| HANGER ORTHOPEDIC GROUP INC Item 1A Risk Factors 19 ITEM 1A RISK FACTORS We incurred net losses for the years ended December 31, 2004 and 2001 and could incur net losses in the future |
| We incurred a net loss of dlra23dtta4 million for the year ended December 31, 2004 primarily as a result of the recognition of dlra45dtta8 million in non-cash charges related to goodwill impairment |
| For the years ended December 31, 2005, 2003 and 2002, however, we generated net income of dlra17dtta8 million, dlra15dtta6 million and dlra23dtta0 million, respectively |
| Following the NovaCare O&P acquisition, we incurred a net loss of dlra9dtta7 million for the year ended December 31, 2001 |
| We cannot assure that we will not incur net losses in the future |
| We are highly leveraged and have significant fixed operating costs; therefore our profitability and ability to service our debt could be negatively impacted by our ability to generate sales growth |
| We are highly leveraged and have a significant amount of fixed costs |
| Therefore, our ability to continue to service our debt and fund necessary capital additions is dependent on our ability to grow sales and control inflationary increases in our fixed costs |
| Changes in government reimbursement levels could adversely affect our net sales, cash flows and profitability |
| We derived 41dtta2prca, 44dtta3prca and 44dtta8prca of our net sales for the years ended December 31, 2005, 2004 and 2003, respectively, from reimbursements for O&P services and products from programs administered by Medicare, Medicaid and the US 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 US 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 fee schedules of certain third-party payors are indexed to Medicare |
| 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 US Congress were to legislate modifications to the Medicare fee schedules, our net sales from Medicare and other payors could be adversely and materially affected |
| We cannot predict whether any such modifications to the fee schedules will be enacted or what the final form of any modifications might be |
| See previous discussion in Item 1 under “Reimbursement” and “Government Regulation |
| ” In November 2003, Congress legislated a three-year freeze on Medicare reimbursement levels beginning January 1, 2004 on all O&P services |
| The effect of this legislation has been a downward pressure on our income from operations |
| We have, however, initiated certain purchasing and efficiency programs which we believe will minimize such effects |
| 19 _________________________________________________________________ Changes in payor reimbursements could negatively affect our net sales volume |
| Recent years have seen a consolidation of healthcare companies coupled with certain payors terminating contracts, imposing caps or reducing reimbursement for O&P products |
| Additionally, employers are increasingly pushing healthcare costs down to their employees |
| These trends could result in decreased O&P revenue |
| If we cannot collect our accounts receivable and effectively manage our inventory, our business, results of operations, financial condition and ability to satisfy our obligations under our indebtedness could be adversely affected |
| As of December 31, 2005 and 2004, our accounts receivable over 120 days represented approximately 20dtta4prca and 23dtta8prca of total accounts receivable outstanding in each period, respectively |
| If we cannot collect our accounts receivable, our business, results of operations, financial condition and ability to satisfy our obligations under our indebtedness could be adversely affected |
| 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 |
| In conjunction with our physical inventory performed on October 1, 2004, we recorded a dlra1dtta6 million increase in inventory |
| Because our income from operations percentage is based on our inventory levels, adjustments to inventory during interim periods following our physical inventory could adversely affect our results of operations and financial condition |
| A decrease in the quality of services provided at our patient-care centers may negatively impact our reputation |
| Maintaining our market share is dependent on us providing quality services and products |
| Increasingly, payors are seeking out service providers that control a significant market presence and abide by high quality standards |
| In addition, suppliers attempting to sell directly to hospitals and healthcare management companies, O&P competitors and other service providers, such as physical therapists, are continually attempting to penetrate the market |
| If we are unable to abide by our standard operating procedures and continue providing quality services to our patients, our net sales and market presence could be adversely impacted |
| 20 _________________________________________________________________ If we are unable to maintain good relations with our suppliers, our existing purchasing discounts may be jeopardized, which could adversely affect our gross margins |
| We currently enjoy significant purchasing discounts with most of our suppliers, and our ability to sustain our income from operations 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 physicians 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 relationships |
| Our net sales would be reduced if a significant number of our practitioners leave us |
| In addition, any failure of our 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 adversely affect our reputation, subject us to liability and significantly reduce our net sales |
| A substantial amount of our business is derived from orthopedic surgeons and other healthcare providers |
| If the quality of our services and products declines in the opinion of these healthcare providers, they may cease to recommend our products, 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 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: 21 _________________________________________________________________ • 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; • damage to our reputation in various markets; or • material and/or adverse effects on our business, financial condition and results of operations |
| We are subject to numerous federal, state and local governmental regulations, noncompliance with which could result in significant penalties that could have a material adverse effect on our business |
| A failure by us to comply with the numerous federal, state and/or local healthcare and other governmental regulations to which we are subject, including the regulations discussed under “Government Regulation” in Item 1 above, could result in significant penalties and adverse consequences, including exclusion from the Medicare and Medicaid programs, which could have a material adverse effect on our business |
| If the results of the current investigations over the billing allegations at the West Hempstead patient-care center and the associated class action lawsuits are not resolved in our favor or if such allegations are expanded to other patient-care centers and are not resolved in our favor, our operations may be negatively impacted and we may be subject to significant fines |
| Although we believe that the class action suits against management that surfaced as a result of the billing allegations at the West Hempstead patient-care center are without merit, if the courts decide in favor of the plaintiffs, we may be subject to monetary and/or compensatory damages |
| In addition, if the results of the investigation at the West Hempstead patient-care center and any other patient-care centers uncover billing discrepancies, we may be responsible for noncompliance fines and the extension of such investigation to other patient-care centers |
| 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 allow us to expand into under-served geographic areas or otherwise offer growth opportunities |
| The financing for these acquisitions could significantly dilute our investors or result in an increase in our indebtedness |
| 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 22 _________________________________________________________________ • 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 |
| We make available free of charge, on or through our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and Section 16 filings (ie Forms 3, 4 and 5) as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission at http://www |
| Our website also contains the charters of the Audit Committee, Corporate Governance and Nominating Committee, Compensation Committee and Quality and Technology Committee of our board of directors; our Code of Business Conduct and Ethics for Directors and Employees, which includes our principal executive, financial and accounting officers; as well as our Corporate Governance Guidelines |
| Information contained on our website is not part of this report |