| Given the nature of the markets in which we participate, we cannot reliably predict future revenues and profitability |
| Changes in competitive, market and economic conditions may cause us to adjust our operations |
| A high proportion of our costs are fixed, due in part to our significant sales, research and development and manufacturing costs |
| Thus, small declines in revenue could disproportionately affect our operating results |
| Factors that may affect our operating results and the market price of our Common Stock include: • demand for and market acceptance of our products; • competitive pressures resulting in lower selling prices; • adverse changes in the level of economic activity in regions in which we do business; • low or fluctuating levels of political stability in regions in which we do business; • adverse changes in industries, such as semiconductors and electronics, on which we are particularly dependent; • changes in the portions of our revenue represented by various products and customers; • delays or problems in the introduction of new products; • the announcement or introduction of new products, services or technological innovations by our competitors; • variations in our product mix; 21 ______________________________________________________________________ [49]Table of Contents • the timing and amount of our expenditures in anticipation of future sales; • exchange rate fluctuations; • increased costs of raw materials or supplies; • changes in the volume or timing of product orders; • timing of completion of acceptance testing of some of our products; • natural disasters; and • changes in general economic factors |
| We face aggressive competition in many areas of business |
| If we do not compete effectively, our business will be harmed |
| In the security and inspection and medical monitoring and anesthesia systems markets, competition is based primarily on such factors as product performance, functionality and quality, cost, prior customer relationships, technological capabilities of the product, price, certification by government authorities, local market presence and breadth of sales and service organization |
| In the optoelectronic devices and electronics manufacturing markets competition is based primarily on factors such as expertise in the design and development of optoelectronic devices, product quality, timeliness of delivery, price, customer technical support and on the ability to provide fully-integrated services from application development and design through volume subsystem production |
| We may not be able to compete effectively with all of our competitors |
| To remain competitive, we must develop new products and enhance our existing products and services in a timely manner |
| We anticipate that we may have to adjust prices of many of our products to stay competitive |
| In addition, new competitors may emerge, and entire product lines or service offerings may be threatened by new technologies or market trends that reduce the value of these product lines or service offerings |
| The September 11, 2001 terrorist attacks and the creation of the US Department of Homeland Security have increased financial expectations that may not materialize |
| The September 11, 2001 terrorist attacks and the subsequent creation of the US Department of Homeland Security have created increased interest in our security and inspection systems, however, we are not certain whether the level of demand will continue to be as high as it is now |
| Additionally, should our products be considered as a part of the future security solution, it is unclear what the level may be and how quickly funding to purchase our products may be made available |
| These factors may adversely impact us and create unpredictability in revenues and operating results |
| If operators of our security and inspection systems fail to detect weapons, explosives or other devises that are used to commit a terrorist act, we could be exposed to product liability and related claims for which we may not have adequate insurance coverage |
| Our business exposes us to potential product liability risks that are inherent in the development, manufacturing, sale and service of security inspection systems |
| Our customers use our security and inspection systems to help them detect items that could be used in performing terrorist acts or other crimes |
| Others signal to the operator that further investigation is required |
| In either case, the training, reliability and competence of the customer’s operator is crucial to the detection of suspicious items |
| Furthermore, security inspection by technological means is circumstance and application-specific |
| In addition, our security and inspection systems are not designed to work under all circumstances |
| We test the reliability of 22 ______________________________________________________________________ [50]Table of Contents our security and inspection systems during both their development and manufacturing phases |
| We also perform such tests if we are requested to perform installation, warranty or post-warranty servicing |
| However, our security inspection systems are advanced mechanical and electronic devices and therefore can malfunction |
| In addition, there are also many other factors beyond our control that could lead to liability claims should an act of terrorism occur |
| The September 11, 2001 and 1993 World Trade Center bombing attacks, and the potential for future attacks, have caused commercial insurance for such threats to become extremely difficult to obtain |
| It is very likely that, should we be found liable following a major act of terrorism, the insurance we currently have in place would not fully cover the claims for damages |
| Our medical monitoring and anesthesia systems could give rise to product liability claims that could materially and adversely affect our financial condition and results of operations |
| The development, manufacturing and sale of medical devices expose us to significant risk of product liability claims and, sometimes, product failure claims |
| We face an inherent business risk of financial exposure to product liability claims if the use of our medical devices results in personal injury or death |
| Substantial product liability litigation currently exists within the medical device industry |
| Some of our medical monitoring and anesthesia systems businesses have, in the past, been subject to product liability claims and/or product recalls |
| To date, no such claim or recall has had a significant impact on our operations |
| Future product liability claims may exceed the limits of our insurance coverages or such insurance may not continue to be available to us on commercially reasonable terms, or at all |
| Consequently, a product liability claim or other claim with respect to uninsured liabilities, or in excess of insured liabilities, could have a material adverse effect on our business, financial condition, operating results and cash flows |
| Our revenues are dependent on orders of security and inspection systems and medical monitoring and anesthesia systems, which may have lengthy and unpredictable sales cycles |
| Sales of security and inspection systems often depend upon the decision of governmental agencies to upgrade or expand existing airports, border crossing inspection sites, seaport inspection sites and other security installations |
| Sales outside of the United States of our medical monitoring and anesthesia systems depend in significant part on the decision of governmental agencies to build new medical facilities or to expand or update existing medical facilities |
| Accordingly, a significant portion of our sales of security and inspection systems and our medical monitoring and anesthesia systems is often subject to delays associated with the lengthy approval processes that typically accompany such capital expenditures |
| During these approval periods, we expend significant financial and management resources in anticipation of future orders that may not occur |
| If we fail to receive an order after expending such resources, such failure could have a material adverse effect on our business, financial condition and results of operations |
| If we do not introduce new products in a timely manner, our products could become obsolete and our operating results would suffer |
| We sell many of our products in industries characterized by rapid technological changes, frequent new product and service introductions and evolving industry standards and customer needs |
| Without the timely introduction of new products and enhancements, our products could become technologically obsolete over time, in which case our revenue and operating results would suffer |
| The success of our new product offerings will depend upon several factors, including our ability to: • accurately anticipate customer needs; • innovate and develop new technologies and applications; • successfully commercialize new technologies in a timely manner; • price our products competitively and manufacture and deliver our products in sufficient volumes and on time; and • differentiate our offerings from our competitors’ offerings |
| 23 ______________________________________________________________________ [51]Table of Contents Some of our products are used by our customers to develop, test and manufacture their products |
| We therefore must anticipate industry trends and develop products in advance of the commercialization of our customers’ products |
| In developing any new product, we may be required to make a substantial investment before we can determine the commercial viability of the new product |
| If we fail to accurately foresee our customers’ needs and future activities, we may invest heavily in research and development of products that do not lead to significant revenues |
| Interruptions in our ability to purchase raw materials and components may adversely affect our profitability |
| We purchase certain raw materials and subcomponents from third parties pursuant to purchase orders placed from time to time |
| Purchase order terms range from three months to one year at fixed costs, but we do not have guaranteed long-term supply arrangements with our suppliers |
| Any material interruption in our ability to purchase necessary raw materials or subcomponents could have a material adverse effect on our business, financial condition and results of operations |
| We may not be able to successfully implement our acquisitions strategy, integrate acquired businesses into our existing business or make acquired businesses profitable |
| One of our strategies is to supplement our internal growth by acquiring businesses and technologies that complement or augment our existing product lines |
| This growth has placed, and may continue to place, significant demands on our management, working capital and financial resources |
| We may be unable to identify or complete promising acquisitions for many reasons, including: • competition among buyers; • the need for regulatory approvals, including antitrust approvals; and • the high valuations of businesses |
| Some of the businesses we may seek to acquire may be marginally profitable or unprofitable |
| For these acquired businesses to achieve acceptable levels of profitability, we must improve their management, operations, products and market penetration |
| We may not be successful in this regard and may encounter other difficulties in integrating acquired businesses into our existing operations |
| To finance our acquisitions, we may have to raise additional funds, through either public or private financings |
| We may be unable to obtain such funds or may be able to do so only on unfavorable terms |
| Our acquisition and alliance activities could disrupt our ongoing business |
| We intend to continue to make investments in companies, products and technologies, either through acquisitions, investments or alliances |
| Acquisition and alliance activities often involve risks, including: (i) difficulty in assimilating the acquired operations and employees; (ii) difficulty in managing product co-development activities with our alliance partners; (iii) difficulty in retaining the key employees of the acquired operation; (iv) disruption of our ongoing business; (v) inability to successfully integrate the acquired technologies and operations into our businesses and maintain uniform standards, controls, policies and procedures; and (vi) lacking the experience necessary to enter into new product or technology markets successfully |
| In addition, from time to time, our competitors acquire or enter into exclusive arrangements with companies with whom we do business or may do business in the future |
| Reductions in the number of partners with whom we may do business in a particular context may reduce our ability to enter into critical alliances on attractive terms or at all, and the termination of an existing alliance by a business partner may disrupt our operations |
| 24 ______________________________________________________________________ [52]Table of Contents Economic, political and other risks associated with international sales and operations could adversely affect our sales |
| In fiscal year 2004, revenues from shipments made outside of the United States accounted for approximately 41prca of our revenues, 40prca in fiscal year 2005 and 42prca in fiscal year 2006 |
| Of the revenues generated during fiscal year 2006 from shipments made to customers outside of the United States, 46prca represented sales made by subsidiaries based in United States to foreign customers, and the balance represented sales generated by foreign subsidiaries |
| Since we sell certain of our products worldwide, our businesses are subject to risks associated with doing business internationally |
| We anticipate that revenues from international operations will continue to represent a substantial portion of our total revenue |
| In addition, many of our manufacturing facilities, and therefore employees, suppliers, real property, capital equipment, cash and other assets are located outside the United States |
| Accordingly, our future results could be harmed by a variety of factors, including: • changes in foreign currency exchange rates; • changes in a country’s or region’s political or economic conditions, particularly in developing or emerging markets; • longer payment cycles of foreign customers and difficulty of collecting receivables in foreign jurisdictions; • trade protection measures and import or export licensing requirements; • differing legal and court systems; • differing tax laws and changes in those laws; • difficulty in staffing and managing widespread operations; • differing labor laws and changes in those laws; • differing protection of intellectual property and changes in that protection; and • differing regulatory requirements and changes in those requirements |
| Our products may infringe on the intellectual property rights of others, and resulting claims against us could be costly and prevent us from making or selling certain products |
| Third parties may seek to claim that our products and operations infringe their patent or other intellectual property rights |
| In addition, we may find it necessary to initiate litigation in order to protect our patent or other intellectual property rights |
| Under either circumstance, we may incur significant expenses |
| Our competitors may seek to challenge the intellectual property rights on which some of our new and more promising products are based |
| As we introduce any new and potentially promising product, companies possessing competing technologies may be motivated to assert infringement claims in order to delay or diminish potential sales and challenge our right to market such product |
| Lengthy and costly litigation may be necessary in order to defend against these claims |
| Our ongoing success is dependent upon the continued availability of certain key employees |
| We are dependent in our operations on the continued availability of the services of our employees, many of whom are individually key to our current and future success, and the availability of new employees to implement our growth plans |
| In particular, we are dependent upon the services of Deepak Chopra, our Chairman of the Board of Directors, President and Chief Executive Officer |
| We have entered into a 5-year employment agreement 25 ______________________________________________________________________ [53]Table of Contents with Mr |
| Chopra, which expires July 18, 2010 and we maintain a dlra13dtta0 million policy of key man life insurance on the life of Mr |
| The market for skilled employees is highly competitive, especially for employees in technical fields |
| While our compensation programs are intended to attract and retain the employees required for it to be successful, ultimately, we may not be able to retain the services of all of our key employees or a sufficient number to execute on our plans |
| In addition, we may not be able to continue to attract new employees as required |
| Substantial government regulation in the United States and abroad may restrict our ability to sell our medical monitoring and anesthesia systems |
| The FDA and comparable regulatory authorities in foreign countries extensively and rigorously regulate our medical monitoring and anesthesia systems, including related development activities and manufacturing processes |
| In the United States, the FDA regulates the introduction of medical devices as well as the manufacturing, labeling and record-keeping procedures for such products |
| We are required to: • obtain clearance before we can market and sell medical devices; • satisfy content requirements applicable to our labeling, sales and promotional materials; • comply with manufacturing and reporting requirements; and • undergo rigorous inspections |
| Our future products may not obtain FDA clearance on a timely basis, or at all |
| Our medical monitoring and anesthesia systems must also comply with the laws and regulations of foreign countries in which we develop, manufacture and market such products |
| This trend is likely to continue and the cost and time required to obtain marketing clearance in any given country may increase as a result |
| Our products may not obtain any necessary foreign clearances on a timely basis, or at all |
| Once any of our medical monitoring and anesthesia systems is cleared for sale, regulatory authorities may still limit the use of such product, prevent its sale or manufacture or require a recall or withdrawal of such product from the marketplace |
| Following initial clearance from regulatory authorities, we continue to be subject to extensive regulatory requirements |
| Government authorities can withdraw marketing clearance due to our failure to comply with regulatory standards or due to the occurrence of unforeseen problems following initial clearance |
| Ongoing regulatory requirements are wide-ranging and govern, among other things: • annual inspections to retain CE mark for sale of products in the European Union; • product manufacturing; • supplier substitution; • product changes; • process modifications; • medical device reporting; and • product sales and distribution |
| Our failure to comply with environmental regulations may create significant environmental liabilities and force us to modify our manufacturing processes |
| We are subject to various foreign and US federal, state and local environmental laws, ordinances and regulations relating to the use, storage, handling and disposal of certain hazardous substances and wastes used or generated in the manufacturing and assembly of our products |
| Under such laws, we may become liable for the costs of removal or remediation of certain hazardous substances or wastes that have been or are being disposed of 26 ______________________________________________________________________ [54]Table of Contents offsite as wastes or that have been or are being released on or in our facilities |
| Such laws may impose liability without regard to whether we knew of, or caused, the release of such hazardous substances or wastes |
| Any failure by us to comply with present or future regulations could subject us to the imposition of substantial fines, suspension of production, alteration of manufacturing processes, or cessation of operations, any of which could have a material adverse effect on our business, financial condition and results of operations |
| We may be exposed to potential risks relating to our internal controls over financial reporting and our ability to have our independent registered public accounting firm attest to these controls |
| As directed by the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies to include in their annual reports an assessment of the effectiveness of the company’s internal controls over financial reporting |
| In addition, the independent registered public accounting firm auditing a public company’s financial statements must attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting, as well as the operating effectiveness of the company’s internal controls over financial reporting |
| We evaluate our internal controls over financial reporting in order to allow our management to report on, and our independent registered public accounting firm to attest to, our internal controls |
| We expect to continue to expend significant resources in complying with the documentation and testing procedures required by the Sarbanes-Oxley Act of 2002 |
| However, there will remain an ongoing risk that we will not comply with all of its requirements |
| If our independent registered public accounting firm differs from us in its interpretation of the requirements imposed on us by the Sarbanes-Oxley Act of 2002, or if it is not satisfied with our internal controls over financial reporting or with the level at which such controls are documented, operated or reviewed, we may be delayed in filing reports with the Securities and Exchange Commission, our independent registered public accounting firm may decline to attest to our management’s assessment or it may issue a qualified report |
| In addition, if our independent registered public accounting firm is unable to rely on our internal controls over financial reporting in connection with its audit of our financial statements and if it is unable to devise alternative procedures in order to satisfy itself as to the material accuracy of our financial statements and related disclosures, it is possible that we could receive a qualified or adverse audit opinion in connection with those financial statements |
| Accordingly, we may not receive a favorable report from our independent registered public accounting firm regarding our internal controls over financial reporting and the operating effectiveness of our internal controls over financial reporting |
| If we identify material weaknesses in our internal controls over financial reporting that we cannot remediate in a timely manner or if we receive an adverse report from our independent registered public accounting firm with respect to our internal controls over financial reporting, investors and others may lose confidence in the reliability of our financial statements and the market for our Common Stock could be adversely affected |
| Our operations are subject to certain risks and uncertainties associated with the listing in the United Kingdom of common stock of Spacelabs Healthcare |
| In October 2005, we announced the initial public offering in the United Kingdom of 13dtta5 million previously unissued shares of common stock (representing approximately 20prca of its total issued and outstanding shares) of Spacelabs Healthcare, a newly formed subsidiary composed of the business operations of our Healthcare division |
| These shares currently trade under the ticker symbol “SLAB” on the Alternative Investment Market (AIM), a market administered by the London Stock Exchange |
| The value of these shares, and consequently the value of the shares in Spacelabs Healthcare that we retained following the placing, is subject to stock price fluctuations as well as fluctuations in the British pound, the currency in which the shares trade |
| A downturn in the performance of equity markets in the United Kingdom generally, or on the AIM specifically, could depress the value of the Spacelabs Healthcare shares that we own |
| 27 ______________________________________________________________________ [55]Table of Contents We receive significant amounts of research and development funding for our security and inspection systems from government grants and contracts |
| We may not continue to receive comparable levels of funding for future product development |
| The US government currently plays an important role in funding the development of certain of our security and inspection systems and sponsoring their deployment at airports, ports and border crossings |
| However, in the future, additional research and development funds from the government may not be available to us |
| If the government fails to continue to sponsor our technologies we may have to expend more resources on product development or cease development of certain technologies, which could adversely affect our business |
| In addition, any future grants to our competitors may improve their ability to develop and market competing products and cause our customers to delay purchase decisions, which could harm our ability to market our products |
| Our Articles of Incorporation and other agreements contain provisions that could discourage a takeover |
| Our Articles of Incorporation authorize our Board of Directors to issue up to 10cmam000cmam000 shares of Preferred Stock in one or more series, to fix the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued shares of Preferred Stock, to fix the number of shares constituting any such series and to fix the designation of any such series, without further vote or action by shareholders |
| The terms of any series of Preferred Stock, which may include priority claims to assets and dividends and special voting rights, could adversely affect the rights of the holders of our Common Stock and thereby reduce the value of our Common Stock |
| We have no present plans to issue shares of Preferred Stock |
| The issuance of Preferred Stock, coupled with the concentration of ownership in the directors and executive officers, could discourage certain types of transactions involving an actual or potential change in control of our company, including transactions in which the holders of Common Stock might otherwise receive a premium for their shares over then current prices, otherwise dilute the rights of holders of Common Stock and may limit the ability of such shareholders to cause or approve transactions which they may deem to be in their best interests, all of which could have a material adverse effect on the market price of our Common Stock |
| We have in place a stockholder rights plan, adopted in 2000, under which our shareholders are entitled to purchase shares of Preferred Stock under certain circumstances |
| The stockholder rights plan may have the effect of impeding or preventing certain types of transactions involving a change in control of our company that could be beneficial to the shareholders |
| Our Articles of Incorporation limit the liability of its directors, which may limit the remedies we or our shareholders have available |
| Our Articles of Incorporation provide that, pursuant to the California Corporations Code, the liability of our directors for monetary damages shall be eliminated to the fullest extent permissible under California law |
| This is intended to eliminate the personal liability of a director for monetary damages in an action brought by us, or in our right, for breach of a director’s duties to us or our shareholders and may limit the remedies available to us or our shareholders |
| This provision does not eliminate the directors’ fiduciary duty and does not apply to liabilities for: (i) acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; (ii) acts or omissions that a director believes to be contrary to the best interests of our company or our shareholders or that involve the absence of good faith on the part of the director; (iii) any transaction from which a director derived an improper personal benefit; (iv) acts or omissions that show a reckless disregard for the director’s duty to the our company or our shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director’s duties, of a risk of serious injury to our company or our shareholders; (v) acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director’s duty to our company or our shareholders; (vi) certain transactions or the approval of transactions in which a director has a material financial interest; and (vii) expressly imposed by statute for approval of certain improper distributions to shareholders or certain loans or guarantees |