-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DPfO2pxt5smHCWqRYFQr8RvUr0tsd6MDDeH+AF0RmPNXeOu1259uppEWMiX3970d mmwFUHKyrgkwSwKqD/qa4Q== /in/edgar/work/20000814/0000904456-00-000042/0000904456-00-000042.txt : 20000921 0000904456-00-000042.hdr.sgml : 20000921 ACCESSION NUMBER: 0000904456-00-000042 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANGER ORTHOPEDIC GROUP INC CENTRAL INDEX KEY: 0000722723 STANDARD INDUSTRIAL CLASSIFICATION: [8093 ] IRS NUMBER: 840904275 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10670 FILM NUMBER: 697179 BUSINESS ADDRESS: STREET 1: TWO BETHESDA METRO CENTER STREET 2: SUITE 1300 CITY: BETHESDA STATE: MD ZIP: 20814 BUSINESS PHONE: 3019860701 MAIL ADDRESS: STREET 1: TWO BETHESDA METRO CENTER STREET 2: SUITE 1300 CITY: BETHESDA STATE: MD ZIP: 20814 FORMER COMPANY: FORMER CONFORMED NAME: SEQUEL CORP DATE OF NAME CHANGE: 19890814 FORMER COMPANY: FORMER CONFORMED NAME: CELLTECH COMMUNICATIONS INC DATE OF NAME CHANGE: 19860304 10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2000 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to ___________________ Commission File Number 1-10670 HANGER ORTHOPEDIC GROUP, INC. ----------------------------------------------------------------------------- (Exact name of registrant as specified in its charter.) Delaware 84-0904275 ----------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Two Bethesda Metro Center, Suite 1200, Bethesda, MD 20814 ----------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's phone number, including area code: (301) 986-0701 ----------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check 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 [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 8, 2000; 18,910,002 shares of common stock, $.01 par value per share. HANGER ORTHOPEDIC GROUP, INC. INDEX
INDEX Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2000 (unaudited) and December 31, 1999 1 Consolidated Statements of Income for the three months ended June 30, 2000 and 1999 (unaudited) 3 Consolidated Statements of Income for the six months ended June 30, 2000 and 1999 (unaudited) 4 Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999 (unaudited) 5 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings 24 Item 4. Submission of Matters to a Vote of Security Holders 24 Item 6. Exhibits and Reports on Form 8-K 25 SIGNATURES 26
HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS (Dollars In Thousands, Except Shares and Per Share Amounts) (unaudited)
June 30, December 31, 2000 1999 ------------- ------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,289 $ 5,735 Accounts receivable less allowance for doubtful accounts of $15,153 and $17,866 in 2000 and 1999, respectively 112,249 103,125 Inventories 67,878 59,915 Prepaid expenses and other assets 17,715 5,222 Income taxes receivable 4,535 3,644 Deferred income taxes 8,125 11,778 ---------- ---------- Total current assets 213,791 189,419 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT Land 4,177 4,177 Buildings 8,902 8,886 Machinery and equipment 29,139 26,677 Furniture and fixtures 9,563 8,629 Leasehold improvements 15,578 13,004 ---------- ---------- 67,359 61,373 Less accumulated depreciation and amortization 19,849 15,269 ---------- ---------- 47,510 46,104 ---------- ---------- INTANGIBLE ASSETS Excess of cost over net assets acquired 478,755 498,612 Non-compete agreements 1,551 2,019 Patents 9,835 9,768 Assembled Work Force 7,000 7,000 Other intangible assets 17,111 15,833 ---------- ---------- 514,252 533,232 Less accumulated amortization 27,667 20,412 ---------- ---------- 486,585 512,820 ---------- ---------- OTHER ASSETS Other 1,590 1,738 ---------- ---------- TOTAL ASSETS $ 749,476 $ 750,081 ========== ==========
The accompany notes are an integral part of the consolidated financial statements. 1 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS (Dollars In Thousands, Except Shares and Per Share Amounts) (unaudited)
June 30, December 31, 2000 1999 ------------- ------------- LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 29,591 $ 25,406 Accounts payable 18,538 16,714 Accrued expenses 6,130 5,445 Accrued interest payable 7,441 4,768 Accrued wages and payroll taxes 11,912 18,658 ---------- ---------- Total current liabilities 73,612 70,991 ---------- ---------- Long-term debt 421,162 426,211 Deferred income taxes 13,481 13,481 Other liabilities 4,837 5,141 7% Redeemable Preferred Stock, liquidation preference of $1,000 per share 63,647 61,343 SHAREHOLDERS' EQUITY Common stock, $.01 par value; 60,000,000 shares authorized, 19,043,497 and 19,043,497 shares issued, and 18,910,002 and 18,910,002 shares outstanding in 2000 and 1999 190 190 Additional paid-in capital 146,498 146,498 Retained earnings 26,705 26,882 ---------- ---------- 173,393 173,570 Treasury stock, at cost (133,495 shares) (656) (656) ---------- ---------- 172,737 172,914 TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY $ 749,476 $ 750,081 ========== ==========
The accompany notes are an integral part of the consolidated financial statements. 2 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS (Dollars In Thousands, Except Shares and Per Share Amounts) (unaudited)
2000 1999 ---- ---- Net Sales $ 125,872 $ 56,417 Cost of products and services sold 60,310 27,555 ------------ ------------ Gross profit 65,562 28,862 Selling, general & administrative expenses 42,833 18,052 Integration costs 502 Depreciation and amortization 2,939 1,021 Amortization of excess cost over net assets acquired 2,796 756 ------------ ------------ Income from operations 16,492 9,033 Other expense: Interest expense, net (10,951) (787) Other, net (31) (137) ------------ ------------ Income before income taxes 5,510 8,109 Provision for income taxes 3,103 3,234 ------------ ------------ Net income $ 2,407 $ 4,875 ============ ============ BASIC PER COMMON SHARE DATA Net income $ .06 $ .26 ============ ============ Shares used to compute basic per common share amounts 18,910,002 18,846,547 ============ ============ DILUTED PER COMMON SHARE DATA Net income $ .06 $ .24 ============ ============ Shares used to compute diluted per common share amounts * 19,154,415 20,023,628 ============ ============
* Excludes the effect of the conversion of common stock into which shares of 7% Redeemable Preferred Stock are convertible as it is anti-dilutive. The accompany notes are an integral part of the consolidated financial statements. 3 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED June 30, 2000 and 1999 (Dollars In Thousands, Except Shares and Per Share Amounts) (unaudited)
2000 1999 ---- ---- Net Sales $ 240,740 $ 105,562 Cost of products and services sold 117,494 52,444 ------------ ------------ Gross profit 123,246 53,118 Selling, general & administrative expenses 82,008 35,151 Integration costs 1,088 Depreciation and amortization 5,656 1,984 Amortization of excess cost over net assets acquired 5,787 1,498 ------------ ------------ Income from operations 28,707 14,485 Other expense: Interest expense, net (22,109) (1,075) Other, net (33) (99) ------------ ------------ Income before income taxes 6,565 13,311 Provision for income taxes 4,438 5,315 ------------ ------------ Net income $ 2,127 $ 7,996 ============ ============ BASIC PER COMMON SHARE DATA Net income (loss) $ (.01) $ .42 ============ ============ Shares used to compute basic per common share amounts 18,910,002 18,823,480 ============ ============ DILUTED PER COMMON SHARE DATA Net income (loss) $ (.01) $ .40 ============ ============ Shares used to compute diluted per common share amounts * 18,910,002 20,131,175 ============ ============
* Excludes the effect of the conversion of common stock into which shares of 7% Redeemable Preferred Stock are convertible as it is anti-dilutive. All other outstanding options and warrants are anti-dilutive due to the net loss for the Company for the six months ended June 30, 2000. The accompany notes are an integral part of the consolidated financial statements. 4 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED June 30, 2000 and 1999 (Dollars In Thousands, Except Shares and Per Share Amounts) (unaudited)
2000 1999 ---- ---- Cash flows from operating activities: Net income $ 2,127 $ 7,996 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for bad debt 8,106 4,226 Deferred income taxes 3,653 --- Depreciation and amortization 5,656 1,984 Amortization of excess cost over net assets acquired 5,787 1,498 Amortization of debt issue costs 965 --- Changes in assets and liabilities, net of effect from acquired companies: Accounts receivable (17,080) (8,374) Inventory (7,913) (3,572) Prepaid and other assets (3,769) (1,218) Other assets 146 (657) Accounts payable 1,797 1,988 Accrued expenses 1,286 1,730 Accrued wages and payroll taxes (6,794) (282) Other liabilities (222) (1,121) ---------- --------- Total adjustments (8,382) (3,798) ---------- --------- Net cash provided by (used in) operating activities (6,255) 4,198 ---------- --------- Cash flows provided by (used in) investing activities: Purchase of fixed assets (5,934) (2,557) Acquisitions, net of cash acquired (4,550) (8,950) Cash received pursuant to purchase price adjustment 15,000 --- ---------- --------- Net cash provided by (used in) investing activities 4,516 (11,507) ---------- ----------
Continued The accompany notes are an integral part of the consolidated financial statements. 5 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED June 30, (Dollars In Thousands, Except Shares and Per Share Amounts) (unaudited)
2000 1999 ---- ---- Cash flows provided by (used in) financing activities: Net borrowings under revolving credit facility $ 13,400 $ 21,157 Repayment of term loans (5,500) --- Proceeds from sale of common stock 545 Proceeds from long-term debt 150,000 Repayment of long-term debt (7,352) (2,239) Increase in debt issue costs (1,255) (12,175) --------- ---------- Net cash provided by (used in) financing activities (707) 157,288 --------- ---------- Net change in cash and cash equivalents for the period (2,446) 149,978 Cash and cash equivalents at beginning of period 5,735 9,683 --------- ---------- Cash and cash equivalents at end of period $ 3,289 $ 159,661 ========= ========== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 19,373 $ 422 ========= ========== Taxes $ 2,137 $ 2,504 ========= ========== Non-cash financing and investing activities: Issuance of common stock in connection with acquisitions $ --- $ 500 ========= ========= Issuance of notes in connection with acquisitions $ 924 $ 1,026 ========= ========= Issuance of common stock in repayment of debt $ --- $ 168 ========= ========= Dividends declared on preferred stock $ 2,267 $ --- ========= ========= Accretion of preferred stock $ 37 $ --- ========= ========= Notes received pursuant to purchase price adjustment $ 9,700 $ --- ========= =========
The accompany notes are an integral part of the consolidated financial statements. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Shares and Per Share Amounts) NOTE A -- BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X. They do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of a normal recurring nature, considered necessary for a fair presentation have been included. Certain reclassifications of prior year's data have been made to improve comparability and the Company uses the gross profit method to value inventory on an interim basis. These financial statements should be read in conjunction with the financial statements of Hanger Orthopedic Group, Inc. ("Hanger" or the "Company") and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 1999 filed by the Company with the Securities and Exchange Commission. NOTE B - SEGMENT AND RELATED INFORMATION The Company evaluates segment performance and allocates resources based on the segments' EBITDA. "EBITDA" is defined as income from operations before depreciation, amortization, and integration costs. EBITDA is not a recognized measure of performance under Generally Accepted Accounting Principles ("GAAP"). While EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity, management understands that EBITDA is customarily used as a criteria in evaluating heath care companies. Moreover, substantially all of the Company's financing agreements contain covenants in which EBITDA is used as a measure of financial performance. "Other" EBITDA not directly attributable to reportable segments is primarily related to corporate general and administrative expenses. 7 Summarized financial information concerning the Company's reportable segments is shown in the following table:
Practice Management And Patient Care Centers Manufacturing Distribution Other Total ------------ ------------- ------------ ----- ----- Three Months Ended June 30, 2000 - ------------------- Net Sales Customers $ 116,004 $ 2,598 $ 7,270 $ --- $ 125,872 ========== ========== ========== ========== ========== Intersegments $ --- $ 4,057 $ 12,951 $ (17,008) $ --- ========== ========== ========== ========== ========== EBITDA $ 27,618 $ (1,219) $ 1,816 $ (5,486) $ 22,729 Restructuring costs and integration expense 257 -- --- 245 502 Depreciation and amortization 4,781 607 101 246 5,735 Interest expense, net 24,345 4 -- (13,398) 10,951 Other (income) expense (23) 16 38 -- 31 Income before taxes $ (1,742) $ (1,846) $ 1,677 $ 7,421 $ 5,510 ========== ========== ========== ========== ========== THREE MONTHS ENDED JUNE 30, 1999 Net Sales Customers $ 44,918 $ 2,794 $ 8,705 $ --- $ 56,417 ========== ========== ========== ========== ========== Intersegments $ --- $ 1,536 $ 5,674 $ (7,210) $ --- ========== ========== ========== ========== ========== EBITDA $ 10,795 $ 519 $ 1,436 $ (1,940) $ 10,810 Depreciation and amortization 1,260 400 43 74 1,777 Interest expense, net 250 4 --- 533 787 Other expense (income) 20 21 (117) 213 137 Income before taxes $ 9,265 $ 94 $ 1,510 $ (2,760) $ 8,109 ========== ========== ========== ========== ==========
8
Practice Management And Patient Care Centers Manufacturing Distribution Other Total ------------ ------------- ------------ ----- ----- Three Months Ended June 30, 2000 - ------------------- Net Sales Customers $ 221,459 $ 4,990 $ 14,291 $ --- $ 240,740 ========== ========== =========== =========== =========== Intersegments $ --- $ 7,624 $ 26,523 $ (34,147) $ --- ========== ========== =========== =========== =========== EBITDA $ 49,632 $ (1,222) $ 3,716 $ (10,888) $ 41,238 Restructuring costs and integration expense 747 -- 6 335 1,088 Depreciation and amortization 9,918 902 152 471 11,443 Interest expense, net 25,047 7 -- (2,945) 22,109 Other expense 14 18 1 -- 33 Income before taxes $ 13,906 $ (2,149) $ 3,557 $ (8,749) $ 6,565 ========== ========== =========== =========== =========== SIX MONTHS ENDED JUNE 30, 1999 Net Sales Customers $ 85,107 $ 5,397 $ 15,058 $ --- $ 105,562 ========== ========== =========== =========== =========== Intersegments $ --- $ 2,662 $ 10,821 $ (13,483) $ --- ========== ========== =========== =========== =========== EBITDA $ 18,500 $ 827 $ 2,535 $ (3,895) $ 17,967 Depreciation and amortization 2,490 785 82 125 3,482 Interest expense, net 519 10 --- 546 1,075 Other (income) expense (181) (8) (219) 507 99 Income before taxes $ 15,672 $ 40 $ 2,672 $ (5,073) $ 13,311 ========== ========== =========== =========== ===========
9 NOTE C - INVENTORY Inventories at June 30, 1999 and December 31, 1998 were comprised of the following:
June 30, 2000 December 31, 1998 ------------- ----------------- (unaudited) Raw materials $40,775 $31,715 Work-in-process 17,155 17,172 Finished goods 9,948 11,028 --------- -------- $67,878 $59,915 ======= =======
NOTE D - ACQUISITIONS On July 1, 1999, the Company acquired all of the outstanding stock of NovaCare Orthotics and Prosthetics, Inc. ("NovaCare O&P") from NovaCare, Inc. pursuant to the terms of a Stock Purchase Agreement (the "Agreement"). Under the terms of the Agreement, the aggregate consideration totaled $445,000, which consisted of the assumption of liabilities and other obligations of $38,400 and the balance in cash. Of the cash portion, $15,000 was placed in escrow pending the determination of any potential post closing adjustments relating to working capital. On May 22, 2000, an arbitrator awarded the Company $25,104 as a result of the working capital deficiency from the purchase of NovaCare O&P. During the second quarter 2000, the Company received $15,000 of the award from escrow, and approximately $600 in interest on the escrow was recorded as interest income. Also during the second quarter of 2000, Hanger executed an agreement to settle the balance of the arbitration award with NovaCare, Inc. for $9,700, of which $6,000 was received on July 3, 2000, and $3,700 was in the form of a promissory note to be paid by the end of the fiscal year. The promissory note is secured and paid on a monthly basis of approximately $617 plus interest computed at a per annum rate of 7%. Amounts received and to be received under the arbitration and settlement agreements of $24,700 have been recorded as a reduction to "Excess cost over net assets acquired" in the accompanying consolidated balance sheet at June 30, 2000. Hanger required approximately $430,200 in cash to close the acquisition, to pay approximately $20,000 of related fees and expenses, including debt issue costs of approximately $16,000, and to refinance existing debt of approximately $2,500. The funds were raised by Hanger through (i) borrowing approximately $230,000 of revolving credit and term loans under a new bank facility; (ii) selling $150,000 principal amount of 11.25% Senior Subordinated Notes due 2009; and (iii) selling $60,000 of 7% Redeemable Preferred Stock. The new bank credit facility consists of a $100,000 revolving credit facility, of which $30,000 was drawn on in connection with the acquisition of NovaCare O&P, an A term facility and a tranche B term facility. The 7% Redeemable Preferred Stock accrues annual dividends, compounded quarterly, equal to 7%, is subject to put rights and will not require principal payments prior to maturity. Such Preferred Stock is convertible into shares of the Company's non-voting common stock at a price of $16.50 per share. 10 The acquisition of NovaCare O&P has been accounted for as a business combination in accordance with the purchase method. The results of operations for this acquisition have been included in the Company's results since July 1, 1999. The following table summarizes the unaudited consolidated pro forma information, assuming the acquisition had occurred at the beginning of the following period:
Six Months Ended June 30, 1999 ------------------ Net sales $241,238 ---------------------------------------------------- Net (loss) $ (4,599) ---------------------------------------------------- Net loss per common share - diluted (1) $ (.36) ---------------------------------------------------- (1) Excludes the effect of the conversion of common stock into which shares of 7% Redeemable Preferred Stock are convertible as it is anti-dilutive. All outstanding options and warrants are anti-dilutive due to the net loss for the Company for the six months ended June 30, 1999.
Adjustments made in arriving at the unaudited consolidated pro forma results include increased interest expense on acquisition debt, amortization of goodwill, adjustments to the fair value of assets acquired and depreciable lives, preferred stock dividends and related tax adjustments. The unaudited consolidated pro forma results do not necessarily represent results which would have occurred if the acquisition had taken place at the beginning of the period, nor are they indicative of the results of future combined operations or trends. Additionally, the Company paid, during the six month period ending June 30, 2000, approximately $3,935 related to 38 orthotic and prosthetic companies acquired in years prior to 2000. The payments were primarily made pursuant to earnout and working capital provisions contained in the respective acquisition agreements. The Company has accounted for these amounts as additional purchase price resulting in an increase to excess of cost over net assets acquired. Additional amounts aggregating approximately $16,487 may be paid in connection with earnout provisions contained in previous acquisition agreements. NOTE E -INTEGRATION & RESTRUCTURING COSTS In connection with the acquisition of NovaCare O&P, the Company implemented a restructuring plan on July 1, 1999. The plan contemplated lease termination and severance costs associated with the closure of certain redundant patient-care centers and corporate functions of the Company and NovaCare O&P. The costs associated with the former NovaCare O&P centers were recorded in connection with the purchase price allocation on July 1, 1999. The costs associated with the existing Hanger centers were charged to operations during the third quarter of 1999. 11 The restructuring plan provided for the closure of 54 patient-care centers and the termination of 225 employees. Through June 30, 2000, 43 of the patient-care centers have been closed and 210 employees have been terminated. Management reasonably expects to have the remaining patient-care centers closed and employees severed by the end of 2000. Lease payments on closed patient care centers are expected to be paid through 2003. The components of the total restructuring reserve through June 30, 2000 are as follows: Lease Employee Termination and Total Severance Other Exit Restructuring Costs Costs Reserve --------- --------------- ------------- Balance at December 31, 1999 $1,600 $2,992 $ 4, 592 Year-to-date Spending (1,363) (430) $ (1,793) ------- ------- --------- Balance at June 30, 2000 $ 237 $2,562 $ 2,799 ======= ======= =========
Additionally, during the three and six-month periods ended June 30, 2000, the Company recorded integration costs of $502 and $1,088, respectively, related to the acquisition of NovaCare O&P. Integration costs include costs of changing patient care center names, payroll and related benefits conversion costs, stay-pay bonuses and related benefits for transitional employees and certain other costs related to the acquisition. These costs are expensed as incurred. NOTE F - NET INCOME PER COMMON SHARE 12 The following sets forth the calculation of the basic and diluted income per common share amounts for the three and six month periods ended June 30, 2000 and 1999.
Three Months Ended Six Months Ended June 30 June 30 ----------------------------- ----------------------------- 2000 1999 2000 1999 ------------- ------------- ------------- ------------- Net income $ 2,407 $ 4,875 $ 2,127 $ 7,996 Less preferred stock accretion and dividends declared (1,181) --- (2,304) --- ------------- ------------- ------------- ------------- Income (loss) available to common stockholders used to compute basic per common share amounts 1,226 4,875 (177) 7,996 Add back interest expense on convertible note payable, net of tax (2) 15 15 -- 27 ------------- ------------- ------------- ------------- Income (loss) available to common stockholders plus assumed conversions used to com- pute diluted per common share amounts (1) $ 1,241 $ 4,890 $ (177) $ 8,023 ============= ============= ============= ============ Average shares of common stock outstanding used to compute basic per common share amounts 18,910,002 18,846,547 18,910,002 18,823,480 Effect of convertible note payable (2) 69,430 92,573 -- 92,573 Effect of dilutive options (2) 103,140 559,995 -- 654,173 Effect of dilutive warrants (2) 71,843 524,513 -- 560,949 ------------- ------------- ------------- ------------- Shares used to compute dilutive per common share amounts (1) 19,154,415 20,023,628 18,910,002 20,131,175 ============= ============= ============= ============= Basic income (loss) per common share $ .06 $ .26 $ (.01) $ .42 Diluted income (loss) per common share $ .06 $ .24 $ (.01) $ .40 (1) Excludes the effect of the conversion of common stock into which shares of 7% Redeemable Preferred Stock are convertible as it is anti-dilutive. (2) All options, warrants and convertible notes payable are anti-dilutive due to the net loss for the Company for the six months ended June 30, 2000.
Options to purchase 243,000 and 2,835,963 shares of common stock were outstanding at June 30, 1999 and 2000, respectively, but were not included in the computation of diluted income per share for the three and six month ended June 30, 1999 and 2000, because the options' prices were greater than the average market price of the common shares. NOTE G - LONG TERM DEBT 13 On June 16, 1999, the Company issued, in a private offering, $150,000 of Senior Subordinated Notes, bearing interest of 11.25%, and maturing on June 15, 2009. Interest is payable on June 15 and December 15, commencing on December 15, 1999. In connection with the acquisition of NovaCare O&P, the Company replaced its bank credit facility existing at June 30, 1999 with a new facility. The new bank credit facility consists of a $100,000 revolving credit facility, a $100,000 tranche A term facility and a $100,000 tranche B term facility. The revolving credit facility and the tranche A term facility mature on July 1, 2005 and currently carry an interest rate of adjusted LIBOR plus 3.0% or ABR plus 2.0%. The tranche B term facility will mature on January 1, 2007 and currently carries an interest rate of adjusted LIBOR plus 4.0% or ABR plus 3.0%. The bank credit facility is collateralized by substantially all of the Company's assets, restricts the payment of dividends and contains certain affirmative and negative covenants customary in an agreement of this nature. The Company's total long term debt at June 30, 2000, including a current portion of approximately $29,591, was approximately $450,753. Such indebtedness included: (i) $150,000 senior subordinated notes; (ii) $68,400 for the revolver; (iii) $95,000 for tranche A; (iv) $99,500 for tranche B; and (v) a total of $37,853 of other indebtedness. NOTE H - COMMITMENTS AND CONTINGENCIES The Company is subject to legal proceedings and claims which arise in the ordinary course of its business, including claims related to alleged contingent additional payments under business purchase agreements. Many of these legal proceedings and claims existed in the NovaCare O&P business prior to the Company's acquisition of NovaCare O&P. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not have a materially adverse effect on the financial position, liquidity or results of operations of the Company. NOTE I - NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standard Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as amended, requires that an entity recognize all derivative instruments as either assets or liabilities on its balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction, and, if it is, the type of hedge transaction. The Company will adopt SFAS 133 by the first quarter of 2001. Due to the Company's limited use of derivative instruments, SFAS 133 is not expected to have a material effect on the financial position or results of operations of the Company. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14 RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain items of the Company's Statements of Income and their percentage of the Company's net sales: Three Months Six Months ENDED JUNE 30, ENDED JUNE 30, -------------- -------------- 2000 1999 2000 1999 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of products and services sold 47.9 48.8 48.8 49.7 Gross profit 52.1 51.2 51.2 50.3 Selling, general & administrative expenses 34.0 32.0 34.1 33.3 Depreciation and amortization 2.3 1.8 2.3 1.9 Amortization of excess cost over net assets acquired 2.2 1.3 2.4 1.4 Integration costs .4 -- .5 -- Income from operations 13.1 16.0 11.9 13.7 Interest expense, net 8.7 1.4 9.2 1.0 Provision for income taxes 2.5 5.7 1.8 5.0 Net income (loss) 1.9 8.6 .9 7.6
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1999 ------------------------------------------------------------------------------ NET SALES Net sales for the quarter ended June 30, 2000, were approximately $125.9 million, an increase of approximately $69.5 million, or 123.1%, over net sales of approximately $56.4 million for the quarter ended June 30, 1999. Contributing to the increase were (i) net sales at patient care facilities acquired subsequent to June 30, 1999, most of which was acquired when Hanger acquired NovaCare O&P on July 1, 1999, and (ii) a 10.2% increase in net sales at patient care centers owned and operated by Hanger and NovaCare O&P during both quarters ("same store sales"). GROSS PROFIT Gross profit in the quarter ended June 30, 2000 was approximately $65.6 million, an increase of approximately $36.7 million, or 127.2%, over gross profit of approximately $28.9 million for the quarter ended June 30, 1999. The increase was primarily attributable to the increase in net sales. Gross profit as a percentage of net sales increased to 52.1% in the second quarter of 2000 from 51.2% in the second quarter of 1999. The increase in the gross profit margin is primarily a result of the NovaCare O&P acquisition which was entirely patient care services. Patient care services historically have experienced higher gross profit margins than distribution and manufacturing operations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 15 Selling, general and administrative expenses in the quarter ended June 30, 2000 increased by approximately $24.8 million, or 137.3%, compared to the quarter ended June 30, 1999. Selling, general and administrative expenses as a percentage of net sales increased to 34.0% in the second quarter of 2000 compared to 32% for same period in 1999. The increase in selling, general and administrative expenses, both in dollar amount and as a percent of net sales is primarily the result of Hanger's acquisition of NovaCare O&P. INTEGRATION COSTS During the quarter ended June 30, 2000, the Company recognized approximately $.5 million of integration costs in connection with its acquisition of NovaCare O&P. Additional information relating to the integration and restructuring costs is set forth below under "Integration and Restructuring Costs." INCOME FROM OPERATIONS Principally as a result of the above, income from operations in the quarter ended June 30, 2000 was approximately $16.5 million, an increase of $7.5 million, or 82.6%, over the prior year's comparable quarter. Income from operations as a percentage of net sales decreased to 13.1% in the second quarter of 2000 from 16% for the prior year's comparable period. INTEREST EXPENSE, NET Net interest expense in the second quarter of 2000 was approximately $11.0 million, an increase of approximately $10.2 million over approximately $.8 million incurred in the second quarter of 1999. Interest expense as a percentage of net sales increased to 8.7% from 1.4% for the same period a year ago. The increase in interest expense was primarily attributable to $262.9 million borrowed under a bank credit facility and $150.0 million in senior subordinated notes issued to acquire NovaCare O&P. INCOME TAXES The Company's effective tax rate was 56.3% in the second quarter of 2000 versus 40% in 1999. The increase in the second quarter of 2000 is a result of the disproportionate impact of the amortization of the excess costs over net assets acquired in relation to taxable income, primarily attributable to the acquisition of NovaCare O&P. The provision for income taxes in the second quarter of 2000 was approximately $3.1 million compared to approximately $3.2 million for the second quarter of 1999. NET INCOME 16 As a result of the above, the Company recorded net income of approximately $2.4 million, or $.06 per dilutive common share, in the quarter ended June 30, 2000, compared to net income of $4.9 million, or $.24 per dilutive common share, in the quarter ended June 30, 1999. Net income for the quarter ended June 30, 2000, excluding the integration costs, would have been $2.7 million, or $.08 per dilutive common share after the effect of the preferred stock dividend. SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999 - ----------------------------------------------------------------------------- NET SALES Net sales for the six months ended June 30, 2000, were approximately $240.7 million, an increase of approximately $135.2 million, or 128.1%, over net sales of approximately $105.6 million for the six months ended June 30, 1999. Contributing to the increase were (i) net sales at patient care facilities acquired subsequent to June 30, 1999, most of which were acquired when Hanger acquired NovaCare O&P on July 1, 1999, and (ii) a 6.6% increase in sales by patient care centers owned and operated by Hanger and NovaCare O&P during both quarters ("same store sales"). GROSS PROFIT Gross profit in the six months ended June 30, 2000 was approximately $123.2 million, an increase of approximately $70.1 million, or 132%, over gross profit of approximately $53.1 million for the quarter ended June 30, 1999. The increase was primarily attributable to the increase in net sales. Gross profit as a percentage of net sales increased to 51.2% in the second quarter of 2000 from 50.3% in 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the six months ended June 30, 2000 increased by approximately $46.9 million, or 133.3%, compared to the six months ended June 30, 1999. Selling, general and administrative expenses as a percentage of net sales increased to 34.1% in the six months ended June 30, 2000 compared to 33.3% for same period in 1999. The increase in selling, general and administrative expenses, both in dollar amount and as a percent of net sales is primarily the result of Hanger's acquisition of NovaCare O&P. INTEGRATION COSTS During the quarter ended June 30, 2000, the Company recognized approximately $1.1 million of integration costs in connection with its acquisition of NovaCare O&P. Additional information relating to the integration and restructuring costs is set forth below under "Integration and Restructuring Costs." INCOME FROM OPERATIONS 17 Principally as a result of the above, income from operations for the six months ended June 30, 2000 was approximately $28.7 million, an increase of $14.2 million, or 98.2%, over the prior year's comparable six month period. Income from operations as a percentage of net sales decreased to 11.9% in the six month period ended June 30, 2000 from 13.7% for the prior year's comparable period. INTEREST EXPENSE, NET Net interest expense in the six month period ended June 30, 2000 was approximately $22.0 million, an increase of approximately $21 million over the approximately $1.1 million incurred in the six month period ended June 30, 1999. Interest expense as a percentage of net sales increased to 9.2% from 1.0% for the same period a year ago. The increase in interest expense was primarily attributable to $262.9 million borrowed under a bank credit facility and $150.0 million in senior subordinated notes issued to acquire NovaCare O&P. INCOME TAXES The Company's effective tax rate was 67.6% in the six month period ended June 30, 2000 versus 40% in 1999. The increase in the six month period ended June 30, 2000 is a result of the disproportionate impact of the amortization of the excess costs over net assets acquired in relation to taxable income, primarily attributable to the acquisition of NovaCare O&P. The provision for income taxes in the six month period ended June 30, 2000 was approximately $4.4 million compared to approximately $5.3 million for the six month period ended June 30, 1999. NET INCOME (LOSS) As a result of the above, the Company recorded net income of approximately $2.1 million, or $(.01) loss per dilutive common share which reflects the accrual of the preferred stock dividend, in the six month period ended June 30, 2000, compared to net income of $8.0 million, or $.40 per dilutive common share, in the six month period ended June 30, 1999. Net income for the six months ended June 30, 2000, excluding the integration costs, would have been $2.7 million, or $.08 per dilutive common share after the effect of the preferred stock dividend. LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated working capital at June 30, 2000 was approximately $140.2 million and cash and cash equivalents available were approximately $3.3 million. The Company's cash resources were satisfactory to meet its obligations for the quarter ended June 30, 2000. On July 1, 1999, the Company entered into a new credit agreement (the "Credit Agreement") with The Chase Manhattan Bank, Bankers Trust Company, Paribas and certain other banks (the "Banks"), which consists of a $100.0 million Revolving Credit Facility, a $100.0 million Tranche A Term Facility 18 and $100.0 million Tranche B Term Facility. The Tranche A Term Facility and the Revolving Credit Facility mature on July 1, 2005 and the Tranche B Term Facility matures on January 1, 2007. The Credit Agreement, as originally entered into, provided that the Tranche A Term Facility and the Revolving Credit Facility would carry an annual interest rate of adjusted LIBOR plus 2.50% or ABR plus 1.50%, and that the Tranche B Term Facility would carry an annual interest rate of adjusted LIBOR plus 3.50% or ABR plus 2.50%. In consideration for the Banks' waiver of the Company's non-compliance with certain of the covenants under the Credit Agreement in the fourth quarter of 1999, and a relaxation of certain of the financial covenants relating to 2000 and 2001, an amendment to the Credit Agreement was entered into and provides for an increase in the Tranche A Term Facility and the Revolving Credit Facility annual interest note to adjusted LIBOR plus 3.00% or ABR plus 2.00%, and an increase in the Tranche B Term Facility annual interest rate to adjusted LIBOR plus 4.00% or ABR plus 3.00%. The Revolving Credit Facility is available to Hanger for use in connection with future acquisitions and for working capital and general corporate purposes. The Company's total long term debt at June 30, 2000, including a current portion of approximately $29.6 million, was approximately $450.7 million. Such indebtedness included: (i) $150.0 of 11.25% million Senior Subordinated Notes due 2009 (ii) $68.4 million for the Revolving Credit Facility; (iii) $95.0 million for Tranche A Term Facility; (iv) $99.5 million for Tranche B Term Facility; and (v) a total of $37.8 million of other indebtedness. The Credit Facility with the Banks is collateralized by substantially all the assets of the Company, restricts the payment of dividends, and contains certain affirmative and negative covenants customary in an agreement of this nature. All or any portion of outstanding loans under the Credit Agreement may be repaid at any time and commitments may be terminated in whole or in part at the option of the Company without premium or penalty, except that LIBOR-based loans may only be repaid 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. On July 1, 1999, the Company acquired all of the outstanding capital stock of NovaCare O&P from NovaCare, Inc. pursuant to the terms of a Stock Purchase Agreement (the "Agreement"). Under the terms of the Agreement, the aggregate consideration totaled $445.0 million, which consisted of the assumption of liabilities and other obligations of $38.4 million and the balance in cash. Of the cash portion, $15.0 million was placed in escrow pending the determination of any potential post closing adjustments relating to working capital. Reference is made to the discussion under "Arbitration of Dispute Regarding Adjusted Working Capital of NovaCare O&P and Subsequent Litigation" below for information regarding post closing adjustments. Hanger required approximately $430.2 million in cash to close the acquisition of NovaCare O&P, to pay approximately $20.0 million of related fees and expenses, including debt issue costs of approximately $16.0 million, and to refinance existing debt of approximately $2.5 million. The funds were raised by Hanger through (i) borrowing approximately $230.0 million of revolving credit and term loans under the Credit Agreement; (ii) selling $150.0 million principal amount of 11.25% Senior Subordinated Notes due 2009; 19 and (iii) selling $60.0 million of 7% Redeemable Preferred Stock. The new bank credit facility consists of a $100.0 million revolving credit facility, of which $30.0 million was drawn on in connection with the acquisition of NovaCare O&P, a Tranche A Term Facility and a Tranche B Term Facility. The 7% Redeemable Preferred Stock accrues annual dividends, compounded quarterly, equal to 7%, is subject to put rights and will not require principal payments prior to maturity. Such Preferred Stock is convertible into shares of the Company's non-voting common stock at a price of $16.50 per share. As stated above, the Company sold $60.0 million of 7% Redeemable Preferred Stock on July 1, 1999 in connection with its acquisition of NovaCare O&P. The 60,000 outstanding shares of 7% Redeemable Preferred Stock are convertible into shares of the Company's non-voting common stock at a price of $16.50 per share, subject to adjustment. The Company is entitled to require that the 7% Redeemable Preferred Stock be converted into non-voting common stock on and after July 2, 2002, if the average closing price of the common stock for 20 consecutive trading days is equal to or greater than 175% of the conversion price. The 7% Redeemable Preferred Stock will be mandatorily redeemable on July 1, 2010 at a redemption price equal to the liquidation preference plus all accrued and unpaid dividends. In the event of a change in control of the Company, it must offer to redeem all of the outstanding 7% Redeemable Preferred Stock at a redemption price equal to 101% of the sum of the per share liquidation preference thereof plus all accrued and unpaid dividends through the date of payment. The Company plans to finance future acquisitions through internally generated funds or borrowings under the Revolving Credit Facility, the issuance of notes or shares of Common Stock of the Company, or through a combination thereof. The Company is engaged in ongoing discussions with prospective acquisition candidates. The Company plans to continue to expand its operations through strategic acquisitions. INTEGRATION AND RESTRUCTURING COSTS The Company had made an assessment of the restructuring costs to be incurred relative to the acquisition of NovaCare O&P. Affected by the plan of restructuring are approximately 54 patient care centers to be closed, including approximately 29 Hanger and 25 NovaCare O&P locations. The Company began formulating, and commenced, a plan of restructuring on July 1, 1999, which is substantially complete. Since commencement of the plan of restructuring, the Company has transitioned patients being cared for at closed patient care centers to other patient care centers generally within proximity to a closed branch. During 1999, the Company recorded approximately $5.6 million in restructuring liabilities for the costs associated with the restructuring of the NovaCare O&P operations and allocated such costs to the purchase price of NovaCare O&P in accordance with purchase accounting requirements. The Company also accrued approximately $1.3 million ($.8 million after tax) for the costs associated with the restructuring of the existing Hanger operations in conjunction with the NovaCare O&P acquisition and the Company has recorded such charges in the statement of income. 20 The above-referenced restructuring costs primarily include severance pay benefits and lease termination costs. The cost of providing severance pay and benefits for the reduction of approximately 225 employees is estimated at approximately $3.4 million and is primarily a cash expense. Total expected employee terminations include approximately 70 acquired corporate and 155 patient-care center employees. Employees terminated at patient-care centers include most, if not all, employees at each patient care center to be closed. Through the second quarter of 2000, approximately 210 employees were terminated including approximately 66 acquired corporate employees and 144 patient care center employees. During the second quarter of 2000, approximately 9 employees were terminated, all of whom were acquired corporate employees. Lease termination costs for patient care centers to be closed, are estimated at $3.5 million, are cash expenses and are expected to be paid through 2003. Through the six months ended June 30, 2000, 43 patient care centers were closed. No additional branches were closed during the second quarter of 2000. Management reasonably expects to have the remaining patient care centers closed and employees severed by the end of 2000. The Company estimates that the plan of restructuring Hanger and NovaCare O&P operations, when complete, will generate annual cost savings of approximately $13.0 million ($8.0 million after-tax) on a full year basis, excluding anticipated reductions in material purchase costs. The foregoing restructuring charges and related cost savings represent the Company's best estimates, but necessarily make numerous assumptions with respect to industry performance, general business and economic conditions, raw materials and product pricing levels, government legislation, the timing of implementation of the restructuring and related employee reductions and patient care center closings and other matters, many of which are outside of the Company's control. The Company's estimate of cost savings is not necessarily indicative of future performance, which may be significantly more or less favorable than as set forth and is subject to the considerations described below under "Forward Looking Statements". Additionally, in relation to the acquisition of NovaCare O&P, through the second quarter of 2000, the Company recorded integration costs of approximately $6.1 million including costs of changing patient care center names, payroll and related benefits conversion, stay-bonuses and related benefits for transitional employees and certain other costs related to the acquisition. ARBITRATION OF DISPUTE REGARDING ADJUSTED WORKING CAPITAL OF NOVACARE O&P AND SUBSEQUENT LITIGATION As stated above, on July 1, 1999, Hanger acquired all of the outstanding capital stock of NovaCare O&P from NovaCare, Inc. ("NovaCare") pursuant to a Stock Purchase Agreement, dated April 2, 1999 and amended on May 19, 1999 and June 30, 1999, by and among NovaCare, NC Resources, Inc., Hanger and HPO Acquisition Corporation (the "Agreement"). The purchase price paid by Hanger was $445 million, subject to adjustment to the extent that NovaCare O&P's adjusted working capital at June 30, 1999 was less or greater than $93,982,000. Of the purchase price paid by Hanger, $15 million was placed in escrow with U.S. Bank Trust National Association (the "Exchange Agent") pending the determination of such amount of adjusted working capital. Hanger and NovaCare disagreed regarding the determination of the amount of NovaCare O&P adjusted working capital and on February 25, 2000, Hanger and NovaCare 21 submitted the matter to the independent accounting firm of KPMG LLP ("KPMG") in accordance with the dispute resolution arbitration mechanism provided under the Agreement. The Agreement provided that such arbitrator's determination would be conclusive and binding upon the parties. On May 22, 2000, KPMG issued its report concluding that NovaCare O&P's adjusted working capital at June 30, 1999 was approximately $68,878,000 and that Hanger was entitled to the working capital deficiency of approximately $25,104,000, representing the required decrease in the purchase price previously paid by Hanger for NovaCare O&P. On May 25, 2000, at the request of Hanger and in view of the conclusion in KPMG's report that the "Total Working Capital Deficiency shall be returned to Hanger Orthopedic Group, Inc.," the Escrow Agent released the $15 million of escrowed funds to Hanger. Pursuant to the Agreement, Hanger was entitled to receive the approximately $10,104,000 balance of the working capital deficiency on or before June 21, 2000, which was 30 days after the date of the KPMG determination. On June 5, 2000 NovaCare (the name of which was recently changed to NAHC, Inc.), filed a Complaint in the Court of Chancery of the State of Delaware in and for New Castle County against Hanger, its subsidiary HPO Acquisition Corp. and the Escrow Agent alleging the wrongful release of the escrowed funds and seeking the return of such escrowed funds to the Escrow Agent. On June 9, 2000, Hanger filed an answer and counterclaim requesting the Court to dismiss the Complaint and confirm the entire KPMG award. On June 30, 2000, Hanger entered into a Settlement Agreement with NovaCare providing for dismissal of the litigation and execution of a mutual release relating to currently unknown matters arising from the acquisition. In addition, the Settlement Agreement provided that of the $10.1 million owed by NovaCare to Hanger, $6 million would be paid immediately by NovaCare to Hanger and NovaCare would execute a collateralized promissory note in the principal amount of $3.7 million, plus 7% annual interest, payable monthly over the following six months. Actual payment of the $6 million was received by Hanger on July 3, 2000. In connection with the settlement, Hanger was confident that it would have prevailed in the litigation. However, in view of the time that would have been involved in obtaining a favorable result and NovaCare's inability to pay the full $10 million at the time the Settlement Agreement was entered into, Hanger determined it would be prudent to enter into such agreement, under which Hanger gave NovaCare a $400,000 discount in exchange for the immediate payment of $6 million and the greater certainty of receiving $3.7 million under the promissory note. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standard Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as amended, requires that an entity recognize all derivative instruments as either assets or liabilities on its balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction, and, if it is, the type of hedge transaction. The Company will adopt SFAS 133 by the first quarter of 2001. Due to the Company's limited use of derivative instruments, SFAS 133 is not expected to have a material effect on the financial position or results of operations of the Company. 22 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. Based on the Company's experience in 2000, its operations have not been adversely affected to date by Year 2000 or leap year problems. The total costs for the Company's Year 2000 program were approximately $1.3 million, which was expended during 1999. FORWARD LOOKING STATEMENTS This report contains forward-looking statements setting forth the Company's beliefs or expectations relating to future revenues. 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 successfully integrate the operations of NovaCare O&P and 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. Readers are cautioned not to put undue reliance on forward-looking statements. The Company disclaims any intent or obligation to up-date publicly these forward-looking statements, whether as a result of new information, future events or otherwise. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 23 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Arbitration of Dispute Regarding Adjusted Working Capital of NovaCare O&P and Subsequent Litigation" set forth above under Item 2 of Part I of this report for information relating to the Complaint filed on June 5, 2000 by NAHC, Inc. (formerly named NovaCare, Inc.) against Hanger Orthopedic Group, Inc., HPO Acquisition Corp. and U.S. Bank Trust National Association in the Court of Chancery of the State of Delaware in and for New Castle County. On June 30, 2000, Hanger and NovaCare entered into the Settlement Agreement discussed in the above-referenced MD&A and the suit has been dismissed. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- The Company's Annual Meeting of Stockholders was held on May 16, 2000. A total of 18,910,002 shares of Common Stock were outstanding and entitled to vote at the Annual Meeting. The first proposal was the election of directors. The following persons were nominated and elected to serve as members of the Board of Directors for one year or until their successors are elected and qualified by the votes indicated: Mitchell J. Blutt, M.D. (17,617,877 shares for and 79,769 shares withheld), Edmond E. Charrette, M.D. (17,627,677 shares for and 69,969 shares withheld), Thomas P. Cooper, M.D. (17,626,077 shares for and 71,569 shares withheld), Robert J. Glaser, M.D. (17,606,600 shares for and 91,046 shares withheld), C. Raymond Larkin, Jr. (17,616,222 shares for and 81,424 shares withheld), Risa J. Lavizzo-Mourey, M.D. (16,223,486 shares for and 1,474,160 shares withheld), Brig. Gen. William L. McCulloch (17,586,905 shares for and 110,741 shares withheld), Ivan R. Sabel (17,628,366 shares for and 69,280 shares withheld) and H.E. Thranhardt (16,186,231 shares for and 1,511,415 shares withheld). The second proposal was a proposed amendment to the Certificate of Designations relating to the Company's outstanding 7% Redeemable Preferred Stock. The proposal was approved by the holders of more than the required majority of the shares of Common Stock outstanding as well as the holder of a majority of the outstanding 7% Redeemable Preferred Stock. The proposal was approved by a vote of 11,965,158 shares of Common Stock for (representing 63.3% of the outstanding shares), 146,186 shares of Common Stock against with 118,943 shares of Common Stock abstaining. A copy of the Certificate of Amendment to the Certificate of Designations, as filed with the Secretary of State of Delaware on May 16, 2000, is filed as an exhibit to this Form 10-Q. The third proposal was the proposed ratification of the selection of PricewaterhouseCoopers LLP as the independent accountants for the Company for the current fiscal year. The proposal was approved by the holders of more than the required majority of the shares of Common Stock voting at the meeting. The proposal was approved by a vote of 17,645,702 shares for (representing 99.7% of the shares voting), 40,051 shares against, with 11,893 shares abstaining. Item 6. EXHIBITS AND REPORTS ON FORM 8-K 24 EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS. The following exhibits are filed herewith: EXHIBIT NO. DOCUMENT 3 Certificate of Amendment to Certificate of Designations relating to the 7% Redeemable Preferred Stock of the Registrant, as filed with the Secretary of State of Delaware on May 16, 2000. 27 Financial Data Schedule (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended June 30, 2000. 25 SIGNATURES Pursuant to the requirements 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. Date: August 11, 2000 /s/IVAN R. SABEL --------------- ------------------ Ivan R. Sabel, CPO Chief Executive Officer Date: August 11, 2000 /s/RICHARD A. STEIN --------------- ------------------- Richard A. Stein Vice President - Finance Principal Financial and Accounting Officer The accompanying notes are an integral part of the consolidated financial statements. EX-3 2 0002.txt EXHIBIT 3 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF DESIGNATIONS, POWERS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS AND QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF 7% REDEEMABLE PREFERRED STOCK OF HANGER ORTHOPEDIC GROUP, INC., A DELAWARE CORPORATION (THE "CERTIFICATE OF DESIGNATIONS") -------------------------------------------------- Pursuant to Section 242 the General Corporation Law of the State of Delaware -------------------------------------------------- Hanger Orthopedic Group, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (hereinafter called the "Corporation"), hereby certifies that the following resolution was duly adopted by the Board of Directors of the Corporation and was approved by the holders of a majority of the outstanding shares of Common Stock of the Corporation and by the holder of a majority of the outstanding shares of 7% Redeemable Preferred Stock of the Corporation in accordance with the provisions of Section 242 of the Delaware General Corporation Law at a meeting duly called and held on May 16, 2000. RESOLVED, that the Certificate of Designations setting forth the terms of the Redeemable Preferred Stock of the Corporation shall be amended as follows: Section 1. The definition of "Change of Control" set forth in Article II of the Certificate of Designations is hereby deleted in its entirety and replaced with the following: "Change of Control" means (a) a "Change of Control" (as defined in the Indenture) or (b) a Merger Change of Control. Page 2 Section 2. Article II of the Certificate of Designations is hereby amended by adding a new definition thereto which shall read in its entirety as follows: "Merger Change of ControL" means a merger, consolidation or amalgamation between the Corporation or any wholly-owned Subsidiary and any other Person, except a merger or consolidation of any Subsidiary with or into any Person in connection with any acquisition permitted under Section 3.3(c)(v)." Section 3. Section 3.3 of the Certificate of Designations is hereby amended by deleting Section 3.3(c)(iv) and replacing it with "Intentionally Omitted." IN WITNESS WEREOF, the Corporation had caused this Certificate of Amendment to signed as of the 16th day of May, 2000. HANGER ORTHOPEDIC GROUP, INC. By: /s/IVAN R. SABEL ---------------- Name: Ivan R. Sabel Title: Chairman of the Board, President and Chief Executive Officer EX-27 3 0003.txt
5 0000722723 HANGER ORTHOPEDIC GROUP, INC. 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 3,289 0 112,249 15,152 67,878 213,791 67,359 19,849 749,476 73,612 421,162 63,647 0 172,737 0 749,476 125,872 125,872 60,310 49,070 0 0 10,951 5,510 3,103 2,407 0 0 0 2,407 0.06 0.06
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