-----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, G2cgHpn3wNsrY5kocBTrgIM9B2SesfFMeXuG513FSYdXHzUz3Da1OQOqyRJjoyoN HICyiuhkJMKG4I40uvg+jg== 0000950133-96-000271.txt : 19960329 0000950133-96-000271.hdr.sgml : 19960329 ACCESSION NUMBER: 0000950133-96-000271 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 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: 96539632 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 HANGER ORTHOPEDIC GROUP FORM 10-K, 12/31/95. 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, 1995 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 23, 1996 by non-affiliates of the registrant was $20,757,984 based on the $3.25 closing sale price of the Common Stock on the American Stock Exchange on such date. As of February 23, 1996, the registrant had 8,290,544 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 2 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. 3 PART I 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, J. E. Hanger, Inc. ("JEH"), 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 manages O&P patient care practices. 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 fit, support and comfort. Of the orthotic devices provided by Hanger, approximately one-half are custom designed, fabricated and fitted and the other half 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 1 4 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 division allows its personnel faster access to the products needed to fabricate devices for patients. This is accomplished at competitive prices, as a result of direct purchases by the Company's distribution division from 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 313 patient care practitioners, of whom 98 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 O&P practices currently managed by the Company provide O&P services through patient care centers in Alabama, Arizona, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Kentucky, Maryland, Massachusetts, Michigan, Mississippi, Montana, New Mexico, New York, North Carolina, 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, Illinois, Maryland and New York and maintains a central distribution facility in Maryland. The Company was originally incorporated under Colorado law in March 1983. It initially engaged in activities other than its current line of business, which activities were discontinued during 1986 when the Company entered the O&P business. The Company changed its name to Sequel Corporation ("Sequel") in February 1986 and reincorporated under Delaware law in April 1988. On May 15, 1989, the Company acquired JEH in a transaction which was treated for accounting purposes as a reverse acquisition, i.e., as though JEH acquired Hanger. The Company changed its name to Hanger Orthopedic Group, Inc. in July 1989. The Company's 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. THE MARKET FOR ORTHOPEDIC REHABILITATION SERVICES In addition to O&P patient care practice management, the Company is engaged in O&P product manufacturing and distribution activities. The O&P industry in the United States, including 2 5 patient care services, manufacturing and distribution, is estimated to generate $1 billion in sales annually. Of that amount, an estimated $700 million is attributed to the patient care services sector, 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: - 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. - 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. - Growing Physical Health Consciousness. There is a growing emphasis on physical fitness, leisure sports and conditioning, such as running and aerobics, which has led to increased injuries requiring orthopedic rehabilitative services and products. In addition, as the current middle-age population ages, it brings its more active life-style and accompanying emphasis on physical fitness to the over-65 age group. These trends are evidenced by the increasing demand for new devices which provide support for injuries, prevent further or new injuries or enhance physical performance. - Advancing Technology. The range and effectiveness of treatment options have increased in connection with the technological sophistication of O&P devices. Advances in design technology and lighter, stronger and more cosmetically acceptable materials have enabled the industry to produce 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. - 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 3 6 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 in 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 (vi) developing a proprietary referral network between selected O&P service providers and the Company's contract business with managed care organizations. See "Acquisitions" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." ACQUISITION STRATEGY 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 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 reviews the operational and financial performance of its acquisitions to determine whether to maintain or dispose of any such acquisition. In the event an acquisition performs at levels which meet or exceed the operational and financial standards of the Company, then such acquisition will be maintained by the Company. However, in the event an acquired operation performs at levels which are below the operational and financial standards of the Company, even after sufficient remedial efforts have been applied, then such operation will be sold or closed by the Company. The Company also plans to expand its contractual relationships with large rehabilitation hospitals pursuant to which Hanger operates such facilities' O&P patient care centers. In 1989, the Company commenced the provision of all in-patient O&P services to patients of The Rusk Institute of Rehabilitation Medicine at the New York University Medical Center. In 1990, by virtue of its acquisition of Scott Orthopedics, Inc. ("Scott"), the Company commenced provision of all O&P services to the patients of the Rocky Mountain Regional Spinal Injury Center of the Craig Hospital in 4 7 Colorado. In March 1992, the Company commenced a similar service with the Harmarville Rehabilitation Center in 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 20% 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. 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 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 hired in 1992 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 grown important as 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 5 8 this effort, the Company employed a Vice President of Contract Services in 1993 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 The following table sets forth information regarding the O&P businesses which the Company has acquired since 1986:
Name of Acquired Company Year (Year Commenced Business) Acquired O&P Patient Care Centers and Facilities - --------------------------------------------- -------- ----------------------------------------------------------- State Number Cities ----- ------ ------ Capital Orthopedics, Inc. (1968) 1986 Maryland 2 Bethesda Gaithersburg Virginia 1 Vienna (1) West Virginia 1 Martinsburg (1) Greiner and Saur Orthopedics, Inc. (1897) 1986 Pennsylvania 4 Broomall Philadelphia (two) Reading R&G Orthopedics, Inc. (1949) 1988 Washington, D.C. 1 Washington, D.C. J. E. Hanger, Inc. (1861) 1989 California 4 Monterey (1) San Jose (1) Santa Teresa (1) Salinas (1) Washington, D.C. 2 Washington, D.C. (two) Maryland 2 Baltimore Forestville (2) Massachusetts 1 Brighton (1)(5) New York 3 Kenmore New York (two) (3) No. Carolina 2 Raleigh Rocky Mount (1) Pennsylvania 2 Philadelphia Pittsburgh (3)
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Name of Acquired Company Year (Year Commenced Business) Acquired O&P Patient Care Centers and Facilities - --------------------------------------------- -------- --------------------------------------------------- State Number Cities ----- ------ ------ Virginia 3 Newport News Portsmouth Richmond West Virginia 4 Beckley (1) Charleston Clarksburg (1) Morgantown Amsterdam Brothers, Inc. (1919) 1989 Delaware 1 Wilmington Nulty-Coggins, Inc. (1928) 1989 Pennsylvania 1 Philadelphia Zielke Orthotics and Prosthetics, Inc. and affiliated company (1945) 1989 Pennsylvania 2 Lancaster York Schumacher Orthopedic Appliances, Inc. (1958) 1989 Connecticut 2 Wallingford Woodbridge Massachusetts 1 Worcester (1) Summit Health Care Group, Inc. (1987) 1989 New Jersey 1 Voorhees (4) Scott Orthopedics, Inc. and affiliated companies (1947) 1990 Colorado 5 Boulder Denver Englewood Greeley New Mexico 1 Albuquerque Manufacturing Division of Ralph Storrs, Inc. (1979) 1990 Illinois 1 Kankakee Lynchburg Orthopaedic Laboratory, Inc. (1954) 1991 Virginia 1 Lynchburg Memphis Orthopedic, an operation of Durr-Fillauer Medical, Inc. Orthopedic Division (1924) 1991 Tennessee 3 Memphis (two) Cordova (1) Mississippi 1 Corinth (1) Dorsch Prosthetics and Orthotics, Inc. (1950) 1991 New York 2 New York Elmsford (4) Metro Orthopedic Appliances, Inc. (1972) 1991 Maryland 1 Landover Hills
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Name of Acquired Company Year (Year Commenced Business) Acquired O&P Patient Care Centers and Facilities - --------------------------------------------- -------- --------------------------------------------------- State Number Cities ----- ------ ------ Northeast Paramedical Industries, Inc. (1971) 1991 Maryland - Forestville (2) New York - New York (2) York Prosthetics, Inc. (1980) 1992 Kentucky 1 Paducah Tennessee 1 Union City (5) Bay Orthopedics, Inc. (1981) 1992 California 1 San Mateo Norton Shoes (1938) 1992 Colorado 1 Colorado Springs Metzgers Orthopaedic Services, Inc. (1932) 1992 California 2 Cypress (4) Long Beach (4) DOBI-Symplex, a division of Caretenders Health Corp. (1982) 1992 Florida 1 Orlando Raiford's Shoes, Inc. (1948) 1992 Tennessee 1 Memphis Advanced Orthopedic Appliance Company and Rehab Resources Orthotics and Prosthetics, operations of a subsidiary of Caretenders Health Corp. (1986) 1992 Alabama 2 Birmingham Decatur AO Artificial Limb, Inc. and Dallas Prosthetic and Orthotic Center, Inc. (1973) 1992 Texas 4 Fort Worth (two) Dallas Denton (1) (4) Kinetics Engineering (1970) 1992 Colorado 1 Pueblo Rehab Systems, Inc. (1984) 1992 California 1 Long Beach (4) Lenox Hill, an operation of Minnesota Mining and Manufacturing Company ("3M") (1961) 1992 New York 1 Long Island City Anne Arundel Orthopaedics, Inc. (1977) 1993 Maryland 2 Annapolis Hughesville Billings Orthopaedic, Inc. (1947) 1993 Montana 2 Billings Bozeman Wyoming 1 Thermopolis (1)
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Name of Acquired Company Year (Year Commenced Business) Acquired O&P Patient Care Centers and Facilities - --------------------------------------------- -------- --------------------------------------------------- State Number Cities ----- ------ ------ Certified Orthopedics, Inc. (1989) 1993 California 1 Orange (4) Winter Park Orthotics & Prosthetics, Inc. (1987) 1993 Florida 1 Winter Park Billings Comfort Shoes, Inc. (1984) 1993 Montana 1 Billings Institute for the Advancement of Prosthetics, Inc. (1978) 1993 Michigan 3 Lansing Jackson (1) Ann Arbor (1) Columbia Brace Shop, Inc. (1929) 1994 South Carolina 2 Columbia Florence (1) No. Charleston (1) Orthotic & Prosthetic Division of M-D Medical, a division of Health Industries, Inc. (1975) 1994 Arizona 4 Phoenix Scottsdale Sun City Tucson (1) J.E. Hanger, Inc. of New England 1994 Massachusetts 1 Boston (1966) Pedi-Mac Shoe Company, Inc. (1946) 1994 Massachusetts 1 Boston Gulf Coast Orthopaedic Supply, Inc. 1995 Florida 1 Ft. Myers Summit Prosthetics and Orthotics 1995 Montana 1 Great Falls --- Total........... 93 (4) ===
(1) Opened Monterey in January 1992; San Jose in October 1992; Beckley in November 1992; Santa Teresa in March 1993; Portsmouth, Virginia in November 1993, Bozeman and Cordova in September 1993; Salinas in December 1993; Clarksburg, Denton and St. Louis in January 1994; Corinth and Florence in February 1994; Martinsburg in September 1994; Rocky Mount, Thermopolis, Jackson and Ann Arbor in June 1994; Charleston and Tucson in September 1994; Brighton in June 1994; Santa Clara in September 1994. Vienna Virginia in May 1995, Washington, D.C. in June 1995 and Worcester, Massachusetts in April 1995. (2) The Company's central distribution facility was opened at this location in Maryland in August 1991 as a result of the combination of the Company's existing distribution division, Washington Prosthetic Services, and the inventory and certain other assets of Northeast Paramedical Industries, Inc., a distributor of components for O&P devices, that were purchased by the Company and moved from New York to its central distribution facility in Maryland. In 1992, the Company closed its sales office in New York and moved it to Forestville, Maryland. (3) Operations commenced at one of the New York City locations pursuant to an agreement, effective July 1989, with New York University Medical Center to provide all in-patient O&P services to patients of The Rusk Institute of Rehabilitation Medicine. Operations at the Pittsburgh location commenced in March 1992 pursuant to an agreement with the Harmarville Rehabilitation Center to provide O&P services to its patients. 9 12 (4) In 1995, the Company closed the following offices or sold the assets relating to the following operations: Denton in January 1995; Santa Clara in February 1995; Long Beach, Cyprus and Orange in March 1995; Voorhees in July 1995 and Elmsford in November 1995. (5) In 1992, the Company moved its Madison, Kentucky office to Union City, Tennessee. In June 1994, the Company moved one of its Boston, Massachusetts offices to Brighton, Massachusetts. The Company continues to be engaged in discussions with prospective acquisition candidates and 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 will be effected. 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, Inc. ("DOBI-Symplex"), a facility in Orlando, Florida, a Ralph Storrs, Inc. facility in Kankakee, Illinois, a Lenox Hill facility in Long Island City, New York and an Ortho-Mold facility in Forestville, Maryland. The principal products manufactured are pre-fabricated and custom-made spinal orthoses as well as a custom and off-the-shelf Precision Fit 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, 1991, 1992, 1993, 1994 and 1995 sales of products manufactured by the Company accounted for 7% ,10%, 18%, 18% and 16%, respectively, of Hanger's historical net sales. O&P Express, a division of JEH located in Forestville, Maryland, is primarily engaged in the distribution of O&P products, a majority of which are manufactured by others and distributed by O&P Express primarily to others in the O&P industry. The O&P Express facility inventories over 20,000 items. For the years ended December 31, 1991, 1992, 1993, 1994 and 1995 revenues attributable to distribution by O&P Express accounted for 6%, 6%, 5%, 4% and 5%, respectively, of Hanger's historical net sales. Marketing of Hanger's manufactured products and distribution services is conducted on a national basis, primarily through 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. The Company's manufacturing activities and capabilities were expanded with the acquisition of Ralph Storrs, Inc. ("Storrs") in November 1990. Storrs' revenues are derived primarily from the manufacture of orthotic devices. One such device is a hyperextension brace for lumbar and thoracic spinal support which Storrs holds a United States patent which expires in 1996. Another orthopedic device, for which Storrs manufactures the brace components pursuant to what was a requirements arrangement with the patent holder, is an internationally recognized derotation knee orthosis, and 10 13 which business Hanger acquired on December 31, 1992 from Minnesota Mining and Manufacturing Company ("3M"). See "Acquisitions." 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. 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 80% 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 15% of its annual revenues; and (iii) the fabrication of custom-made prosthetic devices. 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. 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. Storrs, another subsidiary of the Company, has, since 1980, manufactured and sold metal components used by Lenox Hill in its custom knee brace manufacturing activities. On September 1, 1993, DOBI-Symplex purchased from 3M substantially all of 3M's assets relating directly and solely to its off-the-shelf Precision-Fit knee brace business. The purchase of the off-the-shelf Precision-Fit knee brace business compliments 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. 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 11 14 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 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 March 1996, with the option to renew for a one year period. The contracts, awarded on a non-exclusive basis, establish the amount of reimbursement to the eligible veteran if the veteran should choose to use the Company's products and services. The Company has been awarded United States Veterans Administration contracts in the past and expects that it will obtain additional contracts when its 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. The Company believes that OBRA 1990's separation of O&P from DME for Medicare reimbursement purposes will not adversely affect 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 12 15 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 the identification and acquisition of O&P businesses. However, no assurance can be given that such competition will not be encountered in the future. 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 4, 1996, Hanger had 497 full-time employees. Of these employees, 313 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. 13 16 ITEM 2. PROPERTIES. During 1995, Hanger operated 93 patient care centers and facilities in 23 states and in Washington, D.C. Of these, ten centers are owned by Hanger. The remaining centers are occupied under leases expiring between the years of 1995 and 2002. Hanger believes that the centers leased or owned by it are adequate for carrying on its current O&P operations at its existing locations, as well as its anticipated future needs at those locations. Hanger believes it will be able to renew such leases as they expire or find comparable or additional space on commercially suitable terms. Hanger also leases manufacturing and distribution facilities in Illinois, New York, Maryland and Florida, its corporate headquarters in Bethesda, Maryland and a corporate office in New Canaan, Connecticut. Several of Hanger's O&P related properties are pledged to collateralize debt incurred in connection with acquisitions made by Hanger. See Notes H and K 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 through the solicitation of proxies or otherwise. 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 51 Chairman of the Board, 1987 President, Chief Executive Officer and Director Richard A. Stein 36 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 since September 1986. From 1968 until joining Hanger in 1986, 14 17 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. 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 subsidiary of the Company, from April 1987 until November 1989. Mr. Stein is a Certified Public Accountant and was employed by Coopers & Lybrand from September 1982 until he joined Hanger in 1987. 15 18 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:
1994 High Low --------------------------------------------------------------------- First Quarter $ 6.625 $ 5.750 Second Quarter 5.875 4.125 Third Quarter 4.375 3.250 Fourth Quarter 4.125 2.625
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 February 23, 1996 there were 500 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. 16 19 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, ---------------------------------------------------------------- 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Net sales $22,622 $32,406 $43,877 $50,300 $52,468 Gross profit 13,082 17,277 24,207 27,091 27,896 Selling, general & administrative 9,218 13,064 17,124 21,340 19,362 Depreciation and amortization 1,502 2,100 2,655 3,137 2,691 Restructuring cost (1) --- --- --- 460 --- Loss from disposal of assets (2) --- --- --- (2,150) --- Income from operations 2,362 2,113 4,428 4 5,843 Interest expense (2,122) (1,279) (1,167) (1,746) (2,056) Income (loss) from operations before taxes, extraordinary item and accounting change 240 807 3,221 (1,922) 3,680 Provision for income taxes 204 487 1,626 358 1,544 Income (loss) from operations before extraordinary item and accounting change 36 320 1,595 (2,280) 2,135 Income (loss) from discontinued operations (3) 16 (35) (105) (407) --- Income (loss) before extraordinary item and accounting change 52 285 1,490 (2,687) --- Extraordinary loss on early extinguishment of debt (676) (1,139) (23) --- --- Cumulative effect of change in accounting for income taxes --- --- 1,190 --- --- Net income (loss) $ (624) $ (854) $ 2,655 $ (2,687) $ 2,135 INCOME (LOSS) PER COMMON SHARE: Income (loss) before discontinued operations and extraordinary item $ (0.03) $ 0.03 $ 0.19 $ (0.28) $ 0.26 Income (loss) from discontinued operations --- --- (0.01) (0.05) --- Extraordinary loss on early extinguishment of debt (0.15) (0.15) --- --- --- Cumulative effect of change in accounting for income taxes --- --- 0.14 --- --- ----------- --------- --------- ------------ ---------- Net income (loss) per share (4) $ (0.18) $ (0.12) $ 0.32 $ (0.33) $ 0.26 =========== ========== ======== ========== ========== Weighted average number of common shares outstanding used in computing net income (loss) per share 4,587,000 7,565,000 8,344,000 8,290,000 8,290,000 ========= ========= ========= ========= =========
17 20
December 31, ---------------------------------------------------------------------------- 1991 1992 1993 1994 1995 Balance Sheet Data: Working capital $ 4,689 $11,887 $ 15,738 $18,412 $20,622 Total assets 30,287 47,996 56,571 61,481 61,800 Long-term debt 10,150 14,970 19,153 24,330 22,925 Redeemable preferred stock 1,278 194 212 232 254 Shareholders' equity 13,408 28,564 31,681 29,178 31,291
(1) Restructuring costs recorded in 1994 are associated with the closing of unprofitable patient care centers. See Note F to the Company's consolidated financial statements. (2) The loss from disposal of assets recorded in 1994 relates to the 1995 sale of the Company's southern California patient care centers. See Note D to the Company's consolidated financial statements. (3) 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 which was sold in 1994. See Note E to the Company's Consolidated Financial Statements. (4) Net income (loss) per common share, which has been adjusted for preferred stock dividends, is computed on the basis of the weighted average number of shares of Common Stock issued and outstanding. 18 21 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, 1993, 1994 and 1995, and the Company's liquidity and capital resources at December 31, 1995. 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 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 53% and 55% during these periods. Fluctuations in gross profit were a result of the timing of acquisitions and pricing pressures from managed care companies. 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 is primarily a result of implementing a plan to restructure its operations providing for the sale or closure of certain under-performing assets and focused plans to reduce overhead costs, including payroll and other operating costs. Interest expense has fluctuated between 2.7% and 3.9% as a percent of net sales due to an increase in bank debt used to consummate additional acquisitions in 1993 through 1995 and an increase in average interest rates. 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, --------------------------------------- 1993 (1) 1994 (2) 1995 (3) ----- ----- ---- Net Sales 100.0% 100.0% 100.0% Cost of products and services sold 44.8 46.1 46.8 Gross profit 55.2 53.9 53.2 Selling, general and administrative expenses 39.0 42.4 36.9 Depreciation and amortization 4.7 4.8 3.8 Amortization of excess cost over net assets acquired 1.4 1.4 1.3 Restructuring cost .9 Loss from disposal of assets 4.3 Income from operations 10.1 .0 11.1 Interest expense 2.7 3.5 3.9 Income (loss) from continuing operations 7.4 (3.8) 7.0 Income taxes 3.7 .7 2.9 Loss from discontinued operations (.8) Cumulative effect of accounting change 2.7 Net income (loss) 6.1 (5.3) 4.1
19 22 (1) Includes Anne Arundel Orthopaedics, Inc. from February 5, 1993, Billings Orthopaedic, Inc. from April 16, 1993, Certified Orthopedics, Inc. from May 20, 1993, Winter Park Orthotics & Prosthetics, Inc. from May 26, 1993, Billings Comfort Shoes, Inc. from September 30, 1993, Institute for the Advancement of Prosthetics, Inc. from October 18, 1993. (2) Includes all companies listed in footnote (1) 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. (3) Includes all companies listed in footnotes (1) and (2) for the entire period: 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. 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 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 20 23 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. 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. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 Net sales for the year ended December 31, 1994, amounted to approximately $50,300,000, an increase of approximately $6,423,000, or 14.6%, over net sales of approximately $43,877,000 for the year ended December 31, 1993. The increase was primarily attributable to the $7,804,000 net sales contribution of O&P patient care centers and facilities acquired by the Company in 1994 and late 1993, offset by a decline in net sales attributable to patient care centers and facilities that were in operation during both years ("Internal Base Net Sales") of $1,381,000, or 3%. The decline in Internal Base Net Sales was primarily due to severe weather conditions in the first quarter of 1994. Of the $1,381,000 decline in Internal Base Net Sales, $1,158,000 was attributable to patient care centers and $223,000 was attributable to the Company's manufacturing and distribution activities. Gross profit increased by approximately $2,884,000, or 11.9%, in 1994 over the prior year. Gross profit as a percent of net sales decreased to 53.9% in 1994 from 55.2% in 1993. The cost of products and services sold for the year ended December 31, 1994 amounted to $23,208,000 compared to $19,669,000 for the year ended December 31, 1993. Gross profit as a percent of net sales for patient care services declined from 54% in 1993 to 53% in 1994. This decline resulted primarily from the decrease in base business growth in the first quarter of 1994 due principally to severe weather conditions while labor costs remained constant. Gross profit as a percent of net sales for manufacturing and distribution declined from 38% in 1993 to 37% in 1994. This decline resulted 21 24 principally from pricing pressures in the distribution division offset by an increase in gross profit as a percent of net sales for the manufacturing division. Selling, general and administrative expenses in 1994 increased by approximately $4,216,000, or 24.6%, over 1993 due in significant part to the acquisition of additional patient care and manufacturing companies by the Company. Selling, general and administrative expenses as a percent of net sales increased from 39.0% in 1993 to 42.4% in 1994. This increase in selling, general and administrative expenses resulted primarily from the decline in Internal Base Net Sales as a result of severe weather conditions in the first quarter of 1995 while selling, general and administrative expenses remained the same. The $460,000 of non-recurring Restructuring costs recorded in 1994 relate to the closure of unprofitable start-up patient care centers located in Elmsford, Aurora and the Long Beach location of Rehab Systems, Inc. Such Restructuring costs primarily consist of charges to reserve for non-cancellable future lease commitments for the facilities that have been closed. The $2.15 million loss from the disposal of assets recorded during 1994 relate to the 1995 sale of the Company's southern California patient care centers located in Long Beach, Cyprus and Orange, California in connection with the Restructuring. In March 1995, the Company entered into an agreement to sell such patient care centers for $288,000 under a 10-year promissory note bearing interest at 8% per annum. Principally as a result of the above, income from operations in 1994 totalled approximately $4,000, a decrease of $4,424,000 from the prior year. Income from operations as a percent of net sales decreased to .0% in 1994 from 10.1% in 1993. Interest expense in 1994 amounted to approximately $1,746,000, an increase of approximately $579,000, or 49.6%, above the $1,167,000 of interest expense incurred in 1993. Interest expense as a percent of net sales amounted to 3.5% in 1994, as compared to 2.7% in 1993. The increase in interest expense was primarily attributable to the issuance of approximately $3,000,000 in bank term loans in connection with additional acquisitions in late 1993 and 1994 and the increase in the bank's lending rate. The provision for income taxes in 1994 amounted to approximately $358,000, as compared to $1,627,000 in 1993. A net income tax expense was incurred in 1994, notwithstanding a pre-tax loss, due to the fact that nondeductible goodwill was included in the Company's pre-tax loss during 1994. Such goodwill resulted from the loss from the disposal of assets related to certain of the Company's southern California patient care centers. Income (loss) from discontinued operations represents the loss from operations of the Company's subsidiary, Apothecaries, Inc., totalling $248,000 (net of a tax benefit of $179,000) and the loss on disposal of the assets totalling $159,000 (net of a tax benefit of $115,000). This subsidiary was the only non-orthotic and prosthetic division the Company operated. The sale of the assets in September 1994 was for $181,000 in cash. 22 25 As a result of above, the Company reported a net loss of $2,687,000, or $.33 per share for the year ended December 31, 1994, as compared to net income of $2,655,000, or $.32 per share for the year ended December 31, 1993. LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated working capital at December 31, 1995 was approximately $20,622,000. Cash and cash equivalents available at that date was approximately $1,456,000. The net cash provided by operations in 1995 was $3,722,000. The Company's cash resources available during 1995 were satisfactory to meet its obligations during the year. The Company's total long-term debt at December 31, 1995, including a current portion of approximately $1.8 million, was approximately $24.7 million. Such indebtedness included: (i) $4.0 million principal amount of an 8.5% Convertible Note; (ii) $1.0 million principal amount of an 8.25% Convertible Note; (iii) $12.7 million borrowed under the Company's revolving credit facility with NationsBank, N.A. (formerly Maryland National Bank; the "Bank"); (iv) a total of $4.6 million in term loans borrowed from the Bank; and (v) approximately $2.4 million of other indebtedness. Under the terms of the Financing and Security Agreement, as amended, between the Bank and the Company (the "Financing Agreement"), the Bank currently provides a $13.0 million revolving credit facility (the "Revolving Credit Facility"), which reflects a reduction from its original amount of $13.5 million. The Revolving Credit Facility bears interest, at the Company's option, at either a fluctuating rate equal to the Bank's prime lending rate plus .25% or a fixed rate equal to the three-month London InterBank Offered Rate ("LIBOR") plus 2.5%. On June 30, 1995, the Company made a mandatory curtailment payment of $250,000 to the Bank to reduce the maximum amount of the Revolving Credit Facility from $13.5 million to $13.25 million. On October 2, 1995, the Company and the Bank entered into Amendment No. 8 to the Financing Agreement which reduced the mandatory curtailment payment required by the Company under the Revolving Credit Facility from a $1.0 million curtailment to a $250,000 curtailment at September 30, 1995. On September 30, 1995, the Company made such mandatory curtailment payment of $250,000 to the Bank to reduce the maximum amount of the Revolving Credit Facility from $13.25 million to its current amount of $13.0 million. On November 13, 1995, the Company and the Bank agreed to the terms of Amendment No. 9 to the Financing Agreement, which (i) eliminated the previously required mandatory curtailment payments of the Revolving Credit Facility of $250,000 at each of December 31, 1995 and March 31, 1996, and (ii) extended the expiration date of the Revolving Credit Facility from September 30, 1996 to June 30, 1997. The Revolving Credit Facility is collateralized by substantially all the assets of the Company and contains convenants restricting, among other things, the payment of dividends, the making of acquisitions and other transactions, and imposes net worth, fixed charge ratio, debt service coverage and other financial maintenance requirements. In the first quarter of 1995, the Company was in default under the debt to net worth covenant of the Financing Agreement. The Bank has issued a waiver to the Company for this default. 23 26 In September 1994, the Company repaid a $1.8 million term loan from the Bank with a portion of the proceeds from a new $3.0 million term loan provided by the Bank. This new $3.0 million term loan bears interest at prime plus .75%, provides for monthly principal and interest payments and matures on March 31, 1998. In addition to such new term loan, the Company also has three other existing term loans with the Bank, consisting of: (i) a $1.575 million term loan provided by the Bank on November 17, 1993 which currently bears interest at a fixed rate equal to the three-month LIBOR plus 2.75% and matures on November 30, 1998; (ii) a $600,000 term loan provided by the Bank on December 22, 1993, which currently bears interest at a fixed rate equal to the Bank's prime lending rate plus .50% and matures on December 31, 1998; and (iii) a $200,000 term loan provided by the Bank on May 3, 1994, which currently bears interest at a fixed rate equal to the three-month LIBOR plus 2.75% and matures on April 30, 1999. The Company has the option to periodically elect to change the interest rates under each of these term loans between either a fluctuating rate equal to the Bank's prime lending rate plus .50% or a fixed rate equal to LIBOR plus 2.75%. The Company plans to finance future acquisitions through internally generated funds or borrowings under the Revolving Credit Facility, the issuance of notes or shares of common stock of the Company, or through a combination thereof. The Company is actively engaged in ongoing discussions with prospective acquisition candidates. The Company plans to continue to expand its operations through acquisitions, at a slower rate, with a view towards increasing efficiency and profitability of its existing facilities. During the year ended December 31, 1995, the Company acquired two orthotic and prosthetic companies. Negotiations relating to those acquisitions commenced prior to the Restructuring. The total purchase price of the acquisitions effected during that period was $385,000, of which $210,000 was paid in cash and $175,000 was financed through seller notes. The cash paid to effect such acquisitions was borrowed under the Revolving Credit Facility established between the Company and the Bank. 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 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. 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. 24 27 In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" which is effective for years beginning after December 15, 1995. This statement established criteria for recognizing, measuring and disclosing impairments of long-lived assets, including intangibles and goodwill. The Company plans to adopt SFAS 121 in 1996, but does not expect that the adoption will have a material effect on its consolidated financial position or results of operations. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 is required to be adopted for fiscal years beginning after December 15, 1995. SFAS No. 123 encourages a fair value based method of accounting for employee stock options or similar equity instruments, but allows continued use of the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. APB 25, "Accounting for Stock Issued to Employee." Companies electing to continue to use APB No. 25 must make proforma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. The Company is evaluating the provisions of SFAS No. 123, but has not yet determined whether it will continue to follow the provisions of APB No. 25 or change to the fair value method of SFAS No. 123. 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. 25 28 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, 1994 26 29 and 1995 Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1993, 1994 and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 Notes to Consolidated Financial Statements (2) Financial Statements Schedule: Report of Independent Accountants Schedule II - Valuation and qualifying accounts All other schedules are omitted either because they are not applicable or required, or because the required information is included in the financial statements or notes thereto: (b) Reports on Form 8-K: None. (c) Exhibits: The following exhibits are filed herewith or incorporated by reference: Exhibit No. Document ----------- -------- 3(a) Certificate of Incorporation, as amended, of the Registrant. (Incorporated herein by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1988.) 3(b) Certificate of Amendment of the Registrant's Certificate of Incorporation (which, among other things, changed the Registrant's corporate name from Sequel Corporation to Hanger Orthopedic Group, Inc.), as filed on August 11, 1989 with the Office of the Secretary of State of Delaware. (Incorporated herein by reference to Exhibit 3(b) to the Registrant's Current Report on Form 10-K dated February 13, 1990.) 3(c) Certificate of Agreement of Merger of Sequel Corporation and Delaware Sequel Corporation. (Incorporated herein by reference to Exhibit 3.1(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1988.) 27 30 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) of 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) Employment and Non-Compete Agreements, dated May 15, 1989 between Sequel Corporation and each of Gerald E. Bisbee, Jr., Ivan R. Sabel and Richard A. Stein. (Incorporated herein by reference to Exhibit 10(i) to the Registrant's Current Report on Form 8-K dated May 15, 1989.) * 10(b) Guaranty Agreement, dated May 15, 1989, by Sequel Corporation, Capital Orthopedics, Inc. and Greiner and Saur Orthopedics, Inc. in favor of Chemical Equity Associates. (Incorporated herein by reference to Exhibit 10(j) to the Registrant's Current Report on Form 8-K dated May 15, 1989.) 10(c) Stockholders' Agreement, dated as of May 15, 1989, by and among Sequel Corporation, Ronald J. Manganiello, Joseph M. Cestaro, Gerald E. Bisbee, Jr., Ivan R. Sabel, Richard A. Stein, Chemical Venture Capital Associates and Chemical Equity Associates. (Incorporated herein by reference to Exhibit 10(k) to the Registrant's Current Report on Form 8-K dated May 15, 1989.) 10(d) 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(e) Amendment to Employment Agreement, dated February 28, 1989, between J. E. Hanger, Inc. and Joseph M. Cestaro; and Employment and Non-Compete Agreement, dated as of February 28, 1989, between J. E. Hanger, Inc. and Ronald J. Manganiello. (Incorporated herein by reference to Exhibit 10(n) to the Registrant's Current Report on Form 8-K dated May 15, 1989.) * * Management contract or compensatory plan. 28 31 10(f) Amendment No. 1, dated as of February 12, 1990, to the Stockholders' Agreement, dated May 15, 1989, by and among Hanger Orthopedic Group, Inc., Ivan R. Sabel, Richard A. Stein, Ronald J. Manganiello, Joseph M. Cestaro, Chemical Venture Capital Associates and Chemical Equity Associates. (Incorporated herein by reference to Exhibit 10(l) to the Registrant's Current Report on Form 8-K dated February 13, 1990.) 10(g) 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(h) Third Amendment, dated as of February 12, 1990, to the Stock and Note Purchase Agreement, dated as of February 28, 1989 and as amended on May 9, 1989 and May 15, 1989, by and among J. E. Hanger, Inc., as successor to Hanger Acquisition Corporation, Ronald J. Manganiello, Chemical Venture Capital Associates and Chemical Equity Associates. (Incorporated herein by reference to Exhibit 10(n) to the Registrant's Current Report on Form 8-K dated February 13, 1990.) 10(i) Form of Stock Option and Vesting Agreements, dated as of August 13, 1990, between Chemical Venture Capital Associates and Ronald J. Manganiello, Ivan R. Sabel, Joseph M. Cestaro and Richard A. Stein. (Incorporated herein by reference to Exhibit 10(ccc) to the Registrant's Registration Statement on Form S-2, File No. 33-37594.) * 10(j) Fourth Amendment, dated as of June 19, 1990 to the Stock and Note Purchase Agreement, dated as of February 28, 1989 and as amended on May 9, 1989, May 15, 1989 and February 12, 1990, by and among J. E. Hanger, Inc., as successor to Hanger Acquisition Corporation, Hanger Orthopedic Group, Inc., Ronald J. Manganiello, Joseph M. Cestaro, Chemical Venture. (Incorporated herein by reference to Exhibit 10(qqq) to the Registrant's Registration Statement on Form S-2, File No. 33-37594.) 10(k) 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. 29 32 10(l) Amendment No. 3, dated as of November 8, 1990, to the Stockholders' Agreement, dated as of May 15, 1989 and as amended on February 12, 1990 and August 13, 1990, by and among Hanger Orthopedic Group, Inc., Gerald E. Bisbee, Jr., Ivan R. Sabel, Richard A. Stein, Ronald J. Manganiello, Joseph M. Cestaro, Chemical Venture Capital Associates and Chemical Equity Associates. (Incorporated herein by reference to Exhibit 10(www) to the Registrant's Registration Statement on Form S-2, File No. 33-37594.) 10(m) Form of Stock Option and Vesting Agreements, dated March 14, 1991, between Chemical Venture Capital Associates and Ronald J. Manganiello, Ivan R. Sabel and Richard A. Stein. (Incorporated herein by reference to Exhibit 10(cccc) to the Registrant's Registration Statement on Form S-2, File No. 33-37594.) * 10(n) 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(o) Form of Sixth Amendment to the Subordination Agreement, dated as of February 20, 1992, between CoreStates Bank, N.A., Chemical Equity Associates, and Chemical Venture Capital Associates. (Incorporated herein by reference to Exhibit 10(mmmm) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991.) 10(p) Form of Eighth Amendment to the Stock and Note Purchase Agreement, dated as of February 20, 1992, by and among J.E. Hanger, Inc., Hanger Orthopedic Group, Inc., Ronald J. Manganiello, Joseph M. Cestero, Chemical Venture Capital Associates and Chemical Equity Associates. (Incorporated herein by reference to Exhibit 10(nnnn) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991.) 10(q) Form of Amendment to Stock Option and Vesting Agreement and Amendment Agreement, dated as of February 20, 1992, by and among Chemical Venture Capital Associates, Chemical Equity Associates, Exeter Capital L.P., Hanger Orthopedic Group, Inc., Ronald J. Manganiello, Ivan R. Sabel and Richard A. Stein. (Incorporated herein by reference to Exhibit 10(pppp) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991.) * * Management contract or compensatory plan. 30 33 10(r) Form of Asset Purchase Agreement between DOBI Assets Acquisition Corp., Hanger Orthopedic Group, Inc., National Orthopedic & Rehabilitation Services, Inc. and Caretenders Health Corp. (Incorporated herein by reference to Exhibit 10(rrrr) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991.) 10(s) Amendment No. 9, dated as of April 30, 1992, to the Bank Credit Agreement, dated as of May 15, 1989 and as amended through April 30, 1992, among Hanger Orthopedic Group, Inc., Albuquerque Prosthetic Center, Inc., Apothecaries, Inc., Capital Orthopedics, Inc., DOBI-Symplex, Inc., Dorsch Prosthetics and Orthotics, Inc., Greiner & Saur Orthopedics, Inc., J.E. Hanger, Inc., J.E. Hanger of California, Inc., Memphis Orthopedic, Inc., Metzgers Orthopaedic Services, Inc., Ralph Storrs, Inc., Scott Orthopedics, Inc., Scott Orthopedics, of Northern Colorado, Inc., York Prosthetics, Inc., Zielke Orthotics & Prosthetics, Inc. and CoreStates Bank, N.A. (Incorporated by reference to Exhibit 22 to the Registrant's Current Report on Form 8-K dated March 31, 1992.) 10(t) Amendment No. 10, dated as of September 3, 1992, to the Bank Credit Agreement, dated as of May 15, 1989 and as amended through September 3, 1992, among Hanger Orthopedic Group, Inc., Albuquerque Prosthetic Center, Inc., Apothecaries, Inc., Capital Orthopedics, Inc., DOBI-Symplex, Inc., Dorsch Prosthetics & Orthotics, Inc., Greiner & Saur Orthopedics, Inc., J.E. Hanger, Inc., J.E. Hanger of California, Inc., Memphis Orthopedic, Inc., Metzgers Orthopaedic Services, Inc., Ralph Storrs, Inc., Scott Orthopedics, Inc., Scott Orthopedics of Northern Colorado, Inc., York Prosthetics, Inc., Zielke Orthotics & Prosthetics, Inc. and CoreStates Bank, N.A. (Incorporated by reference to Exhibit 22 to the Registrant's Current Report on Form 8-K dated March 31, 1992.) 10(u) Amendment No. 11, dated as of December 8, 1992, to the Bank Credit Agreement, dated as of May 15, 1989 and as amended through December 8, 1992, among Hanger Orthopedic Group, Inc., Albuquerque Prosthetic Center, Inc., Apothecaries, Inc., Capital Orthopedics., Inc., DOBI-Symplex, Inc., Dorsch Prosthetics & Orthotics, Inc., Greiner & Saur Orthopedics, Inc., J.E. Hanger, Inc., J.E. Hanger of California, Inc., Memphis Orthopedic, Inc., Metzgers Orthopaedic Services, Inc., Ralph Storrs, Inc., Scott Orthopedics, Inc., Scott Orthopedics of Northern Colorado, Inc., York Prosthetics, Inc., Zielke Orthotics & Prosthetics, Inc. and CoreStates Bank, N.A. (Incorporated by reference to Exhibit 22 to the Registrant's Current Report on Form 8-K dated March 31, 1992.) 10(v) Asset Purchase Agreement, dated as of December 31, 1992, between DOBI-Symplex, Inc. and Minnesota Mining and Manufacturing Company. (Incorporated 31 34 herein by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K, dated March 31, 1992.) 10(w) Amendment No. 12 dated as of March 12, 1993, to the Bank Credit Agreement referred to in Exhibit 10(u) above. (Incorporated herein by reference to Exhibit 10 (w) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.) 10(x) 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(y) 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(z) Revolving Promissory Note, dated as of July 2, 1993 from Hanger Orthopedic Group, Inc., Albuquerque Prosthetic Center, Inc., Apothecaries, Inc., Capital Orthopedics, Inc., Dorsch Prosthetics & Orthotics, Inc., DOBI-Symplex, Inc., Greiner and Saur Orthopedics, Inc., J.E. Hanger, Inc., J.E. Hanger of California, Inc., Memphis Orthopedic, Inc., Metzgers Orthopaedic Services, Inc., Ralph Storrs, Inc., Scott Orthopedics of Northern Colorado, Inc., York Prosthetics, Inc., Zielke Orthotics & Prosthetics, Inc., to Maryland National Bank regarding $12,500,000 principal amount due June 30, 1996. (Incorporated herein by reference to Exhibit 10 (z) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.) 10(aa) Financing and Security Agreement between Maryland National Bank and Hanger Orthopedic Group, dated as of July 2, 1993. (Incorporated herein by reference to Exhibit 10 (aa) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.) 10(bb) Asset Purchase Agreement, dated August 31, 1993, between DOBI-Symplex, Inc., Hanger Orthopedic Group, Inc. and Minnesota Mining and Manufacturing Company. (Incorporated herein by reference to Exhibit 10 (bb) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.) * Management contract or compensatory plan. 32 35 10(cc) Incentive Stock Option Agreement, dated as of September 14, 1993, between Hanger Orthopedic Group, Inc. and Ronald J. Manganiello. (Incorporated herein by reference to Exhibit 10 (cc) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.)* 10(dd) Incentive Stock Option Agreement, dated as of September 14, 1993, between Hanger Orthopedic Group, Inc. and Ivan R. Sabel. (Incorporated herein by reference to Exhibit 10 (dd) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.)* 10(ee) Incentive Stock Option Agreement, dated as of September 14, 1993, between Hanger Orthopedic Group, Inc. and Richard A. Stein. (Incorporated herein by reference to Exhibit 10 (ee) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.)* 10(ff) Non-qualified Stock Option Agreement, dated as of October 12, 1993, between Hanger Orthopedic Group, Inc. and Thomas P. Cooper. (Incorporated herein by reference to Exhibit 10 (ff) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.)* 10(gg) Non-qualified Stock Option Agreement, dated as of October 12, 1993, between Hanger Orthopedic Group, Inc. and James H. Hellmuth. (Incorporated herein by reference to Exhibit 10 (gg) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.)* 10(hh) Non-qualified Stock Option Agreement, dated as of October 12, 1993, between Hanger Orthopedic Group, Inc. and B. Martha Cassidy. (Incorporated herein by reference to Exhibit 10 (hh) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.)* 10(ii) Non-qualified Stock Option Agreement, dated as of October 12, 1993, between Hanger Orthopedic Group, Inc. and William L. McCulloch. (Incorporated herein by reference to Exhibit 10 (ii) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.)* 10(jj) Non-qualified Stock Option Agreement, dated as of October 12, 1993, between Hanger Orthopedic Group, Inc. and Walter J. McNerney. (Incorporated herein by reference to Exhibit 10 (jj) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.)* 10(kk) Non-qualified Stock Option Agreement, dated as of October 12, 1993, between Hanger Orthopedic Group, Inc. and Robert J. Glaser. (Incorporated herein by reference to Exhibit 10 (kk) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.)* * Management contract or compensatory plan. 33 36 10(ll) Term Note, dated as of November 17, 1993, from Hanger Orthopedic Group, Inc. to Maryland National Bank regarding $1,575,000 principal amount due November 30, 1998. (Incorporated herein by reference to Exhibit 10 (ll) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.) 10(mm) Amendment No. 1, dated as of November 17, 1993, to the Financing and Security Agreement, dated as of July 2, 1993, and as amended through November 17, 1993, among Hanger Orthopedic Group, Inc. and Maryland National Bank. (Incorporated herein by reference to Exhibit 10 (mm) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.) 10(nn) Term Note, dated as of December 22, 1993, form Hanger Orthopedic Group, Inc. to Maryland National Bank regarding $600,000 principal amount due December 31, 1998. (Incorporated herein by reference to Exhibit 10 (nn) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.) 10(oo) Amendment No. 2, dated as of December 22, 1993, to the Financing and Security Agreement, dated as of July 2, 1993, and as amended through December 22, 1993, among Hanger Orthopedic Group, Inc. and Maryland National Bank. (Incorporated herein by reference to Exhibit 10 (oo) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.) 10(pp) Asset Purchase Agreement, dated as of January 3, 1994, between Columbia Brace Shop, Inc., Austin T. Moore, Jr., Columbia Brace Acquisitions Corp. and Hanger orthopedic Group, Inc. (Incorporated herein by reference to Exhibit 10 (pp) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(qq) Asset Purchase Agreement, dated as of January 10,1994, between J.E. Hanger of California, Inc., Health Industries, Inc., Louis Goldstein and Barbara Goldstein. (Incorporated herein by reference to Exhibit 10 (qq) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(rr) Asset Purchase Agreement, dated as of January 31, 1994, between J.E. Hanger, Inc., Pedi-Mac Shoe Company, Inc., and Thomas McGillicuddy. (Incorporated herein by reference to Exhibit 10 (rr) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(ss) Amendment No. 3, dated as of April 15, 1994, to the Financing and Security Agreement, dated as of July 2, 1993, and as amended through April 15, 1994, from Hanger Orthopedic Group, Inc. and Maryland National Bank. 34 37 (Incorporated herein by reference to Exhibit 10 (ss) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(tt) Promissory Note, dated as of April 15, 1994, from Hanger Orthopedic Group, Inc. and Maryland National Bank regarding $1,800,000 principal amount due September 30, 1994. (Incorporated herein by reference to Exhibit 10 (tt) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(uu) Amendment No. 4, dated as of May 3, 1994, to the Financing and Security Agreement, dated as of July 2, 1993, and as amended through May 3, 1994, among Hanger Orthopedic Group, Inc. and NationsBank, N.A. (formerly Maryland National Bank). (Incorporated herein by reference to Exhibit 10 (uu) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(vv) Term Note, dated as of May 3, 1994, from Hanger Orthopedic Group, Inc. and NationsBank, N.A. (formerly Maryland National Bank) regarding $200,000 principal amount due April 30, 1999. (Incorporated herein by reference to Exhibit 10 (vv) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(ww) Employment and Non-Compete Agreement, dated as of May 16, 1994, between Hanger Orthopedic Group, Inc. and Ronald J. Manganiello.* (Incorporated herein by reference to Exhibit 10 (ww) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(xx) 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(yy) 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.) * Management contract or compensatory plan. 35 38 10(zz) Second Amendment, dated as of May 16, 1994, to the Stock Option and Vesting Agreements, dated as of March 14, 1991 and as amended through May 16, 1994, by and among Chemical Venture Capital Associates, Chemical Equity Associates, Exeter Capital L.P., Hanger Orthopedic Group, Inc. Ronald J. Manganiello, Ivan R. Sabel and Richard A. Stein.* (Incorporated herein by reference to Exhibit 10 (zz) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(aaa) Stock Option Agreement, dated as of May 16, 1994, between Chemical Venture Capital Associates and Ronald J. Manganiello.* (Incorporated herein by reference to Exhibit 10 (aaa) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(bbb) Stock Option Agreement, dated as of May 16, 1994, between Chemical Venture Capital Associates and Ivan R. Sabel.* (Incorporated herein by reference to Exhibit 10 (bbb) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(ccc) Stock Option Agreement, dated as of May 16, 1994, between Chemical Venture Capital Associates and Richard A. Stein.* (Incorporated herein by reference to Exhibit 10 (ccc) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(ddd) Non-qualified Stock Option Agreement, dated as of June 22, 1994, between Hanger Orthopedic Group, Inc. and B. Martha Cassidy.* (Incorporated herein by reference to Exhibit 10 (ddd) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(eee) Non-qualified Stock Option Agreement, dated as of June 22, 1994, between Hanger Orthopedic Group, Inc. and Thomas P. Cooper.* (Incorporated herein by reference to Exhibit 10 (eee) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(fff) Non-qualified Stock Option Agreement, dated as of June 22, 1994, between Hanger Orthopedic Group, Inc. and Robert J. Glaser.* (Incorporated herein by reference to Exhibit 10 (fff) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(ggg) Non-qualified Stock Option Agreement, dated as of June 22, 1994, between Hanger Orthopedic Group, Inc. and James H. Hellmuth.* (Incorporated herein by reference to Exhibit 10 (ggg) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) * Management contract or compensatory plan. 36 39 10(hhh) Non-qualified Stock Option Agreement, dated as of June 22, 1994, between Hanger Orthopedic Group, Inc. and William L. McCulloch.* (Incorporated herein by reference to Exhibit 10 (hhh) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(iii) Non-qualified Stock Option Agreement, dated as of June 22, 1994, between Hanger Orthopedic Group, Inc. and Walter J. McNerney.* (Incorporated herein by reference to Exhibit 10 (iii) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(jjj) Amendment No. 5, dated as of August 12, 1994, to the Financing and Security Agreement, dated as of July 2, 1993, and as amended through August 12, 1994, among Hanger Orthopedic Group, Inc. and NationsBank, N.A. (formerly Maryland National Bank). (Incorporated herein by reference to Exhibit 10 (jjj) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(kkk) Amendment No. 6, dated as of September 13, 1994, to the Financing and Security Agreement, dated as of July 2, 1993, and as amended through September 13, 1994, among Hanger Orthopedic Group, Inc. and NationsBank, N.A. (formerly Maryland National Bank). (Incorporated herein by reference to Exhibit 10 (kkk) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(lll) Amended and Restated Revolving Promissory Note, dated September 13, 1994, from Hanger orthopedic Group, Inc. to NationsBank, N.A. (formerly Maryland National Bank) regarding $13,500,000 principal amount. (Incorporated herein by reference to Exhibit 10 (lll) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(mmm) Term Note, dated as of September 13, 1994, from Hanger Orthopedic Group, Inc. and NationsBank, N.A. (formerly Maryland National Bank) regarding $3,000,000 principal amount due March 31, 1998. (Incorporated herein by reference to Exhibit 10 (mmm) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(nnn) Third Amendment, dated as of September 22, 1994, to the Stock Option and Vesting Agreements, dated as of March 14, 1991 and as amended through September 22, 1994, by and among Chemical Venture Capital Associates, Chemical Equity Associates, Exeter Capital L.P., Hanger Orthopedic Group, Inc., Ronald J. Manganiello, Ivan R. Sabel and Richard A. Stein.* (Incorporated herein by reference to Exhibit 10 (nnn) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) * Management contract or compensatory plan. 37 40 10(ooo) Letter Agreement, dated as of September 29, 1994, between Apothecaries Inc. and Eakles Drug Store, Inc. (Incorporated herein by reference to Exhibit 10 (ooo) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(ppp) Asset Purchase Agreement, dated as of October 7, 1994, between J.E. Hanger, Inc., J.E. Hanger, Inc. of New England and Samuel Polsky. (Incorporated herein by reference to Exhibit 10 (ppp) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(qqq) Agreement, dated as of November 30, 1994, between J.E. Hanger, Inc., G.O. Formation, L.L.C. and Barbara Ziegler. (Incorporated herein by reference to Exhibit 10 (qqq) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(rrr) Asset Purchase Agreement, dated as of January 5, 1995, between J.E. Hanger of California, Inc., Summit Prosthetics & Orthotics and Timothy R. Chaffin. (Incorporated herein by reference to Exhibit 10 (rrr) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(sss) Incentive Stock Option Agreement, dated as of January 31, 1995, between Hanger Orthopedic Group, Inc. and Ronald J. Manganiello.* (Incorporated herein by reference to Exhibit 10 (sss) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(ttt) Incentive Stock Option Agreement, dated as of January 31, 1995, between Hanger Orthopedic Group, Inc. and Ivan R. Sabel.* (Incorporated herein by reference to Exhibit 10 (ttt) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(uuu) Incentive Option Agreement, dated as of January 31, 1995, between Hanger Orthopedic Group, Inc. and Richard A. Stein.* (Incorporated herein by reference to Exhibit 10 (uuu) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(vvv) Amendment No. 7, dated as of March 24, 1995, to the Financing and Security Agreement, dated as of July 2, 1993, and as amended through March 24, 1995, among Hanger Orthopedic Group, Inc. and NationsBank, N.A. (formerly Maryland National Bank). (Incorporated herein by reference to Exhibit 10 (vvv) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) * Management contract or compensatory plan. 38 41 10(www) Amended and Restated Revolving Promissory Note, dated March 24, 1995, from Hanger Orthopedic Group, Inc. to NationsBank, N.A. (formerly Maryland National Bank) regarding $13,500,000 principal amount. (Incorporated herein by reference to Exhibit 10 (www) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.) 10(xxx) Letter Agreement, dated March 17, 1995, relating to the purchase by Hanger Orthopedic Group, Inc. of the assets of Gulf Coast Orthopedic Supply, Inc. 10(yyy) Non-Qualified Stock Option Agreement, dated as of June 14, 1995, between Hanger Orthopedic Group, Inc. and B. Martha Cassidy.* 10(zzz) Non-Qualified Stock Option Agreement, dated as of June 14, 1995, between Hanger Orthopedic Group, Inc. and Thomas P. Cooper.* 10(aaaa) Non-Qualified Stock Option Agreement, dated as of June 14, 1995, between Hanger Orthopedic Group, Inc. and Robert J. Glaser.* 10(bbbb) Non-Qualified Stock Option Agreement, dated as of June 14, 1995, between Hanger Orthopedic Group, Inc. and James C. Hellmuth.* 10(cccc) Non-Qualified Stock Option Agreement, dated as of June 14, 1995, between Hanger Orthopedic Group, Inc. and William L. McCulloch.* 10(dddd) Non-Qualified Stock Option Agreement, dated as of June 14, 1995, between Hanger Orthopedic Group, Inc. and Walter J. McNerney.* 10(eeee) Agreement, dated as of July 31, 1995, between Hanger Orthopedic Group, Inc. and Ronald J. Manganiello. 10(ffff) Amendment No. 8, dated as of October 2, 1995, the Financing and Security Agreement, dated as of July 2, 1993 and as amended through October 2, 1995, among Hanger Orthopedic Group, Inc. and NationsBank, N.A. (formerly Maryland National Bank). 10(gggg) Fourth Amendment, dated as of October 27, 1995, to the Stock Option and Vesting Agreements, dated as of March 14, 1991 and as amended through October 27, 1995, by and among Chemical Venture Capital Associates, Chemical Equity Associates, Exeter Capital L.P., Hanger Orthopedic Group, Inc., Ronald J. Manganiello, Ivan R. Sabel and Richard A. Stein.* * Management contract or compensatory plan. 39 42 10(hhhh) Fifth Amendment, dated as of October 27, 1995, to the Stock Option and Vesting Agreements, dated as of March 14, 1991 and as amended through October 27, 1995, by and among Chemical Venture Capital Associates, Chemical Equity Associates, Exeter Capital L.P., Hanger Orthopedic Group, Inc., Ronald J. Manganiello, Ivan R. Sabel and Richard A. Stein* 10(iiii) Amendment No. 9, dated as of November 16, 1995, to the Financing and Security Agreement, dated as of July 2, 1993 and as amended through November 16, 1995, among Hanger Orthopedic Group, Inc. and NationsBank, N.A. (formerly Maryland National Bank). 10(jjjj) Second Amended and Restated Revolving Promissory Note, dated November 16, 1995, from Hanger Orthopedic Group, Inc. to NationsBank, N.A. (formerly Maryland National Bank) regarding $13,000,000 principal amount. 10(kkkk) Incentive Stock Option Agreement, dated as of February 21, 1996, between Hanger Orthopedic Group, Inc. and Ivan R. Sabel.* 10(llll) Incentive Stock Option Agreement, dated as of February 21, 1996, between Hanger Orthopedic Group, Inc. and Richard A. Stein.* 11 Computation of earnings per share. 21 List of Subsidiaries of the Registrant. 23 Consent of Coopers & Lybrand L.L.P. * Management contract or compensatory plan. 40 43 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 29, 1996 By: IVAN R. SABEL, CPO ------------------------------------------ Ivan R. Sabel, CPO Chief Executive Officer (Principal Executive Officer) Dated: March 29, 1996 By: 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 29, 1996 IVAN R. SABEL, CPO ---------------------------------- Ivan R. Sabel, CPO Chief Executive Officer and Director (Principal Executive Officer) Dated: March 29, 1996 RICHARD A. STEIN ------------------------------------------ Richard A. Stein Vice President - Finance, Treasurer and Secretary (Principal Financial and Accounting Officer) Dated: March 29, 1996 MITCHELL J. BLUTT, MD ---------------------------------- Mitchell J. Blutt, M.D.
41 44 Director Dated: March 29, 1996 B. MARTHA CASSIDY ---------------------------------- B. Martha Cassidy Director Dated: March 29, 1996 THOMAS P. COOPER, M.D. ------------------------- Thomas P. Cooper, M.D. Director Dated: March 29, 1996 ROBERT J. GLASER, M.D. ---------------------------------- Robert J. Glaser, M.D. Director Dated: March 29, 1996 JAMES G. HELLMUTH ---------------------------------- James G. Hellmuth Director Dated: March 29, 1996 RONALD J. MANGANIELLO ------------------------- Ronald J. Manganiello Director Dated: March 29, 1996 WILLIAM L. MCCULLOCH ------------------------- William L. McCulloch Director Dated: March 29, 1996 WALTER J. MCNERNEY ---------------------------------- Walter J. McNerney Director
42 45 INDEX TO FINANCIAL STATEMENTS HANGER ORTHOPEDIC GROUP, INC. - ----------------------------- Report of Independent Accountants F-1 Consolidated Balance Sheets as of December 31, 1994 and 1995 F-2 Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995 F-4 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1993, 1994 and 1995 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 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
43 46 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, 1994 and 1995 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hanger Orthopedic Group, Inc., and subsidiaries as of December 31, 1994 and 1995 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note B to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1993. Coopers & Lybrand L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania March 8, 1996 F-1 47 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------------------- 1994 1995 ----------- ---------- ASSETS CURRENT ASSETS Cash and cash equivalents $1,048,381 $1,456,305 Accounts receivable, less allowances for doubtful accounts of $975,600 and $1,144,000 in 1994 and 1995, respectively 12,392,843 13,324,991 Inventories 9,465,186 10,312,289 Prepaid and other assets 1,149,026 1,040,914 Deferred income taxes 1,264,790 804,499 ----------- ---------- Total current assets 25,320,226 26,938,998 ----------- ---------- PROPERTY, PLANT AND EQUIPMENT Land 2,991,245 2,991,245 Buildings 2,288,357 2,592,214 Machinery and equipment 3,232,442 3,654,780 Furniture and fixtures 1,526,237 1,575,493 Leasehold improvements 1,075,481 1,184,782 ----------- ---------- 11,113,762 11,998,514 Less accumulated depreciation and amortization 3,104,828 4,232,858 ----------- ---------- 8,008,934 7,765,656 ----------- ---------- INTANGIBLE ASSETS Excess cost over net assets acquired 26,633,643 27,133,528 Non-compete agreements 4,751,371 4,786,371 Other intangible assets 3,762,307 3,825,240 ----------- ---------- 35,147,321 35,745,139 Less accumulated amortization 7,532,295 9,035,394 ----------- ---------- 27,615,026 26,709,745 ----------- ---------- OTHER ASSETS Other 537,032 385,662 ----------- ---------- TOTAL ASSETS $61,481,218 $61,800,061 =========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. F-2 48 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS
December 31, ------------------------------------- 1994 1995 ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $2,132,076 $1,828,953 Accounts payable 1,562,625 1,612,401 Accrued expenses 1,300,070 710,510 Customer deposits 392,722 489,758 Accrued wages and payroll taxes 1,422,741 1,495,013 Deferred revenue 97,690 180,587 ----------- ----------- Total current liabilities 6,907,924 6,317,222 ----------- ----------- Long-term debt 24,329,710 22,925,124 Deferred income taxes 563,902 706,965 Other liabilities 269,871 305,499 Mandatorily redeemable preferred stock class C, 300 shares authorized, liquidation preference of $500 per share (See Note M) 232,086 253,886 Mandatorily redeemable preferred stock class F, 100,000 shares authorized, liquidation preference of $1,000 per share (See Note M) Commitments and contingent liabilities SHAREHOLDERS' EQUITY Common stock, $.01 par value; 25,000,000 shares authorized, 8,424,039 shares issued and 8,290,544 shares outstanding in 1994 and 1995, respectively 84,241 84,241 Additional paid-in capital 33,595,857 33,574,058 Accumulated deficit (3,846,811) (1,711,372) ----------- ----------- 29,833,287 31,946,927 Treasury stock, cost --(133,495 shares) (655,562) (655,562) ----------- ----------- 29,177,725 31,291,365 ----------- ----------- $61,481,218 $61,800,061 =========== =========== TOTAL LIABILITES & SHAREHOLDERS' EQUITY
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENT F-3 49 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31,
1993 1994 1995 ----------- ----------- ----------- Net sales $43,876,801 $50,300,297 $52,467,899 Cost of products and services sold 19,669,645 23,208,944 24,572,089 ----------- ----------- ----------- Gross profit 24,207,156 27,091,353 27,895,810 Selling, general and administrative 17,123,684 21,340,148 19,361,701 Depreciation and amortization 2,056,390 2,435,727 2,005,113 Amortization of excess cost over net assets acquired 599,321 701,018 686,275 Restructuring cost 459,804 Loss from disposal of assets 2,150,310 ----------- ----------- ----------- Income from operations 4,427,761 4,346 5,842,721 Interest expense (1,166,606) (1,745,781) (2,056,140) Other expense, net (39,956) (180,940) (106,644) ----------- ----------- ----------- Income (loss) from operations before taxes, extraordinary item, and accounting change 3,221,199 (1,922,375) 3,679,937 Provision for income taxes 1,626,706 358,029 1,544,498 ----------- ----------- ----------- Income (loss) from operations before extraordinary item and accounting change 1,594,493 (2,280,404) 2,135,439 Loss from discontinued operations (104,808) (247,655) Loss from sale of discontinued operations (159,379) ----------- ----------- ----------- Income (loss) before extraordinary item and accounting change 1,489,685 (2,687,438) 2,135,439 Extraordinary loss on early extinguishment of debt, net of tax (23,168) Cumulative effect of change in accounting 1,188,706 ----------- ----------- ----------- Net income (loss) $2,655,223 ($2,687,438) $2,135,439 =========== =========== =========== Income (loss) before extraordinary item and accounting change applicable to common stock $1,576,294 ($2,300,286) $2,113,640 =========== =========== =========== INCOME (LOSS) PER COMMON SHARE: Income (loss) before extraordinary item and accounting change $0.19 ($0.28) $0.26 Loss from discontinued operations (0.01) (0.03) Loss from sale of discontinued operations (0.02) Cumulative effect of change in accounting 0.14 ----------- ----------- ----------- Net income (loss) per share $0.32 ($0.33) $0.26 =========== =========== =========== Weighted average number of common shares outstanding used in computing net income (loss) per share 8,343,784 8,290,276 8,290,544
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. F-4 50 HANGER ORTHOPEDIC GROUP, INC CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 31, 1993, 1994 and 1995
Additional Common Common Paid in Accumulated Treasury Deferred Shares Stock Capital Deficit Stock Compensation Total ----------- -------- ------------ ------------ ----------- ------------ ----------- Balance, December 31, 1992 8,177,029 $83,071 $32,952,360 ($3,814,596) ($632,262) ($24,885) $28,563,688 Issuance of Common Stock for the purchase of Billings 46,764 468 279,532 280,000 Issuance of Common Stock for purchase of Certified 7,029 70 49,930 50,000 Issuance of Common Stock in connection with the exercise of stock options 30,458 305 152,443 152,748 Repurchase of Common Stock (3,389) (23,300) (23,300) Amortization of deferred compensation 20,688 20,688 Preferred dividends declared (18,199) (18,199) Net Income 2,655,223 2,655,223 ----------- -------- ------------ ------------ ----------- ------------ ----------- 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 =========== ======== ============ ============ =========== ============ ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. F-5 51 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31,
1993 1994 1995 ----------- ----------- ----------- Cash flows from operating activities: Net income (loss) $2,655,223 ($2,687,438) $2,135,439 Adjustments to reconcile net income (loss) to net cash provided by (used in) continuing operations: Cumulative effect of change in accounting for income taxes 1,188,706 Discontinued operations 174,808 426,991 Loss from sale of discontinued operations 274,791 Loss from sale of disposal of assets 2,150,310 Provision for bad debt 688,036 973,678 1,008,731 Amortization of deferred compensation 20,688 4,197 Depreciation and amortization 2,056,390 2,435,727 2,005,113 Amortization of excess cost over net assets acquired 599,321 701,018 686,275 Deferred taxes (1,410,912) (629,674) 755,869 Extraordinary loss on early extinguishment of debt 39,168 Changes in assets and liabilities, net of effects from acquired companies: Accounts receivable (3,134,295) (3,639,274) (1,922,572) Inventories (618,295) (1,169,232) (800,933) Prepaid and other assets (197,314) 131,714 108,112 Other assets 13,600 3,782 151,367 Accounts payable 132,218 (54,555) 48,462 Accrued expenses (46,310) 776,860 (742,075) Accrued wages & payroll taxes 129,484 (116,852) 72,272 Customer deposits (34,919) 143,070 97,036 Deferred revenue (52,306) (22,691) 82,897 Other liabilities (69,250) 156,884 35,628 ----------- ----------- ----------- Net cash provided by (used in) continuing operations 2,134,041 (140,694) 3,721,621 Net cash provided by (used in) discontinued operations 66,043 (172,146) ----------- ----------- ----------- Net cash provided by (used in) operating activities 2,200,084 (312,840) 3,721,621 ----------- ----------- ----------- Cash flows from investing activities: Purchase of fixed assets (655,236) (1,114,551) (934,798) Acquisitions, net of cash (3,200,719) (2,599,133) (273,939) Purchase of patent (41,020) (59,382) (70,552) Proceeds from sale of certain assets 180,806 Purchase of non-compete agreements (454,500) (480,500) (35,000) Purchase of customer list (2,500) (Decrease) increase in other intangibles (388,345) (265,624) (24,321) ----------- ----------- ----------- Net cash used in investing activities (4,742,320) (4,338,384) (1,338,610) ----------- ----------- ----------- Cash flows from financing activities: Net borrowings (repayments) under revolving credit agreement 10,164,551 2,635,449 (100,000) Proceeds from bank borrowings 2,175,000 Proceeds from the sale of common stocks 152,749 Purchase of treasury stock (23,300) Proceeds from long-term debt 1,000,000 5,000,000 Repayment of debt (10,559,768) (3,276,608) (1,882,706) (Increase) decrease in financing costs (354,123) (63,393) 7,619 ----------- ----------- ----------- Net cash provided by (used in) financing activities 2,555,109 4,295,448 (1,975,087) ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents for the year 12,873 (355,776) 407,924 Cash and cash equivalents at beginning of year 1,391,284 1,404,157 1,048,381 ----------- ----------- ----------- Cash and cash equivalents at end of year $1,404,157 $1,048,381 $1,456,305 =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. F-6 52 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, J.E. Hanger, Inc. ("JEH"), 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 financial institutions. Cash equivalents are highly liquid investments with original maturities of three months or less at the date of purchase. Fair Value of Financial Instruments: At December 31, 1994 and 1995, 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: In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" which is effective for years beginning after December 15, 1995. This statement established criteria for recognizing, measuring and disclosing impairments of long-lived assets, including intangibles and goodwill. The F-7 53 Company plans to adopt SFAS 121 in 1996, and does not expect that the adoption will have a material effect on its consolidated financial position or results of operations. 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 $875,000, $1,090,000 and $1,136,000 for the years ended December 31, 1993, 1994 and 1995, 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. 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. Deferred revenue represents billings made prior to the final fitting and acceptance by the patient. Revenue is recorded at its net realizable value, taking into consideration all governmental and contractual discounts and allowances. 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. The Company maintains its cash and cash equivalents with high quality financial institutions. Income Taxes: Effective January 1, 1993, the Company adopted SFAS No. 109 "Accounting for Income Taxes" (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 F-8 54 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. The Company recognized a cumulative effect to January 1, 1993 of the change in accounting for income taxes of approximately $1,189,000 ($.14 per share). Approximately $2,918,000 of the net operating loss carryforwards recognized by the Company in the cumulative effect on January 1, 1993 were generated prior to the acquisition of the Company in 1989. As a result, the Company has reduced excess of cost over net assets acquired related to this acquisition by approximately $992,000 through the recording of the cumulative effect. Net Income (Loss) Per Share: Net income (loss) per common share is computed on the basis of the weighted average number of shares of common stock issued and outstanding. In 1994 common share equivalents are not included in the per share calculations because they are anti-dilutive. Income (loss) before extraordinary item and cumulative effect of accounting change applicable to common stock has been adjusted for the dividends declared applicable to certain classes of cumulative preferred stock. Stock Based Compensation: In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 is required to be adopted for fiscal years beginning after December 15, 1995. SFAS No. 123 encourages a fair value based method of accounting for employee stock options or similar equity instruments, but allows continued use of the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employee." Companies electing to continue to use APB No. 25 must make proforma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. The Company is evaluating the provisions of SFAS No. 123, but has not yet determined whether it will continue to follow the provisions of APB No. 25 or change to the fair value method of SFAS No. 123. F-9 55 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, -------------------------------------------- 1993 1994 1995 ---- ---- ---- Cash paid during the period for: Interest $ 928,729 $1,690,742 $2,166,877 Income taxes 652,000 212,000 712,800 Non-cash financing and investing activities: Preferred dividends declared 18,199 19,882 21,799 Issuance of notes in connection with acquisitions 1,600,000 1,925,000 175,000 Issuance of common stock in connection with 330,000 200,000 acquisitions Reduction in the excess cost over net assets acquired through the utilization of net operating loss carryforwards 992,081
NOTE D - ACQUISITIONS AND SALE OF ASSETS During 1993, 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 $2,987,473 in cash plus $1,600,000 in notes and 53,793 shares of common stock valued at $330,000. The notes are payable over 3 to 5 years with interest ranging from 6% to 7%. 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. All of the above acquisitions have been accounted for as business combinations in accordance with the purchase method. The results of operations for these acquisitions are included in the Company's results of operations from their date of acquisition. Excess cost over net assets acquired in these acquisitions amounting to approximately $3,557,000 and $376,000 in 1994 and 1995, respectively, are amortized using the straight-line method over 40 years. F-10 56 The following table summarizes the unaudited consolidated pro forma information, assuming the acquisitions had occurred at the beginning of each of the following periods:
1994 1995 ---- ---- Net sales $51,392,000 $52,512,000 Income from operations 152,000 5,850,000 Net income (loss) (2,550,000) 2,143,000 Net income (loss) per share $(.31) $.26
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 year ended December 31, 1993, and for the nine months ended September 30, 1994, were as follows:
1993 1994 ---- ---- Sales $1,462,657 $1,294,341 Loss before taxes (174,808) (426,991) Tax benefit (70,000) (179,336) ---------- ---------- Loss from discontinued operations $ (104,808) $ (247,655) ========== ==========
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 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, 1994 and 1995 consist of the following: F-11 57
1994 1995 ---- ---- Raw materials $8,078,838 $ 8,526,760 Work in-process 835,934 1,107,289 Finished goods 550,414 678,240 ---------- ----------- $9,465,186 $10,312,289 ========== ===========
NOTE H - LONG-TERM DEBT Long-term debt consists of the following at December 31, 1994 and 1995:
1994 1995 ---- ---- 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 and 8.25% and 9.0% at December 31, 1994) $12,800,000 $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 8.4375% at December 31, 1995 and 9.25%, 9.0% and 8.25% at December 31, 1994) with balloon payments due in November and December 1998 5,210,301 4,596,663 8.5% Convertible Junior Subordinated Note 4,000,000 4,000,000 8.25% Convertible Junior Subordinated Note 1,000,000 1,000,000 Subordinated seller notes with principle and interest payable in either monthly or quarterly installments at interest rates ranging from 6% to 10%, maturing through April 15, 1999 3,344,966 2,375,609 Other subordinated notes 106,519 81,805 ------------ ----------- 26,461,786 24,754,077 Less current portion 2,132,076 1,828,953 ------------ ----------- $ 24,329,710 $22,925,124 ============ ===========
Under the terms of the Financing and Security Agreement, as amended, between NationsBank, N.A. ("the Bank") and the Company (the "Financing Agreement"), the Bank currently provides a $13.0 million revolving credit facility (the "Revolving Credit Facility"), which reflects a reduction from its original amount of $13.5 million. The Revolving Credit Facility bears interest, at the Company's option, at either a fluctuating rate equal to the Bank's prime lending rate plus .25% or a fixed rate equal to the three-month London InterBank Offered Rate ("LIBOR") plus 2.5%. On June 30, 1995, the Company made a mandatory curtailment payment of $250,000 to the Bank to reduce the maximum F-12 58 amount of the Revolving Credit Facility from $13.5 million to $13.25 million. On October 2, 1995, the Company and the Bank entered into Amendment No. 8 to the Financing Agreement which reduced the mandatory curtailment payment by the Company under the Revolving Credit Facility from a $1.0 million curtailment to a $250,000 curtailment at September 30, 1995. On September 30, 1995, the Company made such mandatory curtailment payment of $250,000 to the Bank to reduce the maximum amount of the Revolving Credit Facility from $13.25 million to its current amount of $13.0 million. On November 13, 1995, the Company and the Bank agreed to the terms of Amendment No. 9 to the Financing Agreement, which (i) eliminated the previously required mandatory curtailment payments of the Revolving Credit Facility of $250,000 at each of December 31, 1995 and March 31, 1996, and (ii) extended the expiration date of the Revolving Credit Facility from September 30, 1996 to June 30, 1997. Borrowings outstanding under the Revolving Credit Facility amounted to $12.7 million at December 31, 1995. The Revolving Credit Facility is collateralized by substantially all the assets of the Company and contains covenants restricting, among other things, the payment of dividends, the making of acquisitions and other transactions, and imposes net worth, debt service coverage and other financial maintenance requirements. At December 31, 1994, the Company was in default under the fixed charge ratio covenant of the Revolving Credit Facility. The event was cured by a March 31, 1995 amendment. In the first quarter of 1995, the Company was in default under the debt to net worth covenant of the Revolving Credit Facility. The Bank has issued a waiver to the Company for this default. In September 1994, the Company repaid a $1.8 million term loan from the Bank with a portion of the proceeds from a new $3.0 million term loan provided by the Bank. This new $3.0 million term loan bears interest at the Bank's prime rate plus .75%, provides for monthly principal and interest payments and matures on March 31, 1998. In addition to such new term loan, the Company also has three other existing term loans with the Bank, consisting of: (i) a $1.575 million term loan provided by the Bank on November 17, 1993 which currently bears interest at a fixed rate equal to the three-month LIBOR plus 2.75% and matures on November 30, 1998; (ii) a $600,000 term loan provided by the Bank on December 2, 1993, which currently bears interest at the Bank's prime lending rate plus .50% and matures on December 31, 1998; and (iii) a $200,000 term loan provided by the Bank on May 3, 1994, which currently bears interest at the three-month LIBOR plus 2.75% and matures on April 30, 1999. The Company has a $4,000,000 Convertible Junior Subordinated Note with (the "8.5% Junior Note") interest payable semi-annually. The 8.5% Junior Note matures in March 1999 and is convertible into shares of common stock at $8.80 per share. The Company may require, subject to certain conditions, that the 8.5% Junior Note be fully converted in the event the market price of the common stock exceeds $18.00 for ten consecutive business days. The interest rate of the 8.5% Junior Note may increase by up to two percent in the event of an uncured default. The 8.5% Junior Note is not collateralized. The Company has a $1,000,000 Convertible Junior Subordinated Note (the "8.25% Junior Note") which matures in March 1999 in the principal amount of $1,000,000 at 8.25% interest payable semi-annually. The Junior Note matures in March 1999 and is convertible into shares of common stock at $6.74 per share. The Company may require that the Junior Note be fully converted in the event the market price of the common stock exceeds $9.16 for ten consecutive business days. The 8.25% Junior Note is not collateralized. F-13 59 Deferred financing costs of $39,000 relating to retirement of debt have been expensed and accounted for as an extraordinary item in 1993. Maturities of long-term debt, at December 31, 1995 are as follows: 1996 $ 1,828,953 1997 14,737,079 1998 2,848,022 1999 5,340,023 ------------ $ 24,754,077 ============
NOTE I - INCOME TAXES The provisions for income taxes for the years ended December 31, 1993, 1994 and 1995 consisted of the following:
1993 1994 1995 ---- ---- ---- Current: Federal $1,337,417 $ 454,955 $ 541,626 State 350,297 238,000 370,973 ---------- ----------- ----------- Total 1,687,714 692,955 912,599 Deferred: Federal and State (61,008) (334,926) 631,899 ---------- ----------- ----------- Provision for income taxes on income before discontinued operations and extraordinary item 1,626,706 358,029 1,544,498 Tax benefit from discontinued operations (70,000) (179,336) Tax benefit from sale of discontinued operations (115,412) Tax benefit from extra- ordinary item (16,000) ---------- ------------ ------------ Provision for income taxes $1,540,706 $ 63,281 $ 1,544,498 ========== ============ ============
F-14 60 A reconciliation of the federal statutory tax rate to the effective tax rate for the years ended December 31, 1993, 1994 and 1995 is as follows:
1993 1994 1995 ---- ---- ---- Federal statutory tax rate $ 1,095,207 $ (653,608) $1,251,349 Increase (reduction) in taxes resulting from: State income taxes (net of federal effect) 231,196 151,080 249,047 Amortization of the excess cost over net assets acquired 100,599 178,160 92,777 Disposal of assets 459,340 Valuation allowance 70,000 (70,000) Other, net 199,704 153,057 21,325 ----------- ----------- ---------- Provision for income taxes on income before extraordinary item 1,626,706 358,029 1,544,498 Tax benefit from discontinued operations (70,000) (179,336) Tax benefit from sale of discontinued operations (115,412) Tax benefit from extraordinary item (16,000) ----------- ----------- ---------- Provision for income taxes $ 1,540,706 $ 63,281 $1,544,498 =========== =========== ==========
Temporary differences and carryforwards which give rise to deferred tax assets and liabilities as of December 31, 1994 and 1995 are as follows:
1994 1995 ---- ---- Deferred Tax Liabilities: Book basis in excess of tax $ 775,838 $ 775,838 Depreciation and amortization 584,132 666,920 -------------- ------------ 1,359,970 1,442,758 -------------- ------------ Deferred Tax Assets: Net operating loss, Federal 420,210 369,624 Net operating loss, States 171,035 211,165 Accrued expenses 225,500 334,790 Reserve for bad debts 339,773 393,322 Alternative minimum tax 325,483 Inventory capitalization 245,318 218,086 Other 16,619 Restructuring 114,920 13,305 Asset dispositions 272,000 -------------- ------------ Gross deferred tax assets 2,130,858 1,540,292 -------------- ------------ Valuation allowance (70,000) -------------- ------------ Net deferred tax assets $ 700,888 $ 97,534 ============== ============
For Federal and State tax purposes at December 31, 1995, the Company has available approximately $1,087,000 of net operating loss carryforwards expiring from 1998 through 2007 and F-15 61 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 revised projections of taxable income by state, has concluded that a valuation allowance is 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 - 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 position or results of operations of the Company. NOTE K - OPERATING LEASES The Company leases office space under noncancellable operating leases. Certain of these leases contain escalation clauses based on the consumer price index. Future minimum rental payments, by year and in the aggregate, under operating leases with terms of one year or more consist of the following at December 31, 1995: 1996 $1,841,000 1997 1,135,000 1998 778,000 1999 513,000 2000 368,000 Thereafter 284,000 ---------- $4,919,000 ==========
Rent expense was approximately $2,172,000, $2,499,000 and $2,144,000 for the years ended December 31, 1993, 1994 and 1995 respectively. NOTE L- PENSION AND PROFIT SHARING PLANS Previously, the Company had a 401(k) Saving and Retirement Plan (the "Plan") available to all employees of J.E. Hanger, Inc. ("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 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 $132,000 and $130,000 for the years ended December 31, 1993 and 1994, respectively. The Company maintains a 401(k) Savings and Retirement plan to include 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. F-16 62 NOTE M - REDEEMABLE PREFERRED STOCKS The Company has 10,000,000 authorized shares of preferred stock, par value $.01 per share, which may be issued in various classes with different characteristics. The 300 issued and outstanding shares of non-voting, non-convertible Class C preferred stock have an aggregate liquidation value equal to $150,000 plus accrued dividends at 9% and are required to be redeemed on February 1, 2000. Accrued dividends at December 31, 1994 and 1995, were $20,000 and $22,000 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, 1994 and 1995, none of the Class F preferred stock was issued or outstanding. NOTE N - WARRANTS AND OPTIONS WARRANTS In November 1990, the Company entered into a $2,450,000 Note which required the Company, based on certain repayment provisions, to issue to an affiliate in 1991 warrants to purchase 297,883 and 322,699 shares of common stock at $4.16 and $7.65 per share, respectively. These warrants are exercisable through December 31, 2001. The Company had allocated $1,600,000 of the debt proceeds to the warrant. In 1992, the Note was repaid and the unamortized portion of the debt discount was expensed. No warrants have been exercised to date. 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, 1994 and 1995, were 1,007,417 and 892,790, 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. F-17 63 The following is a summary of option transactions and exercise prices:
Stock Non-qualified Option Plan Stock Options ------------------------------ ---------------------------------- Price Price Shares Per Share Shares Per Share -------- --------- -------- ----------- Outstanding at December 31, 1993 473,434 47,693 ------- -------- Granted 82,000 $ 6.00 30,000 $ 4.38 Terminated (17,833) $6.00 to $12.25 Expired (3,559) $14.08 (5,191) $14.08 ------- -------- Outstanding at December 31, 1994 534,042 $6.00 to $12.25 72,502 $4.38 to $6.00 ------- -------- Granted 171,918 $2.75 to $3.25 37,500 $ 3.00 Terminated (57,291) $6.00 to $12.25 ------- -------- Outstanding at December 31 1995 648,669 $2.75 to $12.25 110,002 $3.00 to $6.00 ======= ======= Vested at December 31, 1995 361,668 34,375 ======= =======
In August 1990, a principle shareholder (the "Grantor") granted options (the "Manager Options") to three members of management (the "Managers") of the Company to purchase 413,750 shares of Company Common Stock owned by the Grantor at an exercise price of $6.00 per share. The Grantor agreed upon exercise of the Manager Options to transfer 27.5% of the exercise price of each Manager Option to the Company as a capital contribution. The Manager Options were scheduled to expire in May 1994. In March 1991, the Grantor granted options (the "Additional Manager Options") to the Managers to purchase 248,265 and 100,000 shares of Company Common Stock owned by the Grantor at exercise prices of $6.00 and $8.00 per share, respectively. The Additional Manager Options were to expire in December 1994. In May 1994, the Manager Options expired and the Grantor (i) agreed to extend the expiration date from December 1994 to December 1995 relating to an aggregate of 264,124 shares of Company Common Stock, and (ii) grant new options (the "New Manager Options") to the Managers to purchase 313,788 shares of Company Common Stock owned by the Grantor at an exercise price of $6.00 per share. The remaining 84,141 shares of Company Common Stock which underlied the balance of the Additional Manager Options continued to have an expiration date of December 1994. The New Manager Options vested immediately upon the date of grant and were scheduled to expire in May 1995. In September 1994, the Grantor agreed to (i) decrease the option exercise price of each of the New Manager Options and the previously extended portion of the Additional Manager Options relating to 264,124 shares of Company Common Stock to the then current market price of the Company Common Stock of $3.875 per share and (ii) extend the expiration dates of all such New Manager Options and such portion of the Additional Manager Options to March 1996. In October 1995, the Grantor agreed to allow for the payment of the option exercise price of all New Manager Options and Additional Manager Options in cash and/or the reduction in the remaining number of shares issuable upon the exercise of such options, as well as to extend the F-18 64 expiration dates of all the New Manager Options and Additional Manager Options as follows: (i) the expiration date of New Manager Options relating to 232,720 shares was extended from March 22, 1996 to March 22, 1997, (ii) the expiration date of new Manager Options relating to 81,068 shares was extended from March 22, 1996 to December 31, 1997, (iii) the expiration date of Additional Manager Options relating to 93,389 shares was extended from March 22, 1996 to March 22, 1997 and (iv) the expiration date of Additional Manager Options relating to 170,735 shares was extended from March 22, 1996 to December 31, 1997. 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, 1994 and 1995 were 190,000 and 160,000, respectively. F-19 65 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 43 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 8, 1996 S-1 66 HANGER ORTHOPEDIC GROUP, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF YEAR CLASSIFICATION OF YEAR EXPENSES DEDUCTIONS YEAR ---- -------------- ------- -------- ---------- ---- 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 1993 Allowance for doubtful accounts $447,000 $688,000 $473,000 $662,000
S-2 EX-10.XXX 2 GULF COAST ORTHOPEDIC PURCHASE AGREEMENT. 1 Memphis Orthopedic, Inc. 7700 Old Georgetown Road Second Floor Bethesda, Maryland 20814 March 17, 1995 Mr. Robert Brown, President Gulf Coast Orthopaedic Supply, Inc. 3660 Central Avenue, Suite 9 Fort Myers, FL 33901 Re: Purchase of Business Assets Dear Mr. Brown: This letter will memorialize the agreement by Memphis Orthopedic, Inc. (the "Company"), a wholly-owned subsidiary of Hanger Orthopedic Group, Inc., to purchase from Gulf coast Orthopaedic Supply, Inc. (the "Seller") and you, as the sole owner of the stock of the Seller (the "Shareholder"), the business inventory, machinery, equipment, business name, customer lists, customer records, furniture, fixtures, signs and telephone numbers of the Seller as set forth on Exhibit A hereto, together with the execution by the Seller and Shareholder of a covenant not to compete with the Company and the separate execution by Gary Curtis of an employment and non-competition agreement with the Company (such items are collectively referred to hereinafter as the "Assets"). The Company will not assume the existing lease ("the Lease") of the Seller relating to the business premises located at 3660 Central Avenue, Suite 9, Fort Myers, Florida 33901. The Company will not assume any liabilities whatsoever of the Seller or Shareholder, including, but not limited to, any liability of the Seller or Shareholder under the Lease. The form of convenant not to compete to be executed by the Seller and Shareholder is attached hereto as Exhibit B. The form of employment and non-competition agreement to be executed by Gary Curtis is attached hereto as Exhibit C. The purchase price for the Assets, which is based on the current valuation of the Assets, will be $35,000.00, all of which shall be paid in cash at a closing that shall occur on or before March 17, 1995. The closing shall take place at the offices of the Company. (The Seller and Shareholder shall provide to the Company, prior to the closing, with an updated accounting and valuation of the Assets which, if necessary, may result in an appropriate adjustment in the purchase price for the Assets.) 2 the Company (i) all documents necessary to vest the company with the unencumbered ownership of the Assets, (ii) the covenant not to compete as executed by the Seller and Shareholder, (iii) the employment and non-competition agreement as executed by Gary Curtis and (iv) a Bill of Sale, substantially in the form of Exhibit D hereto. At the closing, the Company shall deliver to the Seller a check for $35,000. Furthermore, from and after the closing, the Seller and Shareholder shall make the Assets available for transport by the Company. Indemnification of Seller appears in Exhibit E. From and after the closing, the Seller and Shareholder consent to the exclusive ownership and use by the Company or the Company's designee of the business name of "Gulf Coast Orthopaedic Supply." The Seller and Shareholder represent and warrant to the Company as follows: (a) the Seller is, and at the closing shall be, duly organized and validly existing as a corporation under the laws of the State of Florida with all requisite power and authority to enter into the transactions described in this letter and to perform its obligations hereunder; (b) neither the Seller nor the Shareholder knows or has any reasonable ground to know of any basis for the assertion against the Seller or Shareholder, as of the date of their signing of this letter agreement, of any claim or liability of any nature against either of them which could have an affect on the Assets or their ownership interest in the Assets; (c) as of the date of their signing of this letter agreement, neither the Seller nor the Shareholder knows of any damage, destruction or loss to any of the Assets, whether or not covered by insurance, which has adversely effected or impaired or which may adversely effect or impair the Assets or the ability of the Seller to conduct its business with the Assets; (d) the Seller and Shareholder have filed all required federal, state and local tax returns and reports and have duly paid all taxes which are due, and will pay those taxes that will be due when they become due; (e) the Seller has good title, free and clear of all liens, claims, encumbrances, charges, easements and restrictions of any nature whatsoever, to the Assets; (f) the Assets are in good operating and/or marketable condition and repair and, in the specific case of the customer lists and customer records, such lists and records are current, up-to-date and have never been licensed, sold, disseminated or loaned to any other person or entity; (g) there is no suit, action, proceeding, inquiry or any change in the laws effecting the Assets which, to the knowledge of the Seller or the Shareholder, 2 3 might, severally or in the aggregate, adversely effect the Assets, the Seller or the Shareholder; (h) the Seller and the Shareholder have action to approve the transactions described in this letter agreement and the performance of the obligations of the Seller and Shareholder hereunder; (i) no consents of any federal, state or local governmental body are necessary in connection with the sale of the Assets by the Seller and Shareholder to the Company; (j) the Seller and the Shareholder have no knowledge of any claim or reason to believe that they are or may be infringing on or otherwise acting adversely to the rights of any other person under or in respect of the business name of "Gulf Coast Orthopaedic Supply," nor is the Seller or the Shareholder under any obligation or under any liability to make any payments by way of royalties, fees or otherwise to any owner or licensee or other claimant to the business name of "Gulf Coast Orthopaedic Supply;" (k) neither the Seller nor the Shareholder are a party to any agreement or instrument or subject to any restriction which would materially and adversely effect the Assets; and (l) no representation or warranty by the Seller or the Shareholder herein contains or will contain any untrue statement of material fact or omit to state any material fact required to make the information herein not misleading. All negotiations relating to the transactions contemplated by this letter agreement have been carried on without the intervention of any other person in any such manner so as to give rise to any valid claim against the Seller, the Shareholder or the company for a finder's fee, brokerage commission or other like payment. The Seller and Shareholder agree to indemnify the Company from any claims for finder's fees, brokerage commissions or other like payments. The Seller assumes all risk of destruction, loss or damage due to fire or other casualty up through the time of the closing hereunder. Upon the destruction, loss or damage due to fire or other casualty of any part of the Assets prior to the closing, the Company shall have the option to either terminate its obligation to purchase the Assets or to offer to the Seller and the Shareholder an appropriate adjustment in the purchase price. The Seller and the Shareholder agree to comply with all applicable provisions of the Uniform Commercial Code - Bulk Transfers provisions and to indemnify the Company against and save the Company harmless from all liabilities and obligations arising from the failure of the Seller and the Shareholder to comply with the Uniform Commercial Code - Bulk Transfers provisions. 3 4 The Company, the Seller and the Shareholder shall each pay all of their own respective costs and expenses incurred with respect to the transactions contemplated under this letter agreement, including without limitation, legal, accounting and other professional fees incurred or to be incurred by such party in negotiating and carrying out the transactions contemplated under this letter agreement. The provisions of this letter agreement can only be amended by a written instrument signed by both the Company and the Seller. This letter agreement shall be governed by the laws of the State of Florida. Please sign and date this letter agreement where indicated below and return this document to me as promptly as possible. Sincerely, MEMPHIS ORTHOPEDIC, INC. /s/ IVAN R. SABEL ----------------------------- Ivan R. Sabel President SEEN AND AGREED TO: GULF COAST ORTHOPAEDIC SUPPLY, INC. By: /s/ ROBERT BROWN Dated: March 17, 1995 ---------------------------------- Robert Brown President ATTEST: By: /s/ MARIA E. RIVERA Dated: March 17, 1995 --------------------------------- Name: Maria E. Rivera Secretary N0TARY PUBLIC, STATE OF FLORIDA AT LARGE [SEAL] MY COMMISSION EXPIRES APRIL 24, 1995 BONDED THRU ASHTON AGENCY INC. 4 EX-10.YYY 3 B. MARTHA CASSIDY STOCK OPTION AGREEMENT. 1 EXHIBIT 10(yyy) HANGER ORTHOPEDIC GROUP, INC. NON-QUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT is made as of June 14, 1995, by and between HANGER ORTHOPEDIC GROUP, INC., a Delaware corporation (the "Company"), and B. Martha Cassidy (the "Optionee"). W I T N E S E T H: WHEREAS, the Company desires to grant to the Optionee a stock option under the Company's 1993 Stock Option Plan for Non-Employee Directors (the "Plan") to purchase shares of the Company's common stock, par value $.01 per share (the "Common Stock"), in consideration for the Optionee's service as a member of the Board of Directors of the Company (the "Board of Directors"). NOW, THEREFORE, the parties hereto, intending to be legally bound, do agree as follows: 1. GRANT OF OPTION. Subject to the terms and conditions of this Agreement and the Plan, the Company hereby grants to the Optionee the right and option to purchase from the Company all or part of an aggregate of 5,000 shares of Common Stock. This option is not intended to qualify as an incentive stock option within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended. 2. OPTION PRICE AND TIME OF EXERCISE. The per-share purchase price at which the shares subject to option may be purchased by Optionee pursuant to the exercise of this option shall be $3.00, which price equals the closing sale price per share of the Common Stock on the American Stock Exchange on June 14, 1995, the date of grant of this option. In accordance with Section 6(a) of the Plan, such date is the third business day following the June 9, 1995 Annual Meeting of Shareholders. The Optionee's right to exercise this option shall vest as to 25% of the shares of Common Stock underlying the option at the end of each of the first four years following the date hereof. The right to exercise the option shall be cumulative to the extent not theretofore exercised. The right to exercise the option shall in all events expire, except as provided in Paragraph 5 below, at the close of business on June 14, 2005. 3. METHOD OF EXERCISE AND PAYMENT FOR SHARES. This option shall be exercised by written notice directed to the Company at its principal office, specifying the number of shares to be acquired upon such exercise and indicating whether the exercise is being paid for (i) in cash, (ii) in shares of Common Stock already owned 2 by the Optionee and valued at their fair market value on the date of exercise of the option, or (ii) by a combination of (i) and (ii) above. 4. NON-TRANSFERABILITY. This option is not transferable by the Optionee except as otherwise provided in Paragraph 5 below, and during the Optionee's lifetime is exercisable only by him or her. 5. EXERCISE AFTER TERMINATION OF MEMBERSHIP ON THE BOARD OF DIRECTORS. In the event of termination of the Optionee's membership on the Board of Directors by reason of total and permanent disability, this option shall continue to mature and become exercisable in accordance with Paragraph 3 above and the Optionee may exercise the matured installment(s) at any time within one year after such disability, but in no event after the expiration date of the option. In the event of the termination of the Optionee's membership on the Board of Directors by reason of the death of the Optionee, the option shall immediately mature and become exercisable in full by the Optionee's legal representative at any time within one year after death, but in no event after the expiration date of the option. In the event of the termination of the Optionee's membership on the Board of Directors other than by reason of total and permanent disability or death, this option will expire three months after such termination. 6. ADJUSTMENT. If there shall be any change in the Common Stock through a merger, consolidation, reorganization, recapitalization, stock dividend, stock split, exchange of stock or other change in the corporate structure, appropriate adjustments shall be made in the aggregate number and kind of shares or other securities subject to this option and in the purchase price of this option to reflect such change. 7. MERGER, CONSOLIDATION OR LIQUIDATION. At least 30 days prior written notice of a merger, consolidation or liquidation of the Company shall be given by the Company to the Optionee, in which case vesting shall accelerate and the Option shall become fully exercisable. Upon the occurrence of a merger, consolidation or liquidation of the Company, this option shall automatically terminate unless the surviving or acquiring corporation shall assume this option or substitute a new option for it. 8. OPTION NON-ASSIGNABLE AND NON-TRANSFERABLE. This option and all rights hereunder shall be non-assignable and non-transferable other than by will or the laws of descent and distribution and shall be exercisable during the Optionee's lifetime only by the Optionee or the Optionee's guardian or legal representative. 9. LIMITATION OF RIGHTS. (a) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan nor this option shall constitute or be evidence of any agreement or understanding, express or implied, that the Optionee has a right to continue as a member of the Company's Board of Directors for any 3 period of time. (b) NO STOCKHOLDER'S RIGHTS FOR OPTIONS. The Optionee shall have no rights as a stockholder with respect to the shares covered by this option until the date of the issuance of a stock certificate therefor, and no adjustment will be made for any dividends or other rights for which the record date is prior to the date such certificate is issued. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its President and its Secretary, and the Optionee has affixed his or her signature hereto. B. MARTHA CASSIDY -------------------------------------- B. Martha Cassidy Optionee Attest: HANGER ORTHOPEDIC GROUP, INC. RICHARD A. STEIN By: IVAN R. SABEL - ---------------------- ----------------------------------- Richard A. Stein Ivan R. Sabel Secretary President 3 EX-10.ZZZ 4 THOMAS P. COOPER STOCK OPTION AGREEMENT. 1 EXHIBIT 10(zzz) HANGER ORTHOPEDIC GROUP, INC. NON-QUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT is made as of June 14, 1995, by and between HANGER ORTHOPEDIC GROUP, INC., a Delaware corporation (the "Company"), and Thomas P. Cooper (the "Optionee"). W I T N E S E T H: WHEREAS, the Company desires to grant to the Optionee a stock option under the Company's 1993 Stock Option Plan for Non-Employee Directors (the "Plan") to purchase shares of the Company's common stock, par value $.01 per share (the "Common Stock"), in consideration for the Optionee's service as a member of the Board of Directors of the Company (the "Board of Directors"). NOW, THEREFORE, the parties hereto, intending to be legally bound, do agree as follows: 1. GRANT OF OPTION. Subject to the terms and conditions of this Agreement and the Plan, the Company hereby grants to the Optionee the right and option to purchase from the Company all or part of an aggregate of 5,000 shares of Common Stock. This option is not intended to qualify as an incentive stock option within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended. 2. OPTION PRICE AND TIME OF EXERCISE. The per-share purchase price at which the shares subject to option may be purchased by Optionee pursuant to the exercise of this option shall be $3.00, which price equals the closing sale price per share of the Common Stock on the American Stock Exchange on June 14, 1995, the date of grant of this option. In accordance with Section 6(a) of the Plan, such date is the third business day following the June 9, 1995 Annual Meeting of Shareholders. The Optionee's right to exercise this option shall vest as to 25% of the shares of Common Stock underlying the option at the end of each of the first four years following the date hereof. The right to exercise the option shall be cumulative to the extent not theretofore exercised. The right to exercise the option shall in all events expire, except as provided in Paragraph 5 below, at the close of business on June 14, 2005. 3. METHOD OF EXERCISE AND PAYMENT FOR SHARES. This option shall be exercised by written notice directed to the Company at its principal office, specifying the number of shares to be acquired upon such exercise and indicating whether the exercise is being paid for (i) in cash, (ii) in shares of Common Stock already owned 2 by the Optionee and valued at their fair market value on the date of exercise of the option, or (ii) by a combination of (i) and (ii) above. 4. NON-TRANSFERABILITY. This option is not transferable by the Optionee except as otherwise provided in Paragraph 5 below, and during the Optionee's lifetime is exercisable only by him or her. 5. EXERCISE AFTER TERMINATION OF MEMBERSHIP ON THE BOARD OF DIRECTORS. In the event of termination of the Optionee's membership on the Board of Directors by reason of total and permanent disability, this option shall continue to mature and become exercisable in accordance with Paragraph 3 above and the Optionee may exercise the matured installment(s) at any time within one year after such disability, but in no event after the expiration date of the option. In the event of the termination of the Optionee's membership on the Board of Directors by reason of the death of the Optionee, the option shall immediately mature and become exercisable in full by the Optionee's legal representative at any time within one year after death, but in no event after the expiration date of the option. In the event of the termination of the Optionee's membership on the Board of Directors other than by reason of total and permanent disability or death, this option will expire three months after such termination. 6. ADJUSTMENT. If there shall be any change in the Common Stock through a merger, consolidation, reorganization, recapitalization, stock dividend, stock split, exchange of stock or other change in the corporate structure, appropriate adjustments shall be made in the aggregate number and kind of shares or other securities subject to this option and in the purchase price of this option to reflect such change. 7. MERGER, CONSOLIDATION OR LIQUIDATION. At least 30 days prior written notice of a merger, consolidation or liquidation of the Company shall be given by the Company to the Optionee, in which case vesting shall accelerate and the Option shall become fully exercisable. Upon the occurrence of a merger, consolidation or liquidation of the Company, this option shall automatically terminate unless the surviving or acquiring corporation shall assume this option or substitute a new option for it. 8. OPTION NON-ASSIGNABLE AND NON-TRANSFERABLE. This option and all rights hereunder shall be non-assignable and non-transferable other than by will or the laws of descent and distribution and shall be exercisable during the Optionee's lifetime only by the Optionee or the Optionee's guardian or legal representative. 9. LIMITATION OF RIGHTS. (a) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan nor this option shall constitute or be evidence of any agreement or 2 3 understanding, express or implied, that the Optionee has a right to continue as a member of the Company's Board of Directors for any period of time. (b) NO STOCKHOLDER'S RIGHTS FOR OPTIONS. The Optionee shall have no rights as a stockholder with respect to the shares covered by this option until the date of the issuance of a stock certificate therefor, and no adjustment will be made for any dividends or other rights for which the record date is prior to the date such certificate is issued. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its President and its Secretary, and the Optionee has affixed his or her signature hereto. THOMAS P. COOPER -------------------------------------- Thomas P. Cooper Optionee Attest: HANGER ORTHOPEDIC GROUP, INC. RICHARD A. STEIN By: IVAN R. SABEL - ---------------------- ----------------------------------- Richard A. Stein Ivan R. Sabel Secretary President 3 EX-10.AAAA 5 ROBERT J. GLASER STOCK OPTION AGREEMENT. 1 EXHIBIT 10(aaaa) HANGER ORTHOPEDIC GROUP, INC. NON-QUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT is made as of June 14, 1995, by and between HANGER ORTHOPEDIC GROUP, INC., a Delaware corporation (the "Company"), and Robert J. Glaser (the "Optionee"). W I T N E S E T H: WHEREAS, the Company desires to grant to the Optionee a stock option under the Company's 1993 Stock Option Plan for Non-Employee Directors (the "Plan") to purchase shares of the Company's common stock, par value $.01 per share (the "Common Stock"), in consideration for the Optionee's service as a member of the Board of Directors of the Company (the "Board of Directors"). NOW, THEREFORE, the parties hereto, intending to be legally bound, do agree as follows: 1. GRANT OF OPTION. Subject to the terms and conditions of this Agreement and the Plan, the Company hereby grants to the Optionee the right and option to purchase from the Company all or part of an aggregate of 5,000 shares of Common Stock. This option is not intended to qualify as an incentive stock option within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended. 2. OPTION PRICE AND TIME OF EXERCISE. The per-share purchase price at which the shares subject to option may be purchased by Optionee pursuant to the exercise of this option shall be $3.00, which price equals the closing sale price per share of the Common Stock on the American Stock Exchange on June 14, 1995, the date of grant of this option. In accordance with Section 6(a) of the Plan, such date is the third business day following the June 9, 1995 Annual Meeting of Shareholders. The Optionee's right to exercise this option shall vest as to 25% of the shares of Common Stock underlying the option at the end of each of the first four years following the date hereof. The right to exercise the option shall be cumulative to the extent not theretofore exercised. The right to exercise the option shall in all events expire, except as provided in Paragraph 5 below, at the close of business on June 14, 2005. 3. METHOD OF EXERCISE AND PAYMENT FOR SHARES. This option shall be exercised by written notice directed to the Company at its principal office, specifying the number of shares to be acquired 1 2 upon such exercise and indicating whether the exercise is being paid for (i) in cash, (ii) in shares of Common Stock already owned by the Optionee and valued at their fair market value on the date of exercise of the option, or (ii) by a combination of (i) and (ii) above. 4. NON-TRANSFERABILITY. This option is not transferable by the Optionee except as otherwise provided in Paragraph 5 below, and during the Optionee's lifetime is exercisable only by him or her. 5. EXERCISE AFTER TERMINATION OF MEMBERSHIP ON THE BOARD OF DIRECTORS. In the event of termination of the Optionee's membership on the Board of Directors by reason of total and permanent disability, this option shall continue to mature and become exercisable in accordance with Paragraph 3 above and the Optionee may exercise the matured installment(s) at any time within one year after such disability, but in no event after the expiration date of the option. In the event of the termination of the Optionee's membership on the Board of Directors by reason of the death of the Optionee, the option shall immediately mature and become exercisable in full by the Optionee's legal representative at any time within one year after death, but in no event after the expiration date of the option. In the event of the termination of the Optionee's membership on the Board of Directors other than by reason of total and permanent disability or death, this option will expire three months after such termination. 6. ADJUSTMENT. If there shall be any change in the Common Stock through a merger, consolidation, reorganization, recapitalization, stock dividend, stock split, exchange of stock or other change in the corporate structure, appropriate adjustments shall be made in the aggregate number and kind of shares or other securities subject to this option and in the purchase price of this option to reflect such change. 7. MERGER, CONSOLIDATION OR LIQUIDATION. At least 30 days prior written notice of a merger, consolidation or liquidation of the Company shall be given by the Company to the Optionee, in which case vesting shall accelerate and the Option shall become fully exercisable. Upon the occurrence of a merger, consolidation or liquidation of the Company, this option shall automatically terminate unless the surviving or acquiring corporation shall assume this option or substitute a new option for it. 8. OPTION NON-ASSIGNABLE AND NON-TRANSFERABLE. This option and all rights hereunder shall be non-assignable and non-transferable other than by will or the laws of descent and distribution and shall be exercisable during the Optionee's lifetime only by the Optionee or the Optionee's guardian or legal representative. 9. LIMITATION OF RIGHTS. (a) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan nor this option shall constitute or be evidence of any agreement or 3 understanding, express or implied, that the Optionee has a right to continue as a member of the Company's Board of Directors for any period of time. (b) NO STOCKHOLDER'S RIGHTS FOR OPTIONS. The Optionee shall have no rights as a stockholder with respect to the shares covered by this option until the date of the issuance of a stock certificate therefor, and no adjustment will be made for any dividends or other rights for which the record date is prior to the date such certificate is issued. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its President and its Secretary, and the Optionee has affixed his or her signature hereto. ROBERT J. GLASER --------------------------------------- Robert J. Glaser Optionee Attest: HANGER ORTHOPEDIC GROUP, INC. RICHARD A.STEIN By: IVAN R. SABEL - ---------------------- ---------------------------------- Richard A. Stein Ivan R. Sabel Secretary President 3 EX-10.BBBB 6 JAMES J. HELMUTH STOCK OPTION AGREEMENT. 1 EXHIBIT 10(bbbb) HANGER ORTHOPEDIC GROUP, INC. NON-QUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT is made as of June 14, 1995, by and between HANGER ORTHOPEDIC GROUP, INC., a Delaware corporation (the "Company"), and James J. Hellmuth (the "Optionee"). W I T N E S E T H: WHEREAS, the Company desires to grant to the Optionee a stock option under the Company's 1993 Stock Option Plan for Non-Employee Directors (the "Plan") to purchase shares of the Company's common stock, par value $.01 per share (the "Common Stock"), in consideration for the Optionee's service as a member of the Board of Directors of the Company (the "Board of Directors"). NOW, THEREFORE, the parties hereto, intending to be legally bound, do agree as follows: 1. GRANT OF OPTION. Subject to the terms and conditions of this Agreement and the Plan, the Company hereby grants to the Optionee the right and option to purchase from the Company all or part of an aggregate of 5,000 shares of Common Stock. This option is not intended to qualify as an incentive stock option within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended. 2. OPTION PRICE AND TIME OF EXERCISE. The per-share purchase price at which the shares subject to option may be purchased by Optionee pursuant to the exercise of this option shall be $3.00, which price equals the closing sale price per share of the Common Stock on the American Stock Exchange on June 14, 1995, the date of grant of this option. In accordance with Section 6(a) of the Plan, such date is the third business day following the June 9, 1995 Annual Meeting of Shareholders. The Optionee's right to exercise this option shall vest as to 25% of the shares of Common Stock underlying the option at the end of each of the first four years following the date hereof. The right to exercise the option shall be cumulative to the extent not theretofore exercised. The right to exercise the option shall in all events expire, except as provided in Paragraph 5 below, at the close of business on June 14, 2005. 3. METHOD OF EXERCISE AND PAYMENT FOR SHARES. This option shall be exercised by written notice directed to the Company at its principal office, specifying the number of shares to be acquired 1 2 upon such exercise and indicating whether the exercise is being paid for (i) in cash, (ii) in shares of Common Stock already owned by the Optionee and valued at their fair market value on the date of exercise of the option, or (ii) by a combination of (i) and (ii) above. 4. NON-TRANSFERABILITY. This option is not transferable by the Optionee except as otherwise provided in Paragraph 5 below, and during the Optionee's lifetime is exercisable only by him or her. 5. EXERCISE AFTER TERMINATION OF MEMBERSHIP ON THE BOARD OF DIRECTORS. In the event of termination of the Optionee's membership on the Board of Directors by reason of total and permanent disability, this option shall continue to mature and become exercisable in accordance with Paragraph 3 above and the Optionee may exercise the matured installment(s) at any time within one year after such disability, but in no event after the expiration date of the option. In the event of the termination of the Optionee's membership on the Board of Directors by reason of the death of the Optionee, the option shall immediately mature and become exercisable in full by the Optionee's legal representative at any time within one year after death, but in no event after the expiration date of the option. In the event of the termination of the Optionee's membership on the Board of Directors other than by reason of total and permanent disability or death, this option will expire three months after such termination. 6. ADJUSTMENT. If there shall be any change in the Common Stock through a merger, consolidation, reorganization, recapitalization, stock dividend, stock split, exchange of stock or other change in the corporate structure, appropriate adjustments shall be made in the aggregate number and kind of shares or other securities subject to this option and in the purchase price of this option to reflect such change. 7. MERGER, CONSOLIDATION OR LIQUIDATION. At least 30 days prior written notice of a merger, consolidation or liquidation of the Company shall be given by the Company to the Optionee, in which case vesting shall accelerate and the Option shall become fully exercisable. Upon the occurrence of a merger, consolidation or liquidation of the Company, this option shall automatically terminate unless the surviving or acquiring corporation shall assume this option or substitute a new option for it. 8. OPTION NON-ASSIGNABLE AND NON-TRANSFERABLE. This option and all rights hereunder shall be non-assignable and non-transferable other than by will or the laws of descent and distribution and shall be exercisable during the Optionee's lifetime only by the Optionee or the Optionee's guardian or legal representative. 9. LIMITATION OF RIGHTS. (a) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan nor this option shall constitute or be evidence of any agreement or 3 understanding, express or implied, that the Optionee has a right to continue as a member of the Company's Board of Directors for any period of time. (b) NO STOCKHOLDER'S RIGHTS FOR OPTIONS. The Optionee shall have no rights as a stockholder with respect to the shares covered by this option until the date of the issuance of a stock certificate therefor, and no adjustment will be made for any dividends or other rights for which the record date is prior to the date such certificate is issued. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its President and its Secretary, and the Optionee has affixed his or her signature hereto. JAMES J. HELLMUTH -------------------------------------- James J. Hellmuth Optionee Attest: HANGER ORTHOPEDIC GROUP, INC. RICHARD A. STEIN By: IVAN R. SABEL - ---------------------- --------------------------------- Richard A. Stein Ivan R. Sabel Secretary President 3 EX-10.CCCC 7 WILLIAM C. MCCULLOCH STOCK OPTION AGREEMENT. 1 EXHIBIT 10(cccc) HANGER ORTHOPEDIC GROUP, INC. NON-QUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT is made as of June 14, 1995, by and between HANGER ORTHOPEDIC GROUP, INC., a Delaware corporation (the "Company"), and William J. McCulloch (the "Optionee"). W I T N E S E T H: WHEREAS, the Company desires to grant to the Optionee a stock option under the Company's 1993 Stock Option Plan for Non-Employee Directors (the "Plan") to purchase shares of the Company's common stock, par value $.01 per share (the "Common Stock"), in consideration for the Optionee's service as a member of the Board of Directors of the Company (the "Board of Directors"). NOW, THEREFORE, the parties hereto, intending to be legally bound, do agree as follows: 1. GRANT OF OPTION. Subject to the terms and conditions of this Agreement and the Plan, the Company hereby grants to the Optionee the right and option to purchase from the Company all or part of an aggregate of 5,000 shares of Common Stock. This option is not intended to qualify as an incentive stock option within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended. 2. OPTION PRICE AND TIME OF EXERCISE. The per-share purchase price at which the shares subject to option may be purchased by Optionee pursuant to the exercise of this option shall be $3.00, which price equals the closing sale price per share of the Common Stock on the American Stock Exchange on June 14, 1995, the date of grant of this option. In accordance with Section 6(a) of the Plan, such date is the third business day following the June 9, 1995 Annual Meeting of Shareholders. The Optionee's right to exercise this option shall vest as to 25% of the shares of Common Stock underlying the option at the end of each of the first four years following the date hereof. The right to exercise the option shall be cumulative to the extent not theretofore exercised. The right to exercise the option shall in all events expire, except as provided in Paragraph 5 below, at the close of business on June 14, 2005. 3. METHOD OF EXERCISE AND PAYMENT FOR SHARES. This option shall be exercised by written notice directed to the Company at its principal office, specifying the number of shares to be acquired 1 2 upon such exercise and indicating whether the exercise is being paid for (i) in cash, (ii) in shares of Common Stock already owned by the Optionee and valued at their fair market value on the date of exercise of the option, or (ii) by a combination of (i) and (ii) above. 4. NON-TRANSFERABILITY. This option is not transferable by the Optionee except as otherwise provided in Paragraph 5 below, and during the Optionee's lifetime is exercisable only by him or her. 5. EXERCISE AFTER TERMINATION OF MEMBERSHIP ON THE BOARD OF DIRECTORS. In the event of termination of the Optionee's membership on the Board of Directors by reason of total and permanent disability, this option shall continue to mature and become exercisable in accordance with Paragraph 3 above and the Optionee may exercise the matured installment(s) at any time within one year after such disability, but in no event after the expiration date of the option. In the event of the termination of the Optionee's membership on the Board of Directors by reason of the death of the Optionee, the option shall immediately mature and become exercisable in full by the Optionee's legal representative at any time within one year after death, but in no event after the expiration date of the option. In the event of the termination of the Optionee's membership on the Board of Directors other than by reason of total and permanent disability or death, this option will expire three months after such termination. 6. ADJUSTMENT. If there shall be any change in the Common Stock through a merger, consolidation, reorganization, recapitalization, stock dividend, stock split, exchange of stock or other change in the corporate structure, appropriate adjustments shall be made in the aggregate number and kind of shares or other securities subject to this option and in the purchase price of this option to reflect such change. 7. MERGER, CONSOLIDATION OR LIQUIDATION. At least 30 days prior written notice of a merger, consolidation or liquidation of the Company shall be given by the Company to the Optionee, in which case vesting shall accelerate and the Option shall become fully exercisable. Upon the occurrence of a merger, consolidation or liquidation of the Company, this option shall automatically terminate unless the surviving or acquiring corporation shall assume this option or substitute a new option for it. 8. OPTION NON-ASSIGNABLE AND NON-TRANSFERABLE. This option and all rights hereunder shall be non-assignable and non-transferable other than by will or the laws of descent and distribution and shall be exercisable during the Optionee's lifetime only by the Optionee or the Optionee's guardian or legal representative. 9. LIMITATION OF RIGHTS. (a) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan nor this option shall constitute or be evidence of any agreement or 3 understanding, express or implied, that the Optionee has a right to continue as a member of the Company's Board of Directors for any period of time. (b) NO STOCKHOLDER'S RIGHTS FOR OPTIONS. The Optionee shall have no rights as a stockholder with respect to the shares covered by this option until the date of the issuance of a stock certificate therefor, and no adjustment will be made for any dividends or other rights for which the record date is prior to the date such certificate is issued. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its President and its Secretary, and the Optionee has affixed his or her signature hereto. WILLIAM L. MCCULLOCH ------------------------------------- William L. McCulloch Optionee Attest: HANGER ORTHOPEDIC GROUP, INC. RICHARD A. STEIN By: IVAN R. SABEL - ---------------------- ---------------------------------- Richard A. Stein Ivan R. Sabel Secretary President 3 EX-10.DDDD 8 WALTER J. MCNERNEY STOCK OPTION AGREEMENT. 1 EXHIBIT 10(dddd) HANGER ORTHOPEDIC GROUP, INC. NON-QUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT is made as of June 14, 1995, by and between HANGER ORTHOPEDIC GROUP, INC., a Delaware corporation (the "Company"), and Walter J. McNerney (the "Optionee"). W I T N E S E T H: WHEREAS, the Company desires to grant to the Optionee a stock option under the Company's 1993 Stock Option Plan for Non-Employee Directors (the "Plan") to purchase shares of the Company's common stock, par value $.01 per share (the "Common Stock"), in consideration for the Optionee's service as a member of the Board of Directors of the Company (the "Board of Directors"). NOW, THEREFORE, the parties hereto, intending to be legally bound, do agree as follows: 1. GRANT OF OPTION. Subject to the terms and conditions of this Agreement and the Plan, the Company hereby grants to the Optionee the right and option to purchase from the Company all or part of an aggregate of 5,000 shares of Common Stock. This option is not intended to qualify as an incentive stock option within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended. 2. OPTION PRICE AND TIME OF EXERCISE. The per-share purchase price at which the shares subject to option may be purchased by Optionee pursuant to the exercise of this option shall be $3.00, which price equals the closing sale price per share of the Common Stock on the American Stock Exchange on June 14, 1995, the date of grant of this option. In accordance with Section 6(a) of the Plan, such date is the third business day following the June 9, 1995 Annual Meeting of Shareholders. The Optionee's right to exercise this option shall vest as to 25% of the shares of Common Stock underlying the option at the end of each of the first four years following the date hereof. The right to exercise the option shall be cumulative to the extent not theretofore exercised. The right to exercise the option shall in all events expire, except as provided in Paragraph 5 below, at the close of business on June 14, 2005. 3. METHOD OF EXERCISE AND PAYMENT FOR SHARES. This option shall be exercised by written notice directed to the Company at its principal office, specifying the number of shares to be acquired 1 2 upon such exercise and indicating whether the exercise is being paid for (i) in cash, (ii) in shares of Common Stock already owned by the Optionee and valued at their fair market value on the date of exercise of the option, or (ii) by a combination of (i) and (ii) above. 4. NON-TRANSFERABILITY. This option is not transferable by the Optionee except as otherwise provided in Paragraph 5 below, and during the Optionee's lifetime is exercisable only by him or her. 5. EXERCISE AFTER TERMINATION OF MEMBERSHIP ON THE BOARD OF DIRECTORS. In the event of termination of the Optionee's membership on the Board of Directors by reason of total and permanent disability, this option shall continue to mature and become exercisable in accordance with Paragraph 3 above and the Optionee may exercise the matured installment(s) at any time within one year after such disability, but in no event after the expiration date of the option. In the event of the termination of the Optionee's membership on the Board of Directors by reason of the death of the Optionee, the option shall immediately mature and become exercisable in full by the Optionee's legal representative at any time within one year after death, but in no event after the expiration date of the option. In the event of the termination of the Optionee's membership on the Board of Directors other than by reason of total and permanent disability or death, this option will expire three months after such termination. 6. ADJUSTMENT. If there shall be any change in the Common Stock through a merger, consolidation, reorganization, recapitalization, stock dividend, stock split, exchange of stock or other change in the corporate structure, appropriate adjustments shall be made in the aggregate number and kind of shares or other securities subject to this option and in the purchase price of this option to reflect such change. 7. MERGER, CONSOLIDATION OR LIQUIDATION. At least 30 days prior written notice of a merger, consolidation or liquidation of the Company shall be given by the Company to the Optionee, in which case vesting shall accelerate and the Option shall become fully exercisable. Upon the occurrence of a merger, consolidation or liquidation of the Company, this option shall automatically terminate unless the surviving or acquiring corporation shall assume this option or substitute a new option for it. 8. OPTION NON-ASSIGNABLE AND NON-TRANSFERABLE. This option and all rights hereunder shall be non-assignable and non-transferable other than by will or the laws of descent and distribution and shall be exercisable during the Optionee's lifetime only by the Optionee or the Optionee's guardian or legal representative. 9. LIMITATION OF RIGHTS. (a) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan nor this option shall constitute or be evidence of any agreement or 3 understanding, express or implied, that the Optionee has a right to continue as a member of the Company's Board of Directors for any period of time. (b) NO STOCKHOLDER'S RIGHTS FOR OPTIONS. The Optionee shall have no rights as a stockholder with respect to the shares covered by this option until the date of the issuance of a stock certificate therefor, and no adjustment will be made for any dividends or other rights for which the record date is prior to the date such certificate is issued. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its President and its Secretary, and the Optionee has affixed his or her signature hereto. WALTER J. MCNERNEY ---------------------------------- Walter J. McNerney Optionee Attest: HANGER ORTHOPEDIC GROUP, INC. RICHARD A. STEIN By: IVAN R. SABEL - ---------------------- -------------------------------- Richard A. Stein Ivan R. Sabel Secretary President 3 EX-10.EEEE 9 RONALD J. MANGANIELLO AGREEMENT. 1 EXHIBIT 10(eeee) AGREEMENT AGREEMENT, made as of July 31, 1995, by and between HANGER ORTHOPEDIC GROUP, INC. (the "Company"), 7700 Old Georgetown Road, Bethesda, Maryland 20814, and RONALD J. MANGANIELLO ("RJM") 389 West Road, New Canaan, Connecticut 06840. WHEREAS, RJM has been serving as Chairman of the Board and Chief Executive Officer of the Company since 1989; WHEREAS, RJM has determined to submit, and the Company is agreeable to accept, his resignation from such positions; and WHEREAS, RJM and the Company each wish to enter into an agreement regarding RJM's future relationship with the Company that is different in terms from the provisions in RJM's Employment Agreement with the Company dated May 16, 1994. WHEREAS, RJM and the Company both waive the requirement contained in the Employment and Non-Compete Agreement dated May 16, 1994 and RJM to give the Company not less than three months notice. IT IS NOW, THEREFORE, hereby agreed as follows: 1. RJM will, simultaneously with the execution of this Agreement, submit his resignation as Chairman of the Board and Chief Executive Officer of the Company, said resignation will be effective as of the close of business on July 31, 1995. 2. RJM will remain a director of the Company until the next Annual Meeting of Shareholders, unless determined otherwise by the shareholders. Whether RJM will be a member of the slate of directors presented to the shareholders at the Company's next Annual Meeting will be determined by the Board in accordance with its normal procedures. 3. RJM will be retained by the Company as an independent consultant at his current base annual compensation from August 1, 1995 through July 31, 1996 subject to the conditions set forth herein. For the period from August 1, 1995 through January 31, 1996, RJM's retention and payment is guaranteed. For the period from February 1, 1996 through July 31, 1996, RJM's retention and payment will be contingent upon his availability to the Company for reasonable assignments as requested by the Company relating to possible acquisitions or other corporate financing activities. RJM shall receive at least ten (10) days advance notice of such assignments and the Company agrees to consider in good faith the opinion of RJM as to the nature and timing of such assignments. Such assignments shall cumulatively be for no more than one week duration per quarter unless the assignment relates to a fee-based transaction pursuant to Paragraphs 4 or 5 hereof. If, during this 2 period, RJM is, in the reasonable business judgment of the Board, not available to perform such assignments in a timely fashion or if RJM is engaged in business activities or conduct that, in the reasonable business judgment of the Board, are adversarial or detrimental to the business or business prospects of the Company, the Board reserves the right to terminate the consulting arrangement upon written notice to RJM. The nature of any assignments given to RJM during this consulting period must be approved by the Board. 4. If a transaction, initiated by RJM subsequent to July 31, 1995, results in a sale of the Company, or any portion thereof, RJM will be paid a fee to be negotiated with the Board at the time a transaction opportunity is presented by RJM to the Company. The fee will be in accordance with generally accepted industry standards for comparable transactions. 5. If the Company consummates an acquisition introduced by RJM subsequent to July 31, 1995, or if RJM is instrumental in raising capital for the Company, the Company will pay RJM a fee to be negotiated with the Board on a case-by-case basis prior to any substantive discussions with the proposed acquisition company or source of financing. Such fee will be in accordance with generally accepted industry standards for comparable transactions. 6. With respect to any activities encompassed by Paragraphs 4 and 5 above, RJM will serve at the direction of the Company's Chief Executive Officer and/or the Board and the fee arrangement would not be applicable to a transaction with any company with which the Company has had prior discussions about sale, acquisition or merger of a material nature, or which is part of the Company's acquisition candidate file as of July 31, 1995. 7. RJM will continue to receive the health benefits he is currently receiving through January 31, 1996. RJM will then be eligible to pay for such benefits through COBRA. RJM will, beginning August 1, 1995, reimburse the Company for automobile lease payments made on his behalf. RJM will be paid a $1,000 per month expense allowance from August 1, 1995 through January 31, 1996. 8. RJM will be reimbursed for any pre-approved business expenses he incurs in fulfilling his obligations as a consultant when conducting business performed at the direction of the Company. 9. Stock options previously granted to RJM by the Company will continue to vest during the period RJM is consulting with the Company pursuant to this Agreement. If the consulting arrangement is terminated pursuant to Paragraph 3 hereof, the vesting of options will also cease at the time of termination. RJM will have six (6) months from the end of the consulting period to exercise the options. 10. This Agreement supersedes the Employment Agreement 3 between RJM and the Company dated May 16, 1994 and the parties hereto agree that this Agreement, which can only be amended in writing, shall control the relationship between RJM and the Company subsequent to July 31, 1995, with the exception that the provisions of Paragraph 5 relating to non-competition and Paragraph 6 relating to Confidential Information shall remain in full force and effect during the term of RJM's consulting period. 11. The Company agrees to indemnify RJM for any past, present or future claims and related expenses to defend such claims brought against RJM if such claims are related to his duties carried out in his capacity of employee or director. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of this date first above written. Attest (Seal): HANGER ORTHOPEDIC GROUP, INC. RICHARD A. STEIN By: IVAN R. SABEL - ----------------------------- ---------------------------- Richard A. Stein Ivan R. Sabel Secretary President RONALD J. MANGANIELLO ------------------------------- Ronald J. Manganiello 3 EX-10.FFFF 10 NATIONSBANK FINANCING AGREEMENT (8TH AMENDMENT). 1 EXHIBIT 10(ffff) EIGHTH AMENDMENT TO FINANCING AND SECURITY AGREEMENT THIS EIGHTH AMENDMENT TO FINANCING AND SECURITY AGREEMENT (this "Agreement") is made the 2nd day of October, 1995 but effective as of September 30, 1995, by HANGER ORTHOPEDIC GROUP, INC., a corporation organized and existing under the laws of the State of Delaware (the "Borrower"), and NATIONSBANK, N.A., successor by merger to Maryland National Bank, its successor and assigns (the "Lender"). RECITALS A. The Borrower and the Lender entered into a Financing and Security Agreement dated July 3, 1993, (the same, as amended, modified, substituted, extended, and renewed from time to time, the "Financing Agreement"). The Financing Agreement includes, without limitation, the following amendments:
Number of Amendment Date ------------------- ---- First November 17, 1993 Second December 22, 1993 Third April 15, 1994 Fourth May 3, 1994 Fifth August 12, 1994 Sixth September 13, 1994 Seventh March 24, 1995
B. Pursuant to the provisions of the Financing Agreement, the Lender has from time to time made certain credit facilities available to the Borrower, including the following: (i) a revolving credit facility in the current maximum principal amount of $13,500,000 (the "Revolving Loan"); (ii) one or more term loans in the aggregate principal amount of $2,375,000 (the "Term Loans"); and (iii) an acquisition loan in the principal amount of $3,000,000 (the "Acquisition Loan"). C. The Borrower has requested that the Lender agree to reduce the scheduled reduction of the Revolving Credit Committed Amount from $1,000,000 to $250,000 as of September 30, 1995. D. The Lender is willing to agree to the Borrower's request on the condition, among others, that this Agreement be executed. 2 AGREEMENTS NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, receipt of which is hereby acknowledged, the Borrower and the Lender agree as follows: 1. The Borrower and the Lender agree that the Recitals above are a part of this Agreement. Unless otherwise expressly defined in this Agreement, terms defined in the Financing Agreement shall have the same meaning under this Agreement. 2. Amendment. The Financing Agreement is hereby amended as follows: (a) Mandatory Reduction. Effective as of the date hereof, Section 2.1.9 of the Financing Agreement is amended and restated in its entirety as follows: 2.1.9 Mandatory Reduction of Revolving Credit Committed Amount. The Revolving Credit Committed Amount shall be automatically and permanently reduced to by the amounts listed below as of the dates listed below (individually and collectively, the "Mandatory Revolving Credit Reduction"). The Borrower shall on or before each of the dates listed below make a Revolving Loan Mandatory Prepayment in an amount necessary to reduce the outstanding principal balance of the Revolving Credit Facility to the applicable Revolving Credit Committed Amount.
Mandatory Reduction Revolving Credit Date Reduction Amount Committed Amount ------------------- ---------------- ---------------- June 30, 1995 $250,000 $13,250,000 September 20, 1995 $250,000 $13,000,000 December 31, 1995 $250,000 $12,750,000 March 31, 1996 $250,000 $12,500,000
3. Conditions Precedent. This Agreement shall become effective on the date the Lender receives the following documents, each of which shall be satisfactory in form and substance to the Lender: (a) this Agreement executed and delivered by the Borrower and the Guarantors; (b) a certificate of an officer of the Borrower to the effect that there has been no change to the Articles of Incorporation or Bylaws of the Borrower as delivered to the Lender in connection with the Loans made under the Financing Agreement, all evidence of all actions taken by the Borrower approving each Financing Document to which it is a party and as to the incumbency and the specimen signature of each officer of 2 3 the Borrower executing this Agreement, and other documents executed in connection herewith and a certification by the President or Vice President of the Borrower as to the incumbency and signature of the Secretary of the Borrower and any other documents as the Lender may reasonably require the Borrower to execute in form and substance acceptable to the Lender; and (c) proof that the Borrower has paid all costs and expenses of the Lender in connection with the Loans and with this Agreement, including but not limited to all Lender's attorneys' fees. 4. Representations; No Novation. The Borrower hereby issues, ratifies and confirms the representations, warranties and covenants contained in the Financing Agreement, as amended hereby. The Borrower represents and warrants that there exists no Event of Default or event which with the giving of notice or passage of time would constitute an Event of Default under the Financing Documents. The Borrower agrees that this Agreement is not intended to and shall not cause a novation with respect to any or all of the Obligations. 5. Lender Release. The Borrower acknowledges and warrants that the Lender has acted in good faith and has conducted in a commercially reasonable manner its relationships with the Borrower in connection with this Agreement and generally in connection with the Financing Agreement and the Obligations, the Borrower hereby waiving and releasing any claims to the contrary. 6. Expenses. The Borrower shall pay at the time this Agreement is executed and delivered all fees, commissions, costs, charges, taxes and other expenses incurred by the Lender and its counsel in connection with this Agreement, including, but not limited to, reasonable fees and expenses of the Lender's counsel and all recording fees, taxes and charges. 7. Counterparts. This Agreement may be executed in any number of duplicate originals or counterparts, each of such duplicate originals or counterparts shall be deemed to be an original and all taken together shall constitute but one and the same instrument. The Borrower agrees that the Lender may rely on a telecopy of any signature of any Borrower. The Lender agrees that the Borrower may rely on a telecopy of this Agreement executed by the Lender. 8. Entire Agreement. This Agreement contains the entire understanding between the Lender and the Borrower with respect to the subject matter hereof and supersedes any prior understandings and agreements between them respecting the subject matter hereof. 9. Governing Law. This Agreement is one of the Financing Documents in the Financing Agreement and shall be governed by and 3 4 construed in accordance with the laws of the State of Maryland and shall be deemed an instrument under seal pursuant to said law. 10. Headings. The headings and captions used in this Agreement are for the convenience of the parties only and are not a part of this Agreement. IN WITNESS WHEREOF, the Borrower and the Lender have executed this Agreement under seal as of the date and year first written above. ATTEST: HANGER ORTHOPEDIC GROUP, INC. By: (SEAL) - ------------------------- ---------------------- , Secretary Richard A. Stein - -------------- Vice President WITNESS: NATIONSBANK, N.A., as successor by merger to Maryland National Bank By: (SEAL) - ------------------------- ---------------------- Louise M. Webster Vice President 4 5 AGREEMENT OF GUARANTORS The undersigned are the "Guarantors" under various Guaranty of Payment Agreements, dated July 2, 1993 and a Confirmation of Guaranty and Security Agreement dated September 13, 1994 (collectively, as amended, modified, substituted, extended and renewed from time to time, the "Guaranty"), in favor of the foregoing Lender. In order to induce the Lender to enter into the foregoing Agreement, the undersigned (a) consent to the transactions contemplated by, and agreements made by the Borrower under, the foregoing Agreement, and (b) ratify, confirm and reissue the terms, conditions, promises, covenants, grants, assignments, security agreements, agreements, representations, warranties and provisions contained in the Guaranty. Without limiting the foregoing, the undersigned acknowledge and agree that the Obligations (defined in the Financing Agreement) are covered by the Guaranty. WITNESS signatures and seals of the undersigned as of the date of the Agreement. GUARANTORS: ATTEST: ALBUQUERQUE PROSTHETIC CENTER, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: CAPITAL ORTHOPEDICS, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: COLUMBIA BRACE ACQUISITION CORP. By: (SEAL) - ------------------------- -------------------------- Name: Title: 5 6 ATTEST: DORSCH PROSTHETICS & ORTHOTICS, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: DOBI-SYMPLEX, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: GREINER AND SAUR ORTHOPEDICS, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: J.E. HANGER, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: J.E. HANGER OF CALIFORNIA, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: MEMPHIS ORTHOPEDIC, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: 6 7 ATTEST: RALPH STORRS, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: SCOTT ORTHOPEDICS, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: SCOTT ORTHOPEDICS OF NORTHERN COLORADO, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: YORK PROSTHETICS, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: ZIELKE ORTHOTICS & PROSTHETICS, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: 7 EX-10.GGGG 11 STOCK OPTION/VESTING AGREEMENTS (4TH AMENDMENT). 1 EXHIBIT 10(gggg) FOURTH AMENDMENT TO STOCK OPTION AND VESTING AGREEMENTS AND AMENDMENT AGREEMENT THIS FOURTH AMENDMENT (this "Amendment"), dated as of October 27, 1995, is by and among Chemical Venture Capital Associates, A California Limited Partnership ("CVCA"), Chemical Equity Associates, A California Limited Partnership ("CEA"), Hanger Orthopedic Group, Inc., a Delaware corporation (the "Company") and Messrs. Ronald J. Manganiello, Ivan R. Sabel and Richard A. Stein (such individuals hereinafter referred to individually as an "Optionee" and collectively as the "Optionees"). This Amendment amends (i) the Stock Option and Vesting Agreements, dated as of March 14, 1991, by and between CVCA and the Optionees (the "Additional Manager Option Agreements") and (ii) the Stock Option and Vesting Agreements, dated as of May 16, 1994, by and between CVCA and the Optionees (the "New Manager Option Agreements"). WHEREAS, pursuant to the Stock Option and Vesting Agreements, dated as of August 13, 1990, by and between CVCA and the Optionees (the "Manager Option Agreements"), CVCA granted options to the Optionees and Joseph M. Cestaro to purchase a total of 496,250 shares of common stock, par value $.01 per share, of the Company (the "Common Stock"), which number of shares gave effect to the one-for-four reverse split of the Common Stock effected on December 31, 1990; and, as a result of the cancellation on March 31, 1991 of an option for 82,500 shares upon the resignation of Joseph M. Cestaro, options were then held by the Optionees for a total of 413,750 shares (the "Manager Options") under the Manager Option Agreements; WHEREAS, pursuant to paragraph 3 of the Amendment Agreement, dated as of August 13, 1990, by and among the Company, CVCA, CEA, the Optionees and Joseph M. Cestaro (the "Amendment Agreement"), CVCA agreed to promptly pay to the Company 27.5% of the exercise price received by CVCA upon the exercise of any Manager Options (the "Company Payment"); WHEREAS, pursuant to the Additional Manager Option Agreements, CVCA granted options to the Optionees (the "Additional Manager Options") to purchase from CVCA an aggregate of 348,265 shares of Common Stock in accordance with the terms of the Additional Manager Option Agreements; WHEREAS, CVCA, CEA and Exeter Capital, L.P., a Delaware Limited Partnership ("Exeter"), entered into an agreement, dated as of February 20, 1992 (the "Termination Agreement"), pursuant to paragraph 6 of which CVCA and Exeter agreed to enter into an agreement amending each of the Manager Option Agreements and 1 2 Additional Manager Option Agreements to provide that Exeter would be obligated as optionor with respect to 24.16% of the shares of Common Stock covered by each of the Manager Options and Additional Manager Options; WHEREAS, CVCA, CEA, Exeter, the Company and the Optionees entered into an Amendment to Stock Option and Vesting Agreements and Amendment Agreement, dated as of February 20, 1992 (the "First Amendment"), pursuant to which, among other things, (i) each Manager Option Agreement and Additional Manager Option Agreement was amended to provide that of the shares of Common Stock underlying each Manager Option and Additional Manager Option, 75.84% of the shares could be purchased by the Optionees from CVCA and 24.16% of the shares could be purchased by the Optionees from Exeter, with each Optionee being required to provide separate written notices to each of CVCA and Exeter with respect to each exercise of a Manager Option or Additional Manager Option by the Optionee, and that 75.84% and 24.16% of the shares of Common Stock purchased and purchase price payable by the Optionee must be purchased from and paid to CVCA and Exeter, respectively; (ii) the Amendment Agreement was amended to provide that 75.84% and 24.16% of the Company Payment would be made by CVCA and Exeter, respectively; and (iii) each of CVCA and Exeter would not be liable for any obligation of the other under the Manager Option Agreements and the Manager Options granted pursuant thereto or the Additional Manager Option Agreements and the Additional Manager Options granted pursuant thereto, as amended by the First Amendment; WHEREAS, the Manager Option Agreements and the Manager Options granted pursuant thereto expired on May 15, 1994, together with the expiration on that date of the obligation of CVCA and Exeter to pay the Company Payment, as set forth in the Amendment Agreement and the First Amendment; WHEREAS, pursuant to the New Manager Option Agreements, CVCA granted options to the Optionees to purchase a total of 313,788 shares of Common Stock (the "New Manager Options") to replace the 75.84% portion of the shares of Common Stock that were previously purchasable by the Optionees from CVCA under the Manager Option Agreements and the Manager Options that expired on May 15, 1994 (it being understood by the Company that it has no right to a Company Payment with respect to such New Manager Option Agreements); WHEREAS, CVCA, CEA, the Company and the Optionees entered into a Second Amendment to Stock Option and Vesting Agreements and Amendment Agreement, dated as of May 16, 1994 (the "Second Amendment"), pursuant to which each Additional Manager Option Agreement between CVCA and the Optionees was amended by replacing the then existing expiration date of December 14, 1994, with a new expiration date of December 14, 1995, with such extension having no effect on the expiration date of the exercise period relating to the 24.16% portion of each Additional Manager Option, which expired on December 14, 1994 and for which Exeter was solely responsible as provided under the terms of the First Amendment; 3 WHEREAS, CVCA, CEA, the Company and the Optionees entered into a Third Amendment to Stock Option and Vesting Agreements and Amendment Agreement, dated as of September 22, 1994 (the "Third Amendment"), pursuant to which each New Manager Option Agreement and each Additional Manager Option Agreement between CVCA and the Optionees was amended by (i) changing the exercise price per share of each New Manager Option and each Additional Manager Option to equal $3.875, which exercise price exceeded the closing sale price of $3.625 per share of Common Stock as reported on the American Stock Exchange as of the close of business on September 22, 1994, (ii) extending the expiration date of each New Manager Option from May 16, 1995 to March 22, 1996 and (iii) extending the expiration date of each Additional Manager Option from December 14, 1995 to March 22, 1996; and WHEREAS, CVCA, CEA, the Company and Ronald J. Manganiello each desire to further amend each New Manager Option Agreement and each Additional Manager Option Agreement between CVCA and Ronald J. Manganiello to (i) extend the expiration date of the New Manager Option of Ronald J. Manganiello from March 22, 1996 to March 22, 1997; (ii) extend the expiration date of the Additional Manager Option of Ronald J. Manganiello from March 22, 1996 to March 22, 1997; and (iii) provide for the payment of the exercise price of the New Manager Option and Additional Manager Option of Ronald J. Manganiello with cash and/or the reduction in the number of shares of Common Stock issuable upon the exercise of the subject option. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements herein contained, the parties hereto agree as follows: 1. Each and all of the recital paragraphs set forth above are hereby incorporated as if set forth herein. 2. Paragraph 3(b)(i) of the New Manager Option Agreement between CVCA and Ronald J. Manganiello is hereby amended by replacing the existing expiration date of March 22, 1996, with the new expiration date of March 22, 1997. 3. Paragraph 3(b)(i) of the Additional Manager Option Agreement between CVCA and Ronald J. Manganiello is hereby amended by replacing the existing expiration date of March 22, 1996, with the new expiration date of March 22, 1997. 4. Paragraph 5 of the New Manager Option Agreement between CVCA and Ronald J. Manganiello is hereby amended by replacing the existing text thereof with the following language: 5. Exercise of Option. Written notice of the exercise of the Option or any portion thereof shall be given to CVCA accompanied by the aggregate Exercise Price for the Option Shares proposed to be acquired payable (i) 3 4 in cash by certified or bank cashier's check, (ii) by instructing CVCA to cancel that portion of this Option exercisable for that number of shares of Company Common Stock (the "Relinquished Shares") having an aggregate Market Value on the last business day immediately preceding the date of exercise equal to sum of (A) the Exercise Price multiplied by the number of Relinquished Shares plus (B) the Exercise Price multiplied by the number of shares subject to such exercise or (iii) by a combination of the foregoing. If any exercise is made pursuant to clause (ii) above, the Option shall automatically be adjusted to reduce the number of shares issuable upon exercise of the Option by the number of Relinquished Shares. No exercise may be made pursuant to clause (ii) above if the number of shares subject to such exercise and the number of Relinquished Shares exceeds the number of shares issuable upon exercise of the Option. As used herein, "Market Value" means as to any security the average of the closing prices of such security's sales on the United States securities exchanges on which such security may at the time be listed, or, if there have no sales on any such exchange on the subject day, the average of the highest bid and lowest asked prices on such exchange at the end of such day, or, if on any such day such security is not so listed, the average of the representative bid and asked prices quoted on the NASDAQ System as of 4:00 P.M., New York time on such day, or, if on any day such security is not quoted in the NASDAQ System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar or successor organization. 5. Paragraph 5 of the Additional Manager Option Agreement between CVCA and Ronald J. Manganiello is hereby amended by replacing the existing text thereof with the following language: 5. Exercise of Option. Written notice of the exercise of the Option or any portion thereof shall be given to CVCA accompanied by the aggregate Exercise Price for the Vested Shares proposed to be acquired payable (i) in cash by certified or bank cashier's check, (ii) by instructing CVCA to cancel that portion of this Option exercisable for that number of shares of Company Common Stock (the "Relinquished Shares") having an aggregate Market Value on the last business day immediately preceding the date of exercise equal to sum of (A) the Exercise Price multiplied by the number of Relinquished Shares plus (B) the Exercise Price multiplied by the number of shares subject to such exercise or (iii) by a combination of the foregoing. If any exercise is made 4 5 pursuant to clause (ii) above, the Option shall automatically be adjusted to reduce the number of shares issuable upon exercise of the Option by the number of Relinquished Shares. No exercise may be made pursuant to clause (ii) above if the number of shares subject to such exercise and the number of Relinquished Shares exceeds the number of shares issuable upon exercise of the Option. As used herein, "Market Value" means as to any security the average of the closing prices of such security's sales on the United States securities exchanges on which such security may at the time be listed, or, if there have no sales on any such exchange on the subject day, the average of the highest bid and lowest asked prices on such exchange at the end of such day, or, if on any such day such security is not so listed, the average of the representative bid and asked prices quoted on the NASDAQ System as of 4:00 P.M., New York time on such day, or, if on any day such security is not quoted in the NASDAQ System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar or successor organization. 6. Except as otherwise herein amended, the terms and conditions of the New Manager Option Agreements, the Additional Manager Option Agreements and the Amendment Agreement shall remain in force. [SIGNATURES APPEAR ON NEXT PAGE] 5 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. CHEMICAL VENTURE CAPITAL ASSOCIATES By: CHEMICAL VENTURE PARTNERS, Its General Partner By: MITCHELL J. BLUTT, M.D. ------------------------------------ Mitchell J. Blutt, M.D., Executive Partner CHEMICAL EQUITY ASSOCIATES By: CHEMICAL VENTURE PARTNERS, Its General Partner By: MITCHELL J. BLUTT, M.D. --------------------------------------- Mitchell J. Blutt, M.D., Executive Partner HANGER ORTHOPEDIC GROUP, INC. By: IVAN R. SABEL ---------------------------------- Ivan R. Sabel President OPTIONEE RONALD J. MANGANIELLO --------------------------------- Ronald J. Manganiello 6 EX-10.HHHH 12 STOCK OPTION/VESTING AGREEMENTS (5TH AMENDMENT). 1 EXHIBIT 10(hhhh) FIFTH AMENDMENT TO STOCK OPTION AND VESTING AGREEMENTS AND AMENDMENT AGREEMENT THIS FIFTH AMENDMENT (this "Amendment"), dated as of October 27, 1995, is by and among Chemical Venture Capital Associates, A California Limited Partnership ("CVCA"), Chemical Equity Associates, A California Limited Partnership ("CEA"), Hanger Orthopedic Group, Inc., a Delaware corporation (the "Company") and Messrs. Ronald J. Manganiello, Ivan R. Sabel and Richard A. Stein (such individuals hereinafter referred to individually as an "Optionee" and collectively as the "Optionees"). This Amendment amends (i) the Stock Option and Vesting Agreements, dated as of March 14, 1991, by and between CVCA and the Optionees (the "Additional Manager Option Agreements") and (ii) the Stock Option and Vesting Agreements, dated as of May 16, 1994, by and between CVCA and the Optionees (the "New Manager Option Agreements"). WHEREAS, pursuant to the Stock Option and Vesting Agreements, dated as of August 13, 1990, by and between CVCA and the Optionees (the "Manager Option Agreements"), CVCA granted options to the Optionees and Joseph M. Cestaro to purchase a total of 496,250 shares of common stock, par value $.01 per share, of the Company (the "Common Stock"), which number of shares gave effect to the one-for-four reverse split of the Common Stock effected on December 31, 1990; and, as a result of the cancellation on March 31, 1991 of an option for 82,500 shares upon the resignation of Joseph M. Cestaro, options were then held by the Optionees for a total of 413,750 shares (the "Manager Options") under the Manager Option Agreements; WHEREAS, pursuant to paragraph 3 of the Amendment Agreement, dated as of August 13, 1990, by and among the Company, CVCA, CEA, the Optionees and Joseph M. Cestaro (the "Amendment Agreement"), CVCA agreed to promptly pay to the Company 27.5% of the exercise price received by CVCA upon the exercise of any Manager Options (the "Company Payment"); WHEREAS, pursuant to the Additional Manager Option Agreements, CVCA granted options to the Optionees (the "Additional Manager Options") to purchase from CVCA an aggregate of 348,265 shares of Common Stock in accordance with the terms of the Additional Manager Option Agreements; WHEREAS, CVCA, CEA and Exeter Capital, L.P., a Delaware Limited Partnership ("Exeter"), entered into an agreement, dated as of February 20, 1992 (the "Termination Agreement"), pursuant to paragraph 6 of which CVCA and Exeter agreed to enter into an agreement amending each of the Manager Option Agreements and Additional Manager Option Agreements to provide that Exeter would be obligated as optionor with respect to 24.16% of the shares of 2 Common Stock covered by each of the Manager Options and Additional Manager Options; WHEREAS, CVCA, CEA, Exeter, the Company and the Optionees entered into an Amendment to Stock Option and Vesting Agreements and Amendment Agreement, dated as of February 20, 1992 (the "First Amendment"), pursuant to which, among other things, (i) each Manager Option Agreement and Additional Manager Option Agreement was amended to provide that of the shares of Common Stock underlying each Manager Option and Additional Manager Option, 75.84% of the shares could be purchased by the Optionees from CVCA and 24.16% of the shares could be purchased by the Optionees from Exeter, with each Optionee being required to provide separate written notices to each of CVCA and Exeter with respect to each exercise of a Manager Option or Additional Manager Option by the Optionee, and that 75.84% and 24.16% of the shares of Common Stock purchased and purchase price payable by the Optionee must be purchased from and paid to CVCA and Exeter, respectively; (ii) the Amendment Agreement was amended to provide that 75.84% and 24.16% of the Company Payment would be made by CVCA and Exeter, respectively; and (iii) each of CVCA and Exeter would not be liable for any obligation of the other under the Manager Option Agreements and the Manager Options granted pursuant thereto or the Additional Manager Option Agreements and the Additional Manager Options granted pursuant thereto, as amended by the First Amendment; WHEREAS, the Manager Option Agreements and the Manager Options granted pursuant thereto expired on May 15, 1994, together with the expiration on that date of the obligation of CVCA and Exeter to pay the Company Payment, as set forth in the Amendment Agreement and the First Amendment; WHEREAS, pursuant to the New Manager Option Agreements, CVCA granted options to the Optionees to purchase a total of 313,788 shares of Common Stock (the "New Manager Options") to replace the 75.84% portion of the shares of Common Stock that were previously purchasable by the Optionees from CVCA under the Manager Option Agreements and the Manager Options that expired on May 15, 1994 (it being understood by the Company that it has no right to a Company Payment with respect to such New Manager Option Agreements); WHEREAS, CVCA, CEA, the Company and the Optionees entered into a Second Amendment to Stock Option and Vesting Agreements and Amendment Agreement, dated as of May 16, 1994 (the "Second Amendment"), pursuant to which each Additional Manager Option Agreement between CVCA and the Optionees was amended by replacing the then existing expiration date of December 14, 1994, with a new expiration date of December 14, 1995, with such extension having no effect on the expiration date of the exercise period relating to the 24.16% portion of each Additional Manager Option, which expired on December 14, 1994 and for which Exeter was solely responsible as provided under the terms of the First Amendment; WHEREAS, CVCA, CEA, the Company and the Optionees entered into 3 a Third Amendment to Stock Option and Vesting Agreements and Amendment Agreement, dated as of September 22, 1994 (the "Third Amendment"), pursuant to which each New Manager Option Agreement and each Additional Manager Option Agreement between CVCA and the Optionees was amended by (i) changing the exercise price per share of each New Manager Option and each Additional Manager Option to equal $3.875, which exercise price exceeded the closing sale price of $3.625 per share of Common Stock as reported on the American Stock Exchange as of the close of business on September 22, 1994, (ii) extending the expiration date of each New Manager Option from May 16, 1995 to March 22, 1996 and (iii) extending the expiration date of each Additional Manager Option from December 14, 1995 to March 22, 1996; WHEREAS, CVCA, CEA, the Company and Ronald J. Manganiello entered into a Fourth Amendment to Stock Option and Vesting Agreements and Amendment Agreement, dated as of October 27, 1995 (the "Fourth Amendment"), pursuant to which each New Manager Option Agreement and each Additional Manager Option Agreement between CVCA and Ronald J. Manganiello was amended by (i) extending the expiration date of the New Manager Option of Ronald J. Manganiello from March 22, 1996 to March 22, 1997; (ii) extending the expiration date of the Additional Manager Option of Ronald J. Manganiello from March 22, 1996 to March 22, 1997; and (iii) providing for the payment of the exercise price of the New Manager Option and Additional Manager Option of Ronald J. Manganiello with cash and/or shares of Common Stock; and WHEREAS, CVCA, CEA, the Company, Ivan R. Sabel and Richard A. Stein each desire to further amend each New Manager Option Agreement and each Additional Manager Option Agreement between CVCA and Ivan R. Sabel and Richard A. Stein to (i) extend the expiration date of the New Manager Options of each of Ivan R. Sabel and Richard A. Stein from March 22, 1996 to March 22, 1997 with respect to 67,000 shares underlying the New Manager Options of Ivan R. Sabel and 33,000 shares underlying the New Manager Options of Richard A. Stein, with the expiration date for the balance of 51,500 shares for Ivan R. Sabel and 29,568 shares for Richard A. Stein that underlie their respective New Manager Options being extended from March 22, 1996 to December 31, 1997; (ii) extend the expiration date of the Additional Manager Options of each of Ivan R. Sabel and Richard A. Stein from March 22, 1996 to December 31, 1997; and (iii) provide for the payment of the exercise price of each such New Manager Option and Additional Manager Option of Ivan R. Sabel and Richard A. Stein with cash and/or the reduction in the number of shares of Common Stock issuable upon the exercise of the subject option. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements herein contained, the parties hereto agree as follows: 3 4 1. Each and all of the recital paragraphs set forth above are hereby incorporated as if set forth herein. 2. Paragraph 3(b)(i) of each New Manager Option Agreement between CVCA and each of Ivan R. Sabel and Richard A. Stein is hereby amended by replacing the existing expiration date of March 22, 1996, with (A) the new expiration date of March 22, 1997 with respect to 67,000 shares for Ivan R. Sabel and 33,000 shares for Richard A. Stein and (B) the new expiration date of December 31, 1997 with respect to the balance of the 51,500 shares underlying such New Manager Option of Ivan R. Sabel and 29,568 shares underlying such New Manager Option of Richard A. Stein. 3. Paragraph 3(b)(i) of each Additional Manager Option Agreement between CVCA and each of Ivan R. Sabel and Richard A. Stein is hereby amended by replacing the existing expiration date of March 22, 1996, with the new expiration date of December 31, 1997. 4. Paragraph 5 of each New Manager Option Agreement between CVCA and each of Ivan R. Sabel and Richard A. Stein is hereby amended by replacing the existing text thereof with the following language: 5. Exercise of Option. Written notice of the exercise of the Option or any portion thereof shall be given to CVCA accompanied by the aggregate Exercise Price for the Option Shares proposed to be acquired payable (i) in cash by certified or bank cashier's check, (ii) by instructing CVCA to cancel that portion of this Option exercisable for that number of shares of Company Common Stock (the "Relinquished Shares") having an aggregate Market Value on the last business day immediately preceding the date of exercise equal to sum of (A) the Exercise Price multiplied by the number of Relinquished Shares plus (B) the Exercise Price multiplied by the number of shares subject to such exercise or (iii) by a combination of the foregoing. If any exercise is made pursuant to clause (ii) above, the Option shall automatically be adjusted to reduce the number of shares issuable upon exercise of the Option by the number of Relinquished Shares. No exercise may be made pursuant to clause (ii) above if the number of shares subject to such exercise and the number of Relinquished Shares exceeds the number of shares issuable upon exercise of the Option. As used herein, "Market Value" means as to any security the average of the closing prices of such security's sales on the United States securities exchanges on which such security may at the time be listed, or, if there have no sales on any such exchange on the subject day, the average of the highest bid and lowest asked prices on such exchange at the end of such 4 5 day, or, if on any such day such security is not so listed, the average of the representative bid and asked prices quoted on the NASDAQ System as of 4:00 P.M., New York time on such day, or, if on any day such security is not quoted in the NASDAQ System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar or successor organization. 5. Paragraph 5 of each Additional Manager Option Agreement between CVCA and each of Ivan R. Sabel and Richard A. Stein is hereby amended by replacing the existing text thereof with the following language: 5. Exercise of Option. Written notice of the exercise of the Option or any portion thereof shall be given to CVCA accompanied by the aggregate Exercise Price for the Option Shares proposed to be acquired payable (i) in cash by certified or bank cashier's check, (ii) by instructing CVCA to cancel that portion of this Option exercisable for that number of shares of Company Common Stock (the "Relinquished Shares") having an aggregate Market Value on the last business day immediately preceding the date of exercise equal to sum of (A) the Exercise Price multiplied by the number of Relinquished Shares plus (B) the Exercise Price multiplied by the number of shares subject to such exercise or (iii) by a combination of the foregoing. If any exercise is made pursuant to clause (ii) above, the Option shall automatically be adjusted to reduce the number of shares issuable upon exercise of the Option by the number of Relinquished Shares. No exercise may be made pursuant to clause (ii) above if the number of shares subject to such exercise and the number of Relinquished Shares exceeds the number of shares issuable upon exercise of the Option. As used herein, "Market Value" means as to any security the average of the closing prices of such security's sales on the United States securities exchanges on which such security may at the time be listed, or, if there have no sales on any such exchange on the subject day, the average of the highest bid and lowest asked prices on such exchange at the end of such day, or, if on any such day such security is not so listed, the average of the representative bid and asked prices quoted on the NASDAQ System as of 4:00 P.M., New York time on such day, or, if on any day such security is not quoted in the NASDAQ System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar or successor organization. 5 6 6. Except as otherwise herein amended, the terms and conditions of the New Manager Option Agreements, the Additional Manager Option Agreements and the Amendment Agreement shall remain in force. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. CHEMICAL VENTURE CAPITAL ASSOCIATES By: CHEMICAL VENTURE PARTNERS, Its General Partner By: MITCHELL J. BLUTT, M.D. ----------------------------------- Mitchell J. Blutt, M.D., Executive Partner CHEMICAL EQUITY ASSOCIATES By: CHEMICAL VENTURE PARTNERS, Its General Partner By: MITCHELL J. BLUTT, M.D. ------------------------------------ Mitchell J. Blutt, M.D., Executive Partner HANGER ORTHOPEDIC GROUP, INC. By: IVAN R. SABEL ------------------------------- Ivan R. Sabel President OPTIONEES IVAN R. SABEL -------------------------------------- Ivan R. Sabel RICHARD A. STEIN ------------------------------------- Richard A. Stein 6 EX-10.IIII 13 NATIONSBANK FINANCING AGREEMENT (9TH AMENDMENT). 1 EXHIBIT 10(iiii) NINTH AMENDMENT TO FINANCING AND SECURITY AGREEMENT THIS NINTH AMENDMENT TO FINANCING AND SECURITY AGREEMENT (this "Agreement") is made the 16th day of November, 1995, by HANGER ORTHOPEDIC GROUP, INC., a corporation organized and existing under the laws of the State of Delaware (the "Borrower"), and NATIONSBANK, N.A., successor by merger to Maryland National Bank, its successor and assigns (the "Lender"). RECITALS A. The Borrower and the Lender entered into a Financing and Security Agreement dated July 3, 1993, (the same, as amended, modified, substituted, extended, and renewed from time to time, the "Financing Agreement"). The Financing Agreement includes, without limitation, the following amendments:
Number of Amendment Date ------------------- ---- First November 17, 1993 Second December 22, 1993 Third April 15, 1994 Fourth May 3, 1994 Fifth August 12, 1994 Sixth September 13, 1994 Seventh March 24, 1995 Eighth October 2, 1995
B. Pursuant to the provisions of the Financing Agreement, the Lender has from time to time made certain credit facilities available to the Borrower, including the following: (i) a revolving credit facility in the current maximum principal amount of $13,000,000 (the "Revolving Loan"); (ii) one or more term loans in the aggregate principal amount of $2,375,000 (the "Term Loans"); and (iii) an acquisition loan in the principal amount of $3,000,000 (the "Acquisition Loan"). C. The Borrower has requested that the Lender agree to eliminate the scheduled reductions of the Revolving Credit Committed Amount and to maintain the Revolving Credit Committed Amount at $13,000,000. The Borrower has also requested that the Lender extend the maturity date of the Revolving Loan, increase the limit on the Borrower's capital expenditures and eliminate the Revolving Line of Unused Line Fee and make certain other changes in the Financing Agreement. 2 D. The Lender is willing to agree to the Borrower's requests on the condition, among others, that this Agreement be executed. AGREEMENTS NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, receipt of which is hereby acknowledged, the Borrower and the Lender agree as follows: 1. The Borrower and the Lender agree that the Recitals above are a part of this Agreement. Unless otherwise expressly defined in this Agreement, terms defined in the Financing Agreement shall have the same meaning under this Agreement. 2. Amendments. The Financing Agreement is hereby amended as follows: (a) Elimination of Certain Definitions. Effective as of the date hereof, the following definitions shall henceforth be eliminated from Section 1.1 of the Financing Agreement: "Revolving Credit Unused Line Fee" "Revolving Loan Mandatory Prepayment" and "Revolving Loan Mandatory Prepayments" (b) Modification of Certain Definitions. Effective as of the date hereof, the following definitions in Section 1.1 of the Financing Agreement are amended and restated as follows: "Eligible Inventory" means all of the Borrower's and each of its Subsidiary's Inventory, valued at the lowest of (a) the Borrower's and each of its Subsidiary's net purchase cost or net manufacturing cost, (b) the lowest bulk market price, (c) the Borrower's and each of its Subsidiary's lowest bulk selling price, minus estimated expenses for completion and disposal, and minus an allowance for normal profit margin for bulk sales, (d) any ceiling prices which may be established by any Laws of any Governmental Authority or (e) prevailing market value, excluding, however, any Inventory which consists of (i) any goods located outside of the United States, (ii) any goods located outside of a State in which the Lender has properly and unavoidably perfected its security interests by filing, free and clear of all other Liens, (iii) any goods not in the actual possession of, or in transit to, or from, the Borrower or any Subsidiary, (iv) any goods in the possession of a bailee, warehouseman, consignee or similar third party, (v) work-in-process, (vi) any goods the sale or other disposition of which has given rise to a Receivable, (vii) any goods as to 2 3 which the Lender determines in the exercise of its sole and absolute discretion at any time and in good faith are defective, unmerchantable, slow moving or obsolete, and (viii) any goods which the Lender in the good faith exercise of its sole and absolute discretion has deemed to be ineligible because the Lender otherwise considers the collateral value thereof to the Lender to be impaired or its ability to realize such value to be insecure. In the event of any dispute, under the foregoing criteria, as to whether goods are, or have ceased to be, Eligible Inventory, the decision of the Lender in the good faith exercise of its sole and absolute discretion shall control. "Eligible Receivable" and "Eligible Receivables" mean, at any time of determination thereof, each Account which conforms and continues to conform to the following criteria to the satisfaction of the Lender: (a) the account arose in the ordinary course of the Borrower's or any Subsidiary's business from a bona fide outright sale or lease of goods by the Borrower or a Subsidiary, or from services performed by the Borrower, and (i) such goods have been delivered to the appropriate Account Debtors or their respective designees, the Borrower or a Subsidiary has in its possession shipping and delivery receipts evidencing such shipment and delivery, no return, rejection or repossession has occurred, and such goods have been finally accepted by the Account Debtor, or (ii) such services have been satisfactorily completed and accepted by the appropriate Account Debtor; (b) the Account is based upon an enforceable order or contract, written or oral, for goods delivered or for services performed, and the same were shipped, held, or performed in accordance with such order or contract; (c) the title of the Borrower or its Subsidiary to the Account and, except as to the Account Debtor and any creditor which finances the Account Debtor's purchase of such goods, to any goods is absolute and is not subject to any prior assignment, claim, Lien, or security interest, except Permitted Liens and Liens created by the Account Debtors in connection with their interests in the goods, and the Borrower or its Subsidiary otherwise have the full and unqualified right and power to assign and grant a security interest in it to the Lender as security and collateral for the payment of the Obligations; (d) the amount shown on the books of the Borrower or its Subsidiary and on any invoice, certificate, schedule or statement delivered to the Lender is owing to the Borrower or its Subsidiary and no partial payment has been received unless reflected with that delivery; (e) the Account is not subject to any claim of reduction, counterclaim, setoff, recoupment, or other defense in law or equity, or any claim for credits, allowances, or adjustments by the Account Debtor because of returned, inferior, or damaged goods or unsatisfactory 3 4 services, or for any other reason; (f) the Account Debtor has not returned or refused to retain, or otherwise notified the Borrower or any Subsidiary of any dispute concerning, or claimed nonconformity of, any of the goods or services from the sale of which the Account arose; (g) the Account is not outstanding more than one hundred twenty (120) days from the date of the invoice therefor; (h) the account is not owing by any Account Debtor for which the Lender has deemed fifty percent (50%) or more of such Account Debtor's other accounts (or any portion thereof) due to the Borrower to be non-Eligible Receivables; (i) the Account does not arise out of a contract with, or order from, an Account Debtor that, by its terms, forbids or makes void or unenforceable the assignment by the Borrower to the Lender of the Account arising with respect thereto; (j) the Account Debtor is not a Subsidiary or other Affiliate of the Borrower; (k) the Account Debtor is not incorporated in or primarily conducting business in any jurisdiction located outside of the United States of America; (l) the Borrower or any Subsidiary is not indebted in any manner to the Account Debtor, with the exception of customary credits, adjustments and/or discounts given to an Account Debtor by the Borrower or any Subsidiary in the ordinary course of their businesses, (m) no part of the Account represents a progress billing or a retainage, and (n) the Lender in the exercise of its sole and absolute discretion has not deemed the Account ineligible because of uncertainty as to the creditworthiness of the Account Debtor or because the Lender otherwise considers the collateral value thereof to the Lender to be impaired or its ability to realize such value to be insecure. In the event of any dispute, under the foregoing criteria, as to whether an account is, or has ceased to be, an Eligible Receivable, the decision of the Lender in the exercise of its sole and absolute discretion shall control. "Revolving Credit Expiration Date" means June 30, 1997. (c) Addition of Certain Definitions. Effective as of the date hereof, the following definitions shall be added to Section 1.1 of the Financing Agreement: "Borrowing Base" shall have the meaning given such term in Section 2.1.10. "Borrowing Base Deficiency" shall have the meaning given such term in Section 2.1.10. 4 5 "Borrowing Base Report" and "Borrowing Base Reports" shall have the meaning given such terms in Section 2.1.10. (d) Revolving Credit Facility Fee. Effective as of the date hereof, Section 2.1.8 of the Financing Agreement is amended and restated in its entirety as follows: 2.1.8 Revolving Credit Facility Fee. The Borrower shall pay to the Lender a revolving credit commitment fee, (a "Revolving Credit Facility Fee") on June 30, 1996 in an amount equal to Twenty Five Thousand Dollars ($25,000). (e) Elimination of Mandatory Reduction. Effective as of the date hereof, Section 2.1.9 of the Financing Agreement is deleted in its entirety. (f) Elimination of Revolving Credit Unused Line Fee. Effective as of the date hereof, existing Section 2.1.10 of the Financing Agreement is deleted in its entirety. (g) Borrowing Base. Paragraph 3 of the Fifth Amendment to Financing and Security Agreement dated August 12, 1994 is hereby deleted and is replaced by replacement Section 2.1.10: 2.1.10 Borrowing Base for Revolving Loan. (a) From and after April 1, 1996, the Revolving Credit Committed Amount shall equal the lesser of (i) $13,000,000, or (ii) the most current Borrowing Base (as hereinafter defined). As used herein, the term "Borrowing Base" means at any time an amount equal to the aggregate of (i) eighty percent (80%) of the amount of Eligible Receivables, plus (ii) fifty percent (50%) of the amount of Eligible Inventory but not to exceed $7,000,000. (b) If at any time during the period referenced in sub-part (a) of this Section the outstanding principal amount outstanding under the Revolving Loan exceeds the Borrowing Base, a borrowing base deficiency ("Borrowing Base Deficiency") shall exist. Each time a Borrowing Base Deficiency exists, the Borrower shall pay to the Lender the Borrowing Base Deficiency on demand from time to time. Without implying any limitation on the Lender's discretion with respect to determining the Borrowing Base, the criteria for Eligible Receivables and for Eligible Inventory contained in the respective definitions of Eligible Receivables and of Eligible Inventory are in part based 5 6 upon the business operations of the Borrower and the Subsidiaries existing on or about the date of this Agreement and upon information or records furnished to the Lender by the Borrower and its Subsidiaries. If at any time or from time to time hereafter, the business operations of the Borrower or any of its Subsidiaries change so as to impair the financial condition of the Borrower or any of its Subsidiaries or impair the value of Collateral or such information or records furnished to the Lender are materially incorrect or materially misleading, the Lender in its discretion, may at any time and from time to time during the duration of the Financing Agreement upon prior written notice to the Borrower change such Borrowing Base criteria and add new Borrowing Base criteria. (c) The Borrower will furnish to the Lender no less frequently than the fifteenth day of each month and at such other times as may be requested by the Lender a report of the Borrowing Base (each a "Borrowing Base Report"; collectively, the "Borrowing Base Reports") in the form required from time to time by the Lender, appropriately completed and duly signed. The Borrowing Base Report shall contain the amount and payments on the Receivables, the value of the Inventory and the calculations of the Borrowing Base as of the end of the preceding month, all in such detail, and accompanied by such supporting and other information, as the Lender may from time to time request. Upon the Lender's request and upon the creation of any Receivables, or at such intervals as the Lender may require, the Borrower shall provide the Lender with: (a) confirmatory assignment schedules; (b) copies of Account Debtor invoices; (c) evidence of shipment or delivery; (d) such further schedules, documents and/or information regarding Receivables and the Inventory as the Lender may reasonably require. The items to be provided under this subsection shall be in form satisfactory to the Lender and certified as true and correct by a Responsible Officer, and delivered to the Lender from time to time solely for the Lender's convenience in maintaining records of the Collateral. The Borrower's failure to deliver any of such items the Lender shall not affect, terminate, modify or otherwise limit the Lender's security interest in the Collateral. (h) Capital Expenditures. Effective as of the date hereof, Section 6.4.5 of the Financing Agreement is amended and restated in its entirety as follows: 6 7 6.4.5 Capital Expenditures. Without the prior written consent of the Lender, the Borrower will not, or will not permit any Subsidiary to, directly or indirectly (by way of the acquisition of the securities of a Person or otherwise other than the Acquisitions permitted by this Agreement), make any expenditure in respect of the purchase or other acquisition (including by way of incurring Lease Obligations which should be, in accordance with GAAP, capitalized) of Fixed or Capital Assets (excluding normal replacements and maintenance which are properly charged to current operations in the ordinary course of business) in the aggregate for the Borrower and their Subsidiaries (taken as a whole) in any Fiscal Year exceeding One Million Two Hundred Thousand Dollars ($1,200,000). 3. Conditions Precedent. This Agreement shall become effective on the date the Lender receives the following documents, each of which shall be satisfactory in form and substance to the Lender: (a) this Agreement executed and delivered by the Borrower and the Guarantors; (b) a certificate of an officer of the Borrower to the effect that there has been no change to the Articles of Incorporation or Bylaws of the Borrower as delivered to the Lender in connection with the Loans made under the Financing Agreement, all evidence of all actions taken by the Borrower approving each Financing Document to which it is a party and as to the incumbency and the specimen signature of each officer of the Borrower executing this Agreement, and other documents executed in connection herewith and a certification by the President or Vice President of the Borrower as to the incumbency and signature of the Secretary of the Borrower and any other documents as the Lender may reasonably require the Borrower to execute in form and substance acceptable to the Lender; and (c) proof that the Borrower has paid all costs and expenses of the Lender in connection with the Loans and with this Agreement, including but not limited to all Lender's attorneys' fees. 4. Representations; No Novation. The Borrower hereby issues, ratifies and confirms the representations, warranties and covenants contained in the Financing Agreement, as amended hereby. The Borrower represents and warrants that there exists no Event of Default or event which with the giving of notice or passage of time would constitute an Event of Default under the Financing Documents. The Borrower agrees that this Agreement is not intended to and shall not cause a novation with respect to any or all of the Obligations. 7 8 5. Lender Release. The Borrower acknowledges and warrants that the Lender has acted in good faith and has conducted in a commercially reasonable manner its relationships with the Borrower in connection with this Agreement and generally in connection with the Financing Agreement and the Obligations, the Borrower hereby waiving and releasing any claims to the contrary. 6. Expenses. The Borrower shall pay at the time this Agreement is executed and delivered all fees, commissions, costs, charges, taxes and other expenses incurred by the Lender and its counsel in connection with this Agreement, including, but not limited to, reasonable fees and expenses of the Lender's counsel and all recording fees, taxes and charges. 7. Counterparts. This Agreement may be executed in any number of duplicate originals or counterparts, each of such duplicate originals or counterparts shall be deemed to be an original and all taken together shall constitute but one and the same instrument. The Borrower agrees that the Lender may rely on a telecopy of any signature of any Borrower. The Lender agrees that the Borrower may rely on a telecopy of this Agreement executed by the Lender. 8. Entire Agreement. This Agreement contains the entire understanding between the Lender and the Borrower with respect to the subject matter hereof and supersedes any prior understandings and agreements between them respecting the subject matter hereof. 9. Governing Law. This Agreement is one of the Financing Documents in the Financing Agreement and shall be governed by and construed in accordance with the laws of the State of Maryland and shall be deemed an instrument under seal pursuant to said law. 10. Headings. The headings and captions used in this Agreement are for the convenience of the parties only and are not a part of this Agreement. IN WITNESS WHEREOF, the Borrower and the Lender have executed this Agreement under seal as of the date and year first written above. 8 9 ATTEST: HANGER ORTHOPEDIC GROUP, INC. By: (SEAL) - ------------------------- ---------------------- , Secretary Richard A. Stein - -------------- Vice President WITNESS: NATIONSBANK, N.A., as successor by merger to Maryland National Bank By: (SEAL) - ------------------------- ---------------------- Louise M. Webster Vice President 9 10 AGREEMENT OF GUARANTORS The undersigned are the "Guarantors" under various Guaranty of Payment Agreements, dated July 2, 1993 and a Confirmation of Guaranty and Security Agreement dated September 13, 1994 (collectively, as amended, modified, substituted, extended and renewed from time to time, the "Guaranty"), in favor of the foregoing Lender. In order to induce the Lender to enter into the foregoing Agreement, the undersigned (a) consent to the transactions contemplated by, and agreements made by the Borrower under, the foregoing Agreement, and (b) ratify, confirm and reissue the terms, conditions, promises, covenants, grants, assignments, security agreements, agreements, representations, warranties and provisions contained in the Guaranty. Without limiting the foregoing, the undersigned acknowledge and agree that the Obligations (defined in the Financing Agreement) are covered by the Guaranty. WITNESS signatures and seals of the undersigned as of the date of the Agreement. GUARANTORS: ATTEST: ALBUQUERQUE PROSTHETIC CENTER, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: CAPITAL ORTHOPEDICS, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: COLUMBIA BRACE ACQUISITION CORP. By: (SEAL) - ------------------------- -------------------------- Name: Title: 10 11 ATTEST: DORSCH PROSTHETICS & ORTHOTICS, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: DOBI-SYMPLEX, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: GREINER AND SAUR ORTHOPEDICS, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: J.E. HANGER, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: J.E. HANGER OF CALIFORNIA, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: MEMPHIS ORTHOPEDIC, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: 11 12 ATTEST: RALPH STORRS, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: SCOTT ORTHOPEDICS, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: SCOTT ORTHOPEDICS OF NORTHERN COLORADO, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: YORK PROSTHETICS, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: ATTEST: ZIELKE ORTHOTICS & PROSTHETICS, INC. By: (SEAL) - ------------------------- -------------------------- Name: Title: 12 EX-10.JJJJ 14 NATIONSBANK REVOLVING PROMISSORY NOTE. 1 EXHIBIT 10(jjjj) SECOND AMENDED AND RESTATED REVOLVING PROMISSORY NOTE $13,000,000 Bethesda, Maryland November 16, 1995 FOR VALUE RECEIVED, HANGER ORTHOPEDIC GROUP, INC., a Delaware corporation (the "Borrower"), promises to pay to the order of NATIONSBANK, N.A, a national banking association, successor by merger to Maryland National Bank, its successors and assigns (the "Lender"), the principal sum of THIRTEEN MILLION DOLLARS ($13,000,000) (the "Principal Sum"), or so much thereof as has been or may be advanced or readvanced to or for the account of the Borrower pursuant to the terms and conditions of the Financing Agreement (as hereinafter defined), together with interest thereon at the rate or rates hereinafter provided, in accordance with the following: 1. INTEREST. (a) Commencing as of the date hereof and continuing until repayment in full of all sums due hereunder, each advance under this Note (hereafter an "Advance") shall bear interest at either the Lender's fluctuating Prime Rate Option (as hereinafter defined) or the Lender's LIBOR Rate Option (as hereinafter defined). Selection of the interest rate applicable for each Advance shall be made by the Borrower at least three (3) Business Days (as defined in the Financing Agreement) prior to the date of each Advance or any renewal of any prior Advance which is accruing interest at the LIBOR Rate option. In the event the Borrower fails to select either the Prime Rate Option 2 or the LIBOR Rate Option for any Advance or any renewal of any prior Advance which is accruing interest at the LIBOR Rate option, the Borrower shall be conclusively deemed to have elected the Prime Rate Option with respect to such Advance or renewal thereof. (b) For purposes hereof, the "Prime Rate Option" shall mean the fluctuating prime rate of interest established and declared by the Lender from time to time (the "Prime Rate") plus one-quarter of one percent (1/4%) per annum. The Prime Rate Option does not necessarily represent the lowest rate of interest charged by the Lender to borrowers. The rate of interest charged on each Advance accruing interest at the Prime Rate Option shall change immediately and contemporaneously with any change in the Prime Rate. (c) For purposes hereof, the "LIBOR Rate Option" shall mean a fixed rate equal to the daily London Interbank Offered Rate for three-month U.S. Dollar deposits as quoted by the Lender as of 11:00 A.M. (Washington, D.C. time) three (3) business days prior to the date of each advance or renewal thereof, which rate shall be adjusted for any Federal Reserve Board reserve requirements imposed upon the Lender from time to time (the "LIBOR Rate") plus two and one-half percent (2.5%) per annum. (d) Interest on the unpaid Principal Sum shall be computed on the basis of a 360-day year and the actual number of days which have elapsed. -2- 3 2. PAYMENTS AND MATURITY. The unpaid Principal Sum, together with interest thereon at the rate or rates provided above, shall be payable as follows: (a) Interest on the unpaid Principal Sum shall be due and payable monthly, commencing December 1, 1995, and on the first day of each month thereafter to maturity; and (b) Unless sooner paid, the entire unpaid Principal Sum, together with all interest accrued and unpaid thereon, shall be due and payable in full on June 30, 1997. The fact that the balance hereunder may be reduced to zero from time to time pursuant to the Financing Agreement will not affect the continuing validity of this Note or the Financing Agreement, and the balance may be increased to the Principal Sum after any such reduction to zero. 3. DEFAULT INTEREST. Upon the occurrence of an Event of Default (as hereinafter defined), the unpaid Principal Sum shall bear interest thereafter at a rate one percent (1.0%) per annum in excess of the then current rate or rates of interest hereunder until such Event of Default is cured. 4. LATE CHARGES. If the Borrower shall fail to make any payment under the terms of this Note within fifteen (15) days after the date such payment is due, the Borrower shall pay to the Lender on demand a late charge equal to five percent (5%) of such payment. -3- 4 5. APPLICATION AND PLACE OF PAYMENTS. All payments, made on account of this Note shall be applied first to the payment of any late charge then due hereunder, second to the payment of accrued and unpaid interest then due hereunder, and the remainder, if any, shall be applied to the unpaid Principal Sum. All payments on account of this Note shall be paid in lawful money of the United States of America in immediately available funds during regular business hours of the Lender at its principal office at 10 Light Street, Baltimore, Maryland 21202 or at such other times and places as the Lender may at any time and from time to time designate in writing to the Borrower. 6. FINANCING AGREEMENT AND OTHER FINANCING DOCUMENTS. This Note is the "Revolving Note" described in a Financing and Security Agreement dated July 2, 1993 by and between the Borrower and the Lender (as thereafter amended from time to time, the "Financing Agreement"). This Note amends and restates in its entirety that certain Amended and Restated Revolving Promissory Note dated September 13, 1994 from the Borrower in favor of the Lender. The Borrower agrees that the indebtedness evidenced by said Amended and Restated Revolving Promissory Note has not been extinguished or discharged hereby and is not intended to and shall not cause or result in a novation with regard to the Revolving Note. The indebtedness evidenced by this Note is included within the meaning of the term "Obligations" as defined in the Financing Agreement. The term "Financing Documents" as -4- 5 used in this Note shall mean collectively this Note, the Financing Agreement and any other instrument, agreement, or document previously, simultaneously, or hereafter executed and delivered by the Borrower and/or any other person, singularly or jointly with any other person, evidencing, securing, guaranteeing, or in connection with the Principal Sum, this Note and/or the Financing Agreement. 7. SECURITY. This Note is secured as provided in the Financing Agreement. 8. EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an event of default (individually, an "Event of Default" and collectively, the "Events of Default") under the terms of this Note: (a) The failure of the Borrower to pay to the Lender within ten (10) days after Notice thereof any and all amounts payable by the Borrower to the Lender under the terms of this Note; or (b) The occurrence of an event of default (as defined therein) under the terms and conditions of any of the other Financing Documents. 9. REMEDIES. Upon the occurrence of an Event of Default, at the option of the Lender, all amounts payable by the Borrower to the Lender under the terms of this Note shall immediately become due and payable by the Borrower to the Lender without notice to the Borrower or any other person, and the Lender shall -5- 6 have all of the rights, powers, and remedies available under the terms of this Note, any of the other Financing Documents and all applicable laws. The Borrower and all endorsers, guarantors, and other parties who may now or in the future be primarily or secondarily liable for the payment of the indebtedness evidenced by this Note hereby severally waive presentment, protest and demand, notice of protest, notice of demand and of dishonor and non-payment of this Note and expressly agree that this Note or any payment hereunder may be extended from time to time without in any way affecting the liability of the Borrower, guarantors and endorsers. 10. CONFESSED JUDGMENT. Upon the occurrence of an Event of Default, the Borrower hereby authorizes any attorney designated by the Lender or any clerk of any court of record to appear for the Borrower in any court of record and confess judgment without prior hearing against the Borrower in favor of the Lender for and in the amount of the unpaid Principal Sum, all interest accrued and unpaid thereon, all other amounts payable by the Borrower to the Lender under the terms of this Note or any of the other Financing Documents, costs of suit, and attorneys' fees of $300,000. The Borrower hereby releases, to the extent permitted by applicable law, all errors and all rights of exemption, appeal, stay of execution, inquisition, and other rights to which the Borrower may otherwise be entitled under the laws of the United States of America or of any state or possession of the -6- 7 United States of America now in force and which may hereafter be enacted. The authority and power to appear for and enter judgment against the Borrower shall not be exhausted by one or more exercises thereof or by any imperfect exercise thereof and shall not be extinguished by any judgment entered pursuant thereto. Such authority may be exercised on one or more occasions or from time to time in the same or different jurisdictions as often as the Lender shall deem necessary or desirable, for all of which this Note shall be a sufficient warrant. 11. EXPENSES. The Borrower promises to pay to the Lender on demand by the Lender all costs and expenses incurred by the Lender in connection with the collection and enforcement of this Note, including, without limitation, all attorneys' fees and expenses and all court costs. 12. NOTICES. Any notice, request, or demand to or upon the Borrower or the Lender shall be deemed to have been properly given or made when delivered in accordance with Section 8.3 of the Financing Agreement. 13. MISCELLANEOUS. Each right, power, and remedy of the Lender as provided for in this Note or any of the other Financing Documents, or now or hereafter existing under any applicable law or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power, or remedy provided for in this Note or any of the other Financing Documents or now or hereafter existing under any applicable law, and the exercise or -7- 8 beginning of the exercise by the Lender of any one or more of such rights, powers, or remedies shall not preclude the simultaneous or later exercise by the Lender of any or all such other rights, powers, or remedies. No failure or delay by the Lender to insist upon the strict performance of any term, condition, covenant, or agreement of this Note or any of the other Financing Documents, or to exercise any right, power, or remedy consequent upon a breach thereof, shall constitute a waiver of any such term, condition, covenant, or agreement or of any such breach, or preclude the Lender from exercising any such right, power, or remedy at a later time or times. By accepting payment after the due date of any amount payable under the terms of this Note, the Lender shall not be deemed to waive the right either to require prompt payment when due of all other amounts payable under the terms of this Note or to declare an Event of Default for the failure to effect such prompt payment of any such other amount. No course of dealing or conduct shall be effective to amend, modify, waive, release, or change any provisions of this Note. 14. PARTIAL INVALIDITY. In the event any provision of this Note (or any part of any provision) is held by a court of competent jurisdiction to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision (or remaining part of the affected provision) of this Note; but this Note shall be -8- 9 construed as if such invalid, illegal, or unenforceable provision (or part thereof) had not been contained in this Note, but only to the extent it is invalid, illegal, or unenforceable. 15. CAPTIONS. The captions herein set forth are for convenience only and shall not be deemed to define, limit, or describe the scope or intent of this Note. 16. GOVERNING LAW. The provisions of this Note shall be construed, interpreted and enforced in accordance with the laws of the State of Maryland as the same may be in effect from time to time. 17. CONSENT TO JURISDICTION. The Borrower irrevocably submits to the jurisdiction of any state or federal court sitting in the State of Maryland over any suit, action, or proceeding arising out of or relating to this Note. The Borrower irrevocably waives, to the fullest extent permitted by law, any objection that the Borrower may now or hereafter have to the laying of venue of any such suit, action, or proceeding brought in any such court and any claim that any such suit, action, or proceeding brought in any such court has been brought in an inconvenient forum. Final judgment in any such suit, action, or proceeding brought in any such court shall be conclusive and binding upon the Borrower and may be enforced in any court in which the Borrower is subject to jurisdiction by a suit upon such judgment provided that service of process is effected upon the -9- 10 Borrower as provided in this Note or as otherwise permitted by applicable law. 18. SERVICE OF PROCESS. The Borrower hereby consents to process being served in any suit, action, or proceeding instituted in connection with this Note by (a) the mailing of a copy thereof by certified mail, postage prepaid, return receipt requested, to the Borrower and (b) serving a copy thereof upon Jay W. Freedman, Esquire, 1050 Connecticut Avenue, N.W., Suite 825, Washington, D.C. 20036, the agent hereby designated and appointed by the Borrower as the Borrower's agent for service of process. The Borrower irrevocably agrees that such service shall be deemed to be service of process upon the Borrower in any such suit, action, or proceeding. Nothing in this Section shall affect the right of the Lender to serve process in any manner otherwise permitted by law and nothing in this Section will limit the right of the Lender otherwise to bring proceedings against the Borrower in the courts of any jurisdiction or jurisdictions, however the Lender will use its best efforts to serve the Borrower in the manner set forth above. If such agent shall cease so to act, the Borrower shall irrevocably designate and appoint without delay appoint another such agent in the State of Maryland satisfactory to the Lender and shall promptly deliver to the Lender evidence in writing of such agent's acceptance of such appointment and its agreement that such appointment shall be irrevocable by the Borrower. -10- 11 19. WAIVER OF TRIAL BY JURY. The Borrower hereby waives trial by jury in any action or proceeding to which the Borrower and the Lender may be parties, arising out of or in any way pertaining to (a) this Note or (b) the Financing Documents. It is agreed and understood that this waiver constitutes a waiver of trial by jury of all claims against all parties to such actions or proceedings, including claims against parties who are not parties to this Note. This waiver is knowingly, willingly and voluntarily made by the Borrower, and the Borrower hereby represents that no representations of fact or opinion have been made by any individual to induce this waiver of trial by jury or to in any way modify or nullify its effect. The Borrower further represents that it has been represented in the signing of this Note and in the making of this waiver by independent legal counsel, selected of its own free will, and that it has had the opportunity to discuss this waiver with counsel. IN WITNESS WHEREOF, the Borrower has caused this Note to be executed under seal by its duly authorized officer(s) as of the date first written above. WITNESS OR ATTEST: HANGER ORTHOPEDIC GROUP, INC. By: (SEAL) - ------------------------------ -------------------------- Richard A. Stein Vice President -11- EX-10.KKKK 15 IVAN R. SABEL STOCK OPTION AGREEMENT. 1 EXHIBIT 10(kkkk) HANGER ORTHOPEDIC GROUP, INC. Incentive Stock Option Agreement THIS AGREEMENT is made as of February 21, 1996, by and between HANGER ORTHOPEDIC GROUP, INC., a Delaware corporation (the "Company"), and Ivan R. Sabel (the "Optionee"). W I T N E S S E T H: WHEREAS, the Company desires to grant to the Optionee an incentive stock option under the Company's 1991 Stock Option Plan to purchase shares of the Company's common stock, par value $.01 per share (the "Common Stock"), in consideration for the Optionee's service to the Company. NOW, THEREFORE, the parties hereto, intending to be legally bound, do agree as follows: 1. Grant of Option. Subject to the terms and conditions of this Agreement, the Company hereby grants to Optionee the right and option to purchase from the Company all or part of an aggregate of 67,000 shares of Common Stock. This option is intended to constitute an incentive stock option within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Option Price and Time of Exercise. The per-share purchase price at which the shares subject to option hereunder may be purchased by Optionee pursuant to his exercise of this option shall be $3.50, which price equals the closing sale price per share of the Common Stock on the American Stock Exchange on February 21, 1996, the date of grant of this option. The Optionee's right to exercise this option shall vest as to 25% of the shares of Common Stock underlying the option at the end of each of the first four years following the date hereof. The right to exercise the option shall be cumulative to the extent not theretofore exercised. The right to exercise the option shall in all events expire, except as provided in Paragraph 7 below, after the day preceding the tenth anniversary hereof (the "Option Period"). 3. Method of Exercise and Payment for Shares. This option shall be exercised by written notice directed to the Company at its principal office, specifying the number of shares to be acquired upon such exercise and indicating whether the exercise is being paid for (i) in cash, (ii) in shares of Common Stock already owned by the Optionee and valued at their fair market value on the date of exercise of the option, (iii) by requesting the Company to withhold from the number of shares of Common Stock otherwise issuable upon exercise of the option that number of shares of Common Stock having an aggregate fair market value on the date of exercise equal to the option price for all the shares of Common 2 Stock subject to such exercise, or (iv) by a combination of (i), (ii) and/or (iii) above. 4. Non-transferability. This option is not transferable by Optionee except as otherwise provided in Paragraph 7 below, and during Optionee's lifetime is exercisable only by him. 5. Agreement to Continue in Employment. The Optionee hereby agrees to remain in the employment of the Company, at the pleasure of the Company, for a continuous period of at least six months after the date hereof, at the salary rate in effect as of the date hereof or at such increased salary as may be fixed, from time to time, by the Company. 6. Notice of Sale of Stock; Withholding. The Optionee hereby agrees to notify the Company in writing if any shares of Common Stock acquired hereunder are "disposed of" within the meaning of Section 422A of the Code, within two years after the date of grant of this option or within one year after the transfer of such shares of Common Stock to the Optionee. If the Optionee does "dispose of" any shares of Common Stock acquired hereunder within either such time period, then the Optionee further agrees to make appropriate arrangements with the Company to provide for the amount of additional withholding required by Sections 3102 and 3402 of the Code and applicable state income tax laws. 7. Exercise After Death or Termination of Service to the Company. In the event Optionee dies before the expiration of this option, Optionee's estate, or the person or persons to whom his rights under this option shall pass by will or the laws of descent and distribution, may exercise this option, to the extent exercisable at the date of death, at any time within six months following Optionee's death (but in any event before the expiration of the Option Period). In the event Optionee ceases to be employed by the Company or a subsidiary of the Company by reason of termination of employment other than for cause, before expiration of the Option Period, Optionee may exercise this option, to the extent exercisable upon termination of employment, at any time within three months next following such termination of employment (but in any event before the expiration of the Option Period). If Optionee's employment is otherwise terminated, this option shall terminate at the time of such termination of employment. 8. Adjustments. (a) Adjustments by Stock Split, Stock Dividend, Etc. If the Company shall at any time increase or decrease the number of its outstanding shares of Common Stock, or change in any way the rights and privileges of such shares, by means of the payment of a Common Stock dividend or the making of any other distribution upon such shares payable in Common Stock, or through a Common Stock split or subdivision of shares, or a consolidation or combination of shares, or through a reclassification or recapitalization involving the 3 Common Stock, then the numbers, rights and privileges of the shares of Common Stock underlying the option granted hereunder shall be increased, decreased or changed in like manner as if they had been issued and outstanding, fully paid and nonassessable at the time of such occurrence. (b) Dividend Payable in Stock of Another Corporation, Etc. If the Company shall at any time pay or make any dividend or other distribution upon the Common Stock payable in securities or other property (except money or Common Stock), a proportionate part of such securities or other property shall be set aside and delivered to the Optionee upon exercise hereof. (c) Apportionment of Price. Upon any occurrence described in the preceding subsections (a) and (b) of this Section 8, the total option price hereunder shall remain unchanged but shall be apportioned ratably over the increased or decreased number or changed kinds of securities or other property subject to this option. (d) Rights to Subscribe. If the Company shall at any time grant to the holders of its Common Stock rights to subscribe pro rata for additional shares thereof or for any other securities of the Company or of any other corporation, there shall be added to the number of shares underlying this option the Common Stock or other securities which the Optionee would have been entitled to subscribe for if immediately prior to such grant the Optionee had exercised his entire option, and the option price shall be increased by the amount which would have been payable by the Optionee for such Common Stock or other securities. (e) Determination by the Company. Adjustments under this Section 8 shall be made by the Company, whose determinations with regard thereto shall be final and binding. No fractional shares of Common Stock shall be issued on account of any such adjustment. 9. Merger, Consolidation, Etc. (a) Effect of Transaction. Upon the occurrence of any of the following events, if the notice required by Section 9(b) hereof shall have first been given, the option granted hereunder shall automatically terminate and be of no further force and effect whatsoever, without the necessity for any additional notice or other action by the Company: (i) the merger, consolidation or liquidation of the Company or the acquisition of its assets or stock pursuant to a nontaxable reorganization, unless the surviving or acquiring corporation, as the case may be, shall assume all outstanding options of the Company or substitute new options for them pursuant to Section 425(a) of the Code; (ii) the dissolution or liquidation of the Company; (iii) the appointment of a receiver for all or substantially all of the Company's assets or business; 3 4 (iv) the appointment of a trustee for the Company after a petition has been filed for the Company's reorganization under applicable statutes; or (v) the sale, lease or exchange of all or substantially all of the Company's assets and business. (b) Notice of Such Occurrences. At least 30 days' prior written notice of any event described in Section 9(a) hereof, except the transactions described in subsections 9(a)(iii) and (iv) as to which no notice shall be required, shall be given by the Company to the Optionee. If the Optionee is so notified, he may exercise all or a portion of the entire unexercised portion of this option at any time before the occurrence of the event requiring the giving of notice, regardless of whether all conditions of exercise relating to continuation of employment for specified periods of time have been satisfied. Such notice shall be deemed to have been given when delivered personally to the Optionee or when mailed to the Optionee by registered or certified mail, postage prepaid, at the Optionee's last address known to the Company. 10. Binding Effect, Entire Agreement. Subject to the limitations stated above, this Agreement shall be binding upon and inure to the benefit of the personal representatives of Optionee and the successors of the Company. This Agreement constitutes the entire agreement between the parties and cannot be altered, modified, or changed in any way unless made in writing and signed by the party against whom such alteration, modification, or change is asserted. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its Chairman and its corporate seal to be hereunto affixed and attested by its Secretary, and the Optionee has affixed his signature hereto. IVAN R. SABEL ---------------------------------- Ivan R. Sabel Optionee Attest: HANGER ORTHOPEDIC GROUP, INC. RICHARD A. STEIN By: IVAN R. SABEL - ------------------------ -------------------------------- Richard A. Stein Ivan R. Sabel Secretary President 4 EX-10.LLLL 16 RICHARD A. STEIN STOCK OPTION AGREEMENT. 1 EXHIBIT 10(llll) HANGER ORTHOPEDIC GROUP, INC. Incentive Stock Option Agreement THIS AGREEMENT is made as of February 21, 1996, by and between HANGER ORTHOPEDIC GROUP, INC., a Delaware corporation (the "Company"), and Richard A. Stein (the "Optionee"). W I T N E S S E T H: WHEREAS, the Company desires to grant to the Optionee an incentive stock option under the Company's 1991 Stock Option Plan to purchase shares of the Company's common stock, par value $.01 per share (the "Common Stock"), in consideration for the Optionee's service to the Company. NOW, THEREFORE, the parties hereto, intending to be legally bound, do agree as follows: 1. Grant of Option. Subject to the terms and conditions of this Agreement, the Company hereby grants to Optionee the right and option to purchase from the Company all or part of an aggregate of 33,000 shares of Common Stock. This option is intended to constitute an incentive stock option within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Option Price and Time of Exercise. The per-share purchase price at which the shares subject to option hereunder may be purchased by Optionee pursuant to his exercise of this option shall be $3.50, which price equals the closing sale price per share of the Common Stock on the American Stock Exchange on February 21, 1996, the date of grant of this option. The Optionee's right to exercise this option shall vest as to 25% of the shares of Common Stock underlying the option at the end of each of the first four years following the date hereof. The right to exercise the option shall be cumulative to the extent not theretofore exercised. The right to exercise the option shall in all events expire, except as provided in Paragraph 7 below, after the day preceding the tenth anniversary hereof (the "Option Period"). 3. Method of Exercise and Payment for Shares. This option shall be exercised by written notice directed to the Company at its principal office, specifying the number of shares to be acquired upon such exercise and indicating whether the exercise is being paid for (i) in cash, (ii) in shares of Common Stock already owned by the Optionee and valued at their fair market value on the date of exercise of the option, (iii) by requesting the Company to withhold from the number of shares of Common Stock otherwise issuable upon exercise of the option that number of shares of Common Stock having an aggregate fair market value on the date of exercise equal to the option price for all the shares of Common Stock subject to such exercise, or (iv) by a combination of (i), 2 (ii) and/or (iii) above. 4. Non-transferability. This option is not transferable by Optionee except as otherwise provided in Paragraph 7 below, and during Optionee's lifetime is exercisable only by him. 5. Agreement to Continue in Employment. The Optionee hereby agrees to remain in the employment of the Company, at the pleasure of the Company, for a continuous period of at least six months after the date hereof, at the salary rate in effect as of the date hereof or at such increased salary as may be fixed, from time to time, by the Company. 6. Notice of Sale of Stock; Withholding. The Optionee hereby agrees to notify the Company in writing if any shares of Common Stock acquired hereunder are "disposed of" within the meaning of Section 422A of the Code, within two years after the date of grant of this option or within one year after the transfer of such shares of Common Stock to the Optionee. If the Optionee does "dispose of" any shares of Common Stock acquired hereunder within either such time period, then the Optionee further agrees to make appropriate arrangements with the Company to provide for the amount of additional withholding required by Sections 3102 and 3402 of the Code and applicable state income tax laws. 7. Exercise After Death or Termination of Service to the Company. In the event Optionee dies before the expiration of this option, Optionee's estate, or the person or persons to whom his rights under this option shall pass by will or the laws of descent and distribution, may exercise this option, to the extent exercisable at the date of death, at any time within six months following Optionee's death (but in any event before the expiration of the Option Period). In the event Optionee ceases to be employed by the Company or a subsidiary of the Company by reason of termination of employment other than for cause, before expiration of the Option Period, Optionee may exercise this option, to the extent exercisable upon termination of employment, at any time within three months next following such termination of employment (but in any event before the expiration of the Option Period). If Optionee's employment is otherwise terminated, this option shall terminate at the time of such termination of employment. 8. Adjustments. (a) Adjustments by Stock Split, Stock Dividend, Etc. If the Company shall at any time increase or decrease the number of its outstanding shares of Common Stock, or change in any way the rights and privileges of such shares, by means of the payment of a Common Stock dividend or the making of any other distribution upon such shares payable in Common Stock, or through a Common Stock split or subdivision of shares, or a consolidation or combination of shares, or through a reclassification or recapitalization involving the Common Stock, then the numbers, rights and privileges of the shares of Common Stock underlying the option granted hereunder shall be 3 increased, decreased or changed in like manner as if they had been issued and outstanding, fully paid and nonassessable at the time of such occurrence. (b) Dividend Payable in Stock of Another Corporation, Etc. If the Company shall at any time pay or make any dividend or other distribution upon the Common Stock payable in securities or other property (except money or Common Stock), a proportionate part of such securities or other property shall be set aside and delivered to the Optionee upon exercise hereof. (c) Apportionment of Price. Upon any occurrence described in the preceding subsections (a) and (b) of this Section 8, the total option price hereunder shall remain unchanged but shall be apportioned ratably over the increased or decreased number or changed kinds of securities or other property subject to this option. (d) Rights to Subscribe. If the Company shall at any time grant to the holders of its Common Stock rights to subscribe pro rata for additional shares thereof or for any other securities of the Company or of any other corporation, there shall be added to the number of shares underlying this option the Common Stock or other securities which the Optionee would have been entitled to subscribe for if immediately prior to such grant the Optionee had exercised his entire option, and the option price shall be increased by the amount which would have been payable by the Optionee for such Common Stock or other securities. (e) Determination by the Company. Adjustments under this Section 8 shall be made by the Company, whose determinations with regard thereto shall be final and binding. No fractional shares of Common Stock shall be issued on account of any such adjustment. 9. Merger, Consolidation, Etc. (a) Effect of Transaction. Upon the occurrence of any of the following events, if the notice required by Section 9(b) hereof shall have first been given, the option granted hereunder shall automatically terminate and be of no further force and effect whatsoever, without the necessity for any additional notice or other action by the Company: (i) the merger, consolidation or liquidation of the Company or the acquisition of its assets or stock pursuant to a nontaxable reorganization, unless the surviving or acquiring corporation, as the case may be, shall assume all outstanding options of the Company or substitute new options for them pursuant to Section 425(a) of the Code; (ii) the dissolution or liquidation of the Company; (iii) the appointment of a receiver for all or substantially all of the Company's assets or business; (iv) the appointment of a trustee for the Company after a petition has been filed for the Company's reorganization under applicable 3 4 statutes; or (v) the sale, lease or exchange of all or substantially all of the Company's assets and business. (b) Notice of Such Occurrences. At least 30 days' prior written notice of any event described in Section 9(a) hereof, except the transactions described in subsections 9(a)(iii) and (iv) as to which no notice shall be required, shall be given by the Company to the Optionee. If the Optionee is so notified, he may exercise all or a portion of the entire unexercised portion of this option at any time before the occurrence of the event requiring the giving of notice, regardless of whether all conditions of exercise relating to continuation of employment for specified periods of time have been satisfied. Such notice shall be deemed to have been given when delivered personally to the Optionee or when mailed to the Optionee by registered or certified mail, postage prepaid, at the Optionee's last address known to the Company. 10. Binding Effect, Entire Agreement. Subject to the limitations stated above, this Agreement shall be binding upon and inure to the benefit of the personal representatives of Optionee and the successors of the Company. This Agreement constitutes the entire agreement between the parties and cannot be altered, modified, or changed in any way unless made in writing and signed by the party against whom such alteration, modification, or change is asserted. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its President and its corporate seal to be hereunto affixed and attested by its Chairman, and the Optionee has affixed his signature hereto. RICHARD A. STEIN ------------------------------------ Richard A. Stein Optionee Attest: HANGER ORTHOPEDIC GROUP, INC. RICHARD A. STEIN By: IVAN R. SABEL - -------------------------- -------------------------------- Richard A. Stein Ivan R. Sabel Secretary President 4 EX-11 17 COMPUTATION OF EARNINGS PER SHARE. 1 HANGER ORTHOPEDIC GROUP, INC. EXHIBIT 11 COMPUTATION OF NET INCOME PER SHARE FOR THE YEARS ENDED DECEMBER 31,
1993 1994 1995 ---- ---- ---- Net income (loss) $2,655,223 $(2,687,438) $2,135,439 Less: Dividends declared 18,199 19,882 21,799 ---------- ----------- ---------- Total $2,637,024 $(2,707,320) $2,113,640 ========== =========== ========== Divided by: Weighted average number of shares outstanding 8,343,784 8,290,276 8,290,544 Net income (loss) per share $ .32 $ (.33) $ .26 ========== =========== ==========
EX-21 18 LIST OF SUBSIDIARIES. 1 EXHIBIT 21 LIST OF SUBSIDIARIES The following is a list of the subsidiaries of Hanger Orthopedic Group, Inc. as of December 31, 1995, all of which are wholly-owned except as noted below, and their respective states of incorporation: Albuquerque Prosthetic Center, Inc. - New Mexico Apothecaries, Inc. - Delaware Capital Orthopedics, Inc. - Colorado Columbia Brace Acquisition Corp. - Delaware (80%-owned) DOBI-Symplex, Inc. - Delaware Dorsch Prosthetics & Orthotics, Inc. - New York Greiner & Saur Orthopedics, Inc. - Colorado J.E. Hanger, Inc. - Delaware J.E. Hanger of California, Inc. - Delaware Memphis Orthopedic, Inc. - Delaware Metzgers Orthopaedic Services, Inc. - California Ralph Storrs, Inc. - Delaware Scott Orthopedics, Inc. - Colorado Scott Orthopedics of Northern Colorado, Inc. - Colorado York Prosthetics, Inc. - Delaware Zielke Orthotics & Prosthetics, Inc. - Delaware EX-23 19 CONSENT OF COOPERS & LYBRAND L.L.P. 1 [COOPERS & LYBRAND LETTERHEAD] CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement of Hanger Orthopedic Group, Inc. on Form S-8 (File No. 33-63191) of our reports dated March 8, 1996, which includes an explanatory paragraph relating to the Company changing its method of accounting for income taxes effective January 1, 1993, on our audits of the consolidated financial statements and financial statement schedule of Hanger Orthopedic Group, Inc. as of December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995, which report is included in this Form 10-K. /s/ COOPERS & LYBRAND L.L.P. - ---------------------------- 2400 Eleven Penn Center Philadelphia, Pennsylvania March 28, 1996 EX-27 20 FINANCIAL DATA SCHEDULE.
5 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1,456,305 0 14,468,991 1,144,000 10,312,289 26,938,998 11,998,514 4,232,858 61,800,061 6,317,222 22,925,124 253,886 0 84,241 31,207,124 61,800,061 52,467,899 52,467,899 24,572,089 24,572,089 22,159,733 0 2,056,140 3,679,937 1,544,498 2,135,439 0 0 0 2,135,439 .26 .26
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