| KYPHON INC ITEM 1A RISK FACTORS Factors Affecting Future Operating Results Our future success depends on our ability to develop and successfully introduce new products, product extensions and improvements to existing products to address unmet patient and market needs |
| Our current products offer orthopaedic surgeons and neurosurgeons, interventional radiologists and interventional neuroradiologists the ability to treat and restore spinal anatomy during balloon kyphoplasty |
| We cannot assure you that the market for the treatment of spinal fractures will continue to generate significant or consistent demand for our KyphX instruments |
| Demand for our products could be significantly diminished by alternative treatment methods, and by new technologies or products that replace and render our products obsolete or too expensive |
| Our future success is dependent upon, among other factors, our ability to develop, obtain regulatory clearance or approval for, manufacture, sell and achieve market acceptance of new products, product extensions and improvements to our existing products |
| The extent of, and rate at which, market acceptance and penetration are achieved by future products is a function of many variables |
| These variables include price, safety, efficacy, reliability, marketing and sales efforts, the availability of adequate third-party coverage and reimbursement for procedures using our new products and the existence of competing products and general economic conditions affecting purchasing patterns |
| Our ability to market and sell new products, product extensions and improvements to our existing products may also be subject to government regulation, including clearance and approval by the FDA and foreign government agencies |
| Any failure in our ability to successfully develop, obtain regulatory approval for, manufacture, sell and achieve market acceptance of our new products, product extensions or improvements to our existing products could adversely affect our business and our financial condition, which could cause our stock price to decline |
| Our success is dependent upon the availability of adequate physician and hospital reimbursement by third-party payors for balloon kyphoplasty procedures using our KyphX instruments |
| Our ability to commercialize our products successfully depends in significant part on the extent to which appropriate coverage and reimbursement for our products and related procedures are obtained from third-party payors, including governmental payors such as Medicare |
| Uncertainty exists as to the coverage and reimbursement status of new medical technologies |
| Procedures using our KyphX instruments are currently covered and reimbursed by the Medicare program and other governmental and private third-party payors |
| However, as a result of developments in both physician and hospital reimbursement, including the establishment of new reimbursement codes describing kyphoplasty, some physicians and hospitals in some states may believe that the level of reimbursement they receive is too low to support performing balloon kyphoplasty |
| Continued use of our KyphX instruments by the medical community may be adversely impacted if physicians perceive that they do not receive sufficient reimbursement from third-party payors for their services in performing the procedures using our instruments |
| As of now, it is not possible to assess with any degree of certainty whether the implementation of recent reimbursement code changes has had or will have any material impact on the behavior of clinicians with respect to their interest in performing the balloon kyphoplasty procedure |
| In addition, reimbursement for competing procedures, such as vertebroplasty, may also continue to be perceived in some cases as more favorable for the physician or hospital than that available for using our products and thus may reduce the frequency with which balloon kyphoplasty procedures using our products are performed, which could harm our revenues |
| If domestic or international third-party payors adversely change coverage or reimbursement policies for balloon kyphoplasty procedures, our ability to market and sell our KyphX instruments would be adversely impacted, which would harm our business, revenues and operating results |
| Third-party payors, including Medicare and private health maintenance organizations and insurance plans, are increasingly challenging the prices charged for medical products and services and may institute adverse changes in their coverage or reimbursement policies for balloon kyphoplasty procedures |
| Governmental and private third-party payors are developing increasingly sophisticated methods of controlling healthcare costs and are exploring more cost-effective methods of delivering healthcare, including the placement of limitations on the circumstances under which a procedure is covered and other restrictions |
| While many governmental and private third-party payors currently provide coverage and reimbursement for the procedures in which our KyphX instruments are used, we cannot assure you that procedures in which our technology is used will continue to be reimbursed at current rates or that third-party payors will continue to consider our technology cost-effective and provide coverage and reimbursement for our technology, in whole or in part |
| If third-party payors adopt new limits or restrictions on coverage and reimbursement of balloon kyphoplasty procedures, such a development could significantly impact the willingness of hospitals, clinics and doctors to purchase and use our KyphX instruments, which in turn could adversely affect our business and our financial condition, which could cause our stock price to decline |
| In the United States, there have been and we expect there will continue to be a number of legislative and regulatory proposals to change the healthcare system, including the Medicare program, and some could involve changes that could significantly affect our business |
| Future legislative or policy initiatives directed at increasing the accessibility of healthcare and reducing costs could be introduced on either the Federal or state level |
| We cannot predict the impact on our business of any legislation or regulations related to the healthcare system that may be enacted or adopted in the future |
| In addition, healthcare cost containment efforts similar to those we face in the United States are prevalent in many of the other countries in which we intend to, or already do, sell our instruments, and these efforts are expected to continue in both the United States and abroad |
| Reimbursement and healthcare payment systems in international markets vary significantly by country and include both government-sponsored healthcare and private insurance |
| Given that the vast majority of our revenues indirectly rely on government-funded health care systems that reimburse our customers for their use of our products to treat patients, any adverse change in governmental payors &apos coverage and/or reimbursement policies, including as a result of reaction to rapidly escalating budget pressures, would adversely impact our ability to market and sell our KyphX instruments, harm our business and reduce our revenues |
| The absence of prospective, randomized, controlled clinical trial data as support for the economic differentiation of balloon kyphoplasty over vertebroplasty is causing some influential physicians in positions of authority to speak out against adoption of balloon kyphoplasty, which may ultimately adversely affect our business and our financial condition, which could cause our stock price to decline |
| Over the past year or so, a handful of vocal physicians have begun to publicly criticize the cost and merits of balloon kyphoplasty as a procedure for treating vertebral compression fractures |
| We believe this is due, in part, to the absence to-date of prospective, randomized, controlled clinical trial data on the effectiveness of balloon kyphoplasty and the perceived economic cost difference between balloon kyphoplasty and vertebroplasty |
| On more than one occasion, certain speakers, including a few physicians of authority in various institutions and professional societies, have publicly stated their opposition to both balloon kyphoplasty and Kyphon based on this lack of perceived justification for the cost or economics of the procedure |
| We have recently completed enrollment in a randomized, controlled trial comparing balloon kyphoplasty versus non-surgical management |
| We do not yet know what clinical outcomes that trial will reveal, or whether the trialapstas results, once available, will demonstrate the benefits of treatment of vertebral compression fractures with balloon kyphoplasty |
| We also cannot predict how the current negative public criticism to adoption of our products for treating patients ultimately may affect our business or our revenues |
| If primary care physicians are unwilling or unable to refer patients to trained clinicians that use our KyphX products to perform balloon kyphoplasty, our revenues will suffer and our business may not expand or may decline |
| A key element of our business strategy is to educate primary care physicians and spine specialists on the use of our KyphX instruments as an alternative to conventional spinal fracture treatment and conservative pain management therapies |
| We believe primary care is an important source of patient referral, and, therefore, it is important to educate them about our products and the clinical outcome of the balloon kyphoplasty procedure |
| We believe that primary care physicians and spine specialists may not widely adopt our products unless they determine, based on experience, clinical data and published, peer- reviewed journal articles, that our products provide benefits or an attractive alternative to conventional treatments of spinal fractures |
| In addition, we believe that recommendations and support of our products by influential practitioners are essential for market acceptance and adoption of our products |
| If we are unable to have continued referrals from primary care physicians, then our future growth will be harmed and our business may decline |
| If we are unable to successfully integrate into our business InnoSpine, Inc |
| or any other acquisitions we may choose to make, we could encounter difficulties that harm our business |
| We recently acquired InnoSpine, Inc |
| and a technology that we have not dealt with before |
| We may also acquire other companies, products or technologies that we believe to be complementary to the present or future direction of our business |
| We may have difficulty integrating the acquired personnel, financials, operations, products or technologies into our existing business |
| Acquisitions and the resulting integration may dilute our earnings per share, harm our liquidity, disrupt our ongoing business, distract our management and employees, increase our expenses, create an unfavorable impression of our company in the public markets for our equity, and expose us to new risks and liabilities, any or all of which could harm our business and cause our stock price to decline |
| Because we may face significant competition from other companies with greater resources or superior technology than we have, we may be unable to maintain our competitive position and sales of our KyphX instruments may decline |
| The market for medical devices is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants |
| While the direct competition we have faced to date has been limited, we are aware that several companies, some with more resources than ours, are developing and may already be introducing products to directly compete with ours in similar procedures, both in the United States and abroad, including, in some instances, copies of our technology for distribution in one or more foreign markets |
| Some of these competitors &apos products may be successful as a result of greater efficacy, less expensive alternatives to our products, or another advantage that makes their products more attractive than ours, which could significantly impact our reimbursement levels, anticipated revenues and future growth |
| Our industry also includes large pharmaceutical companies that are developing drug products that may reduce the incidence of osteoporosis and cancer and, therefore, the market for our KyphX instruments |
| Our ability to compete successfully depends in part on our ability to respond quickly to medical and technological changes and user preferences through the development and introduction of new products that are of high quality and address patient and surgeon requirements |
| We compete with many larger companies that enjoy competitive advantages, including: * longer-standing distribution networks and relationships with healthcare providers and payors; * additional lines of products and the ability to bundle products to offer higher discounts or other incentives to gain a competitive advantage; * greater experience completing preclinical testing and clinical trials and obtaining FDA and other regulatory approvals; and * greater resources for product development, manufacturing, sales and marketing and patent litigation |
| If we are unable to compete effectively against existing or future competitors, sales of our instruments will decline |
| If we are unable to prevent third parties from using our intellectual property, our ability to compete in the market will be harmed |
| We believe that the proprietary technology embodied in our instruments and methods gives us a competitive advantage |
| Maintaining this competitive advantage is important to our future success |
| We rely on patent protection in the US and abroad, as well as on a combination of copyright, trade secret and trademark laws, to protect our proprietary technology |
| However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage |
| For example, our patents may be challenged, invalidated or circumvented by third parties |
| Our two earliest patents, which we believe provide broad protection to our technology, expire as early as February 2009 |
| Our patent applications may not issue as patents at all or in a form that will be advantageous to us |
| We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors, former employees and current employees, despite the existence of nondisclosure and confidentiality agreements and other contractual restrictions |
| Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States and may permit others to copy our products abroad without effective recourse |
| We have recently detected what we believe are the first attempts to copy some of our products for distribution in one or more foreign countries |
| In addition, in many foreign jurisdictions, we have either acquired patent protection that is narrower in scope than our corresponding protection in the US or chosen, for various business reasons, not to pursue any patent protection at all |
| We also may not have the ability to prevent infringing products from remaining on the market in at least some geographic locations, and we may lose market share or have our growth impeded in those geographic markets as a result |
| To protect our rights, we may in the future initiate other claims or litigation against third parties for infringement of our proprietary rights |
| We may also begin one or more patent proceedings in various administrative agencies and patent offices to protect our patent rights and prevent them from being undermined by our competitors &apos patent filings |
| If we decide to enforce our intellectual property rights to prevent or inhibit appropriation of our technology by competitors, that process will be expensive and time consuming to litigate or otherwise dispose of, will divert managementapstas attention from our core business, and may harm our business if we do not prevail |
| Our instruments could infringe on the intellectual property rights of others, which may lead to costly litigation, payment of substantial damages or royalties and/or our inability to use essential technologies |
| The medical device industry has been characterized by extensive litigation and administrative proceedings regarding patents and other intellectual property rights |
| Whether a medical device infringes a patent involves complex legal and factual issues, the determination of which is often uncertain |
| Our competitors may assert that our instruments and methods infringe their patents, especially as we expand our business into other areas of technology for diagnosis and treatment of spinal conditions |
| From time to time, we receive correspondence from various third parties accusing us of infringing their patents or inviting us to license their patents |
| In addition, they may claim that their patents have priority over ours because they invented first or their patents were filed or issued first |
| Because patent applications can take many years to issue, there may be applications now pending of which we may be aware or unaware, which may later result in issued patents that our instruments or methods may infringe |
| There could also be existing patents that one or more of our instruments or methods may inadvertently be infringing |
| As the number of competitors in the market for minimally invasive spine disorder treatments grow, the possibility of a patent infringement claim against us increases |
| Infringement and other intellectual property claims, with or without merit, against us can be expensive and time-consuming to litigate or otherwise dispose of and can divert managementapstas attention from our core business |
| In addition, if we lose an intellectual property litigation matter, a court could require us to pay substantial damages and royalties, as well as issue a preliminary or permanent injunction that would prohibit us from developing, manufacturing or selling our products |
| Also, although we may seek to obtain a license under a third partyapstas intellectual property rights to bring an end to any claims or actions asserted or threatened against us or to address an injunction or simply if we believe it makes business sense to do so, we may not be able to obtain a license on reasonable terms or at all |
| If we cannot design around a patent, are enjoined from infringing it, and cannot obtain a satisfactory license, we may be forced to cease selling our products, which could cause substantial harm to our business |
| We expend considerable effort complying with federal and state healthcare "e fraud and abuse "e laws, but, if we are found not to have fully complied with such laws, our business and financial condition could be adversely affected, which could cause our stock price to decline |
| As part of the medical device industry, we are subject to various federal and state healthcare laws generally collectively referred to as the healthcare "e fraud and abuse "e laws |
| Investigations and enforcement under these laws within our industry is increasing, and at least five other medical device manufacturers have recently been the subject of investigations and/or enforcement activities by the United States government in connection with the industryapstas interactions with, and payments to, healthcare professionals |
| While we educate and train our employees on how to interact appropriately with healthcare providers under applicable laws, and while we believe we are in substantial compliance with these laws, we cannot assure you that we will not be subject to investigations or enforcement actions under any of these laws based on the actions of our employees |
| We may also face increased risk of investigation and enforcement based on the actions of our customers under these same laws |
| If our past or present operations are judged to be in violation of any of the laws described above or the other similar governmental regulations to which we are subject, we may ultimately face associated adverse consequences, such as fines, penalties, exclusion from healthcare programs and/or the curtailment and restructuring of our operations, which could harm our business and our financial condition and cause our stock price to decline |
| Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our managementapstas attention from the operation of our business and damage our reputation |
| This, in turn, could adversely affect our business and our financial condition, which could cause our stock price to decline |
| Our failure to maintain necessary regulatory clearances or approvals, or to obtain additional regulatory clearances or approvals, in the US and abroad could hurt our ability to commercially distribute and market our KyphX instruments |
| Our KyphX instruments and bone cement and our KyphOs calcium phosphate are considered medical devices and are subject to extensive regulation in the United States and in foreign countries where we currently conduct, or intend to conduct, our business |
| Unless an exemption applies, each medical device that we wish to market in the United States must first receive either 510(k) clearance or premarket approval from the FDA The FDAapstas 510(k) clearance process usually takes from three to 12 months, but may take longer |
| The premarket approval process generally takes from one to three years from the time the application is filed with the FDA, but it can take longer, require more information, and be significantly more expensive than the 510(k) clearance process |
| So far, we have obtained 510(k) clearance for the KyphX Inflatable Bone Tamps for fracture reduction or void creation in specific sites including the spine (including for use during balloon kyphoplasty using our bone cement), hand, tibia, radius and calcaneus, and clearance for our KyphX HV- R Bone Cement for the treatment of pathological fractures of the vertebral body due to osteoporosis, cancer, or benign lesions during balloon kyphoplasty procedures |
| These clearances allow us to promote numerous short- and long-term clinical benefits associated with balloon kyphoplasty procedures |
| We have also procured CE marking for promoting our products in Europe and the appropriate governmental regulatory clearances to conduct business in Canada and several other foreign countries |
| Nevertheless, our 510(k) and foreign regulatory clearances can be revoked if safety or effectiveness problems develop |
| We also will be required to obtain 510(k) clearance or premarket approval and foreign regulatory clearances to market additional products, such as new biomaterials for use in balloon kyphoplasty, which will likely require clinical data, and to market our existing products for new indications, such as treatment of fractures caused by trauma, or in new geographic jurisdictions for us, such as Japan |
| If the clinical data gathered are not supportive, then applications will not be filed |
| If we choose to seek additional clearances or approvals by filing one or more applications, we cannot be certain that we would obtain any further regulatory clearances or premarket approvals in a timely manner or at all, and delays in obtaining clearances or approvals may adversely affect our revenue growth, future profitability and ability to penetrate what otherwise might be lucrative markets for our products |
| We have begun to invest significant financial resources to conduct clinical trials of our products, which will reduce our earnings during the foreseeable future, and which may not ultimately provide data supportive of the use and clinical efficacy of our products |
| We anticipate conducting significant additional clinical trial activity both in the United States and abroad to collect further data that may support the use and clinical efficacy of our products |
| The cost of these trials will be significant, which may reduce our net income and earnings for the foreseeable future |
| In addition, the results of our clinical trials may not ultimately produce data that are supportive of our products over other treatment alternatives, that may support unfavorable conclusions regarding our technology, and that ultimately may provide information that leads to a decreased rate of adoption of our products for balloon kyphoplasty, which would harm our business and cause our stock price to decline |
| Finally, we may be unable to complete the clinical trials for a variety of reasons, and therefore may not be able to provide additional clinical data on our products |
| Modifications to our marketed devices may require new 510(k) clearances or premarket approvals or the FDA may require us to cease marketing or recall the modified devices until clearances are obtained |
| Any modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or, possibly, premarket approval |
| The FDA requires every manufacturer to make this determination in the first instance, but the FDA can review any manufacturerapstas decision |
| We have modified aspects of our KyphX instruments without seeking new 510(k) clearances because we believe that the modifications do not significantly affect the productapstas safety or effectiveness |
| The FDA may not agree with any of our decisions not to seek new clearances or approvals |
| If the FDA requires us to seek 510(k) clearance or premarket approval for any of these modifications to a previously cleared device, we may be required to cease marketing or to recall the modified device until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties |
| If we are unable to expand our manufacturing capacity in a timely manner, or if we do not accurately project demand, we could have excess capacity or insufficient capacity, either of which could adversely affect our operating results |
| We currently manufacture substantially all of our KyphX instruments in our facilities located in Sunnyvale, California |
| We plan to expand our manufacturing capacity at this facility |
| In addition, we will be devoting significant resources during 2006 and 2007 towards establishing our new facilities in Neuchâtel, Switzerland that will include manufacturing capacity |
| We plan to manufacture a secondary supply of our KyphX instruments in this facility, in addition to manufacturing our proprietary KyphOs calcium phosphate and KyphX HV-R bone cement |
| We could experience difficulties and disruptions in the manufacture of our KyphX instruments during capacity expansion in our Sunnyvale facility, prior to bringing up our Neuchâtel facility |
| In both our Sunnyvale and Neuchâtel facilities we could also face the inability to procure and install the necessary manufacturing equipment, a shortage of components used in our products, a lack of availability of qualified manufacturing personnel, difficulties in achieving consistent quality control from new manufacturing lines, difficulties in obtaining or maintaining compliance with regulatory requirements mandated by the FDA and the European Union and an inability to maintain sufficient manufacturing capacity |
| We may experience delays, disruptions, capacity constraints and other problems in our manufacturing operations, and, as a result, product shipments to our customers could be delayed, which would negatively impact our revenues, competitive position and reputation |
| If we are unable to expand our manufacturing capacity in a timely manner, or if we do not accurately project demand, we will have excess capacity or insufficient capacity, either of which could seriously harm our profitability |
| Because injuries that occur during spine surgery can be significant, we are subject to an increased risk of product liability lawsuits and/or regulatory action |
| If we are sued in a product liability action, we could be forced to pay substantial damages |
| We manufacture medical devices that are used on patients in spine surgery procedures |
| Spine surgery, including balloon kyphoplasty, involves risk of serious complications, including cardiac arrest, cerebrovascular accident, myocardial infarction, pulmonary embolism, and death |
| The use of bone filler material by surgeons to fill the void created using our KyphX Inflatable Bone Tamp may also lead to these complications, as a result of leakage of the bone filler material into the spinal canal or surrounding tissue or for other reasons |
| We are aware that some of these complications have occurred during procedures performed with our products, including our KyphX HV-R bone cement and KyphOs calcium phosphate, and we have had to publicly report that information through filing a Medical Device Report to the FDA or Vigilance Reports in Europe |
| Increased reporting of adverse events in connection with the use of our or other bone void filler materials during balloon kyphoplasty could expose us to increased risk of product liability litigation, and our current insurance coverage limits may not be adequate and we may not be able to obtain continued product liability coverage on commercially reasonable terms, if at all |
| Companies, including ours, which produce devices for use in the spine, are subject to a significant risk of product liability litigation |
| If any of our devices are found to have caused or contributed to any injury, we could be held liable for substantial damages, and our current product liability coverage limits may not be adequate to protect us from any liabilities we might incur |
| Product liability insurance is expensive and may not be available to us in the future on acceptable terms, if at all |
| In addition, increased reporting of adverse events may lead to regulatory action by the FDA which could adversely affect our ability to market products and/or result in other adverse consequences to our Company, our employees and our business, including but not limited to civil and criminal penalties, recall, seizure, and product withdrawal, which in turn could adversely affect our business and our financial condition and cause our stock price to decline |
| We are aware that a complaint, which we believe is a qui tam complaint, is being evaluated by a US Attorneyapstas Office in connection with our marketing and sales practices, including those relating to the Medicare reimbursement available to our customer hospitals |
| If a subpoena, or an enforcement or other action ultimately results from this investigation, our business and financial condition could be adversely affected which could cause our stock price to decline |
| We have learned that sometime in 2005, a US Attorneyapstas Office (USAO) received a complaint that we believe is a qui tam complaint that alleges impropriety in our reimbursement practices |
| Although no subpoena has been issued to us, the USAO in connection with this complaint is investigating our sales and marketing practices, including those relating to Medicare reimbursement available to our customer hospitals, based on site-of-service, for using Kyphonapstas products in surgery, and has informally asked about some of our documentation that may be relevant to the investigation |
| We believe we are in substantial compliance with the healthcare laws relevant to our Company |
| Even though we have not received a subpoena regarding the complaint or its allegations, we are voluntarily cooperating with the USAO, to permit the USAO to develop an informed opinion on whether or not to pursue any action in connection with the complaint, although timing on that decision is uncertain |
| At this time, we do not know whether the outcome of the investigation will have a material adverse impact to our business, and cannot assure you regarding any future path USAO or any related lawsuit may take |
| If an enforcement or other action results from the ongoing investigation, our business and financial condition could be adversely affected which could cause our stock price to decline |
| We derive a significant portion of our operating results from non-US sales, which are subject to additional risks arising from international operations and sales |
| Sales outside of the United States account for a significant percentage of our revenues and we intend to continue to expand our presence in international markets |
| International net sales accounted for dlra48dtta5 million, or approximately 16prca of total net sales in 2005 |
| Our international operations and sales are subject to a number of further risks in addition to those faced for our business, generally including: * our products may sell at lower prices outside the United States; * agreements may be difficult to enforce; * receivables may be difficult to collect through a foreign countryapstas legal system; * foreign customers may have longer payment cycles; * foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade; * US export licenses may be difficult to obtain; * intellectual property may be more difficult to acquire and enforce in foreign countries, and copying of our products in certain jurisdictions may become widespread; * terrorist activity may interrupt distribution channels or impact our customers or employees; and * fluctuations in exchange rates may affect product demand and adversely affect the profitability, in US dollars, of products sold in foreign markets where payments are made in local currencies |
| Any one or more of these factors stated above could have an adverse effect on our non-US financial condition, results of operations and business |
| Since we depend upon distributors in some markets, if we lose a distributor or a distributor fails to perform, our revenues will be harmed in those geographic markets |
| With the present exception of Canada and some of the larger countries in Europe, we sell our KyphX instruments in foreign markets through distributors and sales agents |
| To the extent we rely on distributors, our success will depend upon the efforts of others, over which we may have little control |
| We recently terminated our relationship with distributors in several foreign jurisdictions and are in the process of establishing, or have already established, new relationships in those and other geographic regions |
| We may also terminate or modify other distribution relationships in further geographic locations in the future |
| If we lose a distributor or a distributor fails to perform, our revenues will be harmed in those geographies, and the market for our products may also be harmed in those geographies as a result of the distributorapstas or agentapstas actions |
| Alternative sales channels are available in these geographic markets, however, their establishment could consume substantial time and resources |
| Our reliance on suppliers could limit our ability to meet demand for our products in a timely manner or within our budget |
| We are dependent upon outside suppliers to provide us with key components necessary for the manufacture of our products |
| In addition, we are presently sourcing our KyphX Inflation Syringe and our KyphX HV-R Bone Cement from single suppliers, without any present viable alternative suppliers qualified |
| Generally, since we obtain components through purchase orders rather than long-term supply agreements and do not maintain large volumes of inventory, a product recall, disruption or termination of the supply of components could adversely affect our continued ability to conduct business, including causing: * a significant increase in manufacturing costs associated with the need to obtain replacement components; * our inability to meet demand for our instruments, which could lead to customer dissatisfaction and damage our reputation; and * delays associated with regulatory qualifications required for use of replacement suppliers |
| Any one of these results could harm our sales and profits and make it difficult to meet our business goals |
| If we do not effectively manage our growth, our existing infrastructure may become strained, and as a result we may be unable to increase sales of our KyphX instruments or generate significant revenue growth |
| Our world-wide direct sales organization has increased from approximately 31 employees in October 2000 to over 425 employees in December 2005, which we believe represents significant growth over a relatively short period of time |
| Our world-wide organization as a whole has increased from approximately 131 employees in October 2000 to over 880 employees in December 2005 |
| We intend to continue growing rapidly |
| The growth that we have experienced, and in the future likely will experience, provides challenges to our organization, requiring us to rapidly expand our personnel and manufacturing operations |
| We may not be able to hire sufficient personnel to meet our growth goals or may have difficulty managing such rapid growth |
| As a result, our failure to recruit additional sales and other personnel may result in our inability to meet our projections |
| Future growth may strain our infrastructure, operations, product development and other managerial and operating resources |
| If our business resources become strained, we may not be able to deliver instruments in a timely manner |
| We are dependent on our senior management team and key personnel, and the loss of any of them could harm our business |
| Our continued success depends in part upon the continued availability and contributions of our senior management team and key personnel |
| We have entered into an employment agreement with Richard W Mott, but this agreement does not guarantee his service for any specified period of time |
| We have not entered into employment agreements with any of our other senior management or key personnel |
| The loss of members of our senior management or key personnel, or our inability to attract and retain other qualified personnel or advisors could adversely affect our business and financial condition, which could cause our stock price to decline |
| We may be adversely affected by the impact of environmental and safety regulations |
| We are subject to federal, state, local and foreign laws and regulations governing the protection of the environment and occupational health and safety, including laws regulating the disposal of hazardous wastes and the health and safety of our employees |
| We may be required to obtain permits for governmental authorities for certain operations |
| If we violate or fail to comply with these laws and regulations, we could incur fines, penalties or other sanctions, which could adversely affect our business and our financial condition and cause our stock price to decline |
| 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 present facilities or third-party waste disposal sites |
| Such costs could be material |
| 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 |
| We may seek additional financing, which could result in dilution to our stockholders or may not be available to us on acceptable terms, if at all |
| As of December 31, 2005, we had dlra76dtta1 million of cash and cash equivalents and dlra118dtta3 million of short-term investments |
| We currently believe that our current cash, cash equivalents, investments, and cash generated from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months |
| If existing cash, cash equivalents, and cash generated from operations are insufficient to satisfy our cash requirements, whether as a result of possible investment in new markets or businesses through both internal or external business development, expansion of product lines, increased capital expenditures, additional clinical trials, expansion of product lines or investment in new markets or businesses, or for other reasons related to our business, we may seek to sell additional equity or debt securities or obtain a credit facility |
| The sale of additional equity or the sale of convertible debt securities could result in dilution to our stockholders |
| If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock, and could contain covenants that would restrict our operations |
| Additional financing may not be available to us when we need it or it may not be available on favorable terms, if at all |
| If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or eliminate our business development activities |
| Our certificate of incorporation and by-laws include anti-takeover provisions that may enable our management to resist an unwelcome takeover attempt by a third party |
| Our basic corporate documents and Delaware law contain provisions that enable our management to attempt to resist a takeover unless it is deemed by management and our Board of Directors to be in the best interests of our stockholders |
| Those provisions might discourage, delay or prevent a change in the control of our company or a change in our management |
| Our Board of Directors may also choose to adopt further anti-takeover measures without stockholder approval |
| The existence and adoption of these provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock |
| We have experienced and may continue to experience increases in our general and administrative costs as a result of additional securities and corporate governance laws and regulations |
| The Sarbanes-Oxley Act of 2002 that became law in July 2002, as well as the rules and regulations subsequently implemented by the SEC and the NASDAQ exchange on which we are listed, required significant changes to our corporate governance practices |
| These new rules and regulations have resulted in increased legal and financial compliance costs, make some activities more difficult, time consuming and/or costly, and make it more difficult and more expensive for us to obtain directors and officers liability insurance, all of which may affect our financial performance |
| These new rules and regulations may also make it more difficult for us to attract or retain qualified executive officers and members of our Board of Directors, particularly to serve on our Audit Committee |
| We may experience additional increases in our general and administrative costs as a result of additional securities and corporate governance laws and regulations that may be enacted in the future |
| We can provide no assurance regarding our, or our independent auditorapstas, conclusions after December 31, 2005 with respect to the effectiveness of our internal control over financial reporting |
| Section 404 of the Sarbanes-Oxley Act of 2002 requires us to include an internal control report from management in our Annual Report on Form 10-K for the years ending on and after December 31, 2004 |
| The internal control report must include a statement: * about managementapstas responsibility for establishing and maintaining adequate internal control over financial reporting; * identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting; * concerning managementapstas assessment of the effectiveness of our internal control over financial reporting as of the period covered by the Annual Report, including a statement as to whether or not internal control over financial reporting is effective; and * that our independent auditors have issued an attestation report on managementapstas assessment of internal control over financial reporting |
| While we expended significant resources in developing the necessary documentation and testing procedures required by Section 404, given the risks inherent in the operation of internal controls over financial reporting, we can provide no assurance as to our, or our independent auditorapstas, conclusions after December 31, 2005 with respect to the effectiveness of our internal control over financial reporting |
| Although we received unqualified opinions as of December 31, 2005, if we are unable to maintain compliance with all of the requirements imposed by Section 404, or if we are unable to complete any assessment of our internal controls, or if our internal controls are not designed or operating effectively, we may conclude that our internal control over financial reporting is not effective and our external auditors may either disclaim an opinion as it relates to managementapstas assessment of the effectiveness of our internal control or may issue a qualified opinion on the effectiveness of our internal controls |
| Investors may lose confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline and which could affect our business and financial condition |
| Recent changes in the required accounting treatment for stock options will have a material negative impact on our financial statements and may affect our stock price |
| In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) Nodtta 123(R), pursuant to which we must measure all stock-based compensation awards, including grants of employee stock options, using a fair value-based method and record such expense in our consolidated financial statements |
| Currently, we disclose such expenses on a pro forma basis in the notes to our consolidated financial statements, but we do not record a charge for employee stock option expense in the financial statements |
| Once we begin to comply with SFAS Nodtta 123(R) as of the beginning of fiscal year 2006, our reported earnings will decrease, which may affect our stock price |
| In addition, our reported earnings may have increased volatility due to the tax impact and timing of employee stock option exercises |
| Our facilities are located near known earthquake fault zones, and the occurrence of an earthquake or other natural disaster or catastrophic event could cause damage to our facilities and equipment, which could require us to cease or curtail operations and could hurt our revenues |
| Our facilities are located near known earthquake fault zones and are vulnerable to significant damage from earthquakes |
| We are also vulnerable to damage from other types of disasters, including fires, floods, power loss, communications failures and similar events including the effects of war or acts of terrorism |
| If any disaster of this sort were to occur, our ability to operate our business at our facilities could be seriously or completely impaired or destroyed and our revenues could be significantly impacted as a result of our inability to continue to supply products to our customers |
| The insurance we maintain may also not be adequate to cover our own losses resulting from disasters or other business interruptions |
| A significant amount of our United States revenue is dependent on business from areas prone to hurricanes, and the occurrence of one or more significant hurricanes or other natural disasters in those geographic areas could substantially adversely impact many of our customers &apos operations, which would harm our financial condition and our revenues |
| Many of our customers in the southeastern United States and the Gulf Coast region have been adversely affected by one or more major hurricanes during the past several years, and may be so affected in the future |
| Such catastrophic storm activity has in the past adversely affected our revenues from, and business activities in, those regions, and could in the future similarly adversely affect our revenues and operations, due to our customers &apos decreased ability to continue their operations without significant disruption |
| We may also be entering a historic period of increased hurricane activity |
| If any disaster of this sort were to occur in the future, our United States revenues could be significantly impacted |