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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-26538
ENCORE MEDICAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 65-0572565
- ---------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9800 Metric Boulevard
Austin, Texas 78758
- ---------------------------------------- -----------------------
(Address of principal executive offices) (Zip code)
512-832-9500
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(Registrant's telephone number including area code)
Healthcare Acquisition Corp.
300 East Broward Blvd., Ft. Lauderdale, Florida 33301
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(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark 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
--- ---
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
----- -----------
Common Stock 8,247,345
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 28, 1997 AND DECEMBER 31, 1996
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
December 31, March 28,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash $ 472 $ 8,456
Accounts receivable, net 4,467 5,572
Inventories 9,912 10,797
Prepaid expenses and other current assets 537 443
------------ ------------
Total current assets 15,388 25,268
Property, plant and equipment, net 3,931 4,088
Other noncurrent assets 956 934
------------ ------------
Total assets $ 20,275 $ 30,290
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 2,612 $ 4,259
Current portion - long-term debt 164 169
Current portion - payable to a related party 300 300
Revolving loan 2,300 3,200
------------ ------------
Total current liabilities 5,376 7,928
Long-term debt, net of current portion 4,913 4,907
Payable to a related party, net of current portion 1,100 800
------------ ------------
Total liabilities 11,389 13,635
Common stock put warrants 2,297 --
Preferred stock, $1.00 par value, 1,000,000 shares
authorized, 587,000 (652,000 equivalent basis)
and 0 shares issued and outstanding,
respectively (See Note 3) 2,935 --
Common stock, $0.001 par value, 35,000,000 shares
authorized, 6,334,000 (5,627,000 equivalent
basis) and 8,247,345 shares issued and
outstanding, respectively (See Note 3) 6 8
Additional paid-in capital and deferred
compensation 6,315 17,708
Accumulated deficit (2,667) (1,061)
------------ ------------
Total stockholders' equity 6,589 16,655
------------ ------------
Total liabilities and stockholders' equity $ 20,275 $ 30,290
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 28, 1997 AND MARCH 29, 1996
(in thousands, except per share amounts) (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 29, March 28,
1996 1997
---------- ----------
<S> <C> <C>
Sales $ 3,634 $ 5,740
Cost of goods sold 1,205 1,924
---------- ----------
Gross margin 2,429 3,816
Operating expenses:
Research and development 440 405
Selling, general and administrative 1,815 2,729
---------- ----------
Operating income 174 682
Interest income 15 4
Interest expense (127) (259)
Other expenses (48) (3)
---------- ----------
Income before income taxes 14 424
Current provision for income taxes 5 119
---------- ----------
Net income $ 9 $ 305
========== ==========
Net income $ 9 $ 305
Change in redemption amount of put warrants (175) --
---------- ----------
Net income (loss) applicable to common shares $ (166) $ 305
========== ==========
Weighted average shares outstanding 5,279 9,148
Net income (loss) applicable to common
stock per share $ (0.03) $ 0.04
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 28, 1997 AND MARCH 29, 1996
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 29, March 28,
1996 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9 $ 305
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 191 286
Amortization of debt discount 23 39
Other 8 (3)
Changes in operating assets and liabilities:
Increase in accounts receivable (835) (1,105)
Increase in inventories (2,105) (885)
(Inc.)/dec. in prepaid expenses and other assets (279) 116
Increase in accounts payable and accrued expenses 1,020 1,643
---------- ----------
Net cash provided by (used in) operating activities (1,968) 396
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (826) (418)
---------- ----------
Net cash used in investing activities (826) (418)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock 309 7,446
Payments on payable to a related party (200) (300)
Proceeds from long-term debt 2,000 --
Payments on long-term debt (24) (40)
Payment on debt issuance costs (48) --
Net change in cash due to conforming fiscal
year-end of pooled company (31) --
Proceeds from revolving loan 250 900
---------- ----------
Net cash provided by financing activities 2,256 8,006
---------- ----------
Net increase (decrease) in cash equivalents (538) 7,984
Cash and cash equivalents at beginning of period 1,191 472
---------- ----------
Cash and cash equivalents at end of period $ 653 $ 8,456
========== ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Encore Medical Corporation and its wholly-owned subsidiaries (individually and
collectively referred to as the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation. The unaudited
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, 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 normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 28, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Joint
Proxy/Prospectus dated February 27, 1997 (the "Joint Proxy/Prospectus").
2. DESCRIPTION OF BUSINESS
The Company designs, manufactures, markets and sells products for the
orthopedic implant industry primarily in the United States, Europe and Asia.
The Company's products are subject to regulation by the Food and Drug
Administration ("FDA") with respect to their sale in the United States, and the
Company must obtain FDA authorization to market each of its products before
they can be sold in the United States. Additionally, the Company is subject to
similar regulations in many of the international countries in which it sells
products.
As explained in Note 3, Encore Orthopedics, Inc. ("Encore") merged with
Healthcare Acquisition, Inc., a wholly-owned subsidiary of Healthcare
Acquisition Corp. ("HCAC").
3. HCAC MERGER
In November 1996, Encore, HCAC, a publicly traded, specified purpose
acquisition company, and a wholly owned subsidiary of HCAC, executed a
definitive agreement and plan of merger. The merger was contingent upon, among
other things, the approval of the shareholders of both Encore and HCAC at
meetings which were held in March 1997. Effective March 25, 1997, the merger
was completed and HCAC's name was changed to Encore Medical Corporation.
The merger was effected by HCAC issuing 0.8884 HCAC common shares and
0.13326 HCAC warrants with an exercise price of $7.00 ("HCAC $7.00 warrants")
for each common share of Encore and 1.11049 HCAC common shares and 0.16657 HCAC
$7.00 warrants for each preferred share of Encore in accordance with the
exchange ratio set forth in the Agreement and Plan of Merger. In addition,
outstanding options and warrants to purchase common stock of Encore were
exchanged for options and warrants to purchase HCAC common stock and HCAC $7.00
warrants based on the exchange ratio discussed above.
For financial reporting and accounting purposes, the merger was accounted
for as a recapitalization of Encore, with the issuance of shares by Encore for
the net assets of HCAC, consisting primarily of cash. As such, Encore is
considered the predecessor company, and the accompanying balance sheet at
December 31, 1996 and statement of income for the three months ended March 29,
1996 are those of Encore and do not include the accounts or results of
operations of HCAC. The capital accounts of Encore at December 31, 1996,
however, have been reflected on an equivalent share basis to give effect to the
exchange ratios discussed above. The accompanying statement of income for the
three months ended March 28, 1997 includes the results of operations of HCAC
from the effective date of the merger (March 25, 1997) through the end of the
period.
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4. INVENTORIES
Inventories at March 28, 1997 and December 31,1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, March 28,
1996 1997
------------ ------------
<S> <C> <C>
Components and raw materials $ 1,563 $ 1,996
Work in process 985 978
Finished goods 7,364 7,823
------------ ------------
$ 9,912 $ 10,797
============ ============
</TABLE>
5. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed based on the weighted average
number of outstanding common and common equivalent shares, using the modified
treasury stock method. Common equivalent shares are not included in the per
share calculation where the effect of their inclusion would be anti-dilutive.
For the three months ended March 28, 1997, the application of the modified
treasury stock method resulted in an assumed reduction of interest expense and
amortization of debt discount, net of the related tax benefit, of approximately
$66,000 which has been added to net income available to common stockholders for
purposes of calculating earnings per share.
6. RECENT PRONOUNCEMENT
The Financial Accountings Standards Board has issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128")
establishing a new methodology for calculating earnings per share. FAS 128 must
be adopted as of December 31, 1997, and earlier adoption is not permitted. Had
net income (loss) applicable to common stock per share been determined under
this new standard, there would have been no change for the three months ended
March 29, 1996 from amounts reported, but for the three months ended March 28,
1997, basic earnings per share would have been $0.05 and diluted earnings per
share would have been $0.03.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 28, 1997, AS COMPARED TO
THE THREE MONTHS ENDED MARCH 29, 1996
Net sales increased 58% to $5,740,000 for the first quarter of 1997, when
compared to $3,634,000 for the same period in 1996. U.S. sales increased 70.8%
to $3,011,000 and sales outside the U.S. increased 45.9% to $2,729,000. This
increase was primarily a result of the Company's continued penetration of the
reconstructive device market led by the Foundation(R) Total Knee System.
Gross margin was $3,816,000 or 66.5% of sales, up from $2,429,000 or 66.8%
of sales for the same period in 1996. The increase in gross margin resulted
from increased sales.
Operating income was $682,000 or 11.9% of sales, up from $174,000 or 4.8%
of sales for the same period in 1996. Increased operating income resulted from
increased sales and non-recurring costs of $192,000 in 1996 associated with the
acquisition of Applied Osteo Systems, Inc. Costs associated with expanding the
infrastructure partially offset the increase in operating income.
Net income was $305,000 or 5.3% of sales, up from $9,000 or 0.2% of sales
for the same period in 1996. Increased net income resulted primarily from
increased sales. The increase in net income was partially offset by costs
associated with expanding the infrastructure, increased interest expense and
federal income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations through the sale
of equity securities, borrowings and cash flow from operations. At March 28,
1997, the Company had cash of $8,456,000 compared to $472,000 at December 31,
1996. On March 25, 1997, the merger with HCAC was completed, resulting in net
proceeds to the Company of $7,446,000 after deduction of HCAC stock
conversions, investment banking, legal, accounting and
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other related costs. The Company intends to use the proceeds from the merger to
primarily fund working capital, specifically inventory and the expected
increase in accounts receivable, as well as capital expenditures.
The Company projects that through the combination of cash generated from
operations, its credit facilities and the funds from the merger with HCAC, the
cash available will be sufficient to fund operations and expand the business
for at least the next twelve months.
FORWARD LOOKING STATEMENTS
The discussion in this document contains analysis or trends and other
forward looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. These statements involve management assumptions and are
subject to risks and uncertainties, including the risk factors which are fully
described in the Joint Proxy/Prospectus in "Risk Factors - Risks Relating to
Encore" on pages 21 to 27 thereof, and "Business of Encore" on pages 84 to 94
thereof.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently a defendant in Intermedics Orthopedics, Inc. vs.
Encore Orthopedics, Inc., Joint Concepts, Inc. and Bob Wolf, cause no 96-14729,
98th Judicial District Court of Travis County, Texas. The plaintiff in the
Intermedics action claims that Encore tortuously interfered with the
plaintiff's contractual relationship with its former sales agent and sub-agent
in eastern Pennsylvania, southern New Jersey and Delaware by contracting with
said agent and sub-agent. The plaintiff seeks unspecified damages and sought
injunctive relief. Encore has denied the plaintiff's allegations and plans to
continue to vigorously defend the suit. The court has denied the plaintiff's
request for injunctive relief.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 25, 1997, at a special meeting of the stockholders of the
Company, the shareholders approved a merger between HCAC (now known as Encore
Medical Corporation), Healthcare Acquisition, Inc. and Encore, pursuant to the
terms and provisions of the Agreement and Plan of Merger dated November 12,
1996, as amended February 14, 1997. In addition, the stockholders approved
amending the Certificate of Incorporation of the Company to change the name of
the Company, to increase the number of authorized shares, to increase the size
of the board of directors and create three (3) classes of directors. Finally
the shareholders approved the adoption of the 1996 Incentive Stock Option Plan.
The vote for the merger was 1,732,264 FOR, 142,900 AGAINST and 400 ABSTAIN. The
vote for the Amendment to the Certificate of Incorporation was 1,749,264 FOR,
141,900 AGAINST and 2,400 ABSTAIN. The vote for the adoption of the 1996
Incentive Plan was 1,709,964 FOR, 163,200 AGAINST and 2,400 ABSTAIN. Additional
information concerning the matters put forward at this meeting can be found in
the Form S-4 (File No. 333-22053) filed on February 19, 1997, and incorporated
by reference herein. A more detailed description of the transactions involved
in the vote of the stockholders of the Company is included in the Joint
Proxy/Prospectus dated February 26, 1997 and is hereby incorporated by
reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits. See Index to Exhibits
2. Reports on Form 8-K. A Form 8-K was filed on April 10, 1997, relating to
the completion of the merger between HCAC and Encore. Included with that
Form 8-K was a pro forma balance sheet for the consolidated companies dated
December 31, 1996.
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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.
ENCORE MEDICAL CORPORATION
By:
- -------------- ----------------------------------------
Date Nick Cindrich, Chairman of the Board and
Chief Executive Officer
By:
- -------------- ----------------------------------------
Date August Faske, Vice President - Finance,
Chief Financial Officer
INDEX TO EXHIBITS
Number Assigned in
Regulation S-K
Item 601 Description of Exhibit
- -------- ----------------------
(2) No exhibit
(4) No exhibit
(10) No exhibit
(11) Attached
(15) No exhibit
(18) No exhibit
(19) No exhibit
(22) No exhibit
(23) No exhibit
(24) No exhibit
(27) Financial data schedules
(99) No exhibit
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
11 - Earnings Per Share Computation
27 - Financial Data Schedule
</TABLE>
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EXHIBIT 11
ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
EARNINGS PER SHARE COMPUTATION
AS OF MARCH 28, 1997 AND MARCH 29, 1996
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
March 29, 1996 March 28, 1997
-------------------- ----------------------
Fully Fully
Primary Diluted Primary Diluted
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) applicable to common stock $ (166) $ (166) $ 305(1) $ 305(1)
Weighted average shares outstanding 5,279 5,279 9,148 9,148
Net income (loss) applicable to common stock per share $ (0.03) $ (0.03) $ 0.04 $ 0.04
======== ======== ======== ========
CALCULATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
Weighted average common stock outstanding 5,279 5,279 6,347 6,347
Dilutive effect of stock performance plans and warrants -- -- 2,801 2,801
-------- -------- -------- --------
Weighted average shares outstanding 5,279 5,279 9,148 9,148
======== ======== ======== ========
</TABLE>
(1) For the three months ended March 29, 1997, the application of the modified
treasury stock method resulted in a an assumed reduction of interest
expense and amortization of debt discount, net of the related tax benefit,
of approximately $66,000 and $16,000 which has been added to net income
available to common stockholders for purposes of calculating net income
available to common stockholders per share for the primary and fully
diluted calculation, respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET DATED MARCH 28, 1997 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 28, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-28-1997
<CASH> 8,456
<SECURITIES> 0
<RECEIVABLES> 5,572
<ALLOWANCES> 0
<INVENTORY> 10,797
<CURRENT-ASSETS> 25,268
<PP&E> 7,241
<DEPRECIATION> 3,153
<TOTAL-ASSETS> 30,290
<CURRENT-LIABILITIES> 7,928
<BONDS> 5,707
0
0
<COMMON> 8
<OTHER-SE> 16,647
<TOTAL-LIABILITY-AND-EQUITY> 30,290
<SALES> 5,740
<TOTAL-REVENUES> 5,740
<CGS> 1,924
<TOTAL-COSTS> 1,924
<OTHER-EXPENSES> 3,134
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 259
<INCOME-PRETAX> 424
<INCOME-TAX> 119
<INCOME-CONTINUING> 305
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 305
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
