-----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, UqbUz/cT0l2RnOE+hcGPKhb+B6UER2gQQHg60gMafGSf6CHxRj+yGba5sXKf+fVy bpAMg8ieEEZbGw35S3CmhA== 0000904456-98-000200.txt : 19981109 0000904456-98-000200.hdr.sgml : 19981109 ACCESSION NUMBER: 0000904456-98-000200 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981106 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: 98739377 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, 1998 ------------------ 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 14, 1998; 18,178,751 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 30,1998 (unaudited) and December 31, 1997 1 Consolidated Statements of Income for the three months ended September 30, 1998 and 1997 (unaudited) 3 Consolidated Statements of Income for the nine months ended September 30, 1998 and 1997 (unaudited) 4 Consolidated Statements of Cash Flows for the nine months ended September 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 11 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, 1998 1997 -------------- -------------- (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 9,439,692 $ 6,557,409 Accounts receivable less allowances for doubtful accounts of $8,030,000 and $4,871,000 in 1998 and 1997, respectively 35,725,044 31,145,327 Inventories 18,683,711 17,445,476 Prepaid expenses and other assets 4,717,819 4,260,656 Deferred income taxes 2,127,185 2,127,185 -------------- -------------- Total current assets 70,693,451 61,536,053 -------------- -------------- PROPERTY, PLANT AND EQUIPMENT Land 4,267,045 4,269,045 Buildings 8,420,692 8,326,732 Machinery and equipment 12,379,676 7,591,821 Furniture and fixtures 2,898,825 2,378,808 Leasehold improvements 4,079,137 3,142,244 -------------- -------------- 32,045,375 25,708,650 Less accumulated depreciation and amortization 9,539,484 7,538,385 -------------- -------------- 22,505,891 18,170,265 -------------- -------------- INTANGIBLE ASSETS Excess of cost over net assets acquired 111,188,711 81,150,328 Non-compete agreements 2,604,417 2,236,979 Other intangible assets 3,568,230 3,221,912 -------------- -------------- 117,361,358 86,609,219 Less accumulated amortization 11,449,566 9,101,531 -------------- -------------- 105,911,792 77,507,688 -------------- -------------- OTHER ASSETS Other 867,562 768,604 -------------- -------------- TOTAL ASSETS $ 199,978,696 $ 157,982,610 ============== ==============
The accompany notes are an integral part of the consolidated financial statements. 1 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1998 1997 -------------- -------------- (unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 4,484,243 $ 5,747,865 Accounts payable 5,197,459 3,827,338 Accrued expenses 5,413,039 3,597,104 Customer deposits 1,103,294 1,145,001 Accrued wages and payroll taxes 8,639,105 8,037,805 Deferred revenue 273,024 150,418 -------------- -------------- Total current liabilities 25,110,164 22,505,531 -------------- -------------- Long-term debt 11,762,013 23,237,321 Deferred income taxes 3,405,833 3,405,833 Other liabilities 2,257,567 2,210,445 Mandatorily redeemable preferred stock, class C, liquidation preference of $500 per share 324,881 303,753 Mandatorily redeemable preferred stock, class F, liquidation preference of $500 per share SHAREHOLDERS' EQUITY Common stock, $.01 par value; 25,000,000 shares authorized, 18,459,989 and 15,670,100 shares issued, and 18,326,494 and 15,536,605 shares outstanding in 1998 and 1997 184,601 156,702 Additional paid-in capital 143,922,864 102,585,837 Retained earnings 13,666,335 4,232,750 -------------- -------------- 157,773,800 106,975,289 Treasury stock - (133,495 shares) (655,562) (655,562) -------------- -------------- 157,118,238 106,319,727 -------------- -------------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 199,978,696 $ 157,982,610 ============== ==============
The accompany notes are an integral part of the consolidated financial statements. 2 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED September 30, 1998 and 1997 (unaudited)
1998 1997 -------------- -------------- Net Sales $ 48,776,505 $ 38,839,333 Cost of products and services sold 23,977,787 19,779,856 -------------- -------------- Gross profit 24,798,718 19,059,477 Selling, general & administrative 15,915,819 12,898,204 Depreciation and amortization 865,445 716,244 Amortization of excess cost over net assets acquired 656,545 460,882 -------------- -------------- Income from operations 7,360,909 4,984,147 Other expense: Interest expense, net (386,833) (1,079,184) Other 8,878 (44,710) -------------- -------------- Income before income taxes 6,982,954 3,860,253 Provision for income taxes 2,863,000 1,620,836 -------------- -------------- Net income before extraordinary item 4,119,954 2,239,417 Extraordinary loss on early extinguishment of debt (net of tax benefit of $1,950,700) (2,693,791) -------------- -------------- Net income (loss) $ 4,119,954 $ (454,374) ============== ============== Basic Per Common Share Data Net income before extraordinary item $ .24 $ .17 Extraordinary item (.20) -------------- -------------- Net income $ .24 $ (.03) ============== ============== Shares used to compute basic per common share amounts 17,291,768 12,871,560 ============== ============== Diluted Per Common Share Data Net income before extraordinary item $ .22 $ .15 Extraordinary item (.18) -------------- -------------- Net income $ .22 $ (.03) ============== ============== Shares used to compute diluted per common share Amounts 19,039,164 14,426,302 ============== ==============
The accompany 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, 1998 and 1997 (unaudited)
1998 1997 -------------- -------------- Net Sales $ 136,426,413 $ 106,433,592 Cost of products and services sold 68,541,960 54,331,907 -------------- -------------- Gross profit 67,884,453 52,101,685 Selling, general & administrative 46,099,269 35,862,411 Depreciation and amortization 2,351,227 2,210,508 Amortization of excess cost over net assets acquired 1,783,932 1,321,714 -------------- -------------- Income from operations 17,650,025 12,707,052 Other income expense: Interest expense, net (1,700,664) (4,455,955) Other income (expense) 39,224 (131,695) -------------- -------------- Income before income taxes 15,988,585 8,119,402 Provision for income taxes 6,555,000 3,410,136 -------------- -------------- Net income before extraordinary item 9,433,585 4,709,266 Extraordinary loss on early extinguishment of debt (net of tax benefit of $1,950,700) (2,693,791) -------------- -------------- Net income $ 9,433,585 $ 2,015,475 ============== ============== Basic Per Common Share Data Net income before extraordinary item $ .58 $ .45 Extraordinary item (.26) -------------- -------------- Net income $ .58 $ .19 ============== ============== Shares used to compute basic per common Share amounts 16,197,010 10,562,973 ============== ============== Diluted Per Common Share Data Net income before extraordinary item $ .53 $ .40 Extraordinary item (.23) -------------- -------------- Net income $ .53 $ .17 ============== ============== Shares used to compute diluted per common Share amounts 17,878,220 11,806,607 ============== ==============
The accompany notes are an integral part of the consolidated financial statements. 4 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED September 30, 1998 and 1997 (unaudited)
1998 1997 -------------- -------------- Cash flows from operating activities: Net income $ 9,433,585 $ 2,015,475 Adjustments to reconcile net income to net cash provided by operating activities: Provision for bad debt 5,292,635 3,958,988 Depreciation and amortization 2,351,227 2,210,508 Amortization of excess cost over net assets acquired 1,783,932 1,321,714 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 (6,157,066) (8,552,527) Inventory 546,095 194,269 Prepaid and other assets (4,270) (402,809) Other assets (13,588) 101,329 Accounts payable (194,924) (1,348,312) Accrued expenses 1,088,555 (1,594,727) Accrued wages and payroll taxes (117,847) (2,509,158) Customer deposits (42,129) 444,922 Deferred revenue (75,284) (115,985) Other liabilities 47,122 201,984 -------------- -------------- Total adjustments 4,504,458 (1,293,248) -------------- -------------- Net cash provided by operating activities 13,938,043 722,227 -------------- -------------- Cash flows from investing activities: Purchase of fixed assets, net (2,023,990) (1,769,833) Acquisitions, net of cash (28,245,808) (8,649,183) Purchase of patents (14,053) (88,779) Purchase of non-compete agreements (367,438) (138,151) -------------- -------------- Net cash used in investing activities (30,651,289) (10,645,946) -------------- --------------
Continued The accompany notes are an integral part of the consolidated financial statements. 5 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED September 30, 1998 and 1997 (unaudited)
1998 1997 -------------- -------------- Cash flows from financing activities: Net borrowings under revolving credit facility $ --- $ --- Proceeds from sale of common stock 39,186,054 60,202,157 Proceeds from long-term debt 6,000,000 8,256,000 Repayment of long-term debt (25,590,525) (58,627,500) -------------- -------------- Net cash provided by financing activities 19,595,529 9,830,657 -------------- -------------- Net change in cash and cash equivalents for the period 2,882,283 (93,062) Cash and cash equivalents at beginning of period 6,557,409 6,572,402 -------------- -------------- Cash and cash equivalents at end of period $ 9,439,692 $ 6,479,340 ============== ============== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 1,526,460 $ 4,270,921 ============== ============== Taxes $ 5,948,700 $ 2,306,000 ============== ============== Non-cash financing and investing activities: Issuance of common stock in connection with acquisition $ 2,200,000 $ 500,000 ============== ============== Issuance of notes in connection with acquisitions $ 6,773,457 $ 2,864,200 ============== ============== Dividends declared preferred stock $ 21,128 $ 19,319 ============== ==============
The accompany 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 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 During the fourth quarter of 1997, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) 128 and, as required, has restated all prior period per common share data. 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 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 7 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 September 30, 1998 and December 31, 1997 were comprised of the following:
September 30, 1998 December 31, 1997 ------------------ ----------------- (unaudited) Raw materials $ 8,457,045 $ 7,685,134 Work-in-process 1,705,713 1,437,946 Finished goods 8,520,953 8,322,396 -------------- -------------- $ 18,683,711 $ 17,445,476 ============== ==============
NOTE D - ACQUISITIONS During the first nine months of 1998, the Company acquired twelve orthotic and prosthetic companies and one prosthetic component manufacturing company. The aggregate purchase price, excluding potential earn-out provisions, was $35,990,000, comprised of $27,017,000 in cash, $6,773,000 in promissory notes and 132,331 shares of common stock of the Company valued at $2,200,000. 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 and cash. The excess cost of the above acquisitions over the recorded amount of net assets acquired amounted to approximately $28,522,000. During the first nine months of 1998, the Company paid approximately $531,000 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 $740,000 to the former owners of Seattle Limb Systems, Inc. and $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 respective 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 $1,568,000. 8 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 September 30, 1998 and 1997 and the nine month period ended September 30, 1998 and 1997.
Three Months Ended Nine Months Ended September 30 September 30 ----------------------------- ---------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------ Net income (loss) $ 4,119,954 $ (454,374) $ 9,433,585 $ 2,015,475 Less preferred stock dividends declared (7,199) (6,584) (21,128) (19,319) ------------- ------------- ------------- ------------ Income available to common stockholders used to compute basic per common share amounts $ 4,112,755 $ (460,958) $ 9,412,457 $ 1,996,156 ============= ============= ============= ============ Add back interest expense on convertible note payable, net of tax 14,824 0 29,648 0 Income available to common stockholders plus assumed conversions used to com- pute diluted per common share amounts $ 4,127,579 $ (460,958) $ 9,442,105 $ 1,996,156 ============= ============= ============= ============ Average shares of common stock outstanding used to compute basic per common share amounts 17,291,768 12,871,560 16,197,010 10,562,973 Effect of convertible note payable 115,717 77,992 Effect of dilutive options 804,799 830,673 810,864 554,345 Effect of dilutive warrants 826,880 724,069 792,354 689,289 Shares used to compute dilutive per ------------- ------------- ------------- ------------ common share amounts 19,039,164 14,426,302 17,878,220 11,806,607 ============= ============= ============= ============ Basic income per common share $ .24 $ (.03) $ .58 $ .19 Diluted income per common share $ .22 $ (.03) $ .53 $ .17
Options to purchase 28,179 shares of common stock were outstanding at September 30, 1998 but were not included in the computation of diluted income per common share for the nine months ended September 30, 1998 because the options' exercise price was greater than the average market price of the common shares. Options to purchase 1,348 shares of common stock were outstanding at September 30, 1998 but were not included in the computation of basic income per common share for the nine months ended September 30, 1998 because the options' exercise price was greater than the average market price of the common shares. 9 NOTE F --- EQUITY OFFERING In an underwritten public offering that was consummated on August 4, 1998, 3,300,000 shares of common stock of the Company were sold 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 $37.8 million of net proceeds of the offering received by the Company, the Company applied $24.7 million to the repayment of senior indebtedness. 10 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:
Nine Months Three Months Ended September 30, Ended September 30, ------------------- ------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of products and services sold 50.2 51.0 49.2 50.9 Gross profit 49.8 49.0 50.8 49.1 Selling, general & administrative expenses 33.8 33.7 32.6 33.2 Depreciation and amortization 1.7 2.1 1.8 1.8 Amortization of excess cost over net assets acquired 1.3 1.2 1.3 1.2 Income from operations 12.9 11.9 15.1 12.8 Interest expense 1.2 4.2 .8 2.8 Provision for income taxes 4.8 3.2 5.9 4.2 Net income before extraordinary item 4.4 5.8 Loss from early extinguishment of debt 2.5 6.9 Net income 6.9 1.9 8.4 1.2
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 NET SALES Net sales for the quarter ended September 30, 1998, were approximately $48,777,000, an increase of approximately $9,937,000, or 25.6%, over net sales of approximately $38,839,000 for the quarter ended September 30, 1997. The majority of the increase was attributable to acquisitions consummated subsequent to September 30, 1997. In addition, contributing to the increase in net sales was a 10.0% increase in sales by those Hanger patient-care centers operating throughout both quarters. GROSS PROFIT Gross profit in the quarter ended September 30, 1998 was approximately $24,799,000, an increase of approximately $5,739,000, or 30.1%, over gross profit of approximately $19,059,000 for the quarter ended September 30, 1997. The increase was primarily attributable to the increase in net sales. Gross profit as a percentage of net sales increased to 50.8% in the third quarter of 1998 from 49.1% in the third quarter of 1997. 11 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses in the quarter ended September 30, 1998 increased by approximately $3,018,000, or 23.4%, compared to the quarter ended September 30, 1997. Selling, general and administrative expenses as a percentage of net sales decreased to 32.6% compared to 33.2% for same period in 1997. INCOME FROM OPERATIONS Principally as a result of the above, income from operations in the quarter ended September 30, 1998 was approximately $7,361,000, an increase of $2,377,000, or 47.7%, over the prior year's comparable quarter. Income from operations as a percentage of net sales increased to 15.1% in the second quarter of 1998 from 12.8% for the prior year's comparable period. INTEREST EXPENSE Net interest expense in the third quarter of 1998 was approximately $387,000, a decrease of approximately $692,000, or 64.2%, from approximately $1,079,000 incurred in the third quarter of 1997. Interest expense as a percentage of net sales decreased to .8% from 2.8% for the same period a year ago. The decrease in interest expense was primarily attributable to the repayment of $24.7 million of indebtedness during August of 1998 from the proceeds of an underwritten public offering consummated in that month in which the Company sold 2,400,000 shares of common stock at $17.00 per share. INCOME TAXES The Company's effective tax rate was 41% in the third quarter of 1998 versus 42.0% in 1997. The provision for income taxes in the third quarter of 1998 was approximately $2,863,000 compared to approximately $1,621,000 for the third quarter of 1997. EXTRAORDINARY ITEM An extraordinary item of approximately $2.7 million in the third quarter of 1997 (net of a tax benefit of approximately $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 a public equity offering during that quarter. NET INCOME As a result of the above, the Company recorded net income of $4,120,000, or $.22 per dilutive common share, in the quarter ended September 30, 1998, compared to net loss of $454,000, or $.03 per dilutive common share, in the quarter ended September 30, 1997. 12 NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997 NET SALES Net sales for the nine months ended September 30, 1998 were approximately $136,426,000, an increase of approximately $29,993,000, or 28.2%, over net sales of approximately $106,434,000 for the nine months ended September 30, 1997. The majority of the increase was attributable to acquisitions consummated subsequent to September 30, 1997. In addition, contributing to the increase in net sales was a 11.0% increase in sales by those Hanger patient-care centers operating throughout both nine-month periods. GROSS PROFIT Gross profit for the nine months ended September 30, 1998 was approximately $67,884,000, an increase of approximately $15,783,000, or 30.3%, over gross profit of approximately $52,102,000 for the nine months ended September 30, 1997. The increase was primarily attributable to the increase in net sales. Gross profit as a percent of net sales increased from 49.0% in the nine months ended September 30, 1997 to 49.8% in the nine months ended September 30, 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses in the nine months ended September 30, 1998 increased by approximately $10,237,000, or 28.5%, compared to the nine months ended September 30, 1997. Selling, general and administrative expenses as a percentage of net sales increased to 33.8% from 33.7% for the same period in 1997. INCOME FROM OPERATIONS Principally as a result of the above, income from operations in the nine months ended September 30, 1998 was approximately $17,650,000, an increase of approximately $4,943,000, or 38.9%, over the prior year's comparable period. Income from operations as a percentage of net sales increased to 12.9% in the nine months ended September 30, 1998 from 11.9% in the nine months ended September 30, 1997. INTEREST EXPENSE Net interest expense for the first nine months of 1998 was approximately $1,701,000, a decrease of approximately $2,755,000, or 61.8%, from approximately $4,456,000 incurred in the first nine months of 1997. Interest expense as a percentage of net sales decreased to 1.2% from 4.2% for the same period one year ago. The decrease in interest expense was primarily 13 attributable to the repayment of $24.7 million of indebtedness during August of 1998 from the proceeds of an underwritten public offering consummated in that month in which the Company sold 2,400,000 shares of common stock at $17.00 per share. INCOME TAXES The Company's effective tax rate was 41.0% in the first nine months of 1998 versus 42.0% in 1997. The provision for income taxes for the nine months ended September 30, 1998 was approximately $6,555,000 compared to approximately $3,410,000 for the nine months ended September 30, 1997. EXTRAORDINARY ITEM An extraordinary item of approximately $2.7 million in the third quarter of 1997 (net of a tax benefit of approximately $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 a public equity offering during that quarter. NET INCOME As a result of the above, the Company recorded net income of approximately $9,434,000, or $.53 per dilutive common share, in the first nine months of 1998, compared to net income of approximately $2,015,000, or $.17 per dilutive common share, in the first nine months of 1997. LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated working capital at September 30, 1998 was approximately $45,583,000 and cash and cash equivalents available were approximately $9,440,000. The Company's cash resources were satisfactory to meet its obligations for the quarter ended September 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 September 30, 1998 was approximately $16,246,000, consisting of seller notes and other indebtedness. No borrowings were outstanding under the Credit Agreement on September 30, 1998. 14 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 A-Term Loan was repaid with the proceeds of the public offering on August 4, 1998. The B-Term Loan bore 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 were 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 B-Term Loan was repaid with the proceeds of the public offering consummated on August 4, 1998. 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 nine months of 1998, the Company acquired twelve orthotic and prosthetic companies and one prosthetic component manufacturing company. The aggregate purchase price excluding potential earn-out provisions was $35,990,000, comprised of $27,017,000 in cash, $6,773,000 in promissory notes and 132,331 shares of common stock of the Company valued at $2,200,000. The cash portion of the purchase price of these acquisitions was borrowed under the Company's Revolving Loan and Acquisition Loan and cash. The Revolving Loan and Acquisition Loan were repaid with the proceeds of the public offering consummated on August 4, 1998. The Company plans to finance future acquisitions through internally generated funds or borrowings under the Acquisition Loan, 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. In an underwritten public offering consummated on August 4, 1998, 3,300,000 shares of common stock of the Company were sold 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 $37.8 million of net proceeds of the offering, a total of $24.7 million was used to 15 repay the outstanding amounts of the A-Term Loan and B-Term Loan, Acquisition Loan and Revolving Loan. The underwriters did not exercise the over allotment option to purchase up to 495,000 additional shares of common stock. 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 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 currently is upgrading its patient care, manufacturing and headquarters information systems. Included in the upgrading is a program to ensure that all significant computer systems are substantially Year 2000 compliant by the year ending December 31, 1999. The program is divided into three major components: (1) identification of all information technology systems ("IT Systems") and non-information technology systems ("Non-IT 16 Systems") that are not Year 2000 compliant: (2) repair or replacement of the identified non-compliant systems; and (3) testing of the repaired or replaced systems. The Company has no "in house" developed or proprietary IT Systems. The Company uses commercially developed software, the majority of which is constantly upgraded through existing maintenance contracts. Parts (1) and (2) of the Year 2000 program are currently underway. Part (1), identification, should be completed by the end of the current calendar year. Review of accounting and financial reporting systems is nearly finished and the Company is continuing to review Non-IT Systems that have embedded microprocessors in various types of equipment. Part (2), repairing and replacing, currently continues, primarily under maintenance contracts with the Company's software vendors. While most of the major systems are 2000 compliant, the software vendors have targeted December 1998 as a completion date. Part (3), testing, is scheduled to start in the first quarter of 1999 and to finish at the end of that quarter. The Company has been contacting key suppliers and business partners about the Year 2000 issue. While no assurance can be given that key suppliers and business partners will remedy their own Year 2000 issues, the Company, to date, has not identified any material impact on its ability to continue normal business operations with suppliers or other third parties who fail to address the issue. The Company presently estimates that projected costs to implement the Company's Year 2000 program, primarily for hardware, will approximate $1.3 million. The projected total costs for the upgrading of the Company's information systems, including the Year 2000 program, are estimated to range from $2.25 million to $2.75 million. The Company will continue to monitor and evaluate the impact of the Year 2000 issue on its operations. Until the Company is into the final testing part of its program, the risks from potential Year 2000 failures cannot be fully assessed. Due to this situation, the Company cannot now begin final contingency plans. These plans will be developed as potential Year 2000 failures are identified in the final testing stages. This report contains forward-looking statements setting forth the Company's beliefs or expectations relating to future revenues. Actual results may differ materially from projected or expected results due to changes in the demand for the Company's O&P services and products, uncertainties relating to the results of operations or recently acquired and newly acquired O&P patient care practices and prosthetic component manufacturing, 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. PART II. OTHER INFORMATION 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit 27 Financial Data Schedule (b) REPORTS ON FORM 8-K None 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: November 6, 1998 /s/IVAN R. SABEL ------------------ Ivan R. Sabel, CPO Chief Executive Officer Date: November 6, 1998 /s/RICHARD A. STEIN ------------------- Richard A. Stein Vice President - Finance Principal Financial and Accounting Officer EX-27 2
5 0000722723 HANGER ORTHOPEDIC GROUP, INC. 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 9,439,692 0 35,725,044 8,030,000 18,683,711 70,693,451 32,045,375 9,539,484 199,978,696 25,110,164 11,762,013 324,881 0 184,601 156,933,637 199,978,696 136,486,413 136,486,413 68,541,960 68,541,960 50,244,428 0 1,700,664 15,988,585 6,555,000 9,433,585 0 0 0 9,433,585 0 0.53
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