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 MARCH 31, 1999
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________
Commission File Number 1-10670
HANGER ORTHOPEDIC GROUP, INC.
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(Exact name of registrant as specified in its charter.)
Delaware 84-0904275
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 May 7,
1999: 18,845,075 shares of common stock, $.01 par value per share.
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
<TABLE>
<CAPTION>
INDEX
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1999
(unaudited) and December 31, 1998 2
Consolidated Statements of Income for the three
months ended March 31, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 (unaudited) 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,982,406 $ 9,682,786
Accounts receivable less allowances for
doubtful accounts of $9,553,000 and
$8,022,000 in 1999 and 1998 respectively 40,511,291 39,156,940
Inventories 17,487,818 16,934,600
Prepaid expenses and other assets 5,433,884 4,063,648
Deferred income taxes 4,497,724 4,497,724
------------- -------------
Total current assets 72,913,123 74,335,698
------------- -------------
PROPERTY, PLANT AND EQUIPMENT
Land 4,247,045 4,267,045
Buildings 8,683,613 8,522,978
Machinery and equipment 13,757,829 13,008,780
Furniture and fixtures 3,140,118 2,980,647
Leasehold improvements 4,354,734 4,263,274
------------- -------------
34,183,339 33,042,724
Less accumulated depreciation and amortization 11,076,865 10,333,371
------------- -------------
23,106,474 22,709,353
------------- -------------
INTANGIBLE ASSETS
Excess of cost over net assets acquired 120,930,544 114,074,842
Non-compete agreements 1,799,890 1,724,440
Other intangible assets 2,697,884 2,701,639
------------- -------------
125,428,318 118,500,921
Less accumulated amortization 11,416,769 10,545,148
------------- -------------
114,011,549 107,955,773
------------- -------------
OTHER ASSETS
Other 978,943 947,297
------------- -------------
TOTAL ASSETS $211,010,089 $205,948,121
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------------------------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 4,097,338 $ 4,407,369
Accounts payable 5,189,337 4,975,581
Accrued expenses 6,641,961 4,635,048
Customer deposits 933,739 1,122,438
Accrued wages and payroll taxes 5,910,858 9,000,721
Deferred revenue 292,368 516,943
------------- -------------
Total current liabilities 23,065,601 24,658,100
------------- -------------
Long-term debt 13,698,506 11,154,116
Deferred income taxes 5,222,766 5,222,766
Other liabilities and accrued dividends 2,228,289 2,360,219
Mandatorily redeemable preferred stock, class F,
100,000 shares authorized, liquidation preference of
$1,000 per share --- ---
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 25,000,000 shares
authorized, 18,973,861 and 18,825,372 shares
issued and 18,840,366 and 18,691,877 shares
outstanding in 1999 and 1998, respectively 189,739 188,255
Additional paid-in capital 146,089,640 144,970,114
Retained earnings 21,171,110 18,050,113
------------- -------------
167,450,489 163,208,482
Treasury stock - (133,495 shares) (655,562) (655,562)
------------- -------------
166,794,927 162,552,920
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $211,010,089 $205,948,121
============= =============
</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 March 31, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net Sales $ 49,144,593 $ 40,750,018
Cost of products and services sold 24,888,376 21,303,131
------------- -------------
Gross profit 24,256,217 19,446,887
Selling, general & administrative 17,099,004 14,729,001
Depreciation and amortization 963,183 709,022
Amortization of excess cost over net assets acquired 741,863 550,961
------------- -------------
Income from operations 5,452,167 3,457,903
Other expense:
Interest expense, net (287,754) (614,822)
Other 37,584 30,345
------------- -------------
Income from operations before income taxes 5,201,997 2,873,426
Provision for income taxes 2,081,000 1,178,000
------------- -------------
Net income $ 3,120,997 $ 1,695,426
============= =============
BASIC PER COMMON SHARE DATA:
Net income $ .17 $ .11
============= =============
Shares used to compute basic per common share
amounts 18,800,158 15,576,030
============= =============
DILUTED PER COMMON SHARE DATA:
Net income $ .15 $ .10
============= =============
Shares used to compute diluted per common share
amounts 20,201,380 17,081,983
============= =============
</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 THREE MONTHS ENDED March 31, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,120,997 $ 1,695,426
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debt 1,978,055 1,702,241
Depreciation and amortization 963,183 709,022
Amortization of excess cost over net
assets acquired 741,863 550,961
Changes in assets and liabilities, net
of effect from acquired companies:
Accounts receivable (2,337,779) (272,575)
Inventory (230,335) 236,234
Prepaid and other assets (1,329,416) 362,852
Other assets (30,623) (203,723)
Accounts payable 18,831 (624,949)
Accrued expenses 1,904,968 848,880
Accrued wages and payroll taxes (3,055,273) (3,221,776)
Customer deposits (188,699) (14,294)
Deferred revenue (224,575) (38,507)
Other liabilities (131,930) 25,562
------------- -------------
Total adjustments (1,921,730) 59,928
------------- -------------
Net cash provided by operating activities 1,199,267 1,755,354
------------- -------------
Cash flows from investing activities:
Purchase of fixed assets, net (1,060,784) (605,905)
Acquisitions, net of cash (6,596,120) (10,713,583)
Purchase of non-compete agreements
and other intangible assets (71,695) (66,426)
------------- -------------
Net cash used in investing activities (7,728,599) (11,385,914)
------------- -------------
</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 THREE MONTHS ENDED March 31, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net borrowings under revolving credit facility $ 2,500,000 $ 4,000,000
Proceeds from long-term debt --- 5,000,000
Repayment of long-term debt (1,124,558) (1,192,552)
Proceeds from the sale of common stock 453,510 918,449
------------- -------------
Net cash provided by financing activities 1,828,952 8,725,897
------------- -------------
Net change in cash and cash equivalents for the period (4,700,380) (904,663)
Cash and cash equivalents at beginning of period 9,682,786 6,557,409
------------- -------------
Cash and cash equivalents at end of period $ 4,982,406 $ 5,652,746
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 190,329 $ 483,646
============= =============
Taxes $ 392,600 $ 325,400
============= =============
Non-cash financing and investing activities:
Issuance of notes in connection with acquisitions $ 1,026,417 $ 2,755,000
============= =============
Issuance of common stock in connection with acquisitions $ 500,000 $ ---
============= =============
Issuance of common stock in repayment of debt $ 167,500 $ ---
============= =============
Dividends declared - preferred stock $ --- $ 6,835
============= =============
</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
consolidated financial statements of Hanger Orthopedic Group, Inc. ("Hanger"
or the "Company"), as of December 31, 1998 and notes thereto included in the
Annual Report on Form 10-K for the year December 31, 1998, filed by the
Company with the Securities and Exchange Commission.
NOTE B - SEGMENT AND RELATED INFORMATION
The Company evaluates segment performance and allocates resources based
on the segments' EBITDA. "EBITDA" is defined as income from operations before
depreciation and amortization. EBITDA is not a measure of performance under
Generally Accepted Accounting Principles ("GAAP"). While EBITDA should not be
considered in isolation or as a substitute for net income, cash flows from
operating activities and other income or cash flow statement data prepared in
accordance with GAAP, or as a measure of profitability or liquidity,
management understands that EBITDA is customarily used as a criteria in
evaluating heath care companies. Moreover, substantially all of the Company's
financing agreements contain covenants in which EBITDA is used as a measure of
financial performance. EBITDA is presented for each reported segment before
reclassifications between EBITDA and other income (expense) made for external
reporting purposes. "Other" EBITDA not directly attributable to reportable
segments is primarily related to corporate general and administrative
expenses.
Summarized financial information concerning the Company's reportable
segments is shown in the following table:
<TABLE>
<CAPTION>
Practice
Management
And Patient
Care Centers Manufacturing Distribution Other Total
------------ ------------- ------------ ----- -----
Three Months
Ended March 31, 1999
- --------------------
<S> <C> <C> <C> <C> <C>
Net Sales
Customers $ 40,188,560 $ 2,602,393 $ 6,353,640 $ --- $ 49,144,593
============= ============= ============= ============= =============
Intersegments $ --- $ 1,126,331 $ 5,146,969 $ (6,273,300) $ ---
============= ============= ============= ============= =============
EBITDA $ 7,705,006 $ 308,738 $ 1,099,066 $ (2,200,954) $ 6,911,856
Depreciation and
amortization 1,229,618 385,708 39,502 50,218 1,705,046
Interest expense, net (269,023) (5,431) (114) (13,186) (287,754)
Other income (expense) 201,231 28,936 102,355 (49,581) 282,941
------------- ------------- ------------- ------------- -------------
Income before taxes $ 6,407,596 $ (53,465) $ 1,161,805 $ (2,313,939) $ 5,201,997
============= ============= ============= ============= =============
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Practice
Management
And Patient
Care Centers Manufacturing Distribution Other Total
------------ ------------- ------------ ----- -----
Three Months
Ended March 31, 1998
- --------------------
<S> <C> <C> <C> <C> <C>
Net Sales
Customers $ 32,183,464 $ 1,708,662 $ 6,857,892 $ --- $ 40,750,018
============= ============= ============= ============= =============
Intersegments $ --- $ 431,882 $ 4,035,351 $ (4,467,233) $ ---
============= ============= ============= ============= =============
EBITDA $ 5,328,519 $ 161,918 $ 771,558 $ (1,707,806) $ 4,554,189
Depreciation and
amortization 971,085 184,199 61,754 42,945 1,259,983
Interest expense, net (465,890) (7,023) 444 (142,353) (614,822)
Other income (expense) 98,758 (22,113) 99,312 18,085 194,042
------------- ------------- ------------- ------------- -------------
Income before taxes $ 3,990,302 $ (51,417) $ 809,560 $ (1,875,019) $ 2,873,426
============= ============= ============= ============= =============
</TABLE>
NOTE C -- INVENTORY
Inventories at March 31, 1999 and December 31, 1998 were comprised of
the following:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(unaudited)
<S> <C> <C>
Raw materials $ 7,432,949 $ 7,196,176
Work-in-process 2,052,606 2,093,575
Finished goods 8,002,263 7,644,849
------------- -------------
$ 17,487,818 $ 16,934,600
============= =============
</TABLE>
NOTE D - ACQUISITIONS
During the first three months ended March 31, 1999, the Company acquired
four orthotic and prosthetic companies. The aggregate purchase price,
excluding potential earn-out provisions, was $7,545,000, comprised of
$6,145,000 in cash, $900,000 in promissory notes, and 23,002 shares of common
stock of the Company valued at $500,000.
During the first three months ended March 31, 1999, the Company paid
approximately $275,000 and issued a $50,000 note pursuant to earnout
provisions contained in 1997 acquisition agreements relating to three orthotic
and prosthetic companies. In addition, the Company paid approximately $253,000
and issued a note for approximately $76,000 pursuant to working capital
provisions contained in 1997 acquisition agreements relating to two orthotic
and prosthetic companies. The Company has accounted for these additional
payments as additional purchase price resulting in an increase to excess of
cost over net assets acquired in the amount of $654,000.
8
<PAGE>
NOTE E - NET INCOME PER COMMON SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted income per common share amounts for the three months
ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
---- ----
<S> <C> <C>
Net income $ 3,120,997 $ 1,695,426
Less preferred stock dividends declared --- (6,835)
------------ ------------
Income available to common stockholders
used to compute basic per common
share amounts $ 3,120,997 $ 1,688,591
============ ============
Add back interest expense on convertible
note payable, net of tax 14,824 ---
------------ ------------
Income available to common stockholders
plus assumed conversions used to
compute diluted per common share
amounts $ 3,135,821 $ 1,688,591
============ ============
Average shares of common stock
outstanding used to compute basic per
common share amounts 18,800,158 15,576,030
Effect of convertible note payable 92,573 ---
Effect of dilutive options 718,177 1,049,473
Effect of dilutive warrants 590,472 456,480
Shares used to compute dilutive per
------------ ------------
common share amounts 20,201,380 17,081,983
============ ============
Basic income per common share $ .17 $ .11
Diluted income per common share $ .15 $ .10
</TABLE>
Options to purchase 175,000 shares of common stock were outstanding at
March 31, 1999 but were not included in the computation of diluted income per
common share because the options' exercise price was greater than the average
market price of the common shares.
NOTE F - SUBSEQUENT EVENT
On April 5, 1999, the Company and NovaCare, Inc. entered into a
definitive agreement pursuant to which Hanger will purchase NovaCare Orthotics
& Prosthetics, Inc. ("NovaCare O&P"), a wholly-owned subsidiary of NovaCare,
Inc. (the "Acquisition"). Pursuant to the agreement, Hanger will pay NovaCare,
Inc. $455 million, including the assumption of seller notes (expected to be
approximately $38 million as of June 15, 1999). Hanger plans to raise the
estimated $420 million of cash expected to be needed to pay the Acquisition
purchase price and related expenses by means of (i) a $300 million bank credit
facility (the "New Credit Facility"); (ii) a $150 million private offering of
debt securities; and (iii) a $60 million redeemable preferred stock private
placement.
9
<PAGE>
The New Credit Facility, which will replace the existing Credit
Agreement and will be provided by The Chase Manhattan Bank, Bankers Trust
Company and Paribas, will consist of a $100 million Revolving Credit Facility,
a $100 million Tranche A Term Facility and a $100 million Tranche B Term
Facility. The Tranche A Term Facility and the Revolving Credit Facility will
mature six years after the closing of the Acquisition and carry an interest
rate of adjusted LIBOR plus 2.50% or ABR plus 1.50%. The Tranche B Term
Facility will mature seven years and six months after the closing and carry an
interest rate of adjusted LIBOR plus 3% or ABR plus 2.00%. The Revolving
Credit Facility will be made available to Hanger to use in connection with
future acquisitions and for working capital and general corporate purposes.
The bank loans will be collateralized by all the assets of Hanger and all its
subsidiaries. The Acquisition will be accounted for as a purchase and is
subject to customary conditions precedent to closing, which is anticipated in
the second quarter of 1999.
10
<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 Three
Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of products and services sold 50.6 52.3
Gross profit 49.4 47.7
Selling, general & administrative
expenses 34.8 36.1
Depreciation and amortization 2.0 1.7
Amortization of excess cost over net
assets acquired 1.5 1.4
Income from operations 11.1 8.5
Interest expense .6 1.5
Provision for income taxes 4.2 2.9
Net income 6.4 4.2
</TABLE>
FOR THE THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1998
NET SALES
Net sales for the three months ended March 31, 1999, amounted to
approximately $49,145,000, an increase of approximately $8,395,000, or 20.6%,
over net sales of approximately $40,750,000 for the three months ended March
31, 1998. Contributing to the increase were (i) a 6.3% increase in sales by
those Hanger patient-care centers operating during both quarters ("same store
sales") and (ii) sales by patient-care centers acquired by Hanger subsequent
to March 31, 1998.
GROSS PROFIT
Gross profit during the three months ended March 31, 1999 amounted to
approximately $24,256,000, an increase of approximately $4,809,000, or 24.7%,
over gross profit of approximately $19,447,000 for the three months ended
March 31, 1998. Gross profit as a percent of net sales increased to 49.4% for
the quarter ended March 31, 1999 from 47.7% for the quarter ended March 31,
1998. The increase in the gross profit margin is primarily a result of the
continuing increase in the portion of the company s revenues attributable to
patient-care services. A majority of the Company's acquisitions have been and
will continue to be in the area of patient-care services, which historically
11
<PAGE>
has experienced higher gross profit margins than the distribution and
manufacturing areas.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses in the three months ended
March 31, 1999 increased by approximately $2,370,000, or 16.1%, compared to
the three months ended March 31, 1998. The increase in selling, general and
administrative expenses was primarily a result of the acquisitions subsequent
to March 31, 1998. Selling, general and administrative expenses as a percent
of net sales in the first three months of 1999 decreased to 34.8% from 36.1%
for the same period a year ago. The decrease in selling, general and
administrative expenses as a percent of net sales is primarily the result of
acquisitions in the patient-care services division, which has lower selling,
general and administrative margins than the Company on a consolidated basis.
INCOME FROM OPERATIONS
Principally as a result of the above, income from operations in the
quarter ended March 31, 1999 amounted to approximately $5,452,000, an increase
of $1,994,000, or 57.7%, over the prior year's comparable quarter. Income from
operations as a percent of net sales for the quarter ended March 31, 1999
increased to 11.1% from 8.5% for the same period a year ago.
INTEREST EXPENSE
Interest expense in the first quarter of 1999 amounted to approximately
$288,000, a decrease of approximately $327,000, or 53.2%, from the
approximately $615,000 of interest expense incurred in the first quarter of
1998. Interest expense as a percent of net sales decreased to .6% in the first
quarter of 1999 from 1.5% for the same period a year ago. The decrease in
interest expense was primarily attributable to the repayment of $24.7 million
of indebtedness during August of 1998 from the proceeds of a underwritten
public offering in which the Company sold 3,300,000 shares of common stock at
$17.00 per share.
INCOME TAXES
The Company's effective tax rate was 40% in the first quarter of 1999
versus 41% in 1998. The provision for income taxes in the first quarter of
1999 amounted to approximately $2,081,000 compared to approximately $1,178,000
in the first quarter of 1998.
NET INCOME
As a result of the above, the Company recorded net income of
approximately $3,121,000, or $.15 per diluted common share on approximately
20,201,000 shares outstanding for the quarter ended March 31, 1999, compared
to net income of approximately $1,695,000, or $.10 per diluted common share on
approximately 17,082,000 shares outstanding in the quarter ended March 31,
1998.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated working capital at March 31, 1999 was
approximately $49,848,000 and cash and cash equivalents available were
approximately $4,982,000.
The Company has a credit agreement (the "Credit Agreement") with a
syndicate of banks, (collectively, the "Banks") that provides for: (i) an
acquisition loan of up to $25,000,000 (the "Acquisition Loan"); and (ii) a
revolving loan of up to $8,000,000 (the "Revolving Loan").
The Company's total long-term debt at March 31, 1999, including a
current portion of approximately $4,097,000, was approximately $17,796,000.
Such indebtedness included $2,500,000 borrowed under the Revolving Loan, with
the balance of such indebtedness consisting primarily of subordinated seller
notes issued in connection with various acquisitions.
The Credit Agreement with the Banks 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 Acquisition Loan and the Revolving Loan 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 1.75% depending upon
the ratio of the Company's total indebtedness to annual earnings before
interest, taxes, depreciation and amortization.
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 the Company 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.
During the first three months of 1999, the Company acquired four
orthotic and prosthetic companies. The aggregate purchase price, excluding
potential earn-out provisions, was $7,545,000, comprised of $6,145,000 in
cash, $900,000 in promissory notes, and 23,002 shares of common stock of the
Company valued at $500,000.
On April 5, 1999, the Company and NovaCare, Inc. entered into a
definitive agreement pursuant to which Hanger will purchase NovaCare Orthotics
& Prosthetics, Inc. ("NovaCare O&P"), a wholly-owned subsidiary of NovaCare,
Inc. (the "Acquisition"). Pursuant to the agreement, Hanger will pay NovaCare,
Inc. $455 million, including the assumption of seller notes (expected to be
approximately $38 million as of June 15, 1999). Hanger plans to raise the
estimated $420 million of cash expected to be needed to pay the Acquisition
purchase price and related expenses by means of (i) a $300 million bank credit
facility (the "New Credit Facility"); (ii) a $150 million private offering of
debt securities; and (iii) a $60 million redeemable preferred stock private
placement.
13
<PAGE>
The New Credit Facility, which will replace the existing Credit
Agreement and will be provided by The Chase Manhattan Bank, Bankers Trust
Company and Paribas, will consist of a $100 million Revolving Credit Facility,
a $100 million Tranche A Term Facility and a $100 million Tranche B Term
Facility. The Tranche A Term Facility and the Revolving Credit Facility will
mature six years after the closing of the Acquisition and carry an interest
rate of adjusted LIBOR plus 2.50% or ABR plus 1.50%. The Tranche B Term
Facility will mature seven years and six months after the closing and carry an
interest rate of adjusted LIBOR plus 3% or ABR plus 2.00%. The Revolving
Credit Facility will be made available to Hanger to use in connection with
future acquisitions and for working capital and general corporate purposes.
The bank loans will be collateralized by all the assets of Hanger and all its
subsidiaries. The Acquisition will be accounted for as a purchase and is
subject to customary conditions precedent to closing, which is anticipated in
the second quarter of 1999.
The Company plans to continue to expand its operations in the future
through acquisitions. Hanger plans to finance such other future acquisitions
through internally generated funds or borrowings under the Revolving Credit
Facility, the issuance of notes or shares of Common Stock or securities
convertible into Hanger Common Stock, or through a combination thereof.
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
principally dependent upon the financial stability of the insurers of the
Company's patients and future legislation and regulatory actions.
The Company currently is upgrading its patient care, manufacturing and
headquarters information systems. Included in the upgrading is a program to
ensure that all significant computer systems are substantially Year 2000
compliant by the year ending December 31, 1999. The program is divided into
three major components: (1) identification of all information technology
systems ("IT Systems") and non-information technology systems ("Non-IT
Systems") that are not Year 2000 compliant: (2) repair or replacement of the
identified non-compliant systems; and (3) testing of the repaired or replaced
systems. The Company has no "in house" developed or proprietary IT Systems.
The Company uses commercially developed software, the majority of which is
constantly upgraded through existing maintenance contracts. Parts (1), (2) and
(3) of the Year 2000 program are currently underway. Part (1), identification,
was completed during the first quarter of 1999. Review of accounting and
financial reporting systems is nearly finished and the Company is continuing
to review Non-IT Systems that have embedded microprocessors in various types
of equipment. Part (2), repairing and replacing, currently continues,
primarily under maintenance contracts with the Company's software vendors.
While most of the major systems are Year 2000 compliant, the software vendors
have targeted June 1999 as a completion date. Part (3), testing, started in
the first quarter of 1999 and is expected to be substantially finished at the
14
<PAGE>
end of the second quarter and to continue, as needed, into the new millennium.
The Company has been contacting key suppliers and business partners
about the Year 2000 issue. While no assurance can be given that key suppliers
and business partners will remedy their own Year 2000 issues, the Company, to
date, has not identified any material impact on its ability to continue normal
business operations with suppliers or other third parties who fail to address
the issue.
The Company presently estimates that projected costs to implement the
Company's Year 2000 program, primarily for hardware, will approximate $1.3
million. The projected total costs for the upgrading of the Company's
information systems, including the Year 2000 program, are estimated to range
from $2.25 million to $2.75 million.
The Company will continue to monitor and evaluate the impact of the Year
2000 issue on its operations. Until the Company is into the final testing part
of its program, the risks from potential Year 2000 failures cannot be fully
assessed. Due to this situation, the Company cannot now begin final
contingency plans. These plans will be developed as potential Year 2000
failures are identified in the final testing stages.
This report contains forward-looking statements setting forth the
company's beliefs or expectations relating to future revenues. 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 update publicly these forward-looking
statements, whether as a result of new information, future events or
otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
March 31, 1999, the Company had an outstanding interest rate swap agreement
with a commercial bank, having a total notional principal amount of up to
$26,950,000. However, at March 31, 1999, there were no borrowings outstanding.
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.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS -
Exhibit 27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
16
<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: May 12, 1999 /s/IVAN R. SABEL
------------ ------------------
Ivan R. Sabel, CPO
Chief Executive Officer
Date: May 12, 1999 /s/RICHARD A. STEIN
------------ -------------------
Richard A. Stein
Vice President - Finance
Principal Financial and
Accounting Officer
17
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