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.
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(Exact name of registrant as specified in its charter.)
Delaware 84-0904275
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Two Bethesda Metro Center, Suite 1200, Bethesda, MD 20814
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(Address of principal executive offices) (Zip Code)
Registrant's phone number, including area code:
(301) 986-0701
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes _X_ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of May 11,
2000; 19,136,412 shares of common stock, $.01 par value per share.
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
INDEX
<TABLE>
<CAPTION>
INDEX
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - 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
</TABLE>
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Shares and Per Share Amounts)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------------------------------------
(unaudited)
<S> <C> <C>
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
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
1
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Shares and Per Share Amounts)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------------------------------------
(unaudited)
<S> <C> <C>
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
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
2
<PAGE>
HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED March 31, 2000 and 1999
(Dollars In Thousands, Except Shares and Per Share Amounts)
(unaudited)
<TABLE>
<CAPTION>
2000 1999
-------------------------------------
<S> <C> <C>
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
============= =============
<FN>
* 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.
</FN>
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
<PAGE>
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)
<TABLE>
<CAPTION>
2000 1999
-------------------------------------
<S> <C> <C>
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)
------------- -------------
</TABLE>
Continued
The accompanying notes are an integral part of the consolidated
financial statements.
4
<PAGE>
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)
<TABLE>
<CAPTION>
2000 1999
-------------------------------------
<S> <C> <C>
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 $ ---
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
5
<PAGE>
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
<PAGE>
Summarized financial information concerning the Company's reportable
segments is shown in the following table:
<TABLE>
<CAPTION>
Practice
Management Other
And Patient and
Care Centers Manufacturing Distribution Eliminations Total
------------ ------------- ------------ ------------ -----
Three Months
Ended March 31, 2000
- --------------------
<S> <C> <C> <C> <C> <C>
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
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Practice
Management Other
And Patient and
Care Centers Manufacturing Distribution Eliminations Total
------------ ------------- ------------ ------------ -----
Three Months
Ended March 31, 1999
- --------------------
<S> <C> <C> <C> <C> <C>
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
============= ============= ============= ============= =============
</TABLE>
7
<PAGE>
NOTE C - INVENTORY
Inventories at March 31, 2000 and December 31, 1999 were comprised of
the following:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
(unaudited)
<S> <C> <C>
Raw materials $ 36,333 $ 31,715
Work-in-process 17,232 17,172
Finished goods 10,677 11,028
------------- -------------
$ 64,242 $ 59,915
============= =============
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999
------------------
<S> <C>
Net sales $ 117,211
------------------
Net (loss) $ (3,157)
------------------
Net loss per common share - diluted (1) $ (.13)
------------------
<FN>
(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.
</FN>
</TABLE>
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
<PAGE>
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
<PAGE>
The components of the total restructuring accrual through March 31, 2000
are as follows:
<TABLE>
<CAPTION>
Provisions
for existing Provisions for Balance at
Hanger NovaCare O&P March 31,
business business Payments 2000
------------ -------------- -------- ----------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
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
<PAGE>
NOTE F - NET INCOME PER COMMON SHARE
The following sets forth the calculation of the basic and diluted income
per common share amounts for the three month periods ended March 31, 2000 and
1999.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
2000 1999
---- ----
<S> <C> <C>
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
<FN>
(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.
</FN>
</TABLE>
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
<PAGE>
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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items
of the Company's Statements of Income and their percentage of the Company's
net sales:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------
2000 1999
---- ----
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANGER ORTHOPEDIC GROUP, INC.
Date: 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
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
<PAGE>
be, based upon the Leverage Ratio as of the most recent determination
date:
<TABLE>
<CAPTION>
==================================================================================================
ABR EURODOLLAR COMMITMENT FEE
LEVERAGE RATIO: SPREAD SPREAD RATE
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
==================================================================================================
</TABLE>
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:
<PAGE>
(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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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:
<PAGE>
THE CHASE MANHATTAN BANK,
individually and as Administrative
Agent,
By: ______________________________
Name:
Title:
<PAGE>
BANKERS TRUST COMPANY,
By: ______________________________
Name:
Title:
<PAGE>
PARIBAS,
By: ______________________________
Name:
Title:
By: ______________________________
Name:
Title:
<PAGE>
ABN AMRO BANK N.V.
By: ______________________________
Name:
Title:
By: ______________________________
Name:
Title:
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY,
By: ______________________________
Name:
Title:
<PAGE>
ALLSTATE INSURANCE COMPANY,
By: ______________________________
Name:
Title:
<PAGE>
BANKBOSTON, N.A.
By: ______________________________
Name:
Title:
<PAGE>
BAYERISCHE HYPO-UND
VEREINSBANK, NEW YORK
BRANCH,
By: ______________________________
Name:
Title:
<PAGE>
COMERICA BANK,
By: ______________________________
Name:
Title:
<PAGE>
COOPERATIEVE CENTRALE
RAIFFEISEN-
BOERENLEENBANK B.A.
"RABOBANK INTERNATIONAL",
NEW YORK BRANCH,
By: ______________________________
Name:
Title:
By: ______________________________
Name:
Title:
<PAGE>
CREDIT LYONNAIS NEW YORK
BRANCH,
By: ______________________________
Name:
Title:
<PAGE>
CYPRESSTREE INSTITUTIONAL
FUND, LLC,
By: CypressTree Investment
Management Company, Inc. its
Managing Member,
By: ______________________________
Name:
Title:
<PAGE>
DEBT STRATEGIES FUND III,
INC.,
By: ______________________________
Name:
Title:
<PAGE>
DRESDNER BANK AG, NEW
YORK BRANCH AND GRAND
CAYMAN BRANCH
By: ______________________________
Name:
Title:
By: ______________________________
Name:
Title:
<PAGE>
FIRST SOURCE FINANCIAL,
INC.,
By: ______________________________
Name:
Title:
<PAGE>
FIRST UNION NATIONAL BANK,
individually and as a co-agent,
By: ______________________________
Name:
Title:
<PAGE>
FLEET NATIONAL BANK,
By: ______________________________
Name:
Title:
<PAGE>
FRANKLIN FLOATING RATE TRUST,
By: ______________________________
Name:
Title:
<PAGE>
HELLER FINANCIAL, INC.,
By: ______________________________
Name:
Title:
<PAGE>
KZH IV LLC,
By: ______________________________
Name:
Title:
<PAGE>
KZH CYPRESSTREE-1 LLC,
By: ______________________________
Name:
Title:
<PAGE>
KZH STERLING LLC,
By: ______________________________
Name:
Title:
<PAGE>
MERRILL LYNCH SENIOR
FLOATING RATE FUND II, INC.,
By: ______________________________
Name:
Title:
<PAGE>
METROPOLITAN LIFE
INSURANCE COMPANY,
By: ______________________________
Name:
Title:
<PAGE>
MORGAN STANLEY DEAN
WITTER PRIME INCOME TRUST,
By: ______________________________
Name:
Title:
<PAGE>
NATIONAL BANK OF CANADA,
A CANADIAN CHARTERED
BANK,
By: ______________________________
Name:
Title:
<PAGE>
NORTH AMERICAN SENIOR
FLOATING RATE FUND,
By: CypressTree Investment
Management Company, Inc. as
Portfolio Manager
By: ______________________________
Name:
Title:
<PAGE>
PINEHURST TRADING, INC.,
By: ______________________________
Name:
Title:
<PAGE>
PROVIDENT BANK OF
MARYLAND,
By: ______________________________
Name:
Title:
<PAGE>
SCOTIABANC, INC.,
By: ______________________________
Name:
Title:
<PAGE>
SEQUILS I, LTD.,
By: TCW Advisors, Inc. as its
Collateral Manager
By: ______________________________
Name:
Title:
<PAGE>
SUMMIT BANK,
By: ______________________________
Name:
Title:
<PAGE>
THE UNION BANK OF
CALIFORNIA, N.A.,
By: ______________________________
Name:
Title:
<PAGE>
U.S. BANK NATIONAL
ASSOCIATION,
By: ______________________________
Name:
Title:
<PAGE>
USTRUST,
By: ______________________________
Name:
Title:
<PAGE>
KZH SOLEIL-2 LLC,
By: ______________________________
Name:
Title:
<PAGE>
GALAXY CLO 1999-1, LTD.,
By: ______________________________
Name:
Title:
<PAGE>
STANFIELD CLO, LTD.,
By: ______________________________
Name:
Title:
<PAGE>
ELC (CAYMAN) LTD. CDO
SERIES 1999-I,
By: ______________________________
Name:
Title:
<PAGE>
FIRST DOMINION FUNDING III,
By: ______________________________
Name:
Title:
<PAGE>
SENIOR DEBT PORTFOLIO,
By: ______________________________
Name:
Title:
<PAGE>
GREAT POINT CLO 1999-1 LTD.,
By: ______________________________
Name:
Title:
<PAGE>
MAGNETITE ASSET
INVESTORS,
By: ______________________________
Name:
Title:
<PAGE>
BALANCED HIGH YIELD FUND
II LTD,
By: ______________________________
Name:
Title:
<PAGE>
BHF (USA) CAPITAL
CORPORATION,
By: ______________________________
Name:
Title:
By: ______________________________
Name:
Title:
<PAGE>
CYPRESSTREE SR. FLOATING
RATE FUND,
By: ______________________________
By: ______________________________
Name:
Title:
<PAGE>
ML SENIOR FLOATING RATE
FUND II, INC.,
By: ______________________________
Name:
Title:
<PAGE>
NORSE CBO, LTD,
By: ______________________________
Name:
Title:
<PAGE>
UNITED OF OMAHA LIFE
INSURANCE CO.,
By: ______________________________
Name:
Title:
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000722723
<NAME> HANGER ORTHOPEDIC GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,885
<SECURITIES> 0
<RECEIVABLES> 104,517
<ALLOWANCES> 16,044
<INVENTORY> 64,242
<CURRENT-ASSETS> 193,958
<PP&E> 46,830
<DEPRECIATION> 17,485
<TOTAL-ASSETS> 754,037
<CURRENT-LIABILITIES> 79,696
<BONDS> 421,859
0
59,243
<COMMON> 190
<OTHER-SE> 171,322
<TOTAL-LIABILITY-AND-EQUITY> 754,037
<SALES> 114,868
<TOTAL-REVENUES> 114,868
<CGS> 57,184
<TOTAL-COSTS> 57,184
<OTHER-EXPENSES> 45,468
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,158
<INCOME-PRETAX> 1,056
<INCOME-TAX> 1,335
<INCOME-CONTINUING> (279)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (279)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
