10-Q 1 w42681e10-q.txt QUARTERLY REPORT 1 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 September 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 (IRS Employer Identification No.) incorporation or organization) Two Bethesda Metro Center, Suite 1200, Bethesda, MD 20814 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone 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 November 1, 2000; 18,910,002 shares of common stock, $.01 par value per share. 2 HANGER ORTHOPEDIC GROUP, INC. INDEX Page No. Part I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - September 30, 2000 (unaudited) and December 31, 1999 1 Consolidated Statements of Income for the three months ended September 30, 2000 and 1999 (unaudited) 3 Consolidated Statements of Income for the nine months ended September 30, 2000 and 1999 (unaudited) 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 1999 (unaudited) 5 Notes to Consolidated Financial Statements (unaudited) 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 24 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 25 SIGNATURES 26 3 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS (Dollars In Thousands, Except Shares and Per Share Amounts)
September 30, December 31, 2000 1999 ----- ---- (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 7,828 $ 5,735 Accounts receivable less allowances for Doubtful accounts of $16,569 and $17,866 in 2000 and 1999, respectively 119,443 103,125 Inventories 69,889 59,915 Prepaid expenses and other assets 10,474 8,866 Deferred income taxes 11,411 11,778 -------- -------- Total current assets 219,045 189,419 -------- -------- PROPERTY, PLANT AND EQUIPMENT Land 4,177 4,177 Buildings 8,898 8,886 Machinery and equipment 30,278 26,677 Furniture and fixtures 9,820 8,629 Leasehold improvements 16,255 13,004 -------- -------- 69,428 61,373 Less accumulated depreciation and amortization 22,302 15,269 -------- -------- 47,126 46,104 -------- -------- INTANGIBLE ASSETS Excess of cost over net assets acquired 482,022 498,612 Non-compete agreements 1,570 2,019 Patents 9,734 9,768 Assembled Work Force 7,000 7,000 Other intangible assets 17,014 15,833 -------- -------- 517,340 533,232 Less accumulated amortization 31,755 20,412 -------- -------- 485,585 512,820 -------- -------- OTHER ASSETS Other 1,560 1,738 -------- -------- TOTAL ASSETS $753,316 $750,081 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 1 4 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS (Dollars In Thousands, Except Shares and Per Share Amounts)
September 30, December 31, 2000 1999 ---- ---- (unaudited) LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 29,848 $ 25,406 Accounts payable 16,412 16,714 Accrued expenses 8,152 5,445 Accrued interest payable 12,063 4,768 Accrued compensation related cost 15,636 18,658 Deferred revenue 174 --- ---------- --------- Total current liabilities 82,285 70,991 ---------- --------- Long-term debt 416,220 426,211 Deferred income taxes 13,481 13,481 Other liabilities 3,352 5,141 7% Redeemable Convertible Preferred Stock, liquidation preference of $1,000 per share 64,904 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 27,042 26,882 ---------- --------- 173,730 173,570 Treasury stock, at cost (133,495 shares) (656) (656) ---------- --------- 173,074 172,914 ---------- --------- TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY $ 753,316 $750,081 ========== ========
The accompanying notes are an integral part of the consolidated financial statements. 2 5 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED September 30, 2000 and 1999 (Dollars In Thousands, Except Shares and Per Share Amounts) (unaudited)
2000 1999 ---- ---- Net Sales $ 125,252 $ 124,922 Cost of products and services sold 60,822 59,578 ---------- ---------- Gross profit 64,430 65,344 Selling, general & administrative 41,748 38,678 Depreciation and amortization 2,914 2,283 Amortization of excess cost over net assets acquired 3,037 2,963 Integration and restructuring costs 305 3,917 ---------- ---------- Income from operations 16,426 17,503 Other (expense) income: Interest expense, net (12,170) (10,487) Other (108) (6) ---------- ---------- Income before income taxes 4,148 7,010 Provision for income taxes 2,552 3,561 ---------- ---------- Net income $ 1,596 $ 3,449 ========== ========== Basic Per Common Share Data --------------------------- Net income $ .02 $ .13 ========== ========== Shares used to compute basic per common share amounts 18,910,002 18,862,071 ========== ========== Diluted Per Common Share Data ----------------------------- Net income * $ .02 $ .12 ========== ========== Shares used to compute diluted per common share amounts * 18,997,841 19,895,853 ========== ==========
* Excludes the effect of the conversion of common stock into which shares of 7% Redeemable Preferred Stock are convertible as it is considered anti-dilutive. The accompanying notes are an integral part of the consolidated financial statements. 3 6 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED September 30, 2000 and 1999 (Dollars In Thousands, Except Shares and Per Share Amounts) (unaudited)
2000 1999 ---- ---- Net Sales $ 365,992 $ 230,484 Cost of products and services sold 178,316 112,021 ----------- ---------- Gross profit 187,676 118,463 Selling, general & administrative 123,756 73,784 Depreciation and amortization 8,570 4,244 Amortization of excess cost over net assets acquired 8,825 4,461 Integration and restructuring costs 1,393 3,917 ----------- ---------- Income from operations 45,132 32,057 Other (expense) income: Interest expense, net (34,278) (11,585) Other income (expense) (142) (151) ----------- ---------- Income before income taxes 10,712 20,321 Provision for income taxes 6,990 8,876 ----------- ---------- Net income $ 3,722 $ 11,445 =========== ========== Basic Per Common Share Data --------------------------- Net income $ .01 $ .55 =========== ========== Shares used to compute basic per common share amounts 18,910,002 18,836,485 =========== ========== Diluted Per Common Share Data ----------------------------- Net income * $ .01 $ .52 =========== ========== Shares used to compute diluted per common share amounts * 19,095,191 20,088,833 =========== ==========
* Excludes the effect of the conversion of common stock into which shares of 7% Redeemable Preferred Stock are convertible as it is considered anti-dilutive. The accompanying notes are an integral part of the consolidated financial statements. 4 7 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED September 30, 2000 and 1999 (Dollars In Thousands, Except Shares and Per Share Amounts) (unaudited)
2000 1999 ---- ---- Cash flows from operating activities: Net income $ 3,722 $ 11,445 Adjustments to reconcile net income to net cash provided by operating activities: Provision for bad debt 12,986 7,788 Depreciation and amortization 8,570 4,244 Amortization of excess cost over net assets acquired 8,825 4,461 Amortization of debt discount 1,474 Restructuring costs -- 1,305 Changes in assets and liabilities, net of effect from acquired companies: Accounts receivable (28,899) (15,255) Inventory (9,774) (6,406) Prepaid and other assets 232 (1,204) Other assets 545 (1,042) Accounts payable 115 1,854 Accrued expenses 7,789 5,118 Accrued wages and payroll taxes (3,070) (3,613) Other liabilities (1,612) (20) --------- --------- Total adjustments (2,819) (2,770) --------- --------- Net cash provided by operating activities 903 8,675 --------- --------- Cash flows from investing activities: Purchase of fixed assets (7,965) (5,054) Acquisitions, net of cash acquired (6,773) (424,409) Cash received pursuant to purchase price adjustment 22,850 --- Other intangibles (27) (350) --------- --------- Net cash provided by (used in) investing activities 8,085 (429,813) --------- ---------
Continued The accompanying notes are an integral part of the consolidated financial statements. 5 8 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED September 30, 2000 and 1999 (Dollars In Thousands, Except Shares and Per Share Amounts) (unaudited)
2000 1999 ---- ---- Cash flows from financing activities: Net borrowings under revolving credit facility $ 10,300 $ 30,000 Repayment of term loans (5,500) -- Proceeds from sale of common stock -- 611 Proceeds from sale of preferred stock, net -- 59,188 Proceeds from long-term debt -- 350,000 Repayment of long-term debt (10,536) (5,365) Increase in debt issue costs (1,159) (13,907) ------------- ----------- Net cash provided by (used in) financing activities (6,895) 420,527 ------------- ----------- Net change in cash and cash equivalents for the period 2,093 (611) Cash and cash equivalents at beginning of period 5,735 9,683 ------------- ------------ Cash and cash equivalents at end of period $ 7,828 $ 9,072 ============= ============ Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 26,167 $ 4,148 ============= ============ Taxes $ 2,237 $ 8,630 ============= ============ Non-cash financing and investing activities: Issuance of common stock in connection with Acquisitions $ -- $ 500 ============= ============ Issuance of notes in connection with acquisitions $ 2,174 $ 1,026 ============= ============ Issuance of common stock in repayment of debt $ -- $ 168 ============= ============ Accretion of preferred stock $ 55 $ 18 ============= ============ Dividends declared on preferred stock $ 3,506 $ 1,050 ============= ============
The accompanying notes are an integral part of the consolidated financial statements. 6 9 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. 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. These financial statements should be read in conjunction with the financial statements of Hanger Orthopedic Group, Inc. (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 and amortization. EBITDA is not a 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. EBITDA is presented for each reported segment before reclassifications between EBITDA and other income (expense) made for external reporting purposes. "Other" EBITDA not directly attributable to reportable segments is primarily related to corporate general and administrative expenses. 7 10 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 SEPTEMBER 30, 2000 ------------------------ Net Sales Customers $ 115,609 $ 2,269 $ 7,374 $ --- $ 125,252 =========== ============ ============ ============= ============ Intersegments $ --- $ 4,075 $ 12,756 $ (16,831) $ --- =========== ============ ============ ============= ============ EBITDA $ 26,312 $ (280) $ 1,929 $ (5,279) $ 22,682 Integration costs $ 147 $ --- $ --- $ 158 $ 305 Depreciation and amortization 5,062 510 91 288 5,951 Interest expense, (income) 12,733 4 --- (567) 12,170 Other expense 88 17 --- 3 108 ----------- ------------ ------------ ------------- ------------ Income before taxes $ 8,282 $ (811) $ 1,838 $ (5,161) $ 4,148 =========== ============ ============ ============= ============
PRACTICE MANAGEMENT AND PATIENT CARE CENTERS MANUFACTURING DISTRIBUTION OTHER TOTAL ------------ ------------- ------------ ------------- ------------ THREE MONTHS ------------ ENDED SEPTEMBER 30, 1999 ------------------------ Net Sales Customers $ 115,151 $ 2,949 $ 6,822 $ --- $ 124,922 =========== ============ ============ ============= ============ Intersegments $ --- $ 1,461 $ 12,147 $ (13,608) $ --- =========== ============ ============ ============= ============ EBITDA $ 26,625 $ 571 $ 2,365 $ (2,895) $ 26,666 Integration and restructuring costs $ 3,775 $ 124 $ --- $ 18 $ 3,917 Depreciation and amortization 4,721 421 40 64 5,246 Interest expense, (income) 10,542 4 --- (59) 10,487 Other expense (income) (41) 15 1 31 6 ----------- ------------ ------------ ------------- ------------ Income before taxes $ 7,628 $ 7 $ 2,324 $ (2,949) $ 7,010 =========== ============ ============ ============= ============
8 11
PRACTICE MANAGEMENT AND PATIENT CARE CENTERS MANUFACTURING DISTRIBUTION OTHER TOTAL ----------- ------------- ------------ ----------- ------------ NINE MONTHS ----------- ENDED SEPTEMBER 30, 2000 ------------------------ Net Sales Customers $ 337,068 $ 7,259 $ 21,665 $ --- $ 365,992 =========== ============ ============ ============ ============ Intersegments $ --- $ 11,699 $ 39,279 $ (50,978) $ --- =========== ============ ============ ============ ============ EBITDA $ 75,945 $ (1,502) $ 5,646 $ (16,169) $ 63,920 Integration costs $ 895 $ --- $ 6 $ 492 $ 1,393 Depreciation and amortization 14,979 1,411 243 762 17,395 Interest expense, (income) 37,779 11 - (3,512) 34,278 Other expense 102 36 1 3 142 ----------- ------------ ------------ ----------- ------------ Income before taxes $ 22,190 $ (2,960) $ 5,396 $ (13,914) $ 10,712 =========== ============ ============ =========== ============
PRACTICE MANAGEMENT AND PATIENT CARE CENTERS MANUFACTURING DISTRIBUTION OTHER TOTAL ----------- ------------- ------------ ----------- ------------ NINE MONTHS ----------- ENDED SEPTEMBER 30, 1999 ------------------------ Net Sales Customers $ 200,258 $ 8,772 $ 21,454 $ --- $ 230,484 =========== ============ ============ =========== ============ Intersegments $ --- $ 3,696 $ 23,394 $ (27,090) $ --- =========== ============ ============ =========== ============ EBITDA $ 45,322 $ 1,449 $ 5,113 $ (7,205) $ 44,679 Integration and restructuring costs $ 3,775 $ 124 $ --- $ 18 $ 3,917 Depreciation and amortization 7,211 1,207 122 165 8,705 Interest expense, (income) 11,939 13 - (367) 11,585 Other expense (income) (25) 57 (4) 123 151 ----------- ------------ ----------- ----------- ------------ Income before taxes $ 22,422 $ 48 $ 4,995 $ (7,144) $ 20,321 =========== ============ =========== =========== ============
NOTE C -- INVENTORY Inventories at September 30, 2000 and December 31, 1999 were comprised of the following:
September 30, 2000 December 31, 1999 ------------------ ----------------- (unaudited) Raw materials $40,962 $31,715 Work-in-process 17,254 17,172 Finished goods 11,673 11,028 -------- -------- $69,889 $59,915 ======== ========
NOTE D - ACQUISITIONS 9 12 During the first nine months of 2000, the Company acquired four orthotic and prosthetic companies. The aggregate purchase price, excluding potential earn-out provisions, was $3,000, comprised of $1,600 in cash and $1,400 in promissory notes. 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 $25,100 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%. As of September 30, 2000, approximately $1,800 of the above noted $3,700 promissory note had been received. 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 September 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. 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: 10 13
----------------------------------------------------- --------------------------- Nine Months Ended ----------------- September 30, 1999 ------------------ ----------------------------------------------------- --------------------------- ----------------------------------------------------- --------------------------- Net sales $366,160 ----------------------------------------------------- --------------------------- Net (loss) (1,150) ----------------------------------------------------- --------------------------- Net loss per common share - diluted (1) $ (.23) ----------------------------------------------------- ---------------------------
(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 nine months ended September 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 nine month period ending September 30, 2000, approximately $5,000 and issued $750 in notes related to 53 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 in the amount of $5,700. Additional amounts aggregating up to approximately $14,600 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. The restructuring plan provided for the closure of 54 patient-care centers and the termination of the employment of 225 employees. Through September 30, 2000, 44 of the patient-care centers had been closed and the employment of 210 employees had been terminated. Management expects to have the remaining 10 patient-care centers closed and the employment of the remaining 15 employees terminated by the end of 2000. Lease payments on closed patient care centers are expected to be paid through 2003. 11 14 The components of the total restructuring reserve through September 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) (646) $ (2,009) ---------- --------------- -------------- Balance at September 30, 2000 $ 237 $ 2,346 $ 2,583 ========== =============== ==============
Additionally, during the three and nine-month periods ended September 30, 2000, the Company recorded integration costs of $305 and $1,400, 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 15 The following sets forth the calculation of the basic and diluted income per common share amounts for the three month periods ended September 30, 2000 and 1999 and the nine month periods ended September 30, 2000 and 1999.
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- --------------------- 2000 1999 2000 1999 ----- ----- ----- ----- Net income $1,596 $3,449 $3,722 $11,445 Less preferred stock accretion and dividends declared (1,257) (1,068) (3,561) (1,068) ------ ------ ------ ------- Income available to common stockholders used to compute basic per common share amounts 339 2,381 161 10,377 Add back interest expense on convertible note payable, net of tax 15 12 50 39 ------ ------ ------ ------- Income available to common stockholders plus assumed conversions used to com- pute diluted per common share amounts $354 $2,393 $211 $10,416 ====== ====== ====== ======= Average shares of common stock outstanding used to compute basic per common share amounts 18,910,002 18,862,071 18,910,002 18,836,485 Effect of convertible note payable 69,430 92,572 69,430 92,572 Effect of dilutive options 18,405 459,960 55,927 621,532 Effect of dilutive warrants 4 481,250 59,832 538,244 ---------- ----------- ----------- ----------- Shares used to compute dilutive per common share amounts (1) 18,997,841 19,895,853 19,095,191 20,088,833 ========== =========== =========== =========== Basic income per common share $ .02 $ .13 $ .01 $ .55 Diluted income per common share $ .02 $ .12 $ .01 $ .52
(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. Options to purchase 4,341,167 and 1,463,750 shares of common stock were outstanding at September 30, 2000 and 1999, respectively, but were not included in the computation of diluted income per share for the three months ended September 30, 2000 and 1999 because the options' exercise prices were greater than the average market price of the common shares. Options to purchase 2,826,666 and 450,000 shares of common stock were outstanding at September 30, 2000 and 1999, respectively, but were not included in the computation of diluted income per common share for the nine months ended September 30, 2000 and 1999 because the options' exercise prices were greater than the average market price of the common shares. NOTE G - LONG TERM DEBT 13 16 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 will mature six years after the closing of the NovaCare O&P acquisition and carry an interest rate of adjusted LIBOR plus 3.0% or ABR plus 2.0%. The Tranche B Term Facility will mature seven years and six months after the closing of the NovaCare O&P acquisition and 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 on common stock and contains certain affirmative and negative covenants customary in an agreement of this nature. The Company's total long term debt at September 30, 2000, including a current portion of approximately $29,800, was approximately $446,100. Such indebtedness included: (i) $150,000 senior subordinated notes; (ii) $65,300 under the Revolving Credit Facility; (iii) $95,000 under the Tranche A Term Facility; (iv) $99,500 under the Tranche B Term Facility; and (v) a total of $36,300 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. In December 1999, the Staff of the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes some of the SEC's interpretations of the application of generally accepted 14 17 accounting principles to revenue recognition. The Company has reviewed SAB 101 and does expect it to have a material impact on the existing revenue recognition policies. NOTE J - SUBSEQUENT EVENTS During the third quarter of 2000, the Company signed a letter of intent to sell its manufacturing division, Seattle Limb ("SOGI"). The transaction is expected to close in December 2000, with the Company receiving approximately $75,000 in gross proceeds ($50,000 after tax). These proceeds are expected to be used by management to pay down portions of the Tranche A and Tranche B Credit Facilities in accordance with the financing agreement. The sale of SOGI is not expected to have a materially adverse effect to the consolidated financial statements of the Company, as SOGI revenues are approximately 2% of the consolidated revenues of the Company for the nine months ended September 30, 2000, and are included in Income from Operations. 15 18 Management's Discussion and Analysis of Financial Condition and Results of Operations 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:
Nine Months Three Months Ended September 30, Ended September 30, ------------------- ------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of products and services sold 48.7 48.6 48.6 47.7 Gross profit 51.3 51.4 51.4 52.3 Selling, general & administrative expenses 33.8 32.0 33.3 31.0 Depreciation and amortization 2.3 1.8 2.3 1.8 Amortization of excess cost over net assets acquired 2.4 1.9 2.4 2.4 Integration and restructuring costs .4 1.7 .2 3.1 Income from operations 12.3 13.9 13.1 14.0 Interest expense 9.4 5.0 9.7 8.4 Provision for income taxes 1.9 3.9 2.0 2.9 Net income 1.0 5.0 1.3 2.8
Three Months Ended September 30, 2000 Compared to the Three Months Ended September 30, 1999 Net Sales Net sales for the quarter ended September 30, 2000, were approximately $125.3 million, an increase of approximately $.3 million, or .3%, over net sales of approximately $124.9 million for the quarter ended September 30, 1999. The increase was primarily attributable to (i) a 6.4% increase in net sales at patient-care centers owned and operated by Hanger during both quarters (i.e., same store sales), assuming 1999 revenue is adjusted for certain losses of sales resulting from the acquisition, and (ii) net sales at patient-care facilities acquired by Hanger subsequent to September 30, 1999. Gross Profit Gross profit in the quarter ended September 30, 2000 was approximately $64.4 million, a decrease of approximately $.9 million, or 1.4%, from gross profit of approximately $65.3 million for the quarter ended September 30, 1999. Gross profit as a percentage of net sales decreased to 51.4% in the third quarter of 2000 from 52.3% in the third quarter of 1999. 16 19 Selling, General and Administrative Expenses Selling, general and administrative expenses in the quarter ended September 30, 2000 increased by approximately $3.1 million, or 7.9%, compared to the quarter ended September 30, 1999. Selling, general and administrative expenses as a percentage of net sales increased to 33.3% in the third quarter of 2000 compared to 31.0% for same period in 1999. The increase in selling, general and administrative expenses was primarily the result of (i) an increase of approximately $1.8 million in labor costs primarily at patient-care centers previously acquired from NovaCare O&P and (ii) an increase of approximately $1.3 million in the provision for bad debts. The Company plans to effect a decrease in labor costs prior to the end of 2000. Integration and Restructuring Costs During the quarter ended September 30, 2000, the Company recognized approximately $.3 million of one-time integration costs in connection with its acquisition on July 1, 1999 of NovaCare O&P, a substantial decrease from the $3.9 million of integration and restructuring costs recognized in the prior year's comparable quarter. The $.3 million integration costs recorded in the quarter ended September 30, 2000 consisted primarily of software, hardware and consulting costs associated with the new human resource and payroll information system. Additional information relating to 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 September 30, 2000 was approximately $16.4 million, a decrease of $1.1 million, or 6.2%, from the prior year's comparable quarter. Income from operations as a percentage of net sales decreased to 13.1% in the third quarter of 2000 from 14.0% for the prior year's comparable period. Interest Expense Net interest expense in the third quarter of 2000 was approximately $12.2 million, an increase of approximately $1.7 million over the approximately $10.5 million incurred in the third quarter of 1999. Interest expense as a percentage of net sales in the third quarter of 2000 increased to 9.7% from 8.4% for the same period a year ago. The increase in interest expense was primarily attributable to the increase during the fourth quarter of 1999 in the interest rates under the Company's Bank Credit Facility that is described below. Income Taxes The Company's effective tax rate was 62% in the third quarter of 2000 versus 51% in the third quarter of 1999. The increase in the effective tax rate in 2000 was principally a result of the effect of non-deductible goodwill amortization, and low levels of pre-tax income. The provision for income taxes in the third quarter of 2000 was approximately $2.5 million compared to approximately $3.6 million for the third quarter of 1999. 17 20 Net Income As a result of the above, the Company recorded net income of $1.6 million, or $.02 per dilutive common share, in the quarter ended September 30, 2000, compared to net income of $3.4 million, or $.12 per dilutive common share, in the quarter ended September 30, 1999. Net income for the quarter ended September 30, 2000, excluding the integration costs, would have been $1.8 million, or $.03 per dilutive common share. Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September 30, 1999 Net Sales Net sales for the nine months ended September 30, 2000 were approximately $366.0 million, an increase of approximately $135.5 million, or 59%, over net sales of approximately $230.5 million for the nine months ended September 30, 1999. The increase was primarily attributable to (i) the acquisition of NovaCare on July 1, 1999, (ii) a 7.9% increase in net sales at patient-care centers owned and operated by Hanger during both periods (i.e., same store sales), and (iii) net sales at patient-care facilities acquired by Hanger subsequent to September 30, 1999. Gross Profit Gross profit for the nine months ended September 30, 2000 was approximately $187.7 million, an increase of approximately $69.2 million, or 58%, over gross profit of approximately $118.5 million for the nine months ended September 30, 1999. The increase was primarily attributable to the increase in net sales which, in turn, was primarily attributable to the Company's acquisition of NovaCare O&P on July 1, 1999. Gross profit as a percentage of net sales was 51.3% in the first nine months of 2000 compared to 51.4% in the first nine months of 1999. Selling, General and Administrative Expenses Selling, general and administrative expenses in the nine months ended September 30, 2000 increased by approximately $50.0 million, or 67.7%, compared to the nine months ended September 30, 1999. Selling, general and administrative expenses as a percentage of net sales increased to 33.8% in the nine months ended September 30, 2000, from 32.0% for the same period in 1999. The increase in selling, general and administrative expenses, both in dollar amount and as a percent of net sales, was primarily the result of an increase in labor costs primarily at patient care centers previously acquired from NovaCare O&P and an increase in the provision for bad debts. Integration and Restructuring Costs The Company recognized approximately $1.4 million of one-time integration costs during the nine months ended September 30, 2000 in connection with the Company's acquisition on July 1, 1999 of NovaCare O&P, a substantial decrease from the $3.9 million of such costs recognized in the prior year's comparable period. The approximately $1.4 million of integration costs recognized 18 21 during the nine months ended September 30, 2000, included (i) the $.3 million of computer conversion, consulting and related costs recognized during the quarter ended September 30, 2000 and discussed above, and (ii) approximately $1.1 million of costs of changing patient care center names, payroll and related benefit conversion, stay-bonuses and related benefits for transitional employees and certain other costs relating to the acquisition recognized during the six months ended June 30, 2000. 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 nine months ended September 30, 2000 was approximately $45.1 million, an increase of approximately $13.1 million, or 40.8%, over the prior year's comparable period. Income from operations as a percentage of net sales decreased to 12.3% in the nine months ended September 30, 2000 from 13.9% in the nine months ended September 30, 1999. Interest Expense Net interest expense for the first nine months of 2000 was approximately $34.3 million, an increase of approximately $22.7 million over approximately $11.6 million incurred in the first nine months of 1999. Interest expense as a percentage of net sales increased to 9.4% in the nine months ended September 30, 2000 from 5.0% for the same period one year ago. The increase in interest expense was primarily attributable to $230.0 million borrowed under the Company's Bank Credit Facility and $150.0 million in senior subordinated notes issued to acquire NovaCare O&P on July 1, 1999. Income Taxes The Company's effective tax rate was 65% in the first nine months of 2000 versus 44% in the comparable period of 1999. The increase in the effective tax rate in 2000 is principally a result of the effect of non-deductible goodwill amortization, and low levels of pre-tax income. The provision for income taxes for the nine months ended September 30, 2000 was approximately $7.0 million compared to approximately $8.9 million for the nine months ended September 30, 1999. Net Income As a result of the above, the Company recorded net income of approximately $3.7 million, or $.01 per dilutive common share, in the first nine months of 2000, compared to net income of approximately $11.4 million, or $.52 per dilutive common share, in the first nine months of 1999. Net income for the nine months ended September 30, 2000, excluding the integration costs, would have been $4.6 million, or $.05 per dilutive common share. Liquidity and Capital Resources 19 22 The Company's consolidated working capital at September 30, 2000 was approximately $136.8 million and cash and cash equivalents available were approximately $7.8 million. The Company's cash resources were satisfactory to meet its obligations for the quarter ended September 30, 2000, and are expected to be sufficient to meet the Company's obligations from operations for the next year. 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 and $100.0 million Tranche B Term Facility (collectively, the "Bank Credit 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 September 30, 2000, including a current portion of approximately $29.8 million, was approximately $446.1 million. Such indebtedness included: (i) $150.0 million of 11.25% million Senior Subordinated Notes due 2009 (ii) $65.3 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 $36.3 million of other indebtedness. The Bank Credit Facility 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 20 23 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. The Company also has 7% Redeemable Preferred Stock which accrues annual dividends, compounded quarterly, equal to 7%, is subject to put rights and will not require principal payments prior to its maturity, July 1, 2010. Such Preferred Stock is convertible into shares of the Company's non-voting common stock at a price of $16.50 per share. During the quarter ended September 30, 1999, the Mandatorily Redeemable Preferred Stock Class F, of which no shares had been issued, was retired. The Company plans to finance future acquisitions through internally generated funds or borrowings under the Revolving Credit Facility, the issuance of notes or shares of Common Stock of the Company, or through a combination thereof. The Company is actively engaged in ongoing discussions with prospective acquisition candidates. The Company plans to continue to expand its operations through acquisitions. Integration and Restructuring Costs The Company has been implementing a plan of restructuring relating to its acquisition of NovaCare O&P 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. The Company has transitioned patients being cared for at a closed patient-care center to another patient-care center generally located within proximity to the 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. Also during 1999, the Company accrued approximately $1.3 million ($.8 million after tax) for the costs associated with the restructuring of Hanger operations. The restructuring plan provided for the closure of 54 patient-care centers, consisting of 29 Hanger and 25 NovaCare O&P locations, and the termination of the employment of 225 employees. Through September 30, 2000, 44 of the patient-care centers had been closed and the employment of 210 employees had been terminated. Management expects to have the remaining 10 patient-care centers closed and the employment of the remaining 15 employees terminated by the end of 2000. Lease payments on closed patient-care centers are expected to be paid through 2003. Implementation of the plan of restructuring was substantially complete as of September 30, 2000, and the Company does not expect to accrue a material amount of additional restructuring costs in the future. The Company estimates that when the plan of restructuring is completed, it 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 above restructuring charges and the related cost savings represent the Company's best estimate, but necessarily make numerous 21 24 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 relating to forward-looking statements that are set forth below in the third paragraph under "Other." The Company also has expensed integration costs relating to the integration of the acquired NovaCare O&P patient-care centers. During 1999, the Company expensed approximately $5.0 million of integration costs and during the nine months ended September 30, 2000, the Company expensed approximately $1.4 million of integration costs, of which approximately $.3 million were recognized during the quarter ended September 30, 2000. Such integration costs include costs of changing patient-care center names, payroll and related benefits conversion costs, stay-paid bonuses and related benefits for transitional employees and certain other costs relating to the acquisition. Integration costs are expensed as incurred. Proposed Sale of Manufacturing Business In September 2000, the Company entered into a letter of intent to sell substantially all of the O&P component manufacturing assets of its wholly-owned subsidiary, Seattle Orthopedic Group, Inc., to Otto Bock Orthopedic Industry, Inc., a United States subsidiary of a German manufacturer of O&P components. The purchase price is expected to be approximately $75.0 million and the Company plans to use the estimated $50.0 million of after-tax proceeds of the sale to pay down a portion of its Tranche A and Tranche B Term Loans. As a result of that transaction, which is expected to close during December 2000, subject to entering into a definitive purchase agreement, the Company expects to reduce its interest expenses by approximately $5.0 million per year. 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 $445.0 million, subject to adjustment to the extent that NovaCare O&P's adjusted working capital at June 30, 1999 was less or greater than $94.0 million. Of the purchase price paid by Hanger, $15.0 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 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. 22 25 On May 22, 2000, KPMG issued its report concluding that NovaCare O&P's adjusted working capital at June 30, 1999 was approximately $68.9 million and that Hanger was entitled to the working capital deficiency of approximately $25.1 million, 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 $15.0 million of escrowed funds to Hanger. Pursuant to the Agreement, Hanger was entitled to receive the approximately $10.1 million 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, $6.0 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 $6.0 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 $10.1 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 $.4 million discount in exchange for the immediate payment of $6.0 million and the greater certainty of receiving $3.7 million under the promissory note. 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. 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 23 26 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. In December 1999, the Staff of the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes some of the SEC's interpretations of the application of generally accepted accounting principles to revenue recognition. The Company has reviewed SAB 101 and does expect it to have a material impact on the existing revenue recognition policies. 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 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. 24 27 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The following exhibits are filed herewith: Exhibit No. Document 27 Financial Data Schedule. (b) Forms 8-K. No reports on Form 8-K were filed during the quarter ended September 30, 2000. 25 28 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: November 13, 2000 IVAN R. SABEL ------------------------------------------ Ivan R. Sabel Chairman of the Board, President and Chief Executive Officer Date: November 13, 2000 RICHARD A. STEIN ------------------------------------------ Richard A. Stein Executive Vice President - Finance, Principal Financial and Accounting Officer #84065 26