SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______ to _______.
Commission File Number 1-10670
HANGER ORTHOPEDIC GROUP, INC.
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(Exact name of registrant as specified in its charter.)
Delaware 84-0904275
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7700 Old Georgetown Road, Bethesda, MD 20814
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(Address of principal executive offices) (Zip Code)
Registrant's phone number, including area code: (301) 986-0701
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Securities registered pursuant to section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes [X] No [ ]
The aggregate market value of the registrant's Common Stock, par value
$.01 per share, held as of February 21, 1997 by non-affiliates of the
registrant was $63,181,823 based on the $6.75 closing sale price of the Common
Stock on the American Stock Exchange on such date.
As of March 21, 1996, the registrant had 9,360,270 shares of its Common
Stock issued and outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III of the Form 10-K is incorporated
by reference from the registrant's definitive proxy statement or amendment
hereto which will be filed not later than 120 days after the end of the fiscal
year covered by this report.
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ITEM 1. BUSINESS.
INTRODUCTION
Hanger Orthopedic Group, Inc. ("Hanger" or the "Company") is one of the
nation's largest practice management companies in the orthotic and prosthetic
("O&P") rehabilitation industry. In addition to providing O&P patient care
services through its operating subsidiaries, Hanger also manufactures and
distributes components and finished patient care products to the O&P industry.
Hanger's largest subsidiary, Hanger Prosthetics & Orthotics, Inc., formerly
known as J. E. Hanger, Inc. ("HPO"), was founded in 1861 by a Civil War
amputee and is the oldest company in the O&P industry in the United States.
Orthotics is the design, fabrication, fitting and supervised use of
custom-made braces and other devices such as knee, spinal, neck and cervical
braces and foot orthoses, that provide external support to treat
musculoskeletal disorders. Musculoskeletal disorders are ailments of the back,
extremities or joints caused by traumatic injuries, chronic conditions,
diseases, congenital disorders or injuries resulting from sports or other
activities. Prosthetics is the design, fabrication and fitting of custom-made
artificial limbs for patients who have lost limbs as a result of traumatic
injuries, vascular diseases, diabetes, cancer or congenital disorders.
The Company is a vertically integrated provider of O&P services that
offers its own manufacturing, distribution and provision of patient care
services. The Company manufactures O&P components and finished patient care
products for both the O&P industry and the Company's own patient care
practices through its wholly-owned subsidiary, DOBI-Symplex, Inc.
("DOBI-Symplex"). The Company manufactures components and finished products
under various name brands such as Lenox Hill, CASH Brace, Ortho-Mold and
Charleston Bending Brace. The Company distributes O&P components and finished
patient care products to the O&P industry and the Company's own patient care
practices through the Company's wholly-owned subsidiary, Southern Prosthetic
Supply, Inc. ("SPS").
The Company also manages O&P patient care practices through its HPO
subsidiary. Care of O&P patients is part of a continuum of rehabilitation
services from diagnosis to treatment and prevention of future injury. This
continuum involves the integration of several medical disciplines that begins
with the attending physician's diagnosis. Once a course of treatment is
determined, the physician, generally an orthopedic surgeon, vascular surgeon
or physiatrist, refers a patient to one of Hanger's patient care centers for
treatment. A Hanger practitioner then consults with both the referring
physician and the patient to formulate the prescription for, and design of, an
orthotic or prosthetic device to meet the patient's needs.
The fitting process involves several stages in order to successfully
achieve desired functional and cosmetic results. The practitioner creates a
cast and takes detailed measurements of the patient to ensure an anatomically
correct fit. All of the prosthetic devices fitted by Hanger's practitioners
are custom designed and fabricated by skilled practitioners who can balance
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fit, support and comfort. Of the orthotic devices provided by Hanger,
approximately 79% are custom designed, fabricated and fitted and the other 21%
are prefabricated but custom fitted.
Custom devices are fabricated by the Company's skilled technicians using
the castings, measurements and designs made by the practitioner. Technicians
use advanced materials and technologies to fabricate a custom device under
stringent quality assurance guidelines. After final adjustments to the device
by the practitioner, the patient is instructed in the use, care and
maintenance of the device. A program of scheduled follow-up and maintenance
visits is used to provide post-fitting treatment, including adjustments or
replacements as the patient's physical condition and lifestyle changes.
Generally, the useful life of most custom designed and fabricated O&P devices
ranges from three to five years.
A substantial portion of Hanger's O&P services involves treatment of a
patient in a non-hospital setting, such as one of Hanger's patient care
centers, a physician's office, an out-patient clinic or other facilities. In
addition, O&P services are increasingly rendered to patients in hospitals,
nursing homes, rehabilitation centers and other alternate-site healthcare
facilities. In a hospital setting, the practitioner works with a physician to
provide either orthotic devices or temporary prosthetic devices that are later
replaced by permanent prostheses. Hanger's distribution capability allows its
personnel faster access to the products needed to fabricate devices for
patients. This is accomplished at competitive prices, as a result of either
manufacturing by DOBI-Symplex or direct purchases by SPS from other
manufacturers. As a result of faster access to products, the length of a
patient's treatment in the hospital can be reduced, thereby contributing to
healthcare cost containment.
Each of the Company's patient care centers is closely supervised by one
or more certified practitioners, which enables the Company to assure the
highest quality of services and patient care satisfaction. Hanger currently
employs 562 patient care practitioners, of whom 230 are certified
practitioners or candidates for formal certification by the American Board of
Certification in Orthotics and Prosthetics. The balance of the Company's
patient care practitioners are highly trained technical personnel who assist
in the provision of services to patients and fabricate various O&P devices.
The Company currently manages 178 O&P patient care centers in the
following 29 jurisdictions: Alabama, Arizona, California, Colorado,
Connecticut, Delaware, District of Columbia, Florida, Georgia, Indiana,
Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Montana,
New Hampshire, New Mexico, New York, North Carolina, Ohio, Pennsylvania, South
Carolina, Tennessee, Texas, Virginia, West Virginia and Wyoming. Hanger also
manufactures a number of specialized O&P components and finished patient care
products at its manufacturing facilities in Florida and Illinois and maintains
distribution facilities in California, Florida, Georgia, Illinois, Maryland
and Texas.
The Company, which was formed in March 1983, is a Delaware corporation.
Its executive offices are located at 7700 Old Georgetown Road, Bethesda,
Maryland 20814. Its telephone number is (301)-986-0701. Hanger is a holding
company which transacts business through its subsidiaries. Unless the context
otherwise requires, all references herein to Hanger include its subsidiaries.
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THE MARKET FOR ORTHOPEDIC REHABILITATION SERVICES
The Company is engaged in O&P patient care practice management, as well
as O&P product manufacturing and distribution activities. The O&P industry in
the United States, including patient care services, manufacturing and
distribution, is estimated to generate $2 billion in sales annually. Of that
amount, an estimated $700 million is attributed to the patient care services
sector, a highly fragmented market with over 2,740 certified practitioners and
1,230 certified O&P facilities, generally operated as small group practices.
The Company believes that the demand for orthopedic rehabilitation is
increasing at a rapid rate due to a combination of the following factors:
o GROWING ELDERLY POPULATION. The growth rate of the over-65 age
group is nearly triple that of the under-65 age group. The
elderly require orthopedic rehabilitation more frequently than
younger age groups. With broader medical insurance coverage,
increasing disposable income, longer life expectancy, greater
mobility and improved technology and devices they are expected
to seek orthopedic rehabilitation services more often.
o COST-EFFECTIVE REDUCTION IN HOSPITALIZATION. As public and
private payors encourage reduced hospital admissions and
reduced length of stay, out-patient rehabilitation is in
greater demand. O&P services and devices have enabled patients
to become ambulatory more quickly after receiving medical
treatment in the hospital. The Company believes that
significant cost savings can be achieved through the early use
of O&P services. The provision of O&P services in many cases
reduces the need for more expensive treatment modalities, thus
representing a cost savings to the third-party payor.
o GROWING PHYSICAL HEALTH CONSCIOUSNESS. There is a growing
emphasis on physical fitness, leisure sports and conditioning,
such as running and aerobics, which has led to increased
injuries requiring orthopedic rehabilitative services and
products. In addition, as the current middle-age population
ages, it brings its more active life-style and accompanying
emphasis on physical fitness to the over-65 age group. These
trends are evidenced by the increasing demand for new devices
which provide support for injuries, prevent further or new
injuries or enhance physical performance.
o ADVANCING TECHNOLOGY. The range and effectiveness of treatment
options have increased in connection with the technological
sophistication of O&P devices. Advances in design technology
and lighter, stronger and more cosmetically acceptable
materials have enabled the industry to produce more new O&P
products, which provide greater comfort, protection and patient
acceptability. Therefore, treatment can be more effective and
of shorter duration, contributing to greater mobility and a
more active lifestyle for the patient. Orthotic devices are
more prevalent and visible in many sports, including but not
limited to skiing.
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o NEED FOR REPLACEMENT AND CONTINUING CARE. Because the useful
life of most custom fitted and fabricated O&P devices is
approximately three to five years, such devices need
retrofitting and replacement. There is also an attendant need
for continuing patient care services, which contributes to the
increasing demand for orthopedic rehabilitation.
BUSINESS STRATEGY
The Company's business strategy is to significantly expand its O&P
practice management presence in the patient care services segment of the O&P
industry, which is a highly fragmented market with over 2,740 certified
practitioners and 1,230 certified O&P facilities in the United States. Most of
these facilities operate as small group practices. The Company's strategy
involves: (i) broadening the Company's presence in targeted geographic areas
through a program of selected acquisitions; (ii) expanding and improving O&P
practice management operations at existing and acquired patient care
facilities through more efficient operating practices and the use of
professional marketing programs not generally utilized in the O&P industry;
(iii) increasing the manufacturing and distribution of O&P components and
products used by others in the O&P industry as well as by its own patient care
centers; (iv) opening new patient care centers in existing markets including
centers within rehabilitation hospitals; (v) developing contract business with
managed care organizations, including health maintenance organizations
("HMOs") and preferred provider organizations ("PPOs"), and a proprietary
referral network between selected O&P service providers and such managed care
organizations through its wholly-owned subsidiary, OPNET, Inc., which operates
the Company's Orthotic and Prosthetic Network ("OPNET"). See "Acquisition
Strategy" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
In December 1996, following the Company's acquisition of J.E. Hanger,
Inc. of Georgia ("SEH"), the Company consolidated its business operations by
merging many of its subsidiaries and otherwise combining similar lines of
business within certain continuing subsidiaries. The result of this
consolidation is that patient-care services are consolidated under HPO,
manufacturing activities are consolidated under DOBI-Symplex, distribution
activities are consolidated under SPS, and managed care contract services are
concentrated under OPNET.
ACQUISITION STRATEGY
The Company's primary growth strategy is pursued through acquisitions.
The Company considers both operating and financial factors in evaluating
prospective acquisitions. Operating factors include Hanger's emphasis on high
standards of professionalism and patient care and the presence of certified
practitioners at each of its facilities. Financial factors include historical
earnings and cash flow history and the projected benefits of applying Hanger's
management, marketing, information systems and other operational programs,
such as access to its manufacturing and wholesale distribution facilities, to
the acquired company's business. Hanger's acquisition criteria also include
the retention and support of the existing management of the acquired company,
typically through the use of employment contracts, non-compete agreements and
incentive programs. In evaluating acquisitions in geographic areas where the
Company has an established presence, Hanger targets businesses that complement
its existing network of patient care centers. In locations where the Company
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has not yet established a presence, the Company generally focuses on strong
regional businesses which have multiple patient care centers and experienced
practitioners.
The Company also plans to continue to expand its contractual
relationships with large managed care organizations for the provision of O&P
services. In 1995, the Company formed OPNET which serves as a referral source
of O&P services for managed care providers at a reduced cost for claims
administration due to OPNET's prenegotiated fee structure with payor groups.
OPNET has successfully established contractual relationships with
approximately 374 patient care centers and 221 insurance payors. OPNET also
provides incentives to independent O&P service provider members to purchase
their O&P products from SPS and DOBI-Symplex. OPNET further provides the
Company with opportunities for future acquisitions by allowing the Company to
evaluate the financial and clinical performance of the OPNET member clinics.
The Company also maintains contractual relationships with rehabilitation
hospitals pursuant to which Hanger operates such facilities' O&P patient care
centers. This includes The Rusk Institute of Rehabilitation Medicine at the
New York University Medical Center in New York, New York, the Rocky Mountain
Regional Spinal Injury Center of the Craig Hospital in Denver, Colorado, and
the Harmarville Rehabilitation Center in Pittsburgh, Pennsylvania.
OPERATIONAL STRATEGY
The Company's O&P practice management operational strategy includes the
continued development and implementation of programs designed to enhance the
efficiency of its consolidated clinical practices. These programs permit its
certified practitioners to allocate a greater portion of their time to patient
care activities by reducing the administrative responsibilities of operating
the business. Such programs include: (i) sales and marketing initiatives
designed to attract new patient referrals through established relationships
with physicians, therapists, employers, managed care organizations, such as
HMOs and PPOs, hospitals, rehabilitation centers, out-patient clinics and
insurance companies; (ii) professional management and information systems
designed to improve efficiencies of administrative and operational functions
under guidelines of the Company's patient care centers; (iii) professional
educational programs for practitioners emphasizing state-of-the-art
developments in the increasingly sophisticated field of O&P clinical therapy;
(iv) the regional centralization of fabrication and purchasing activities
which provides overnight access to component parts and products at prices that
are typically 25% lower than traditional procurement methods; and (v) the
acquisition of state-of-the-art equipment which is financially more difficult
for smaller, independent facilities to obtain. Management believes that the
programs which have been created by the Company to enhance its operational
strategy have made the Company attractive to clinical practices, which
enhances the Company's ability to expand through acquisitions and maximize the
retention of practitioners.
SALES AND MARKETING
The Company believes that the application of modern sales and marketing
techniques is a key element of its O&P practice management business strategy.
While patient referrals have always been a source of new business,
historically there has been an absence of a comprehensive sales and marketing
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effort in the patient care segment of the O&P industry. The success of an O&P
business has been largely a function of its local reputation for quality of
care, responsiveness and length of service in the community. This is due
primarily to the fragmented nature of the industry, with individual
practitioners relying almost exclusively on referrals from local physicians or
physical therapists.
Hanger's patient care marketing efforts are managed by a Vice President
of Marketing and are directed toward referring physicians, therapists,
employers, HMOs, PPOs, hospitals, rehabilitation centers, out-patient clinics
and insurance companies on both a local, regional and national basis. While
specialized physicians, such as orthopedic and vascular surgeons and
physiatrists, have been principal referral sources, regional and national
third-party payors such as managed care organizations, including HMOs and
PPOs, have become important sources of patient referrals. Hanger has also
targeted other rehabilitation professionals in the continuum of care for O&P
patients, including physical therapists, orthopedic nurses and technicians and
other professionals. Hanger employs personnel whose responsibilities include
the solicitation of new business from these referral sources. The Company has
been successful in procuring the approval of broad-based managed care plans
and other institutional healthcare providers and payors. As part of this
effort, the Company formed OPNET which employs personnel whose primary
responsibility is to develop and implement new marketing techniques directed
toward such managed-care plans and other institutional healthcare providers
and payors.
Although referrals are instrumental in establishing initial contact with
patients, the Company's O&P practice management policies continue to emphasize
the primary importance of its service to its patients. Hanger believes that it
is important to develop the doctor/patient relationship in order to properly
meet the needs of the patient, ensure the patient's satisfaction with the O&P
device and establish a long-term relationship between the doctor and patient
in order for the patient to understand adequately the rehabilitation program,
which is attendant to regaining mobility, and the proper maintenance of the
O&P device to ensure ongoing performance of the brace or device. The patient
orientation of Hanger's services are designed to ensure the patient's return
to Hanger for his or her orthotic or prosthetic needs.
ACQUISITIONS
Since 1986, the Company has acquired over 40 businesses representing 178
offices in 29 jurisdictions, with the most recent of these acquisitions being
the acquisition in November 1996 of SEH, a Georgia corporation which operated
93 patient care offices in 15 states, and was the country's largest
distributor of O&P products. The Company has entered into letters of intent to
effect three acquisitions in Tennessee, Ohio and Florida, which, if
consumated, would be expected to add approximately $9 million in annual net
sales. The Company continues to be engaged in discussions with several other
O&P companies relating to the Company's possible acquisition of their patient
care centers. The Company's investigations of such other companies' affairs
are in their formative stages and no final representations can be made as to
whether, when or on what terms such possible acquisitions may be effected.
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MANUFACTURING AND DISTRIBUTION
In addition to on-site fabrication of custom devices incidental to the
services rendered at its O&P patient care centers, Hanger also manufactures a
number of non-customized orthotic components and finished patient care
products at DOBI-Symplex, a facility in Orlando, Florida at which Lenox Hill
and Ortho-Mold products are also manufactured, and a Ralph Storrs, Inc.
("Storrs") facility in Kankakee, Illinois. The principal products manufactured
are pre-fabricated and custom-made spinal orthoses as well as custom and
off-the-shelf derotation knee braces. These products are supplied to Hanger's
patient care centers, as well as sold to unaffiliated O&P patient care
facilities. For the years ended December 31, 1992, 1993, 1994, 1995 and 1996,
sales of products manufactured by the Company accounted for 10%, 18%, 18%, 16%
and 12%, respectively, of Hanger's historical net sales. As a result of the
business mix of SEH, which included no manufacturing revenues, the Company's
manufacturing revenues as a percentage of sales is anticipated to be only 7%
of net sales in 1997.
SPS is primarily engaged in the distribution of O&P products, a majority
of which are manufactured by others and distributed by SPS primarily to others
in the O&P industry. SPS inventories over 20,000 items. After the Company's
acquisition of SPS in November 1996, the Company consolidated its distribution
business, O&P Express, into SPS. For the years ended December 31, 1992, 1993,
1994, 1995 and 1996, revenues attributable to distribution accounted for 6%,
5%, 4%, 5% and 10%, respectively, of Hanger's historical net sales. As a
result of the business mix of SEH, which included a substantial distribution
business, the Company's distribution revenues as a percentage of sales is
anticipated to be 18% of net sales in 1997.
Marketing of Hanger's manufactured products and distribution services is
conducted on a national basis, primarily through independent sales
representatives and an internal sales force, catalogues and through exhibits
at industry and medical meetings and conventions. Hanger directs specialized
catalogues to segments of the healthcare industry, such as orthopedic surgeons
and physical and occupational therapists, and also directs its broad-based
marketing to the O&P industry.
Storrs' revenues are derived primarily from the manufacture of orthotic
devices. One such device is a hyperextension brace for lumbar and thoracic
spinal support. Storrs also manufactures the brace components for the Lenox
Hill derotation knee orthosis, a business which Hanger, through DOBI-Symplex,
acquired on December 31, 1992 from Minnesota Mining and Manufacturing Company
("3M").
DOBI-Symplex is engaged primarily in the manufacture and distribution of
plastic spinal orthotic devices. Its activities include: (i) the fabrication
of custom-made plastic orthotic devices from patient molds and/or
measurements, which account for approximately 61% of its annual revenues; (ii)
the manufacture of prefabricated plastic orthotic devices that are
mass-produced and sold to distributors and patient care providers, which
account for approximately 38% of its annual revenues; and (iii) the
fabrication of custom-made prosthetic devices, which account for approximately
1% of its annual revenues. A significant product manufactured and sold by
DOBI-Symplex is the custom-made Charleston Bending Brace, an orthotic device
designed for nocturnal use to correct spinal curvature in adolescents.
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On December 31, 1992, DOBI-Symplex, as a wholly-owned subsidiary of the
Company, acquired from 3M substantially all of 3M's assets relating to the
custom derotation knee brace business primarily known in the O&P industry as
the "Lenox Hill" derotation knee brace. The purchase of 3M's Lenox Hill
derotation knee brace business complements the manufacturing activities of
DOBI-Symplex, which include the fabrication of custom-made plastic orthotic
devices and the manufacture of pre-fabricated plastic orthotic devices. In
June 1996, the Company developed the LH Custom 2 derotation knee brace which
has replaced the Lenox Hill custom derotation knee brace.
On September 1, 1993, DOBI-Symplex purchased from 3M substantially all of
3M's assets relating to its off-the-shelf Precision-Fit knee brace business.
The purchase of the off-the-shelf Precision-Fit knee brace business
complements the custom Lenox Hill derotation knee brace business.
On April 15, 1994, the Company acquired from Brunswick Medical
Corporation substantially all the assets relating to the custom fitted
thermo-plastic spinal brace business primarily known as Ortho-Mold. The
purchase of the Ortho-Mold business complements the manufacturing activities
of DOBI-Symplex, which includes the pre-fabricated plastic insert to the
Ortho-Mold product.
To provide timely custom fabrication and service to its patients, the
Company employs technical personnel and maintains laboratories at each of its
patient care centers. Hanger also maintains several larger, fully staffed
central fabrication facilities to service its patient care centers. These
centrally-located facilities enable Hanger to fabricate those O&P products
which are more easily produced in larger quantities and in a more cost
effective manner, as well as serving as an auxiliary production center for
products normally fabricated at individual patient care centers. The Company
believes that the laboratories in its patient care centers are critical for
the provision of patient care services.
PATIENT REIMBURSEMENT SOURCES
The principal reimbursement sources for Hanger's O&P services are: (i)
private payor/third-party insurer sources which consist of individuals,
private insurance companies, HMOs, PPOs, hospitals, vocational rehabilitation,
workers' compensation and similar sources; (ii) Medicare, which is a federally
funded health insurance program providing health insurance coverage for
persons age 65 or older and certain disabled persons, and Medicaid, which is a
health insurance program jointly funded by Federal and state governments
providing health insurance coverage for certain persons in financial need,
regardless of age, and which may supplement Medicare benefits for financially
needy persons aged 65 or older; and (iii) the United States Veterans
Administration, with which Hanger has entered into contracts to provide O&P
services.
Medicare, Medicaid, the United States Veterans Administration and certain
state agencies have set maximum reimbursement levels for payments for O&P
services and products. The healthcare policies and programs of these agencies
have been subject to changes in payment and methodologies during the past
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several years. There can be no assurance that future changes will not reduce
reimbursements for O&P services and products from these sources.
The Company provides O&P services to eligible veterans pursuant to
several contracts with the United States Veterans Administration. The United
States Veterans Administration establishes rates for reimbursement for
itemized products and services under contracts, which expire in September
1997, with the option to renew for a one or two year period. The contracts,
awarded on a non-exclusive basis, establish the amount of reimbursement to the
eligible veteran if the veteran should choose to use the Company's products
and services. The Company has been awarded United States Veterans
Administration contracts in the past and expects that it will obtain
additional contracts when its present agreements expire.
The Omnibus Budget Reconciliation Act of 1990 ("OBRA 1990"), which was
enacted on November 5, 1990, provides for the separate treatment of O&P
reimbursement and the general category of durable medical equipment ("DME")
reimbursement for Medicare purposes. Previously, O&P devices were included
within the DME category which failed to acknowledge the fact that O&P devices
are custom fabricated and subjected O&P to the same budget reductions that
were applicable to DME. The separate recognition of O&P for Medicare
reimbursement purposes will enable O&P to have its own budget estimates and
administration process in connection with the regulatory activities of the
United States Health Care Financing Administration ("HCFA"). Pursuant to OBRA
1990, HCFA has established separate professional O&P fee schedules that
generally reflect the cost of O&P services. Effective January 1, 1992, HCFA
commenced the regionalization of O&P fee schedules whereby regional fee
schedule averages may not exceed 125% of the national fee schedule average.
OBRA 1990's separation of O&P from DME for Medicare reimbursement purposes has
not adversely affected the Company.
COMPETITION
The O&P industry is highly fragmented, with approximately 1,230 certified
facilities providing patient care services in the United States. There are
also several regional and multi-regional competitors which operate a number of
patient care centers. The competition among O&P patient care centers is
primarily for referrals from physicians, therapists, employers, HMOs, PPOs,
hospitals, rehabilitation centers, out-patient clinics and insurance companies
on both a local and regional basis. In addition to O&P facilities, Hanger
competes with other providers of O&P services, such as hospitals, physicians
and therapists. The Company believes that distinguishing competitive factors
in the O&P industry are quality and timeliness of patient care, service to the
customer and referring source and, to a lesser degree, charges for services.
While the Company believes it is one of the largest suppliers of O&P services
in the U.S., certain competitors may have greater financial and personnel
resources than Hanger. Hanger competes with others in the industry for trained
personnel. To date, however, Hanger has been able to achieve its staffing
needs and has experienced a relatively low turnover rate of employees.
The Company has not encountered significant competition to date in
connection with its acquisition of other O&P businesses. However, no assurance
can be given that such competition will not be encountered in the future.
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GOVERNMENT REGULATIONS AND O&P CERTIFICATION
Certain state and Federal agencies require that practitioners providing
services to such agencies be certified by the American Board for Certification
in Orthotics and Prosthetics (the "ABC"). Hanger's practitioners currently
comply with all such requirements. Hanger provides services under various
contracts to such Federal agencies. These contracts are subject to regulations
governing Federal contracts, including the ability of the government to
terminate for its convenience. Revenue from such contracts is not material to
Hanger.
The Company's manufactured or fabricated devices are not subject to
approval or review of the U.S. Food and Drug Administration nor are there any
requirements for governmental certification of orthotists or prosthetists or
accreditation of Hanger's facilities.
The ABC conducts a certification program for practitioners and an
accreditation program for patient care centers. The minimum requirements for a
certified practitioner are a college degree, completion of an accredited
academic program, one year of staff experience at a patient care center under
the supervision of a certified practitioner and successful completion of
certain examinations. Minimum requirements for an ABC-accredited patient care
center include the presence of a certified practitioner and specific plant and
equipment requirements.
EMPLOYEES
As of March 21, 1997, Hanger had 996 full-time employees. Of these
employees, 562 are patient care practitioners. The balance are executive,
sales and administrative personnel. None of the Company's employees is subject
to a collective bargaining agreement. The Company considers its relationship
with its employees to be good.
INSURANCE
The Company currently maintains insurance of the type and in the amount
customary in the orthopedic rehabilitation industry, including coverage for
malpractice liability, product liability, workers' compensation and property
damage. Hanger's general liability insurance coverage is at least $500,000 per
incident. Based on the Company's experience and prevailing industry practices,
Hanger believes its coverage is adequate as to risks and amount.
ITEM 2. PROPERTIES.
As of December 31, 1996, Hanger operated 178 patient care centers and
facilities in 28 states and in Washington, D.C. Of these, 25 centers are owned
by Hanger. The remaining centers are occupied under leases expiring between
the years of 1997 and 2007. Hanger believes that the centers leased or owned
by it are adequate for carrying on its current O&P operations at its existing
locations, as well as its anticipated future needs at those locations. Hanger
believes it will be able to renew such leases as they expire or find
comparable or additional space on commercially suitable terms.
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Hanger also owns distribution facilities in Georgia and Texas, and leases
manufacturing and distribution facilities in Illinois, Maryland, Florida and
California. The Company leases its corporate headquarters in Bethesda,
Maryland and owns its corporate office in Alpharetta, Georgia. Substantially
all of Hanger's properties are pledged to collateralize bank indebtedness. See
Notes H and L to Hanger's Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
Legal proceedings to which Hanger is subject arise in the ordinary course
of business. Currently, Hanger is not a party to any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of stockholders.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth information regarding the Company's
current executive officers:
<TABLE>
<CAPTION>
Office with Appointed
Name Age the Company to Office
------ ----- ------------- -----------
<S> <C> <C> <C>
Ivan R. Sabel, CPO 52 Chairman of the Board, 1987
President, Chief Executive
Officer and Director
Richard A. Stein 37 Vice President-Finance, 1987
Secretary and Treasurer
</TABLE>
IVAN R. SABEL has been Chairman of the Board and Chief Executive Officer
of Hanger since August 1995 and President since November 1987. Mr. Sabel also
served as Chief Operating Officer of Hanger from November 1987 to August 1995.
Prior to that time, Mr. Sabel was Vice President - Corporate Development from
September 1986 to November 1987. From 1968 until joining Hanger in 1986, Mr.
Sabel was the founder and President of Capital Orthopedics, Inc. Mr. Sabel is
a Certified Prosthetist and Orthotist ("CPO"), a clinical instructor in
orthopedics at Georgetown University Medical School in Washington, D.C., a
member of the Board of Directors of the American Orthotic and Prosthetic
Association, a former Chairman of the National Commission for Health
Certifying Agencies, a former member of the Strategic Planning Committee and a
current member of the Veterans Administration Affairs Committee of the
American Orthotic and Prosthetic Association and a former President of the
American Board for Certification in Orthotics and Prosthetics.
11
<PAGE>
RICHARD A. STEIN has been Vice President - Finance, Secretary and
Treasurer of Hanger since April 1987. Mr. Stein was also the President of
Greiner & Saur Orthopedics, Inc., a former subsidiary of the Company, from
April 1987 until November 1989. Mr. Stein is a Certified Public Accountant and
was employed by Coopers & Lybrand, LLP from September 1982 until he joined
Hanger in 1987.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following table sets forth for the periods indicated the high and low
closing sales prices per share for the Common Stock on the AMEX:
<TABLE>
<CAPTION>
1996 High Low
---------------------------------------------------------------
<S> <C> <C>
First Quarter $ 4.625 $ 2.6875
Second Quarter 6.3125 4.0625
Third Quarter 7.250 5.000
Fourth Quarter 7.125 5.9375
</TABLE>
<TABLE>
<CAPTION>
1995 High Low
---------------------------------------------------------------
<S> <C> <C>
First Quarter $ 3.250 $ 2.500
Second Quarter 3.500 2.190
Third Quarter 3.875 2.750
Fourth Quarter 3.500 2.560
</TABLE>
As of March 21, 1997 there were 814 holders of record of the Common
Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and intends
to continue this policy for the foreseeable future. Hanger plans to retain
earnings for use in its business. The terms of Hanger's agreements with its
financing sources and certain other agreements prohibit the payment of
dividends on its Common Stock and Preferred Stock and such agreements will
continue to prohibit the payment of dividends in the future. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors of the Company and will be dependent on Hanger's results of
operations, financial condition, contractual and legal restrictions and any
other factors deemed to be relevant.
13
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION.
The selected financial information presented below has been derived from
the consolidated financial statements of the Company.
<TABLE>
SELECTED FINANCIAL STATEMENTS
(In thousands, except per share data)
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $32,406 $43,877 $50,300 $52,468 $66,806
Gross profit 17,277 24,207 27,091 27,896 34,572
Selling, general & administrative 13,064 17,124 21,340 19,362 24,550
Depreciation and amortization 2,100 2,655 3,137 2,691 2,848
Acquisition and Integration Costs (1) --- --- --- --- 2,479
Restructuring cost (1) --- --- 460 --- ---
Loss from disposal of assets (1) --- --- 2,150 --- ---
Income from operations 2,113 4,428 4 5,843 4,695
Interest expense (1,279) (1,167) (1,746) (2,056) (2,546)
Income (loss) from continuing operations
before taxes, extraordinary item and
accounting change 807 3,221 (1,922) 3,680 1,971
Provision for income taxes 487 1,626 358 1,544 890
Income (loss) from continuing operations
before extraordinary item and
accounting change 320 1,595 (2,280) 2,135 1,081
Loss from discontinued operations (2) (35) (105) (407) --- ---
Income (loss) before extraordinary
item and accounting change 285 1,490 (2,687) --- 1,081
Extraordinary loss on early
extinguishment of debt (1,139) (23) --- --- (83)
Cumulative effect of change in
accounting for income taxes --- 1,190 --- --- ---
Net income (loss) $ (854) $ 2,655 $(2,687) $ 2,135 $ 998
Income (loss) per common share:
Income (loss) from continuing operations
before extraordinary item and
accounting change $ 0.03 $ 0.19 $ (0.28) $ 0.26 $ 0.12
Loss from discontinued
operations --- (0.01) (0.05) --- ---
Extraordinary loss on early
extinguishment of debt (0.15) --- --- --- (0.01)
Cumulative effect of change in
accounting for income taxes --- 0.14 --- --- ---
Net income (loss) per share (3) $ (0.12) $ 0.32 $ (0.33) $ 0.26 $ 0.11
</TABLE>
14
<PAGE>
<TABLE>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $11,887 $15,738 $18,412 $20,622 $25,499
Total assets 47,996 56,571 61,481 61,800 134,941
Long-term debt 14,970 19,153 24,330 22,925 64,298
Redeemable preferred stock 194 212 232 254 278
Shareholders' equity 28,564 31,681 29,178 31,291 39,734
<FN>
(1) The 1994 results includes restructuring costs of $460,000 associated
with the closing of unprofitable patient care centers and a loss from
the disposal of assets of $2,150,000 resulting from the 1995 sale of
the Company's southern California patient care centers. The 1996
results includes acquisition and integration costs of $2,479,000
incurred in connection with the purchase of SEH. See Notes F and D to
the Company's Consolidated Financial Statements, respectively.
(2) Loss from discontinued operations consists of the loss from
discontinued operations and the sale of the discontinued operation of
the Company's Apothecaries, Inc. subsidiary, the assets of which were
sold in 1994. See Note E to the Company's Consolidated Financial
Statements.
(3) Income (loss) per common share has been adjusted for preferred stock
dividends.
</FN>
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Set forth below is a discussion of the results of the Company's
operations for the years ended December 31, 1994, 1995 and 1996, and the
Company's liquidity and capital resources at December 31, 1996. The discussion
which follows should be read in conjunction with Hanger's Selected
Consolidated Financial Statements and the Consolidated Financial Statements
included elsewhere herein.
RESULTS OF OPERATIONS
On November 1, 1996, the Company acquired SEH in a transaction that was
accounted for under the purchase method. Therefore, the acquisition, which
increased the number of the Company's patient care centers from 93 in 15
states and the District of Columbia to 178 in 28 states and the District of
Columbia and significantly expanded its distribution capabilities, only
impacted two months of reported 1996 results of operations. The Company
believes that its results of operations for 1997 will fully reflect the
increased level of revenues experienced during the last two months of 1996. In
addition, the Company believes that as a result of the Company's recognition
in late 1996 of certain non-recurring costs incurred in connection with the
SEH acquisition and integration of the companies' operations, as well as
certain post-acquisition cost savings expected to be realized, the Company's
1997 profitability is expected to be enhanced.
Growth in net sales during the last three fiscal periods has been
achieved principally through acquisitions and growth in net sales attributable
to patient care centers and facilities that were in operation during the three
periods. Gross profit as a percent of net sales has fluctuated between
approximately 52% and 54% during these periods. The decline in gross profit as
a percent of net sales in 1996 was primarily attributable to Hanger's
acquisition, effective November 1, 1996, of SEH which operated not only
patient care centers, but a large distribution division that had lower gross
profit margins than patient care services. Selling, general and administrative
expenses have fluctuated between 37% and 42% as a percent of net sales. The
decrease in general and administrative expenses as a percent of net sales in
1995 and 1996 is primarily a result of executing the 1994 restructuring plan
discussed below.
16
<PAGE>
The following table sets forth for the periods indicated certain items of
the Company's statements of operations and their percentage of the Company's
net sales:
<TABLE>
<CAPTION>
Historical
For the Years Ended December 31
--------------------------------------------
1994 (1) 1995 (2) 1996 (3)
---- ---- ----
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of products and services sold 46.1 46.8 48.2
Gross profit 53.9 53.2 51.8
Selling, general and administrative expenses 42.4 36.9 36.7
Depreciation and amortization 4.8 3.8 3.0
Acquisition and Integration Costs 3.7
Amortization of excess cost over net
assets acquired 1.4 1.3 1.2
Restructuring cost .9
Loss from disposal of assets 4.3
Income from operations .0 11.1 7.0
Interest expense 3.5 3.9 3.8
Income (loss) from continuing operations (3.8) 7.0 3.0
Income taxes .7 2.9 1.3
Loss from discontinued operations (.8)
Net income (loss) (5.3) 4.1 1.5
<FN>
(1) Includes all companies listed for the entire period: Columbia Brace
Shop from January 3, 1994, Orthotic and Prosthetic Division of M-D
Medical, a Division of Health Industries, Inc. from January 7, 1994,
Pedi-Mac Shoe Company, Inc. from January 31, 1994, Ortho-Mold from
April 15, 1994 and J.E. Hanger, Inc. of New England from October 7,
1994.
(2) Includes all companies listed in footnote (1) for the entire period,
as well as Summit Prosthetics and Orthotics from January 5, 1995,
Gulf Coast Orthopaedic Supply, Inc. from March 17, 1995 and excludes
the nine patient care centers sold or closed during 1994.
(3) Includes all companies listed in footnote (1) and (2) for the entire
period, as well as SEH from November 1,1996.
</FN>
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales for the year ended December 31, 1996 amounted to approximately
$66,806,000, an increase of approximately $14,338,000, or 27%, over net sales
of approximately $52,468,000 for the year ended December 31, 1995. The
increase was primarily a result of: (i) an increase of $12,257,000
attributable to O&P patient care centers and facilities acquired in late 1996,
and (ii) an increase of $2,081,000, or an increase of 5%, in net sales
attributable to patient care centers and facilities that were in operation
during both periods ("Internal Base Net Sales"). Of the $2,081,000 increase in
Internal Base Net Sales, $1,900,000, or an increase of 5%, was attributable to
patient care centers and $181,000 was attributable to manufacturing and
distribution activities.
17
<PAGE>
Gross profit in 1996 increased approximately $6,677,000, or 24%, over the
prior year. Gross profit as a percent of net sales decreased from 53% in 1995
to 52% in 1996. The 1% decrease in gross profit as a percent of net sales is
primarily attributable to the acquisition effective November 1, 1996, of SEH
which operated a large distribution division that had lower gross profit
margins than patient care services. The cost of products and services sold for
the year ended December 31, 1996, amounted to $32,234,000 compared to
$24,572,000 in 1995.
Selling, general and administrative expenses in 1996 increased
approximately $5,188,000, or 27%, compared to 1995. The increase in selling,
general and administrative expenses was primarily a result of the acquisition
of SEH in November 1996. Selling, general and administrative expenses as a
percent of net sales stayed approximately the same at 37%.
Non-recurring acquisition and integration costs totaling $2,479,000 in
1996 consisted of: (i) $1,300,000 of bonuses and non-capitalizable
professional acquisition advisory support service costs incurred to acquire
SEH; and (ii) $1,200,000 of costs to integrate the operations of SEH with the
Company.
Principally as a result of the above, income from operations in 1996
totalled approximately $4,695,000, a decrease of $1,148,000 below the prior
year. Income from operations as a percent of net sales in 1996 decreased to 7%
from 11% in 1995.
Interest expense for the year ended December 31, 1996 amounted to
approximately $2,546,000, which is an increase of $490,000, or 24%, over the
$2,056,000 of interest expense incurred during the year ended December 31,
1995. The increase in interest expense was primarily attributable to the
increase in bank debt resulting from the acquisition of SEH in November 1996.
Interest expense as a percent of net sales was 3.8% for the year ended
December 31, 1996, compared to 3.9% for 1995.
The Company's effective tax rate was 42.3% in 1996 versus 41.9% in 1995.
The increase in 1996 reflects both the recognition of a state deferred tax
benefit in 1995, which did not occur in 1996 and the disproportional impact of
permanent differences in relation to taxable income.
As a result of the above, the Company reported income from operations
before extraordinary item and accounting change of $1,081,000 for the year
ended December 31, 1996, compared to $2,135,000 for the prior year. A pretax
$139,000 (after tax $83,000) extraordinary loss on early extinguishment of
debt was recognized in 1996 in connection with the Company's refinancing of
bank indebtedness.
As a result of the above, the Company reported net income of $998,000, or
$.11 per share, for the year ended December 31, 1996, as compared to net
income of $2,135,000, or $.26 per share, for the year ended December 31, 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales for the year ended December 31, 1995 amounted to approximately
$52,468,000, an increase of approximately $2,168,000, or 4.3%, over net sales
of approximately $50,300,000 for the year ended December 31, 1994. The
18
<PAGE>
increase was primarily a result of an increase of $2,059,000, or an increase
of 5%, in net sales attributable to patient care centers and facilities that
were in operation during both periods ("Internal Base Net Sales"). Of the
$2,059,000 increase in Internal Base Net Sales, $1,704,000, or an increase of
5%, was attributable to patient care centers and $355,000 was attributable to
the Company's manufacturing and distribution activities. The balance of the
increase in net sales was attributable to O&P patient care centers and
facilities acquired by the Company in late 1994 and 1995. The increase of
$2,168,000 in net sales occurred notwithstanding the sale or closure of nine
patient care centers during late 1994 and the first quarter of 1995 in
connection with the restructuring (the "Restructuring") undertaken by the
Company in 1994 and consummated in March 1995. These nine centers accounted
for net sales of $1,770,000 during the year ended December 31, 1994 compared
with only $74,000 during the year ended December 31, 1995.
Gross profit increased by approximately $805,000, or 3.0%, over the prior
year. Gross profit as a percent of net sales decreased from 53.9% in 1994 to
53.2% in 1995. The cost of products and services sold for the year ended
December 31, 1995 amounted to $24,572,000 compared to $23,209,000 for the year
ended December 31, 1994. Gross profit as a percent of net sales for patient
care services remained the same during 1994 and 1995 at 53%. Gross profit as a
percent of net sales for manufacturing and distribution declined from 37% in
1994 to 36% in 1995. This decline resulted principally from pricing pressures
in the distribution and manufacturing divisions.
Selling, general and administrative expenses in 1995 decreased by
approximately $1,978,000, or 9.3%, compared to 1994. In addition to decreasing
in dollar amount, selling, general and administrative expenses as a percent of
net sales decreased to 36.9% for the year ended December 31, 1995 from 42.4%
of net sales for the year ended December 31, 1994. The decrease in selling,
general and administrative expenses was primarily a result of the sale and
closure of nine patient care centers during late 1994 and the first quarter of
1995 in connection with the Restructuring undertaken by the Company in 1994,
and consummated in March 1995. These nine centers accounted for selling,
general and administrative expenses of $1,043,000 during the year ended
December 31, 1994 compared with only $67,000 during the year ended December
31, 1995. The remaining reduction in selling, general and administrative
expenses was primarily a result of additional cost cutting at the patient care
center level.
Principally as a result of the above, income from operations in 1995
totalled approximately $5,843,000, an increase of $5,839,000 over the prior
year. Income from operations as a percent of net sales increased 11% in 1995
as compared to 1994.
Interest expense for the year ended December 31, 1995 amounted to
approximately $2,056,000, which is an increase of $310,000, or 17.8%, over the
$1,746,000 of interest expense incurred during the year ended December 31,
1994. The increase in interest expense was primarily attributable to the facts
that (i) average borrowings in 1995 were $1.8 million higher than the average
borrowing during 1994, and (ii) borrowing rates from the bank were 1% higher
in 1995 when compared to 1994.
19
<PAGE>
The provision for income taxes in 1995 amounted to approximately
$1,544,000, as compared to $358,000 in 1994. The increase of $1,186,000 was
primarily a result of a $5,839,000 increase in income from operations and a
reduction in the non-tax deductible amortization of excess cost over net
assets acquired, offset by the reversal of the valuation allowance relating to
state net operating loss carryforwards.
As a result of the above, the Company reported net income of $2,135,000,
or $.26 per share, for the year ended December 31, 1995, as compared to a net
loss of $2,687,000, or $.33 per share, for the year ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated working capital at December 31, 1996 was
approximately $25,499,000. Cash and cash equivalents available at that date
was approximately $6,572,000. The Company's cash resources were satisfactory
to meet its obligations during the year ended December 31, 1996. It is also
anticipated that such cash resources will adequately meet the Company's
obligations during 1997.
The Company's total long-term debt at December 31, 1996, including a
current portion of approximately $4,903,000, was approximately $69,200,000.
Such indebtedness included: (i) $57,000,000 borrowed under term loan
agreements with Banque Paribas; (ii) $6,000,000, net of discount, borrowed
under 8% Senior Subordinated Notes; and (iii) a total of $6,200,000 of other
indebtedness.
On November 1, 1996, the Company repaid the outstanding balance under its
$13.0 million revolving credit agreement and its senior term loans with
NationsBank, N.A. and $5.0 million of Convertible Junior Subordinated Notes,
with a portion of the proceeds received from new term loans provided on that
date by Banque Paribas (the "Bank"), as agent for a syndication of banks.
Under the terms of a new Financing and Security Agreement between the
Bank and the Company, the Bank provided up to $90.0 million principal amount
of senior financing (the "Senior Financing Facilities") that includes: (i) $57
million of term loans (the "Term Loans") for use in connection with Hanger's
acquisition of SEH, (ii) a $8.0 million revolving loan facility (the
"Revolver"), and (iii) up to $25 million principal amount of loans under an
acquisition loan facility (the "Acquisition Loans") for use in connection with
future acquisitions. As of December 31, 1996 the Company had no outstanding
balances under the Revolver or the Acquisition Loan Facilities.
Of the Term Loans, approximately $29.0 million principal amount (the "A
Term Loan") will be amortized in quarterly amounts and will mature on December
31, 2001, and $28.0 million principal amount (the "B Term Loan") will be
amortized in quarterly amounts and will mature on December 31, 2003. The final
maturity of any loans under the Revolver and Acquisition Loans will mature on
November 1, 2001. The Senior Financing Facilities provided for an initial
commitment fee of .5% on the total $90,000,000 facility. In addition, an
unused commitment fee of .5% of 1% per year on the unused portion of the
20
<PAGE>
Revolver and the Acquisition Loan facilities will be payable quarterly in
arrears.
The above Senior Financing Facilities are collateralized by a first
priority security interest in all of the common stock of Hanger's subsidiaries
and all assets of Hanger and its subsidiaries. At Hanger's option, the annual
interest rate will be adjusted to be either LIBOR plus 2.75% or a Base Rate
(as defined below) plus 1.75% in the case of the A Term Loan, Acquisition
Loans and Revolver borrowings, and adjusted LIBOR plus 3.25% or a Base Rate
plus 2.25% in the case of the B Term Loan. The "Base Rate" is defined as the
higher of (i) the federal funds rate plus .5%, or (ii) the prime commercial
lending rate of Chase Manhattan Bank, N.A., as announced from time to time.
All or any portion of outstanding loans under any of the Senior Financing
Facilities may be prepaid at any time and commitments may be terminated in
whole or in part at the option of Hanger without premium or penalty, except
that LIBOR - based loans may only be paid at the end of the applicable
interest period. Mandatory prepayments will be required in the event of
certain sales of assets, debt or equity financings and under certain other
circumstances.
In addition, on November 1, 1996, the Company borrowed $8.0 million from
the Bank and Chase Venture Capital Associates L.P. in the form of Senior
Subordinated Notes ("Subordinated Notes") with detachable Warrants.
Cash interest on the Subordinated Notes, which will mature on November 1,
2004, will be payable quarterly at an annual rate of 8%; provided, however,
that Hanger will be permitted, in lieu of cash interest, to pay interest in a
combination of cash and additional Subordinated Notes ("PIK Interest Notes")
at the above interest rate. In that event, interest paid in cash will be at an
annual rate of 3.2% and interest paid in the form of PIK Interest Notes will
be paid at an annual rate of 4.8%. The Subordinated Notes will be subordinated
to loans under the Senior Financing Facilities. Hanger will, at its option, be
entitled to redeem the Subordinated Notes at any time at their liquidation
value. Hanger must use 100% of the proceeds from any future public offering of
its equity securities to repurchase the Subordinated Notes, if permitted under
the Senior Financing Facilities.
The detachable Warrants issued by Hanger in conjunction with the
Subordinated Notes represent 1.6 million shares of Hanger Common Stock with an
exercise price equal to: (a) $4.01 as to 929,700 shares, and (b) $6.375 as to
670,300 shares. Up to 50% of the Warrants (representing up to 800,000 shares
of Hanger Common Stock) will be terminated upon the repayment of 100% of the
Subordinated Notes on or prior to May 1, 1998. An additional 5% of the
Warrants (representing up to 80,000 shares of Hanger Common Stock) will be
terminated upon the repayment of 100% of the Subordinated Notes on or prior to
November 1, 1997. Warrants will be terminated pro-rata across the above two
exercise prices.
The Company plans to finance future acquisitions through internally
generated funds or borrowings under the Acquisition Loans, the issuance of
notes or shares of common stock of the Company, or through a combination
thereof.
21
<PAGE>
The Company is actively engaged in ongoing discussions with prospective
acquisition candidates. The Company plans to continue to expand its operations
aggressively through acquisitions.
On November 1, 1996, Hanger acquired SEH, in a merger transaction
effected pursuant to an Agreement and Plan of Merger, dated as of July 29,
1996 (the "Merger Agreement"), by and among Hanger, SEH and JEH Acquisition
Corporation, a Georgia corporation ("Acquisition") wholly-owned by Hanger. The
Merger Agreement provided for the merger of Acquisition with and into SEH (the
"Merger"), as a result of which SEH became a wholly-owned subsidiary of
Hanger, effective November 1, 1996. Pursuant to the Merger Agreement, Hanger
paid a total of $44 million and issued a total of approximately one million
shares of Hanger common stock in exchange for all of SEH's outstanding common
stock on November 1, 1996, and paid an additional $1,783,000 to former SEH
shareholders on March 27, 1997 pursuant to provisions in the Merger Agreement
calling for a post-closing adjustment.
OTHER
Inflation has not had a significant effect on the Company's operations,
as increased costs to the Company generally have been offset by increased
prices of products and services sold.
The Company has entered into an interest rate swap agreement to reduce
the impact of changes in interest rates on its A Term Loan Commitment. At
December 31, 1996, the Company had an outstanding interest rate swap agreement
with a commercial bank, having a total notional principal amount of
$28,500,000. The agreement effectively minimizes the Company's base interest
rate exposure between a floor of 5.32% and a cap of 7%. The interest rate swap
agreement matures on September 30, 1999. The Company is exposed to credit loss
in the event of non-performance by the other party to the interest rate swap
agreement. However, the Company does not anticipate non-performance by the
counterparty. All other debt accrues interest at a fixed rate except the B
Term Loan Commitment which accrues interest at a floating rate. A material
change in interest rates could have a significant impact on the Company's
operating results.
This report contains forward-looking statements setting forth the
Company's beliefs or expectations relating to future revenues and
profitability. Actual results may differ materially from projected or expected
results due to changes in the demand for the Company's O&P services and
products, uncertainties relating to the results of operations or recently
acquired and newly acquired O&P patient care practices, the Company's ability
to attract and retain qualified O&P practitioners, governmental policies
affecting O&P operations and other risks and uncertainties affecting the
health-care industry generally.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
22
<PAGE>
The Company primarily provides customized devices or services throughout
the United States and is reimbursed, in large part, by the patients' third
party insurers or governmentally funded health insurance programs. The ability
of the Company's debtors to meet their obligations is principally dependent
upon the financial stability of the insurers of the Company's patients and
future legislation and regulatory actions.
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") 128, "Earnings Per Share." This
statement established standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or
potential common stock. This statement is effective for financial statements
issued for periods ending after December 15, 1997. Earlier application is not
permitted. This statement requires reinstatement of all prior-period EPS data
presented. The Company is currently evaluating the impact, if any, adoption of
SFAS 128 will have on its financial statements.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and schedules required hereunder
and contained herein are listed under Item 14(a) below. The Company is not
subject to the requirement to file selected quarterly financial data under
Item 302 of Regulation S-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
24
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instruction G(3) of Form 10-K, the information called
for by this item regarding directors is hereby incorporated by reference from
the Company's definitive proxy statement or amendment hereto to be filed
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year covered by this report. Information regarding the Company's executive
officers is set forth under Item 4A of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Pursuant to General Instruction G(3) of Form 10-K, the information called
for by this item is hereby incorporated by reference from the Company's
definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Pursuant to General Instruction G(3) of Form 10-K, the information called
for by this item is hereby incorporated by reference from the Company's
definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction G(3) of Form 10-K, the information called
for by this item is hereby incorporated by reference from the Company's
definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) Financial Statements and Financial Statement Schedule:
(1) Financial Statements:
HANGER ORTHOPEDIC GROUP, INC.
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1995
and 1996
25
<PAGE>
Consolidated Statements of Operations for the years
ended December 31, 1994, 1995 and 1996
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for the years
ended December 31, 1994, 1995 and 1996
Notes to Consolidated Financial Statements
(2) Financial Statements Schedule:
Report of Independent Accountants
Schedule II - Valuation and qualifying accounts
All other schedules are omitted either because they are not applicable or
required, or because the required information is included in the financial
statements or notes thereto:
<TABLE>
<CAPTION>
Exhibit No. Document
<S> <C>
(b) Reports on Form 8-K:
A Form 8-K reporting the Registrant's acquisition of J.E.
Hanger, Inc. of Georgia, effective November 1, 1996, was
filed on November 12, 1996.
(c) Exhibits: The following exhibits are filed herewith or
incorporated herein by reference:
3(a) Certificate of Incorporation, as amended, of the Registrant.
(Incorporated herein by reference to Exhibit 3.1 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1988.)
3(b) Certificate of Amendment of the Registrant's Certificate of
Incorporation (which, among other things, changed the
Registrant's corporate name from Sequel Corporation to Hanger
Orthopedic Group, Inc.), as filed on August 11, 1989 with the
Office of the Secretary of State of Delaware. (Incorporated
herein by reference to Exhibit 3(b) to the Registrant's
Current Report on Form 10-K dated February 13, 1990.)
3(c) Certificate of Agreement of Merger of Sequel Corporation and
Delaware Sequel Corporation. (Incorporated herein by
reference to Exhibit 3.1(a) to the Registrant's Annual Report
on Form 10-K for the fiscal year ended September 30, 1988.)
26
<PAGE>
3(d) Certificate of Ownership and Merger of Hanger Acquisition
Corporation and J. E. Hanger, Inc. as filed with the Office
of the Secretary of the State of Delaware on April 11, 1989.
(Incorporated herein by reference to Exhibit 2(f) to the
Registrant's Current Report on Form 8-K dated May 15, 1989.)
3(e) Certificate of Designation, Preferences and Rights of
Preferred Stock of the Registrant as filed on February 12,
1990 with the Office of the Secretary of State of Delaware.
(Incorporated herein by reference to Exhibit 3(a) to the
Registrant's Current Report on Form 8-K dated February 13,
1990.)
3(f) By-Laws of the Registrant, as amended. (Incorporated herein
by reference to Exhibit 3 to the Registrant's Current Report
on Form 8-K dated May 15, 1989.)
10(a) Registration Agreement, dated May 15, 1989, between Sequel
Corporation, First Pennsylvania Bank, N.A., Gerald E. Bisbee,
Jr., Ivan R. Sabel, Richard A. Stein, Ronald J. Manganiello,
Joseph M. Cestaro and Chemical Venture Capital Associates.
(Incorporated herein by reference to Exhibit 10(l) to the
Registrant's Current Report on Form 8-K dated May 15, 1989.)
10(b) First Amendment dated as of February 12, 1990, to the
Registration Agreement, dated as of May 15, 1989, by and
among Hanger Orthopedic Group, Inc., First Pennsylvania Bank,
N.A., Ivan R. Sabel, Richard A. Stein, Ronald J. Manganiello,
Joseph M. Cestaro and Chemical Venture Capital Associates.
(Incorporated herein by reference to Exhibit 10(m) to the
Registrant's Current Report on Form 8-K dated February 13,
1990.)
10(c) Fifth Amendment, dated as of November 8, 1990, to the Stock
and Note Purchase Agreement, dated as of February 28, 1989
and as amended on May 9, 1989, May 15, 1989, February 12,
1990, and June 19, 1990 by and among J. E. Hanger, Inc., as
successor to Hanger Acquisition Corporation, Ronald J.
Manganiello, Joseph M. Cestaro, Chemical Venture Capital
Associates and Chemical Equity Associates. (Incorporated
herein by reference to Exhibit 10(f) to the Registrant's
Current Report on Form 8-K filed on November 21, 1990.)
10(d) Form of Stock Option Agreements, dated as of August 13, 1990,
between Hanger Orthopedic Group, Inc. and Thomas P. Cooper,
James G. Hellmuth, Walter F. Abendschein, Jr., Norman Berger,
Bruce B. Grynbaum and Joseph S. Torg. (Incorporated herein by
reference to Exhibit 10(rrr) to the Registrant's Registration
Statement on Form S-2, File No. 33-37594.) *
* Management contract or compensatory plan
27
<PAGE>
10(e) Convertible Junior Subordinated Note Agreement, dated as of
March 1, 1992, from Hanger Orthopedic Group, Inc. to R. S.
Lauder, Gaspar & Co., L.P. regarding $4,000,000 8.5%
Convertible Junior Subordinated Notes due March 31, 1999.
(Incorporated herein by reference to Exhibit 10(jjjj) of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991.)
10(f) Convertible Junior Subordinated Note Agreement dated as of
May 7, 1993, from Hanger Orthopedic Group, Inc. to R.S.
Lauder, Gaspar & Co., L.P. regarding $1,000,000 8.25%
Convertible Junior Subordinated Notes due March 31, 1999.
(Incorporated herein by reference to Exhibit 10 (x) of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993.)
10(g) Amendment No. 1, dated as of May 7, 1993, to the Convertible
Junior Subordinated Note Agreement referred to in Exhibit (x)
above. (Incorporated herein by reference to Exhibit 10 (y) of
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993.)
10(h) Employment and Non-Compete Agreement, dated as of May 16,
1994, between Hanger Orthopedic Group, Inc. and Ivan R.
Sabel. (Incorporated herein by reference to Exhibit 10 (xx)
of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994.) *
10(i) Employment and Non-Compete Agreement, dated as of May 16,
1994, between Hanger Orthopedic Group, Inc. and Richard A.
Stein. (Incorporated herein by reference to Exhibit 10 (yy)
of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994.) *
10(j) Agreement and Plan of Merger, dated as of July 29, 1996,
among Hanger Orthopedic Group, Inc., SEH Acquisition
Corporation and J.E. Hanger, Inc. of Georgia. (Incorporated
herein by reference to Exhibit 2 to the Registrant's Current
Report on Form 8-K filed on November 12, 1996.)
10(k) Credit Agreement, dated November 1, 1996, among Hanger
Orthopedic Group, Inc., various banks and Banque Paribas, as
agent. (Incorporated herein by reference to Exhibit 10(a) to
the Registrant's Current Report on Form 8-K filed on November
12, 1996.)
10(l) Senior Subordinated Note Purchase Agreement, dated as of
November 1, 1996, among Hanger Orthopedic Group, Inc. and the
purchasers listed therein. (Incorporated hereby by reference
to Exhibit 10(b) to the Registrant's Current Report on Form
8-K filed on November 12, 1996.)
* Management contract or compensatory plan
28
<PAGE>
10(m) Warrants to purchase Common Stock of Hanger Orthopedic Group,
Inc. issued November 1, 1996. (Incorporated herein by
reference to Exhibit 10(c) to the Registrant's Current Report
on Form 8-K filed on November 12, 1996.)
10(n) 1991 Stock Option Plan of the Registrant. (Incorporated
herein by reference to Exhibit 4(b) to the Registrant's
Registration Statement on Form S-8 (File No. 33-48265).)*
10(o) 1993 Non-Employee Directors Stock Option Plan of the
Registrant. (Incorporated herein by reference to Exhibit 4(b)
to the Registrant's Registration Statement on Form S-8 (File
No. 33-63191).)*
10(p) Employment and Non-Compete Agreement, dated as of November 1,
1996, and Amendment No. 1 thereto, dated January 1, 1997,
between the Registrant and H.E. Thranhardt. (Filed
herewith.)*
10(q) Employment and Non-Compete Agreement, dated as of November 1,
1996, between the Registrant and John McNeill. (Filed
herewith.)*
10(r) Employment and Non-Compete Agreement, dated as of November 1,
1996, between the Registrant and Alice Tidwell. (Filed
herewith.)*
11 Computation of earnings per share.
22 List of Subsidiaries of the Registrant.
24 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule.
</TABLE>
* Management contract or compensatory plan
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
HANGER ORTHOPEDIC GROUP, INC.
<TABLE>
<S> <C>
Dated: March 28, 1997 By: /s/IVAN R. SABEL
--------------------------
Ivan R. Sabel, CPO
Chief Executive Officer
(Principal Executive Officer)
Dated: March 28, 1997 By: /s/RICHARD A. STEIN
--------------------------
Richard A. Stein
Vice President - Finance
(Principal Financial and
Accounting Officer)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Dated: March 28, 1997 /s/IVAN R. SABEL
--------------------------
Ivan R. Sabel, CPO
Chief Executive Officer
and Director (Principal
Executive Officer)
Dated: March 28, 1997 /s/RICHARD A. STEIN
--------------------------
Richard A. Stein
Vice President - Finance
(Principal Financial and
Accounting Officer)
Dated: March 28, 1997 /s/MITCHELL J. BLUTT
--------------------------
Mitchell J. Blutt, M.D.
Director
30
<PAGE>
Dated: March 28, 1997 /s/EDMOND E. CHARRETTE
--------------------------
Edmond E. Charrette, M.D.
Director
Dated: March 28, 1997 /s/THOMAS P. COOPER
--------------------------
Thomas P. Cooper, M.D.
Director
Dated: March 28, 1997 /s/ROBERT J. GLASER
--------------------------
Robert J. Glaser, M.D.
Director
Dated: March 28, 1997 /s/JAMES G. HELLMUTH
--------------------------
James G. Hellmuth
Director
Dated: March 28, 1997 /s/WILLIAM L. MCCULLOCH
--------------------------
William L. McCulloch
Director
Dated: March 28, 1997 /s/DANIEL A. MCKEEVER
--------------------------
Daniel A. McKeever. CP
Director
Dated: March 28, 1997
--------------------------
Walter J. McNerney
Director
Dated: March 28, 1997
--------------------------
H.E. Tranhardt, CPO
Director
</TABLE>
31
<PAGE>
<TABLE>
INDEX TO FINANCIAL STATEMENTS
HANGER ORTHOPEDIC GROUP, INC.
<S> <C>
Report of Independent Accountants F-1
Consolidated Balance Sheets as of December 31, 1995
and 1996 F-2
Consolidated Statements of Operations for the years
ended December 31, 1994, 1995 and 1996 F-4
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1994,
1995 and 1996 F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1994, 1995 and 1996 F-6
Notes to Consolidated Financial Statements F-7
FINANCIAL STATEMENT SCHEDULE
Report of Independent Accountants S-1
Schedule II - Valuation and Qualifying Accounts S-2
</TABLE>
32
<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 flow for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hanger
Orthopedic Group, Inc., and Subsidiaries as of December 31, 1995 and 1996, and
the consolidated results of their operations and their cash flow for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 21, 1997, except as to the
information presented in Note D, for
which the date is March 27, 1997
F-1
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------------
1995 1996
------------- ----------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $1,456,305 $6,572,402
Accounts receivable, less allowances for doubtful
accounts of $1,144,000 and $2,478,800 in 1995 and 1996,
respectively 13,324,991 24,321,872
Inventories 10,312,289 15,916,638
Prepaid and other assets 1,040,914 1,595,169
Deferred income taxes 804,499 3,159,280
------------- -------------
Total current assets 26,938,998 51,565,361
------------- -------------
PROPERTY, PLANT AND EQUIPMENT
Land 2,991,245 4,269,045
Buildings 2,592,214 8,017,547
Machinery and equipment 3,654,780 6,275,307
Furniture and fixtures 1,575,493 2,095,900
Leasehold improvements 1,184,782 2,139,207
------------- -------------
11,998,514 22,797,006
Less accumulated depreciation and amortization 4,232,858 5,497,809
------------- -------------
7,765,656 17,299,197
------------- -------------
INTANGIBLE ASSETS
Excess cost over net assets acquired 27,133,528 63,935,447
Non-compete agreements 4,786,371 1,981,329
Other intangible assets 3,825,240 6,152,607
------------- -------------
35,745,139 72,069,383
Less accumulated amortization 9,035,394 6,917,960
------------- -------------
26,709,745 65,151,423
------------- -------------
OTHER ASSETS
Other 385,662 925,446
------------- -------------
TOTAL ASSETS $61,800,061 $134,941,427
============= =============
</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,
--------------------------------
1995 1996
------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 1,828,953 $ 4,902,572
Accounts payable 1,612,401 4,141,993
Accrued expenses 710,510 7,815,028
Customer deposits 489,758 578,219
Accrued compensation related cost 1,495,013 8,321,395
Deferred revenue 180,587 306,998
------------ -------------
Total current liabilities 6,317,222 26,066,205
------------ -------------
Long-term debt 22,925,124 64,297,801
Deferred income taxes 706,965 2,377,627
Other liabilities 305,499 2,188,278
Mandatorily redeemable preferred stock class C, 300 shares authorized,
liquidation preference of $500 per share (See Note N) 253,886 277,701
Mandatorily redeemable preferred stock class F, 100,000 shares authorized,
liquidation preference of $1,000 per share (See Note N)
Commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 25,000,000 shares authorized,
8,424,039 and 9,449,129 shares issued and 8,290,544 and
9,315,634 shares outstanding in 1995 and 1996, respectively 84,241 94,492
Additional paid-in capital 33,574,058 41,008,363
Accumulated deficit (1,711,372) (713,478)
------------ -------------
31,946,927 40,389,377
Treasury stock, cost --(133,495 shares) (655,562) (655,562)
------------ -------------
31,291,365 39,733,815
------------ -------------
TOTAL LIABILITES & SHAREHOLDERS' EQUITY $61,800,061 $134,941,427
============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
<TABLE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
<CAPTION>
1994 1995 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Net sales $50,300,297 $52,467,899 $66,805,944
Cost of products and services sold 23,208,944 24,572,089 32,233,373
--------------- --------------- ---------------
Gross profit 27,091,353 27,895,810 34,572,571
Selling, general and administrative 21,340,148 19,361,701 24,549,802
Depreciation and amortization 2,435,727 2,005,113 2,016,390
Amortization of excess cost over net assets acquired 701,018 686,275 832,075
Restructuring cost 459,804
Loss from disposal of assets 2,150,310
Acquisition costs 1,297,819
Integration costs 1,181,694
--------------- --------------- ---------------
Income from continuing operations 4,346 5,842,721 4,694,791
Interest expense (1,745,781) (2,056,140) (2,546,561)
Other expense, net (180,940) (106,644) (177,216)
--------------- --------------- ---------------
Income (loss) from continuing operations before
taxes and extraordinary item (1,922,375) 3,679,937 1,971,014
Provision for income taxes 358,029 1,544,498 889,886
--------------- --------------- ---------------
Income (loss) from continuing operations before
extraordinary item (2,280,404) 2,135,439 1,081,128
Loss from discontinued operations (247,655)
Loss from sale of discontinued operations (159,379)
--------------- --------------- ---------------
Income (loss) before extraordinary item (2,687,438) 2,135,439 1,081,128
Extraordinary loss on early extinguishment of debt, net of tax (83,234)
--------------- --------------- ---------------
Net income (loss) ($2,687,438) $2,135,439 $997,894
=============== =============== ===============
Income (loss) from continuing operations before extraordinary
item applicable to common stock ($2,300,286) $2,113,640 $1,057,313
=============== =============== ===============
INCOME (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations before extraordinary item ($.28) $0.26 ($0.12)
Loss from discontinued operations (0.03)
Loss from sale of discontinued operations (0.02)
Extraordinary loss on early extinguishment of debt (0.01)
--------------- --------------- ---------------
Net income (loss) per share ($0.33) $0.26 $0.11
=============== =============== ===============
Weighted average number of common shares outstanding
used in computing net income (loss) per share 8,290,276 8,290,544 8,663,161
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
<TABLE>
HANGER ORTHOPEDIC GROUP, INC
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1994, 1995 and 1996
<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 SEH 1,000,000 10,000 5,240,000 5,250,000
Issuance of Warrants in
connection with the purchase
of SEH 133,000 133,000
Issuance of Warrants in
connection with the Senior
Subordinated Note Agreement 2,038,500 2,038,500
Net Income 997,894 997,894
----------- --------- ------------- ------------ ---------- ------------ ------------
Balance, December 31, 1996 9,315,634 $94,492 $41,008,363 ($713,478) ($655,562) $39,733,815
=========== ========= ============= ============ ========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
<TABLE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Years Ended December 31,
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
--------------- --------------- ---------------
Cash flow from operating activities:
Net income (loss) ($2,687,438) $2,135,439 $997,894
Adjustments to reconcile net income (loss) to net cash provided by
(used in) continuing operations:
Discontinued operations 426,991
Loss from sale of discontinued operations 274,791
Loss from sale of disposal of assets 2,150,310
Provision for bad debt 973,678 1,008,731 1,629,065
Amortization of deferred compensation 4,197
Depreciation and amortization 2,435,727 2,005,113 2,016,390
Amortization of excess cost over net assets acquired 701,018 686,275 832,075
Amortization of debt discount 42,469
Deferred taxes (629,674) 631,899 (684,119)
Extraordinary loss on early extinguishment of debt 138,724
Changes in assets and liabilities, net of effects from acquired companies:
Accounts receivable (3,639,274) (1,922,572) (2,772,619)
Inventories (1,169,232) (800,933) 737,104
Prepaid and other assets 131,714 108,112 (199,638)
Other assets 3,782 151,367 27,342
Accounts payable (54,555) 48,462 361,441
Accrued expenses 776,860 (618,105) 709,638
Accrued wages & payroll taxes (116,852) 72,272 1,942,581
Customer deposits 143,070 97,036 88,461
Deferred revenue (22,691) 82,897 126,411
Other liabilities 156,884 35,628 (66,459)
--------------- --------------- ---------------
Net cash provided by (used in) continuing operations (140,694) 3,721,621 5,926,760
Net cash used in discontinued operations (172,146)
--------------- --------------- ---------------
Net cash provided by (used in) operating activities (312,840) 3,721,621 5,926,760
--------------- --------------- ---------------
Cash flow from investing activities:
Purchase of fixed assets (1,114,551) (934,798) (1,239,364)
Acquisitions, net of cash (2,599,133) (273,939) (37,671,754)
Purchase of patent (59,382) (70,552) (31,840)
Proceeds from sale of certain assets 180,806
Purchase of non-compete agreements (480,500) (35,000) (200,000)
Decrease in other intangibles (265,624) (24,321) (7,596)
--------------- --------------- ---------------
Net cash used in investing activities (4,338,384) (1,338,610) (39,150,554)
--------------- --------------- ---------------
Cash flow from financing activities:
Net borrowings (repayments) under revolving credit agreement 2,635,449 (100,000) (12,700,000)
Proceeds from the sale of common stocks 46,871
Proceeds from long-term debt 5,000,000 65,000,000
Repayment of debt (3,276,608) (1,882,706) (11,040,029)
(Increase) decrease in financing costs (63,393) 7,619 (2,966,951)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 4,295,448 (1,975,087) 38,339,891
--------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents (355,776) 407,924 5,116,097
Cash and cash equivalents at beginning of year 1,404,157 1,048,381 1,456,305
--------------- --------------- ---------------
Cash and cash equivalents at end of year $1,048,381 $1,456,305 $6,572,402
=============== =============== ===============
</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. (the "Company") is one of the nation's
largest practice management companies in the orthotic and prosthetic ("O&P")
rehabilitation industry. In addition to providing O&P patient care services
through its operating subsidiaries, the Company also manufactures and
distributes components and finished patient care products to the O&P industry
primarily in the United States. Hanger's largest subsidiary, Hanger
Prosthetics & Orthotics, Inc. formerly known as J.E. Hanger, Inc., was founded
in 1861 by a Civil War amputee and is the oldest company in the O&P industry
in the United States. Orthotics is the design, fabrication, fitting and
supervised use of custom-made braces and other devices that provide external
support to treat musculoskeletal disorders. Prosthetics is the design,
fabrication and fitting of custom-made artificial limbs.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS: Cash includes currency on hand and demand
deposits with high quality financial institutions. Management considers all
highly liquid investments with original maturities of three months or less at
the date of purchase to be cash equivalents. At various times throughout the
year, the Company maintains cash balances in excess of FDIC limits.
FAIR VALUE OF FINANCIAL INSTRUMENTS: At December 31, 1995 and 1996, the
carrying value of financial instruments such as cash and cash equivalents,
trade receivables, trade payables, and debt approximates fair value.
INVENTORIES: Inventories, which consist principally of purchased parts,
are stated at the lower of cost or market using the first-in, first-out (FIFO)
method.
LONG-LIVED ASSET IMPAIRMENT: Effective January 1, 1996, the Company
adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." The provisions of Statement of
Financial Accounting Standards ("SFAS") 121 require the Company to review its
long lived assets for impairment on an exception basis whenever events or
F-7
<PAGE>
changes in circumstances indicate that the carrying amount of the assets may
not be recoverable through future cash flows. If it is determined that an
impairment loss has occurred based on expected cash flows, then the loss is
recognized in the income statement. The adoption of SFAS 121 did not have an
effect on the Company's consolidated financial statements.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded
at cost. The cost and related accumulated depreciation of assets sold, retired
or otherwise disposed of are removed from the respective accounts, and any
resulting gains or losses are included in the statement of operations.
Depreciation is computed for financial reporting purposes using the
straight-line method over the estimated useful lives of the related assets.
Depreciation expense was approximately $1,090,000, $1,136,000 and $1,288,000
for the years ended December 31, 1994, 1995 and 1996, respectively.
INTANGIBLE ASSETS: Intangible assets, including non-compete agreements,
are recorded based on agreements entered into by the Company and are being
amortized over their estimated useful lives ranging from 5 to 7 years using
the straight-line method. Other intangible assets are recorded at cost and are
being amortized over their estimated useful lives of up to 16 years using the
straight-line method. Excess cost over net assets acquired represents the
excess of purchase price over the value assigned to net identifiable assets of
purchased businesses and is being amortized using the straight-line method
over 40 years. It is the Company's policy to periodically review and evaluate
whether there has been a permanent impairment in the value of excess cost over
net assets acquired and other intangible assets. Factors considered in the
evaluation include current operating results, trends, prospects and
anticipated undiscounted future cash flows. Fully amortized intangible assets
amounting to approximately $3,225,000 were removed from the financial
statements at December 31, 1996.
PRE-OPENING COSTS: The Company capitalizes certain costs relating to the
pre-opening of new patient care centers. These costs are amortized over a
twelve-month period using the straight-line method commencing on the date in
which the patient care center opens.
REVENUE RECOGNITION: Revenue on the sale of orthotic and prosthetic
devices is recorded when the device is accepted by the patient. Revenues from
referral service contracts is recognized over the term of the contract.
Deferred revenue represents billings made prior to the final fitting and
acceptance by the patient and unearned service contract revenue. Revenue is
recorded at its net realizable value taking into consideration all
governmental and contractual discounts.
CREDIT RISK: The Company primarily provides customized devices or
services throughout the United States and is reimbursed by the patients'
third-party insurers or governmentally funded health insurance programs. The
Company performs ongoing credit evaluations of its distribution customers. The
accounts receivable are not collateralized. The ability of the Company's
debtors to meet their obligations is dependent upon the financial stability of
the insurers of the Company's customers and future legislation and regulatory
actions. Additionally, the Company maintains reserves for potential losses
from these receivables that historically have been within management's
expectations.
F-8
<PAGE>
INCOME TAXES: Income taxes are determined in accordance with SFAS 109,
which requires recognition of deferred income tax liabilities and assets for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income tax
liabilities and assets are determined based on the difference between
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
SFAS 109 also provides for the recognition of deferred tax assets if it is
more likely than not that the assets will be realized in future years.
NET INCOME (LOSS) PER SHARE: Net income per common share is calculated
using the weighted average of common and common-equivalent shares outstanding
during the year. Common-equivalent shares are attributable to unexercised
stock options and warrants. In 1994, 1995 and 1996, common-equivalents which
would be considered in a fully diluted calculation are not included in the per
share calculation as the effect is not material. Income (loss) from continuing
operations before extraordinary item applicable to common stock has been
adjusted for the dividends declared applicable to certain classes of
cumulative preferred stock.
STOCK-BASED COMPENSATION: Compensation costs attributable to stock option
and similar plans are recognized based on any difference between the quoted
market price of the stock on the date of the grant over the amount the
employee is required to pay to acquire the stock (the intrinsic value method
under Accounting Principles Board Opinion 25). Such amount, if any, is accrued
over the related vesting period, as appropriate. SFAS 123, "Accounting for
Stock-Based Compensation," requires companies electing to continue to use the
intrinsic value method to make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting had been
applied. The Company has adopted the disclosure only provisions of SFAS 123.
NEW ACCOUNTING STANDARDS: In March 1997, the Financial Accounting
Standards Board issued SFAS 128, "Earnings Per Share." This statement
established standards for computing and presenting earnings per share (EPS)
and applies to entities with publicly held common stock or potential common
stock. This statement is effective for financial statements issued for periods
ending after December 15, 1997. Earlier application is not permitted. This
statement requires reinstatement of all prior-period EPS data presented. The
Company is currently evaluating the impact, if any, adoption of SFAS 128 will
have on its financial statements.
RECLASSIFICATIONS: Certain previously reported amounts have been
reclassified to conform with the current year presentation.
F-9
<PAGE>
NOTE C - SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION
<TABLE>
The following are the supplemental disclosure requirements for the
statements of cash flows:
<CAPTION>
For the Years Ended December 31
--------------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash paid during the period for:
Interest $1,690,742 $2,166,877 $2,273,629
Income taxes 212,000 712,800 1,893,990
Non-cash financing and investing activities:
Preferred dividends declared 19,882 21,799 23,815
Issuance of notes in connection with acquisition 1,925,000 175,000
Issuance of common stock in connection with acquisition 200,000 5,250,000
Issuance of warrants in connection with acquisition 133,000
Issuance of warrants in connection with Senior 2,038,500
Issuance of common stock in connection with Subordinated Notes
exercise of warrants 113
</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 ("SEH"), pursuant to the terms of a Merger
Agreement. As of the acquisition date, SEH, headquartered in Alpharetta,
Georgia, operated 93 patient care centers and 5 warehouses located primarily
in the Mid-Atlantic and Southeastern United States. Under the terms of the
agreement which became effective on November 1, 1996, the Company paid SEH
shareholders $44 million in cash and issued one million shares of Company
common stock and paid an additional $1,783,000 to former SEH shareholders on
March 27, 1997 pursuant to provisions in the Merger Agreement calling for a
post-closing adjustment. In addition the Company issued 35,000 warrants to one
SEH noteholder in order to facilitate assumption of this debt under the same
terms and conditions that had existed prior to the acquisition. Included in
accrued expenses at December 31, 1996, is approximately $3,119,000 and
$1,554,000 of severence and relocation costs incurred in connection with the
acquisition of SEH.
All of the above acquisitions have been accounted for as business
combinations in accordance with the purchase method. The results of operations
for these acquisitions are included in the Company's results of operations
from their date of acquisition. Excess cost over net assets acquired in these
F-10
<PAGE>
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
Primary income per common share $.27 $.12
Fully diluted 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.
NOTE E - DISCONTINUED OPERATIONS
In the fourth quarter of 1993, the Company declared its intent to seek a
buyer for the assets of its subsidiary, Apothecaries, Inc. ("Apothecaries").
On September 30, 1994, the Company sold those assets for $181,000 in cash and
reported a loss on the sale of $159,379 (net of a tax benefit of $115,412).
Apothecaries has been classified in the Consolidated Statements of Operations
as a discontinued operation, with all revenue, expenses and other income
having been excluded from continuing operations.
The operating results of Apothecaries for the nine months ended September
30, 1994, was as follows:
<TABLE>
<CAPTION>
1994
----
<S> <C>
Sales $1,294,341
Loss before taxes (426,991)
Tax benefit (179,336)
-----------
Loss from discontinued $ (247,655)
operations ===========
</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
F-11
<PAGE>
consolidate the Company's operations. The restructuring charges include future
rental payments on buildings that the Company has abandoned, for which the
leases cannot be cancelled and subleasing attempts have been unsuccessful.
NOTE G - INVENTORY
Inventories at December 31, 1995 and 1996 consist of the following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Raw materials $ 6,603,619 $ 7,504,442
Work in-process 1,107,289 831,632
Finished goods 2,601,381 7,580,564
------------ ------------
$10,312,289 $15,916,638
============ ============
</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% effect interest
rate 6,003,969
Revolving credit facility expiring in June, 1997
with interest payable monthly at the Company's
option of either the Bank's prime rate plus .25%
or the three month LIBOR plus 2.50% (8.175% and
8.75% at December 31, 1995) $12,700,000
Senior term loans, with principal and interest
payable monthly and with one loan at the Bank's
prime rate plus .75%, with the remaining loans at
the Company's option of either the Bank's prime
rate plus .50% or the three-month LIBOR plus 2.75%
(9.25% and 8.44% at December 31, 1995) with
balloon payments due in November and December 1998 4,596,663
8.5% Convertible Junior Subordinated Note 4,000,000
F-12
<PAGE>
8.25% Convertible Junior Subordinated Note 1,000,000
Subordinated seller notes, non-collateralized net
of unamortized discount of $612,696, with
principle and interest payable in either monthly
or quarterly installments at effective interest
rates ranging from 6% to 11%, maturing through
January 2009 2,375,609 5,574,793
Other miscellaneous obligations with principle and
interest payable in either monthly or annual
installments at interest rates ranging from 6% to
10% maturing through December 2007 81,805 621,611
----------- -----------
24,754,077 69,200,373
Less current portion 1,828,953 4,902,572
----------- -----------
$22,925,124 $64,297,801
=========== ===========
</TABLE>
In November 1996, the Company entered into a new $90,000,000 Credit
Agreement with a syndication of banks which provides for (i) a "A Term Loan"
in the principal amount of $29,000,000 with scheduled incrementally varying
quarterly repayments commencing March 1997 through December 2001, (ii) a "B
Term Loan" in the principal amount of $28,000,000 with scheduled varying
quarterly repayments commencing March 1997 through December 2003, (iii) a
$25,000,000 Acquisition Loan Commitment and, (iv) a $8,000,000 Revolving Loan
Commitment.
The Acquisition Loan Commitment and Revolving Loan Commitment bear
interest at the Company's option of either the Prime Lending Rate plus 1.75%,
or the one, three or six month LIBOR plus 2.75%. The Credit Agreement is
collateralized by substantially all the assets of the Company and contains
certain affirmative and negative covenants customary in an agreement of this
nature.
The Credit Agreement provides for an initial commitment fee of 2.625% on
the total $90,000,000 facility and an annual fee of .5% per year on the
aggregate unused portion of the Credit Agreement. As of December 31, 1996, the
Company had no outstanding balances on both the Acquisition and Revolving Loan
Commitments.
The Company has entered into an interest rate swap agreement to reduce
the impact of changes in interest rates on its A Term Loan Commitment. At
December 31, 1996, the Company had an outstanding interest rate swap agreement
with a commercial bank, having a total notional principle amount of
$28,500,000. The agreement effectively minimizes the Company's base interest
rate exposure between a floor of 5.32% and a cap of 7%. The interest rate swap
agreement matures on September 30, 1999. The Company is exposed to credit loss
in the event of non-performance by the other party to the interest rate swap
agreement. However, the Company does not anticipate non-performance by the
counterparties.
In November 1996, the Company also entered into a Senior Subordinated
Note Purchase Agreement in the principal amount of $8,000,000 which is due in
its entirety November 2004 bearing interest at 8%. Upon entering into this
Agreement, the Company issued 1,600,000 warrants to noteholders. This
transaction resulted in the Company recording a debt discount of $2,038,500
which is being amortized ratably over the life of the notes. The Note Purchase
F-13
<PAGE>
Agreement is subordinate to the Credit Agreement and contains covenants
restricting the payment of dividends, the incurrence of indebtedness and the
making of acquisitions and other transactions. It should be noted that a
shareholder owns 50% of the Senior Subordinated Notes.
The Company used the proceeds of the A Term Loan, B Term Loan and Senior
Subordinated Notes to finance the acquisition of SEH and to repay all amounts
then outstanding under the Revolving credit facility, Senior term loans, the
8.5% Convertible Junior Subordinated Note and the 8.25% Convertible Junior
Subordinate Note. In connection with this transaction, the Company recorded an
extraordinary charge of $138,724 pre-tax, $83,234 after tax, or $.01 per share
for the write-off of unamortized discounts and financing costs, in 1996.
Maturities of long-term debt, at December 31, 1996, are as follows:
<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>
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 extra-
ordinary item (55,489)
------------ ------------ ------------
Provision for income taxes $ 63,281 $ 1,544,498 $ 834,397
============ ============ ============
</TABLE>
F-14
<PAGE>
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>
Temporary differences and carryforwards 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>
F-15
<PAGE>
For Federal and State tax purposes at December 31, 1996, the Company has
available approximately $938,000 of net operating loss carryforwards expiring
from 1998 through 2007 and are subject to a limitation in their utilization of
approximately $149,000 per year as a result of several changes in shareholder
control.
At December 31, 1995, the Company evaluated the realizability of the
state net operating losses and, based upon projections of taxable income by
state, concluded that a valuation allowance was not necessary. The remaining
balance of the deferred tax assets should be realized through future taxable
income and the reversal of taxable temporary differences.
NOTE J - DEFERRED COMPENSATION
In conjunction with the SEH acquisition, the Company assumed the unfunded
deferred compensation plan that had been established for certain key SEH
officers. The plan accrues benefits ratably over the period of active
employment from the time the contract is entered into to the time the
participant retires. Participation had been determined by SEH's Board of
Directors. The Company has purchased individual life insurance contracts with
respect to each employee covered by this plan. The Company is the owner and
beneficiary of the insurance contracts. The accrual related to the deferred
compensation arrangements amounted to approximately $1,985,000 at December 31,
1996.
NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES
The Company is engaged in legal proceedings in the normal course of
business. The Company believes that any unfavorable outcome from these suits
not covered by insurance would not have a material adverse effect on the
financial statements of the Company.
NOTE L - OPERATING LEASES
The Company leases office space under noncancellable operating leases.
Certain of these leases contain escalation clauses based on the consumer price
index. Future minimum rental payments, by year and in the aggregate, under
operating leases with terms of one year or more consist of the following at
December 31, 1996:
<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. ("JEH"), a
wholly-owned subsidiary of the Company. The Company matched the participant's
contributions and made discretionary matching contributions. On January 1,
1993, the Company froze the Plan such that no new employees of JEH were able
F-16
<PAGE>
to participate. On December 31, 1995, the Company terminated the Plan. There
was no employer contribution made to the Plan in 1995. Benefit expense was
$130,000 for the year ended December 31, 1994.
The Company maintains a separate defined contribution profit sharing and
401(k) plan ("SEH Plan") covering all the employees of SEH, a recently
acquired wholly-owned subsidiary of the Company. On November 1, 1996, the
Company froze the SEH Plan such that no new employees of SEH were able to
participate. The Company did not make any contributions to the SEH Plan during
1996.
The Company maintains a 401(k) Savings and Retirement plan to cover all
of the employees of the Company. The Company may make discretionary
contributions. Under this 401(k) plan, employees may defer such amounts of
their compensation up to the levels permitted by the Internal Revenue Service.
The Company has not made any contributions to this plan.
NOTE N - REDEEMABLE PREFERRED STOCKS
The Company has 10,000,000 authorized shares of preferred stock, par
value $.01 per share, which may be issued in various classes with different
characteristics.
The 300 issued and outstanding shares of non-voting, non-convertible
Class C preferred stock have an aggregate liquidation value equal to $150,000
plus accrued dividends at 9% and are required to be redeemed on February 1,
2000. Accrued dividends at December 31, 1995 and 1996, were $21,799 and
$23,815, respectively.
The 100,000 authorized shares of Class F preferred stock, accrues
dividends cumulatively at 16.5% and is required to be redeemed prior to any
other class of preferred stock, before September 1998, for the aggregate
liquidation value of $1,000 per share, plus accrued dividends. As of December
31, 1995 and 1996, none of the Class F preferred stock was issued or
outstanding.
NOTE O - WARRANTS AND OPTIONS
WARRANTS
In November 1990, the Company entered into a $2,450,000 Note which
required the Company, based on certain repayment provisions, to issue to an
affiliate in 1991 warrants to purchase 297,883 and 322,699 shares of common
stock at $4.16 and $7.65 per share, respectively. These warrants are
exercisable through December 31, 2001. In May 1996, 71,969 warrants were
exercised at $4.16 per share which resulted in the issuance of 11,332 shares.
In November 1996, the Company issued warrants for 1.6 million shares of
common stock to the holders of the Senior Subordinated Notes. The warrants
provide that the noteholders may purchase 929,700 shares and 670,300 shares
for $4.01 and $6.375, respectively. If the Company repays 100% of the Senior
Subordinated Notes within 18 or 12 months, 50% or 55%, respectively, of the
warrants will terminate. Warrants will terminate pro-rata across the exercise
prices.
F-17
<PAGE>
In November 1996, the Company issued warrants for 35,000 shares of common
stock as an incentive to one SEH noteholder to allow the notes to be assumed
by the Company under the same terms and conditions that had existed prior to
the acquisition. The warrants provide that the noteholder may purchase common
stock at an exercise price of $2.44 per share. The warrants are exercisable at
any time during the eight year term. In January 1997, the noteholder exercised
the warrants and purchased 35,000 shares of common stock for $2.44 per share.
OPTIONS
Under the Company's 1991 Stock Option Plan ("SOP"), 1,500,000 shares of
common stock are authorized for issuance under options that may be granted to
employees. The number of shares that remain available for grant at December
31, 1995 and 1996, were 892,790 and 113,501, respectively. Under the SOP,
options may be granted at an exercise price not less than the fair market
value of the common stock on the date of grant. Vesting and expiration periods
are established by the Compensation Committee of the Board of Directors and
generally vest three years following grant and generally expire eight to ten
years after grant.
In addition to the SOP, non-qualified options may be granted with
exercise prices that are less than the current market value. Accordingly,
compensation expense for the difference between current market value and
exercise price is recorded at the date of grant.
<TABLE>
The following is a summary of option transactions and exercise prices:
<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>
F-18
<PAGE>
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
---- ----
<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.
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
F-19
<PAGE>
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
------------------------------------------------- -------------------------------------
Range of Exercise Number of Options Weighted Average Number of Options Weighted Average
Prices and Awards Remaining Exercise Price and Awards Exercise Price
Life (Years)
-------------------- --------- ---- -------- -------- -------
<S> <C> <C> <C> <C> <C>
$ 2.750 to $ 3.000 175,199 8.30 $ 2.82 77,699 $ 2.82
$ 3.250 to $ 4.125 229,878 8.67 $ 3.77 25,375 $ 3.75
$ 4.375 to $ 5.875 63,750 7.78 $ 5.12 18,750 $ 4.50
$ 6.000 to $ 6.000 168,750 6.69 $ 6.00 138,083 $ 6.00
$ 6.125 to $ 6.125 600,000 9.84 $ 6.13 0 $ 0.00
$ 6.250 to $ 6.250 205,000 6.70 $ 6.25 153,750 $ 6.25
$ 6.520 to $ 8.000 10,000 0.98 $ 7.27 10,000 $ 7.27
$ 8.125 to $ 8.125 25,000 5.75 $ 8.13 25,000 $ 8.13
$ 12.000 to $ 12.000 50,000 5.52 $ 12.00 50,000 $ 12.00
$ 12.250 to $ 12.250 26,625 5.17 $ 12.25 26,625 $ 12.25
-------------------- --------- ---- -------- -------- -------
$ 2.750 to $ 12.250 1,554,202 8.31 $ 5.69 525,282 $ 6.45
</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. These events satisfied
the Grantor's obligations under the agreement. As a result of those
transactions, none of such options remain outstanding.
Under the Company's 1993 Non-Employee Director Stock Option Plan, 250,000
shares of common stock are authorized for issuance to directors of the Company
who are not employed by the Company or any affiliate of the Company. Under
this plan, an option to purchase 5,000 shares of common stock is granted
automatically on an annual basis to each eligible director on the third
business day following the date of each Annual Meeting of Stockholders of the
Company at which the eligible director is elected. The exercise price of each
option will be equal to 100% of the fair market value of the common stock on
the date of grant. Each option will vest at the rate of 25% each year for the
first four years after the date of grant of the option and each such option
will expire ten years from the date of grant; provided, however, that in the
event of termination of a director's service other than by reason of total and
permanent disability or death, then the outstanding options of such holder
will expire three months after such termination. Outstanding options remain
exercisable for one year after termination of service by reason of total and
permanent disability or death. The number of shares that remain available for
grant at December 31, 1995 and 1996 were 160,000 and 130,000, respectively.
F-20
<PAGE>
NOTE P - OTHER EVENTS
On December 2, 1996 and January 23, 1997, the Company signed letters of
intent to purchase the net assets of two companies. The total consideration to
acquire these companies, excluding potential earn-out provisions, is expected
to total approximately $9,200,000. The acquisitions are expected to be
finalized during the second quarter of 1997.
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Hanger Orthopedic
Group, Inc. and Subsidiaries is included on Page F-1 of this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on Page 32 of
this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 21, 1997, except as to the
information presented in Note D, for
which the date is March 27, 1997
S-1
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
<TABLE>
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO IMPACT OF BALANCE AT
BEGINNING COSTS AND ACQUIRED END OF
YEAR CLASSIFICATION OF YEAR EXPENSES COMPANIES DEDUCTIONS YEAR
---- -------------- ------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1996 Allowance for
doubtful
accounts $1,144,000 $1,629,000 $1,220 000 $1,514,000 $2,479,000
1995 Allowance for
doubtful
accounts $ 976,000 $1,009,000 $ 841,000 $1,144,000
1994 Allowance for
doubtful
accounts $ 662,000 $ 974,000 $ 660,000 $ 976,000
</TABLE>
S-2
EXHIBIT 10(p)
EMPLOYMENT AND NON-COMPETE AGREEMENT
Agreement made as of November 1, 1996, between Hanger Orthopedic Group,
Inc., a Delaware corporation (the "Company"), and H.E. Thranhardt
("Executive").
WITNESSETH:
WHEREAS, Executive has great expertise in the Company's and its
Subsidiaries' businesses;
WHEREAS, Executive's use of such expertise in competition with the
Company and its Subsidiaries would have an extremely detrimental effect on the
Company and its Subsidiaries; and
WHEREAS, the Company desires to retain the services of Executive and to
assure itself that Executive does not engage in competition with the Company
and its Subsidiaries.
NOW, THEREFORE, the parties hereto agree as follows:
1. EMPLOYMENT. The Company agrees to employ Executive and Executive
accepts such employment by the Company upon the terms and conditions set forth
in this Agreement, for the period beginning on the date of this Agreement, and
ending upon termination pursuant to paragraph 4 hereof (the "Employment
Period").
2. COMPENSATION. During the Employment Period, the Company will pay
Executive a base salary at the rate of $250,000 per annum in consideration for
the services to be rendered to the Company by Executive (the "Base Salary").
Executive's Base Salary may be increased from time to time as determined by
the Board of Directors of the Company (the "Board"). In addition to the Base
Salary, Executive also will be entitled to reimbursement for preapproved
travel expenses during the Employment Period.
3. SERVICES. During the Employment Period, Executive shall devote his
best efforts and a sufficient amount of his business time and attention to the
affairs of the Company or its Subsidiaries as may be necessary to perform his
duties hereunder. During the Employment Period, Executive agrees to render
such services of an executive and administrative character to the Company and
its Subsidiaries as the Board may from time to time direct.
4. TERMINATION. The Employment Period will be for a period of three (3)
years, unless terminated earlier by (a) Executive's death or permanent
disability (as determined by the Board in its good faith judgment), (b) by
Executive's resignation upon prior written notice to the Company of not less
than three (3) months, (c) the Board for Cause, or (d) the Board without
Cause. For purpose of this paragraph 4, "Cause" shall mean (i) the failure or
refusal of Executive to follow the lawful directives of the Board (except due
<PAGE>
to sickness, injury or disabilities), (ii) inattention to duty or any other
willful, reckless or negligent act (or omission to act) by Executive, which,
in the good faith judgment of the Board, materially injures the Company or one
of its Subsidiaries, including the repeated failure to follow the policies and
procedures of the Company or one of its Subsidiaries, (iii) a material breach
of this Agreement by Executive, (iv) the commission by Executive of a felony
or other crime involving moral turpitude or the commission by Executive of an
act of financial dishonesty against the Company or one of its Subsidiaries or
(v) a proper business purpose of the Company, including but not limited to a
decrease in the staffing of the office in which Executive is working or the
elimination of the position filled by Executive.
If Executive's employment is terminated by the Executive in any manner
other than clauses (a) or (b) above, the Company will have the remedies
enumerated in paragraph 16.
If Executive's employment is terminated for any reason prior to end of
three (3) years from the date of this Agreement, then Executive shall be
entitled to receive the remainder of his Base Salary over the remainder of
such 3-year period at such times as the regular payments (monthly or
bi-monthly) of his Base Salary would have been paid to him in the event his
employment with the Company had not been terminated prior to the end of such
3-year period.
5. NON-COMPETE.
(a) Executive agrees that during the Employment Period and for a period
of thirty-six (36) months thereafter (the "Non-Compete Period"), Executive
will not directly or indirectly (whether as employee, director, owner,
stockholder, consultant, partner (limited or general) or otherwise) own,
manage, control, participate in, consult with, render services for or in any
manner engage in any Competitive Business or solicit any other Person to
engage in any of the foregoing activities or knowingly request, induce or
attempt to influence any then existing customer of the Company or its
Subsidiaries to curtail or cause any business they are currently, or in the
last 36 months have been, transacting with the Company and its Subsidiaries
(the "Non-Compete"). Nothing herein will prevent Executive from being a
passive owner of not more than 1% of the outstanding stock of any class of a
corporation which is a competitor of the Company or its Subsidiaries and which
is publicly traded, so long as Executive has no participation in the business
of such corporation. During the Non-Compete Period, Executive shall not,
without the Company's prior written consent, directly or indirectly, knowingly
solicit or encourage or attempt to influence any employee to leave the
employment of the Company or any of its Subsidiaries.
2
<PAGE>
"Competitive Business" shall mean engaging in "Business" within the
"Restricted Territory." "Business" shall mean manufacturing, distributing,
wholesaling or retailing of orthotics or prosthetics, or the operation of
clinics to fit patients for orthotics or prosthetics, or any other related
businesses which the Company and its Subsidiaries are engaged in during and at
the expiration of the Employment Period. "Restricted Territory" shall mean the
United States of America, the District of Columbia and any U.S. territory in
which the Company or any one or more of its Subsidiaries conducts Business
during and at the expiration of the Employment Period.
(b) If, at the time of enforcement of any provision of paragraph 5(a)
above, a court holds that the restrictions stated therein are unreasonable
under circumstances then existing, the parties hereto agree that the maximum
period, scope, and geographical area reasonable under such circumstances will
be substituted for the stated period, scope or area.
(c) The parties hereto agree and acknowledge that money damages may not
be an adequate remedy for any breach of the provisions of this paragraph 5;
therefore, in the event of a breach by Executive of any of the provisions of
this paragraph 5, the Company or its successors or assigns may, in addition to
other rights and remedies existing in its favor, apply to any court of law or
equity of competent jurisdiction for specific performance and/or injunctive or
other relief in order to enforce or prevent any violations of the provisions
hereof.
6. CONFIDENTIAL INFORMATION. Executive acknowledges that the information,
observations, data and trade secrets (collectively, "Confidential
Information") obtained by him during the course of his performance under this
Agreement, and previously as an employee of the Company and/or its
Subsidiaries, concerning the business or affairs of the Company or any of its
Subsidiaries are the property of the Company and its Subsidiaries. For
purposes of this Agreement, "trade secret" means any method, program or
compilation of information which is used in the Company's or any Subsidiary's
business, including but not limited to: (a) techniques, plans and materials
used by the Company and its Subsidiaries, (b) marketing methods and strategies
employed by the Company and its Subsidiaries, and (c) all lists of past,
present or prospective customers, suppliers, referring physicians and all
other referral sources of the Company and its Subsidiaries. Executive agrees
that he will not disclose to any unauthorized Person or use for his own
account any of such Confidential Information without the Board's written
consent, unless and to the extent that the aforementioned matters become
generally known to and available for use by the public other than as a result
of the Executive's acts or omissions to act or become known to the Executive
3
<PAGE>
lawfully outside the scope of his employment under this Agreement. Executive
agrees to deliver to the Company at the termination of his employment, or at
any other time the Company may request, all memoranda, notes, plans, records,
reports and other documents and its Subsidiaries which he may then possess or
have under his control.
7. INVENTIONS AND PATENTS. Executive agrees that all Confidential
Information and all inventions, innovations or improvements in the Company's
and its Subsidiaries' method of conducting their respective businesses, or any
reasonable development or extension of such businesses (including new
contributions, improvements, ideas and discoveries, whether patentable or
not), conceived or made by him (whether individually or in conjunction with
other Persons) during the Employment Period belong to the Company and its
Subsidiaries. Executive will promptly disclose such inventions, innovations or
improvements to the Board and perform all actions reasonably requested by the
Board to establish and confirm such ownership.
8. OTHER BUSINESSES. During the Employment Period, Executive agrees that
he will not, except with the express written consent of the Board, become
engaged in, render services for, or permit his name to be used in connection
with, any Competitive Business other than the business of the Company and its
Subsidiaries. Notwithstanding anything else contained herein to the contrary,
the Company agrees that Executive may continue to serve on the board of
directors of CRP Springlite.
9. NO INCONSISTENT AGREEMENTS. Any and all employment, consulting or
other similar agreements heretofore executed between the Company and/or its
Subsidiaries on the one hand and Executive on the other are hereby terminated.
10. NOTICES. Any notice provided for in this Agreement must be in writing
and must be either personally delivered, sent by overnight courier (E.G.,
Federal Express) or mailed by first class mail, to the recipient at the
address below indicated:
To the Company:
Hanger Orthopedic Group, Inc.
7700 Old Georgetown Road (Second Floor)
Bethesda, Maryland 20814
Attention: Chief Executive Officer
To Executive:
H.E. Thranhardt
J.E. Hanger, Inc. of Georgia
5010 McGinnis Ferry Road
Alpharetta, Georgia 30202
4
<PAGE>
With a copy of any of the foregoing notices to:
Freedman, Levy, Kroll & Simonds
1050 Connecticut Avenue, N.W. (Suite 825)
Washington, D.C. 20036
Attention: Jay W. Freedman, Esq.
or such other address or to the attention of such other Person as the
recipient party shall have specified by prior written notice to the sending
party. Any notice under this Agreement will be deemed to have been given when
so delivered, sent or mailed.
11. SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under
applicable law. The parties agree that (i) the provisions of this Agreement
shall be severable in the event that any of the provisions hereof are for any
reason whatsoever invalid, void or otherwise unenforceable, (ii) such invalid,
void or otherwise unenforceable provisions shall be automatically replaced by
other provisions which are as similar as possible in terms to such invalid,
void or otherwise unenforceable provisions but are valid and enforceable and
(iii) the remaining provisions shall remain enforceable to the fullest extent
permitted by law.
12. COMPLETE AGREEMENT. This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the
complete agreement and understanding among the parties and supersede and
preempt any prior understandings, agreements or representations by or among
the parties, written or oral, which may have related to the subject matter
hereof in any way.
13. COUNTERPARTS. This Agreement may be executed on separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
14. SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure
to the benefit of and be enforceable by Executive and the Company, and their
respective successors and assigns. Executive may not assign his rights or
delegate his obligations hereunder without the prior written consent of the
Company. The Company may assign its rights and delegate its duties hereunder
without the consent of the Executive to Permitted Transferees.
15. GOVERNING LAW. All questions concerning the construction, validity
and interpretation of the Agreement will be governed by the internal law, and
not the law of conflicts of the State of Maryland.
5
<PAGE>
16. REMEDIES. Each of the parties to this Agreement will be entitled to
enforce its rights under this Agreement specifically, to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights existing in its favor. The parties hereto agree and acknowledge
that money damages may not be an adequate remedy for any breach of the
provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction for specific
performance and/or injunctive relief in order to enforce or prevent any
violations of the provisions of this Agreement. Executive acknowledges that in
his past, present and future capacity as an executive officer of the Company
and/or its Subsidiaries, he was, is and will be critical to the success of the
Company and its Subsidiaries and that the Company would not have consummated
the Purchase unless Executive entered into this Agreement. Executive further
acknowledges that his material breach of this Agreement would cause the
Company and its Subsidiaries material adverse harm, including lost sales,
profits and growth potential. Executive believes it would be just and
equitable for a court to consider the foregoing factors when accessing damages
against Executive for his material breach of this Agreement.
17. AMENDMENTS AND WAIVERS; THIRD PARTY BENEFICIARIES. Any provision of
this Agreement may be amended or waived only with the prior written consent of
the Company and Executive. The failure of either party to insist, in any one
or more instances, upon performance of the terms or conditions of this
Agreement shall not be construed as a waiver or a relinquishment of any right
granted hereunder or of the future performance of any such term, covenant or
condition. Each direct and indirect Subsidiary of the Company shall be a third
party beneficiary of the Executive's obligations under this Agreement,
provided that this Agreement may be amended in any manner without the consent
of such third party beneficiaries.
18. DEFINITIONS. "Person" shall mean and include an individual, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a governmental entity or any department or agency thereof.
"Permitted Transferee" shall mean (a) any successor by merger or consolidation
to the Company or any Permitted Transferee; (b) any purchaser of all or
substantially all of the Company's or any Permitted Transferee's assets; and
(c) any lender to (i) the Company, (ii) any Permitted Transferee and/or (iii)
any affiliate of the Company or of any Permitted Transferee. "Subsidiary"
shall mean any Person which the Company has the direct or indirect right to
control, direct or cause direction of management and policies of, whether
through the ownership of voting securities, by contract or otherwise,
including but not limited to J.E. Hanger, Inc. of Georgia.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written.
HANGER ORTHOPEDIC GROUP, INC.
HANGER ORTHOPEDIC GROUP, INC.
By:__________________________ __________________________
Ivan R. Sabel H.E. Thranhardt
President and Chief Executive
Officer
7
<PAGE>
AMENDMENT NO. 1 TO EMPLOYMENT AND NON-COMPETE AGREEMENT
Amendment No. 1, dated as of January 1, 1997 (the "Amendment"), to the
Employment and Non-Compete Agreement, dated as of November 1, 1996 (the
"Agreement"), between Hanger Orthopedic Group, Inc., a Delaware corporation
(the "Company"), and H.E. Thranhardt ("Executive").
WHEREAS, Executive and the Company wish to reflect the cessation of
executive management services by Executive to the Company, although Executive
will continue to be employed by and provide non-management services to the
Company through Southern Prosthetic Supply, Inc., a wholly-owned subsidiary of
the Company.
NOW, THEREFORE, the parties hereto agree as follows:
1. AMENDMENT OF AGREEMENT. The Agreement is amended only as hereinafter
provided. All terms of the Agreement which are not herein amended shall remain
in full force and effect. All capitalized terms used herein shall have the
meanings ascribed to them in the Agreement unless otherwise provided herein.
2. COMPENSATION. During the remaining thirty-four (34) months of the
Employment Period from and after the date of this Amendment, unless earlier
terminated in accordance with the terms of the Agreement, the Company will pay
Executive a base salary at the gross, pre-tax rate of $25,000 per annum in
consideration for the services to be rendered to the Company by Executive (the
"Base Salary"). In addition to the Base Salary, Executive also will be
entitled to benefits as provided by the Company. During the Employment Period,
the Company will also pay Executive a termination fee (the "Termination Fee")
in the gross, pre-tax amount of $19,166.67 per month in consideration for the
termination of the executive management services of Executive as a result of
the acquisition by merger of Southern Prosthetic Supply, Inc. (formerly known
as J.E. Hanger, Inc. of Georgia) by the Company. If Executive's employment is
terminated for any reason prior to end of the remaining 34 months of the
Employment Period, then Executive shall be entitled to receive the remainder
of his Base Salary and Termination Fee over the remainder of such 34-month
period at such times as the regular payments of his Base Salary and
Termination Fee would have been paid to him in the event his employment with
the Company had not been terminated prior to the end of such 34-month period.
3. COUNTERPARTS. This Amendment may be executed on separate counterparts,
each of which is deemed to be an original and all of which taken together
constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
day and year first above written.
HANGER ORTHOPEDIC GROUP, INC.
By:__________________________ __________________________
Ivan R. Sabel H.E. Thranhardt
President and Chief Executive
Officer
EXHIBIT 10(q)
EMPLOYMENT AND NON-COMPETE AGREEMENT
Agreement made as of November 1, 1996, between Hanger Orthopedic Group,
Inc., a Delaware corporation (the "Company"), and John McNeill ("Executive").
WITNESSETH:
WHEREAS, Executive has great expertise in the Company's and its
Subsidiaries' businesses;
WHEREAS, Executive's use of such expertise in competition with the
Company and its Subsidiaries would have an extremely detrimental effect on the
Company and its Subsidiaries; and
WHEREAS, the Company desires to retain the services of Executive and to
assure itself that Executive does not engage in competition with the Company
and its Subsidiaries.
NOW, THEREFORE, the parties hereto agree as follows:
1. EMPLOYMENT. The Company agrees to employ Executive and Executive
accepts such employment by the Company upon the terms and conditions set forth
in this Agreement, for the period beginning on the date of this Agreement, and
ending upon termination pursuant to paragraph 4 hereof (the "Employment
Period").
2. COMPENSATION.
(a) During the Employment Period, the Company will pay Executive a base
salary at the rate of $234,000.00 per annum in consideration for the services
to be rendered to the Company by Executive (the "Base Salary"). Executive's
Base Salary may be increased from time to time as determined by the Board of
Directors of the Company (the "Board"). In addition to the Base Salary payable
to Executive pursuant to this paragraph 2(a), during the Employment Period
Executive will be entitled to the benefits set forth on Schedule I attached
hereto.
(b) In addition to the Base Salary and the other benefits paid to
Executive during the Employment Period, Executive also shall be eligible to
receive awards of stock options from the Company, as well as cash bonus
compensation based on formulae related to year-end financial data of the
Company and determined in the reasonable discretion of the Board and its
Compensation Committee.
3. SERVICES. During the Employment Period, Executive shall devote his
best efforts and substantially all of his business time and attention to the
affairs of the Company or its Subsidiaries (except for reasonable vacation
periods subject to the reasonable approval of the Board, or reasonable periods
of illness or other incapacity). During the Employment Period, Executive
agrees to render such services of an executive and administrative character to
the Company and its Subsidiaries as the Board may from time to time direct.
<PAGE>
4. TERMINATION. The Employment Period will continue from year to year
unless terminated earlier by (a) Executive's death or permanent disability (as
determined by the Board in its good faith judgment), (b) by Executive's
resignation upon prior written notice to the Company of not less than three
(3) months, (c) the Board for Cause, or (d) the Board without Cause. For
purpose of this paragraph 4, "Cause" shall mean (i) the failure or refusal of
Executive to follow the lawful directives of the Board (except due to
sickness, injury or disabilities), (ii) inattention to duty or any other
willful, reckless or negligent act (or omission to act) by Executive, which,
in the good faith judgment of the Board, materially injures the Company or one
of its Subsidiaries, including the repeated failure to follow the policies and
procedures of the Company or one of its Subsidiaries, (iii) a material breach
of this Agreement by Executive, (iv) the commission by Executive of a felony
or other crime involving moral turpitude or the commission by Executive of an
act of financial dishonesty against the Company or one of its Subsidiaries or
(v) a proper business purpose of the Company, including but not limited to a
decrease in the staffing of the office in which Executive is working or the
elimination of the position filled by Executive; provided, however, that prior
to any termination of the Employment Period for Cause as defined under items
(i) and (ii) above, the Company shall be required to give Employee prior
written notice of any such claim of Cause by the Company, with Executive
having the right promptly thereafter to appeal such claim of Cause by the
Company in a hearing with the Board. Except in the case of death, resignation
or the continuation of the Employment Period during the appeal process
described above, termination will not be effective until 30 days after the
Board has given written notice to Executive of such termination.
If Executive's employment is terminated by the Executive in any manner
other than clauses (a) or (b) above, the Company will have the remedies
enumerated in paragraph 17.
If Executive's employment is terminated, then Executive may be entitled
to receive severance payments in the amount and under the terms set forth in
Schedule II attached hereto.
5. NON-COMPETE.
(a) Executive agrees that during the Employment Period and for a period
of thirty-six (36) months thereafter (the "Non-Compete Period"), Executive
will not directly or indirectly (whether as employee, director, owner,
stockholder, consultant, partner (limited or general) or otherwise) own,
2
<PAGE>
manage, control, participate in, consult with, render services for or in any
manner engage in any Competitive Business or solicit any other Person to
engage in any of the foregoing activities or knowingly request, induce or
attempt to influence any then existing customer of the Company or its
Subsidiaries to curtail or cause any business they are currently, or in the
last 36 months have been, transacting with the Company and its Subsidiaries
(the "Non-Compete"). Nothing herein will prevent Executive from being a
passive owner of not more than 1% of the outstanding stock of any class of a
corporation which is a competitor of the Company or its Subsidiaries and which
is publicly traded, so long as Executive has no participation in the business
of such corporation. Notwithstanding the terms of the Non-Compete, after the
expiration of the Employment Period but prior to the expiration of the
Non-Compete Period, Executive may engage in Limited Competition. Furthermore,
during the Non-Compete Period, Executive shall not, without the Company's
prior written consent, directly or indirectly, knowingly solicit or encourage
or attempt to influence any employee to leave the employment of the Company or
any of its Subsidiaries.
"Competitive Business" shall mean engaging in "Business" within the
"Restricted Territory." "Business" shall mean manufacturing, distributing,
wholesaling or retailing of orthotics or prosthetics, or the operation of
clinics to fit patients for orthotics or prosthetics, or any other related
businesses which the Company and its Subsidiaries are engaged in during and at
the expiration of the Employment Period. "Restricted Territory" shall mean the
United States of America, the District of Columbia and any U.S. territory in
which the Company or any one or more of its Subsidiaries conducts Business
during and at the expiration of the Employment Period. "Limited Competition"
shall mean being an employee, director, owner, stockholder consultant and/or
partner (limited or general) in only one business enterprise which consists of
only one retail clinical operation selling and fitting patients for
prosthetics and orthotics.
(b) If, at the time of enforcement of any provision of paragraph 5(a)
above, a court holds that the restrictions stated therein are unreasonable
under circumstances then existing, the parties hereto agree that the maximum
period, scope, and geographical area reasonable under such circumstances will
be substituted for the stated period, scope or area.
(c) The parties hereto agree and acknowledge that money damages may not
be an adequate remedy for any breach of the provisions of this paragraph 5;
therefore, in the event of a breach by Executive of any of the provisions of
this paragraph 5, the Company or its successors or assigns may, in addition to
other rights and remedies existing in its favor, apply to any court of law or
3
<PAGE>
equity of competent jurisdiction for specific performance and/or injunctive or
other relief in order to enforce or prevent any violations of the provisions
hereof.
6. CONFIDENTIAL INFORMATION. Executive acknowledges that the information,
observations, data and trade secrets (collectively, "Confidential
Information") obtained by him during the course of his performance under this
Agreement, and previously as an employee of the Company and/or its
Subsidiaries, concerning the business or affairs of the Company or any of its
Subsidiaries are the property of the Company and its Subsidiaries. For
purposes of this Agreement, "trade secret" means any method, program or
compilation of information which is used in the Company's or any Subsidiary's
business, including but not limited to: (a) techniques, plans and materials
used by the Company and its Subsidiaries, (b) marketing methods and strategies
employed by the Company and its Subsidiaries, and (c) all lists of past,
present or prospective customers, suppliers, referring physicians and all
other referral sources of the Company and its Subsidiaries. Executive agrees
that he will not disclose to any unauthorized Person or use for his own
account any of such Confidential Information without the Board's written
consent, unless and to the extent that the aforementioned matters become
generally known to and available for use by the public other than as a result
of the Executive's acts or omissions to act or become known to the Executive
lawfully outside the scope of his employment under this Agreement. Executive
agrees to deliver to the Company at the termination of his employment, or at
any other time the Company may request, all memoranda, notes, plans, records,
reports and other documents and its Subsidiaries which he may then possess or
have under his control.
7. INVENTIONS AND PATENTS. Executive agrees that all Confidential
Information and all inventions, innovations or improvements in the Company's
and its Subsidiaries' method of conducting their respective businesses, or any
reasonable development or extension of such businesses (including new
contributions, improvements, ideas and discoveries, whether patentable or
not), conceived or made by him (whether individually or in conjunction with
other Persons) during the Employment Period belong to the Company and its
Subsidiaries. Executive will promptly disclose such inventions, innovations or
improvements to the Board and perform all actions reasonably requested by the
Board to establish and confirm such ownership.
8. OTHER BUSINESSES. During the Employment Period, Executive agrees that
he will not, except with the express written consent of the Board, become
engaged in, render services for, or permit his name to be used in connection
with, any business other than the business of the Company and its
Subsidiaries.
4
<PAGE>
9. ANNUAL PHYSICAL EXAMINATION. The Executive will assist the Company and
its Subsidiaries (without cost to the Executive) in obtaining key man life and
disability insurance, including, without limitation, to submitting to an
annual general physical examination (and such other physical examinations
requested by the Company's insurers), and to share the results of such
examinations with the Company and its insurers.
10. NO INCONSISTENT AGREEMENTS. Any and all employment, consulting or
other similar agreements heretofore executed between the Company and/or its
Subsidiaries on the one hand and Executive on the other are hereby terminated.
11. NOTICES. Any notice provided for in this Agreement must be in writing
and must be either personally delivered, sent by overnight courier (E.G.,
Federal Express) or mailed by first class mail, to the recipient at the
address below indicated:
To the Company:
Hanger Orthopedic Group, Inc.
7700 Old Georgetown Road (Second Floor)
Bethesda, Maryland 20814
Attention: Chief Executive Officer
To Executive:
John McNeill
Hanger Orthopedic Group, Inc.
7700 Old Georgetown Road
Bethesda, Maryland 20814
With a copy of any of the foregoing notices to:
Freedman, Levy, Kroll & Simonds
1050 Connecticut Avenue, N.W. (Suite 825)
Washington, D.C. 20036
Attention: Jay W. Freedman, Esq.
or such other address or to the attention of such other Person as the
recipient party shall have specified by prior written notice to the sending
party. Any notice under this Agreement will be deemed to have been given when
so delivered, sent or mailed.
12. SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under
applicable law. The parties agree that (i) the provisions of this Agreement
shall be severable in the event that any of the provisions hereof are for any
reason whatsoever invalid, void or otherwise unenforceable, (ii) such invalid,
5
<PAGE>
void or otherwise unenforceable provisions shall be automatically replaced by
other provisions which are as similar as possible in terms to such invalid,
void or otherwise unenforceable provisions but are valid and enforceable and
(iii) the remaining provisions shall remain enforceable to the fullest extent
permitted by law.
13. COMPLETE AGREEMENT. This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the
complete agreement and understanding among the parties and supersede and
preempt any prior understandings, agreements or representations by or among
the parties, written or oral, which may have related to the subject matter
hereof in any way.
14. COUNTERPARTS. This Agreement may be executed on separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
15. SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure
to the benefit of and be enforceable by Executive and the Company, and their
respective successors and assigns. Executive may not assign his rights or
delegate his obligations hereunder without the prior written consent of the
Company. The Company may assign its rights and delegate its duties hereunder
without the consent of the Executive to Permitted Transferees.
16. GOVERNING LAW. All questions concerning the construction, validity
and interpretation of the Agreement will be governed by the internal law, and
not the law of conflicts of the State of Maryland.
17. REMEDIES. Each of the parties to this Agreement will be entitled to
enforce its rights under this Agreement specifically, to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights existing in its favor. The parties hereto agree and acknowledge
that money damages may not be an adequate remedy for any breach of the
provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction for specific
performance and/or injunctive relief in order to enforce or prevent any
violations of the provisions of this Agreement. Executive acknowledges that in
his past, present and future capacity as an executive officer of the Company
and/or its Subsidiaries, he was, is and will be critical to the success of the
Company and its Subsidiaries and that the Company would not have consummated
the Purchase unless Executive entered into this Agreement. Executive further
acknowledges that his material breach of this Agreement would cause the
Company and its Subsidiaries material adverse harm, including lost sales,
profits and growth potential. Executive believes it would be just and
6
<PAGE>
equitable for a court to consider the foregoing factors when accessing damages
against Executive for his material breach of this Agreement.
18. AMENDMENTS AND WAIVERS; THIRD PARTY BENEFICIARIES. Any provision of
this Agreement may be amended or waived only with the prior written consent of
the Company and Executive. The failure of either party to insist, in any one
or more instances, upon performance of the terms or conditions of this
Agreement shall not be construed as a waiver or a relinquishment of any right
granted hereunder or of the future performance of any such term, covenant or
condition. Each direct and indirect Subsidiary of the Company shall be a third
party beneficiary of the Executive's obligations under this Agreement,
provided that this Agreement may be amended in any manner without the consent
of such third party beneficiaries.
19. DEFINITIONS. "Person" shall mean and include an individual, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a governmental entity or any department or agency thereof.
"Permitted Transferee" shall mean (a) any successor by merger or consolidation
to the Company or any Permitted Transferee; (b) any purchaser of all or
substantially all of the Company's or any Permitted Transferee's assets; and
(c) any lender to (i) the Company, (ii) any Permitted Transferee and/or (iii)
any affiliate of the Company or of any Permitted Transferee. "Subsidiary"
shall mean any Person which the Company has the direct or indirect right to
control, direct or cause direction of management and policies of, whether
through the ownership of voting securities, by contract or otherwise,
including but not limited to J.E. Hanger, Inc. of Georgia.
* * * *
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written.
HANGER ORTHOPEDIC GROUP, INC.
By: ____________________________
Ivan R. Sabel
President and Chief Executive Officer
____________________________
John McNeill
7
<PAGE>
SCHEDULE I
EXECUTIVE BENEFITS
1. All group medical, life, short-term disability, dental and other
insurance generally made available to employees of the Company and its
Subsidiaries.
2. Reasonable auto expense allowances consistent with the Company's past
practices.
3. Reimbursement for any reasonable out-of-pocket business expense actually
and necessarily incurred by Executive in the conduct of the business of
the Company upon receipt of itemized vouchers approved in accordance with
agreed-upon review and approval procedures. Reimbursement of the costs of
attending organizational and trade association conferences and customary
travel expenses.
4. General long-term disability insurance (group and individual policies)
generally made available to key employees of the Company and its
Subsidiaries.
<PAGE>
SCHEDULE II
SEVERANCE BENEFITS OF EXECUTIVE
1. In the event the employment of Executive by the Company is terminated
for any reason other than Cause, as defined in the Employment Agreement
between Executive and the Company to which this Schedule is attached, then the
Company shall pay to Executive one of the following severance payments:
(i) in the event of the termination of Executive by the Company
within the first twelve (12) months immediately following the date of the
Employment Agreement, then in such event the Company shall pay to
Executive an amount equal to three (3) times the annualized average of
Executive's W-2 income for the years of 1995, 1994 and 1993;
(ii) in the event of the termination of Executive by the Company
more than twelve (12) months immediately following the date of the
Employment Agreement but on or prior to twenty-four (24) months
immediately following the date of the Employment Agreement, then in such
event the Company shall pay to Executive an amount equal to two (2) times
the annualized average of Executive's W-2 income for the years of 1995,
1994 and 1993; or
(iii) in the event of the termination of Executive by the Company
more than twenty-four (24) months immediately following the date of the
Employment Agreement but on or prior to thirty-six (36) months
immediately following the date of the Employment Agreement, then in such
event the Company shall pay to Executive an amount equal to one-half
(1/2) of the annualized average of Executive's W-2 income for the years
of 1995, 1994 and 1993.
For purposes of this calculation, the "annualized average of Executive's W-2
income for the years 1995, 1994 and 1993" shall be determined by adding the
gross income earned by Executive during 1995, 1994 and 1993 as shown on
Executive's W-2 wage statement and dividing such sum by three (3).
Notwithstanding anything else contained herein to the contrary, the Company
shall nevertheless pay to Executive the applicable amount of severance
payments as provided herein in the event the employment of Executive by the
Company is terminated by the Company for a proper business purpose as provided
in paragraph 4(v) of the Employment Agreement.
2. In the event the employment of Executive by the Company is terminated
for any reason other than Cause within the first thirty-six (36) months
<PAGE>
immediately following the date of the Employment Agreement, then (i) the
non-compete portion of the Employment Agreement shall be invalid and (ii) all
stock options of Executive shall become immediately fully vested.
3. In the event the employment of Executive by the Company is terminated
either by the resignation of Executive or for reasons which are determined to
constitute Cause, then in either such event (i) Executive shall not be
entitled to any of the severance payments described herein and (ii) all
remaining provisions of the Employment Agreement shall apply, including but
not limited to the non-compete, confidentiality and non-solicitation
provisions.
EXHIBIT 10(r)
EMPLOYMENT AND NON-COMPETE AGREEMENT
Agreement made as of November 1, 1996, between Hanger Orthopedic Group,
Inc., a Delaware corporation (the "Company"), and Alice Tidwell ("Executive").
WITNESSETH:
WHEREAS, Executive has great expertise in the Company's and its
Subsidiaries' businesses;
WHEREAS, Executive's use of such expertise in competition with the
Company and its Subsidiaries would have an extremely detrimental effect on the
Company and its Subsidiaries; and
WHEREAS, the Company desires to retain the services of Executive and to
assure itself that Executive does not engage in competition with the Company
and its Subsidiaries.
NOW, THEREFORE, the parties hereto agree as follows:
1. EMPLOYMENT. The Company agrees to employ Executive and Executive
accepts such employment by the Company upon the terms and conditions set forth
in this Agreement, for the period beginning on the date of this Agreement, and
ending upon termination pursuant to paragraph 4 hereof (the "Employment
Period").
2. COMPENSATION.
(a) During the Employment Period, the Company will pay Executive a base
salary at the rate of $39,000.00 per annum in consideration for the services
to be rendered to the Company by Executive (the "Base Salary"). Executive's
Base Salary may be increased from time to time as determined by the Board of
Directors of the Company (the "Board"). In addition to the Base Salary payable
to Executive pursuant to this paragraph 2(a), during the Employment Period
Executive will be entitled to the benefits set forth on Schedule I attached
hereto.
(b) In addition to the Base Salary and the other benefits paid to
Executive during the Employment Period, Executive also shall be eligible to
receive awards of stock options from the Company, as well as cash bonus
compensation based on formulae related to year-end financial data of the
Company and determined in the reasonable discretion of the Board and its
Compensation Committee.
3. SERVICES. During the Employment Period, Executive shall devote her
best efforts and substantially all of her business time and attention to the
affairs of the Company or its Subsidiaries (except for reasonable vacation
periods subject to the reasonable approval of the Board, or reasonable periods
of illness or other incapacity). During the Employment Period, Executive
<PAGE>
agrees to render such services of an executive and administrative character to
the Company and its Subsidiaries as the Board may from time to time direct.
4. TERMINATION. The Employment Period will continue from year to year
unless terminated earlier by (a) Executive's death or permanent disability (as
determined by the Board in its good faith judgment), (b) by Executive's
resignation upon prior written notice to the Company of not less than three
(3) months, (c) the Board for Cause, or (d) the Board without Cause. For
purpose of this paragraph 4, "Cause" shall mean (i) the failure or refusal of
Executive to follow the lawful directives of the Board (except due to
sickness, injury or disabilities), (ii) inattention to duty or any other
willful, reckless or negligent act (or omission to act) by Executive, which,
in the good faith judgment of the Board, materially injures the Company or one
of its Subsidiaries, including the repeated failure to follow the policies and
procedures of the Company or one of its Subsidiaries, (iii) a material breach
of this Agreement by Executive, (iv) the commission by Executive of a felony
or other crime involving moral turpitude or the commission by Executive of an
act of financial dishonesty against the Company or one of its Subsidiaries or
(v) a proper business purpose of the Company, including but not limited to a
decrease in the staffing of the office in which Executive is working or the
elimination of the position filled by Executive.
If Executive's employment is terminated by the Executive in any manner
other than clauses (a) or (b) above, the Company will have the remedies
enumerated in paragraph 17.
If Executive's employment is terminated, then Executive may be entitled
to receive severance payments in the amount and under the terms set forth in
Schedule II attached hereto.
5. NON-COMPETE.
(a) Executive agrees that during the Employment Period and for a period
of thirty-six (36) months thereafter (the "Non-Compete Period"), Executive
will not directly or indirectly (whether as employee, director, owner,
stockholder, consultant, partner (limited or general) or otherwise) own,
manage, control, participate in, consult with, render services for or in any
manner engage in any Competitive Business or solicit any other Person to
engage in any of the foregoing activities or knowingly request, induce or
attempt to influence any then existing customer of the Company or its
Subsidiaries to curtail or cause any business they are currently, or in the
last 36 months have been, transacting with the Company and its Subsidiaries
2
<PAGE>
(the "Non-Compete"). Nothing herein will prevent Executive from being a
passive owner of not more than 1% of the outstanding stock of any class of a
corporation which is a competitor of the Company or its Subsidiaries and which
is publicly traded, so long as Executive has no participation in the business
of such corporation. During the Non-Compete Period, Executive shall not,
without the Company's prior written consent, directly or indirectly, knowingly
solicit or encourage or attempt to influence any employee to leave the
employment of the Company or any of its Subsidiaries.
"Competitive Business" shall mean engaging in "Business" within the
"Restricted Territory." "Business" shall mean manufacturing, distributing,
wholesaling or retailing of orthotics or prosthetics, or the operation of
clinics to fit patients for orthotics or prosthetics, or any other related
businesses which the Company and its Subsidiaries are engaged in during and at
the expiration of the Employment Period. "Restricted Territory" shall mean the
United States of America, the District of Columbia and any U.S. territory in
which the Company or any one or more of its Subsidiaries conducts Business
during and at the expiration of the Employment Period.
(b) If, at the time of enforcement of any provision of paragraph 5(a)
above, a court holds that the restrictions stated therein are unreasonable
under circumstances then existing, the parties hereto agree that the maximum
period, scope, and geographical area reasonable under such circumstances will
be substituted for the stated period, scope or area.
(c) The parties hereto agree and acknowledge that money damages may not
be an adequate remedy for any breach of the provisions of this paragraph 5;
therefore, in the event of a breach by Executive of any of the provisions of
this paragraph 5, the Company or its successors or assigns may, in addition to
other rights and remedies existing in its favor, apply to any court of law or
equity of competent jurisdiction for specific performance and/or injunctive or
other relief in order to enforce or prevent any violations of the provisions
hereof.
6. CONFIDENTIAL INFORMATION. Executive acknowledges that the information,
observations, data and trade secrets (collectively, "Confidential
Information") obtained by her during the course of her performance under this
Agreement, and previously as an employee of the Company and/or its
Subsidiaries, concerning the business or affairs of the Company or any of its
Subsidiaries are the property of the Company and its Subsidiaries. For
purposes of this Agreement, "trade secret" means any method, program or
compilation of information which is used in the Company's or any Subsidiary's
business, including but not limited to: (a) techniques, plans and materials
used by the Company and its Subsidiaries, (b) marketing methods and strategies
employed by the Company and its Subsidiaries, and (c) all lists of past,
present or prospective customers, suppliers, referring physicians and all
other referral sources of the Company and its Subsidiaries. Executive agrees
that he will not disclose to any unauthorized Person or use for her own
account any of such Confidential Information without the Board's written
consent, unless and to the extent that the aforementioned matters become
generally known to and available for use by the public other than as a result
of the Executive's acts or omissions to act or become known to the Executive
lawfully outside the scope of her employment under this Agreement. Executive
3
<PAGE>
agrees to deliver to the Company at the termination of her employment, or at
any other time the Company may request, all memoranda, notes, plans, records,
reports and other documents and its Subsidiaries which he may then possess or
have under her control.
7. INVENTIONS AND PATENTS. Executive agrees that all Confidential
Information and all inventions, innovations or improvements in the Company's
and its Subsidiaries' method of conducting their respective businesses, or any
reasonable development or extension of such businesses (including new
contributions, improvements, ideas and discoveries, whether patentable or
not), conceived or made by her (whether individually or in conjunction with
other Persons) during the Employment Period belong to the Company and its
Subsidiaries. Executive will promptly disclose such inventions, innovations or
improvements to the Board and perform all actions reasonably requested by the
Board to establish and confirm such ownership.
8. OTHER BUSINESSES. During the Employment Period, Executive agrees that
she will not, except with the express written consent of the Board, become
engaged in, render services for, or permit her name to be used in connection
with, any business other than the business of the Company and its
Subsidiaries.
9. ANNUAL PHYSICAL EXAMINATION. The Executive will assist the Company and
its Subsidiaries (without cost to the Executive) in obtaining key man life and
disability insurance, including, without limitation, to submitting to an
annual general physical examination (and such other physical examinations
requested by the Company's insurers), and to share the results of such
examinations with the Company and its insurers.
10. NO INCONSISTENT AGREEMENTS. Any and all employment, consulting or
other similar agreements heretofore executed between the Company and/or its
Subsidiaries on the one hand and Executive on the other are hereby terminated.
11. NOTICES. Any notice provided for in this Agreement must be in writing
and must be either personally delivered, sent by overnight courier (E.G.,
Federal Express) or mailed by first class mail, to the recipient at the
address below indicated:
4
<PAGE>
To the Company:
Hanger Orthopedic Group, Inc.
7700 Old Georgetown Road (Second Floor)
Bethesda, Maryland 20814
Attention: Chief Executive Officer
To Executive:
Alice Tidwell
J.E. Hanger, Inc. of Georgia
5010 McGinniss Ferry Road
Alpharetta, Georgia 30202
With a copy of any of the foregoing notices to:
Freedman, Levy, Kroll & Simonds
1050 Connecticut Avenue, N.W. (Suite 825)
Washington, D.C. 20036
Attention: Jay W. Freedman, Esq.
or such other address or to the attention of such other Person as the
recipient party shall have specified by prior written notice to the sending
party. Any notice under this Agreement will be deemed to have been given when
so delivered, sent or mailed.
12. SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under
applicable law. The parties agree that (i) the provisions of this Agreement
shall be severable in the event that any of the provisions hereof are for any
reason whatsoever invalid, void or otherwise unenforceable, (ii) such invalid,
void or otherwise unenforceable provisions shall be automatically replaced by
other provisions which are as similar as possible in terms to such invalid,
void or otherwise unenforceable provisions but are valid and enforceable and
(iii) the remaining provisions shall remain enforceable to the fullest extent
permitted by law.
13. COMPLETE AGREEMENT. This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the
complete agreement and understanding among the parties and supersede and
preempt any prior understandings, agreements or representations by or among
the parties, written or oral, which may have related to the subject matter
hereof in any way.
14. COUNTERPARTS. This Agreement may be executed on separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
5
<PAGE>
15. SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure
to the benefit of and be enforceable by Executive and the Company, and their
respective successors and assigns. Executive may not assign her rights or
delegate her obligations hereunder without the prior written consent of the
Company. The Company may assign its rights and delegate its duties hereunder
without the consent of the Executive to Permitted Transferees.
16. GOVERNING LAW. All questions concerning the construction, validity
and interpretation of the Agreement will be governed by the internal law, and
not the law of conflicts of the State of Maryland.
17. REMEDIES. Each of the parties to this Agreement will be entitled to
enforce its rights under this Agreement specifically, to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights existing in its favor. The parties hereto agree and acknowledge
that money damages may not be an adequate remedy for any breach of the
provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction for specific
performance and/or injunctive relief in order to enforce or prevent any
violations of the provisions of this Agreement. Executive acknowledges that in
her past, present and future capacity as an executive officer of the Company
and/or its Subsidiaries, he was, is and will be critical to the success of the
Company and its Subsidiaries and that the Company would not have consummated
the Purchase unless Executive entered into this Agreement. Executive further
acknowledges that her material breach of this Agreement would cause the
Company and its Subsidiaries material adverse harm, including lost sales,
profits and growth potential. Executive believes it would be just and
equitable for a court to consider the foregoing factors when accessing damages
against Executive for her material breach of this Agreement.
18. AMENDMENTS AND WAIVERS; THIRD PARTY BENEFICIARIES. Any provision of
this Agreement may be amended or waived only with the prior written consent of
the Company and Executive. The failure of either party to insist, in any one
or more instances, upon performance of the terms or conditions of this
Agreement shall not be construed as a waiver or a relinquishment of any right
granted hereunder or of the future performance of any such term, covenant or
condition. Each direct and indirect Subsidiary of the Company shall be a third
party beneficiary of the Executive's obligations under this Agreement,
provided that this Agreement may be amended in any manner without the consent
of such third party beneficiaries.
6
<PAGE>
19. DEFINITIONS. "Person" shall mean and include an individual, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a governmental entity or any department or agency thereof.
"Permitted Transferee" shall mean (a) any successor by merger or consolidation
to the Company or any Permitted Transferee; (b) any purchaser of all or
substantially all of the Company's or any Permitted Transferee's assets; and
(c) any lender to (i) the Company, (ii) any Permitted Transferee and/or (iii)
any affiliate of the Company or of any Permitted Transferee. "Subsidiary"
shall mean any Person which the Company has the direct or indirect right to
control, direct or cause direction of management and policies of, whether
through the ownership of voting securities, by contract or otherwise,
including but not limited to J.E. Hanger, Inc. of Georgia.
* * * *
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written.
HANGER ORTHOPEDIC GROUP, INC.
By: ____________________________
Ivan R. Sabel
President and Chief Executive Officer
____________________________
Alice Tidwell
7
<PAGE>
SCHEDULE I
EXECUTIVE BENEFITS
1. All group medical, life, short-term disability, dental and other
insurance generally made available to employees of the Company and its
Subsidiaries.
2. Reasonable auto expense allowances consistent with the Company's past
practices.
3. Reimbursement for any reasonable out-of-pocket business expense actually
and necessarily incurred by Executive in the conduct of the business of
the Company upon receipt of itemized vouchers approved in accordance with
agreed-upon review and approval procedures. Reimbursement of the costs of
attending organizational and trade association conferences and customary
travel expenses.
4. General long-term disability insurance (group and individual policies)
generally made available to key employees of the Company and its
Subsidiaries.
<PAGE>
SCHEDULE II
SEVERANCE BENEFITS OF EXECUTIVE
1. In the event the employment of Executive by the Company is terminated
for any reason other than Cause, as defined in the Employment Agreement
between Executive and the Company to which this Schedule is attached, then the
Company shall pay to Executive one of the following severance payments:
(i) in the event of the termination of Executive by the Company
within the first twelve (12) months immediately following the date of the
Employment Agreement, then in such event the Company shall pay to
Executive an amount equal to three (3) times the annualized average of
Executive's W-2 income for the years of 1995, 1994 and 1993;
(ii) in the event of the termination of Executive by the Company
more than twelve (12) months immediately following the date of the
Employment Agreement but on or prior to twenty-four (24) months
immediately following the date of the Employment Agreement, then in such
event the Company shall pay to Executive an amount equal to two (2) times
the annualized average of Executive's W-2 income for the years of 1995,
1994 and 1993; or
(iii) in the event of the termination of Executive by the Company
more than twenty-four (24) months immediately following the date of the
Employment Agreement but on or prior to thirty-six (36) months
immediately following the date of the Employment Agreement, then in such
event the Company shall pay to Executive an amount equal to one-half
(1/2) of the annualized average of Executive's W-2 income for the years
of 1995, 1994 and 1993.
For purposes of this calculation, the "annualized average of Executive's W-2
income for the years 1995, 1994 and 1993" shall be determined by adding the
gross income earned by Executive during 1995, 1994 and 1993 as shown on
Executive's W-2 wage statement and dividing such sum by three (3).
Notwithstanding anything else contained herein to the contrary, the Company
shall nevertheless pay to Executive the applicable amount of severance
payments as provided herein in the event the employment of Executive by the
Company is terminated by the Company for a proper business purpose as provided
in paragraph 4(v) of the Employment Agreement.
2. In the event the employment of Executive by the Company is terminated
for any reason other than Cause within the first thirty-six (36) months
<PAGE>
immediately following the date of the Employment Agreement, then (i) the
non-compete portion of the Employment Agreement shall be invalid and (ii) all
stock options of Executive shall become immediately fully vested.
3. In the event the employment of Executive by the Company is terminated
either by the resignation of Executive or for reasons which are determined to
constitute Cause, then in either such event (i) Executive shall not be
entitled to any of the severance payments described herein and (ii) all
remaining provisions of the Employment Agreement shall apply, including but
not limited to the non-compete, confidentiality and non-solicitation
provisions.
EXHIBIT 11
<TABLE>
HANGER ORTHOPEDIC GROUP, INC.
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
FOR THE YEARS ENDED DECEMBER 31,
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $(2,687,438) $ 2,135,439 $ 997,894
Less:
Dividends declared 19,882 21,799 23,815
------------ ------------ ------------
Total $(2,707,320) $ 2,113,640 $ 974,079
============ ============ ============
Income (loss) per share (.33) .26 .11
============ ============ ============
Shares used to compute net income
(loss) per share 8,290,276 8,290,544 8,663,161
============ ============ ============
</TABLE>
EXHIBIT 22
LIST OF SUBSIDIARIES
The following is a list of the subsidiaries of Hanger Orthopedic Group,
Inc. as of December 31, 1996, all of which are wholly-owned except as noted
below, and their respective states of incorporation:
Apothecaries, Inc. - Delaware
Columbia Brace Acquisition Corp. - Delaware (80% owned)
DOBI-Symplex, Inc. - Delaware
Hanger Prosthetics & Orthotics, Inc. - Delaware
Metzgers Orthopaedic Services, Inc. - California
OPNET, Inc. - Nevada
Southern Prosthetics Supply, Inc. - Georgia
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000722723
<NAME> HANGER ORTHOPEDIC GROUP
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,572,402
<SECURITIES> 0
<RECEIVABLES> 24,321,872
<ALLOWANCES> 2,478,800
<INVENTORY> 15,916,638
<CURRENT-ASSETS> 51,565,361
<PP&E> 22,797,006
<DEPRECIATION> 5,497,809
<TOTAL-ASSETS> 134,941,427
<CURRENT-LIABILITIES> 26,066,205
<BONDS> 64,297,801
277,701
0
<COMMON> 94,492
<OTHER-SE> 39,639,323
<TOTAL-LIABILITY-AND-EQUITY> 134,941,427
<SALES> 66,805,944
<TOTAL-REVENUES> 66,805,944
<CGS> 32,233,373
<TOTAL-COSTS> 59,631,640
<OTHER-EXPENSES> 2,656,729
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,546,561
<INCOME-PRETAX> 1,971,014
<INCOME-TAX> 889,886
<INCOME-CONTINUING> 1,081,128
<DISCONTINUED> 0
<EXTRAORDINARY> 83,234
<CHANGES> 0
<NET-INCOME> 997,894
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
