SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 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 1-10670
HANGER ORTHOPEDIC GROUP, INC.
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(Exact name of registrant as specified in its charter.)
Delaware 84-0904275
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7700 Old Georgetown Road, Bethesda, MD 20814
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(Address of principal executive offices) (Zip Code)
Registrant's phone number, including area code: (301) 986-0701
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Securities registered pursuant to section 12(g) of the Act: None.
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 [ ]
The aggregate market value of the registrant's Common Stock, par value
$.01 per share, held as of March 18, 1998 by non-affiliates of the registrant
was $267,817,995 based on the $17.125 closing sale price of the Common Stock
on the American Stock Exchange on such date.
As of March 18, 1998, the registrant had 15,639,007 shares of its Common
Stock issued and outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III of the Form 10-K is incorporated
by reference from the registrant's definitive proxy statement or amendment
hereto which will be filed not later than 120 days after the end of the fiscal
year covered by this report.
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ITEM 1. BUSINESS.
OVERVIEW
Hanger Orthopedic Group, Inc. is a professional practice management
company focused on the orthotic and prosthetic segment of the orthopedic
rehabilitation industry. The Company acquires and operates the practices of
orthotists and prosthetists, medical professionals that design, fabricate, fit
and supervise the use of external musculoskeletal support devices and
artificial limbs. The Company has acquired over 60 O&P businesses since 1986
and currently employs 249 certified O&P practitioners and operates 213 O&P
centers in 29 states and the District of Columbia. The Company also has
developed OPNET, a national preferred provided network of O&P service
professionals. OPNET has contractual relationships with 344 patient-care
centers (213 of which are owned and operated by the Company) serving 279
managed care plans. In addition to its practice management and patient-care
services, the Company manufactures custom-made and prefabricated O&P devices
and is the country's largest distributor of O&P components and finished O&P
patient-care products.
INDUSTRY BACKGROUND
Orthotics is the design, fabrication, fitting and supervised use of
custom-made braces and other devices that provide external support to treat
musculoskeletal disorders. Musculoskeletal disorders are ailments of the back,
extremities or joints caused by traumatic injuries, chronic conditions,
diseases, congenital disorders or injuries resulting from sports or other
activities. Prosthetics is the design, fabrication and fitting of custom-made
artificial limbs for patients who have lost limbs as a result of traumatic
injuries, vascular diseases, diabetes, cancer or congenital disorders.
Care of O&P patients is part of a continuum of rehabilitation services
from diagnosis to treatment and prevention of future injury. This continuum
involves the integration of several medical disciplines that begins with the
attending physician's diagnosis. Once a course of treatment is determined, the
physician, generally an orthopedic surgeon, vascular surgeon or psychiatrist,
refers a patient to an O&P patient-care service provider for treatment. An O&P
practitioner then consults with both the referring physician and the patient
to formulate the prescription for and design of, an orthotic or prosthetic
device to meet the patient's needs.
The Company estimates that the O&P patient-care services industry in the
United States represented approximately $2.0 billion in sales in 1995. Key
trends expected to increase demand for orthopedic rehabilitation services
include the following:
GROWING ELDERLY POPULATION. The growth rate of the over-65 age
group is nearly triple that of the under-65 age group. With broader
medical insurance coverage, increasing disposable income, longer life
expectancy, greater mobility and improved technology and devices, the
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elderly are expected to seek orthopedic rehabilitation services more
often.
COST-EFFECTIVE REDUCTION IN HOSPITALIZATION. As public and private
payors encourage reduced hospital admissions and reduced length of stay,
out-patient rehabilitation is in greater demand. O&P services and
devices have enabled patients to become ambulatory more quickly after
receiving medical treatment in the hospital. The Company believes that
significant cost savings can be achieved through the early use of O&P
services. The provision of O&P services in many cases reduces the need
for more expensive treatments, thus representing a cost savings to the
third-party payor.
GROWING PHYSICAL HEALTH CONSCIOUSNESS. There is a growing emphasis
on physical fitness, leisure sports and conditioning, such as running
and aerobics, which has led to increased injuries requiring orthopedic
rehabilitative services and products. In addition, as the current
middle-age population ages, it brings its more active life-style and
accompanying emphasis on physical fitness to the over-65 age group.
These trends are evidenced by the increasing demand for new devices
which provide support for injuries, prevent further or new injuries or
enhance physical performance.
ADVANCING TECHNOLOGY. The range and effectiveness of treatment
options have increased in connection with the technological
sophistication of O&P devices. Advances in design technology and
lighter, stronger and more cosmetically acceptable materials have
enabled the industry to produce new O&P products, which provide greater
comfort, protection and patient acceptability. Therefore, treatment can
be more effective and of shorter duration, contributing to greater
mobility and a more active lifestyle for the patient. Orthotic devices
are more prevalent and visible in many sports, including skiing, running
and golf.
NEED FOR REPLACEMENT AND CONTINUING CARE. Because the useful life
of most custom fitted and fabricated O&P devices is approximately three
to five years, such devices need retrofitting and replacement. There is
also an attendant need for continuing patient-care services, which
contributes to the increasing demand for orthopedic rehabilitation.
INDUSTRY CONSOLIDATION
The O&P services market is highly fragmented and relatively
underpenetrated by professional practice management companies. Hanger is one
of the two largest companies in the O&P industry which, combined, accounted
for less that 15% of the total estimated O&P industry revenue in 1995. There
are an estimated 3,200 certified prosthetists and/or orthotists and
approximately 2,670 patient-care centers in the United States, with such
facilities generally being operated as small group practices. There are also
several regional and multi-regional competitors that operate numerous
patient-care centers. The Company believes that the O&P industry will continue
to consolidate as a result of a variety of factors, including: (i) increased
pressures from growth in managed care; (ii) demonstrated benefits from
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economies of scale; and (iii) desire by orthotists and prosthetists to obtain
financial liquidity and concentrate on providing patient care.
INCREASED MANAGED CARE PENETRATION. The expanding geographical reach of
the large managed care organizations makes it increasingly important for them
to contract for their patient-care needs with counterparts who have large,
national operations. Managed care companies therefore prefer to contract with
a single professional practice management company to provide all their O&P
patient-care services. As a result, small independent O&P practices feel
pressure to consolidate in order to access managed care referrals.
ECONOMICS OF SCALE. A significant portion of the cost of O&P services is
attributable to the cost of materials used in orthoses and prostheses.
Achieving purchase discounts through group purchasing can increase
profitability at each patient-care center. In addition, economies of scale
provide O&P practices with access to additional capital and personnel which
can be used in growing their businesses.
FINANCIAL LIQUIDITY FOR O&P PRACTICES. The security of a large O&P
network is extremely appealing to small providers who desire to reduce the
financial and personal liabilities of their practices. Through consolidation,
individual providers are able to realize financial liquidity by turning their
practices' cash flows into cash assets. This consolidation allows smaller
providers to continue their O&P practices as employees of a national O&P
professional practice management provider.
COMPANY STRATEGY
The Company's objective is to build a major national rehabilitation
company focused on the acquisition and operation of O&P practices and the
manufacture and distribution of O&P products. The Company's strategy for
achieving this objective is to:
o Acquire and integrate O&P practices in targeted geographic areas
across the United States;
o Develop new patient-care centers in existing markets;
o Expandand improve O&P practice management operations at existing
and acquired patient-care centers;
o Increase the number of OPNET's O&P patient-care service members
and its contractual relationships with managed care organizations;
and
o Expand the Company's O&P manufacturing and distribution
operations.
ACQUIRE AND INTEGRATE O&P PRACTICES IN TARGETED GEOGRAPHICAL AREAS
ACROSS THE UNITED STATES. The Company's expansion is focused on developing a
national network providing O&P patient-care coverage. Therefore, when
identifying patient-care centers for acquisition, the Company seeks to fill
gaps in its existing geographic coverage. By focusing on national development,
the Company is well-positioned to negotiate for national contracts as payors
consolidate and look to large providers for services.
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DEVELOP NEW O&P PATIENT-CARE CENTERS IN EXISTING MARKETS. In addition to
acquiring patient-care centers, the Company intends to open new patient-care
centers in existing markets. The Company plans to pursue this strategy by
opening satellite centers in areas where a need for O&P services has been
identified. In opening satellite patient-care centers, the Company's procedure
is to staff on a part-time basis with professionals from a nearby existing
center so as to test the viability of a full-time practice.
EXPAND AND IMPROVE O&P PRACTICE MANAGEMENT OPERATIONS AT EXISTING AND
ACQUIRED PATIENT-CARE CENTERS. As the number of Hanger patient-care centers
continues to increase, the benefits of the Company's practice management
operations will be maximized. The Company will be able to spread
administrative fixed costs and capital expenditures for state-of-the-art
equipment such as CAD/CAM systems over a large number of patient-care centers.
Furthermore, sales can also be enhanced by the Company's use of marketing
programs not generally utilized by practitioners in smaller, independent
practices.
INCREASE THE NUMBER OF OPNET'S O&P PATIENT-CARE SERVICE MEMBERS AND ITS
CONTRACTUAL RELATIONSHIPS WITH MANAGED CARE ORGANIZATIONS. The Company intends
to expand OPNET membership towards the goal of achieving complete nationwide
O&P patient-care coverage. A national network will enable OPNET to negotiate
for contracts with any local, regional or national third-party payor seeking a
single source O&P provider regardless of the payor's geographic scope.
EXPAND THE COMPANY'S O&P MANUFACTURING AND DISTRIBUTION OPERATIONS. As
the patient-care practice management division of the Company expands, it can
create captive demand for the company's distribution business. An increase in
the number of OPNET members, to whom preferred purchasing agreements are
offered, can also increase net sales for the Company's distribution business.
The Company's manufacturing division can also benefit from increased net sales
at the distribution division by providing proprietary products to meet the
demand of an expanded captive market. The Company's manufacturing efforts will
focus on the acquisition and/or development of proprietary patented products
such as the Lenox Hill knee brace and the Charleston Bending Brace.
PRACTICE MANAGEMENT AND PATIENT-CARE SERVICES
PRACTICE MANAGEMENT SERVICES
The Company provides all senior management, accounting, accounts
payable, payroll, sales and marketing, human resources and management
information systems for its patient-care centers. By providing these services
on a centralized basis, the Company is able to provide such services to its
patient-care centers and practitioners more efficiently and cost-effectively
than if such services had to be generated at each center. The centralization
of these services also permits the Company's certified practitioners to
allocate a greater portion of their time to patient-care activities by
reducing the administrative responsibilities of operating their businesses.
Billing and collections are handled on a decentralized basis, which the
Company believes enhances collectibility.
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The Company also develops and implements programs designed to enhance
the efficiency of its clinical practices. Such programs include: (i) sales and
marketing initiatives to attract new-patient referrals by establishing
relationships with physicians, therapists, employers, managed care
organizations, hospitals, rehabilitation centers, out-patient clinics and
insurance companies; (ii) professional management and information systems to
improve efficiencies of administrative and operational functions; (iii)
professional education programs for practitioners emphasizing new developments
in the increasingly sophisticated field of O&P clinical therapy; (iv) the
regional centralization of fabrication and purchasing activities, which
provides overnight access to component parts and products at prices that are
typically 25% lower than traditional procurement methods; and (v) access to
expensive, state-of-the-art equipment which is financially more difficult for
smaller, independent facilities to obtain.
The Company believes that the application of sales and marketing
techniques is a key element of its O&P professional practice management
strategy. Due primarily to the fragmented nature of the industry, the success
of an O&P practice has been largely a function of its local reputation for
quality of care, responsiveness and length of service in the community.
Individual practitioners have relied almost exclusively on referrals from
local physicians or physical therapists and typically have not used marketing
techniques.
PATIENT-CARE SERVICES
The Company provides O&P patient-care services through 213 Company-owned
and operated O&P patient-care centers in 29 states and the District of
Columbia. Hanger currently employs 335 patient-care practitioners, of whom 249
are certified practitioners and 29 are candidates for formal certification by
the O&P industry certifying boards. Each of the Company's patient-care centers
is closely supervised by one or more certified practitioners. The balance of
the Company's patient-care practitioners are highly trained technical
personnel who assist in the provision of services to patients and fabricate
various O&P devices.
A patient is referred to one of Hanger's patient-care centers for
treatment upon a determination by the attending physician of a course of
treatment for a patient in need of O&P patient-care services. A Hanger
practitioner then consults with both the referring physician and the patient
to formulate the prescription for, and design of, an orthotic or prosthetic
device to meet the patient's needs.
The fitting process involves several stages in order to successfully
achieve desired functional and cosmetic results. The practitioner creates a
cast and takes detailed measurements of the patient to ensure an anatomically
correct fit. All of the prosthetic devices fitted by Hanger's practitioners
are custom designed and fabricated by skilled practitioners who can balance
fit, support and comfort. Of the orthotic devices provided by Hanger,
approximately 75% are custom designed, fabricated and fitted and the balance
are prefabricated but custom fitted.
Custom devices are fabricated by the Company's skilled technicians using
the castings, measurements and designs made by the practitioner. Technicians
use advanced materials and technologies to fabricate a custom device under
quality assurance guidelines. After final adjustments to the device by the
practitioner, the patient is instructed in the use, care and maintenance of
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the device. A program of scheduled follow-up and maintenance visits is used to
provide post-fitting treatment, including adjustments or replacements as the
patient's physical condition and lifestyle change.
A substantial portion of Hanger's O&P services involves treatment of a
patient in a non-hospital setting, such as a Hanger patient-care center, a
physician's office, an out-patient clinic or other facility. In addition, O&P
services are increasingly rendered to patients in hospitals, nursing homes,
rehabilitation centers and other alternate-site healthcare facilities. In a
hospital setting, the practitioner works with a physician to provide either
orthotic devices or temporary prosthetic devices that are later replaced by
permanent prostheses.
The Company also operates in-patient O&P patient-care centers at The
Rusk Institute of Rehabilitation Medicine at the New York University Medical
Center in New York, New York and the Harmarville Rehabilitation Center in
Pittsburgh, Pennsylvania,
OPNET
In 1995, Hanger formed OPNET, a proprietary national preferred provider
O&P referral network serving managed care organizations, including HMOs and
PPOs. Through this network, managed care organizations can contract for O&P
services with any O&P patient-care center in the OPNET network. As of December
31, 1997, OPNET has a network of 344 patient-care centers (213 of which are
owned and operated by the Company) serving 279 managed care plans. The Company
intends to extend the network's reach nationwide through acquisitions and
marketing. OPNET also provides incentives to independent O&P service provider
members to purchase their O&P products from the Company. The Company receives
upfront annual payments from practitioners to enter the OPNET network and
OPNET does not receive payments from the managed care participants. Total 1997
net sales from these fees were approximately $277,000. The Company believes
that OPNET's membership enables it to establish significant relationships with
practitioners otherwise not affiliated with the Company.
MANUFACTURING AND DISTRIBUTION
In addition to on-site fabrication of custom O&P devices incidental to
the services rendered at its O&P patient-care centers, the Company
manufactures O&P components and finished patient-care products for both the
O&P industry and the Company's own patient-care practices. The Company
manufactures components and finished products under various name brands such
as Lenox Hill, CASH Brace, Ortho-Mold and Charleston Bending Brace. The
principal products manufactured are prefabricated and custom-made spinal
orthoses as well as custom-made and off-the-shelf derotation knee braces. The
Company distributes O&P components and finished patient-care products to the
O&P industry and to the Company's own patient-care practices. The Company
inventories over 20,000 items, a majority of which are manufactured by other
companies and are distributed by Hanger.
Hanger's distribution capability allows its personnel faster access to
the products needed to fabricate devices for patients. This is accomplished at
competitive prices, as a result of either manufacturing by Hanger or direct
purchases by Hanger from other manufacturers. As a result of faster access to
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products, the length of a patient's treatment in the hospital can be reduced,
thereby contributing to healthcare cost containment.
Marketing of Hanger's manufactured products and distribution services is
conducted on a national basis, primarily through approximately 67 independent
sales representatives, catalogues and exhibits at industry and medical
meetings and conventions. Hanger directs specialized catalogues to segments of
the healthcare industry, such as orthopedic surgeons and physical and
occupational therapists. In addition, the Company directs its broad-based
marketing to the O&P industry and the home healthcare industry.
To provide timely custom fabrication and service to its patients, the
Company employs technical personnel and maintains laboratories at each of its
patient-care centers. The Company uses advanced computer-aided design and
computer-aided machinery (CAD-CAM) technology to produce precise and uniform
products. Hanger has several large, fully-staffed central fabrication
facilities to service its patient-care centers. These strategically located
facilities enable Hanger to fabricate those O&P products that are more easily
produced in larger quantities and in a more cost-effective manner, as well as
serving as an auxiliary production center for products normally fabricated at
individual patient-care centers.
ACQUISITIONS
Since 1986, the Company has acquired over 60 businesses in 29 states and
the District of Columbia. In November 1996, Hanger acquired JEH, a Georgia
corporation that operated 96 patient-care centers in 15 states and was the
country's largest distributor of O&P products.
During 1997, the Company acquired nine O&P companies and the remaining
20% interest of its majority owned subsidiary, Columbia Brace, for an
aggregate consideration, excluding potential earn-out provisions, of $22.5
million. These O&P companies, which operate 29 patient-care centers and employ
175 employees had combined net sales of $18.2 million in the year ended
December 31, 1997.
The Company continues to be engaged in discussions with several O&P
companies relating to the Company's possible acquisition of their patient-care
practices. The Company's investigations of these businesses are in the
formative stages and no representations can be made as to whether, when or on
what terms such possible acquisitions may be effected.
The Company considers both operating and financial factors in evaluating
prospective acquisitions. Operating factors include high standards of
professionalism and patient care, the presence of certified practitioners at
each of its facilities and reputation in the O&P industry. Financial factors
include earnings and cash flow history and the projected benefits of applying
Hanger's operating model to the acquired company's practice. In evaluating
acquisitions in geographic areas where the Company has an established
presence, Hanger targets businesses that complement its existing network of
patient-care centers. In geographic areas where the Company has not yet
established a presence, the Company generally focuses on acquiring strong
regional businesses which have multiple patient-care centers and experienced
practitioners.
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The Company's acquisition strategy also includes the retention and
support of the existing management of the acquired company, typically through
the use of employment contracts, non-compete agreements and incentive
programs. Upon the completion of an acquisition, the Company will integrate
the business of the acquired company by: (i) transferring all administrative
and financial management responsibilities to Hanger's corporate headquarters;
(ii) providing all new personnel with compensation and benefit packages and
training by the Company's Human Resources Department; and (iii) providing the
management of the acquired company with instruction on the Company's latest
marketing and sales techniques. Thereafter, the Company will provide the
management and staff of the newly acquired company with financial incentives
to induce greater financial performance.
NEW-CENTER DEVELOPMENT
In addition to acquired patient-care centers, the Company develops new
satellite patient-care centers in existing markets with underserved demand for
O&P services. These satellite centers require less capital to develop than
complete O&P centers since the satellite centers usually consist of only a
waiting room and patient fitting rooms, but without a fabrication laboratory
for creating O&P devices. An O&P practitioner will spend one or two days each
week in a satellite center treating those patients who find it inconvenient to
visit the O&P practitioner's primary center.
These satellite centers also tend to receive new patient referrals from
hospitals and physicians located near the newly-developed center, driving new
patient growth and center revenue. While a partial revenue shift occurs from
the O&P practitioner's main center to the satellite center because the O&P
practitioner is now seeing some of the same patients out of a new center, the
additional patient volume in the satellite center increases the O&P
practitioner's overall revenue. If demand for O&P services at a satellite
center increases beyond the ability of the O&P practitioner to service in one
or two days a week, the company will staff the satellite office on a full-time
basis. The Company estimates that the cost of opening a new patient-care
center is approximately $100,000, which includes equipment, leasehold
improvements and working capital. The Company expects a new patient-care
center to reach profitability, as measured by EBITDA, within one year of
opening. No assurance can be given that the Company will be successful in
achieving these start-up and profitability goals with regard to new
patient-care centers.
PATIENT REIMBURSEMENT SOURCES
The principal reimbursement sources for Hanger's O&P services are: (i)
private payor/third-party insurer sources which consist of individuals,
private insurance companies, HMOs, PPOs, hospitals, vocational rehabilitation,
workers' compensation and similar sources; (ii) Medicare, which is a federally
funded health insurance program providing health insurance coverage for
persons aged 65 or older and certain disabled persons; (iii) Medicaid, which
is a health insurance program jointly funded by federal and state governments
providing health insurance coverage for certain persons in financial need,
regardless of age, and which may supplement Medicare benefits for financially
needy persons aged 65 or older; and (iv) the VA, with which Hanger has entered
into contracts to provide O&P services.
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Medicare, Medicaid, the VA and certain state agencies, which accounted
for approximately 56.6%, 56.8% and 62.0% of the Company's net sales in 1995,
1996 and 1997, respectively, (based on a sampling of approximately 40%, 75%
and 75% of patient-care centers in 1995, 1996 and 1997, respectively) have set
maximum reimbursement levels for payments for O&P services and products. The
healthcare policies and programs of these agencies have been subject to
changes in payment and methodologies during the past several years. There can
be no assurance that future changes will not reduce reimbursements for O&P
services and products from these sources.
The Company provides O&P services to eligible veterans pursuant to
several contracts with the VA. The VA establishes its reimbursement rates for
itemized products and services on a competitive bidding basis. The Company's
contracts with the VA expire in September 1998, with the option to renew for a
one- or two-year period. The contracts, awarded on a non-exclusive basis,
establish the amount of reimbursement to the eligible veteran if the veteran
should choose to use the Company's products and services. The Company has been
awarded VA contracts in the past and expects that it will obtain additional
contracts when its present agreements expire.
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PATIENT-CARE CENTERS AND FACILITIES
Hanger currently operates 213 patient-care centers, six distribution
facilities and two manufacturing facilities, as detailed in the following
table:
<TABLE>
<CAPTION>
Patient-
Care Distribution Manufacturing
Jurisdiction Centers Facilities Facilities
------------ ------- ------------ --------------
<S> <C> <C> <C>
Alabama 15 --- ---
Arizona 4 --- ---
California 5 1 ---
Colorado 6 --- ---
Connecticut 3 --- ---
Delaware 1 --- ---
District of Columbia 2 --- ---
Florida 26 1 1
Georgia 18 1 ---
Illinois --- 1 1
Indiana 2 --- ---
Kentucky 6 --- ---
Louisiana 8 --- ---
Maryland 6 1 ---
Massachusetts 3 --- ---
Michigan 3 --- ---
Mississippi 7 --- ---
Montana 6 --- ---
Nevada 1
New Hampshire 1 --- ---
New Mexico 1 --- ---
New York 8 --- ---
North Carolina 3 --- ---
Ohio 18 --- ---
Pennsylvania 15 --- ---
South Carolina 11 --- ---
Tennessee 10 --- ---
Texas 10 1 ---
Virginia 6 --- ---
West Virginia 7 --- ---
Wyoming 1 --- ---
--- --- ---
TOTAL 213 6 2
=== === ===
</TABLE>
COMPETITION
The competition among O&P patient-care centers is primarily for
referrals from physicians, therapists, employers, HMOs, PPOs, hospitals,
rehabilitation centers, out-patient clinics and insurance companies on both a
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local and regional basis. The Company believes that distinguishing competitive
factors in the O&P industry are quality and timeliness of patient care and, to
a lesser degree, charges for services. While the Company believes it is one of
the largest suppliers of O&P services in the U.S., certain competitors may
have greater financial and personnel resources than Hanger. The Company
competes with others in the industry for trained personnel. To date, however,
Hanger has been able to achieve its staffing needs and has experienced a
relatively low turnover rate of employees. In connection with its efforts to
acquire additional O&P patient-care practices, the Company encounters
competition from several other O&P companies.
GOVERNMENT REGULATION
CERTIFICATION AND LICENSURE
Most states do not require separate licensure for O&P practitioners.
However, several states currently require O&P practitioners to be certified by
an organization such as the ABC.
The ABC conducts a certification program for practitioners and an
accreditation program for patient-care centers. The minimum requirements for a
certified practitioner are a college degree, completion of an accredited
academic program, one to four years of residency at a patient-care center
under the supervision of a certified practitioner and successful completion of
certain examinations. Minimum requirements for an ABC-accredited patient-care
center include the presence of a certified practitioner and specific plant and
equipment requirements. While the Company endeavors to comply with all state
licensure requirements, no assurance can be given that the Company will be in
compliance at all times with these requirements.
Hanger provides services under various contracts to federal agencies.
These contracts are subject to regulations governing federal contracts,
including the ability of the government to terminate for its convenience.
Revenue from such contracts is not material to Hanger.
MEDICAL DEVICE REGULATION
The Company manufactures and distributes products that are subject to
regulation as medical devices by the Food and Drug Administration ("FDA")
under the Federal Food, Drug, and Cosmetic Act and accompanying regulations.
The Company believes that the products it manufactures and/or distributes,
including O&P accessories and components, are exempt from FDA's regulations
for premarket clearance or approval requirements and from requirements
relating to "good manufacturing practices: (except for certain recordkeeping
and complaint handling requirements). The Company is required to adhere to
regulations regarding adverse event reporting, and is subject to inspection by
the FDA for compliance with all applicable requirements. Labeling and
promotional materials also are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. Although the Company has never
been challenged by FDA for noncompliance with FDA requirements, no assurance
can be given that the Company would be found to be or to have been in
compliance at all times. Noncompliance could result in a variety of civil
and/or criminal enforcement actions, which could have a material adverse
effect on the Company's business and results of operations.
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FRAUD AND ABUSE
The Company is subject to various federal and state laws pertaining to
healthcare fraud and abuse, including antikickback laws, false claims laws,
and physician self-referral laws. Violations of these laws are punishable by
criminal and/or civil sanctions, including, in some instances, imprisonment
and exclusion from participation in federal healthcare programs, including
Medicare, Medicaid, VA health programs and CHAMPUS. The Company has never been
challenged by a governmental authority under any of these laws and believes
that, based on this history, its operations are in material compliance with
such laws. However, because of the far-reaching nature of these laws, there
can be no assurance that one or more of the Company's practices would not be
required to alter its practices as a result, or that the occurrence of one or
more of these events would not result in a material adverse effect on the
Company's business and results of operations.
ANTIKICKBACK LAWS. The Company's operations are subject to federal and
state antikickback laws. The Federal Health Care Programs Antikickback Statute
(section 1128B(b) of the Social Security Act) prohibits persons or entities
from knowingly and willfully soliciting, offering, receiving, or paying any
remuneration in return for, or to induce, the referral of persons eligible for
benefits under a Federal Health Care Program (including Medicare, Medicaid,
the VA health programs and CHAMPUS), or the ordering, purchasing or leasing of
items or services that may be paid for, in whole or in part, by a Federal
Health Care Program. The statute may be violated when even one purpose (as
opposed to a primary or sole purpose) of a payment is to induce referrals or
other business. Regulations create a small number of "safe harbors." Practices
which meet all the criteria of an applicable safe harbor will not be deemed to
violate the statute; practices that do not satisfy all elements of a safe
harbor do not necessarily violate the statute, although such practices may be
subject to scrutiny by enforcement agencies. Several states also have
antikickback laws which vary in scope and may apply regardless of whether a
Federal Health Care Program is involved.
These laws may apply to certain of the Company's operations. The Company
has instituted various types of discount programs for individuals or entities
that purchase its products and services. The Company also maintains financial
relationships with individuals and entities who may: (i) may purchase the
Company's products and services; (ii) refer patients to Company-owned and
managed O&P patient-care centers; or (iii) receive referrals through OPNET.
These relationships include, among other things, lease arrangements with
hospitals and OPNET participation arrangements. Because some of these
arrangements may not satisfy all elements of an applicable safe harbor, they
could be subject to scrutiny and challenge under one or more such laws.
FALSE CLAIMS LAWS. The Company is also subject to federal and state laws
prohibiting individuals or entities from knowingly and willfully presenting,
or causing to be presented, claims for payment to third-party payors
(including Medicare and Medicaid) that are false or fraudulent or are for
items or services not provided as claimed. Each Company-owned and managed O&P
patient-care center is responsible for preparation and submission of
reimbursement claims to third-party payors for items and services furnished to
patients. In addition, Company personnel may, in some instances, provide
12
<PAGE>
advice on billing and reimbursement for the Company's products to purchasers.
While the Company endeavors to ensure that its billing practices comply with
applicable laws, if claims submitted to payors are deemed to be false,
fraudulent, or for items or services not provided as claimed, the Company
could face liability for presenting or causing to be presented such claims.
PHYSICIAN SELF-REFERRAL LAWS. The Company is also subject to federal and
state physician self-referral laws. With certain exceptions, the federal
Medicare/Medicaid physician self-referral law (the "Stark" law, section 1877
of the Social Security Act) prohibits a physician from referring Medicare and
Medicaid beneficiaries to an entity for "designated health services" -
including prosthetics, orthotics and prosthetic devices and supplies - if the
physician has either an investment interest in the entity or a compensation
arrangement with the entity. An exception is recognized for referrals made to
a publicly-traded entity in which the physician has an investment interest if,
among other things, the entity had shareholders' equity exceeding $75.0
million for its most recent fiscal year, or on average during the three
previous fiscal years. While the Company does not provide stock to referring
physicians and the Company's stock is publicly-traded, the Company is not in a
position to know or control whether some referring physicians may be
investors. Because the Company does not currently have sufficient
shareholders' equity to meet the exception that would allow
physician-investors to refer Medicare and Medicaid beneficiaries to
Company-owned and managed O&P patient-care centers, and any such referrals
that do occur could be found to be in violation of the Stark law.
ANTITRUST
The Company is subject to federal and state antitrust laws which
prohibit, among other things, the establishment of ventures that result in
certain anticompetitive conduct. These laws have been applied to the
establishment of certain networks of otherwise competing healthcare provider.
In September 1995, the Antitrust Division of the Department of Justice ("DOJ")
issued a business review letter which concluded, in part, that the description
of OPNET voluntarily furnished to the DOJ by the Company "did not pose any
significant competitive issues" and, therefore, DOJ "has no present intention
of challenging [OPNET]" under federal antitrust law. Although the Company is
not able to assure that the continued operation of OPNET will comply in all
respects with the terms specified in the business review letter, noncompliance
with these terms does not mean that the antitrust authorities or private
parties would challenge the conduct, and the Company believes that the current
operation of OPNET is not anticompetitive and results in significant
efficiencies. However, DOJ reserves the right to bring an investigation or
proceeding if it determines that OPNET is anticompetitive in purpose or
effect. There can be no assurance that DOJ will not bring an investigation or
proceeding challenging OPNET (or other aspects of the Company's operations)
under these laws, or that such an investigation or proceeding would not result
in a material adverse effect on the Company's business and results of
operations.
PERSONNEL
As of December 31, 1997, the Company employed 1,213 persons, including
1,114 full-time and 99 part-time employees. None of the Company's employees is
subject to a collective bargaining agreement. The Company believes that it has
satisfactory relationships with its employees and strives to maintain these
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<PAGE>
relationships by offering competitive benefit packages, training programs and
opportunities for advancement.
INSURANCE
The Company currently maintains insurance of the type and in the amount
customary in the orthopedic rehabilitation industry, including coverage for
malpractice liability, product liability, workers' compensation and property
damage. Hanger's general liability insurance coverage is at least $500,000 per
incident. Based on the Company's experience and prevailing industry practices,
Hanger believes its coverage is adequate as to risks and amount.
ITEM 2. PROPERTIES.
As of December 31, 1997, Hanger operated 213 patient-care centers and
facilities in 29 states and in Washington, D.C. Of these, 30 centers are owned
by Hanger. The remaining centers are occupied under leases expiring between
the years of 1998 and 2007. Hanger believes that the centers leased or owned
by it are adequate for carrying on its current O&P operations at its existing
locations, as well as its anticipated future needs at those locations. Hanger
believes it will be able to renew such leases as they expire or find
comparable or additional space on commercially suitable terms.
Hanger also owns distribution facilities in Georgia and Texas, and
leases manufacturing and distribution facilities in Illinois, Maryland,
Florida and California. The Company leases its corporate headquarters in
Bethesda, Maryland and owns its corporate office in Alpharetta, Georgia.
Substantially all of Hanger's properties are pledged to collateralize bank
indebtedness. See Notes H and L to Hanger's Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
Legal proceedings to which Hanger is subject arise in the ordinary
course of business. Currently, Hanger is not a party to any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of stockholders.
14
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth information regarding the current
executive officers of the Company and certain of its subsidiaries:
<TABLE>
<CAPTION>
Office with
Name Age the Company
------ ----- -------------
<S> <C> <C>
Ivan R. Sabel, CPO 53 Chairman of the Board, President, Chief Executive
Officer and Director
Richard A. Stein 38 Vice President-Finance, Secretary and Treasurer
John D. McNeill, CPO 50 President and Chief Operating Officer of
Hanger Prosthetics & Orthotics, Inc.
Alice G. Tidwell 59 President and Chief Operating Officer of
Southern Prosthetic Supply, Inc.
Juan B. Paez 53 Vice President - Manufacturing of DOBI-
Symplex, Inc.
Jeffrey L. Martin 44 Vice President of OPNET, Inc.
</TABLE>
IVAN R. SABEL has been Chairman of the Board and Chief Executive Officer
of Hanger since August 1995 and President of Hanger since November 1987. Mr.
Sabel also served as the Chief Operating Officer of Hanger from November 1987
to August 1995. Prior to that time, Mr. Sabel had been Vice President -
Corporate Development from September 1986 to November 1987. From 1968 until
joining Hanger in 1986, Mr. Sabel was the founder and President of Capital
Orthopedics, Inc. before that company was acquired by Hanger. Mr. Sabel is a
Certified Prosthetist and Orthotist ("CPO"), a clinical instructor in
orthopedics at Georgetown University Medical School in Washington, D.C., a
member of the Board of Directors of the American Orthotic and Prosthetic
Association, a former Chairman of the National Commission for Health
Certifying Agencies, a former member of the Strategic Planning Committee and a
current member of the Veterans Administration Affairs Committee of AOPA and a
former President of the ABC.
RICHARD A. STEIN has been Vice President-Finance, Secretary and
Treasurer of Hanger since April 1987. Mr. Stein was also the President of
Greiner & Saur Orthopedics, Inc., a former subsidiary of the Company, from
April 1987 until November 1989. Mr. Stein is a Certified Public Accountant and
was employed by Coopers & Lybrand, L.L.P. from September 1982 until he joined
Hanger in 1987.
JOHN D. MCNEILL, CPO has been the President and Chief Operating Officer
of Hanger Prosthetics & Orthotics, Inc., a wholly-owned subsidiary of the
Company that operates the Company's patient-care centers, since November 1,
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<PAGE>
1996. From 1990 to November 1, 1996, he was Senior Vice President, Chief
Operating Officer and a director of JEH. From 1986 to 1990, Mr. McNeill was a
Regional Vice President and an area manager for JEH. Mr. McNeill, who is a
CPO, conducted his own O&P practice in Marietta, Georgia from 1979 to 1986,
when it was acquired by JEH.
ALICE G. TIDWELL has been the President and Chief Operating Officer of
Southern Prosthetic Supply, Inc., the Company's wholly-owned distribution
subsidiary, since November 1, 1996. From 1990 to November 1, 1996, she served
as a Senior Vice President and Chief Operating Officer of Southern Prosthetic
Supply, Inc. From 1992 to 1996, Ms. Tidwell served on the Board of Directors
of JEH. Previously, she served as supervisor, office manager and Vice
President of Corporate Central Services of JEH.
JUAN B. PAEZ has been a Vice President of DOBI-Symplex, Inc., the
Company's wholly-owned manufacturing subsidiary, since 1992. In addition to
management responsibilities relating to the Company's manufacturing, central
fabrication and distribution activities, Mr. Paez oversees new product and
manufacturing business development. From 1990 to 1992, Mr. Paez was the
Director of New Product Development of Bissell Healthcare and from 1982 to
1990 he was employed as Manager of Engineering and Research & Development and
Manager of Industrial Engineering by Camp International.
JEFFREY L. MARTIN has been the Vice President of OPNET, the Company's
preferred provider network of O&P service professionals, since October 1995.
In addition to being responsible for the recruitment of OPNET members and the
planning and implementation of OPNET member services Mr. Martin directs the
solicitation and management of OPNET managed care contracts. From 1984 until
joining Hanger in 1995, Mr. Martin was Director of Marketing for the Ohio
Willow Wood Company, a manufacturer of prosthetic componentry.
EMPLOYMENT AND NON-COMPETE AGREEMENTS
Messrs. Sabel, Stein and McNeill and Ms. Tidwell have executed
employment agreements with the Company which contain non-compete provisions.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Common Stock is listed and traded on the American Stock Exchange
under the symbol "HGR." The following table sets forth the high and low
intra-day sale prices for the Common Stock for the periods indicated as
reported on the AMEX:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 HIGH LOW
---- ---
<S> <C> <C>
First Quarter $ 4.75 $ 2.63
Second Quarter 6.50 4.06
Third Quarter 7.50 4.88
Fourth Quarter 7.38 5.81
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 HIGH LOW
---- ---
<S> <C> <C>
First Quarter $ 7.00 $ 5.50
Second Quarter 9.25 6.25
Third Quarter 14.94 8.44
Fourth Quarter 14.63 10.56
</TABLE>
At March 17, 1998, there were approximately 763 holders of record of
Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and
intends to continue this policy for the foreseeable future. Hanger plans to
retain earnings for use in its business. The terms of Hanger's agreements with
its financing sources and certain other agreements prohibit the payment of
dividends on its Common Stock and Preferred Stock and such agreements will
continue to prohibit the payment of dividends in the future. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors of the Company and will be dependent on Hanger's results of
operations, financial condition, contractual and legal restrictions and any
other factors deemed to be relevant.
17
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION.
The selected consolidated financial data presented below is derived from
the audited Consolidated Financial Statements and Notes thereto included
elsewhere in this report.
18
<PAGE>
<TABLE>
SELECTED FINANCIAL STATEMENTS
(In thousands, except per share data)
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $43,877 $50,300 $52,468 $66,806 $145,598
Gross profit 24,207 27,091 27,896 34,573 72,064
Selling, general & administrative 17,124 21,340 19,362 24,550 49,076
Depreciation and amortization 2,656 3,137 2,691 2,848 4,681
Acquisition and integration costs (1) --- --- --- 2,479 ---
Restructuring cost (1) --- 460 --- --- ---
Loss from disposal of assets (1) --- 2,150 --- --- ---
Income from continuing operations 4,428 4 5,843 4,695 18,308
Interest expense (1,167) (1,746) (2,056) (2,547) (4,932)
Income (loss) from continuing operations
before taxes, extraordinary item and
accounting change 3,221 (1,922) 3,680 1,971 13,166
Provision for income taxes 1,626 358 1,544 890 5,526
Income (loss) from continuing operations
before extraordinary item and
accounting change 1,594 (2,280) 2,135 1,081 7,640
Loss from discontinued operations (2) (105) (407) --- --- ---
Income (loss) before extraordinary
item and accounting change 1,490 (2,687) 2,135 1,081 7,640
Extraordinary loss on early
extinguishment of debt (23) --- --- (83) (2,694)
Cumulative effect of change in
accounting for income taxes 1,189 --- --- --- ---
Net income (loss) $ 2,655 $(2,687) $ 2,135 $ 998 $ 4,946
BASIC PER COMMON SHARE DATA (3):
Income (loss) from continuing operations
before extraordinary item and
accounting change $ 0.19 $ (0.28) $ 0.25 $ 0.12 $ 0.65
Loss from discontinued operations (0.01) (0.05) --- --- ---
Extraordinary loss on early
extinguishment of debt --- --- --- (0.01) (0.23)
Cumulative effect of change in
accounting for income taxes 0.14 --- --- --- ---
-------- -------- -------- -------- ---------
Net income (loss) per common share $ 0.32 $ (0.33) $ 0.25 $ 0.11 $ 0.42
======== ======== ======== ======== =========
Shares used to calculate basic per common
share amounts 8,217 8,290 8,291 8,470 11,793
======== ======== ======= ======== =========
DILUTED PER COMMON SHARE DATA (3):
Income (loss) from continuing operations
before extraordinary item and accounting
change $ 0.19 $ (0.28) $ 0.25 $ 0.12 $ 0.58
Loss from discontinued operations (0.01) (0.05) --- --- ---
Extraordinary loss on early extinguishment
of debt --- --- --- (0.01) (0.21)
Cumulative effect of change in accounting
for income taxes 0.14 --- --- --- ---
-------- -------- ------- --------- ---------
Net income (loss) per common share $ 0.32 $ (0.33) $ 0.25 $ 0.11 $ 0.37
======== ======== ======== ========= =========
Shares used to calculate diluted per common
share amounts 8,267 8,290 8,300 8,663 13,138
======== ======== ======== ========= =========
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
BALANCE SHEET DATA: 1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 1,404 $ 1,048 $ 1,456 $ 6,572 $ 6,557
Working capital 15,738 18,412 20,622 25,499 39,031
Total assets 57,427 61,481 61,800 134,941 157,983
Long-term debt 19,153 24,330 22,925 64,298 23,237
Shareholders' equity 31,681 29,178 31,291 39,734 106,320
<FN>
(1) The 1994 results include restructuring costs of $460,000 associated with
the closing of unprofitable patient-care centers and a loss from the
disposal of assets of $2.2 million resulting from the sale of the
Company's southern California patient-care centers. The 1996 results
include acquisition and integration costs of $2.5 million incurred in
connection with the purchase of JEH effective November 1, 1996.
(2) Loss from discontinued operations consists of the loss from discontinued
operations and the sale of the discontinued operation of the Company's
Apothecaries, Inc. subsidiary, the assets of which were sold in 1994.
(3) During the fourth quarter of 1997, the Company adopted the provisions of
SFAS 128 and, as required, has restated all prior period per common
share data. Basic per common share amounts are computed using the
weighted average number of common shares outstanding during the year.
Diluted per common share amounts are computed using the weighted average
number of common shares outstanding during the year and dilutive
potential common shares. Dilutive potential common shares consist of
stock options and stock warrants and are calculated using the treasury
stock method.
</FN>
</TABLE>
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
The significant growth in the Company's O&P professional practice
management net sales has resulted from an aggressive program of acquiring and
developing O&P patient-care centers. Similarly, growth in the Company's O&P
distribution and manufacturing net sales is attributable primarily to
acquisitions. At December 31, 1997, the Company operated 213 patient-care
centers, six distribution facilities, three of which contain central
fabrication operations, and two manufacturing facilities.
SEASONALITY
The Company's results of operations are affected by seasonal
considerations. The adverse weather conditions often experienced in certain
geographical areas of the United States during the first quarter of each year,
together with a greater degree of patients' sole responsibility for their
insurance deductible payment obligations during the beginning of each calendar
year, have contributed to lower Company net sales during that quarter.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items
of the Company's statements of operations as a percentage of the Company's net
sales:
<TABLE>
<CAPTION>
Historical
For the Years Ended December 31,
--------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of products and services sold 46.8 48.2 50.5
Gross profit 53.2 51.8 49.5
Selling, general and administrative 36.9 36.7 33.7
Depreciation and amortization 3.8 3.0 2.0
Acquisition and integration costs --- 3.7 ---
Amortization of excess cost over net
assets acquired 1.3 1.2 1.2
Income from operations 11.1 7.0 12.6
Interest expense 3.9 3.8 3.4
Income before taxes and extraordinary item 7.0 3.0 9.0
Income taxes 2.9 1.3 3.8
Net income 4.1 1.5 3.4
</TABLE>
21
<PAGE>
YEARS ENDED DECEMBER 31, 1997 AND 1996
NET SALES. Net sales for the year ended December 31, 1997 were
approximately $145.6 million, an increase of approximately $78.8 million, or
118%, over net sales of approximately $66.8 million for the year ended
December 31, 1996. The increase was primarily a result of: (i) the acquisition
of J.E. Hanger, Inc. of Georgia ("JEH") on November 1, 1996, as well as other
acquisitions during 1997, and (ii) an 11.7% increase in net sales attributable
to patient-care centers and facilities operating during both periods.
GROSS PROFIT. Gross profit in 1997 was approximately $37.5 million, or
108%, over the prior year. The cost of products and services sold for the year
ended December 31, 1997, was $73.5 million compared to $32.2 million in 1996.
Gross profit as a percentage of net sales for patient-care service was 55.1%
in the years ended December 31, 1996 and 1997. Gross profit as a percentage of
net sales for manufacturing and distribution was 44.9% and 16% for those
years, respectively. The total Company gross profit as a percent of net sales
declined from 51.8% in 1996 to 49.5% in 1997. The 2.3% decrease in the
Company's gross profit as a percentage of net sales is primarily attributable
to the acquisition of JEH, which operated a large distribution division that
had lower gross profit margins than patient-care services.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses in 1997 increased approximately $24.5 million, or 99.9%, compared to
1996. The increase in selling, general and administrative expenses was
primarily a result of the acquisition of JEH and other acquisitions. Selling,
general and administrative expenses as a percent of net sales decreased to
33.7% in 1997 from 36.7% in 1996. The selling, general and administrative
expenses as a percentage of net sales decreased primarily as a result of cost
cutting measures completed during the fourth quarter of 1996 and the first six
months of 1997.
INCOME FROM CONTINUING OPERATIONS. Principally as a result of the above,
income from operations in 1997 totalled approximately $18.3 million, an
increase of $13.6 million, or 290.0%, over the prior year. Income from
operations as a percentage of net sales increased to 12.6% in 1997 from 7.0%
in 1996.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1997
was approximately $4.9 million, an increase of approximately $2.4 million, or
93.6%, over the approximately $2.5 million of interest expense incurred during
1996. Interest expense as a percent of net sales decreased to 3.4% in 1997
from 3.8% for 1996. The increase in interest expense was primarily
attributable to the increase in bank debt resulting from the acquisition of
JEH in November 1996, which was offset in part by the repayment of bank debt
out of the proceeds of the public equity offering in the third quarter of
1997.
INCOME TAXES. The Company's effective tax rate was 42% in 1997 versus
45% in 1996. The decrease in 1997 is a result of the disproportionate impact
of the amortization of the excess costs over net assets acquired in relation
to taxable income in 1996.
EXTRAORDINARY ITEM. A pre-tax extraordinary item of $4.6 million ($2.7
million, net of tax benefit) in 1997, represents entirely a write-off of debt
issue costs and debt discount as a result of extinguishing approximately $58.3
22
<PAGE>
million of bank debt from the net proceeds of the third quarter public equity
offering.
NET INCOME. As a result of the above, the Company recorded net income
from operations before extraordinary item of $7.6 million for the year ended
December 31, 1997, compared to $1.1 million for the prior year. A pre-tax
extraordinary item of $4.6 million ($2.7 million, net of tax benefit) on early
extinguishment of debt was recognized in 1997 compared to $139,000 ($83,000,
net of tax benefit) in 1996. Both extraordinary items were in connection with
refinancings of bank indebtedness.
As a result of the above, the company reported net income of $4.9
million, or $.42 per common dilutive share, for the year ended December 31,
1997, as compared to net income of $998,000, or $.11 per common dilutive
share, for the year ended December 31, 1996.
YEARS ENDED DECEMBER 31, 1996 AND 1995
NET SALES. Net sales for the year ended December 31, 1996 were
approximately $66.8 million, an increase of approximately $14.3 million, or
27.3%, over net sales of approximately $52.5 million for the year ended
December 31, 1995. The increase was primarily a result of: (i) an increase of
$12.1 million attributable to the acquisition of JEH; and (ii) an increase of
$2.2 million, or an increase of 5.6%, in net sales attributable to
patient-care centers and facilities that were in operation during both
periods. Of the $2.2 million increase in net sales, $1.8 million was
attributable to patient-care centers and $293,000 was attributable to
manufacturing and distribution activities.
GROSS PROFIT. Gross profit in 1996 increased approximately $6.7 million,
or 23.9%, over the prior year. Gross profit as a percentage of net sales
decreased from 53.2% in 1995 to 51.8% in 1996. The 1.4% decrease in gross
profit as a percentage of net sales is primarily attributable to the
acquisition of JEH, which operated a large distribution division that had
lower gross profit margins than patient-care services. The cost of products
and services sold for the year ended December 31, 1996, was $32.2 million
compared to $24.6 million in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in 1996 increased approximately $5.2 million, or
26.8%, compared to 1995. The increase in selling, general and administrative
expenses was primarily a result of the acquisition of JEH. Selling, general
and administrative expenses as a percentage of net sales stayed approximately
the same at 37%.
ACQUISITION AND INTEGRATION COSTS. Non-recurring acquisition and
integration costs totaling $2.5 million in 1996 consisted of: (i) $1.3 million
of bonuses and legal and consulting expenses incurred to acquire JEH; and (ii)
$1.2 million of costs to integrate the operations of JEH with the Company,
including costs of severance and the conversion of its health insurance plan
and computer systems.
23
<PAGE>
INCOME FROM OPERATIONS. Principally as a result of the above, income
from operations in 1996 totalled approximately $4.7 million, a decrease of
$1.1 million from the prior year. Income from operations as a percentage of
net sales in 1996 decreased to 7.0% from 11.1% in 1995.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1996
was approximately $2.5 million, which is an increase of $490,000, or 23.9%,
over the $2.1 million of interest expense incurred during the year ended
December 31, 1995. The increase in interest expense was primarily attributable
to the increase in bank debt resulting from the acquisition of JEH. Interest
expense as a percentage of net sales was 3.8% for the year ended December 31,
1996, compared to 3.9% for 1995.
INCOME TAXES. The Company's effective tax rate was 45% in 1996 versus
42% in 1995. The increase in 1996 reflects both the recognition of a state
deferred tax benefit in 1995, which did not occur in 1996, and the
disproportionate impact of permanent differences in relation to taxable
income.
NET INCOME. As a result of the above, the Company reported income from
operations before extraordinary item and accounting change of $1.1 million for
the year ended December 31, 1996, compared to $2.1 million for the prior year.
A pre-tax extraordinary item of $139,000 ($83,000, net of tax) on early
extinguishment of debt was recognized in 1996 in connection with the Company's
refinancing of bank indebtedness.
As a result of the above, the Company reported net income of $998,000,
or $.11 per common dilutive share, for the year ended December 31, 1996, as
compared to net income of $2.1 million, or $.25 per common dilutive share, for
the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES. The Company's consolidated working
capital at December 31, 1997 was approximately $39.0 million and cash and cash
equivalents available were approximately $6.6 million. It is anticipated that
such cash resources will adequately meet the Company's working capital
requirements during at least the next 18 months.
In November 1996, the Company entered into a new Credit Agreement (the
"Credit Agreement") with a syndication of banks which provided for: (i) an
"A-Term Loan" in the principal amount of $29.0 million; (ii) a "B-Term Loan"
in the principal amount of $28.0 million; (iii) a $25.0 million Acquisition
Loan Commitment; and (iv) an $8.0 million Revolving Loan Commitment.
The Credit Agreement provided for an initial commitment fee of 2.625% on
the total $90.0 million facility and an annual fee of .5% per year on the
aggregate unused portion of the Credit Agreement. As of December 31, 1997, the
Company had no outstanding borrowings on either the Acquisition or Revolving
Loan Commitments.
In November 1996, the Company also entered into a Senior Subordinated
Note Purchase Agreement providing for the issuance of $8,000,000 principal
amount of Senior Subordinated Notes (the "Senior Subordinated Notes"), in
connection with which the Company issued detachable warrants to purchase
1,600,000 shares to noteholders. This transaction resulted in the Company
24
<PAGE>
recording a debt discount of $2,038,500 which was being amortized over the
life of the notes.
The Company used the proceeds of the A-Term Loan, B-Term Loan and Senior
Subordinated Notes to finance the acquisition of JEH and to repay all amounts
then outstanding under the Company's former Revolving credit facility, Senior
Financing Facility, the 8.5% Convertible Junior Subordinated Note and the
8.25% Convertible Junior Subordinated Note. In connection with this
transaction, the Company recorded an extraordinary charge of $139,000
($83,000, net of tax benefit) for the write-off of unamortized discounts and
financing costs, in 1996.
During July and August of 1997, the Company sold 5,750,000 shares of
Common Stock in a underwritten public offering at $11.00 per share resulting
in approximately $58.3 million of net proceeds to the Company.
The Company applied the net proceeds of the public offering to the
repayment of the Senior Subordinated Notes and certain indebtedness
outstanding under the Credit Agreement. Upon repayment of this debt and the
Credit Agreement being substantially modified, the Company recorded an
extraordinary item of $4.6 million ($2.7 million net of tax benefit).
The modified Credit Agreement is collateralized by substantially all the
assets of the Company, restricts the payment of dividends, and contains
certain affirmative and negative covenants customary in an agreement of this
nature.
The Company's total debt at December 31, 1997, including a current
portion of approximately $5.7 million, was approximately $29.0 million. Such
indebtedness included: (i) $17.2 million of Credit Agreement A-Term and B-Term
Loans; and (ii) a total of $11.8 million of other indebtedness.
The remainder of the A-Term Loan, the $25,000,000 Acquisition Loan
Commitment and the 8,000,000 Revolving Loan Commitment bear base interest at
the Company's option of either LIBOR plus 2.50% or the Bank's prime rate plus
1.50%. The base interest rate is then reduced by .25% to 1.25% depending upon
the ratio of the Company's total indebtedness to annual earnings before
interest, taxes, depreciation and amortization. As of December 31, 1997, $8.6
million was outstanding on the A-Term Loan which is being amortized in
quarterly amounts and will mature on December 31, 2001.
The remainder of the B-Term Loan bears base interest at the Company's
option of either LIBOR plus 2.75% or the Bank's prime rate plus 1.75%. The
base interest rate is then reduced by .25% to 1.25% depending upon the ratio
of the Company's total indebtedness to annual earnings before interest, taxes,
depreciation and amortization. As of December 31, 1997, $8.6 million was
outstanding on the B-Term Loan which is being amortized in quarterly amounts
and will mature on December 31, 2003.
All or any portion of outstanding loans under the Credit Agreement may
be repaid at any time and commitments may be terminated in whole or in part at
the option of Hanger without premium or penalty, except that LIBOR-based loans
25
<PAGE>
may only be repaid at the end of the applicable interest period. Mandatory
prepayments will be required in the event of certain sales of assets, debt or
equity financings and under certain other circumstances.
The Company has entered into an interest rate swap agreement to reduce
the impact of changes in interest rates on its Senior Financing Facilities. At
December 31, 1997, the Company had an outstanding interest rate swap agreement
with a commercial bank, having a total notional principal amount of up to
$27.0 million. The agreement effectively minimizes the Company's base interest
rate exposure between a floor of 5.32% and a cap of 7.0%. The interest rate
swap agreement matures on September 30, 1999. The Company is exposed to credit
loss in the event of non-performance by the other party to the interest rate
swap agreement. All other debt accrues interest at a fixed rate.
As a result of the Company's repayment of the Senior Subordinated Notes,
the warrant for 1,600,000 shares previously issued by the Company in
conjunction with the Senior Subordinated Notes were amended to reflect the
reduction in the aggregate number of shares of Company Common Stock issuable
upon exercise of the Warrants to 720,000 shares. These detachable warrants
have an exercise price equal to $4.01 as to 418,365 shares, and $6.38 as to
301,635 shares.
During 1996, the Company acquired one orthotic and prosthetic company,
JEH, pursuant to the terms of a Merger Agreement. Under the terms of the
agreement, which became effective on November 1, 1996, the Company paid JEH
shareholders $44.0 million in cash and issued 1.0 million shares of Company
Common Stock and paid an additional $1.8 million to the former JEH
shareholders on March 27, 1997 pursuant to provisions in the Merger Agreement
calling for a post-closing adjustment.
During 1997, the Company acquired nine O&P companies and the remaining
20% interest of its majority owned subsidiary, Columbia Brace, for an
aggregate consideration, excluding potential earn-out provisions, of $22.5
million. These O&P companies, which operate 29 patient-care centers and employ
175 employees, had combined net sales of $18.2 million in the year ended
December 31, 1997.
The Company plans to finance future acquisitions through internally
generated funds or borrowings under the Acquisition Loans, the issuance of
notes or shares of Common Stock of the Company, or through a combination
thereof.
Capital expenditures during 1997 approximated $2.6 million.
NEW ACCOUNTING STANDARDS. Effective January 1, 1998 the Company will
adopt the provisions of Statement of Financial Accounting Standards ("SFAS")
130, "Reporting Comprehensive Income". SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in the
financial statements. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company is in the
process of determining its preferred format. The adoption of SFAS No. 130 will
26
<PAGE>
not have a material impact on the Company's consolidated results of
operations, financial position or cash flows.
The Company will adopt the provisions of SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information" effective with the
financial statements for the year ended December 31, 1998. SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Financial statement disclosures for
prior periods are required to be restated. The Company is in the process of
evaluating the disclosure requirements. The adoption of SFAS 131 will not have
a material impact on the Company's consolidated results of operations,
financial position or cash flows.
OTHER. Inflation has not had a significant effect on the Company's
operations, as increased costs to the Company generally have been offset by
increased prices of products and services sold.
The Company primarily provides services and customized devices
throughout the United States and is reimbursed, in large part, by the
patients' third-party insurers or governmentally funded health insurance
programs. The ability of the Company's debtors to meet their obligations is
principally dependent upon the financial stability of the insurers of the
Company's patients and future legislation and regulatory actions.
The Company's management believes that its major financial and
manufacturing applications are year 2000 compliant. The company expects no
material impact on its internal information systems from the year 2000 issue.
The Company has recently initiated communications with its significant
suppliers to determine the extent that the Company may be impacted by third
parties' failure to address the issue. The Company will continue to monitor
and evaluate the impact of the year 2000 on its operations.
This report contains forward-looking statements setting forth the
Company's beliefs or expectations relating to future revenues and
profitability. Actual results may differ materially from projected or expected
results due to changes in the demand for the Company's O&P services and
products, uncertainties relating to the results of operations or recently
acquired and newly acquired O&P patient care practices, the Company's ability
to attract and retain qualified O&P practitioners, governmental policies
affecting O&P operations and other risks and uncertainties affecting the
health-care industry generally. Readers are cautioned not to put undue
reliance on forward-looking statements. The Company disclaims any intent or
obligation to up-date publicly these forward-looking statements, whether as a
result of new information, future events or otherwise.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and schedules required hereunder
and contained herein are listed under Item 14(a) below. The Company is not
subject to the requirement to file selected quarterly financial data under
Item 302 of Regulation S-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instruction G(3) of Form 10-K, the information
called for by this item regarding directors is hereby incorporated by
reference from the Company's definitive proxy statement or amendment hereto to
be filed pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report. Information regarding the Company's
executive officers is set forth under Item 4A of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Pursuant to General Instruction G(3) of Form 10-K, the information
called for by this item is hereby incorporated by reference from the Company's
definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Pursuant to General Instruction G(3) of Form 10-K, the information
called for by this item is hereby incorporated by reference from the Company's
definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction G(3) of Form 10-K, the information
called for by this item is hereby incorporated by reference from the Company's
definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K.
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE:
(1) FINANCIAL STATEMENTS:
HANGER ORTHOPEDIC GROUP, INC.
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996
and 1997
29
<PAGE>
Consolidated Statements of Income for the years ended December 31, 1995, 1996
and 1997
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1995,
1996 and 1997
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENTS SCHEDULE:
Report of Independent Accountants
Schedule II - Valuation and qualifying accounts
All other schedules are omitted either because they are not applicable or
required, or because the required information is included in the financial
statements or notes thereto:
(b) REPORTS ON FORM 8-K:
No Forms 8-K were filed during the quarter ended December 31,
1997.
(c) EXHIBITS: The following exhibits are filed herewith or
incorporated herein by reference:
Exhibit No. Document
----------- --------
3(a) Certificate of Incorporation, as amended, of the Registrant.
(Incorporated herein by reference to Exhibit 3.1 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1988.)
3(b) Certificate of Amendment of the Registrant's Certificate of
Incorporation (which, among other things, changed the
Registrant's corporate name from Sequel Corporation to Hanger
Orthopedic Group, Inc.), as filed on August 11, 1989 with the
Office of the Secretary of State of Delaware. (Incorporated
herein by reference to Exhibit 3(b) to the Registrant's
Current Report on Form 10-K dated February 13, 1990.)
3(c) Certificate of Agreement of Merger of Sequel Corporation and
Delaware Sequel Corporation. (Incorporated herein by reference
to Exhibit 3.1(a) to the Registrant's Annual Report on Form
10-K for the fiscal year ended September 30, 1988.)
30
<PAGE>
3(d) Certificate of Ownership and Merger of Hanger Acquisition
Corporation and J. E. Hanger, Inc. as filed with the Office of
the Secretary of the State of Delaware on April 11, 1989.
(Incorporated herein by reference to Exhibit 2(f) to the
Registrant's Current Report on Form 8-K dated May 15, 1989.)
3(e) Certificate of Designation, Preferences and Rights of
Preferred Stock of the Registrant as filed on February 12,
1990 with the Office of the Secretary of State of Delaware.
(Incorporated herein by reference to Exhibit 3(a) to the
Registrant's Current Report on Form 8-K dated February 13,
1990.)
3(f) By-Laws of the Registrant, as amended. (Incorporated herein by
reference to Exhibit 3 to the Registrant's Current Report on
Form 8-K dated May 15, 1989.)
10(a) Registration Agreement, dated May 15, 1989, between Sequel
Corporation, First Pennsylvania Bank, N.A., Gerald E. Bisbee,
Jr., Ivan R. Sabel, Richard A. Stein, Ronald J. Manganiello,
Joseph M. Cestaro and Chemical Venture Capital Associates.
(Incorporated herein by reference to Exhibit 10(l) to the
Registrant's Current Report on Form 8-K dated May 15, 1989.)
10(b) First Amendment dated as of February 12, 1990, to the
Registration Agreement, dated as of May 15, 1989, by and among
Hanger Orthopedic Group, Inc., First Pennsylvania Bank, N.A.,
Ivan R. Sabel, Richard A. Stein, Ronald J. Manganiello, Joseph
M. Cestaro and Chemical Venture Capital Associates.
(Incorporated herein by reference to Exhibit 10(m) to the
Registrant's Current Report on Form 8-K dated February 13,
1990.)
10(c) Fifth Amendment, dated as of November 8, 1990, to the Stock
and Note Purchase Agreement, dated as of February 28, 1989 and
as amended on May 9, 1989, May 15, 1989, February 12, 1990,
and June 19, 1990 by and among J. E. Hanger, Inc., as
successor to Hanger Acquisition Corporation, Ronald J.
Manganiello, Joseph M. Cestaro, Chemical Venture Capital
Associates and Chemical Equity Associates. (Incorporated
herein by reference to Exhibit 10(f) to the Registrant's
Current Report on Form 8-K filed on November 21, 1990.)
10(d) Form of Stock Option Agreements, dated as of August 13, 1990,
between Hanger Orthopedic Group, Inc. and Thomas P. Cooper,
James G. Hellmuth, Walter F. Abendschein, Jr., Norman Berger,
Bruce B. Grynbaum and Joseph S. Torg. (Incorporated herein by
reference to Exhibit 10(rrr) to the Registrant's Registration
Statement on Form S-2, File No. 33-37594.) *
* Management contract or compensatory plan
31
<PAGE>
10(e) Convertible Junior Subordinated Note Agreement, dated as of
March 1, 1992, from Hanger Orthopedic Group, Inc. to R. S.
Lauder, Gaspar & Co., L.P. regarding $4,000,000 8.5%
Convertible Junior Subordinated Notes due March 31, 1999.
(Incorporated herein by reference to Exhibit 10(jjjj) of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991.)
10(f) Convertible Junior Subordinated Note Agreement dated as of May
7, 1993, from Hanger Orthopedic Group, Inc. to R.S. Lauder,
Gaspar & Co., L.P. regarding $1,000,000 8.25% Convertible
Junior Subordinated Notes due March 31, 1999. (Incorporated
herein by reference to Exhibit 10 (x) of the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1993.)
10(g) Amendment No. 1, dated as of May 7, 1993, to the Convertible
Junior Subordinated Note Agreement referred to in Exhibit (x)
above. (Incorporated herein by reference to Exhibit 10 (y) of
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993.)
10(h) Employment and Non-Compete Agreement, dated as of May 16,
1994, between Hanger Orthopedic Group, Inc. and Ivan R. Sabel.
(Incorporated herein by reference to Exhibit 10 (xx) of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994.) *
10(i) Employment and Non-Compete Agreement, dated as of May 16,
1994, between Hanger Orthopedic Group, Inc. and Richard A.
Stein. (Incorporated herein by reference to Exhibit 10 (yy) of
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994.) *
10(j) Agreement and Plan of Merger, dated as of July 29, 1996, among
Hanger Orthopedic Group, Inc., SEH Acquisition Corporation and
J.E. Hanger, Inc. of Georgia. (Incorporated herein by
reference to Exhibit 2 to the Registrant's Current Report on
Form 8-K filed on November 12, 1996.)
10(k) Credit Agreement, dated November 1, 1996, among Hanger
Orthopedic Group, Inc., various banks and Banque Paribas, as
agent. (Incorporated herein by reference to Exhibit 10(a) to
the Registrant's Current Report on Form 8-K filed on November
12, 1996.)
10(l) Senior Subordinated Note Purchase Agreement, dated as of
November 1, 1996, among Hanger Orthopedic Group, Inc. and the
purchasers listed therein. (Incorporated hereby by reference
to Exhibit 10(b) to the Registrant's Current Report on Form
8-K filed on November 12, 1996.)
* Management contract or compensatory plan
32
<PAGE>
10(m) Warrants to purchase Common Stock of Hanger Orthopedic Group,
Inc. issued November 1, 1996. (Incorporated herein by
reference to Exhibit 10(c) to the Registrant's Current Report
on Form 8-K filed on November 12, 1996.)
10(n) 1991 Stock Option Plan of the Registrant. (Incorporated herein
by reference to Exhibit 4(b) to the Registrant's Registration
Statement on Form S-8 (File No. 33-48265).)*
10(o) 1993 Non-Employee Directors Stock Option Plan of the
Registrant. (Incorporated herein by reference to Exhibit 4(b)
to the Registrant's Registration Statement on Form S-8 (File
No. 33-63191).)*
10(p) Employment and Non-Compete Agreement, dated as of November 1,
1996, and Amendment No. 1 thereto, dated January 1, 1997,
between the Registrant and H.E. Thranhardt. (Incorporated
herein by reference to Exhibit 10(p) of the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1996).*
10(q) Employment and Non-Compete Agreement, dated as of November 1,
1996, between the Registrant and John McNeill. (Incorporated
herein by reference to Exhibit 10(q) of the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1996).*
10(r) Employment and Non-Compete Agreement, dated as of November 1,
1996, between the Registrant and Alice Tidwell. (Incorporated
herein by reference to Exhibit 10(r) of the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1996).*
10(s) Asset Purchase Agreement, dated as of March 26, 1997, by and
between Hanger Prosthetics & Orthotics, Inc., Acor
Orthopaedic, Inc., and Jeff Alaimo, Greg Alaimo and Mead
Alaimo. (Incorporated by reference to Exhibit 2 to the Current
Report on Form 8-K filed by the Registrant on April 15, 1997.)
10(t) Asset purchase Agreement, dated as of May 8, 1997, by and
between Hanger Prosthetics & Orthotics, Inc., Fort Walton
Orthopedic, Inc., Mobile Limb and Brace, Inc. and Frank
Deckert, Ronald Deckert, Thomas Deckert, Robert Deckert and
Charles Lee. (Incorporated by reference to Exhibit 2 to the
Current Report on Form 8-K filed by the Registrant on June 5,
1997.)
10(u) Second Amendment, dated June 25, 1997, to Credit Agreement,
dated November 1, 1996, among Hanger Orthopedic Group, Inc.,
various banks and Banque Paribas, as agent. (Incorporated
herein by reference to Exhibit 10(r) to the Registrant's
Registration Statement on Form S-2 (File No. 333-30193).)
10(v) Asset Purchase Agreement, dated as of November 3, 1997, by and
between Hanger Prosthetics & Orthotics, Inc., Morgan
Prosthetic-Orthotics, Inc. and Dan Morgan.
10(w) Asset Purchase Agreement, dated as of December 23, 1997, by
and between Hanger Prosthetics & Orthotics, Inc., Harshberger
33
<PAGE>
Prosthetic & Orthotic Center, Inc., Harshberger Prosthetic &
Orthotic Center of Mobile, Inc., Harshberger Prosthetic &
Orthotic Center of Florence, Inc., FAB-CAM, Inc. and Jerald J.
Harshberger.
22 List of Subsidiaries of the Registrant.
24 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule for the year ended December 31, 1997
27.1 Restated Financial Data Schedule for the quarter ended June
30, 1997
27.2 Restated Financial Data Schedule for the quarter ended
September 30, 1997
27.3 Restated Financial Data Schedule for the year ended December
31, 1995
* Management contract or compensatory plan
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
HANGER ORTHOPEDIC GROUP, INC.
Dated: March 28, 1998 By: /s/IVAN R. SABEL
-----------------------------
Ivan R. Sabel, CPO
Chief Executive Officer
(Principal Executive Officer)
Dated: March 28, 1998 By: /s/RICHARD A. STEIN
-----------------------------
Richard A. Stein
Vice President - Finance
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 28, 1998 By: /s/IVAN R. SABEL
-----------------------------
Ivan R. Sabel, CPO
Chief Executive Officer
and Director (Principal
Executive Officer)
Dated: March 28, 1998 By: /s/RICHARD A. STEIN
-----------------------------
Richard A. Stein
Vice President - Finance,
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
Dated: March 28, 1998 /s/MITCHELL J. BLUTT, M.D.
-----------------------------
Mitchell J. Blutt, M.D.
Director
35
<PAGE>
Dated: March 28, 1998 /s/EDMOND E. CHARRETTE, M.D.
-----------------------------
Edmond E. Charrette, M.D.
Director
Dated: March 28, 1998 /s/THOMAS P. COOPER, M.D.
-----------------------------
Thomas P. Cooper, M.D.
Director
Dated: March 28, 1998 /s/ROBERT J. GLASER, M.D.
-----------------------------
Robert J. Glaser, M.D.
Director
Dated: March 28, 1998 /s/JAMES G. HELLMUTH
-----------------------------
James G. Hellmuth
Director
Dated: March 28, 1998 /s/WILLIAM L. MCCULLOCH
-----------------------------
William L. McCulloch
Director
Dated: March 28, 1998 /s/H.E. THRANHARDT, CPO
-----------------------------
H.E. Thranhardt, CPO
Director
36
<PAGE>
<TABLE>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
HANGER ORTHOPEDIC GROUP, INC.
Report of Independent Accountants F-1
Consolidated balance sheets as of December 31, 1996
and 1997 F-2
Consolidated statements of income for the years
ended December 31, 1995, 1996 and 1997 F-4
Consolidated statements of changes in shareholders'
equity for the years ended December 31, 1995,
1996 and 1997 F-5
Consolidated statements of cash flows for the years
ended December 31, 1995, 1996 and 1997 F-6
Notes to Consolidated Financial Statements F-7
FINANCIAL STATEMENT SCHEDULE
Report of Independent Accountants S-1
Schedule II - Valuation and Qualifying Accounts S-2
</TABLE>
37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Hanger
Orthopedic Group, Inc.
We have audited the accompanying consolidated balance sheets of Hanger
Orthopedic Group, Inc. and Subsidiaries as of December 31, 1996 and 1997 and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hanger
Orthopedic Group, Inc., and Subsidiaries as of December 31, 1996 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 13, 1998
F-1
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1997
------------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $6,572,402 $6,557,409
Accounts receivable, less allowances for doubtful accounts
of $2,478,800 and $4,871,000 in 1996 and
1997, respectively 24,321,872 31,145,327
Inventories 15,916,638 17,445,476
Prepaid and other assets 1,595,169 4,260,656
Deferred income taxes 3,159,280 2,127,185
------------- -------------
Total current assets 51,565,361 61,536,053
------------- -------------
PROPERTY, PLANT AND EQUIPMENT
Land 4,269,045 4,269,045
Buildings 8,017,547 8,326,732
Machinery and equipment 6,275,307 7,591,821
Furniture and fixtures 2,095,900 2,378,808
Leasehold improvements 2,139,207 3,142,244
------------- -------------
22,797,006 25,708,650
Less accumulated depreciation and amortization 5,497,809 7,538,385
------------- -------------
17,299,197 18,170,265
------------- -------------
INTANGIBLE ASSETS
Excess cost over net assets acquired 63,935,447 81,150,328
Non-compete agreements 1,981,329 2,236,979
Other intangible assets 6,152,607 3,221,912
------------- -------------
72,069,383 86,609,219
Less accumulated amortization 6,917,960 9,101,531
------------- -------------
65,151,423 77,507,688
------------- -------------
OTHER ASSETS
Other 925,446 768,604
------------- -------------
TOTAL ASSETS $134,941,427 $157,982,610
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1997
------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 4,902,572 $ 5,747,865
Accounts payable 4,141,993 3,827,338
Accrued expenses 7,815,028 3,597,104
Customer deposits 578,219 1,145,001
Accrued compensation related cost 8,321,395 8,037,805
Deferred revenue 306,998 150,418
------------- -------------
Total current liabilities 26,066,205 22,505,531
------------- -------------
Long-term debt 64,297,801 23,237,321
Deferred income taxes 2,377,627 3,405,833
Other liabilities 2,188,278 2,210,445
Mandatorily redeemable preferred stock class C, 300 shares authorized,
liquidation preference of $500 per share (See Note M) 277,701 303,753
Mandatorily redeemable preferred stock class F, 100,000 shares authorized,
liquidation preference of $1,000 per share (See Note M)
Commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 25,000,000 shares authorized,
9,449,129 and 15,670,100 shares issued and 9,315,634 and
15,536,605 shares outstanding in 1996 and 1997, respectively 94,492 156,702
Additional paid-in capital 41,008,363 102,585,837
Retained earnings (accumulated deficit) (713,478) 4,232,750
------------- -------------
40,389,377 106,975,289
Treasury stock, cost -- (133,495 shares) (655,562) (655,562)
39,733,815 106,319,727
------------- -------------
TOTAL LIABILITES & SHAREHOLDERS' EQUITY $134,941,427 $157,982,610
------------- ------------
</TABLE>
F-3
<PAGE>
<TABLE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 52,467,899 $ 66,805,944 $145,597,876
Cost of products and services sold 24,572,089 32,233,373 73,533,398
------------- ------------- -------------
Gross profit 27,895,810 34,572,571 72,064,478
Selling, general and administrative 19,361,701 24,549,802 49,075,956
Depreciation and amortization 2,005,113 2,016,390 2,870,539
Amortization of excess cost over net assets acquired 686,275 832,075 1,810,283
Acquisition costs 1,297,819
Integration costs 1,181,694
------------- ------------- -------------
Income from operations 5,842,721 4,694,791 18,307,700
Interest expense (2,056,140) (2,546,561) (4,932,385)
Other expense, net (106,644) (177,216) (209,296)
------------- ------------- -------------
Income before taxes and extraordinary item 3,679,937 1,971,014 13,166,019
Provision for income taxes 1,544,498 889,886 5,526,000
------------- ------------- -------------
Income before extraordinary item 2,135,439 1,081,128 7,640,019
Extraordinary loss on early extinguishment of debt, net of tax benefit (83,234) (2,693,791)
------------- ------------- -------------
Net income $ 2,135,439 $ 997,894 $ 4,946,228
============= ============= =============
Income before extraordinary item applicable to common stock $ 2,113,640 $ 1,057,313 $ 7,613,967
============= ============= =============
Basic Per Common Share Data
---------------------------
Income before extraordinary item $0.25 $0.12 $0.65
Extraordinary item, net of tax benefit (0.01) (0.23)
------------- ------------- -------------
Net income $0.25 $0.11 $0.42
============= ============= =============
Shares used to compute basic per common share amounts 8,290,544 8,469,645 11,792,892
Diluted Per Common Share Data
- -------------------------------------
Income before extraordinary item $0.25 $0.12 $0.58
Extraordinary item, net of tax benefit (0.01) (0.21)
------------- ------------- -------------
Net income $0.25 $0.11 $0.37
============= ============= =============
Shares used to compute diluted per common share amounts 8,299,516 8,663,161 13,138,377
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
HANGER ORTHOPEDIC GROUP, INC
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1995, 1996 and 1997
<CAPTION>
Retained
Additional Earnings
Common Common Paid in (Accumulated Treasury
Shares Stock Capital Deficit) Stock Total
----------- --------- ------------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 8,290,544 $ 84,241 $ 33,595,857 ($3,846,811) ($655,562) $ 29,177,725
Preferred dividends declared (21,799) (21,799)
Net Income 2,135,439 2,135,439
----------- --------- ------------- ------------- ---------- -------------
Balance, December 31, 1995 8,290,544 84,241 33,574,058 (1,711,372) (655,562) 31,291,365
----------- --------- ------------- ------------- ---------- -------------
Preferred dividends declared (23,815) (23,815)
Net Income 997,894 997,894
Issuance of Common Stock in
connection with the exercise
of stock options 13,758 138 46,733 46,871
Issuance of Common Stock in
connection with the exercise
of stock warrants 11,332 113 (113)
Issuance of Common Stock in
connection with the purchase
of JEH 1,000,000 10,000 5,240,000 5,250,000
Issuance of Warrants in
connection with the purchase
of JEH 133,000 133,000
Issuance of Warrants in
connection with the Senior
Subordinated Note Agreement 2,038,500 2,038,500
----------- --------- ------------- ------------- ---------- -------------
Balance, December 31, 1996 9,315,634 94,492 41,008,363 (713,478) (655,562) 39,733,815
----------- --------- ------------- ------------- ---------- -------------
Preferred dividends declared (26,052) (26,052)
Net Income 4,946,228 4,946,228
Issuance of Common Stock in
connection with the exercise
of stock options 395,277 3,953 2,823,194 2,827,147
Issuance of Common Stock in
connection with the exercise
of stock warrants 11,694 117 (117)
Issuance of Common Stock in
connection with the purchase
of Fort Walton Mobile 64,000 640 499,360 500,000
Issuance of Common Stock in
Public Offering 5,750,000 57,500 58,281,089 58,338,589
----------- --------- ------------- ------------- ---------- -------------
Balance, December 31, 1997 15,536,605 $156,702 $102,585,837 $ 4,232,750 ($655,562) $106,319,727
=========== ========= ============= ============= ========== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Years Ended December 31,
<CAPTION>
1995 1996 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 2,135,439 $ 997,894 $ 4,946,228
Adjustments to reconcile net income to net cash provided by
operations:
Provision for bad debt 1,008,731 1,629,065 5,613,076
Provision for inventory reserves 1,160,000
Depreciation and amortization 2,005,113 2,016,390 2,870,539
Amortization of excess cost over net assets acquired 686,275 832,075 1,810,283
Amortization of debt discount 42,469 152,065
Deferred taxes 631,899 (684,119) 2,060,301
Extraordinary loss on early extinguishment of debt 138,724 4,644,491
Changes in assets and liabilities, net of effects from acquired companies:
Accounts receivable (1,922,572) (2,772,619) (9,380,532)
Inventories (800,933) 737,104 (1,068,769)
Prepaid and other assets 108,112 (199,638) (2,586,738)
Other assets 151,367 27,342 176,083
Accounts payable 48,462 361,441 (1,326,067)
Accrued expenses (618,105) 709,638 (1,000,414)
Accrued wages & payroll taxes 72,272 1,942,581 (400,575)
Customer deposits 97,036 88,461 576,240
Deferred revenue 82,897 126,411 (156,580)
Other liabilities 35,628 (66,459) 22,167
----------- ------------ -------------
Net cash provided by operating activities 3,721,621 5,926,760 8,111,798
----------- ------------ -------------
Cash flow from investing activities:
Purchase of fixed assets (934,798) (1,239,364) (2,581,424)
Acquisitions, net of cash (273,939) (37,671,754) (15,800,077)
Purchase of patent (70,552) (31,840) (88,671)
Purchase of non-compete agreements (35,000) (200,000) (255,650)
Decrease in other intangibles (24,321) (7,596)
----------- ------------ -------------
Net cash used in investing activities (1,338,610) (39,150,554) (18,725,822)
----------- ------------ -------------
Cash flow from financing activities:
Net (repayments) under revolving credit agreement (100,000) (12,700,000)
Proceeds from the sale of Common Stock 46,871 61,165,736
Proceeds from long-term debt 65,000,000 8,256,000
Repayment of debt (1,882,706) (11,040,029) (58,781,418)
(Increase) decrease in financing costs 7,619 (2,966,951) (41,287)
----------- ------------ -------------
Net cash provided by (used in) financing activities (1,975,087) 38,339,891 10,599,031
----------- ------------ -------------
Increase (decrease) in cash and cash equivalents 407,924 5,116,097 (14,993)
Cash and cash equivalents at beginning of year 1,048,381 1,456,305 6,572,402
----------- ------------ -------------
Cash and cash equivalents at end of year $1,456,305 $ 6,572,402 $ 6,557,409
=========== ============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - THE COMPANY
Hanger Orthopedic Group, Inc. is one of the nation's largest
professional practice management companies in the O&P rehabilitation industry.
In addition to providing O&P patient-care services through its operating
subsidiaries, the Company also manufactures and distributes components and
finished patient-care products to the O&P industry primarily in the United
States. Hanger's largest subsidiary, Hanger Prosthetics & Orthotics, Inc.
formerly known as J.E. Hanger, Inc., was founded in 1861 by a Civil War
amputee and is the oldest company in the O&P industry in the United States.
Orthotics is the design, fabrication, fitting and supervised use of
custom-made braces and other devices that provide external support to treat
musculoskeletal disorders. Prosthetics is the design, fabrication and fitting
of custom-made artificial limbs.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS: Cash includes currency on hand and demand
deposits with high quality financial institutions. Management considers all
highly liquid investments with original maturities of three months or less at
the date of purchase to be cash equivalents. At various times throughout the
year, the Company maintains cash balances in excess of FDIC limits.
FAIR VALUE OF FINANCIAL INSTRUMENTS: At December 31, 1996 and 1997, the
carrying value of financial instruments such as cash and cash equivalents,
trade receivables, trade payables, and debt approximates fair value.
INVENTORIES: Inventories, which consist principally of purchased parts,
are stated at the lower of cost or market using the first-in, first-out (FIFO)
method.
LONG-LIVED ASSET IMPAIRMENT: The Company reviews its long-lived assets
for impairment on an exception basis whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through future cash flows. If it is determined that an impairment
loss has occurred based on expected cash flows, then the loss is recognized in
the income statement.
F-7
<PAGE>
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are
recorded at cost. The cost and related accumulated depreciation of assets
sold, retired or otherwise disposed of are removed from the respective
accounts, and any resulting gains or losses are included in the statement of
income. Depreciation is computed for financial reporting purposes using the
straight-line method over the estimated useful lives of the related assets
ranging from 5 to 20 years. Depreciation expense was approximately $1,136,000,
$1,288,000 and $2,173,000 for the years ended December 31, 1995, 1996 and
1997, respectively.
INTANGIBLE ASSETS: Intangible assets, including non-compete agreements,
are recorded based on agreements entered into by the Company and are being
amortized over their estimated useful lives ranging from 5 to 7 years using
the straight-line method. Other intangible assets are recorded at cost and are
being amortized over their estimated useful lives of up to 16 years using the
straight-line method. Excess cost over net assets acquired represents the
excess of purchase price over the value assigned to net identifiable assets of
purchased businesses and is being amortized using the straight-line method
over 40 years. Fully amortized intangible assets amounting to approximately
$3,225,000 were removed from the financial statements at December 31, 1996.
REVENUE RECOGNITION: Revenue on the sale of orthotic and prosthetic
devices is recorded when the device is accepted by the patient. Revenues from
referral service contracts is recognized over the term of the contract.
Deferred revenue represents billings made prior to the final fitting and
acceptance by the patient and unearned service contract revenue. Revenue is
recorded at its net realizable value taking into consideration all
governmental and contractual discounts.
CREDIT RISK: The Company primarily provides services and customized
devices throughout the United States and is reimbursed by the patients'
third-party insurers or governmentally funded health insurance programs. The
Company performs ongoing credit evaluations of its distribution customers. The
accounts receivable are not collateralized. The ability of the Company's
debtors to meet their obligations is dependent upon the financial stability of
the insurers of the Company's customers and future legislation and regulatory
actions. Additionally, the Company maintains reserves for potential losses
from these receivables that historically have been within management's
expectations.
INCOME TAXES: Income taxes are determined in accordance with Statement
of Financial Accounting Standards ("SFAS") 109, which requires recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income tax liabilities and assets are
determined based on the difference between financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. SFAS 109 also provides for the
recognition of deferred tax assets if it is more likely than not that the
assets will be realized in future years.
STOCK-BASED COMPENSATION: Compensation costs attributable to stock
option and similar plans are recognized based on any difference between the
quoted market price of the stock on the date of the grant over the amount the
F-8
<PAGE>
employee is required to pay to acquire the stock (the intrinsic value method
under Accounting Principles Board Opinion 25). SFAS 123, "Accounting for
Stock-Based Compensation," requires companies electing to continue to use the
intrinsic value method to make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting had been
applied. The Company has adopted the disclosure only provisions of SFAS 123.
NEW ACCOUNTING STANDARDS: Effective January 1, 1998 the Company will
adopt the provisions of SFAS 130, "Reporting Comprehensive Income". SFAS 130
establishes standards for reporting and display of comprehensive income and
its components in the financial statements. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company is in the process of determining its preferred format. The
adoption of SFAS 130 will not have a material impact on the Company's
consolidated results of operations, financial position or cash flows.
The Company will adopt the provisions of SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information" effective with the
financial statements for the year ended December 31, 1998. SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Financial statement disclosures for
prior periods are required to be restated. The Company is in the process of
evaluating the disclosure requirements. The adoption of SFAS 131 will not have
a material impact on the Company's consolidated results of operations,
financial position or cash flows.
RECLASSIFICATIONS: Certain previously reported amounts have been
reclassified to conform with the current year presentation.
F-9
<PAGE>
NOTE C - SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION
The following are the supplemental disclosure requirements for the
statements of cash flows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash paid during the period for:
Interest $2,166,877 $2,273,629 $5,361,176
Income taxes 712,800 1,893,990 2,469,000
Non-cash financing and investing activities:
Preferred dividends declared 21,799 23,815 26,052
Issuance of notes in connection with acquisition 175,000 8,314,200
Issuance of Common Stock in connection with acquisition 5,250,000 500,000
Issuance of warrants in connection with acquisition 133,000
Issuance of warrants in connection with Senior Subordinated
Notes 2,038,500
Issuance of Common Stock in connection with exercise of
warrants/options 113 117
Change in goodwill resulting from reduction in estimated
acquisition costs 3,236,552
</TABLE>
NOTE D - ACQUISITIONS
During 1996, the Company acquired one orthotic and prosthetic company,
J.E. Hanger, Inc. of Georgia ("JEH"), pursuant to the terms of a Merger
Agreement. As of the acquisition date, JEH, headquartered in Alpharetta,
Georgia, operated 94 patient-care centers and five warehouses located
primarily in the Mid-Atlantic and Southeastern United States. Under the terms
of the agreement, which became effective on November 1, 1996, the Company paid
JEH shareholders $44.0 million in cash and issued 1.0 million shares of
Company Common Stock and paid an additional $1,783,000 to the former JEH
shareholders on March 27, 1997 pursuant to provisions in the Merger Agreement
calling for a post-closing adjustment. In addition the Company issued 35,000
warrants to one JEH noteholder in order to facilitate assumption of this debt
under the same terms and conditions that had existed prior to the acquisition.
During 1997, the Company acquired nine orthotic and prosthetic companies
and the remaining 20% interest of its majority owned subsidiary, Columbia
Brace. The aggregate purchase price, excluding potential earn-out provisions
was $22,529,200 comprised of $13,715,000 in cash, $8,314,200 in promissory
notes and 64,000 shares of Common Stock of the Company valued at $500,000. The
notes are payable over two to five years with interest rates ranging from 6%
to 8%. The cash portion of these acquisitions was borrowed under the Company's
acquisition loan facility.
All of the above acquisitions have been accounted for as business
combinations in accordance with the purchase method. The results of operations
for these acquisitions are included in the Company's results of operations
from their date of acquisition. Excess cost over net assets acquired in these
acquisitions amounting to approximately $36,699,000 and $20,451,000 in 1996
and 1997, respectively, are amortized using the straight-line method over 40
years.
F-10
<PAGE>
The following table summarizes the unaudited consolidated pro forma
information, assuming the acquisitions had occurred at the beginning of each
of the following periods:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Net sales $141,010,000 $156,946,000
Income before extraordinary item 1,546,000 7,772,000
Net income 1,463,000 5,078,000
Diluted income per common share before
extraordinary item $.15 $.59
Diluted income per common share $.15 $.38
</TABLE>
The pro forma results do not necessarily represent results which would
have occurred if the acquisitions had taken place at the beginning of each
period, nor are they indicative of the results of future combined operations.
NOTE E - NET INCOME PER COMMON SHARE
Basic per common share amounts are computed using the weighted average
number of common shares outstanding during the year. Diluted per common share
amounts are computed using the weighted average number of common shares
outstanding during the year and dilutive potential common shares. Dilutive
potential common shares consist of stock options and stock warrants and are
calculated using the treasury stock method.
Earnings per share amounts have been restated in accordance with SFAS
128, "Earnings Per Share." This restatement did not result in a material
change between diluted per share amounts and amounts previously reported.
Earnings per share are computed as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Income before extraordinary item $2,135,439 $1,081,128 $7,640,019
Less preferred stock dividends declared (21,799) (23,815) (26,052)
----------- ----------- -----------
Income available to common stockholders $2,113,640 $1,057,313 $7,613,967
=========== =========== ===========
Average shares of common stock
outstanding used to compute basic per
common share amounts 8,290,544 8,469,645 11,792,892
Effect of dilutive options 8,972 163,442 556,476
Effect of dilutive warrants 30,074 789,009
Shares used to compute dilutive per ----------- ----------- -----------
common share amounts 8,299,516 8,663,161 13,138,377
=========== =========== ===========
Basic income per common share before
extraordinary item $ .25 $ .12 $ .65
Diluted income per common share before
extraordinary item $ .25 $ .12 $ .58
</TABLE>
Options to purchase 528,750 shares of common stock at prices ranging
from $11.31 per share to $13.25 per share were outstanding at December 31,
1997 but were not included in the computation of diluted income per common
share because the options' exercise price was greater than the average market
price of the common shares.
F-11
<PAGE>
NOTE F - INVENTORY
Inventories at December 31, 1996 and 1997 consist of the following:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Raw materials $ 7,504,442 $ 7,685,134
Work in-process 831,632 1,437,946
Finished goods 7,580,564 8,322,396
------------ ------------
$15,916,638 $17,445,476
</TABLE>
NOTE G - LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996 and
1997:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
A-Term Loan Commitment payable in quarterly
installments through December 2001 with interest
payable monthly at the Company's option of either the
Bank's prime rate plus 1.75%, or LIBOR plus 2.75%
(8.31% at December 31, 1996). $29,000,000
B-Term Loan Commitment payable in quarterly
installments through December 2003 with interest
payable monthly at the Company's option of either the
Bank's prime rate plus 2.25%, or the LIBOR plus 3.25%
(8.81% at December 31, 1996). 28,000,000
A-Term Loan Commitment payable in quarterly
installments through December 2001 with interest
payable monthly at the Company's option of either the
Bank's prime rate or LIBOR plus additional basis
points ranging from .25% to 2.50% depending upon the
Company's leverage ratio as defined in the agreement
(7.0% at December 31, 1997). $ 8,567,704
B-Term Loan Commitment payable in quarterly
installments through December 2003 with interest
payable monthly at the Company's option of either the
Bank's prime rate or LIBOR plus additional basis
points ranging from .50% to 2.75% depending upon the
Company's leverage ratio as defined in the agreement
(7.25% at December 31, 1997). 8,663,611
8% Senior Subordinated Notes with detachable warrants
due November 2004, net of unamortized discount of
$1,996,031, 11.19% effect interest rate. 6,003,969
Subordinated seller notes, non-collateralized net of
unamortized discount of $612,696 and $444,776 at
December 31, 1996 and 1997, respectively, with
principle and interest payable in either monthly or
quarterly installments at effective interest rates
ranging from 6% to 11%, maturing through January 2009 5,574,793 11,256,699
Other miscellaneous obligations with principle and
interest payable in either monthly or annual
installments at interest rates ranging from 6% to 10%
maturing through December 2007 621,611 497,172
----------- -----------
69,200,373 28,985,186
Less current portion 4,902,572 5,747,865
----------- -----------
$64,297,801 $23,237,321
</TABLE>
F-12
<PAGE>
In November 1996, the Company entered into a new $90,000,000 Credit
Agreement "Credit Agreement" with a syndication of banks which provided for a:
(i) "A Term Loan" in the principal amount of $29,000,000; (ii) "B Term Loan"
in the principal amount of $28,000,000; (iii) $25,000,000 Acquisition Loan
Commitment and; (iv) $8,000,000 Revolving Loan Commitment.
The Credit Agreement provided for an initial commitment fee of 2.625% on
the total $90,000,000 facility and an annual fee of .5% per year on the
aggregate unused portion of the Credit Agreement. As of December 31, 1996, the
Company had no outstanding balances on both the Acquisition and Revolving Loan
Commitments.
In November 1996, the Company also entered into a Senior Subordinated
Note Purchase Agreement in the principal amount of $8,000,000 whereby the
Company issued 1,600,000 warrants to noteholders. This transaction resulted in
the Company recording a debt discount of $2,038,500 which was being amortized
over the life of the notes.
The Company used the proceeds of the A-Term Loan, B-Term Loan and Senior
Subordinated Notes to finance the acquisition of JEH and to repay all amounts
then outstanding under the Company's former Revolving credit facility, Senior
Financing Facility, the 8.5% Convertible Junior Subordinated Note and the
8.25% Convertible Junior Subordinate Note. In connection with this
transaction, the Company recorded an extraordinary charge of $138,724
($83,234, net of tax benefit) for the write-off of unamortized discounts and
financing costs, in 1996.
During July and August of 1997, the Company sold 5,750,000 shares of
Common Stock in a underwritten public offering at $11.00 per share resulting
in approximately $58.3 million of net proceeds to the Company.
The Company applied the net proceeds of the public offering to the
repayment of the Senior Subordinated Notes and certain indebtedness
outstanding under the Credit Agreement. Upon repayment of this debt and the
Credit Agreement being substantially modified, the Company incurred an
extraordinary loss of $4.6 million ($2.7 million net of tax benefit).
The modified Credit Agreement is collateralized by substantially all the
assets of the Company, restricts the payment of dividends, and contains
certain affirmative and negative covenants customary in an agreement of this
nature.
The remainder of the A-Term Loan, the $25,000,000 Acquisition Loan
Commitment and the 8,000,000 Revolving Loan Commitment bears base interest at
the Company's option of either LIBOR plus 2.50% or the Bank's prime rate plus
1.50%. The base interest rate is then reduced by .25% to 1.25% depending upon
the ratio of the Company's total indebtedness to annual earnings before
interest, taxes, depreciation and amortization. As of December 31, 1997, the
Company had no outstanding balances on both the Acquisition and Revolving Loan
Commitments.
The remainder of the B-Term Loan bears base interest at the Company's
option of either LIBOR plus 2.75% or the Bank's prime rate plus 1.75%. The
base interest rate is then reduced by .25% to 1.25% depending upon the ratio
F-13
<PAGE>
of the Company's total indebtedness to annual earnings before interest, taxes,
depreciation and amortization.
The Company has entered into an interest rate swap agreement to reduce
the impact of changes in interest rates on amounts outstanding on its Credit
Agreement. At December 31, 1997, the Company had an outstanding interest rate
swap agreement with a commercial bank, having a total notional principle
amount of up to $26,950,000. The agreement effectively minimizes the Company's
base interest rate exposure between a floor of 5.32% and a cap of 7%. The
interest rate swap agreement matures on September 30, 1999. The Company is
exposed to credit loss in the event of non-performance by the other party to
the interest rate swap agreement. However, the Company does not anticipate
non-performance by the counterparties.
Maturities of long-term debt, at December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998 $ 5,747,865
1999 4,952,369
2000 4,431,531
2001 4,553,149
2002 4,763,946
Thereafter 4,536,326
-----------
$28,985,186
</TABLE>
NOTE H - INCOME TAXES
The provisions for income taxes for the years ended December 31, 1995,
1996 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 541,626 $ 1,146,564 $ 3,067,546
State 370,973 427,441 398,153
------------ ------------ ------------
Total 912,599 1,574,005 3,465,699
Deferred:
Federal and State 631,899 (684,119) 2,060,301
------------ ------------ ------------
Provision for income taxes on
income before extraordinary item 1,544,498 889,886 5,526,000
Tax benefit from extra-
ordinary item (55,489) (1,950,700)
------------ ------------ ------------
Provision for income taxes $ 1,544,498 $ 834,397 $ 3,575,300
============ ============ ============
</TABLE>
F-14
<PAGE>
A reconciliation of the federal statutory tax rate to the effective tax
rate for the years ended December 31, 1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate $ 1,251,349 $ 670,145 $ 4,608,106
Increase (reduction) in taxes
resulting from:
State income taxes (net of
federal effect) 249,047 98,573 606,397
Amortization of the excess cost
over net assets acquired 92,777 92,777 95,506
Valuation allowance (70,000)
Other, net 21,325 28,391 215,991
------------ ------------ ------------
Provision for income taxes on
income before extraordinary item 1,544,498 889,886 5,526,000
Tax benefit from extraordinary
item (55,489) (1,950,700)
------------ ------------ ------------
Provision for income taxes $ 1,544,498 $ 834,397 $ 3,575,300
============ ============ ============
</TABLE>
Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities as of December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred Tax Liabilities:
Book basis in excess of tax $ 775,838 $ 798,657
Depreciation and amortization 2,498,527 3,212,106
------------ ------------
3,274,365 4,010,763
------------ ------------
Deferred Tax Assets:
Net operating loss, Federal 319,039 276,272
Net operating loss, States 281,051 6,735
Accrued expenses 1,554,907 1,097,339
Reserve for bad debts 965,116 12,382
Inventory capitalization and reserves 664,371 1,069,421
Acquisition costs 271,534 269,966
------------ ------------
Gross deferred tax assets 4,056,018 2,732,115
------------ ------------
Net deferred tax assets (liabilities) $ 781,653 ($1,278,648)
============ ============
</TABLE>
For Federal tax purposes at December 31, 1997, the Company has available
approximately $789,000 of net operating loss carryforwards expiring from 1998
through 2007 and are subject to a limitation in their utilization of
approximately $149,000 per year as a result of several changes in shareholder
control.
At December 31, 1995, the Company evaluated the realizability of the
state net operating losses and, based upon projections of taxable income by
state, concluded that a valuation allowance was not necessary. The remaining
balance of the deferred tax assets should be realized through future taxable
income and the reversal of taxable temporary differences.
F-15
<PAGE>
NOTE I - DEFERRED COMPENSATION
In conjunction with the JEH acquisition, the Company assumed the
unfunded deferred compensation plan that had been established for certain key
JEH officers. The plan accrues benefits ratably over the period of active
employment from the time the contract is entered into to the time the
participant retires. Participation had been determined by JEH's Board of
Directors. The Company has purchased individual life insurance contracts with
respect to each employee covered by this plan. The Company is the owner and
beneficiary of the insurance contracts. The accrual related to the deferred
compensation arrangements amounted to approximately $1,985,000 and $2,099,000
at December 31, 1996 and 1997, respectively.
NOTE J - COMMITMENTS AND CONTINGENT LIABILITIES
The Company is engaged in legal proceedings in the normal course of
business. The Company believes that any unfavorable outcome from these suits
not covered by insurance would not have a material adverse effect on the
financial statements of the Company.
NOTE K - OPERATING LEASES
The Company leases office space under noncancellable operating leases.
Certain of these leases contain escalation clauses based on the consumer price
index. Future minimum rental payments, by year and in the aggregate, under
operating leases with terms of one year or more consist of the following at
December 31, 1997:
<TABLE>
<S> <C>
1998 $ 4,169,000
1999 3,386,000
2000 2,803,000
2001 2,264,000
2002 1,388,000
Thereafter 1,296,000
-----------
$15,306,000
</TABLE>
Rent expense was approximately $2,144,000, $2,554,000 and $4,509,000 for
the years ended December 31, 1995, 1996 and 1997, respectively.
NOTE L - PENSION AND PROFIT SHARING PLANS
Previously, the Company had a 401(k) Saving and Retirement Plan (the
"Plan") available to all employees of J.E. Hanger, Inc. ("J.E. Hanger"), a
wholly-owned subsidiary of the Company. The Company matched the participant's
contributions and made discretionary matching contributions. On January 1,
1993, the Company froze the Plan such that no new employees of J.E. Hanger
were able to participate. On December 31, 1995, the Company terminated the
Plan. There was no employer contribution made to the Plan in 1995.
The Company maintains a separate defined contribution profit sharing and
401(k) plan ("JEH Plan") covering all the employees of JEH, a wholly-owned
subsidiary of the Company acquired November 1, 1996. On this date, the Company
F-16
<PAGE>
froze the JEH Plan such that no new employees of JEH were able to participate.
The Company did not incur any expense in connection with this plan during the
years ended December 31, 1996 and 1997. On January 1, 1998 the JEH Plan was
merged into the Company's 401(k) Savings and Retirement Plan.
The Company maintains a 401(k) Savings and Retirement plan to cover all
of the employees of the Company. The Company may make discretionary
contributions. Under this 401(k) plan, employees may defer such amounts of
their compensation up to the levels permitted by the Internal Revenue Service.
The Company has not made any contributions to this plan.
NOTE M - REDEEMABLE PREFERRED STOCKS
The Company has 10,000,000 authorized shares of preferred stock, par
value $.01 per share, which may be issued in various classes with different
characteristics.
The 300 issued and outstanding shares of non-voting, non-convertible
Class C preferred stock have an aggregate liquidation value equal to $150,000
plus accrued dividends at 9% and are required to be redeemed on February 1,
2000. Accrued dividends at December 31, 1996 and 1997, were $616,124 and
$642,176, respectively.
The 100,000 authorized shares of Class F preferred stock, accrues
dividends cumulatively at 16.5% and is required to be redeemed prior to any
other class of preferred stock, before September 1998, for the aggregate
liquidation value of $1,000 per share, plus accrued dividends. As of December
31, 1996 and 1997, none of the Class F preferred stock was issued or
outstanding.
NOTE N - WARRANTS AND OPTIONS
WARRANTS
In November 1990, the Company entered into a $2,450,000 Note which
required the Company, based on certain repayment provisions, to issue to an
affiliate in 1991 warrants to purchase 297,883 and 322,699 shares of common
stock at $4.16 and $7.65 per share, respectively. These warrants are
exercisable through December 31, 2001. In May 1996, 71,969 warrants were
exercised at $4.16 per share which resulted in the issuance of 11,332 shares.
In May 1997, 77,964 warrants were exercised at $7.65 per share which resulted
in the issuance of 11,694 shares.
In November 1996, the Company issued warrants for 1.6 million shares of
common stock to the holders of the Senior Subordinated Notes. In August 1997,
the Company repaid these Notes with the proceeds from the public offering. In
accordance with the Senior Subordinate Note Agreement, 880,000 warrants were
terminated. The remaining 720,000 warrants provide that the noteholders may
purchase 418,365 shares and 301,635 shares for $4.01 and $6.375, respectively.
The warrants are exercisable through November 1, 2004.
In November 1996, the Company issued warrants for 35,000 shares of
common stock as an incentive to one JEH noteholder to allow the notes to be
assumed by the Company under the same terms and conditions that had existed
F-17
<PAGE>
prior to the acquisition. In January 1997, the noteholder exercised the
warrants and purchased 35,000 shares of common stock for $2.44 per share.
OPTIONS
Under the Company's 1991 Stock Option Plan ("SOP"), 1,500,000 shares of
Common Stock are authorized for issuance under options that may be granted to
employees. The number of shares available for grant at December 31, 1996 was
113,501. There were no shares available for grant at December 31, 1997. Under
the SOP, options may be granted at an exercise price not less than the fair
market value of the Common Stock on the date of grant. Vesting and expiration
periods are established by the Compensation Committee of the Board of
Directors and generally vest three years following grant and generally expire
eight to ten years after grant.
Under the Company's 1993 Non-Employee Director Stock Option Plan,
250,000 shares of Common Stock are authorized for issuance to directors of the
Company who are not employed by the Company or any affiliate of the Company.
Under this plan, an option to purchase 5,000 shares of Common Stock is granted
automatically on an annual basis to each eligible director on the third
business day following the date of each Annual Meeting of Stockholders of the
Company at which the eligible director is elected. The exercise price of each
option will be equal to 100% of the fair market value of the Common Stock on
the date of grant. Each option will vest at the rate of 25% each year for the
first four years after the date of grant of the option and each such option
expires ten years from the date of grant; provided, however, that in the event
of termination of a director's service other than by reason of total and
permanent disability or death, then the outstanding options of such holder
expires three months after such termination. Outstanding options remain
exercisable for one year after termination of service by reason of total and
permanent disability or death. The number of shares that remain available for
grant at December 31, 1996 and 1997 were 130,000 and 95,000, respectively.
In addition to the SOP, non-qualified options may be granted with
exercise prices that are less than the current market value. Accordingly,
compensation expense for the difference between current market value and
exercise price is recorded at the date of grant.
F-18
<PAGE>
The following is a summary of option transactions and exercise
prices:
<TABLE>
<CAPTION>
Stock Option Plan Non-qualified Stock Options
----------------------------------------- -------------------------------------------
Price Weighted Price Weighted
Shares Per Share Average Shares Per Share Average
------ --------- -------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
December 31, 1994 418,874 $6.00 to $12.25 6.57 130,000 $4.38 to $12.00 7.78
========== ========
Granted 171,918 $2.75 to $3.25 2.83 37,500 $ 3.00 3.00
Terminated (57,291) $6.00 to $12.25 7.20 ---
---------- --------
Outstanding at
December 31, 1995 533,501 $2.75 to $12.25 5.49 167,500 $3.00 to $12.00 6.81
========== ========
Granted 802,250 $3.50 to $6.125 5.54 30,000 $5.875 5.875
Terminated (22,961) $2.81 to $12.25 4.93 ---
Exercised (7,508) $2.81 2.81 (6,250) $3.00 to $12.00 4.75
---------- --------
Outstanding at
December 31, 1996 1,305,282 $2.75 to $12.25 5.54 191,250 $3.00 to $12.00 6.74
========== ========
Granted 675,000 $6.00 to $13.25 9.95 35,000 $8.75 8.75
Terminated (34,984) $2.81 to $13.25 6.69 ---
Expired (6,250) $7.12 7.12
Exercised (388,915) $2.75 to $12.25 5.78 (19,375) $3.00 to $6.52 4.91
---------- --------
Outstanding at
December 31, 1997 1,556,383 $2.75 to $13.25 7.42 200,625 $3.00 to $12.00 7.27
========== ========
Vested at December 31,
1997 322,347 120,625
========== ========
</TABLE>
The Company applies APB Opinion 25 "Accounting for Stock Issued to
Employees", and related Interpretations in accounting for its plans.
Historically, the Company granted stock options at exercise prices equal to
the fair market value of the stock on the date of grant for fixed stock
options. Accordingly, no compensation cost has been recognized for its fixed
stock option plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of SFAS 123,
"Accounting for Stock-Based Compensations" the Company's net income and
earnings per share would have been reduced to the unaudited pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net Income: As reported $2,135,439 $ 997,894 $4,946,228
Pro Forma 2,017,179 745,714 4,010,102
Diluted Income Per
Common Share: As reported $.26 $.11 $.37
Pro Forma $.24 $.08 $.31
</TABLE>
F-19
<PAGE>
The following is a summary of stock options exercisable at December
31, 1995, 1996 and 1997, and their respective weighted-average share prices:
<TABLE>
Weighted-average
Number of Shares Exercise Price
---------------- ----------------
<S> <C> <C>
Options exercisable December 31, 1995 396,043 $6.83
Options exercisable December 31, 1996 525,282 6.45
Options exercisable December 31, 1997 442,972 5.66
</TABLE>
The pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of SFAS 123. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Expected term 7 7 5
Volatility factor 120% 120% 58%
Risk free interest rate 6.8% 6.7% 6.3%
Dividend yield 0 % 0 % 0 %
Fair value $2.51 $5.03 $4.99
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------------
Range of Exercise Number of Options Weighted Average Number of Options Weighted Average
Prices and Awards Remaining Exercise Price and Awards Exercise Price
Life (Years)
-------------------- --------- ---- -------- -------- -------
<S> <C> <C> <C> <C> <C>
$ 2.750 to $ 3.500 207,130 7.79 $ 3.19 75,463 $ 3.08
$ 4.125 to $ 4.125 74,086 8.22 $ 4.13 21,558 $ 4.13
$ 4.375 to $ 6.000 240,250 7.42 $ 5.82 110,250 $ 5.75
$ 6.125 to $ 6.125 665,417 8.89 $ 6.13 157,076 $ 6.13
$ 6.250 to $ 6.250 5,000 5.70 $ 6.25 5,000 $ 6.25
$ 6.520 to $ 8.750 40,625 9.31 $ 8.68 625 $ 6.52
$ 11.313 to $ 11.313 339,000 9.96 $ 11.31 0 $ 0.00
$ 12.000 to $ 13.250 185,500 7.62 $ 12.72 73,000 $ 12.08
-------------------- --------- ---- ------- ------- -------
$ 2.750 to $ 13.250 1,757,008 8.60 $ 7.41 442,972 $ 6.40
</TABLE>
F-20
<PAGE>
NOTE O - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized unaudited quarterly financial data for the years ended
December 31, 1996 and 1997 are:
<TABLE>
<CAPTION>
(Thousands Of Dollars Except Per Share Data)
Quarter Ended
1997 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net Sales $30,950 $36,645 $38,840 $39,164
Gross Profit 14,720 18,323 19,059 19,963
Income before extraordinary item 618 1,852 2,239 2,931
Extraordinary loss on early extinguishment
of debt, net of tax benefit (2,693)
Net income (loss) 618 1,852 (454) 2,931
DILUTED PER COMMON SHARE DATA (1)
Income before extraordinary item .06 .18 .15 .17
Extraordinary item, net of tax benefit (.18)
Net income (loss) .06 .18 (.03) .17
1996 (2)
----
Net Sales $12,230 $14,021 $14,529 $26,027
Gross Profit 6,344 7,667 8,039 12,523
Income (loss) before extraordinary item 150 738 850 (658)
Extraordinary loss on early extinguishment
of debt, net of tax (83)
Net income (loss) 150 738 850 (741)
DILUTED PER COMMON SHARE DATA (1)
Income (loss) before extraordinary item .02 .09 .10 (.07)
Extraordinary item, net of tax benefit (.01)
Net income (loss) share .02 .09 .10 (.08)
<FN>
(1) During the fourth quarter of 1977, the Company adopted the provisions of
SFAS 128 and, as required, has restated all prior period per common
share data.
(2) Includes fourth quarter pre-tax charges of $2,479 for acquisition and
integration costs incurred in connection with the purchase of JEH.
</FN>
</TABLE>
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Hanger Orthopedic
Group, Inc. and Subsidiaries is included on Page F-1 of this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on Page 37 of
this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 13, 1998
S-1
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
<TABLE>
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO IMPACT OF BALANCE AT
BEGINNING COSTS AND ACQUIRED END OF
YEAR CLASSIFICATION OF YEAR EXPENSES COMPANIES DEDUCTIONS YEAR
---- -------------- ------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1997 Allowance for
doubtful accounts $2,479,000 $5,613,000 $ 531,000 $3,752,000 $4,871,000
Inventory Reserves $1,160,000 $ 340,000 $1,500,000
1996 Allowance for
doubtful
accounts $1,144,000 $1,629,000 $1,220,000 $1,514,000 $2,479,000
1995 Allowance for
doubtful
accounts $ 976,000 $1,009,000 $ 841,000 $1,144,000
</TABLE>
S-2
<PAGE>
EXHIBIT 10(v)
STOCK PURCHASE AGREEMENT
BY AND AMONG
HANGER ORTHOPEDIC GROUP, INC.,
HANGER PROSTHETIC & ORTHOTICS, INC.,
MORGAN PROSTHETICS-ORTHOTICS, INC.
AND
DAN MORGAN
Dated as of November 3, 1997
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C>
ARTICLE I SALE AND PURCHASE OF SHARES................................... 1
SECTION 1.1. SALE OF SHARES............................................ 1
SECTION 1.2. PURCHASE PRICE, PAYMENT AND ADJUSTMENTS................... 1
SECTION 1.3. DELIVERIES AT CLOSING; STOCK TRANSFER BOOKS............... 3
ARTICLE II CLOSING; CLOSING DATE.......................................... 3
ARTICLE III REPRESENTATIONS AND WARRANTIES CONCERNING THE COMPANY......... 4
SECTION 3.1. ORGANIZATION AND QUALIFICATION............................ 4
SECTION 3.2. CERTIFICATE OF INCORPORATION AND BY-LAWS.................. 4
SECTION 3.3. CAPITALIZATION............................................ 4
SECTION 3.4. AUTHORITY................................................. 5
SECTION 3.5. NO CONFLICT; REQUIRED FILINGS AND CONSENTS................ 5
SECTION 3.6. PERMITS; COMPLIANCE....................................... 5
SECTION 3.7. FINANCIAL STATEMENTS...................................... 6
SECTION 3.8. NO UNDISCLOSED LIABILITIES................................ 6
SECTION 3.9. ABSENCE OF CERTAIN CHANGES OR EVENTS...................... 6
SECTION 3.10. ABSENCE OF LITIGATION.................................... 8
SECTION 3.11. BROKERS.................................................. 8
SECTION 3.12. TAX MATTERS.............................................. 9
SECTION 3.13. REAL PROPERTY............................................ 10
SECTION 3.14. INTELLECTUAL PROPERTY.................................... 11
SECTION 3.15. TANGIBLE ASSETS.......................................... 13
SECTION 3.16. INVENTORY................................................ 13
SECTION 3.17. CONTRACTS................................................ 13
SECTION 3.18. NOTES RECEIVABLE AND ACCOUNTS RECEIVABLE................. 14
SECTION 3.19. POWERS OF ATTORNEY....................................... 15
SECTION 3.20. INSURANCE................................................ 15
SECTION 3.21. EMPLOYEES................................................ 15
SECTION 3.22. EMPLOYEE BENEFITS........................................ 16
SECTION 3.23. GUARANTIES............................................... 17
SECTION 3.24. ENVIRONMENT, HEALTH AND SAFETY........................... 17
SECTION 3.25. CERTAIN BUSINESS RELATIONSHIPS WITH THE COMPANY.......... 18
SECTION 3.26. DELIVERY OF INFORMATION.................................. 18
SECTION 3.27. PRODUCT AND SERVICE WARRANTIES........................... 18
SECTION 3.28. PRODUCT AND SERVICE LIABILITY............................ 18
SECTION 3.29. CERTAIN BUSINESS PRACTICES............................... 19
SECTION 3.30. DISCLOSURE............................................... 19
ARTICLE IIIA REPRESENTATIONS AND WARRANTIES OF SOLE STOCKHOLDER........... 19
SECTION 3.1A. AUTHORIZATION OF TRANSACTION............................ 19
SECTION 3.2A. NONCONTRAVENTION........................................ 19
SECTION 3.3A. BROKERS' FEES........................................... 20
SECTION 3.4A. COMPANY SHARES.......................................... 20
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF HANGER AND BUYER............. 20
SECTION 4.1. ORGANIZATION AND QUALIFICATION............................ 20
SECTION 4.2. AUTHORITY................................................. 20
SECTION 4.3. NO CONFLICT; REQUIRED FILINGS AND CONSENTS................ 21
SECTION 4.4. LIMITATION ON REPRESENTATIONS AND WARRANTIES.............. 21
SECTION 4.5. REPORTS; FINANCIAL STATEMENTS............................. 21
i
<PAGE>
SECTION 4.6. ABSENCE OF CERTAIN CHANGES OR EVENTS...................... 22
SECTION 4.7. OWNERSHIP OF BUYER........................................ 22
SECTION 4.8. BROKERS................................................... 22
ARTICLE V COVENANTS....................................................... 22
SECTION 5.1. AFFIRMATIVE COVENANTS OF THE COMPANY...................... 22
SECTION 5.2. NEGATIVE COVENANTS OF THE COMPANY......................... 23
SECTION 5.3. NEGATIVE COVENANTS OF HANGER AND BUYER.................... 24
SECTION 5.4. ACCESS AND INFORMATION.................................... 25
ARTICLE VI ADDITIONAL AGREEMENTS.......................................... 25
SECTION 6.1. APPROPRIATE ACTION; CONSENTS; FILINGS..................... 25
SECTION 6.2. TRANSFER OF CERTAIN COMPANY ASSETS PRIOR TO THE
CLOSING DATE......................................................... 26
SECTION 6.3. PAYMENT BY COMPANY OF CERTAIN OUTSTANDING
OBLIGATIONS PRIOR TO THE CLOSING DATE................................ 26
SECTION 6.4. EMPLOYMENT AND NON-COMPETITION AGREEMENTS................. 26
SECTION 6.5. LANDLORD APPROVALS........................................ 27
SECTION 6.6. Contract ASSIGNMENTS/NOVATIONS............................ 27
SECTION 6.7. BEST EFFORTS.............................................. 27
SECTION 6.8. PUBLIC ANNOUNCEMENTS...................................... 27
SECTION 6.9. TAIL INSURANCE............................................ 27
SECTION 6.10. NO COMPETING TRANSACTION................................. 27
SECTION 6.11. TAX TREATMENT AS STOCK PURCHASE......................... 27
ARTICLE VII CLOSING CONDITIONS............................................ 28
SECTION 7.1. CONDITIONS TO OBLIGATIONS OF EACH PARTY UNDER
THIS AGREEMENT....................................................... 28
SECTION 7.2. ADDITIONAL CONDITIONS TO OBLIGATIONS OF BUYER
AND/OR HANGER........................................................ 28
SECTION 7.3. ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE
COMPANY AND THE SOLE STOCKHOLDER..................................... 29
ARTICLE VIII TERMINATION, AMENDMENT, WAIVER AND INDEMNIFICATION........... 30
SECTION 8.1. TERMINATION............................................... 30
SECTION 8.2. INVESTIGATION............................................. 31
SECTION 8.3. AMENDMENT................................................. 31
SECTION 8.4. WAIVER.................................................... 31
SECTION 8.5. FEES, EXPENSES AND OTHER PAYMENTS......................... 31
SECTION 8.6. INDEMNIFICATION........................................... 31
ARTICLE IX GENERAL PROVISIONS............................................. 33
SECTION 9.1. EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS........................................................... 33
SECTION 9.2. NOTICES................................................... 33
SECTION 9.3. CERTAIN DEFINITIONS....................................... 34
SECTION 9.4. HEADINGS; CONSTRUCTION.................................... 39
SECTION 9.5. SEVERABILITY.............................................. 39
SECTION 9.6. ENTIRE AGREEMENT AND MODIFICATION......................... 40
SECTION 9.7. ASSIGNMENT................................................ 40
SECTION 9.8. PARTIES IN INTEREST....................................... 40
SECTION 9.9. WAIVER; REMEDIES CUMULATIVE............................... 40
SECTION 9.10. FURTHER ASSURANCES....................................... 40
SECTION 9.11. GOVERNING LAW............................................ 41
SECTION 9.12. JURISDICTION; SERVICE OF PROCESS......................... 41
SECTION 9.13. COUNTERPARTS............................................. 41
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Exhibits Description
-------- -----------
<S> <C>
Exhibit A Promissory Note
Exhibit B-1 Form of Dan Morgan Employment Agreement
Exhibit B-2 Form of Key Employee Employment Agreement
Exhibit C Form of Sole Stockholder Non-Competition Agreement
Exhibit D Legal Opinion of Counsel to the Company
Exhibit E Legal Opinion of Counsel to Hanger
</TABLE>
<TABLE>
Schedule
Number Description
-------- -----------
<S> <C>
1.1 Purchased Shares
3.2 Officers and Directors; Certificate of
Incorporation and By-Laws; Minutes; Stock
Certificates and Transfer Books
3.5 Filings and Consents
3.7 Financial Statements
3.8 Liabilities
3.9 Certain Changes or Events of the Company
3.10 Litigation Matters
3.11 Brokers
3.12(c) Tax Returns
3.12(f) Additional Tax Matters
3.13(a) Real Property Owned
3.13(b) Real Property Leased or Subleased
3.14(c) Intellectual Property Owned
3.14(d) Intellectual Property Licensed, Sublicensed,
Agreements or Permission
3.15 Tangible Assets
3.16 Inventory
3.17 Contracts
3.20 Insurance Policies
3.21 Employees
3.22 Employee Benefit Plans
3.24 Environmental Matters
3.25 Certain Business Relationships with the Company
3.27 Standard Sale, Lease and Performance Terms and
Conditions
5.2 Negative Covenants
7.2(c) Contracts or Agreements Requiring Consents or
Waivers
</TABLE>
iii
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT, dated as of November 3, 1997 (this
"AGREEMENT"), by and among Hanger Orthopedic Group, Inc., a Delaware
corporation ("HANGER"); Hanger Prosthetics & Orthotics, Inc., a Delaware
corporation ("BUYER") and a wholly-owned subsidiary of Hanger; Morgan
Prosthetics-Orthotics, Inc., a Texas corporation (the "COMPANY"); and Dan
Morgan, the sole stockholder of the Company (the "SOLE STOCKHOLDER").
W I T N E S S E T H:
WHEREAS, the Sole Stockholder is the sole owner of all the issued and
outstanding shares (all of such shares being collectively referred to as the
"SHARES") of the common stock, par value $___, of the Company (the "COMPANY
COMMON STOCK"), and the Sole Stockholder now desires to sell, and the Buyer
wishes to purchase (the "PURCHASE"), all of the shares of Company Common Stock
upon the terms and subject to the conditions of this Agreement; and
WHEREAS, Hanger and the Company are made a party hereto for the purposes
as set forth herein; and
WHEREAS, certain capitalized terms used in this Agreement are defined in
Section 9.3.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto agree as follows:
ARTICLE I
SALE AND PURCHASE OF SHARES
SECTION 1.1 SALE OF SHARES. Sole Stockholder agrees to sell the Shares
to Buyer and Buyer agrees to purchase the Shares, as set forth on SCHEDULE
1.1, from Sole Stockholder for the purchase price provided in Section 1.2(a),
payable in accordance with Section 1.2, subject to adjustment in accordance
with Section 1.2(c), and subject to the terms and conditions and based upon
the representations and warranties contained herein.
SECTION 1.2 PURCHASE PRICE, PAYMENT AND ADJUSTMENTS.
(a) PURCHASE PRICE AND PAYMENT. Buyer agrees to pay to the Sole
Stockholder at the Closing a total of Three Million Five Hundred Thousand
Dollars ($3,500,000) ("PURCHASE PRICE") for the Shares by delivery of: (i) One
Million Seven Hundred Fifty Thousand Dollars ($1,750,000) in cash payable by
wire transfer or delivery of other immediately available funds; and (ii) a
subordinated promissory note in the principal amount of One Million Seven
Hundred Fifty Thousand Dollars ($1,750,000) in the form attached hereto as
EXHIBIT A (the "NOTE"), having a term of five (5) years and bearing interest
at the rate of seven and one-half percent (7.5%) per annum, with equal
payments of interest and principal being payable on an annual basis on each
anniversary date of the Closing Date. The Note shall be guaranteed by Hanger.
<PAGE>
The Purchase Price shall be subject to pre-Closing and post-Closing
adjustments as set forth in Section 1.2(c) below.
(b) PRE-CLOSING TRANSFERS. Notwithstanding anything contained
herein to the contrary, prior to the Closing Date in accordance with Sections
6.2 and 6.3 hereof, the Company shall transfer, distribute and/or dispose of
the following items to the Sole Stockholder or to a third party at the
direction of the Sole Stockholder, all with the effect that the following
items shall not be owned by the Company, nor assumed by Buyer, at the Closing
Date: (i) any notes or accounts receivable due to the Company from its
officers, directors or the Sole Stockholder, or due from the Company to its
officers, directors or the Sole Stockholder; (ii) any real property owned by
the Company (and any fixtures located thereon) and any mortgages, deeds of
trust or other indebtedness on or relating to such real property for which the
Company is liable in any manner whatsoever; (iii) any automobiles or vehicles
leased or owned by the Company that are used for personal purposes by the Sole
Stockholder or any employee of the Company, and any leases or indebtedness on
or relating to such automobiles or vehicles for which the Company is liable in
any manner whatsoever; (iv) all life insurance policies on the life of the
Sole Stockholder; (v) all long-term indebtedness, including but not limited to
all bank debt, and all indebtedness relating to prior acquisitions by the
Company; and (vi) any cash in excess of the amount necessary to fully cover
all checks issued by the Company up to and through the Closing Date. Any Taxes
generated in connection with such transfers, distributions or disposals shall
be borne solely by the Sole Stockholder or shall be reimbursed to the Buyer by
the Sole Stockholder. Furthermore, prior to the Closing Date, the Company
shall fully pay all outstanding pension plan and profit sharing contributions
due from the Company, if any.
(c) PURCHASE PRICE ADJUSTMENT.
(i) Notwithstanding anything contained in this Agreement
to the contrary, the Sole Stockholder guarantees that the Company's adjusted
working capital measured as of the close of business on the Closing Date (the
"ADJUSTED WORKING CAPITAL") shall equal or exceed $300,000, and shall consist
of the following components: (i) cash on hand; (ii) Accounts Receivable; (iii)
Inventory; (iv) prepaid expenses; (v) deposits; (vi) accounts payable
("ACCOUNTS PAYABLE"); (vii) accrued salaries and expenses ("ACCRUED
EXPENSES"); and (viii) income taxes payable. If Adjusted Working Capital is
less than $300,000 on the Closing Date, then the cash portion of the Purchase
Price payable pursuant to Section 1.2(a) shall be reduced by the aggregate
amount of such deficiency.
(ii) On the date that is one year after the Closing Date
(the "POST-CLOSING DATE ADJUSTMENT DATE"), any shortfall in the amount of the
Accounts Receivable of the Company at the Closing Date and the amount of such
Accounts Receivable actually collected by Buyer within such one-year period
(the "SHORTFALL") shall reduce the Purchase Price and shall be deducted from
the then outstanding principal amount of the Note. Buyer shall assign to the
Sole Stockholder any Accounts Receivable that remain uncollected on the
Post-Closing Date Adjustment Date, and Buyer shall execute such other
instruments or documents at that time to complete such assignment to the Sole
Stockholder. On the Post-Closing Date Adjustment Date, in the event the amount
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of the Adjusted Working Capital exceeds $300,000, then such excess shall be
paid by the Buyer to the Sole Shareholder.
(iii) Hanger or Buyer may hire, at its sole cost, an
independent certified public accounting firm to certify the accuracy of the
calculation of Adjusted Working Capital and the components thereof and the
Shortfall, which certification shall be conclusive and binding upon Hanger,
Buyer and the Sole Stockholder.
(d) CANCELLATION OF TREASURY STOCK. Each share of Company Common
Stock held in the treasury of the Company, if any, immediately prior to the
Closing Date shall be canceled and extinguished and no payment shall be made
with respect thereto.
SECTION 1.3 DELIVERIES AT CLOSING; STOCK TRANSFER BOOKS.
(a) At the Closing, (i) the Sole Stockholder shall deliver to
the Buyer the various certificates, instruments, and documents referred to in
Sections 7.1 and 7.2 hereof, (ii) the Buyer shall deliver to the Sole
Stockholder the various certificates, instruments, and documents referred to
in Sections 7.1 and 7.3 hereof, (iii) the Sole Stockholder shall deliver to
the Buyer stock certificates representing all of the outstanding shares of the
Company, endorsed in blank or accompanied by duly executed assignment
documents, and (iv) the Buyer shall deliver to the Sole Stockholder the
consideration specified in Section 1.2(a) hereof, subject to adjustment as
provided in Section 1.2(c).
(b) On the date of the Agreement, the stock transfer books of
the Company shall be closed and there shall be no further registration of
transfers of shares of Company Common Stock thereafter on the records of the
Company. On and after the Closing Date, any certificates representing shares
of Company Common Stock shall thereafter only represent the right to receive a
pro rata portion of the Purchase Price and such certificates, upon
presentation to Hanger or Buyer, shall be converted into the Purchase Price
consideration.
ARTICLE II
CLOSING; CLOSING DATE
The closing of the transactions contemplated by this Agreement (the
"CLOSING") shall take place at the offices of Buyer's attorneys, Freedman,
Levy, Kroll & Simonds, Suite 825, 1050 Connecticut Avenue, N.W., Washington,
D.C. 20036, on or before November 3, 1997, or at such other location and on
such other date as the Buyer and the Sole Stockholder may mutually agree in
writing; PROVIDED, HOWEVER, that the Closing shall take place no later than
November 3, 1997 (the "CLOSING DATE").
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
CONCERNING THE COMPANY
Each of the Company and the Sole Stockholder hereby represents and
warrants, jointly and severally, to Hanger and Buyer as follows as of the date
of this Agreement and as of the Closing Date:
SECTION 3.1 ORGANIZATION AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or organization, has all
requisite corporate or other power and authority to own, lease and operate its
properties and to carry on its business as it is now being conducted, and is
duly qualified and in good standing to do business in each jurisdiction in
which the nature of the business conducted by it or the ownership or leasing
of its properties makes such qualification necessary. The Company has no
Subsidiaries, and does not, directly or indirectly, own or control any
investment or interest (whether in the form of debt or equity) in any other
Person.
SECTION 3.2 CERTIFICATE OF INCORPORATION AND By-Laws. SCHEDULE 3.2
contains (i) a list of the officers and directors of the Company, (ii)
complete and correct copies of the Company's Certificate of Incorporation and
By-Laws or equivalent organizational documents, in each case as amended or
restated, as in effect as of the Closing Date, (iii) the minute books relating
to all meetings of stockholders, board of directors and committees of the
Company, (iv) stock certificate books the Company and (v) stock transfer books
of the Company. The Company is not in violation of any of the provisions of
its Certificate of Incorporation or By- Laws or equivalent organizational
documents, in each case as amended or restated. In addition, the minute books
(containing the record of meetings of the stockholders, the board of directors
and any committees of the board of directors), the stock certificate books and
the stock transfer books of the Company are correct and complete.
SECTION 3.3 CAPITALIZATION. The authorized capital stock of the
Company consists of Ten Thousand (10,000) shares of Company Common Stock, of
which One Thousand (1,000) Shares are issued and outstanding as of the date of
this Agreement, and (a) all of which Shares are duly authorized, validly
issued, fully paid and non-assessable and not subject to preemptive rights
created by statute, the Company's Certificate of Incorporation or By-Laws or
any agreement to which the Company is a party or bound, (b) no shares of
Company Common Stock were held in treasury of the Company and (c) all of the
issued and outstanding shares of Company Common Stock are owned by and held in
the name of the Sole Stockholder. There are no bonds, debentures, notes or
other indebtedness, issued or outstanding, having the right to vote on any
matters on which the Company's stockholders may vote. There are no options,
warrants, calls or other rights (including subscription rights or registration
rights), agreements, proxies, voting rights agreements, voting trusts,
arrangements or commitments of any character, presently outstanding, which (i)
obligate the Company to issue, deliver or sell shares of its capital stock or
debt securities, (ii) obligate the Company to grant, extend or enter into any
such option, warrant, call or other such right, agreement, arrangement or
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commitment, (iii) obligate the Company to repurchase, redeem or otherwise
acquire any shares of Company Common Stock, or (iv) relate to the issued or
unissued capital stock of, or other equity interests in, the Company.
SECTION 3.4 AUTHORITY. The Company has all requisite corporate power
and authority to execute and deliver this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action and no other corporate proceeding on the part of the Company
is necessary to authorize this Agreement or to consummate the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
the Company and, assuming the due authorization, execution and delivery
thereof by the Sole Stockholder, Hanger and Buyer, constitutes the legal,
valid and binding obligation of the Company enforceable in accordance with its
terms.
SECTION 3.5 NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) Except as set forth in SCHEDULE 3.5, the execution and
delivery of this Agreement by the Company does not, and the performance of
this Agreement by the Company will not (i) conflict with or violate the
Company's Certificate of Incorporation or By-Laws or equivalent organizational
documents, in each case as amended or restated, (ii) conflict with or violate
any federal, state, foreign or local law, statute, ordinance, rule,
regulation, order, judgment or decree (collectively, "LAWS") and applicable to
the Company or by which any of its properties is bound or subject to, or (iii)
result in any breach of or constitute a default (or an event that with notice
or lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, or require
payment under, or result in the creation of an Encumbrance on, any of the
properties or Assets of the Company pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which the Company is a party or by which the
Company or any of its properties is bound or subject.
(b) The execution and delivery of this Agreement by the Company
does not, and the performance of this Agreement by the Company will not,
require the Company to obtain any consent, approval, authorization or permit
of, or to make any filing with or notification to, any governmental or
regulatory authority, domestic or foreign ("GOVERNMENTAL ENTITIES") based on
Laws and other requirements of Governmental Entities.
SECTION 3.6 PERMITS; COMPLIANCE. The Company is in possession of all
franchises, grants, authorizations, licenses, permits, easements, variances,
exemptions, consents, certificates, approvals and orders necessary to own,
lease and operate its properties and to carry on its business as it is now
being conducted (collectively, the "COMPANY PERMITS"), and there is no action,
proceeding or investigation pending or threatened regarding suspension or
cancellation of any of the Company Permits. The Company is not in conflict
with, or in default or violation of (a) any Law applicable to the Company or
which any of its properties is bound by or subject to or (b) any of the
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Company Permits. The Company has not received from any Governmental Entity any
written notification with respect to possible conflicts, defaults or
violations of Laws.
SECTION 3.7 FINANCIAL STATEMENTS. SCHEDULE 3.7 contains true, correct
and complete copies of the compilation balance sheet of the Company as of July
31, 1997 (the "BALANCE SHEET"), and the income statement as of July 31, 1997,
each as prepared by Gerald L. Simpson, C.P.A. (collectively, the "FINANCIAL
STATEMENTS"). The Financial Statements are attached hereto as SCHEDULE 3.7 and
have been prepared from books and records of the Company on a basis consistent
with preceding years and throughout the periods involved (except as otherwise
noted therein). The Financial Statements fairly present the financial
condition of the Company at the dates thereof and for the periods indicated in
the Financial Statements. No financial statement of any Person other than the
Company is required by GAAP to be included in the Financial Statements.
SECTION 3.8 NO UNDISCLOSED LIABILITIES. Except as set forth on
SCHEDULE 3.8, the Company has no liabilities or other obligations of any kind
whatsoever, whether accrued, contingent, absolute, determined, determinable or
otherwise ("LIABILITY" or "LIABILITIES"), and there is no existing condition,
situation or set of circumstances which could reasonably be expected to result
in such a Liability, other than Liabilities fully reflected or reserved
against on the face of the Balance Sheet as adjusted for Liabilities incurred
in the Ordinary Course of Business since June 30, 1997 through the Closing
Date.
SECTION 3.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since June 30, 1997,
there has not been any adverse change in the business, financial condition,
operations, results of operations or future prospects of the Company. Without
limiting the generality of the foregoing, since that date and except as
otherwise disclosed in SCHEDULE 3.9:
(a) the Company has not sold, leased, transferred, or assigned
any of its Assets, tangible or intangible, other than sales to its customers
for fair consideration in the Ordinary Course of Business;
(b) the Company has not entered into any agreement, contract,
lease or license (or series of related agreements, contracts, leases and
licenses) outside the Ordinary Course of Business;
(c) no party (including the Company) has accelerated,
terminated, modified or canceled any agreement, contract, lease or license (or
series of related agreements, contracts, leases and licenses) to which the
Company is a party or by which the Company is bound;
(d) the Company has not imposed, granted, allowed or consented
to any Security Interest upon any of its Assets;
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(e) the Company has not made any capital expenditure (or series
of related capital expenditures) either involving more than an aggregate of
Five Thousand Dollars ($5,000.00) or outside the Ordinary Course of Business;
(f) the Company has not made any capital investment in, any loan
to, or any acquisition of the securities or Assets of, any other Person (or
series of related capital investments, loans, and acquisitions);
(g) the Company has not issued any note, bond, or other debt
security or created, incurred, assumed, or guaranteed any indebtedness for
borrowed money or capitalized lease obligation;
(h) the Company has not delayed or postponed the payment of
Accounts Payable, Accrued Expenses or other Liabilities outside the Ordinary
Course of Business;
(i) the Company has not canceled, compromised, waived, or
released any right or claim (or series of related rights and claims);
(j) the Company has not granted any license or sublicense of any
rights under or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the Company's
Certificate of Incorporation or By-Laws or equivalent organizational
documents, in each case as amended or restated prior to February 8, 1988;
(l) the Company has not issued, sold or otherwise disposed of
any of its capital stock, or granted any options, warrants, or other rights to
purchase or obtain (including upon conversion, exchange, or exercise) any of
its capital stock;
(m) the Company has not declared, set aside, or paid any
dividend or made any distribution with respect to its capital stock (whether
in cash or in kind) or redeemed, purchased, or otherwise acquired any of its
capital stock;
(n) the Company has not experienced any damage, destruction, or
loss (whether or not covered by insurance) to its Assets;
(o) the Company has not made any loan to, or entered into any
other transaction with, any of its directors, officers and employees;
(p) the Company has not entered into any employment contract or
collective bargaining agreement, written or oral, or modified the terms of any
existing such contract or agreement;
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(q) the Company has not granted any increase in the compensation
of any of its directors, officers and employees;
(r) the Company has not adopted, amended, modified or terminated
any bonus, profit-sharing, incentive, severance or other plan, contract or
commitment for the benefit of any of its directors, officers and employees (or
taken any such action with respect to any other Employee Benefit Plan);
(s) the Company has not made any other change in employment
terms for any of its directors, officers and employees outside the Ordinary
Course of Business;
(t) the Company has not made or pledged to make any charitable
or other capital contribution;
(u) the Company has not done any act, or failed to do any act
which it had a duty or obligation to perform, which has or could result in a
breach of any obligation of the Company;
(v) there has not been any other occurrence, event, incident,
action, failure to act or transaction outside the Ordinary Course of Business
involving the Company; and
(w) the Company has not committed to any of the foregoing.
SECTION 3.10 ABSENCE OF LITIGATION. Except as set forth on SCHEDULE
3.10, (a) there is no claim, action, suit, litigation, proceeding, arbitration
or investigation of any kind, at law or in equity (including actions or
proceedings seeking injunctive relief), pending or threatened against the
Company or any properties or rights of the Company, and (b) the Company is not
subject to any continuing order of, consent decree, settlement agreement or
other similar written agreement with or continuing investigation by, any court
or Governmental Entity, or any judgment, order, writ, injunction, decree or
award of any court, Governmental Entity or arbitrator. In respect of the
matters relating to or arising in connection with the actions set forth in
SCHEDULE 3.10, there is no fact, event, condition, circumstance or other
matter which either has, or is reasonably likely to have resulted in, an event
or determination having a Company Material Adverse Effect. The Company has
delivered to Hanger or Buyer copies of all pleadings, correspondence and other
documents relating to each matter disclosed in SCHEDULE 3.10.
SECTION 3.11 BROKERS. Except as set forth on SCHEDULE 3.11, no broker,
finder or investment banker is entitled to any brokerage, finder's or other
fee or commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of the Company. The
Company has heretofore furnished to Hanger a correct copy of all agreements
between the Company and any broker, finder or investment adviser pursuant to
which such firm or individual would be entitled to any payment relating to the
Purchase. The Purchase Price shall be reduced to reflect the payment of such
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fees by the Company in the event any such fees are not paid by the Sole
Stockholder or by the Company prior to the Closing Date.
SECTION 3.12 TAX MATTERS.
(a) The Company has filed all Tax Returns in a timely manner
that it was required to file. All such Tax Returns were correct and complete
in all respects. All Taxes owed by the Company (whether or not shown on any
Tax Return) have been paid. The Company is not currently the beneficiary of
any extension of time within which to file any Tax Return. No claim has ever
been made by an authority in a jurisdiction where the Company does not file
Tax Returns that it is or may be subject to taxation by that jurisdiction.
There are no Security Interests on any of the Assets of the Company that arose
in connection with any failure (or alleged failure) to pay any Tax or file any
Tax Return.
(b) The Company has withheld and paid all Taxes required to have
been withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder or other third party.
(c) There is no dispute or claim concerning any Liability for
Taxes of the Company claimed or raised by any Governmental Entity. SCHEDULE
3.12(c) lists all federal, state, local, and foreign income Tax Returns filed
with respect to the Company for taxable periods ended on or after December 31,
1993, and indicates those Tax Returns that have been audited, and indicates
those Tax Returns that currently are the subject of audit. The Company has
delivered to Hanger correct and complete copies of all federal income Tax
Returns, examination reports and statements of deficiencies assessed against
or agreed to by the Company since December 31, 1993.
(d) The Company has not waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to a Tax
assessment or deficiency.
(e) The Company has not filed any consent under Section 341(f)
of the Code concerning collapsible corporations. The Company has not made any
payments, or is not obligated to make any payments, and is not a party to any
agreement that under certain circumstances could obligate it to make any
payments that will not be deductible under Section 280G of the Code. The
Company has not been a United States real property holding corporation within
the meaning of Section 897(c)(2) of the Code during the applicable period
specified in Section 897(c)(1)(A)(ii) of the Code. The Company is not a party
to any Tax allocation or sharing agreement. The Company (i) has not been a
member of an Affiliated Group filing a consolidated federal income Tax Return
(other than a group the common parent of which was the Company) and (ii) has
no Liability for the Taxes of any Person (other than the Company) under Treas.
Reg. Section 1.1502-6 (or any similar provision of state, local, or foreign
law), as a transferee or successor by contract, or otherwise.
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(f) SCHEDULE 3.12(f) sets forth the following information with
respect to the Company as of the most recent practicable date: (A) the
adjusted tax basis of the Company in its Assets; (B) the amount of any net
operating loss, net capital loss, unused investment or other credit, unused
foreign tax, or excess charitable contribution allocable to the Company; and
(C) the amount of any inter-company items or any deferred gain or loss
allocable to the Company with respect to any inter-company transaction.
(g) The unpaid Taxes of the Company (i) do not exceed the
reserve for Liability for Taxes (rather than any reserve for deferred Taxes
established to reflect timing differences between book and Tax income) set
forth on the face of the Balance Sheet (rather than in any notes thereto) and
(ii) do not exceed that reserve as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the
Company in filing its Tax Returns.
SECTION 3.13 REAL PROPERTY.
(a) SCHEDULE 3.13(a) lists and describes all real property owned
by the Company. The Company represents and warrants that no Lien or
Encumbrance exists with respect to any such property, except as fully
described on SCHEDULE 3.13(a). The Company will not own any real property as
of the Closing Date.
(b) SCHEDULE 3.13(b) lists and describes briefly all real
property leased or subleased to the Company. The Company has delivered to
Buyer correct and complete copies of the leases and subleases listed in
SCHEDULE 3.13(b). With respect to each lease and sublease listed in SCHEDULE
3.13(b):
(i) the lease or sublease is legal, valid, binding,
enforceable and in full force and effect;
(ii) the lease or sublease will continue to be legal,
valid, binding, enforceable and in full force and effect on identical terms
following the consummation of the transactions contemplated by this Agreement;
(iii) no party to the lease or sublease is in breach or
default, and no event has occurred which, with notice or lapse of time, would
constitute a breach or default or permit termination, modification, or
acceleration thereunder;
(iv) no party to the lease or sublease has repudiated any
provision thereof;
(v) there are no disputes, oral agreements or forbearance
programs in effect as to the lease or sublease;
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(vi) the Company has not assigned, transferred, conveyed,
mortgaged, deeded in trust or encumbered any interest in the leasehold or
subleasehold;
(vii) all facilities leased or subleased thereunder have
received all approvals of Governmental Entities (including licenses and
permits) required in connection with the operation thereof and have been
operated and maintained in accordance with applicable laws, rules, and
regulations; and
(viii) all facilities leased or subleased thereunder are
supplied with functional utilities and other services necessary for the normal
and usual operation of said facilities.
SECTION 3.14 INTELLECTUAL PROPERTY.
(a) The Company owns or has the right to use pursuant to
license, sublicense, agreement or permission all Intellectual Property
necessary for the operation of the Company's business as presently conducted.
Each item of Intellectual Property owned or used by the Company is owned or
available for use by the Company on identical terms and conditions immediately
subsequent to the Closing Date. The Company has taken all reasonably necessary
and desirable action to maintain and protect each item of Intellectual
Property that it owns or uses.
(b) The Company has not interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual
Property rights of any third party. The Sole Stockholder and none of the
directors and officers (and employees with responsibility for Intellectual
Property matters) of the Company has ever received any oral or written charge,
complaint, claim, demand or notice alleging any such interference,
infringement, misappropriation or violation (including any claim that the
Company must license or refrain from using any Intellectual Property rights of
any third party). To the Company's Knowledge, no third party has interfered
with, infringed upon, misappropriated, or otherwise come into conflict with
any Intellectual Property rights of the Company.
(c) SCHEDULE 3.14(c) identifies each patent or trademark and
copyright registration which has been issued to the Company or any Affiliate
of the Company with respect to any of its Intellectual Property, identifies
each pending patent application or application for registration which the
Company or any Affiliate of the Company has made with respect to any of its
Intellectual Property, and identifies each license, agreement, or other
permission which the Company or any Affiliate of the Company has granted to
any third party with respect to any of its Intellectual Property (together
with any exceptions). The Company has delivered to Buyer correct and complete
copies of all such patents, registrations, applications, licenses, agreements
and permissions (as amended to date). SCHEDULE 3.14(c) also identifies each
trade name or unregistered trademark used by the Company or any Affiliate of
the Company in connection with any of its businesses. With respect to each
item of Intellectual Property required to be identified in SCHEDULE 3.14(c):
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(i) the Company possesses all right, title, and interest
in and to the item, free and clear of any Security Interest, license, or other
restriction;
(ii) no royalty or other remuneration of any type is
payable with respect to any such item of Intellectual Property;
(iii) such item is not subject to any outstanding
injunction, judgment, order, decree, ruling or charge;
(iv) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim or demand is pending or threatened which challenges
the legality, validity, enforceability, use or ownership of such item; and
(v) the Company has never agreed to indemnify any Person
for or against any interference, infringement, misappropriation or other
conflict with respect to such item.
(d) SCHEDULE 3.14(d) identifies each item of Intellectual
Property that any third party owns and that the Company or any Affiliate of
the Company uses pursuant to license, sublicense, agreement or permission,
other than shrink-wrap licenses for personal computer software. The Company
has delivered to Buyer correct and complete copies of all such licenses,
sublicenses, agreements, and permissions (as amended to date). With respect to
each item of Intellectual Property required to be identified in SCHEDULE
3.14(d):
(i) the license, sublicense, agreement or permission
covering such item is legal, valid, binding, enforceable and in full force and
effect;
(ii) the license, sublicense, agreement or permission will
continue to be legal, valid, binding, enforceable and in full force and effect
on identical terms following the Closing Date;
(iii) no party to the license, sublicense, agreement, or
permission is in breach or default, and no event has occurred which with
notice or lapse of time would constitute a breach or default or permit
termination, modification or acceleration thereunder;
(iv) no party to the license, sublicense, agreement or
permission has repudiated any provision thereof;
(v) no royalty or other remuneration of any type is
payable with respect to any such item of Intellectual Property;
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(vi) with respect to each sublicense, the representations
and warranties set forth in items (i) through (iv) above are true and correct
with respect to the underlying license;
(vii) the underlying item of Intellectual Property is not
subject to any outstanding injunction, judgment, order, decree, ruling or
charge;
(viii) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim or demand is pending or threatened which challenges
the legality, validity or enforceability of the underlying item of
Intellectual Property; and
(ix) the Company has not granted any sublicense or similar
right with respect to the license, sublicense, agreement, or permission.
(e) Neither the Sole Stockholder nor any of the directors and
officers (nor any employees with responsibility for Intellectual Property
matters) of the Company has any Knowledge of any new products, inventions,
procedures or methods of manufacturing or processing that any competitors or
other third parties have developed which reasonably could be expected to
supersede or make obsolete any product or process of the Company.
SECTION 3.15 TANGIBLE ASSETS. SCHEDULE 3.15 lists all the tangible
Assets of the Company. Except as set forth on SCHEDULE 3.15, the Company owns
and has good and marketable title to all the tangible property and Assets
necessary for the conduct of its business as presently conducted and as
proposed to be conducted, including, but not limited to, those Assets listed
on SCHEDULE 3.15. Each tangible Asset is free from defects, has been
maintained in accordance with normal industry practice and is in good
operating condition and repair. There are no Security Interests on any of the
Assets of the Company.
SECTION 3.16 INVENTORY. SCHEDULE 3.16 lists all the inventory
("Inventory") of the Company as of September 8, 1997. The Inventory of the
Company consists of raw materials and supplies, manufactured and purchased
parts, goods/work in process and finished goods, all of which is merchantable
and fit for the purpose for which it was procured or manufactured, and none of
which is slow-moving, obsolete, damaged or defective, subject only to the
reserve for inventory writedown set forth on the face of the Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the
Company. There are no Security Interests on any of the Inventory of the
Company.
SECTION 3.17 CONTRACTS. SCHEDULE 3.17 lists the following Contracts and
other agreements to which the Company is a party as of the date hereof:
(a) any agreement (or group of related agreements) for the lease
of personal property to or from any Person providing for lease payments of any
amount or for a term of more than one (1) year;
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(b) any agreement (or group of related agreements) for the
purchase or sale of raw materials, commodities, supplies, products or other
personal property, or for the furnishing or receipt of services of any amount
or which has a term of any duration;
(c) any partnership or joint venture agreement;
(d) any agreement (or group of related agreements) under which
it has created, incurred, assumed or guaranteed any indebtedness for borrowed
money, or any capitalized lease obligation, in any amount, or under which it
has imposed a Security Interest on any of its Assets, tangible or intangible;
(e) any agreement concerning confidentiality or non-competition;
(f) any agreement with the Sole Stockholder or Affiliates of the
Sole Stockholder;
(g) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance or other material plan or
arrangement (including any Employee Benefit Plan) for the benefit of its
current or former directors, officers and employees;
(h) any collective bargaining agreement;
(i) any agreement for the employment of any individual on a
full-time, part-time, consulting or other basis;
(j) any agreement under which the consequences of a default or
termination could have a Company Material Adverse Effect; or
(k) any other agreement (or group of related agreements) the
performance of which involves consideration in excess of One Thousand Dollars
($1,000.00).
The Company has delivered to Buyer a correct and complete copy of each
written agreement listed in SCHEDULE 3.17 and a written summary setting forth
the terms and conditions of each oral agreement referred to in SCHEDULE 3.17.
With respect to each such agreement: (i) such agreement is legal, valid,
binding, enforceable and in full force and effect; (ii) such agreement will
continue to be legal, valid, binding, enforceable and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby; (iii) no party is in breach or default, and no event has occurred
which with notice or lapse of time would constitute a breach or default, or
permit termination, modification or acceleration, under such agreement; and
(iv) no party has repudiated any provision of such agreement.
SECTION 3.18 NOTES RECEIVABLE AND ACCOUNTS RECEIVABLE. All notes
receivable and accounts receivable (collectively, "ACCOUNTS RECEIVABLE") of
the Company are reflected properly on its books and records and are valid
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receivables subject to no setoffs or counterclaims, are current and
collectible and will be collected in accordance with their terms at their
recorded amounts, subject only to the reserve for bad debts set forth on the
face of the Balance Sheet (rather than in any notes thereto) as adjusted for
the passage of time through the Closing Date in accordance with the past
custom and practice of the Company. On the Closing Date, there are no Accounts
Receivable due from the Sole Stockholder or any of the Company's officers or
directors.
SECTION 3.19 POWERS OF ATTORNEY. There are no outstanding powers of
attorney executed on behalf of the Company.
SECTION 3.20 INSURANCE. SCHEDULE 3.20 sets forth the following
information with respect to each current insurance policy (including policies
providing property, casualty, liability and workers' compensation coverage and
bond and surety arrangements) to which the Company has been a party, a named
insured, or otherwise the beneficiary of coverage:
(a) the name, address, and telephone number of the agent;
(b) the name of the insurer, the name of the policyholder and
the name of each covered insured;
(c) the policy number, the period of coverage and the amount of
the annual premiums payable;
(d) the scope (including an indication of whether the coverage
was on a claims made, occurrence, or other basis) and amount (including a
description of how deductibles and ceilings are calculated and operate) of
coverage; and
(e) a description of any retroactive premium adjustments or
other loss-sharing arrangements.
With respect to each such insurance policy: (i) such policy is legal, valid,
binding, enforceable and in full force and effect; (ii) such policy will
continue to be legal, valid, binding, enforceable and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby; (iii) neither the Company nor any other party to the policy is in
breach or default (including with respect to the payment of premiums or the
giving of notices), and no event has occurred which, with notice or the lapse
of time, would constitute such a breach or default, or permit termination,
modification, or acceleration, under such policy; and (iv) no party to the
policy has repudiated any provision thereof. The Company has been covered
during the past three (3) years by insurance in scope and amount customary and
reasonable for the business in which it has engaged during the aforementioned
period. SCHEDULE 3.20 also describes any self-insurance arrangements affecting
the Company.
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SECTION 3.21 EMPLOYEES. SCHEDULE 3.21 sets forth a true and complete
list of all employees of the Company, their respective positions, locations,
salaries or hourly wages and severance arrangements, each as of the date
hereof and as of the Closing Date. To the Knowledge of the Sole Stockholder
and the directors and officers (and employees with responsibility for
employment matters) of the Company, no executive, key employee or group of
employees has any plans to terminate employment with the Company. Except as
set forth in SCHEDULE 3.21, each employee of the Company is employed on an "at
will" basis and has no right to any material compensation following
termination of employment. Each employee of the Company has executed a
proprietary information and inventions agreement in the form provided to
counsel for Hanger and Buyer. The Company is not a party to or bound by any
collective bargaining agreement, nor has it experienced any strikes,
grievances, claims of unfair labor practices or other collective bargaining
disputes. The Company has not committed any unfair labor practice. There is no
organizational effort presently being made or threatened by or on behalf of
any labor union with respect to employees of the Company.
SECTION 3.22 EMPLOYEE BENEFITS.
(a) Except as set forth on SCHEDULE 3.22, with respect to all
employees, former employees, directors and independent contractors of the
Company and their dependents and beneficiaries, neither the Company nor any
ERISA Affiliate presently maintains, contributes to or has any Liability under
or with respect to any Employee Benefit Plan. The plans, programs and
arrangements set forth on SCHEDULE 3.22 are herein referred to as the "COMPANY
EMPLOYEE BENEFIT PLANS." Each Company Employee Benefit Plan (and each related
trust, insurance contract or other funding arrangement) complies in form and
in operation in all material respects with the applicable requirements of
ERISA, the Code, other applicable Laws and governing documents and agreements.
With respect to each Company Employee Benefit Plan, there has been no act or
omission by the Company or any ERISA Affiliate that would impair the right or
ability of the Company or any ERISA Affiliate to unilaterally amend in whole
or part or terminate such Company Employee Benefit Plan at any time, subject
to the terms of any insurance contract or other contractual arrangements with
third parties, and the Company has delivered to Buyer true and complete copies
of: (i) the plan documents, including any related trust agreements, insurance
contracts or other funding arrangements, or a written summary of the terms and
conditions of the plan if there is no written plan document; (ii) the most
recent IRS Form 5500; (iii) the most recent financial statement and, if
applicable, actuarial valuation; (iv) all correspondence with the Internal
Revenue Service, the Department of Labor and other governmental agencies with
respect to the past three (3) plan years other than IRS Form 5500 filings; and
(v) the most recent summary plan description.
(b) Neither the Company nor any of its directors, officers or
employees has any Liability with respect to any Company Employee Benefit Plan
for failure to comply with ERISA, the Code, any other applicable Laws or any
governing documents or agreements.
(c) No Company Employee Benefit Plan is an Employee Pension
Benefit Plan, and no Company Employee Benefit Plan has any unfunded Liability.
With respect to the Company Employee Benefit Plans, all applicable
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contributions and premium payments for all periods ending prior to the Closing
Date (including periods from the first day of the then current plan year to
the Closing Date) shall be made prior to the Closing Date in accordance with
past practice.
(d) Neither the Company nor any ERISA Affiliate maintains,
maintained, contributes to, or has any Liability (including, but not limited
to, current or potential withdrawal Liability) with respect to any
Multiemployer Plan or Employee Pension Benefit Plan.
(e) With respect to all employees and former employees of the
Company, neither the Company nor any ERISA Affiliate presently maintains,
contributes to or has any Liability under any funded or unfunded medical,
health or life insurance plan or arrangement for present or future retirees or
present or future terminated employees except as required by the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended, or state continuation
coverage laws. There has been no act or acts which would result in a
disallowance of a deduction or the imposition of a tax pursuant to Section
4980B, or any predecessor provision, of the Code or any related regulations.
No event has occurred with respect to which the Company or any Affiliates
could be liable for a material Tax imposed by any of Sections 4972, 4976,
4977, 4979 or 4980 of the Code, or for a material civil penalty under Section
502(c) of ERISA.
(f) There is no pending, or to the Knowledge of the Company,
threatened legal action, proceeding, audit, examination or investigation
against or involving any Company Employee Benefit Plan maintained by the
Company or any ERISA Affiliate (other than routine claims for benefits). To
the Knowledge of the Company, there is no basis for, and there are no facts
which could give rise to, any such condition, legal action, proceeding or
investigation. Any bonding required with respect to any Company Employee
Benefit Plans in accordance with applicable provisions of ERISA has been
obtained and is in full force and effect.
SECTION 3.23 GUARANTIES. The Company is not a guarantor or otherwise is
liable for any Liability or obligation (including indebtedness) of any other
Person.
SECTION 3.24 ENVIRONMENT, HEALTH AND SAFETY.
(a) Except as set forth on SCHEDULE 3.24, the Company has
complied with all Environmental, Health and Safety Laws, and no action, suit,
proceeding, hearing, investigation, charge, complaint, claim, demand or notice
has been filed or commenced against the Company alleging any failure so to
comply. Without limiting the generality of the preceding sentence, the Company
has obtained and been in compliance with all of the terms and conditions of
all permits, licenses, and other authorizations which are required under, and
has complied with all other limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules, and timetables which are
contained in, all Environmental, Health and Safety Laws. The Company has
provided Buyer with correct and complete copies of all reports and studies
within the possession or control of the Company or the Sole Stockholder with
respect to past or present environmental conditions or events at any real
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property presently or previously owned or leased by the Company.
(b) Except as set forth on SCHEDULE 3.24, the Company has no
Liability (and the Company has not handled or disposed of any substance,
arranged for the disposal of any substance, exposed any employee or other
individual to any substance or condition, or owned or operated any property or
facility in any manner that could form the basis for any present or future
action, suit, proceeding, hearing, investigation, charge, complaint, claim, or
demand against the Company giving rise to any Liability) for damage to any
site, location, or body of water (surface or subsurface), for any illness of
or personal injury to any employee or other individual, or for any reason
under any Environmental, Health and Safety Law.
(c) All properties owned (previously or currently) or leased and
equipment used in the business of the Company, and its predecessors and
Affiliates, have been free of asbestos, PCB's, underground storage tanks,
methylene chloride, trichloroethylene, 1,2- transdichloroethylene, dioxins,
dibenzofurans, polychlorinated biphenyls, landfills, surface impoundments,
disposal areas and Extremely Hazardous Substances.
SECTION 3.25 CERTAIN BUSINESS RELATIONSHIPS WITH THE COMPANY. Except as
described in SCHEDULE 3.25, neither the Sole Stockholder nor any Affiliates of
the Sole Stockholder has been involved in any business arrangement or
relationship with the Company within the past twelve (12) months (other than
employment by the Company), and neither the Sole Stockholder nor any
Affiliates of the Sole Stockholder owns any Asset which is used in the
business of the Company.
SECTION 3.26 DELIVERY OF INFORMATION. The Sole Stockholder acknowledges
the receipt and review by the Sole Stockholder of the most recent filings made
by Hanger with the SEC under the Securities Act and the Exchange Act.
SECTION 3.27 PRODUCT AND SERVICE WARRANTIES. Each product sold, leased
or delivered, and each service performed, by the Company has been in
conformity with all applicable contractual commitments and all express and
implied warranties, and the Company has no Liability (and there is no Basis
for any present or future action, suit, proceeding, hearing, investigation,
charge, complaint, claim or demand against any of them giving rise to any
Liability) for the replacement or repair of any product, the substandard
performance of any service, or other damages in connection with the product
sold or services provided by the Company, subject only to the reserve for
product and service warranty claims set forth on the face of the Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the
Company. No product sold, leased or delivered, or service performed, by the
Company is subject to any guaranty, warranty or other indemnity beyond the
applicable standard terms and conditions of sale, lease or performance.
SCHEDULE 3.27 includes copies of the standard terms and conditions of sale,
lease or performance for the Company (containing applicable guaranty, warranty
and indemnity provisions).
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SECTION 3.28 PRODUCT AND SERVICE LIABILITY. The Company has no
Liability (and there is no Basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim or demand against
the Company giving rise to any Liability) arising out of any injury or damages
(whether actual or alleged) to any Person or its property or its business
operations or prospects as a result of the ownership, possession or use of (i)
any product sold, leased or delivered by the Company or (ii) any service
performed by the Company.
SECTION 3.29 CERTAIN BUSINESS PRACTICES. Neither the Company nor any
director, officer, stockholder, agent or employee of the Company has (i) used
any funds for unlawful contributions, gifts, entertainment or other unlawful
expenses relating to political activity, (ii) made any unlawful payment to
foreign or domestic government officials or employees or to foreign or
domestic political parties or campaigns or violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended, or (iii) made any other
unlawful payment.
SECTION 3.30 DISCLOSURE. No representation or warranty made by the
Company or the Sole Stockholder, nor any document, written information,
statement, financial statement, certificate, schedule or exhibit prepared and
furnished or to be prepared and furnished by the Company or its
representatives pursuant hereto or in connection with the transactions
contemplated hereby, contains or will contain any untrue statement of a
material fact, or omits or will omit to state a material fact necessary to
make the statements of facts contained herein or therein not misleading in
light of the circumstances under which they were furnished.
ARTICLE IIIA
REPRESENTATIONS AND WARRANTIES OF SOLE STOCKHOLDER
Sole Stockholder hereby represents and warrants to Hanger and Buyer
as follows:
SECTION 3.1A AUTHORIZATION OF TRANSACTION. Sole Stockholder has full
power and authority to execute and deliver this Agreement and to perform all
obligations hereunder and thereunder required to be performed by the Sole
Stockholder. This Agreement constitutes the valid and legally binding
obligation of Sole Stockholder, enforceable in accordance with its terms and
conditions. Sole Stockholder is a natural person, is over 21 years of age and
has not had a legal representative appointed by a court of law or otherwise
act in behalf of Sole Stockholder or with respect to any property of Sole
Stockholder. Sole Stockholder is not required to give any notice to, make any
filing with, or obtain any authorization, consent or approval of any
Governmental Entity in order to consummate the transactions contemplated by
this Agreement.
SECTION 3.2A NONCONTRAVENTION. Neither the execution and the delivery
of this Agreement, nor the consummation of the transactions contemplated
hereby and thereby, will (a) violate any constitution, statute, regulation,
rule, injunction, judgment, order, decree, ruling, charge or other restriction
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of any government, Governmental Entity, or court to which Sole Stockholder is
subject or (b) conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify or cancel, or require any notice under any
agreement, contract, lease, license, instrument or other arrangement to which
Sole Stockholder is a party, by which Sole Stockholder is bound or to which
any Assets of Sole Stockholder is subject.
SECTION 3.3A BROKERS' FEES. Except as set forth on SCHEDULE 3.11, Sole
Stockholder has no Liability or obligation to pay any fees or commissions to
any broker, finder, or agent with respect to the transactions contemplated by
this Agreement.
SECTION 3.4A COMPANY SHARES. Sole Stockholder holds of record and owns
beneficially all the outstanding shares of Company Common Stock, free and
clear of any restrictions on transfer (other than any restrictions under the
Securities Act and state securities laws), Encumbrances, Security Interests,
options, warrants, purchase rights, contracts, commitments and/or other rights
whatsoever. Sole Stockholder is not a party to any option, warrant, purchase
right or other contract or commitment whatsoever that could require Sole
Stockholder to sell, transfer or otherwise dispose of any capital stock of the
Company (other than this Agreement). Sole Stockholder is not a party to any
voting trust, proxy, voting rights agreement or other agreement or
understanding with respect to the voting of any capital stock of the Company.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF HANGER AND BUYER
Hanger and Buyer hereby represent and warrant, jointly and severally,
to the Company and the Sole Stockholder that:
SECTION 4.1 ORGANIZATION AND QUALIFICATION. Each of Hanger and Buyer
is a corporation duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation or organization and has all
requisite power and authority to own, lease and operate its properties and to
carry on its business as it is now being conducted, and each of Hanger and
Buyer is duly qualified and in good standing to do business in each
jurisdiction in which the nature of the business conducted by it or the
ownership or leasing of its properties makes such qualification necessary,
except for such failures to be so qualified or licensed and in good standing
as would not, individually or in the aggregate, have a Hanger Material Adverse
Effect.
SECTION 4.2 AUTHORITY. Each of Hanger and Buyer has all requisite
corporate power and authority to execute and deliver this Agreement, to
perform its respective obligations hereunder and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
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authorized by all necessary corporate action and no other corporate proceeding
on the part of Hanger or Buyer is necessary to authorize this Agreement or to
consummate the transactions contemplated hereby. This Agreement has been duly
executed and delivered by Hanger and Buyer and, assuming the due
authorization, execution and delivery thereof by the Sole Stockholder and the
Company, constitutes the legal, valid and binding obligations of Hanger and
Buyer enforceable in accordance with its terms.
SECTION 4.3 NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) The execution and delivery of this Agreement by Hanger and
Buyer do not, and the performance of this Agreement by Hanger and Buyer will
not, (i) conflict with or violate the Certificate of Incorporation or By-Laws
of Hanger or Buyer, (ii) conflict with or violate any Laws in effect as of the
date of this Agreement applicable to Hanger or Buyer or by which any of their
respective properties is bound, or (iii) result in any breach of or constitute
a default (or an event that with notice or lapse of time or both would become
a default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or require payment under, or result in the
creation of a lien or encumbrance on, any of the properties or Assets of
Hanger or Buyer pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which Hanger or Buyer is a party or by which Hanger or Buyer or any of
their respective properties is bound by or subject to, except for breaches,
defaults, events, rights of termination, amendment, acceleration or
cancellation, payment obligations or Liens or Encumbrances that would not have
a Hanger Material Adverse Effect.
(b) The execution and delivery of this Agreement by Hanger and
Buyer do not, and the performance of this Agreement by Hanger and Buyer will
not, require Hanger or Buyer to obtain any consent, approval, authorization or
permit of, or to make any filing with or notification to, any Governmental
Entities, except (i) for applicable requirements, if any, of the Securities
Act and the Exchange Act and (ii) where the failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or
notifications, would not, either individually or in the aggregate, prevent
Hanger or Buyer from performing its obligations under this Agreement.
SECTION 4.4 LIMITATION ON REPRESENTATIONS AND WARRANTIES.
(a) Neither Hanger nor Buyer makes any other representation or
warranty to the Company or the Sole Stockholder, or any of the Company's or
the Sole Stockholder's employees, agents, consultants or representatives
except as expressly provided in this Agreement.
(b) Neither Hanger nor Buyer make any representation or warranty
to the Company or the Sole Stockholder regarding the probable success or
profitability of Buyer or Hanger.
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SECTION 4.5 REPORTS; FINANCIAL STATEMENTS.
(a) Hanger is current in all forms, reports, statements and
other documents required to be filed with the SEC (collectively, the "HANGER
SEC REPORTS"). The Hanger SEC Reports, including all Hanger SEC Reports filed
after the date of this Agreement and prior to the Closing Date, were or will
be prepared in all material respects in accordance with the requirements of
applicable Law (including, the Securities Act and the Exchange Act, as the
case may be, and the rules and regulations of the SEC thereunder applicable to
such Hanger SEC Reports). As of their respective dates, the Hanger SEC Reports
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements made therein, in the light of the circumstances under which they
were made, not misleading.
(b) Each of the financial statements (including, in each case,
any related notes thereto) contained in the Hanger SEC Reports filed prior to,
on or after the date of this Agreement (i) have been or will be prepared in
accordance with, and complied or will comply as to form with, the published
rules and regulations of the SEC and GAAP applied on a consistent basis
throughout the periods involved (except as otherwise noted therein) and (ii)
fairly present or will fairly present the financial position of Hanger as of
the respective dates thereof and the results of its operations and cash flows
for the periods indicated, except that any unaudited interim financial
statements were or will be subject to normal and recurring year-end
adjustments.
SECTION 4.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as and to the
extent disclosed in the Hanger SEC Reports filed prior to the date of this
Agreement or as contemplated in this Agreement, since the end of the calendar
period for which Hanger filed its most recent Hanger SEC Report, there has not
been (a) a Hanger Material Adverse Effect or (b) any significant change by
Hanger in its accounting methods, principles or practices.
SECTION 4.7 OWNERSHIP OF BUYER. All of the outstanding capital stock
of Buyer is owned directly by Hanger.
SECTION 4.8 BROKERS. There is no broker, finder or investment banker
which is entitled to any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Hanger or Buyer.
ARTICLE V
COVENANTS
SECTION 5.1 AFFIRMATIVE COVENANTS OF THE COMPANY. The Company hereby
covenants and agrees that, prior to the Closing Date, unless otherwise
expressly contemplated by this Agreement or consented to in writing by Hanger,
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the Company will: (a) operate only in the Ordinary Course of Business; (b) use
its best efforts to (1) preserve and/or maintain, in all material respects and
consistent with past custom and practice, its business and properties,
including its present operations, physical facilities, working conditions and
relationships with its present employees and Persons having significant
business relations with it, including, without limitation, suppliers and
customers, (2) maintain and keep its properties and Assets in as good repair
and condition as at present, ordinary wear and tear excepted, (3) keep in full
force and effect insurance and bonds comparable in amount and scope of
coverage to that currently maintained, and (4) at the request of Hanger or
Buyer, obtain pre-clearance certificates and file such instruments and
documents as are necessary to permit Buyer to merge with the Company or
liquidate the Company and distribute the Company's Assets and Liabilities in
liquidation to the Buyer on the Closing Date or immediately following the
Closing Date; and (c) transfer, distribute and/or dispose of the items set
forth in Sections 1.2(b) and 6.2 to the Sole Stockholder or to a third party
at the direction of the Sole Stockholder, as further described therein.
SECTION 5.2 NEGATIVE COVENANTS OF THE COMPANY. Except as expressly
contemplated by this Agreement or as previously disclosed to Buyer or Hanger
in writing on SCHEDULE 5.2, or otherwise consented to in writing by Buyer or
Hanger, from the date of this Agreement until the Closing Date, the Company
shall not, directly or indirectly through any Affiliate or otherwise (and the
Sole Stockholder shall not and shall not cause the Company to), and shall not
permit any Affiliate to directly or indirectly, do any of the following:
(a) (i) increase the compensation payable to, or to become
payable to, any employee, director or executive officer; (ii) grant any
severance or termination pay to, or enter into any employment or severance
agreement with, any director, officer or employee; (iii) establish, adopt,
enter into, amend, modify or terminate any Employee Benefit Plan or
arrangement except as may be required by applicable Law; or (iv) hire any
person;
(b) declare or pay any dividend on or make any other
distribution in respect of, outstanding shares of its capital stock, except
for the items set forth in Sections 1.2(b);
(c) (i) redeem, purchase or otherwise acquire any shares of its
capital stock or any securities or obligations convertible into or
exchangeable for any shares of its capital stock, or any options, warrants or
conversion or other rights to acquire any shares of its capital stock or any
such securities or obligations; (ii) effect any reorganization or
recapitalization; or (iii) split, combine or reclassify any of its capital
stock or issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for, shares of its capital stock;
(d) (i) issue, deliver, award, grant or sell, or authorize or
propose the issuance, delivery, award, grant or sale (including the grant of
any Security Interests, Liens, claims, pledges, limitations in voting rights,
charges or other Encumbrances) of, any shares of any class of its capital
stock (including shares held in treasury), any securities convertible into or
exercisable or exchangeable for any other shares, or any rights, warrants or
options to acquire, any such shares; and (ii) amend or otherwise modify the
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terms of any such rights, warrants or options the effect of which shall be to
make such terms more favorable to the holders thereof;
(e) acquire or agree to acquire, by merging or consolidating
with, by purchasing an equity interest in, all or a portion of the Assets of,
or by any other manner, any corporation, partnership, association or other
business, organization or division thereof, or otherwise acquire or agree to
acquire any Assets of any other Person (other than the purchase of Assets from
suppliers or vendors in the Ordinary Course of Business) which are material,
individually or in the aggregate, to the Company;
(f) sell, lease, exchange, mortgage, pledge, transfer or
otherwise dispose of, or agree to sell, lease, exchange, mortgage, pledge,
transfer or otherwise dispose of, any of its material Assets;
(g) propose or adopt any amendments to its Certificate of
Incorporation or its By-Laws;
(h) (i) change any of its methods of accounting in effect on the
date of the Balance Sheet, or (ii) make or rescind any material election
relating to Taxes, settle or compromise any claim, action, suit, litigation,
proceeding, arbitration, investigation, audit or controversy relating to
Taxes, or change in any material respect any of its methods of reporting
income or deductions for federal income tax purposes from those employed in
the preparation of the federal income Tax Return for the taxable year ended
December 31, 1997, except, in the case of clause (i) or clause (ii), as may be
required by Law or GAAP;
(i) enter into any Contract outside the Ordinary Course of
Business;
(j) create, or permit the creation of, any Lien upon any Assets
outside the Ordinary Course of Business;
(k) enter into any employment Contract or collective bargaining
agreement, or modify the terms of any existing such Contract or agreement;
(l) sell, lease, transfer or assign any Assets;
(m) make any capital expenditures other than in the Ordinary
Course of Business, or make any capital expenditures which in the aggregate
exceed Five Thousand Dollars ($5,000.00);
(n) amend or renew, or enter into any Contract involving
operations outside of the United States; or
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(o) take or agree to take any action that would or is reasonably
likely to result in any representations and warranties of the Company or the
Sole Stockholder set forth in this Agreement being untrue or in any of the
conditions to the Purchase not being satisfied.
SECTION 5.3 NEGATIVE COVENANTS OF HANGER AND Buyer. Except as
expressly contemplated by this Agreement or otherwise consented to in writing
by the Company, from the date of this Agreement until the Closing Date, Hanger
and Buyer will not take or agree to take any action that would or is
reasonably likely to result in any representations and warranties of Hanger or
Buyer set forth in this Agreement being untrue or in any of the conditions to
the Purchase not being satisfied.
SECTION 5.4 ACCESS AND INFORMATION. The Company shall (i) provide
Hanger, Buyer and their officers, directors, employees, agents, counsel,
accountants, financial advisors, consultants and other representatives
(collectively, the "HANGER REPRESENTATIVES"), with full access, upon
reasonable prior notice, to all officers, employees and accountants of the
Company and to their assets, properties, Contracts, books, records and all
such other information and data concerning the business and operations of the
Company as Hanger, Buyer or any of the Hanger Representatives reasonably may
request in connection with such investigation. Such investigation will
involve, among other things, Hanger's or Buyer's review and confirmation of
the Company's Financial Statements, the legal review of the Company's
Contracts and leases, the review of the Company's patient, client and referral
lists and reference checks of the Company. Hanger will provide the Sole
Stockholder with all information reasonably requested by the Sole Stockholder
to enable the Sole Stockholder to evaluate the merits of the Purchase.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.1 APPROPRIATE ACTION; CONSENTS; FILINGS.
(a) The Company, Hanger and Buyer shall each use its best
efforts to: (i) take, or cause to be taken, all appropriate action, and do, or
cause to be done, all things necessary, proper or advisable under applicable
Law or otherwise to consummate and make effective the transactions
contemplated by this Agreement; (ii) obtain from any Governmental Entities any
consents, licenses, permits, waivers, approvals, authorizations or orders
required to be obtained or made by Hanger, Buyer or the Company in connection
with the authorization, execution and delivery of this Agreement and the
consummation of the transactions contemplated herein, including, without
limitation, the Purchase; (iii) make all necessary filings, and thereafter
make any other required submissions, with respect to this Agreement and the
liquidation of the Company into the Buyer as of the Closing Date or
immediately following the Closing Date required under the federal securities
laws and the rules and regulations thereunder, if any, and any other
applicable federal or state securities laws, and (B) any other applicable Law;
provided that Hanger, Buyer and the Company shall cooperate with each other in
connection with the making of all such filings, including providing copies of
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all such documents to the non-filing party and its advisors prior to filing
and, if requested, accepting all reasonable additions, deletions or changes
suggested in connection therewith. The Company, Hanger and Buyer shall furnish
all information required for any application or other filing to be made
pursuant to the rules and regulations of any applicable Law in connection with
the transactions contemplated by this Agreement.
(b) (i) Each of the Company, Hanger and Buyer shall give any
notices to third parties, and use its best efforts to obtain any third party
consents (A) necessary, proper or advisable to consummate the transactions
contemplated in this Agreement, (B) disclosed or required to be disclosed in
the schedules contained herein, (C) otherwise required under any Contracts,
licenses, leases or other agreements in connection with the consummation of
the transactions contemplated herein or (D) required to prevent a Company
Material Adverse Effect from occurring prior to or after the Closing Date or a
Hanger Material Adverse Effect from occurring prior to or after the Closing
Date.
(ii) In the event that any party shall fail to obtain any
third party consent described in subsection (b) (i) above, such party shall
use its best efforts, and shall take any such actions reasonably requested by
the other party hereto, to minimize any adverse effect upon the Company,
Hanger and Buyer and their respective businesses resulting, or which could
reasonably be expected to result after the Closing Date, from the failure to
obtain such consent.
SECTION 6.2 TRANSFER OF CERTAIN COMPANY ASSETS PRIOR TO THE CLOSING
DATE. The Company and the Sole Stockholder shall do all acts necessary to
transfer, distribute and/or dispose of the following items to the Sole
Stockholder or to a third party at the direction of the Sole Stockholder, all
with the effect that the following items shall not be owned by the Company,
nor assumed by Buyer, at the Closing Date: (i) any notes or accounts
receivable due to the Company from its officers, directors or the Sole
Stockholder, or due from the Company to its officers, directors or the Sole
Stockholder; (ii) any real property owned by the Company (and any fixtures
located thereon) and any mortgages, deeds of trust or other indebtedness on or
relating to such real property for which the Company is liable in any manner
whatsoever; (iii) any automobiles or vehicles leased or owned by the Company
that are used for personal purposes by the Sole Stockholder or any employee of
the Company, and any leases or indebtedness on or relating to such automobiles
or vehicles for which the Company is liable in any manner whatsoever; (iv) all
life insurance policies on the life of the Sole Stockholder; (v) all long-term
indebtedness, including but not limited to all bank debt, and all indebtedness
relating to prior acquisitions by the Company; and (vi) any cash in excess of
the amount necessary to fully cover all checks issued by the Company up to and
through the Closing Date. Any Taxes generated in connection with such
transfers, distributions or disposals shall be borne solely by the Sole
Stockholder or shall be reimbursed to the Buyer by the Sole Stockholder.
SECTION 6.3 PAYMENT BY COMPANY OF CERTAIN OUTSTANDING OBLIGATIONS
PRIOR TO THE CLOSING DATE. Prior to the Closing Date, the Company and the Sole
Stockholder shall do all acts necessary to cause the Company to fully pay all
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outstanding pension plan and profit sharing contributions due from the
Company, if any.
SECTION 6.4 EMPLOYMENT AND NON-COMPETITION AGREEMENTS. Prior to the
Closing Date, the Sole Stockholder shall do all acts necessary (i) to cause
Sole Stockholder and all employees of the Company designated by Hanger or the
Buyer to execute the form of Employment and Non-Competition Agreements
attached hereto as EXHIBITS B-1 and B-2, and to deliver all such
fully-executed Employment and Non-Competition Agreements to Hanger and Buyer
prior to the Closing Date; and (ii) to cause Sole Stockholder to also execute
the Non-Competition Agreement attached hereto as EXHIBIT C and deliver such
fully-executed Non- Competition Agreement to Hanger and Buyer prior to the
Closing Date.
SECTION 6.5 LANDLORD APPROVALS. Prior to the Closing Date, the Company
and the Sole Stockholder shall do all acts necessary to cause all landlords to
issue their written consent, if necessary, to the change in the tenant from
the Company to the Buyer without any charge or cost and without any material
change in the terms of the applicable lease or other arrangement previously
existing between such party and the Company or the Sole Stockholder.
SECTION 6.6 Contract ASSIGNMENTS/NOVATIONS. Prior to the Closing Date
or such reasonable time after the Closing Date as may be required, the Company
and the Sole Stockholder agree to use their best efforts do all acts
reasonably necessary to cause all parties to all material contracts with the
Company to issue their written consent, if necessary, to the assignment and
novation of all such contracts from the Company to the Buyer without any
charge or cost and without any material change in the terms of the applicable
contract or other arrangement previously existing between such party and the
Company or the Sole Stockholder, with such consents to be set forth on
Schedule 7.2(c) hereto.
SECTION 6.7 BEST EFFORTS. The parties hereto shall use their best
efforts to consummate the Purchase and the other transactions contemplated
hereby as promptly as practicable.
SECTION 6.8 PUBLIC ANNOUNCEMENTS. The parties hereto agree that only
Hanger may make any public announcement of the existence of this Agreement
and/or the transactions contemplated hereby, including but not limited to the
Purchase.
SECTION 6.9 TAIL INSURANCE. The Sole Stockholder shall purchase, at
the sole cost and expense of the Sole Stockholder a Discontinued Products and
Operations Coverage liability insurance policy to cover the three (3) year
period immediately following the Closing Date, with such policy to provide for
the same insurance coverage as the Company's existing liability policies.
SECTION 6.10 NO COMPETING TRANSACTIONS. The Sole Stockholder and/or the
Company shall not have engaged in any Competing Transaction since the
execution of any letter of intent or memorandum of understanding relating to
the transactions contemplated by this Agreement or from and after the date on
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which the first draft of this Agreement was delivered to counsel for the
Company, whichever is earlier. The Company and the Sole Stockholder agree that
they shall not, individually or in the aggregate, engage in or conduct any
discussions relating to any Competing Transaction.
SECTION 6.11 TAX TREATMENT AS STOCK PURCHASE. The parties to this
Agreement agree that they will treat the Purchase as a purchase of the Sole
Stockholder's stock for federal and state income tax purposes, and that they
will not make any election or take any position on any Tax Return that would
cause the Purchase to be treated as a sale of Assets by the Company to the
Buyer or in any manner that is inconsistent with this Section 6.11.
ARTICLE VII
CLOSING CONDITIONS
SECTION 7.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY UNDER THIS
AGREEMENT. The respective obligations of each party to effect the Purchase and
the other transactions contemplated herein shall be subject to the
satisfaction at or prior to the Closing Date of the following conditions, any
or all of which may be waived, in whole or in part, to the extent permitted by
applicable Law:
(a) NO ORDER. No Governmental Entity or federal or state court
of competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, injunction or
other order (whether temporary, preliminary or permanent) which is in effect
and which has the effect of making the Purchase illegal or otherwise
prohibiting consummation of the Purchase.
(b) CONSENTS AND APPROVALS. All material consents, approvals and
authorizations legally required to be obtained to consummate the Purchase
shall have been obtained from all required Governmental Entities.
SECTION 7.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF BUYER AND/OR
HANGER. The obligations of Hanger and Buyer to effect the Purchase and the
other transactions contemplated herein are also subject to the following
conditions, each of which may be waived, in whole or in part, to the extent
permitted by applicable Law, by Hanger or Buyer:
(a) REPRESENTATIONS AND WARRANTIES.
(i) Each of the representations and warranties of the
Company contained in this Agreement shall be true and correct when made and on
and as of the Closing Date, as if made on and as of such date, individually or
in the aggregate, and except that those representations and warranties which
address matters only as of a particular date shall remain true and correct as
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of such date. Hanger or Buyer shall have received a certificate of the
President of the Company to such effect; and
(ii) Each of the representations and warranties of the
Sole Stockholder contained in this Agreement shall be true and correct when
made and on and as of the Closing Date, as if made on and as of such date,
except that those representations and warranties which address matters only as
of a particular date shall remain true and correct as of such date.
(b) AGREEMENTS AND COVENANTS. The Company shall have performed
or complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it on or prior
to the Closing Date. Hanger or Buyer shall have received a certificate of the
President or Chief Financial Officer of the Company to that effect.
(c) THIRD PARTY CONSENTS AND WAIVERS. The Company shall have
obtained consents and waivers, in form and substance reasonably satisfactory
to Hanger or Buyer, in respect of the contracts or agreements set forth on
SCHEDULE 7.2(C).
(d) COMPANY MATERIAL ADVERSE EFFECT. The Company shall not have
become subject to any action or event which resulted in or may likely result
in a Company Material Adverse Effect.
(e) LEGAL OPINION. Hanger or Buyer shall have received the legal
opinion of James Haggard, counsel for the Company and the Sole Stockholder,
covering the matters set forth on EXHIBIT D hereto.
(f) EMPLOYMENT AND NON-COMPETITION AGREEMENTS. Each of Dan
Morgan and such other employees of the Company as shall be identified by
Hanger and the Buyer shall execute employment and non-competition agreements
(collectively, the "EMPLOYMENT AGREEMENTS") in the forms attached hereto as
EXHIBITS B-1 AND B-2, respectively.
(g) NON-COMPETITION AGREEMENT. Sole Stockholder shall execute
and deliver to Hanger and Buyer a non-competition agreement in the form
attached hereto as EXHIBIT C.
(h) UCC FORMS. The Company and the Sole Stockholder shall
execute and deliver to Hanger and Buyer such UCC forms as may be necessary in
the opinion of the counsel for Hanger and Buyer to evidence that all the
Assets of the Company are free and clear of any Liens.
(i) TAIL INSURANCE. The Sole Stockholder shall deliver to Hanger
and Buyer evidence of the purchase by Sole Stockholder, at the sole cost and
expense of Sole Stockholder of a Discontinued Products and Operations Coverage
liability insurance policy to cover the three (3) year period immediately
following the Closing Date, with such policy to provide for the same insurance
coverage as the Company's existing liability policies.
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SECTION 7.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY AND
THE SOLE STOCKHOLDER. The obligations of the Company and/or the Sole
Stockholder to effect the Purchase and the other transactions contemplated in
this Agreement is subject to the following conditions, each of which may be
waived, in whole or in part, to the extent permitted by applicable Law, by the
Company or the Sole Stockholder on behalf of both such parties:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations
and warranties of Hanger and Buyer contained in this Agreement shall be true
and correct when made and on and as of the Closing Date as if made on and as
of such date, except where the failure to be so true and correct would not
have a Hanger Material Adverse Effect, and except that those representations
and warranties which address matters only as of a particular date shall remain
true and correct as of such date, except where the failure to be so true and
correct would not have a Hanger Material Adverse Effect. Solely for purposes
of this section and in determining compliance with the conditions set forth
herein, any representation and warranty made by Hanger in this Agreement shall
be read and interpreted as if the qualification stated therein with respect to
materiality or Hanger Material Adverse Effect were not contained therein. The
Company shall have received a certificate of the President of Hanger to such
effect.
(b) AGREEMENTS AND COVENANTS. Hanger and Buyer shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by it or
them on or prior to the Closing Date. The Company shall have received a
certificate of the President of Hanger to that effect.
(c) HANGER MATERIAL ADVERSE EFFECT. Hanger shall not have become
subject to any action or event which resulted in or may likely result in a
Hanger Material Adverse Effect.
(d) LEGAL OPINION. The Company shall have received the legal
opinion of Freedman, Levy, Kroll & Simonds, counsel to Hanger and the Buyer,
covering the matters set forth on EXHIBIT E.
ARTICLE VIII
TERMINATION, AMENDMENT, WAIVER AND INDEMNIFICATION
SECTION 8.1 TERMINATION. This Agreement may be terminated at any time
prior to the Closing Date:
(a) by mutual consent of Hanger or Buyer and the Company;
(b) by Hanger or Buyer, upon a material breach of any covenant
or agreement on the part of the Company or the Sole Stockholder as set forth
in this Agreement;
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(c) by the Company, upon a material breach of any covenant or
agreement on the part of Hanger or Buyer as set forth in this Agreement;
(d) by either Hanger, Buyer or the Company, if there shall be
any order of a Governmental Entity which is final and non-appealable
preventing the consummation of the Purchase;
(e) by Hanger or Buyer if Hanger or Buyer is not satisfied with
the results of its continuing due diligence review regarding the Company;
(f) by either Hanger, Buyer or the Company, if the Closing shall
not have occurred on or before November 3, 1997 (unless the failure to
consummate the Purchase by such date shall be due to the action or failure to
act of the party seeking to terminate this Agreement).
SECTION 8.2 INVESTIGATION. Notwithstanding any of the foregoing, the
right of any party hereto to terminate this Agreement pursuant to Section 8.1
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any party hereto, any Person controlling
any such party or any of their respective officers or directors, whether prior
to or after the execution of this Agreement.
SECTION 8.3 AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed by all the parties hereto.
SECTION 8.4 WAIVER. At any time prior to the Closing Date, any party
hereto may (a) extend the time for the performance of any of the obligations
or other acts of the other party hereto, (b) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document delivered pursuant hereto and (c) waive compliance by the other party
with any of the agreements or conditions contained herein. Any such extension
or waiver shall be valid only if set forth in an instrument in writing signed
by the party or parties to be bound thereby.
SECTION 8.5 FEES, EXPENSES AND OTHER PAYMENTS. Hanger, Buyer, the
Company and the Sole Stockholder each shall bear its and his own respective
costs and expenses which are incurred in connection with the preparation,
negotiation and performance of this Agreement (including any prior memorandum
of understanding or letter of intent relating hereto) and the transactions
contemplated hereby, including all due diligence expenses and fees and
expenses of agents, representatives, counsel and accountants.
SECTION 8.6 INDEMNIFICATION.
(a) The Sole Stockholder shall indemnify and defend each of
Hanger and the Buyer, and hold it harmless, from and against any and all
losses, damages, Liabilities, claims, demands, judgments, settlements, costs
and expenses of any nature whatsoever (including reasonable attorneys' fees)
(collectively, "LOSS"), resulting from or arising out of any: (i) breach of
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any representation or warranty or agreement of the Company or the Sole
Stockholder contained herein; or (ii) Liability of the Company, whether or not
addressed by a representation or warranty, which was created, incurred or
arose from facts, events, conditions or circumstances existing on or before
the Closing Date, to the extent that, but only to the extent that, such
Liability was not reflected or reserved against on the face of the Balance
Sheet (rather than in any notes thereto) as adjusted for Liabilities incurred
in the Ordinary Course of Business since the date of the Balance Sheet
(provided that the items listed on SCHEDULE 3.8 shall be deemed to be incurred
in the Ordinary Course of Business unless otherwise objected to by Hanger or
Buyer prior to the Closing Date). No claim for indemnification pursuant to
this Section 8.6(a) may be made subsequent to the date three (3) years after
the Closing Date or in respect of a Loss for which Hanger or Buyer has
otherwise been previously reimbursed by the Sole Stockholder. Without limiting
any other rights of Hanger or Buyer, any such Loss may be deducted by Hanger
or Buyer from the outstanding principal amount of the Note portion of the
Purchase Price consideration.
(b) (i) If any third party shall notify Hanger or Buyer with
respect to any third party claim (a "THIRD PARTY CLAIM") that may give rise to
a Loss, then Hanger or Buyer shall promptly notify the Sole Stockholder
thereof in writing; PROVIDED, HOWEVER, that no delay on the part of Hanger or
Buyer in notifying the Sole Stockholder shall relieve the Sole Stockholder
from any obligation hereunder unless (and then solely to the extent) the Sole
Stockholder is prejudiced by such delay.
(ii) The Sole Stockholder will have the right to defend
Hanger and Buyer against the Third Party Claim with counsel selected by Sole
Stockholder and reasonably satisfactory to Hanger or Buyer, so long as: (A)
the Sole Stockholder so notifies Hanger and Buyer in writing within fifteen
(15) days of the Third Party Claim becoming known to the Sole Stockholder,
acknowledging that such claim is in respect of a Loss described in Section
8.6(a); (B) the Third Party Claim involves only money damages and does not
seek an injunction or other equitable relief; (C) settlement of, or an adverse
judgment with respect to, the Third Party Claim is not, in the good faith
judgment of Hanger or Buyer, likely to establish a precedential custom or
practice materially adverse to the continuing business interests of Hanger or
Buyer; and (D) the Sole Stockholder conducts the defense of the Third Party
Claim actively and diligently.
(iii) So long as the Sole Stockholder is conducting the
defense of the Third Party Claim in accordance with Section 8.6(b)(ii), (A)
Hanger or Buyer may retain separate co-counsel at its sole cost and expense
and participate in the defense of the Third Party Claim; (B) Hanger or Buyer
will not consent to the entry of any judgment or enter into any settlement
with respect to the Third Party Claim without the prior written consent of the
Sole Stockholder (which consent will not be withheld unreasonably); and (C)
the Sole Stockholder will not consent to the entry of any judgment or enter
into any settlement with respect to the Third Party Claim without the prior
written consent of Hanger or Buyer (which consent will not be withheld
unreasonably).
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(iv) In the event that any of the conditions in Section
8.6(b)(ii) is or becomes unsatisfied, (A) Hanger or Buyer may defend against
the Third Party Claim in any manner it reasonably may deem appropriate;
PROVIDED, HOWEVER, that Hanger shall not consent to the entry of any judgment
or enter into any settlement or agreement to settle a Third Party Claim
without the prior written consent of the Sole Stockholder, which consent shall
not be unreasonably withheld; (B) Hanger or Buyer shall be reimbursed by Sole
Stockholder, or Hanger or Buyer may deduct such amounts from the next
payment(s) due to Sole Stockholder under the Note portion of the Purchase
Price consideration, promptly and periodically for the costs of defending
against the Third Party Claim (including reasonable attorneys' fees and
expenses); and (C) the Sole Stockholder will remain responsible for any Loss
that Hanger or Buyer actually suffers resulting from, arising out of, relating
to, in the nature of, or caused by the Third Party Claim to the fullest extent
provided in this Section 8.6.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.1 EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS.
(a) Except as set forth in Section 9.1(b), the representations,
warranties and agreements of each party hereto shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any other party hereto, any Person controlling any such party or any of their
officers or directors, whether prior to or after the execution of this
Agreement.
(b) The representations, warranties and agreements in this
Agreement shall terminate on the date which is three (3) years after the
Closing Date, except that the representations, warranties and agreements set
forth in Section 3.3, and Article IIIA, and Section 6.6, Section 6.7, and
Article VIII and Article IX shall not so terminate.
SECTION 9.2 NOTICES. All notices and other communications given or
made pursuant hereto shall be in writing and shall be deemed to have been duly
given or made as of the date delivered, mailed or transmitted, and shall be
effective upon receipt, if delivered personally, mailed by registered or
certified mail (postage prepaid, return receipt requested), or delivered by
overnight delivery service (e.g., Federal Express), to the parties at the
following addresses (or at such other address for a party as shall be
specified by like changes of address) or sent by electronic transmission to
the fax number specified below:
(a) If to Hanger or Buyer:
Hanger Orthopedic Group, Inc.
7700 Old Georgetown Road
Bethesda, Maryland 20814
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ATTENTION: President
ATTENTION: Chief Financial Officer
Fax No.: (301) 652-8307
with a copy to:
Freedman, Levy, Kroll & Simonds
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036
ATTENTION: Jay W. Freedman, Esq.
Fax No.: (202) 457-5151
(b) If to the Company or the Sole Stockholder:
Dan Morgan
625 University
Galveston, Texas 77550
Fax No.: ______________
with a copy to:
James Haggard, Esq.
1221 University
Huntsville, Texas 77340
Fax No.: (409) 295-7951
SECTION 9.3 CERTAIN DEFINITIONS. For purposes of this Agreement, the
following terms shall have the following meanings:
"ACCOUNTS PAYABLE" as defined in Section 1.2(c)(i);
"ACCOUNTS RECEIVABLE" as defined in Section 3.18;
"ACCRUED EXPENSES" as defined in Section 1.2(c)(i);
"ADJUSTED WORKING CAPITAL" as defined in Section 1.2(c)(i);
"AFFILIATE" means a Person that directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control
with, the first mentioned Person;
"AFFILIATED GROUP" means any affiliated group within the meaning of
Section 1504 of the Code or any similar group defined under a similar
provision of state, local or foreign law;
"AGREEMENT" as defined in the Preamble;
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"ASSETS" means any and all properties and assets (real, personal or
mixed, tangible or intangible) of any Person;
"BALANCE SHEET" as defined in Section 3.7;
"BASIS" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms or could form the basis for any
specified consequence;
"BUYER" as defined in the Preamble;
"CLOSING" and "CLOSING DATE" as defined in Article II;
"CODE" means the Internal Revenue Code of 1986, as amended;
"COMPANY" as defined in the Preamble;
"COMPANY COMMON STOCK" as defined in the Preamble;
"COMPANY EMPLOYEE BENEFIT PLAN" as defined in Section 3.22;
"COMPANY MATERIAL ADVERSE EFFECT" means any change or effect that,
individually or when taken together with all other such changes or effects, is
or is reasonably likely to be materially adverse to the business, properties,
Assets, condition (financial or otherwise), liabilities, operations or
prospects of the Company at the time of such change or effect. A Company
Material Adverse Effect shall be deemed to exist if there shall occur any
event which causes or may reasonably be expected to cause or result in
estimable monetary loss which, individually or when aggregated with all other
events, exceeds Five Thousand Dollars ($5,000.00);
"COMPANY PERMITS" as defined in Section 3.6;
"COMPETING TRANSACTION" means any of the following involving the Company
or any Subsidiary or Affiliate of the Company: (i) any merger, consolidation,
share exchange, business combination, or other similar transaction (other than
the transactions contemplated by this Agreement); (ii) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition of twenty-five
percent (25%) or more of the Assets of the Company in a single transaction or
series of transactions; (iii) any offer (whether cash or securities) for
twenty-five percent (25%) or more of the outstanding shares of capital stock
of the Company; or (iv) any public announcement of a proposal, plan or
intention to do any of the foregoing;
"CONTRACT" of any Person means any contract, agreement or instrument of
any type whatsoever (i) to which such Person is a party and by which such
Person either has made a binding undertaking to perform an obligation or is
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entitled to any property or right, or (ii) by which any of the Assets of such
Person is bound;
"CONTROL" (including the terms "CONTROLLED," "CONTROLLED by" and "UNDER
COMMON CONTROL WITH") means the possession, directly or indirectly or as
trustee or executor, of the power to direct or cause the direction of the
management or policies of a Person, whether through the ownership of stock or
as trustee or executor, by Contract or credit arrangement or otherwise;
"EMPLOYEE BENEFIT PLAN" means (a) any bonus, incentive compensation,
profit sharing, retirement, pension, group insurance, death benefit, group
health, medical expense reimbursement, workers' compensation, dependent care,
flexible benefits or cafeteria, stock option, stock purchase, stock
appreciation rights, savings, deferred compensation, consulting, severance pay
or termination pay, vacation pay, life insurance, disability, welfare or other
employee benefit or fringe benefit plan, program or arrangement; or (b) any
plan, program or arrangement which is an Employee Pension Benefit Plan,
Employee Welfare Benefit Plan or Multiemployer Plan.
"EMPLOYEE PENSION BENEFIT PLAN" has the meaning set forth in ERISA
Section 3(2);
"EMPLOYEE WELFARE BENEFIT PLAN" has the meaning set forth in ERISA
Section 3(1);
"EMPLOYMENT AGREEMENTS" as defined in Section 7.2(f);
"ENCUMBRANCES" means any Security Interests, Liens, claims, pledges,
agreements, limitations on voting rights, charges or other encumbrances of any
nature whatsoever;
"ENVIRONMENTAL, HEALTH AND SAFETY LAWS" means the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Resource
Conservation and Recovery Act of 1976, and the Occupational Safety and Health
Act of 1970, each as amended, together with all other laws (including rules,
regulations, codes, plans, injunctions, judgments, orders, decrees, rulings,
and charges thereunder) of federal, state, local, and foreign governments (and
all agencies thereof), concerning pollution or protection of the environment,
public health and safety, or employee health and safety, including laws
relating to emissions, discharges, releases, or threatened releases of
pollutants, contaminants, or chemical, industrial, hazardous, or toxic
materials or wastes into ambient air, surface water, ground water, or lands or
otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of pollutants,
contaminants, or chemical, industrial, hazardous, or toxic materials or
wastes;
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended;
"ERISA AFFILIATE" means each person (as defined in Section 3(9) of
ERISA) that together with the Company (or any person whose liabilities the
Company has assumed or is otherwise subject to) would be considered or has
been a single employer under Section 4001(b) of ERISA or would be considered
36
<PAGE>
or has been a member of the same "controlled group," under common control, a
member of the same affiliated service group or otherwise a single employer
within the meaning of Section 414(b), (c), (m) and (o) of the Code (PROVIDED,
HOWEVER, that when the subject of the provision is a Multiemployer Plan only
subsections (b) and (c) of Section 414 of the Code shall be taken into
account).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended;
"EXTREMELY HAZARDOUS SUBSTANCE" has the meaning set forth in Section 302
of the Emergency Planning and Community Right-to-Know Act of 1986, as amended;
"FINANCIAL STATEMENTS" as defined in Section 3.7;
"GAAP" means United States generally accepted accounting principles as
in effect from time to time;
"GOVERNMENTAL ENTITIES" as defined in Section 3.5(b);
"HANGER" as defined in the Preamble;
"HANGER MATERIAL ADVERSE EFFECT" shall mean any change or effect that,
individually or when taken together with all such other changes or effects, is
or is reasonably likely to be materially adverse to the business, properties,
Assets, condition (financial or otherwise), liabilities, operations or
prospects of Hanger and its Subsidiaries, taken as a whole at the time of such
change or effect. A Hanger Material Adverse Effect shall be deemed to exist if
there shall occur any event which causes or may reasonably be expected to
cause or result in estimable monetary loss which, individually or when
aggregated with all other events, exceeds $500,000;
"HANGER REPRESENTATIVES" as defined in Section 5.4;
"HANGER SEC REPORTS" as defined in Section 4.5(a);
"INTELLECTUAL PROPERTY" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations- in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
37
<PAGE>
computer software (including data and related documentation), (g) all other
proprietary rights, and (h) all copies and tangible embodiments thereof (in
whatever form or medium);
"INVENTORY" as defined in Section 3.16;
"KNOWLEDGE" or "KNOWN" means, with respect to a particular fact or other
matter, that (i) an individual is actually aware of such fact or other matter
or (ii) a prudent individual could be expected to discover or otherwise become
aware of such fact or other matter in the course of conducting a reasonably
comprehensive investigation concerning the existence of such fact or other
matter; a Person (other than an individual) will be deemed to have "Knowledge"
of a particular fact or other matter if any individual who is serving, or who
has at any time served, as a director, officer, partner, executor or trustee
of such Person (or in any similar capacity) has, or at any time had, Knowledge
of such fact or other matter;
"LAWS" as defined in Section 3.5(a);
"LIABILITY" OR LIABILITIES" as defined in Section 3.8;
"LIEN" means any lien, charge, encumbrance, mortgage, conditional sale
agreement, title retention agreement, financing lease, pledge or Security
Interest of any kind or type and whether arising by Contract or under Law;
"LOSS" as defined in Section 8.6(a);
"MULTIEMPLOYER PLAN" has the meaning set forth in ERISA Section 3(37);
"NOTE" as defined in Section 1.2(b);
"ORDINARY COURSE OF BUSINESS" with respect to any entity, means the
ordinary course of business consistent with past custom and practice
(including with respect to quantity and frequency) of that entity;
"PERSON" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, a Governmental Entity (or any
department, agency, or political subdivision thereof) or any other entity;
"POST-CLOSING DATE ADJUSTMENT DATE" as defined in Section 1.2(d)(ii);
"PURCHASE" as defined in the Preamble;
"PURCHASE PRICE" as defined in Section 1.2(a);
38
<PAGE>
"SEC" means the U.S. Securities and Exchange Commission;
"SECURITIES ACT" means the Securities Act of 1933, as amended;
"SECURITY INTEREST" means any mortgage, pledge, Lien, Encumbrance,
charge, or other security interest, other than (a) mechanic's, materialmen's,
and similar Liens, (b) Liens for Taxes not yet due and payable, (c) purchase
money Liens and Liens securing rental payments under capital lease
arrangements, and (d) other Liens arising in the Ordinary Course of Business
and not incurred in connection with the borrowing of money;
"SHARES" as defined in the Preamble;
"SHORTFALL" as defined in Section 1.2(d)(ii);
"SOLE STOCKHOLDER" as defined in the Preamble;
"SUBSIDIARY" or "SUBSIDIARIES" of the Company, Hanger, the Buyer or any
other Person, means any corporation, partnership, joint venture or other legal
entity of which the Company, Hanger, the Buyer or such other Person, as the
case may be (either alone or through or together with any other subsidiary),
owns, directly or indirectly, fifty percent (50%) or more of the capital stock
or other equity interests which the holders thereof are generally entitled to
vote for the election of the board of directors or other governing body of
such corporation or other legal entity;
"TAX" or "TAXES" shall mean any and all taxes, charges, fees or levies,
payable to any federal, state, local or foreign taxing authority or agency,
including, without limitation, (i) income, franchise, profits, gross receipts,
minimum, alternative minimum, estimated, AD VALOREM, value added, sales, use,
service, real or personal property, capital stock, license, payroll,
withholding, disability, employment, social security, workers compensation,
unemployment compensation, utility, severance, excise, stamp, windfall
profits, transfer and capital gains taxes, (ii) custom duties, imposts,
charges, levies or other similar assessments of any kind, and (iii) interest,
penalties and additions to tax imposed with respect thereto;
"TAX RETURN" shall mean any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof;
"THIRD PARTY CLAIM" as defined in Section 8.6(b).
SECTION 9.4 HEADINGS; CONSTRUCTION. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. All words used in this Agreement
will be construed to be of such gender or number as the circumstances require.
Unless otherwise expressly provided, the word "including" does not limit the
preceding words or terms.
39
<PAGE>
SECTION 9.5 SEVERABILITY. If any term or other provision of this
Agreement is determined to be invalid, illegal or incapable of being enforced
by any rule of law or public policy, all other conditions and provisions of
this Agreement shall nevertheless remain in full force and effect so long as
the economic or legal substance of the transactions contemplated hereby is not
affected in any manner materially adverse to any party. Upon such
determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith
to modify this Agreement so as to effect the original intent of the parties
hereto as closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
SECTION 9.6 ENTIRE AGREEMENT AND MODIFICATION. This Agreement
(together with the exhibits and schedules) constitutes the entire agreement of
the parties and supersedes all prior agreements and undertakings, both written
and oral, between the parties hereto, or any of them, with respect to the
subject matter hereof. This Agreement may not be amended except by a written
agreement executed by the party to be charged with the amendment.
SECTION 9.7 ASSIGNMENT. This Agreement shall not be assigned by
operation of law or otherwise.
SECTION 9.8 PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
Person any right, benefit or remedy of any nature whatsoever under or by
reason of this Agreement.
SECTION 9.9 WAIVER; REMEDIES CUMULATIVE. No failure or delay on the
part of any party hereto in the exercise of any right hereunder shall impair
such right or be construed to be a waiver of, or acquiescence in, any breach
of any representation, warranty or agreement herein, nor shall any single or
partial exercise of any such right preclude other or further exercise thereof
or of any other right. To the maximum extent permitted by applicable law, (a)
no claim or right arising out of this Agreement or the documents referred to
in this Agreement can be discharged by one party, in whole or in part, by a
waiver or renunciation of the claim or right unless in writing signed by the
other party; (b) no waiver that may be given by a party will be applicable
except in the specific instance for which it is given; and (c) no notice to or
demand on one party will be deemed to be a waiver of any obligation of such
party or of the right of the party giving such notice or demand to take
further action without notice or demand as provided in this Agreement or the
documents referred to in this Agreement. All rights and remedies existing
under this Agreement are in addition to, and not exclusive of, any rights or
remedies otherwise available.
SECTION 9.10 FURTHER ASSURANCES. The parties hereto agree (a) to
furnish upon request to each other such further information, (b) to execute
and deliver to each other such other documents, and (c) to do such other acts
and things, all as another party hereto may reasonably request for the purpose
40
<PAGE>
of carrying out the intent of this Agreement and the documents referred to in
this Agreement.
SECTION 9.11 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, REGARDLESS OF
THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS
OF LAW.
SECTION 9.12 JURISDICTION; SERVICE OF PROCESS. ANY ACTION OR PROCEEDING
SEEKING TO ENFORCE ANY PROVISION OF, OR BASED ON ANY RIGHT ARISING OUT OF,
THIS AGREEMENT MAY BE BROUGHT AGAINST ANY OF THE PARTIES HERETO IN THE COURTS
OF THE STATE OF TEXAS, COUNTY OF GALVESTON, OR, IF IT HAS OR CAN ACQUIRE
JURISDICTION, IN THE UNITED STATES DISTRICT COURT FOR THE GALVESTON DISTRICT
OF TEXAS, AND EACH OF THE PARTIES HERETO CONSENTS TO THE JURISDICTION OF SUCH
COURTS (AND OF THE APPROPRIATE APPELLATE COURTS) IN ANY SUCH ACTION OR
PROCEEDING AND WAIVES ANY OBJECTION TO VENUE LAID THEREIN. PROCESS IN ANY
ACTION OR PROCEEDING REFERRED TO IN THE PRECEDING SENTENCE MAY BE SERVED ON
ANY PARTY HERETO ANYWHERE IN THE WORLD.
SECTION 9.13 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original
but all of which taken together shall constitute one and the same agreement.
[The next page is the signature page.]
41
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed or caused this
Agreement to be executed as of the date first written above by their
respective officer thereunto duly authorized:
HANGER ORTHOPEDIC GROUP, INC.
By: ________________________________
Name: Ivan R. Sabel
Title: President
HANGER PROSTHETICS & ORTHOTICS, INC.
By: ________________________________
Name: John D. McNeill
Title: President
MORGAN PROSTHETICS-ORTHOTICS, INC.
By: ________________________________
Name: Dan Morgan
Title: President
SOLE STOCKHOLDER
____________________________________
Dan Morgan, As the Sole Stockholder
of Morgan Prosthetics-Orthotics, Inc.
42
EXHIBIT 10(w)
STOCK PURCHASE AGREEMENT
BY AND AMONG
HANGER ORTHOPEDIC GROUP, INC.,
HANGER PROSTHETICS & ORTHOTICS, INC.,
HARSHBERGER PROSTHETIC & ORTHOTIC CENTER, INC.
HARSHBERGER PROSTHETIC & ORTHOTIC CENTER OF MOBILE, INC.,
HARSHBERGER PROSTHETIC & ORTHOTIC CENTER OF FLORENCE, INC.,
FAB-CAM, INC.
AND
JERALD J. HARSHBERGER
Dated as of December 23, 1997
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C>
ARTICLE I SALE AND PURCHASE OF SHARES................................... 1
SECTION 1.1. SALE OF SHARES............................................ 1
SECTION 1.2. PURCHASE PRICE, PAYMENT AND ADJUSTMENTS................... 1
SECTION 1.3. DELIVERIES AT CLOSING; STOCK TRANSFER BOOKS............... 7
ARTICLE II CLOSING; CLOSING DATE.......................................... 7
ARTICLE III REPRESENTATIONS AND WARRANTIES CONCERNING THE COMPANY......... 8
SECTION 3.1. ORGANIZATION AND QUALIFICATION............................ 8
SECTION 3.2. CERTIFICATE OF INCORPORATION AND BY-LAWS.................. 8
SECTION 3.3. CAPITALIZATION............................................ 8
SECTION 3.4. AUTHORITY................................................. 9
SECTION 3.5. NO CONFLICT; REQUIRED FILINGS AND CONSENTS................ 9
SECTION 3.6. PERMITS; COMPLIANCE....................................... 9
SECTION 3.7. FINANCIAL STATEMENTS...................................... 10
SECTION 3.8. NO UNDISCLOSED LIABILITIES................................ 10
SECTION 3.9. ABSENCE OF CERTAIN CHANGES OR EVENTS...................... 10
SECTION 3.10. ABSENCE OF LITIGATION.................................... 12
SECTION 3.11. BROKERS.................................................. 12
SECTION 3.12. TAX MATTERS.............................................. 13
SECTION 3.13. REAL PROPERTY............................................ 14
SECTION 3.14. INTELLECTUAL PROPERTY.................................... 15
SECTION 3.15. TANGIBLE ASSETS.......................................... 17
SECTION 3.16. INVENTORY................................................ 17
SECTION 3.17. CONTRACTS................................................ 17
SECTION 3.18. NOTES RECEIVABLE AND ACCOUNTS RECEIVABLE................. 18
SECTION 3.19. POWERS OF ATTORNEY....................................... 19
SECTION 3.20. INSURANCE................................................ 19
SECTION 3.21. EMPLOYEES................................................ 19
SECTION 3.22. EMPLOYEE BENEFITS........................................ 20
SECTION 3.23. GUARANTIES............................................... 21
SECTION 3.24. ENVIRONMENT, HEALTH AND SAFETY........................... 21
SECTION 3.25. CERTAIN BUSINESS RELATIONSHIPS WITH THE COMPANY.......... 22
SECTION 3.26. DELIVERY OF INFORMATION.................................. 22
SECTION 3.27. PRODUCT AND SERVICE WARRANTIES........................... 23
SECTION 3.28. PRODUCT AND SERVICE LIABILITY............................ 23
SECTION 3.29. CERTAIN BUSINESS PRACTICES............................... 23
SECTION 3.30. DISCLOSURE............................................... 23
SECTION 3.31. LIMITATIONS ON REPRESENTATIONS AND WARRANTIES............ 23
ARTICLE IIIA REPRESENTATIONS AND WARRANTIES OF SOLE STOCKHOLDER........... 24
SECTION 3.1A. AUTHORIZATION OF TRANSACTION............................ 24
SECTION 3.2A. NONCONTRAVENTION........................................ 24
SECTION 3.3A. BROKERS' FEES........................................... 24
SECTION 3.4A. COMPANY SHARES.......................................... 24
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF HANGER AND BUYER............. 25
SECTION 4.1. ORGANIZATION AND QUALIFICATION............................ 25
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SECTION 4.2. AUTHORITY................................................. 25
SECTION 4.3. NO CONFLICT; REQUIRED FILINGS AND CONSENTS................ 25
SECTION 4.4. LIMITATION ON REPRESENTATIONS AND WARRANTIES.............. 26
SECTION 4.5. REPORTS; FINANCIAL STATEMENTS............................. 26
SECTION 4.6. ABSENCE OF CERTAIN CHANGES OR EVENTS...................... 26
SECTION 4.7. OWNERSHIP OF BUYER........................................ 27
SECTION 4.8. BROKERS................................................... 27
SECTION 4.9. FINANCIAL STATEMENTS...................................... 27
ARTICLE V COVENANTS....................................................... 27
SECTION 5.1. AFFIRMATIVE COVENANTS OF THE COMPANY...................... 27
SECTION 5.2. NEGATIVE COVENANTS OF THE COMPANY......................... 28
SECTION 5.3. NEGATIVE COVENANTS OF HANGER AND BUYER.................... 29
SECTION 5.4. ACCESS AND INFORMATION.................................... 29
ARTICLE VI ADDITIONAL AGREEMENTS.......................................... 30
SECTION 6.1. APPROPRIATE ACTION; CONSENTS; FILINGS..................... 30
SECTION 6.2. TRANSFER OF COMPANY LIABILITIES PRIOR TO THE
CLOSING DATE............................................ 31
SECTION 6.3. PAYMENT BY COMPANY OF CERTAIN OUTSTANDING
OBLIGATIONS PRIOR TO THE CLOSING DATE.................................. 31
SECTION 6.4. EMPLOYMENT AND NON-COMPETITION AGREEMENTS................. 31
SECTION 6.5. LANDLORD APPROVALS........................................ 31
SECTION 6.6. CONTRACT ASSIGNMENTS/NOVATIONS............................ 31
SECTION 6.7. BEST EFFORTS.............................................. 31
SECTION 6.8. PUBLIC ANNOUNCEMENTS...................................... 31
SECTION 6.9. TAIL INSURANCE............................................ 32
SECTION 6.10. NO COMPETING TRANSACTION................................ 32
SECTION 6.11. TAX TREATMENT AS STOCK PURCHASE......................... 32
SECTION 6.12. ADDITIONAL TAX MATTERS.................................. 32
ARTICLE VII CLOSING CONDITIONS............................................ 33
SECTION 7.1. CONDITIONS TO OBLIGATIONS OF EACH PARTY UNDER
THIS AGREEMENT.......................................... 33
SECTION 7.2. ADDITIONAL CONDITIONS TO OBLIGATIONS OF BUYER
AND/OR HANGER........................................... 34
SECTION 7.3. ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE
COMPANY AND SOLE STOCKHOLDER............................ 35
ARTICLE VIII TERMINATION, AMENDMENT, WAIVER AND INDEMNIFICATION........... 36
SECTION 8.1. TERMINATION............................................... 36
SECTION 8.2. INVESTIGATION............................................. 36
SECTION 8.3. AMENDMENT................................................. 36
SECTION 8.4. WAIVER.................................................... 36
SECTION 8.5. FEES, EXPENSES AND OTHER PAYMENTS......................... 37
SECTION 8.6. INDEMNIFICATION........................................... 37
ARTICLE IX GENERAL PROVISIONS............................................. 38
SECTION 9.1. EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS.............................................. 38
SECTION 9.2. NOTICES................................................... 39
SECTION 9.3. CERTAIN DEFINITIONS....................................... 39
SECTION 9.4. HEADINGS; CONSTRUCTION.................................... 45
SECTION 9.5. SEVERABILITY.............................................. 45
SECTION 9.6. ENTIRE AGREEMENT AND MODIFICATION......................... 45
SECTION 9.7. ASSIGNMENT................................................ 45
SECTION 9.8. PARTIES IN INTEREST....................................... 45
SECTION 9.9. WAIVER; REMEDIES CUMULATIVE............................... 45
SECTION 9.10. FURTHER ASSURANCES....................................... 46
SECTION 9.11. GOVERNING LAW............................................ 46
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SECTION 9.12. JURISDICTION; SERVICE OF PROCESS......................... 46
SECTION 9.13. COUNTERPARTS............................................. 46
</TABLE>
<TABLE>
<CAPTION>
Exhibits Description
-------- -----------
<S> <C>
Exhibit A Promissory Note
Exhibit B-1 Form of Jerald Harshberger Employment Agreement
Exhibit B-2 Form of Key Employee Employment Agreement
Exhibit C Form of Sole Stockholder Non-Competition Agreement
Exhibit D Legal Opinion of Counsel to the Company
Exhibit E Legal Opinion of Counsel to Hanger
</TABLE>
<TABLE>
<CAPTION>
Schedules Description
-------- -----------
<S> <C>
1.1 Purchased Shares
1.2(b) Assets and Liabilities Transferred Prior to
Closing
3.2 Officers and Directors; Certificate of
Incorporation and By-Laws; Minutes; Stock
Certificates and Transfer Books
3.3 Capitalization
3.5 Filings and Consents
3.7 Financial Statements
3.8 Liabilities
3.9 Certain Changes or Events of the Company
3.10 Litigation Matters
3.11 Brokers
3.12(c) Tax Returns
3.12(e) Affiliated Groups
3.12(f) Additional Tax Matters
3.13(a) Real Property Owned
3.13(b) Real Property Leased or Subleased
3.14(c) Intellectual Property Owned
3.14(d) Intellectual Property Licensed, Sublicensed,
Agreements or Permission
3.15 Tangible Assets
3.16 Inventory
3.17 Contracts
3.20 Insurance Policies
3.21 Employees
3.22 Employee Benefit Plans
3.25 Certain Business Relationships with the Company
3.27 Standard Sale, Lease and Performance Terms and
Conditions
5.2 Negative Covenants
7.2(c) Contracts or Agreements Requiring Consents or
Waivers
</TABLE>
iv
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STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT, dated as of December 23, 1997 (this
"AGREEMENT"), by and among Hanger Orthopedic Group, Inc., a Delaware
corporation ("HANGER"); Hanger Prosthetics & Orthotics, Inc., a Delaware
corporation ("BUYER") and a wholly-owned subsidiary of Hanger; Harshberger
Prosthetic & Orthotic Center, Inc., an Alabama corporation, Harshberger
Prosthetic & Orthotic Center of Mobile, Inc., an Alabama corporation,
Harshberger Prosthetic & Orthotic Center of Florence, Inc., an Alabama
corporation and FAB- CAM, Inc., an Alabama corporation (individually, the
"COMPANY" and collectively, the "Companies"); and Jerald J. Harshberger, the
sole stockholder of the Companies (the "SOLE STOCKHOLDER").
W I T N E S S E T H:
WHEREAS, the Sole Stockholder is the sole owner of all the issued and
outstanding shares (all of such shares being collectively referred to as the
"SHARES") of the common stock, par value of $1.00 per share, of each of the
Companies (the "COMPANY COMMON STOCK"), and the Sole Stockholder now desires
to sell, and the Buyer wishes to purchase (the "PURCHASE"), all of the shares
of Company Common Stock upon the terms and subject to the conditions of this
Agreement; and
WHEREAS, Hanger, the Company and the Sole Stockholder are made parties
hereto for the purposes as set forth herein; and
WHEREAS, certain capitalized terms used in this Agreement are defined in
Section 9.3.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto agree as follows:
ARTICLE I
SALE AND PURCHASE OF SHARES
SECTION 1.1 SALE OF SHARES. Sole Stockholder agrees to sell the
Shares to Buyer and Buyer agrees to purchase the
Shares, as set forth on SCHEDULE 1.1, from Sole
Stockholder for the purchase price provided in
Section 1.2(a), payable in accordance with Section
1.2, subject to adjustment in accordance with
Sections 1.2(c) and 1.2(d), and subject to the terms
and conditions and based upon the representations and
warranties contained herein.
SECTION 1.2 PURCHASE PRICE, PAYMENT AND ADJUSTMENTS.
(a) PURCHASE PRICE AND PAYMENT. Buyer agrees to pay to the Sole
Stockholder at the Closing a total of Three Million Fifty Thousand Dollars
($3,050,000) (the "PURCHASE PRICE") for the Shares by delivery of: (i) One
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Million Five Hundred Fifty Thousand Dollars ($1,550,000) in cash payable by
wire transfer or delivery of other immediately available funds; and (ii) a
subordinated promissory note in the principal amount of One Million Five
Hundred Thousand Dollars ($1,500,000) in the form attached hereto as EXHIBIT A
(the "NOTE"), having a term of five (5) years and bearing simple interest at
the rate of seven and one-half percent (7.5%) per annum, with principal
payable annually in equal installments of Three Hundred Thousand Dollars
($300,000) each, plus accrued interest on the unpaid principal balance payable
with each such principal installment, and with such installments being made
annually on each anniversary date of the Closing Date. The Note shall be
guaranteed by Hanger. The Purchase Price shall be subject to pre-Closing
adjustments as set forth in Section 1.2(d)(ii) below and post-Closing
adjustments as set forth in Sections 1.2(c) and 1.2(d)(iii) below. The portion
of the Purchase Price allocated to the covenant not to compete set forth in
the Non-Competition Agreement attached hereto as EXHIBIT C shall equal one
percent (1%) of the Purchase Price (as modified by any Purchase Price
Adjustments made as of the Closing Date under Section 1.2(d)(ii)), and shall
be payable at the Closing out of the cash portion of the Purchase Price.
(b) PRE-CLOSING TRANSFERS. Notwithstanding anything contained
herein to the contrary, prior to the Closing Date in accordance with Sections
6.2 and 6.3 hereof, the Companies shall transfer, distribute and/or dispose of
the following items (listed in detail on SCHEDULE 1.2(B) attached hereto) to
the Sole Stockholder or to a third party at the direction of the Sole
Stockholder, all with the effect that the following items shall not be owned
by the Companies, nor assumed by Buyer, at the Closing Date: (i) any notes or
accounts receivable due to the Companies from their officers, directors or the
Sole Stockholder, or due from the Companies to its officers, directors or the
Sole Stockholder; (ii) any real property owned by the Companies (and any
fixtures located thereon) and any mortgages, deeds of trust or other
indebtedness on or relating to such real property for which the Companies are
liable in any manner whatsoever; (iii) any automobiles or vehicles leased or
owned by the Companies that are used for personal purposes by the Sole
Stockholder or any employee of the Companies, and any leases or indebtedness
on or relating to such automobiles or vehicles for which the Companies are
liable in any manner whatsoever; (iv) all life insurance policies on the life
of the Sole Stockholder; (v) all indebtedness, including but not limited to
all bank debt, and all indebtedness relating to prior acquisitions by the
Company; and (vi) any cash in excess of the amount necessary to fully cover
all checks issued by the Company up to and through the Closing Date. Any Taxes
generated in connection with such transfers, distributions or disposals shall
be borne solely by the Sole Stockholder or shall be reimbursed to the Buyer by
the Sole Stockholder. Furthermore, prior to the Closing Date, the Company
shall fully pay all outstanding pension plan and profit sharing contributions
due from the Company, if any.
(c) EARNOUT PAYMENTS.
(i) In addition to the consideration to be paid to the
Sole Stockholder pursuant to Section 1.2(a), so long as (i) none of the
Companies nor the Sole Stockholder has breached the representations and
warranties contained in Articles III and IIIA hereof and (ii) the Sole
Stockholder has not breached the terms of the Non-Competition Agreement
(attached hereto as EXHIBIT C), Buyer shall pay to the Sole Stockholder
additional consideration for the Shares (the "EARNOUT PAYMENTS") in an amount
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equal to twenty percent (20%) of the annual Net Sales (as defined in Section
1.2(c)(ii)) during the five-year period beginning on the first day of the
month immediately following the Closing Date and ending on the last day of the
month including the fifth anniversary date of the Closing Date (the "EARNOUT
PERIOD").
(A) Notwithstanding anything herein to the contrary
and subject to Sections 1.2(c)(i)(B) and (C) below, the amount of the Earnout
Payment for each year of the Earnout Period shall not exceed Sixty Thousand
Dollars ($60,000) for such year (the "ANNUAL MAXIMUM"), and the maximum amount
of the Earnout Payments for the Earnout Period shall not exceed Three Hundred
Thousand Dollars ($300,000) in the aggregate.
(B) If the Annual Maximum for any Earnout Year
exceeds the amount of the Earnout Payment for such year, the amount of the
Annual Maximum for the next Earnout Year shall be increased by the amount of
such excess.
(C) If the amount of the Earnout Payment for any
Earnout Year exceeds the amount of the Annual Maximum for such year, the
amount of the Earnout Payment for the next Earnout Year shall be increased by
the amount of such deficiency but not in excess of the Annual Maximum for such
year or years.
(ii) For purposes of this Agreement, "NET SALES" means
gross sales and revenues earned during each 12-month period during the Earnout
Period (individually, the "EARNOUT YEAR" or collectively, the "EARNOUT YEARS")
and attributable to orthotic and prosthetic services rendered and products
sold by Harshberger Prosthetic & Orthotic Center of Florence, Inc., or any
successor entity, less non-allowed charges (except for any such non-allowed
insurance charges resulting from Buyer's negligence), deductions for sales
discounts and disallowances and a reasonable allowance for doubtful accounts
or reserve for bad debts for each such Earnout Year.
(iii) The computations required in this Section 1.2(c)
shall be made in accordance with GAAP applied on a consistent basis. Buyer
shall deliver the calculation of the Earnout Payment for each of the Earnout
Years to the Sole Stockholder within forty-five (45) days after the end of
each such year, and such calculation shall be deemed conclusive and binding on
the parties for purposes of computing the Earnout Payments, unless the Sole
Stockholder notifies Buyer in writing within thirty (30) days after receipt of
such calculation of the disagreement therewith by Sole Stockholder, which
notice shall state in reasonable detail the reasons for any such disagreement
and identify the amounts and items in dispute. Any such dispute shall be
resolved in the manner set forth in Section 1.2(d)(v) hereof. If Sole
Stockholder does not provide such written notice to Buyer within such 30-day
period, then Buyer shall make the applicable Earnout Payment within ten (10)
days after the date by which Sole Stockholder was required to provide such
written notice under this Section 1.2(c)(iii).
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(d) PURCHASE PRICE ADJUSTMENTS.
(i) Notwithstanding anything contained in this Agreement
to the contrary, the Sole Stockholder guarantees that the Companies' combined
Adjusted Working Capital (as defined herein) measured as of the close of
business on the Closing Date shall equal or exceed $360,000. For purposes of
this Agreement, "ADJUSTED WORKING CAPITAL" means, as of the Closing Date and
determined in accordance with GAAP, the SUM OF THE COMPANIES' (A) cash on hand
or in the bank, (B) Accounts Receivable (as defined in Section 3.18), (C)
Inventory (as defined in Section 3.16), and (D) prepaid expenses and deposits
shown as assets on the Companies' books and records, LESS THE SUM OF THE
COMPANIES' (x) trade accounts payable, (y) accrued expenses and payroll taxes
payable, and (z) income Taxes payable and any other current Liabilities. For
purposes of calculating the Purchase Price Adjustment on the Post-Closing
Adjustment Date (as defined below), Accounts Receivable shall be adjusted to
reflect actual collections of Accounts Receivable by the Companies or any
successor entity, as provided in Section 1.2(d)(iv) below.
(ii) If, on the Closing Date, Adjusted Working Capital is
less than the amount set forth in Section 1.2(d)(i) above, the cash portion of
the Purchase Price payable pursuant to Section 1.2(a) shall be reduced by the
amount of such deficiency. Any material change between August 31, 1997 and the
Closing Date in the Companies' Assets and Liabilities (other than Assets and
Liabilities included in the calculation of Adjusted Working Capital) will also
result in an appropriate adjustment to the Purchase Price stated in Section
1.2(a). For purposes of this Section 1.2(d)(ii), a "material change" is a
change that is greater than $10,000. The amounts to be determined under this
Section 1.2(d)(ii) shall be based upon an estimated trial balance dated as of
the Closing Date or a date prior to the Closing Date that is acceptable to the
Buyer and that shall be prepared by the Company and presented to the Buyer at
or immediately prior to the Closing Date.
(iii) If, on December 31, 1998 (the "POST-CLOSING
ADJUSTMENT DATE"), Adjusted Working Capital measured as of the Closing Date is
less than the amount set forth in Section 1.2(d)(i) above, the Purchase Price
shall be reduced by the amount of such deficiency, less the amount of any
adjustment to the Purchase Price made under Section 1.2(d)(ii) above. The
Buyer shall be entitled to reduce the first installment payment of principal
and interest on the Note by the amount of such deficiency, and next to reduce
the outstanding principal balance of the Note by any remaining deficiency.
(iv) If, on the Post-Closing Adjustment Date, Adjusted
Working Capital measured as of the Closing Date is greater than the amount set
forth in Section 1.2(d)(i) above, the Purchase Price shall be increased by the
amount of such deficiency, and the Buyer shall pay the amount of such excess
to the Sole Stockholder in cash by wire transfer or delivery of other
immediately available funds, subject to the provisions of Sections 1.2(d)(v)
and (vi) hereof.
(v) Solely for purposes of determining Adjusted Working
Capital under Sections 1.2(d)(iii) and (iv) above, any deficiency or excess in
the amount of the Accounts Receivable component of Adjusted Working Capital
shall be determined by comparing Accounts Receivable of the Company measured
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at the Closing Date and the amount of such Accounts Receivable actually
collected by Buyer for the period beginning on the first business day
following the Closing Date and ending on the Post-Closing Adjustment Date. If
Buyer subsequently collects any Accounts Receivable that were uncollected as
of the Post-Closing Adjustment Date, Buyer shall be entitled to retain any
such collections.
(vi) The amounts to be determined under Sections
1.2(d)(iii), (iv) and (v) shall be based upon a final balance sheet dated as
of the Closing Date. Buyer may choose to have such final balance sheet
prepared by a nationally-recognized, independent certified public accounting
firm selected by the Buyer. Buyer shall deliver the calculation and
determination of the Purchase Price Adjustment to the Sole Stockholder within
forty-five (45) days after the Post- Closing Adjustment Date. Such calculation
shall be deemed conclusive and binding on the parties for purposes of
computing the Purchase Price Adjustment unless the Sole Stockholder objects
pursuant to the provisions of this Section 1.2(d)(vi). If the Sole Stockholder
has any objections to the determination of the Purchase Price Adjustment under
this Section 1.2(d)(vi), he will deliver a detailed statement describing his
objections to the Buyer within thirty (30) days after receiving the
appropriate determination of the Purchase Price Adjustment and supporting
calculations from the Buyer. The Buyer and the Sole Stockholder will use
reasonable efforts to resolve any such objections themselves.
(A) If the parties do not obtain a final resolution
within thirty (30) days after the Buyer has received the statement of
objections regarding the calculation of the Purchase Price Adjustment or the
Earnout Payment, the Buyer and the Sole Stockholder will select an accounting
firm mutually acceptable to them to resolve any remaining objections. If the
Buyer and the Sole Stockholder are unable to agree on the choice of an
accounting firm, Buyer will select a nationally-recognized, independent public
accounting firm. The determination of any accounting firm so selected will be
set forth in writing and will be conclusive and binding upon the parties. The
Buyer will revise the determination of the Purchase Price Adjustment or the
Earnout Payments as appropriate to reflect the resolution of any objections
thereto.
(B) In the event the parties submit any unresolved
objections with respect to the determination of the amount of the Purchase
Price Adjustment or the Earnout Payments to an accounting firm for resolution
as provided in Section 1.2(d)(vi)(A) above, the Buyer, the Sole Stockholder
will share responsibility for the fees and expenses of the accounting firm as
follows:
(I) if the accounting firm agrees with the
Buyer's determination of the amount of the Purchase Price Adjustment or the
Earnout Payments (with the amount so determined by the Buyer referred to
herein as the "BUYER'S VALUE"), the Sole Stockholder will be responsible for
all of the fees and expenses of the accounting firm incurred in connection
with the preparation of the determination with which the accounting firm
agrees;
(II) if the accounting firm agrees with the
Sole Stockholders' determination of the amount of the Purchase Price
Adjustment or the Earnout Payments (with the amount so determined by the Sole
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Stockholder referred to herein as the "SOLE STOCKHOLDER'S VALUE"), the Buyer
will be responsible for all of the fees and expenses of the accounting firm
incurred in connection with the preparation of the determination with which
the accounting firm agrees; and
(C) if the accounting firm determines that the
amount of the Purchase Price Adjustment or the Earnout Payments (the "ACTUAL
VALUE") is different from either the Buyer's Value or the Sole Stockholder's
Value, the party whose determination is closest to the Actual Value will be
responsible for that fraction of the fees and expenses of the accounting firm
equal to (x) the difference between the closest party's determination and the
Actual Value over (y) the greater of the difference between (I) the Buyer's
Value and the Sole Stockholder's Value and (II) the other party's
determination (which is furthest from the Actual Value) and the Actual Value,
and the Buyer will be responsible for the remainder of the fees and expenses.
(D) Each party will make the work papers and
back-up materials used in determining the Buyer's Value and the Sole
Stockholder's Value available to the other party and their accountants and
other representatives at reasonable times and upon reasonable notice at any
time during (I) the preparation of the Buyer's Value or Sole Stockholder's
Value, (II) the review by either party of the other party's determination of
the Purchase Price Adjustment or the Earnout Payments, and (III) the
resolution by the parties of any objections thereto.
(E) If the Sole Stockholder does not provide a
written statement of objections to Buyer within thirty (30) days after Buyer
provides the Sole Stockholder with the determination of the Purchase Price
Adjustment or the Earnout Payment, then Buyer shall make the Purchase Price
Adjustment or Earnout Payment, if applicable, and, solely with respect to the
Purchase Price Adjustment, shall (i) reduce the first installment payment due
under the Note and issue a Replacement Note, if there is a reduction in the
Purchase Price, or (ii) make the cash payment to the Sole Stockholder, if
there is an increase in the Purchase Price, within ten (10) days after the
date by which the Sole Stockholder was required to provide such a written
statement of objections under this Section 1.2(d)(vi). If the Sole Stockholder
provides a written statement of objections to Buyer within thirty (30) days
after Buyer provides the Sole Stockholder with the determination of the
Purchase Price Adjustment or the Earnout Payment and the parties proceed with
the dispute resolution mechanism described in this Section 1.2(d)(vi), then
Buyer shall: (I) in the case of the Earnout Payment, make the Earnout Payment,
as adjusted; and (II) in the case of the Purchase Price Adjustment, reduce the
first installment payment due under the Note and issue a Replacement Note, if
applicable, as set forth above, within ten (10) days after the resolution of
such dispute.
(vii) In the event the Purchase Price Adjustment results in
a reduction in the principal amount of the original Note, the original Note
shall be deemed to have been cancelled on the Post-Closing Adjustment Date,
and the Sole Stockholder shall have the right to receive a replacement
promissory note (the "REPLACEMENT NOTE") from the Buyer. Upon surrender of the
original Note for cancellation to the Buyer, the Sole Stockholder shall be
entitled to receive a Replacement Note from the Buyer, and the Buyer shall
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promptly issue a Replacement Note to the Sole Stockholder, which Note shall
have a principal balance equal to the principal balance of the original Note,
less the portion of the Purchase Price Adjustment that results in a reduction
in the principal amount of the original Note. The reduced principal amount and
interest on the reduced principal amount of the Replacement Note shall be
payable over four (4) years and otherwise on the same terms and conditions as
the original Note.
(e) CANCELLATION OF TREASURY STOCK. Each share of Company Common
Stock held in the treasury of the Company, if any, immediately prior to the
Closing Date shall be canceled and extinguished and no payment shall be made
with respect thereto.
SECTION 1.3 DELIVERIES AT CLOSING; STOCK TRANSFER BOOKS.
(a) At the Closing, (i) the Sole Stockholder shall
deliver to the Buyer the various certificates, instruments, and documents
referred to in Sections 7.1 and 7.2 hereof, (ii) the Buyer shall deliver to
the Sole Stockholder the various certificates, instruments, and documents
referred to in Sections 7.1 and 7.3 hereof, (iii) the Sole Stockholder shall
deliver to the Buyer stock certificates representing all of the issued and
outstanding shares of capital stock of the Companies, endorsed in blank or
accompanied by duly executed assignment documents, and (iv) the Buyer shall
deliver to the Sole Stockholder the consideration specified in Section 1.2(a)
hereof, subject to any pre-Closing adjustment required under Section
1.2(d)(ii).
(b) On the date of the Agreement, the stock transfer
books of the Company shall be closed and there shall be no further
registration of transfers of shares of Company Common Stock thereafter on the
records of the Company. On and after the Closing Date, any certificates
representing shares of Company Common Stock shall thereafter only represent
the right to receive a pro rata portion of the Purchase Price and such
certificates, upon presentation to Hanger or Buyer, shall be converted into
the Purchase Price consideration.
ARTICLE II
CLOSING; CLOSING DATE
The closing of the transactions contemplated by this Agreement (the
"CLOSING") shall take place at the offices of Buyer's attorneys, Freedman,
Levy, Kroll & Simonds, Suite 825, 1050 Connecticut Avenue, N.W., Washington,
D.C. 20036, or at such other location and on such other date as the Buyer and
the Sole Stockholder may mutually agree in writing; PROVIDED, however, that
the Closing shall take place no later than December 31, 1997 (the "CLOSING
DATE"). The Closing shall take place following the receipt of all executed
documents by Freedman, Levy, Kroll & Simonds, as agent for the Buyer, and the
satisfaction of the conditions to Closing set forth in Section 7 of this
Agreement, and there shall be no need for any party to appear at the Closing.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
CONCERNING THE COMPANY
Each of the Companies and the Sole Stockholder hereby represents and
warrants, jointly and severally, to Hanger and Buyer as follows as of the date
of this Agreement and as of the Closing Date:
SECTION 3.1 ORGANIZATION AND QUALIFICATION. Each Company is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or organization, has all
requisite corporate or other power and authority to own, lease and operate its
properties and to carry on its business as it is now being conducted, and is
duly qualified and in good standing to do business in each jurisdiction in
which the nature of the business conducted by it or the ownership or leasing
of its properties makes such qualification necessary. The Companies have no
Subsidiaries, and do not, directly or indirectly, own or control any
investment or interest (whether in the form of debt or equity) in any other
Person.
SECTION 3.2 CERTIFICATE OF INCORPORATION AND By-Laws. SCHEDULE
3.2 contains (i) a list of the officers and directors of the Companies, (ii)
complete and correct copies of each Company's Certificate or Articles of
Incorporation and By-Laws or equivalent organizational documents, in each case
as amended or restated, as in effect as of the Closing Date, (iii) the minute
books relating to all meetings of stockholders, board of directors and
committees of the Companies, (iv) stock certificate books of the Companies and
(v) stock transfer books of the Companies. None of the Companies is in
violation of any of the provisions of its Certificate or Articles of
Incorporation or By-Laws or equivalent organizational documents, in each case
as amended or restated. In addition, the minute books (containing the record
of meetings of the stockholders, the board of directors and any committees of
the board of directors), the stock certificate books and the stock transfer
books of each Company are correct and complete.
SECTION 3.3 CAPITALIZATION. The authorized capital stock of each
of the Companies is set forth on SCHEDULE 3.3 attached hereto. All of the
Shares of the Companies are duly authorized, validly issued, fully paid and
non-assessable and not subject to preemptive rights created by statute, the
Companies' Certificates or Articles of Incorporation or By-Laws or any
agreement to which any of the Companies is a party or bound, (b) no shares of
Company Common Stock were held in treasury of any of the Companies and (c) all
of the issued and outstanding shares of Company Common Stock are owned by and
held in the name of the Sole Stockholder. There are no bonds, debentures,
notes or other indebtedness, issued or outstanding, having the right to vote
on any matters on which the Companies' stockholders may vote. There are no
options, warrants, calls or other rights (including subscription rights or
registration rights), agreements, proxies, voting rights agreements, voting
trusts, arrangements or commitments of any character, presently outstanding,
which (i) obligate any of the Companies to issue, deliver or sell shares of
its capital stock or debt securities, (ii) obligate any of the Companies to
grant, extend or enter into any such option, warrant, call or other such
right, agreement, arrangement or commitment, (iii) obligate any of the
Companies to repurchase, redeem or otherwise acquire any shares of Company
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Common Stock, or (iv) relate to the issued or unissued capital stock of, or
other equity interests in, any of the Companies.
SECTION 3.4 AUTHORITY. Each Company has all requisite corporate
power and authority to execute and deliver this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action and no other corporate proceeding on the part of each Company
is necessary to authorize this Agreement or to consummate the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
each Company and, assuming the due authorization, execution and delivery
thereof by the Sole Stockholder, Hanger and Buyer, constitutes the legal,
valid and binding obligation of each Company enforceable in accordance with
its terms.
SECTION 3.5 NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) Except as set forth in SCHEDULE 3.5, the execution
and delivery of this Agreement by the Companies does not, and the performance
of this Agreement by the Companies will not (i) conflict with or violate the
Companies' Certificates or Articles of Incorporation or By-Laws or equivalent
organizational documents, in each case as amended or restated, (ii) conflict
with or violate any federal, state, foreign or local law, statute, ordinance,
rule, regulation, order, judgment or decree (collectively, "LAWS") applicable
to the Companies or by which any of their properties or Assets are bound or
subject to, or (iii) result in any breach of or constitute a default (or an
event that with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, or require payment under, or result in the creation of an
Encumbrance on, any of the properties or Assets of the Companies pursuant to,
any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which any of the
Companies is a party or by which any of the Companies or any of its properties
is bound or subject.
(b) The execution and delivery of this Agreement by the
Companies does not, and the performance of this Agreement by the Companies
will not, require any of the Companies to obtain any consent, approval,
authorization or permit of, or to make any filing with or notification to, any
governmental or regulatory authority, domestic or foreign ("GOVERNMENTAL
ENTITIES") based on Laws and other requirements of Governmental Entities.
SECTION 3.6 PERMITS; COMPLIANCE. The Companies are in possession
of all franchises, grants, authorizations, licenses, permits, easements,
variances, exemptions, consents, certificates, approvals and orders necessary
to own, lease and operate its properties and to carry on their business as it
is now being conducted (collectively, the "COMPANY PERMITS"), and there is no
action, proceeding or investigation pending or threatened regarding suspension
or cancellation of any of the Company Permits. The Companies are not in
conflict with, or in default or violation of (a) any Law applicable to the
Companies or which any of their properties or Assets are bound by or subject
to or (b) any of the Company Permits. None of the Companies has received from
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any Governmental Entity any written notification with respect to possible
conflicts, defaults or violations of Laws.
SECTION 3.7 FINANCIAL STATEMENTS. SCHEDULE 3.7 contains true,
correct and complete copies of the unaudited balance sheets of the Companies
as of August 31, 1997 and, with respect to Harshberger Prosthetic & Orthotic
Center of Florence, Inc., as of October 24, 1997 (collectively, the "BALANCE
Sheet"), and the related statements of operations, statements of cash flows
and statements of stockholders equity for the period then ended, and the notes
and schedules thereto, together with the report thereon of Donegan, Bradley &
Wylie, LLP (collectively, the "FINANCIAL STATEMENTS"). The Financial
Statements are attached hereto as SCHEDULE 3.7 and have been prepared from
books and records of the Company on the tax basis method of accounting applied
on a basis consistent with preceding years and throughout the periods involved
(except as otherwise noted therein). The Financial Statements fairly and
accurately present the financial condition, results of operations and changes
in cash flows of the Companies at the dates thereof and for the periods
indicated in the Financial Statements. No financial statement of any Person
other than the Companies is required to be included in the Financial
Statements.
SECTION 3.8 NO UNDISCLOSED LIABILITIES. Except as set forth on
SCHEDULE 3.8, the Companies have no liabilities or other obligations of any
kind whatsoever, whether accrued, contingent, absolute, determined,
determinable or otherwise ("LIABILITY" or "LIABILITIES"), and there is no
existing condition, situation or set of circumstances which could reasonably
be expected to result in such a Liability, other than Liabilities fully
reflected or reserved against on the face of the Balance Sheet as adjusted for
Liabilities incurred in the Ordinary Course of Business since August 31, 1997,
through the Closing Date.
SECTION 3.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since August
31, 1997, there has not been any material adverse change in the business,
financial condition, operations, results of operations or future prospects of
the Companies. Without limiting the generality of the foregoing, since that
date and except as otherwise disclosed in SCHEDULE 3.9:
(a) the Companies have not sold, leased, transferred, or
assigned any of their Assets, tangible or intangible, other than sales to
their customers for fair consideration in the Ordinary Course of Business;
(b) the Companies have not entered into any agreement,
contract, lease or license (or series of related agreements, contracts, leases
and licenses) outside the Ordinary Course of Business;
(a) no party (including the Companies) has accelerated,
terminated, modified or canceled any agreement, contract, lease or license (or
series of related agreements, contracts, leases and licenses) to which the
Companies are a party or by which the Companies are bound;
(b) the Companies have not imposed, granted, allowed or
consented to any Security Interest upon any of their Assets;
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(c) the Companies have not made any capital expenditure
(or series of related capital expenditures) either involving more than an
aggregate of Five Thousand Dollars ($5,000.00) or outside the Ordinary Course
of Business;
(d) the Companies have not made any capital investment
in, any loan to, or any acquisition of the securities or Assets of, any other
Person (or series of related capital investments, loans, and acquisitions);
(e) the Companies have not issued any note, bond, or
other debt security or created, incurred, assumed, or guaranteed any
indebtedness for borrowed money or capitalized lease obligation;
(f) the Companies have not delayed or postponed the
payment of trade accounts payable, accrued expenses or other Liabilities
outside the Ordinary Course of Business;
(g) the Companies have not canceled, compromised, waived,
or released any right or claim (or series of related rights and claims);
(h) the Companies have not granted any license or
sublicense of any rights under or with respect to any Intellectual Property;
(i) there has been no change made or authorized in any
Company's Certificate or Articles of Incorporation or By-Laws or equivalent
organizational documents, in each case as amended or restated prior to August
31, 1997;
(j) the Companies have not issued, sold or otherwise
disposed of any of their capital stock, or granted any options, warrants, or
other rights to purchase or obtain (including upon conversion, exchange, or
exercise) any of its capital stock;
(k) the Companies have not declared, set aside, or paid
any dividend or made any distribution with respect to their capital stock
(whether in cash or in kind) or redeemed, purchased, or otherwise acquired any
of their capital stock;
(l) the Companies have not experienced any damage,
destruction, or loss (whether or not covered by insurance) to their Assets;
(m) the Companies have not made any loan to, or entered
into any other transaction with, any of their directors, officers and
employees;
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(n) the Companies have not entered into any employment
contract or collective bargaining agreement, written or oral, or modified the
terms of any existing such contract or agreement;
(o) the Companies have not granted any increase in the
compensation of any of their directors, officers and employees;
(p) the Companies have not adopted, amended, modified or
terminated any bonus, profit-sharing, incentive, severance or other plan,
contract or commitment for the benefit of any of their directors, officers and
employees (or taken any such action with respect to any other Employee Benefit
Plan);
(q) the Companies have not made any other change in
employment terms for any of their directors, officers and employees outside
the Ordinary Course of Business;
(r) the Companies have not made or pledged to make any
charitable or other capital contribution;
(u) the Companies have not done any act, or failed to do
any act which they had a duty or obligation to perform, which has or could
result in a breach of any obligation of any of the Companies;
(v) there has not been any other occurrence, event,
incident, action, failure to act or transaction outside the Ordinary Course of
Business involving any of the Companies; and
(w) the Companies have not committed to any of the
foregoing.
SECTION 3.10 ABSENCE OF LITIGATION. Except as set forth on
SCHEDULE 3.10, (a) there is no claim, action, suit, litigation, proceeding,
arbitration or investigation of any kind, at law or in equity (including
actions or proceedings seeking injunctive relief), pending or threatened
against any of the Companies or any Assets, properties or rights of the
Companies, and (b) the Companies are not subject to any continuing order of,
consent decree, settlement agreement or other similar written agreement with
or continuing investigation by, any court or Governmental Entity, or any
judgment, order, writ, injunction, decree or award of any court, Governmental
Entity or arbitrator. In respect of the matters relating to or arising in
connection with the actions set forth in SCHEDULE 3.10, there is no fact,
event, condition, circumstance or other matter which either has, or is
reasonably likely to have resulted in, an event or determination having a
Company Material Adverse Effect. The Companies have delivered to Hanger or
Buyer copies of all pleadings, correspondence and other documents relating to
each matter disclosed in SCHEDULE 3.10.
SECTION 3.11 BROKERS. Except as set forth on SCHEDULE 3.11, no
broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of any Company.
Each Company has heretofore furnished to Hanger a correct copy of all
agreements between such Company and any broker, finder or investment adviser
pursuant to which such firm or individual would be entitled to any payment
relating to the Purchase. The Purchase Price shall be reduced to reflect the
payment of such fees by any Company in the event any such fees are not paid by
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the Sole Stockholder or by any of the Companies prior to the Closing Date.
SECTION 3.12 TAX MATTERS.
(a) Each Company has filed all Tax Returns in a timely manner
that it was required to file. All such Tax Returns were correct and complete
in all respects. All Taxes owed by each Company (whether or not shown on any
Tax Return) have been paid or accrued and proper reserves have been
established therefor. Each Company is not currently the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where any Company does not file Tax
Returns that it is or may be subject to taxation by that jurisdiction. There
are no Security Interests on any of the Assets of the Companies that arose in
connection with any failure (or alleged failure) to pay any Tax or file any
Tax Return.
(b) Each Company has withheld and paid all Taxes required to
have been withheld and paid or accrued and proper reserves have been
established therefor in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other third party.
(c) There is no dispute or claim concerning any Liability for
Taxes of any Company claimed or raised by any Governmental Entity. SCHEDULE
3.12(c) lists all federal, state, local, and foreign income Tax Returns filed
with respect to each Company for taxable periods ended on or after December
31, 1993, and indicates those Tax Returns that have been audited, and
indicates those Tax Returns that currently are the subject of audit. Each
Company has delivered to Hanger correct and complete copies of all federal
income Tax Returns, examination reports and statements of deficiencies
assessed against or agreed to by such Company since December 31, 1993.
(d) The Companies have not waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to a Tax
assessment or deficiency.
(e) The Companies have not filed any consent under Section
341(f) of the Code concerning collapsible corporations. The Companies have not
made any payments, or is not obligated to make any payments, and no Company is
a party to any agreement that under certain circumstances could obligate it to
make any payments that will not be deductible under Section 280G of the Code.
The Companies have not been United States real property holding corporations
within the meaning of Section 897(c)(2) of the Code during the applicable
period specified in Section 897(c)(1)(A)(ii) of the Code. The Companies are
not a party to any Tax allocation or sharing agreement. Except as described in
SCHEDULE 3.12(E), the Companies (i) have not been members of an Affiliated
Group filing a consolidated federal income Tax Return (other than a group the
common parent of which was one of the Companies) and (ii) has no Liability for
the Taxes of any Person (other than the Companies) under Treas. Reg. Section
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1.1502-6 (or any similar provision of state, local, or foreign law), as a
transferee or successor by contract, or otherwise.
(f) SCHEDULE 3.12(f) sets forth the following information with
respect to each Company as of the most recent practicable date: (A) the
adjusted tax basis of each Company in its Assets; (B) the amount of any net
operating loss, net capital loss, unused investment or other credit, unused
foreign tax, or excess charitable contribution allocable to each Company; and
(C) the amount of any inter-company items or any deferred gain or loss
allocable to each Company with respect to any inter-company transaction.
(g) The unpaid Taxes of the Companies in the aggregate (i) do
not exceed the aggregate reserve for Liability for Taxes (rather than any
reserve for deferred Taxes established to reflect timing differences between
book and Tax income), less any prepayment of estimated Taxes, set forth on the
face of the Balance Sheet (rather than in any notes thereto) and (ii) do not
exceed that reserve as adjusted for the passage of time through the Closing
Date in accordance with the past customs and practices of the Companies in
filing their Tax Returns.
SECTION 3.13 REAL PROPERTY.
(a) SCHEDULE 3.13(A) lists and describes all real property owned
by the Companies. Each Company represents and warrants that no Lien or
Encumbrance exists with respect to any such property, except as fully
described on SCHEDULE 3.13(A). The Companies will not own any real property as
of the Closing Date.
(b) SCHEDULE 3.13(B) lists and describes briefly all real
property leased or subleased to the Companies. The Companies have delivered to
Buyer correct and complete copies of the leases and subleases listed in
SCHEDULE 3.13(B). With respect to each lease and sublease listed in SCHEDULE
3.13(B):
(i) the lease or sublease is legal, valid, binding,
enforceable and in full force and effect;
(ii) the lease or sublease will continue to be legal,
valid, binding, enforceable and in full force and effect on identical terms
following the consummation of the transactions contemplated by this Agreement;
(iii) no party to the lease or sublease is in breach or
default, and no event has occurred which, with notice or lapse of time, would
constitute a breach or default or permit termination, modification, or
acceleration thereunder;
(iv) no party to the lease or sublease has repudiated any
provision thereof;
(v) there are no disputes, oral agreements or forbearance
programs in effect as to the lease or sublease;
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(vi) the Companies have not assigned, transferred,
conveyed, mortgaged, deeded in trust or encumbered any interest in the
leasehold or subleasehold;
(vii) all facilities leased or subleased thereunder have
received all approvals of Governmental Entities (including licenses and
permits) required in connection with the operation thereof and have been
operated and maintained in accordance with applicable laws, rules, and
regulations; and
(viii) all facilities leased or subleased thereunder are
supplied with functional utilities and other services necessary for the normal
and usual operation of said facilities.
SECTION 3.14 INTELLECTUAL PROPERTY.
(a) The Companies own or have the right to use pursuant to
license, sublicense, agreement or permission all Intellectual Property
necessary for the operation of each Company's business as presently conducted.
Each item of Intellectual Property owned or used by each Company is owned or
available for use by such Company on identical terms and conditions
immediately subsequent to the Closing Date. Each Company has taken all
reasonably necessary and desirable action to maintain and protect each item of
Intellectual Property that it owns or uses.
(b) The Companies have not interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual
Property rights of any third party. The Sole Stockholder and none of the
directors and officers (and employees with responsibility for Intellectual
Property matters) of the Companies has ever received any oral or written
charge, complaint, claim, demand or notice alleging any such interference,
infringement, misappropriation or violation (including any claim that the
Companies must license or refrain from using any Intellectual Property rights
of any third party). To the Companies' Knowledge, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Companies.
(c) SCHEDULE 3.14(c) identifies each patent or trademark and
copyright registration which has been issued to the Companies or any Affiliate
with respect to any of their Intellectual Property, identifies each pending
patent application or application for registration which the Companies or any
Affiliate has made with respect to any of its Intellectual Property, and
identifies each license, agreement, or other permission which the Companies or
any Affiliate has granted to any third party with respect to any of its
Intellectual Property (together with any exceptions). Each Company has
delivered to Buyer correct and complete copies of all such patents,
registrations, applications, licenses, agreements and permissions (as amended
to date). SCHEDULE 3.14(c) also identifies each trade name or unregistered
trademark used by each Company or any Affiliate in connection with any of its
businesses. With respect to each item of Intellectual Property required to be
identified in SCHEDULE 3.14(c):
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(i) the Company possesses all right, title, and interest
in and to the item, free and clear of any Security Interest, license, or other
restriction;
(ii) no royalty or other remuneration of any type is
payable with respect to any such item of Intellectual Property;
(iii) such item is not subject to any outstanding
injunction, judgment, order, decree, ruling or charge;
(iv) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim or demand is pending or threatened which challenges
the legality, validity, enforceability, use or ownership of such item; and
(v) the Company has never agreed to indemnify any Person
for or against any interference, infringement, misappropriation or other
conflict with respect to such item.
(d) SCHEDULE 3.14(d) identifies each item of Intellectual
Property that any third party owns and that the Companies or any Affiliate
uses pursuant to license, sublicense, agreement or permission, other than
shrink-wrap licenses for personal computer software. The Companies have
delivered to Buyer correct and complete copies of all such licenses,
sublicenses, agreements, and permissions (as amended to date). With respect to
each item of Intellectual Property required to be identified in SCHEDULE
3.14(d):
(i) the license, sublicense, agreement or permission
covering such item is legal, valid, binding, enforceable and in full force and
effect;
(ii) the license, sublicense, agreement or permission will
continue to be legal, valid, binding, enforceable and in full force and effect
on identical terms following the Closing Date;
(iii) no party to the license, sublicense, agreement, or
permission is in breach or default, and no event has occurred which with
notice or lapse of time would constitute a breach or default or permit
termination, modification or acceleration thereunder;
(iv) no party to the license, sublicense, agreement or
permission has repudiated any provision thereof;
(v) no royalty or other remuneration of any type is
payable with respect to any such item of Intellectual Property;
(vi) with respect to each sublicense, the representations
and warranties set forth in items (i) through (iv) above are true and correct
with respect to the underlying license;
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(vii) the underlying item of Intellectual Property is not
subject to any outstanding injunction, judgment, order, decree, ruling or
charge;
(viii) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim or demand is pending or threatened which challenges
the legality, validity or enforceability of the underlying item of
Intellectual Property; and
(ix) the Companies have not granted any sublicense or
similar right with respect to the license, sublicense, agreement, or
permission.
(e) Neither the Sole Stockholder nor any of the directors and
officers (nor any employees with responsibility for Intellectual Property
matters) of any of the Companies has any Knowledge of any new products,
inventions, procedures or methods of manufacturing or processing that any
competitors or other third parties have developed which reasonably could be
expected to supersede or make obsolete any product or process of the
Companies.
SECTION 3.15 TANGIBLE ASSETS. SCHEDULE 3.15 lists all the tangible
Assets of the Companies. Except as set forth on SCHEDULE 3.15, each Company
owns and has good and marketable title to all the tangible property and Assets
necessary for the conduct of its business as presently conducted and as
proposed to be conducted, including, but not limited to, those Assets listed
on SCHEDULE 3.15. Each tangible Asset is free from defects, has been
maintained in accordance with normal industry practice and is in good
operating condition and repair. There are no Security Interests on any of the
Assets of the Companies.
SECTION 3.16 INVENTORY. SCHEDULE 3.16 lists all the inventory
("INVENTORY") of each Company as of November 30, 1997. The Inventory of each
Company consists of raw materials and supplies, manufactured and purchased
parts, goods/work in process and finished goods, all of which is merchantable
and fit for the purpose for which it was procured or manufactured, and none of
which is slow-moving, obsolete, damaged or defective, subject only to the
reserve for inventory writedown set forth on the face of the Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the
Company. Except as listed on SCHEDULE 3.16, there are no Security Interests on
any of the Inventory of the Companies.
SECTION 3.17 CONTRACTS. SCHEDULE 3.17 lists the following
Contracts and other agreements to which the Companies are a party as of the
date hereof:
(a) any agreement (or group of related agreements) for the lease
of personal property to or from any Person providing for lease payments of any
amount or for a term of more than one (1) year;
(b) any agreement (or group of related agreements) for the
purchase or sale of raw materials, commodities, supplies, products or other
personal property, or for the furnishing or receipt of services of any amount
or which has a term of any duration;
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(c) any partnership or joint venture agreement;
(d) any agreement (or group of related agreements) under which
it has created, incurred, assumed or guaranteed any indebtedness for borrowed
money, or any capitalized lease obligation, in any amount, or under which it
has imposed a Security Interest on any of its Assets, tangible or intangible;
(e) any agreement concerning confidentiality or non-competition;
(f) any agreement with the Sole Stockholder or Affiliates of the
Sole Stockholder;
(g) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance or other material plan or
arrangement (including any Employee Benefit Plan) for the benefit of its
current or former directors, officers and employees;
(h) any collective bargaining agreement;
(i) any agreement for the employment of any individual on a
full-time, part-time, consulting or other basis;
(j) any agreement under which the consequences of a default or
termination could have a Company Material Adverse Effect; or
(k) any other agreement (or group of related agreements) the
performance of which involves consideration in excess of One Thousand Dollars
($1,000.00).
Each Company has delivered to Buyer a correct and complete copy of each
written agreement listed in SCHEDULE 3.17 and a written summary setting forth
the terms and conditions of each oral agreement referred to in SCHEDULE 3.17.
With respect to each such agreement: (i) such agreement is legal, valid,
binding, enforceable and in full force and effect; (ii) such agreement will
continue to be legal, valid, binding, enforceable and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby; (iii) no party is in breach or default, and no event has occurred
which with notice or lapse of time would constitute a breach or default, or
permit termination, modification or acceleration, under such agreement; and
(iv) no party has repudiated any provision of such agreement.
SECTION 3.18 NOTES RECEIVABLE AND ACCOUNTS RECEIVABLE. All trade
accounts receivable (collectively, "ACCOUNTS RECEIVABLE") and notes receivable
of the Companies are reflected properly on its books and records and are valid
receivables subject to no setoffs or counterclaims, are current and
collectible and will be collected in accordance with their terms at their
recorded amounts, subject only to the reserve for bad debts set forth on the
face of the Balance Sheet (rather than in any notes thereto) as adjusted for
the passage of time through the Closing Date in accordance with the past
custom and practice of the Company. On the Closing Date, there are no notes
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receivable or Accounts Receivable due from the Sole Stockholder or any of the
Companies' officers or directors.
SECTION 3.19 POWERS OF ATTORNEY. There are no outstanding powers
of attorney executed on behalf of any of the Companies.
SECTION 3.20 INSURANCE. SCHEDULE 3.20 sets forth the following
information with respect to each current insurance policy (including policies
providing property, casualty, liability and workers' compensation coverage and
bond and surety arrangements) to which each Company has been a party, a named
insured, or otherwise the beneficiary of coverage:
(a) the name, address, and telephone number of the agent;
(b) the name of the insurer, the name of the policyholder and
the name of each covered insured;
(c) the policy number, the period of coverage and the amount of
the annual premiums payable;
(d) the scope (including an indication of whether the coverage
was on a claims made, occurrence, or other basis) and amount (including a
description of how deductibles and ceilings are calculated and operate) of
coverage; and
(e) a description of any retroactive premium adjustments or
other loss-sharing arrangements.
With respect to each such insurance policy: (i) such policy is legal, valid,
binding, enforceable and in full force and effect; (ii) such policy will
continue to be legal, valid, binding, enforceable and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby; (iii) none of the Companies nor any other party to the policy is in
breach or default (including with respect to the payment of premiums or the
giving of notices), and no event has occurred which, with notice or the lapse
of time, would constitute such a breach or default, or permit termination,
modification, or acceleration, under such policy; and (iv) no party to the
policy has repudiated any provision thereof. Each Company has been covered
during the past three (3) years by insurance in scope and amount customary and
reasonable for the business in which it has engaged during the aforementioned
period. SCHEDULE 3.20 also describes any self-insurance arrangements affecting
the Companies.
SECTION 3.21 EMPLOYEES. SCHEDULE 3.21 sets forth a true and
complete list of all employees of the Companies, their respective positions,
locations, salaries or hourly wages and severance arrangements, each as of the
date hereof and as of the Closing Date. To the Knowledge of the Sole
Stockholder and the directors and officers (and employees with responsibility
for employment matters) of the Companies, no executive, key employee or group
of employees has any plans to terminate employment with the Company. Except as
set forth in SCHEDULE 3.21, each employee of each Company is employed on an
"at will" basis and has no right to any material compensation following
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termination of employment. None of the Companies is a party to or bound by any
collective bargaining agreement, and has not experienced any strikes,
grievances, claims of unfair labor practices or other collective bargaining
disputes. None of the Companies has committed any unfair labor practice. There
is no organizational effort presently being made or threatened by or on behalf
of any labor union with respect to employees of any of the Companies.
SECTION 3.22 EMPLOYEE BENEFITS.
(a) Except as set forth on SCHEDULE 3.22, with respect to all
employees, former employees, directors and independent contractors of each
Company and their dependents and beneficiaries, none of the Companies nor any
ERISA Affiliate presently maintains, contributes to or has any Liability under
or with respect to any Employee Benefit Plan. The plans, programs and
arrangements set forth on SCHEDULE 3.22 are herein referred to as the "COMPANY
EMPLOYEE BENEFIT PLANS." Each Company Employee Benefit Plan (and each related
trust, insurance contract or other funding arrangement) complies in form and
in operation in all material respects with the applicable requirements of
ERISA, the Code, other applicable Laws and governing documents and agreements.
With respect to each Company Employee Benefit Plan, there has been no act or
omission by any of the Companies or any ERISA Affiliate that would impair the
right or ability of any Company or any ERISA Affiliate to unilaterally amend
in whole or part or terminate such Company Employee Benefit Plan at any time,
subject to the terms of any insurance contract or other contractual
arrangements with third parties, and the Companies have delivered to Buyer
true and complete copies of: (i) the plan documents, including any related
trust agreements, insurance contracts or other funding arrangements, or a
written summary of the terms and conditions of the plan if there is no written
plan document; (ii) the most recent IRS Forms 5500; (iii) the most recent
financial statements and, if applicable, actuarial valuation; (iv) all
correspondence with the Internal Revenue Service, the Department of Labor and
other governmental agencies with respect to the past three (3) plan years
other than IRS Forms 5500 filings; and (v) the most recent summary plan
descriptions.
(b) None of the Companies nor any of its directors, officers or
employees has any Liability with respect to any Company Employee Benefit Plan
for failure to comply with ERISA, the Code, any other applicable Laws or any
governing documents or agreements.
(c) No Company Employee Benefit Plan is an Employee Pension
Benefit Plan, and no Company Employee Benefit Plan has any unfunded Liability.
With respect to the Company Employee Benefit Plans, all applicable
contributions and premium payments for all periods ending prior to the Closing
Date (including periods from the first day of the then current plan year to
the Closing Date) shall be made prior to the Closing Date in accordance with
past practice.
(d) None of the Companies nor any ERISA Affiliate maintains,
maintained, contributes to, or has any Liability (including, but not limited
to, current or potential withdrawal Liability) with respect to any
Multiemployer Plan or Employee Pension Benefit Plan.
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(e) With respect to all employees and former employees of each
Company, none of the Companies nor any ERISA Affiliate presently maintains,
contributes to or has any Liability under any funded or unfunded medical,
health or life insurance plan or arrangement for present or future retirees or
present or future terminated employees except as required by the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended, or state continuation
coverage laws. There has been no act or acts which would result in a
disallowance of a deduction or the imposition of a tax pursuant to Section
4980B, or any predecessor provision, of the Code or any related regulations.
No event has occurred with respect to which any of the Companies or any
Affiliates could be liable for a material Tax imposed by any of Sections 4972,
4976, 4977, 4979 or 4980 of the Code, or for a material civil penalty under
Section 502(c) of ERISA.
(f) There is no pending, or to the Knowledge of any of the
Companies, threatened legal action, proceeding, audit, examination or
investigation against or involving any Company Employee Benefit Plan
maintained by any Company or any ERISA Affiliate (other than routine claims
for benefits). To the Knowledge of the Companies, there is no basis for, and
there are no facts which could give rise to, any such condition, legal action,
proceeding or investigation. Any bonding required with respect to any Company
Employee Benefit Plans in accordance with applicable provisions of ERISA has
been obtained and is in full force and effect.
SECTION 3.23 GUARANTIES. None of the Companies is a guarantor or
otherwise is liable for any Liability or obligation (including indebtedness)
of any other Person.
SECTION 3.24 ENVIRONMENT, HEALTH AND SAFETY.
(a) For purposes of this Section 3.24, "Environmental and Safety
Requirements" means all federal, state, local or foreign statutes, orders,
rules, regulations, laws, contractual obligations and all common law
concerning public health and safety, worker health and safety, and pollution
or protection of the environment, including, without limitation, all those
relating to the presence, use, production, generation, handling,
transportation, treatment, storage, disposal, distribution, labeling, testing,
processing, discharge, release, threatened release, control, or cleanup of any
hazardous materials, substances or wastes, chemical substances or mixtures,
pesticides, pollutants, contaminants, toxic chemicals, petroleum products or
byproducts, asbestos, polychlorinated biphenyls, noise or radiation,
including, but not limited to, the Solid Waste Disposal Act, as amended
("SWDA"), 42 U.S.C.ss.ss.6901, et seq., the Clean Air Act, as amended, 42
U.S.C. ss.ss.7401 et seq., the Federal Water Pollution Control Act, as
amended, 33 U.S.C. ss.ss.1251 et seq., the Emergency Planning and Community
Right-to-Know Act, 42 U.S.C. ss.ss.1101 et seq., the Comprehensive
Environmental Response, Compensation, and Liability Act, as amended
("CERCLA"), 42 U.S.C. ss.ss.9601 et seq., the Hazardous Materials
Transportation Uniform Safety Act, as amended, 49 U.S.C. ss.1804 et seq., the
Occupational Safety and Health Act of 1970, as amended, and the regulations
promulgated thereunder. The term "Proceedings" means any actions, suits,
claims, investigations or legal or administrative arbitration. The term
"Orders" means judgments, writs, decrees, compliance agreements, injunctions
or orders of any Governmental Entity or arbitrator.
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(b) None of the Companies nor any of its past or currently owned
or leased real properties or operations, are subject to or the subject of any
Proceeding, hearing, Order, settlement, claim or other contract or agreement
arising under Environmental and Safety Requirements, nor has any investigation
been commenced or is any Proceeding threatened against such Company under the
Environmental and Safety Requirements with regard to such Company's business
activities.
(c) The Companies have not received any written notice, report
or other written information regarding any actual or alleged violation of any
Environmental and Safety Requirement, or any Liabilities or potential
Liabilities, including any investigatory, remedial, or corrective obligations,
relating to the Companies' business activities or the real properties owned,
leased or operated by the Companies at any time and arising under any
Environmental and Safety Requirement.
(d) To each Company's and Sole Stockholder's Knowledge, none of
the following exists, nor has ever existed, at any real property currently or
previously owned, leased or operated by any Company: (1) underground storage
tanks, (2) asbestos-containing material in any form or condition, (3)
materials or equipment containing polychlorinated biphenyls or (4) landfills,
surface impoundments or disposal areas.
(e) The Companies have not treated, stored, disposed of,
arranged for or permitted the disposal of, transported, handled or released
any substance, or owned, leased or operated any real property (and no such
real property is contaminated by any such substance) in a manner that has
given or could reasonably be expected to give rise to onsite or offsite
Liabilities pursuant to CERCLA, SWDA or any other Environmental and Safety
Requirement, including any Liability for response costs, corrective action
costs, personal injury, property damage, natural resources damage or attorney
fees, or any investigative, corrective or remedial obligations.
(f) The Companies have provided Buyer with correct and complete
copies of all reports and studies within the possession or control of each
Company with respect to past or present environmental conditions or events at
any of real properties presently or previously owned or operated by such
Company.
SECTION 3.25 CERTAIN BUSINESS RELATIONSHIPS WITH THE COMPANIES.
Except as described in SCHEDULE 3.25, neither the Sole Stockholder nor any
Affiliates of the Sole Stockholder has been involved in any business
arrangement or relationship with any of the Companies within the past twelve
(12) months (other than employment by the Companies), and neither the Sole
Stockholder nor any Affiliates of the Sole Stockholder owns any Asset which is
used in the business of the Companies.
SECTION 3.26 DELIVERY OF INFORMATION. The Sole Stockholder
acknowledges the receipt and review by the Sole Stockholder of the most recent
filings made by Hanger with the SEC under the Securities Act and the Exchange
Act.
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SECTION 3.27 PRODUCT AND SERVICE WARRANTIES. Each product sold,
leased or delivered, and each service performed, by the Companies has been in
conformity with all applicable contractual commitments and all express and
implied warranties, and, to each Company's and Sole Stockholder's knowledge,
the Companies have no Liability (and there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim or demand against any of them giving rise to any Liability) for the
replacement or repair of any product, the substandard performance of any
service, or other damages in connection with the products sold or services
provided by the Companies, subject only to the reserve for product and service
warranty claims set forth on the face of the Balance Sheet (rather than in any
notes thereto) as adjusted for the passage of time through the Closing Date in
accordance with the past customs and practices of the Companies. No product
sold, leased or delivered, or service performed, by the Companies is subject
to any guaranty, warranty or other indemnity beyond the applicable standard
terms and conditions of sale, lease or performance. SCHEDULE 3.27 includes
copies of the standard terms and conditions of sale, lease or performance for
the Companies (containing applicable guaranty, warranty and indemnity
provisions).
SECTION 3.28 PRODUCT AND SERVICE LIABILITY. To each Company's and
Sole Stockholder's knowledge, the Companies have no Liability (and there is no
Basis for any present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claim or demand against any of the Companies
giving rise to any Liability) arising out of any injury or damages (whether
actual or alleged) to any Person or its property or its business operations or
prospects as a result of the ownership, possession or use of (i) any product
sold, leased or delivered by the Companies or (ii) any service performed by
the Companies.
SECTION 3.29 CERTAIN BUSINESS PRACTICES. None of the Companies nor
any director, officer, stockholder, agent or employee of the Companies has (i)
used any funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity, (ii) made any unlawful
payment to foreign or domestic government officials or employees or to foreign
or domestic political parties or campaigns or violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended, or (iii) made any other
unlawful payment.
SECTION 3.30 DISCLOSURE. No representation or warranty made by any
of the Companies or the Sole Stockholder, nor any document, written
information, statement, financial statement, certificate, schedule or exhibit
prepared and furnished or to be prepared and furnished by the Companies or
their representatives pursuant hereto or in connection with the transactions
contemplated hereby, contains or will contain any untrue statement of a
material fact, or omits or will omit to state a material fact necessary to
make the statements of facts contained herein or therein not misleading in
light of the circumstances under which they were furnished.
SECTION 3.31 LIMITATIONS ON REPRESENTATIONS AND Warranties. None
of the Companies nor the Sole Stockholder make any representation or warranty
to Hanger or the Buyer regarding the probable success or profitability of any
Company after the Closing Date.
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ARTICLE IIIA
REPRESENTATIONS AND WARRANTIES OF SOLE STOCKHOLDER
Sole Stockholder hereby represent and warrant to Hanger and Buyer as
follows:
SECTION 3.1A AUTHORIZATION OF TRANSACTION. Sole Stockholder has
full power and authority to execute and deliver this Agreement and to perform
all obligations hereunder and thereunder required to be performed by the Sole
Stockholder. This Agreement constitutes the valid and legally binding
obligation of Sole Stockholder, enforceable in accordance with its terms and
conditions. Sole Stockholder is a natural person, is over 21 years of age and
has not had a legal representative appointed by a court of law or otherwise
act in behalf of Sole Stockholder or with respect to any property of Sole
Stockholder. Sole Stockholder is not required to give any notice to, make any
filing with, or obtain any authorization, consent or approval of any
Governmental Entity in order to consummate the transactions contemplated by
this Agreement.
SECTION 3.2A NONCONTRAVENTION. Neither the execution and the
delivery of this Agreement, nor the consummation of the transactions
contemplated hereby and thereby, will (a) violate any constitution, statute,
regulation, rule, injunction, judgment, order, decree, ruling, charge or other
restriction of any government, Governmental Entity, or court to which Sole
Stockholder is subject or (b) conflict with, result in a breach of, constitute
a default under, result in the acceleration of, create in any party the right
to accelerate, terminate, modify or cancel, or require any notice under any
agreement, contract, lease, license, instrument or other arrangement to which
Sole Stockholder is a party, by which Sole Stockholder is bound or to which
any Assets of Sole Stockholder is subject.
SECTION 3.3A BROKERS' FEES. Except as set forth on SCHEDULE 3.11,
Sole Stockholder has no Liability or obligation to pay any fees or commissions
to any broker, finder, or agent with respect to the transactions contemplated
by this Agreement.
SECTION 3.4A COMPANY SHARES. Sole Stockholder holds of record and
owns beneficially all the outstanding Shares of Company Common Stock, free and
clear of any restrictions on transfer (other than any restrictions under the
Securities Act and state securities laws), Encumbrances, Security Interests,
options, warrants, purchase rights, contracts, commitments and/or other rights
whatsoever. Sole Stockholder is not a party to any option, warrant, purchase
right or other contract or commitment whatsoever that could require Sole
Stockholder to sell, transfer or otherwise dispose of any capital stock of the
Companies (other than this Agreement). Sole Stockholder is not a party to any
voting trust, proxy, voting rights agreement or other agreement or
understanding with respect to the voting of any capital stock of the
Companies.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF HANGER AND BUYER
Hanger and Buyer hereby represent and warrant, jointly and severally, to
the Companies and Sole Stockholder that:
SECTION 4.1 ORGANIZATION AND QUALIFICATION. Each of Hanger and
Buyer is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or organization and
has all requisite power and authority to own, lease and operate its properties
and to carry on its business as it is now being conducted, and each of Hanger
and Buyer is duly qualified and in good standing to do business in each
jurisdiction in which the nature of the business conducted by it or the
ownership or leasing of its properties makes such qualification necessary,
except for such failures to be so qualified or licensed and in good standing
as would not, individually or in the aggregate, have a Hanger Material Adverse
Effect.
SECTION 4.2 AUTHORITY. Each of Hanger and Buyer has all requisite
corporate power and authority to execute and deliver this Agreement, to
perform its respective obligations hereunder and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action and no other corporate proceeding
on the part of Hanger or Buyer is necessary to authorize this Agreement or to
consummate the transactions contemplated hereby. This Agreement has been duly
executed and delivered by Hanger and Buyer and, assuming the due
authorization, execution and delivery thereof by the Sole Stockholder, Bindi
and the Company, constitutes the legal, valid and binding obligations of
Hanger and Buyer enforceable in accordance with its terms.
SECTION 4.3 NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) The execution and delivery of this Agreement by Hanger and
Buyer do not, and the performance of this Agreement by Hanger and Buyer will
not, (i) conflict with or violate the Certificate of Incorporation or By-Laws
of Hanger or Buyer, (ii) conflict with or violate any Laws in effect as of the
date of this Agreement applicable to Hanger or Buyer or by which any of their
respective properties is bound, or (iii) result in any breach of or constitute
a default (or an event that with notice or lapse of time or both would become
a default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or require payment under, or result in the
creation of a lien or encumbrance on, any of the properties or Assets of
Hanger or Buyer pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which Hanger or Buyer is a party or by which Hanger or Buyer or any of
their respective properties is bound by or subject to, except for breaches,
defaults, events, rights of termination, amendment, acceleration or
cancellation, payment obligations or Liens or Encumbrances that would not have
a Hanger Material Adverse Effect.
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(b) The execution and delivery of this Agreement by Hanger and
Buyer do not, and the performance of this Agreement by Hanger and Buyer will
not, require Hanger or Buyer to obtain any consent, approval, authorization or
permit of, or to make any filing with or notification to, any Governmental
Entities, except (i) for applicable requirements, if any, of the Securities
Act and the Exchange Act and (ii) where the failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or
notifications, would not, either individually or in the aggregate, prevent
Hanger or Buyer from performing its obligations under this Agreement.
SECTION 4.4 LIMITATION ON REPRESENTATIONS AND WARRANTIES.
(a) Neither Hanger nor Buyer makes any other representation or
warranty to the Companies or Sole Stockholder, or any of the Companies' or
Sole Stockholder's employees, agents, consultants or representatives except as
expressly provided in this Agreement.
(b) Neither Hanger nor Buyer make any representation or warranty
to the Companies or Sole Stockholder regarding the probable success or
profitability of Buyer or Hanger.
SECTION 4.5 REPORTS; FINANCIAL STATEMENTS.
(a) Hanger is current in all forms, reports, statements and
other documents required to be filed with the SEC (collectively, the "HANGER
SEC REPORTS"). The Hanger SEC Reports, including all Hanger SEC Reports filed
after the date of this Agreement and prior to the Closing Date, were or will
be prepared in all material respects in accordance with the requirements of
applicable Law (including, the Securities Act and the Exchange Act, as the
case may be, and the rules and regulations of the SEC thereunder applicable to
such Hanger SEC Reports). As of their respective dates, the Hanger SEC Reports
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements made therein, in the light of the circumstances under which they
were made, not misleading.
(b) Each of the financial statements (including, in each case,
any related notes thereto) contained in the Hanger SEC Reports filed prior to,
on or after the date of this Agreement (i) have been or will be prepared in
accordance with, and complied or will comply as to form with, the published
rules and regulations of the SEC and GAAP applied on a consistent basis
throughout the periods involved (except as otherwise noted therein) and (ii)
fairly present or will fairly present the financial position of Hanger as of
the respective dates thereof and the results of its operations and cash flows
for the periods indicated, except that any unaudited interim financial
statements were or will be subject to normal and recurring year-end
adjustments.
SECTION 4.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as and
to the extent disclosed in the Hanger SEC Reports filed prior to the date of
this Agreement or as contemplated in this Agreement, since the end of the
calendar period for which Hanger filed its most recent Hanger SEC Report,
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there has not been (a) a Hanger Material Adverse Effect or (b) any significant
change by Hanger in its accounting methods, principles or practices.
SECTION 4.7 OWNERSHIP OF BUYER. All of the outstanding capital
stock of Buyer is owned directly by Hanger.
SECTION 4.8 BROKERS. There is no broker, finder or investment
banker which is entitled to any brokerage, finder's or other fee or commission
in connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Hanger or Buyer.
SECTION 4.9 FINANCIAL STATEMENTS. SCHEDULE 4.9 contains true,
correct and complete copies of the balance sheet of Hanger as of September 30,
1997, and the related statements of operations, statements of cash flows and
statements of stockholders equity for the period then ended, and the notes and
schedules thereto, together with the report thereon of Coopers & Lybrand,
LLP(collectively, the "HANGER FINANCIAL STATEMENTS"). The Hanger Financial
Statements are attached hereto as SCHEDULE 4.9 and have been prepared from
books and records of Hanger in accordance with GAAP applied on a basis
consistent with preceding years and throughout the periods involved (except as
otherwise noted therein). The Hanger Financial Statements fairly present the
financial condition, results of operations and changes in cash flows of Hanger
at the dates thereof and for the periods indicated in the Hanger Financial
Statements.
ARTICLE V
COVENANTS
SECTION 5.1 AFFIRMATIVE COVENANTS OF THE Companies. Each Company
hereby covenants and agrees that, prior to the Closing Date, unless otherwise
expressly contemplated by this Agreement or consented to in writing by Hanger,
it will: (a) operate only in the Ordinary Course of Business; (b) use its best
efforts to (1) preserve and/or maintain, in all material respects and
consistent with past custom and practice, its business and properties,
including its present operations, physical facilities, working conditions and
relationships with its present employees and Persons having significant
business relations with it, including, without limitation, suppliers and
customers, (2) maintain and keep its properties and Assets in as good repair
and condition as at present, ordinary wear and tear excepted, (3) keep in full
force and effect insurance and bonds comparable in amount and scope of
coverage to that currently maintained, and (4) at the request of Hanger or
Buyer, obtain pre-clearance certificates and file such instruments and
documents as are necessary to permit Buyer to liquidate such Company and
distribute its Assets and Liabilities in liquidation to the Buyer on the
Closing Date or immediately following the Closing Date; and (c) transfer,
distribute and/or dispose of the items set forth in Sections 1.2(b) and 6.2 to
the Sole Stockholder or to a third party at the direction of the Sole
Stockholder, as further described therein.
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SECTION 5.2 NEGATIVE COVENANTS OF THE COMPANIES. Except as
expressly contemplated by this Agreement or as previously disclosed to Buyer
or Hanger in writing on SCHEDULE 5.2, or otherwise consented to in writing by
Buyer or Hanger, from the date of this Agreement until the Closing Date, each
Company shall not, directly or indirectly through any Affiliate or otherwise
(and the Sole Stockholder shall not and shall not cause any Company to), and
shall not permit any Affiliate to directly or indirectly, do any of the
following:
(a) (i) increase the compensation payable to, or to become
payable to, any employee, director or executive officer; (ii) grant any
severance or termination pay to, or enter into any employment or severance
agreement with, any director, officer or employee; (iii) establish, adopt,
enter into, amend, modify or terminate any Employee Benefit Plan or
arrangement except as may be required by applicable Law; or (iv) hire any
person;
(b) declare or pay any dividend on or make any other
distribution in respect of, outstanding shares of its capital stock;
(c) (i) redeem, purchase or otherwise acquire any shares of its
capital stock or any securities or obligations convertible into or
exchangeable for any shares of its capital stock, or any options, warrants or
conversion or other rights to acquire any shares of its capital stock or any
such securities or obligations; (ii) effect any reorganization or
recapitalization; or (iii) split, combine or reclassify any of its capital
stock or issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for, shares of its capital stock;
(d) (i) issue, deliver, award, grant or sell, or authorize or
propose the issuance, delivery, award, grant or sale (including the grant of
any Security Interests, Liens, claims, pledges, limitations in voting rights,
charges or other Encumbrances) of, any shares of any class of its capital
stock (including shares held in treasury), any securities convertible into or
exercisable or exchangeable for any other shares, or any rights, warrants or
options to acquire, any such shares; and (ii) amend or otherwise modify the
terms of any such rights, warrants or options the effect of which shall be to
make such terms more favorable to the holders thereof;
(e) acquire or agree to acquire, by merging or consolidating
with, by purchasing an equity interest in, all or a portion of the Assets of,
or by any other manner, any corporation, partnership, association or other
business, organization or division thereof, or otherwise acquire or agree to
acquire any Assets of any other Person (other than the purchase of Assets from
suppliers or vendors in the Ordinary Course of Business) which are material,
individually or in the aggregate, to the Company;
(f) sell, lease, exchange, mortgage, pledge, transfer or
otherwise dispose of, or agree to sell, lease, exchange, mortgage, pledge,
transfer or otherwise dispose of, any of its material Assets;
(g) propose or adopt any amendments to its Certificate or
Articles of Incorporation or its By-Laws;
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(h) (i) change any of its methods of accounting in effect on the
date of the Balance Sheet, or (ii) make or rescind any material election
relating to Taxes, settle or compromise any claim, action, suit, litigation,
proceeding, arbitration, investigation, audit or controversy relating to
Taxes, or change in any material respect any of its methods of reporting
income or deductions for federal income tax purposes from those employed in
the preparation of the federal income Tax Return for the taxable year ended
December 31, 1997, except, in the case of clause (i) or clause (ii), as may be
required by Law or proper tax accounting principles;
(i) enter into any Contract outside the Ordinary Course of
Business;
(j) create, or permit the creation of, any Lien upon any Assets
outside the Ordinary Course of Business;
(k) enter into any employment Contract or collective bargaining
agreement, or modify the terms of any existing such Contract or agreement;
(l) sell, lease, transfer or assign any Assets;
(m) make any capital expenditures other than in the Ordinary
Course of Business, or make any capital expenditures which in the aggregate
exceed Five Thousand Dollars ($5,000.00);
(n) amend or renew, or enter into any Contract involving
operations outside of the United States; or
(o) take or agree to take any action that would or is reasonably
likely to result in any representations and warranties of the Company or the
Sole Stockholder set forth in this Agreement being untrue or in any of the
conditions to the Purchase not being satisfied.
SECTION 5.3 NEGATIVE COVENANTS OF HANGER AND Buyer. Except as
expressly contemplated by this Agreement or otherwise consented to in writing
by the Sole Stockholder, from the date of this Agreement until the Closing
Date, Hanger and Buyer will not take or agree to take any action that would or
is reasonably likely to result in any representations and warranties of Hanger
or Buyer set forth in this Agreement being untrue or in any of the conditions
to the Purchase not being satisfied.
SECTION 5.4 ACCESS AND INFORMATION. Each Company shall (i)
provide Hanger, Buyer and their officers, directors, employees, agents,
counsel, accountants, financial advisors, consultants and other
representatives (collectively, the "HANGER REPRESENTATIVES"), with full
access, upon reasonable prior notice, to all officers, employees and
accountants of the Company and to their assets, properties, Contracts, books,
records and all such other information and data concerning the business and
operations of the Company as Hanger, Buyer or any of the Hanger
Representatives reasonably may request in connection with such investigation.
Such investigation will involve, among other things, Hanger's or Buyer's
review and confirmation of the Financial Statements, the legal review of each
Company's Contracts and leases, the review of each Company's patient, client
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and referral lists and reference checks of the Company. Hanger will provide
the Sole Stockholder with all information reasonably requested by the Sole
Stockholder to enable the Sole Stockholder to evaluate the merits of the
Purchase.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.1 APPROPRIATE ACTION; CONSENTS; FILINGS.
(a) Each Company, Hanger and Buyer shall each use its best
efforts to: (i) take, or cause to be taken, all appropriate action, and do, or
cause to be done, all things necessary, proper or advisable under applicable
Law or otherwise to consummate and make effective the transactions
contemplated by this Agreement; (ii) obtain from any Governmental Entities any
consents, licenses, permits, waivers, approvals, authorizations or orders
required to be obtained or made by Hanger, Buyer or each Company in connection
with the authorization, execution and delivery of this Agreement and the
consummation of the transactions contemplated herein, including, without
limitation, the Purchase; (iii) make all necessary filings, and thereafter
make any other required submissions, with respect to this Agreement and the
merger or liquidation of the Companies into the Buyer as of the Closing Date
or immediately following the Closing Date required under the federal
securities laws and the rules and regulations thereunder, if any, and any
other applicable federal or state securities laws, and (B) any other
applicable Law; provided that Hanger, Buyer and each Company shall cooperate
with each other in connection with the making of all such filings, including
providing copies of all such documents to the non-filing party and its
advisors prior to filing and, if requested, accepting all reasonable
additions, deletions or changes suggested in connection therewith. Each
Company, Hanger and Buyer shall furnish all information required for any
application or other filing to be made pursuant to the rules and regulations
of any applicable Law in connection with the transactions contemplated by this
Agreement.
(b) (i) Each of the Companies, Hanger and Buyer shall give any
notices to third parties, and use its best efforts to obtain any third party
consents (A) necessary, proper or advisable to consummate the transactions
contemplated in this Agreement, (B) disclosed or required to be disclosed in
the schedules contained herein, (C) otherwise required under any Contracts,
licenses, leases or other agreements in connection with the consummation of
the transactions contemplated herein or (D) required to prevent a Company
Material Adverse Effect from occurring prior to or after the Closing Date or a
Hanger Material Adverse Effect from occurring prior to or after the Closing
Date.
(ii) In the event that any party shall fail to obtain any
third party consent described in subsection (b) (i) above, such party shall
use its best efforts, and shall take any such actions reasonably requested by
the other party hereto, to minimize any adverse effect upon the Companies,
Hanger and Buyer and their respective businesses resulting, or which could
reasonably be expected to result after the Closing Date, from the failure to
obtain such consent.
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SECTION 6.2 TRANSFER OF CERTAIN ASSETS AND LIABILITIES PRIOR TO
THE CLOSING DATE. The Companies and Sole Stockholder shall do all acts
necessary to transfer, distribute and/or dispose of the Assets and Liabilities
described in Section 1.2(b) hereof to the Sole Stockholder, and the Sole
Stockholder shall assume such Liabilities all with the effect that such
Liabilities shall not be owned by the Company, nor assumed by Buyer, at the
Closing Date. Any Taxes generated in connection with such transfers,
distributions or disposals shall be borne by the Sole Stockholder or shall be
reimbursed to the Buyer by the Sole Stockholder.
SECTION 6.3 PAYMENT BY COMPANIES OF CERTAIN OUTSTANDING
OBLIGATIONS PRIOR TO THE CLOSING DATE. Prior to the Closing Date, each Company
and the Sole Stockholder shall do all acts necessary to cause the Companies to
fully pay all outstanding pension plan and profit sharing contributions due
from the Companies.
SECTION 6.4 EMPLOYMENT AGREEMENTS. Prior to the Closing Date, the
Sole Stockholder shall do all acts necessary (i) to cause Sole Stockholder and
all employees of the Companies designated by Hanger or the Buyer to execute
the form of Employment Agreements attached hereto as EXHIBITS B-1 and B-2, and
to deliver all such fully-executed Employment Agreements to Hanger and Buyer
prior to the Closing Date; and (ii) to cause Sole Stockholder to execute the
Non-Competition Agreement attached hereto as EXHIBIT C and to deliver such
fully- executed Non-Competition Agreement to Hanger and Buyer prior to the
Closing Date.
SECTION 6.5 LANDLORD APPROVALS. Prior to the Closing Date, the
Companies and Sole Stockholder shall do all acts necessary to cause all
landlords to issue their written consent, if necessary, to the change in the
tenant from the Companies to the Buyer without any charge or cost and without
any material change in the terms of the applicable lease or other arrangement
previously existing between such party and the Companies and/or Sole
Stockholder.
SECTION 6.6 CONTRACT ASSIGNMENTS/NOVATIONS. Prior to the Closing
Date or such reasonable time after the Closing Date as may be required, the
Companies and Sole Stockholder agree to use their best efforts do all acts
reasonably necessary to cause all parties to all material contracts with the
Company to issue their written consent, if necessary, to the assignment and
novation of all such contracts from the Companies to the Buyer without any
charge or cost and without any material change in the terms of the applicable
contract or other arrangement previously existing between such party and the
Companies or Sole Stockholder, with such consents to be set forth on SCHEDULE
7.2(C) hereto.
SECTION 6.7 BEST EFFORTS. The parties hereto shall use their best
efforts to consummate the Purchase and the other transactions contemplated
hereby as promptly as practicable.
SECTION 6.8 PUBLIC ANNOUNCEMENTS. The parties hereto agree that
only Hanger may make any public announcement of the existence of this
Agreement and/or the transactions contemplated hereby, including but not
limited to the Purchase. Nothing herein shall prevent either party from
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privately disclosing the existence of this Agreement and/or the transactions
contemplated hereby.
SECTION 6.9 TAIL INSURANCE. The Sole Stockholder shall purchase,
at the sole cost and expense of the Sole Stockholder, a Discontinued Products
and Operations Coverage liability insurance policy to cover the three (3) year
period immediately following the Closing Date, with such policy to provide for
a minimum of at least One Million Dollars ($1,000,000) in liability coverage.
SECTION 6.10 NO COMPETING TRANSACTIONS. The Sole Stockholder
and/or the Companies shall not have engaged in any Competing Transaction since
the execution of any letter of intent or memorandum of understanding relating
to the transactions contemplated by this Agreement or from and after the date
on which the first draft of this Agreement was delivered to counsel for the
Companies, whichever is earlier. The Companies and Sole Stockholder agree that
they shall not, individually or in the aggregate, engage in or conduct any
discussions relating to any Competing Transaction.
SECTION 6.11 TAX TREATMENT AS STOCK PURCHASE. The parties to this
Agreement agree that they will treat the Purchase as a purchase of the Sole
Stockholder's stock for federal and state income tax purposes, and that they
will not make any election or take any position on any Tax Return that would
cause the Purchase to be treated as a sale of Assets by the Company to the
Buyer or in any manner that is inconsistent with this Section 6.11.
SECTION 6.12 ADDITIONAL TAX MATTERS.
(a) TAX PERIODS ENDING ON OR BEFORE THE CLOSING DATE.
(i) Buyer shall prepare or cause to be prepared and file
or cause to be filed, at Buyer's cost and expense, all Tax Returns other than
income Tax Returns for the Companies described in Section 6.12(a)(ii) below
for all periods ending on or prior to the Closing Date which are filed after
the Closing Date. Buyer shall permit the Sole Stockholder to review and
comment on each such Tax Return described in the preceding sentence prior to
filing. The Sole Stockholder shall reimburse Buyer for any Taxes of the
Companies with respect to such periods within fifteen (15) days after payment
by Buyer or the Companies of such Taxes to the extent such Taxes are not
reflected in the Liabilities shown on SCHEDULE 3.8 hereof.
(ii) The Sole Stockholder shall prepare or cause to be
prepared and file or cause to be filed all income Tax Returns for the
Companies (including, without limitation, the Company's final federal Form
1120S, U.S. Income Tax Return for an S Corporation, and any related state
income Tax Return) for all periods ending on or prior to the Closing Date
which are filed after the Closing Date. The Sole Stockholder shall permit
Buyer to review and comment on each such Tax Return described in the preceding
sentence prior to filing and shall make such revisions to such Tax Returns as
are reasonably requested by the Buyer. To the extent required by applicable
law, the Sole Stockholder shall include any income, gain, loss, deduction or
other tax items for such periods on his Tax Returns in a manner consistent
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with the Schedule K-1s relating to such income Tax Returns for such periods.
(iii) The Buyer shall prepare or cause to be prepared and
file or cause to be filed any Tax Returns for the Companies for all periods
beginning on or after the Closing Date, including, without limitation, the
final income Tax Returns, if any, of the Companies that may be required to be
filed prior to the merger or liquidation of the Companies into the Buyer.
(b) COOPERATION ON TAX MATTERS.
(i) Buyer, the Companies and the Sole Stockholder shall
cooperate fully, as and to the extent reasonably requested by the other party,
in connection with the filing of Tax Returns pursuant to this Section 6.12 and
any audit, litigation or other proceeding with respect to Taxes. Such
cooperation shall include the retention and (upon the other party's request)
the provision of records and information which are reasonably relevant to any
such audit, litigation or other proceeding and making employees available on a
mutually convenient basis to provide additional information and explanation of
any material provided hereunder. The Companies and the Sole Stockholder agree
(A) to retain all books and records with respect to Tax matters pertinent to
the Companies relating to any taxable period beginning before the Closing Date
until the expiration of the statute of limitations (and, to the extent
notified by Buyer or the Sole Stockholder, any extensions thereof) of the
respective taxable periods, and to abide by all record retention agreements
entered into with any taxing authority, and (B) to give the other party
reasonable written notice prior to transferring, destroying or discarding any
such books and records and, if the other party so requests, the Companies or
the Sole Stockholder, as the case may be, shall allow the other party to take
possession of such books and records.
(ii) Buyer and the Sole Stockholder further agree, upon
request, to use their best efforts to obtain any certificate or other document
from any governmental authority or any other Person as may be necessary to
mitigate, reduce or eliminate any Tax that could be imposed (including, but
not limited to, with respect to the transactions contemplated hereby).
ARTICLE VII
CLOSING CONDITIONS
SECTION 7.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY UNDER THIS
AGREEMENT. The respective obligations of each party to effect the Purchase and
the other transactions contemplated herein shall be subject to the
satisfaction at or prior to the Closing Date of the following conditions, any
or all of which may be waived, in whole or in part, to the extent permitted by
applicable Law:
(a) NO ORDER. No Governmental Entity or federal or state court
of competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, injunction or
other order (whether temporary, preliminary or permanent) which is in effect
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and which has the effect of making the Purchase illegal or otherwise
prohibiting consummation of the Purchase.
(b) CONSENTS AND APPROVALS. All material consents, approvals and
authorizations legally required to be obtained to consummate the Purchase
shall have been obtained from all required Governmental Entities.
SECTION 7.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF BUYER AND/OR
HANGER. The obligations of Hanger and Buyer to effect the Purchase and the
other transactions contemplated herein are also subject to the following
conditions, each of which may be waived, in whole or in part, to the extent
permitted by applicable Law, by Hanger or Buyer:
(a) REPRESENTATIONS AND WARRANTIES.
(i) Each of the representations and warranties of each
Company contained in this Agreement shall be true and correct when made and on
and as of the Closing Date, as if made on and as of such date, individually or
in the aggregate, and except that those representations and warranties which
address matters only as of a particular date shall remain true and correct as
of such date. Hanger or Buyer shall have received a certificate of the
President of each Company to such effect; and
(ii) Each of the representations and warranties of the
Sole Stockholder contained in this Agreement shall be true and correct when
made and on and as of the Closing Date, as if made on and as of such date,
except that those representations and warranties which address matters only as
of a particular date shall remain true and correct as of such date.
(b) AGREEMENTS AND COVENANTS. Each Company shall have performed
or complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it on or prior
to the Closing Date. Hanger or Buyer shall have received a certificate of the
President or Chief Financial Officer of each Company to that effect.
(c) THIRD PARTY CONSENTS AND WAIVERS. Each Company shall have
obtained consents and waivers, in form and substance reasonably satisfactory
to Hanger or Buyer, in respect of the contracts or agreements set forth on
SCHEDULE 7.2(C).
(d) COMPANY MATERIAL ADVERSE EFFECT. The Companies shall not
have become subject to any action or event which resulted in or may likely
result in a Company Material Adverse Effect.
(e) LEGAL OPINION. Hanger or Buyer shall have received the legal
opinion of Hartman, Springfield and Beckham, counsel for the Companies and
Sole Stockholder, covering the matters set forth on EXHIBIT D hereto.
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(f) EMPLOYMENT AGREEMENTS. Each of Sole Stockholder and such
other employees of the Company as shall be identified by Hanger and the Buyer
shall execute employment and non-competition agreements (collectively, the
"EMPLOYMENT Agreements") in the forms attached hereto as EXHIBIT B-1 and B-2,
respectively.
(g) NON-COMPETITION AGREEMENT. Sole Stockholder shall execute
and deliver to Hanger and Buyer a non-competition agreement in the form
attached hereto as EXHIBIT C.
(h) UCC FORMS. The Companies and Sole Stockholder shall execute
and deliver to Hanger and Buyer such UCC forms as may be necessary in the
opinion of the counsel for Hanger and Buyer to evidence that all the Assets of
the Companies are free and clear of any Liens.
(i) TAIL INSURANCE. The Sole Stockholder shall deliver to Hanger
and Buyer evidence of the purchase by Sole Stockholder, at the sole cost and
expense of Sole Stockholder, of a Discontinued Products and Operations
Coverage liability insurance policy to cover the three (3) year period
immediately following the Closing Date, with such policy to provide for a
minimum of at least $1,000,000 in liability coverage.
SECTION 7.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANIES
AND SOLE STOCKHOLDER. The obligations of the Companies and/or the Sole
Stockholder to effect the Purchase and the other transactions contemplated in
this Agreement are subject to the following conditions, each of which may be
waived, in whole or in part, to the extent permitted by applicable Law, by the
Companies or the Sole Stockholder on behalf of all such parties:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations
and warranties of Hanger and Buyer contained in this Agreement shall be true
and correct when made and on and as of the Closing Date as if made on and as
of such date, except where the failure to be so true and correct would not
have a Hanger Material Adverse Effect, and except that those representations
and warranties which address matters only as of a particular date shall remain
true and correct as of such date, except where the failure to be so true and
correct would not have a Hanger Material Adverse Effect. Solely for purposes
of this section and in determining compliance with the conditions set forth
herein, any representation and warranty made by Hanger in this Agreement shall
be read and interpreted as if the qualification stated therein with respect to
materiality or Hanger Material Adverse Effect were not contained therein. The
Companies shall have received a certificate of the President of Hanger and
Buyer to such effect.
(b) AGREEMENTS AND COVENANTS. Hanger and Buyer shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by it or
them on or prior to the Closing Date. The Companies shall have received a
certificate of the President of Hanger and Buyer to that effect.
(c) HANGER MATERIAL ADVERSE EFFECT. Hanger and Buyer shall not
have become subject to any action or event which resulted in or may likely
result in a Hanger Material Adverse Effect.
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(d) LEGAL OPINION. The Companies shall have received the legal
opinion of Freedman, Levy, Kroll & Simonds, counsel to Hanger and the Buyer,
covering the matters set forth on EXHIBIT E.
ARTICLE VIII
TERMINATION, AMENDMENT, WAIVER AND INDEMNIFICATION
SECTION 8.1 TERMINATION. This Agreement may be terminated at any
time prior to the Closing Date:
(a) by mutual consent of Hanger or Buyer and the Sole
Stockholder;
(b) by Hanger or Buyer, upon a material breach of any covenant
or agreement on the part of any of the Companies or the Sole Stockholder as
set forth in this Agreement;
(c) by all of the Companies, upon a material breach of any
covenant or agreement on the part of Hanger or Buyer as set forth in this
Agreement;
(d) by either Hanger, Buyer or all of the Companies, if there
shall be any order of a Governmental Entity which is final and non-appealable
preventing the consummation of the Purchase;
(e) by Hanger or Buyer if Hanger or Buyer is not satisfied with
the results of its continuing due diligence review regarding the Companies;
(f) by either Hanger, Buyer or all of the Companies, if the
Closing shall not have occurred on or before December 31, 1997 (unless the
failure to consummate the Purchase by such date shall be due to the action or
failure to act of the party seeking to terminate this Agreement).
SECTION 8.2 INVESTIGATION. Notwithstanding any of the foregoing,
the right of any party hereto to terminate this Agreement pursuant to Section
8.1 shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any party hereto, any Person controlling
any such party or any of their respective officers or directors, whether prior
to or after the execution of this Agreement.
SECTION 8.3 AMENDMENT. This Agreement may not be amended except
by an instrument in writing signed by all the parties hereto.
SECTION 8.4 WAIVER. At any time prior to the Closing Date, any
party hereto may (a) extend the time for the performance of any of the
obligations or other acts of the other party hereto, (b) waive any
inaccuracies in the representations and warranties of the other party
contained herein or in any document delivered pursuant hereto and (c) waive
compliance by the other party with any of the agreements or conditions
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contained herein. Any such extension or waiver shall be valid only if set
forth in an instrument in writing signed by the party or parties to be bound
thereby.
SECTION 8.5 FEES, EXPENSES AND OTHER PAYMENTS. Hanger, Buyer, the
Companies and Sole Stockholder each shall bear its and his own respective
costs and expenses which are incurred in connection with the preparation,
negotiation and performance of this Agreement (including any prior memorandum
of understanding or letter of intent relating hereto) and the transactions
contemplated hereby, including all due diligence expenses and fees and
expenses of agents, representatives, counsel and accountants.
SECTION 8.6 INDEMNIFICATION.
(a) The Sole Stockholder shall jointly and severally indemnify
and defend each of Hanger and the Buyer, and hold it harmless, from and
against any and all losses, damages, Liabilities, claims, demands, judgments,
settlements, costs and expenses of any nature whatsoever (including reasonable
attorneys' fees) (collectively, "LOSS"), resulting from or arising out of any:
(i) breach of any representation or warranty or agreement of each Company or
the Sole Stockholder contained herein; or (ii) Liability of any Company,
whether or not addressed by a representation or warranty, which was created,
incurred or arose from facts, events, conditions or circumstances existing on
or before the Closing Date, to the extent that, but only to the extent that,
such Liability was not reflected or reserved against on the face of the
Balance Sheet (rather than in any notes thereto) as adjusted for Liabilities
incurred in the Ordinary Course of Business since the date of the Balance
Sheet (provided that the items listed on SCHEDULE 3.8 shall be deemed to be
incurred in the Ordinary Course of Business unless otherwise objected to by
Hanger or Buyer prior to the Closing Date). No claim for indemnification
pursuant to this Section 8.6(a) may be made subsequent to the date three (3)
years after the Closing Date or in respect of a Loss for which Hanger or Buyer
has otherwise been previously reimbursed by the Sole Stockholder. Without
limiting any other rights of Hanger or Buyer, any such Loss may be treated as
a Purchase Price adjustment under Section 1.2(d)(iii), in which case such Loss
shall be deducted by Hanger or Buyer from the next installment payment due of
principal and interest of the Note portion of the Purchase Price
consideration, with any remaining Loss being deducted from the principal
amount of the Note.
(b) (i) If any third party shall notify Hanger or Buyer with
respect to any third party claim (a "THIRD PARTY CLAIM") that may give rise to
a Loss, then Hanger or Buyer shall promptly notify the Sole Stockholder
thereof in writing; PROVIDED, HOWEVER, that no delay on the part of Hanger or
Buyer in notifying the Sole Stockholder shall relieve the Sole Stockholder
from any obligation hereunder unless (and then solely to the extent) the Sole
Stockholder is prejudiced by such delay.
(ii) The Sole Stockholder will have the right to defend
Hanger and Buyer against the Third Party Claim with counsel selected by Sole
Stockholder and reasonably satisfactory to Hanger or Buyer, so long as: (A)
the Sole Stockholder so notifies Hanger and Buyer in writing within fifteen
(15) days of the Third Party Claim becoming known to the Sole Stockholder,
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acknowledging that such claim is in respect of a Loss described in Section
8.6(a); (B) the Third Party Claim involves only money damages and does not
seek an injunction or other equitable relief; (C) settlement of, or an adverse
judgment with respect to, the Third Party Claim is not, in the good faith
judgment of Hanger or Buyer, likely to establish a precedential custom or
practice materially adverse to the continuing business interests of Hanger or
Buyer; and (D) the Sole Stockholder conducts the defense of the Third Party
Claim actively and diligently.
(iii) So long as the Sole Stockholder is conducting the
defense of the Third Party Claim in accordance with Section 8.6(b)(ii), (A)
Hanger or Buyer may retain separate co-counsel at its sole cost and expense
and participate in the defense of the Third Party Claim; (B) Hanger or Buyer
will not consent to the entry of any judgment or enter into any settlement
with respect to the Third Party Claim without the prior written consent of the
Sole Stockholder (which consent will not be withheld unreasonably); and (C)
the Sole Stockholder will not consent to the entry of any judgment or enter
into any settlement with respect to the Third Party Claim without the prior
written consent of Hanger or Buyer (which consent will not be withheld
unreasonably).
(iv) In the event that any of the conditions in Section
8.6(b)(ii) is or becomes unsatisfied, (A) Hanger or Buyer may defend against
the Third Party Claim in any manner it reasonably may deem appropriate;
PROVIDED, HOWEVER, that Hanger shall not consent to the entry of any judgment
or enter into any settlement or agreement to settle a Third Party Claim
without the prior written consent of the Sole Stockholder, which consent shall
not be unreasonably withheld; (B) Hanger or Buyer shall be reimbursed by Sole
Stockholder, or Hanger or Buyer may deduct such amounts from the next
payment(s) due to Sole Stockholder under the Note portion of the Purchase
Price consideration, promptly and periodically for the costs of defending
against the Third Party Claim (including reasonable attorneys' fees and
expenses); and (C) the Sole Stockholder will remain responsible for any Loss
that Hanger or Buyer actually suffers resulting from, arising out of, relating
to, in the nature of, or caused by the Third Party Claim to the fullest extent
provided in this Section 8.6.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.1 EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS.
(a) Except as set forth in Section 9.1(b), the representations,
warranties and agreements of each party hereto shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any other party hereto, any Person controlling any such party or any of their
officers or directors, whether prior to or after the execution of this
Agreement.
(b) The representations, warranties and agreements in this
Agreement shall terminate on the date which is three (3) years after the
Closing Date, except that the representations, warranties and agreements set
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forth in Section 3.3, and Article IIIA, and Section 6.7, Section 6.8, and
Article VIII and Article IX shall not so terminate.
SECTION 9.2 NOTICES. All notices and other communications given
or made pursuant hereto shall be in writing and shall be deemed to have been
duly given or made as of the date delivered, mailed or transmitted, and shall
be effective upon receipt, if delivered personally, mailed by registered or
certified mail (postage prepaid, return receipt requested), or delivered by
overnight delivery service (e.g., Federal Express), to the parties at the
following addresses (or at such other address for a party as shall be
specified by like changes of address) or sent by electronic transmission to
the fax number specified below:
(a) If to Hanger or Buyer:
Hanger Orthopedic Group, Inc.
7700 Old Georgetown Road
Bethesda, Maryland 20814
ATTENTION: Richard Stein, Chief Financial Officer
Fax No.: (301) 652-8307
with a copy to:
Freedman, Levy, Kroll & Simonds
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036
ATTENTION: Jay W. Freedman, Esq.
Fax No.: (202) 457-5151
(b) If to any Company or Sole Stockholder:
Jerald J. Harshberger
828 Caledonia Way
Birmingham, Alabama 35242
with a copy to:
Hartman, Springfield and Beckham
P.O. Box 846
Birmingham, AL 35201
ATTENTION: John L. Hartman III, Esq.
Fax No.: (205) 879-5903
SECTION 9.3 CERTAIN DEFINITIONS. For purposes of this Agreement,
the following terms shall have the following meanings:
"ACCOUNTS RECEIVABLE" as defined in Section 3.18;
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"ACTUAL VALUE" as defined in Section 1.2(d)(v)(B);
"ADJUSTED WORKING CAPITAL" as defined in Section 1.2(d)(i);
"AFFILIATE" means a Person that directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control
with, the first mentioned Person;
"AFFILIATED GROUP" means any affiliated group within the meaning of
Section 1504 of the Code or any similar group defined under a similar
provision of state, local or foreign law;
"AGREEMENT" as defined in the Preamble;
"ANNUAL MAXIMUM" as defined in Section 1.2(c)(i);
"ASSETS" means any and all properties and assets (real, personal or
mixed, tangible or intangible) of any Person;
"BALANCE SHEET" as defined in Section 3.7;
"BASIS" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms or could form the basis for any
specified consequence;
"BUYER" as defined in the Preamble;
"BUYER'S VALUE" as defined in Section 1.2(d)(v)(B);
"CLOSING" and "CLOSING DATE" as defined in Article II;
"CODE" means the Internal Revenue Code of 1986, as amended;
"COMPANY" or "COMPANIES" as defined in the Preamble;
"COMPANY COMMON STOCK" as defined in the Preamble;
"COMPANY EMPLOYEE BENEFIT PLAN" as defined in Section 3.22;
"COMPANY MATERIAL ADVERSE EFFECT" means any change or effect that,
individually or when taken together with all other such changes or effects, is
or is reasonably likely to be materially adverse to the business, properties,
Assets, condition (financial or otherwise), liabilities, operations or
prospects of the Company at the time of such change or effect. A Company
Material Adverse Effect shall be deemed to exist if there shall occur any
event which causes or may reasonably be expected to cause or result in
estimable monetary loss which, individually or when aggregated with all other
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events, exceeds Ten Thousand Dollars ($10,000.00);
"COMPANY PERMITS" as defined in Section 3.6;
"COMPETING TRANSACTION" means any of the following involving the Company
or any Subsidiary or Affiliate of the Company: (i) any merger, consolidation,
share exchange, business combination, or other similar transaction (other than
the transactions contemplated by this Agreement); (ii) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition of twenty-five
percent (25%) or more of the Assets of the Company in a single transaction or
series of transactions; (iii) any offer (whether cash or securities) for
twenty-five percent (25%) or more of the outstanding shares of capital stock
of the Company; or (iv) any public announcement of a proposal, plan or
intention to do any of the foregoing;
"CONTRACT" of any Person means any contract, agreement or instrument of
any type whatsoever (i) to which such Person is a party and by which such
Person either has made a binding undertaking to perform an obligation or is
entitled to any property or right, or (ii) by which any of the Assets of such
Person is bound;
"CONTROL" (including the terms "CONTROLLED," "CONTROLLED by" and "UNDER
COMMON CONTROL WITH") means the possession, directly or indirectly or as
trustee or executor, of the power to direct or cause the direction of the
management or policies of a Person, whether through the ownership of stock or
as trustee or executor, by Contract or credit arrangement or otherwise;
"EARNOUT" as defined in Section 1.2(c);
"EARNOUT PAYMENTS" as defined in Section 1.2(c);
"EARNOUT PERIOD" as defined in Section 1.2(c);
"EARNOUT YEAR" or "EARNOUT YEARS" as defined in Section 1.2(c);
"EMPLOYEE BENEFIT PLAN" means (a) any bonus, incentive compensation,
profit sharing, retirement, pension, group insurance, death benefit, group
health, medical expense reimbursement, workers' compensation, dependent care,
flexible benefits or cafeteria, stock option, stock purchase, stock
appreciation rights, savings, deferred compensation, consulting, severance pay
or termination pay, vacation pay, life insurance, disability, welfare or other
employee benefit or fringe benefit plan, program or arrangement; or (b) any
plan, program or arrangement which is an Employee Pension Benefit Plan,
Employee Welfare Benefit Plan or Multiemployer Plan.
"EMPLOYEE PENSION BENEFIT PLAN" has the meaning set forth in ERISA
Section 3(2);
"EMPLOYEE WELFARE BENEFIT PLAN" has the meaning set forth in ERISA
Section 3(1);
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"EMPLOYMENT AGREEMENTS" as defined in Section 7.2(f);
"ENCUMBRANCES" means any Security Interests, Liens, claims, pledges,
agreements, limitations on voting rights, charges or other encumbrances of any
nature whatsoever;
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended;
"ERISA AFFILIATE" means each person (as defined in Section 3(9) of
ERISA) that together with the Company (or any person whose liabilities the
Company has assumed or is otherwise subject to) would be considered or has
been a single employer under Section 4001(b) of ERISA or would be considered
or has been a member of the same "controlled group," under common control, a
member of the same affiliated service group or otherwise a single employer
within the meaning of Section 414(b), (c), (m) and (o) of the Code (PROVIDED,
HOWEVER, that when the subject of the provision is a Multiemployer Plan only
subsections (b) and (c) of Section 414 of the Code shall be taken into
account).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended;
"FINANCIAL STATEMENTS" as defined in Section 3.7;
"GAAP" means United States generally accepted accounting principles as
in effect from time to time;
"GOVERNMENTAL ENTITIES" as defined in Section 3.5(b);
"HANGER" as defined in the Preamble;
"HANGER FINANCIAL STATEMENTS" as defined in Section 4.9;
"HANGER MATERIAL ADVERSE EFFECT" shall mean any change or effect that,
individually or when taken together with all such other changes or effects, is
or is reasonably likely to be materially adverse to the business, properties,
Assets, condition (financial or otherwise), liabilities, operations or
prospects of Hanger and its Subsidiaries, taken as a whole at the time of such
change or effect. A Hanger Material Adverse Effect shall be deemed to exist if
there shall occur any event which causes or may reasonably be expected to
cause or result in estimable monetary loss which, individually or when
aggregated with all other events, exceeds $500,000;
"HANGER REPRESENTATIVES" as defined in Section 5.4;
"HANGER SEC REPORTS" as defined in Section 4.5(a);
"INTELLECTUAL PROPERTY" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
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translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation), (g) all other
proprietary rights, and (h) all copies and tangible embodiments thereof (in
whatever form or medium);
"INVENTORY" as defined in Section 3.16;
"KNOWLEDGE" or "KNOWN" means, with respect to a particular fact or other
matter, that (i) an individual is actually aware of such fact or other matter
or (ii) a prudent individual could be expected to discover or otherwise become
aware of such fact or other matter in the course of conducting a reasonably
comprehensive investigation concerning the existence of such fact or other
matter; a Person (other than an individual) will be deemed to have "Knowledge"
of a particular fact or other matter if any individual who is serving, or who
has at any time served, as a director, officer, partner, executor or trustee
of such Person (or in any similar capacity) has, or at any time had, Knowledge
of such fact or other matter;
"LAWS" as defined in Section 3.5(a);
"LIABILITY" OR LIABILITIES" as defined in Section 3.8;
"LIEN" means any lien, charge, encumbrance, mortgage, conditional sale
agreement, title retention agreement, financing lease, pledge or Security
Interest of any kind or type and whether arising by Contract or under Law;
"LOSS" as defined in Section 8.6(a);
"MULTIEMPLOYER PLAN" has the meaning set forth in ERISA Section 3(37);
"NET SALES" as defined in Section 1.2(c);
"NOTE" as defined in Section 1.2(a);
"ORDINARY COURSE OF BUSINESS" with respect to any entity, means the
ordinary course of business consistent with past custom and practice
(including with respect to quantity and frequency) of that entity;
"PERSON" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, a Governmental Entity (or any
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department, agency, or political subdivision thereof) or any other entity;
"POST-CLOSING ADJUSTMENT DATE" as defined in Section 1.2(d)(iii);
"PROSPECTUS" as defined in Section 3.28;
"PURCHASE" as defined in the Preamble;
"PURCHASE PRICE" as defined in Section 1.2(a);
"REPLACEMENT NOTE" as defined in Section 1.2(d)(vi);
"SEC" means the U.S. Securities and Exchange Commission;
"SECURITIES ACT" means the Securities Act of 1933, as amended;
"SECURITY INTEREST" means any mortgage, pledge, Lien, Encumbrance,
charge, or other security interest, other than (a) mechanic's, materialmen's,
and similar Liens, (b) Liens for Taxes not yet due and payable, (c) purchase
money Liens and Liens securing rental payments under capital lease
arrangements, and (d) other Liens arising in the Ordinary Course of Business
and not incurred in connection with the borrowing of money;
"SHARES" as defined in the Preamble;
"SOLE STOCKHOLDER" as defined in the Preamble;
"SOLE STOCKHOLDER'S VALUE" as defined in Section 1.2(d)(v)(B);
"SUBSIDIARY" or "SUBSIDIARIES" of the Company, Hanger, the Buyer or any
other Person, means any corporation, partnership, joint venture or other legal
entity of which the Company, Hanger, the Buyer or such other Person, as the
case may be (either alone or through or together with any other subsidiary),
owns, directly or indirectly, fifty percent (50%) or more of the capital stock
or other equity interests which the holders thereof are generally entitled to
vote for the election of the board of directors or other governing body of
such corporation or other legal entity;
"TAX" or "TAXES" shall mean any and all taxes, charges, fees or levies,
payable to any federal, state, local or foreign taxing authority or agency,
including, without limitation, (i) income, franchise, profits, gross receipts,
minimum, alternative minimum, estimated, AD VALOREM, value added, sales, use,
service, real or personal property, capital stock, license, payroll,
withholding, disability, employment, social security, workers compensation,
unemployment compensation, utility, severance, excise, stamp, windfall
profits, transfer and capital gains taxes, (ii) custom duties, imposts,
charges, levies or other similar assessments of any kind, and (iii) interest,
penalties and additions to tax imposed with respect thereto;
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"TAX RETURN" shall mean any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof; and
"THIRD PARTY CLAIM" as defined in Section 8.6(b).
SECTION 9.4 HEADINGS; CONSTRUCTION. The headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. All words used in this
Agreement will be construed to be of such gender or number as the
circumstances require. Unless otherwise expressly provided, the word
"including" does not limit the preceding words or terms.
SECTION 9.5 SEVERABILITY. If any term or other provision of this
Agreement is determined to be invalid, illegal or incapable of being enforced
by any rule of law or public policy, all other conditions and provisions of
this Agreement shall nevertheless remain in full force and effect so long as
the economic or legal substance of the transactions contemplated hereby is not
affected in any manner materially adverse to any party. Upon such
determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith
to modify this Agreement so as to effect the original intent of the parties
hereto as closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
SECTION 9.6 ENTIRE AGREEMENT AND MODIFICATION. This Agreement
(together with the exhibits and schedules) constitutes the entire agreement of
the parties and supersedes all prior agreements and undertakings, both written
and oral, between the parties hereto, or any of them, with respect to the
subject matter hereof. This Agreement may not be amended except by a written
agreement executed by the party to be charged with the amendment.
SECTION 9.7 ASSIGNMENT. This Agreement shall not be assigned by
operation of law or otherwise.
SECTION 9.8 PARTIES IN INTEREST. This Agreement shall be binding
upon and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
Person any right, benefit or remedy of any nature whatsoever under or by
reason of this Agreement.
SECTION 9.9 WAIVER; REMEDIES CUMULATIVE. No failure or delay on
the part of any party hereto in the exercise of any right hereunder shall
impair such right or be construed to be a waiver of, or acquiescence in, any
breach of any representation, warranty or agreement herein, nor shall any
single or partial exercise of any such right preclude other or further
exercise thereof or of any other right. To the maximum extent permitted by
applicable law, (a) no claim or right arising out of this Agreement or the
documents referred to in this Agreement can be discharged by one party, in
whole or in part, by a waiver or renunciation of the claim or right unless in
writing signed by the other party; (b) no waiver that may be given by a party
will be applicable except in the specific instance for which it is given; and
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(c) no notice to or demand on one party will be deemed to be a waiver of any
obligation of such party or of the right of the party giving such notice or
demand to take further action without notice or demand as provided in this
Agreement or the documents referred to in this Agreement. All rights and
remedies existing under this Agreement are in addition to, and not exclusive
of, any rights or remedies otherwise available.
SECTION 9.10 FURTHER ASSURANCES. The parties hereto agree (a) to
furnish upon request to each other such further information, (b) to execute
and deliver to each other such other documents, and (c) to do such other acts
and things, all as another party hereto may reasonably request for the purpose
of carrying out the intent of this Agreement and the documents referred to in
this Agreement.
SECTION 9.11 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE,
REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES
OF CONFLICTS OF LAW.
SECTION 9.12 JURISDICTION; SERVICE OF PROCESS. ANY ACTION OR
PROCEEDING SEEKING TO ENFORCE ANY PROVISION OF, OR BASED ON ANY RIGHT ARISING
OUT OF, THIS AGREEMENT MAY BE BROUGHT AGAINST ANY OF THE PARTIES HERETO IN THE
COURTS OF THE STATE OF ALABAMA, COUNTY OF JEFFERSON, OR, IF IT HAS OR CAN
ACQUIRE JURISDICTION, IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN
DISTRICT OF ALABAMA, AND EACH OF THE PARTIES HERETO CONSENTS TO THE
JURISDICTION OF SUCH COURTS (AND OF THE APPROPRIATE APPELLATE COURTS) IN ANY
SUCH ACTION OR PROCEEDING AND WAIVES ANY OBJECTION TO VENUE LAID THEREIN.
PROCESS IN ANY ACTION OR PROCEEDING REFERRED TO IN THE PRECEDING SENTENCE MAY
BE SERVED ON ANY PARTY HERETO ANYWHERE IN THE WORLD.
SECTION 9.13 COUNTERPARTS. This Agreement may be executed in one
or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original
but all of which taken together shall constitute one and the same agreement.
[The next page is the signature page.]
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IN WITNESS WHEREOF, the parties hereto have executed or caused this
Agreement to be executed as of the date first written above by their
respective officer thereunto duly authorized:
HANGER ORTHOPEDIC GROUP, INC.
By: ________________________________________
Name: Ivan R. Sabel
Title: President
HANGER PROSTHETICS & ORTHOTICS, INC.
By: ________________________________________
Name: John D. McNeill
Title: President
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HARSHBERGER PROSTHETIC & ORTHOTIC CENTER, INC.
By: ________________________________________
Name: Jerald J. Harshberger
Title: President
HARSHBERGER PROSTHETIC & ORTHOTIC CENTER OF MOBILE, INC.
By: ________________________________________
Name: Jerald J. Harshberger
Title: President
HARSHBERGER PROSTHETIC & ORTHOTIC CENTER OF FLORENCE, INC.
By: ________________________________________
Name: Jerald J. Harshberger
Title: President
FAB-CAM, INC.
By: ________________________________________
Name: Jerald J. Harshberger
Title: President
SOLE STOCKHOLDER
____________________________________________
Jerald J. Harshberger
1,000 shares for each of the foregoing Companies
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EXHIBIT 22
<TABLE>
LIST OF SUBSIDIARIES
<S> <C>
Hanger Orthopedic Group, Inc. 84-0904275
OPNET, Inc. 93-1203555
DOBI-Symplex, Inc. 52-1770022
Southern Prosthetics Supply, Inc. 58-0276760
Montana Orthotics & Prosthetics, Inc. 81-0458574
Rehabilitation Engineering, Inc. 59-2106177
Columbia Brace Acquisition Corp. 52-1856088
Hanger Prosthetics & Orthotics, Inc. 52-1486235
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Hanger Orthopedic Group, Inc. on Form S-8 (File No. 33-63191) of our report
dated March 13, 1998, on our audits of the consolidated financial statements
and financial statement schedule of Hanger Orthopedic Group, Inc. as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997, which is included in this form 10-K.
/s/Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
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