AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 2002
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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HANGER ORTHOPEDIC GROUP, INC.
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 84-0904275
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</Table>
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TWO BETHESDA METRO CENTER
SUITE 1200
BETHESDA, MARYLAND 20814
(301) 986-0701
(Address, including zip code and telephone number, including area
code, of registrant's principal executive offices)
---------------------
IVAN R. SABEL
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
HANGER ORTHOPEDIC GROUP, INC.
TWO BETHESDA METRO CENTER
SUITE 1200
BETHESDA, MARYLAND 20814
(301) 986-0701
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
PLEASE SEND COPIES OF COMMUNICATIONS TO:
ARTHUR H. BILL, ESQ.
FOLEY & LARDNER
3000 K STREET, N.W., SUITE 500
WASHINGTON, D.C. 20007
(202) 672-5300
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
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PROPOSED
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT(1) PRICE(1) FEE
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10 3/8% Senior Notes due 2009.......................... $200,000,000 106.25% $212,500,000(2) $19,550.00
Guarantees of 10 3/8% Senior Notes due 2009............ (3) (4)
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</Table>
(1) Plus accrued interest. Estimated solely for purpose of determining the
registration fee pursuant to Rule 457(b) under the Securities Act of 1933.
(2) Pursuant to Rule 457(f)(1) under the Securities Act of 1933, this amount is
the market value as of April 18, 2002 of the maximum amount of 10 3/8%
Senior Notes due 2009 that may be received by the Registrant from tendering
holders thereof.
(3) The 10 3/8% Senior Notes due 2009 being registered will be guaranteed on a
senior basis by each of the Guarantor Subsidiaries. No separate
consideration will be received for the guarantees.
(4) Pursuant to Rule 457(n) under the Securities Act, no separate fee is payable
for the guarantees.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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TABLE OF ADDITIONAL REGISTRANTS
<Table>
<Caption>
STATE/COUNTRY OF
NAME INCORPORATION
- ---- ----------------
Hanger Prosthetics & Orthotics, Inc......................... Delaware
Southern Prosthetic Supply, Inc............................. Georgia
DOBI-Symplex, Inc........................................... Delaware
OPNET, Inc.................................................. Nevada
Eugene Teufel & Son Orthotics & Prosthetics, Inc............ Pennsylvania
HPO, Inc.................................................... Delaware
Advanced Orthopedic Technologies, Inc....................... Nevada
Hanger Prosthetics & Orthotics Holdings, Inc................ Delaware
Hanger Prosthetics & Orthotics West, Inc.................... California
Hanger Prosthetics & Orthotics East, Inc.................... Delaware
Advanced Orthopedic Technologies (Clayton), Inc............. New Jersey
AD Craig Company............................................ California
Progressive Orthopedic...................................... California
E.A. Warnick-Pomeroy Co., Inc............................... Pennsylvania
Frank J. Malone & Son, Inc.................................. Pennsylvania
Meadowbrook Orthopedics, Inc................................ Michigan
Medical Arts O&P Services, Inc.............................. Wisconsin
Orthotic & Prosthetic Rehabilitation Technologies, Inc...... Florida
University Orthotic & Prosthetic Consultants, Ltd........... Pennsylvania
</Table>
- ---------------
The address of each of the additional registrants is Two Bethesda Metro Center,
Suite 1200, Bethesda, Maryland 20814.
The information in this prospectus is not complete and may be changed. We may
not complete the exchange offer and issue these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell securities and it is not
soliciting an offer to buy these securities in any state where the offer is not
permitted.
Subject to completion, dated April 24, 2002
$200,000,000
(Hanger Orthopedic Group Logo)
Hanger Orthopedic Group, Inc.
Exchange Offer for
10 3/8% Senior Notes due 2009
- --------------------------------------------------------------------------------
This is an offer to exchange the outstanding, unregistered Hanger Orthopedic
Group, Inc. 10 3/8% Senior Notes due 2009 you now hold for new, substantially
identical 10 3/8% Senior Notes due 2009 that will be free of the transfer
restrictions that apply to the outstanding notes. This offer will expire at 5:00
p.m., New York City time, on , 2002, unless we extend it. You must
tender your outstanding, unregistered notes by the deadline to obtain new,
registered notes and the liquidity benefits they offer.
We agreed with the initial purchasers of the outstanding notes to make this
offer and register the issuance of the new notes following the closing of the
sale of the outstanding notes. This offer applies to any and all outstanding
notes tendered by the deadline.
The new notes will not trade on any established exchange. The new notes have the
same financial terms and covenants as the outstanding notes, and are subject to
the same business and financial risks.
A DESCRIPTION OF THOSE RISKS BEGINS ON PAGE 18.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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, 2002
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Special Note on Forward-Looking
Statements......................... 3
Prospectus Summary................... 4
Risk Factors......................... 18
The Exchange Offer................... 24
Use of Proceeds...................... 33
Capitalization....................... 34
Selected Consolidated Financial and
Operating Data..................... 35
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 38
</Table>
<Table>
<Caption>
PAGE
----
Description of the 10 3/8% Senior
Notes due 2009..................... 47
Description of Other Indebtedness and
Preferred Stock.................... 81
Plan of Distribution................. 86
Certain United States Federal Income
Tax Considerations................. 87
Legal Matters........................ 91
Experts.............................. 91
Where You Can Find More Information;
Incorporation of Documents by
Reference.......................... 91
</Table>
---------------------
You should rely only upon the information contained in this prospectus. We
have not authorized any other person to provide you with different information.
If anyone provides you with different or inconsistent information, you should
not rely on it. We are not making an offer of these securities in any
jurisdiction where the offer is not permitted. You should assume the information
appearing in this prospectus is accurate only as of the date on the front cover
of this prospectus. Our business, financial condition, results of operations and
prospects may have changed since that date.
2
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Some of the statements contained in, or incorporated by reference in, this
prospectus discuss our plans and strategies for our business or make other
forward-looking statements, as this term is defined in the Private Securities
Litigation Reform Act. The words "anticipates," "believes," "estimates,"
"expects," "plans," "intends" and similar expressions are intended to identify
these forward-looking statements, but are not the exclusive means of identifying
them. These forward-looking statements reflect the current views of our
management; however, various risks, uncertainties and contingencies could cause
our actual results, performance or achievements to differ materially from those
expressed in, or implied by, these statements, including the following:
- our indebtedness and the impact of increases in interest rates on such
indebtedness;
- the demand for our orthotic and prosthetic services and products;
- our ability to integrate effectively the operations of businesses that we
plan to acquire in the future;
- our ability to successfully implement our performance improvement plan
and realize and maintain its benefits;
- our ability to attract and retain qualified orthotic and prosthetic
practitioners;
- changes in federal Medicare reimbursement levels and other governmental
policies affecting orthotic and prosthetic operations;
- changes in prevailing interest rates and the availability of favorable
terms of equity and debt financing to fund the anticipated growth of our
business;
- changes in, or failure to comply with, federal, state and/or local
governmental regulations; and
- liability relating to orthotic and prosthetic services and products and
other claims asserted against us.
For a discussion of important risks relating to an investment in our
securities, including factors that could cause actual results to differ
materially from results referred to in the forward-looking statements, see "Risk
Factors." We do not have any obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
3
PROSPECTUS SUMMARY
This summary may not contain all the information that may be important to
you. You should read this entire prospectus as well as the information
incorporated by reference in this prospectus before making an investment
decision. References in this prospectus to "we," "us," "our" or "our company"
refer to Hanger Orthopedic Group, Inc. and its subsidiaries combined, unless the
context clearly indicates otherwise.
HANGER ORTHOPEDIC GROUP, INC.
BUSINESS OVERVIEW
We are the largest owner and operator of orthotic and prosthetic ("O&P")
patient-care centers in the United States. In our orthotics business, we design,
fabricate, fit and maintain a wide range of standard and custom-made braces and
other devices (such as spinal, knee and sports-medicine braces) that provide
external support to patients suffering from musculoskeletal disorders, such as
ailments of the back, extremities or joints and injuries from sports or other
activities. In our prosthetics business, we design, fabricate, fit and maintain
custom-made artificial limbs for patients who are without limbs as a result of
traumatic injuries, vascular diseases, diabetes, cancer or congenital disorders.
O&P devices are increasingly technologically advanced and are custom-designed to
add functionality and comfort to patients' lives, shorten the rehabilitation
process and lower the cost of rehabilitation. We are also a leading distributor
of branded and private label O&P devices and components in the United States,
all of which are manufactured by third parties.
At March 31, 2002, we operated 591 O&P patient-care centers in 44 states
and the District of Columbia and employed 864 certified O&P practitioners.
Patients are referred to our local patient-care centers directly by physicians
as a result of our relationships with them or through our agreements with
managed care providers. Our patient-care centers are staffed by certified O&P
practitioners and technicians. Our practitioners generally design and fit
patients with, and the technicians fabricate, O&P devices as prescribed by the
referring physician. Following the initial design, fabrication and fitting of
our O&P devices, our technicians conduct regular, periodic maintenance of O&P
devices as needed. Our practitioners are also responsible for managing and
operating our patient-care centers and are compensated, in part, based on their
success in managing costs and collecting accounts receivable. We provide
centralized administrative, marketing and materials management services to take
advantage of economies of scale and to increase the time practitioners have to
provide patient care. In areas where we have multiple patient-care centers, we
also utilize shared fabrication facilities where technicians fabricate devices
for practitioners in that area.
We have increased our net sales through acquisitions, by opening new
patient-care centers and through same-center net sales growth, the latter being
achieved primarily through physician referral marketing and branding
initiatives. We strive to improve our local market position to enhance operating
efficiencies and generate economies of scale by implementing our disciplined
growth strategy. We generally acquire small and medium-sized O&P patient-care
businesses and open new patient-care centers to achieve greater density in our
existing markets.
We acquired NovaCare Orthotics and Prosthetics, Inc. ("NovaCare O&P") in
July 1999, which more than doubled our number of O&P patient-care centers and
certified O&P practitioners and made us the largest operator of O&P patient-care
centers in the United States. Our acquisition of NovaCare O&P also significantly
expanded our presence in the western United States and allowed us to achieve a
greater density of operations in the eastern United States.
THE O&P INDUSTRY
We estimate the O&P patient-care services market in the United States
represented approximately $2.1 billion in revenues in 2001, of which we
accounted for approximately 25%. The O&P patient-care
4
services market is highly fragmented and is characterized by local, independent
O&P businesses, with the majority generally having annual revenues of less than
$1.0 million and a single facility. According to the most recent American
Orthotic and Prosthetic Association study, which was conducted in 1999, there
are an estimated 3,300 certified prosthetists and/or orthotists and
approximately 2,850 O&P patient-care centers in the United States. We do not
believe that any of our competitors account for a market share of more than 2%
of the country's total estimated O&P patient-care services revenue.
Care of O&P patients is part of a continuum of rehabilitation services from
diagnosis to treatment and prevention of future injury. This continuum involves
the integration of several medical disciplines that begins with the attending
physician's diagnosis. Once a course of treatment is determined generally by an
orthopedic surgeon, vascular surgeon or physiatrist, he or she writes a
prescription and refers the patient to an O&P patient-care services provider for
treatment. An O&P practitioner then, using the prescription, consults with both
the referring physician and the patient to formulate the design of an orthotic
or prosthetic device to meet the patient's needs.
The O&P industry is characterized by stable, recurring revenues, primarily
resulting from the need for periodic replacement and modification of O&P
devices. Based on our experience, the average replacement time for orthotic
devices is one to three years, while the average replacement time for prosthetic
devices is three to five years. There is also an attendant need for continuing
patient-care services. In addition to the inherent need for periodic replacement
and modification of O&P devices and continuing care, we expect the demand for
O&P patient-care services and O&P devices will continue to grow as a result of
several key trends, including:
Aging U.S. Population. The growth rate of the over-65 age group is
nearly triple that of the under-65 age group. There is a direct correlation
between age and the onset of diabetes and vascular disease, which is the
leading cause of amputations. With broader medical insurance coverage,
increasing disposable income, longer life expectancy, greater mobility,
expectations and improved technology of O&P devices, we believe the elderly
will seek orthopedic rehabilitation services and products more often.
Growing Physical Health Consciousness. The emphasis on physical
fitness, leisure sports and conditioning, such as running and aerobics is
growing, which has led to increased injuries requiring orthopedic
rehabilitative services and products. These trends are evidenced by the
increasing demand for new devices which provide support for injuries,
prevent further or new injuries or enhance physical performance.
Increased Efforts to Reduce Healthcare Costs. O&P services and
devices have enabled patients to become ambulatory more quickly after
receiving medical treatment in the hospital. We believe that significant
cost savings can be achieved through the early use of O&P services and
products. The provision of O&P services and products in many cases reduces
the need for more expensive treatments, thus representing a cost savings to
third-party payors.
Advancing Technology. The range and effectiveness of treatment
options for patients requiring O&P services have increased in connection
with the technological sophistication of O&P devices. Advances in design
technology and lighter, stronger and more cosmetically acceptable materials
have enabled patients to replace older O&P devices with new O&P products
that provide greater comfort, protection and patient acceptability. As a
result, treatment can be more effective and of shorter duration, giving the
patient greater mobility and a more active lifestyle. Advancing technology
has also increased the prevalence and visibility of O&P devices in many
sports, including skiing, running and tennis.
5
COMPETITIVE STRENGTHS
We believe that the combination of the following competitive strengths will
enable us to continue to increase our net sales, EBITDA and market share:
- Leading market position, with an approximate 25% share of total industry
revenues, in a fragmented industry;
- National scale of operations, which has better enabled us to:
-- establish our brand name and generate economies of scale;
-- implement best practices throughout the country;
-- utilize shared fabrication facilities;
-- contract with national and regional managed care entities;
-- train O&P practitioners to utilize leading O&P technology; and
-- increase our influence on, and input into, regulatory trends;
- Distribution of, and purchasing power for, O&P components and finished
O&P products, which enables us to:
-- negotiate greater purchasing discounts from manufacturers and freight
providers;
-- reduce patient-care center inventory levels and improve inventory turns
through centralized purchasing control;
-- quickly access prefabricated and finished O&P products;
-- promote the usage by our patient-care centers of clinically appropriate
products that also enhance our profit margins; and
-- engage in co-marketing and O&P product development programs with
suppliers;
- Full O&P product offering, with a balanced mix between orthotic services
and products, which represented 44.5% of our patient-care net sales, and
prosthetic services and products, which represented 50.0% of our
patient-care net sales during the year ended December 31, 2001 (other
services and products represented 5.5% of our patient-care net sales);
- Practitioner bonus plan that financially rewards practitioners for their
efficient management of accounts receivable collections, labor,
materials, and other costs, and that encourages cooperation among our
practitioners within the same local market area;
- Proven ability to rapidly incorporate technological advances in O&P
devices;
- History of successful integration of small and medium-sized O&P business
acquisitions, including 66 O&P businesses since 1992, excluding our
acquisition of NovaCare O&P, with purchase prices ranging from less than
$100,000 to $50 million and representing over 230 patient-care centers;
- Highly trained O&P practitioners, whom we provide with the highest level
of continuing education and training through programs designed to inform
our O&P practitioners of the latest technological developments in the O&P
industry, and our certification program located at the University of
Connecticut; and
- Experienced and committed management team.
6
BUSINESS STRATEGY
Our goal is to continue to provide superior patient care and to be the most
cost-efficient, full service, national O&P operator. The key elements of our
strategy to achieve this goal are to:
- Continue to implement initiatives under our performance improvement plan
designed to:
-- achieve cost savings through improved utilization and efficiency of
administrative and corporate support services;
-- enhance margins through consolidation of our purchasing, distribution
and inventory management; and
-- use more efficient billing and collection procedures;
- Increase our market share and net sales by:
-- contracting with national and regional managed care providers, who we
believe select us as a preferred provider because of our reputation,
national reach, density of our patient-care centers in certain markets
and our ability to help reduce administrative expenses;
-- increasing our volume of business through enhanced comprehensive
marketing programs aimed at referring physicians and patients, such as
our Patient Evaluation Clinics program, which reminds patients to have
their O&P devices serviced or replaced and informs them of
technological improvements of which they can take advantage; and
-- improving billing for services provided by our O&P patient-care centers
through the implementation of standardized billing procedures, which
will improve the accuracy and timeliness of invoices for services we
render to our customers;
- Selectively acquire small and medium-sized O&P patient-care service
businesses and open satellite patient-care centers primarily to expand
our presence within existing markets and secondarily to enter into new
markets; and
- Provide our O&P practitioners with:
-- training and continuing education;
-- career development and increased compensation opportunities;
-- a wide array of O&P products from which to choose; and
-- administrative and corporate support services that enable them to focus
their time on providing superior patient care.
PERFORMANCE IMPROVEMENT PLAN
In January 2001, we developed, with the assistance of our consultant, Jay
Alix & Associates, a performance improvement plan which contained many
initiatives that were designed to effect further cost savings through improved
utilization and efficiency of support services, enhanced purchasing and
inventory management, improved collection methods and consolidation of
distribution services. In addition, we are seeking to enhance net sales through
improved marketing and branding initiatives and more efficient billing
procedures.
During 2001, we accomplished the following under our performance
improvement plan:
- improved our cash flow by accelerating the collection of our accounts
receivable;
- reduced our inventory carrying levels and improved the rate at which we
turn our inventory levels through more centralized inventory management;
7
- consolidated our distribution facilities from six to three, thereby
reducing our materials handling, lease and freight expenses and staffing
levels;
- reduced our overhead expense by eliminating and consolidating corporate
expenses;
- increased the use of our shared fabrication facilities and decreased the
use of more expensive third parties to fabricate products for us;
- instituted our Best Value program, in which our practitioners are given
the information to select the most appropriate and cost-effective
materials, component parts and finished products, which, in conjunction
with our negotiation of discounts from our preferred vendors, reduced our
costs of materials, component parts and finished products;
- developed a plan to transition to a common systems platform for billing,
collections and application of cash in our patient-care centers; and
- developed a new marketing and sales organization plan for 2002, designed
to initiate programs to continue to enhance our net sales.
NEW CREDIT FACILITY
In connection with, and as a condition to, the closing of our sale on
February 15, 2002 of the outstanding notes, we retired all outstanding
indebtedness under our previously existing credit facility and entered into a
new revolving credit facility that provided senior secured financing of up to
$75.0 million ("New Credit Facility"). We borrowed $36.5 million under the New
Credit Facility to use in conjunction with the net proceeds of the sale of the
outstanding notes to retire the outstanding indebtedness under our previously
existing credit facility and to pay related fees and expenses.
8
THE EXCHANGE OFFER
BACKGROUND OF THE OUTSTANDING
NOTES....................... On February 15, 2002, we issued $200 million
aggregate principal amount of our 10 3/8%
Senior Notes due 2009 (the "outstanding notes")
to Lehman Brothers Inc., J.P. Morgan Securities
Inc. Solomon Smith Barney Inc. and BNP Paribas
Securities Corp. (the "initial purchasers") in
transactions not registered under the
Securities Act of 1933 in reliance on
exemptions from registration under that act.
The initial purchasers then sold the
outstanding notes to qualified institutional
buyers in reliance on Rule 144A under the
Securities Act and outside the U.S. to persons
in reliance on Regulation S under the
Securities Act. Because they have been sold in
reliance on exemptions from registration, the
outstanding notes are subject to transfer
restrictions. In connection with the issuance
of the outstanding notes, we entered into a
registration rights agreement with the initial
purchasers in which we agreed to deliver to you
this prospectus and to use our commercially
reasonable efforts to complete the exchange
offer or to file and cause to become effective
a registration statement covering the resale of
the outstanding notes.
THE EXCHANGE OFFER............ We are offering to issue up to $200 million
aggregate principal amount of new 10 3/8%
Senior Notes due 2009 (the "exchange notes") in
exchange for an identical aggregate principal
amount of outstanding notes. Outstanding notes
may be exchanged only in $1,000 increments. The
terms of the exchange notes are identical in
all material respects to the outstanding notes
except that the exchange notes have been
registered under the Securities Act. Because we
have registered the exchange notes, the
exchange notes will not be subject to transfer
restrictions.
RESALE OF EXCHANGE NOTES...... We will issue the exchange notes promptly after
the expiration of the exchange offer. We
believe you may offer, sell or otherwise
transfer the exchange notes you receive in the
exchange offer without compliance with the
registration and prospectus delivery provisions
of the Securities Act provided that:
- you acquire the exchange notes you receive in
the exchange offer in the ordinary course of
your business;
- you are not engaging in and do not intend to
engage in a distribution of the exchange
notes;
- you have no arrangement or understanding with
any person to participate in the distribution
of the exchange notes issued to you in the
exchange offer; and
- you are not an "affiliate" of ours, as that
term is defined in Rule 405 under the
Securities Act.
Our belief is based upon interpretations by the
staff of the Securities and Exchange
Commission, as set forth in no-action letters
to third parties unrelated to us. The staff has
not considered the exchange offer in the
context of a no-action letter
9
and we cannot assure you that the staff would
make a similar determination with respect to
this exchange offer. If you do not meet the
conditions described above, you may incur
liability under the Securities Act if you
transfer any exchange note without delivering a
prospectus meeting the requirements of the
Securities Act. We do not assume or indemnify
you against that liability.
Each broker-dealer issued exchange notes in the
exchange offer for its own account in exchange
for outstanding notes acquired by the
broker-dealer as a result of market-making or
other trading activities must acknowledge that
it will deliver a prospectus meeting the
requirements of the Securities Act in
connection with any resale of the exchange
notes issued in the exchange offer. A
broker-dealer may use this prospectus for an
offer to resell, a resale or other retransfer
of the exchange notes issued to it in the
exchange offer. See "Plan of Distribution."
EXPIRATION DATE............... 5:00 p.m., New York City time, on ,
2002, unless we extend the exchange offer. It
is possible that we will extend the exchange
offer until all outstanding notes are tendered.
You may withdraw outstanding notes you tendered
at any time before 5:00 p.m., New York City
time, on the expiration date. See "The Exchange
Offer -- Expiration Date; Extensions;
Amendments."
WITHDRAWAL RIGHTS............. You may withdraw outstanding notes you tendered
by furnishing a notice of withdrawal to the
exchange agent or by complying with the
applicable procedures of The Depository Trust
Company's (DTC) Automated Tender Offer Program
(ATOP) system at any time before 5:00 p.m., New
York City time, on the expiration date. See
"The Exchange Offer -- Withdrawal of Tenders."
ACCRUED INTEREST ON THE
EXCHANGE NOTES AND THE
OUTSTANDING NOTES........... The exchange notes will bear interest from
February 15, 2002 or, if later, from the most
recent date of payment of interest on the
outstanding notes.
CONDITIONS TO THE EXCHANGE
OFFER......................... The exchange offer is subject only to the
following conditions:
- the compliance of the exchange offer with
securities laws;
- the proper tender of the outstanding notes;
- the representation by the holders of the
outstanding notes that they are not our
affiliate, that the exchange notes they will
receive are being acquired by them in the
ordinary course of their business and that at
the time the exchange offer is completed the
holder had no plan to participate in the
distribution of the exchange notes; and
- no judicial or administrative proceeding
shall have been threatened that would limit
us from proceeding with the exchange offer.
10
REPRESENTATIONS AND
WARRANTIES.................... By participating in the exchange offer, you
represent to us that, among other things:
- you will acquire the exchange notes you
receive in the exchange offer in the ordinary
course of your business;
- you are not engaging in and do not intend to
engage in a distribution of the exchange
notes;
- you have no arrangement or understanding with
any person to participate in the distribution
of the exchange notes issued to you in the
exchange offer; and
- you are not an affiliate of ours or, if you
are an affiliate, you will comply with the
registration and prospectus delivery
requirements of the Securities Act to the
extent applicable.
PROCEDURES FOR TENDERING
OUTSTANDING NOTES HELD IN THE
FORM OF BOOK-ENTRY
INTERESTS................... The outstanding notes were issued as global
securities in fully registered form without
coupons. Beneficial interests in the
outstanding notes that are held by direct or
indirect participants in DTC are shown on, and
transfers of the outstanding notes can be made
only through, records maintained in book-entry
form by DTC with respect to its participants.
If you are a holder of an outstanding note held
in the form of a book-entry interest and you
wish to tender your outstanding note for
exchange pursuant to the exchange offer, you
must send the exchange agent either:
- a properly completed and validly executed
letter of transmittal; or
- a computer-generated message transmitted by
means of DTC's ATOP system that, when
received by the exchange agent, will form a
part of a confirmation of book-entry transfer
in which you acknowledge and agree to be
bound by the terms of the letter of
transmittal.
The exchange agent must also receive prior to
the expiration of the exchange offer either:
- a timely confirmation of book-entry transfer
of your outstanding notes into the exchange
agent's account at DTC; or
- the documents necessary for compliance with
the guaranteed delivery procedures described
below.
For more information, see "The Exchange
Offer -- Procedures for Tendering."
PROCEDURES FOR TENDERING
CERTIFICATED OUTSTANDING
NOTES....................... If you are a holder of book-entry interests in
the outstanding notes, you are entitled to
receive, in limited circumstances, in exchange
for your book-entry interests, certificated
notes that are in equal principal amounts to
your book-entry interests. See "Description of
the 10 3/8% Senior Notes due
2009 -- Book-Entry,
11
Delivery and Form." No certificated notes are
issued and outstanding as of the date of this
prospectus. If you acquire certificated
outstanding notes before the expiration of the
exchange offer, you must tender your
certificated outstanding notes in accordance
with the procedures described in this
prospectus under the heading "The Exchange
Offer -- Procedures for Tendering --
Outstanding Notes Held in Certificated Form."
TENDERS BY BENEFICIAL
OWNERS........................ If you are a beneficial owner whose outstanding
notes are registered in the name of the broker,
dealer, commercial bank, trust or other nominee
and wish to tender those outstanding notes in
the exchange offer, please contact the
registered holder as soon as possible and
instruct them to tender on your behalf and
comply with the instructions in this
prospectus.
GUARANTEED DELIVERY
PROCEDURES.................... If you are unable to comply with the procedures
for tendering, you may tender your outstanding
notes according to the guaranteed delivery
procedures described in this prospectus under
the heading "The Exchange Offer -- Procedures
for Tendering -- Guaranteed Delivery
Procedures."
ACCEPTANCE OF OUTSTANDING
NOTES AND DELIVERY OF EXCHANGE
NOTES....................... If the conditions described under "The Exchange
Offer -- Conditions" are satisfied, we will
accept for exchange any and all outstanding
notes that are properly tendered before the
expiration date. If we close the exchange
offer, the exchange notes will be delivered
promptly following the expiration date.
Otherwise, we will promptly return any
outstanding notes tendered.
FEDERAL INCOME TAX
CONSIDERATIONS................ See "Certain United States Federal Income Tax
Considerations" for a discussion of U.S.
federal income tax considerations you should
consider before tendering outstanding notes in
the exchange offer.
CONSEQUENCES OF FAILURE TO
EXCHANGE.................... If you do not participate in the exchange
offer, upon completion of the exchange offer,
the liquidity of the market for your
outstanding notes could be adversely affected.
See "The Exchange Offer -- Participation in the
Exchange Offer; Untendered Notes."
EXCHANGE AGENT................ Wilmington Trust Company is serving as exchange
agent for the exchange offer. The address of
the exchange agent is listed under "The
Exchange Offer -- Exchange Agent."
12
THE EXCHANGE NOTES
The form and terms of the exchange notes to be issued in the exchange offer
are the same as the form and terms of the outstanding notes except that the
exchange notes will be registered under the Securities Act and, accordingly,
will not bear legends restricting their transfer. The exchange notes issued in
the exchange offer will evidence the same debt as the outstanding notes, and
both the outstanding notes and the exchange notes are governed by the same
indenture.
ISSUER........................ Hanger Orthopedic Group, Inc.
NOTES OFFERED................. $200,000,000 aggregate principal amount of
10 3/8% Senior Notes due 2009.
GUARANTEES.................... All payments with respect to the notes,
including principal and interest, will be fully
and unconditionally guaranteed on an unsecured
senior basis, jointly and severally, by all of
our current and future domestic subsidiaries.
MATURITY DATE................. February 15, 2009.
INTEREST PAYMENT DATES........ February 15 and August 15, commencing August
15, 2002.
RANKING....................... The notes and the guarantees will be unsecured
and:
- equal in right of payment to all of our and
our subsidiary guarantors' existing and
future unsecured senior indebtedness;
- senior in right of payment to all of our and
our subsidiary guarantors' existing and
future subordinated indebtedness;
- effectively subordinated in right of payment
to all existing and future indebtedness and
other liabilities of any of our existing or
future non-guarantor subsidiaries; and
- effectively subordinated in right of payment
to all of our and our subsidiary guarantors'
secured indebtedness to the extent of the
value of the assets securing that
indebtedness.
OPTIONAL REDEMPTION........... On or after February 15, 2006, we may redeem
all or part of the notes, at the redemption
prices (expressed as percentages of principal
amount) listed below, plus accrued and unpaid
interest, if any, to the date of redemption, if
redeemed during the 12-month period commencing
on February 15 of the years set forth below:
<Table>
<Caption>
REDEMPTION
YEAR PRICE
---- ----------
2006................................... 105.188%
2007................................... 102.594%
2008 and thereafter.................... 100.000%
</Table>
Before February 15, 2005, we may redeem up to
35% of the aggregate principal amount of notes
outstanding at a redemption price of 110.375%
of the principal amount thereof, plus accrued
interest, with the net cash proceeds of certain
equity offerings; provided at least 65% of the
aggregate principal amount of the notes remains
outstanding after the redemption.
13
CHANGE OF CONTROL............. Upon specified change of control events, unless
we have exercised our option to redeem all of
the notes as described above, each holder of a
note will have the right to require us to
repurchase all or a portion of its notes at a
purchase price in cash equal to 101% of the
principal amount, plus accrued and unpaid
interest, if any, to the date of repurchase.
COVENANTS..................... The indenture governing the notes limits our
ability and that of our subsidiary guarantors
to, among other things:
- incur additional indebtedness;
- create liens;
- pay dividends on or redeem capital stock;
- make certain investments;
- make restricted payments;
- make certain dispositions of assets;
- engage in transactions with affiliates;
- engage in certain business activities; and
- engage in mergers, consolidations and certain
sales of assets.
The indenture governing the notes also limits
our ability to permit restrictions on the
ability of certain of our subsidiaries to pay
dividends or make certain other distributions.
These covenants are subject to important
exceptions and qualifications, as described
under "Description of the 10 3/8% Senior Notes
due 2009."
EXCHANGE AND REGISTRATION
RIGHTS AGREEMENT.............. On February 15, 2002, we and our subsidiary
guarantors entered into an agreement with the
initial purchasers in which we agreed:
- to use our commercially reasonable efforts to
file a registration statement within 90 days
after the issue date of the outstanding
notes, enabling holders to exchange the
outstanding notes for publicly registered
exchange notes with substantially identical
terms;
- to use our commercially reasonable efforts to
cause the registration statement to become
effective within 150 days after the issue
date of the outstanding notes; and
- to file a shelf registration statement for
the resale of outstanding notes if we cannot
effect an exchange offer within the time
periods listed above and in certain other
circumstances.
If we and the subsidiary guarantors do not
comply with these registration obligations, we
will be required to pay liquidated damages to
holders of the outstanding notes under certain
circumstances.
14
ABSENCE OF ESTABLISHED MARKET
FOR THE NOTES................. We do not intend to apply for the notes to be
listed on any securities exchange or to arrange
for any quotation system to quote them. The
notes have been designated for trading on the
PORTAL Market(SM). The initial purchasers have
advised us that they intend to make a market
for the notes, but they are not obligated to do
so. The initial purchasers may discontinue any
market making in the notes or any new notes
issued in exchange for the notes at any time in
their sole discretion. Accordingly, we cannot
assure you that a liquid market will develop
for the outstanding notes or any exchange notes
issued in exchange for the outstanding notes.
USE OF PROCEEDS............... We will not receive any proceeds upon the
completion of the exchange offer. See "Use of
Proceeds."
15
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(In thousands, except per share data)
The following table summarizes our consolidated financial and operating
data, which you should read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in this
prospectus and our consolidated financial statements and related notes
incorporated herein by reference. The summary consolidated financial data and
other financial data as of December 31, 2000 and 2001 and for each of the years
in the three-year period ended December 31, 2001 have been derived from our
audited consolidated financial statements incorporated herein by reference. The
summary consolidated financial data and other financial data as of December 31,
1999 has been derived from our audited consolidated financial statements.
"Operating Data" below are not directly derived from our financial statements,
but have been presented to provide additional analysis.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
1999 2000 2001
-------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net sales................................................... $346,826 $486,031 $508,053
-------- -------- --------
Gross profit................................................ 177,750 234,663 267,185
Selling, general and administrative......................... 113,995 177,392 182,972
Depreciation and amortization............................... 6,538 11,178 12,488
Amortization of excess cost over net assets acquired........ 7,520 12,150 12,198
Unusual charges(1).......................................... 6,340 2,364 24,438
-------- -------- --------
Income from operations...................................... 43,357 31,579 35,089
Interest expense, net....................................... (22,177) (47,072) (43,065)
-------- -------- --------
Income (loss) before taxes.................................. 21,180 (15,493) (7,896)
Provision (benefit) for income taxes........................ 10,194 (1,497) 907
-------- -------- --------
Net income (loss)........................................... $ 10,986 $(13,996) $ (8,883)
======== ======== ========
Net income (loss) applicable to common stock................ $ 8,831 $(18,534) $(13,741)
======== ======== ========
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
1999 2000 2001
--------- ------- --------
OTHER FINANCIAL DATA:
Capital expenditures........................................ $ 12,598 $ 9,845 $ 6,697
Gross margin................................................ 51.3% 48.3% 52.6%
Net cash provided by (used in):
Operating activities...................................... $ (224) $ 3,607 $ 51,166
Investing activities...................................... $(444,995) $ 4,624 $ 1,105
Financing activities...................................... $ 441,271 $ 6,703 $(62,897)
EBITDA(2)................................................... $ 63,755 $57,271 $ 84,213
EBITDA margin(2)............................................ 18.4% 11.8% 16.6%
Ratio of earnings to fixed charges(3)....................... 1.8X N/A N/A
</Table>
16
<Table>
<Caption>
DECEMBER 31,
------------------------------
1999 2000 2001
-------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 5,735 $ 20,669 $ 10,043
Working capital............................................. 118,428 133,690 109,216
Total assets................................................ 750,081 761,818 699,907
Long-term debt.............................................. 426,211 422,838 367,315
Redeemable convertible preferred stock...................... 61,343 65,881 70,739
Shareholders' equity........................................ $172,914 $154,380 $145,674
OPERATING DATA:
Patient care centers........................................ 617 620 597
Certified practitioners..................................... 962 888 867
Number of states (including D.C.)........................... 42 45 45
Same-center net sales growth(5)............................. 4.1% 6.0% 6.8%
</Table>
- ---------------
(1) The 1999 and 2000 results include integration and restructuring costs of
approximately $6.3 million and approximately $2.4 million, respectively,
incurred in connection with the purchase of NovaCare O&P. The 2001 results
include impairment, restructuring, and improvement costs of $24.4 million,
comprised of: (i) a non-cash charge of approximately $4.8 million related to
stock option compensation to Jay Alix & Associates for services rendered;
(ii) restructuring charges of approximately $3.7 million recorded in the
second quarter of 2001 principally related to severance and lease
termination expenses; (iii) an asset impairment loss of approximately $8.1
million incurred in connection with the October 9, 2001 sale of
substantially all of the manufacturing assets of Seattle Orthopedic Group,
Inc.; and (iv) approximately $7.8 million of other charges, primarily
comprised of fees paid to Jay Alix & Associates in connection with
development of our performance improvement plan.
(2) "EBITDA" is defined as net income (loss) before interest, taxes,
depreciation and amortization, and unusual charges consisting of impairment
loss on assets held for sale, and integration, impairment, restructuring and
performance improvement costs. EBITDA is not a measure of performance under
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, we understand that EBITDA is customarily used
by financial and credit analysts as a criteria in evaluating healthcare
companies. Moreover, substantially all of our financing arrangements contain
covenants in which EBITDA is used as a measure of financial performance. Our
definition of EBITDA may not be comparable to the definition of EBITDA used
by other companies. EBITDA margin is defined as EBITDA as a percent of net
sales. See table immediately following these footnotes for a reconciliation
of net income (loss) to EBITDA.
(3) For the purpose of calculating the ratio of earnings to fixed charges,
earnings consist of income (loss) before income taxes and extraordinary item
plus fixed charges. Fixed charges consist of interest expense (including
amortization of debt issuance costs, but not losses relating to the early
extinguishment of debt) and 33% of rental expense (considered to be
representative of the interest factors). Fixed charges exceeded earnings by
approximately $15.5 million for the year ended December 31, 2000 and
approximately $8.0 million in the year ended December 31, 2001.
(4) Net sales contributed by those patient-care centers that we owned and
operated during the entire period as well as the prior year's entire period.
The following table reconciles net income (loss) to EBITDA:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------
1999 2000 2001
------- -------- -------
Net income (loss)........................................... $10,986 $(13,996) $(8,883)
Provision (benefit) for income taxes........................ 10,194 (1,497) 907
Interest expense, net....................................... 22,177 47,072 43,065
Unusual charges............................................. 6,340 2,364 24,438
Depreciation and amortization............................... 6,538 11,178 12,488
Amortization of excess costs over net assets acquired....... 7,520 12,150 12,198
------- -------- -------
EBITDA...................................................... $63,755 $ 57,271 $84,213
======= ======== =======
</Table>
17
RISK FACTORS
RISKS RELATING TO US AND OUR BUSINESS
See "Risk Factors" immediately following this summary for a discussion of
risks related to the exchange notes, all of which apply to the outstanding notes
as well.
WE HAVE A RECENT HISTORY OF NET LOSSES AND MAY INCUR NET LOSSES IN THE FUTURE.
AS A RESULT, WE MAY BE UNABLE TO PAY AMOUNTS DUE UNDER THE NOTES.
From time to time, we have historically incurred net losses. We incurred
net losses of $14.0 million for the year ended December 31, 2000 and $8.9
million for the year ended December 31, 2001. We cannot assure you that we will
not incur net losses in the future. To the extent that we incur net losses in
the future, we may be unable to meet our obligations to make payments under the
notes. We have financed our operating cash requirements, as well as our capital
needs, with the proceeds of financing activities, including the issuance of
preferred stock and additional borrowings. We cannot assure you that we will
generate sufficient operating cash flow in the future to pay our debt service
obligations on the notes or that we will be able to obtain sufficient additional
financing to meet our debt service requirements on terms acceptable to us, or at
all.
CHANGES IN GOVERNMENT REIMBURSEMENT LEVELS COULD ADVERSELY AFFECT OUR NET SALES,
CASH FLOWS AND PROFITABILITY.
We estimate that we derived 41.0%, 38.4% and 40.5% of our net sales for the
years ended December 31, 1999, 2000 and 2001, respectively, from reimbursements
for O&P services and products from programs administered by Medicare, Medicaid
and the U.S. Veterans Administration. Each of these programs sets maximum
reimbursement levels for O&P services and products. If these agencies reduce
reimbursement levels for O&P services and products in the future, our net sales
could substantially decline. In addition, the percentage of our net sales
derived from these sources may increase as the portion of the U.S. population
over age 65 continues to grow, making us more vulnerable to maximum
reimbursement level reductions by these organizations. Reduced government
reimbursement levels could result in reduced private payor reimbursement levels
because of indexing of Medicare fee schedules by certain third-party payors.
Furthermore, the healthcare industry is experiencing a trend towards cost
containment as government and other third-party payors seek to impose lower
reimbursement rates and negotiate reduced contract rates with service providers.
This trend could adversely affect our net sales. Medicare provides for
reimbursement for O&P products and services based on prices set forth in fee
schedules for ten regional service areas. Additionally, if the U.S. Congress
were to enact into law modifications to the Medicare fee schedules to include
upper limits based on national median prices, our net sales from Medicare
reimbursements and other payors could be adversely affected, which could have a
material adverse effect on us. We cannot predict whether any such modifications
to the fee schedules will be enacted or what the final form of any modifications
might be.
WE HAVE NOT YET FULLY IMPLEMENTED OUR PERFORMANCE IMPROVEMENT PLAN AND MAY BE
UNABLE TO ACHIEVE THE FUTURE OPERATING EFFICIENCIES AND RESULTS THAT WE DESIRE.
We expect by the end of 2002 to have substantially implemented the major
performance improvement initiatives that we commenced last year. We initially
targeted $45.0 million in cash flow improvements over two years, which included
$30.0 million in annualized recurring operating and general and administrative
expense improvements and $15.0 million in one-time working capital improvements
over two years. While we have made substantial progress, we have not yet fully
completed those performance improvement initiatives, and we are unable to
represent that we will fully achieve or maintain the planned operating
efficiencies and results that we desire. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
18
IF WE CANNOT CONTINUE TO IMPROVE OUR CONTROLS AND PROCEDURES FOR MANAGING OUR
ACCOUNTS RECEIVABLE AND INVENTORY, OUR BUSINESS, RESULTS OF OPERATIONS,
FINANCIAL CONDITION AND ABILITY TO SATISFY OUR OBLIGATIONS UNDER OUR
INDEBTEDNESS COULD BE ADVERSELY AFFECTED.
Members of our senior management team have spent a significant amount of
time improving systems and controls relating to our collection of accounts
receivable. As of December 31, 2000 and 2001, our accounts receivable over 120
days represented approximately 33% and 30% of total accounts receivable
outstanding in each period, respectively. In order to adequately provide for
doubtful accounts, we recorded an increase in the allowance of $9.0 million in
the fourth quarter of December 31, 2000. If our efforts do not improve our
controls and procedures for managing accounts receivable, we may be unable to
collect certain accounts receivable, which could adversely affect our business,
results of operations, financial condition and ability to satisfy our
obligations under our indebtedness. In addition, our principal means of control
with respect to accounting for inventory and costs of goods sold is a physical
inventory conducted on an annual basis. This accepted method of accounting
controls and procedures may result in an understatement or overstatement, as the
case may be, of inventory between our annual physical inventories. For example,
in conjunction with the physical inventory performed on September 30, 2000, we
recorded a $9.6 million inventory write down. Conversely, in conjunction with
our physical inventory performed on December 31, 2001, we recorded a $4.2
million increase in inventory. Because our gross profit percentage is based on
our inventory levels, adjustments to inventory following physical inventory
could adversely affect our results of operations and financial condition.
IF WE ARE UNABLE TO MAINTAIN GOOD RELATIONS WITH OUR SUPPLIERS, OUR EXISTING
PURCHASING DISCOUNTS MAY BE JEOPARDIZED, WHICH COULD ADVERSELY AFFECT OUR NET
SALES.
We currently enjoy significant purchasing discounts with most of our
suppliers, and our ability to sustain our gross margins has been, and will
continue to be, dependent, in part, on our ability to continue to obtain
favorable discount terms from our suppliers. These terms may be subject to
changes in suppliers' strategies, from time to time, which could adversely
affect our gross margins over time. The profitability of our business depends,
in part, upon our ability to maintain good relations with these suppliers.
WE DEPEND ON THE CONTINUED EMPLOYMENT OF OUR ORTHOTISTS AND PROSTHETISTS WHO
WORK AT OUR PATIENT-CARE CENTERS AND THEIR RELATIONSHIPS WITH REFERRAL SOURCES
AND PATIENTS. OUR ABILITY TO PROVIDE O&P SERVICES AT OUR PATIENT-CARE CENTERS
WOULD BE IMPAIRED AND OUR NET SALES REDUCED IF WE WERE UNABLE TO MAINTAIN THESE
EMPLOYMENT AND REFERRAL RELATIONSHIPS.
Our net sales would be reduced if a significant number of our practitioners
leave us. In addition, any failure of these practitioners to maintain the
quality of care provided or to otherwise adhere to certain general operating
procedures at our facilities or any damage to the reputation of a significant
number of our practitioners could damage our reputation, subject us to liability
and significantly reduce our net sales. A substantial amount of our business is
derived from patient referrals by orthopedic surgeons and other healthcare
providers. If the quality of our services and products declines in the opinion
of these sources, the number of their patient referrals may decrease, which
would adversely affect our net sales.
IF THE NON-COMPETITION AGREEMENTS WE HAVE WITH OUR KEY EXECUTIVE OFFICERS AND
KEY PRACTITIONERS WERE FOUND BY A COURT TO BE UNENFORCEABLE, WE COULD EXPERIENCE
INCREASED COMPETITION RESULTING IN A DECREASE IN OUR NET SALES.
We generally enter into employment agreements with our executive officers
and a significant number of our practitioners which contain non-compete and
other provisions. The laws of each state differ concerning the enforceability of
non-competition agreements. State courts will examine all of the facts and
circumstances at the time a party seeks to enforce a non-compete covenant. We
cannot predict with certainty whether or not a court will enforce a non-compete
covenant in any given situation based on the facts and circumstances at that
time. If one of our key executive officers and/or a significant number of our
practitioners were to leave us and the courts refused to enforce the non-compete
covenant, we might
19
be subject to increased competition, which could materially and adversely affect
our business, financial condition and results of operations.
WE FACE PERIODIC REVIEWS, AUDITS AND INVESTIGATIONS UNDER OUR CONTRACTS WITH
FEDERAL AND STATE GOVERNMENT AGENCIES, AND THESE AUDITS COULD HAVE ADVERSE
FINDINGS THAT MAY NEGATIVELY IMPACT OUR BUSINESS.
We contract with various federal and state governmental agencies to provide
O&P services. Pursuant to these contracts, we are subject to various
governmental reviews, audits and investigations to verify our compliance with
the contracts and applicable laws and regulations. Any adverse review, audit or
investigation could result in:
- refunding of amounts we have been paid pursuant to our government
contracts;
- imposition of fines, penalties and other sanctions on us;
- loss of our right to participate in various federal programs; or
- damage to our reputation in various markets.
WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE AND OPERATE OTHER O&P BUSINESSES THAT
WE ACQUIRE IN THE FUTURE.
Part of our business strategy involves the acquisition and integration of
small and medium-sized O&P businesses. We may not be able to successfully
consummate and/or integrate future acquisitions. We continuously review
acquisition prospects that would complement our existing operations, increase
our size and expand into geographic scope of operations or otherwise offer
growth opportunities. The financing for these acquisitions could significantly
dilute our investors or result in an increase in our indebtedness. While we have
no current agreements with respect to any such acquisitions, we may acquire or
make investments in businesses or products in the future. Acquisitions may
entail numerous integration risks and impose costs on us, including:
- difficulties in assimilating acquired operations or products, including
the loss of key employees from acquired businesses;
- diversion of management's attention from our core business concerns;
- adverse effects on existing business relationships with suppliers and
customers;
- risks of entering markets in which we have no or limited experience;
- dilutive issuances of equity securities;
- incurrence of substantial debt;
- assumption of contingent liabilities; and
- incurrence of significant immediate write-offs.
Our failure to successfully complete the integration of future acquisitions
could have a material adverse effect on our results of operations, business and
financial condition.
RISKS RELATING TO THE NOTES
OUR SUBSTANTIAL INDEBTEDNESS COULD IMPAIR OUR FINANCIAL CONDITION AND OUR
ABILITY TO FULFILL OUR OBLIGATIONS UNDER OUR INDEBTEDNESS.
We have substantial debt. After giving pro forma effect to the issuance on
February 15, 2002 of the outstanding notes and the refinancing of our previously
existing credit facility, as of December 31, 2001, we would have had total
indebtedness of approximately $405.9 million. Subject to the restrictions to be
contained in the indenture governing the notes and in the New Credit Facility
and the terms of the
20
indenture governing our outstanding indebtedness, we may incur additional
indebtedness. The level of our indebtedness could have important consequences to
us and you.
For example, our substantial indebtedness could:
- make it more difficult for us to satisfy our obligations with respect to
the notes;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, thereby reducing the availability of
our cash flow to fund working capital, capital expenditures and other
general corporate requirements;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- place us at a competitive disadvantage compared to our competitors that
have proportionately less debt;
- make it more difficult for us to borrow money for working capital,
capital expenditures, acquisitions or other purposes; and
- expose us to the risk of increased interest rates with respect to that
portion of our debt that has a variable rate of interest.
If we are unable to meet our indebtedness obligations, we could be forced
to restructure, seek additional equity capital or sell assets. We may be unable
to obtain financing or sell assets on satisfactory terms or at all.
THE NOTES ARE EFFECTIVELY SUBORDINATED TO OUR SECURED INDEBTEDNESS AND
STRUCTURALLY SUBORDINATED TO THE LIABILITIES OF OUR SUBSIDIARIES THAT DO NOT
GUARANTEE THE NOTES.
The notes are our unsecured obligations and are effectively subordinated to
our secured indebtedness. The effect of this subordination is that if we or a
subsidiary guarantor are involved in a bankruptcy, liquidation, dissolution,
reorganization or similar proceeding or upon a default in payment on, or the
acceleration of, any indebtedness under the New Credit Facility or other secured
indebtedness, our assets and those of the subsidiary guarantors that secure
indebtedness will be available to pay obligations on the notes only after all
indebtedness under the New Credit Facility or other secured indebtedness have
been paid in full from those assets. We may not have sufficient assets remaining
to pay amounts due on any or all of the notes then outstanding. The notes are
also be structurally subordinated to all existing and future obligations,
including indebtedness, of our subsidiaries that do not guarantee the notes, and
the claims of creditors of these subsidiaries, including trade creditors, will
have priority as to the assets of these subsidiaries. See "Description of the
10 3/8% Senior Notes due 2009."
THE RESTRICTIONS CONTAINED IN OUR OUTSTANDING INDEBTEDNESS AND PREFERRED STOCK
MAY LIMIT OUR ABILITY TO OPERATE OUR BUSINESS.
The indenture governing the notes, the indenture governing our 11 1/4%
Senior Subordinated Notes due 2009 (the "Senior Subordinated Notes"), the
certificate of designations for our 7% Redeemable Preferred Stock (the
"Redeemable Preferred Stock") and the New Credit Facility contain a number of
significant restrictions and covenants that limit our and our subsidiaries'
ability to:
- borrow money;
- use assets as security in other borrowings or transactions;
- pay dividends on capital stock or purchase capital stock;
- sell assets, including capital stock of subsidiaries;
- enter into certain transactions with affiliated parties; and
- make certain investments or acquisitions.
21
In addition, the New Credit Facility further requires us to comply with
specified financial ratios and tests.
Events beyond our control, such as prevailing economic conditions and
changes in healthcare regulations, could impair our operating performance, which
could affect our ability to comply with the terms of our debt instruments. We
cannot assure you that we will be able to comply with the provisions of our debt
instruments. Breaching any of these covenants or restrictions or the failure to
comply with our obligations after the lapse of any applicable grace periods
could result in a default under the applicable debt instruments. If there were
an event of default, holders of such defaulted debt could cause all amounts
borrowed under these instruments to be due and payable immediately. We cannot
assure you that our assets or cash flow will be sufficient to fully repay
borrowings under the outstanding debt instruments, either upon maturity or if
accelerated upon an event of default or, if we are required to repurchase the
notes or other debt securities upon a change in control, that we would be able
to refinance or restructure the payments on such debt. See "Description of Other
Indebtedness and Preferred Stock" and "Description of the 10 3/8% Senior Notes
due 2009."
A COURT MAY VOID THE GUARANTEES OF THE NOTES OR SUBORDINATE THE GUARANTEES TO
OTHER OBLIGATIONS OF THE SUBSIDIARY GUARANTORS.
Although standards may vary depending upon the applicable law, generally
under U.S. federal bankruptcy law and comparable provisions of state fraudulent
transfer laws, a court could void all or a portion of the guarantees of the
notes or subordinate the guarantees to other obligations of the guarantors. If
the claims of the holders of these notes against any subsidiary were held to be
subordinated in favor of other creditors of that subsidiary, the other creditors
would be entitled to be paid in full before any payment could be made on the
notes. If one or more of the guarantees is voided or subordinated, we cannot
assure you that after providing for all prior claims, there would be sufficient
assets remaining to satisfy the claims of the holders of the notes.
WE MAY BE UNABLE TO REPURCHASE THE NOTES IF WE EXPERIENCE A CHANGE IN CONTROL.
If we were to experience a change of control, the indenture governing the
notes, the indenture governing the Senior Subordinated Notes and the certificate
of designations governing the Redeemable Preferred Stock require us to offer to
purchase all of the outstanding notes, Senior Subordinated Notes and Redeemable
Preferred Stock. The New Credit Facility restricts our ability to repurchase
notes, including the repurchase of notes under a change of control offer. Our
failure to repay holders tendering notes upon a change of control will result in
an event of default under the notes, the Senior Subordinated Notes and the
Redeemable Preferred Stock. A change of control, or an event of default under
the notes, the Senior Subordinated Notes or the Redeemable Preferred Stock, may
also result in an event of default under our New Credit Facility, which may
result in the acceleration of the indebtedness under that facility requiring us
to repay that indebtedness immediately. If a change of control were to occur, we
cannot assure you that we would have sufficient funds to repay debt outstanding
under the New Credit Facility or to purchase the notes, the Senior Subordinated
Notes, the Redeemable Preferred Stock or any other securities which we would be
required to offer to purchase. We expect that we would require additional
financing from third parties to fund any such purchases, and we cannot assure
you that we would be able to obtain financing on satisfactory terms or at all.
See "Description of Other Indebtedness and Preferred Stock" and "Description of
the 10 3/8% Senior Notes due 2009."
IF YOU FAIL TO EXCHANGE YOUR OUTSTANDING NOTES, THEY WILL CONTINUE TO BE
RESTRICTED SECURITIES AND MAY BECOME LESS LIQUID.
Outstanding notes that you do not tender or we do not accept will,
following the exchange offer, continue to be restricted securities. You may not
offer or sell untendered outstanding notes except in reliance on an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. We will issue new notes in exchange for the outstanding
notes pursuant to the exchange offer only following the satisfaction of
procedures and conditions described elsewhere in this prospectus.
22
These procedures and conditions include timely receipt by the exchange agent of
the outstanding notes and of a properly completed and validly executed letter of
transmittal.
Because we anticipate that most holders of outstanding notes will elect to
exchange their notes, we expect that the liquidity of the market for any
outstanding notes remaining after the completion of the exchange offer may be
substantially limited. Any outstanding notes tendered and exchanged in the
exchange offer will reduce the aggregate principal amount of the outstanding
notes outstanding. Following the exchange offer, if you did not tender your
outstanding notes you generally will not have any further registration rights
and your outstanding notes will continue to be subject to transfer restrictions.
Accordingly, the liquidity of the market for any outstanding notes could be
adversely affected.
THERE MAY BE NO ACTIVE TRADING MARKET FOR THE EXCHANGE NOTES TO BE ISSUED IN THE
EXCHANGE OFFER.
There is no existing market for the exchange notes. We cannot assure you
with respect to:
- the liquidity of any market for the exchange notes that may develop;
- your ability to sell exchange notes; or
- the price at which you will be able to sell the exchange notes.
If a public market were to exist, the exchange notes could trade at prices
that may be higher or lower than their principal amount or purchase price,
depending on many factors, including prevailing interest rates, the market for
similar notes and our financial performance. We do not intend to list the
exchange notes to be issued to you in the exchange offer on any securities
exchange or to seek approval for quotations through any automated quotation
system. No active market for the exchange notes is currently anticipated. The
initial purchasers of the outstanding notes have advised us that they currently
anticipate making a secondary market for the exchange notes, but they are not
obligated to do so. We cannot assure you that an active or liquid public trading
market will develop for the exchange notes.
23
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
On February 15, 2002, we issued the outstanding notes to the initial
purchasers in transactions not registered under the Securities Act of 1933 in
reliance on exemptions from registration under that act. The initial purchasers
then sold the outstanding notes to qualified institutional buyers in reliance on
Rule 144A under the Securities Act and outside the U.S. to non-U.S. persons in
reliance on Regulation S under the Securities Act. Because they have been sold
pursuant to exemptions from registration, the outstanding notes are subject to
transfer restrictions.
In connection with the issuance of the outstanding notes, we entered into a
registration rights agreement with the initial purchasers in which we agreed
with the initial purchasers that, we would:
- use our commercially reasonable efforts to file with the Securities and
Exchange Commission a registration statement related to the exchange
notes on or before 90 days following the issuance of the outstanding
notes;
- use our commercially reasonable efforts to cause the registration
statement to become effective under the Securities Act on or before 150
days following the issuance of the outstanding notes; and
- offer to the holders of the outstanding notes the opportunity to exchange
their outstanding notes for a like principal amount of exchange notes
upon the effectiveness of the registration statement.
Our failure to comply with these agreements would result in liquidated
damages being due on the outstanding notes. A copy of the registration rights
agreement has been filed as an exhibit to the registration statement of which
this prospectus is a part.
Based on existing interpretations of the Securities Act by the staff of the
Securities and Exchange Commission described in several no-action letters to
third parties unrelated to us, and subject to the following sentence, we believe
that the exchange notes issued in the exchange offer may be offered for resale,
resold and otherwise transferred by their holders, other than broker-dealers or
our "affiliates," as that term is defined in Rule 405 under the Securities Act,
without further compliance with the registration and prospectus delivery
provisions of the Securities Act. However, any holder of outstanding notes who
is an affiliate of ours, who is not acquiring the exchange notes in the ordinary
course of such holder's business or who intends to participate in the exchange
offer for the purpose of distributing the exchange notes:
- will not be able to rely on the interpretations by the staff of the
Securities and Exchange Commission described in the above-mentioned
no-action letters;
- will not be able to tender outstanding notes in the exchange offer; and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any sale or transfer of the
outstanding notes unless the sale or transfer is made under an exemption
from these requirements.
We do not intend to seek our own no-action letter, and there is no
assurance that the staff of the Securities and Exchange Commission would make a
similar determination regarding the exchange notes as it has in these no-action
letters to third parties.
As a result of the filing and effectiveness of the registration statement
of which this prospectus is a part, we will not be required to pay an increased
interest rate on the outstanding notes. Following the closing of the exchange
offer, holders of outstanding notes not tendered will not have any further
registration rights except in limited circumstances requiring the filing of a
shelf registration statement, and the outstanding notes will continue to be
subject to restrictions on transfer. Accordingly, the liquidity of the market
for the outstanding notes will be adversely affected.
24
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions stated in this prospectus and
in the letter of transmittal, we will accept all outstanding notes properly
tendered and not withdrawn before 5:00 p.m., New York City time, on the
expiration date. After authentication of the exchange notes by the trustee or an
authenticating agent, we will issue $1,000 principal amount of exchange notes in
exchange for each $1,000 principal amount of outstanding notes accepted in the
exchange offer.
By tendering your outstanding notes for exchange notes in the exchange
offer and signing or agreeing to be bound by the letter of transmittal, you will
represent to us that:
- you will acquire the exchange notes you receive in the exchange offer in
the ordinary course of your business;
- you have no arrangement or understanding with any person to participate
in the distribution of the exchange notes issued to you in the exchange
offer;
- you are not an affiliate of ours or, if you are an affiliate, you will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable;
- you are not engaged in and do not intend to engage in the distribution of
the exchange notes; and
- if you are a broker-dealer that will receive exchange notes for your own
account in exchange for outstanding notes that were acquired as a result
of market-making or other trading activities, that you will deliver a
prospectus, as required by law, in connection with any resale of those
exchange notes.
Broker-dealers that are receiving exchange notes for their own account must
have acquired the outstanding notes as a result of market-making or other
trading activities in order to participate in the exchange offer. Each
broker-dealer that receives exchange notes for its own account under the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of the exchange notes. The letter of transmittal states that by
so acknowledging and by delivering a prospectus, a broker-dealer will not be
admitting that it is an "underwriter" within the meaning of the Securities Act.
We will be required to allow broker-dealers to use this prospectus following the
exchange offer in connection with the resale of exchange notes received in
exchange for outstanding notes acquired by broker-dealers for their own account
as a result of market-making or other trading activities. If required by
applicable securities laws, we will, upon request, make this prospectus
available to any broker-dealer for use in connection with a resale of exchange
notes for a period of 180 days after the consummation of the exchange offer. See
"Plan of Distribution."
The exchange notes will evidence the same debt as the outstanding notes and
will be issued under and entitled to the benefits of the same indenture. The
form and terms of the exchange notes are identical in all material respects to
the form and terms of the outstanding notes except that:
- the exchange notes will be issued in a transaction registered under the
Securities Act; and
- the exchange notes will not be subject to transfer restrictions.
As of the date of this prospectus, $200,000,000 aggregate principal amount
of the outstanding notes was outstanding. In connection with the issuance of the
outstanding notes, we arranged for the outstanding notes to be issued and
transferable in book-entry form through the facilities of DTC, acting as
depositary. The exchange notes will also be issuable and transferable in
book-entry form through DTC.
This prospectus, together with the accompanying letter of transmittal, is
initially being sent to all registered holders of the outstanding notes as of
the close of business on , 2002. We intend to conduct the exchange
offer as required by the Securities Exchange Act of 1934, and the rules and
regulations of the Securities and Exchange Commission under the Exchange Act,
including Rule 14e-1, to the extent applicable.
25
Rule 14e-1 describes unlawful tender practices under the Exchange Act. This
section requires us, among other things:
- to hold our exchange offer open for 20 business days;
- to give 10 days notice of any change in the terms of this exchange offer;
and
- to issue a press release in the event of an extension of the exchange
offer.
The exchange offer is not conditioned upon any minimum aggregate principal
amount of outstanding notes being tendered, and holders of the outstanding notes
do not have any appraisal or dissenters' rights under the Delaware General
Corporation Law or under the indenture in connection with the exchange offer. We
shall be considered to have accepted outstanding notes tendered according to the
procedures in this prospectus when, as and if we have given oral or written
notice of acceptance to the exchange agent. See "-- Exchange Agent." The
exchange agent will act as agent for the tendering holders of outstanding notes
for the purpose of receiving exchange notes from us and delivering them to those
holders.
If any tendered outstanding notes are not accepted for exchange because of
an invalid tender or the occurrence of other events described in this
prospectus, certificates for these unaccepted outstanding notes will be
returned, at our cost, to the tendering holder of the outstanding notes or, in
the case of outstanding notes tendered by book-entry transfer, into the holder's
account at DTC according to the procedures described below, as promptly as
practicable after the expiration date.
Holders who tender outstanding notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the letter of transmittal, transfer taxes related to the exchange of outstanding
notes in the exchange offer. We will pay all charges and expenses, other than
applicable taxes, in connection with the exchange offer. See "-- Solicitation of
Tenders, Fees and Expenses."
Neither we nor our Board of Directors makes any recommendation to holders
of outstanding notes as to whether or not to tender all or any portion of their
outstanding notes pursuant to the exchange offer. Moreover, we have not
authorized anyone to make any such recommendation. Holders of outstanding notes
must make their own decision whether to tender in the exchange offer and, if so,
the amount of outstanding notes to tender after reading this prospectus and the
letter of transmittal and consulting with their advisors, if any, based on their
own financial position and requirements.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "expiration date" shall mean 5:00 p.m., New York City time, on
, 2002, unless we, in our sole discretion, extend the exchange offer,
in which case the term "expiration date" shall mean the latest date to which the
exchange offer is extended.
We expressly reserve the right, in our sole discretion:
- to delay acceptance of any outstanding notes or to terminate the exchange
offer and to refuse to accept outstanding notes not previously accepted,
if any of the conditions described under "-- Conditions" shall have
occurred and shall not have been waived by us;
- to extend the expiration date of the exchange offer;
- to amend the terms of the exchange offer in any manner;
- to purchase or make offers for any outstanding notes that remain
outstanding after the expiration date; and
- to the extent permitted by applicable law, to purchase outstanding notes
in the open market, in privately negotiated transactions or otherwise.
The terms of the purchases or offers described in the fourth and fifth
clauses above may differ from the terms of the exchange offer.
26
Any delay in acceptance, termination, extension or amendment will be
followed as promptly as practicable by oral or written notice to the exchange
agent and by a public announcement. If the exchange offer is amended in a manner
determined by us to constitute a material change, we will promptly disclose the
amendment in a manner reasonably calculated to inform the holders of the
amendment.
We may elect to extend the exchange offer solely because some of the
holders of the outstanding notes do not tender on a timely basis, in order to
give them the ability to participate and avoid the significant reduction in
liquidity associated with holding an unexchanged outstanding note.
INTEREST ON THE EXCHANGE NOTES
The exchange notes will bear interest from February 15, 2002, or the most
recent date on which interest was paid or provided for on the outstanding notes
surrendered for the exchange notes. Accordingly, holders of outstanding notes
that are accepted for exchange will not receive interest that is accrued but
unpaid on the outstanding notes at the time of tender. Interest on the exchange
notes will be payable semi-annually on each February 15 and August 15,
commencing on August 15, 2002.
PROCEDURES FOR TENDERING
Only a holder may tender its outstanding notes in the exchange offer. Any
beneficial owner whose outstanding notes are registered in the name of its
broker, dealer, commercial bank, trust company or other nominee or are held in
book-entry form and who wishes to tender should contact the registered holder
promptly and instruct the registered holder to tender on his behalf. If the
beneficial owner wishes to tender on its own behalf, the beneficial owner must,
before completing and executing the letter of transmittal and delivering its
outstanding notes, either make appropriate arrangements to register ownership of
the outstanding notes in the beneficial owner's name or obtain a properly
completed bond power from the registered holder. The transfer of record
ownership may take considerable time.
The tender by a holder will constitute an agreement between the holder, us
and the exchange agent according to the terms and subject to the conditions
described in this prospectus and in the letter of transmittal.
A holder who desires to tender outstanding notes and who cannot comply with
the procedures described in the prospectus for tender on a timely basis, or
whose outstanding notes are not immediately available, must comply with the
procedures for guaranteed delivery described below.
The method of delivery of outstanding notes and the letter of transmittal
and all other required documents to the exchange agent is at the election and
risk of the holders. Delivery of such documents will be deemed made only when
actually received by the exchange agent or deemed received under the ATOP
procedures described below. In all cases, sufficient time should be allowed to
assure delivery to the exchange agent before the expiration date. No letter of
transmittal or outstanding notes should be sent to us. Holders may also request
that their respective brokers, dealers, commercial banks, trust companies or
nominees effect the tender for holders in each case as described in this
prospectus and in the letter of transmittal.
OUTSTANDING NOTES HELD IN CERTIFICATED FORM
For a holder to validly tender outstanding notes held in physical form, the
exchange agent must receive, before 5:00 p.m., New York city time, on the
expiration date, at its address set forth in this prospectus:
- a properly completed and validly executed letter of transmittal, or a
manually signed facsimile thereof, together with any signature guarantees
and any other documents required by the instructions to the letter of
transmittal; and
- certificates for tendered outstanding notes.
27
OUTSTANDING NOTES HELD IN BOOK-ENTRY FORM
We understand that the exchange agent will make a request promptly after
the date of the prospectus to establish accounts for the outstanding notes at
DTC for the purpose of facilitating the exchange offer, and subject to their
establishment, any financial institution that is a participant in DTC may make
book-entry delivery of outstanding notes by causing DTC to transfer the
outstanding notes into the exchange agent's account for the outstanding notes
using DTC's procedures for transfer.
If you desire to transfer outstanding notes held in book-entry form with
DTC, the exchange agent must receive, before 5:00 p.m., New York City time, on
the expiration date, at its address listed in this prospectus, a confirmation of
book-entry transfer of the outstanding notes into the exchange agent's account
at DTC, which is referred to in this prospectus as a "book-entry confirmation,"
and:
- a properly completed and validly executed letter of transmittal, or
manually signed facsimile thereof, together with any signature guarantees
and other documents required by the instructions in the letter of
transmittal; or
- an agent's message transmitted pursuant to DTC's Automated Tender Offer
Program.
TENDER OF OUTSTANDING NOTES USING DTC'S AUTOMATED TENDER OFFER PROGRAM (ATOP)
The exchange agent and DTC have confirmed that the exchange offer is
eligible for DTC's Automated Tender Offer Program. Accordingly, DTC participants
may electronically transmit their acceptance of the exchange offer by causing
DTC to transfer outstanding notes held in book-entry form to the exchange agent
in accordance with DTC's ATOP procedures for transfer. DTC will then send a
book-entry confirmation, including an agent's message to the exchange agent.
The term "agent's message" means a message transmitted by DTC, received by
the exchange agent and forming part of the book-entry confirmation, which states
that DTC has received an express acknowledgment from the participant in DTC
tendering outstanding notes that are the subject of that book-entry confirmation
that the participant has received and agrees to be bound by the terms of the
letter of transmittal, and that we may enforce such agreement against such
participant. If you use ATOP procedures to tender outstanding notes you will not
be required to deliver a letter of transmittal to the exchange agent, but you
will be bound by its terms just as if you had signed it.
SIGNATURES
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act, unless the outstanding notes tendered with the
letter of transmittal are tendered:
- by a registered holder who has not completed the box entitled "Special
Registration Instructions" or "Special Delivery Instructions" in the
letter of transmittal; or
- for the account of an institution eligible to guarantee signatures.
If the letter of transmittal is signed by a person other than the
registered holder or DTC participant who is listed as the owner, the outstanding
notes must be endorsed or accompanied by appropriate bond powers that authorize
the person to tender the outstanding notes on behalf of the registered holder or
DTC participant who is listed as the owner, in either case signed as the name of
the registered holder(s) who appears on the outstanding notes or the DTC
participant who is listed as the owner, with the signature on the outstanding
notes or bond powers guaranteed by an eligible guarantor institution. If the
letter of transmittal or any outstanding notes or bond powers are signed or
endorsed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, those persons should so indicate when signing, and unless waived by
us, evidence satisfactory to us of their authority to so act must be submitted
with the letter of transmittal.
28
If you tender your outstanding notes through ATOP, signatures and signature
guarantees are not required.
DETERMINATION OF VALIDITY
All questions as to the validity, form, eligibility, including time of
receipt, acceptance and withdrawal of the tendered outstanding notes will be
determined by us in our sole discretion. This determination will be final and
binding. We reserve the absolute right to reject any and all outstanding notes
not properly tendered or any outstanding notes our acceptance of which would, in
the opinion of our counsel, be unlawful. We also reserve the absolute right to
waive any irregularities or conditions of tender as to particular outstanding
notes. Our interpretation of the terms and conditions of the exchange offer,
including the instructions in the letter of transmittal, will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of outstanding notes must be cured within the time we
shall determine. Although we intend to notify holders of defects or
irregularities related to tenders of outstanding notes, neither we, the exchange
agent nor any other person shall be under any duty to give notification of
defects or irregularities related to tenders of outstanding notes nor shall any
of them incur liability for failure to give notification. Tenders of outstanding
notes will not be considered to have been made until the irregularities have
been cured or waived. Any outstanding notes received by the exchange agent that
we determine are not properly tendered or the tender of which is otherwise
rejected by us and as to which the defects or irregularities have not been cured
or waived by us will be returned by the exchange agent to the tendering holder
unless otherwise provided in the letter of transmittal, as soon as practicable
following the expiration date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their outstanding notes and:
- whose outstanding notes are not immediately available;
- who cannot complete the procedure for book-entry transfer on a timely
basis;
- who cannot deliver their outstanding notes, the letter of transmittal or
any other required documents to the exchange agent before the expiration
date; or
- who cannot complete a tender of outstanding notes held in book-entry form
using DTC's ATOP procedures on a timely basis
may effect a tender if they tender through an eligible institution described
under "-- Procedures for Tendering -- Signatures," or, if they tender using
ATOP's guaranteed delivery procedures.
A tender of outstanding notes made by or through an eligible institution
will be accepted if:
- before 5:00 p.m., New York City time, on the expiration date, the
exchange agent receives from an eligible institution a properly completed
and validly executed notice of guaranteed delivery, by facsimile
transmittal, mail or hand delivery, that: (1) sets forth the name and
address of the holder, the registration or certificate number or numbers
of the holder's outstanding notes and the principal amount of the
outstanding notes tendered; (2) states that the tender is being made; and
(3) guarantees that, within three New York Stock Exchange trading days
after the expiration date, a properly completed and validly executed
letter of transmittal or facsimile, together with a certificate(s)
representing the outstanding notes to be tendered in proper form for
transfer, or a confirmation of book-entry transfer into the exchange
agent's account at DTC of outstanding notes delivered electronically, and
any other documents required by the letter of transmittal will be
deposited by the eligible institution with the exchange agent; and
- the properly completed and validly executed letter of transmittal or a
manually signed facsimile thereof, together with the certificate(s)
representing all tendered outstanding notes in proper form for transfer,
or a book-entry confirmation, and all other documents required by the
letter of
29
transmittal are received by the exchange agent within three New York
Stock Exchange trading days after the expiration date.
A tender made through DTC's ATOP system will be accepted if:
- before 5:00 p.m., New York City time, on the expiration date, the
exchange agent receives an agent's message from DTC stating that DTC has
received an express acknowledgment from the participant in DTC tendering
the outstanding notes that they have received and agree to be bound by
the notice of guaranteed delivery; and
- the exchange agent receives, within three New York Stock Exchange trading
days after the expiration date, either: (1) a book-entry confirmation,
including an agent's message, transmitted via DTC's ATOP procedures; or
(2) a properly completed and validly executed letter of transmittal or a
manually signed facsimile thereof, together with the certificate(s)
representing all tendered outstanding notes in proper form for transfer,
or a book-entry confirmation, and all other documents required by the
letter of transmittal.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their outstanding notes according to the
guaranteed delivery procedures described above.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, tenders of outstanding
notes may be withdrawn at any time before 5:00 p.m., New York City time, on the
expiration date. To withdraw a tender of outstanding notes in the exchange
offer:
- a written or facsimile transmission of a notice of withdrawal must be
received by the exchange agent at its address listed below before 5:00
p.m., New York City time, on the expiration date; or
- you must comply with the appropriate procedures of DTC's ATOP system.
Any notice of withdrawal must:
- specify the name of the person having deposited the outstanding notes to
be withdrawn;
- identify the outstanding notes to be withdrawn, including the
registration or certificate number or numbers and principal amount of the
outstanding notes or, in the case of outstanding notes transferred by
book-entry transfer, the name and number of the account at the book-entry
facility to be credited;
- be signed by the same person and in the same manner as the original
signature on the letter of transmittal by which the outstanding notes
were tendered, including any required signature guarantee, or be
accompanied by documents of transfer sufficient to permit the trustee for
the outstanding notes to register the transfer of the outstanding notes
into the name of the person withdrawing the tender; and
- specify the name in which any of these outstanding notes are to be
registered, if different from that of the person who deposited the
outstanding notes to be withdrawn.
All questions as to the validity, form and eligibility, including time of
receipt, of the withdrawal notices will be determined by us, whose determination
shall be final and binding on all parties. Any outstanding notes so withdrawn
will be judged not to have been tendered according to the procedures in this
prospectus for purposes of the exchange offer, and no exchange notes will be
issued in exchange for those outstanding notes unless the outstanding notes so
withdrawn are validly retendered. Any outstanding notes that have been tendered
but are not accepted for exchange will be returned to the holder of the
outstanding notes without cost to the holder or, in the case of outstanding
notes tendered by book-entry transfer, into the holder's account at DTC
according to the procedures described above. This return or crediting will take
place as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. Properly withdrawn outstanding notes may be
retendered by following one of the
30
procedures described above under "-- Procedures for Tendering" at any time
before 5:00 p.m., New York City time, on the expiration date.
CONDITIONS
The exchange offer is subject only to the following conditions:
- the compliance of the exchange offer with securities laws;
- the proper tender of the outstanding notes;
- the representation by the holders of the outstanding notes that they are
not our affiliate, that the exchange notes they will receive are being
acquired by them in the ordinary course of their business and that at the
time the exchange offer is completed the holder had no plan to
participate in the distribution of the exchange notes; and
- no judicial or administrative proceeding is pending or shall have been
threatened that would limit us from proceeding with the exchange offer.
EXCHANGE AGENT
Wilmington Trust Company, the trustee under the indenture, has been
appointed as exchange agent for the exchange offer. In this capacity, the
exchange agent has no fiduciary duties and will be acting solely on the basis of
our directions. Requests for assistance and requests for additional copies of
this prospectus or of the letter of transmittal should be directed to the
exchange agent. You should send certificates for outstanding notes, letters of
transmittal and any other required documents to the exchange agent addressed as
follows:
<Table>
By Overnight Delivery or By Hand in New York:
Registered or Certified Mail:
Wilmington Trust Company
Wilmington Trust Company c/o Computershare Trust Company of New York
Rodney Square North Wall Street Plaza
1100 North Market Street 88 Pine Street, 19th Floor
Wilmington, DE 19890-1615 New York, NY 10005
Attn: Corporate Trust Attn: Wilmington Trust/Hanger
</Table>
By Hand in Delaware:
Wilmington Trust Company
301 West 11th Street
Wilmington, DE 19801-1615
Attn: Corporate Trust, 1st Floor
Facsimile Transmission Number
(for Eligible Institutions Only):
(302) 636-4145
Confirm Receipt of Facsimile by Telephone:
(302) 636-6472
Delivery of the letter of transmittal to an address other than as listed
above or transmission of instructions via facsimile other than as described
above does not constitute a valid delivery of the letter of transmittal.
SOLICITATION OF TENDERS, FEES AND EXPENSES
We will bear the expenses of requesting that holders of outstanding notes
tender those notes for exchange notes. The principal solicitation under the
exchange offer is being made by mail. Additional
31
solicitations may be made by our officers and regular employees and our
affiliates in person, by telegraph, telephone or telecopier.
We have not retained any dealer manager in connection with the exchange
offer and will not make any payments to brokers, dealers or other persons
soliciting acceptances of the exchange offer. We, however, will pay the exchange
agent reasonable and customary fees for its services and will reimburse the
exchange agent for its reasonable out-of-pocket costs and expenses in connection
with the exchange offer and will indemnify the exchange agent for all losses and
claims incurred by it as a result of the exchange offer. We may also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this prospectus,
letters of transmittal and related documents to the beneficial owners of the
outstanding notes and in handling or forwarding tenders for exchange.
We will pay the expenses to be incurred in connection with the exchange
offer, including fees and expenses of the exchange agent and trustee and
accounting and legal fees and printing costs.
You will not be obligated to pay any transfer tax in connection with the
exchange, except if you instruct us to register exchange notes in the name of,
or request that outstanding notes not tendered or not accepted in the exchange
offer be returned to, a person other than you, in which event you will be
responsible for the payment of any applicable transfer tax.
ACCOUNTING TREATMENT
The exchange notes will be recorded at the same carrying value as the
outstanding notes, as reflected in our accounting records on the date of the
exchange. Accordingly, we will recognize no gain or loss for accounting purposes
upon the closing of the exchange offer. We will amortize the expenses of the
exchange offer over the term of the exchange notes under generally accepted
accounting principles.
PARTICIPATION IN THE EXCHANGE OFFER; UNTENDERED NOTES
Participation in the exchange offer is voluntary. Holders of the
outstanding notes are urged to consult their financial and tax advisors in
making their own decisions on what action to take.
As a result of the making of, and upon acceptance for exchange of all
outstanding notes tendered under the terms of, this exchange offer, we will have
fulfilled a covenant contained in the terms of the registration rights agreement
with the Initial Purchasers. Holders of the outstanding notes who do not tender
in the exchange offer will continue to hold their outstanding notes and will be
entitled to all the rights, and subject to the limitations, applicable to the
outstanding notes under the indenture. Holders of outstanding notes will no
longer be entitled to any rights under the registration rights agreement that by
their terms terminate or cease to have further effect as a result of the making
of this exchange offer. All untendered outstanding notes will continue to be
subject to the restrictions on transfer described in the indenture. To the
extent that outstanding notes are tendered and accepted in the exchange offer,
the trading market for untendered outstanding notes could be adversely affected.
This is because there will probably be many fewer outstanding notes that remain
outstanding following the exchange offer, significantly reducing the liquidity
of any untendered notes.
We may in the future seek to acquire any untendered outstanding notes in
the open market or through privately negotiated transactions, through subsequent
exchange offers or otherwise. We intend to make any acquisitions of outstanding
notes following the applicable requirements of the Exchange Act, and the rules
and regulations of the Securities and Exchange Commission under the Exchange
Act, including Rule 14e-1, to the extent applicable. We have no present plan to
acquire any outstanding notes that are not tendered in the exchange offer or to
file a registration statement to permit resales of any outstanding notes that
are not tendered in the exchange offer.
32
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes as described in this prospectus. We will receive in exchange outstanding
notes in like principal amount. The outstanding notes surrendered in exchange
for the exchange notes will be retired and canceled and cannot be reissued.
Accordingly, the issuance of the exchange notes will not result in any change in
our indebtedness.
33
CAPITALIZATION
The following table sets forth the cash and cash equivalents and our
consolidated capitalization as of December 31, 2001 on an actual basis and as
adjusted to give effect to the:
- Sale on February 15, 2002 of $200.0 million principal amount of 10 3/8%
Senior Notes due 2009 and receipt of approximately $194.0 million of net
proceeds therefrom;
- Establishment on February 15, 2002 of a new $75 million senior secured
revolving line of credit (the "New Credit Facility"); and
- Use of such net proceeds, along with approximately $36.5 million borrowed
under the New Credit Facility to retire the approximately $228.4 million
outstanding indebtedness under our previously existing credit facility
and to pay related fees and expenses.
You should read this table in conjunction with our consolidated financial
statements and the related notes to the consolidated financial statements
incorporated by reference in this prospectus. See "Use of Proceeds," "Selected
Consolidated Financial and Operating Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Description of
Other Indebtedness and Preferred Stock."
<Table>
<Caption>
DECEMBER 31, 2001
-------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
(dollars in thousands)
Cash and cash equivalents................................... $ 20,669 $ 20,669
======== ========
Total debt:
Existing Credit Facility.................................. 228,387 --
New Credit Facility(1).................................... -- 36,475
10 3/8% Senior Notes due 2009............................. -- 200,000
11 1/4% Senior Subordinated Notes due 2009................ 150,000 150,000
Seller notes and other debt............................... 19,440 19,440
-------- --------
Total debt........................................ 397,827 405,915
-------- --------
7% Redeemable Preferred Stock............................... 70,739 70,739
-------- --------
Shareholders' equity:
Common stock.............................................. 191 191
Additional paid-in capital................................ 146,674 146,674
Accumulated deficit(3).................................... (535) (3,347)
Treasury stock, cost...................................... (656) (656)
-------- --------
Total shareholders' equity........................ 145,674 142,862
-------- --------
Total capitalization.............................. $614,240 $619,516
======== ========
</Table>
- ---------------
(1) Subject to certain conditions, we expect to be able to borrow up to $75.0
million under the New Credit Facility.
(2) The table above shows our capitalization as of December 31, 2001 adjusted
solely to give effect to the sale of outstanding notes and the New Credit
Facility and the application of the net proceeds therefrom to repay the
$228.4 million outstanding indebtedness under the Existing Credit Facility.
(3) Adjusted for a $2.8 million charge, net of a tax benefit of $1.9 million
calculated at an assumed 40% tax rate, for the extinguishment of debt
related to prepayment of the Existing Credit Facility.
34
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes our selected consolidated financial and
operating data, which you should read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this Form S-4 and our consolidated financial statements and related
notes incorporated herein by reference. The summary selected consolidated
financial data and other financial data as of December 31, 2000 and 2001 and for
each of the years in the three-year period ended December 31, 2001 have been
derived from our consolidated financial statements incorporated herein by
reference, which were audited by PricewaterhouseCoopers LLP. The summary
selected consolidated financial data and other financial data as of December 31,
1997, 1998 and 1999, and for each of the years in the two-year period ended
December 31, 1998 have been derived from our consolidated financial statements,
which were audited by PricewaterhouseCoopers LLP. "Operating Data" below are not
directly derived from our financial statements, but have been presented to
provide additional analysis.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net sales............................... $145,598 $187,870 $346,826 $486,031 $508,053
-------- -------- -------- -------- --------
Gross profit............................ 72,065 94,967 177,750 234,663 267,185
Selling, general and administrative..... 49,285 63,827 113,995 177,392 182,972
Depreciation and amortization........... 2,871 3,294 6,538 11,178 12,488
Amortization of excess cost over net
assets acquired....................... 1,810 2,488 7,520 12,150 12,198
Unusual charges(1)...................... -- -- 6,340 2,364 24,438
-------- -------- -------- -------- --------
Income from operations.................. 18,099 25,358 43,357 31,579 35,089
Interest expense, net................... (4,933) (1,902) (22,177) (47,072) (43,065)
-------- -------- -------- -------- --------
Income (loss) before taxes,
extraordinary item.................... 13,166 23,456 21,180 (15,493) (7,976)
Provision (benefit) for income taxes.... 5,526 9,616 10,194 (1,497) 907
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item.................................. 7,640 13,840 10,986 (13,996) (8,883)
Extraordinary loss on early
extinguishment of debt................ (2,694) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss)....................... $ 4,946 $ 13,840 $ 10,986 $(13,996) $ (8,883)
======== ======== ======== ======== ========
Net income (loss) applicable to common
stock................................. $ 7,614 $ 13,818 $ 8,831 $(18,534) $(13,741)
======== ======== ======== ======== ========
Basic Per Common Share Data
Income (loss) before extraordinary
item.................................. $ 0.65 $ 0.82 $ 0.47 $ (0.98) $ (0.73)
Extraordinary loss on early
extinguishment of debt................ (0.23) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss)....................... $ 0.42 $ 0.82 $ 0.47 $ (0.98) $ (0.73)
======== ======== ======== ======== ========
Shares used to compute basic per common
share amounts......................... 11,793 16,813 18,855 18,910 18,920
======== ======== ======== ======== ========
</Table>
35
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
Diluted Per Common Share Data(2)
Income (loss) before extraordinary
item.................................. $ 0.58 $ 0.75 $ 0.44 $ (0.98) $ (0.73)
Extraordinary loss on early
extinguishment of debt................ (0.21) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss)....................... $ 0.37 $ 0.75 $ 0.44 $ (0.98) $ (0.73)
======== ======== ======== ======== ========
Shares used to compute diluted per
common share amounts.................. 13,138 18,516 20,005 18,910 18,920
======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Capital expenditures.................... $ 2,581 $ 2,859 $ 12,598 $ 9,845 $ 6,697
Gross margin............................ 49.5% 50.5% 51.3% 48.3% 52.6%
Net cash provided by (used in):
Operating activities.................. $ 8,112 $ 18,531 $ (224) $ 3,607 $ 51,166
Investing activities.................. $(18,726) $(33,650) $(444,995) $ 4,624 $ 1,105
Financing activities.................. $ 10,599 $ 18,245 $441,271 $ 6,703 $(62,897)
EBITDA(3)............................... $ 22,780 $ 31,140 $ 63,755 $ 57,271 $ 84,213
EBITDA margin(3)........................ 15.6% 16.6% 18.4% 11.8% 16.6%
Ratio of earnings to fixed charges(4)... 3.1x 6.9x 1.8x N/A N/A
</Table>
<Table>
<Caption>
DECEMBER 31,
----------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 6,557 $ 9,683 $ 5,735 $ 20,669 $ 10,043
Working capital......................... 39,031 49,678 118,428 133,690 109,216
Total assets............................ 157,983 205,948 750,081 761,818 699,907
Long-term debt.......................... 23,237 11,154 426,211 422,838 367,315
Redeemable convertible preferred
stock................................. -- -- 61,343 65,881 70,739
Shareholders' equity.................... $106,320 $162,553 $172,914 $154,380 $145,674
OPERATING DATA:
Patient care centers.................... 213 256 617 620 597
Certified practitioners................. 249 321 962 888 867
Number of states (including D.C.)....... 30 31 42 45 45
Same-center net sales growth(5)......... 11.7% 11.1% 4.1% 6.0% 6.8%
</Table>
- ---------------
(1) The 1999 and 2000 results include integration and restructuring costs of
approximately $6.3 million and approximately $2.4 million, respectively,
incurred in connection with the purchase of NovaCare O&P. The 2001 results
include impairment, restructuring, and improvement costs of approximately
$24.4 million, comprised of: (i) a non-cash charge of approximately $4.8
million related to stock option compensation to Jay Alix & Associates for
services rendered; (ii) restructuring charges of approximately $3.7 million
recorded in the second quarter of 2001 principally related to severance and
lease termination expenses; (iii) an asset impairment loss of approximately
$8.1 million incurred in connection with the October 9, 2001 sale of
substantially all of the manufacturing assets of Seattle Orthopedic Group,
Inc.; and (iv) approximately $7.8 million of other charges primarily
comprised of fees paid to Jay Alix & Associates in connection with
development of the Company's performance improvement plan.
(2) Excludes the effect of the conversion of the 7% Redeemable Convertible
Preferred Stock into Common Stock as it is considered anti-dilutive. For
2000 and 2001, excludes the effect of all dilutive options and warrants as a
result of the Company's net loss for the years ended December 31, 2000 and
2001.
(3) "EBITDA" is defined as net income (loss) before interest, taxes,
depreciation and amortization, and unusual charges consisting of impairment
loss on assets held for sale, and integration, impairment, restructuring and
performance improvement costs. EBITDA is not a measure of performance under
GAAP. While EBITDA should not be considered in isolation or as a substitute
36
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, we understand that EBITDA is customarily used
by financial and credit analysts as a criteria in evaluating healthcare
companies. Moreover, substantially all of our financing arrangements contain
covenants in which EBITDA is used as a measure of financial performance. Our
definition of EBITDA may not be comparable to the definition of EBITDA used
by other companies. EBITDA margin is defined as EBITDA as a percent of net
sales. See table immediately following these footnotes for a reconciliation
of net income (loss) to EBITDA.
(4) For the purpose of calculating the ratio of earnings to fixed charges,
earnings consist of income (loss) before income taxes and extraordinary item
plus fixed charges. Fixed charges consist of interest expense (including
amortization of debt issuance costs, but not losses relating to the early
extinguishment of debt) and 33% of rental expense (considered to be
representative of the interest factors). Fixed charges exceeded earnings by
approximately $15.5 million for the year ended December 31, 2000 and
approximately $8.0 million in the year ended December 31, 2001.
(5) Net sales contributed by those patient-care centers that we owned and
operated during the entire year as well as the entire prior year.
The following table reconciles net income (loss) to EBITDA:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1998 1999 2000 2001
------- ------- ------- -------- -------
Net income (loss)........................................... $ 4,946 $13,840 $10,986 $(13,996) $(8,883)
Extraordinary loss on early extinguishment of debt.......... 2,694 -- -- -- --
Provision (benefit) for income taxes........................ 5,526 9,616 10,194 (1,497) 907
Interest expense, net....................................... 4,933 1,902 22,177 47,072 43,065
Unusual charges............................................. -- -- 6,340 2,364 24,438
Depreciation and amortization............................... 2,871 3,294 6,538 11,178 12,488
Amortization of excess costs over net assets acquired....... 1,810 2,488 7,520 12,150 12,198
------- ------- ------- -------- -------
EBITDA...................................................... $22,780 $31,140 $63,755 $ 57,271 $84,213
======= ======= ======= ======== =======
</Table>
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following is a discussion of our results of operations and financial
position for the periods described below. This discussion should be read in
conjunction with the consolidated financial statements incorporated herein by
reference. Our discussion of our results of operations and financial condition
includes various forward-looking statements about our markets, the demand for
our products and services and our future results. These statements are based on
certain assumptions that we consider reasonable. Our actual results may differ
materially from those indicated forward looking statements. See "Special Notes
on Forward-Looking Statements" and "Risk Factors."
We are the largest operator and developer of orthotic and prosthetic
("O&P") patient-care centers in the United States. Orthotics is the design,
fabrication, fitting and device maintenance of custom-made braces and other
devices (such as spinal, knee and sports-medicine braces) that provide external
support to treat musculoskeletal disorders. Musculoskeletal disorders are
ailments of the back, extremities or joints caused by traumatic injuries,
chronic conditions, diseases, congenital disorders or injuries resulting from
sports or other activities. Prosthetics is the design, fabrication and fitting
of custom-made artificial limbs for patients who have lost limbs as a result of
traumatic injuries, vascular diseases, diabetes, cancer or congenital disorders.
We have two segments, the O&P patient-care services segment, which generated
approximately 93.3% of our net sales in 2001, and the distribution of O&P
components segment, which accounted for 5.8% of our net sales in 2001. The
manufacture of finished O&P products segment, which was sold on October 9, 2001,
accounted for the remaining 0.9% of our net sales. Our operations are located in
44 states and the District of Columbia, with a substantial presence in
California, Florida, Georgia, Illinois, New York, Ohio, Pennsylvania and Texas.
We generate net sales primarily from patient-care services related to the
fabrication, fitting and maintenance of O&P devices. During 2001, we increased
same-center sales by 6.8% over 2000. Our sales growth in 2000 was also
principally driven by 6.0% same-center sales growth in our existing practices.
Prior to calendar 2000, our growth in net sales resulted primarily from an
aggressive program of acquiring and developing O&P patient-care centers and
secondarily from same-center sales. Similarly, growth in our O&P distribution
business was attributable primarily to acquisitions. At December 31, 2001, we
operated 597 patient-care centers and three distribution facilities, down from
620 and six, respectively, as of December 31, 2000, due to reductions relating
to our performance improvement initiatives in 2001.
We calculate cost of goods sold in accordance with the gross profit method.
We base the estimates used in applying the gross profit method on the actual
results of the most recently completed fiscal year and other factors affecting
cost of goods sold. Estimated cost of goods sold is adjusted when the annual
physical inventory is taken and compiled, generally in the fourth quarter, and a
new accrual rate is established.
Our revenues and results of operations are affected by seasonal
considerations. The adverse weather conditions often experienced in certain
geographical areas of the United States during the first quarter of each year,
together with a greater degree of patients' sole responsibility for their
insurance deductible payment obligations during the beginning of each calendar
year, have contributed to lower net sales during that quarter. Our fourth
quarter is also adversely affected by weather and a significant number of
holidays, the impact of which is somewhat offset by patients' desire to use up
insurance.
We believe that the expansion of our business through a combination of
continued same-center sales growth, which has averaged 7.9% over the last five
years, the addition of new facilities and a program of selective acquisitions is
critical to the continued improvement in our profitability.
38
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items of
our statements of operations as a percentage of our net sales:
<Table>
<Caption>
1999 2000 2001
----- ----- -----
Net sales................................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 48.7 51.7 47.4
Gross profit................................................ 51.3 48.3 52.6
Selling, general and administrative......................... 32.9 36.5 36.0
Depreciation and amortization............................... 1.9 2.3 2.5
Amortization of excess cost over net assets acquired........ 2.2 2.5 2.4
Unusual charges............................................. 1.8 0.5 4.8
Income from operations...................................... 12.5 6.5 6.9
Interest expense, net....................................... (6.4) (9.7) (8.5)
Income (loss) before taxes.................................. 6.1 (3.2) (1.6)
Provision (benefit) for income taxes........................ 2.9 (0.3) 0.1
Net income (loss)........................................... 3.2 (2.9) (1.7)
Net income (loss) applicable to common stock................ 2.5 (3.8) (2.7)
</Table>
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2000
Net Sales. Net sales for the year ended December 31, 2001 reached $508.1
million, an increase of $22.1 million or 4.5%, over the prior year's net sales
of $486.0 million. The increase in net sales was primarily due to a 6.8%
increase in same center sales in our O&P practices offset by a reduction in net
sales due to the sale of Seattle Orthopedic Group, Inc.
Gross Profit. Gross profit for the year ended December 31, 2001 improved
by $32.5 million, or 4.3 percentage points as a percentage of net sales, to
$267.2 million, or 52.6% of net sales, compared to $234.7 million, or 48.3% of
net sales, in the prior year. The gross margin was favorably impacted by the
increase in net sales along with a reduction in the costs of materials and labor
resulting from the impact of various performance improvement initiatives
implemented during 2001.
Selling, General and Administrative. Selling, general and administrative
expenses for the year ended December 31, 2001 were $183.0 million, an increase
of $5.6 million, or 3.2%, compared to $177.4 million for the year ended December
31, 2000. The increase in selling, general and administrative expenses in
dollars was primarily the result of an increase of $14.0 million in performance
based bonus program costs and an increase in legal fees of $1.2 million offset
by (i) a decrease of $6.8 million in labor expense, (ii) a decrease of $1.7
million in bad debt expense, and (iii) a reduction in travel expenses of $1.1
million. Selling, general and administrative expenses as a percentage of net
sales decreased to 36.0% for the year ended December 31, 2001, as compared to
36.5% for the year ended December 31, 2000. The decrease in selling, general and
administrative expenses as a percentage of sales was primarily the result of the
aforementioned increase in net sales.
Depreciation and Amortization. Depreciation and amortization for the year
ended December 31, 2001 amounted to $12.5 million, a 11.6% increase in such
costs over the prior year ended December 31, 2000. The increase is attributable
to our purchases of fixed assets. Amortization of goodwill for the year ended
December 31, 2001 increased by 0.4% to $12.2 million, compared to the year ended
December 31, 2000. As discussed below under "New Accounting Standards", we will
discontinue amortization related to goodwill and other indefinite lived
intangible assets commencing January 1, 2002 pursuant to recently issued
Statement of Financial Accounting Standards No. 142.
Unusual Charges. Unusual charges for the year ended December 31, 2001
amounted to $24.4 million, which consisted of the following one-time costs: (i)
a non-cash charge of $4.8 million
39
related to stock compensation to Jay Alix & Associates for services rendered;
(ii) restructuring charges of $3.7 million recorded in the second quarter of
2001 principally related to severance and lease termination expenses; (iii) an
$8.1 million loss on the disposal of substantially all the manufacturing assets
of SOGI; and (iv) $7.8 million in other charges primarily related to fees paid
to Jay Alix & Associates in connection with development of our performance
improvement plan. During the year ended December 31, 2000, we recognized $1.7
million of integration costs in connection with the acquisition of NovaCare O&P
and $0.7 million of restructuring costs. Additional information relating to
these costs is set forth below under "-- Unusual Charges."
Income from Operations. Principally as a result of the above, income from
operations for the year ended December 31, 2001 was $35.1 million, an increase
of $3.5 million, or 11.1%, from the year ended December 31, 2000. Income from
operations as a percentage of net sales increased to 6.9% in the year ended
December 31, 2001 from 6.5% in the year ended December 31, 2000.
Interest Expense, Net. Net interest expense for the year ended December
31, 2001 was $43.1 million, a decrease of $4.0 million from $47.1 million
incurred in the year ended December 31, 2000. Interest expense as a percentage
of net sales decreased to 8.5% for the year ended December 31, 2001 from 9.7%
for the year ended December 31, 2000. The decrease in interest expense as a
percentage of net sales was primarily attributable to the net sales increase, a
decrease of $26.9 million in average borrowings and a reduction in LIBOR.
Income Taxes. The provision for income taxes for the year ended December
31, 2001 was $0.9 million compared to a benefit from income taxes of $1.5
million for the year ended December 31, 2000. We recorded a provision for income
taxes in 2001 due to the impact of nondeductible amortization on low levels of
pre-tax loss.
Net Loss. As a result of the above, we recorded a net loss of $8.9 million
for the year ended December 31, 2001, compared to a net loss of $14.0 million in
the prior year, an improvement of $5.1 million. We recorded a net loss
applicable to common stock of $13.7 million, or $0.73 per dilutive common share,
for the year ended December 31, 2001, compared to net loss applicable to common
stock of $18.5 million, or $0.98 per dilutive common share, for the year ended
December 31, 2000.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
Net Sales. Net sales for the year ended December 31, 2000, were $486.0
million, an increase of $139.2 million, or 40.1%, over net sales of $346.8
million for the year ended December 31, 1999. The increase was principally
attributable to the acquisition of NovaCare O&P on July 1, 1999.
Gross Profit. Gross profit in the year ended December 31, 2000 was $234.7
million, an increase of $56.9 million, or 32.0%, from gross profit of $177.8
million for the year ended December 31, 1999. Gross profit as a percentage of
net sales decreased to 48.3% in 2000 from 51.3% in 1999. This decrease in the
gross profit margin was primarily attributable to higher materials costs and
changes in product mix.
Selling, General and Administrative. Selling, general and administrative
expenses in the year ended December 31, 2000 increased by $63.4 million, or
55.6%, compared to the year ended December 31, 1999. Selling, general and
administrative expenses as a percentage of net sales increased to 36.5% in 2000
as compared to 32.9% in 1999. The increase in selling, general and
administrative expenses was primarily due to the NovaCare O&P acquisition on
July 1, 1999 and primarily occurred in payroll, rent and bad debt expenses.
Depreciation and Amortization. Depreciation and amortization for the year
ended December 31, 2000 amounted to $11.2 million, a 72.3% increase over the
prior year. Amortization of excess cost over net assets acquired amounted to
$12.2 million in 2000, a 62.7% increase over 1999. Both increases were primarily
attributable to our acquisition of NovaCare O&P on July 1, 1999, which impacted
the full year 2000 and only the latter half of 1999.
40
Unusual Charges. During the year ended December 31, 2000, we recognized
$2.4 million of integration and restructuring costs in connection with our
acquisition on July 1, 1999 of NovaCare O&P, a substantial decrease from $6.3
million of integration and restructuring costs recognized in the prior year.
Additional information relating to these costs is set forth below under
"-- Unusual Charges."
Income from Operations. Principally as a result of the above, income from
operations in 2000 was $31.6 million, a decrease of $11.8 million, or 27.2%,
from the prior year. Income from operations as a percentage of net sales
decreased to 6.5% in 2000 from 12.5% for the prior year.
Interest Expense, Net. Net interest expense for the year ended December
31, 2000 was $47.1 million, an increase of $24.9 million over $22.2 million
incurred in 1999. Interest expense as a percentage of net sales in 2000
increased to 9.7% from 6.4% for 1999. The increase in interest expense was
primarily attributable to $255.0 million borrowed under our existing credit
facility and $150.0 million in senior subordinated notes issued to acquire
NovaCare O&P, as well as an increase in variable borrowing rates.
Income Taxes. As a result of the loss, we recorded a benefit from income
taxes for the year ended December 31, 2000 of $1.5 million compared to a
provision for income taxes of $10.2 million for the year ended December 31,
1999.
Net Loss. As a result of the above, we recorded a net loss of $14.0
million for the year ended December 31, 2000, compared to net income of $11.0
million in the prior year. We recorded a net loss applicable to common stock of
$18.5 million, or $0.98 per dilutive common share, for the year ended December
31, 2000, compared to net income applicable to common stock of $8.8 million, or
$0.44 per dilutive common share, for the year ended December 31, 1999.
UNUSUAL CHARGES
RESTRUCTURING AND INTEGRATION COSTS
In connection with the acquisition of NovaCare O&P on July 1, 1999, we
implemented a restructuring plan. The 1999 plan contemplated lease termination
and severance costs associated with the closure of certain patient-care centers
and corporate functions made redundant after the NovaCare O&P acquisition. The
costs associated with the former NovaCare O&P centers were recorded in
connection with the purchase price allocation of that acquisition on July 1,
1999. The costs associated with our existing patient-care centers were charged
to operations during the third quarter of 1999. As of December 31, 2000, the
planned reduction in work force had been completed and we closed all
patient-care centers that were identified for closure in 1999. Lease payments on
these closed patient-care centers are expected to be paid through 2003. During
the year ended December 31, 2001, management reversed $0.8 million of the lease
termination restructuring reserve as a result of favorable lease buyouts and
subleasing activity.
In December 2000, our management and the Board of Directors determined that
additional performance improvement initiatives needed to be adopted. In December
2000, we retained Jay Alix & Associates to do an assessment of the opportunities
available for improved financial and operating performance. The first phase of
their plan called for the termination of 234 employees, for which we recorded
$0.7 million in severance costs during 2000.
We then began, in January 2001, to develop, with the assistance of Jay Alix
& Associates, a comprehensive performance improvement program consisting of 14
performance improvement initiatives aimed at improving cash collections,
reducing working capital requirements and improving operating performance. In
connection with the implementation of these initiatives, we recorded in the
second quarter of 2001 $3.7 million in restructuring and asset impairment costs
($4.5 million expense offset by the above-mentioned approximate $0.8 million
benefit). These initiatives called for the closure of 37 additional patient-care
centers and the termination of 135 additional employees. In the fourth quarter
of 2001, the lease restructuring component of the plan was amended as seven
additional properties, the closure of which was originally contemplated but not
finalized, were added to the list of restructured facilities. As of December 31,
2001, all properties, except the seven in the amendment, had been vacated and
substantially
41
all of the employees had been terminated. All payments under the severance
initiative are expected to be made during the first quarter of 2002. The
remaining seven properties in the lease initiative are expected to be vacated by
the end of the second quarter of 2002. All payments under these initiatives for
lease and severance costs are expected to be paid by December 31, 2004.
PERFORMANCE IMPROVEMENT COSTS
In 2001, the Company paid or accrued $7.8 million in fees and costs
associated with the various performance improvement initiatives. Included in
that total, in connection with its contract, Jay Alix & Associates was paid $6.3
million, comprised of $5.2 million based on that firm's hourly rates and $1.1
million in success fees. We also recorded a $4.8 million non-cash charge related
to stock option compensation paid for that firm's services.
IMPAIRMENT LOSS ON ASSETS HELD FOR SALE
In connection with the analysis of our continuing business, we determined
that the manufacture of orthotic and prosthetic components and devices was not
one of our core businesses as it represented only 0.9% of our net sales for the
year ended December 31, 2001 and 1.7% for the year ended December 31, 2000. In
July 2001, we agreed to the general terms of a sale of substantially all of the
manufacturing assets of Seattle Orthopedic Group, Inc. to United States
Manufacturing Company for $20.0 million. The sale resulted in our recording, in
the second quarter of 2001, an asset impairment loss of $8.1 million, as the net
book value of the assets was $26.2 million, while net proceeds from the sale of
the assets were $18.1 million.
PERFORMANCE IMPROVEMENT PLAN
In January 2001, we developed, with the assistance of our consultant, Jay
Alix & Associates, a performance improvement plan which contained many
initiatives that were designed to effect further cost savings through improved
utilization and efficiency of support services, enhanced purchasing and
inventory management, improved collection methods and consolidation of
distribution services. In addition, we are seeking to enhance net sales through
improved marketing and branding initiatives and more efficient billing
procedures.
During 2001, we accomplished the following under our performance
improvement plan:
- improved our cash flow by accelerating the collection of our accounts
receivable;
- reduced our inventory carrying levels and improved the rate at which we
turn our inventory levels through more centralized inventory management;
- consolidated our distribution facilities from six to three, thereby
reducing our materials handling, lease and freight expenses and staffing
levels;
- reduced our overhead expense by eliminating and consolidating corporate
expenses;
- increased the use of our shared fabrication facilities and decreased the
use of more expensive third parties to fabricate products for us;
- instituted our Best Value program, in which our practitioners are given
the information to select the most appropriate and cost-effective
materials, component parts and finished products, which, in conjunction
with our negotiation of discounts from our preferred vendors, reduced our
costs of materials, component parts and finished products;
- developed a plan to transition to a common systems platform for billing,
collections and application of cash in our patient-care centers; and
- developed a new marketing and sales organization plan for 2002, designed
to initiate programs to continue to enhance our net sales.
42
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our working capital at December 31, 2001 was approximately $109.2 million
compared to $133.7 million at December 31, 2000. Our cash and cash equivalents
amounted to $10.0 million at December 31, 2001 and $20.7 million at December 31,
2000. The ratio of current assets to current liabilities was 2.3 to 1 at
December 31, 2001, compared to 2.5 to 1 at December 31, 2000.
Net cash provided by operating activities in the year ended December 31,
2001 increased to $51.2 million, from $3.6 million in the year ended December
31, 2000. The $47.6 million improvement resulted from improvements in operations
and working capital management resulting from our performance improvement
initiatives.
Net cash provided by investing activities was $1.1 million for the year
ended December 31, 2001. The funds were generated primarily from the $15.1
million from the sale of substantially all of the manufacturing related assets
of Seattle Orthopedic Group, Inc. Of these funds, the company used $6.7 million
to purchase fixed assets and $8.3 million for the payment of contingent purchase
price called for by earnout agreements from prior acquisitions of patient-care
practices.
Net cash used in financing activities was $62.9 million for the year ended
December 31, 2001, resulting from: (i) scheduled principal payments of our
existing long-term debt of $38.2 million, (ii) a paydown of $9.9 million of our
revolving line of credit, and (iii) repayment of existing long-term debt of
$13.9 million from the proceeds of the sale of the manufacturing assets.
On February 15, 2002, we issued $200.0 million aggregate principal amount
of 10 3/8% Senior Notes due 2009 ("Senior Notes") in a private placement exempt
from registration under the Securities Act of 1933. We also closed, concurrent
with the Senior Notes, a new $75.0 million senior secured revolving line of
credit ("New Revolving Credit Facility"). The proceeds from these transactions
were used to retire the existing revolving line of credit, Tranche A & B term
loans, and for fees related to the transaction.
The Senior Notes mature on February 15, 2009 and do not require any
prepayments of principal prior to maturity. Interest on the Senior Notes accrued
from February 15, 2002, and is payable semi-annually on February 15 and August
15 of each year, commencing August 15, 2002. Payment of principal and interest
on the Senior Notes is guaranteed on a senior unsecured basis by all of our
current and future domestic subsidiaries. On and after February 15, 2006, we may
redeem all or part of the Senior Notes at 105.188% of principal amount during
the 12 month period commencing on February 15, 2006, at 102.594% of principal
amount if redeemed during the 12-month period commencing on February 15, 2007,
and at 100% of principal amount if redeemed on or after February 15, 2008.
Before February 15, 2005, we may redeem up to 35% of the aggregate principal
amount of the Senior Notes with the cash proceeds of certain equity offerings,
provided that at least 65% of the aggregate principal amount of Senior Notes
remains outstanding after the redemption. Upon the occurrence of certain
specified change of control events, unless we have exercised our option to
redeem all the Senior Notes as described above, each holder of a Senior Note
will have the right to require us to repurchase all or a portion of such
holder's Senior Notes at a purchase price in cash equal to 101% of the principal
amount, plus accrued and unpaid interest, if any, to the date of repurchase. The
Senior Notes were issued under an indenture, dated as of February 15, 2002, with
Wilmington Trust Company, as trustee. The indenture limits our ability to, among
other things, incur additional indebtedness, create liens, pay dividends on or
redeem capital stock, make certain investments, make restricted payments, make
certain dispositions of assets, engage in transactions with affiliates, engage
in certain business activities and engage in mergers, consolidations and certain
sales of assets.
The New Revolving Credit Facility, which was provided by a syndicate of
banks and other financial institutions led by BNP Paribas, is a senior secured
revolving credit facility providing for loans of up to $75.0 million and will
terminate on February 15, 2007. Borrowings under the New Revolving Credit
Facility will bear interest, at our option, at an annual rate equal to LIBOR
plus 3.50% or the Base Rate (as defined in the New Revolving Credit Facility),
plus 2.50% in each case, subject to adjustments based on financial performance.
Our obligations under the New Revolving Credit Facility are guaranteed by our
subsidiaries and are secured by a first priority perfected security interest in
our subsidiaries' shares, all of
43
our assets and all of the assets of our subsidiaries. Borrowings under the New
Revolving Credit Facility are prepayable at any time without premium or penalty.
The New Revolving Credit Facility requires compliance with various financial
covenants, including a minimum consolidated interest coverage ratio, minimum
consolidated EBITDA, a maximum total leverage ratio, a maximum senior secured
leverage ratio and a minimum fixed charge coverage ratio, as well as other
covenants.
The New Revolving Credit Facility contains customary events of default and
is subject to various mandatory prepayments and commitment reductions.
We believe that, based on current levels of operations and anticipated
growth, cash generated from operations, together with other available sources of
liquidity, including borrowings available under the New Revolving Credit
Facility, will be sufficient for the foreseeable future to fund anticipated
capital expenditures and make required payments of principal and interest on our
debt, including payments due on the Senior Notes and obligations under the New
Revolving Credit Facility. In addition, we continually evaluate potential
acquisitions and expect to fund such acquisitions from our available sources of
liquidity, as discussed above.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table sets forth the unaudited contractual obligations and
commercial commitments of the Company as of December 31, 2001:
<Table>
<Caption>
PAYMENTS DUE BY PERIOD (000S)
------------------------------------------------------------------------
TOTAL 2002 2003 2004 2005 2006 THEREAFTER
-------- ------- ------- -------- ------- ------- ----------
Long-term debt......... $397,827 $30,512 $24,066 $ 95,494 $38,968 $57,825 $150,962
Redeemable preferred
stock................ 128,726 -- -- -- -- -- 128,726
Operating leases....... 72,546 20,176 16,826 12,928 9,160 5,628 7,828
Unconditional purchase
commitments.......... 42,900 7,500 8,500 9,500 8,700 8,700 --
Other long-term
obligations.......... 8,893 5,487 2,160 534 186 154 372
-------- ------- ------- -------- ------- ------- --------
Total contractual cash
obligations.......... $650,892 $63,675 $51,552 $118,456 $57,014 $72,307 $287,888
======== ======= ======= ======== ======= ======= ========
</Table>
The following table sets forth the pro forma, unaudited contractual
obligations and commercial commitments of the Company as of December 31, 2001 to
reflect the effect of the issuance of new Senior Notes and the new Revolving
Credit Facility that closed on February 15, 2002:
<Table>
<Caption>
PAYMENTS DUE BY PERIOD (000S)
-----------------------------------------------------------------------
TOTAL 2002 2003 2004 2005 2006 THEREAFTER
-------- ------- ------- ------- ------- ------- ----------
Long-term debt.......... $397,827 $11,313 $ 4,867 $ 1,496 $ 571 $ 230 $379,350
Redeemable preferred
stock................. 128,726 -- -- -- -- -- 128,726
Operating leases........ 72,546 20,176 16,826 12,928 9,160 5,628 7,828
Unconditional purchase
commitments........... 42,900 7,500 8,500 9,500 8,700 8,700 --
Other long-term
obligations........... 8,893 5,487 2,160 534 186 154 372
-------- ------- ------- ------- ------- ------- --------
Total contractual cash
obligations........... $650,892 $44,476 $32,353 $24,458 $18,617 $14,712 $516,276
======== ======= ======= ======= ======= ======= ========
</Table>
MARKET RISK
We are exposed to the market risk that is associated with changes in
interest rates. To manage that risk, in March 2002, we entered into interest
rate swaps to modify our exposure to interest rate movements
44
and reduce borrowing costs. We entered into $100.0 million fixed-to-floating
interest rate swaps, consisting of floating rate instruments benchmarked to
LIBOR. We are exposed to potential losses in the event of nonperformance by the
counterparties to the swap agreements.
CRITICAL ACCOUNTING ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon our consolidated financial statements that have been
prepared in accordance with generally accepted accounting principles in the
United States ("U.S. GAAP"). The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. U.S.
GAAP provides the framework from which to make these estimates, assumptions and
disclosures. We choose accounting policies within U.S. GAAP that management
believes are appropriate to accurately and fairly report our operating results
and financial position in a consistent manner. Management regularly assesses
these policies in light of current and forecasted economic conditions. Our
accounting policies are stated in Note B to the consolidated financial
statements incorporated by reference herein. We believe the following accounting
policies are critical to understanding the results of operations and affect the
more significant judgments and estimates used in the preparation of the
consolidated financial statements.
- Revenue Recognition: Revenues on the sale of orthotic and prosthetic
devices and associated services to patients are recorded when the device
is accepted by the patient. Revenues on the sale of orthotic and
prosthetic devices to customers by our distribution segment are recorded
upon the shipment of products, in accordance with the terms of the
invoice. Deferred revenue represents deposits made prior to the final
fitting and acceptance by the patient and unearned service contract
revenue. Revenue is recorded at its net realizable value taking into
consideration all governmental and contractual adjustments and discounts.
Management regularly assesses the recoverability of the related amounts
of receivable from the vendors that participate in the related
cooperative advertising programs.
- Inventories: Inventories, which consist principally of purchased parts
and work in process, are stated at the lower of cost or market using the
first-in, first-out (FIFO) method. We calculate cost of goods sold in
accordance with the gross profit method. We base the estimates used in
applying the gross profit method on the actual results of the most
recently completed fiscal year and other factors affecting cost of goods
sold during the current reporting periods. Estimated cost of goods sold
during the period is adjusted when the annual physical inventory is
taken. Management adjusts its reserve for inventory obsolescence whenever
the facts and circumstances indicate that the carrying cost of certain
inventory items are in excess of its market price.
- Intangible Assets: Excess cost over net assets acquired represents the
excess of purchase price over the value assigned to net identifiable
assets of purchased businesses and is amortized using the straight-line
method over 40 years. Non-compete agreements are recorded based on
agreements entered into by us and are amortized over their estimated
useful lives ranging from 5 to 7 years using the straight-line method.
The remainder of the intangible assets are recorded at cost and are
amortized over their estimated useful lives of up to 16 years using the
straight-line method. Whenever the facts and circumstances indicate that
the carrying amounts of these intangibles may not be recoverable,
management reviews and assesses the future cash flows expected to be
generated from the related intangible for possible impairment. Impairment
is recognized by a charge to operating results and a reduction in the
carrying value of the intangible asset.
NEW ACCOUNTING STANDARDS
On June 29, 2001, the FASB unanimously approved its proposed Statements of
Financial Accounting Standards No. 141 (SFAS 141), Business Combinations, and
No. 142 (SFAS 142), Goodwill and Other Intangible Assets.
45
SFAS 141 supercedes Accounting Principles Board (APB) Opinion No. 16,
Business Combinations. The most significant changes made by SFAS 141 are: (1)
requiring that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, (2) establishing specific criteria
for the recognition of intangible assets separately from goodwill, and (3)
requiring unallocated negative goodwill to be written off immediately as an
extraordinary gain rather than being deferred and amortized. The adoption of
SFAS 141 did not have a material impact on our financial statements as no
acquisitions were made subsequent to June 30, 2001.
SFAS 142 supercedes APB 17, Intangible Assets. SFAS 142 primarily addresses
accounting for goodwill and intangible assets subsequent to their acquisition
(i.e., the post-acquisition accounting). The provisions of SFAS 142 will be
effective for fiscal years beginning after December 15, 2001. SFAS 142 must be
adopted at the beginning of a fiscal year. The most significant changes made by
SFAS 142 are: (1) goodwill and indefinite lived intangible assets will no longer
be amortized, (2) goodwill will be tested for impairment at least annually at
the reporting unit level, (3) intangible assets deemed to have an indefinite
life will be tested for impairment at least annually, and (4) the amortization
period of intangible assets with finite lives will no longer be limited to 40
years.
We adopted SFAS 142 effective January 1, 2002. Due to the application of
the nonamortization provisions of SFAS 142, annual amortization in the amount of
$12.8 million will no longer be recorded. In addition, we will reclassify an
assembled workforce intangible asset with an unamortized balance of $4.8 million
(along with a deferred tax liability of $2.0 million) to goodwill at the date of
adoption.
We will test goodwill for impairment using a two-step process prescribed in
SFAS 142. The first step is to identify or screen for potential impairment,
while the second step is to measure the amount of the impairment, if any. We
expect to perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002 in the first quarter of
2002. Any impairment charge resulting from these transitional impairment tests
will be reflected as the cumulative effect of a change in accounting principle
in the first quarter of 2002. We are in the process of making the determinations
as to what our reporting units are and what amounts of goodwill, intangible
assets, other assets, and liabilities should be allocated to those reporting
units. We have not yet determined what the effect of these tests, if any, will
be on our earnings and financial position.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 provides guidance on the
accounting for the impairment or disposal of long-lived assets, and applies to
all long-lived assets (including discontinued operations) and consequently
amends APB Opinion No. 30, "Reporting Results of Operations -- Reporting the
Effects of Disposal of Segment of a Business." SFAS No. 144 develops one
accounting model (based on the model in SFAS No. 121) for long-lived assets that
are to be disposed of by sale, as well as addresses the principal implementation
issues. SFAS No. 144 requires that long-lived assets that are to be disposed of
by sale be measured at the lower of book value or fair value less cost to sell.
We do not expect SFAS No. 144 to have a material effect on our financial
statements.
OTHER
Inflation has not had a significant effect on our operations, as increased
costs to us generally have been offset by increased prices of products sold.
46
DESCRIPTION OF THE 10 3/8% SENIOR NOTES DUE 2009
We issued the notes under an indenture among us, the subsidiary guarantors
and Wilmington Trust Company, as trustee, in a private transaction that is not
subject to the registration requirements of the Securities Act. The terms of the
notes include those stated in the indenture and those made part of the indenture
by reference to the Trust Indenture Act of 1939.
The indenture for the outstanding notes will also govern the exchange
notes. In connection with the issuance of the outstanding notes, we entered into
a registration rights agreement in which we agreed to deliver this prospectus to
you and use our commercially reasonable efforts to complete the exchange offer
of exchange notes for outstanding notes or file or cause to become effective a
registration statement covering the resale of the outstanding notes.
The following description is a summary of the material provisions of the
indenture and the registration rights agreement and references to the "notes"
refers to both the outstanding notes and the exchange notes, unless specifically
stated otherwise. It does not restate those agreements in their entirety. We
urge you to read the indenture and the registration rights agreement because
they, and not this description, define your rights as holders of the notes.
Copies of the indenture and the registration rights agreement are available as
set forth below under "-- Additional Information." Certain defined terms used in
this description but not defined below under "-- Certain Definitions" have the
meanings assigned to them in the indenture. In this Description of the Notes,
"we," "us" and "our" refer only to Hanger Orthopedic Group, Inc. and not to any
of its subsidiaries.
The registered Holder of a note will be treated as its owner of for all
purposes. Only registered Holders will have rights under the indenture.
BRIEF DESCRIPTION OF THE NOTES AND THE SUBSIDIARY GUARANTEES
THE NOTES
The notes are:
- our general unsecured obligations;
- senior in right of payment to all of our existing and any future
subordinated Indebtedness, including the Senior Subordinated Notes;
- pari passu in right of payment with all of our existing and any future
unsecured subordinated Indebtedness that it not by its terms expressly
subordinated to the notes;
- effectively junior in right of payment to our existing and future secured
Indebtedness, including up to $75.0 million under the Credit Agreement,
to the extent of the value of the collateral securing that Indebtedness;
and
- guaranteed by all of our existing and future domestic subsidiaries.
THE SUBSIDIARY GUARANTEES
Each subsidiary guarantee of the notes is:
- a senior unsecured obligation of each Subsidiary Guarantor;
- senior in right of payment to all existing and any future subordinated
Indebtedness, including the guarantees of the Senior Subordinated Notes,
of that Subsidiary Guarantor;
- pari passu in right of payment with all existing and any future
Indebtedness of that Subsidiary Guarantor that is not by its terms
expressly subordinated to the guarantee of the notes; and
- effectively junior in right of payment to the existing and future secured
Indebtedness of that Subsidiary Guarantor, including the guarantee of our
Credit Agreement, to the extent of the value of the collateral securing
that Indebtedness.
47
As of the date of the indenture, all of our existing subsidiaries were
"Restricted Subsidiaries." However, under the circumstances described below
under "-- Designation of Restricted and Unrestricted Subsidiaries," we will be
permitted to designate certain of our subsidiaries as "Unrestricted
Subsidiaries." Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants in the indenture. Our Unrestricted Subsidiaries will not
guarantee the notes.
PRINCIPAL, MATURITY AND INTEREST
We initially issued $200.0 million in aggregate principal amount of
outstanding notes. We may issue additional notes from time to time after this
offering. Any offering of additional notes is subject to the "-- Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant described below. The
notes and any additional notes subsequently issued under the indenture will be
treated as a single class for all purposes under the indenture, including,
without limitation, waivers, amendments, redemptions and offers to purchase. We
issued notes in denominations of $1,000 and integral multiples of $1,000. The
notes will mature on February 15, 2009.
Interest on the notes accrues at the rate of 10 3/8% per annum and will be
payable semi-annually in arrears on February 15 and August 15, commencing on
August 15, 2002. We will make each interest payment to the Holders of record on
the immediately preceding February 1 and August 1.
Interest on the notes accrued from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest is computed on the basis of a 360-day year comprised of twelve 30-day
months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a Holder has given wire transfer instructions to us, we will pay all
principal, interest and premium and liquidated damages under the registration
rights agreement ("Liquidated Damages"), if any, on that Holder's notes in
accordance with those instructions. All other payments on notes will be made at
the office or agency of the paying agent and registrar within the City and State
of New York unless we elect to make interest payments by check mailed to the
Holders at their address set forth in the register of Holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustee acts as paying agent and registrar. We may change the paying
agent or registrar without prior notice to the Holders of the notes, and we or
any of our Subsidiaries may act as paying agent or registrar.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a Holder to furnish appropriate
endorsements and transfer documents in connection with a transfer of notes.
Holders will be required to pay all taxes due on transfer. We are not required
to transfer or exchange any note selected for redemption. Also, we are not
required to transfer or exchange any note for a period of 15 days before a
selection of notes to be redeemed.
SUBSIDIARY GUARANTEES
The notes are guaranteed by each of our current and future Domestic
Subsidiaries on a senior unsecured basis. These Subsidiary Guarantees are joint
and several obligations of the Subsidiary Guarantors. The obligations of each
Subsidiary Guarantor under its Subsidiary Guarantee is limited as necessary to
prevent that Subsidiary Guarantee from constituting a fraudulent conveyance
under applicable law, after giving effect to all other obligations of that
Subsidiary Guarantor including its guarantee of all obligations under the Credit
Agreement. See "Risk Factors -- Risks Related to the Notes -- A court may
48
void the guarantees of the notes or subordinate the guarantees to other
obligations of the subsidiary guarantors."
A Subsidiary Guarantor may not sell or otherwise dispose of all or
substantially all of its assets to, or consolidate with or merge with or into
(whether or not such Subsidiary Guarantor is the surviving Person), another
Person, other than us or another Subsidiary Guarantor, unless:
(1) immediately after giving effect to that transaction, no Default or
Event of Default exists; and
(2) either:
(a) the Person acquiring the property in any such sale or
disposition or the Person formed by or surviving any such consolidation
or merger assumes all the obligations of that Subsidiary Guarantor under
the indenture, its Subsidiary Guarantee and the registration rights
agreement pursuant to a supplemental indenture satisfactory to the
trustee; or
(b) the Net Proceeds of such sale or other disposition are applied
in accordance with the provisions of the indenture relating to Asset
Sales.
The Subsidiary Guarantee of a Subsidiary Guarantor will be released:
(1) in connection with any sale or other disposition of all or
substantially all of the assets of that Subsidiary Guarantor (including by
way of merger or consolidation) to a Person that is not (either before or
after giving effect to such transaction) a Subsidiary of ours, if the sale
or other disposition complies with the provisions of the indenture relating
to Asset Sales;
(2) in connection with any sale of all of the Capital Stock of a
Subsidiary Guarantor to a Person that is not (either before or after giving
effect to such transaction) a Subsidiary of ours, if the sale complies with
the provisions of the indenture relating to Asset Sales; or
(3) if we designate any Restricted Subsidiary that is a Subsidiary
Guarantor as an Unrestricted Subsidiary in accordance with the applicable
provisions of the indenture.
See "-- Repurchase at the Option of Holders -- Asset Sales."
OPTIONAL REDEMPTION
On or prior to February 15, 2005, we may on one or more occasions redeem up
to 35% of the aggregate principal amount of notes issued under the indenture at
a redemption price of 110.375% of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, to the redemption date, with the
net cash proceeds of any Qualified Equity Offering of our common stock; provided
that:
(1) at least 65% of the aggregate principal amount of notes issued
under the indenture remains outstanding immediately after the occurrence of
such redemption (excluding notes held by us and our Subsidiaries); and
(2) the redemption occurs within 90 days of the date of the closing of
such Qualified Equity Offering.
Except pursuant to the preceding paragraph, the notes will not be
redeemable at our option prior to February 15, 2006.
On or after February 15, 2006, we may redeem all or a part of the notes
upon not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued and
unpaid interest and Liquidated Damages, if any, on the notes redeemed, to
49
the applicable redemption date, if redeemed during the twelve-month period
beginning on February 15 of the years indicated below:
<Table>
<Caption>
YEAR PERCENTAGE
- ---- ----------
2006........................................................ 105.188%
2007........................................................ 102.594%
2008 and thereafter......................................... 100.000%
</Table>
MANDATORY REDEMPTION
We are not required to make mandatory redemption or sinking fund payments
with respect to the notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs, each Holder of notes will have the right to
require us to repurchase all or any part (equal to $1,000 or an integral
multiple of $1,000) of that Holder's notes pursuant to a Change of Control Offer
on the terms set forth in the indenture. In the Change of Control Offer, we will
offer a Change of Control Payment in cash equal to 101% of the aggregate
principal amount of notes repurchased plus accrued and unpaid interest and
Liquidated Damages, if any, on the notes repurchased, to the date of purchase.
Subject to compliance with the provisions of the third succeeding paragraph,
within ten days following any Change of Control, we will mail a notice to the
trustee and each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase notes on the Change
of Control Payment Date specified in the notice, which date will be no earlier
than 30 days and no later than 60 days from the date such notice is mailed,
pursuant to the procedures required by the indenture and described in such
notice. We will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent those
laws and regulations are applicable in connection with the repurchase of the
notes as a result of a Change of Control. To the extent that the provisions of
any securities laws or regulations conflict with the Change of Control
provisions of the indenture, we will comply with the applicable securities laws
and regulations and will not be deemed to have breached our obligations under
the Change of Control provisions of the indenture by virtue of such conflict.
On the Change of Control Payment Date, we will, to the extent lawful:
(1) accept for payment all notes or portions of notes properly
tendered pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of
Control Payment in respect of all notes or portions of notes properly
tendered; and
(3) deliver or cause to be delivered to the trustee the notes properly
accepted together with an officers' certificate stating the aggregate
principal amount of notes or portions of notes being purchased by us.
The paying agent will promptly mail to each Holder of notes properly
tendered the Change of Control Payment for such notes, and the trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new note equal in principal amount to any unpurchased portion of
the notes surrendered, if any; provided that each new note will be in a
principal amount of $1,000 or an integral multiple of $1,000.
Prior to complying with any of the provisions of this "Change of Control"
covenant, but in any event within 90 days following a Change of Control, we will
either repay all outstanding Senior Debt or obtain the requisite consents, if
any, under all agreements governing outstanding Senior Debt to permit the
50
repurchase of notes required by this covenant. We will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
The provisions described above that require us to make a Change of Control
Offer following a Change of Control will be applicable whether or not any other
provisions of the indenture are applicable. Except as described above with
respect to a Change of Control, the indenture does not contain provisions that
permit the Holders of the notes to require that we repurchase or redeem the
notes in the event of a takeover, recapitalization or similar transaction.
We will not be required to make a Change of Control Offer upon a Change of
Control if a third party makes the Change of Control Offer in the manner, at the
times and otherwise in compliance with the requirements set forth in the
indenture applicable to a Change of Control Offer made by us and purchases all
notes properly tendered and not withdrawn under the Change of Control Offer.
The definition of Change of Control includes a phrase relating to the
direct or indirect sale, lease, transfer, conveyance or other disposition of
"all or substantially all" of our properties or assets and the properties or
assets of our Subsidiaries taken as a whole. Although there is a limited body of
case law interpreting the phrase "substantially all," there is no precise
established definition of the phrase under applicable law. Accordingly, the
ability of a Holder of notes to require us to repurchase its notes as a result
of a sale, lease, transfer, conveyance or other disposition of less than all of
our assets and the assets of our Subsidiaries taken as a whole to another Person
or group may be uncertain.
ASSET SALES
We will not, and will not permit any of our Restricted Subsidiaries to,
consummate an Asset Sale unless:
(1) we (or the Restricted Subsidiary, as the case may be) receive
consideration at the time of the Asset Sale at least equal to the fair
market value of the assets sold or otherwise disposed of;
(2) the fair market value, if greater than $2.0 million, is determined
by our Board of Directors and evidenced by a resolution of the Board of
Directors set forth in an officer's certificate delivered to the trustee;
and
(3) at least 75% of the consideration received in the Asset Sale by us
or such Restricted Subsidiary is in the form of cash, Cash Equivalents or
Replacement Assets.
For purposes of this provision, each of the following will be deemed to be
cash:
(a) any liabilities of ours or any of our Restricted Subsidiaries, as
shown on our or such Restricted Subsidiary's most recent balance sheet
(other than contingent liabilities and liabilities that are by their terms
subordinated to the notes or any Restricted Subsidiary's Subsidiary
Guarantee), that are assumed by the transferee of any such assets pursuant
to a customary novation agreement that releases us or such Restricted
Subsidiary from further liability; and
(b) any securities, notes or other obligations received by us or any
such Restricted Subsidiary from such transferee that are contemporaneously,
subject to ordinary settlement periods, converted by us or such Restricted
Subsidiary into cash, to the extent of the cash received in that
conversion.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
we may apply those Net Proceeds at our option:
(1) to repay Senior Debt and, if the Senior Debt repaid is revolving
credit Indebtedness, to correspondingly permanently reduce commitments with
respect thereto;
(2) to acquire all or substantially all of the assets of, or a
majority of the Voting Stock of, another Permitted Business; or
(3) to acquire other long-term assets that are used or useful in a
Permitted Business.
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Pending the final application of any Net Proceeds, we may temporarily
reduce revolving credit borrowings or otherwise invest the Net Proceeds in any
manner that is not prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $5.0 million, we will make an Asset
Sale Offer to all Holders of notes and all holders of other Indebtedness that is
pari passu with the notes containing provisions similar to those set forth in
the indenture with respect to offers to purchase or redeem with the proceeds of
sales of assets to purchase the maximum principal amount of notes and such other
pari passu Indebtedness that may be purchased out of the Excess Proceeds. The
offer price in any Asset Sale Offer will be equal to 100% of the principal
amount thereof plus accrued and unpaid interest and Liquidated Damages, if any,
to the date of purchase, and will be payable in cash. If any Excess Proceeds
remain after consummation of an Asset Sale Offer, we may use those Excess
Proceeds for any purpose not otherwise prohibited by the indenture. If the
aggregate principal amount of notes and other pari passu Indebtedness tendered
into such Asset Sale Offer exceeds the amount of Excess Proceeds, the trustee
will select the notes and such other pari passu Indebtedness to be purchased as
described below under "-- Selection and Notice." Upon completion of each Asset
Sale Offer, the amount of Excess Proceeds will be reset at zero.
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent those
laws and regulations are applicable in connection with each repurchase of notes
pursuant to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the Asset Sale provisions of the
indenture, we will comply with the applicable securities laws and regulations
and will not be deemed to have breached our obligations under the Asset Sale
provisions of the indenture by virtue of such conflict.
SELECTION AND NOTICE
If less than all of the notes are to be redeemed or purchased at any time,
the trustee will select notes for redemption or purchase as follows:
(1) if the notes are listed on any national securities exchange, in
compliance with the requirements of the principal national securities
exchange on which the notes are listed; or
(2) if the notes are not listed on any national securities exchange,
on a pro rata basis, by lot or by such method as the trustee deems fair and
appropriate.
No notes of $1,000 or less can be redeemed in part. Notices of redemption
will be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of notes to be redeemed at its registered
address, except that redemption notices may be mailed more than 60 days prior to
a redemption date if the notice is issued in connection with a defeasance of the
notes or a satisfaction and discharge of the indenture. Notices of redemption
may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount of that note
that is to be redeemed. A new note in principal amount equal to the unredeemed
portion of the original note will be issued in the name of the Holder of notes
upon cancellation of the original note. Notes called for redemption become due
on the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on notes or portions of them called for redemption.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of our Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation
involving us) or to the direct or indirect holders of our Equity Interests
in their capacity
52
as such (other than dividends or distributions payable in our Equity
Interests (other than Disqualified Stock) or to us);
(2) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or
consolidation involving us) any of our Equity Interests;
(3) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any of our or our
Restricted Subsidiaries' Subordinated Indebtedness, except a payment of
interest or principal at the Stated Maturity thereof; or
(4) make any Restricted Investment
(all such payments and other actions set forth in these clauses (1) through (4)
above being collectively referred to as "Restricted Payments"), unless, at the
time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default has occurred and is continuing or
would occur as a consequence of such Restricted Payment; and
(2) we would, at the time of such Restricted Payment and after giving
pro forma effect thereto as if such Restricted Payment had been made at the
beginning of the applicable four-quarter period, have been permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the
"Incurrence of Indebtedness and Issuance of Preferred Stock" covenant; and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by us and our Restricted Subsidiaries after
the date of the indenture (excluding Restricted Payments permitted by
clauses (2), (3) and (4) of the next paragraph), is less than the sum,
without duplication, of:
(a) 50% of our Consolidated Net Income for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the date of the indenture to the end of our most
recently ended fiscal quarter for which internal financial statements
are available at the time of such Restricted Payment (or, if such
Consolidated Net Income for such period is a deficit, less 100% of such
deficit), plus
(b) 100% of the aggregate net cash proceeds received by us since
the date of the indenture as a contribution to our common equity capital
or from the issue or sale of our Equity Interests (other than
Disqualified Stock) or from the issue or sale of convertible or
exchangeable Disqualified Stock or convertible or exchangeable debt
securities of ours that have been converted into or exchanged for such
Equity Interests (other than Equity Interests or Disqualified Stock or
debt securities sold to a Subsidiary of ours), plus
(c) to the extent that any Restricted Investment that was made
after the date of the indenture is sold for cash or otherwise liquidated
or repaid for cash, the lesser of (i) the cash return of capital with
respect to such Restricted Investment (less the cost of disposition, if
any) and (ii) the initial amount of such Restricted Investment.
So long as no Default has occurred and is continuing or would be caused
thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration of the dividend, if at the date of declaration the dividend
payment would have complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any of our or any of our Restricted Subsidiaries'
Subordinated Indebtedness or of any of our Equity Interests in exchange
for, or out of the net cash proceeds of the substantially concurrent sale
(other than to any of our Restricted Subsidiaries) of, our Equity Interests
(other than Disqualified Stock); provided that
53
the amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement, defeasance or other acquisition will be
excluded from clause (3)(b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of our
Subordinated Indebtedness or Subordinated Indebtedness of any of our
Restricted Subsidiaries with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness;
(4) the repurchase, redemption or other acquisition or retirement for
value of any of our Equity Interests held by any member of our (or any of
our Restricted Subsidiaries') management pursuant to any management equity
subscription agreement, stock option agreement or similar agreement;
provided that the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests may not exceed $1,000,000 in any
twelve-month period; and
(5) other Restricted Payments in an aggregate amount since the issue
date not to exceed $10.0 million.
The amount of all Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by us or such Restricted Subsidiary, as the
case may be, pursuant to the Restricted Payment. The fair market value of any
assets or securities that are required to be valued by this covenant will be
determined by our Board of Directors whose resolutions with respect thereto will
be delivered to the trustee. The Board of Directors' determination must be based
upon an opinion or appraisal issued by an accounting, appraisal or investment
banking firm of national standing if the fair market value exceeds $5.0 million.
Not later than the date of making any Restricted Payment, we will deliver to the
trustee an officers' certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
this "Restricted Payments" covenant were computed, together with a copy of any
fairness opinion or appraisal required by the indenture.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt), and we will
not issue any Disqualified Stock and will not permit any of our Restricted
Subsidiaries to issue any shares of preferred stock; provided, however, that we
may incur Indebtedness (including Acquired Debt) or issue Disqualified Stock,
and any of our Subsidiary Guarantors may incur Indebtedness, if the Fixed Charge
Coverage Ratio for our most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date on
which such additional Indebtedness is incurred or such Disqualified Stock is
issued would have been at least 2.00 to 1, determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Indebtedness had been incurred or the preferred stock or Disqualified
Stock had been issued, as the case may be, at the beginning of such four-quarter
period.
The first paragraph of this covenant does not prohibit the incurrence of
any of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) our incurrence of additional Indebtedness and letters of credit
under one or more Credit Facilities and Guarantees thereof by the
Subsidiary Guarantors; provided that the aggregate principal amount of all
Indebtedness of ours and our Restricted Subsidiaries incurred pursuant to
this clause (1) (with letters of credit being deemed to have a principal
amount equal to the maximum potential liability of us and our Restricted
Subsidiaries thereunder) does not exceed an amount equal to $75.0 million
less the aggregate amount of Asset Sale Proceeds applied by us and our
Restricted Subsidiaries since the date of the indenture to repay
Indebtedness thereunder or to permanently reduce the availability of
revolving credit Indebtedness pursuant to the provisions described above
under the heading "-- Repurchase at the Option of Holders -- Asset Sales;"
54
(2) the incurrence by us and our Restricted Subsidiaries of the
Existing Indebtedness;
(3) the incurrence by us of Indebtedness represented by the notes to
be issued on the date of the indenture (and the related Exchange Notes to
be issued pursuant to the Registration Rights Agreement) and the incurrence
by the Subsidiary Guarantors of the Subsidiary Guarantees of those notes
(and the related Exchange Notes);
(4) the incurrence by us or any of our Subsidiary Guarantors of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in our business or the
business of such Subsidiary Guarantor, in an aggregate principal amount,
including all Permitted Refinancing Indebtedness incurred to refund,
refinance or replace any Indebtedness incurred pursuant to this clause (4),
not to exceed $10.0 million at any time outstanding;
(5) the incurrence by us or any of our Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was incurred under the first paragraph of
this covenant or clauses (2), (3), (4), (10) or (11) of this paragraph;
(6) the incurrence by us or any of our Restricted Subsidiaries of
intercompany Indebtedness owed to us or any of the Subsidiary Guarantors;
provided, however, that:
(a) if we are the obligor on such Indebtedness, such Indebtedness
must be expressly subordinated to the prior payment in full in cash of
all Obligations with respect to the notes;
(b) if a Subsidiary Guarantor is the obligor on such Indebtedness,
such Indebtedness is expressly subordinated to the prior payment in full
in cash of such Subsidiary Guarantor's Subsidiary Guarantee; and
(c) (i) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other than
us or a Subsidiary Guarantor and (ii) any sale or other transfer of any
such Indebtedness to a Person that is not either us or a Subsidiary
Guarantor shall be deemed, in each case, to constitute an incurrence of
such Indebtedness by us or such Subsidiary Guarantor, as the case may
be, that was not permitted by this clause (6);
(7) the incurrence by us or any of our Restricted Subsidiaries of
Hedging Obligations that are incurred in the normal course of business for
the purpose of fixing or hedging currency, commodity or interest rate risk
(including with respect to any floating rate Indebtedness that is permitted
by the terms of the indenture to be outstanding in connection with the
conduct of our respective businesses and not for speculative purposes);
(8) the guarantee by us or any of the Subsidiary Guarantors of our
Indebtedness or Indebtedness of one of our Restricted Subsidiaries that was
permitted to be incurred by another provision of this covenant;
(9) the incurrence by our Unrestricted Subsidiaries of Non-recourse
Debt; provided, however, that if any such Indebtedness ceases to be
Non-recourse Debt of an Unrestricted Subsidiary, such event shall be deemed
to be an incurrence of Indebtedness by a Subsidiary of ours that was not
permitted by this clause (9);
(10) unsecured Indebtedness of ours payable to one or more sellers of
any Person acquired by us or any Restricted Subsidiary of ours, incurred in
connection with such acquisition in compliance with the terms of the
indenture, not to exceed $20.0 million in the aggregate at any one time
outstanding and in each case subordinated in right of payment to the notes
and the Subsidiary Guarantees; and
(11) the incurrence by us or any of our Restricted Subsidiaries of
additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness
55
incurred pursuant to this clause (11), not to exceed $30.0 million (which
amount may be incurred, in whole or in part, under any of the Credit
Facilities); provided that no more than $10.0 million shall be incurred by
a Restricted Subsidiary that is not a Subsidiary Guarantor.
For purposes of determining compliance with this covenant, in the event
that an item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (11) above as of
the date of incurrence thereof or is entitled to be incurred pursuant to the
first paragraph of this covenant, we shall, in our sole discretion, at the time
the proposed Indebtedness is incurred, (x) classify all or a portion of that
item of Indebtedness on the date of its incurrence under either the first
paragraph of this covenant or under any category of Permitted Debt, (y)
reclassify at a later date all or a portion of that or any other item of
Indebtedness as being or having been incurred in any manner that complies with
this covenant and (z) elect to comply with this covenant and the applicable
definitions in any order.
We will not incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness that is subordinate or junior in right of payment to
any Senior Debt of ours and not subordinate or junior in right of payment to the
notes; provided, however, that no Indebtedness of ours will be deemed to be
contractually subordinated in right of payment solely by virtue of being
unsecured. No Subsidiary Guarantor will incur, create, issue, assume, guarantee
or otherwise become liable for any Indebtedness that is subordinate or junior in
right of payment to the Senior Debt of such Subsidiary Guarantor and not
subordinate or junior in right of payment to such Subsidiary Guarantor's
Subsidiary Guarantee; provided, however, that no Indebtedness of a Subsidiary
Guarantor will be deemed to be contractually subordinated in right of payment
solely by virtue of being unsecured.
LIENS
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, create, incur, assume or suffer to exist any Lien of any
kind securing Indebtedness, Attributable Debt or trade payables on any asset now
owned or hereafter acquired or any proceeds therefrom, or assign or convey any
right to receive income therefrom, except Permitted Liens.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, create or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on or in respect of
its Capital Stock to us or any of our Restricted Subsidiaries, or with
respect to any other interest or participation in, or measured by, its
profits, or pay any Indebtedness owed to us or any other of our Restricted
Subsidiaries;
(2) make any loans or advances to us or any other of our Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to us or any other of our
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) agreements as in effect on the date of the indenture or subsequent
agreements relating to our Indebtedness or Indebtedness of any Subsidiary
Guarantor and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings of those
agreements; provided that the amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacement or refinancings
are not materially more restrictive, taken as a whole, with respect to such
dividend and other payment restrictions than those contained in those
agreements on the date of the indenture;
(2) the indenture, the notes and the Subsidiary Guarantees;
56
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by us or any of our Restricted Subsidiaries as in effect at the
time of such acquisition (except to the extent such Indebtedness or Capital
Stock was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired; provided that, in the
case of Indebtedness, such Indebtedness was permitted by the terms of the
indenture to be incurred;
(5) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(6) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions on that property of the nature
described in clause (3) of the preceding paragraph;
(7) any agreement for the sale or other disposition of a Restricted
Subsidiary that restricts distributions by that Restricted Subsidiary
pending its sale or other disposition;
(8) Permitted Refinancing Indebtedness; provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are not materially more restrictive, taken as a whole, than
those contained in the agreements governing the Indebtedness being
refinanced;
(9) Liens securing Indebtedness otherwise permitted to be incurred
under the provisions of the "-- Liens" covenant that limit the right of the
debtor to dispose of the assets subject to such Liens; and
(10) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements, asset sale agreements,
stock sale agreements and other similar agreements entered into in the
ordinary course of business.
ISSUANCES AND SALES OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
We (a) will not, and will not permit any of our Restricted Subsidiaries to,
transfer, convey, sell, lease or otherwise dispose of any Capital Stock of any
of our Restricted Subsidiaries to any Person (other than to us or another
Restricted Subsidiary of ours), unless (i) such transfer, conveyance, sale,
lease or other disposition is of all the Capital Stock of such Restricted
Subsidiary, and (ii) the Net Proceeds from such transfer, conveyance, sale,
lease or other disposition are applied in accordance with the provisions
described above under "-- Repurchase at the Option of Holders -- Asset Sales;"
provided that this clause (a) shall not apply to any pledge of Capital Stock of
any Restricted Subsidiary of ours securing Indebtedness under Credit Facilities,
including the Credit Agreement, or any exercise of remedies in connection
therewith, and (b) will not permit any Restricted Subsidiary of ours to issue
any of its Equity Interests (other than, if necessary, shares of its Capital
Stock constituting directors' qualifying shares) to any Person other than us or
another Restricted Subsidiary of ours.
MERGER, CONSOLIDATION OR SALE OF ASSETS
We may not, directly or indirectly: (1) consolidate or merge with or into
another Person (whether or not we are the surviving corporation) or (2) sell,
assign, transfer, convey or otherwise dispose of all or substantially all of our
properties or assets and the properties or assets of our Restricted Subsidiaries
taken as a whole, in one or more related transactions, to another Person;
unless:
(a) either: (x) we are the surviving corporation; or (y) the Person
formed by or surviving any such consolidation or merger (if other than us)
or to which such sale, assignment, transfer, conveyance or other
disposition has been made is a corporation organized or existing under the
laws of the United States, any state of the United States or the District
of Columbia;
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(b) the Person formed by or surviving any such consolidation or merger
(if other than us) or the Person to which such sale, assignment, transfer,
conveyance or other disposition has been made assumes all of our
obligations under the notes and the indenture pursuant to agreements
reasonably satisfactory to the trustee;
(c) immediately after such transaction no Default or Event of Default
exists; and
(d) we or the Person formed by or surviving any such consolidation or
merger (if other than us), or to which such sale, assignment, transfer,
conveyance or other disposition has been made will, on the date of such
transaction after giving pro forma effect thereto and any related financing
transactions as if the same had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in
the "-- Incurrence of Indebtedness and Issuance of Preferred Stock"
covenant.
In addition, we may not, directly or indirectly, lease all or substantially
all of our properties or assets, in one or more related transactions, to any
other Person.
The Person formed by or surviving any consolidation or merger (if other
than us) will succeed to, and be substituted for, and may exercise every right
and power of ours under the indenture, but, in the case of a lease of all or
substantially all our assets, we will not be released from the obligation to pay
the principal of and interest on the notes.
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
Our Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate
fair market value of all outstanding Investments owned by us and our Restricted
Subsidiaries in the Subsidiary properly designated will be deemed to be an
Investment made as of the time of the designation and will reduce the amount
available for Restricted Payments under the first paragraph of the
"-- Restricted Payments" covenant or Permitted Investments, as determined by us.
That designation will only be permitted if the Investment would be permitted at
that time and if the Restricted Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary. Our Board of Directors may redesignate any Unrestricted
Subsidiary to be a Restricted Subsidiary if the redesignation would not cause a
Default.
TRANSACTIONS WITH AFFILIATES
We will not, and will not permit any of our Restricted Subsidiaries to,
make any payment to, or sell, lease, transfer or otherwise dispose of any of our
or our Restricted Subsidiaries' respective properties or assets to, or purchase
any property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each, an "Affiliate Transaction"), unless:
(1) the Affiliate Transaction is on terms that are no less favorable
to us or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction by us or such Restricted Subsidiary
with an unrelated Person; and
(2) we deliver to the trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$2.5 million, a resolution of our Board of Directors set forth in an
officers' certificate certifying that such Affiliate Transaction
complies with this covenant and that such Affiliate Transaction has been
approved by a majority of the disinterested members of our Board of
Directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$10.0 million, an opinion as to the fairness to the
58
Holders of such Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm of
national standing.
The following items will not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreement entered into by us or any of our
Restricted Subsidiaries in the ordinary course of business and consistent
with our past practice or the past practice of such Restricted Subsidiary;
(2) transactions between or among us and/or our Restricted
Subsidiaries;
(3) transactions with a Person that is an Affiliate of ours solely
because we own an Equity Interest in such Person;
(4) payment of reasonable directors fees to Persons who are not
otherwise Affiliates of ours;
(5) sales of Equity Interests (other than Disqualified Stock) to
Affiliates of ours;
(6) Restricted Payments that are permitted by the "-- Restricted
Payments" covenant;
(7) any agreement (including any certificate of designations relating
to Capital Stock) as in effect as of the date of the indenture or any
amendment thereto or any transaction contemplated thereby (including
pursuant to any amendment thereto) in any replacement agreement thereto so
long as any such amendment or replacement agreement is not more
disadvantageous to the Holders in any material respect than the original
agreement as in effect on the date of the indenture; and
(8) the payment of dividends on our Redeemable Preferred Stock in
accordance with the terms of such preferred stock.
ADDITIONAL SUBSIDIARY GUARANTEES
If we or any of our Restricted Subsidiaries acquires or creates another
Domestic Subsidiary after the date of the indenture, then that newly acquired or
created Domestic Subsidiary will execute and deliver to the trustee a
supplemental indenture providing for a Subsidiary Guarantee and deliver an
opinion of counsel satisfactory to the trustee within 10 business days of the
date on which it was acquired or created; provided, however, that the foregoing
shall not apply to Subsidiaries that have properly been designated as
Unrestricted Subsidiaries in accordance with the indenture for so long as they
continue to constitute Unrestricted Subsidiaries.
SALE AND LEASEBACK TRANSACTIONS
We will not, and will not permit any of our Restricted Subsidiaries to,
enter into any sale and leaseback transaction; provided that we or any
Subsidiary Guarantor may enter into a sale and leaseback transaction if:
(1) we or that Subsidiary Guarantor could have (a) incurred
Indebtedness in an amount equal to the Attributable Debt relating to such
sale and leaseback transaction under the Fixed Charge Coverage Ratio test
in the first paragraph of the "-- Incurrence of Indebtedness and Issuance
of Preferred Stock" covenant and (b) incurred a Lien to secure such
Indebtedness pursuant to the "-- Liens" covenant;
(2) the gross cash proceeds of that sale and leaseback transaction are
at least equal to the fair market value, as determined in good faith by our
Board of Directors and set forth in an officers' certificate delivered to
the trustee, of the property that is the subject of that sale and leaseback
transaction; and
(3) the transfer of assets in that sale and leaseback transaction is
permitted by, and we apply the proceeds of such transaction in compliance
with, the "-- Asset Sales" covenant.
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BUSINESS ACTIVITIES
We will not, and will not permit any Subsidiary to, engage in any business
other than Permitted Businesses, except to such extent as would not be material
to us and our Subsidiaries taken as a whole.
PAYMENTS FOR CONSENT
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to or for the benefit of any Holder of notes
for or as an inducement to any consent, waiver or amendment of any of the terms
or provisions of the indenture or the notes unless such consideration is offered
to be paid and is paid to all Holders of the notes that consent, waive or agree
to amend in the time frame set forth in the solicitation documents relating to
such consent, waiver or agreement.
REPORTS
Whether or not required by the SEC, so long as any notes are outstanding,
we will furnish to the Holders of notes, within the time periods specified in
the SEC's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC on Forms 10-Q and 10-K if
we were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with
respect to the annual information only, a report on the annual financial
statements by our certified independent accountants; and
(2) all current reports that would be required to be filed with the
SEC on Form 8-K if we were required to file such reports.
If we have designated any of our Subsidiaries as Unrestricted Subsidiaries,
then the quarterly and annual financial information required by the preceding
paragraph will include a reasonably detailed presentation, either on the face of
the financial statements or in the footnotes thereto, and in Management's
Discussion and Analysis of Financial Condition and Results of Operations, of the
financial condition and results of operations of us and our Restricted
Subsidiaries separate from the financial condition and results of operations of
our Unrestricted Subsidiaries.
In addition, following the consummation of this exchange offer, whether or
not required by the SEC, we will file a copy of all of the information and
reports referred to in clauses (1) and (2) above with the SEC for public
availability within the time periods specified in the SEC's rules and
regulations (unless the SEC will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, we and the Subsidiary Guarantors have agreed that, for so
long as any outstanding notes remain outstanding, we will furnish to the Holders
and to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an "Event of Default."
(1) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the notes;
(2) default in payment when due of the principal of or premium, if
any, on the notes;
(3) failure by us or any of our Restricted Subsidiaries to comply with
the "-- Restricted Payments," "-- Incurrence of Indebtedness and Issuance
of Preferred Stock" or "-- Merger, Consolidation or Sale of Assets"
covenants;
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(4) failure by us or any of our Restricted Subsidiaries for 30 days
after notice to comply with the provisions described under the headings
"-- Repurchase at the Option of Holders -- Asset Sales" or "-- Repurchase
at the Option of Holders -- Change of Control;"
(5) failure by us or any of our Restricted Subsidiaries for 60 days
after notice to comply with any other covenant or agreement in the
indenture or the notes;
(6) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by us or any of our Restricted Subsidiaries
(or the payment of which is guaranteed by us or any of our Restricted
Subsidiaries) whether such Indebtedness or guarantee now exists, or is
created after the date of the indenture, if that default:
(a) is caused by a failure to pay principal of, or interest or
premium, if any, on such Indebtedness prior to the expiration of the
grace period provided in such Indebtedness on the date of such default
(a "Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its
express maturity;
and, in each case, the principal amount of any such Indebtedness, together
with the principal amount of any other such Indebtedness under which there
has been a Payment Default or the maturity of which has been so
accelerated, aggregates $10.0 million or more;
(7) failure by us or any of our Restricted Subsidiaries to pay final
judgments (to the extent not covered by insurance) aggregating in excess of
$10.0 million, which judgments are not paid, discharged or stayed for a
period of 60 consecutive days;
(8) except as permitted by the indenture, any Subsidiary Guarantee
shall be held in any judicial proceeding to be unenforceable or invalid or
shall cease for any reason to be in full force and effect or any Subsidiary
Guarantor, or any Person acting on behalf of any Subsidiary Guarantor,
shall deny or disaffirm its obligations under its Subsidiary Guarantee; and
(9) certain events of bankruptcy or insolvency described in the
indenture with respect to us or any of our Restricted Subsidiaries.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to us, any Subsidiary that is a
Significant Subsidiary or any group of Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding notes will become due and
payable immediately without further action or notice. If any other Event of
Default occurs and is continuing, the trustee or the Holders of at least 25% in
principal amount of the then outstanding notes may declare all the notes to be
due and payable immediately.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding notes may direct the trustee in its
exercise of any trust or power. The trustee may withhold from Holders of the
notes notice of any continuing Default or Event of Default if it determines that
withholding notes is in their interest, except a Default or Event of Default
relating to the payment of principal or interest or Liquidated Damages.
The Holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the Holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in the payment of
interest or Liquidated Damages on, or the principal of, the notes.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by us or on our behalf with the intention
of avoiding payment of the premium that we would have had to pay if we then had
elected to redeem the notes pursuant to the optional redemption provisions of
the indenture, an equivalent premium will also become and be immediately due and
payable to the extent permitted by law upon the acceleration of the notes. If an
Event of Default occurs prior to February 15,
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2006, by reason of any willful action (or inaction) taken (or not taken) by us
or on our behalf with the intention of avoiding the prohibition on redemption of
the notes prior to February 15, 2006, then the premium specified in the
indenture will also become immediately due and payable to the extent permitted
by law upon the acceleration of the notes.
We are required to deliver to the trustee annually a statement regarding
compliance with the indenture. Upon becoming aware of any Default or Event of
Default, we are required to deliver to the trustee a statement specifying such
Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of ours or of
any Subsidiary Guarantor, as such, will have any liability for any obligations
of ours or of the Subsidiary Guarantors under the notes, the indenture, the
Subsidiary Guarantees, or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of notes by accepting a note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the notes. The waiver may not be effective to
waive liabilities under the federal securities laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
We may, at our option and at any time, elect to have all of our obligations
discharged with respect to the outstanding notes and all obligations of the
Subsidiary Guarantors discharged with respect to their Subsidiary Guarantees
("Legal Defeasance") except for:
(1) the rights of Holders of outstanding notes to receive payments in
respect of the principal of, or interest or premium and Liquidated Damages,
if any, on such notes when such payments are due from the trust referred to
below;
(2) our obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost or
stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee,
and our and the Subsidiary Guarantors' obligations in connection therewith;
and
(4) the Legal Defeasance provisions of the indenture.
In addition, we may, at our option and at any time, elect to have our
obligations and the obligations of the Subsidiary Guarantors released with
respect to certain covenants that are described in the indenture ("Covenant
Defeasance") and thereafter any omission to comply with those covenants will not
constitute a Default or Event of Default with respect to the notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"-- Events of Default and Remedies" will no longer constitute an Event of
Default with respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) we must irrevocably deposit with the trustee, in trust, for the
benefit of the Holders of the notes, cash in U.S. dollars, non-callable
Government Securities, or a combination of cash in U.S. dollars and
non-callable Government Securities, in amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, or interest and premium and
Liquidated Damages, if any, on the outstanding notes on the Stated Maturity
or on the applicable redemption date, as the case may be, and we must
specify whether the notes are being defeased to maturity or to a particular
redemption date;
(2) in the case of Legal Defeasance, we must deliver to the trustee an
opinion of counsel reasonably acceptable to the trustee confirming that (a)
we have received from, or there has been published by, the Internal Revenue
Service a ruling or (b) since the date of the indenture, there has
62
been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel will confirm
that, the Holders of the outstanding notes will not recognize income, gain
or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, we must deliver to the trustee
an opinion of counsel reasonably acceptable to the trustee confirming that
the Holders of the outstanding notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred;
(4) no Default or Event of Default has occurred and is continuing on
the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit);
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under, any material
agreement or instrument (including, without limitation, the Credit
Agreement, but excluding the indenture) to which we or any of our
Subsidiaries is a party or by which we or any of our Subsidiaries is bound;
(6) we must deliver to the trustee an officers' certificate stating
that the deposit was not made by us with the intent of preferring the
Holders of notes over our other creditors with the intent of defeating,
hindering, delaying or defrauding our creditors or others; and
(7) we must deliver to the trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent relating to
the Legal Defeasance or the Covenant Defeasance have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the indenture or
the notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, notes), and any existing default or
compliance with any provision of the indenture or the notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting Holder):
(1) reduce the principal amount of notes whose Holders must consent to
an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note
or alter the provisions with respect to the redemption of the notes;
(3) make any change in the provisions of the indenture described above
under the heading "-- Repurchase at the Option of Holders;"
(4) reduce the rate of or change the time for payment of interest on
any note;
(5) waive a Default or Event of Default in the payment of principal
of, or interest or premium, or Liquidated Damages, if any, on the notes
(except a rescission of acceleration of the notes by the Holders of at
least a majority in aggregate principal amount of the notes and a waiver of
the payment default that resulted from such acceleration);
(6) make any note payable in money other than that stated in the
notes;
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(7) make any change in the provisions of the indenture relating to
waivers of past Defaults or the rights of Holders of notes to receive
payments of principal of, or interest or premium or Liquidated Damages, if
any, on the notes;
(8) waive a redemption payment with respect to any note;
(9) release any Subsidiary Guarantor from any of its obligations under
its Subsidiary Guarantee or the indenture, except in accordance with the
terms of the indenture; or
(10) make any change in the preceding amendment and waiver provisions.
Notwithstanding the preceding, without the consent of any Holder of notes,
we, the Subsidiary Guarantors and the trustee may amend or supplement the
indenture or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption by a successor corporation of our
obligations under the indenture in the case of a merger or consolidation or
sale of all or substantially all of our assets;
(4) to make any change that would provide any additional rights or
benefits to the Holders of notes or that does not adversely affect the
legal rights under the indenture of any such Holder; or
(5) to make any change to comply with any requirement of the SEC in
order to effect or maintain the qualification of the indenture under the
Trust indenture Act.
SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated, except lost, stolen or
destroyed notes that have been replaced or paid and notes for whose
payment money has been deposited in trust and thereafter repaid to us,
have been delivered to the trustee for cancellation; or
(b) all notes that have not been delivered to the trustee for
cancellation have become due and payable by reason of the mailing of a
notice of redemption or otherwise or will become due and payable within
one year, and we have irrevocably deposited or caused to be deposited
with the trustee as trust funds in trust solely for the benefit of the
Holders, cash in U.S. dollars, non-callable Government Securities, or a
combination of cash in U.S. dollars and non-callable Government
Securities, in such amounts as will be sufficient without consideration
of any reinvestment of interest, to pay and discharge the entire
indebtedness on the notes not delivered to the trustee for cancellation
for principal, premium and Liquidated Damages, if any, and accrued
interest to the date of maturity or redemption;
(2) no Default or Event of Default has occurred and is continuing on
the date of the deposit or will occur as a result of the deposit and the
deposit will not result in a breach or violation of, or constitute a
default under, any other instrument to which we or any Subsidiary Guarantor
is a party or by which we or any Subsidiary Guarantor is bound;
(3) we have paid or caused to be paid all sums payable by us under the
indenture; and
(4) we have delivered irrevocable instructions to the trustee under
the indenture to apply the deposited money and/or non-callable Government
Securities toward the payment of the notes at maturity or the redemption
date, as the case may be.
In addition, we must deliver an officers' certificate and an opinion of
counsel to the trustee stating that all conditions precedent to satisfaction and
discharge have been satisfied.
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CONCERNING THE TRUSTEE
If the trustee becomes a creditor of ours or of any Subsidiary Guarantor,
the indenture limits its right to obtain payment of claims in certain cases, or
to realize on certain property received in respect of any such claim as security
or otherwise. The trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest, it must (i) eliminate such
conflict within 90 days, (ii) apply to the SEC for permission to continue or
(iii) resign.
The Holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
occurs and is continuing, the trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
Holder of notes, unless such Holder has offered to the trustee security and
indemnity satisfactory to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this offering memorandum may obtain a copy of the
indenture and registration rights agreement without charge by writing to us at
the address set forth in "Where You Can Find More Information; Incorporation of
Documents by Reference."
BOOK-ENTRY, DELIVERY AND FORM
The notes were sold to qualified institutional buyers in reliance on Rule
144A ("Rule 144A Notes"). Notes may also were sold in offshore transactions in
reliance on Regulation S ("Regulation S Notes"). Except as set forth below,
notes were issued in registered, global form in minimum denominations of $1,000
and integral multiples of $1,000 in excess of $1,000.
Rule 144A Notes are represented by one or more notes in registered, global
form without interest coupons (collectively, the "144A Global Notes").
Regulation S Notes are represented by one or more notes in registered, global
form without interest coupons (collectively, the "Regulation S Global Notes"
and, together with the 144A Global Notes, the "Global Notes"). The Global Notes
were deposited upon issuance with the trustee as custodian for The Depository
Trust Company ("DTC"), in New York, New York, and registered in the name of Cede
& Co., as nominee of DTC (such nominee being referred to herein as the "Global
Note Holder"), in each case for credit to an account of a direct or indirect
participant in DTC as described below. Through and including March 27, 2002,
beneficial interests in the Regulation S Global Notes could be held only through
the Euroclear System ("Euroclear") and Clearstream Banking S.A. ("Clearstream")
(as indirect participants in DTC), unless transferred to a person that takes
delivery through a Rule 144A Global Note in accordance with the certification
requirements described below. Beneficial interests in the Rule 144A Global Notes
may not be exchanged for beneficial interests in the Regulation S Global Notes
at any time except in the limited circumstances described below. See
"-- Exchanges Between Regulation S Notes and Rule 144A Notes."
Except as set forth below, the Global Notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for notes
in certificated form except in the limited circumstances described below. See
"-- Exchange of Global Notes for Certificated Notes." Except in the limited
circumstances described below, owners of beneficial interests in the Global
Notes will not be entitled to receive physical delivery of notes in certificated
form.
Rule 144A Notes (including beneficial interests in the Rule 144A Notes) are
subject to certain restrictions on transfer and bear a restrictive legend.
Regulation S Notes will also bear the legend. In addition, transfers of
beneficial interests in the Global Notes will be subject to the applicable rules
and
65
procedures of DTC and its direct or indirect participants (including, if
applicable, those of Euroclear and Clearstream), which may change from time to
time.
DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC,
Euroclear and Clearstream are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them. We take no responsibility
for these operations and procedures and urge investors to contact the system or
their participants directly to discuss these matters.
DTC has advised us that DTC is a limited-purpose trust company created to
hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in accounts of its Participants. The Participants include securities brokers and
dealers (including the initial purchasers), banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly (collectively, the "Indirect Participants").
Persons who are not Participants may beneficially own securities held by or on
behalf of DTC only through the Participants or the Indirect Participants. The
ownership interests in, and transfers of ownership interests in, each security
held by or on behalf of DTC are recorded on the records of the Participants and
Indirect Participants.
DTC has also advised us that, pursuant to procedures established by it:
(1) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the initial purchasers with portions of the
principal amount of the Global Notes; and
(2) ownership of these interests in the Global Notes will be shown on,
and the transfer of ownership of these interests will be effected only
through, records maintained by DTC (with respect to the Participants) or by
the Participants and the Indirect Participants (with respect to other
owners of beneficial interest in the Global Notes).
Investors in the Rule 144A Global Notes who are Participants in DTC's
system may hold their interests therein directly through DTC. Investors in the
Rule 144A Global Notes who are not Participants may hold their interests therein
indirectly through organizations (including Euroclear and Clearstream) which are
Participants in such system. Investors in the Regulation S Global Notes must
initially hold their interests therein through Euroclear or Clearstream, if they
are participants in such systems, or indirectly through organizations that are
participants in such systems. After March 27, 2002, investors may also hold
interests in the Regulation S Global Notes through Participants in the DTC
system other than Euroclear and Clearstream. Euroclear and Clearstream will hold
interests in the Regulation S Global Notes on behalf of their participants
through customers' securities accounts in their respective names on the books of
their respective depositories, which are Morgan Guaranty Trust Company of New
York, Brussels office, as operator of Euroclear, and Citibank, N.A., as operator
of Clearstream. All interests in a Global Note, including those held through
Euroclear or Clearstream, may be subject to the procedures and requirements of
DTC. Those interests held through Euroclear or Clearstream may also be subject
to the procedures and requirements of such systems. The laws of some states
require that certain Persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer beneficial
interests in a Global Note to such Persons will be limited to that extent.
Because DTC can act only on behalf of Participants, which in turn act on behalf
of Indirect Participants, the ability of a Person having beneficial interests in
a Global Note to pledge such interests to Persons that do not participate in the
DTC system, or otherwise take actions in respect of such interests, may be
affected by the lack of a physical certificate evidencing such interests.
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Except as described below, owners of interest in the Global Notes will not
have notes registered in their names, will not receive physical delivery of
notes in certificated form and will not be considered the registered owners or
"Holders" thereof under the indenture for any purpose.
Payments in respect of the principal of, and interest and premium and
Liquidated Damages, if any, on a Global Note registered in the name of DTC or
its nominee will be payable to DTC in its capacity as the registered Holder
under the indenture. Under the terms of the indenture, we and the trustee will
treat the Persons in whose names the notes, including the Global Notes, are
registered as the owners of the notes for the purpose of receiving payments and
for all other purposes. Consequently, neither we, the trustee nor any agent of
ours or the trustee has or will have any responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interest in the Global Notes or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Notes; or
(2) any other matter relating to the actions and practices of DTC or
any of its Participants or Indirect Participants.
DTC has advised us that its current practice, upon receipt of any payment
in respect of securities such as the notes (including principal and interest),
is to credit the accounts of the relevant Participants with the payment on the
payment date unless DTC has reason to believe it will not receive payment on
such payment date. Each relevant Participant is credited with an amount
proportionate to its beneficial ownership of an interest in the principal amount
of the relevant security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will not
be the responsibility of DTC, the trustee or us. Neither we nor the trustee will
be liable for any delay by DTC or any of its Participants in identifying the
beneficial owners of the notes, and we and the trustee may conclusively rely on
and will be protected in relying on instructions from DTC or its nominee for all
purposes.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds, and transfers between
participants in Euroclear and Clearstream will be effected in accordance with
their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
notes described herein, cross-market transfers between the Participants in DTC,
on the one hand, and Euroclear or Clearstream participants, on the other hand,
will be effected through DTC in accordance with DTC's rules on behalf of
Euroclear or Clearstream, as the case may be, by its respective depositary;
however, such cross-market transactions will require delivery of instructions to
Euroclear or Clearstream, as the case may be, by the counterparty in such system
in accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or Clearstream, as the case may be,
will, if the transaction meets its settlement requirements, deliver instructions
to its respective depositary to take action to effect final settlement on its
behalf by delivering or receiving interests in the relevant Global Note in DTC,
and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Euroclear participants and
Clearstream participants may not deliver instructions directly to the
depositories for Euroclear or Clearstream.
DTC has advised us that it will take any action permitted to be taken by a
Holder of notes only at the direction of one or more Participants to whose
account DTC has credited the interests in the Global Notes and only in respect
of such portion of the aggregate principal amount of the notes as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the notes, DTC reserves the right to exchange the
Global Notes for legended notes in certificated form, and to distribute such
notes to its Participants.
Although DTC, Euroclear and Clearstream have agreed to the foregoing to
facilitate transfers of interests in the Rule 144A Global Notes and the
Regulation S Global Notes among participants in DTC,
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Euroclear and Clearstream, they are under no obligation to perform or to
continue to perform such procedures, and may discontinue such procedures at any
time. Neither we nor the trustee nor any of their respective agents will have
any responsibility for the performance by DTC, Euroclear or Clearstream or their
respective participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive notes in registered
certificated form ("Certificated Notes") if:
(1) DTC (a) notifies us that it is unwilling or unable to continue as
depositary for the Global Notes and we fail to appoint a successor
depositary or (b) has ceased to be a clearing agency registered under the
Exchange Act;
(2) we, at our option, notify the trustee in writing that we elect to
cause the issuance of the Certificated Notes; or
(3) there has occurred and is continuing a Default or Event of Default
with respect to the notes.
In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon prior written notice given to the trustee by or on
behalf of DTC in accordance with the indenture. In all cases, Certificated Notes
delivered in exchange for any Global Note or beneficial interests in Global
Notes will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures) and will bear the applicable restrictive legend referred to in
"Notice to Investors," unless that legend is not required by applicable law.
EXCHANGE OF CERTIFICATED NOTES FOR GLOBAL NOTES
Certificated Notes may not be exchanged for beneficial interests in any
Global Note unless the transferor first delivers to the trustee a written
certificate (in the form provided in the indenture) to the effect that such
transfer will comply with the appropriate transfer restrictions applicable to
such notes. See "Notice to Investors."
SAME DAY SETTLEMENT AND PAYMENT
We will make payments in respect of the notes represented by the Global
Notes (including principal, premium, if any, interest and Liquidated Damages, if
any) by wire transfer of immediately available funds to the accounts specified
by the Global Note Holder. We will make all payments of principal, interest and
premium and Liquidated Damages, if any, with respect to Certificated Notes by
wire transfer of immediately available funds to the accounts specified by the
Holders of Certificated Notes or, if no such account is specified, by mailing a
check to each such Holder's registered address. The notes represented by the
Global Notes are expected to be eligible to trade in the PORTAL Market(SM) and
to trade in DTC's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such notes will, therefore, be required by DTC to be
settled in immediately available funds. We expect that secondary trading in any
Certificated Notes will also be settled in immediately available funds.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified
Person, whether or not such Indebtedness is incurred in
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connection with, or in contemplation of, such other Person merging with or
into, or becoming a Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a Person will be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" have correlative meanings.
"Asset Sale" means the sale, lease, conveyance or other disposition of any
assets or rights; provided that the sale, conveyance or other disposition of all
or substantially all of the assets of us and our Restricted Subsidiaries taken
as a whole will be governed by the provisions of the indenture described above
under "-- Repurchase at the Option of Holders -- Change of Control" and/or the
provisions described above under "-- Merger, Consolidation or Sale of Assets"
and not by the provisions of the "-- Asset Sales" covenant.
Notwithstanding the preceding, the following items will not be deemed to be
Asset Sales:
(1) any single transaction or series of related transactions that
involves assets or rights having a fair market value of less than $1.0
million;
(2) a transfer of assets or rights between or among us and our
Restricted Subsidiaries or between or among our Restricted Subsidiaries;
(3) the sale, lease or other disposition of equipment, inventory,
accounts receivable or other assets or rights in the ordinary course of
business; and
(4) a Restricted Payment or Permitted Investment that is permitted by
the "Restricted Payments" covenant.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
sale and leaseback transaction, including any period for which such lease has
been extended or may, at the option of the lessor, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), such "person" will be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire by conversion or
exercise of other securities, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition. The terms
"Beneficially Owns" and "Beneficially Owned" have a corresponding meaning.
"Board of Directors" means:
(1) with respect to a corporation, the board of directors of the
corporation;
(2) with respect to a partnership, the board of directors of the
general partner of the partnership; and
(3) with respect to any other Person, the board or committee of such
Person serving a similar function.
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"Capital Lease Obligation" means, at the time any determination is to be
made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means:
(1) in the case of a corporation, any and all shares, including common
stock and preferred stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality of the United
States government (provided that the full faith and credit of the United
States is pledged in support of those securities) having maturities of not
more than six months from the date of acquisition;
(3) certificates of deposit and eurodollar time deposits with
maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case, with any lender party to the Credit Agreement or
with any domestic commercial bank having capital and surplus in excess of
$500.0 million and a Thomson Bank Watch Rating of "B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Rating Services and in each
case maturing within six months after the date of acquisition; and
(6) money market funds at least 95% of the assets of which constitute
Cash Equivalents of the kinds described in clauses (1) through (5) of this
definition.
"Change of Control" means the occurrence of any of the following:
(1) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of our assets
to any Person or group of related Persons for purposes of Section 13(d) of
the Exchange Act (a "Group"), together with any Affiliates thereof (whether
or not otherwise in compliance with the provisions of the indenture);
(2) the approval by the holders of our Capital Stock of any plan or
proposal for the liquidation or dissolution of us (whether or not otherwise
in compliance with the provisions of the indenture);
(3) any Person or Group shall be or become the owner, directly or
indirectly, beneficially or of record, of shares representing more than 40%
of the aggregate ordinary voting power represented by our issued and
outstanding Capital Stock;
(4) for so long as JP Morgan is an Affiliate of ours and the Senior
Subordinated Notes remain outstanding, any Person or Group, other than JP
Morgan, shall be or become the owner, directly or indirectly, beneficially
or of record, of shares representing more than 25% of the aggregate
ordinary voting power represented by our issued and outstanding Capital
Stock; provided that JP Morgan then
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owns, directly or indirectly, beneficially or of record, a lesser
percentage of such aggregate voting power;
(5) the replacement of a majority of our Board of Directors over a
two-year period from the directors who constituted our Board of Directors
at the beginning of such period, and such replacement shall not have been
approved by a vote of at least a majority of the Board of Directors then
still in office who either were members of such Board of Directors at the
beginning of such period or whose election as a member of such Board of
Directors was previously so approved; or
(6) we consolidate with, or merge with or into, any Person, or any
Person consolidates with, or merges with or into, us, in any such event
pursuant to a transaction in which any of our outstanding Voting Stock or
the outstanding Voting Stock of such other Person is converted into or
exchanged for cash, securities or other property, other than any such
transaction where our Voting Stock outstanding immediately prior to such
transaction is converted into or exchanged for Voting Stock (other than
Disqualified Stock) of the surviving or transferee Person constituting a
majority of the outstanding shares of such Voting Stock of such surviving
or transferee Person (immediately after giving effect to such issuance).
"Consolidated Cash Flow" means, with respect to any specified Person for
any period, the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss plus any net loss
realized by such Person or any of its Subsidiaries in connection with an
Asset Sale, to the extent such losses were deducted in computing such
Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net Income;
plus
(3) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of
all payments associated with Capital Lease Obligations, imputed interest
with respect to Attributable Debt, commissions, discounts and other fees
and charges incurred in respect of letter of credit or bankers' acceptance
financings, and net of the effect of all payments made or received pursuant
to Hedging Obligations), to the extent that any such expense was deducted
in computing such Consolidated Net Income; plus
(4) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period) and other non-cash expenses (excluding any
such non-cash expense to the extent that it represents an accrual of or
reserve for cash expenses in any future period) of such Person and its
Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income; minus
(5) non-cash items increasing such Consolidated Net Income for such
period, other than the accrual of revenue in the ordinary course of
business,
in each case, on a consolidated basis and determined in accordance with GAAP.
"Consolidated Lease Expense" means, with respect to any specified Person
for any period, the aggregate rental obligations of the specified Person and its
consolidated Restricted Subsidiaries determined on a consolidated basis in
accordance with GAAP payable in respect of such period under leases of real
and/or personal property (net of income from subleases of such properties, but
including taxes, insurance, maintenance and similar expenses that the lessee is
obligated to pay under the terms of such leases), whether or not such
obligations are reflected as liabilities or commitments on a consolidated
balance sheet of the specified Person and its Restricted Subsidiaries or in the
notes thereto.
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"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting will be included only to the extent of the amount of dividends
or distributions paid in cash to the specified Person or a Restricted
Subsidiary of the Person;
(2) the Net Income of any Restricted Subsidiary will be excluded to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of
the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition will be
excluded; and
(4) the cumulative effect of a change in accounting principles will be
excluded.
"Credit Agreement" means that certain Credit Agreement, dated as of the
date of the indenture, by and among us, the Subsidiary Guarantors and BNP
Paribas, as administrative agent, and the lenders party thereto, including any
related notes, guarantees, security and collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced, restructured, restated or refinanced
(including any agreement to extend the maturity thereof and adding additional
borrowers or guarantors) from time to time under the same or any other agent,
lender or group of lenders and including increasing the amount of available
borrowings thereunder; provided that such increase is permitted by the
"-- Incurrence of Indebtedness and Issuance of Preferred Stock" covenant above.
"Credit Facilities" means one or more debt facilities or agreements
(including, without limitation, the Credit Agreement) or commercial paper
facilities, in each case with banks or other lenders providing for revolving
credit loans, term loans, notes, receivables financing (including through the
sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables) or letters of credit, in each
case, as amended, restated, modified, renewed, refunded, replaced, restructured,
restated or refinanced (including any agreement to extend the maturity thereof
and adding additional borrowers or guarantors) in whole or in part from time to
time under the same or any other agent, lender or group of lenders and including
increasing the amount of available borrowings thereunder; provided that such
increase is permitted by the "-- Incurrence of Indebtedness and Issuance of
Preferred Stock" covenant above.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder of the Capital Stock), or
upon the happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or redeemable at the option of the
holder of the Capital Stock, in whole or in part, on or prior to the date that
is 91 days after the date on which the notes mature. Notwithstanding the
preceding sentence, any Capital Stock that would constitute Disqualified Stock
solely because the holders of the Capital Stock have the right to require us to
repurchase such Capital Stock upon the occurrence of a Change of Control or an
Asset Sale will not constitute Disqualified Stock if the terms of such Capital
Stock provide that we may not repurchase or redeem any such Capital Stock
pursuant to such provisions unless such repurchase or redemption complies with
the "-- Restricted Payments" covenant.
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"Domestic Subsidiary" means any Restricted Subsidiary of ours that was
formed under the laws of the United States or any state of the United States or
the District of Columbia or that guarantees or otherwise provides direct credit
support for any Indebtedness of ours.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of us and our Subsidiaries
(other than Indebtedness under the Credit Agreement) in existence on the date of
the indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any specified Person for any period,
the sum, without duplication, of:
(1) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued,
including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest component
of any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, imputed interest with respect to
Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings,
and net of the effect of all payments made or received pursuant to Hedging
Obligations; plus
(2) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period; plus
(3) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries,
whether or not such Guarantee or Lien is called upon; plus
(4) the product of (a) all dividends, whether paid or accrued and
whether or not in cash, on any series of preferred stock of such Person or
any of its Restricted Subsidiaries, other than dividends on Equity
Interests payable solely in Equity Interests of such Person (other than
Disqualified Stock) or to such Person or one of its Restricted
Subsidiaries, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state
and local statutory tax rate of such Person, expressed as a decimal, in
each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means, with respect to any specified Person
for any period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the specified
Person or any of its Restricted Subsidiaries incurs, assumes, Guarantees,
repays, repurchases or redeems any Indebtedness (other than ordinary working
capital borrowings) or issues, repurchases or redeems preferred stock subsequent
to the commencement of the period for which the Fixed Charge Coverage Ratio is
being calculated and on or prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio will be calculated giving pro forma effect
to such incurrence, assumption, Guarantee, repayment, repurchase or redemption
of Indebtedness, or such issuance, repurchase or redemption of preferred stock,
and the use of the proceeds therefrom as if the same had occurred at the
beginning of the applicable four-quarter reference period; provided, however,
that the Fixed Charges of such Person attributable to interest on any
Indebtedness under a revolving credit facility computed on a pro forma basis
will be computed based on the average daily balance of such Indebtedness during
the four-quarter reference period and using the interest rate in effect at the
end of such period.
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions that have been made by the specified Person or any of
its Restricted Subsidiaries, including through mergers or consolidations
and including any related financing transactions, during the four-quarter
reference period or subsequent to such reference period and on or prior to
the Calculation Date will be given pro forma effect (calculated in
accordance with
73
Regulation S-X) as if they had occurred on the first day of the
four-quarter reference period and Consolidated Cash Flow for such reference
period will be calculated without giving effect to clause (3) of the
proviso set forth in the definition of Consolidated Net Income;
(2) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, will be excluded; and
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed
of prior to the Calculation Date, will be excluded, but only to the extent
that the obligations giving rise to such Fixed Charges will not be
obligations of the specified Person or any of its Restricted Subsidiaries
following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the indenture.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any specified Person, the
obligations of such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements;
(2) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates; and
(3) foreign exchange contracts, currency swap agreements or other
agreements or arrangements designed to protect such Person against
fluctuations in currency values.
"Holder" means a Person in whose name a note is registered.
"Indebtedness" means, with respect to any specified Person, any
indebtedness of such Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof);
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations;
(5) representing the balance deferred and unpaid of the purchase price
of any property, except any such balance that constitutes an accrued
expense or trade payable; or
(6) representing any Hedging Obligations,
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness is assumed by
the specified Person) and, to the extent not otherwise included, the Guarantee
by the specified Person of any Indebtedness of any other Person.
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The amount of any Indebtedness outstanding as of any date will be:
(1) the accreted value of the Indebtedness, in the case of any
Indebtedness issued with original issue discount; and
(2) the principal amount of the Indebtedness, together with any
interest on the Indebtedness that is more than 30 days past due, in the
case of any other Indebtedness.
"Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including Affiliates) in the forms
of loans (including Guarantees or other obligations), advances or capital
contributions (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If we or any of
our Subsidiaries sells or otherwise disposes of any Equity Interests of any
direct or indirect Subsidiary of ours such that, after giving effect to any such
sale or disposition, such Person is no longer a Subsidiary of ours, we will be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Equity Interests of such Subsidiary not
sold or disposed of in an amount determined as provided in the final paragraph
of the "-- Restricted Payments" covenant. The acquisition by us or any of our
Subsidiaries of a Person that holds an Investment in a third Person will be
deemed to be an Investment by us or such Subsidiary in such third Person in an
amount equal to the fair market value of the Investment held by the acquired
Person in such third Person in an amount determined as provided in the final
paragraph of the "Restricted Payments" covenant.
"JP Morgan" means J.P. Morgan Partners, LLC and its Affiliates.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"Net Income" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:
(1) any gain (but not loss), together with any related provision for
taxes on such gain (but not loss), realized in connection with: (a) any
Asset Sale or (b) the disposition of any securities by such Person or any
of its Restricted Subsidiaries or the extinguishment of any Indebtedness of
such Person or any of its Restricted Subsidiaries; and
(2) any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by us or any of
our Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale, including, without limitation, legal, accounting and investment
banking fees, and sales commissions, and any relocation expenses incurred as a
result of the Asset Sale, taxes paid or payable as a result of the Asset Sale,
in each case, after taking into account any available tax credits or deductions
and any tax sharing arrangements, and amounts required to be applied to the
repayment of Indebtedness, other than Senior Debt, secured by a Lien on the
asset or assets that were the subject of such Asset Sale, and any reserve for
adjustment in respect of the sale price of such asset or assets established in
accordance with GAAP.
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"Non-recourse Debt" means Indebtedness:
(1) as to which neither we nor any of our Restricted Subsidiaries (a)
provides credit support of any kind (including any undertaking, agreement
or instrument that would constitute Indebtedness), (b) is directly or
indirectly liable as a guarantor or otherwise, or (c) constitutes the
lender;
(2) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit upon notice, lapse of time or both any holder of
any other Indebtedness (other than the notes) of ours or any of our
Restricted Subsidiaries to declare a default on such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity; and
(3) as to which the lenders have been notified in writing that they
will not have any recourse to our stock or assets or the stock or assets of
any of our Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means the lines of business conducted by us and our
Restricted Subsidiaries on the date of the indenture and the businesses
reasonably related thereto within the healthcare services sector.
"Permitted Investments" means:
(1) any Investment in us or in one of our Restricted Subsidiaries;
(2) any Investment in Cash Equivalents;
(3) loans and advances to employees and officers of us and our
Restricted Subsidiaries in the ordinary course of business for bona fide
business purposes not in excess of $1.0 million at any one time
outstanding;
(4) any Investment by us or any of our Restricted Subsidiaries in a
Person, if as a result of such Investment:
(a) such Person becomes one of our Restricted Subsidiaries; or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, us or one of our Restricted Subsidiaries;
(5) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under "-- Repurchase at the
Option of Holders -- Asset Sales;"
(6) any acquisition of assets solely in exchange for the issuance of
our Equity Interests (other than Disqualified Stock);
(7) any Investments received in compromise of obligations of such
Persons incurred in the ordinary course of trade creditors or customers
that were incurred in the ordinary course of business, including pursuant
to any plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of any trade creditor or customer;
(8) Hedging Obligations; and
(9) other Investments in any Person having an aggregate fair market
value (measured on the date each such Investment was made and without
giving effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (9) that are at the time
outstanding, not to exceed $15.0 million.
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"Permitted Liens" means:
(1) Liens securing Indebtedness under Credit Facilities, including the
Credit Agreement, where such Indebtedness was permitted by the terms of the
indenture to be incurred;
(2) Liens in favor of us or the Subsidiary Guarantors;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with us or any Subsidiary of ours;
providedthat such Liens were in existence prior to the contemplation of
such merger or consolidation and do not extend to any assets other than
those of the Person merged into or consolidated with us or such Subsidiary;
(4) Liens on property existing at the time of acquisition of the
property by us or any of our Subsidiaries; provided that such Liens were in
existence prior to the contemplation of such acquisition;
(5) Liens to secure the performance of statutory obligations, surety
or appeal bonds, performance bonds or other obligations of a like nature;
(6) Liens to secure Indebtedness (including Capital Lease Obligations)
permitted by clause (4) of the second paragraph of the "-- Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant covering only the
assets acquired with such Indebtedness;
(7) Liens existing on the date of the indenture;
(8) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded;
provided that any reserve or other appropriate provision as is required in
conformity with GAAP has been made therefor;
(9) pledges or deposits in the ordinary course of business to secure
lease obligations or nondelinquent obligations under workers' compensation,
unemployment insurance or similar legislation;
(10) easements, rights-of-way, restrictions, minor defects or
irregularities in title and other similar charges or encumbrances not
interfering in any material respect with our business or assets or the
business or assets of any of our Subsidiaries incurred in the ordinary
course of business; and
(11) Liens incurred by us or any Restricted Subsidiary of ours with
respect to obligations that do not exceed $10.0 million at any one time
outstanding.
"Permitted Refinancing Indebtedness" means any Indebtedness of ours or any
of our Restricted Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of ours or any of our Restricted Subsidiaries (other than
intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount (or
accreted value, if applicable) of the Indebtedness extended, refinanced,
renewed, replaced, defeased or refunded (plus all accrued interest on the
Indebtedness and the amount of all expenses and premiums incurred in
connection therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded;
(3) except with respect to the Senior Subordinated Notes, if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the notes, such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and is subordinated in right of payment to, the notes on
terms at least as favorable to the Holders
77
of notes as those contained in the documentation governing the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by us or by the Subsidiary
who is the obligor on the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Qualified Equity Offering" means any underwritten public or any private
offering of our Capital Stock (excluding Disqualified Stock).
"Replacement Assets" means any properties or assets used or useful in a
Permitted Business.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission.
"Senior Debt" means:
(1) all Indebtedness of ours or of any Subsidiary Guarantor
outstanding under Credit Facilities and all Hedging Obligations with
respect thereto;
(2) any other Indebtedness of ours or of any Subsidiary Guarantor
permitted to be incurred under the terms of the indenture, unless the
instrument under which such Indebtedness is incurred expressly provides
that it is on a parity with or subordinated in right of payment to the
notes or any Subsidiary Guarantee; and
(3) all Obligations with respect to the items listed in the preceding
clauses (1) and (2).
Notwithstanding anything to the contrary in the preceding, Senior Debt will
not include:
(1) any liability for federal, state, local or other taxes owed or
owing by us;
(2) any Indebtedness of ours to any of our Subsidiaries or other
Affiliates (other than Credit Facilities under which an Affiliate is a
lender);
(3) any trade payables; or
(4) the portion of any Indebtedness that is incurred in violation of
the indenture.
"Senior Subordinated Notes" means our 11 1/4% Senior Subordinated Notes
due 2009.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date of
the indenture.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and will not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subordinated Indebtedness" means any Indebtedness (whether outstanding on
the Issue Date or thereafter incurred, including the Senior Subordinated Notes)
that is subordinated or junior in right of payment to the notes pursuant to a
written agreement, executed by the Person to whom such Indebtedness is owed, to
that effect.
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"Subsidiary" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which
more than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees of the corporation, association
or other business entity is at the time owned or controlled, directly or
indirectly, by that Person or one or more of the other Subsidiaries of that
Person (or a combination thereof); and
(2) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are that Person or one or more
Subsidiaries of that Person (or any combination thereof).
"Subsidiary Guarantee" means the Guarantee of the notes by each of the
Subsidiary Guarantors pursuant to Article 10 of the indenture and in the form of
the Guarantee endorsed on the form of note attached as Exhibit A to the
indenture and any additional Guarantee of the notes to be executed by any
Subsidiary of ours pursuant to the covenant described above under "-- Additional
Subsidiary Guarantees."
"Subsidiary Guarantors" means all of our current Domestic Subsidiaries and
any other Subsidiary that executes a Subsidiary Guarantee in accordance with the
provisions of the indenture, and their respective successors and assigns.
"Unrestricted Subsidiary" means any Subsidiary of ours (or any successor to
any of them) that is designated by our Board of Directors as an Unrestricted
Subsidiary pursuant to a board resolution, but only to the extent that such
Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with us or any Restricted Subsidiary of ours unless the terms
of any such agreement, contract, arrangement or understanding are no less
favorable to us or such Restricted Subsidiary than those that might be
obtained at the time from Persons who are not Affiliates of ours;
(3) is a Person with respect to which neither we nor any of our
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of ours or any of our Restricted
Subsidiaries; and
(5) has at least one director on its Board of Directors that is not a
director or executive officer of ours or any of our Restricted Subsidiaries
and has at least one executive officer that is not a director or executive
officer of ours or any of our Restricted Subsidiaries.
Any designation of a Subsidiary of ours as an Unrestricted Subsidiary will
be evidenced to the trustee by filing with the trustee a certified copy of the
board resolution giving effect to such designation and an officers' certificate
certifying that such designation complied with the preceding conditions and was
permitted by the "-- Restricted Payments" covenant. If, at any time, any
Unrestricted Subsidiary would fail to meet the preceding requirements as an
Unrestricted Subsidiary, it will thereafter cease to be an Unrestricted
Subsidiary for purposes of the indenture and any Indebtedness of such Subsidiary
will be deemed to be incurred by a Restricted Subsidiary of ours as of such date
and, if such Indebtedness is not permitted to be incurred as of such date under
the "-- Incurrence of Indebtedness and Issuance of Preferred Stock" covenant, we
will be in default of such covenant. Our Board of Directors may at any time
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that such designation will be deemed to be an incurrence of Indebtedness by one
of our Restricted Subsidiaries of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation will only be permitted if (1) such
Indebtedness is permitted under the "-- Incurrence of Indebtedness and Issuance
of Preferred Stock" covenant, calculated on a pro forma basis as if such
designation had occurred at the beginning of
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the four-quarter reference period; (2) no Default or Event of Default would be
in existence following such designation; and (3) such Subsidiary executes and
delivers to the trustee a supplemental indenture providing for a Subsidiary
Guarantee.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect of the Indebtedness, by (b) the number of years (calculated to the
nearest one-twelfth) that will elapse between such date and the making of
such payment; by
(2) the then outstanding principal amount of such Indebtedness.
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DESCRIPTION OF OTHER INDEBTEDNESS AND PREFERRED STOCK
NEW CREDIT FACILITY
The New Credit Facility was provided by a syndicate of banks and other
financial institutions led by BNP Paribas, as administrative agent and lead
arranger. The New Credit Facility is a senior secured revolving credit facility
providing for loans of up to $75.0 million. The New Credit Facility will
terminate five years after the date of initial funding.
Interest Rate; Fees. All borrowings under the New Credit Facility bear
interest, at our option, at a rate per annum equal to: (i) adjusted LIBOR plus
3.50%; or (ii) the Base Rate (as defined in the New Credit Facility) plus 2.50%,
in each case subject to adjustments based on financial performance.
In addition to paying interest on outstanding principal under the New
Credit Facility, we are required to pay a commitment fee to the lenders in
respect of the unutilized commitments thereunder at a rate equal to 0.5% per
annum.
Guarantees; Security. Our obligations under the New Credit Facility are
unconditionally and irrevocably guaranteed by each of our domestic (and, to the
extent no adverse tax consequences would result, foreign) subsidiaries.
In addition, the New Credit Facility is secured by first priority perfected
security interests in: (i) all of the stock and other equity interests of each
of the subsidiary guarantors; and (ii) all of our (and the subsidiary
guarantors') tangible and intangible assets (including, without limitation, real
estate, trademarks and patents).
Repayment. All or any portion of the outstanding loans under the New
Credit Facility may be prepaid at any time and commitments may be terminated in
whole or in part at our option (in each case upon at least three business days'
prior notice) without premium or penalty. The New Credit Facility is subject to
various mandatory prepayments and commitment reductions.
Certain Covenants. The New Credit Facility requires compliance with
various financial covenants, including a minimum consolidated interest coverage
ratio, minimum consolidated EBITDA, a maximum total leverage ratio, a maximum
senior secured leverage ratio and a minimum fixed charge coverage ratio. The New
Credit Facility also contains a number of covenants that, among other things,
restrict our ability and that of certain of our subsidiaries to dispose of
assets, incur additional indebtedness, incur guarantee obligations, repay other
indebtedness (including the notes), pay certain restricted payments and
dividends, create liens on assets, make investments, loans or advances, engage
in mergers or consolidations, make capital expenditures, enter into sale and
leaseback transactions, or engage in certain transactions with subsidiaries and
affiliates and otherwise restrict corporate activities. The New Credit Facility
also contains other usual and customary negative and affirmative covenants.
Events of Default. The New Credit Facility contains events of default
including, without limitation (subject to customary cure periods and materiality
thresholds):
- failure to make payments when due;
- material inaccuracies of representations and warranties;
- breach of covenants;
- certain cross-defaults and cross-accelerations;
- events of insolvency, bankruptcy or similar events;
- certain judgments against us;
- certain occurrences with respect to employee benefit plans;
- failure of guarantees;
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- failure of certain liens and security documents; and
- the occurrence of a change in control.
If such a default occurs, the lenders under the New Credit Facility would
be entitled to take various actions, including all actions permitted to be taken
by a secured creditor, the acceleration of amounts due under the New Credit
Facility and requiring that all such amounts be immediately paid in full.
11 1/4% SENIOR SUBORDINATED NOTES DUE 2009
We issued $150.0 million principal amount of Senior Subordinated Notes in
connection with the NovaCare O&P acquisition. The Senior Subordinated Notes are
our unsecured obligations and are junior in right of payment to all of our
senior debt. The Senior Subordinated Notes mature on June 15, 2009. Interest on
the Senior Subordinated Notes accrues at the rate of 11 1/4% per annum and is
payable semiannually in cash on each June 15 and December 15, to the persons who
are registered holders at the close of business on the June 1 and December 1
immediately preceding the applicable interest payment date.
Subordination. The payment of all obligations on the Senior Subordinated
Notes is subordinated in right of payment to the prior payment in full in cash
of all obligations on our Senior Debt (as defined in the indenture governing the
Senior Subordinated Notes). Holders of Designated Senior Debt can prevent
payments on the Senior Subordinated Notes in certain circumstances. The notes
are Designated Senior Debt.
Redemption. Except as described below, the Senior Subordinated Notes are
not redeemable before June 15, 2004. Thereafter, we may redeem the Senior
Subordinated Notes at our option, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the following redemption prices, plus accrued and
unpaid interest (expressed as percentages of the principal amount thereof) if
redeemed during the twelve-month period commencing on June 15 of the year set
forth below:
<Table>
<Caption>
YEAR PERCENTAGE
- ---- ----------
2004........................................................ 105.625%
2005........................................................ 104.219%
2006........................................................ 102.813%
2007........................................................ 101.406%
2008 and thereafter......................................... 100.000%
</Table>
In addition, at any time, or from time to time, on or prior to June 15,
2002, we may, at our option, use the net cash proceeds of one or more public
equity offerings to redeem up to 33% of the principal amount of the Senior
Subordinated Notes issued under the Indenture at a redemption price of 111.25%
of the principal amount thereof plus accrued and unpaid interest thereon, if
any, to the date of redemption; provided that:
(1) at least 67% of the principal amount of Senior Subordinated Notes
issued under the indenture related to the Senior Subordinated Notes remains
outstanding immediately after any such redemption; and
(2) we make such redemption not more than 30 days after the
consummation of any such public equity offering.
Change of Control. If we experience a change of control (as defined in the
indenture relating to the Senior Subordinated Notes), each holder of the Senior
Subordinated Notes has the right to require that we purchase all or a portion of
such holder's Senior Subordinated Notes at a purchase price equal to 101% of the
principal amount thereof plus accrued interest to the date of purchase.
Covenants. The Senior Subordinated Notes contain, among other things,
covenants limiting the incurrence of additional indebtedness, the payment of
certain dividends and other restricted payments,
82
certain sales of assets, the payment of dividends and certain other payments by
certain subsidiaries, the issuance of capital stock by certain subsidiaries, the
creation of certain liens, the incurrence of additional senior subordinated debt
and certain transactions with affiliates, and other customary provisions.
Events of Default. The following events would be an event of default under
the Senior Subordinated Notes:
(1) the failure to pay interest when the same becomes due and payable
and the default continues for a period of 30 days (whether or not such
payment shall be prohibited by the subordination provisions of the
indenture);
(2) the failure to pay the principal of or premium when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Senior Subordinated
Notes tendered pursuant to a change of control or an asset sale offer)
(whether or not such payment shall be prohibited by the subordination
provisions of the indenture);
(3) a default in the observance or performance of any other covenant
or agreement contained in the indenture related to the Senior Subordinated
Notes, which default continues for a period of 30 days after we receive
written notice specifying the default (and demanding that such default be
remedied) from the trustee or the holders of at least 25% of the
outstanding principal amount of the Senior Subordinated Notes (except in
the case of a default with respect to the "Merger, Consolidation and Sale
of Assets" covenant, which will constitute an Event of Default with such
notice requirement but without such passage of time requirement);
(4) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any indebtedness under the existing credit facility of us or any of our
restricted subsidiaries, or the acceleration of the final stated maturity
of any such indebtedness (which acceleration is not rescinded, annulled or
otherwise cured within 20 days of receipt by us or such restricted
subsidiary of notice of any such acceleration) if the aggregate principal
amount of such indebtedness, together with the principal amount of any
other such indebtedness in default for failure to pay principal at final
maturity or which has been accelerated, aggregates $10.0 million or more at
any time;
(5) one or more judgments in an aggregate amount in excess of $10.0
million shall have been rendered against us or any of our restricted
subsidiaries and such judgments remain undischarged, unpaid or unstayed for
a period of 60 days after such judgment or judgments become final and non-
appealable;
(6) certain events of bankruptcy affecting us or any of our
significant subsidiaries; or
(7) any guarantee of a significant subsidiary ceases to be in full
force and effect or any guarantee of a significant subsidiary is declared
to be null and void and unenforceable or any guarantee of a significant
subsidiary is found to be invalid or any guarantor that is a significant
subsidiary denies its liability under its guarantee (other than by reason
of release of such guarantor in accordance with the terms of the
indenture).
If an Event of Default (other than an Event of Default specified in clause
(6) above with respect to us) shall occur and be continuing, the trustee or the
holders of at least 25% in principal amount of outstanding Senior Subordinated
Notes may declare the principal of and accrued interest on all the Senior
Subordinated Notes to be due and payable by notice in writing to us and the
trustee specifying the respective Event of Default and that it is a notice of
acceleration, and the same:
(1) shall become immediately due and payable; or
(2) if there are any amounts outstanding under the existing credit
facility, shall become immediately due and payable upon the first to occur
of an acceleration under the existing credit facility or five business days
after receipt by us and the representative under the existing credit
facility of such notice but only if such Event of Default is then
continuing. If an Event of Default specified in
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clause (6) above with respect to us occurs and is continuing, then all
unpaid principal of, and premium, if any, and accrued and unpaid interest
on all of the outstanding Senior Subordinated Notes shall ipso facto become
and be immediately due and payable without any declaration or other act on
the part of the trustee or any holder.
SELLER NOTES
In connection with some of our acquisitions, we have issued promissory
notes to the sellers of the acquired businesses that cover a portion of the
purchase price. As of December 31, 2001, approximately $19.4 million of these
notes were outstanding, of which $11.9 million are expressly subordinated to our
senior indebtedness (including these notes) and the Senior Subordinated Notes.
The interest rates on the outstanding seller notes are fixed and range from 6.0%
to 12.287%.
7% REDEEMABLE PREFERRED STOCK
The description set forth below does not purport to be complete and is
qualified in its entirety by reference to the certificate of designations
setting forth the principal terms and conditions of our 7% Redeemable Preferred
Stock, par value $0.01 per share, which we refer to in this prospectus as the
"Redeemable Preferred Stock."
We issued $60 million in aggregate liquidation preference of Redeemable
Preferred Stock to an affiliate of J.P. Morgan Partners, LLC (an affiliate of
J.P. Morgan Chase Bank) and Paribas North America (an affiliate of BNP Paribas)
as part of the NovaCare O&P acquisition. The Redeemable Preferred Stock, which
has a liquidation preference of $1,000 per share, is entitled to receive
dividends at an annual rate of 7.0%, compounded quarterly, and such dividends,
whether or not declared, accumulate and compound until declared and paid. The
dividend rate will increase to 10.0% if certain events of non-compliance occur.
Conversion. The Redeemable Preferred Stock is convertible at any time at
the holder's option into shares of our non-voting common stock at a conversion
price of $16.50 per share, subject to customary anti-dilution adjustment. The
non-voting common stock will be convertible at the option of the holders upon
the occurrence of certain events into shares of our voting common stock. In
addition, we are entitled to convert the Redeemable Preferred Stock into
non-voting common stock on and after July 2, 2002, if the average closing price
of our common stock for 20 consecutive trading days is equal to or greater than
175% of the conversion price.
Redemption. The Redeemable Preferred Stock, which is non-voting, is
redeemable, in its entirety but not in part, at any time at a redemption price
equal to the liquidation preference plus all accrued and unpaid dividends. The
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. If we experience a change of control, we must offer to redeem all the
outstanding shares of 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 the change of control.
Voting Rights. For so long as any shares of Redeemable Preferred Stock are
outstanding, without first obtaining the affirmative written consent of a
majority of the holders of the Redeemable Preferred Stock, we are not permitted
to: (i) create or issue any shares of capital stock which is senior to or on a
parity with the Redeemable Preferred Stock; (ii) alter the terms, designations,
powers, preferences or the qualifications, limitations or restrictions of the
Redeemable Preferred Stock; (iii) reclassify the shares of any class of capital
stock of ours into shares of any other class or capital stock which is senior to
or on a parity with the Redeemable Preferred Stock; (iv) amend, alter or repeal
any of the provisions of the certificate of designations governing the
Redeemable Preferred Stock, our certificate of incorporation or our bylaws if
such amendment, alteration or repeal would have an adverse effect on the holders
of the Redeemable Preferred Stock; and (v) agree to or permit any of our
subsidiaries to agree to any provision in any agreement that would impose any
restriction on our ability to honor the exercise of any of the rights of the
holders of the Redeemable Preferred Stock, except for such restrictions
contained in our existing
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credit facility and the Senior Subordinated Notes. In addition, without first
obtaining the affirmative written consent of a majority of the holders of the
Redeemable Preferred Stock, we may not (i) permit any subsidiary of ours to
issue any capital stock to any person other than us or one of our direct or
indirect wholly-owned subsidiaries; (ii) enter into certain affiliate
transactions; (iii) incur any indebtedness which is not permitted by the terms
of the indenture governing the Senior Subordinated Notes; (iv) merge,
consolidate or amalgamate with any Person; (v) acquire or dispose of any
business or assets in a transaction with an aggregate value in excess of $100.0
million; (vi) engage in any business other than our current business or
businesses reasonably related thereto; and (vii) effect any liquidation of us or
any of our subsidiaries.
Events of Non-compliance. Upon the occurrence of an event of
non-compliance, holders of the Redeemable Preferred Stock will have the right to
elect two board members. The following events would constitute Events of
Non-compliance:
- failure to pay or set aside dividends;
- breach of covenants;
- material inaccuracies of representations and warranties;
- events of insolvency, bankruptcy or similar events;
- failure to redeem the Redeemable Preferred Stock when required; and
- certain judgments against us.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of the exchange notes. This prospectus,
as it may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of exchange notes received in the exchange
offer, where the exchange notes were acquired as a result of market-making
activities or other trading activities. We have agreed that, for a period of one
year after the expiration of the exchange offer, we will make this prospectus,
as amended or supplemented, available to any broker-dealer for use in connection
with any such resale. In addition, until such date all dealers effecting
transactions in the exchange notes may be required to deliver a prospectus. We
reserve the right in our sole discretion to purchase or make offers for, or to
offer exchange notes for, any outstanding notes that remain outstanding after
the expiration of the exchange offer pursuant to this prospectus or otherwise
and, to the extent permitted by applicable law, purchase outstanding notes in
the open market, in privately negotiated transactions or otherwise.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers in the exchange offer
for their own account may be sold from time to time in one or more transactions
in the over-the-counter market, in negotiated transactions, through the writing
of options on the exchange notes or a combination of those methods of resale, at
market prices prevailing at the time of resale, at prices related to the
prevailing market prices or negotiated prices. Any resale may be made directly
to purchasers or to or through brokers or dealers who may receive compensation
in the form of commissions or concessions from any broker-dealer and/or the
purchasers of any of the exchange notes. Any broker-dealer that resells exchange
notes that were received by it in the exchange offer for its own account and any
broker or dealer that participates in a distribution of the exchange notes may
be deemed to be an "underwriter" within the meaning of the Securities Act and
any profit on such a resale of the exchange notes and any commissions or
concessions received by those persons may be deemed to be underwriting
compensation under the Securities Act. The letter of transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus meeting the
requirements of the Securities Act, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the expiration of the exchange offer, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests these documents
in the letter of transmittal. We have agreed to pay certain expenses incident to
our performance of or compliance with the exchange and registration rights
agreement, other than commissions or concessions of any brokers or dealers, and
will indemnify holders of the outstanding notes against certain liabilities,
including liabilities under the Securities Act.
The initial purchasers have, directly and indirectly, from time to time
provided certain investment banking and commercial banking and financial
advisory services to us, our affiliates and other companies in our industry, for
which they have received customary fees and commissions, and they expect to
provide these services to us and others in the future, for which they expect to
receive customary fees and commissions. In addition, affiliates of the initial
purchasers were participating lenders under our previously existing credit
facility, and as such, received a portion of the proceeds from the initial sale
of the notes that were used to repay amounts outstanding under that credit
facility. See "Description of Other Indebtedness and Preferred Stock" and "Use
of Proceeds."
86
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
THIS SUMMARY IS OF A GENERAL NATURE AND IS INCLUDED HEREIN SOLELY FOR
INFORMATIONAL PURPOSES. THIS SUMMARY IS NOT INTENDED TO BE AND SHOULD NOT BE
CONSTRUED TO BE LEGAL OR TAX ADVICE. NO REPRESENTATION WITH RESPECT TO THE
CONSEQUENCES TO ANY PARTICULAR PURCHASER OF THE NOTES IS MADE. PROSPECTIVE
PURCHASERS SHOULD CONSULT THEIR OWN ADVISORS WITH RESPECT TO THEIR PARTICULAR
CIRCUMSTANCES.
The following general discussion is a summary of certain United States
federal income tax considerations relevant to the purchase, ownership and
disposition of the notes by holders thereof, based upon current provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), existing and
proposed Treasury regulations promulgated thereunder ("Treasury Regulations"),
rulings, pronouncements, judicial decisions, and administrative interpretations,
all of which are subject to change (possibly on a retroactive basis) at any time
by legislative, judicial or administrative action. Any such changes may be
applied retroactively in a manner that could affect adversely a holder of the
notes. No assurances are provided that the Internal Revenue Service (the "IRS")
will not challenge the conclusions stated below, and no ruling from the IRS has
been or will be sought on any of the matters discussed below.
The following summary does not purport to be a complete analysis of all the
potential U.S. federal income tax effects relating to the purchase, ownership
and disposition of the notes. Without limiting the generality of the foregoing,
the summary does not address the effect of any special rules applicable to
certain types of holders, including, without limitation, dealers in securities,
insurance companies, financial institutions, thrifts, tax-exempt entities,
persons who hold notes as part of a straddle, hedge, conversion transaction, or
other integrated investment, investors in securities that elect to use a
market-to-market method of accounting for their securities holdings, or
investors in pass through entities. In addition, the summary is limited to
holders who are the initial purchasers of the notes at their original issue
price and hold the notes as capital assets within the meaning of Section 1221 of
the Code. This discussion does not address the effect of any U.S. state or local
income or other tax laws, any U.S. federal estate and gift tax laws, any foreign
tax laws, or any tax treaties.
U.S. HOLDERS
In general, the term "U.S. Holder" means (i) an individual who is a citizen
or resident of the United States, (ii) a corporation or other entity taxable as
a corporation for U.S. federal income tax purposes created or organized in or
under the laws of the United States or any state thereof, (iii) an estate the
income of which is subject to United States federal income taxation regardless
of its source, or (iv) a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more United States persons have the authority to control all substantial
decisions of the trust.
Taxation of Interest. Any interest earned on a note held by a U.S. Holder
generally is required to be included in the holder's gross income and is taxable
as ordinary income for federal income tax purposes at the time that the interest
is paid or accrued, in accordance with the holder's regular method of tax
accounting.
Sale, Exchange or Disposition. In the case of a sale or exchange
(including a redemption) of a note, the holder will recognize gain or loss equal
to the difference, if any, between the proceeds received and the holder's
adjusted tax basis in the note. The proceeds received by the holder will include
the amount of any cash and the fair market value of any other property received
for the note. The holder's tax basis in the note generally will equal the amount
the holder paid for the note increased by any accrued but unpaid interest that
the holder previously included in income. The amount of any proceeds
attributable to accrued interest will not be taken into account in computing the
holder's capital gain or loss. Instead, that portion will be recognized as
ordinary income to the extent that the holder has not previously included the
accrued interest in income.
87
Any gain or loss recognized on the sale or exchange of the note will be
treated as a capital gain or loss. Such capital gain or loss will be treated as
a long-term capital gain or loss if, at the time of the sale or exchange, the
note has been held by the holder for more than one year; otherwise, the capital
gain or loss will be short-term. Non-corporate taxpayers are subject to a lower
tax rate on their long-term capital gains than the rates applicable to ordinary
income. All taxpayers are subject to certain limitations on the deductibility of
their capital losses. Moreover, the recognition of capital gain by an individual
could cause the individual to exceed certain income thresholds, which, in turn,
could affect adversely the individual's ability to benefit from other provisions
of the Code.
Exchange Offer. A U.S. Holder should recognize no gain or loss on the
exchange of the outstanding notes for exchange notes pursuant to the Exchange
Offer. Consequently, (i) the holding period of the exchange note should include
the holding period of the note exchanged therefor, and (ii) the adjusted tax
basis of the exchange note should be the same as the adjusted tax basis of the
note exchanged therefor immediately before the exchange.
Redemptions. We intend to take the position that the likelihood of a
redemption or repurchase by us in the event of a change of control is remote
under applicable Treasury Regulations. We, therefore, do not intend to treat
that likelihood as affecting the yield to maturity of the notes.
We have an option to redeem the notes at any time on or after a certain
date, and to redeem or repurchase all or a portion of the notes at certain times
prior to the maturity date. Under the applicable Treasury Regulations, we will
be deemed to have exercised that option if the exercise of that option would
lower the yield of the notes. We believe that we will not be treated as having
exercised that option under these regulations.
Information Reporting and Backup Withholding. U.S. Holders of notes may be
subject, under certain circumstances, to information reporting and backup
withholding at a rate up to 30% on payments of interest, principal, gross
proceeds from disposition of notes, and premium, if any. Currently, the backup
withholding rate is 30% for 2002-2003, 29% for 2004-2005, and 28% for 2006 and
thereafter. Backup withholding applies only if the U.S. Holder:
- fails to furnish its social security or other taxpayer identification
number ("TIN") within a reasonable time after a request for such
information; or
- furnishes an incorrect TIN; or
- fails to report interest properly; or
- fails, under certain circumstances, to provide a certified statement,
signed under penalty of perjury, that the TIN provided is its correct
number and that the U.S. Holder is not subject to backup withholding.
Backup withholding is not an additional tax. Any amount withheld from a
payment to a U.S. Holder under the backup withholding rules is allowable as a
credit against such U.S. Holder's U.S. federal income tax liability, and may
entitle such holder to a refund, provided that the required information is
furnished to the IRS. Certain persons are exempt from backup withholding,
including corporations and financial institutions. U.S. Holders of notes should
consult their tax advisors as to their qualification for exemption from backup
withholding and the procedure for obtaining such exemption.
We will furnish annually to the IRS, and to record holders of the notes to
whom we are required to furnish such information, information relating to the
amount of interest paid and the amount of tax withheld, if any, with respect to
payments on the notes.
NON-U.S. HOLDERS
The following summary is limited to the U.S. federal income tax
consequences relevant to a holder of a note that is not a U.S. Holder (a
"Non-U.S. Holder").
88
Taxation of Interest. Subject to the summary of backup withholding rules
below, payments of interest on a note to any Non-U.S. Holder generally will not
be subject to U.S. federal income or withholding tax if we or our paying agent
receives certification to the effect that the holder is not:
- an actual or constructive owner of 10% or more of the total voting power
of all our voting stock; or
- a controlled foreign corporation related (directly or indirectly) to us
through stock ownership; or
- a bank receiving interest described in Section 881 (c)(3)(A) of the Code;
or
- receiving such interest payments as income effectively connected with the
conduct by the Non-U.S. Holder of a trade or business within the United
States.
Such certification requires that the Non-U.S. Holder provide us or our
paying agent with a properly completed IRS Form W-8BEN (or substitute IRS Form
W-8BEN or the appropriate successor form) under penalties of perjury which
provides the Non-U.S. Holder's name and address and certifies that the Non-U.S.
Holder is a Non-U.S. Holder. Alternatively, in a case where a security clearing
organization, bank or other financial institution holds the notes in the
ordinary course of its trade or business (a "financial institution") on behalf
of the Non-U.S. Holder, certification requires that we or our paying agent
receive from the financial institution a certification under penalties of
perjury that a properly completed IRS Form W-8BEN (or substitute IRS Form W-8BEN
or the appropriate successor form) has been received by it, or by another such
financial institution, from the Non-U.S. Holder, and a copy of such a form is
furnished to the payor. Special rules apply to payments made through a qualified
intermediary.
A Non-U.S. Holder that does not qualify for exemption from withholding
under the preceding paragraph generally will be subject to withholding of U.S.
federal income tax at the rate of 30% (or lower applicable treaty rate) on
payments of interest on the notes.
If the payments of interest on a note are effectively connected with the
conduct by a Non-U.S. Holder of a trade or business within the United States,
such payments will be subject to U.S. federal income tax on a net basis at the
rates applicable to U.S. persons generally (and, if the Non-U.S. Holder is a
corporation for U.S. federal income purposes, may be subject also to a 30%
branch profits tax on the "dividend equivalent amount"). If payments are subject
to U.S. federal income tax on a net basis in accordance with the rules described
in the preceding sentence, such payments will not be subject to U.S. withholding
tax so long as the holder provides us or the paying agent with appropriate
certification.
Non-U.S. Holders should consult their tax advisors regarding any applicable
income tax treaties, which may provide for a lower rate of withholding tax,
exemption from or reduction of branch profits tax, or other rules different from
those described above.
Sale, Exchange or Disposition. Subject to the summary of backup
withholding rules below, any gain realized by a Non-U.S. Holder on the sale,
exchange, retirement or other disposition of a note generally will not be
subject to U.S. federal income tax, unless:
- such gain is effectively connected with the conduct by such Non-U.S.
Holder of a trade or business within the United States; or
- the Non-U.S. Holder is an individual who is present in the United States
for 183 days or more in the taxable year of the disposition and certain
other conditions are satisfied; or
- the Non-U.S. Holder is subject to tax under provisions of the Code
applicable to certain U.S. expatriates (including certain former citizens
or residents of the United States).
Exchange Offer. A non-U.S. Holder should recognize no gain or loss on the
exchange of the outstanding notes for exchange notes pursuant to the Exchange
Offer. See above "Certain U.S. Federal Income Tax Considerations -- U.S.
Holders -- Exchange Offer."
89
Redemptions. See above "Certain U.S. Federal Income Tax
Considerations -- U.S. Holders -- Redemptions."
Information Reporting and Backup Withholding. We must report annually to
the IRS and to each Non-U.S. Holder any interest that is paid to the Non-U.S.
Holder. Copies of these information returns also may be made available under the
provisions of a specific treaty or other agreement to the tax authorities of the
country in which the Non-U.S. Holder resides.
Treasury regulations provide that the backup withholding tax and certain
information reporting will not apply to such payments of interest with respect
to which either the requisite certification, as described above, has been
received or an exemption otherwise has been established, provided that neither
we nor our paying agent have actual knowledge that the Non-U.S. Holder is, in
fact, a United States person or that the conditions of any other exemption are
not, in fact, satisfied.
The payment of proceeds from the disposition of the notes to or through the
United States office of any broker, U.S. or foreign, will be subject to
information reporting and possible backup withholding unless the owner certifies
as to its non-U.S. status under penalties of perjury or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
holder is a United States person or that the conditions of any other exemption
are not, in fact, satisfied. The payment of proceeds from the disposition of the
notes to or through a non-U.S. office of a non-U.S. broker will not be subject
to information reporting or backup withholding unless the non-U.S. broker has
certain types of relationships with the United States (a "U.S. related person").
In the case of the payment of proceeds from the disposition of the notes to or
through a non-U.S. office of a broker that is either a U.S. person or a U.S.
related person, the Treasury regulations require information reporting (but not
back-up withholding) on the payment unless the broker has documentary evidence
in its files that the owner is a Non-U.S. Holder and the broker has no knowledge
to the contrary.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the Non-U.S.
Holder's United States federal income tax liability, provided that the required
information is provided to the IRS.
THE PRECEDING SUMMARY OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES IS
FOR GENERAL INFORMATION ONLY AND IS NOT LEGAL OR TAX ADVICE. ACCORDINGLY,
PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR OWN ADVISORS ON THE U.S. FEDERAL,
STATE, AND LOCAL, AND FOREIGN TAX CONSEQUENCES OF THEIR PURCHASE, OWNERSHIP, AND
DISPOSITION OF THE NOTES, AND ON THE CONSEQUENCES OF ANY CHANGES IN APPLICABLE
LAW.
90
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for us by
Foley & Lardner.
EXPERTS
The financial statements incorporated in this Form S-4 by reference to the
Annual Report on Form 10-K of Hanger Orthopedic Group, Inc. for the year ended
December 31, 2001, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION; INCORPORATION OF
DOCUMENTS BY REFERENCE
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any document we file at the Securities and Exchange Commission's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further
information on the public reference rooms. Our Securities and Exchange
Commission filings are also available to the public at the Securities and
Exchange Commission's web site at http://www.sec.gov. Our common stock is listed
on the New York Stock Exchange. Our reports, proxy statements and other
information can also be inspected at the offices of the New York Stock Exchange,
20 Broad Street, New York, New York 10005.
We are "incorporating by reference" the documents listed below that we have
filed with the Securities and Exchange Commission, which means we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is considered to be a part of this
prospectus. We incorporate by reference the documents listed below:
- our Annual Report on Form 10-K for the year ended December 31, 2001;
- our Current Report on Form 8-K dated February 15, 2001;
- all documents that we file with the Securities and Exchange Commission
under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this prospectus until the expiration of the exchange offer and
thereafter so long as there may be resales by Chase Securities Inc. of
notes, including resales of notes acquired by it pursuant to
market-making activities.
You may request a copy of those filings, at no cost, by writing or
telephoning us at the following:
Hanger Orthopedic Group, Inc.
Two Bethesda Metro Center
Suite 1200
Bethesda, Maryland 20814
Attention: Glenn M. Lohrmann
Secretary
(301) 986-0701
Information that we file later with the Securities and Exchange Commission
and that is incorporated by reference in this prospectus will automatically
update and supersede information contained in this prospectus as if that
information were included in this prospectus.
91
$200,000,000
(HANGER ORTHOPEDIC GROUP LOGO)
HANGER ORTHOPEDIC GROUP, INC.
OFFER TO EXCHANGE
10 3/8% SENIOR NOTES DUE 2009
THAT HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
FOR OUTSTANDING
10 3/8% SENIOR NOTES DUE 2009
---------------------------
PROSPECTUS
, 2002
---------------------------
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Hanger Orthopedic Group, Inc. (the "Company") is a Delaware corporation. In
its Certificate of Incorporation, the Company has adopted the provisions of
Section 102(b)(7) of the Delaware General Corporation Law (the "Delaware Law"),
which enables a corporation in its original certificate of incorporation or an
amendment thereto to eliminate or limit the personal liability of a director for
monetary damages for breach of the director's fiduciary duty, except (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the
Delaware law (providing for liability of directors for unlawful payment of
dividends or unlawful stock purchases or redemptions) or (iv) for any
transaction from which a director will personally receive a benefit in money,
property or services to which the director is not legally entitled.
The Company has also adopted indemnification provisions pursuant to Section
145 of the Delaware Law, which provides that a corporation may indemnify any
persons, including officers and directors, who are, or are threatened to be
made, parties to any threatened, pending or completed legal action, suit or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation), by reason of the fact
that such person was an officer, director, employee or agent of the corporation,
or is or was serving at the request of such corporation as a director, officer,
employee or agent of another corporation or enterprise. The indemnity may
include expenses (including attorneys fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding, provided such officer, director, employee or
agent acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests and, with respect to criminal
proceedings, had no reasonable cause to believe that his conduct was unlawful. A
Delaware corporation may indemnify officers or directors in an action by or in
the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against expenses
(including attorney's fees) that such officer or director actually and
reasonably incurred.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits: The following exhibits are filed herewith or incorporated herein
by reference:
<Table>
<Caption>
EXHIBIT NO. DOCUMENT
- ----------- --------
3(a) -- Certificate of Incorporation, as amended, of the Registrant.
(Incorporated herein by reference to Exhibit 3.1 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1988.)
3(b) -- Certificate of Amendment of the Registrant's Certificate of
Incorporation (which, among other things, changed the
Registrant's corporate name from Sequel Corporation to
Hanger Orthopedic Group, Inc.), as filed on August 11, 1989
with the Office of the Secretary of State of Delaware.
(Incorporated herein by reference to Exhibit 3(b) to the
Registrant's Current Report on Form 10-K dated February 13,
1990.)
3(c) -- Certificate of Agreement of Merger of Sequel Corporation and
Delaware Sequel Corporation. (Incorporated herein by
reference to Exhibit 3.1(a) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30,
1988.)
3(d) -- Certificate of Ownership and Merger of Hanger Acquisition
Corporation and J. E. Hanger, Inc. as filed with the Office
of the Secretary of the State of Delaware on April 11, 1989.
(Incorporated herein by reference to Exhibit 2(f) to the
Registrant's Current Report on Form 8-K dated May 15, 1989.)
</Table>
II-1
<Table>
<Caption>
EXHIBIT NO. DOCUMENT
- ----------- --------
3(e) -- Certificate of Designation, Preferences and Rights of
Preferred Stock of the Registrant as filed on February 12,
1990 with the Office of the Secretary of State of Delaware.
(Incorporated herein by reference to Exhibit 3(a) to the
Registrant's Current Report on Form 8-K dated February 13,
1990.)
3(f) -- Certificate of Amendment to Certificate of Incorporation of
the Registrant, as filed with the Secretary of State of
Delaware on September 16, 1999. (Incorporated herein by
reference to Exhibit 3 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999.)
3(g) -- Certificate of Designation, Rights and Preferences of 7%
Redeemable Preferred Stock as filed with the Office of the
Secretary of State of Delaware on June 28, 1999.
(Incorporated herein by reference to Exhibit 2(b) to the
Registrant's Current Report of Form 8-K dated July 1, 1999.)
3(h) -- Certificate of Elimination of Class A, B, C, D, E and F
Preferred Stock of the Registrant as filed with the Office
of the Secretary of State of Delaware on June 18, 1999.
(Incorporated herein by reference to Exhibit 2(c) to the
Registrant's Current Report on Form 8-K dated July 1, 1999.)
3(i) -- By-Laws of the Registrant, as amended. (Incorporated herein
by reference to Exhibit 3 to the Registrant's Current Report
on Form 8-K dated May 15, 1989.)
4(a) -- Purchase Agreement, dated as of February 8, 2002, among
Hanger Orthopedic Group, Inc., the guarantors signatory
thereto, Lehman Brothers Inc., J.P. Morgan Securities Inc.,
Salomon Smith Barney Inc. and BNP Paribas Securities Corp.
(Incorporated herein by reference to Exhibit 1 to the
Registrant's Current Report on Form 8-K dated February 15,
2002.)
4(b) -- Indenture, dated as of February 15, 2002, among Hanger
Orthopedic Group, Inc., the Subsidiary Guarantors and
Wilmington Trust Company as trustee, relating to the 10 %
Senior Notes due 2009. (Incorporated herein by reference to
Exhibit 4(a) to the Registrant's Current Report on Form 8-K
dated February 15, 2002.)
4(c) -- Registration Rights Agreement, dated as of February 15,
2002, among Hanger Orthopedic Group, Inc., the guarantors
signatory thereto, Lehman Brothers Inc., J.P. Morgan
Securities Inc., Salomon Smith Barney Inc. and BNP Paribas
Securities Corp. (Incorporated herein by reference to
Exhibit 4(b) to the Registrant's Current Report on Form 8-K
dated February 15, 2002.)
5 -- Opinion of Foley & Lardner. (Filed herewith.)
8 -- Tax Opinion of Foley & Lardner. (Filed herewith.)
12.1 -- Ratio of Earnings to Fixed Charges. (Filed herewith.)
21 -- List of Subsidiaries of the Registrant. (Incorporated herein
by reference to Exhibit 21 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2001.)
23(a) -- Consent of Foley & Lardner. (Included in Exhibits 5 and 8.)
23(b) -- Consent of PricewaterhouseCoopers LLP. (Filed herewith.)
24 -- Power of Attorney (Included on Page II-4.)
25 -- Statement on Form T-1 of Eligibility of Trustee. (Filed
herewith.)
99(a) -- Form of Letter of Transmittal. (Filed herewith.)
99(b) -- Form of Notice of Guaranteed Delivery. (Filed herewith.)
99(c) -- Form of Letter to Clients. (Filed herewith.)
99(d) -- From of Letter to Nominees. (Filed herewith.)
</Table>
ITEM 22. UNDERTAKINGS
Insofar as indemnifications for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 20 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and
II-2
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the option of their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of this Registration Statement through the date
of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement or amendment thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Bethesda, State of Maryland, on April 23, 2002.
HANGER ORTHOPEDIC GROUP, INC.
By: /s/ IVAN R. SABEL
------------------------------------
Ivan R. Sabel
Chairman of the Board and Chief
Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints IVAN R. SABEL, and THOMAS F. KIRK his or her true
and lawful attorneys-in-fact and agents, each acting alone, with full powers of
substitution, for him or her and in his or her name, place and stead, in any and
all capacities, to sign any or all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with exhibits
thereto, and other documents in connection therewith, including any subsequent
registration statement filed by the Registrant pursuant to Rule 462(b) under the
Securities Act of 1933, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform for all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or amendment thereto has been signed below by the
following persons in the capacities and on the dates indicated:
<Table>
Dated: April 23, 2002 /s/ IVAN R. SABEL
----------------------------------------
Ivan R. Sabel, CPO
Chairman, Chief Executive Officer and
Director
(Principal Executive Officer)
Dated: April 23, 2002 /s/ GEORGE E. MCHENRY
----------------------------------------
George E. McHenry
Chief Financial Officer
(Principal Financial Officer)
Dated: April 23, 2002 /s/ GLENN M. LOHRMANN
----------------------------------------
Glenn M. Lohrmann
Controller
(Chief Accounting Officer)
</Table>
II-4
<Table>
Dated: April 23, 2002 /s/ MITCHELL J. BLUTT, M.D.
-------------------------------------------------
Mitchell J. Blutt, M.D.
Director
Dated: April 19, 2002 /s/ EDMOND E. CHARRETTE, M.D.
-------------------------------------------------
Edmond E. Charrette, M.D.
Director
Dated: April 23, 2002 /s/ THOMAS P. COOPER, M.D.
-------------------------------------------------
Thomas P. Cooper, M.D.
Director
Dated: April 18, 2002 /s/ ROBERT J. GLASER, M.D.
-------------------------------------------------
Robert J. Glaser, M.D.
Director
Dated: April 23, 2002 /s/ ERIC GREEN
-------------------------------------------------
Eric Green
Director
-------------------------------------------------
C. Raymond Larkin, Jr.
Director
Dated: April 19, 2002 /s/ RISA J. LAVIZZO-MOUREY, M.D.
-------------------------------------------------
Risa J. Lavizzo-Mourey, M.D.
Director
Dated: April 23, 2002 /s/ H.E. THRANHARDT, CPO
-------------------------------------------------
H.E. Thranhardt, CPO
Director
</Table>
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Bethesda, Maryland, on April 23, 2002.
HANGER PROSTHETICS & ORTHOTICS, INC.
By: /s/ IVAN R. SABEL
------------------------------------
Ivan R. Sabel
Chairman
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IVAN R. SABEL Chairman and Director April 23, 2002
- ------------------------------------------ (Chief Executive Officer)
Ivan R. Sabel
/s/ GEORGE E. MCHENRY Treasurer April 23, 2002
- ------------------------------------------ (Chief Financial Officer)
George E. McHenry
/s/ GLENN M. LOHRMANN Vice President, Secretary and Director April 23, 2002
- ------------------------------------------
Glenn M. Lohrmann
</Table>
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Bethesda, Maryland, on April 23, 2002.
SOUTHERN PROSTHETIC SUPPLY, INC.
By: /s/ IVAN R. SABEL
------------------------------------
Ivan R. Sabel
Chairman
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IVAN R. SABEL Chairman and Director April 23, 2002
- ------------------------------------------ (Chief Executive Officer)
Ivan R. Sabel
/s/ GEORGE E. MCHENRY Treasurer April 23, 2002
- ------------------------------------------ (Chief Financial Officer)
George E. McHenry
/s/ GLENN M. LOHRMANN Vice President, Secretary and Director April 23, 2002
- ------------------------------------------
Glenn M. Lohrmann
</Table>
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Bethesda, Maryland, on April 23, 2002.
DOBI-SYMPLEX, INC.
By: /s/ IVAN R. SABEL
------------------------------------
Ivan R. Sabel
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IVAN R. SABEL President and Director April 23, 2002
- ------------------------------------------ (Chief Executive Officer)
Ivan R. Sabel
/s/ GEORGE E. MCHENRY Treasurer April 23, 2002
- ------------------------------------------ (Chief Financial Officer)
George E. McHenry
/s/ GLENN M. LOHRMANN Vice President, Secretary and Director April 23, 2002
- ------------------------------------------
Glenn M. Lohrmann
</Table>
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Bethesda, Maryland, on April 23, 2002.
OPNET, INC.
By: /s/ IVAN R. SABEL
------------------------------------
Ivan R. Sabel
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IVAN R. SABEL President and Director April 23, 2002
- ------------------------------------------ (Chief Executive Officer)
Ivan R. Sabel
/s/ GEORGE E. MCHENRY Treasurer April 23, 2002
- ------------------------------------------ (Chief Financial Officer)
George E. McHenry
/s/ GLENN M. LOHRMANN Vice President, April 23, 2002
- ------------------------------------------ Secretary and Director
Glenn M. Lohrmann
</Table>
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Bethesda, Maryland, on April 23, 2002.
EUGENE TEUFEL & SON ORTHOTICS &
PROSTHETICS, INC.
By: /s/ IVAN R. SABEL
------------------------------------
Ivan R. Sabel
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IVAN R. SABEL President and Director April 23, 2002
- ------------------------------------------ (Chief Executive Officer)
Ivan R. Sabel
/s/ GEORGE E. MCHENRY Treasurer April 23, 2002
- ------------------------------------------ (Chief Financial Officer)
George E. McHenry
/s/ GLENN M. LOHRMANN Vice President, April 23, 2002
- ------------------------------------------ Secretary and Director
Glenn M. Lohrmann
</Table>
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Bethesda, Maryland, on April 23, 2002.
ADVANCED ORTHOPEDIC TECHNOLOGIES, INC.
By: /s/ IVAN R. SABEL
------------------------------------
Ivan R. Sabel
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IVAN R. SABEL President and Director April 23, 2002
- ------------------------------------------ (Chief Executive Officer)
Ivan R. Sabel
/s/ GEORGE E. MCHENRY Treasurer April 23, 2002
- ------------------------------------------ (Chief Financial Officer)
George E. McHenry
/s/ GLENN M. LOHRMANN Vice President, April 23, 2002
- ------------------------------------------ Secretary and Director
Glenn M. Lohrmann
</Table>
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Bethesda, Maryland, on April 23, 2002.
HANGER PROSTHETICS & ORTHOTICS
HOLDINGS, INC.
By: /s/ IVAN R. SABEL
------------------------------------
Ivan R. Sabel
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IVAN R. SABEL President and Director April 23, 2002
- ------------------------------------------ (Chief Executive Officer)
Ivan R. Sabel
/s/ GEORGE E. MCHENRY Treasurer April 23, 2002
- ------------------------------------------ (Chief Financial Officer)
George E. McHenry
/s/ GLENN M. LOHRMANN Vice President, Secretary and Director April 23, 2002
- ------------------------------------------
Glenn M. Lohrmann
</Table>
II-12
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Bethesda, Maryland, on April 23, 2002.
HANGER PROSTHETICS & ORTHOTICS
WEST, INC.
By: /s/ IVAN R. SABEL
------------------------------------
Ivan R. Sabel
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IVAN R. SABEL President and Director April 23, 2002
- ------------------------------------------ (Chief Executive Officer)
Ivan R. Sabel
/s/ GEORGE E. MCHENRY Treasurer April 23, 2002
- ------------------------------------------ (Chief Financial Officer)
George E. McHenry
/s/ GLENN M. LOHRMANN Vice President, Secretary and Director April 23, 2002
- ------------------------------------------
Glenn M. Lohrmann
</Table>
II-13
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Bethesda, Maryland, on April 23, 2002.
HANGER PROSTHETICS & ORTHOTICS
EAST, INC.
By: /s/ IVAN R. SABEL
------------------------------------
Ivan R. Sabel
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IVAN R. SABEL President and Director April 23, 2002
- ------------------------------------------ (Chief Executive Officer)
Ivan R. Sabel
/s/ GEORGE E. MCHENRY Treasurer April 23, 2002
- ------------------------------------------ (Chief Financial Officer)
George E. McHenry
/s/ GLENN M. LOHRMANN Vice President, Secretary and Director April 23, 2002
- ------------------------------------------
Glenn M. Lohrmann
</Table>
II-14
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Bethesda, Maryland, on April 23, 2002.
ADVANCED ORTHOPEDIC TECHNOLOGIES
(CLAYTON), INC.
By: /s/ IVAN R. SABEL
------------------------------------
Ivan R. Sabel
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IVAN R. SABEL President and Director April 23, 2002
- ------------------------------------------ (Chief Executive Officer)
Ivan R. Sabel
/s/ GEORGE E. MCHENRY Treasurer April 23, 2002
- ------------------------------------------ (Chief Financial Officer)
George E. McHenry
/s/ GLENN M. LOHRMANN Vice President, Secretary and Director April 23, 2002
- ------------------------------------------
Glenn M. Lohrmann
</Table>
II-15
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Bethesda, Maryland, on April 23, 2002.
AD CRAIG COMPANY
By: /s/ IVAN R. SABEL
------------------------------------
Ivan R. Sabel
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IVAN R. SABEL President and Director April 23, 2002
- ------------------------------------------ (Chief Executive Officer)
Ivan R. Sabel
/s/ GEORGE E. MCHENRY Treasurer April 23, 2002
- ------------------------------------------ (Chief Financial Officer)
George E. McHenry
/s/ GLENN M. LOHRMANN Vice President, Secretary and Director April 23, 2002
- ------------------------------------------
Glenn M. Lohrmann
</Table>
II-16
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Bethesda, Maryland, on April 23, 2002.
PROGRESSIVE ORTHOPEDIC
By: /s/ IVAN R. SABEL
------------------------------------
Ivan R. Sabel
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IVAN R. SABEL President and Director April 23, 2002
- ------------------------------------------ (Chief Executive Officer)
Ivan R. Sabel
/s/ GEORGE E. MCHENRY Treasurer April 23, 2002
- ------------------------------------------ (Chief Financial Officer)
George E. McHenry
/s/ GLENN M. LOHRMANN Vice President, Secretary and Director April 23, 2002
- ------------------------------------------
Glenn M. Lohrmann
</Table>
II-17
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Bethesda, Maryland, on April 23, 2002.
E.A. WARNICK-POMEROY CO., INC.
By: /s/ IVAN R. SABEL
------------------------------------
Ivan R. Sabel
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IVAN R. SABEL President and Director April 23, 2002
- ------------------------------------------ (Chief Executive Officer)
Ivan R. Sabel
/s/ GEORGE E. MCHENRY Treasurer April 23, 2002
- ------------------------------------------ (Chief Financial Officer)
George E. McHenry
/s/ GLENN M. LOHRMANN Vice President, April 23, 2002
- ------------------------------------------ Secretary and Director
Glenn M. Lohrmann
</Table>
II-18
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Bethesda, Maryland, on April 23, 2002.
FRANK J. MALONE & SON, INC.
By: /s/ IVAN R. SABEL
------------------------------------
Ivan R. Sabel
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IVAN R. SABEL President and Director April 23, 2002
- ------------------------------------------ (Chief Executive Officer)
Ivan R. Sabel
/s/ GEORGE E. MCHENRY Treasurer April 23, 2002
- ------------------------------------------ (Chief Financial Officer)
George E. McHenry
/s/ GLENN M. LOHRMANN Vice President, April 23, 2002
- ------------------------------------------ Secretary and Director
Glenn M. Lohrmann
</Table>
II-19
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Bethesda, Maryland, on April 23, 2002.
MEADOWBROOK ORTHOPEDICS, INC.
By: /s/ IVAN R. SABEL
------------------------------------
Ivan R. Sabel
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IVAN R. SABEL President and Director April 23, 2002
- ------------------------------------------ (Chief Executive Officer)
Ivan R. Sabel
/s/ GEORGE E. MCHENRY Treasurer April 23, 2002
- ------------------------------------------ (Chief Financial Officer)
George E. McHenry
/s/ GLENN M. LOHRMANN Vice President, April 23, 2002
- ------------------------------------------ Secretary and Director
Glenn M. Lohrmann
</Table>
II-20
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Bethesda, Maryland, on April 23, 2002.
MEDICAL ARTS O&P SERVICES, INC.
By: /s/ IVAN R. SABEL
------------------------------------
Ivan R. Sabel
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IVAN R. SABEL President and Director April 23, 2002
- ------------------------------------------ (Chief Executive Officer)
Ivan R. Sabel
/s/ GEORGE E. MCHENRY Treasurer April 23, 2002
- ------------------------------------------ (Chief Financial Officer)
George E. McHenry
/s/ GLENN M. LOHRMANN Vice President, Secretary and Director April 23, 2002
- ------------------------------------------
Glenn M. Lohrmann
</Table>
II-21
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Bethesda, Maryland, on April 23, 2002.
ORTHOTIC & PROSTHETIC REHABILITATION
TECHNOLOGIES, INC.
By: /s/ IVAN R. SABEL
------------------------------------
Ivan R. Sabel
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IVAN R. SABEL President and Director April 23, 2002
- ------------------------------------------ (Chief Executive Officer)
Ivan R. Sabel
/s/ GEORGE E. MCHENRY Treasurer April 23, 2002
- ------------------------------------------ (Chief Financial Officer)
George E. McHenry
/s/ GLENN M. LOHRMANN Vice President, Secretary and Director April 23, 2002
- ------------------------------------------
Glenn M. Lohrmann
</Table>
II-22
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Bethesda, Maryland, on April 23, 2002.
UNIVERSITY ORTHOTIC & PROSTHETIC
CONSULTANTS, INC.
By: /s/ IVAN R. SABEL
------------------------------------
Ivan R. Sabel
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IVAN R. SABEL President and Director April 23, 2002
- ------------------------------------------ (Chief Executive Officer)
Ivan R. Sabel
/s/ GEORGE E. MCHENRY Treasurer April 23, 2002
- ------------------------------------------ (Chief Financial Officer)
George E. McHenry
/s/ GLENN M. LOHRMANN Vice President, Secretary and Director April 23, 2002
- ------------------------------------------
Glenn M. Lohrmann
</Table>
II-23