SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
---------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-10670
HANGER ORTHOPEDIC GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 84-0904275
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Two Bethesda Metro Center, Suite 1200, Bethesda, MD 20814
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(301) 986-0701
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- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No .
---------- --------
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of August 8,
2002; 19,512,213 shares of common stock, $.01 par value per share.
HANGER ORTHOPEDIC GROUP, INC.
INDEX
Page No.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2002
(unaudited) and December 31, 2001 1
Consolidated Statements of Operations for the three and six
months ended June 30, 2002 and 2001 (unaudited) 3
Consolidated Statements of Cash Flows for the six
months ended June 30, 2002 and 2001 (unaudited) 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 6. Exhibits and Reports on Form 8-K 35
SIGNATURES 36
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
June 30, December 31,
2002 2001
----------- ------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 15,201 $ 10,043
Accounts receivable, less allowances for doubtful accounts
of $15,372 and $17,625 in 2002 and 2001, respectively 105,995 104,040
Inventories 52,550 55,946
Prepaid, other assets, and income taxes receivable 5,439 4,901
Deferred income taxes 20,957 20,957
-------- --------
Total current assets 200,142 195,887
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Land 3,743 4,078
Buildings 6,700 8,629
Machinery and equipment 31,183 28,675
Furniture and fixtures 10,162 9,967
Leasehold improvements 18,633 18,027
-------- --------
70,421 69,376
Less accumulated depreciation and amortization 35,344 31,598
-------- --------
35,077 37,778
-------- --------
INTANGIBLE ASSETS
Excess cost over net assets acquired, less accumulated
amortization of $38,915 and $36,727 in 2002 and 2001,
respectively 448,447 440,874
Assembled workforce, less accumulated amortization of
$0 and $2,188 in 2002 and 2001, respectively -- 4,812
Patents and other intangible assets, less accumulated
amortization of $3,919 and $3,430 in 2002 and 2001,
respectively 6,209 6,694
-------- --------
454,656 452,380
-------- --------
OTHER ASSETS
Debt issuance costs, net 14,604 10,846
Other assets 3,917 3,016
-------- --------
Total other assets 18,521 13,862
-------- --------
TOTAL ASSETS $708,396 $699,907
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
1
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
June 30, December 31,
2002 2001
------------ ------------
(unaudited)
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 9,104 $ 30,512
Accounts payable 7,388 16,901
Accrued expenses 9,459 8,196
Accrued interest payable 7,911 2,017
Accrued compensation related cost 22,677 29,045
Accrued income taxes 4,412 --
--------- ---------
Total current liabilities 60,951 86,671
Long-term debt, less current portion 391,438 367,315
Deferred income taxes 26,495 26,495
Other liabilities 1,855 3,013
--------- ---------
Total liabilities 480,739 483,494
--------- ---------
7% Redeemable Convertible Preferred stock, liquidation preference
$1,000 per share 73,296 70,739
--------- ---------
Commitments and contingent liabilities (See Note I)
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 60,000,000 shares authorized,
19,467,018 and 19,057,876 shares issued and
outstanding in 2002 and 2001, respectively 195 191
Additional paid-in capital 148,721 146,674
Retained earnings (accumulated deficit) 6,101 (535)
--------- ---------
155,017 146,330
Treasury stock, cost -- (133,495 shares) (656) (656)
--------- ---------
154,361 145,674
--------- ---------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY $ 708,396 $ 699,907
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
2
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30,
(Dollars in thousands, except share and per share amounts)
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------- ------------------------------
2002 2001 2002 2001
-------------- -------------- ------------ ------------
(unaudited) (unaudited)
Net sales $ 133,056 $ 129,187 $ 256,566 $ 249,760
Cost of goods sold 61,298 63,434 120,835 126,408
------------ ------------ ------------ ------------
Gross profit 71,758 65,753 135,731 123,352
Selling, general and administrative 46,582 42,638 91,359 85,327
Depreciation and amortization 2,294 3,115 5,078 5,954
Amortization of excess cost over net assets acquired -- 3,292 -- 6,557
Unusual charges -- 13,324 -- 14,839
------------ ------------ ------------ ------------
Income from operations 22,882 3,384 39,294 10,675
Interest expense, net 9,977 11,033 19,056 23,291
------------ ------------ ------------ ------------
Income (loss) before taxes 12,905 (7,649) 20,238 (12,616)
Provision (benefit) for income taxes 5,234 (2,908) 8,234 (8,007)
------------ ------------ ------------ ------------
Income (loss) before extraordinary item 7,671 (4,741) 12,004 (4,609)
Extraordinary loss on early extinguishment of debt,
net of tax benefit -- -- 2,811 --
------------ ------------ ------------ ------------
Net income (loss) $ 7,671 $ (4,741) $ 9,193 $ (4,609)
============ ============ ============ ============
Income (loss) before extraordinary item applicable
to common stock $ 6,380 $ (5,945) $ 9,447 $ (6,997)
============ ============ ============ ============
Net income (loss) applicable to common stock $ 6,380 $ (5,945) $ 6,636 $ (6,997)
============ ============ ============ ============
Basic Per Common Share Data
Income (loss) before extraordinary item $ 0.33 $ (0.31) $ 0.49 $ (0.37)
Extraordinary item, net of tax benefit -- -- (0.14) --
------------ ------------ ------------ ------------
Net income (loss) $ 0.33 $ (0.31) $ 0.35 $ (0.37)
============ ============ ============ ============
Shares used to compute basic per common share
amounts 19,336,954 18,910,002 19,221,865 18,910,002
============ ============ ============ ============
Diluted Per Common Share Data
Income (loss) before extraordinary item $ 0.29 $ (0.31) $ 0.44 $ (0.37)
Extraordinary item, net of tax benefit -- -- (0.13) --
------------ ------------ ------------ ------------
Net income (loss) $ 0.29 $ (0.31) $ 0.31 $ (0.37)
============ ============ ============ ============
Shares used to compute diluted per common share
amounts 22,013,471 18,910,002 21,669,180 18,910,002
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
3
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
(Dollars in thousands)
2002 2001
----------- -----------
Cash flows from operating activities: (unaudited)
Net income (loss) $ 9,193 $ (4,609)
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss on extinguishment of debt 2,811 --
Loss on disposal of assets 557 8,176
Provision for bad debts 10,725 10,628
Depreciation and amortization 5,078 5,954
Amortization of excess cost over net assets acquired -- 6,557
Amortization of debt issuance costs 1,099 1,273
Deferred income taxes -- 945
Restructuring costs -- 3,688
Changes in assets and liabilities:
Accounts receivable (12,681) (8,420)
Inventories 3,397 8,088
Prepaid, other assets, and income taxes receivable (1,570) (5,172)
Other assets (180) 234
Accounts payable (9,325) (3,880)
Accrued expenses, interest and income taxes 14,419 (9,070)
Accrued compensation related costs (6,368) (3,295)
Other liabilities (1,159) 1,635
--------- ---------
Net cash provided by operating activities 15,996 12,732
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets (3,936) (3,701)
Acquisitions, net of cash acquired, and earnouts (2,952) (2,783)
Proceeds from sale of fixed assets 1,492 444
--------- ---------
Net cash used in investing activities (5,396) (6,040)
--------- ---------
Cash flows from financing activities:
Net repayments under revolving credit agreement (38,800) 4,000
Proceeds from sale of Senior Notes 200,000 --
Repayment and termination of bank loans (153,587) (13,250)
Scheduled repayment of long-term debt (5,619) (6,969)
Increase in financing costs (9,487) (1,059)
Proceeds from issuance of Common Stock 2,051 --
--------- ---------
Net cash used in financing activities (5,442) (17,278)
--------- ---------
Increase (decrease) in cash and cash equivalents 5,158 (10,586)
Cash and cash equivalents at beginning of period 10,043 20,669
--------- ---------
Cash and cash equivalents at end of period $ 15,201 $ 10,083
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
4
HANGER ORTHOPEDIC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 ("GAAP") for
complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation of the financial statements have
been included. Certain reclassifications of the prior year's data have been made
to improve comparability.
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 of Form 10-K for the year ended December 31, 2001,
filed by the Company with the Securities and Exchange Commission.
NOTE B - SIGNIFICANT ACCOUNTING PRINCIPLES
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Also, see "Critical Accounting Estimates" in Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Inventories
Inventories, which consist principally of purchased parts and work in process,
are stated at the lower of cost or market using the first-in, first-out (FIFO)
method. The Company calculates cost of goods sold in accordance with the gross
profit method. The Company bases the estimates used in applying the gross profit
method on the actual results of the most recently completed fiscal year and
other factors affecting cost of goods sold during the current reporting periods.
Estimated cost of goods sold during the period is adjusted when the annual
physical inventory is taken.
Change in Accounting for Goodwill and Certain Other Intangibles
Effective July 1, 2001 the Company adopted certain provisions of SFAS No. 141,
and effective January 1, 2002, the Company adopted the full provisions of SFAS
No. 141 and SFAS No. 142.
5
NOTE B - SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
Change in Accounting for Goodwill and Certain Other Intangibles (Continued)
SFAS No. 141 requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting, and broadens the criteria
for recording intangible assets apart from goodwill. The Company evaluated its
goodwill and intangibles acquired prior to June 30, 2001 using the criteria of
SFAS No. 141, which resulted in other intangibles with an unamortized balance of
$4.8 million (comprised entirely of assembled workforce intangibles) being
combined into goodwill at January 1, 2002.
SFAS No. 142 requires that purchased goodwill and certain indefinite-lived
intangibles no longer be amortized, but instead be tested for impairment at
least annually. The Company evaluated its intangible assets, other than
goodwill, and determined that all such assets have determinable lives.
SFAS No. 142 prescribes a two-phase process for impairment testing of goodwill.
The first phase, required to be completed by June 30, 2002, screens for
impairment; while the second phase (if necessary), required to be completed by
December 31, 2002, measures the impairment. The Company has completed the
transitional impairment test, which did not result in the impairment of recorded
goodwill. In completing the analysis, the Company determined that it had two
reporting units, which were the same as its reportable segments: (i)
patient-care centers and (ii) distribution. As of June 30, 2002, the
patient-care center segment had an unamortized balance of goodwill of $448.4
million.
In accordance with SFAS No. 142, the effect of this accounting change is
reflected prospectively. Supplemental comparative disclosure as if the change
had been retroactively applied to the prior year period is as follows (in
thousands, except per share amounts):
6
NOTE B - SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
Change in Accounting for Goodwill and Certain Other Intangibles (Continued)
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss):
Reported net income (loss) $ 7,671 $ (4,741) $ 9,193 $ (4,609)
Goodwill amortization, net of tax benefit (1) - 2,570 - 1,590
----------- ------------ ------------ ------------
Adjusted net income (loss) $ 7,671 $ (2,171) $ 9,193 $ (3,019)
=========== ============ ============ ============
Per Share Info:
Basic income (loss):
Reported income (loss) $ 0.33 $ (0.31) $ 0.35 $ (0.37)
Goodwill amortization, net of tax benefit (1) $ - $ 0.13 $ - $ 0.08
----------- ------------ ------------ ------------
Adjusted basic income (loss) $ 0.33 $ (0.18) $ 0.35 $ (0.29)
=========== ============ ============ ============
Diluted income (loss):
Reported income (loss) $ 0.29 $ (0.31) $ 0.31 $ (0.37)
Goodwill amortization, net of tax benefit (1) $ - $ 0.13 $ - $ 0.08
----------- ------------ ------------ ------------
Adjusted diluted income (loss) $ 0.29 $ (0.18) $ 0.31 $ (0.29)
=========== ============ ============ ============
(1) For the three ended June 30, 2001, consists of $3.3 million in
amortization, offset by the reduction in the tax benefit of $0.7 million
based on the revised effective tax rate for 2001. For the six months
ended June 30, 2001, consists of $6.6 million in amortization, offset by
the reduction in the tax benefit of $5.0 million based on the revised
effective tax rate for 2001.
Amortization expense related to definite-lived intangible assets was $0.2
million and $0.5 million for the three and six months ended June 30, 2002,
respectively. Estimated aggregate amortization expense for such assets for each
of the five years ended December 31, 2006 is as follows (in thousands):
2002 $ 963
2003 $ 839
2004 $ 768
2005 $ 762
2006 $ 751
7
NOTE B - SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
New Accounting Pronouncements
On April 30, 2002, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS
145"). Under SFAS 145, gains and losses from the early extinguishment of debt
would no longer be extraordinary items, unless they satisfied the criteria in
Accounting Principles Board Opinion No. 30 ("APB 30") where extraordinary items
are stated to be distinguishable by their unusual nature and by the infrequency
of their occurrence. Any gain or loss on extinguishment of debt that was
classified as an extraordinary item in prior periods presented that does not
meet the criteria in APB 30 for classification as an extraordinary item shall be
reclassified. In addition, under SFAS 145, certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-leaseback transactions. SFAS is effective for fiscal years
beginning after May 15, 2002. SFAS 145 will be adopted by us on January 1, 2003
and may result in a reclassification of existing extraordinary losses on the
early extinguishment of debt from an extraordinary item to a non-operating item.
On July 30, 2002, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS 146"). Under SFAS 146, costs associated with
exit or disposal activities would be recognized when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Such costs would
include lease termination costs and certain employee severance costs that are
associated with a restructuring, discontinued operation, plant closing, or other
exit or disposal activity. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company does not
expect SFAS 146 to have a material effect on its financial statements.
NOTE C - SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION
The following are the supplemental disclosure requirements for the statements of
cash flows:
2002 2001
---- ----
(in thousands)
Cash paid during the period for:
Interest $ 21,584 $ 27,518
Income taxes $ 916 $ 375
Non-cash financing and investing activities:
Preferred stock dividends declared and accretion $ 2,557 $ 2,388
8
NOTE D - ACQUISITIONS
The Company has not acquired any companies during the three or six months ended
June 30, 2001 or 2002.
In connection with the acquisition of NovaCare Orthotics & Prosthetics, Inc.
("NovaCare O&P") in July 1999, the Company assumed responsibility for payments
of earnouts and working capital provisions related to acquisitions made by
NovaCare O&P prior to July 1, 1999. In connection with these agreements and the
Company's acquisitions prior to 2001, the Company paid $3.0 million and $2.8
million in the six-month periods ended June 30, 2002, and 2001, respectively.
The Company has accounted for these amounts as additional purchase price,
resulting in an increase in goodwill. The Company estimates that it may pay an
additional $2.5 million related to earnout provisions that are expected to be
paid by June 30, 2004.
NOTE E - UNUSUAL CHARGES
Summary
Unusual charges for the three and six months ended June 30, 2001 consist of the
following costs, which are explained below:
Three Six
(in thousands) Months Months
------ ------
Restructuring and asset impairment costs $3,688 $3,688
Performance improvement costs 1,460 2,975
Impairment loss on assets held for sale 8,176 8,176
------- -------
Unusual charges $13,324 $14,839
======= =======
Restructuring Costs
In the second quarter of 2001, in connection with the implementation of the
AlixPartners, LLC (formerly Jay Alix & Associates, Inc.; "JA&A") initiatives,
the Company recorded approximately $3.7 million in restructuring and asset
impairment costs. The plan of initiatives, as amended in December 2001, called
for the closure of 44 facilities and the termination of approximately 135
employees. As of June 30, 2002, 42 properties had been vacated and 135 employees
had been terminated. All payments under the plan for lease and severance costs
are expected to be paid by December 31, 2004.
The previously adopted 1999 and 2000 plans contemplated lease termination and
severance costs associated with the closure of certain redundant patient-care
centers and corporate functions of the Company and NovaCare O&P. All
contemplated employees have been terminated and all contemplated patient-care
centers have been closed. Lease payments on those closed patient-care centers
are expected to be paid through 2003.
9
NOTE E - UNUSUAL CHARGES (CONTINUED)
Restructuring Costs (Continued)
Components of the restructuring reserves, spending during the periods, and
remaining reserve balances are as follows:
Lease
Employee Termination Total
Severence and other Exit Restructuring
Costs Costs Reserve
----- ----- -------
(in thousands)
1999 & 2000 Restructuring Reserve
Balance at December 31, 2001 $ -- $ 329 $ 329
Spending -- (50) (50)
------- ------- -------
Balance at June 30, 2002 -- 279 279
------- ------- -------
2001 Restructuring Reserve
Balance at December 31, 2001 50 1,886 1,936
Spending (30) (699) (729)
------- ------- -------
Balance at June 30, 2002 20 1,187 1,207
------- ------- -------
1999, 2000, and 2001 Restructuring Reserves
Balance at June 30, 2002 $ 20 $ 1,466 $ 1,486
======= ======= =======
Performance Improvement Costs
Unusual charges for the three and six months ended June 30, 2001 amounted to
$1.5 million and $3.0 million, respectively, in fees paid to JA&A in connection
with the execution of the Company's performance improvement plan.
JA&A's work with the Company was substantially completed as of December 31,
2001. In the fourth quarter of 2001, the Company was invoiced for and accrued a
success fee based upon identified savings and operational improvements. The
Company's contract with JA&A calls for the possibility of one additional success
fee, which will be based on the realization of further savings from initiatives
that were not fully implemented by December 31, 2001. As of June 30, 2002, these
savings are not yet measurable, and therefore, the Company is unable to estimate
the amount, if any, related to this second success fee. (See Note L.)
10
NOTE E - UNUSUAL CHARGES (CONTINUED)
Impairment Loss on Assets Held for Sale
During the three and six months ended June 30, 2001, the Company recognized an
impairment loss of $8.2 million on the planned sale of substantially all of the
manufacturing assets of Seattle Orthopedic Group, Inc. to United States
Manufacturing Company, LLC ("USMC"). The amount of the loss represented the
excess of the net book value of the assets held for sale over the estimated
proceeds for the assets. The sale of the assets was ultimately completed on
October 9, 2001.
NOTE F - NET INCOME (LOSS) PER COMMON SHARE
Basic per common share amounts are computed using the weighted average number of
common shares outstanding during the period. Diluted per common share amounts
are computed using the weighted average number of common shares outstanding
during the period and dilutive potential common shares. Dilutive potential
common shares consist of stock options, stock warrants, redeemable convertible
preferred stock and convertible notes payable and are calculated using the
treasury stock method.
11
NOTE F - NET INCOME (LOSS) PER COMMON SHARE (CONTINUED)
Earnings per share for the three months ended June 30, 2002 and 2001 and for the
six months ended June 30, 2002 and 2001 are computed based on the following
amounts:
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------------
(in thousands, except share amounts) 2002 2001 2002 2001
---- ---- ---- ----
Income (loss) before extraordinary item $ 7,671 $ (4,741) $ 12,004 $ (4,609)
Less preferred stock dividends declared and accretion (1,291) (1,204) (2,557) (2,388)
------------ ------------ ------------ ------------
Income (loss) before extraordinary item available to
common stockholders used to compute basic
and diluted per common share amounts $ 6,380 $ (5,945) $ 9,447 $ (6,997)
============ ============ ============ ============
Net income (loss) $ 7,671 $ (4,741) $ 9,193 $ (4,609)
Less preferred stock dividends declared and accretion (1,291) (1,204) (2,557) (2,388)
------------ ------------ ------------ ------------
Net income (loss) available to common stockholders
used to compute basic and diluted per common
share amounts $ 6,380 $ (5,945) $ 6,636 $ (6,997)
============ ============ ============ ============
Shares of common stock outstanding used to compute
basic per common share amounts 19,336,954 18,910,002 19,221,865 18,910,002
Effect of dilutive options 2,452,016 -- 2,252,874 --
Effect of dilutive warrants 224,501 -- 194,441 --
------------ ------------ ------------ ------------
Shares used to compute dilutive per common share
amounts (1) 22,013,471 18,910,002 21,669,180 18,910,002
============ ============ ============ ============
(1) Excludes the effect of the conversion of the 7% Redeemable Convertible
Preferred Stock into Common Stock as it is considered anti-dilutive. For
2001, excludes the effect of all dilutive options and warrants as a
result of the Company's net loss before extraordinary item available to
common shareholders for the three and six months ended June 30, 2001.
NOTE G - INVENTORY
Inventories at June 30, 2002 and December 31, 2001 consist of the following:
June 30, December 31,
(in thousands) 2002 2001
--------- ---------
Raw materials $ 24,252 $ 27,224
Work in process 19,908 19,908
Finished goods 8,390 8,814
--------- ---------
$ 52,550 $ 55,946
========= =========
12
NOTE H - LONG TERM DEBT
Long-term debt consisted of the following at June 30, 2002 and December 31,
2001:
June 30, December 31,
(in thousands) 2002 2001
---- ----
Revolving Credit Facility $ 36,000 $ 74,800
10 3/8% Senior Notes due 2009 200,722 -
A Term Loan Commitment - 63,995
B Term Loan Commitment - 89,592
11 1/4% Senior Subordinated Notes due 2009 150,000 150,000
Subordinated seller notes, non-collateralized net of unamortized
discount of $0.1 million with principal and interest payable in either
monthly, quarterly or annual installments at effective interest rates
ranging from 6% to 12.287%, maturing through December 2011 13,820 19,440
----------- ------------
400,542 397,827
Less current portion (9,104) (30,512)
----------- ------------
$ 391,438 $ 367,315
=========== ============
On February 15, 2002, the Company sold $200.0 million principal amount of its 10
3/8% Senior Notes due 2009 (the "Senior Notes") and established a new $75.0
million senior secured revolving line of credit (the "Revolving Credit
Facility"). The Senior Notes mature on February 15, 2009, are senior
indebtedness and are guaranteed by all of the Company's domestic subsidiaries.
Interest is payable semi-annually on February 15 and August 15, commencing
August 15, 2002. The Revolving Credit Facility carries an interest rate of LIBOR
plus 3.50% and matures on February 15, 2007. The Company used the $194.0 million
net proceeds from the sale of the Senior Notes, along with approximately $36.5
million from the Revolving Credit Facility, to retire approximately $228.4
million of indebtedness, plus related fees and expenses, outstanding under the
Company's previously existing revolving credit and term loan facilities.
As a result of retiring the previously existing indebtedness, the Company wrote
off $4.6 million in unamortized debt issuance costs that had previously been
included in other assets. The extraordinary item for the six months ended June
30, 2002 consists of such costs, offset by a tax benefit of $1.8 million.
13
NOTE H - LONG TERM DEBT (CONTINUED)
In March 2002, the Company entered into two fixed-to-floating interest rate
swaps with an aggregate notional amount of $100.0 million in connection with the
sale of the Senior Notes and in order to mitigate its interest rate risk. Under
the interest rate swap agreements, the Company will receive amounts based on a
fixed interest rate of 10 3/8% per annum. In return, the Company will pay
amounts based on a variable interest rate based on the six-month LIBOR plus a
spread between 492 and 497 basis points. The Company will receive and pay these
amounts semiannually through the maturity date of February 15, 2009. The terms
of these agreements are identical to the Senior Notes. The Company has
designated its interest rate swaps as fair value hedges and they qualify for the
short-cut method of accounting under the provisions of Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities. The Company has adjusted the carrying amount of the Senior Notes and
the swaps by $0.7 million, to reflect the fair value of the swaps as of June 30,
2002. The fair value of interest rate swaps are included in other assets.
The Company uses derivative financial instruments for the purpose of hedging
interest rate exposures that exist as part of ongoing business operations. The
Company's derivative financial instruments are designated as and qualify as fair
value flow hedges. The Company's policy requires that the Company formally
document all relationships between hedging instruments and hedged items, as well
as the Company's risk management objective and strategy for undertaking various
hedge transactions. The Company also formally assesses (both at the hedge's
inception and on an ongoing basis) whether the derivatives that are used in
hedging transactions have been highly effective in offsetting changes in the
fair value or of hedged items and whether those derivatives may be expected to
remain highly effective in future periods. If it is determined that a derivative
is not (or has ceased to be) highly effective as a hedge, the Company would
discontinue hedge accounting prospectively. As a policy, the Company does not
engage in speculative or leveraged transactions, nor does the Company hold or
issue financial instruments for trading purposes.
NOTE I - COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
In October 2001, the Company entered into a Supply Agreement with USMC, under
which it agreed to purchase certain products and components for use solely by
the Company's patient-care centers during a five-year period following the date
of the agreement. The Company is obligated to purchase from USMC at least $7.5
million of products and components during the first year following the date of
the agreement, $8.5 million of products and components during the second year
following the agreement, and $9.5 million of products and components during the
third year following the date of the agreement, subject to certain adjustments.
However, in the event purchases during each of the fourth and fifth years are
less than approximately $8.7 million, the Company shall pay USMC an amount equal
to $0.1 million multiplied by the number of $1.0 million units by which actual
purchases during each of the fourth and fifth years are less than approximately
$8.7 million.
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.
14
NOTE I - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Contingencies (Continued)
On November 28, 2000, a class action complaint (Norman Ottmann v. Hanger
Orthopedic Group, Inc., Ivan R. Sabel and Richard A. Stein; Civil Action No.
00CV3508) was filed against the Company in the United States District Court for
the District of Maryland on behalf of all purchasers of our common stock from
November 8, 1999 through and including January 6, 2000. The complaint also names
as defendants Ivan R. Sabel, the Company's Chairman of the Board and Chief
Executive Officer of the Company, and Richard A. Stein, the Company's former
Chief Financial Officer, Secretary and Treasurer.
The complaint alleges that during the above period of time, the defendants
violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934 by,
among other things, knowingly or recklessly making material misrepresentations
concerning the Company's financial results for the quarter ended September 30,
1999, and the progress of the Company's efforts to integrate the
recently-acquired operations of NovaCare O&P. The complaint further alleges that
by making those material misrepresentations, the defendants artificially
inflated the price of the Company's common stock. The plaintiff seeks to recover
damages on behalf of all of the class members.
The Company believes that the allegations have no merit and is vigorously
defending the lawsuit.
NOTE J - SEGMENT AND RELATED INFORMATION
The Company has identified two reportable segments in which it operates based on
the products and services it provides. The Company evaluates segment performance
and allocates resources based on the segments' EBITDA. EBITDA is defined as net
income (loss) before extraordinary item, interest, taxes, depreciation and
amortization, and unusual charges consisting of impairment loss on assets held
for sale, and integration, impairment, restructuring, and performance
improvement costs. EBITDA is not a measure of performance under 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 health care companies. Moreover, substantially all of the
Company's financing agreements contain covenants in which EBITDA is used as a
measure of financial performance. Our definition of EBITDA may not be comparable
to the definition of EBITDA used by other companies. Other EBITDA not directly
attributable to reportable segments is primarily related to corporate general
and administrative expenses.
The two reportable segments are: (i) patient-care centers and (ii) distribution.
A third segment that was previously reportable, manufacturing, was sold on
October 9, 2001. On June 1, 2001, in anticipation of the sale of the
manufacturing segment, the Company transferred its central fabrication
operations from the manufacturing segment to the patient-care centers segment.
Accordingly, all prior periods have been recast to be consistent with 2001
reporting. The reportable segments are described further below:
15
NOTE J - SEGMENT AND RELATED INFORMATION (CONTINUED)
Patient-care centers - This segment consists of the Company's owned and operated
O&P patient-care centers, fabrication centers of O&P components and OPNET. The
patient-care centers provide services to design and fit orthotic and prosthetic
devices to patients. These centers also instruct patients in the use, care and
maintenance of the devices. Fabrication centers are involved in the fabrication
of O&P components for both the O&P industry and the Company's own patient-care
practices. OPNET is a national managed care agent for O&P services and a patient
referral clearing house.
Distribution - This segment distributes O&P products and components to both the
O&P industry and the Company's own patient-care practices.
Manufacturing - This previously reportable segment consisted of the manufacture
of components and finished patient-care products for both the O&P industry and
the Company's own patient-care practices.
Summarized financial information concerning the Company's reportable segments is
shown in the following table. Intersegment sales mainly include sales of O&P
components from the manufacturing and distribution segments to the patient-care
centers segment and were made at prices which approximate market values.
Patient-Care Other and
Centers Distribution Manufacturing Eliminations Total
------- ------------ ------------- ------------ -----
(in thousands)
Three Months Ended June 30, 2002
Net sales
Customers $ 126,123 $ 6,933 $ - $ - $ 133,056
================================================================================================
Intersegment $ - $ 12,796 $ - $ (12,796) $ -
================================================================================================
EBITDA $ 28,292 $ 1,864 $ - $ (4,980) $ 25,176
Depreciation and amortization 1,884 73 - 337 2,294
Interest expense, net 9,977 - - - 9,977
Provision for income taxes - - - 5,234 5,234
------------------------------------------------------------------------------------------------
Net income (loss) $ 16,431 $ 1,791 $ - $ (10,551) $ 7,671
================================================================================================
Three Months Ended June 30, 2001
Net sales
Customers $ 119,988 $ 7,565 $ 1,634 $ - $ 129,187
================================================================================================
Intersegment $ - $ 13,945 $ 1,149 $ (15,094) $ -
================================================================================================
EBITDA $ 26,503 $ 1,779 $ (20) $ (5,147) $ 23,115
Depreciation and amortization 5,346 110 438 513 6,407
Unusual charges 3,333 60 8,248 1,683 13,324
Interest expense, net 10,796 - 237 - 11,033
Benefit for income taxes - - - (2,908) (2,908)
------------------------------------------------------------------------------------------------
Net income (loss) $ 7,028 $ 1,609 $ (8,943) $ (4,435) $ (4,741)
================================================================================================
16
NOTE J - SEGMENT AND RELATED INFORMATION (CONTINUED)
Patient-Care Other and
Centers Distribution Manufacturing Eliminations Total
------- ------------ ------------- ------------ -----
(in thousands)
Six Months Ended June 30, 2002
- ------------------------------
Net sales
Customers $ 243,070 $ 13,496 $ - $ - $ 256,566
===============================================================================================
Intersegment $ - $ 25,195 $ - $ (25,195) $ -
===============================================================================================
EBITDA $ 50,895 $ 3,008 $ - $ (9,531) $ 44,372
Depreciation and amortization 4,242 163 - 673 5,078
Interest expense, net 19,056 - - - 19,056
Provision for income taxes - - - 8,234 8,234
Extraordinary item - - - 2,811 2,811
-----------------------------------------------------------------------------------------------
Net income (loss) $ 27,597 $ 2,845 $ - $ (21,249) $ 9,193
===============================================================================================
Six Months Ended June 30, 2001
- ------------------------------
Net sales
Customers $ 231,034 $ 15,512 $ 3,214 $ - $ 249,760
===============================================================================================
Intersegment $ - $ 26,720 $ 2,239 $ (28,959) $ -
===============================================================================================
EBITDA $ 45,628 $ 3,364 $ 224 $ (11,191) $ 38,025
Depreciation and amortization 10,623 219 854 815 12,511
Unusual charges 4,051 89 8,260 2,439 14,839
Interest expense, net 23,037 - 254 - 23,291
Benefit for income taxes - - - (8,007) (8,007)
-----------------------------------------------------------------------------------------------
Net income (loss) $ 7,917 $ 3,056 $ (9,144) $ (6,438) $ (4,609)
===============================================================================================
NOTE K - CONSOLIDATING FINANCIAL INFORMATION
The Company's Senior Notes, Senior Subordinated Notes and Revolving Credit
Facility are guaranteed fully, jointly and severally, and unconditionally by all
of the Company's current and future domestic subsidiaries. The following is
summarized condensed consolidating financial information, as of June 30, 2002
and December 31, 2001, for the three-month periods ended June 30, 2002 and 2001,
and for the six-month periods ended June 30, 2002 and 2001 of the Company,
segregating the parent company (Hanger Orthopedic Group, Inc.) and its guarantor
subsidiaries, as each of the Company's subsidiaries is wholly-owned.
17
NOTE K - CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Hanger
Orthopedic
Group
(Parent Guarantor Consolidating Consolidated
BALANCE SHEET - June 30, 2002 Company) Subsidiaries Adjustments Totals
- ----------------------------- -------- ------------ ----------- ------
(in thousands)
ASSETS
Cash and cash equivalents $ 6,570 $ 8,631 $ - $ 15,201
Accounts receivable - 105,995 - 105,995
Inventories - 52,550 - 52,550
Prepaid expenses and other assets 26,987 2,854 (24,402) 5,439
Intercompany receivable 93,785 (93,785) - -
Deferred income taxes 20,957 - - 20,957
----------------------------------------------------------------
Total current assets 148,299 76,245 (24,402) 200,142
Property, plant and equipment, net 4,387 30,690 - 35,077
Intangible assets, net (156) 454,812 - 454,656
Investment in subsidiaries 85,239 - (85,239) -
Other assets 422,369 2,852 (406,700) 18,521
----------------------------------------------------------------
Total assets $ 660,138 $ 564,599 $(516,341) $ 708,396
================================================================
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND SHAREHOLDERS' EQUITY
Current portion of long-term debt $ - $ 9,104 $ - $ 9,104
Accounts payable 7 7,381 - 7,388
Accrued expenses 3,231 6,228 - 9,459
Accrued interest payable 7,536 24,777 (24,402) 7,911
Accrued compensation related cost 2,062 20,615 - 22,677
Income taxes payable 6,428 (2,016) - 4,412
----------------------------------------------------------------
Total current liabilities 19,264 66,089 (24,402) 60,951
Long-term debt, less current portion 386,722 411,416 (406,700) 391,438
Deferred income taxes 26,495 - - 26,495
Other liabilities - 1,855 - 1,855
----------------------------------------------------------------
Total liabilities 432,481 479,360 (431,102) 480,739
----------------------------------------------------------------
Redeemable preferred stock 73,296 - - 73,296
----------------------------------------------------------------
Common stock 195 35 (35) 195
Additional paid-in capital 148,721 7,461 (7,461) 148,721
Retained earnings 6,101 78,283 (78,283) 6,101
Treasury stock (656) (540) 540 (656)
----------------------------------------------------------------
Total shareholders' equity 154,361 85,239 (85,239) 154,361
----------------------------------------------------------------
Total liabilities, redeemable preferred stock,
and shareholders' equity ----------------------------------------------------------------
$ 660,138 $ 564,599 $(516,341) $ 708,396
================================================================
18
NOTE K - CONSOLIDATING FINANCIAL INFORMATION (CONSOLIDATED)
Hanger
Orthopedic
Group
(Parent Guarantor Consolidating Consolidated
BALANCE SHEET - December 31, 2001 Company) Subsidiaries Adjustments Totals
- --------------------------------- -------- ------------ ----------- ------
(in thousands)
ASSETS
Cash and cash equivalents $ (212) $ 10,255 $ - $ 10,043
Accounts receivable - 104,040 - 104,040
Inventories - 55,946 - 55,946
Prepaid expenses and other assets 591 4,310 - 4,901
Intercompany receivable 126,124 (126,124) - -
Deferred income taxes 20,957 - - 20,957
----------------------------------------------------------------
Total current assets 147,460 48,427 - 195,887
Property, plant and equipment, net 4,767 33,011 - 37,778
Intangible assets, net (156) 452,536 - 452,380
Investment in subsidiaries 60,673 - (60,673) -
Other assets 417,672 2,890 (406,700) 13,862
----------------------------------------------------------------
Total assets $ 630,416 $ 536,864 $(467,373) $ 699,907
================================================================
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND SHAREHOLDERS' EQUITY
Current portion of long-term debt $ 19,199 $ 11,313 $ - $ 30,512
Accounts payable 520 16,381 - 16,901
Accrued expenses 4,586 3,610 - 8,196
Accrued interest payable 1,577 440 - 2,017
Accrued compensation related cost 2,438 26,607 - 29,045
----------------------------------------------------------------
Total current liabilities 28,320 58,351 - 86,671
Long-term debt, less current portion 359,188 414,827 (406,700) 367,315
Deferred income taxes 26,495 - - 26,495
Other liabilities - 3,013 - 3,013
----------------------------------------------------------------
Total liabilities 414,003 476,191 (406,700) 483,494
----------------------------------------------------------------
Redeemable preferred stock 70,739 - - 70,739
----------------------------------------------------------------
Common stock 191 35 (35) 191
Additional paid-in capital 146,674 7,461 (7,461) 146,674
Accumulated deficit (535) 53,717 (53,717) (535)
Treasury stock (656) (540) 540 (656)
----------------------------------------------------------------
Total shareholders' equity 145,674 60,673 (60,673) 145,674
----------------------------------------------------------------
Total liabilities, redeemable preferred stock,
and shareholders' equity ----------------------------------------------------------------
$ 630,416 $ 536,864 $(467,373) $ 699,907
================================================================
19
NOTE K - CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Hanger
Orthopedic
Group
(Parent Guarantor Consolidating Consolidated
STATEMENTS OF OPERATIONS Company) Subsidiaries Adjustments Totals
- ------------------------ -------- ------------ ----------- ------
(in thousands)
Three months ended June 30, 2002
Net sales $ - $ 145,852 $ (12,796) $ 133,056
Cost of goods sold - 74,090 (12,792) 61,298
----------------------------------------------------------------
Gross profit - 71,762 (4) 71,758
Selling, general and administrative 4,980 41,606 (4) 46,582
Depreciation and amortization 337 1,957 - 2,294
----------------------------------------------------------------
Income (loss) from operations (5,317) 28,199 - 22,882
Interest income (expense), net 2,481 (12,458) - (9,977)
Equity in earnings of subsidiaries 15,741 - (15,741) -
----------------------------------------------------------------
Income (loss) before taxes 12,905 15,741 (15,741) 12,905
Provision for income taxes 5,234 - - 5,234
----------------------------------------------------------------
Net income (loss) $ 7,671 $ 15,741 $ (15,741) $ 7,671
================================================================
Three months ended June 30, 2001
Net sales $ - $ 144,281 $ (15,094) $ 129,187
Cost of goods sold - 78,528 (15,094) 63,434
----------------------------------------------------------------
Gross profit - 65,753 - 65,753
Selling, general and administrative 5,147 37,491 - 42,638
Depreciation and amortization 513 2,602 - 3,115
Amortization of excess cost over net assets acquired - 3,292 - 3,292
Unusual charges 1,683 11,641 - 13,324
----------------------------------------------------------------
Income (loss) from operations (7,343) 10,727 - 3,384
Interest income (expense), net 1,836 (12,869) (11,033)
Equity in earnings of subsidiaries (2,142) - 2,142 -
----------------------------------------------------------------
Income (loss) before taxes (7,649) (2,142) 2,142 (7,649)
Benefit for income taxes (2,908) - - (2,908)
----------------------------------------------------------------
Net income (loss) $ (4,741) $ (2,142) $ 2,142 $ (4,741)
================================================================
20
NOTE K - CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Hanger
Orthopedic
Group
(Parent Guarantor Consolidating Consolidated
STATEMENTS OF OPERATIONS Company) Subsidiaries Adjustments Totals
- ------------------------ -------- ------------ ----------- ------
(in thousands)
Six months ended June 30, 2002
Net sales $ - $ 281,761 $ (25,195) $ 256,566
Cost of goods sold - 146,021 (25,186) 120,835
----------------------------------------------------------------
Gross profit - 135,740 (9) 135,731
Selling, general and administrative 9,533 81,835 (9) 91,359
Depreciation and amortization 672 4,406 - 5,078
----------------------------------------------------------------
Income (loss) from operations (10,205) 49,499 - 39,294
Interest income (expense), net 5,877 (24,933) - (19,056)
Equity in earnings of subsidiaries 24,566 - (24,566) -
----------------------------------------------------------------
Income (loss) before taxes 20,238 24,566 (24,566) 20,238
Provision for income taxes 8,234 - - 8,234
----------------------------------------------------------------
Income (loss) before extraordinary item 12,004 24,566 (24,566) 12,004
Extraordinary item (2,811) - - (2,811)
----------------------------------------------------------------
Net income (loss) $ 9,193 $ 24,566 $ (24,566) $ 9,193
================================================================
Six months ended June 30, 2001
Net sales $ - $ 278,729 $ (28,969) $ 249,760
Cost of goods sold - 155,377 (28,969) 126,408
----------------------------------------------------------------
Gross profit - 123,352 - 123,352
Selling, general and administrative 11,191 74,136 - 85,327
Depreciation and amortization 817 5,137 - 5,954
Amortization of excess cost over net assets acquired - 6,557 - 6,557
Unusual charges 2,439 12,400 - 14,839
----------------------------------------------------------------
Income (loss) from operations (14,447) 25,122 - 10,675
Interest income (expense), net 2,305 (25,596) - (23,291)
Equity in earnings of subsidiaries (474) - 474 -
----------------------------------------------------------------
Income (loss) before taxes (12,616) (474) 474 (12,616)
Provision for income taxes (8,007) - - (8,007)
----------------------------------------------------------------
Net income (loss) $ (4,609) $ (474) $ 474 $ (4,609)
================================================================
21
NOTE K - CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Hanger
Orthopedic
Group
(Parent Guarantor Consolidating Consolidated
STATEMENTS OF CASH FLOWS Company) Subsidiaries Adjustments Totals
- ------------------------ -------- ------------ ----------- ------
Six months ended June 30, 2002
Cash flows provided by operating activities $ 6,885 $ 9,111 $ - $ 15,996
Cash flows used in investing activities (280) (5,116) - (5,396)
Cash flows provided by (used in) financing
activities 177 (5,619) - (5,442)
----------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 6,782 (1,624) - 5,158
Cash and cash equivalents, beginning of period (212) 10,255 - 10,043
----------------------------------------------------------------
Cash and cash equivalents, end of period $ 6,570 $ 8,631 $ - $ 15,201
================================================================
Six months ended June 30, 2001
Cash flows provided by operating activities $ 2,759 $ 9,973 $ - $ 12,732
Cash flows used in investing activities (762) (5,278) - (6,040)
Cash flows used in financing activities (10,309) (6,969) - (17,278)
----------------------------------------------------------------
Net decrease in cash and cash equivalents (8,312) (2,274) - (10,586)
Cash and cash equivalents, beginning of period 10,829 9,840 - 20,669
----------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,517 $ 7,566 $ - $ 10,083
================================================================
NOTE L - SUBSEQUENT EVENT
As described in Note E, the Company approved for payment two invoices for
success fees in the fourth quarter of 2001. In accordance with the contract with
JA&A, the invoices were satisfied by the payment of $1.1 million in cash and the
issuance of nonqualified options to purchase 1,202,436 shares of the Company's
stock at an exercise price of $1.40 per share. The options were valued using a
Black-Scholes option-pricing model, and an expense of $4.8 million was recorded.
On July 23, 2002 the Company agreed to purchase 601,218 of the options
previously granted for a payment of $3.98 per share, or a total of $2,392,704.
On July 23, 2002 the Company's shares opened for trading at $12.00 per share.
The Company also agreed to file a Registration Statement on Form S-3 with the
Securities and Exchange Commission within 20 business days to register the
remaining 601,218 shares underlying this option in order to permit JA&A to sell
the shares of the Company's stock that it may acquire upon exercise of the
option.
22
NOTE L - SUBSEQUENT EVENT (CONTINUED)
In connection with the sale of any shares that JA&A may acquire under these
options JA&A has agreed to limit sales of shares of the Company's stock to
40,000 shares in any calendar week. JA&A also agreed to permanently amend its
contract with the Company so that the payment of future success fees, if any,
would be made only in cash.
Completion of the transaction with JA&A is subject to the approval, which the
Company expects to obtain, of a majority of the banks holding the Revolving
Credit Facility.
23
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following table sets forth for the periods indicated certain items of the
Company's Statements of Operations and their percentage of the Company's net
sales:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 46.1 49.1 47.1 50.6
Gross profit 53.9 50.9 52.9 49.4
Selling, general and administrative 35.0 33.0 35.6 34.2
Depreciation and amortization 1.7 2.4 2.0 2.4
Amortization of excess cost over net assets acquired - 2.5 - 2.6
Unusual charges - 10.4 - 5.9
Income from operations 17.2 2.6 15.3 4.3
Interest expense, net 7.5 8.5 7.4 9.3
Income (loss) before taxes 9.7 (5.9) 7.9 (5.1)
Provision (benefit) for income taxes 3.9 (2.2) 3.2 (3.2)
Net income (loss) before extraordinary item 5.8 (3.7) 4.7 (1.8)
Extraordinary item - - (1.1) -
Net income (loss) 5.8 (3.7) 3.6 (1.8)
Three Months Ended June 30, 2002 Compared to the Three Months Ended June 30,
2001
Net Sales. Net sales for the quarter ended June 30, 2002, were $133.1 million,
an increase of $3.9 million, or 3.0%, versus net sales of $129.2 million for the
quarter ended June 30, 2001. The sales growth was primarily the result of a 5.2%
increase in same center sales in the Company's O&P patient-care practices offset
by a $0.6 million, or 0.5%, decrease in outside sales of the distribution
segment and a $1.6 million, or 1.2%, reduction in sales due to the sale of
Seattle Orthopedic Group, Inc. ("SOGI"), the Company's manufacturing segment, in
the fourth quarter of 2001.
Gross Profit. Gross profit in the quarter ended June 30, 2002 was $71.8 million,
an increase of $6.0 million, or 9.1%, versus $65.8 million for the quarter ended
June 30, 2001. Gross profit as a percentage of net sales increased to 53.9% in
the second quarter of 2002 versus 50.9% in the second quarter of 2001. The
improvement in gross profit, in both dollars and as a percentage of sales, was
due to a reduction in labor and material costs as well as the increase in net
sales.
24
Selling, General and Administrative. Selling, general and administrative
expenses in the quarter ended June 30, 2002 increased by $3.9 million, or 9.2%,
compared to the quarter ended June 30, 2001. Selling, general and administrative
expenses as a percentage of net sales increased to 35.0% in the second quarter
of 2002 compared to 33.0% for same period in 2001. The increase in selling,
general and administrative expenses in both dollars and as a percentage of sales
was primarily due to an increase in our accrual for the practitioners'
performance-based bonus program costs that resulted from the Company's increased
collections and decreased labor and material costs.
Depreciation and Amortization. Depreciation and amortization for the three
months ended June 30, 2002 were $2.3 million, a 64.2% decrease in such costs
versus the $6.4 million for the three months ended June 30, 2001. The decrease
is due principally to the discontinuation of amortization related to goodwill
commencing January 1, 2002 pursuant to Statement of Financial Accounting
Standards No. 142 and to the sale of SOGI in the fourth quarter of 2001.
Unusual Charges. Unusual charges for the three months ended June 30, 2001
amounted to $13.3 million, which consisted of the following one-time costs: (i)
restructuring charges of $3.6 million principally related to severance and lease
termination expenses; (ii) an $8.2 million loss on the disposal of substantially
all the manufacturing assets of SOGI; and (iii) $1.5 million in other charges
primarily related to fees paid to AlixPartners, LLC (formerly Jay Alix &
Associates, Inc.; "JA&A") in connection with development of the Company's
performance improvement plan. No such unusual charges were incurred during the
three months ended June 30, 2002.
JA&A's work with the Company was substantially completed as of December 31,
2001. In the fourth quarter of 2001, we were invoiced for and accrued a success
fee based upon identified savings and operational improvements. Our contract
with JA&A calls for the possibility of one additional success fee, which will be
based on the realization of further savings from initiatives that were not fully
implemented by December 31, 2001. As of June 30, 2002, these savings are not yet
measurable, and therefore, we are unable to estimate the amount, if any, related
to this second success fee.
Income from Operations. Principally as a result of the above, income from
operations for the quarter ended June 30, 2002 was $22.9 million, an increase of
$19.5 million, or 576.2%, compared to the quarter ended June 30, 2001. Income
from operations as a percentage of net sales increased by 14.6 percentage points
to 17.2% of net sales in the second quarter of 2002 versus 2.6% for the prior
year's comparable period.
Interest Expense, Net. Interest expense in the second quarter of 2002 was $10.0
million, a decrease of $1.0 million from the $11.0 million incurred in the
second quarter of 2001. The decrease in dollars of interest expense was
primarily attributable to a decrease in average borrowings and a reduction in
LIBOR.
Income Taxes. The provision for income taxes for the three months ended June 30,
2002 was $5.2 million compared to a benefit from income taxes of $2.9 million
for the three months ended June 30, 2001. The change in the income tax provision
was due to the Company's return to profitability and the impact of the
discontinuation of amortization related to goodwill.
25
Net Income (Loss). As a result of the above, we recorded net income of $7.7
million for the three months ended June 30, 2002, compared to net loss of $4.7
million in the comparable quarter in the prior year, an improvement of $12.4
million.
Six Months Ended June 30, 2002 Compared to the Six Months Ended June 30, 2001
Net Sales. Net sales for the six months ended June 30, 2002, were $256.6
million, an increase of $6.8 million, or 2.7%, versus net sales of $249.8
million for the six months ended June 30, 2001. The sales growth was primarily
the result of a 5.3% increase in same center sales in the Company's O&P
patient-care practices offset by a $2.0 million, or 0.8%, decrease in outside
sales of the distribution segment and a $3.2 million, or 1.3%, reduction in
sales due to the sale of SOGI, the Company's manufacturing segment, in the
fourth quarter of 2001.
Gross Profit. Gross profit in the six months ended June 30, 2002 was $135.7
million, an increase of $12.4 million, or 10.0%, versus $123.4 million for the
six months ended June 30, 2001. Gross profit as a percentage of net sales
increased to 52.9% in the first six months of 2002 versus 49.4% in the first six
months of 2001. The improvement in gross profit, in both dollars and as a
percentage of sales, was due to a reduction in labor and material costs as well
as the increase in net sales.
Selling, General and Administrative. Selling, general and administrative
expenses in the six months ended June 30, 2002 increased by $6.0 million, or
7.1%, compared to the six months ended June 30, 2001. Selling, general and
administrative expenses as a percentage of net sales increased to 35.6% in the
first six months of 2002 compared to 34.2% for the same period in 2001. The
increase in selling, general and administrative expenses in both dollars and as
a percentage of sales was primarily due to an increase in our accrual for the
practitioners' performance-based bonus program of approximately $7.0 million
that resulted from the Company's increased collections and decreased labor and
material costs, offset by decreases in legal and occupancy costs of
approximately $1.0 million.
Depreciation and Amortization. Depreciation and amortization for the six months
ended June 30, 2002 were $5.1 million, a 59.4% decrease in such costs versus the
$12.5 million for the six months ended June 30, 2001. The decrease is due
principally to the discontinuation of amortization related to goodwill
commencing January 1, 2002 pursuant to Statement of Financial Accounting
Standards No. 142 and to the sale of SOGI in the fourth quarter of 2001.
Unusual Charges. Unusual charges for the six months ended June 30, 2001 amounted
to $14.8 million, which consisted of the following one-time costs: (i)
restructuring charges of $3.6 million principally related to severance and lease
termination expenses; (ii) an $8.2 million loss on the disposal of substantially
all the manufacturing assets of SOGI; and (iii) $3.0 million in other charges
primarily related to fees paid to JA&A in connection with development of the
Company's performance improvement plan. No such unusual charges were incurred
during the six months ended June 30, 2002.
26
Income from Operations. Principally as a result of the above, income from
operations for the six months ended June 30, 2002 was $39.3 million, an increase
of $28.6 million, or 268.1%, compared to the six months ended June 30, 2001.
Income from operations as a percentage of net sales increased by 11.0 percentage
points to 15.3% of net sales in the first six months of 2002 versus 4.3% for the
prior year's comparable period.
Interest Expense, Net. Interest expense in the first six months of 2002 was
$19.1 million, a decrease of $4.2 million from the $23.3 million incurred in the
first six months of 2001. The decrease in dollars of interest expense was
primarily attributable to a decrease in average borrowings and a reduction in
LIBOR.
Income Taxes. The provision for income taxes for the six months ended June 30,
2002 was $8.2 million compared to a benefit from income taxes of $8.0 million
for the six months ended June 30, 2001. The change in the income tax provision
was due to the Company's return to profitability.
Net Income (Loss) before Extraordinary Item. As a result of the above, we
recorded net income before extraordinary item of $12.0 million for the six
months ended June 30, 2002, compared to a net loss before extraordinary item of
$4.6 million in the comparable period in the prior year, an improvement of $16.6
million.
Extraordinary Item. The extraordinary item of $2.8 million ($4.6 million
pre-tax) in the six months ended June 30, 2002, represents the write-off of debt
issue costs as a result of extinguishing $228.4 million of bank debt in
connection with the issuance of the $200.0 million principal amount of its 10
3/8% Senior Notes due 2009 (the "Senior Notes") and the establishment of the
$75.0 million senior secured revolving line of credit (the "Revolving Credit
Facility").
Net Income (Loss). As a result of the above, we recorded net income of $9.2
million for the six months ended June 30, 2002, compared to net loss of $4.6
million in the comparable period in the prior year, an improvement of $13.8
million and the impact of the discontinuation of amortization related to
goodwill.
Financial Condition, Liquidity And Capital Resources
Our working capital at June 30, 2002 was $139.2 million compared to $109.2
million at December 31, 2001. Our cash and cash equivalents amounted to $15.2
million at June 30, 2002 and $10.0 million at December 31, 2001. The current
ratio improved to 3.3 to 1 at June 30, 2002, compared to 2.3 to 1 at December
31, 2001. Available cash under our Revolving Credit Facility increased to $39.0
million at June 30, 2002 compared to $25.2 million at December 31, 2001.
Net cash provided by operating activities for the six months ended June 30, 2002
was $16.0 million, compared to $12.7 million provided by operating activities in
the six months ended June 30, 2001. The $3.3 million increase was primarily due
to the increase in the Company's EBITDA, which is defined as net income (loss)
before extraordinary item, interest, taxes, depreciation and amortization, and
unusual charges.
27
Net cash used in investing activities was $5.4 million for the six months ended
June 30, 2002, versus $6.0 million for the same period in the prior year. The
decrease in net cash used was primarily due to the receipt of proceeds from the
sale of the building which formerly housed the Company's distribution segment.
Net cash used in financing activities was $5.4 million for the six months ended
June 30, 2002. During that period, the Company received $200.0 million in
proceeds from the sale of the Senior Notes that were offset by (i) principal
payments of $153.6 million to retire our Tranche A & B Term Facilities, (ii) a
net paydown of $38.3 million of our revolving line of credit, and (iii) payment
of $8.1 million in financing costs related to the issuance of the Senior Notes
and the establishment of the Revolving Credit Facility. In addition, during that
period, the Company received $2.1 million in proceeds from the exercise of stock
options, offset by: (i) scheduled principal payments of $5.6 million on our
long-term debt, (ii) a net paydown of $0.5 million of our revolving line of
credit and (iii) payment of $1.4 million in financing costs related to the
issuance of the Senior Notes and the establishment of the Revolving Credit
Facility.
On February 15, 2002, we issued $200.0 million aggregate principal amount of
Senior Notes in a private placement exempt from registration under the
Securities Act of 1933, as amended. We also established, concurrent with the
sale of the Senior Notes, the Revolving Credit Facility.
The Senior Notes mature on February 15, 2009 and do not require any prepayments
of principal prior to maturity. Interest on the Senior Notes accrues from
February 15, 2002, and is payable semi-annually on February 15 and August 15 of
each year, commencing August 15, 2002. Payment of principal and interest on the
Senior Notes is guaranteed on a senior unsecured basis by all of our current and
future domestic subsidiaries. The indenture limits our ability to, among other
things, incur additional indebtedness, create liens, pay dividends on or redeem
capital stock, make certain investments, make restricted payments, make certain
dispositions of assets, engage in transactions with affiliates, engage in
certain business activities and engage in mergers, consolidations and certain
sales of assets.
On May 13, 2002, we commenced an exchange offer to exchange the
privately-placed, unregistered Senior Notes with new Senior Notes that had been
registered under the Securities Act of 1933, as amended, on the Company's
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission. The exchange offer expired on June 11, 2002. All of the previously
issued unregistered Senior Notes were exchanged for registered Senior Notes. The
new notes are substantially identical to the previously issued notes except that
the new notes will be free of the transfer restrictions that applied to
unregistered notes.
The Revolving Credit Facility, which was provided by a syndicate of banks and
other financial institutions, is a senior secured revolving credit facility
providing for loans of up to $75.0 million and will terminate on February 15,
2007. Borrowings under the Revolving Credit Facility will bear interest, at our
option, at an annual rate equal to LIBOR plus 3.50% or the Base Rate (as defined
in the Revolving Credit Facility) plus 2.50% in each case, subject to
adjustments based on financial performance. Our obligations under the Revolving
Credit Facility are guaranteed by our subsidiaries and are secured by a first
priority perfected security interest in our subsidiaries'
28
shares, all of our assets and all of the assets of our subsidiaries. Borrowings
under the Revolving Credit Facility are prepayable at any time without premium
or penalty. The Revolving Credit Facility requires compliance with various
financial covenants, including a minimum consolidated interest coverage ratio,
minimum consolidated EBITDA, a maximum total leverage ratio, a maximum senior
secured leverage ratio and a minimum fixed charge coverage ratio, as well as
other covenants. The Revolving Credit Facility contains customary events of
default and is subject to various mandatory prepayments and commitment
reductions
During the fourth quarter of 2001, the Company approved for payment two invoices
from JA&A for success fees. In accordance with the contract with JA&A, the
invoices were satisfied by the payment of $1.1 million in cash and the issuance
of nonqualified options to purchase 1,202,436 shares of the Company's stock at
an exercise price of $1.40 per share. The options were valued using a
Black-Scholes option-pricing model, and an expense of $4.8 million was recorded.
On July 23, 2002 the Company agreed to purchase 601,218 of the options
previously granted for a payment of $3.98 per share, or a total of $2,392,704.
On July 23, 2002 the Company's shares opened for trading at $12.00 per share.
The Company also agreed to file a Registration Statement on Form S-3 with the
Securities and Exchange Commission within 20 business days to register the
remaining 601,218 shares underlying this option in order to permit JA&A to sell
the shares of the Company's stock that it may acquire upon exercise of the
option.
In connection with the sale of any shares that JA&A may acquire under these
options JA&A has agreed to limit sales of shares of the Company's stock that it
may acquire by exercise of the options, to 40,000 shares in any calendar week.
JA&A also agreed to permanently amend its contract with the Company so that the
payment of future success fees, if any, would be made only in cash.
Completion of the transaction with JA&A is subject to the approval, which the
Company expects to obtain, of a majority of the banks holding the Revolving
Credit Facility.
We believe that, based on current levels of operations and anticipated growth,
cash generated from operations, together with other available sources of
liquidity, including borrowings available under the Revolving Credit Facility,
will be sufficient for the foreseeable future to fund anticipated capital
expenditures and make required payments of principal and interest on our debt,
including payments due on the Senior Notes and obligations under the Revolving
Credit Facility. In addition, we continually evaluate potential acquisitions and
expect to fund such acquisitions from our available sources of liquidity, as
discussed above.
Market Risk
We are exposed to the market risk that is associated with changes in interest
rates. To manage that risk, in March 2002, we entered into interest rate swaps
to modify our exposure to interest rate movements and reduce borrowing costs. We
entered into $100.0 million fixed-to-floating interest rate swaps, consisting of
floating rate instruments benchmarked to LIBOR. We are exposed to potential
losses in the event of nonperformance by the counterparties to the swap
agreements.
29
New Accounting Pronouncements
On April 30, 2002, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS
145"). Under SFAS 145, gains and losses from the early extinguishment of debt
would no longer be extraordinary items, unless they satisfied the criteria in
Accounting Principles Board Opinion No. 30 ("APB 30") where extraordinary items
are stated to be distinguishable by their unusual nature and by the infrequency
of their occurrence. Any gain or loss on extinguishment of debt that was
classified as an extraordinary item in prior periods presented that does not
meet the criteria in APB 30 for classification as an extraordinary item shall be
reclassified. In addition, under SFAS 145, certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-leaseback transactions. SFAS is effective for fiscal years
beginning after May 15, 2002. SFAS 145 will be adopted by us on January 1, 2003
and may result in a reclassification of existing extraordinary losses on the
early extinguishment of debt from an extraordinary item to a non-operating item.
On July 30, 2002, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS 146"). Under SFAS 146, costs associated with
exit or disposal activities would be recognized when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Such costs would
include lease termination costs and certain employee severance costs that are
associated with a restructuring, discontinued operation, plant closing, or other
exit or disposal activity. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company does not
expect SFAS 146 to have a material effect on its financial statements.
Critical Accounting Estimates
The Company's analysis and discussion of its financial condition and results of
operations are based upon its consolidated financial statements that have been
prepared in accordance with generally accepted accounting principles in the
United States ("U.S. GAAP"). The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. U.S.
GAAP provides the framework from which to make these estimates, assumptions and
disclosures. The Company chooses accounting policies within U.S. GAAP that
management believes are appropriate to accurately and fairly report the
Company's operating results and financial position in a consistent manner.
Management regularly assesses these policies in light of current and forecasted
economic conditions. The Company's accounting principles are stated in Note B to
the Consolidated Financial Statements as presented in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001. In connection with the
adoption of SFAS No. 142; Goodwill and Other Intangible Assets, the Company
believes the following accounting policy is critical to understanding the
results of operations and affect the more significant judgments and estimates
used in the preparation of the consolidated financial statements.
30
o Intangible Assets: Excess cost over net assets acquired represents the
excess of purchase price over the value assigned to net identifiable
assets of purchased businesses. Other definite-lived intangible assets
include non-compete agreements which are recorded based on agreements
entered into by the Company and are amortized over their estimated useful
lives ranging from 5 to 7 years using the straight-line method. The
remainder of the other definite-lived intangible assets, including
patents, are recorded at cost and are amortized over their estimated
useful lives of up to 16 years using the straight-line method. SFAS 142
requires that excess cost over net assets acquired and indefinite-lived
intangibles be tested for impairment annually. In connection with the
impairment assessment management reviews and assesses, future cash flows,
the market value of the Company's stock price as well as other market
valuation indicators. Further changes in these items could result in an
impairment. Impairment would be recognized by a charge to operating
results and a reduction in the carrying value of the asset.
Class Action
On November 28, 2000, a class action complaint (Norman Ottmann v. Hanger
Orthopedic Group, Inc., Ivan R. Sabel and Richard A. Stein; Civil Action No.
00CV3508) was filed against us in the United States District Court for the
District of Maryland on behalf of all purchasers of our common stock from
November 8, 1999 through and including January 6, 2000. The complaint also names
as defendants Ivan R. Sabel, our Chairman of the Board, President and Chief
Executive Officer, and Richard A. Stein, our former Chief Financial Officer,
Secretary and Treasurer.
The complaint alleges that during the above period of time, the defendants
violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934 by,
among other things, knowingly or recklessly making material misrepresentations
concerning the Company's financial results for the quarter ended September 30,
1999, and the progress of the Company's efforts to integrate the
recently-acquired operations of NovaCare O&P. The complaint further alleges that
by making those material misrepresentations, the defendants artificially
inflated the price of the Company's common stock. The plaintiff seeks to recover
damages on behalf of all of the class members.
The Company believes that the allegations have no merit and is vigorously
defending the lawsuit.
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.
31
Forward Looking Statements
This report contains forward-looking statements setting forth the Company's
beliefs or expectations relating to future revenues. Actual results may differ
materially from projected or expected results due to changes in the demand for
the Company's O&P services and products, uncertainties relating to the results
of operations or recently acquired and newly acquired O&P patient care
practices, the Company's ability to successfully integrate the operations of
NovaCare O&P and to attract and retain qualified O&P practitioners, federal laws
governing the health-care industry, 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 publicly update
these forward-looking statements, whether as a result of new information, future
events or otherwise.
32
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, we are exposed to fluctuations in interest
rates. We address this risk by using interest rate swaps from time to time. At
December 31, 2001 there were no interest rate swaps outstanding. In March 2002,
the Company entered into two fixed-to-floating interest rate swaps with an
aggregate notional amount of $100 million, as discussed in Note H to Hanger's
Consolidated Financial Statements.
33
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 30, 2002.
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. (16,055,242 shares for and 1,844,092 shares withheld),
Edmond E. Charrette, M.D. (16,569,957 shares for and 1,329,377 shares withheld),
Thomas P. Cooper, M.D. (16,571,777 shares for and 1,327,577 shares withheld),
Robert J. Glaser, M.D. (16,568,175 shares for and 1,331,159 shares withheld),
Eric Green (16,570,057 shares for and 1,329,277 shares withheld), C. Raymond
Larkin, Jr. (16,570,964 shares for and 1,328,370 shares withheld), Risa J.
Lavizzo-Mourey, M.D. (16,571,684 shares for and 1,327,650 shares withheld), Ivan
R. Sabel (16,572,864 shares for and 1,326,470 shares withheld) and H.E.
Thranhardt (16,572,184 shares for and 1,327,150 shares withheld).
The second proposal was the proposed approval of the Company's 2002 Stock Option
Plan and authorization of 1,500,000 shares of the Company's Common Stock for
issuance under that Plan. The proposal was approved by the holders of more than
the required majority of the shares of Common Stock voting at the meeting. The
proposal was approved by a vote of 10,471,851 shares of Common Stock for
(representing approximately 58.5% of the shares voting), 1,817,639 shares of
Common Stock against, with 91,868 shares of Common Stock abstaining and
6,902,979 shares of Common Stock not voting on this proposal.
The third proposal was the proposed ratification of the selection of
PricewaterhouseCoopers LLP as the independent accountants for the Company for
the current fiscal year. The proposal was approved by the holders of more than
the required majority of the shares of Common Stock voting at the meeting. The
proposal was approved by a vote of 17,831,202 shares for (representing
approximately 99.6% of the shares voting), 39,014 shares against, with 8,032
shares abstaining and 1,406,001 shares of Common Stock not voting on this
proposal.
34
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
99.1 Written Statement of the Chief Executive Officer
Pursuant to 18 U.S.C.ss.1350 (Attached herewith.)
99.2 Written Statement of the Chief Financial Officer
Pursuant to 18 U.S.C.ss.1350 (Attached herewith.)
(b) Forms 8-K. None
35
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.
Dated: August 14, 2002 /s/ Ivan R. Sabel
------------------------------------
Ivan R. Sabel, CPO
Chairman and Chief Executive Officer
(Principal Executive Officer)
Dated: August 14, 2002 /s/ George E. McHenry
------------------------------------
George E. McHenry
Chief Financial Officer
(Principal Financial Officer)
Dated: August 14, 2002 /s/ Glenn M. Lohrmann
------------------------------------
Glenn M. Lohrmann
Controller
(Chief Accounting Officer)
36