| NATUS MEDICAL INC ITEM 1A Risk Factors On January 5, 2006 we completed our acquisition of Bio-logic Systems Corp |
| There are numerous risks associated with having completed the acquisition The completion of the acquisition may not result in improved operating results for us, or in our achieving financial condition superior to that which we would have achieved had we not completed the acquisition |
| The acquisition could fail to produce the benefits that we anticipate, or could have other adverse effects that we currently do not foresee |
| In addition, some of the assumptions that we have relied upon, such as achievement of operating synergies, may not be realized |
| In this event, the acquisition could result in reduced earnings of Natus as compared to the per-share earnings that would have been achieved by Natus if the acquisition had not occurred |
| We used virtually all of our existing cash resources to complete the acquisition, and have also incurred indebtedness under a new credit facility for a portion of the purchase price |
| This usage of cash has had an adverse impact on our liquidity, and will force us to place more reliance on cash flow from operations for our liquidity |
| If our cash flow from operations is not sufficient for our needs, our business could be adversely affected |
| If we are required to seek additional external financing to support our need for cash, we may not have access to financing on terms that are acceptable to us, or at all |
| Alternatively, we may obtain additional financing on terms that are dilutive to existing holders of our common stock or that include covenants that restrict our business, or both |
| 23 ______________________________________________________________________ [50]Table of Contents We entered into a senior secured borrowing facility to obtain a portion of the funds needed to complete the acquisition |
| The loan causes us to incur interest charges for such time as the loan is outstanding |
| In addition, the loan contains various covenants by us that directly or indirectly restrict our ability to engage in activities that we may otherwise believe to be in the best interests of the company |
| The loan is secured by the assets of the Company, and this security interest may also negatively effect our flexibility to engage in financing or other activities in future periods |
| If we fail to successfully integrate the operations of Natus and Bio-logic, we may not realize the potential benefits of the acquisition |
| The integration of the operations of Natus and Bio-logic is a time consuming and expensive process and may disrupt our operations if it is not completed in a timely and efficient manner |
| Bio-logic’s primary offices are located in Mundelein, Illinois and it also has employees and contractors in, among other places, Israel and Poland |
| The geographical distance between Bio-logic’s and our facilities may further adversely affect our ability to integrate these operations |
| If this integration effort is not successful, our results of operations could be harmed, employee morale could decline, key employees could leave, and customers could cancel existing orders or choose not to place new ones |
| In addition, we may not achieve the synergies or other benefits of the acquisition that we anticipate |
| We may encounter the following difficulties, costs and delays involved in integrating these operations: • Failure to successfully manage relationships with customers and other important business partners; • Failure of customers to continue using the products and services of the combined company; • The loss of key employees; • Challenges encountered in managing larger, more geographically dispersed operations; • Diversion of the attention of management from other ongoing business concerns; and • Potential impairment charges incurred to write down the carrying amount of intangible assets generated as a result of the acquisition |
| We have a history of losses, variable quarterly results, and seasonality in the sale of our products, and may not maintain profitability in the future Since our inception, we have incurred significant net losses, including net losses for the years 2002, 2003 and 2004, and we may incur net losses in the future |
| As of December 31, 2005, we had an accumulated deficit of approximately dlra30dtta8 million |
| Additionally, our revenue and operating results have varied significantly from quarter to quarter in the past and may continue to fluctuate in the future |
| The following are among the factors that could cause our revenue, operating results, and margins to fluctuate significantly from quarter to quarter: • Budgeting cycle of our customers, particularly government entities, in the US and internationally; • Size and timing of specific sales, such as large purchases of our devices and systems or our supplies and services, by government agencies or hospital systems; • Trade-in allowances or other concessions in connection with the introduction of new products or improvements to existing products; • Length and unpredictability of our sales cycle, particularly for our Neometrics products which may have sales cycles that are longer or different from the sales cycles of our other products; and • Marked changes caused by rapidly evolving technology |
| In addition, we experience seasonality in our revenue |
| For example, our sales typically decline from our fourth fiscal quarter to our first fiscal quarter, due to patterns in the capital budgeting and purchasing cycles of our current and prospective customers, many of which are government agencies |
| We may also experience declining sales in the third fiscal quarter due to summer holiday and vacation schedules |
| We anticipate that we 24 ______________________________________________________________________ [51]Table of Contents will continue to experience these seasonal fluctuations, which may lead to fluctuations in our quarterly operating results |
| We believe that you should not rely on our results of operations for interim periods as an indication of our expected results in any future period |
| We anticipate that it will become increasingly difficult for us to manage our expenses as we: • Continue to invest in research and development to enhance our hearing-screening and phototherapy product lines, the technologies we acquired from Bio-logic, and other products and technologies; • Develop additional applications for our current technology; • Increase our marketing and selling activities, particularly outside the US; • Develop additional infrastructure and hire required management and other employees to keep pace with our growth As a result of these factors, we may need to generate proportionately higher revenue to maintain profitability |
| We cannot be certain that we will be able to sustain profitability in the future |
| Our operations may be restricted by the terms of our debt, which could adversely affect us The credit facility that we entered into to finance a portion of the purchase price of Bio-Logic includes a number of restrictive covenants |
| These covenants could adversely affect us by limiting our ability to plan for or react to market conditions or to meet our capital needs |
| These covenants will, among other things, restrict our ability to: • Incur more debt; • Create liens; • Pay dividends and make distributions or repurchase stock; • Make large capital expenditures; and • Merge, consolidate, or make other changes to our corporate structure, or transfer or sell assets |
| In addition, our credit agreement requires us to maintain certain financial ratios and meet other financial covenants |
| Our failure to comply with these ratios or covenants would cause a default that, if not cured or waived, could result in our being required to repay the borrowing under our credit facility before its due date |
| If we are unable to make this repayment or otherwise refinance the borrowing, the lender under our credit agreement could foreclose on our assets |
| If we refinance the borrowing on less favorable terms, our results of operations and financial condition could be adversely impacted by increased costs and rates |
| In addition, our failure to maintain covenants related to our credit agreement could have an impact on our other contractual arrangements that require us to maintain third-party credit related covenants |
| We may be unable to service our debt Our ability to make scheduled payments on or to refinance our obligations with respect to our debt will depend on our financial and operating performance |
| We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us to enable us to service our debt or to fund our other liquidity needs |
| If we are unable to meet our debt obligations or fund our other liquidity needs, we may need to restructure or refinance all or a portion of our debt or sell certain of our assets |
| We cannot assure you that we would be able to restructure or refinance any of our debt on commercially reasonable terms, if at all, which could cause us to default on our debt obligations and impair our liquidity |
| Any refinancing of our debt could be at higher interest rates and may require us to comply with less favorable covenants, which could further restrict our business operations |
| 25 ______________________________________________________________________ [52]Table of Contents We have relied, and expect to continue to rely, on sales of our newborn screening products for the majority of our revenue, and a decline in sales of these products could cause our revenue to fall We expect that the revenue from our newborn hearing screening products will continue to account for a majority of our revenue for at least the next year |
| Any factors adversely affecting the pricing of our newborn hearing screening devices and related supplies, or demand for our newborn hearing screening products, including physician acceptance or the selection of competing products, could cause our revenue to decline and our business to suffer |
| In the United States we sell our newborn hearing screening products in a mature market We face competition from other companies in all of our product lines |
| Our competitors range from small privately held companies to multinational corporations, and their product offerings vary in scope and breadth |
| We do not believe that any single competitor is dominant in any of our product lines |
| We derive a significant portion of our revenue from the sale of disposable supplies that are used with our hearing screening devices |
| In the US, we sell our supply products in a mature market |
| Because these products can generate high margins, we expect that our products, particularly our hearing screening supply products, could face increasing competition, including competitors offering lower prices, which could have an adverse affect on our revenue and margins |
| We believe that our primary competitive strength relates to the functionality and reliability of our products |
| Our competitors may have certain competitive advantages which include the ability to devote greater resources to the development, promotion and sale of their products |
| Consequently, we may need to increase our efforts, and related expenses for research and development, to maintain or improve our position |
| We expect recurring sales to our existing customers to generate a majority of our revenue in the future, and if our existing customers do not continue to purchase products from us, our revenue may decline |
| Our business could be harmed if our competitors establish cooperative relationships with large medical device vendors or rapidly acquire market share through industry consolidation Large medical device vendors may acquire or establish cooperative relationships with our current competitors |
| We expect that the medical device industry will continue to consolidate |
| New competitors or alliances among competitors may emerge and rapidly acquire significant market share, which would harm our business and financial prospects |
| Our operating results may decline if we do not succeed in developing, acquiring and marketing additional products or improving our existing products We intend to develop and acquire additional products and technologies for the screening, detection, treatment, monitoring and tracking of common medical ailments |
| Developing and acquiring new products, and improving our existing products, to meet the needs of current and future customers requires significant investments in research and development |
| If we fail to successfully sell new products or update our existing products, our operating results may decline as our existing products reach the end of their commercial life cycles |
| In order to accurately recognize revenue on long-term development and implementation contracts associated with our Neometrics newborn screening data management systems, we must be able to accurately estimate the total cost of completing a project |
| In arriving at these estimates, we must make assumptions about future costs that may prove to be inaccurate |
| We recognize revenue from our Neometrics newborn screening data management systems, which are generally highly configurable, on the percentage of completion basis over the development and implementation 26 ______________________________________________________________________ [53]Table of Contents period of the associated installation |
| The development and implementation period typically ranges from six to nine months |
| In order to determine percentage of completion, we must be able to accurately estimate the total cost of the development and implementation process |
| If our estimates of the future costs to be incurred are understated, our future gross profit would be negatively impacted, and the impact could be material to our results of operations |
| If we fail in our efforts to educate clinicians, government agency personnel, and third-party payors on the effectiveness of our products we will not achieve future sales growth It is critical to the success of our sales efforts that we educate a sufficient number of clinicians, hospital administrators, and government agencies about our products and the costs and benefits of their use |
| The commercial success of our products depends upon clinician, government agency, and other third-party payor confidence in the economic and clinical benefits of our products as well as their comfort with the efficacy, reliability, sensitivity, and specificity of our products |
| We believe that clinicians will not use our products unless they determine, based on published peer-reviewed journal articles and experience, that our products provide an accurate and cost-effective alternative to other means of testing or treatment |
| Our customers may choose to use competitive products, which may be less expensive or may provide faster results than our devices |
| Clinicians are traditionally slow to adopt new products, testing practices, and clinical treatments, partly because of perceived liability risks and the uncertainty of third-party reimbursement |
| If more clinicians, government agencies, and hospital administrators do not adopt our products, we may not maintain profitability |
| Factors that may adversely affect the medical community’s acceptance of our products include: • Publication of clinical study results that demonstrate a lack of efficacy or cost-effectiveness of our products; • Changing governmental and physician group guidelines; • Performance, quality, price, and total cost of ownership of our products relative to other such products; • Our ability to maintain and enhance our existing relationships and to form new relationships with leading physicians, physician organizations, hospitals, state laboratory personnel, and third-party payors; • Changes in state and third-party payor reimbursement policies for our products; and • Adoption of federal, state and foreign laws mandating or requiring universal newborn hearing screening and metabolic screening |
| Our plan to expand our international operations will result in increased costs and is subject to numerous risks; if our efforts are not successful, this could harm our business The domestic market for our ALGO hearing screening products is mature and we plan to expand our international sales and marketing efforts to increase sales of our products in foreign countries |
| Following our acquisition of Fischer-Zoth in September 2004, sales of our Echo-Screen OAE device have contributed to a significant portion of our sales outside the US We have only begun over the past five years to significantly develop our distributor sales force outside the US We may not realize corresponding growth in revenue from growth in international unit sales, due to the lower average selling prices we receive on sales outside of the US Even if we are able to successfully expand our international selling efforts, we cannot be certain that we will be able to create or increase demand for our products outside of the US Our international operations are subject to other risks, which include: • Impact of possible recessions in economies outside the US; • Political and economic instability, including instability related to war and terrorist attacks in the US and abroad; 27 ______________________________________________________________________ [54]Table of Contents • Contractual provisions governed by foreign law, such as local law rights to sales commissions by terminated distributors; • Dependence of demand for our products on health care spending by foreign governments; • Greater difficulty in accounts receivable collection and longer collection periods; • Difficulties of staffing and managing foreign operations; • Reduced protection for intellectual property rights in some countries and potentially conflicting intellectual property rights of third parties under the laws of various foreign jurisdictions; • Difficulty in obtaining and maintaining foreign regulatory approval; and • Attitudes by clinicians, and cost reimbursement policies, towards use of disposable supplies that are potentially unfavorable to our business |
| If guidelines mandating universal newborn screening do not continue to develop in foreign countries and governments do not mandate testing of all newborns as we anticipate, or if those guidelines have a long phase-in period, our revenues may not grow We estimate that approximately 90 to 95prca of the children born in the US are currently being tested for hearing prior to discharge from the hospital |
| To date, there has been only limited adoption of newborn hearing screening prior to hospital discharge by foreign governments, and the phase-in period varies from several months to several years |
| The widespread adoption of these guidelines depends, in part, on our ability to educate foreign government agencies, neonatologists, pediatricians, third-party payors, and hospital administrators about the benefits of universal newborn screening as well as the use of our products to perform the screening and monitoring |
| Our revenues may not grow if governments do not require universal newborn screening prior to hospital discharge, or if physicians or hospitals are slow to comply with those guidelines, or if governments provide for a lengthy phase-in period for compliance |
| Because we rely on distributors or sub-distributors to sell our products in most of our markets outside of the US, our revenue could decline if our existing distributors reduce the volume of purchases from us, or if our relationship with any of these distributors is terminated We currently rely on our distributors or sub-distributors for a majority of our sales outside the US Our reliance on international distributors has increased with our decision in 2004 to close our Japanese sales subsidiary and sell through a distributor in Japan, and our acquisition of Fischer-Zoth, which sells its products through distributors in Europe and Asia |
| Some distributors also assist us with regulatory approvals and education of clinicians and government agencies |
| We intend to continue our efforts to increase our sales in Europe, Japan and other developed countries |
| If we fail to sell our products through our international distributors, we would experience a decline in revenues unless we begin to sell our products directly in those markets |
| We cannot be certain that we will be able to attract new international distributors to market our products effectively or provide timely and cost-effective customer support and service |
| Even if we are successful in selling our products through new distributors, the rate of growth of our revenue could be harmed if our existing distributors do not continue to sell a large dollar volume of our products |
| None of our existing distributors are obligated to continue selling our products |
| We may be subject to foreign laws governing our relationships with our international distributors |
| These laws may require us to make payments to our distributors if we terminate our relationship for any reason, including for cause |
| Some countries require termination payments under local law or legislation that may supersede our contractual relationship with the distributor |
| These payments could be equal to a year or more of gross profit on sales of our products that the distributor would have earned |
| We have terminated our relationship with certain distributors in the past |
| To date, we have not been required to make any material termination payments under local laws |
| Any required payments would adversely affect our operating results |
| 28 ______________________________________________________________________ [55]Table of Contents Our operating results may suffer because of foreign currency exchange rate fluctuations and may require us to engage in foreign currency hedging Substantially all of our sales contracts to our US based customers provide for payment in US dollars |
| In addition, sales to most of our international distributors provide for payment in US dollars |
| However, substantially all of the revenue and expenses of our foreign subsidiaries are denominated in the applicable foreign currency |
| To date we have not undertaken any foreign currency hedging transactions and, as a result, our future revenue and expenses may be unpredictable due to exchange rate fluctuations that could result in foreign exchange gains and losses associated with the translation of assets denominated in foreign currencies |
| If health care providers are not adequately reimbursed for procedures conducted with our devices or supplies, or if reimbursement policies change adversely, we may not be successful marketing and selling new products or technologies Clinicians, hospitals, and government agencies are unlikely to purchase our products if clinicians are not adequately reimbursed for the procedures conducted with our devices or supplies |
| Unless a sufficient amount of conclusive, peer-reviewed clinical data about our products has been published, third-party payors, including insurance companies and government agencies, may refuse to provide reimbursement |
| Furthermore, even if reimbursement is provided, it may not be adequate to fully compensate the clinicians or hospitals |
| Some third-party payors may refuse adequate reimbursement unless the infant has demonstrable risk factors |
| If health care providers cannot obtain sufficient reimbursement from third-party payors for our products or the screenings conducted with our products, it is unlikely that our products will ever achieve significant market acceptance |
| Acceptance of our products in international markets will depend upon the availability of adequate reimbursement or funding within prevailing health care payment systems |
| Reimbursement, funding and health care payment systems vary significantly by country |
| We may not obtain approvals for reimbursement in a timely manner or at all |
| Adverse changes in reimbursement policies in general could harm our business |
| We are unable to predict changes in the reimbursement methods used by third-party health care payors, particularly those in countries and regions outside the US For example, some payors are moving toward a managed care system in which providers contract to provide comprehensive health care for a fixed cost per person |
| In a managed care system the cost of our products may not be incorporated into the overall payment for childbirth and newborn care or there may not be adequate reimbursement for our products separate from reimbursement for the procedure |
| Unless the cost of screening or treatment is reimbursed as a standard component of newborn care, universal screening is unlikely to occur and the number of infants likely to be screened with our products will be substantially reduced |
| If we lose our relationship with any supplier of key product components or our relationship with a supplier deteriorates or key components are not available in sufficient quantities, our manufacturing could be delayed and our business could suffer We contract with third parties for the supply of some of the components used in our products and the production of our disposable products |
| We have relatively few sources of supply for some of the components used in our products and in some cases we rely entirely on sole-source suppliers |
| In addition, the lead-time involved in the manufacturing of some of these components can be lengthy and unpredictable |
| For example, during 2002, we experienced delays on the part of a supplier to provide us with volume production of our new Flexicoupler supplies |
| In 2005, we relied on a single supplier of cables used in our ALGO hearing screening devices to help us complete a field replacement program of those cables |
| If these or other suppliers become unwilling or unable to supply us with components meeting our requirements, it might be difficult to establish additional or replacement suppliers in a timely manner, or at all |
| This would cause our product sales to be disrupted and our revenue and operating results to suffer |
| Replacement or alternative sources might not be readily obtainable due to regulatory requirements and other factors applicable to our manufacturing operations |
| Incorporation of components from a new supplier into our products may require a new or supplemental filing with applicable regulatory authorities and clearance or 29 ______________________________________________________________________ [56]Table of Contents approval of the filing before we could resume product sales |
| This process may take a substantial period of time, and we may not be able to obtain the necessary regulatory clearance or approval |
| This could create supply disruptions that would harm our product sales and operating results |
| Our sales efforts through group purchasing organizations and sales to high volume purchasers may reduce our average selling prices, which would reduce our revenue and gross profits from these sales We have entered, and may in the future enter, into agreements with customers who purchase high volumes of our products |
| Our agreements with these customers may contain discounts from our normal selling prices and other special pricing considerations, which could cause our revenue and profits to decline |
| In addition, we have entered into agreements to sell our products to members of GPOs, which negotiate volume purchase prices for medical devices and supplies for member hospitals, group practices and other clinics |
| While we make sales directly to GPO members, the members of these GPOs now receive volume discounts from our normal selling price and may receive other special pricing considerations from us |
| Sales to members of one GPO, Novation, LLC, accounted for approximately 15prca, 20prca, and 22prca, of our total revenue in the twelve months ended December 31, 2005, 2004 and 2003, respectively |
| Sales to members of GPOs accounted for approximately 28prca, 46prca, and 39prca of our total revenue during the 12 months ended December 31, 2005, 2004, and 2003, respectively |
| Other of our existing customers may be members of GPOs with which we do not have agreements |
| Our sales efforts through GPOs may conflict with our direct sales efforts to our existing customers |
| If we enter into agreements with new GPOs and some of our existing customers begin purchasing our products through those GPOs, our revenue and profits could decline |
| If material weaknesses in the adequacy of our internal control over financial reporting are identified and reported as a result of the assessment required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability of our financial statements As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the company’s internal control over financial reporting in their annual reports on Form 10-K We completed an implementation project in preparation for our first Section 404 reporting requirement that was effective for the year ending December 31, 2005 and the report of management is contained herein |
| This report contains an assessment by management of the effectiveness of the Company’s internal controls over financial reporting |
| In addition, our independent registered public accounting firm that has audited our financial statements for the year ended December 31, 2005 also attested to and reported on management’s assessment of the effectiveness of our internal control over financial reporting, as well as the operating effectiveness of our internal controls, and their attestation is contained herein |
| While we have expended significant resources in developing the necessary documentation and testing procedures required by Section 404, there is a risk that in the future we will not comply with all of the requirements imposed by Section 404 |
| If we do not continue to maintain an effectively designed and operating system of internal control, we may be unable to comply with the requirements of Section 404 in the future |
| This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements |
| Our failure to obtain necessary FDA clearances or approvals or to comply with FDA regulations could hurt our ability to commercially distribute and market our products in the US, and this would harm our business and financial condition Unless an exemption applies, each medical device that we wish to market in the US must first receive one of the following types of FDA premarket review authorizations: • Clearance via Section 510(k) of the federal Food, Drug, and Cosmetics Act of 1938, as amended; or 30 ______________________________________________________________________ [57]Table of Contents • Premarket approval via Section 515 of the Food, Drug, and Cosmetics Act if the FDA has determined that the medical device in question poses a greater risk of injury |
| The process of obtaining premarket approval is much more costly, lengthy and uncertain |
| Premarket approval generally takes from one to three years, but can take even longer |
| The FDA may not grant either 510(k) clearance or premarket approval for any product we propose to market |
| Furthermore, if the FDA concludes that future products using our technology do not meet the requirements to obtain 510(k) clearance, we would have to seek premarket approval |
| The FDA may impose the more burdensome premarket approval requirement on modifications to our existing products or future products, which in either case could be costly and cause us to divert our attention and resources from the development of new products or the enhancement of existing products |
| Our business may suffer if we are required to revise our labeling or promotional materials, or the FDA takes an enforcement action against us for off-label uses We may not promote or advertise the ALGO and Echo-Screen devices, MiniMuffs, neoBLUE phototherapy device products, or any future cleared or approved devices, for uses not within the scope of our clearances or approvals or make unsupported promotional claims about the benefits of our products |
| If the FDA determines that our claims are outside the scope of our clearances or are unsupported it could require us to revise our promotional claims or take enforcement action against us |
| If we were subject to such an action by the FDA, our sales could be delayed, our revenue could decline, and our reputation among clinicians could be harmed |
| Our business would be harmed if the FDA determines that we have failed to comply with applicable regulations or we do not pass an inspection We are subject to inspection and market surveillance by the FDA concerning compliance with pertinent regulatory requirements |
| If the FDA finds that we have failed to comply with these requirements, the Agency can institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions such as: • Fines, injunctions and civil penalties; • Recall or seizure of our products; • Issuance of public notices or warnings; • Imposition of operating restrictions, partial suspension, or total shutdown of production; • Refusal of our requests for 510(k) clearance or premarket approval of new products; • Withdrawal of 510(k) clearance or premarket approvals already granted; or • Criminal prosecution |
| If we fail to obtain and maintain necessary foreign regulatory approvals in order to market and sell our products outside of the US, we may not be able to sell our products in other countries Our products that are regulated domestically by the FDA are also regulated outside the US by foreign governmental agencies similar to the FDA and are subject to regulatory requirements similar to those of the FDA The time and cost required to obtain market authorization from other countries and the requirements for licensing a product in another country may differ significantly from FDA requirements |
| We may not be able to obtain these approvals without incurring significant expenses or at all, and we may not be able to maintain these approvals once they have been obtained |
| 31 ______________________________________________________________________ [58]Table of Contents If we, or our suppliers, fail to comply with applicable regulations, sales of our products could be delayed and our revenue could be harmed Every manufacturer of a finished medical device, including Natus and some of our contract manufacturers and suppliers, is required to demonstrate and maintain compliance with the FDA’s quality system regulation and comparable regulations of states and other countries |
| The FDA enforces the quality system regulation through periodic inspections |
| We or our contract manufacturers, may fail to pass future quality system regulation inspections |
| If we, or our contract manufacturers, fail one of these inspections in the future, our operations could be disrupted and our manufacturing and sales delayed significantly until we can demonstrate adequate compliance |
| If we or our contract manufacturers fail to take adequate corrective action in a timely fashion in response to a quality system regulation inspection, the FDA could shut down our or our contract manufacturers’ manufacturing operations or require us, among other things, to recall our products, either of which would harm our business |
| Governmental, environmental, health and safety regulations could adversely affect our operations |
| Our operations are subject to complex and stringent environmental, health, safety and other governmental laws and regulations |
| We are subject to a varied and complex body of laws and regulations |
| Existing laws and regulations may be revised or reinterpreted, or new laws and regulations may become applicable to us, that may have a negative effect on our business and results of operations |
| We may not be successful in integrating the businesses that we acquire, or such businesses may not be accretive to earnings or perform as projected We acquired intellectual property assets and technology patents from Pemstar Pacific Consultants during 2002, and we acquired the assets of Neometrics Inc |
| and affiliated entities during 2003, we acquired Fischer-Zoth in 2004 and we acquired Bio-logic Systems Corp |
| We expect to make additional acquisitions of products, technology assets or businesses in the future as part of our efforts to increase revenue and expand our product offerings |
| In addition to direct costs, acquisitions pose a number of risks, including: • Inability to effectively integrate acquired products into our business; • Loss of key personnel of the acquired company; • Failure to realize expected synergies; • Failure of acquired products to achieve projected sales; • Failure to maintain customers of, or other relationships existing with respect to, the acquired business; • Failure to successfully develop the acquired technology into the desired products or enhancements; • Assumption of unknown liabilities; • Failure to understand and compete effectively in markets and with products or technologies with which we have limited previous experience; and • Write-off of goodwill and intangible assets related to such acquisitions |
| Our acquisitions of products, technology assets, or businesses may have a negative impact on our business if we fail to achieve the anticipated financial, strategic, and other benefits of acquisitions or investments, and our operating results may suffer because of this |
| Future changes in technology or market conditions result in adjustments to our recorded asset balance for intangible assets, resulting in additional charges that could significantly impact our operating results At December 31, 2005, we had significant intangible assets, including goodwill and other acquired intangibles |
| As a result of our acquisition of Bio-logic, these assets will increase significantly |
| The determination of related estimated useful lives and whether these assets are impaired involves significant judgments |
| Our ability 32 ______________________________________________________________________ [59]Table of Contents to accurately predict future cash flows related to these intangible assets might be hindered by events over which we have no control |
| Due to the highly competitive nature of the medical device industry, new technologies could impair the value of our intangible assets if they create market conditions where our products are no longer competitive |
| Any future determination that these assets are carried at greater than their fair value could result in additional charges, which could significantly impact our operating results |
| We may not be able to preserve the value of our intellectual property because we may not be able to protect access to our intellectual property or we may lose our intellectual property rights due to expiration of our licenses or patents If we fail to protect our intellectual property rights or if our intellectual property rights do not adequately cover the technology we employ, other medical device companies could sell products with features similar to ours, and this could reduce demand for our products |
| We protect our intellectual property through a combination of patent, copyright, trade secret and trademark laws |
| Despite our efforts to protect our proprietary rights, others may attempt to copy or otherwise improperly obtain and use our products or technology |
| Policing unauthorized use of our technology is difficult and expensive, and we cannot be certain that the steps we have taken will prevent misappropriation |
| Our means of protecting our proprietary rights may be inadequate |
| Enforcing our intellectual property rights could be costly and time consuming and may divert our management’s attention and resources |
| Failing to enforce our intellectual property rights could also result in the loss of those rights |
| Our operating results would suffer if we were subject to a protracted infringement claim or a significant damage award The medical technology industry has, in the past, been characterized by a substantial amount of litigation and related administrative proceedings regarding patents and intellectual property rights |
| We expect that medical screening products may become increasingly subject to third-party infringement claims as the number of competitors in our industry segment grows and the functionality of products in different industry segments overlaps |
| Third parties such as individuals, educational institutions or other medical device companies may claim that we infringe their intellectual property rights |
| Any claims, with or without merit, could have any of the following negative consequences: • Result in costly litigation and damage awards; • Divert our management’s attention and resources; • Cause product shipment delays or suspensions; or • Require us to seek to enter into royalty or licensing agreements |
| A successful claim of infringement against us could result in a substantial damage award and materially harm our financial condition |
| Our failure or inability to license the infringed or similar technology, or design and build non-infringing products, could prevent us from selling our products and adversely affect our business and financial results |
| Product liability suits against us could result in expensive and time consuming litigation, payment of substantial damages and an increase in our insurance rates The sale and use of our products could lead to the filing of a product liability claim by someone claiming to have been injured using one of our products or claiming that one of our products failed to perform properly |
| A product liability claim could result in substantial damages and be costly and time consuming to defend, either of which could materially harm our business or financial condition |
| Our product liability insurance may not protect our assets from the financial impact of defending a product liability claim |
| Any product liability claim brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing any coverage in the future |
| 33 ______________________________________________________________________ [60]Table of Contents We depend upon key employees in a competitive market for skilled personnel, and, without additional employees, we cannot grow or maintain profitability Our products and technologies are complex, and we depend substantially on the continued service of our senior management team |
| The loss of any of our key employees could adversely affect our business and slow our product development process |
| Our future success also will depend, in part, on the continued service of our key management personnel, software engineers, and other research and development employees and our ability to identify, hire, and retain additional personnel, including customer service, marketing, and sales staff |
| Hiring research and development, engineering, sales, marketing and customer service personnel in our industry is very competitive due to the limited number of people available with the necessary technical skills and understanding of pediatric audiology, neonatal jaundice management, and neonatal metabolic screening |
| We may be unable to attract and retain personnel necessary for the development of our business |
| We could lose the ability to use net operating loss carryforwards, which may adversely affect our financial results As of December 31, 2005, we had a total federal and state net operating loss carryforwards of approximately dlra20dtta4 million and dlra7dtta0 million, respectively, available to reduce future taxable income |
| These net operating loss carryforwards, if not utilized to offset taxable income in future periods, will expire in various amounts beginning in 2008 through 2025 for state and/or federal income tax purposes |
| If we continue to have net losses, we may not be able to utilize some or all of our net operating loss carryforwards before they expire |
| In addition, US income tax law imposes limitations on the ability of corporations to use net operating loss carryforwards if the corporation experiences a more than 50prca change in ownership during any three-year period |
| We may take actions, such as the issuance of additional stock, which would cause an ownership change to occur |
| Accordingly, we may be limited to the amount we can use in any given year, so even if we have substantial net income, we may not be able to use our net operating loss carryforwards before they expire |
| In addition, the net operating loss carryforwards are subject to examination by the Internal Revenue Service (“IRS”), and are thus subject to adjustment or disallowance resulting from any such IRS examination |
| We have not undertaken a study to determine whether such limitations exist, and if so, the extent of such limitations |
| However, we believe it is probable that some amount of our net operating losses will be affected |
| If we are unable to fully utilize our net operating loss carryforwards, our future tax payments could be higher and our financial results may suffer |
| Our stockholder rights plan and anti-takeover provisions in our charter documents and under Delaware law may make it more difficult to acquire a large portion of our securities, to initiate a tender offer or a proxy contest, or to acquire us, even though such events may be beneficial to our stockholders We maintain a stockholder rights plan that is designed to deter unsolicited takeover activity with respect to our Company |
| In addition, provisions of our certificate of incorporation and bylaws may affect the price of our common stock, and could make it more difficult for a third party to remove our management |
| Further, these provisions may make it more difficult to acquire a large portion of our securities, to initiate a tender offer or a proxy contest or acquire us, even if doing so would benefit our stockholders |