-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KLZXU6iXGO39Oj1j+Sd3bKY6Zlh9bHH4gvpIHci10elIKCGYaXf3yfZVqLRrtEKp KDuLbYQ1Z96XabQ0XE6jMA== 0000904456-97-000142.txt : 19970815 0000904456-97-000142.hdr.sgml : 19970815 ACCESSION NUMBER: 0000904456-97-000142 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANGER ORTHOPEDIC GROUP INC CENTRAL INDEX KEY: 0000722723 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 840904275 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10670 FILM NUMBER: 97662397 BUSINESS ADDRESS: STREET 1: 7700 OLD GEORGETOWN RD 2ND FL CITY: BETHESDA STATE: MD ZIP: 20814 BUSINESS PHONE: 3019860701 MAIL ADDRESS: STREET 2: 7700 OLD GEORGETOWN RD 2ND FL CITY: BETHESDA STATE: MD ZIP: 20814 FORMER COMPANY: FORMER CONFORMED NAME: SEQUEL CORP DATE OF NAME CHANGE: 19890814 FORMER COMPANY: FORMER CONFORMED NAME: CELLTECH COMMUNICATIONS INC DATE OF NAME CHANGE: 19860304 10-Q 1 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, 1997 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to ___________________ Commission File Number 1-10670 HANGER ORTHOPEDIC GROUP, INC. -------------------------------------------------------------------- (Exact name of registrant as specified in its charter.) Delaware 84-0904275 ---------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7700 Old Georgetown Road, Bethesda, MD 20814 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's phone number, including area code: (301) 986-0701 ----------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 6, 1997; 14,571,465 shares of common stock, $.01 par value per share. HANGER ORTHOPEDIC GROUP, INC. INDEX
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - June 30, 1997 (unaudited) and December 31, 1996 1 Consolidated Statements of Operations for the six months ended June 30, 1997 and 1996 (unaudited) 3 Consolidated Statements of Operations for the three months ended June 30, 1997 and 1996 (unaudited) 4 Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996 (unaudited) 5 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Securityholders 17 Item 5. Exhibits and Reports on Form 8-K 17 SIGNATURES 18
HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1997 1996 ------------------------------------- (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 5,744,561 $ 6,572,402 Accounts receivable less allowances for doubtful accounts of $3,752,000 and $1,144,000 in 1997 and 1996, respectively 28,224,831 24,321,872 Inventories 16,656,795 15,916,638 Prepaid expenses and other assets 2,274,207 1,595,169 Deferred income taxes 3,159,280 3,159,280 ------------- ------------- Total current assets 56,059,674 51,565,361 ------------- ------------- PROPERTY, PLANT AND EQUIPMENT Land 4,269,045 4,269,045 Buildings 8,253,513 8,017,547 Machinery and equipment 6,812,647 6,275,307 Furniture and fixtures 2,198,963 2,095,900 Leasehold improvements 2,565,071 2,139,207 ------------- ------------- 24,099,239 22,797,006 Less accumulated depreciation and amortization 6,546,107 5,497,809 ------------- ------------- 17,553,132 17,299,197 ------------- ------------- INTANGIBLE ASSETS Excess of cost over net assets acquired 73,609,502 63,935,447 Non-compete agreements 2,119,479 1,981,329 Other intangible assets 6,226,193 6,152,607 ------------- ------------- 81,955,174 72,069,383 Less accumulated amortization 8,224,289 6,917,960 ------------- ------------- 73,730,885 65,151,423 ------------- ------------- OTHER ASSETS Other 1,014,587 925,446 ------------- ------------- TOTAL ASSETS $148,358,278 $134,941,427 ============= =============
The accompany notes are an integral part of the consolidated financial statements. 1 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1997 1996 ------------------------------------- (unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 6,805,582 $ 4,902,572 Accounts payable 3,350,291 4,141,993 Accrued expenses 7,606,809 7,815,028 Customer deposits 929,453 578,219 Accrued wages and payroll taxes 5,327,909 8,321,395 Deferred revenue 284,287 306,998 ------------- ------------- Total current liabilities 24,304,330 26,066,205 ------------- ------------- Long-term debt 75,948,349 64,297,801 Deferred income taxes 2,377,627 2,377,627 Other liabilities 2,314,971 2,188,278 Mandatorily redeemable preferred stock, class C, liquidation preference of $500 per share 290,434 277,701 Mandatorily redeemable preferred stock, class F, liquidation preference of $500 per share SHAREHOLDERS' EQUITY Common stock, $.01 par value; 25,000,000 shares authorized, 9,610,414 and 9,449,129 shares issued, and 9,476,918 and 9,315,634 shares outstanding in 1997 and 1996 96,104 94,492 Additional paid-in capital 41,925,654 41,008,363 Retained earnings (Accumulated deficit) 1,756,371 (713,478) ------------- ------------- 43,778,129 40,389,377 Treasury stock - (133,495 shares) (655,562) (655,562) ------------- ------------- 43,122,567 39,733,815 ------------- ------------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $148,358,278 $134,941,427 ============= =============
The accompany notes are an integral part of the consolidated financial statements. 2 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED June 30, 1997 and 1996 (unaudited)
1997 1996 ---- ---- Net Sales $ 67,594,259 $ 26,249,672 Cost of products and services sold 34,552,051 12,238,843 ------------- ------------- Gross profit 33,042,208 14,010,829 Selling, general & administrative 22,964,207 10,222,239 Depreciation and amortization 1,494,264 955,685 Amortization of excess cost over net assets acquired 860,832 339,674 ------------- ------------- Income from operations 7,722,905 2,493,231 Other income expense: Interest expense, net (3,376,771) (861,539) Other income (expense) (86,985) (73,502) ------------- ------------- Income from operations before income taxes 4,259,149 1,558,190 Provision for income taxes 1,789,300 669,700 ------------- ------------- Net income $ 2,469,849 $ 888,490 ============= ============= Earnings Per Share: Net income per share $ .23 $ .11 ============= ============= Weighted average number of common shares outstanding 10,726,396 8,351,436
The accompany notes are an integral part of the consolidated financial statements. 3 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED June 30, 1997 and 1996 (unaudited)
1997 1996 ---- ---- Net Sales $ 36,644,645 $ 14,020,643 Cost of products and services sold 18,322,122 6,354,119 ------------- ------------- Gross profit 18,322,523 7,666,524 Selling, general & administrative 12,039,572 5,225,161 Depreciation and amortization 744,959 479,530 Amortization of excess cost over net assets acquired 451,320 170,059 ------------- ------------- Income from operations 5,086,672 1,791,774 Other expense: Interest expense, net (1,849,502) (468,303) Other (43,236) (27,990) ------------- ------------- Income from operations before income taxes 3,193,934 1,295,481 Provision for income taxes 1,342,000 557,000 ------------- ------------- Net income $ 1,851,934 $ 738,481 ============= ============= Earnings Per Share: Net income per share $ .17 $ .09 ============= ============= Weighted average number of common shares outstanding 10,773,837 8,354,424
The accompany notes are an integral part of the consolidated financial statements. 4 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED June 30, 1997 and 1996 (unaudited)
1997 1996 ---- ---- Cash flows from operating activities: Net income $ 2,469,849 $ 888,490 Adjustments to reconcile net income to net cash provided by operating activities: Provision for bad debt 2,337,603 507,182 Depreciation and amortization 1,494,264 955,685 Amortization of excess cost over net assets acquired 860,832 339,674 Amortization of debt discount 127,406 Changes in assets and liabilities, net of effect from acquired companies: Accounts receivable (4,882,718) (822,781) Inventory 208,278 (43,577) Prepaid and other assets (653,807) (222,296) Other assets (86,878) (15,408) Accounts payable (1,107,765) (164,127) Accrued expenses (208,553) (84,908) Accrued wages and payroll taxes (3,062,226) (132,206) Customer deposits 351,234 (39,022) Deferred revenue (22,711) 88,418 Other liabilities 126,693 (45,067) ------------- ------------- Total adjustments (4,518,348) 321,567 ------------- ------------- Net cash (used in) provided by operating activities (2,048,499) 1,210,057 ------------- ------------- Cash flows from investing activities: Purchase of fixed assets, net (1,115,007) (390,336) Acquisitions, net of cash (8,446,189) (95,000) Purchase of patents (73,242) (13,065) Purchase of non-compete agreements (138,150) Other intangibles (7,596) Net cash used in investing activities (9,772,588) (505,997) ------------- -------------
Continued The accompany notes are an integral part of the consolidated financial statements. 5 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED June 30, (unaudited)
1997 1996 ---- ---- Cash flows from financing activities: Net borrowings under revolving credit facility $ 5,500,000 $ (800,000) Proceeds from exercise of stock options and warrants 431,637 Proceeds from long-term debt 8,256,000 Repayment of long-term debt (3,194,047) (831,913) Increase in financing costs (344) (976) ------------- ------------- Net cash (used in) provided by financing activities 10,993,246 (1,632,889) ------------- ------------- Net change in cash and cash equivalents for the period (827,841) (928,829) Cash and cash equivalents at beginning of period 6,572,402 1,456,305 ------------- ------------- Cash and cash equivalents at end of period $ 5,744,561 $ 527,476 ============= ============= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 3,156,241 $ 887,529 ============= ============= Taxes $ 1,328,000 $ 786,980 ============= ============= Non-cash financing and investing activities: Issuance of common stock in connection with acquisition $ 500,000 ============= Issuance of notes in connection with acquisitions $ 2,864,200 ============= Dividends declared preferred stock $ 12,735 $ 11,641 ============= =============
The accompanying notes are an integral part of the consolidated financial statements. 6 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 footnotes 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"), as of December 31, 1996, and notes thereto included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission. NOTE B - NEW ACCOUNTING STANDARD - EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which will replace the current rules for earnings per share computations, presentation and disclosure. Under the new standard, basic earnings per share excludes dilution and is computed by dividing income available to common shareowners by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. SFAS No. 128 requires a dual presentation of basic and diluted earnings per share on the face of the income statement. The Company will be required to adopt SFAS No. 128 in the fourth quarter of this year and, as required by the standard, we will restate all prior period earnings per share data. Our new earnings per share amounts are not expected to be materially different from those computed under the present accounting standard. NOTE C -- INVENTORY Inventories at June 30, 1997 and December 31, 1996 were comprised of the following:
JUNE 30, 1997 DECEMBER 31, 1996 ------------- ----------------- (unaudited) Raw materials $ 8,669,023 $ 7,504,442 Work-in-process 926,755 831,632 Finished goods 7,061,017 7,580,564 ------------ ------------ $16,656,795 $15,916,638 ============ ============
7 NOTE D - ACQUISITIONS On November 1, 1996, Hanger acquired J.E. Hanger, Inc. of Georgia ("JEH"), in a merger transaction effected pursuant to an Agreement and Plan of Merger, dated as of July 29, 1996 (the "Merger Agreement"), by and among Hanger, JEH and JEH Acquisition Corporation, a Georgia corporation ("Acquisition") wholly-owned by Hanger. The Merger Agreement provided for the merger of Acquisition with and into JEH (the "Merger"), as a result of which JEH became a wholly-owned subsidiary of Hanger, effective November 1, 1996. Pursuant to the Merger Agreement, Hanger paid a total of $44 million and issued a total of approximately one million shares of Hanger common stock in exchange for all of JEH's outstanding common stock on November 1, 1996, and paid an additional $1,783,000 to former JEH shareholders on March 27, 1997 pursuant to provisions in the Merger Agreement calling for a post-closing adjustment. During the first six months of 1997, the Company acquired four orthotic and prosthetic companies. The aggregate purchase price was $9,679,200, comprised of $6,315,000 in cash, $2,864,200 in promissory notes and $500,000 in common stock. The cash portion of these acquisitions was borrowed under the Company's acquisition loan facility. The following unaudited pro-forma consolidated results of operations of the Company are presented as if the above acquisitions had been made at the beginning of the periods presented:
Six Months Ended June 30, 1997 1996 ---- ---- Net sales $70,567,000 $63,161,000 Net income 2,730,000 1,290,000 Net income per common share and common share equivalent .25 .14
The pro-forma consolidated results of operations include adjustments to give effect to amortization of goodwill, interest expense on acquisition debt and certain other adjustments, together with related income tax effects. The unaudited pro-forma information is not necessarily indicative of the results of operations that would have occurred had the purchase been made at the beginning of the periods presented or the future results of the combined operations. NOTE E --- SUBSEQUENT EVENT On July 31, 1997, the Company sold 5.0 million shares of common stock in an underwritten public offering at $11.00 per share resulting in approximately $51 million of net proceeds to the Company. The Company applied such net proceeds of the public 8 offering to the repayment of Senior Subordinated Notes and certain indebtedness outstanding under the Company's Senior Financing Facilities. Upon repayment of the Senior Subordinated Notes, the Company was required to write off the unamortized debt discount of $1.9 million ($1.1 million net of tax benefit that was recorded upon issuance of such notes). As a result of the Company's repayment of the Senior Subordinated Notes, the Warrants previously issued by the Company in conjunction with the Senior Subordinated Notes were amended to reflect the reduction in the aggregate number of shares of Company Common Stock issuable upon exercise of the Warrants from 1,600,000 shares to 720,000 shares. 9 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:
For the Six For the Three Months Ended Months Ended June 30, June 30, ------------- ------------ 1997 1996 1997 1996 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of products and services sold 51.1 46.6 50.0 45.3 Gross profit 48.9 53.4 50.0 54.7 Selling, general & administrative expenses 34.0 38.9 32.9 37.3 Depreciation and amortization 2.2 3.6 2.0 3.4 Amortization of excess cost over net assets acquired 1.3 1.3 1.2 1.2 Income from operations 11.4 9.5 13.9 12.8 Interest expense 5.0 3.3 5.0 3.3 Provision for income taxes 2.6 2.6 3.7 4.0 Net income 3.7 3.4 5.1 5.3
FOR THE SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996 NET SALES Net sales for the six months ended June 30, 1997 were approximately $67,594,000, an increase of approximately $41,344,000, or 157.5%, over net sales of approximately $26,249,000 for the six months ended June 30, 1996. The majority of increase was attributable to Hanger's acquisition of J.E. Hanger, Inc. of Georgia ("JEH") on November 1, 1996. In addition, contributing to the increase in net sales was an 11.3% increase in sales by those Hanger patient-care centers operating throughout both six-month periods. The Company believes that its net sales during the balance of 1997 will continue to exceed 1996 net sales. GROSS PROFIT Gross profit for the six months ended June 30, 1997 was approximately $33,042,000, an increase of approximately $19,031,000, or 135.8%, over gross profit of approximately $14,011,000 for the six months ended June 30, 1996. Gross profit as a percent of net sales decreased from 53.4% in the six months ended June 30, 1996 to 10 48.9% in the six months ended June 30, 1997. The 4.5% decrease in gross profit as a percent of net sales is primarily attributable to the acquisition of JEH, which operated a large distribution division that has lower gross profit margins than patient-care services. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses in the six months ended June 30, 1997 increased by approximately $12,742,000, or 124.6%, compared to the six months ended June 30, 1996. The increase in selling, general and administrative expenses was primarily a result of the acquisition of JEH. Selling, general and administrative expenses as a percentage of net sales decreased to 34.0% from 38.9% for the same period in 1996. The decrease in selling, general and administrative expenses as a percentage of net sales occurred primarily as a result of cost cutting measures completed during integration of JEH in the first quarter of 1997. INCOME FROM OPERATIONS Principally as a result of the above, income from operations in the six months ended June 30, 1997 was approximately $7,723,000, an increase of approximately $5,230,000, or 209.8%, over the prior year's comparable period. Income from operations as a percentage of net sales increased to 11.4% in the six months ended June 30, 1997 from 9.5% in the six months ended June 30, 1996. INTEREST EXPENSE Interest expense for the first six months of 1997 was approximately $3,377,000, an increase of approximately $2,515,000, or 291.9%, over approximately $862,000 incurred in the first six months of 1996. Interest expense as a percentage of net sales increased to 5.0% from 3.3% for the same period one year ago. The increase in interest expense was attributable primarily to the increase in bank debt resulting from the acquisition of JEH. INCOME TAXES The Company's effective tax rate was 42.0% in the first six months of 1997 versus 43.0% in 1996. The provision for income taxes for the six months ended June 30, 1997 was approximately $1,789,000 compared to approximately $669,000 for the six months ended June 30, 1996. NET INCOME As a result of the above, the Company recorded net income of approximately $2,470,000, or $.23 per common share, in the first six months of 1997, compared to net income of approximately $888,000, or $.11 per common share, in the first six months of 1996. 11 FOR THE THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1996 NET SALES Net sales for the quarter ended June 30, 1997, were approximately $36,645,000, an increase of approximately $22,624,000, or 161.4%, over net sales of approximately $14,021,000 for the quarter ended June 30, 1996. The majority of the increase was attributable to Hanger's acquisition of JEH. In addition, contributing to the increase in net sales was an 11.8% increase in sales by those Hanger patient-care centers operating during the entire period of both quarters. GROSS PROFIT Gross profit in the quarter ended June 30, 1997 was approximately $18,322,000, an increase of approximately $10,656,000, or 139.0%, over gross profit of approximately $7,666,000 for the quarter ended June 30, 1996. Gross profit as a percentage of net sales decreased from 54.7% in the first quarter of 1996 to 50.0% in the first quarter of 1997. The 4.7% decrease in gross profit as a percentage of net sales is attributable primarily to the acquisition of JEH, which operated a large distribution division that has lower gross profit margins than patient-care services. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses in the quarter ended June 30, 1997 increased by approximately $6,814,000, or 130.4%, compared to the quarter ended June 30, 1996. The increase in selling, general and administrative expenses was primarily a result of the acquisition of JEH. Selling, general and administrative expenses as a percentage of net sales decreased to 32.9% from 37.3% for same period in 1996. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily due to cost cutting measures completed during the integration of JEH in the first quarter of 1997. INCOME FROM OPERATIONS Principally as a result of the above, income from operations in the quarter ended June 30, 1997 was approximately $5,087,000, an increase of $3,295,000, or 183.9%, over the prior year's comparable quarter. Income from operations as a percentage of net sales increased to 13.9% in the second quarter of 1997 from 12.8% for the prior year's comparable period. 12 INTEREST EXPENSE Interest expense in the second quarter of 1997 was approximately $1,850,000, an increase of approximately $1,381,000, or 294.9%, over approximately $469,000 incurred in the second quarter of 1996. Interest expense as a percentage of net sales increased to 5.0% from 3.3% for the same period a year ago. The increase in interest expense was attributable primarily to the increase in bank debt resulting from the acquisition of JEH. INCOME TAXES The Company's effective tax rate was 42.0% in the second quarter of 1997 versus 43.0% in 1996. The provision for income taxes in the second quarter of 1997 was approximately $1,342,000 compared to approximately $557,000 for the second quarter of 1996. NET INCOME As a result of the above, the Company recorded net income of $1,852,000, or $.17 per common share, in the quarter ended June 30, 1997, compared to net income of $739,000, or $.09 per common share, in the quarter ended June 30, 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated working capital at June 30, 1997 was approximately $31,755,000 and cash and cash equivalents available were approximately $5,745,000. The Company's cash resources were satisfactory to meet its obligations for the quarter ended June 30, 1997. Under the terms of a new Financing and Security Agreement entered into on November 1, 1996, between Banque Paribas (the "Bank") and the Company, the Bank provided up to $90.0 million principal amount of senior financing (the "Senior Financing Facilities") that includes: (i) $57 million of term loans (the "Term Loans") for use in connection with Hanger's acquisition of JEH; (ii) an $8.0 million revolving loan facility (the "Revolver"); and (iii) up to $25 million principal amount of loans under an acquisition loan facility (the "Acquisition Loans") for use in connection with future acquisitions. In addition, on November 1, 1996, the Company borrowed $8.0 million from the Bank and Chase Venture Capital Associates L.P. in the form of Senior Subordinated Notes ("Senior Subordinated Notes") with detachable warrants. The Company's total debt at June 30, 1997, including a current portion of approxi mately $6,806,000, was approximately $82,754,000. Such indebtedness included: (i) $55,114,000 of Term Loans; (ii) $8,000,000 of Acquisition Loans; (iii) $5,500,000 13 borrowed under the Revolver; (iv) $6,387,000, net of discount, borrowed under the Senior Subordinated Notes; and (v) a total of $7,753,000 of other indebtedness. Of the Term Loans, approximately $29.0 million principal amount (the "A Term Loan") is being amortized in quarterly amounts and will mature on December 31, 2001, and $28.0 million principal amount (the "B Term Loan") is being amortized in quarterly amounts and will mature on December 31, 2003. The final maturity of any loans under the Revolver and Acquisition Loans will mature on November 2, 2001. The Senior Financing Facilities provided for an initial commitment fee of 2.65% on the $90.0 million facility. In addition, an unused commitment fee of .5% of 1% per year on the unused portion of the Revolver and the Acquisition Loan facilities is payable quarterly in arrears. The Senior Financing Facilities are collateralized by a first priority security interest in all of the common stock of the Company's subsidiaries and all assets of the Company and its subsidiaries. At the Company's option, the annual interest rate will be adjusted to be either LIBOR plus 2.75% or a Base Rate (as defined below) plus 1.75% in the case of the A Term Loan, Acquisition Loans and Revolver borrowings, and adjusted LIBOR plus 3.25% or a Base Rate plus 2.25% in the case of the B Term Loan. The "Base Rate" is defined as the higher of (i) the federal funds rate plus .5%, or (ii) the prime commercial lending rate of Chase Manhattan Bank, N.A., as announced from time to time. The Agreement relating to the Senior Financing Facilities contains a minimum net worth covenant and prohibits the payment of cash dividends on the Company's Common Stock. All or any portion of outstanding loans under any of the Senior Financing Facilities 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 paid 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. Cash interest on the Senior Subordinated Notes, which mature on November 1, 2004, is payable quarterly at an annual rate of 8.0%. However, the Company is permitted, in lieu of cash interest, to pay interest in a combination of cash and additional Senior Subordinated Notes ("PIK Interest Notes") at the above interest rate. In that event, interest paid in cash will be at an annual rate of 3.2% and interest paid in the form of PIK Interest Notes will be paid at an annual rate of 4.8%. The Senior Subordinated Notes are subordinated to loans under the Senior Financing Facilities. The Company is, at its option, entitled to redeem the Senior Subordinated Notes at any time at their liquidation value. Detachable warrants issued by the Company in conjunction with the Senior Subordinated Notes represent 1.6 million shares of the Company Common Stock with an exercise price equal to $4.01 as to 929,700 shares, and $6.38 as to 670,300 shares. Up to 50% of the warrants (representing up to 800,000 shares of the Company Common Stock) 14 will be terminated upon the repayment of 100% of the Senior Subordinated Notes on or prior to May 1, 1998. An additional 5% of the warrants (representing up to 80,000 shares of the Company Common Stock) will be terminated upon the repayment of 100% of the Senior Subordinated Notes on or prior to November 1, 1997. Warrants will be terminated pro-rata across the above two exercise prices. On November 1, 1996, the Company acquired JEH, in a merger transaction effected pursuant to an Agreement and Plan of Merger, dated as of July 29, 1996 (the "Merger Agreement"), by and among the Company, JEH and JEH Acquisition Corporation, a Georgia corporation ("Acquisition") wholly-owned by the Company. The Merger Agreement provided for the merger of Acquisition with and into JEH (the "Merger"), as a result of which JEH became a wholly-owned subsidiary of the Company, effective November 1, 1996. Pursuant to the Merger Agreement, the Company paid a total of $44 million in cash and issued a total of approximately one million shares of the Company Common Stock in exchange for all of JEH's outstanding common stock on November 1, 1996, and paid an additional $1,783,000 to former JEH shareholders on March 27, 1997 pursuant to provisions in the Merger Agreement calling for a post-closing adjustment. During the first six months of 1997, the Company acquired four orthotic and prosthetic companies. The aggregate purchase price excluding potential earn-out provisions was $9,679,200, comprised of $6,315,000 in cash, $2,864,000 in promissory notes and $500,000 in common stock. The cash portion of these acquisitions was borrowed as 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 31, 1997, the Company sold 5.0 million shares of Common Stock in an underwritten public offering at $11.00 per share resulting in approximately $51 million of net proceeds to the Company. The Company applied such net proceeds of the public offering to the repayment of the Senior Subordinated Notes and certain indebtedness outstanding under the Senior Financing Facilities. Upon repayment of the Senior Subordinated Notes, the Company was required to write off the unamortized debt discount of $1.9 million ($1.1 million net of tax benefit that was recorded upon the issuance of such notes). As a result of the Company's repayment of the Senior Subordinated Notes, the Warrants previously issued by the Company in conjunction with the Senior Subordinated Notes were amended to reflect the reduction in the aggregate number of shares of Company Common Stock issuable upon exercise of the Warrants from 1,600,000 shares to 720,000 shares. 15 Capital expenditures during the first six months of 1997 approximated $1.1 million and the Company expects approximately $.9 million of additional capital expenditures during the balance of the year. Working capital is expected to be available to fund such capital expenditures. 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 has entered into an interest rate swap agreement to reduce the impact of changes in interest rates on its A Term Loan commitment. At June 30, 1997, the Company had an outstanding interest rate swap agreement with a commercial bank, having a total notional principal amount of $28.5 million. The agreement effectively minimizes the Company's base interest rate exposure between a floor of 5.32% and a cap of 7.0%. The interest rate swap agreement matures on September 30, 1999. The Company is exposed to credit loss in the event of non-performance by the other party to the interest rate swap agreement. All other debt accrues interest at a fixed rate except the B Term Loan commitment which accrues interest at a floating rate. A material change in interest rates could have a significant impact on the Company's operating results. 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. In February 1997, the Financial Accounting Standards Board issued SFAS 128, "Earnings Per Share," which will replace the current rules for earnings per share computations, presentation and disclosure. Under the new standard, basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. SFAS 128 requires a dual presentation of basic and diluted earnings per share on the face of the income statement. The Company will be required to adopt SFAS 128 in the fourth quarter of this year and, as required by the standard, will restate all prior period earnings per share data. The Company's earnings per share, as calculated under SFAS 128, are not expected to be materially different from those computed under the present accounting standard. 16 This report contains forward-looking statements setting forth the Company's beliefs or expectations relating to future revenues and profitability. Actual results may differ materially from projected or expected results due to changes in the demand for the Company's O&P services and products, uncertainties relating to the results of operations or recently acquired and newly acquired O&P patient care practices, the Company's ability to attract and retain qualified O&P practitioners, governmental policies affecting O&P operations and other risks and uncertainties affecting the health-care industry generally. Readers are cautioned not to put undue reliance on forward-looking statements. The Company disclaims any intent or obligation to up-date publicly these forward-looking statements, whether as a result of new information, future events or otherwise. 17 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 June 3, 1997. The following eight directors were reelected by the following votes to serve as members of the Board of Directors for one year or until their successors are elected and qualified:
NAME VOTES FOR VOTES WITHHELD Ivan R. Sabel 8,754,478 48,391 Mitchell J. Blutt, M.D. 8,751,028 51,841 Edmond E. Charrette, M.D. 8,754,478 48,391 Thomas P. Cooper, M.D. 8,755,478 47,391 Robert J. Glaser, M.D. 8,751,616 51,253 James G. Hellmuth 8,753,566 49,303 William L. McCulloch 8,751,616 51,253 Daniel A. McKeever 8,752,616 50,253 H. E. Thranhardt 8,755,478 47,391
Shareholders ratified the selection of Coopers & Lybrand as the independent accountants for the Company for the current fiscal year. Such proposal was approved by a vote of 8,500,512 shares for and 288,966 shares against, with 12,908 shares abstaining. Item 5. Exhibits And Reports On Form 8-K ------- -------------------------------- (a) EXHIBITS The following exhibits is filed herewith: 11 Computation of Net Income Per Share 27 Financial Data Schedule (b) REPORTS ON FORM 8-K On April 15, 1997, the Company filed a Form 8-K (Item 2), as amended on June 13, 1997 (to provide Item 7 financial information), regarding the Company's acquisition of the non-manufacturing O&P assets of ACOR Orthopaedic, Inc. On May 12, 1997, the Company filed a Form 8-K (Item 2), as amended on July 16, 1997 (to provide Item 7 financial information), regarding the Company's acquisition of the O&P assets of Fort Walton Orthopedic, Inc. and Mobile Limb & Brace, Inc. 18 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 12, 1997 /s/IVAN R. SABEL ----------------------- Ivan R. Sabel Chief Executive Officer Date: August 12, 1997 /s/RICHARD A. STEIN ----------------------- Richard A. Stein Vice President - Finance Principal Financial and Accounting Officer 19 EX-27 2
5 0000722723 HANGER ORTHOPEDIC GROUP, INC. 6-MOS DEC-31-1997 JUN-30-1997 5,744,561 0 28,224,831 3,752,000 16,656,795 56,059,674 24,099,239 6,546,107 148,358,278 24,304,330 75,948,349 290,434 0 96,104 43,026,463 148,358,278 67,594,259 67,594,259 34,552,051 34,552,051 25,319,303 0 3,376,771 4,259,149 1,789,000 2,469,849 0 0 0 2,469,849 .23 .23
EX-11 3 HANGER ORTHOPEDIC GROUP, INC. EXHIBIT 11 COMPUTATION OF NET INCOME PER SHARE FOR THE THREE MONTHS ENDED June 30, 1997 and 1996
1997 1996 ---- ---- Net income $ 1,851,934 $ 738,481 Less: Dividends declared (6,440) (5,886) ------------ ------------ Total $ 1,845,494 $ 732,595 Divided by: Weighted average number of shares outstanding 10,773,837 8,354,424 ------------ ------------ Net income per share $ .17 $ .09 ============ ============
FOR THE SIX MONTHS ENDED June 30, 1997 and 1996
1997 1996 ---- ---- Net income $ 2,469,849 $ 888,490 Less: Dividends declared (12,735) (11,641) ------------ ------------ Total $ 2,457,114 $ 876,849 Divided by: Weighted average number of shares outstanding 10,726,396 8,351,436 ------------ ------------ Net income per share $ .23 $ .11 ============ ============
-----END PRIVACY-ENHANCED MESSAGE-----