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.
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(Exact name of registrant as specified in its charter)
DELAWARE 84-0904275
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7700 OLD GEORGETOWN ROAD, BETHESDA, MD 20814
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(Address of principal executive offices) (Zip Code)
(301) 986-0701
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Registrant's telephone number, including area code
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of November
14, 1996, 9,315,634 shares of common stock, $.01 par value per share.
<PAGE>
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
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
(unaudited)
<S> <C> <C>
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
=========== ===========
</TABLE>
1
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
(unaudited)
<S> <C> <C>
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
============ ============
</TABLE>
2
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED September 30,
(unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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
============ ============
</TABLE>
3
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED September 30,
(unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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
============ ============
</TABLE>
4
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED September 30,
(unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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)
------------ ------------
</TABLE>
Continued
5
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED September 30,
(unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with Rule 10-01 of Regulation S-X. They do not include all of the
information and 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:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
(unaudited)
<S> <C> <C>
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
=========== ===========
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1996 1995
---- ----
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
For the Nine For the Three
Months Ended Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANGER ORTHOPEDIC GROUP, INC.
Date: November 14, 1996 /s/RICHARD A. STEIN
-----------------------------
Richard A. Stein
Vice President - Finance
Principal Financial and
Accounting Officer
16
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
FOR THE THREE MONTHS ENDED September 30,
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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
========== ==========
</TABLE>
FOR THE NINE MONTHS ENDED September 30,
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000722723
<NAME> HANGER ORTHOPEDIC GROUP, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,416,663
<SECURITIES> 0
<RECEIVABLES> 14,129,902
<ALLOWANCES> 1,107,000
<INVENTORY> 10,716,490
<CURRENT-ASSETS> 28,227,234
<PP&E> 12,688,091
<DEPRECIATION> 5,073,085
<TOTAL-ASSETS> 62,096,633
<CURRENT-LIABILITIES> 6,605,653
<BONDS> 21,136,881
271,545
0
<COMMON> 84,467
<OTHER-SE> 33,595,976
<TOTAL-LIABILITY-AND-EQUITY> 62,096,633
<SALES> 40,778,816
<TOTAL-REVENUES> 40,778,816
<CGS> 18,729,475
<TOTAL-COSTS> 17,567,299
<OTHER-EXPENSES> 106,685
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,321,780
<INCOME-PRETAX> 3,053,577
<INCOME-TAX> 1,315,022
<INCOME-CONTINUING> 1,738,555
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,738,555
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
