-----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, RlNkewPBVXncyEBAJoXpGy5yVy2Dfz3oYHvXheV8M/Kb+pAkfg5frNwBl3HzwULB n5DIxVMtqxIyGtbV9jRYxQ== 0000904456-00-000029.txt : 20000516 0000904456-00-000029.hdr.sgml : 20000516 ACCESSION NUMBER: 0000904456-00-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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: 633667 BUSINESS ADDRESS: STREET 1: TWO BETHESDA METRO CENTER STREET 2: SUITE 1300 CITY: BETHESDA STATE: MD ZIP: 20814 BUSINESS PHONE: 3019860701 MAIL ADDRESS: STREET 1: TWO BETHESDA METRO CENTER STREET 2: SUITE 1300 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 MARCH 31, 2000 -------------- 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) Two Bethesda Metro Center, Suite 1200, 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 May 11, 2000; 19,136,412 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 - March 31, 2000 (unaudited) and December 31, 1999 1 Consolidated Statements of Income for the three months ended March 31, 2000 and 1999 (unaudited) 3 Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999 (unaudited) 4 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURES 22
HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS (Dollars In Thousands, Except Shares and Per Share Amounts)
March 31, December 31, 2000 1999 ------------------------------------- (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,885 $ 5,735 Accounts receivable less allowances for Doubtful accounts of $16,044 and $17,860 in 2000 and 1999, respectively 104,517 103,125 Inventories 64,242 59,915 Prepaid expenses and other assets 8,984 5,222 Income taxes receivable 2,552 3,644 Deferred income taxes 11,778 11,778 ------------- ------------- Total current assets 193,958 189,419 ------------- ------------- PROPERTY, PLANT AND EQUIPMENT Land 4,177 4,177 Buildings 8,886 8,886 Machinery and equipment 27,685 26,677 Furniture and fixtures 8,950 8,629 Leasehold improvements 14,617 13,004 ------------- ------------- 64,315 61,373 Less accumulated depreciation and amortization 17,485 15,269 ------------- ------------- 46,830 46,104 ------------- ------------- INTANGIBLE ASSETS Excess of cost over net assets acquired 501,325 498,612 Non-compete agreements 1,539 2,019 Patents 9,849 9,768 Assembled Work Force 7,000 7,000 Other intangible assets 15,826 15,833 ------------- ------------- 535,539 533,232 Less accumulated amortization 23,904 20,412 ------------- ------------- 511,635 512,820 ------------- ------------- OTHER ASSETS Other 1,614 1,738 ------------- ------------- TOTAL ASSETS $ 754,037 $ 750,081 ============= =============
The accompanying notes are an integral part of the consolidated financial statements. 1 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED BALANCE SHEETS (Dollars In Thousands, Except Shares and Per Share Amounts)
March 31, December 31, 2000 1999 ------------------------------------- (unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 25,006 $ 25,406 Accounts payable 15,927 16,714 Accrued expenses 8,145 5,445 Accrued interest payable 12,118 4,768 Accrued wages and payroll taxes 18,500 18,658 ------------- ------------- Total current liabilities 79,696 70,991 ------------- ------------- Long-term debt 421,859 426,211 Deferred income taxes 13,481 13,481 Other liabilities 8,246 7,259 7% Redeemable Preferred Stock, liquidation preference of $1,000 per share 59,243 59,225 SHAREHOLDERS' EQUITY Common stock, $.01 par value; 60,000,000 shares authorized, 19,043,497 and 19,043,497 shares issued, and 18,910,002 and 18,910,002 shares outstanding in 2000 and 1999 190 190 Additional paid-in capital 146,500 146,498 Retained earnings 25,478 26,882 ------------- ------------- 172,168 173,570 Treasury stock, at cost (133,495 shares) (656) (656) ------------- ------------- 171,512 172,914 TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 754,037 $ 750,081 ============= =============
The accompanying notes are an integral part of the consolidated financial statements. 2 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED March 31, 2000 and 1999 (Dollars In Thousands, Except Shares and Per Share Amounts) (unaudited)
2000 1999 ------------------------------------- Net Sales $ 114,868 $ 49,145 Cost of products and services sold 57,184 24,889 ------------- ------------- Gross profit 57,684 24,256 Selling, general & administrative 39,174 17,099 Depreciation and amortization 2,717 963 Amortization of excess cost over net assets acquired 2,991 742 Integration costs 586 --- ------------- ------------- Income from operations 12,216 5,452 Other (expense) income: Interest expense, net (11,158) (288) Other, net (2) 38 ------------- ------------- Income before income taxes 1,056 5,202 Provision for income taxes 1,335 2,081 ------------- ------------- Net income (loss) $ (279) $ 3,121 ============= ============= BASIC PER COMMON SHARE DATA Net income (loss) $ (.07) $ .17 ============= ============= Shares used to compute basic per common share amounts 18,910,002 18,800,158 ============= ============= DILUTED PER COMMON SHARE DATA Net income (loss) $ (.07) $ .15 ============= ============= Shares used to compute diluted per common share amounts* 18,910,002 20,201,380 ============= ============= * Excludes the effect of the conversion of common stock into which shares of 7% Redeemable Preferred Stock are convertible as it is anti-dilutive. All other outstanding options and warrants are anti-dilutive due to the net loss for the Company for the three months ended March 31, 2000.
The accompanying notes are an integral part of the consolidated financial statements. 3 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED March 31, 2000 and 1999 (Dollars In Thousands, Except Shares and Per Share Amounts) (unaudited)
2000 1999 ------------------------------------- Cash flows from operating activities: Net income (loss) $ (279) $ 3,121 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for bad debt 4,035 1,978 Depreciation and amortization 2,717 963 Amortization of excess cost over net assets acquired 2,991 742 Amortization of debt discount 530 --- Changes in assets and liabilities, net of effect from acquired companies: Accounts receivable (5,426) (2,338) Inventory (4,327) (230) Prepaid and other assets (2,713) (1,329) Other assets 123 (31) Accounts payable (787) 19 Accrued expenses 8,782 1,905 Accrued wages and payroll taxes (312) (3,055) Other liabilities (116) (546) ------------- ------------- Total adjustments 5,497 (1,922) ------------- ------------- Net cash provided by operating activities 5,218 1,199 ------------- ------------- Cash flows used in investing activities: Purchase of fixed assets (2,942) (1,061) Acquisitions, net of cash acquired (1,293) (6,596) Other intangibles (81) --- Purchase of non-compete agreements --- (72) ------------- ------------- Net cash used in investing activities (4,316) (7,729) ------------- -------------
Continued The accompanying notes are an integral part of the consolidated financial statements. 4 HANGER ORTHOPEDIC GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED March 31, (Dollars In Thousands, Except Shares and Per Share Amounts) (unaudited)
2000 1999 ------------------------------------- Cash flows from financing activities: Net borrowings under revolving credit facility $ 2,400 $ 2,500 Repayment of term loans (2,750) Proceeds from sale of common stock 1 454 Repayment of long-term debt (4,403) (1,125) ------------- ------------- Net cash used in financing activities (4,752) 1,829 ------------- ------------- Net change in cash and cash equivalents for the period (3,850) (4,701) Cash and cash equivalents at beginning of period 5,735 9,683 ------------- ------------- Cash and cash equivalents at end of period $ 1,885 $ 4,982 ============= ============= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 3,103 $ 190 ============= ============= Taxes $ 288 $ 393 ============= ============= Non-cash financing and investing activities: Issuance of common stock in connection with Acquisitions $ --- $ 500 ============= ============= Issuance of notes in connection with acquisitions $ --- $ 1,026 ============= ============= Issuance of common stock in repayment of debt $ --- $ 168 ============= ============= Dividends declared on preferred stock $ 1,105 $ --- ============= ============= Accretion of preferred stock $ 18 $ --- ============= =============
The accompanying notes are an integral part of the consolidated financial statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Shares and Per Share Amounts) 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. Certain reclassifications of prior year's data have been made to improve comparability and the Company uses the gross profit method to value inventory on an interim basis. 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, 1999 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. 6 Summarized financial information concerning the Company's reportable segments is shown in the following table:
Practice Management Other And Patient and Care Centers Manufacturing Distribution Eliminations Total ------------ ------------- ------------ ------------ ----- Three Months Ended March 31, 2000 - -------------------- Net Sales Customers $ 105,455 $ 2,393 $ 7,020 $ --- $ 114,868 ============= ============= ============= ============= ============= Intersegments $ --- $ 3,567 $ 13,572 $ (17,139) $ --- ============= ============= ============= ============= ============= EBITDA $ 22,015 $ (3) $ 1,901 $ (5,403) $ 18,510 Restructuring costs and integration expense 490 -- 6 90 586 Depreciation and amortization 5,137 295 50 226 5,708 Interest expense, net (702) (4) -- (10,452) (11,158) Other income (expense) (36) (1) 35 -- (2) ------------- ------------- ------------- ------------- ------------- Income before taxes $ 15,650 $ (303) $ 1,880 $ (16,171) $ 1,056 ============= ============= ============= ============= =============
Practice Management Other And Patient and Care Centers Manufacturing Distribution Eliminations Total ------------ ------------- ------------ ------------ ----- Three Months Ended March 31, 1999 - -------------------- Net Sales Customers $ 40,189 $ 2,602 $ 6,354 $ --- $ 49,145 ============= ============= ============= ============= ============= Intersegments $ --- $ 1,126 $ 5,147 $ (6,273) $ --- ============= ============= ============= ============= ============= EBITDA $ 7,705 $ 309 $ 1,099 $ (2,201) $ 6,912 Depreciation and amortization 1,230 386 40 49 1,705 Interest expense, net (269) (5) -- (14) (288) Other income (expense) 201 29 102 (49) 283 ------------- ------------- ------------- ------------- ------------- Income before taxes $ 6,407 $ (53) $ 1,161 $ (2,313) $ 5,202 ============= ============= ============= ============= =============
7 NOTE C - INVENTORY Inventories at March 31, 2000 and December 31, 1999 were comprised of the following:
March 31, 2000 December 31, 1999 -------------- ----------------- (unaudited) Raw materials $ 36,333 $ 31,715 Work-in-process 17,232 17,172 Finished goods 10,677 11,028 ------------- ------------- $ 64,242 $ 59,915 ============= =============
NOTE D - ACQUISITIONS On July 1, 1999, the Company acquired all of the outstanding stock of NovaCare Orthotics and Prosthetics, Inc. ("NovaCare O&P") from NovaCare, Inc. pursuant to the terms of a Stock Purchase Agreement (the "Agreement"). Under the terms of the Agreement, the aggregate consideration totaled $445,000, which consisted of the assumption of liabilities and other obligations of $38,400 and the balance in cash. Of the cash portion, $15,000 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 was less than approximately $94,000, the cash portion of the purchase price will be reduced by the amount of such deficiency. If, however, the adjusted working capital exceeded approximately $94,000, the cash portion will be increased by the amount of the excess. For purposes of this calculation, adjusted working capital will be comprised of cash in an amount of at least $2,000, 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). The Company and NovaCare, Inc. have disagreed on the amount by which the cash portion of the purchase price will be required to be decreased based on the need for a post-closing working capital adjustment. It is expected that the final amount of the required working capital adjustment will be determined by an independent certified public accounting firm during the second quarter of 2000 in accordance with the dispute resolution arbitration mechanism provided for under the Agreement. Hanger required approximately $430,200 in cash to close the acquisition, to pay approximately $20,000 of related fees and expenses, including debt issue costs of approximately $16,000, and to refinance existing debt of approximately $2,500. The funds were raised by Hanger through (i) borrowing approximately $230,000 of revolving credit and term loans under a new bank facility; (ii) selling $150,000 principal amount of 11.25% Senior Subordinated Notes due 2009; and (iii) selling $60,000 of 7% Redeemable Preferred Stock. The new bank credit facility consists of a $100,000 revolving credit facility, of which $30,000 was drawn on in connection with the acquisition of NovaCare O&P, an A term facility and a tranche B term facility. The 7% Redeemable Preferred Stock accrues annual dividends, compounded quarterly, equal to 7%, is subject to put rights and will not require principal payments prior to maturity. Such Preferred Stock is convertible into shares of the Company's non-voting common stock at a price of $16.50 per share. 8 The acquisition of NovaCare O&P has been accounted for as a business combination in accordance with the purchase method. The results of operations for this acquisition have been included in the Company's results since July 1, 1999. Excess cost over net assets acquired includes goodwill and other intangible assets. Goodwill is amortized using the straight-line method over 40 years. Other intangible assets of $15,000, primarily patents, are amortized over periods of between 8 and 11 years. The following represents the non-cash impact of the NovaCare O&P acquisition: Fair value of assets acquired, including goodwill $ 496,224 Liabilities assumed 82,358 ---------- Cash paid $ 413,866 ========== Included in liabilities assumed are restructure provisions which are more fully described in Note E. Additionally, certain contingent liabilities, more fully described in Note H, exist which, when resolved, may result in adjustment of the purchase price cost allocation. The following table summarizes the unaudited consolidated pro forma information, assuming all acquisitions had occurred at the beginning of each of the following periods:
Three Months Ended March 31, 1999 ------------------ Net sales $ 117,211 ------------------ Net (loss) $ (3,157) ------------------ Net loss per common share - diluted (1) $ (.13) ------------------ (1) All other outstanding options and warrants are anti-dilutive due to the net loss for the Company for the three months ended March 31, 1999.
Adjustments made in arriving at the unaudited consolidated pro forma results include increased interest expense on acquisition debt, amortization of goodwill, adjustments to the fair value of assets acquired and depreciable lives, preferred stock dividends and related tax adjustments. 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 or trends. Additionally, the Company paid, during the three month period ending March 31, 2000, approximately $1,293 related to seven orthotic and prosthetic companies acquired in years prior to 2000. The payments were primarily made pursuant to earnout and working capital provisions contained in the respective 9 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 $1,293. Additional amounts aggregating approximately $18,879 may be paid in connection with earnout provisions contained in previous acquisition agreements. NOTE E - INTEGRATION & RESTRUCTURING COSTS The Company had made an assessment of the restructuring costs to be incurred relative to the acquisition of NovaCare O&P. Affected by the plan of restructuring are approximately 54 patient care centers to be closed, including approximately 29 Hanger and 25 NovaCare O&P locations. The Company began formulating, and commenced, a plan of restructuring on July 1, 1999, which has been substantially completed as of March 31, 2000. Since commencement of the plan of restructuring, the Company had transitioned patients being cared for at closed patient care centers to other patient care centers generally within proximity to a closed branch. The Company has recorded a total of approximately $3,422 and $1,566 in accrued expenses and other liabilities, respectively, for the costs associated with the restructuring of the NovaCare O&P operations and allocated such costs to the purchase price of NovaCare O&P in accordance with purchase accounting requirements. The Company also has accrued a total of approximately $1,305 ($796 after tax) for the costs associated with the restructuring of the existing Hanger operations in conjunction with the NovaCare O&P acquisition and the Company has recorded such charges in the statement of income. The above-referenced restructuring costs primarily include severance pay benefits and lease termination costs. The cost of providing severance pay and benefits for the reduction of approximately 225 employees is estimated at approximately $3,368 and is primarily a cash expense. Total employee terminations are expected to include approximately 70 acquired corporate and 155 patient-care center employees. Employees terminated and to be terminated at patient-care centers include most, if not all, employees at each patient care center to be closed. Through the first quarter of 2000, approximately 201 employees were terminated including approximately 57 acquired corporate employees and 144 patient care center employees. During the first quarter of 2000, approximately 6 employees were terminated, including approximately 4 acquired corporate employees and 2 patient care center employees. Lease termination costs, for patient care centers to be closed, are estimated at $3,510, are cash expenses and are expected to be paid through 2003. No additional branches were closed during the first quarter of 2000. 10 The components of the total restructuring accrual through March 31, 2000 are as follows:
Provisions for existing Provisions for Balance at Hanger NovaCare O&P March 31, business business Payments 2000 ------------ -------------- -------- ---------- Employee severance costs $ 223 $ 3,145 $(3,020) $ 348 Lease terminiation and other exit costs 1,040 2,470 (786) 2,724 -------- -------- -------- -------- $ 1,263 $ 5,615 $(3,806) $ 3,072 ======== ======== ======== ========
Additionally, during the quarter ended March 31, 2000 in relation to the acquisition of NovaCare O&P, the Company recorded integration costs of approximately $586 including costs of changing patient care center names, payroll and related benefits conversion, stay-bonuses and related benefits for transitional employees and certain other costs related to the acquisition. These costs are expensed as incurred and were recorded against operations. 11 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 March 31, 2000 and 1999.
Three Months Ended March 31, --------------------- 2000 1999 ---- ---- Net income (loss) $ (279) $ 3,121 Less preferred stock accretion and dividends declared (1,124) --- ------------ ------------ Income (loss) available to common stockholders used to compute basic per common share amounts (1,403) 3,121 Add back interest expense on convertible note payable, net of tax 63 15 ------------ ------------ Income (loss) available to common stockholders plus assumed conversions used to com- pute diluted per common share amounts $ (1,340) $ 3,136 ============ ============ Average shares of common stock outstanding used to compute basic per common share amounts 18,910,002 18,800,158 Effect of convertible note payable --- 92,573 Effect of dilutive options --- 718,177 Effect of dilutive warrants --- 590,472 ------------ ------------ Shares used to compute dilutive per common share amounts (1) 18,910,002 20,201,380 ============ ============ Basic income (loss) per common share $ (.07) $ .17 Diluted income (loss) per common share $ (.07) $ .15 (1) Excludes the effect of the conversion of common stock into which shares of 7% Redeemable Preferred Stock are convertible as it is anti-dilutive. All other outstanding options and warrants are anti-dilutive due to the net loss for the Company for the three months ended March 31, 2000.
Options to purchase 175,000 shares of common stock were outstanding at March 31, 1999, but were not included in the computation of diluted income per share for the three months ended March 31, 1999 because the options' prices were greater than the average market price of the common shares. 12 NOTE G - LONG TERM DEBT On June 16, 1999, the Company issued, in a private offering, $150,000 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. In connection with the acquisition of NovaCare O&P, the Company replaced its bank credit facility existing at June 30, 1999 with a new facility. The new bank credit facility consists of a $100,000 revolving credit facility, a $100,000 tranche A term facility and a $100,000 tranche B term facility. The revolving credit facility and the tranche A term facility mature on July 1, 2005 and currently carry an interest rate of adjusted LIBOR plus 3.0% or ABR plus 2.0%. The tranche B term facility will mature on January 1, 2007 and currently carries an interest rate of adjusted LIBOR plus 4.0% or ABR plus 3.0%. 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 Company's total long term debt at March 31, 2000, including a current portion of approximately $25,006, was approximately $446,865. Such indebtedness included: (i) $150,000 senior subordinated notes; (ii) $57,400 for the revolver; (iii) $97,500 for tranche A; (iv) $99,750 for tranche B; and (v) a total of $42,215 of other indebtedness. NOTE H - COMMITMENTS AND CONTINGENCIES The Company is subject to legal proceedings and claims which arise in the ordinary course of its business, including claims related to alleged contingent additional payments under business purchase agreements. Many of these legal proceedings and claims existed in the NovaCare O&P business prior to the Company's acquisition of NovaCare O&P. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not have a materially adverse effect on the financial position, liquidity or results of operations of the Company. 13 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 Ended March 31, ------------- 2000 1999 ---- ---- Net sales 100.0% 100.0% Cost of products and services sold 49.8 50.6 Gross profit 50.2 49.4 Selling, general & administrative expenses 34.1 34.8 Depreciation and amortization 2.4 2.0 Amortization of excess cost over net assets acquired 2.6 1.5 Integration costs .5 -- Income from operations 10.6 11.1 Interest expense, net 9.7 .6 Provision for income taxes 1.2 4.2 Net income (loss) (.2) 6.4
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1999 NET SALES Net sales for the quarter ended March 31, 2000, were approximately $114.9 million, an increase of approximately $65.7 million, or 133.7%, over net sales of approximately $49.1 million for the quarter ended March 31, 1999. Contributing to the increase were (i) the acquisition of NovaCare O&P on July 1, 1999 and (ii) a 6.6% increase in sales by patient care centers operating during both quarters ("same store sales"). GROSS PROFIT Gross profit in the quarter ended March 31, 2000 was approximately $57.7 million, an increase of approximately $33.4 million, or 137.8%, over gross profit of approximately $24.3 million for the quarter ended March 31, 1999. The increase was primarily attributable to the increase in net sales. Gross profit as a percentage of net sales increased to 50.2% in the first quarter of 2000 from 49.4% in the first quarter of 1999. The increase in the gross profit margin is primarily a result of the NovaCare O&P acquisition which was entirely patient care services. Patient care services historically have experienced higher gross profit margins than distribution and manufacturing operations. 14 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses in the quarter ended March 31, 2000 increased by approximately $22.1 million, or 129.1%, compared to the quarter ended March 31, 1999. Selling, general and administrative expenses as a percentage of net sales decreased to 34.1% in the first quarter of 2000 compared to 34.8% for same period in 1999. The decrease in selling, general and administrative expenses as a percent of net sales is primarily the result of (i) the acquisition of NovaCare O&P, which has lower selling, general and administrative expenses as a percent of net sales than the Company on a consolidated basis and (ii) the elimination of duplicative overhead and corporate field personnel. INTEGRATION COSTS During the quarter ended March 31, 2000, the Company recognized approximately $.6 million of integration costs in connection with its acquisition of NovaCare O&P. Additional information relating to the integration and restructuring costs is set forth below under "Integration and Restructuring Costs." INCOME FROM OPERATIONS Principally as a result of the above, income from operations in the quarter ended March 31, 2000 was approximately $12.2 million, an increase of $6.8 million, or 124.1%, over the prior year's comparable quarter. Income from operations as a percentage of net sales decreased to 10.6% in the first quarter of 2000 from 11.1% for the prior year's comparable period. INTEREST EXPENSE, NET Net interest expense in the first quarter of 2000 was approximately $11.2 million, an increase of approximately $10.9 million over the approximately $.3 million incurred in the first quarter of 1999. Interest expense as a percentage of net sales increased to 9.7% from .6% for the same period a year ago. The increase in interest expense was primarily attributable to $254.7 million borrowed under a bank credit facility and $150.0 million in senior subordinated notes issued to acquire NovaCare O&P. INCOME TAXES The Company's effective tax rate was 126% in the first quarter of 2000 versus 40% in 1999. The increase in the first quarter of 2000 is a result of the disproportionate impact of the amortization of the excess costs over net assets acquired in relation to taxable income, primarily attributable to the acquisition of NovaCare O&P. The provision for income taxes in the first quarter of 2000 was approximately $1.3 million compared to approximately $2.1 million for the first quarter of 1999. 15 NET INCOME (LOSS) As a result of the above, the Company recorded net loss of approximately $.3 million, or $.07 loss per dilutive common share, in the quarter ended March 31, 2000, compared to net income of $3.1 million, or $.15 per dilutive common share, in the quarter ended March 31, 1999. Net income for the quarter ended March 31, 2000, excluding the integration costs, would have been $41,000, or ($.05) loss per dilutive common share after the effect of the preferred stock dividend. LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated working capital at March 31, 2000 was approximately $114.3 million and cash and cash equivalents available were approximately $1.9 million. The Company's cash resources were satisfactory to meet its obligations for the quarter ended March 31, 2000. On July 1, 1999, the Company entered into a new credit agreement (the "Credit Agreement") with The Chase Manhattan Bank, Bankers Trust Company, Paribas and certain other banks (the "Banks"), which consists of a $100.0 million Revolving Credit Facility, a $100.0 million Tranche A Term Facility and $100.0 million Tranche B Term Facility. The Tranche A Term Facility and the Revolving Credit Facility mature on July 1, 2005 and the Tranche B Term Facility matures on January 1, 2007. The Credit Agreement, as originally entered into, provided that the Tranche A Term Facility and the Revolving Credit Facility would carry an annual interest rate of adjusted LIBOR plus 2.50% or ABR plus 1.50%, and that the Tranche B Term Facility would carry an annual interest rate of adjusted LIBOR plus 3.50% or ABR plus 2.50%. In consideration for the Banks' waiver of the Company's non-compliance with certain of the covenants under the Credit Agreement in the fourth quarter of 1999, and a relaxation of certain of the financial covenants relating to 2000 and 2001, an amendment to the Credit Agreement was entered into and provides for an increase in the Tranche A Term Facility and the Revolving Credit Facility annual interest note to adjusted LIBOR plus 3.00% or ABR plus 2.00%, and an increase in the Tranche B Term Facility annual interest rate to adjusted LIBOR plus 4.00% or ABR plus 3.00%. The Revolving Credit Facility is available to Hanger for use in connection with future acquisitions and for working capital and general corporate purposes. The Company's total long term debt at March 31, 2000, including a current portion of approximately $25.0 million, was approximately $446.9 million. Such indebtedness included: (i) $150.0 of 11.25% million Senior Subordinated Notes due 2009 (ii) $57.4 million for the Revolving Credit Facility; (iii) $97.5 million for Tranche A Term Facility; (iv) $99.8 million for Tranche B Term Facility; and (v) a total of $42.2 million of other indebtedness. The Credit Facility with the Banks is collateralized by substantially all the assets of the Company, restricts the payment of dividends, and contains certain affirmative and negative covenants customary in an agreement of this nature. All or any portion of outstanding loans under the Credit Agreement may be repaid at any time and commitments may be terminated in whole or in part at the option of the Company without premium or penalty, except that LIBOR-based loans may only be repaid at the end of the applicable interest period. 16 Mandatory prepayments will be required in the event of certain sales of assets, debt or equity financings and under certain other circumstances. On July 1, 1999, the Company acquired all of the outstanding capital stock of NovaCare O&P from NovaCare, Inc. pursuant to the terms of a Stock Purchase Agreement (the "Agreement"). Under the terms of the Agreement, the aggregate consideration totaled $445.0 million, which consisted of the assumption of liabilities and other obligations of $38.4 million and the balance in cash. Of the cash portion, $15.0 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 was less than approximately $94.0 million, the cash portion of the purchase price will be reduced by the amount of such deficiency. If, however, the adjusted working capital exceeded approximately $94.0 million, the cash portion will be increased by the amount of the excess. For purposes of this calculation, adjusted working capital will be comprised of cash in an amount of at least $2.0 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). The Company and NovaCare, Inc. have disagreed on the amount by which the cash portion of the purchase price will be required to be decreased based on the need for a post-closing working capital adjustment. It is expected that the final amount of the required working capital adjustment will be determined by an independent certified public accounting firm during the second quarter of 2000 in accordance with the dispute resolution arbitration mechanism provided for under the Agreement. Hanger required approximately $430.2 million in cash to close the acquisition of NovaCare O&P, to pay approximately $20.0 million of related fees and expenses, including debt issue costs of approximately $16.0 million, and to refinance existing debt of approximately $2.5 million. The funds were raised by Hanger through (i) borrowing approximately $230.0 million of revolving credit and term loans under the Credit Agreement; (ii) selling $150.0 million principal amount of 11.25% Senior Subordinated Notes due 2009; and (iii) selling $60.0 million of 7% Redeemable Preferred Stock. The new bank credit facility consists of a $100.0 million revolving credit facility, of which $30.0 million was drawn on in connection with the acquisition of NovaCare O&P, a Tranche A Term Facility and a Tranche B Term Facility. The 7% Redeemable Preferred Stock accrues annual dividends, compounded quarterly, equal to 7%, is subject to put rights and will not require principal payments prior to maturity. Such Preferred Stock is convertible into shares of the Company's non-voting common stock at a price of $16.50 per share. As stated above, the Company sold $60.0 million of 7% Redeemable Preferred Stock on July 1, 1999 in connection with its acquisition of NovaCare O&P. The 60,000 outstanding shares of 7% Redeemable Preferred Stock are convertible into shares of the Company's non-voting common stock at a price of $16.50 per share, subject to adjustment. The Company is entitled to require that the 7% Redeemable Preferred Stock be converted into non-voting common stock on and after July 2, 2002, if the average closing price of the common stock for 20 consecutive trading days is equal to or greater than 175% of the conversion price. The 7% Redeemable Preferred Stock will be mandatorily redeemable on July 1, 2010 at a redemption price equal to the liquidation preference plus all accrued and unpaid dividends. In the event of a change in control of the Company, it must offer to redeem all of the outstanding 7% 17 Redeemable Preferred Stock at a redemption price equal to 101% of the sum of the per share liquidation preference thereof plus all accrued and unpaid dividends through the date of payment. The Company plans to finance future acquisitions through internally generated funds or borrowings under the Revolving Credit Facility, the issuance of notes or shares of Common Stock of the Company, or through a combination thereof. The Company is engaged in ongoing discussions with prospective acquisition candidates. The Company plans to continue to expand its operations through strategic acquisitions. INTEGRATION AND RESTRUCTURING COSTS The Company had made an assessment of the restructuring costs to be incurred relative to the acquisition of NovaCare O&P. Affected by the plan of restructuring are approximately 54 patient care centers to be closed, including approximately 29 Hanger and 25 NovaCare O&P locations. The Company began formulating, and commenced, a plan of restructuring on July 1, 1999, which is substantially complete. Since commencement of the plan of restructuring, the Company has transitioned patients being cared for at closed patient care centers to other patient care centers generally within proximity to a closed branch. During 1999, the Company recorded approximately $5.6 million in restructuring liabilities for the costs associated with the restructuring of the NovaCare O&P operations and allocated such costs to the purchase price of NovaCare O&P in accordance with purchase accounting requirements. The Company also accrued approximately $1.3 million ($.8 million after tax) for the costs associated with the restructuring of the existing Hanger operations in conjunction with the NovaCare O&P acquisition and the Company has recorded such charges in the statement of income. The above-referenced restructuring costs primarily include severance pay benefits and lease termination costs. The cost of providing severance pay and benefits for the reduction of approximately 225 employees is estimated at approximately $3.4 million and is primarily a cash expense. Total expected employee terminations include approximately 70 acquired corporate and 155 patient-care center employees. Employees terminated at patient-care centers include most, if not all, employees at each patient care center to be closed. Through the first quarter of 2000, approximately 201 employees were terminated including approximately 57 acquired corporate employees and 144 patient care center employees. During the first quarter of 2000, approximately 6 employees were terminated, including approximately 4 acquired corporate employees and 2 patient care center employees. Lease termination costs for patient care centers to be closed, are estimated at $3.5 million, are cash expenses and are expected to be paid through 2003. Through the three months ended March 31, 2000, 43 patient care centers were closed. No additional branches were closed during the first quarter of 2000. The Company estimates that the plan of restructuring Hanger and NovaCare O&P operations, when complete, will generate annual cost savings of approximately $13.0 million ($8.0 million after-tax) on a full year basis, excluding anticipated reductions in material purchase costs. The foregoing restructuring charges and related cost savings represent the Company's best estimates, but necessarily make numerous assumptions with respect to industry 18 performance, general business and economic conditions, raw materials and product pricing levels, government legislation, the timing of implementation of the restructuring and related employee reductions and patient care center closings and other matters, many of which are outside of the Company's control. The Company's estimate of cost savings is not necessarily indicative of future performance, which may be significantly more or less favorable than as set forth and is subject to the considerations described below under "Forward Looking Statements". Additionally, in relation to the acquisition of NovaCare O&P, through the first quarter of 2000, the Company recorded integration costs of approximately $5.6 million including costs of changing patient care center names, payroll and related benefits conversion, stay-bonuses and related benefits for transitional employees and certain other costs related to the acquisition. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standard Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," then amended by Financial Accounting Standards Board, SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB No. 133, and amendment of FASB No. 133", which defers the effective date of SFAS 133 until fiscal years beginning after June 15, 2000. SFAS 133 requires that an entity recognize all derivative instruments as either assets or liabilities on its balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction, and, if it is, the type of hedge transaction. The Company will adopt SFAS 133 by the first quarter of 2001. Due to the Company's limited use of derivative instruments, SFAS 133 is not expected to have a material effect on the financial position or results of operations of the Company. 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 was a program to ensure that all significant computer systems are substantially Year 2000 compliant. The Year 2000 compliance program, which was complete by the end of 1999, included the (1) identification of all information technology systems and non-information technology systems that were 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 19 majority of which is constantly upgraded through existing maintenance contracts. Based on the Company's experience to date in 2000, its operations have not been adversely affected to date by Year 2000 or leap year problems. The total costs for the Company's Year 2000 program were approximately $1.3 million, which was expended during 1999. FORWARD LOOKING STATEMENTS 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 successfully integrate the operations of NovaCare O&P and 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 Not applicable. 20 PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS. The following exhibits are filed herewith: EXHIBIT NO. DOCUMENT 3 Certificate of Amendment to Certificate of Incorporation of the Registrant, as filed with the Secretary of State of Delaware on September 16, 1999. 10 Amended and Restated Credit Agreement, dated as of March 29, 2000, among the Registrant, various bank lenders, The Chase Manhattan Bank (as Administrative Agent and Collateral Agent) , Bankers Trust Company, (as Syndication Agent) and Paribas (as Documentation Agent). 27 Financial Data Schedule. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HANGER ORTHOPEDIC GROUP, INC. Date: May 11, 2000 /s/IVAN R. SABEL ---------------- Ivan R. Sabel Chairman of the Board, President and Chief Executive Officer Date: May 11, 2000 /s/RICHARD A. STEIN ------------------- Richard A. Stein Executive Vice President - Finance, Principal Financial and Accounting Officer 22 EX-10 2 EXHIBIT 10 AMENDED AND RESTATED CREDIT AGREEMENT, dated as of March 29, 2000 (this "Amendment and Restatement"), among HANGER ORTHOPEDIC GROUP, INC., the LENDERS party hereto, THE CHASE MANHATTAN BANK, as Administrative Agent and Collateral Agent, BANKERS TRUST COMPANY, as Syndication Agent and PARIBAS as Documentation Agent. WHEREAS, on June 16, 1999, HANGER ORTHOPEDIC GROUP, INC., the LENDERS party thereto, THE CHASE MANHATTAN BANK, as Administrative Agent and Collateral Agent, BANKERS TRUST COMPANY, as Syndication Agent and PARIBAS as Documentation Agent, entered into a Credit Agreement (the "Credit Agreement"); WHEREAS, the Borrower (such term and each other capitalized term used but not otherwise defined herein having the meaning assigned to it in the Credit Agreement) has requested that the Lenders approve amendments to certain provisions of the Credit Agreement as forth herein and a restatement of the Credit Agreement in its entirety giving effect to such amendments; and WHEREAS, the undersigned Lenders are willing, on the terms and subject to the conditions set forth herein, to approve such amendments and such restatement. NOW, THEREFORE, in consideration of these premises, the Borrower and the undersigned Lenders hereby agree as follows: SECTION 1. AMENDMENTS. Effective as of the Amendment Effective Date (as defined in Section 3 hereof), the Credit Agreement is hereby amended as follows: (a) The definition of "Applicable Rate" in Section 1.01 is hereby amended and restated in its entirety as follows: "APPLICABLE RATE" means, for any day (a) with respect to any Tranche B Term Loan, (i) 3.00% per annum, in the case of an ABR Loan, or (ii) 4.00% per annum, in the case of a Eurodollar Loan, and (b) with respect to any Revolving Loan or Tranche A Term Loan or with respect to the commitment fees payable hereunder, as the case may be, the applicable rate per annum set forth below under the caption "ABR Spread", "Eurodollar Spread" or "Commitment Fee Rate", as the case may be, based upon the Leverage Ratio as of the most recent determination date:
================================================================================================== ABR EURODOLLAR COMMITMENT FEE LEVERAGE RATIO: SPREAD SPREAD RATE -------------------------------------------------------------------------------------------------- CATEGORY 1 Greater than or equal to 2.00% 3.00% 0.50% 4.00 to 1.00 -------------------------------------------------------------------------------------------------- CATEGORY 2 Greater than or equal to 3.50 to 1.00 but less than 1.75% 2.75% 0.50% 4.00 to 1.00 -------------------------------------------------------------------------------------------------- CATEGORY 3 Greater than or equal to 3.00 to 1.00 but 1.50% 2.50% 0.375% less than 3.50 to 1.00 -------------------------------------------------------------------------------------------------- CATEGORY 4 Less than 3.00 to 1.00 1.25% 2.25% 0.375% ==================================================================================================
For purposes of the foregoing, (i) the Leverage Ratio shall be determined as of the end of each fiscal quarter of the Borrower's fiscal year based upon the Borrower's consolidated financial statements delivered pursuant to Section 5.01(a) or (b) and (ii) each change in the Applicable Rate resulting from a change in the Leverage Ratio shall be effective during the period commencing on and including the date of delivery to the Administrative Agent of such consolidated financial statements indicating such change and ending on the date immediately preceding the effective date of the next such change; PROVIDED that the Leverage Ratio shall be deemed to be in Category 1 (a) at any time that an Event of Default has occurred and is continuing or (b) at the option of the Administrative Agent or at the request of the Required Lenders, if the Borrower fails to deliver the consolidated financial statements required to be delivered by it pursuant to Section 5.01(a) or (b), during the period from the expiration of the time for delivery thereof until such consolidated financial statements are delivered. (b) A new Section 2.10(g) shall be inserted after Section 2.10(f) and shall read as follows: (g) In the event and on each occasion that any Net Proceeds are received by or on behalf of the Borrower or any Subsidiary in respect of a dispute regarding the Acquisition (including but not limited to any arbitration award, judgment or settlement received in respect of any claim based on the Stock Purchase Agreement or any escrow arrangement with respect to the Acquisition), the Borrower shall, immediately after such Net Proceeds are received, prepay Revolving Borrowings in an aggregate amount equal to such Net Proceeds (or, if the amount of such Net Proceeds exceed the aggregate amount of Revolving Borrowings then outstanding, in an amount equal to the aggregate amount of all outstanding Revolving Borrowings). (c) Section 6.12 of the Credit Agreement is hereby amended and restated in its entirety as follows: SECTION 6.12. INTEREST EXPENSE COVERAGE RATIO. The Borrower will not permit the ratio of (a) Consolidated EBITDA to (b) Consolidated Cash Interest Expense, in each case for any period of four consecutive fiscal quarters (or such lesser number of fiscal quarters as shall have elapsed since June 30, 1999) ending during any period set forth below, commencing with the period of four consecutive fiscal quarters (or such lesser number of fiscal quarters as shall have elapsed since June 30, 1999) ending on December 31, 1999, to be less than the ratio set forth below opposite such period: PERIOD RATIO Quarter ending December 31, 1999 2.25 to 1.00 Quarter ending March 31, 2000 2.20 to 1.00 Quarter ending June 30, 2000 1.95 to 1.00 Quarter ending September 30, 2000 1.90 to 1.00 Quarter ending December 31, 2000 2.10 to 1.00 Quarter ending March 31, 2001 2.15 to 1.00 Quarter ending June 30, 2001 2.20 to 1.00 Quarter ending September 30, 2001 2.30 to 1.00 Quarter ending December 31, 2001 2.35 to 1.00 Quarter ending March 31, 2002 2.75 to 1.00 Quarter ending June 30, 2002 2.75 to 1.00 Quarter ending September 30, 2002 2.75 to 1.00 Quarter ending December 31, 2002 3.00 to 1.00 Thereafter 3.00 to 1.00 (d) Section 6.13 of the Credit Agreement is hereby amended and restated in its entirety as follows: SECTION 6.13. LEVERAGE RATIO. The Borrower will not permit the Leverage Ratio at the end of and for any period of four consecutive fiscal quarters (or such lesser number of fiscal quarters as shall have elapsed since June 30, 1999) ending on any date during any period set forth below, commencing with the period of four consecutive quarters (or such lesser number of fiscal quarters as shall have elapsed since June 30, 1999) ending on December 31, 1999, to exceed the ratio set forth opposite such period: PERIOD RATIO Quarter ending December 31, 1999 4.75 to 1.00 Quarter ending March 31, 2000 5.25 to 1.00 Quarter ending June 30, 2000 5.25 to 1.00 Quarter ending September 30, 2000 5.25 to 1.00 Quarter ending December 31, 2000 4.85 to 1.00 Quarter ending March 31, 2001 4.70 to 1.00 Quarter ending June 30, 2001 4.55 to 1.00 Quarter ending September 30, 2001 4.40 to 1.00 Quarter ending December 31, 2001 4.25 to 1.00 Quarter ending March 31, 2002 3.50 to 1.00 Quarter ending June 30, 2002 3.50 to 1.00 Quarter ending September 30, 2002 3.50 to 1.00 Quarter ending December 31, 2002 3.25 to 1.00 Thereafter 3.25 to 1.00 (e) Section 6.14 of the Credit Agreement is hereby amended and restated in its entirety as follows: SECTION 6.14. CONSOLIDATED ADJUSTED EBITDA/ INTEREST COVERAGE RATIO. The Borrower will not permit the ratio of (a) Consolidated Adjusted EBITDA to (b) Consolidated Cash Interest Expense, in each case for any period of four consecutive fiscal quarters (or such lesser number of fiscal quarters as shall have elapsed since June 30, 1999) ending on any date during any period set forth below, commencing with the period of four consecutive fiscal quarters (or such lesser number of fiscal quarters as shall have elapsed since June 30, 1999) ending on December 31, 1999, to be less than the ratio set forth below opposite such period: PERIOD RATIO Fiscal year ending December 31, 1999 1.90 to 1.00 Quarter ending March 31, 2000 1.75 to 1.00 Quarter ending June 30, 2000 1.60 to 1.00 Quarter ending September 30, 2000 1.55 to 1.00 Quarter ending December 31, 2000 1.80 to 1.00 Quarter ending March 31, 2001 1.85 to 1.00 Quarter ending June 30, 2001 1.95 to 1.00 Quarter ending September 30, 2001 2.00 to 1.00 Quarter ending December 31, 2001 2.10 to 1.00 Quarter ending March 31, 2002 2.50 to 1.00 Quarter ending June 30, 2002 2.50 to 1.00 Quarter ending September 30, 2002 2.50 to 1.00 Quarter ending December 31, 2002 2.50 to 1.00 Thereafter 2.50 to 1.00 (f) Section 6.15 of the Credit Agreement is hereby amended by (i) deleting the figure "$10,500,000" set forth below the caption "BASE AMOUNT" opposite the fiscal year 1999 and inserting in lieu thereof the figure "$12,750,000", (ii) deleting the figure "$8,000,000" set forth below the caption "BASE AMOUNT" opposite the fiscal year 2000 and inserting in lieu thereof the figure "$12,000,000" and (iii) deleting the figure "$7,800,000" set forth below the caption "BASE AMOUNT" opposite the fiscal year 2001 and inserting in lieu thereof the figure "$12,000,000". SECTION 2. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to each of the Lenders that, after giving effect to the amendments contemplated hereby, (a) the representations and warranties of the Borrower set forth in the Credit Agreement are true and correct in all material respects on and as of the date of this Amendment and Restatement, except to the extent such representations and warranties expressly relate to an earlier date (in which case such representations and warranties were true and correct in all material respects as of the earlier date) and (b) no Default has occurred and is continuing. SECTION 3. EFFECTIVENESS. (a) This Amendment and Restatement shall become effective as of the date (the "Amendment Effective Date") when the Administrative Agent (or its counsel) shall have received copies hereof that, when taken together, bear the signatures of the Borrower and the Required Lenders. (b) Any change in the interest rate applicable to any outstanding Loans as a result of the amendments set forth herein shall be effective from and after the Amendment Effective Date and shall not affect interest or fees accrued prior to the Amendment Effective Date. SECTION 4. AMENDMENT FEE. The Borrower agrees to pay to each Lender that executes and delivers a copy of this Amendment and Restatement to the Administrative Agent (or its counsel) on or prior to March 29, 2000 an amendment fee in an amount equal to 0.375% of such Lender's aggregate unused Commitments, outstanding Loans and LC Exposure, in each case as of the Amendment Effective Date; PROVIDED that the Borrower shall have no liability for any such amendment fee if this Amendment and Restatement does not become effective. Such amendment fee shall be payable (i) on the Amendment Effective Date, to each Lender entitled to receive such fee as of the Amendment Effective Date and (ii) in the case of any Lender that becomes entitled to such fee after the Amendment Effective Date, within two Business Days after such Lender becomes entitled to such fee. SECTION 5. RESTATEMENT. On the Amendment Effective Date, the Credit Agreement, as amended hereby, shall be deemed incorporated herein by reference and restated in its entirety. On and after the Amendment Effective Date, each reference in the Credit Agreement to "this Agreement", "hereunder", "herein", or words of like import shall mean and be a reference to the Credit Agreement, as amended and restated hereby. SECTION 6. WAIVER. Any Default occurring on or after December 31, 1999 and prior to the Amendment Effective Date that would not have occurred if this Amendment and Restatement had been in effect during such period is hereby waived by the undersigned Lenders. SECTION 7. APPLICABLE LAW. THIS AMENDMENT AND RESTATEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. SECTION 8. NO OTHER AMENDMENTS. Except as expressly set forth herein, this Amendment and Restatement shall not by implication or otherwise limit, impair, constitute a waiver of, or otherwise affect the rights and remedies of any party under, the Credit Agreement, nor alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement, all of which are ratified and affirmed in all respects and shall continue in full force and effect. This Amendment and Restatement shall apply and be effective only with respect to the provisions of the Credit Agreement specifically referred to herein. SECTION 9. COUNTERPARTS. This Amendment and Restatement may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one contract. Delivery of an executed counterpart of a signature page of this Amendment and Restatement by facsimile transmission shall be as effective as delivery of a manually executed counterpart of this Amendment and Restatement. SECTION 10. HEADINGS. Section headings used herein are for convenience of reference only, are not part of this Amendment and Restatement and are not to affect the construction of, or to be taken into consideration in interpreting, this Amendment and Restatement. SECTION 11. EXPENSES. The Borrower shall reimburse the Administrative Agent for its reasonable out-of-pocket expenses incurred in connection with this Amendment and Restatement, including the reasonable fees and expenses of Cravath, Swaine & Moore, counsel for the Administrative Agent. IN WITNESS WHEREOF, the Borrower and the undersigned Lenders have caused this Amendment and Restatement to be duly executed by their duly authorized officers, all as of the date first above written. HANGER ORTHOPEDIC GROUP, INC., By: ______________________________ Name: Title: THE CHASE MANHATTAN BANK, individually and as Administrative Agent, By: ______________________________ Name: Title: BANKERS TRUST COMPANY, By: ______________________________ Name: Title: PARIBAS, By: ______________________________ Name: Title: By: ______________________________ Name: Title: ABN AMRO BANK N.V. By: ______________________________ Name: Title: By: ______________________________ Name: Title: ALLSTATE LIFE INSURANCE COMPANY, By: ______________________________ Name: Title: ALLSTATE INSURANCE COMPANY, By: ______________________________ Name: Title: BANKBOSTON, N.A. By: ______________________________ Name: Title: BAYERISCHE HYPO-UND VEREINSBANK, NEW YORK BRANCH, By: ______________________________ Name: Title: COMERICA BANK, By: ______________________________ Name: Title: COOPERATIEVE CENTRALE RAIFFEISEN- BOERENLEENBANK B.A. "RABOBANK INTERNATIONAL", NEW YORK BRANCH, By: ______________________________ Name: Title: By: ______________________________ Name: Title: CREDIT LYONNAIS NEW YORK BRANCH, By: ______________________________ Name: Title: CYPRESSTREE INSTITUTIONAL FUND, LLC, By: CypressTree Investment Management Company, Inc. its Managing Member, By: ______________________________ Name: Title: DEBT STRATEGIES FUND III, INC., By: ______________________________ Name: Title: DRESDNER BANK AG, NEW YORK BRANCH AND GRAND CAYMAN BRANCH By: ______________________________ Name: Title: By: ______________________________ Name: Title: FIRST SOURCE FINANCIAL, INC., By: ______________________________ Name: Title: FIRST UNION NATIONAL BANK, individually and as a co-agent, By: ______________________________ Name: Title: FLEET NATIONAL BANK, By: ______________________________ Name: Title: FRANKLIN FLOATING RATE TRUST, By: ______________________________ Name: Title: HELLER FINANCIAL, INC., By: ______________________________ Name: Title: KZH IV LLC, By: ______________________________ Name: Title: KZH CYPRESSTREE-1 LLC, By: ______________________________ Name: Title: KZH STERLING LLC, By: ______________________________ Name: Title: MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC., By: ______________________________ Name: Title: METROPOLITAN LIFE INSURANCE COMPANY, By: ______________________________ Name: Title: MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST, By: ______________________________ Name: Title: NATIONAL BANK OF CANADA, A CANADIAN CHARTERED BANK, By: ______________________________ Name: Title: NORTH AMERICAN SENIOR FLOATING RATE FUND, By: CypressTree Investment Management Company, Inc. as Portfolio Manager By: ______________________________ Name: Title: PINEHURST TRADING, INC., By: ______________________________ Name: Title: PROVIDENT BANK OF MARYLAND, By: ______________________________ Name: Title: SCOTIABANC, INC., By: ______________________________ Name: Title: SEQUILS I, LTD., By: TCW Advisors, Inc. as its Collateral Manager By: ______________________________ Name: Title: SUMMIT BANK, By: ______________________________ Name: Title: THE UNION BANK OF CALIFORNIA, N.A., By: ______________________________ Name: Title: U.S. BANK NATIONAL ASSOCIATION, By: ______________________________ Name: Title: USTRUST, By: ______________________________ Name: Title: KZH SOLEIL-2 LLC, By: ______________________________ Name: Title: GALAXY CLO 1999-1, LTD., By: ______________________________ Name: Title: STANFIELD CLO, LTD., By: ______________________________ Name: Title: ELC (CAYMAN) LTD. CDO SERIES 1999-I, By: ______________________________ Name: Title: FIRST DOMINION FUNDING III, By: ______________________________ Name: Title: SENIOR DEBT PORTFOLIO, By: ______________________________ Name: Title: GREAT POINT CLO 1999-1 LTD., By: ______________________________ Name: Title: MAGNETITE ASSET INVESTORS, By: ______________________________ Name: Title: BALANCED HIGH YIELD FUND II LTD, By: ______________________________ Name: Title: BHF (USA) CAPITAL CORPORATION, By: ______________________________ Name: Title: By: ______________________________ Name: Title: CYPRESSTREE SR. FLOATING RATE FUND, By: ______________________________ By: ______________________________ Name: Title: ML SENIOR FLOATING RATE FUND II, INC., By: ______________________________ Name: Title: NORSE CBO, LTD, By: ______________________________ Name: Title: UNITED OF OMAHA LIFE INSURANCE CO., By: ______________________________ Name: Title: EX-27 3
5 0000722723 HANGER ORTHOPEDIC GROUP, INC. 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 1,885 0 104,517 16,044 64,242 193,958 46,830 17,485 754,037 79,696 421,859 0 59,243 190 171,322 754,037 114,868 114,868 57,184 57,184 45,468 0 11,158 1,056 1,335 (279) 0 0 0 (279) (.07) (.07)
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