-----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, UKMFJkxGd0zwn+4RV0LB2wU6UnxnAlfhW4rfvLMPpd/xrho3Gb/bJoJU4cTn8pke TZ49vzQ1oGgvqCoYB3KSsA== 0000904456-97-000176.txt : 19971103 0000904456-97-000176.hdr.sgml : 19971103 ACCESSION NUMBER: 0000904456-97-000176 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971031 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: SEC FILE NUMBER: 001-10670 FILM NUMBER: 97705969 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 SEPTEMBER 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 October 28, 1997; 15,340,255 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 - September 30, 1997 (unaudited) and December 31, 1996 1 Consolidated Statements of Income for the nine months ended September 30, 1997 and 1996 (unaudited) 3 Consolidated Statements of Income for the three months ended September 30, 1997 and 1996 (unaudited) 4 Consolidated Statements of Cash Flows for the nine months ended September 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 10 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19
HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1997 1996 ------------------------------------- (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 6,479,340 $ 6,572,402 Accounts receivable less allowances for doubtful accounts of $4,579,000 and $1,144,000 in 1997 and 1996, respectively 30,273,255 24,321,872 Inventories 16,670,805 15,916,638 Prepaid expenses and other assets 2,023,209 1,595,169 Deferred income taxes 3,159,280 3,159,280 ------------ ------------ Total current assets 58,605,889 51,565,361 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT Land 4,269,045 4,269,045 Buildings 8,297,644 8,017,547 Machinery and equipment 7,127,515 6,275,307 Furniture and fixtures 2,228,602 2,095,900 Leasehold improvements 2,799,037 2,139,207 ------------ ------------ 24,721,843 22,797,006 Less accumulated depreciation and 7,098,202 5,497,809 ------------ ------------ 17,623,641 17,299,197 ------------ ------------ INTANGIBLE ASSETS Excess of cost over net assets acquired 73,812,496 63,935,447 Non-compete agreements 2,119,479 1,981,329 Other intangible assets 3,136,688 6,152,607 ------------ ------------ 79,068,663 72,069,383 Less accumulated amortization 8,512,925 6,917,960 ------------ ------------ 70,555,738 65,151,423 ------------ ------------ OTHER ASSETS Other assets 826,379 925,446 ------------ ------------ TOTAL ASSETS $147,611,647 $134,941,427 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 1 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1997 1996 ------------------------------------- (unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 4,534,880 $ 4,902,572 Accounts payable 3,109,744 4,141,993 Accrued expenses 6,220,634 7,815,028 Customer deposits 1,023,141 578,219 Accrued wages and payroll taxes 5,880,976 8,321,395 Deferred revenue 191,013 306,998 ------------- ------------- Total current liabilities 20,960,388 26,066,205 Long-term debt 19,984,626 64,297,801 Deferred income taxes 2,377,627 2,377,627 Other liabilities 2,390,261 2,188,278 Mandatorily redeemable preferred stock, class C, liquidation preference of $500 per share 297,002 277,701 Mandatorily redeemable preferred stock, class F, liquidation preference of $500 per share SHAREHOLDERS' EQUITY Common stock, $.01 par value; 25,000,000 shares authorized, 15,472,835 and 9,449,129 shares issued and 15,339,339 and 9,315,634 shares outstanding in 1997 and 1996, respectively 154,729 94,492 Additional paid-in capital 100,800,577 41,008,363 Retained earnings (deficit) 1,301,999 (713,478) ------------- ------------- 102,257,305 40,389,377 Treasury stock - (133,495 shares) (655,562) (655,562 ------------- ------------- 101,601,743 39,733,815 ------------- ------------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $147,611,647 $134,941,427 ============= ===============
The accompanying notes are an integral part of the consolidated financial statements. 2
1997 1996 ---- ---- Net Sales $106,433,592 $ 40,778,816 Cost of products and services sold 54,331,907 18,729,475 ------------- ------------- Gross profit 52,101,685 22,049,341 Selling, general & administrative 35,862,411 15,680,448 Depreciation and amortization 2,210,508 1,377,631 Amortization of excess cost over net assets acquired 1,321,714 509,220 ------------ ------------- Income from operations 12,707,052 4,482,042 Other expense Interest expense, net (4,455,955) (1,321,780) Other expense (131,695) (106,685) ------------- -------------- Income from operations before income taxes and extraordinary item 8,119,402 3,053,577 Provision for income taxes 3,410,136 1,315,022 ------------- -------------- Net income before extraordinary item 4,709,266 1,738,555 Extraordinary loss on early extinguishment of debt (net of tax benefit of $1,950,700) (2,693,791) ------------- -------------- Net income $ 2,015,475 $ 1,738,555 ============ ============== Net income (loss) per common share: Net income before extraordinary item $ .37 $ .21 Extraordinary loss on early extinguishment of debt (.21) ------------- -------------- Net income per share $ .16 $ .21 ============= ============== Weighted average number of common shares outstanding 12,647,065 8,384,307 ============= =============
The accompanying notes are an integral part of the consolidated financial statements. 3 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED September 30, (unaudited)
1997 1996 ---- ---- Net Sales $ 38,839,333 $ 14,529,144 Cost of products and services sold 19,779,856 6,490,632 ------------- ------------- Gross profit 19,059,477 8,038,512 Selling, general & administrative 12,898,204 5,458,209 Depreciation and amortization 716,244 421,946 Amortization of excess cost over net assets acquired 460,882 169,546 ------------- ------------- Income from operations 4,984,147 1,988,811 Other expense: Interest expense, net (1,079,184) (460,241) Other (44,710) (33,183) ------------- ------------- Income from operations before income taxes and extraordinary item 3,860,253 1,495,387 Provision for income taxes 1,620,836 645,322 ------------- ------------- Net income before extraordinary item 2,239,417 850,065 Extraordinary loss on early extinguishment of debt (net of tax benefit of $1,950,700) (2,693,791) ------------- ------------- Net income (loss) $ (454,374) $ 850,065 ============= ============== Net income (loss) per common share: Net income before extraordinary item $ .15 $ .10 Extraordinary loss on early extinguishment of debt (.18) ------------- -------------- Net income (loss) per share $ (.03) .10 ============= ============== Weighted average number of common shares outstanding 14,725,180 8,394,444 ============= ==============
The accompanying notes are an integral part of the consolidated financial statements. 4 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED September 30, (unaudited)
1997 1996 ---- ---- Cash flows from operating activities: Net income $ 2,015,475 $ 1,738,555 Adjustments to reconcile net income to net cash provided by operating activities: Provision for bad debt 3,958,988 832,678 Depreciation and amortization 2,210,508 1,377,631 Amortization of excess cost over net assets acquired 1,321,714 509,220 Amortization of debt discount 152,065 Extraordinary loss on the early extinguishment of debt 4,644,491 Changes in assets and liabilities, net of effect from acquired companies: Accounts receivable (8,552,527) (1,637,589) Inventory 194,269 (404,201) Prepaid and other assets (402,809) (118,766) Other assets 101,329 (73,151) Accounts payable (1,348,312) 236,011 Accrued expenses (1,594,727) (264,702) Accrued wages and payroll taxes (2,509,158) 39,439 Customer deposits 444,922 (41,009) Deferred revenue (115,985) 152,984 Other liabilities 201,984 (11,871) --------------- -------------- Total adjustments (1,293,248) 596,674 --------------- -------------- Net cash provided by operations 722,227 2,335,229 --------------- -------------- Cash flows from investing activities: Purchase of fixed assets (1,769,833) (703,474) Acquisitions, net of cash (8,649,183) (15,964) Purchase of patents (88,779) (95,000) Purchase of non-compete agreements (138,151) Other intangibles (7,596) --------------- -------------- Net cash used in investing activities (10,645,946) (822,034) --------------- --------------
Continued The accompanying notes are an integral part of the consolidated financial statements. 5 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED September 30, (unaudited)
1997 1996 ---- ---- Cash flows from financing activities: Net borrowings under revolving credit facility $ $ (250,000) Proceeds from the sale of common 60,202,157 39,804 stock Proceeds from long-term debt 8,256,000 Repayment of long-term debt (58,627,500) (1,342,641) Net cash provided by (used in) --------------- financing activities 9,830,657 (1,552,837) --------------- ------------- Net change in cash and cash equivalents for the period (93,062) (39,642) Cash and cash equivalents at beginning of period 6,572,402 1,456,305 --------------- ------------- Cash and cash equivalents at end of period 6,479,340 1,416,663 =============== ============= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 4,270,921 $ 1,340,970 ================ ============= Taxes 2,306,000 1,460,190 ================ ============= Non-cash financing and investing activities: Issuance of common stock in connection with acquisitions $ 500,000 =============== Issuance of notes in connection $ 2,864,200 =============== Dividends declared preferred stock $ 19,319 $ 17,656 =============== =============
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. ("Hanger" or the "Company"), as of December 31, 1996, and notes thereto included in the Annual Report on Form 10-K for the year December 31, 1996, 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, the Company, will restate all prior period earnings per share data. The Company's 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 September 30, 1997 and December 31, 1996 were comprised of the following:
SEPTEMBER 30, 1997 DECEMBER 31, 1996 (unaudited) Raw materials $ 8,339,141 $ 7,504,442 Work-in-process 912,589 831,632 Finished goods 7,419,075 7,580,564 ----------- ------------ $16,670,805 $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 nine months ended September 30, 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 64,000 shares of Common Stock of the Company valued at $500,000. 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:
Nine Months Ended September 30, 1997 1996 ---- ---- Net sales $109,406,000 $98,205,000 Net income 2,275,000 1,828,000 Net income per common share and common share equivalent .18 .19
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 --- SALE OF COMMON STOCK 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 8 net proceeds to the Company. On August 28, 1997, the Company sold an additional 750,000 shares of its Common Stock as a result of the exercise of an over-allotment option granted to the underwriters in connection with the public offering on July 31, 1997. Exercise of the over-allotment option resulted in the Company's receipt of approximately $7.6 million of additional net proceeds. The Company applied the net proceeds of the public offering to the repayment of Senior Subordinated Notes and certain indebtedness outstanding under the Company's Senior Financing Facilities. Upon repayment of this debt, the Company was required to write off the debt issue costs and unamortized debt discount of $2.7 million ($2.0 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 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain items of the Company's statements of operations and their percentage of the Company's net sales:
For the Nine For the Three Months Ended Months Ended SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1997 1996 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of products and services sold 51.0 45.9 50.9 44.7 Gross profit 49.0 54.1 49.1 55.3 Selling, general & administrative expenses 33.7 38.5 33.2 37.6 Depreciation and amortization 2.1 3.4 1.8 2.9 Amortization of excess cost over net assets acquired 1.2 1.2 1.2 1.2 Income from operations 11.9 11.0 12.8 13.7 Interest expense 4.2 3.2 2.8 3.2 Provision for income taxes 3.2 3.2 4.2 4.4 Net income before extraordinary item 4.4 4.3 5.8 5.9 Loss from early extinguishment of debt 2.5 6.9 Net income 1.9 4.3 1.2 5.9
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 NET SALES Net sales for the nine months ended September 30, 1997, amounted to approximately $106,434,000, an increase of approximately $65,655,000, or 161%, over net sales of approximately $40,779,000 for the nine months ended September 30, 1996. Contributing to the increase were sales attributable to Hanger's acquisition of J.E. Hanger, Inc. of Georgia ("JEH") on November 1, 1996, as well as an 11.7% increase in sales by those Hanger patient-care centers operating during both nine month periods. The Company believes that its net sales during the balance of 1997 will continue to substantially exceed 1996 net sales. GROSS PROFIT Gross profit during the nine months ended September 30, 1997 amounted to approximately $52,101,000, an increase of approximately $30,052,000, or 136%, over gross profit of approximately $22,049,000 for the nine months ended September 30, 10 1996. Gross profit as a percent of net sales decreased from 54.1% in the nine months ended September 30, 1996 to 49.0% in the nine months ended September 30, 1997. The 4.1% decrease in gross profit as a percent of net sales is primarily attributable to the acquisition effective November 1, 1996, of JEH, which operated a large distribution division that has lower gross profit margins than patient care services. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses in the nine months ended September 30, 1997 increased by approximately $20,182,000, or 128.7%, compared to the nine months ended September 30, 1996. The increase in selling, general and administrative expenses was primarily a result of the acquisition of JEH in November 1996. Selling, general and administrative expenses as a percent of net sales decreased to 33.7% from 38.5% for the same period a year ago. The selling, general and administrative expenses as a percent of net sales decreased primarily as a result of cost cutting measures completed during the fourth quarter of 1996 and the first six months of 1997. INCOME FROM OPERATIONS Principally as a result of the above, income from operations in the nine months ended September 30, 1997 amounted to approximately $12,707,000, an increase of $8,225,000, or 183.5%, over the prior year's comparable period. Income from operations as a percent of net sales increased to 11.9% in the nine months ended September 30, 1997 from 11.0% for the prior year's comparable period. INTEREST EXPENSE Interest expense in the nine months ended September 30, 1997 amounted to approximately $4,456,000, an increase of approximately $3,134,000, or 237.1%, over the approximately $1,322,000 of interest expense incurred in the nine months ended September 30, 1996. Interest expense as a percent of net sales increased to 4.2% from 3.2% for the same period a year ago. The increase in interest expense was primarily attributable to the increase in bank debt resulting from the acquisition of JEH in November 1996, which was offset in part by the repayment of bank debt out of the proceeds of the public equity offering in the third quarter of 1997. INCOME TAXES The Company's effective tax rate was 42% in the nine months ended September 30, 1997 versus 43% in 1996. The provision for income taxes in the nine months ended September 30, 1997 amounted to approximately $3,410,000 compared to approximately $1,315,000 in the nine months ended September 30, 1996. 11 EXTRAORDINARY ITEM An extraordinary item of $2.7 million (net of a tax benefit of $2.0 million), represents entirely a non-cash write-off of debt issue costs and debt discount as a result of extinguishing approximately $58.6 million of bank debt from the net proceeds of the third quarter public equity offering. NET INCOME As a result of the above, the Company recorded net income of approximately $2,015,000, or $.16 per share, on approximately 12,647,000 shares outstanding for the nine months ended September 30, 1997, compared to net income of approximately $1,739,000, or $.21 per share, on approximately 8,384,000 shares outstanding in the quarter ended September 30, 1996. The Company believes that its profitability during the balance of 1997 will continue to be enhanced as a result of the integration of the operations of Hanger and JEH and the cost cutting measures completed by the Company in late 1996 and the first six months of 1997. FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1996 NET SALES Net sales for the quarter ended September 30, 1997, were approximately $38,839,000, an increase of approximately $24,310,000, or 167.3%, over net sales of approximately $14,529,000 for the quarter ended September 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 a 12.2% 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 September 30, 1997 was approximately $19,059,000, an increase of approximately $11,021,000, or 137.1%, over gross profit of approximately $8,038,000 for the quarter ended September 30, 1996. Gross profit as a percentage of net sales decreased from 55.3% in the third of 1996 to 49.1% in the third quarter of 1997. The 5.2% 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 September 30, 1997 increased by approximately $7,440,000, or 136.3%, compared to the quarter ended 12 September 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 33.2% from 37.6% 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 late 1996 and the first six months of 1997. INCOME FROM OPERATIONS Principally as a result of the above, income from operations in the quarter ended September 30, 1997 was approximately $4,984,000, an increase of $2,995,000, or 150.6%, over the prior year's comparable quarter. Income from operations as a percentage of net sales decreased to 12.8% in the third quarter of 1997 from 13.7% for the prior year's comparable period. INTEREST EXPENSE Interest expense in the third quarter of 1997 was approximately $1,079,000, an increase of approximately $619,000, or 134.5%, over approximately $460,000 incurred in the third quarter of 1996. Interest expense as a percentage of net sales decreased to 2.8% from 3.2% for the same period a year ago. The decrease in interest expense was attributable primarily to the increase in bank debt resulting from the acquisition of JEH in November 1996, which was offset in part by the repayment of bank debt out of the net proceeds of the public equity offering during the third quarter of 1997. INCOME TAXES The Company's effective tax rate was 42.0% in the third quarter of 1997 versus 43.2% in 1996. The provision for income taxes in the third quarter of 1997 was approximately $1,621,000 compared to approximately $645,000 for the third quarter of 1996. EXTRAORDINARY ITEM An extraordinary item of $2.7 million (net of a tax benefit of $2.0 million), represents entirely a non-cash write-off of debt issue costs and debt discount as a result of extinguishing approximately $58.6 million of bank debt from the net proceeds of the third quarter public equity offering. NET INCOME As a result of the above, the Company recorded a net loss of $454,000, or $.03 per share, in the quarter ended September 30, 1997, compared to net income of $850,000, or $.10 per share, in the quarter ended September 30, 1996. 13 LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated working capital at September 30, 1997 was approximately $37,645,000 and cash and cash equivalents available were approximately $6,479,000. The Company's cash resources were satisfactory to meet its obligations for the quarter ended September 30, 1997. Under the terms of a 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 included: (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 net proceeds of the public equity offering in the third quarter of 1997 were used to repay (i) $37,371,500 of the Term Loans, (ii) $5,000,000 of the loans under the Revolver, (iii) $8,000,000 of Acquisition Loans and (iv) all of the Senior Subordinated Notes. The Company's total debt at September 30, 1997, including a current portion of approximately $4,535,000, was approximately $24,520,000. Such indebtedness included: (i) $17,495,000 of Term Loans; and (ii) a total of $7,025,000 of other indebtedness. Of the Term Loans, approximately $8.8 million principal amount (the "A Term Loan") is being amortized in quarterly amounts and will mature on December 31, 2001, and $8.7 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. Effective October 22, 1997, at the Company's option, the annual interest rate will be adjusted to be either LIBOR plus 1.25% or a Base Rate (as defined below) plus .25% in the case of the A Term Loan, Acquisition Loans and Revolver borrowings, and adjusted LIBOR plus 1.50% or a Base Rate plus .50% in the case of the B Term Loan. Interest rates on the Senior Financing Facilities will increase upon the occurrence of certain increases in the ratio of the Company's total indebtedness to annual earnings before interest, taxes, depreciation and amortization. The "Base Rate" is defined as the higher of (i) the federal funds rate plus .5%, or (ii) the prime commercial 14 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. Detachable warrants issued by the Company in conjunction with the Senior Subordinated Notes represent 720,000 shares of the Company Common Stock with an exercise price equal to $4.01 as to 418,365 shares, and $6.38 as to 301,635 shares. 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. 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 nine months ended September 30, 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 64,000 shares of Common Stock of the Company valued at $500,000. 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. 15 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. On August 28, 1997, the Company sold an additional 750,000 shares of its Common Stock as a result of the exercise of an over-allotment option granted to the underwriters in connection with the public offering on July 31, 1997. Exercise of the over-allotment option resulted in the Company's receipt of approximately $7.6 million of additional net proceeds. The Company applied the 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 this debt, the Company was required to write off the debt issue costs and unamortized debt discount of $2.7 million ($2.0 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. Capital expenditures during the nine months ended September 30, 1997 approximated $1.8 million and the Company expects approximately $.2 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 16 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. 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 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS - Exhibit 11 - Computation of Net Income Per Share Exhibit 27 - Financial Data Schedule (b) REPORTS ON FORM 8-K - On July 16, 1997, the Company filed an amendment to the Form 8-K filed by it in June 5, 1997 regarding certain acquisitions. 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: October 31, 1997 /s/IVAN R. SABEL ----------------------- Ivan R. Sabel Chief Executive Officer Date: October 31, 1997 /s/RICHARD A. STEIN ----------------------- Richard A. Stein Vice President - Finance Principal Financial and Accounting Officer 19 EX-11 2 HANGER ORTHOPEDIC GROUP, INC. EXHIBIT 11 COMPUTATION OF NET INCOME PER SHARE FOR THE THREE MONTHS ENDED September 30,
1997 1996 ---- ---- Net (loss) income $ (454,374) $ 850,065 Less: Dividends declared (6,584) (5,628) ----------- ------------- Total $ (460,958) $ 844,047 Divided by: Weighted average number of shares outstanding 14,725,180 8,394,444 -------------- ------------- Net income (loss) per share $ .03 $ .10 ============= ===============
FOR THE NINE MONTHS ENDED September 30,
1997 1996 ---- ---- Net income $ 2,015,475 $ 1,738,555 Less: Dividends declared (19,319) (17,659) ------------- ------------- Total $ 1,996,156 $ 1,720,896 Divided by: Weighted average number of shares outstanding 12,647,065 8,384,307 ------------- ------------- Net income per share $ .16 $ .21 ============== =============
EX-27 3
5 0000722723 HANGER ORTHOPEDIC GROUP, INC. 6-MOS DEC-31-1997 JUN-30-1997 6,479,340 0 30,273,255 4,579,000 16,670,805 58,605,889 24,721,843 7,098,202 147,611,647 20,9603880 19,984,626 279,002 0 54,729 101,447,014 147,611,647 106,433,592 106,433,592 54,331,907 54,331,907 39,394,633 0 4,455,955 8,119,402 3,410,136 4,709,266 0 2,693,791 0 2,015,475 .16 .16
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