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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 1, 1996
DYNATRONICS CORPORATION
(Exact name of registrant as specified in its charter)
Utah 0-12697 87-0398434
(State or other (Commission File) (IRS Employer
jurisdiction Number Identification No.
of incorporation)
7030 Park Centre Drive
Salt Lake City, Utah 84121
(801) 568-7000
(Address of principal executive offices and Zip Code
Registrant's telephone number with area code)
- ------------------------------------------------------------
(Former name, former address & former fiscal year,
if changed since last report)
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Item 2. Acquisition or Disposition of Assets.
The descriptions set forth in this report do not purport
to be complete, and this report is qualified in its entirety
by reference to the documents described herein and attached as
exhibits hereto, which are hereby incorporated herein by this
reference.
On April 29, 1996, effective May 1, 1996, Dynatronics
Corporation, a Utah corporation (the "Company"), executed a
definitive Asset Purchase Agreement (the "Purchase Agreement")
by and among the Company, Superior Orthopaedic Supplies, Inc.,
a Tennessee corporation ("Superior"), H. Allen Hughes, Jr.,
Thomas W. Hughes, individuals resident in Tennessee, and
Herbert A. Hughes and Betty D. Hughes, individuals resident in
Georgia, (collectively the "Sellers"). Sellers are the
shareholders of Superior. Prior to the execution of the
Purchase Agreement, Superior was dissolved and the assets of
Superior (the "Superior Assets") were distributed to and held
by Sellers as tenants in common. Pursuant to the Purchase
Agreement, Sellers agreed to sell substantially all of the
Superior Assets to the Company, for the payment of $550,000
cash, a promissory note for $550,000, and 440,000 shares of
the Company's authorized but previously unissued common stock.
The Purchase Agreement specified that the transactions
contemplated thereby would close, subject to the fulfillment
of certain conditions, on May 1, 1996, or such later time as
the parties may agree. The parties did, in fact, agree to
effect the closing on May 1, 1996, on which date the Company
issued its common stock, promissory note and cash in return
for the transfer of the Superior Assets, and the acquisition
was in all other respects consummated.
Before its dissolution and the sale of all of the
Superior Assets in connection with the closing of the Purchase
Agreement, Superior was engaged in the business of
manufacturing, assembling and distributing physical therapy
and consumable products for the health care industry. The
Superior Assets that were acquired by the Company consist
primarily of fixed assets, inventory, accounts receivable and
work in process, as well as copyrights and trademarks used and
developed by Superior and Sellers and certain equipment.
Under the Purchase Agreement, the consideration paid to
Sellers for the Superior Assets was 440,000 shares of the
Company's restricted common stock, no par value, cash of
$550,000, and a promissory note payable over three years for
$550,000. The amount of such consideration was the result of
arms-length negotiation among the parties. Cash for the
purchase will be paid from bank deposits or amounts available
under an existing line of credit with a bank or a combination
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of the two. Prior to the execution and consummation of the
Purchase Agreement, neither Superior nor any of the Sellers
had any material relationship with the Company, any of its
affiliates, directors, officers or any associates of any of
the foregoing. Mr. H. Allen Hughes, one of the Sellers, is
the principal stockholder of Rehab MedEquip, Inc., a Tennessee
corporation ("Rehab"), which is an independent distributor of
the Company's products.
To the extent that equipment or other physical property
was among the Superior Assets acquired by the Company, and
such equipment or other physical property was used in
connection with Superior's (and Sellers') business, the
Company intends to continue to use such assets for the same
business purposes. The business will be operated as a
division of the Company, at 6607 Mountain View Road, Ooltewah,
Tennessee 37363; with limited manufacturing activities
conducted at 6129 Hunter Road, Ooltewah, Tennessee. Both
premises are leased. The premises on Mountain View Road are
owned and leased from a general partnership, of which one of
the Sellers, H. Allen Hughes, is a majority owner and managing
general partner. A part of the premises are subleased to
Rehab. Mr. Hughes is the majority shareholder of Rehab. His
brother, Thomas W. Hughes, is a minority shareholder of Rehab.
Item 7. Financial Statements and Exhibits.
Listed below are the financial statements and information
and pro forma financial information and exhibits filed as part
of this report.
(a) Financial Statements of the Business Acquired.
Superior Orthopaedic Supplies, Inc.
Independent Auditors' Report for the Nine
Months Ended March 31, 1996 and the
Fiscal Year Ended June 30, 1995
Superior Orthopaedic Supplies, Inc.,
Audited Balance Sheets as of June 30,
1996, and the Nine-Month Period Ended
March 31, 1996
Superior Orthopaedic Supplies, Inc.,
Statements of Earnings and Retained
Earnings, Fiscal Year Ended June 30, 1995
and Nine Months Ended March 31, 1996
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Superior Orthopaedic Supplies, Inc.,
Statements of Cash Flows, Fiscal Year
Ended June 30, 1995 and Nine Months Ended
March 31, 1996
Notes to Audited Financial Statements of
Superior Orthopaedic Supplies, Inc.
(b) Pro Forma Financial Information
Pro Forma Financial Information will be
prepared and filed within 60 days of the
date of filing of this report.
(c) Exhibits
Regulation
S-B
Exhibit
No. Description Page No.
- ---------- ---------------------------------- ----------
(2) Asset Purchase Agreement by and
among Dynatronics Corporation, a
Utah corporation, Superior
Orthopaedic Supplies, Inc., a
Tennessee corporation, H. Allen
Hughes and Thomas W. Hughes,
residents of Tennessee, and Herbert
A. and Betty D. Hughes, residents of
Georgia
Pursuant to Item 601(b)(2) of Regulation S-B, the following
exhibits and schedules to the Asset Purchase Agreement dated
as April 29, 1996 and effective May 1, 1996, are omitted as
exhibits to this Report but will be provided to the Securities
and Exchange Commission upon request therefor by the
Commission Staff:
Exhibit 1.2 Acquired Intellectual Property
Exhibit 1.3 Acquired Leases
Exhibit 1.6 Assets
Exhibit 1.7 Assumed Liabilities
Exhibit 2.2(d)(i)A H. Allen Hughes Employment
Agreement
Exhibit 2.2(d)(i)B Thomas W. Hughes Employment
Agreement
Exhibit 2.2(d)(ii) Registration Rights Agreement
Exhibit 2.3(b) Sellers' Promissory Note
Exhibit 2.3(c)(i) Form of Promissory Note
Exhibit 2.3(c)(ii) Form of Security Agreement
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Exhibit 3.1 States in Which Superior is
Qualified to do Business
Exhibit 3.6 Insurance Policies and
Description of Claims
Exhibit 3.8 Superior Financial Statements
Exhibit 3.11 Litigation of Sellers and
Superior
Exhibit 3.13 Interest of Officers and
Directors of Superior
Exhibit 3.14(g) Known or Suspected Infringement
of Acquired Intellectual
Property
Exhibit 4.3 Purchaser Litigation Schedule
Exhibit 6.1 Allocation of Purchase Price to
Covenant not to Compete
Exhibit 11 Form of Escrow Agreement
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SIGNATURE
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 hereunto duly
authorized.
Dynatronics Corporation
By: /s/ Kelvyn H. Cullimore, Jr.
------------------------------
Kelvyn H. Cullimore, Jr.,
President and CEO
Dated: 5/16/96
----------------------------
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ASSET PURCHASE AGREEMENT
BY AND AMONG
SUPERIOR ORTHOPAEDIC SUPPLIES, INC.
a Tennessee corporation,
HERBERT ALLEN HUGHES, HERBERT ALLEN
HUGHES, JR., THOMAS WEBSTER HUGHES,
AND
BETTY D. HUGHES, the Shareholders of SUPERIOR,
and
DYNATRONICS CORPORATION,
a Utah corporation
Dated
APRIL 29, 1996
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is dated April 29, 1996,
effective May 1, 1996, by and among Superior Orthopaedic
Supplies, Inc., a Tennessee corporation ("Superior"),
Dynatronics Corporation, a Utah corporation ("Purchaser"),
Herbert Allen Hughes, Jr., an individual resident of the State
of Tennessee (sometimes referred to individually herein as
"HAH"), Thomas Webster Hughes, an individual resident of the
State of Tennessee (sometimes referred to individually herein
as "TWH"), Herbert A. Hughes, an individual resident of the
State of Georgia and Betty D. Hughes, an individual resident
in the State of Georgia, (collectively herein as the
"Sellers").
RECITALS:
A. Superior was dissolved by filing of Articles of
Dissolution with the Secretary of State of the State of
Tennessee on April 23, 1996 (the "Articles of Dissolution")
and its assets distributed to HAH, a 47.5 percent interest,
TWH, a 47.5 percent interest, and Herbert A. Hughes and Betty
D. Hughes, as joint tenants, a 5 percent interest, as tenants
in common, in exchange for and in full redemption of all of
the common stock of Superior and certain of its liabilities
assumed by Sellers, jointly and severally, pursuant to such
Articles of Dissolution;
B. Sellers are engaged in the business of developing,
manufacturing, assembling and selling medical consumables and
related equipment in the physical medicine and health care
industries (which assets, business and related goodwill are
hereinafter referred to as the "Acquired Business");
C. As of the filing of the Articles of Dissolution,
Sellers were the sole shareholders of all of the issued and
outstanding common stock of Superior;
D. Purchaser is a Utah corporation engaged in the
manufacture, marketing and sale of products in the physical
medicine and physical therapy markets;
E. Purchaser desires to acquire all of the assets used
or useful in the Acquired Business in exchange for cash and
shares of unregistered voting common stock of Purchaser;
F. Sellers desire to sell the Assets (hereinafter
defined) comprising the Acquired Business for cash and shares
of unregistered voting common stock of Purchaser;
G. Prior to the filing of the Articles of Dissolution
by Superior, this Agreement and its performance by Superior
were authorized, approved, and recommended by the board of
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directors of Superior, and authorized and approved by the
requisite affirmative vote of the Sellers; and
H. This Agreement and its performance by Purchaser have
been authorized and approved by the board of directors of
Purchaser and do not require the approval of the shareholders
of Purchaser.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements, covenants and provisions hereinafter set
forth and intending to be legally bound, the parties hereby
agree as follows:
ARTICLE I
DEFINITIONS
1.1 "Acquired Business" shall have the meaning set forth
in the second recital of this Agreement.
1.2 "Acquired Intellectual Property" shall mean all
patents, patent applications, trade secrets, know-how,
copyrights, trademarks and service marks specified on Exhibit
1.2 that have been designated as being acquired by Purchaser.
1.3 "Acquired Leases" shall mean those leases, permits,
rights and privileges specified on Exhibit 1.3 that have been
designated as being acquired by Purchaser.
1.4 "Affiliate" shall mean any Person that directly, or
indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with the Person
specified.
1.5 "Agreement" shall mean this Asset Purchase
Agreement, including the exhibits and schedules attached
hereto.
1.6 "Assets" shall mean all of the assets of every
nature and description which constitute the Acquired Business
including, but not limited to, those described in Exhibit 1.6.
1.7 "Assumed Liabilities" shall mean the obligations of
Sellers which are listed on Exhibit 1.7 attached hereto which
shall be assumed by Purchaser in amounts not to exceed those
set forth on Exhibit 1.7. Purchaser shall have no obligation
for or assume any liability that is not listed on such
Exhibit.
1.8 "Business Day" shall mean any day other than a
Saturday, Sunday or any other day on which commercial banks in
Salt Lake City, Utah are required or authorized to close.
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1.9 "CERCLA" shall mean the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended,
42 U.S.C. 9601 et seq.
1.10 "Closing" shall have the meaning set forth in
Section 2.1.
1.11 "Closing Date" shall have the meaning set forth in
Section 2.1.
1.12 "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.
1.13 "Environmental Laws" shall mean RCRA, CERCLA and all
other state, federal or local laws (including common laws),
rules, regulations, statutes, charters, ordinances, binding
interpretations, binding policies, permits, orders, court
orders or consent decrees relating to air, soil, subsoil, or
water quality, hazardous waste, solid waste, hazardous
substances or any other environmental matters which pertain
to, govern or otherwise regulate any of the following
activities, including without limitation (a) the emission,
discharge, release, threat of release, or spilling of any
substance into the air, surface water, groundwater, soil or
substrata; (b) the manufacturing, processing, sale,
generation, treatment, storage, disposal, labeling or other
management of any waste, hazardous substance, toxic substance,
toxic waste, or hazardous waste as may be defined as such by
any applicable environmental law; or (c) the use or exposure
to any material referred to in Subsection (b) of this
definition in any manner which might adversely effect human
health.
1.14 "GAAP" shall mean generally accepted accounting
principles.
1.15 "Hazardous Substance" shall mean any hazardous
substance, hazardous material or hazardous waste or any
variation thereof, as defined or listed in any Environmental
Law, including but not limited to CERCLA.
1.16 "Liability" shall mean any direct or indirect
indebtedness, liability, potential transferee liability,
adverse claim, loss, damage, fine, penalty, deficiency,
obligation or responsibility, whether known or unknown, fixed
or unfixed, conditional or unconditional, choate or inchoate,
liquidated or unliquidated, secured or unsecured, accrued,
absolute, contingent or otherwise (including, without
limitation, reasonable fees and expenses of counsel related to
any of the foregoing).
1.17 "Lien" shall mean any mortgage, pledge, lien,
encumbrance, charge, option, deed of trust, security interest,
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claim, restriction, easement, title deed or any other
encumbrance of any type whatsoever, whether imposed by law,
contract or otherwise.
1.18 "Person" shall mean any natural person, corporation,
general partnership, limited partnership, trust, union,
association, court, agency, government, tribunal,
instrumentality, commission, arbitrator, board, bureau, or
other entity or authority.
1.19 "RCRA" shall mean the Resource Conservation and
Recovery Act, as amended, 42 U.S.C. 6901 et seq.
1.20 "Records" shall mean and include all agreements,
documents, maps, books, records (including personnel records),
data, studies, journals, drawings, specifications and files in
the possession of Superior or the Sellers relating to the
Acquired Business, whether maintained on hard copy, microfiche
or other data storage media or computer or magnetic tapes,
disks or other computer storage device.
1.21 "Taxes" shall mean all income, gross receipts,
profits, franchise, sales, use, occupation, property,
employment, severance, production, excise, stamp, transfer,
workers' compensation, social security, withholding or similar
taxes and any other tax or other governmental fee or charge of
any nature whatsoever imposed by any country or political
subdivision thereof.
ARTICLE II
PURCHASE AND SALE; CONSIDERATION
2.1 Closing. The closing of the transactions
contemplated herein (the "Closing") shall take place at the
offices of Purchaser located at 7030 Park Centre Drive, Salt
Lake City, Utah 84121, or at such other location as the
parties shall mutually agree, at 10:00 a.m. Mountain Standard
Time, on April 29, 1996 or on such other day or at such other
place as the parties may mutually agree upon in writing (the
"Closing Date"), with an effective date of May 1, 1996 (the
"Effective Date").
2.2 Transactions at Closing. Subject to the fulfillment
of the conditions precedent specified herein by the Closing
Date or the waiver of such conditions at the Closing:
(a) Sellers shall, at the Closing on the Closing
Date, by bills of sale, assignments, deeds, leases, licenses,
contracts and other appropriate documents reasonably
satisfactory to counsel for Purchaser, transfer to Purchaser
the Assets, free and clear of any Lien except the Acquired
Leases; simultaneously with such delivery, Sellers will take
all such steps as may be requisite to put the Purchaser in
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actual possession and operating control of the Acquired
Business as of the Effective Date;
(b) Purchaser shall assume the Assumed Liabilities
described in Exhibit 1.7 and the Acquired Leases described in
Exhibit 1.3 by executing and delivering appropriate
instruments of conveyance and assumptions;
(c) Purchaser shall purchase and accept the Assets
from Sellers and Purchaser shall deliver the consideration
therefor as set forth in Section 2.3; and
(d) The parties shall execute and deliver, or cause
to be executed and delivered, the following:
(i) Employment Agreements between Purchaser
and HAH and TWH in the form of Exhibits 2.2(d)(i)A and
2.2(d)(i)B, respectively; and
(ii) Registration Rights Agreement between
Purchaser and Superior in the form of Exhibit 2.2(d)(ii)
("Rights Agreement");
(iii) Appropriate bills of sale or other
instruments of conveyance reasonably required to transfer
title to the Assets to Purchaser; and
(iv) The other documents referred to herein
that are required to be delivered at Closing and such
other documents as either party may reasonably request.
2.3 Consideration for the Assets. At Closing, the
purchase price for the Assets shall be paid as follows:
(a) Issuance of Purchaser's Shares. Purchaser
shall issue and cause to be delivered to Sellers four hundred
forty thousand (440,000) shares of Purchaser's restricted
unregistered voting common stock (the "Shares") valued at the
price of Sixty-five Cents ($.65) per share, calculated based
on a public market price of the common stock of Purchaser of
$1.03 per share on February 13, 1996, the date the parties
agreed in principle to the transactions described herein,
discounted due to the restrictions on marketability of the
Shares to be delivered to Sellers, the lack of liquidity in
the market for the Purchaser's common stock, and the
volatility of the market in general for small capital market
issuers such as the Purchaser, and Purchaser has delivered to
Superior and the Sellers that certain letter dated April 18,
1996 from Joseph Charles & Associates outlining the basis for
the foregoing discount and the parties agree that the value of
sixty-five cents ($0.65) per share represents the fair value
of each of the Shares for purposes of the transactions
contemplated hereby;
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(b) Cash. Purchaser shall deliver the sum of five
hundred fifty thousand dollars ($550,000), consisting of the
fifty thousand dollar ($50,000) cash advance made to Sellers
by Purchaser on April 24, 1996, as represented by that certain
promissory note of Sellers attached to and by this reference
made a part of this Agreement as Exhibit 2.3(b), and a
cashier's check or confirmed bank wire transfer for five
hundred thousand dollars ($500,000), (the method of payment to
be as the parties may mutually agree at or before the
Closing), payable to Sellers as tenants in common in same day
funds;
(c) Promissory Note. Purchaser shall execute and
deliver its promissory note in the principal amount of five
hundred fifty thousand dollars ($550,000) with monthly
payments amortized over a ten-year term at seven percent (7%)
interest per annum, in the form attached to this Agreement as
Exhibit 2.3(c)(i), by this reference made a part hereof (the
"Note"), said Note to be secured by a security interest in
that portion of the Assets constituting fixed assets, pursuant
to a Security Agreement to be executed and delivered by
Purchaser at Closing in the form attached to this Agreement as
Exhibit 2.3(c)(ii) (the "Security Agreement"); and
(d) Assumption of Assumed Liabilities and Acquired
Leases. As additional consideration for the purchase of the
Assets, Purchaser shall assume the Assumed Liabilities as
stated on Exhibit 1.7 and the Acquired Leases as stated on
Exhibit 1.3 and Purchaser shall not be deemed to have assumed
or be liable for any other Liabilities or obligations of
Sellers or Superior.
2.4 Audits. As soon as possible, KPMG Peat Marwick,
Purchaser's independent certified public accountants, shall
conduct audits (the "Audits") of the financial statements of
Superior for the year ended June 30, 1995 and the nine month
period ending March 31, 1996 and copies of such audited
financial statements of Superior (collectively, the "Audited
Financials") shall be promptly delivered to Purchaser.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SUPERIOR OR SELLERS
Superior and Sellers represent and warrant to Purchaser
that the following are true and correct as of the date of the
Agreement and will be true and correct as of the Effective
Date as if made on such date:
3.1 Organization and Qualification. Until April 23,
1996, upon the filing of the Articles of Dissolution, Superior
was a corporation duly organized, validly existing and in good
standing under the laws of the State of Tennessee and had all
requisite corporate power and authority to own and lease its
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properties and carry on its business. Until the filing of the
Articles of Dissolution, Superior was duly qualified to do
business and in good standing as a foreign corporation in all
jurisdictions in which the location of its properties or the
conduct of its activities required such qualification except
where the failure to so qualify would not have had a material
adverse effect on the Acquired Business. Exhibit 3.1 lists
all states in which Superior was duly qualified to do
business. Following the filing of the Articles of Dissolution
and through and including the date immediately preceding the
Effective Date, Sellers are in lawful possession of and have
all requisite power to conduct the Acquired Business as the
lawful successors in interest of Superior.
3.2 Authority Relative to Agreement. Superior and the
Sellers have all requisite power and authority to enter into
this Agreement and the other agreements contemplated hereby to
which they are party and to carry out their obligations
hereunder and thereunder, as the case may be. The execution,
delivery and performance by Superior of this Agreement and the
other agreements contemplated hereby to which Superior is a
party have been duly authorized by all requisite corporate
action on the part of Superior and by the approval of the
Sellers, as shareholders of Superior prior to the filing of
the Articles of Dissolution by Superior. This Agreement
constitutes, and other agreements contemplated hereby to which
Superior and Sellers are parties upon their due execution and
delivery by Superior and Sellers will constitute, legal, valid
and binding obligations of Superior and Sellers, enforceable
in accordance with their terms, except (i) that such
enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or similar
laws affecting creditors' rights, and (ii) that the remedy of
specific performance and injunctive and other forms of
equitable relief are subject to certain equitable defenses and
to the discretion of the court before which any such
proceedings therefor may be brought. To the best knowledge of
Superior and Sellers, no authorization, consent or approval
of, or filing with, any public body or authority is necessary
to be obtained by Sellers for the consummation by Sellers of
the transactions contemplated by this Agreement. No
authorization, consent or approval of any third party is
necessary for the consummation by Sellers of the transactions
contemplated by this Agreement other than those which may be
required with respect to any Assumed Liability or Acquired
Lease.
3.3 Acquired Leases. On the Effective Date, the
Acquired Leases will be in full force and effect and
enforceable in accordance with their terms and, to the best
knowledge of Sellers and Superior, there will exist no default
or event of default or event, occurrence, condition or act
that with the giving of notice, the lapse of time or the
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happening of any other event or condition, would become a
default or event of default thereunder.
3.4 Environmental Matters. To the best knowledge of
Superior and Sellers, Sellers are and at all times Superior
has been, in compliance with, in all material respects, and
there has been no violation by Superior or Sellers of, any
Environmental Laws applicable to the Acquired Business. There
is no pending or, to the best knowledge of Sellers and
Superior, threatened lawsuit or administrative proceeding
before any governmental entity against Superior or Sellers
with respect to environmental compliance, control or liability
relating to the Assets or Acquired Business and neither
Superior nor Sellers have knowledge of any facts or
circumstances that could form the basis of a claim, citation
or allegation against Superior or Sellers for a violation of,
or alleging liability under, any Environmental Laws.
3.5 Employment Relations and Benefits.
(a) There is no labor union that claims to
represent the employees of Sellers and no collective
bargaining agreement currently being negotiated by Sellers
with respect to their employees.
(b) Sellers do not maintain nor has Superior ever
maintained any employee benefit plan as defined by Section
3(3) of ERISA or that is a multi-employer plan as defined in
Section 3(37) of ERISA or a plan under Title IV of ERISA.
(c) All accrued vacation and absent time of former
employees of Superior and Sellers has been paid through April
30, 1996 and there is no obligation owing by Purchaser to any
such employees with respect to such benefits as of the
Effective Date.
3.6 Insurance. Exhibit 3.6 sets forth a true and
correct listing of all insurance policies and coverage
thereunder currently in effect with respect to the Acquired
Business. Sellers have insurance in amounts at least equal to
that required to comply with all insurance maintenance
requirements in the Acquired Leases. All premiums payable
under such policies have been paid in full, no notice of
cancellation of any such policy has been received, and there
is no existing default or event that, with the giving of
notice or lapse of time or both, would constitute a default
thereunder. There are no claims in existence or pending under
such policies and, to the best of Sellers' knowledge, except
as set forth on said Exhibit 3.6, no circumstances likely to
give rise to any such claim.
3.7 Ability to Conduct the Business. There is no
contract, or other agreement or arrangement of any kind
<PAGE>
applicable to Superior, Sellers, the Assets or the Acquired
Business, nor any judgment, order, writ, injunction or decree
applicable to Superior, Sellers, the Assets or the Acquired
Business, that by its terms prevents or would reasonably be
expected to prevent the use by Purchaser of the Assets or the
conduct by Purchaser of the Acquired Business after the
Effective Date.
3.8 Financial Statements. The copies of the financial
statements of Superior previously provided to Purchaser by
Superior (the "Superior Financial Statements") and attached
hereto as Exhibit 3.8 are true, correct and complete copies
thereof and have been prepared in conformity with GAAP applied
on a consistent basis, and such Superior Financial Statements
present fairly in all material respects the financial position
and results of operations of Superior at the dates and for the
periods specified. The Records of Superior and Sellers
relating to the Acquired Business from which the Superior
Financial Statements were prepared properly and accurately
record the transactions and activities in all material
respects which they purport to record, and such Records will
properly and accurately so record such transactions and
activities in all material respects from December 31, 1995,
through the Effective Date. There has been no change in the
accounting policies of Superior or the Sellers relating to the
Acquired Business, except as described in the notes to the
Superior Financial Statements.
3.9 No Changes Prior to the Date of this Agreement.
During the period from December 31, 1995 to the date hereof,
the Acquired Business has been conducted in the ordinary
course of business consistent with past practice and there has
not been:
(a) any event, occurrence, development or state of
circumstances or facts that has had or, to the knowledge of
Sellers, could reasonably be expected to result in a material
adverse effect on the Acquired Business or the Assets taken as
a whole;
(b) any creation or other incurrence of any Lien on
any of the Assets, except in the ordinary course of business
consistent with past practice;
(c) any sale, transfer, lease or other disposition
of any Assets, except in the ordinary course of business
consistent with past practice and except for the distribution
of the Assets to the Sellers in dissolution of Superior;
(d) any transaction or any contract or agreement
entered into, by Superior or Sellers relating to the Acquired
Business or the Assets (including the acquisition or
disposition of any Assets) other than transactions and
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commitments in the ordinary course of business consistent with
past practice except for the distribution of the Assets to the
Sellers in dissolution of Superior;
(e) any damage, destruction, or casualty loss,
whether or not covered by insurance, to any of the Assets that
has or could reasonably be expected to result in a material
adverse effect on the Acquired Business, taken as a whole; or
(f) any agreement, whether or not in writing, to do
any of the foregoing.
3.10 Compliance with Law. To the best knowledge of
Superior and Sellers, Superior and Sellers are in compliance
and have conducted business so as to comply in all material
respects with all laws, rules and regulations, judgments,
decrees or orders of any governmental entity applicable to the
Acquired Business or with respect to which compliance is a
condition of engaging in the Acquired Business, the breach or
violation of which would have a material adverse effect on the
financial condition or business operation of the Acquired
Business. There are no judgments or orders, injunctions,
decrees, stipulations or awards (whether rendered by a court
or administrative agency or by arbitration) against Superior
or any of the Sellers or against any of the properties or
businesses of Superior or any of the Sellers.
3.11 Litigation. Except as provided in the attached
Exhibit 3.11, by this reference made a part hereof, there is
no action, suit, proceeding, claim or investigation pending
or, to the best knowledge of Sellers, threatened, against
Sellers or any of the Assets which could, individually or in
the aggregate, have a material adverse effect or which in any
manner challenges or seeks to prevent, enjoin, alter or delay
any of the transactions contemplated hereby.
3.12 Taxes. All material tax returns, statements,
reports and forms (including estimated tax returns and reports
and information returns and reports) required to be filed with
any taxing authority with respect to any taxable period ending
on or before the Effective Date, by or on behalf of Superior
(collectively, the "Returns"), have been or will be filed when
due in accordance with all applicable laws (including any
extensions of such due date), and all amounts shown due
thereon (or estimated to be due thereon in the case of any
extensions filed) have been paid or have been fully accrued on
the Superior Financial Statements in accordance with GAAP.
Except to the extent provided for or disclosed in the Superior
Financial Statements (including notes thereto), the Returns
correctly reflect, to the best knowledge of Sellers, in all
material respects (and, as to any Returns not filed as of the
date hereof but filed prior to the Effective Date, will, to
the best knowledge of Sellers, correctly reflect in all
<PAGE>
material respects) the tax liability and status of Superior.
Superior and Sellers have withheld and paid to the applicable
financial institution or taxing authority all amounts required
to be withheld. Except for the effect of applicable statutes
of limitation, all returns pertaining to state and federal
income Taxes filed with respect to taxable years of Superior
through the taxable year ended December 31, 1995, in the case
of the United States, have been examined and closed or are
returns with respect to which the applicable period for
assessment under applicable law, after giving effect to
extensions or waivers, has expired. There is no claim, audit,
action, suit, proceeding, or investigation now pending or (to
the best knowledge of Superior) threatened against or with
respect to Superior in respect of any tax or assessment. No
notice of deficiency or similar document of any tax authority
has been received by Superior or Sellers, and there are no
liabilities for Taxes (including liabilities for interest,
additions to tax and penalties thereon and related expenses)
with respect to the issues that have been raised (and are
currently pending) by any tax authority that could, if
determined adversely to Superior or Sellers, materially affect
the liability of Superior or Sellers for Taxes in other
taxable periods. There are no Liens for Taxes upon the assets
of Superior or Sellers except Liens for current Taxes not yet
due. Neither Superior nor Sellers have been required to
include any material adjustment in taxable income for any tax
period (or portion thereof) pursuant to Section 481 or 263A of
the Internal Revenue Code or any comparable provision under
state or foreign tax laws as a result of transactions, events
or accounting methods employed prior to the Effective Date.
Superior or Sellers have provided or made available to
Purchaser or its designated representative true and correct
copies of all material tax returns of Superior for the years
ending December 31, 1991 through and including December 31,
1995, and, as reasonably requested by Purchaser prior to or
following the date hereof, information statements, reports,
work papers, tax opinions and memoranda and other tax data and
documents (other than tax research memoranda on the structure
of the transactions contemplated by this Agreement that were
prepared by Superior's or Sellers' attorneys and that are
protected by the attorney-client privilege). Superior has not
been within the five year period preceding the date hereof a
"United States real property holding corporation" within the
meaning of Section 897(c)(2) of the Internal Revenue Code.
Superior is not a party to (or to the knowledge of Sellers or
Superior, obligated under) any tax allocation, tax
distribution, tax sharing, tax indemnity or similar agreement
or arrangement with respect to any tax (including without
limitation any such agreement or arrangement imposed by
operation of law).
3.13 Interests of Officers and Directors. Except as set
forth on Exhibit 3.13, none of the officers or directors of
<PAGE>
Superior, the Sellers, or any Affiliate of any such Person
has, either directly or indirectly, a material interest in:
(i) any Person which purchases from or sells, licenses or
furnishes to Sellers any goods, property, technology or
intellectual or other property rights or services; (ii) any
contract or agreement to which Superior or any of the Sellers
are parties or by which they may be bound or affected; or
(iii) any property, real or personal, tangible or intangible,
used in or pertaining to the Acquired Business, except that
the Sellers have an undivided interest as tenants in common in
the Assets distributed to the Sellers in dissolution of
Superior.
3.14 Intellectual Property.
(a) Sellers own, or are licensed or otherwise
entitled to exercise, without restriction, all rights to the
Acquired Intellectual Property and the Acquired Intellectual
Property constitutes all intellectual property that is used or
currently proposed to be used in the Acquired Business.
(b) Exhibit 1.2 lists all patents, registered and
unregistered copyrights, trade names, trademarks, service
marks and other company, product or service identifiers and
mask work rights, and any applications or registrations
therefor, included in the Acquired Intellectual Property, and
an indication as to which, if any, of such products have been
registered for protection with the United States Patent and
Trademark Office and any foreign offices.
(c) Sellers are not or as a result of the execution
and delivery of this Agreement or the performance of Sellers'
obligations hereunder Sellers will not be, in violation of, or
lose any rights pursuant to any license, sublicense or
agreement described in Exhibit 1.2.
(d) Sellers are the owners or licensees of, with
all necessary right, title and interest in and to (free and
clear of any Liens, encumbrances or security interests other
than those which may apply to any Assumed Liability or
Acquired Lease), the Acquired Intellectual Property and have
rights to the use thereof or the material covered thereby in
connection with the Acquired Business.
(e) No claims with respect to the Acquired
Intellectual Property have been asserted or, to the best
knowledge of Sellers, after reasonable investigation, are
threatened by any person, and Sellers know of no claims (i) to
the effect that the manufacture, sale or use of any product as
now used or offered or proposed for use or sale by Sellers in
connection with the Acquired Business infringes any copyright,
patent, trade secret, or other intellectual property right,
(ii) against the use by Sellers of the Acquired Intellectual
<PAGE>
Property, or (iii) challenging the ownership, validity or
effectiveness of any of the Acquired Intellectual Property.
(f) All patents and registered trademarks, service
marks, and other company, product or service identifiers and
registered copyrights held by Sellers relating to the Acquired
Business are valid and subsisting.
(g) Except as set forth in Exhibit 3.14(g) hereto,
to the best knowledge of Sellers, there has not been and there
is not now any material unauthorized use, infringement or
misappropriation of any of the Acquired Intellectual Property
by any third party, including without limitation any employee
or former employee of Superior or Sellers; neither Superior
nor Sellers have been sued or charged in any writing received
by any Seller or Superior as a defendant in any claim, suit,
action or proceeding which involves a claim of infringement of
any patents, trademarks, service marks, copyrights or other
Acquired Intellectual Property and which has not been finally
terminated prior to the date hereof; there are no such charges
or claims outstanding; and to the best knowledge of Sellers,
they have no infringement liability with respect to any
patent, trademark, service mark, copyright or other
intellectual property right of another.
(h) The Acquired Intellectual Property is not
subject to any outstanding order, judgment, decree,
stipulation or agreement restricting in any manner the
licensing thereof by Sellers. Neither Superior nor the
Sellers have entered into any agreement to indemnify any other
person against any charge of infringement of the Acquired
Intellectual Property. Sellers have not entered into any
agreement granting any third party the right to bring
infringement actions with respect to, or otherwise to enforce
rights with respect to, the Acquired Intellectual Property.
To the best knowledge of Sellers and Superior, Sellers have
the exclusive right to file, prosecute and maintain all
applications and registrations with respect to the Acquired
Intellectual Property that Sellers own.
3.15 Restrictions on Business Activities. There is no
material agreement, judgment, injunction, order or decree
binding upon Superior or the Sellers which has or could
reasonably be expected to have the effect of prohibiting or
materially impairing any presently employed business practice
in connection with the Acquired Business by Purchaser, the
acquisition of the Acquired Business (other than agreements
securing Assumed Liabilities which have been disclosed to
Purchaser, and are identified in Exhibit 1.7 hereto), or the
conduct of the Acquired Business by Purchaser.
3.16 Title to Assets; Absence of Liens; Condition of
Assets.
<PAGE>
(a) Sellers, as tenants in common, have good and
valid title to all of the Assets, real, personal and mixed,
free and clear of any Liens, potential transferee liability,
or other encumbrances subject only to the Assumed Liabilities
and, if applicable, the Acquired Leases.
(b) The Assets, including equipment or other
property leased by Sellers under the terms of the Acquired
Leases, are, taken as a whole, (i) adequate for the conduct of
the Acquired Business consistent with its past practice, (ii)
suitable for the uses to which they are currently employed,
(iii) in good operating condition, normal wear and tear
excepted, (iv) regularly and properly maintained to at least
conform with standards generally prevailing in Sellers'
industry, (v) not obsolete, dangerous or in need of renewal or
replacement, except for renewal or replacement in the ordinary
course of business. For purposes of this Section, claims
involving equipment which do not exceed $250 in value per
occurrence, shall not be deemed material.
(c) In the case of inventory that is included in
the Assets, such inventory is, to the best of Sellers'
knowledge, fit for sale in the ordinary course of business
(based on the past experience of Sellers and Superior and the
standards generally prevailing in the industry), subject to
usual and customary reserves.
(d) All accounts receivable and notes receivable of
the Acquired Business reflected in the financial statements
are good and have been collected or are, to the best knowledge
of Superior and Sellers collectible within their terms,
subject to past collection history experienced by Superior and
the Sellers and disclosed to Purchaser, in writing, and except
to the extent reasonable reserve has been made therefore on
the Audits.
3.17 Board and Shareholder Approval. On April 19, 1996,
the Board of Directors of Superior unanimously (i) approved
this Agreement and the transactions contemplated hereby, and
(ii) determined that the execution of this Agreement by
Superior was in the best interests of Superior and the
shareholders of Superior. The shareholders of Superior have
duly accepted the recommendations of Superior's Board of
Directors as set forth in this Section 3.17 and have
unanimously voted to accept and approve the execution of this
Agreement by Superior and the consummation of the transactions
contemplated by this Agreement by Sellers as the successor in
interest of Superior.
3.18 Questionable Payments. Neither Superior nor any of
the Sellers nor any director or officer of Superior has: (i)
<PAGE>
made any payments or provided services or other favors in the
United States of America or in any foreign country in order to
obtain preferential treatment or consideration by any
governmental entity with respect to any aspect of the Acquired
Business; or (ii) made any political contributions which would
not be lawful under the laws of the United States and the
foreign country in which such payments are made. Neither
Superior nor any of the Sellers nor any director or officer of
Superior nor, to the best knowledge of Sellers, any Affiliate
of Superior has been the subject of any inquiry or
investigation by an governmental entity in connection with
payments or benefits or other favors to or for the benefit of
any governmental or armed services official, agent,
representative or employee with respect to any aspect of the
Acquired Business or with respect to any political
contribution.
3.19 FDA Compliance. To the best knowledge of Superior
and the Sellers, Superior has operated and Sellers are
currently operating in compliance in all material respects
with all laws, rules, regulations, orders, decrees, licenses
or permits applicable to the Acquired Business, the violation
of which could have a material adverse effect on the business
operations or financial condition of the Acquired Business.
Neither Superior nor any of the Sellers have received any
notice from the FDA or any other governmental agency or
authority of any noncompliance by Sellers with any law, rule,
regulation, order, decree, license or permit applicable to the
Acquired Business or the Assets. To the best knowledge of
Superior and the Sellers, the manufacture, advertising,
marketing and sale of products of the Acquired Business comply
in all material respects with all applicable FDA regulations
and applicable statutes, the violation of which could have a
material adverse effect on the business operations or the
financial condition of the Acquired Business, and all required
clearances have been obtained from the FDA and other federal
or state agency in accordance with applicable law.
3.20 Brokers. No broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission
payable by Sellers in connection with the transactions
contemplated by this Agreement, except for the consulting fee
payable to its consultant as described in Section 3.23, below.
In the event that the preceding sentence is in any way
inaccurate, Sellers agree to indemnify and hold harmless
Purchaser from any liability for any commission or
compensation in the nature of a finder's fee (and the costs
and expenses of defending against such liability or asserted
liability) for which Purchaser or any of its officers,
partners, employees or representatives is responsible or
becomes liable.
<PAGE>
3.21 Disclosure. No representation or warranty made by
Superior or any of the Sellers in this Agreement, nor any
document, written information, statement, financial statement,
certificate, schedule or exhibit prepared and furnished or to
be prepared and furnished by Superior or any of the Sellers or
their representatives pursuant hereto or in connection with
the transactions contemplated hereby, contains or will contain
any untrue statement of a material fact, or omits or will omit
to state a material fact necessary to make the statements or
facts contained herein or therein not misleading in light of
the circumstances under which they were furnished. To the
best knowledge of Superior or any of the Sellers after
reasonable inquiry, there is no event, fact or condition that
has resulted in, or could reasonably be expected to result in,
a material adverse effect that has not been set forth in this
Agreement.
3.22 Securities Compliance Representations. Sellers each
acknowledge and agree that Purchaser or its representatives
have advised Sellers of the following:
(a) Exempt Transaction. The Shares will be
offered, sold and issued by Purchaser in connection with this
Agreement without registration or the delivery of a qualifying
prospectus as required under the U.S. Securities Act of 1933,
as amended (the "Act"), pursuant to exemptions from such
registration and prospectus delivery requirements afforded by
Sections 3(b) and/or 4(2) of the Act and pursuant to
Regulation D comprising Commission Rules 501-508 under the Act
("Regulation D"). Each of the representations and warranties
included in this Article III is made by Superior and the
Sellers with the knowledge and the intent that Purchaser shall
rely on the accuracy of such representations and warranties in
executing this Agreement and in offering, selling and issuing
the Shares without complying with the registration and
prospectus delivery requirements of the Act.
(b) Restricted Shares. Because the Shares have not
been registered under the Act, or any state securities laws,
and will be issued in reliance upon certain exemptions from
the registration requirements of those laws, the Shares cannot
be resold unless they are registered under the Act or unless
Purchaser first receives an opinion of competent securities
counsel that an exemption from registration is available for
such resale. With regard to the restrictions on resales of
the Shares, Sellers are aware (i) of the limitations and
applicability of Securities and Exchange Commission Rule 144;
(ii) that Purchaser will issue stop transfer orders to its
stock transfer agent in the event of attempts to improperly
transfer any such securities; and (iii) that a restrictive
legend will be placed on any certificate representing the
Shares, which legend will read substantially as follows:
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
BEEN ISSUED PURSUANT TO A CLAIM OF EXEMPTION FROM
THE REGISTRATION OR QUALIFICATION PROVISIONS OF THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND
STATE SECURITIES LAWS AND THEREFORE HAVE NOT BEEN
REGISTERED UNDER THE ACT OR UNDER THE SECURITIES
LAWS OF ANY STATE. THESE SECURITIES MAY NOT BE
OFFERED, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED
WITHOUT COMPLIANCE WITH THE REGISTRATION OR
QUALIFICATION PROVISIONS OF THE ACT OR APPLICABLE
STATE LAWS, OR PURSUANT TO AN AVAILABLE EXEMPTION
FROM SUCH REGISTRATION REQUIREMENTS. FURTHERMORE,
THE COMPANY WILL INSTRUCT ITS STOCK TRANSFER AGENT
NOT TO RECOGNIZE ANY SALE OF THESE SECURITIES
UNLESS THE COMPANY HAS FIRST RECEIVED AN OPINION OF
COUNSEL, SATISFACTORY TO THE COMPANY AND ITS
SECURITIES COUNSEL, THAT AN EXEMPTION FROM SUCH
REGISTRATION REQUIREMENTS IS AVAILABLE.
(c) Description of Securities Being Offered.
Purchaser's authorized capital stock consists of 50,000,000
shares of Common Stock, no par value per share. As of
December 31, 1995, there were issued and outstanding 7,964,397
shares of Common Stock. Holders of the Common Stock are
entitled to one vote for each share held of record on matters
submitted to a vote of stockholders. Each share is entitled
to share pro rata in dividends and distributions with respect
to the shares when, as and if declared by Purchaser's Board of
Directors from funds legally available therefor. No holder of
any shares has any preemptive right to subscribe for any of
Purchaser's securities, nor are any common shares subject to
redemption. Upon dissolution, liquidation or winding up of
Purchaser, the assets will be divided pro rata on a share-for-
share basis among the holders of the Common Stock, subject to
the rights of creditors. The outstanding shares of Common
Stock are fully paid and nonassessable. The stockholders are
not entitled to cumulative voting in the election of
directors. Accordingly, the holders of more than 50% of the
shares voting for the election of directors can elect all of
the directors if they choose to do so; and, in such event, the
holders of the remaining shares voting for the election of the
directors will be unable to elect any person or persons to the
Board of Directors.
3.23 Sole Parties in Interest. Sellers are the sole and
true parties in interest, and no other person or entity has or
will have upon the issuance of the Shares any beneficial
ownership interest in the Shares or any portion of the Shares,
whether direct or indirect; provided, however, that Purchaser
acknowledges and agrees that 30,000 of the Shares will be
assigned by and issued as directed by Sellers to certain
former employees of Superior and the Sellers as a bonus and
<PAGE>
6,666 of the Shares will be assigned and issued by Sellers to
John Disterdick as a consulting fee.
3.24 Investment Purpose. Sellers (and those persons
receiving a part of the Shares as provided in Section 3.23,
above) are acquiring the Shares for their own account and for
investment purposes and not on behalf of any other person or
entity or for or with a view to resale or distribution.
3.25 Investment Advisors. Sellers engaged the services
of John Disterdick as a consultant to them in connection with
their decision to acquire the Shares in the transactions
contemplated by this Agreement. By reason of his professional
and personal investment experience and expertise, Mr.
Disterdick is qualified to provide such counsel and advice.
Mr. Disterdick is not an affiliate of or otherwise related to
the Purchaser or any of its officers, directors or affiliates.
3.26 Disclosure, Access to Information. Sellers confirm
that they have received and thoroughly read and are familiar
with and understand this Agreement, and that all documents,
records, books and other information pertaining to their
acquisition of the Shares pursuant to this Agreement requested
by Sellers or their respective agents or attorneys have been
made available for inspection and copying and that there are
no additional materials or documents that have been requested
by Sellers or their respective agents that have not been made
available by Purchaser. Sellers have had an opportunity to
ask questions of and receive answers from Purchaser's
representatives, and any decision not to ask questions of
Purchaser's representatives was a conscious decision on
Sellers' part and reflects their belief that no additional
information is necessary in order to make an informed decision
about whether to acquire the Shares. Each of Sellers further
acknowledges that Purchaser is subject to the periodic
reporting requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and Sellers have reviewed or
received copies of any such reports that have been requested
by them. Without limiting the generality of the foregoing,
Sellers acknowledge that they have received and have reviewed
copies of the following documents and materials, all of which
are incorporated herein by reference:
(a) Articles of Incorporation of Purchaser, as
amended;
(b) Bylaws of Purchaser, as amended;
(c) Purchaser's annual report on Form 10-K filed
with the Securities and Exchange Commission ("SEC") for the
years ended June 30, 1995, 1994 and 1993;
<PAGE>
(d) Purchaser's quarterly reports on Form 10-Q
filed with the SEC for the quarters ended March 31, September
30, and December 31, 1995, 1994 and 1993;
(e) Purchaser's Annual Report to Shareholders for
the years ended June 30, 1995, 1994 and 1993; and
(f) Purchaser's proxy statement filed in connection
with its annual meeting of shareholders held in 1995, 1994 and
1993.
Between the date of this Agreement and the Effective Date,
Sellers shall have the opportunity to ask additional questions
and receive answers concerning the terms and conditions of the
issuance of the Shares and to obtain any additional
information which Purchaser possesses or can acquire without
unreasonable effort or expense that is necessary to verify the
accuracy of the information otherwise provided to Sellers.
3.27 Exclusive Reliance on this Agreement. In making the
decision to acquire the Shares, Sellers have relied
exclusively upon information included in this Agreement or
incorporated herein by reference, and not on any other
representations, promises or information, whether written or
verbal, by any person.
3.28 Accuracy of Unincorporated Documents and Other
Unincorporated Materials. To the extent Sellers have received
documents or other materials, other than as expressly
incorporated herein by reference, Sellers acknowledge the
following with respect to such documents and materials:
(a) Such documents and materials and any
projections contained therein may be incomplete, may contain
errors or misstatements, and do not purport to adequately
describe the transactions contemplated by this Agreement.
Such documents and materials cannot be relied upon in making
a decision as to whether to acquire the Shares. There can be
no assurance that any of the projections contained therein
will be achieved; and
(b) Sellers have been advised and fully understand
that any summaries, projections, forecasts or estimates
included in such documents and materials, including those
relating to product development, possible revenues, income,
profitability of Purchaser or an investment therein inherently
involve uncertainties and may be affected by circumstances in
the future which cannot be reasonably predicted and are beyond
the control of Purchaser. Further, the projections, forecasts
and estimates are speculative and may be optimistic, and there
can be no assurance that any of the projections, forecasts or
estimates will be reached, or that Purchaser will realize any
<PAGE>
profits or that any dividends or distributions of profits will
be paid on Purchaser's securities.
Residency. The Sellers are resident in the state
indicated following their respective names on the first page
of this Agreement.
3.30 Advice of Counsel. Sellers understand the terms and
conditions of this Agreement, have investigated all issues to
their satisfaction, have consulted with such of their own
legal counsel or other advisors as they have deemed necessary,
and are not relying, and have not relied on Purchaser for an
explanation of the terms or conditions of this Agreement or
any document or instrument related to the transactions
contemplated thereby. Sellers further acknowledge, understand
and agree that, in arranging for the preparation of this
Agreement and all other documents and materials related
thereto, Purchaser has not attempted to procure, and has not
procured, legal representation for them.
3.31 No Representations. None of the following have ever
been represented, guaranteed, or warranted to Sellers by
Purchaser or any of its employees, agents, representatives or
affiliates, or any broker or any other person, expressly or by
implication:
(a) The approximate or exact length of time that
Sellers will be required to remain as owner of the Shares;
(b) The percentage of profit or amount of or type
of consideration, profit or loss (including tax write-offs or
other tax benefits) to be realized, if any, as a result of
Sellers' acquisition of the Shares; or
(c) The past performance or experience on the part
of Purchaser or any Affiliate or their associates, agents or
employees, or of any other person as being indicative of
future results of an acquisition of the Shares.
3.32 Certain Risk Factors. Sellers have been informed
about and fully understand that there are risks associated
with acquiring the Shares. Such risks may include, but not
necessarily be limited to, the following:
(a) No Agency Approval. No federal or state agency
has made any finding or determination as to the fairness for
investment or made any recommendation or endorsement of the
Shares.
(b) Need For Additional Financing; Dilution. If
Purchaser is unable to obtain additional financing for
development, manufacturing, marketing, operations, or any
other purpose, when and if such financing is required,
<PAGE>
Sellers' investment in Purchaser may be significantly and
adversely affected. Even if additional financing is obtained,
there can be no assurance it can be obtained upon favorable
terms, and as a condition of such additional financing,
Sellers' interest in Purchaser could be diluted or otherwise
adversely affected. In the case of a registered public
offering of Purchaser's common stock or securities convertible
into Purchaser's Common Stock, Sellers' interests in Purchaser
would be substantially diluted.
(c) Dividend Policy. Purchaser has never declared
or paid any cash dividends on its Shares and does not
anticipate paying cash dividends in the foreseeable future.
(d) Government Regulation of Products.
Substantially all of Purchaser's products are subject to the
provisions of the Federal Food, Drug and Cosmetic Act (the
"Act") and, in particular, the Safe Medical Devices Amendment
("SMDA") of the Act. The Act is administered by the Food and
Drug Administration ("FDA") and similar laws are administered
by similar agencies in other countries. The Act generally
classifies medical devices into categories, and establishes
varying degrees of labeling and marketing clearance
procedures. Purchaser is subject to FDA standards and
procedures governing the manufacture of medical devices and to
FDA inspection for compliance with such standards. Failure to
obtain FDA clearance or to comply with FDA regulations may
result in the imposition of sanctions upon Purchaser which
could have a material adverse effect on its business and
results of operations. Purchaser is required to manufacture
its regulated products in accordance with Good Manufacturing
Procedures ("GMP") and is subject to periodic audits by the
FDA. In addition, the use of Purchaser's products may be
regulated by various state agencies. Although Purchaser
believes it has been and is now in compliance with such
regulations, there can be no assurance that its products will
be able to comply successfully with any such requirements or
regulations in the future. Federal and state regulations
regarding the manufacture and sale of health care products are
subject to future change. Purchaser cannot predict what
material impact, if any, such changes might have on its
business. In addition, the introduction of Purchaser's
products in foreign markets will require obtaining foreign
regulatory clearances. There can be no assurance that
Purchaser will be able to obtain regulatory clearances for its
products in the U.S. or in foreign markets. Although
Purchaser believes that it will continue to be able to comply
with all applicable regulations of the FDA, including GMP
guidelines, current regulations depend heavily on
administrative interpretations, and there can be no assurance
that future interpretations made by the FDA or other
regulatory bodies, with possible retroactive effect, will not
adversely affect Purchaser.
<PAGE>
(e) Risks Inherent in Company's Growth Strategy.
Purchaser may continue to grow and diversify through expanding
current operations or by acquiring existing manufacturers or
distributors within its industry. This growth strategy
entails the risks inherent in assessing the value, strengths
and weaknesses of acquisition candidates and/or new products,
and in integrating and managing the operations of acquired
companies. Purchaser's growth may place significant demands
on its financial and management resources. There can be no
assurance that Purchaser will be able to implement its growth
strategy or that such strategy will ultimately prove
successful.
(f) Technological Obsolescence. The business of
designing and manufacturing technical products such as those
manufactured and marketed by Purchaser is characterized by
rapid technological change. Although Purchaser has obtained
or applied for patents on certain aspects of its technology,
there can be no assurance that its competitors will not
develop or manufacture products technologically superior to
those of Purchaser. Purchaser also relies upon unpatented
trade secrets, and no assurance can be given that others will
not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to
Purchaser's trade secrets or disclose such technology, or that
Purchaser can meaningfully protect its rights to unpatented
trade secrets.
(g) Competition. Purchaser operates in a highly
competitive industry and competes with firms which may have
greater financial resources, broader experience and more
substantial marketing operations than Purchaser.
(h) Product Liability. Manufacturers and
distributors of products used in the medical industry are from
time to time subject to lawsuits alleging product liability,
negligence or related theories of recovery, which have become
an increasingly frequent risk of doing business in these
industries. Although from time to time lawsuits may arise or
claims may be asserted based on product liability or other
legal theories against Purchaser, Purchaser has obtained
insurance that may cover, at least in part, some of such
claims. There can be no assurance that Purchaser will not be
subjected to claims for and suffer substantial losses arising
out of the use of any of its products which may be defective.
Such claims and losses, and the expense of defending against
such claims, would be costly and could have a materially
adverse effect on Purchaser's results of operations. Although
Purchaser presently maintains product liability insurance
coverage, there can be no assurance that such coverage will be
available for such risks in the future or that, if available,
it would prove sufficient to cover potential claims or that
the present amount of insurance can be maintained in force at
<PAGE>
an acceptable cost. Furthermore, the assertion of such
claims, regardless of their merit or eventual outcome, also
may have a material adverse effect on Purchaser, its business
reputation and its operations.
(i) Dependence Upon Market Acceptance of Company's
Products. Purchaser's ability to expand its product line and
market its new products and processes (including the Acquired
Business) will depend upon the willingness of potential
customers to purchase such products. In addition, there can
be no assurance that any new products or technologies
developed or acquired by Purchaser will be accepted by the
industry.
(j) Dependence on Patents and Proprietary Rights.
Purchaser has several United States patents and has filed
certain applications to reserve its right to file for patent
protection in certain foreign jurisdictions. Purchaser
believes patents and proprietary rights have been and will
continue to be important in enabling Purchaser to compete.
However, there can be no assurance that the pending patents
will issue or, if they do issue, that they and the other
patents of Purchaser will not be challenged or circumvented or
will provide Purchaser with any competitive advantages or that
any patents will issue from pending patent applications.
Failure to obtain patents in certain foreign countries may
materially adversely affect the ability of Purchaser to
compete effectively in certain international markets.
Purchaser also relies on trade secrets that it seeks to
protect, in part, through confidentiality agreements with
employees, consultants, advisors and other parties. There can
be no assurance that these agreements will not be breached,
that Purchaser would have adequate remedies for any breach or
that its trade secrets will not otherwise become known to or
independently developed by competitors. Purchaser may become
involved from time to time in litigation to determine the
enforceability, scope and validity of proprietary rights. Any
such litigation could result in substantial cost to Purchaser
and divert the efforts of its management and technical
personnel.
(k) Risks of Foreign Sales. Purchaser's expanded
marketing strategy includes increased marketing of its
products in foreign countries. Accordingly, Purchaser's
business is subject to many of the risks of international
operations, including tariff restrictions, foreign currency
fluctuations, currency control regulations, competing or
conflicting manufacturing standards, government regulation and
approval policies for medical testing and therapy devices and
licensing requirements.
(l) Dependence on Existing Management. The
development and operation of Purchaser and its Affiliates has
<PAGE>
depended and will continue to depend greatly on the efforts of
the key management personnel of these entities. Purchaser
believes that the loss of the services of any of these key
employees could have a material adverse effect on its business
and future development if suitable replacements cannot be
quickly retained. To support anticipated growth, it may be
necessary for Purchaser to employ additional administrative
personnel in the future. Purchaser's future success will
depend, in part, on its ability to retain and integrate new
personnel into its operations.
3.33 Manner of Sale. At no time were Sellers presented
with or solicited by or through any leaflet, public
promotional meeting, television advertisement or any other
form of general solicitation or advertising.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to Sellers that the
following are true and correct as of the date of this
Agreement and will be true and correct as of the Effective
Date as if made on that date:
4.1 Organization and Qualification.
(a) Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the
State of Utah and has all requisite corporate power and
authority to own and lease its properties and carry on its
business as presently conducted. Purchaser is duly qualified
to do business and is in good standing as a foreign
corporation in all states where the conduct of its business or
the ownership of its properties requires qualification.
(b) The authorized capital stock of Purchaser
consists of (i) 50,000,000 shares of Common Stock of
Dynatronics Corporation, no par value, of which 7,964,397
shares are issued and outstanding as of the date of this
Agreement, and (ii) 5,000,000 shares of Preferred Stock of
Dynatronics Corporation, no par value, of which no shares are
issued and outstanding as of the date of this Agreement. All
of the issued and outstanding shares of Purchaser's Common
Stock are, and the shares of Purchaser's Common Stock to be
issued upon consummation of the transactions contemplated by
this Agreement shall be, duly and validly issued and
outstanding and fully paid and nonassessable. The Shares to
be issued pursuant to this Agreement, when issued, shall be
free of any liens, except as otherwise provided hereby. As of
the date of this Agreement, Purchaser has reserved 1,000,000
shares of Common Stock for issuance under the Dynatronics
Stock Option Plan, pursuant to which options for the purchase
of 537,131 shares of Common Stock were outstanding as of the
<PAGE>
date of this Agreement. In addition, there are 150,075 shares
reserved for issuance upon exercise of certain options granted
to Gene Morgan Financial. Except as set forth above and
pursuant to the terms of this Agreement, as of the date of
this Agreement, there are no shares of capital stock or other
equity securities of Purchaser outstanding and no outstanding
options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or
securities or rights convertible into or exchangeable for,
shares of the capital stock of Purchaser or contracts,
commitments, understandings, or arrangements by which
Purchaser is or may be bound to issue additional shares of its
capital stock or options, warrants, or rights to purchase or
acquire any additional shares of its capital stock.
(c) The Common Stock of Purchaser is registered
under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and Purchaser is therefore subject to the
reporting requirements of the Exchange Act. As of the
Effective Date, Purchaser is in compliance with and has filed
all reports, together with any amendments required to be made
with respect thereto, required to be filed by it under the
rules and regulations under the Exchange Act, including, but
not limited to reports on Form 10-K, Form 10-Q, Form 8-K and
proxy statements. To the best of its knowledge, no filing
submitted by Purchaser to any federal or state agency under
the Securities Act, the Exchange Act and state securities laws
during the three year period ending on the date hereof
contains any false or misleading statement with respect to any
material fact, or omits to state any material fact necessary
in order to make the statements therein not false or
misleading, in each case at the time such filing became
effective.
4.2 Authority Relative to Agreement. The Board of
Directors of Purchaser has duly approved this Agreement and
the transactions contemplated hereby. Purchaser has all
requisite power and authority to enter into this Agreement and
the other agreements contemplated hereby to which Purchaser is
a party and to carry out its obligations hereunder and
thereunder. The execution, delivery and performance by
Purchaser of this Agreement and the other agreements
contemplated hereby to which Purchaser is a party and the
consummation of all transactions contemplated herein have been
duly authorized by all requisite action on the part of
Purchaser. This Agreement constitutes and the other
agreements contemplated hereby to which Purchaser is a party
upon their execution and delivery by Purchaser will
constitute, legal, valid and binding obligations of Purchaser,
enforceable in accordance with their respective terms, except
(i) that such enforcement may be limited by bankruptcy,
insolvency moratorium or similar laws affecting creditors'
rights and (ii) that the remedy of specific performance and
<PAGE>
injunctive and other forms of equitable relief are subject to
certain equitable defenses and to the discretion of the court
before which any proceedings therefor may be brought. Neither
the execution, delivery and performance of this Agreement and
the other agreements contemplated hereby by Purchaser, the
consummation by Purchaser of the transactions contemplated
herein or therein nor compliance by Purchaser with the terms
and provisions of this Agreement and such other agreements
will (A) conflict with or result in a breach, default or
violation of any of the terms, provisions or conditions of the
Articles of Incorporation or By-Laws of Purchaser, (B)
conflict with or result in a violation or breach of or
constitute a default (or an event which could, with the giving
of notice or the passage of time, or both, constitute a
default) under, or result in the creation or imposition of any
lien, charge, pledge, security interest or encumbrance upon
any of Purchaser's assets or the Assets pursuant to the terms
of, any indenture or mortgage, material agreement, instrument,
governmental permit or license, to which it or any of its
properties or assets may be subject, or (C) violate any
provision of any law, statute, rule, regulation or any
judgment, injunction, or order to which Purchaser is subject.
No authorization, consent or approval of, or filing with, any
public body or authority is necessary for the consummation by
Purchaser of any of the transactions contemplated by this
Agreement. On April 5, 1996, Purchaser made a public
announcement of its planned acquisition of the Acquired
Business. Purchaser will timely file with the SEC a Form 8-K
reporting the acquisition of the Acquired Business. Except
for compliance with relevant securities laws and certain
covenants in agreements with Purchaser's primary bank and
investment banking firm, no authorization, consent or approval
of any other third party is necessary for the consummation by
Purchaser of all transactions contemplated by this Agreement.
4.3 Actions, Suits, Etc. Except as described on the
attached Exhibit 4.3, by this reference made a part hereof,
there are no actions, suits, proceedings or investigations
pending, or to the best knowledge of Purchaser, threatened
against or affecting Purchaser at law or in equity or before
any court or any federal, state, municipal or other
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign (each being hereinafter
referred to as an "Agency") the objective of which is to
restrain or prohibit or obtain damages in respect to the
consummation of the purchase and sale of the Acquired Business
or the transactions contemplated hereby or which could have a
material adverse effect upon the financial condition or
business operations of Purchaser or upon the ability of
Purchaser to fulfill its obligations under this Agreement and
the other documents to be executed by Purchaser contemplated
hereby. Moreover, Purchaser is not, to the best knowledge of
Purchaser, in default with respect to any order, writ,
<PAGE>
injunction or decree of any court or Agency with respect to
the consummation of the purchase and sale of the Acquired
Business or the transactions contemplated hereby.
4.4 Financial Statements. Purchaser has delivered to
Sellers prior to the execution of this Agreement copies of the
following financial statements of Purchaser included in
reports filed with the SEC (collectively referred to herein as
the "Purchaser Financial Statements"):
(a) Balance sheet (unaudited) as of September 30,
December 31, and March 31, 1995, 1994, and 1993, and the
related statements of income, stockholders' equity and cash
flows (unaudited) for the three (3) months ended September 30,
1995, 1994 and 1993, the six (6) months ended December 31,
1995, 1994 and 1993, and the nine (9) months ended March 31,
1995, 1994 and 1993, and (audited) for each of the fiscal
years ended June 30, 1995, 1994, and 1993 (including related
notes and schedules, if any), as reported upon by KPMG Peat
Marwick, independent certified public accountant. The
Purchaser Financial Statements (as of the dates thereof and
for the periods covered thereby): (i) are in accordance with
the books and records of Purchaser, which are complete and
accurate in all material respects and which have been
maintained in accordance with good business practices, and
(ii) present fairly the financial position and results of
operations of Purchaser as of the dates and for the periods
indicated, in accordance with GAAP, applied on a basis
consistent with prior periods (subject in the case of interim
financial statements to normal recurring year-end audit
adjustments).
4.5 Absence of Undisclosed Liabilities. Purchaser does
not have any obligation or liability (contingent or otherwise)
that is material to Purchaser, or that when combined with
similar obligations or liabilities would be material to
Purchaser, (a) except as disclosed in the Purchaser Financial
Statements or by Purchaser in this Agreement and (b) except
commitments made in the ordinary course of Purchaser's
business consistent with past practices. Since June 30, 1995,
Purchaser has not incurred or paid any obligation or liability
which would be material to Purchaser, except for obligations
paid in connection with transactions by it in the ordinary
course of its business consistent with past practices or as
disclosed in the Purchaser Financial Statements.
4.6 Absence of Certain Changes or Events. Since June
30, 1995, Purchaser has not: incurred any material liability,
except in the ordinary course of its business consistent with
its past practices and except as permitted pursuant to this
Agreement; suffered any material or adverse change in its
business, operations, assets or condition (financial or
otherwise) which has not been disclosed in the Purchaser
<PAGE>
Financial Statements or in publicly filed reports; or failed
to operate its business consistent with its past practices.
4.7 Tax Matters.
(a) All federal, state, local and foreign tax
returns required to be filed with respect to any taxable
period ending on or before the Effective Date by or on behalf
of the Purchaser have been timely filed or requests for
extensions have been timely filed, granted, and have not
expired, and all returns filed are complete and accurate in
all material respects. All taxes shown on filed returns have
been paid. As of the date of this Agreement, there is no
audit examination, deficiency, or refund litigation or matter
in controversy with respect to any taxes that might result in
a determination materially adverse to the Purchaser, except as
reserved against in the Purchaser Financial Statements. All
taxes, interest, additions and penalties due with respect to
completed and settled examinations or concluded litigation
have been paid.
(b) Purchaser has not executed an extension or
waiver of any statute of limitations on the assessment or
collection of any taxes due that is currently in effect.
(c) Adequate provision for any federal, state,
local, or foreign taxes due or to become due for Purchaser for
any period or periods through and including the date of this
Agreement, have been made and is reflected in the Purchaser
Financial Statements.
(d) Deferred taxes of Purchaser have been provided
for in accordance with GAAP.
4.8 Disclosure. No representation or warranty made by
Purchaser in this Agreement, nor any document, written
information, statement, financial statement, certificate,
schedule or exhibit prepared and furnished or to be prepared
and furnished by Purchaser or its representatives pursuant
hereto or in connection with the transactions contemplated
hereby, contains or will contain any untrue statement of a
material fact, or omits or will omit to state a material fact
necessary to make the statements or facts contained herein or
therein not misleading in light of the circumstances under
which they were furnished. To the best knowledge of Purchaser
after reasonable inquiry, there is no event, fact or condition
that has resulted in, or could reasonably be expected to
result in, a material adverse effect that has not been set
forth in this Agreement.
4.9 Compliance with Law. To the best of Purchaser's
knowledge, Purchaser is in compliance and has conducted its
business so as to comply in all material respects with all
<PAGE>
laws, rules and regulations, judgments, decrees or orders of
any governmental entity applicable to its business or with
respect to which compliance is a condition of engaging in its
business, the breach or violation of which would have a
material adverse effect on the financial condition of
Purchaser. To the best knowledge of Purchaser, Purchaser has
not received any notification nor communication from any
agency or department of federal, state, or local government
(a) asserting that Purchaser is not in compliance with any of
the statutes, regulations or ordinances which such
governmental authority enforces, which as a result of such
non-compliance, would result in a material adverse impact on
the financial condition of Purchaser, or (b) threatening to
revoke any license, franchise, permit or governmental
authorization which is material to the financial condition of
Purchaser.
ARTICLE V
JOINT COVENANTS
5.1 Access. Each party hereto will afford to one
another and to one another's officers, employees, accountants,
counsel, and other authorized representatives, full and
complete access during normal business hours, throughout the
period prior to the earlier of the Effective Date or the
Termination Date (as hereinafter defined), to its properties,
personnel, contracts, commitments, books, records (including
but not limited to tax returns) and reports, schedules or
other documents (including but not limited to reports,
schedules and documents relating to environmental matters and
employee medical examinations and condition and those filed or
received by it pursuant to the requirements of the federal or
state securities laws) to make or cause to be made such
investigation, if any, of the business and properties of such
party, and of the financial and legal condition of such party
as the other party reasonably deems necessary or advisable to
familiarize itself and its advisors with such business,
properties and other matters, provided that such investigation
shall be reasonably related to the transactions contemplated
hereby and shall not interfere unnecessarily with such party's
normal operations. Each party will use all its reasonable
efforts to cause its respective representatives to furnish
promptly to the other such additional financial and operating
data and other information as to its business and properties
as the other or its duly authorized representatives may from
time to time reasonably request.
5.2 Notice of Any Material Change. Sellers on the one
hand, and Purchaser on the other hand, promptly after the
first notice or occurrence thereof, but no later than the
Closing Date, shall disclose to the other in writing the
occurrence of any event or the existence of any state of facts
that: (a) had such event occurred or such facts existed or
<PAGE>
been known at the date hereof, would have been required to
have been set forth in this Agreement; (b) would make any of
its or their representations and warranties in this Agreement
untrue in any material respect; or (c) with respect to each of
Purchaser and the Acquired Business, would otherwise
constitute a material adverse change in the business, results
of operations, working capital, assets, liabilities, or
condition (financial or otherwise) of each of Purchaser and
the Acquired Business. No notice hereunder will have any
effect for the purpose of determining the satisfaction of or
compliance with the conditions to the obligations of the
parties set forth elsewhere in this Agreement.
5.3 Cooperation. Sellers and Purchaser will: (a)
cooperate with one another in determining whether any filings
are required to be made with or consents, authorizations,
clearances and approvals required to be obtained from, any
governmental or regulatory authorities in any jurisdiction or
any third party prior to or following the Effective Date in
connection with the consummation of the transactions
contemplated in this Agreement and cooperate in making any
such filings promptly and in seeking timely to obtain any such
consents; (b) keep each other informed in connection with the
transactions contemplated by this Agreement and any material
transaction affecting the business of each respective company;
(c) cooperate with one another and expend reasonable amounts
in order to lift any injunctions or remove any other
impediment to the consummation of the transactions
contemplated herein; and (d) take such actions as the other
party may reasonably request to consummate the transactions
contemplated by this Agreement and use all reasonable efforts
to satisfy all conditions precedent to the obligations to
close such transactions.
5.4 Confidentiality. Each party to this Agreement will
take all reasonable precautions to maintain the
confidentiality of any information concerning any other party
or any affiliate of any other party provided to or discovered
by it or its representatives and will not disclose such
information to anyone other than those people directly
involved in the investigation and negotiations pertaining to
the transactions contemplated hereby and will not use such
information for any purpose except in furtherance of the
transactions contemplated by this Agreement. Each party
further agrees that in the event the transactions contemplated
by this Agreement are not consummated, it will promptly return
(or, if requested by the other party, destroy) all documents
and records obtained from any other party during the course of
its investigation or negotiations pertaining to the
transactions contemplated hereby and will use all its
reasonable efforts to cause all information with respect to
such other party and its businesses which it obtained pursuant
to this Agreement to be kept confidential. Notwithstanding
<PAGE>
the foregoing, the obligation of any party to maintain
confidentiality with respect to information received by it
will not apply to any disclosure of information required to be
disclosed in compliance with the parties' obligations under
the Act or the Exchange Act, as the case may be.
5.5 No Solicitation. Unless and until this Agreement is
terminated, Sellers covenant that neither they nor any of
their respective agents or affiliates, will, except as
required by law or by this Agreement: (a) directly or
indirectly, encourage, solicit or initiate discussion or
negotiations with any corporation, partnership, person or
other entity or group concerning any merger, sale of all or
substantially all of the assets, business combination, sale of
shares of capital stock or similar transactions involving
Sellers, whether by providing non-public information or
otherwise; or (b) disclose, directly or indirectly, any
information not customarily disclosed to any person concerning
the Acquired Business and the Assets, afford to any other
person access to the properties, books or records of the
Acquired Business or otherwise assist or encourage any person
in connection with any of the foregoing. In the event Sellers
receive any offer or inquiry for a transaction of the type
referred to in (a) above, Sellers will promptly inform
Purchaser about any such offer.
5.6 Public Announcements. Sellers and Purchaser will
consult with each other before issuing any press release,
public announcement, or make any public filing regarding this
Agreement and will not, unless otherwise required by law,
issue any such press release prior to such consultation.
ARTICLE VI
ADDITIONAL AGREEMENTS OF SELLERS
6.1 Covenant Not to Compete.
(a) Limitations. For a period of five (5) years
after the Effective Date each of the Sellers and Superior will
not, either directly or indirectly, engage or attempt to
engage in any business or activity relating to developing,
manufacturing, assembling and/or selling products and related
equipment that are similar to or in general competition with
those of Purchaser (including those of the Acquired Business)
at such time (the "Industry") in the greater of the
geographical area of the United States of America, Canada, the
Philippines, Japan, Mexico and the European Economic Community
or other marketing areas in which Purchaser is conducting
business at such time as Superior or Sellers would propose to
initiate conducting such business (the "Territory"). The
foregoing covenant shall automatically cease in the event of
<PAGE>
the bankruptcy, insolvency, liquidation, dissolution or
cessation of business of Purchaser or the Acquired Business.
As consideration for the covenants in this Section 6.1 (the
"Covenant Not to Compete"), subject to Sellers' approval,
which shall not be unreasonably withheld, at Closing Purchaser
may allocate a portion of the Purchase Price, as indicated on
the attached Exhibit 6.1, by this reference incorporated in
and made a part of this Agreement. Purchaser acknowledges the
ownership interest of HAH in Rehab Supply & Information Group,
LLC, a Tennessee limited liability company ("RSI") and Rehab
MedEquip, Inc., a Tennessee corporation ("Rehab") and TWH's
ownership interest in RSI and agrees that such ownership
interests, as adjusted upward or downward from time to time
after the Closing, shall not constitute a violation of the
foregoing covenant not to compete. Purchaser further agrees
that none of the Sellers shall be deemed, at any time, to be
in violation of the foregoing covenant not to compete as a
result of the following activities: (i) the conduct of
business by Rehab, including, but not limited to, the method,
manner, and type of products sold, in a manner that is the
same or substantially similar to the manner in which Rehab
conducts its business as of the Closing Date (provided,
however, that Rehab shall not hereafter engage in manufacture
of any products now distributed by it) or (ii) the conduct of
business by RSI, including, but not limited to, the method,
manner, and type of products to be sold, in a manner that is
the same or substantially similar to the manner in which RSI
proposes to conduct its business as of the Closing Date
(provided, however, that RSI shall not hereafter engage in
manufacture of any products now distributed by it). Subject
to the preceding sentence, the Sellers covenant and agree that
any conflict of interest which may arise between the interests
of Purchaser and Rehab or RSI shall always be resolved by
Sellers in favor of Purchaser. The preceding sentence shall
never be construed as requiring any of the Sellers to cause
Rehab or RSI to purchase products from Purchaser when more
favorable terms can be obtained for similar product from a
different source. Furthermore, all agreements for purchase of
product between Purchaser and Rehab or RSI shall be based on
volume and shall not be more favorable to Rehab or RSI, as the
case may be, than agreements with any other customer of
similar volume.
(b) Confidential Information. Neither Superior nor
Sellers, or any of them, shall not, without Purchaser's prior
written consent, directly or indirectly, disclose or
disseminate to any person, firm or corporation or other entity
or make any use of any information disclosed to or known by
Superior or the Sellers as a consequence of or through (i) its
prior operation of the Acquired Business or, (ii) its access
to information relating to the business of Purchaser in
connection with the execution of this Agreement, or the
satisfaction of any of its obligations thereunder, which is
<PAGE>
not generally known in any industry in which Purchaser is or
will be engaged and which is of a confidential, technical,
financial or business-oriented nature, including but not
limited to, any customer lists, trade secrets, plans,
proposals, marketing and sales plans or techniques, financial
information, costs, pricing information, trade practices,
process of manufacture, or information pertaining to machines
or apparatus considered, made, used, installed, experimented
upon or developed by or for the Acquired Business. The
foregoing covenant, to the extent it pertains to information
known by Superior or the Sellers as a consequence of or
through the operation of the Acquired Business prior to the
Effective Date, shall automatically cease in the event of the
bankruptcy, insolvency, liquidation, dissolution or cessation
of business of Purchaser or the Acquired Business. Superior
and Sellers, and each of them, shall not, without Purchaser's
prior written consent, publish or knowingly permit to be
published any material on any subject in any way relating to
the business of Purchaser or any affiliate thereof.
(c) Enforcement of Restrictions. Superior and
Sellers, and each of them, acknowledges and agrees that the
restrictions set forth in Sections 6.1(a) and (b) hereof are
fair and reasonable and are necessarily required for the
protection of the interests of Purchaser (including the value
of the Assets obtained pursuant to this Agreement). Superior
and Sellers, and each of them, further acknowledges that due
to the nature of the Industry, of which the Acquired Business
is part, a more limited geographical restriction or shorter
time duration would not be reasonable or appropriate.
Sellers, jointly and severally, hereby covenant and agree with
Purchaser that if any of them shall violate any of the
covenants or agreements contained in this Section 6.1, then
Purchaser shall be entitled to injunctive relief; such remedy
to be in addition to and not in limitation of any other rights
or remedies to which Purchaser shall also be able to recover
from Sellers, jointly and severally, together with all
reasonable costs and expenses incurred in enforcing this
Covenant Not to Compete. In the event that, notwithstanding
the foregoing, any part of this Covenant Not to Compete shall
be determined to be unenforceable, the remaining parts hereof
shall nevertheless continue to be valid and enforceable as
though the invalid and unenforceable part had not been
included herein. In the event that any provisions of this
Covenant Not to Compete relating to the time period and/or
area of restriction shall be declared by a court of competent
jurisdiction to exceed the maximum time periods or areas which
such court deems reasonable and enforceable, such time period
and/or area of restriction shall be deemed to become and
thereafter be the maximum time period and/or area which such
court deems reasonable and enforceable. Superior and Sellers'
covenants and obligations in this Section 6.1 shall survive
the Closing Date.
<PAGE>
6.2 Conduct of Acquired Business. At all times prior to
the Effective Date, Sellers shall:
(a) conduct the Acquired Business in the ordinary
course consistent with past practices, use all reasonable
efforts to keep available services of its key officers and
employees and use all reasonable efforts to maintain good
relationships with its customers, suppliers, distributors,
vendors, agents, representatives, consultants and others
having business relationships with them (collectively the
"Business Contacts");
(b) not commit or omit to do any act that would
cause Superior or any of the Sellers to breach, in any
material respect, any of the agreements, commitments or
covenants contained in this Agreement;
(c) continue to operate the Acquired Business
substantially in the same manner as heretofore operated and to
maintain the Assets in good working order, ordinary wear and
tear excepted;
(d) maintain in full force and effect the insurance
policies carried on the Assets existing on the date hereof;
and
(e) not institute any new methods of purchase,
sale, lease, management, accounting or operation or engage in
any transaction or activity, enter into any agreement or make
any commitment that will materially affect the operation or
use of the Assets after the Closing, except in the ordinary
course consistent with past practices.
6.3 Maintain Acquired Business as a Going Concern, etc.
Prior to the Effective Date, and subject to Section 6.2,
Sellers shall conduct the Acquired Business in all material
respects in the ordinary and usual course, consistent with
past practices. Sellers shall use reasonable efforts to
preserve the goodwill of the Business Contacts.
6.4 Governmental Filings and Submissions. Sellers will
make all filings required to be made by them in connection
with the purchase and sale of the Acquired Business as
contemplated hereby under any applicable law or regulation and
will promptly respond to any governmental request or inquiries
relating to such filings.
6.5 Satisfaction of Conditions. Sellers shall use all
reasonable efforts to cause all conditions precedent to
Purchaser's obligations hereunder to be satisfied on or before
the Effective Date.
<PAGE>
6.6 Provide Information. Superior and Sellers shall
provide to Purchaser all information relating to the Acquired
Business requested by Purchaser or any Affiliate which is
within Sellers or Superior's possession and reasonably
necessary for the preparation of any of the documents or other
materials necessary to effectuate the consummation of the
transactions contemplated by this Agreement.
6.7 Purchaser's Right of Off-set. As an additional
remedy for breach by Sellers and/or Sellers of any of their
respective representations and warranties set forth in this
Agreement, including amounts in excess of the $250 limitation
as to claims involving equipment under Section 3.16(b), above,
Purchaser may, pursuant to Section 10.5 of this Agreement,
off-set its expenses and costs incurred in connection with and
arising out of such breaches and reduce the amount otherwise
payable to Sellers under the Note, with such offsets, if any,
being applied to installments due under the Note in the
inverse order of their maturity.
6.8 Requirement of Unqualified Audit. The Audited
Financials shall not contain any qualified opinion of the
auditors preparing them. Sellers agree that if an unqualified
opinion cannot be obtained hereafter for both audit periods
covered by such Audited Financials, Purchaser shall have the
right to unwind the transactions contemplated by this
Agreement.
6.9 Credits Upon Early Termination of Certain Sellers.
As a condition for Purchaser to enter into this Agreement, HAH
and TWH have covenanted and agreed to enter into employment
agreements with Purchaser. Such agreements (collectively, the
"Employment Agreements") are for terms of five (5) years. To
the extent the employment of either of these Sellers is
terminated within the first three years of the contract term
of such Employment Agreements, as defined therein, Purchaser
shall not be required to repay and there shall be credited
against the outstanding balance then due and owing on the
Note, an amount equal to a percentage of the pro-rata interest
of such Seller in the original principal amount of the Note
(the "Original Amount"), as evidenced by such employee's
ownership interest in Superior at the time it filed Articles
of Dissolution, as follows:
(a) If employment of HAH or TWH terminates at any
time during the twelve months following the execution of this
Agreement, then the credit shall be equal to 47.5% of the
Original Amount applied against the total balance due and
owing under the Note at such time as to such terminating
employee;
(b) If employment of HAH or TWH terminates at any
time during second twelve months, then the credit shall be
<PAGE>
equal to 35.625% of the Original Amount applied against the
total balance due and owing under the Note at such time as to
such terminating employee; and
(c) If employment of HAH or TWH terminates at any
time during the third twelve months, then the credit shall be
equal to 23.75% of the Original Amount applied against the
total balance due and owing under the Note at such time as to
such terminating employee;
provided, in each case, however, that no penalty permitted to
be assessed by Purchaser under this Section 6.9 shall be
assessed if termination of employment is due to death,
disability, or termination without cause by Purchaser, or in
the event of bankruptcy, dissolution, or liquidation of
Purchaser.
6.10 Use of Trade Names, Trademarks, Service Marks, Etc.
Following the Effective Date, Sellers shall immediately cease
and desist from any further use of the name "Superior
Orthopaedic" or any derivative thereof, as well as from the
use of any of the other trade names, trademarks or service
marks or other intellectual property sold to Purchaser under
this Agreement. Superior shall file amendments to Superior's
charter and such other instruments reasonably required to
comply with this covenant and shall provide copies of such
instruments and related documents to Purchaser promptly after
filing.
6.11 Continuation of Lease. The oral month to month
lease for the premises at 6129 Hunter Road utilized in the
Acquired Business will be confirmed and continue on its prior
terms for a period of at least 120 days following the
Effective Date.
ARTICLE VII
ADDITIONAL AGREEMENTS OF PURCHASER
7.1 Governmental Filings and Submissions. Purchaser
will make all filings it is required to make in connection
with the purchase and sale contemplated hereby under any
applicable law or regulation and will furnish Sellers copies
of all such reports promptly after the same are filed, and
will promptly respond to any governmental requests or
inquiries relating to such filings to the extent it is
required to do so in the opinion of counsel.
7.2 Satisfaction of Conditions. Purchaser shall use all
reasonable efforts to cause all conditions precedent to
Sellers' obligations hereunder to be satisfied on or before
the Effective Date.
<PAGE>
7.3 Adequate Assurance of Future Performance. Purchaser
shall use all reasonable efforts to provide adequate assurance
of future performance of the assumed Acquired Leases and the
Assumed Liabilities.
7.4 Financing. Purchaser shall use its best efforts to
obtain financing to fulfill its obligations under this
Agreement. Such financing may be in the form of debt or
equity funding, or a combination thereof, all subject to the
prior approval of the Purchaser's Board of Directors, primary
lender and investment banker.
7.5 Assumed Liabilities, Etc.. After the Closing Date,
Purchaser shall fully pay, perform and observe all Assumed
Liabilities and Assumed Leases as and when such payment,
performance or observance is due.
7.6 Taxes. All transfer or other similar taxes
(excluding any income or franchise tax liability of Sellers)
payable to any jurisdiction by reason of the sale and transfer
of the Assets pursuant to this Agreement shall be paid by the
Purchaser.
7.7 Vacation Policy. Former employees of Superior and
Sellers who will continue with the Acquired Business following
the Effective Date will receive from Superior and/or Sellers
all currently accrued vacation and absent time paid in full
through April 30, 1996. Following the Effective Date, such
continuing employees will accrue vacation time pursuant to
Purchaser's policies and procedures, commencing as of the
Effective Date, for use in 1997. For purposes of calculating
eligibility for such benefits, Purchaser will recognize past
years of service of continuing employees with Superior and/or
Sellers. Accrual and use of vacation time shall be subject in
every case to the policies and procedures of Purchaser as from
time to time in effect following the Effective Date.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PURCHASER
The obligations of Purchaser hereunder are subject to the
fulfillment or waiver by it in writing, prior to or at the
Effective Date, of each of the following conditions:
8.1 Representations. The representations and warranties
of Sellers and Superior contained in Article III shall be true
and correct in all material respects at and as of the
Effective Date.
8.2 Performance. Sellers and Superior shall have
performed and complied in all material respects with all
agreements and conditions required by this Agreement to be
<PAGE>
performed or complied with by Sellers and/or Superior, as the
case may be, prior to or at the Effective Date.
8.3 Superior's and Sellers' Certificates. Superior and
Sellers shall have delivered to Purchaser certificates dated
as of the Closing Date, certifying the fulfillment of the
conditions specified in Sections 8.1 and 8.2.
8.4 Consents. All necessary governmental consents to
the consummation of the purchase and sale contemplated hereby
shall have been obtained.
8.5 Employment Agreements. HAH and TWH shall have
executed and delivered the Employment Agreements in the form
of Exhibits 2.2(d)(i)A and 2.2(d)(i)B, respectively.
8.6 Approval by Board of Directors of Purchaser.
Purchaser shall have received all required authorizations and
approvals to undertake this transaction from its Boards of
Directors.
8.7 Approval by Counsel for Purchaser. All actions,
proceedings, instruments or other legal matters required to
consummate the transactions contemplated by this Agreement,
shall have been approved by counsel to Purchaser, provided
that the approval of such counsel shall not be unreasonably
withheld.
8.8 Financing. Purchaser shall have obtained sufficient
financing, either in the form of debt or equity funding, or a
combination thereof, on reasonable terms satisfactory to and
accepted and approved by each of the Board of Directors,
investment banker (Joseph Charles & Assoc.) and primary lender
(Zion's First National Bank, N.A.) of the Purchaser.
8.9 Audits and Audited Financials. The Audits shall
have been completed and the Audited Financials delivered to
Purchaser and such Audited Financials shall not contain any
material change in the financial condition of Superior or the
Acquired Business since September 30, 1995. To the extent
there is a material adverse change in condition of Superior or
the Acquired Business as disclosed by the Audits, Purchaser
shall have the rights of off-set described in Section 6.7,
above, and in the Note.
8.10 No Threat of Litigation. Neither Superior nor any
of the Sellers shall not be a party to or be threatened with
any litigation or administrative proceeding relating to this
Agreement, or the transactions contemplated hereby, which, in
the reasonable judgment of Purchaser, would materially affect
the desirability of executing this Agreement or consummating
the transactions contemplated by this Agreement.
<PAGE>
8.11 Opinion from Counsel for Sellers and Superior.
Purchaser shall have received an opinion dated as of the
Closing Date from Shumacker & Thompson, P.C., counsel to
Sellers and Superior. In the preparation of the opinion, such
counsel shall be permitted to assume that, with respect to the
agreements governed by the laws of a state other than
Tennessee, the relevant laws of such state are identical to
the laws of Tennessee. The opinion shall address the
following:
(a) Superior was a corporation duly organized,
validly existing and in good standing under the laws of the
State of Tennessee prior to the filing of the Articles of
Dissolution.
(b) Superior has the corporate power and Sellers
have the power and authority to enter into this Agreement and
to consummate the transactions contemplated hereby.
(c) All corporate actions required to be taken by
Superior to approve this Agreement and the transactions
contemplated hereby and to authorize execution and delivery of
this Agreement and the performance by Superior of its
obligations hereunder, including, without limitation, approval
of such by Superior's Board of Directors and shareholders, are
consistent with applicable provisions of the Tennessee
Business Corporation Act, have been duly and properly taken,
and no further corporate action or approval is required in
order to permit Superior to consummate the transactions
contemplated hereunder.
(d) This Agreement and all related agreements and
documents attached hereto have been duly executed and
delivered by Superior and the Sellers and constitute legal,
valid and binding obligations of Superior and the Sellers
enforceable in accordance with their respective terms (subject
to the effect of general principles of equity, the effect of
applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws from time to time in effect, affecting the
rights and remedies of creditors, but excluding any presently
pending proceedings and such other exceptions as Sellers'
counsel may reasonably request), provided, however, such
counsel shall not be required to give any opinion as to the
enforceability of the duration or scope of the non-competition
agreements contemplated by this Agreement.
(e) The instruments of transfer of the Assets from
Sellers to Purchaser have been duly executed and delivered by
Sellers, and are legal, valid and binding instruments
enforceable in accordance with their terms, subject to the
exceptions noted above.
<PAGE>
(f) To the best knowledge of such counsel, no
consent, approval, authorization or order of any court or
governmental authority is required for the sale and delivery
of the Assets, or if any such consent, approval, authorization
or order is so required (the nature of which shall be
described in the opinion), the same has been obtained.
(g) As to such other matters incident to the
transaction as Purchaser may upon due notice reasonably
request.
8.12 Superior's Good Standing, Etc. Superior shall have
obtained for Purchaser with respect to Superior, a Certificate
of Existence, Certified Charter, as amended, and Bylaws.
8.13 Certificates of Authority. Sellers shall have
furnished to Purchaser:
(a) a copy, certified by an authorized officer of
Superior, of resolutions duly adopted by the Board of
Directors of Superior authorizing this Agreement and the
transactions contemplated hereby; and
(b) a copy, certified by an authorized officer of
Superior, of resolutions duly adopted pursuant to a duly
noticed meeting or other procedure allowed by law by the
shareholders of Superior authorizing this Agreement and the
transactions contemplated hereby.
ARTICLE IX
CONDITIONS TO THE OBLIGATIONS OF SELLERS
The obligations of Sellers hereunder are subject to the
fulfillment or waiver by Sellers in writing, prior to or at
the Effective Date, of each of the following conditions:
9.1 Representations. The representations and warranties
of Purchaser contained in Article IV of this Agreement shall
be true and correct in all material respects at and as of the
Effective Date.
9.2 Performance. Purchaser shall have performed and
complied in all material respects with all agreements and
conditions required by this Agreement to be performed or
complied by it prior to or at the Effective Date.
9.3 Purchaser's Certificate. Purchaser shall have
delivered to Sellers a certificate of their President or a
Vice President, dated as of the Closing Date, certifying the
fulfillment of the conditions specified in Sections 9.1 and
9.2.
<PAGE>
9.4 Consents. All governmental consents necessary to
the consummation of the purchase and sale contemplated hereby
shall have been obtained.
9.5 Approval by Counsel for Sellers. All actions,
proceedings, instruments or other legal matters required to
consummate the transactions contemplated by this Agreement,
shall have been approved by counsel to Sellers, provided that
the approval of such counsel shall not be unreasonably
withheld.
9.6 Opinion from Counsel for Purchaser. Sellers shall
have received an opinion dated as of the Closing Date of
Durham, Evans, Jones & Pinegar, P.C., counsel to Purchaser,
satisfactory to counsel to Sellers, to the effect that:
(a) Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the
State of Utah and is qualified to transact business and is in
good standing under the laws of the State of Tennessee.
(b) Purchaser has full power, authority and legal
right to enter into this Agreement, to consummate the
transactions contemplated hereby, to own and use its assets
and properties and to conduct its business as now being
conducted.
(c) All corporate actions required to be taken by
Purchaser to approve this Agreement and the transactions
contemplated hereby and to authorize the execution and
delivery of this Agreement, and the performance by Purchaser
of its obligations hereunder, have been duly and properly
taken, and no further action or approval is required in order
to permit Purchaser to consummate the transactions
contemplated hereby.
(d) This Agreement and all related agreements and
documents attached hereto have been duly executed and
delivered by Purchaser and constitute legal, valid and binding
obligations of Purchaser enforceable in accordance with their
respective terms (subject to the availability of the
discretionary remedy of specific enforcement and, as to the
enforcement of remedies, to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws from time to time
in effect, but excluding any presently pending proceedings);
provided, however, such counsel shall not be required to give
an opinion as to the enforceability of the non-competition
agreements contemplated by this Agreement.
(e) The authorized capital stock of Purchaser
consists of 50,000,000 shares of Common Stock, no par value
per share, of which 7,964,397 shares have been duly issued,
are outstanding, are free of preemptive rights of others and
<PAGE>
are fully paid and nonassessable, and 5,000,000 shares of
Preferred Stock, no par value per share, none of which have
been issued; and 537,131 shares of Common Stock are issuable
upon the exercise of employee stock options.
(f) To the knowledge of said counsel, except for
150,075 shares under option to Gene Morgan Financial,
Purchaser is not a party to or bound by any outstanding
option, warrant or other right to subscribe for or purchase
from it, or any plans, contracts or commitments providing for
the issuance of, or the granting of rights to acquire, any
capital stock of, or securities convertible into or
exchangeable for, capital stock of Purchaser, except as
disclosed in the Form 10-Q of Purchaser for the period ending
December 31, 1995.
(g) To the knowledge of such counsel, no litigation
or other proceeding against Purchaser or any of its properties
is pending or overtly threatened by a written communication to
Purchaser which might materially and adversely affect or
impair Purchaser's business or condition, financial or
otherwise, except as covered by insurance or as disclosed on
Exhibit 4.3.
(h) The Shares issuable at the Closing will be duly
authorized and validly issued, free of preemptive rights of
others, and fully paid and nonassessable.
(i) Such other matters as counsel for Sellers may
reasonably request.
9.7 Certificates of Authority. Purchaser shall have
furnished to Sellers:
(a) A certificate of the Secretary of State of Utah
dated as of a date not more than twenty (20) days prior to the
Effective Date, attesting to the organization and good
standing of Purchaser; and
(b) A copy, certified by an authorized officer of
Purchaser, of resolutions duly adopted by the Board of
Directors authorizing this Agreement and the transactions
contemplated hereby.
9.8 Releases. Purchaser shall pay immediately following
Closing or shall have obtained from Pioneer Bank ("Pioneer")
and First Tennessee Bank ("FTB") full releases of all
liability of Sellers with respect to any indebtedness of
Sellers to Pioneer and FTB that is to be assumed by Purchaser
as of the Effective Date. Following payment of such
obligations, Sellers shall file or cause to be filed,
appropriate forms to terminate all liens related to such
obligations, including, without limitation, the following:
<PAGE>
(a) UCC-1 Financing Statement filed with the
Tennessee Secretary of State on March 22, 1991, bearing File
No. 864228.
(b) UCC-1 Financing Statement filed with the
Register's Office of Hamilton County, Tennessee, on April 1,
1991, bearing File No. C62597.
(c) UCC-1 Financing Statement filed with the
Clerk's Office, Catoosa County, Georgia, Superior Court on
June 10, 1992, bearing File No. 92-20340.
ARTICLE X
INDEMNIFICATION
10.1 Indemnification by Sellers. Except as otherwise
limited by this Article X, Sellers hereby agree to defend,
indemnify and hold harmless, Purchaser and its Affiliates,
representatives, agents, attorneys and successors and assigns,
against and in respect of:
(a) any and all losses, damages, deficiencies or
liabilities resulting from any and all (A) misrepresentations
or breaches of warranty, agreement or undertaking hereunder on
the part of Superior and/or Sellers as contained in Article
III hereof, and (B) failures by Superior or Sellers to perform
or otherwise fulfill any undertaking or other agreement or
obligation hereunder;
(b) any and all Liabilities which are not Assumed
Liabilities or Liabilities associated with the Acquired
Leases;
(c) non-compliance by Sellers with any applicable
laws for the protection of creditors generally regarding bulk
transfers;
(d) any transfer, property, sales, use or other
Taxes of Superior or Sellers under federal, state, local or
foreign law, incurred prior to the Effective Date, or any
income tax liability of Superior or Sellers under such laws,
arising from the transfer of the Assets;
(e) any and all losses, damages, deficiencies or
liabilities resulting from any claims against Purchaser or its
Affiliates arising in connection with death, personal injury,
other injury to persons, property damage, losses or
deprivation of rights (whether based on statute, negligence,
breach of warranty, strict liability or any other theory)
caused by or resulting from, directly or indirectly, any
defect or claimed defect in or with respect to any products
<PAGE>
manufactured or shipped or services performed for customers by
Superior or Sellers before the Effective Date;
(f) any and all losses, damages, deficiencies or
liabilities resulting from any legal proceedings against
Purchaser and/or its Affiliates arising out of or in
connection with events occurring prior to the Effective Date
relating to the operation of the Acquired Business;
(g) any and all claims, demands or actions by any
Person, including but not limited to those Persons who are
parties to distributorship agreements with Superior or
Sellers, that they have rights acquired from or under Superior
or Sellers to own, operate, license, sell or otherwise utilize
any process or product based upon, relating to or derived from
the Acquired Intellectual Property and any and all Losses
resulting therefrom; and
(h) any and all actions, suits, proceedings,
claims, liabilities, demands, assessments, judgments, costs
and expenses, including reasonable outside attorneys' fees,
incident to any of the foregoing or such indemnification.
10.2 Indemnification by Purchaser. Except as otherwise
limited by this Article X, Purchaser hereby agrees to defend,
indemnify and hold harmless, Superior and Sellers and their
respective Affiliates, representatives, agents, attorneys and
successors and assigns against and in respect of:
(a) Any and all losses, damages, deficiencies or
liabilities resulting from any and all (i) misrepresentations
or breaches of warranty, agreement or undertaking hereunder on
the part of Purchaser as contained in Article IV hereof, and
(ii) failures by Purchaser to perform or otherwise fulfill any
undertaking or other agreement or obligation hereunder;
(b) Any and all Liabilities incurred by Superior or
any of the Sellers in respect of Assumed Liabilities,
Liabilities associated with Acquired Leases, or Liabilities of
the Acquired Business accruing after the Effective Date;
(c) Any Taxes of Purchaser relating to the Acquired
Business under federal, state, local or foreign law, accruing
after the Effective Date;
(d) Any and all losses, damages, deficiencies or
liabilities resulting from any claims against Superior or any
of the Sellers arising in connection with death, personal
injury, or other injury to persons, property damage, losses or
deprivation of rights (whether based on statute, negligence,
breach of warranty, strict liability or any other theory)
caused by or resulting from, directly or indirectly, any
defect or claim of defect in or with respect to any products
<PAGE>
manufactured or services performed for customers by Purchaser
on or after the Effective Date;
(e) Any and all losses, damages, deficiencies or
liabilities resulting from any legal proceedings against
Superior or any of the Sellers arising out of or in connection
with events occurring after the Effective Date relating to the
operation of the Acquired Business; and
(f) Any and all actions, suits, proceedings,
claims, liabilities, demands, assessments, judgments, costs
and expenses, including reasonable outside attorneys' fees,
incident to any of the foregoing or such indemnification.
Such losses, damages, deficiencies or liabilities described in
Sections 10.1 and 10.2 above are hereinafter referred to
individually as a "Loss" or collectively as "Losses." For
purposes of the balance of this Article X, any party claiming
indemnification under Sections 10.1 or 10.2 is referred to as
an "Indemnitee" and any party upon whom the claim for
indemnification is made under Sections 10.1 or 10.2 will be
referred to as an "Indemnitor."
10.3 Term of Indemnification. Any Indemnitor shall not
have any liability under this Agreement with respect to any
breach of the representations, warranties, matters of
indemnification and covenants made herein, or in any documents
collateral hereto, for any claim made by any Indemnitee of
which notice is given after the expiration of eighteen (18)
months from the Effective Date; provided, however, that
nothing in this Section 10.3 shall be construed as limiting
the rights and obligations of the parties to this Agreement
after the expiration of eighteen (18) months to the extent
necessary to accomplish the preservation of those rights and
obligations of the parties that are intended by the terms of
this Agreement and any documents collateral hereto to be
preserved following the expiration of eighteen (18) months
from the Effective Date, including, but not limited to, the
rights and obligations of the parties under the Employment
Agreements, the Registration Rights Agreement, the Note, the
Security Agreement and under Section 2.3(c), Section 6.1,
Section 6.9, Section 6.10, Article XII and Article XIII of
this Agreement.
10.4 Recoveries. The amount of any payment with respect
to Losses which Purchaser or its Affiliates shall have
suffered or incurred shall be limited as follows:
(a) The extent to which the aggregate sum of any
payments constituting the Losses which are not required to be
paid by such Indemnitee to a third party for more than twelve
(12) months following the date upon which the amount and
Indemnitors' responsibility therefor is determined shall be
<PAGE>
discounted to its present value, with such present value being
computed as of the date of such determination by using a
discount rate, compounded annually, equal to the rate of
interest announced from time to time by Chase Manhattan Bank,
N.A. as its prime or base rate (the "Base Rate") in effect as
of such date; provided, however, that Indemnitee may elect in
its sole discretion instead to have such payments constituting
the Losses paid by Indemnitors as they become due.
(b) There shall be netted from such payment the
amount of any insurance proceeds or other cash receipts of a
like nature paid to such Indemnitee as an offset against such
Losses (and no right of subrogation shall accrue to any
insurer hereunder, except as required by statute or pursuant
to contract).
(c) There shall be netted from such payment the
amount paid to such Indemnitee pursuant to any indemnification
from an unrelated party with respect to such Losses.
(d) The Indemnitors shall not be liable under the
indemnification provisions of Section 10.1 to the extent that:
(i) such Loss results from returns or allowances in the
ordinary course of business; (ii) such Indemnitee realizes any
tax benefit as a result of such Loss; or (iii) such Loss
arises after the Effective Date solely by reason of any act or
omission of such Indemnitee after the Effective Date.
10.5 Method of Asserting Claims.
(a) Notice must be given of facts which are the
basis of an indemnification claim under this Article X
promptly after the Indemnitee becomes aware of the possibility
that such facts could be reasonably expected to form the basis
of an indemnification claim and within the time period set
forth in Section 10.3 above.
(b) The Indemnitee shall provide the Indemnitor as
promptly as practical thereafter with information and
documentation reasonably requested by the Indemnitor to
support and verify the Loss. If the facts pertaining to a
Loss arise out of the claim of any third party ("Third Party
Claim"), subject to rights of or duties to any insurer or any
other third person having liability therefor, then the
Indemnitor may assume the defense thereof by prompt written
notice to the Indemnitee, including the employment of counsel
or accountants at the Indemnitor's cost and expense. No such
Third Party Claim may be settled by the Indemnitor or the
Indemnitee without the written consent of the other, which may
not be unreasonably withheld. If any such settlement offered
to, or offered by, the Indemnitor, which is otherwise
acceptable to the party making the Third Party Claim, shall
not be approved by the Indemnitee, the Indemnitor shall be
<PAGE>
relieved of liability for such claim above the amount offered
in settlement; and in such event, if the Indemnitor is
carrying on the defense of the said Third Party Claim, the
Indemnitor may at its option require either (i) reimbursement
of reasonable legal fees and reasonable expenses paid by the
Indemnitor after the time of the refusal by the Indemnitee to
approve such settlement, or (ii) require the Indemnitee to
assume the continued defense of the claim at the Indemnitee's
expense. All parties hereto shall cooperate in the defense of
any claims which may result in Loss or Losses, and shall
furnish such records, information and testimony, and attend
such conferences, discovery proceedings, hearings, trials, and
appeals, as may be reasonably requested in connection
therewith. Upon payment of any Loss, the Indemnitor shall be
subrogated to all rights and remedies of the Indemnitee as to
such Loss. The notice and opportunity to defend a Third Party
Claim required by this Section 10.5 shall be conditions
precedent to the liability of the Indemnitor under this
Section 10.5 as to such Third Party Claim.
(c) When a Loss not arising from a Third Party
Claim is paid or is otherwise fixed or determined, then the
Indemnitee shall give the Indemnitor notice of such Loss, in
reasonable detail and specifying the amount of such Loss, and
the Sections of this Agreement upon which the claim for
indemnification for such Loss is based. This notice shall be
in addition to the notice required under Section 10.5(a)
above, but the notices under this Section 10.5(c) and under
such Section 10.5(a) may be given simultaneously and in a
single instrument when appropriate and in compliance with both
provisions. If the recipient of the notice desires to dispute
such claim, it shall, within thirty (30) days after receipt of
notice of the claim of Loss against it pursuant to this
Section 10.5(c), give counternotice, setting forth the basis
for disputing such claim to the Indemnitee. If no such
counternotice is given within such 30-day period or if the
Indemnitor acknowledges liability for indemnification, then
such Loss shall be promptly satisfied.
(d) Upon final determination of a Loss hereunder
for which Purchaser is entitled to indemnification under this
Article X, Purchaser shall be first required to offset the
amount of such Loss against the Note, such offsets to be in
the inverse order of the installments due under the Note.
ARTICLE XI
EFFECTIVE DATE BALANCE SHEET
Not later than thirty (30) days after the Effective Date,
Purchaser, at its expense, shall cause Purchaser's independent
public accountants, KPMG Peat Marwick, or their successors to
furnish to Sellers and Purchaser a balance sheet of the
Acquired Business (the "Closing Balance Sheet") as of the
<PAGE>
Effective Date. Purchaser's independent public accountants
shall permit Sellers' independent public accountants to be
present while the Closing Balance Sheet is being prepared.
The Closing Balance Sheet shall be prepared in accordance with
GAAP consistent with Sellers and Superior's past practice in
connection with the Acquired Business adjusted to reflect the
elimination of all Liabilities other than Assumed Liabilities
or any Liabilities as associated with the Acquired Leases.
Notwithstanding anything in this Agreement to the contrary, at
the election of Purchaser, the Closing may be made in escrow,
with all executed documents and agreements, etc., funds and
securities to be held in trust by counsel for Purchaser,
pending the completion of the Closing Balance Sheet and the
satisfaction of all other conditions precedent to Closing as
contained in this Agreement. In such event, the parties will
enter into an escrow agreement in the form provided in the
attached Exhibit 11, by this reference made a part hereof and
incorporated herein.
ARTICLE XII
RECORDS
On the Closing Date, Sellers shall deliver or cause to be
delivered to Purchaser possession of all Records in the
possession of Sellers necessary for or relating to the
operations of the Acquired Business. Purchaser shall make the
Records available to Sellers upon their request until December
31, 2001. If either party desires to destroy the Records
after December 31, 2001, the party desiring to destroy the
records shall notify the other party in writing. Within
fifteen (15) days of the receipt of such notice, the party
receiving said notice may request, in writing, that the other
party retain the records for an additional year from the date
of such notice.
ARTICLE XIII
SURVIVAL OF OBLIGATIONS
Except as otherwise set forth herein, all
representations, warranties and agreements contained in this
Agreement or in any exhibit, schedule, certificate or other
agreement delivered pursuant hereto shall terminate on the
Effective Date.
<PAGE>
ARTICLE XIV
TERMINATION OF AGREEMENT
14.1 Termination. Notwithstanding anything to the
contrary contained in this Agreement, this Agreement may be
terminated and abandoned at any time prior to the Effective
Date:
(a) by written mutual consent of Sellers and
Purchaser;
(b) by either Sellers or Purchaser if the purchase
and sale contemplated hereby shall not have been consummated
on or before June 30, 1996, unless such failure to consummate
the transaction shall have been caused by willful breach of
this Agreement by the party seeking termination;
(c) by either Sellers or Purchaser if the other
party is in material breach of this Agreement and such party
fails to cure such breach within ten (10) Business Days of
receiving written notice thereof; or
(d) by Purchaser in the event Purchaser determines
subsequent to the date hereof that the value of the Assets is
materially less than set forth in the Financial Statements.
14.2 Effect of Termination. In the event of any
termination of this Agreement, this Agreement shall become
void and have no effect, except that,
(a) the provisions of Sections 5.4 and 15.10 (first
two sentences) shall survive any such termination, and
(b) a termination pursuant to Sections 14.1(b) or
14.1(c) of this Agreement shall not relieve the breaching
party from liability for any uncured, intentional and willful
breach of a representation, warranty, covenant or agreement
contained herein giving rise to such termination.
ARTICLE XV
MISCELLANEOUS
15.1 Applicable Law. This Agreement and the rights and
obligations of the parties hereto shall be governed, construed
and enforced in accordance with the laws of the State of Utah
(except for the conflicts of laws rules of such State).
15.2 Benefit. This Agreement shall be binding upon and
shall inure to the exclusive benefit of the parties hereto.
This Agreement is not assignable without the written consent
of all parties hereto, and is not intended to, nor shall it,
create any rights in any other party, provided that Purchaser
<PAGE>
may, at its sole discretion, perform its obligations hereunder
and effect the purchaser of the Assets through a wholly-owned
subsidiary corporation or Affiliate established for the
purpose of purchasing and operating the Acquired Business,
and, provided further that the Purchaser may assign its rights
hereunder which survive the closing to any of its lender(s)
without the consent of Sellers.
15.3 Waiver. Neither the failure nor any delay on the
part of any party hereto in exercising any rights, power or
remedy hereunder shall operate as a waiver thereof, or of any
other right, power or remedy; nor shall any single or partial
exercise of any right, power or remedy preclude any further or
other exercise thereof, or the exercise of any right, power or
remedy. Except as expressly provided herein, no waiver of any
of the provisions of this Agreement shall be valid unless it
is in writing and signed by the party against whom it is
sought to be enforced.
15.4 Further Assurances. Each of the parties hereto
agrees to use all reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions
contemplated by this Agreement.
15.5 Entire Agreement. This Agreement, the Schedules and
Exhibits hereto, each of which is deemed to be a part hereof,
and any certificates executed and delivered by the parties
pursuant to this Agreement, constitute the entire agreement
and understanding between the parties hereto, and it is
understood and agreed that all undertakings, negotiations and
agreements heretofore had between the parties are merged
herein. This Agreement may not be modified orally, but only
by an agreement in writing signed by Sellers and Purchaser.
15.6 Notices. Any and all notices or other
communications required or permitted under this Agreement
shall be in writing and shall be deemed sufficient when
delivered personally or by facsimile transmission, overnight
courier or by United States certified mail, return receipt
requested, at the address of such party set forth below or to
such other address as the party shall have furnished in
writing in accordance with this Section 15.6:
If to Sellers:
H. Allen Hughes, Jr.
9203 Cobblestone Hill Drive
Ooltewah, Tennessee 37363
<PAGE>
Herbert A. or Betty D. Hughes
647 Council Drive
Marietta, Georgia 30067
Thomas W. Hughes
9204 Waconda Shore Drive
Chattanooga, Tennessee 37416
With a copy to:
Shumacker & Thompson, P.C.
Suite 500, First Tennessee Building
701 Market Street
Chattanooga, TN 37402
Attn: John K. Culpepper, Esq.
If to Purchaser:
Dynatronics Corporation
7030 Park Centre Drive
Salt Lake City, Utah 84121
Attn: Kelvyn H. Cullimore, Jr.
With a copy to:
Durham, Evans, Jones & Pinegar
50 South Main, Suite 850
Salt Lake City, Utah 84144
Attn: Kevin R. Pinegar, Esq.
15.7 Severability. If any provision of this Agreement is
held to be invalid, illegal or unenforceable, the balance of
this Agreement shall remain in full force and effect and this
Agreement shall be construed in all respects as if such
invalid, illegal or unenforceable provision were omitted. If
any provision is unapplicable to any person or circumstance,
it shall, nevertheless, remain applicable to all other persons
and circumstances.
15.8 Headings, Gender, Etc.. Any paragraph headings in
this Agreement are for convenience of reference only and shall
be given no effect in the construction or interpretation of
this Agreement or any provisions thereof. All personal
pronouns used in this Agreement, whether used in the
masculine, feminine or neuter gender, shall include all of the
genders; the singular shall include the plural and the plural
shall include the singular.
15.9 Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, each of which
shall be deemed an original, and which together shall
constitute one and the same instrument.
<PAGE>
15.10 Expenses. Unless otherwise provided herein,
Sellers and Purchaser shall each bear all expenses incurred by
each of them in connection with the preparation, performance
and consummation of the transactions contemplated by this
Agreement. Purchaser will pay the professional fees of KPMG
Peat Marwick incurred in connection with the Audits of
Superior's financial statements as required by this Agreement.
Sellers shall not cause any expense relating to this
transaction to be paid from Superior's or the Acquired
Business' funds.
15.11 Specific Performance. The parties hereto shall
be entitled to specific performance of this Agreement, in
addition to all other remedies to which they may be entitled
at law or in equity. The remedies of each party hereto under
this Agreement shall be cumulative of each other and of the
remedies available at law or in equity. A party's full or
partial exercise of any such remedy shall not preclude any
subsequent exercise by such party of the same or any other
remedy.
15.12 Facts "Known" to Sellers or Purchaser.
Wherever a representation or warranty is made herein as being
"to the best of knowledge," "to the knowledge of Superior or
Sellers" or words to that effect, such words shall mean the
actual knowledge of Sellers. Wherever a representation or
warranty is made herein as being "to the best of knowledge of
Purchaser" or "to the knowledge of Purchaser," or words to
that effect, such words shall mean the actual knowledge of
Purchaser's executive officers.
Executed the day and year first written above.
SUPERIOR:
SUPERIOR ORTHOPAEDIC SUPPLIES, INC.
a Tennessee corporation
By /s/ H. Allen Hughes
----------------------------
Its: C.E.O.
----------------------------
SELLERS:
/s/ Herbert Allen Hughes, Jr.
-------------------------------
Herbert Allen Hughes, Jr.
/s/ Thomas W. Hughes
-------------------------------
Thomas Webster Hughes
/s/ Betty D. Hughes
-------------------------------
Betty D. Hughes
<PAGE>
/s/ Herbert A. Hughes
-------------------------------
Herbert A. Hughes
PURCHASER:
DYNATRONICS, INC., a Utah corporation
By /s/ Kelvyn H. Cullimore, Jr.
---------------------------
Its: President
---------------------------
<PAGE>
SUPERIOR ORTHOPAEDIC SUPPLIES, INC.
Financial Statements
March 31, 1996 and June 30, 1995
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
- -----------------------------
The Board of Directors
Superior Orthopaedic Supplies, Inc.:
We have audited the accompanying balance sheets of Superior
Orthopaedic Supplies, Inc. as of March 31, 1996 and June 30,
1995, and the related statements of earnings and retained
earnings and cash flows for the nine-month period ending March
31, 1996 and the year ended June 30, 1995. 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 in accordance with generally accepted
auditing standards. Those standards 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. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Superior Orthopaedic Supplies, Inc. as of March 31, 1996
and June 30, 1995, and the results of its operations and its
cash flows for the nine-months ended March 31, 1996 and the year
ended June 30, 1995 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick
April 11, 1996
1
<PAGE>
SUPERIOR ORTHOPAEDIC SUPPLIES, INC.
Balance Sheets
March 31, 1996 and June 30, 1995
<TABLE>
<CAPTION>
Assets (notes 2 and 5) 1996 1995
- ---------------------- ---------- ---------
<S> <C> <C>
Current assets:
Accounts receivable (note 8) $ 343,148 287,358
Inventories (note 3) 275,029 206,090
Other current assets 1,414 -
-------- --------
Total current assets 619,591 493,448
Property and equipment (note 4) 68,990 63,727
Less accumulated depreciation 62,294 56,560
-------- --------
Property and equipment, net 6,696 7,167
-------- --------
Total assets 626,287 500,615
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Current installments of long-term
debt (note 5) 3,999 3,948
Notes payable to bank (note 5) 57,000 40,000
Notes payable to related parties
(notes 5 and 8) 82,505 54,843
Accounts payable (note 8) 225,693 210,889
Other accrued expenses 3,873 8,570
State franchise and excise taxes
payable (note 7) 4,900 5,700
-------- --------
Total current liabilities 377,970 323,950
Long-term debt, less current
installments (note 5) 6,319 -
-------- --------
Total liabilities 384,289 323,950
Stockholders' equity:
Common stock, no par value, 2,000
shares authorized, 1,000 shares
issued and outstanding 2,058 2,058
Retained earnings 239,940 174,607
-------- --------
Total stockholders' equity 241,998 176,665
-------- --------
Commitments and contingencies
(notes 5 and 6)
Total liabilities and
stockholders' equity $626,287 500,615
======== ========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
SUPERIOR ORTHOPAEDIC SUPPLIES, INC.
Statements of Earnings and Retained Earnings
Nine-months ended March 31, 1996
and Year ended June 30, 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Sales (note 8) $ 1,561,690 2,021,189
Cost of sales 1,095,273 1,504,705
----------- -----------
Gross margin 466,417 516,484
Selling, general, and
administrative expenses (note 8) 392,407 469,624
----------- -----------
Operating income 74,010 46,860
Other income (expense):
Interest expense (notes 5 and 8) (7,405) (6,237)
Gain on sale of property and
equipment 2,553 2,958
Miscellaneous 275 -
----------- -----------
Net other expense 4,577 3,279
----------- -----------
Earnings before state
income taxes 69,433 43,581
State income taxes (note 7) 4,100 2,500
----------- -----------
Net earnings 65,333 41,081
Retained earnings:
Beginning of period 174,607 133,526
----------- -----------
End of period $ 239,940 174,607
=========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
SUPERIOR ORTHOPAEDIC SUPPLIES, INC.
Statements of Cash Flows
Nine-months ended March 31, 1996
and Year ended June 30, 1995
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $65,333 41,081
Adjustments to reconcile net
earnings to net cash used
by operating activities:
Depreciation 12,480 13,978
Gain on sale of property
and equipment (2,553) (2,958)
Increase (decrease) in cash
due to changes in:
Accounts receivable (55,790) (73,216)
Inventories (68,939) (68,448)
Other current assets (1,414) -
Accounts payable 14,804 72,569
Other accrued expenses (4,697) 573
State franchise and
excise taxes payable (800) (200)
------- -------
Net cash used in
operating activities (41,576) (16,621)
------- -------
Cash flows from investing activities:
Proceeds from disposal of
property and equipment 3,250 7,600
Acquisition of property and equipment (12,706) (13,306)
------- -------
Net cash used in investing activities (9,456) (5,706)
------- -------
Cash flows from financing activities:
Proceeds from issuance of
long-term debt 12,500 -
Net borrowings under notes payable 40,714 22,073
Payments of long-term debt (2,182) -
------- -------
Net cash provided by financing
activities 51,032 22,073
-------- -------
Net decrease in cash - (254)
Cash at beginning of year - 254
-------- -------
Cash at end of year $ - -
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 7,405 6,237
Income taxes 4,000 1,500
-------- -------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
SUPERIOR ORTHOPAEDIC SUPPLIES, INC.
Notes to Financial Statements
March 31, 1996 and June 30, 1995
(1) Summary of Significant Accounting Policies
------------------------------------------
The accompanying financial statements include the
accounts of Superior Orthopaedic Supplies, Inc. (the
Company). The Company was formed in August 1987 to
manufacture and sell certain orthopaedic and other
medical supplies through a nationwide distributor
network. Prior to being incorporated, the Company
operated as a division of a related company, Rehab Med
Equip, Inc. The following is a summary of the Company's
significant accounting policies:
(a) Inventories
-----------
Inventories are stated at the lower of cost or market.
Cost is determined using the first-in, first-out method.
(b) Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation
on property and equipment is calculated using straight-
line and accelerated methods over the estimated useful
lives of the assets.
(c) Income Taxes
------------
The Company has applied for and received approval from
the Internal Revenue Service to be treated as an S
Corporation for federal income tax purposes.
Accordingly, any federal income tax liability is the
responsibility of the individual stockholders. Provision
has been made in the accompanying financial statements
for state franchise and excise taxes.
(d) Use of Estimates
----------------
Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements in
conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(2) Sale of Certain Assets of the Company
-------------------------------------
In February 1996, the shareholders of the Company reached
an agreement with an unrelated company, Dynatronics
Corporation (Dynatronics), for the sale of substantially
all of the Company's assets. In addition, certain
liabilities will also be assumed by Dynatronics. As a
result of the transaction, the Company distributed the
Company's net assets to the shareholders who will
consummate the transaction with Dynatronics. Total
consideration for the net assets includes 440,000
restricted shares of Dynatronics common stock, a note in
the amount of $550,000, bearing interest at 7% with monthly
principal and interest payments over 10 years callable
after 3 years, and $550,000 in cash.
(3) Inventories
------------
At March 31, 1996 and June 30, 1995, inventories consisted
of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Raw materials $118,312 95,950
Work in process 24,828 22,331
Finished goods 131,889 87,809
-------- --------
$275,029 206,090
======== ========
</TABLE>
5
<PAGE>
SUPERIOR ORTHOPAEDIC SUPPLIES, INC.
Notes to Financial Statements
(4) Property and Equipment
----------------------
At March 31, 1996 and June 30, 1995, property and equipment
consisted of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Machinery and equipment $ 43,738 38,746
Office furniture and fixtures 16,853 9,139
Automobiles 8,399 15,842
-------- --------
$ 68,990 63,727
======== ========
</TABLE>
(5) Long-term Debt and Notes Payable
--------------------------------
In June 1995, the Company entered into a revolving line of credit
with a bank in the amount of $75,000. The line of credit bears
interest at the bank's base rate plus 1% (9% at March 31, 1996
and June 30, 1995), and matures on May 15, 1996. Interest is
payable monthly with any outstanding principal due at maturity.
At March 31, 1996 and June 30, 1995, the outstanding balance was
$57,000 and $40,000, respectively. The line of credit is secured
by substantially all of the Company's assets. This agreement is
also guaranteed by two of the Company's stockholders.
In August 1995, the Company entered into an unsecured loan agreement
with a bank in the original amount of $12,500. The note is payable
in 36 monthly installments of $397, bears interest at 9% and matures
on August 20, 1998. At March 31, 1996, the loan had a balance of
$10,318. This loan has been guaranteed by one of the Company's
stockholders.
The Company has a noninterest bearing note payable to a related
company that shares common ownership. The note is unsecured and
is payable on demand or upon the sale of the Company. At March 31,
1996 and June 30, 1995, the note payable had a balance of $21,250
and $36,250, respectively.
Two shareholders of the Company have also advanced funds to the
Company. At March 31, 1996 and June 30, 1995, $61,255 and $18,593,
respectively, had been advanced by shareholders. The outstanding
amounts bear interest at 9% with interest payments made monthly.
The amounts are unsecured and are payable on demand or upon the sale
of the Company.
At March 31, 1996, maturities of long-term debt are as follows:
1997 $3,999
1998 4,374
1999 1,945
--------
$10,318
========
(6) Leases
------
The Company is a party to lease agreements for real property.
These leases are on a month-to-month basis. Rent expense was
$31,730 for the nine-months ended March 31, 1996 and $21,150
for the year ended June 30, 1995.
6
<PAGE>
SUPERIOR ORTHOPAEDIC SUPPLIES, INC.
Notes to Financial Statements
(7) State Income Taxes
------------------
For the nine-months ended March 31, 1996 and the year ended
June 30, 1995, state income tax expense was $4,100 (5.9%
effective rate) and $2,500 (5.7% effective rate), respectively.
The Company has no temporary differences that would give rise
to significant deferred tax assets or liabilities.
(8) Related Party Transactions
--------------------------
In the normal course of business, the Company enters into various
transactions with related parties including sales to, purchases
from, and leasing agreements with these parties. Additionally, the
Company transfers inventory to a related party at cost. These
transfers are not reflected as sales or cost of sales in the
accompanying statement of earnings and retained earnings. For the
nine-months ended March 31, 1996 and the year ended June 30, 1995,
the Company had the following related party transactions:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Sales to related party $ 179,352 255,171
Transfers to related party, at cost 144,317 184,329
Purchases from related party 278,862 216,965
Rent expense 19,200 11,550
Interest expense 2,550 2,003
========= ========
</TABLE>
Also, at March 31, 1996 and June 30, 1995, the Company had the following
amounts outstanding due from or due to related parties:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Accounts receivable $ 54,077 48,315
Accounts payable 70,260 26,014
Notes payable 82,505 54,843
========= =========
</TABLE>
(9) Financial Instruments
---------------------
At March 31, 1996, the Company had financial instruments including
accounts receivable of $343,148, accounts payable of $225,693,
accrued expenses of $8,322, notes payable of $139,505, and long-term
debt of $10,766. The carrying value of accounts receivable, accounts
payable, accrued expenses, and notes payable approximates their
estimated fair value due to the relative short maturity of these
instruments. The carrying value of long-term debt approximates its
estimated fair value due to recent issuance of the debt.
7
