-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IKrKPFpsOwG4GPz+6XV4OynZFzcRb3yt3H0sn4GTDk0owiqKAw/c6PxBFNOynXGr dMuTYZac386I0yatllsTSQ== 0000950133-99-003629.txt : 19991117 0000950133-99-003629.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950133-99-003629 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANGER ORTHOPEDIC GROUP INC CENTRAL INDEX KEY: 0000722723 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 840904275 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10670 FILM NUMBER: 99755613 BUSINESS ADDRESS: STREET 1: TWO BETHESDA METRO CENTER STREET 2: SUITE 1300 CITY: BETHESDA STATE: MD ZIP: 20814 BUSINESS PHONE: 3019860701 MAIL ADDRESS: STREET 1: TWO BETHESDA METRO CENTER STREET 2: SUITE 1300 CITY: BETHESDA STATE: MD ZIP: 20814 FORMER COMPANY: FORMER CONFORMED NAME: SEQUEL CORP DATE OF NAME CHANGE: 19890814 FORMER COMPANY: FORMER CONFORMED NAME: CELLTECH COMMUNICATIONS INC DATE OF NAME CHANGE: 19860304 10-Q 1 FORM 10-Q 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. 2 HANGER ORTHOPEDIC GROUP, INC. INDEX
Page No. -------- 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 - ----------
3 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS (Dollars In Thousands, Except Shares and Per Share Amounts)
September 30, December 31, 1999 1998 ---- ---- (unaudited) 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 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 1 4 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS (Dollars In Thousands, Except Shares and Per Share Amounts)
September 30, December 31, 1999 1998 ---- ---- (unaudited) 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 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 2 5 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED September 30, 1999 and 1998 (Dollars In Thousands, Except Shares and Per Share Amounts) (unaudited)
1999 1998 ---- ---- 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 ============= ============
* Excludes the effect of the conversion of common stock into which shares of 7% Redeemable Preferred Stock are convertible as it is considered anti-dilutive. The accompanying notes are an integral part of the consolidated financial statements. 3 6 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED September 30, 1999 and 1998 (Dollars In Thousands, Except Shares and Per Share Amounts) (unaudited)
1999 1998 ---- ---- 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 ============== ============
* Excludes the effect of the conversion of common stock into which shares of 7% Redeemable Preferred Stock are convertible as it is considered anti-dilutive. The accompanying notes are an integral part of the consolidated financial statements. 4 7 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED September 30, 1999 and 1998 (Dollars In Thousands, Except Shares and Per Share Amounts) (unaudited)
1999 1998 ---- ---- 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) ---------- ----------
Continued The accompanying notes are an integral part of the consolidated financial statements. 5 8 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED September 30, (Dollars In Thousands, Except Shares and Per Share Amounts) (unaudited)
1999 1998 ---- ---- 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 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 6 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Shares and Per Share Amounts) NOTE A -- BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X. They do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of a normal recurring nature, considered necessary for a fair presentation have been included. Certain reclassifications of prior year's data have been made to improve 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 10 Summarized financial information concerning the Company's reportable segments is shown in the following table:
PRACTICE MANAGEMENT AND PATIENT CARE CENTERS MANUFACTURING DISTRIBUTION OTHER TOTAL THREE MONTHS ------------ ------------- ------------ ----- ----- - ------------ ENDED SEPTEMBER 30, 1999 - ------------------------ 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 ======== ======= ======== ======== ========
PRACTICE MANAGEMENT AND PATIENT CARE CENTERS MANUFACTURING DISTRIBUTION OTHER TOTAL THREE MONTHS ------------ ------------- ------------ ----- ----- - ------------ ENDED SEPTEMBER 30, 1999 - ------------------------ 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 ======== ======= ====== ======= ========
8 11
PRACTICE MANAGEMENT AND PATIENT CARE CENTERS MANUFACTURING DISTRIBUTION OTHER TOTAL NINE MONTHS ------------ ------------- ------------ ----- ----- - ------------ ENDED SEPTEMBER 30, 1999 - ------------------------ Net Sales Customers $200,258 $ 8,772 $21,454 $ --- $230,484 ======== ======= ======= ======== ======== Intersegments $ - $ 3,696 $23,394 $(27,090) $ --- ======== ======= ======= ======== ======== EBITDA $ 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 ======== ======= ======= ======== ========
PRACTICE MANAGEMENT AND PATIENT CARE CENTERS MANUFACTURING DISTRIBUTION OTHER TOTAL NINE MONTHS ------------ ------------- ------------ ----- ----- - ------------ ENDED SEPTEMBER 30, 1998 - ------------------------ 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 ======== ======= ======= ======== ========
** Income before taxes include the following restructuring and integration costs for the three and nine months ended September 30, 1999:
PRACTICE MANAGEMENT AND PATIENT CARE CENTERS MANUFACTURING DISTRIBUTION OTHER TOTAL ------------ ------------- ------------ ----- ------ Restructuring $ 1,181 $ 124 --- --- $ 1,305 Integration 2,594 --- --- $ 18 2,612 ---------------- -------------- ----------- ----------- ----------- $ 3,775 $ 124 --- $ 18 $ 3,917 ================ ============== =========== =========== ===========
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 12 NOTE C -- INVENTORY Inventories at September 30, 1999 and December 31, 1998 were comprised of the following:
September 30, 1999 December 31, 1998 ------------------ ----------------- (unaudited) Raw materials $29,376 $ 7,196 Work-in-process 11,790 2,094 Finished goods 14,398 7,644 -------- --------- $55,564 $ 16,934 ======== =========
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 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: Fair value of assets acquired, including goodwill $496,224 Liabilities assumed 82,358 --------- Cash paid $413,866 =========
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:
- ------------------------------------ ----------------------------------- ----------------------------------- Nine Months Ended Nine Months Ended ----------------- ----------------- September 30, 1999 September 30, 1998 ------------------ ------------------ - ------------------------------------ ----------------------------------- ----------------------------------- - ------------------------------------ ----------------------------------- ----------------------------------- Net sales $366,160 $367,815 - ------------------------------------ ----------------------------------- ----------------------------------- Net (loss) income $ (1,150) $ 2,718 - ------------------------------------ ----------------------------------- ----------------------------------- Net loss per common share - diluted (1) $(0.23) $(0.03) - ------------------------------------ ----------------------------------- -----------------------------------
(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 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 15 The components of the restructuring accrual are as follows:
Provisions for existing Provisions for Transfer Balance at Hanger NovaCare O&P against September 30, business business Payments assets 1999 --------------- ----------------- --------------- ------------- ------------------ 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 =============== ================= =============== ============= ==================
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 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.
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- 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
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 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 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:
Nine Months Three Months Ended September 30, Ended September 30, ------------------- ------------------- 1999 1998 1999 1998 ---- ---- ---- ---- 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
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 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 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 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 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 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 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 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 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 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 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 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 EX-3 2 EXHIBIT 3 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 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 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 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 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 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 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 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 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 EX-27 3 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 9,072 0 106,641 8,030 55,564 185,773 54,608 13,485 738,699 77,305 405,460 59,206 0 190 174,016 174,206 124,922 124,922 59,578 47,841 0 0 10,487 7,010 3,561 3,449 0 0 0 3,449 .13 .12
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