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, 2003
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.
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
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(301) 986-0701
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark 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 __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2 of the Exchange Act): Yes X No__
As of August 11, 2003, 20,715,874 shares of common stock, $.01 par value
per share were outstanding.
HANGER ORTHOPEDIC GROUP, INC.
INDEX
Page
No.
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2003 and December 31,
2002 1
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2003 and 2002 3
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2003 and 2002 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 32
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 34
SIGNATURES 35
Exhibit Index 36
Exhibits 37
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
June 30, December 31,
2003 2002
---------- ------------
(unaudited) (unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,520 $ 6,566
Accounts receivable, less allowances for
doubtful accounts of $8,456 and $8,649 in
2003 and 2002, respectively 111,060 107,604
Inventories 58,256 56,454
Prepaid expenses, other assets and income
taxes receivable 6,247 15,432
Deferred income taxes 6,767 6,586
-------- --------
Total current assets
186,850 192,642
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Land 3,668 3,743
Buildings 6,526 6,715
Machinery and equipment 17,958 17,110
Computer and software 20,856 17,990
Furniture and fixtures 12,014 10,353
Leasehold improvements 21,426 18,671
-------- --------
Property, plant and equipment, gross
82,448 74,582
Less accumulated depreciation and amortization 43,575 39,036
-------- --------
Property, plant and equipment, net 38,873 35,546
-------- --------
INTANGIBLE ASSETS
Excess cost over net assets acquired 459,533 453,988
Patents and other intangible assets, $10,232 and
$10,232 less accumulated amortization of $4,849
and $4,404 in 2003 and 2002, respectively 5,383 5,828
-------- --------
Total intangible assets 464,916 459,816
-------- --------
OTHER ASSETS
Debt issuance costs, net 13,540 13,741
Other assets 12,626 10,481
-------- --------
Total other assets 26,166 24,222
-------- --------
TOTAL ASSETS $716,805 $712,226
======== ========
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,
2003 2002
---------- ------------
(unaudited) (unaudited)
LIABILITIES, REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 2,715 $ 5,181
Accounts payable 12,605 14,876
Accrued expenses 4,793 5,460
Accrued interest payable 7,226 7,507
Accrued compensation related cost 21,555 32,950
Income taxes payable 3,642 --
--------- ---------
Total current liabilities 52,536 65,974
LONG-TERM LIABILITIES
Long-term debt, less current portion 376,894 378,101
Deferred income taxes 26,698 22,965
Other liabilities 1,599 1,578
--------- ---------
Total long-term liabilities 405,191 402,644
--------- ---------
Total liabilities 457,727 468,618
--------- ---------
REDEEMABLE PREFERRED STOCK
7% Redeemable Convertible Preferred Stock,
liquidation preference $1,000 per share 78,679 75,941
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 60,000,000 shares
authorized, 20,652,910 shares and 20,277,180
shares issued and outstanding in 2003 and 2002,
respectively 207 203
Additional paid-in capital 151,037 150,287
Unearned compensation (115) --
Retained earnings 29,926 17,833
--------- ---------
181,055 168,323
Treasury stock, cost (133,495 shares) (656) (656)
--------- ---------
Total shareholders' equity 180,399 167,667
--------- ---------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY $ 716,805 $ 712,226
========= =========
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 Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(unaudited) (unaudited)
Net sales $ 138,936 $ 133,056 $ 265,064 $ 256,566
Cost of goods sold (exclusive of
depreciation and amortization) 65,416 63,189 126,106 122,726
---------- ---------- ---------- ----------
Gross profit 73,520 69,867 138,958 133,840
Selling, general and administrative 45,712 44,691 90,478 89,468
Depreciation and amortization 2,620 2,294 5,073 5,078
---------- ---------- ---------- ----------
Income from operations 25,188 22,882 43,407 39,294
Interest expense, net 9,354 9,977 18,450 19,056
Extinguishment of debt -- -- -- 4,686
---------- ---------- ---------- ----------
Income before taxes 15,834 12,905 24,957 15,552
Provision for income taxes 6,481 5,234 10,126 6,359
---------- ---------- ---------- ----------
Net income 9,353 7,671 14,831 9,193
Preferred stock dividend and accretion 1,381 1,291 2,738 2,557
---------- ---------- ---------- ----------
Net income applicable to common stock $ 7,972 $ 6,380 $ 12,093 $ 6,636
========== ========== ========== ==========
Basic Per Common Share Data
- ---------------------------
Net income $ 0.39 $ 0.33 $ 0.59 $ 0.35
========== ========== ========== ==========
Shares used to compute basic per
common share amounts 20,572,473 19,336,954 20,582,064 19,221,865
========== ========== ========== ==========
Diluted Per Common Share Data
- -----------------------------
Net income $ 0.35 $ 0.29 $ 0.55 $ 0.31
========== ========== ========== ==========
Shares used to compute diluted per
common share amounts 26,844,609 22,013,471 26,804,325 21,669,180
========== ========== ========== ==========
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)
2003 2002
---------- ----------
(unaudited)
Cash flows from operating activities:
Net income $ 14,831 $ 9,193
Adjustments to reconcile net income to net cash
provided by operating activities:
Extinguishment of debt -- 4,686
(Gain) loss on disposal of assets (109) 557
Provision for obsolete inventory 60 --
Provision for bad debts 10,406 10,725
Depreciation and amortization 5,073 5,078
Amortization of debt issuance costs 1,256 1,099
Deferred income taxes 3,552 --
Changes in assets and liabilities, net of
effects of acquired companies:
Accounts receivable (13,018) (12,681)
Inventories (1,815) 3,397
Prepaid expenses, other assets, and income
taxes receivable (1,195) (3,445)
Other assets 35 (180)
Accounts payable (2,377) (12,374)
Accrued expenses, interest, and income
taxes payable 13,062 17,468
Accrued compensation related costs (11,413) (6,368)
Other liabilities 19 (1,159)
--------- ---------
Net cash provided by operating activities 18,367 15,996
--------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment (8,166) (3,936)
Acquisitions and earnouts (3,780) (2,952)
Proceeds from sale of certain assets 358 1,492
--------- ---------
Net cash used in investing activities (11,588) (5,396)
--------- ---------
Cash flows from financing activities:
Borrowings under revolving credit agreement 18,000 43,975
Repayments under revolving credit agreement (23,000) (82,775)
Proceeds from sale of Senior Notes -- 200,000
Repayment and termination of bank loans -- (153,587)
Scheduled repayment of long-term debt (3,410) (5,619)
Increase in financing costs (1,054) (9,487)
Proceeds from issuance of Common Stock 639 2,051
--------- ---------
Net cash used in financing activities (8,825) (5,442)
--------- ---------
(Decrease) increase in cash and cash equivalents (2,046) 5,158
Cash and cash equivalents at beginning of period 6,566 10,043
--------- ---------
Cash and cash equivalents at end of period $ 4,520 $ 15,201
========= =========
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 accounting principles generally accepted in the United
States ("U.S. GAAP") for complete financial statements. In the opinion of
management, all adjustments considered necessary (consisting solely of normal
recurring adjustments) 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. Approximately $1.9 million in medical benefits for the
quarter and six month period ended June 30, 2002 were reclassed from Selling,
General and Administrative expenses to Cost of Goods Sold to conform to the
current year presentation.
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, 2002,
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 U.S. 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.
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. At its Patient-Care Centers segment, 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. The Company
treats these adjustments as changes in accounting estimates in accordance with
the provisions of Accounting Principles Board Opinion ("APB") No. 20, Accounting
Changes. At its Distribution segment, a perpetual inventory is maintained.
5
NOTE B - SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
Stock Based Compensation
At June 30, 2003, the Company has multiple stock-based employee compensation
plans and has outstanding non-qualified options held by employees. Stock-based
compensation is accounted for using the intrinsic-value-based method in
accordance with APB No. 25, Accounting for Stock Issued to Employees ("APB 25"),
and related Interpretations. No stock-based employee compensation expense is
reflected in net income as all options granted under these plans and the
non-qualified options granted to employees had an exercise price equal to the
market value of the underlying common stock on the date of grant. The following
table illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation,
as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition
and Disclosure, to stock-based employee compensation:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2003 2002 2003 2002
(In thousands, except per share amounts)
Net income applicable to common stock, as reported $ 7,972 $ 6,380 $ 12,093 $ 6,636
Deduct: total stock-based employee compensation
expense determined under fair value method for
all awards, net of related tax effects (730) (733) (1,368) (1,361)
--------- --------- ---------- ---------
Pro forma net income applicable to common stock $ 7,242 $ 5,647 $ 10,725 $ 5,275
========= ========= ========== =========
Earnings per share:
Basic - as reported $ 0.39 $ 0.33 $ 0.59 $ 0.35
Basic - pro forma $ 0.35 $ 0.29 $ 0.52 $ 0.27
Diluted - as reported $ 0.35 $ 0.29 $ 0.55 $ 0.31
Diluted - pro forma $ 0.32 $ 0.26 $ 0.50 $ 0.24
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Expected term 5% 5% 5% 5%
Volatility factor 77% 71% 77% 71%
Risk free interest rate 2.6% 5.8% 2.7% 5.8%
Dividend yield 0.00% 0.00% 0.00% 0.00%
6
NOTE B - SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
Stock Based Compensation (continued)
For the quarters ended June 30, 2003 and 2002, the Company granted aggregate
options to purchase 32,140 and 229,998 shares of the Company's common stock,
respectively. The Company granted aggregate options to purchase 142,472 and
634,998 shares of the Company's common stock during the six month periods ended
June 30, 2003 and 2002, respectively. The weighted average fair value of each
option granted was $7.14 per share for 2003 and $6.80 per share for 2002.
During the quarter ended June 30, 2003 the Company granted 10,280 shares of the
Company's common stock to certain directors, subject to various restrictions. No
such shares were granted in 2002. The market value of the restricted shares at
the date of grant will be amortized to expense ratably over the restriction
period.
Segment Information
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"), applies a "management" approach to disclosure of
segment information. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the basis of the Company's reportable segments. The
description of the Company's reportable segments and the disclosure of segment
information pursuant to SFAS 131 are presented in Note I.
New Accounting Standards
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement
13, and Technical Corrections ("SFAS 145"). Under SFAS 145, gains and losses
from the early extinguishment of debt are no longer classified as extraordinary
items, unless they satisfied the criteria in APB No. 30, Reporting the Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("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 has been reclassified. In addition, under SFAS 145,
certain lease modifications that have economic effects similar to sale-leaseback
transactions are to be accounted for in the same manner as sale-leaseback
transactions. SFAS 145 was effective for fiscal years beginning after May 15,
2002. SFAS 145 was adopted by the Company on January 1, 2003 and resulted in a
reclassification of existing extraordinary losses on the early extinguishment of
debt from an extraordinary item to a non-operating item.
7
NOTE B - SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
New Accounting Standards (continued)
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS 146"). Under SFAS 146, costs associated with
exit or disposal activities are to be recognized when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Such costs 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. SFAS 146 has not had a material
effect on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS 150").
SFAS 150 identifies three classes of financial instruments that require
reclassification from equity to liabilities and their measurement at fair value.
SFAS 150 is applicable to financial instruments entered into or modified
subsequent to May 31, 2003 and to all financial instruments at the beginning of
the first interim period beginning after June 15, 2003. The Company will adopt
the provisions of SFAS 150 as of July 1, 2003. The adoption of this statement is
not expected to have a material impact on the Company's financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees that are
issued or modified after December 31, 2002. The adoption of this statement had
no material effect on the Company's financial statements.
NOTE C - SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION
The following are the supplemental disclosure requirements for the consolidated
statements of cash flows:
8
Six Months Ended
June 30,
----------------------
(In thousands) 2003 2002
--------- ---------
Cash paid (received) during the period for:
Interest $ 18,593 $ 21,568
Income taxes $ (7,472) $ 916
Non-cash financing and investing activities:
Preferred stock dividends declared and accretion $ 2,738 $ 2,557
NOTE D - ACQUISITIONS
During the three months ended June 30, 2003, the Company acquired two orthotic
and prosthetic companies. The Company did not acquire any companies during the
three months ended June 30, 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 earnout agreements relating to the Company's acquisitions,
the Company paid $0.4 million and $3.0 million in the six month periods ended
June 30, 2003 and 2002, respectively. The Company has accounted for these
amounts as additional purchase price, resulting in an increase in excess cost
over net assets acquired. The Company estimates that it may pay an additional
$2.4 million related to earn-out provisions in future periods.
The activity related to goodwill for the six month period ended June 30, 2003 is
as follows (in thousands:
Balance at December 31, 2002 $ 453,988
Additions due to acquisitions 5,119
Additions due to earnouts 426
----------
Balance at June 30, 2003 $ 459,533
==========
NOTE E - NET INCOME 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, and redeemable
convertible preferred stock and are calculated using the treasury stock method.
9
NOTE E - NET INCOME PER COMMON SHARE (CONTINUED)
Income per share is computed as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
(In thousands, except share amounts) 2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income $ 9,353 $ 7,671 $ 14,831 $ 9,193
Less preferred stock dividends
declared and accretion (1,381) (1,291) (2,738) (2,557)
---------- ---------- ---------- ----------
Net income available to common
stockholders used to compute basic
per common share amounts 7,972 6,380 12,093 6,636
Plus preferred stock dividends declared
and accretion (b) 1,381 -- 2,738 --
---------- ---------- ---------- ----------
Net income used to compute diluted per
common share amounts $ 9,353 $ 6,380 $ 14,831 $ 6,636
========== ========== ========== ==========
Shares of common stock outstanding used
to compute basic per common share amounts 20,572,473 19,336,954 20,582,064 19,221,865
Effect of dilutive options 1,503,710 2,452,016 1,453,835 2,252,874
Effect of dilutive warrants -- 224,501 -- 194,441
Effect of dilutive preferred shares 4,768,426 (a) 4,768,426 (a)
---------- ---------- ---------- ----------
Shares used to compute dilutive per
common share amounts 26,844,609 22,013,471 26,804,325 21,669,180
========== ========== ========== ==========
(a) Excludes the effect of the conversion of the 7% Redeemable Convertible Preferred Stock into
common stock as it is considered anti-dilutive.
(b) During the three months ended June 30, 2003 it became more dilutive to net income per common
share to convert the Company's outstanding preferred stock to common stock. Therefore, the
preferred stock dividends declared and accretion were not included in the computation of diluted
per common share data for the three and six month periods ended June 30, 2003.
Options to purchase 1,570,322 and 980,797 shares of common stock were
outstanding at June 30, 2003 and 2002, respectively, and are not included in the
computation of diluted income per share for the three month periods ended June
30, 2003 and 2002, respectively, as these options are anti-dilutive. Options to
purchase 1,382,998 and 1,069,165 shares of common stock were outstanding at June
30, 2003 and 2002, respectively, and are not included in the computation of
diluted income per share for the six month periods ended June 30, 2003 and 2002,
respectively, as these options are anti-dilutive.
10
NOTE F - INVENTORY
Inventories consist of the following:
June 30, December 31,
(In thousands) 2003 2002
-------- ------------
Raw materials $27,890 $26,905
Work in process 19,719 19,719
Finished goods 10,647 9,830
------- -------
$58,256 $56,454
======= =======
NOTE G - LONG TERM DEBT
Long-term debt consists of the following:
June 30, December 31,
(In thousands) 2003 2002
---------- ------------
Revolving credit facility $ 10,000 $ 15,000
10 3/8% Senior Notes due 2009 (1) 210,578 208,398
11 1/4% Senior Subordinated Notes due 2009 150,000 150,000
Subordinated seller notes, non-collateralized,
net of unamortized discount of $0.05 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 January 2009 9,031 9,884
--------- ---------
379,609 383,282
Less current portion (2,715) (5,181)
--------- ---------
Total long-term debt $ 376,894 $ 378,101
========= =========
(1) Includes $10.6 million and $8.4 million adjustments for June 30, 2003 and
December 31, 2002, respectively, related to the interest rate swaps.
As a result of retiring the previously existing credit facility during 2002, the
Company wrote off $4.7 million in unamortized debt issuance costs. These costs
are included in extinguishment of debt for the six month period ended June 30,
2002. As discussed in Note B, under "New Accounting Standards", this amount was
previously reported as an extraordinary item, net of a tax benefit of $1.8
million. The gross amount has been reclassified to a non-operating item and the
tax benefit has been reclassified into the provision for income taxes as a
result of the Company's adoption of SFAS 145.
11
NOTE G - LONG TERM DEBT (CONTINUED)
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 were issued under an indenture, dated as of
February 15, 2002, with Wilmington Trust Company, as trustee. The Company used
the $194.0 million net proceeds from the sale of the Senior Notes, along with
approximately $36.9 million from the Revolving Credit Facility, to retire
approximately $228.4 million of indebtedness outstanding under the Company's
previously existing revolving credit and term loan facilities, plus related fees
and expenses.
During April 2003, the total availability under the Revolving Credit Facility
was increased from $75.0 million to $100.0 million and the administrative agent
was changed from BNP Paribas to GE Capital Corporation. As of June 30, 2003, the
Company had unused availability of $86.7 million under the Revolving Credit
Facility.
NOTE H - COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
In October 2001, the Company entered into a supply agreement with United States
Manufacturing Company ("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
satisfied its obligation to purchase from USMC at least $7.5 million of products
and components during the first year following the date of the agreement.
Accordingly, on November 1, 2002, the escrow agent released $1.0 million in
escrowed funds to the Company for the satisfaction of such first-year purchase
obligations.
In addition, the Company is obligated to purchase from USMC at least $8.5
million and $9.5 million of products and components during the second and third
years following the agreement, respectively, 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. In the opinion of
management, the amount of the 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.
12
NOTE H - 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 (and then President), and Richard A. Stein, the Company's
former Chief Financial Officer, Secretary and Treasurer (the "Class Action
Lawsuit").
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 Class Action Lawsuit has been
dismissed by the District Court for failure to comply with statutory
requirements. On November 5, 2002, plaintiffs filed a notice of appeal to the
United States Court of Appeals for the Fourth Circuit.
The Company believes that the allegations have no merit and is vigorously
defending the Class Action Lawsuit. Additionally, the Company believes that it
is remote that any claims would result from this action and therefore, no
related liabilities have been recorded.
Guarantees and Indemnifications
In the ordinary course of its business, the Company may enter into service
agreements with service providers in which it agrees to indemnify or limit the
service provider against certain losses and liabilities arising from the service
provider's performance of the agreement. The Company does not believe that its
obligation under its existing contracts containing indemnification or clauses of
guarantees will result in any material liability.
NOTE I - SEGMENT AND RELATED INFORMATION
The Company has identified two reportable segments based on the products and
services it provides. The Company evaluates segment performance and allocates
resources based on the segment's EBITDA. EBITDA is defined as net income (loss)
before extraordinary item, interest, taxes, depreciation and amortization and
unusual charges. EBITDA, as used by management to evaluate segment performance,
is not a measure of performance under U.S. GAAP. Other EBITDA not directly
attributable to reportable segments is primarily related to corporate general
and administrative expenses.
13
NOTE I - SEGMENT AND RELATED INFORMATION (CONTINUED)
The two reportable segments are: (i) patient-care centers and (ii) distribution.
The reportable segments are described further below:
Patient-care centers - This segment consists of the Company's owned and operated
orthotic and prosthetic ("O&P") patient-care centers, fabrication centers of O&P
components and OPNET. The patient-care centers provide services to design and
fit O&P 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 centers. 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 centers.
The accounting principles of the segments are the same as those described in the
summary of Note B, "Significant Accounting Principles."
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 distribution segment to the patient-care centers segment and
were made at prices that approximate market values.
Patient-
Care Other and
(In thousands) Centers Distribution Eliminations Total
-------- ------------ ------------ --------
Three Months Ended
June 30, 2003
- ----------------------
Net sales
Customers $130,092 $ 8,844 $ -- $138,936
Intersegment -- 15,882 (15,882) --
EBITDA 31,160 2,456 (5,808) 27,808
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
14
NOTE I - SEGMENT AND RELATED INFORMATION (CONTINUED)
Patient-
Care Other and
(In thousands) Centers Distribution Eliminations Total
-------- ------------ ------------ --------
Six Months Ended
June 30, 2003
- ----------------------
Net sales
Customers $248,202 $ 16,862 $ -- $265,064
Intersegment -- 29,823 (29,823) --
EBITDA 54,395 5,020 (10,935) 48,480
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
The following tables reconcile EBITDA to consolidated net income:
Three Months Ended
June 30,
------------------
(In thousands) 2003 2002
------- -------
EBITDA $27,808 $25,176
Depreciation and amortization 2,620 2,294
Interest expense, net 9,354 9,977
Provision for income taxes 6,481 5,234
------- -------
Net income $ 9,353 $ 7,671
======= =======
Six Months Ended
June 30,
------------------
(In thousands) 2003 2002
------- -------
EBITDA $48,480 $44,372
Depreciation and amortization 5,073 5,078
Interest expense, net 18,450 19,056
Extinguishment of debt -- 4,686
Provision for income taxes 10,126 6,359
------- -------
Net income $14,831 $ 9,193
======= =======
15
NOTE J - CONSOLIDATING FINANCIAL INFORMATION
The Company's Senior Notes and Senior Subordinated Notes 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, 2003 and December 31, 2002,
and for the three and six month periods ended June 30, 2003 and 2002 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.
16
NOTE J - CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Hanger
Orthopedic
BALANCE SHEET - June 30, 2003 Group (Parent Guarantor Consolidating Consolidated
(In thousands) Company) Subsidiaries Adjustments Totals
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
- ------
Cash and cash equivalents $ 666 $ 3,854 $ -- $ 4,520
Accounts receivable -- 111,060 -- 111,060
Inventories -- 58,256 -- 58,256
Prepaid expenses, other assets and income taxes receivable 665 5,582 -- 6,247
Intercompany receivable 500,434 -- (500,434) --
Deferred income taxes 6,767 -- -- 6,767
-------------------------------------------------------------
Total current assets 508,532 178,752 (500,434) 186,850
-------------------------------------------------------------
Property, plant and equipment, net 4,689 34,184 -- 38,873
Intangible assets, net -- 464,916 -- 464,916
Investment in subsidiaries 138,819 -- (138,819) --
Other assets 24,363 1,803 -- 26,166
-------------------------------------------------------------
Total assets $ 676,403 $ 679,655 $(639,253) $ 716,805
=============================================================
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
- ---------------------------------------
Current portion of long-term debt $ -- $ 2,715 $ -- $ 2,715
Accounts payable 473 12,132 -- 12,605
Accrued expenses 3,047 1,746 -- 4,793
Accrued interest payable 7,005 221 -- 7,226
Accrued compensation related cost 2,323 19,232 -- 21,555
Income taxes payable (receivable) 6,921 (3,279) -- 3,642
-------------------------------------------------------------
Total current liabilities 19,769 32,767 -- 52,536
-------------------------------------------------------------
Long-term debt, less current portion 370,578 6,316 -- 376,894
Deferred income taxes 26,698 -- -- 26,698
Intercompany payable -- 500,434 (500,434) --
Other liabilities 280 1,319 -- 1,599
-------------------------------------------------------------
Total long-term liabilities 397,556 508,069 (500,434) 405,191
-------------------------------------------------------------
Total liabilities 417,325 540,836 (500,434) 457,727
-------------------------------------------------------------
Redeemable preferred stock 78,679 -- -- 78,679
-------------------------------------------------------------
Common stock 207 35 (35) 207
Additional paid-in capital 151,037 7,460 (7,460) 151,037
Unearned compensation (115) -- -- (115)
Retained earnings 29,926 131,864 (131,864) 29,926
Treasury stock (656) (540) 540 (656)
-------------------------------------------------------------
Total shareholders' equity 180,399 138,819 (138,819) 180,399
-------------------------------------------------------------
Total liabilities, redeemable preferred stock
and shareholders' equity $ 676,403 $ 679,655 $(639,253) $ 716,805
=============================================================
17
NOTE J - CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Hanger
Orthopedic
BALANCE SHEET - December 31, 2002 Group (Parent Guarantor Consolidating Consolidated
(In thousands) Company) Subsidiaries Adjustments Totals
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
- ------
Cash and cash equivalents $ 570 $ 5,996 $ -- $ 6,566
Accounts receivable -- 107,604 -- 107,604
Inventories -- 56,454 -- 56,454
Prepaid expenses, other assets and income taxes receivable 8,865 6,567 -- 15,432
Intercompany receivable 513,802 -- (513,802) --
Deferred income taxes 6,586 -- -- 6,586
-------------------------------------------------------------
Total current assets 529,823 176,621 (513,802) 192,642
-------------------------------------------------------------
Property, plant and equipment, net 4,633 30,913 -- 35,546
Intangible assets, net -- 459,816 -- 459,816
Investment in subsidiaries 98,258 -- (98,258) --
Other assets 22,465 1,757 -- 24,222
-------------------------------------------------------------
Total assets $ 655,179 $ 669,107 $(612,060) $ 712,226
=============================================================
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
- ---------------------------------------
Current portion of long-term debt $ -- $ 5,181 $ -- $ 5,181
Accounts payable 334 14,542 -- 14,876
Accrued expenses 4,446 1,014 -- 5,460
Accrued interest payable 7,340 167 -- 7,507
Accrued compensation related cost 3,062 29,888 -- 32,950
-------------------------------------------------------------
Total current liabilities 15,182 50,792 -- 65,974
-------------------------------------------------------------
Long-term debt, less current portion 373,398 4,703 -- 378,101
Deferred income taxes 22,965 -- -- 22,965
Intercompany payable -- 513,802 (513,802) --
Other liabilities 26 1,552 -- 1,578
-------------------------------------------------------------
Total long-term liabilities 396,389 520,057 (513,802) 402,644
-------------------------------------------------------------
Total liabilities 411,571 570,849 (513,802) 468,618
-------------------------------------------------------------
Redeemable preferred stock 75,941 -- -- 75,941
-------------------------------------------------------------
Common stock 203 35 (35) 203
Additional paid-in capital 150,287 7,460 (7,460) 150,287
Unearned compensation -- -- -- --
Retained earnings 17,833 91,303 (91,303) 17,833
Treasury stock (656) (540) 540 (656)
-------------------------------------------------------------
Total shareholders' equity 167,667 98,258 (98,258) 167,667
-------------------------------------------------------------
Total liabilities, redeemable preferred stock
and shareholders' equity $ 655,179 $ 669,107 $(612,060) $ 712,226
-------------------------------------------------------------
18
NOTE J - CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Hanger
STATEMENT OF OPERATIONS Orthopedic
Three Months ended June 30, 2003 Group (Parent Guarantor Consolidating Consolidated
(In thousands) Company) Subsidiaries Adjustments Totals
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ -- $ 138,936 $ -- $ 138,936
Cost of goods sold (exclusive of depreciation and amortization) -- 65,416 -- 65,416
-------------------------------------------------------------
Gross profit -- 73,520 -- 73,520
Selling, general and administrative 5,808 39,904 -- 45,712
Depreciation and amortization 365 2,255 -- 2,620
-------------------------------------------------------------
(Loss) income from operations (6,173) 31,361 -- 25,188
Interest expense, net 9,206 148 -- 9,354
Equity in earnings of subsidiaries 31,213 -- (31,213) --
Extinguishment of debt -- -- -- --
-------------------------------------------------------------
Income before taxes 15,834 31,213 (31,213) 15,834
Provision for income taxes 6,481 -- -- 6,481
-------------------------------------------------------------
Net income $ 9,353 $ 31,213 $ (31,213) $ 9,353
=============================================================
STATEMENT OF OPERATIONS
Three Months Ended June 30, 2002
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ -- $ 133,056 -- $ 133,056
Cost of goods sold (exclusive of depreciation and amortization) -- 63,189 -- 63,189
-------------------------------------------------------------
Gross profit -- 69,867 -- 69,867
Selling, general and administrative 4,980 39,711 -- 44,691
Depreciation and amortization 337 1,957 -- 2,294
-------------------------------------------------------------
(Loss) income 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) --
Extinguishment of debt -- -- -- --
-------------------------------------------------------------
Income before taxes 12,905 15,741 (15,741) 12,905
Provision for income taxes 5,234 -- -- 5,234
-------------------------------------------------------------
Net income $ 7,671 $ 15,741 $ (15,741) $ 7,671
=============================================================
19
NOTE J - CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Hanger
STATEMENT OF OPERATIONS Orthopedic
Six Months Ended June 30, 2003 Group (Parent Guarantor Consolidating Consolidated
(In thousands) Company) Subsidiaries Adjustments Totals
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ -- $ 265,064 $ -- $ 265,064
Cost of goods sold (exclusive of depreciation and amortization) -- 126,106 -- 126,106
-------------------------------------------------------------
Gross profit -- 138,958 -- 138,958
Selling, general and administrative 10,936 79,542 -- 90,478
Depreciation and amortization 722 4,351 -- 5,073
-------------------------------------------------------------
(Loss) income from operations (11,658) 55,065 -- 43,407
Interest expense, net 18,158 292 -- 18,450
Equity in earnings of subsidiaries 54,773 -- (54,773) --
Extinguishment of debt -- -- -- --
-------------------------------------------------------------
Income before taxes 24,957 54,773 (54,773) 24,957
Provision for income taxes 10,126 -- -- 10,126
-------------------------------------------------------------
Net income $ 14,831 $ 54,773 $ (54,773) $ 14,831
=============================================================
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2002
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ -- $ 256,566 $ -- $ 256,566
Cost of goods sold (exclusive of depreciation and amortization) -- 122,726 -- 122,726
-------------------------------------------------------------
Gross profit -- 133,840 -- 133,840
Selling, general and administrative 9,533 79,935 -- 89,468
Depreciation and amortization 672 4,406 -- 5,078
-------------------------------------------------------------
(Loss) income from operations (10,205) 49,499 -- 39,294
Interest expense, net (5,877) 24,933 -- 19,056
Equity in earnings of subsidiaries 24,566 -- (24,566) --
Extinguishment of debt 4,686 -- -- 4,686
-------------------------------------------------------------
Income before taxes 15,552 24,566 (24,566) 15,552
Provision for income taxes 6,359 -- -- 6,359
-------------------------------------------------------------
Net income $ 9,193 $ 24,566 $ (24,566) $ 9,193
=============================================================
20
NOTE J - CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Hanger
STATEMENTS OF CASH FLOWS Orthopedic
Six Months Ended June 30, 2003 Group (Parent Guarantor Consolidating Consolidated
(In thousands) Company) Subsidiaries Adjustments Totals
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows (used in) provided by operating activities $ 46,848 $ 26,292 $ (54,773) $ 18,367
-----------------------------------------------------------------
Cash flows provided by (used in) investing activities
Purchase of property, plant and equipment (779) (7,387) -- (8,166)
Acquisitions and earnouts -- (3,780) -- (3,780)
Investment in subsidiaries (54,773) -- 54,773 --
Intercompany dividend 14,212 (14,212) -- --
Proceeds from sale of certain assets 4 354 -- 358
-----------------------------------------------------------------
Net cash provided by (used in) investing activities (41,336) (25,025) 54,773 (11,588)
-----------------------------------------------------------------
Cash flows used in financing activities
Borrowings under revolving credit agreement 18,000 -- -- 18,000
Repayments under revolving credit agreement (23,000) -- -- (23,000)
Proceeds from sale of Senior Notes -- -- -- --
Repayment and termination of bank loans -- -- -- --
Scheduled repayment of long-term debt -- (3,410) -- (3,410)
Increase in financing costs (1,054) -- -- (1,054)
Proceeds from issuance of Common Stock 639 -- -- 639
-----------------------------------------------------------------
Net cash used in financing activities (5,415) (3,410) -- (8,825)
-----------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 97 (2,143) -- (2,046)
Cash and cash equivalents, beginning of period 570 5,996 -- 6,566
-----------------------------------------------------------------
Cash and cash equivalents, end of period $ 667 $ 3,853 $ -- $ 4,520
=================================================================
STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2002
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows provided by operating activities $ 31,451 $ 9,111 $ (24,566) $ 15,996
-----------------------------------------------------------------
Cash flows used in investing activities
Purchase of property, plant and equipment (280) (3,656) -- (3,936)
Acquisitions and earnouts -- (2,952) -- (2,952)
Investment in subsidiaries (24,566) -- 24,566 --
Intercompany dividend -- -- -- --
Proceeds from sale of certain assets -- 1,492 -- 1,492
-----------------------------------------------------------------
Net cash used in investing activities (24,846) (5,116) 24,566 (5,396)
-----------------------------------------------------------------
Cash flows provided by (used in) financing activities
Borrowings under revolving credit agreement 43,975 -- -- 43,975
Repayments under revolving credit agreement (82,775) -- -- (82,775)
Proceeds from sale of Senior Notes 200,000 -- -- 200,000
Repayment and termination of bank loans (153,587) -- -- (153,587)
Scheduled repayment of long-term debt -- (5,619) -- (5,619)
Increase in financing costs (9,487) -- -- (9,487)
Proceeds from issuance of Common Stock 2,051 -- -- 2,051
-----------------------------------------------------------------
Net cash 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
=================================================================
21
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 Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 47.1 47.5 47.6 47.8
Gross profit 52.9 52.5 52.4 52.2
Selling, general and administrative 32.9 33.6 34.1 34.9
Depreciation and amortization 1.9 1.7 1.9 2.0
Income from operations 18.1 17.2 16.4 15.3
Interest expense, net 6.7 7.5 7.0 7.4
Extinguishment of debt - - - 1.8
Income before taxes 11.4 9.7 9.4 6.1
Provision for income taxes 4.7 3.9 3.8 2.5
Net income 6.7 5.8 5.6 3.6
Three Months Ended June 30, 2003 Compared to the Three Months Ended June 30,
2002
Net Sales. Net sales for the quarter ended June 30, 2003 were $138.9 million, an
increase of $5.8 million, or 4.4%, versus net sales of $133.1 million for the
quarter ended June 30, 2002. The sales growth was primarily the result of a $2.3
million, or 1.9%, increase in same center sales in the Company's O&P
patient-care centers and a $1.9 million, or 27.6%, increase in outside sales of
the distribution segment.
Gross Profit. Gross profit for the quarter ended June 30, 2003 was $73.5
million, an increase of approximately $3.6 million, or 5.2%, versus $69.9
million for the quarter ended June 30, 2002. Gross profit as a percentage of net
sales for the second quarter of 2003 increased slightly to 52.9% from 52.5% for
the second quarter of 2002. The improvement in gross profit, in both dollars and
as a percentage of net sales, was due to the increase in net sales and a
reduction in labor costs.
Selling, General and Administrative. Selling, general and administrative
expenses in the quarter ended June 30, 2003 remained relatively constant
compared to the same quarter in 2002. However, due to the increased net sales,
these expenses as a percentage of net sales dropped by 0.7 percentage points.
22
Depreciation and Amortization. Depreciation and amortization for the three
months ended June 30, 2003 was $2.6 million versus $2.3 million for the three
months ended June 30, 2002.
Income from Operations. Principally as a result of the above, income from
operations for the quarter ended June 30, 2003 was $25.2 million, an increase of
$2.3 million, or 10.1%, compared to the quarter ended June 30, 2002. Income from
operations, as a percentage of net sales, increased by 0.9 percentage points to
18.1% of net sales in the second quarter of 2003 versus 17.2% for the prior
year's comparable period.
Interest Expense, Net. Interest expense in the second quarter of 2003 decreased
compared to the same quarter in 2002 due to decreased borrowings and a reduction
in LIBOR.
Income Taxes. The provision for income taxes for the three months ended June 30,
2003 was $6.5 million compared to $5.2 million for the three months June 30,
2002. The change in the income tax provision was due to the Company's increased
profitability. The effective rate for the three months ended June 30, 2003 and
2002 was 40.9% and 40.6%, respectively.
Net Income. As a result of the above, we recorded net income of $9.4 million for
the three months ended June 30, 2003, an improvement of $1.7 million, or 21.9%,
over the three months ended June 30, 2002.
Six Months Ended June 30, 2003 Compared to the Six Months Ended June 30, 2002
Net Sales. Net sales for the six months ended June 30, 2003, were $265.1
million, an increase of $8.5 million, or 3.3%, versus net sales of $256.6
million for the six months ended June 30, 2002. The sales growth was primarily
the result of a $2.6 million, or 1.1%, increase in same center sales in the
Company's O&P patient-care centers and a $3.4 million, or 24.9%, increase in
outside sales of the distribution segment.
Gross Profit. Gross profit in the six months ended June 30, 2003 was $139.0
million, an increase of $5.2 million, or 3.9%, versus $133.8 million for the six
months ended June 30, 2002. Gross profit as a percentage of net sales increased
to 52.4% in the first six months of 2003 versus 52.2% in the first six months of
2002. The improvement in gross profit, in both dollars and as a percentage of
net sales, was due to a reduction in material and labor 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, 2003 increased by $1.0 million, or
1.1%, compared to the six months ended June 30, 2002. Selling, general and
administrative expenses as a percentage of net sales decreased to 34.1% in the
first six months of 2003 compared to 34.9% for the same period in 2002. The
decrease in selling, general and administrative expenses, in both dollars and as
a percentage of net sales, was primarily due to a decrease in labor costs and
legal fees.
Depreciation and Amortization. Depreciation and amortization for the six months
ended June 30, 2003 was consistent with the six months ended June 30, 2002 at
$5.1 million.
23
Income from Operations. Principally as a result of the above, income from
operations for the six months ended June 30, 2003 was $43.4 million, an increase
of $4.1 million, or 10.4%, compared to $39.3 million for the six months ended
June 30, 2002. Income from operations as a percentage of net sales increased by
1.1 percentage points to 16.4% of net sales in the first six months of 2003
versus 15.3% for the prior year's comparable period.
Interest Expense, Net. Interest expense in the first six months of 2003 was
$18.5 million, a decrease of $0.6 million from the $19.1 million incurred in the
first six months of 2002. The decrease in dollars of interest expense was
primarily attributable to a decrease in average borrowings and a reduction in
LIBOR.
Extinguishment of Debt. Extinguishment of debt was $4.7 million (unamortized
debt issuance costs) in the six months ended June 30, 2002 as a result of
retiring the previously existing credit facility.
Income Taxes. The provision for income taxes for the six months ended June 30,
2003 was $10.1 million compared to that of $6.4 million for the six months ended
June 30, 2002. The change in the income tax provision was due to the increase in
the Company's income before taxes. The effective rate for the six months ended
June 30, 2003 and 2002 was 40.6% and 40.9%, respectively.
Net Income. As a result of the above, we recorded net income of $14.8 million
for the six months ended June 30, 2003, compared to net income of $9.2 million
in the comparable period in the prior year, an improvement of $5.6 million, or
60.9%.
24
Financial Condition, Liquidity, and Capital Resources
Our working capital at June 30, 2003 was $134.3 million compared to $126.7
million at December 31, 2002. While current assets decreased by $5.8 million,
current liabilities decreased by a larger amount, $13.4 million. The decline in
current liabilities was due principally to decreased obligations related to
accrued compensation costs. Our cash and cash equivalents amounted to $4.5
million at June 30, 2003, and $6.6 million at December 31, 2002. The ratio of
current assets to current liabilities increased to 3.6 to 1 at June 30, 2003,
compared to 2.9 to 1 at December 31, 2002. Available cash under our Revolving
Credit Facility increased to $86.7 million at June 30, 2003 compared to $60.0
million at December 31, 2002 due to the modification of the credit facility in
the second quarter of 2003 and a $5 million reduction in outstanding debt.
Net cash provided by operating activities for the six months ended June 30, 2003
was $18.4 million, compared to net cash provided by operating activities of
$16.0 million in the six months ended June 30, 2002. The increase was primarily
due to an increase in net income.
Net cash used in investing activities was $11.6 million for the six months ended
June 30, 2003, versus $5.4 million for the same period in the prior year. The
increase in net cash used was primarily due to capitalization of internal use
software and continuing leasehold improvements.
Net cash used in financing activities was $8.8 million for the six months ended
June 30, 2003 compared to $5.4 million for the six months ended June 30, 2003.
The increase in cash used in financing activities was primarily due to the
payments on the revolving credit facility.
On February 15, 2002, we received $200.0 million in proceeds from the sale of
10 3/8% Senior Notes due 2009 ("Senior Notes") in a private placement exempt
from registration under the Securities Act of 1933, as amended. The Senior Notes
were issued under an indenture, dated as of February 15, 2002, with Wilmington
Trust Company, as trustee. We also closed, concurrent with the sale of Senior
Notes, a new $75.0 million senior secured revolving line of credit ("Revolving
Credit Facility"). The proceeds from the sale of Senior Notes and the Revolving
Credit Facility 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 prior 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.
During April 2003, the total availability under the Revolving Credit Facility
was increased from $75.0 million to $100.0 million and the administrative agent
was changed from BNP Paribas to GE Capital Corporation. At June 30, 2003, the
Company had unused availability of $86.7 million under the Revolving Credit
Facility.
25
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.
New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB
Statements 4, 44, and 64, Amendment of FASB Statement 13, and Technical
Corrections ("SFAS 145"). Under SFAS 145, gains and losses from the early
extinguishment of debt are no longer classified as extraordinary items, unless
they satisfy the criteria in Accounting Principles Board Opinion ("APB") No. 30,
Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions ("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 has been reclassified. In
addition, under SFAS 145, certain lease modifications that have economic effects
similar to sale-leaseback transactions are to be accounted for in the same
manner as sale-leaseback transactions. SFAS 145 was effective for fiscal years
beginning after May 15, 2002. SFAS 145 was adopted by us on January 1, 2003 and
resulted in a reclassification of existing extraordinary losses on the early
extinguishment of debt from an extraordinary item to a non-operating item.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS 146"). Under SFAS 146, costs associated with
exit or disposal activities are to be recognized when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Such costs 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. SFAS 146 has not had a material
effect on our financial statements.
26
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS 150").
SFAS 150 identifies three classes of financial instruments that require
reclassification from equity to liabilities and their measurement at fair value.
SFAS 150 is applicable to financial instruments entered into or modified
subsequent to May 31, 2003 and to all financial instruments at the beginning of
the first interim period beginning after June 15, 2003. We will adopt the
provisions of SFAS 150 as of July 1, 2003. The adoption of this statement is not
expected to have a material impact on our financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires that, upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees that are
issued or modified after December 31, 2002. The adoption had no material impact
on our financial statements.
Critical Accounting Estimates
Our analysis and discussion of our financial condition and results of operations
are based upon our Consolidated Financial Statements that have been prepared in
accordance with accounting principles generally accepted 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. We
have chosen accounting policies within U.S. GAAP that management believes are
appropriate to accurately and fairly report our operating results and financial
position in a consistent manner. Management regularly assesses these policies in
light of current and forecasted economic conditions. Our accounting principles
are stated in Note B to the Consolidated Financial Statements as presented
elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the year
ended December 31, 2002. We believe the following accounting policies are
critical to understanding the results of operations and affect the more
significant judgments and estimates used in the preparation of the consolidated
financial statements.
27
o Revenue Recognition: Revenues on the sale of orthotic and prosthetic
devices and associated services to patients are recorded when the device is
accepted by the patient. Revenues on the sale of orthotic and prosthetic
devices to customers by our distribution segment are recorded upon the
shipment of products, in accordance with the terms of the invoice. Revenue
is recorded at its net realizable value taking into consideration all
governmental and contractual adjustments and discounts. Deferred revenue
represents both deposits made prior to the final fitting and acceptance by
the patient and unearned service contract revenue. Subsequent to billing
for our devices and services, disallowed sales may result if there are
problems with pre-authorization or with other insurance coverage issues
with third party payers. If these problems occur, they are recognized as
reductions in sales. Other revenue may be uncollectible, even if properly
pre-authorized and billed. In the cases when valid revenue cannot be
collected, a bad debt expense is recognized. In addition to the actual bad
debt expense encountered during collection activities, we estimate the
amount of potential bad debt expense that may occur in the future as we
collect our receivables. This estimate is based upon our historical
experience as well as a detailed review of our receivable balances.
o 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 at its Patient-Care Centers segment, we
calculate cost of goods sold in accordance with the gross profit method. We
base 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. In 2002, virtually no adjustment was required
in the fourth quarter as we were more accurately estimating our cost of
goods sold throughout the year. Management adjusts our reserve for
inventory obsolescence whenever the facts and circumstances indicate that
the carrying cost of certain inventory items is in excess of its market
price. At its Distribution segment, a perpetual inventory is maintained.
o Intangible Assets: Excess cost over net assets acquired ("Goodwill")
represents the excess of purchase price over the value assigned to net
identifiable assets of purchased businesses. We assess Goodwill for
impairment when events or circumstances indicate that the carrying value
may not be recoverable, or, at a minimum, annually. Any impairment would be
recognized by a charge to operating results and a reduction in the carrying
value of the intangible asset. We completed the annual impairment test as
of October 1, 2002, which did not result in the impairment of Goodwill.
This assessment included assumptions regarding estimated future cash flows,
discount rates and other factors.
28
Non-compete agreements are recorded based on the terms of the agreements we
have entered into and are amortized over their terms ranging from 5 to 7
years using the straight-line method. Other definite-lived intangible
assets are recorded at cost and are amortized over their estimated useful
lives of up to 16 years using the straight-line method. Whenever the facts
and circumstances indicate that the carrying amounts of these intangibles
may not be recoverable, management reviews and assesses the future cash
flows expected to be generated from the related intangible for possible
impairment. Any impairment would be recognized as a charge to operating
results and a reduction in the carrying value of the intangible asset.
o Deferred Tax Assets (Liabilities): We account for certain income and
expense items differently for financial accounting purposes than for income
tax purposes. Deferred income taxes are provided in recognition of these
temporary differences. We recognize deferred tax assets, if it is more
likely than not the assets will be realized in future years.
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 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 (and then President), and Richard A. Stein, the Company's
former Chief Financial Officer, Secretary and Treasurer (the "Class Action
Lawsuit").
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 Class Action Lawsuit has been dismissed by the District Court for failure to
comply with statutory requirements. On November 5, 2002, plaintiffs filed a
notice of appeal to the United States Court of Appeals for the Fourth Circuit.
The Company believes that the allegations have no merit and is vigorously
defending the Class Action Lawsuit. Additionally, the Company believes that it
is remote that any claims would result from this action and therefore, no
related liabilities have been recorded.
29
Other
Inflation has not had a significant effect on our operations, as increased costs
generally have been offset by increased prices of products and services sold. We
primarily provide customized devices and services throughout the United States
and are reimbursed, in a large part, by the patients' third-party insurers or
governmentally-funded health insurance programs. The ability of our debtors to
meet their obligations is principally dependent upon the financial stability of
the insurers of our patients and future legislation and regulatory actions.
Forward Looking Statements
This report contains forward-looking statements setting forth our beliefs or
expectations relating to future revenues. Actual results may differ materially
from projected or expected results due to changes in the demand for our O&P
products and services, uncertainties relating to the results of operations or
recently acquired O&P patient-care centers, our ability to successfully 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 generally affecting the health-care industry. Readers are
cautioned not to put undue reliance on forward-looking statements. We disclaim
any intent or obligation to publicly update these forward-looking statements,
whether as a result of new information, future events or otherwise.
30
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk
We have existing obligations relating to our Senior Notes, Senior Subordinated
Notes, subordinated seller notes, and outstanding 7% Redeemable Convertible
Preferred Stock. We do not have cash flow exposure to changing interest rates on
these obligations because the interest and dividend rates of these securities
are fixed. However, as discussed below, we entered into two fixed-to-floating
interest rate swaps, in connection with the sale of our Senior Notes, whereby
the aggregate notional amount of the swaps equaled one-half of the principal
amount of the Senior Notes.
We have a $100 million Revolving Credit Facility, with an outstanding balance of
$10 million at June 30, 2003, as discussed in Note G to Hanger's Consolidated
Financial Statements ("Note G"). The rates at which interest accrues under the
entire outstanding balance are variable.
In addition, 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. In March 2002, we entered into two fixed-to-floating interest rate swaps
with an aggregate notional amount of $100 million in connection with the sale of
our Senior Notes, as discussed in Note G. Variable rate debt and
fixed-to-floating interest rate swaps subject us to cash flow exposure resulting
from changing interest rates, as illustrated in the table below.
Presented below is an analysis as of June 30, 2003 of our financial instruments
that are sensitive to changes in interest rates. The table demonstrates the
change in cash flow related to the Senior Notes, as affected by the related
fixed-to-floating interest rate swaps, and the outstanding balance under the
Revolving Credit Facility, calculated for an instantaneous parallel shift in
interest rates, plus or minus 50 basis points ("BPS"), 100 BPS, and 150 BPS.
Annual Interest No
Expense Given Change in Annual Interest Expense
an Interest Rate Decrease Interest Given an Interest Rate
Cash Flow Risk of X Basis Points Rates Increase of X Basis Points
-------------------------------- ---------- -------------------------------
(In thousands) (150 BPS) (100 BPS) (50 BPS) Fair Value 50 BPS 100 BPS 150 BPS
--------- --------- -------- ---------- -------- -------- ---------
Senior Notes (as affected by
related interest-rate swaps) $ 14,983 $ 15,483 $ 15,983 $ 16,483 $ 16,983 $ 17,483 $ 17,983
Revolving Credit Facility 265 315 365 415 465 515 565
-------------------------------------------------------------------------------
$ 15,248 $ 15,798 $ 16,348 $ 16,898 $ 17,448 $ 17,998 $ 18,548
===============================================================================
31
ITEM 4: Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are effective as of June 30, 2003. There has
been no change in our internal control over financial reporting during the
quarter ended June 30, 2003 that has materially affected or is reasonably likely
to materially affect our internal control over financial reporting.
32
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, 2003.
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. (12,721,653 shares for and 1,763,138 shares withheld),
Edmond E. Charrette, M.D. (12,957,647 shares for and 1,527,144 shares withheld),
Thomas P. Cooper, M.D. (8,988,271 shares for and 5,496,520 shares withheld),
Eric Green (13,332,053 shares for and 1,152,738 shares withheld), C. Raymond
Larkin, Jr. (8,987,171 shares for and 5,497,620 shares withheld), Risa J.
Lavizzo-Mourey, M.D. (9,052,951 shares for and 5,431,840 shares withheld), Ivan
R. Sabel (13,110,013 shares for and 1,374,778 shares withheld), Thomas F. Kirk
(13,333,473 shares for and 1,151,318 shares withheld), and H.E. Thranhardt
(13,333,473 shares for and 1,151,318 shares withheld).
The second proposal was the proposed approval of the Company's 2003 Non-Employee
Directors' Stock Incentive Plan and authorization of 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 7,882,524 shares
of Common Stock for (representing approximately 54.42% of the shares voting),
6,118,981 shares of Common Stock against, with 483,289 shares of Common Stock
abstaining.
The third proposal was a proposed amendment to the Company's 2002 Stock Option
Plan to provide for the grant of restricted stock awards under that Plan and to
rename the Plan to be the 2002 Stock Incentive 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 12,068,596 shares
of Common Stock for (representing approximately 83.32% of the shares voting),
2,353,283 shares of Common Stock against, with 62,912 shares of Common Stock
abstaining.
33
ITEM 5: Other Information
Corporate Governance Matters
Set forth below is disclosure relating to certain corporate governance
matters:
1. Size of Board. Section 2 of Article III of the Company's By-Laws
provides for there to be no more than nine members of the Company's Board of
Directors. It currently is the Board's policy to retain its size at nine
members. Section 13 of Article III of the By-Laws provides that any vacancy on
the Board, other than an increase by more than two members, may be filled by the
majority vote of the remaining members of the Board. Any vacancy, including one
created as an increase in the number of directors, may be filled by stockholders
at a meeting called for such purpose.
2. Approval of Mergers. There are no supermajority vote requirements to
approve mergers or business combinations.
3. Procedures for By-Law Amendments. The Company's By-Laws include
provisions setting forth procedures for amendments to the By-Laws. Section 1 of
Article VIII of the By-Laws provides that the Board of Directors by a majority
vote has the power to amend By-Laws at any regular or special meeting of the
Board. However, under the Delaware General Corporation Law, any amendment to the
By-Laws must be approved by the holders of a majority of the shares of the
Company's common stock present in person or represented by proxy and entitled to
vote on the matter. Section 2 of Article VIII provides that stockholders may
amend the By-Laws by a vote of a majority of the total number of outstanding
shares entitled to vote at any annual or special meeting, and that stockholders
may provide that certain By-Laws adopted or designated by them may not be
amended except by a certain specified percentage and interest of the
stockholders or by a certain specified percentage and interest of a particular
class of stockholders.
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
----------- --------
31.1 Written Statement of the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Written Statement of the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 Written Statement of the Chief Executive Officer and
Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Forms 8-K. Current Report on Form 8-K dated August 1, 2003
furnishing the press release reporting the results of the first
quarter of 2003.
34
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 12, 2003 /s/ Ivan R. Sabel
---------------------------------------
Ivan R. Sabel, CPO
Chairman and Chief Executive Officer
(Principal Executive Officer)
Dated: August 12, 2003 /s/ George E. McHenry
---------------------------------------
George E. McHenry
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Dated: August 12, 2003 /s/ Glenn M. Lohrmann
---------------------------------------
Glenn M. Lohrmann
Vice President, Secretary and Controller
(Chief Accounting Officer)
EXHIBIT INDEX
Exhibit No. Document
----------- --------
31.1 Written Statement of the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Written Statement of the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 Written Statement of the Chief Executive Officer and
Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
36