-----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, Dk0Xpf0mGd2PMKaTH+U4ruRPbPc2ID15N9vHM9NFhRNeBK7MeuU10DgI28ic1b5P faa5XUt4r9U0sKNbd0HlBA== 0000908634-96-000267.txt : 19961118 0000908634-96-000267.hdr.sgml : 19961118 ACCESSION NUMBER: 0000908634-96-000267 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 96665103 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, 1996 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 (IRS Employer Identification No.) incorporation or organization) 7700 OLD GEORGETOWN ROAD, BETHESDA, MD 20814 ----------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (301) 986-0701 ----------------------------------------------------------------------------- Registrant's telephone number, including area code ----------------------------------------------------------------------------- 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 November 14, 1996, 9,315,634 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, 1996 (unaudited) and December 31, 1995 1 Consolidated Statements of Income for the nine months ended September 30, 1996 and 1995 (unaudited) 3 Consolidated Statements of Income for the three months ended September 30, 1996 and 1995 (unaudited) 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1995 (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 15 SIGNATURES 16 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1996 1995 ---- ---- (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,416,663 $ 1,456,305 Accounts receivable less allowances for doubtful accounts of $1,107,000 and $1,144,000 in 1996 and 1995, respectively 14,129,902 13,324,991 Inventories 10,716,490 10,312,289 Prepaid expenses and other assets 1,159,680 1,040,914 Deferred income taxes 804,499 804,499 ----------- ----------- Total current assets 28,227,234 26,938,998 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT Land 2,991,245 2,991,245 Buildings 2,719,428 2,592,214 Machinery and equipment 4,033,234 3,654,780 Furniture and fixtures 1,700,263 1,575,493 Leasehold improvements 1,243,921 1,184,782 ----------- ----------- 12,688,091 11,998,514 Less accumulated depreciation and amortization 5,073,085 4,232,858 ----------- ----------- 7,615,006 7,765,656 ----------- ----------- INTANGIBLE ASSETS Excess of cost over net assets acquired 27,236,124 27,133,528 Non-compete agreements 3,219,662 4,786,371 Other intangible assets 3,392,516 3,825,240 ----------- ----------- 33,848,302 35,745,139 Less accumulated amortization 8,052,724 9,035,394 ----------- ----------- 25,795,578 26,709,745 ----------- ----------- OTHER ASSETS Other 458,815 385,662 ----------- ----------- TOTAL ASSETS $62,096,633 $61,800,061 =========== ===========
1 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1996 1995 ---- ---- (unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 2,024,559 $ 1,828,953 Accounts payable 1,848,412 1,612,401 Accrued expenses 415,910 710,510 Customer deposits 448,749 489,758 Accrued wages and payroll taxes 1,534,452 1,495,013 Deferred revenue 333,571 180,587 ------------ ------------ Total current liabilities 6,605,653 6,317,222 ------------ ------------ Long-term debt 21,136,881 22,925,124 Deferred income taxes 736,863 706,965 Other liabilities 293,628 305,499 Mandatorily redeemable preferred stock, class C, liquidation preference of $500 per share 271,545 253,886 Mandatorily redeemable preferred stock, class F, liquidation preference of $500 per share SHAREHOLDERS' EQUITY Common stock, $.01 par value; 25,000,000 shares authorized, 8,446,615 and 8,424,039 shares issued and 8,313,119 and 8,290,544 shares outstanding in 1996 and 1995, respectively 84,467 84,241 Additional paid-in capital 33,595,976 33,574,058 Retained earnings (deficit) 27,182 (1,711,372) ------------ ------------ 33,707,625 31,946,927 Treasury stock - (133,495 shares) (655,562) (655,562) ------------ ------------ 33,052,063 31,291,365 ------------ ------------ TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 62,096,633 $ 61,800,061 ============ ============
2 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED September 30, (unaudited)
1996 1995 ---- ---- Net Sales $ 40,778,816 $ 39,110,549 Cost of products and services sold 18,729,475 18,334,524 ------------ ------------ Gross profit 22,049,341 20,776,025 Selling, general & administrative 15,680,448 14,362,923 Depreciation and amortization 1,377,631 1,514,443 Amortization of excess cost over net assets acquired 509,220 517,618 ------------ ------------ Income from operations 4,482,042 4,381,041 Other expense Interest expense, net (1,321,780) (1,545,706) Other expense (106,685) (106,280) ------------ ------------ Income from operations before income taxes 3,053,577 2,729,055 Provision for income taxes 1,315,022 1,140,822 Net income $ 1,738,555 $ 1,588,233 ============ ============ Net income per share $ .21 $ .19 ============ ============ Weighted average number of common shares outstanding 8,384,307 8,290,544 ============ ============
3 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED September 30, (unaudited)
1996 1995 ---- ---- Net Sales $ 14,529,144 $ 13,549,654 Cost of products and services sold 6,490,632 6,404,886 ------------ ------------ Gross profit 8,038,512 7,144,768 Selling, general & administrative 5,458,209 4,758,320 Depreciation and amortization 421,946 468,482 Amortization of excess cost over net assets acquired 169,546 171,494 ------------ ------------ Income from operations 1,988,811 1,746,472 Other expense: Interest expense, net (460,241) (528,682) (33,183) (43,077) ------------ ------------ Income from operations before income taxes 1,495,387 1,174,713 Provision for income taxes 645,322 488,000 ------------ ------------ Net income $ 850,065 $ 686,713 ============ ============ Net income per share .10 .08 ============ ============ Weighted average number of common shares outstanding 8,394,444 8,290,544 ============ ============
4 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED September 30, (unaudited)
1996 1995 ---- ---- Cash flows from operating activities: Net income $ 1,738,555 $ 1,588,233 Adjustments to reconcile net income to net cash provided by operating activities: Provision for bad debt 832,678 554,661 Depreciation and amortization 1,377,631 1,514,443 Amortization of excess cost over net assets acquired 509,220 517,618 Changes in assets and liabilities, net of effect from acquired companies: Increase in accounts receivable (1,637,589) (695,128) Increase in inventory (404,201) (790,941) (Increase) decrease in prepaid and other assets (118,766) 22,015 (Increase) decrease in other assets (73,151) 136,267 Increase (decrease) in accounts payable 236,011 (62,997) Increase (decrease) in accrued expenses 20,381 (587,315) Increase (decrease) in accrued wages and payroll taxes 39,439 (365,424) Decrease in customer deposits (41,009) (51,896) Increase in deferred revenue 152,984 3,833 Increase (decrease) in taxes payable (285,083) 652,822 Increase (decrease) in other liabilities (11,871) 24,652 ------------ ------------ Total adjustments 596,674 872,609 ------------ ------------ Net cash provided by operations 2,335,229 2,460,842 ------------ ------------ Cash flows from investing activities: Purchase of fixed assets (703,474) (792,148) Acquisitions, net of cash (15,964) (274,294) Purchase of patents (95,000) (58,188) Purchase of non-compete agreements (35,000) Other intangibles (7,596) (12,293) ------------ ------------ Net cash used in investing activities (822,034) (1,171,923) ------------ ------------
Continued 5 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED September 30, (unaudited)
1996 1995 ---- ---- Cash flows from financing activities: Net borrowings under revolving credit facility $ (250,000) $ 200,000 Proceeds from the sale of common stock 39,804 Repayment of long-term debt (1,342,641) (1,478,292) Increase in financing costs 10,619 ------------ ------------ Net cash used in financing activities (1,552,837) (1,267,673) ------------ ------------ Net change in cash and cash equivalents for the period (39,642) 21,246 Cash and cash equivalents at beginning of period 1,456,305 1,048,381 ------------ ------------ Cash and cash equivalents at end of period $ 1,416,663 $ 1,069,627 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 1,340,970 $ 1,750,507 ============ ============ Taxes $ 1,460,190 $ 427,700 ============ ============ Non-cash financing and investing activities: Issuance of notes in connection with acquisitions $ 175,000 Dividends declared preferred stock ============ $ 17,659 $ 16,146 ============ ============
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, 1995, and notes thereto included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission for the year then ended. NOTE B -- INVENTORY Inventories at September 30, 1996 and December 31, 1995 were comprised of the following:
September 30, 1996 December 31, 1995 ------------------ ----------------- (unaudited) Raw materials $ 8,622,036 $ 8,526,760 Work-in-process 1,274,685 1,107,289 Finished goods 819,769 678,240 ----------- --------- $10,716,490 $10,312,289 =========== ===========
NOTE C -- ACQUISITION On November 1, 1996, Hanger acquired J.E. Hanger, Inc. of Georgia, a Georgia corporation ("JEH"). Each outstanding share of JEH Common Stock was converted into $2,009.13 in cash (subject to adjustment as discussed below) and 45.66 shares of Hanger Common Stock. The total amount of cash paid to holders of JEH Common Stock was $44 million (subject to adjustment as discussed below) and the total number of shares of Hanger Common Stock issued to holders of JEH Common Stock was one million shares. Based on the market price of the shares on July 29, 1996, the date of the Merger Agreement, the shares issued in the merger were valued at $5.25 per share. The $44 million in cash payable by Hanger in exchange for the shares of JEH Common Stock consisted of (i) approximately $40 million, which was paid at the closing and is not subject to any adjustment and (ii) approximately $4 million which was placed in an escrow account with a bank (the "Escrow Agent"), will be subject to adjustment as discussed below and will be paid as promptly as practicable after the amount of such post-closing adjustment is determined as described below. The post-closing adjustment is based on the amount of JEH's shareholders' equity at the November 1, 1996 effective 7 date of the merger, exceeds or is less than $22,926,999, which is the amount of JEH's shareholders' equity at December 31, 1995, less (i) the fair market value of certain marketable securities distributed to JEH shareholders prior to November 1, 1996, (ii) the cash proceeds from the sale by JEH of any marketable securities or non-operating real properties distributed to JEH shareholders prior to November 1, 1996 and (iii) the net book value of the non-operating real properties distributed to JEH shareholders prior to November 1, 1996. In addition, the post-closing adjustment may also be increased by the additional federal income tax attributable to the election by Hanger and JEH under Section 338 (h) (10) of the Internal Revenue Code of 1986, as amended (the "Code"), and any corresponding election under state, local or foreign tax law. Banque Paribas (the "Bank"), as the agent for a syndicate of banks, provided $90.0 million principal amount of senior secured financing (the "Senior Financing Facilities") that includes (i) $57.0 million of term loans (the "Term Loans") for use in connection with the acquisition, (ii) a $8.0 million revolving loan facility (the "Revolver") and (iii) up to $25.0 million principal amount of loans under an acquisition loan facility (the "Acquisition Loans") for use in connection with future acquisitions. The proceeds of borrowings under the Term Loans, along with approximately $8.0 million raised from the Bank and Chase Venture Capital Associates L.P. in the form of Senior Subordinated Notes with detachable warrants and $4.0 million cash on hand, were used to (i) provide the cash consideration paid (subject to adjustment as discussed above), (ii) refinance existing Hanger and JEH indebtedness of approximately $20.0 million and (iii) pay related transaction expenses. Of the Term Loans, approximately $29.0 million principal amount (the "A Term Loan") will be amortized in equal quarterly amounts and will mature five years from the Closing Date, and $28.0 million principal amount (The "B Term Loan") will be amortized in equal quarterly amounts and will mature seven years from the Closing Date. The final maturity of any loans under the Revolver and Acquisition Loans will be five years from the Closing Date. An unused commitment fee of 1/2 of 1% per year on the unused portion of the Revolver and the Acquisition Loan facilities will be payable quarterly in arrears. The above Senior Financing Facilities are secured by a first priority security interest in all of the common stock of Hanger's subsidiaries and all assets of Hanger and its subsidiaries. At Hanger's option, the annual interest rate will be adjusted to 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 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 1/2 of 1%, or (ii) the prime commercial lending rate of the Chase Manhattan Bank, N.A., as announced from time to time. All or any portion of outstanding loans under any of the Senior Financing Facilities may be prepaid at any time and commitments may be terminated in whole or in part at the option of Hanger without premium or penalty, except that LIBOR - based 8 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 Subordinated Notes, which will mature eight years from the date of issuance, will be payable quarterly at an annual rate of 8%; provided, however, that Hanger will be permitted, in lieu of cash interest, to pay interest in a combination of cash and additional 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 Subordinated Notes will be subordinated to loans under the Senior Financing Facilities. Hanger will, at its option, be entitled to redeem the Subordinated Notes at any time at their liquidation value. Hanger must use 100% of the proceeds from any public offering of its equity securities to repurchase the Subordinated Notes, if permitted under the Senior Financing Facilities. The detachable warrants issued by Hanger in conjunction with the Senior Subordinated Notes will represent 1.6 million shares of Hanger Common Stock with an exercise price equal to the lower of (a) $4.01 as to 929,700 shares, and (b) $6.375 as to 670,300 shares. Up to 50% of the Warrants (representing up to 800,000 shares of Hanger Common Stock) will be terminated upon the repayment of 100% of the Subordinated Notes within 18 months of the date of issuance. An additional 5% of the Warrants (representing up to 80,000 shares of Hanger Common Stock) will be terminated upon the repayment of 100% of the Subordinated Notes within 12 months of the date of issuance. Warrants will be terminated pro-rata across the above two exercise prices. The following unaudited pro forma consolidated results of operations of Hanger are presented as if the acquisition had been made at the beginning of the periods presented.
Nine Months Ended September 30, ------------- 1996 1995 ---- ---- Net sales $91,820,000 $83,946,000 Net income 1,653,000 1,433,000 Net income per common share and common share equivalent .18 .15
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. 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 relationship to the Company's net sales:
For the Nine For the Three Months Ended Months Ended September 30, September 30, ------------- ------------- 1996 1995 1996 1995 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of products and services sold 45.9 46.9 44.7 47.3 Gross profit 54.1 53.1 55.3 52.7 Selling, general & administrative expenses 38.5 36.7 37.6 35.1 Depreciation and amortization 3.4 3.9 2.9 3.5 Amortization of excess cost over net assets acquired 1.2 1.3 1.2 1.3 Income from operations 11.0 11.2 13.7 12.9 Interest expense 3.2 4.0 3.2 3.9 Provision for income taxes 3.2 2.9 4.4 3.6 Loss from discontinued operations and sale of assets Net income 4.3 4.1 5.9 5.1
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995 NET SALES Net sales for the nine months ended September 30, 1996 amounted to approximately $40,779,000, an increase of approximately $1,668,000, or 4.3%, over net sales of approximately $39,111,000 for the nine months ended September 30, 1995. Of this $1,668,000 increase, $1,449,000 was derived from patient care centers and facilities that were in operation during both periods ("Internal Base Net Sales"). Contributing to the $1,449,000 increase in Internal Base Net Sales was a $1,202,000, or 4.0%, increase attributable to patient care centers, a $371,000, or 5.8%, decrease from manufacturing and a $618,000, or 30.8%, increase from distribution. GROSS PROFIT Gross profit for the first nine months of 1996 increased by approximately $1,273,000, or 6.1%, over the prior year's comparable period. Gross profit as a percent of 10 net sales increased from 53.1% in the nine months ended September 30, 1995, to 54.1% in the nine months ended September 30, 1996. The increase in gross profit as a percent of net sales was primarily a result of a decrease in labor costs. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses for the nine months ended September 30, 1996 increased by approximately $1,318,000, or 9.2%, compared to the first nine months of 1995. In addition to increasing in dollar amount, selling, general and administrative expenses as a percent of net sales increased to 38.5% for the nine months ended September 30, 1996 from 36.7% of net sales for the nine months ended September 30, 1995. The increase in selling, general and administrative expenses was primarily attributable to (i) the Company's new OPNET program which generated insignificant revenues during the period, and (ii) an increase in manager's profit participation at the patient care centers resulting from an increase in business and a new incentive plan implemented in 1996. It is expected that OPNET revenues will exceed expenses relating to that program in the fourth quarter. INCOME FROM OPERATIONS As a result of the increase in net sales and gross profit, which more than offset the increase in selling, general and administrative expenses, income from operations for the first nine months ended September 30, 1996 amounted to approximately $4,482,000, an increase of $101,000, or 2.3%, over the prior year's comparable period. Income from operations as a percent of net sales decreased from 11.2% in the nine months ended September 30, 1995 to 11.0% in the nine months ended September 30, 1996. INTEREST EXPENSE Interest expense for the first nine months of 1996 amounted to approximately $1,322,000, a decrease of approximately $224,000, or 14.5% from the $1,546,000 of interest expense incurred in the first nine months of 1995. In addition, interest expense as a percent of net sales decreased from 4.0% for the nine months ended September 30, 1995 to 3.2% for the nine months ended September 30, 1996. The decrease in interest was primarily a result of a decrease in outstanding borrowings of approximately $2,600,000. INCOME TAXES The provision for income taxes for the nine months ended September 30, 1996 amounted to approximately $1,315,000, compared to a $1,141,000 for the nine months ended September 30, 1995. 11 NET INCOME As a result of the above, the Company recorded net income of $1,738,000, or $.21 per share, in the first nine months of 1996, compared to net income of $1,588,000, or $.19 per share, in the first nine months of 1995. FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1995 NET SALES Net sales for the three months ended September 30, 1996, amounted to approximately $14,529,000, an increase of approximately $979,000, or 7.2%, over net sales of approximately $13,550,000 for the three months ended September 30, 1995. Of this $979,000 increase, $873,000 was a result of patient care centers and facilities that were in operation during both periods ("Internal Base Net Sales"). Of the $873,000 increase in Internal Base Net Sales, an increase of $682,000, or 6.5%, was attributable to patient care centers, a decrease of $108,000, or 5.1%, was attributable to manufacturing and an increase of $299,000, or 40.4%, was attributable to distribution. GROSS PROFIT Gross profit in the three months ended September 30, 1996 increased by approximately $894,000, or 12.5%, from the prior year's comparable quarter. Gross profit as a percent of net sales increased from 52.7% to 55.3% for the comparable periods. The increase in gross profit as a percent of net sales was primarily a result of a decrease in labor costs and a larger percent of prosthetic business which has higher gross profit margins than orthotic sales. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses in the three months ended September 30, 1996 increased by approximately $700,000, or 14.7%, compared to the three months ended September 30, 1995. Selling, general and administrative expenses as a percent of net sales increased to 37.6% in the three months ended September 30, 1996 from 35.1% for the last year's comparable period. The increase in selling, general and administrative expenses was primarily attributable to (i) the Company's OPNET program and, (ii) an increase in manager's profit participation at the patient care centers resulting from an increase in business and a new incentive plan implemented in 1996. INCOME FROM OPERATIONS As a result of the increase in net sales and gross profit, which more than offset the increase in selling, general and administrative expenses, income from operations in the 12 three months ended September 30, 1996 amounted to approximately $1,989,000, an increase of $242,000, or 13.9%, over the prior year's comparable quarter. Income from operations as a percent of net sales, increased to 13.7% in the third quarter of 1996 from 12.9% for the prior year's comparable period. INTEREST EXPENSE Interest expense in the third quarter of 1996 amounted to approximately $460,000, a decrease of approximately $68,000, or 12.9%, from the $528,000 of interest expense incurred in the third quarter of 1995. Interest expense as a percent of net sales decreased to 3.2% from 3.9% for the same period a year ago. The decrease in interest was primarily a result of a decrease in outstanding borrowings of approximately $2,600,000. INCOME TAXES The provision for income taxes for the quarter ended September 30, 1996 was $645,000 compared to $488,000 for the quarter ended September 30, 1995. NET INCOME As a result of the above, the Company recorded net income of $850,000, or $.10 per share, in the quarter ended September 30, 1996, compared to net income of $687,000, or $.08 per share, in the quarter ended September 30, 1995. LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated working capital at September 30, 1996 was approximately $21.6 million. Cash available at that date was approximately $1,417,000. Net cash provided by operations for the nine months ended September 30, 1996 was $2,335,000. The Company's cash resources available during the first nine months of 1996 were satisfactory to meet its obligations. The Company's total long-term debt at September 30, 1996, including a current portion of approximately $2.0 million, was approximately $23.2 million. Such indebtedness included: (i) $4.0 million principal amount of an 8.5% Convertible Note; (ii) $1.0 million principal amount of an 8.25% Convertible Note; (iii) $12.5 million borrowed under the Company's revolving credit facility with NationsBank, N.A. (the "Bank"); (iv) $4.0 million in term loans borrowed from the Bank and (v) approximately $1.7 million of other indebtedness. As discussed in Note C to the financial statements, on November 1, 1996, Hanger acquired J.E. Hanger, Inc. of Georgia, a Georgia corporation ("JEH") for approximately $44 million in cash and one million of Hanger common stock. 13 Also as discussed in Note C to the financial statements, Banque Paribas (the "Bank"), as the agent for a syndicate of banks, provided $90.0 million principal amount of senior secured financing (the "Senior Financing Facilities") that includes (i) $57.0 million of term loans (the "Term Loans") for use in connection with the acquisition, (ii) a $8.0 million revolving loan facility (the "Revolver") and (iii) up to $25.0 million principal amount of loans under an acquisition loan facility (the "Acquisition Loans") for use in connection with future acquisitions. The proceeds of borrowings under the Term Loans, along with approximately $8.0 million raised from the Bank and Chase Venture Capital Associates L.P. in the form of Senior Subordinated Notes with detachable warrants and $4.0 million cash on hand, were used to (i) provide the cash consideration paid (subject to adjustment as discussed above), (ii) refinance existing Hanger and JEH indebtedness of approximately $20.0 million and (iii) pay related transaction expenses. 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 through acquisitions, at a slower rate, with a view towards increasing efficiency and profitability of its existing facilities. 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. 14 PART II. OTHER INFORMATION ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K (a) EXHIBITS The following exhibit is filed herewith: 11 Computation of net Income Per Share (b) REPORTS ON FORM 8-K A Form 8-K reporting Hanger's acquisition of J.E. Hanger, Inc. of Georgia effective November 1, 1996, was filed on November 12, 1996. 15 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 14, 1996 /s/RICHARD A. STEIN ----------------------------- Richard A. Stein Vice President - Finance Principal Financial and Accounting Officer 16 HANGER ORTHOPEDIC GROUP, INC. EXHIBIT 11 COMPUTATION OF NET INCOME PER SHARE FOR THE THREE MONTHS ENDED September 30,
1996 1995 ---- ---- Net income $ 850,065 $ 686,713 Less: Dividends declared (6,018) (5,628) ---------- ---------- Total $ 844,047 $ 681,085 Divided by: Weighted average number of shares outstanding 8,394,444 8,290,544 ---------- ---------- Net income (loss) per share $ .10 $ .08 ========== ==========
FOR THE NINE MONTHS ENDED September 30,
1996 1995 ---- ---- Net income $1,738,555 $1,588,233 ---------- ---------- Less: Dividends declared (17,659) (16,146) ---------- ---------- Total $1,720,896 $1,572,087 Divided by: Weighted average number of shares outstanding 8,384,307 8,290,544 ---------- ---------- Net income per share $ .21 $ .19 ========== ==========
EX-27 2
5 0000722723 HANGER ORTHOPEDIC GROUP, INC. 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 1,416,663 0 14,129,902 1,107,000 10,716,490 28,227,234 12,688,091 5,073,085 62,096,633 6,605,653 21,136,881 271,545 0 84,467 33,595,976 62,096,633 40,778,816 40,778,816 18,729,475 17,567,299 106,685 0 1,321,780 3,053,577 1,315,022 1,738,555 0 0 0 1,738,555 0.21 0.21
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