| ARMOR HOLDINGS INC Item 1 A Risk Factors 23 ITEM 1 A RISK FACTORS In addition to other information in this Annual Report on Form 10-K, the following risk factors should be carefully considered in evaluating our busines s because such factors may have a significant impact on our business, operating results, liquidity and financial condition |
| As a result of the risk factors set forth below, actual results could differ materially from those projected in any forward-looking statements |
| Additional risks and uncertainties not presently known to us, or that we currently consider to be immaterial, may also impact ou r business, operating results, liquidity and financial condition |
| If any of the following risks occur, our business, operating results, liquidity and financial condition could be materially adversely affected |
| In such case, the trading price of our securities could decline, and you may lose all or part of your investment |
| RISKS RELATED TO OUR INDUSTRY THE PRODUCTS WE SELL ARE INHERENTLY RISKY AND COULD GIVE RISE TO PRODUCT LIABILITY AND OTHER CLAIMS The products that we manufacture are typically used in applications and situations that involve high levels of risk of personal injury |
| Failure to use our products for their intended purposes, failure to use or care for them properly, or their malfunction, or, in some limited circumstances, even correct use of our products, could result in serious bodily injury or death |
| Given this potential risk of injury, proper maintenance of our products is critical |
| Our products include: vehicle and hard armoring systems; rotary and fixed-wing aircraft seating systems; parachutes; military helmets; body armor and plates designed to protect against ballistic and sharp instrument penetration; less-lethal products such as less-lethal munitions, pepper sprays, distraction devices and flameless expulsion grenades; various models of police batons; and police duty gear |
| Claims have been made and are pending against certain of our subsidiaries, involving permanent physical injury and death caused by self-defense sprays and other munitions intended to be less-lethal |
| In addition, the manufacture and sale of certain less-lethal products may be the subject of product liability claims arising from the design, manufacture or sale of such goods |
| If these claims are decided against us and we are found to be liable, we may be required to pay substantial damages and our insurance costs may increase significantly a s a result which could have a material adverse effect on our business, financial condition and results of operation |
| Also, a significant or extended lawsuit, such as a class action, could also divert significant amounts of managementapstas time and attention |
| We cannot assure you that our insurance coverage would be sufficient to cover the payment of any potential claim |
| In addition, we cannot assure you that this or any other insurance coverage will continue to be available or, if available, that we will be able to obtain it at a reasonable cost |
| Our cost of obtaining insurance coverage has risen substantially since September 11, 2001 |
| Any material uninsured loss could have a material adverse effect on our business, financial condition and results of operations |
| In addition, the inability to obtain product liability coverage would prohibit us from bidding for orders from certain governmental customers since, at present, many bids from governmental entities require such coverage, and any such inability would have a material adverse effect on our business, financial condition, results of operations and liquidity |
| In April, 2004, two class action lawsuits were filed against us in Florida stat e court by police organizations and individual police officers, alleging that ballistic-resistant soft body armor (vests) containing Zylon(R), manufactured and sold by American Body Armor(TM), Safariland(R) and PROTECH(R), failed to meet the warranties provided with the vests |
| On November 5, 2004, the Jacksonville, Florida (Duval County) Circuit Court gave final approval to a settlement reached with the SSPBA which provided that (i) purchasers of certain Zylon(R)-containing vest models could exchange their vests for other vests manufactured by the Company and (ii) the Company would continue its internal used-vest testing program (VestCheck(TM)) |
| Myers, Florida (Lee County), was voluntarily dismissed with prejudice on November 16, 2004 |
| On August 24, 2005, the United States Department of Justice, NIJ, released its Third NIJ Report |
| The Third NIJ Report contained, among other items, informatio n and testing data on Zylon(R) and Zylon(R)-containing vests, and substantially modified compliance standards for all ballistic-resistant vests with the implementation of the NIJ 2005 Interim Requirements for Ballistic-Resistant Bod y Armor |
| As a result of the actions of the NIJ, the Company halted all sales or shipment of any Zylon(R)-containing vest models effective August 25, 2005, and immediately established a Supplemental Relief (renamed the ZVE) Program that provides either a cash or voucher option to those who purchased any Zylon(R)-containing vests from us through August 29, 2005 |
| The ZVE Program, wit h the consent of the SSPBA, was given final approval by the Jacksonville, Florida Court on October 27, 2005 |
| 23 We are also voluntarily cooperating with a request for documents and data received from the Department of Justice, which is reviewing the entire body armor industryapstas use of Zylon(R), and a subpoena served by the General Services Administration for information relating to Zylon(R) |
| Any adverse resolution of these matters could have a material adverse effect on our business, financial condition, results of operations and liquidity |
| WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION, AND OUR FAILURE OR INABILITY TO COMPLY WITH THESE REGULATIONS COULD MATERIALLY RESTRICT OUR OPERATIONS AND SUBJECT US TO SUBSTANTIAL PENALTIES We are subject to federal licensing requirements with respect to the sale in foreign countries of certain of our products |
| In addition, we are obligated to comply with a variety of federal, state and local regulations, both domesticall y and abroad, governing certain aspects of our operations and workplace, includin g regulations promulgated by, among others, the US Departments of Commerce, State and Transportation, the Federal Aviation Administration, the US Environmental Protection Agency and the US Bureau of Alcohol, Tobacco and Firearms |
| The US Bureau of Alcohol, Tobacco, and Firearms also regulates us a s a result of our manufacturing of certain destructive devices and by the use of ethyl alcohol in certain products |
| We also ship hazardous goods, and in doing so, must comply with the regulations of the US Department of Transportation for packaging and labeling |
| Additionally, the failure to obtain applicable governmental approval and clearances could materially adversely affect our ability to continue to service the government contracts we maintain |
| Furthermore, we have material contracts with governmental entities and are subject to rules, regulations and approvals applicable to government contractors |
| We are also subject to routine audits to assure our compliance wit h these requirements |
| We have become aware that we are not in full compliance wit h certain regulations governing the export of equipment and related technology used for military purposes that are applicable to certain of our products |
| We have made a voluntary disclosure to the Office of Defense Trade Controls Compliance and have undertaken steps to comply with these regulations and to help ensure compliance in the future |
| We do not believe that such noncompliance will have a material adverse effect on our business |
| In addition, a number of our employees involved with certain of our federal government contracts are required to obtain specified levels of security clearances |
| Our business may suffer if we or our employees are unable to obtain the security clearances that are needed to perform services contracted for the US Department of Defense, one of our major customers |
| Our failure to comply with these contract terms, rules or regulations could expose us to substantial penalties, including the loss of these contracts and disqualification as a US government contractor |
| Like other companies operating internationally, we are subject to the Foreign Corrupt Practices Act and other laws which prohibit improper payments to foreig n governments and their officials by US and other business entities |
| We operate in countries known to experience endemic corruption |
| Our extensive operations i n such countries create risk of an unauthorized payment by one of our employees o r agents, which would be in violation of various laws including the Foreign Corrupt Practices Act |
| Violations of the Foreign Corrupt Practices Act may result in severe criminal penalties, which could have a material adverse effect on our business, financial condition, results of operations and liquidity |
| WE HAVE SIGNIFICANT INTERNATIONAL OPERATIONS AND ASSETS, AND THEREFORE, ARE SUBJECT TO ADDITIONAL FINANCIAL AND REGULATORY RISKS We sell our products in foreign countries and seek to increase our level of international business activity |
| Our overseas operations are subject to various risks, including: US-imposed embargoes of sales to specific countries (which could prohibit sales of our products there); foreign import controls (which may be arbitrarily imposed and enforced and which could interrupt our supplies or prohibit customers from purchasing our products); exchange rate fluctuations; dividend remittance restrictions; expropriation of assets; war, civil uprisings and riots; government instability; the necessity of obtaining government approvals for both new and continuing operations; and legal systems of decrees, laws, taxes, regulations, interpretations and court decisions that are not always fully developed and that may be retroactively or arbitrarily applied |
| 24 One component of our strategy is to expand our operations into selected international markets |
| Military procurement, for example, has traditionally had a large international base |
| We actively market our products in Europe, North an d South America, the Middle East, Africa, and Asia |
| We, however, may be unable to execute our business model in these markets or new markets |
| Further, foreign providers of competing products and services may have a substantial advantage over us in attracting consumers and businesses in their country due to earlier established businesses in that country, greater knowledge with respect to the cultural differences of consumers and businesses residing in that country and/o r their focus on a single market |
| We expect to continue to experience higher cost s as a percentage of revenues in connection with the development and maintenance of international products and services |
| In pursuing our international expansion strategy, we face several additional risks, including: o foreign laws and regulations, which may vary country by country, that may impact how we conduct our business; o higher costs of doing business in foreign countries, including different employment laws; o potential adverse tax consequences if taxing authorities in different jurisdictions worldwide disagree with our interpretation of various tax laws or our determinations as to the income and expenses attributable to specific jurisdictions, which could result in our paying additional taxes, interest and penalties; o technological differences that vary by marketplace, which we may not be able to support; o longer payment cycles and foreign currency fluctuations; o economic downturns; and o revenue growth outside of the United States may not continue at the same rate if it is determined that we have already launched our products and services in the most significant markets |
| We may also be subject to unanticipated income taxes, excise duties, import taxes, export taxes or other governmental assessments |
| In addition, a percentag e of the payments to us in our international markets are often in local currencies |
| Although most of these currencies are presently convertible into US dollars, we cannot be sure that convertibility will continue |
| Even if currencies are convertible, the rate at which they convert is subject to substantial fluctuation |
| Our ability to transfer currencies into or out of loca l currencies may be restricted or limited |
| Any of these events could result in a loss of business or other unexpected costs, which could reduce revenue or profits and have a material adverse effect on our business, financial condition , results of operations and liquidity |
| We routinely operate in areas where local government policies regarding foreign entities and the local tax and legal regimes are often uncertain, poorly administered and in a state of flux |
| We cannot, therefore, be certain that we are in compliance with, or will be protected by, all relevant local laws and taxes at any given point in time |
| A subsequent determination that we failed to comply with relevant local laws and taxes could have a material adverse effect on our business, financial condition, results of operations and liquidity |
| One or more of these factors could adversely affect our future international operations and, consequently, could have a material adverse effect on our business, financial condition, results of operation and liquidity |
| 25 RISKS RELATED TO OUR BUSINESS MANY OF OUR CUSTOMERS HAVE FLUCTUATING BUDGETS, WHICH MAY CAUSE SUBSTANTIAL FLUCTUATIONS IN OUR RESULTS OF OPERATIONS Customers for our products include federal, state, municipal, foreign and military, law enforcement and other governmental agencies |
| Government tax revenues and budgetary constraints, which fluctuate from time to time, can affect budgetary allocations for these customers |
| Many domestic and foreign government agencies have in the past experienced budget deficits that have led to decreased spending in defense, law enforcement and other military and security areas |
| Our results of operations may be subject to substantial period-to-period fluctuations because of these and other factors affecting military, law enforcement and other governmental spending |
| A reduction of funding for federal, state, municipal, foreign and other governmental agencies could have a material adverse effect on sales of our products and our business, financial condition, results of operations and liquidity |
| THE LOSS OF, OR A SIGNIFICANT REDUCTION IN, US MILITARY BUSINESS WOULD HAVE A MATERIAL ADVERSE EFFECT ON US US military contracts account for a significant portion of our business |
| The US military funds these contracts in annual increments |
| These contracts require subsequent authorization and appropriation that may not occur or that may be greater than or less than the total amount of the contract |
| Changes in the US militaryapstas budget, spending allocations and the timing of such spendin g could adversely affect our ability to receive future contracts |
| None of our contracts with the US military has a minimum purchase commitment, and the US |
| military generally has the right to cancel its contracts unilaterally without prior notice |
| We are the sole-source provider to the US military for the armo r and blast protection systems (up-armoring) for their HMMWVs |
| The HMMWVs are manufactured by AM General Corporation under separate US military contracts |
| Should production or deliveries of HMMWVs be significantly interrupted, or should other single source suppliers significantly interrupt deliveries of our components for up-armoring the HMMWVs, we will not be able to deliver such up-armoring systems for the HMMWVs to the US military on schedule, which coul d have a material adverse effect on our business, financial condition, results of operations and liquidity |
| We also manufacture for the US military helicopter seating systems, aircraft and land vehicle armor systems, protective equipment for military personnel and other technologies used to protect soldiers in a variety of life-threatening or catastrophic situations |
| The loss of, or a significant reduction in, US military business for our aircraft and land vehicle armor systems, other protective equipment, or helicopter seating system s could have a material adverse effect on our business, financial condition, results of operations and liquidity |
| A REDUCTION OF US FORCE LEVELS IN IRAQ MAY AFFECT OUR RESULTS OF OPERATIONS Since the invasion of Iraq by the US and other forces in March 2003, we have received steadily increasing orders from the US military for the up-armoring of HMMWVs and the armoring of other tactical trucks as well as orders for personnel equipment, including SAPI and other engineered ceramic body armor, helmets, and other protective and duty equipment |
| Orders for the up-armoring of HMMWVs and the armoring of other tactical trucks as well as orders for personne l equipment are the result, in significant part, from the particular combat situations encountered by the US military in Iraq, including the use of IEDs by enemy combatants |
| We cannot be certain, therefore, to what degree the US military would continue placing armoring orders for its HMMWVs and other tactical trucks as well as orders for personnel equipment, if the US military were to reduce its force levels or withdraw completely from Iraq |
| A significant reduction in orders from the US military for the armoring of HMMWVs and other tactical trucks as well as orders for personnel equipment, following a reductio n of US force levels in Iraq could have a material adverse effect on our business, financial condition, results of operations and liquidity |
| 26 A REPLACEMENT OF THE HMMWV IN THE US MILITARY MAY AFFECT OUR RESULTS OF OPERATIONS There continues to be new orders under our current M1114 Up-Armored HMMWV contract and additional orders for the next-generation versions known as the M1151 and M1152 Up-Armored HMMWVs |
| While backlog extends into 2006 for both the M1114 and M1151/2 Up-Armored HMMWV versions, there are plans for procurement of a replacement military light transport vehicle which is currently in the early development stage |
| While current acquisition strategies plan for possible production of new light and medium support vehicles beginning as early as 2008, there is no assurance as to when a replacement for the HMMWV may be selected, and, furthermore, it is reasonable to believe that the HMMWV may continue for some time to be one of the primary transport vehicles in the US military |
| In the event the HMMWV is replaced, based on US military procurement plans, it i s anticipated that vehicle armoring for a replacement vehicle would be provided t o the vehicleapstas OEM for inclusion in the manufacturing process |
| We anticipate tha t procurements for the potential HMMWV replacement models would be competitive an d could be awarded to multiple armor suppliers based on full and open competition |
| Although we anticipate continuation of developmental efforts and enhancement of manufacturing capabilities, at this time, there is no certainty of obtaining armoring contracts for any HMMWV replacement vehicles selected by the US military, and, if successful in competitive programs, we cannot determine the specific levels of effort likely under such military contracts |
| Additionally, with regard to the introduction of potential HMMWV replacement vehicles, the US military recently announced the US Governmentapstas preference to own the technical data rights for new major end items of equipment and sub-systems, including the vehicle armoring packages |
| The US Governmentapstas intent to mitigate risk of limitations on producibility and to ensure commonality of armor components produced by multiple sources may negatively influence future manufacturing content and product pricing, which could have a material adverse effect on our business, financial condition, results of operations and liquidity |
| WE MAY LOSE MONEY OR GENERATE LESS THAN EXPECTED PROFITS ON OUR FIXED-PRICE CONTRACTS Some of our government contracts provide for a predetermined, fixed price for the products we make regardless of the costs we incur |
| Therefore, fixed-price contracts require us to price our contracts by forecasting our expenditures |
| These estimates reflect managementapstas judgments regarding our capability to complete projects efficientl y and timely |
| Our production costs may, however, exceed forecasts due to unanticipated delays or increased cost of materials, components, labor, capital equipment or other factors |
| Therefore, we may incur losses on fixed price contracts that we had expected to be profitable, or such contracts may be less profitable than expected, which could have a material adverse effect on our business, financial condition, results of operations and liquidity |
| OUR BUSINESS IS SUBJECT TO VARIOUS LAWS AND REGULATIONS FAVORING THE US GOVERNMENT &apos S CONTRACTUAL POSITION, AND OUR FAILURE TO COMPLY WITH SUCH LAWS AND REGULATIONS COULD HARM OUR OPERATING RESULTS AND PROSPECTS As a contractor to the US government, we must comply with laws and regulation s relating to the formation, administration and performance of the federal government contracts that affect how we do business with our clients and may impose added costs on our business |
| These rules generally favor the US governmentapstas contractual position |
| For example, these regulations and laws include provisions that subject contracts we have been awarded to: o protest or challenge by unsuccessful bidders; and o unilateral termination, reduction or modification by the government |
| 27 The accuracy and appropriateness of certain costs and expenses used to substantiate our direct and indirect costs for the US government under both cost-plus and fixed-price contracts are subject to extensive regulation and audit by the Defense Contract Audit Agency, an arm of the US Department of Defense |
| Responding to governmental audits, inquiries or investigations may involve significant expense and divert managementapstas attention |
| Our failure to comply with these or other laws and regulations could result in contract termination, suspension or debarment from contracting with the federal government, civil fines and damages and criminal prosecution and penalties, any of which could have a material adverse effect on our business, financial condition, results of operations and liquidity |
| OUR MARKETS ARE HIGHLY COMPETITIVE, AND IF WE ARE UNABLE TO COMPETE EFFECTIVELY , WE WILL BE ADVERSELY AFFECTED The markets in which we operate include a large number of competitors ranging from small businesses to multinational corporations and are highly competitive |
| Competitors who are larger, better financed and better known than we are may compete more effectively than we can |
| In order to stay competitive in our industry, we must keep pace with changing technologies and client preferences |
| If we are unable to differentiate our services from those of our competitors, our revenues may decline |
| In addition, our competitors have established relationships among themselves or with third parties to increase their ability to address client needs |
| As a result, new competitors or alliances among competitors may emerge and compete more effectively than we can |
| There is also a significant industry trend towards consolidation, which may result in the emergence of companies which are better able to compete against us |
| Any such development could have a material adverse effect on our business, financial condition, results of operation and liquidity |
| THERE ARE LIMITED SOURCES FOR SOME OF OUR RAW MATERIALS, WHICH MAY SIGNIFICANTL Y CURTAIL OUR MANUFACTURING OPERATIONS The raw materials that we use in manufacturing ballistic resistant garments, SAPI plates and armored vehicles include: ceramic; steel; SpectraShield, a patented product of Honeywell, Inc |
| ; Kevlar(R), a patented product of EI du Pont de Nemours Co, Inc |
| We purchase these materials in the form of woven cloth from five independent weaving companies |
| In the event du Pont or its licensee in Europe cease, for an y reason, to produce or sell Kevlar(R) to us, we would utilize these other ballistic resistant materials as a substitute |
| However, neither SpectraShield nor Twaron, is expected to become a complete substitute for Kevlar(R) in the near future |
| We enjoy a good relationship with our suppliers of Kevlar(R), SpectraShield and Twaron |
| Should these materials become unavailable for any reason, we would be unable to replace them with materials of like weight and strength |
| We use a variety of ceramic materials in the production of SAPI plate s and a variety of steels in armoring vehicles |
| Although we have a number of suppliers that we deal with in obtaining both ceramic and steel supplies, the industry generally, including our operations, is experiencing a limited supply of certain of these materials, which is affecting the quantity of product that we can complete in any given period |
| In addition, SpectraShield, the ballistic fiber backing used in a variety of our ballistic applications, including SAPI plates, is currently being rationed by the US Department of Commerce, which could limit the quantity of SAPI plates that we produce in any given period |
| Thus, if our supply of any of these materials were materially reduced or cut of f or if there was a material increase in the prices of these materials, our manufacturing operations could be adversely affected and our costs increased, and our business, financial condition, results of operations and liquidity coul d be materially adversely affected |
| WE MAY BE UNABLE TO COMPLETE OR INTEGRATE ACQUISITIONS EFFECTIVELY, IF AT ALL, AND AS A RESULT MAY INCUR UNANTICIPATED COSTS OR LIABILITIES OR OPERATIONAL DIFFICULTIES We intend to grow through the acquisition of businesses and assets that will complement our current businesses |
| We cannot be certain that we will be able to identify attractive acquisition targets, obtain financing for acquisitions on satisfactory terms or successfully acquire identified targets |
| Furthermore, we may have to divert our managementapstas attention and our financial and other resources from other areas of our business |
| Our inability to implement our acquisition strategy successfully may hinder the expansion of our business |
| Because we depend in part on acquiring new businesses and assets to develop and offer new products, failure to implement our acquisition strategy may also adversely affect our ability to offer new products in line with industry trends |
| 28 We may not be successful in integrating businesses acquired in the future or those recently acquired into our existing operations |
| Integration may result in unanticipated liabilities or unforeseen operational difficulties, which may be material or require a disproportionate amount of managementapstas attention which could have a material adverse effect on our business, financial condition, results of operations and liquidity |
| Future acquisitions may result in us incurring additional indebtedness or issuing preferred stock or additional Common Stock |
| Competition for acquisition opportunities in the industry may rise, thereby increasing our cost of making acquisitions or causing us to refrain from making further acquisitions |
| In addition, the terms and conditions of our senior credit facility, 2dtta00prca Senior Subordinated Convertible Notes due November 1, 2024 (the "e 2prca Convertible Notes "e ) and the indenture governing the 8 1/4prca Senior Subordinated Notes due 2013 (the "e 8dtta25prca Notes "e ) impose restrictions on us that, among other things, restrict our ability to make acquisitions and adversely affect our ability to execute our execute acquisition strategy |
| OUR RESOURCES MAY BE INSUFFICIENT TO MANAGE THE DEMANDS IMPOSED BY OUR GROWTH We have rapidly expanded our operations, and this growth has placed significant demands on our management, administrative, operating and financial resources |
| The continued growth of our customer base, the types of services and products offered and the geographic markets served can be expected to continue to place a significant strain on our resources |
| In addition, we cannot easily identify and hire personnel qualified both in the provision and marketing of our products an d systems |
| Our future performance and profitability will depend in large part on our ability to attract and retain additional management and other key personnel ; our ability to implement successful enhancements to our management, accounting and information technology systems; and our ability to adapt those systems, as necessary, to respond to growth in our business |
| WE ARE DEPENDENT ON INDUSTRY RELATIONSHIPS A number of our products are components in our customers &apos final products |
| Accordingly, to gain market acceptance, we must demonstrate that our products will provide advantages to the manufacturers of final products, including increasing the safety of their products, providing such manufacturers with competitive advantages or assisting such manufacturers in complying with existing or new government regulations affecting their products |
| There can be n o assurance that our products will be able to achieve any of these advantages for the products of our customers |
| Furthermore, even if we are able to demonstrate such advantages, there can be no assurance that such manufacturers will elect t o incorporate our products into their final products, or if they do, that our products will be able to meet such customers &apos manufacturing requirements |
| Additionally, there can be no assurance that our relationships with our manufacturer customers will ultimately lead to volume orders for our products |
| The failure of manufacturers to incorporate our products into their final products could have a material adverse effect on our business, financial condition, results of operations and liquidity |
| WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, INCLUDING THE TECHNOLOGIES WE USE TO FURNISH THE UP-ARMORING OF HMMWVS We depend upon a variety of methods and techniques that we regard as proprietar y trade secrets |
| We also depend upon a variety of trademarks, service marks and designs to promote brand name development and recognition |
| We rely on a combination of trade secret, copyright, patent, trademark, unfair competition and other intellectual property laws as well as contractual agreements to protect our rights to such intellectual property |
| Due to the difficulty of monitoring unauthorized use of and access to intellectual property, however, such measures may not provide adequate protection |
| It is possible that our competitors may access our intellectual property and proprietary information an d use it to their advantage |
| In addition, there can be no assurance that courts will always uphold our intellectual property rights, or enforce the contractual arrangements that we have entered into to protect our proprietary technology |
| Any unenforceability or misappropriation of our intellectual property could hav e a material adverse effect on our business, financial condition, results of operations and liquidity |
| Furthermore, we cannot assure you that any pending patent application or trademark application made by us will result in an issued patent or registered trademark, or that, if a patent is issued, it will provide meaningful protection against competitors or competitor technologies |
| In addition, if we bring or become subject to litigation to defend against claimed infringement of our rights or of the rights of others or to determine the scope and validity of our intellectual property rights, such litigation could result in substantial costs and diversion of our resources, which could have a materia l adverse effect on our business, financial condition and results of operations |
| Unfavorable results in such litigation could also result in the loss or compromise of our proprietary rights, subject us to significant liabilities, require us to seek licenses from third parties on unfavorable terms, or prevent us from manufacturing or selling our products, any of which could have a material adverse effect on our business, financial condition, results of operations and liquidity |
| 29 TECHNOLOGICAL ADVANCES, THE INTRODUCTION OF NEW PRODUCTS, AND NEW DESIGN AND MANUFACTURING TECHNIQUES COULD ADVERSELY AFFECT OUR OPERATIONS UNLESS WE ARE ABLE TO ADAPT TO THE RESULTING CHANGE IN CONDITIONS Our future success and competitive position depend to a significant extent upon our proprietary technology |
| We must make significant investments to continue to develop and refine our technologies |
| We will be required to expend substantial funds for and commit significant resources to the conduct of continuing researc h and development activities, the engagement of additional engineering and other technical personnel, the purchase of advanced design, production and test equipment, and the enhancement of design and manufacturing processes and techniques |
| Our future operating results will depend to a significant extent on our ability to continue to provide design and manufacturing services for new products that compare favorably on the basis of time to introduction, cost and performance with the design and manufacturing capabilities |
| The success of new design and manufacturing services depends on various factors, including utilization of advances in technology, innovative development of new solutions for customer products, efficient and cost-effective services, timely completion and delivery of new product solutions and market acceptance of customers &apos end products |
| Because of the complexity of our products, we may experience delays from time to time in completing the design and manufacture of new product solutions |
| In addition, there can be no assurance that any new product solution s will receive or maintain customer or market acceptance |
| If we are unable to design and manufacture solutions for new products of our customers on a timely and cost-effective basis, such inability could have a material adverse effect o n our business, financial condition, results of operations and liquidity |
| WE MAY BE ADVERSELY AFFECTED BY APPLICABLE ENVIRONMENTAL LAWS AND REGULATIONS We are subject to federal, state, local and foreign laws and regulations governing the protection of the environment and human health, including those regulating discharges to the air and water, the management of wastes, and the control of noise and odors |
| We cannot assure you that we are at all times in complete compliance with all such requirements |
| Like all companies in our industry, we are subject to potentially significant fines or penalties if we fail to comply with environmental requirements |
| Environmental requirements are complex, change frequently, and could become more stringent in the future |
| Accordingly, we cannot assure you that these requirements will not change in a manner that will require material capital or operating expenditures or will otherwise have a material adverse effect on us in the future |
| In addition, we are also subject to environmental laws requiring the investigation and clean-up of environmental contamination |
| We may be subject to liability, including liability for clean-up costs, if contamination is discovered at one of our current or former facilities, in some circumstances even if such contamination was caused by a third party such as a prior owner |
| We also may be subject to liability if contamination is discovered at a landfill or other location where we have disposed of wastes, notwithstanding that historic disposal practices ma y have been in accordance with all applicable requirements |
| We use Orthochlorabenzalmalononitrile and Chloroacetophenone chemical agents in connection with our production of tear gas, and these chemicals are hazardous and could cause environmental damage if not handled and disposed of properly |
| Moreover, private parties may bring claims against us based on alleged adverse health impacts or property damage caused by our operations |
| The amount of liability for cleaning up contamination or defending against private party claims could be material and have a material adverse effect on our business, financial condition, results of operations and liquidity |
| RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK DELAWARE LAW MAY LIMIT POSSIBLE TAKEOVERS Our certificate of incorporation makes us subject to the anti-takeover provisions of Section 203 of the General Corporation Law of the State of Delaware |
| In general, Section 203 prohibits publicly-held Delaware corporations to which it applies from engaging in a "e business combination "e with an "e interested stockholder "e for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner |
| This provision could discourage others from bidding for our shares and could, as a result, reduce th e likelihood of an increase in our stock price that would otherwise occur if a bidder sought to buy our stock |
| 30 OUR CERTIFICATE OF INCORPORATION AUTHORIZES THE ISSUANCE OF SHARES OF BLANK CHECK PREFERRED STOCK Our certificate of incorporation provides that our board of directors will be authorized to issue from time to time, without further stockholder approval, up to 5cmam000cmam000 shares of preferred stock in one or more series and to fix or alte r the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each series, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, includin g sinking fund provisions, redemption price or prices, liquidation preferences an d the number of shares constituting any series or designations of any series |
| Suc h shares of preferred stock could have preferences over our Common Stock with respect to dividends and liquidation rights |
| We may issue additional preferred stock in ways which may delay, defer or prevent a change in control of us without further action by our stockholders |
| Such shares of preferred stock may be issued with voting rights that may adversely affect the voting power of the holders of our Common Stock by increasing the number of outstanding shares having voting rights, and by the creation of class or series voting rights |
| THE MARKET PRICE FOR OUR COMMON STOCK IS VOLATILE The market price for our Common Stock may be highly volatile |
| We believe that a variety of factors, including announcements by us or our competitors, current events such as the war in Iraq, quarterly variations in financial results, trading volume, general market trends and other factors, could cause the market price of our Common Stock to fluctuate substantially |
| Additionally, due to our relatively modest size, our winning or losing a large contract may have the effect of distorting our overall financial results |
| WE MAY ISSUE A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK IN CONNECTION WITH FUTURE ACQUISITIONS, AND THE SALE OF THOSE SHARES COULD ADVERSELY AFFECT OUR STOCK PRICE As part of our acquisition strategy, we anticipate issuing additional shares of Common Stock as consideration for such acquisitions |
| To the extent that we are able to grow through acquisitions and issue shares of our Common Stock as consideration, the number of outstanding shares of Common Stock that will be eligible for sale in the future is likely to increase substantially |
| Persons receiving shares of our Common Stock in connection with these acquisitions may be more likely to sell large quantities of their Common Stock that may influenc e the price of our Common Stock |
| In addition, the potential issuance of additiona l shares in connection with anticipated acquisitions could lessen demand for our Common Stock and result in a lower price than would otherwise be obtained |
| OUR STOCK PRICE MAY BE ADVERSELY AFFECTED WHEN ADDITIONAL SHARES ARE SOLD If our stockholders sell substantial amounts of our Common Stock in the public market, the market price of our Common Stock could fall |
| These sales might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate and may require us to issue greater amounts of our Common Stock to finance future acquisitions |
| Additional shares sold to finance acquisitions may dilute our earnings per share if the ne w operations &apos earnings are disappointing |
| OUR DEBT AGREEMENTS RESTRICT OUR ABILITY TO PAY DIVIDENDS OR MAKE OTHER DISTRIBUTIONS TO OUR STOCKHOLDERS Our debt agreements, such as the indenture governing the 2prca Convertible Notes, the indenture governing the 8dtta25prca Notes and the senior credit facility, contain certain financial and other covenants that limit, under certain circumstances, our ability to pay dividends or make other distributions to our stockholders |
| W e are permitted to pay dividends and make other distributions to stockholders to the extent we satisfy the conditions, including the financial and other covenants, contained in such documents |
| 31 WE HAVE dlra497 MILLION OF TOTAL DEBT (SHORT-TERM, CURRENT PORTION AND LONG-TERM) AS OF DECEMBER 31, 2005 Our dlra497 million of total debt as of December 31, 2005, could have important consequences to you and to us |
| For example: o No payment of any kind may be made to our Common Stockholders without first meeting our obligations under our senior credit facility, the indenture governing our 8dtta25prca Notes and the indenture governing our 2 % Convertible Notes; o We may become more vulnerable to general adverse economic and industr y conditions and adverse changes in governmental regulations; o We may have to dedicate a substantial portion of our cash flow from operations to make payments required under our senior credit facility , the 8dtta25prca Notes and the 2prca Convertible Notes, reducing the availability of cash flow to fund future capital expenditures, workin g capital, execution of our growth strategy, research and development costs and other general corporate requirements; o We may have limited flexibility in planning for, or reacting to, changes in our business and our industry, which may place us at a competitive disadvantage compared with competitors that have less deb t or more financial resources; o We may have limited ability to borrow additional funds, even when necessary to maintain adequate liquidity; and o The terms of our senior credit facility, the indentures governing the 8dtta25prca Notes and 2prca Convertible Notes allow us to incur substantial amounts of additional debt, subject to certain limitations |
| We might incur additional debt for various reasons, including to pay for additional acquisitions that we may make and assuming debt of companies that we may acquire, including new senior credit facilities associated with our pending acquisition of Stewart & Stevenson Services, Inc |