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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file number 1-9913
KINETIC CONCEPTS, INC.
- ----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 74-1891727
- --------------------------------- ---------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
8023 Vantage Drive
San Antonio, Texas 78230 (210) 524-9000
- --------------------------------- ---------------------------------
(Address of principal executive (Registrant's phone number)
offices and zip code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports, and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock: 42,442,535 shares as of April 30, 1997
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
March 31, December 31,
1997 1996
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents.............. $ 41,394 $ 59,045
Accounts receivable, net............... 71,556 58,241
Inventories............................ 21,367 20,042
Prepaid expenses and other............. 8,991 6,860
------- -------
Total current assets............ 143,308 144,188
------- -------
Net property, plant and equipment........ 67,933 65,224
Notes receivable......................... 3,100 --
Goodwill, less accumulated amortization of
$12,120 in 1997 and $12,021 in 1996.... 21,339 13,541
Other assets, less accumulated amortization
of $2,871 in 1997 and $5,614 in 1996... 31,871 30,440
------- -------
$267,551 $253,393
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................... $ 5,480 $ 3,974
Current installments of capital lease
obligations.......................... 118 118
Accrued expenses....................... 32,281 29,792
Income tax payable..................... 7,812 2,970
------- -------
Total current liabilities...... 45,691 36,854
------- -------
Capital lease obligations, net of current
installments........................... 363 396
Deferred income taxes, net............... 6,007 5,065
------- -------
52,061 42,315
------- -------
Shareholders' equity:
Common stock; issued and outstanding 42,305
in 1997 and 42,355 in 1996............. 42 42
Retained earnings........................ 218,212 210,816
Cumulative foreign currency translation
adjustment............................. (2,518) 555
Notes receivable from officers........... (246) (335)
------- -------
215,490 211,078
------- -------
$267,551 $253,393
======= =======
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(in thousands, except per share data)
(unaudited)
Three months ended
March 31,
---------------------
1997 1996
-------- ----------
Revenue:
Rental and service................. $61,825 $56,790
Sales and other.................... 11,356 10,797
------ ------
Total revenue 73,181 67,587
------ ------
Rental expenses...................... 37,712 37,246
Cost of goods sold................... 4,242 4,043
------ ------
41,954 41,289
------ ------
Gross profit................. 31,227 26,298
Selling, general and administrative
expenses........................... 15,010 12,557
------ ------
Operating earnings........... 16,217 13,741
Net interest income.................. 454 970
------ ------
Earnings before income taxes 16,671 14,711
Income taxes........................ 6,668 5,897
------ ------
Net earnings................ $10,003 $ 8,814
====== ======
Earnings per common and common
equivalent share.................. $ 0.23 $ 0.19
====== ======
Shares used in earnings per share
computations...................... 43,763 45,967
====== ======
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three months ended
March 31,
-----------------------
1997 1996
----------- ----------
Cash flows from operating activities:
Net earnings.............................. $ 10,003 $ 8,814
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization........... 5,280 5,476
Provision for uncollectible accounts
receivable............................ 969 408
Change in assets and liabilities:
Increase in accounts receivable, net.... (13,488) (2,920)
Increase in inventory................... (1,823) (831)
Increase in prepaid and other assets.... (2,133) (2,304)
Increase in accounts payable............ 1,356 1,633
Increase (decrease) in accrued expenses. 2,227 (670)
Increase in income taxes payable........ 4,842 4,333
Increase (decrease) in deferred income taxes 942 (116)
------ ------
Net cash provided by operating activities 8,175 13,823
------ ------
Cash flows from investing activities:
Additions to property, plant and equipment (3,615) (6,798)
Increase in inventory to be converted into
equipment for short-term rental........ (2,820) (750)
Dispositions of property, plant and equipment 42 250
Businesses acquired in purchase transactions,
net of cash acquired................... (10,099) --
Decrease in note receivable from principal
shareholder............................ -- 10,000
Increase in other assets................. (5,484) (801)
------- ------
Net cash provided (used) by investing
activities........................... (21,976) 1,901
------- ------
Cash flows from financing activities:
Repayments of capital lease obligations.. (33) --
Proceeds from the exercise of stock options 392 1,141
Purchase and retirement of treasury stock (1,309) (2,331)
Cash dividends paid to shareholders...... (1,608) (1,666)
Other.................................... 8 --
------- ------
Net cash used by financing activities.. (2,550) (2,856)
------- ------
Effect of exchange rate changes on cash and
cash equivalents......................... (1,300) (160)
------- ------
Net increase (decrease)in cash and cash
equivalents.............................. (17,651) 12,708
Cash and cash equivalents, beginning of period 59,045 52,399
------ ------
Cash and cash equivalents, end of period... $41,394 $65,107
====== ======
Supplemental disclosure of cash flow
information:
Cash paid during the first three months for:
Interest............................... $ 59 $ 64
Income taxes........................... $ 676 $ 310
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- ----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1) BASIS OF PRESENTATION
---------------------
The financial statements presented herein include the
accounts of Kinetic Concepts, Inc. and all subsidiaries (the
"Company"). The foregoing financial information reflects all
adjustments (consisting only of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair
presentation of the financial position and results of operations
for the interim periods presented. Interim period operating
results are not necessarily indicative of the results to be
expected for the full fiscal year. The financial information
presented for the interim periods is unaudited and subject to year-
end audit and adjustments.
(2) INVENTORY COMPONENTS
--------------------
Inventories are stated at the lower of cost (first-in, first-
out) or market (net realizable value). Inventories are comprised
of the following (in thousands):
March 31, December 31,
1997 1996
---------- ------------
Finished goods...................... $ 6,010 $ 5,586
Work in process..................... 3,058 1,893
Raw materials, supplies and parts... 19,669 17,113
------ ------
28,737 24,592
Less amounts expected to be converted
into equipment for short-term rental 7,370 4,550
------ ------
Total inventories.......... $21,367 $20,042
====== ======
(3) NOTES RECEIVABLE
----------------
Notes receivable included a $3.0 million note received from
James R. Leininger, M.D., the principal shareholder and chairman
of the Company's Board of Directors, the proceeds of which were
used to finance a construction project for Home Dome, L.L.C., a
third party affiliated with Dr. Leininger. The note carries a
variable interest rate which will fluctuate between 6.25% and
10.25% per annum, and requires quarterly interest payments
beginning May 3, 1997. Monthly principal payments commence March
3, 1998 based on a 20-year note amortization. The note has a
final maturity date of February 3, 2002, at which time the entire
amount of unpaid principal and interest shall be due. The note is
secured by 300,000 shares of the Company's Common Stock and a
mortgage on the property under construction.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(4) ACQUISITIONS/DISPOSITIONS
-------------------------
On February 1, 1997, the Company acquired the assets of H.F.
Systems, Inc. of Los Angeles. H.F. Systems offers a complete line
of therapeutic specialty support surfaces primarily to the
California extended care marketplace. The Company acquired the
assets of H.F. Systems in a single transaction for approximately
$8.0 million in cash plus other consideration. H.F. Systems will
be integrated into Kinetic Concepts' extensive distribution system
and, as a result, the Company expects to benefit from the
elimination of certain redundant expenses. H.F. Systems recorded
revenue of approximately $7.0 million for 1996 and is not expected
to have material impact on the Company's results of operations for
1997.
On January 3, 1997 the Company purchased from Trac Medical,
Inc., a North Carolina corporation, all assets and technology
rights to the "Access" patient care device, an environmental
control system arm which is mountable on beds. The Company
purchase price of the Access device was approximately $2.0 million
in cash plus other consideration.
Subsequent to March 31, 1997, the Company acquired 80% of the
outstanding capital stock of Ethos Medial Group, Ltd. located in
Athlone, Ireland, for approximately $3.5 million in cash plus
other consideration. Ethos manufactures the Keene Roto Rest r
trauma bed and other medical devices and rents specialty support
surfaces to care givers throughout Ireland.
(5) SHARES USED IN EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE COMPUTATIONS
---------------------------------------
The weighted average number of common and common equivalent
shares used in the computation of earnings per share is as follows
(in thousands):
Three months ended
March 31,
-------------------
1997 1996
-------- --------
Average outstanding common shares... 42,401 44,320
Average common equivalent shares-
dilutive effect of option shares.. 1,362 1,647
------ ------
Shares used in earnings per share
computations...................... 43,763 45,967
====== ======
Earnings per common and common equivalent share are computed by
dividing net earnings by the weighted average number of common and
dilutive common equivalent shares outstanding during the period.
Dilutive common equivalent shares consist of stock options (using
the treasury stock method). Earnings per share computed on a
fully diluted basis is not presented as it is not significantly
different from earnings per share computed on a primary basis.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(6) COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is party to several lawsuits generally incidental
to its business and is contesting certain adjustments proposed by
the Internal Revenue Service to prior years' tax returns.
Provisions have been made in the accompanying financial statements
for estimated exposures related to these lawsuits and adjustments.
In the opinion of management, the disposition of these items will
not have a material effect on the Company's financial statements.
(7) NEW PRONOUNCEMENTS
-------------------
In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings per Share, which is required to
be adopted on December 31, 1997. At that time, the Company will
be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact is
expected to result in an increase in primary earnings per
share for the first quarter ended March 31, 1997 and March 31,
1996 of $0.01 and $0.01 per share, respectively. The impact of
Statement 128 on the calculation of fully diluted earnings per
share for these quarters is not expected to be material.
Independent Accountants' Review Report
--------------------------------------
The Board of Directors
Kinetic Concepts, Inc.:
We have reviewed the condensed consolidated balance sheet of Kinetic
Concepts, Inc. and subsidiaries as of March 31, 1997, and the related
condensed consolidated statements of earnings for the three-month
period ended March 31, 1997 and the condensed consolidated statements
of cash flows for the three-month period ended March 31, 1997. These
financial statements are the responsibility of the Company's
management. The condensed consolidated balance sheet and the related
condensed consolidated statement of earnings and condensed consolidated
statement of cash flows of Kinetic Concepts, Inc. and subsidiaries as
of March 31, 1996 and for the three-month period then ended were
reviewed by other accountants whose report (dated April 17, 1996)
stated that they were not aware of any material modifications that
should be made to those statements for them to be in conformity with
generally accepted accounting principles.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data, and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, which will be performed for the
full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying condensed consolidated
financial statements at and for the period ended March 31, 1997
referred to above for them to be in conformity with generally accepted
accounting principles.
The financial statements for the year ended December 31, 1996, from
which the accompanying condensed balance sheet was derived, were
audited by other accountants and they expressed an unqualified opinion
on those financial statements in their report dated February 5, 1997.
/S/ ERNST & YOUNG LLP
---------------------
Ernst & Young LLP
San Antonio, Texas
April 22, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------
Results of Operations
First Quarter of 1997 Compared to First Quarter of 1996
- --------------------------------------------------------
The following table sets forth, for the periods indicated, the
percentage relationship of each item to total revenue as well as the
change in each line item as compared to the first quarter of the prior
year ($ in thousands):
Three Months Ended March 31,
------------------------------
Revenue Increase
Relationship (Decrease)
--------------- -------------
1997 1996 $ Pct
------ ------- ------ ----
Revenue:
Rental and service................. 84% 84% $ 5,035 9%
Sales and other.................... 16 16 559 5
--- --- ------ --
Total Revenue.................... 100% 100% 5,594 8
Rental expenses...................... 51 55 466 1
Cost of goods sold................... 6 6 199 5
--- --- ----- --
Gross profit..................... 43 39 4,929 19
Selling, general and administrative
expenses........................... 21 19 2,453 20
--- --- ----- --
Operating earnings............... 22 20 2,476 18
Interest income, net................. 1 1 (516) (53)
--- --- ----- --
Earnings before income taxes..... 23 22 1,960 13
Income taxes......................... 9 9 771 13
--- --- ----- --
Net earnings..................... 14% 13% $ 1,189 13%
=== === ===== ==
The Company's revenue is derived from three primary markets. The
following table sets forth the amount of revenue derived from each of
these markets for the periods indicated ($ in millions):
Three months ended
March 31,
------------------
1997 1996
-------- -------
Domestic Specialty Surfaces $49.6 $45.5
International 16.6 17.3
Medical Devices 6.9 4.8
Other 0.1 --
---- ----
$73.2 $67.6
==== ====
Total revenue in the first quarter of 1997 increased by $5.6
million, or 8.3%, to $73.2 million, from $67.6 million in the first
quarter of 1996. Revenue from the Company's specialty patient surface
business was $49.6 million, up $4.1 million, or 8.9% from the first
quarter of 1996. This increase resulted from continued market share
gains in the acute care segment combined with market and market share
expansion in the extended care segment. Revenue from the Company's
international operations was $16.6 million, down 4.0% from the
first quarter of 1996, due substantially to unfavorable currency
fluctuations during the period. Excluding currency fluctuations,
international revenue was comparable to the prior year as lower rental
revenue in the German market was offset by revenue gains in other
countries. Revenue from medical device operations increased 45.0% to
$6.9 million in the first quarter of 1997 due of primarily to the
nationwide launch of the V.A.C. in the United States during the last
three months 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
During 1996, the Company was advised that its bid to become the
primary vendor to Premier Purchasing Partners, L.P. ("Premier") was
awarded to another vendor effective January 1, 1997. Revenue from
hospitals within Premier for 1996 accounted for approximately 10% of
the Company's total revenue. Because facilities within Premier are not
committed to do business with the group's primary vendor, it is
difficult to predict the ultimate effect of the new agreement on
revenue and operating profits. During the first three months of 1997,
revenue from hospitals within the Premier group purchasing organization
was higher than in the year-ago period, due primarily to the removal of
contractual revenue caps effective January 1997. Management believes
these interim results are not indicative of the results to be expected
for the full fiscal year, although the Company expects that a portion
of the revenue will be retained.
Rental expenses were 61.0% of total rental revenue in the first
quarter of 1997 compared to 65.6% in the first quarter of 1996. This
decrease is primarily attributable to the increase in rental revenue,
as the majority of rental expenses are relatively fixed, e.g. facility
and delivery costs.
Gross profit increased $4.9 million, or 18.7%, to $31.2 million in
the first quarter of 1997 from $26.3 million in the first quarter of
1996 due to the increase in revenue as well as the controlled growth in
rental expenses.
Selling, general and administrative expenses increased $2.4
million, or 19.5%, to $15.0 million in the first quarter of 1997 from
$12.6 million in the first quarter of 1996. As a percentage of total
revenue, selling, general and administrative expenses were at 20.5% in
the first quarter of 1997 as compared with 18.6% in the first quarter
of 1996. The increase is due in part to costs associated with certain
key investments, e.g. improved marketing and information systems as
well as increased legal and professional fees.
Operating earnings for the period increased $2.5 million, or
18.0%, to $16.2 million compared to $13.7 million in the prior-year
quarter resulting largely from revenue growth.
Net interest income for the three months ended March 31, 1997 was
$.5 million compared to $1.0 million in the prior year. The decrease
in interest income resulted from (i) the early payment in October 1996
of all remaining notes receivable from Mediq/PRN and (ii) lower
invested cash balances due to acquisition activities in the first
quarter of 1997.
The Company's effective income tax rate in the first quarter of
1997 was 40%, consistent with the first quarter of 1996.
Net earnings increased $1.2 million, or 13.5%, to $10.0 million in
the first quarter of 1997 from $8.8 million in the first quarter of
1996. This increase was due to the relative decrease in rental expenses
and the change in revenue as discussed above.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Financial Condition
- -------------------
The change in revenue and expenses experienced by the Company
during the first quarter of 1997 and other factors resulted in changes
to the Company's balance sheet as follows:
Cash and cash equivalents were $41.4 million at March 31, 1997, a
decrease of $17.6 million from December 1996. The cash decrease
resulted substantially from business/asset acquisitions totaling $10.1
million plus a temporary increase in accounts receivable.
Accounts receivable at March 31, 1997 were $71.6 million, a $13.3
million or 22.9%, increase from year-end. On January 2, 1997, the
Company converted to a new billing and accounts receivable system.
Implementation activities had a negative timing impact on collections
for the period. The Company expects future receivable balances to
decrease as this system is stabilized.
Inventory at March 31, 1997 increased $1.4 million, or 6.6%, to
$21.4 million from $20.0 million at December 31, 1996 primarily due
to planned product introductions and further market expansion
internationally.
Net property, plant and equipment at March 31, 1997 increased $2.7
million, or 4.2%, to $67.9 million from $65.2 million at December 31,
1996 due in part to asset acquisitions such as H.F. Systems. Capital
expenditures were $6.4 million during the first quarter of 1997 as the
Company invested in new products for its rental fleet and new computer
systems. Depreciation and amortization for the first three months of
1997 totaled $5.3 million, down 3.6% from the same period in 1996.
Notes receivable consisted of a $3.0 million note received from
James R. Leininger, M.D., the Company's principal shareholder and
chairman of the Board of Directors. The note is secured by a Deed of
Trust/Security Agreement, Vendor's Lien and 300,000 shares of KCI
Common Stock. The note bears interest at market rates and has a final
maturity of February 3, 2002.
Goodwill increased $7.8 million during the period, to $21.3
million, due primarily to the Company's two asset acquisitions in the
period.
Accrued expenses at March 31, 1997 increased $2.5 million, or
8.4%, to $32.3 million from $29.8 million at December 31, 1996.
Accruals for sales taxes payable and national sales meetings and other
operating costs accounted for the majority of this increase.
Market Trends
- --------------
The health care industry continues to face various challenges,
including increased pressure on health care providers to control costs,
the accelerating migration of patients from acute care facilities into
extended care (e.g. skilled nursing facilities and rehabilitation
centers) and home care settings, the consolidation of health care
providers and national and regional group purchasing organizations
and the growing demand for clinically proven and cost effective
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Market Trends (continued)
- -------------------------
therapies. In addition, Congress continues to debate federal health
care expenditures in an attempt to slow the rate of growth and balance
the federal budget. As a result, the Company believes that health
care providers will continue to experience heightened cost control
pressures.
The Company is addressing these trends by expanding its product
line to address certain niche market demands, e.g. obesity, and further
developing applications for its existing product continuum. The
Company believes that introductions of unique and therapeutic products
such as the TriaDyne and BariKare beds and the V.A.C. device will
enable it to further penetrate the market. In addition, the Company is
increasing its marketing efforts beyond its existing base of more than
1000 acute care hospitals and 2000 extended care facilities to market
to an additional 8000 hospitals and nursing homes in which the Company
has a relatively small presence.
The Company's market continues to increase based upon demographic
trends as most of the Company's patients are over 50 years old.
Further, its broad product line and national distribution system enable
it to compete effectively in the changing healthcare environment.
More recently, sales have increased as a portion of the Company's
revenue. The Company believes this trend will continue because certain
U.S. health care providers are purchasing products that are less
expensive and easier to maintain such as medial devices, mattress
overlays and mattress replacement systems. In addition, international
health care providers tend to purchase products more often than U.S.
health care providers.
Legal Proceedings
- -----------------
On February 21, 1992, Novamedix Limited ("Novamedix") filed a
lawsuit against the Company in the United States District Court for the
Western District of Texas. Novamedix manufactures the principal product
which directly competes with the PlexiPulse. The suit alleges that the
PlexiPulse infringes several patents held by Novamedix, that the
Company breached a confidential relationship with Novamedix and a
variety of ancillary claims. Novamedix seeks injunctive relief and
monetary damages.
Initial discovery in this case has been substantially completed.
Although it is not possible to predict the outcome of this litigation
or the damages which could be awarded, the Company believes that its
defenses to these claims are meritorious and that the litigation will
not have a material adverse effect on the Company's business, financial
condition or results of operations.
On August 16, 1995, the Company filed a civil antitrust lawsuit
against Hillenbrand Industries, Inc. and one of its subsidiaries, Hill-
Rom. The suit was filed in the United States District Court for the
Western District of Texas. The suit alleges that Hill-Rom used its
monopoly power in the standard hospital bed business to gain an unfair
advantage in the specialty hospital bed business. Specifically, the
allegations set forth in the suit include a claim that Hill-Rom
required hospitals and purchasing groups to agree to exclusively rent
specialty beds in order to receive substantial discounts on products
over which they have monopoly power -- hospital beds and head wall
units. The suit further alleges that Hill-Rom engaged in
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Legal Proceedings (continued)
- -----------------------------
activities which constitute predatory pricing and refusals to deal.
Hill-Rom has filed an answer denying the allegations in the suit. Although
discovery is just beginning and it is not possible to predict the outcome
of this litigation or the damages which might be awarded, the Company
believes that its claims are meritorious.
On October 31, 1996 the Company received a counterclaim which had
been filed by Hillenbrand Industries, Inc. in the antitrust lawsuit
which the Company filed in 1995. The counterclaim alleges that the
Company's antitrust lawsuit and other actions were designed to enable
KCI to monopolize the bed market. Although it is not possible to
predict the outcome of this litigation, the Company believes that the
counterclaim is without merit.
On December 26, 1996, Hill-Rom, a subsidiary of Hillenbrand
Industries, Inc., filed a lawsuit against the Company alleging that the
Company's TriaDyne bed infringes a patent issued to Hill-Rom December
24, 1996. This suit was filed in the United States District Court for
the District of South Carolina. Substantive discovery in the case has
not begun. Based upon its preliminary investigation, the Company
believes that its defenses to the lawsuit are meritorious and that this
lawsuit will not have a material adverse impact on the marketing of the
TriaDyne bed.
The Company is a party to several lawsuits arising in the ordinary
course of its business and is contesting adjustments proposed by the
Internal Revenue Service to prior years' tax returns. Provisions have
been made in the Company's financial statements for estimated exposures
related to these lawsuits and adjustments. In the opinion of
management, the disposition of these matters will not have a material
adverse effect on the Company's business, financial condition or
results of operations.
The manufacturing and marketing of medical products necessarily
entails an inherent risk of product liability claims. The Company
currently has certain product liability claims pending for which
provision has been made in the Company's financial statements.
Management believes that resolution of these claims will not have a
material adverse effect on the Company's business, financial condition
or results of operations. The Company has not experienced any
significant losses due to product liability claims and currently
maintains adequate liability insurance coverage.
Liquidity and Capital Resources
During the first quarter of 1997, the Company generated net cash
provided by operating activities of $8.2 million compared to $13.8
million in the prior year period. At March 31, 1997, cash and cash
equivalents totaling $41.4 million were available for general corporate
purposes. Additionally, the Company maintains a Credit Agreement with
a bank as an agent for itself and certain other financial institutions.
The Credit Agreement currently permits borrowings of up to $50.0
million. At March 31, 1997, the entire amount of the Credit Agreement
was available. The Company believes that current cash reserves combined
with operating cash flows during the next twelve month period will be
sufficient to provide for new investments in equipment and any working
capital needed during the period.
At March 31, 1997, the Company was committed to purchase
approximately $3.3 million of inventory associated with new products
over the remainder of this year. The Company did not have any other
material purchase commitments.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) EXHIBITS
A list of all exhibits filed or included as part of this
quarterly report on Form 10-Q is as follows:
Exhibit Description
------- ------------
3.1 Restatement of Articles of Incorporation
(filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1, as
amended (Registration No. 33-21353), and
incorporated herein by reference).
3.2 Restated By-Laws of the Company (filed as
Exhibit 3.3 to the Company's Registration
Statement on Form S-1, as amended
(Registration No. 33-21353), and incorporated
herein by reference).
4.1 Specimen Common Stock Certificate of the
Company (filed as Exhibit 4.1 to the Annual
Report on Form 10-K for the year ended
December 31, 1988, and incorporated herein by
reference).
10.1 Agreement dated September 29, 1987, by and
between the Company and Hill-Rom Company,
Inc. (filed as Exhibit 10.7 to the Company's
Registration Statement on Form S-1, as
amended (Registration No. 33-21353), and
incorporated herein by reference).
10.2 Employment and Non-Competition Agreement
dated December 26, 1986, by and between the
Company and James R. Leininger, M.D. (filed
as Exhibit 10.10 to the Company's
Registration Statement on Form S-1, as
amended (Registration No. 33-21353), and
incorporated herein by reference).
10.3 Contract dated September 30, 1985, by and
between Ryder Truck Rental, Inc. and the
Company regarding the rental of delivery
trucks (filed as Exhibit 10.23 to the
Company's Registration Statement on Form S-1,
as amended (Registration No. 33-21353), and
incorporated herein by reference).
10.4 1988 Kinetic Concepts, Inc. Directors Stock
Option Plan (filed as Exhibit 10.26 to the
Company's Registration Statement on Form S-1,
as amended (Registration No. 33-21353), and
incorporated herein by reference).
EXHIBITS (continued)
---------------------
10.5 Kinetic Concepts, Inc. Employee Stock
Ownership Plan and Trust dated January 1,
1989 (filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1989, and incorporated herein
by reference).
10.6 1987 Key Contributor Stock Option Plan, as
amended, dated October 27, 1989 (filed as
Exhibit 10.9 to the Company's Annual Report
on Form 10-K for the year ended December 31,
1989, and incorporated herein by reference).
10.7 Amendment No. 1 to Asset Purchase Agreement
dated September 30, 1994 by and among Kinetic
Concepts, Inc., a Texas corporation, KCI
Therapeutic Services, Inc., a Delaware
corporation, MEDIQ Incorporated, a Delaware
corporation, PRN Holdings, Inc., a Delaware
corporation and MEDIQ/PRN Life Support
Services-I, Inc., a Delaware corporation
(filed as Exhibit 2.2 to the Company's Form 8-
K dated October 17, 1994, and incorporated
herein by reference).
10.17 Credit Agreement dated as of May 8, 1995 by
and among the Company and Bank of America
National Trust and Savings Association, as
Agent (filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995, and incorporated herein
by reference).
10.18 Purchasing Agreement, dated February 1, 1994,
between the Company, KCI Therapeutic
Services, Inc. and Voluntary Hospitals of
America, Inc.(filed as Exhibit 10.18 to the
Company's Amended Annual Report on Form 10-
K/A, dated January 23, 1996, for the year
ended December 31, 1994, and incorporated
herein by reference).
10.19 Rental/Purchasing Agreement, dated April 1,
1993 between the Company, KCI Therapeutic
Services, Inc. and AmHS Purchasing Partners,
L.P. (filed as Exhibit 10.19 to the Company's
Amended Annual Report on Form 10-K/A, dated
January 23, 1996, for the year ended December
31, 1994, and incorporated herein by
reference).
10.20 KCI Management 1994 Incentive Program (filed
as Exhibit 10.20 to the Company's Amended
Annual Report on Form 10-K/A, dated January
23, 1996, for the year ended December 31,
1994, and incorporated herein by reference).
EXHIBITS (continued)
--------------------
10.21 KCI Employee Benefits Trust Agreement (filed
as Exhibit 10.21 to the Company's Amended
Annual Report on Form 10-K/A, dated January
23, 1996, for the year ended December 31,
1994, and incorporated herein by reference).
10.22 Letter, dated September 19, 1994, from the
Company to Raymond R. Hannigan outlining the
terms of his employment (filed as Exhibit
10.22 to the Company's Amended Annual Report
on Form 10-K/A, dated January 23, 1996, for
the year ended December 31, 1994, and
incorporated herein by reference).
10.23 Letter, dated November 22, 1994, from the
Company to Christopher M. Fashek outlining
the terms of his employment (filed as Exhibit
10.23 to the Company's Amended Annual Report
on Form 10-K/A, dated January 23, 1996, for
the year ended December 31, 1994, and
incorporated herein by reference).
10.24 Option Agreement, dated November 21, 1994,
between Dr. James R. Leininger, Cecilia
Leininger and Raymond R. Hannigan (filed as
Exhibit 10.24 to the Company's Amended Annual
Report on Form 10-K/A, dated January 23,
1996, for the year ended December 31, 1994,
and incorporated herein by reference).
10.25 Option Agreement, dated August 23, 1995,
between Dr. James R. Leininger, Cecilia
Leininger and Bianca A. Rhodes (filed as
Exhibit 10.25 to the Company's Amended Annual
Report on Form 10-K/A, dated January 23,
1996, for the year ended December 31, 1994,
and incorporated herein by reference).
10.26 Stock Purchase Agreement dated June 15, 1995
among KCI Financial Services, Inc., Kinetic
Concepts, Inc., Cura Capital Corporation, MG
Acquisition Corporation and the Principal
Shareholders of Cura Capital Corporation
(filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, and incorporated herein
by reference).
10.27 Promissory Note dated August 21, 1995 in the
principal amount of $10,000,000 payable to
James R. Leininger, M.D. to the order of
Kinetic Concepts, Inc., a Texas corporation
(filed as Exhibit 2.2 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, and incorporated
herein by reference).
EXHIBITS (continued)
--------------------
10.28 Stock Pledge Agreement dated August 21, 1995
by and between James R. Leininger, M.D. and
Kinetic Concepts, Inc., a Texas corporation
(filed as Exhibit 2.3 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, and incorporated
herein by reference).
10.29 Executive Committee Stock Ownership Plan
(filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, and incorporated herein
by reference).
10.30 Deferred Compensation Plan (filed as Exhibit
99.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30,
1995 and incorporated herein by reference).
10.31 Kinetic Concepts, Inc. Senior Executive Stock
Option Plan (filed as Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated
herein by reference).
10.32 Form of Option Instrument with respect to
Senior Executive Stock Option Plan (filed as
Exhibit 10.32 to the Company's Annual Report
on Form 10-K for the year ended December 31,
1996 and incorporated herein by reference).
* 10.33 Asset Purchase Agreement dated January 3,
1997 by and among Trac Medical, Inc., a North
Carolina corporation, Terry Williams, David
Mattis, George Parrish and KCI Therapeutic
Services, Inc., a Delaware corporation.
* 10.34 Asset Purchase Agreement dated January 27,
1997 by and among Hydrothermic Floatation
Systems, Inc., a California corporation, Y.
Jeremy Levy and KCI Therapeutic Services,
Inc., a Delaware corporation.
11.1 Earnings Per Share Computation (filed as
Exhibit 11.1 to the Company's Annual Report
on Form 10-K for the year ended December 31,
1996 and incorporated herein by reference).
13.1 Kinetic Concepts, Inc. 1996 Annual Report to
Shareholders (furnished for the information
of the Commission and not deemed to be
"filed," except for those portions expressly
incorporated herein by reference)(filed as
Exhibit 13.1 to the Company's Annual Report
on Form 10-K for the year ended December 31,
1996 and incorporated herein by reference).
EXHIBITS (continued)
--------------------
16.1 Letter from KPMG Peat Marwick LLP to the
Securities and Exchange Commission regarding
agreement with statements made by Registrant
under Item 9 of its Form 10-K dated March 28,
1997 (filed as Exhibit 16.1 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by
reference).
22.1 List of Subsidiaries (filed as Exhibit 22.1
to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 and
incorporated herein by reference).
* 23.1 Acknowledgment by Ernst & Young dated May 8,
1997.
* 27.1 Financial Data Schedule
Note: (*) Exhibits filed herewith.
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K dated February 25,
1997, with respect to the change of the Company's certifying accountant
for the year ending December 31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
KINETIC CONCEPTS, INC.
(REGISTRANT)
By: /S/ JAMES R. LEININGER, M.D.
----------------------------
James R. Leininger, M.D.
Chairman of the Board
By: /S/ RAYMOND R. HANNIGAN
----------------------------
Raymond R. Hannigan
President and Chief Executive Officer
By: /S/ BIANCA A. RHODES
----------------------------
Bianca A. Rhodes
Senior Vice President,
Chief Financial Officer and
Chief Accounting Officer
Date: May 8, 1997
EXHIBIT 10.33
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement ("Agreement") is made and
entered into as of the 3rd day of January, 1997 by and among
Trac Medical, Inc., a North Carolina corporation ("Seller"),
Terry Williams ("Williams"), David Mattis ("Mattis"), George
Parrish ("Parrish") (Williams, Mattis and Parrish are
hereinafter collectively referred to as the "Shareholders"),
and KCI Therapeutic Services, Inc., a Delaware corporation
("Buyer");
W I T N E S S E T H:
WHEREAS, Seller has developed technologies related to
control systems mountable on beds and is engaged in the
marketing and manufacture thereof (the "Business"); and
WHEREAS, Seller and the Shareholders desire to sell,
assign and convey to Buyer, and Buyer desires to purchase
from Seller, the assets of Seller relating to the Trac
ACCESS Device (as hereinafter specifically defined);
NOW, THEREFORE, in consideration of the premises and
mutual covenants and agreements of the parties hereinafter
contained, it is agreed by and between the parties as
follows:
ARTICLE 1
SALE OF ASSETS
1.01 Sale of Assets. Seller hereby agrees that,
subject to the terms, provisions and conditions of this
Agreement, Seller shall transfer, sell, assign, convey and
deliver to Buyer, and Buyer shall purchase from Seller, on
the Closing Date (as hereinafter defined) the Trac ACCESS
Device as described and identified at Schedule 1.01 (the
"Current Embodiment") and other existing or presently
conceived technology related to control systems mountable on
beds (the "Conceptions") (collectively, the "Trac ACCESS
Device"), all of the assets utilized, developed or acquired
by Seller related to the Trac ACCESS Device, all right,
title and interest in all patents, patent applications,
patent rights, inventions, products, product enhancements,
concepts, data, information, source code, government permits
(to the extent such permits are assignable), know how, trade
secrets, trademarks, copyrights, licenses, contractual
rights, causes of action, customer lists, goodwill, vendor
relationships, inventory, business, accounts, parts lists,
and the like, and all other rights related to the
manufacture, sale or use of the Trac ACCESS Device, and all
other assets (i.e. blueprints, tooling, fixtures, testing
devices, etc.) necessary to manufacture and assemble the
Trac ACCESS Device (collectively, the "Assets"). With
respect to the Conceptions, Seller shall (i) transfer to
Buyer such right, title and interest which it has to the
Conceptions at the time of Closing, (ii) not make any
specific representations or warranties with respect to the
Conceptions except as specifically set forth in Section 2.07
hereof and (iii) retain a non-exclusive worldwide license
and right to use the technology underlying the Conceptions
if, and only to the extent, such technology has a non
medical use.
1.02 Purchase Price and Earnout Payment. In
consideration of the transfer, sale, assignment, conveyance
and delivery of the Assets to Buyer as described in Section
1.01 hereof, and subject to the conditions to Closing (as
hereinafter defined) set forth in Article 7 hereto, Buyer
agrees to pay to Seller an aggregate of $1,850,000 (the
"Closing Purchase Price"), payable by means of a wire
transfer in immediately available funds to the bank account
designated by Seller (the "Purchase Price").
(a) Earnout Payment.
(i) In addition to the Closing Purchase
Price to be paid by Buyer at the Closing, Buyer shall
deliver to Seller an earnout payment (the "Earnout
Payments") based on the cumulative number of Units (as
hereinafter defined) sold or leased to third party
purchasers (including any leasing corporation as may exist
or be organized by Buyer) in the first thirty-six (36)
months (or portion thereof) (the "Earnout Period") following
the Closing at the time each of the following hurdles (the
"Hurdles") is reached:
Hurdle - # Units Sold/Leased Earnout Payment
---------------------------- -----------------
5,000 $550,000
10,000 $550,000
15,000 $550,000
20,000 $550,000
30,000 $550,000
40,000 $550,000
50,000 $550,000
(ii) "Units" shall mean the number of Base
Units installed. "Base Unit" shall mean the Current
Embodiment of the Trac ACCESS Device as described on
Schedule 1.01 hereto and any successor product to the Trac
ACCESS Device having a list price which is at least eighty
percent (80%) of the list price of the Current Embodiment
but shall not include units of the Trac ACCESS Device which
are manufactured by Buyer or Seller for use in Buyer's
rental fleet. The parties hereto agree to negotiate in good
faith to determine the treatment of those units of successor
products to the Trac ACCESS Device having a list price which
is equal to or less than eighty percent (80%) of the list
price of the Current Embodiment. Such negotiations shall be
based upon the anticipated list price and gross profit
margin of the successor product when compared to the Current
Embodiment. No successor device shall be treated as a Base
Unit unless it has a gross margin of at least fifty percent
(50%).
(iii) Notwithstanding anything contained
herein to the contrary, those Base Units for which a
purchase order has been received by Buyer at the end of the
Earnout Period but which have not been installed shall be
included in the number of Units for purposes of determining
the Earnout Payments if such Base Units are ultimately
installed within 90 days of the end of the Earnout Period,
provided, however, if such Base Units have not been
installed solely as a result of Buyers failure to supply
Base Units for installation (as a result of a force
majeure event or any other event which is not related to
Seller's breach of a representation or warranty), the
Base Units which Buyer failed to supply will be credited to
Seller for purposes of the Earnout Payment.
(iv) If Buyer shall become obligated to
deliver an Earnout Payment, Buyer shall, within 30 days
of reaching the Hurdle, deliver to Seller $550,000 in cash
by wire transfer in immediately available funds to the bank
account designated by Seller. For purposes of this Section
1.02(c)(iv), a Hurdle shall be deemed to be reached when the
number of Units designated in Section 1.02(c)(i) have been
installed.
(v) Buyer shall provide Seller with a
periodic accounting of the Units, which accounting shall
be limited to the invoice numbers, customer names,
quantities, product catalogue numbers and charge
backs which have been made and reasonable access to
Buyer's records which Seller may request in order to
substantiate any such accounting.
(b) Royalty. In addition to the Closing Purchase
Price to be paid by Buyer at the Closing, Buyer shall pay
Seller royalties in accordance with the Royalty Agreement
by and between Buyer and Seller dated as of the date hereof.
1.03 No Assumption of Liabilities. Buyer does
not and shall not assume or agree to assume, and
shall not acquire or take over, the liabilities and
obligations of Seller or the Shareholders of any nature,
direct, contingent or otherwise, except the obligations (the
"Assumed Liabilities") which arise out of the performance
by Buyer from and after the Effective Date (as hereinafter
defined) of the contracts and accounts set forth on Schedule
1.03 attached hereto and incorporated herein by reference
(the "Contracts and Accounts"). Buyer shall have and assumes
no liabilities, obligations, or responsibilities arising
before or after the Effective Date which arise out of the
activity or inactivity of Seller (including, without
limitation, breach or default) prior to the Effective Date
Without limiting the generality of the foregoing, it is expressly
agreed that Buyer shall have no liability to, for, or in
respect of, any employees of Seller including,
without limitation, accrued payroll, salary, severance,
accrued vacation, accrued sick leave or benefit claims of any
nature, or any withholding or other tax or payment
in respect thereof.
1.04 Closing; Effective Date. The Closing of
the transactions provided for in this Article 1 (the
"Closing") shall take place on January 3, 1997 at
10:00 a.m. at the offices of Kennedy Covington Lobdell & Hickman,
L.L.P., Two Hannover Square, Suite 1900, 434 Fayetteville Street
Mall, Raleigh, North Carolina or such other place, time and date
as the parties may mutually agree. The date, as thus determined,
on which the Closing is to take place is referred to herein as the
"Closing Date." The transactions hereunder shall be effective as
of 12:01 a.m. on the Closing Date or such other time and date as
the parties may mutually agree. The date, as thus determined, on
which the transactions hereunder shall be effective is referred to
herein as the "Effective Date". Immediately prior to the Closing,
Buyer shall conduct an inventory of the tangible assets. To the
extent that there are tangible assets located at sites other
than Seller's principal place of business, Seller shall provide
Buyer a certificate at Closing which sets forth the identity and
location of such assets.
1.05 Conveyance and Transfer. Seller hereby agrees that, at
the Closing, it will deliver to Buyer: the Bill of Sale and
Assumption Agreement in the form agreed to by the parties (the
"Bill of Sale and Assumption Agreement") and all other bills of
sale, endorsements, assignments, releases and other good and
sufficient instruments of transfer, assignment and conveyance, in
form satisfactory to Buyer and its counsel, as shall be effective to
convey to Buyer good and marketable title in and to all of the
Assets. Such bills of sale and other instruments of transfer
shall contain covenants of general warranty and all other
documents required to be delivered to Buyer under the provisions
of this Agreement. Simultaneously with such deliveries, Seller will
take all steps necessary to put Buyer in actual possession of the
Assets.
1.06 Further Assurances. Seller and the
Shareholders hereby agree that, from time to time, at
Buyer's request and without further consideration,
they will execute and deliver to Buyer such other
and further instruments of conveyance, assignment and
transfer and take such other action as Buyer may
reasonably require to more effectively convey,
transfer and assign to Buyer, and to put Buyer in
possession of, the Assets.
1.07 Allocation of Sales Price. The
aggregate consideration received by Seller pursuant to
this Agreement shall be allocated as set forth below:
Fixed Assets - $100,000
Inventory - $50,000
Non-Compete - $250,000
Other intangibles
(including goodwill) - remainder of consideration
1.08 Taxes. Except for taxes owed by Buyer as a
result of its use and operation of the Assets, from and
after the Effective Date, Buyer shall have no
liability or responsibility for any income, franchise,
excise, sales, use or other taxes (other than income
taxes based upon or measured by Buyer's net income) or
charges or imposts of any kind relating to or arising
out of the transactions contemplated by this Agreement.
Seller shall be solely responsible for the payment
of sales, transfer and use taxes arising out of the
sale, transfer and assignment of the Assets.
1.09 Deliveries on Closing Date. Subject to the
terms and provisions hereof, on or before the
Closing, Seller shall deliver to Buyer the
originals of any contracts assumed by Buyer and
all other written contracts, books, records and
other data of Seller relating to the Assets or the
Business and performance of services by Seller in
connection therewith. Subject to the confidentiality
provisions of the Non-Competition and Continuity of
Business Dealings Agreement referred to in Section
4.04 hereof to the extent necessary, and for the sole
purpose of, the preparation of its tax returns, Seller
may retain copies of all such documents and data.
1.10 Books and Records. All other books and
records with respect to Seller shall be retained by
Seller and such books and records as relate to the
Assets and the Business shall be open for
inspection and copying upon reasonable notice at
any time during regular business hours for a
period of five (5) years from and after the Effective
Date. Seller agrees that all such books and records
will be kept and maintained or made available at
Seller's corporate office in Raleigh, North Carolina
or such other location as the parties may mutually
agree.
1.11 Right of First Refusal. Seller hereby
grants to Buyer a right of first refusal (the
"Right of First Refusal") to purchase any New
Invention (as hereinafter defined) during the period
beginning on the Effective Date and ending five
years thereafter. "New Inventions" shall mean medical
device inventions conceived by Seller, or which Seller
is entitled to manufacture or market, which are
unrelated to the Trac ACCESS Device. Seller shall
provide Buyer with written notice ("Seller's Notice")
of its intent to enter into any agreement or other
arrangement providing for the sale or disposition of
any New Invention. Buyer may exercise the Right of
First Refusal by notifying Seller, in writing,
within thirty days after Seller's Notice, of
Buyer's agreement to purchase such New Invention on
terms and conditions of substantially equivalent to
such agreement or arrangement.
1.12 Future Development. All rights related
to the manufacture, sale or use of any inventions
related to the Trac ACCESS Device or its
Improvements (as hereinafter defined) will be
assigned to Buyer to the extent such invention is
either conceived or acquired by Seller or its
employees or representatives during the five year
period immediately following the Closing. Seller
agrees to have its employees sign agreements which
provide that inventions conceived during the course of
their employment with Seller belong to Seller.
Seller shall retain a non-exclusive worldwide
license with respect to such inventions if, and only
to the extent, such inventions have a non-medical use.
"Improvements" of the Trac ACCESS Device means: (a)
anything that performs the same general function as
the Trac ACCESS Device or any components of the Trac
ACCESS Device, and (b) anything that, if commercialized,
would infringe upon any rights included in the Assets.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
OF SELLER AND THE SHAREHOLDERS
Seller and the Shareholders jointly and
severally represent and warrant to Buyer as follows:
2.01 Organization, Power and Subsidiaries of
Seller. Seller is a corporation duly organized,
validly existing and in good standing under the
laws of the State of North Carolina. Seller has
all requisite corporate power and authority to own,
lease and operate its properties and to carry on its
business as now being conducted. Seller has been duly
qualified to do business in all states in which
the nature of its business or the character ofits
properties requires it to be so qualified. Seller
has no subsidiaries. The Shareholders are the
lawful record and beneficial owners of all of the issued
and outstanding shares of capital stock of Seller.
2.02 Authority for Agreement. The execution
and delivery of this Agreement and the performance of
the transactions contemplated hereby have been duly and
validly authorized by all necessary corporate and other
action on the part of Seller and the Shareholders and
assuming the binding and enforceable effect thereof on
Buyer, this Agreement constitutes a valid and legally binding
obligation of Seller and the Shareholders enforceable
against them in accordance with its terms.
2.03 Brokers and Finders. Neither Seller, the
Shareholders nor any of their respective
officers, directors, agents, employees or affiliates
has employed any broker, agent or finder or incurred
any liability for any brokerage fees, agents'
commissions or finders' fees in connection with
the transactions contemplated by this Agreement.
2.04 Good Title; No Encumbrances; Condition
of the Assets. Except as set forth at Schedule 2.04,
Seller is the owner of all right, title and interest
in and to the Assets and is conveying to Buyer good
title to the Assets. Seller has good right, power
and authority to sell, convey and assign the Assets
to Buyer. Except as set forth at Schedule 2.04, none
of the Assets is subject to any mortgage, pledge,
lien, charge, security interest, encumbrance,
restriction, lease, license, easement, liability or
adverse claim of any nature whatsoever, direct or
indirect, whether accrued, absolute, contingent or
otherwise (collectively,"Liens") and except as set forth
at Schedule 2.04, Seller has the unrestricted right
to commercially use all the Assets throughout the
United States without payment or other obligation
to any third party. Upon the Closing, Buyer shall
have the exclusive right to make, use and/or sell the
Trac ACCESS Device which is specifically described
and identified at Schedule 1.01 without infringing
upon the rights of any party. All of the
operating Assets owned, leased or used by Seller are
in good operating condition and repair, ordinary wear
and tear excepted, are suitable for the purposes
used, and are adequate and sufficient for all current
operations of Seller. Except as set forth at
Schedule 2.04, to the knowledge of Seller and
the Shareholders, there have been no safety problems
or defects encountered in relation to the Trac
ACCESS Device and/or components thereof.
2.05 Assets. Set forth on Schedule 2.05 hereto
is an accurate and complete list of the following with
respect to the Business:
(a) All machinery, tools, equipment and
other tangible personal property (other than inventory
and supplies), owned or used by Seller except for
items having a value of less than $50 which do not, in
the aggregate, have a total value of more than $1,000.
(b) All patents, patent applications,
licenses, trademarks, trademark registrations, service
marks, service names, trade names, copyrights and
copyright registrations and applications for any
of the foregoing, wholly or partially owned or held
by Seller or used in the operation of the Business.
(c) All sales agency or distributorship
agreements or franchises or agreements providing for
the services of an independent contractor to which Seller
is a party or by which it is bound as of the Closing Date.
(d) All contracts, agreements, commitments
or licenses relating to patents, trademarks, trade
names, copyrights, inventions, processes, know-how,
formulae or trade secrets to which Seller is a party
or by which it is bound.
(e) All loan agreements, indentures,
mortgages, pledges, conditional sale or title
retention agreements, security agreements, equipment
obligations, guaranties, leases or lease purchase
agreements to which Seller is a party or by which it
is bound and which relate to the Business or encumber
any of the Assets.
(f) All contracts, agreements, commitments
or other understandings or arrangements concerning the
Business to which Seller is a party or by which it
or any of its property is bound or affected.
(g) All collective bargaining
agreements, employment and consulting agreements.
All of the contracts, agreements, leases,
licenses and commitments required to be listed on
Schedule 2.05 hereto (the "Agreements"), are valid and
binding, enforceable in accordance with their respective
terms, in full force and effect and, except as otherwise
specified in Schedule 2.05 hereto, validly assignable
to Buyer without the consent of any other party so that,
after the assignment thereof to Buyer pursuant hereto, Buyer
will be entitled to the full benefits thereof accruing after
Closing. Except as disclosed in Schedule 2.05 hereto, (i)
none of the Agreements has been amended, modified or altered
in any material manner, (ii) to the best of the
Shareholder's knowledge with respect to third party
defaults, there is not under any of the Agreements any
existing default and (iii) no oral or written notice of
termination or indication of an intention to terminate
has been given by any party to any of the Agreements. True and
complete copies of all of the Agreements (together with any and
all amendments thereto) have been delivered to Buyer.
2.06 Inventory. Except as set forth at Schedule 2.06, all
items of Seller's inventory and related supplies
(including raw materials, work-in-process and finished
goods) which are included in the Assets are suitable and usable
for the production or completion of products for sale in the
ordinary course of business as first quality goods at normal mark-
ups, and none of such items is obsolete or below standard quality.
2.07 Intellectual Property. Except as set forth in Schedule
2.07 hereto, Seller owns or possesses all patents, patent applications,
patent rights, trade secrets, trademarks, copyrights, licenses and
service marks and other proprietary rights necessary to conduct the
Business as presently conducted by Seller (the "Intellectual
Property Rights"). The Current Embodiment does not and the
embodiment described in the patents included in the Assets, if
reduced to practice and commercialized, would not infringe upon any
intellectual property rights or other proprietary rights owned by any
other person or persons, and there is no claim or action by any such
person pending or to the knowledge of Seller threatened with respect
thereto. To the best of the Shareholders' and the Company's actual
knowledge, no other person has good title to or an interest in the
Conceptions and the Conceptions do not infringe on the intellectual
property rights of any third party. All of the trademark registrations,
copyright registrations and patents that are included in the
Assets are valid and enforceable in their entirety in all material
respects, and Seller and the Shareholders are aware of no prior art
more pertinent to the validity of such patents than has already been
disclosed in the prosecution of such patents.
2.08 Litigation. Except as set forth on Schedule 2.08 hereto,
there is no (a) claim, suit, action, arbitration, proceeding,
governmental investigation or other legal or administrative proceeding
(collectively, "Claims") in progress, pending or to the knowledge
of Seller or the Shareholders threatened against or relating to
Seller, the Shareholders or the Business or the transactions
contemplated by this Agreement, nor is there any basis for any such
Claims known to Seller or the Shareholders including, without
limitation, Claims relating to safety problems or defects in
connection with the Trac ACCESS Device and/or components thereof
or (b) order, decree or ruling of any court or administrative
agency to which Seller, the Shareholders or any of their affiliates
is a party or bound, which matters identified at (a) and (b) could
adversely affect Seller, the Business, the Assets or the performance of
the obligations of Seller or the Shareholders hereunder and Seller is
not in default in respect of any such order, decree or ruling.
2.09 No Conflict with Other Instruments. The
execution and delivery of this Agreement and the consummation of the
transactions herein contemplated will not (a) constitute a default
under, conflict with, result in a right to accelerate, loss of rights
under or a breach of any of the terms, conditions or provisions of,
Seller's organizational documents or any agreement or instrument to
which Seller or any of the Shareholders is now a party, (b) result
in the creation or imposition of any Lien upon the Assets or the
Business or (c) result in the violation of any applicable law,
ordinance, regulation, permit, authorization, decree or order of
any court or other government agency.
2.10 Compliance with Applicable Laws. The
Business has been, and until the Effective Date will
be, conducted in material compliance with all
applicable laws, common law doctrine, ordinances,
regulations, permits, authorizations, decrees and
orders (collectively "laws and regulations"),
including laws and regulations concerning the
environment, occupational health and safety and the
marketing of medical devices, the noncompliance with
which will have a material adverse effect on the
Business or the Assets. Seller has all licenses,
permits, orders, approvals or other authorizations
of governmental, regulatory or administrative agencies
or authorities required to conduct the Business and own
and operate the Assets (the "Permits"), the absence of
which would have a material adverse effect on the Business
or the Assets.
2.11 Insurance. Set forth on Schedule 2.11
hereto is an accurate and complete list of all liability and
other insurance policies insuring Seller or its
properties or interests therein, specifying with
respect to each such policy the name of the
insurer, the risk insured against, the limits of
coverage, the deductible amount (if any), the premium
rate and the date through which coverage will
continue by virtue of premiums already paid. Seller
and the Shareholders have obtained and maintained in
full force and effect insurance to protect them and
the Business against the types of liabilities
customarily insured against by persons in
connection with the operation of similar
practices, and all premiums due on such policies
have been paid. All of such policies are
"occurrence" policies and are not "claims made"
policies.
2.12 Consents. Except as disclosed at
Schedule 2.12, there are no (a) consents or
approvals of any public body or authority, (b)
filings with any public body or authority or (c)
consents or waivers from other parties to the
Agreements or other instruments, that are required
for the lawful consummation of the transactions
contemplated hereby or necessary in order that
the Business can be conducted by Buyer in the same
manner after the Closing as heretofore conducted by Seller.
2.13 Undisclosed Liabilities. Seller does not
have any liability or obligations whether known or
unknown, asserted or unasserted, absolute or
contingent, accrued or unaccrued, liquidated or
unliquidated, due or to become due, and choate or
inchoate ("Liabilities") individually or in the
aggregate in excess of $10,000 (including,
without limitation, liabilities or obligations
arising out of claims based on products liability),
and, to the best of the Shareholder's knowledge,
there is no basis for any present or future action,
suit, proceeding, hearing, investigation, charge,
complaint, claim or demand against Seller giving rise
to any such liabilities or obligations, except as
set forth in Schedule 2.13 hereto.
2.14 Absence of Changes or Events. Except as set
forth in Schedule 2.14 hereto, since May 1, 1996,
Seller has conducted the Business only in the
ordinary course of business, and Seller has not:
(a) incurred any Liabilities which
individually or in the aggregate have had or might
have a material adverse effect on the Assets or the
Business;
(b) pledged or subjected to any Lien any
of the Assets, other than liens arising by operation
of law to secure payment of ad valorem or personal
property taxes or securing credit facilities which
will not encumber the Assets after Closing;
(c) sold, transferred, leased to
others or otherwise disposed of any of the Assets,
except in the ordinary course of the business of
Seller;
(d) received any notice of termination
of any contract, lease or other agreement, or suffered
any damage, destruction or loss that, individually or
in the aggregate, has had or might have a material
adverse effect on the Assets or the Business;
(e) suffered any event or events,
whether individually or in the aggregate, that has had
or could be reasonably expected by Seller to have
a material adverse effect on the Assets or the Business;
(f) entered into any agreement or
made any commitment to take any of the actions
described in Subsections (a) through (e) inclusive
of this Section 2.14.
2.15 Taxes. All taxes that relate to, arise out of or
impact upon the Business or the Assets, including, without
limitation, income, property, sales, use, franchise, added
value, employees' income withholding, unemployment disability
and social security taxes, imposed by the United States or
by any foreign country or by any state, municipality,
subdivision or instrumentality of the United States or of
any foreign country, or by any other taxing authority
(collectively, "Taxes"), which are due or payable by Seller
and all interest and penalties thereon, whether
disputed or not, have been timely paid in full, all tax returns
required to be filed in connection therewith have been accurately
prepared in all material respects and duly and timely filed, all
deposits required by law to be made by Seller with respect to
employees' income withholding and other taxes have been duly made
and in the case of Taxes for which payment is not yet required, such
Taxes have been adequately accrued for on the Financial
Statements of Seller. Buyer will not after the Closing owe to any
person or entity or be liable for, directly or indirectly, any
Taxes imposed on Seller or the Shareholders. There are no liens
for Taxes (other than for current Taxes not yet due and payable)
upon the Assets.
2.16 Labor and Employment Contracts. Seller has not
(a) been a party to a collective bargaining agreement, (b) had any
organization certified as a bargaining agent on behalf of all or
any portion of Seller's employees, (c) received a demand for
recognition from any union or other organization, (d) had any
attempt made to organize any of Seller's employees, (e) encountered
any labor union organizing activity or (f) encountered any actual
or threatened employee strikes, work stoppages, jurisdictional
disputes, slow-downs or lock-outs. Seller has provided Buyer
a written list of all agreements and understandings, whether written
or oral, between Seller and any of its officers, employees or agents
that contain a non-competition or confidentiality agreement and/or
covenant or any other terms of employment.
2.17 Books and Records. All of the books and records
of Seller are complete and correct in all material respects and have
been adequately maintained in accordance with good business practice
and there have been no transactions involving the Business which
are required to have been set forth therein and which have not
been accurately so set forth.
2.18 Disclosures to Third Parties. Except as set
forth on Schedule 2.18 hereto, neither Seller, the Shareholders nor
any of their respective brokers, representatives, accountants,
attorneys or agents has disclosed any confidential customerlists,
contract terms, pricing information, margin information, trade secrets
or other confidential information to any other person or other entity.
2.19 Disclosure. No representation or warranty made by Seller
or the Shareholders contained in this Agreement nor any exhibit,
schedule, statement or certificate furnished or to be furnished by
Seller or the Shareholders to Buyer or its representatives pursuant
hereto, contains or will contain on the Closing Date any untrue
statement of a material fact, or omits or will omit on the
Closing Date to state any material fact required to make the
statements herein or therein contained not misleading. The
representations and warranties contained in this Article 2 or
elsewhere in this Agreement or any document delivered pursuant
hereto shall not be affected or deemed waived by reason of the fact
that Buyer and/or its representatives knew or should have known
that any such representation or warranty is or might be inaccurate
in any respect provided, however, that Buyer shall inform Seller
at or prior to Closing with respect to any information it has
uncovered in its due diligence which indicates that a representation
or warranty in this Agreement is inaccurate. In the event such breaches
could result in a claim by Buyer for indemnification in excess of
$18,500, Seller's sole remedy shall be to elect not to close the
transaction.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller and the
Shareholders as follows:
3.01 Organization; Valid Authorization; Good Standing. Buyer is
a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware. Buyer has
all requisite corporate power and authority to enter into this
Agreement and to perform its obligations hereunder. The execution
and delivery of this Agreement and the performance of the transactions
contemplated hereby have been duly and validly authorized by all
necessary corporate and other action on the part of Buyer,
and this Agreement constitutes a valid and legally binding
obligation of Buyer enforceable against it in accordance
with its terms.
3.02 Compliance. The execution and delivery ofthis Agreement
and the consummation of the transactions contemplated hereby by Buyer
will not (a) violate any provision of its charter or bylaws, (b)
violate any material provision of or result in the breach of or entitle
any party to accelerate (whether after the giving of notice or lapse of
time or both) any material obligation under, any mortgage, lien, lease,
contract, license, instrument or any other agreement to which Buyer is
a party, (c) result in the creation or imposition of any material lien,
charge, pledge, security interest or other encumbrance upon any
property of Buyer or (d) violate or conflict with any order, award,
judgment or decree or other material restriction or any law, ordinance
or regulation to which Buyer or its property is subject.
3.03 Approvals. No consent, approval, order or
authorization of, or registration, declaration or filing with, any
governmental authority or other person not yet obtained is required
in connection with the execution and delivery of this Agreement by
Buyer or the consummation by Buyer of the transactions contemplated
hereby.
3.04 Brokers. Neither Buyer nor any of its officers, directors,
agents, employees or affiliates has employed any broker, agent or
finder or incurred any liability for any brokerage fees, agents'
commissions or finders' fees in connection with the transactions
contemplated by this Agreement.
3.05 Disclosure. No representation or warranty
made by Buyer contained in this Agreement nor any exhibit, schedule,
statement or certificate furnished or to be furnished by Buyer to
Seller or its representatives in connection herewith or pursuant
hereto, contains or will contain on the Closing Date any untrue
statement of a material fact, or omits or will omit on the Closing
Date to state any material fact required to make the statements
herein or therein contained not misleading. The representations and
warranties contained in this Article 3 or elsewhere in this Agreement
or any document delivered pursuant hereto shall not be affected or deemed
waived by reason of the fact that Seller and/or its representatives knew
or should have known that any such representation or warranty is or
might be inaccurate in any respect.
ARTICLE 4
COVENANTS OF SELLER AND
THE SHAREHOLDERS
4.01 Conduct Prior to Effective Date. Unless
otherwise expressly consented to in writing by Buyer,
from and after the date of this Agreement through the
Effective Date, Seller agrees to (and the Shareholders
agree, jointly and severally, to cause Seller to):
(a) carry on the Business in the ordinary
and usual course as has been conducted since January 1,
1995;
(b) keep and preserve the Assets in
good condition and repair, ordinary wear and tear
excepted;
(c) maintain in full force and effect
insurance comparable in amount and in scope of the
current policies listed on Schedule 2.11 hereto;
(d) to the extent within the control of
Seller, maintain in full force and effect in accordance
with the terms thereof, perform all of its obligations
under and not change any of the material terms under, the
contracts to be assumed by Buyer and all other
agreements, leases and other commitments relating to or
affecting the Assets or the Business;
(e) comply in all material respects with
and perform in all material respects, all obligations and
duties imposed upon it by all federal and state laws and
all rules, regulations and orders imposed by federal
or state governmental authorities;
(f) not dispose of or encumber any of the Assets;
(g) not change its certificate of
incorporation or bylaws or merge or consolidate or
obligate itself to do so with or into any other entity;
and
(h) cause Buyer, its counsel, accountants
and other representatives, to have full access, during
normal business hours, to the properties, books and
records of Seller and will furnish to Buyer and its
representatives during such period all such information
concerning the Assets and the Business as Buyer or its
representatives may reasonably request.
4.02 Use of Names. Seller and the Shareholders agree,
jointly and severally, that they shall not for a period
of ten years from and after the Effective Date, use or
grant any rights to any individual, corporation,
partnership or other entity to use, or otherwise consent
to the use of, any name or mark that is deceptively
similar to any of the service marks, trademarks or
trade names of Seller included within the Assets conveyed
hereunder, as a name, trade name, service mark, trademark
or otherwise. Seller shall have the right to use
tradenames or trademarks owned by Buyer only to the
extent that it is specifically granted the right to do
so under the Distribution and Services Agreement.
Seller shall retain and use its corporate name.
4.03 Advice of Change. Seller and the Shareholders
shall advise Buyer in writing prior to the Effective Date
of any material adverse change in the Business, or
the occurrence of any event which involves any
substantial possibility of any material adverse change in
the Assets, in the condition, financial or otherwise, of
the Business or the Assets or in any of the information
contained in the representations and warranties made in
Article 2 or elsewhere in this Agreement or the schedules
or exhibits hereto that has occurred since the date of this
Agreement.
4.04 Non-Competition and Continuity of
Business Dealings Agreement. In consideration for the
purchase of the Assets hereunder and other good
and valuable consideration, at the Closing, Seller
and the Shareholders shall each execute and
deliver the Non-Competition and Continuity of
Business Dealings Agreement in the form agreed to by
the parties.
4.05 Bill of Sale and Assumption Agreement. At the
Closing, Seller shall execute and deliver the Bill of
Sale and Assumption Agreement in the form agreed
to by the parties (the "Bill of Sale and Assumption
Agreement").
4.06 Royalty Agreement. At the Closing, Seller shall
execute and deliver the Royalty Agreement in the form
agreed to by the parties (the "Royalty Agreement").
4.07 Distribution and Services Agreement. At the
Closing, Seller shall execute and deliver the
Distribution and Services Agreement in the form
agreed to by the parties (the "Distribution and
Services Agreement").
4.08 Injunctive Relief. Since Buyer will
be irreparably damaged if the provisions of Section 4.02
are not specifically enforced, Buyer shall be entitled
to an injunction restraining any violation of such
section by Seller or the Shareholders, or any other
appropriate decree of specific performance. Such remedies
shall not be exclusive, shall not be construed to limit the
right for injunctive relief under any other provision of
this Agreement and shall be in addition to any
other remedies which Buyer may have.
4.09 Cooperation. Subject to the terms and conditions
herein provided, Seller and the Shareholders will
each use their best efforts to take, or cause to
be taken, such action, to execute and deliver, or
cause to be executed and delivered, such additional documents
and instruments and to do, or cause to be done, all things
necessary, proper or advisable under the provisions
of this Agreement and under applicable law, to
consummate and make effective all of the transactions
contemplated by this Agreement.
ARTICLE 5
COVENANTS OF BUYER
Buyer covenants and agrees with Seller and
Shareholders as follows:
5.01 Cooperation. Subject to the terms and
conditions herein provided, Buyer will use its best
efforts to take, or cause to be taken, such action, to
execute and deliver, or cause to be executed and delivered,
such additional documents and instruments and to do, or
cause to be done, all things necessary, proper or advisable
under the provisions of this Agreement and under applicable
law to consummate and make effective all of the transactions
contemplated by this Agreement.
5.02 Distribution and Services Agreement. At
the Closing, Buyer shall execute and deliver the Distribution and
Services Agreement.
5.03 Royalty Agreement. At the Closing, Buyer
shall execute and deliver the Royalty Agreement.
5.04 Bill of Sale and Assumption Agreement. At
the Closing, Buyer shall execute and deliver the Bill of Sale and
Assumption Agreement.
5.05 Marketing and Distribution. Buyer agrees
that it will use its best efforts to market and
distribute the Trac ACCESS Device in a commercially reasonable manner.
Buyer's obligation under this Section 5.05 is subject to the ongoing
commercial viability and profitability of the Trac ACCESS Device.
ARTICLE 6
CONDITIONS TO OBLIGATIONS OF SELLER
AND THE SHAREHOLDERS
All obligations of Seller and the Shareholders to be discharged
under this Agreement are subject to the fulfillment, prior to or at the
Closing, of each of the following conditions, unless waived in writing
by Seller and the Shareholders at any time prior to or at the Closing:
6.01 Representations and Warranties of Buyer. All of the
representations and warranties of Buyer contained in this Agreement
shall be true as of the date of this Agreement in all material
respects. All such representations and warranties shall be deemed to have
been made again as of the Closing Date, and shall be true in all
material respects as of the time of the Closing.
6.02 Covenants and Agreements of Buyer. Buyer shall have
caused all covenants, agreements and conditions required by this
Agreement to be performed or complied with by it prior to or at
the Closing to be so performed or complied with.
6.03 Distribution and Services Agreement. Buyer shall have
executed and delivered the Distribution and Services Agreement.
6.04 Royalty Agreement. Buyer shall have
executed and delivered the Royalty Agreement.
6.05 Opinion of Counsel. Cox & Smith
Incorporated, counsel for Buyer shall have delivered
to Seller an opinion, dated the Closing Date, in
the form agreed to by the parties.
6.06 Bill of Sale and Assumption Agreement.
At the Closing, Seller shall execute and deliver the
Bill of Sale and Assumption Agreement.
ARTICLE 7
CONDITIONS TO OBLIGATIONS OF BUYER
All obligations of Buyer to be discharged under
this Agreement at the Closing are subject to the
fulfillment, prior to or at the Closing, of each
of the following conditions, unless expressly waived
in writing by Buyer at any time prior to or at the
Closing:
7.01 Representations and Warranties of Seller
and the Shareholders. All of the representations and
warranties of Seller and the Shareholders
contained in this Agreement shall be true as of
the date of this Agreement in all material
respects. All of such representations and warranties
shall be deemed to have been made again as of the
Closing Date, and shall be true in all material
respects as of the time of the Closing.
7.02 Covenants and Agreements of Seller and
the Shareholders. Seller and the Shareholders shall
have caused all covenants, agreements and conditions
required by this Agreement to be performed or
complied with by them prior to or at the Closing to
be so performed or complied with.
7.03 Consents. All of the consents necessary
or advisable to transfer the Assets to Buyer and for
Buyer to operate the Business from and after the
Effective Date in the manner owned and operated by
Seller shall have been secured in form reasonably
satisfactory to Buyer.
7.04 Opinion of Counsel. Kennedy Covington
Lobdell & Hickman, L.L.P., counsel for Seller and
the Shareholders, shall have delivered to Buyer an
opinion, dated the Closing Date, in the form agreed to
by the parties.
7.05 No Material Adverse Changes. There shall
not have been any material adverse changes to the
Assets or the Business after the date hereof prior to the
Closing.
7.06 Releases. All of the liens, charges,
security interests and encumbrances outstanding on any
of the Assets shall have been terminated and
released prior to or at the Closing.
7.07 Agreements. Seller and the Shareholders shall
have each executed and delivered a Non-
Competition and Continuity of Business Dealings
Agreement, and Seller shall have executed and delivered
the Bill of Sale and Assumption Agreement, the Royalty
Agreement and the Distribution and Services Agreement.
ARTICLE 8
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION
8.01 Survival of Representations and Warranties. The
representations, warranties, covenants and agreements
made by Seller and the Shareholders hereunder, except as
they may be fully performed prior to or at the Closing,
shall survive Closing and shall thereafter terminate
and expire on April 30, 1998 and shall be fully
enforceable by Buyer, its successors and assigns,
at law or in equity, against the Shareholders and
Seller, their successors and assigns; provided,
however, that the representations, warranties,
covenants and agreements made in Sections 2.04 (with
respect to title matters), 2.07 (with respect to non
infringement of third party intellectual property
rights and the validity and enforceability of the
patents included in the Assets), 2.08, 2.10, 2.13 and
2.15 shall survive until the expiration of the
applicable statute of limitations (except in respect
to covenants to be performed after Closing which
shall survive in accordance with the terms thereof).
All of the representations, warranties, covenants and
agreements made by Buyer hereunder, except as they
may be fully performed prior to or at the Closing,
shall survive Closing and shall thereafter terminate
and expire on April 30, 1998 except in respect to
covenants to be performed after Closing which shall
survive in accordance with the terms thereof and shall
be fully enforceable by the Shareholders and Seller,
their respective successors and assigns, at law or
in equity, against Buyer and its successors and
assigns. Any representation, warranty, covenant or
agreement scheduled to expire pursuant to this Section
8.01 shall not expire with respect to any claim received
by Seller or the Shareholders prior to the scheduled
expiration date.
8.02 Indemnification by Seller and the
Shareholders. Seller and the Shareholders, jointly and
severally, agree to indemnify and hold Buyer
harmless from all liabilities, damages, losses,
costs, reasonable attorneys' fees and other expenses
(collectively, "Losses") resulting from, arising out
of or incurred with respect to, the falsity of
any representation or the breach of any warranty or
covenant made by Seller or the Shareholders herein
or in accordance herewith or in enforcing any
agreement or indemnity hereunder; provided,
however, that Seller and the Shareholders shall be
obligated to indemnify Buyer only to the extent that
Buyer's Losses exceed $18,500 in the aggregate. Seller
and the Shareholders shall not be required to indemnify
Buyer for amounts in excess of the aggregate of the
payments actually made to Seller under Sections 1.02(a),
(b) and (c) provided, however, that, if Buyer is
entitled to indemnification in excess of the
amounts paid as of a particular date, Buyer may
elect to utilize the Right of Offset provided for
in Section 8.05 with respect to payments to be made
after that date. Except as expressly provided in
Section 1.03, Buyer has not assumed, or agreed to
assume, any liabilities or obligations of any
kind or nature whatsoever of Seller, whether
direct, contingent or otherwise. In connection
therewith, Seller and the Shareholders agree, jointly
and severally, to indemnify and hold Buyer harmless
from all Losses resulting from or arising out of or
incurred in connection with any actual or alleged
liability or obligation of Seller or the
Shareholders not expressly assumed by Buyer.
8.03 Indemnification by Buyer. Buyer agrees
to indemnify and hold Seller and the Shareholders harmless
from all Losses resulting from, arising out of or
incurred with respect to, the falsity of any
representation or the breach of any warranty or
covenant made by Buyer herein or in accordance herewith
or in enforcing any agreement or indemnity hereunder.
Buyer agrees to indemnify and hold Seller and the
Shareholders harmless from all Losses resulting from,
arising out of or incurred in connection with, the Assumed
Liabilities and the operation of the Business after
the Effective Date.
8.04 Notice of Claim. The party
seeking indemnification (the "Indemnified Party")
shall give notice to the party obligated to
indemnify and hold the other harmless (the
"Indemnifying Party") of an event giving rise to the
obligation to indemnify, allow the Indemnifying Party
to assume and conduct the defense of the claim or
action and cooperate with the Indemnifying Party
in the defense thereof. If the Indemnifying Party
wrongfully refuses to assume the defense of the
Indemnified Party, the Indemnifying Party shall
be responsible for all legal and other expenses
incurred by the Indemnified Party in connection
with the investigation or defense of such
claim or action including, without limitation,
expenses incurred in enforcing such obligation to
indemnify.
8.05 Offset. In the event Buyer shall be entitled (a)
to indemnification pursuant to this Article 8 or
(b) any other payments or claims from or against
Seller and/or the Shareholders, Buyer shall have
the right to offset the amount of such claim, debt
or obligation against the amounts owed by Buyer to
Seller pursuant to the provisions of Section 1.02
hereto (the "Right of Offset"). In the event it is
later determined that Buyer is not entitled to a
recovery for the amount offset, Buyer shall repay to
Seller the amount improperly offset plus accrued
interest on such amount at the rate of 10% per annum
from the date that payment would have been due had
such amount not been improperly offset. The Right
of Offset shall in no way limit or impair any other
remedies available to Buyer. Buyer shall not enforce
the Right of Offset unless it has received an opinion
from Cox & Smith Incorporated (and delivered a copy
thereof to Seller) that it has the legal right under
this Agreement to effect the Right of Offset. The failure
of Buyer to exercise its Right of Offset shall not affect
its right to indemnification hereunder. To the extent that
the event giving rise to the Right of Offset is curable,
Buyer shall give Seller notice of the event and a
thirty day opportunity to cure, provided, however,
that Buyer need not give such notice prior to
exercising its Right of Offset.
ARTICLE 9
GENERAL
9.01 Notices, Etc. All notices, requests,demands and
other communications hereunder shall be in writing
and, unless otherwise provided herein, shall be deemed
to have been duly given upon delivery in person, by telecopy,
by overnight courier or by certified or registered mail,
return receipt requested, as follows:
If to Seller or any Trac Medical, Inc.
of the sharholders: 2801 Spring Forest Road
Raleigh, North Carolina 27604
Attention: Mr. Terry Williams,
President
Facsimile No.: (919)876-1210
With a copy to: Kennedy Covington Lobdell &
Hickman, L.L.P.
Two Hannover Square, Suite 1900
434 Fayetteville Street
Mall Raleigh, North Carolina 27602-1070
Attention: Mr. Kent F. Christison
Facsimile No.: (919)743-7358
If to Buyer: KCI Therapeutic Services, Inc.
8023 Vantage Drive
San Antonio, Texas 78230
Attention: Mr. Christopher M. Fashek,
President
Mr. Dennis E. Noll,
General Counsel
Facsimile No.: (210)255-6993
With a copy to: Cox & Smith Incorporated
112 E. Pecan, Suite 1800
San Antonio, Texas 78205
Attention: Mr. Stephen D. Seidel
Facsimile No.: (210)226-8395
or at such other address as shall have been furnished to
the other in writing in accordance herewith, except
that such notice of such change shall be effective only
upon receipt.
9.02 Amendments and Waiver. This Agreement may
be amended or modified by, and only by, a written
instrument executed by all the parties hereto. The
terms of this Agreement may be waived by, and
only by, a written instrument executed by the party
against whom such waiver is sought to be enforced.
9.03 Expenses. Except as otherwise expressly
herein provided, each party to this Agreement shall
pay its own expenses (including, without limitation,
the fees and expenses of such party's counsel
incidental to the preparation of and/or consummation
of this Agreement).
9.04 Section and Other Headings. The section and
other headings contained in this Agreement are for
convenience of reference only and shall not in any way
affect the meaning or interpretation of this Agreement.
9.05 Counterparts. This Agreement may be executed
in any number of counterparts, each of which shall be
deemed an original and all of which shall constitute one
and the same
instrument.
9.06 Parties in Interest. This Agreement shall inure
to the benefit of and be binding upon parties
hereto, and their respective successors and assigns.
This Agreement shall not be assigned by any party
hereto without the written consent of the other parties,
except as otherwise expressly permitted herein.
9.07 No Implied Rights or Remedies. Except as
otherwise expressly provided herein, nothing herein
expressed or implied is intended or shall be construed
to confer upon or to give any person, firm, or
corporation, other than the parties hereto and
their respective successors and assigns, any rights or
remedies under or by reason of this Agreement.
9.08 Exhibits and Schedules. All exhibits and
schedules referred to herein and attached hereto
are incorporated herein for all purposes.
9.09 Entire Agreement. This Agreement, together with
all exhibits and schedules hereto, embodies the
entire agreement and understanding between the
parties hereto relating to the subject matter hereof
and supersedes any prior agreements and understandings
relating to the subject matter hereof.
9.10 Legal Invalidity. If any part or provision of
this Agreement is or shall be deemed violative of
any applicable laws, rules or regulations, such legal
invalidity shall not void the Agreement or affect the
remaining terms and provisions of this Agreement, and
the Agreement shall be construed and interpreted to
comport with all such laws, rules or regulations to
the maximum extent possible.
9.11 Applicable Law. This Agreement and the rights
and obligations of the parties hereto shall be
construed under and governed by internal laws, and not
the law of conflicts, of the State of Texas.
9.12 Enforcement; Venue; Service of Process. In the
event either party shall seek enforcement of any
covenant, warranty or other term or provision of this
agreement, the party which prevails in such
enforcement proceedings shall be entitled to recover
reasonable attorneys' fees actually incurred by it in
connection therewith. The parties hereto agree that
this Agreement is performable in Bexar County, Texas.
The parties hereto agree that the service of process or
any other papers upon them or any of them by registered
mail at their respective addresses where notices are to
be sent pursuant to this Article 9 hereto shall be
deemed good, proper and effective service upon them.
9.13 Arbitration.
(a) The parties hereto agree that all
disputes, controversies or claims that may arise among
them (including their agents and employees) including,
without limitation, any dispute, controversy or
claim arising out of this Agreement, the Distribution
Services Agreement or the Royalty Agreement, or the
breach, termination or invalidity thereof, shall be
submitted to, and determined by, binding arbitration.
Such arbitration shall be conducted pursuant to the
Commercial Arbitration Rules (the "Rules") then in
effect of the American Arbitration Association, except to
the extent such rules are inconsistent with this
Section 9.13. If the arbitration controversy in the
arbitration exceeds $200,000, exclusive of interest,
attorneys' fees and costs, the arbitration shall be
conducted by a panel of three (3) neutral arbitrators.
Otherwise, the arbitration shall be conducted by a
single neutral arbitrator. The arbitrator(s) shall
be selected pursuant to the Rules. Exclusive venue
for such arbitration shall be in San Antonio, Bexar
County, Texas. The arbitrator(s) shall apply the internal
laws of the State of Texas (without regard to conflict of law
rules) in determining the substance of the dispute,
controversy or claim and shall decide the same in
accordance with applicable usages and terms of
trade. Evidentiary questions shall be governed by the
Federal Rules of Evidence. The arbitrator's award shall
be in writing and shall set forth the findings and
conclusions upon which the arbitrator(s) based the
award. The prevailing party in any such arbitration
shall be entitled to recover its reasonable attorneys'
fees, costs and expenses incurred in connection with the
arbitration. Any award pursuant to such arbitration
shall be final and binding upon the parties, and judgment
on the award may be entered in any federal or state court
sitting or located in Bexar County, Texas, or in any other
court having jurisdiction. The provisions of this Section
9.13 shall survive the termination of this Agreement.
(b) The arbitration shall commence within
thirty (30) days after the arbitrator(s) is selected in
accordance with the provisions of this Section 9.l3. In
fulfilling his or her duties, the arbitrator(s) may
consider such matters as, in the opinion of the
arbitrator(s), are necessary or helpful to render an
appropriate decision. All discovery shall be
expedited, consistent with the nature and
complexity of the claim or dispute and consistent with
the nature and complexity of the claim or dispute and
consistent with fairness and justice. The arbitrator(s)
shall have the power to compel any party to comply with
discovery requests of the other parties and to issue
binding orders relating to any discovery dispute which
shall be enforceable in the same manner as awards.
The arbitrator(s) also shall have the power to impose
sanctions for abuse or frustration of the arbitration
process, including without limitation, the refusal
to comply with orders of the arbitrator(s) relating to
discovery and compliance with subpoenas.
(c) Without limiting the enforceability or
scope of this Section 9.13, the parties to this
Agreement agree that if a controversy or claim between
them arises out of or relates to this Agreement and
results in litigation, the courts of Bexar County,
Texas or the courts of the United States of America
located in Bexar County, Texas shall have jurisdiction
to hear and decide such matter, and such parties
hereby submit to jurisdiction of such courts.
IN WITNESS WHEREOF, the undersigned have duly
executed this Agreement as of the date and year first
above written.
KCI THERAPEUTIC SERVICES, INC.
By: /S/ DENNIS E. NOLL
___________________________
Title: Vice President
________________________
TRAC MEDICAL, INC.
By:/S/ TERRY N. WILLIAMS
___________________________
Title: President
________________________
/S/ TERRY N. WILLIAMS
______________________________
Terry Williams, Individually
/S/ DAVID MATTIS
______________________________
David Mattis, Individually
/S/ GEROGE PARRISH
______________________________
George Parrish, Individually
SCHEDULE 1.01
The Current Embodiment of the Trac Access Device
is described in the Trac Medical ACCESS Environmental
Control System Manual which is attached hereto and made
a part hereof. Buyer acknowledges that the actual embodiment
of the Trac Access Device may differ slightly from the
descriptions contained in the Manual. The transfer of
the Current Embodiment includes the transfer of all
technology developed in connection with the Current
Embodiment.
The technology being transferred with the Trac
Access Device includes the Infrared Technology.
The following are not included within the
definition of Assets:
1. Bed Exit Sensor Technology
2. Orthotrac
3. Physiotrac
4. Angiotrac
5. The Names "Trac" and "Trac Medical, Inc."
6. Surgical Staple Location Technology
7. Accounts Receivable
8. Investments
9. Cash
10. Cash Equivalents
EXHIBIT 10.34
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement ("Agreement") is made
and entered into as of the 27th day of January, 1997 by
and among Hydrothermic Floatation Systems, Inc., a
California corporation ("Seller"), Y. Jeremy Levy
("Shareholder") and KCI Therapeutic Services, Inc., a
Delaware corporation
("Buyer").
W I T N E S S E T H:
WHEREAS, Seller is presently engaged in the specialty
patient surface business, including, without limitation,
the rental of specialty patient beds, overlays, mattress
replacement systems or other therapeutic support surfaces
(the "Business"); and
WHEREAS, Seller and Shareholder desire to sell, assign
and convey to Buyer, and Buyer desires to purchase from
Seller, all of the assets of Seller except those
expressly excluded herein;
NOW, THEREFORE, in consideration of the premises
and mutual covenants and agreements of the parties
hereinafter contained, the parties hereby agree as follows:
ARTICLE I
SALE OF ASSETS
1.01 Sale of Assets. Subject to the provisions of
this Agreement, Buyer agrees to purchase and accept
delivery of, and Seller agrees to sell, assign, convey
and deliver to Buyer, at the Closing (as hereinafter
defined), all of the business, assets, properties,
goodwill and rights of Seller as a going concern, of
every nature, kind or description, tangible and
intangible, wheresoever located and whether or not carried
or reflected on the books and records of Seller
(hereinafter sometimes collectively called the "Assets"),
including, without limitation, (i) the right to use
Seller's corporate name and all variations thereof, (ii)
the assets referred to in the form of Bill of Sale and
Assumption Agreement attached hereto as Exhibit A (the "Bill
of Sale and Assumption Agreement") and (iii) the assets
reflected on the balance sheet of Seller dated December
31, 1996 referred to in Section 2.06 hereof, with only
such dispositions of such Assets as shall have occurred
in the ordinary course of business between the date
thereof and the Closing and which are permitted by the
terms hereof, and excluding only the minute books,
corporate seal, stock records and other assets of Seller set
forth on Exhibit B attached hereto. The Assets shall be
conveyed free and clear of all liabilities,
obligations, liens, security interests, encumbrances and
restrictions.
1.02 Purchase Price and Earnout Payment. In
consideration of the transfer, sale, assignment, conveyance
and delivery of the Assets to Buyer, and subject to
adjustments provided for herein and the conditions to
Closing (as hereinafter defined) set forth in
Article VII:
(a) Payments Due at Closing. Buyer agrees to
pay at the Closing an aggregate of Eight Million Forty-
Nine Thousand Eight Hundred Ninety-Two Dollars
($8,049,892) (the "Purchase Price"), to be paid to
Seller in cash by wire transfer in immediately available
funds to the bank account designated by Seller.
(b) Earnout Payment. In addition to
the consideration paid to Seller pursuant to Section
1.02(a) hereof, Buyer shall pay to Seller an amount, not
to exceed $2,500,000, determined in accordance with the
calculations and procedures set forth on Exhibit C hereto.
The amount of such payment, as thus determined, is
hereinafter referred to as the "Earnout Payment."
Within 5 days after the final determination, as provided
in Exhibit C hereto, of the amount of the Earnout
Payment, Buyer agrees to pay the Earnout Payment to
Seller in cash by wire transfer of immediately available
funds to the bank account designated by Seller. Interest
shall accrue upon the unpaid portion of the Earnout
Payment from the date such payment is due until paid at
the annual "Prime Rate" of interest as published in the
Wall Street Journal. In the event that the Earnout Payment
as determined by the Earnout Arbitrator (as defined in
Exhibit C hereto) in accordance with this Section 1.02(b)
is more than $100,000 in excess of the amount of the
Earnout Payment set forth in the Earnout Period Revenue
Statement (as defined in Exhibit C hereto) delivered by
Buyer, the fees and expenses of the Earnout Arbitrator
shall be paid by Buyer. Otherwise, all such fees and
expenses shall be paid by Seller.
(c) Accounts Receivable Closing
Adjustment. Notwithstanding anything contained herein to
the contrary:
(i) at the Closing, Seller and
Shareholder shall jointly deliver a certificate (the
"Accounts Receivable Certification") to Buyer, in form
reasonably satisfactory to Buyer, certifying the
aggregate amount of the accounts receivable being
sold to Buyer at Closing, net of allowance for
uncollectible accounts receivable, determined
in accordance with generally accepted accounting
principles, consistent with Seller's Financial Statements
(as hereinafter defined);
(ii) if and to the extent that the
aggregate amount of accounts receivable, net of allowance
for uncollected accounts receivable, reflected on the
Accounts Receivable Certification is less than One Million
Two Hundred Twenty-Four Thousand Five Hundred Forty Seven
Dollars ($1,224,547), then at the Closing, the amount of the
Purchase Price shall be adjusted downward on a dollar-for
dollar basis to the extent of such difference (the
"Closing Receivable Adjustment").
(d) Closing Asset Statement
Adjustment. Notwithstanding anything contained herein to
the contrary:
(i) as soon as practicable following the
date of this Agreement but in no event later than the
Closing Date, Buyer shall cause a statement setting forth
the book value of the Assets as of such date (the
"Adjusted Assets Statement") to be calculated,
prepared and adjusted in accordance with the principles
and procedures set forth on Exhibit D hereto (the
amount as thus determined shall hereinafter be referred
to as the "Adjusted Book Value") and to be delivered
to Seller. On the basis of the Adjusted Assets
Statement, Seller and Shareholder jointly and
severally, shall pay to Buyer the amount, if any, by
which the amount of the Adjusted Book Value (as defined
on Exhibit D hereto) of the Assets is less than
$3,377,883 ("Seller's Adjustment Amount").
(ii) Within 5 days after the
final determination, as provided for in Exhibit D
hereto, of Seller's Adjustment Amount, Seller and
Shareholder agree, jointly and severally, to pay to
Buyer in cash by wire transfer of immediately
available funds to the bank account designated by Buyer
an amount equal to Seller's Adjustment Amount. Interest
shall accrue on the unpaid portion of any such payment
from the date such payment is due until paid at the
annual "Prime Rate" of interest as published by the Wall
Street Journal. In the event that the Adjusted Book Value
as determined by the Adjusted Assets Arbitrator (as
defined in Exhibit D hereto) in accordance with this
Exhibit D hereto is more than $50,000 in excess of the
amount set forth on the Adjusted Assets Statement
delivered by Buyer at the Closing, the fees and expenses
of the Adjusted Assets Arbitrator shall be paid by
Buyer. Otherwise, all such fees and expenses shall be
paid by Seller.
1.03 Assumption of Liabilities. Buyer does not and
shall not assume or agree to assume, and shall not acquire
or take over, the liabilities and obligations of
Seller or Shareholder of any nature, direct, contingent
or otherwise, except the obligations listed on Schedule
1.03 hereto (the "Assumed Liabilities"). Buyer shall
not have, and assumes no, liabilities, obligations, or
responsibilities arising before or after the Effective
Time (as hereinafter defined) which arise out of the
activity or inactivity of Seller (including, without
limitation, breach or default) prior to the Effective
Time. Without limiting the generality of the foregoing,
it is expressly agreed that Buyer shall have no
liability to, for, or in respect of, any employees of
Seller including, without limitation, accrued payroll,
salary, expenses, severance, accrued vacation, accrued
sick leave or benefit claims of any nature, or any
withholding or other tax or payment in respect thereof.
1.04 Closing; Effective Time. The closing
(the "Closing") of the transactions provided for in this
Article I shall take place on February 3, 1997 at 9:00
a.m. at the offices of Jeffer, Mangels, Butler &
Marmaro LLP or such other place, time and date as the
parties may mutually agree. The date, as thus determined,
on which the Closing is to take place is referred to
herein as the "Closing Date." The transactions hereunder
shall be effective as of 12:01 a.m., Los Angeles time,
on February 1, 1997 or such other time and date as the
parties may mutually agree. The time and date, as thus
determined, on which the transactions hereunder shall be
effective is referred to herein as the "Effective Time"
and the "Effective Date," respectively.
1.05 Conveyance and Transfer. Seller hereby agrees
that, at Closing, it shall deliver to Buyer the Bill of
Sale and Assumption Agreement and all other bills
of sale, endorsements, assignments, releases and other
goodand sufficient instruments of transfer, assignment and
conveyance, in form satisfactory to Buyer and its counsel,
as shall be effective to convey to Buyer good and
marketable title in and to all of the Assets and all
other documents required to be delivered to Buyer under
the provisions of this Agreement. Simultaneously with
such deliveries, Seller will take all steps necessary
to put Buyer in actual possession of the Assets
other than such Assets which are located on third-party
premises.
1.06 Further Assurances. Seller and Shareholder hereby
agree that, from time to time, at Buyer's request and
without further consideration, they will execute and
deliver to Buyer such other and further instruments of
conveyance, assignment and transfer and take such
other action as Buyer may reasonably require to more
effectively convey, transfer and assign to Buyer, and
to put Buyer in possession of, the Assets.
1.07 Allocation of Sales Price.
(a) The aggregate consideration received by
Seller pursuant to this Agreement shall be allocated as
set forth on Exhibit E hereto.
(b) The parties hereto covenant and agree
with each other that this allocation was arrived at
by arm's length negotiation and that none of them will
take a position on any income tax return, before any
governmental agency charged with the collection of any
income tax or in any judicial proceeding that is in
any manner inconsistent with the terms of this Section
1.07 without the written consent of the other parties to
this Agreement.
1.08 Taxes. Except for taxes owed by Buyer as a
result of its use and operation of the Assets, from and
after the Effective Time, Buyer shall have no
liability or responsibility for any income, franchise,
excise, sales, use or other taxes (other than income
taxes based upon or measured by Buyer's net income) or
charges or imposts of any kind relating to or
arising out of the transactions contemplated by this
Agreement. Seller shall be solely responsible for the
payment of sales, transfer and use taxes arising out of
the sale, transfer and assignment of the Assets.
1.09 Deliveries on Closing Date.
(a) Subject to the terms and provisions hereof,
on or before the Closing Date, Seller shall deliver to
Buyer the originals of all written contracts, books,
records and other data of Seller relating to the Assets,
the Business and the performance of services by Seller
in connection therewith (except Seller's minute books,
and all other corporate seal, stock records and other
corporate records (together, Seller's "Corporate Records")).
Buyer shall retain, and shall make available for inspection
by Seller all written contracts, books, records and other
data of Seller delivered to Buyer at the Closing at an
office of Buyer in California, at any time, on reasonable
notice, during regular business hours for a period of
seven (7) years from and after the Closing Date.
(b) Seller shall retain Seller's Corporate
Records and shall make Seller's Corporate Records
available to Buyer for inspection and copying at any time,
on reasonable notice, during regular business hours for a
period of seven (7) years from and after the Effective
Time. Seller agrees that all Seller's Corporate Records
will be kept and maintained or made available to Buyer
at Seller's corporate office in Los Angeles, California
or such other location as the parties may mutually agree.
1.10 Accrued Vacation. At the Closing, Seller
shall provide a schedule to Buyer detailing the accrued
vacation and sick leave owed to each of Seller's
employees that Buyer intends to employ. Seller agrees to
pay to such employees at the Closing an amount equal to
the total of such accrued vacation and sick leave.
1.11 Employment Agreement. At the Closing,
Shareholder and Buyer shall execute and deliver the
Employment Agreement in the form of Exhibit F
attached hereto (the "Levy Employment Agreement").
1.12 Guarantee of Collectibility of Receivables
of Seller.
(a) Subject to the limitations set forth in
this Section 1.12, Seller and Shareholder, jointly and
severally, guarantee to Buyer that, except to the extent
of the reserve for doubtful accounts shown on the
Accounts Receivable Certification, all accounts and
notes receivable and other receivables reflected on
the Accounts Receivable Certification (the "Receivables")
will be valid and legally binding obligations of the
persons owing said amounts to Seller and that the full
amount of the Receivables will be paid to Buyer on or
before February 28, 1998.
(b) If any part of the Receivables has not
been paid on or before February 28, 1998, then to the
extent that such unpaid part of the Receivables exceeds
the reserve for doubtful accounts shown on the Accounts
Receivable Certification, Buyer may reassign on or before
March 31, 1998 to Seller all or any part of the unpaid part
of the Receivables, free and clear of any security
interest, lien or other encumbrance arising on or after
the Closing, in which event Seller shall pay to Buyer in
cash or by certified check that amount equal to such
reassigned part of the unpaid part of the Receivables
net of the reserve for doubtful accounts shown on the
Accounts Receivable Certification. Buyer shall deliver
to Seller reasonably detailed information supporting the
determination of the amount of such unpaid portion of the
Receivables.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
AND SHAREHOLDER
Seller and Shareholder jointly and severally
represent and warrant to Buyer as follows:
2.01 Organization, Standing and Power of Seller. Seller
is a corporation duly organized, validly existing and in
good standing under the laws of the State of California.
Seller has all requisite corporate power and authority to
own, lease and operate its properties and to carry on
its business as now being conducted. Seller has no
subsidiaries and does not conduct business in any
state other than California. Shareholder is the lawful
record and beneficial owner of all of the issued and
outstanding shares of capital stock of Seller, free
and clear of all security interests, liens, proxies,
voting trusts, voting agreements and other
encumbrances and restrictions of any kind, and all of
such shares are validly issued and outstanding and are
fully paid and nonassessable.
2.02 Authority for Agreements. Seller has the corporate
power and authority to enter into this Agreement and to
carry out its obligations hereunder. The execution and
delivery of this Agreement and all other agreements,
instruments and documents which are contemplated by this
Agreement and the performance of the transactions
contemplated hereby and thereby have been duly and
validly authorized by all necessary corporate and other
action on the part of Seller and Shareholder and when
executed and delivered on behalf of Seller this Agreement
and all agreements contemplated by this Agreement will
constitute a valid and legally binding obligation of
Seller and Shareholder enforceable against them in
accordance with its terms.
2.03 Brokers and Finders. Neither Seller, Shareholder
nor any of their respective officers, directors,
agents, employees or affiliates has employed any broker,
agent or finder or incurred any liability for any brokerage
fees, agents' commissions or finders' fees in connection with
the transactions contemplated by this Agreement.
2.04 Good Title; No Encumbrances; Condition of the
Assets. Except as set forth on Schedule 2.04, Seller is
the owner of and has all right, title and interest in and
to the Assets and is conveying to Buyer good and
marketable title to the Assets. Seller has good right,
power and authority to sell, convey and assign the
Assets to Buyer. Except as set forth on Schedule 2.04,
none of the Assets is subject to any mortgage,
pledge, lien, charge, security interest,
encumbrance, restriction, lease, license, easement,
liability or adverse claim of any nature
whatsoever, direct or indirect, whether accrued, absolute,
contingent or otherwise (collectively, "Liens"). Except
as set forth on Schedule 2.04, all of the Assets owned,
leased or used by Seller are in good operating
condition and repair, subject to ordinary wear and tear,
are suitable for the purposes used, are adequate and
sufficient for all current operations of Seller and are
directly related to the Business.
2.05 Assets. Set forth on Schedule 2.05 hereto is an
accurate and complete list of:
(a) All real property owned by Seller or in
which Seller has a leasehold or other interest or which is
used by Seller in connection with the operation of its
business, together with a description of each lease, sublease,
license or any other instrument under which Seller claims
or holds such leasehold or other interest or right to
the use thereof or pursuant to which Seller has assigned,
sublet or granted any rights therein, identifying the
parties thereto, the rental or other payment
terms, expiration date and cancellation and renewal
terms thereof.
(b) All machinery, tools, equipment,
motor vehicles, rolling stock and other tangible personal
property (other than inventory and supplies), owned,
leased or used by Seller, setting forth with respect
to all such listed property a summary description of all
Liens relating thereto, identifying the parties thereto,
the rental or other payment terms, expiration date and
cancellation and renewal terms thereof.
(c) All patents, patent applications,
licenses, trademarks, trademark registrations, service
marks, service names, trade names, copyrights and
copyright registrations and applications for any of
the foregoing, wholly or partially owned or held by
Seller or used in the operation of Seller's business.
(d) All fire, theft, casualty, liability and
other insurance policies insuring Seller or its
properties or interests therein, specifying with
respect to each such policy the name of the insurer, the
risk insured against, the limits of coverage, the
deductible amount (if any), the premium rate and the
date through which coverage will continue by virtue of
premiums already paid.
(e) All sales agency or distributorship
agreements or franchises or agreements providing for the
services of an independent contractor to which Seller is a
party or by which it is bound.
(f) All contracts, agreements, commitments
or licenses relating to patents, trademarks, trade
names, copyrights, inventions, processes, know-how,
formulae or trade secrets to which Seller is a party or
by which it is bound.
(g) All loan agreements, indentures,
mortgages, pledges, conditional sale or title
retention agreements, security agreements, equipment
obligations, guaranties, leases or lease purchase
agreements to which Seller is a party or by which
it is bound.
(h) All contracts, agreements and
commitments, whether or not fully performed, in respect
of the issuance, sale or transfer of the capital
stock, bonds or other securities of Seller or pursuant
to which Seller has acquired any substantial portion of
its business or assets.
(i) All contracts, agreements, commitments
or other understandings or arrangements to which Seller
is a party or by which it or any of its property is
bound or affected but excluding purchase and sales orders
and commitments made in the ordinary course of business
involving payments or receipts by Seller of less than
$10,000 in any single case but not more than $30,000 in
the aggregate.
(j) All collective bargaining agreements, employment
and consulting agreements, executive compensation
plans, bonus plans, deferred compensation
agreements, employee pension plans or retirement plans,
employee stock options or stock purchase plans and
group life, health and accident insurance and other
employee benefit plans agreements, arrangements or
commitments, whether or not legally binding, including,
without limitation, holiday, vacation and other bonus
practices, to which Seller is a party or is bound or which
relate to the operation of Seller's business.
(k) The names and current annual salary rates
of all employees of Seller, (including independent
commission agents) showing separately for each such
person the amounts paid or payable as salary, bonus
payments and any indirect compensation for the year ended
December 31, 1996.
(l) The names of all of Seller's directors
and officers; and the names of all persons, if any,
holding tax or other powers of attorney from Seller and a
summary of the terms thereof.
All of the contracts, agreements, leases, licenses
and commitments required to be listed on Schedule 2.05
hereto (the "Agreements"), other than those which have
been fully performed, are valid and binding, enforceable
in accordance with their respective terms, in full
force and effect and, except as otherwise specified in
Schedule 2.05 hereto, validly assignable to Buyer without
the consent of any other party so that, after the assignment
thereof to Buyer pursuant hereto, Buyer will be entitled
to the full benefits thereof. Except as disclosed in
Schedule 2.05 hereto, (i) none of the Agreements has
been amended, modified or altered in any
manner, (ii) there is not under any of the Agreements
any existing default or other condition on the part of
Seller which would result in a right to accelerate or
a loss of rights, (iii) none of the Agreements is,
either when considered singly or in the aggregate with
others, unduly burdensome, onerous or materially adverse
to Seller's business, properties, assets, earnings or
prospects or likely, either before or after Closing, to
result in any material loss or liability, (iv) other than
in the ordinary course of business consistent with past
practice, no oral or written notice of termination or
indication of an intention to terminate has been given by any
party to any of the Agreements and (v) except as set forth
on Schedule 2.05, Seller is not providing any additional
products or services, without charge, to any customer covered by
any of the Agreements. True and complete copies of all of the
Agreements (together with any and all amendments thereto)
have been delivered to Buyer.
2.06 Financial Information. Seller has delivered to
Buyer copies of the balance sheets of Seller for each of
the past two (2) fiscal years, and the related statements of
income for each of the fiscal years ended December 31,
1995 and December 31, 1996 (collectively, "Seller's
Financial Statements"), all of which are complete and
correct in all material respects, have been prepared
from the books and records of Seller in accordance
with generally accepted accounting principles consistently
applied and maintained throughout the periods indicated,
and fairly present the financial condition of Seller as at
their respective dates and the results of its operations
for the periods covered thereby. Except as set forth on
Schedule 2.06, Seller's Financial Statements do not contain
any items of special or nonrecurring revenue or any other
revenue not earned in the ordinary course of business
except as expressly specified therein. For purposes of this
Agreement, Seller's Financial Statements shall include any
notes and schedules attached to such financial statements.
2.07 Inventory. All items of Seller's inventory and
related supplies (including finished goods and disassembled
inventory) are suitable and usable for rental in the ordinary
course of business, except as set forth on Schedule 2.07,
none of such items is obsolete or below standard quality
and each item of such inventory reflected on the balance
sheet of Seller as at December 31, 1996 (the "Base Balance
Sheet") and the books and records of Seller is so
reflected on the basis of a complete physical count and is
valued in accordance with generally accepted accounting
principles consistently applied. Except as set forth on
Schedule 2.07, the Assets include a sufficient but not an
excessive quantity of each type of such inventory and supplies in
order to meet the normal requirements of Seller's business.
2.08 Accounts Receivable. Schedule 2.08 hereto sets
forth a complete list of all accounts receivable of
Seller arising out of the Business showing the amounts
due and an aging analysis thereof. The accounts and
other receivables shown on Schedule 2.08 hereto have arisen
in the ordinary course of business, are valid and enforceable
and are not in dispute by the respective obligors therefore and
are collectible consistent with past experience. Schedule
2.08 hereto sets forth a list of any oral or written
communication to Seller of any dispute relating
to such accounts receivable.
2.09 Intellectual Property. Except as set forth on
Schedule 2.09 hereto, Seller owns or has the legal right
to utilize as presently used by Seller all inventions,
patents, patent applications, patent rights, trade
secrets, licenses, transferable permits and transferable
franchises, trademarks, trade names, service marks, copyrights
and copyright applications and applications for any of the
foregoing, know how (collectively, the "Intellectual Property
Rights"), including the exclusive right to use the name
"Hydrothermic Floatation Systems, Inc.," necessary to
manufacture and sell its products and to conduct its
business as it is presently operated, free and clear of
all liens or claims of others. Seller is not
infringing upon any Intellectual Property Rights owned
by any other person or persons, there is no claim or
action by any such person pending or to Seller's
Knowledge (as hereinafter defined), threatened against
Seller or any of its affiliates with respect thereto and
to Seller's Knowledge, there is no person or persons
infringing upon any Intellectual Property Rights used by
Seller. Subject to periodic filing reports due after the
Closing, all of the trademark registrations, copyright
registrations and patents that are included in the Assets
are valid and enforceable in their entirety in all
material respects.
2.10 Litigation. Except as set forth on Schedule 2.10
hereto, there is no (a) claim, suit, action, arbitration,
proceeding, governmental investigation or other legal or
administrative proceeding (collectively, "Claims")
in progress, pending or to Seller's Knowledge,
threatened against or relating to Seller, Shareholder or
any of their officers, directors or employees,
affiliates, properties, assets or the Business or the
transactions contemplated by this Agreement, nor to
Seller's Knowledge, is there any basis for any Claims or
(b) order, decree or ruling of any court or administrative
agency to which Seller, Shareholder or any of their
affiliates is a party or bound, which could adversely
affect Seller, the Business, the Assets or the performance
of the obligations of Seller or Shareholder hereunder and
Seller is not in default in respect of any such order,
decree or ruling. As used herein, the term "Seller's
Knowledge" shall mean the actual knowledge of Y. Jeremy
Levy, Shawn Lipman and Rick Bowen and such knowledge as a
reasonably prudent person would have in the ordinary
exercise of his affairs in the capacity in which his
knowledge is at issue.
2.11 No Conflict with Other Instruments. The
execution, delivery and performance of this Agreement and
the consummation of the transactions herein contemplated will
not (a) constitute a default under, conflict with, result
in a right to accelerate, loss of rights under or a breach
of any of the terms, conditions or provisions of, Seller's
organizational documents or any agreement or instrument
to which Seller or Shareholder is now a party or by which
Seller or Shareholder is bound or to which any property
or asset of any of them is bound, (b) result in
the creation or imposition of any Lien upon Seller's
capital stock, the Assets or the Business or (c) result
in the violation of any applicable law, ordinance,
regulation, permit, authorization, decree or order of any
court or other government agency.
2.12 No Guaranties. Except as set forth on
Schedule 2.12, none of the obligations or liabilities of
Seller is guaranteed by, or subject to a similar contingent
liability of, any other person, firm or corporation, nor
has Seller guaranteed, or otherwise become contingently
liable for, the obligations or liabilities of any
other person, firm or corporation.
2.13 Compliance with Applicable Laws. Except as
set forth on Schedule 2.13, the Business has been, and
until the Effective Time will be, conducted in
compliance in all material respects with all
applicable laws, ordinances, regulations, permits,
authorizations, decrees and orders (collectively, "Laws
and Regulations"), including Laws and Regulations
concerning the environment, occupational health and
safety and the marketing of medical devices. Seller has
all licenses, permits, orders, approvals or other
authorizations of governmental, regulatory or
administrative agencies or authorities required to conduct
the Business and own and operate the Assets and neither
Seller nor Shareholder has received any written notice
or, to Seller's knowledge, any other notice, that any
governmental authority intends to cancel, terminate or
not renew any such license, permit, order, approval or
other authorization. Neither Seller nor Shareholder has
received any opinion or memorandum of legal advice from
any legal counsel to the effect that either of them is
exposed to any liability or disadvantage that is or may
be material to Seller.
2.14 Insurance. Schedule 2.14 hereto sets forth a
list of all insurance policies carried by Seller during
the period beginning January 1, 1994, including types
and limits of coverages and all claims, notice of which
were submitted to any insurer pursuant to any insurance
policy since January 1, 1994. True and complete copies
of such policies have been furnished to Buyer. Seller
has made available to Buyer all files and other information
known to Seller or Shareholder with respect to any claims
made or threatened against Seller arising out of the
Business during the period beginning January 1, 1994,
regardless of whether covered by insurance and regardless
of whether notice thereof was submitted to any insurer.
Except as indicated on Schedule 2.14 hereto, all of such
policies are "occurrence" policies and are not "claims made"
policies. In the event any such policies are on a
claims made basis, Seller shall, at Seller's
expense, purchase insurance with similar coverage which
shall insure Seller for claims made after the Closing
Date with respect to Seller's provision of services before
the Closing Date.
2.15 Consents. There are no (a) consents or
approvals of any public body or authority, (b) filings
with any public body or authority or (c) except as set
forth on Schedule 2.15, consents or waivers from other
parties to the Agreements or other instruments, that are
required for the lawful consummation of the transactions
contemplated hereby or necessary in order that the Business
can be conducted by Buyer in the same manner after Closing
as heretofore conducted by Seller.
2.16 Undisclosed Liabilities. Except as set forth
on Schedule 2.16 hereto or as reflected on the Base
Balance Sheet, Seller does not have any liability or
obligations whether known or unknown, asserted or
unasserted, absolute or contingent, accrued or unaccrued,
liquidated or unliquidated, due or to become due, and
choate or inchoate that would be required under generally
accepted accounting principles to be reflected in a
balance sheet of Seller (including footnotes thereto)
("Liabilities") individually or in the aggregate in
excess of $10,000 (including, without limitation,
liabilities or obligations arising out of claims
based on products liability), and to Seller's Knowledge
there is no basis for any present or future action,
suit, proceeding, hearing, investigation, charge,
complaint, claim or demand against Seller giving rise
to any such liabilities or obligations, except as set
forth in Schedule 2.16 hereto or incurred after December
31, 1996 in the ordinary course of business
consistent with prior practices.
2.17 Absence of Changes or Events. Except as set
forth in Schedule 2.17 hereto or as contemplated by this
Agreement, since July 31, 1996, Seller has conducted the
Business only in the ordinary course of business, and
Seller has not:
(a) incurred any Liabilities which individually
or in the aggregate have had or might have a material
adverse effect on the Assets or the Business;
(b) pledged or subjected to any Lien any of
the Assets, other than liens arising by operation of
law to secure payment of ad valorem or personal property
taxes or arising in the ordinary course of business of
Seller;
(c) sold, transferred, leased to others
or otherwise disposed of any of the Assets, except
in the ordinary course of business of Seller;
(d) discharged, satisfied, canceled or
compromised any material debt or claim, or waived or
released any right of substantial value except for fair
value or in the ordinary course of business;
(e) received any notice of termination of
any contract, lease or other agreement, or suffered any
damage, destruction or loss that, individually or in the
aggregate, has had or might have a material adverse effect
on the Assets or the Business;
(f) instituted, settled or agreed to settle
any litigation, action, proceeding or arbitration;
(g) failed to replenish its inventory or
supplies in a normal and customary manner or made
any material purchase commitment other than in the
ordinary course of business of Seller;
(h) failed to pay any accounts or notes payable
or any other obligations on a timely basis consistent
with the practices of Seller;
(i) entered into any material
transaction, contract or commitment other than in the
ordinary course of the business of Seller;
(j) suffered any event or events,
whether individually or in the aggregate, that has had or
could be reasonably expected to have a material adverse
effect on the Assets or the Business;
(k) made any material change in the rate
of compensation, commission, bonus or other remuneration
payable, or paid or agreed to pay any material bonus,
extra compensation, pension, severance or vacation pay,
to Shareholder or any director, officer, salesman,
distributor, agent or employee of Seller other than
periodic salary increases consistent with past practices;
(l) issued any equity interests, declared or
paid any distribution on equity interests (not including
bonuses) or entered into any agreement or understanding
to do or engage in any of the foregoing actions;
(m) engaged in any activities or practices
other than the Business; or
(n) entered into any agreement or made
any commitment to take any of the actions described in
Subsections (a) through (m) inclusive of this Section
2.17.
2.18 Transactions with Affiliates. Except as set
forth on Schedule 2.18 hereto, during the past three
years Seller has not, directly or indirectly, purchased,
leased from others or otherwise acquired any property
or obtained any services from, or sold, leased or
otherwise disposed of any property or furnished any
services to, or otherwise dealt with (except with
respect to remuneration for services rendered as a
director, officer or employee of Seller), in the
ordinary course of business or otherwise, (i) any
shareholder of Seller or (ii) any person, firm or
corporation which, directly or indirectly, alone or
together with others, controls, is controlled by or is
under common control with, Seller or any shareholder
of Seller. Except as set forth on Schedule 2.18 hereto,
Seller does not owe any amount to, or have any contract
with or commitment to, any of its shareholders, directors,
officers, employees or consultants (other than compensation
for current services not yet due and payable and reimbursement
of expenses arising in the ordinary course of business),
and none of such persons owes any amount to Seller. Except
as set forth on Schedule 2.18 hereto, no part of the property
or assets of Shareholder or any affiliate of Shareholder has,
during the past three years, been used by Seller.
2.19 Taxes. All taxes that relate to, arise out of
or impact upon the Business or the Assets, including,
without limitation, income, property, sales, use,
franchise, added value, employees' income withholding,
unemployment disability and social security taxes, imposed
by the United States or by any foreign country or by any
state, municipality, subdivision or instrumentality of
the United States or of any foreign country, or by any
other taxing authority (collectively, "Taxes"), which are
due or payable by Seller and/or Shareholder and all interest
and penalties thereon, whether disputed or not, have
been timely paid in full, all tax returns required to be
filed in connection therewith have been accurately
prepared and duly and timely filed, all deposits
required by law to be made by Seller with respect to
employees' income withholding and other taxes have been
duly made and in the case of Taxes for which payment is
not yet required, such Taxes have been fully accrued for
on Seller's Financial Statements.
2.20 Labor and Employment Contracts. Seller has not (a)
been a party to a collective bargaining agreement, (b)
had any organization certified as a bargaining agent on
behalf of all or any portion of Seller's employees, (c)
received a demand for recognition from any union or
other organization, (d) to Seller's Knowledge had any
attempt made to organize any of Seller's employees, (e)
encountered any labor union organizing activity or (f)
encountered any actual or threatened employee strikes,
work stoppages, jurisdictional disputes, slow-downs or
lock-outs. Seller has provided Buyer a written list of
all agreements and understandings, whether written or oral,
between Seller and any of its officers, employees or agents
that contain a noncompetition and confidentiality agreement
and/or covenant or any other terms of employment.
Except as set forth on Schedule 2.20 hereto, Seller does
not have any labor disputes currently subject to any
material grievance procedure, arbitration or litigation,
unfair labor practice charges, Equal Employment
Opportunity Commission charges, state or local fair
employment practice charges, Department of Labor
investigations, wage and hour claims or disputes or any
other labor law related charges or investigations
relating to or arising out of the Business or the Assets.
2.21 Environmental Matters.
(a) Except as set forth in Schedule 2.21 hereto,
(i) neither Seller nor any of its subsidiaries or
affiliates has ever generated, transported, used,
stored, treated, disposed of or managed any Hazardous
Waste (as hereinafter defined); (ii) no Hazardous
Material has ever been or is threatened to be spilled,
released or disposed of at any site presently or
formerly owned, operated, leased or used by Seller or
any of its subsidiaries or affiliates, or has ever come
to be located in the soil or groundwater at any such
site; (iii) no Hazardous Material has ever been
transported from any site presently or formerly owned,
operated, leased or used by Seller or any of its
subsidiaries or affiliates for treatment, storage or
disposal at any other place; (iv) neither Seller nor
any of its subsidiaries or affiliates presently owns,
operates, leases or uses, and has not previously owned,
operated, leased or used any site on which underground
storage tanks are or were located and (v) no lien has
ever been imposed by any governmental agency on any
property, facility, machinery or equipment owned,
operated, leased or used by Seller or any of its
subsidiaries or affiliates in connection with the
presence of any Hazardous Material.
(b) Except as set forth in Schedule 2.21 hereto,
(i) neither Seller nor any of its subsidiaries or
affiliates has any liability under, and has not
violated, any Environmental Law (as hereinafter defined);
(ii) each of Seller and its subsidiaries and affiliates, any
property, whether real, personal or mixed, owned,
operated, leased or used by Seller or any of its
subsidiaries or affiliates and any facilities and
operations thereon are presently in compliance with
all applicable Environmental Laws; (iii) neither Seller
nor any of its subsidiaries or affiliates has entered
into or been subject to any judgment, consent decree,
compliance order or administrative order with respect to
any environmental or health and safety matter or
received any request for information, notice, demand
letter, administrative inquiry or formal or informal complaint
or claim with respect to any environmental or health and
safety matter or the enforcement of any Environmental Law
and (iv) neither Seller nor Shareholder has any reason to
believe that any of the items enumerated in clause (iii)
of this paragraph will be forthcoming.
(c) Except as set forth in Schedule 2.21 hereto,
no site, improvements or other property of any kind
owned, operated, leased or used by Seller or any of its
subsidiaries or affiliates contains any lead-based
paint, asbestos or asbestos-containing material, any
polychlorinated biphenyls ("PCBs") or equipment containing
PCBs or any urea formaldehyde foam insulation.
(d) No condition exists affecting any property,
whether real, personal or mixed, occupied, owned,
used, operated, leased or possessed by Seller that might
(i) result in a generation of or a release into the
environment of Hazardous Materials or Hazardous Waste,
(ii) create a risk of harm to human health or animal
health or habitat or the Environment, (iii) require, under
any Environmental Law, that such condition be contained,
abated, remediated, removed, investigated or cleaned up
(regardless of whether or not any government or
regulatory body has ordered or required such action) or
(iv) limit Buyer's full and beneficial use of such
property in full compliance with all Environmental Laws.
(e) Seller has provided to Buyer copies of all
documents, records and information available to Seller
concerning any environmental or health and safety matter
relevant to Seller or any of its subsidiaries or affiliates,
whether generated by Seller or any of its subsidiaries or
affiliates, including, without limitation, environmental risk
assessments, site assessments, documentation regarding
off-site disposal of Hazardous Materials, spill
control plans, and reports, correspondence, permits, licenses,
approvals, consents and other authorizations related
to environmental or health and safety matters issued
by any governmental agency.
(f) For purposes of this Section 2.21, (i)
"Hazardous Material" shall mean and include any
hazardous waste, any reportable quantities of
hazardous material, hazardous substance, petroleum
product, oil, toxic substance, pollutant or contaminant,
as defined or regulated under any Environmental Law;
(ii) "Hazardous Waste" shall mean and include any
hazardous waste as defined or regulated under any
Environmental Law and (iii) "Environmental Law" shall
mean any applicable environmental or health and safety-
related law, regulation, rule, judgment, administrative
order, decree, ordinance or by-law at the federal, state
or local level, existing as of the date hereof or
previously enforced and (iv) the "Environment" means any
surface water, ground water,drinking water supply,
land surface, subsurface strata, ambient air (including
indoor air) and includes any property owned, used or occupied
by Seller.
2.22 Employee Benefit Programs.
(a) Schedule 2.22 hereto sets forth a list of
every Employee Program (as hereinafter defined) that has
been maintained (as such term is hereinafter defined) by
Seller or any of its subsidiaries or affiliates at any
time during the 5-year period ending on the date hereof.
(b) Except as set forth in Schedule 2.22 hereto,
each Employee Program which has been maintained by Seller
or any of its subsidiaries or affiliates and which has
at any time been intended to qualify under Section 401(a)
or 501(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), has received a favorable
determination or approval letter from the Internal
Revenue Service ("IRS") regarding its qualification
under such section and has, in fact, been qualified under
the applicable section of the Code from the effective
date of such Employee Program through and including the
Closing (or, if earlier, the date that all of such
Employee Program's assets were distributed). No event or
omission has occurred which would cause any such
Employee Program to lose its qualification under the
applicable Code section.
(c) Except as set forth in Schedule 2.22
hereto, there has not been any failure of Seller to
comply with any laws applicable with respect to the
Employee Programs that have been maintained by Seller or
any of its subsidiaries or affiliates. With respect to
any Employee Program now or heretofore maintained by
Seller or any of its subsidiaries or affiliates,there has
occurred no "prohibited transaction," as defined in
Section 406 of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or Section 4975 of
the Code, or breach of any duty under ERISA or other
applicable law (including, without limitation, any
health care continuation requirements or any other tax
law requirements, or conditions to favorable tax
treatment, applicable to such plan), which could
result, directly or indirectly (including without
limitation through any obligation of indemnification
or contribution), in any taxes, penalties or other
liability to Seller or any of its subsidiaries or
affiliates. Except as set forth in Schedule 2.22
hereto, no litigation, arbitration, governmental
administrative proceeding or investigation or other
proceeding (other than those relating to routine claims
for benefits) is pending or, to Seller's Knowledge,
threatened with respect to any Employee Program.
(d) Neither Seller nor any of its subsidiaries
or affiliates has incurred any liability under Title IV of
ERISA which will not be paid in full prior to Closing.
Except as set forth in Schedule 2.22 hereto, there has been
no "accumulated funding deficiency" (whether or not waived)
with respect to any Employee Program ever maintained by
Seller or any of its subsidiaries or affiliates and subject to
Code Section 412 or ERISA Section 302. With respect to any
Employee Program maintained by Seller or any of its
subsidiaries or affiliates and subject to Title IV of
ERISA, there has been no (nor will there be any as a
result of the transaction contemplated by this Agreement)
(i) "reportable event," within the meaning of ERISA
Section 4043, or the regulations thereunder (for which
the notice requirement is not waived under 29 C.F.R. Part
2615) or (ii) event or condition which presents a material
risk of plan termination or any other event that may cause
Seller or any of its subsidiaries or affiliates to incur
liability or have a lien imposed on its assets under
Title IV or ERISA. Except as set forth in Schedule 2.22
hereto, all payments and/or contributions required to have
been made (under the provisions of any agreements or other
governing documents or applicable law) with respect to all
Employee Programs ever maintained by Seller or any of its
subsidiaries or affiliates, for all periods prior to Closing,
either have been made or have been accrued (and all such unpaid
but accrued amounts are described on Schedule 2.22
hereto). Except as described in Schedule 2.22 hereto,
no Employee Program maintained by Seller or any of its
subsidiaries or affiliates and subject to Title IV of ERISA
(other than a Multiemployer Plan as hereinafter defined) has any
"unfunded benefit liabilities" within the meaning of
ERISA Section 4001(a)(18), as of the Closing Date.
Neither Seller nor any of its subsidiaries or
affiliates has ever maintained a Multiemployer Plan.
None of the Employee Programs ever maintained by Seller
or any of its subsidiaries or affiliates has ever
provided health care or any other non-pension
benefits to any employees after their employment
was terminated (other than as required by Part 6 of
Subtitle B of Title I of ERISA or any other health
benefits law) or has ever promised to provide such post-
termination benefits.
(e) With respect to each Employee
Program maintained by Seller of any of its subsidiaries or
affiliates within the five years preceding the date
hereof, complete and correct copies of the following
documents (if applicable to such Employee Program) have
previously been delivered to Buyer: (i) all documents
embodying or governing such Employee Program, and any
funding medium for the Employee Program, including, without
limitation, trust agreements) as they may have been amended
through the date hereof; (ii) the most recent IRS
determination or approval letter with respect to such
Employee Program under Code Section 401 or 501(a), and any
applications for determination or approval subsequently
filed with the IRS; (iii) the three most recently
filed IRS Forms 5500, with all applicable schedules and
accountants' opinions attached thereto; (iv) the current
summary plan description for such Employee Program (or
other descriptions of such Employee Program provided to
employees) and any material modifications to such summary
plan descriptions or other descriptions; (v) any insurance
policy (including any fiduciary liability insurance
policy) related to such Employee Program; (vi) any
documents evidencing any loan to an Employee Program
that is a leveraged employee stock ownership plan;
and (vii) with respect to any Multiemployer Plan, any
participation or adoption agreement relating to any such
participation in or contributions under such plan by Seller
or any of its subsidiaries or affiliates.
(f) Except as set forth in Schedule 2.22
hereto, each Employee Program maintained by Seller or
any of its subsidiaries or affiliates as of the date
hereof is subject to termination by the Board of
Directors of such Seller or any of its subsidiaries or
affiliates, as the case may be, without any further
liability or obligation on the part of Seller or
any of its subsidiaries or affiliates to make
further contributions to any trust maintained under any
such Employee Program following such termination.
(g) Buyer will not adopt or in any way
become a successor employer with respect to any such
Employee Program. Except as otherwise required by
law, any obligation, liabilities or responsibilities
under COBRA with respect to any such Employee Program
will be satisfied by Seller, and Buyer shall have no
obligations, liabilities or responsibilities under
COBRA with respect to any such Employee Program.
Seller shall indemnify Buyer for any and all liability
imposed by law under COBRA with respect to any such
Employee Program.
(h) For purposes of this Section 2.22:
(i) "Employee Program" means (A) all
employee benefit plans within the meaning of ERISA
Section 3(3), including, but not limited to, multiple
employer welfare arrangements (within the meaning of
ERISA Section 3(40)), plans to which more than one
unaffiliated employer contributes and employee benefit
plans (such as foreign or excess benefit plans) which
are not subject to ERISA; and (B) all stock option
plans, bonus or incentive award plans, severance
pay policies or agreements, deferred compensation
agreements, supplemental income arrangements, vacation
plans, and all other employee benefit plans, agreements
and arrangements not described in (A) above. In the case
of an Employee Program funded through an organization
described in Code Section 501(c)(9), each reference
to such Employee Program shall include a reference to such
organization;
(ii) an entity "maintains" an Employee
Program if such entity sponsors, contributes to, or
provides (or has promised to provide) benefits under such
Employee Program, or has any obligation (by agreement or
under applicable law) to contribute to or provide
benefits under such Employee Program, or if such
Employee Program provides benefits to or otherwise
covers employees of such entity (or their spouses,
dependents, or beneficiaries);
(iii) An entity is an "Affiliate"
of Seller or any of its subsidiaries or affiliates for
purposes of this Section 2.22 if it would have ever been
considered a single employer with Seller or any of its
subsidiaries or affiliates under ERISA Section 4001(b)
or part of the same "controlled group" as Seller for
purposes of ERISA Section 302(d)(8)(C), and in any
case includes each subsidiary or affiliate of Seller;
and
(iv) "Multiemployer Plan" means a
(pension or non-pension) employee benefit plan to which
more than one employer contributes and which is maintained
pursuant to one or more collective bargaining agreements.
2.23 Books and Records. All of the books and records
of Seller are complete and correct in all material
respects and have been maintained in accordance with
good business practice and there have been no
transactions involving the Business which are required
to have been set forth therein and which have not been
accurately so set forth.
2.24 Other Names and Businesses. During the past
five years, except for the names set forth on
Schedule 2.24, Seller has used no trade names,
fictitious names, assumed names, "doing business as"
names or other names to conduct business nor has
Shareholder had any interest in any other specialty
patient surface or woundcare business other than Apex,
Inc., a California corporation ("Apex"), Blue Line, Inc.
and 9th Wave, Inc.
2.25 Disclosures to Third Parties. Except as set
forth on Schedule 2.25 hereto, neither Seller,
Shareholder nor any of their respective brokers,
representatives, accountants, attorneys or agents has
disclosed any customer lists, contract terms, pricing
information, margin information, trade secrets or other
confidential information to any other person or other
entity.
2.26 Customer Relationships. The relationships
of Seller with its customers and suppliers
("Customers") are generally satisfactory business
relationships. Except as set forth on Schedule 2.26, no
Customer which accounted for more than 1% of the
revenues of Seller for the fiscal year ended December
31, 1996 has canceled or otherwise terminated its
relationship with Seller or has during said period
decreased materially its usage, purchase or provision, as
the case may be, of the services or products of Seller,
other than in the ordinary course of business consistent
with past practice. Except as set forth on Schedule 2.26
hereto, no Customer has, to Seller's Knowledge, any plan
or intention to terminate, cancel or otherwise adversely
modify its relationship with Seller or to decrease or
limit its usage, purchase or provision, as the case
may be, of the services or products of Seller other than
in the ordinary course of business consistent with past
practice.
2.27 Affiliated Entities. Apex has no material
assets and no longer conducts business.
2.28 Disclosure. No representation or warranty made
by Seller or Shareholder contained in this Agreement
nor any exhibit, schedule, statement or certificate
furnished or to be furnished by Seller or Shareholder to
Buyer or its representatives in connection herewith or
pursuant hereto, contains or will contain on the
Closing Date any untrue statement of a material fact,
or omits or will omit on the Closing Date to state any
material fact required to make the statements herein or
therein contained not misleading. The representations and
warranties contained in this Article II or elsewhere in
this Agreement or any document delivered pursuant hereto
shall not be affected or deemed waived by reason of the
fact that Buyer and/or its representatives knew or should
have known that any such representation or warranty is or
might be inaccurate in any respect.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller and Shareholder as follows:
3.01 Organization; Valid Authorization; Good
Standing. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the
State of Delaware. Buyer has all requisite corporate
power and authority to enter into this Agreement and
to perform its obligations hereunder. The execution and
delivery of this Agreement and all other agreements,
instruments and documents which are contemplated by
this Agreement and the performance of the transactions
contemplated hereby and thereby have been duly and
validly authorized by all necessary corporate and other
action on the part of Buyer, and when executed and
delivered on behalf of Buyer, this Agreement and all
agreements contemplated by this Agreement will constitute
a valid and legally binding obligation of Buyer
enforceable against it in accordance with its terms.
3.02 No Conflict with Other Instruments. The execution,
delivery and performance of this Agreement and the
consummation of the transactions herein contemplated will
not (a) constitute a default under, conflict with, result
in a right to accelerate, loss of rights under or a
breach of any of the terms, conditions or provisions of,
Buyer's organizational documents or any agreement or instrument
to which Buyer is now a party or by which Buyer is bound
or to which any property or asset of Buyer is bound or
(b) result in the violation of any applicable law, ordinance,
regulation, permit, authorization, decree or order of
any court or other government agency.
3.03 Consents. There are no (a) consents or
approvals of any public body or authority, (b) filings
with any public body or authority or (c) consents or
waivers from other parties to the Agreements or other
instruments, that are required for the lawful
consummation of the transactions contemplated hereby or
necessary in order that the Business can be conducted by
Buyer in the same manner after Closing as heretofore
conducted by Seller.
3.04 Brokers. Neither Buyer nor any of its respective
officers, directors, agents, employees or affiliates
has employed any broker, agent or finder or incurred any
liability for any brokerage fees, agents' commissions
or finders' fees in connection with the transactions
contemplated by this Agreement.
3.05 Disclosure. No representation or warranty made
by Buyer contained in this Agreement nor any exhibit,
schedule, statement or certificate furnished or to be
furnished by Buyer to Seller, Shareholder or their
representatives in connection herewith or pursuant hereto,
contains or will contain on the Closing Date any untrue
statement of a material fact, or omits or will omit on the
Closing Date to state any material fact required to make
the statements herein or therein contained not misleading.
The representations and warranties contained in this Article
III or elsewhere in this Agreement or any document
delivered pursuant hereto shall not be affected or
deemed waived by reason of the fact that Seller and/or its
representatives knew or should have known that any such
representation or warranty is or might be inaccurate in
any respect.
ARTICLE IV
COVENANTS OF SELLER AND
SHAREHOLDER
Seller and Shareholder jointly and severally covenant
and agree with Buyer as follows:
4.01 Conduct Prior to Effective Time. Unless
otherwise expressly consented to in writing by Buyer,
from and after the date of this Agreement through the
Effective Time, Seller agrees to (and Shareholder agrees
to cause Seller to):
(a) carry on the Business in the ordinary
and usual course as has been conducted since July 31, 1996;
(b) keep and preserve the Assets in good
condition and repair, ordinary wear and tear excepted;
(c) preserve the goodwill of Seller's
suppliers, customers, landlords and others having business
relations with Seller;
(d) maintain in full force and effect
insurance comparable in amount and in scope of the current
policies listed on Schedule 2.14 hereto;
(e) maintain in full force and effect, perform
all of its obligations under and not change any of the
material terms under, the customer accounts of Seller and
all other agreements, leases and other commitments
relating to or affecting the Assets or the Business;
(f) to cooperate with Buyer and use
reasonable efforts to assist Buyer in obtaining the
consent of any landlord or other party to any lease or
contract with Seller where the consent of such landlord
or other party may be required by reason of the transactions
contemplated hereby;
(g) comply in all material respects with
and perform in all material respects, all obligations and
duties imposed upon it by all federal and state laws and
all rules, regulations and orders imposed by federal or
state governmental authorities;
(h) not grant any increase or make any change
in the compensation of any employee employed in
connection with the Business other than in the ordinary
course of business consistent with past practices;
(i) not dispose of or encumber any of the
Assets other than in the ordinary course of business;
(j) not take any actions of the type described
in Section 2.17 other than in the ordinary course of
business;
(k) not take any actions that would be
inconsistent with the intent of this Agreement;
(l) not change its articles of incorporation
or bylaws or merge or consolidate or obligate itself to
do so with or into any other entity;
(m) cause Buyer, its counsel, accountants
and other representatives, to have full access, during
normal business hours, to the properties, books and
records of Seller and will furnish to Buyer and its
representatives during such period all such
information concerning the Business as Buyer or its
representatives may reasonably request; and
(n) give Buyer prompt written notice of
any material change of any of the information contained
in the representations and warranties made in Article
II or elsewhere in this Agreement or the schedules or
exhibits hereto which occurs prior to the Effective Time.
4.02 Advice of Change. Seller and Shareholder shall
advise Buyer in writing prior to the Effective Time of
any material adverse change, or the occurrence of any
event which involves any substantial possibility of any
material adverse change, in the condition, financial or
otherwise, to the Business or the Assets that has
occurred since the date of this Agreement.
4.03 Non-Competition Agreement. In consideration for
the purchase of the Assets hereunder and other good
and valuable consideration, at Closing, Seller and
Shareholder shall, and shall cause Apex to, execute and
deliver, the NonCompetition and Continuity of Business
Dealings Agreement in the form of Exhibit G
attached hereto (the "NonCompetition Agreement").
4.04 Cooperation. Subject to the terms and conditions
herein provided, Seller and Shareholder will each use
all commercially reasonable efforts to take, or cause
to be taken, such action, to execute and deliver, or
cause to be executed and delivered, such additional documents
and instruments and to do, or cause to be done, all
things necessary, proper or advisable under the provisions
of this Agreement and under applicable law, to
consummate and make effective all of the transactions
contemplated by this Agreement.
4.05 Right to Name. Seller and Shareholder agreeto
cause Seller, immediately after Closing, to change the
name of Seller to a name which does not include "H.F.,"
"H.F. Systems" or "Hydrothermic Floatation Systems, Inc.,"
a similar name or any other name reasonably objected to
by Buyer. Seller shall provide copies of all
documents evidencing the change of name to Buyer.
4.06 Access and Information. From the date hereof until
the first to occur of (i) the Closing Date and (ii)
the termination of this Agreement in accordance with
Section 9.01, Seller shall permit Buyer, its counsel,
accountants and other representatives full and complete
access during normal business hours to enable Buyer to
make such investigation of the business, operations and
properties of Seller relating to the Business as Buyer in
its sole discretion deems necessary or desirable in connection
with the transactions contemplated hereby. Such investigation
shall include, without limitation, access to the directors,
officers, employees, agents and representatives (including
legal counsel and independent accountants) of Seller
relating to the Business and the properties, books,
records and other documents of Seller relating to the Business.
Buyer, Seller and Shareholder agree to use reasonable efforts
wherever possible in conducting such investigation to keep
confidential the existence of this Agreement and the
proposed transactions contemplated hereby. Seller
shall furnish Buyer and its representatives with
such financial (including data with respect to
billing and accounts receivable), operating and other
data and information, and copies of documents with
respect to the Business or any of the
transactions contemplated hereby, as Buyer shall from
time to time request. Such access and investigation
shall be made upon reasonable notice and at reasonable
places and times. Such access and information shall not
in any way affect or diminish any of the representations
or warranties hereunder. Without limiting the foregoing,
during such period, Seller shall keep Buyer informed as
to the business and operations of the Business and shall
consult with Buyer with respect thereto as appropriate.
4.07 Termination of 401(k) Plan. Shareholder agrees
to, and shall cause Seller to, take all actions necessary
in accordance with all applicable laws to terminate
Seller's 401(k) Plan.
4.08. Termination of Settlement Agreement. Shareholder
agrees to, and shall cause Seller to, pay all amounts owed to
Jack Sneh prior to the Closing.
ARTICLE V
COVENANTS OF BUYER
Buyer covenants and agrees with Seller and Shareholder as follows:
5.01 Cooperation. Subject to the terms and
conditions herein provided, Buyer will use its best
efforts to take, or cause to be taken, such action,
to execute and deliver, or cause to be executed and
delivered, such additional documents and instruments
and to do, or cause to be done, all things necessary,
proper or advisable under the provisions of this
Agreement and under applicable law to consummate
and make effective all of the transactions contemplated
by this Agreement.
5.02 Confidentiality. In the event that the
Closing does not occur,(i) the terms of the confidentiality
provisions set forth in Section 9 of the letter of intent
dated December 9, 1996 shall remain in full force and
effect, (ii) Seller and Shareholder shall maintain, and
shall require its accountants, attorneys, lenders,
employees, officers and other representatives to
maintain, the confidentiality of business methods,
practices, customer lists, trade secrets, books and
records of Buyer for a five-year period beginning on the
date of this Agreement and ending on December 31,
2001, (iii) for a period of twelve (12) months beginning
on the date of this Agreement, Buyer shall not
solicit any individual currently employed by Seller
("Seller Employees") other than pursuant to a general
solicitation or hire any of Seller's clinical
consultants, and (iv) for a period of six (6) months
beginning on the date of this Agreement, Buyer shall not
hire any Seller Employees.
5.03 Employees.
(a) On the date of this Agreement, Seller
shall, to the extent not previously provided to Buyer,
provide Buyer with a list of all of Seller's employees
employed in the Business ("Employees") by name, date of
hire, current salary and position and shall promptly
provide to Buyer the most recent performance
evaluation and other compensation information
(including anticipated bonuses, if any) for any
Employee who consents in writing to the provision of
such information to Buyer. Buyer shall interview each
Employee for employment effective as of the Closing Date
and use its reasonable efforts to hire as many of
the Employees as possible consistent with, and subject to,
Buyer's requirements and employment policies. Seller shall
permit Buyer to interview Employees at times and
locations acceptable to each of Seller and Buyer. No
later than seven (7) days from the date of this
Agreement, Buyer shall provide to Seller a list of
Employees it intends to employ following the Closing
Date. Seller shall permit Buyer to communicate with
Employees at reasonable times and upon reasonable notice
concerning Buyer's plans, operations, business,
customer relations and general personnel matters, provided
that such contacts shall be conducted in a manner as is
reasonably acceptable to Seller. Buyer shall pay to any
Employee (other than Shareholder and Julie Levy) who is not
offered employment by Buyer for a reason other than a
failure to meet Buyer's standard pre-employment qualifications,
or is terminated by Buyer without good cause after the Closing
such amount, if any, as such Employee would have received
pursuant to Buyer's severance policy had such
Employee been an employee of Buyer since their date of
hire by Seller. Each Employee offered employment by
Buyer effective as of the Closing Date who accepts such
employment shall be referred to herein as a "Transferred
Employee."
(b) Other than as set forth in Sections
5.03(a) and (c) and subject to the provisions of Buyer's
policies and programs, each Transferred Employee shall
be eligible to participate or eligible for accrual of
benefits, vesting and contributions or accruals to be
made or credited following the Closing Date under
each of Buyer's employee benefit plans, programs or
arrangements available to all or substantially all of
Buyer's employees, subject to the terms upon which such
plans allow new participation by Buyer's employees. Each
Transferred Employee shall be deemed to have been hired
by Buyer as of the Closing Date. Except as expressly
provided in this Section 5.03, Buyer has no obligation
to (i) make any contributions or accruals with respect
to any period preceding the Closing Date, (ii) offer
Transferred Employees the same or comparable employee plans
or benefits as Seller, or (iii) assume any liability
of Seller with respect to Seller's employee benefit
plans or severance policy, accrued vacation or sick leave
for Seller's employees, or Seller's employment of
the Transferred Employees prior to the Closing Date.
(c) With respect to Transferred Employees
who regularly work less than 40 hours per week, Buyer
shall not be required to offer or provide benefits, other
than benefits offered or provided to Buyer's employees
who work a similar number of hours per week.
(d) This Agreement is not intended to create
and does not create any contractual or legal rights
in or enforceable by any employee of Seller employed
with the Business or upon any party other than Seller,
Shareholder and Buyer. Any written communications to the
employees of Seller employed with the Business concerning
the subject matter of this Section 5.03 shall be approved
by Seller and Buyer.
5.04 Earnout Revenues. Buyer agrees to use
commercially reasonable efforts to maximize the Earnout
Revenue during the Earnout Period, subject to all
applicable laws.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF SELLER
AND SHAREHOLDER
All obligations of Seller and Shareholder to
be discharged under this Agreement are subject to the
fulfillment, prior to or at the Closing, of each of
the following conditions, unless waived in writing by
Seller and Shareholder at any time prior to or at the
Closing:
6.01 Representations and Warranties of Buyer. All of
the representations and warranties of Buyer contained in
this Agreement shall be true and correct in all material
respects as of the date of this Agreement. All such
representations and warranties shall be deemed to have
been made again as of the Closing Date, and shall be
true and correct in all material respects as of the
time of the Closing. Buyer shall have executed and
delivered to Seller a Certificate, in form and substance
reasonably satisfactory to Seller, dated the Closing
Date, to such effect.
6.02 Covenants and Agreements of Buyer. Buyer shall
have caused all covenants, agreements and conditions
required by this Agreement to be performed or complied
with by them prior to or at the Closing to be so
performed or complied with in all material respects.
Buyer shall have executed and delivered to Seller a
Certificate, in form and substance reasonably
satisfactory to Seller, dated the Closing Date, to such
effect.
6.03 Opinion of Counsel. Cox & Smith Incorporated,
counsel for Buyer, shall have delivered to Seller
and Shareholder an opinion, dated the Closing Date, in
substantially the form of Exhibit H attached hereto.
6.04 Option. Kinetic Concepts, Inc., a Texas
corporation ("KCI"), shall have granted to Shareholder
an option (the "Option") pursuant to the 1987 Kinetic
Concepts, Inc. Key Contributor Stock Option Plan (the
"Plan") to purchase Fifteen Thousand (15,000) shares
of the common stock, par value $.001 per share, of KCI.
The Option shall have all terms and conditions of other
options granted under the Plan except the Option shall
(i) vest as of the date of Closing and (ii) have an exercise
price equal to $11.375.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF BUYER
All obligations of Buyer to be discharged under
this Agreement at the Closing are subject to the
fulfillment, prior to or at the Closing, of each of
the following conditions, unless expressly waived in
writing by Buyer at any time prior to or at the Closing:
7.01 Representations and Warranties of Seller
and Shareholder. All of the representations and
warranties of Seller and Shareholder contained in this
Agreement shall be true and correct in all material
respects as of the date of this Agreement. All of such
representations and warranties shall be deemed to have
been made again as of the Closing Date, and shall be
true and correct in all material respects as of the time
of the Closing. Seller and Shareholder shall each have
executed and delivered to Buyer a Certificate, in form
and substance reasonably satisfactory to Buyer, dated the
Closing Date, to such effect.
7.02 Covenants and Agreements of Seller and Shareholder.
Seller and Shareholder shall have caused all
covenants, agreements and conditions required by this
Agreement to be performed or complied with by them prior
to or at the Closing to be so performed or complied with
in all material respects. Seller and Shareholder shall
each have executed and delivered to Buyer a
Certificate, in form and substance reasonably
satisfactory to Buyer, dated the Closing Date, to
such effect.
7.03 Consents. All of the consents necessary
or advisable to transfer the Assets to Buyer and for
Buyer to operate the Business from and after the Effective
Time shall have been secured in form reasonably
satisfactory to Buyer, except for any such consents the
failure of which to be made or obtained, individually or
in the aggregate, would not have a material adverse effect
on the Business or the Assets.
7.04 Opinion of Counsel. Jeffer, Mangels, Butler
& Marmaro LLP, counsel for Seller and Shareholder, shall
have delivered to Buyer an opinion, dated the Closing
Date, in substantially the form of Exhibit I attached
hereto.
7.05 No Material Adverse Changes. There shall not
have been any material adverse changes to the Assets
or the Business prior to the Closing; provided,
however, for purposes of this Section 7.05, a material
adverse change resulting solely from the announcement
of the transactions contemplated hereby shall only be
deemed to be a material adverse change under this
Section 7.05 if (i) eight (8) or more of Seller's
consulting clinicians elect to give notice to terminate
their employment with Seller or (ii) 80 or more
therapeutic support surface rentals are terminated,
other than in the ordinary course of business.
7.06 Releases. All of the liens, charges,
security interests and encumbrances outstanding on any of
the Assets shall have been terminated and released prior
to or at the Closing.
7.07 Agreements. Seller, Shareholder and Apex shall
have each executed and delivered the Non-Competition
Agreement. Seller shall have executed and delivered the
Bill of Sale and Assumption Agreement. Shareholder
shall have executed and delivered the Levy Employment
Agreement.
7.08 Employment Agreements. Shawn Lipman and Rick
Bowen shall have executed and delivered to Buyer
Employment Agreements in form and substance reasonably
satisfactory to Buyer.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION
8.01 Survival of Representations and Warranties.
Subject to the limitations set forth in Section 8.04,
the representations, warranties, covenants, and
agreements made by Seller and Shareholder hereunder,
except as they may be fully performed prior to or at the
Closing, shall survive Closing and shall be fully
enforceable by Buyer and its successors and assigns, at
law or in equity, against Seller and Shareholder and their
respective successors or assigns. All of the
representations, warranties, covenants, and agreements
made by Buyer hereunder, except as they may be fully
performed prior to or at the Closing, shall survive
Closing and shall be fully enforceable by
Seller, Shareholder, its successors, and assigns, at
law or in equity, against Buyer and its successors and
assigns.
8.02 Indemnification by Seller and Shareholder. Subject
to the limitations set forth in Section 8.04, Seller
and Shareholder, jointly and severally, agree to
indemnify and hold Buyer harmless from all liabilities,
damages, losses, costs, reasonable attorneys' fees and
other expenses resulting from, arising out of or incurred
with respect to, the falsity of any representation or the
breach of any warranty or covenant made by Seller or Shareholder
herein or in accordance herewith or in enforcing any
agreement or indemnity hereunder. Except as expressly
provided in Section 1.03, Buyer has not assumed, or
agreed to assume, any liabilities or obligations of
any kind or nature whatsoever of Seller, whether
direct, contingent or otherwise. In connection therewith,
Seller and Shareholder agree, jointly and severally, to
indemnify and hold Buyer harmless from all liabilities,
damages, losses, costs, reasonable attorneys' fees and
other expenses resulting from or arising out of or incurred
in connection with any actual or alleged liability or
obligation of Seller or Shareholder not expressly assumed by Buyer.
8.03 Indemnification by Buyer. Buyer agrees to
indemnify and hold Seller and Shareholder harmless from
all liabilities, damages, losses, costs, reasonable
attorneys' fees and other expenses resulting from,
arising out of or incurred with respect to, the
falsity of any representation or the breach of any
warranty or covenant made by Buyer herein or in
accordance herewith or in enforcing any
agreement or indemnity hereunder. Buyer agrees to
indemnify and hold Seller and Shareholder harmless
from all liabilities, damages, losses, costs, reasonable
attorneys' fees and other expenses resulting from,
arising out of or incurred in connection with, (i) the
Assumed Liabilities and (ii) the operation of the
Business or the use of the Assets from and after the
Closing Date.
8.04 Limitations on Indemnification.
(a) If the Closing occurs, Seller and
Shareholder will have no liability with respect to any
representations or warranties in article II hereof,
other than with respect to Sections 2.19, 2.21 and 2.22,
unless on or before March 31, 1998, Buyer notifies
Seller or Shareholder of a claim for indemnification.
Any claim with respect to Sections 2.19, 2.21 and
2.22 may be made at any time. If the Closing occurs,
Buyer will have no liability with respect to any
representation or warranty made in Article III hereof,
unless on or before March 31, 1998, Seller notifies
Buyer of a claim for indemnification.
(b) If the Closing occurs, Seller and
Shareholder shall not be obligated to indemnify Buyer with
respect to the representations and warranties set forth in
Article II until and unless the cumulative amount of all
indemnification claims with respect to the representations
and warranties contained in Article II exceeds One Hundred
Thousand Dollars ($100,000) (the 'Basket"), at which
point Seller and Shareholder shall be obligated to indemnify
Buyer for all such claims in excess of the Basket.
(c) If the Closing occurs, Seller's and
Shareholder's liability for and obligation to indemnify
Buyer with respect to any breach of representations and
warranties contained in Article II shall be limited to
the aggregate amount of the consideration paid to
Seller pursuant to Sections 1.02(a) and (b) hereof.
The limitations set forth in this Section 8.04(c) shall
only apply with respect to those claims based solely on
the representations and warranties set forth in Article II hereof.
(d) If the Closing occurs, the aggregate liability of Buyer
for and obligation to indemnify Seller and Shareholder with
respect to any breaches of representations and warranties contained
in Article III shall be limited to the amount of One Million
Dollars ($1,000,000), except for Buyer's obligations under Sections
1.02(b), 1.02(c) and 1.03. The limitations set forth in this
Section 8.04(d) shall only apply with respect to claims based solely
on the representations and warranties set forth in Article
III hereof.
(e) In calculating the amount of any loss incurred by
any party hereto, such amount shall be reduced by the net amount of
recovery (after deducting all attorneys' fees, expenses and
other costs of recovery) from any insurer or other party liable for
such loss, and the indemnified party shall use reasonable efforts
to effect any such recovery.
8.05 Notice of Claim. The party seeking
indemnification (the "Indemnified Party") shall give
written notice to the party obligated to indemnify and
hold the other harmless (the "Indemnifying Party") of
an event giving rise to the obligation to indemnify,
allow the Indemnifying Party to assume and conduct the
defense of the claim or action and cooperate with the
Indemnifying Party in the defense thereof. If the
Indemnifying Party wrongfully refuses to assume the
defense of the Indemnified Party, the Indemnifying Party
shall be responsible for all legal and other
expenses incurred by the Indemnified Party in
connection with the investigation or defense of such
claim or action including, without limitation, expenses
incurred in enforcing such obligation to indemnify.
8.06 Offset. In the event Buyer shall be entitled
(a) to indemnification pursuant to this Article VIII or
(b) any other payments or claims from or against
Seller and/or Shareholder, Buyer shall have the right to
offset the amount of such claim, debt or obligation
against any amounts or consideration to be paid to
Seller and/or Shareholder after the Closing (the "Right
of Offset"). In the event it is later determined that
Buyer is not entitled to a recovery for the amount
offset, Buyer shall repay to Seller the amount
improperly offset plus accrued interest on such amount at
the rate of 10% per annum from the date that payment
would have been due had such amount not been improperly
offset. The Right of Offset shall in no way limit or impair
any other remedies available to Buyer.
8.07 Tax Treatment of Indemnification Payments.
Unless otherwise required by law, each of the parties
agree to treat any indemnification payments made pursuant
to this Agreement as an adjustment to the purchase price
for all tax purposes.
8.08 Exclusive Remedy. Except with respect to claims for
actual fraud only, the parties hereto agree that their
exclusive remedy after the Closing for any breach of
any representation or warranty set forth in Articles II
and III hereof contained in this Agreement shall be the
indemnity contained in this Article VIII; provided,
however, that nothing contained herein shall limit the
rights of any party to seek and obtain injunctive relief
to specifically enforce another party's obligations
hereunder.
ARTICLE IX
GENERAL
9.01 Termination.
(a) This Agreement may, by notice given prior
to or at the Closing, be terminated:
(i) by the mutual written agreement of
Buyer and Seller and Shareholder;
(ii) by either Buyer, on the one hand,
or Seller and Shareholder, on the other hand, if a
material breach of any provision of this Agreement has
been committed by the other party and such breach has
not been waived or cured without having a material
adverse effect on the Business or the Assets;
(iii) (I) by Buyer if any of the
conditions in Section VII has not been satisfied as of
the Closing, or if satisfaction of such a condition is or
becomes impossible (other than through the failure of
Buyer to comply with its obligations under this Agreement)
and Buyer has not waived such condition on or before the
Closing or (II) by Seller if any of the conditions in
Section VI has not been satisfied as of the Closing, or
if satisfaction of such a condition is or becomes
impossible (other than through the failure of Seller to
comply with its obligations under this Agreement) and
Seller has not waived such condition on or before the
Closing.
(iv) the Closing shall not have
occurred (other than through the failure of any party
seeking to terminate this Agreement to comply fully with
its obligations under this Agreement) as of February 15,
1997, or such later date as the parties may agree upon in
writing.
(b) Nothing in this Section 9.01 shall relieve
any party of any liability for a breach of this Agreement prior
to the termination hereof.
9.02 Notices, Etc. All notices, requests, demands
and other communications hereunder shall be in writing and,
unless otherwise provided herein, shall be deemed to
have been duly given upon delivery in person, by
telecopy, by overnight courier or by certified or
registered mail, return receipt requested, as follows:
If to Seller Hydrothermic Floatation Systems, Inc
or Shareholder: 127 North Bowling Green Way
Los Angeles, California 90049
Attention: Mr. Jeremy Levy,
President
Facsimile No.: (310)476-2303
With a copy to: Jeffer, Mangels, Butler & Marmaro, LLP
2121 Avenue of the Stars, Tenth Floor
Los Angeles, California 90067-5010
Attention: Mr. Joel I. Bennett
Facsimile No.: (310)203-0567
If to Buyer: KCI Therapeutic Services, Inc.
8023 Vantage Drive
San Antonio, Texas 78230
Attention: Mr. Dennis E. Noll,
General Counsel
Facsimile No.: (210)225-6993
With a copy to: Cox & Smith Incorporated
112 E. Pecan Street, Suite 1800
San Antonio, Texas 78205
Attention: Mr. Stephen D. Seidel
Facsimile: (210)226-8395
or at such other address or telecopy number as shall
have been furnished to the other in writing in accordance
herewith, except that such notice of such change shall
be effective only upon receipt. Each such notice,
request, demand or other communication shall be
effective when received or, if given my mail, when
delivered at the address specified in this Section 9.02
or on the fifth business day following the date on
which such communication is posted, whichever occurs
first.
9.03 Amendments and Waiver. This Agreement may
be amended or modified by, and only by, a written
instrument executed by all the parties hereto. The
terms of this Agreement may be waived by, and only by, a
written instrument executed by the party against whom
such waiver is sought to be enforced.
9.04 Section and Other Headings. The section and
other headings contained in this Agreement are for
convenience of reference only and shall not in any way
affect the meaning or interpretation of this Agreement.
9.05 Counterparts. This Agreement may be executed
in any number of counterparts, each of which shall be
deemed an original and all of which shall constitute one
and the same
instrument.
9.06 Parties in Interest. This Agreement shall inure
to the benefit of and be binding upon parties hereto, and
their respective successors and assigns. This Agreement
shall not be assigned by any party hereto without the
written consent of the other parties, except as otherwise
expressly permitted herein.
9.07 No Implied Rights or Remedies. Except as
otherwise expressly provided herein, nothing herein
expressed or implied is intended or shall be construed
to confer upon or to give any person, firm, or
corporation, other than the parties hereto and their
respective successors and assigns, any rights or remedies
under or by reason of this Agreement.
9.08 Exhibits and Schedules. All exhibits and
schedules referred to herein and attached hereto are
incorporated herein for all purposes.
9.09 Entire Agreement. This Agreement, together
with all exhibits and schedules hereto and the letter
agreement of even date herewith between Buyer, Seller,
Shareholder, Apex and Blue Line, Inc., (the "Letter
Agreement"), embodies the entire agreement and
understanding between the parties hereto relating to the
subject matter hereof and supersedes any prior
agreements and understandings relating to the subject
matter hereof.
9.10 Legal Invalidity. If any part or provision of
this Agreement is or shall be deemed violative of any
applicable laws, rules or regulations, such legal invalidity
shall not void the Agreement or affect the remaining terms
and provisions of this Agreement, and the Agreement shall
be construed and interpreted to comport with all such
laws, rules or regulations to the maximum extent possible.
9.11 Applicable Law. This Agreement and the rights
and obligations of the parties hereto shall be construed
under and governed by the laws of the State of Delaware,
without giving effect to principles of conflict of laws.
9.12 Enforcement; Service of Process. In the
event either party shall seek enforcement of any covenant,
warranty or other term or provision of this agreement, the
party which prevails in such enforcement proceedings shall
be entitled to recover reasonable attorneys' fees actually
incurred by it in connection therewith. The parties
hereto agree that the service of process or any other
papers upon them or any of them by registered mail at
their respective addresses where notices are to be sent
pursuant to this Article IX shall be deemed good, proper
and effective service upon them.
9.13 Expenses; Taxes. Each party hereto shall pay
its own expenses incurred in connection with the
transactions contemplated hereby; provided, however, that
Seller shall pay the cost of all income, single
business, sales, transfer, use, value added, gross
receipts, registration and similar taxes
arising out of or in connection with the transactions
contemplated by this Agreement, other than any sales or
use tax that Buyer elects to pay, if such tax payment
is not mandatory; provided, Buyer shall pay use tax with
respect to any such election to the extent such
payment does not adversely affect Buyer.
9.14 Waiver of Punitive Damages. EXCEPT WITH RESPECT TO
FRAUD, THE PARTIES TO THIS AGREEMENT EXPRESSLY WAIVE
AND FORGO ANY RIGHT TO RECOVER PUNITIVE AND EXEMPLARY
DAMAGES IN ANY ARBITRATION, LAWSUIT, LITIGATION OR
PROCEEDING ARISING OUT OF OR RESULTING FROM ANY
CONTROVERSY OR CLAIM ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR ANY RELATED DOCUMENT, OR THE BREACH,
TERMINATION OR VALIDITY OF ANY PROVISION OF THIS
AGREEMENT, OR ANY RELATED DOCUMENT, OR THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT OR ANY RELATED DOCUMENT.
EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (a) NO REPRESENTATIVE,
AGENT OR ATTORNEY OR ANY OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN
THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER,
(b) IT UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THE
WAIVER, (c) IT MAKES THIS WAIVER VOLUNTARILY, AND (d) IT HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS,
THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.14.
9.15 Exclusivity of Representations and Warranties;
Relationship Between the Parties. It is the explicit
intent and understanding of each of the parties hereto that
neither party hereto nor any of its affiliates,
representatives or agents is making any representation
or warranty whatsoever, oral or written, express or
implied, other than those set forth in this Agreement,
and neither party hereto is relying on any statement,
representation or warranty, oral or written, express or
implied, made by the other party hereto or such other party's
affiliates, representatives or agents, except for the
representations and warranties set forth in this Agreement
and the Exhibits, Schedules and other documents executed
and delivered by the parties hereto pursuant to this
Agreement. The parties hereto agree that this is an
arms' length transaction in which the parties' undertakings
and obligations are limited to the performance of their
obligations under this Agreement and the Exhibits, Schedules
and other documents executed and delivered by the parties
hereto pursuant to this Agreement.
9.16 Arbitration.
(a) The parties hereto agree that all
disputes, controversies or claims that may arise among
them (including their agents and employees) including,
without limitation, any dispute, controversy or claim
arising out of this Agreement, the Letter
Agreement, the Non-Competition Agreement or the Levy
Employment Agreement, or the breach, termination or
invalidity thereof, shall be submitted to, and determined
by, binding arbitration. The foregoing
notwithstanding, the parties may seek and obtain from a
court of competent jurisdiction a temporary restraining
order, temporary injunction or other temporary
emergency relief without first having to submit such
dispute to arbitration. Such arbitration shall be
conducted pursuant to the Commercial Arbitration Rules
(the "Rules") then in effect of the American Arbitration
Association, except to the extent such rules are inconsistent
with this Section 9.16; provided; however, that any dispute
relating to the calculation of the Earnout Revenue Statement
or the Adjusted Assets Statement shall be resolved in accordance
with Sections 1.02(b) and (d) hereof. If the amount in
controversy in the arbitration exceeds $200,000, exclusive of
interest, attorneys' fees and costs, the arbitration shall be
conducted by a panel of three (3) neutral arbitrators. Otherwise, the
arbitration shall be conducted by a single neutral arbitrator.
The arbitrator(s) shall be selected pursuant to the Rules.
Exclusive venue for such arbitration shall be in Phoenix, Arizona.
The arbitrator(s) shall apply the internal laws of the State
of Delaware (without regard to conflict of law
rules) in determining the substance of the dispute,
controversy or claim and shall decide the same in
accordance with the applicable usages and terms of trade.
Evidentiary questions shall be governed by the Federal
Rules of Evidence. The arbitrator(s)' award shall be in writing
and shall set forth the findings and conclusions upon which the
arbitrator(s) based the award. The prevailing party
in any such arbitration shall be entitled to recover
its reasonable attorneys' fees, costs and expenses
incurred in connection with the arbitration. Any award
pursuant to such arbitration shall be final and binding
upon the parties, and judgment on the award may be
entered in any federal or state court sitting or
located in Maricopa County, Arizona or in any other
court having jurisdiction. The provisions of this
Section 9.16 shall survive the termination of this
Agreement.
(b) The arbitration shall commence within
thirty (30) days after the selection of neutral
arbitrator(s) in accordance with the provisions of this
Section 9.16. In fulfilling his or her duties, the arbitrator(s)
may consider such matters as, in the opinion of the
arbitrator(s), are necessary or helpful to render an appropriate
decision. All discovery shall be expedited, consistent with the
nature and complexity of the claim or dispute and
consistent with fairness and justice. The arbitrator(s)
shall have the power to compel any party to comply with
discovery requests of the other parties and to issue
binding orders relating to any discovery dispute which
shall be enforceable in the same manner as awards.
The arbitrator(s) also shall have the power to impose
sanctions for abuse or frustration of the arbitration
process, including without limitation, the
refusal to comply with orders of the arbitrator(s)
relating to discovery and compliance with subpoenas.
(c) Without limiting the enforceability or
scope of this Section 9.16, the parties to this
Agreement agree that if a controversy or claim between
them arises out of or relates to this Agreement and results in
litigation, the courts of Maricopa County, Arizona or
the courts of the United States of America located in
Maricopa County, Arizona shall have jurisdiction to hear
and decide such matter, and such parties hereby submit to
jurisdiction of such courts.
IN WITNESS WHEREOF, the undersigned have duly
executed this Agreement as of the date and year first
above written.
KCI THERAPEUTIC SERVICES, INC.
/S/ DENNIS E. NOLL
By:______________________________
Dennis E. Noll, Vice President
HYDROTHERMIC FLOATATION SYSTEMS, INC.
/S/ Y. JERMY LEVY
By:______________________________
Y. Jeremy Levy, President
/S/ Y. JEREMY LEVY
_________________________________
Y. Jeremy Levy, Individually
Board of Directors
Kinetic Concepts, Inc.
San Antonio, Texas
Ladies and Gentlemen:
Re: Form 10-Q
We are aware of the inclusion in Form 10-Q of Kinetic Concepts,
Inc. of our report dated April 22, 1997 relating to the
unaudited condensed consolidated interim financial statements of
Kinetic Concepts, Inc. for the quarter ended March 31, 1997.
Pursuant to Rule 436(c) of the Securities Act of 1933 our
report is not a part of the registration statement prepared
or certified by accountants within the meaning of Section 7
or 11 of the Securities Act of 1933.
Very truly yours,
/S/ ERNST & YOUNG LLP
---------------------
Ernst & Young LLP
San Antonio, Texas
May 8, 1997
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 41,394,150
<SECURITIES> 0
<RECEIVABLES> 79,894,273
<ALLOWANCES> (8,338,493)
<INVENTORY> 21,366,599
<CURRENT-ASSETS> 143,308,447
<PP&E> 194,484,215
<DEPRECIATION> (126,551,684)
<TOTAL-ASSETS> 267,550,914
<CURRENT-LIABILITIES> 45,690,652
<BONDS> 0
0
0
<COMMON> 42,289
<OTHER-SE> 215,448,141
<TOTAL-LIABILITY-AND-EQUITY> 267,550,914
<SALES> 11,356,375
<TOTAL-REVENUES> 73,180,822
<CGS> 4,242,325
<TOTAL-COSTS> 52,721,476
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (453,955)
<INCOME-PRETAX> 16,670,976
<INCOME-TAX> 6,668,390
<INCOME-CONTINUING> 10,002,586
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,002,586
<EPS-PRIMARY> $0.23
<EPS-DILUTED> $0.23
</TABLE>
