| Symmetry Medical Inc |
| ITEM 1A RISK FACTORS Our profitability is subject to risks described under this section on “Risk Factors” described below |
| Although the following are not necessarily the only ones facing our company, our business, financial condition or results of operations they could be maternally adversely affected by many of the following risks |
| 15 ______________________________________________________________________ Risks Related to Our Business We depend heavily on sales to our significant customers, and our business could be adversely affected if any of them reduced or terminated purchases from us |
| A limited number of large orthopedic device manufacturers, all of whom are our customers, control the predominate share of the orthopedic device market |
| We depend heavily on revenue from these large companies |
| Revenue from our ten largest customers represented approximately 78dtta8prca of our revenue in fiscal year 2005 and 78dtta7prca of our revenue in fiscal year 2004 |
| Our two largest customers accounted for approximately 33dtta2prca and 13dtta6prca of our revenue in the fiscal year 2005 and our three largest customers accounted for 25dtta4prca, 14dtta6prca and 13dtta6prca of our revenue in fiscal 2004 |
| We expect that we will continue to depend on a limited number of large customers for a significant portion of our revenue |
| In addition, our customer base could become more concentrated if, among other things, there is further consolidation among orthopedic device manufacturers |
| If a significant customer reduces or delays orders from us, terminates its relationship with us or fails to pay its obligations to us, our revenues could decrease significantly |
| If we are unable to continue to improve our current products and develop new products, we may experience a decrease in demand for our products or our products could become obsolete, and our business would be adversely affected |
| We sell our products to customers in markets that are characterized by technological change, product innovation and evolving industry standards |
| We are continually engaged in product development and improvement programs, both in collaboration with our customers and independently |
| Our customers may engage in additional in-house development and manufacturing, and we may be unable to compete effectively with our independent competitors, unless we can continue to develop and assist our customers in developing innovative products |
| Our competitors’ product development capabilities could become more effective than ours, and their new products may get to market before our products, may be more effective or less expensive than our products or render our products obsolete |
| If one or more of these events were to occur, our business, financial condition and results of operation could be adversely affected |
| We face competition from our customers’ in-house capabilities, established independent suppliers and potential new market entrants, and if we lose customers it could have an adverse effect on our revenue and operating results |
| Our customers have varying degrees of development and manufacturing capabilities, and one or more of them may seek to expand their in-house capabilities in the future, including adding capacity in existing sites or expanding into low labor cost areas such as Asia |
| Many of our customers are larger and have greater financial and other resources than we do and can commit significant resources to product development and manufacturing |
| Most of our independent competitors are smaller companies, many of which have close customer relationships and either a low cost structure or highly specialized design or production capabilities |
| Our independent competitors may consolidate and some of our current and future competitors, either alone or in conjunction with their respective parent corporate groups, may have financial resources and research and development, sales and marketing and manufacturing capabilities or brand recognition that are greater than ours |
| In addition, the innovative nature of our markets may attract new entrants to the field |
| Our products may not be able to compete successfully with the products of other companies, which could result in the loss of customers and, as a result, decreased revenue and operating results |
| 16 ______________________________________________________________________ If product liability lawsuits are brought against us or our customers our business may be harmed |
| The manufacture and sale of our healthcare and other products, including our aerospace products, expose us to potential product liability claims and product recalls, including those which may arise from misuse or malfunction of, or design or manufacturing flaws in, our products, or use of our products with components or systems not manufactured by us |
| Product liability claims or product recalls, regardless of their ultimate outcome, could require us to spend significant time and money in litigation or otherwise require us to pay significant damages, which could adversely affect our earnings and financial condition |
| We carry product liability insurance but it is limited in scope and amount and may not be adequate to protect us against product liability claims |
| We may be unable to maintain this insurance at reasonable costs and on reasonable terms, if at all |
| Our operating results are subject to significant potential fluctuation and you should not rely on historical results as an indication of our future results |
| Our operating results have fluctuated in the past and may vary significantly from quarter to quarter or year to year in the future due to a combination of factors, many of which are beyond our control |
| These factors include: • the timing of significant orders and shipments, including the effects of changes in inventory management practices by our customers; • the number, timing and significance of new products and product introductions and enhancements by us, our customers and our competitors; • changes in pricing policies by us and our competitors; • changes in medical treatment or regulatory practices; • restrictions and delays caused by regulatory review of our customers’ products; • recalls of our customers’ products; • availability and cost of raw materials; and • general economic factors |
| Our quarterly revenue and operating results may vary significantly in the future and period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of our future performance |
| We cannot assure you that our revenue will increase or be sustained in future periods or that we will be profitable in any future period |
| Any shortfalls in revenue or earnings from levels expected by securities or industry analysts could have an immediate and significant adverse effect on the trading price of our common stock in any given period |
| If we do not retain key individuals and retain and attract skilled manufacturing workers, we may not be able to operate successfully, and we may not be able to meet our strategic objectives |
| Our success depends in part upon the retention of key managerial, sales and technical personnel, particularly skilled manufacturing workers |
| We compete for such personnel with other companies and other organizations, many of which are larger and have greater name recognition and financial and other resources than we do |
| There can be no assurance that we will be successful in retaining our current personnel or in hiring or retaining qualified personnel in the future |
| The loss of key personnel or the inability to hire or retain qualified personnel in the future could have a material adverse effect on our ability to operate successfully |
| We compete with numerous precision manufacturing companies to attract and retain qualified and highly skilled manufacturing employees |
| Our Warsaw, Indiana facilities, in particular, faces significant competition, including from certain of our customers and other companies located in or near Warsaw that are larger and have greater financial and other resources than we do, for skilled production employees |
| If 17 ______________________________________________________________________ we are not able to retain and attract skilled manufacturing employees, we may be unable to support our anticipated growth, which could adversely affect our profitability |
| A significant shift in technologies or methods used in the treatment of damaged or diseased bone and tissue could make our products obsolete or less attractive |
| The development of new technologies could reduce demand for our products |
| For example, pharmaceutical advances could result in non-surgical treatments gaining more widespread acceptance as a viable alternative to orthopedic implants |
| The emergence of successful new biological tissue-based or synthetic materials to regenerate damaged or diseased bone and to repair damaged tissue could increasingly minimize or delay the need for implant surgery and provide other biological alternatives to orthopedic implants |
| New surgical procedures could diminish demand for our instruments |
| A significant shift in technologies or methods used in the treatment of damaged or diseased bone and tissue could adversely affect demand for our products |
| We depend on third party suppliers, and in some cases a single third party supplier, for key components and raw materials used in our manufacturing processes and the loss of these sources could harm our business |
| We use titanium, cobalt chrome, stainless steel and nickel alloys, and various other raw materials in our products |
| Although we generally believe these materials are readily available from multiple sources, from time to time we rely on a limited number of suppliers and in some cases on a single source vendor |
| For example, we obtain patented Radel R plastic, which is designed to withstand intense heat produced during frequent sterilizations, for use in our instrument handles and plastic cases from a single supplier |
| Any supply interruption in a limited or sole-sourced component or raw material could materially harm our ability to manufacture our products until a new source of supply, if any, could be found |
| We may be unable to find a sufficient alternative supply channel in a reasonable time period or on commercially reasonable terms if at all |
| This could interrupt our business or reduce the quality of our products |
| Our acquisition of Mettis on June 11, 2003 significantly increased the size and scope of our operations |
| Our business has continued to grow at a fast pace since the acquisition, and we believe we will continue to grow at a significant rate |
| Rapid growth of our business may place a strain on our managerial, operational and financial resources and systems |
| To execute our anticipated growth successfully, we must attract and retain qualified personnel and manage and train them effectively |
| Any failure by us to expand and train our work force or increase production capacity or otherwise manage our growth effectively could have an adverse effect on our ability to achieve our business strategy |
| Our growth may be impaired if we are unable to meet the demands of our customers, which could result in our customers turning to alternative suppliers |
| Our current or future levels of indebtedness may limit our ability to operate our business, finance acquisitions and pursue new business strategies |
| As of December 31, 2005, our total indebtedness, including short-term debt, long-term debt and capital lease obligations, was dlra39dtta3 million |
| As of December 31, 2005, we had an additional dlra40dtta0 million of borrowings available under our revolving credit facility |
| Although covenants under our senior credit facility limit our ability to incur additional indebtedness, in the future we may incur additional debt to finance acquisitions, business opportunities, capital expenditures or other capital requirements |
| Our indebtedness could: • make us more vulnerable to unfavorable economic conditions; • make it more difficult to obtain additional financing in the future for working capital, capital expenditures or other general corporate purposes; 18 ______________________________________________________________________ • require us to dedicate or reserve a large portion of our cash flow from operations for making payments on our indebtedness, which would prevent us from using it for other purposes; • make us susceptible to fluctuations in market interest rates that affect the cost of our borrowings to the extent that our variable rate debt is not covered by interest rate derivative agreements; and • make it more difficult to pursue strategic acquisitions, alliances and collaborations |
| Our ability to service our indebtedness will depend on our future performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors |
| We believe that, based upon current levels of operations, we will be able to meet our debt service obligations when due |
| Significant assumptions underlie this belief, including, among others, that we will continue to be successful in implementing our business strategy and that there will be no material adverse developments in our business, liquidity or capital requirements |
| If we cannot generate sufficient cash flow from operations to service our indebtedness and to meet our other obligations and commitments, we may be required to refinance our debt or to dispose of assets to obtain funds for such purpose |
| We cannot assure you that refinancing or asset dispositions could be effected on a timely basis or on satisfactory terms, if at all, or would be permitted by the terms of our debt instruments |
| To the extent we incur additional indebtedness or other obligations in the future, the risks associated with our indebtedness described above, including our possible inability to service our debt, would increase |
| Our senior credit facility contains restrictions that limit our ability to pay dividends, incur additional debt, make acquisitions and make other investments |
| Our senior credit facility contains covenants that restrict our ability to make distributions to stockholders or other payments unless we satisfy certain financial tests and comply with various financial ratios |
| If we do not satisfy these tests or comply with these ratios, our creditors could declare a default under our debt instruments, and our indebtedness could be declared immediately due and payable |
| Our ability to comply with the provisions of our senior credit facility may be affected by changes in economic or business conditions beyond our control |
| Our senior credit facility also contains covenants that limit our ability to incur indebtedness, acquire other businesses and make capital expenditures, and impose various other restrictions |
| These covenants could affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise |
| We may be unable to comply with the forgoing financial ratios or covenants and, if we fail to do so, we may be unable to obtain waivers from our lenders |
| Our future capital needs are uncertain and we may need to raise additional funds in the future |
| Our future capital needs are uncertain and we may need to raise additional funds in the future through debt or equity offerings |
| Our future capital requirements will depend on many factors, including: • revenue generated by sales of our products; • expenses incurred in manufacturing and selling our products; • costs of developing new products or technologies; • costs associated with capital expenditures; • costs associated with our expansion; • costs associated with regulatory compliance, including maintaining compliance with the quality system regulations imposed by the FDA; and • the number and timing of acquisitions and other strategic transactions |
| 19 ______________________________________________________________________ As a result of these factors, we may need to raise additional funds, and these funds may not be available on favorable terms, or at all |
| Furthermore, if we issue equity or convertible debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or convertible debt securities may have rights, preferences and privileges senior to those of our existing stockholders |
| If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, execute our business strategy, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements |
| We may not realize all of the sales expected from new product development programs |
| We incur substantial expenses in developing and testing new products and related devices |
| The realization of additional revenue from new product development efforts is inherently subject to a number of important risks and uncertainties, including, directly or indirectly, end-user acceptance of the product, reimbursement approval of third-party payors such as Medicaid, Medicare and private insurers and, in some cases, FDA or comparable foreign regulatory approval of the product |
| In addition, our customers typically have no contractual requirement to purchase from us the products that we develop for their medical devices, and they could seek to have another supplier or in-house facilities manufacture products that we have developed for their medical devices |
| We also incur costs and make capital expenditures for new product development and production based upon certain estimates of production volumes for our existing and anticipated products |
| Our earnings could decline if we write off goodwill or intangible assets created as a result of our various acquisitions |
| As a result of acquisitions we have accumulated a substantial amount of goodwill, amounting to dlra124dtta5 million as of December 31, 2005, or approximately 36dtta8prca of our total assets as of such date |
| Goodwill and certain intangible assets are not amortized but rather are tested for impairment by us annually or more frequently if an event occurs or circumstances develop that would likely result in impairment |
| Examples of such events or circumstances include, but are not limited to, a significant adverse change in legal or business climate, an adverse regulatory action or unanticipated competition |
| We completed annual impairment tests as of October 2005 and 2004 and concluded at those dates that no impairment of goodwill or intangible assets existed |
| During 2002, in connection with the adoption of SFAS Nodtta 142, Goodwill and Other Intangible Assets, we recognized impairment of approximately dlra1dtta1 million, which is reflected as a cumulative effect of accounting change in our statement of operations |
| In the future, we could recognize impairment of our goodwill or other intangible assets, and that impairment could result in a charge to our results of operation and have an adverse effect on our financial condition |
| If we are unable to protect our intellectual property and property rights, or are subject to intellectual property claims by third parties, our business could be harmed |
| We rely on a combination of patents, trade secrets, copyrights, know-how, trademarks, license agreements and contractual provisions to establish and protect our proprietary rights to our technologies and products |
| We cannot guarantee that the steps we have taken or will take to protect our intellectual property rights will be adequate or that they will deter infringement, misappropriation or violation of our intellectual property |
| Litigation may be necessary to enforce our intellectual property rights and to determine the validity and scope of our proprietary rights |
| Any litigation could result in substantial expenses and may not adequately protect our intellectual property rights |
| In addition, the laws of some of the countries in which our products are or may be sold may not protect our products and intellectual property to the same extent as US laws, or at all |
| We may be unable to protect our rights in trade secrets and unpatented proprietary technology in these countries |
| If our trade secrets become known, we may lose our competitive advantages |
| 20 ______________________________________________________________________ We seek to protect our trade secrets, know-how and other unpatented proprietary technology, in part, with confidentiality agreements with our employees, independent distributors and customers |
| We cannot assure you, however, that: • these agreements will not be breached; • we will have adequate remedies for any breach; or • trade secrets, know-how and other unpatented proprietary technology will not otherwise become known to or independently developed by our competitors |
| We hold licenses with third parties that are necessary to utilize certain technologies used in the design and manufacturing of some of our products |
| The loss of such licenses would prevent us from manufacturing, marketing and selling these products, which could harm our business |
| In addition, third parties may claim that we are infringing, misappropriating or violating their intellectual property rights |
| We could be found to infringe those intellectual property rights, which could affect our ability to manufacture any affected product |
| In addition, any protracted litigation to defend or prosecute our intellectual property rights could drain our financial resources, divert the time and effort of our management and cause customers to delay or limit their purchases of the affected product until resolution of the litigation |
| Any litigation or claims against us, whether or not successful, could result in substantial costs and could harm our reputation |
| In addition, intellectual property litigation or claims could force us to do one or more of the following: • cease selling or using any of our products that incorporate the challenged intellectual property, which could adversely affect our revenue; • obtain a license from the holder of the intellectual property right alleged to have been infringed, which license may not be available on reasonable terms, if at all; and • redesign or, in the case of trademark claims, rename our products to avoid infringing the intellectual property rights of third parties, which may not be possible and could be costly and time-consuming if it is possible to do so |
| Efforts to acquire other companies or product lines may divert our managerial resources away from our business operations, and if we complete an acquisition, we may incur or assume additional liabilities or experience integration problems |
| We may seek to acquire businesses or product lines for various reasons, including to provide new product manufacturing and service capabilities, add new customers, increase penetration with existing customers or expand into new geographic markets |
| Our ability to successfully grow through acquisitions depends upon our ability to identify, negotiate, complete and integrate suitable acquisitions and to obtain any necessary financings |
| These efforts could divert the attention of our management and key personnel from our business operations |
| If we complete acquisitions, we may also experience: • difficulties in integrating any acquired companies, personnel and products into our existing business; • delays in realizing the benefits of the acquired company or products; • diversion of our management’s time and attention from other business concerns; • limited or no direct prior experience in new markets or countries we may enter; • higher costs of integration than we anticipated; • difficulties in retaining key employees of the acquired business who are necessary to manage these businesses; 21 ______________________________________________________________________ • difficulties in maintaining uniform standards, controls, procedures and policies throughout our acquired companies; or • adverse customer reaction to the business combination |
| In addition, an acquisition could materially impair our operating results by causing us to incur debt or requiring us to amortize acquisition expenses and acquired assets |
| We are subject to risks associated with our foreign operations |
| We have significant international operations, specifically in the United Kingdom and France |
| Certain risks are inherent in international operations, including: • difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; • foreign customers who may have longer payment cycles than customers in the United States; • tax rates in certain foreign countries that may exceed those in the United States and foreign earnings that may be subject to withholding requirements or the imposition of tariffs, exchange controls or other restrictions including transfer pricing restrictions when products produced in one country are sold to an affiliated entity in another country; • general economic and political conditions in countries where we operate or where end users of orthopedic devices reside may have an adverse effect on our operations; • difficulties associated with managing a large organization spread throughout various countries; • difficulties in enforcing intellectual property rights; and • required compliance with a variety of foreign laws and regulations |
| As we continue to expand our business globally, our success will depend, in part, on our ability to anticipate and effectively manage these and other risks |
| We cannot assure you that these and other factors will not have a material adverse effect on our international operations or our business as a whole |
| Currency exchange rate fluctuations could have an adverse effect on our revenue and financial results |
| We generate a significant portion of our revenue and incur a significant portion of our expenses in currencies other than US dollars |
| Currency exchange rates are subject to fluctuation due to, among other things, changes in local, regional or global economic conditions, the imposition of currency exchange restrictions and unexpected changes in regulatory or taxation environments |
| To the extent that we are unable to match revenue received in foreign currencies with costs incurred in the same currency, exchange rate fluctuations in any such currency could have an adverse effect on our financial results |
| During fiscal year 2003 and 2004, we benefited from foreign exchange rates, in particular because of the weakening US dollar versus both the pound sterling and the euro, the primary currencies to which we are exposed |
| The US dollar has recently strengthened against these currencies and caused an unfavorable impact to operations in fiscal 2005 |
| We cannot assure you that exchange rates will not impact us favorably or unfavorably in the future |
| In addition, as of December 31, 2005, we did not hold or issue foreign exchange options or forward contracts to mitigate this risk; however, we may enter into such agreements in the future |
| Any change in the exchange rates of currencies of jurisdictions into which we sell products or incur expenses could result in a decrease in our revenue or operating income |
| We may be adversely affected as a result of the long lead times required for sales of certain new products |
| We often compete for business at the beginning of the development of new medical devices or upon customer redesign of existing medical devices |
| Our customers generally must obtain clearance or approval from the FDA before commercially distributing their products |
| Unless exempt, a new medical device must be approved for commercial distribution in the United States by the FDA through the 510(k) pre-market Notification Process or, in some cases, through the more burdensome pre-market approval, or PMA, process |
| It generally takes three to six months from the date of submission to the FDA to obtain 22 ______________________________________________________________________ 510(k) clearance and one to three years from the date of submission to the FDA to obtain approval through the PMA process, but in each case may take significantly longer |
| This results in long lead times for some of our customers’ new products, which may make it difficult in the short term for us to obtain sales of new products to replace any unexpected decline in sales of existing products |
| We may be adversely impacted by work stoppages and other labor matters |
| Currently, none of our employees are unionized |
| However, from time to time some of our employees have attempted to unionize at two of our facilities |
| While we have not experienced any adverse effects from work stoppages or low-downs at our customers’ facilities, work stoppages or slow-downs experienced by us, our suppliers or our customers or their suppliers could result in slow-downs or closures of facilities where our products are made or used |
| We cannot assure you that we will not encounter strikes, further unionization efforts or other types of conflicts with labor unions or our employees, which could have an adverse effect on our financial results |
| If a natural or man-made disaster strikes one or more of our manufacturing facilities, we may be unable to manufacture certain products for a substantial amount of time and our revenue could decline |
| We have thirteen manufacturing facilities, which are located in the United States, the United Kingdom and France |
| These facilities and the manufacturing equipment and personnel know-how that we use to produce our products would be difficult to replace and could require substantial lead-time to repair or replace |
| Our facilities may be affected by natural or man-made disasters |
| In the event that one of our facilities was affected by a disaster, we would be forced to attempt to shift production to our other manufacturing facilities or rely on third-party manufacturers, and our other facilities or a third-party manufacturer may not have the capability to effectively supply the affected products |
| Although we have insurance for damage to our property and the interruption of our business, this insurance may not be sufficient in scope or amount to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all |
| Risks Related to Our Industry Orthopedic device manufacturers have significant leverage over their independent suppliers and consolidation could increase their leverage, which could result in the loss of customers or force us to reduce our prices |
| We compete with many distributors and manufacturers to develop and supply implants, surgical instruments and cases to a limited number of large orthopedic device manufacturers |
| As a result, orthopedic device manufacturers have historically had significant leverage over their independent suppliers |
| For example, independent suppliers like us are subject to continuing pressure from the major orthopedic device manufacturers to reduce the cost of products and services while maintaining quality levels |
| In recent years, the medical device industry has experienced substantial consolidation |
| If the medical device industry, and the orthopedic device industry in particular, continues to consolidate, competition to provide products and services to orthopedic device manufacturers may become more intense |
| Orthopedic device manufacturers may seek to use their market power to negotiate price or other concessions for our products |
| If we are forced to reduce prices or if we lose customers because of competition, our revenue and results of operations would suffer |
| Our business is indirectly subject to healthcare industry cost containment measures and other industry trends affecting pricing that could result in reduced sales of or prices for our products |
| Acceptance of our customers’ products by hospitals, outpatient centers and physicians depend on, among other things, reimbursement approval of third-party payors such as Medicaid, Medicare and private insurers |
| The continuing efforts of government, insurance companies and other payors of healthcare costs to contain or reduce those costs could lead to lower reimbursement rates or non-reimbursement for medical devices that use our products |
| If that were to occur, medical device manufacturers might insist that 23 ______________________________________________________________________ we lower prices on products related to the affected medical device or they might significantly reduce or eliminate their purchases from us of these related products, which could affect our profitability |
| We are aware of several legal developments that could negatively impact prices of orthopedic devices |
| At least one major hospital chain is seeking permission from the US Office of the Inspector General to implement gain-sharing initiatives which could, if approved, negatively impact the prices of orthopedic devices because it would enable hospitals to consolidate vendors and share cost savings with doctors |
| We are also aware of governmental investigations of some of the largest orthopedic device companies reportedly focusing on consulting and service agreements between these companies and orthopedic surgeons |
| If one of these investigations results in a judgment against one of our large customers our results of operations could be negatively impacted |
| We and our customers are subject to substantial government regulation that is subject to change and could force us to make modifications to how we develop, manufacture and price our products |
| The medical device industry is regulated extensively by governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies |
| Some of our manufacturing processes are required to comply with quality systems regulations, including current good manufacturing practice requirements that cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging and shipping of our products |
| Further, some of our facilities, records and manufacturing processes are subject to periodic unscheduled inspections by the FDA or other agencies |
| Failure to comply with applicable medical device regulatory requirements could result in, among other things, warning letters, fines, injunctions, civil penalties, repairs, replacements, refunds, recalls or seizures of products, total or partial suspensions of production, refusal of the FDA or other regulatory agencies to grant future pre-market clearances or approvals, withdrawals or suspensions of current clearances or approvals and criminal prosecution |
| In addition, orthopedic implants and other medical devices produced by our customers are subject to intensive regulation and potential pre-approval requirements by the FDA and similar international agencies that govern a wide variety of product activities from design and development to labeling, manufacturing, promotion, sales and distribution |
| Compliance with these regulations may be time consuming, burdensome and expensive for our customers and, indirectly, for us to the extent that our customers’ compliance depends on our operations |
| These regulations could negatively affect our customers’ abilities to sell their products, which in turn would adversely affect our ability to sell our products |
| The regulations that we and our customers are subject to are complex, change frequently and have tended to become more stringent over time |
| Federal and state legislatures have periodically considered programs to reform or amend the US healthcare system at both the federal and state levels |
| In addition, these regulations may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate |
| Foreign governmental authorities that regulate the manufacture and sale of medical devices have become increasingly stringent and, to the extent we sell our products in foreign countries, we may be subject to rigorous regulation in the future |
| Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated revenue |
| If our customers fail to obtain, or experience significant delays in obtaining, FDA clearances or approvals to commercially distribute our future products our ability to sell our products could suffer |
| Some of our medical devices are subject to rigorous regulatory pre-approval by the FDA and other federal, state and foreign governmental authorities |
| Our customers are typically responsible for obtaining the applicable regulatory approval for the commercial distribution of our products |
| The process of obtaining this approval, particularly from the FDA, can be costly and time consuming, and there can be no assurance that our customers will obtain the required approvals on a timely basis, if at all |
| The FDA, for example, assigns medical devices to one of three classes which determines, among other things, the type and degree of FDA approval required to commercially distribute the device in the United States |
| We 24 ______________________________________________________________________ produce Class I, II and III devices |
| Class I devices are deemed to present little risk to patients and are generally exempt from FDA approval requirements |
| Class II devices can generally be commercially distributed only after the device has received “510(k) clearance” |
| The FDA will clear marketing of a medical device through the 510(k) process if certain design, testing and validation requirements are met and it is demonstrated that the device is “substantially equivalent” to a device that was legally marketed prior to May 28, 1976, or to another commercially available device subsequently cleared through the 510(k) Pre-Market Notification process |
| This process generally takes three to six months, but may take substantially longer |
| Before a Class III device can be commercially distributed in the United States, a pre-market approval, or PMA, must be obtained from the FDA The PMA process can be expensive and uncertain, requires detailed and comprehensive scientific and other data and generally takes between one and three years, but may take significantly longer |
| The commercial distribution of any products we develop that require regulatory clearance may be delayed |
| In addition, because we cannot assure you that any new products or any product enhancements we develop for commercial distribution in the United States will be exempt from the FDA market clearance requirements or subject to the shorter 510(k) clearance process, the regulatory approval process for our products or product enhancements may take significantly longer than anticipated by us or our customers |
| We may be adversely affected by the impact of environmental and safety regulations |
| We are subject to foreign, federal, state, local and foreign laws and regulations governing the protection of the environment and occupational health and safety, including laws regulating air emissions, wastewater discharges, and the management and disposal of hazardous materials and wastes; and the health and safety of our employees |
| We are also required to obtain permits from governmental authorities for certain operations |
| If we violate or fail to comply with these laws, regulations or permits, we could incur fines, penalties or other sanctions, which could have a material adverse effect on us |
| Environmental laws tend to become more stringent over time, and we could incur material expenses in the future relating to compliance with future environmental laws |
| In addition, we could be held responsible for costs and damages arising from any contamination at our past or present facilities or at third-party waste disposal sites |
| We cannot completely eliminate the risk of contamination or injury resulting from hazardous materials, and we may incur material liability as a result of any contamination or injury |
| Risks Relating to Our Common Stock Our common stock may be volatile and could decline substantially |
| There has been significant volatility in the market price and trading volume of securities of companies operating in the medical device industry, including our company, which has often been unrelated to the operating performance of particular companies |
| These broad market fluctuations may adversely affect the trading price of our common stock |
| Price declines in our common stock could result from general market and economic conditions and a variety of other factors, including: • actual or anticipated fluctuations in our operating results; • our announcements or our competitors’ announcements regarding new products, significant contracts, acquisitions or strategic investments; • loss of any of our key management or technical personnel; • conditions affecting orthopedic device manufacturers or the medical device industry generally; • product liability lawsuits against us or our customers; • clinical trial results with respect or our customers’ medical devices; • changes in our growth rates or our competitors’ growth rates; • developments regarding our patents or proprietary rights, or those of our competitors; 25 ______________________________________________________________________ • FDA and international actions with respect to the government regulation of medical devices and third-party reimbursement practices; • public concern as to the safety of our products; • changes in health care policy in the United States and internationally; • conditions in the financial markets in general or changes in general economic conditions; • our inability to raise additional capital; • changes in stock market analyst recommendations regarding our common stock, other comparable companies or the medical device industry generally, or lack of analyst coverage of our common stock; • sales of our common stock by our executive officers, directors and five percent stockholders or sales of substantial amounts of common stock; and • changes in accounting principles |
| In the past, following periods of volatility in the market price of a particular company’s securities, litigation has often been brought against that company |
| If litigation of this type is brought against us, it could be extremely expensive and divert management’s attention and the company’s resources |
| A large percentage of our voting stock is controlled by one principal stockholder whose interests may conflict with those of our other stockholders |
| As of December 31, 2005 the Olympus Funds beneficially own 24dtta9prca of our common stock |
| As a result of this ownership, the Olympus Funds have a substantial influence on our affairs and their voting power will constitute a large percentage of any quorum of our stockholders voting on any matter requiring the approval of our stockholders |
| Such matters include the election of directors, the adoption of amendments to our certificate of incorporation and by-laws and approval of mergers or sales of substantially all our assets |
| This concentration of ownership may also have the effect of delaying or preventing a change in control of our company or discouraging others from making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares |
| In addition, as of December 31, 2005, three of our seven directors, including the chairman of our board, are representatives of the Olympus Funds |
| The Olympus Funds may cause corporate actions to be taken even if the interests of the Olympus Funds conflict with the interests of our other stockholders |
| We are no longer a “controlled company” within the meaning of the New York Stock Exchange Rules, and as a result will no longer qualify for exemptions from certain corporate governance requirements |
| We are listed on the New York Stock Exchange and are therefore subject to the NYSE’s corporate governance rules |
| We are no longer a “controlled company” within the meaning of Section 303A of the NYSE’s Listed Company Manual |
| Furthermore, by July 19, 2006, all of our committees must be comprised solely of independent directors and a majority of the directors on our board must be independent |
| Currently our board consists of seven directors, three of whom are independent |
| During the phase-in period granted to us by the NYSE, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all NYSE corporate governance rules |
| If, by July 19, 2006 we do not comply with NYSE requirements, we may be subject to enforcement actions by the NYSE In addition, this change in our board and committee membership may result in a change in corporate strategy and operating philosophies, and may result in deviations from our current growth strategy, and the board’s limited history of working together may inhibit its ability to function at current levels of efficiency |
| 26 ______________________________________________________________________ A significant portion of our total outstanding shares may be sold into the market in the near future |
| If there are substantial sales of our common stock or the perception that these sales could occur, the price of our common stock could decline |
| Our current stockholders hold a substantial number of shares of our common stock that they are able to sell in the public market in the near future |
| A significant portion of these shares are held by a small number of stockholders |
| Sales by our current stockholders of a substantial number of shares could significantly reduce the market price of our common stock |
| As of December 31, 2005, Olympus Funds held approximately 8dtta6 million shares of our common stock, including shares issuable upon the exercise of warrants, have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders |
| Effective February 21, 2006, Olympus Funds distributed approximately 3dtta6 million net shares to investors in their fund |
| After this distribution, Olympus funds held approximately 5dtta0 million shares of our common stock |
| Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional equity securities |
| Our certificate of incorporation, our by-laws and Delaware law contain provisions that could discourage another company from acquiring us and may prevent attempts by our stockholders to replace or remove our current management |
| Provisions of the Delaware General Corporation Law, our certificate of incorporation and our by-laws may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares |
| In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace or remove our board of directors |
| These provisions include: • providing for a classified board of directors with staggered terms; • requiring supermajority stockholder voting to effect certain amendments to our certificate of incorporation and by-laws; • eliminating the ability of stockholders to call special meetings of stockholders; • prohibiting stockholder action by written consent; • establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings |
| • limiting the ability of stockholders to amend, alter or repeal the by-laws; and • authorizing of the board of directors to issue, without stockholder approval, shares of preferred stock with such terms as the board of directors may determine and shares of our common stock |
| We are also protected by Section 203 of the Delaware General Corporation Law, which prevents us from engaging in a business combination with a person who becomes a 15dtta0prca or greater stockholder for a period of three years from the date such person acquired such status unless certain board or stockholder approvals were obtained |