SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A No. 2
(For Year Ended 12/31/97)
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
HANGER ORTHOPEDIC GROUP, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 1-10670 84-0904275
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification
Number)
7700 Old Georgetown Road
Bethesda, Maryland 20814
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (301) 986-0701
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Annual Report on Form 10-K for
the year ended December 31, 1997, as set forth in the pages attached hereto:
Part II - Item 7 Management's Discussion and Analysis
of Financial Condition and Results
of Operations
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
HANGER ORTHOPEDIC GROUP, INC.
By:/s/RICHARD A. STEIN
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Richard A. Stein
Vice President - Finance
Date: June 23, 1998
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HANGER ORTHOPEDIC GROUP, INC.
AMENDMENT NO. 2 TO
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
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The purpose of this Amendment No. 2 to the Hanger Orthopedic Group, Inc.
Annual Report on Form 10-K for the year ended December 31, 1997 (the "Form
10-K") is to amend the sentence that appears as the second full paragraph on
page 23 of the Form 10-K which is in the Management's Discussion and Analysis
of Financial Condition and Results of Operations under Item 7 of the Form
10-K. The amendment replaces the $.42 figure set forth in the first line of
that paragraph with the figure $.37. Such revised figure appears in the second
line of the last full paragraph on page 5 of this Amendment.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The significant growth in the Company's O&P professional practice
management net sales has resulted from an aggressive program of acquiring and
developing O&P patient-care centers. Similarly, growth in the Company's O&P
distribution and manufacturing net sales is attributable primarily to
acquisitions. At December 31, 1997, the Company operated 213 patient-care
centers, six distribution facilities, three of which contain central
fabrication operations, and two manufacturing facilities.
SEASONALITY
The Company's results of operations are affected by seasonal
considerations. The adverse weather conditions often experienced in certain
geographical areas of the United States during the first quarter of each year,
together with a greater degree of patients' sole responsibility for their
insurance deductible payment obligations during the beginning of each calendar
year, have contributed to lower Company net sales during that quarter.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items
of the Company's statements of operations as a percentage of the Company's net
sales:
<TABLE>
<CAPTION>
Historical
For the Years Ended December 31,
----------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of products and services sold 46.8 48.2 50.5
Gross profit 53.2 51.8 49.5
Selling, general and administrative 36.9 36.7 33.7
Depreciation and amortization 3.8 3.0 2.0
Acquisition and integration costs --- 3.7 ---
Amortization of excess cost over net
assets acquired 1.3 1.2 1.2
Income from operations 11.1 7.0 12.6
Interest expense 3.9 3.8 3.4
Income before taxes and extraordinary
item 7.0 3.0 9.0
Income taxes 2.9 1.3 3.8
Net income 4.1 1.5 3.4
</TABLE>
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YEARS ENDED DECEMBER 31, 1997 AND 1996
NET SALES. Net sales for the year ended December 31, 1997 were
approximately $145.6 million, an increase of approximately $78.8 million, or
118%, over net sales of approximately $66.8 million for the year ended
December 31, 1996. The increase was primarily a result of: (i) the acquisition
of J.E. Hanger, Inc. of Georgia ("JEH") on November 1, 1996, as well as other
acquisitions during 1997, and (ii) an 11.7% increase in net sales attributable
to patient-care centers and facilities operating during both periods.
GROSS PROFIT. Gross profit in 1997 was approximately $37.5 million, or
108%, over the prior year. The cost of products and services sold for the year
ended December 31, 1997, was $73.5 million compared to $32.2 million in 1996.
Gross profit as a percentage of net sales for patient-care service was 55.1%
in the years ended December 31, 1996 and 1997. Gross profit as a percentage of
net sales for manufacturing and distribution was 44.9% and 16% for those
years, respectively. The total Company gross profit as a percent of net sales
declined from 51.8% in 1996 to 49.5% in 1997. The 2.3% decrease in the
Company's gross profit as a percentage of net sales is primarily attributable
to the acquisition of JEH, which operated a large distribution division that
had lower gross profit margins than patient-care services.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses in 1997 increased approximately $24.5 million, or 99.9%, compared to
1996. The increase in selling, general and administrative expenses was
primarily a result of the acquisition of JEH and other acquisitions. Selling,
general and administrative expenses as a percent of net sales decreased to
33.7% in 1997 from 36.7% in 1996. The selling, general and administrative
expenses as a percentage 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 CONTINUING OPERATIONS. Principally as a result of the above,
income from operations in 1997 totalled approximately $18.3 million, an
increase of $13.6 million, or 290.0%, over the prior year. Income from
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operations as a percentage of net sales increased to 12.6% in 1997 from 7.0%
in 1996.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1997
was approximately $4.9 million, an increase of approximately $2.4 million, or
93.6%, over the approximately $2.5 million of interest expense incurred during
1996. Interest expense as a percent of net sales decreased to 3.4% in 1997
from 3.8% for 1996. 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 1997 versus
45% in 1996. The decrease in 1997 is a result of the disproportionate impact
of the amortization of the excess costs over net assets acquired in relation
to taxable income in 1996.
EXTRAORDINARY ITEM. A pre-tax extraordinary item of $4.6 million ($2.7
million, net of tax benefit) in 1997, represents entirely a write-off of debt
issue costs and debt discount as a result of extinguishing approximately $58.3
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
from operations before extraordinary item of $7.6 million for the year ended
December 31, 1997, compared to $1.1 million for the prior year. A pre-tax
extraordinary item of $4.6 million ($2.7 million, net of tax benefit) on early
extinguishment of debt was recognized in 1997 compared to $139,000 ($83,000,
net of tax benefit) in 1996. Both extraordinary items were in connection with
refinancings of bank indebtedness.
As a result of the above, the company reported net income of $4.9
million, or $.37 per common dilutive share, for the year ended December 31,
1997, as compared to net income of $998,000, or $.11 per common dilutive
share, for the year ended December 31, 1996.
YEARS ENDED DECEMBER 31, 1996 AND 1995
NET SALES. Net sales for the year ended December 31, 1996 were
approximately $66.8 million, an increase of approximately $14.3 million, or
27.3%, over net sales of approximately $52.5 million for the year ended
December 31, 1995. The increase was primarily a result of: (i) an increase of
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$12.1 million attributable to the acquisition of JEH; and (ii) an increase of
$2.2 million, or an increase of 5.6%, in net sales attributable to
patient-care centers and facilities that were in operation during both
periods. Of the $2.2 million increase in net sales, $1.8 million was
attributable to patient-care centers and $293,000 was attributable to
manufacturing and distribution activities.
GROSS PROFIT. Gross profit in 1996 increased approximately $6.7 million,
or 23.9%, over the prior year. Gross profit as a percentage of net sales
decreased from 53.2% in 1995 to 51.8% in 1996. The 1.4% decrease in gross
profit as a percentage of net sales is primarily attributable to the
acquisition of JEH, which operated a large distribution division that had
lower gross profit margins than patient-care services. The cost of products
and services sold for the year ended December 31, 1996, was $32.2 million
compared to $24.6 million in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in 1996 increased approximately $5.2 million, or
26.8%, compared to 1995. 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 stayed approximately
the same at 37%.
ACQUISITION AND INTEGRATION COSTS. Non-recurring acquisition and
integration costs totaling $2.5 million in 1996 consisted of: (i) $1.3 million
of bonuses and legal and consulting expenses incurred to acquire JEH; and (ii)
$1.2 million of costs to integrate the operations of JEH with the Company,
including costs of severance and the conversion of its health insurance plan
and computer systems.
INCOME FROM OPERATIONS. Principally as a result of the above, income
from operations in 1996 totalled approximately $4.7 million, a decrease of
$1.1 million from the prior year. Income from operations as a percentage of
net sales in 1996 decreased to 7.0% from 11.1% in 1995.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1996
was approximately $2.5 million, which is an increase of $490,000, or 23.9%,
over the $2.1 million of interest expense incurred during the year ended
December 31, 1995. The increase in interest expense was primarily attributable
to the increase in bank debt resulting from the acquisition of JEH. Interest
expense as a percentage of net sales was 3.8% for the year ended December 31,
1996, compared to 3.9% for 1995.
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INCOME TAXES. The Company's effective tax rate was 45% in 1996 versus
42% in 1995. The increase in 1996 reflects both the recognition of a state
deferred tax benefit in 1995, which did not occur in 1996, and the
disproportionate impact of permanent differences in relation to taxable
income.
NET INCOME. As a result of the above, the Company reported income from
operations before extraordinary item and accounting change of $1.1 million for
the year ended December 31, 1996, compared to $2.1 million for the prior year.
A pre-tax extraordinary item of $139,000 ($83,000, net of tax) on early
extinguishment of debt was recognized in 1996 in connection with the Company's
refinancing of bank indebtedness.
As a result of the above, the Company reported net income of $998,000,
or $.11 per common dilutive share, for the year ended December 31, 1996, as
compared to net income of $2.1 million, or $.25 per common dilutive share, for
the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES. The Company's consolidated working
capital at December 31, 1997 was approximately $39.0 million and cash and cash
equivalents available were approximately $6.6 million. It is anticipated that
such cash resources will adequately meet the Company's working capital
requirements during at least the next 18 months.
In November 1996, the Company entered into a new Credit Agreement (the
"Credit Agreement") with a syndication of banks which provided for: (i) an
"A-Term Loan" in the principal amount of $29.0 million; (ii) a "B-Term Loan"
in the principal amount of $28.0 million; (iii) a $25.0 million Acquisition
Loan Commitment; and (iv) an $8.0 million Revolving Loan Commitment.
The Credit Agreement provided for an initial commitment fee of 2.625% on
the total $90.0 million facility and an annual fee of .5% per year on the
aggregate unused portion of the Credit Agreement. As of December 31, 1997, the
Company had no outstanding borrowings on either the Acquisition or Revolving
Loan Commitments.
In November 1996, the Company also entered into a Senior Subordinated
Note Purchase Agreement providing for the issuance of $8,000,000 principal
amount of Senior Subordinated Notes (the "Senior Subordinated Notes"), in
connection with which the Company issued detachable warrants to purchase
1,600,000 shares to noteholders. This transaction resulted in the Company
recording a debt discount of $2,038,500 which was being amortized over the
life of the notes.
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The Company used the proceeds of the A-Term Loan, B-Term Loan and Senior
Subordinated Notes to finance the acquisition of JEH and to repay all amounts
then outstanding under the Company's former Revolving credit facility, Senior
Financing Facility, the 8.5% Convertible Junior Subordinated Note and the
8.25% Convertible Junior Subordinated Note. In connection with this
transaction, the Company recorded an extraordinary charge of $139,000
($83,000, net of tax benefit) for the write-off of unamortized discounts and
financing costs, in 1996.
During July and August of 1997, the Company sold 5,750,000 shares of
Common Stock in a underwritten public offering at $11.00 per share resulting
in approximately $58.3 million of net proceeds to the Company.
The Company applied the net proceeds of the public offering to the
repayment of the Senior Subordinated Notes and certain indebtedness
outstanding under the Credit Agreement. Upon repayment of this debt and the
Credit Agreement being substantially modified, the Company recorded an
extraordinary item of $4.6 million ($2.7 million net of tax benefit).
The modified Credit Agreement is collateralized by substantially all the
assets of the Company, restricts the payment of dividends, and contains
certain affirmative and negative covenants customary in an agreement of this
nature.
The Company's total debt at December 31, 1997, including a current
portion of approximately $5.7 million, was approximately $29.0 million. Such
indebtedness included: (i) $17.2 million of Credit Agreement A-Term and B-Term
Loans; and (ii) a total of $11.8 million of other indebtedness.
The remainder of the A-Term Loan, the $25,000,000 Acquisition Loan
Commitment and the 8,000,000 Revolving Loan Commitment bear base interest at
the Company's option of either LIBOR plus 2.50% or the Bank's prime rate plus
1.50%. The base interest rate is then reduced by .25% to 1.25% depending upon
the ratio of the Company's total indebtedness to annual earnings before
interest, taxes, depreciation and amortization. As of December 31, 1997, $8.6
million was outstanding on the A-Term Loan which is being amortized in
quarterly amounts and will mature on December 31, 2001.
The remainder of the B-Term Loan bears base interest at the Company's
option of either LIBOR plus 2.75% or the Bank's prime rate plus 1.75%. The
base interest rate is then reduced by .25% to 1.25% depending upon the ratio
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of the Company's total indebtedness to annual earnings before interest, taxes,
depreciation and amortization. As of December 31, 1997, $8.6 million was
outstanding on the B-Term Loan which is being amortized in quarterly amounts
and will mature on December 31, 2003.
All or any portion of outstanding loans under the Credit Agreement may
be repaid at any time and commitments may be terminated in whole or in part at
the option of Hanger without premium or penalty, except that LIBOR-based loans
may only be repaid at the end of the applicable interest period. Mandatory
prepayments will be required in the event of certain sales of assets, debt or
equity financings and under certain other circumstances.
The Company has entered into an interest rate swap agreement to reduce
the impact of changes in interest rates on its Senior Financing Facilities. At
December 31, 1997, the Company had an outstanding interest rate swap agreement
with a commercial bank, having a total notional principal amount of up to
$27.0 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.
As a result of the Company's repayment of the Senior Subordinated Notes,
the warrant for 1,600,000 shares 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 to 720,000 shares. These detachable warrants
have an exercise price equal to $4.01 as to 418,365 shares, and $6.38 as to
301,635 shares.
During 1996, the Company acquired one orthotic and prosthetic company,
JEH, pursuant to the terms of a Merger Agreement. Under the terms of the
agreement, which became effective on November 1, 1996, the Company paid JEH
shareholders $44.0 million in cash and issued 1.0 million shares of Company
Common Stock and paid an additional $1.8 million to the former JEH
shareholders on March 27, 1997 pursuant to provisions in the Merger Agreement
calling for a post-closing adjustment.
During 1997, the Company acquired nine O&P companies and the remaining
20% interest of its majority owned subsidiary, Columbia Brace, for an
aggregate consideration, excluding potential earn-out provisions, of $22.5
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million. These O&P companies, which operate 29 patient-care centers and employ
175 employees, had combined net sales of $18.2 million in the year ended
December 31, 1997.
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.
Capital expenditures during 1997 approximated $2.6 million.
NEW ACCOUNTING STANDARDS. Effective January 1, 1998 the Company will
adopt the provisions of Statement of Financial Accounting Standards ("SFAS")
130, "Reporting Comprehensive Income". SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in the
financial statements. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company is in the
process of determining its preferred format. The adoption of SFAS No. 130 will
not have a material impact on the Company's consolidated results of
operations, financial position or cash flows.
The Company will adopt the provisions of SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information" effective with the
financial statements for the year ended December 31, 1998. SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Financial statement disclosures for
prior periods are required to be restated. The Company is in the process of
evaluating the disclosure requirements. The adoption of SFAS 131 will not have
a material impact on the Company's consolidated results of operations,
financial position or cash flows.
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 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
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principally dependent upon the financial stability of the insurers of the
Company's patients and future legislation and regulatory actions.
The Company's management believes that its major financial and
manufacturing applications are year 2000 compliant. The company expects no
material impact on its internal information systems from the year 2000 issue.
The Company has recently initiated communications with its significant
suppliers to determine the extent that the Company may be impacted by third
parties' failure to address the issue. The Company will continue to monitor
and evaluate the impact of the year 2000 on its operations.
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.
