SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC.
................................................................................
(Name of Registrant as Specified In Its Charter)
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC.
................................................................................
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(l), or 14a-6(j)(2)
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[x] Fee computed on table below per Exchange Act Rule 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
Common Stock, par value $.001 per share ...............................
2) Aggregate number of securities to which transaction applies:
4,297,566 (4,774,233 outstanding on date hereof less 466,667 shares
to be redeemed prior to transaction)...................................
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
$3.00 per share (subject to downward adjustment), multiplied by
4,297,566 shares, yielding $12,892,698 maximum aggregate value of
transaction. Fee calculated as one-fiftieth (1/50) of one (1%) percent
of the maximum aggregate value of the transaction ($12,892,698) =
$2,579 ................................................................
<PAGE>
4) Proposed maximum aggregate value of transaction:
$12,892,698 ..........................................................
5) Total Fee Paid= $2,579 ...............................................
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
......................................................................
2) Form, Schedule or Registration Statement No.:
......................................................................
3) Filing Party:
......................................................................
4) Date Filed:
......................................................................
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC.
151 HEMPSTEAD TURNPIKE
WEST HEMPSTEAD, NEW YORK 11552
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD WEDNESDAY, NOVEMBER 13, 1996
----------------------------------
To the Stockholders of Advanced Orthopedic Technologies, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Advanced Orthopedic Technologies, Inc., a Nevada corporation
("AOT") will be held on Wednesday, November 13, 1996, at 10:00 A.M., New York
City time, at the offices of Herrick, Feinstein LLP, counsel to AOT, Two Park
Avenue, New York, New York 10016, 21st floor Main Conference Room, for the
following purposes as more fully described in the accompanying Proxy Statement:
1. To consider and act upon a proposal to approve and adopt the Agreement
and Plan of Merger dated as of September 30, 1996 by and among AOT, NovaCare
Prosthetics & Orthotics, Inc., a Delaware corporation ("NovaCare O&P") and AOT
Acquisition Corp., a Nevada corporation and wholly owned subsidiary of NovaCare
O&P ("NovaCare Sub"), providing for the merger of NovaCare Sub with and into
AOT, whereupon AOT will become a wholly owned subsidiary of NovaCare O&P, and
the shareholders of AOT will receive a cash consideration of approximately $3.00
per share, subject to adjustment (a copy of said Agreement and Plan of Merger is
attached as Appendix A to the accompanying Proxy Statement); and
2. Transacting such other business as may properly come before the Special
Meeting or any adjournments thereof.
The Board of Directors of AOT has fixed the close of business on Wednesday,
October 23, 1996 as the record date for the determination of the stockholders
entitled to notice of and to vote at the Special Meeting and any adjournments
thereof.
Stockholders, whether or not they expect to attend the Special Meeting
personally, are requested to complete, date, sign and return the enclosed proxy
in the accompanying envelope, which requires no postage.
By Order of the Board of Directors,
West Hempstead, New York NORBERT B. MEYERS
October 23, 1996 Chairman of the Board
and Secretary
YOUR ATTENTION IS DIRECTED TO THE ACCOMPANYING PROXY STATEMENT
IMPORTANT - PLEASE SIGN AND MAIL YOUR PROXY PROMPTLY. To assure that your
shares are represented and voted at the Special Meeting, please sign, date
and return the proxy in the enclosed postage-paid envelope.
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION..........................................................
Purpose of the Meeting....................................................
Voting Rights.............................................................
SUMMARY OF TRANSACTION.......................................................
The Companies.............................................................
Effect of Merger; Consideration...........................................
Recommendation of the Boards of Directors; Reasons For the Merger.........
Dissenters' Rights........................................................
Accounting Treatment; Certain Federal Income Tax Consequences.............
Market Price Data; Book Value per Share...................................
SELECTED FINANCIAL DATA......................................................
QUARTERLY FINANCIAL DATA.....................................................
THE MERGER...................................................................
Recommendations of the Boards of Directors; Reasons
for the Merger..........................................................
Accounting Treatment......................................................
Certain Federal Income Tax Consequences of the Merger.....................
Other Agreements..........................................................
Interest of Certain Persons in the Merger.................................
Dissenters' Rights........................................................
THE MERGER AGREEMENT.........................................................
Effective Time............................................................
The Merger................................................................
Consideration to be Received in the Merger.............................
Escrow Payments........................................................
Surrender of Shares and Payment........................................
Conditions to Consummation of the Merger...............................
Conditions to Obligations of the Company, NovaCare O&P
and NovaCare Sub.....................................................
Additional Conditions to Obligations of NovaCare O&P
and NovaCare Sub.....................................................
Additional Conditions to Obligations of the Company....................
Covenants of the Company..................................................
Covenants-NovaCare O&P and the Company....................................
Covenants-NovaCare O&P....................................................
Termination...............................................................
Amendments and Waivers....................................................
Fees and Expenses.........................................................
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<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................
MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS...............
Fiscal Year Ended December 31, 1995.......................................
Three Months and Six Months Ended June 30, 1996...........................
Liquidity and Capital Resources...........................................
Other.....................................................................
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................
DESCRIPTION OF BUSINESS
Background................................................................
Completed Acquisitions....................................................
Existing Bank Financing...................................................
The Prosthetic and Orthotic Patient Care Process..........................
The Market for Prosthetic and Orthotic Rehabilitation
Services................................................................
Description of Property...................................................
Legal Proceedings.........................................................
DIRECTORS AND EXECUTIVE OFFICERS.............................................
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............
STOCKHOLDER PROPOSALS FOR THE 1997 ANNUAL MEETING............................
OTHER MATTERS................................................................
FINANCIAL STATEMENTS.........................................................
Fiscal Year Ended December 31,1995........................................
Three Months and Six Months Ended June 30,1996............................
APPENDICES
Appendix A - Agreement and Plan of Merger
Appendix B - Rights of Dissenting Owners (Nevada Revised
Statutes 92A.300 Through 92A.500 Inclusive)
Appendix C - Form of Proxy
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<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC.
151 HEMPSTEAD TURNPIKE
WEST HEMPSTEAD, NEW YORK 11552
-------------------
PROXY STATEMENT
OCTOBER 23, 1996
-------------------
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD WEDNESDAY, NOVEMBER 13, 1996
GENERAL INFORMATION
This Proxy Statement is being furnished to holders of common stock, par
value $0.001 per share (the "Common Stock"), of Advanced Orthopedic
Technologies, Inc., a Nevada corporation (the "Company" or "AOT") in connection
with the solicitation of proxies by the Company to be voted at the Special
Meeting of Stockholders (the "Special Meeting") scheduled to be held on
Wednesday, November 13, 1996 at 10:00 A.M., New York City time, at the offices
of Herrick, Feinstein LLP, counsel to AOT, Two Park Avenue, New York, New York
10016, 21st floor Main Conference Room, and at any and all adjournments thereof.
This Proxy Statement, the enclosed Notice of Special Meeting of Stockholders and
the enclosed form of proxy are first being mailed or given on or about
Wednesday, October 23, 1996 to holders of record of the Company's Common Stock
as of the close of business on Wednesday, October 23, 1996.
Stockholders of the Company are cordially invited to attend the Special
Meeting. Whether or not you expect to attend the Special Meeting, it is
important that you complete the enclosed proxy card and sign, date and return it
as promptly as possible in the envelope enclosed for that purpose. Stockholders
giving a proxy may revoke it by notice in writing delivered to the Secretary of
the Company or by delivering a later dated proxy to the Secretary of the
Company, in either case, at any time before it is exercised. Execution of a
proxy will not in any way affect a stockholder's right to attend the Special
Meeting and vote in person. Stockholders who wish to vote in person at the
Special Meeting despite execution of a proxy, should contact the Secretary of
the Company.
The solicitation of proxies being made hereby is made by the Company, and
the cost of soliciting proxies and the cost of the Special Meeting will be borne
by the Company. In addition to the solicitation of proxies by mail, proxies may
be solicited by personal interview, telephone and similar means by directors,
officers or employees of the Company, none of whom will be specially compensated
for such activities. The Company also intends to request that brokers, banks and
other nominees solicit proxies from their principals, and the Company will, upon
request, pay such brokers', banks' and other nominees' reasonable expenses
incurred by them for such activities.
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<PAGE>
The Company's principal offices are located at 151 Hempstead Turnpike, West
Hempstead, New York 11552 and its telephone number is (516) 481-9670.
PURPOSE OF THE MEETING
At the Special Meeting, the Company's shareholders will consider and vote
upon (i) the approval and adoption of the Agreement and Plan of Merger (the
"Merger Agreement") dated as of September 30, 1996 by and among AOT, NovaCare
Prosthetics & Orthotics, Inc., a Delaware corporation ("NovaCare O&P") and AOT
Acquisition Corp., a Nevada corporation and wholly owned subsidiary of NovaCare
O&P ("NovaCare Sub"), providing for the merger (the "Merger") of NovaCare Sub
with and into AOT, whereupon AOT will become a wholly owned subsidiary of
NovaCare O&P, and the shareholders of AOT will receive a cash consideration of
approximately $3.00 per share, subject to adjustment (a copy of said Merger
Agreement is attached as Appendix A to this Proxy Statement); and (ii) such
other business as may properly come before the Special Meeting or any
adjournments thereof.
VOTING RIGHTS
Each share of Common Stock is entitled to one vote on all matters to be
voted upon at the Special Meeting. There is no cumulative voting. The presence
in person or by proxy of the holders of a majority of the outstanding shares of
Common Stock entitled to vote at the Special Meeting constitutes a quorum for
the transaction of business. On matters brought before the Special Meeting as to
which a choice has been specified by stockholders on the proxy, the shares will
be voted accordingly. If no choice is so specified, the shares will be voted FOR
the adoption and approval of the Merger Agreement. Other business, if any,
brought before the Special Meeting shall be voted FOR or AGAINST by the persons
designated to vote the proxies as they, in their discretion, determine.
The approval and adoption of the Merger Agreement by the stockholders of
the Company requires the affirmative vote of the holders of a majority of the
issued and outstanding shares of Common Stock of the Company.
The Company will appoint inspectors of election which will tally votes of
those attending the Special Meeting or voting by proxy. Abstentions and
non-votes will not be counted towards the requirement of a majority of the
issued and outstanding shares of Common Stock of the Company.
Only stockholders of record as of the close of business on Wednesday,
October 23, 1996, are entitled to vote at the Special Meeting. At that date, the
Company had outstanding and entitled to vote 4,774,233 shares of Common Stock
held by approximately 381 stockholders of record. For information regarding the
current ownership of the Common Stock by its principal stockholders and
management, see "Security Ownership of Certain Beneficial Owners and Management"
herein. The Company has no class or series of stock outstanding other than the
Common Stock entitled to vote at the Special Meeting.
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<PAGE>
A representative of the Company's independent certified public accountants,
Kofler, Levenstein, Romanotto & Co., P.C. will be present at the Special
Meeting. The representative will have an opportunity to make a statement and
will be available to respond to appropriate questions.
SUMMARY OF TRANSACTION
The following is a brief summary of information contained elsewhere in this
Proxy Statement. This summary does not contain a complete description of the
terms of the Merger and the other matters summarized herein and is qualified in
its entirety by reference to the full text of this Proxy Statement and the
Appendices.
THE COMPANIES
Advanced Orthopedic Technologies, Inc. ("AOT" or the "Company") is a
provider of patient care services for orthotic and prosthetic rehabilitation
markets. Orthotics is the design, fabrication and fitting of custom-made braces
and other devices, and prosthetics is the design, fabrication and fitting of
artificial limbs. AOT's executive offices are located at 151 Hempstead Turnpike,
West Hempstead, New York 11552, Telephone (516) 481-9670. AOT operates 37
patient care centers in New York, New Jersey, West Virginia, Virginia,
California and New Mexico, which it has developed through internal expansion as
well as acquisitions. AOT reported net revenues of $13,813,000 for the fiscal
year ended December 31, 1995 and $8,455,000 for the six months ended June 30,
1996. AOT believes it is the fourth largest orthotic and prosthetics provider in
the United States. AOT's Common Stock is traded on the NASDAQ Small Cap Market
under the symbol "AOTI".
NovaCare O&P is a wholly-owned subsidiary of NovaCare, Inc., a Delaware
corporation ("NovaCare"), with executive offices at 1016 West Ninth Avenue, King
of Prussia, Pennsylvania 19406, Telephone (610)-992-7200. NovaCare believes it
is the leading national provider of medical rehabilitation services outside the
medical rehabilitation hospital setting, and that it is the largest orthotics
and prosthetics provider in the United States. Rehabilitation is the process
that restores individuals disabled by trauma or disease to their optimal level
of functionality and self-sufficiency. NovaCare operates a national network of
approximately 500 outpatient care center locations, and also provides
occupational health and management consulting services and manages
rehabilitation programs on a contract basis in more than 1,800 nursing
facilities. NovaCare reported net revenues of approximately $800 million for its
fiscal year ending June 30, 1996. NovaCare's Common Stock is traded on the New
York Stock Exchange under the symbol "NOV".
EFFECT OF THE MERGER; CONSIDERATION
The Merger Agreement provides for an all-cash transaction in which the
holders of the Company's Common Stock are expected to receive approximately
$3.00 per share, subject to certain adjustments.
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<PAGE>
Upon consummation of the Merger pursuant to the Merger Agreement, NovaCare
Sub will be merged with and into the Company, the Company will become a wholly
owned subsidiary of NovaCare O&P, and each share of the Company's Common Stock
outstanding immediately prior to the Effective Time, other than shares of the
Company's Common Stock held by the Company as treasury stock (all of which shall
be cancelled) and shares with respect to which dissenter's rights have been
perfected under the Nevada General Corporation Law ("Nevada Law"), will be
converted into the right to receive a cash payment per share as described herein
(the "Cash Consideration").
SHAREHOLDERS OF THE COMPANY WILL NOT RECEIVE ANY COMMON STOCK OR OTHER
SECURITIES OF NOVACARE OR ITS SUBSIDIARIES AND WILL NOT HAVE ANY CONTINUING
INVESTMENT IN NOVACARE, ITS SUBSIDIARIES, OR THE COMPANY FROM AND AFTER THE
EFFECTIVE TIME. NOVACARE O&P WILL OWN 100% OF THE COMMON STOCK OF THE COMPANY
FROM AND AFTER THE EFFECTIVE TIME.
The Cash Consideration per share will be computed as (1) $14,080,000 less
the sum of (x) the Merger Expenses (as hereinafter defined) and (y) the amounts
payable with respect to the Company Warrants and the Company Options (each as
hereinafter defined), divided by (2) the number of shares of the Company's
Common Stock outstanding immediately prior to the Effective Time. The Cash
Consideration is estimated to be approximately $3.00 per share.
Under the terms of the Merger Agreement, NovaCare O&P will provide a total
merger consideration of $14,080,000 in cash, which will be utilized to pay the
Cash Consideration to holders of outstanding Common Stock of the Company, at the
Effective Time; to pay the excess, if any, of such per share cash price over the
exercise price of outstanding stock options under AOT's 1992 Stock Option and
Stock Appreciation Rights Plan ("Company Options") and outstanding AOT Common
Stock Purchase Warrants ("Company Warrants"); and to pay AOT's expenses in the
merger transaction ("Merger Expenses"). Under the terms of the Merger Agreement,
NovaCare will permit the Company to have up to $4,000,000 of bank debt and debt
owed under certain acquisitions, at the Effective Time of the Merger;
indebtedness of such types in excess of such amounts will be considered Merger
Expenses of the Company. See "The Merger Agreement--The Merger--Consideration to
be Received in the Merger."
RECOMMENDATION OF THE BOARD OF DIRECTORS; REASONS FOR THE MERGER
The Merger Agreement has been unanimously approved by the Boards of
Directors of the Company, of NovaCare O&P, and NovaCare Sub. The effectiveness
of the merger is subject to the approval of the Company's shareholders. The
Merger Agreement provides that consummation of the merger is subject to the
Company and NovaCare O&P having complied with their covenants and agreements set
forth in the Merger Agreement and their representations and warranties being, in
all material respects, true and accurate as of the Effective Time.
The recommendation of the Company's Board of Directors is based on a number
of factors, which are discussed below in the section, "The
Merger--Recommendation of the Boards
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<PAGE>
of Directors; Reasons for Merger." The Company's Board of Directors recommends
that the Company's shareholders vote in favor of the Merger and approve and
adopt the Merger Agreement.
DISSENTER'S RIGHTS
A holder of the Company's Common Stock will be entitled to demand
dissenter's rights in respect of such shares under Chapter 92A of the Nevada
General Corporation Law ("Chapter 92A"), subject to satisfaction by such
stockholder of the conditions for dissenter's rights established by Chapter 92A.
The portion of Chapter 92A relating to dissenter's rights is set forth in full
in Appendix B hereto. See, "The Merger--Dissenter's Rights", and Appendix B
hereto.
ACCOUNTING TREATMENT; CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The transaction will be treated, for accounting purposes, as a purchase of
the shares held by the Company's shareholders. The transaction intended by the
Merger Agreement is NOT a tax-free transaction, reorganization or exchange, and
each holder of the Company's Common Stock will be subject to federal income tax
on the gain represented by the excess of the per-share Cash Consideration over
such shareholder's basis in his shares. See "The Merger--Certain Federal Income
Tax Consequences of the Merger."
MARKET PRICE DATA; BOOK VALUE PER SHARE
The Company's Common Stock has been traded on the NASDAQ Small Cap Market
since December, 1992. On October 1, 1996, the last full trading day prior to the
public announcement of the proposed Merger, the bid and ask prices for the
Company's Common Stock were $1.75 and $2.37, respectively. See "Market for
Common Equity and Related Stockholder Matters" for additional historical
information regarding trading prices of the Company's Common Stock. Stockholders
are urged to obtain current market quotations for the Company's Common Stock.
The book value of the Company's Common Stock was $1.26 per share at
December 31, 1995 and $1.31 per share at June 30, 1996.
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<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------
1995 1994(5)(7) 1993(4)(7) 1992(3)(6)(7) 1991(2)(6)(7)
---- ---------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Sales $13,813,000 $13,162,000 $ 9,609,000 $ 7,163,000 $4,762,000
----------- ----------- ----------- ----------- ----------
Income before
cumulative effect of
accounting change 486,000 406,000 582,000 570,000 $ 89,000
Per common share .11 .09 .14 .13 .02
----------- ----------- ----------- ----------- ----------
Cumulative effect of
accounting change -- -- -- 88,000 --
Per common share -- -- -- .02 --
----------- ----------- ----------- ----------- ----------
Net income $486,000 $406,000 $582,000 $658,000 $ 89,000
Per common share .11 .09 .14 .15 .02
----------- ----------- ----------- ----------- ----------
December 31,
---------------------------------------------------------------------------------------------------
1995 1994(5)(7) 1993(4)(7) 1992(3)(6)(7) 1991(2)(6)(7)
---- ---------- ---------- ------------- -------------
Working capital $ 2,343,000 $ 2,702,000 $ 2,914,000 $ 2,784,000 $ 706,000
----------- ----------- ----------- ----------- ----------
Total assets 11,031,000 10,794,000 10,548,000 6,119,000 2,235,000
----------- ----------- ----------- ----------- ----------
Long-term debt 2,826,000 3,956,000 4,071,000 1,096,000 387,000
----------- ----------- ----------- ----------- ----------
Stockholders' equity 5,413,000 4,751,000 4,135,000 3,568,000 887,000
----------- ----------- ----------- ----------- ----------
Book value per
common share $ 1.26 $ 1.12 $ 0.99 $ 0.86 $ 0.21
=========== =========== =========== =========== ==========
</TABLE>
Six Months Ended
June 30, 1996
(unaudited)
----------------
Sales $ 8,455,000
-----------
Net income 494,000
Per common share .10
-----------
Working capital 2,637,000
-----------
Total assets 12,182,000
-----------
Long-term debt 2,791,000
-----------
Stockholders' equity 6,230,000
-----------
Book value per
common share $ 1.31
===========
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<PAGE>
(1) Historical information for periods prior to April 30, 1992, consists of
Advanced Orthopedic Technologies, Inc., a New York corporation
("Advanced"), and subsidiaries. On such date, Advanced became a
wholly-owned subsidiary of Advanced Orthopedic Technologies, Inc., a Nevada
corporation (the "Company"), in a transaction accounted for as a
recapitalization of Advanced. The Nevada corporation had no operating
revenues prior to that date.
(2) Includes the results of operations of Westfield Brace Co., Inc., from the
effective date of acquisition, January 1, 1991.
(3) Includes the results of operations of Lett Orthopedic Industries, Inc.,
from the effective date of acquisition, January 1, 1992.
(4) Includes the results of operations of Prosthetic and Orthotic Associates,
Inc. (effective January 1, 1993), Orthopedic Technologies, Inc. (effective
July 1, 1993), SFV Rehabilitation Specialists, Inc. (effect August 1,
1993), Exe, Inc. (effective August 26, 1993), and Parmeco, Inc. (effective
August 31, 1993), from the effective date of acquisition.
(5) Includes the results of operations of Clayton Prosthetics and Orthotics,
Inc. from the effective date of acquisition, April 18, 1994.
(6) Adjusted to give effect to the Company's three into one reverse stock split
on December 11, 1992.
(7) Includes 1,146,618 in 1993, 1,162,558 in 1992, and 1,166,667 in 1991 shares
of Common Stock to be issued (or reserved for issuance to key employees on
future vesting) on conversion into Common Stock of all of the Company's
Series A, Series B, Series C and Series D Preferred Shares issued and
outstanding (or reserved for issuance to key employees on future vesting).
All outstanding Series A, Series B, Series C, and Series D Preferred Shares
were converted into Common Shares on April 1, 1994.
(8) There were no dividends paid for the fiscal years 1991 through 1995, nor
for any period during 1996.
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<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC.
QUARTERLY FINANCIAL DATA
(UNAUDITED)
Net
Net Gross Income
Quarter ended Sales Profit (Loss)
------------- ----- ------ ------
1996
March $ 3,930,000 $ 1,918,000 $ 179,000
June 4,525,000 2,322,000 315,000
--------- ----------- ---------
$ 8,455,000 $ 4,240,000 $ 494,000
============ =========== =========
1995
March $ 3,337,000 $ 1,713,000 $ 91,000
June 3,422,000 1,730,000 161,000
September 3,417,000 1,767,000 174,000
December 3,637,000 1,865,000 60,000
------------ ----------- ---------
$ 13,813,000 $ 7,075,000 $ 486,000
============ =========== =========
1994
March $ 2,727,000 $ 1,421,000 $ 68,000
June 3,430,000 1,721,000 172,000
September 3,537,000 1,855,000 245,000
December 3,468,000 1,735,000 (79,000)
------------ ----------- ---------
$ 13,162,000 $ 6,732,000 $ 406,000
============ =========== =========
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<PAGE>
THE MERGER
The effective time, consideration and other terms of the Merger are
described in "The Merger Agreement" below.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS; REASONS FOR THE MERGER
The Boards of Directors of the Company, NovaCare O&P and NovaCare Sub have
each unanimously approved and adopted the Merger Agreement. The Board of
Directors of the Company recommends that holders of the Company's Common Stock
vote FOR approval and adoption of the Merger and the Merger Agreement.
The Board of Directors of the Company considered a number of factors in
reaching the recommendations described above, including the following:
(i) the financial condition, results of operations and prospects of the
Company as an independent company, in view of the rapidly changing conditions in
the health care industry in general and in the prosthetic and orthotic services
industry in particular.
Substantial changes in the methods of delivery of health care services, in
the nature and scope of health care insurance, the methods of payment of the
costs of health care services and insurance, the pricing of health care services
and governmental and insurance reimbursement of health care costs, as well as
proposals for an overall restructuring of the health care system as well as the
Medicare and Medicaid programs, continue to be the subject of major legislative
and budgetary initiatives at the federal and state levels. It is not possible to
predict whether such legislation will ultimately be enacted. If such legislation
is enacted, it is impossible to predict the form which such legislation will
take or the impact such legislation will have on the Company's operations or on
the health care industry in general. The Company, as an independent
organization, may not have the financial, personnel and other resources to
respond to such changes, at least in comparison to larger and more diversified
health care organizations, such as NovaCare.
Furthermore, the Company is engaged only in the provision of prosthetic and
orthotic services, and does not provide any other form of rehabilitation
services. Larger and more diversified health care organizations, such as
NovaCare, which provide rehabilitation services in a number of different
disciplines, may be better positioned in the future to service the health care
markets. The Company's Board of Directors considers it unlikely that the Company
would have the financial, personnel and other resources, in the foreseeable
future, to expand its patient care services beyond prosthetic and orthotic
services.
The last few years have witnessed substantial growth of large for-profit
health care conglomerates, operating on a substantially national basis. Such
organizations, which operate hospitals and other health care facilities on a
national basis, may desire to engage prosthetics and orthotics suppliers which
can service their needs on a national basis, and which may also provide
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<PAGE>
rehabilitation services in other disciplines. The Company's Board of Directors
considers it unlikely that the Company would have the financial, personnel and
other resources, in the foreseeable future, to expand its geographic coverage to
provide prosthetic or orthotic services on a nationwide basis. The Company
currently operates primarily in three major regional concentrations (New
York/New Jersey metropolitan area; Upstate New York and West Virginia/Virginia),
plus two patient centers in New Mexico and one in California.
(ii) Limitations on Geographic Expansion of the Company and Future
Acquisitions. The Company has developed its three major regional concentrations
(New York/New Jersey metropolitan area; Upstate New York; and West
Virginia/Virginia) by acquisitions and internal expansion such that the Company
has extensive geographical coverage of patient care centers within such markets.
Such coverage has enabled the Company to be successful in obtaining managed care
contracts from health maintenance organizations, hospital groups and other
health care providers demanding accessible patient care centers for use of their
members throughout the region in which they operate.
Further geographical expansion of the Company would most likely require
that the Company develop entirely new regional concentrations in different
states or parts of the country. Given the recent changes in the health care
industry in general and the prosthetic and orthotic industry in particular as
described above, and the need to offer health care providers managed care
services throughout a geographic region, successful penetration of new regions
requires substantial geographical coverage of patient care centers in such
regions. This could only be accomplished by acquisition of prosthetic and
orthotic providers having a substantial presence in the new region, and is
unlikely to be accomplished by acquiring an organization with only a few patient
care centers, or by the Company starting up one or a few of its own patient care
centers in the new region. The Board of Directors considers it uncertain that
the Company would have the financial, personnel and other resources to make such
a major acquisition in the foreseeable future. Furthermore, the Company would
have to compete, in locating and acquiring such acquisition targets, with large
and diversified health care organizations, such as NovaCare, which have
substantially greater financial and other resources than the Company.
(iii) Recent and historical market prices of the Company's Common Stock.
Based upon the market price of the Company's Common Stock at the close of
business on October 1, 1996, the Cash Consideration that the Company's
stockholders would receive in the Merger constitutes a premium in excess of 26%
over the then closing price of the Company's Common Stock of $2.37 per share.
Furthermore, the Cash Consideration compares favorably to the historical market
prices of the Company's Common Stock over the past two years. See "Market for
Common Equity and Related Stockholder Matters."
(iv) The all-cash nature of the proposed transaction. In the event the
Merger becomes effective, the entire Cash Consideration will become available to
the shareholders of the Company, without any holdbacks, escrows or retainages.
The Company's shareholders will not have to bear the risks that would be
involved in a purchase transaction where components of the purchase price would
be paid on a deferred basis by promissory notes or where components of the
purchase price are paid as earn-outs or other forms of contingent consideration
dependent on future performance of the Company from and after the Effective
Date. Furthermore, once
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the Cash Consideration is computed at the Effective Time in accordance with the
Merger Agreement, it will be permanently fixed, and there will be no purchase
price adjustments based on audits or performance of the Company from and after
the Effective Time. The Board of Directors considers the all-cash form of the
transaction to be a major advantage.
(v) Market for the Company's Common Stock. Even though the Company's Common
Stock has been publicly traded on the NASDAQ Small Cap Market since December,
1992, it has generally been thinly traded and shareholders have experienced a
lack of liquidity in the market.
(vi) Lack of opportunity for additional investment financing. For several
years, the Company's management has explored opportunities to obtain additional
financial resources for the Company, including the possibility of additional
public offerings of its Common Stock or other securities, and private
investments from a variety of sources. The Company has not been able to effect
such additional investment financing, which would be necessary for significant
expansion of the Company's business.
The Company's Board of Directors evaluated the primary factors listed
above, as well as others, in light of their knowledge of the business and
operations of the Company and their business judgment. In view of the variety of
factors considered in connection with evaluation of the transaction, the Board
of Directors did not find it practical to, and did not, quantify or otherwise
attempt to assign relative weights to the specific factors considered in its
determination. However, the Board placed special emphasis on the fact that the
estimated Cash Consideration per share is at a premium over historical and
current trading prices for the Company's Common Stock, that it will be paid in
cash at the Effective Time, and the difficulties that it perceives the Company
would have in expanding its business if it were to remain an independent
company.
ACCOUNTING TREATMENT
The Merger will be treated as a purchase of the shares of the Company for
accounting and financial reporting purposes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following summary describes the material federal income tax
consequences of the Merger to holders of the Company's Common Stock who are
citizens or residents of the United States. It does not discuss all the tax
consequences that may be relevant to stockholders of the Company in special tax
situations (such as insurance companies, dealers in securities, tax exempt
organizations or non-US persons) or to stockholders of the Company who acquired
their shares of the Company's Common Stock pursuant to the exercise of employee
stock options or otherwise as compensation. Neither the Company nor NovaCare O&P
has requested a ruling from the Internal Revenue Service in regard to any of the
federal income tax consequences of the Merger.
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A stockholder of the Company who receives the Cash Consideration in payment
for a share of Common Stock of the Company will recognize gain or loss equal to
the difference between the Cash Consideration received and such stockholder's
basis in the shares. A dissenting stockholder who receives cash for such
stockholder's Common Stock pursuant to the exercise of dissenter's rights will
recognize gain or loss equal to the difference between the amount of cash
received with respect to such shares (other than amounts, if any, which are or
are deemed to be interest for federal income tax purposes, which amounts will be
taxed as ordinary income), and such stockholder's basis in such shares of the
Company's Common Stock. If Common Stock of the Company were held as a capital
asset, such gain or loss will be capital gain or loss and will be long term
capital gain or loss if such stock was held for more than one year.
The transaction intended by the Merger Agreement is NOT a tax-free
transaction, reorganization or exchange, and each holder of the Company's Common
Stock will be subject to federal income tax on the gain represented by the
excess of the per-share Cash Consideration over such shareholder's basis in such
share.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
THE DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE US INTERNAL
REVENUE CODE. NO INFORMATION IS PROVIDED HEREIN WITH RESPECT TO THE TAX
CONSEQUENCES, IF ANY, OF THE MERGER UNDER APPLICABLE FOREIGN, STATE AND LOCAL
LAWS. THE COMPANY'S COMMON STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING
TAX RETURN REPORTING REQUIREMENTS, THE APPLICABILITY AND AFFECT OF FOREIGN,
STATE, LOCAL AND OTHER APPLICABLE TAX LAWS, AND THE POSSIBLE EFFECT OF ANY
PROPOSED CHANGES IN THE TAX LAWS.
OTHER AGREEMENTS
On September 30, 1996, Andrew H. Meyers, the President and Chief Executive
Officer of the Company, and Norbert B. Meyers, the Chairman of the Board, Vice
President and Secretary of the Company, each entered into agreements in favor of
NovaCare O&P, pursuant to which they agreed, among other things, to vote the
shares of the Company's Common Stock of which they are the record holders and
beneficial owners in favor of the Merger Agreement and all matters related
thereto and against any alternative proposal relating to a merger, consolidation
or other business combination involving the Company, or a transaction which
would result in a change in control of the Company, or any sale or transfer of
any of the Company's assets or business or that of any of the Company's
subsidiaries. Such agreements also preclude such individuals from granting any
proxies or entering into any other voting arrangement with respect to the voting
of any of such shares and from selling, transferring, granting options on,
granting liens on, or otherwise disposing of such shares. Such agreements will
remain in effect until the earlier to occur of the Effective Time or the
termination of the Merger Agreement in accordance with its terms. No
consideration was paid to Andrew H. Meyers or Norbert B. Meyers for entering
into such agreements. Andrew H. Meyers is the
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beneficial owner of approximately 62.3%, and Norbert B. Meyers is the beneficial
owner of approximately 4.0%, of the Company' Common Stock entitled to vote upon
the proposed Merger. See "Security Ownership of Certain Beneficial Owners and
Management."
INTEREST OF CERTAIN PERSONS IN THE MERGER
The officers and directors of the Company (including without limitation,
Andrew H. Meyers and Norbert B. Meyers) do NOT own, beneficially or of record,
any material number of shares of NovaCare, and they will not receive any shares
of Common Stock or other securities of NovaCare or its subsidiaries as a result
of the Merger transaction. There are NO common directors or officers serving the
Company, on the one hand, and NovaCare and its subsidiaries, on the other hand.
Neither NovaCare or its subsidiaries, or any of its officers and directors,
currently own any material number of shares of Common Stock of the Company.
Modification of Employment and Other Agreements with Executive Officers.
Andrew H. Meyers, the President and Chief Executive Officer of the Company, will
at the Effective Time, enter into an Employment Agreement with NovaCare O&P, to
serve as an Area Vice President, providing for a term of three years, a base
salary of $120,000 per year and bonuses consistent with the position of Area
Vice President based on criteria to be mutually agreed in the future and the
performance of NovaCare O&P. After the expiration of one year from the Effective
Time, the agreement may be terminated by NovaCare, upon payment to Mr. Meyers of
six months severance at the base salary rate then in effect. At the Effective
Time, Mr. Meyers will also enter into a Non-Competition Agreement with NovaCare
O&P, providing that for three years after the Effective Time, Mr. Meyers will
not engage in certain aspects of the prosthetic and orthotic services business
in certain geographic areas, and will be paid compensation therefore at the rate
of $133,333 per year. At the Effective Time, Mr. Meyers will enter into an
Indemnity Agreement (the "Indemnity Agreement") with NovaCare O&P whereby he
will indemnify O&P, for a limited time period and subject to certain maximum
liability limits, in the event NovaCare incurs damages as a result of certain
breaches of the Company's representations and warranties under the Merger
Agreement.
At the Effective Time, Mr. Meyer's existing Executive Employment Agreement
with the Company, dated April 30, 1992, as amended to date, will be terminated
and neither the Company nor Mr. Meyers will have any further obligations
thereunder, except for the payment to Mr. Meyers of compensation and benefits
thereunder accrued up to the Effective Time. The Board of Directors of the
Company has granted Mr. Meyers a bonus of $48,000 for performance during the
1996 calendar year; $15,000 of such bonus has already been paid and the balance
of $33,000 will be paid in the first ten days of 1997. At the Effective Time,
the existing License Agreement dated April 30, 1992 between Mr. Meyers and the
Company, whereby he licensed certain patents to the Company, will be terminated
and neither the Company nor Mr. Meyers will have any further obligations
thereunder. In October 1996, the Company repaid to Mr. Meyers the net amount of
approximately $107,000, representing the balance remaining of a loan made in
1989 by Mr. Meyers to the Company and which had been utilized by the Company to
finance an acquisition at that time. At the Effective Time, the Company will
transfer ownership
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to Mr. Meyers of a key man life insurance policy issued on his life, and the
Company shall have no further obligation to pay, or reimburse the payment of,
any of the premiums on such policy.
At the Effective Time, Norbert B. Meyer's existing Employment Agreement
with the Company, dated May 1, 1994, as amended to date, will be terminated, and
the Company will enter into a one year employment agreement with Mr. Meyers, at
a salary of $15,000 per annum, under which he will work part time at the
direction of Andrew H. Meyers.
Elimination of Certain Personal Guarantees. At the Effective Time, the
personal guarantees made by Andrew H. Meyers and Norbert B. Meyers of the
Company's loan obligations to State Bank of Long Island will be terminated, and
the payment by the Company to them of guarantee fees will terminate on such
date. Certain securities collateral that had been provided by Norbert B. Meyers
to State Bank of Long Island to secure his guarantee will be returned to Mr.
Meyers.
Lease of Certain Offices From Andrew H. Meyers and Norbert B. Meyers. (a)
Simultaneous with the acquisition by the Company of certain operations in
Morgantown, West Virginia, in 1988, Andrew H. Meyers purchased the real estate
in Morgantown, West Virginia, where the Company's offices are located. The
Company guaranteed the payment by Andrew H. Meyers of the purchase price for
such real estate of $135,000, payable with interest at ten percent per annum in
monthly payments of $1,302.78 over ten years with a balloon payment of the
unpaid balance in 1998, and secured by a deed of trust. Andrew H. Meyers leases
this facility to the Company under a ten year lease expiring December 31, 1999,
at an annual base rent of $21,600 from January 1, 1990 through December 31, 1994
and $24,000 from January 1, 1995 through December 31, 1999, plus consumer price
index and tax increase escalations. Andrew H. Meyers had agreed that a $7,500
security deposit (otherwise required under the lease) would not be required of
the Company so long as Andrew H. Meyers and certain trusts for the benefit of
his family (the "Meyers Trusts") own at least 51% of the Company's Common Stock.
The Company will continue to lease this facility in accordance with the terms of
such lease from and after the Effective Time and the Company will pay a one
month $2,000 security deposit to Mr. Meyers on the Effective Time (Mr. Meyers
has agreed to waive the balance of the $7500 security deposit). Pursuant to the
Indemnity Agreement, Mr. Meyers will indemnify the Company for any obligations
it occurs under its guaranty of Mr. Meyers' purchase obligations of such
Morgantown, West Virginia real estate.
(b) The land and buildings comprising the Company's executive offices and
patient care center in West Hempstead, New York are owned by Norbert B. Meyers,
and leased to the Company under a ten year lease expiring December 31, 1999.
This lease provides for a base rent of $11,331.25 per month from April 1, 1990
to December 31, 1994 and $12,464.38 per month during the period January 1, 1995
through December 31, 1999 (plus consumer price index and tax increase
escalations). In the event that Andrew H. Meyers and the Meyers Trusts own less
than 51% of the Company's Common Stock, rentals will increase to $14,333.34 per
month through December 31, 1994 and $15,766.66 per month from January 1, 1995
through December 31, 1999 (plus consumer price index and tax increase
escalations). Norbert B. Meyers had agreed that a $50,000 security deposit
(otherwise required under the lease) would not be required so long as Andrew
H.Meyers and the Meyers Trusts own at least 51% of the Common Stock. The Company
will continue to lease this facility in accordance with the terms
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of such lease from and after the Effective Time; the Company will pay the
increased rentals which under the terms of the lease will go into effect on the
Effective Time, and the Company will pay a one-month $16,000 security deposit to
Mr. Meyers on the Effective Time (Mr. Meyers has agreed to waive the balance of
the $50,000 security deposit).
(c) In August, 1996, the Company opened its uptown Manhattan, New York,
patient care center, in an office condominium under an unwritten sublease
agreement with a limited liability company owned by Andrew H. Meyers and his
children (the "Meyers LLC"), at a rental of approximately $4,000 per month. It
is intended that prior to the Effective Time, the Meyers LLC will purchase the
office condominium unit pursuant to a contract it has entered into and lease it
to the Company at the same initial rental rate, with rent increasing at 3.5% per
annum (and also for tax increase escalations), under a ten year lease, with the
Company having the option to renew for an additional five years. The Company
will have the right, after expiration of the first five years of the lease term,
to terminate the lease upon payment to the Meyers LLC of $100,000, upon which
the Company will be relieved of any future obligations under said lease. The
Company will continue to lease this facility in accordance with the terms of the
lease after the Effective Time and will also pay the Meyers LLC a one month
$4,000 security deposit.
The Company believes that each of these leases is substantially upon terms
which are as favorable as those which could have been obtained in arms-length
negotiations with unrelated third party landlords.
Jerome Grossman Investment Banking Services Fee.. As of September 1, 1993,
the Company and Mr. Jerome Grossman entered into a Services Contract whereby Mr.
Grossman was engaged by the Company to perform consulting and investment banking
services during a three and one-third year term ending December 31, 1996. On
June 1, 1995, the term of Mr. Grossman's Services Contract with the Company was
extended for one additional year through December 31, 1997, on the same terms
and conditions.
The Services Contract further provides that Mr. Grossman's services to the
Company will include investment banking services in connection with any possible
"Sale Transaction", defined as the merger or acquisition of the Company by a
corporation (which is not an affiliate or subsidiary of the Company) with
revenues greater than those of the Company, which transaction constitutes the
sale of all or substantially all of the Company's assets or more than 50% of its
Common Stock, and if such Sale Transaction is approved by the Board of Directors
of the Company and if such a transaction is implemented, then the Company shall
be obligated to compensate Mr. Grossman in a manner customary within the
investment banking industry.
On September 10, 1996, the Company entered into a further amendment to Mr.
Grossman's Services Contract setting forth that in the event of a Sale
Transaction with NovaCare, Mr. Grossman would be paid at the closing of such
transaction a cash fee of three and one half (3.5%) percent of the total
consideration paid by NovaCare, including assumption of debt. Such investment
banking fee will be included in the Merger Expenses of the Company. See "The
Merger Agreement -- The Merger -- Consideration to be Received in the Merger."
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Repurchase of Shares Issued in Med-Tech Acquisition. On January 5, 1996,
the Company entered into an Asset Purchase Agreement with WG Equities, Inc. ("WG
Equities", f/k/a Med-Tech O&P Services, Inc). and its principal shareholders, to
purchase the operating assets of WG Equities. A component of the purchase price
consisted of the issuance on such date of 450,000 shares of the Company's Common
Stock. Under the terms of such Asset Purchase Agreement, the Company has the
right, but not the obligation, to repurchase any or all of such shares on or
prior to June 30, 1997 at a price of $1.50 per share. On July 26, 1996, the
Company, WG Equities, and WG Equities' principal shareholders entered into an
amendment to such Asset Purchase Agreement whereby the Company was granted the
option to repurchase up to 225,000 of such shares at a price of $0.75 per share,
which option was exercisable until September 30, 1996. On September 13, 1996,
the Company exercised such option to repurchase 225,000 shares at $0.75 per
share by written notice to WG Equities. In addition, in October 1996, the
Company exercised its option to repurchase the balance of the other 225,000
shares at $1.50 per share. It is intended that such purchases, for a total
consideration of $506,250, will be implemented at or before the Effective Time.
Such repurchases at reduced prices from market value and from the Cash
Consideration amount, will increase the amount of the Cash Consideration
available to be paid to the holders of the Company's Common Stock under the
Merger Agreement. The principal shareholders of WG Equities, Marc Waldman and
Steven Goldstein, are NOT officers or directors of the Company. Mr. Waldman has
a contract as a consultant to the Company, and Mr. Goldstein has an employment
agreement as a prosthetic and orthotic practitioner with the Company, each for a
five year term commencing January 1, 1996.
Pursuant to such Asset Purchase Agreement, on January 5, 1996, WG Equities
granted a proxy to Andrew H. Meyers, to vote all 450,000 of such shares, in Mr.
Meyer's discretion, on all matters to submitted to or requiring the vote of
shareholders of the Company. In the event that such shares are outstanding (and
have not yet been repurchased) at the date of the Special Meeting, Mr. Meyers
will vote all of such shares FOR approval and adoption of the Merger Agreement.
Conversion of Certain Stock Earnouts and Bonuses to Cash Payments. In
connection with certain of the Company's acquisitions of prosthetic and orthotic
services businesses, the Company granted to the acquisition sellers the
opportunity to achieve additional contingent purchase price based on performance
of the acquired business, to be paid on future dates in specified dollar amounts
(based on market value) or specified numbers of shares of the Company's Common
Stock, if earned. At or prior to the Effective Time, the Company intends to
enter into amendments of its agreements with such acquisition sellers to provide
that such earnouts to be paid in shares of the Company's Common Stock, will, if
earned, instead be paid in cash in the same specified dollar amounts (and in
cases where the earnout was a specific number of shares, in a dollar amount
equivalent to $3.00 per share). Such amendments will also provide that all
potential earnouts to be paid on future dates based on performance of the
acquired business, if earned, will be paid whether or not the individual
acquisition seller was employed by the Company on such future dates. Two
individuals have practitioner employment agreements with the Company providing
for bonuses on future dates, if earned, to be paid in specified dollar amounts
of the Company's Common Stock; at or prior to the Effective Time, the Company
intends to enter into amendments of its agreements with such individuals to
provide that such bonuses, if earned, will instead be paid in cash in the same
specified dollar amounts.
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The obligation of the Company to make such payments of earnouts and bonuses is
contingent on the level of performance of certain of the Company's regional
businesses in future periods, which cannot be predicted. None of the individuals
affected by these amendments are officers or directors of the Company, but they
each have practitioner employment agreements or consulting agreements with the
Company.
Company Stock Options. Certain officers and directors of the Company (other
than Andrew H. Meyers) have in the past been granted stock options under the
Company's 1992 Stock Option and Stock Appreciation Rights Plan ("Company
Options"). Under the terms of the Merger Agreement, they, as with any other
holders of Company Options, will receive the excess of the Cash Consideration
per share, if any, over the excise price of such Company Options held by them.
DISSENTERS' RIGHTS
Holders of shares of the Company's Common Stock are entitled to dissenters'
rights under Chapter 92A of the Nevada General Corporation Law ("Chapter 92A")
provided they comply with the conditions established by Chapter 92A. The portion
of Chapter 92A relating to Rights of Dissenting Owners (Nevada Revised Statutes
92A.300 to 92A.500 inclusive) is reprinted in its entirety as Appendix B to this
Proxy Statement. The following discussion is not a complete statement of the law
relating to dissenters' rights and is qualified in its entirety by reference to
Appendix B. This discussion and Appendix B should be reviewed carefully by any
holder who wishes to exercise statutory dissenters rights or who wishes to
preserve the right to do so, as failure to comply with the procedures set forth
herein or therein will result in the loss of dissenters' rights.
A record holder of shares of the Company's Common Stock who makes the
demand described below with respect to such shares, who continuously is the
record holder of such shares through the Effective Time of the Merger, who
otherwise complies with the statutory requirements of Chapter 92A and who
neither votes in favor of the Merger nor consents thereto in writing will be
entitled to receive the "fair value" of his shares of the Company's Common Stock
as determined under Chapter 92A. All references in Chapter 92A and in this
summary of dissenters' rights to a "stockholder" or "holders of the Company's
Common Stock" are to the record holder or holders of shares of the Company's
Common Stock.
A stockholder who desires to assert dissenter's rights must deliver a
separate written notice of his intent to demand payment for his shares under
Chapter 92A, if the Merger is effectuated, to the Secretary of the Company prior
to the vote by the stockholders of the Company on the Merger, and must NOT vote
his shares in favor of the Merger. Chapter 92A provides that a stockholder who
does not satisfy the requirement of sending such a written notice, or a
stockholder who votes in favor of the Merger, is NOT entitled to dissenter's
rights or payment for his shares pursuant to Chapter 92A.
Such notice of intent to demand dissenter's rights must be executed by or
on behalf of the stockholder of record, fully and correctly, as such
stockholder's name appears on the
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certificate or certificates representing the shares of the Company's Common
Stock. A stockholder of record may assert dissenter's rights as to fewer than
all of the shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the Company in writing
of the name and address of each person on whose behalf he asserts dissenter's
rights. The rights of a partial dissenter are determined as if the shares as to
which he dissents and his other shares were registered in the names of different
stockholders.
A beneficial stockholder may assert dissenter's rights as to shares held on
his behalf only if (a) he submits to the Company the written consent of the
stockholder of record to the dissent not later than the time the beneficial
stockholder asserts dissenter's rights; and (b) he does so with respect to all
shares of which he is the beneficial stockholder or over which he has power to
direct the vote. Accordingly, a person having a beneficial interest in shares of
the Company's Common Stock that are held of record in the name of another
person, such as a broker, fiduciary or other nominee, must act promptly to cause
the record holder to follow the steps summarized herein properly and in a timely
manner to perfect whatever dissenter's rights are available. If the shares of
the Company's Common Stock are owned of record by more than one person, such as
in a joint tenancy or tenancy in common, the written notice of intent to demand
dissenter's rights must be executed by all joint owners.
A stockholder who elects to exercise dissenter's rights should mail or
deliver his or her written notice of intent to demand dissenter's rights to
Advanced Orthopedic Technologies, Inc., 151 Hempstead Turnpike, West Hempstead,
New York 11552, Attn: Norbert B. Meyers, Secretary. Such notice must be received
by the Company at such address on or prior to November 12, 1996, the day before
the date of the Special Meeting, November 13, 1996, or may be delivered in
person at the Special Meeting prior to the vote on the Merger. The written
notice should specify the stockholder's name and mailing address, the number of
shares of the Company's Common Stock owned, and that the stockholder is thereby
notifying the Company of his or her intent to demand payment for payment for his
or her shares under Chapter 92A. A proxy or vote against the Merger will not
constitute such a notification or demand.
If the Merger is approved at the Special Meeting, the Company must deliver
a written dissenter's notice ("Dissenter's Notice") to all stockholders who
satisfied the requirements to assert dissenter's rights. This notification must
be sent no later than ten (10) days after the Effective Time of the Merger, and
must (a) state where the written demand for payment must be sent and where and
when certificates for the shares which are the subject of dissenter's rights
must be deposited and set forth a date by which the Company must receive such
demand for payment and deposit of shares ("Demand Date"), which may be not less
than 30 nor more than 60 days after the Dissenter's Notice is delivered, (b)
supply a form for demanding payment that includes the date of the first
announcement to the news media or to the stockholders of the terms of the
proposed action ("Announcement Date", which is established as October 1, 1996)
and require that the person asserting dissenter's rights certify whether or not
he acquired beneficial ownership of the shares before the Announcement Date and
(c) be accompanied by a copy of that portion of Chapter 92A relating to Rights
of Dissenting Owners (Nevada Revised Statutes 92A.300 to 92A.500, inclusive).
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A stockholder to whom a Dissenter's Notice is sent must (a) demand payment
in writing for his shares ("Demand Notice"), (b) certify whether he acquired
beneficial ownership of the shares before the Announcement Date set forth in the
Dissenter's Notice and, (c) deposit his certificates for shares of the Company's
Common Stock in accordance with the terms of the Dissenter's Notice. Such demand
and deposit must be received by the Company on or before the Demand Date set
forth in the Dissenter's Notice. Any stockholder who does not demand payment or
deposit his certificates where required, each by the Demand Date set forth in
the Dissenter's Notice, will lose his dissenter's rights under Chapter 92A and
will not be entitled to demand payment for his shares pursuant to Chapter 92A.
Within 30 days after the Company receives a Demand Notice from a
stockholder which has complied with all requirements of Chapter 92A for the
assertion of dissenter's rights, the Company shall pay such dissenter the amount
of the Company's estimate of the fair value of his shares, plus accrued interest
from the Effective Time. Such payment must be accompanied by (a) the Company's
financial statements as at the fiscal year ended December 31, 1995 and the
latest available interim quarterly financial statements (anticipated to be as at
September 30, 1996); (b) a statement of the Company's estimate of the fair value
of the shares; (c) an explanation of how interest was calculated, (d) a
statement of the dissenter's rights to demand payment of his own estimate of the
fair value of the shares under Chapter 92A (as described below), and (e) be
accompanied by a copy of that portion of Chapter 92A relating to Rights of
Dissenting Owners (Nevada Revised Statutes 92A.300 to 92A.500, inclusive). The
obligation of the Company to pay such amount may be enforced by the district
court of the State of Nevada in the county where the Company's registered office
is located (Washoe County, Nevada). At the election of any dissenter residing or
having its registered office in the State of Nevada, enforcement may also be
obtained in the district court of the State of Nevada in the county where the
dissenter resides or has its registered office. In a proceeding commenced to
enforce the Company's obligation to make payment of the amounts estimated by the
Company to be the fair value of the shares, the court may assess the costs
against the Company, except that the court may assess costs against all or some
of the dissenters who are parties to the proceeding, in amounts the court finds
equitable, to the extent the court finds that such parties did not act in good
faith in instituting the proceeding. In the event that a dissenter became a
beneficial owner of shares of the Company's Common Stock after the Announcement
Date, the Company may withhold actual payment of the Company's estimate of the
fair value of the applicable shares, but instead must offer to pay such amount
to each such dissenter who agrees to accept it in full satisfaction of his
demand. Such offer must be accompanied by the same information set forth above
in subparagraphs (a) through (e) of this paragraph.
A dissenting stockholder who has complied with all requirements of Chapter
92A may, within 30 days after receiving the Company's payment to him of the
Company's estimate of the fair value of his shares, or in cases where the
Company has withheld payment, the Company's offer to pay the Company's estimate
of the fair value of his shares, notify the Company in writing of his own
estimate of the fair value of his shares and the amount of interest due, and
demand payment of his estimate, less any payment already made by the Company, if
he believes that the amount paid or offered by the Company is less than the fair
value of his shares or that the interest due is incorrectly calculated. A
dissenter waives his right to demand payment
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pursuant to Chapter 92A unless he notifies the Company of his demand in writing
within such 30 day time period.
If a demand for payment from a dissenter who has complied with all
requirements of Chapter 92A remains unsettled, the Company must commence a
proceeding within 60 days after receiving the demand of the stockholder's
estimate of the fair value of his shares, and petition the court to determine
the fair value of the shares and accrued interest. If the Company does not
commence such proceeding within the 60 day period, it shall pay each dissenter
who has complied with all requirements of Chapter 92A and whose demand remains
unsettled, the amount demanded. The court proceeding will be commenced in the
district court of the State of Nevada for Washoe County, which is where the
registered office of the Company is located, which court has plenary and
exclusive jurisdiction. The court may appoint appraisers to determine the fair
value of the shares. Each dissenter who has complied with all requirements of
Chapter 92A and whose demands remain unsettled at such time shall be made a
party to the proceeding and receive notice thereof. Each such dissenter shall be
entitled to a judgment for the amount, if any, by which the court finds the fair
value of his shares, plus interest, exceeds the amount paid by the Company (and
in the case of a dissenting stockholder who acquired his shares after the
Announcement Date, and for which the Company withheld payment, the fair value of
such after-acquired shares plus accrued interest).
The court shall determine and assess all costs of such proceeding
(including the cost of appraisers appointed by the court) against the Company,
except that the court may assess costs against some or all the dissenters, in
amounts the court finds equitable, to the extent the court finds the dissenters
acted arbitrarily, vexatiously or not in good faith in demanding payment. The
court may also assess the fees and expenses of counsel and experts for their
respective parties, in amounts the court finds equitable: (a) against the
Company and in favor of all dissenters if the court finds the Company did not
substantially comply with the requirements of Chapter 92A, or (b) against the
Company or a dissenter in favor of any other party, if the court finds that the
party against whom the fees and expenses are assessed acted arbitrarily,
vexatiously or not in good faith with respect to the rights provided by Chapter
92A. If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the Company, the court may
award to those counsel reasonable fees to be paid out of the amounts awarded to
the dissenters who benefited.
Stockholders considering seeking dissenters' rights should recognize that
the fair value of their shares determined under Chapter 92A could be more, the
same as or less than the Cash Consideration they are to receive pursuant to the
Merger Agreement if they do not seek dissenters' rights with respect to their
shares. Stockholders seeking and perfecting dissenter's rights under Chapter 92A
will receive payment for their shares only as determined under Chapter 92A,
which will be in lieu of, and not in addition to, the Cash Consideration, and
such stockholders will not receive the Cash Consideration provided in the Merger
Agreement. If, after the Effective Time, a holder of shares of the Company's
Common stock which had previously sent a notice of intent to assert dissenter's
rights, fails to comply with the requirements of Chapter 92A, or waives,
withdraws, fails to perfect, or otherwise loses his dissenter's rights, he will
have only the right to receive the Cash Consideration in respect of such shares.
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THE MERGER AGREEMENT
THE INFORMATION CONTAINED IN THIS PROXY STATEMENT WITH RESPECT TO THE
MERGER AGREEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPLETE TEXT
OF THE MERGER AGREEMENT ATTACHED HERETO AS APPENDIX A, WHICH IS INCORPORATED
HEREIN BY REFERENCE. STOCKHOLDERS OF THE COMPANY ARE URGED TO READ THE MERGER
AGREEMENT CAREFULLY.
EFFECTIVE TIME
The Merger Agreement provides that the Merger will become effective at the
time a certificate of merger is duly filed with the Secretary of State of the
State of Nevada or at such later time as may be specified in the certificate of
merger. The time at which the Merger will become effective is referred to herein
as the "Effective Time.". Such filing, together with all other filings or
recordings required by Nevada Law in connection with the Merger, will be made as
soon as practicable after the approval and adoption by the stockholders of the
Company of the Merger Agreement and the satisfaction, or to the extent permitted
under the Merger Agreement, waiver of all conditions to the Merger contained in
the Merger Agreement.
THE MERGER
At the Effective Time, NovaCare Sub will be merged with and into the
Company, at which time the separate existence of NovaCare Sub will cease and the
Company will be the surviving corporation (the "Surviving Corporation") and a
wholly owned subsidiary of NovaCare O&P. From and after the Effective Time, the
Surviving Corporation will possess all the assets, rights, privileges, powers
and franchises and be subject to all of the limitations, restrictions,
disabilities and duties of the Company and NovaCare Sub, as provided under
Nevada Law.
CONSIDERATION TO BE RECEIVED IN THE MERGER. At the Effective Time,
(i) Each share of the Company's Common Stock held by the Company as
treasury stock or outstanding and owned by NovaCare O&P or any subsidiary
thereof immediately prior to the Effective Time shall be cancelled.
(ii) Each share of the Common Stock of NovaCare Sub outstanding immediately
prior to the Effective Time will be converted into and become one share of the
Surviving Corporation; and
(iii) Each share of the Company's Common Stock outstanding immediately
prior to the Effective Time (except for shares described in clause (i) above or
shares as to which dissenters rights have been exercised under Chapter 92A of
Nevada Law) will be converted into the right to receive the Cash Consideration,
as defined below.
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The Merger Agreement provides for an all-cash transaction in which the
holders of the Company's Common Stock are expected to receive approximately
$3.00 per share, subject to certain adjustments.
SHAREHOLDERS OF THE COMPANY WILL NOT RECEIVE ANY COMMON STOCK OR OTHER
SECURITIES OF NOVACARE OR ITS SUBSIDIARIES AND WILL NOT HAVE ANY CONTINUING
INVESTMENT IN NOVACARE, ITS SUBSIDIARIES, OR THE COMPANY FROM AND AFTER THE
EFFECTIVE TIME. NOVACARE O&P WILL OWN 100% OF THE COMMON STOCK OF THE COMPANY
FROM AND AFTER THE EFFECTIVE TIME.
The Cash Consideration per share will be computed as (1) $14,080,000 less
the sum of (x) the Merger Expenses (as hereinafter defined) and (y) the amounts
payable with respect to the Company Warrants and the Company Options (each as
hereinafter defined), divided by (2) the number of shares of the Company's
Common Stock outstanding immediately prior to the Effective Time. The Cash
Consideration is estimated to be approximately $3.00 per share.
Under the terms of the Merger Agreement, NovaCare O&P will provide a total
merger consideration of $14,080,000 in cash, which will be utilized to pay the
Cash Consideration to holders of outstanding Common Stock of the Company, at the
Effective Time; to pay the excess, if any, of such per share cash price over the
exercise price of outstanding stock options under AOT's 1992 Stock Option and
Stock Appreciation Rights Plan ("Company Options") and outstanding AOT Common
Stock Purchase Warrants ("Company Warrants"), and to pay AOT's expenses in the
merger transaction ("Merger Expenses"). Under the terms of the Merger Agreement,
NovaCare will permit the Company to have up to $4,000,000 of bank debt and debt
owed under certain acquisitions, at the Effective Time of the merger;
indebtedness of such types in excess of $4,000,000 ("Excess Debt") will be
considered Merger Expenses of the Company.
The Company estimates that the Merger Expenses will aggregate approximately
$1,007,800, consisting of (a) approximately $285,000 of Excess Debt and (b)
investment banking fees, legal fees and disbursements, accounting fees, filing,
printing and distribution expenses, and miscellaneous transaction costs and
expenses, aggregating approximately $722,800.
There are 219,534 outstanding Company Options, all of which will be deemed
vested at the Effective Time; however, only 25,000 Company Options have an
exercise price less than the anticipated Cash Consideration of approximately
$3.00 per share. The excess of the Cash Consideration over the per share
exercise price of such 25,000 Company Options, in the aggregate, is estimated to
be $13,750.
There are 665,334 outstanding Company Warrants. None of the Company
Warrants are publicly traded. Even if all of such Company Warrants were deemed
vested at the Effective Time, only 177,000 Company Warrants have an exercise
price less than the anticipated Cash Consideration of approximately $3.00 per
share. The excess of the Cash Consideration over the per share exercise price of
such 177,000 Company Warrants, in the aggregate, is estimated to be $188,499.
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The sum of the estimated Merger Expenses ($1,007,800), estimated payments
with respect to Company Options ($13,750), and estimated payments with respect
to the Company Warrants ($188,499), is $1,210,049; if this amount is subtracted
from $14,080,000, the net amount of $12,869,951 is available for payment of the
Cash Consideration to the holders of outstanding shares of Common Stock at the
Effective Time. Assuming that no shareholders exercise dissenters' rights, if
this net amount is divided by the anticipated number of outstanding shares of
Common Stock at the Effective Time after giving effect to certain redemptions
(4,297,566 shares), the Cash Consideration is estimated to be $2.9947 per share.
ESCROW PAYMENTS. On September 30, 1996, simultaneous with the execution and
delivery of the Merger Agreement, NovaCare O&P deposited with its attorneys,
Haythe & Curley (the "Escrow Agent"), the sum of $14,080,000 to be utilized,
from and after the Effective Time, for payment of the Cash Consideration,
payment of the Merger Expenses and the payments with respect to the Company
Options and Company Warrants. At the Effective Time, the Escrow Agent shall (i)
pay the Merger Expenses as certified in a list delivered by the Company and (ii)
transfer the entire remaining balance of the escrowed funds to the Exchange
Agent (described below) for payment of the Cash Consideration to the holders of
the Company's Common Stock and to make the payments required by the Merger
Agreement to the holders of the Company Options and Company Warrants.
SURRENDER OF SHARES AND PAYMENT. Before the Effective Time, NovaCare O&P
will appoint an agent (the "Exchange Agent") for the purpose of exchanging
certificates representing shares of the Company's Common Stock for the Cash
Consideration, and for payment to the holders of the Company Options and Company
Warrants the amounts required by the Merger Agreement. At the Effective Time,
the Escrow Agent shall transfer to the Exchange Agent all of the funds which
NovaCare O&P had deposited with it, other than the amounts utilized to pay the
Merger Expenses. Within ten (10) business days after the Effective Time,
NovaCare O&P will, or will cause the Exchange Agent to, send to each holder of
the Company's Common Stock at the Effective Time, a letter of transmittal to be
used in such exchange. STOCKHOLDERS OF THE COMPANY ARE REQUESTED NOT TO
SURRENDER THEIR CERTIFICATES FOR EXCHANGE UNTIL THEY RECEIVE A LETTER OF
TRANSMITTAL AND INSTRUCTIONS FROM THE EXCHANGE AGENT OR NOVACARE O&P.
Each holder of shares of the Company's Common Stock that have been
converted into a right to receive the Cash Consideration, upon surrender to the
Exchange Agent of a certificate or certificates representing such shares of the
Company's Common Stock, together with a properly completed letter of
transmittal, will be entitled to receive in exchange therefor, the Cash
Consideration per share which such holder has the right to receive pursuant to
the Merger Agreement, and the certificate or certificates for shares of the
Company's Common Stock so surrendered shall be cancelled. Until so surrendered,
each such certificate will,after the Effective Time, represent for all purposes
only the right to receive the Cash Consideration per share.
After the Effective Time, there will be no further registration of
transfers of shares of the Company's Common Stock. If, after the Effective Time,
certificates representing shares of the Company's Common Stock are presented for
transfer, they will be cancelled and exchanged for the Cash Consideration
pursuant to the terms of the Merger Agreement.
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<PAGE>
Any amounts made available to the Exchange Agent pursuant to the Merger
Agent for payment of Cash Consideration that remain unclaimed by the holders of
shares of the Company's Common Stock six months after the Effective Time will,
upon request, be returned to NovaCare O&P, and any such holder who has not
exchanged his shares prior to that time will be entitled thereafter to look only
to NovaCare O&P to exchange such shares. Notwithstanding the foregoing, NovaCare
O&P will not be liable to any holder of shares of the Company's Common Stock for
any amount paid or delivered to a public official pursuant to applicable
abandoned property laws. Any amounts remaining unclaimed by holders of shares of
the Company's Common Stock two years after the Effective Time (or such earlier
date prior to such time as such amounts would otherwise escheat to or become
property of any governmental entity), will, to the extent permitted by
applicable law, become the property of NovaCare O&P, free and clear of any
claims or interest of any person previously entitled thereto.
NO INTEREST WILL BE PAID WITH RESPECT TO THE CASH CONSIDERATION,
REGARDLESS OF WHEN A STOCKHOLDER SURRENDERS HIS CERTIFICATES IN EXCHANGE FOR
THE CASH CONSIDERATION.
For the rights of stockholders who dissent from the Merger, See "The
Merger-Dissenter's Rights."
CONDITIONS TO CONSUMMATION OF THE MERGER
CONDITIONS TO OBLIGATIONS OF THE COMPANY, NOVACARE O&P AND NOVACARE SUB.
The obligations of the Company, NovaCare O&P and NovaCare Sub to consummate the
Merger are subject to the satisfaction of the following conditions: (i) the
stockholders of the Company shall have approved the Merger by the affirmative
vote of the holders of a majority of the outstanding shares of the Company's
Common Stock, (ii) no provision of any applicable domestic law or regulation and
no judgment, injunction, order or decree of a court of competent jurisdiction
shall restrain or prohibit the consummation of the Merger, (iii) NovaCare O&P
and Andrew H. Meyers, the President and Chief Executive Officer of the Company,
shall have entered into the Non-Competition Agreement (described above) and (iv)
the Company and Mr. Meyers shall have terminated his existing employment
agreement dated April 30, 1992 and NovaCare O&P and Mr. Meyers shall have
entered into the new Employment Agreement (described above). See "The
Merger-Interest of Certain Persons in the Merger-Modification of Employment and
other Agreements with Executive Officers."
ADDITIONAL CONDITIONS TO OBLIGATIONS OF NOVACARE O&P AND NOVACARE SUB. The
obligations of NovaCare O&P and NovaCare Sub to consummate the Merger are
subject to the satisfaction of the following further conditions: (i) the Company
shall have performed in all material respects all of its obligations under the
Merger Agreement required to be performed by it at or prior to the Effective
Time and the representations and warranties of the Company contained in the
Merger Agreement shall be true in all material respects at and as of the
Effective Time as if made at and as of such time, (ii) NovaCare O&P and Andrew
H. Meyers shall have entered into the Indemnity Agreement (described above),
(iii) the patent License Agreement between the Company and Andrew H. Meyers
shall have been terminated, and (iv) the obligations of the Company to pay
Andrew H. Meyers and Norbert B. Meyers guarantee fees shall have been
terminated. See "The Merger-Interest of Certain Persons in the Merger".
Notwithstanding the foregoing, the Company shall be entitled, up to five
days prior to the Effective Time, to update the disclosure schedules relating to
the representations and
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<PAGE>
warranties made by the Company in the Merger Agreement, so long as such updates
do not set forth the occurrence or existence of events or circumstances which
have had a material adverse effect on the Company. If such updates do set forth
the occurrence or existence of events or circumstances which have had a material
adverse effect on the Company which is not cured or modified to avoid such
effect within thirty (30) days after such update notice, NovaCare O&P can
terminate the Merger Agreement, which is its sole and exclusive remedy in such
circumstances.
ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations of the
Company to consummate the Merger is also subject to the satisfaction of the
conditions that: (i) NovaCare O&P and NovaCare Sub shall have performed in all
material respects all of their respective obligations under the Merger Agreement
required to be performed by them at or prior to the Effective Time and that the
representations and warranties of NovaCare O&P and NovaCare Sub contained in the
Merger Agreement shall be true in all material respects at and as of the
Effective Time as if made at and as of such time and (ii) Andrew H. Meyers and
Norbert B. Meyers shall have been released from their respective guarantees of
the Company's obligations to State Bank of Long Island. See "The Merger --
Interest of Certain Persons in the Merger -- Elimination of Certain Personal
Guarantees."
COVENANTS OF THE COMPANY
The Company has agreed that, except as expressly contemplated by the Merger
Agreement or disclosed in writing to NovaCare O&P in the Merger Agreement or the
disclosure schedules thereto, until the Effective Time or the earlier
termination of the Merger Agreement, it will conduct its business in the
ordinary course consistent with past practice and will use its best efforts to
preserve intact its business organization and relationships with third parties
and to keep available the services of its present officers and employees and
that, except as otherwise approved in writing by NovaCare O&P or as expressly
contemplated by the Merger Agreement, it will, among other things, (a) not amend
or propose any changes to its articles of incorporation or by-laws; (b) not
engage in any mergers or consolidations with any person or acquire a material
amount of stock or assets of any other person; (c) not sell, lease, license or
otherwise dispose of material assets, subject to certain exceptions; (d) not
declare or pay any dividends or make any distributions in respect of its capital
stock, not issue any form of securities (except in respect of certain employee
benefit arrangements or to fulfill exercise of Company Options or Company
Warrants); (e) not make any commitment or enter into any contract or agreement
material to the Company and its subsidiaries taken as a whole except in the
ordinary course of business consistent with past practice; (f) not agree or
commit to do any of the foregoing, and (g) not take any action that would make
any of its representations or warranties under the Merger Agreement inaccurate
in any material respect at or prior to the Effective Time.
The Company has further agreed that until the Effective Time or earlier
termination of the Merger Agreement, it will provide NovaCare O&P, including
representatives thereof, access to information concerning the Company, subject
to the Confidentiality Agreement between NovaCare O&P and the Company dated
August 14, 1996 (which will continue in effect even if the Merger Agreement is
terminated). The Company will also notify NovaCare O&P of its
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<PAGE>
receipt of certain communications relating to the transactions contemplated by
the Merger Agreement.
Until the Effective Time or earlier termination of the Merger Agreement,
the Company and its subsidiaries and the officers, directors, employees or other
agents of the Company and its subsidiaries will not, directly or indirectly (i)
take any action to solicit, initiate or encourage any Company Acquisition
Proposal (as defined below), or (ii) unless otherwise required in accordance
with the fiduciary duties of the Company's Board of Directors under applicable
law as advised by counsel to the Company, engage in negotiations with, or
disclose any nonpublic information relating to the Company or any of its
subsidiaries or afford access to the properties, books or records of the Company
or any of its subsidiaries to, any person that may be considering making, or has
made, a Company Acquisition Proposal. The Company has agreed to notify NovaCare
O&P promptly after receipt of any Company Acquisition Proposal or any indication
that any person is considering making a Company Acquisition Proposal or any
request for nonpublic information relating to the Company or any of its
subsidiaries or for access to the properties, books or records of the Company or
any of its subsidiaries by any person that may be considering making, or has
made, a Company Acquisition Proposal. For purposes of the Merger Agreement, a
"Company Acquisition Proposal" means any offer or proposal for, or any
indication of interest in, a merger or other business combination involving the
Company or any of its subsidiaries or the acquisition of any equity interest in,
or a substantial portion of the assets of, the Company or any of its
subsidiaries, other than the transactions contemplated by the Merger Agreement.
The Company has agreed to cause a meeting of its stockholders to be duly
called and held for the purpose of voting on the approval and adoption of the
Merger Agreement and the Merger, with respect to which the Board of the
Directors of the Company shall, unless otherwise required in accordance with
their fiduciary duties as advised by counsel, recommend approval and adoption of
the Merger Agreement and the Merger by the Company's stockholders.
COVENANTS - NOVACARE O&P AND THE COMPANY
Each of NovaCare O&P and the Company has agreed to (i) use their best
efforts to take all actions necessary, proper or advisable under applicable laws
and regulations to consummate the transactions contemplated by the Merger
Agreement, (ii) consult with the other party prior to issuing any press release
or making any public announcement related to the Merger and the transactions
contemplated by the Merger Agreement, and except to the extent required by law
or the requirements of securities exchanges or markets, obtain the written
approval of the other party before issuing such release or public statement, and
(iii) take or cause to be taken such actions to vest, perfect and confirm of
record in the Surviving Corporation all rights, title and interest in, to and
under any of the rights, properties or assets of the Company to be acquired by
the Surviving Corporation as a result of or in connection with the Merger.
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COVENANTS - NOVACARE O&P
NovaCare has agreed that it will take all necessary action to cause
NovaCare Sub to perform its obligations under the Merger Agreement and to
consummate the Merger on the terms and conditions set forth in the Merger
Agreement.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time (notwithstanding any approval of the Merger
Agreement by the stockholders of the Company): (i) by mutual written consent of
the Company and NovaCare O&P, (ii) by either the Company or NovaCare O&P if the
Merger has not been consummated by December 31, 1996 (provided that the right to
terminate the Merger Agreement under this clause shall not be available to any
party whose failure to fulfill any of its obligations under the Merger Agreement
has been the cause of or resulted in the failure to consummate the Merger by
such date); (iii) by either the Company or NovaCare O&P, if there shall be any
applicable domestic law, rule or regulation that makes consummation of the
Merger illegal or otherwise prohibited or if any judgment, injunction, order or
decree of a court of competent jurisdiction shall restrain or prohibit the
consummation of the Merger, and such judgment,injunction, order or decree shall
become final and nonappealable; (iv) by either the Company or NovaCare O&P, if
the requisite approval of the stockholders of the Company shall not have been
obtained, (v) by either the Company or NovaCare O&P (the "Terminating Party") if
(x) there has been a breach by the other party of any representation or warranty
contained in this Agreement which would have or would be reasonably likely to
have a material adverse effect on the business, operations or properties of the
Company or NovaCare O&P, as the case may be, or (y) there has been a material
breach of any of the covenants or agreements set forth in the Merger Agreement
on the part of the other party, which breach is not curable or, if curable, is
not cured within 30 days after written notice of such breach is given by the
Terminating Party to the other party; (vi) by NovaCare O&P if holders of a
substantial number of the shares of the Company's Common Stock outstanding
immediately prior to the Effective Time shall have complied with all
requirements for perfecting rights of dissenters as set forth in Chapter 92A.380
of the Nevada Law with respect to such shares; or (vii) by NovaCare O&P if the
Company shall, after the date of the Merger Agreement, send an update notice to
the disclosure schedules to the Merger Agreement which sets forth the occurrence
or existence of events or circumstances which have had a material adverse effect
on the Company which is not cured or modified to avoid such effect within thirty
(30) days after such update notice.
If the Merger Agreement is terminated pursuant to the terms thereof, the
Merger Agreement shall become void and of no effect, with no liability on the
party of any party thereto, subject to certain exceptions.
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AMENDMENTS AND WAIVERS
The Merger Agreement may be amended or any provisions thereof may be waived
prior to the Effective Time if such amendment or waiver is in writing and
signed, in the case of an amendment, by the Company, NovaCare O&P and NovaCare
Sub, and in the case of a waiver, by the party against whom the waiver is to be
effective, provided that (i) any waiver or amendment will be effective against a
party only if the Board of Directors of such party approves such waiver or
amendment and only if such Board of Directors can take such actions on behalf of
that party and (ii) after the adoption of the Merger Agreement by the
stockholders of the Company, no such amendment or waiver may without the further
approval of such stockholders and each party's Board of Directors, alter or
change (x) the amount or kind of consideration to be received in exchange for
any shares of capital stock of the Company, or (y) any terms or conditions of
the Merger Agreement if such alteration or change would adversely affect the
holders of any shares of the capital stock of the Company.
FEES AND EXPENSES
All costs and expenses incurred in connection with the Merger Agreement are
to be paid by the party incurring such cost or expense, except that, if the
Merger is consummated, the expenses of the Company are to be paid as Merger
Expenses out of the funds provided by NovaCare O&P to the Escrow Agent.
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MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information. The Company's Common Stock is currently traded on
the National Association of Securities Dealers Automated Quotation System
(NASDAQ) Small Cap Market under the symbol "AOTI". Prior to December 31, 1994,
the Company's Units (each Unit consisting of one share of Common Stock, one
Class A Redeemable Common Stock Purchase Warrant and one Class B Redeemable
Common Stock Purchase Warrant), Class A Redeemable Common Stock Purchase
Warrants and Class B Redeemable Common Stock Purchase Warrants were traded
over-the-counter and quoted in the National Quotation Sheets. On December 31,
1994, all of the Company's Class A and Class B Redeemable Common Stock Purchase
Warrants expired by their terms and accordingly such Warrants and the Units are
no longer publicly traded. The Company's Class C Redeemable Selling
Warrantholder Warrants are not publicly traded. Set forth below are the range of
reported high and low bid quotations for a share of the Company's Common Stock,
for each fiscal quarter during the prior two fiscal years. All over-the-counter
market price quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
Price per Share
of Common Stock
-------------------
Bid Ask
--- ---
Fiscal Year Ended December 31, 1994
First Quarter High 4 4 1/4
Low 3 1/2 4 1/4
Second Quarter High 3 1/4 4 1/4
Low 2 1/2 3 1/4
Third Quarter High 2 1/2 3 1/4
Low 1 3/4 2 3/4
Fourth Quarter High 2 2 3/4
Low 1 3/8 1 7/8
Fiscal Year Ended December 31, 1995
First Quarter High 2 2 3/8
Low 1 5/8 2 1/4
Second Quarter High 2 1/4 2 1/2
Low 1 1/4 1 5/8
Third Quarter High 2 2 3/8
Low 1 5/8 2 1/4
Fourth Quarter High 3 1/8 3 1/2
Low 1 1/2 2 1/8
Fiscal Year Ending December 31, 1996
First Quarter High 2 7/8 3 3/8
Low 1 5/8 2
Second Quarter High 3 3 1/5
Low 1 1/4 1 3/4
Third Quarter High 3 3/8 3 3/4
Low 1 3/4 2 3/8
Fourth Quarter, through High 1 3/4 2 3/8
October 1, 1996 Low 1 3/4 2 3/8
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(a) Holders. The Company has approximately 381 shareholders of its Common
Stock.
(b) Dividends. The Company has not paid dividends on its Common Stock since
its inception and has no intention to pay any dividends to its shareholders in
the foreseeable future. The Company's current term loan agreement with its bank
prohibits the declaration of dividends. The Company currently intends to
reinvest earnings, if any, in the development and expansion of its business. The
declaration of dividends in the future will be at the election of the Board of
Directors, will require the consent of the Company's bank, and will depend upon
the earnings, capital requirements and financial position of the Company, plans
for expansion, general economic conditions and other pertinent factors. Due to
the Company's present financial status and due to its contemplated financial
requirements, the Company does not contemplate or anticipate paying any
dividends on its Common Stock in the foreseeable future.
(c) Warrants. On November 10, 1994, the Securities and Exchange Commission
declared effective the Company's Post Effective Amendment No. 4 with respect to
996,000 shares of Common Stock issuable upon exercise of 994,000 Class A
Redeemable Common Stock Purchase Warrants ("Class A Warrants"), 994,000 Class B
Redeemable Common Stock Purchase Warrants ("Class B Warrants") and 1,000,000
Class C Redeemable Selling Warrantholder Warrants ("Class C Warrants"). The
Company called for redemption on December 31, 1994 all Class A Warrants and
Class B Warrants, which would otherwise have expired pursuant to their terms on
December 31, 1994, pursuant to a Notice of Redemption dated November 11, 1994.
On December 31, 1994, all of the Class A Warrants and Class B Warrants expired
pursuant to their terms, without any such warrants having been exercised.
Accordingly, the Class A Warrants and Class B Warrants are no longer exercisable
for shares of Common Stock of the Company and are no longer publicly traded.
The Company's Class C Redeemable Warrantholder Warrants are not publicly
traded; three Class C Warrants are exercisable at $5.25 for one share of Common
Stock, until November 30, 1996. There are 1,000,000 outstanding Class C Warrants
convertible into a total of 333,334 shares of Common Stock. The Company also has
outstanding a total of 332,000 Common Stock Purchase Warrants (each convertible
into one share of Common Stock) issued to consultants of the Company, which
warrants are not publicly traded.
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MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPEATIONS.
Background. The predecessor company of Advanced was incorporated in New
York in 1972. The Company acquired 100% of the issued and outstanding stock of
Advanced as of April 30, 1992. The transaction was accounted for as a
recapitalization of Advanced.
The Company has grown internally and by acquisitions. During 1988 it
acquired the assets of JDM Orthotics in Farmingdale, New York, Prosthetic and
Orthotic Laboratories, Inc. in Hackensack and Union City, New Jersey and
Para-Med Corp. in Morgantown, West Virginia. The assets of Westfield Brace
Company, Inc. in Westfield, New Jersey were acquired as of January 1, 1991. The
Company acquired the stock of Lett Orthopedic Industries, Inc. located in
Clarksburg, Fairmont and Princeton, West Virginia as of January 1, 1992, the
stock of Prosthetic and Orthotic Associates, Inc. located in Chesapeake and
Virginia Beach, Virginia as of January 1, 1993 and the stock of Orthopedic
Technologies, Inc. located in Syracuse, Potsdam, Utica and Watertown, New York
as of July 1, 1993. During August, 1993, the Company acquired the assets of SFV
Rehabilitation Specialists, Inc. located in Sherman Oaks, California; Exe, Inc.
(Orthotech), located in Albuquerque, Rio Rancho and Santa Fe, New Mexico, and
Parmeco, Inc., located in Huntington, West Virginia. During April, 1994, the
Company acquired the assets of Clayton Prosthetics & Orthotics, Inc. located in
Manasquan, Manahawkin and Middletown, New Jersey. On January 5, 1996, the
Company acquired the operating assets of Med-Tech O&P Services, Inc., which
operated several patient care centers in the New York metropolitan area.
The Company implemented such acquisitions by combinations of cash down
payments and deferred payments. In certain of the acquisitions, the Company
agreed to make contingent payments of additional purchase price to the sellers,
in cash and/or restricted shares of the Company's Common Stock, if certain
financial criteria were achieved by the acquired business.
- 31 -
<PAGE>
Results of Operations. The following table sets forth for the periods
indicated certain items of the Company's financial statements and their
respective percentage of the Company's net sales. The discussion which follows
should be read in conjunction with the Company's consolidated financial
statements.
<TABLE>
<CAPTION>
Historical
-------------------------------------------------------------------------------------
Three Months Ended Six Months Ended Years Ended
June 30, June 30, December 31,
-------------------- --------------------- ---------------------
(Unaudited) (Unaudited)
1996 1995 1996 1995 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales (48.7) (49.4) (49.9) (49.1) (48.8) (48.9)
Gross Profit 51.3 50.6 50.1 50.9 51.2 51.1
Selling, general and
administrative expenses (37.2) (39.3) (37.8) (41.2) (39.3) (40.5)
Litigation costs, inventory
obsolescence and asset
impairment - - - - (2.7) -
Income from operations 14.1 11.3 12.3 9.7 9.2 10.6
Interest expense (1.9) (2.8) (2.1) (2.9) (2.8) (2.7)
Other income .1 .1 .1 .1 .1 (2.0)
Income before taxes 12.3 8.6 10.3 6.9 6.5 5.9
Income taxes (5.3) (3.9) (4.5) (3.2) (3.0) (2.8)
Net income 7.0 4.7 5.8 3.7 3.5 3.1
</TABLE>
FISCAL YEAR ENDED DECEMBER 31, 1995
Net Sales. Net sales for the year ended December 31, 1995 were $13,813,000
as compared to $13,162,000 for the same period in 1994, an increase of 5%. The
sales increase was primarily the result of internal growth as well as the
inclusion in the first quarter of 1995 sales added by the acquisition of Clayton
Prosthetics and Orthotics, Inc., completed in April 1994. The increase in
internal growth was partially offset by historically lower billing prices
attributable to the Company's increasing number of managed care contracts with
third party payors.
Gross Profit. Gross profit for the year ended December 31, 1995 was
$7,075,000 as compared to $6,732,000 for the same period in 1994, an increase of
5.1%. The increase in gross profit is primarily the result of increases in sales
volume as well as the achievement of certain efficiencies in the patient care
process.
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<PAGE>
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses increased from $5,338,000 (40.5%) for the year ended
December 31, 1994 to $5,435,000 (39.3%) for the year ended December 31, 1995.
The increase is attributable to the inclusion of the first quarter of 1995
expenses added by the acquisition of Clayton Prosthetics and Orthotics, Inc.,
completed in April 1994 offset in part by the achievement of operating
efficiencies.
Income From Operations. In 1995, the Company was named as the defendant in
several lawsuits. Two of the suits involve the sellers of acquired businesses
for breach of contract. The Company has been named co-defendant in a class
action suit alleging anti-trust violations in connection with a managed care
contract. The Company has charged against income in 1995 $188,000 of costs it
expects to incur in connection with these litigations.
During 1995, the Company determined that certain inventory was obsolete and
no longer usable and the Company recorded a charge against income for $62,000.
Also in 1995, the Company determined the carrying value of the assets of one of
its operating facilities may not be recoverable and recorded a charge against
income for the impairment of these assets of $124,000.
Income from operations decreased from $1,394,000 (10.6%) for the year ended
December 31, 1994 to $1,266,000 (9.2%) for the year ended December 31, 1995. The
decrease is directly attributable to the charges to income as indicated above.
Exclusive of these charges, income from operations increased by $246,000 or
17.6% for the year ended December 31, 1995 over 1994. The increase in operating
income for the two periods, exclusive of the charges indicated above, is
attributable to higher sales volume, the inclusion of the acquisition of Clayton
Prosthetics and Orthotics, Inc., completed in April 1994 and operating
efficiencies the Company has realized from its cost containment plan.
Other Income (Deductions). Interest expense for the year ended December 31,
1995 was $380,000 as compared to $353,000 for the same period in 1994. Interest
expense is primarily on debt which was incurred to finance the Company's
acquisitions.
Net Income. The Company earned $486,000 or $.11 per share for the year
ended December 31, 1995. For the same period in 1994, the Company earned
$406,000 or $.09 per share. The charges to income resulting from litigation,
obsolete inventory, and the write-down of impaired assets, resulted in an
overall increase in the Company's effective income tax rate because of the
greater impact of other non-deductible expenses on lower taxable income. The
effect of these charges, combined with their impact on the Company's effective
income tax rate, resulted in a decrease of earnings per share of approximately
$.05 for the year ended December 31, 1995.
- 33 -
<PAGE>
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996
Net Sales. Net sales for the three months ended June 30, 1996 were
$4,525,000 as compared to $3,422,000 for the same period in 1995, an increase of
32%. For the six months ended June 30, net sales were $8,455,000 and $6,759,000
respectively in 1996 and 1995, an increase of 25%. The sales increase was
primarily due to sales added by the acquisition of Med-Tech O&P Services
completed in January, 1996 and sales generated from additional managed care
contracts entered into over the past year.
Gross Profit. Gross profit for the three months ended June 30, 1996 was
$2,322,000 as compared to $1,730,000 for the same period in 1995, an increase of
34%. Gross profit for the six months ended June 30, 1996 was $4,240,000 as
compared to $3,443,000 for the same period in 1995, an increase of 23%. The
increase in year to date gross profit was due primarily to the increase in sales
volume. Gross profit as a percentage of sales was 51.3% for the three months
ended June 30, 1996 and 50.1% for the six months ended June 30, 1996 as compared
to 50.6% and 50.9% respectively for the same periods in 1995. The increase in
the percentage for the three month period is attributable primarily to the
increase in sales volume and the integration of the Med-Tech acquisition into
the Company's existing New York metropolitan area operation and the economies
achieved by this integration. The decrease in the percentage for the six month
period is attributable primarily to the impact on the sales volume of the
climate conditions experienced during the first quarter of 1996 during which the
Company continued to incur practitioner salaries.
Selling, General and Administrative Expenses. Selling, General and
Administrative expenses increased to $1,684,000 for the three months ended June
30, 1996 from $1,343,000 for the same period in 1995, and increased to
$3,199,000 for the six months ended June 30, 1996 from $2,788,000 for the same
period in 1995. Selling, General and Administrative expenses decreased as a
percentage of sales from 39.3% in 1995 to 37.2% in 1996 for the three months
ended June 30 and decreased from 41.2% in 1995 to 37.8% in 1996 for the six
months ended June 30. The decreases in these percentages are attributable
primarily to the integration of the Med-Tech acquisition into the Company's
existing New York metropolitan area operation and the economies achieved by this
integration.
Income from Operations. Income from operations for the three months ended
June 30, 1996 increased to $638,000 as compared to $387,000 for the same period
in 1995, an increase of 65%. Income from operations for the six months ended
June 30, 1996 increased to $1,041,000 as compared to $655,000 for the same
period in 1995, an increase of 59%. Income from operations as a percentage of
sales was 14.1% for the three months ended June 30, 1996 as compared to 11.3%
for the same period in 1995. For the six months ended June 30, income from
operations as a percentage of sales was 12.3% in 1996 and 9.7% in 1995. The
increases in these percentages are attributable primarily to the acquisition of
Med-Tech O&P Services and the economies achieved by its integration into the
Company's existing operations.
- 34 -
<PAGE>
Other Income/Deductions: Interest expense for the three months ended June
30, 1996 was $85,000 as compared to $97,000 for the same period in 1995 and
$173,000 and $196,000 for the six months ended June 30, 1996 and 1995
respectively. Interest expense consists primarily of interest on debt incurred
to finance the Company's acquisitions.
Net Income. The Company earned $315,000 or $.06 per share for the three
months ended June 30, 1996 as compared to $161,000 or $.04 per share generated
in the prior year's second quarter. For the six months ended June 30, 1996, the
Company had net income of $494,000 or $.10 per share as compared to $252,000 or
$.06 per share for the same period in 1995. The increase in net income was due
primarily to the Company's increased sales volume discussed above and the
economies achieved through the integration of the acquisition of Med-Tech O&P
Services.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1995, the Company had $216,000 in cash and cash
equivalents. The Company's consolidated working capital at December 31, 1995 was
$2,343,000. As of December 31, 1995, there were no additional commitments which
would affect liquidity in a material way. As of June 30, 1996, the Company had
$106,000 in cash and cash equivalents. The Company's consolidated working
capital at June 30, 1996 was $2,637,000. As of June 30, 1996, there were no
additional commitments which will affect liquidity in a material way.
The Company has established lines of credit with State Bank of Long Island
of $500,000, due May, 1997; $625,000, due December 2, 1996; and $110,000, due
December 19, 1996.
The Company expects that cash generated from operations and from its
credit lines will be adequate to provide for future operations.
No material changes in inventory or property and equipment are presently
planned.
OTHER
Effective October 1, 1995, the Company implemented Financial Accounting
Standards Board Statement No. 121, "Accounting For Impairment of Long-Lived
Assets And For Long-Lived Assets To Be Disposed Of." The Company charged
$124,000 against income in 1995 in connection with the provisions of SFAS No.
121.
Statement No. 123 of the Financial Accounting Standards Board "Accounting
for Stock Based Compensation" is effective for fiscal years beginning after
December 15, 1995. The Company believes the implementation of SFAS No. 123 will
not have a material effect.
Inflation has not had a significant impact on the Company's operating
expenses. There is no assurance inflation will not be a significant factor in
the future.
- 35 -
<PAGE>
Substantial changes in the methods of delivery of health care services, in
the nature and scope of health care insurance, the methods of payment of the
costs of health care services and insurance, the pricing of health care services
and governmental and insurance reimbursement of health care costs, as well as
proposals for an overall restructuring of the health care system as well as the
Medicare and Medicaid programs, continue to be the subject of major legislative
and budgetary initiatives at the federal and state levels. It is not possible to
predict whether such legislation will ultimately be enacted. If such legislation
is enacted, it is impossible to predict the form which such legislation will
take or the impact such legislation will have on the Company's operations or on
the health care industry in general.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
- 36 -
<PAGE>
DESCRIPTION OF BUSINESS.
BACKGROUND
The Company was incorporated in the State of Nevada on August 15, 1989
under the name Pilgrim Acquisition Corp., and on July 5, 1991, changed its name
to Zeron Acquisition I, Inc. Prior to May 6, 1992, the Company had been seeking
potential business ventures, and the Company did not conduct any operating
business.
The Company acquired all of the issued and outstanding capital stock of
Advanced Orthopedic Technologies, Inc., a New York corporation, ("Advanced")
which transaction was completed May 6, 1992 effective April 30, 1992 pursuant to
the Agreement and Plan of Reorganization (the "Reorganization Agreement") among
the Company, as Buyer, Andrew H. Meyers and four trusts for the benefit of Mr.
Meyers' family (the "Meyers Trusts") as Sellers, and Advanced. Pursuant to the
Reorganization Agreement, the Company issued to (and/or reserved for) the
shareholders of Advanced 1,850,003 shares of Common Stock and 35,000 shares of
the Company's Preferred Shares (constituting approximately 59% of the
outstanding voting stock of the Company after the reorganization, without giving
effect to outstanding warrants). The transactions pursuant to the Reorganization
Agreement were intended to be a tax-free exchange pursuant to Section
368(a)(1)(b) of the Internal Revenue Code of 1986. Upon implementation of this
transaction, Advanced became a wholly-owned subsidiary of the Company, and the
Company's only operating business entity; the Company's management resigned in
favor of Advanced's management, and the Company changed its name to Advanced
Orthopedic Technologies, Inc. As used herein, "the Company" refers to Advanced
Orthopedic Technologies, Inc., a Nevada corporation, and its subsidiaries and
predecessors.
In April, 1990, the Company completed a public offering of 994,000 Units,
each Unit consisting of one share of Common Stock, one Class A Redeemable Common
Stock Purchase Warrant and one Class B Redeemable Common Stock Purchase Warrant,
at an offering price of $1.00 per Unit. The net proceeds of the offering to the
Company were $980,113.
The predecessor company of Advanced had been engaged as a prosthetic and
orthotic provider since its incorporation in New York in 1972. The Company is a
provider of patient care services for orthotic and prosthetic rehabilitation.
Orthotics is the design, fabrication, fitting and supervised use of custom-made
braces and other devices, such as neck, spinal, knee and cervical braces and
foot orthoses, that provide external support to treat musculoskeletal disorders.
Musculoskeletal disorders are ailments of the back, extremities or joints caused
by traumatic injuries, diseases, congenital disorders, chronic conditions 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, diabetes, cancer, vascular
diseases or congenital disorders.
The Company has grown through internal expansion and acquisitions to 37
patient care centers in New York, New Jersey, Virginia, West Virginia,
California and New Mexico. Orthotic and prosthetic services are supervised by
the Company's certified prosthetists and
- 37 -
<PAGE>
orthotists who are accredited by the American Board for Certification in
Orthotics and Prosthetics, Inc.
COMPLETED ACQUISITIONS
(a) Acquisitions Completed 1988-1991. Prior to 1988, the Company's
operations were concentrated in five patient care centers located in the Long
Island and New York City regions. In 1988, the Company acquired the prosthetic
and orthotic practices of JDM Orthotics, Inc. in Farmingdale, New York;
Prosthetic and Orthotic Laboratories, Inc. in Hackensack and Union City, New
Jersey; and Para-Med Corp. in Morgantown, West Virginia thereby growing to nine
patient care centers. Effective as of January 1, 1991, the Company acquired the
assets of the prosthetic and orthotic business operated in Westfield, New Jersey
by Westfield Brace Co., and thereby grew to ten patient care centers. The
Company has completed all of its payment obligations for these acquisitions.
(b) 1992 Acquisition of Lett Orthopedic Industries, Inc. Effective as of
January 1, 1992, the Company acquired all of the capital stock of Lett
Orthopedic Industries, Inc. ("LOI"), which operates three prosthetic and
orthotic patient care centers in Clarksburg, Fairmont and Princeton, West
Virginia, for a purchase price of $565,000 paid at the closing, $366,769 in
installments over a seven-year period and a contingent purchase price based on
the performance of the Company's West Virginia offices payable over five years
(of which there is a minimum guaranteed contingent purchase price of $160,000
over the five years following the closing). In connection with this acquisition,
the Company entered into deferred compensation agreements with each of the two
individual LOI sellers, requiring the Company to pay $150,000 to each of the LOI
sellers over five years. Subject to the LOI sellers' consent, the Company may
elect to pay installments of the purchase price (up to $150,000 for each of the
two LOI sellers) and deferred compensation payments in restricted shares of
Common Stock valued at the market price on the installment date (in lieu of
cash). To date, the Company has made all such installment payments in cash and
no shares of restricted Common Stock have been issued to the LOI sellers. Upon
the completion of the LOI acquisition, the Company owned and operated 13 patient
care centers.
(c) 1993 - Five Acquisitions Completed. During the fiscal year ended
December 31, 1993, the Company completed five separate acquisitions and upon the
completion of these acquisitions, the Company owned and operated 25 patient care
centers.
Acquisition of Prosthetic and Orthotic Associates, Inc. Effective as of
January 1, 1993, the Company acquired all of the capital stock of Prosthetic and
Orthotic Associates, Inc. ("POA"), which operated two prosthetic and orthotic
patient care centers located in Virginia Beach and Chesapeake, Virginia, for a
purchase price of $300,000 paid at the closing, $300,000 in a five year
promissory note of the Company and a contingent purchase price based on
performance of the acquired business payable in a combination of cash and
restricted Common Stock over five years.
Acquisition of Orthopedic Technologies, Inc. Effective as of July 1, 1993
the Company acquired all of the capital stock of Orthopedic Technologies, Inc.
("OTI"), which operated five
- 38 -
<PAGE>
prosthetic and orthotic patient care centers located in Syracuse, Utica, Potsdam
and Watertown, New York, for a purchase price of $1,015,000 paid at the closing,
$520,000 in a five year promissory note of the Company and a contingent purchase
price based on the performance of the acquired business payable in a combination
of cash and restricted Common Stock over five years. Pursuant to a Modification
Agreement effective July 15, 1994, the principal amount of such promissory note
was reduced to $350,668 and the contingent purchase price was reduced by
eliminating, for amounts payable after 1994, the portion originally to be paid
in restricted Common Stock.
SFV, Exe and Parmeco Acquisitions
During August of 1993, in three separate transactions, the Company acquired
the assets of SFV Rehabilitation Specialists, Inc. of Sherman Oaks, California;
Parmeco, Inc. of Huntington West Virginia; and Exe, Inc. (Orthotech) of
Albuquerque, Rio Rancho and Santa Fe, New Mexico (which operations added five
prosthetic and orthotic patient care centers to the Company), for an aggregate
purchase price of $828,000 paid at the closings thereof, $625,000 in promissory
notes of the Company payable over seven years and contingent purchase price
based on performance of the respective acquired businesses payable in a
combination of cash and restricted Common Stock over four years.
(d) 1994 Acquisition of Clayton Prosthetics & Orthotics, Inc. Effective
April 18, 1994, the Company acquired substantially all of the assets of Clayton
Prosthetics & Orthotics, Inc. which operates three patient care centers located
in Manasquan, Manahawkin and Middletown, New Jersey, for a purchase price of
$500,000 payable at the closing, $400,000 in a six year promissory note of the
Company and a contingent purchase price based on performance of the acquired
business payable in a combination of cash and restricted Common Stock over five
years. Upon the completion of this acquisition, the Company owned and operated
31 patient care centers.
(e) 1996 Acquisition of Med-Tech O&P Services, Inc. Effective January 5,
1996, the Company acquired the operating assets of Med-Tech O&P Services, Inc.
("Med-Tech"), which operated several patient care centers located in the New
York metropolitan area, for a purchase price of $25,000 payable at the closing,
$150,000 in a promissory note of the Company payable over eighteen (18) months,
450,000 shares of restricted Common Stock of the Company, and a contingent
purchase price based upon performance of the acquired business, payable in a
combination of cash and restricted Common Stock of the Company over five years.
Upon completion of this acquisition, the Company owned and operated 34 patient
care centers.
With respect to all of the acquisitions completed by the Company from 1992
through 1996, the Company funded the cash portion of the purchase price through
a combination of internally generated funds and cash obtained through the
Company's loan agreements with State Bank of Long Island.
(f) Obligations Relating to Certain Acquisitions. Components of the
deferred portions of the purchase price payments and related obligations due
from the Company to the sellers of acquired businesses are in some cases secured
by the grant to such sellers of a lien and
- 39 -
<PAGE>
security interest in all of the assets of the subsidiary of the Company which
operates the acquired business, subordinate (except for the LOI acquisition) to
the security interest of the Company's lenders in the cash and receivables of
such subsidiary.
The agreement for the acquisition of POA provides that for a period of ten
business days following the second anniversary of the payment to such sellers of
any installment of restricted Common Stock issued as part of the contingent
purchase price, such sellers may require the Company to purchase all, but not
less than all, of such installment to such sellers of restricted Common Stock at
a price per share of $6. The Company has a "call" on such shares issued to such
sellers for a ten business day period following the eighteenth month after which
such shares of restricted Common Stock are issued to such sellers at a price of
$6 per share. The applicable sellers may reject any such call, but if they do,
the put rights relating to such called shares will be forfeited. As of September
30, 1996, the Company had outstanding 1,562 shares having such put rights.
The agreement for the Med-Tech acquisition provides that for a period of
ten business days following each of January 5, 1999, January 5, 2000 and January
5, 2001, such seller may require the Company to purchase up to a maximum of
50,000 of the shares of Common Stock which had been issued to the seller on the
closing date of the acquisition, at a purchase price of $1.50 per share (an
aggregate of 150,000 shares). The Company has a "call" on up to 50,000 of the
shares issued to such seller for a ten business day period following each of
July 5, 1998, July 5, 1999 and July 5, 2000 at a price of $1.50 per share (an
aggregate of 150,000 shares). The seller may reject any such call, but if it
does, the put rights relating to such called shares will be forfeited.
Pursuant to an amendment dated July 26, 1996 to the agreements for the
Med-Tech acquisition, the Company exercised an option to repurchase 225,000
shares issued to the Med-Tech seller at a price of $0.75 per share, and the
Company exercised its option to purchase the remaining 225,000 shares issued to
the Med-Tech seller at $1.50 per share, such purchases to be completed on or
prior to the Effective Time.
(g) Future Acquisitions. As at December 31, 1995 and the date of this Proxy
Statement, the Company does not have any contracts or unexpired letters of
intent for acquisitions of additional prosthetic and orthotic patient care
centers.
EXISTING BANK FINANCING
Effective June 30, 1994, the Company entered into an Amended Term Loan
Agreement with State Bank of Long Island (replacing prior loan arrangements with
such bank) for a loan in the principal amount of $2,805,000, to be repaid in
monthly installments through December, 1998. The Company is required to prepay a
portion of the outstanding balance of the term loan (but not in excess of a
$500,000 cumulative prepayment and not in excess of 35% of the outstanding
principal balance prior to any such prepayment) from twenty (20%) percent of the
net proceeds of certain transactions (if they should occur) as follows: (1) the
conversion into Common Stock of the Company's Class A Redeemable Common Stock
Purchase Warrants, Class B Redeemable Common Stock Purchase Warrants and Class C
Redeemable Selling
- 40 -
<PAGE>
Warrantholder Warrants; (2) a private placement of Common Stock to investors
unaffiliated with the Company or its existing officers, directors and
shareholders if such transaction results in net proceeds of at least $500,000;
and (3) a public offering of Common Stock registered and effective with the SEC
(for such a public offering, the prepayment amount will be 25% of net proceeds).
On December 31, 1994, all of the Company's Class A and Class B Redeemable Common
Stock Purchase Warrants expired without any having been converted to Common
Stock; no proceeds were received by the Company nor payable to State Bank of
Long Island.
The loan bears interest at 1% above the bank's prime rate payable monthly
on the outstanding principal amount. The loan is secured by a lien on all assets
of the Company and its subsidiaries. The Amended Term Loan Agreement contains
certain affirmative and negative covenants as to the operation of the Company.
The Company also has a $500,000 line of credit with State Bank of Long
Island, due in May, 1997; a $625,000 line of credit with such bank due December
2, 1996; and a $110,000 line of credit with such bank due December 19, 1996.
THE PROSTHETIC AND ORTHOTIC PATIENT CARE PROCESS
Care of prosthetic and orthotic 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 physiatrist, refers a patient to one of the Company's patient care centers
for service. A Company 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 achieve desired
functional and cosmetic results. The practitioner creates a cast and takes
detailed measurements of the patient to ensure both an anatomically correct fit
as well as to distribute the weight of the patient appropriately. All of the
prosthetic devices fitted by the Company's practitioners are custom designed and
fabricated by skilled practitioners who can balance fit, support and comfort. Of
the orthotic devices provided by the Company, the majority are custom designed,
fabricated and fitted. The balance are prefabricated but custom fitted.
Custom prosthetic and orthotic 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 stringent quality assurance guidelines. After final
adjustments to the device by the practitioner, the patient is instructed in the
use, care and maintenance of the device. A program of scheduled follow-up and
maintenance visits is used to provide post-fitting service, including
adjustments or replacements as the patient's physical condition and lifestyle
change. Generally, the useful life of most custom designed and fabricated
orthotic and prosthetic ("O&P") devices is up to three years.
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<PAGE>
A substantial portion of the Company's O&P services involves the servicing
of a patient in a non-hospital setting, such as one of the Company's patient
care centers, a physician's office, an out-patient clinic or other facilities.
In addition, O&P services are sometimes rendered to patients in hospitals,
nursing homes, rehabilitation centers and other alternative site health care
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.
Each of the Company's patient care centers is supervised by one or more
Certified Prosthetist Orthotists (certified by the American Board of
Certification in Orthotics and Prosthetics). The Company currently employs 62
patient care practitioners, of whom 36 are certified or candidates for
certification by the American Board of Certification in Orthotics and
Prosthetics. The balance of the Company's patient care practitioners are trained
technical personnel who assist in the provision of services to patients and
fabricate various O&P devices.
THE MARKET FOR PROSTHETIC AND ORTHOTIC REHABILITATION SERVICES
The O&P industry, which includes patient care services, manufacturing and
distribution, is estimated to generate $1 billion in sales annually. Of that
amount, an estimated $700 million is attributed to the patient care services
sector, estimated to have more than 3,100 certified practitioners and 1,500
certified O&P facilities. The Company believes that the demand for orthopedic
rehabilitation is increasing at a rapid rate due to a combination of the
following factors:
o Growing Elderly Population. The growth rate of the over-65 age group
is nearly triple that of the under-65 age group. The elderly require
orthopedic rehabilitation more frequently than younger age groups.
o Cost-effective Reduction in Hospitalization. As public and private
payors encourage reduced hospital admissions and reduced length of
stay, out-patient rehabilitation can be expected to be in greater
demand. O&P services and devices have enabled patients to become
ambulatory more quickly after receiving medical treatment in the
hospital.
o Growing Physical Health Consciousness and Sports and Fitness Activity.
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-aged 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.
o 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 more new O&P products which provide greater comfort,
protection and patient acceptability. Therefore, treatment can be more
effective and of
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<PAGE>
shorter duration, contributing to greater mobility and a more active
lifestyle for the patient. Orthotic devices are more prevalent and
visible in many sports.
o Need for Replacement and Continuing Care. Because the useful life of
most custom fitted and fabricated O&P devices is approximately up to
three 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.
Traditionally, the principal referral source for orthotic and prosthetic
services has been the orthopedic surgeon, who is able to refer both orthotic and
prosthetic patients depending upon the surgeon's practice mix. Other specialized
physicians such as physiatrists and vascular surgeons have also become important
referral sources. Secondary referral sources include physical therapists,
orthopedic nurses, orthopedic technicians and other rehabilitation
professionals.
Managed Care Contracts
In the past several years, payors such as health maintenance organizations
("HMOs"), preferred provider organizations ("PPOs") and other "managed care"
organizations have emerged as important referral sources.
Managed care organizations, which may be independent for profit or
not-for-profit health care plans, or may be affiliated with an HMO, a hospital
system, an insurance carrier, large employers or unions, or university or
governmental health care plans, typically enter into a negotiated contract
whereby a selected O&P provider, such as the Company is, for the term of the
contract, a preferred or recommended source for provision of O&P services to
such managed care organization's subscribers. Such contracts are subject to
renewal at the discretion of the managed care organization. The managed care
organization then reimburses the Company, at the contract prices, for O&P
products and services provided to such organization's subscribers as prescribed
by the physicians or other health professionals affiliated with such
organization.
Responding to the national trend toward managed health care, the Company
has been and will continue to aggressively market its services and products to
managed care organizations and seek to obtain additional managed care contracts
and renewal of existing contracts. The Company's strategy is to provide
geographic coverage of patient care centers in its major service regions, so as
to be positioned to service managed care organizations, which have subscribers
throughout a particular metropolitan, regional or statewide area. On the date of
this Proxy Statement, the Company has 103 managed care contracts to provide O&P
services to a variety of managed care organizations.
The Company entered into an agreement effective August 1, 1995 with Health
Insurance Plan of Greater New York ("HIP") under which the Company, for a
minimum term of eighteen (18) months, will be the preferred provider of orthotic
and prosthetic services to HIP members in Nassau and Suffolk Counties on Long
Island and in Queens County, New York. HIP, a not-for-profit health maintenance
organization, together with its affiliated plans, forms one of the largest
not-for-profit HMO systems in the eastern United States, serving approximately
one
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<PAGE>
million members. Concurrent with the commencement of services under the HIP
Agreement, the Company opened additional offices in Long Island and Queens,
which can also serve other managed care organizations as well as private pay
patients of referring physicians.
Post-Mastectomy Services
In August, 1995, the Company began offering post-mastectomy services in its
outpatient care centers in the New York metropolitan area. The Company will seek
to expand this new discipline, which will diversify its patient referral
sources.
The Company is not dependent on any particular patient referral source for
any significant part of its revenue.
Patient Reimbursement Sources. The principal reimbursement sources for the
Company's O&P services are: (i) private payor/third party insurer sources, which
consist of individuals, private insurance companies, HMOs, PPOs, other managed
care organizations, hospitals, workers' compensation and similar sources; (ii)
Medicare, which is a federally funded health insurance program providing health
insurance coverage for persons age 65 or older and certain disabled persons, and
Medicaid, which is a health insurance program jointly funded by the federal
government 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 (iii) the United
States Veterans Administration, with which the Company has entered into
contracts to provide O&P services.
The Company estimates that private payor/third party insurer sources
account for approximately 50% - 60% of revenue; Medicare and Medicaid account
for approximately 35% - 45% of revenue; and that the U.S. Veterans
Administration accounts for less than 3% of revenue.
With respect to private payor/third party insurer sources, the Company has
in excess of 500 private insurance companies and other private payor sources,
none of which, individually, comprises a significant or material portion of the
Company's revenue. With respect to the Medicare-Medicaid reimbursement programs
and the Veterans Administration programs, the payors are all agencies of the
United States government and various state governments, and although such
sources may comprise a significant component of the Company's revenue, the
Company does not consider this concentration to be a material risk in that these
governmental reimbursement programs have been in place for several decades and
the risk of their being terminated is remote or non-existent. The Company must
comply with the documentation requirements of these agencies which may audit the
Company in connection with their reimbursement programs.
Medicare, Medicaid, the United States Veterans Administration and certain
state agencies have set maximum reimbursement levels for payments for O&P
services and products; and the health care policies and programs of these
agencies have been subject to changes in payment and methodologies during the
past several years. Furthermore, managed care contracts limit the reimbursement
levels for O&P services and products provided by the Company to the managed
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<PAGE>
care organization's subscribers.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 United States Veterans Administration. The United States
Veterans Administration establishes rates for reimbursement for itemized
products and services under contracts which commenced on April 1, 1996 and
expire in March 1997, with the option to renew for a one 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 United States
Veterans Administration contracts in the past and expects that it will obtain
additional contracts when its current agreements expire.
The Omnibus Budget Reconciliation Act of 1990 ("OBRA 1990"), which was
enacted on November 5, 1990, called for the separate treatment of O&P
reimbursement and the general category of durable medical equipment ("DME")
reimbursement for Medicare purposes. Previously, O&P devices were included
within the DME category which failed to acknowledge that O&P devices are
custom-fabricated and subjected O&P to the same budget reductions that were
applicable to DME. The separate recognition of O&P for Medicare reimbursement
purposes enables O&P to have its own budget estimates and administration process
in connection with the regulatory activities of the United States Health Care
Financing Administration ("HCFA"). Pursuant to OBRA 1990, HCFA has established
separate professional O&P fee schedules that generally reflect the cost of O&P
services. Effective January 1, 1992, HCFA commenced the regionalization of O&P
fee schedules whereby regional fee schedule averages may not exceed 125% of the
national fee schedule average. The Company believes that OBRA 1990's separation
of O&P from DME for Medicare reimbursement purposes and the establishment of
separate O&P fee schedules will not adversely affect the Company.
Competition. The O&P industry includes over 1,500 certified facilities
providing patient care services in the United States. In the past several years,
a few large companies operating on a substantially nationwide basis have
conducted dramatic expansion through aggressive acquisition programs. These
organizations include NovaCare O&P and Hanger Orthopedic. While the Company has
a major presence and coverage with many patient care centers in its primary
service regions (New York/New Jersey metropolitan area; Upstate New York; and
West Virginia/Virginia), and has two facilities in New Mexico and one in
California, the Company does not operate in other geographic regions. The
competition among O&P patient care centers is primarily for referrals from
physicians, therapists, employers, HMOs, PPOs, other managed care organizations,
hospitals, rehabilitation centers, out-patient clinics and insurance companies
on both a local and regional basis. In addition to O&P facilities, the Company
competes with other providers of O&P services, such as hospitals, physicians and
therapists. The Company believes that distinguishing competitive factors in the
O&P industry are quality and timeliness of patient care, service to the customer
and referring source and, to a lesser degree, charges for services. Competitive
factors in obtaining managed care contracts for O&P products and services also
include geographic coverage of O&P patient care centers to conveniently service
subscribers of the managed care organization throughout its membership
territory, charges for services and quality control. Certain competitors,
especially those operating on a substantially nationwide basis and those which
are affiliated with diversified rehabilitation and health care
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<PAGE>
service providers, may have substantially greater financial and personnel
resources than the Company.
The Company competes with others in the industry for trained personnel; to
date, however, the Company has been able to achieve its staffing needs. The
Company has not encountered significant competition to date in the
identification and acquisition of O&P businesses. However, no assurance can be
given that such competition will not be encountered in the future.
Proposed health care legislation may change the nature of competition
experienced by the Company. See "Health Care Restructuring Initiatives" below.
Health Care Restructuring Initiatives. Substantial changes in the methods
of delivery of health care services, in the nature and scope of health care
insurance, in the methods of payment of the costs of health care services and
insurance, the pricing of health care services and governmental and insurance
reimbursement of health care costs, as well as proposals for an overall
restructuring of the health care system and the Medicare and Medicaid programs
continue to be the subject of major legislative and budgetary initiatives at the
Federal level. It is not possible to predict whether such legislation will
ultimately be enacted. If such legislation is enacted, it is impossible to
predict the form which such legislation will take or the impact such legislation
will have on the Company's operations or on the health care industry in general.
Government Regulation and O&P Certification. Certain federal and state
agencies require that practitioners providing services to such agencies be
certified by the American Board for Certification in Orthotics and Prosthetics
(the "ABC"), and the Company provides services under various contracts to such
federal agencies (including the United States Veterans Administration). These
contracts are subject to regulations governing federal contracts, including the
ability of the government to terminate for its convenience.
The Company's manufactured or fabricated devices are not subject to
approval or review of the United States Food and Drug Administration nor are
there any requirements for governmental professional licensing or certification
of orthotists or prosthetists or accreditation of the Company's facilities,
other than the requirement of certified practitioners for the provision of
services to certain government agencies.
The ABC conducts a certification program for orthotic and prosthetic
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 year of staff experience 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. All of the Company's patient care
centers are ABC-accredited.
Suppliers. The Company purchases prosthetic and orthotic materials, devices
and supplies from at least 100 different vendors and has in the past been able
to satisfy its requirements. The Company is not dependent on any one source for
its supplies. No supplier
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<PAGE>
accounted for more than approximately 16% of the Company's purchases of
prosthetic and orthotic materials, devices and supplies during the fiscal year
ended December 31, 1995. The Company believes that if this supplier were not
available to the Company, there would be no significant adverse effect on the
Company and that alternative sources of supply are available.
Employees. The Company has 138 full-time employees. Of these employees, 62
are patient care practitioners. The balance are executive, sales and
administrative personnel and technicians.
Insurance. The Company maintains insurance of the type and in the amount
customary in the orthopedic rehabilitation industry, including coverage for
professional liability, product liability, workers' compensation and property
damage. The Company's general liability insurance coverage is at least $500,000
per incident. Based on the Company's experience and prevailing industry
practices, the Company believes its coverage is adequate as to risks and amount.
The Company also maintains key man life insurance on Andrew H. Meyers,
President, Chief Executive Officer and a Director of the Company.
DESCRIPTION OF PROPERTY.
All of the Company's 37 patient care facilities and its executive offices
are at premises leased for various terms, expiring 1996 through 2006. The
Company believes it will be able to renew such leases as they expire or find
comparable or additional space on commercially suitable terms.
The Company's patient care centers are generally located in small,
free-standing one or two story office or professional buildings on commercial
streets, and include examining and fitting rooms, patient waiting areas, small
administrative and storage spaces and provision for a limited number of
off-street parking spaces. The Company's two Manhattan (New York City) offices,
and certain other offices, are located in the professional office suites of
residential towers. The Company's patient care centers are located as follows:
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New York (19 locations)
Brooklyn
Bronx
Carmel
Farmingdale
Manhattan (New York City)(2 locations)
Oswego
Potsdam
Queens (2 locations)
Rye
Stony Brook
Suffern
Syracuse (2 locations)
Utica
Watertown
West Hempstead (also contains the Company's executive offices)
White Plains
New Jersey (6 locations)
Hackensack
Manahawkin
Manasquan
Middletown
Union City
Westfield
Virginia (3 locations)
Chesapeake
Hampton
Virginia Beach
West Virginia (6 locations)
Charleston
Clarksburg
Fairmont
Huntington
Princeton
Morgantown
New Mexico (2 locations)
Albuquerque
Santa Fe
California (1 location)
Sherman Oaks
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<PAGE>
LEGAL PROCEEDINGS.
On November 6, 1995, a Summons and Complaint was served in a class action
brought in the US District Court for the Eastern District of New York entitled
Continental Orthopedic Appliances, Inc. et al. v. Health Insurance Plan of
Greater New York ("HIP"), Advanced Orthopedic Technologies, Inc. and Arimed
Orthotic, Prosthetics and Pedorthotics, Inc. ("Arimed"), in which eighteen (18)
prosthetic/orthotic suppliers are alleging that HIP's granting of a managed care
contract to a subsidiary of the Company violated various federal and state
antitrust laws, claiming damages of $500,000 per plaintiff, treble damages under
such antitrust laws, and injunctive relief. The Company believes this claim is
without merit and intends to vigorously defend this action. In January, 1996,
the Company, HIP and Arimed each filed motions to dismiss the complaint for
failure to state a claim. On February 9, 1996, in a case brought in the same
court, the US District Court for the Eastern District of New York, and on the
same facts, entitled The Orthopedic Studio, Inc. v. HIP, the court granted HIP's
motion to dismiss the complaint in its entirety for failure to state any facts
which could support a claim under federal or New York State anti-trust laws.
While the Company cannot predict the outcome of the litigation brought against
it, the Orthopedic Studio dismissal appears to be dispositive and the Company
believes its liability in such litigation to be remote.
From time to time, the Company is party to certain claims, suits and
complaints which arise in the ordinary course of business. Currently, there are
no such claims, suits or complaints, which in the opinion of management, would
have a material adverse effect on the Company's financial position.
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<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers. The Directors and executive officers of
the Company, their positions held with the Company and their ages, are as
follows:
Name Age Position and Term in Office
- - ---- --- ---------------------------
Andrew H. Meyers 39 President, Chief Executive Officer,
Medical Director and Director since
April, 1992
Norbert B. Meyers 73 Vice President, Secretary, and Chairman
of the Board since April, 1992
Jesse Z. Fink 40 Vice President and Chief Financial
Officer since April, 1995
William Lovegreen 37 Vice President of Professional Services
since August, 1992
Elton Strauss, M.D. 47 Director since April, 1992
Gregory R. Nelson 45 Director since August, 1995
Directors are elected by vote of the shareholders at the Company's Annual
Meeting of Shareholders to serve generally for one year until the next Annual
Meeting of Shareholders and until their respective successors are elected and
qualify, provided that vacancies occurring in the Board of Directors may be
filled by vote of the Directors.
ANDREW H. MEYERS, 39, President, Chief Executive Officer and Medical
Director and a member of the Board of Directors of the Company since April,
1992, has been President of Advanced and its predecessors since 1979. He is a
Certified Prosthetist/Orthotist and is also the inventor of a number of patented
orthotic devices. Mr. Meyers is a guest lecturer at New York University Medical
School, State University of New York at Stony Brook Orthopedic Residency
Training Program, Mount Sinai Medical Center and North Shore University
Hospital.He is a member of the Adjunct Staff of the State University of New York
at Stony Brook, North Shore University Hospital, Mt. Sinai Medical Center and
The Hospital for Joint Diseases. Mr. Meyers received a B.S. Degree from New York
University with a major in Prosthetics and Orthotics and has completed his
course work towards a PhD. in Biomechanics. Andrew H. Meyers is the son of
Norbert B. Meyers.
NORBERT B. MEYERS, 73, Chairman of the Board of Directors and a member of
the Board of Directors, Vice President and Secretary of the Company since April,
1992, and an executive officer of Advanced and its predecessors since their
founding in 1972. He holds a B.S. degree and has had forty-five years experience
in the health-care field, including ownership and management of businesses in
pharmacy, orthotics, and in-home nursing services. Norbert B. Meyers is the
father of Andrew H. Meyers.
JESSE Z. FINK, 40, became Vice President and Chief Financial Officer of the
Company in April, 1995. Prior thereto, he was a manager at the firm of Kofler,
Levenstein, Romanotto & Co., P.C., Certified Public Accountants, for many years
the auditors of the Company, where for sixteen years he concentrated in
accounting and consulting for the health care industry. Mr. Fink holds a B.S. in
Business Administration with a concentration in Accounting from the University
of Nebraska.
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<PAGE>
WILLIAM LOVEGREEN, 37, a Certified Prosthetist/Orthotist, became Vice
President of Professional Services of the Company in August 1992. From May 1990
to July 1992, he was owner/manager and a prosthetist and orthotist for the
Amputee and Brace Center in Lakeland, Florida. Mr. Lovegreen was Director of
Prosthetics and Orthotics of the Harmarville Rehabilitation Center, Inc. located
in Pittsburgh, Pennsylvania from August 1987 until July 1990. Mr. Lovegreen
received his certifications in prosthetics and orthotics from Northwestern
University Medical School, in 1984 and 1982 respectively. He was the co-founder
of the Central Florida Amputee Support Group and is a Member and Examiner for
the American Board of Certification in Orthotics and Prosthetics.
ELTON STRAUSS, M.D., 47, a member of the Board of Directors of the Company
since April, 1992, has been Chief of Orthopedic Trauma and Reconstructive
Surgery at the Mount Sinai Medical Center since 1987. He has an Orthopedic Board
Certification and a New York State Medical License. Dr. Strauss is a member of
the American College of Surgeons, American College of Sports Medicine, American
Foot Society and the International Society for Fracture Repair.
GREGORY R. NELSON, 45, a member of the Board of Directors of the Company
since August, 1995, currently serves as Chairman of the Board of Breg, Inc., a
California based, privately held health care company specializing in the
distribution of orthopedic products. From 1977 until May, 1995, Mr. Nelson
served as President of DonJoy Orthopedic, a company he founded in 1977 and which
was acquired by Smith & Nephew PLC in 1987 and which performs research,
development and distribution of products for the orthopedic and sports medicine
market and manufactures and distributes knee bracing.
It is anticipated that at the Effective Time, all current Directors of the
Company will resign from such positions and NovaCare O&P, as the sole
shareholder of the Company, will elect new Directors of the Company. If the
Merger is approved, then at or prior to the Effective Time, the existing
employment agreements between the Company and each of Andrew H. Meyers and
Norbert B. Meyers will be terminated and such individuals will enter into new
employment agreements with NovaCare O&P. See "The Merger-Interest of Certain
Persons in the Merger."
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 30, 1996, the names and
addresses of (i) the only shareholders known by the Company to beneficially own
more than five percent of the Common Stock of the Company, (ii) each director of
the Company, (iii) each of the executive officers of the Company named above in
this Proxy Statement and (iv) all directors and executive officers as a group,
and also lists the number of shares beneficially owned by them and the
percentage of outstanding shares that such ownership represents.
<TABLE>
<CAPTION>
Common Stock (1)
------------------------------------------------
Number of Shares
Name and Address of Beneficial Owner Beneficially Owned (2) Percentage of Class
- - ------------------------------------ ---------------------- -------------------
<S> <C> <C>
Andrew H. Meyers 2,974,403(3) 62.30%
151 Hempstead Turnpike
West Hempstead, New York 11552
Norbert B. Meyers 190,644(4) 4.00%
151 Hempstead Turnpike
West Hempstead, New York 11552
The Meyers Trusts 141,293(5) 2.96%
151 Hempstead Turnpike
West Hempstead, New York 11552
WG Equities, Inc. 450,000(6) 9.43%
Mark Waldman
Steven Goldstein
140 East 40th Street
New York, New York 10016
Shigeru Masuda 204,096(7) 4.28%
c/o Zeron Capital Management, Inc.
117 East 57th Street
New York, New York 10022
Zeron Capital Partners, L.P. 392,157(8) 8.21%
Bermuda Commercial Bank Building
44 Church Street
Hamilton HM12, Bermuda
Gary Takata 166,667(9) 3.49%
330 East 38th Street
New York, New York 10016
Jesse Z. Fink 20,000(10) (13)
151 Hempstead Turnpike
West Hempstead, New York 11552
William Lovegreen 60,000(11) 1.26%
151 Hempstead Turnpike
West Hempstead, New York 11552
Elton Strauss 15,001(12) (13)
45 Fir Drive
Roslyn, New York 11577
All Executive Officers and Directors
of the Company as a Group (6 persons) 3,260,048 68.28%
========= ======
</TABLE>
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<PAGE>
- - ---------------------
(1) This table is prepared using 4,774,233 actual shares of Common Stock
outstanding at September 30, 1996. Such number excludes all shares which
may be issued in the future, contingent on achievement of acquisition
earnouts in future periods; but includes 276,667 shares issued and
outstanding but held in escrow on September 30, 1996. See
"Business-Acquisitions." The Company has exercised options to repurchase
from WG Equities, Inc. 225,000 shares at $0.75 per share and 225,000 shares
at $1.50 per share; such shares to be redeemed include 250,000 of the
shares held in escrow at September 30, 1997. If any shares held by WG
Equities, Inc. remain outstanding on the date of the Special Meeting,
Andrew H. Meyers, pursuant to a proxy granted by WG Equities, Inc., will
vote such shares FOR approval of the Merger and the Merger Agreement. The
Company has also entered into an agreement to convert 26,667 shares being
held in escrow for another acquisition seller to $80,000 in a cash escrow
and to cancel such shares. After giving effect to the redemption and
cancellation, prior to be Effective Time, of a total of 476,667 shares, the
Company anticipates that it will have 4,297,566 shares of Common Stock
outstanding at the Effective Time.
(2) Except as noted, each person has sole voting and investment power. In
accordance with Commission Rule 13d-3(d)(1), shares of Common Stock
issuable upon exercise of all Class C Redeemable Selling Warrantholder
Warrants shall be deemed to be outstanding for the purpose of computing the
percentage of outstanding shares of Common Stock owned by holders of such
Class C Redeemable Selling Warrantholder Warrants but shall not be deemed
to be outstanding for the purpose of computing the percentage of the class
owned by any other person.
(3) Includes 450,000 shares of Common Stock owned by WG Equities, Inc.
(formerly known as Med-Tech O&P Services, Inc.) issued on January 5, 1996
in connection with the Company's acquisition of certain assets of Med-Tech,
as to which shares WG Equities, Inc., Marc Waldman and Steven Goldstein
have granted a proxy and power of attorney to Andrew H. Meyers to vote such
shares until December 31, 2000. Andrew H. Meyers has no economic interest
in the shares owned by WG Equities, Inc. and disclaims any beneficial
interest in such shares. If such shares are outstanding at the date of the
Special Meeting, Mr. Meyers will vote such shares for adoption and approval
of the Merger and the Merger Agreement. Includes 2,667 shares of Common
Stock held by Mr. Andrew H. Meyers as custodian under the New York Uniform
Gifts to Minors Act for the benefit of his children. Does not include
141,293 shares of Common Stock owned by four trusts for the benefit of
Andrew H. Meyers' family (the "Meyers Trusts") of which Norbert B. Meyers
and Harold N. Howard are trustees. Andrew H. Meyers disclaims any
beneficial interest in the shares of the Company held by the Meyers Trusts
or held by him as custodian. Andrew H. Meyers is the son of Norbert B.
Meyers.
(4) Includes 141,293 shares of Common Stock owned by the Meyers Trusts, of
which Norbert B. Meyers and Harold N. Howard are trustees and also includes
3,333 shares held by Lisa Meyers, wife of Norbert B. Meyers. Norbert B.
Meyers disclaims any beneficial interest in the shares of the Company held
by the Meyers Trusts and in the shares of the Company owned by Lisa Meyers.
Norbert B. Meyers is the father of Andrew H. Meyers. Includes options held
by Norbert B. Meyers to purchase 10,000 shares of Common Stock which became
exercisable May 1, 1994.
(5) Includes 35,323 shares of Common Stock owned by the Andrew H. Meyers (1983)
Trust; 35,323 shares of Common Stock owned by the Andrew H. Meyers (1983)
Irrevocable Trust; 35,323 shares of Common Stock owned by the Andrew H. and
Janet Lynn Meyers (1983) Trust; and 35,324 shares of Common Stock owned by
the Andrew H. and Janet L. Meyers (1983) Irrevocable Trust. Norbert B.
Meyers and Harold N. Howard are the co-trustees of all four Meyers Trusts.
Norbert B. Meyers, Harold N. Howard and Andrew H. Meyers disclaim any
beneficial interest in the shares of the Company held by the Meyers Trusts.
(6) Includes 450,000 shares issued on January 5, 1996 (of which 250,000 are
held in escrow) to WG Equities, Inc. (formerly known as Med-Tech O&P
Services, Inc.) in connection with the Company's acquisition of certain
assets of Med-Tech. These shares are also beneficially owned by Marc
Waldman and Steven Goldstein, the controlling shareholders of WG Equities,
Inc.
(7) Includes 166,667 shares of Common Stock issuable upon exercise of 500,000
Class C Redeemable Selling Warrantholder Warrants issued to Mr. Masuda in
October, 1989, exercisable until November 30, 1996, to purchase 166,667
shares of Common Stock. Does not include 392,157 Shares of Common Stock
owned by Zeron Capital Partners, L.P., a Bermuda limited partnership
("Zeron"), an affiliate of Mr. Masuda.
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<PAGE>
(8) Does not include: (i) 37,429 outstanding shares of Common Stock owned by
Shigeru Masuda, an affiliate of Zeron or (ii) 166,667 shares of Common
Stock issuable upon exercise of Class C Redeemable Selling Warrantholder
Warrants held by Mr. Masuda.
(9) Includes 166,667 shares of Common Stock issuable upon exercise by Gary
Takata of 500,000 Class C Redeemable Selling Warrantholder Warrants issued
to him in October 1989, exercisable until November 30, 1996, to purchase
166,667 shares of Common Stock. Does not include 12,752 outstanding shares
of Common Stock owned by LJ Investment Company. The sole proprietor of LJ
Investment Company is Louise Jones, the wife of Mr. Takata. Mr. Takata
disclaims any beneficial interest in the shares of the Company held or
beneficially owned by LJ Investment Company. LJ Investment Company and
Louise Jones disclaim any beneficial ownership in the shares of the Company
held or beneficially owned by Gary Takata.
(10) Includes options to purchase 20,000 shares of Common Stock which became
exercisable on or before December 31, 1995. Does not include options to
purchase 20,000 shares of Common Stock to become exercisable by Mr. Fink on
completion of employment for the fiscal year ending December 31, 1996 and
20,000 shares of Common Stock to become exercisable by Mr. Fink on
completion of employment for the fiscal year ending December 31, 1997.
(11) Includes options to purchase 60,000 shares of Common Stock which became
exercisable on or prior to June 30, 1995.
(12) Includes options to purchase 13,334 shares of Common Stock which became
exercisable on or prior to May 1, 1995.
(13) Holdings in the aggregate represent less than 1% of the shares of Common
Stock outstanding.
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<PAGE>
STOCKHOLDER PROPOSALS FOR 1997 ANNUAL MEETING
If the Merger is not consummated, it is presently anticipated that the next
Annual Meeting of Stockholders of the Company will be held on or about June 30,
1997. Any proposal of a stockholder to be presented at the Annual Meeting of
Stockholders in 1997 must be received by the Secretary of the Company at its
principal offices, prior to 5:00 p.m., New York City time, on February 1, 1997,
in order to be considered for inclusion in the Company's 1997 proxy materials.
Any such proposal must be in writing and signed by the stockholder.
OTHER MATTERS
Management knows of no other matters that will be presented at the Special
Meeting. If any other matters arise at the Special Meeting, it is intended that
the shares represented by the proxies in the accompanying form will be voted in
accordance with the judgment of the persons named in the proxy.
By Order of the Board of Directors,
NORBERT B. MEYERS
Chairman of the Board and Secretary
- 55 -
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
The following financial statements are furnished as part of this Proxy
Statement:
Index to Financial Statements and Schedules Pages
------------------------------------------- -----
FISCAL YEAR ENDED DECEMBER 31, 1995
<S> <C>
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheet as of December 31, 1995 F-2
Consolidated Statements of Income for each of the two
years in the period ended December 31, 1995 F-3
Consolidated Statements of Stockholders' Equity for
each of the two years in the period ended December 31, 1995 F-4 - F-5
Consolidated Statements of Cash Flows for each of the
two years in the period ended December 31, 1995 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-18
Exhibit
Schedule showing computations of average number of
common shares outstanding for each of the two
years in the period ended December 31, 1995 F-19
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996
Consolidated Balance Sheets as of June 30, 1996 (unaudited)
and December 31, 1995 (audited) F-20
Consolidated Statements of Income (Unaudited) for the Three
Months Ended June 30, 1996 and June 30, 1995 and for the
Six Months Ended June 30, 1996 and June 30, 1995 F-21
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended June 30, 1996 and June 30, 1995 F-22
Summarized Financial Information F-24
</TABLE>
- 56 -
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Advanced Orthopedic Technologies, Inc.
We have audited the accompanying consolidated balance sheet of
Advanced Orthopedic Technologies, Inc. and Subsidiaries as of
December 31, 1995 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the two years in the period
then ended. 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 audits 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
Advanced Orthopedic Technologies, Inc. and Subsidiaries as of December 31,
1995 and the results of its operations and its cash flows for each of
the two years in the period then ended, in conformity with generally
accepted accounting principles.
As discussed in Note D, the Company changed its method of
accounting for long-lived assets in 1995. We concur with the change.
/s/Kofler, Levenstein, Romanotto & Co., P.C.
-----------------------------------------
Kofler, Levenstein, Romanotto & Co., P.C.
Certified Public Accountants
Rockville Centre, New York
March 1, 1996
F-1
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
ASSETS
Current assets
Cash and cash equivalents $ 216,000
Accounts receivable - net of allowance for
doubtful accounts of $204,000 3,470,000
Inventory 1,038,000
Prepaid expenses 193,000
Recoverable income taxes 26,000
Deferred income taxes 192,000
-----------
Total current assets 5,135,000
-----------
Property and equipment - at cost 1,374,000
Less accumulated depreciation 819,000
-----------
555,000
-----------
Other assets
Intangibles - net of accumulated amortization
of $421,000 5,209,000
Deferred income taxes 28,000
Miscellaneous 104,000
-----------
Total other assets 5,341,000
-----------
Total $11,031,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable $ 247,000
Current maturities of long-term debt 1,065 000
Accounts payable 387,000
Accrued expenses 930,000
Deferred compensation 86,000
Income taxes payable 77,000
-----------
Total current liabilities 2,792,000
-----------
Deferred compensation 9,000
-----------
Long-term debt 2,817,000
Stockholders' equity
Common stock 4,000
Common stock warrants 18,000
Additional paid-in capital 3,082,000
Retained earnings 2,309,000
-----------
Total stockholders' equity 5,413,000
-----------
Total $11,031,000
===========
The notes to consolidated financial statements are made a part hereof.
F-2
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
----------------------------
1995 1994
----------- -----------
Sales $13,813,000 $13,162,000
Cost of sales 6,738,000 6,430,000
----------- -----------
Gross profit 7,075,000 6,732,000
----------- -----------
Selling, general and administrative expenses 5,435,000 5,338,000
Litigation costs 188,000 --
Inventory obsolescence 62,000 --
Impairment of assets 124,000 --
----------- -----------
5,809,000 5,338,000
----------- -----------
Operating income 1,266,000 1,394,000
----------- -----------
Other income (deductions)
Interest expense (380,000) (353,000)
Other income 12,000 12,000
Costs of abandoned acquisition -- (108,000)
Registration costs -- (167,000)
----------- -----------
(368,000) (616,000)
----------- -----------
Income before provision for
income taxes 898,000 778,000
Provision for income taxes
Current 398,000 323,000
Deferred 14,000 49,000
----------- -----------
412,000 372,000
----------- -----------
Net income $ 486,000 $ 406,000
=========== ===========
Earnings per common share $ .11 $ .09
=========== ===========
Shares used in earnings per
common share computation 4,453,711 4,404,287
========= =========
The notes to consolidated financial statements are made a part hereof.
F-3
<PAGE>
<TABLE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TWO YEARS ENDED DECEMBER 31, 1995
DOLLAR AMOUNTS
<CAPTION>
Additional Unrealized Loss
Common Common Stock Paid-in Retained on Marketable
Stock Warrants Capital Earnings Securities Total
----- -------- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance -- January 1, 1994 $ 3,000 $ 1,000 $2,742,000 $1,417,000 $ (28,000) $4,135,000
Net income 406,000 406,000
Conversion of Preferred Stock 1,000 (1,000) --
In connection with acquisitions
Shares issued 260,000 260,000
Held in escrow (90,000) (90,000)
Shares issued to employees as compensation 59,000 59,000
Unrealized loss on marketable securities (19,000) (19,000)
---------- ---------- ---------- ---------- ---------- ----------
Balance -- December 31, 1994 4,000 1,000 2,970,000 1,823,000 (47,000) 4,751,000
Net income 486,000 486,000
Shares issued in connection with prior
acquisitions 76,000 76,000
Shares issued to employees as compensation 36,000 36,000
Warrants repriced resulting in compensation 17,000 17,000
Unrealized loss on marketable securities 47,000 47,000
---------- ---------- ---------- ---------- ---------- ----------
Balance -- December 31, 1995 $ 4,000 $ 18,000 $3,082,000 $2,309,000 $ -- $5,413,000
========== ========== ========== ========== ========== ==========
</TABLE>
The notes to consolidated financial statements are made a part hereof.
F-4
<PAGE>
<TABLE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TWO YEARS ENDED DECEMBER 31, 1995
SHARES ISSUED
<CAPTION>
Preferred Preferred Preferred Preferred
Stock Stock Stock Stock Common Common Stock
Series A Series B Series C Series D Stock Warrants
-------- -------- -------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Balance -- January 1, 1994 9,409 9,409 7,057 7,057 2,999,382 1,000,000
Conversion of Preferred Stock (9,409) (9,409) (7,057) (7,057) 1,097,591
In connection with acquisitions
Shares issued 90,587
Held in escrow (26,667)
Shares issued to employees as compensation 41,639
------ ----- ----- ----- --------- ---------
Balance -- December 31, 1994 4,202,532 1,000,000
Shares issued in connection with prior
acquisitions 35,625
Shares issued to employees as compensation 34,781
Warrants repriced resulting in compensation 66,666
------ ----- ----- ----- --------- ---------
Balance -- December 31, 1995 -- -- -- -- 4,272,938 1,066,666
====== ===== ===== ===== ========= =========
</TABLE>
The notes to consolidated financial statements are made a part hereof.
F-5
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Years ended
December 31,
---------------------
1995 1994
-------- --------
Cash flows from operating activities
Net income $486,000 $406,000
Items not requiring the current use of cash
Impairment of assets 124,000 --
Depreciation and amortization 321,000 305,000
Gain on sale of property and equipment (1,000) --
Provision for doubtful accounts 175,000 124,000
Deferred compensation provision 35,000 1,000
Deferred income taxes 14,000 49,000
Loss on sale of marketable securities 3,000 --
Compensation paid in Company securities 8,000 4,000
Changes in items affecting operations
Accounts receivable (607,000) (330,000)
Inventory 15,000 (43,000)
Prepaid expenses (20,000) 295,000
Recoverable income taxes 152,000 (107,000)
Miscellaneous 15,000 (43,000)
Accounts payable 239,000 (178,000)
Accrued expenses (166,000) (36,000)
Deferred compensation paid (72,000) (73,000)
Income taxes payable 77,000 (20,000)
-------- --------
Net cash provided by operating activities 798,000 354,000
-------- --------
Cash flows from investing activities
Proceeds from sale of marketable securities 186,000 --
Payments for acquired business, net of
cash acquired -- (482,000)
Purchase of property and equipment (184,000) (56,000)
Proceeds from sale of property and equipment 13,000 --
Contingent purchase price of acquisitions (168,000) (233,000)
-------- --------
Net cash used by investing activities (153,000) (771,000)
-------- --------
Cash flows from financing activities
Proceeds from long-term debt -- 405,000
Principal payments of long-term debt (717,000) (476,000)
Proceeds from note payable 122,000 125,000
Repayment of note payable -- (250,000)
-------- --------
Net cash used by financing activities (595,000) (196,000)
-------- --------
Increase (decrease) in cash
and cash equivalents 50,000 (613,000)
Cash and cash equivalents -- beginning 166,000 779,000
-------- --------
Cash and cash equivalents -- end $216,000 $166,000
======== ========
The notes to consolidated financial statements are made a part hereof.
F-6
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
Supplemental Schedule of Noncash Investing and Financing Activities
The Company issued 34,781 shares in 1995 and 41,639 shares in 1994 of
common stock to employees as compensation and 35,625 shares in 1995 and 90,587
shares in 1994 of common stock as contingent payment on prior year acquisitions.
The value of the common shares was $112,000 in 1995 and $319,000 in 1994. Of the
shares issued in 1994, 26,667 ($90,000 value) are held in escrow.
In 1995, the Company repriced 66,666 warrants in connection with the
extension of a services agreement. This will result in a charge to income of
$17,000 over the period of the agreement.
The Company's acquisition in 1994 was paid for as follows:
Cash paid for assets -- net of cash acquired $482,000
Common stock issued 45,000
Liabilities assumed 413,000
--------
Fair value of assets acquired $940,000
========
In 1994, the Company entered into a modification agreement with the sellers
of Orthopedic Technologies, Inc. The agreement provides for additional cash
payments of approximately $60,000 through December 1996 in lieu of amounts that
were contingently payable in common stock.
Supplemental Disclosure of Cash Flow Information
Net cash provided by operating activities reflects cash payments for
interest and income taxes as follows:
Years ended December 31,
--------------------------
1995 1994
-------- --------
Interest paid $387,000 $333,000
Income taxes paid 169,000 450,000
F-7
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(NOTE A) -- THE COMPANY
The Company is one of the nation's leading providers of patient care
services to the orthotic and prosthetic rehabilitation markets. Orthotics is the
design, fabrication and fitting of custom-made braces and other devices.
Prosthetics is the design, fabrication and fitting of artificial limbs.
(NOTE B) -- SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements include the
accounts of Advanced Orthopedic Technologies, Inc. and its wholly-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition -- The Company recognizes revenue from the sale of products
at amounts estimated to be due at the time of delivery. Payment of amounts
billed to patients is derived from a large number of private and third party
payor sources, which include insurance companies and government agencies.
Cash and Cash Equivalents -- The Company considers all highly-liquid debt
instruments with a maturity of three months or less when purchased to be cash
equivalents.
Marketable Securities -- Marketable securities are valued based upon Statement
No. 115 of the Financial Accounting Standards Board. Under Statement No. 115,
assets available for sale are valued at fair value. Temporary differences
between cost and fair value are reported as a separate component of
stockholders' equity, net of income tax effect. When the securities are sold,
the amount previously provided as a separate component of stockholders' equity
is reversed with the resultant gain or loss charged to operations.
Inventory -- Inventory is valued at the lower of cost, determined on a first-in,
first-out basis, or market.
F-8
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(NOTE B) -- SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment -- Property and equipment are stated at cost. Major
renewals and betterments are capitalized, while repairs and maintenance which do
not extend the life of the respective assets are expensed currently. When items
are disposed of, the cost and accumulated depreciation are eliminated from the
accounts and any gain or loss is included in income.
For financial reporting purposes, depreciation is provided on a
straight-line basis over the estimated useful lives of furniture and equipment
(5-10 years), vehicles (3-7 years) and leasehold improvements (term of lease).
Long-Lived Assets -- Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate the carrying amount may not be
recoverable. If the sum of the expected future cash flows is less than the
carrying amount of the asset, a loss is recognized.
Income Taxes -- Deferred income taxes, based upon currently enacted tax rates,
are provided for temporary differences in the recognition of assets and
liabilities on the financial statements and for income tax purposes.
Earnings per Common Share -- Earnings per common share is computed by dividing
net income by the weighted average number of common shares and common share
equivalents outstanding. Common share equivalents represent the number of common
shares that would be outstanding assuming the exercise of dilutive stock options
and warrants, the issuance of common stock as compensation and issuance of
common shares which are contingently issuable. Fully diluted earnings per share
is not presented because the result would be anti-dilutive or result in less
than 3% dilution.
(NOTE C) -- ACQUISITIONS
Effective April 18, 1994, the Company acquired certain assets of Clayton
Prosthetics and Orthotics, Inc. for a cash payment of $482,000, additional
payments of approximately $413,000 payable through May 2000 and 13,334 shares of
the Company's common stock valued at $45,000.
Additional amounts are contingently payable with respect to the
above-mentioned and prior acquisitions. Contingent payments, in either cash or
the Company's common stock, are based on the acquired companies attaining
certain revenue targets or operating performance. As of December 31, 1995, the
minimum amount contingently payable is approximately $116,000.
All of the Company's acquisitions have been accounted for by the purchase
method of accounting. The operating results of these acquisitions are included
in the Company's consolidated results of operations from the effective date of
each acquisition.
F-9
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(NOTE C) -- ACQUISITIONS (Continued)
Proforma Information -- The following unaudited proforma results of operations
for the years ended December 31, 1995 and 1994, assumes all of the acquisitions,
including the "Med-Tech" acquisition in 1996 (see Note R), occurred on January
1, 1994 and gives effect to certain adjustments including amortization of
goodwill, interest expense on acquisition indebtedness, officer salaries as a
result of new employment agreements and common shares issued.
Years ended December 31,
---------------------------
1995 1994
----------- -----------
Sales $16,253,000 $15,928,000
=========== ===========
Net income $ 681,000 $ 665,000
=========== ===========
Earnings per common share $ .15 $ .14
===== =====
Shares used in earnings
per common share computation 4,653,711 4,626,708
========= =========
The proforma financial information presented above does not purport to
represent what the Company's results of operations would have been had these
acquisitions occurred on January 1, 1994 or to project the Company's results of
operations for any future period.
(NOTE D) -- CHANGES IN ACCOUNTING PRINCIPLES
Effective October 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of." The Company charged to
operations in the fourth quarter of 1995, $124,000 in connection with the
adoption of this policy by reducing the carrying value of goodwill.
(NOTE E) -- INVENTORY
Inventory is classified as follows:
Finished goods $ 572,000
Work-in-process 138,000
Raw materials 328,000
----------
$1,038,000
==========
F-10
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(NOTE F) -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Furniture and equipment $ 769,000
Leasehold improvements 560,000
Vehicles 45,000
----------
$1,374,000
==========
Depreciation expense charged to operations was $153,000 and $154,000 for
1995 and 1994, respectively.
(NOTE G) -- INTANGIBLE ASSETS
Goodwill -- Goodwill represents the excess of the cost of acquiring assets over
the fair value of the assets acquired at the date of acquisition and is being
amortized on a straight-line basis over a forty-year period. Amortization
expense charged to operations was $142,000 and $129,000 for 1995 and 1994,
respectively.
Restrictive Covenants -- The Company has entered into restrictive covenant
agreements with the former principals of acquired businesses. Amortization of
the restrictive covenants is being charged to operations over the term of
restriction. The total charge to operations for restrictive covenants was
$16,000 and $14,000 for 1995 and 1994, respectively.
(NOTE H) -- MARKETABLE SECURITIES
At December 31, 1994, the cost of the marketable securities exceeded the fair
market value by $80,000. An allowance for unrealized losses reduced
stockholders' equity by $47,000, net of income taxes of $33,000. The marketable
securities were sold in 1995.
(NOTE I) -- NOTE PAYABLE
The Company is indebted to its bank for $247,000 against a $500,000 line of
credit which matures in May 1996.
In connection with an acquisition (See Note R), the Company obtained a
$625,000 line of credit from its bank which is expected to be converted into a
term loan in September 1996.
Both lines are collateralized by substantially all of the assets of the
Company not pledged elsewhere (See Note J) and carry interest at the rate of
1/2% over the bank's prime rate.
F-11
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(NOTE J) -- LONG-TERM DEBT
Long-term debt consists of the following:
Term loan payable to bank with interest
at 1% above the bank's prime rate
Varying monthly principal is payable
through December 1998. Interest is
payable monthly $2,245,000
Notes payable to former owners of acquired
businesses payable in varying installments
of principal and interest through
August 2000. Interest is provided at
rates varying from 5.3% to 9% per annum
The obligations are collateralized by
substantially all of the assets of the
wholly-owned subsidiaries whose book
values are approximately $1,624,000 1,497,000
Demand note payable to the Company's
majority stockholder. Interest is
provided at 1% above the prime lending
rate. The loan is subordinated to the
bank debt 140,000
----------
3,882,000
Less current maturities 1,065,000
----------
Total $2,817,000
==========
Long-term debt matures as follows:
1996 $1,065,000
1997 1,137,000
1998 1,426,000
1999 133,000
Thereafter 121,000
----------
$3,882,000
==========
The term loan to the bank of $2,245,000 and the note payable (Note I)
contain, among others, covenants to maintain certain financial tests and ratios
(including tangible net worth, total debt to net worth and cash flow to fixed
charges). In addition, the agreement places restrictions and limitations on
investment of the Company's assets and payment of dividends. Both obligations
are collateralized by substantially all of the assets of the Company not pledged
elsewhere.
F-12
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(NOTE K) -- CAPITAL STOCK
Capital stock is summarized as follows:
Preferred stock, nonvoting, $.001 par value, 14,965,000 shares
authorized, none outstanding
Common stock, voting, $.001 par value, 75,000,000 shares authorized,
outstanding 4,272,938 shares
Class C redeemable selling warrantholder warrants, $.001 par value,
outstanding 1,000,000 warrants
Common stock purchase warrants, $.001 par value, outstanding 66,666
warrants
At December 31, 1995, common stock was reserved as follows:
Contingently issuable in connection
with acquisitions 123,424
Exercise of common stock warrants 665,334
Stock option plan 500,000
Employee stock plan 37,084
---------
1,325,842
=========
(NOTE L) -- STOCK PLANS
Stock Option Plan -- Under the Company's 1992 Stock Option and Stock
Appreciation Rights Plan, certain officers, employees and directors can be
granted options to purchase a maximum of 500,000 shares of common stock. These
grants may be combined with grants of stock appreciation rights. The plan
provides for incentive stock options to be granted at a price equal to or
greater than the market price of the stock at the date of grant and for
nonqualified stock options to be granted at a price no less than 50% of the
market price of the stock at the date of grant. Options may be exercised for up
to ten years from the date of grant. Upon exercise of a stock appreciation
right, the holder may receive shares of common stock or cash equal to the excess
of the fair market value of the common stock at the date of exercise over the
option price.
F-13
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(NOTE L) -- STOCK PLANS (Continued)
The following is a summary of the activity for the two years ended December
31, 1995:
Number of Option Price Aggregate
Shares per Share Value
------ --------- -----
Balance outstanding --
January 1, 1994 161,834 $ 3.75 $607,000
1994 Activity
Granted 99,416 3.00-4.25 373,000
Cancelled (6,000) (3.75) (23,000)
------- ----------- --------
Balance outstanding --
December 31, 1994 255,250 3.00-4.25 957,000
1995 Activity
Granted 80,418 2.25-3.00 222,000
Cancelled (134,834) (3.00-4.25) (510,000)
------- ----------- --------
Balance outstanding
December 31, 1995 200,834 $2.25-$3.75 $669,000
======= =========== ========
Options exercisable
December 31, 1995 157,834
=======
Employee Stock Plan -- The Company granted certain key employees options to
purchase the Company's common stock at $.001 per share (par value). Options may
be exercised at various employment anniversary dates. Upon termination of
employment, options not yet exercisable are subject to forfeiture. The
difference between the fair value at the date of grant and the option price is
compensation which is amortized over the period of vesting which ends in June
1997. Changes in the fair value of the unissued shares affects the amount of
compensation expense. Compensation charged to operations in connection with
these stock options was $26,000 1995 and ($13,000) in 1994.
Warrants -- At December 31, 1995, the Company had outstanding common stock
purchase warrants ("warrants") to purchase 332,000 shares of the Company's
common stock at prices ranging from $1.00 to $3.50 per share and 1,000,000 Class
C Redeemable Selling Warrantholder Warrants ("C warrants") which entitle the
holder to use three warrants to purchase one share of common stock at $5.25. The
warrants may be exercised for up to five years from the vesting date, through
December 2000 and the C warrants may be exercised through November 30, 1996. At
December 31, 1995, 209,500 warrants and 1,000,000 C warrants were exercisable.
F-14
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(NOTE M) -- INCOME TAXES
The significant components of the deferred tax expense were as follows:
Years ended
December 31,
----------------------
1995 1994
-------- --------
Allowance for doubtful accounts $ (1,000) $ (3,000)
Depreciation (6,000) (8,000)
Deferred compensation 29,000 51,000
Utilization of operating
loss carryforwards 18,000 6,000
Compensated absences (11,000) (27,000)
Amortization of intangibles 35,000 30,000
Impairment of assets (50,000) --
-------- --------
$ 14,000 $ 49,000
======== ========
The components of the net deferred tax asset as of December 31, 1995 were
as follows:
Allowance for doubtful accounts $ 82,000
Property and equipment 44,000
Compensated absences 74,000
Deferred compensation 39,000
Other 3,000
Intangibles (22,000)
--------
$220,000
========
The provision for income taxes differs from the statutory U.S. income tax
rate as follows:
Years ended
December 31,
----------------------
1995 1994
-------- --------
Federal income tax at
statutory rates $314,000 $272,000
Federal surtax exemption (9,000) (8,000)
State tax effect and
nondeductible expenses 71,000 72,000
Amortization of goodwill 29,000 25,000
Other 7,000 11,000
-------- --------
Provision for income taxes $412,000 $372,000
======== ========
F-15
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(NOTE N) -- RETIREMENT PLANS
The Company maintains a 401(k) plan for substantially all employees. Costs
charged to operations were $18,000 and $24,000 for 1995 and 1994, respectively.
(NOTE O) -- COMMITMENTS AND CONTINGENCIES
Leases -- The Company leases various facilities and equipment (including the
leases mentioned in Note P) under noncancelable operating leases.
Certain leases contain renewal options and escalation clauses which require
payment of additional rent based on increases in the cost of living and real
estate taxes. Total rental expense under all operating leases amounted to
$928,000 and $901,000 for 1995 and 1994, respectively.
The following table presents the future minimum payments required under
agreements which have initial or remaining noncancelable terms in excess of one
year:
Total Facilities Equipment
---------- ---------- ---------
1996 $ 784,000 $ 766,000 $18,000
1997 629,000 622,000 7,000
1998 565,000 560,000 5,000
1999 382,000 377,000 5,000
2000 84,000 83,000 1,000
Thereafter 116,000 116,000 --
---------- ---------- -------
$2,560,000 $2,524,000 $36,000
========== ========== =======
Litigation -- The Company has been named co-defendant in a complaint brought in
U.S. District Court by 18 complainants alleging that a health maintenance
organization, the Company and another provider violated various federal and
state antitrust laws when the HMO granted managed care contracts to the Company
and such other provider. The complaint seeks actual damages of $500,000 per
claimant, treble damages under such antitrust laws and injunctive relief. The
HMO, the Company and the other provider have each made a motion to dismiss the
complaint for failure to state a claim. On February 9, 1996, the same U.S.
District Court where this complaint was filed dismissed another complaint
against the same HMO which was based upon similar facts. Based upon review with
counsel, and the courts dismissal of the similar claim, the Company believes its
liability in such litigation to be remote.
In addition, two former owners of acquired companies have made claims in
connection with their sale and/or employment contracts. The Company is also
involved in legal proceedings in which damages and other remedies are sought. In
the opinion of management, after review with counsel, the eventual disposition
of these matters will not have a material adverse effect on the Company's
consolidated financial position.
The Company has made provision for costs of defending these claims and has
shown the amount as a separate charge in the determination of operating income.
F-16
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(NOTE P) -- RELATED PARTY TRANSACTIONS
Facilities -- The Company leases a facility from a director and stockholder. The
lease provides for minimum annual rentals of $150,000 through 1999. In addition,
the lease provides for payments of additional rent for increases in the cost of
living and real estate taxes. Certain terms of the lease are modified if
ownership by the majority stockholder falls below 51%. Rent expense amounted to
$167,000 and $184,000 in 1995 and 1994, respectively.
The Company leases a facility from its majority stockholder. The lease
provides for minimum annual rentals of $24,000 through 1999, plus increases in
the cost of living, the payment of real estate taxes and operating expenses.
Rent expense amounted to $31,000 and $28,000 for 1995 and 1994, respectively. In
connection with the lease, the Company has guaranteed a purchase money mortgage
of approximately $115,000 on the building.
Patents -- The Company's majority stockholder owns patents on several orthotic
devices, which the Company sells directly to its patients and to unrelated
prosthetic and orthotic facilities. A licensing agreement between the parties
provides for the license to be used by the Company royalty-free based on
continued employment of the stockholder.
Loans and Advances -- The loan from the Company's majority stockholder, as
described in Note J, is subordinated to the bank loan. Net interest charged to
income related to the stockholder loan was approximately $12,000 and $11,000 in
1995 and 1994, respectively.
Loan Guarantee -- Two stockholders have provided guarantees of the Company's
bank debt. Fees paid to stockholders are based on the amount of collateral
provided and debt guaranteed. The fees charged to income amounted to $17,000 in
1995 and 1994, respectively.
(NOTE Q) -- NONRECURRING ITEMS
Inventory Obsolescence -- In December 1995, the Company determined that certain
inventory was no longer usable. The cost of obsolete inventory was charged to
operations.
Acquisitions -- During 1994, the Company ceased negotiations with a group of
sellers representing two prosthetic and orthotic companies which the Company was
considering acquiring. The costs incurred in connection with this potential
acquisition, which normally are included in the purchase price of an
acquisition, were charged against income in 1994.
Registration Costs -- During 1994, the Company solicited the exercise of its
Class A and Class B redeemable warrants. There were no proceeds received from
the exercise of these warrants, which expired on December 31, 1994. The costs
incurred were charged against income.
F-17
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(NOTE R) -- SUBSEQUENT EVENT - ACQUISITION
On January 5, 1996, the Company acquired certain assets of Med-Tech O & P
Services, Inc. for a cash payment of $25,000, additional payments of
approximately $228,000 payable through July 1997 and 450,000 shares of the
Company's common stock. Of the shares issued, 250,000 shares are being held in
escrow and are contingently releasable. The acquisition is being accounted for
by the purchase method of accounting.
F-18
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
COMPUTATION OF AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Actual Average
Outstanding Outstanding
Shares Shares (a)
--------- ---------
1994 beginning balance 2,999,382 2,999,382
Shares issued 1,203,150 1,194,167
--------- ---------
Ending balance 4,202,532 4,193,549
========= =========
1995 beginning balance 4,202,532 4,202,532
Shares issued 70,406 70,406
--------- ---------
Ending balance 4,272,938 4,272,938
========= =========
- - ----------
(a) Based upon the number of days outstanding during the year.
F-19
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1996 1995
--------- ------------
(Unaudited) (Audited)
Current assets
Cash and cash equivalents $ 106,000 $ 216,000
Accounts receivable - net of allowance for
doubtful accounts of $326,000 and $204,000,
respectively 4,117,000 3,470,000
Inventory 1,150,000 1,038,000
Prepaid expenses 166,000 193,000
Recoverable income taxes -- 26,000
Deferred income taxes 259,000 192,000
----------- -----------
Total current assets 5,798,000 5,135,000
----------- -----------
Property and equipment - at cost 1,493,000 1,374,000
Less accumulated depreciation 889,000 819,000
----------- -----------
604,000 555,000
----------- -----------
Other assets
Intangibles - net of accumulated amortization
of $511,000 and $421,000, respectively 5,663,000 5,209,000
Deferred income taxes 18,000 28,000
Miscellaneous 99,000 104,000
----------- -----------
Total other assets 5,780,000 5,341,000
----------- -----------
Total $12,182,000 $11,031,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable $ 325,000 $ 247,000
Current maturities of long-term debt 1,183,000 1,065 000
Accounts payable 374,000 387,000
Accrued expenses 991,000 930,000
Deferred compensation 74,000 86,000
Income taxes payable 214,000 77,000
----------- -----------
Total current liabilities 3,161,000 2,792,000
----------- -----------
Deferred compensation -- 9,000
----------- -----------
Long-term debt 2,791,000 2,817,000
----------- -----------
Stockholders' equity
Common stock 4,000 4,000
Common stock warrants 18,000 18,000
Additional paid-in capital 3,405,000 3,082,000
Retained earnings 2,803,000 2,309,000
----------- -----------
Total stockholders' equity 6,230,000 5,413,000
----------- -----------
Total $12,182,000 $11,031,000
=========== ===========
F-20
<PAGE>
<TABLE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $4,525,000 $3,422,000 $8,455,000 $6,759,000
Cost of sales 2,203,000 1,692,000 4,215,000 3,316,000
---------- ---------- ---------- ----------
Gross profit 2,322,000 1,730,000 4,240,000 3,443,000
Selling, general and
administrative expenses 1,684,000 1,343,000 3,199,000 2,788,000
---------- ---------- ---------- ----------
Operating income 638,000 387,000 1,041,000 655,000
---------- ---------- ---------- ----------
Other income (deductions)
Interest expense (85,000) (97,000) (173,000) (196,000)
Other income 3,000 4,000 6,000 6,000
---------- ---------- ---------- ----------
(82,000) (93,000) (167,000) (190,000)
---------- ---------- ---------- ----------
Income before provision for
income taxes 556,000 294,000 874,000 465,000
---------- ---------- ---------- ----------
Provision for income taxes
Current 264,000 124,000 422,000 212,000
Deferred (23,000) 9,000 (42,000) 1,000
---------- ---------- ---------- ----------
241,000 133,000 380,000 213,000
---------- ---------- ---------- ----------
Net income $ 315,000 $ 161,000 $ 494,000 $ 252,000
========== ========== =========== ==========
Earnings per common share $ .06 $ .04 $ .10 $ .06
========== ========== ========== ==========
Shares used in earnings per
common share computation 4,931,067 4,465,089 4,931,067 4,465,089
========== ========== ========== ==========
</TABLE>
F-21
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Six months ended
June 30,
-----------------
1996 1995
---- ----
Cash flows from operating activities
Net income $ 494,000 $ 252,000
Items not requiring the current use of cash
Depreciation and amortization 165,000 170,000
Provision for doubtful accounts 140,000 87,000
Deferred compensation provision 9,000 14,000
Deferred income taxes (42,000) 1,000
Changes in items affecting operations
Accounts receivable (787,000) (148,000)
Inventory (59,000) (47,000)
Prepaid expenses 7,000 54,000
Recoverable income taxes 26,000 121,000
Miscellaneous -- 3,000
Accounts payable (13,000) 247,000
Accrued expenses 17,000 (272,000)
Deferred compensation paid (30,000) (30,000)
Income taxes payable 137,000 51,000
--------- ---------
Net cash provided by operating activities 64,000 503,000
--------- ---------
Cash flows from investing activities
Payment for acquired business (25,000) --
Purchase of property and equipment (45,000) (148,000)
Contingent purchase price of acquisitions (91,000) (40,000)
--------- ---------
Net cash used by investing activities (161,000) (188,000)
--------- ---------
Cash flows from financing activities
Proceeds from long-term debt 526,000 --
Principal payments of long-term debt (617,000) (366,000)
Proceeds from note payable 78,000 --
--------- ---------
Net cash used by financing activities (13,000) (366,000)
--------- ---------
Decrease in cash and cash equivalents (110,000) (51,000)
Cash and cash equivalents - beginning 216,000 166,000
--------- ---------
Cash and cash equivalents - end $ 106,000 $ 115,000
========= =========
F-22
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Supplemental Schedule of Noncash Financing Activities
In 1996, the Company issued 450,000 shares of common stock in connection
with the acquisition of Med-Tech O & P Services, Inc. Of the shares issued,
250,000 are held in escrow. The value of the shares is $675,000 and $375,000,
respectively.
The Company's acquisition in 1996 was paid for as follows:
Cash paid for assets $ 25,000
Common stock issued 300,000
Liabilities assumed 220,000
-------
Fair value of assets acquired $545,000
========
In 1996, the Company issued 11,403 shares of common stock as contingent
purchase price of acquisitions. The value of the shares was $23,000.
In 1995, the Company issued 10,050 shares of common stock as contingent
purchase price of acquisitions and 4,934 shares of common stock to employees as
compensation. The value of the shares was $25,000.
Supplemental Disclosure of Cash Flow Information
Net cash provided by operating activities reflects cash payments for
interest and income taxes as follows:
Six months ended
June 30,
---------------------------
1996 1995
---- ----
Interest paid $185,000 $210,000
Income taxes paid 259,000 40,000
F-23
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARIZED FINANCIAL INFORMATION
JUNE 30, 1996
(NOTE 1) - The accompanying consolidated financial statements are prepared on
the basis of generally accepted accounting principles. In the opinion of the
management of Advanced Orthopedic Technologies, Inc., all adjustments are of a
normal recurring nature and have been reflected for a fair presentation of the
unaudited balance sheet as of June 30, 1996 and results of operations for the
periods ended June 30, 1996 and 1995, respectively. The operating results for
the periods are not necessarily indicative of the results to be expected for the
entire year.
(NOTE 2) - Effective January 5, 1996, the Company acquired certain assets of
Med-Tech O & P Services, Inc. for a cash payment of $25,000, additional payments
of approximately $220,000 payable through July 1997, 450,000 shares of the
Company's common stock (valued at $675,000) and additional amounts which may be
contingently payable. Of the shares issued, 250,000 shares (valued at $375,000)
are held in escrow. The acquisition has been accounted for by the purchase
method of accounting. The operating results of the acquisition are included in
the Company's consolidated results of operations from the effective date of
acquisition. The following unaudited proforma results of operations for the six
months ended June 30, 1995 and the three months ended June 30, 1995 assumes the
acquisition occurred on January 1, 1995 and gives effect to certain adjustments,
including amortization of goodwill, increased interest expense on acquisition
indebtedness, officer salaries as a result of new employment agreements and
common shares issued.
Three months Six months
ended ended
June 30, 1995 June 30, 1995
------------- -------------
Sales $ 4,065,000 $8,009,000
=========== ==========
Net income $ 221,000 $ 358,000
=========== ==========
Earnings per common share $ .05 $ .07
=========== ==========
Shares used in earnings
per common share computation 4,915,089 4,915,089
=========== ==========
The proforma financial information presented above does not purport to
represent what the Company's results of operations would have been had this
acquisition occurred on January 1, 1995 or to project the Company's results of
operations for any future period.
F-24
<PAGE>
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARIZED FINANCIAL INFORMATION
JUNE 30, 1996
(NOTE 3)-- Inventory at June 30, 1996 is based on historical gross profit
percentages. An analysis of inventory is as follows:
June 30, December 31,
1996 1995
---------- ------------
(Unaudited) (Audited)
Finished goods $ 646,000 $ 572,000
Work-in-process 164,000 138,000
Raw materials 340,000 328,000
---------- ----------
$1,150,000 $1,038,000
========== ==========
(NOTE 4) -- CAPITAL STOCK
Capital stock is summarized as follows:
Preferred stock, nonvoting, $.001 par value, 14,965,000 shares
authorized, none outstanding
Common stock, voting, $.001 par value, 75,000,000 shares authorized,
outstanding 4,484,341 shares in 1996 and 4,272,938 shares in 1995
Class C redeemable selling warrantholder warrants, $.001 par value,
outstanding 1,000,000 warrants
Common stock purchase warrants, $.001 par value, outstanding 66,666
warrants
F-25
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT dated as of the 30th day of September, 1996 by and among
Advanced Orthopedic Technologies, Inc., a Nevada corporation (the "Company"),
NovaCare Orthotics & Prosthetics, Inc., a Delaware corporation ("O&P"), and AOT
Acquisition Corp., a Nevada corporation and a wholly owned subsidiary of O&P
("Merger Subsidiary").
WHEREAS, the Company is engaged in the business of providing prosthetic and
orthotic services to the general public and the retail distribution and custom
fabrication of prosthetic and orthotic devices, primarily in the States of New
York, New Jersey, Virginia, West Virginia, New Mexico and California (such
activities being hereinafter referred to as the "Business"); and
WHEREAS, the Boards of Directors of O&P, Merger Subsidiary and the Company
have approved this Agreement and the Merger (as defined below).
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
SECTION I
THE MERGER
A. The Merger.
(i) At the Effective Time (as defined in subsection (ii) below),
Merger Subsidiary shall be merged (the "Merger") with and into the Company
in accordance with the General Corporation Law of the State of Nevada
("Nevada Law"), whereupon the separate existence of Merger Subsidiary shall
cease, and the Company shall be the surviving corporation (the "Surviving
Corporation").
(ii) As soon as practicable after satisfaction or, to the extent
permitted hereunder, waiver of all conditions to the Merger, the Company
and Merger Subsidiary will file a certificate of merger with the Secretary
of State of the State of Nevada and make all other filings or recordings
required by Nevada Law in connection with the Merger. The closing of the
Merger will take place at the offices of Haythe & Curley, 237 Park Avenue,
New York, New York 10017, or such other place as the parties may agree. The
Merger shall become effective at such time as the certificate of merger is
duly filed with the Secretary of State of the State of Nevada or at such
later time as is specified in the certificate of merger (the "Effective
Time").
A-1
<PAGE>
(iii) From and after the Effective Time, the Surviving Corporation
shall possess all the assets, rights, privileges, powers and franchises and
be subject to all of the liabilities, restrictions, disabilities and duties
of the Company and Merger Subsidiary, all as provided under Nevada Law.
B. Conversion of Shares. At the Effective Time:
(i) each outstanding share of common stock, $.001 par value per share
(the "Shares"), of the Company held by the Company as treasury stock or
owned by O&P or any subsidiary of O&P immediately prior to the Effective
Time shall be cancelled, and no payment shall be made with respect thereto;
(ii) each share of common stock of Merger Subsidiary outstanding
immediately prior to the Effective Time shall be converted into and become
one share of common stock of the Surviving Corporation with the same
rights, powers and privileges as the shares so converted and shall
constitute the only outstanding shares of capital stock of the Surviving
Corporation; and
(iii) each Share outstanding immediately prior to the Effective Time
shall, except as otherwise provided in Section I(B)(i) or as provided in
Section I(E) with respect to shares as to which dissenter's rights have
been exercised, be converted into the right to receive an amount in cash
without interest thereon equal to (1) $14,080,000 less the sum of (x) the
Merger Expenses (as hereinafter defined) and (y) the amounts payable with
respect to the Company Warrants and the Company Options (each as
hereinafter defined) pursuant to Section I(D) hereof divided by (2) the
number of Shares outstanding immediately prior to the Effective Time (the
"Cash Consideration").
C. Surrender and Payment.
(i) Prior to the Effective Time, O&P shall appoint an agent reasonably
acceptable to the Company (the "Exchange Agent"), which shall enter into an
agreement with O&P and the Company reasonably acceptable to O&P and the
Company, for the purpose of exchanging certificates representing Shares for
the Cash Consideration.
(ii) Simultaneously with the execution hereof, O&P shall deposit with
Haythe & Curley, as escrow agent (the "Escrow Agreement"), cash in an
amount equal to $14,080,000 (the "Merger Consideration Fund") for (A) the
benefit of the holders of the Shares, the Company Warrants and the Company
Options for exchange in accordance with this Section I(C), through the
Exchange Agent, and (B) the payment of the Merger Expenses (as hereinafter
defined). For purposes hereof, "Merger Expenses" shall include (A) expenses
incurred by the Company in connection with the Merger plus (b) the amount,
if any, by which the aggregate amount owing under (1) the Company's loan
with State Bank of Long Island ("Bank Debt"), (2) notes of the Company
issued in connection with acquisitions by the Company and (3) any net
indebtedness of the Company owing to AHM (as hereinafter defined) for
borrowed funds, exceeds $4,000,000.
A-2
<PAGE>
(iii) At the Effective Time, the Escrow Agent shall, pursuant to
irrevocable instructions, (A) deliver a portion of the Merger Consideration
Fund to the Exchange Agent in an amount equal to (1) the Cash Consideration
times the number of Shares to be exchanged pursuant to Section I(B) plus
(2) the amount to be paid to the holders of Company Warrants and Company
Options in accordance with Section I(D) and (B) pay the Merger Expenses, as
certified in a list delivered by the Company to the Escrow Agent, out of
the Merger Consideration Fund. The Merger Consideration Fund shall not be
used for any other purposes.
(iv) Within ten (10) business days after the Effective Time, O&P will
send, or will cause the Exchange Agent to send, to each holder of Shares at
the Effective Time a letter of transmittal for use in such exchange (which
shall specify that the delivery shall be effected, and risk of loss and
title shall pass, only upon proper delivery of the certificates
representing Shares to the Exchange Agent).
(v) Each holder of Shares that have been converted into a right to
receive cash, upon surrender to the Exchange Agent of a certificate or
certificates representing such Shares, together with a properly completed
letter of transmittal covering such Shares, will be entitled to receive in
exchange therefor cash which such holder has the right to receive pursuant
to Section I(B) (which cash shall be paid by check sent to such holder
within ten (10) business days after such surrender), and the certificate or
certificates for Shares so surrendered shall be cancelled. Until so
surrendered, each such certificate shall, after the Effective Time,
represent for all purposes, only the right to receive upon such surrender
the Cash Consideration as contemplated by this Section I(C).
(vi) After the Effective Time, there shall be no further registration
of transfers of Shares. If, after the Effective Time, certificates
representing Shares are presented to the Surviving Corporation, they shall
be cancelled and exchanged as provided for, and in accordance with the
procedures set forth, in this Section I.
(vii) The Merger Consideration Fund shall be invested by (A) the
Escrow Agent prior to the Effective Time and (B) the Exchange Agent after
the Effective Time, in each case, as directed by O&P in consultation with
the Surviving Corporation (so long as such directions do not impair the
rights of the holders of Shares) in direct obligations of the United States
of America, obligations for which the full faith and credit of the United
States of America is pledged to provide for the payment of principal and
interest, commercial paper rated of the highest quality by Moody's
Investors Service Inc. or Standard & Poor's Corporation or certificates of
deposit issued by a commercial bank having combined capital, surplus and
undivided profits aggregating at least $500,000,000 (provided that no such
investment made prior to the thirtieth day after the Effective Time shall
mature more than seven days after such investment is made), and any net
earnings with respect thereto shall be paid to the Surviving Corporation as
and when requested by the Surviving Corporation.
(viii) Any portion of the Merger Consideration Fund made available to
the Exchange Agent pursuant to Section I(C)(iii) that remains unclaimed by
the holders of Shares, Company Warrants or Company Options six months after
the Effective Time shall be returned to O&P, upon demand, and any such
holder who has not exchanged his Shares, Company
A-3
<PAGE>
Warrants or Company Options in accordance with this Section I(C) prior to
that time shall thereafter look only to O&P to exchange such Shares,
Company Warrants or Company Options. Notwithstanding the foregoing, O&P
shall not be liable to any holder of Shares, Company Warrants or Company
Options for any amount paid to a public official pursuant to applicable
abandoned property laws. Any amounts remaining unclaimed by holders of
Shares, Company Warrants or Company Options two years after the Effective
Time (or such earlier date immediately prior to such time as such amounts
would otherwise escheat to or become property of any governmental entity)
shall, to the extent permitted by applicable law, become the property of
O&P free and clear of any claims or interest of any Person (as hereinafter
defined) previously entitled thereto. For purposes of this Agreement,
"Person" means an individual, a corporation, a partnership, an association,
a trust or any other entity or organization, including a government or
political subdivision or any agency or instrumentality thereof.
(ix) The Surviving Corporation shall be entitled to deduct and
withhold from the amounts payable pursuant to this Agreement to any holder
of Shares, Company Warrants or Company Options such amounts as the
Surviving Corporation is required to deduct and withhold with respect to
the making of such payment under the Internal Revenue Code of 1986, as
amended (the "Code"), or any provisions of state, local or foreign tax law.
To the extent that amounts are so withheld, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid to the
holder of such Shares, Company Warrants or Company Options in respect of
which such deduction and withholding was made by the Surviving Corporation.
(x) Any portion of the Merger Consideration Fund made available to the
Exchange Agent pursuant to Section I(C)(iii) to be paid with respect to
Shares for which dissenter's rights have been perfected shall be returned
to O&P, upon demand.
D. Stock Options and Warrants.
(i) At the Effective Time, each outstanding warrant to purchase Shares
(a "Company Warrant"), which by its terms so provides, shall be cancelled
and each Person holding such Company Warrant shall receive in consideration
thereof cash in an amount (the "Warrant Consideration") equal to (x) the
difference between the Cash Consideration and the exercise price per share
of such Company Warrant multiplied by (y) the number of Shares covered by
such Company Warrant; and
(ii) At the Effective Time, each outstanding option to purchase Shares
(a "Company Option"), whether or not exercisable, and whether or not
vested, shall be cancelled and each Person holding a Company Option shall
receive in consideration thereof cash in an amount equal to (x) the
difference between the Cash Consideration and the option price per share of
such Company Option multiplied by (y) the number of Shares covered by such
Company Option.
E. Dissenting Shares. Notwithstanding Section I(B), Shares outstanding
immediately prior to the Effective Time and held by a holder who has not voted
in favor of the Merger or consented thereto in writing and who has demanded
appraisal for such Shares in
A-4
<PAGE>
accordance with Nevada Law shall not be converted into a right to receive the
Cash Consideration, unless such holder fails to perfect or withdraws or
otherwise loses his right to appraisal. If after the Effective Time such holder
fails to perfect or withdraws or loses his right to appraisal, such Shares shall
be treated as if they had been converted as of the Effective Time into a right
to receive the Cash Consideration. The Company shall give O&P prompt notice of
any demands received by the Company for appraisal of Shares, and O&P shall have
the right to participate in all negotiations and proceedings with respect to
such demands. The Company shall not, except with the prior written consent of
O&P, make any payment with respect to, or settle or offer to settle, any such
demands. O&P shall be responsible for any and all payments required to be made
with respect to Shares for which the holder thereof has perfected his
dissenter's rights, as well as the costs and expenses of all proceedings
relating to the adjudication and/or settlement thereof.
SECTION II
THE SURVIVING CORPORATION
A. Certificate of Incorporation. The articles of incorporation of Merger
Subsidiary in effect at the Effective Time shall be the certificate of
incorporation of the Surviving Corporation until amended in accordance with
applicable law.
B. By-laws. The by-laws of Merger Subsidiary in effect at the Effective
Time shall be the by-laws of the Surviving Corporation until amended in
accordance with applicable law.
C. Directors and Officers. From and after the Effective Time, until
successors are duly elected or appointed and qualified in accordance with
applicable law, (i) the directors of Merger Subsidiary at the Effective Time
shall be the directors of the Surviving Corporation, and (ii) the officers of
the Company at the Effective Time shall be the officers of the Surviving
Corporation.
SECTION III
REPRESENTATIONS, WARRANTIES, COVENANTS
AND AGREEMENTS OF THE COMPANY
The Company hereby represents and warrants to, and covenants and agrees
with, O&P, as of the date hereof and as of the Effective Time, that, except as
disclosed on the Company Disclosure Schedule delivered by the Company to O&P
simultaneously with the execution and delivery hereof (the "Company Disclosure
Schedule") and subject to the approval of the Merger by the stockholders of the
Company prior to the Effective Time:
A. Organization and Qualification. The Company is duly organized, validly
existing and in good standing under the laws of the State of Nevada and has full
corporate
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power and authority to own its properties and to conduct the businesses in which
it is now engaged. The Company is in good standing in each other jurisdiction
wherein the failure so to qualify would have a material adverse effect on the
financial condition, business, assets or results of operations of the Company
and the Subsidiaries (as hereinafter defined), taken as a whole (a "Company
Material Adverse Effect"). Except for the Subsidiaries, the Company has no
subsidiaries, owns no capital stock or other proprietary interest, directly or
indirectly, in any other corporation, association, trust, partnership, joint
venture or other entity and has no agreement with any person, firm or
corporation to acquire any such capital stock or other proprietary interest. The
Company has full power, authority and legal right, and all necessary approvals,
permits, licenses and authorizations to own its properties and to conduct the
Business and to enter into and consummate the transactions contemplated under
this Agreement. The copies of the articles of incorporation and by-laws of the
Company and each of the Subsidiaries which have been delivered to O&P are
complete and correct.
B. Authority. The execution and delivery of this Agreement by the Company,
the performance by the Company of its covenants and agreements hereunder and the
consummation by the Company of the transactions contemplated hereby have been
duly authorized by all necessary corporate action. This Agreement constitutes a
valid and legally binding obligation of the Company, enforceable against the
Company in accordance with its terms.
C. No Legal Bar; Conflicts. Neither the execution and delivery of this
Agreement, nor the consummation of the transactions contemplated hereby,
violates any provision of the articles of incorporation or by-laws of the
Company or, assuming (i) the filing of a certificate of merger in accordance
with Nevada Law and (ii) compliance with applicable requirements of the
Securities Exchange Act of 1934 and the rules and regulations promulgated
thereunder (the "Exchange Act"), any statute, ordinance, regulation, order,
judgment or decree of any court or governmental agency or board, or conflicts
with or will result in any breach of any of the terms of or constitute a default
under or result in the termination of or the creation of any lien pursuant to
the terms of any contract or agreement to which the Company is a party or by
which the Company or any of the assets of the Company is bound, except for any
conflict, breach, default, termination or lien which would not have a Company
Material Adverse Effect. Other than (i) the filing of a certificate of merger in
accordance with Nevada Law, (ii) compliance with applicable requirements of the
Exchange Act and (iii) approval of the Merger by the Company's stockholders, no
consents, approvals or authorizations of, or filings with, any governmental
authority or any other person or entity are required in connection with the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby, except for required consents, if any, to
assignment of permits, certificates, contracts, leases and other agreements as
set forth in the Company Disclosure Schedule.
D. Capitalization. The authorized capital stock of the Company consists of
(i) 75,000,000 Shares and (ii) 14,955,000 shares of preferred stock, $.001 par
value per share. As of September 30, 1996, there were outstanding (w) 4,774,233
Shares, (w) Company Options to purchase an aggregate of 219,534 Shares, (x)
Company Warrants to purchase an aggregate of 665,334 Shares and (y) obligations
(a "Company Share Obligation") to issue,
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subject to certain conditions, up to 224,804 Shares (assuming for purposes of
this representation, a Company stock price of approximately $3.00 and
achievement of 100% of earnings targets) in connection with certain acquisitions
made by the Company. All outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid and nonassessable and
free of preemptive rights. Except as set forth in this Section III(D) and except
for changes since September 30, 1996 resulting from the exercise of Company
Options, Company Warrants or other obligations to issue Shares referred to above
outstanding on such date, there are outstanding (1) no shares of capital stock
or other voting securities of the Company, (2) no securities of the Company
convertible into or exchangeable for shares of capital stock or voting
securities of the Company, and (3) no options, warrants or other rights to
acquire from the Company, and no obligation of the Company to issue, any capital
stock, voting securities or securities convertible into or exchangeable for
capital stock or voting securities of the Company (the items in clauses (1), (2)
and (3) being referred to collectively as the "Company Securities"). There are
no outstanding obligations of the Company or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any Company Securities.
E. Subsidiaries.
(i) Each Subsidiary of the Company is a corporation duly incorporated,
validly existing and, at the Effective Time, each Subsidiary will be in
good standing under the laws of its jurisdiction of incorporation. Each
Subsidiary has all corporate power and all material governmental licenses,
permits, authorizations, consents and approvals required to carry on its
business as now conducted and is duly qualified to do business as a foreign
corporation and, at the Effective Time, each subsidiary will be in good
standing in each jurisdiction where the character of the property owned or
leased by it or the nature of its activities makes such qualification
necessary, except where failure to be so qualified would not have or
reasonably be expected to have, individually or in the aggregate, a Company
Material Adverse Effect. For purposes of this Agreement, "Subsidiary" of
the Company means any corporation or other entity of which all of the
outstanding securities or other ownership interests are owned directly or
indirectly by the Company. Unless otherwise noted or as the context shall
otherwise require, references herein to the Company shall include the
Company and each of the Subsidiaries.
(ii) All of the outstanding capital stock of each Subsidiary of the
Company is owned by the Company, directly or indirectly, free and clear of
any lien, encumbrance, security interest or claim whatsoever. The Company
Disclosure Schedule sets forth, for each Subsidiary, the outstanding
capital stock, jurisdiction of incorporation and all jurisdictions in which
it is qualified to do business as a foreign corporation. There are no
outstanding (a) securities of the Company or any of its Subsidiaries
convertible into or exchangeable for shares of capital stock or other
voting securities or ownership interests in any Subsidiary of the Company,
or (b) options or other rights to acquire from the Company or any of its
Subsidiaries, and no other obligation of the Company or any of its
Subsidiaries to issue, any capital stock, voting securities or other
ownership interests in, or any securities convertible into or exchangeable
for any capital stock, voting securities or ownership interests in, any
Subsidiary of the Company (the items in clauses (a) and (b) being referred
to collectively as
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the "Company Subsidiary Securities"). There are no outstanding obligations
of the Company or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any outstanding Company Subsidiary Securities.
F. SEC Filings.
(i) The Company has delivered to O&P (a) the Company's annual report
on Form 10-KSB for the fiscal year ended December 31, 1995 (the "Company
10-KSB"), (b) its quarterly reports on Form 10-QSB for its fiscal quarters
ended March 31, 1996 and June 30, 1996, (c) its current report on Form 8-K
dated January 6, 1996, (d) its proxy or information statements relating to
meetings of, or actions taken without a meeting by, the stockholders of the
Company held since December 31, 1995, and (e) all of its other reports,
statements, schedules and registration statements filed with the Securities
and Exchange Commission (the "SEC") since December 31, 1995, and all
materials incorporated therein by reference (the filings referred to in
clauses (a) through (e) above and delivered to O&P prior to the date hereof
being hereinafter referred to as the "Company SEC Filings").
(ii) As of its filing date, each such report or statement filed
pursuant to the Exchange Act complied as to form in all material respects
with the requirements of the Exchange Act and did not contain any untrue
statement of a material fact or omit to state any material fact necessary
in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.
(iii) Each such registration statement and any amendment thereto filed
pursuant to the Securities Act of 1933 and the rules and regulations
promulgated thereunder (the "Securities Act"), as of the date such
statement or amendment became effective, complied as to form in all
material respects with the Securities Act and did not contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading.
G. Financial Statements. The audited consolidated financial statements and
unaudited consolidated interim financial statements of the Company and its
consolidated Subsidiaries included in the Company 10-KSB and the quarterly
reports on Form 10-QSB referred to in Section III(F) (collectively, the
"Financial Statements") fairly present, in conformity with generally accepted
accounting principles applied on a consistent basis (except as may be indicated
in the notes thereto), the consolidated financial position of the Company and
its consolidated Subsidiaries as of the dates thereof and their consolidated
results of operations and cash flows for the periods then ended (subject, in the
case of any unaudited interim financial statements, to normal year-end
adjustments, none of which, individually or in the aggregate, would have a
Company Material Adverse Effect).
H. Absence of Certain Changes. Except as contemplated hereby or as
described in any Company SEC Filing, subsequent to June 30, 1996, there has not
been any (i) material adverse or prospective material adverse change in the
condition of the Company, financial or otherwise, or in the results of the
operations of the Company; (ii) material damage or destruction (whether or not
insured) affecting the properties or business operations
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of the Company; (iii) labor dispute or threatened labor dispute involving the
employees of the Company or notice that any groups of employees or executive
employees of the Company intend to take leaves of absence, with or without pay;
(iv) actual or, to the best knowledge of the Company, threatened disputes
pertaining to the Business with any major accounts or referral sources of the
Company, or actual or, to the best knowledge of the Company, threatened loss of
all or substantially all the business from any of the major accounts or referral
sources of the Company; (v) changes in the methods or procedures for billing or
collection of customer accounts or recording of customer accounts receivable or
reserves for doubtful accounts with respect to the Company; or (vi) other event
or condition of any character, known to the Company or which in the exercise of
reasonable diligence should be known to the Company, not disclosed in this
Agreement pertaining to and materially adversely affecting the Company, the
Business or the assets of the Company. Notwithstanding the representation in
subparagraph (iv) above, in the ordinary course of the Company's business, there
are customer complaints, adjustments, returns, refunds, replacements,
maintenance and notifications thereof regarding customers, patients, accounts
and referral sources, which do not, individually or in the aggregate, have a
Company Material Adverse Effect; the existence of such claims does not
constitute a breach of the representations contained in this Section III(H). No
representation or warranty is made in this Agreement as to the effect or change
on the Company, its Business or assets of general economic trends, or conditions
or trends in the prosthetic and orthotic industry, or the health care industry
in general, or as to the impact on the Company or such industries of federal and
state legislative, budgetary and regulatory changes proposed or enacted which
affect the methods of delivery of health care services, health care insurance,
pricing and reimbursement of health care services, or as to the overall
restructuring of the health care system and the Medicare and Medicaid programs.
I. Liabilities Incurred. Subsequent to June 30, 1996, the Company has not
(i) incurred any bank indebtedness, entered into any leases, loan agreements, or
contracts, obligations or arrangements of any kind, including, without
limitation, for the payment of money or property to any person except for (x)
contracts, obligations or arrangements entered into in the ordinary course of
business consistent with past practices which are not material to the operation
of the Business or (y) contracts and agreements specifically contemplated or
required by the terms and conditions of this Agreement, or (ii) permitted any
liens or encumbrances to attach to any of the assets of the Company.
J. Real Property Owned or Leased. A list and description of all real
property owned by or leased to or by the Company or in which the Company has any
interest is set forth in the Company Disclosure Schedule. All such leased real
property is held subject to written leases or other agreements which are valid
and effective in accordance with their respective terms, and, to the best
knowledge of the Company, there are no existing defaults or events of default,
or events which with notice or lapse of time or both would constitute defaults,
thereunder on the part of the Company, except for such defaults, if any, as are
not material in character, amount or extent and do not, severally or in the
aggregate, materially detract from the value or interfere with the present use
of the property subject to such lease or affect the validity or enforceability
of such lease or otherwise materially impair the Company or the operations of
the Business. The Company has no knowledge of any material
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default or claimed or purported or alleged material default or state of facts
which with notice or lapse of time or both would constitute a material default
on the part of any other party in the performance of any obligation to be
performed or paid by such other party under any lease referred to in the Company
Disclosure Schedule. The Company has not received any written or oral notice to
the effect that any lease will not be renewed at the termination of the term
thereof or that any such lease will be renewed only at a substantially higher
rent; provided, however, that no representation, warranty or assurance is made
that any lease will actually be renewed by the landlord thereof.
K. Title to Assets; Condition of Property. The Company has good and valid
title to the assets of the Company, including, without limitation, the
properties and assets reflected in the Financial Statements (except for assets
leased under leases set forth in the Company Disclosure Schedule, inventory and
other assets sold or retired and accounts receivable collected upon, since June
30, 1996 in the ordinary course of business consistent with past practices). The
Company leases or owns all properties and assets used in the operations of the
Business as currently conducted other than inventory and supplies which need to
be purchased and replenished in the ordinary course of business. All such
properties and assets are in all material respects in good condition and repair,
ordinary wear and tear excepted, consistent with their respective ages, and have
been maintained and serviced in accordance with the normal practices of the
Company and as necessary in the normal course of business. At the Effective
Time, none of the assets of the Company will be subject to any liens, charges,
encumbrances or security interests except for liens and encumbrances and
security interests not related to indebtedness, which individually and in the
aggregate, do not materially adversely affect the conduct or operation of the
Company's Business; liens for taxes not yet due and payable or which are being
contested in good faith; and liens of mechanics, materialmen, warehouseman,
carriers, landlords and other like liens securing obligations incurred in the
ordinary course of business that are not yet due and payable or which are being
contested in good faith. None of the assets of the Company (or uses to which
they are put) fails to conform with any applicable agreement, law, ordinance or
regulation in a manner which is likely to be material to the operations of the
Business. The Company owns all the properties and assets which have been located
at or on any of the leased premises of the Company at any time since June 30,
1996.
L. Taxes. The Company and each Subsidiary has filed or caused to be filed
on a timely basis all federal, state, local, foreign and other tax returns,
reports and declarations (collectively, "Tax Returns") required to be filed by
it. All Tax Returns filed by or on behalf of the Company and each Subsidiary are
true, complete and correct in all material respects. The Company and each
Subsidiary has paid all income, estimated, excise, franchise, gross receipts,
capital stock, profits, stamp, occupation, sales, use, transfer, value added,
property (whether real, personal or mixed), employment, unemployment,
disability, withholding, social security, workers' compensation and other taxes,
and interest, penalties, fines, costs and assessments (collectively, "Taxes"),
due and payable with respect to the periods covered by such Tax Returns (whether
or not reflected thereon). There are no Tax liens on any of the properties or
assets, real, personal or mixed, tangible or intangible, of the Company or any
of the Subsidiaries except for liens for Taxes not yet due and payable or being
contested in good faith. The accrual for Taxes reflected in the Financial
Statements
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accurately reflects the total amount of all unpaid Taxes, whether or not
disputed and whether or not presently due and payable, of the Company and each
Subsidiary as of the close of the period covered by the Financial Statements,
and the amount of the Company's and each Subsidiary's unpaid Taxes on June 30,
1996 does not exceed the accrual for Taxes reflected in the Financial Statements
for the period ended June 30, 1996, subject to year end adjustments. Since June
30, 1996, neither the Company nor any of the Subsidiaries has incurred any Tax
liability other than in the ordinary course of business. No deficiency in Taxes
for any period has been asserted by any taxing authority which remains unpaid at
the date hereof (the results of any settlement being set forth in the Company
Disclosure Schedule), no written inquiries or notices have been received by the
Company or any of the Subsidiaries from any taxing authority with respect to
possible claims for Taxes, and neither the Company nor any of the Subsidiaries
has any reason to believe that such an inquiry or notice is pending or
threatened, and, to the best knowledge of the Company and each of the
Subsidiaries, there is no basis for any additional claims or assessments for
Taxes. Neither the Company nor any of the Subsidiaries has agreed to the
extension of the statute of limitations with respect to any Tax Return or Tax
period. The Company and each Subsidiary has delivered to O&P copies of the
federal and state income Tax Returns filed by the Company and each Subsidiary
for the past three years and for all other past periods as to which the
appropriate statute of limitations has not lapsed.
M. Permits; Compliance with Applicable Law.
(i) General. The Company is not in default under any, and has complied
with all, mandatory statutes, ordinances, regulations and laws (including,
but not limited to, all federal and state fraud and abuse, "anti-kickback"
and "self-referral" laws), orders, judgments and decrees of any court or
governmental entity or agency, relating to the Business or any of the
assets of the Company as to which a default or failure to comply might
result in a Company Material Adverse Effect. The Company has no knowledge
of any basis for assertion of any violation of the foregoing or for any
claim for compensation or damages or otherwise arising out of any violation
of the foregoing. The Company has not received any notification of any
asserted present or past failure to comply with any of the foregoing which
has not been satisfactorily responded to in the time period required
thereunder.
(ii) Permits; Intellectual Property. Set forth in the Company
Disclosure Schedule is a complete and accurate list of all permits,
licenses, approvals, franchises, patents, registered and common law
trademarks, service marks, tradenames, copyrights (and applications for
each of the foregoing), notices and authorizations issued by governmental
entities or other regulatory authorities, federal, state or local
(collectively the "Permits"), held by the Company in connection with the
Business. To the best knowledge of the Company, the Permits set forth in
the Company Disclosure Schedule are all the Permits required for the
conduct of the Business. All the Permits set forth in the Company
Disclosure Schedule are in full force and effect, and the Company has not
engaged in any activity which would cause or permit revocation or
suspension of any such Permit, and no action or proceeding looking to or
contemplating the revocation or suspension of any such Permit is pending
or, to the best knowledge of the Company, threatened. To the best
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knowledge of the Company, there are no existing material defaults or events
of default or event or state of facts which with notice or lapse of time or
both would constitute a material default by the Company under any such
Permit. The Company has no knowledge of any material default or claimed or
purported or alleged material default or state of facts which with notice
or lapse of time or both would constitute a material default on the part of
any other party in the performance of any obligation to be performed or
paid by any other party under any Permits set forth in the Company
Disclosure Schedule. To the best knowledge of the Company, the use by the
Company of any proprietary rights relating to any Permit does not involve
any claimed infringement of such Permit or rights.
(iii) Environmental. (a) To the best knowledge of the Company, the
Company has duly complied with, in all material respects, the provisions of
all federal, state and local environmental, health and safety laws, codes
and ordinances and all rules and regulations promulgated thereunder.
(b) The Company has not received any notice of violations of any
federal, state or local environmental, health or safety laws, codes or
ordinances, and any rules or regulations promulgated thereunder, which
violations, individually or in the aggregate, could result in a
Company Material Adverse Effect.
(iv) Medicare, Medicaid and CHAMPUS. The Company has complied in all
material respects with all laws, rules and regulations of the Medicare,
Medicaid, CHAMPUS and other governmental healthcare programs, except for
any such failure to comply which would not have or reasonably be expected
to have, individually or in the aggregate, a Company Material Adverse
Effect. All claims, returns, invoices, cost reports and other forms made by
the Company to Medicare, Medicaid, CHAMPUS or any other governmental health
or welfare related entity or any other third party payor since January 1,
1992 are in all material respects true, complete, correct and accurate. To
the best knowledge of the Company, no deficiency in any such claims,
returns, cost reports and other filings, including claims for over-payments
or deficiencies for late filings, has been asserted or threatened by any
federal or state agency or instrumentality or other provider or
reimbursement entities relating to Medicare, Medicaid or CHAMPUS claims or
any other third party payor. The Company has not been subject to any audit
relating to fraudulent Medicare, Medicaid or CHAMPUS procedures or
practices. To the best knowledge of the Company, there is no basis for any
claim or request for recoupment or reimbursement from the Company by, or
for reimbursement by the Company of, any federal or state agency or
instrumentality or other provider reimbursement entities relating to
Medicare, Medicaid or CHAMPUS claims.
N. Inventories; Accounts Payable.
(i) The inventories of the Company are in all material respects
merchantable and fully usable in the ordinary course of business.
(ii) The accounts and notes payable and other accrued expenses
reflected in the Financial Statements, and the accounts and notes payable
and accrued expenses incurred
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by the Company subsequent to June 30, 1996, are in all respects valid
claims that arose in the ordinary course of business. Since June 30, 1996,
the accounts and notes payable and other accrued expenses of the Company
have been paid in a manner consistent with past practice.
O. Contractual and Other Obligations. Set forth in the Company Disclosure
Schedule is a list of all (i) material contracts, agreements, licenses, leases,
arrangements (written or oral) and other documents to which the Company is a
party or by which the Company or any of the assets of the Company is bound
(including, in the case of loan agreements, a description of the amounts of any
outstanding borrowings thereunder and the collateral, if any, for such
borrowings) other than contracts or agreements under which the consideration to
be paid by or received by the Company is less than $25,000; (ii) obligations and
liabilities of the Company pursuant to uncompleted orders for the purchase of
materials, supplies, equipment and services for the requirements of the Business
with respect to which the remaining obligation of the Company is in excess of
$25,000; and (iii) material contingent obligations and liabilities of the
Company; all of the foregoing being hereinafter referred to as the "Contracts".
Neither the Company nor, to the best knowledge of the Company, any other party
is in material default in the performance of any covenant or condition under any
Contract and no claim of such a default has been made and, to the best knowledge
of the Company, no event has occurred which with the giving of notice or the
lapse of time would constitute a material default under any covenant or
condition under any Contract. The Company is not a party to any Contract which
would terminate or be violated by the consummation of the transactions
contemplated by this Agreement. Originals or true, correct and complete copies
of all written Contracts have been provided to O&P.
P. Compensation. Set forth in the Company Disclosure Schedule is a list of
all agreements between the Company and each person employed by or independently
contracting with the Company with regard to compensation, whether individually
or collectively, and set forth in the Company Disclosure Schedule is a list of
all employees or independent contractors of the Company entitled to receive
annual compensation in excess of $20,000 and their respective salaries. The
transactions contemplated by this Agreement will not result in any liability for
severance pay to any employee or independent contractor of the Company. Except
for the Company Options, the Company Warrants and the Contingent Payees (as
hereinafter defined), the Company has not informed any employee or independent
contractor providing services to the Company that such person will receive any
increase in compensation or benefits or any ownership interest in the Company or
the Business.
Q. Employee Benefit Plans. Except as set forth in the Company Disclosure
Schedule, the Company does not maintain or sponsor, or contribute to, any
pension, profit-sharing, savings, bonus, incentive or deferred compensation,
severance pay, medical, life insurance, welfare or other employee benefit plan.
All pension, profit-sharing, savings, bonus, incentive or deferred compensation,
severance pay, medical, life insurance, welfare or other employee benefit plans
within the meaning of Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended (hereinafter referred to as "ERISA"), in which the
employees participate are hereinafter referred to as the "Benefit Plans". All
Benefit Plans comply in all material respects with all requirements of the
Department of Labor and the
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Internal Revenue Service, and with all other applicable law, and the Company has
not taken or failed to take any action with respect to the Benefit Plans which
might create any liability on the part of the Company or O&P except for claims
in the ordinary course for benefits with respect to the Benefit Plans and any
requirements of the Company to contribute to a Benefit Plan as set forth in the
terms and conditions of such Benefit Plan. In addition:
(i) Each Benefit Plan, including the Advanced Orthopedic Technologies,
Inc. 401(k) Plan (the "Plan"), intended to qualify under Section 401(a) of
the Code has received a favorable determination letter from the Internal
Revenue Service as to its qualification;
(ii) The Company does not maintain, sponsor or contribute to, and has
never maintained, sponsored or contributed to, a "defined benefit plan"
(within the meaning of Section 3(35) of ERISA) or a "multiemployer plan"
(within the meaning of Section 3(37) of ERISA);
(iii) There are no contributions which are or hereafter will be
required to have been made to trusts in connection with any Benefit Plan
that would constitute a "defined contribution plan" (within the meaning of
Section 3(34) of ERISA);
(iv) Other than claims in the ordinary course for benefits with
respect to the Benefit Plans, there are no actions, suits or claims
(including claims for income Taxes, interest, penalties, fines or excise
Taxes with respect thereto) pending with respect to any Benefit Plan, or,
to the best knowledge of the Company, any circumstances which might give
rise to any such action, suit or claim (including claims for income Taxes,
interest, penalties, fines or excise Taxes with respect thereto); and
(v) The Company has no obligation to provide health or other welfare
benefits to former, retired or terminated employees, except as specifically
required under Section 4980B of the Code or Section 601 of ERISA. The
Company has complied with the notice and continuation requirements of
Section 4980B of the Code and Section 601 of ERISA and the regulations
thereunder.
In connection with the transactions contemplated by this Agreement, the
Company hereby agrees that it will (i) terminate the Plan as of a date prior to
the Effective Time, (ii) take any and all steps necessary to effectuate promptly
the termination of the Plan including but not limited to the amendment of the
Plan, if necessary, to comply with the Tax Reform Act of 1986 and the filing of
an Application for Determination Upon Termination for the Plan, and all required
forms with the Internal Revenue Service and Department of Labor, (iii) deliver
all notices required to be delivered to employees and to the trustees of the
Plan, (iv) continue to file any and all information reports, including annual
reports, required with respect to the Plan until the completion of the
termination of the Plan and (v) fully vest all employees in their account
balances in the Plan.
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As soon as practicable following the receipt of a favorable determination
letter from the Internal Revenue Service with respect to the termination of the
Plan, the Company shall cause the trustees of the Plan to distribute the account
balances in the Plan of the employees who are participants in the Plan in
accordance with the terms of the plan documents and any and all applicable laws,
rules and regulations. The current trustees of the Plan shall remain as trustees
of the Plan through completion of the termination process.
R. Labor Relations. Since January 1, 1992, there have been no violations of
any federal, state or local statutes, laws, ordinances, rules, regulations,
orders or directives with respect to the employment of individuals by, or the
employment practices or work conditions of, the Company, or the terms and
conditions of employment, wages and hours which violations, individually or in
the aggregate, could result in a Company Material Adverse Effect. The Company is
not engaged in any unfair labor practice or other unlawful employment practice
and there are no charges of unfair labor practices or other employee-related
complaints pending or, to the best knowledge of the Company, threatened against
the Company before the National Labor Relations Board, the Equal Employment
Opportunity Commission, the Occupational Safety and Health Review Commission,
the Department of Labor or any other federal, state, local or other governmental
authority. There is no strike, picketing, slowdown or work stoppage or
organizational attempt pending, threatened against (to the best knowledge of the
Company) or involving the Business. No issue with respect to union
representation is pending or, to the best knowledge of the Company, threatened
with respect to the employees of the Company. No union or collective bargaining
unit or other labor organization has ever been certified or recognized by the
Company as the representative of any of the employees of the Company.
S. Increases in Compensation or Benefits. Subsequent to June 30, 1996,
there have been no increases in the compensation payable or to become payable to
any of the employees of the Company and there have been no payments or
provisions for any awards, bonuses, loans, profit sharing, pension, retirement
or welfare plans or similar or other disbursements or arrangements for or on
behalf of such employees (or related parties thereof), in each case, other than
pursuant to currently existing plans or arrangements, if any, set forth in the
Company Disclosure Schedule. Except for bonuses that may be due to employees of
the Company for the current year as set forth in the Company Disclosure
Schedule, all bonuses heretofore granted to employees of the Company have been
paid in full to such employees. The vacation policy of the Company is set forth
in the Company Disclosure Schedule. No employee of the Company is entitled to
vacation time in excess of three weeks during the current calendar year and no
employee of the Company has any accrued vacation or sick time with respect to
any prior period.
T. Insurance. A list of each of the insurance policies maintained by the
Company is set forth in the Company Disclosure Schedule. Such insurance policies
are in full force and effect and all premiums due thereon prior to or at the
Effective Time have been, or prior to the Effective Time will be, paid. The
Company has complied with the provisions of such policies. Such insurance is of
comparable amounts and coverage as that which companies engaged in similar
businesses maintain in accordance with good business practices. There are no
notices of any pending or threatened termination or premium increases with
respect to
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any such policies. The Company has not had any material casualty loss or
occurrence which may give rise to any claim of any kind not covered by insurance
and the Company is not aware of any occurrence which may give rise to any
material claim of any kind not covered by insurance. No third party has filed
any claim against the Company for personal injury or property damage of a kind
for which liability insurance is generally available which is not fully insured,
subject only to the standard deductible. All claims against the Company covered
by insurance have been reported to the insurance carrier on a timely basis.
U. Conduct of Business. The Company is not restricted from conducting the
Business in any location by agreement or court decree.
V. Allowances. The Company has no obligation outside of the ordinary course
of business or pursuant to the terms and conditions of managed care contracts to
make allowances to any customers with respect to the Business.
W. Use of Names. All names under which the Company currently conducts the
Business are listed in the Company Disclosure Schedule. To the best knowledge of
the Company, there are no other persons or businesses conducting businesses
similar to those of the Company in the States of New York, New Jersey, Virginia,
West Virginia, New Mexico and California having the right to use or using the
names set forth in the Company Disclosure Schedule or any variants of such
names; and no other person or business has ever attempted to restrain the
Company from using such names or any variant thereof. The Company and its
Subsidiaries utilize the corporate names "Advanced Orthopedic Technologies,
Inc." with modifiers identifying the state of incorporation of the Subsidiaries.
None of such names are registered trademarks, trade names, service marks or
service names under federal or state law. No representation or warranty is made
as to the use of such names outside the states set forth in this Section III(W).
Inasmuch as numerous organizations competitive with the Business utilize the
word "Orthopedic" in their corporate or business names, no representation or
warranty is made as to proprietary use of such word in any jurisdiction as part
of a corporate or business name nor as to the ability to obtain any registration
of any trademark, trade name, service mark or service name with respect to any
names utilized by the Company or its Subsidiaries. As set forth in the Company
Disclosure Schedule, in certain locations the Company or its Subsidiaries
utilize the business names formerly utilized by companies the Company has
acquired and other former names ("Seller Names"), the Company does not own any
registered trademark, trade name, service mark, service name, nor does it
possess any business, trade name or fictitious name certificates for any of the
Seller Names and the Company makes no representation or warranty as to the
ability to obtain registration or certificates therefor.
X. Power of Attorney. The Company has not granted any power of attorney
(revocable or irrevocable) to any person, firm or corporation for any purpose
whatsoever.
Y. Certification. The Company is in compliance with applicable industry
standards requiring supervision of professional operations by prosthetic and
orthotic practitioners certified by the American Board for Certification in
Prosthetics and Orthotics.
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Neither the Company nor such practitioners are currently required to hold any
professional license issued by any state authority to engage in the Business.
Z. Litigation; Disputes. Except as set forth in the Company Disclosure
Schedule, (i) there are no claims, disputes, actions, suits, investigations or
proceedings pending or, to the best knowledge of the Company, threatened against
or affecting the Company, the Business or any of the assets of the Company, (ii)
no such claim, dispute, action, suit, proceeding or investigation in excess of
$50,000 has been pending or threatened against or affecting the Company, the
Business or any of the assets of the Company during the five-year period
preceding the Effective Time and (iii) to the best knowledge of the Company,
there is no basis for any such claim, dispute, action, suit, investigation or
proceeding against or affecting the Company, the Business or any of the assets
of the Company. Notwithstanding the foregoing set forth above, in the ordinary
course of the Company's business, there are customer complaints, adjustments,
returns, refunds, replacements, maintenance and notifications thereof regarding
customers, patients, accounts and referral sources, which do not, individually
or in the aggregate, have a Company Material Adverse Effect; the existence of
such claims does not constitute a breach of the representations contained in
this Section III(Z). The Company has no knowledge of any default under any such
action, suit or proceeding set forth in the Company Disclosure Schedule. The
Company is not in default in respect of any judgment, order, writ, injunction or
decree of any court or of any federal, state, municipal or other government
department, commission, bureau, agency or instrumentality or any arbitrator.
AA. Location of Business and Assets. Set forth in the Company Disclosure
Schedule is each location (specifying state, county and city) where the Company
(i) has a place of business, (ii) owns or leases real property and (iii) owns or
leases any other property, including inventory, equipment and furniture.
AB. Computer Software. The Company has the right to use all computer
software, including all property rights constituting part of that computer
software, used in connection with the Company's business operations (the
"Computer Software"). A list of all written licenses pertaining to the Computer
Software is set forth in the Company Disclosure Schedule (the "Licenses"). The
Company has no knowledge that any of the Licenses may not be valid or
enforceable by the Company or that the use of the Computer Software or any of
the Licenses may infringe upon or conflict with the rights of any third party.
The Company has not granted any licenses to use the Computer Software or any
sub-licenses with respect to any of the Licenses.
AC. Vote Required. The affirmative vote of the holders of a majority of the
outstanding Shares is the only vote of the holders of any class or series of the
Company's capital stock necessary to approve this Agreement and the transactions
contemplated hereby.
AD. Finders' Fees. Except for the Company's agreement with Jerome Grossman,
as amended to date, there is no investment banker, broker, finder or other
intermediary which has been retained by or is authorized to act on behalf of the
Company or any
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Subsidiary who might be entitled to any fee or commission in connection with the
transactions contemplated by this Agreement.
AE. Contingent Payments. The Company has entered into written agreements
with each Person (a "Contingent Payee") who is entitled to receive Shares as
contingent payments from the Company pursuant to a definitive agreement for such
Person to receive, if and at the time such contingent payment is due, certain
consideration in lieu of Shares. In addition, in circumstances where such
Contingent Payee is entitled to such contingent payment as an additional payment
in connection with an acquisition, such written agreement shall provide that the
contingent payment, if earned, is not contingent on such Contingent Payee being
employed by the Company. A list of all Contingent Payees is set forth in the
Company Disclosure Schedule.
AF. Disclosure. No representation or warranty made under any Section hereof
and none of the information set forth herein or in the Company Disclosure
Schedule contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements herein or therein not misleading.
No representations or warranties are made by any party hereto except as set
forth in this Agreement or in the Company Disclosure Schedule.
SECTION IV
REPRESENTATIONS, WARRANTIES, COVENANTS
AND AGREEMENTS OF O&P AND MERGER SUBSIDIARY
Each of O&P and Merger Subsidiary hereby represents and warrants to, and
covenants and agrees with, the Company, as of the date hereof and as of the
Effective Time, that:
A. Organization. Each of O&P and Merger Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its incorporation and has full corporate power and authority to own its
properties and to conduct the businesses in which it is now engaged.
B. Authority. The execution and delivery of this Agreement by each of O&P
and Merger Subsidiary, the performance by each of O&P and Merger Subsidiary of
its respective covenants and agreements hereunder and the consummation by each
of O&P and Merger Subsidiary of the transactions contemplated hereby have been
duly authorized by all necessary corporate action, and this Agreement
constitutes a valid and legally binding obligation of O&P and Merger Subsidiary,
respectively, enforceable against each of them in accordance with its terms.
C. No Legal Bar; Conflicts. Neither the execution and delivery of this
Agreement, nor the consummation of the transactions contemplated hereby,
violates any provision of the certificate of incorporation or by-laws of either
O&P or Merger Subsidiary
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or any statute, ordinance, regulation, order, judgment or decree of any court or
governmental agency or board, or conflicts with or will result in any breach of
any of the terms of or will constitute a default under or result in the
termination of or the creation of any lien pursuant to the terms of any contract
or agreement to which either O&P or Merger Subsidiary is a party or by which
either O&P or Merger Subsidiary or any of their assets is bound.
D. Ownership. O&P owns 100% of the issued and outstanding capital stock of
Merger Subsidiary. NovaCare, Inc., a Delaware corporation ("NovaCare"), owns
100% of the issued and outstanding capital stock of O&P.
SECTION V
COVENANTS OF THE COMPANY
The Company agrees that:
A. Conduct of the Company. Except as expressly contemplated by this
Agreement or as set forth in the Company Disclosure Schedule, from the date
hereof until the Effective Time, the Company and each Subsidiary shall conduct
their business in the ordinary course consistent with past practice and shall
use their best efforts to preserve intact their business organizations and
relationships with third parties and to keep available the services of their
present officers and employees. Except as otherwise approved in writing by O&P,
or as expressly contemplated by this Agreement, and without limiting the
generality of the foregoing, from the date hereof until the Effective Time:
(a) the Company will not, and will not permit any Subsidiary to, adopt
or propose any change in its articles of incorporation or by-laws;
(b) the Company will not, and will not permit any of its Subsidiaries
to, merge or consolidate with any other Person (other than another wholly
owned Subsidiary) or acquire a material amount of stock or assets of any
other Person;
(c) the Company will not, and will not permit any of its Subsidiaries
to, sell, lease, license or otherwise dispose of any material assets or
property except (i) pursuant to existing contracts or commitments, (ii) in
the ordinary course consistent with past practice or (iii) transfers
between the Company and/or its Subsidiaries;
(d) the Company will not declare or pay any dividends or make any
distributions on its Shares;
(e) the Company will not, and will not permit any of its Subsidiaries
to, (i) issue, deliver or sell, or authorize or propose the issuance,
delivery or sale of, any Company Securities or Company Subsidiary
Securities, other than the issuance of Shares either upon the exercise of
Company Options or Company Warrants or to
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fulfill obligations to issue Shares in each case as described in Section
I(D) and outstanding on the date hereof, (ii) split, combine or reclassify
any Company Securities or Company Subsidiary Securities or (iii) except as
required or permitted by this Agreement, repurchase, redeem or otherwise
acquire any Company Securities or any Company Subsidiary Securities;
(f) except as otherwise expressly permitted hereby, the Company will
not make any commitment or enter into any contract or agreement material to
the Company and its Subsidiaries taken as a whole except in the ordinary
course of business consistent with past practice;
(g) the Company will not, and will not permit any of its Subsidiaries
to, agree or commit to do any of the foregoing; and
(h) the Company will not, and will not permit any of its Subsidiaries
to, take or agree to commit to take any action that would make any
representation and warranty of the Company hereunder inaccurate in any
material respect at, or as of any time prior to, the Effective Time.
B. Access to Information. From the date hereof until the Effective Time,
the Company will give O&P, its counsel, financial advisors, auditors and other
authorized representatives full access to the offices, properties, books and
records of the Company and its Subsidiaries, will furnish to O&P, its counsel,
financial advisors, auditors and other authorized representatives such financial
and operating data and other information as such Persons may reasonably request
and will instruct the Company's employees, counsel and financial advisors to
cooperate with O&P in its investigation of the business of the Company and its
Subsidiaries; provided that no investigation pursuant to this Section V(B) shall
affect any representation or warranty given by the Company to O&P hereunder.
C. Confidentiality. Each of the Company, Merger Subsidiary and O&P shall be
bound by the terms of the Confidentiality Agreement dated as of August 14, 1996,
which agreement shall survive the execution and delivery of this Agreement.
D. Other Offers. From the date hereof until the termination hereof, the
Company and its Subsidiaries and the officers, directors, employees or other
agents of the Company and its Subsidiaries will not, directly or indirectly, (i)
take any action to solicit, initiate or encourage any Company Acquisition
Proposal (as defined below) or (ii) unless otherwise required in accordance with
the fiduciary duties of the Board of Directors under applicable law as advised
by counsel to the Company, engage in negotiations with, or disclose any
nonpublic information relating to the Company or any of its Subsidiaries or
afford access to the properties, books or records of the Company or any of its
Subsidiaries to, any Person that may be considering making, or has made, a
Company Acquisition Proposal. The Company will promptly notify O&P after receipt
of any Company Acquisition Proposal or any indication that any Person is
considering making a Company Acquisition Proposal or any request for nonpublic
information relating to the Company or any of its Subsidiaries or for access to
the properties, books or records of the Company or any of its Subsidiaries by
any
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Person that may be considering making, or has made, a Company Acquisition
Proposal. For purposes of this Agreement, "Company Acquisition Proposal" means
any offer or proposal for, or any indication of interest in, a merger or other
business combination involving the Company or any of its Subsidiaries or the
acquisition of any equity interest in, or a substantial portion of the assets
of, the Company or any of its Subsidiaries, other than the transactions
contemplated by this Agreement.
E. Notices of Certain Events. The Company shall promptly notify O&P of:
(i) any notice or other communication from any Person alleging that
the consent of such Person (or another Person) is or may be required in
connection with the transactions contemplated by this Agreement;
(ii) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions
contemplated by this Agreement; and
(iii) any actions, suits, claims, investigations or proceedings
commenced or, to the best of its knowledge, threatened against, relating to
or involving or otherwise affecting the Company or any of its Subsidiaries
which, if pending on the date of this Agreement, would have been required
to have been disclosed pursuant to Section I(Z) or which relate to the
consummation of the transactions contemplated by this Agreement.
F. Certain Filings; Stockholders Meeting. The Company shall promptly
prepare and file with the SEC a Proxy Statement and cause a meeting of its
stockholders to be duly called and held as soon as reasonably practicable for
the purpose of voting on the approval and adoption of this Agreement and the
Merger. The Directors of the Company shall, unless otherwise required in
accordance with their fiduciary duties as advised by counsel, recommend approval
and adoption of this Agreement and the Merger by the Company's stockholders. In
connection with such meeting, the Company will, subject to the foregoing, use
its best efforts to obtain the necessary approvals by its stockholders of this
Agreement, the transactions contemplated hereby and such other matters as are
contemplated by the terms of this Agreement or required by Nevada Law, and will
otherwise comply with all legal requirements applicable to such meeting.
SECTION VI
COVENANTS OF O&P
O&P agrees that it will take all action necessary to cause Merger
Subsidiary to perform its obligations under this Agreement and to consummate the
Merger on the terms and conditions set forth in this Agreement.
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SECTION VII
COVENANTS OF O&P AND THE COMPANY
The parties hereto agree that:
A. Best Efforts. Subject to the terms and conditions of this Agreement,
each party will use its best efforts to take, or cause to be taken, all actions
and to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate the transactions contemplated by
this Agreement.
B. Public Announcements. O&P and the Company will consult with each other
before issuing any press release or making any public statement with respect to
this Agreement and the transactions contemplated hereby and, except as may be
required by applicable law or any listing agreement with any national securities
exchange or interdealer quotation system, will not issue any such press release
or make any such public statement without obtaining the prior written approval
of the other party.
C. Further Assurances. At and after the Effective Time, the officers and
directors of the Surviving Corporation will be authorized to execute and
deliver, in the name and on behalf of the Company or Merger Subsidiary, any
deeds, bills of sale, assignments or assurances and to take and do, in the name
and on behalf of the Company or Merger Subsidiary, any other actions and things
to vest, perfect or confirm of record or otherwise in the Surviving Corporation
any and all right, title and interest in, to and under any of the rights,
properties or assets of the Company acquired or to be acquired by the Surviving
Corporation as a result of, or in connection with, the Merger.
SECTION VIII
CONDITIONS TO THE MERGER
A. Conditions to the Obligations of Each Party. The obligations of the
Company, O&P and Merger Subsidiary to consummate the Merger are subject to the
satisfaction of the following conditions:
(i) this Agreement shall have been adopted by the requisite vote of
the stockholders of the Company in accordance with Nevada Law;
(ii) no provision of any applicable domestic law or regulation and no
judgment, injunction, order or decree of a court of competent jurisdiction
shall restrain or prohibit the consummation of the Merger;
(iii) O&P and Andrew H. Meyers ("AHM") shall have entered into a Non-
competition Agreement on mutually agreed upon terms; and
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(iv) O&P and AHM shall have terminated AHM's Employment Agreement
dated April 30, 1992 and entered into an Employment Agreement on mutually
agreed upon terms.
B. Conditions to the Obligations of O&P and Merger Subsidiary. The
obligations of O&P and Merger Subsidiary to consummate the Merger are subject to
the satisfaction of the following further conditions:
(i) Subject to the next succeeding sentence, the representations and
warranties made by the Company herein shall be correct as of the Effective
Time in all respects with the same force and effect as though such
representations and warranties had been made as of the Effective Time, and,
at the Effective Time, the Company shall deliver to O&P and Merger
Subsidiary a certificate dated the date of the Effective Time to such
effect; and all the terms, covenants and conditions of this Agreement to be
complied with and performed by the Company on or before the Effective Time
shall have been duly complied with and performed in all material respects,
and, at the Effective Time, the Company shall deliver to O&P and Merger
Subsidiary a certificate dated as of the date of the Effective Time to such
effect. The Company shall be entitled to notify O&P, from time to time, on
or before the date which is five (5) business days prior to the Effective
Time, which notification (each, an "Update Notice") may (i) update, modify
or supplement the Company Disclosure Schedule and, upon delivery of such
Update Notice, the Company Disclosure Schedule, for all purposes of this
Agreement, shall be deemed to be amended to be consistent with each such
Update Notice. In the event that O&P receives an Update Notice which sets
forth the occurrence or existence of events or circumstances which have had
a Company Material Adverse Effect, O&P shall (after providing the Company
with written notice and an opportunity to modify the Update Notice or to
cure any matter set forth in the Update Notice which has had such effect
and the Company shall not have modified the Update Notice or cured such
matter so as to avoid such effect on or prior to the date which is thirty
(30) days after the Company has received such written notice, but in no
event later than December 31, 1996) have no obligation to complete the
transactions contemplated by this Agreement; O&P's sole and exclusive
remedy in such event shall be to terminate this Agreement pursuant to
Section IX(A)(vi);
(ii) Prior to the Effective Time, O&P shall have received evidence of
the consent of each Person holding (a) a Company Warrant or (b) a Company
Share Obligation to have such Company Warrant or Company Share Obligation,
as the case may be, cancelled on the terms and conditions set forth in this
Agreement;
(iii) O&P shall have received a copy of the resolutions of the Board
of Directors of the Company authorizing the Merger, which copy shall be
certified by an executive officer of the Company;
(iv) O&P shall have received an opinion of Herrick, Feinstein LLP,
counsel for the Company, substantially to the effect set forth in Exhibit A
attached hereto;
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(v) O&P and AHM shall have entered into an Indemnification Agreement
on mutually agreed upon terms;
(vi) O&P shall have received evidence, reasonably satisfactory to it
and its counsel, of the termination or transfer of the two key man life
insurance policies issued on the life of AHM and that the Company has no
further obligation to pay (or reimburse the payment of) any of the premiums
on such policies;
(vii) O&P, or a representative thereof, shall have received an
irrevocable proxy from each of AHM and Norbert B. Meyers ("NBM") to vote
their Shares in favor of the Merger at the special meeting of the
stockholders of the Company called to vote on the Merger;
(viii) O&P shall have received evidence, reasonably satisfactory to it
and its counsel, that the agreement to pay each of AHM and NBM a guarantee
fee in connection with the Bank Debt has been terminated; and
(ix) O&P shall have received evidence, reasonably satisfactory to it
and its counsel, that all patent license agreements between AHM and the
Company have been terminated.
C. Conditions to the Obligations of the Company. The obligations of the
Company to consummate the Merger are subject to the satisfaction of the
following further conditions:
(i) The representations and warranties made by O&P and Merger
Subsidiary herein shall be correct as of the Effective Time in all respects
with the same force and effect as though such representations and
warranties had been made as of the Effective Time, and, at the Effective
Time, O&P and Merger Subsidiary shall deliver to the Company a certificate
dated the date of the Effective Time to such effect. All the terms,
covenants and conditions of this Agreement to be complied with and
performed by O&P and Merger Subsidiary on or before the Effective Time
shall have been duly complied with and performed in all material respects,
and, at the Effective Time, O&P and Merger Subsidiary shall deliver to the
Company a certificate dated as of the date of the Effective Time to such
effect;
(ii) the Company shall have received a copy of the resolutions of the
Board of Directors of O&P, Merger Subsidiary and NovaCare authorizing the
Merger and the transactions contemplated thereby, which copy shall be
certified by an executive officer of O&P, Merger Subsidiary or NovaCare, as
the case may be;
(iii) the Company shall have received an opinion of Peter D. Bewley,
Esq., counsel for O&P and Merger Subsidiary, substantially to the effect
set forth in Exhibit B attached hereto; and
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(iv) AHM and NBM shall have received evidence that each of them has
been released from their respective guarantees with respect to the
Company's repayment of the Bank Debt.
SECTION IX
TERMINATION
A. Termination. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time (notwithstanding any approval
of this Agreement by the stockholders of the Company);
(i) by mutual written consent of the Company and O&P;
(ii) by either the Company or O&P, if the Merger has not been
consummated by December 31, 1996 (provided that the right to terminate this
Agreement under this clause shall not be available to any party whose
failure to fulfill any of its obligations under this Agreement has been the
cause of or resulted in the failure to consummate the Merger by such date);
(iii) by either the Company or O&P, if there shall be any applicable
domestic law, rule or regulation that makes consummation of the Merger
illegal or otherwise prohibited or if any judgment, injunction, order or
decree of a court of competent jurisdiction shall restrain or prohibit the
consummation of the Merger, and such judgment, injunction, order or decree
shall become final and nonappealable;
(iv) by either the Company or O&P, if the stockholder approval
referred to in Section VIII(A)(i) shall not have been obtained by reason of
the failure to obtain the requisite vote upon a vote at a duly held meeting
of stockholders or at any adjournment thereof;
(v) by either the Company or O&P (the "Terminating Party") if (x)
there has been a breach by the other party of any representation or
warranty contained in this Agreement which would have or would be
reasonably likely to have an material adverse effect on the business,
operations or properties of the Company or O&P, as the case may be, or (y)
there has been a material breach of any of the covenants or agreements set
forth in this Agreement on the part of the other party, which breach is not
curable or, if curable, is not cured within 30 days after written notice of
such breach is given by the Terminating Party to the other party; or
(vi) by O&P (A) if holders of a substantial number of the Shares
outstanding immediately prior to the Effective Time shall have complied
with all requirements for perfecting rights of dissenters as set forth in
Section 92A.380 of the Nevada Law with respect to such shares or (B)
pursuant to Section VIII(B)(i).
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B. Effect of Termination. If this Agreement is terminated pursuant to
Section IX(A), this Agreement shall become void and of no effect with no
liability on the part of any party hereto, except that the parties shall be
liable for any willful breaches hereof.
SECTION X
MISCELLANEOUS
A. Notices. All notices, requests or instructions hereunder shall be in
writing and delivered personally, sent by telecopy or sent by registered or
certified mail, postage prepaid, as follows:
(1) If to the Company:
151 Hempstead Turnpike
West Hempstead, New York 11552
Attention: President
Telecopy No.: (516) 481-4137
with a copy to:
Herrick, Feinstein LLP
2 Park Avenue
New York, New York 10016
Attention: Lawrence M. Levinson, Esq.
Telecopy No.: (212) 889-7577
(2) If to O&P:
c/o NovaCare, Inc.
1016 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Attention: President
Telecopy No.: (610) 992-3328
with a copy to:
NovaCare, Inc.
1016 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Attention: General Counsel
Telecopy No.: (610) 992-3328
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Any of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date of delivery,
if hand delivered or telecopied, and two business days after the date of
mailing, if mailed.
B. Survival of Representations. The representations, warranties and
agreements contained herein and in any certificate or other writing delivered
pursuant hereto shall not survive the Effective Time, except Article I.
C. Entire Agreement. This Agreement and the documents referred to herein
contain the entire agreement among the parties hereto with respect to the
transactions contemplated hereby, and, subject to Section X(I), no modification
hereof shall be effective unless in writing and signed by the party against
which it is sought to be enforced.
D. Expenses. Each of the parties hereto shall bear such party's own
expenses in connection with this Agreement and the transactions contemplated
hereby.; provided, however, that the expenses of the Company may be paid in
accordance with Section I(C)(iii).
E. Invalidity. Should any provision of this Agreement be held by a court of
competent jurisdiction to be enforceable only if modified, such holding shall
not affect the validity of the remainder of this Agreement, the balance of which
shall continue to be binding upon the parties hereto with any such modification
to become a part hereof and treated as though originally set forth in this
Agreement. The parties further agree that any such court is expressly authorized
to modify any such unenforceable provision of this Agreement in lieu of severing
such unenforceable provision from this Agreement in its entirety, whether by
rewriting the offending provision, deleting any or all of the offending
provision, adding additional language to this Agreement, or by making such other
modifications as it deems warranted to carry out the intent and agreement of the
parties as embodied herein to the maximum extent permitted by law. The parties
expressly agree that this Agreement as modified by the court shall be binding
upon and enforceable against each of them. In any event, should one or more of
the provisions of this Agreement be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
any other provisions hereof, and if such provision or provisions are not
modified as provided above, this Agreement shall be construed as if such
invalid, illegal or unenforceable provisions had never been set forth herein.
F. Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the successors and assigns of the Company, Merger Subsidiary
and O&P, respectively.
G. Governing Law. The validity of this Agreement and of any of its terms or
provisions, as well as the rights and duties of the parties under this
Agreement, shall be construed pursuant to and in accordance with the laws of the
State of Nevada, without regard to conflict of laws principles.
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H. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
I. Amendments. Any provision of this Agreement may be amended or waived
prior to the Effective Time if, and only if, such amendment or waiver is in
writing and signed, in the case of an amendment, by the Company, O&P and Merger
Subsidiary or, in the case of a waiver, by the party against whom the waiver is
to be effective; provided that (i) any waiver or amendment shall be effective
against a party only if the Board of Directors of such party approves such
waiver or amendment and only such Board of Directors can take actions on behalf
of that party and (ii) after the adoption of this Agreement by the stockholders
of the Company, no such amendment or waiver shall, without the further approval
of such stockholders and each party's Board of Directors, alter or change (x)
the amount or kind of consideration to be received in exchange for any shares of
capital stock of the Company or (y) any of the terms or conditions of this
Agreement if such alteration or change would adversely affect the holders of any
shares of capital stock of the Company.
* * *
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IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of the date first above written.
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC.
By: /s/ ANDREW H. MEYERS
--------------------------------------
Name: Andrew H. Meyers
Title: President
AOT ACQUISITION CORP.
By: /s/ ROBERT E. HEALEY, JR.
--------------------------------------
Name: Robert E. Healey, Jr.
Title: Vice President
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APPENDIX B
FULL TEXT OF NEVADA STATUTE REGARDING
RIGHTS OF DISSENTING OWNERS
(NEVADA REVISED STATUTES 92A.300 THROUGH 92A.500 INCLUSIVE)
92A.300 DEFINITIONS.--As used in NRS 92A.300 to 92A.500, inclusive, unless
the context otherwise requires, the words and terms defined in NRS 92A.305 to
92A.335, inclusive, have the meanings ascribed to them in those sections.
92A.305 "BENEFICIAL STOCKHOLDER" DEFINED.--"Beneficial stockholder" means a
person who is a beneficial owner of shares held in a voting trust or by a
nominee as the stockholder of record.
92A.310 "CORPORATE ACTION" DEFINED.--"Corporate action" means the action of
a domestic corporation.
92A.315 "DISSENTER" DEFINED.--"Dissenter" means a stockholder who is
entitled to dissent from a domestic corporation's action under NRS 92A.380 and
who exercises that right when and in the manner required by NRS 92A.410 to
92A.480, inclusive.
92A.320 "FAIR VALUE" DEFINED.--"Fair value," with respect to a dissenter's
shares, means the value of the shares immediately before the effectuation of the
corporate action to which he objects, excluding any appreciation or depreciation
in anticipation of the corporate action unless exclusion would be inequitable.
92A.325 "STOCKHOLDER" DEFINED.--"Stockholder" means a stockholder of record
or a beneficial stockholder of a domestic corporation.
92A.330 "STOCKHOLDER OF RECORD" DEFINED.--"Stockholder of record" means the
person in whose name shares are registered in the records of a domestic
corporation or the beneficial owner of shares to the extent of the rights
granted by a nominee's certificate on file with the domestic corporation.
92A.335 "SUBJECT CORPORATION" DEFINED.--"Subject corporation" means the
domestic corporation which is the issuer of the shares held by a dissenter
before the corporate action creating the dissenter's rights becomes effective or
the surviving or acquiring entity of that issuer after the corporate action
becomes effective.
92A.340 COMPUTATION OF INTEREST.--Interest payable pursuant to NRS 92A.300
to 92A.500, inclusive, must be computed from the effective date of the action
until the date of payment, at the average rate currently paid by the entity on
its principal bank loans or, if it has no bank loans, at a rate that is fair and
equitable under all of the circumstances.
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92A.350 RIGHTS OF DISSENTING PARTNER OF DOMESTIC LIMITED PARTNERSHIP.--A
partnership agreement of a domestic limited partnership or, unless otherwise
provided in the partnership agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the partnership interest of a
dissenting general or limited partner of a domestic limited partnership are
available for any class or group of partnership interests in connection with any
merger or exchange in which the domestic limited partnership is a constituent
entity.
92A.360 RIGHTS OF DISSENTING MEMBER OF DOMESTIC LIMITED LIABILITY
COMPANY.--The articles of organization or operating agreement of domestic
limited-liability company or, unless otherwise provided in the articles of
organization or operating agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the interest of a dissenting
member are available in connection with any merger or exchange in which the
domestic limited-liability company is a constituent entity.
92A.370 RIGHTS OF DISSENTING MEMBER OF DOMESTIC NONPROFIT CORPORATION.--1.
Except as otherwise provided in subsection 2 and unless otherwise provided in
the articles or bylaws, any member of any constituent domestic nonprofit
corporation who voted against the merger may, without prior notice, but within
30 days after the effective date of the merger, resign from membership and is
thereby excused from all contractual obligations to the constituent or surviving
corporations which did not occur before his resignation and is thereby entitled
to those rights, if any, which would have existed if there had been no merger
and the membership had been terminated or the member had been expelled.
2. Unless otherwise provided in its articles of incorporation or bylaws, no
member of a domestic nonprofit corporation, including, but not limited to, a
cooperative corporation, which supplies services described in chapter 704 of NRS
to its members only, and no person who is a member of a domestic nonprofit
corporation as a condition of or by reason of the ownership of an interest in
real property, may resign and dissent pursuant to subsection 1.
92A.380 RIGHT OF STOCKHOLDER TO DISSENT FROM CERTAIN CORPORATE ACTIONS AND
TO OBTAIN PAYMENT FOR SHARES.--1. Except as otherwise provided in NRS 92A.370 to
92A.390, a stockholder is entitled to dissent from, and obtain payment of the
fair value of his shares in the event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the domestic corporation
is a party:
(1) If approval by the stockholders is required for the merger by
NRS 92A.120 to 92A.160, inclusive, or the articles of incorporation
and he is entitled to vote on the merger; or
(2) If the domestic corporation is a subsidiary and is merged
with its parent under NRS 92A.180.
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(b) Consummation of a plan of exchange to which the domestic
corporation is a party as the corporation whose subject owner's interests
will be acquired, if he is entitled to vote on the plan.
(c) Any corporate action take pursuant to a vote of the stockholders
to the event that the articles of incorporation, bylaws or a resolution of
the board of directors provides that voting or nonvoting stockholders are
entitled to dissent and obtain payment for their shares.
2. A stockholder who is entitled to dissent and obtain payment under NRS
92A.300 to 92A.500, inclusive, may not challenge the corporate action creating
his entitlement unless the action is unlawful or fraudulent with respect to him
or the domestic corporation.
92A.390 LIMITATIONS ON RIGHT OF DISSENT: STOCKHOLDERS OF CERTAIN CLASSES OR
SERIES; ACTION OF STOCKHOLDERS NOT REQUIRED FOR PLAN OF MERGER.--1. There is no
right of dissent with respect to a plan of merger or exchange in favor of
stockholders of any class or series which, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting at
which the plan of merger or exchange is to be acted on, were either listed on a
national securities exchange, included in the national market system by the
National Association of Securities Dealers, Inc., or held by at least 2,000
stockholders of record, unless:
(a) The articles of incorporation of the corporation issuing the
shares provide otherwise; or
(b) The holders of the class or series are required under the plan of
merger or exchange to accept for the shares anything except:
(1) Cash, owner's interests or owner's interests and cash in lieu
of fractional owner's interests of:
(I) The surviving or acquiring entity; or
(II) Any other entity which, at the effective date of the
plan of merger or exchange, were either listed on a national
securities exchange, included in the national market system by
National Association of Securities Dealers, Inc., or held of
record by at least 2,000 holders of owner's interests of record;
or
(2) A combination of cash and owner's interests of the kind
described in sub-subparagraphs (I) and (II) of subparagraph (1) of
paragraph (b).
2. There is no right of dissent for any holders of stock of the surviving
domestic corporation if the plan of merger does not require action of the
stockholders of the surviving domestic corporation under NRS 92A.130.
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92A.400 LIMITATIONS ON RIGHT OF DISSENT: ASSERTION AS TO PORTIONS ONLY TO
SHARES REGISTERED TO STOCKHOLDER; ASSERTION BY BENEFICIAL STOCKHOLDER.--1. A
stockholder of record may assert dissenter's rights as to fewer than all of the
shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the subject corporation in
writing of the name and address of each person on whose behalf he asserts
dissenter's rights. The rights of a partial dissenter under this subsection are
determined as if the shares as to which he dissents and his other shares were
registered in the names of different stockholders.
2. A beneficial stockholder may assert dissenter's rights as to shares held
on his behalf only if:
(a) He submits to the subject corporation the written consent of the
stockholder of record to the dissent not later than the time the beneficial
stockholder asserts dissenter's rights; and
(b) He does so with respect to all shares of which he is the
beneficial stockholder or over which he has power to direct the vote.
92A.410 NOTIFICATION OF STOCKHOLDERS REGARDING RIGHT OF DISSENT.--1. If a
proposed corporate action creating dissenters' rights is submitted to a vote at
a stockholders' meeting, the notice of the meeting must state that stockholders
are or may be entitled to assert dissenters' rights under NRS 92A.300 to
92A.500, inclusive, and be accompanied by a copy of those sections.
2. If the corporate action creating dissenters' rights is taken without a
vote of the stockholders, the domestic corporation shall notify in writing all
stockholders entitled to assert dissenters' rights that the action was taken and
send them the dissenter's notice described in NRS 92A.430.
92A.420 PREREQUISITES TO DEMAND FOR PAYMENT FOR SHARES.--1. If a proposed
corporate action creating dissenters' rights is submitted to a vote at a
stockholders' meeting, a stockholder who wishes to assert dissenter's rights:
(a) Must deliver to the subject corporation, before the vote is taken,
written notice of his intent to demand payment for his shares if the
proposed action is effectuated; and
(b) Must not vote his shares in favor of the proposed action.
2. A stockholder who does not satisfy the requirements of subsection 1 is
not entitled to payment for his shares under this chapter.
92A.430 DISSENTER'S NOTICE: DELIVERY TO STOCKHOLDERS ENTITLED TO ASSERT
RIGHTS; CONTENTS.--1. If a proposed corporate action creating dissenters' rights
is authorized at a stockholders' meeting, the subject corporation shall deliver
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a written dissenter's notice to all stockholders who satisfied the requirements
to assert those rights.
2. The dissenter's notice must be sent no later than 10 days after the
effectuation of the corporate action, and must:
(a) State where the demand for payment must be sent and where and when
certificates, if any, for shares must be deposited;
(b) Inform the holders of shares not represented by certificates to
what extent the transfer of the shares will be restricted after the demand
for payment is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to the news media or to the stockholders of the terms of
the proposed action and requires that the person asserting dissenter's
rights certify whether or not he acquired beneficial ownership of the
shares before that date;
(d) Set a date by which the subject corporation must receive the
demand for payment, which may not be less than 30 nor more than 60 days
after the date the notice is delivered; and
(e) Be accompanied by a copy of NRS 92A.300 to 92A.500, inclusive.
92A.440 DEMAND FOR PAYMENT AND DEPOSIT OF CERTIFICATES; RETENTION OF RIGHTS
OF STOCKHOLDER.--1. A stockholder to whom a dissenter's notice is sent must:
(a) Demand payment;
(b) Certify whether he acquired beneficial ownership of the
shares before the date required to be set forth in the dissenter's
notice for this certification; and
(c) Deposit his certificates, if any, in accordance with the
terms of the notice.
2. The stockholder who demands payment and deposits his certificates, if
any, retains all other rights of a stockholder until those rights are canceled
or modified by the taking of the proposed corporate action.
3. The stockholder who does not demand payment or deposit his certificates
where required, each by the date set forth in the dissenter's notice, is not
entitled to payment for his shares under this chapter.
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92A.450 UNCERTIFICATED SHARES: AUTHORITY TO RESTRICT TRANSFER AFTER DEMAND
FOR PAYMENT; RETENTION OF RIGHTS OF STOCKHOLDER.--1. The subject corporation may
restrict the transfer of shares not represented by a certificate from the date
the demand for their payment is received.
2. The person for whom dissenter's rights are asserted as to shares not
represented by a certificate retains all other rights of a stockholder until
those rights are canceled or modified by the taking of the proposed corporate
action.
92A.460 PAYMENT FOR SHARES: GENERAL REQUIREMENTS.--1. Except as otherwise
provided in NRS 92A.470, within 30 days after receipt of a demand for payment,
the subject corporation shall pay each dissenter who complied with NRS 92A.440
the amount the subject corporation estimates to be the fair value of his shares,
plus accrued interest. The obligation of the subject corporation under this
subsection may be enforced by the district court:
(a) Of the county where the corporation's registered office is
located;
or
(b) At the election of any dissenter residing or having its registered
office in this state, of the county where the dissenter resides or has its
registered office. The court shall dispose of the complaint promptly.
2. The payment must be accompanied by:
(a) The subject corporation's balance sheet as of the end of a fiscal
year ending not more than 16 months before the date of payment, a statement
of income for that year, a statement of changes in the stockholders' equity
for that year and the latest available interim financial statements, if
any:
(b) A statement of the subject corporation's estimate of the fair
value of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's rights to demand payment under NRS
92A.480; and
(e) A copy of NRS 92A.300 to 92A.500, inclusive.
92A.470 PAYMENT FOR SHARES: SHARES ACQUIRED ON OR AFTER DATE OF DISSENTER'S
NOTICE.--1. A subject corporation may elect to withhold payment from a dissenter
unless he was the beneficial owner of the shares before the date set forth in
the dissenter's notice as the date of the first announcement to the news media
or to the stockholders of the terms of the proposed action.
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2. To the extent the subject corporation elects to withhold payment, after
taking the proposed action, it shall estimate the fair value of the shares, plus
accrued interest, and shall offer to pay this amount to each dissenter who
agrees to accept it in full satisfaction of his demand. The subject corporation
shall send with its offer a statement of its estimate of the fair value of the
shares, an explanation of how the interest was calculated, and a statement of
the dissenters' right to demand payment pursuant to NRS 92A.480.
92A.480 DISSENTER'S ESTIMATE OF FAIR VALUE: NOTIFICATION OF SUBJECT
CORPORATION; DEMAND FOR PAYMENT OF ESTIMATE.--1. A dissenter may notify the
subject corporation in writing of his own estimate of the fair value of his
shares and the amount of interest due, and demand payment of his estimate, less
any payment pursuant to NRS 92A.460, or reject the offer pursuant to NRS 92A.470
and demand payment of the fair value of his shares and interest due, if he
believes that the amount paid pursuant to NRS 92A.460 or offered pursuant to NRS
92A.470 is less than the fair value of his shares or that the interest due is
incorrectly calculated.
2. A dissenter waives his right to demand payment pursuant to this section
unless he notifies the subject corporation of his demand in writing within 30
days after the subject corporation made or offered payment for his shares.
92A.490 LEGAL PROCEEDING TO DETERMINE FAIR VALUE: DUTIES OF SUBJECT
CORPORATION; POWERS OF COURT; RIGHTS OF DISSENTER.--1. If a demand for payment
remains unsettled, the subject corporation shall commence a proceeding within 60
days after receiving the demand and petition the court to determine the fair
value of the shares and accrued interest. If the subject corporation does not
commence the proceeding within the 60-day period, it shall pay each dissenter
whose demand remains unsettled the amount demanded.
2. A subject corporation shall commence the proceeding in the district
court of the county where its registered office is located. If the subject
corporation is a foreign entity without a resident agent in the state, it shall
commence the proceeding in the county where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
entity was located.
3. The subject corporation shall make all dissenters, whether or not
residents of Nevada, whose demands remain unsettled, parties to the proceeding
as in an action against their shares. All parties must be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
4. The jurisdiction of the court in which the proceeding is commenced under
subsection 2 is plenary and exclusive. The court may appoint one or more persons
as appraisers to receive evidence and recommend a decision on the question of
fair value. The appraisers have the powers described in the order appointing
them, or any amendment thereto. The dissenters are entitled to the same
discovery rights as parties in other civil proceedings.
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5. Each dissenter who is made a party to the proceeding is entitled to a
judgment:
(a) For the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the subject
corporation; or
(b) For the fair value, plus accrued interest, of his after-acquired
shares for which subject corporation elected to withhold payment pursuant
to NRS 92A.470.
92A.500 LEGAL PROCEEDING TO DETERMINE FAIR VALUE: ASSESSMENT OF COSTS AND
FEES.--1. The court in a proceeding to determine fair value shall determine all
of the costs of the proceeding, including the reasonable compensation and
expenses of any appraisers appointed by the court. The court shall assess the
costs against the subject corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously or not
in good faith in demanding payment.
2. The court may also assess the fees and expenses of the counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the subject corporation and in favor of all dissenters if
the court finds the subject corporation did not substantially comply with
the requirements of NRS 92A.300 to 92A.500, inclusive; or
(b) Against either the subject corporation or a dissenter in favor of
any other party, if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously or not in good
faith with respect to the rights provided by NRS 92A.300 to 92A.500,
inclusive.
3. If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the subject corporation, the
court may award to those counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who were benefited.
4. In a proceeding commenced pursuant to NRS 92A.460, the court may assess
the costs against the subject corporation, except that the court may assess
costs against all or some of the dissenters who are parties to the proceeding,
in amounts the court finds equitable, to the extent the court finds that such
parties did not act in good faith in instituting the proceeding.
5. This section does not preclude any party in a proceeding commenced
pursuant to NRS 92A.460 or 92A.490 from applying the provisions of N.R.C.P. 68
or NRS 17.115.
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APPENDIX C
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC.
151 HEMPSTEAD TURNPIKE
WEST HEMPSTEAD, NEW YORK 11552
PROXY
The undersigned Stockholder hereby appoints Andrew H. Meyers and Norbert B.
Meyers, and each or any of them, proxies for the undersigned, with full power of
substitution, to appear and vote all of the shares of stock of Advanced
Orthopedic Technologies, Inc., a Nevada corporation ("AOT" or the "Company"),
which the undersigned would be entitled to vote if personally present, and
otherwise act with the same force and effect as the undersigned, at the Special
Meeting of Shareholders of the Company to be held at the offices of Herrick,
Feinstein LLP, counsel to the Company, Two Park Avenue, New York, New York
10016, 21st Floor Main Conference Room, on Wednesday, November 13, 1996, 10:00
A.M. and at any adjournments thereof, and to take action on the proposal set
forth below and any other business that may lawfully come before the meeting.
Unless a contrary direction is indicated, this proxy will be voted "FOR" the
proposal set forth below. If specific instructions are indicated, this proxy
will be voted in accordance therewith. In his discretion, each proxy is
authorized to vote upon such other business as may properly come before the
meeting or any adjournments or postponements thereof. THE BOARD OF DIRECTORS
RECOMMENDS A VOTE FOR THE PROPOSAL SET FORTH BELOW. THIS PROXY IS BEING
SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY.
1. To approve and adopt the Agreement and Plan of Merger dated as of
September 30, 1996 by and among AOT, NovaCare Prosthetics & Orthotics, Inc., a
Delaware corporation ("NovaCare O&P") and AOT Acquisition Corp., a Nevada
corporation and wholly owned subsidiary of NovaCare O&P ("NovaCare Sub"),
providing for the merger of NovaCare Sub with and into AOT, whereupon AOT will
become a wholly owned subsidiary of NovaCare O&P, and the shareholders of AOT
will receive a cash consideration of approximately $3.00 per share, subject to
adjustment (a copy of said Agreement and Plan of Merger is attached as Appendix
A to the accompanying Proxy Statement); and
|_| For |_| Against |_| Abstain
2. In the discretion of the proxies, upon all other matters coming before
the meeting.
The undersigned hereby revokes any proxies heretofore given to vote or act
in respect of any shares of stock of the Company and acknowledges receipt of the
Notice of Special Meeting of Shareholders. This proxy is revocable; however, it
will remain valid until canceled by a writing delivered to Advanced Orthopedic
Technologies, Inc. The shares represented by this proxy will be voted as
directed by the Stockholder. If no direction is given when the duly executed
proxy is returned, such shares will be voted "FOR" the approval and adoption of
the Merger Agreement.
WHEN SIGNING AS ATTORNEY, PLEASE SIGN HERE EXACTLY
EXECUTOR, ADMINISTRATOR, AS YOUR NAME IS PRINTED ABOVE
TRUSTEE, GUARDIAN, PARTNER OR
CORPORATE OFFICER, PLEASE SIGN Sign Here:___________________________
YOUR FULL TITLE AS SUCH. EACH
JOINT TENANT OR TENANT-IN- Dated:_______________________________
COMMON SHOULD ALSO SIGN.
PLEASE SIGN AND SEND IN YOUR PROXY IN THE ENCLOSED ENVELOPE
PROMPTLY. NO POSTAGE REQUIRED IF MAILED IN THE UNITED STATES.
