-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EVWZdhNOCd2IHgAPz/F1J5zU50IyWQmFtB0g356ZZ9mNDWMVxa5ykg2cp1pgcQq2 WRNbcgj86t170hi9yEpvBA== 0000904456-97-000030.txt : 19970401 0000904456-97-000030.hdr.sgml : 19970401 ACCESSION NUMBER: 0000904456-97-000030 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANGER ORTHOPEDIC GROUP INC CENTRAL INDEX KEY: 0000722723 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 840904275 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10670 FILM NUMBER: 97570442 BUSINESS ADDRESS: STREET 1: 7700 OLD GEORGETOWN RD 2ND FL CITY: BETHESDA STATE: MD ZIP: 20814 BUSINESS PHONE: 3019860701 MAIL ADDRESS: STREET 2: 7700 OLD GEORGETOWN RD 2ND FL CITY: BETHESDA STATE: MD ZIP: 20814 FORMER COMPANY: FORMER CONFORMED NAME: SEQUEL CORP DATE OF NAME CHANGE: 19890814 FORMER COMPANY: FORMER CONFORMED NAME: CELLTECH COMMUNICATIONS INC DATE OF NAME CHANGE: 19860304 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _______ to _______. Commission File Number 1-10670 HANGER ORTHOPEDIC GROUP, INC. -------------------------------------------------------------------- (Exact name of registrant as specified in its charter.) Delaware 84-0904275 ---------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7700 Old Georgetown Road, Bethesda, MD 20814 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's phone number, including area code: (301) 986-0701 Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $.01 per share -------------------------------------- (Title of Class) Securities registered pursuant to section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ] The aggregate market value of the registrant's Common Stock, par value $.01 per share, held as of February 21, 1997 by non-affiliates of the registrant was $63,181,823 based on the $6.75 closing sale price of the Common Stock on the American Stock Exchange on such date. As of March 21, 1996, the registrant had 9,360,270 shares of its Common Stock issued and outstanding. Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] DOCUMENTS INCORPORATED BY REFERENCE The information called for by Part III of the Form 10-K is incorporated by reference from the registrant's definitive proxy statement or amendment hereto which will be filed not later than 120 days after the end of the fiscal year covered by this report. ITEM 1. BUSINESS. INTRODUCTION Hanger Orthopedic Group, Inc. ("Hanger" or the "Company") is one of the nation's largest practice management companies in the orthotic and prosthetic ("O&P") rehabilitation industry. In addition to providing O&P patient care services through its operating subsidiaries, Hanger also manufactures and distributes components and finished patient care products to the O&P industry. Hanger's largest subsidiary, Hanger Prosthetics & Orthotics, Inc., formerly known as J. E. Hanger, Inc. ("HPO"), was founded in 1861 by a Civil War amputee and is the oldest company in the O&P industry in the United States. Orthotics is the design, fabrication, fitting and supervised use of custom-made braces and other devices such as knee, spinal, neck 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, chronic conditions, diseases, congenital disorders or injuries resulting from sports or other activities. Prosthetics is the design, fabrication and fitting of custom-made artificial limbs for patients who have lost limbs as a result of traumatic injuries, vascular diseases, diabetes, cancer or congenital disorders. The Company is a vertically integrated provider of O&P services that offers its own manufacturing, distribution and provision of patient care services. The Company manufactures O&P components and finished patient care products for both the O&P industry and the Company's own patient care practices through its wholly-owned subsidiary, DOBI-Symplex, Inc. ("DOBI-Symplex"). The Company manufactures components and finished products under various name brands such as Lenox Hill, CASH Brace, Ortho-Mold and Charleston Bending Brace. The Company distributes O&P components and finished patient care products to the O&P industry and the Company's own patient care practices through the Company's wholly-owned subsidiary, Southern Prosthetic Supply, Inc. ("SPS"). The Company also manages O&P patient care practices through its HPO subsidiary. Care of O&P patients is part of a continuum of rehabilitation services from diagnosis to treatment and prevention of future injury. This continuum involves the integration of several medical disciplines that begins with the attending physician's diagnosis. Once a course of treatment is determined, the physician, generally an orthopedic surgeon, vascular surgeon or physiatrist, refers a patient to one of Hanger's patient care centers for treatment. A Hanger practitioner then consults with both the referring physician and the patient to formulate the prescription for, and design of, an orthotic or prosthetic device to meet the patient's needs. The fitting process involves several stages in order to successfully achieve desired functional and cosmetic results. The practitioner creates a cast and takes detailed measurements of the patient to ensure an anatomically correct fit. All of the prosthetic devices fitted by Hanger's practitioners are custom designed and fabricated by skilled practitioners who can balance 1 fit, support and comfort. Of the orthotic devices provided by Hanger, approximately 79% are custom designed, fabricated and fitted and the other 21% are prefabricated but custom fitted. Custom devices are fabricated by the Company's skilled technicians using the castings, measurements and designs made by the practitioner. Technicians use advanced materials and technologies to fabricate a custom device under 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 treatment, including adjustments or replacements as the patient's physical condition and lifestyle changes. Generally, the useful life of most custom designed and fabricated O&P devices ranges from three to five years. A substantial portion of Hanger's O&P services involves treatment of a patient in a non-hospital setting, such as one of Hanger's patient care centers, a physician's office, an out-patient clinic or other facilities. In addition, O&P services are increasingly rendered to patients in hospitals, nursing homes, rehabilitation centers and other alternate-site healthcare facilities. In a hospital setting, the practitioner works with a physician to provide either orthotic devices or temporary prosthetic devices that are later replaced by permanent prostheses. Hanger's distribution capability allows its personnel faster access to the products needed to fabricate devices for patients. This is accomplished at competitive prices, as a result of either manufacturing by DOBI-Symplex or direct purchases by SPS from other manufacturers. As a result of faster access to products, the length of a patient's treatment in the hospital can be reduced, thereby contributing to healthcare cost containment. Each of the Company's patient care centers is closely supervised by one or more certified practitioners, which enables the Company to assure the highest quality of services and patient care satisfaction. Hanger currently employs 562 patient care practitioners, of whom 230 are certified practitioners or candidates for formal certification by the American Board of Certification in Orthotics and Prosthetics. The balance of the Company's patient care practitioners are highly trained technical personnel who assist in the provision of services to patients and fabricate various O&P devices. The Company currently manages 178 O&P patient care centers in the following 29 jurisdictions: Alabama, Arizona, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Indiana, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Montana, New Hampshire, New Mexico, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, West Virginia and Wyoming. Hanger also manufactures a number of specialized O&P components and finished patient care products at its manufacturing facilities in Florida and Illinois and maintains distribution facilities in California, Florida, Georgia, Illinois, Maryland and Texas. The Company, which was formed in March 1983, is a Delaware corporation. Its executive offices are located at 7700 Old Georgetown Road, Bethesda, Maryland 20814. Its telephone number is (301)-986-0701. Hanger is a holding company which transacts business through its subsidiaries. Unless the context otherwise requires, all references herein to Hanger include its subsidiaries. 2 THE MARKET FOR ORTHOPEDIC REHABILITATION SERVICES The Company is engaged in O&P patient care practice management, as well as O&P product manufacturing and distribution activities. The O&P industry in the United States, including patient care services, manufacturing and distribution, is estimated to generate $2 billion in sales annually. Of that amount, an estimated $700 million is attributed to the patient care services sector, a highly fragmented market with over 2,740 certified practitioners and 1,230 certified O&P facilities, generally operated as small group practices. 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. With broader medical insurance coverage, increasing disposable income, longer life expectancy, greater mobility and improved technology and devices they are expected to seek orthopedic rehabilitation services more often. o COST-EFFECTIVE REDUCTION IN HOSPITALIZATION. As public and private payors encourage reduced hospital admissions and reduced length of stay, out-patient rehabilitation is in greater demand. O&P services and devices have enabled patients to become ambulatory more quickly after receiving medical treatment in the hospital. The Company believes that significant cost savings can be achieved through the early use of O&P services. The provision of O&P services in many cases reduces the need for more expensive treatment modalities, thus representing a cost savings to the third-party payor. o GROWING PHYSICAL HEALTH CONSCIOUSNESS. There is a growing emphasis on physical fitness, leisure sports and conditioning, such as running and aerobics, which has led to increased injuries requiring orthopedic rehabilitative services and products. In addition, as the current middle-age population ages, it brings its more active life-style and accompanying emphasis on physical fitness to the over-65 age group. These trends are evidenced by the increasing demand for new devices which provide support for injuries, prevent further or new injuries or enhance physical performance. 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 shorter duration, contributing to greater mobility and a more active lifestyle for the patient. Orthotic devices are more prevalent and visible in many sports, including but not limited to skiing. 3 o NEED FOR REPLACEMENT AND CONTINUING CARE. Because the useful life of most custom fitted and fabricated O&P devices is approximately three to five years, such devices need retrofitting and replacement. There is also an attendant need for continuing patient care services, which contributes to the increasing demand for orthopedic rehabilitation. BUSINESS STRATEGY The Company's business strategy is to significantly expand its O&P practice management presence in the patient care services segment of the O&P industry, which is a highly fragmented market with over 2,740 certified practitioners and 1,230 certified O&P facilities in the United States. Most of these facilities operate as small group practices. The Company's strategy involves: (i) broadening the Company's presence in targeted geographic areas through a program of selected acquisitions; (ii) expanding and improving O&P practice management operations at existing and acquired patient care facilities through more efficient operating practices and the use of professional marketing programs not generally utilized in the O&P industry; (iii) increasing the manufacturing and distribution of O&P components and products used by others in the O&P industry as well as by its own patient care centers; (iv) opening new patient care centers in existing markets including centers within rehabilitation hospitals; (v) developing contract business with managed care organizations, including health maintenance organizations ("HMOs") and preferred provider organizations ("PPOs"), and a proprietary referral network between selected O&P service providers and such managed care organizations through its wholly-owned subsidiary, OPNET, Inc., which operates the Company's Orthotic and Prosthetic Network ("OPNET"). See "Acquisition Strategy" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." In December 1996, following the Company's acquisition of J.E. Hanger, Inc. of Georgia ("SEH"), the Company consolidated its business operations by merging many of its subsidiaries and otherwise combining similar lines of business within certain continuing subsidiaries. The result of this consolidation is that patient-care services are consolidated under HPO, manufacturing activities are consolidated under DOBI-Symplex, distribution activities are consolidated under SPS, and managed care contract services are concentrated under OPNET. ACQUISITION STRATEGY The Company's primary growth strategy is pursued through acquisitions. The Company considers both operating and financial factors in evaluating prospective acquisitions. Operating factors include Hanger's emphasis on high standards of professionalism and patient care and the presence of certified practitioners at each of its facilities. Financial factors include historical earnings and cash flow history and the projected benefits of applying Hanger's management, marketing, information systems and other operational programs, such as access to its manufacturing and wholesale distribution facilities, to the acquired company's business. Hanger's acquisition criteria also include the retention and support of the existing management of the acquired company, typically through the use of employment contracts, non-compete agreements and incentive programs. In evaluating acquisitions in geographic areas where the Company has an established presence, Hanger targets businesses that complement its existing network of patient care centers. In locations where the Company 4 has not yet established a presence, the Company generally focuses on strong regional businesses which have multiple patient care centers and experienced practitioners. The Company also plans to continue to expand its contractual relationships with large managed care organizations for the provision of O&P services. In 1995, the Company formed OPNET which serves as a referral source of O&P services for managed care providers at a reduced cost for claims administration due to OPNET's prenegotiated fee structure with payor groups. OPNET has successfully established contractual relationships with approximately 374 patient care centers and 221 insurance payors. OPNET also provides incentives to independent O&P service provider members to purchase their O&P products from SPS and DOBI-Symplex. OPNET further provides the Company with opportunities for future acquisitions by allowing the Company to evaluate the financial and clinical performance of the OPNET member clinics. The Company also maintains contractual relationships with rehabilitation hospitals pursuant to which Hanger operates such facilities' O&P patient care centers. This includes The Rusk Institute of Rehabilitation Medicine at the New York University Medical Center in New York, New York, the Rocky Mountain Regional Spinal Injury Center of the Craig Hospital in Denver, Colorado, and the Harmarville Rehabilitation Center in Pittsburgh, Pennsylvania. OPERATIONAL STRATEGY The Company's O&P practice management operational strategy includes the continued development and implementation of programs designed to enhance the efficiency of its consolidated clinical practices. These programs permit its certified practitioners to allocate a greater portion of their time to patient care activities by reducing the administrative responsibilities of operating the business. Such programs include: (i) sales and marketing initiatives designed to attract new patient referrals through established relationships with physicians, therapists, employers, managed care organizations, such as HMOs and PPOs, hospitals, rehabilitation centers, out-patient clinics and insurance companies; (ii) professional management and information systems designed to improve efficiencies of administrative and operational functions under guidelines of the Company's patient care centers; (iii) professional educational programs for practitioners emphasizing state-of-the-art developments in the increasingly sophisticated field of O&P clinical therapy; (iv) the regional centralization of fabrication and purchasing activities which provides overnight access to component parts and products at prices that are typically 25% lower than traditional procurement methods; and (v) the acquisition of state-of-the-art equipment which is financially more difficult for smaller, independent facilities to obtain. Management believes that the programs which have been created by the Company to enhance its operational strategy have made the Company attractive to clinical practices, which enhances the Company's ability to expand through acquisitions and maximize the retention of practitioners. SALES AND MARKETING The Company believes that the application of modern sales and marketing techniques is a key element of its O&P practice management business strategy. While patient referrals have always been a source of new business, historically there has been an absence of a comprehensive sales and marketing 5 effort in the patient care segment of the O&P industry. The success of an O&P business has been largely a function of its local reputation for quality of care, responsiveness and length of service in the community. This is due primarily to the fragmented nature of the industry, with individual practitioners relying almost exclusively on referrals from local physicians or physical therapists. Hanger's patient care marketing efforts are managed by a Vice President of Marketing and are directed toward referring physicians, therapists, employers, HMOs, PPOs, hospitals, rehabilitation centers, out-patient clinics and insurance companies on both a local, regional and national basis. While specialized physicians, such as orthopedic and vascular surgeons and physiatrists, have been principal referral sources, regional and national third-party payors such as managed care organizations, including HMOs and PPOs, have become important sources of patient referrals. Hanger has also targeted other rehabilitation professionals in the continuum of care for O&P patients, including physical therapists, orthopedic nurses and technicians and other professionals. Hanger employs personnel whose responsibilities include the solicitation of new business from these referral sources. The Company has been successful in procuring the approval of broad-based managed care plans and other institutional healthcare providers and payors. As part of this effort, the Company formed OPNET which employs personnel whose primary responsibility is to develop and implement new marketing techniques directed toward such managed-care plans and other institutional healthcare providers and payors. Although referrals are instrumental in establishing initial contact with patients, the Company's O&P practice management policies continue to emphasize the primary importance of its service to its patients. Hanger believes that it is important to develop the doctor/patient relationship in order to properly meet the needs of the patient, ensure the patient's satisfaction with the O&P device and establish a long-term relationship between the doctor and patient in order for the patient to understand adequately the rehabilitation program, which is attendant to regaining mobility, and the proper maintenance of the O&P device to ensure ongoing performance of the brace or device. The patient orientation of Hanger's services are designed to ensure the patient's return to Hanger for his or her orthotic or prosthetic needs. ACQUISITIONS Since 1986, the Company has acquired over 40 businesses representing 178 offices in 29 jurisdictions, with the most recent of these acquisitions being the acquisition in November 1996 of SEH, a Georgia corporation which operated 93 patient care offices in 15 states, and was the country's largest distributor of O&P products. The Company has entered into letters of intent to effect three acquisitions in Tennessee, Ohio and Florida, which, if consumated, would be expected to add approximately $9 million in annual net sales. The Company continues to be engaged in discussions with several other O&P companies relating to the Company's possible acquisition of their patient care centers. The Company's investigations of such other companies' affairs are in their formative stages and no final representations can be made as to whether, when or on what terms such possible acquisitions may be effected. 6 MANUFACTURING AND DISTRIBUTION In addition to on-site fabrication of custom devices incidental to the services rendered at its O&P patient care centers, Hanger also manufactures a number of non-customized orthotic components and finished patient care products at DOBI-Symplex, a facility in Orlando, Florida at which Lenox Hill and Ortho-Mold products are also manufactured, and a Ralph Storrs, Inc. ("Storrs") facility in Kankakee, Illinois. The principal products manufactured are pre-fabricated and custom-made spinal orthoses as well as custom and off-the-shelf derotation knee braces. These products are supplied to Hanger's patient care centers, as well as sold to unaffiliated O&P patient care facilities. For the years ended December 31, 1992, 1993, 1994, 1995 and 1996, sales of products manufactured by the Company accounted for 10%, 18%, 18%, 16% and 12%, respectively, of Hanger's historical net sales. As a result of the business mix of SEH, which included no manufacturing revenues, the Company's manufacturing revenues as a percentage of sales is anticipated to be only 7% of net sales in 1997. SPS is primarily engaged in the distribution of O&P products, a majority of which are manufactured by others and distributed by SPS primarily to others in the O&P industry. SPS inventories over 20,000 items. After the Company's acquisition of SPS in November 1996, the Company consolidated its distribution business, O&P Express, into SPS. For the years ended December 31, 1992, 1993, 1994, 1995 and 1996, revenues attributable to distribution accounted for 6%, 5%, 4%, 5% and 10%, respectively, of Hanger's historical net sales. As a result of the business mix of SEH, which included a substantial distribution business, the Company's distribution revenues as a percentage of sales is anticipated to be 18% of net sales in 1997. Marketing of Hanger's manufactured products and distribution services is conducted on a national basis, primarily through independent sales representatives and an internal sales force, catalogues and through exhibits at industry and medical meetings and conventions. Hanger directs specialized catalogues to segments of the healthcare industry, such as orthopedic surgeons and physical and occupational therapists, and also directs its broad-based marketing to the O&P industry. Storrs' revenues are derived primarily from the manufacture of orthotic devices. One such device is a hyperextension brace for lumbar and thoracic spinal support. Storrs also manufactures the brace components for the Lenox Hill derotation knee orthosis, a business which Hanger, through DOBI-Symplex, acquired on December 31, 1992 from Minnesota Mining and Manufacturing Company ("3M"). DOBI-Symplex is engaged primarily in the manufacture and distribution of plastic spinal orthotic devices. Its activities include: (i) the fabrication of custom-made plastic orthotic devices from patient molds and/or measurements, which account for approximately 61% of its annual revenues; (ii) the manufacture of prefabricated plastic orthotic devices that are mass-produced and sold to distributors and patient care providers, which account for approximately 38% of its annual revenues; and (iii) the fabrication of custom-made prosthetic devices, which account for approximately 1% of its annual revenues. A significant product manufactured and sold by DOBI-Symplex is the custom-made Charleston Bending Brace, an orthotic device designed for nocturnal use to correct spinal curvature in adolescents. 7 On December 31, 1992, DOBI-Symplex, as a wholly-owned subsidiary of the Company, acquired from 3M substantially all of 3M's assets relating to the custom derotation knee brace business primarily known in the O&P industry as the "Lenox Hill" derotation knee brace. The purchase of 3M's Lenox Hill derotation knee brace business complements the manufacturing activities of DOBI-Symplex, which include the fabrication of custom-made plastic orthotic devices and the manufacture of pre-fabricated plastic orthotic devices. In June 1996, the Company developed the LH Custom 2 derotation knee brace which has replaced the Lenox Hill custom derotation knee brace. On September 1, 1993, DOBI-Symplex purchased from 3M substantially all of 3M's assets relating to its off-the-shelf Precision-Fit knee brace business. The purchase of the off-the-shelf Precision-Fit knee brace business complements the custom Lenox Hill derotation knee brace business. On April 15, 1994, the Company acquired from Brunswick Medical Corporation substantially all the assets relating to the custom fitted thermo-plastic spinal brace business primarily known as Ortho-Mold. The purchase of the Ortho-Mold business complements the manufacturing activities of DOBI-Symplex, which includes the pre-fabricated plastic insert to the Ortho-Mold product. To provide timely custom fabrication and service to its patients, the Company employs technical personnel and maintains laboratories at each of its patient care centers. Hanger also maintains several larger, fully staffed central fabrication facilities to service its patient care centers. These centrally-located facilities enable Hanger to fabricate those O&P products which are more easily produced in larger quantities and in a more cost effective manner, as well as serving as an auxiliary production center for products normally fabricated at individual patient care centers. The Company believes that the laboratories in its patient care centers are critical for the provision of patient care services. PATIENT REIMBURSEMENT SOURCES The principal reimbursement sources for Hanger's O&P services are: (i) private payor/third-party insurer sources which consist of individuals, private insurance companies, HMOs, PPOs, hospitals, vocational rehabilitation, workers' compensation and similar sources; (ii) Medicare, which is a federally funded health insurance program providing health insurance coverage for persons age 65 or older and certain disabled persons, and Medicaid, which is a health insurance program jointly funded by Federal and state governments providing health insurance coverage for certain persons in financial need, regardless of age, and which may supplement Medicare benefits for financially needy persons aged 65 or older; and (iii) the United States Veterans Administration, with which Hanger has entered into contracts to provide O&P services. Medicare, Medicaid, the United States Veterans Administration and certain state agencies have set maximum reimbursement levels for payments for O&P services and products. The healthcare policies and programs of these agencies have been subject to changes in payment and methodologies during the past 8 several years. There can be no assurance that future changes will not reduce reimbursements for O&P services and products from these sources. The Company provides O&P services to eligible veterans pursuant to several contracts with the United States Veterans Administration. The United States Veterans Administration establishes rates for reimbursement for itemized products and services under contracts, which expire in September 1997, with the option to renew for a one or two year period. The contracts, awarded on a non-exclusive basis, establish the amount of reimbursement to the eligible veteran if the veteran should choose to use the Company's products and services. The Company has been awarded United States Veterans Administration contracts in the past and expects that it will obtain additional contracts when its present agreements expire. The Omnibus Budget Reconciliation Act of 1990 ("OBRA 1990"), which was enacted on November 5, 1990, provides 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 the fact 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 will enable 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. OBRA 1990's separation of O&P from DME for Medicare reimbursement purposes has not adversely affected the Company. COMPETITION The O&P industry is highly fragmented, with approximately 1,230 certified facilities providing patient care services in the United States. There are also several regional and multi-regional competitors which operate a number of patient care centers. The competition among O&P patient care centers is primarily for referrals from physicians, therapists, employers, HMOs, PPOs, hospitals, rehabilitation centers, out-patient clinics and insurance companies on both a local and regional basis. In addition to O&P facilities, Hanger 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. While the Company believes it is one of the largest suppliers of O&P services in the U.S., certain competitors may have greater financial and personnel resources than Hanger. Hanger competes with others in the industry for trained personnel. To date, however, Hanger has been able to achieve its staffing needs and has experienced a relatively low turnover rate of employees. The Company has not encountered significant competition to date in connection with its acquisition of other O&P businesses. However, no assurance can be given that such competition will not be encountered in the future. 9 GOVERNMENT REGULATIONS AND O&P CERTIFICATION Certain state and Federal agencies require that practitioners providing services to such agencies be certified by the American Board for Certification in Orthotics and Prosthetics (the "ABC"). Hanger's practitioners currently comply with all such requirements. Hanger provides services under various contracts to such Federal agencies. These contracts are subject to regulations governing Federal contracts, including the ability of the government to terminate for its convenience. Revenue from such contracts is not material to Hanger. The Company's manufactured or fabricated devices are not subject to approval or review of the U.S. Food and Drug Administration nor are there any requirements for governmental certification of orthotists or prosthetists or accreditation of Hanger's facilities. The ABC conducts a certification program for practitioners and an accreditation program for patient care centers. The minimum requirements for a certified practitioner are a college degree, completion of an accredited academic program, one 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. EMPLOYEES As of March 21, 1997, Hanger had 996 full-time employees. Of these employees, 562 are patient care practitioners. The balance are executive, sales and administrative personnel. None of the Company's employees is subject to a collective bargaining agreement. The Company considers its relationship with its employees to be good. INSURANCE The Company currently maintains insurance of the type and in the amount customary in the orthopedic rehabilitation industry, including coverage for malpractice liability, product liability, workers' compensation and property damage. Hanger's general liability insurance coverage is at least $500,000 per incident. Based on the Company's experience and prevailing industry practices, Hanger believes its coverage is adequate as to risks and amount. ITEM 2. PROPERTIES. As of December 31, 1996, Hanger operated 178 patient care centers and facilities in 28 states and in Washington, D.C. Of these, 25 centers are owned by Hanger. The remaining centers are occupied under leases expiring between the years of 1997 and 2007. Hanger believes that the centers leased or owned by it are adequate for carrying on its current O&P operations at its existing locations, as well as its anticipated future needs at those locations. Hanger believes it will be able to renew such leases as they expire or find comparable or additional space on commercially suitable terms. 10 Hanger also owns distribution facilities in Georgia and Texas, and leases manufacturing and distribution facilities in Illinois, Maryland, Florida and California. The Company leases its corporate headquarters in Bethesda, Maryland and owns its corporate office in Alpharetta, Georgia. Substantially all of Hanger's properties are pledged to collateralize bank indebtedness. See Notes H and L to Hanger's Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS. Legal proceedings to which Hanger is subject arise in the ordinary course of business. Currently, Hanger is not a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of stockholders. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth information regarding the Company's current executive officers:
Office with Appointed Name Age the Company to Office ------ ----- ------------- ----------- Ivan R. Sabel, CPO 52 Chairman of the Board, 1987 President, Chief Executive Officer and Director Richard A. Stein 37 Vice President-Finance, 1987 Secretary and Treasurer
IVAN R. SABEL has been Chairman of the Board and Chief Executive Officer of Hanger since August 1995 and President since November 1987. Mr. Sabel also served as Chief Operating Officer of Hanger from November 1987 to August 1995. Prior to that time, Mr. Sabel was Vice President - Corporate Development from September 1986 to November 1987. From 1968 until joining Hanger in 1986, Mr. Sabel was the founder and President of Capital Orthopedics, Inc. Mr. Sabel is a Certified Prosthetist and Orthotist ("CPO"), a clinical instructor in orthopedics at Georgetown University Medical School in Washington, D.C., a member of the Board of Directors of the American Orthotic and Prosthetic Association, a former Chairman of the National Commission for Health Certifying Agencies, a former member of the Strategic Planning Committee and a current member of the Veterans Administration Affairs Committee of the American Orthotic and Prosthetic Association and a former President of the American Board for Certification in Orthotics and Prosthetics. 11 RICHARD A. STEIN has been Vice President - Finance, Secretary and Treasurer of Hanger since April 1987. Mr. Stein was also the President of Greiner & Saur Orthopedics, Inc., a former subsidiary of the Company, from April 1987 until November 1989. Mr. Stein is a Certified Public Accountant and was employed by Coopers & Lybrand, LLP from September 1982 until he joined Hanger in 1987. 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The following table sets forth for the periods indicated the high and low closing sales prices per share for the Common Stock on the AMEX:
1996 High Low --------------------------------------------------------------- First Quarter $ 4.625 $ 2.6875 Second Quarter 6.3125 4.0625 Third Quarter 7.250 5.000 Fourth Quarter 7.125 5.9375
1995 High Low --------------------------------------------------------------- First Quarter $ 3.250 $ 2.500 Second Quarter 3.500 2.190 Third Quarter 3.875 2.750 Fourth Quarter 3.500 2.560
As of March 21, 1997 there were 814 holders of record of the Common Stock. DIVIDEND POLICY The Company has never paid cash dividends on its Common Stock and intends to continue this policy for the foreseeable future. Hanger plans to retain earnings for use in its business. The terms of Hanger's agreements with its financing sources and certain other agreements prohibit the payment of dividends on its Common Stock and Preferred Stock and such agreements will continue to prohibit the payment of dividends in the future. Any future determination to pay cash dividends will be at the discretion of the Board of Directors of the Company and will be dependent on Hanger's results of operations, financial condition, contractual and legal restrictions and any other factors deemed to be relevant. 13 ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION. The selected financial information presented below has been derived from the consolidated financial statements of the Company. SELECTED FINANCIAL STATEMENTS (In thousands, except per share data)
Years Ended December 31, ------------------------------------------------------------------ 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- Statement of Operations Data: Net sales $32,406 $43,877 $50,300 $52,468 $66,806 Gross profit 17,277 24,207 27,091 27,896 34,572 Selling, general & administrative 13,064 17,124 21,340 19,362 24,550 Depreciation and amortization 2,100 2,655 3,137 2,691 2,848 Acquisition and Integration Costs (1) --- --- --- --- 2,479 Restructuring cost (1) --- --- 460 --- --- Loss from disposal of assets (1) --- --- 2,150 --- --- Income from operations 2,113 4,428 4 5,843 4,695 Interest expense (1,279) (1,167) (1,746) (2,056) (2,546) Income (loss) from continuing operations before taxes, extraordinary item and accounting change 807 3,221 (1,922) 3,680 1,971 Provision for income taxes 487 1,626 358 1,544 890 Income (loss) from continuing operations before extraordinary item and accounting change 320 1,595 (2,280) 2,135 1,081 Loss from discontinued operations (2) (35) (105) (407) --- --- Income (loss) before extraordinary item and accounting change 285 1,490 (2,687) --- 1,081 Extraordinary loss on early extinguishment of debt (1,139) (23) --- --- (83) Cumulative effect of change in accounting for income taxes --- 1,190 --- --- --- Net income (loss) $ (854) $ 2,655 $(2,687) $ 2,135 $ 998 Income (loss) per common share: Income (loss) from continuing operations before extraordinary item and accounting change $ 0.03 $ 0.19 $ (0.28) $ 0.26 $ 0.12 Loss from discontinued operations --- (0.01) (0.05) --- --- Extraordinary loss on early extinguishment of debt (0.15) --- --- --- (0.01) Cumulative effect of change in accounting for income taxes --- 0.14 --- --- --- Net income (loss) per share (3) $ (0.12) $ 0.32 $ (0.33) $ 0.26 $ 0.11
14 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- Balance Sheet Data: Working capital $11,887 $15,738 $18,412 $20,622 $25,499 Total assets 47,996 56,571 61,481 61,800 134,941 Long-term debt 14,970 19,153 24,330 22,925 64,298 Redeemable preferred stock 194 212 232 254 278 Shareholders' equity 28,564 31,681 29,178 31,291 39,734 (1) The 1994 results includes restructuring costs of $460,000 associated with the closing of unprofitable patient care centers and a loss from the disposal of assets of $2,150,000 resulting from the 1995 sale of the Company's southern California patient care centers. The 1996 results includes acquisition and integration costs of $2,479,000 incurred in connection with the purchase of SEH. See Notes F and D to the Company's Consolidated Financial Statements, respectively. (2) Loss from discontinued operations consists of the loss from discontinued operations and the sale of the discontinued operation of the Company's Apothecaries, Inc. subsidiary, the assets of which were sold in 1994. See Note E to the Company's Consolidated Financial Statements. (3) Income (loss) per common share has been adjusted for preferred stock dividends.
15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Set forth below is a discussion of the results of the Company's operations for the years ended December 31, 1994, 1995 and 1996, and the Company's liquidity and capital resources at December 31, 1996. The discussion which follows should be read in conjunction with Hanger's Selected Consolidated Financial Statements and the Consolidated Financial Statements included elsewhere herein. RESULTS OF OPERATIONS On November 1, 1996, the Company acquired SEH in a transaction that was accounted for under the purchase method. Therefore, the acquisition, which increased the number of the Company's patient care centers from 93 in 15 states and the District of Columbia to 178 in 28 states and the District of Columbia and significantly expanded its distribution capabilities, only impacted two months of reported 1996 results of operations. The Company believes that its results of operations for 1997 will fully reflect the increased level of revenues experienced during the last two months of 1996. In addition, the Company believes that as a result of the Company's recognition in late 1996 of certain non-recurring costs incurred in connection with the SEH acquisition and integration of the companies' operations, as well as certain post-acquisition cost savings expected to be realized, the Company's 1997 profitability is expected to be enhanced. Growth in net sales during the last three fiscal periods has been achieved principally through acquisitions and growth in net sales attributable to patient care centers and facilities that were in operation during the three periods. Gross profit as a percent of net sales has fluctuated between approximately 52% and 54% during these periods. The decline in gross profit as a percent of net sales in 1996 was primarily attributable to Hanger's acquisition, effective November 1, 1996, of SEH which operated not only patient care centers, but a large distribution division that had lower gross profit margins than patient care services. Selling, general and administrative expenses have fluctuated between 37% and 42% as a percent of net sales. The decrease in general and administrative expenses as a percent of net sales in 1995 and 1996 is primarily a result of executing the 1994 restructuring plan discussed below. 16 The following table sets forth for the periods indicated certain items of the Company's statements of operations and their percentage of the Company's net sales:
Historical For the Years Ended December 31 -------------------------------------------- 1994 (1) 1995 (2) 1996 (3) ---- ---- ---- Net Sales 100.0% 100.0% 100.0% Cost of products and services sold 46.1 46.8 48.2 Gross profit 53.9 53.2 51.8 Selling, general and administrative expenses 42.4 36.9 36.7 Depreciation and amortization 4.8 3.8 3.0 Acquisition and Integration Costs 3.7 Amortization of excess cost over net assets acquired 1.4 1.3 1.2 Restructuring cost .9 Loss from disposal of assets 4.3 Income from operations .0 11.1 7.0 Interest expense 3.5 3.9 3.8 Income (loss) from continuing operations (3.8) 7.0 3.0 Income taxes .7 2.9 1.3 Loss from discontinued operations (.8) Net income (loss) (5.3) 4.1 1.5 (1) Includes all companies listed for the entire period: Columbia Brace Shop from January 3, 1994, Orthotic and Prosthetic Division of M-D Medical, a Division of Health Industries, Inc. from January 7, 1994, Pedi-Mac Shoe Company, Inc. from January 31, 1994, Ortho-Mold from April 15, 1994 and J.E. Hanger, Inc. of New England from October 7, 1994. (2) Includes all companies listed in footnote (1) for the entire period, as well as Summit Prosthetics and Orthotics from January 5, 1995, Gulf Coast Orthopaedic Supply, Inc. from March 17, 1995 and excludes the nine patient care centers sold or closed during 1994. (3) Includes all companies listed in footnote (1) and (2) for the entire period, as well as SEH from November 1,1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Net sales for the year ended December 31, 1996 amounted to approximately $66,806,000, an increase of approximately $14,338,000, or 27%, over net sales of approximately $52,468,000 for the year ended December 31, 1995. The increase was primarily a result of: (i) an increase of $12,257,000 attributable to O&P patient care centers and facilities acquired in late 1996, and (ii) an increase of $2,081,000, or an increase of 5%, in net sales attributable to patient care centers and facilities that were in operation during both periods ("Internal Base Net Sales"). Of the $2,081,000 increase in Internal Base Net Sales, $1,900,000, or an increase of 5%, was attributable to patient care centers and $181,000 was attributable to manufacturing and distribution activities. 17 Gross profit in 1996 increased approximately $6,677,000, or 24%, over the prior year. Gross profit as a percent of net sales decreased from 53% in 1995 to 52% in 1996. The 1% decrease in gross profit as a percent of net sales is primarily attributable to the acquisition effective November 1, 1996, of SEH which operated a large distribution division that had lower gross profit margins than patient care services. The cost of products and services sold for the year ended December 31, 1996, amounted to $32,234,000 compared to $24,572,000 in 1995. Selling, general and administrative expenses in 1996 increased approximately $5,188,000, or 27%, compared to 1995. The increase in selling, general and administrative expenses was primarily a result of the acquisition of SEH in November 1996. Selling, general and administrative expenses as a percent of net sales stayed approximately the same at 37%. Non-recurring acquisition and integration costs totaling $2,479,000 in 1996 consisted of: (i) $1,300,000 of bonuses and non-capitalizable professional acquisition advisory support service costs incurred to acquire SEH; and (ii) $1,200,000 of costs to integrate the operations of SEH with the Company. Principally as a result of the above, income from operations in 1996 totalled approximately $4,695,000, a decrease of $1,148,000 below the prior year. Income from operations as a percent of net sales in 1996 decreased to 7% from 11% in 1995. Interest expense for the year ended December 31, 1996 amounted to approximately $2,546,000, which is an increase of $490,000, or 24%, over the $2,056,000 of interest expense incurred during the year ended December 31, 1995. The increase in interest expense was primarily attributable to the increase in bank debt resulting from the acquisition of SEH in November 1996. Interest expense as a percent of net sales was 3.8% for the year ended December 31, 1996, compared to 3.9% for 1995. The Company's effective tax rate was 42.3% in 1996 versus 41.9% in 1995. The increase in 1996 reflects both the recognition of a state deferred tax benefit in 1995, which did not occur in 1996 and the disproportional impact of permanent differences in relation to taxable income. As a result of the above, the Company reported income from operations before extraordinary item and accounting change of $1,081,000 for the year ended December 31, 1996, compared to $2,135,000 for the prior year. A pretax $139,000 (after tax $83,000) extraordinary loss on early extinguishment of debt was recognized in 1996 in connection with the Company's refinancing of bank indebtedness. As a result of the above, the Company reported net income of $998,000, or $.11 per share, for the year ended December 31, 1996, as compared to net income of $2,135,000, or $.26 per share, for the year ended December 31, 1995. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Net sales for the year ended December 31, 1995 amounted to approximately $52,468,000, an increase of approximately $2,168,000, or 4.3%, over net sales of approximately $50,300,000 for the year ended December 31, 1994. The 18 increase was primarily a result of an increase of $2,059,000, or an increase of 5%, in net sales attributable to patient care centers and facilities that were in operation during both periods ("Internal Base Net Sales"). Of the $2,059,000 increase in Internal Base Net Sales, $1,704,000, or an increase of 5%, was attributable to patient care centers and $355,000 was attributable to the Company's manufacturing and distribution activities. The balance of the increase in net sales was attributable to O&P patient care centers and facilities acquired by the Company in late 1994 and 1995. The increase of $2,168,000 in net sales occurred notwithstanding the sale or closure of nine patient care centers during late 1994 and the first quarter of 1995 in connection with the restructuring (the "Restructuring") undertaken by the Company in 1994 and consummated in March 1995. These nine centers accounted for net sales of $1,770,000 during the year ended December 31, 1994 compared with only $74,000 during the year ended December 31, 1995. Gross profit increased by approximately $805,000, or 3.0%, over the prior year. Gross profit as a percent of net sales decreased from 53.9% in 1994 to 53.2% in 1995. The cost of products and services sold for the year ended December 31, 1995 amounted to $24,572,000 compared to $23,209,000 for the year ended December 31, 1994. Gross profit as a percent of net sales for patient care services remained the same during 1994 and 1995 at 53%. Gross profit as a percent of net sales for manufacturing and distribution declined from 37% in 1994 to 36% in 1995. This decline resulted principally from pricing pressures in the distribution and manufacturing divisions. Selling, general and administrative expenses in 1995 decreased by approximately $1,978,000, or 9.3%, compared to 1994. In addition to decreasing in dollar amount, selling, general and administrative expenses as a percent of net sales decreased to 36.9% for the year ended December 31, 1995 from 42.4% of net sales for the year ended December 31, 1994. The decrease in selling, general and administrative expenses was primarily a result of the sale and closure of nine patient care centers during late 1994 and the first quarter of 1995 in connection with the Restructuring undertaken by the Company in 1994, and consummated in March 1995. These nine centers accounted for selling, general and administrative expenses of $1,043,000 during the year ended December 31, 1994 compared with only $67,000 during the year ended December 31, 1995. The remaining reduction in selling, general and administrative expenses was primarily a result of additional cost cutting at the patient care center level. Principally as a result of the above, income from operations in 1995 totalled approximately $5,843,000, an increase of $5,839,000 over the prior year. Income from operations as a percent of net sales increased 11% in 1995 as compared to 1994. Interest expense for the year ended December 31, 1995 amounted to approximately $2,056,000, which is an increase of $310,000, or 17.8%, over the $1,746,000 of interest expense incurred during the year ended December 31, 1994. The increase in interest expense was primarily attributable to the facts that (i) average borrowings in 1995 were $1.8 million higher than the average borrowing during 1994, and (ii) borrowing rates from the bank were 1% higher in 1995 when compared to 1994. 19 The provision for income taxes in 1995 amounted to approximately $1,544,000, as compared to $358,000 in 1994. The increase of $1,186,000 was primarily a result of a $5,839,000 increase in income from operations and a reduction in the non-tax deductible amortization of excess cost over net assets acquired, offset by the reversal of the valuation allowance relating to state net operating loss carryforwards. As a result of the above, the Company reported net income of $2,135,000, or $.26 per share, for the year ended December 31, 1995, as compared to a net loss of $2,687,000, or $.33 per share, for the year ended December 31, 1994. LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated working capital at December 31, 1996 was approximately $25,499,000. Cash and cash equivalents available at that date was approximately $6,572,000. The Company's cash resources were satisfactory to meet its obligations during the year ended December 31, 1996. It is also anticipated that such cash resources will adequately meet the Company's obligations during 1997. The Company's total long-term debt at December 31, 1996, including a current portion of approximately $4,903,000, was approximately $69,200,000. Such indebtedness included: (i) $57,000,000 borrowed under term loan agreements with Banque Paribas; (ii) $6,000,000, net of discount, borrowed under 8% Senior Subordinated Notes; and (iii) a total of $6,200,000 of other indebtedness. On November 1, 1996, the Company repaid the outstanding balance under its $13.0 million revolving credit agreement and its senior term loans with NationsBank, N.A. and $5.0 million of Convertible Junior Subordinated Notes, with a portion of the proceeds received from new term loans provided on that date by Banque Paribas (the "Bank"), as agent for a syndication of banks. Under the terms of a new Financing and Security Agreement between the Bank and the Company, the Bank provided up to $90.0 million principal amount of senior financing (the "Senior Financing Facilities") that includes: (i) $57 million of term loans (the "Term Loans") for use in connection with Hanger's acquisition of SEH, (ii) a $8.0 million revolving loan facility (the "Revolver"), and (iii) up to $25 million principal amount of loans under an acquisition loan facility (the "Acquisition Loans") for use in connection with future acquisitions. As of December 31, 1996 the Company had no outstanding balances under the Revolver or the Acquisition Loan Facilities. Of the Term Loans, approximately $29.0 million principal amount (the "A Term Loan") will be amortized in quarterly amounts and will mature on December 31, 2001, and $28.0 million principal amount (the "B Term Loan") will be amortized in quarterly amounts and will mature on December 31, 2003. The final maturity of any loans under the Revolver and Acquisition Loans will mature on November 1, 2001. The Senior Financing Facilities provided for an initial commitment fee of .5% on the total $90,000,000 facility. In addition, an unused commitment fee of .5% of 1% per year on the unused portion of the 20 Revolver and the Acquisition Loan facilities will be payable quarterly in arrears. The above Senior Financing Facilities are collateralized by a first priority security interest in all of the common stock of Hanger's subsidiaries and all assets of Hanger and its subsidiaries. At Hanger's option, the annual interest rate will be adjusted to be either LIBOR plus 2.75% or a Base Rate (as defined below) plus 1.75% in the case of the A Term Loan, Acquisition Loans and Revolver borrowings, and adjusted LIBOR plus 3.25% or a Base Rate plus 2.25% in the case of the B Term Loan. The "Base Rate" is defined as the higher of (i) the federal funds rate plus .5%, or (ii) the prime commercial lending rate of Chase Manhattan Bank, N.A., as announced from time to time. All or any portion of outstanding loans under any of the Senior Financing Facilities may be prepaid at any time and commitments may be terminated in whole or in part at the option of Hanger without premium or penalty, except that LIBOR - based loans may only be paid at the end of the applicable interest period. Mandatory prepayments will be required in the event of certain sales of assets, debt or equity financings and under certain other circumstances. In addition, on November 1, 1996, the Company borrowed $8.0 million from the Bank and Chase Venture Capital Associates L.P. in the form of Senior Subordinated Notes ("Subordinated Notes") with detachable Warrants. Cash interest on the Subordinated Notes, which will mature on November 1, 2004, will be payable quarterly at an annual rate of 8%; provided, however, that Hanger will be permitted, in lieu of cash interest, to pay interest in a combination of cash and additional Subordinated Notes ("PIK Interest Notes") at the above interest rate. In that event, interest paid in cash will be at an annual rate of 3.2% and interest paid in the form of PIK Interest Notes will be paid at an annual rate of 4.8%. The Subordinated Notes will be subordinated to loans under the Senior Financing Facilities. Hanger will, at its option, be entitled to redeem the Subordinated Notes at any time at their liquidation value. Hanger must use 100% of the proceeds from any future public offering of its equity securities to repurchase the Subordinated Notes, if permitted under the Senior Financing Facilities. The detachable Warrants issued by Hanger in conjunction with the Subordinated Notes represent 1.6 million shares of Hanger Common Stock with an exercise price equal to: (a) $4.01 as to 929,700 shares, and (b) $6.375 as to 670,300 shares. Up to 50% of the Warrants (representing up to 800,000 shares of Hanger Common Stock) will be terminated upon the repayment of 100% of the Subordinated Notes on or prior to May 1, 1998. An additional 5% of the Warrants (representing up to 80,000 shares of Hanger Common Stock) will be terminated upon the repayment of 100% of the Subordinated Notes on or prior to November 1, 1997. Warrants will be terminated pro-rata across the above two exercise prices. The Company plans to finance future acquisitions through internally generated funds or borrowings under the Acquisition Loans, the issuance of notes or shares of common stock of the Company, or through a combination thereof. 21 The Company is actively engaged in ongoing discussions with prospective acquisition candidates. The Company plans to continue to expand its operations aggressively through acquisitions. On November 1, 1996, Hanger acquired SEH, in a merger transaction effected pursuant to an Agreement and Plan of Merger, dated as of July 29, 1996 (the "Merger Agreement"), by and among Hanger, SEH and JEH Acquisition Corporation, a Georgia corporation ("Acquisition") wholly-owned by Hanger. The Merger Agreement provided for the merger of Acquisition with and into SEH (the "Merger"), as a result of which SEH became a wholly-owned subsidiary of Hanger, effective November 1, 1996. Pursuant to the Merger Agreement, Hanger paid a total of $44 million and issued a total of approximately one million shares of Hanger common stock in exchange for all of SEH's outstanding common stock on November 1, 1996, and paid an additional $1,783,000 to former SEH shareholders on March 27, 1997 pursuant to provisions in the Merger Agreement calling for a post-closing adjustment. OTHER Inflation has not had a significant effect on the Company's operations, as increased costs to the Company generally have been offset by increased prices of products and services sold. The Company has entered into an interest rate swap agreement to reduce the impact of changes in interest rates on its A Term Loan Commitment. At December 31, 1996, the Company had an outstanding interest rate swap agreement with a commercial bank, having a total notional principal amount of $28,500,000. The agreement effectively minimizes the Company's base interest rate exposure between a floor of 5.32% and a cap of 7%. The interest rate swap agreement matures on September 30, 1999. The Company is exposed to credit loss in the event of non-performance by the other party to the interest rate swap agreement. However, the Company does not anticipate non-performance by the counterparty. All other debt accrues interest at a fixed rate except the B Term Loan Commitment which accrues interest at a floating rate. A material change in interest rates could have a significant impact on the Company's operating results. This report contains forward-looking statements setting forth the Company's beliefs or expectations relating to future revenues and profitability. Actual results may differ materially from projected or expected results due to changes in the demand for the Company's O&P services and products, uncertainties relating to the results of operations or recently acquired and newly acquired O&P patient care practices, the Company's ability to attract and retain qualified O&P practitioners, governmental policies affecting O&P operations and other risks and uncertainties affecting the health-care industry generally. 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. 22 The Company primarily provides customized devices or services throughout the United States and is reimbursed, in large part, by the patients' third party insurers or governmentally funded health insurance programs. The ability of the Company's debtors to meet their obligations is principally dependent upon the financial stability of the insurers of the Company's patients and future legislation and regulatory actions. In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") 128, "Earnings Per Share." This statement established standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This statement is effective for financial statements issued for periods ending after December 15, 1997. Earlier application is not permitted. This statement requires reinstatement of all prior-period EPS data presented. The Company is currently evaluating the impact, if any, adoption of SFAS 128 will have on its financial statements. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements and schedules required hereunder and contained herein are listed under Item 14(a) below. The Company is not subject to the requirement to file selected quarterly financial data under Item 302 of Regulation S-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item regarding directors is hereby incorporated by reference from the Company's definitive proxy statement or amendment hereto to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. Information regarding the Company's executive officers is set forth under Item 4A of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item is hereby incorporated by reference from the Company's definitive proxy statement or amendment hereto to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item is hereby incorporated by reference from the Company's definitive proxy statement or amendment hereto to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item is hereby incorporated by reference from the Company's definitive proxy statement or amendment hereto to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K. (a) Financial Statements and Financial Statement Schedule: (1) Financial Statements: HANGER ORTHOPEDIC GROUP, INC. Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1995 and 1996 25 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1994, 1995 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 Notes to Consolidated Financial Statements (2) Financial Statements Schedule: Report of Independent Accountants Schedule II - Valuation and qualifying accounts All other schedules are omitted either because they are not applicable or required, or because the required information is included in the financial statements or notes thereto:
Exhibit No. Document (b) Reports on Form 8-K: A Form 8-K reporting the Registrant's acquisition of J.E. Hanger, Inc. of Georgia, effective November 1, 1996, was filed on November 12, 1996. (c) Exhibits: The following exhibits are filed herewith or incorporated herein by reference: 3(a) Certificate of Incorporation, as amended, of the Registrant. (Incorporated herein by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1988.) 3(b) Certificate of Amendment of the Registrant's Certificate of Incorporation (which, among other things, changed the Registrant's corporate name from Sequel Corporation to Hanger Orthopedic Group, Inc.), as filed on August 11, 1989 with the Office of the Secretary of State of Delaware. (Incorporated herein by reference to Exhibit 3(b) to the Registrant's Current Report on Form 10-K dated February 13, 1990.) 3(c) Certificate of Agreement of Merger of Sequel Corporation and Delaware Sequel Corporation. (Incorporated herein by reference to Exhibit 3.1(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1988.) 26 3(d) Certificate of Ownership and Merger of Hanger Acquisition Corporation and J. E. Hanger, Inc. as filed with the Office of the Secretary of the State of Delaware on April 11, 1989. (Incorporated herein by reference to Exhibit 2(f) to the Registrant's Current Report on Form 8-K dated May 15, 1989.) 3(e) Certificate of Designation, Preferences and Rights of Preferred Stock of the Registrant as filed on February 12, 1990 with the Office of the Secretary of State of Delaware. (Incorporated herein by reference to Exhibit 3(a) to the Registrant's Current Report on Form 8-K dated February 13, 1990.) 3(f) By-Laws of the Registrant, as amended. (Incorporated herein by reference to Exhibit 3 to the Registrant's Current Report on Form 8-K dated May 15, 1989.) 10(a) Registration Agreement, dated May 15, 1989, between Sequel Corporation, First Pennsylvania Bank, N.A., Gerald E. Bisbee, Jr., Ivan R. Sabel, Richard A. Stein, Ronald J. Manganiello, Joseph M. Cestaro and Chemical Venture Capital Associates. (Incorporated herein by reference to Exhibit 10(l) to the Registrant's Current Report on Form 8-K dated May 15, 1989.) 10(b) First Amendment dated as of February 12, 1990, to the Registration Agreement, dated as of May 15, 1989, by and among Hanger Orthopedic Group, Inc., First Pennsylvania Bank, N.A., Ivan R. Sabel, Richard A. Stein, Ronald J. Manganiello, Joseph M. Cestaro and Chemical Venture Capital Associates. (Incorporated herein by reference to Exhibit 10(m) to the Registrant's Current Report on Form 8-K dated February 13, 1990.) 10(c) Fifth Amendment, dated as of November 8, 1990, to the Stock and Note Purchase Agreement, dated as of February 28, 1989 and as amended on May 9, 1989, May 15, 1989, February 12, 1990, and June 19, 1990 by and among J. E. Hanger, Inc., as successor to Hanger Acquisition Corporation, Ronald J. Manganiello, Joseph M. Cestaro, Chemical Venture Capital Associates and Chemical Equity Associates. (Incorporated herein by reference to Exhibit 10(f) to the Registrant's Current Report on Form 8-K filed on November 21, 1990.) 10(d) Form of Stock Option Agreements, dated as of August 13, 1990, between Hanger Orthopedic Group, Inc. and Thomas P. Cooper, James G. Hellmuth, Walter F. Abendschein, Jr., Norman Berger, Bruce B. Grynbaum and Joseph S. Torg. (Incorporated herein by reference to Exhibit 10(rrr) to the Registrant's Registration Statement on Form S-2, File No. 33-37594.) * * Management contract or compensatory plan 27 10(e) Convertible Junior Subordinated Note Agreement, dated as of March 1, 1992, from Hanger Orthopedic Group, Inc. to R. S. Lauder, Gaspar & Co., L.P. regarding $4,000,000 8.5% Convertible Junior Subordinated Notes due March 31, 1999. (Incorporated herein by reference to Exhibit 10(jjjj) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991.) 10(f) Convertible Junior Subordinated Note Agreement dated as of May 7, 1993, from Hanger Orthopedic Group, Inc. to R.S. Lauder, Gaspar & Co., L.P. regarding $1,000,000 8.25% Convertible Junior Subordinated Notes due March 31, 1999. (Incorporated herein by reference to Exhibit 10 (x) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.) 10(g) Amendment No. 1, dated as of May 7, 1993, to the Convertible Junior Subordinated Note Agreement referred to in Exhibit (x) above. (Incorporated herein by reference to Exhibit 10 (y) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.) 10(h) Employment and Non-Compete Agreement, dated as of May 16, 1994, between Hanger Orthopedic Group, Inc. and Ivan R. Sabel. (Incorporated herein by reference to Exhibit 10 (xx) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) * 10(i) Employment and Non-Compete Agreement, dated as of May 16, 1994, between Hanger Orthopedic Group, Inc. and Richard A. Stein. (Incorporated herein by reference to Exhibit 10 (yy) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) * 10(j) Agreement and Plan of Merger, dated as of July 29, 1996, among Hanger Orthopedic Group, Inc., SEH Acquisition Corporation and J.E. Hanger, Inc. of Georgia. (Incorporated herein by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K filed on November 12, 1996.) 10(k) Credit Agreement, dated November 1, 1996, among Hanger Orthopedic Group, Inc., various banks and Banque Paribas, as agent. (Incorporated herein by reference to Exhibit 10(a) to the Registrant's Current Report on Form 8-K filed on November 12, 1996.) 10(l) Senior Subordinated Note Purchase Agreement, dated as of November 1, 1996, among Hanger Orthopedic Group, Inc. and the purchasers listed therein. (Incorporated hereby by reference to Exhibit 10(b) to the Registrant's Current Report on Form 8-K filed on November 12, 1996.) * Management contract or compensatory plan 28 10(m) Warrants to purchase Common Stock of Hanger Orthopedic Group, Inc. issued November 1, 1996. (Incorporated herein by reference to Exhibit 10(c) to the Registrant's Current Report on Form 8-K filed on November 12, 1996.) 10(n) 1991 Stock Option Plan of the Registrant. (Incorporated herein by reference to Exhibit 4(b) to the Registrant's Registration Statement on Form S-8 (File No. 33-48265).)* 10(o) 1993 Non-Employee Directors Stock Option Plan of the Registrant. (Incorporated herein by reference to Exhibit 4(b) to the Registrant's Registration Statement on Form S-8 (File No. 33-63191).)* 10(p) Employment and Non-Compete Agreement, dated as of November 1, 1996, and Amendment No. 1 thereto, dated January 1, 1997, between the Registrant and H.E. Thranhardt. (Filed herewith.)* 10(q) Employment and Non-Compete Agreement, dated as of November 1, 1996, between the Registrant and John McNeill. (Filed herewith.)* 10(r) Employment and Non-Compete Agreement, dated as of November 1, 1996, between the Registrant and Alice Tidwell. (Filed herewith.)* 11 Computation of earnings per share. 22 List of Subsidiaries of the Registrant. 24 Consent of Coopers & Lybrand L.L.P. 27 Financial Data Schedule.
* Management contract or compensatory plan 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HANGER ORTHOPEDIC GROUP, INC. Dated: March 28, 1997 By: /s/IVAN R. SABEL -------------------------- Ivan R. Sabel, CPO Chief Executive Officer (Principal Executive Officer) Dated: March 28, 1997 By: /s/RICHARD A. STEIN -------------------------- Richard A. Stein Vice President - Finance (Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the Registrant and in the capacities and on the dates indicated. Dated: March 28, 1997 /s/IVAN R. SABEL -------------------------- Ivan R. Sabel, CPO Chief Executive Officer and Director (Principal Executive Officer) Dated: March 28, 1997 /s/RICHARD A. STEIN -------------------------- Richard A. Stein Vice President - Finance (Principal Financial and Accounting Officer) Dated: March 28, 1997 /s/MITCHELL J. BLUTT -------------------------- Mitchell J. Blutt, M.D. Director 30 Dated: March 28, 1997 /s/EDMOND E. CHARRETTE -------------------------- Edmond E. Charrette, M.D. Director Dated: March 28, 1997 /s/THOMAS P. COOPER -------------------------- Thomas P. Cooper, M.D. Director Dated: March 28, 1997 /s/ROBERT J. GLASER -------------------------- Robert J. Glaser, M.D. Director Dated: March 28, 1997 /s/JAMES G. HELLMUTH -------------------------- James G. Hellmuth Director Dated: March 28, 1997 /s/WILLIAM L. MCCULLOCH -------------------------- William L. McCulloch Director Dated: March 28, 1997 /s/DANIEL A. MCKEEVER -------------------------- Daniel A. McKeever. CP Director Dated: March 28, 1997 -------------------------- Walter J. McNerney Director Dated: March 28, 1997 -------------------------- H.E. Tranhardt, CPO Director
31 INDEX TO FINANCIAL STATEMENTS HANGER ORTHOPEDIC GROUP, INC. Report of Independent Accountants F-1 Consolidated Balance Sheets as of December 31, 1995 and 1996 F-2 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 F-4 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1994, 1995 and 1996 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 F-6 Notes to Consolidated Financial Statements F-7 FINANCIAL STATEMENT SCHEDULE Report of Independent Accountants S-1 Schedule II - Valuation and Qualifying Accounts S-2
32 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Hanger Orthopedic Group, Inc. We have audited the accompanying consolidated balance sheets of Hanger Orthopedic Group, Inc. and Subsidiaries as of December 31, 1995 and 1996 and the related consolidated statements of operations, changes in shareholders' equity and cash flow for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hanger Orthopedic Group, Inc., and Subsidiaries as of December 31, 1995 and 1996, and the consolidated results of their operations and their cash flow for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania March 21, 1997, except as to the information presented in Note D, for which the date is March 27, 1997 F-1 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS
December 31, -------------------------------- 1995 1996 ------------- ---------------- ASSETS CURRENT ASSETS Cash and cash equivalents $1,456,305 $6,572,402 Accounts receivable, less allowances for doubtful accounts of $1,144,000 and $2,478,800 in 1995 and 1996, respectively 13,324,991 24,321,872 Inventories 10,312,289 15,916,638 Prepaid and other assets 1,040,914 1,595,169 Deferred income taxes 804,499 3,159,280 ------------- ------------- Total current assets 26,938,998 51,565,361 ------------- ------------- PROPERTY, PLANT AND EQUIPMENT Land 2,991,245 4,269,045 Buildings 2,592,214 8,017,547 Machinery and equipment 3,654,780 6,275,307 Furniture and fixtures 1,575,493 2,095,900 Leasehold improvements 1,184,782 2,139,207 ------------- ------------- 11,998,514 22,797,006 Less accumulated depreciation and amortization 4,232,858 5,497,809 ------------- ------------- 7,765,656 17,299,197 ------------- ------------- INTANGIBLE ASSETS Excess cost over net assets acquired 27,133,528 63,935,447 Non-compete agreements 4,786,371 1,981,329 Other intangible assets 3,825,240 6,152,607 ------------- ------------- 35,745,139 72,069,383 Less accumulated amortization 9,035,394 6,917,960 ------------- ------------- 26,709,745 65,151,423 ------------- ------------- OTHER ASSETS Other 385,662 925,446 ------------- ------------- TOTAL ASSETS $61,800,061 $134,941,427 ============= =============
The accompanying notes are an integral part of the consolidated financial statements. F-2 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS
December 31, -------------------------------- 1995 1996 ------------- ---------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 1,828,953 $ 4,902,572 Accounts payable 1,612,401 4,141,993 Accrued expenses 710,510 7,815,028 Customer deposits 489,758 578,219 Accrued compensation related cost 1,495,013 8,321,395 Deferred revenue 180,587 306,998 ------------ ------------- Total current liabilities 6,317,222 26,066,205 ------------ ------------- Long-term debt 22,925,124 64,297,801 Deferred income taxes 706,965 2,377,627 Other liabilities 305,499 2,188,278 Mandatorily redeemable preferred stock class C, 300 shares authorized, liquidation preference of $500 per share (See Note N) 253,886 277,701 Mandatorily redeemable preferred stock class F, 100,000 shares authorized, liquidation preference of $1,000 per share (See Note N) Commitments and contingent liabilities SHAREHOLDERS' EQUITY Common stock, $.01 par value; 25,000,000 shares authorized, 8,424,039 and 9,449,129 shares issued and 8,290,544 and 9,315,634 shares outstanding in 1995 and 1996, respectively 84,241 94,492 Additional paid-in capital 33,574,058 41,008,363 Accumulated deficit (1,711,372) (713,478) ------------ ------------- 31,946,927 40,389,377 Treasury stock, cost --(133,495 shares) (655,562) (655,562) ------------ ------------- 31,291,365 39,733,815 ------------ ------------- TOTAL LIABILITES & SHAREHOLDERS' EQUITY $61,800,061 $134,941,427 ============ =============
The accompanying notes are an integral part of the consolidated financial statements. F-3 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31,
1994 1995 1996 --------------- --------------- --------------- Net sales $50,300,297 $52,467,899 $66,805,944 Cost of products and services sold 23,208,944 24,572,089 32,233,373 --------------- --------------- --------------- Gross profit 27,091,353 27,895,810 34,572,571 Selling, general and administrative 21,340,148 19,361,701 24,549,802 Depreciation and amortization 2,435,727 2,005,113 2,016,390 Amortization of excess cost over net assets acquired 701,018 686,275 832,075 Restructuring cost 459,804 Loss from disposal of assets 2,150,310 Acquisition costs 1,297,819 Integration costs 1,181,694 --------------- --------------- --------------- Income from continuing operations 4,346 5,842,721 4,694,791 Interest expense (1,745,781) (2,056,140) (2,546,561) Other expense, net (180,940) (106,644) (177,216) --------------- --------------- --------------- Income (loss) from continuing operations before taxes and extraordinary item (1,922,375) 3,679,937 1,971,014 Provision for income taxes 358,029 1,544,498 889,886 --------------- --------------- --------------- Income (loss) from continuing operations before extraordinary item (2,280,404) 2,135,439 1,081,128 Loss from discontinued operations (247,655) Loss from sale of discontinued operations (159,379) --------------- --------------- --------------- Income (loss) before extraordinary item (2,687,438) 2,135,439 1,081,128 Extraordinary loss on early extinguishment of debt, net of tax (83,234) --------------- --------------- --------------- Net income (loss) ($2,687,438) $2,135,439 $997,894 =============== =============== =============== Income (loss) from continuing operations before extraordinary item applicable to common stock ($2,300,286) $2,113,640 $1,057,313 =============== =============== =============== INCOME (LOSS) PER COMMON SHARE: Income (loss) from continuing operations before extraordinary item ($.28) $0.26 ($0.12) Loss from discontinued operations (0.03) Loss from sale of discontinued operations (0.02) Extraordinary loss on early extinguishment of debt (0.01) --------------- --------------- --------------- Net income (loss) per share ($0.33) $0.26 $0.11 =============== =============== =============== Weighted average number of common shares outstanding used in computing net income (loss) per share 8,290,276 8,290,544 8,663,161
The accompanying notes are an integral part of the consolidated financial statements. F-4 HANGER ORTHOPEDIC GROUP, INC CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 31, 1994, 1995 and 1996
Additional Common Common Paid in Accumulated Treasury Deferred Shares Stock Capital Deficit Stock Compensation Total ----------- --------- ------------- ------------ ---------- ------------ ------------ Balance, December 31, 1993 8,257,891 $83,914 $33,416,066 ($1,159,373) ($655,562) ($4,197) $31,680,848 Issuance of Common Stock for purchase of Columbia Brace 32,653 327 199,673 200,000 Amortization of deferred compensation 4,197 4,197 Preferred dividends declared (19,882) (19,882) Net Loss (2,687,438) (2,687,438) ----------- --------- ------------- ------------ ---------- ------------ ------------ Balance, December 31, 1994 8,290,544 84,241 33,595,857 (3,846,811) (655,562) 29,177,725 Preferred dividends declared (21,799) (21,799) Net Income 2,135,439 2,135,439 ----------- --------- ------------- ------------ ---------- ------------ ------------ Balance, December 31, 1995 8,290,544 84,241 33,574,058 (1,711,372) (655,562) 31,291,365 ----------- --------- ------------- ------------ ---------- ------------ ------------ Preferred dividends declared (23,815) (23,815) Issuance of Common Stock in connection with the exercise of Stock Options 13,758 138 46,733 46,871 Issuance of Common Stock in connection with the exercise of Stock Warrants 11,332 113 (113) Issuance of Common Stock in connection with the purchase of SEH 1,000,000 10,000 5,240,000 5,250,000 Issuance of Warrants in connection with the purchase of SEH 133,000 133,000 Issuance of Warrants in connection with the Senior Subordinated Note Agreement 2,038,500 2,038,500 Net Income 997,894 997,894 ----------- --------- ------------- ------------ ---------- ------------ ------------ Balance, December 31, 1996 9,315,634 $94,492 $41,008,363 ($713,478) ($655,562) $39,733,815 =========== ========= ============= ============ ========== ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-5 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOW For the Years Ended December 31,
1994 1995 1996 --------------- --------------- --------------- Cash flow from operating activities: Net income (loss) ($2,687,438) $2,135,439 $997,894 Adjustments to reconcile net income (loss) to net cash provided by (used in) continuing operations: Discontinued operations 426,991 Loss from sale of discontinued operations 274,791 Loss from sale of disposal of assets 2,150,310 Provision for bad debt 973,678 1,008,731 1,629,065 Amortization of deferred compensation 4,197 Depreciation and amortization 2,435,727 2,005,113 2,016,390 Amortization of excess cost over net assets acquired 701,018 686,275 832,075 Amortization of debt discount 42,469 Deferred taxes (629,674) 631,899 (684,119) Extraordinary loss on early extinguishment of debt 138,724 Changes in assets and liabilities, net of effects from acquired companies: Accounts receivable (3,639,274) (1,922,572) (2,772,619) Inventories (1,169,232) (800,933) 737,104 Prepaid and other assets 131,714 108,112 (199,638) Other assets 3,782 151,367 27,342 Accounts payable (54,555) 48,462 361,441 Accrued expenses 776,860 (618,105) 709,638 Accrued wages & payroll taxes (116,852) 72,272 1,942,581 Customer deposits 143,070 97,036 88,461 Deferred revenue (22,691) 82,897 126,411 Other liabilities 156,884 35,628 (66,459) --------------- --------------- --------------- Net cash provided by (used in) continuing operations (140,694) 3,721,621 5,926,760 Net cash used in discontinued operations (172,146) --------------- --------------- --------------- Net cash provided by (used in) operating activities (312,840) 3,721,621 5,926,760 --------------- --------------- --------------- Cash flow from investing activities: Purchase of fixed assets (1,114,551) (934,798) (1,239,364) Acquisitions, net of cash (2,599,133) (273,939) (37,671,754) Purchase of patent (59,382) (70,552) (31,840) Proceeds from sale of certain assets 180,806 Purchase of non-compete agreements (480,500) (35,000) (200,000) Decrease in other intangibles (265,624) (24,321) (7,596) --------------- --------------- --------------- Net cash used in investing activities (4,338,384) (1,338,610) (39,150,554) --------------- --------------- --------------- Cash flow from financing activities: Net borrowings (repayments) under revolving credit agreement 2,635,449 (100,000) (12,700,000) Proceeds from the sale of common stocks 46,871 Proceeds from long-term debt 5,000,000 65,000,000 Repayment of debt (3,276,608) (1,882,706) (11,040,029) (Increase) decrease in financing costs (63,393) 7,619 (2,966,951) --------------- --------------- --------------- Net cash provided by (used in) financing activities 4,295,448 (1,975,087) 38,339,891 --------------- --------------- --------------- Increase (decrease) in cash and cash equivalents (355,776) 407,924 5,116,097 Cash and cash equivalents at beginning of year 1,404,157 1,048,381 1,456,305 --------------- --------------- --------------- Cash and cash equivalents at end of year $1,048,381 $1,456,305 $6,572,402 =============== =============== ===============
The accompanying notes are an integral part of the consolidated financial statements. F-6 HANGER ORTHOPEDIC GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - THE COMPANY Hanger Orthopedic Group, Inc. (the "Company") is one of the nation's largest practice management companies in the orthotic and prosthetic ("O&P") rehabilitation industry. In addition to providing O&P patient care services through its operating subsidiaries, the Company also manufactures and distributes components and finished patient care products to the O&P industry primarily in the United States. Hanger's largest subsidiary, Hanger Prosthetics & Orthotics, Inc. formerly known as J.E. Hanger, Inc., was founded in 1861 by a Civil War amputee and is the oldest company in the O&P industry in the United States. Orthotics is the design, fabrication, fitting and supervised use of custom-made braces and other devices that provide external support to treat musculoskeletal disorders. Prosthetics is the design, fabrication and fitting of custom-made artificial limbs. NOTE B - SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS: Cash includes currency on hand and demand deposits with high quality financial institutions. Management considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. At various times throughout the year, the Company maintains cash balances in excess of FDIC limits. FAIR VALUE OF FINANCIAL INSTRUMENTS: At December 31, 1995 and 1996, the carrying value of financial instruments such as cash and cash equivalents, trade receivables, trade payables, and debt approximates fair value. INVENTORIES: Inventories, which consist principally of purchased parts, are stated at the lower of cost or market using the first-in, first-out (FIFO) method. LONG-LIVED ASSET IMPAIRMENT: Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The provisions of Statement of Financial Accounting Standards ("SFAS") 121 require the Company to review its long lived assets for impairment on an exception basis whenever events or F-7 changes in circumstances indicate that the carrying amount of the assets may not be recoverable through future cash flows. If it is determined that an impairment loss has occurred based on expected cash flows, then the loss is recognized in the income statement. The adoption of SFAS 121 did not have an effect on the Company's consolidated financial statements. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at cost. The cost and related accumulated depreciation of assets sold, retired or otherwise disposed of are removed from the respective accounts, and any resulting gains or losses are included in the statement of operations. Depreciation is computed for financial reporting purposes using the straight-line method over the estimated useful lives of the related assets. Depreciation expense was approximately $1,090,000, $1,136,000 and $1,288,000 for the years ended December 31, 1994, 1995 and 1996, respectively. INTANGIBLE ASSETS: Intangible assets, including non-compete agreements, are recorded based on agreements entered into by the Company and are being amortized over their estimated useful lives ranging from 5 to 7 years using the straight-line method. Other intangible assets are recorded at cost and are being amortized over their estimated useful lives of up to 16 years using the straight-line method. Excess cost over net assets acquired represents the excess of purchase price over the value assigned to net identifiable assets of purchased businesses and is being amortized using the straight-line method over 40 years. It is the Company's policy to periodically review and evaluate whether there has been a permanent impairment in the value of excess cost over net assets acquired and other intangible assets. Factors considered in the evaluation include current operating results, trends, prospects and anticipated undiscounted future cash flows. Fully amortized intangible assets amounting to approximately $3,225,000 were removed from the financial statements at December 31, 1996. PRE-OPENING COSTS: The Company capitalizes certain costs relating to the pre-opening of new patient care centers. These costs are amortized over a twelve-month period using the straight-line method commencing on the date in which the patient care center opens. REVENUE RECOGNITION: Revenue on the sale of orthotic and prosthetic devices is recorded when the device is accepted by the patient. Revenues from referral service contracts is recognized over the term of the contract. Deferred revenue represents billings made prior to the final fitting and acceptance by the patient and unearned service contract revenue. Revenue is recorded at its net realizable value taking into consideration all governmental and contractual discounts. CREDIT RISK: The Company primarily provides customized devices or services throughout the United States and is reimbursed by the patients' third-party insurers or governmentally funded health insurance programs. The Company performs ongoing credit evaluations of its distribution customers. The accounts receivable are not collateralized. The ability of the Company's debtors to meet their obligations is dependent upon the financial stability of the insurers of the Company's customers and future legislation and regulatory actions. Additionally, the Company maintains reserves for potential losses from these receivables that historically have been within management's expectations. F-8 INCOME TAXES: Income taxes are determined in accordance with SFAS 109, which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income tax liabilities and assets are determined based on the difference between financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. SFAS 109 also provides for the recognition of deferred tax assets if it is more likely than not that the assets will be realized in future years. NET INCOME (LOSS) PER SHARE: Net income per common share is calculated using the weighted average of common and common-equivalent shares outstanding during the year. Common-equivalent shares are attributable to unexercised stock options and warrants. In 1994, 1995 and 1996, common-equivalents which would be considered in a fully diluted calculation are not included in the per share calculation as the effect is not material. Income (loss) from continuing operations before extraordinary item applicable to common stock has been adjusted for the dividends declared applicable to certain classes of cumulative preferred stock. STOCK-BASED COMPENSATION: Compensation costs attributable to stock option and similar plans are recognized based on any difference between the quoted market price of the stock on the date of the grant over the amount the employee is required to pay to acquire the stock (the intrinsic value method under Accounting Principles Board Opinion 25). Such amount, if any, is accrued over the related vesting period, as appropriate. SFAS 123, "Accounting for Stock-Based Compensation," requires companies electing to continue to use the intrinsic value method to make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. The Company has adopted the disclosure only provisions of SFAS 123. NEW ACCOUNTING STANDARDS: In March 1997, the Financial Accounting Standards Board issued SFAS 128, "Earnings Per Share." This statement established standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This statement is effective for financial statements issued for periods ending after December 15, 1997. Earlier application is not permitted. This statement requires reinstatement of all prior-period EPS data presented. The Company is currently evaluating the impact, if any, adoption of SFAS 128 will have on its financial statements. RECLASSIFICATIONS: Certain previously reported amounts have been reclassified to conform with the current year presentation. F-9 NOTE C - SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION The following are the supplemental disclosure requirements for the statements of cash flows:
For the Years Ended December 31 -------------------------------------------- 1994 1995 1996 ---- ---- ---- Cash paid during the period for: Interest $1,690,742 $2,166,877 $2,273,629 Income taxes 212,000 712,800 1,893,990 Non-cash financing and investing activities: Preferred dividends declared 19,882 21,799 23,815 Issuance of notes in connection with acquisition 1,925,000 175,000 Issuance of common stock in connection with acquisition 200,000 5,250,000 Issuance of warrants in connection with acquisition 133,000 Issuance of warrants in connection with Senior 2,038,500 Issuance of common stock in connection with Subordinated Notes exercise of warrants 113
NOTE D - ACQUISITIONS AND SALE OF ASSETS During 1994, the Company acquired the net assets of several orthotic and prosthetic companies and one manufacturer of orthotic devices. The purchase price for these companies was $2,780,000 in cash, plus $1,925,000 in notes and 32,653 shares of common stock valued at $200,000. The notes are payable over one to five years with interest from 6% to 7%. During 1995, the Company acquired two orthotic and prosthetic companies. The aggregate purchase price was $385,000 comprised of $210,000 in cash and $175,000 in promissory notes. The cash portion of the purchase prices for these acquisitions was borrowed under the Company's revolving credit facility. During 1996, the Company acquired one orthotic and prosthetic company, J.E. Hanger, Inc. of Georgia ("SEH"), pursuant to the terms of a Merger Agreement. As of the acquisition date, SEH, headquartered in Alpharetta, Georgia, operated 93 patient care centers and 5 warehouses located primarily in the Mid-Atlantic and Southeastern United States. Under the terms of the agreement which became effective on November 1, 1996, the Company paid SEH shareholders $44 million in cash and issued one million shares of Company common stock and paid an additional $1,783,000 to former SEH shareholders on March 27, 1997 pursuant to provisions in the Merger Agreement calling for a post-closing adjustment. In addition the Company issued 35,000 warrants to one SEH noteholder in order to facilitate assumption of this debt under the same terms and conditions that had existed prior to the acquisition. Included in accrued expenses at December 31, 1996, is approximately $3,119,000 and $1,554,000 of severence and relocation costs incurred in connection with the acquisition of SEH. All of the above acquisitions have been accounted for as business combinations in accordance with the purchase method. The results of operations for these acquisitions are included in the Company's results of operations from their date of acquisition. Excess cost over net assets acquired in these F-10 acquisitions amounting to approximately $376,000 and $36,699,000 in 1995 and 1996, respectively, are amortized using the straight-line method over 40 years. The following table summarizes the unaudited consolidated pro forma information, assuming the acquisitions had occurred at the beginning of each of the following periods:
1995 1996 ---- ---- Net sales $112,292,000 $122,946,000 Income from operations 10,938,243 8,728,783 Net income 2,535,567 1,225,925 Primary income per common share $.27 $.12 Fully diluted income per common share $.27 $.12
The pro forma results do not necessarily represent results which would have occurred if the acquisitions had taken place at the beginning of each period, nor are they indicative of the results of future combined operations. During 1994 the Company commenced discussions and on March 23, 1995, the Company entered into an agreement to sell certain assets related to its operations in southern California for $288,000 under a 10-year promissory note bearing interest at 8%. As a result, the Company recorded a loss in 1994 of $2,150,000, which primarily consisted of the write-off of the related goodwill. NOTE E - DISCONTINUED OPERATIONS In the fourth quarter of 1993, the Company declared its intent to seek a buyer for the assets of its subsidiary, Apothecaries, Inc. ("Apothecaries"). On September 30, 1994, the Company sold those assets for $181,000 in cash and reported a loss on the sale of $159,379 (net of a tax benefit of $115,412). Apothecaries has been classified in the Consolidated Statements of Operations as a discontinued operation, with all revenue, expenses and other income having been excluded from continuing operations. The operating results of Apothecaries for the nine months ended September 30, 1994, was as follows:
1994 ---- Sales $1,294,341 Loss before taxes (426,991) Tax benefit (179,336) ----------- Loss from discontinued $ (247,655) operations ===========
NOTE F - RESTRUCTURING COSTS Results of operations for 1994 include a charge of $460,000 which was recorded in the fourth quarter for costs associated with the closing of several patient care centers in conjunction with management's plan to F-11 consolidate the Company's operations. The restructuring charges include future rental payments on buildings that the Company has abandoned, for which the leases cannot be cancelled and subleasing attempts have been unsuccessful. NOTE G - INVENTORY Inventories at December 31, 1995 and 1996 consist of the following:
1995 1996 ---- ---- Raw materials $ 6,603,619 $ 7,504,442 Work in-process 1,107,289 831,632 Finished goods 2,601,381 7,580,564 ------------ ------------ $10,312,289 $15,916,638 ============ ============
NOTE H- LONG-TERM DEBT Long-term debt consists of the following at December 31, 1995 and 1996:
1995 1996 ---- ---- A Term Loan Commitment payable in quarterly installments through December 2001 with interest payable monthly at the Company's option of either the Bank's prime rate plus 1.75%, or the one, three or six month LIBOR plus 2.75%. (8.31% at December 31, 1996) The base interest rate is subject to a floor of 5.32% and a cap of 7.0% by an agreement that became effective on December 31, 1996 and terminates on September 30, 1999. $29,000,000 B Term Loan Commitment payable in quarterly installments through December 2003 with interest payable monthly at the Company's option of either the Bank's prime rate plus 2.25%, or the one, three or six month LIBOR plus 3.25% (8.81% at December 31, 1996) 28,000,000 8% Senior Subordinated Notes with detachable warrants due November 2004, net of unamortized discount of $1,996,031, 11.19% effect interest rate 6,003,969 Revolving credit facility expiring in June, 1997 with interest payable monthly at the Company's option of either the Bank's prime rate plus .25% or the three month LIBOR plus 2.50% (8.175% and 8.75% at December 31, 1995) $12,700,000 Senior term loans, with principal and interest payable monthly and with one loan at the Bank's prime rate plus .75%, with the remaining loans at the Company's option of either the Bank's prime rate plus .50% or the three-month LIBOR plus 2.75% (9.25% and 8.44% at December 31, 1995) with balloon payments due in November and December 1998 4,596,663 8.5% Convertible Junior Subordinated Note 4,000,000 F-12 8.25% Convertible Junior Subordinated Note 1,000,000 Subordinated seller notes, non-collateralized net of unamortized discount of $612,696, with principle and interest payable in either monthly or quarterly installments at effective interest rates ranging from 6% to 11%, maturing through January 2009 2,375,609 5,574,793 Other miscellaneous obligations with principle and interest payable in either monthly or annual installments at interest rates ranging from 6% to 10% maturing through December 2007 81,805 621,611 ----------- ----------- 24,754,077 69,200,373 Less current portion 1,828,953 4,902,572 ----------- ----------- $22,925,124 $64,297,801 =========== ===========
In November 1996, the Company entered into a new $90,000,000 Credit Agreement with a syndication of banks which provides for (i) a "A Term Loan" in the principal amount of $29,000,000 with scheduled incrementally varying quarterly repayments commencing March 1997 through December 2001, (ii) a "B Term Loan" in the principal amount of $28,000,000 with scheduled varying quarterly repayments commencing March 1997 through December 2003, (iii) a $25,000,000 Acquisition Loan Commitment and, (iv) a $8,000,000 Revolving Loan Commitment. The Acquisition Loan Commitment and Revolving Loan Commitment bear interest at the Company's option of either the Prime Lending Rate plus 1.75%, or the one, three or six month LIBOR plus 2.75%. The Credit Agreement is collateralized by substantially all the assets of the Company and contains certain affirmative and negative covenants customary in an agreement of this nature. The Credit Agreement provides for an initial commitment fee of 2.625% on the total $90,000,000 facility and an annual fee of .5% per year on the aggregate unused portion of the Credit Agreement. As of December 31, 1996, the Company had no outstanding balances on both the Acquisition and Revolving Loan Commitments. The Company has entered into an interest rate swap agreement to reduce the impact of changes in interest rates on its A Term Loan Commitment. At December 31, 1996, the Company had an outstanding interest rate swap agreement with a commercial bank, having a total notional principle amount of $28,500,000. The agreement effectively minimizes the Company's base interest rate exposure between a floor of 5.32% and a cap of 7%. The interest rate swap agreement matures on September 30, 1999. The Company is exposed to credit loss in the event of non-performance by the other party to the interest rate swap agreement. However, the Company does not anticipate non-performance by the counterparties. In November 1996, the Company also entered into a Senior Subordinated Note Purchase Agreement in the principal amount of $8,000,000 which is due in its entirety November 2004 bearing interest at 8%. Upon entering into this Agreement, the Company issued 1,600,000 warrants to noteholders. This transaction resulted in the Company recording a debt discount of $2,038,500 which is being amortized ratably over the life of the notes. The Note Purchase F-13 Agreement is subordinate to the Credit Agreement and contains covenants restricting the payment of dividends, the incurrence of indebtedness and the making of acquisitions and other transactions. It should be noted that a shareholder owns 50% of the Senior Subordinated Notes. The Company used the proceeds of the A Term Loan, B Term Loan and Senior Subordinated Notes to finance the acquisition of SEH and to repay all amounts then outstanding under the Revolving credit facility, Senior term loans, the 8.5% Convertible Junior Subordinated Note and the 8.25% Convertible Junior Subordinate Note. In connection with this transaction, the Company recorded an extraordinary charge of $138,724 pre-tax, $83,234 after tax, or $.01 per share for the write-off of unamortized discounts and financing costs, in 1996. Maturities of long-term debt, at December 31, 1996, are as follows: 1997 $ 4,902,572 1998 7,141,513 1999 7,774,296 2000 8,628,500 2001 9,388,507 Thereafter 31,364,985 ------------ $69,200,373 ============
NOTE I - INCOME TAXES The provisions for income taxes for the years ended December 31, 1994, 1995 and 1996 consisted of the following:
1994 1995 1996 ---- ---- ---- Current: Federal $ 454,955 $ 541,626 $ 1,146,564 State 238,000 370,973 427,441 ------------ ------------ ------------ Total 692,955 912,599 1,574,005 Deferred: Federal and State (334,926) 631,899 (684,119) ------------ ------------ ------------ Provision for income taxes on income before discontinued operations and extraordinary item 358,029 1,544,498 889,886 Tax benefit from discontinued operations (179,336) Tax benefit from sale of discontinued operations (115,412) Tax benefit from extra- ordinary item (55,489) ------------ ------------ ------------ Provision for income taxes $ 63,281 $ 1,544,498 $ 834,397 ============ ============ ============
F-14 A reconciliation of the federal statutory tax rate to the effective tax rate for the years ended December 31, 1994, 1995 and 1996 is as follows:
1994 1995 1996 ---- ---- ---- Federal statutory tax rate $ (653,608) $ 1,251,349 $ 670,145 Increase (reduction) in taxes resulting from: State income taxes (net of federal effect) 151,080 249,047 98,573 Amortization of the excess cost over net assets acquired 178,160 92,777 92,777 Disposal of assets 459,340 Valuation allowance 70,000 (70,000) Other, net 153,057 21,325 28,391 ------------ ------------ ------------ Provision for income taxes on income before extraordinary item 358,029 1,544,498 889,886 Tax benefit from discontinued operations (179,336) Tax benefit from sale of discontinued operations (115,412) Tax benefit from extraordinary item (55,489) ------------ ------------ ------------ Provision for income taxes $ 63,281 $ 1,544,498 $ 834,397 ============ ============ ============
Temporary differences and carryforwards which give rise to deferred tax assets and liabilities as of December 31, 1995 and 1996 are as follows:
1995 1996 ---- ---- Deferred Tax Liabilities: Book basis in excess of tax $ 775,838 $ 775,838 Depreciation and amortization 666,920 2,498,527 ----------- ----------- 1,442,758 3,274,365 ----------- ----------- Deferred Tax Assets: Net operating loss, Federal 369,624 319,039 Net operating loss, States 211,165 281,051 Accrued expenses 334,790 1,554,907 Reserve for bad debts 393,322 965,116 Inventory capitalization 218,086 664,371 Restructuring 13,305 Acquisition Costs 271,534 ----------- ----------- Gross deferred tax assets 1,540,292 4,056,018 ----------- ----------- ----------- ----------- Net deferred tax assets $ 97,534 $ 781,653 =========== ===========
F-15 For Federal and State tax purposes at December 31, 1996, the Company has available approximately $938,000 of net operating loss carryforwards expiring from 1998 through 2007 and are subject to a limitation in their utilization of approximately $149,000 per year as a result of several changes in shareholder control. At December 31, 1995, the Company evaluated the realizability of the state net operating losses and, based upon projections of taxable income by state, concluded that a valuation allowance was not necessary. The remaining balance of the deferred tax assets should be realized through future taxable income and the reversal of taxable temporary differences. NOTE J - DEFERRED COMPENSATION In conjunction with the SEH acquisition, the Company assumed the unfunded deferred compensation plan that had been established for certain key SEH officers. The plan accrues benefits ratably over the period of active employment from the time the contract is entered into to the time the participant retires. Participation had been determined by SEH's Board of Directors. The Company has purchased individual life insurance contracts with respect to each employee covered by this plan. The Company is the owner and beneficiary of the insurance contracts. The accrual related to the deferred compensation arrangements amounted to approximately $1,985,000 at December 31, 1996. NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES The Company is engaged in legal proceedings in the normal course of business. The Company believes that any unfavorable outcome from these suits not covered by insurance would not have a material adverse effect on the financial statements of the Company. NOTE L - OPERATING LEASES The Company leases office space under noncancellable operating leases. Certain of these leases contain escalation clauses based on the consumer price index. Future minimum rental payments, by year and in the aggregate, under operating leases with terms of one year or more consist of the following at December 31, 1996: 1997 $ 3,925,000 1998 3,064,000 1999 2,401,000 2000 1,932,000 2001 1,432,000 Thereafter 1,974,000 ------------ $14,728,000
Rent expense was approximately $2,499,000, $2,144,000 and $2,554,000 for the years ended December 31, 1994, 1995 and 1996, respectively. NOTE M- PENSION AND PROFIT SHARING PLANS Previously, the Company had a 401(k) Saving and Retirement Plan (the "Plan") available to all employees of J.E. Hanger, Inc. ("JEH"), a wholly-owned subsidiary of the Company. The Company matched the participant's contributions and made discretionary matching contributions. On January 1, 1993, the Company froze the Plan such that no new employees of JEH were able F-16 to participate. On December 31, 1995, the Company terminated the Plan. There was no employer contribution made to the Plan in 1995. Benefit expense was $130,000 for the year ended December 31, 1994. The Company maintains a separate defined contribution profit sharing and 401(k) plan ("SEH Plan") covering all the employees of SEH, a recently acquired wholly-owned subsidiary of the Company. On November 1, 1996, the Company froze the SEH Plan such that no new employees of SEH were able to participate. The Company did not make any contributions to the SEH Plan during 1996. The Company maintains a 401(k) Savings and Retirement plan to cover all of the employees of the Company. The Company may make discretionary contributions. Under this 401(k) plan, employees may defer such amounts of their compensation up to the levels permitted by the Internal Revenue Service. The Company has not made any contributions to this plan. NOTE N - REDEEMABLE PREFERRED STOCKS The Company has 10,000,000 authorized shares of preferred stock, par value $.01 per share, which may be issued in various classes with different characteristics. The 300 issued and outstanding shares of non-voting, non-convertible Class C preferred stock have an aggregate liquidation value equal to $150,000 plus accrued dividends at 9% and are required to be redeemed on February 1, 2000. Accrued dividends at December 31, 1995 and 1996, were $21,799 and $23,815, respectively. The 100,000 authorized shares of Class F preferred stock, accrues dividends cumulatively at 16.5% and is required to be redeemed prior to any other class of preferred stock, before September 1998, for the aggregate liquidation value of $1,000 per share, plus accrued dividends. As of December 31, 1995 and 1996, none of the Class F preferred stock was issued or outstanding. NOTE O - WARRANTS AND OPTIONS WARRANTS In November 1990, the Company entered into a $2,450,000 Note which required the Company, based on certain repayment provisions, to issue to an affiliate in 1991 warrants to purchase 297,883 and 322,699 shares of common stock at $4.16 and $7.65 per share, respectively. These warrants are exercisable through December 31, 2001. In May 1996, 71,969 warrants were exercised at $4.16 per share which resulted in the issuance of 11,332 shares. In November 1996, the Company issued warrants for 1.6 million shares of common stock to the holders of the Senior Subordinated Notes. The warrants provide that the noteholders may purchase 929,700 shares and 670,300 shares for $4.01 and $6.375, respectively. If the Company repays 100% of the Senior Subordinated Notes within 18 or 12 months, 50% or 55%, respectively, of the warrants will terminate. Warrants will terminate pro-rata across the exercise prices. F-17 In November 1996, the Company issued warrants for 35,000 shares of common stock as an incentive to one SEH noteholder to allow the notes to be assumed by the Company under the same terms and conditions that had existed prior to the acquisition. The warrants provide that the noteholder may purchase common stock at an exercise price of $2.44 per share. The warrants are exercisable at any time during the eight year term. In January 1997, the noteholder exercised the warrants and purchased 35,000 shares of common stock for $2.44 per share. OPTIONS Under the Company's 1991 Stock Option Plan ("SOP"), 1,500,000 shares of common stock are authorized for issuance under options that may be granted to employees. The number of shares that remain available for grant at December 31, 1995 and 1996, were 892,790 and 113,501, respectively. Under the SOP, options may be granted at an exercise price not less than the fair market value of the common stock on the date of grant. Vesting and expiration periods are established by the Compensation Committee of the Board of Directors and generally vest three years following grant and generally expire eight to ten years after grant. In addition to the SOP, non-qualified options may be granted with exercise prices that are less than the current market value. Accordingly, compensation expense for the difference between current market value and exercise price is recorded at the date of grant. The following is a summary of option transactions and exercise prices:
Stock Non-qualified Option Plan Stock Options Price Weighted Price Weighted Shares Per Share Average Shares Per Share Average Outstanding at December 31, 1993 473,434 $4.76 to $14.08 6.17 47,693 $6.00 to $14.08 9.42 ---------- -------- Granted 82,000 $ 6.00 6.00 30,000 $ 4.38 4.38 Terminated (17,833) $6.00 to $12.25 6.72 --- Expired (3,559) $14.08 14.08 (5,191) $14.08 14.08 ---------- -------- Outstanding at December 31, 1994 534,042 $6.00 to $12.25 6.57 72,502 $4.38 to $6.00 7.78 ---------- -------- Granted 171,918 $2.75 to $3.25 2.83 37,500 $ 3.00 3.00 Terminated (57,291) $6.00 to $12.25 7.20 --- ---------- -------- Outstanding at December 31 1995 648,669 $2.75 to $12.25 5.49 110,002 $3.00 to $6.00 6.81 ========== ======== Granted 802,250 $3.50 to $6.125 5.54 30,000 $ 5.875 5.875 Terminated 22,961 $2.81 to $12.25 4.93 --- Exercised 7,508 $2.81 2.81 6,250 $3.00 to $6.00 4.75 ---------- -------- Outstanding at December 31, 1996 1,420,450 $2.75 to $12.25 5.54 133,752 $3.00 to $6.00 6.74 ========== ======== Vested at December 31, 1996 467,782 57,500 ========== ========
F-18 The Company applies APB Opinion 25 and related Interpretations in accounting for its plans. Historically, the Company granted stock options at exercise prices equal to the fair market value of the stock on the date of grant for fixed stock options. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123, the Company's net income and earnings per share would have been reduced to the unaudited pro forma amounts indicated below:
1995 1996 ---- ---- Net Income: As reported $2,135,439 $ 997,894 Pro Forma 2,017,179 745,714 Income Per Share: As reported $ .26 $.11 Pro Forma $ .24 $.08
The weighted-average fair value of stock options granted during 1995 was $2.51 and $5.03 during 1996. The following is a summary of stock options exercisable at December 31, 1994, 1995 and 1996, and their respective weighted-average share prices:
Weighted- Average Number of Exercise Shares Price Options exercisable December 31, 1994 262,484 $7.31 Options exercisable December 31, 1995 396,043 6.83 Options exercisable December 31, 1996 525,282 6.45
The pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1995 and 1996: a risk-free interest rate ranging from 5.83% to 7.6%, 0% dividend yield, volatility factor of the expected market price of the Company's common stock of 120% and a weighted average life of the option of 7 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily F-19 provide a reliable single measure of the fair value of its employee stock options. The following table summarizes information concerning outstanding and exercisable options as of December 31, 1996:
Options Outstanding Options Exercisable ------------------------------------------------- ------------------------------------- Range of Exercise Number of Options Weighted Average Number of Options Weighted Average Prices and Awards Remaining Exercise Price and Awards Exercise Price Life (Years) -------------------- --------- ---- -------- -------- ------- $ 2.750 to $ 3.000 175,199 8.30 $ 2.82 77,699 $ 2.82 $ 3.250 to $ 4.125 229,878 8.67 $ 3.77 25,375 $ 3.75 $ 4.375 to $ 5.875 63,750 7.78 $ 5.12 18,750 $ 4.50 $ 6.000 to $ 6.000 168,750 6.69 $ 6.00 138,083 $ 6.00 $ 6.125 to $ 6.125 600,000 9.84 $ 6.13 0 $ 0.00 $ 6.250 to $ 6.250 205,000 6.70 $ 6.25 153,750 $ 6.25 $ 6.520 to $ 8.000 10,000 0.98 $ 7.27 10,000 $ 7.27 $ 8.125 to $ 8.125 25,000 5.75 $ 8.13 25,000 $ 8.13 $ 12.000 to $ 12.000 50,000 5.52 $ 12.00 50,000 $ 12.00 $ 12.250 to $ 12.250 26,625 5.17 $ 12.25 26,625 $ 12.25 -------------------- --------- ---- -------- -------- ------- $ 2.750 to $ 12.250 1,554,202 8.31 $ 5.69 525,282 $ 6.45
In a series of transactions beginning August 1990, a principal shareholder (the "Grantor") granted options to members of management (the "Managers") of the Company to purchase 577,912 shares of Company Common Stock owned by the Grantor at exercise prices that ranged from $3.875 to $8.00 per share. In five related transactions during August 1996 and January 1997, the Managers exchanged their entire rights to the total number of shares for 229,672 shares of common stock owned by the Grantor. These events satisfied the Grantor's obligations under the agreement. As a result of those transactions, none of such options remain outstanding. Under the Company's 1993 Non-Employee Director Stock Option Plan, 250,000 shares of common stock are authorized for issuance to directors of the Company who are not employed by the Company or any affiliate of the Company. Under this plan, an option to purchase 5,000 shares of common stock is granted automatically on an annual basis to each eligible director on the third business day following the date of each Annual Meeting of Stockholders of the Company at which the eligible director is elected. The exercise price of each option will be equal to 100% of the fair market value of the common stock on the date of grant. Each option will vest at the rate of 25% each year for the first four years after the date of grant of the option and each such option will expire ten years from the date of grant; provided, however, that in the event of termination of a director's service other than by reason of total and permanent disability or death, then the outstanding options of such holder will expire three months after such termination. Outstanding options remain exercisable for one year after termination of service by reason of total and permanent disability or death. The number of shares that remain available for grant at December 31, 1995 and 1996 were 160,000 and 130,000, respectively. F-20 NOTE P - OTHER EVENTS On December 2, 1996 and January 23, 1997, the Company signed letters of intent to purchase the net assets of two companies. The total consideration to acquire these companies, excluding potential earn-out provisions, is expected to total approximately $9,200,000. The acquisitions are expected to be finalized during the second quarter of 1997. F-21 REPORT OF INDEPENDENT ACCOUNTANTS Our report on the consolidated financial statements of Hanger Orthopedic Group, Inc. and Subsidiaries is included on Page F-1 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on Page 32 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. Coopers & Lybrand L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania March 21, 1997, except as to the information presented in Note D, for which the date is March 27, 1997 S-1 HANGER ORTHOPEDIC GROUP, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT CHARGED TO IMPACT OF BALANCE AT BEGINNING COSTS AND ACQUIRED END OF YEAR CLASSIFICATION OF YEAR EXPENSES COMPANIES DEDUCTIONS YEAR ---- -------------- ------- ---------- --------- ---------- ---------- 1996 Allowance for doubtful accounts $1,144,000 $1,629,000 $1,220 000 $1,514,000 $2,479,000 1995 Allowance for doubtful accounts $ 976,000 $1,009,000 $ 841,000 $1,144,000 1994 Allowance for doubtful accounts $ 662,000 $ 974,000 $ 660,000 $ 976,000
S-2 EX-10.P 2 EXHIBIT 10(p) EMPLOYMENT AND NON-COMPETE AGREEMENT Agreement made as of November 1, 1996, between Hanger Orthopedic Group, Inc., a Delaware corporation (the "Company"), and H.E. Thranhardt ("Executive"). WITNESSETH: WHEREAS, Executive has great expertise in the Company's and its Subsidiaries' businesses; WHEREAS, Executive's use of such expertise in competition with the Company and its Subsidiaries would have an extremely detrimental effect on the Company and its Subsidiaries; and WHEREAS, the Company desires to retain the services of Executive and to assure itself that Executive does not engage in competition with the Company and its Subsidiaries. NOW, THEREFORE, the parties hereto agree as follows: 1. EMPLOYMENT. The Company agrees to employ Executive and Executive accepts such employment by the Company upon the terms and conditions set forth in this Agreement, for the period beginning on the date of this Agreement, and ending upon termination pursuant to paragraph 4 hereof (the "Employment Period"). 2. COMPENSATION. During the Employment Period, the Company will pay Executive a base salary at the rate of $250,000 per annum in consideration for the services to be rendered to the Company by Executive (the "Base Salary"). Executive's Base Salary may be increased from time to time as determined by the Board of Directors of the Company (the "Board"). In addition to the Base Salary, Executive also will be entitled to reimbursement for preapproved travel expenses during the Employment Period. 3. SERVICES. During the Employment Period, Executive shall devote his best efforts and a sufficient amount of his business time and attention to the affairs of the Company or its Subsidiaries as may be necessary to perform his duties hereunder. During the Employment Period, Executive agrees to render such services of an executive and administrative character to the Company and its Subsidiaries as the Board may from time to time direct. 4. TERMINATION. The Employment Period will be for a period of three (3) years, unless terminated earlier by (a) Executive's death or permanent disability (as determined by the Board in its good faith judgment), (b) by Executive's resignation upon prior written notice to the Company of not less than three (3) months, (c) the Board for Cause, or (d) the Board without Cause. For purpose of this paragraph 4, "Cause" shall mean (i) the failure or refusal of Executive to follow the lawful directives of the Board (except due to sickness, injury or disabilities), (ii) inattention to duty or any other willful, reckless or negligent act (or omission to act) by Executive, which, in the good faith judgment of the Board, materially injures the Company or one of its Subsidiaries, including the repeated failure to follow the policies and procedures of the Company or one of its Subsidiaries, (iii) a material breach of this Agreement by Executive, (iv) the commission by Executive of a felony or other crime involving moral turpitude or the commission by Executive of an act of financial dishonesty against the Company or one of its Subsidiaries or (v) a proper business purpose of the Company, including but not limited to a decrease in the staffing of the office in which Executive is working or the elimination of the position filled by Executive. If Executive's employment is terminated by the Executive in any manner other than clauses (a) or (b) above, the Company will have the remedies enumerated in paragraph 16. If Executive's employment is terminated for any reason prior to end of three (3) years from the date of this Agreement, then Executive shall be entitled to receive the remainder of his Base Salary over the remainder of such 3-year period at such times as the regular payments (monthly or bi-monthly) of his Base Salary would have been paid to him in the event his employment with the Company had not been terminated prior to the end of such 3-year period. 5. NON-COMPETE. (a) Executive agrees that during the Employment Period and for a period of thirty-six (36) months thereafter (the "Non-Compete Period"), Executive will not directly or indirectly (whether as employee, director, owner, stockholder, consultant, partner (limited or general) or otherwise) own, manage, control, participate in, consult with, render services for or in any manner engage in any Competitive Business or solicit any other Person to engage in any of the foregoing activities or knowingly request, induce or attempt to influence any then existing customer of the Company or its Subsidiaries to curtail or cause any business they are currently, or in the last 36 months have been, transacting with the Company and its Subsidiaries (the "Non-Compete"). Nothing herein will prevent Executive from being a passive owner of not more than 1% of the outstanding stock of any class of a corporation which is a competitor of the Company or its Subsidiaries and which is publicly traded, so long as Executive has no participation in the business of such corporation. During the Non-Compete Period, Executive shall not, without the Company's prior written consent, directly or indirectly, knowingly solicit or encourage or attempt to influence any employee to leave the employment of the Company or any of its Subsidiaries. 2 "Competitive Business" shall mean engaging in "Business" within the "Restricted Territory." "Business" shall mean manufacturing, distributing, wholesaling or retailing of orthotics or prosthetics, or the operation of clinics to fit patients for orthotics or prosthetics, or any other related businesses which the Company and its Subsidiaries are engaged in during and at the expiration of the Employment Period. "Restricted Territory" shall mean the United States of America, the District of Columbia and any U.S. territory in which the Company or any one or more of its Subsidiaries conducts Business during and at the expiration of the Employment Period. (b) If, at the time of enforcement of any provision of paragraph 5(a) above, a court holds that the restrictions stated therein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope, and geographical area reasonable under such circumstances will be substituted for the stated period, scope or area. (c) The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this paragraph 5; therefore, in the event of a breach by Executive of any of the provisions of this paragraph 5, the Company or its successors or assigns may, in addition to other rights and remedies existing in its favor, apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce or prevent any violations of the provisions hereof. 6. CONFIDENTIAL INFORMATION. Executive acknowledges that the information, observations, data and trade secrets (collectively, "Confidential Information") obtained by him during the course of his performance under this Agreement, and previously as an employee of the Company and/or its Subsidiaries, concerning the business or affairs of the Company or any of its Subsidiaries are the property of the Company and its Subsidiaries. For purposes of this Agreement, "trade secret" means any method, program or compilation of information which is used in the Company's or any Subsidiary's business, including but not limited to: (a) techniques, plans and materials used by the Company and its Subsidiaries, (b) marketing methods and strategies employed by the Company and its Subsidiaries, and (c) all lists of past, present or prospective customers, suppliers, referring physicians and all other referral sources of the Company and its Subsidiaries. Executive agrees that he will not disclose to any unauthorized Person or use for his own account any of such Confidential Information without the Board's written consent, unless and to the extent that the aforementioned matters become generally known to and available for use by the public other than as a result of the Executive's acts or omissions to act or become known to the Executive 3 lawfully outside the scope of his employment under this Agreement. Executive agrees to deliver to the Company at the termination of his employment, or at any other time the Company may request, all memoranda, notes, plans, records, reports and other documents and its Subsidiaries which he may then possess or have under his control. 7. INVENTIONS AND PATENTS. Executive agrees that all Confidential Information and all inventions, innovations or improvements in the Company's and its Subsidiaries' method of conducting their respective businesses, or any reasonable development or extension of such businesses (including new contributions, improvements, ideas and discoveries, whether patentable or not), conceived or made by him (whether individually or in conjunction with other Persons) during the Employment Period belong to the Company and its Subsidiaries. Executive will promptly disclose such inventions, innovations or improvements to the Board and perform all actions reasonably requested by the Board to establish and confirm such ownership. 8. OTHER BUSINESSES. During the Employment Period, Executive agrees that he will not, except with the express written consent of the Board, become engaged in, render services for, or permit his name to be used in connection with, any Competitive Business other than the business of the Company and its Subsidiaries. Notwithstanding anything else contained herein to the contrary, the Company agrees that Executive may continue to serve on the board of directors of CRP Springlite. 9. NO INCONSISTENT AGREEMENTS. Any and all employment, consulting or other similar agreements heretofore executed between the Company and/or its Subsidiaries on the one hand and Executive on the other are hereby terminated. 10. NOTICES. Any notice provided for in this Agreement must be in writing and must be either personally delivered, sent by overnight courier (E.G., Federal Express) or mailed by first class mail, to the recipient at the address below indicated: To the Company: Hanger Orthopedic Group, Inc. 7700 Old Georgetown Road (Second Floor) Bethesda, Maryland 20814 Attention: Chief Executive Officer To Executive: H.E. Thranhardt J.E. Hanger, Inc. of Georgia 5010 McGinnis Ferry Road Alpharetta, Georgia 30202 4 With a copy of any of the foregoing notices to: Freedman, Levy, Kroll & Simonds 1050 Connecticut Avenue, N.W. (Suite 825) Washington, D.C. 20036 Attention: Jay W. Freedman, Esq. or such other address or to the attention of such other Person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement will be deemed to have been given when so delivered, sent or mailed. 11. SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law. The parties agree that (i) the provisions of this Agreement shall be severable in the event that any of the provisions hereof are for any reason whatsoever invalid, void or otherwise unenforceable, (ii) such invalid, void or otherwise unenforceable provisions shall be automatically replaced by other provisions which are as similar as possible in terms to such invalid, void or otherwise unenforceable provisions but are valid and enforceable and (iii) the remaining provisions shall remain enforceable to the fullest extent permitted by law. 12. COMPLETE AGREEMENT. This Agreement, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. 13. COUNTERPARTS. This Agreement may be executed on separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. 14. SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company, and their respective successors and assigns. Executive may not assign his rights or delegate his obligations hereunder without the prior written consent of the Company. The Company may assign its rights and delegate its duties hereunder without the consent of the Executive to Permitted Transferees. 15. GOVERNING LAW. All questions concerning the construction, validity and interpretation of the Agreement will be governed by the internal law, and not the law of conflicts of the State of Maryland. 5 16. REMEDIES. Each of the parties to this Agreement will be entitled to enforce its rights under this Agreement specifically, to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights existing in its favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive relief in order to enforce or prevent any violations of the provisions of this Agreement. Executive acknowledges that in his past, present and future capacity as an executive officer of the Company and/or its Subsidiaries, he was, is and will be critical to the success of the Company and its Subsidiaries and that the Company would not have consummated the Purchase unless Executive entered into this Agreement. Executive further acknowledges that his material breach of this Agreement would cause the Company and its Subsidiaries material adverse harm, including lost sales, profits and growth potential. Executive believes it would be just and equitable for a court to consider the foregoing factors when accessing damages against Executive for his material breach of this Agreement. 17. AMENDMENTS AND WAIVERS; THIRD PARTY BENEFICIARIES. Any provision of this Agreement may be amended or waived only with the prior written consent of the Company and Executive. The failure of either party to insist, in any one or more instances, upon performance of the terms or conditions of this Agreement shall not be construed as a waiver or a relinquishment of any right granted hereunder or of the future performance of any such term, covenant or condition. Each direct and indirect Subsidiary of the Company shall be a third party beneficiary of the Executive's obligations under this Agreement, provided that this Agreement may be amended in any manner without the consent of such third party beneficiaries. 18. DEFINITIONS. "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a governmental entity or any department or agency thereof. "Permitted Transferee" shall mean (a) any successor by merger or consolidation to the Company or any Permitted Transferee; (b) any purchaser of all or substantially all of the Company's or any Permitted Transferee's assets; and (c) any lender to (i) the Company, (ii) any Permitted Transferee and/or (iii) any affiliate of the Company or of any Permitted Transferee. "Subsidiary" shall mean any Person which the Company has the direct or indirect right to control, direct or cause direction of management and policies of, whether through the ownership of voting securities, by contract or otherwise, including but not limited to J.E. Hanger, Inc. of Georgia. 6 IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. HANGER ORTHOPEDIC GROUP, INC. HANGER ORTHOPEDIC GROUP, INC. By:__________________________ __________________________ Ivan R. Sabel H.E. Thranhardt President and Chief Executive Officer 7 AMENDMENT NO. 1 TO EMPLOYMENT AND NON-COMPETE AGREEMENT Amendment No. 1, dated as of January 1, 1997 (the "Amendment"), to the Employment and Non-Compete Agreement, dated as of November 1, 1996 (the "Agreement"), between Hanger Orthopedic Group, Inc., a Delaware corporation (the "Company"), and H.E. Thranhardt ("Executive"). WHEREAS, Executive and the Company wish to reflect the cessation of executive management services by Executive to the Company, although Executive will continue to be employed by and provide non-management services to the Company through Southern Prosthetic Supply, Inc., a wholly-owned subsidiary of the Company. NOW, THEREFORE, the parties hereto agree as follows: 1. AMENDMENT OF AGREEMENT. The Agreement is amended only as hereinafter provided. All terms of the Agreement which are not herein amended shall remain in full force and effect. All capitalized terms used herein shall have the meanings ascribed to them in the Agreement unless otherwise provided herein. 2. COMPENSATION. During the remaining thirty-four (34) months of the Employment Period from and after the date of this Amendment, unless earlier terminated in accordance with the terms of the Agreement, the Company will pay Executive a base salary at the gross, pre-tax rate of $25,000 per annum in consideration for the services to be rendered to the Company by Executive (the "Base Salary"). In addition to the Base Salary, Executive also will be entitled to benefits as provided by the Company. During the Employment Period, the Company will also pay Executive a termination fee (the "Termination Fee") in the gross, pre-tax amount of $19,166.67 per month in consideration for the termination of the executive management services of Executive as a result of the acquisition by merger of Southern Prosthetic Supply, Inc. (formerly known as J.E. Hanger, Inc. of Georgia) by the Company. If Executive's employment is terminated for any reason prior to end of the remaining 34 months of the Employment Period, then Executive shall be entitled to receive the remainder of his Base Salary and Termination Fee over the remainder of such 34-month period at such times as the regular payments of his Base Salary and Termination Fee would have been paid to him in the event his employment with the Company had not been terminated prior to the end of such 34-month period. 3. COUNTERPARTS. This Amendment may be executed on separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first above written. HANGER ORTHOPEDIC GROUP, INC. By:__________________________ __________________________ Ivan R. Sabel H.E. Thranhardt President and Chief Executive Officer EX-10.Q 3 EXHIBIT 10(q) EMPLOYMENT AND NON-COMPETE AGREEMENT Agreement made as of November 1, 1996, between Hanger Orthopedic Group, Inc., a Delaware corporation (the "Company"), and John McNeill ("Executive"). WITNESSETH: WHEREAS, Executive has great expertise in the Company's and its Subsidiaries' businesses; WHEREAS, Executive's use of such expertise in competition with the Company and its Subsidiaries would have an extremely detrimental effect on the Company and its Subsidiaries; and WHEREAS, the Company desires to retain the services of Executive and to assure itself that Executive does not engage in competition with the Company and its Subsidiaries. NOW, THEREFORE, the parties hereto agree as follows: 1. EMPLOYMENT. The Company agrees to employ Executive and Executive accepts such employment by the Company upon the terms and conditions set forth in this Agreement, for the period beginning on the date of this Agreement, and ending upon termination pursuant to paragraph 4 hereof (the "Employment Period"). 2. COMPENSATION. (a) During the Employment Period, the Company will pay Executive a base salary at the rate of $234,000.00 per annum in consideration for the services to be rendered to the Company by Executive (the "Base Salary"). Executive's Base Salary may be increased from time to time as determined by the Board of Directors of the Company (the "Board"). In addition to the Base Salary payable to Executive pursuant to this paragraph 2(a), during the Employment Period Executive will be entitled to the benefits set forth on Schedule I attached hereto. (b) In addition to the Base Salary and the other benefits paid to Executive during the Employment Period, Executive also shall be eligible to receive awards of stock options from the Company, as well as cash bonus compensation based on formulae related to year-end financial data of the Company and determined in the reasonable discretion of the Board and its Compensation Committee. 3. SERVICES. During the Employment Period, Executive shall devote his best efforts and substantially all of his business time and attention to the affairs of the Company or its Subsidiaries (except for reasonable vacation periods subject to the reasonable approval of the Board, or reasonable periods of illness or other incapacity). During the Employment Period, Executive agrees to render such services of an executive and administrative character to the Company and its Subsidiaries as the Board may from time to time direct. 4. TERMINATION. The Employment Period will continue from year to year unless terminated earlier by (a) Executive's death or permanent disability (as determined by the Board in its good faith judgment), (b) by Executive's resignation upon prior written notice to the Company of not less than three (3) months, (c) the Board for Cause, or (d) the Board without Cause. For purpose of this paragraph 4, "Cause" shall mean (i) the failure or refusal of Executive to follow the lawful directives of the Board (except due to sickness, injury or disabilities), (ii) inattention to duty or any other willful, reckless or negligent act (or omission to act) by Executive, which, in the good faith judgment of the Board, materially injures the Company or one of its Subsidiaries, including the repeated failure to follow the policies and procedures of the Company or one of its Subsidiaries, (iii) a material breach of this Agreement by Executive, (iv) the commission by Executive of a felony or other crime involving moral turpitude or the commission by Executive of an act of financial dishonesty against the Company or one of its Subsidiaries or (v) a proper business purpose of the Company, including but not limited to a decrease in the staffing of the office in which Executive is working or the elimination of the position filled by Executive; provided, however, that prior to any termination of the Employment Period for Cause as defined under items (i) and (ii) above, the Company shall be required to give Employee prior written notice of any such claim of Cause by the Company, with Executive having the right promptly thereafter to appeal such claim of Cause by the Company in a hearing with the Board. Except in the case of death, resignation or the continuation of the Employment Period during the appeal process described above, termination will not be effective until 30 days after the Board has given written notice to Executive of such termination. If Executive's employment is terminated by the Executive in any manner other than clauses (a) or (b) above, the Company will have the remedies enumerated in paragraph 17. If Executive's employment is terminated, then Executive may be entitled to receive severance payments in the amount and under the terms set forth in Schedule II attached hereto. 5. NON-COMPETE. (a) Executive agrees that during the Employment Period and for a period of thirty-six (36) months thereafter (the "Non-Compete Period"), Executive will not directly or indirectly (whether as employee, director, owner, stockholder, consultant, partner (limited or general) or otherwise) own, 2 manage, control, participate in, consult with, render services for or in any manner engage in any Competitive Business or solicit any other Person to engage in any of the foregoing activities or knowingly request, induce or attempt to influence any then existing customer of the Company or its Subsidiaries to curtail or cause any business they are currently, or in the last 36 months have been, transacting with the Company and its Subsidiaries (the "Non-Compete"). Nothing herein will prevent Executive from being a passive owner of not more than 1% of the outstanding stock of any class of a corporation which is a competitor of the Company or its Subsidiaries and which is publicly traded, so long as Executive has no participation in the business of such corporation. Notwithstanding the terms of the Non-Compete, after the expiration of the Employment Period but prior to the expiration of the Non-Compete Period, Executive may engage in Limited Competition. Furthermore, during the Non-Compete Period, Executive shall not, without the Company's prior written consent, directly or indirectly, knowingly solicit or encourage or attempt to influence any employee to leave the employment of the Company or any of its Subsidiaries. "Competitive Business" shall mean engaging in "Business" within the "Restricted Territory." "Business" shall mean manufacturing, distributing, wholesaling or retailing of orthotics or prosthetics, or the operation of clinics to fit patients for orthotics or prosthetics, or any other related businesses which the Company and its Subsidiaries are engaged in during and at the expiration of the Employment Period. "Restricted Territory" shall mean the United States of America, the District of Columbia and any U.S. territory in which the Company or any one or more of its Subsidiaries conducts Business during and at the expiration of the Employment Period. "Limited Competition" shall mean being an employee, director, owner, stockholder consultant and/or partner (limited or general) in only one business enterprise which consists of only one retail clinical operation selling and fitting patients for prosthetics and orthotics. (b) If, at the time of enforcement of any provision of paragraph 5(a) above, a court holds that the restrictions stated therein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope, and geographical area reasonable under such circumstances will be substituted for the stated period, scope or area. (c) The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this paragraph 5; therefore, in the event of a breach by Executive of any of the provisions of this paragraph 5, the Company or its successors or assigns may, in addition to other rights and remedies existing in its favor, apply to any court of law or 3 equity of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce or prevent any violations of the provisions hereof. 6. CONFIDENTIAL INFORMATION. Executive acknowledges that the information, observations, data and trade secrets (collectively, "Confidential Information") obtained by him during the course of his performance under this Agreement, and previously as an employee of the Company and/or its Subsidiaries, concerning the business or affairs of the Company or any of its Subsidiaries are the property of the Company and its Subsidiaries. For purposes of this Agreement, "trade secret" means any method, program or compilation of information which is used in the Company's or any Subsidiary's business, including but not limited to: (a) techniques, plans and materials used by the Company and its Subsidiaries, (b) marketing methods and strategies employed by the Company and its Subsidiaries, and (c) all lists of past, present or prospective customers, suppliers, referring physicians and all other referral sources of the Company and its Subsidiaries. Executive agrees that he will not disclose to any unauthorized Person or use for his own account any of such Confidential Information without the Board's written consent, unless and to the extent that the aforementioned matters become generally known to and available for use by the public other than as a result of the Executive's acts or omissions to act or become known to the Executive lawfully outside the scope of his employment under this Agreement. Executive agrees to deliver to the Company at the termination of his employment, or at any other time the Company may request, all memoranda, notes, plans, records, reports and other documents and its Subsidiaries which he may then possess or have under his control. 7. INVENTIONS AND PATENTS. Executive agrees that all Confidential Information and all inventions, innovations or improvements in the Company's and its Subsidiaries' method of conducting their respective businesses, or any reasonable development or extension of such businesses (including new contributions, improvements, ideas and discoveries, whether patentable or not), conceived or made by him (whether individually or in conjunction with other Persons) during the Employment Period belong to the Company and its Subsidiaries. Executive will promptly disclose such inventions, innovations or improvements to the Board and perform all actions reasonably requested by the Board to establish and confirm such ownership. 8. OTHER BUSINESSES. During the Employment Period, Executive agrees that he will not, except with the express written consent of the Board, become engaged in, render services for, or permit his name to be used in connection with, any business other than the business of the Company and its Subsidiaries. 4 9. ANNUAL PHYSICAL EXAMINATION. The Executive will assist the Company and its Subsidiaries (without cost to the Executive) in obtaining key man life and disability insurance, including, without limitation, to submitting to an annual general physical examination (and such other physical examinations requested by the Company's insurers), and to share the results of such examinations with the Company and its insurers. 10. NO INCONSISTENT AGREEMENTS. Any and all employment, consulting or other similar agreements heretofore executed between the Company and/or its Subsidiaries on the one hand and Executive on the other are hereby terminated. 11. NOTICES. Any notice provided for in this Agreement must be in writing and must be either personally delivered, sent by overnight courier (E.G., Federal Express) or mailed by first class mail, to the recipient at the address below indicated: To the Company: Hanger Orthopedic Group, Inc. 7700 Old Georgetown Road (Second Floor) Bethesda, Maryland 20814 Attention: Chief Executive Officer To Executive: John McNeill Hanger Orthopedic Group, Inc. 7700 Old Georgetown Road Bethesda, Maryland 20814 With a copy of any of the foregoing notices to: Freedman, Levy, Kroll & Simonds 1050 Connecticut Avenue, N.W. (Suite 825) Washington, D.C. 20036 Attention: Jay W. Freedman, Esq. or such other address or to the attention of such other Person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement will be deemed to have been given when so delivered, sent or mailed. 12. SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law. The parties agree that (i) the provisions of this Agreement shall be severable in the event that any of the provisions hereof are for any reason whatsoever invalid, void or otherwise unenforceable, (ii) such invalid, 5 void or otherwise unenforceable provisions shall be automatically replaced by other provisions which are as similar as possible in terms to such invalid, void or otherwise unenforceable provisions but are valid and enforceable and (iii) the remaining provisions shall remain enforceable to the fullest extent permitted by law. 13. COMPLETE AGREEMENT. This Agreement, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. 14. COUNTERPARTS. This Agreement may be executed on separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. 15. SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company, and their respective successors and assigns. Executive may not assign his rights or delegate his obligations hereunder without the prior written consent of the Company. The Company may assign its rights and delegate its duties hereunder without the consent of the Executive to Permitted Transferees. 16. GOVERNING LAW. All questions concerning the construction, validity and interpretation of the Agreement will be governed by the internal law, and not the law of conflicts of the State of Maryland. 17. REMEDIES. Each of the parties to this Agreement will be entitled to enforce its rights under this Agreement specifically, to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights existing in its favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive relief in order to enforce or prevent any violations of the provisions of this Agreement. Executive acknowledges that in his past, present and future capacity as an executive officer of the Company and/or its Subsidiaries, he was, is and will be critical to the success of the Company and its Subsidiaries and that the Company would not have consummated the Purchase unless Executive entered into this Agreement. Executive further acknowledges that his material breach of this Agreement would cause the Company and its Subsidiaries material adverse harm, including lost sales, profits and growth potential. Executive believes it would be just and 6 equitable for a court to consider the foregoing factors when accessing damages against Executive for his material breach of this Agreement. 18. AMENDMENTS AND WAIVERS; THIRD PARTY BENEFICIARIES. Any provision of this Agreement may be amended or waived only with the prior written consent of the Company and Executive. The failure of either party to insist, in any one or more instances, upon performance of the terms or conditions of this Agreement shall not be construed as a waiver or a relinquishment of any right granted hereunder or of the future performance of any such term, covenant or condition. Each direct and indirect Subsidiary of the Company shall be a third party beneficiary of the Executive's obligations under this Agreement, provided that this Agreement may be amended in any manner without the consent of such third party beneficiaries. 19. DEFINITIONS. "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a governmental entity or any department or agency thereof. "Permitted Transferee" shall mean (a) any successor by merger or consolidation to the Company or any Permitted Transferee; (b) any purchaser of all or substantially all of the Company's or any Permitted Transferee's assets; and (c) any lender to (i) the Company, (ii) any Permitted Transferee and/or (iii) any affiliate of the Company or of any Permitted Transferee. "Subsidiary" shall mean any Person which the Company has the direct or indirect right to control, direct or cause direction of management and policies of, whether through the ownership of voting securities, by contract or otherwise, including but not limited to J.E. Hanger, Inc. of Georgia. * * * * IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. HANGER ORTHOPEDIC GROUP, INC. By: ____________________________ Ivan R. Sabel President and Chief Executive Officer ____________________________ John McNeill 7 SCHEDULE I EXECUTIVE BENEFITS 1. All group medical, life, short-term disability, dental and other insurance generally made available to employees of the Company and its Subsidiaries. 2. Reasonable auto expense allowances consistent with the Company's past practices. 3. Reimbursement for any reasonable out-of-pocket business expense actually and necessarily incurred by Executive in the conduct of the business of the Company upon receipt of itemized vouchers approved in accordance with agreed-upon review and approval procedures. Reimbursement of the costs of attending organizational and trade association conferences and customary travel expenses. 4. General long-term disability insurance (group and individual policies) generally made available to key employees of the Company and its Subsidiaries. SCHEDULE II SEVERANCE BENEFITS OF EXECUTIVE 1. In the event the employment of Executive by the Company is terminated for any reason other than Cause, as defined in the Employment Agreement between Executive and the Company to which this Schedule is attached, then the Company shall pay to Executive one of the following severance payments: (i) in the event of the termination of Executive by the Company within the first twelve (12) months immediately following the date of the Employment Agreement, then in such event the Company shall pay to Executive an amount equal to three (3) times the annualized average of Executive's W-2 income for the years of 1995, 1994 and 1993; (ii) in the event of the termination of Executive by the Company more than twelve (12) months immediately following the date of the Employment Agreement but on or prior to twenty-four (24) months immediately following the date of the Employment Agreement, then in such event the Company shall pay to Executive an amount equal to two (2) times the annualized average of Executive's W-2 income for the years of 1995, 1994 and 1993; or (iii) in the event of the termination of Executive by the Company more than twenty-four (24) months immediately following the date of the Employment Agreement but on or prior to thirty-six (36) months immediately following the date of the Employment Agreement, then in such event the Company shall pay to Executive an amount equal to one-half (1/2) of the annualized average of Executive's W-2 income for the years of 1995, 1994 and 1993. For purposes of this calculation, the "annualized average of Executive's W-2 income for the years 1995, 1994 and 1993" shall be determined by adding the gross income earned by Executive during 1995, 1994 and 1993 as shown on Executive's W-2 wage statement and dividing such sum by three (3). Notwithstanding anything else contained herein to the contrary, the Company shall nevertheless pay to Executive the applicable amount of severance payments as provided herein in the event the employment of Executive by the Company is terminated by the Company for a proper business purpose as provided in paragraph 4(v) of the Employment Agreement. 2. In the event the employment of Executive by the Company is terminated for any reason other than Cause within the first thirty-six (36) months immediately following the date of the Employment Agreement, then (i) the non-compete portion of the Employment Agreement shall be invalid and (ii) all stock options of Executive shall become immediately fully vested. 3. In the event the employment of Executive by the Company is terminated either by the resignation of Executive or for reasons which are determined to constitute Cause, then in either such event (i) Executive shall not be entitled to any of the severance payments described herein and (ii) all remaining provisions of the Employment Agreement shall apply, including but not limited to the non-compete, confidentiality and non-solicitation provisions. EX-10.R 4 EXHIBIT 10(r) EMPLOYMENT AND NON-COMPETE AGREEMENT Agreement made as of November 1, 1996, between Hanger Orthopedic Group, Inc., a Delaware corporation (the "Company"), and Alice Tidwell ("Executive"). WITNESSETH: WHEREAS, Executive has great expertise in the Company's and its Subsidiaries' businesses; WHEREAS, Executive's use of such expertise in competition with the Company and its Subsidiaries would have an extremely detrimental effect on the Company and its Subsidiaries; and WHEREAS, the Company desires to retain the services of Executive and to assure itself that Executive does not engage in competition with the Company and its Subsidiaries. NOW, THEREFORE, the parties hereto agree as follows: 1. EMPLOYMENT. The Company agrees to employ Executive and Executive accepts such employment by the Company upon the terms and conditions set forth in this Agreement, for the period beginning on the date of this Agreement, and ending upon termination pursuant to paragraph 4 hereof (the "Employment Period"). 2. COMPENSATION. (a) During the Employment Period, the Company will pay Executive a base salary at the rate of $39,000.00 per annum in consideration for the services to be rendered to the Company by Executive (the "Base Salary"). Executive's Base Salary may be increased from time to time as determined by the Board of Directors of the Company (the "Board"). In addition to the Base Salary payable to Executive pursuant to this paragraph 2(a), during the Employment Period Executive will be entitled to the benefits set forth on Schedule I attached hereto. (b) In addition to the Base Salary and the other benefits paid to Executive during the Employment Period, Executive also shall be eligible to receive awards of stock options from the Company, as well as cash bonus compensation based on formulae related to year-end financial data of the Company and determined in the reasonable discretion of the Board and its Compensation Committee. 3. SERVICES. During the Employment Period, Executive shall devote her best efforts and substantially all of her business time and attention to the affairs of the Company or its Subsidiaries (except for reasonable vacation periods subject to the reasonable approval of the Board, or reasonable periods of illness or other incapacity). During the Employment Period, Executive agrees to render such services of an executive and administrative character to the Company and its Subsidiaries as the Board may from time to time direct. 4. TERMINATION. The Employment Period will continue from year to year unless terminated earlier by (a) Executive's death or permanent disability (as determined by the Board in its good faith judgment), (b) by Executive's resignation upon prior written notice to the Company of not less than three (3) months, (c) the Board for Cause, or (d) the Board without Cause. For purpose of this paragraph 4, "Cause" shall mean (i) the failure or refusal of Executive to follow the lawful directives of the Board (except due to sickness, injury or disabilities), (ii) inattention to duty or any other willful, reckless or negligent act (or omission to act) by Executive, which, in the good faith judgment of the Board, materially injures the Company or one of its Subsidiaries, including the repeated failure to follow the policies and procedures of the Company or one of its Subsidiaries, (iii) a material breach of this Agreement by Executive, (iv) the commission by Executive of a felony or other crime involving moral turpitude or the commission by Executive of an act of financial dishonesty against the Company or one of its Subsidiaries or (v) a proper business purpose of the Company, including but not limited to a decrease in the staffing of the office in which Executive is working or the elimination of the position filled by Executive. If Executive's employment is terminated by the Executive in any manner other than clauses (a) or (b) above, the Company will have the remedies enumerated in paragraph 17. If Executive's employment is terminated, then Executive may be entitled to receive severance payments in the amount and under the terms set forth in Schedule II attached hereto. 5. NON-COMPETE. (a) Executive agrees that during the Employment Period and for a period of thirty-six (36) months thereafter (the "Non-Compete Period"), Executive will not directly or indirectly (whether as employee, director, owner, stockholder, consultant, partner (limited or general) or otherwise) own, manage, control, participate in, consult with, render services for or in any manner engage in any Competitive Business or solicit any other Person to engage in any of the foregoing activities or knowingly request, induce or attempt to influence any then existing customer of the Company or its Subsidiaries to curtail or cause any business they are currently, or in the last 36 months have been, transacting with the Company and its Subsidiaries 2 (the "Non-Compete"). Nothing herein will prevent Executive from being a passive owner of not more than 1% of the outstanding stock of any class of a corporation which is a competitor of the Company or its Subsidiaries and which is publicly traded, so long as Executive has no participation in the business of such corporation. During the Non-Compete Period, Executive shall not, without the Company's prior written consent, directly or indirectly, knowingly solicit or encourage or attempt to influence any employee to leave the employment of the Company or any of its Subsidiaries. "Competitive Business" shall mean engaging in "Business" within the "Restricted Territory." "Business" shall mean manufacturing, distributing, wholesaling or retailing of orthotics or prosthetics, or the operation of clinics to fit patients for orthotics or prosthetics, or any other related businesses which the Company and its Subsidiaries are engaged in during and at the expiration of the Employment Period. "Restricted Territory" shall mean the United States of America, the District of Columbia and any U.S. territory in which the Company or any one or more of its Subsidiaries conducts Business during and at the expiration of the Employment Period. (b) If, at the time of enforcement of any provision of paragraph 5(a) above, a court holds that the restrictions stated therein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope, and geographical area reasonable under such circumstances will be substituted for the stated period, scope or area. (c) The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this paragraph 5; therefore, in the event of a breach by Executive of any of the provisions of this paragraph 5, the Company or its successors or assigns may, in addition to other rights and remedies existing in its favor, apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce or prevent any violations of the provisions hereof. 6. CONFIDENTIAL INFORMATION. Executive acknowledges that the information, observations, data and trade secrets (collectively, "Confidential Information") obtained by her during the course of her performance under this Agreement, and previously as an employee of the Company and/or its Subsidiaries, concerning the business or affairs of the Company or any of its Subsidiaries are the property of the Company and its Subsidiaries. For purposes of this Agreement, "trade secret" means any method, program or compilation of information which is used in the Company's or any Subsidiary's business, including but not limited to: (a) techniques, plans and materials used by the Company and its Subsidiaries, (b) marketing methods and strategies employed by the Company and its Subsidiaries, and (c) all lists of past, present or prospective customers, suppliers, referring physicians and all other referral sources of the Company and its Subsidiaries. Executive agrees that he will not disclose to any unauthorized Person or use for her own account any of such Confidential Information without the Board's written consent, unless and to the extent that the aforementioned matters become generally known to and available for use by the public other than as a result of the Executive's acts or omissions to act or become known to the Executive lawfully outside the scope of her employment under this Agreement. Executive 3 agrees to deliver to the Company at the termination of her employment, or at any other time the Company may request, all memoranda, notes, plans, records, reports and other documents and its Subsidiaries which he may then possess or have under her control. 7. INVENTIONS AND PATENTS. Executive agrees that all Confidential Information and all inventions, innovations or improvements in the Company's and its Subsidiaries' method of conducting their respective businesses, or any reasonable development or extension of such businesses (including new contributions, improvements, ideas and discoveries, whether patentable or not), conceived or made by her (whether individually or in conjunction with other Persons) during the Employment Period belong to the Company and its Subsidiaries. Executive will promptly disclose such inventions, innovations or improvements to the Board and perform all actions reasonably requested by the Board to establish and confirm such ownership. 8. OTHER BUSINESSES. During the Employment Period, Executive agrees that she will not, except with the express written consent of the Board, become engaged in, render services for, or permit her name to be used in connection with, any business other than the business of the Company and its Subsidiaries. 9. ANNUAL PHYSICAL EXAMINATION. The Executive will assist the Company and its Subsidiaries (without cost to the Executive) in obtaining key man life and disability insurance, including, without limitation, to submitting to an annual general physical examination (and such other physical examinations requested by the Company's insurers), and to share the results of such examinations with the Company and its insurers. 10. NO INCONSISTENT AGREEMENTS. Any and all employment, consulting or other similar agreements heretofore executed between the Company and/or its Subsidiaries on the one hand and Executive on the other are hereby terminated. 11. NOTICES. Any notice provided for in this Agreement must be in writing and must be either personally delivered, sent by overnight courier (E.G., Federal Express) or mailed by first class mail, to the recipient at the address below indicated: 4 To the Company: Hanger Orthopedic Group, Inc. 7700 Old Georgetown Road (Second Floor) Bethesda, Maryland 20814 Attention: Chief Executive Officer To Executive: Alice Tidwell J.E. Hanger, Inc. of Georgia 5010 McGinniss Ferry Road Alpharetta, Georgia 30202 With a copy of any of the foregoing notices to: Freedman, Levy, Kroll & Simonds 1050 Connecticut Avenue, N.W. (Suite 825) Washington, D.C. 20036 Attention: Jay W. Freedman, Esq. or such other address or to the attention of such other Person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement will be deemed to have been given when so delivered, sent or mailed. 12. SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law. The parties agree that (i) the provisions of this Agreement shall be severable in the event that any of the provisions hereof are for any reason whatsoever invalid, void or otherwise unenforceable, (ii) such invalid, void or otherwise unenforceable provisions shall be automatically replaced by other provisions which are as similar as possible in terms to such invalid, void or otherwise unenforceable provisions but are valid and enforceable and (iii) the remaining provisions shall remain enforceable to the fullest extent permitted by law. 13. COMPLETE AGREEMENT. This Agreement, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. 14. COUNTERPARTS. This Agreement may be executed on separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. 5 15. SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company, and their respective successors and assigns. Executive may not assign her rights or delegate her obligations hereunder without the prior written consent of the Company. The Company may assign its rights and delegate its duties hereunder without the consent of the Executive to Permitted Transferees. 16. GOVERNING LAW. All questions concerning the construction, validity and interpretation of the Agreement will be governed by the internal law, and not the law of conflicts of the State of Maryland. 17. REMEDIES. Each of the parties to this Agreement will be entitled to enforce its rights under this Agreement specifically, to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights existing in its favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive relief in order to enforce or prevent any violations of the provisions of this Agreement. Executive acknowledges that in her past, present and future capacity as an executive officer of the Company and/or its Subsidiaries, he was, is and will be critical to the success of the Company and its Subsidiaries and that the Company would not have consummated the Purchase unless Executive entered into this Agreement. Executive further acknowledges that her material breach of this Agreement would cause the Company and its Subsidiaries material adverse harm, including lost sales, profits and growth potential. Executive believes it would be just and equitable for a court to consider the foregoing factors when accessing damages against Executive for her material breach of this Agreement. 18. AMENDMENTS AND WAIVERS; THIRD PARTY BENEFICIARIES. Any provision of this Agreement may be amended or waived only with the prior written consent of the Company and Executive. The failure of either party to insist, in any one or more instances, upon performance of the terms or conditions of this Agreement shall not be construed as a waiver or a relinquishment of any right granted hereunder or of the future performance of any such term, covenant or condition. Each direct and indirect Subsidiary of the Company shall be a third party beneficiary of the Executive's obligations under this Agreement, provided that this Agreement may be amended in any manner without the consent of such third party beneficiaries. 6 19. DEFINITIONS. "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a governmental entity or any department or agency thereof. "Permitted Transferee" shall mean (a) any successor by merger or consolidation to the Company or any Permitted Transferee; (b) any purchaser of all or substantially all of the Company's or any Permitted Transferee's assets; and (c) any lender to (i) the Company, (ii) any Permitted Transferee and/or (iii) any affiliate of the Company or of any Permitted Transferee. "Subsidiary" shall mean any Person which the Company has the direct or indirect right to control, direct or cause direction of management and policies of, whether through the ownership of voting securities, by contract or otherwise, including but not limited to J.E. Hanger, Inc. of Georgia. * * * * IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. HANGER ORTHOPEDIC GROUP, INC. By: ____________________________ Ivan R. Sabel President and Chief Executive Officer ____________________________ Alice Tidwell 7 SCHEDULE I EXECUTIVE BENEFITS 1. All group medical, life, short-term disability, dental and other insurance generally made available to employees of the Company and its Subsidiaries. 2. Reasonable auto expense allowances consistent with the Company's past practices. 3. Reimbursement for any reasonable out-of-pocket business expense actually and necessarily incurred by Executive in the conduct of the business of the Company upon receipt of itemized vouchers approved in accordance with agreed-upon review and approval procedures. Reimbursement of the costs of attending organizational and trade association conferences and customary travel expenses. 4. General long-term disability insurance (group and individual policies) generally made available to key employees of the Company and its Subsidiaries. SCHEDULE II SEVERANCE BENEFITS OF EXECUTIVE 1. In the event the employment of Executive by the Company is terminated for any reason other than Cause, as defined in the Employment Agreement between Executive and the Company to which this Schedule is attached, then the Company shall pay to Executive one of the following severance payments: (i) in the event of the termination of Executive by the Company within the first twelve (12) months immediately following the date of the Employment Agreement, then in such event the Company shall pay to Executive an amount equal to three (3) times the annualized average of Executive's W-2 income for the years of 1995, 1994 and 1993; (ii) in the event of the termination of Executive by the Company more than twelve (12) months immediately following the date of the Employment Agreement but on or prior to twenty-four (24) months immediately following the date of the Employment Agreement, then in such event the Company shall pay to Executive an amount equal to two (2) times the annualized average of Executive's W-2 income for the years of 1995, 1994 and 1993; or (iii) in the event of the termination of Executive by the Company more than twenty-four (24) months immediately following the date of the Employment Agreement but on or prior to thirty-six (36) months immediately following the date of the Employment Agreement, then in such event the Company shall pay to Executive an amount equal to one-half (1/2) of the annualized average of Executive's W-2 income for the years of 1995, 1994 and 1993. For purposes of this calculation, the "annualized average of Executive's W-2 income for the years 1995, 1994 and 1993" shall be determined by adding the gross income earned by Executive during 1995, 1994 and 1993 as shown on Executive's W-2 wage statement and dividing such sum by three (3). Notwithstanding anything else contained herein to the contrary, the Company shall nevertheless pay to Executive the applicable amount of severance payments as provided herein in the event the employment of Executive by the Company is terminated by the Company for a proper business purpose as provided in paragraph 4(v) of the Employment Agreement. 2. In the event the employment of Executive by the Company is terminated for any reason other than Cause within the first thirty-six (36) months immediately following the date of the Employment Agreement, then (i) the non-compete portion of the Employment Agreement shall be invalid and (ii) all stock options of Executive shall become immediately fully vested. 3. In the event the employment of Executive by the Company is terminated either by the resignation of Executive or for reasons which are determined to constitute Cause, then in either such event (i) Executive shall not be entitled to any of the severance payments described herein and (ii) all remaining provisions of the Employment Agreement shall apply, including but not limited to the non-compete, confidentiality and non-solicitation provisions. EX-11 5 EXHIBIT 11 HANGER ORTHOPEDIC GROUP, INC. EXHIBIT 11 COMPUTATION OF NET INCOME PER SHARE FOR THE YEARS ENDED DECEMBER 31,
1994 1995 1996 ---- ---- ---- Net income (loss) $(2,687,438) $ 2,135,439 $ 997,894 Less: Dividends declared 19,882 21,799 23,815 ------------ ------------ ------------ Total $(2,707,320) $ 2,113,640 $ 974,079 ============ ============ ============ Income (loss) per share (.33) .26 .11 ============ ============ ============ Shares used to compute net income (loss) per share 8,290,276 8,290,544 8,663,161 ============ ============ ============
EX-22 6 EXHIBIT 22 LIST OF SUBSIDIARIES The following is a list of the subsidiaries of Hanger Orthopedic Group, Inc. as of December 31, 1996, all of which are wholly-owned except as noted below, and their respective states of incorporation: Apothecaries, Inc. - Delaware Columbia Brace Acquisition Corp. - Delaware (80% owned) DOBI-Symplex, Inc. - Delaware Hanger Prosthetics & Orthotics, Inc. - Delaware Metzgers Orthopaedic Services, Inc. - California OPNET, Inc. - Nevada Southern Prosthetics Supply, Inc. - Georgia EX-27 7
5 0000722723 HANGER ORTHOPEDIC GROUP 12-MOS DEC-31-1996 DEC-31-1996 6,572,402 0 24,321,872 2,478,800 15,916,638 51,565,361 22,797,006 5,497,809 134,941,427 26,066,205 64,297,801 277,701 0 94,492 39,639,323 134,941,427 66,805,944 66,805,944 32,233,373 59,631,640 2,656,729 0 2,546,561 1,971,014 889,886 1,081,128 0 83,234 0 997,894 .11 .11
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