SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2000
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________
Commission File Number 1-10670
HANGER ORTHOPEDIC GROUP, INC.
-----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter.)
Delaware 84-0904275
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Two Bethesda Metro Center, Suite 1200, Bethesda, MD 20814
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(Address of principal executive offices) (Zip Code)
Registrant's phone number, including area code:
(301) 986-0701
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of August 8,
2000; 18,910,002 shares of common stock, $.01 par value per share.
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
INDEX
<TABLE>
<CAPTION>
INDEX
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2000
(unaudited) and December 31, 1999 1
Consolidated Statements of Income for the three
months ended June 30, 2000 and 1999 (unaudited) 3
Consolidated Statements of Income for the six
months ended June 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999 (unaudited) 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
</TABLE>
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Shares and Per Share Amounts)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,289 $ 5,735
Accounts receivable less allowance for
doubtful accounts of $15,153 and $17,866
in 2000 and 1999, respectively 112,249 103,125
Inventories 67,878 59,915
Prepaid expenses and other assets 17,715 5,222
Income taxes receivable 4,535 3,644
Deferred income taxes 8,125 11,778
---------- ----------
Total current assets 213,791 189,419
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Land 4,177 4,177
Buildings 8,902 8,886
Machinery and equipment 29,139 26,677
Furniture and fixtures 9,563 8,629
Leasehold improvements 15,578 13,004
---------- ----------
67,359 61,373
Less accumulated depreciation and amortization 19,849 15,269
---------- ----------
47,510 46,104
---------- ----------
INTANGIBLE ASSETS
Excess of cost over net assets acquired 478,755 498,612
Non-compete agreements 1,551 2,019
Patents 9,835 9,768
Assembled Work Force 7,000 7,000
Other intangible assets 17,111 15,833
---------- ----------
514,252 533,232
Less accumulated amortization 27,667 20,412
---------- ----------
486,585 512,820
---------- ----------
OTHER ASSETS
Other 1,590 1,738
---------- ----------
TOTAL ASSETS $ 749,476 $ 750,081
========== ==========
</TABLE>
The accompany notes are an integral part of the consolidated financial
statements.
1
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Shares and Per Share Amounts)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 29,591 $ 25,406
Accounts payable 18,538 16,714
Accrued expenses 6,130 5,445
Accrued interest payable 7,441 4,768
Accrued wages and payroll taxes 11,912 18,658
---------- ----------
Total current liabilities 73,612 70,991
---------- ----------
Long-term debt 421,162 426,211
Deferred income taxes 13,481 13,481
Other liabilities 4,837 5,141
7% Redeemable Preferred Stock,
liquidation preference of $1,000 per share 63,647 61,343
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 60,000,000 shares
authorized, 19,043,497 and 19,043,497 shares
issued, and 18,910,002 and 18,910,002 shares
outstanding in 2000 and 1999 190 190
Additional paid-in capital 146,498 146,498
Retained earnings 26,705 26,882
---------- ----------
173,393 173,570
Treasury stock, at cost (133,495 shares) (656) (656)
---------- ----------
172,737 172,914
TOTAL LIABILITIES, REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS' EQUITY $ 749,476 $ 750,081
========== ==========
</TABLE>
The accompany notes are an integral part of the consolidated financial
statements.
2
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Shares and Per Share Amounts)
(unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net Sales $ 125,872 $ 56,417
Cost of products and services sold 60,310 27,555
------------ ------------
Gross profit 65,562 28,862
Selling, general & administrative expenses 42,833 18,052
Integration costs 502
Depreciation and amortization 2,939 1,021
Amortization of excess cost over net assets acquired 2,796 756
------------ ------------
Income from operations 16,492 9,033
Other expense:
Interest expense, net (10,951) (787)
Other, net (31) (137)
------------ ------------
Income before income taxes 5,510 8,109
Provision for income taxes 3,103 3,234
------------ ------------
Net income $ 2,407 $ 4,875
============ ============
BASIC PER COMMON SHARE DATA
Net income $ .06 $ .26
============ ============
Shares used to compute basic per common
share amounts 18,910,002 18,846,547
============ ============
DILUTED PER COMMON SHARE DATA
Net income $ .06 $ .24
============ ============
Shares used to compute diluted per common share
amounts * 19,154,415 20,023,628
============ ============
</TABLE>
* Excludes the effect of the conversion of common stock into which shares of
7% Redeemable Preferred Stock are convertible as it is anti-dilutive.
The accompany notes are an integral part of the consolidated financial
statements.
3
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED June 30, 2000 and 1999
(Dollars In Thousands, Except Shares and Per Share Amounts)
(unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net Sales $ 240,740 $ 105,562
Cost of products and services sold 117,494 52,444
------------ ------------
Gross profit 123,246 53,118
Selling, general & administrative expenses 82,008 35,151
Integration costs 1,088
Depreciation and amortization 5,656 1,984
Amortization of excess cost over net assets acquired 5,787 1,498
------------ ------------
Income from operations 28,707 14,485
Other expense:
Interest expense, net (22,109) (1,075)
Other, net (33) (99)
------------ ------------
Income before income taxes 6,565 13,311
Provision for income taxes 4,438 5,315
------------ ------------
Net income $ 2,127 $ 7,996
============ ============
BASIC PER COMMON SHARE DATA
Net income (loss) $ (.01) $ .42
============ ============
Shares used to compute basic per common
share amounts 18,910,002 18,823,480
============ ============
DILUTED PER COMMON SHARE DATA
Net income (loss) $ (.01) $ .40
============ ============
Shares used to compute diluted per common share
amounts * 18,910,002 20,131,175
============ ============
</TABLE>
* Excludes the effect of the conversion of common stock into which shares of
7% Redeemable Preferred Stock are convertible as it is anti-dilutive. All
other outstanding options and warrants are anti-dilutive due to the net loss
for the Company for the six months ended June 30, 2000.
The accompany notes are an integral part of the consolidated financial
statements.
4
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED June 30, 2000 and 1999
(Dollars In Thousands, Except Shares and Per Share Amounts)
(unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,127 $ 7,996
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for bad debt 8,106 4,226
Deferred income taxes 3,653 ---
Depreciation and amortization 5,656 1,984
Amortization of excess cost over net
assets acquired 5,787 1,498
Amortization of debt issue costs 965 ---
Changes in assets and liabilities, net
of effect from acquired companies:
Accounts receivable (17,080) (8,374)
Inventory (7,913) (3,572)
Prepaid and other assets (3,769) (1,218)
Other assets 146 (657)
Accounts payable 1,797 1,988
Accrued expenses 1,286 1,730
Accrued wages and payroll taxes (6,794) (282)
Other liabilities (222) (1,121)
---------- ---------
Total adjustments (8,382) (3,798)
---------- ---------
Net cash provided by (used in) operating activities (6,255) 4,198
---------- ---------
Cash flows provided by (used in) investing activities:
Purchase of fixed assets (5,934) (2,557)
Acquisitions, net of cash acquired (4,550) (8,950)
Cash received pursuant to purchase price adjustment 15,000 ---
---------- ---------
Net cash provided by (used in) investing activities 4,516 (11,507)
---------- ----------
</TABLE>
Continued
The accompany notes are an integral part of the consolidated financial
statements.
5
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED June 30,
(Dollars In Thousands, Except Shares and Per Share Amounts)
(unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flows provided by (used in) financing activities:
Net borrowings under revolving credit facility $ 13,400 $ 21,157
Repayment of term loans (5,500) ---
Proceeds from sale of common stock 545
Proceeds from long-term debt 150,000
Repayment of long-term debt (7,352) (2,239)
Increase in debt issue costs (1,255) (12,175)
--------- ----------
Net cash provided by (used in) financing activities (707) 157,288
--------- ----------
Net change in cash and cash equivalents for the period (2,446) 149,978
Cash and cash equivalents at beginning of period 5,735 9,683
--------- ----------
Cash and cash equivalents at end of period $ 3,289 $ 159,661
========= ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 19,373 $ 422
========= ==========
Taxes $ 2,137 $ 2,504
========= ==========
Non-cash financing and investing activities:
Issuance of common stock in connection with
acquisitions $ --- $ 500
========= =========
Issuance of notes in connection with acquisitions $ 924 $ 1,026
========= =========
Issuance of common stock in repayment of debt $ --- $ 168
========= =========
Dividends declared on preferred stock $ 2,267 $ ---
========= =========
Accretion of preferred stock $ 37 $ ---
========= =========
Notes received pursuant to purchase price adjustment $ 9,700 $ ---
========= =========
</TABLE>
The accompany notes are an integral part of the consolidated financial
statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Shares and Per Share Amounts)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with Rule 10-01 of Regulation S-X. They do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments,
consisting of a normal recurring nature, considered necessary for a fair
presentation have been included. Certain reclassifications of prior year's
data have been made to improve comparability and the Company uses the gross
profit method to value inventory on an interim basis.
These financial statements should be read in conjunction with the
financial statements of Hanger Orthopedic Group, Inc. ("Hanger" or the
"Company") and notes thereto included in the Annual Report on Form 10-K for
the year ended December 31, 1999 filed by the Company with the Securities and
Exchange Commission.
NOTE B - SEGMENT AND RELATED INFORMATION
The Company evaluates segment performance and allocates resources based
on the segments' EBITDA. "EBITDA" is defined as income from operations before
depreciation, amortization, and integration costs. EBITDA is not a recognized
measure of performance under Generally Accepted Accounting Principles
("GAAP"). While EBITDA should not be considered in isolation or as a
substitute for net income, cash flows from operating activities and other
income or cash flow statement data prepared in accordance with GAAP, or as a
measure of profitability or liquidity, management understands that EBITDA is
customarily used as a criteria in evaluating heath care companies. Moreover,
substantially all of the Company's financing agreements contain covenants in
which EBITDA is used as a measure of financial performance. "Other" EBITDA not
directly attributable to reportable segments is primarily related to corporate
general and administrative expenses.
7
<PAGE>
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 June 30, 2000
-------------------
<S> <C> <C> <C> <C> <C>
Net Sales
Customers $ 116,004 $ 2,598 $ 7,270 $ --- $ 125,872
========== ========== ========== ========== ==========
Intersegments $ --- $ 4,057 $ 12,951 $ (17,008) $ ---
========== ========== ========== ========== ==========
EBITDA $ 27,618 $ (1,219) $ 1,816 $ (5,486) $ 22,729
Restructuring costs and
integration expense 257 -- --- 245 502
Depreciation and
amortization 4,781 607 101 246 5,735
Interest expense, net 24,345 4 -- (13,398) 10,951
Other (income) expense (23) 16 38 -- 31
Income before taxes $ (1,742) $ (1,846) $ 1,677 $ 7,421 $ 5,510
========== ========== ========== ========== ==========
THREE MONTHS
ENDED JUNE 30, 1999
Net Sales
Customers $ 44,918 $ 2,794 $ 8,705 $ --- $ 56,417
========== ========== ========== ========== ==========
Intersegments $ --- $ 1,536 $ 5,674 $ (7,210) $ ---
========== ========== ========== ========== ==========
EBITDA $ 10,795 $ 519 $ 1,436 $ (1,940) $ 10,810
Depreciation and
amortization 1,260 400 43 74 1,777
Interest expense, net 250 4 --- 533 787
Other expense (income) 20 21 (117) 213 137
Income before taxes $ 9,265 $ 94 $ 1,510 $ (2,760) $ 8,109
========== ========== ========== ========== ==========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Practice
Management
And Patient
Care Centers Manufacturing Distribution Other Total
------------ ------------- ------------ ----- -----
Three Months
Ended June 30, 2000
-------------------
<S> <C> <C> <C> <C> <C>
Net Sales
Customers $ 221,459 $ 4,990 $ 14,291 $ --- $ 240,740
========== ========== =========== =========== ===========
Intersegments $ --- $ 7,624 $ 26,523 $ (34,147) $ ---
========== ========== =========== =========== ===========
EBITDA $ 49,632 $ (1,222) $ 3,716 $ (10,888) $ 41,238
Restructuring costs and
integration expense 747 -- 6 335 1,088
Depreciation and
amortization 9,918 902 152 471 11,443
Interest expense, net 25,047 7 -- (2,945) 22,109
Other expense 14 18 1 -- 33
Income before taxes $ 13,906 $ (2,149) $ 3,557 $ (8,749) $ 6,565
========== ========== =========== =========== ===========
SIX MONTHS
ENDED JUNE 30, 1999
Net Sales
Customers $ 85,107 $ 5,397 $ 15,058 $ --- $ 105,562
========== ========== =========== =========== ===========
Intersegments $ --- $ 2,662 $ 10,821 $ (13,483) $ ---
========== ========== =========== =========== ===========
EBITDA $ 18,500 $ 827 $ 2,535 $ (3,895) $ 17,967
Depreciation and
amortization 2,490 785 82 125 3,482
Interest expense, net 519 10 --- 546 1,075
Other (income) expense (181) (8) (219) 507 99
Income before taxes $ 15,672 $ 40 $ 2,672 $ (5,073) $ 13,311
========== ========== =========== =========== ===========
</TABLE>
9
<PAGE>
NOTE C - INVENTORY
Inventories at June 30, 1999 and December 31, 1998 were comprised of the
following:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1998
------------- -----------------
(unaudited)
<S> <C> <C>
Raw materials $40,775 $31,715
Work-in-process 17,155 17,172
Finished goods 9,948 11,028
--------- --------
$67,878 $59,915
======= =======
</TABLE>
NOTE D - ACQUISITIONS
On July 1, 1999, the Company acquired all of the outstanding stock of
NovaCare Orthotics and Prosthetics, Inc. ("NovaCare O&P") from NovaCare, Inc.
pursuant to the terms of a Stock Purchase Agreement (the "Agreement"). Under
the terms of the Agreement, the aggregate consideration totaled $445,000,
which consisted of the assumption of liabilities and other obligations of
$38,400 and the balance in cash. Of the cash portion, $15,000 was placed in
escrow pending the determination of any potential post closing adjustments
relating to working capital. On May 22, 2000, an arbitrator awarded the
Company $25,104 as a result of the working capital deficiency from the
purchase of NovaCare O&P. During the second quarter 2000, the Company received
$15,000 of the award from escrow, and approximately $600 in interest on the
escrow was recorded as interest income. Also during the second quarter of
2000, Hanger executed an agreement to settle the balance of the arbitration
award with NovaCare, Inc. for $9,700, of which $6,000 was received on July 3,
2000, and $3,700 was in the form of a promissory note to be paid by the end of
the fiscal year. The promissory note is secured and paid on a monthly basis of
approximately $617 plus interest computed at a per annum rate of 7%. Amounts
received and to be received under the arbitration and settlement agreements of
$24,700 have been recorded as a reduction to "Excess cost over net assets
acquired" in the accompanying consolidated balance sheet at June 30, 2000.
Hanger required approximately $430,200 in cash to close the acquisition,
to pay approximately $20,000 of related fees and expenses, including debt
issue costs of approximately $16,000, and to refinance existing debt of
approximately $2,500. The funds were raised by Hanger through (i) borrowing
approximately $230,000 of revolving credit and term loans under a new bank
facility; (ii) selling $150,000 principal amount of 11.25% Senior Subordinated
Notes due 2009; and (iii) selling $60,000 of 7% Redeemable Preferred Stock.
The new bank credit facility consists of a $100,000 revolving credit facility,
of which $30,000 was drawn on in connection with the acquisition of NovaCare
O&P, an A term facility and a tranche B term facility. The 7% Redeemable
Preferred Stock accrues annual dividends, compounded quarterly, equal to 7%,
is subject to put rights and will not require principal payments prior to
maturity. Such Preferred Stock is convertible into shares of the Company's
non-voting common stock at a price of $16.50 per share.
10
<PAGE>
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:
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999
------------------
<S> <C>
Net sales $241,238
----------------------------------------------------
Net (loss) $ (4,599)
----------------------------------------------------
Net loss per common share - diluted (1) $ (.36)
----------------------------------------------------
<FN>
(1) Excludes the effect of the conversion of common stock into which
shares of 7% Redeemable Preferred Stock are convertible as it is
anti-dilutive. All outstanding options and warrants are anti-dilutive
due to the net loss for the Company for the six months ended June 30,
1999.
</FN>
</TABLE>
Adjustments made in arriving at the unaudited consolidated pro forma
results include increased interest expense on acquisition debt, amortization
of goodwill, adjustments to the fair value of assets acquired and depreciable
lives, preferred stock dividends and related tax adjustments.
The unaudited consolidated pro forma results do not necessarily
represent results which would have occurred if the acquisition had taken place
at the beginning of the period, nor are they indicative of the results of
future combined operations or trends.
Additionally, the Company paid, during the six month period ending June
30, 2000, approximately $3,935 related to 38 orthotic and prosthetic companies
acquired in years prior to 2000. The payments were primarily made pursuant to
earnout and working capital provisions contained in the respective acquisition
agreements. The Company has accounted for these amounts as additional purchase
price resulting in an increase to excess of cost over net assets acquired.
Additional amounts aggregating approximately $16,487 may be paid in connection
with earnout provisions contained in previous acquisition agreements.
NOTE E -INTEGRATION & RESTRUCTURING COSTS
In connection with the acquisition of NovaCare O&P, the Company
implemented a restructuring plan on July 1, 1999. The plan contemplated lease
termination and severance costs associated with the closure of certain
redundant patient-care centers and corporate functions of the Company and
NovaCare O&P. The costs associated with the former NovaCare O&P centers were
recorded in connection with the purchase price allocation on July 1, 1999. The
costs associated with the existing Hanger centers were charged to operations
during the third quarter of 1999.
11
<PAGE>
The restructuring plan provided for the closure of 54 patient-care
centers and the termination of 225 employees. Through June 30, 2000, 43 of the
patient-care centers have been closed and 210 employees have been terminated.
Management reasonably expects to have the remaining patient-care centers
closed and employees severed by the end of 2000. Lease payments on closed
patient care centers are expected to be paid through 2003.
The components of the total restructuring reserve through June 30, 2000
are as follows:
<TABLE>
Lease
Employee Termination and Total
Severance Other Exit Restructuring
Costs Costs Reserve
--------- --------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1999 $1,600 $2,992 $ 4, 592
Year-to-date Spending (1,363) (430) $ (1,793)
------- ------- ---------
Balance at June 30, 2000 $ 237 $2,562 $ 2,799
======= ======= =========
</TABLE>
Additionally, during the three and six-month periods ended June 30,
2000, the Company recorded integration costs of $502 and $1,088, respectively,
related to the acquisition of NovaCare O&P. Integration costs include costs of
changing patient care center names, payroll and related benefits conversion
costs, stay-pay bonuses and related benefits for transitional employees and
certain other costs related to the acquisition. These costs are expensed as
incurred.
NOTE F - NET INCOME PER COMMON SHARE
12
<PAGE>
The following sets forth the calculation of the basic and diluted income
per common share amounts for the three and six month periods ended June 30,
2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $ 2,407 $ 4,875 $ 2,127 $ 7,996
Less preferred stock accretion and
dividends declared (1,181) --- (2,304) ---
------------- ------------- ------------- -------------
Income (loss) available to
common stockholders used to
compute basic per common share amounts 1,226 4,875 (177) 7,996
Add back interest expense on convertible
note payable, net of tax (2) 15 15 -- 27
------------- ------------- ------------- -------------
Income (loss) available to common stockholders
plus assumed conversions used to com-
pute diluted per common share amounts (1) $ 1,241 $ 4,890 $ (177) $ 8,023
============= ============= ============= ============
Average shares of common stock
outstanding used to compute basic per
common share amounts 18,910,002 18,846,547 18,910,002 18,823,480
Effect of convertible note payable (2) 69,430 92,573 -- 92,573
Effect of dilutive options (2) 103,140 559,995 -- 654,173
Effect of dilutive warrants (2) 71,843 524,513 -- 560,949
------------- ------------- ------------- -------------
Shares used to compute dilutive per
common share amounts (1) 19,154,415 20,023,628 18,910,002 20,131,175
============= ============= ============= =============
Basic income (loss) per common share $ .06 $ .26 $ (.01) $ .42
Diluted income (loss) per common share $ .06 $ .24 $ (.01) $ .40
<FN>
(1) Excludes the effect of the conversion of common stock into which shares
of 7% Redeemable Preferred Stock are convertible as it is anti-dilutive.
(2) All options, warrants and convertible notes payable are anti-dilutive
due to the net loss for the Company for the six months ended June 30,
2000.
</FN>
</TABLE>
Options to purchase 243,000 and 2,835,963 shares of common stock were
outstanding at June 30, 1999 and 2000, respectively, but were not included in
the computation of diluted income per share for the three and six month ended
June 30, 1999 and 2000, because the options' prices were greater than the
average market price of the common shares.
NOTE G - LONG TERM DEBT
<PAGE>
13
On June 16, 1999, the Company issued, in a private offering, $150,000 of
Senior Subordinated Notes, bearing interest of 11.25%, and maturing on June
15, 2009. Interest is payable on June 15 and December 15, commencing on
December 15, 1999.
In connection with the acquisition of NovaCare O&P, the Company replaced
its bank credit facility existing at June 30, 1999 with a new facility. The
new bank credit facility consists of a $100,000 revolving credit facility, a
$100,000 tranche A term facility and a $100,000 tranche B term facility. The
revolving credit facility and the tranche A term facility mature on July 1,
2005 and currently carry an interest rate of adjusted LIBOR plus 3.0% or ABR
plus 2.0%. The tranche B term facility will mature on January 1, 2007 and
currently carries an interest rate of adjusted LIBOR plus 4.0% or ABR plus
3.0%. The bank credit facility is collateralized by substantially all of the
Company's assets, restricts the payment of dividends and contains certain
affirmative and negative covenants customary in an agreement of this nature.
The Company's total long term debt at June 30, 2000, including a current
portion of approximately $29,591, was approximately $450,753. Such
indebtedness included: (i) $150,000 senior subordinated notes; (ii) $68,400
for the revolver; (iii) $95,000 for tranche A; (iv) $99,500 for tranche B; and
(v) a total of $37,853 of other indebtedness.
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in
the ordinary course of its business, including claims related to alleged
contingent additional payments under business purchase agreements. Many of
these legal proceedings and claims existed in the NovaCare O&P business prior
to the Company's acquisition of NovaCare O&P. In the opinion of management,
the amount of ultimate liability, if any, with respect to these actions will
not have a materially adverse effect on the financial position, liquidity or
results of operations of the Company.
NOTE I - NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standard Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as
amended, requires that an entity recognize all derivative instruments as
either assets or liabilities on its balance sheet at their fair value. Changes
in the fair value of derivatives are recorded each period in current earnings
or other comprehensive income, depending on whether a derivative is designated
as part of a hedge transaction, and, if it is, the type of hedge transaction.
The Company will adopt SFAS 133 by the first quarter of 2001. Due to the
Company's limited use of derivative instruments, SFAS 133 is not expected to
have a material effect on the financial position or results of operations of
the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
14
<PAGE>
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>
Three Months Six Months
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products and services sold 47.9 48.8 48.8 49.7
Gross profit 52.1 51.2 51.2 50.3
Selling, general & administrative
expenses 34.0 32.0 34.1 33.3
Depreciation and amortization 2.3 1.8 2.3 1.9
Amortization of excess cost over net
assets acquired 2.2 1.3 2.4 1.4
Integration costs .4 -- .5 --
Income from operations 13.1 16.0 11.9 13.7
Interest expense, net 8.7 1.4 9.2 1.0
Provision for income taxes 2.5 5.7 1.8 5.0
Net income (loss) 1.9 8.6 .9 7.6
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE
30, 1999
------------------------------------------------------------------------------
NET SALES
Net sales for the quarter ended June 30, 2000, were approximately $125.9
million, an increase of approximately $69.5 million, or 123.1%, over net sales
of approximately $56.4 million for the quarter ended June 30, 1999.
Contributing to the increase were (i) net sales at patient care facilities
acquired subsequent to June 30, 1999, most of which was acquired when Hanger
acquired NovaCare O&P on July 1, 1999, and (ii) a 10.2% increase in net sales
at patient care centers owned and operated by Hanger and NovaCare O&P during
both quarters ("same store sales").
GROSS PROFIT
Gross profit in the quarter ended June 30, 2000 was approximately $65.6
million, an increase of approximately $36.7 million, or 127.2%, over gross
profit of approximately $28.9 million for the quarter ended June 30, 1999. The
increase was primarily attributable to the increase in net sales. Gross profit
as a percentage of net sales increased to 52.1% in the second quarter of 2000
from 51.2% in the second quarter of 1999. The increase in the gross profit
margin is primarily a result of the NovaCare O&P acquisition which was
entirely patient care services. Patient care services historically have
experienced higher gross profit margins than distribution and manufacturing
operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
15
<PAGE>
Selling, general and administrative expenses in the quarter ended June
30, 2000 increased by approximately $24.8 million, or 137.3%, compared to the
quarter ended June 30, 1999. Selling, general and administrative expenses as a
percentage of net sales increased to 34.0% in the second quarter of 2000
compared to 32% for same period in 1999. The increase in selling, general and
administrative expenses, both in dollar amount and as a percent of net sales
is primarily the result of Hanger's acquisition of NovaCare O&P.
INTEGRATION COSTS
During the quarter ended June 30, 2000, the Company recognized
approximately $.5 million of integration costs in connection with its
acquisition of NovaCare O&P. Additional information relating to the
integration and restructuring costs is set forth below under "Integration and
Restructuring Costs."
INCOME FROM OPERATIONS
Principally as a result of the above, income from operations in the
quarter ended June 30, 2000 was approximately $16.5 million, an increase of
$7.5 million, or 82.6%, over the prior year's comparable quarter. Income from
operations as a percentage of net sales decreased to 13.1% in the second
quarter of 2000 from 16% for the prior year's comparable period.
INTEREST EXPENSE, NET
Net interest expense in the second quarter of 2000 was approximately
$11.0 million, an increase of approximately $10.2 million over approximately
$.8 million incurred in the second quarter of 1999. Interest expense as a
percentage of net sales increased to 8.7% from 1.4% for the same period a year
ago. The increase in interest expense was primarily attributable to $262.9
million borrowed under a bank credit facility and $150.0 million in senior
subordinated notes issued to acquire NovaCare O&P.
INCOME TAXES
The Company's effective tax rate was 56.3% in the second quarter of 2000
versus 40% in 1999. The increase in the second quarter of 2000 is a result of
the disproportionate impact of the amortization of the excess costs over net
assets acquired in relation to taxable income, primarily attributable to the
acquisition of NovaCare O&P. The provision for income taxes in the second
quarter of 2000 was approximately $3.1 million compared to approximately $3.2
million for the second quarter of 1999.
NET INCOME
16
<PAGE>
As a result of the above, the Company recorded net income of
approximately $2.4 million, or $.06 per dilutive common share, in the quarter
ended June 30, 2000, compared to net income of $4.9 million, or $.24 per
dilutive common share, in the quarter ended June 30, 1999. Net income for the
quarter ended June 30, 2000, excluding the integration costs, would have been
$2.7 million, or $.08 per dilutive common share after the effect of the
preferred stock dividend.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
-----------------------------------------------------------------------------
NET SALES
Net sales for the six months ended June 30, 2000, were approximately
$240.7 million, an increase of approximately $135.2 million, or 128.1%, over
net sales of approximately $105.6 million for the six months ended June 30,
1999. Contributing to the increase were (i) net sales at patient care
facilities acquired subsequent to June 30, 1999, most of which were acquired
when Hanger acquired NovaCare O&P on July 1, 1999, and (ii) a 6.6% increase in
sales by patient care centers owned and operated by Hanger and NovaCare O&P
during both quarters ("same store sales").
GROSS PROFIT
Gross profit in the six months ended June 30, 2000 was approximately
$123.2 million, an increase of approximately $70.1 million, or 132%, over
gross profit of approximately $53.1 million for the quarter ended June 30,
1999. The increase was primarily attributable to the increase in net sales.
Gross profit as a percentage of net sales increased to 51.2% in the second
quarter of 2000 from 50.3% in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the six months ended
June 30, 2000 increased by approximately $46.9 million, or 133.3%, compared to
the six months ended June 30, 1999. Selling, general and administrative
expenses as a percentage of net sales increased to 34.1% in the six months
ended June 30, 2000 compared to 33.3% for same period in 1999. The increase in
selling, general and administrative expenses, both in dollar amount and as a
percent of net sales is primarily the result of Hanger's acquisition of
NovaCare O&P.
INTEGRATION COSTS
During the quarter ended June 30, 2000, the Company recognized
approximately $1.1 million of integration costs in connection with its
acquisition of NovaCare O&P. Additional information relating to the
integration and restructuring costs is set forth below under "Integration and
Restructuring Costs."
INCOME FROM OPERATIONS
17
<PAGE>
Principally as a result of the above, income from operations for the six
months ended June 30, 2000 was approximately $28.7 million, an increase of
$14.2 million, or 98.2%, over the prior year's comparable six month period.
Income from operations as a percentage of net sales decreased to 11.9% in the
six month period ended June 30, 2000 from 13.7% for the prior year's
comparable period.
INTEREST EXPENSE, NET
Net interest expense in the six month period ended June 30, 2000 was
approximately $22.0 million, an increase of approximately $21 million over the
approximately $1.1 million incurred in the six month period ended June 30,
1999. Interest expense as a percentage of net sales increased to 9.2% from
1.0% for the same period a year ago. The increase in interest expense was
primarily attributable to $262.9 million borrowed under a bank credit facility
and $150.0 million in senior subordinated notes issued to acquire NovaCare
O&P.
INCOME TAXES
The Company's effective tax rate was 67.6% in the six month period ended
June 30, 2000 versus 40% in 1999. The increase in the six month period ended
June 30, 2000 is a result of the disproportionate impact of the amortization
of the excess costs over net assets acquired in relation to taxable income,
primarily attributable to the acquisition of NovaCare O&P. The provision for
income taxes in the six month period ended June 30, 2000 was approximately
$4.4 million compared to approximately $5.3 million for the six month period
ended June 30, 1999.
NET INCOME (LOSS)
As a result of the above, the Company recorded net income of
approximately $2.1 million, or $(.01) loss per dilutive common share which
reflects the accrual of the preferred stock dividend, in the six month period
ended June 30, 2000, compared to net income of $8.0 million, or $.40 per
dilutive common share, in the six month period ended June 30, 1999. Net income
for the six months ended June 30, 2000, excluding the integration costs, would
have been $2.7 million, or $.08 per dilutive common share after the effect of
the preferred stock dividend.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated working capital at June 30, 2000 was
approximately $140.2 million and cash and cash equivalents available were
approximately $3.3 million. The Company's cash resources were satisfactory to
meet its obligations for the quarter ended June 30, 2000.
On July 1, 1999, the Company entered into a new credit agreement (the
"Credit Agreement") with The Chase Manhattan Bank, Bankers Trust Company,
Paribas and certain other banks (the "Banks"), which consists of a $100.0
million Revolving Credit Facility, a $100.0 million Tranche A Term Facility
18
<PAGE>
and $100.0 million Tranche B Term Facility. The Tranche A Term Facility and
the Revolving Credit Facility mature on July 1, 2005 and the Tranche B Term
Facility matures on January 1, 2007. The Credit Agreement, as originally
entered into, provided that the Tranche A Term Facility and the Revolving
Credit Facility would carry an annual interest rate of adjusted LIBOR plus
2.50% or ABR plus 1.50%, and that the Tranche B Term Facility would carry an
annual interest rate of adjusted LIBOR plus 3.50% or ABR plus 2.50%. In
consideration for the Banks' waiver of the Company's non-compliance with
certain of the covenants under the Credit Agreement in the fourth quarter of
1999, and a relaxation of certain of the financial covenants relating to 2000
and 2001, an amendment to the Credit Agreement was entered into and provides
for an increase in the Tranche A Term Facility and the Revolving Credit
Facility annual interest note to adjusted LIBOR plus 3.00% or ABR plus 2.00%,
and an increase in the Tranche B Term Facility annual interest rate to
adjusted LIBOR plus 4.00% or ABR plus 3.00%. The Revolving Credit Facility is
available to Hanger for use in connection with future acquisitions and for
working capital and general corporate purposes.
The Company's total long term debt at June 30, 2000, including a current
portion of approximately $29.6 million, was approximately $450.7 million. Such
indebtedness included: (i) $150.0 of 11.25% million Senior Subordinated Notes
due 2009 (ii) $68.4 million for the Revolving Credit Facility; (iii) $95.0
million for Tranche A Term Facility; (iv) $99.5 million for Tranche B Term
Facility; and (v) a total of $37.8 million of other indebtedness.
The Credit Facility with the Banks is collateralized by substantially
all the assets of the Company, restricts the payment of dividends, and
contains certain affirmative and negative covenants customary in an agreement
of this nature.
All or any portion of outstanding loans under the Credit Agreement may
be repaid at any time and commitments may be terminated in whole or in part at
the option of the Company without premium or penalty, except that LIBOR-based
loans may only be repaid at the end of the applicable interest period.
Mandatory prepayments will be required in the event of certain sales of
assets, debt or equity financings and under certain other circumstances.
On July 1, 1999, the Company acquired all of the outstanding capital
stock of NovaCare O&P from NovaCare, Inc. pursuant to the terms of a Stock
Purchase Agreement (the "Agreement"). Under the terms of the Agreement, the
aggregate consideration totaled $445.0 million, which consisted of the
assumption of liabilities and other obligations of $38.4 million and the
balance in cash. Of the cash portion, $15.0 million was placed in escrow
pending the determination of any potential post closing adjustments relating
to working capital. Reference is made to the discussion under "Arbitration of
Dispute Regarding Adjusted Working Capital of NovaCare O&P and Subsequent
Litigation" below for information regarding post closing adjustments.
Hanger required approximately $430.2 million in cash to close the
acquisition of NovaCare O&P, to pay approximately $20.0 million of related
fees and expenses, including debt issue costs of approximately $16.0 million,
and to refinance existing debt of approximately $2.5 million. The funds were
raised by Hanger through (i) borrowing approximately $230.0 million of
revolving credit and term loans under the Credit Agreement; (ii) selling
$150.0 million principal amount of 11.25% Senior Subordinated Notes due 2009;
19
<PAGE>
and (iii) selling $60.0 million of 7% Redeemable Preferred Stock. The new bank
credit facility consists of a $100.0 million revolving credit facility, of
which $30.0 million was drawn on in connection with the acquisition of
NovaCare O&P, a Tranche A Term Facility and a Tranche B Term Facility. The 7%
Redeemable Preferred Stock accrues annual dividends, compounded quarterly,
equal to 7%, is subject to put rights and will not require principal payments
prior to maturity. Such Preferred Stock is convertible into shares of the
Company's non-voting common stock at a price of $16.50 per share.
As stated above, the Company sold $60.0 million of 7% Redeemable
Preferred Stock on July 1, 1999 in connection with its acquisition of NovaCare
O&P. The 60,000 outstanding shares of 7% Redeemable Preferred Stock are
convertible into shares of the Company's non-voting common stock at a price of
$16.50 per share, subject to adjustment. The Company is entitled to require
that the 7% Redeemable Preferred Stock be converted into non-voting common
stock on and after July 2, 2002, if the average closing price of the common
stock for 20 consecutive trading days is equal to or greater than 175% of the
conversion price. The 7% Redeemable Preferred Stock will be mandatorily
redeemable on July 1, 2010 at a redemption price equal to the liquidation
preference plus all accrued and unpaid dividends. In the event of a change in
control of the Company, it must offer to redeem all of the outstanding 7%
Redeemable Preferred Stock at a redemption price equal to 101% of the sum of
the per share liquidation preference thereof plus all accrued and unpaid
dividends through the date of payment.
The Company plans to finance future acquisitions through internally
generated funds or borrowings under the Revolving Credit Facility, the
issuance of notes or shares of Common Stock of the Company, or through a
combination thereof.
The Company is engaged in ongoing discussions with prospective
acquisition candidates. The Company plans to continue to expand its operations
through strategic acquisitions.
INTEGRATION AND RESTRUCTURING COSTS
The Company had made an assessment of the restructuring costs to be
incurred relative to the acquisition of NovaCare O&P. Affected by the plan of
restructuring are approximately 54 patient care centers to be closed,
including approximately 29 Hanger and 25 NovaCare O&P locations. The Company
began formulating, and commenced, a plan of restructuring on July 1, 1999,
which is substantially complete. Since commencement of the plan of
restructuring, the Company has transitioned patients being cared for at closed
patient care centers to other patient care centers generally within proximity
to a closed branch. During 1999, the Company recorded approximately $5.6
million in restructuring liabilities for the costs associated with the
restructuring of the NovaCare O&P operations and allocated such costs to the
purchase price of NovaCare O&P in accordance with purchase accounting
requirements. The Company also accrued approximately $1.3 million ($.8 million
after tax) for the costs associated with the restructuring of the existing
Hanger operations in conjunction with the NovaCare O&P acquisition and the
Company has recorded such charges in the statement of income.
20
<PAGE>
The above-referenced restructuring costs primarily include severance pay
benefits and lease termination costs. The cost of providing severance pay and
benefits for the reduction of approximately 225 employees is estimated at
approximately $3.4 million and is primarily a cash expense. Total expected
employee terminations include approximately 70 acquired corporate and 155
patient-care center employees. Employees terminated at patient-care centers
include most, if not all, employees at each patient care center to be closed.
Through the second quarter of 2000, approximately 210 employees were
terminated including approximately 66 acquired corporate employees and 144
patient care center employees. During the second quarter of 2000,
approximately 9 employees were terminated, all of whom were acquired corporate
employees. Lease termination costs for patient care centers to be closed, are
estimated at $3.5 million, are cash expenses and are expected to be paid
through 2003. Through the six months ended June 30, 2000, 43 patient care
centers were closed. No additional branches were closed during the second
quarter of 2000. Management reasonably expects to have the remaining patient
care centers closed and employees severed by the end of 2000.
The Company estimates that the plan of restructuring Hanger and NovaCare
O&P operations, when complete, will generate annual cost savings of
approximately $13.0 million ($8.0 million after-tax) on a full year basis,
excluding anticipated reductions in material purchase costs. The foregoing
restructuring charges and related cost savings represent the Company's best
estimates, but necessarily make numerous assumptions with respect to industry
performance, general business and economic conditions, raw materials and
product pricing levels, government legislation, the timing of implementation
of the restructuring and related employee reductions and patient care center
closings and other matters, many of which are outside of the Company's
control. The Company's estimate of cost savings is not necessarily indicative
of future performance, which may be significantly more or less favorable than
as set forth and is subject to the considerations described below under
"Forward Looking Statements".
Additionally, in relation to the acquisition of NovaCare O&P, through
the second quarter of 2000, the Company recorded integration costs of
approximately $6.1 million including costs of changing patient care center
names, payroll and related benefits conversion, stay-bonuses and related
benefits for transitional employees and certain other costs related to the
acquisition.
ARBITRATION OF DISPUTE REGARDING ADJUSTED WORKING CAPITAL OF NOVACARE O&P AND
SUBSEQUENT LITIGATION
As stated above, on July 1, 1999, Hanger acquired all of the outstanding
capital stock of NovaCare O&P from NovaCare, Inc. ("NovaCare") pursuant to a
Stock Purchase Agreement, dated April 2, 1999 and amended on May 19, 1999 and
June 30, 1999, by and among NovaCare, NC Resources, Inc., Hanger and HPO
Acquisition Corporation (the "Agreement"). The purchase price paid by Hanger
was $445 million, subject to adjustment to the extent that NovaCare O&P's
adjusted working capital at June 30, 1999 was less or greater than
$93,982,000. Of the purchase price paid by Hanger, $15 million was placed in
escrow with U.S. Bank Trust National Association (the "Exchange Agent")
pending the determination of such amount of adjusted working capital. Hanger
and NovaCare disagreed regarding the determination of the amount of NovaCare
O&P adjusted working capital and on February 25, 2000, Hanger and NovaCare
21
<PAGE>
submitted the matter to the independent accounting firm of KPMG LLP ("KPMG")
in accordance with the dispute resolution arbitration mechanism provided under
the Agreement. The Agreement provided that such arbitrator's determination
would be conclusive and binding upon the parties.
On May 22, 2000, KPMG issued its report concluding that NovaCare O&P's
adjusted working capital at June 30, 1999 was approximately $68,878,000 and
that Hanger was entitled to the working capital deficiency of approximately
$25,104,000, representing the required decrease in the purchase price
previously paid by Hanger for NovaCare O&P. On May 25, 2000, at the request of
Hanger and in view of the conclusion in KPMG's report that the "Total Working
Capital Deficiency shall be returned to Hanger Orthopedic Group, Inc.," the
Escrow Agent released the $15 million of escrowed funds to Hanger. Pursuant to
the Agreement, Hanger was entitled to receive the approximately $10,104,000
balance of the working capital deficiency on or before June 21, 2000, which
was 30 days after the date of the KPMG determination.
On June 5, 2000 NovaCare (the name of which was recently changed to
NAHC, Inc.), filed a Complaint in the Court of Chancery of the State of
Delaware in and for New Castle County against Hanger, its subsidiary HPO
Acquisition Corp. and the Escrow Agent alleging the wrongful release of the
escrowed funds and seeking the return of such escrowed funds to the Escrow
Agent. On June 9, 2000, Hanger filed an answer and counterclaim requesting the
Court to dismiss the Complaint and confirm the entire KPMG award.
On June 30, 2000, Hanger entered into a Settlement Agreement with
NovaCare providing for dismissal of the litigation and execution of a mutual
release relating to currently unknown matters arising from the acquisition. In
addition, the Settlement Agreement provided that of the $10.1 million owed by
NovaCare to Hanger, $6 million would be paid immediately by NovaCare to Hanger
and NovaCare would execute a collateralized promissory note in the principal
amount of $3.7 million, plus 7% annual interest, payable monthly over the
following six months. Actual payment of the $6 million was received by Hanger
on July 3, 2000. In connection with the settlement, Hanger was confident that
it would have prevailed in the litigation. However, in view of the time that
would have been involved in obtaining a favorable result and NovaCare's
inability to pay the full $10 million at the time the Settlement Agreement was
entered into, Hanger determined it would be prudent to enter into such
agreement, under which Hanger gave NovaCare a $400,000 discount in exchange
for the immediate payment of $6 million and the greater certainty of receiving
$3.7 million under the promissory note.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standard Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as
amended, requires that an entity recognize all derivative instruments as
either assets or liabilities on its balance sheet at their fair value. Changes
in the fair value of derivatives are recorded each period in current earnings
or other comprehensive income, depending on whether a derivative is designated
as part of a hedge transaction, and, if it is, the type of hedge transaction.
The Company will adopt SFAS 133 by the first quarter of 2001. Due to the
Company's limited use of derivative instruments, SFAS 133 is not expected to
have a material effect on the financial position or results of operations of
the Company.
22
<PAGE>
OTHER
Inflation has not had a significant effect on the Company's operations,
as increased costs to the Company generally have been offset by increased
prices of products and services sold.
Based on the Company's experience in 2000, its operations have not been
adversely affected to date by Year 2000 or leap year problems. The total costs
for the Company's Year 2000 program were approximately $1.3 million, which was
expended during 1999.
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements setting forth the
Company's beliefs or expectations relating to future revenues. Actual results
may differ materially from projected or expected results due to changes in the
demand for the Company's O&P services and products, uncertainties relating to
the results of operations or recently acquired and newly acquired O&P patient
care practices, the Company's ability to successfully integrate the operations
of NovaCare O&P and to attract and retain qualified O&P practitioners,
governmental policies affecting O&P operations and other risks and
uncertainties affecting the health-care industry generally. Readers are
cautioned not to put undue reliance on forward-looking statements. The Company
disclaims any intent or obligation to up-date publicly these forward-looking
statements, whether as a result of new information, future events or
otherwise.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
23
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources -
Arbitration of Dispute Regarding Adjusted Working Capital of NovaCare O&P and
Subsequent Litigation" set forth above under Item 2 of Part I of this report
for information relating to the Complaint filed on June 5, 2000 by NAHC, Inc.
(formerly named NovaCare, Inc.) against Hanger Orthopedic Group, Inc., HPO
Acquisition Corp. and U.S. Bank Trust National Association in the Court of
Chancery of the State of Delaware in and for New Castle County. On June 30,
2000, Hanger and NovaCare entered into the Settlement Agreement discussed in
the above-referenced MD&A and the suit has been dismissed.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company's Annual Meeting of Stockholders was held on May 16, 2000. A
total of 18,910,002 shares of Common Stock were outstanding and entitled to
vote at the Annual Meeting.
The first proposal was the election of directors. The following persons
were nominated and elected to serve as members of the Board of Directors for
one year or until their successors are elected and qualified by the votes
indicated: Mitchell J. Blutt, M.D. (17,617,877 shares for and 79,769 shares
withheld), Edmond E. Charrette, M.D. (17,627,677 shares for and 69,969 shares
withheld), Thomas P. Cooper, M.D. (17,626,077 shares for and 71,569 shares
withheld), Robert J. Glaser, M.D. (17,606,600 shares for and 91,046 shares
withheld), C. Raymond Larkin, Jr. (17,616,222 shares for and 81,424 shares
withheld), Risa J. Lavizzo-Mourey, M.D. (16,223,486 shares for and 1,474,160
shares withheld), Brig. Gen. William L. McCulloch (17,586,905 shares for and
110,741 shares withheld), Ivan R. Sabel (17,628,366 shares for and 69,280
shares withheld) and H.E. Thranhardt (16,186,231 shares for and 1,511,415
shares withheld).
The second proposal was a proposed amendment to the Certificate of
Designations relating to the Company's outstanding 7% Redeemable Preferred
Stock. The proposal was approved by the holders of more than the required
majority of the shares of Common Stock outstanding as well as the holder of a
majority of the outstanding 7% Redeemable Preferred Stock. The proposal was
approved by a vote of 11,965,158 shares of Common Stock for (representing
63.3% of the outstanding shares), 146,186 shares of Common Stock against with
118,943 shares of Common Stock abstaining. A copy of the Certificate of
Amendment to the Certificate of Designations, as filed with the Secretary of
State of Delaware on May 16, 2000, is filed as an exhibit to this Form 10-Q.
The third proposal was the proposed ratification of the selection of
PricewaterhouseCoopers LLP as the independent accountants for the Company for
the current fiscal year. The proposal was approved by the holders of more than
the required majority of the shares of Common Stock voting at the meeting. The
proposal was approved by a vote of 17,645,702 shares for (representing 99.7%
of the shares voting), 40,051 shares against, with 11,893 shares abstaining.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
24
<PAGE>
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following exhibits are filed herewith:
EXHIBIT NO. DOCUMENT
3 Certificate of Amendment to Certificate of
Designations relating to the 7% Redeemable Preferred
Stock of the Registrant, as filed with the Secretary
of State of Delaware on May 16, 2000.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the
quarter ended June 30, 2000.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANGER ORTHOPEDIC GROUP, INC.
Date: August 11, 2000 /s/IVAN R. SABEL
--------------- ------------------
Ivan R. Sabel, CPO
Chief Executive Officer
Date: August 11, 2000 /s/RICHARD A. STEIN
--------------- -------------------
Richard A. Stein
Vice President - Finance
Principal Financial and
Accounting Officer
The accompanying notes are an integral part of the consolidated
financial statements.
