-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IXu8qQoFvGdWAgdd4yC6Idpal58VRdxH0e1mKYq390WnS68gD1GvSf+Qy8TaCLwn +J5TkJ2TwK9m4chPNdG3Mw== 0000904456-99-000080.txt : 19990817 0000904456-99-000080.hdr.sgml : 19990817 ACCESSION NUMBER: 0000904456-99-000080 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANGER ORTHOPEDIC GROUP INC CENTRAL INDEX KEY: 0000722723 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 840904275 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10670 FILM NUMBER: 99691211 BUSINESS ADDRESS: STREET 1: 7700 OLD GEORGETOWN RD 2ND FL CITY: BETHESDA STATE: MD ZIP: 20814 BUSINESS PHONE: 3019860701 MAIL ADDRESS: STREET 1: 7700 OLD GEORGETOWN RD 2ND FL STREET 2: 7700 OLD GEORGETOWN RD 2ND FL CITY: BETHESDA STATE: MD ZIP: 20814 FORMER COMPANY: FORMER CONFORMED NAME: SEQUEL CORP DATE OF NAME CHANGE: 19890814 FORMER COMPANY: FORMER CONFORMED NAME: CELLTECH COMMUNICATIONS INC DATE OF NAME CHANGE: 19860304 10-Q 1 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. ----------------------------------------------------------------------------- (Exact name of registrant as specified in its charter.) Delaware 84-0904275 ----------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7700 Old Georgetown Road, Bethesda, MD 20814 ----------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's phone number, including area code: (301) 986-0701 ----------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 11, 1999; 18,856,440 shares of common stock, $.01 par value per share. HANGER ORTHOPEDIC GROUP, INC. INDEX
INDEX Page No. -------- 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
HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1999 1998 ------------- ------------- (unaudited) 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 ============= =============
The accompany notes are an integral part of the consolidated financial statements. 1 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1999 1998 ------------- ------------- (unaudited) 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 ============= =============
The accompany notes are an integral part of the consolidated financial statements. 2 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED June 30, 1999 and 1998 (unaudited)
1999 1998 ------------- ------------- 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 ============= =============
The accompany notes are an integral part of the consolidated financial statements. 3 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED June 30, 1999 and 1998 (unaudited)
1999 1998 ---- ---- 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 ============= =============
The accompany notes are an integral part of the consolidated financial statements. 4 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED June 30, 1999 and 1998 (unaudited)
1999 1998 ---- ---- 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) ------------- -------------
Continued The accompany notes are an integral part of the consolidated financial statements. 5 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED June 30, 1999 and 1998 (unaudited)
1999 1998 ---- ---- 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 ============= =============
The accompany notes are an integral part of the consolidated financial statements. 6 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:
Practice Management And Patient Care Centers Manufacturing Distribution Other Total ------------ ------------- ------------ ----- ----- Three Months Ended June 30, 1999 - ------------------- 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 ============= ============= ============= ============= =============
7
Practice Management And Patient Care Centers Manufacturing Distribution Other Total ------------ ------------- ------------ ----- ----- Three Months Ended June 30, 1998 - ------------------- 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 ============= ============= ============= ============= =============
Practice Management And Patient Care Centers Manufacturing Distribution Other Total ------------ ------------- ------------ ----- ----- Six Months Ended June 30, 1999 - ------------------- 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 ============= ============= ============= ============= =============
Practice Management And Patient Care Centers Manufacturing Distribution Other Total ------------ ------------- ------------ ----- ----- Six Months Ended June 30, 1998 - ------------------- 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 ============= ============= ============= ============= =============
8 NOTE C - INVENTORY Inventories at June 30, 1999 and December 31, 1998 were comprised of the following:
June 30, 1999 December 31, 1998 ------------- ----------------- (unaudited) 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 ============= =============
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 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.
Three Months Ended Six Months Ended June 30 June 30 ----------------------------- ---------------------------- 1999 1998 1999 1998 ------------- ------------- ------------- ------------ 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
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 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 The following table summarizes the unaudited consolidated pro forma information, assuming the acquisition had occurred at the beginning of each of the following periods:
Three Months Ended March 31, Twelve Months Ended March 31, 1999 (000's) 1998 (000's) ---------------------------- ----------------------------- Net sales $117,286 $429,417 Net income 2,265 12,247 Net income per common share - diluted $ 0.11 $ 0.66
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 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:
Three Months Six Months Ended June 30, Ended June 30, -------------- -------------- 1999 1998 1999 1998 ---- ---- ---- ---- 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
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 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 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 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 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 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 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 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 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 EX-27 2
5 0000722723 HANGER ORTHOPEDIC GROUP, INC. 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 159,660,524 0 44,299,460 10,495,000 20,829,466 234,609,714 35,565,543 11,854,550 387,538,534 26,774,009 181,563,971 0 0 189,866 171,570,666 387,538,534 105,561,886 105,561,886 52,443,729 91,076,829 99,317 0 1,075,160 13,310,580 5,315,000 7,995,580 0 0 0 7,995,580 0.42 0.40
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