| COBRA ELECTRONICS CORP Item 1A Risk Factors This section identifies certain risks and uncertainties that Cobra faces |
| If Cobra is unable to appropriately address these and other circumstances that could have a negative effect on its business, Cobra’s business may suffer |
| Negative events may decrease Cobra’s revenues, increase Cobra’s costs, negatively affect Cobra’s financial results and decrease Cobra’s financial strength, thereby, causing Cobra’s stock to decline |
| Our business, financial condition or results of operation could be adversely affected by our inability to enhance existing products or introduce new products to meet consumer preferences, including timely introductions as new consumer technologies are introduced |
| Management believes that the Company’s future success depends upon its ability to predict and respond in a timely and effective manner to changes in the market it serves |
| Consequently, we strive to introduce distinctive new products that anticipate changing consumer demands and capitalize upon emerging technologies |
| If we fail to introduce, or suffer delays in introducing new products, misinterpret consumer preferences or fail to respond to changes in the marketplace, consumer demand for our products could decrease and our brand image could suffer |
| In addition, our competitors may introduce new designs or technologies, undermining our products’ desirability |
| If any of the foregoing occurs, our business, financial condition or results of operations could be materially harmed |
| Failure to maintain relationships with our key customers and failure by our key customers to purchase expected quantities of our products could have an adverse effect on our business |
| Our products are distributed through a network of nearly 300 retailers and distributors located primarily in the United States |
| The Company’s success is dependent upon our ability to retain an existing base of customers to sell the Company’s products |
| Loss of customers means loss of product placement and, consequently, a reduction in sales volume |
| Certain of the Company’s customers account for a large portion of the Company’s net sales |
| We anticipate that Wal-Mart will continue to account for a significant portion of our net sales in the foreseeable future |
| Our customers are not obligated by any firm, long-term purchase commitments for our products |
| As a result, customers may cancel purchase commitments or reduce or delay orders on relatively short notice |
| The loss of sales to, or a material delay in orders from, our key customers could materially harm our business, financial condition and results of operations |
| If we are unable to obtain sufficient amounts of high quality products on a timely basis, we may not be able to meet our customers’ needs and may suffer reduced sales |
| Substantially all of our products are manufactured by third party manufacturers located outside of the United States, primarily in China, Hong Kong, the Philippines and Italy |
| Our ability to meet our customers’ needs depends on our ability to maintain an uninterrupted supply of products from more than one third party manufacturer |
| While we purchase most of our products from a number of third party manufacturers, our business, 7 ______________________________________________________________________ [40]Table of Contents financial condition or results of operations could be adversely affected if any of our principal third party manufacturers experience production problems, lack of capacity or transportation disruptions |
| In addition, certain of our third party manufacturers serve other customers, a number of which have greater production requirements than we do |
| As a result, our third party manufacturers could determine to prioritize production capacity for other customers or reduce or eliminate services for us on short notice |
| The extent to which changes in third party manufacturers would have an adverse effect on the Company’s business depends upon the timing of the changes, the product or products that the third party manufacturers produce and the volume of production |
| Our dependence on third party manufacturers for products subjects us to the risk of supplier failure and customer dissatisfaction with the quality or performance of such products |
| Quality or performance failures by our third party manufacturers or changes in their financial or business condition which affect their production could disrupt our ability to supply quality products to our customers and thereby materially harm our business |
| Shortages of components and materials may disrupt the supply of our products |
| The inability of our third party manufacturers to obtain sufficient quantities of components and other materials used in our products could disrupt the supply of our products or increase our costs |
| Materials and components for some of our products may not be available in sufficient quantities to satisfy our needs as a result of supply shortages |
| Supply interruptions relating to our products could result in lost sales opportunities which may harm our business, financial condition and results of operation |
| We rely on retailers and third party distributors to sell our products |
| We offer our products through a network of nearly 300 retailers and distributors located primarily in the United States |
| Certain of our distributors market products that compete with our products |
| The loss, termination or failure of one or more of our distributors to effectively promote our products could affect the Company’s ability to bring its products to market and could reduce our sales |
| Changes in the financial or business condition of these distributors and retailers could also affect the level of their purchases of our products which could materially harm our business, financial condition and results of operation |
| We compete with a large number of companies in the consumer electronics business, and if we are unable to compete effectively, our business, financial condition and results of operations may be materially affected |
| We encounter strong competition from a number of companies in the consumer electronics business |
| Some of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial resources than we do |
| Competition is based principally on the introduction of new products and pricing |
| Our competitors may have greater resources and operating and financial flexibility to introduce new products and withstand changes in pricing |
| To compete for sales, we may have to lower our prices or increase our investment in development of new technologies, which could reduce our gross margin and adversely affect our business, financial condition and results of operations |
| We cannot assure you that we will continue to compete effectively against existing and new competitors that may enter our markets |
| Any downturn in the global economic and market conditions could negatively impact our business, financial condition and results of operations |
| The consumer electronics products that we sell are generally discretionary purchases for consumers |
| Consumer spending is affected by many factors, including consumer confidence levels, interest rates, tax rates, employment levels and prospects and other general economic conditions |
| Periods of economic slowdown or recession in the United States or worldwide economies, or the public’s perception that these may occur, would likely decrease the demand for our products and adversely affect our sales |
| In addition, deteriorating or weak economic conditions, or the forecast or perception of the same, may trigger changes in inventory levels at our retail customers, including a reduction in product offerings and out of stock situations, which may adversely affect our results of operations |
| 8 ______________________________________________________________________ [41]Table of Contents International markets expose us to political and economic risks in foreign countries, as well as to risks relating to currency values and import/export policies |
| Substantially all of our products are manufactured to our specifications and engineering designs by suppliers located primarily in China, Hong Kong, the Philippines and Italy |
| In addition, international sales, primarily in Canada and Europe, represent a significant portion of our total sales |
| Our international activities pose risks not faced by companies that limit themselves to the United States market |
| These risks include: • changes in foreign currency exchange rates; • exchange controls; • changes in a specific country’s or region’s political or economic conditions; • issues affecting health and safety in specific countries or regions; • tariffs, quotas, trade barriers, other trade protection measures in the United States or foreign countries and import or export licensing requirements; • increased shipping costs, disruptions in shipping or reduced availability of freight transportation; • difficulties in enforcing remedies in foreign jurisdictions and compliance with applicable foreign laws; • potentially negative consequences from changes in tax laws; and • different regulatory structures and unexpected changes in regulatory requirements |
| Our revenues and purchases are predominately in US dollars; however, we collect a portion of our revenue in other currencies, principally euros |
| As we expand our sales in international markets, our customers may increasingly make payments in other currencies |
| We take measures to hedge foreign currency fluctuations; however, we may not be able to fully hedge against the risks of such fluctuations and future exchange rate fluctuations could materially affect our operating results |
| We are subject to various governmental regulations that could adversely affect our business |
| Our operations are subject to various federal, state and local regulatory requirements, including those relating to environmental, health and safety matters |
| We could become subject to liabilities as a result of a failure to comply with applicable laws and could incur substantial costs to comply with existing or new more stringent regulations |
| In addition, the use of our products is also governed by a variety of federal, state and local regulations, including the regulations of the Federal Communications Commission, and changes in such regulations may affect demand for our products |
| If we are unable to enforce or defend our rights with respect to intellectual property, our business may be adversely affected |
| Our trademark protection with respect to the Cobra trademark in the United States could be subject to challenge in some product areas |
| In addition, we may not be able to obtain trademark protection for the Cobra trademark in each country in which we sell our products |
| If we are unable to use the Cobra trademark with respect to some of our products or in some markets our results of operations could be adversely affected |
| We license patents for use in certain of our products, particularly navigation products |
| If the patents upon which we are relying are challenged, or third parties claim that our products infringe upon the intellectual property rights of others, we may incur significant costs to defend our intellectual property rights and may not ultimately be successful |
| If any of our products are determined to have infringed upon the intellectual property rights of others we may face substantial damages as well as injunctive relief which could effectively block our ability to market these products in the United States and abroad |
| Such a judgment could materially harm our business |
| 9 ______________________________________________________________________ [42]Table of Contents Our profitability and financial condition depends on our ability to collect on amounts due from our customers |
| We have significant accounts receivable due from our customers |
| It is not uncommon for a customer to suspend payments of amounts due if the customer experiences operational difficulties |
| A customer experiencing severe operational difficulties may file for bankruptcy |
| In these cases, we may be unable to collect on that customer’s outstanding accounts receivable balance |
| The failure of our customers to pay amounts due to us could negatively affect our financial condition and results of operations |
| Our secured credit facility contains restrictive covenants and our failure to comply with those restrictions could result in a default, which could have a material adverse effect on our business |
| Our secured credit facility is our principal source of available liquidity, other than cash generated by operations |
| The credit facility contains a number of significant restrictions that limit our ability to, among other things, do the following: • incur additional indebtedness; • make capital expenditures and other investments; • grant liens on assets; or • merge, consolidate or dispose of our assets |
| Our secured credit facility also requires that we comply with certain financial covenants |
| A breach of the covenants contained in the credit facility could result in any outstanding indebtedness under the credit facility becoming immediately due and payable and in our inability to borrow additional funds under the credit facility, either of which could adversely affect our business |
| Sales of our products are subject to seasonal variations and, as a result, our quarterly operating results may fluctuate and may not be a reliable indicator of future performance |
| Because mass retail accounts make up an increasing portion of our business, we have experienced a shift in orders from the third quarter to the fourth quarter when mass retailers normally begin purchasing for the holiday selling season |
| Consequently, you should not rely on our results of operations during any particular quarter as an indication of our results for a full year or any other quarter |
| In addition, if investors inaccurately estimate our results of operations in one or more future quarters and our operating results fall below expectations, our stock price may decline |
| The price of our common stock may be subject to sudden decreases due to the potential volatility of the price of our common stock |
| The market price of our common stock may be highly volatile and subject to wide fluctuations in response to various factors |
| The market price of our common stock is dependent upon, but not limited to: • press releases or publicity relating to us or our competitors or relating to trends in the consumer electronics industry; • changes in the legal or regulatory environment affecting our business; • changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; • the operating and stock performance of other companies that investors may deem comparable; • developments affecting us, our customers or our suppliers; and • general domestic or international economic, market and political conditions |
| 10 ______________________________________________________________________ [43]Table of Contents These factors may adversely affect the trading price of our common stock, regardless of our actual operating performance, and could prevent our stockholders from selling their common stock at or above the price at which they purchased it |
| In addition, the stock markets from time to time experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies |
| In the past, some stockholders have brought securities class action lawsuits against companies following periods of volatility in the market price of their securities |
| We may in the future be the target of similar litigation |
| Securities litigation, regardless of whether we are ultimately successful, could result in substantial costs and divert management’s attention and resources |
| The loss of key members of our management and technical team may adversely affect our business |
| Our success depends on the performance of our key management, sales, technical and other critical personnel and our ability to continue to attract, motivate and retain management and highly qualified key personnel |
| Failure to do so could disrupt our operations, adversely affect our customer relationships and impair our ability to successfully implement and complete Company initiatives |
| The loss of any services of any key management or technical personnel could make it more difficult for us to successfully pursue our business goals |
| In addition, we may not be as successful as our competitors at recruiting, assimilating and retaining key personnel |
| Our performance depends on favorable relations with our employees and our ability to attract and retain them |
| Any deterioration of those relations, increase in labor costs or inability to attract and retain employees could adversely affect our business |
| Any significant deterioration in employee relations, increases in labor costs or shortages of labor at any of our facilities could have a material adverse effect on our business, financial condition and results of operations |
| As of December 31, 2005, none of our employees were covered by collective bargaining agreements |
| A slowdown or work stoppage at one of our facilities that lasts for a significant period of time could cause us to lose sales and incur increased costs and could adversely affect our ability to meet customers’ needs |
| Our business could be adversely affected by a disruption to our Chicago, Illinois facility’s operations |
| Our Chicago, Illinois facility accounts for approximately 91dtta5 percent of the total space utilized by the Company |
| Therefore, any disruption to our operations at this facility could adversely impact our performance and impair our ability to deliver products and services to our customers on a timely basis |
| Our operations at the Chicago, Illinois facility could be disrupted in the event of: • damage to, or inoperability of, its warehouse; • a hardware or software error, failure or crash; • a power or telecommunications failure; or • fire, flood or other natural disaster |
| Any disruption could damage our reputation and cause customers to cease purchasing products from us |
| We could be subject to claims or litigation with respect to these losses |
| Our property and business interruption insurance may not adequately compensate us for all losses we may incur |
| Damage to or disruptions in the operations of our computer infrastructure and software systems could harm our business |
| The unavailability of any of our information management systems for any significant period of time could have a material adverse effect on our operations |
| In particular, our ability to deliver products to our customers when needed, collect our receivables and manage inventory levels successfully largely depends on the efficient operation of our computer hardware and software systems |
| All information management systems are potentially vulnerable to damage or interruption from a variety of sources, including but not limited to computer viruses, security breaches, 11 ______________________________________________________________________ [44]Table of Contents energy blackouts, natural disasters, terrorism, war and telecommunication failures |
| There also may be system or network disruptions if new or upgraded business management systems are defective or are not installed properly |
| Any system failure or security breach could negatively impact our business and results of operations |
| In addition, we may incur additional costs to remedy the damages caused by these system failures or security breaches |
| Our internal controls over financial reporting may not be considered effective, which could result in possible regulatory sanctions and a decline in our stock price |
| Beginning with our fiscal year ended December 31, 2007 (or December 31, 2006 if we meet the criteria for accelerated filer status in 2006), Section 404 of the Sarbanes-Oxley Act of 2002 requires us to furnish annually a report on our internal controls over financial reporting, beginning with that Annual Report on Form 10-K The internal control report must contain an assessment by our management of the effectiveness of our internal control over financial reporting (including the disclosure of any material weakness) and a statement that our independent auditors have attested to and reported on management’s evaluation of such internal controls |
| The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting |
| In order for management to evaluate our internal controls, we must regularly review and document our internal control processes and procedures and test such controls |
| Ultimately, we or our independent auditors could conclude that our internal control over financial reporting may not be effective if, among others things: • any material weakness in our internal controls over financial reporting exist; or • we fail to remediate assessed deficiencies Due to the number of controls to be examined, the complexity of the project, and the subjectivity involved in determining the effectiveness of controls, we cannot be certain that, in the future, all of our controls will be considered effective by management or, if considered effective by our management, that our auditors will agree with such assessment |
| If, as required by the Sarbanes-Oxley Act of 2002, we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to attest that our management’s report is fairly stated or they are unable to express an opinion on our management’s evaluation, we could be subject to regulatory sanctions or lose investor confidence in the accuracy and completeness of our financial reports, either of which could have an adverse effect on the market price for our common stock |