| VIASYS HEALTHCARE INC Item 1A Risk Factors Demand for some of our products depends on the capital spending policies of our customers and on government funding policies |
| Changes in these policies could negatively affect our business |
| We also sell to laboratories, universities, healthcare providers and public and private research institutions |
| Many factors, including public policy spending provisions, available resources and economic cycles have a significant effect on the capital spending policies of these entities |
| These factors can have a significant effect on the demand for our products which would have an adverse effect on our results of operations |
| For example, a reduction in funding to major government research supported agencies, such as the National Institutes of Health or the National Science Foundation, could materially adversely affect sales of our sleep diagnostic testing equipment |
| We depend on third-party reimbursement to our customers for market acceptance of our products |
| Our profitability would suffer if third-party payors failed to provide appropriate levels of reimbursement for the purchase or use of our products or if any governmental or third-party payor were to issue an adverse determination or restrictive coverage policy |
| Sales of medical products largely depend on the reimbursement of patients &apos medical expenses by government healthcare programs and private health insurers |
| Without both favorable coverage determinations by, and the financial support of, government and third-party insurers, the market for some of our products could be limited |
| Governments and private insurers in many countries closely examine medical products and devices incorporating new technologies to determine whether to cover and reimburse for the purchase or use of such products and devices and, if so, the appropriate level of reimbursement |
| We cannot be sure that third-party payors will cover and reimburse customers for purchases of future products or that any such reimbursement will enable us to sell these products at profitable prices |
| We also cannot be sure that third-party payors will maintain the current level of reimbursement to physicians and medical centers for use of our existing products |
| Adverse coverage determinations or any reduction in the amount of this reimbursement could harm our business |
| Third-party payors emphasize managed care, leading to the use of cost-effective medical devices by healthcare providers |
| In addition, through their purchasing power, these payors often seek discounts, price reductions or other incentives from medical products suppliers |
| The federal government and private insurers continue to consider ways to change the manner in which healthcare services are provided and paid for in the United States |
| In the future, it is possible that the government may institute price controls and further limits on Medicare and Medicaid spending |
| These controls and limits could materially affect the payments we receive from sales of our products |
| Internationally, medical reimbursement systems vary significantly, with some medical centers having fixed budgets, regardless of the level of patient treatment and other countries requiring application for, and approval of, government or third-party reimbursement |
| Even if we succeed in bringing new products to market, uncertainties regarding future healthcare policy, legislation and regulations, as well as private market practices, could materially affect our ability to sell our products in commercially acceptable quantities at profitable prices |
| We may need additional capital to sustain and expand our business, including acquisitions and the development of new products |
| As of December 31, 2005, we had cash and cash equivalents of dlra19dtta5 million and a dlra150dtta0 million revolving credit facility under which we have dlra70dtta2 million outstanding, which includes dlra2dtta7 million of outstanding standby letters of credit, and of which dlra79dtta8 million was available for borrowing |
| The revolving credit facility can be increased to dlra200dtta0 million at our request |
| Both cash and the credit facility may be used to fund the expansion of our business, either through acquisitions or development of new products |
| Our ability to access the credit facility is dependent on complying with the debt 20 _________________________________________________________________ covenants that are part of that agreement |
| These covenants include a maximum leverage ratio of debt to earnings before interest, taxes and depreciation and amortization ( "e EBITDA "e ) of 3dtta0, a minimum ratio of EBITDA to interest expense of 4dtta0, minimum stockholders &apos equity and maximum annual capital expenditures of dlra30 million or 5prca of the Companyapstas consolidated net assets |
| While we were in compliance with the debt covenants in the Facility at December 31, 2005 and expect to be able to meet these requirements in the future, failure to satisfy any of the conditions would require us to renegotiate the facility on terms that may not be favorable or could require us to repay any outstanding balance |
| While we would attempt to find alternative sources to fund our operations from other financial institutions, we cannot assure you that we would be successful, or if we were successful that the new credit would be on terms that would be attractive to us in financing our business plans |
| The credit facility is due to expire on May 3, 2010 |
| In addition, we may need to seek capital beyond that available |
| Adequate funds for these purposes on terms favorable to us, whether through additional equity financing, debt financing or other sources, may not be available when needed and, if consummated, may result in significant dilution to existing stockholders |
| If we are unable to secure additional funding when required, we may be required to delay, scale back, and/or abandon some or all of our product development programs or proposed acquisitions |
| We face aggressive competition in many areas of our business and our business will be harmed if we fail to compete effectively |
| Although we believe that our products currently compete favorably with respect to these factors, we cannot give assurance that we can maintain our competitive position against our current and potential competitors |
| Many of our current and potential competitors have longer operating histories, greater name recognition and substantially greater financial, technical and marketing resources than we have |
| We may not be able to compete effectively with these competitors |
| To remain competitive, we must develop new products and periodically enhance our existing products |
| We anticipate that we may have to adjust the prices of many of our products to stay competitive |
| In addition, new competitors may emerge and entire product lines may be threatened by new technologies or market trends that reduce the value of these product lines |
| A significant percentage of our total assets consist of goodwill from acquired companies and we may be unable to realize the value of this asset |
| We have acquired significant intangible assets, including approximately dlra261dtta9 million of cost in excess of net assets of acquired companies, or goodwill, recorded on our balance sheet as of December 31, 2005 |
| This represents approximately 40prca of our total assets as of that date |
| Our ability to realize the value of this asset will depend on future cash flows of the acquired businesses |
| Cash flow, in turn, depends on how well we have identified these acquired businesses as desirable acquisition candidates and how well we can integrate these acquired businesses |
| We may incur a variety of costs to engage in future acquisitions of companies, products or technologies, and the anticipated benefits of those acquisitions may never be realized |
| As a part of our strategy to grow our business, we seek to make strategic acquisitions of, or significant investments in, complementary companies, products or technologies, although no significant acquisition or investments are currently pending |
| We may not be successful in the future in identifying companies that meet out acquisition criteria |
| The failure to identify such companies may limit the rate at which we are able to grow our business |
| Furthermore, any future acquisitions that we do undertake could be accompanied by risks such as: • Difficulties in integrating the operations and personnel of acquired companies; 21 _________________________________________________________________ • Diversion of our managementapstas attention from ongoing business concerns; • Our potential inability to maximize our financial and strategic position through the successful incorporation of acquired technology and rights into our products and services; • Additional expense associated with amortization of acquired assets; • Maintenance of uniform standards, controls, procedures and policies; and • Impairment of existing relationships with employees, suppliers and customers as a result of the integration of new management personnel |
| We cannot guarantee that we will be able to successfully integrate any business, products, technologies or personnel that we might acquire in the future, and our failure to do so could harm our business |
| International revenues account for a substantial portion of our revenues |
| International revenues from continuing operations, including export revenues from the United States, accounted for 43prca of our total revenues in 2005 and 44prca of our total revenues in 2004 |
| While we plan to continue expanding our presence in international markets, our international operations present a number of risks, including the following: • Foreign laws in a number of countries may limit our ability to properly maintain our distribution channels |
| For example, a number of foreign laws restrict our ability to terminate a distributor for taking actions that materially adversely affect our business, such as manufacturing and selling competing products |
| • The successful marketing of our products in some countries, including many European countries, may require us to establish a local presence |
| The revenues generated in these countries may not justify the expense of establishing and maintaining such a local presence |
| • Fluctuations in currency exchange rates have occasionally forced us to lower our prices, thereby reducing our margins for some of our respiratory and neurodiagnostic products |
| Our competitive position is partially dependent on protecting our intellectual property, which can be difficult and expensive |
| We believe that the success of our business depends, in part, on obtaining patent protection for our products, defending our patents once obtained and preserving our trade secrets |
| Patent and trade secret protection is important to us because developing and marketing new technologies and products is time consuming and expensive |
| We own many US and foreign patents and intend to apply for additional patents to cover our products |
| We may not receive enforceable patents from any pending or future patent applications owned by or licensed to us |
| The claims allowed under any issued patents may not be broad enough to protect our technology |
| Our competitive position is also dependent upon unpatented trade secrets |
| Trade secrets are difficult to protect |
| Our competitors may independently develop proprietary information and techniques that are substantially equivalent to ours or otherwise gain access to our trade secrets, such as through unauthorized or inadvertent disclosure of our trade secrets |
| Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of our proprietary rights |
| Any litigation could result in substantial expense and diversion of attention from our business and may not adequately protect our intellectual property rights |
| In addition, we may be sued by third parties claiming that our products infringe on the intellectual property rights of others |
| This risk is exacerbated by the fact that the validity and breadth of claims covered in medical technology patents involve complex legal and factual questions for which important legal principles are unresolved |
| Any litigation or claims against us, whether or not valid, could result in 22 _________________________________________________________________ substantial costs, place a significant strain on our financial resources, divert management resources and harm our reputation |
| Such claims could result in awards of substantial damages, which could have a material adverse impact on our operating results |
| In addition, intellectual property litigation or claims could force us to: • cease selling, incorporating or using any of our products that incorporate the challenged intellectual property, which would materially adversely affect our revenue; • obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, if at all; or • redesign our products, which would be costly and time-consuming |
| We are involved on an ongoing basis in claims and lawsuits relating to our operations, including product liability, patent infringement, employment, business practices, commercial transactions, environmental and other matters |
| We are involved in the design, manufacture and sale of health care products, which face an inherent risk of exposure to product liability claims if our products are alleged to have caused injury or are found to be unsuitable for their intended use |
| Any such claims could negatively impact the sales of products that are the subject of such claims or other products |
| Currently, we are a party to claims and lawsuits alleging that our products have caused injury or death or are otherwise unsuitable |
| Moreover, we are involved in litigation relating to patent infringement, employment, business practices, commercial transactions, environmental and other matters |
| In addition, when we enter into new markets or launch new products, we may face litigation related to our new products and/or instituted by our competitors in the new markets |
| The ultimate outcome of these lawsuits cannot be predicted with certainty |
| Any litigation or claims against us, whether or not valid, could result in substantial costs, place a significant strain on our financial resources, divert management resources and harm our reputation |
| While we maintain insurance to limit our exposure to such claims, awards of substantial damages in connection with such claims could have a material adverse impact on our operating results and financial conditions |
| If we breach any of the agreements under which we license commercialization rights to products or technology from others, we could lose license rights that are important to our business |
| We license rights to products and technology that are important to our business and we expect to enter into additional licenses in the future |
| Although the products and technology that we currently license account for less than 5prca of our total annual revenues, we expect that this percentage will increase as we develop and introduce additional licensed products to the market |
| For instance, a number of the therapy-based products that we are developing incorporate proprietary technologies that we have licensed from third parties |
| Under these licenses, we are subject to commercialization, development, sublicensing, royalty, insurance and other obligations |
| If we fail to comply with any of these requirements, or otherwise breach a license agreement, the licensor may have the right to terminate the license in whole or to terminate the exclusive nature of the license |
| In addition, upon the termination of the license, we may be required to license to the licensor any related intellectual property that we developed |
| Our ability to market and sell our products depends upon receipt of domestic and foreign regulatory approval of our products and manufacturing operations |
| Our failure to obtain or maintain regulatory approvals and compliance could have a material adverse effect on our business |
| Our products and manufacturing operations are subject to extensive regulation in the United States by the FDA and by similar regulatory agencies in many other countries in which we do business |
| 23 _________________________________________________________________ The principal risks that we face in obtaining and maintaining the regulatory approvals necessary to market our products include: • The approval process for medical devices in the United States and abroad can be lengthy, expensive and require extensive preclinical and clinical trials |
| As a result, we may expend substantial resources in developing and testing a new product but fail to obtain the necessary approvals or clearances to market or manufacture the product on a timely basis or at all |
| • When we modify a medical device for which we have received marketing approval, we must determine whether the modification requires us to seek new regulatory approvals |
| If the FDA or other regulatory agency does not agree with our determination, we may be prohibited from marketing the modified device until we receive the requisite regulatory approval or clearance |
| In addition, the FDA actively enforces regulations prohibiting marketing of devices for indications or uses that have not been cleared or approved by the FDA • The FDA and foreign regulatory agencies require us to comply with an array of manufacturing and design controls and testing, quality control, storage and documentation procedures |
| Because our business is geographically dispersed in the United States and abroad, compliance with these procedures is difficult and costly |
| If we fail to comply with applicable regulations, we could be subject to a number of enforcement actions, including warning letters, fines, product seizures, recalls, injunctions, total or partial suspension of production, operating restrictions or limitations on marketing, refusal of the government to grant new clearances or approvals, withdrawal of marketing clearances or approvals and civil and criminal penalties |
| Companies may also voluntarily conduct a recall of a problem product |
| For a summary of government regulations applicable to our business, see "e Business—Government Regulation "e |
| We may be unable to successfully develop and/or commercialize our new and existing products |
| We have undertaken a substantial internal development strategy under which we anticipate developing a number of therapy and service-based products |
| This strategy represents a departure from our traditional business model and we may not have sufficient expertise and experience necessary to successfully implement this new strategy and develop these new products |
| Furthermore, the successful development and commercialization of these new products will depend upon our ability to obtain regulatory approvals, as discussed above |
| If we are unable to obtain these regulatory approvals, we will be unable to market and sell our products, which will negatively affect our business |
| Even if we are able to obtain regulatory approval for our products we may have difficulty in bringing these products to market |
| In addition, once our new products are brought to market, their shipment may be delayed or the products may have to be discontinued based on design, mechanical, software, regulatory or other issues |
| Finally, we may face competition from other companies who may have a well-established presence in the new market or a strong intellectual property position |
| These matters may materially adversely affect our business and reputation and may make us unable to develop and/or commercialize new products in a successful manner |
| Our dependence on suppliers for materials could impair our ability to manufacture our products |
| Outside vendors, some of which are sole-source suppliers, provide key components and raw materials that we use in the manufacture of our products |
| Although we believe that alternative sources for these components and raw materials are available, any supply interruption in a limited or sole-source component or raw material could harm our ability to manufacture the affected product until we identify and qualify a new source of supply |
| In addition, an uncorrected defect or supplierapstas variation in a component or raw material, either unknown to us or incompatible with our manufacturing process, could harm our ability to manufacture the affected product |
| We may not be able to find a qualified alternative supplier in a reasonable time period, or on commercially reasonable terms, if at all, which could impair our ability to produce and supply our products |
| If we cannot obtain a necessary component, we may need to find, test and obtain regulatory approval for a replacement 24 _________________________________________________________________ component, which would cause significant delays that could have a material adverse effect on our business and operating results |
| We are dependent on our key executives and technical staff, and the loss of key personnel or the failure to attract additional qualified personnel could harm our business |
| Our business is highly dependent on our key executives and technical staff |
| The loss of key personnel or the failure to recruit necessary additional or replacement personnel will likely impede the achievement of our business objectives |
| There is intense competition for qualified personnel our industry, and there can be no assurances that we will be able to attract and retain the qualified personnel necessary for the growth of our business |
| Anti-takeover provisions in our Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws, and certain provisions of Delaware law could prevent or delay transactions that our stockholders may favor |
| Provisions of our Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws may discourage, delay or prevent a merger or acquisition that our stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares |
| For example, these provisions: • authorize the issuance of "e blank check "e preferred stock without any need for action by stockholders; • provide for a classified Board of Directors with staggered three-year terms (however, our Board of Directors has submitted a proposal to amend our Amended and Restated Certificate of Incorporation to eliminate the classification of the Board of Directors for stockholder approval during our 2006 Annual Meeting of Stockholders); • require supermajority stockholder approval to effect various amendments to our charter and by-laws; • eliminate the ability of stockholders to call special meetings of stockholders; • prohibit stockholder action by written consent; and • establish 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 |
| In addition, our board of directors has adopted a stockholder rights plan intended to protect stockholders in the event of an unfair or coercive offer to acquire our Company and to provide our board of directors with adequate time to evaluate unsolicited offers |
| This rights plan may have anti-takeover effects |
| The rights plan would cause substantial dilution to a person or group that attempts to acquire us on terms that our board of directors does not believe are in the best interests of us and our stockholders and may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares |
| As a Delaware corporation, we are also subject to certain Delaware anti-takeover provisions |
| Under Delaware law, a corporation may not engage in a business combination with any holder of 15prca or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction |
| Our Board of Directors could rely on Delaware law to prevent or delay an acquisition of us |