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, 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 August 11,
1999; 18,856,440 shares of common stock, $.01 par value per share.
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
INDEX
<TABLE>
<CAPTION>
INDEX
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1999
(unaudited) and December 31, 1998 1
Consolidated Statements of Income for the three
months ended June 30, 1999 and 1998 (unaudited) 3
Consolidated Statements of Income for the six
months ended June 30, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 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 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
</TABLE>
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $159,660,524 $ 9,682,786
Accounts receivable less allowances for
doubtful accounts of $10,495,000 and $8,022,000
in 1999 and 1998, respectively 44,299,460 39,156,940
Inventories 20,829,466 16,934,600
Prepaid expenses and other assets 5,322,540 4,063,648
Deferred income taxes 4,497,724 4,497,724
------------- -------------
Total current assets 234,609,714 74,335,698
------------- -------------
PROPERTY, PLANT AND EQUIPMENT
Land 4,207,045 4,267,045
Buildings 8,639,615 8,522,978
Machinery and equipment 14,825,817 13,008,780
Furniture and fixtures 3,299,245 2,980,647
Leasehold improvements 4,593,821 4,263,274
------------- -------------
35,565,543 33,042,724
Less accumulated depreciation and amortization 11,854,550 10,333,371
------------- -------------
23,710,993 22,709,353
------------- -------------
INTANGIBLE ASSETS
Excess of cost over net assets acquired 123,196,876 114,074,842
Non-compete agreements 1,799,890 1,724,440
Other intangible assets 14,917,991 2,701,639
------------- -------------
139,914,757 118,500,921
Less accumulated amortization 12,302,432 10,545,148
------------- -------------
127,612,325 107,955,773
------------- -------------
OTHER ASSETS 1,605,502 947,297
------------- -------------
TOTAL ASSETS $387,538,534 $205,948,121
============= =============
</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,
1999 1998
------------- -------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 3,773,993 $ 4,407,369
Accounts payable 7,159,968 4,975,581
Accrued expenses 6,494,885 4,635,048
Customer deposits 546,127 1,122,438
Accrued wages and payroll taxes 8,683,869 9,000,721
Deferred revenue 115,167 516,943
------------- -------------
Total current liabilities 26,774,009 24,658,100
------------- -------------
Long-term debt 181,563,971 11,154,116
Deferred income taxes 5,222,766 5,222,766
Other liabilities 2,217,256 2,360,219
Mandatorily redeemable preferred stock class F,
100,000 shares authorized, liquidation preference
$1,000 per share --- ---
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 25,000,000 shares
authorized, 18,986,569 and 15,670,100 shares
issued, and 18,853,074 and 15,536,605 shares
outstanding in 1999 and 1998 189,866 188,255
Additional paid-in capital 146,158,198 144,970,114
Retained earnings 26,068,030 18,050,113
------------- -------------
172,416,094 163,208,482
Treasury stock - (133,495 shares) (655,562) (655,562)
------------- -------------
171,760,532 162,552,920
------------- -------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $387,538,534 $205,948,121
============= =============
</TABLE>
The accompany notes are an integral part of the consolidated financial
statements.
2
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED June 30, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Net Sales $ 56,417,293 $ 46,899,890
Cost of products and services sold 27,555,353 23,261,042
------------- -------------
Gross profit 28,861,940 23,638,848
Selling, general & administrative 18,052,168 15,454,449
Depreciation and amortization 1,020,779 776,760
Amortization of excess cost over net assets acquired 756,105 576,426
------------- -------------
Income from operations 9,032,888 6,831,213
Other expense:
Interest expense, net (787,406) (699,008)
Other (136,899) ---
------------- -------------
Income before income taxes 8,108,583 6,132,204
Provision for income taxes 3,234,000 2,514,000
------------- -------------
Net income $ 4,874,583 $ 3,618,204
============= =============
BASIC PER COMMON SHARE DATA
Net income $ .26 $ .23
============= =============
Shares used to compute basic per common
share amounts 18,846,547 15,704,378
============= =============
DILUTED PER COMMON SHARE DATA
Net income $ .24 $ .21
============= =============
Shares used to compute diluted per common share
amounts 20,023,628 17,442,608
============= =============
</TABLE>
The accompany notes are an integral part of the consolidated financial
statements.
3
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED June 30, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net Sales $105,561,886 $ 87,649,908
Cost of products and services sold 52,443,729 44,564,173
------------- -------------
Gross profit 53,118,157 43,085,735
Selling, general & administrative 35,151,172 30,183,450
Depreciation and amortization 1,983,962 1,485,782
Amortization of excess cost over net assets acquired 1,497,966 1,127,387
------------- -------------
Income from operations 14,485,057 10,289,116
Other (expense) income:
Interest expense, net (1,075,160) (1,313,830)
Other (expense) income (99,317) 30,345
------------- -------------
Income before income taxes 13,310,580 9,005,631
Provision for income taxes 5,315,000 3,692,000
------------- -------------
Net income $ 7,995,580 $ 5,313,630
============= =============
BASIC PER COMMON SHARE DATA
Net income $ .42 $ .34
============= =============
Shares used to compute basic per common
share amounts 18,823,480 15,640,558
============= =============
DILUTED PER COMMON SHARE DATA
Net income $ .40 $ .31
============= =============
Shares used to compute diluted per common
share amounts 20,131,175 17,274,607
============= =============
</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, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,995,580 $ 5,313,630
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debt 4,225,713 3,351,935
Depreciation and amortization 1,983,962 1,485,782
Amortization of excess cost over net
assets acquired 1,497,966 1,127,387
Changes in assets and liabilities, net
of effect from acquired companies:
Accounts receivable (8,373,606) (3,236,946)
Inventory (3,571,984) 533,997
Prepaid and other assets (1,218,072) (483,423)
Other assets (657,182) (82,582)
Accounts payable 1,987,562 730,801
Accrued expenses 1,730,392 816,325
Accrued wages and payroll taxes (282,262) (653,107)
Customer deposits (576,311) (1,528)
Deferred revenue (401,776) (193,342)
Other liabilities (142,965) 36,547
------------- -------------
Total adjustments (3,798,563) 3,431,846
------------- -------------
Net cash provided by operating activities 4,197,017 8,745,476
------------- -------------
Cash flows from investing activities:
Purchase of fixed assets (2,556,521) (1,452,263)
Acquisitions, net of cash (8,833,060) (13,153,307)
Purchase of non-compete agreements (75,450) (169,200)
Purchase of other intangibles (41,75) (8,222)
------------- -------------
Net cash used in investing activities (11,506,789) (14,782,992)
------------- -------------
</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, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net borrowings under revolving credit facility $ 21,156,875 $ 3,500,000
Proceeds from exercise of stock options and warrants 544,542 1,124,194
Proceeds from long-term debt 150,000,000 6,000,000
Repayment of long-term debt (2,239,313) (2,429,700)
Increase in debt issue costs (12,174,594) ---
------------- -------------
Net cash provided by financing activities 157,287,510 8,194,494
------------- -------------
Net change in cash and cash equivalents for the period 149,977,738 2,156,978
Cash and cash equivalents at beginning of period 9,682,786 6,557,409
------------- -------------
Cash and cash equivalents at end of period $159,660,524 $ 8,714,387
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 421,769 $ 1,144,175
============= =============
Taxes $ 2,503,700 $ 3,896,000
============= =============
Non-cash financing and investing activities:
Issuance of notes in connection with acquisitions $ 1,026,417 $ 4,420,957
============= =============
Issuance of common stock in connection with
acquisition $ 500,000 $ ---
============= =============
Issuance of common stock in repayment of debt $ 167,500 $ ---
============= =============
Dividends declared on preferred stock $ --- $ 13,929
============= =============
</TABLE>
The accompany 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 notes 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") and
notes thereto included in the Annual Report on Form 10-K for the year ended
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 June 30, 1999
- -------------------
<S> <C> <C> <C> <C> <C>
Net Sales
Customers $ 44,918,084 $ 2,794,239 $ 8,704,970 $ --- $ 56,417,293
============= ============= ============= ============= =============
Intersegments $ --- $ 1,535,610 $ 5,674,012 $ (7,209,622) $ ---
============= ============= ============= ============= =============
EBITDA $ 10,794,693 $ 518,629 $ 1,435,791 $ (2,111,326) $ 10,637,787
Depreciation and
amortization 1,260,132 399,524 42,710 74,518 1,776,884
Interest expense, net (250,287) (4,281) (92) (532,746) (787,406)
Other income (expense) (19,966) (20,907) 117,047 (41,088) 35,086
------------- ------------- ------------- ------------- -------------
Income before taxes $ 9,264,308 $ 93,917 $ 1,510,036 $ (2,759,678) $ 8,108,583
============= ============= ============= ============= =============
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Practice
Management
And Patient
Care Centers Manufacturing Distribution Other Total
------------ ------------- ------------ ----- -----
Three Months
Ended June 30, 1998
- -------------------
<S> <C> <C> <C> <C> <C>
Net Sales
Customers $ 38,062,655 $ 1,538,074 $ 7,299,161 $ --- $ 46,899,890
============= ============= ============= ============= =============
Intersegments $ --- $ 501,485 $ 4,806,519 $ (5,308,004) $ ---
============= ============= ============= ============= =============
EBITDA $ 8,151,893 $ 250,742 $ 1,148,931 $ (1,585,975) $ 7,965,591
Depreciation and
amortization 1,056,088 184,352 67,661 45,084 1,353,185
Interest expense, net (469,056) (10,157) 5,874 (225,669) (669,008)
Other income (expense) 84,287 (20,437) 151,968 2,988 218,806
------------- ------------- ------------- ------------- -------------
Income before taxes $ 6,711,036 $ 35,796 $ 1,239,112 $ (1,853,740) $ 6,132,204
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Practice
Management
And Patient
Care Centers Manufacturing Distribution Other Total
------------ ------------- ------------ ----- -----
Six Months
Ended June 30, 1999
- -------------------
<S> <C> <C> <C> <C> <C>
Net Sales
Customers $ 85,106,645 $ 5,396,632 $ 15,058,609 $ --- $105,561,886
============= ============= ============= ============= =============
Intersegments $ --- $ 2,661,941 $ 10,820,981 $(13,482,922) $ ---
============= ============= ============= ============= =============
EBITDA $ 18,499,700 $ 827,367 $ 2,534,856 $ (4,312,279) $ 17,549,644
Depreciation and
amortization 2,489,748 785,233 82,211 124,736 3,481,928
Interest expense, net (519,311) (9,712) (205) (545,932) (1,075,160)
Other income (expense) 181,265 8,029 219,402 (90,672) 318,024
------------- ------------- ------------- ------------- -------------
Income before taxes $ 15,671,906 $ 40,451 $ 2,671,842 $ (5,073,619) $ 13,310,580
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Practice
Management
And Patient
Care Centers Manufacturing Distribution Other Total
------------ ------------- ------------ ----- -----
Six Months
Ended June 30, 1998
- -------------------
<S> <C> <C> <C> <C> <C>
Net Sales
Customers $ 70,246,119 $ 3,246,736 $ 14,157,053 $ --- $ 87,649,908
============= ============= ============= ============= =============
Intersegments $ --- $ 933,367 $ 8,841,870 $ (9,775,237) $ ---
============= ============= ============= ============= =============
EBITDA $ 13,480,410 $ 412,661 $ 1,920,489 $ (3,293,781) $ 12,519,779
Depreciation and
amortization 2,027,174 368,551 129,415 88,029 2,613,169
Interest expense, net (934,945) (17,180) 6,318 (368,023) (1,313,830)
Other income (expense) 183,046 (42,550) 251,280 21,075 412,851
------------- ------------- ------------- ------------- -------------
Income before taxes $ 10,701,337 $ (15,620) $ 2,048,672 $ (3,728,758) $ 9,005,631
============= ============= ============= ============= =============
</TABLE>
8
<PAGE>
NOTE C - INVENTORY
Inventories at June 30, 1999 and December 31, 1998 were comprised of the
following:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(unaudited)
<S> <C> <C>
Raw materials $ 8,769,285 $ 7,196,176
Work-in-process 2,083,056 2,093,575
Finished goods 9,977,125 7,644,849
------------- -------------
$ 20,829,466 $ 16,934,600
============= =============
</TABLE>
NOTE D - ACQUISITIONS
During the first six 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.
Additionally, the Company paid approximately $2,761,000 and issued
$126,000 in notes in relation to seven orthotic and prosthetic companies
acquired in years prior to 1999. The payments were primarily made pursuant to
earnout and working capital provisions contained in the respective acquisition
agreements. The company has accounted for these amounts as additional purchase
price resulting in an increase to excess of cost over net assets acquired in
the amount of $2,887,000.
NOTE E - LONG TERM DEBT
On June 16, 1999 the Company issued, in a private offering, $150,000,000
of Senior Subordinated Notes, bearing interest of 11.25%, and maturing on June
15, 2009. Interest is payable on June 15 and December 15, commencing on
December 15, 1999.
9
<PAGE>
NOTE F - NET INCOME PER COMMON SHARE
The following sets forth the calculation of the basic and diluted income
per common share amounts for the three month periods ended June 30, 1999 and
1998 and the six month periods ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net income $ 4,874,583 $ 3,618,204 $ 7,995,580 $ 5,313,630
Less preferred stock dividends declared --- (7,094) --- (13,929)
------------- ------------- ------------- ------------
Income available to common stockholders
used to compute basic per common
share amounts 4,874,583 3,611,110 7,995,580 5,299,701
Add back interest expense on convertible
note payable, net of tax 15,075 14,824 27,135 14,824
------------- ------------- ------------- ------------
Income available to common stockholders
plus assumed conversions used to com-
pute diluted per common share amounts $ 4,889,658 $ 3,625,934 $ 8,022,715 $ 5,314,525
============= ============= ============= ============
Average shares of common stock
outstanding used to compute basic per
common share amounts 18,846,547 15,704,378 18,823,480 15,640,558
Effect of convertible note payable 92,573 115,717 92,573 58,817
Effect of dilutive options 559,995 818,910 654,173 803,213
Effect of dilutive warrants 524,513 803,603 560,949 772,019
Shares used to compute dilutive per
------------- ------------- ------------- ------------
common share amounts 20,023,628 17,442,608 20,131,175 17,274,607
============= ============= ============= ============
Basic income per common share $ .26 $ .23 $ .42 $ .34
Diluted income per common share $ .24 $ .21 $ .40 $ .31
</TABLE>
Options to purchase 243,000 shares of common stock were outstanding at
June 30, 1999 but were not included in the computation of diluted income per
common share for the six months ended June 30, 1999 because the options'
exercise price was higher than the average market price of the common shares.
NOTE G - SUBSEQUENT EVENT
On July 1, 1999, the Company acquired all of the outstanding capital
stock of NovaCare Orthotics and Prosthetics, Inc. ("NovaCare O&P") from
NovaCare, Inc. pursuant to the terms of a Stock Purchase Agreement (the
"Agreement"). As of the acquisition date, NovaCare O&P operated approximately
394 patient care centers in 37 states. As of July 31, 1999, the Company and
NovaCare O&P collectively operate in excess of 640 patient care centers.
10
<PAGE>
Under the terms of the Agreement, the aggregate consideration totaled
$445 million, which consisted of the assumption of liabilities and other
obligations of $38.4 million and the balance in cash. Of the cash portion, $15
million was placed in escrow pending the determination of any potential post
closing adjustments relating to working capital. If, as of July 1, 1999, the
adjusted working capital of NovaCare O&P is less than approximately $94
million, the cash portion of the purchase price will be reduced by the amount
of such deficiency. If, however, the adjusted working capital exceeds
approximately $94 million, the cash portion will be increased by the amount of
the excess. Adjusted working capital will be determined by September 30, 1999
(i.e., within 90 days of the closing). For purposes of this calculation,
adjusted working capital will be comprised of cash in an amount of at least $2
million, accounts receivable, inventory, other current assets, accounts
payable, and accrued expenses to third-parties (excluding all inter-company
obligations, accrued but unpaid taxes and the current portion of the
promissory notes owed to sellers of businesses acquired by NovaCare O&P)
calculated on a basis consistent with NovaCare O&P's past practice and in
accordance with GAAP.
Hanger required approximately $430.2 million in cash to close the
acquisition, to pay approximately $20 million of related fees and expenses and
to refinance existing debt of approximately $2.5 million. The funds were
raised by Hanger through (i ) borrowing approximately $230 million of
revolving credit and term loans under a new bank facility; (ii) selling $150
million principal amount of 11.25% Senior Subordinated Notes due 2009; and
(iii) selling $60 million of 7% Redeemable Preferred Stock. The new bank
credit facility consists of a $100 million revolving credit facility, of which
$30 million was drawn on in connection with the acquisition of NovaCare O&P, a
$100 million tranche A term facility and a $100 million tranche B term
facility. The revolving credit facility and the tranche A term facility
matures on July 1, 2005 and carries an interest rate of adjusted LIBOR plus
2.5% or ABR plus 1.5%. The tranche B term facility matures on January 1, 2007
and carries an interest rate of adjusted LIBOR plus 3.5% or ABR plus 2.5%. The
bank credit facility is collateralized by substantially all of the Company's
assets, restricts the payment of dividends and contains certain affirmative
and negative covenants customary in an agreement of this nature. The Preferred
Stock accrues annual dividends, compounded quarterly, equal to 7%, is subject
to put rights and will not require principal payments prior to maturity.
The acquisition has been accounted for as a business combination in
accordance with the purchase method. The results of operations for this
acquisition have not been included in the Company's results as the date of
acquisition is subsequent to the period end. The purchase price will be
allocated to the net assets acquired subject to adjustment based on post
closing working capital. Excess cost over net assets acquired amounting to
approximately $100 million will be amortized using the straight- line method
over 40 years.
11
<PAGE>
The following table summarizes the unaudited consolidated pro forma
information, assuming the acquisition had occurred at the beginning of each of
the following periods:
<TABLE>
<CAPTION>
Three Months Ended March 31, Twelve Months Ended March 31,
1999 (000's) 1998 (000's)
---------------------------- -----------------------------
<S> <C> <C>
Net sales $117,286 $429,417
Net income 2,265 12,247
Net income per common
share - diluted $ 0.11 $ 0.66
</TABLE>
The unaudited consolidated pro forma results do not necessarily
represent results which would have occurred if the acquisition had taken place
at the beginning of each period, nor are they indicative of the results of
future combined operations.
12
<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 Income and their percentage of the Company's
net sales:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products and services sold 48.8 49.6 49.7 50.8
Gross profit 51.2 50.4 50.3 49.2
Selling, general & administrative
expenses 32.0 33.0 33.3 34.4
Depreciation and amortization 1.8 1.7 1.9 1.7
Amortization of excess cost over net
assets acquired 1.3 1.2 1.4 1.3
Income from operations 16.0 14.6 13.7 11.7
Interest expense 1.4 1.5 1.0 1.5
Provision for income taxes 5.7 5.4 5.0 4.2
Net income 8.6 7.7 7.6 6.1
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1998
NET SALES
Net sales for the quarter ended June 30, 1999, were approximately
$56,417,000, an increase of approximately $9,517,000, or 20.3%, over net sales
of approximately $46,900,000 for the quarter ended June 30, 1998. The majority
of the increase was attributable to acquisitions consummated subsequent to
June 30, 1998. In addition, contributing to the increase in net sales was a
5.5% increase in sales by those Hanger patient-care centers operating
throughout both quarters.
GROSS PROFIT
Gross profit in the quarter ended June 30, 1999 was approximately
$28,862,000, an increase of approximately $5,223,000, or 22.1%, over gross
profit of approximately $23,639,000 for the quarter ended June 30, 1998. The
increase was primarily attributable to the increase in net sales. Gross profit
as a percentage of net sales increased to 51.2% in the second quarter of 1999
from 50.4% in the second quarter of 1998. The increase in the gross profit
margin is primarily a result of the increase in the portion of Hanger's
revenues attributable to patient-care services and in manufacturing revenues.
13
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in the quarter ended June
30, 1999 increased by approximately $2,598,000, or 16.8%, compared to the
quarter ended June 30, 1998. Selling, general and administrative expenses as a
percentage of net sales decreased to 32.0% compared to 33.0% for same period
in 1998. The increase in selling general and administrative expenses was
primarily attributable to acquisitions consummated subsequent to June 30,
1998. 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 Hanger on a consolidated basis, and economies of
scale resulting from the low level of variable costs in that division.
INCOME FROM OPERATIONS
Principally as a result of the above, income from operations in the
quarter ended June 30, 1999 was approximately $9,033,000, an increase of
$2,202,000, or 32.2%, over the prior year's comparable quarter. Income from
operations as a percentage of net sales increased to 16.0% in the second
quarter of 1999 from 14.6% for the prior year's comparable period.
INTEREST EXPENSE
Interest expense in the second quarter of 1999 was approximately
$787,000, an increase of approximately $88,000, or 12.6%, from approximately
$699,000 incurred in the second quarter of 1998. Interest expense as a
percentage of net sales decreased to 1.4% from 1.5% for the same period a year
ago.
INCOME TAXES
The Company's effective tax rate was 40.0% in the second quarter of 1999
versus 41.0% in 1998. The provision for income taxes in the second quarter of
1999 was approximately $3,234,000 compared to approximately $2,514,000 for the
second quarter of 1998.
NET INCOME
As a result of the above, the Company recorded net income of $4,875,000,
or $.24 per dilutive common share, in the quarter ended June 30, 1999,
compared to net income of $3,618,000, or $.21 per dilutive common share, in
the quarter ended June 30, 1998.
14
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
NET SALES
Net sales for the six months ended June 30, 1999 were approximately
$105,562,000, an increase of approximately $17,912,000, or 20.4%, over net
sales of approximately $87,650,000 for the six months ended June 30, 1998. The
majority of the increase was attributable to acquisitions consummated
subsequent to June 30, 1998. In addition, contributing to the increase in net
sales was a 6.0% increase in sales by those Hanger patient-care centers
operating throughout both six-month periods.
GROSS PROFIT
Gross profit for the six months ended June 30, 1999 was approximately
$53,118,000, an increase of approximately $10,032,000, or 23.3%, over gross
profit of approximately $43,086,000 for the six months ended June 30, 1998.
The increase was primarily attributable to the increase in net sales. Gross
profit as a percent of net sales increased from 49.2% in the six months ended
June 30, 1998 to 50.3% in the six months ended June 30, 1999. The increase in
the gross profit margin is primarily a result of the increase in the portion
of Hanger's revenues attributable to patient-care services and in
manufacturing revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in the six months ended
June 30, 1999 increased by approximately $4,968,000, or 16.5%, compared to the
six months ended June 30, 1998. Selling, general and administrative expenses
as a percentage of net sales decreased to 33.3% from 34.4% for the same period
in 1998. The increase in selling, general and administrative expenses was
primarily attributable to acquisitions consummated subsequent to June 30,
1998. 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 Hanger on a consolidated basis, and economies of
scale resulting from the low level of variable costs in that division.
INCOME FROM OPERATIONS
Principally as a result of the above, income from operations in the six
months ended June 30, 1999 was approximately $14,485,000, an increase of
approximately $4,196,000, or 40.8%, over the prior year's comparable period.
Income from operations as a percentage of net sales increased to 13.7% in the
six months ended June 30, 1999 from 11.7% in the six months ended June 30,
1998.
INTEREST EXPENSE
Net interest expense for the first six months of 1999 was approximately
$1,075,000, a decrease of approximately $239,000, or 18.2%, from approximately
$1,314,000 incurred in the first six months of 1998. Interest expense as a
15
<PAGE>
percentage of net sales decreased to 1.0% from 1.5% for the same period one
year ago.
INCOME TAXES
The Company's effective tax rate was 40.0% in the first six months of
1999 versus 41.0% in 1998. The provision for income taxes for the six months
ended June 30, 1999 was approximately $5,315,000 compared to approximately
$3,692,000 for the six months ended June 30, 1998.
NET INCOME
As a result of the above, the Company recorded net income of
approximately $7,996,000, or $.40 per dilutive common share, in the first six
months of 1999, compared to net income of approximately $5,314,000, or $.31
per dilutive common share, in the first six months of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated working capital at June 30, 1999 was
approximately $207,836,000 and cash and cash equivalents available were
approximately $159,661,000.
At June 30, 1999, the Company had 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 Acquisition Loan and the Revolving Loan bore 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 would then be 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.
On June 16, 1999, the Company issued, in a private offering,
$150,000,000 of Senior Subordinated Notes, bearing interest of 11.25%, and
maturing on June 15, 2009. Interest is payable on June 15 and December 15,
commencing on December 15, 1999. The Company's total long-term debt at June
30, 1999, including a current portion of approximately $3,774,000, was
approximately $185,338,000. Such indebtedness included: (i) $150,000,000
senior subordinated notes; (ii) $15,157,000 borrowed under the Acquisition
Loan; (iii) $6,000,000 borrowed under the Revolving Loan; and (iv) a total of
$14,181,000 of other indebtedness.
The above described credit agreement was replaced by a new bank credit
facility provided on July 1, 1999 by a syndicate of banks and other financial
institutions led by The Chase Manhattan Bank, as administrative agent and
collateral agent, Chase Securities, Inc., as lead arranger, Bankers Trust
Company, as syndication agent, and Paribas, as documentation agent. The new
credit facility provides senior collateralized financing of up to $300
million, consisting of a $100 million tranche A-term facility and a $100
million revolving credit facility, each with a maturity of six years, and a
$100 million tranche B-term facility with a maturity of seven years and six
months.
16
<PAGE>
The bank credit facility is collateralized by substantially all of the
Company's assets, restricts the payment of dividends, and contains certain
affirmative and negative covenants customary in an agreement of this nature.
Subject to certain exceptions, the new credit facility is subject to
mandatory prepayment with (a) 100% of the proceeds of asset sales, (b) 50% of
the Company's excess cash flow (as defined in the new credit facility), (c)
100% of the proceeds of equity offering and (d) 100% of the proceeds from the
issuance of debt obligations (other than the 11-1/4% Senior Subordinated
Notes).
The new credit facility contains a number of convenants that, among
other things, restrict the Company's ability to dispose of assets, incur
additional indebtedness, incur guarantee obligations, repay other
indebtedness, pay certain restricted payments and dividends, create liens on
assets, make investments, loans or advances, make certain acquisitions engage
in mergers or consolidations, make capital expenditures, enter into sale and
leaseback transactions, or engage in certain transactions with subsidiaries
and affiliates and otherwise restrict corporate activities. In additional,
under the new credit facility, the Company is required to comply with
specified financial ratios and tests, including minimum fixed charge coverage
and interest coverage ratios and a maximum leverage ratio. The new credit
facility also contains certain customary events of default.
The tranche A-term facility, the tranche B-term facility and the
revolving credit facility initially bear interest (subject to performance
based stepdowns applicable to the tranche A-term facility and the revolving
credit facility) at a rate equal to LIBOR plus (a) in the case of the tranche
A-term facility and the revolving credit facility, 2.5% or, at the Company's
option, the alternate base rate plus 1.5% of (b) in the case of the tranche
B-term facility, 3.5% or, at the Company's option, the alternate base rate
plus 2.5%.
The Company required approximately $430.2 million in cash to close its
acquisition of NovaCare O&P on July 1, 1999, pay approximately $20.0 million
of expenses in connection with the transaction and refinance existing debt of
approximately $2.5 million. The funds were raised by (i) borrowing
approximately $230 million of revolving credit and term loans under the new
bank credit facility; (ii) the sale of the $150 million of 11-1/4 Senior
Subordinated Notes due 2009; and (iii) the sale of $60 million of 7%
Redeemable Preferred Stock. The Preferred Stock accrues annual dividends,
compounded quarterly, equal to 7% and, subject to certain put rights, will not
require principal payments prior to maturity. The revolving credit facility is
available for use in connection with future acquisitions and for working
capital and general corporate purposes.
During the first six 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.
17
<PAGE>
Additionally, the Company paid approximately $2,761,000 and issued
$126,000 in notes in relation to seven orthotic and prosthetic companies
acquired in years prior to 1999. The payments were primarily made pursuant to
earnout and working capital provisions contained in the respective acquisition
agreements.
The Company plans to finance future acquisitions through internally
generated funds or borrowings under the new revolving credit facility, the
issuance of notes or shares of Common Stock of the Company, or through a
combination thereof.
The Company is actively engaged in ongoing discussions with prospective
acquisition candidates. The Company plans to continue to expand its operations
through acquisitions.
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 is currently 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 and non-information technology 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. It uses commercially developed
software, the majority of which is constantly upgraded through existing
maintenance contracts. Parts (1) and (2) 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 (3),
repairing and replacing, currently continues, primarily under maintenance
contracts with software vendors. While most of the major systems are Year 2000
compliant, the software vendors have targeted September 1999 as a completion
date. Part (3), testing, started in the first quarter of 1999 and is expected
to be substantially finished at the end of the third quarter and to continue,
as needed, into the new millennium.
The Company has been contacting key suppliers and business partners
about the Year 2000 program, primarily for hardware. The projected total costs
for the upgrading of information systems, including the Year 2000 program, are
estimated to range from $2.25 million to $2.75 million.
18
<PAGE>
The Company will continue to monitor and evaluate the impact of the Year
2000 issue on its operations. Until it 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 up-date 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
June 30, 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. The agreement effectively minimizes the Company's base interest
rate exposure between a floor of 5.32% and a cap of 7%. 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.
19
<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
No Forms 8-K were filed by the Company during the quarter ended
June 30, 1999. On July 15, 199, the Company filed a Form 8-K relating to
its acquisitions on July 1, 1999 of NovaCare Orthotics & Prosthetics,
Inc.
20
<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 13, 1999 /s/IVAN R. SABEL
--------------- ------------------
Ivan R. Sabel, CPO
Chief Executive Officer
Date: August 13, 1999 /s/RICHARD A. STEIN
--------------- -------------------
Richard A. Stein
Vice President - Finance
Principal Financial and
Accounting Officer
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