| CECO ENVIRONMENTAL CORP Item 1A Risk Factors RISK FACTORS In addition to the other information in this Annual Report on Form 10-K, the factors listed below should be considered in evaluating our business and prospects |
| This Annual Report on Form 10-K contains a number of forward-looking statements that reflect our current views with respect to future events and financial performance |
| These forward-looking statements are subject to certain risks and uncertainties, including those discussed below and elsewhere herein, that could cause actual results to differ materially from historical results or those anticipated |
| In this report, the words “anticipates,” “believes,” “expects,” “intends,” “future” and similar expressions identify forward-looking statements |
| Readers are cautioned to consider the specific factors described below and not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date of this Annual Report on Form 10-K We assume no obligation to publicly update any forward-looking statements |
| Operating at a Loss We have incurred net losses for our past 5 fiscal years |
| There are no assurances that we will achieve or sustain profitability |
| Competition The industries in which we compete are all highly competitive |
| We compete against a number of local, regional and national contractors and manufacturers in each of our business segments, many of which have been in existence longer than us and some of which have substantially greater financial resources than we do |
| We believe new entrants that are large corporations may be able to compete with the Company on the basis of price and as a result may have a material adverse affect on the results of our operations |
| In addition, there can be no assurance that other companies will not develop new or enhanced products that are either more effective than ours or would render our products non-competitive or obsolete |
| Dependence on Key Personnel We are highly dependent on the experience of our management in the continuing development of its operations |
| The loss of the services of certain of these individuals, particularly Richard J Blum, President of CECO, would have a material adverse effect on our business |
| Our future success will depend in part on our ability to attract and retain qualified personnel to manage our development and future growth |
| The failure to recruit additional key personnel could have a material adverse effect on our business, financial condition and results of operations |
| Continued Control by Management As of the date of this Annual Report on Form 10-K, management of the Company beneficially owns approximately 56prca of the Company’s outstanding common stock, assuming the exercise of currently exercisable warrants and options held by management |
| Our stockholders do not have the right to cumulative voting in the election of directors |
| Accordingly, present management will be in a position to exert control over our business and operations, including the election of our directors |
| Dependence Upon Third-Party Suppliers Although we are not dependent on any one supplier, we are dependent on the ability of our third-party suppliers to supply our raw materials, as well as certain specific component parts |
| We purchase all of our chemical grade fiberglass from one domestic supplier, which we believe is the only domestic supplier of such fiberglass, and certain specialty items from only two domestic suppliers |
| These items also can be purchased from 7 ______________________________________________________________________ [31]Table of Contents foreign suppliers |
| Failure by our third-party suppliers to meet our requirements could have a material adverse effect on us |
| There can be no assurance that our third-party suppliers will dedicate sufficient resources to meet our scheduled delivery requirements or that our suppliers will have sufficient resources to satisfy our requirements during any period of sustained demand |
| Failure of manufacturers or suppliers to supply, or delays in supplying, our raw materials or certain components, or allocations in the supply of certain high demand raw components could materially adversely affect our operations and ability to meet our own delivery schedules on a timely and competitive basis |
| Patents We hold various patents and licenses relating to certain of our products |
| There can be no assurance as to the breadth or degree of protection that existing or future patents, if any, may afford us, that our patents will be upheld, if challenged, or that competitors will not develop similar or superior methods or products outside the protection of any patent issued to us |
| Although we believe that our products do not and will not infringe patents or violate the proprietary rights of others, it is possible that our existing patent rights may not be valid or that infringement of existing or future patents or proprietary rights may occur |
| In the event our products infringe patents or proprietary rights of others, we may be required to modify the design of our products or obtain a license for certain technology |
| There can be no assurance that we will be able to do so in a timely manner, upon acceptable terms and conditions, or at all |
| Failure to do any of the foregoing could have a material adverse effect upon our business |
| In addition, there can be no assurance that we will have the financial or other resources necessary to enforce or defend a patent infringement or proprietary rights violations action which may be brought against us |
| Moreover, if our products infringe patents or proprietary rights of others, we could, under certain circumstances, become liable for damages, which also could have a material adverse effect on our business |
| New Product Development The air pollution control and filtration industry is characterized by ongoing technological developments and changing customer requirements |
| As a result, our success and continued growth depend, in part, on our ability in a timely manner to develop or acquire rights to, and successfully introduce into the marketplace, enhancements of existing products or new products that incorporate technological advances, meet customer requirements and respond to products developed by our competition |
| There can be no assurance that we will be successful in developing or acquiring such rights to products on a timely basis or that such products will adequately address the changing needs of the marketplace |
| Technological and Regulatory Change The air pollution control and filtration industry is characterized by changing technology, competitively imposed process standards and regulatory requirements, each of which influences the demand for our products and services |
| Changes in legislative, regulatory or industrial requirements may render certain of our filtration products and processes obsolete |
| Acceptance of new products may also be affected by the adoption of new government regulations requiring stricter standards |
| Our ability to anticipate changes in technology and regulatory standards and to develop and introduce new and enhanced products successfully on a timely basis will be a significant factor in our ability to grow and to remain competitive |
| There can be no assurance that we will be able to achieve the technological advances that may be necessary for us to remain competitive or that certain of our products will not become obsolete |
| Leverage We are highly leveraged |
| We currently have the New Bank Facility, which includes a term loan and line of credit, with Fifth Third Bank |
| The terms of such loan facility were entered into on December 29, 2005 |
| Our cash interest costs relate primarily to our revolving credit line and term loans; interest payments on the subordinated debt are permitted under the credit agreement if we remain in compliance with the loan covenants |
| 8 ______________________________________________________________________ [32]Table of Contents Our loans are secured by substantially all of our assets and our ability to borrow additional amounts on a secured basis would be limited |
| On December 31, 2004, the principal balance of the notes owed to Green Diamond was increased for the unpaid accrued interest |
| The principal balance for the dlra4dtta0 million subordinated note was increased by the accrued interest of dlra1dtta4 million to dlra5dtta4 million, and the principal balance for the dlra1dtta2 million subordinated note was increased by dlra0dtta1 million to dlra1dtta3 million and the maturity date was extended to January 1, 2007 |
| On December 29, 2005, in connection with our New Bank Facility, the maturity date for these notes was extended to April 1, 2007 |
| The remaining interest accrued on these subordinated notes was dlra730cmam230 at December 31, 2005 and dlra372cmam352 at December 31, 2004 |
| Interest is charged on the revolving credit line at the bank’s prime rate plus 2 percentage points and on the term debt at prime plus 2dtta25 points |
| A 1prca increase in the average interest rate would increase cash interest cost by approximately dlra60cmam000 if borrowings remain constant in 2006 |
| There are no scheduled increases in the fixed or variable rates on the credit facility, however; an increase or decrease in the prime rate would cause the Company’s future interest expense and cash flows to increase or decrease proportionately |
| Our Common Stock Has Been Relatively Thinly Traded and We Cannot Predict the Extent to Which a Trading Market Will Develop Our common stock trades on the NASDAQ SmallCap Market |
| Our common stock is thinly traded compared to larger, more widely known companies |
| Thinly traded common stock can be more volatile than common stock trading in an active public market |
| Future Sales by Our Stockholders May Adversely Affect Our Stock Price and Our Ability to Raise Funds in New Stock Offerings On December 31, 2005, Phillip DeZwirek owned, in addition to other shares of common stock, warrants to purchase 2cmam250cmam000 shares of CECO common stock |
| We are obligated to register these shares upon demand |
| On January 6, 2006, Mr |
| Phillip DeZwirek elected to exercise warrants for 1cmam000cmam000 shares of common stock for an aggregate amount of dlra1cmam718cmam750 paid to us |
| DeZwirek and/or his affiliates should decide to sell such shares or other shares they own, such sales may cause our stock price to decline |
| Such sales may also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that our management deems acceptable or at all |
| Our Financial Performance is seasonal The fourth quarter of our fiscal year, which ends December 31, is typically our strongest quarter |
| This is due to a combination of factors: First, many of our customers attempt to complete major capital improvement projects before the end of the calendar year |
| Also, many customers shut down over the Christmas holidays to perform maintenance services on their facilities |
| These factors create increased demand for our products and services during this period |
| Conversely, the first quarter of our calendar fiscal year is typically our weakest quarter |
| This is caused to some extent by winter weather constraints on outside construction activity but also by the seasonality of capital improvement projects as discussed relating to the fourth quarter |
| Our Financial Performance Is Sensitive to Changes in Overall Economic Conditions A general slowdown in the United States economy may adversely affect the spending of our customers, which would likely result in lower net sales than expected on a quarterly or annual basis |
| Future economic conditions, such as business conditions, fuel and energy costs, interest rates, and tax rates, could also adversely affect our business by reducing customer spending |
| International War and Possibility of Acts of Terrorism Could Adversely Impact Us The involvement of the United States in the conflict in the Middle East or elsewhere or a significant act of terrorism on US soil or elsewhere could have an adverse impact on us by, among other things, disrupting our 9 ______________________________________________________________________ [33]Table of Contents information or distribution systems, causing dramatic increases in fuel prices thereby increasing the costs of doing business, or impeding the flow of imports or domestic products to us |
| There are inherent limitations in all control systems, and misstatements due to error or fraud may occur and not be detected |
| While we continue to take action to ensure compliance with the disclosure controls and other requirements of the Sarbanes-Oxley Act of 2002 and the related Securities and Exchange Commission and NASDAQ Exchange rules, there are inherent limitations in our ability to control all circumstances |
| Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal controls and disclosure controls will prevent all error and all fraud |
| A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met |
| In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be evaluated in relation to their costs |
| Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, in our Company have been detected |
| These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake |
| Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls |
| The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions |
| Over time, a control may be inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate |
| Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected |
| Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports are available, without charge, on the website as soon as reasonably practicable after we file these reports with the SEC You can also obtain these reports, free of charge, by contacting Investor Relations, CECO Environmental, 3120 Forrer Street, Cincinnati, Ohio 45209 |
| You can also obtain these reports and other information, free of charge, at www |
| You may also read and copy materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 |
| Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-732-0330 |
| We are not including the information contained in our website as part of, or incorporating it by reference into, the Annual Report on Form 10-K |