<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 1997
SEC FILE NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
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 NUMBER)
7700 OLD GEORGETOWN ROAD
BETHESDA, MD 20814
(301) 986-0701
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
IVAN R. SABEL
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
HANGER ORTHOPEDIC GROUP, INC.
7700 OLD GEORGETOWN ROAD
BETHESDA, MD 20814
(301) 986-0701
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
PLEASE SEND COPIES OF COMMUNICATIONS TO:
ARTHUR H. BILL, ESQ. MICHAEL J. SILVER, ESQ.
FREEDMAN, LEVY, KROLL & SIMONDS HOGAN & HARTSON L.L.P.
1050 CONNECTICUT AVE., N.W. 111 SOUTH CALVERT STREET
WASHINGTON, D.C. 20036 BALTIMORE, MD 21202
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If the Registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(1) of this form, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF SHARES TO BE PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share........ 5,175,000 shares(2) $8.25 $42,693,750 $12,937.50
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated in accordance with Rule 457(c) under the Securities Act of 1933
solely for the purpose of determining the registration fee and based on
the average of the high and low prices of the Common Stock on the American
Stock Exchange on June 20, 1997.
(2) Includes 675,000 shares issuable upon exercise of the Underwriters' over-
allotment option.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CROSS REFERENCE SHEET
BETWEEN ITEMS OF FORM S-2 AND PROSPECTUS
<TABLE>
<CAPTION>
FORM S-2 ITEM LOCATION IN PROSPECTUS
------------- ----------------------
<S> <C> <C>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus........................... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus.................. Available Information,
Incorporation of Certain
Documents by Reference
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges... Prospectus Summary, The
Company, Risk Factors
4. Use of Proceeds....................... Use of Proceeds
5. Determination of Offering Price....... Underwriting
6. Dilution.............................. Not Applicable
7. Selling Security Holders.............. Not Applicable
8. Plan of Distribution.................. Underwriting
9. Description of Securities to be
Registered........................... Description of Capital Stock
10. Interests of Named Experts and
Counsel.............................. Not Applicable
11(b). Information with Respect to the
Registrant........................... Prospectus Summary, The
Company, Price Range of Common
Stock, Dividend Policy,
Capitalization, Selected
Historical and Pro Forma
Consolidated Financial
Information, Management's
Discussion and Analysis of
Financial Condition and
Results of Operations,
Business, Financial Statements
12. Incorporation of Certain Information
by Reference......................... Documents Incorporated by
Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.......................... Not Applicable (See Part II--
</TABLE> Item 17)
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION JUNE 27, 1997
4,500,000 Shares
[LOGO OF HANGER ORTHOPEDIC GROUP INC APPEARS HERE]
Common Stock
--------
All of the shares of Common Stock offered hereby are being sold by Hanger
Orthopedic Group, Inc. ("Hanger" or the "Company"). The Company's Common Stock
is traded on the American Stock Exchange ("AMEX") under the symbol "HGR." On
June 25, 1997, the closing sale price of the Company's Common Stock was $9.06
per share.
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share...................................... $ $ $
- --------------------------------------------------------------------------------
Total(2)....................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Before deducting expenses of the Offering estimated at $700,000, payable by
the Company.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to 675,000 additional shares of Common Stock solely to cover over-
allotments, if any. To the extent the option is exercised, the Underwriters
will offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1997.
ALEX. BROWN & SONS
INCORPORATED
MONTGOMERY SECURITIES
LEGG MASON WOOD WALKEr
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
[INSERT U.S. MAP SHOWING PATIENT-CARE CENTERS, DISTRIBUTION CENTERS AND
MANUFACTURING FACILITIES.]
The Company's executive offices are located at 7700 Old Georgetown Road,
Bethesda, Maryland 20814. Its telephone number is (301) 986-0701.
THE UNDERWRITERS AND OTHER PERSONS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT
STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus.
THE COMPANY
Hanger Orthopedic Group, Inc. is a professional practice management company
focused on the orthotic and prosthetic ("O&P") segment of the orthopedic
rehabilitation industry. The Company acquires and operates the practices of
orthotists and prosthetists, medical professionals that design, fabricate, fit
and supervise the use of external musculoskeletal support devices and
artificial limbs. The Company has acquired over 40 O&P businesses since 1986
and currently employs 208 certified O&P practitioners and operates 190 O&P
centers in 28 states and the District of Columbia. The Company also has
developed OPNET, Inc. ("OPNET"), a national preferred provider network of O&P
service professionals in 358 patient-care centers with 230 managed care
contracts. In addition to its practice management and patient-care services,
the Company manufactures custom-made and prefabricated O&P devices and is the
country's largest distributor of O&P components and finished O&P patient-care
products.
The Company has been an active acquiror of O&P practices since 1986. The
Company experienced operating difficulties in 1994 and suspended its
acquisition program. In 1994 and 1995, the Company sold or closed nine
unprofitable patient-care centers and reorganized its management team. In late
1995, having reestablished a strong base of operations, the Company launched
OPNET, and resumed its acquisition program with the November 1, 1996
acquisition of J.E. Hanger, Inc. of Georgia ("JEH"), an O&P provider with 94
patient-care centers in 15 states and the largest O&P distribution business in
the United States. The acquisition essentially doubled the Company's number of
patient-care centers and certified practitioners and significantly expanded its
distribution capabilities. Since January 1, 1997, the Company has also acquired
the assets of four additional O&P companies, representing an aggregate of nine
patient-care centers and 18 practitioners.
The Company estimates that the U.S. O&P patient-care services industry
represented approximately $2.0 billion in sales in 1995. Key trends expected to
increase the demand for O&P services include: (i) the growing elderly
population; (ii) more active lifestyles and emphasis on physical fitness; (iii)
cost savings through the use of outpatient O&P treatment to reduce
hospitalization; (iv) advancing technology in the design and manufacture of O&P
devices; and (v) the inherent need for replacement of O&P devices and
continuing care.
The O&P services market is highly fragmented and relatively underpenetrated
by professional practice management companies. Hanger is one of the two largest
companies in the O&P industry which, combined, accounted for less than 15% of
total estimated O&P industry revenue in 1995. There are an estimated 3,200
certified prosthetists and/or orthotists and approximately 2,670 O&P patient-
care centers in the United States. The Company believes that the O&P industry
will continue to consolidate as a result of a variety of factors, including:
(i) increased pressures from growth in managed care; (ii) demonstrated benefits
from economies of scale; and (iii) desire by independent orthotists and
prosthetists to obtain financial liquidity and concentrate on providing patient
care.
The Company's objective is to build a major national orthopedic
rehabilitation company focused on acquiring and operating O&P practices and
related businesses. The Company's strategy for achieving this objective is to:
(i) acquire and integrate O&P practices in targeted geographic areas across the
United States; (ii) develop new patient-care centers in existing markets; (iii)
expand and improve O&P practice management operations at existing and acquired
patient-care centers; (iv) increase the number of OPNET's O&P patient-care
service members and its contractual relationships with managed care
organizations; and (v) expand the Company's O&P manufacturing and distribution
operations.
3
<PAGE>
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company......... 4,500,000 shares
Common Stock to be outstanding after the
Offering................................... 13,965,811 shares(1)
Use of proceeds............................. Repayment of certain indebtedness
American Stock Exchange symbol.............. HGR
</TABLE>
- --------
(1) Excludes 3,622,931 shares of Common Stock issuable upon exercise of
outstanding stock options and warrants, at a weighted average exercise
price of $5.59 per share. See "Capitalization" and "Principal
Shareholders."
Unless the context otherwise requires, references to the Company include
Hanger Orthopedic Group, Inc. and its subsidiaries. Except as otherwise
specified, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. See "Underwriting."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND STATISTICAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<TABLE>
<CAPTION>
QUARTERS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------- ---------------------------
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
1992 1993 1994 1995 1996 1996(1) 1996 1997 1997(2)
------- ------- ------- ------- ------- ----------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.............. $32,405 $43,877 $50,300 $52,468 $66,806 $131,557 $12,229 $30,950 $33,139
Acquisition and
integration costs,
restructuring costs
and loss from disposal
of assets............. -- -- 2,610 -- 2,479 2,479 -- -- --
Income from continuing
operations............ 2,113 4,428 4 5,843 4,695 10,801 701 2,636 3,101
Income (loss) from
continuing operations
before extraordinary
item and accounting
change................ 320 1,594 (2,280) 2,135 1,081 3,704 150 618 1,232
Income (loss) before
extraordinary item and
accounting change..... 285 1,490 (2,687) 2,135 1,081 3,704 150 618 1,232
Income (loss) per
common share from
continuing operations
before extraordinary
item and accounting
change................ $ 0.03 $ 0.19 $ (0.28) $ 0.26 $ 0.12 $ 0.26 $ 0.02 $ 0.06 $ 0.08
Weighted average common
shares outstanding.... 7,565 8,344 8,290 8,291 8,663 14,544 8,324 9,978 14,542
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(3)(4)
-------- ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................ $ 28,825 $ 26,324 $ 27,153
Total assets........................... 138,158 144,248 144,206
Long-term debt......................... 68,815 72,944 37,242
Shareholders' equity................... 40,431 40,931 77,419
</TABLE>
<TABLE>
<CAPTION>
QUARTERS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------- -------------
1992 1993 1994 1995 1996 1996 1997(5)
---- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATISTICAL DATA:
Patient-care centers(6).......... 63 72 85 84 178 81 178
Certified practitioners(6)....... 82 104 125 119 199 90 197
Number of states (including
D.C.)(6)........................ 18 22 25 24 29 26 29
Same-center sales growth......... 12.3% 4.4% (3.7)% 5.2% 5.8% 1.8% 10.6%
EBITDA margin(7)................. 12.9% 16.1% 11.1% 16.1% 14.7% 10.6% 12.1%
Operating margin................. 6.5% 10.1% -- 11.1% 7.0% 5.7% 8.5%
Payor mix(8):
Private pay and other........... -- -- -- 43.4% 43.2% 50.0% 43.0%
Medicare/Medicaid/VA............ -- -- -- 56.6% 56.8% 50.0% 57.0%
Percentage of net sales from:
Practice management and patient-
care services................... 82.5% 76.8% 78.0% 78.5% 78.2% 78.5% 74.6%
Manufacturing................... 10.9% 18.3% 17.6% 16.3% 12.0% 15.7% 6.3%
Distribution.................... 6.6% 4.9% 4.4% 5.2% 9.8% 5.8% 19.1%
</TABLE>
See accompanying notes on following page.
5
<PAGE>
- --------
(1) Adjusted to give effect to: (i) acquisitions which occurred during 1996 and
the five months ended May 31, 1997; and (ii) the reduction in interest
expense resulting from the assumed use of the estimated net proceeds of
this Offering upon the sale by the Company of 4.5 million shares of Common
Stock offered hereby at an offering price of $9.06 per share, after
deducting the underwriting discounts and commissions and estimated offering
expenses payable by the Company, as if such transactions had occurred as of
the beginning of 1996. See "Use of Proceeds" and "Unaudited Pro Forma
Consolidated Condensed Financial Statements."
(2) Adjusted to give effect to: (i) acquisitions which occurred during the five
months ended May 31, 1997; and (ii) the reduction in interest expense
resulting from the assumed use of the estimated net proceeds of this
Offering upon the sale by the Company of 4.5 million shares of Common Stock
offered hereby at an offering price of $9.06 per share, after deducting the
underwriting discounts and commissions and estimated offering expenses
payable by the Company, as if such transactions had occurred as of the
beginning of 1997. See "Use of Proceeds" and "Unaudited Pro Forma
Consolidated Condensed Financial Statements."
(3) Adjusted to give effect to acquisitions which occurred during the five
months ended May 31, 1997. See "Unaudited Pro Forma Consolidated Condensed
Financial Statements."
(4) Adjusted to give effect to the sale by the Company of 4.5 million shares of
Common Stock in this Offering and the application of the estimated net
proceeds therefrom, assuming an offering price of $9.06 per share.
Shareholders' equity reflects debt discounts and deferred financing costs
of $2.0 million ($1.1 million net of tax benefit) expensed as a result of
the retirement of certain indebtedness from the assumed use of proceeds of
this Offering. See "Use of Proceeds."
(5) Excludes eight patient-care centers acquired subsequent to March 31, 1997,
and 17 certified practitioners employed by such patient-care centers.
(6) At end of period.
(7) "EBITDA" is defined as net income (loss) before interest expense, taxes,
depreciation and amortization, discontinued operations, non-recurring
charges, extraordinary item and accounting change. EBITDA is not a measure
of performance under GAAP. While EBITDA should not be considered in
isolation or as a substitute for net income, cash flows from operating
activities and other income or cash flow statement data prepared in
accordance GAAP, or as a measure of profitability or liquidity, management
understands that EBITDA is customarily used as a criteria in evaluating
healthcare companies. Moreover, substantially all of the Company's
financing agreements contain covenants in which EBITDA is used as a measure
of financial performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of other
measures of performance determined in accordance with GAAP.
(8) Payor mix data not available for the years ended 1992, 1993 and 1994.
6
<PAGE>
RISK FACTORS
In addition to other information in this Prospectus, the following factors
should be considered carefully in evaluating an investment in shares of the
Common Stock offered by this Prospectus. This discussion also identifies
important cautionary factors that could cause the Company's actual results to
differ materially from those described in forward-looking statements made by,
or on behalf of, the Company. In particular, the Company's forward-looking
statements, including those regarding the acquisition of additional patient-
care centers and related businesses, the adequacy of the Company's capital
resources and other statements regarding trends, could be affected by a number
of risks and uncertainties including those described below.
Risks Associated with Acquisition Strategy. The Company's business strategy
contemplates the continued acquisition and integration of O&P businesses. The
success of the Company's acquisitions will be determined by numerous factors,
including the Company's ability to identify O&P patient-care practices and
other O&P businesses suitable for acquisition, to acquire and finance such
businesses on acceptable terms and to integrate and operate such businesses
profitably after acquisition. No assurance can be given that future
acquisitions by the Company will be successfully consummated and integrated or
that such acquisitions will favorably affect the Company's business or
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Business--
Acquisitions."
Additional Financings. The Company's acquisition program requires
substantial capital resources. No assurance can be given that the Company's
available bank facility and other sources of capital will be sufficient to
provide for the Company's cash requirements for future acquisitions. The
Company may issue additional debt or equity securities in connection with the
acquisition of additional O&P patient-care centers. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Business--Acquisitions."
Rapid Growth. The Company has pursued, and plans to continue to pursue, an
aggressive growth strategy. The rapid growth may place significant demands on
the Company's financial and management resources. There can be no assurance
that the Company will be able to manage this growth effectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
Reimbursement Limitations. Approximately 56.8% and 57.0% of the Company's
net sales in 1996 and the first quarter of 1997, respectively, were derived
from Medicare, Medicaid, the United States Department of Veterans Affairs (the
"VA") and certain state agencies, each of which sets maximum reimbursement
levels for O&P services and products. No assurance can be given that
reimbursement levels under such programs will not be lowered in the future or
that the percentage of the Company's net sales derived from sources limiting
reimbursement levels will not increase. Furthermore, the healthcare industry
is experiencing a trend towards cost containment as government and other
third-party payors seek to impose lower reimbursement rates and negotiate
reduced contract rates with service providers, which may adversely affect the
Company's operating results or financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Other" and "Business--Patient Reimbursement Sources."
Retention of Key Personnel. The success of the Company will depend in part
on its continued ability to retain Ivan R. Sabel, Chairman of the Board,
President and Chief Executive Officer of the Company, and qualified O&P
practitioners and other managerial and technical personnel. There can be no
assurance that the Company will be able to continue to retain all the
personnel necessary for continued growth. The loss of the services of key
personnel could have a material adverse effect on the Company. See
"Management."
7
<PAGE>
Variability of Quarterly Operating Results. The Company's operating results
have varied from quarter to quarter and may continue to vary. Quarterly
variations may result from, among other things, the non-recurring costs
associated with the acquisition of patient-care centers. The Company's
operating results for any particular quarter may not be indicative of results
for future periods.
Potential Liability and Insurance. The provision of O&P services and
products, as is the case with other healthcare services and products, involves
an inherent risk of liability that could have a material adverse effect on the
Company. No assurance can be given that insurance coverage will continue to be
available at commercially reasonable prices or that such insurance will cover
actual future liabilities.
Government Regulation. Most states do not require separate licensure for O&P
practitioners. However, several states currently require practitioners to be
certified by an organization such as the American Board for Certification in
Orthotics and Prosthetics (the "ABC"). While the Company endeavors to comply
with all state licensure requirements, no assurance can be given that the
Company will be in compliance at all times with these requirements. The
Company is subject to various federal and state laws pertaining to healthcare
fraud and abuse, including antikickback laws, false claims laws, and physician
self-referral laws. Antikickback laws make it illegal to solicit, offer,
receive, or pay any remuneration in exchange for, or to induce, the referral
of business. False claims laws prohibit anyone from knowingly and willfully
presenting claims for payment that contain false or fraudulent information.
Physician self-referral laws restrict the ability of a physician to refer
patients to entities with which the physician has a financial relationship, as
well as the ability of an entity to claim reimbursement for services furnished
pursuant to a prohibited referral. Violations of these laws are punishable by
criminal and/or civil sanctions, including, in some instances, imprisonment
and exclusion from participation in federal healthcare programs, including
Medicare, Medicaid, VA health programs and the Civilian Health and Medical
Program for the Uniformed Services ("CHAMPUS"). There can be no assurance that
one or more of the Company's practices will not be challenged by governmental
authorities under certain of these laws, that the Company would not be
required to alter its practices as a result, or that the occurrence of one or
more of these events would not result in a material adverse effect on the
Company's business and results of operations. The Company is subject to
federal and state antitrust laws which prohibit, among other things, the
establishment of ventures that result in certain anticompetitive conduct.
These laws have been applied to the establishment of certain networks of
otherwise competing healthcare providers. There can be no assurance that
governmental authorities would not bring an investigation or proceeding
challenging this or some other aspect of the Company's operations under these
laws, or that such an investigation or proceeding would not result in a
material adverse effect on the Company's business and results of operations.
See "Business--Government Regulation."
Competition. The business of providing O&P patient-care services is highly
competitive. In addition to many local O&P practices, there are several
regional and multi-regional competitors which operate numerous patient-care
centers. The competition among O&P patient-care centers is primarily for
referrals from physicians, therapists, employers, health maintenance
organizations ("HMOs"), preferred provider organizations ("PPOs"), hospitals,
rehabilitation centers, out-patient clinics and insurance companies on both a
local and regional basis. Hanger also competes with other providers of O&P
services such as hospitals, physicians and therapists. In connection with its
efforts to acquire additional O&P patient-care practices, the Company
encounters competition from several other companies. The Company also
encounters competition from other manufacturers of non-customized orthotic and
prosthetic components. Finally, although the Company is the country's largest
distributor of O&P products, a majority of which are manufactured by other
companies, Hanger encounters competition from numerous smaller companies
engaged in the distribution of O&P products. There can be no assurance that
levels of competition will not increase or that such competition will not have
a material adverse effect on the Company's O&P patient-care services,
manufacturing or distribution activities or O&P patient-care practice
acquisition program. See "Business--Competition."
8
<PAGE>
Shares Eligible for Future Sale. As of June 20, 1997, the Company had
9,465,811 shares of Common Stock outstanding, of which 8,366,811 shares are
freely tradeable without restriction under federal securities laws, except
shares held by affiliates of the Company. Of the currently outstanding shares,
1,099,000 constitute "restricted securities" as that term is defined under Rule
144 under the Securities Act of 1933 and will be eligible for resale commencing
November 1, 1997, subject to compliance with volume limitations and other
restrictions under Rule 144. As of March 31, 1997, there were a total of
1,546,287 shares of Common Stock underlying outstanding options (of which
options for 531,921 shares are presently exercisable) and 2,076,644 shares
underlying outstanding warrants (of which warrants for 1,196,644 shares are
presently exercisable) to purchase shares from the Company. The shares
underlying substantially all of the outstanding options will be freely
tradeable upon issuance as a result of a currently effective registration
statement relating to certain of the Company's stock option plans and the
holders of substantially all of the outstanding warrants have rights to require
the Company to register the underlying shares. The Company, the holders of an
aggregate of 2,642,154 shares of Common Stock and the holders of options and
warrants to purchase 1,388,649 shares (including all shares beneficially owned
by the Company's directors and officers) have agreed that they will not sell
any shares of Common Stock held by them for a period of 90 days from the date
of this Prospectus without the prior written consent of Alex. Brown & Sons
Incorporated. No prediction can be made as to the effect, if any, that sales of
shares of Common Stock, or the availability of such shares for sale, will have
on the market prices of the Company's Common Stock prevailing from time to
time. The possibility that substantial amounts of shares may be sold in the
public market may adversely affect prevailing market prices for the Common
Stock and could impair the Company's ability to raise capital through the sale
of its equity securities.
Absence of Dividends. The Company has never declared or paid, nor does it
intend to declare or pay, cash dividends on its Common Stock for the
foreseeable future, but intends instead to retain any future earnings to
finance expansion and operations. In addition, the Company's agreement with its
senior bank lender contains a minimum net worth covenant and prohibits the
payment of cash dividends. See "Dividend Policy" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
9
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4.5 million shares of
Common Stock offered hereby will be approximately $37.6 million ($43.4 million
if the Underwriters' over-allotment option is exercised in full), based upon a
public offering price of $9.06 per share.
The Company intends to use the net proceeds of the Offering to repay,
without penalty, existing indebtedness primarily incurred under the Company's
senior financing facilities (the "Facilities") with Banque Paribas (the
"Bank"), which were established on November 1, 1996. The Facilities were
established to provide up to $90.0 million principal amount of senior secured
financing that included: (i) $57.0 million of term loans (the "Term Loans")
for use in connection with Hanger's acquisition of JEH; (ii) an $8.0 million
revolving loan facility (the "Revolver"); and (iii) up to $25.0 million
principal amount of loans under an acquisition loan facility (the "Acquisition
Loans") for use in connection with future acquisitions. The proceeds of the
borrowings under the Term Loans and the Revolver, along with $8.0 million
raised on November 1, 1996 from the Bank and Chase Venture Capital Associates,
L.P. ("CVCA") upon the Company's issuance of Senior Subordinated Notes (the
"Senior Subordinated Notes") with detachable warrants, were primarily used to:
(i) provide $45.8 million cash consideration to JEH shareholders in connection
with the Company's acquisition of JEH; and (ii) refinance existing Hanger and
JEH indebtedness of approximately $20.7 million.
Of the $74.9 million principal amount of existing indebtedness of the
Company, the following amounts will be repaid out of the net proceeds of the
Offering: (i) the $8.0 million of Senior Subordinated Notes, maturing on
November 1, 2004 and bearing annual interest of 8.0%; (ii) $23.6 million
principal amount of Term Loans, maturing between December 31, 2001 and
December 31, 2003 and bearing annual interest between LIBOR plus 2.75% and
LIBOR plus 3.25%; (iii) $500,000 of borrowings under the Revolver, maturing on
November 1, 2001 and bearing annual interest of LIBOR plus 2.75%; and (iv)
$5.5 million principal amount of Acquisition Loans, maturing on November 1,
2001 and bearing annual interest of LIBOR plus 2.75%. Upon repayment of the
Senior Subordinated Notes, the Company will be required to write off the
unamortized debt discount, which was $1.9 million ($1.1 million net of tax
benefit) at March 31, 1997, recorded upon the issuance of such notes.
DIVIDEND POLICY
The Company has never declared or paid, nor does it intend to declare or
pay, cash dividends on the Common Stock for the foreseeable future, but
intends instead to retain future earnings to finance expansion and operations.
Certain financial covenants in the Company's loan agreement with the Bank
limit the ability of the Company to pay dividends or make other distributions
on the Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
10
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock is listed and traded on the American Stock Exchange under
the symbol "HGR." The following table sets forth the high and low intra-day
sale prices for the Common Stock for the periods indicated as reported on the
AMEX:
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1995
First Quarter.............................................. $3.13 $2.50
Second Quarter............................................. 3.50 2.19
Third Quarter.............................................. 3.88 2.75
Fourth Quarter............................................. 3.50 2.56
YEAR ENDED DECEMBER 31, 1996
First Quarter.............................................. $4.75 $2.63
Second Quarter............................................. 6.50 4.06
Third Quarter.............................................. 7.50 4.88
Fourth Quarter............................................. 7.38 5.81
YEAR ENDING DECEMBER 31, 1997
First Quarter.............................................. $7.00 $5.50
Second Quarter (through June 25, 1997)..................... 9.38 6.25
</TABLE>
On June 25, 1997, the last reported sale price of the Common Stock on the
AMEX was $9.06 per share. At June 20, 1997, there were approximately 910
holders of record of Common Stock.
11
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1997: (i) the capitalization
of the Company; (ii) the capitalization of the Company on a pro forma basis to
reflect acquisitions completed after March 31, 1997; and (iii) the
capitalization of the Company on a pro forma as adjusted basis to reflect the
sale of the shares of Common Stock offered hereby (based on an assumed
offering price of $9.06 per share) and the application of the estimated net
proceeds therefrom, all as if they occurred on March 31, 1997:
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
-------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Outstanding debt:
Revolving Loan Commitment............... $ 500 $ 500 $ --
Acquisition Loan Commitment............. 5,500 8,065 --
A Term Loan............................. 29,000 29,000 18,280
B Term Loan............................. 28,000 28,000 17,650
8.0% Senior Subordinated Notes due
November 2004.......................... 6,067 6,067 --
Subordinated seller notes and other
miscellaneous obligations.............. 5,801 8,417 8,417
-------- -------- --------
Total outstanding debt.............. 74,868 80,049 44,347
-------- -------- --------
Mandatorily redeemable preferred stock:
Class C, par value $.01; 300 shares
authorized, issued and outstanding
liquidation preference of $500 per
share plus accrued dividends........... 284 284 284
Class F, par value $.01; 100,000 shares
authorized, no shares issued or
outstanding; liquidation preference
$1,000 per share plus accrued
dividends.............................. -- -- --
Shareholders' equity:
Common Stock--$.01 par value; 25,000,000
shares authorized; 9,493,766 shares
issued and 9,360,270 shares
outstanding; 9,557,766 shares issued
and 9,424,270 shares outstanding on a
pro forma basis; 14,057,766 shares
issued and 13,924,270 shares
outstanding on a pro forma as adjusted
basis(3)............................... 95 96 141
Additional paid-in capital............... 41,087 41,586 79,176
Accumulated deficit...................... (96) (96) (1,242)
Treasury stock, cost--(133,495 shares)... (655) (655) (655)
-------- -------- --------
Total shareholders' equity.......... 40,431 40,931 77,420
-------- -------- --------
Total capitalization............... $115,583 $121,264 $122,051
======== ======== ========
</TABLE>
- --------
(1) Gives effect to the consummation of the acquisitions after March 31, 1997.
See "Business--Acquisitions."
(2) Gives effect to the application of the net proceeds from the sale of 4.5
million shares of Common Stock offered hereby by the Company at an assumed
public offering price of $9.06 share. Shareholders' equity reflects debt
discounts and deferred finance costs of $2.0 million ($1.1 million net of
tax benefit) expensed as a result of the retirement of certain
indebtedness from the assumed use of proceeds of the Offering. See "Use of
Proceeds."
(3) Excludes: (i) 401,296 shares of Common Stock issuable upon exercise of
stock options outstanding under the Company's 1991 Stock Option Plan with
a weighted average exercise price of $5.62 per share at June 24, 1997;
(ii) 61,250 shares of Common Stock issuable upon the exercise of stock
options outstanding under the Company's 1993 Non-Employee Director Stock
Option Plan with a weighted average exercise price of $5.70 per share;
(iii) 69,375 shares of Common Stock issuable upon exercise of outstanding
non-qualified options at a weighted average exercise price of $8.46 per
share; and (iv) 2,076,644 shares of Common Stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $5.35 per
share. See "Principal Shareholders."
12
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The selected historical consolidated statement of operations data for the
years ended December 31, 1994, 1995 and 1996, and the selected consolidated
balance sheet data as of December 31, 1995 and 1996, presented below, are
derived from the audited Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus. The selected historical consolidated
statement of operations data for the quarters ended March 31, 1996 and 1997,
and the selected historical consolidated balance sheet data as of March 31,
1997, are derived from unaudited financial statements included elsewhere in
this Prospectus, and include, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position and results of operations of the
Company for such periods. In view of the significance of JEH, which was
acquired by the Company effective November 1, 1996 in a transaction accounted
for as a purchase, the results of operations for the quarter ended March 31,
1997 are not comparable with the results for the quarter ended March 31, 1996.
Furthermore, the results of operations for the quarter ended March 31, 1997
are not necessarily indicative of the results to be expected for the entire
year ending December 31, 1997, or any future period.
The following selected pro forma consolidated financial information should
be read in conjunction with the Pro Forma Consolidated Condensed Financial
Statements for the year ended December 31, 1996 and quarter ended March 31,
1997, and the Notes thereto included elsewhere in this Prospectus. The pro
forma adjustments are described in the accompanying Notes to the Pro Forma
Consolidated Condensed Financial Statements.
13
<PAGE>
SELECTED HISTORICAL AND CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTERS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------------- -----------------------------
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
1992 1993 1994 1995 1996 1996(4) 1996 1997 1997(5)
------- ------- ------- ------- ------- ----------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................... $32,405 $43,877 $50,300 $52,468 $66,806 $131,557 $12,229 $30,950 $33,139
Gross profit................. 17,277 24,207 27,091 27,896 34,573 64,264 6,344 14,720 16,111
Selling, general and
administrative.............. 13,064 17,124 21,340 19,362 24,550 46,137 4,997 10,925 11,783
Depreciation and
amortization................ 2,100 2,656 3,137 2,691 2,848 4,846 646 1,159 1,227
Acquisition and
integration costs(1)........ -- -- -- -- 2,479 2,479 -- -- --
Restructuring costs(1)....... -- -- 460 -- -- -- -- -- --
Loss from disposal of
assets(1)................... -- -- 2,150 -- -- -- -- -- --
Income from continuing
operations.................. 2,113 4,428 4 5,843 4,695 10,801 701 2,636 3,101
Interest expense............. (1,279) (1,167) (1,746) (2,056) (2,547) (4,075) (393) (1,527) (939)
Income (loss) from continuing
operations before taxes,
extraordinary item and
accounting change........... 807 3,221 (1,922) 3,680 1,971 6,740 263 1,065 2,123
Provision for income taxes... 487 1,627 358 1,544 890 3,036 113 447 892
Income (loss) from continuing
operations before
extraordinary item and
accounting change........... 320 1,594 (2,280) 2,135 1,081 3,704 150 618 1,232
Loss from
discontinued operations(2).. (35) (105) (407) -- -- -- -- -- --
Income (loss) before
extraordinary item and
accounting change........... 285 1,490 (2,687) 2,135 1,081 3,704 150 618 1,232
Extraordinary loss on early
extinguishment of debt...... (1,139) (23) -- -- (83) (83) -- -- --
Cumulative effect of change
in accounting for income
taxes....................... -- 1,189 -- -- -- -- -- -- --
Net income (loss)(6)......... (853) 2,655 (2,687) 2,135 998 3,621 150 618 1,232
INCOME (LOSS) PER COMMON
SHARE(3)(6):
Income (loss) from continuing
operations before
extraordinary item and
accounting change........... $ 0.03 $ 0.19 $ (0.28) $ 0.26 $ 0.12 $ 0.26 $ 0.02 $ 0.06 $ 0.08
Loss from
discontinued operations..... -- (0.01) (0.05) -- -- -- -- -- --
Extraordinary loss on early
extinguishment of debt...... (0.15) -- -- -- (0.01) (0.01) -- -- --
Cumulative effect of change
in accounting for income
taxes....................... -- 0.14 -- -- -- -- -- -- --
------- ------- ------- ------- ------- -------- ------- ------- -------
Net income (loss) per common
share....................... $ (0.12) $ 0.32 $ (0.33) $ 0.26 $ 0.11 $ 0.25 $ 0.02 $ 0.06 $ 0.08
======= ======= ======= ======= ======= ======== ======= ======= =======
Weighted average common
shares outstanding.......... 7,565 8,344 8,290 8,291 8,663 14,544 8,324 9,978 14,542
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------------- -----------------------
1997
1992 1993 1994 1995 1996 1997 AS ADJUSTED(7)
------- ------- ------- ------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 1,391 $ 1,404 $ 1,048 $ 1,456 $ 6,572 $ 6,720 $ 3,220
Working capital......... 11,886 15,738 18,412 20,622 25,499 28,825 27,153
Total assets............ 48,844 57,427 61,481 61,800 134,941 138,158 144,206
Long-term debt.......... 14,970 19,153 24,330 22,925 64,298 68,815 37,242
Shareholders' equity.... 28,564 31,681 29,178 31,291 39,734 40,431 77,419
</TABLE>
See accompanying notes on following page.
14
<PAGE>
(1) The 1994 results include restructuring costs of $460,000 associated with
the closing of unprofitable patient-care centers and a loss from the
disposal of assets of $2.2 million resulting from the sale of the
Company's southern California patient-care centers. The 1996 results
include acquisition and integration costs of $2.5 million incurred in
connection with the purchase of JEH effective November 1, 1996. See Notes
F and D to the Company's Consolidated Financial Statements, respectively.
(2) Loss from discontinued operations consists of the loss from discontinued
operations and the sale of the discontinued operation of the Company's
Apothecaries, Inc. subsidiary, the assets of which were sold in 1994. See
Note E to the Company's Consolidated Financial Statements.
(3) Income (loss) per common share is calculated using the weighted average
common and common equivalent shares outstanding during the period, and has
been adjusted for preferred stock dividends.
(4) Adjusted to give effect to: (i) acquisitions which occurred during 1996
and the five months ended May 31, 1997; and (ii) the reduction in interest
expense resulting from the assumed use of the estimated net proceeds of
this Offering upon the sale by the Company of 4.5 million shares of Common
Stock offered hereby at an offering price of $9.06 per share, after
deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company, as if such transactions had
occurred as of the beginning of 1996. See "Use of Proceeds" and "Unaudited
Pro Forma Consolidated Financial Statements."
(5) Adjusted to give effect to: (i) acquisitions which occurred during the
five months ended May 31, 1997; and (ii) the reduction in interest expense
resulting from the assumed use of the estimated net proceeds of this
Offering upon the sale by the Company of 4.5 million shares of Common
Stock offered hereby at an offering price of $9.06 per share, after
deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company, as if such transactions had
occurred as of the beginning of 1997. See "Use of Proceeds" and "Unaudited
Pro Forma Consolidated Financial Statements."
(6) Pro forma as adjusted net income and net income per common share do not
include debt discounts and deferred financing fees of $2.0 million ($1.1
million net of tax benefit) for the year ended December 31, 1996 and $2.0
million ($1.1 million net of tax benefit) for the quarter ended March 31,
1997, expensed as a result of the retirement of certain indebtedness from
the assumed use of the estimated net proceeds therefrom. See "Use of
Proceeds."
(7) Adjusted to give effect to the sale by the Company of 4.5 million shares
of Common Stock in this Offering and the application of the estimated net
proceeds therefrom, assuming an offering price of $9.06 per share.
Shareholders' equity reflects debt discounts and deferred financing costs
of $2.0 million ($1.1 million net of tax benefit) expensed as a result of
the retirement of certain indebtedness from the assumed use of proceeds of
this Offering. See "Use of Proceeds."
15
<PAGE>
SELECTED UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma consolidated condensed statement of
operations for the quarter ended March 31, 1997 is based on the historical
financial statements of the Company, adjusted to give effect to the
acquisition of certain assets and assumption of certain liabilities of
Prosthetic Treatment Center, Inc. ("Kingsport"), the retail division of ACOR
Orthopaedic, Inc. ("ACOR"), and the financial statements of Fort Walton
Orthopedic, Inc. and Mobile Limb & Brace, Inc. ("FWM"). The following
unaudited pro forma consolidated condensed balance sheet as of March 31, 1997
is based on the historical financial statements of the Company, adjusted to
give effect to the acquisition of certain assets and assumption of certain
liabilities of ACOR and FWM. The following unaudited pro forma consolidated
condensed statement of operations for the year ended December 31, 1996 is
based on the historical financial statements of Hanger, adjusted to give
effect to the acquisition of certain assets and assumption of certain
liabilities of Kingsport, ACOR, FWM and JEH.
The unaudited pro forma consolidated condensed statement of operations for
the quarter ended March 31, 1997 has been prepared assuming the Kingsport,
ACOR and FWM acquisitions occurred as of January 1, 1997. The unaudited pro
forma consolidated condensed statement of operations for the year ended
December 31, 1996 has been prepared assuming the Kingsport, ACOR, FWM and JEH
acquisitions occurred as of January 1, 1996. The unaudited pro forma
consolidated condensed balance sheet as of March 31, 1997 has been prepared
assuming that the ACOR and FWM acquisitions occurred as of March 31, 1997. The
acquisition and related adjustments are described in the notes thereto.
The unaudited pro forma consolidated condensed financial statements of
operations do not purport to represent what the Company's results of
operations would actually have been had the transactions in fact occurred on
the aforementioned date, or to project the Company's results of operations for
any future period.
The pro forma adjustments are based upon available information and upon
certain assumptions that management believes are reasonable. These adjustments
are directly attributable to the transactions and are expected to have a
continuing impact on the financial position and results of operations of the
Company.
The unaudited pro forma consolidated condensed statements of operations
should be read in conjunction with the Company's consolidated financial
statements and the financial statements of JEH and ACOR included elsewhere in
this Prospectus. See "Capitalization" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The consolidated
condensed pro forma financial information does not give effect to any matters
other than those described in the notes thereto.
16
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET AS OF MARCH 31, 1997
<TABLE>
<CAPTION>
HISTORICAL
------------
HANGER
ORTHOPEDIC ACQUIRED PRO FORMA OFFERING PRO FORMA
GROUP, INC. COMPANIES(1) ADJUSTMENTS PRO FORMA(8) ADJUSTMENTS(7) AS ADJUSTED
------------ ------------ ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash
equivalents............ $ 6,720,021 $ 572,187 $(4,072,187)(2)(3) $ 3,220,021 $ -- $ 3,220,021
Accounts receivable..... 24,528,348 1,397,001 -- 25,925,349 -- 25,925,349
Inventory............... 15,650,023 1,044,985 -- 16,695,008 -- 16,695,008
Prepaids and other
assets................. 2,756,664 18,679 -- 2,775,343 -- 2,775,343
Deferred income taxes... 3,159,280 -- -- 3,159,280 -- 3,159,280
------------ ---------- ----------- ------------ ------------ ------------
Total Current Assets..... 52,814,336 3,032,852 (4,072,187) 51,775,001 -- 51,775,001
------------ ---------- ----------- ------------ ------------ ------------
Property, plant and
equipment, net......... 17,287,656 140,304 (15,350)(2) 17,412,610 -- 17,412,610
Intangible assets, net.. 67,081,267 -- 7,002,372 74,083,639 (42,000) 74,041,639
Other assets............ 975,083 1,264 -- 976,347 -- 976,347
------------ ---------- ----------- ------------ ------------ ------------
Total Assets............. $138,158,342 $3,174,420 $ 2,914,835 $144,247,597 $ (42,000) $144,205,597
============ ========== =========== ============ ============ ============
LIABILITIES
Current Liabilities:
Current portion of long-
term debt.............. $ 6,052,939 $ 15,501 $ 1,036,461(2)(4) $ 7,104,901 $ -- $ 7,104,901
Accounts payable........ 2,834,080 337,453 -- 3,171,533 -- 3,171,533
Accrued expenses and
other.................. 15,102,741 137,121 (65,750)(2) 15,174,112 (829,000) 14,345,112
------------ ---------- ----------- ------------ ------------ ------------
Total Current
Liabilities............. 23,989,760 490,075 970,711 25,450,546 (829,000) 24,621,546
------------ ---------- ----------- ------------ ------------ ------------
Long-term debt.......... 68,815,270 40,580 4,087,889(2)(4) 72,943,739 (35,701,375) 37,242,364
Deferred income taxes... 2,377,627 -- -- 2,377,627 -- 2,377,627
Other liabilities....... 2,544,850 -- -- 2,544,850 -- 2,544,850
------------ ---------- ----------- ------------ ------------ ------------
Total Liabilities........ 97,727,507 530,655 5,058,600 103,316,762 (36,530,375) 66,786,387
------------ ---------- ----------- ------------ ------------ ------------
SHAREHOLDERS' EQUITY
Common stock............ 94,938 5,900 (5,260)(5)(6) 95,578 45,000 140,578
Additional paid-in
capital................ 41,087,021 19,296 480,064(5)(6) 41,586,381 37,589,375 79,175,756
Retained earnings
(Accumulated deficit).. (95,562) 2,618,569 (2,618,569)(5) (95,562) (1,146,000) (1,241,562)
------------ ---------- ----------- ------------ ------------ ------------
41,086,397 2,643,765 (2,143,765) 41,586,397 36,488,375 78,074,772
Treasury stock.......... (655,562) -- -- (655,562) -- (655,562)
------------ ---------- ----------- ------------ ------------ ------------
Total Shareholders'
Equity.................. 40,430,835 2,643,765 (2,143,765) 40,930,835 36,488,375 77,419,210
------------ ---------- ----------- ------------ ------------ ------------
Total Liabilities and
Shareholders' Equity.... $138,158,342 $3,174,420 $ 2,914,835 $144,247,597 $ (42,000) $144,205,597
============ ========== =========== ============ ============ ============
</TABLE>
- -------
(1) The aggregate purchase price for the acquisitions consummated subsequent to
March 31, 1997 amounts to approximately $9.2 million, comprised of $6.1
million in cash, seller notes of $2.6 million and the issuance of 64,000
shares of Common Stock with a value of approximately $500,000. Condensed
historical balance sheet information for businesses acquired subsequent to
March 31, 1997:
<TABLE>
<CAPTION>
CURRENT TOTAL CURRENT TOTAL
COMPANY ASSETS ASSETS LIABILITIES EQUITY
------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
ACOR............................ $1,978,769 $2,063,355 $381,705 $1,681,650
FWM............................. 1,054,083 1,111,065 108,370 962,115
---------- ---------- -------- ----------
Total......................... $3,032,852 $3,174,420 $490,075 $2,643,765
========== ========== ======== ==========
</TABLE>
(2) Adjusts assets and liabilities to fair market value and eliminates certain
assets and liabilities not assumed by the Company.
17
<PAGE>
(3) Reflects that the $3.5 million paid in cash at settlement for the ACOR
acquisition had been funded from the Acquisition Loans on March 31, 1997
and the cash and debt amounts are included in the historical Company
balance sheet as of March 31, 1997.
(4) Reflects long-term debt and notes payable which the Company incurred to
purchase ACOR and FWM.
(5) Eliminates ownership interest in the companies acquired.
(6) Represents issuance of 64,000 shares of Company Common Stock at $7.81 per
share in conjunction with the FWM acquisition.
(7) Reflects the application of net proceeds from the sale of Common Stock in
this Offering and the recognition of the expense of $2.0 million ($1.1
million net of tax benefit) of debt discounts and deferred financing fees
as if these transactions occurred as of March 31, 1997. See "Use of
Proceeds."
(8) Excludes potential future contingent consideration to be paid to former
shareholders of acquired companies based on prescribed formulas.
Contingent consideration is to be accounted for as additional purchase
price consideration if and when it becomes probable.
18
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
HISTORICAL
-----------
HANGER
ORTHOPEDIC ACQUIRED PRO FORMA OFFERING PRO FORMA
GROUP, INC. COMPANIES(1) ADJUSTMENTS PRO FORMA(11) ADJUSTMENTS AS ADJUSTED
----------- ------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $30,949,614 $2,287,219 $ (97,780)(2) $33,139,053 $ -- $33,139,053
Cost of sales........... 16,229,929 893,000 (95,009)(2) 17,027,920 -- 17,027,920
----------- ---------- --------- ----------- -------- -----------
Gross profit............ 14,719,685 1,394,219 (2,771) 16,111,133 -- 16,111,133
Selling, general
and administrative..... 10,924,635 858,466 -- (5) 11,783,101 -- 11,783,101
Depreciation and
amortization........... 1,158,817 5,786 61,969(3)(4) 1,226,572 -- 1,226,572
----------- ---------- --------- ----------- -------- -----------
Income from operations.. 2,636,233 529,967 (64,740) 3,101,460 -- 3,101,460
Interest expense........ (1,527,269) -- (236,887)(6) (1,764,156) 824,808(8) (939,348)
Other expense........... (43,749) 5,866 (1,042)(6) (38,925) -- (38,925)
----------- ---------- --------- ----------- -------- -----------
Income from operations
before taxes........... 1,065,215 535,833 (302,669) 1,298,379 824,808 2,123,187
Provision for income
taxes.................. 447,300 -- 97,928(7) 545,228 346,420(9) 891,648
----------- ---------- --------- ----------- -------- -----------
Net income.............. $ 617,915 $ 535,833 $(400,597) $ 753,151 $478,388 $ 1,231,539
=========== ========== ========= =========== ======== ===========
Net income per common
share(10):............. $ 0.06 $ 0.07 $ 0.08
----------- ----------- -----------
Shares used to compute
net income per common
share:................. 9,977,853 10,041,853 14,541,853
----------- ----------- -----------
</TABLE>
- --------
(1) The historical statements of operations data for Kingsport, ACOR and FWM
(collectively, the "Acquired Companies") for the quarter ended March 31,
1997 represent the results of operations of such companies from January
1, 1997 to the earlier of their respective dates of acquisition or March
31, 1997. Each of the acquisitions has been accounted for as a purchase.
Accordingly, the results of operations of each of the Acquired Companies
are included in the historical results of operations of the Company from
the date of its acquisition.
Represents results of operations of the Acquired Companies prior to their
acquisition dates for the periods presented:
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, 1997
----------------------------
COMPANY ACQUIRED AS OF NET SALES NET INCOME (LOSS)
------- -------------- ---------- -----------------
<S> <C> <C> <C>
Kingsport....................... March 5, 1997 $ 56,920 $(11,361)
ACOR............................ April 1, 1997 1,290,580 194,290
FWM............................. May 12, 1997 939,719 352,904
---------- --------
Total......................... $2,287,219 $535,833
========== ========
</TABLE>
(2) The adjustments to reduce sales ($97,780) and cost of sales ($95,009)
reflect the elimination of profit on intercompany sales during the period
presented.
(3) Reflects increases in historical amounts of the Acquired Companies for
amortization expense resulting from the revaluation in purchase
accounting of intangible assets, as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
COMPANY MARCH 31, 1997
------- --------------
<S> <C>
Kingsport.................................................... $1,667
ACOR......................................................... 2,500
FWM.......................................................... 1,908
------
Total...................................................... $6,075
======
</TABLE>
19
<PAGE>
(4) Reflects additional amortization over a 40-year period, as if such
Acquired Companies were acquired as of the beginning of the period
presented, as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
COMPANY MARCH 31, 1997
------- --------------
<S> <C>
JEH*......................................................... $11,146
Kingsport.................................................... 1,535
ACOR......................................................... 24,913
FWM.......................................................... 18,300
-------
Total...................................................... $55,894
=======
</TABLE>
--------
* Reflects the full-period effect of amortization incurred as a result of
the final working capital adjustment paid to the former shareholders of
JEH.
(5) Excludes reductions to historical amounts approximating $35,000 for
employee and practitioner salaries of the Acquired Companies as a result
of termination of employment of certain employees and the elimination of
employer retirement plan contributions and certain other items.
(6) The additional interest expense of $236,887 and the reduction in other
income of $1,042 reflect what would have been incurred if the
consideration (in the form of cash and promissory notes) for the Acquired
Companies had been paid at January 1, 1997. The interest rates used to
calculate pro forma interest (between 8% and 9%) on the assumed
additional debt required to fund the cash payments reflect the Company's
approximate borrowing rate.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, 1997
-----------------------------
COMPANY INTEREST EXPENSE OTHER INCOME
------- ---------------- ------------
<S> <C> <C>
JEH*.......................................... $ 41,264 $ --
Kingsport..................................... 3,244 (1,042)
ACOR.......................................... 117,563 --
FWM........................................... 74,816 --
-------- -------
Total....................................... $236,887 $(1,042)
======== =======
</TABLE>
--------
* Reflects the full-period effect of interest incurred as a result of the
final working capital adjustment paid to the former shareholders of JEH.
(7) Reflects income taxes as if each of the Company, JEH and the Acquired
Companies were a C Corporation for the period presented.
(8) Represents the assumed application of estimated net proceeds to be
received in this Offering as of the beginning of the period presented.
Pro forma interest expense, net income and net income per common share do
not include $2.0 million ($1.1 million net of tax benefit) in debt
discounts and deferred financing fees expensed as a result of the
retirement of certain indebtedness from such net proceeds. The following
reflects the debt to be repaid by the Company from the net proceeds in
this Offering and the debt to be outstanding as of March 31, 1997 on a
pro forma as adjusted basis.
<TABLE>
<CAPTION>
REMAINING
DESCRIPTION REPAID INDEBTEDNESS
----------- ----------- ------------
<S> <C> <C>
Senior Subordinated Notes.......................... $ 8,000,000 $ --
Acquisition Line of Credit and Revolver............ 8,565,000 --
A Term Loan Commitment............................. 10,719,507 18,280,493
B Term Loan Commitment............................. 10,349,868 17,650,132
Subordinated seller notes and other................ -- 8,416,640
----------- -----------
$37,634,375 $44,347,265
=========== ===========
</TABLE>
20
<PAGE>
(9) Represents the adjustments to income taxes which would have been provided
on a pro forma as adjusted income before income taxes basis using an
effective tax rate of 42%.
(10) Historical and pro forma net income per common share, which have been
adjusted for preferred stock dividends, are computed by dividing net
income by the number of weighted average common and common equivalent
shares outstanding for the period. The shares used in the computation of
net income per common share on a pro forma as adjusted basis also include
Common Stock issued in connection with acquisitions and Common Stock
being sold pursuant to this Offering.
(11) The unaudited pro forma amounts exclude potential future contingent
consideration to be paid to former shareholders of acquired companies
based on prescribed formulas. Contingent consideration is to be accounted
for as additional purchase price consideration if and when it becomes
probable.
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONSFOR THE YEAR
ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HISTORICAL
-----------
HANGER
ORTHOPEDIC ACQUIRED PRO FORMA OFFERING PRO FORMA
GROUP, INC. COMPANIES(1) ADJUSTMENTS PRO FORMA(13) ADJUSTMENTS AS ADJUSTED
----------- ------------ ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $66,805,944 $64,878,148 $ (127,555)(2) $131,556,537 $ -- $131,556,537
Cost of sales........... 32,233,373 35,113,611 (54,519)(2)(3)(4) 67,292,465 -- 67,292,465
----------- ----------- ----------- ------------ ---------- ------------
Gross profit............ 34,572,571 29,764,537 (73,036) 64,264,072 -- 64,264,072
Selling, general
and administrative..... 27,029,315 22,083,280 (496,311)(3)(6)(7) 48,616,284 -- 48,616,284
Depreciation
and amortization....... 2,848,465 1,626,639 371,266(4)(5)(6) 4,846,370 -- 4,846,370
----------- ----------- ----------- ------------ ---------- ------------
Income from operations.. 4,694,791 6,054,618 52,009 10,801,418 -- 10,801,418
Interest expense........ (2,546,561) (394,650) (4,391,721)(8) (7,332,932) 3,257,595(10) (4,075,337)
Other income
(expense), net......... (177,216) 707,134 (515,751)(3)(8) 14,167 -- 14,167
----------- ----------- ----------- ------------ ---------- ------------
Income from operations
before taxes and
extraordinary item..... 1,971,014 6,367,102 (4,855,463) 3,482,653 3,257,595 6,740,248
Provision for income
taxes.................. 889,886 76,966 603,272(9) 1,570,124 1,465,918(11) 3,036,042
Extraordinary loss on
early extinguishment of
debt, net of tax....... 83,234 -- -- 83,234 -- 83,234
----------- ----------- ----------- ------------ ---------- ------------
Net income (loss)....... $ 997,894 $ 6,290,136 $(5,458,735) $ 1,829,295 $1,791,677 $ 3,620,972
=========== =========== =========== ============ ========== ============
Net income per common
share(12):............. $ 0.11 $ 0.18 $ 0.25
----------- ------------ ------------
Shares used to compute
net income per common
share:................. 8,663,161 10,043,604 14,543,604
----------- ------------ ------------
</TABLE>
- --------
(1) The historical statements of operations data for JEH and the Acquired
Companies for the year ended December 31, 1996 represent the results of
operations of such companies from January 1, 1996 to the earlier of their
respective dates of acquisition or December 31, 1996. Each of the
acquisitions has been accounted for as a purchase. Accordingly, the
results of operations of each of the above companies are included in the
historical results of operations of the Company from the date of its
acquisition.
Represents results of operations of JEH and each of the Acquired Companies
prior to their acquisition dates for the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------
COMPANY ACQUIRED AS OF NET SALES NET INCOME (LOSS)
------- ---------------- ----------- -----------------
<S> <C> <C> <C>
JEH.......................... November 1, 1996 $56,140,445 $4,518,040
Kingsport.................... March 5, 1997 382,009 (126,995)
ACOR......................... April 1, 1997 5,231,514 1,271,402
FWM.......................... May 12, 1997 3,124,180 627,689
----------- ----------
Total...................... $64,878,148 $6,290,136
=========== ==========
</TABLE>
(2) The adjustments to reduce sales ($127,555) and cost of sales ($123,940)
reflect the elimination of profit on intercompany sales during the period
presented.
(3) The adjustments to reduce cost of sales ($47,279), selling, general and
administrative expenses ($56,398) and other income ($439,151) reflect the
elimination of historical income and expenses generated from JEH assets
not acquired.
22
<PAGE>
(4) Reflects increases and reductions in historical amounts of JEH and the
Acquired Companies for depreciation and amortization expenses resulting
from the revaluation in purchase accounting of fixed assets and
intangible assets, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------
COMPANY COST OF SALES DEPRECIATION AMORTIZATION TOTAL
------- ------------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
JEH..................... $116,700 $116,700 $(1,213,744) $(980,344)
Kingsport............... -- -- 10,000 10,000
ACOR.................... -- -- 10,000 10,000
FWM..................... -- -- 7,630 7,630
-------- -------- ----------- ---------
Total................. $116,700 $116,700 $(1,186,114) $(952,714)
======== ======== =========== =========
</TABLE>
(5) Reflects additional amortization over a 40-year period, as if JEH and the
Acquired Companies were acquired as of the beginning of the period
presented, as follows:
<TABLE>
<CAPTION>
YEAR ENDED
COMPANY DECEMBER 31, 1996
------- -----------------
<S> <C>
JEH....................................................... $809,154
Kingsport................................................. 9,048
ACOR...................................................... 98,338
FWM....................................................... 78,260
--------
Total................................................... $994,800
========
</TABLE>
(6) Reflects adjustments to depreciation and amortization for $445,880 of
additional amortized debt issue costs and selling, general and
administrative expenses for $85,000 of loan administative expenses as if
the $90.0 million credit facility had been in place on January 1, 1996.
(7) Includes a net reduction to historical amounts of $496,000 for employee
and practitioner salaries of JEH and the Acquired Companies to reflect
the difference between such historical amounts and amounts specified in
employment contracts for comparable employment positions with the
Company. Excludes reductions to historical amounts approximating $1.3
million as a result of termination of employment of certain employees and
the elimination of employer retirement plan contributions and certain
other items.
(8) The additional interest expense of $4.4 million and the reduction in
other income of $76,600 reflect what would have been incurred if the
consideration (in the form of cash and promissory notes) for JEH and the
Acquired Companies had been paid at January 1, 1997. The interest rates
used to calculate pro forma interest (between 8% and 9%) on the assumed
additional debt required to fund the cash payments reflect the Company's
approximate borrowing rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------
COMPANY INTEREST EXPENSE OTHER INCOME
------- ---------------- ------------
<S> <C> <C>
JEH........................................... $3,639,611 $(70,350)
Kingsport..................................... 16,691 (6,250)
ACOR.......................................... 440,265 --
FWM........................................... 295,154 --
---------- --------
Total....................................... $4,391,721 $(76,600)
========== ========
</TABLE>
(9) Reflects income taxes as if each of the Company, JEH and the Acquired
Companies were a C Corporation for the period presented.
23
<PAGE>
(10) Represents the assumed application of estimated net proceeds to be
received in this Offering as of the beginning of the period presented.
Pro forma interest expense, net income and net income per common share do
not include $2.0 million ($1.1 million net of tax benefit) in debt
discounts and deferred financing fees expensed as a result of the
retirement of certain indebtedness from such net proceeds. The following
reflects the debt to be repaid by the Company from the net proceeds in
this Offering and the debt to be outstanding as of December 31, 1996 on a
pro forma as adjusted basis:
<TABLE>
<CAPTION>
REMAINING
DESCRIPTION REPAID INDEBTEDNESS
----------- ----------- ------------
<S> <C> <C>
Senior Subordinated Notes.......................... $ 8,000,000 $ --
Acquisition Line of Credit......................... 7,885,253 --
A Term Loan Commitment............................. 11,065,343 17,934,657
B Term Loan Commitment............................. 10,683,779 17,316,221
Subordinated seller notes and other................ -- 9,061,834
----------- -----------
$37,634,375 $44,312,712
=========== ===========
</TABLE>
(11) Represents the adjustments to income taxes which would have been provided
on a pro forma as adjusted income before income taxes basis using an
effective tax rate of 45%.
(12) Historical and pro forma net income per common share, which have been
adjusted for preferred stock dividends, are computed by dividing net
income by the number of weighted average common and common equivalent
shares outstanding for the period. The shares used in the computation of
net income per share on a pro forma as adjusted basis also include Common
Stock issued in connection with acquisitions and Common Stock being sold
pursuant to this Offering.
(13) Excludes potential future contingent consideration to be paid to former
shareholders of acquired companies based on prescribed formulas.
Contingent consideration is to be accounted for as additional purchase
price consideration if and when it becomes probable.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF
OPERATIONS
The following discussion is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
OVERVIEW
The significant growth in the Company's O&P professional practice management
net sales has resulted from an aggressive program of acquiring and developing
O&P patient-care centers. Similarly, growth in the Company's O&P distribution
and manufacturing net sales is attributable primarily to acquisitions. Since
1986, when the Company acquired its first O&P practice, the Company has
acquired over 40 businesses and presently operates 190 patient-care centers,
six distribution facilities, three of which contain central fabrication
operations, and two manufacturing facilities. Since 1995, the Company has
significantly expanded OPNET, its national O&P preferred provider network, in
order to facilitate contracting with managed care organizations on a national
level.
COMPANY EXPANSION
During late-1994 and 1995, the Company closed or sold nine unprofitable
patient-care centers and temporarily discontinued its acquisition program.
Following a change in executive management in mid-1995 and a refinancing in
1996, the Company's acquisition program was resumed. The significant increase
in the number of patient-care centers and certified practitioners in 1996 is
attributable primarily to the Company's acquisition of JEH. The following
table sets forth the number of patient-care centers, certified practitioners
and states (including the District of Columbia) in which the Company operated
at the end of each of the past five years and at March 31, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------ ---------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Number of patient-care centers.............. 63 72 85 84 178 81 178
Number of certified practitioners........... 82 104 125 119 199 90 197
Number of states (including D.C.)........... 18 22 25 24 29 26 29
</TABLE>
NON-RECURRING CHARGES
As more fully discussed below under "Results of Operations," the Company's
results of operations have been adversely affected by certain non-recurring
charges, the most significant of which were associated with: (i) the sale or
closure of unprofitable patient-care centers and related restructuring charges
recorded in 1994; and (ii) non-recurring acquisition and integration costs
incurred in 1996 in connection with the acquisition of JEH.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income from continuing operations (as
reported)................................. $2,113 $4,428 $ 4 $5,843 $4,695
Nature of non-recurring charges:
Loss from disposal of assets............. -- -- 2,150 -- --
Restructuring costs...................... -- -- 460 -- --
Acquisition and integration costs........ -- -- -- -- 2,479
------ ------ ------ ------ ------
Income from continuing operations
(excluding
non-recurring charges).................... $2,113 $4,428 $2,614 $5,843 $7,174
</TABLE>
25
<PAGE>
RECENT ACQUISITIONS
On November 1, 1996, the Company acquired JEH in a transaction that was
accounted for as a purchase. The acquisition, which increased the Company's
patient-care centers from 84 in 24 states and the District of Columbia to 178
in 28 states and the District of Columbia and significantly expanded its
distribution capabilities, impacted the last two months of the Company's
reported 1996 results of operations. JEH's net sales for the ten months ended
October 31, 1996 were $57.2 million. The total purchase price for JEH
consisted of approximately $45.8 million in cash plus 1.0 million shares of
the Company's Common Stock. The Company believes that as a result of the
Company's recognition, in late- 1996, of certain non-recurring costs incurred
in connection with the JEH acquisition and integration of the companies'
operations, as well as certain post-acquisition cost savings expected to be
realized, the Company's 1997 profitability will be enhanced. This forward-
looking statement should be read in conjunction with the risk factor captioned
"Risks Associated with Acquisition Strategy" under "Risk Factors." Since
January 1, 1997, the Company has also acquired the assets of four additional
O&P practices, representing an aggregate of nine patient-care centers and 18
practitioners. The four companies acquired by the Company had net sales of
$8.8 million in the year ended December 31, 1996 and were acquired for
aggregate consideration of $9.7 million.
SAME-CENTER SALES GROWTH
In addition to acquisitions of new patient-care centers, the growth in the
Company's net sales from O&P patient-care services is attributable to a lesser
degree to increases in net sales from existing patient-care centers. In 1994,
the Company's decline in same-center sales growth was primarily as a result of
poor operating performance at several centers that the Company subsequently
sold or closed, the loss of several practitioners and severe weather
conditions in the first quarter. The following table sets forth, for the
periods indicated, the percentage increase (decreases) in net sales
contributed by those patient-care centers that were open during the entire
period as well as the prior year's entire comparable period:
<TABLE>
<CAPTION>
QUARTERS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ----- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Percentage increase
(decrease).................. 12.3% 4.4% (3.7)% 5.2% 5.8% 1.8% 10.6%
</TABLE>
CENTER-LEVEL RESULTS BY YEAR
The Company generally experiences rapid growth in net sales in the first
full calendar year following an acquisition or a new patient-care center
opening, with rates of growth moderating in the following years. In addition
to net sales growth, the Company tracks profitability as measured by center-
level EBITDA contribution before corporate overhead allocations. The following
table represents the aggregate average net sales and EBITDA contribution of
the Company's patient-care centers that have been acquired or opened since
1990:
<TABLE>
<CAPTION>
YEAR 1(1) YEAR 2 YEAR 3 YEAR 4 YEAR 5
--------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Average net sales growth.................. 12.1% 3.7% 3.7% 6.7% 4.4%
EBITDA margin(2).......................... 20.6 21.8 26.2 22.0 27.6
</TABLE>
- --------
(1) Year one represents the first full year of operation by the Company
following the center's acquisition or opening.
(2) EBITDA margin defined as EBITDA as a percentage of net sales.
EBITDA margins for year 4 were negatively affected due to the
underperformance in the years ended December 31, 1994 and 1995 of centers
acquired in 1990 and 1991, respectively. This underperformance is primarily
attributable to the loss of certain O&P practitioners and the underperformance
by certain of the Company's patient-care centers. As previously discussed, the
Company closed or sold nine unprofitable patient-care centers and replaced
previously vacant practitioner positions beginning in late-1994 through 1995.
26
<PAGE>
SOURCES OF REVENUE
Although the Company's net sales continue to be most significantly derived
from O&P practice management activities, including patient-care services, the
percentage of the Company's total net sales attributable to O&P distribution
activities has increased. The following table sets forth the percentage
contribution to net sales in each of the periods indicated by the principal
sources of the Company's net sales. The increase in the percentage of net
sales contributed by distribution activities in the first quarter of 1997 is
attributable to the Company's acquisition of JEH in late 1996. Manufacturing
as a percentage of net sales declined to 6.3% for the quarter ended March 31,
1997 versus 15.7% for the same period of 1996. However, there was a slight
increase in the actual dollar amount of net sales attributable to
manufacturing.
<TABLE>
<CAPTION>
QUARTERS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Sources of revenue:
Practice management
and patient-care services..... 82.5% 76.8% 78.0% 78.5% 78.2% 78.5% 74.6%
Manufacturing.................. 10.9 18.3 17.6 16.3 12.0 15.7 6.3
Distribution................... 6.6 4.9 4.4 5.2 9.8 5.8 19.1
</TABLE>
PAYOR MIX
The Company receives payments for O&P services rendered to patients from
private insurers, HMOs, PPOs, the patients directly and governmental payors,
including Medicare, Medicaid and the VA. The sources and amounts of the
Company's revenues derived from its patient-care centers are determined by a
number of factors, including the number and nature of O&P services rendered
and the rates of reimbursement among payor categories. Generally, private
insurance and other third-party reimbursement levels are greater than managed
care (HMO/PPO), Medicare, Medicaid and VA reimbursement levels. Changes in the
Company's payor mix can affect its profitability. The following table sets
forth the percentage contribution to net sales in each of the following
periods by the principal categories of payors:
<TABLE>
<CAPTION>
YEARS ENDED QUARTERS ENDED
DECEMBER 31, MARCH 31,
-------------- ----------------
1995 1996 1996 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
Payor Mix:
Private pay and other........................ 43.4% 43.2% 50.0% 43.0%
Medicare/Medicaid/VA......................... 56.6 56.8 50.0 57.0
</TABLE>
SELLING, GENERAL AND ADMINISTRATIVE MARGIN TRENDS
The Company seeks to achieve operating leverage of its corporate
infrastructure. In recent years, the rate of growth of the Company's corporate
overhead has been lower than the rate of growth of its consolidated net sales.
<TABLE>
<CAPTION>
QUARTERS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Selling, general and
administrative margin........ 40.3% 39.0% 42.4% 36.9% 36.7% 40.9% 35.3%
</TABLE>
EBITDA AND OPERATING MARGIN TRENDS
The Company's EBITDA and operating margins have fluctuated over the past
five years. From 1992 to 1993, margins increased as a result of the successful
integration of acquired operations. In 1994, margins decreased due to the loss
of several practitioners, poor operating performance at several centers and
severe weather in the first quarter of the year. In 1995, margins increased to
1993 levels due to the sale and/or closing of the unprofitable practices. In
1996, margins declined slightly when compared to 1995 as a result of the JEH
acquisition. JEH has a larger mix of distribution revenue than the Company,
and distribution operations have lower gross profit margins than patient-care
services. Also causing the decline in margins in 1996 was a decision by the
management of the Company not to eliminate any duplicate
27
<PAGE>
expenses during the two months ended December 31, 1996 following the JEH
acquisition. In the first quarter of 1997, margins were lower than full-year
1996 margins due to seasonal trends in the O&P industry. See "Seasonality."
The following table tracks the trends in the Company's EBITDA and operating
margins:
<TABLE>
<CAPTION>
QUARTERS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA margin................... 12.9% 16.1% 11.1% 16.1% 14.7% 10.6% 12.1%
Operating margin................ 6.5% 10.1% -- 11.1% 7.0% 5.7% 8.5%
</TABLE>
SEASONALITY
The Company's results of operations are affected by seasonal considerations.
The adverse weather conditions often experienced in certain geographical areas
of the United States during the first quarter of each year, together with a
greater degree of patients' sole responsibility for their insurance deductible
payment obligations during the beginning of each calendar year, have
contributed to lower Company net sales during that quarter.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items of
the Company's statements of operations as a percentage of the Company's net
sales:
<TABLE>
<CAPTION>
YEARS ENDED QUARTERS ENDED
DECEMBER 31, MARCH 31,
------------------- ----------------
1994 1995 1996 1996 1997
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales.............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of products and services sold..... 46.1 46.8 48.2 48.1 52.4
Gross profit........................... 53.9 53.2 51.8 51.9 47.6
Selling, general and administrative.... 42.4 36.9 36.7 40.9 35.3
Depreciation and amortization.......... 4.8 3.8 3.0 3.9 2.4
Acquisition and integration costs...... -- -- 3.7 -- --
Amortization of excess cost over net
assets acquired....................... 1.4 1.3 1.2 1.4 1.3
Restructuring costs.................... 0.9 -- -- -- --
Loss from disposal of assets........... 4.3 -- -- -- --
Income from operations................. -- 11.1 7.0 5.7 8.5
Interest expense....................... 3.5 3.9 3.8 3.2 4.9
Income (loss) from continuing
operations............................ (3.8) 7.0 3.0 2.1 3.4
Income taxes........................... 0.7 2.9 1.3 0.9 1.4
Loss from discontinued operations...... (0.8) -- -- -- --
Net income (loss)...................... (5.3) 4.1 1.5 1.2 2.0
</TABLE>
QUARTERS ENDED MARCH 31, 1997 AND 1996
Net Sales. Net sales for the quarter ended March 31, 1997 were approximately
$30.9 million, an increase of approximately $18.7 million, or 153.1%, over net
sales of approximately $12.2 million for the quarter ended March 31, 1996. The
majority of increase was attributable to Hanger's acquisition of JEH. In
addition, contributing to the increase in net sales was an 10.6% increase in
sales by those Hanger patient-care centers operating during the entire period
of both quarters. The Company believes that its net sales during the balance
of 1997 will continue to exceed 1996 net sales.
Gross Profit. Gross profit during the quarter ended March 31, 1997 was
approximately $14.7 million, an increase of approximately $8.4 million, or
132.0%, over gross profit of approximately $6.3 million for the quarter ended
March 31, 1996. Gross profit as a percentage of net sales decreased from 51.9%
in the first quarter of 1996 to 47.6% in the first quarter of 1997. The 4.3%
decrease in gross profit as a percentage of net sales is attributable
primarily to the acquisition of JEH, which operated a large
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distribution division that has lower gross profit margins than patient-care
services. The Company expects that its gross profit as a percentage of net
sales for the balance of 1997 will decline below the prior year's level as a
result of the operation of this division for an entire year. Gross profit as a
percentage of net sales for patient-care services was 52.4% in each of the
quarters ended March 31, 1996 and 1997. Gross profit as a percentage of net
sales for manufacturing and distribution was 35.8% in the quarter ended March
31, 1996 and 23.1% in the quarter ended March 31, 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the quarter ended March 31, 1997 increased by
approximately $5.9 million, or 118.6%, compared to the quarter ended March 31,
1996. The increase in selling, general and administrative expenses was
primarily a result of the acquisition of JEH. Selling, general and
administrative expenses as a percentage of net sales decreased to 35.3% from
40.9% for the same period in 1996. The decrease in selling, general and
administrative expenses as a percentage of net sales occurred primarily as a
result of cost cutting measures completed during the first quarter of 1997.
Income from Operations. Principally as a result of the above, income from
operations in the quarter ended March 31, 1997 was approximately $2.6 million,
an increase of $1.9 million, or 275.8%, over the prior year's comparable
quarter. Income from operations as a percentage of net sales increased to 8.5%
in the first quarter of 1997 from 5.7% for the prior year's comparable period.
Interest Expense. Interest expense in the first quarter of 1997 was
approximately $1.5 million, an increase of approximately $1.1 million, or
288.4%, over approximately $393,000 incurred in the first quarter of 1996.
Interest expense as a percentage of net sales increased to 4.9% from 3.2% for
the same period a year ago. The increase in interest expense was attributable
primarily to the $44.0 million increase in bank debt resulting from the
acquisition of JEH.
Income Taxes. The Company's effective tax rate was 42.0% in the first
quarter of 1997 versus 42.9% in 1996. The provision for income taxes in the
first quarter of 1997 was approximately $447,000 compared to approximately
$113,000 in the first quarter of 1996.
Net Income. As a result of the above, the Company recorded net income of
$618,000, or $.06 per common share on approximately 10.0 million weighted
average common shares outstanding for the quarter ended March 31, 1997,
compared to net income of approximately $150,000, or $.02 per common share on
approximately 8.3 million weighted average common shares outstanding in the
quarter ended March 31, 1996.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Sales. Net sales for the year ended December 31, 1996 were approximately
$66.8 million, an increase of approximately $14.3 million, or 27.3%, over net
sales of approximately $52.5 million for the year ended December 31, 1995. The
increase was primarily a result of: (i) an increase of $12.1 million
attributable to the acquisition of JEH; and (ii) an increase of $2.2 million,
or 5.6%, in net sales attributable to patient-care centers and facilities that
were in operation during both periods. Of the $2.2 million increase in net
sales, $1.8 million was attributable to patient-care centers and $293,000 was
attributable to manufacturing and distribution activities.
Gross Profit. Gross profit in 1996 increased approximately $6.7 million, or
23.9%, over the prior year. Gross profit as a percentage of net sales
decreased from 53.2% in 1995 to 51.8% in 1996. The 1.4% decrease in gross
profit as a percentage of net sales is primarily attributable to the
acquisition of JEH, which operated a large distribution division that had
lower gross profit margins than patient-care services. The cost of products
and services sold for the year ended December 31, 1996, was $32.2 million
compared to $24.6 million in 1995. Gross profit as a percentage of net sales
for patient-care services was 53.0% and 55.1% in the years ended December 31,
1995 and 1996, respectively. Gross profit as a percentage of net sales for
manufacturing and distribution was 47.0% and 44.9% for those years,
respectively.
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1996 increased approximately $5.2 million, or
26.8%, compared to 1995. The increase in selling, general and administrative
expenses was primarily a result of the acquisition of JEH. Selling, general
and administrative expenses as a percentage of net sales remained
approximately the same at 37%.
Acquisition and Integration Costs. Non-recurring acquisition and integration
costs totalling $2.5 million in 1996 consisted of: (i) $1.3 million of bonuses
and legal and consulting expenses incurred to acquire JEH; and (ii) $1.2
million of costs to integrate the operations of JEH with the Company,
including costs of severance and the conversion of its health insurance plan
and computer systems.
Income from Operations. Principally as a result of the above, income from
operations in 1996 totalled approximately $4.7 million, a decrease of $1.1
million from the prior year. Income from operations as a percentage of net
sales in 1996 decreased to 7.0% from 11.1% in 1995.
Interest Expense. Interest expense for the year ended December 31, 1996 was
approximately $2.5 million, which is an increase of $490,000, or 23.9%, over
the $2.1 million of interest expense incurred during the year ended December
31, 1995. The increase in interest expense was primarily attributable to the
increase in bank debt resulting from the acquisition of JEH. Interest expense
as a percentage of net sales was 3.8% for the year ended December 31, 1996,
compared to 3.9% for 1995.
Income Taxes. The Company's effective tax rate was 45.5% in 1996 versus
41.9% in 1995. The increase in 1996 reflects both the recognition of a state
deferred tax benefit in 1995, which did not occur in 1996, and the
disproportionate impact of permanent differences in relation to taxable
income.
Net Income. As a result of the above, the Company reported income from
operations before extraordinary item and accounting change of $1.1 million for
the year ended December 31, 1996, compared to $2.1 million for the prior year.
A pre-tax extraordinary loss of $139,000 ($83,000, net of tax) on early
extinguishment of debt was recognized in 1996 in connection with the Company's
refinancing of bank indebtedness.
As a result of the above, the Company reported net income of $998,000, or
$.11 per common share, for the year ended December 31, 1996, as compared to
net income of $2.1 million, or $.26 per common share, for the year ended
December 31, 1995.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Net Sales. Net sales for the year ended December 31, 1995 were approximately
$52.5 million, an increase of approximately $2.2 million, or 4.3%, over net
sales of approximately $50.3 million for the year ended December 31, 1994. The
increase was primarily a result of an increase of $2.1 million, or 4.8%, in
net sales attributable to patient-care centers and facilities that were in
operation during both periods. Of such $2.1 million increase in net sales,
$1.7 million 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 $2.2 million 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 undertaken by the Company in late
1994. These nine centers accounted for net sales of $1.8 million during the
year ended December 31, 1994, compared with net sales of only $74,000 during
the year ended December 31, 1995.
Gross Profit. Gross profit increased by approximately $805,000, or 3.0%,
over the prior year. Gross profit as a percentage 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 was $24.6 million compared to $23.2 million for
the year ended December 31, 1994. Gross profit as a percentage of net sales
for patient-care services remained the same during 1994 and 1995 at 53%. Gross
profit as a percentage 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.
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1995 decreased by approximately $2.0 million, or
9.3%, compared to 1994. In addition to decreasing in dollar amount, selling,
general and administrative expenses as a percentage 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
completed in March 1995. These nine centers accounted for selling, general and
administrative expenses of $1.0 million during the year ended December 31,
1994 compared with only $67,000 during the year ended December 31, 1995. The
remaining reduction in selling, general and administrative expenses was
primarily a result of additional cost cutting at the patient-care center
level.
Income from Operations. Principally as a result of the above, income from
operations in 1995 totalled approximately $5.8 million, an increase of $5.8
million over the prior year. Income from operations as a percentage of net
sales increased to 11.1% in 1995 from less than 1% in 1994.
Interest Expense. Interest expense for the year ended December 31, 1995 was
approximately $2.1 million, which is an increase of $310,000, or 17.8%, over
the $1.7 million of interest expense incurred during the year ended December
31, 1994. The increase in interest expense was primarily because average
borrowings in 1995 were $1.8 million higher than the average borrowing during
1994, and borrowing rates from the Company's lender were 1% higher in 1995
than 1994.
Income Taxes. The provision for income taxes in 1995 was approximately $1.5
million, as compared to $358,000 in 1994. The increase of $1.2 million was
primarily a result of a $5.8 million 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.
Net Income. As a result of the above, the Company reported net income of
$2.1 million, or $.26 per common share, for the year ended December 31, 1995,
as compared to a net loss of $2.7 million, or $.33 per common share, for the
year ended December 31, 1994.
PRO FORMA RESULTS--YEAR ENDED DECEMBER 31, 1996 AND QUARTER ENDED MARCH
31, 1997
The Unaudited Pro Forma Consolidated Condensed Statements of Operations for
the year ended December 31, 1996 and the quarter ended March 31, 1997 are
based on the historical consolidated statements of operations of the Company,
adjusted to give effect to the acquisitions of JEH and the Acquired Companies.
The Unaudited Pro Forma Consolidated Condensed Statements of Operations have
been prepared assuming such acquisitions occurred as of January 1, 1996 and
1997. The Unaudited Pro Forma Consolidated Condensed Statements of Operations
also give effect to the reduction in interest expense resulting from the
assumed application of the estimated net proceeds to be received by the
Company in this Offering to retire certain outstanding debt as if such
retirement occurred on January 1, 1996 and 1997. See "Use of Proceeds."
The Unaudited Pro Forma Consolidated Condensed Financial Statements of
Operations do not purport to represent what the Company's results of
operations would have been had the acquisitions of JEH and the Acquired
Companies occurred as of the beginning of the period presented or to project
the Company's results of operations for any future date or period, nor do they
give effect to any matters other than those described in the notes thereto.
For a description of adjustments made to the historical financial statements,
see the "Unaudited Pro Forma Consolidated Condensed Financial Statements of
Operations" and the notes thereto.
The effect of the acquisitions of JEH and the Acquired Companies was to
increase net sales by approximately $64.8 million in the year ended December
31, 1996 and $2.2 million in the quarter ended March 31, 1997 above the
Company's historical results for such periods. JEH and the Acquired Companies
had a gross profit margin of 45.9% of net sales in the year ended December 31,
1996 and 61.0% of net sales in the quarter ended March 31, 1997. Gross profit
margins of the Company on a pro forma as adjusted basis were 48.8% of net
sales for the year ended December 31, 1996 and 48.6% of net sales for
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the quarter ended March 31, 1997. JEH and the Acquired Companies' selling,
general and administrative expenses as a percent of net sales were 34.0% in
the year ended December 31, 1996 and 37.5% in the quarter ended March 31,
1997. Selling, general and administrative expenses of the Company on a pro
forma as adjusted basis were 37.0% of net sales for the year ended December
31, 1996 and 35.6% of net sales for the quarter ended March 31, 1997 as a
result of adjustments to eliminate JEH and Acquired Companies' compensation in
connection with which salaries were contractually reduced. As a result, the
Company's income from operations on a pro forma as adjusted basis was 8.2% of
net sales for the year ended December 31, 1996 and 9.4% for the quarter ended
March 31, 1997. Interest expense on a pro forma as adjusted basis decreased by
approximately $3.3 million for the year ended December 31, 1996 and $825,000
for the quarter ended March 31, 1997 due to the application of the estimated
net proceeds to be received by the Company in this Offering to retire certain
indebtedness. See "Use of Proceeds" and "Unaudited Pro Forma Consolidated
Condensed Financial Statements."
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated working capital at March 31, 1997 was
approximately $28.8 million, and cash and cash equivalents available were
approximately $6.7 million. The Company's cash resources were satisfactory to
meet its obligations during the year ended December 31, 1996, and the quarter
ended March 31, 1997. It is anticipated that such cash resources will
adequately meet the Company's working capital requirements during at least the
next 18 months.
On November 1, 1996, the Company repaid the outstanding balance under its
$13.0 million revolving credit agreement and its senior term loans with
NationsBank, N.A. and $5.0 million of Convertible Junior Subordinated Notes,
with a portion of the proceeds received from new term loans provided on that
date by the Bank, as agent for a syndicate of banks.
Under the terms of a new Financing and Security Agreement between the Bank
and the Company, the Bank provided up to $90.0 million principal amount of
senior financing that includes: (i) $57.0 million of Term Loans for use in
connection with the acquisition of JEH; (ii) an $8.0 million Revolver; and
(iii) up to $25.0 million principal amount of Acquisition Loans for use in
connection with future acquisitions.
The Company's total debt at March 31, 1997, including a current portion of
approximately $6.1 million, was approximately $74.9 million. Such indebtedness
included: (i) $57.0 million of Term Loans; (ii) $5.5 million of Acquisition
Loans; (iii) $500,000 borrowed under the Revolver; (iv) $6.1 million, net of
discount, borrowed on November 1, 1996 from the Bank and CVCA under the Senior
Subordinated Notes; and (v) $5.8 million of seller notes and other
indebtedness.
Of the Term Loans, approximately $29.0 million principal amount (the "A Term
Loan") is being amortized in quarterly amounts and will mature on December 31,
2001, and $28.0 million principal amount (the "B Term Loan") is being
amortized in quarterly amounts and will mature on December 31, 2003. The final
maturity of any loans under the Revolver and Acquisition Loans will mature on
November 1, 2001. The Facilities provided for an initial commitment fee of .5%
on the $90.0 million facility. In addition, an unused commitment fee of .5% of
1% per year on the unused portion of the Revolver and the Acquisition Loan
facilities is payable quarterly in arrears.
The Facilities are collateralized by a first priority security interest in
all of the common stock of Hanger's subsidiaries and all assets of Hanger and
its subsidiaries. At Hanger's option, the annual interest rate will be
adjusted to be either LIBOR plus 2.75% or a Base Rate (as defined below) plus
1.75% in the case of the A Term Loan, Acquisition Loans and Revolver
borrowings, and adjusted LIBOR plus 3.25% or a Base Rate plus 2.25% in the
case of the B Term Loan. The "Base Rate" is defined as the higher of the
federal funds rate plus .5%, or the prime commercial lending rate of Chase
Manhattan Bank, N.A., as announced from time to time. The Agreement relating
to the Facilities contains a minimum net worth covenant and prohibits the
payment of cash dividends on the Common Stock.
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All or any portion of outstanding loans under any of the Facilities may be
repaid at any time and commitments may be terminated in whole or in part at
the option of Hanger without premium or penalty, except that LIBOR-based loans
may only be paid at the end of the applicable interest period. Mandatory
prepayments will be required in the event of certain sales of assets, debt or
equity financings and under certain other circumstances.
Cash interest on the Senior Subordinated Notes, which mature on November 1,
2004, is payable quarterly at an annual rate of 8.0%. However, Hanger is
permitted, in lieu of cash interest, to pay interest in a combination of cash
and additional Senior Subordinated Notes ("PIK Interest Notes") at the above
interest rate. In that event, interest paid in cash will be at an annual rate
of 3.2% and interest paid in the form of PIK Interest Notes will be paid at an
annual rate of 4.8%. The Senior Subordinated Notes are subordinated to loans
under the Facilities. Hanger is, at its option, entitled to redeem the Senior
Subordinated Notes at any time at their liquidation value.
Detachable warrants issued by Hanger in conjunction with the Senior
Subordinated Notes represent 1.6 million shares of Hanger Common Stock with an
exercise price equal to $4.01 as to 929,700 shares, and $6.38 as to 670,300
shares. Up to 50% of the warrants (representing up to 800,000 shares of Hanger
Common Stock) will be terminated upon the repayment of 100% of the Senior
Subordinated Notes on or prior to May 1, 1998. An additional 5% of the
warrants (representing up to 80,000 shares of Hanger Common Stock) will be
terminated upon the repayment of 100% of the Senior Subordinated Notes on or
prior to November 1, 1997. Warrants will be terminated pro-rata across the
above two exercise prices.
Pursuant to the Merger Agreement with JEH, Hanger paid $44.0 million in cash
and issued 1.0 million shares of Hanger Common Stock in exchange for all of
JEH's outstanding common stock on November 1, 1996, and paid an additional
$1.8 million to former JEH shareholders on March 27, 1997 pursuant to
provisions in the Merger Agreement calling for a post-closing adjustment.
During the first five months of 1997, the Company acquired four O&P
companies for an aggregate consideration, excluding potential earn-out
provisions, of $9.7 million. These O&P companies, which operate nine patient-
care centers and employ 18 practitioners, had combined net sales of $8.8
million in the year ended December 31, 1996.
The Company plans to finance future acquisitions through internally
generated funds or borrowings under the Acquisition Loans or the issuance of
notes or shares of Common Stock of the Company, or through a combination
thereof.
Capital expenditures during the first quarter of 1997 approximated $500,000
and the Company expects approximately $1.5 million of additional capital
expenditures during the balance of the year. Working capital is expected to be
available to fund such capital expenditures.
OTHER
Inflation has not had a significant effect on the Company's operations, as
increased costs to the Company generally have been offset by increased prices
of products and services sold.
The Company has entered into an interest rate swap agreement to reduce the
impact of changes in interest rates on its A Term Loan commitment. At March
31, 1997, the Company had an outstanding interest rate swap agreement with a
commercial bank, having a total notional principal amount of $28.5 million.
The agreement effectively minimizes the Company's base interest rate exposure
between a floor of 5.32% and a cap of 7.0%. The interest rate swap agreement
matures on September 30, 1999. The Company is exposed to credit loss in the
event of non-performance by the other party to the interest rate swap
agreement. All other debt accrues interest at a fixed rate except the B Term
Loan commitment which accrues interest at a floating rate. A material change
in interest rates could have a significant impact on the Company's operating
results.
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The Company primarily provides services and customized devices throughout
the United States and is reimbursed, in large part, by the patients' third-
party insurers or governmentally funded health insurance programs. The ability
of the Company's debtors to meet their obligations is principally dependent
upon the financial stability of the insurers of the Company's patients and
future legislation and regulatory actions.
In February 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings Per Share," which will replace the current rules for earnings per
share computations, presentation and disclosure. Under the new standard, basic
earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflect the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. SFAS 128 requires
a dual presentation of basic and diluted earnings per share on the face of the
income statement.
The Company will be required to adopt SFAS 128 in the fourth quarter of this
year and, as required by the standard, will restate all prior period earnings
per share data. The Company's earnings per share, as calculated under SFAS
128, are not expected to be materially different from those computed under the
present accounting standard.
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BUSINESS
OVERVIEW
Hanger Orthopedic Group, Inc. is a professional practice management company
focused on the orthotic and prosthetic segment of the orthopedic
rehabilitation industry. The Company acquires and operates the practices of
orthotists and prosthetists, medical professionals that design, fabricate, fit
and supervise the use of external musculoskeletal support devices and
artificial limbs. The Company has acquired over 40 O&P businesses since 1986
and currently employs 208 certified O&P practitioners and operates 190 O&P
centers in 28 states and the District of Columbia. The Company also has
developed OPNET, a national preferred provider network of O&P service
professionals. OPNET has contractual relationships with 358 patient-care
centers (190 of which are owned and operated by the Company) with 230 managed
care contracts. In addition to its practice management and patient-care
services, the Company manufactures custom-made and prefabricated O&P devices
and is the country's largest distributor of O&P components and finished O&P
patient-care products.
INDUSTRY BACKGROUND
Orthotics is the design, fabrication, fitting and supervised use of custom-
made braces and other devices that provide external support to treat
musculoskeletal disorders. Musculoskeletal disorders are ailments of the back,
extremities or joints caused by traumatic injuries, chronic conditions,
diseases, congenital disorders or injuries resulting from sports or other
activities. Prosthetics is the design, fabrication and fitting of custom-made
artificial limbs for patients who have lost limbs as a result of traumatic
injuries, vascular diseases, diabetes, cancer or congenital disorders.
Care of O&P patients is part of a continuum of rehabilitation services from
diagnosis to treatment and prevention of future injury. This continuum
involves the integration of several medical disciplines that begins with the
attending physician's diagnosis. Once a course of treatment is determined, the
physician, generally an orthopedic surgeon, vascular surgeon or psychiatrist,
refers a patient to an O&P patient-care service provider for treatment. An O&P
practitioner then consults with both the referring physician and the patient
to formulate the prescription for, and design of, an orthotic or prosthetic
device to meet the patient's needs.
The Company estimates that the O&P patient-care services industry in the
United States represented approximately $2.0 billion in sales in 1995. Key
trends expected to increase demand for orthopedic rehabilitation services
include the following:
Growing Elderly Population. The growth rate of the over-65 age group is
nearly triple that of the under-65 age group. With broader medical insurance
coverage, increasing disposable income, longer life expectancy, greater
mobility and improved technology and devices, the elderly can be 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 enable patients
to become ambulatory more quickly after receiving medical treatment in the
hospital. The Company believes that significant cost savings can be achieved
through the early use of O&P services. The provision of O&P services in many
cases reduces the need for more expensive treatments, thus representing a cost
savings to the third-party payor.
Growing Physical Health Consciousness. There is a growing emphasis on
physical fitness, leisure sports and conditioning, such as running and
aerobics, which has led to increased injuries requiring orthopedic
rehabilitative services and products. In addition, as the current middle-age
population ages, it brings a more active life-style and accompanying emphasis
on physical fitness to the over-65 age group.
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These trends are evidenced by the increasing demand for new devices that
provide support for injuries, prevent further or new injuries or enhance
physical performance.
Advancing Technology. The range and effectiveness of treatment options have
increased in connection with the technological sophistication of O&P devices.
Advances in design technology and lighter, stronger and more cosmetically
acceptable materials have enabled the industry to produce new O&P products
which provide greater comfort, protection and patient acceptability.
Therefore, treatment can be more effective and of shorter duration,
contributing to greater mobility and a more active lifestyle for the patient.
Orthotic devices are more prevalent and visible in many sports, including
skiing, running and golf.
Need for Replacement and Continuing Care. Because the useful life of most
custom-fitted and fabricated O&P devices is approximately three to five years,
such devices need retrofitting and replacement. There is also an attendant
need for continuing patient-care services, which contributes to the increasing
demand for orthopedic rehabilitation.
INDUSTRY CONSOLIDATION
The O&P services market is highly fragmented and relatively underpenetrated
by professional practice management companies. Hanger is one of the two
largest companies in the O&P industry which, combined, accounted for less than
15% of the total estimated O&P industry revenue in 1995. There are an
estimated 3,200 certified prosthetists and/or orthotists and approximately
2,670 patient-care centers in the United States, with such facilities
generally being operated as small group practices. There are also several
regional and multi-regional competitors that operate numerous patient-care
centers. The Company believes that the O&P industry will continue to
consolidate as a result of a variety of factors, including: (i) increased
pressures from growth in managed care; (ii) demonstrated benefits from
economies of scale; and (iii) desire by orthotists and prosthetists to obtain
financial liquidity and concentrate on providing patient care.
Increased Managed Care Penetration. The expanding geographical reach of the
large managed care organizations makes it increasingly important for them to
contract for their patient-care needs with counterparts who have large,
national operations. Managed care companies therefore prefer to contract with
a single professional practice management company to provide all their O&P
patient-care services. As a result, small independent O&P practices feel
pressure to consolidate in order to access managed care referrals.
Economies of Scale. A significant portion of the cost of O&P services is
attributable to the cost of materials used in orthoses and prostheses.
Achieving purchase discounts through group purchasing can increase
profitability at each patient-care center. In addition, economies of scale
provide O&P practices with access to additional capital and personnel which
can be used in growing their businesses.
Financial Liquidity for O&P Practices. The security of a large O&P network
is extremely appealing to small providers who desire to reduce the financial
and personal liabilities of their practices. Through consolidation, individual
providers are able to realize financial liquidity by turning their practices'
cash flows into cash assets. This consolidation allows smaller providers to
continue their O&P practices as employees of a national O&P professional
practice management provider.
COMPANY STRATEGY
The Company's objective is to build a major national orthopedic
rehabilitation company focused on the acquisition and operation of O&P
practices and the manufacture and distribution of O&P products. The Company's
strategy for achieving this objective is to:
. Acquire and integrate O&P practices in targeted geographic areas across
the United States;
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. Develop new patient-care centers in existing markets;
. Expand and improve O&P practice management operations at existing and
acquired patient-care centers;
. Increase the number of OPNET's O&P patient-care service members and its
contractual relationships with managed care organizations; and
. Expand the Company's O&P manufacturing and distribution operations.
Acquire and integrate O&P practices in targeted geographic areas across the
United States. The Company's expansion is focused on developing a national
network providing O&P patient-care coverage. Therefore, when identifying
patient-care centers for acquisition, the Company seeks to fill gaps in its
existing geographic coverage. By focusing on national development, the Company
is well-positioned to negotiate for national contracts as payors consolidate
and look to large providers for services.
Develop new O&P patient-care centers in existing markets. In addition to
acquiring patient-care centers, the Company intends to open new patient-care
centers in existing markets. The Company plans to pursue this strategy by
opening satellite centers in areas where a need for O&P services has been
identified. In opening satellite patient-care centers, the Company's procedure
is to staff on a part-time basis with professionals from a nearby existing
center so as to test the viability of a full-time practice.
Expand and improve O&P practice management operations at existing and
acquired patient-care centers. As the number of Hanger patient-care centers
continues to increase, the benefits of the Company's practice management
operations will be maximized. The Company will be able to spread
administrative fixed costs and capital expenditures for state-of-the-art
equipment such as CAD/CAM systems over a large number of patient-care centers.
Furthermore, sales can also be enhanced by the Company's use of marketing
programs not generally utilized by practitioners in smaller, independent
practices.
Increase the number of OPNET's O&P patient-care service members and its
contractual relationships with managed care organizations. The Company intends
to expand OPNET membership towards the goal of achieving complete nationwide
O&P patient-care coverage. A national network will enable OPNET to negotiate
for contracts with any local, regional or national third-party payor seeking a
single source O&P provider regardless of the payor's geographic scope.
Expand the Company's O&P manufacturing and distribution operations. As the
patient-care practice management division of the Company expands, it can
create captive demand for the Company's distribution business. An increase in
the number of OPNET members, to whom preferred purchasing agreements are
offered, can also increase net sales for the Company's distribution business.
The Company's manufacturing division can also benefit from increased net sales
at the distribution division by providing proprietory products to meet the
demand of an expanded captive market. The Company's manufacturing efforts will
focus on the acquisition and/or development of proprietary patented products
such as the Lenox Hill knee brace and the Charleston Bending Brace.
PRACTICE MANAGEMENT AND PATIENT-CARE SERVICES
Practice Management Services
The Company provides all senior management, accounting, accounts payable,
payroll, sales and marketing, human resources and management information
systems for its patient-care centers. By providing these services on a
centralized basis, the Company is able to provide such services to its
patient-
37
<PAGE>
care centers and practitioners more efficiently and cost-effectively than if
such services had to be generated at each center. The centralization of these
services also permits the Company's certified practitioners to allocate a
greater portion of their time to patient-care activities by reducing the
administrative responsibilities of operating their businesses. Billing and
collections are handled on a decentralized basis, which the Company believes
enhances collectibility.
The Company also develops and implements programs designed to enhance the
efficiency of its clinical practices. Such programs include: (i) sales and
marketing initiatives to attract new-patient referrals by establishing
relationships with physicians, therapists, employers, managed care
organizations, hospitals, rehabilitation centers, out-patient clinics and
insurance companies; (ii) professional management and information systems to
improve efficiencies of administrative and operational functions; (iii)
professional educational programs for practitioners emphasizing new
developments in the increasingly sophisticated field of O&P clinical therapy;
(iv) the regional centralization of fabrication and purchasing activities,
which provides overnight access to component parts and products at prices that
are typically 25% lower than traditional procurement methods; and (v) access
to expensive, state-of-the-art equipment which is financially more difficult
for smaller, independent facilities to obtain.
The Company believes that the application of sales and marketing techniques
is a key element of its O&P professional practice management strategy. Due
primarily to the fragmented nature of the industry, the success of an O&P
practice has been largely a function of its local reputation for quality of
care, responsiveness and length of service in the community. Individual
practitioners have relied almost exclusively on referrals from local
physicians or physical therapists and typically have not used marketing
techniques.
Patient-Care Services
The Company provides O&P patient-care services through 190 Company-owned and
operated O&P patient-care centers in 28 states and the District of Columbia.
Hanger currently employs 266 patient-care practitioners, of whom 208 are
certified practitioners and 58 are candidates for formal certification by the
O&P industry certifying boards. Each of the Company's patient-care centers is
closely supervised by one or more certified practitioners. The balance of the
Company's patient-care practitioners are highly trained technical personnel
who assist in the provision of services to patients and fabricate various O&P
devices.
A patient is referred to one of Hanger's patient-care centers for treatment
upon a determination by the attending physician of a course of treatment for a
patient in need of O&P patient-care services. A Hanger practitioner then
consults with both the referring physician and the patient to formulate the
prescription for, and design of, an orthotic or prosthetic device to meet the
patient's needs.
The fitting process involves several stages in order to successfully achieve
desired functional and cosmetic results. The practitioner creates a cast and
takes detailed measurements of the patient to ensure an anatomically correct
fit. All of the prosthetic devices fitted by Hanger's practitioners are custom
designed and fabricated by skilled practitioners who can balance fit, support
and comfort. Of the orthotic devices provided by Hanger, approximately 75% are
custom designed, fabricated and fitted and the balance are prefabricated but
custom fitted.
Custom devices are fabricated by the Company's skilled technicians using the
castings, measurements and designs made by the practitioner. Technicians use
advanced materials and technologies to fabricate a custom device under quality
assurance guidelines. After final adjustments to the device by the
practitioner, the patient is instructed in the use, care and maintenance of
the device. A program of scheduled follow-up and maintenance visits is used to
provide post-fitting treatment, including adjustments or replacements as the
patient's physical condition and lifestyle change.
A substantial portion of Hanger's O&P services involves treatment of a
patient in a non-hospital setting, such as a Hanger patient-care center, a
physician's office, an out-patient clinic or other facility. In
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<PAGE>
addition, O&P services are increasingly rendered to patients in hospitals,
nursing homes, rehabilitation centers and other alternate-site healthcare
facilities. In a hospital setting, the practitioner works with a physician to
provide either orthotic devices or temporary prosthetic devices that are later
replaced by permanent prostheses.
The Company also operates the in-patient O&P patient-care centers at The
Rusk Institute of Rehabilitation Medicine at the New York University Medical
Center in New York, New York and the Harmarville Rehabilitation Center in
Pittsburgh, Pennsylvania.
OPNET
In 1995, Hanger formed OPNET, a proprietary national preferred provider O&P
referral network serving managed care organizations, including HMOs and PPOs.
Through this network, managed care organizations can contract for O&P services
with any O&P patient-care center in the OPNET network. To date, OPNET has a
network of 358 patient-care centers with 230 managed care contracts. The
Company intends to extend the network's reach nationwide through acquisitions
and marketing. OPNET also provides incentives to independent O&P service
provider members to purchase their O&P products from the Company. The Company
receives upfront annual payments from practitioners to enter the OPNET network
and OPNET does not receive payments from the managed care participants. Total
1996 net sales from these fees were approximately $250,000. The Company
believes that OPNET's membership enables it to establish significant
relationships with practitioners otherwise not affiliated with the Company.
MANUFACTURING AND DISTRIBUTION
In addition to on-site fabrication of custom O&P devices incidental to the
services rendered at its O&P patient-care centers, the Company manufactures
O&P components and finished patient-care products for both the O&P industry
and the Company's own patient-care practices. The Company manufactures
components and finished products under various name brands such as Lenox Hill,
CASH Brace, Ortho-Mold and Charleston Bending Brace. The principal products
manufactured are prefabricated and custom-made spinal orthoses as well as
custom-made and off-the-shelf derotation knee braces. The Company distributes
O&P components and finished patient-care products to the O&P industry and to
the Company's own patient-care practices. The Company inventories over 20,000
items, a majority of which are manufactured by other companies and are
distributed by Hanger.
Hanger's distribution capability allows its personnel faster access to the
products needed to fabricate devices for patients. This is accomplished at
competitive prices, as a result of either manufacturing by Hanger or direct
purchases by Hanger from other manufacturers. As a result of faster access to
products, the length of a patient's treatment in the hospital can be reduced,
thereby contributing to healthcare cost containment.
Marketing of Hanger's manufactured products and distribution services is
conducted on a national basis, primarily through approximately 72 independent
sales representatives, catalogues and exhibits at industry and medical
meetings and conventions. Hanger directs specialized catalogues to segments of
the healthcare industry, such as orthopedic surgeons and physical and
occupational therapists. In addition, the Company directs its broad-based
marketing to the O&P industry and the home healthcare industry.
To provide timely custom fabrication and service to its patients, the
Company employs technical personnel and maintains laboratories at each of its
patient-care centers. The Company uses advanced computer-aided design and
computer-aided machinery (CAD/CAM) technology to produce precise and uniform
products. Hanger has several large, fully-staffed central fabrication
facilities to service its patient-care centers. These strategically located
facilities enable Hanger to fabricate those O&P products that are more easily
produced in larger quantities and in a more cost-effective manner, as well as
serving as an auxiliary production center for products normally fabricated at
individual patient-care centers.
39
<PAGE>
ACQUISITIONS
Since 1986, the Company has acquired over 40 business in 28 states and the
District of Columbia. In November 1996, Hanger acquired JEH, a Georgia
corporation that operated 94 patient-care centers in 15 states and was the
country's largest distributor of O&P products.
On March 5, 1997, the Company purchased the assets of Prosthetic Treatment
Center, Inc., an owner-operator of one patient-care facility located in
Kingsport, Tennessee; on April 1, 1997, the Company acquired the patient-care
division of ACOR Orthopaedic, Inc., a company primarily engaged in the
operation of four O&P patient-care centers in the central Ohio area and
headquartered in Cleveland, Ohio; and on May 12, 1997, the Company acquired
Fort Walton Orthopedic, Inc. and Mobile Limb & Brace, Inc., which are
companies primarily engaged in the operation of three patient-care centers in
the Fort Walton, Florida area and one patient-care center in Mobile, Alabama.
The four companies acquired by the Company to date in 1997 had net sales of
$8.8 million in the year ended December 31, 1996 and were acquired for
aggregate consideration of $9.7 million.
The Company continues to be engaged in discussions with several O&P
companies relating to the Company's possible acquisition of their patient-care
practices. The Company's investigations of these businesses are in the
formative stages and no representations can be made as to whether, when or on
what terms such possible acquisitions may be effected. The Company's
acquisition strategy contemplates the acquisition of O&P patient-care
practices by the end of 1998 that could contribute an additional $30.0 to
$40.0 million of annual net sales. No assurance can be given as to whether, or
to what extent, the Company will be successful in achieving this goal.
The Company considers both operating and financial factors in evaluating
prospective acquisitions. Operating factors include high standards of
professionalism and patient care, the presence of certified practitioners at
each of its facilities and reputation in the O&P industry. Financial factors
include earnings and cash flow history and the projected benefits of applying
Hanger's operating model to the acquired company's practice. In evaluating
acquisitions in geographic areas where the Company has an established
presence, Hanger targets businesses that complement its existing network of
patient-care centers. In geographic areas where the Company has not yet
established a presence, the Company generally focuses on acquiring strong
regional businesses which have multiple patient-care centers and experienced
practitioners.
The Company's acquisition strategy also includes the retention and support
of the existing management of the acquired company, typically through the use
of employment contracts, non-compete agreements and incentive programs. Upon
the completion of an acquisition, the Company will integrate the business of
the acquired company by: (i) transferring all administrative and financial
management responsibilities to Hanger's corporate headquarters; (ii) providing
all new personnel with compensation and benefit packages and training by the
Company's Human Resources Department; and (iii) providing the management of
the acquired company with instruction on the Company's latest marketing and
sales techniques. Thereafter, the Company will provide the management and
staff of the newly acquired company with financial incentives to induce
greater financial performance.
NEW-CENTER DEVELOPMENT
In addition to acquired patient-care centers, the Company has developed 16
new satellite patient-care centers in existing markets with underserved demand
for O&P services. These satellite centers require less capital to develop than
complete O&P centers since the satellite centers usually consist of only a
waiting room and patient fitting rooms, but without a fabrication laboratory
for creating O&P devices. An O&P practitioner will spend one or two days each
week in a satellite center treating those patients who find it inconvenient to
visit the O&P practitioner's primary center.
40
<PAGE>
These satellite centers also tend to receive new patient referrals from
hospitals and physicians located near the newly-developed center, driving new
patient growth and center revenue. While a partial revenue shift occurs from
the O&P practitioner's main center to the satellite center because the O&P
practitioner is now seeing some of the same patients out of a new center, the
additional patient volume in the satellite center increases the O&P
practitioner's overall revenue. If demand for O&P services at a satellite
center increases beyond the ability of the O&P practitioner to service in one
or two days a week, the Company will staff the satellite office on a full-time
basis. The Company estimates that the cost of opening a new patient-care
center is approximately $100,000, which includes equipment, leasehold
improvements and working capital. The Company expects a new patient-care
center to reach profitability, as measured by EBITDA, within one year of
opening. No assurance can be given that the Company will be successful in
achieving these start-up and profitability goals with regard to new patient-
care centers.
PATIENT REIMBURSEMENT SOURCES
The principal reimbursement sources for Hanger's O&P services are: (i)
private payor/third-party insurer sources which consist of individuals,
private insurance companies, HMOs, PPOs, hospitals, vocational rehabilitation,
workers' compensation and similar sources; (ii) Medicare, which is a federally
funded health insurance program providing health insurance coverage for
persons aged 65 or older and certain disabled persons; (iii) Medicaid, which
is a health insurance program jointly funded by federal and state governments
providing health insurance coverage for certain persons in financial need,
regardless of age, and which may supplement Medicare benefits for financially
needy persons aged 65 or older; and (iv) the VA, with which Hanger has entered
into contracts to provide O&P services.
Medicare, Medicaid, the VA and certain state agencies, which accounted for
approximately 56.6%, 56.8% and 57.0% of the Company's net sales in 1995, 1996
and the first quarter of 1997, respectively, have set maximum reimbursement
levels for payments for O&P services and products. The healthcare policies and
programs of these agencies have been subject to changes in payment and
methodologies during the past several years. There can be no assurance that
future changes will not reduce reimbursements for O&P services and products
from these sources.
The Company provides O&P services to eligible veterans pursuant to several
contracts with the VA. The VA establishes its reimbursement rates for itemized
products and services on a competitive bidding basis. The Company's contracts
with the VA expire in September 1997, with the option to renew for a one- or
two-year period. The contracts, awarded on a non-exclusive basis, establish
the amount of reimbursement to the eligible veteran if the veteran should
choose to use the Company's products and services. The Company has been
awarded VA contracts in the past and expects that it will obtain additional
contracts when its present agreements expire.
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<PAGE>
PATIENT-CARE CENTERS AND FACILITIES
Hanger currently operates 190 patient-care centers, six distribution
facilities and two manufacturing facilities, as detailed in the following
table:
<TABLE>
<CAPTION>
PATIENT-
CARE DISTRIBUTION MANUFACTURING
JURISDICTION CENTERS FACILITIES FACILITIES
------------ -------- ------------ -------------
<S> <C> <C> <C>
Alabama.................................. 7 -- --
Arizona.................................. 4 -- --
California............................... 5 1 --
Colorado................................. 8 -- --
Connecticut.............................. 3 -- --
Delaware................................. 1 -- --
District of Columbia..................... 3 -- --
Florida.................................. 20 1 1
Georgia.................................. 16 1 --
Illinois................................. -- 1 1
Indiana.................................. 2 -- --
Kentucky................................. 6 -- --
Louisiana................................ 8 -- --
Maryland................................. 6 1 --
Massachusetts............................ 3 -- --
Michigan................................. 2 -- --
Mississippi.............................. 7 -- --
Montana.................................. 5 -- --
New Hampshire............................ 1 -- --
New Mexico............................... 1 -- --
New York................................. 8 -- --
North Carolina........................... 3 -- --
Ohio..................................... 18 -- --
Pennsylvania............................. 13 -- --
South Carolina........................... 11 -- --
Tennessee................................ 9 -- --
Texas.................................... 5 1 --
Virginia................................. 6 -- --
West Virginia............................ 8 -- --
Wyoming.................................. 1 -- --
--- --- ---
TOTAL.................................. 190 6 2
=== === ===
</TABLE>
COMPETITION
The competition among O&P patient-care centers is primarily for referrals
from physicians, therapists, employers, HMOs, PPOs, hospitals, rehabilitation
centers, out-patient clinics and insurance companies on both a local and
regional basis. The Company believes that distinguishing competitive factors
in the O&P industry are quality and timeliness of patient care and, to a
lesser degree, charges for services. While the Company believes it is one of
the largest suppliers of O&P services in the U.S., certain competitors may
have greater financial and personnel resources than Hanger. The Company
competes with others in the industry for trained personnel. To date, however,
Hanger has been able to achieve its staffing needs and has experienced a
relatively low turnover rate of employees. In connection with its efforts to
acquire additional O&P patient-care practices, the Company encounters
competition from several other O&P companies.
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<PAGE>
GOVERNMENT REGULATION
Certification and Licensure
Most states do not require separate licensure for O&P practitioners.
However, several states currently require O&P practitioners to be certified by
an organization such as the ABC. The ABC conducts a certification program for
practitioners and an accreditation program for patient-care centers. The
minimum requirements for a certified practitioner are a college degree,
completion of an accredited academic program, one to four years of residency
at a patient-care center under the supervision of a certified practitioner and
successful completion of certain examinations. Minimum requirements for an
ABC-accredited patient-care center include the presence of a certified
practitioner and specific plant and equipment requirements. While the Company
endeavors to comply with all state licensure requirements, no assurance can be
given that the Company will be in compliance at all times with these
requirements.
Hanger provides services under various contracts to federal agencies. These
contracts are subject to regulations governing federal contracts, including
the ability of the government to terminate for its convenience. Revenue from
such contracts is not material to Hanger.
Medical Device Regulation
The Company manufactures and distributes products that are subject to
regulation as medical devices by the U.S. Food and Drug Administration ("FDA")
under the Federal Food, Drug, and Cosmetic Act and accompanying regulations.
The Company believes that the products it manufactures and/or distributes,
including O&P accessories and components, are exempt from FDA's regulations
for premarket clearance or approval requirements and from requirements
relating to "good manufacturing practices" (except for certain recordkeeping
and complaint handling requirements). The Company is required to adhere to
regulations regarding adverse event reporting, and is subject to inspection by
the FDA for compliance with all applicable requirements. Labeling and
promotional materials also are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. Although the Company has never
been challenged by FDA for noncompliance with FDA requirements, no assurance
can be given that the Company would be found to be or to have been in
compliance at all times. Noncompliance could result in a variety of civil
and/or criminal enforcement actions, which could have a material adverse
effect on the Company's business and results of operations.
Fraud and Abuse
The Company is subject to various federal and state laws pertaining to
healthcare fraud and abuse, including antikickback laws, false claims laws,
and physician self-referral laws. Violations of these laws are punishable by
criminal and/or civil sanctions, including, in some instances, imprisonment
and exclusion from participation in federal healthcare programs, including
Medicare, Medicaid, VA health programs and CHAMPUS. The Company has never been
challenged by a governmental authority under any of these laws and believes
that, based on this history, its operations are in material compliance with
such laws. However, because of the far-reaching nature of these laws, there
can be no assurance that one or more of the Company's practices would not be
challenged by governmental authorities under certain of these laws, that the
Company would not be required to alter its practices as a result, or that the
occurrence of one or more of these events would not result in a material
adverse effect on the Company's business and results of operations.
Antikickback Laws. The Company's operations are subject to federal and state
antikickback laws. The Federal Health Care Programs Antikickback Statute
(section 1128B(b) of the Social Security Act) prohibits persons or entities
from knowingly and willfully soliciting, offering, receiving, or paying any
remuneration in return for, or to induce, the referral of persons eligible for
benefits under a Federal Health Care Program (including Medicare, Medicaid,
the VA health programs and CHAMPUS), or the ordering, purchasing or leasing of
items or services that may be paid for, in whole or in part, by a Federal
Health Care Program. The statute may be violated when even one purpose (as
opposed to a primary or sole
43
<PAGE>
purpose) of a payment is to induce referrals or other business. Regulations
create a small number of "safe harbors." Practices which meet all the criteria
of an applicable safe harbor will not be deemed to violate the statute;
practices that do not satisfy all elements of a safe harbor do not necessarily
violate the statute, although such practices may be subject to scrutiny by
enforcement agencies. Several states also have antikickback laws which vary in
scope and may apply regardless of whether a Federal Health Care Program is
involved.
These laws may apply to certain of the Company's operations. The Company has
instituted various types of discount programs for individuals or entities that
purchase its products and services. The Company also maintains financial
relationships with individuals and entities who may: (i) may purchase the
Company's products and services; (ii) refer patients to Company-owned and
managed O&P patient-care centers; or (iii) receive referrals through OPNET.
These relationships include, among other things, lease arrangements with
hospitals and OPNET participation arrangements. Because some of these
arrangements may not satisfy all elements of an applicable safe harbor, they
could be subject to scrutiny and challenge under one or more such laws.
False Claims Laws. The Company is also subject to federal and state laws
prohibiting individuals or entities from knowingly and willfully presenting,
or causing to be presented, claims for payment to third-party payors
(including Medicare and Medicaid) that are false or fraudulent or are for
items or services not provided as claimed. Each Company-owned and managed O&P
patient-care center is responsible for preparation and submission of
reimbursement claims to third-party payors for items and services furnished to
patients. In addition, Company personnel may, in some instances, provide
advice on billing and reimbursement for the Company's products to purchasers.
While the Company endeavors to ensure that its billing practices comply with
applicable laws, if claims submitted to payors are deemed to be false,
fraudulent, or for items or services not provided as claimed, the Company
could face liability for presenting or causing to be presented such claims.
Physician Self-Referral Laws. The Company is also subject to federal and
state physician self-referral laws. With certain exceptions, the federal
Medicare/Medicaid physician self-referral law (the "Stark" law, section 1877
of the Social Security Act) prohibits a physician from referring Medicare and
Medicaid beneficiaries to an entity for "designated health services"--
including prosthetics, orthotics and prosthetic devices and supplies--if the
physician has either an investment interest in the entity or a compensation
arrangement with the entity. An exception is recognized for referrals made to
a publicly-traded entity in which the physician has an investment interest if,
among other things, the entity had shareholders' equity exceeding $75.0
million for its most recent fiscal year, or on average during the three
previous fiscal years. While the Company does not provide stock to referring
physicians and the Company's stock is publicly-traded, the Company is not in a
position to know or control whether some referring physicians may be
investors. Because the Company does not currently have sufficient
shareholders' equity to meet the exception that would allow physician-
investors to refer Medicare and Medicaid beneficiaries to Company-owned and
managed O&P patient-care centers, any such referrals that do occur could be
found to be in violation of the Stark law.
Antitrust
The Company is subject to federal and state antitrust laws which prohibit,
among other things, the establishment of ventures that result in certain
anticompetitive conduct. These laws have been applied to the establishment of
certain networks of otherwise competing healthcare providers. In September
1995, the Antitrust Division of the Department of Justice ("DOJ") issued a
business review letter which concluded, in part, that the description of OPNET
voluntarily furnished to the DOJ by the Company "did not pose any significant
competitive issues" and, therefore, DOJ "has no present intention of
challenging [OPNET]" under federal antitrust law. Although the Company is not
able to assure that the continued operation of OPNET will comply in all
respects with the terms specified in the business review letter, noncompliance
with these terms does not mean that the antitrust authorities or private
parties would
44
<PAGE>
challenge the conduct, and the Company believes that the current operation of
OPNET is not anticompetitive and results in significant efficiencies. However,
DOJ reserves the right to bring an investigation or proceeding if it
determines that OPNET is anticompetitive in purpose or effect. There can be no
assurance that DOJ will not bring an investigation or proceeding challenging
OPNET (or other aspects of the Company's operations) under these laws, or that
such an investigation or proceeding would not result in a material adverse
effect on the Company's business and results of operations.
PERSONNEL
As of June 20, 1997, the Company employed 1,062 persons, including 976 full-
time and 86 part-time employees. None of the Company's employees is subject to
a collective bargaining agreement. The Company believes that it has
satisfactory relationships with its employees and strives to maintain these
relationships by offering competitive benefit packages, training programs and
opportunities for advancement.
INSURANCE
The Company currently maintains insurance of the type, and in the amount,
customary in the orthopedic rehabilitation industry, including coverage for
malpractice liability, product liability, workers' compensation and property
damage. Hanger's general liability insurance coverage is at least $500,000 per
incident. Based on the Company's experience and prevailing industry practices,
Hanger believes its coverage is adequate as to risks and amount.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information with respect to the
executive officers, directors and certain key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ivan R. Sabel, CPO.................. 52 Chairman of the Board, President,
Chief Executive Officer and Director
Richard A. Stein.................... 38 Vice President--Finance, Secretary and
Treasurer
Mitchell J. Blutt, M.D.(1).......... 40 Director
Edmond E. Charrette, M.D.(2)........ 62 Director
Thomas P. Cooper, M.D.(1)........... 53 Director
Robert J. Glaser, M.D.(2)........... 78 Director
James G. Hellmuth(1)................ 74 Director
William L. McCulloch(2)............. 76 Director
Daniel A. McKeever, CP.............. 86 Director
H.E. Thranhardt, CPO................ 57 Director
John D. McNeill, CPO................ 49 President and Chief Operating Officer
of Hanger Prosthetics & Orthotics,
Inc.
Alice G. Tidwell.................... 58 President and Chief Operating Officer
of Southern Prosthetic Supply, Inc.
Juan B. Paez........................ 52 Vice President--Manufacturing of DOBI-
Symplex, Inc.
Jeffrey L. Martin................... 43 Vice President of OPNET, Inc.
</TABLE>
- --------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Ivan R. Sabel has been Chairman of the Board of Directors and Chief
Executive Officer of Hanger since August 1995 and President of Hanger since
November 1987. Mr. Sabel also served as the Chief Operating Officer of Hanger
from November 1987 until August 1995. Prior to that time, Mr. Sabel had been
Vice President--Corporate Development from September 1986 to November 1987.
From 1968 until joining Hanger in 1986, Mr. Sabel was the founder, owner and
President of Capital Orthopedics, Inc. before that company was acquired by
Hanger. Mr. Sabel is a Certified Prosthetist and Orthotist ("CPO"), a clinical
instructor in orthopedics at the Georgetown University Medical School in
Washington, D.C., a member of the Board of Directors of the American Orthotic
and Prosthetic Association, a former Chairman of the National Commission for
Health Certifying Agencies, a former member of the Strategic Planning
Committee and a current member of the Veterans Administration Affairs
Committee of AOPA and a former President of the ABC.
Richard A. Stein has been Vice President-Finance, Secretary and Treasurer of
Hanger since April 1987. Mr. Stein was also the President of Greiner & Saur
Orthopedics, Inc., a former subsidiary of the Company, from April 1987 until
November 1989. Mr. Stein is a Certified Public Accountant and was employed by
Coopers & Lybrand L.L.P. from September 1982 until he joined Hanger in 1987.
Mitchell J. Blutt, M.D. has served as Executive Partner of Chase Capital
Partners (and its predecessor organizations), an affiliate of Chase Manhattan
Bank (and its predecessor corporations), since June 1991.
46
<PAGE>
He joined that firm in July 1987 and became a General Partner in June 1988.
Dr. Blutt also has been engaged in the practice of medicine for 15 years.
Previously, Dr. Blutt was a Robert Wood Johnson Foundation Fellow at the
University of Pennsylvania from July 1985 to June 1987. He is an adjunct
Assistant Professor at the New York Hospital/Cornell Medical Center. Dr. Blutt
is also a director of numerous privately-held companies.
Edmond E. Charrette, M.D. is the co-founder and Chairman of Health Resources
Corporation (principally engaged in occupational medicine services). He also
is a Partner of Ascendant Healthcare International (an investment group with
equity investments in the Latin American healthcare sector) and serves as
President of Latin Healthcare Investment Management Co., LLC (a group composed
of Ascendant Healthcare International and The Global Environmental Fund which
manages and directs the investment activities of the Latin Healthcare
Investment Fund). Previously, he was the Executive Vice President and Chief
Medical Officer of Advantage Health Corporation (a multi-hospital
rehabilitation and post-acute care system) from June 1994 to March 1996. From
1988 to May 1994, Dr. Charrette served as the Corporate Medical Director and
Senior Vice President of Medical Affairs of Advantage Health Corporation. Dr.
Charrette also is a director of Nu-Tech Biomed Corporation, which is
principally engaged in the development of medical diagnostic tests.
Thomas P. Cooper, M.D. has been employed as the President and Chief
Executive Officer of Mobilex U.S.A., providing portable diagnostic services to
long-term care facilities, since May 1989. Dr. Cooper has also been employed
as the President and Chief Executive Officer of Senior Psychology Services
Management, Inc., which supplies psychologists to nursing home patients, since
June 1991. Dr. Cooper was the founder of Spectrum Emergency Care, a provider
of emergency room physicians to hospitals and clinics, and Correctional
Medical Systems, a provider of health services to correctional facilities. Dr.
Cooper has served as Director of Quality Assurance for ARA Living Centers, a
company which operates long-term healthcare facilities, and as Medical
Director for General Motors Corporation Assembly Division. He currently serves
as a consultant to Chase Capital Partners and has served on the faculty of the
University of California, San Diego Medical School.
Robert J. Glaser, M.D. has been the Director for Medical Science and a
Trustee of the Lucille P. Markey Charitable Trust, which provides major grants
in support of basic biomedical research, since 1984. He is also a Professor
Emeritus of Medicine at Stanford University, where he served as the Dean of
the School of Medicine from 1965 to 1970. Dr. Glaser was a founding member of
the Institute of Medicine at the National Academy of Sciences and is a
director of Alza Corporation (principally engaged in pharmaceutical research)
and Nellcor Puritan Bennett Incorporated (principally engaged in the
manufacture of medical equipment). He was a director of Hewlett-Packard
Company from 1971 to 1991, and has continued to serve as a consultant to that
company on health matters.
James G. Hellmuth serves as a director of BT Capital Corporation, an
affiliate of Bankers Trust New York Corporation, as well as a part-time
consultant to Chase Capital Partners. He has been a Commissioner of the Port
Authority of New York and New Jersey since 1969. In addition, Mr. Hellmuth was
a Managing Director of Bankers Trust Company from 1972 to 1988.
Brig. Gen. William L. McCulloch, USMC (Ret.) has served as the President of
Association Communication and Marketing Services, a public relations firm,
since October 1989. Previously, Gen. McCulloch was the Executive Director of
AOPA, the trade association of the orthotic and prosthetic industry, from
October 1976 to September 1989. In 1976, Gen. McCulloch retired from active
military service after serving 30 years as a U.S. Marine infantry officer.
Daniel A. McKeever, CP is the former Chairman of the Board of JEH. He served
in that capacity from September 13, 1972 to November 1, 1996, on which date
JEH was acquired by Hanger. He also served as the Treasurer of JEH from
September 31, 1937 to November 1, 1996. Mr. McKeever was President of the
47
<PAGE>
ABC in 1954 and 1955 and President of the American Orthotics and Prosthetics
Association in 1949 and 1950.
H.E. Thranhardt, CPO is the former President and Chief Executive Officer of
JEH. He served in that capacity from January 1, 1977 to November 1, 1996, on
which date JEH was acquired by Hanger. Mr. Thranhardt, who commenced his
employment with JEH in 1958, has occupied leadership positions in numerous
professional O&P associations, including Chairman of the Board of the
Orthotics and Prosthetics National Office in 1994 and 1995, President of the
American Orthotics and Prosthetics Association in 1992 and 1993, President of
the ABC in 1979 and 1980 and President of The American Academy of Orthotics
and Prosthetics in 1976 and 1977.
John D. McNeill, CPO has been the President and Chief Operating Officer of
Hanger Prosthetics & Orthotics, Inc., a wholly-owned subsidiary of the Company
that operates the Company's patient-care centers, since November 1, 1996. From
1990 to November 1, 1996, he was Senior Vice President, Chief Operating
Officer and a director of JEH. From 1986 to 1990, Mr. McNeill was a Regional
Vice President and an area manager for JEH. Mr. McNeill, who is a CPO,
conducted his own O&P practice in Marietta, Georgia from 1979 to 1986, when it
was acquired by JEH.
Alice G. Tidwell has been the President and Chief Operating Officer of
Southern Prosthetic Supply, Inc., the Company's wholly-owned distribution
subsidiary, since November 1, 1996. From 1990 to November 1, 1996, she served
as a Senior Vice President and Chief Operating Officer of Southern Prosthetic
Supply, Inc. From 1992 to 1996, Ms. Tidwell served on the Board of Directors
of JEH. Previously, she served as supervisor, office manager and Vice
President of Corporate Central Services of JEH.
Juan B. Paez has been a Vice President of DOBI-Symplex, Inc., the Company's
wholly-owned manufacturing subsidiary, since 1992. In addition to management
responsibilities relating to the Company's manufacturing, central fabrication
and distribution activities, Mr. Paez oversees new product and manufacturing
business development. From 1990 to 1992, Mr. Paez was the Director of New
Product Development of Bissell Healthcare and from 1982 to 1990 he was
employed as Manager of Engineering and Research & Development and Manager of
Industrial Engineering by Camp International.
Jeffrey L. Martin has been the Vice President of OPNET, the Company's
preferred provider network of O&P service professionals, since October 1995.
In addition to being responsible for the recruitment of OPNET members and the
planning and implementation of OPNET member services, Mr. Martin directs the
solicitation and management of OPNET managed care contracts. From 1984 until
joining Hanger in 1995, Mr. Martin was Director of Marketing for the Ohio
Willow Wood Company, a manufacturer of prosthetic componentry.
EMPLOYMENT AND NON-COMPETE AGREEMENTS
Messrs. Sabel, Stein, McNeill and Martin and Ms. Tidwell have executed
employment agreements with the Company which contain non-compete provisions.
48
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth the number of shares of Common Stock
beneficially owned as of June 25, 1997 by: (i) each person known by Hanger to
be the beneficial owner of 5% or more of such class of securities; (ii) each
director and executive officer of Hanger; and (iii) all directors and
executive officers of Hanger as a group.
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
NUMBER OF COMMON STOCK COMMON STOCK
SHARES OF OUTSTANDING OUTSTANDING
DIRECTORS, EXECUTIVE COMMON BEFORE THE AFTER THE
OFFICERS AND 5% SHAREHOLDERS POSITION(S) WITH THE COMPANY STOCK(1) OFFERING(1) OFFERING(1)
- ----------------------------- ---------------------------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Chase Venture Capital
Associates, L.P.(2).... -- 2,426,689 22.54% 15.89%
Ivan R. Sabel, CPO(3)... Chairman of the Board,
President and Chief
Executive Officer 238,033 2.46 1.68
Mitchell J. Blutt, Director
M.D.(4)................ -- -- --
Thomas P. Cooper, Director
M.D.(5)................ 18,000 0.19 0.13
Robert J. Glaser, Director
M.D.(6)................ 16,000 0.17 0.11
James G. Hellmuth(7).... Director 11,500 0.12 0.08
William L. Director
McCulloch(8)........... 18,750 0.20 0.13
Edmond E. Charrette, Director
M.D.(9)................ 31,250 0.33 0.22
Daniel A. McKeever, Director
CP(10)................. 572,173 6.05 4.10
H.E. Thranhardt, Director
CPO(11)................ 219,570 2.32 1.57
Richard A. Stein(12).... Vice President--
Finance, Treasurer
and Secretary 118,838 1.24 0.84
All directors and
executive officers as a
group
(10 persons)(13)....... 1,244,144 12.87 8.78
</TABLE>
- --------
(1) Assumes in the case of each shareholder listed in the above list that all
warrants or options exercisable within 60 days that are held by such
shareholder were fully exercised by such shareholder, without the
exercise of any warrants or options held by any other shareholders.
(2) Includes 470,649 shares subject to exercisable warrants to purchase
shares from the Company and excludes 440,000 shares subject to unvested
warrants that have not yet become exercisable. Reference is made to notes
(4) and (5) below for information relating to two directors of the
Company that are affiliated with CVCA. The address of CVCA and its sole
general partner, Chase Capital Partners, is 270 Park Avenue (5th Floor),
New York, New York 10017.
(3) Includes 96,750 shares subject to exercisable options to purchase shares
from the Company and excludes 157,250 shares subject to unvested options
that have not yet become exercisable.
(4) Does not include the shares reported above as owned by CVCA. Dr. Blutt is
a General Partner of Chase Capital Partners, the sole general partner of
CVCA. He disclaims beneficial ownership of the shares beneficially owned
by CVCA.
(5) Includes 11,500 shares subject to exercisable options to purchase shares
from the Company and excludes 13,750 shares subject to unvested options
that have not yet become exercisable. Dr. Cooper currently serves as a
consultant to CVCA.
(6) Includes 15,000 shares subject to exercisable options to purchase shares
from the Company and excludes 15,000 shares subject to unvested options
that have not yet become exercisable.
49
<PAGE>
(7) Includes 11,500 shares subject to exercisable options to purchase shares
from the Company and excludes 13,500 shares subject to unvested options
that have not yet become exercisable.
(8) Includes 11,250 shares subject to exercisable options to purchase shares
from the Company and excludes 13,500 shares subject to unvested options
that have not yet become exercisable.
(9) Includes 1,250 shares subject to an exercisable option to purchase shares
from the Company and excludes 8,750 shares subject to unvested options
that have not yet become exercisable.
(10) Includes 105,022 shares owned indirectly by Mr. McKeever; 55,707 shares
owned indirectly by his wife through a family limited partnership; and
410,444 shares owned indirectly by other members of Mr. McKeever's family
through that family limited partnership, of which Mr. McKeever possesses
sole voting power as the Managing General Partner and with respect to
which he disclaims beneficial ownership. Does not include 5,000 shares
subject to an unvested option that has not yet become exercisable.
(11) Includes 184,027 shares owned directly by Mr. Thranhardt and 35,543
shares owned indirectly by him as trustee for members of his family; does
not include 155,000 shares subject to unvested options that have not yet
become exercisable.
(12) Includes 50,750 shares subject to exercisable options to purchase shares
from the Company and excludes 77,750 shares subject to unvested options
that have not yet become exercisable.
(13) Includes a total of 198,000 shares subject to exercisable options held by
directors and executive officers of the Company to purchase shares from
the Company and excludes a total of 465,000 shares subject to unvested
options held by such persons that have not yet become exercisable.
The preceding table does not include 300 shares of the Company's non-voting
Class C Preferred Stock, which constitutes all the outstanding shares of that
class, held by the former shareholders of Scott Orthopedics, Inc., which was
acquired by Hanger on February 13, 1990.
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Hanger's authorized capital stock consists of 25,000,000 shares of Common
Stock, par value $.01 per share, and 10,000,000 shares of Preferred Stock, par
value $.01 per share (the "Preferred Stock"), issuable in series.
COMMON STOCK
As of June 20, 1997, there were 9,465,811 shares of Common Stock outstanding
held by approximately 910 shareholders of record. Holders of Common Stock have
one vote for each share held, are not entitled to cumulate their votes for the
election of directors and do not have preemptive rights. All shares of Common
Stock have equal rights and, subject to the rights of the holders of the
Preferred Stock, are entitled to receive such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor and to share pro-rata in the net assets of Hanger available
for distribution to holders of Common Stock upon liquidation. See "Dividend
Policy."
The transfer agent for the Common Stock is ChaseMellon Shareholder Services,
New York, New York.
PREFERRED STOCK
The Company has issued and outstanding one series of Preferred Stock,
designated as Class C Preferred Stock, of which 300 shares are outstanding.
Previously outstanding shares of Class A, B, D and E Preferred Stock have
either been redeemed or converted into Common Stock. The Company also has an
authorized Class F Preferred Stock, of which no shares have been, or are
planned to be, issued. The Class C Preferred Stock is non-voting and non-
convertible, accrues dividends cumulatively at 9% per annum (compounded daily)
and is required to be redeemed by Hanger on or before February 1, 2000 for its
aggregate liquidation value of $150,000, plus accrued and unpaid dividends.
Hanger's Board of Directors may, without further action by Hanger's
shareholders, direct the issuance of additional shares of Preferred Stock in
series and may, at the time of issuance, determine the rights, preferences and
limitations of each series. Satisfaction of any dividend preferences of
outstanding Preferred Stock would reduce the amount of funds available for the
payment of dividends on the Common Stock. Also, the holders of Preferred Stock
would normally be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of Hanger before any payment is made to
the holders of the Common Stock.
While issuance of Preferred Stock could provide needed flexibility in
connection with possible acquisitions and other corporate purposes, such
issuance could also make it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company or discourage an
attempt to gain control of the Company. Such potential anti-takeover
provisions could adversely affect the market price of the Common Stock. In
addition, the Board of Directors, without shareholder approval, can issue
shares of Preferred Stock with voting and conversion rights which could
adversely affect the voting power and other rights of holders of Common Stock.
51
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated, Montgomery Securities and Legg Mason Wood
Walker, Incorporated, have severally agreed to purchase from the Company the
following respective numbers of shares of Common Stock at the public offering
price less the underwriting discounts and commissions set forth on the cover
page of the Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated.......................................
Montgomery Securities.................................................
Legg Mason Wood Walker, Incorporated..................................
---------
Total............................................................... 4,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of Common Stock offered hereby if any such shares are
purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the public
offering contemplated hereby, the offering price and other selling terms may
be changed by the Representatives of the Underwriters.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 675,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the above table bears to 4,500,000, and the Company
will be obligated, pursuant to such option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of the Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares on
the same terms as those on which the 4,500,000 shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company and the beneficial owners of approximately 4,030,803 shares of
Common Stock have agreed not to offer, sell or otherwise dispose of any shares
of Common Stock for a period 90 days after the date of this Prospectus without
the prior written consent of Alex. Brown & Sons Incorporated on behalf of the
Representatives of the Underwriters. Alex. Brown & Sons Incorporated may, in
its sole discretion and at any time without notice, release all or any portion
of the Common Stock subject to these lock-up agreements.
52
<PAGE>
In connection with the Offering of the Common Stock, the Underwriters may
engage in transactions that stabilize, maintain or otherwise affect the market
price of the Common Stock. Specifically, the Underwriters may over-allot
shares of the Common Stock in connection with the Offering, thereby creating a
short position in the Underwriters' account. Additionally, to cover such short
position or to stabilize the market price of the Common Stock, the
Underwriters may bid for, and purchase, shares of the Common Stock at a level
above that which might otherwise prevail in the open market. The Underwriters
are not required to engage in these activities, and, if commenced, any such
activities may be discontinued at any time. These activities may be effected
on the American Stock Exchange, in the over-the-counter market or otherwise.
The Underwriters also may impose a penalty bid whereby they may reclaim
selling concessions allowed to an Underwriter or dealer, if the Underwriters
repurchase, in stabilizing or covering transactions, shares distributed by
that Underwriter or dealer.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby is being passed
upon for the Company by Freedman, Levy, Kroll & Simonds, Washington, D.C.
Certain legal matters relating to the sale of the Common Stock offered hereby
will be passed upon for the Underwriters by Hogan & Hartson L.L.P., Baltimore,
Maryland.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1995 and
1996, and the consolidated statements of operations, changes in shareholders'
equity and cash flows of the Company for each of the years in the three-year
period ended December 31, 1996, and the balance sheets of ACOR Orthopaedic,
Inc.--Retail Division as of December 31, 1995 and 1996 and the statements of
income, changes in divisional equity and cash flows of that entity for each of
the years then ended, have been included herein and in the Registration
Statement in reliance upon the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The consolidated statements of income, retained earnings and cash flow of
JEH for each of the years in the two-year period ended December 31, 1995, have
been included herein and in the Registration Statement in reliance upon the
report of Windham Brannan, P.C., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy and information
statements filed by the Company with the Commission pursuant to the
informational requirements of the Exchange Act may be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the
Commission: Northeast Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048; and Midwest Regional Office, Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may be obtained from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates and
such materials may be inspected and copied at the Commission's Web Site
(http://www.sec.gov). In addition, reports, proxy statements and other
information concerning the Company can be inspected at the offices of the
American Stock Exchange, 86 Trinity Place, New York, New York 10006, on which
the Common Stock of the Company is listed.
53
<PAGE>
The Company has filed with the Commission a Registration Statement on Form
S-2 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission (File No.
1-10670) pursuant to Section 13 of the Exchange Act are hereby incorporated by
reference in this Prospectus:
1. Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
2. Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
3. Current Reports on Form 8-K filed on April 15, 1997 (and amended on
June 13, 1997) and June 5, 1997.
Any statement contained herein or in any document incorporated by reference
herein will be deemed to be modified or superseded for purposes of this
Prospectus to the extent that any statement contained in this Prospectus
modifies or supersedes such a statement. Any such statements so modified or
superseded will not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of any such
person, a copy of the documents described above (other than exhibits).
Requests for such copy should be directed to Hanger Orthopedic Group, Inc.,
7700 Old Georgetown Road, Bethesda, Maryland 20814, Attention: Mr. Richard A.
Stein, Secretary, telephone number (301) 986-0701.
54
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
HANGER ORTHOPEDIC GROUP, INC.
Report of Independent Accountants......................................... F-1
Consolidated balance sheets as of December 31, 1995 and 1996 and
March 31, 1997 (unaudited)............................................... F-2
Consolidated statements of operations for the years ended December 31,
1994, 1995 and 1996 and the quarters ended March 31, 1996 and 1997
(unaudited).............................................................. F-4
Consolidated statements of changes in shareholders' equity for the years
ended December 31, 1994, 1995 and 1996 and the quarter ended March 31,
1997 (unaudited)......................................................... F-5
Consolidated statements of cash flows for the years ended December 31,
1994, 1995 and 1996 and the quarters ended March 31, 1996 and 1997
(unaudited).............................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
J.E. HANGER, INC. OF GEORGIA
Report of Independent Accountants......................................... F-21
Balance sheets as of December 3, 1995, 1994 and 1993...................... F-22
Statements of income for the years ended December 31, 1995, 1994 and
1993..................................................................... F-23
Statements of retained earnings for the years ended December 31, 1995,
1994 and 1993............................................................ F-24
Statements of cash flows for the years ended December 31, 1995, 1994 and
1993..................................................................... F-25
Notes to Consolidated Financial Statements................................ F-28
Balance sheet at June 30, 1996 (unaudited)................................ F-34
Statement of income for the six months ended June 30, 1996 (unaudited).... F-35
ACOR ORTHOPAEDIC, INC.--RETAIL DIVISION
Report of Independent Accountants......................................... F-36
Balance sheets as of December 31, 1995 and 1996........................... F-37
Statements of income for the years ended December 31, 1995 and 1996....... F-38
Statements of changes in divisional equity for the years ended December
31, 1995 and 1996........................................................ F-39
Statements of cash flows for the years ended December 31, 1995 and 1996... F-40
Notes to Financial Statements............................................. F-41
</TABLE>
55
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Hanger Orthopedic Group, Inc.
We have audited the accompanying consolidated balance sheets of Hanger
Orthopedic Group, Inc. and Subsidiaries as of December 31, 1995 and 1996 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, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Hanger
Orthopedic Group, Inc., and Subsidiaries as of December 31, 1995 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 21, 1997, except as to the information presented in the third paragraph
of Note D, for which the date is March 27, 1997
F-1
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------ ------------
1995 1996 1997
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............. $ 1,456,305 $ 6,572,402 $ 6,720,021
Accounts receivable, less allowances
for doubtful accounts of $1,144,000,
$2,478,800 and 3,052,000 in 1995,
1996, and 1997, respectively.......... 13,324,991 24,321,872 24,528,348
Inventories............................ 10,312,289 15,916,638 15,650,023
Prepaid and other assets............... 1,040,914 1,595,169 2,756,664
Deferred income taxes.................. 804,499 3,159,280 3,159,280
----------- ------------ ------------
Total current assets................. 26,938,998 51,565,361 52,814,336
----------- ------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Land................................... 2,991,245 4,269,045 4,269,045
Buildings.............................. 2,592,214 8,017,547 8,168,006
Machinery and equipment................ 3,654,780 6,275,307 6,466,540
Furniture and fixtures................. 1,575,493 2,095,900 2,124,041
Leasehold improvements................. 1,184,782 2,139,207 2,287,630
----------- ------------ ------------
11,998,514 22,797,006 23,315,262
Less accumulated depreciation and
amortization.......................... 4,232,858 5,497,809 6,027,606
----------- ------------ ------------
7,765,656 17,299,197 17,287,656
----------- ------------ ------------
INTANGIBLE ASSETS
Excess cost over net assets acquired... 27,133,528 63,935,447 66,405,465
Non-compete agreements................. 4,786,371 1,981,329 2,031,329
Other intangible assets................ 3,825,240 6,152,607 6,192,616
----------- ------------ ------------
35,745,139 72,069,383 74,629,410
Less accumulated amortization.......... 9,035,394 6,917,960 7,548,143
----------- ------------ ------------
26,709,745 65,151,423 67,081,267
----------- ------------ ------------
OTHER ASSETS
Other.................................. 385,662 925,446 975,083
----------- ------------ ------------
TOTAL ASSETS............................. $61,800,061 $134,941,427 $138,158,342
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1995 1996 1997
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt... $ 1,828,953 $ 4,902,572 $ 6,052,939
Accounts payable.................... 1,612,401 4,141,993 2,834,080
Accrued expenses.................... 710,510 7,815,028 9,222,640
Customer deposits................... 489,758 578,219 706,173
Accrued compensation related cost... 1,495,013 8,321,395 4,887,416
Deferred revenue.................... 180,587 306,998 286,512
----------- ------------ ------------
Total current liabilities......... 6,317,222 26,066,205 23,989,760
----------- ------------ ------------
Long-term debt........................ 22,925,124 64,297,801 68,815,270
Deferred income taxes................. 706,965 2,377,627 2,377,627
Other liabilities..................... 305,499 2,188,278 2,260,854
Mandatorily redeemable preferred stock
class C, 300 shares authorized,
liquidation preference of $500 per
share (See Note N)................... 253,886 277,701 283,996
Mandatorily redeemable preferred stock
class F, 100,000 shares authorized,
liquidation preference of $1,000 per
share (See Note N)................... -- -- --
Commitments and contingent
liabilities..........................
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value;
25,000,000 shares authorized,
8,424,039; 9,449,129 and 9,493,766
shares issued and 8,290,544;
9,315,634 and 9,360,270 shares
outstanding in 1995, 1996 and 1997,
respectively....................... 84,241 94,492 94,938
Additional paid-in capital.......... 33,574,058 41,008,363 41,087,022
Accumulated deficit................. (1,711,372) (713,478) (95,563)
----------- ------------ ------------
31,946,927 40,389,377 41,086,397
Treasury stock, cost--(133,495
shares)............................ (655,562) (655,562) (655,562)
----------- ------------ ------------
31,291,365 39,733,815 40,430,835
----------- ------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS'
EQUITY............................... $61,800,061 $134,941,427 $138,158,342
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
QUARTERS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $50,300,297 $52,467,899 $66,805,944 $12,229,029 $30,949,614
Cost of products and
services sold.......... 23,208,944 24,572,089 32,233,373 5,884,724 16,229,929
----------- ----------- ----------- ----------- -----------
Gross profit............ 27,091,353 27,895,810 34,572,571 6,344,305 14,719,685
Selling, general and
administrative......... 21,340,148 19,361,701 24,549,802 4,997,078 10,924,635
Depreciation and
amortization........... 2,435,727 2,005,113 2,016,390 476,155 749,305
Amortization of excess
cost over net assets
acquired............... 701,018 686,275 832,075 169,615 409,512
Restructuring cost...... 459,804 -- -- -- --
Loss from disposal of
assets................. 2,150,310 -- -- -- --
Acquisition costs....... -- -- 1,297,819 -- --
Integration costs....... -- -- 1,181,694 -- --
----------- ----------- ----------- ----------- -----------
Income from continuing
operations............. 4,346 5,842,721 4,694,791 701,457 2,636,233
Interest expense........ (1,745,781) (2,056,140) (2,546,561) (393,236) (1,527,269)
Other expense, net...... (180,940) (106,644) (177,216) (45,512) (43,749)
----------- ----------- ----------- ----------- -----------
Income (loss) from
continuing operations
before taxes and
extraordinary item..... (1,922,375) 3,679,937 1,971,014 262,709 1,065,215
Provision for income
taxes.................. 358,029 1,544,498 889,886 112,700 447,300
----------- ----------- ----------- ----------- -----------
Income (loss) from
continuing operations
before extraordinary
item................... (2,280,404) 2,135,439 1,081,128 150,009 617,915
----------- ----------- ----------- ----------- -----------
Loss from discontinued
operations............. (247,655) -- -- -- --
Loss from sale of
discontinued
operations............. (159,379) -- -- -- --
----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary item..... (2,687,438) 2,135,439 1,081,128 150,009 617,915
----------- ----------- ----------- ----------- -----------
Extraordinary loss on
early extinguishment of
debt, net of tax....... -- -- (83,234) -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)....... $(2,687,438) $ 2,135,439 $ 997,894 $ 150,009 $ 617,915
=========== =========== =========== =========== ===========
Income (loss) from
continuing operations
before extraordinary
item applicable to
common stock........... $(2,300,286) $ 2,113,640 $ 1,057,313 $ 144,254 $ 611,620
=========== =========== =========== =========== ===========
Income (loss) per common
share:
Income (loss) from
continuing operations
before extraordinary
item................... $ (0.28) $ 0.26 $ 0.12 $ 0.02 $ 0.06
Loss from discontinued
operations............. (0.03) -- -- -- --
Loss from sale of
discontinued
operations............. (0.02) -- -- -- --
Extraordinary loss on
early extinguishment of
debt................... -- -- (0.01) -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) per
common share........... $ (0.33) $ 0.26 $ 0.11 $ 0.02 $ 0.06
=========== =========== =========== =========== ===========
Weighted average number
of common shares
outstanding used in
computing net income
(loss) per common
share.................. 8,290,276 8,290,544 8,663,161 8,324,263 9,977,853
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE
QUARTER ENDED MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON COMMON PAID-IN ACCUMULATED TREASURY DEFERRED
SHARES STOCK CAPITAL DEFICIT STOCK COMPENSATION TOTAL
--------- ------- ----------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... 8,257,891 $83,914 $33,416,066 $(1,159,373) $(655,562) $(4,197) $31,680,848
Issuance of Common Stock
for purchase of
Columbia Brace......... 32,653 327 199,673 -- -- -- 200,000
Amortization of deferred
compensation........... -- -- -- -- -- 4,197 4,197
Preferred dividends
declared............... -- -- (19,882) -- -- -- (19,882)
Net Loss................ -- -- -- (2,687,438) -- -- (2,687,438)
--------- ------- ----------- ----------- --------- ------- -----------
Balance, December 31,
1994................... 8,290,544 84,241 33,595,857 (3,846,811) (655,562) -- 29,177,725
Preferred dividends
declared............... -- -- (21,799) -- -- -- (21,799)
Net Income.............. -- -- -- 2,135,439 -- -- 2,135,439
--------- ------- ----------- ----------- --------- ------- -----------
Balance, December 31,
1995................... 8,290,544 84,241 33,574,058 (1,711,372) (655,562) -- 31,291,365
--------- ------- ----------- ----------- --------- ------- -----------
Preferred dividends
declared............... -- -- (23,815) -- -- -- (23,815)
Issuance of Common Stock
in connection with the
exercise of stock
options................ 13,758 138 46,733 -- -- -- 46,871
Issuance of Common Stock
in connection with the
exercise of stock
warrants............... 11,332 113 (113) -- -- -- --
Issuance of Common Stock
in connection with the
purchase of JEH........ 1,000,000 10,000 5,240,000 -- -- -- 5,250,000
Issuance of warrants in
connection with the
purchase of JEH........ -- -- 133,000 -- -- -- 133,000
Issuance of warrants in
connection with the
Senior Subordinated
Note Agreement......... -- -- 2,038,500 -- -- -- 2,038,500
Net Income.............. -- -- -- 997,894 -- -- 997,894
--------- ------- ----------- ----------- --------- ------- -----------
Balance, December 31,
1996................... 9,315,634 94,492 41,008,363 (713,478) (655,562) -- 39,733,815
--------- ------- ----------- ----------- --------- ------- -----------
Preferred dividends
declared............... -- -- (6,295) -- -- -- (6,295)
Net Income.............. -- -- -- 617,915 -- -- 617,915
Issuance of Common Stock
in connection with the
exercise of stock
options................ 9,636 96 (96) -- -- -- --
Issuance of Common Stock
in connection with the
exercise of stock
warrants............... 35,000 350 85,050 -- -- -- 85,400
--------- ------- ----------- ----------- --------- ------- -----------
Balance, March 31,
1997................... 9,360,270 $94,938 $41,087,022 $ (95,563) $(655,562) -- $40,430,835
========= ======= =========== =========== ========= ======= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, QUARTERS ENDED MARCH 31,
-------------------------------------- --------------------------
1994 1995 1996 1996 1997
----------- ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow from operating
activities:
Net income (loss)...... $(2,687,438) $ 2,135,439 $ 997,894 $ 150,008 $ 617,915
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) continuing
operations:
Discontinued
operations............ 426,991 -- -- -- --
Loss from sale of
discontinued
operations............ 274,791 -- -- -- --
Loss from sale of
disposal of assets.... 2,150,310 -- -- -- --
Provision for bad
debt.................. 973,678 1,008,731 1,629,065 236,503 999,208
Amortization of
deferred
compensation.......... 4,197 -- -- -- --
Depreciation and
amortization.......... 2,435,727 2,005,113 2,016,390 476,155 749,305
Amortization of excess
cost over net assets
acquired.............. 701,018 686,275 832,075 169,615 409,512
Amortization of debt
discount.............. -- -- 42,469 -- 318,515
Deferred taxes......... (629,674) 631,899 (684,119) -- --
Extraordinary loss on
early extinguishment
of debt............... -- -- 138,724 -- --
Changes in assets and
liabilities, net of
effects from acquired
companies:
Accounts receivable.... (3,639,274) (1,922,572) (2,772,619) 789,170 (1,145,684)
Inventories............ (1,169,232) (800,933) 737,104 (122,556) 274,166
Prepaid and other
assets................ 131,714 108,112 (199,638) (413,599) (1,161,495)
Other assets........... 3,782 151,367 27,342 8,341 (49,638)
Accounts payable....... (54,555) 48,462 361,441 194,358 (1,314,988)
Accrued expenses....... 776,860 (618,105) 709,638 131,530 1,407,612
Accrued wages & payroll
taxes................. (116,852) 72,272 1,942,581 (177,539) (3,433,979)
Customer deposits...... 143,070 97,036 88,461 (183,771) 127,954
Deferred revenue....... (22,691) 82,897 126,411 3,833 (20,486)
Other liabilities...... 156,884 35,628 (66,459) (85,955) 72,577
----------- ----------- ------------ ------------ ------------
Net cash provided by
(used in) continuing
operations............. (140,694) 3,721,621 5,926,760 1,176,093 (2,149,506)
Net cash used in
discontinued
operations............. (172,146) -- -- -- --
----------- ----------- ------------ ------------ ------------
Net cash provided by
(used in) operating
activities............. (312,840) 3,721,621 5,926,760 1,176,093 (2,149,506)
----------- ----------- ------------ ------------ ------------
Cash flow from investing
activities:
Purchase of fixed
assets................ (1,114,551) (934,798) (1,239,364) (158,891) (495,970)
Acquisitions, net of
cash.................. (2,599,133) (273,939) (37,671,754) -- (2,301,618)
Purchase of patent..... (59,382) (70,552) (31,840) (10,513) (40,009)
Proceeds from sale of
certain assets........ 180,806 -- -- -- --
Purchase of non-compete
agreements............ (480,500) (35,000) (200,000) -- (50,000)
Decrease in other
intangibles........... (265,624) (24,321) (7,596) (1,045) --
----------- ----------- ------------ ------------ ------------
Net cash used in
investing activities... (4,338,384) (1,338,610) (39,150,554) (170,449) (2,887,597)
----------- ----------- ------------ ------------ ------------
Cash flow from financing
activities:
Net borrowings
(repayments) under
revolving credit
agreement............. 2,635,449 (100,000) (12,700,000) (900,000) 500,000
Proceeds from the sale
of Common Stock....... -- -- 46,871 -- 85,400
Proceeds from long-term
debt.................. 5,000,000 -- 65,000,000 -- 5,500,000
Repayment of debt...... (3,276,608) (1,882,706) (11,040,029) (415,639) (900,678)
(Increase) decrease in
financing costs....... (63,393) 7,619 (2,966,951) -- --
----------- ----------- ------------ ------------ ------------
Net cash provided by
(used in) financing
activities............. 4,295,448 (1,975,087) 38,339,891 (1,315,639) 5,184,722
----------- ----------- ------------ ------------ ------------
Increase (decrease) in
cash and cash
equivalents............ (355,776) 407,924 5,116,097 (309,995) 147,619
Cash and cash
equivalents at
beginning of
year/period............ 1,404,157 1,048,381 1,456,305 1,456,305 6,572,402
----------- ----------- ------------ ------------ ------------
Cash and cash
equivalents at end of
year/period............ $ 1,048,381 $ 1,456,305 $ 6,572,402 $ 1,146,310 $ 6,720,021
=========== =========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--THE COMPANY
Hanger Orthopedic Group, Inc. is one of the nation's largest professional
practice management companies in the O&P rehabilitation industry. In addition
to providing O&P patient-care services through its operating subsidiaries, the
Company also manufactures and distributes components and finished patient-care
products to the O&P industry primarily in the United States. Hanger's largest
subsidiary, Hanger Prosthetics & Orthotics, Inc. formerly known as J.E.
Hanger, Inc., was founded in 1861 by a Civil War amputee and is the oldest
company in the O&P industry in the United States. Orthotics is the design,
fabrication, fitting and supervised use of custom-made braces and other
devices that provide external support to treat musculoskeletal disorders.
Prosthetics is the design, fabrication and fitting of custom-made artificial
limbs.
NOTE B--SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents: Cash includes currency on hand and demand
deposits with high quality financial institutions. Management considers all
highly liquid investments with original maturities of three months or less at
the date of purchase to be cash equivalents. At various times throughout the
year, the Company maintains cash balances in excess of FDIC limits.
Fair Value of Financial Instruments: At December 31, 1995 and 1996, the
carrying value of financial instruments such as cash and cash equivalents,
trade receivables, trade payables, and debt approximates fair value.
Inventories: Inventories, which consist principally of purchased parts, are
stated at the lower of cost or market using the first-in, first-out (FIFO)
method.
Long-Lived Asset Impairment: Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards ("SFAS") 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
The provisions of SFAS 121 require the Company to review its long-lived assets
for impairment on an exception basis whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through future cash flows. If it is determined that an impairment
loss has occurred based on expected cash flows, then the loss is recognized in
the income statement. The adoption of SFAS 121 did not have an effect on the
Company's consolidated financial statements.
Property, Plant and Equipment: Property, plant and equipment are recorded at
cost. The cost and related accumulated depreciation of assets sold, retired or
otherwise disposed of are removed from the respective accounts, and any
resulting gains or losses are included in the statement of operations.
Depreciation is computed for financial reporting purposes using the straight-
line method over the estimated useful lives of the related assets.
Depreciation expense was approximately $1,090,000, $1,136,000 and $1,288,000
for the years ended December 31, 1994, 1995 and 1996, respectively and
$288,000 and $530,000 for the quarters ended March 31, 1996 and 1997,
respectively.
F-7
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Intangible Assets: Intangible assets, including non-compete agreements, are
recorded based on agreements entered into by the Company and are being
amortized over their estimated useful lives ranging from 5 to 7 years using
the straight-line method. Other intangible assets are recorded at cost and are
being amortized over their estimated useful lives of up to 16 years using the
straight-line method. Excess cost over net assets acquired represents the
excess of purchase price over the value assigned to net identifiable assets of
purchased businesses and is being amortized using the straight-line method
over 40 years. It is the Company's policy to periodically review and evaluate
whether there has been a permanent impairment in the value of excess cost over
net assets acquired and other intangible assets. Factors considered in the
evaluation include current operating results, trends, prospects and
anticipated undiscounted future cash flows. Fully amortized intangible assets
amounting to approximately $3,225,000 were removed from the financial
statements at December 31, 1996.
Pre-opening Costs: The Company capitalizes certain costs relating to the
pre-opening of new patient-care centers. These costs are amortized over a
twelve-month period using the straight-line method commencing on the date in
which the patient-care center opens.
Revenue Recognition: Revenue on the sale of orthotic and prosthetic devices
is recorded when the device is accepted by the patient. Revenues from referral
service contracts is recognized over the term of the contract. Deferred
revenue represents billings made prior to the final fitting and acceptance by
the patient and unearned service contract revenue. Revenue is recorded at its
net realizable value taking into consideration all governmental and
contractual discounts.
Credit Risk: The Company primarily provides services and customized devices
throughout the United States and is reimbursed by the patients' third-party
insurers or governmentally funded health insurance programs. The Company
performs ongoing credit evaluations of its distribution customers. The
accounts receivable are not collateralized. The ability of the Company's
debtors to meet their obligations is dependent upon the financial stability of
the insurers of the Company's customers and future legislation and regulatory
actions. Additionally, the Company maintains reserves for potential losses
from these receivables that historically have been within management's
expectations.
Income Taxes: Income taxes are determined in accordance with SFAS 109, which
requires recognition of deferred income tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income tax
liabilities and assets are determined based on the difference between
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
SFAS 109 also provides for the recognition of deferred tax assets if it is
more likely than not that the assets will be realized in future years.
Net Income (Loss) Per Common Share: Net income per common share is
calculated using the weighted average of common and common equivalent shares
outstanding during the year. Common equivalent shares are attributable to
unexercised stock options and warrants. In the years ended 1994, 1995 and 1996
and the quarters ended March 31, 1996 and 1997, common equivalents which would
be considered in a fully diluted calculation are not included in the per share
calculation as the effect is not material. Income (loss) from continuing
operations before extraordinary item applicable to Common Stock has been
adjusted for the dividends declared applicable to certain classes of
cumulative preferred stock.
Stock-Based Compensation: Compensation costs attributable to stock option
and similar plans are recognized based on any difference between the quoted
market price of the stock on the date of the grant over the amount the
employee is required to pay to acquire the stock (the intrinsic value method
under
F-8
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accounting Principles Board Opinion 25). Such amount, if any, is accrued over
the related vesting period, as appropriate. SFAS 123, "Accounting for Stock-
Based Compensation," requires companies electing to continue to use the
intrinsic value method to make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting had been
applied. The Company has adopted the disclosure only provisions of SFAS 123.
New Accounting Standard: In February 1997, the Financial Accounting
Standards Board issued SFAS 128, "Earnings per Share," which will replace the
current rules for earnings per share computations, presentation and
disclosure. Under the new standard, basic earnings per share excludes dilution
and is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue Common Stock were exercised or
converted into Common Stock. SFAS 128 requires a dual presentation of basic
and diluted earnings per share on the face of the income statement.
The Company will be required to adopt SFAS 128 in the fourth quarter of 1997
and, as required by the standard, will restate all prior period earnings per
share data. The Company's new earnings per share amounts as calculated under
SFAS 128 are not expected to be materially different from those computed under
the present accounting standard.
Interim Financial Information: The accompanying unaudited consolidated
interim financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the quarter ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1997.
Reclassifications: Certain previously reported amounts have been
reclassified to conform with the current presentation.
F-9
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE C--SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION
The following are the supplemental disclosure requirements for the
statements of cash flows:
<TABLE>
<CAPTION>
QUARTERS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------- -----------------
1994 1995 1996 1996 1997
---------- ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid during the period
for:
Interest................. $1,690,742 $2,166,877 $2,273,629 $542,255 $641,926
Income taxes............. 212,000 712,800 1,893,990 207,780 --
Non-cash financing and
investing activities:
Preferred dividends
declared.................. 19,882 21,799 23,815 5,755 6,295
Issuance of notes in
connection with
acquisition............... 1,925,000 175,000 -- -- 250,000
Issuance of Common Stock in
connection with
acquisition............... 200,000 -- 5,250,000 -- --
Issuance of warrants in
connection with
acquisition............... -- -- 133,000 -- --
Issuance of warrants in
connection with Senior
Subordinated Notes........ -- -- 2,038,500 -- --
Issuance of Common Stock in
connection with exercise
of warrants/options....... -- -- 113 -- 96
</TABLE>
NOTE D--ACQUISITIONS AND SALE OF ASSETS
During 1994, the Company acquired the net assets of several orthotic and
prosthetic companies and one manufacturer of orthotic devices. The purchase
price for these companies was $2,780,000 in cash, plus $1,925,000 in notes and
32,653 shares of Common Stock valued at $200,000. The notes are payable over
one to five years with interest from 6% to 7%.
During 1995, the Company acquired two orthotic and prosthetic companies. The
aggregate purchase price was $385,000 comprised of $210,000 in cash and
$175,000 in promissory notes. The cash portion of the purchase prices for
these acquisitions was borrowed under the Company's revolving credit facility.
During 1996, the Company acquired one orthotic and prosthetic company, J.E.
Hanger, Inc. of Georgia, pursuant to the terms of a Merger Agreement. As of
the acquisition date, JEH, headquartered in Alpharetta, Georgia, operated 94
patient-care centers and five warehouses located primarily in the Mid-Atlantic
and Southeastern United States. Under the terms of the agreement, which became
effective on November 1, 1996, the Company paid JEH shareholders $44.0 million
in cash and issued 1.0 million shares of Company Common Stock and paid an
additional $1,783,000 to former JEH shareholders on March 27, 1997 pursuant to
provisions in the Merger Agreement calling for a post-closing adjustment. In
addition, the Company issued 35,000 warrants to one JEH noteholder in order to
facilitate assumption of this debt under the same terms and conditions that
had existed prior to the acquisition. Included in accrued expenses at December
31, 1996, is approximately $3,119,000 and $1,554,000 of severence and
relocation costs incurred in connection with the acquisition of JEH.
All of the above acquisitions have been accounted for as business
combinations in accordance with the purchase method. The results of operations
for these acquisitions are included in the Company's results of operations
from their date of acquisition. Excess cost over net assets acquired in these
F-10
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
acquisitions amounting to approximately $376,000 and $36,699,000 in 1995 and
1996, respectively, are amortized using the straight-line method over 40
years.
The following table summarizes the unaudited consolidated pro forma
information, assuming the acquisitions had occurred at the beginning of each
of the following periods:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Net sales...................................... $112,292,000 $122,946,000
Income from operations......................... 10,938,243 8,728,783
Net income..................................... 2,535,567 1,225,925
Net income per common share.................... .27 .12
</TABLE>
The pro forma results do not necessarily represent results which would have
occurred if the acquisitions had taken place at the beginning of each period,
nor are they indicative of the results of future combined operations.
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.
During the first quarter of 1997, the Company acquired one orthotic and
prosthetic company. The aggregate purchase price was $500,000, comprised of
$250,000 in cash and $250,000 in promissory notes. The cash portion of this
acquisition was borrowed under the Company's acquisition loan facility.
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. On September 30,
1994, the Company sold those assets for $181,000 in cash and reported a loss
on the sale of $159,379 (net of a tax benefit of $115,412). Apothecaries has
been classified in the Consolidated Statements of Operations as a discontinued
operation, with all revenue, expenses and other income having been excluded
from continuing operations.
The operating results of Apothecaries for the nine months ended September
30, 1994, were as follows:
<TABLE>
<CAPTION>
1994
----------
<S> <C>
Sales........................................................ $1,294,341
Loss before taxes............................................ (426,991)
Tax benefit.................................................. (179,336)
----------
Loss from discontinued operations............................ $ (247,655)
==========
</TABLE>
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.
F-11
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE G--INVENTORY
Inventories at December 31, 1995 and 1996 and March 31, 1997 consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------- -----------
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials......................... $ 6,603,619 $ 7,504,442 $ 7,592,991
Work in-process....................... 1,107,289 831,632 916,755
Finished goods........................ 2,601,381 7,580,564 7,140,277
----------- ----------- -----------
$10,312,289 $15,916,638 $15,650,023
=========== =========== ===========
</TABLE>
NOTE H--LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
A Term Loan Commitment payable in quarterly
installments through December 2001 with interest
payable monthly at the Company's option of either the
Bank's prime rate plus 1.75%, or the one, three or
six month LIBOR plus 2.75%. (8.31% at December 31,
1996). The base interest rate is subject to a floor
of 5.32% and a cap of 7.0% by an agreement that
became effective on December 31, 1996 and terminates
on September 30, 1999................................ $ -- $29,000,000
B Term Loan Commitment payable in quarterly
installments through December 2003 with interest
payable monthly at the Company's option of either the
Bank's prime rate plus 2.25%, or the one, three or
six month LIBOR plus 3.25% (8.81% at December 31,
1996)................................................ -- 28,000,000
8% Senior Subordinated Notes with detachable warrants
due November 2004, net of unamortized discount of
$1,996,031, 11.19% effective interest rate........... -- 6,003,969
Revolving credit facility expiring in June, 1997 with
interest payable monthly at the Company's option of
either the Bank's prime rate plus .25% or the three
month LIBOR plus 2.50% (8.175% and 8.75% at December
31, 1995)............................................ 12,700,000 --
Senior term loans, with principal and interest payable
monthly and with one loan at the Bank's prime rate
plus .75%, with the remaining loans at the Company's
option of either the Bank's prime rate plus .50% or
the three-month LIBOR plus 2.75% (9.25% and 8.44% at
December 31, 1995) with balloon payments due in No-
vember and December 1998............................. 4,596,663 --
8.5% Convertible Junior Subordinated Note............. 4,000,000 --
8.25% Convertible Junior Subordinated Note............ 1,000,000 --
Subordinated seller notes, non-collateralized net of
unamortized discount of $612,696, with principle and
interest payable in either monthly or quarterly
installments at effective interest rates ranging from
6% to 11%, maturing through January 2009 ............ 2,375,609 5,574,793
Other miscellaneous obligations with principle and in-
terest payable in either monthly or annual install-
ments at interest rates ranging from 6% to 10% matur-
ing through December 2007............................ 81,805 621,611
----------- -----------
24,754,077 69,200,373
Less current portion.................................. 1,828,953 4,902,572
----------- -----------
$22,925,124 $64,297,801
=========== ===========
</TABLE>
F-12
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In November 1996, the Company entered into a new $90,000,000 Credit
Agreement with a syndication of banks which provides for a: (i) "A Term Loan"
in the principal amount of $29,000,000 with scheduled incrementally varying
quarterly repayments commencing March 1997 through December 2001; (ii) "B Term
Loan" in the principal amount of $28,000,000 with scheduled varying quarterly
repayments commencing March 1997 through December 2003; (iii) $25,000,000
Acquisition Loan Commitment and; (iv) $8,000,000 Revolving Loan Commitment.
The Acquisition Loan Commitment and Revolving Loan Commitment bear interest
at the Company's option of either the Prime Lending Rate plus 1.75%, or the
one, three or six month LIBOR plus 2.75%. The Credit Agreement is
collateralized by substantially all the assets of the Company and contains
certain affirmative and negative covenants customary in an agreement of this
nature.
The Credit Agreement provides for an initial commitment fee of 2.625% on the
total $90,000,000 facility and an annual fee of .5% per year on the aggregate
unused portion of the Credit Agreement. As of December 31, 1996, the Company
had no outstanding balances on both the Acquisition and Revolving Loan
Commitments.
The Company has entered into an interest rate swap agreement to reduce the
impact of changes in interest rates on its A Term Loan Commitment. At December
31, 1996, the Company had an outstanding interest rate swap agreement with a
commercial bank, having a total notional principle amount of $28,500,000. The
agreement effectively minimizes the Company's base interest rate exposure
between a floor of 5.32% and a cap of 7.0%. The interest rate swap agreement
matures on September 30, 1999. The Company is exposed to credit loss in the
event of non-performance by the other party to the interest rate swap
agreement. However, the Company does not anticipate non-performance by the
counterparties.
In November 1996, the Company also entered into a Senior Subordinated Note
Purchase Agreement in the principal amount of $8,000,000 which is due in its
entirety November 2004 bearing interest at 8.0%. Upon entering into this
Agreement, the Company issued 1,600,000 warrants to noteholders. This
transaction resulted in the Company recording a debt discount of $2,038,500
which is being amortized ratably over the life of the notes. The Note Purchase
Agreement is subordinate to the Credit Agreement and contains covenants
restricting the payment of dividends, the incurrence of indebtedness and the
making of acquisitions and other transactions. It should be noted that a
shareholder owns 50% of the Senior Subordinated Notes.
The Company used the proceeds of the A Term Loan, B Term Loan and Senior
Subordinated Notes to finance the acquisition of JEH and to repay all amounts
then outstanding under the Revolving credit facility, Senior Financing
Facility, the 8.5% Convertible Junior Subordinated Note and the 8.25%
Convertible Junior Subordinate Note. In connection with this transaction, the
Company recorded an extraordinary charge of $138,724 pre-tax, $83,234 after
tax, or $.01 per share for the write-off of unamortized discounts and
financing costs, in 1996.
Maturities of long-term debt, at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997.......................................................... $ 4,902,572
1998.......................................................... 7,141,513
1999.......................................................... 7,774,296
2000.......................................................... 8,628,500
2001.......................................................... 9,388,507
Thereafter.................................................... 31,364,985
-----------
$69,200,373
===========
</TABLE>
F-13
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE I--INCOME TAXES
The provisions for income taxes for the years ended December 31, 1994, 1995
and 1996 consisted of the following:
<TABLE>
<CAPTION>
1994 1995 1996
--------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.................................... $ 454,955 $ 541,626 $1,146,564
State...................................... 238,000 370,973 427,441
--------- ---------- ----------
Total........................................ 692,955 912,599 1,574,005
Deferred:
Federal and State.......................... (334,926) 631,899 (684,119)
--------- ---------- ----------
Provision for income taxes on income before
discontinued operations and extraordinary
item........................................ 358,029 1,544,498 889,886
Tax benefit from discontinued operations..... (179,336) -- --
Tax benefit from sale of discontinued
operations.................................. (115,412) -- --
Tax benefit from extraordinary item.......... -- -- (55,489)
--------- ---------- ----------
Provision for income taxes................... $ 63,281 $1,544,498 $ 834,397
========= ========== ==========
</TABLE>
A reconciliation of the federal statutory tax rate to the effective tax rate
for the years ended December 31, 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- ---------- --------
<S> <C> <C> <C>
Federal statutory tax rate................... $(653,608) $1,251,349 $670,145
Increase (reduction) in taxes resulting from:
State income taxes (net of federal effect)... 151,080 249,047 98,573
Amortization of the excess cost over net
assets acquired............................. 178,160 92,777 92,777
Disposal of assets........................... 459,340 -- --
Valuation allowance.......................... 70,000 (70,000) --
Other, net................................... 153,057 21,325 28,391
--------- ---------- --------
Provision for income taxes on income before
extraordinary item.......................... 358,029 1,544,498 889,886
Tax benefit from discontinued operations..... (179,336) -- --
Tax benefit from sale of discontinued
operations.................................. (115,412) -- --
Tax benefit from extraordinary item.......... -- -- (55,489)
--------- ---------- --------
Provision for income taxes................... $ 63,281 $1,544,498 $834,397
========= ========== ========
</TABLE>
F-14
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Temporary differences and carry forwards which give rise to deferred tax
assets and liabilities as of December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Deferred Tax Liabilities:
Book basis in excess of tax.............................. $ 775,838 $ 775,838
Depreciation and amortization............................ 666,920 2,498,527
---------- ----------
1,442,758 3,274,365
---------- ----------
Deferred Tax Assets:
Net operating loss, Federal.............................. 369,624 319,039
Net operating loss, States............................... 211,165 281,051
Accrued expenses......................................... 334,790 1,554,907
Reserve for bad debts.................................... 393,322 965,116
Inventory capitalization................................. 218,086 664,371
Restructuring............................................ 13,305 --
Acquisition costs........................................ -- 271,534
---------- ----------
Gross deferred tax assets................................ 1,540,292 4,056,018
---------- ----------
Net deferred tax assets.................................. $ 97,534 $ 781,653
========== ==========
</TABLE>
For Federal and State tax purposes at December 31, 1996, the Company has
available approximately $938,000 of net operating loss carryforwards expiring
from 1998 through 2007 and are subject to a limitation in their utilization of
approximately $149,000 per year as a result of several changes in shareholder
control.
At December 31, 1995, the Company evaluated the realizability of the state
net operating losses and, based upon projections of taxable income by state,
concluded that a valuation allowance was not necessary. The remaining balance
of the deferred tax assets should be realized through future taxable income
and the reversal of taxable temporary differences.
NOTE J--DEFERRED COMPENSATION
In conjunction with the JEH acquisition, the Company assumed the unfunded
deferred compensation plan that had been established for certain key JEH
officers. The plan accrues benefits ratably over the period of active
employment from the time the contract is entered into to the time the
participant retires. Participation had been determined by JEH's Board of
Directors. The Company has purchased individual life insurance contracts with
respect to each employee covered by this plan. The Company is the owner and
beneficiary of the insurance contracts. The accrual related to the deferred
compensation arrangements amounted to approximately $1,985,000 at December 31,
1996.
NOTE K--COMMITMENTS AND CONTINGENT LIABILITIES
The Company is engaged in legal proceedings in the normal course of
business. The Company believes that any unfavorable outcome from these suits
not covered by insurance would not have a material adverse effect on the
financial statements of the Company.
F-15
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE L--OPERATING LEASES
The Company leases office space under noncancellable operating leases.
Certain of these leases contain escalation clauses based on the consumer price
index. Future minimum rental payments, by year and in the aggregate, under
operating leases with terms of one year or more consist of the following at
December 31, 1996:
<TABLE>
<S> <C>
1997.......................................................... $ 3,925,000
1998.......................................................... 3,064,000
1999.......................................................... 2,401,000
2000.......................................................... 1,932,000
2001.......................................................... 1,432,000
Thereafter.................................................... 1,974,000
-----------
$14,728,000
===========
</TABLE>
Rent expense was approximately $2,499,000, $2,144,000 and $2,554,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
NOTE M--PENSION AND PROFIT SHARING PLANS
Previously, the Company had a 401(k) Saving and Retirement Plan (the "Plan")
available to all employees of J.E. Hanger, Inc. ("J. E. Hanger"), a wholly-
owned subsidiary of the Company. The Company matched the participant's
contributions and made discretionary matching contributions. On January 1,
1993, the Company froze the Plan such that no new employees of J. E. Hanger
were able to participate. On December 31, 1995, the Company terminated the
Plan. There was no employer contribution made to the Plan in 1995. Benefit
expense was $130,000 for the year ended December 31, 1994.
The Company maintains a separate defined contribution profit sharing and
401(k) plan ("JEH Plan") covering all the employees of JEH, a recently
acquired wholly-owned subsidiary of the Company. On November 1, 1996, the
Company froze the JEH Plan such that no new employees of JEH were able to
participate. The Company did not make any contributions to the JEH Plan during
1996.
The Company maintains a 401(k) Savings and Retirement plan to cover all of
the employees of the Company. The Company may make discretionary
contributions. Under this 401(k) plan, employees may defer such amounts of
their compensation up to the levels permitted by the Internal Revenue Service.
The Company has not made any contributions to this plan.
NOTE N--REDEEMABLE PREFERRED STOCKS
The Company has 10,000,000 authorized shares of preferred stock, par value
$.01 per share, which may be issued in various classes with different
characteristics.
The 300 issued and outstanding shares of non-voting, non-convertible Class C
preferred stock have an aggregate liquidation value equal to $150,000 plus
accrued dividends at 9% and are required to be redeemed on February 1, 2000.
Accrued dividends at December 31, 1995 and 1996, were $21,799 and $23,815,
respectively.
The 100,000 authorized shares of Class F preferred stock, accrues dividends
cumulatively at 16.5% and is required to be redeemed prior to any other class
of preferred stock, before September 1998, for the aggregate liquidation value
of $1,000 per share, plus accrued dividends. As of December 31, 1995 and 1996,
none of the Class F preferred stock was issued or outstanding.
F-16
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE O--WARRANTS AND OPTIONS
WARRANTS
In November 1990, the Company entered into a $2,450,000 Note which required
the Company, based on certain repayment provisions, to issue to an affiliate
in 1991 warrants to purchase 297,883 and 322,699 shares of Common Stock at
$4.16 and $7.65 per share, respectively. These warrants are exercisable
through December 31, 2001. In May 1996, 71,969 warrants were exercised at
$4.16 per share which resulted in the issuance of 11,332 shares.
In November 1996, the Company issued warrants for 1.6 million shares of
Common Stock to the holders of the Senior Subordinated Notes. The warrants
provide that the noteholders may purchase 929,700 shares and 670,300 shares
for $4.01 and $6.375, respectively. If the Company repays 100% of the Senior
Subordinated Notes within 18 or 12 months, 50% or 55%, respectively, of the
warrants will terminate. Warrants will terminate pro-rata across the exercise
prices.
In November 1996, the Company issued warrants for 35,000 shares of common
stock as an incentive to one JEH noteholder to allow the notes to be assumed
by the Company under the same terms and conditions that had existed prior to
the acquisition. The warrants provide that the noteholder may purchase Common
Stock at an exercise price of $2.44 per share. The warrants are exercisable at
any time during the eight year term. In January 1997, the noteholder exercised
the warrants and purchased 35,000 shares of Common Stock for $2.44 per share.
OPTIONS
Under the Company's 1991 Stock Option Plan ("SOP"), 1,500,000 shares of
Common Stock are authorized for issuance under options that may be granted to
employees. The number of shares that remain available for grant at December
31, 1995 and 1996, were 892,790 and 113,501, respectively. Under the SOP,
options may be granted at an exercise price not less than the fair market
value of the Common Stock on the date of grant. Vesting and expiration periods
are established by the Compensation Committee of the Board of Directors and
generally vest three years following grant and generally expire eight to ten
years after grant.
In addition to the SOP, non-qualified options may be granted with exercise
prices that are less than the current market value. Accordingly, compensation
expense for the difference between current market value and exercise price
would be recorded at the date of grant.
F-17
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of option transactions and exercise prices:
<TABLE>
<CAPTION>
STOCK NON-QUALIFIED
OPTION PLAN STOCK OPTIONS
-------------------------- ------------------------
PRICE WEIGHTED PRICE WEIGHTED
SHARES PER SHARE AVERAGE SHARES PER SHARE AVERAGE
--------- --------------- -------- ------- --------------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December
31, 1993............... 473,434 $4.76 to $14.08 $ 6.17 47,693 $6.00 to $14.08 $ 9.42
========= =======
Granted................. 82,000 $6.00 6.00 30,000 $4.38 4.38
Terminated.............. (17,833) $6.00 to $12.25 6.72 --
Expired................. (3,559) $14.08 14.08 (5,191) $14.08 14.08
--------- -------
Outstanding at December
31, 1994............... 534,042 $6.00 to $12.25 6.57 72,502 $4.38 to $6.00 7.78
========= =======
Granted................. 171,918 $2.75 to $3.25 2.83 37,500 $3.00 3.00
Terminated.............. (57,291) $6.00 to $12.25 7.20 --
--------- -------
Outstanding at December
31 1995................ 648,669 $2.75 to $12.25 5.49 110,002 $3.00 to $6.00 6.81
========= =======
Granted................. 802,250 $3.50 to $6.125 5.54 30,000 $5.875 5.875
Terminated.............. (22,961) $2.81 to $12.25 4.93 --
Exercised............... (7,508) $2.81 2.81 (6,250) $3.00 to $6.00 4.75
--------- -------
Outstanding at December
31, 1996............... 1,420,450 $2.75 to $12.25 5.54 133,752 $3.00 to $6.00 6.74
========= =======
Vested at December 31,
1996................... 467,782 57,500
========= =======
</TABLE>
The Company applies APB Opinion 25 and related Interpretations in accounting
for its plans. Historically, the Company granted stock options at exercise
prices equal to the fair market value of the stock on the date of grant for
fixed stock options. Accordingly, no compensation cost has been recognized for
its fixed stock option plans. Had compensation cost for the Company's stock-
based compensation plans been determined based on the fair value at the grant
dates for awards under those plans consistent with the method of SFAS 123, the
Company's net income and earnings per share would have been reduced to the
unaudited pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
---------- --------
<C> <S> <C> <C>
Net Income: As reported ....................... $2,135,439 $997,894
Pro forma ......................... 2,017,179 745,714
Income Per Share: As reported ....................... .26 .11
Pro forma ......................... .24 .08
</TABLE>
The weighted average fair value of stock options granted during 1995 was
$2.51 and $5.03 during 1996.
F-18
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of stock options exercisable at December 31,
1994, 1995 and 1996, and their respective weighted-average share prices:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Options exercisable December 31, 1994.................. 262,484 $7.31
Options exercisable December 31, 1995.................. 396,043 6.83
Options exercisable December 31, 1996.................. 525,282 6.45
</TABLE>
The pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of SFAS 123. The
fair value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted average assumptions
for 1995 and 1996: a risk-free interest rate ranging from 5.83% to 7.6%, 0%
dividend yield, volatility factor of the expected market price of the
Company's Common Stock of 120% and a weighted average life of the option of 7
years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- -------------------------
WEIGHTED AVERAGE
NUMBER OF --------------------- NUMBER OF WEIGHTED
RANGE OF OPTIONS REMAINING EXERCISE OPTIONS AVERAGE
EXERCISE PRICES AND AWARDS LIFE (YEARS) PRICE AND AWARDS EXERCISE PRICE
- --------------- ---------- ------------ -------- ---------- --------------
<S> <C> <C> <C> <C> <C>
$2.750 to $3.000........... 175,199 8.30 $2.82 77,699 $2.82
$3.250 to $4.125........... 229,878 8.67 3.77 25,375 3.75
$4.375 to $5.875........... 63,750 7.78 5.12 18,750 4.50
$6.000 to $6.000........... 168,750 6.69 6.00 138,083 6.00
$6.125 to $6.125........... 600,000 9.84 6.13 -- --
$6.250 to $6.250........... 205,000 6.70 6.25 153,750 6.25
$6.520 to $8.000........... 10,000 0.98 7.27 10,000 7.27
$8.125 to $8.125........... 25,000 5.75 8.13 25,000 8.13
$12.000 to $12.000......... 50,000 5.52 12.00 50,000 12.00
$12.250 to $12.250......... 26,625 5.17 12.25 26,625 12.25
--------- ---- ----- ------- -----
$ 2.750 to $12.250......... 1,554,202 8.31 $5.69 525,282 $6.45
</TABLE>
In a series of transactions beginning August 1990, a principal shareholder
(the "Grantor") granted options to members of management (the "Managers") of
the Company to purchase 577,912 shares of Company Common Stock owned by the
Grantor at exercise prices that ranged from $3.875 to $8.00 per share. In five
related transactions during August 1996 and January 1997, the Managers
exchanged their entire rights to the total number of shares for 229,672 shares
of Common Stock owned by the Grantor.
F-19
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
These events satisfied the Grantor's obligations under the agreement. As a
result of those transactions, none of such options remain outstanding.
Under the Company's 1993 Non-Employee Director Stock Option Plan, 250,000
shares of Common Stock are authorized for issuance to directors of the Company
who are not employed by the Company or any affiliate of the Company. Under
this plan, an option to purchase 5,000 shares of Common Stock is granted
automatically on an annual basis to each eligible director on the third
business day following the date of each Annual Meeting of Stockholders of the
Company at which the eligible director is elected. The exercise price of each
option is equal to 100% of the fair market value of the Common Stock on the
date of grant. Each option vests at the rate of 25% each year for the first
four years after the date of grant of the option and each such option expires
ten years from the date of grant; provided, however, that in the event of
termination of a director's service other than by reason of total and
permanent disability or death, then the outstanding options of such holder
expires three months after such termination. Outstanding options remain
exercisable for one year after termination of service by reason of total and
permanent disability or death. The number of shares that remain available for
grant at December 31, 1995 and 1996 were 160,000 and 130,000, respectively.
NOTE P--OTHER EVENTS
On April 1, 1997 and May 12, 1997, the Company purchased the net assets of
two orthotic and prosthetic companies. The total consideration to acquire
these companies, excluding potential earn-out provisions, is expected to total
approximately $9,200,000.
F-20
<PAGE>
W I N D H A M B R A N N O N, P. C.
C E R T I F I E D P U B L I C A C C O U N T A N T S
INDEPENDENT AUDITOR'S REPORT
To The Stockholders and Directors
J. E. Hanger, Inc. of Georgia
We have audited the accompanying balance sheets of J.E. Hanger, Inc. of
Georgia as of December 31, 1995, 1994 and 1993, and the related statements of
income, retained earnings and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 financial position of J.E. Hanger, Inc. of
Georgia as of December 31, 1995, 1994 and 1993 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for certain investments in debt and equity securities
during 1994 to adopt the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities".
Windham Brannon, P.C.
Certified Public Accountants
February 23, 1996, except for
Note 14, as to which the date is
September 17, 1996.
F-21
<PAGE>
J.E. HANGER, INC. OF GEORGIA
BALANCE SHEETS
DECEMBER 31, 1995, 1994 AND 1993
ASSETS
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Notes 2 and
4)...................................... $ 6,805,953 $ 7,094,940 $ 3,943,276
Marketable securities, at fair value
(Notes 2 and 6) ........................ 4,196,946 3,531,902 --
Accounts receivable, trade (Note 2)...... 10,634,928 8,728,216 8,681,256
Notes receivable......................... 56,704 77,045 189,136
Inventories (Notes 2 and 3).............. 4,102,218 3,540,840 3,284,394
Other receivables and prepaid expenses... 346,207 294,124 338,666
----------- ----------- -----------
Total Current Assets................. 26,142,956 23,267,067 16,436,728
----------- ----------- -----------
PROPERTY, PLANT AND EQUIPMENT--at remaining
cost (Notes 2, 3, 5, 9 and 10)............ 7,019,776 7,150,841 7,241,169
----------- ----------- -----------
OTHER ASSETS:
Notes receivable, long term.............. 141,785 156,258 --
Investments (Notes 2 and 6):
Marketable securities at lower of cost
or market ............................ -- -- 3,209,089
CRP, Inc. Dba Springlite............... 250,000 250,000 250,000
Cash value of life insurance............. 322,576 295,485 510,756
Other intangible assets, at unamortized
cost (Notes 2 and 7) 5,023,911 4,656,529 5,316,483
----------- ----------- -----------
Total Other Assets................... 5,738,272 5,358,272 9,286,328
----------- ----------- -----------
Total Assets......................... $38,901,004 $35,776,180 $32,964,225
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................... $ 1,942,347 $ 1,638,311 $ 1,252,447
Accrued salaries and wages............... 3,362,850 3,104,323 2,557,586
Accrued compensated absences............. 753,488 601,108 534,645
Accrued interest......................... 67,989 87,819 23,747
Accrued deferred comensation (Note 8).... -- -- 53,330
Current portion of Industrial Revenue
Bonds (Notes 9 and 10).................. 66,660 66,660 66,660
Mortgage and other notes (Note 10)....... 1,913,415 1,720,228 1,209,044
Accrued contribution to profit sharing
plan (Note 12) 484,683 420,000 354,896
Other accrued liabilities................ 387,003 319,244 --
----------- ----------- -----------
Total Current Liabilities............ 8,978,435 7,957,693 6,052,355
LIABITIES DUE AFTER ONE YEAR:
Acccrued compensated absences............ 277,111 279,219 252,361
Accrued deferred compensation (note 8)... 2,0007,385 1,725,002 1,698,942
Long term portion of Industrial Revenue
Bonds (Notes 9 and 10).................. 288,960 355,620 422,280
Mortgages and other notes (Note 10)...... 4,422,114 4,683,608 6,073,096
----------- ----------- -----------
Total Liabilities.................... 15,974,005 15,001,142 14,499,034
STOCKHOLDERS' EQUITY
Common Stock, $1 par value, 250,000
shares authorized, 21,900 shares
outstanding (Note 11)................... 21,900 21,900 21,900
Retained Earnings........................ 22,905,099 20,753,138 18,443,291
----------- ----------- -----------
Total Stockholders' Equity........... 22,926,999 20,775,038 18,465,191
----------- ----------- -----------
Total Liabilities and Stockholders'
Equity.............................. $38,901,004 $35,776,180 $32,964,225
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
J.E. HANGER, INC. OF GEORGIA
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993*
----------- ----------- -----------
<S> <C> <C> <C>
SALES...................................... $59,780,443 $52,463,383 $48,026,084
COST OF SALES.............................. 32,812,637 28,177,501 25,871,325
----------- ----------- -----------
GROSS PROFIT............................... 26,967,806 24,285,882 22,154,759
SELLING AND ADMINISTRATIVE EXPENSES........ 22,086,561 20,049,872 18,829,013
----------- ----------- -----------
OPERATING PROFIT........................... 4,881,245 4,236,010 3,325,746
OTHER INCOME............................... 1,130,869 244,257 244,062
----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES... 6,012,114 4,480,267 3,569,808
PROVISION FOR STATE INCOME TAXES (Notes 1
and 2).................................... 65,832 21,832 45,901
----------- ----------- -----------
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING FOR INVESTMENTS...... 5,946,282 4,458,435 3,523,907
CUMULATIVE EFFECT THROUGH DECEMBER 31, 1993
OF CHANGE IN ACCOUNTING FOR INVESTMENTS
(Notes 2 and 6)........................... -- 371,157 --
----------- ----------- -----------
NET INCOME................................. $ 5,946,282 $ 4,829,592 $ 3,523,907
=========== =========== ===========
</TABLE>
- --------
* Certain reclassifications have been made to conform to the 1994 presentation.
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
J.E. HANGER, INC. OF GEORGIA
STATEMENTS OF RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE, BEGINNING OF YEAR.............. $20,753,138 $18,443,291 $17,497,269
NET INCOME.............................. 5,946,282 4,829,592 3,523,907
LESS--DIVIDEND DISTRIBUTIONS ($173.26
per share in 1995, $115.06 per share in
1994 and $117.71 per share in 1993)
(Notes 1 and 11)....................... (3,794,321) (2,519,745) (2,577,885)
----------- ----------- -----------
BALANCE, END OF YEAR.................... $22,905,099 $20,753,138 $18,443,291
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
J.E. HANGER, INC. OF GEORGIA
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS:
Cash Flows From Operating Activities:
Cash received from customers....... $ 58,320,751 $ 52,514,317 $ 47,699,276
Cash paid to suppliers and
employees......................... (50,904,474) (43,933,958) (40,378,081)
Interest received.................. 383,160 236,273 141,751
Dividends received................. 65,051 44,967 43,966
Interest paid...................... (520,207) (453,329) (700,143)
Net purchase of trading
investments....................... (212,809) (106,661) --
Profit sharing contribution paid... (420,000) (354,896) (420,000)
Deferred compensation paid......... -- (17,828) (53,330)
Income taxes paid.................. (65,832) (21,832) (59,020)
------------ ------------ ------------
Net Cash Provided By Operating
Activities...................... 6,645,640 7,907,053 6,274,419
------------ ------------ ------------
Cash Flows From Investing Activities:
Proceeds from sale of investments.. -- -- 1,142,568
Purchase of investments............ -- -- (1,241,426)
Proceeds from sale of property and
equipment......................... 165,670 98,995 13,760
Purchase of property and
equipment......................... (571,708) (1,021,393) (1,159,457)
Collection of notes receivable..... 32,814 157,351 123,968
Payments of premiums resulting in
an increase in cash surrender
value life insurance.............. (27,091) (31,336) (55,158)
Proceeds from surrender of life
insurance policies................ -- 246,607 170,125
Payments for purchase of
professional services companies,
net of cash acquired (Note 3)..... (1,138,000) (232,365) (210,000)
------------ ------------ ------------
Net Cash Used In Investing
Activities...................... (1,538,315) (782,141) (1,215,620)
------------ ------------ ------------
Cash Flows from Financing Activities:
Payments on mortgages and other
notes............................. (1,535,331) (1,386,843) (1,404,012)
Payments on Industrial Revenue
Bonds............................. (66,660) (66,660) (66,660)
Distributions to stockholders...... (3,794,321) (2,519,745) (2,577,885)
------------ ------------ ------------
Net Cash Used In Financing
Activities...................... (5,396,312) (3,973,248) (4,048,557)
------------ ------------ ------------
Net Increase (Decrease) in Cash
and Cash Equivalents............ (288,987) 3,151,664 1,010,242
Cash and Cash Equivalents at
Beginning of Year................... 7,094,940 3,943,276 2,933,034
------------ ------------ ------------
Cash and Cash Equivalents at End of
Year................................ $ 6,805,953 $ 7,094,940 $ 3,943,276
============ ============ ============
</TABLE>
F-25
<PAGE>
J.E. HANGER, INC. OF GEORGIA
STATEMENTS OF CASH FLOWS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income................................. $5,946,282 $4,829,592 $3,523,907
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................. 899,677 890,643 816,610
Amortization of intangibles.............. 1,421,641 1,193,493 1,211,142
Net gain (loss) on sale and abandonment
of equipment............................ (23,476) (40,052) 2,259
Realized and unrealized (gain) loss on
trading investments..................... (452,235) 155,005 (2,759)
Cumulative effect through December 31,
1995 of change in accounting for
investments (Notes 2 and 6)............. -- (371,157) --
Change in assets and liabilities, net of
effects from purchase of various
companies:
Increase in accounts receivable.......... (1,862,642) (81,545) (124,534)
Write off of accounts and note
receivables............................. 248,086 172,067 62,371
Decrease (increase) in inventories....... (374,631) (225,946) 639,039
Net purchase of trading investments...... (212,809) (106,661) --
Decrease (increase) in other receivables
and prepaid expenses.................... (52,083) 44,542 (254,158)
Increase in accounts payable............. 304,036 385,864 67,414
Increase in accrued interest............. (19,830) 64,072 (80,420)
Increase in accrued salaries, compensated
absences and deferred compensation...... 691,182 612,788 569,492
Increase (decrease) in accrued profit
sharing contribution.................... 64,683 65,104 (65,104)
Decrease in accrued income taxes......... -- -- (13,119)
Increase (decrease) in other accrued
liabilities............................. 67,759 319,244 (77,721)
---------- ---------- ----------
Total Adjustments...................... 699,358 3,077,461 2,828,233
---------- ---------- ----------
Net Cash Provided By Operating Activities.. $6,645,640 $7,907,053 $6,274,419
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
J.E. HANGER, INC. OF GEORGIA
STATEMENTS OF CASH FLOWS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1995, the Company issued notes totaling $1,467,024 ($1,423,879 for
intangible assets and $43,143 for accounts receivable, equipment and
inventory) in connection with the acquisition of three professional service
companies (See Note 3).
During 1994, the Company issued a note totaling $508,539 for a non-compete
agreement in connection with the acquisition of one professional service
company. The Company also sold the assets of one professional service company
for notes receivable totaling $189,000 ($124,000 for building, $35,000 for
intangible assets and $30,000 for accounts receivable, inventory and
equipment) (See Note 3).
During 1993, the Company issued notes totaling $309,874 ($254,874 for
intangible assets and $55,000 for equipment and inventory) in connection with
the acquisition of two professional service companies (See Note 3).
Approximately $20,000 during 1994 and $228,000 during 1993 of accounts
receivable were transferred to notes receivable.
The Company retired fully depreciated property and equipment of $32,310
during 1995 and $126,024 during 1994.
The Company retired fully amortized intangibles of $81,000 during 1995,
$829,862 during 1994 and $156,000 during 1993.
During 1994, $3,209,089 of investment securities were transferred to trading
securities (See Note 2).
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
J.E. HANGER, INC. OF GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
1. COMPANY ORGANIZATION AND INDUSTRY
The Company's principal business is the manufacture, sale and distribution
of prosthetic and orthotic appliances, durable medical equipment, components
and supplies. The Company also distributes prosthetic and orthotic materials
to other manufacturers. The Company grants credit to prosthetic and orthotic
manufacturers and to medical patients with insurance, Medicare or Medicaid,
primarily in the south, midwest and eastern United States.
The Company and its stockholders have elected, under the provisions of
Subchapter S of the Internal Revenue Code, to have the corporate earnings
taxed directly to the stockholders. Accordingly, the accompanying financial
statements do not reflect corporate income taxes that otherwise would have
applied had the Company not elected S Corporation status.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Inventories, consisting of materials, components and supplies, are valued at
last-in, first-out cost (LIFO), not in excess of market. If the first-in,
first-out method of inventory valuation had been used by the Company,
inventories would have been stated $1,282,311 more at December 31, 1995,
$1,154,880 more at December 31, 1994 and $1,196,034 more at December 31, 1993
than they are reported. In addition, certain costs under Internal Revenue Code
Section 263(a) have been included in inventory cost. These amounts do not have
a material effect on the financial statements.
The provision for bad debts is determined by the reserve accounting method.
The reserve was $140,000 at December 31, 1995 and $66,000 at December 31,
1994. Uncollectible accounts are charged off at the time they are determined
to be worthless. The reserve method was not used in 1993 because uncollectible
accounts were immaterial and management was of the opinion that all accounts
were collectible.
Property, plant and equipment are recorded at cost. Buildings, land
improvements and factory equipment are depreciated by accelerated methods over
useful lives ranging from five to thirty-one years; leasehold improvements are
amortized over periods up to thirty-one years; automobiles and office
equipment are depreciated by the straight-line method and accelerated methods
over lives ranging from five to seven years.
The compensation and noncompete agreements are amortized by the straight-
line method over their terms ranging from four to ten years. Other intangible
assets are amortized by the straight-line method over two to five years.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires investments
to be classified in three categories: securities held to maturity reported at
amortized cost, trading securities reported at fair value, and securities
available for sale reported at fair value. Unrealized gains or losses on
trading securities are included in earnings. Unrealized gains or losses
F-28
<PAGE>
J.E. HANGER, INC. OF GEORGIA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
on securities available for sale are excluded from earnings and reported as a
separate component of stockholders' equity.
Effective January 1, 1994, the Company adopted SFAS No. 115 and transferred
investment securities totaling $3,209,089, which were previously accounted for
at lower of cost or market value, to trading securities. The Company has
reported the cumulative effect, equal to the net unrealized holding gains on
the securities at January 1, 1994, of the change in accounting as a separate
component of net income.
Trading security investments are reported at fair value, as determined by
market quotations. Realized gains and losses of trading security investments
are recognized on the trade date. In computing realized gains and losses, the
specific identification method was used in determining the investment costs.
The current accrual and provision for income taxes relates to the states
that do not recognize the S Corporation status.
For purposes of the statement of cash flows, the Company considers all cash
on deposit and short-term liquid investments with original maturities of three
months or less to be cash equivalents.
3. ACQUISITIONS
During 1995, the Company acquired the inventory, accounts receivable,
equipment, goodwill and other intangible assets of four professional service
companies. The Company paid cash of $1,138,000 issued notes totaling
$1,467,024 in connection with these acquisitions. Part of the total cost
includes noncompete agreements with the former owners. One of these purchase
agreements provides for contingent consideration of up to $360,000 to be
determined based on net sales between June 1, 1995 through June 1, 1999.
During 1994, the Company acquired the inventory, accounts receivable,
equipment, goodwill and other intangible assets of two professional service
companies. The Company paid cash of $232,365 and issued notes totaling
approximately $508,000 in connection with these acquisitions. Part of the
total cost includes noncompete agreements with the former owners. One of these
agreements provides for contingent consideration of up to $245,100 to be
determined based on net sales between July 1, 1994 through June 30, 1997.
During 1994, the Company sold the inventory, accounts receivable, equipment,
goodwill and other intangible assets of one of its professional service
branches. The Company received cash of $10,000 and a note receivable for
$65,000 in connection with this sale. The Company also received a note
receivable for $124,000 for the building sold.
During 1993, the Company acquired the inventory, accounts receivable,
equipment, goodwill and other intangible assets of three professional service
companies. The Company paid cash of $210,000 and issued notes totaling
approximately $310,000 in connection with these acquisitions. Part of the
total cost includes noncompete agreements with the former owners.
4. CASH AND CASH EQUIVALENTS
The Company maintains the majority of its cash accounts in two Georgia
commercial banks and one investment brokerage firm. The bank balances are
guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $100,000
per bank. During 1995, 1994 and 1993, the Company had an overnight investment
arrangement with one of its banking institutions under which funds are
invested in a government money market fund.
F-29
<PAGE>
J.E. HANGER, INC. OF GEORGIA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Land.................................. $ 1,520,001 $ 1,520,001 $ 1,593,965
Land improvements..................... 47,813 45,683 33,963
Buildings............................. 6,449,380 6,565,059 6,670,141
Leasehold improvements................ 794,716 513,048 393,267
Factory and office equipment.......... 4,784,060 4,405,615 3,904,191
Automobile equipment.................. 619,325 636,005 624,196
----------- ----------- -----------
Total Cost.......................... 14,215,295 13,685,411 13,219,723
Accumulated depreciation.............. (7,195,519) (6,534,570) (5,978,554)
----------- ----------- -----------
Remaining Cost...................... $ 7,019,776 $ 7,150,841 $ 7,241,169
=========== =========== ===========
</TABLE>
6. INVESTMENTS
Marketable securities are summarized below:
<TABLE>
<CAPTION>
COST FAIR VALUE
---------- ----------
<S> <C> <C>
At December 31, 1995:
Investment cash account............................ $ 18,416 $ 18,416
Municipal government and educational institution
bonds............................................. 1,060,416 1,140,722
Tax exempt mutual funds............................ 331,487 331,487
Marketable equity securities....................... 2,144,016 2,706,321
---------- ----------
Total............................................ $3,554,335 $4,196,946
========== ==========
<CAPTION>
COST FAIR VALUE
---------- ----------
<S> <C> <C>
At December 31, 1994:
Investment cash account............................ $ 124,172 $ 124,172
Municipal government and educational institution
bonds............................................. 1,017,203 1,079,221
Tax exempt mutual funds............................ 242,714 242,714
Marketable equity securities....................... 1,999,801 2,085,795
---------- ----------
Total............................................ $3,383,890 $3,531,902
========== ==========
<CAPTION>
COST FAIR VALUE
---------- ----------
<S> <C> <C>
At December 31, 1993:
Investment cash account............................ $ 369,446 $ 369,446
Municipal government and educational institution
bonds............................................. 987,011 1,088,321
Tax exempt mutual funds............................ 19,457 19,457
Marketable equity securities....................... 1,833,175 2,103,022
---------- ----------
Total............................................ $3,209,089 $3,580,246
========== ==========
</TABLE>
Included in 1995 other income are $78,982 net realized gains on sale of
trading security investments and a $373,253 increase in the net unrealized
holding gains.
Included in 1994 other income are $92,560 net realized gains on sale of
trading security investments and a $247,565 decrease in the net unrealized
holding gains.
F-30
<PAGE>
J.E. HANGER, INC. OF GEORGIA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The issuers of the above municipal government and educational institution
bonds are entities located predominately in the State of Georgia.
During 1990, the Company purchased 20% of the voting stock and 100% of the
non-voting stock of CRP, Inc. dba Springlite, a Utah based company. The
investment of $250,000 is accounted for under the cost method.
7. OTHER INTANGIBLE ASSETS
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Noncompete agreements with the former
owners of acquired companies, being
amortized on a straight-line basis
over four to ten years through 2009... $ 8,535,787 $ 7,088,524 $ 7,407,347
Customer lists, trade names and
goodwill from various professional
service companies, being amortized
over two to five years on a straight-
line basis with various maturities.... 704,604 443,846 421,346
----------- ----------- -----------
Total Other Intangible Assets.......... 9,240,391 7,532,370 7,828,693
Less accumulated amortization.......... (4,216,480) (2,875,841) (2,512,210)
----------- ----------- -----------
Unamortized Cost of Other Intangible
Assets................................ $ 5,023,911 $ 4,656,529 $ 5,316,483
=========== =========== ===========
</TABLE>
8. DEFERRED COMPENSATION CONTRACTS
During 1975, the Company entered into a deferred compensation contract with
a principal officer. The Company agreed to pay compensation for life upon his
retirement, or to his beneficiaries upon his death for a ten year period from
retirement. The present value of the obligation is accrued over the employment
tenure.
The Company has an unfunded deferred compensation plan for certain other
officers. The plan accrues benefits ratably over the period of active
employment from the time the contract is entered into to the time the
participant retires. Participation is determined by the Company's Board of
Directors.
The Company assumed a deferred compensation agreement in 1995 in connection
with the acquisition of a professional service company. Under the agreement,
the Company is to pay the employee $2,000 per month beginning in July 1995
through December 1998.
The financial reporting expense for retirement and deferred compensation was
$282,383 in 1995, $2,489 in 1994 and $347,603 in 1993, including interest on
the discounted amounts. During 1994, a retired officer died and another
officer resigned. The obligations related to these deferred compensation
contracts resulted in a reduction of $290,084 in the accrued liability, which
was used to offset the increase in the accrued benefits required by the other
contracts. The Company is deducting the compensation for income tax purposes
in the year of payment.
9. INDUSTRIAL DEVELOPMENT REVENUE BONDS
During December 1985, the Company entered into an agreement with The
Development Authority of Forsyth County and The First National Bank of Atlanta
(Wachovia Bank of Georgia, N.A.) for the issuance of an Industrial Development
Revenue Bond loan in the amount of $1,000,000 to construct a new
F-31
<PAGE>
J.E. HANGER, INC. OF GEORGIA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
facility for its home office and wholesale distribution division. The bonds
are due in monthly installments of $5,555, plus interest at 70% of prime,
through April 1, 2000. The balance owing on these bonds as of December 31,
1995 was $355,620. The land and the facilities constructed are pledged as
collateral. The agreement includes a covenant related to the Company's net
worth.
10. MORTGAGES AND OTHER NOTES PAYABLE
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Notes payable to former owners of
acquired companies, due in varying
payments through 2009, interest at
rates ranging to 11%.................. $ 6,960,852 $ 6,786,549 $ 7,743,917
Discount on noninterest-bearing notes.. (921,795) (698,020) (853,358)
Bank note due in monthly installments
of $1,021 through December, 2006 plus
interest fluctuating at prime plus 1%,
secured by certain property and
equipment and inventory............... 132,111 144,359 156,609
U.S. Small Business Administration note
due in monthly installments of $1,997
including interest at 10.35% through
December, 2007, secured by certain
land, property and equipment.......... 164,361 170,948 176,890
Note secured by cash surrender value of
life insurance policies, interest at
5%.................................... -- -- 58,082
----------- ----------- -----------
Total.................................. 6,171,168 6,232,888 7,047,168
Less current maturities................ (1,913,415) (1,720,228) (1,209,044)
----------- ----------- -----------
Amount Due After One Year.............. $ 4,422,114 $ 4,683,608 $ 6,073,096
=========== =========== ===========
</TABLE>
Maturities of long term debt as of December 31, 1995, including the
Industrial Revenue Bonds (See Note 9), during the next five years and
thereafter are:
<TABLE>
<S> <C>
1996........................................................... $1,980,075
1997........................................................... 1,645,179
1998........................................................... 1,158,044
1999........................................................... 912,397
2000........................................................... 236,546
Thereafter..................................................... 758,908
----------
Total........................................................ $6,691,149
==========
</TABLE>
Based on the borrowing rates currently available to the Company for bank
loans with similar terms and average maturities, the fair value of long term
debt is approximately $6,021,000.
11. COMMON STOCK
The Company has an option to purchase its capital stock if a stockholder
proposes to transfer the stock to any person other than another stockholder,
the Company, or the stockholder's spouse. The purpose of the option is to
permit the Company to protect its election to be taxed as an S Corporation.
The purchase price and terms are, at the option of the Company, either the
price and terms set forth in the proposed transfer or the formula price and
terms described in a stockholder agreement.
F-32
<PAGE>
J.E. HANGER, INC. OF GEORGIA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. PROFIT SHARING PLAN
The Company has a defined contribution profit sharing plan covering
substantially all employees. Contributions are determined annually at the
discretion of the Board of Directors. The contributions were $484,817 for
1995, $420,000 for 1994 and $354,896 for 1993.
The Hanger of Ohio 401(k) Retirement Plan was merged with the Company's
profit sharing plan effective January 1, 1994. Also effective January 1, 1994,
the profit sharing plan was amended to include a 401(k) provision.
13. OPERATING LEASES
The Company leases office space and vehicles in several states. Generally,
leases are renewable each year subject to escalations based on CPI or amounts
stated in the lease agreement. The following is a schedule of future minimum
lease payments required under operating leases as of December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
1996........................................................ $1,413,779
1997........................................................ 1,112,778
1998........................................................ 849,077
1999........................................................ 572,927
2000........................................................ 368,866
Thereafter.................................................. 796,194
----------
$5,113,622
==========
</TABLE>
14. SUBSEQUENT EVENT
On July 29, 1996, the Company entered into an Agreement and Plan of Merger
under which all of the common stock of the Company would be sold to Hanger
Orthopedic Group, Inc. in exchange for approximately $44,000,000 and 1,000,000
shares of the Common Stock of Hanger Orthopedic Group, Inc.
F-33
<PAGE>
J.E. HANGER, INC. OF GEORGIA
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 4,478,457
Marketable securities, at fair value............................ 4,390,249
Accounts receivable, trade...................................... 10,757,313
Notes receivable................................................ 87,853
Inventories..................................................... 4,215,942
Other receivables and prepaid expenses.......................... 428,360
-----------
Total Current Assets.......................................... 24,358,174
-----------
PROPERTY, PLANT AND EQUIPMENT--at remaining cost.................. 7,439,738
-----------
OTHER ASSETS:
Note receivable, long term...................................... 146,263
Investment in CRP, Inc.......................................... 250,000
Cash value of life insurance.................................... 336,799
Other intangible assets, at unamortized cost.................... 4,355,902
-----------
Total Other Assets............................................ 5,088,964
-----------
Total Assets.................................................. $36,886,876
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable................................................ $ 2,204,856
Accrued salaries and wages...................................... 2,165,758
Accrued compensated absences.................................... 543,762
Accrued interest................................................ 796
Current portion of Industrial Revenue Bonds..................... 66,660
Mortgage and other notes........................................ 1,625,287
Accrued contribution to profit sharing plan..................... 264,738
Other accrued liabilities....................................... 571,797
-----------
Total Current Liabilities..................................... 7,443,654
-----------
LIABILITIES DUE AFTER ONE YEAR:
Accrued compensated absences.................................... 201,118
Accrued deferred compensation................................... 2,206,056
Long term portion of Industrial Revenue Bonds................... 255,630
Mortgages and other notes....................................... 3,590,047
-----------
Total Liabilities............................................. 13,696,505
-----------
STOCKHOLDERS' EQUITY:
Common stock.................................................... 21,900
Retained Earnings............................................... 23,168,471
-----------
Total Stockholders' Equity.................................... 23,190,371
-----------
Total Liabilities and Stockholders' Equity.................... $36,886,876
===========
</TABLE>
F-34
<PAGE>
J.E. HANGER, INC. OF GEORGIA
STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1996
-------------
<S> <C>
SALES............................................................. $32,696,693
COST OF SALES:
Materials....................................................... 12,143,993
Salaries and wages.............................................. 2,913,898
Payroll taxes................................................... 300,132
Profit sharing plan contribution................................ 76,042
Group insurance................................................. 374,201
Other taxes..................................................... 154,717
Factory expense and professional training....................... 862,523
Depreciation.................................................... 236,489
Rent............................................................ 838,548
Hazard insurance................................................ 299,759
-----------
Total Cost of Sales........................................... 18,200,302
-----------
GROSS PROFIT...................................................... 14,496,391
-----------
SELLING AND ADMINISTRATIVE EXPENSES:
Salaries........................................................ 7,215,983
Deferred compensation........................................... 198,671
Payroll taxes................................................... 462,510
Profit sharing plan contribution................................ 186,695
Group insurance................................................. 359,527
Sales expense................................................... 875,693
Depreciation.................................................... 230,069
Office expense and telephone.................................... 897,573
Legal and accounting............................................ 156,291
Interest........................................................ 256,627
Amortization.................................................... 736,230
Bad debt expense................................................ 200,717
Miscellaneous................................................... 225,835
-----------
Total Selling and Administrative Expenses..................... 12,002,421
-----------
OPERATING PROFIT.................................................. 2,493,970
OTHER INCOME...................................................... 442,766
-----------
INCOME BEFORE PROVISION FOR INCOME TAXES.......................... 2,936,736
PROVISION FOR INCOME TAXES........................................ 63,467
-----------
NET INCOME........................................................ $ 2,873,269
===========
</TABLE>
F-35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
ACOR Orthopaedic, Inc.--Retail Division:
We have audited the accompanying balance sheets of ACOR Orthopaedic, Inc.--
Retail Division as of December 31, 1995 and 1996 and the related statements of
income, changes in divisional equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 financial position of ACOR Orthopaedic, Inc.--
Retail Division as of December 31, 1995 and 1996 and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 18, 1997
F-36
<PAGE>
ACOR ORTHOPAEDIC, INC.--RETAIL DIVISION
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 586,219 $ 153,393
Accounts receivable, net of allowance for doubtful
accounts of $32,000 and $28,000, respectively......... 737,857 852,716
Inventories............................................ 588,067 641,139
Prepaid expenses....................................... 9,972 13,500
---------- ----------
Total current assets................................. 1,922,115 1,660,748
---------- ----------
Property, plant and equipment:
Machinery and equipment................................ 73,334 74,004
Leasehold improvements................................. 52,197 56,783
Furniture and fixtures................................. 40,267 42,909
---------- ----------
165,798 173,696
Less: accumulated depreciation........................... 84,328 96,594
---------- ----------
Net property, plant and equipment.................... 81,470 77,102
Deposits................................................. 924 1,500
---------- ----------
Total assets......................................... $2,004,509 $1,739,350
========== ==========
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable....................................... 160,630 160,265
Accrued payroll and other.............................. 38,664 54,715
Related party payable.................................. 83,000 37,000
---------- ----------
Total current liabilities............................ 282,294 251,980
Commitments and contingent liabilities
Divisional equity........................................ 1,722,215 1,487,370
---------- ----------
Total liabilities and divisional equity.............. $2,004,509 $1,739,350
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
ACOR ORTHOPAEDIC, INC.--RETAIL DIVISION
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Net sales................................................ $4,754,460 $5,231,514
Cost of goods sold....................................... 1,624,301 1,758,246
---------- ----------
Gross profit......................................... 3,130,159 3,473,268
---------- ----------
Operating expenses:
Salaries and related expenses.......................... 1,611,946 1,637,517
Selling, general and administrative.................... 539,109 564,349
---------- ----------
Total operating expenses............................. 2,151,055 2,201,866
---------- ----------
Net income........................................... $ 979,104 $1,271,402
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
ACOR ORTHOPAEDIC, INC.--RETAIL DIVISION
STATEMENTS OF CHANGES IN DIVISIONAL EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<S> <C>
Balance at December 31, 1994........................................ $1,347,303
Net income........................................................ 979,104
Cash distributions to owners...................................... (604,192)
----------
Balance at December 31, 1995........................................ 1,722,215
Net income........................................................ 1,271,402
Cash distributions to owners...................................... (1,506,247)
----------
Balance at December 31, 1996........................................ $1,487,370
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
ACOR ORTHOPAEDIC, INC.--RETAIL DIVISION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 979,104 $1,271,402
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation........................................ 15,347 12,266
Provision (recovery) for bad debt................... 10,000 (4,000)
Changes in assets and liabilities:
Accounts receivable............................... (25,207) (110,859)
Inventories....................................... (35,167) (53,072)
Other assets...................................... (2,396) (4,104)
Accounts payable and accrued expenses............. 90,062 15,686
Related party payable............................. 23,000 (46,000)
--------- ----------
Net cash provided by operating activities....... 1,054,743 1,081,319
--------- ----------
Cash flows from investing activities:
Capital expenditures.................................. (1,817) (7,898)
--------- ----------
Net cash used in investing activities........... (1,817) (7,898)
--------- ----------
Cash flows from financing activities:
Cash distributions to owners.......................... (604,192) (1,506,247)
--------- ----------
Net cash used in financing activities........... (604,192) (1,506,247)
--------- ----------
Net change in cash and cash equivalents................. 448,734 (432,826)
Cash and cash equivalents, beginning of year............ 137,485 586,219
--------- ----------
Cash and cash equivalents, end of year.................. $ 586,219 $ 153,393
========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
ACOR ORTHOPAEDIC, INC.--RETAIL DIVISION
NOTES TO FINANCIAL STATEMENTS
1. BACKGROUND
ACOR Orthopaedic, Inc.--Retail Division (the "Company") is one of the
leading retailers of orthopedic and prosthetic products in Cleveland, Ohio.
Each of the three retail locations provide various products including
orthopedic braces, orthotics, prosthetics, custom footwear and durable medical
equipment. The Company is an operating division of ACOR Orthopaedic, Inc. (the
"Corporation") and is not a separate legal entity.
The financial statements for the Company as of December 31, 1995 and 1996
and for the years then ended have been prepared from books and records
maintained by the Corporation. These financial statements reflect the
financial position and results of operations of the Company at their
historical bases, including allocations of certain costs by the Corporation.
The Company's cash balance was determined using cash flow contributions less
distributions. Certain income statement amounts were determined using
estimates based on factors such as square footage utilized by the Company as
compared to total square footage and divisional sales. These allocated costs,
while reasonable under the circumstances, may not represent the cost of
similar activities on a separate entity basis. The accounts and transactions
between the divisions have been disclosed as related party transactions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash and cash equivalents. Cash
includes currency on hand and demand deposits with high quality institutions.
At various times throughout the year, the Company maintains cash balances in
excess of FDIC limits.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
At December 31, 1995 and 1996, the carrying value of financial instruments
such as cash and cash equivalents, trade receivables and trade payables
approximates fair value.
INVENTORIES:
Inventories are stated at the lower of cost or market and consists
predominantly of finished goods available for sale. Cost is determined on the
average cost method.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are recorded at cost and are depreciated by
either the straight-line or double-declining balance method over their
estimated useful lives. Costs of major additions and betterments are
capitalized; maintenance and repairs which do not improve or extend the life
of respective assets are charged to operations as incurred. When an asset is
sold or otherwise disposed of, the cost of the property and the related
accumulated depreciation are removed from the respective accounts, and any
resulting gains or losses are reflected in income.
F-41
<PAGE>
ACOR ORTHOPAEDIC, INC.--RETAIL DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
LONG-LIVED ASSET IMPAIRMENT:
Effective January 1, 1996, the Corporation adopted 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." The provisions of
SFAS 121 require the Company to review its long-lived assets for impairment on
an exception basis whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through future cash
flows. If it is determined that an impairment loss has occurred based on
expected cash flows, then the loss is recognized in the income statement. The
adoption of SFAS 121 did not have an effect on the Company's financial
statements.
REVENUE RECOGNITION:
Revenue on the sale of orthotic and prosthetic devices is recorded when the
device is accepted by the patient.
CREDIT RISK:
The Company primarily provides customized devices or services throughout the
north-central region of Ohio and is reimbursed by the patients' third-party
insurers or governmentally funded health insurance programs such as Medicaid,
Medicare, and U.S. Veteran Administration. 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.
INCOME TAXES:
The Corporation elected to be taxed pursuant to Subchapter "S" of the
Internal Revenue Code. Accordingly, federal and state income taxes or credits
accrue directly to the shareholders.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
3. RELATED PARTY TRANSACTIONS:
In the ordinary course of business, the Company purchases certain products
from the Corporation's wholesale division. These purchases amounted to
approximately $273,960 and $332,047 in 1995 and 1996, respectively. The
Company's payable to the wholesale division at December 31, 1995 and 1996 was
$83,000 and $37,000, respectively. Management believes these transactions were
under terms no less favorable to the Company than those arranged with other
parties.
Two of the Company's locations are leased from a shareholder of the
Corporation for a total of $9,300 per month.
F-42
<PAGE>
ACOR ORTHOPAEDIC, INC.--RETAIL DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. COMMITMENTS AND CONTINGENCIES:
The Company leases buildings at three retail locations and a corporate
location as well as leases one automobile. The future minimum payments under
lease commitments as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................. $128,426
1998............................................................. 131,247
1999............................................................. 108,000
2000............................................................. 108,000
2001............................................................. 54,000
--------
$529,673
========
</TABLE>
The Company's total rental expense was approximately $138,000 in 1995 and
$163,000 in 1996.
5. RETIREMENT PLAN:
The Corporation has a 401(k) plan (the "Plan") which is offered to all
employees with over one year of service. The Plan provides, at the discretion
of management, an amount not to exceed 25% of the first 6% contributed by the
eligible employees each year. The Company's matching contributions to the plan
were approximately $16,000 and $12,000 for the years ended December 31, 1995
and 1996, respectively.
6. SUBSEQUENT EVENT:
On April 1, 1997, the Corporation sold certain assets and liabilities of the
Company for $5.2 million to Hanger Orthopedic Group, Inc.
F-43
<PAGE>
[PHOTOGRAPH OF FOOTBALL PLAYER WITH [PHOTOGRAPH OF YOUNG CHILD WITH
LENOX HILL KNEE BRACE] CHARLESTON BENDING BRACE]
[PHOTOGRAPH OF PRACTITIONER WITH [PHOTOGRAPH OF TECHNICIAN
PROSTHETIC CAD-CAM SYSTEM] BUILDING A PROSTHESIS]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 10
Dividend Policy.......................................................... 10
Price Range of Common Stock.............................................. 11
Capitalization........................................................... 12
Selected Historical and Pro Forma Consolidated Financial Information..... 13
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 35
Management............................................................... 46
Principal Shareholders................................................... 49
Description of Capital Stock............................................. 51
Underwriting............................................................. 52
Legal Matters............................................................ 53
Experts.................................................................. 53
Available Information.................................................... 53
Documents Incorporated by Reference...................................... 54
Index to Financial Statements............................................ 55
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,500,000 Shares
[LOGO OF HANGER ORTHOPEDIC GROUP INC. APPEARS HERE]
COMMON STOCK
-------------
PROSPECTUS
-------------
ALEX. BROWN & SONS
INCORPORATED
MONTGOMERY SECURITIES
LEGG MASON WOOD WALKER
Incorporated
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
The fees and expenses to be paid in connection with the issuance and
distribution of securities being registered hereby will be paid by the
Registrant as follows:
<TABLE>
<S> <C>
SEC registration fee......................................... $ 12,937.50
Blue Sky fees and expenses (including legal fees)............ 2,500.00
Printing..................................................... 150,000.00
Legal fees and expenses...................................... 300,000.00
American Stock Exchange listing fee.......................... 17,500.00
NASD filing fee.............................................. 4,770.00
Accounting fees and expenses................................. 200,000.00
Miscellaneous................................................ 12,292.50
-----------
Total...................................................... $700,000.00
===========
</TABLE>
- --------
* All expenses are estimated except the SEC and NASD filing fees.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Hanger is permitted by Delaware law and required by its Certificate of
Incorporation and its By-laws to indemnify any director or officer or former
director of officer against all expenses and liabilities reasonably incurred
by him in connection with any legal action in which such person is involved by
reason of his position with Hanger unless he is adjudged liable for negligence
or misconduct in the performance of his duties as a director or officer. If
any such action is settled, Hanger will provide indemnification only if the
Board of Directors approves such settlement after receiving an opinion of
counsel for Hanger that settlement is in Hanger's best interest.
Reference is made to Section VIII of the Underwriting Agreement (included
herein as a part of Exhibit 1) which contains provisions for the
indemnification by the Underwriters of Hanger and directors, officers and
controlling persons of Hanger under certain circumstances.
ITEM 16. EXHIBITS
The following documents are filed herewith or incorporated herein by
reference:
<TABLE>
<CAPTION>
EXHIBITS
<C> <S>
1 Form of Underwriting Agreement
5 Legal opinion, dated June 27, 1997 of Freedman, Levy, Kroll &
Simonds. (Filed herewith.)
10(a) Registration Agreement, dated May 15, 1989, between Sequel
Corporation, First Pennsylvania Bank, N.A., Gerald E. Bisbee, Jr.,
Ivan R. Sabel, Richard A. Stein, Ronald J. Manganiello, Joseph M.
Cestaro and Chemical Venture Capital Associates. (Incorporated herein
by reference to Exhibit 10(l) to the Registrant's Current Report on
Form 8-K dated May 15, 1989.)
10(b) First Amendment dated as of February 12, 1990, to the Registration
Agreement, dated as of May 15, 1989, by and among Hanger Orthopedic
Group, Inc., First Pennsylvania Bank, N.A., Ivan R. Sabel, Richard A.
Stein, Ronald J. Manganiello, Joseph M.Cestaro and Chemical Venture
Capital Associates. (Incorporated herein by reference to Exhibit
10(m) to the Registrant's Current Report on Form 8-K dated February
13, 1990.)
</TABLE>
- --------
* Management contract or compensatory plan
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
<S> <C>
10(c) Fifth Amendment, dated as of November 8, 1990, to the Stock and Note
Purchase Agreement, dated as of February 28, 1989 and as amended on
May 9, 1989, May 15, 1989, February 12, 1990, and June 19, 1990 by
and among J. E. Hanger, Inc., as successor to Hanger Acquisition
Corporation, Ronald J. Manganiello, Joseph M. Cestaro, Chemical
Venture Capital Associates and Chemical Equity Associates.
(Incorporated herein by reference to Exhibit 10(f) to the
Registrant's Current Report on Form 8-K filed on November 21, 1990.)
10(d) Form of Stock Option Agreements, dated as of August 13, 1990, between
Hanger Orthopedic Group, Inc. and Thomas P. Cooper, James G.
Hellmuth, Walter F. Abendschein, Jr., Norman Berger, Bruce B.
Grynbaum and Joseph S. Torg. (Incorporated herein by reference to
Exhibit 10(rrr) to the Registrant's Registration Statement on Form S-
2, File No. 33-37594.) *
10(e) Convertible Junior Subordinated Note Agreement, dated as of March 1,
1992, from Hanger Orthopedic Group, Inc. to R. S. Lauder, Gaspar &
Co., L.P. regarding $4,000,000 8.5% Convertible Junior Subordinated
Notes due March 31, 1999. (Incorporated herein by reference to
Exhibit 10(jjjj) of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991.)
10(f) Convertible Junior Subordinated Note Agreement dated as of May 7,
1993, from Hanger Orthopedic Group, Inc. to R. S. Lauder, Gaspar &
Co., L.P. regarding $1,000,000 8.25% Convertible Junior Subordinated
Notes due March 31, 1999. (Incorporated herein by reference to
Exhibit 10(x) of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993.)
10(g) Amendment No. 1, dated as of May 7, 1993, to the Convertible Junior
Subordinated Note Agreement referred to in Exhibit (x) above.
(Incorporated herein by reference to Exhibit 10(y) of the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1993.)
10(h) Employment and Non-Compete Agreement, dated as of May 16, 1994,
between Hanger Orthopedic Group, Inc. and Ivan R. Sabel.
(Incorporated herein by reference to Exhibit 10(xx) of the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1994.) *
10(i) Employment and Non-Compete Agreement, dated as of May 16, 1994,
between Hanger Orthopedic Group, Inc. and Richard A. Stein.
(Incorporated herein by reference to Exhibit 10(yy) of the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1994.) *
10(j) Agreement and Plan of Merger, dated as of July 29, 1996, among Hanger
Orthopedic Group, Inc., SEH Acquisition Corporation and J.E. Hanger,
Inc. of Georgia. (Incorporated herein by reference to Exhibit 2 to
the Registrant's Current Report on Form 8-K filed on November 12,
1996.)
10(k) Credit Agreement, dated November 1, 1996, among Hanger Orthopedic
Group, Inc., various banks and Banque Paribas, as agent.
(Incorporated herein by reference to Exhibit 10(a) to the
Registrant's Current Report on Form 8-K filed on November 12, 1996.)
10(l) Senior Subordinated Note Purchase Agreement, dated as of November 1,
1996, among Hanger Orthopedic Group, Inc. and the purchasers listed
therein. (Incorporated hereby by reference to Exhibit 10(b) to the
Registrant's Current Report on Form 8-K filed on November 12, 1996.)
10(m) Warrants to purchase Common Stock of Hanger Orthopedic Group, Inc.
issued November 1, 1996. (Incorporated herein by reference to Exhibit
10(c) to the Registrant's Current Report on Form 8-K filed on
November 12, 1996.)
</TABLE>
- --------
* Management contract or compensatory plan
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
<C> <S>
10(n) 1991 Stock Option Plan of the Registrant. (Incorporated herein by
reference to Exhibit 4(b) to the Registrant's Registration Statement
on Form S-8 (File No. 33-48265).)*
10(o) 1993 Non-Employee Directors Stock Option Plan of the Registrant.
(Incorporated herein by reference to Exhibit 4(b) to the Registrant's
Registration Statement on Form S-8 (File
No. 33-63191).)*
10(p) Employment and Non-Compete Agreement, dated as of November 1, 1996,
and Amendment No. 1 thereto, dated January 1, 1997, between the
Registrant and H.E. Thranhardt. (Incorporated herein by reference to
Exhibit 10(p) to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996. )*
10(q) Employment and Non-Compete Agreement, dated as of November 1, 1996,
between the Registrant and John McNeill. (Incorporated herein by
reference to Exhibit 10(q) to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996.)*
10(r) Employment and Non-Compete Agreement, dated as of November 1, 1996,
between the Registrant and Alice Tidwell. (Incorporated herein by
reference to Exhibit 10(r) to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996.)*
10(s) Asset Purchase Agreement, dated as of March 26, 1997, by and between
Hanger Prosthetics and Orthotics, Inc, Acor Orthopaedic, Inc., and
Jeff Alaimo, Greg Alaimo and Mead Alaimo. (Incorporated herein by
reference to Exhibit 2 to the Current Report on Form 8-K filed by the
Registrant on April 15, 1997.)
10(t) Second Amendment, dated June 25, 1997, to Credit Agreement, dated
November 1, 1996, among Hanger Orthopedic Group, Inc., various banks
and Banque Paribas, as agent.
24(a) Consent of Freedman, Levy, Kroll & Simonds. (Included in Exhibit No.
5 hereto.)
24(b) Consent of Coopers & Lybrand, L.L.P.
24(c) Consent of Windham Brannon, P.C.
25 Power of Attorney. (Included on page II-6.)
27 Financial Data Schedule
</TABLE>
- --------
* Management contract or compensatory plan
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-2 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT OR AMENDMENT THERETO TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF BETHESDA, STATE OF MARYLAND, ON THIS
26TH DAY OF JUNE, 1997.
Hanger Orthopedic Group, Inc.
(Registrant)
Ivan R. Sabel
By: _________________________________
Ivan R. Sabel
Chairman of the Board, President
and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints IVAN R. SABEL and RICHARD A. STEIN his true and
lawful attorneys-in-fact and agents, each acting alone, with full powers of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or
his substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT OR AMENDMENT THERETO HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
--------- ----- ----
Ivan R. Sabel Chairman of the June 25, 1997
- ------------------------------------- Board, Chief
IVAN R. SABEL Executive Officer
and Director
(Principal
Executive Officer)
Richard A. Stein Vice President-- June 25, 1997
- ------------------------------------- Finance, Treasurer
RICHARD A. STEIN and Secretary
(Principal
Financial and
Accounting Officer)
Mitchell J. Blutt Director June 25, 1997
- -------------------------------------
MITCHELL J. BLUTT, M.D.
Edmond E. Charrette Director June 25, 1997
- -------------------------------------
EDMOND E. CHARRETTE, M.D.
Director
- -------------------------------------
THOMAS P. COOPER, M.D.
II-4
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
Richard J. Glaser Director June 25, 1997
- -------------------------------------
RICHARD J. GLASER, M.D.
James G. Hellmuth Director June 25, 1997
- -------------------------------------
JAMES G. HELLMUTH
William L. McCulloch Director June 25, 1997
- -------------------------------------
WILLIAM L. MCCULLOCH
Daniel A. McKeever Director June 25, 1997
- -------------------------------------
DANIEL A. MCKEEVER
Director
- -------------------------------------
H.E. THRANHARDT
II-5
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
EXHIBITS
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
HANGER ORTHOPEDIC GROUP, INC.
(NAME OF REGISTRANT)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 1
4,500,000 Shares
Hanger Orthopedic Group, Inc.
Common Stock
($.01 Par Value)
UNDERWRITING AGREEMENT
----------------------
, 1997
---------------
Alex. Brown & Sons Incorporated
Montgomery Securities
Legg Mason Wood Walker, Incorporated
As Representatives of the
Several Underwriters
c/o Alex. Brown & Sons Incorporated
One South Street
Baltimore, Maryland 21202
Gentlemen:
Hanger Orthopedic Group, Inc., a Delaware corporation (the "Company"),
proposes to sell to the several underwriters (the "Underwriters") named in
Schedule I hereto for whom you are acting as representatives (the
"Representatives") an aggregate of 4,500,000 shares of the Company's Common
Stock, $.01 par value (the "Firm Shares"). The respective amounts of the Firm
Shares to be so purchased by the several Underwriters are set forth opposite
their names in Schedule I hereto. The Company also proposes to sell to the
Underwriters at the Underwriters' option an aggregate of up to 675,000
additional shares of the Company's Common Stock (the "Option Shares") as set
forth below.
As the Representatives, you have advised the Company (a) that you are
authorized to enter into this Agreement on behalf of the several Underwriters,
and (b) that the several
<PAGE>
Underwriters are willing, acting severally and not jointly, to purchase the
numbers of Firm Shares set forth opposite their respective names in Schedule I,
plus their pro rata portion of the Option Shares if you elect to exercise the
over-allotment option in whole or in part for the accounts of the several
Underwriters. The Firm Shares and the Option Shares (to the extent the
aforementioned option is exercised) are herein collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------
The Company represents and warrants to each of the Underwriters as
follows:
(a) A registration statement on Form S-2 (File No. 333-[______]) with
respect to the Shares has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the Rules and Regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder and
has been filed with the Commission. Form S-2 is available for use by the
Company. Copies of such registration statement, including any amendments
thereto, the preliminary prospectuses (meeting the requirements of the
Rules and Regulations) contained therein and the exhibits, financial
statements and schedules, as finally amended and revised, have heretofore
been delivered by the Company to you. Such registration statement,
together with any registration statement filed by the Company pursuant to
Rule 462(b) of the Act, herein referred to as the "Registration Statement,"
which shall be deemed to include all information omitted therefrom in
reliance upon Rule 430A and contained in the Prospectus referred to below,
has come effective under the Act and no post-effective amendment to the
Registration Statement has been filed as of the date of this Agreement.
"Prospectus" means (a) the form of prospectus first filed with the
Commission pursuant to Rule 424(b) or (b) the last preliminary prospectus
included in the Registration Statement filed prior to the time it becomes
effective or filed pursuant to Rule 424(a) under the Act that is delivered
by the Company to the Underwriters for delivery to purchasers of the
Shares, together with the term sheet or abbreviated term sheet filed with
the Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary
prospectus included in the Registration Statement prior to the time it
becomes effective is herein referred to as a "Preliminary Prospectus." Any
reference herein to the Registration Statement, any Preliminary Prospectus
or to the Prospectus shall be deemed to refer to and include any documents
incorporated by reference therein, and, in the case of any reference herein
to any Prospectus, also shall be deemed to include any documents
incorporated by reference therein, and any supplements or amendments
thereto, filed with the Commission after the
2
<PAGE>
date of filing of the Prospectus under Rules 424(b) or 430A, and prior to
the termination of the offering of the Shares by the Underwriters.
(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct
its business as described in the Registration Statement. Each of the
subsidiaries of the Company as listed in Exhibit A hereto (collectively,
the "Subsidiaries") has been duly organized and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement. The Subsidiaries are the only subsidiaries, direct or indirect,
of the Company. The Company and each of the Subsidiaries are duly
qualified to transact business in all jurisdictions in which the conduct of
their business requires such qualification. The outstanding shares of
capital stock of each of the Subsidiaries have been duly authorized and
validly issued, are fully paid and non-assessable and are owned by the
Company or another Subsidiary free and clear of all liens, encumbrances and
equities and claims; and no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert any
obligations into shares of capital stock or ownership interests in the
Subsidiaries are outstanding.
(c) The outstanding shares of Common Stock of the Company have been
duly authorized and validly issued and are fully paid and non-assessable;
the Shares to be issued and sold by the Company have been duly authorized
and when issued and paid for as contemplated herein will be validly issued,
fully paid and non-assessable; and no preemptive rights of stockholders
exist with respect to any of the Shares or the issue and sale thereof.
Neither the filing of the Registration Statement nor the offering or sale
of the Shares as contemplated by this Agreement gives rise to any rights,
other than those which have been waived or satisfied, for or relating to
the registration of any shares of Common Stock.
(d) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct. All of the Shares conform to the
description thereof contained in the Registration Statement. The form of
certificates for the Shares conforms to the corporate law of the
jurisdiction of the Company's incorporation.
(e) The Commission has not issued an order preventing or suspending
the use of any Prospectus relating to the proposed offering of the Shares
nor instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto will
contain, all statements which are required to be
3
<PAGE>
stated therein by, and will conform, to the requirements of the Act and the
Rules and Regulations. The documents incorporated by reference in the
Prospectus, at the time filed with the Commission, conformed in all
respects to the requirements of the Securities Exchange Act of 1934 or the
Act, as applicable, and the rules and regulations of the Commission
thereunder. The Registration Statement and any amendment thereto do not
contain, and will not contain, any untrue statement of a material fact and
do not omit, and will not omit, to state any material fact required to be
stated therein or necessary to make the statements therein not misleading.
The Prospectus and any amendments and supplements thereto do not contain,
and will not contain, any untrue statement of material fact; and do not
omit, and will not omit, to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the Company makes no representations or warranties as to
information contained in or omitted from the Registration Statement or the
Prospectus, or any such amendment or supplement, in reliance upon, and in
conformity with, written information furnished to the Company by or on
behalf of any Underwriter through the Representatives, specifically for use
in the preparation thereof.
(f) The consolidated financial statements of the Company and the
Subsidiaries, together with related notes and schedules as set forth or
incorporated by reference in the Registration Statement, present fairly the
financial position and the results of operations and cash flows of the
Company and the consolidated Subsidiaries, at the indicated dates and for
the indicated periods. Such financial statements and related schedules
have been prepared in accordance with generally accepted principles of
accounting, consistently applied throughout the periods involved, except as
disclosed herein, and all adjustments necessary for a fair presentation of
results for such periods have been made. The summary financial and
statistical data included or incorporated by reference in the Registration
Statement presents fairly the information shown therein and such data has
been compiled on a basis consistent with the financial statements presented
therein and the books and records of the company. The pro forma financial
statements and other pro forma financial information included in the
Registration Statement and the Prospectus present fairly the information
shown therein, have been prepared in accordance with the Commission's rules
and guidelines with respect to pro forma financial statements, have been
properly compiled on the pro forma bases described therein, and, in the
opinion of the Company, the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions or circumstances referred to therein.
(g) Coopers & Lybrand L.L.P., who have certified certain of the
financial statements filed with the Commission as part of, or incorporated
by reference in, the
4
<PAGE>
Registration Statement, are independent public accountants as required by
the Act and the Rules and Regulations.
(h) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company or any of the
Subsidiaries before any court or administrative agency or otherwise which
if determined adversely to the Company or any of its Subsidiaries might
result in any material adverse change in the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and of the Subsidiaries taken as a
whole or to prevent the consummation of the transactions contemplated
hereby, except as set forth in the Registration Statement.
(i) The Company and the Subsidiaries have good and marketable title
to all of the properties and assets reflected in the financial statements
(or as described in the Registration Statement) hereinabove described,
subject to no lien, mortgage, pledge, charge or encumbrance of any kind
except those reflected in such financial statements (or as described in the
Registration Statement) or which are not material in amount. The Company
and the Subsidiaries occupy their leased properties under valid and binding
leases conforming in all material respects to the description thereof set
forth in the Registration Statement.
(j) The Company and the Subsidiaries have filed all Federal, State,
local and foreign income tax returns which have been required to be filed
and have paid all taxes indicated by said returns and all assessments
received by them or any of them to the extent that such taxes have become
due and are not being contested in good faith. All tax liabilities have
been adequately provided for in the financial statements of the Company.
(k) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, there has
not been any material adverse change or any development involving a
prospective material adverse change in or affecting the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise), or prospects of the Company and its Subsidiaries taken as a
whole, whether or not occurring in the ordinary course of business, and
there has not been any material transaction entered into or any material
transaction that is probable of being entered into by the Company or the
Subsidiaries, other than transactions in the ordinary course of business
and changes and transactions described in the Registration Statement, as it
may be amended or supplemented. The Company and the Subsidiaries have no
material contingent obligations which are not disclosed in the Company's
financial statements which are included in the Registration Statement.
5
<PAGE>
(l) Neither the Company nor any of the Subsidiaries is, or with the
giving of notice or lapse of time or both, will be, in violation of or in
default under its Charter or By-Laws or under any agreement, lease,
contract, indenture or other instrument or obligation to which it is a
party or by which it, or any of its properties, is bound and which default
is of material significance in respect of the condition, financial or
otherwise of the Company and its Subsidiaries taken as a whole or the
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and the Subsidiaries
taken as a whole. The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated and the fulfillment of
the terms hereof will not conflict with or result in a breach of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust or other agreement or instrument to which the
Company or any Subsidiary is a party, or of the Charter or By-laws of the
Company or any order, rule or regulation applicable to the Company or any
Subsidiary of any court or of any regulatory body or administrative agency
or other governmental body having jurisdiction.
(m) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions
herein contemplated (except such additional steps as may be required by the
Commission, the National Association of Securities Dealers, Inc. (the
"NASD") or such additional steps as may be necessary to qualify the Shares
for public offering by the Underwriters under state securities or Blue Sky
laws) has been obtained or made and is in full force and effect.
(n) The Company and each of the Subsidiaries holds all material
licenses, certificates and permits from governmental authorities which are
necessary to the conduct of their businesses; and neither the Company nor
any of the Subsidiaries has infringed any patents, patent rights, trade
names, trademarks or copyrights, which infringement is material to the
business of the Company and the Subsidiaries taken as a whole. The Company
knows of no material infringement by others of patents, patent rights,
trade names, trademarks or copyrights owned by or licensed to the Company.
(o) Neither the Company, nor to the Company's best knowledge, any of
its affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of Common Stock to facilitate the sale or resale of
the Shares.
6
<PAGE>
(p) Neither the Company nor any Subsidiary is an "investment company"
within the meaning of such term under the Investment Company Act of 1940
and the rules and regulations of the Commission thereunder.
(q) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(r) The Company and each of its Subsidiaries carry, or are covered
by, insurance in such amounts and covering such risks as is adequate for
the conduct of their respective businesses and the value of their
respective properties and as is customary for companies engaged in similar
industries.
(s) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.
(t) Neither the Company nor any Subsidiary, nor the officers,
directors, employees or agents of any of the Company or any Subsidiary,
have engaged in any activities which are prohibited, or are cause for civil
penalties or mandatory or permissive exclusion from Medicare or Medicaid,
under (S)(S) 1320a-7, 1320a-7a, 1320a-7b, or 1395nn of Title 42 of the
United States Code, the federal CHAMPUS statute, or the regulations
promulgated pursuant to such statutes or regulations or related state or
local statutes or which are prohibited by any private accrediting
organization from which the Company or any of its Subsidiaries seeks
accreditation or by generally recognized professional
7
<PAGE>
standards of care of conduct. Neither the Company nor to the knowledge of
the Company any other person who has a direct or indirect ownership or
control interest in the Company or any Subsidiary or who is an officer,
director, agent or managing employee of the Company or any Subsidiary:
(1) has had a civil monetary penalty assessed against it under
Section 1128A of the Social Security Act ("SSA"); (2) has been excluded
from participation under the Medicare program or a State Health Care
Program (as that term is defined in SSA Section 1128(h)); or (3) has been
convicted (as that term is defined in 42 C.F.R. (S)1001.2) of any of the
categories of offenses described in SSA Section 1128(a) and (b)(1), (2)
and (3).
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
----------------------------------------------
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the
Company agrees to sell to the Underwriters and each Underwriter agrees,
severally and not jointly, to purchase, at a price of $_____ per share, the
number of Firm Shares set forth opposite the name of each Underwriter in
Schedule I hereof, subject to adjustments in accordance with Section 9
hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be made in
Federal funds by certified or bank check drawn to the order of the Company
against delivery of certificates therefor to the Representatives for the
several accounts of the Underwriters. Such payment and delivery are to be
made at the offices of Alex. Brown & Sons Incorporated, One South Street,
Baltimore, Maryland, at 10:00 a.m., Baltimore time, on the third business
day after the date of this Agreement or at such other time and date not
later than five business days thereafter as you and the Company shall agree
upon, such time and date being herein referred to as the "Closing Date."
(As used herein, "business day" means a day on which the New York Stock
Exchange is open for trading and on which banks in New York are open for
business and are not permitted by law or executive order to be closed.)
The certificates for the Firm Shares will be delivered in such
denominations and in such registrations as the Representatives request in
writing not later than the second full business day prior to the Closing
Date, and will be made available for inspection by the Representatives at
least one business day prior to the Closing Date.
(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth,
the Company hereby grants an option to the several Underwriters to purchase
the Option Shares at the price per share as set forth in the first
paragraph of this Section 2. The option granted hereby may be exercised in
whole or in part by giving written notice (i) at any time before the
Closing
8
<PAGE>
Date and (ii) only once thereafter within 30 days after the date of this
Agreement, by you, as Representatives of the several Underwriters, to the
Company setting forth the number of Option Shares as to which the several
Underwriters are exercising the option, the names and denominations in
which the Option Shares are to be registered and the time and date at which
such certificates are to be delivered. The time and date at which
certificates for Option Shares are to be delivered shall be determined by
the Representatives but shall not be earlier than three nor later than 10
full business days after the exercise of such option, nor in any event
prior to the Closing Date (such time and date being herein referred to as
the "Option Closing Date"). If the date of exercise of the option is three
or more days before the Closing Date, the notice of exercise shall set the
Closing Date as the Option Closing Date. The number of Option Shares to be
purchased by each Underwriter shall be in the same proportion to the total
number of Option Shares being purchased as the number of Firm Shares being
purchased by such Underwriter bears to 4,500,000, adjusted by you in such
manner as to avoid fractional shares. The option with respect to the Option
Shares granted hereunder may be exercised only to cover over-allotments in
the sale of the Firm Shares by the Underwriters. You, as Representatives of
the several Underwriters, may cancel such option at any time prior to its
expiration by giving written notice of such cancellation to the Company. To
the extent, if any, that the option is exercised, payment for the Option
Shares shall be made on the Option Closing Date in Federal funds by
certified or bank check drawn to the order of the Company against delivery
of certificates therefor at the offices of Alex. Brown & Sons Incorporated,
One South Street, Baltimore, Maryland.
3. OFFERING BY THE UNDERWRITERS.
----------------------------
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it
advisable to do so. The Firm Shares are to be initially offered to the
public at the initial public offering price set forth in the Prospectus.
The Representatives may from time to time thereafter change the public
offering price and other selling terms. To the extent, if at all, that any
Option Shares are purchased pursuant to Section 2 hereof, the Underwriters
will offer them to the public on the foregoing terms.
It is further understood that you will act as the Representatives for
the Underwriters in the offering and sale of the Shares in accordance with
a Master Agreement Among Underwriters entered into by you and the several
other Underwriters.
4. COVENANTS OF THE COMPANY.
------------------------
The Company covenants and agrees with the several Underwriters that:
9
<PAGE>
(a) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in
Rule 430A of the Rules and Regulations is followed, to prepare and timely
file with the Commission under Rule 424(b) of the Rules and Regulations a
Prospectus in a form approved by the Representatives containing information
previously omitted at the time of effectiveness of the Registration
Statement in reliance on Rule 430A of the Rules and Regulations, (B) not
file any amendment to the Registration Statement or supplement to the
Prospectus or document incorporated by reference therein of which the
Representatives shall not previously have been advised and furnished with a
copy or to which the Representatives shall have reasonably objected in
writing or which is not in compliance with the Rules and Regulations, and
(C) file on a timely basis all reports and any definitive proxy or
information statements required to be filed by the Company with the
Commission subsequent to the date of the Prospectus and prior to the
termination of the offering of the Shares by the Underwriters.
(b) The Company will advise the Representatives promptly (A) when the
Registration Statement or any post-effective amendment thereto shall have
become effective, (B) of receipt of any comments from the Commission,
(C) of any request of the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional
information, and (D) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of
the Prospectus or of the institution of any proceedings for that purpose.
The Company will use its best efforts to prevent the issuance of any such
stop order preventing or suspending the use of the Prospectus and to obtain
as soon as possible the lifting thereof, if issued.
(c) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of
such jurisdictions as the Representatives may reasonably have designated in
writing and will make such applications, file such documents, and furnish
such information as may be reasonably required for that purpose, provided
the Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction where it
is not now so qualified or required to file such a consent. The Company
will, from time to time, prepare and file such statements, reports, and
other documents, as are or may be required to continue such qualifications
in effect for so long a period as the Representatives may reasonably
request for distribution of the Shares.
(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the
10
<PAGE>
Representatives during the period when delivery of a Prospectus is required
under the Act, as many copies of the Prospectus in final form, or as
thereafter amended or supplemented, as the Representatives may reasonably
request. The Company will deliver to the Representatives at or before the
Closing Date, four signed copies of the Registration Statement and all
amendments thereto including all exhibits filed therewith, and will deliver
to the Representatives such number of copies of the Registration Statement
(including such number of copies of the exhibits filed therewith that may
reasonably be requested), including documents incorporated by reference
therein, and of all amendments thereto, as the Representatives may
reasonably request.
(e) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934 (the "Exchange Act"),
and the rules and regulations of the Commission thereunder, so as to permit
the completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus
is required by law to be delivered by an Underwriter or dealer, any event
shall occur as a result of which, in the judgment of the Company or in the
reasonable opinion of the Underwriters, it becomes necessary to amend or
supplement the Prospectus in order to make the statements therein, in the
light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading, or, if it is necessary at any time to amend
or supplement the Prospectus to comply with any law, the Company promptly
will either (i) prepare and file with the Commission an appropriate
amendment to the Registration Statement or supplement to the Prospectus or
(ii) prepare and file with the Commission an appropriate filing under the
Securities Exchange Act of 1934 which shall be incorporated by reference in
the Prospectus so that the Prospectus as so amended or supplemented will
not, in the light of the circumstances when it is so delivered, be
misleading, or so that the Prospectus will comply with the law.
(f) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later
than 15 months after the effective date of the Registration Statement, an
earning statement (which need not be audited) in reasonable detail,
covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement, which earning statement shall
satisfy the requirements of Section 11(a) of the Act and Rule 158 of the
Rules and Regulations and will advise you in writing when such statement
has been so made available.
(g) The Company will, for a period of five years from the Closing
Date, deliver to the Representatives copies of annual reports and copies of
all other documents, reports and information furnished by the Company to
its stockholders or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act or
the Securities Exchange Act of 1934, as amended. The Company
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will deliver to the Representatives similar reports with respect to
significant subsidiaries, as that term is defined in the Rules and
Regulations, which are not consolidated in the Company's financial
statements.
(h) No offering, sale, short sale or other disposition of any shares
of Common Stock of the Company (other than shares issuable upon the
exercise of currently outstanding options and warrants) or other securities
convertible into or exchangeable or exerciseable for shares of Common Stock
or derivative of Common Stock (or agreement for such) will be made for a
period of 90 days after the date of this Agreement, directly or indirectly,
by the Company otherwise than hereunder or with the prior written consent
of Alex. Brown & Sons Incorporated.
(i) The Company will use its best efforts to list, subject to notice
of issuance, the Shares on the American Stock Exchange.
(j) The Company has caused each of Ivan R. Sabel, Richard A. Stein,
Chase Venture Capital Associates, L.P. and [other major holders] to furnish
to you, on or prior to the date of this agreement, a letter or letters, in
form and substance satisfactory to the Underwriters, pursuant to which each
such person shall agree not to offer, sell, sell short or otherwise dispose
of any shares of Common Stock of the Company or other capital stock of the
Company, or any other securities convertible, exchangeable or exerciseable
for Common Shares or derivative of Common Shares owned by such person or
request the registration for the offer or sale of any of the foregoing (or
as to which such person has the right to direct the disposition of) for a
period of 90 days after the date of this Agreement, directly or indirectly,
except with the prior written consent of Alex. Brown & Sons Incorporated
("Lockup Agreements").
(k) The Company shall apply the net proceeds of its sale of the
Shares as set forth in the Prospectus.
(l) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as
would require the Company or any of the Subsidiaries to register as an
investment company under the Investment Company Act of 1940, as amended
(the "1940 Act").
(m) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for the
Common Stock.
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(n) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably
be expected to constitute, the stabilization or manipulation of the price
of any securities of the Company.
(o) The Company shall adopt and implement a compliance plan that will
include all material elements of an effective program to prevent and detect
violations of law as identified in Commentary 3(k) to Section 8A1.2 of the
federal Sentencing Guidelines.
5. COSTS AND EXPENSES.
------------------
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement,
including, without limiting the generality of the foregoing, the following:
accounting fees of the Company; the fees and disbursements of counsel for
the Company; the cost of printing and delivering to, or as requested by,
the Underwriters copies of the Registration Statement, Preliminary
Prospectuses, the Prospectus, this Agreement, the Underwriters' Selling
Memorandum, the Underwriters' Invitation Letter, the Listing Application,
the Blue Sky Survey and any supplements or amendments thereto; the filing
fees of the Commission; the filing fees and expenses (including reasonable
legal fees and disbursements) incident to securing any required review by
the National Association of Securities Dealers, Inc. (the "NASD") of the
terms of the sale of the Shares; the Listing Fee of the American Stock
Exchange; and the expenses, including the reasonable fees and disbursements
of counsel for the Underwriters, incurred in connection with the
qualification of the Shares under State securities or Blue Sky laws. The
Company shall not, however, be required to pay for any of the Underwriters
expenses (other than those related to qualification under NASD regulation
and State securities or Blue Sky laws) except that, if this Agreement shall
not be consummated because the conditions in Section 6 hereof are not
satisfied, or because this Agreement is terminated by the Representatives
pursuant to Section 11 hereof, or by reason of any failure, refusal or
inability on the part of the Company to perform any undertaking or satisfy
any condition of this Agreement or to comply with any of the terms hereof
on its part to be performed, unless such failure to satisfy said condition
or to comply with said terms be due to the default or omission of any
Underwriter, then the Company shall reimburse the several Underwriters for
reasonable out-of-pocket expenses, including fees and disbursements of
counsel, reasonably incurred in connection with investigating, marketing
and proposing to market the Shares or in contemplation of performing their
obligations hereunder; but the Company shall not in any event be liable to
any of the several Underwriters for damages on account of loss of
anticipated profits from the sale by them of the Shares.
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6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
---------------------------------------------
The several obligations of the Underwriters to purchase the Firm
Shares on the Closing Date and the Option Shares, if any, on the Option
Closing Date are subject to the accuracy, as of the Closing Date or the
Option Closing Date, as the case may be, of the representations and
warranties of the Company contained herein, and to the performance by the
Company of its covenants and obligations hereunder and to the following
additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by
Rule 424 and Rule 430A of the Rules and Regulations shall have been made,
and any request of the Commission for additional information (to be
included in the Registration Statement or otherwise) shall have been
disclosed to the Representatives and complied with to their reasonable
satisfaction. No stop order suspending the effectiveness of the
Registration Statement, as amended from time to time, shall have been
issued and no proceedings for that purpose shall have been taken or, to the
knowledge of the Company, shall be contemplated by the Commission and no
injunction, restraining order, or order of any nature by a Federal or state
court of competent jurisdiction shall have been issued as of the Closing
Date which would prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, the opinion of Freedman, Levy,
Kroll & Simonds, counsel for the Company, dated the Closing Date or the
Option Closing Date, as the case may be, addressed to the Underwriters (and
stating that it may be relied upon by counsel to the Underwriters) to the
effect that:
(i) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement; each of the Subsidiaries has been duly organized and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, with corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement; the Company and each of the
Subsidiaries are duly qualified to transact business in all
jurisdictions in which the conduct of their business requires such
qualification, or in which the failure to qualify would have a
materially adverse effect upon the business of the Company and the
Subsidiaries taken as a whole; and the outstanding shares of capital
stock of each of the Subsidiaries have been duly authorized and
validly issued and are fully paid and
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non-assessable and are owned by the Company or a Subsidiary; and, to
the best of such counsel's knowledge, the outstanding shares of
capital stock of each of the Subsidiaries is owned free and clear of
all liens, encumbrances and equities and claims, and no options,
warrants or other rights to purchase, agreements or other obligations
to issue or other rights to convert any obligations into any shares of
capital stock or of ownership interests in the Subsidiaries are
outstanding.
(ii) The Company has authorized and outstanding capital stock as
set forth under the caption "Capitalization" in the Prospectus; the
authorized shares of the Company's Common Stock have been duly
authorized; the outstanding shares of the Company's Common Stock have
been duly authorized and validly issued and are fully paid and non-
assessable; all of the Shares conform to the description thereof
contained in the Prospectus; the certificates for the Shares, assuming
they are in the form filed with the Commission, are in due and proper
form; the shares of Common Stock, including the Option Shares, if any,
to be sold by the Company pursuant to this Agreement have been duly
authorized and will be validly issued, fully paid and non-assessable
when issued and paid for as contemplated by this Agreement; and no
preemptive rights of stockholders exist with respect to any of the
Shares or the issue or sale thereof.
(iii) Except as described in or contemplated by the Prospectus,
to the knowledge of such counsel, there are no outstanding securities
of the Company convertible or exchangeable into or evidencing the
right to purchase or subscribe for any shares of capital stock of the
Company and there are no outstanding or authorized options, warrants
or rights of any character obligating the Company to issue any shares
of its capital stock or any securities convertible or exchangeable
into or evidencing the right to purchase or subscribe for any shares
of such stock; and except as described in the Prospectus, to the
knowledge of such counsel, no holder of any securities of the Company
or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to cause the Company to sell
or otherwise issue to them, or to permit them to underwrite the sale
of, any of the Shares or the right to have any Common Shares or other
securities of the Company included in the Registration Statement or
the right, as a result of the filing of the Registration Statement, to
require registration under the Act of any shares of Common Stock or
other securities of the Company.
(iv) The Registration Statement has become effective under the
Act and, to the best of the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are pending
or threatened under the Act.
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(v) The Registration Statement, the Prospectus and each
amendment or supplement thereto and documents incorporated by
reference therein comply as to form in all material respects with the
requirements of the Act or the Securities Exchange Act of 1934, as
applicable and the applicable rules and regulations thereunder (except
that such counsel need express no opinion as to the financial
statements and related schedules or material incorporated by reference
therein). Form S-2 is available for use by the Company.
(vi) The statements under the captions "____________,"
"___________," and "Description of Capital Stock" in the Prospectus,
insofar as such statements constitute a summary of documents referred
to therein or matters of law, fairly summarize in all material
respects the information called for with respect to such documents and
matters.
(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to or incorporated by reference in
the Registration Statement or described in the Registration Statement
or the Prospectus which are no so filed, incorporated by reference or
described as required, and such contracts and documents as are
summarized in the Registration Statement or the Prospectus are fairly
summarized in all material respects.
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company or any of the
Subsidiaries except as set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will
not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, the Charter or By-laws
of the Company, or any agreement or instrument known to such counsel
to which the Company or any of the Subsidiaries is a party or by which
the Company or any of the Subsidiaries may be bound.
(x) This Agreement has been duly authorized, executed and
delivered by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in connection with the execution
and delivery of this Agreement and the consummation of the
transactions herein contemplated (other than as may be required by the
NASD or as required by State securities and Blue Sky laws as to
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<PAGE>
which such counsel need express no opinion) except such as have been
obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a result of
the consummation of the transactions contemplated by this Agreement,
and application of the net proceeds therefrom as described in the
Prospectus, required to register as an investment company under the
1940 Act.
In rendering such opinion Freedman, Levy, Kroll & Simonds may rely as
to matters governed by the laws of States other than Delaware or Maryland
or the District of Columbia or Federal laws on local counsel in such
jurisdictions, provided that in each case Freedman, Levy, Kroll & Simonds
shall state that they believe that they and the Underwriters are justified
in relying on such other counsel. In addition to the matters set forth
above, such opinion shall also include a statement to the effect that
nothing has come to the attention of such counsel which leads them to
believe that (i) the Registration Statement, at the time it became
effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) and as of the
Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, and (ii) the Prospectus, or any supplement thereto, on the
date it was filed pursuant to the Rules and Regulations and as of the
Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements, in the light of the
circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements and schedules and
other financial and statistical information included or incorporated
therein). With respect to such statement, Freedman, Levy, Kroll & Simonds
may state that their belief is based upon the procedures set forth therein,
but is without independent check and verification.
(c) The Representatives shall have received from Hogan & Hartson
L.L.P., counsel for the Underwriters, an opinion dated the Closing Date or
the Option Closing Date, as the case may be, substantially to the effect
specified in subparagraphs (ii), (iii), (iv) and (ix) of Paragraph (b) of
this Section 6, and that the Company is a duly organized and validly
existing corporation under the laws of the State of Delaware. In rendering
such opinion Hogan & Hartson L.L.P. may rely as to all matters governed
other than by the laws of the States of Delaware or Maryland or the
District of Columbia or Federal laws on the opinion of counsel referred to
in Paragraph (b) of this Section 6. In addition to the matters set forth
above, such opinion shall also include a statement to the effect that
nothing has come to the attention of such counsel which leads them to
believe that (i) the
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Registration Statement, or any amendment thereto, as of the time it became
effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) as of the Closing
Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and (ii) the Prospectus, or any supplement thereto, on the date
it was filed pursuant to the Rules and Regulations and as of the Closing
Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact, necessary
in order to make the statements, in the light of the circumstances under
which they are made, not misleading (except that such counsel need express
no view as to financial statements and schedules and other financial and
statistical information included or incorporated therein). With respect to
such statement, Hogan & Hartson L.L.P. may state that their belief is based
upon the procedures set forth therein, but is without independent check and
verification.
(d) The Representatives shall have received at or prior to the
Closing Date from Hogan & Hartson L.L.P. a memorandum or summary, in form
and substance satisfactory to the Representatives, with respect to the
qualification for offering and sale by the Underwriters of the Shares under
the State securities or Blue Sky laws of such jurisdictions as the
Representatives may reasonably have designated to the Company.
(e) You shall have received, on each of the dates hereof, the Closing
Date and the Option Closing Date, as the case may be, a letter dated the
date hereof, the Closing Date or the Option Closing Date, as the case may
be, in form and substance satisfactory to you, of Coopers & Lybrand L.L.P.
confirming that they are independent public accountants within the meaning
of the Act and the applicable published Rules and Regulations thereunder
and stating that in their opinion the financial statements and schedules
examined by them and included in the Registration Statement comply in form
in all material respects with the applicable accounting requirements of the
Act and the related published Rules and Regulations; and containing such
other statements and information as is ordinarily included in accountants'
"comfort letters" to Underwriters with respect to the financial statements
and certain financial and statistical information contained in the
Registration Statement and Prospectus.
(f) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, a certificate or certificates
of the Chief Executive Officer and the Chief Financial Officer of the
Company to the effect that, as of the Closing Date or the Option Closing
Date, as the case may be, each of them severally represents as follows:
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(i) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for such purpose have
been taken or are, to his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company
contained in Section 1 hereof are true and correct as of the Closing
Date or the Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules
424 or 430A under the Act have been made;
(iv) He has carefully examined the Registration Statement and
the Prospectus and, in his opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration
Statement were true and correct, and such Registration Statement and
Prospectus did not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not
misleading, and since the effective date of the Registration
Statement, no event has occurred which should have been set forth in a
supplement to or an amendment of the Prospectus which has not been so
set forth in such supplement or amendment; and
(v) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been
any material adverse change or any development involving a prospective
material adverse change in or affecting the condition, financial or
otherwise, of the Company and its Subsidiaries taken as a whole or the
earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the
Company and the Subsidiaries taken as a whole, whether or not arising
in the ordinary course of business.
(g) The Company shall have furnished to the Representatives such
further certificates and documents confirming the representations and
warranties, covenants and conditions contained herein and related matters
as the Representatives may reasonably have requested.
(h) The Firm Shares and Option Shares, if any, have been approved for
listing upon notice of issuance on the American Stock Exchange.
(i) The Lockup Agreements described in Section 4(j) are in full force
and effect.
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The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in
all material respects satisfactory to the Representatives and to Hogan &
Hartson L.L.P., counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated
by the Representatives by notifying the Company of such termination in
writing or by telegram at or prior to the Closing Date or the Option
Closing Date, as the case may be.
In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
7. Conditions of the Obligations of the Company.
--------------------------------------------
The obligations of the Company to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing
Date, as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of the Act, against any losses, claims, damages or liabilities
to which such Underwriter or any such controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of or
are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or (ii)
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, in the light of the circumstances under which they were made;
and will reimburse each Underwriter and each such controlling person upon
demand for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating or
defending any such loss, claim, damage or liability, action or proceeding
or in responding to a subpoena or governmental inquiry related to the
offering of the Shares, whether or not such Underwriter or controlling
20
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person is a party to any action or proceeding; provided, however, that the
Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement, or omission or alleged omission made
in the Registration Statement, any Preliminary Prospectus, the Prospectus,
or such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by or through the
Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which the Company
may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and
hold harmless the Company, each of its directors, each of its officers who
have signed the Registration Statement and each person, if any, who
controls the Company within the meaning of the Act, against any losses,
claims, damages or liabilities to which the Company or any such director,
officer, or controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon
(i) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or (ii) the omission or
the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made; and will reimburse
any legal or other expenses reasonably incurred by the Company or any such
director, officer, or controlling person in connection with investigating
or defending any such loss, claim, damage, liability, action or proceeding;
provided, however, that each Underwriter will be liable in each case to the
extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity agreement
will be in addition to any liability which such Underwriter may otherwise
have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to this Section 8, such person (the "indemnified party")
shall promptly notify the person against whom such indemnity may be sought
(the "indemnifying party") in writing. No indemnification provided for in
Section 8(a) or (b) shall be available to any party who shall fail to give
notice as provided in this Section 8(c) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have related
and was materially prejudiced by the failure to give such notice, but the
failure to give such
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notice shall not relieve the indemnifying party or parties from any
liability which it or they may have to the indemnified party for
contribution or otherwise than on account of the provisions of Section 8(a)
or (b). In case any such proceeding shall be brought against any
indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party and shall pay as
incurred (or within 30 days of presentation) the fees and disbursements of
such counsel related to such proceeding. In any such proceeding, any
indemnified party shall have the right to retain its own counsel at its own
expense. Notwithstanding the foregoing, the indemnifying party shall pay as
incurred the fees and expenses of the counsel retained by the indemnified
party in the event (i) the indemnifying party and the indemnified party
shall have mutually agreed to the retention of such counsel, (ii) the named
parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of
both parties by the same counsel would be inappropriate due to actual or
potential differing interests between them or (iii) the indemnifying party
shall have failed to assume the defense and employ counsel acceptable to
the indemnified party within a reasonable period of time after notice of
commencement of the action. It is understood that the indemnifying party
shall not, in connection with any proceeding or related proceedings in the
same jurisdiction, be liable for the reasonable fees and expenses of more
than one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant to
Section 8(a) and by the Company in the case of parties indemnified pursuant
to Section 8(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent but if
settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or
judgment. In addition, the indemnifying party will not, without the prior
written consent of the indemnified party, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action or
proceeding of which indemnification may be sought hereunder (whether or not
any indemnified party is an actual or potential party to such claim, action
or proceeding) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising
out of such claim, action or proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount
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paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions or proceedings in respect
thereof) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on
the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by
applicable law then each indemnifying party shall contribute to such amount
paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the
relative fault of the Company on the one hand and the Underwriters on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, (or actions or proceedings in
respect thereof), as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses)
received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company on the one hand or the Underwriters on the other and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section
8(d). The amount paid or payable by an indemnified party as a result of
the losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) referred to above in this Section 8(d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or
claim. Notwithstanding the provisions of this subsection (d), (i) no
Underwriter shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the Shares purchased
by such Underwriter and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this
Section 8(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
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(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this
Section 8 hereby consents to the jurisdiction of any court having
jurisdiction over any other contributing party, agrees that process issuing
from such court may be served upon him or it by any other contributing
party and consents to the service of such process and agrees that any other
contributing party may join him or it as an additional defendant in any
such proceeding in which such other contributing party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement
shall remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A
successor to any Underwriter, or to the Company, its directors or officers,
or any person controlling the Company, shall be entitled to the benefits of
the indemnity, contribution and reimbursement agreements contained in this
Section 8.
9. Default by Underwriters.
-----------------------
If on the Closing Date or the Option Closing Date, as the case may be,
any Underwriter shall fail to purchase and pay for the portion of the
Shares which such Underwriter has agreed to purchase and pay for on such
date (otherwise than by reason of any default on the part of the Company),
you, as Representatives of the Underwriters, shall use your reasonable
efforts to procure within 36 hours thereafter one or more of the other
Underwriters, or any others, to purchase from the Company such amounts as
may be agreed upon and upon the terms set forth herein, the Firm Shares or
Option Shares, as the case may be, which the defaulting Underwriter or
Underwriters failed to purchase. If during such 36 hours you, as such
Representatives, shall not have procured such other Underwriters, or any
others, to purchase the Firm Shares or Option Shares, as the case may be,
agreed to be purchased by the defaulting Underwriter or Underwriters, then
(a) if the aggregate number of shares with respect to which such default
shall occur does not exceed 10% of the Firm Shares or Option Shares, as the
case may be, covered hereby, the other Underwriters shall be obligated,
severally, in proportion to the respective numbers of Firm Shares or Option
Shares, as the case may be, which they are obligated to
24
<PAGE>
purchase hereunder, to purchase the Firm Shares or Option Shares, as the
case may be, which such defaulting Underwriter or Underwriters failed to
purchase, or (b) if the aggregate number of shares of Firm Shares or Option
Shares, as the case may be, with respect to which such default shall occur
exceeds 10% of the Firm Shares or Option Shares, as the case may be,
covered hereby, the Company or you as the Representatives of the
Underwriters will have the right, by written notice given within the next
36-hour period to the parties to this Agreement, to terminate this
Agreement without liability on the part of the non-defaulting Underwriters
or of the Company except to the extent provided in Section 8 hereof. In the
event of a default by any Underwriter or Underwriters, as set forth in this
Section 9, the Closing Date or Option Closing Date, as the case may be, may
be postponed for such period, not exceeding seven days, as you, as
Representatives, may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this
Section 9 shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
10. Notices.
-------
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or
telegraphed and confirmed as follows: if to the Underwriters, to Alex.
Brown & Sons Incorporated, One South Street, Baltimore, Maryland 21202,
Attention: Steven R. Schuh; with a copy to Alex. Brown & Sons Incorporated,
One South Street, Baltimore, Maryland 21202. Attention: General Counsel; if
to the Company, to Ivan R. Sabel, Chief Executive Officer, Hanger
Orthopedic Group, Inc., 7700 Old Georgetown Road, Second Floor, Bethesda,
Maryland 20814.
11. Termination.
-----------
This Agreement may be terminated by you by notice to the Company as
follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m.
on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change or any development involving
25
<PAGE>
a prospective material adverse change in or affecting the condition,
financial or otherwise, of the Company and its Subsidiaries taken as a
whole or the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company
and its Subsidiaries taken as a whole, whether or not arising in the
ordinary course of business, (ii) any outbreak or escalation of hostilities
or declaration of war or national emergency or other national or
international calamity or crisis or change in economic or political
conditions if the effect of such outbreak, escalation, declaration,
emergency, calamity, crisis or change on the financial markets of the
United States would, in your reasonable judgment, make it impracticable to
market the Shares or to enforce contracts for the sale of the Shares, or
(iii) suspension of trading in securities generally on the New York Stock
Exchange or the American Stock Exchange or limitation on prices (other than
limitations on hours or numbers of days of trading) for securities on
either such Exchange, (iv) the enactment, publication, decree or other
promulgation of any statute, regulation, rule or order of any court or
other governmental authority which in your opinion materially and adversely
affects or may materially and adversely affect the business or operations
of the Company, (v) declaration of a banking moratorium by United States or
New York State authorities, (vi) the suspension of trading of the Company's
common stock by the Commission on the American Stock Exchange or (vii) the
taking of any action by any governmental body or agency in respect of its
monetary or fiscal affairs which in your reasonable opinion has a material
adverse effect on the securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. Successors.
----------
This Agreement has been and is made solely for the benefit of the
Underwriters and the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and
controlling persons referred to herein, and no other person will have any
right or obligation hereunder. No purchaser of any of the Shares from any
Underwriter shall be deemed a successor or assign merely because of such
purchase.
13. Information Provided by Underwriters.
------------------------------------
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company
for inclusion in any Prospectus or the Registration Statement consists of
the information set forth in the last paragraph on the front cover page
(insofar as such information relates to the Underwriters), legends required
by Item 502(d) of Regulation S-K under the Act and
26
<PAGE>
the information contained in the [___], [___] and [___] paragraphs under
the caption "Underwriting" in the Prospectus.
14. Miscellaneous.
-------------
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation
made by or on behalf of any Underwriter or controlling person thereof, or
by or on behalf of the Company or its directors or officers and (c)
delivery of and payment for the Shares under this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Maryland.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
HANGER ORTHOPEDIC GROUP, INC.
By:
-----------------------------------
27
<PAGE>
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
ALEX. BROWN & SONS INCORPORATED
MONTGOMERY SECURITIES
LEGG MASON WOOD WALKER, INCORPORATED
As Representatives of the several
Underwriters listed on Schedule I
By: Alex. Brown & Sons Incorporated
By:
-------------------------------
Authorized Officer
28
<PAGE>
SCHEDULE I
Schedule of Underwriters
Number of Firm Shares
Underwriter to be Purchased
----------- ------------------------
Alex. Brown & Sons Incorporated
Montgomery Securities
Legg Mason Wood Walker, Incorporated
--------------
Total 4,500,000
--------------
<PAGE>
EXHIBIT A
Subsidiaries
2
<PAGE>
[LETTERHEAD OF FREEDMAN, LEVY, KROLL & SIMONDS APPEARS HERE]
EXHIBIT 5
---------
June 27, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Hanger Orthopedic Group, Inc.
Registration Statement on Form S-2
----------------------------------
Gentlemen:
We are counsel to Hanger Orthopedic Group, Inc. (the "Company") and have
represented the Company in connection with the Registration Statement on Form S-
2 being filed by it today with the Commission (together with all exhibits
thereto, the "Registration Statement"). The Registration Statement relates to an
underwritten public offering by the Company of up to 5,175,000 shares of the
Company's common stock, par value of $.01 per share, (the "Shares") to be made
through a group of underwriters represented by Alex. Brown & Sons Incorporated,
Montgomery Securities and Legg Mason Wood Walker, Incorporated. Such amount
includes 675,000 Shares underlying an over-allotment option granted to the
underwriters. A form of underwriting agreement is filed as Exhibit 1 to the
Registration Statement (the "Underwriting Agreement").
This opinion is being delivered to the Commission as Exhibit 5 to the
Registration Statement.
We have examined (1) the Articles of Incorporation, and all amendments
thereto, certified by the Secretary of State of the State of Delaware, (2) the
By-Laws of the Company, certified by the Secretary of the Company as being those
currently in effect, (3) the Registration Statement, and (4) such other
corporate records, certificates, documents and other instruments as in our
opinion are necessary or appropriate in connection with expressing the opinions
set forth below.
<PAGE>
FREEDMAN, LEVY, KROLL & SIMONDS
Based upon the foregoing, it is our opinion that:
1. The Company is a corporation duly organized and validly existing under
the laws of the State of Delaware.
2. When the following events shall have occurred:
(a) the Registration Statement, as amended, shall have been ordered
effective by the Commission in accordance with the Securities Act
of 1933, as amended, and
(b) the Shares shall have been paid for and issued in accordance with
the terms of the Underwriting Agreement and as provided in the
Registration Statement,
the Shares thus sold will be legally issued, fully paid and non-assessable.
This firm hereby consents to the reference to it under the heading "Legal
Matters" appearing in the Prospectus which is part of the Registration
Statement.
Sincerely,
Freedman, Levy, Kroll & Simonds
2
<PAGE>
EXHIBIT 10(t)
SECOND AMENDMENT TO CREDIT AGREEMENT
------------------------------------
SECOND AMENDMENT (this "Amendment"), dated as of June 25, 1997, among
HANGER ORTHOPEDIC GROUP, INC., a Delaware corporation ("Holdings"), J.E.
HANGER, INC., a Georgia corporation (together with Holdings, the "Borrowers"),
the financial institutions listed on the signature pages hereto and Banque
Paribas, as Agent under the Credit Agreement referred to below. All capitalized
terms used herein and not otherwise defined shall have the respective meanings
provided such terms in the Credit Agreement referred to below.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Borrowers, various lending institutions (the "Banks"),
and Banque Paribas, as Agent, are parties to a Credit Agreement dated as of
November 1, 1996 (the "Credit Agreement"); and
WHEREAS, Holdings desires to make a public underwritten offer of
Holdings Common Stock;
NOW, THEREFORE, in consideration of the mutual premises contained
herein and other valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:
I. AMENDMENTS TO THE CREDIT AGREEMENT
----------------------------------
1. Notwithstanding anything to the contrary contained in the Credit
Agreement, Holdings shall be entitled to make a public underwritten offer (a
"Public Offering") of Holdings Common Stock so long as
(i) the cash proceeds (net of the underwriting discounts and
commissions and all other reasonable costs associated with such
transaction) of such Public Offering shall exceed $35 million and the
Public Offering is completed on or prior to September 30, 1997; and
(ii) such cash proceeds shall be applied:
<PAGE>
(a) first, to prepay the outstanding principal amount of Senior
Subordinated Notes at a pre-payment price equal to par plus
accrued interest;
(b) second, to prepay the principal of outstanding Acquisition
Loans and the principal of outstanding Revolving Loans (without
any corresponding reduction to the Acquisition Loan Commitment or
the Revolving Loan Commitment); and
(c) third, to prepay the principal of outstanding A Term Loans
and B Term Loans on a pro rata basis, with the A Term Loan
--- ----
Facility to receive the A TL Percentage and the B Term Loan
Facility to receive the B TL Percentage, in each case, of the
total amount of such cash proceeds remaining after the
prepayments required by paragraphs (a) and (b) above.
2. Section 4.02(A)(g) of the Credit Agreement shall be amended by
inserting the words "ending after the Acquisition Loan Termination Date"
immediately after the words "fiscal year of Holdings" appearing therein.
3. Section 8.01(f) of the Credit Agreement shall be amended by
inserting the words "(and, with respect to the calculations for Sections 9.09,
9.10, 9.11 and 9.14, separate calculations showing the Consolidated EBITDA of
any Person, business, division or product line acquired during the relevant
period pursuant to Section 8.15)" immediately after the words "through 9.15"
appearing therein.
4. Section 9.08 of the Credit Agreement shall be amended by (i)
deleting from clause (a) thereof the chart appearing therein in its entirety and
(ii) inserting in lieu thereof the following new chart:
<TABLE>
<CAPTION>
"Fiscal Year Amount
----------- ------
<S> <C>
1997 $ 2,500,000
1998 $ 3,000,000
1999 $ 3,000,000
2000 $ 3,000,000
2001 $ 3,000,000
2002 $ 3,000,000
2003 $ 3,000,000"
</TABLE>
5. The definition of "Applicable Margin" in Section 11 of the Credit
Agreement shall be deleted in its entirety and replaced with a new definition as
follows:
-2-
<PAGE>
"Applicable Margin" shall mean (A) (i) in the case of A Term Loans,
Acquisition Loans and Revolving Loans which are maintained as Base
Rate Loans, 1.50% less the then applicable Leverage Reduction
Discount, if any, and (ii) in the case of B Term Loans which are
maintained as Base Rate Loans, 1.75% less the then applicable Leverage
Reduction Discount, if any, and (B) (i) in the case of A Term Loans,
Acquisition Loans and Revolving Loans which are maintained as
Eurodollar Loans, 2.50% less the then applicable Leverage Reduction
Discount, if any, and (ii) in the case of B Term Loans which are
maintained as Eurodollar Loans, 2.75% less the then applicable
Leverage Reduction Discount, if any.
6. The definition of "Consolidated EBITDA" in Section 11 of the
Credit Agreement shall be amended by inserting the following new language
immediately after the words "provided that" appearing therein:
--------
"(I) all calculations of Consolidated EBITDA may include the
Consolidated EBITDA of any Person, business, division or product line
acquired during such period pursuant to Section 8.15, subject to such
calculations being made in accordance with clause (ii) of the
definition of "Pro Forma Basis", and the Consolidated EBITDA of such
Person, business, division or product line for the period being tested
by such covenants shall be included as Consolidated EBITDA of Holdings
even though such Person, business, division or product line was
acquired during such period and (II) provided further that".
-------- -------
7. Section 11 of the Credit Agreement shall be amended by inserting
therein the following new definition immediately after the definition of "Letter
of Credit Request":
"Leverage Reduction Discount" shall mean as follows:
(i) during any period in which clause (ii) below does not apply,
the Leverage Reduction Discount shall be 0.00%; and
(ii) from and after the Start Date to and including the End Date:
(v) 0.25%, to the extent but only to the extent that as of
the last day of the most recent fiscal quarter ending immediately
prior to such Start Date for which a certificate has been
delivered to the Banks pursuant to the second succeeding sentence
hereinafter (the "Test Date") the ratio of Consolidated
Indebtedness of Holdings to EBITDA of
-3-
<PAGE>
Holdings for the immediately preceding four fiscal quarters
(including the quarter with respect to which the certificate
referred to below is being delivered) shall be less than 3.50x
but greater than or equal to 3.00x; or
(w) 0.50%, to the extent but only to the extent that as of
the Test Date the ratio of Consolidated Indebtedness of Holdings
to EBITDA of Holdings for the immediately preceding four fiscal
quarters (including the quarter with respect to which the
certificate referred to below is being delivered) shall be less
than 3.00x but greater than or equal to 2.50x;
(x) 0.75%, to the extent but only to the extent that as of
the Test Date the ratio of Consolidated Indebtedness of Holdings
to EBITDA of Holdings for the immediately preceding four fiscal
quarters (including the quarter with respect to which the
certificate referred to below is being delivered shall be less
than 2.50x but greater than or equal to 2.00x; or
(y) 1.00%, to the extent but only to the extent that as of
the Test Date the ratio of Consolidated Indebtedness of Holdings
to EBITDA of Holdings for the immediately preceding four fiscal
quarters (including the quarter with respect to which the
certificate referred to below is being delivered) shall be less
than 2.00x but greater than or equal to 1.50x; or
(z) 1.25%, to the extent but only to the extent that as of
the Test Date the ratio of Consolidated Indebtedness of Holdings
to EBITDA of Holdings for the immediately preceding four fiscal
quarters (including the quarter with respect to which the
certificate referred to below is being delivered) shall be less
than 1.50x;
provided, however, that (even if the relevant tests set forth above are met) if
- -------- -------
at any time a Default or an Event of Default shall exist, the Leverage Reduction
Discount shall be 0.00% until such Default or Event of Default shall no longer
be continuing. It is understood and agreed that the Leverage Reduction Discount
as provided above shall in no event be cumulative and only the Leverage
Reduction Discount available pursuant to either clause (v), (w), (x), (y) or
(z), if any, contained in this definition shall be applicable. The Leverage
Reduction Discount shall be determined by the delivery of a certificate of the
Borrowers, certified by the chief financial officer of the Borrowers, together
with the financial statements required to be delivered pursuant to Section
8.01(b) or (c), as the case may be, which certificate shall set forth the
Leverage
-4-
<PAGE>
Reduction Discount arising from the calculation of the ratio of Consolidated
Indebtedness to EBITDA of Holdings for the four fiscal quarters ending with the
fiscal quarter or fiscal year with respect to which such certificate is being
delivered and the basis for such calculations. The Leverage Reduction Discount
so determined shall apply, except as set forth above in the case of a Default or
an Event of Default, to the period beginning on the date such financial
statements are delivered (the date of delivery of such financial statements on
which such period commences being herein referred to as the "Start Date") and
ending on the earlier of (the "End Date") (i) the next date of actual delivery
of the financial statements required to be delivered pursuant to Section 8.01(b)
or (c) or (ii) the date on which such financial statements are required to be
delivered."
II. MISCELLANEOUS
-------------
1. In order to induce the Banks to enter into this Amendment, the
Borrowers hereby (i) make each of the representations, warranties and agreements
contained in the Credit Agreement as though made on the Second Amendment
Effective Date (as hereinafter defined), unless stated to relate to a specific
earlier date, in which case such representations and warranties shall be true
and correct in all material respects as of such earlier date and (ii) represent
and warrant that there exists no Default or Event of Default, in each case on
the Second Amendment Effective Date both before and after giving effect to this
Amendment.
2. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement.
3. This Amendment may be executed in any number of counterparts and
by the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Borrowers and the Agent.
4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.
5. This Amendment shall become effective on the date (the "Second
Amendment Effective Date") when the Borrowers, the Required Banks and the Agent
-5-
<PAGE>
shall have signed a counterpart hereof (whether the same or different
counterparts) and shall have delivered the same to the Agent at its New York
Office.
6. From and after the Second Amendment Effective Date, all
references in the Credit Agreement shall be deemed to be references to the
Credit Agreement as modified hereby.
* * *
-6-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Amendment to be duly executed and delivered as of the date first above written.
Address:
- -------
7700 Old Georgetown Road HANGER ORTHOPEDIC GROUP, INC.
2nd Floor
Bethesda, MD 20814 /s/ Richard A. Stein
Attention: Ivan R. Sabel --------------------------------
Telephone: (301) 986-0701 By: Richard A. Stein
Facsimile: (301) 652-8307 Title: Vice President
7700 Old Georgetown Road J.E. HANGER, INC.
2nd Floor
Bethesda, MD 20814 /s/ Richard A. Stein
Attention: Ivan R. Sabel --------------------------------
Telephone: (301) 986-0701 By: Richard A. Stein
Facsimile: (301) 652-8307 Title: Vice President
<PAGE>
787 Seventh Avenue BANQUE PARIBAS,
New York, New York 10019 Individually and as Agent
Attention: Don Ercole
Telephone: (212) 841-2000 /s/ Don Ercole
Facsimile: (212) 841-2333 --------------------------------
By: Don Ercole
Title: Vice President
/s/ Edward Irwin
--------------------------------
By: Edward Irwin
Title:
<PAGE>
BANK OF BOSTON
/s/ Linda E. Alto
--------------------------------
By: Linda E. Alto
Title: Vice President
<PAGE>
FIRST SOURCE FINANCIAL, INC.
/s/ David C. Wagner
--------------------------------
By: David C. Wagner
Title: Vice President
<PAGE>
FLEET NATIONAL BANK
/s/ Maryane S. Smith
--------------------------------
By:
Title:
<PAGE>
IMPERIAL BANK
/s/ O. C. Jazowski
--------------------------------
By: O. C. Jazowski
Title: Senior Vice President
<PAGE>
LASALLE NATIONAL BANK
/s/ Marc Pressler
--------------------------------
By: Marc Pressler
Title: First Vice President
<PAGE>
PARIBAS CAPITAL FUNDING LLC
/s/ Eric Green
--------------------------------
By: Eric Green
Title: Director
<PAGE>
PILGRIM AMERICA PRIME
RATE TRUST
/s/ Michael J. Bacevich
--------------------------------
By: Michael J. Bacevich
Title: Vice President
<PAGE>
PRIME INCOME TRUST
/s/ Rajesh Gupa
--------------------------------
By: Rajesh Gupa
Title: Senior Vice President
<PAGE>
EXHIBIT 24(B)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-2 of
(i) our report, dated March 21, 1997, except as to the information presented
in the third paragraph of Note D, for which the date is March 27, 1997, on our
audits of the consolidated financial statements of Hanger Orthopedic Group,
Inc. and subsidiaries as of December 31, 1995 and 1996, and for the years
ended December 31, 1994, 1995 and 1996; and (ii) our report, dated April 18,
1997, on our audits of the financial statements of ACOR Orthopaedic, Inc.--
Retail Division as of December 31, 1995 and 1996, and for the years then
ended. We also consent to the reference to our firm under the caption
"Experts."
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
June 26, 1997
<PAGE>
EXHIBIT 24(C)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-2 of
our report, dated February 23, 1996, on our audits of the consolidated
financial statements of J.E. Hanger, Inc. of Georgia, as of December 31, 1994
and 1995, and for the years ended December 31, 1994 and 1995. We also consent
to the reference to our firm under the caption "Experts."
Windham Brannon, P.C.
Atlanta, Georgia
June 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 6,720,021
<SECURITIES> 0
<RECEIVABLES> 27,580,348
<ALLOWANCES> 3,052,000
<INVENTORY> 15,650,023
<CURRENT-ASSETS> 52,814,336
<PP&E> 23,315,262
<DEPRECIATION> 6,027,060
<TOTAL-ASSETS> 138,158,342
<CURRENT-LIABILITIES> 23,989,760
<BONDS> 0
283,996
0
<COMMON> 94,938
<OTHER-SE> 40,335,897
<TOTAL-LIABILITY-AND-EQUITY> 138,158,342
<SALES> 30,949,614
<TOTAL-REVENUES> 30,949,614
<CGS> 16,229,929
<TOTAL-COSTS> 12,083,452
<OTHER-EXPENSES> 43,749
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,527,269
<INCOME-PRETAX> 1,065,215
<INCOME-TAX> 447,300
<INCOME-CONTINUING> 617,915
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 617,915
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
