SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended (Commission File Number):
September 30, 1996 0-20434
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 13-3531824
--------------- -------------
(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation)
151 Hempstead Turnpike, West Hempstead, New York 11552
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(Address of registrant's principal executive offices)
(516) 481-9670
----------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 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
--- ---
Number of shares of Common Stock outstanding
At September 30, 1996 4,774,233
1
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements..................................... 3
a. Consolidated Balance Sheets as of
September 30, 1996 (unaudited) and
December 31, 1995 (audited)......................... 3
b. Consolidated Statements of Income
(unaudited) for the Three Months Ended
September 30, 1996 and September 30, 1995
and for the Nine Months Ended September
30, 1996 and September 30, 1995..................... 4
c. Consolidated Statements of Cash Flows
(unaudited) for the Nine Months Ended
September 30, 1996 and September 30, 1995
.................................................... 5
d. Summarized Financial Information.................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 14
Item 2. Changes in Securities.................................... 14
Item 3. Defaults upon Senior Securities.......................... 14
Item 4. Submission of Matters to a Vote of Security
Holders.................................................. 14
Item 5. Other Information........................................ 14
Item 6. Exhibits and Reports on Form 8-K......................... 14
SIGNATURES................................................................. 15
2
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
September 30, December 31,
1996 1995
------------- ------------
(Unaudited) (Audited)
Current assets
Cash and cash equivalents $ 242,000 $ 216,000
Accounts receivable - net of allowance for
doubtful accounts of $432,000 and $204,000,
respectively 4,177,000 3,470,000
Inventory 1,171,000 1,038,000
Prepaid expenses 142,000 193,000
Recoverable income taxes 13,000 26,000
Deferred income taxes 285,000 192,000
----------- -----------
Total current assets 6,030,000 5,135,000
----------- -----------
Property and equipment - at cost 1,536,000 1,374,000
Less accumulated depreciation 924,000 819,000
----------- -----------
612,000 555,000
Other assets
Intangibles - net of accumulated amortization
of $558,000 and $421,000, respectively 5,949,000 5,209,000
Deferred income taxes 13,000 28,000
Miscellaneous 96,000 104,000
----------- -----------
Total other assets 6,058,000 5,341,000
----------- -----------
Total $12,700,000 $11,031,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Note payable $ 325,000 $ 247,000
Current maturities of long-term debt 1,229,000 1,065,000
Accounts payable 347,000 387,000
Accrued expenses 1,311,000 930,000
Deferred compensation 38,000 86,000
Income taxes payable 428,000 77,000
----------- -----------
Total current liabilities 3,678,000 2,792,000
----------- -----------
Deferred compensation -- 9,000
----------- -----------
Long-term debt 2,395,000 2,817,000
----------- -----------
Stockholders' equity
Common stock 4,000 4,000
Common stock warrants 18,000 18,000
Additional paid-in capital 3,441,000 3,082,000
Retained earnings 3,164,000 2,309,000
----------- -----------
Total stockholders' equity 6,627,000 5,413,000
----------- -----------
Total $12,700,000 $11,031,000
=========== ===========
3
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
1996 1995 1996 1995
----------- ----------- ------------ ------------
Sales $ 4,668,000 $ 3,417,000 $ 13,123,000 $ 10,176,000
Cost of sales 2,341,000 1,650,000 6,556,000 4,966,000
----------- ----------- ------------ ------------
Gross profit 2,327,000 1,767,000 6,567,000 5,210,000
Selling, general and
administrative expenses 1,603,000 1,350,000 4,802,000 4,138,000
----------- ----------- ------------ ------------
Operating income 724,000 417,000 1,765,000 1,072,000
----------- ----------- ------------ ------------
Other income (deductions)
Interest expense (94,000) (93,000) (267,000) (289,000)
Other income (deductions) - net 4,000 (1,000) 10,000 5,000
----------- ----------- ------------ ------------
(90,000) (94,000) (257,000) (284,000)
----------- ----------- ------------ ------------
Income before provision
for income taxes 634,000 323,000 1,508,000 788,000
----------- ----------- ------------ ------------
Provision for income taxes
Current 295,000 162,000 717,000 374,000
Deferred (22,000) (13,000) (64,000) (12,000)
----------- ----------- ------------ ------------
273,000 149,000 653,000 362,000
----------- ----------- ------------ ------------
Net income $ 361,000 $ 174,000 $ 855,000 $ 426,000
=========== =========== ============ ============
Earnings per common share $ .07 $ .04 $ .17 $ .10
=========== =========== ============ ============
Shares used in earnings per
common share computation 4,911,918 4,451,125 4,911,918 4,451,125
=========== =========== ============ ============
4
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
------------------------------------------------
Nine months ended
September 30,
----------------
1996 1995
--------- ---------
Cash flows from operating activities
Net income $ 855,000 $ 426,000
Items not requiring the current use of cash
Depreciation and amortization 250,000 255,000
Provision for doubtful accounts 265,000 151,000
Deferred compensation provision 15,000 23,000
Deferred income taxes (64,000) (12,000)
Changes in items affecting operations
Accounts receivable (972,000) (448,000)
Inventory (80,000) (160,000)
Prepaid expenses 31,000 62,000
Recoverable income taxes 13,000 143,000
Miscellaneous -- 3,000
Accounts payable (40,000) 384,000
Accrued expenses 36,000 (209,000)
Deferred compensation paid (55,000) (45,000)
Income taxes payable 351,000 125,000
--------- ---------
Net cash provided by operating activities 605,000 698,000
--------- ---------
Cash flows from investing activities
Payment for acquired business (25,000) --
Purchase of property and equipment (88,000) (157,000)
Contingent purchase price of acquisitions (103,000) (192,000)
--------- ---------
Net cash used by investing activities (216,000) (349,000)
--------- ---------
Cash flows from financing activities
Proceeds from long-term debt 526,000 --
Principal payments of long-term debt (967,000) (539,000)
Proceeds from note payable 78,000 122,000
--------- ---------
Net cash used by financing activities (363,000) (417,000)
--------- ---------
Net increase (decrease) in cash and
cash equivalents 26,000 (68,000)
Cash and cash equivalents - beginning 216,000 166,000
--------- ---------
Cash and cash equivalents - end $ 242,000 $ 98,000
========= =========
5
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
---------------------------------------------
Supplemental Schedule of Noncash Financing and Investing Activities
In 1996, the Company issued 450,000 shares of common stock in connection
with the acquisition of Med-Tech O & P Services, Inc. Of the shares issued,
125,000 are held in escrow. The value of the shares is $675,000 and $188,000,
respectively.
The Company's acquisition in 1996 was paid for as follows:
Cash paid for assets $ 25,000
Common stock issued 300,000
Liabilities assumed 220,000
---------
Fair value of assets acquired $ 545,000
=========
In 1996, the Company issued 11,403 shares of common stock as contingent
purchase price of acquisitions and 13,225 shares of common stock to employees as
compensation. The value of the shares was $40,000.
In September 1996, the Company exercised its option to acquire 225,000
shares of its common stock for approximately $169,000.
In 1995, the Company issued 10,050 shares of common stock as contingent
purchase price of acquisitions and 28,463 shares of common stock to employees as
compensation. The value of the shares was $49,000.
Supplemental Disclosure of Cash Flow Information
Net cash provided by operating activities reflects cash payments for
interest and income taxes as follows:
Nine months ended
September 30,
-------------------
1996 1995
---- ----
Interest paid $ 287,000 $ 310,000
Income taxes paid 353,000 106,000
6
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARIZED FINANCIAL INFORMATION
SEPTEMBER 30, 1996
------------------
(NOTE 1) - The accompanying consolidated financial statements are prepared on
the basis of generally accepted accounting principles. In the opinion of the
management of Advanced Orthopedic Technologies, Inc., all adjustments are of a
normal recurring nature and have been reflected for a fair presentation of the
unaudited balance sheet as of September 30, 1996 and results of operations for
the periods ended September 30, 1996 and 1995, respectively. The operating
results for the periods are not necessarily indicative of the results to be
expected for the entire year.
(NOTE 2) - Effective January 5, 1996, the Company acquired certain assets of
Med- Tech O & P Services, Inc. for a cash payment of $25,000, additional
payments of approximately $220,000 payable through July 1997, 450,000 shares of
the Company's common stock (valued at $675,000) and additional amounts which may
be contingently payable. Of the shares issued, 125,000 shares (valued at
$188,000) are held in escrow. The acquisition has been accounted for by the
purchase method of accounting. The operating results of the acquisition are
included in the Company's consolidated results of operations from the effective
date of acquisition. The following unaudited proforma results of operations for
the nine months ended September 30, 1995 and the three months ended September
30, 1995 assumes the acquisition occurred on January 1, 1995 and gives effect to
certain adjustments, including amortization of goodwill, increased interest
expense on acquisition indebtedness, officer salaries as a result of new
employment agreements and common shares issued.
Three months Nine months
ended ended
September 30, September 30,
1995 1995
------------ ------------
Sales $ 4,031,000 $12,040,000
=========== ===========
Net income $ 223,000 $ 582,000
=========== ===========
Earnings per common share $.05 $.12
==== ====
Shares used in earnings
per common share computation 4,901,125 4,901,125
========= =========
The proforma financial information presented above does not purport to
represent what the Company's results of operations would have been had this
acquisition occurred on January 1, 1995 or to project the Company's results of
operations for any future period.
7
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARIZED FINANCIAL INFORMATION
SEPTEMBER 30, 1996
(NOTE 3) - Inventory at September 30, 1996 is based on historical gross profit
percentages. An analysis of inventory is as follows:
September 30, December 31,
1996 1995
------------ ------------
(Unaudited) (Audited)
Finished goods $ 656,000 $ 572,000
Work-in-process 170,000 138,000
Raw materials 345,000 328,000
----------- -----------
$ 1,171,000 $ 1,038,000
=========== ===========
(NOTE 4) - CAPITAL STOCK
Capital stock is summarized as follows:
Preferred stock, nonvoting, $.001 par value, 14,965,000 shares
authorized, none outstanding
Common stock, voting, $.001 par value, 75,000,000 shares authorized,
outstanding 4,397,566 shares in 1996 and 4,272,938 shares in 1995
Class C redeemable selling warrantholder warrants, $.001 par value,
outstanding 1,000,000 warrants
Common stock purchase warrants, $.001 par value, outstanding 66,666
warrants
(NOTE 5) - In September 1996, the Company exercised an option to acquire 225,000
shares of its common stock and in October 1996 exercised an option to acquire an
additional 225,000 shares. The shares were previously issued in connection with
an acquisition. The total cost to acquire these shares is approximately $506,000
and is expected to be financed by a credit facility from the Company's bank.
(NOTE 6) - On September 30, 1996, the Company entered into an agreement and plan
of merger for the sale of the Company to Novacare Orthotics and Prosthetics,
Inc. The agreement is subject to the ratification by the stockholders of the
Company.
8
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
AOT has grown internally and by acquisitions. During 1988 it acquired the
assets of JDM Orthotics, Inc. (New York); Prosthetic and Orthotic Laboratories,
Inc. (New Jersey) and Para- Med Corp. (West Virginia). The assets of Westfield
Brace Company, Inc. (New Jersey) were acquired during 1991. The Company acquired
the stock of Lett Orthopedic Industries, Inc. (West Virginia) as of January 1,
1992, the stock of Prosthetic and Orthotic Associates, Inc. (Virginia) as of
January 1, 1993 and the stock of Orthopedic Technologies, Inc. (based in
Syracuse, New York) as of July 1, 1993. During August, 1993, the Company
acquired the assets of SFV Rehabilitation Specialists, Inc. (Sherman Oaks,
California), Exe, Inc. (Albuquerque, New Mexico) and Parmeco, Inc. (Huntington,
West Virginia). During April, 1994, the Company acquired the assets of Clayton
Prosthetics & Orthotics, Inc. located in Manasquan, Manahawkin and Middletown,
New Jersey. On January 5, 1996, the Company acquired the operating assets of
Med-Tech O&P Services, Inc., which operated several patient care centers in the
New York Metropolitan Area. AOT implemented such acquisitions by combinations of
cash down payments and deferred payments. In certain of the acquisitions, AOT
agreed to pay additional amounts of cash and stock to the sellers if certain
financial criteria were achieved by the acquired businesses.
Results of Operations:
The following table sets forth for the periods indicated certain items of
the Company's financial statements and their respective percentage of the
Company's net sales. The discussion which follows should be read in conjunction
with the Company's consolidated financial statements.
9
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
(Unaudited) (Unaudited)
1996 1995 1996 1995
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales (50.2) (48.3) (50.0) (48.8)
Gross profit 49.8 51.7 50.0 51.2
Selling, general and
administrative expenses (34.3) (39.5) (36.6) (40.7)
Income from operations 15.5 12.2 13.4 10.5
Interest expense (2.0) (2.7) (2.0) (2.8)
Other income (expense) -- -- 0.1 --
Income before taxes 13.5 9.5 11.5 7.7
Income taxes (5.8) (4.4) (5.0) (3.5)
Net income 7.7 5.1 6.5 4.2
Net Sales:
Net sales for the three months ended September 30, 1996 were $4,668,000 as
compared to $3,417,000 for the same period in 1995, an increase of 37%. For the
nine months ended September 30, net sales were $13,123,000 and $10,176,000
respectively in 1996 and 1995, an increase of 29%. The sales increase was
primarily due to sales added by the acquisition of Med-Tech O&P Services
completed in January, 1996 and sales generated from additional managed care
contracts entered into over the past year.
Gross Profit:
Gross profit for the three months ended September 30, 1996 was $2,327,000 as
compared to $1,767,000 for the same period in 1995, an increase of 32%. Gross
profit for the nine months ended September 30, 1996 was $6,567,000 as compared
to $5,210,000 for the same period in 1995, an increase of 26%. The increase in
gross profit was due primarily to the increase in sales volume. Gross profit as
a percentage of sales was 49.8% for the three months ended September 30, 1996
and 50.0% for the nine months ended September 30, 1996 as compared to 51.7% and
51.2% respectively for the same periods in 1995. The decrease in these
percentages is attributable to lower reimbursement rates associated with the
additional managed care business and the hiring of additional
10
practitioners to accommodate this business. These decreases were offset in part
by the integration of the Med-Tech acquisition into the Company's existing New
York metropolitan area operation and the economies achieved by this integration.
The percentage for the nine month period was also impacted by lower sales volume
due to climate conditions experienced during the first quarter of 1996 during
which the Company continued to incur practitioner salaries.
Selling, General and Administrative Expenses:
Selling, General and Administrative expenses increased to $1,603,000 for the
three months ended September 30, 1996 from $1,350,000 for the same period in
1995, and increased to $4,802,000 for the nine months ended September 30, 1996
from $4,138,000 for the same period in 1995. Selling, General and Administrative
expenses decreased as a percentage of sales from 39.5% in 1995 to 34.3% in 1996
for the three months ended September 30 and decreased from 40.7% in 1995 to
36.6% in 1996 for the nine months ended September 30. The decreases in these
percentages are attributable primarily to the integration of the Med-Tech
acquisition into the Company's existing New York metropolitan area operation and
the economies achieved by this integration.
Income from Operations:
Income from operations for the three months ended September 30, 1996 increased
to $724,000 as compared to $417,000 for the same period in 1995, an increase of
74%. Income from operations for the nine months ended September 30, 1996
increased to $1,765,000 as compared to $1,072,000 for the same period in 1995,
an increase of 65%. Income from operations as a percentage of sales was 15.5%
for the three months ended September 30, 1996 as compared to 12.2% for the same
period in 1995. For the nine months ended September 30, income from operations
as a percentage of sales was 13.4% in 1996 and 10.5% in 1995. The increases in
these percentages are attributable primarily to the acquisition of Med-Tech O&P
Services and the economies achieved by its integration into the Company's
existing operations.
11
Other Income/Deductions::
Interest expense for the three months ended September 30, 1996 was $94,000 as
compared to $93,000 for the same period in 1995 and $267,000 and $289,000 for
the nine months ended September 30, 1996 and 1995 respectively. Interest expense
consists primarily of interest on debt incurred to finance the Company's
acquisitions.
Net Income:
The Company earned $361,000 or $.07 per share for the three months ended
September 30, 1996 as compared to $174,000 or $.04 per share generated in the
prior year's third quarter. For the nine months ended September 30, 1996, the
Company had net income of $855,000 or $.17 per share as compared to $426,000 or
$.10 per share for the same period in 1995. The increase in net income was due
primarily to the Company's increased sales volume discussed above and the
economies achieved through the integration of the acquisition of Med-Tech O&P
Services.
Liquidity and Capital Resources:
As of September 30, 1996, the Company had $242,000 in cash and cash equivalents.
The Company's consolidated working capital at September 30, 1996 was $2,352,000.
During the third quarter of 1996, the Company exercised its option to acquire
225,000 shares of common stock previously issued in connection with an
acquisition. Subsequent to September 30, 1996, the Company exercised another
option to acquire an additional 225,000 shares of common stock. The cost to
acquire these shares is approximately $506,000 and is expected to be financed by
a credit facility from the Company's bank. As of September 30, 1996, there were
no additional commitments which will affect liquidity in a material way.
At the date of this report, the Company does not have any contracts or letters
of intent for additional acquisitions.
The Company expects that cash generated from operations and from its credit
lines will be adequate to provide for future operations.
No material changes in inventory levels or machinery and equipment are presently
planned.
12
Other:
On September 30, 1996 the Company entered into an Agreement and Plan of Merger
for the merger of the Company with a wholly owned subsidiary of NovaCare, Inc.
The Agreement is subject to the ratification by the stockholders of the Company.
Statement No. 123 of the Financial Accounting Standards Board "Accounting for
Stock Based Compensation" is effective for fiscal years beginning after December
15, 1995. The Company believes the implementation of SFAS No. 123 will not have
a material effect.
Inflation has not had a significant impact on the Company's operating expenses.
There is no assurance inflation will not be a significant factor in the future.
Substantial changes in the methods of delivery of health care services, in the
nature and scope of health care insurance, the methods of payment of the costs
of health care services and insurance, the pricing of health care services and
governmental and insurance reimbursement of health care costs, as well as
proposals for an overall restructuring of the health care system as well as the
Medicare and Medicaid programs, continue to be the subject of major legislative
and budgetary initiatives at the federal and state levels. It is not possible to
predict whether such legislation will ultimately be enacted. If such legislation
is enacted, it is impossible to predict the form which such legislation will
take or the impact such legislation will have on the Company's operations or on
the health care industry in general.
13
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3 of the Company's Form 10-KSB for the fiscal
year ended December 31, 1995.
Item 2. Changes in Securities
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
NONE
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11. Statement re Computation of Earnings Per
Common Share for the Three Months and Nine
Months Ended September 30, 1996 and September
30, 1995 (unaudited) Sequential Page Number 15
(b) Reports on Form 8-K
Current Report on Form 8-K dated September 30, 1996 with
respect to the Company's entering into a definitive Agreement
and Plan of Merger with a wholly owned subsidiary of NovaCare,
Inc.
14
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.
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC.
Dated: By: /s/ Andrew H. Meyers
November 4, 1996 --------------------------------------
Andrew H. Meyers, President
Dated: By: /s/ Jesse Z. Fink
November 4, 1996 --------------------------------------
Jesse Z. Fink, Chief Financial Officer
15