<PAGE> 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, 1999
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 11,
1999; 19,083,551 shares of common stock, $.01 par value per share.
<PAGE> 2
HANGER ORTHOPEDIC GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I. FINANCIAL INFORMATION
- ---------------------------------------
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1999
(unaudited) and December 31, 1998 1
Consolidated Statements of Income for the three
months ended September 30, 1999 and 1998 (unaudited) 3
Consolidated Statements of Income for the nine
months ended September 30, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and 1998 (unaudited) 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Part II. OTHER INFORMATION
- -----------------------------------
Item 2. Changes in Securities and Use of Proceeds 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 27
- ----------
</TABLE>
<PAGE> 3
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Shares and Per Share Amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 9,072 $ 9,683
Accounts receivable less allowances for
doubtful accounts of $16,310 and $8,022
in 1999 and 1998, respectively 106,641 39,157
Inventories 55,564 16,934
Prepaid expenses and other assets 7,714 4,064
Deferred income taxes 7,574 4,498
-------- --------
Total current assets 186,565 74,336
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Land 4,177 4,267
Buildings 8,892 8,523
Machinery and equipment 22,538 13,009
Furniture and fixtures 7,336 2,980
Leasehold improvements 11,665 4,263
-------- --------
54,608 33,042
Less accumulated depreciation and amortization 13,485 10,333
-------- --------
41,123 22,709
-------- --------
INTANGIBLE ASSETS
Excess of cost over net assets acquired 490,920 114,075
Non-compete agreements 1,975 1,724
Patents 9,659 1,559
Assembled Work Force 7,000 ----
Other intangible assets 15,050 1,143
-------- --------
524,604 118,501
Less accumulated amortization 16,314 10,545
-------- --------
508,290 107,956
-------- --------
OTHER ASSETS
Other 3,514 947
-------- --------
TOTAL ASSETS $739,492 $205,948
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
1
<PAGE> 4
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Shares and Per Share Amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 22,901 $ 4,407
Accounts payable 14,585 4,976
Accrued expenses 19,741 4,635
Customer deposits 792 1,123
Accrued wages and payroll taxes 19,872 9,001
Deferred revenue 206 517
----------- -----------
Total current liabilities 78,097 24,659
----------- -----------
Long-term debt 405,460 11,154
Deferred income taxes 11,465 5,223
Other liabilities 11,058 2,360
7% Redeemable Preferred Stock,
liquidation preference of $1,000 per share 59,206 ----
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 60,000,000 shares
authorized, 19,034,329 and 18,825,372 shares
issued, and 18,900,834 and 18,691,877 shares
outstanding in 1999 and 1998 190 188
Additional paid-in capital 145,156 144,970
Retained earnings 29,516 18,050
----------- -----------
174,862 163,208
Treasury stock, at cost - (133,495 shares) (656) (656)
----------- -----------
174,206 162,552
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 739,492 $ 205,948
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE> 5
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED September 30, 1999 and 1998
(Dollars In Thousands, Except Shares and Per Share Amounts)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net Sales $ 124,922 $ 48,777
Cost of products and services sold 59,578 23,978
------------- ------------
Gross profit 65,344 24,799
Selling, general & administrative 38,678 15,916
Depreciation and amortization 2,283 865
Amortization of excess cost over net assets acquired 2,963 657
Integration and restructuring costs 3,917 ----
------------- ------------
Income from operations 17,503 7,361
Other (expense) income:
Interest expense, net (10,487) (387)
Other (6) 9
------------- ------------
Income before income taxes 7,010 6,983
Provision for income taxes 3,561 2,863
------------- ------------
Net income $ 3,449 $ 4,120
============= ============
Basic Per Common Share Data
- ---------------------------
Net income $ .13 $ .24
============= ============
Shares used to compute basic per common
share amounts 18,862,071 17,291,768
============= ============
Diluted Per Common Share Data
- -----------------------------
Net income * $ .12 $ .22
============= ============
Shares used to compute diluted per common share
amounts * 19,895,853 19,039,164
============= ============
</TABLE>
* 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
<PAGE> 6
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED September 30, 1999 and 1998
(Dollars In Thousands, Except Shares and Per Share Amounts)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net Sales $ 230,484 $ 136,426
Cost of products and services sold 112,021 68,542
-------------- ------------
Gross profit 118,463 67,884
Selling, general & administrative 73,784 46,099
Depreciation and amortization 4,244 2,351
Amortization of excess cost over net assets acquired 4,461 1,784
Integration and restructuring costs 3,917 ----
-------------- ------------
Income from operations 32,057 17,650
Other (expense) income:
Interest expense, net (11,585) (1,701)
Other income (expense) (151) 39
-------------- ------------
Income before income taxes 20,321 15,988
Provision for income taxes 8,876 6,555
-------------- ------------
Net income $ 11,445 $ 9,433
============== ============
Basic Per Common Share Data
- ---------------------------
Net income $ .55 $ .58
============== ============
Shares used to compute basic per common
share amounts 18,836,485 16,197,010
============== ============
Diluted Per Common Share Data
- -----------------------------
Net income * $ .52 $ .53
============== ============
Shares used to compute diluted per common
share amounts * 20,088,833 17,878,220
============== ============
</TABLE>
* 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
<PAGE> 7
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED September 30, 1999 and 1998
(Dollars In Thousands, Except Shares and Per Share Amounts)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,445 $ 9,434
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debt 7,788 5,293
Depreciation and amortization 4,244 2,351
Amortization of excess cost over net
assets acquired 4,461 1,784
Restructuring costs 1,305 ----
Changes in assets and liabilities, net
of effect from acquired companies:
Accounts receivable (15,255) (6,157)
Inventory (6,406) 546
Prepaid and other assets (1,204) (4)
Other assets (1,042) (14)
Accounts payable 1,854 (195)
Accrued expenses 5,118 1,088
Accrued wages and payroll taxes (3,613) (118)
Customer deposits (225) (42)
Deferred revenue (311) (75)
Other liabilities 516 47
---------- ----------
Total adjustments (2,770) 4,504
---------- ----------
Net cash provided by operating activities 8,675 13,938
---------- ----------
Cash flows from investing activities:
Purchase of fixed assets (5,054) (2,024)
Acquisitions, net of cash acquired (424,409) (28,246)
Purchase of patents (100) (14)
Purchase of non-compete agreements (250) (367)
---------- ----------
Net cash used in investing activities (429,813) (30,651)
---------- ----------
</TABLE>
Continued
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 8
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED September 30,
(Dollars In Thousands, Except Shares and Per Share Amounts)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net borrowings under revolving credit facility $ 30,000 $ ---
Proceeds from sale of common stock 611 39,186
Proceeds from sale of preferred stock, net 59,188 ---
Proceeds from long-term debt 350,000 6,000
Repayment of long-term debt (5,365) (25,590)
Increase in debt issue costs (13,907) ---
------------ ------------
Net cash provided by financing activities 420,527 19,596
------------ ------------
Net change in cash and cash equivalents for the period (611) 2,883
Cash and cash equivalents at beginning of period 9,683 6,557
------------ ------------
Cash and cash equivalents at end of period $ 9,072 $ 9,440
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 4,148 $ 1,526
============ ============
Taxes $ 8,630 $ 5,949
============ ============
Non-cash financing and investing activities:
Issuance of common stock in connection with
acquisitions $ 500 $ 2,200
============ ============
Issuance of notes in connection with acquisitions $ 1,026 $ 6,773
============ ============
Issuance of common stock in repayment of debt $ 168 $ --
============ ============
Dividends declared on preferred stock $ 1,050 $ 21
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE> 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 comparabilty.
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, 1998, 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
<PAGE> 10
Summarized financial information concerning the Company's reportable
segments is shown in the following table:
<TABLE>
<CAPTION>
PRACTICE
MANAGEMENT
AND PATIENT
CARE CENTERS MANUFACTURING DISTRIBUTION OTHER TOTAL
THREE MONTHS ------------ ------------- ------------ ----- -----
- ------------
ENDED SEPTEMBER 30, 1999
- ------------------------
<S> <C> <C> <C> <C> <C>
Net Sales
Customers $115,151 $2,949 $ 6,822 $ --- $124,922
======== ====== ======== ======== ========
Intersegments $ --- $1,461 $12,147 $(13,608) $ ---
======== ====== ======== ======== ========
EBITDA $ 22,850 $ 447 $ 2,365 $( 2,913) $ 22,749
Depreciation and
amortization (4,721) (421) (40) (64) (5,246)
Interest expense, net (800) (4) -- ( 9,683) (10,487)
Other income (expense) 41 (15) (1) ( 31) (6)
-------- ------- -------- -------- --------
Income before taxes ** $ 17,370 $ 7 $ 2,324 $(12,691) $ 7,010
======== ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PRACTICE
MANAGEMENT
AND PATIENT
CARE CENTERS MANUFACTURING DISTRIBUTION OTHER TOTAL
THREE MONTHS ------------ ------------- ------------ ----- -----
- ------------
ENDED SEPTEMBER 30, 1999
- ------------------------
<S> <C> <C> <C> <C> <C>
Net Sales
Customers $39,609 $2,578 $6,590 $ ---- $48,777
======== ======= ====== ======= =======
Intersegments $ --- $ 817 $5,019 $(5,836) $ ----
======== ======= ====== ======= =======
EBITDA $ 8,374 $ 538 $1,198 $(1,227) $ 8,883
Depreciation and
amortization (1,113) (291) (70) (48) (1,522)
Interest expense, net (335) (24) -- (28) (387)
Other income (expense) 210 (39) 107 (269) 9
-------- -------- ------ ------- --------
Income before taxes $ 7,136 $ 184 $1,235 $(1,572) $ 6,983
======== ======= ====== ======= ========
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
PRACTICE
MANAGEMENT
AND PATIENT
CARE CENTERS MANUFACTURING DISTRIBUTION OTHER TOTAL
NINE MONTHS ------------ ------------- ------------ ----- -----
- ------------
ENDED SEPTEMBER 30, 1999
- ------------------------
<S> <C> <C> <C> <C> <C>
Net Sales
Customers $200,258 $ 8,772 $21,454 $ --- $230,484
======== ======= ======= ======== ========
Intersegments $ - $ 3,696 $23,394 $(27,090) $ ---
======== ======= ======= ======== ========
EBITDA $ 41,547 $ 1,325 $ 5,113 $ (7,223) $ 40,762
Depreciation and
amortization (7,211) (1,207) (122) (165) (8,705)
Interest expense, net (1,319) (13) - (10,253) (11,585)
Other income (expense) 25 (57) 4 (123) (151)
======== ======= ======= ======== ========
Income before taxes ** $ 33,042 $ 48 $ 4,995 $(17,764) $ 20,321
======== ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
PRACTICE
MANAGEMENT
AND PATIENT
CARE CENTERS MANUFACTURING DISTRIBUTION OTHER TOTAL
NINE MONTHS ------------ ------------- ------------ ----- -----
- ------------
ENDED SEPTEMBER 30, 1998
- ------------------------
<S> <C> <C> <C> <C> <C>
Net Sales
Customers $109,854 $5,825 $20,747 $ --- $136,426
======== ======= ======= ======== ========
Intersegments $ --- $1,750 $13,861 $(15,611) $ ---
======== ======= ======= ======== ========
EBITDA $ 21,854 $ 951 $ 3,119 $ (4,139) $ 21,785
Depreciation and
amortization (3,140) (660) (199) (136) (4,135)
Interest expense, net (1,270) (42) 6 (395) (1,701)
Other income (expense) 393 (81) 358 (631) 39
-------- ------- ------- -------- --------
Income before taxes $ 17,837 $ 168 $ 3,284 $ (5,301) $ 15,988
======== ======= ======= ======== ========
</TABLE>
** Income before taxes include the following restructuring and integration
costs for the three and nine months ended September 30, 1999:
<TABLE>
<CAPTION>
PRACTICE
MANAGEMENT
AND PATIENT
CARE CENTERS MANUFACTURING DISTRIBUTION OTHER TOTAL
------------ ------------- ------------ ----- ------
<S> <C> <C> <C> <C> <C>
Restructuring $ 1,181 $ 124 --- --- $ 1,305
Integration 2,594 --- --- $ 18 2,612
---------------- -------------- ----------- ----------- -----------
$ 3,775 $ 124 --- $ 18 $ 3,917
================ ============== =========== =========== ===========
</TABLE>
Total assets for the Practice Management and Patient Care Centers were
$138,258 and $58,345 as of September 30, 1999 and December 31, 1998,
respectively.
9
<PAGE> 12
NOTE C -- INVENTORY
Inventories at September 30, 1999 and December 31, 1998 were comprised
of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(unaudited)
<S> <C> <C>
Raw materials $29,376 $ 7,196
Work-in-process 11,790 2,094
Finished goods 14,398 7,644
-------- ---------
$55,564 $ 16,934
======== =========
</TABLE>
NOTE D - ACQUISITIONS
During the first six months of 1999, the Company acquired four
orthotic and prosthetic companies. The aggregate purchase price, excluding
potential earn-out provisions, was $7,545, comprised of $6,145 in cash, $900 in
promissory notes and 23,002 shares of common stock of the company valued at
$500.
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. If, as of July 1, 1999, the adjusted working capital of NovaCare O&P
is less than approximately $94,000, the cash portion of the purchase price will
be reduced by the amount of such deficiency. If, however, the adjusted working
capital exceeds approximately $94,000, the cash portion will be increased by
the amount of the excess. For purposes of this calculation, adjusted working
capital will be comprised of cash in an amount of at least $2,000, accounts
receivable, inventory, other current assets, accounts payable, and accrued
expenses to third-parties (excluding all inter-company obligations, accrued but
unpaid taxes and the current portion of the promissory notes owed to sellers of
businesses acquired by NovaCare O&P).
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 $14,000, 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
10
<PAGE> 13
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 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. Excess cost over net assets acquired includes goodwill and other
intangible assets. Goodwill is amortized using the straight-line method over 40
years. Other intangible assets of $15,000, primarily patents, are amortized
over periods of between 8 and 11 years.
The following represents the non-cash impact of the NovaCare O&P
acquisition:
<TABLE>
<S> <C>
Fair value of assets acquired, including goodwill $496,224
Liabilities assumed 82,358
---------
Cash paid $413,866
=========
</TABLE>
Included in liabilities assumed are restructure provisions which are
more fully described in Note E. Additionally, certain contingent liabilities,
more fully described in Note H, exist which, when resolved may result in
adjustment of the purchase price cost allocation.
The following table summarizes the unaudited consolidated pro forma
information, assuming all acquisitions had occurred at the beginning of each of
the following periods:
<TABLE>
<CAPTION>
- ------------------------------------ ----------------------------------- -----------------------------------
Nine Months Ended Nine Months Ended
----------------- -----------------
September 30, 1999 September 30, 1998
------------------ ------------------
- ------------------------------------ ----------------------------------- -----------------------------------
- ------------------------------------ ----------------------------------- -----------------------------------
<S> <C> <C>
Net sales $366,160 $367,815
- ------------------------------------ ----------------------------------- -----------------------------------
Net (loss) income $ (1,150) $ 2,718
- ------------------------------------ ----------------------------------- -----------------------------------
Net loss per common
share - diluted (1) $(0.23) $(0.03)
- ------------------------------------ ----------------------------------- -----------------------------------
</TABLE>
(1) Excludes potentially dilutive common stock and includes an adjustment
to net income for Preferred Stock dividends.
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, restructure and integration costs 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 each period, nor are they indicative of the results of
future combined operations or trends.
11
<PAGE> 14
Additionally, the Company paid during the nine month period ending
September 30, 1999, approximately $4,397 and issued $126 in notes related to
seven orthotic and prosthetic companies acquired in years prior to 1999. 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 $4,523. Additional
amounts aggregating approximately $15,905 may be paid in connection with
earnout provisions contained in previous acquisition agreements.
NOTE E -INTEGRATION & RESTRUCTURING COSTS
The Company has 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
expected to be substantially completed by the end of 1999. Since commencement
of the plan of restructuring, the Company had transitioned patients being cared
for at closed patient care centers to other patient care centers generally
within proximity to a closed branch. As of September 30, 1999, the Company has
recorded approximately $3,422 and $1,566 in accrued expenses and other
liabilities, respectively, 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 $1,305 ($796 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.
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 $3,368 and is primarily a cash expense. Total employee
terminations are expected to include approximately 70 acquired corporate and
155 patient-care center employees. Employees terminated and to be terminated at
patient-care centers include most, if not all, employees at each patient care
center to be closed. During the third quarter of 1999, approximately 140
employees were terminated including approximately 48 acquired corporate
employees and 92 patient care center employees. Lease termination costs, for
patient care centers to be closed, are estimated at $3,510, are cash expenses
and are expected to be paid through 2003.
12
<PAGE> 15
The components of the restructuring accrual are as follows:
<TABLE>
<CAPTION>
Provisions
for existing Provisions for Transfer Balance at
Hanger NovaCare O&P against September 30,
business business Payments assets 1999
--------------- ----------------- --------------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Employee severance costs $223 $3,145 $ (740) $2,628
Writedown of assets 42 100 $ (142) -
Lease termination and
other exit costs 1,040 2,470 (100) 3,410
--------------- ----------------- --------------- ------------- ------------------
$1,305 $5,715 $ (840) $ (142) $ 6,038
=============== ================= =============== ============= ==================
</TABLE>
Additionally, in relation to the acquisition of NovaCare O&P, the
Company recorded integration costs of approximately $2,612 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. These costs are expensed as incurred and were
recorded against operations. Additional costs of this nature are expected to be
incurred during the fourth quarter of 1999.
13
<PAGE> 16
NOTE F - NET INCOME PER COMMON SHARE
The following sets forth the calculation of the basic and diluted
income per common share amounts for the three month periods ended September 30,
1999 and 1998 and the nine month periods ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 3,449 $ 4,120 $ 11,445 $ 9,433
Less preferred stock accretion and
dividends declared (1,068) (7) (1,068) (21)
------- ------- -------- -------
Income available to common stockholders
used to compute basic per common
share amounts 2,381 4,113 10,377 9,412
Add back interest expense on convertible
note payable, net of tax 12 15 39 30
------- -------- -------- -------
Income available to common stockholders
plus assumed conversions used to com-
pute diluted per common share amounts $ 2,393 $ 4,128 $ 10,416 $ 9,442
======= ======= ======== =======
Average shares of common stock
outstanding used to compute basic per
common share amounts 18,862,071 17,291,768 18,836,485 16,197,010
Effect of convertible note payable 92,572 115,717 92,572 77,992
Effect of dilutive options 459,960 804,799 621,532 810,864
Effect of dilutive warrants 481,250 826,880 538,244 792,354
---------- ----------- ------------ ------------
Shares used to compute dilutive per
common share amounts 19,895,853 19,039,164 20,088,833 17,878,220
========== =========== ============ ============
Basic income per common share $ .13 $ .24 $ .55 $ .58
Diluted income per common share $ .12 $ .22 $ .52 $ .53
</TABLE>
Options to purchase 1,463,750 and 1,348 shares of common stock were
outstanding at September 30, 1999 and 1998, respectively, but were not included
in the computation of diluted income per share for the three months ended
September 30, 1999 and 1998 because the options' prices were greater than the
average market price of the common shares.
Options to purchase 450,000 and 28,179 shares of common stock were
outstanding at September 30, 1999 and 1998, respectively, but were not included
in the computation of diluted income per common share for the nine months ended
September 30, 1999 and 1998 because the options' exercise prices were greater
than the average market price of the common shares.
Common shares of 3,636,364 and 1,212,121 into which shares of 7%
Redeemable Preferred Stock are convertible were not included in the computation
of diluted income per common share for the three months and the nine months
ended September 30, 1999, respectively, as the effect is considered
anti-dilutive.
NOTE G - LONG TERM DEBT
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
14
<PAGE> 17
$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 2.5% or ABR plus
1.5%. 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 3.5% or ABR plus 2.5%. 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 September 30, 1999, including a
current portion of approximately $22,901, was approximately $428,361. Such
indebtedness included: (i) $150,000 senior subordinated notes; (ii) $30,000 for
the revolver; (iii) $100,000 for tranche A; (iv) $100,000 for tranche B; and
(v) a total of $48,361 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.
15
<PAGE> 18
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Dollars In Thousands, Except Shares and Per Share Amounts)
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:
<TABLE>
<CAPTION>
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products and services sold 48.6 50.2 47.7 49.2
Gross profit 51.4 49.8 52.3 50.8
Selling, general & administrative
expenses 32.0 33.8 31.0 32.6
Depreciation and amortization 1.8 1.7 1.8 1.8
Amortization of excess cost over net
assets acquired 1.9 1.3 2.4 1.3
Integration and restructuring costs 1.7 -- 3.1 --
Income from operations 13.9 12.9 14.0 15.1
Interest expense 5.0 1.2 8.4 0.8
Provision for income taxes 3.9 4.8 2.9 5.9
Net income 5.0 6.9 2.8 8.4
</TABLE>
Three Months Ended September 30, 1999 Compared to the Three Months Ended
September 30, 1998
Net Sales
Net sales for the quarter ended September 30, 1999, were approximately
$124,900, an increase of approximately $76,100, or 156%, over net sales of
approximately $48,800 for the quarter ended September 30, 1998. Contributing to
the increase were (i) the acquisition of NovaCare O&P on July 1, 1999 and (ii)
a 4.2% increase in sales by patient care centers operating during both quarters
("same store sales").
Gross Profit
Gross profit in the quarter ended September 30, 1999 was approximately
$65,300, an increase of approximately $40,500, or 163%, over gross profit of
approximately $24,800 for the quarter ended September 30, 1998. The increase
was primarily attributable to the increase in net sales. Gross profit as a
percentage of net sales increased to 52.3% in the third quarter of 1999 from
50.8% in the third quarter of 1998. 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
16
<PAGE> 19
historically have experienced higher gross profit margins than distribution and
manufacturing operations.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in the quarter ended
September 30, 1999 increased by approximately $22,800, or 143%, compared to the
quarter ended September 30, 1998. Selling, general and administrative expenses
as a percentage of net sales decreased to 31.0% in the third quarter of 1999
compared to 32.6% for same period in 1998. The decrease in selling, general and
administrative expenses as a percent of net sales is primarily the result of
(i) the acquisition of NovaCare O&P, which has lower selling, general and
administrative margins than the Company on a consolidated basis and (ii) the
elimination of duplicative overhead and corporate field personnel.
Integration and Restructuring Costs
During the quarter ended September 30, 1999, the Company recognized
approximately $3,900 of one-time integration and restructuring costs in
connection with its acquisition on July 1, 1999 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 September 30, 1999 was approximately $17,500, an increase of
$10,100, or 137%, over the prior year's comparable quarter. Income from
operations as a percentage of net sales decreased to 14.0% in the second
quarter of 1999 from 15.1% for the prior year's comparable period.
Interest Expense
Net interest expense in the third quarter of 1999 was approximately
$10,500, an increase of approximately $10,100 over the approximately $390
incurred in the third quarter of 1998. Interest expense as a percentage of net
sales increased to 8.4% from 0.8% for the same period a year ago. The increase
in interest expense was primarily attributable to $230,000 borrowed under a
bank credit facility and $150,000 in senior subordinated notes issued to acquire
NovaCare O&P.
Income Taxes
The Company's effective tax rate was 51% in the third quarter of 1999
versus 41% in 1998. The increase in the effective tax rate in 1999 is
principally a result of the effect of non-deductible goodwill amortization.
The provision for income taxes in the third quarter of 1999 was approximately
$3,600 compared to approximately $2,900 for the third quarter of 1998.
Net Income
17
<PAGE> 20
As a result of the above, the Company recorded net income of $3,400, or
$.12 per dilutive common share, in the quarter ended September 30, 1999,
compared to net income of $4,100, or $.22 per dilutive common share, in the
quarter ended September 30, 1998. Net income for the quarter ended September
30,1999, excluding the integration and restructuring costs, would have been
$5,800, or $.24 per dilutive common share.
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998
Net Sales
Net sales for the nine months ended September 30, 1999 were
approximately $230,500, an increase of approximately $94,100, or 69%, over net
sales of approximately $136,400 for the nine months ended September 30, 1998.
Contributing to the increase were (i) the acquisition of NovaCare O&P on July
1, 1999 and (ii) a 4.6% increase in sales by patient care centers operating
during both periods ("same store sales").
Gross Profit
Gross profit for the nine months ended September 30, 1999 was
approximately $118,500, an increase of approximately $50,600, or 75%, over
gross profit of approximately $67,900 for the nine months ended September 30,
1998. The increase was primarily attributable to the increase in net sales.
Gross profit as a percentage of net sales increased to 51.4% in the first nine
months of 1999 from 49.8% in the first nine months of 1998. 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
Selling, general and administrative expenses in the nine months ended
September 30, 1999 increased by approximately $27,700, or 60%, compared to the
nine months ended September 30, 1998. Selling, general and administrative
expenses as a percentage of net sales decreased to 32.0% from 33.8% for the
same period in 1998. The decrease in selling, general and administrative
expenses as a percent of net sales is primarily the result of (i) the
acquisition of NovaCare O&P, which has lower selling, general and
administrative margins than the Company on a consolidated basis and (ii) the
elimination of duplicative overhead and corporate field personnel.
Integration and Restructuring Costs
As stated above, the Company recognized approximately $3,900 of
one-time integration and restructuring costs during the quarter ended September
30, 1999 in connection with the Company's acquisition on July 1, 1999 of
NovaCare O&P. Additional information relating to the integration and
restructuring costs is set forth below under "Integration and Restructuring
Costs."
18
<PAGE> 21
Income from Operations
Principally as a result of the above, income from operations in the
nine months ended September 30, 1999 was approximately $32,100, an increase of
approximately $14,400, or 82%, over the prior year's comparable period. Income
from operations as a percentage of net sales increased to 13.9% in the nine
months ended September 30, 1999 from 12.9% in the nine months ended September
30, 1998.
Interest Expense
Net interest expense for the first nine months of 1999 was
approximately $11,600, an increase of approximately $9,900 over approximately
$1,700 incurred in the first nine months of 1998. Interest expense as a
percentage of net sales increased to 5.0% from 1.2% for the same period one
year ago. The increase in interest expense was primarily attributable to
$230,000 borrowed under a bank credit facility and $150,000 in senior
subordinated notes issued to acquire NovaCare O&P.
Income Taxes
The Company's effective tax rate was 44% in the first nine months of
1999 versus 41% in 1998. The increase in the effective tax rate in 1999 is
principally a result of the effect of non-deductible goodwill amortization. The
provision for income taxes for the nine months ended September 30, 1999 was
approximately $8,900 compared to approximately $6,600 for the nine months ended
September 30, 1998.
Net Income
As a result of the above, the Company recorded net income of
approximately $11,400, or $.52 per dilutive common share, in the first nine
months of 1999, compared to net income of approximately $9,400, or $.53 per
dilutive common share, in the first nine months of 1998. Net income for the
nine months ended September 30, 1999, excluding the integration and
restructuring costs, would have been $13,800, or $.63 per dilutive common
share.
Liquidity and Capital Resources
The Company's consolidated working capital at September 30, 1999 was
approximately $108,468 and cash and cash equivalents available were
approximately $9,072. The Company's cash resources were satisfactory to meet
its obligations for the quarter ended September 30, 1999.
On July 1, 1999, the Company entered into a new credit facility with
The Chase Manhattan Bank, Bankers Trust Company and Paribas, which consists of
a $100,000 Revolving Credit Facility, a $100,000 Tranche A Term Facility and a
$100,000 Tranche B Term Facility. The Tranche A Term Facility and the Revolving
Credit Facility mature in six years and carry an interest rate of adjusted
LIBOR plus 2.50% or ABR plus 1.50%. The Tranche B Term Facility matures in
seven years and six months and carries an interest rate of adjusted LIBOR plus
3.5% or ABR plus 2.5%. The Revolving Credit Facility is available to Hanger to
use in connection with future acquisitions and for working capital and general
corporate purposes.
19
<PAGE> 22
The Company's total long term debt at September 30, 1999, including a
current portion of approximately $22,901, was approximately $428,361. Such
indebtedness included: (i) $150,000 senior subordinated notes; (ii) $30,000 for
the revolver; (iii) $100,000 for tranche A; (iv) $100,000 for tranche B; and
(v) a total of $48,361 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 $445,000, 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. If, as of July
1, 1999, the adjusted working capital of NovaCare O&P is less than
approximately $94,000, the cash portion of the purchase price will be reduced
by the amount of such deficiency. If, however, the adjusted working capital
exceeds approximately $94,000, the cash portion will be increased by the amount
of the excess. For purposes of this calculation, adjusted working capital will
be comprised of cash in an amount of at least $2,000, accounts receivable,
inventory, other current assets, accounts payable, and accrued expenses to third
- -parties (excluding all inter-company obligations, accrued but unpaid taxes and
the current portion of the promissory notes owed to sellers of businesses
acquired by NovaCare O&P).
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 $14,000, 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. During
the quarter ended September 30, 1999, the Mandatorily Redeemable Preferred
Stock Class F, of which no shares had been issued, was retired.
20
<PAGE> 23
As stated above, the Company sold $60,000 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 actively engaged in ongoing discussions with
prospective acquisition candidates. The Company plans to continue to expand its
operations aggressively through acquisitions.
Integration and Restructuring Costs
The Company has 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
expected to be substantially completed by the end of 1999. 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. As of September 30, 1999, the Company has
recorded approximately $3,422 and $1,566 in accrued expenses and other
liabilities, respectively, 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 $1,305 ($796 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.
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 $3,368 and is primarily a cash expense. Total employee
terminations are expected to include approximately 70 acquired corporate and
155 patient-care center employees. Employees terminated and to be terminated at
patient-care centers include most, if not all, employees at each patient care
center to be closed. During the third quarter
21
<PAGE> 24
of 1999, approximately 140 employees were terminated including approximately 48
acquired corporate employees and 92 patient care center employees. Lease
termination costs for patient care centers to be closed, are estimated at
$3,510, are cash expenses and are expected to be paid through 2003.
The Company estimates that the plan of restructuring Hanger and
NovaCare O&P operations, when complete, will generate annual cost savings of
approximately $13,000 ($8,000 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 under "Forward Looking
Statements". Shareholders are cautioned not to place undue reliance on the
estimate and assumptions and should appreciate that such information may not
necessarily be updated to reflect circumstances existing after the date hereof
or to reflect the occurrence of unanticipated events.
Additionally, in relation to the acquisition of NovaCare O&P, the
Company recorded integration costs of approximately $2,612 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. These costs are expensed as incurred and were
recorded against operations. Additional costs of this nature are expected to be
incurred during the fourth quarter of 1999.
Other
Inflation has not had a significant effect on the Company's
operations, as increased costs to the Company generally have been offset by
increased prices of products and services sold.
The Company primarily provides services and customized devices
throughout the United States and is reimbursed, in large part, by the patients'
third-party insurers or governmentally funded health insurance programs. The
ability of the Company's debtors to meet their obligations is principally
dependent upon the financial stability of the insurers of the Company's
patients and future legislation and regulatory actions.
The Company is currently upgrading its patient-care, manufacturing and
headquarters information systems. Included in the upgrading is a program to
ensure that all significant computer systems are substantially Year 2000
compliant by December 31, 1999. The program is divided into three major
components: (1) identification of all information technology systems and
non-information technology systems that are not Year 2000 compliant; (2) repair
or replacement of the identified non-compliant systems; and (3) testing of the
repaired or replaced systems. The Company has no "in-house" developed or
proprietary IT Systems. It uses commercially developed software, the majority
of which is constantly upgraded through existing maintenance contracts.
22
<PAGE> 25
Parts (1) and (2) of the Year 2000 program are currently underway. Part (1),
identification, was completed during the first quarter of 1999. Review of
accounting and financial reporting systems is nearly finished and the Company
is continuing to review Non-IT Systems that have embedded microprocessors in
various types of equipment. Part (2), repairing and replacing, currently
continues, primarily under maintenance contracts with software vendors. While
most of the major systems are Year 2000 compliant, the software vendors
targeted September 1999 as a completion date. Part (3), testing, started in the
first quarter of 1999 and is expected to be substantially finished at the end
of the fourth quarter and to continue, as needed, into the new millennium.
The Company has been contacting key suppliers and business partners
about the Year 2000 program, primarily for hardware. The projected total costs
for the upgrading of information systems, including the Year 2000 program, are
estimated to range from $2,250 to $2,750.
The Company will continue to monitor and evaluate the impact of the
Year 2000 issue on its operations. Until it is into the final testing part of
its program, the risks from potential Year 2000 failures cannot be fully
assessed. Due to this situation, the Company cannot finalize contingency plans.
These plans will be developed as potential Year 2000 failures are identified in
the final testing stages.
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
The Company has entered into an interest rate swap agreement to reduce
the impact of changes in interest rates on its senior financing facilities. At
September 30, 1999, the Company had an outstanding interest rate swap agreement
with a commercial bank, having a total notional principal amount of up to
$26,950. The agreement effectively minimizes the Company's base interest rate
exposure between a floor of 5.32% and a cap of 7%. The interest rate swap
agreement matures on September 30, 1999. The Company is exposed to credit loss
in the event of non-performance by the other party to the interest rate swap
agreement. All other debt accrues interest at a fixed rate.
23
<PAGE> 26
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Unregistered Issuance of Equity Securities. On July 1, 1999, the
Company issued a total of 60,000 shares of 7% Redeemable Preferred Stock, par
value $0.01 per share (the "Redeemable Preferred Stock"), for $1,000 per share,
for a total purchase price of $60 million. Of that amount, 50,000 shares were
sold for $50 million to Chase Equity Associates, L.P., an affiliate of The
Chase Manhattan Bank, and 10,000 shares were sold for $10 million to Paribas
North America, an affiliate of Banque Paribas. The Redeemable Preferred Stock
was issued without registration under the Securities Act of 1933 in reliance
upon the exemption from registration provided under Section 4(2) thereof. At
the Company's Annual Meeting of Stockholders on September 16, 1999,
stockholders approved a proposal making the Redeemable Preferred Stock
convertible into shares of the Company's non-voting Common Stock. The
Redeemable Preferred Stock is convertible, at the holder's option, into shares
of non-voting Common Stock (which under certain circumstances may be
subsequently converted into voting Common Stock) at a conversion price of
$16.50 per share, subject to adjustment. The Company is entitled to require
that the shares of Redeemable Preferred Stock be converted into non-voting
Common Stock on or after July 2, 2002 (i.e., following the third anniversary of
the issuance of the Redeemable Preferred Stock) 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 non-voting Common Stock is convertible at the
option of the holders into shares of voting Common Stock in the event of a
transfer by such holders and under certain other circumstances. The Redeemable
Preferred Stock will be mandatorily redeemable on July 1, 2010 (i.e., the 11th
anniversary of the issuance of such stock) 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 shares of 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.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on September 16,
1999. A total of 18,987,317 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. (16,887,962 shares for and 133,985
shares withheld), Edmond E. Charrette, M.D. (16,889,592 shares for and 132,355
shares withheld), Thomas P. Cooper, M.D. (16,872,392 shares for and 149,555
shares withheld), Robert J. Glaser, M.D. (16,887,360 shares for and 134,587
shares withheld), C. Raymond Larkin, Jr. (16,887,582 shares for and 134,365
shares withheld), Risa J. Lavizzo-Mourey, M.D. (16,889,892 shares for and
132,055 shares withheld), Brig. Gen. William L. McCulloch (16,888,680 shares
for and 133,267 shares withheld), Ivan R. Sabel (16,889,609 shares for and
132,338 shares withheld) and H.E. Thranhardt (16,885,159 shares for and 136,788
shares withheld).
24
<PAGE> 27
The second proposal was a proposed amendment to the Company's
Certificate of Incorporation increasing the number of authorized shares of the
Company's voting Common Stock from 25 million to 60 million shares and creating
a new authorized class of 10 million shares of non-voting Common Stock. The
proposal was approved by more than the required majority of the shares of
Common Stock outstanding. The proposal was approved by a vote of 12,541,255
shares for (representing 66.1% of the outstanding shares), 1,508,363 shares
against with 68,462 shares abstaining. A copy of the Certificate of Amendment
to the Certificate of Incorporation of the Company, as filed with the Secretary
of State of Delaware on September 16, 1999, is filed as an exhibit to this Form
10-Q.
The third proposal was a proposed amendment to the Company's 1991
Stock Option Plan increasing the total number of shares of Common Stock
authorized for issuance under the Plan from 3,000,000 shares to 8,000,000
shares. The proposal was approved by more than the required majority of the
shares of Common Stock voting at the meeting. The proposal was approved by a
vote of 7,418,610 shares for (representing 52.6% of the shares voting),
6,635,236 shares against, with 64,034 shares abstaining.
The fourth proposal was the proposal making the Company's 7%
Redeemable Preferred Stock convertible into shares of the Company's non-voting
Common Stock. The proposal was approved by more than the required majority of
the shares of Common Stock voting at the meeting. The proposal was approved by
a vote of 13,474,142 shares for (representing 95.4% of the shares voting at the
meeting), 605,128 shares against, with 38,910 shares abstaining.
The fifth 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 more than the required
majority of the shares of Common Stock voting at the meeting. The proposal was
approved by a vote of 16,973,468 shares for (representing 99.7% of the shares
voting), 19,417 shares against, with 26,691 shares abstaining.
Item 6. Exhibits and Reports on Form 8-K
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 Incorporation of the
Registrant, as filed with the
Secretary of State of Delaware on
September 16, 1999.
27 Financial Data Schedule.
25
<PAGE> 28
(b) Forms 8-K. The Company filed a Current Report on Form 8-K on July
15, 1999 reporting the Company's acquisition on July 1, 1999 of NovaCare
Orthotics & Prosthetics, Inc. The Company also filed a Current Report on Form
8-K on October 22, 1999, containing financial statements of NovaCare O&P at
June 30, 1999 and for the fiscal year then ended.
26
<PAGE> 29
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 12, 1999 IVAN R. SABEL
-----------------------------------------
Ivan R. Sabel
Chairman of the Board, President and
Chief Executive Officer
Date: November 12, 1999 RICHARD A. STEIN
-----------------------------------------
Richard A. Stein
Executive Vice President - Finance,
Principal Financial and
Accounting Officer
#74231
27
<PAGE> 1
EXHIBIT 3
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
HANGER ORTHOPEDIC GROUP, INC.
---------------------------------
Hanger Orthopedic Group, Inc., a corporation existing under the laws
of the State of Delaware, DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of Hanger
Orthopedic Group, Inc., a resolution was duly adopted setting forth a proposed
amendment to the Certificate of Incorporation of said corporation, declaring
said amendment to be advisable and calling a meeting of the stockholders of
said corporation for consideration thereof. The resolution setting forth the
proposed amendment is as follows:
RESOLVED, that the Certificate of Incorporation of this
corporation be amended by changing Article Fourth thereof so that, as
amended, said Article shall be and read as follows:
"FOURTH: The authorized capital stock of the Corporation shall consist
of 70,000,000 shares of Common Stock, consisting of 60,000,000 shares of Common
Stock, par value $0.01 per share (the "Voting Common Stock") and 10,000,000
shares of Non-Voting Common Stock, par value $0.01 per share, and 10,000,000
shares of Preferred Stock, par value $0.01 per share. The Board of Directors of
the Corporation shall have the power to issue the Preferred Stock in series,
with such designations, preferences and relative, participating, optional or
other special rights, qualifications, limitations or restrictions thereof as
shall be stated in the resolution or resolutions of the Board of Directors
providing for the issuance of such stock. Nothing contained herein to the
contrary shall affect in any manner the outstanding shares of the Corporation's
7% Redeemable Preferred Stock or the certificate of designations, powers,
preferences and relative, participating, optional or other special rights and
qualifications, limitations or restrictions of such Preferred Stock (the
"Certificate of Designations"), except to the extent expressly set forth
therein.
All shares of Common Stock will be identical and will entitle the
holders thereof to the same rights and privileges, except as otherwise provided
herein.
(a) Voting Rights.
(i) Voting Common Stock. Except as set forth herein or as
otherwise required by law, each outstanding share of Voting Common
Stock shall be entitled to
<PAGE> 2
vote on each matter on which the stockholders of the Corporation shall
be entitled to vote, and each holder of Voting Common Stock shall be
entitled to one vote for each share of such stock held by such holder.
(ii) Non-Voting Common Stock. Except as set forth herein or
as otherwise required by law, each outstanding share of Non-Voting
Common Stock shall not be entitled to vote on any matter on which the
stockholders of the Corporation shall be entitled to vote, and shares
of Non-Voting Common Stock shall not be included in determining the
number of shares voting or entitled to vote on any such matters;
provided that the holders of Non-Voting Common Stock shall have the
right to vote as a separate class on any merger or consolidation of
the Corporation with or into another entity or entities, or any
recapitalization or reorganization, in which shares of Non-Voting
Common Stock would receive or be exchanged for consideration different
on a per share basis from consideration received with respect to or in
exchange for the shares of Voting Common Stock or would otherwise be
treated differently from shares of Voting Common Stock in connection
with such transaction, except that shares of Non-Voting Common Stock
may, without such a separate class vote, receive or be exchanged for
non-voting securities which are otherwise identical on a per share
basis in amount and form to the voting securities received with
respect to or exchanged for the Voting Common Stock so long as (i)
such non-voting securities are convertible into such voting securities
on the same terms as the Non-Voting Common Stock is convertible into
Voting Common Stock and (ii) all other consideration is equal on a per
share basis. Notwithstanding the foregoing, holders of shares of the
Non-Voting Common Stock shall be entitled to vote as a separate class
on any amendment to this paragraph (a)(ii) of this Article Fourth and
on any amendment, repeal or modification of any provision of this
Certificate of Incorporation that adversely affects the powers,
preferences or special rights of holders of the Non-Voting Common
Stock.
(b) Dividends. Any dividend or distribution on the Common Stock
shall be payable on shares of Voting Common Stock and Non-Voting Common Stock,
share and share alike; provided, that (i) in the case of dividends payable in
shares of Common Stock of the Corporation, or options, warrants or rights to
acquire shares of such Common Stock, or securities convertible into or
exchangeable for shares of such Common Stock, the shares, options, warrants,
rights or securities so payable shall be payable in shares of, or options,
warrants or rights to acquire, or securities convertible into or exchangeable
for, Common Stock of the same class upon which the dividend or distribution is
being paid and (ii) if the dividends consist of other voting securities of the
Corporation, the Corporation shall make available to each holder of Non-Voting
Common Stock, at such holder's request, dividends consisting of non-voting
securities of the Corporation which are otherwise identical to the voting
securities and which are convertible into or exchangeable for such voting
securities on the same terms as the Non-Voting Common Stock is convertible into
the Voting Common Stock.
(c) Liquidation. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, after payment or
provision for payment of the debts and other liabilities of the Corporation,
the holders of shares of Voting Common Stock and Non-Voting Common Stock shall
be entitled to share ratably, share and share alike, in the remaining net
assets of the Corporation.
2
<PAGE> 3
(d) Conversion.
(i) Conversion of Voting Common Stock. Subject to and upon
compliance with the provisions of this paragraph (d) of this Article
Fourth, any Regulated Stockholder (defined below) shall be entitled to
convert, at any time and from time to time, any or all of the shares
of Voting Common Stock held by such stockholder into the same number
of shares of Non-Voting Common Stock.
(ii) Conversion of Non-Voting Common Stock. Subject to and
upon compliance with the provisions of this paragraph (d)(ii) of this
Article Fourth, each record holder of Non-Voting Common Stock shall be
entitled at any time and from time to time in such holder's sole
discretion and at such holder's option, to convert any or all of the
shares of such holder's Non-Voting Common Stock into the same number
of shares of Voting Common Stock; provided, however, that Non-Voting
Common Stock constituting Restricted Stock (defined below) with
respect to a particular Regulated Stockholder may not be converted
into Voting Common Stock to the extent that immediately prior thereto,
or as a result of such conversion, the number of shares of Voting
Common Stock which constitute such Restricted Stock held by all
holders thereof would exceed the number of shares of Voting Common
Stock which such Regulated Stockholder reasonably determines it and
its Affiliates (defined below) may own, control or have the power to
vote under any law, regulation, rule or other requirement of any
governmental authority at the time applicable to such Regulated
Stockholder or its Affiliates; and, provided, further, that each
holder of Non-Voting Common Stock may convert such shares into Voting
Common Stock if such holder reasonably believes that such converted
shares will be transferred within fifteen (15) days pursuant to a
Conversion Event (defined below) and such holder agrees not to vote
any such shares of Voting Common Stock prior to such Conversion Event
and undertakes to promptly convert such shares back into Non-Voting
Common Stock if such shares are not transferred pursuant to a
Conversion Event. Each Regulated Stockholder may provide for further
restrictions upon the conversion of any shares of Restricted Stock by
providing the Corporation with signed, written instructions specifying
such additional restrictions and legending such shares as to the
existence of such restrictions.
(iii) Conversion Procedure. Each conversion of shares of
Common Stock of the Corporation into shares of another class of Common
Stock of the Corporation shall be effected by the surrender of the
certificate or certificates representing the shares to be converted
(the "Converting Shares") at the principal office of the Corporation
(or such other office or agency of the Corporation as the Corporation
may designate by written notice to the holders of Common Stock) at any
time during its usual business hours, together with written notice by
the holder of such Converting Shares, stating that such holder desires
to convert the Converting Shares, or a stated number of the shares
represented by such certificate or certificates, into an equal number
of shares of the class into which such shares may be converted (the
"Converted Shares"). Such notice shall also state the name or names
(with addresses) and denominations in which the certificate or
certificates for Converted Shares are to be issued and shall include
instructions for the delivery thereof. The Corporation shall promptly
notify each Regulated Stockholder of its receipt of such notice.
Promptly after such surrender and the receipt of such written
3
<PAGE> 4
notice, the Corporation will issue and deliver in accordance with the
surrendering holder's instructions the certificate or certificates
evidencing the Converted Shares issuable upon such conversion, and the
Corporation will deliver to the converting holder a certificate (which
shall contain such legends as were set forth on the surrendered
certificate or certificates) representing any shares which were
represented by the certificate or certificates that were delivered to
the Corporation in connection with such conversion, but which were not
converted; provided, however, that if such conversion is subject to
paragraph (d)(iv) of this Article Fourth, the Corporation shall not
issue such certificate or certificates until the expiration of the
Deferral Period referred to therein. Such conversion, to the extent
permitted by law, shall be deemed to have been effected as of the
close of business on the date on which such certificate or
certificates shall have been surrendered and such notice shall have
been received by the Corporation, and at such time the rights of the
holder of the Converting Shares as such holder shall cease (except
that, in the case of a conversion subject to paragraph (d)(iv) of this
Article Fourth, the conversion shall be deemed to be effective upon
the expiration of the Deferral Period referred to therein) and the
person or persons in whose name or names the certificate or
certificates for the Converted Shares are to be issued upon such
conversion shall be deemed to have become the holder or holders of
record of the Converted Shares. Upon issuance of shares in accordance
with this paragraph (d) of this Article Fourth, such Converted Shares
shall be deemed to be duly authorized, validly issued, fully paid and
non-assessable. The Corporation shall take all such actions as may be
necessary to assure that all such shares of Common Stock may be so
issued without violation of any applicable law or governmental
regulation or any requirements of any domestic securities exchange
upon which shares of Common Stock may be listed (except for official
notice of issuance which will be immediately transmitted by the
Corporation upon issuance). The Corporation shall not close its books
against the transfer of shares of Common Stock in any manner which
would interfere with the timely conversion of any shares of Common
Stock.
Notwithstanding any provision of this paragraph (d) of this Article
Fourth to the contrary, each holder of Non-Voting Common Stock shall
be entitled to convert shares of Non-Voting Common Stock in connection
with any Conversion Event if such holder reasonably believes that such
Conversion Event will be consummated, and a written request for
conversion from any holder of Non-Voting Common Stock to the
Corporation stating such holder's reasonable belief that a Conversion
Event shall occur shall be conclusive and shall obligate the
Corporation to effect such conversion in a timely manner so as to
enable each such holder to participate in such Conversion Event. The
Corporation will not cancel the shares of Non-Voting Common Stock so
converted before the 15th day following such Conversion Event and will
reserve such shares until such 15th day for reissuance in compliance
with the next sentence. If any shares of Non-Voting Common Stock are
converted into shares of Voting Common Stock in connection with a
Conversion Event and such shares of Voting Common Stock are not
actually distributed, disposed of or sold pursuant to such Conversion
Event, such shares of Voting Common Stock shall be promptly converted
back into the same number of shares of Non-Voting Common Stock.
4
<PAGE> 5
(iv) Notice of Conversion to Other Regulated Stockholders;
Deferral. The Corporation shall not convert or directly or indirectly
redeem, purchase or otherwise acquire any shares of Voting Common
Stock or any other class of capital stock of the Corporation or take
any other action affecting the voting rights of such shares, if such
action will increase the percentage of any class of outstanding voting
securities owned or controlled by any Regulated Stockholder (other
than any such stockholder which requested that the Corporation take
such action, or which otherwise waives in writing its rights under
this paragraph (d)(iv) of this Article Fourth), unless the Corporation
gives written notice (the "Deferral Notice" ) of such action to each
Regulated Stockholder. The Corporation will defer making any such
conversion, redemption, purchase or other acquisition, or taking any
such other action for a period of twenty (20) days (the "Deferral
Period") after giving the Deferral Notice in order to allow each
Regulated Stockholder to determine whether it wishes to convert or
take any other action with respect to the Common Stock it owns,
controls or has the power to vote, and if any such Regulated
Stockholder then elects to convert any shares of Voting Common Stock,
it shall notify the Corporation in writing within ten (10) days of the
issuance of the Deferral Notice, in which case the Corporation shall
(i) promptly notify from time to time prior to the end of such 20-day
period each other Regulated Stockholder holding shares of each
proposed conversion, and (ii) effect the conversions requested by all
Regulated Stockholders in response to the notices issued pursuant to
this paragraph (d)(iv) of this Article Fourth at the end of the
Deferral Period. Upon complying with the procedures hereinabove set
forth in this paragraph (d)(iv) of this Article Fourth, the
Corporation may so convert or directly or indirectly redeem, purchase
or otherwise acquire any shares of Voting Common Stock or any other
class of capital stock of the Corporation or take any other action
affecting the voting rights of such shares.
(e) Miscellaneous.
(i) Restrictions on Redemptions, Etc. The Corporation shall
not redeem, purchase, acquire or take any other action affecting
outstanding shares of Common Stock (including, without limitation,
being a party to any merger, consolidation, recapitalization,
reorganization or other transaction pursuant to which a Regulated
Holder would be required to take any Securities or subordinated debt)
if, after giving effect to such redemption, purchase, acquisition or
other action, a Regulated Stockholder would have or might reasonably
be expected to have a Regulatory Problem.
(ii) Stock Splits; Adjustments. If the Corporation shall in
any manner subdivide (by stock split, stock dividend or otherwise) or
combine (by reverse stock split or otherwise) the outstanding shares
of the Voting Common Stock or the Non-Voting Common Stock, then the
outstanding shares of each other class of Common Stock shall be
subdivided or combined, as the case may be, to the same extent, share
and share alike, and effective provision shall be made for the
protection of the conversion rights hereunder.
In case of any reorganization, reclassification or change of shares of
the Voting Common Stock or Non-Voting Common Stock (other than a change
in par value or from par to no par value or as a result of subdivision
or combination), or in case of any consolidation of
5
<PAGE> 6
the Corporation with one or more corporations or a merger of the
Corporation with another corporation (other than a consolidation or
merger in which the Corporation is the resulting or surviving
corporation and which does not result in any reclassification or
change of outstanding shares of Voting Common Stock or Non-Voting
Common Stock), each holder of a share of Voting Common Stock or
Non-Voting Common Stock shall have the right at any time thereafter,
so long as the conversion right hereunder with respect to such share
would exist had such event not occurred, to convert such share into
the kind and amount of shares of stock and other securities and
properties (including cash) receivable upon such reorganization,
reclassification, change, consolidation or merger by a holder of the
number of shares of Voting Common Stock or Non-Voting Common Stock
into which such shares of Voting Common Stock or Non-Voting Common
Stock, as the case may be, might have been converted immediately prior
to such reorganization, reclassification, change, consolidation or
merger. In the event of such reorganization, reclassification, change,
consolidation or merger, effective provision shall be made in the
certificate of incorporation of the resulting or surviving corporation
or otherwise for the protection of the conversion rights of the shares
of Voting Common Stock and Non-Voting Common Stock that shall be
applicable, as nearly as reasonably may be, to any such other shares
of stock and other securities and property deliverable upon conversion
of such shares of Voting Common Stock or Non-Voting Common Stock into
which such Voting Common Stock or Non-Voting Common Stock might have
been converted immediately prior to such event.
(iii) Reservation of Shares. The Corporation shall at all
times reserve and keep available out of its authorized but unissued
shares of Voting Common Stock and Non-Voting Common Stock or its
treasury shares, solely for the purpose of issuance upon the
conversion of shares of Voting Common Stock and Non-Voting Common
Stock, such number of shares of such class as are then issuable upon
the conversion of all outstanding shares of Voting Common Stock and
Non-Voting Common Stock which may be converted.
(iv) No Charge. The issuance of certificates for shares of
any class of Common Stock (upon conversion of shares of any other
class of Common Stock or otherwise) shall be made without charge to
the holders of such shares for any issuance tax in respect thereof or
other cost incurred by the Corporation in connection with such
conversion and/or the issuance of shares of Common Stock; provided,
however, that the Corporation shall not be required to pay any tax
which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of
the holder of the Common Stock converted.
(v) Registration of Transfer. The Corporation shall keep at
its principal office (or such other place as the Corporation
reasonable designates) a register for the registration of shares of
Common Stock. Upon the surrender of any certificate representing
shares of any class of Common Stock at such place, the Corporation
shall, at the request of the registered holder of such certificate,
execute and deliver a new certificate or certificates in exchange
therefor representing in the aggregate the number of shares of such
class represented by the surrendered certificate, and the Corporation
forthwith shall cancel such surrendered certificate. Each such new
certificate will
6
<PAGE> 7
represent such number of shares of such class as is requested by the
holder of the surrendered certificate and will be substantially
identical in form to the surrendered certificate. Subject to any other
restrictions on transfer to which such holder or such shares may be
bound, the Corporation will also register such new certificate in such
name as requested by the holder of the surrendered certificate.
(vi) Replacement. Upon receipt of evidence reasonably
satisfactory to the Corporation (an affidavit of the registered holder
will be satisfactory) of the ownership and the loss, theft,
destruction or mutilation of any certificate evidencing one or more
shares of any class of Common Stock, and in the case of any such loss,
theft or destruction, upon receipt of indemnity reasonable
satisfactory to the Corporation (provided that if the holder is a
financial institution or other institutional investor its own
agreement will be satisfactory), or, in the case of any such
mutilation upon surrender of such certificate, the Corporation shall
(at its expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing the number of shares of such
class represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or
mutilated certificate.
(vii) Notices. All notices referred to herein shall be in
writing, shall be delivered personally or by first class mail, postage
prepaid, and shall be deemed to have been given when so delivered or
mailed to the Corporation at its principal executive offices and to any
stockholder at such holder's address as it appears in the stock records
of the Corporation (unless otherwise specified in a written notice to
the Corporation by such holder).
(f) Definitions. As used herein, the following terms hall have the
meanings shown below:
(i) "Affiliate" shall mean with respect to any Person, any
other person, directly or indirectly controlling, controlled by or
under common control with such Person. For the purpose of the above
definition, the term "control" (including with correlative meaning,
the terms "controlling", "controlled by" and "under common control
with"), as used with respect to any Person, shall mean the possession,
directly or indirectly, of the power to direct or cause the direction
of the management and policies of such Person, whether through the
ownership of voting securities or by contract or otherwise.
(ii) "Conversion Event" shall mean (a) any public offering
or public sale of securities of the Corporation (including a public
offering registered under the Securities Act of 1933, as amended, and
a public sale pursuant to Rule 144 thereunder or any similar rule then
in force), (b) any sale of securities of the Corporation to a person
or group of persons (within the meaning of the Securities Exchange Act
of 1934, as amended (the "1934 Act")) if, after such sale, such person
or group of persons in the aggregate would own or control securities
which possess in the aggregate the ordinary voting power to elect a
majority of the Corporation's directors (provided that such sale has
been approved by the Corporation's Board of Directors or a committee
thereof), (c) any sale of securities of the Corporation to a person or
group of persons (within the
7
<PAGE> 8
meaning of the 1934 Act) if, after such sale, such person or group of
persons in the aggregate would own or control securities of the
Corporation (excluding any Non-Voting Common being converted and
disposed of in connection with such Conversion Event) which possess in
the aggregate the ordinary voting power to elect a majority of the
Corporation's directors, (d) any sale of securities of the Corporation
to a person or group of persons (within the meaning of the 1934 Act)
if, after such sale, such person or group of persons would not, in the
aggregate, own, control or have the right to acquire more than two
percent (2%) of the outstanding securities of any class of voting
securities of the Corporation, and (e) a merger, consolidation or
similar transaction involving the Corporation if, after such
transaction, a person or group of persons (within the meaning of the
1934 Act) in the aggregate would own or control securities which
possess in the aggregate the ordinary voting power to elect a majority
of the surviving corporation's directors (provided that the
transaction has been approved by the Corporation's Board of Directors
or a committee thereof).
(iii) "Person" or "person" shall be construed
broadly and shall include an individual, a partnership, a limited
liability company, a corporation, a trust, a joint venture, an
unincorporated organization or a government or any department or
agency thereof.
(iv) "Regulated Stockholder" shall mean Chase Equity
Associates, L.P., Paribas North America, Inc. or any other stockholder
that (i) is subject to the provisions of Regulation Y, (ii) holds
shares of Common Stock of the Corporation and (iii) has provided
written notice to the Corporation of its status as a "Regulated
Stockholder" hereunder.
(v) "Regulation Y" shall mean Regulation Y of the Board of
Governors of the Federal Reserve System, 12 C.F.R. Part 225 (or any
successor to such Regulation).
(vi) "Regulatory Problem" means, with respect to any
Regulated Stockholder, that such Regulated Stockholder would own more
than 4.99% of any class of voting securities of any Person (other than
any class of voting securities which is (or, in the case of any
redemption, purchase, acquisition or other action, is made prior to
consummation thereof) convertible into a class of non-voting
securities which are otherwise identical to the voting securities and
convertible into such voting securities on terms reasonably acceptable
to such Regulated Stockholder) or more than 24.99% of the total equity
of such Person or more than 24.99% of the total value of all capital
stock and subordinated debt of such Person (in each case determined by
assuming such Regulated Holder (but no other holder) has exercised,
converted or exchanged all of its options, warrants and other
convertible or exchangeable securities).
(vii) "Restricted Stock" means, with respect to any
Regulated Stockholder, any outstanding shares of Voting Common Stock
and/or Non-Voting Common Stock ever held of record by such Regulated
Stockholder or its Affiliates, excluding treasury shares; provided,
however, that any such shares shall cease to be Restricted Stock with
respect to such Regulated Stockholder when such shares are transferred
in a transaction which is a Conversion Event or are acquired by the
Corporation or any subsidiary of the
8
<PAGE> 9
Corporation; and provided, further, that the Corporation shall have no
responsibility for determining whether any outstanding shares of
Voting Common Stock and/or Non-Voting Common Stock constitute
Restricted Stock with respect to any particular Regulated Stockholder,
but shall instead be entitled to receive, and rely exclusively upon, a
written notice provided by such Regulated Stockholder designating such
shares as Restricted Stock.
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, an Annual Meeting of Stockholders of the corporation was duly called
and held, upon notice in accordance with Section 222 of the General Corporation
Law of the State of Delaware, at which meeting the necessary number of shares
of the Corporation's capital stock as required by statute were voted in favor
of the aforementioned amendment to the Certificate of Incorporation of the
corporation.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
* * *
IN WITNESS WHEREOF, Hanger Orthopedic Group, Inc. has caused this
certificate to be signed by a duly authorized officer as of the 16th day of
September, 1999.
HANGER ORTHOPEDIC GROUP, INC.
By: /s/ IVAN R. SABEL
------------------------------
Name: Ivan R. Sabel
Title: Chairman of the Board and
Chief Executive Officer
#70370
9
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