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 JUNE 30, 1997
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________
Commission File Number 1-10670
HANGER ORTHOPEDIC GROUP, INC.
--------------------------------------------------------------------
(Exact name of registrant as specified in its charter.)
Delaware 84-0904275
---------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7700 Old Georgetown Road, Bethesda, MD 20814
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's phone number, including area code: (301) 986-0701
-----------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of August 6,
1997; 14,571,465 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 - June 30, 1997
(unaudited) and December 31, 1996 1
Consolidated Statements of Operations for the six
months ended June 30, 1997 and 1996 (unaudited) 3
Consolidated Statements of Operations for the three
months ended June 30, 1997 and 1996 (unaudited) 4
Consolidated Statements of Cash Flows for the six
months ended June 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 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securityholders 17
Item 5. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,744,561 $ 6,572,402
Accounts receivable less allowances for
doubtful accounts of $3,752,000 and
$1,144,000 in 1997 and 1996, respectively 28,224,831 24,321,872
Inventories 16,656,795 15,916,638
Prepaid expenses and other assets 2,274,207 1,595,169
Deferred income taxes 3,159,280 3,159,280
------------- -------------
Total current assets 56,059,674 51,565,361
------------- -------------
PROPERTY, PLANT AND EQUIPMENT
Land 4,269,045 4,269,045
Buildings 8,253,513 8,017,547
Machinery and equipment 6,812,647 6,275,307
Furniture and fixtures 2,198,963 2,095,900
Leasehold improvements 2,565,071 2,139,207
------------- -------------
24,099,239 22,797,006
Less accumulated depreciation and amortization 6,546,107 5,497,809
------------- -------------
17,553,132 17,299,197
------------- -------------
INTANGIBLE ASSETS
Excess of cost over net assets acquired 73,609,502 63,935,447
Non-compete agreements 2,119,479 1,981,329
Other intangible assets 6,226,193 6,152,607
------------- -------------
81,955,174 72,069,383
Less accumulated amortization 8,224,289 6,917,960
------------- -------------
73,730,885 65,151,423
------------- -------------
OTHER ASSETS
Other 1,014,587 925,446
------------- -------------
TOTAL ASSETS $148,358,278 $134,941,427
============= =============
</TABLE>
The accompany notes are an integral part of the consolidated financial
statements.
1
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------------------------------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 6,805,582 $ 4,902,572
Accounts payable 3,350,291 4,141,993
Accrued expenses 7,606,809 7,815,028
Customer deposits 929,453 578,219
Accrued wages and payroll taxes 5,327,909 8,321,395
Deferred revenue 284,287 306,998
------------- -------------
Total current liabilities 24,304,330 26,066,205
------------- -------------
Long-term debt 75,948,349 64,297,801
Deferred income taxes 2,377,627 2,377,627
Other liabilities 2,314,971 2,188,278
Mandatorily redeemable preferred stock, class C,
liquidation preference of $500 per share 290,434 277,701
Mandatorily redeemable preferred stock, class F,
liquidation preference of $500 per share
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 25,000,000 shares
authorized, 9,610,414 and 9,449,129 shares
issued, and 9,476,918 and 9,315,634 shares
outstanding in 1997 and 1996 96,104 94,492
Additional paid-in capital 41,925,654 41,008,363
Retained earnings (Accumulated deficit) 1,756,371 (713,478)
------------- -------------
43,778,129 40,389,377
Treasury stock - (133,495 shares) (655,562) (655,562)
------------- -------------
43,122,567 39,733,815
------------- -------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $148,358,278 $134,941,427
============= =============
</TABLE>
The accompany notes are an integral part of the consolidated financial
statements.
2
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED June 30, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net Sales $ 67,594,259 $ 26,249,672
Cost of products and services sold 34,552,051 12,238,843
------------- -------------
Gross profit 33,042,208 14,010,829
Selling, general & administrative 22,964,207 10,222,239
Depreciation and amortization 1,494,264 955,685
Amortization of excess cost over net assets acquired 860,832 339,674
------------- -------------
Income from operations 7,722,905 2,493,231
Other income expense:
Interest expense, net (3,376,771) (861,539)
Other income (expense) (86,985) (73,502)
------------- -------------
Income from operations before income taxes 4,259,149 1,558,190
Provision for income taxes 1,789,300 669,700
------------- -------------
Net income $ 2,469,849 $ 888,490
============= =============
Earnings Per Share:
Net income per share $ .23 $ .11
============= =============
Weighted average number of common shares
outstanding 10,726,396 8,351,436
</TABLE>
The accompany notes are an integral part of the consolidated financial
statements.
3
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED June 30, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net Sales $ 36,644,645 $ 14,020,643
Cost of products and services sold 18,322,122 6,354,119
------------- -------------
Gross profit 18,322,523 7,666,524
Selling, general & administrative 12,039,572 5,225,161
Depreciation and amortization 744,959 479,530
Amortization of excess cost over net assets acquired 451,320 170,059
------------- -------------
Income from operations 5,086,672 1,791,774
Other expense:
Interest expense, net (1,849,502) (468,303)
Other (43,236) (27,990)
------------- -------------
Income from operations before income taxes 3,193,934 1,295,481
Provision for income taxes 1,342,000 557,000
------------- -------------
Net income $ 1,851,934 $ 738,481
============= =============
Earnings Per Share:
Net income per share $ .17 $ .09
============= =============
Weighted average number of common shares
outstanding 10,773,837 8,354,424
</TABLE>
The accompany notes are an integral part of the consolidated financial
statements.
4
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED June 30, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,469,849 $ 888,490
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debt 2,337,603 507,182
Depreciation and amortization 1,494,264 955,685
Amortization of excess cost over net
assets acquired 860,832 339,674
Amortization of debt discount 127,406
Changes in assets and liabilities, net
of effect from acquired companies:
Accounts receivable (4,882,718) (822,781)
Inventory 208,278 (43,577)
Prepaid and other assets (653,807) (222,296)
Other assets (86,878) (15,408)
Accounts payable (1,107,765) (164,127)
Accrued expenses (208,553) (84,908)
Accrued wages and payroll taxes (3,062,226) (132,206)
Customer deposits 351,234 (39,022)
Deferred revenue (22,711) 88,418
Other liabilities 126,693 (45,067)
------------- -------------
Total adjustments (4,518,348) 321,567
------------- -------------
Net cash (used in) provided by operating activities (2,048,499) 1,210,057
------------- -------------
Cash flows from investing activities:
Purchase of fixed assets, net (1,115,007) (390,336)
Acquisitions, net of cash (8,446,189) (95,000)
Purchase of patents (73,242) (13,065)
Purchase of non-compete agreements (138,150)
Other intangibles (7,596)
Net cash used in investing activities (9,772,588) (505,997)
------------- -------------
</TABLE>
Continued
The accompany notes are an integral part of the consolidated financial
statements.
5
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED June 30,
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net borrowings under revolving credit
facility $ 5,500,000 $ (800,000)
Proceeds from exercise of stock options
and warrants 431,637
Proceeds from long-term debt 8,256,000
Repayment of long-term debt (3,194,047) (831,913)
Increase in financing costs (344) (976)
------------- -------------
Net cash (used in) provided by financing activities 10,993,246 (1,632,889)
------------- -------------
Net change in cash and cash equivalents for the period (827,841) (928,829)
Cash and cash equivalents at beginning of period 6,572,402 1,456,305
------------- -------------
Cash and cash equivalents at end of period $ 5,744,561 $ 527,476
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 3,156,241 $ 887,529
============= =============
Taxes $ 1,328,000 $ 786,980
============= =============
Non-cash financing and investing activities:
Issuance of common stock in connection with
acquisition $ 500,000
=============
Issuance of notes in connection with acquisitions $ 2,864,200
=============
Dividends declared preferred stock $ 12,735 $ 11,641
============= =============
</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. (the "Company"), as of
December 31, 1996, and notes thereto included in the Annual Report on Form
10-K 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, we will restate all prior
period earnings per share data. Our 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 June 30, 1997 and December 31, 1996 were comprised of the
following:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
(unaudited)
<S> <C> <C>
Raw materials $ 8,669,023 $ 7,504,442
Work-in-process 926,755 831,632
Finished goods 7,061,017 7,580,564
------------ ------------
$16,656,795 $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 first six months of 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 $500,000
in common stock. 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>
Six Months Ended
June 30,
1997 1996
---- ----
<S> <C> <C>
Net sales $70,567,000 $63,161,000
Net income 2,730,000 1,290,000
Net income per common share
and common share equivalent .25 .14
</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 --- SUBSEQUENT EVENT
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. The Company applied such net
proceeds of the public
8
<PAGE>
offering to the repayment of Senior Subordinated Notes and certain
indebtedness outstanding under the Company's Senior Financing Facilities. Upon
repayment of the Senior Subordinated Notes, the Company was required to write
off the unamortized debt discount of $1.9 million ($1.1 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>
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 Six For the Three
Months Ended Months Ended
June 30, June 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 51.1 46.6 50.0 45.3
Gross profit 48.9 53.4 50.0 54.7
Selling, general & administrative
expenses 34.0 38.9 32.9 37.3
Depreciation and amortization 2.2 3.6 2.0 3.4
Amortization of excess cost over net
assets acquired 1.3 1.3 1.2 1.2
Income from operations 11.4 9.5 13.9 12.8
Interest expense 5.0 3.3 5.0 3.3
Provision for income taxes 2.6 2.6 3.7 4.0
Net income 3.7 3.4 5.1 5.3
</TABLE>
FOR THE SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE
30, 1996
NET SALES
Net sales for the six months ended June 30, 1997 were approximately
$67,594,000, an increase of approximately $41,344,000, or 157.5%, over net
sales of approximately $26,249,000 for the six months ended June 30, 1996. The
majority of increase was attributable to Hanger's acquisition of J.E. Hanger,
Inc. of Georgia ("JEH") on November 1, 1996. In addition, contributing to the
increase in net sales was an 11.3% increase in sales by those Hanger
patient-care centers operating throughout both six-month periods. The Company
believes that its net sales during the balance of 1997 will continue to exceed
1996 net sales.
GROSS PROFIT
Gross profit for the six months ended June 30, 1997 was approximately
$33,042,000, an increase of approximately $19,031,000, or 135.8%, over gross
profit of approximately $14,011,000 for the six months ended June 30, 1996.
Gross profit as a percent of net sales decreased from 53.4% in the six months
ended June 30, 1996 to
10
<PAGE>
48.9% in the six months ended June 30, 1997. The 4.5% decrease in gross profit
as a percent of net sales is primarily attributable 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 six months ended June
30, 1997 increased by approximately $12,742,000, or 124.6%, compared to the
six months ended June 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 34.0% from 38.9% for the same period in 1996. The decrease in
selling, general and administrative expenses as a percentage of net sales
occurred primarily as a result of cost cutting measures completed during
integration of JEH in the first quarter of 1997.
INCOME FROM OPERATIONS
Principally as a result of the above, income from operations in the six
months ended June 30, 1997 was approximately $7,723,000, an increase of
approximately $5,230,000, or 209.8%, over the prior year's comparable period.
Income from operations as a percentage of net sales increased to 11.4% in the
six months ended June 30, 1997 from 9.5% in the six months ended June 30,
1996.
INTEREST EXPENSE
Interest expense for the first six months of 1997 was approximately
$3,377,000, an increase of approximately $2,515,000, or 291.9%, over
approximately $862,000 incurred in the first six months of 1996. Interest
expense as a percentage of net sales increased to 5.0% from 3.3% for the same
period one year ago. The increase in interest expense was attributable
primarily to the increase in bank debt resulting from the acquisition of JEH.
INCOME TAXES
The Company's effective tax rate was 42.0% in the first six months of
1997 versus 43.0% in 1996. The provision for income taxes for the six months
ended June 30, 1997 was approximately $1,789,000 compared to approximately
$669,000 for the six months ended June 30, 1996.
NET INCOME
As a result of the above, the Company recorded net income of
approximately $2,470,000, or $.23 per common share, in the first six months of
1997, compared to net income of approximately $888,000, or $.11 per common
share, in the first six months of 1996.
11
<PAGE>
FOR THE THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1996
NET SALES
Net sales for the quarter ended June 30, 1997, were approximately
$36,645,000, an increase of approximately $22,624,000, or 161.4%, over net
sales of approximately $14,021,000 for the quarter ended June 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 an 11.8% 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 June 30, 1997 was approximately
$18,322,000, an increase of approximately $10,656,000, or 139.0%, over gross
profit of approximately $7,666,000 for the quarter ended June 30, 1996. Gross
profit as a percentage of net sales decreased from 54.7% in the first quarter
of 1996 to 50.0% in the first quarter of 1997. The 4.7% 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 June
30, 1997 increased by approximately $6,814,000, or 130.4%, compared to the
quarter ended June 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 32.9% from 37.3% 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 the first quarter of 1997.
INCOME FROM OPERATIONS
Principally as a result of the above, income from operations in the
quarter ended June 30, 1997 was approximately $5,087,000, an increase of
$3,295,000, or 183.9%, over the prior year's comparable quarter. Income from
operations as a percentage of net sales increased to 13.9% in the second
quarter of 1997 from 12.8% for the prior year's comparable period.
12
<PAGE>
INTEREST EXPENSE
Interest expense in the second quarter of 1997 was approximately
$1,850,000, an increase of approximately $1,381,000, or 294.9%, over
approximately $469,000 incurred in the second quarter of 1996. Interest
expense as a percentage of net sales increased to 5.0% from 3.3% for the same
period a year ago. The increase in interest expense was attributable primarily
to the increase in bank debt resulting from the acquisition of JEH.
INCOME TAXES
The Company's effective tax rate was 42.0% in the second quarter of 1997
versus 43.0% in 1996. The provision for income taxes in the second quarter of
1997 was approximately $1,342,000 compared to approximately $557,000 for the
second quarter of 1996.
NET INCOME
As a result of the above, the Company recorded net income of $1,852,000,
or $.17 per common share, in the quarter ended June 30, 1997, compared to net
income of $739,000, or $.09 per common share, in the quarter ended June 30,
1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated working capital at June 30, 1997 was
approximately $31,755,000 and cash and cash equivalents available were
approximately $5,745,000. The Company's cash resources were satisfactory to
meet its obligations for the quarter ended June 30, 1997.
Under the terms of a new 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 includes: (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 Company's total debt at June 30, 1997, including a current portion of
approxi mately $6,806,000, was approximately $82,754,000. Such indebtedness
included: (i) $55,114,000 of Term Loans; (ii) $8,000,000 of Acquisition Loans;
(iii) $5,500,000
13
<PAGE>
borrowed under the Revolver; (iv) $6,387,000, net of discount, borrowed under
the Senior Subordinated Notes; and (v) a total of $7,753,000 of other
indebtedness.
Of the Term Loans, approximately $29.0 million principal amount (the "A
Term Loan") is being amortized in quarterly amounts and will mature on
December 31, 2001, and $28.0 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. At the Company's option, the
annual interest rate will be adjusted to be either 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 a 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 .5%, or (ii) the prime commercial
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.
Cash interest on the Senior Subordinated Notes, which mature on November
1, 2004, is payable quarterly at an annual rate of 8.0%. However, the Company
is permitted, in lieu of cash interest, to pay interest in a combination of
cash and additional Senior 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 Senior Subordinated Notes are subordinated to
loans under the Senior Financing Facilities. The Company is, at its option,
entitled to redeem the Senior Subordinated Notes at any time at their
liquidation value.
Detachable warrants issued by the Company in conjunction with the Senior
Subordinated Notes represent 1.6 million shares of the Company Common Stock
with an exercise price equal to $4.01 as to 929,700 shares, and $6.38 as to
670,300 shares. Up to 50% of the warrants (representing up to 800,000 shares
of the Company Common Stock)
14
<PAGE>
will be terminated upon the repayment of 100% of the Senior Subordinated Notes
on or prior to May 1, 1998. An additional 5% of the warrants (representing up
to 80,000 shares of the Company Common Stock) will be terminated upon the
repayment of 100% of the Senior Subordinated Notes on or prior to November 1,
1997. Warrants will be terminated pro-rata across the above two exercise
prices.
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 first six months of 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 $500,000 in common stock. 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.
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. The Company applied such 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 the Senior Subordinated Notes, the Company was
required to write off the unamortized debt discount of $1.9 million ($1.1
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.
15
<PAGE>
Capital expenditures during the first six months of 1997 approximated
$1.1 million and the Company expects approximately $.9 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 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.
16
<PAGE>
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 4. Submission Of Matters To A Vote Of Security-holders
------- ---------------------------------------------------
The Company's Annual Meeting of Shareholders was held on June 3, 1997.
The following eight directors were reelected by the following votes to
serve as members of the Board of Directors for one year or until their
successors are elected and qualified:
<TABLE>
<CAPTION>
NAME VOTES FOR VOTES WITHHELD
<S> <C> <C>
Ivan R. Sabel 8,754,478 48,391
Mitchell J. Blutt, M.D. 8,751,028 51,841
Edmond E. Charrette, M.D. 8,754,478 48,391
Thomas P. Cooper, M.D. 8,755,478 47,391
Robert J. Glaser, M.D. 8,751,616 51,253
James G. Hellmuth 8,753,566 49,303
William L. McCulloch 8,751,616 51,253
Daniel A. McKeever 8,752,616 50,253
H. E. Thranhardt 8,755,478 47,391
</TABLE>
Shareholders ratified the selection of Coopers & Lybrand as the
independent accountants for the Company for the current fiscal year. Such
proposal was approved by a vote of 8,500,512 shares for and 288,966 shares
against, with 12,908 shares abstaining.
Item 5. Exhibits And Reports On Form 8-K
------- --------------------------------
(a) EXHIBITS
The following exhibits is filed herewith:
11 Computation of Net Income Per Share
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
On April 15, 1997, the Company filed a Form 8-K (Item 2), as
amended on June 13, 1997 (to provide Item 7 financial information),
regarding the Company's acquisition of the non-manufacturing O&P
assets of ACOR Orthopaedic, Inc.
On May 12, 1997, the Company filed a Form 8-K (Item 2), as
amended on July 16, 1997 (to provide Item 7 financial information),
regarding the Company's acquisition of the O&P assets of Fort Walton
Orthopedic, Inc. and Mobile Limb & Brace, Inc.
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: August 12, 1997 /s/IVAN R. SABEL
-----------------------
Ivan R. Sabel
Chief Executive Officer
Date: August 12, 1997 /s/RICHARD A. STEIN
-----------------------
Richard A. Stein
Vice President - Finance
Principal Financial and
Accounting Officer
19
<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> 5,744,561
<SECURITIES> 0
<RECEIVABLES> 28,224,831
<ALLOWANCES> 3,752,000
<INVENTORY> 16,656,795
<CURRENT-ASSETS> 56,059,674
<PP&E> 24,099,239
<DEPRECIATION> 6,546,107
<TOTAL-ASSETS> 148,358,278
<CURRENT-LIABILITIES> 24,304,330
<BONDS> 75,948,349
290,434
0
<COMMON> 96,104
<OTHER-SE> 43,026,463
<TOTAL-LIABILITY-AND-EQUITY> 148,358,278
<SALES> 67,594,259
<TOTAL-REVENUES> 67,594,259
<CGS> 34,552,051
<TOTAL-COSTS> 34,552,051
<OTHER-EXPENSES> 25,319,303
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,376,771
<INCOME-PRETAX> 4,259,149
<INCOME-TAX> 1,789,000
<INCOME-CONTINUING> 2,469,849
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,469,849
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
HANGER ORTHOPEDIC GROUP, INC.
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
FOR THE THREE MONTHS ENDED June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net income $ 1,851,934 $ 738,481
Less:
Dividends declared (6,440) (5,886)
------------ ------------
Total $ 1,845,494 $ 732,595
Divided by:
Weighted average number of shares
outstanding 10,773,837 8,354,424
------------ ------------
Net income per share $ .17 $ .09
============ ============
</TABLE>
FOR THE SIX MONTHS ENDED June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net income $ 2,469,849 $ 888,490
Less:
Dividends declared (12,735) (11,641)
------------ ------------
Total $ 2,457,114 $ 876,849
Divided by:
Weighted average number of shares
outstanding 10,726,396 8,351,436
------------ ------------
Net income per share $ .23 $ .11
============ ============
</TABLE>
