SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________
Commission File Number 1-10670
HANGER ORTHOPEDIC GROUP, INC.
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's phone number, including area code: (301) 986-0701
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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 October 28,
1997; 15,340,255 shares of common stock, $.01 par value per share.
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
<TABLE>
INDEX
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1997
(unaudited) and December 31, 1996 1
Consolidated Statements of Income for the nine
months ended September 30, 1997 and 1996 (unaudited) 3
Consolidated Statements of Income for the three
months ended September 30, 1997 and 1996 (unaudited) 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 (unaudited) 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,479,340 $ 6,572,402
Accounts receivable less allowances for
doubtful accounts of $4,579,000 and
$1,144,000 in 1997 and 1996, respectively 30,273,255 24,321,872
Inventories 16,670,805 15,916,638
Prepaid expenses and other assets 2,023,209 1,595,169
Deferred income taxes 3,159,280 3,159,280
------------ ------------
Total current assets 58,605,889 51,565,361
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Land 4,269,045 4,269,045
Buildings 8,297,644 8,017,547
Machinery and equipment 7,127,515 6,275,307
Furniture and fixtures 2,228,602 2,095,900
Leasehold improvements 2,799,037 2,139,207
------------ ------------
24,721,843 22,797,006
Less accumulated depreciation and 7,098,202 5,497,809
------------ ------------
17,623,641 17,299,197
------------ ------------
INTANGIBLE ASSETS
Excess of cost over net assets acquired 73,812,496 63,935,447
Non-compete agreements 2,119,479 1,981,329
Other intangible assets 3,136,688 6,152,607
------------ ------------
79,068,663 72,069,383
Less accumulated amortization 8,512,925 6,917,960
------------ ------------
70,555,738 65,151,423
------------ ------------
OTHER ASSETS
Other assets 826,379 925,446
------------ ------------
TOTAL ASSETS $147,611,647 $134,941,427
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
1
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------------------------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 4,534,880 $ 4,902,572
Accounts payable 3,109,744 4,141,993
Accrued expenses 6,220,634 7,815,028
Customer deposits 1,023,141 578,219
Accrued wages and payroll taxes 5,880,976 8,321,395
Deferred revenue 191,013 306,998
------------- -------------
Total current liabilities 20,960,388 26,066,205
Long-term debt 19,984,626 64,297,801
Deferred income taxes 2,377,627 2,377,627
Other liabilities 2,390,261 2,188,278
Mandatorily redeemable preferred stock, class C,
liquidation preference of $500 per share 297,002 277,701
Mandatorily redeemable preferred stock, class F,
liquidation preference of $500 per share
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 25,000,000 shares
authorized, 15,472,835 and 9,449,129 shares
issued and 15,339,339 and 9,315,634 shares
outstanding in 1997 and 1996, respectively 154,729 94,492
Additional paid-in capital 100,800,577 41,008,363
Retained earnings (deficit) 1,301,999 (713,478)
------------- -------------
102,257,305 40,389,377
Treasury stock - (133,495 shares) (655,562) (655,562
------------- -------------
101,601,743 39,733,815
------------- -------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $147,611,647 $134,941,427
============= ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net Sales $106,433,592 $ 40,778,816
Cost of products and services sold 54,331,907 18,729,475
------------- -------------
Gross profit 52,101,685 22,049,341
Selling, general & administrative 35,862,411 15,680,448
Depreciation and amortization 2,210,508 1,377,631
Amortization of excess cost over net assets acquired 1,321,714 509,220
------------ -------------
Income from operations 12,707,052 4,482,042
Other expense
Interest expense, net (4,455,955) (1,321,780)
Other expense (131,695) (106,685)
------------- --------------
Income from operations before income taxes and
extraordinary item 8,119,402 3,053,577
Provision for income taxes 3,410,136 1,315,022
------------- --------------
Net income before extraordinary item 4,709,266 1,738,555
Extraordinary loss on early extinguishment of debt
(net of tax benefit of $1,950,700) (2,693,791)
------------- --------------
Net income $ 2,015,475 $ 1,738,555
============ ==============
Net income (loss) per common share:
Net income before extraordinary item $ .37 $ .21
Extraordinary loss on early extinguishment of debt (.21)
------------- --------------
Net income per share $ .16 $ .21
============= ==============
Weighted average number of common shares
outstanding 12,647,065 8,384,307
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED September 30,
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net Sales $ 38,839,333 $ 14,529,144
Cost of products and services sold 19,779,856 6,490,632
------------- -------------
Gross profit 19,059,477 8,038,512
Selling, general & administrative 12,898,204 5,458,209
Depreciation and amortization 716,244 421,946
Amortization of excess cost over net assets acquired 460,882 169,546
------------- -------------
Income from operations 4,984,147 1,988,811
Other expense:
Interest expense, net (1,079,184) (460,241)
Other (44,710) (33,183)
------------- -------------
Income from operations before income taxes and
extraordinary item 3,860,253 1,495,387
Provision for income taxes
1,620,836 645,322
------------- -------------
Net income before extraordinary item 2,239,417 850,065
Extraordinary loss on early
extinguishment of debt
(net of tax benefit of $1,950,700) (2,693,791)
------------- -------------
Net income (loss) $ (454,374) $ 850,065
============= ==============
Net income (loss) per common share:
Net income before extraordinary item $ .15 $ .10
Extraordinary loss on early extinguishment of debt (.18)
------------- --------------
Net income (loss) per share $ (.03) .10
============= ==============
Weighted average number of common shares
outstanding 14,725,180 8,394,444
============= ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED September 30,
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,015,475 $ 1,738,555
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debt 3,958,988 832,678
Depreciation and amortization 2,210,508 1,377,631
Amortization of excess cost over
net assets acquired 1,321,714 509,220
Amortization of debt discount 152,065
Extraordinary loss on the early
extinguishment of debt 4,644,491
Changes in assets and liabilities, net
of effect from acquired companies:
Accounts receivable (8,552,527) (1,637,589)
Inventory 194,269 (404,201)
Prepaid and other assets (402,809) (118,766)
Other assets 101,329 (73,151)
Accounts payable (1,348,312) 236,011
Accrued expenses (1,594,727) (264,702)
Accrued wages and payroll taxes (2,509,158) 39,439
Customer deposits 444,922 (41,009)
Deferred revenue (115,985) 152,984
Other liabilities 201,984 (11,871)
--------------- --------------
Total adjustments (1,293,248) 596,674
--------------- --------------
Net cash provided by operations 722,227 2,335,229
--------------- --------------
Cash flows from investing activities:
Purchase of fixed assets (1,769,833) (703,474)
Acquisitions, net of cash (8,649,183) (15,964)
Purchase of patents (88,779) (95,000)
Purchase of non-compete agreements (138,151)
Other intangibles (7,596)
--------------- --------------
Net cash used in investing activities (10,645,946) (822,034)
--------------- --------------
</TABLE>
Continued
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED September 30,
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net borrowings under revolving credit facility $ $ (250,000)
Proceeds from the sale of common 60,202,157 39,804
stock
Proceeds from long-term debt 8,256,000
Repayment of long-term debt (58,627,500) (1,342,641)
Net cash provided by (used in) ---------------
financing activities 9,830,657 (1,552,837)
--------------- -------------
Net change in cash and cash equivalents
for the period (93,062) (39,642)
Cash and cash equivalents at beginning of period 6,572,402 1,456,305
--------------- -------------
Cash and cash equivalents at end of period 6,479,340 1,416,663
=============== =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 4,270,921 $ 1,340,970
================ =============
Taxes 2,306,000 1,460,190
================ =============
Non-cash financing and investing activities:
Issuance of common stock in
connection with acquisitions $ 500,000
===============
Issuance of notes in connection $ 2,864,200
===============
Dividends declared preferred stock $ 19,319 $ 17,656
=============== =============
</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, 1996, and notes thereto included in the Annual
Report on Form 10-K for the year December 31, 1996, filed by the Company with
the Securities and Exchange Commission.
NOTE B -- NEW ACCOUNTING STANDARD - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," which will replace the current rules for earnings per share
computations, presentation and disclosure. Under the new standard, basic
earnings per share excludes dilution and is computed by dividing income
available to common shareowners by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. SFAS No. 128
requires a dual presentation of basic and diluted earnings per share on the
face of the income statement.
The Company will be required to adopt SFAS No. 128 in the fourth quarter
of this year and, as required by the standard, the Company, will restate all
prior period earnings per share data. The Company's new earnings per share
amounts are not expected to be materially different from those computed under
the present accounting standard.
NOTE C -- INVENTORY
Inventories at September 30, 1997 and December 31, 1996 were comprised of
the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
(unaudited)
<S> <C> <C>
Raw materials $ 8,339,141 $ 7,504,442
Work-in-process 912,589 831,632
Finished goods 7,419,075 7,580,564
----------- ------------
$16,670,805 $15,916,638
=========== ===========
</TABLE>
7
<PAGE>
NOTE D -- ACQUISITIONS
On November 1, 1996, Hanger acquired J.E. Hanger, Inc. of Georgia
("JEH"), in a merger transaction effected pursuant to an Agreement and Plan of
Merger, dated as of July 29, 1996 (the "Merger Agreement"), by and among
Hanger, JEH and JEH Acquisition Corporation, a Georgia corporation
("Acquisition") wholly-owned by Hanger. The Merger Agreement provided for the
merger of Acquisition with and into JEH (the "Merger"), as a result of which
JEH became a wholly-owned subsidiary of Hanger, effective November 1, 1996.
Pursuant to the Merger Agreement, Hanger paid a total of $44 million and
issued a total of approximately one million shares of Hanger common stock in
exchange for all of JEH's outstanding common stock on November 1, 1996, and
paid an additional $1,783,000 to former JEH shareholders on March 27, 1997
pursuant to provisions in the Merger Agreement calling for a post-closing
adjustment.
During the nine months ended September 30, 1997, the Company acquired
four orthotic and prosthetic companies. The aggregate purchase price was
$9,679,200, comprised of $6,315,000 in cash, $2,864,200 in promissory notes
and 64,000 shares of Common Stock of the Company valued at $500,000. The cash
portion of these acquisitions was borrowed under the Company's acquisition
loan facility.
The following unaudited pro-forma consolidated results of operations of
the Company are presented as if the above acquisitions had been made at the
beginning of the periods presented:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
---- ----
<S> <C> <C>
Net sales $109,406,000 $98,205,000
Net income 2,275,000 1,828,000
Net income per common share
and common share equivalent .18 .19
</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.
NOTE E --- SALE OF COMMON STOCK
On July 31, 1997, the Company sold 5.0 million shares of common stock in
an underwritten public offering at $11.00 per share resulting in approximately
$51 million of
8
<PAGE>
net proceeds to the Company. On August 28, 1997, the Company sold an
additional 750,000 shares of its Common Stock as a result of the exercise of
an over-allotment option granted to the underwriters in connection with the
public offering on July 31, 1997. Exercise of the over-allotment option
resulted in the Company's receipt of approximately $7.6 million of additional
net proceeds. The Company applied the net proceeds of the public offering to
the repayment of Senior Subordinated Notes and certain indebtedness
outstanding under the Company's Senior Financing Facilities. Upon repayment of
this debt, the Company was required to write off the debt issue costs and
unamortized debt discount of $2.7 million ($2.0 million net of tax benefit)
that was recorded upon issuance of such notes. As a result of the Company's
repayment of the Senior Subordinated Notes, the Warrants previously issued by
the Company in conjunction with the Senior Subordinated Notes were amended to
reflect the reduction in the aggregate number of shares of Company Common
Stock issuable upon exercise of the Warrants from 1,600,000 shares to 720,000
shares.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items of the
Company's statements of operations and their percentage of the Company's net
sales:
<TABLE>
<CAPTION>
For the Nine For the Three
Months Ended Months Ended
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products and services sold 51.0 45.9 50.9 44.7
Gross profit 49.0 54.1 49.1 55.3
Selling, general & administrative
expenses 33.7 38.5 33.2 37.6
Depreciation and amortization 2.1 3.4 1.8 2.9
Amortization of excess cost over net
assets acquired 1.2 1.2 1.2 1.2
Income from operations 11.9 11.0 12.8 13.7
Interest expense 4.2 3.2 2.8 3.2
Provision for income taxes 3.2 3.2 4.2 4.4
Net income before extraordinary item 4.4 4.3 5.8 5.9
Loss from early extinguishment of debt 2.5 6.9
Net income 1.9 4.3 1.2 5.9
</TABLE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
NET SALES
Net sales for the nine months ended September 30, 1997, amounted to
approximately $106,434,000, an increase of approximately $65,655,000, or 161%,
over net sales of approximately $40,779,000 for the nine months ended
September 30, 1996. Contributing to the increase were sales attributable to
Hanger's acquisition of J.E. Hanger, Inc. of Georgia ("JEH") on November 1,
1996, as well as an 11.7% increase in sales by those Hanger patient-care
centers operating during both nine month periods. The Company believes that
its net sales during the balance of 1997 will continue to substantially exceed
1996 net sales.
GROSS PROFIT
Gross profit during the nine months ended September 30, 1997 amounted to
approximately $52,101,000, an increase of approximately $30,052,000, or 136%,
over gross profit of approximately $22,049,000 for the nine months ended
September 30,
10
<PAGE>
1996. Gross profit as a percent of net sales decreased from 54.1% in the nine
months ended September 30, 1996 to 49.0% in the nine months ended September
30, 1997. The 4.1% decrease in gross profit as a percent of net sales is
primarily attributable to the acquisition effective November 1, 1996, of JEH,
which operated a large distribution division that has lower gross profit
margins than patient care services.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses in the nine months ended
September 30, 1997 increased by approximately $20,182,000, or 128.7%, compared
to the nine months ended September 30, 1996. The increase in selling, general
and administrative expenses was primarily a result of the acquisition of JEH
in November 1996. Selling, general and administrative expenses as a percent of
net sales decreased to 33.7% from 38.5% for the same period a year ago. The
selling, general and administrative expenses as a percent of net sales
decreased primarily as a result of cost cutting measures completed during the
fourth quarter of 1996 and the first six months of 1997.
INCOME FROM OPERATIONS
Principally as a result of the above, income from operations in the nine
months ended September 30, 1997 amounted to approximately $12,707,000, an
increase of $8,225,000, or 183.5%, over the prior year's comparable period.
Income from operations as a percent of net sales increased to 11.9% in the
nine months ended September 30, 1997 from 11.0% for the prior year's
comparable period.
INTEREST EXPENSE
Interest expense in the nine months ended September 30, 1997 amounted to
approximately $4,456,000, an increase of approximately $3,134,000, or 237.1%,
over the approximately $1,322,000 of interest expense incurred in the nine
months ended September 30, 1996. Interest expense as a percent of net sales
increased to 4.2% from 3.2% for the same period a year ago. The increase in
interest expense was primarily attributable to the increase in bank debt
resulting from the acquisition of JEH in November 1996, which was offset in
part by the repayment of bank debt out of the proceeds of the public equity
offering in the third quarter of 1997.
INCOME TAXES
The Company's effective tax rate was 42% in the nine months ended
September 30, 1997 versus 43% in 1996. The provision for income taxes in the
nine months ended September 30, 1997 amounted to approximately $3,410,000
compared to approximately $1,315,000 in the nine months ended September 30,
1996.
11
<PAGE>
EXTRAORDINARY ITEM
An extraordinary item of $2.7 million (net of a tax benefit of $2.0
million), represents entirely a non-cash write-off of debt issue costs and
debt discount as a result of extinguishing approximately $58.6 million of bank
debt from the net proceeds of the third quarter public equity offering.
NET INCOME
As a result of the above, the Company recorded net income of
approximately $2,015,000, or $.16 per share, on approximately 12,647,000
shares outstanding for the nine months ended September 30, 1997, compared to
net income of approximately $1,739,000, or $.21 per share, on approximately
8,384,000 shares outstanding in the quarter ended September 30, 1996. The
Company believes that its profitability during the balance of 1997 will
continue to be enhanced as a result of the integration of the operations of
Hanger and JEH and the cost cutting measures completed by the Company in late
1996 and the first six months of 1997.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1996
NET SALES
Net sales for the quarter ended September 30, 1997, were approximately
$38,839,000, an increase of approximately $24,310,000, or 167.3%, over net
sales of approximately $14,529,000 for the quarter ended September 30, 1996.
The majority of the increase was attributable to Hanger's acquisition of JEH.
In addition, contributing to the increase in net sales was a 12.2% increase in
sales by those Hanger patient-care centers operating during the entire period
of both quarters.
GROSS PROFIT
Gross profit in the quarter ended September 30, 1997 was approximately
$19,059,000, an increase of approximately $11,021,000, or 137.1%, over gross
profit of approximately $8,038,000 for the quarter ended September 30, 1996.
Gross profit as a percentage of net sales decreased from 55.3% in the third of
1996 to 49.1% in the third quarter of 1997. The 5.2% decrease in gross profit
as a percentage of net sales is attributable primarily to the acquisition of
JEH, which operated a large distribution division that has lower gross profit
margins than patient-care services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in the quarter ended
September 30, 1997 increased by approximately $7,440,000, or 136.3%, compared
to the quarter ended
12
<PAGE>
September 30, 1996. The increase in selling, general and administrative
expenses was primarily a result of the acquisition of JEH. Selling, general
and administrative expenses as a percentage of net sales decreased to 33.2%
from 37.6% for same period in 1996. The decrease in selling, general and
administrative expenses as a percentage of net sales was primarily due to cost
cutting measures completed during the integration of JEH in late 1996 and the
first six months of 1997.
INCOME FROM OPERATIONS
Principally as a result of the above, income from operations in the
quarter ended September 30, 1997 was approximately $4,984,000, an increase of
$2,995,000, or 150.6%, over the prior year's comparable quarter. Income from
operations as a percentage of net sales decreased to 12.8% in the third
quarter of 1997 from 13.7% for the prior year's comparable period.
INTEREST EXPENSE
Interest expense in the third quarter of 1997 was approximately
$1,079,000, an increase of approximately $619,000, or 134.5%, over
approximately $460,000 incurred in the third quarter of 1996. Interest expense
as a percentage of net sales decreased to 2.8% from 3.2% for the same period a
year ago. The decrease in interest expense was attributable primarily to the
increase in bank debt resulting from the acquisition of JEH in November 1996,
which was offset in part by the repayment of bank debt out of the net proceeds
of the public equity offering during the third quarter of 1997.
INCOME TAXES
The Company's effective tax rate was 42.0% in the third quarter of 1997
versus 43.2% in 1996. The provision for income taxes in the third quarter of
1997 was approximately $1,621,000 compared to approximately $645,000 for the
third quarter of 1996.
EXTRAORDINARY ITEM
An extraordinary item of $2.7 million (net of a tax benefit of $2.0
million), represents entirely a non-cash write-off of debt issue costs and
debt discount as a result of extinguishing approximately $58.6 million of bank
debt from the net proceeds of the third quarter public equity offering.
NET INCOME
As a result of the above, the Company recorded a net loss of $454,000, or
$.03 per share, in the quarter ended September 30, 1997, compared to net
income of $850,000, or $.10 per share, in the quarter ended September 30,
1996.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated working capital at September 30, 1997 was
approximately $37,645,000 and cash and cash equivalents available were
approximately $6,479,000. The Company's cash resources were satisfactory to
meet its obligations for the quarter ended September 30, 1997.
Under the terms of a Financing and Security Agreement entered into on
November 1, 1996, between Banque Paribas (the "Bank") and the Company, the
Bank provided up to $90.0 million principal amount of senior financing (the
"Senior Financing Facilities") that included: (i) $57 million of term loans
(the "Term Loans") for use in connection with Hanger's acquisition of JEH;
(ii) an $8.0 million revolving loan facility (the "Revolver"); and (iii) up to
$25 million principal amount of loans under an acquisition loan facility (the
"Acquisition Loans") for use in connection with future acquisitions. In
addition, on November 1, 1996, the Company borrowed $8.0 million from the Bank
and Chase Venture Capital Associates L.P. in the form of Senior Subordinated
Notes ("Senior Subordinated Notes") with detachable warrants.
The net proceeds of the public equity offering in the third quarter of
1997 were used to repay (i) $37,371,500 of the Term Loans, (ii) $5,000,000 of
the loans under the Revolver, (iii) $8,000,000 of Acquisition Loans and (iv)
all of the Senior Subordinated Notes. The Company's total debt at September
30, 1997, including a current portion of approximately $4,535,000, was
approximately $24,520,000. Such indebtedness included: (i) $17,495,000 of Term
Loans; and (ii) a total of $7,025,000 of other indebtedness.
Of the Term Loans, approximately $8.8 million principal amount (the "A
Term Loan") is being amortized in quarterly amounts and will mature on
December 31, 2001, and $8.7 million principal amount (the "B Term Loan") is
being amortized in quarterly amounts and will mature on December 31, 2003. The
final maturity of any loans under the Revolver and Acquisition Loans will
mature on November 2, 2001. The Senior Financing Facilities provided for an
initial commitment fee of 2.65% on the $90.0 million facility. In addition, an
unused commitment fee of .5% of 1% per year on the unused portion of the
Revolver and the Acquisition Loan facilities is payable quarterly in arrears.
The Senior Financing Facilities are collateralized by a first priority
security interest in all of the common stock of the Company's subsidiaries and
all assets of the Company and its subsidiaries. Effective October 22, 1997, at
the Company's option, the annual interest rate will be adjusted to be either
LIBOR plus 1.25% or a Base Rate (as defined below) plus .25% in the case of
the A Term Loan, Acquisition Loans and Revolver borrowings, and adjusted LIBOR
plus 1.50% or a Base Rate plus .50% in the case of the B Term Loan. Interest
rates on the Senior Financing Facilities will increase upon the occurrence of
certain increases in the ratio of the Company's total indebtedness to annual
earnings before interest, taxes, depreciation and amortization. The "Base
Rate" is defined as the higher of (i) the federal funds rate plus .5%, or (ii)
the prime commercial
14
<PAGE>
lending rate of Chase Manhattan Bank, N.A., as announced from time to time.
The Agreement relating to the Senior Financing Facilities contains a minimum
net worth covenant and prohibits the payment of cash dividends on the
Company's Common Stock.
All or any portion of outstanding loans under any of the Senior Financing
Facilities may be repaid at any time and commitments may be terminated in
whole or in part at the option of the Company without premium or penalty,
except that LIBOR-based loans may only be paid at the end of the applicable
interest period. Mandatory prepayments will be required in the event of
certain sales of assets, debt or equity financings and under certain other
circumstances.
Detachable warrants issued by the Company in conjunction with the Senior
Subordinated Notes represent 720,000 shares of the Company Common Stock with
an exercise price equal to $4.01 as to 418,365 shares, and $6.38 as to 301,635
shares. As a result of the Company's repayment of the Senior Subordinated
Notes, the Warrants previously issued by the Company in conjunction with the
Senior Subordinated Notes were amended to reflect the reduction in the
aggregate number of shares of Company Common Stock issuable upon exercise of
the Warrants from 1,600,000 shares to 720,000 shares.
On November 1, 1996, the Company acquired JEH in a merger transaction
effected pursuant to an Agreement and Plan of Merger, dated as of July 29,
1996 (the "Merger Agreement"), by and among the Company, JEH and JEH
Acquisition Corporation, a Georgia corporation ("Acquisition") wholly-owned by
the Company. The Merger Agreement provided for the merger of Acquisition with
and into JEH (the "Merger"), as a result of which JEH became a wholly-owned
subsidiary of the Company, effective November 1, 1996. Pursuant to the Merger
Agreement, the Company paid a total of $44 million in cash and issued a total
of approximately one million shares of the Company Common Stock in exchange
for all of JEH's outstanding common stock on November 1, 1996, and paid an
additional $1,783,000 to former JEH shareholders on March 27, 1997 pursuant to
provisions in the Merger Agreement calling for a post- closing adjustment.
During the nine months ended September 30, 1997, the Company acquired
four orthotic and prosthetic companies. The aggregate purchase price excluding
potential earn-out provisions was $9,679,200, comprised of $6,315,000 in cash,
$2,864,000 in promissory notes and 64,000 shares of Common Stock of the
Company valued at $500,000. The cash portion of these acquisitions was
borrowed as Acquisition Loans.
The Company plans to finance future acquisitions through internally
generated funds or borrowings under the Acquisition Loans, the issuance of
notes or shares of Common Stock of the Company, or through a combination
thereof.
15
<PAGE>
The Company is actively engaged in ongoing discussions with prospective
acquisition candidates. The Company plans to continue to expand its operations
aggressively through acquisitions.
On July 31, 1997, the Company sold 5.0 million shares of Common Stock in
an underwritten public offering at $11.00 per share resulting in approximately
$51 million of net proceeds to the Company. On August 28, 1997, the Company
sold an additional 750,000 shares of its Common Stock as a result of the
exercise of an over-allotment option granted to the underwriters in connection
with the public offering on July 31, 1997. Exercise of the over-allotment
option resulted in the Company's receipt of approximately $7.6 million of
additional net proceeds. The Company applied the net proceeds of the public
offering to the repayment of the Senior Subordinated Notes and certain
indebtedness outstanding under the Senior Financing Facilities. Upon repayment
of this debt, the Company was required to write off the debt issue costs and
unamortized debt discount of $2.7 million ($2.0 million net of tax benefit)
that was recorded upon the issuance of such notes. As a result of the
Company's repayment of the Senior Subordinated Notes, the Warrants previously
issued by the Company in conjunction with the Senior Subordinated Notes were
amended to reflect the reduction in the aggregate number of shares of Company
Common Stock issuable upon exercise of the Warrants from 1,600,000 shares to
720,000 shares.
Capital expenditures during the nine months ended September 30, 1997
approximated $1.8 million and the Company expects approximately $.2 million of
additional capital expenditures during the balance of the year. Working
capital is expected to be available to fund such capital expenditures.
OTHER
Inflation has not had a significant effect on the Company's operations,
as increased costs to the Company generally have been offset by increased
prices of products and services sold.
The Company has entered into an interest rate swap agreement to reduce
the impact of changes in interest rates on its A Term Loan commitment. At June
30, 1997, the Company had an outstanding interest rate swap agreement with a
commercial bank, having a total notional principal amount of $28.5 million.
The agreement effectively minimizes the Company's base interest rate exposure
between a floor of 5.32% and a cap of 7.0%. The interest rate swap agreement
matures on September 30, 1999. The Company is exposed to credit loss in the
event of non-performance by the other party to the interest rate swap
agreement. All other debt accrues interest at a fixed rate except the B Term
Loan commitment which accrues interest at a floating rate. A material change
in interest rates could have a significant impact on the Company's operating
results.
The Company primarily provides services and customized devices throughout
the United States and is reimbursed, in large part, by the patients'
third-party insurers or
16
<PAGE>
governmentally funded health insurance programs. The ability of the Company's
debtors to meet their obligations is principally dependent upon the financial
stability of the insurers of the Company's patients and future legislation and
regulatory actions.
In February 1997, the Financial Accounting Standards Board issued SFAS
128, "Earnings Per Share," which will replace the current rules for earnings
per share computations, presentation and disclosure. Under the new standard,
basic earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflect the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. SFAS 128 requires
a dual presentation of basic and diluted earnings per share on the face of the
income statement.
The Company will be required to adopt SFAS 128 in the fourth quarter of
this year and, as required by the standard, will restate all prior period
earnings per share data. The Company's earnings per share, as calculated under
SFAS 128, are not expected to be materially different from those computed
under the present accounting standard.
This report contains forward-looking statements setting forth the
Company's beliefs or expectations relating to future revenues and
profitability. Actual results may differ materially from projected or expected
results due to changes in the demand for the Company's O&P services and
products, uncertainties relating to the results of operations or recently
acquired and newly acquired O&P patient care practices, the Company's ability
to attract and retain qualified O&P practitioners, governmental policies
affecting O&P operations and other risks and uncertainties affecting the
health-care industry generally. Readers are cautioned not to put undue
reliance on forward-looking statements. The Company disclaims any intent or
obligation to up-date publicly these forward-looking statements, whether as a
result of new information, future events or otherwise.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS -
Exhibit 11 - Computation of Net Income Per Share
Exhibit 27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K -
On July 16, 1997, the Company filed an amendment to the Form
8-K filed by it in June 5, 1997 regarding certain acquisitions.
18
<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: October 31, 1997 /s/IVAN R. SABEL
-----------------------
Ivan R. Sabel
Chief Executive Officer
Date: October 31, 1997 /s/RICHARD A. STEIN
-----------------------
Richard A. Stein
Vice President - Finance
Principal Financial and
Accounting Officer
19
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
FOR THE THREE MONTHS ENDED September 30,
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net (loss) income $ (454,374) $ 850,065
Less:
Dividends declared (6,584) (5,628)
----------- -------------
Total $ (460,958) $ 844,047
Divided by:
Weighted average number of shares
outstanding 14,725,180 8,394,444
-------------- -------------
Net income (loss) per share $ .03 $ .10
============= ===============
</TABLE>
FOR THE NINE MONTHS ENDED September 30,
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net income $ 2,015,475 $ 1,738,555
Less:
Dividends declared (19,319) (17,659)
------------- -------------
Total $ 1,996,156 $ 1,720,896
Divided by:
Weighted average number of shares
outstanding 12,647,065 8,384,307
------------- -------------
Net income per share $ .16 $ .21
============== =============
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000722723
<NAME> HANGER ORTHOPEDIC GROUP, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,479,340
<SECURITIES> 0
<RECEIVABLES> 30,273,255
<ALLOWANCES> 4,579,000
<INVENTORY> 16,670,805
<CURRENT-ASSETS> 58,605,889
<PP&E> 24,721,843
<DEPRECIATION> 7,098,202
<TOTAL-ASSETS> 147,611,647
<CURRENT-LIABILITIES> 20,9603880
<BONDS> 19,984,626
279,002
0
<COMMON> 54,729
<OTHER-SE> 101,447,014
<TOTAL-LIABILITY-AND-EQUITY> 147,611,647
<SALES> 106,433,592
<TOTAL-REVENUES> 106,433,592
<CGS> 54,331,907
<TOTAL-COSTS> 54,331,907
<OTHER-EXPENSES> 39,394,633
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,455,955
<INCOME-PRETAX> 8,119,402
<INCOME-TAX> 3,410,136
<INCOME-CONTINUING> 4,709,266
<DISCONTINUED> 0
<EXTRAORDINARY> 2,693,791
<CHANGES> 0
<NET-INCOME> 2,015,475
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
