SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
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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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7700 Old Georgetown Road, Bethesda, MD 20814
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(Address of principal executive offices) (Zip Code)
Registrant's phone number, including area code:
(301) 986-0701
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of August 14,
1998; 18,178,751 shares of common stock, $.01 par value per share.
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30,1998
(unaudited) and December 31, 1997 1
Consolidated Statements of Income for the three
months ended June 30, 1998 and 1997 (unaudited) 3
Consolidated Statements of Income for the six
months ended June 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securityholders 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,714,387 $ 6,557,409
Accounts receivable less allowances for
doubtful accounts of $7,042,000 and $4,871,000
in 1998 and 1997, respectively 32,886,968 31,145,327
Inventories 17,452,392 17,445,476
Prepaid expenses and other assets 4,938,267 4,260,656
Deferred income taxes 2,127,185 2,127,185
-------------- --------------
Total current assets 66,119,199 61,536,053
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT
Land 4,267,045 4,269,045
Buildings 8,362,169 8,326,732
Machinery and equipment 8,805,583 7,591,821
Furniture and fixtures 2,624,247 2,378,808
Leasehold improvements 3,721,554 3,142,244
-------------- --------------
27,780,598 25,708,650
Less accumulated depreciation and amortization 8,793,253 7,538,385
-------------- --------------
18,987,345 18,170,265
-------------- --------------
INTANGIBLE ASSETS
Excess of cost over net assets acquired 97,247,788 81,150,328
Non-compete agreements 2,406,179 2,236,979
Other intangible assets 3,229,802 3,221,912
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102,883,769 86,609,219
Less accumulated amortization 10,454,903 9,101,531
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92,428,866 77,507,688
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OTHER ASSETS
Other 875,064 768,604
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TOTAL ASSETS $ 178,410,474 $ 157,982,610
============== ==============
</TABLE>
The accompany notes are an integral part of the consolidated financial
statements.
1
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------------------------------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 10,037,166 $ 5,747,865
Accounts payable 5,386,257 3,827,338
Accrued expenses 4,584,065 3,597,104
Customer deposits 1,143,249 1,145,001
Accrued wages and payroll taxes 7,901,961 8,037,805
Deferred revenue 154,966 150,418
-------------- --------------
Total current liabilities 29,207,664 22,505,531
-------------- --------------
Long-term debt 30,488,681 23,237,321
Deferred income taxes 3,405,833 3,405,833
Other liabilities 2,246,992 2,210,445
Mandatorily redeemable preferred stock, class C,
liquidation preference of $500 per share 317,682 303,753
Mandatorily redeemable preferred stock, class F,
liquidation preference of $500 per share
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 25,000,000 shares
authorized, 15,883,939 and 15,670,100 shares
issued, and 15,750,444 and 15,536,605 shares
outstanding in 1998 and 1997 158,840 156,702
Additional paid-in capital 103,693,964 102,585,837
Retained earnings 9,546,380 4,232,750
-------------- --------------
113,399,184 106,975,289
Treasury stock - (133,495 shares) (655,562) (655,562)
-------------- --------------
112,743,622 106,319,727
-------------- --------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 178,410,474 $ 157,982,610
============== ==============
</TABLE>
The accompany notes are an integral part of the consolidated financial
statements.
2
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED June 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Net Sales $ 46,899,890 $ 36,644,645
Cost of products and services sold 23,261,042 18,322,122
-------------- --------------
Gross profit 23,638,848 18,322,523
Selling, general & administrative 15,454,449 12,039,572
Depreciation and amortization 776,760 744,959
Amortization of excess cost over net assets acquired 576,426 451,320
-------------- --------------
Income from operations 6,831,213 5,086,672
Other expense:
Interest expense, net (699,008) (1,849,502)
Other (43,236)
-------------- --------------
Income before income taxes 6,132,204 3,193,934
Provision for income taxes 2,514,000 1,342,000
-------------- --------------
Net income $ 3,618,204 $ 1,851,934
============== ==============
BASIC PER COMMON SHARE DATA
Net income $ .23 $ .20
============== ==============
Shares used to compute basic per common
share amounts 15,704,378 9,420,120
============== ==============
DILUTED PER COMMON SHARE DATA
Net income $ .21 $ .18
============== ==============
Shares used to compute diluted per common share
amounts 17,442,608 10,538,768
============== ==============
</TABLE>
The accompany notes are an integral part of the consolidated financial
statements.
3
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED June 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Net Sales $ 87,649,908 $ 67,594,259
Cost of products and services sold 44,564,173 34,552,051
-------------- --------------
Gross profit 43,085,735 33,042,208
Selling, general & administrative 30,183,450 22,964,207
Depreciation and amortization 1,485,782 1,494,264
Amortization of excess cost over net assets acquired 1,127,387 860,832
-------------- --------------
Income from operations 10,289,116 7,722,905
Other income expense:
Interest expense, net (1,313,830) (3,376,771)
Other income (expense) 30,345 (86,985)
-------------- --------------
Income before income taxes 9,005,631 4,259,149
Provision for income taxes 3,692,000 1,789,300
-------------- --------------
Net income $ 5,313,630 $ 2,469,849
============== ==============
BASIC PER COMMON SHARE DATA
Net income $ .34 $ .26
============== ==============
Shares used to compute basic per common
share amounts 15,640,558 9,389,495
============== ==============
DILUTED PER COMMON SHARE DATA
Net income $ .31 $ .24
============== ==============
Shares used to compute diluted per common
share amounts 17,274,607 10,268,810
============== ==============
</TABLE>
The accompany notes are an integral part of the consolidated financial
statements.
4
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED June 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,313,631 $ 2,469,849
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for bad debt 3,351,935 2,337,603
Depreciation and amortization 1,485,782 1,494,264
Amortization of excess cost over net
assets acquired 1,127,387 860,832
Amortization of debt discount 127,406
Changes in assets and liabilities, net
of effect from acquired companies:
Accounts receivable (3,236,946) (4,882,718)
Inventory 533,997 208,278
Prepaid and other assets (483,423) (653,807)
Other assets (82,582) (86,878)
Accounts payable 730,800 (1,107,765)
Accrued expenses 816,325 (208,553)
Accrued wages and payroll taxes (653,107) (3,062,226)
Customer deposits (1,528) 351,234
Deferred revenue (193,342) (22,711)
Other liabilities 36,547 126,693
-------------- --------------
Total adjustments 3,431,845 (4,518,348)
-------------- --------------
Net cash provided by (used in) operating activities 8,745,476 (2,048,499)
-------------- --------------
Cash flows from investing activities:
Purchase of fixed assets, net (1,452,263) (1,115,007)
Acquisitions, net of cash (13,153,307) (8,446,189)
Purchase of patents (8,222) (73,242)
Purchase of non-compete agreements (169,200) (138,150)
-------------- --------------
Net cash used in investing activities (14,782,992) (9,772,588)
-------------- --------------
Continued
</TABLE>
The accompany notes are an integral part of the consolidated financial
statements.
5
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED June 30,
(unaudited)
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from financing activities:
Net borrowings under revolving credit facility $ 3,500,000 $ 5,500,000
Proceeds from exercise of stock options and warrants 1,124,194 431,637
Proceeds from long-term debt 6,000,000 8,256,000
Repayment of long-term debt (2,429,700) (3,194,391)
-------------- --------------
Net cash provided by financing activities 8,194,494 10,993,246
-------------- --------------
Net change in cash and cash equivalents for the period 2,156,978 (827,841)
Cash and cash equivalents at beginning of period 6,557,409 6,572,402
-------------- --------------
Cash and cash equivalents at end of period $ 8,714,387 $ 5,744,561
============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,144,175 $ 3,156,241
============== ==============
Taxes $ 3,896,000 $ 1,328,000
============== ==============
Non-cash financing and investing activities:
Issuance of common stock in connection with
acquisition $ 500,000
==============
Issuance of notes in connection with acquisitions $ 4,420,957 $ 2,864,200
============== ==============
Dividends declared preferred stock $ 13,929 $ 12,735
============== ==============
</TABLE>
The accompany notes are an integral part of the consolidated financial
statements.
6
<PAGE>
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with Rule 10-01 of Regulation S-X. They do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments,
consisting of a normal recurring nature, considered necessary for a fair
presentation have been included.
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, 1997, filed by the Company with the Securities and Exchange
Commission.
NOTE B - NEW ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards (SFAS)
128, "Earnings per Share," effective January 1, 1997. As a result, earnings
per share for the six and three months ended June 30, 1997 have been restated
to conform to the provisions of this statement.
Effective January 1, 1998 the Company adopted the provisions of SFAS
130, "Reporting Comprehensive Income." SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in the
financial statements. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The adoption of SFAS
130 had no effect on the Company's consolidated financial statements.
The Company will adopt the provisions of SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information" effective with the
financial statements for the year ended December 31, 1998. SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Financial statement disclosures for
prior periods are required to be restated. The Company is in the process of
evaluating the disclosure requirements. The adoption of SFAS 131 affects
disclosure only and will not affect reported earnings, cash flows or financial
position.
In June 1998, the Financial Accounting Standard Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which is
effective for the fiscal years beginning after June 15, 1999. SFAS 133
requires that an entity recognize all derivative instruments as either assets
or liabilities on its balance sheet at their fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part
7
<PAGE>
of a hedge transaction, and, if it is, the type of hedge transaction. The
Company will adopt SFAS 133 by the first quarter of 2000. Due to the Company's
limited use of derivative instruments, SFAS 133 is not expected to have a
material effect on the financial position or results of operations of the
Company.
NOTE C -- INVENTORY
Inventories at June 30, 1998 and December 31, 1997 were comprised of the
following:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
-------------- --------------
(unaudited)
<S> <C> <C>
Raw materials $ 7,989,866 $ 7,685,134
Work-in-process 1,467,133 1,437,946
Finished goods 7,995,393 8,322,396
-------------- --------------
$ 17,452,392 $ 17,445,476
============== ==============
</TABLE>
NOTE D - ACQUISITIONS
During the first six months of 1998, the Company acquired eight orthotic
and prosthetic companies. The aggregate purchase price, excluding potential
earn-out provisions, was $16,868,000, comprised of $12,447,000 in cash and
$4,421,000 in promissory notes. The notes are payable over three to five years
with interest rates ranging from 6% to 7%. The cash portion of the purchase
price for these acquisitions was borrowed under the Company's revolving and
acquisition loan commitments. The excess cost of the above acquisitions over
the recorded amount of net assets acquired amounted to approximately
$14,967,000.
During the first six months of 1998, the Company paid approximately
$579,000 to the former owners of ACOR Orthopaedic, Inc. - Retail Division,
pursuant to earnout provisions contained in the 1997 acquisition agreement. In
addition, the Company paid approximately $297,000 to the former owners of Fort
Walton Orthopedic Inc. and Mobile Limb and Brace, Inc., pursuant to working
capital provisions contained in the 1997 acquisition agreement. The Company
has accounted for these additional payments as additional purchase price
resulting in an increase to excess of cost over net assets acquired in the
amount of $876,000.
8
<PAGE>
NOTE E - NET INCOME PER COMMON SHARE
The following sets forth the calculation of the basic and diluted
income per common share amounts for the three month period ended June 30, 1998
and 1997 and the six month period ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net income $ 3,618,205 $ 1,851,934 $ 5,313,630 $ 2,469,849
Less preferred stock dividends declared (7,095) (6,440) (13,929) (12,735)
------------- ------------- ------------- ------------
Income available to common stockholders
used to compute basic per common
share amounts $ 3,611,110 $ 1,845,494 $ 5,299,701 $ 2,457,114
============= ============= ============= ============
Add back interest expense on convertible
note payable, net of tax 14,824 0 14,824 0
Income available to common stockholders
plus assumed conversions used to com-
pute diluted per common share amounts $ 3,625,934 $ 1,845,494 $ 5,314,525 $ 2,457,114
============= ============= ============= ============
Average shares of common stock
outstanding used to compute basic per
common share amounts 15,704,378 9,420,120 15,640,558 9,389,495
Effect of convertible note payable 115,717 0 58,817 0
Effect of dilutive options 818,910 435,443 803,213 321,508
Effect of dilutive warrants 803,603 683,205 772,019 557,807
------------- ------------- ------------- ------------
Shares used to compute dilutive per
common share amounts 17,442,608 10,538,768 17,274,607 10,268,810
============= ============= ============= ============
Basic income per common share $ .23 $ .20 $ .34 $ .26
Diluted income per common share $ .21 $ .18 $ .31 $ .24
</TABLE>
Options to purchase 7,785 shares of common stock were outstanding at
June 30, 1998 but were not included in the computation of diluted income per
common share for the six months ended June 30, 1998 because the options'
exercise price was greater than the average market price of the common shares.
NOTE F --- SUBSEQUENT EVENT
On July 29, 1998, 3,300,000 shares of common stock of the Company were
sold in an underwritten public offering at $17.00 per share. Of that amount,
2,400,000 shares were sold by the Company and 900,000 shares were sold by
certain stockholders of the Company. Of the approximately $38.4 million of net
proceeds of the offering received by the Company, the Company applied $26.2
million to the repayment of senior and other indebtedness.
9
<PAGE>
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 Income and their percentage of the Company's
net sales:
<TABLE>
<CAPTION>
Six Months Three Months
Ended June 30, Ended June 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products and services sold 50.8 51.1 49.6 50.0
Gross profit 49.2 48.9 50.4 50.0
Selling, general & administrative
expenses 34.4 34.0 33.0 32.9
Depreciation and amortization 1.7 2.2 1.7 2.0
Amortization of excess cost over net
assets acquired 1.3 1.3 1.2 1.2
Income from operations 11.7 11.4 14.6 13.9
Interest expense 1.5 5.0 1.5 5.0
Provision for income taxes 4.2 2.6 5.4 3.7
Net income 6.1 3.7 7.7 5.1
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1997
NET SALES
Net sales for the quarter ended June 30, 1998, were approximately
$46,900,000, an increase of approximately $10,255,000, or 28.0%, over net
sales of approximately $36,645,000 for the quarter ended June 30, 1997. The
majority of the increase was attributable to acquisitions consummated
subsequent to June 30, 1997. In addition, contributing to the increase in net
sales was an 9.0% increase in sales by those Hanger patient-care centers
operating throughout both quarters.
GROSS PROFIT
Gross profit in the quarter ended June 30, 1998 was approximately
$23,639,000 an increase of approximately $5,316,000, or 29%, over gross profit
of approximately $18,323,000 for the quarter ended June 30, 1997. The increase
was primarily attributable to the increase in net sales. Gross profit as a
percentage of net sales increased to 50.4% in the first quarter of 1998 from
50.0% in the first quarter of 1997.
10
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in the quarter ended
June 30, 1998 increased by approximately $3,415,000, or 28.4%, compared to the
quarter ended June 30, 1997. Selling, general and administrative expenses as a
percentage of net sales increased to 33.0% compared to 32.9% for same period
in 1997. The increase in selling, general and administrative expenses as a
percent of net sales occurred primarily as a result of acquisitions subsequent
to June 30, 1997.
INCOME FROM OPERATIONS
Principally as a result of the above, income from operations in
the quarter ended June 30, 1998 was approximately $6,831,000, an increase of
$1,745,000, or 34.3%, over the prior year's comparable quarter. Income from
operations as a percentage of net sales increased to 14.6% in the second
quarter of 1998 from 13.9% for the prior year's comparable period.
INTEREST EXPENSE
Interest expense in the second quarter of 1998 was approximately
$699,000, a decrease of approximately $1,150,000, or 62.2%, from approximately
$1,850,000 incurred in the second quarter of 1997. Interest expense as a
percentage of net sales decreased to 1.5% from 5.0% for the same period a year
ago. The decrease in interest expense was primarily attributable to the
repayment of $58.3 million of indebtedness during August of 1997 from the
proceeds of an underwritten public offering consummated in that month in which
the Company sold 5,750,000 shares of common stock at $11.00 per share.
INCOME TAXES
The Company's effective tax rate was 41% in the second quarter of
1998 versus 42.0% in 1997. The provision for income taxes in the second
quarter of 1998 was approximately $2,514,000 compared to approximately
$1,342,000 for the second quarter of 1997.
NET INCOME
As a result of the above, the Company recorded net income of
$3,618,000, or $.21 per dilutive common share, in the quarter ended June 30,
1998, compared to net income of $1,852,000, or $.18 per dilutive common share,
in the quarter ended June 30, 1997.
11
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
NET SALES
Net sales for the six months ended June 30, 1998 were
approximately $87,650,000, an increase of approximately $20,056,000, or 29.7%,
over net sales of approximately $67,594,000 for the six months ended June 30,
1997. The majority of the increase was attributable to acquisitions
consummated subsequent to June 30, 1997. In addition, contributing to the
increase in net sales was an 11.2% increase in sales by those Hanger
patient-care centers operating throughout both six-month periods. The Company
believes that its net sales during the latter half of 1998 will exceed net
sales during the latter half of 1997.
GROSS PROFIT
Gross profit for the six months ended June 30, 1998 was
approximately $43,086,000, an increase of approximately $10,044,000, or 30.4%,
over gross profit of approximately $33,042,000 for the six months ended June
30, 1997. The increase was primarily attributable to the increase in net
sales. Gross profit as a percent of net sales increased from 48.9% in the six
months ended June 30, 1997 to 49.2% in the six months ended June 30, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in the six months
ended June 30, 1998 increased by approximately $7,219,000, or 31.4%, compared
to the six months ended June 30, 1997. Selling, general and administrative
expenses as a percentage of net sales increased to 34.4% from 34.0% for the
same period in 1997. The increase in selling, general and administrative
expenses as a percentage of net sales occurred primarily as a result of
acquisitions subsequent to June 30, 1997.
INCOME FROM OPERATIONS
Principally as a result of the above, income from operations in
the six months ended June 30, 1998 was approximately $10,289,000, an increase
of approximately $2,566,000, or 33.2%, over the prior year's comparable
period. Income from operations as a percentage of net sales increased to 11.7%
in the six months ended June 30, 1998 from 11.4% in the six months ended June
30, 1997.
INTEREST EXPENSE
Net interest expense for the first six months of 1998 was
approximately $1,314,000, a decrease of approximately $2,063,000, or 61.1%,
from approximately $3,377,000 incurred in the first six months of 1997.
Interest expense as a percentage of net sales decreased to 1.5% from 5.0% for
the same period one year ago. The decrease in interest expense was primarily
12
<PAGE>
attributable to the repayment of $58.3 million of indebtedness during August
of 1997 from the proceeds of an underwritten public offering consummated in
that month in which the Company sold 5,750,000 shares of common stock at
$11.00 per share.
INCOME TAXES
The Company's effective tax rate was 41.0% in the first six months
of 1998 versus 42.0% in 1997. The provision for income taxes for the six
months ended June 30, 1998 was approximately $3,692,000 compared to
approximately $1,789,000 for the six months ended June 30, 1997.
NET INCOME
As a result of the above, the Company recorded net income of
approximately $5,314,000, or $.31 per dilutive common share, in the first six
months of 1998, compared to net income of approximately $2,470,000, or $.24
per dilutive common share, in the first six months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated working capital at June 30, 1998 was
approximately $36,912,000 and cash and cash equivalents available were
approximately $8,714,000. The Company's cash resources were satisfactory to
meet its obligations for the quarter ended June 30, 1998.
The Company has a credit agreement (the "Credit Agreement") with a
syndicate of banks, (collectively, the "Banks") that provides for (i) an
A-Term Loan of up to $29,000,000 (the "A-Term Loan"); (ii) a B-Term Loan of up
to $28,000,000 (the "B-Term Loan"); (iii) an acquisition loan of up to
$25,000,000 (the "Acquisition Loan"); and (iv) a revolving loan of up to
$8,000,000 (the "Revolving Loan").
The Company's total long-term debt at June 30, 1998, including a
current portion of approximately $10,037,000, was approximately $40,526,000.
Such indebtedness included: (i) $16,464,000 borrowed under the A-Term Loan and
B-Term Loan; (ii) $6,000,000 borrowed under the Acquisition Loan; (iii)
$3,500,000 borrowed under the Revolving Loan; and (iv) a total of $14,562,000
of other indebtedness.
The Credit Agreement with the Banks is collateralized by
substantially all the assets of the Company, restricts the payment of
dividends, and contains certain affirmative and negative covenants customary
in an agreement of this nature.
The A-Term Loan, the Acquisition Loan and the Revolving Loan bear
base interest at the Company's option of either LIBOR plus 2.50% or the Bank's
prime rate plus 1.50%. The base interest rate is then reduced by .25% to 1.25%
depending upon the ratio of the Company's total indebtedness to annual
earnings before interest, taxes, depreciation and amortization. The
outstanding amount of the A-Term Loan at June 30, 1998 was $7,944,000, which
is being amortized in quarterly amounts and will mature on December 31, 2001.
The B-Term Loan bears base interest at the Company's option of
either LIBOR plus 2.75% or the Bank's prime rate plus 1.75%. The base interest
rate is then reduced by .25% to 1.25% depending upon the ratio of the
13
<PAGE>
Company's total indebtedness to annual earnings before interest, taxes,
depreciation and amortization. The outstanding amount of the B-Term Loan at
June 30, 1998 was $8,520,000, which is being amortized in quarterly amounts
and will mature on December 31, 2003.
All or any portion of outstanding loans under the Credit Agreement
may be repaid at any time and commitments may be terminated in whole or in
part at the option of the Company without premium or penalty, except that
LIBOR-based loans may only be repaid at the end of the applicable interest
period. Mandatory prepayments will be required in the event of certain sales
of assets, debt or equity financings and under certain other circumstances.
During the first six months of 1998, the Company acquired eight
orthotic and prosthetic companies. The aggregate purchase price excluding
potential earn-out provisions was $16,868,000, comprised of $12,447,000 in
cash and $4,421,000 in promissory notes. The cash portion of the purchase
price of these acquisitions was borrowed under the Company's Revolving Loan
and Acquisition Loans.
The Company plans to finance future acquisitions through
internally generated funds or borrowings under the Acquisition Loans, the
issuance of notes or shares of Common Stock of the Company, or through a
combination thereof.
The Company is actively engaged in ongoing discussions with
prospective acquisition candidates. The Company plans to continue to expand
its operations aggressively through acquisitions.
On July 29, 1998, 3,300,000 shares of common stock of the Company
were sold in an underwritten public offering at $17.00 per share. Of that
amount, 2,400,000 shares were sold by the Company and 900,000 shares were sold
by certain stockholders of the Company. Of the approximately $38.4 million of
net proceeds of the offering, the Company repaid the A-Term Loan and B-Term
Loan, $5.5 million principal amount of the Acquisition Loan, $4.0 million
principal amount of the Revolving Loan and $1.7 million of other indebtedness.
In connection with the public offering, the Company granted the underwriters
an option, exercisable not later than August 28, 1998, to purchase up to
495,000 additional shares of common stock to cover over allotments. If fully
exercised, the Company would receive approximately $7.9 million of additional
net proceeds.
14
<PAGE>
OTHER
Inflation has not had a significant effect on the Company's
operations, as increased costs to the Company generally have been offset by
increased prices of products and services sold.
The Company will adopt the provisions of SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information" effective with the
financial statements for the year ended December 31, 1998. SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Financial statement disclosures for
prior periods are required to be restated. The Company is in the process of
evaluating the disclosure requirements. The adoption of SFAS 131 affects
disclosure only and will not affect reported earnings, cash flows or financial
position.
In June 1998, the Financial Accounting Standard Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
is effective for the fiscal years beginning after June 15, 1999. SFAS 133
requires that an entity recognize all derivative instruments as either assets
or liabilities on its balance sheet at their fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part
of a hedge transaction, and, if it is, the type of hedge transaction. The
Company will adopt SFAS 133 by the first quarter of 2000. Due to the Company's
limited use of derivative instruments, SFAS 133 is not expected to have a
material effect on the financial position or results of operations of the
Company.
The Company primarily provides services and customized devices
throughout the United States and is reimbursed, in large part, by the
patients' third-party insurers or governmentally funded health insurance
programs. The ability of the Company's debtors to meet their obligations is
principally dependent upon the financial stability of the insurers of the
Company's patients and future legislation and regulatory actions.
The Company's management believes that its major financial and
manufacturing applications are year 2000 compliant. The Company expects no
material impact on its internal information systems from the year 2000 issue.
The Company has recently initiated communications with its significant
suppliers to determine the extent that the Company may be impacted by third
parties' failure to address the issue. The Company will continue to monitor
and evaluate the impact of the year 2000 on its operations.
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
15
<PAGE>
the results of operations or recently acquired and newly acquired O&P patient
care practices, the Company's ability to attract and retain qualified O&P
practitioners, governmental policies affecting O&P operations and other risks
and uncertainties affecting the health-care industry generally. Readers are
cautioned not to put undue reliance on forward-looking statements. The Company
disclaims any intent or obligation to up-date publicly these forward-looking
statements, whether as a result of new information, future events or
otherwise.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on May 19, 1998.
The following nine directors were elected by the following votes to
serve as members of the Board of Directors for one year or until their
successors are elected and qualified:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
---- --------- --------------
<S> <C> <C>
Ivan R. Sabel 12,221,418 529,408
Mitchell J. Blutt, M.D. 9,509,698 3,241,130
Edmond E. Charrette, M.D. 12,381,168 369,658
Thomas P. Cooper, M.D. 12,221,418 529,408
Robert J. Glaser, M.D. 12,217,206 533,620
James G. Hellmuth 9,496,754 3,254,072
William L. McCulloch 12,220,206 530,620
H. E. Thranhardt 12,381,168 369,658
Risa J. Lavizzo-Mourey, M.D. 12,219,218 531,608
</TABLE>
Shareholders ratified an amendment to the Company's 1991 Stock Option
Plan to increase the number of shares of Common Stock authorized for issuance
under that Plan from 1,500,000 shares to 3,000,000 shares. Such proposal was
approved by a vote of 9,488,189 shares for and 733,116 shares against, with
72,251 abstaining.
Shareholders also ratified the selection of PricewaterhouseCoopers LLP
(formerly known as Coopers & Lybrand L.L.P.) as the independent accountants
for the Company for the current fiscal year. Such proposal was approved by a
vote of 12,811,076 shares for and 46,801 shares against, with 7,079 shares
abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 10 1991 Stock Option Plan, as amended
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANGER ORTHOPEDIC GROUP, INC.
Date: August 14, 1998 /s/IVAN R. SABEL
------------------
Ivan R. Sabel, CPO
Chief Executive Officer
Date: August 14, 1998 /s/RICHARD A. STEIN
-------------------
Richard A. Stein
Vice President - Finance
Principal Financial and
Accounting Officer
EXHIBIT 10
HANGER ORTHOPEDIC GROUP, INC.
1991 STOCK OPTION PLAN (as amended)
1. PURPOSE. The purpose of the 1991 Stock Option Plan (the "Plan") of
Hanger Orthopedic Group, Inc. (the "Company") is to make shares of the common
stock, $.01 par value per share (the "Stock"), of the Company available for
purchase by selected officers and key employees of the Company or subsidiaries
of the Company, upon terms which will give them an added incentive to continue
service with the Company and a more direct interest in the future success of
its operations. The options granted hereunder shall either be incentive stock
options ("ISOs") within the meaning of Section 422A of the Internal Revenue
Code of 1986, as amended (the "Code"), or nonqualified stock options
("NQSOs"). ISOs and NQSOs collectively are referred to hereinafter as
"Options."
2. ADMINISTRATION.
(a) THE STOCK OPTION COMMITTEE. The Plan shall be administered
by the Compensation Committee (the "Committee") of the Board of Directors of
the Company (the "Board") composed of not less than three directors of the
Company, who shall be appointed by and serve at the pleasure of the Board. A
majority of the Committee shall constitute a quorum and the acts of a majority
of the members present at any meeting at which a quorum is present, or acts
approved in writing by a majority of the Committee, shall be the acts of the
Committee. Each member of the Committee shall be ineligible to be granted
Options under the Plan and shall otherwise be a "disinterested person" within
the meaning of Rule 16b-3(c)(2)(i) under the Securities Exchange Act of 1934,
as amended. The Committee shall keep minutes of its meetings.
(b) AUTHORITY OF THE COMMITTEE. Subject to the provisions of the
Plan, the Committee shall have full authority and power to determine the
employees to whom Options shall be granted, the number of shares of Stock to
be included in each Option, the price at which the shares of Stock included
therein may be purchased, the Option period and time(s) and manner of exercise
and whether the Option shall be an ISO or a NQSO. All decisions of the
Committee may be reviewed by the Board and modified or overruled within 10
days after the date of the Committee's decision; provided, however, that the
<PAGE>
Board shall have no power to modify or overrule a decision of the Committee
with respect to the grant of an Option once the Committee has made a grant of
such Option pursuant to the Plan. Nothing contained in the Plan shall be
construed to give any employee the right to be granted an Option to purchase
Stock or to insist upon the inclusion of any term or condition in any Option
which may be granted, except such as may be authorized by the Committee. The
Committee shall have the authority and power to adopt such rules and
regulations and to take such action as it shall consider advisable for the
administration of the Plan. The Committee shall have the authority and power
to construe, interpret and administer the Plan, and the decisions of the
Committee shall be final and binding upon the Company, its employees, Option
holders and all other persons. No member of the Committee shall incur any
liability by reason of any action or determination made in good faith with
respect to the Plan or any Option.
3. PARTICIPATION.
(a) ELIGIBLE EMPLOYEES. Selected officers and key employees of
the Company or subsidiaries of the Company who are, in the sole opinion of the
Committee, from time to time primarily responsible for the management of, or
in a position to contribute materially to the growth and financial success of
the Company and its subsidiaries (including employees who are members of the
Board) shall be eligible to receive Options to purchase Stock under the Plan,
provided, however, that no member of the Committee may be granted Options
under the Plan. From such eligible employees, the Committee shall from time to
time choose those to whom Options shall be granted. The Committee shall
determine the number of shares of Stock subject to each such Option, whether
the Option is an ISO or NQSO, and the terms and provisions of the Option
agreements. An employee who has been granted an Option may, if he is otherwise
eligible, be granted an additional Option or Options if the Committee shall so
determine.
(b) LIMITATIONS.
(i) Except as permitted below, no ISO may be granted under
the Plan to any employee who, immediately before the granting of such
ISO, owns directly or indirectly Stock possessing more than 10 percent
of the total combined voting power or value of all classes of capital
stock of the Company. An ISO may be granted to an employee in excess of
the 10 percent limit if such ISO has an exercise price of at least 110
2
<PAGE>
percent of the fair market value of the Stock subject to such ISO on the
date of grant and if such ISO by its terms is not exercisable after the
expiration of five years from the date such ISO is granted.
(ii) The aggregate fair market value (determined as of the
time an ISO is granted) of the Stock for which any employee may be
granted ISOs in any calendar year (under this Plan and all other
incentive stock option plans of the employer corporation and its parent
and subsidiary corporations, if any) may exceed $100,000; provided,
however, that such ISOs cannot be exercised for the first time by the
employee with respect to more than $100,000 of Stock in any calendar
year.
4. STOCK OPTION AGREEMENTS. Each Option granted under the Plan shall
be evidenced by a written stock option agreement ("Option Agreement") which
shall be entered into by the Company and the employee to whom the Option is
granted (the "Option Holder"), and which shall contain the following terms and
conditions, as well as such other terms and conditions not inconsistent
therewith, as the Committee may consider appropriate in each case.
(a) PRICE. The price at which each share of Stock covered by an
Option may be purchased shall be determined in each case by the Committee and
set forth in the Option Agreement. In no event shall the price be less than
100 percent of the Fair Market Value of the Stock on the date the Option is
granted. "Fair Market Value" means (i) if the Stock is listed on a national
securities exchange, the last sale price of the Stock as reported by the
consolidated tape of such exchange on the date of grant of the Option, or, if
there is no Stock transaction on such date, on the immediately preceding date
on which there is a Stock transaction; (ii) if the Stock is included in the
NASDAQ National Market System, the last sale price of the Stock as reported
thereby on the date of grant of the Option or, if there is no Stock
transaction on such date, on the immediately preceding date on which there is
a Stock transaction; or (iii) if the Stock is not listed on a national
securities exchange or included in the NASDAQ National Market System, the mean
of the highest and lowest bid prices for the Stock in the over-the-counter
market on the date of grant of the Option or the value determined to be fair
and reasonable by the Committee.
3
<PAGE>
(b) DURATION OF OPTIONS. Each Option Agreement shall state the
period of time, determined by the Committee, within which the Option may be
exercised by the Option Holder. Such period must end, in all cases, not more
than 10 years from the date such Option is granted. No Option shall be
exercisable until it has been held for at least six months from the date of
grant. Any ISO granted prior to January 1, 1987 may not be exercised while any
other incentive stock option within the meaning of Section 422A of the Code
granted to the same Option Holder prior to January 1, 1987 is outstanding. An
ISO shall be treated as outstanding until it is exercised in full or expires
by reason of time.
(c) TRANSFERABILITY. Each Option Agreement shall provide that
the Option granted therein is not transferable by the Option Holder except by
will or pursuant to the laws of descent and distribution and that such Option
is exercisable during the Option Holder's lifetime only by such Option Holder.
(d) AGREEMENT TO CONTINUE IN EMPLOYMENT. Each Option Agreement
shall contain the Option Holder's agreement to remain in the employment of the
Company, at the pleasure of the Company, for a continuous period of at least
six months after the date of such Option Agreement, at the salary rate in
effect on the date of such agreement or at such increased rate as may be
fixed, from time to time, by the Company.
(e) NATURE AND EXERCISE OF, AND PAYMENT FOR, OPTION. Each Option
Agreement shall specify whether the Option is an ISO or NQSO and shall provide
that the method for exercising the Option granted therein shall be by delivery
to the Company of written notice specifying the number of shares of Stock with
respect to which such Option is exercised. If requested by the Company, such
notice shall contain the Option Holder's representation that he is purchasing
the Stock for investment purposes only and his agreement not to sell any Stock
so purchased in any manner which is in violation of the Securities Act of
1933, as amended, or any applicable state law. Such restrictions, or notice
thereof, shall be placed on the certificates representing the Stock so
purchased. The purchase of such Stock shall take place at the principal
offices of the Company within 20 days following delivery of such notice. The
purchase price of Stock upon exercise of any Option shall be paid in full (a)
in cash, (b) in Stock valued at its Fair Market Value on the date of exercise
of the Option, (c) by requesting the Company to withhold from the number of
shares of Stock otherwise issuable upon exercise of the Option that number of
4
<PAGE>
shares of Stock having an aggregate Fair Market Value on the date of exercise
equal to the Option price for all of the shares of Stock subject to such
exercise, or (d) by a combination thereof, in the manner provided in the
Option Agreement. Certificates for such shares of Stock tendered in payment
shall be in a form for good delivery and, if the certificates were issued
pursuant to the exercise of an ISO, the Option Holder must have held the
tendered shares for at least one year.
(f) DATE OF GRANT. An Option shall be considered as having been
granted on the date the Committee decides to grant the Option.
(g) NOTICE OF SALE OF STOCK; WITHHOLDING. Each Option Agreement
shall provide (i) that the Option Holder shall notify the Company in writing
if Stock acquired under an ISO is "disposed of" within the meaning of Section
422A of the Code within two years after the date of the grant of the ISO or
within one year after the transfer of such Stock to the Option Holder; and
(ii) that if the Option Holder does "dispose of" Stock within such period, the
Option Holder shall make appropriate arrangements with the Company to provide
for the amount of additional withholding required by Sections 3102 and 3402 of
the Code and applicable state income tax laws.
5. THE STOCK. The total number of shares of Stock as to which Options
may be granted under this Plan shall not exceed 3,000,000 in the aggregate,
except as such number of shares shall be adjusted in accordance with the
provisions of Section 6 hereof. If any outstanding Option under the Plan shall
expire or be terminated for any reason before the end of the 10-year period
during which Options may be granted hereunder, the shares of Stock allocable
to the unexercised portion of such Option may again be included in an Option
under the Plan. The Company shall at all times retain as authorized and
unissued Stock at least the number of shares from time to time included in
outstanding Options, or otherwise assure itself of its ability to perform its
obligations thereunder.
6. ADJUSTMENTS.
(a) ADJUSTMENTS BY STOCK SPLIT, STOCK DIVIDEND, ETC. If the
Company shall at any time increase or decrease the number of its outstanding
shares of Stock, or change in any way the rights and privileges of such
shares, by means of the payment of a Stock dividend or the making of any other
distribution upon such shares payable in Stock, or through a Stock split or
5
<PAGE>
subdivision of shares, or a consolidation or combination of shares, or through
a reclassification or recapitalization involving the Stock, then the numbers,
rights and privileges of the following shall be increased, decreased or
changed in like manner as if they had been issued and outstanding, fully paid
and nonassessable at the time of such occurrence: (i) the shares of Stock on
which Options may be granted under the Plan; (ii) the maximum number of shares
of Stock with respect to which an employee may receive an Option hereunder;
and (iii) the shares of Stock then included in each outstanding Option granted
hereunder.
(b) DIVIDEND PAYABLE IN STOCK OF ANOTHER CORPORATION, ETC. If
the Company shall at any time pay or make any dividend or other distribution
upon the Stock payable in securities or other property (except money or
Stock), a proportionate part of such securities or other property shall be set
aside and delivered to each Option Holder then holding an Option hereunder
upon exercise thereof.
(c) APPORTIONMENT OF PRICE. Upon any occurrence described in the
preceding subsections (a) and (b) of this Section 6, the total Option price
under any then outstanding Option shall remain unchanged but shall be
apportioned ratably over the increased or decreased number or changed kinds of
securities or other property subject to the Option.
(d) RIGHTS TO SUBSCRIBE. If the Company shall at any time grant
to the holders of its Stock rights to subscribe PRO RATA for additional shares
thereof or for any other securities of the Company or of any other
corporation, there shall be added to the number of shares then underlying each
outstanding Option the Stock or other securities which the Option Holder would
have been entitled to subscribe for if immediately prior to such grant the
Option Holder had exercised his entire Option, and the Option price shall be
increased by the amount which would have been payable by the Option Holder for
such Stock or other securities.
(e) DETERMINATION BY THE COMMITTEE, ETC. Adjustments under this
Section 6 shall be made by the Committee, whose determinations with regard
thereto shall be final and binding. No fractional shares of Stock shall be
issued on account of any such adjustment.
6
<PAGE>
7. MERGER, CONSOLIDATION, ETC.
(a) EFFECT OF TRANSACTION. Upon the occurrence of any of the
following events, if the notice required by Section 7(b) hereof shall have
first been given, this Plan and all Options then outstanding under it shall
automatically terminate and be of no further force and effect whatsoever,
without the necessity for any additional notice or other action by the
Committee, the Board or the Company: (i) the merger, consolidation or
liquidation of the Company or the acquisition of its assets or stock pursuant
to a nontaxable reorganization, unless the surviving or acquiring corporation,
as the case may be, shall assume the outstanding Options or substitute new
options for them pursuant to Section 425(a) of the Code; (ii) the dissolution
or liquidation of the Company; (iii) the appointment of a receiver for all or
substantially all of the Company's assets or business; (iv) the appointment of
a trustee for the Company after a petition has been filed for the Company's
reorganization under applicable statutes; or (v) the sale, lease or exchange
of all or substantially all of the Company's assets and business.
(b) NOTICE OF SUCH OCCURRENCES. At least 30 days' prior written
notice of any event described in Section 7(a) hereof, except the transactions
described in subsections 7(a)(iii) and (iv) as to which no notice shall be
required, shall be given by the Company to each Option Holder theretofore
granted an Option under the Plan. The Option Holders so notified may exercise
their Options at any time before the occurrence of the event requiring the
giving of notice, regardless of whether all conditions of exercise relating to
continuation of employment for specified periods of time have been satisfied.
Such notice shall be deemed to have been given when delivered personally to an
Option Holder or when mailed to an Option Holder by registered or certified
mail, postage prepaid, at such Option Holder's last address known to the
Company.
8. EXPIRATION. The Plan shall terminate whenever the Board adopts a
resolution to that effect. If not sooner terminated under the preceding
sentence hereof, the Plan shall wholly cease and expire 10 years from the
effective date hereof. After termination, no Options shall be granted under
the Plan, but the Company shall continue to recognize Options previously
granted.
9. GENERAL PROVISIONS.
(a) AMENDMENTS, ETC. The Board may from time to time amend,
modify, suspend or terminate the Plan. Nevertheless, no such amendment,
modification, suspension or termination shall (i) impair any Option
7
<PAGE>
theretofore granted under the Plan or deprive any Option Holder of any shares
of Stock which he may have acquired through or as a result of the Plan, or
(ii) be made without the approval of the shareholders of the Company where
such change would (A) materially increase the benefits accruing to Option
Holders under the Plan, (B) materially increase the total number of shares of
Stock which may be issued under the Plan, or (C) materially modify the
requirements as to eligibility for participation in the Plan.
(b) QUALIFICATION UNDER INTERNAL REVENUE CODE. The Company
intends that all ISOs granted under the Plan shall constitute incentive stock
options within the meaning of Section 422A of the Code and the Plan shall be
construed and administered in order to effect such intention.
(c) TREATMENT OF PROCEEDS. Proceeds from the sale of Stock
pursuant to Options granted under the Plan shall constitute general funds of
the Company.
(d) EFFECTIVE DATE. The Plan shall become effective as of the
date of its approval by shareholders of the Company on September 26, 1991.
ISOs previously granted under the Company's 1983 Incentive Stock Option Plan
and outstanding as of the effective date of the Plan shall continue to be
governed by the terms of the Option Agreements entered into in connection with
such ISOs.
(e) PARAGRAPH HEADINGS. The paragraph headings are included
herein only for convenience and they shall have no effect on the
interpretation of the Plan.
8
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000722723
<NAME> HANGER ORTHOPEDIC GROUP, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,714,387
<SECURITIES> 0
<RECEIVABLES> 32,886,968
<ALLOWANCES> 7,042,000
<INVENTORY> 17,452,392
<CURRENT-ASSETS> 66,119,199
<PP&E> 27,780,598
<DEPRECIATION> 8,793,253
<TOTAL-ASSETS> 178,410,474
<CURRENT-LIABILITIES> 29,207,664
<BONDS> 30,488,681
317,682
0
<COMMON> 158,840
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<TOTAL-LIABILITY-AND-EQUITY> 178,410,474
<SALES> 46,899,890
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<CGS> 23,261,042
<TOTAL-COSTS> 23,261,042
<OTHER-EXPENSES> 16,807,635
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<INTEREST-EXPENSE> 699,008
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<INCOME-TAX> 2,514,000
<INCOME-CONTINUING> 3,618,204
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<EPS-PRIMARY> 0.23
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