| CYBEX INTERNATIONAL INC ITEM 1A RISK FACTORS The risk factors identified in the cautionary statements below could cause our actual results to differ materially from those suggested in the forward-looking statements appearing elsewhere in this Annual Report on Form 10-K However, these risk factors are not exhaustive and new risks may also emerge from time to time |
| It is not possible for management to predict all risk factors or to assess the impact of all risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements |
| Accordingly, forward-looking statements should not be relied upon as a prediction of actual results |
| We depend upon our ability to successfully develop, market and sell new or improved products |
| Our continued growth and ability to remain competitive will substantially depend upon our development of new or improved products |
| A failure to develop new or improved products on a timely basis, or which are accepted in the marketplace, or which produce appropriate sales or margins, could adversely affect our ability to generate future revenues and earnings and have a negative impact on our business prospects, liquidity and financial condition |
| Increases in raw material costs, or the unavailability of raw materials or components, could adversely affect us |
| Increases in our cost of raw materials could have a material effect on our profitability |
| We currently source our stepper products and certain raw materials and component parts (eg, drive motors, belts, running decks, molded plastic components and electronics) from single suppliers |
| The loss of a significant supplier, or delays or disruptions in the delivery of raw materials or components, could adversely affect our ability to generate future revenues and earnings and have a material adverse effect on our business and financial results |
| We have been involved in a number of litigation matters and expect legal claims in the future |
| In recent years we have been involved in a number of litigation matters, including with respect to product liability, intellectual property rights, disputes with dealers and a dispute involving a person from whom we acquired a business |
| A judgment of approximately dlra2dtta4 million was entered against us in 2004 in the Kirila et al v |
| We are currently appealing both these judgments, but if we are not successful in these appeals we will have to pay the judgments plus post-judgment interest |
| We expect that we will continue to be involved in litigation in the ordinary course of business |
| While we maintain reserves for estimated litigation losses, one or more adverse determinations in litigation affecting us could have a material adverse effect on our business prospects, liquidity, financial condition and cash flows |
| Our failure or inability to protect our intellectual property from misappropriation or competition could adversely affect our business prospects |
| Our intellectual property aids us in competing in the exercise equipment industry |
| Despite our efforts to protect our intellectual property rights, such as through patent, trade secret and trademark protection, unauthorized parties may try to copy our products, or obtain and use information that we regard as proprietary |
| In addition, the laws of some foreign countries may not protect our rights to as great an 7 ______________________________________________________________________ [8]Table of Contents extent as US law |
| Furthermore, the patents and trademarks which we have obtained or may seek in the future may not be of a sufficient scope or strength to provide meaningful economic or competitive value |
| Our rights and the additional steps we have taken to protect our intellectual property may not be adequate to deter misappropriation, and we also remain subject to the risk that our competitors or others will independently develop non-infringing products substantially equivalent or superior to our products |
| We also may not be able to prevent others from claiming that our products violate their proprietary rights |
| If we are unable to protect our intellectual property, or if we are sued for infringing another party’s intellectual property, our business, financial condition or results of operation could be materially adversely affected |
| We principally use two facilities to produce our products and a material business disruption at either facility could significantly impact our business |
| Substantially all of our products are manufactured or assembled in two vertically integrated facilities located in Massachusetts and Minnesota |
| These facilities house all our manufacturing operations and our executive offices |
| We take precautions to safeguard our facilities, including obtaining insurance, maintaining safety protocols and using off-site storage of computer data |
| However, a natural disaster, such as an earthquake, fire or flood, or an act of terrorism or vandalism, could cause substantial disruption to our operations, damage or destroy our manufacturing equipment, information systems or inventory and cause us to incur substantial additional expenses |
| The insurance we maintain against disasters may not cover or otherwise be adequate to meet our losses in any particular case |
| Any disaster which prevents operations in either of our facilities for any extended period may result in decreased revenues and increased costs and could significantly harm our operating results, financial condition and prospects |
| We rely on third party dealers and distributors to sell and service a significant portion of our products |
| In 2005, over 50prca of our total net sales were to our independent authorized dealers in North America and to independent distributors internationally |
| These third party dealers and distributors may terminate their relationships with us, or fail to commit the necessary resources to sell or service our products to the level of our expectations |
| If current or future third party dealers or distributors do not perform adequately, or if we fail to maintain our existing relationships with them or fail to recruit and retain dealers or distributors in particular markets or geographic areas, our revenues may be adversely affected and our operating results could suffer |
| We have a history of losses in fiscal years prior to 2004 |
| Although we were profitable in fiscal 2004 and marginally profitable in fiscal 2005, we incurred losses in each fiscal year from 2000 through 2003 |
| If we are unable to maintain our profitability and we incur losses in the future, any such losses could have a material adverse effect on our business prospects, liquidity, financial condition and cash flows |
| Our major stockholders may exercise control over us |
| John Aglialoro, Joan Carter and UM Holdings Ltd, who are related parties, collectively own a majority of our outstanding common stock |
| Such stockholders may have the ability to significantly influence (i) the election of our Board of Directors, and thus our future direction and (ii) the outcome of all other matters submitted to our stockholders, including mergers, consolidations and the sale of all or substantially all of our assets |
| We face strong competition |
| The fitness equipment industry is highly competitive |
| Numerous companies manufacture, sell or distribute exercise equipment |
| Our competitors include companies with strong name recognition and more extensive financial and other resources than us |
| We are indebted to several lenders |
| This leverage may have several important consequences, including the need to meet debt service requirements and vulnerability to changes in interest rates |
| This leverage may also limit our ability to raise additional capital, withstand adverse economic or business conditions and competitive pressures, and take advantage of significant business opportunities that may arise |
| In particular, the incurrence of losses in the future could result in the inability to meet the financial covenants pertaining to our indebtedness or to service our debt |
| We warrant our products for varying periods of up to ten years |
| While we maintain reserves for warranty claims, it could have a material adverse effect on our business 8 ______________________________________________________________________ [9]Table of Contents prospects, liquidity, financial condition and cash flows if warranty claims were to materially exceed anticipated levels |
| We may have a contingent liability related to the arrangement of third party financing |
| We offer to our customers leasing and other financing of products by third party providers, for which we may receive a fee |
| While most of these financings are without recourse, in certain cases we may offer a guaranty or other recourse provisions |
| At December 31, 2005, our maximum contingent liability under all recourse provisions was approximately dlra4cmam260cmam000 |
| While we maintain a reserve for estimated losses under these recourse provisions, it could have a material adverse effect on our business prospects, liquidity, financial condition and cash flows if actual losses were to materially exceed the related reserve |
| Unfavorable international political or economic changes and/or currency fluctuations could negatively impact us |
| Approximately 29prca of our sales in 2005 and 2004 were derived from outside North America |
| Political or economic changes and/or currency fluctuations in countries in which we do business could negatively impact our business and financial results, including decreases in our revenues and profitability |
| We may not be able to attract and retain key employees and the loss of any member of our senior management could negatively affect our business |
| We compete for the services of qualified personnel |
| Our future success will depend upon, to a significant degree, the performance and contribution of the members of senior management and upon our ability to attract, motivate and retain other highly qualified employees with technical, management, marketing, sales, product development, creative and other skills |
| Although we do have employment agreements with our executive officers, there can be no assurance that such officers will continue to perform under those contracts |
| Our business, financial condition and results of operations could be materially and adversely affected if we lost the services of members of our senior management team or key technical or creative employees or if we failed to attract additional highly qualified employees |
| Future issuances of preferred stock may adversely affect the holders of our common stock |
| Our Board has the ability to issue, without approval by the common stockholders, shares of one or more series of preferred stock, with the new series having such rights and preferences as the Board may determine in its sole discretion |
| Any series of preferred stock may have rights, including cumulative dividend, liquidation and conversion rights, senior to our common stock, which could adversely affect the holders of the common stock, as well as the economic value of the common stock |
| A variety of factors may discourage potential take-over attempts |
| John Aglialoro, Joan Carter and UM Holdings Ltd, who are related parties, collectively own a majority of the outstanding shares of our common stock |
| In addition, our Certificate of Incorporation requires an affirmative super-majority stockholder vote before we can enter into certain defined business combinations, except for combinations that meet certain specified conditions; provides for staggered three-year terms for members of the Board of Directors; and authorizes the Board of Directors to issue preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions of such preferred stock without any further vote or action by our stockholders |
| Each of these factors could have the effect of discouraging potential take-over attempts and may make attempts by stockholders to change our management more difficult |
| In the event we are unable to satisfy regulatory requirements relating to internal control over financial reporting, or if these internal controls are not effective, our business and financial results may suffer |
| The Sarbanes-Oxley Act of 2002 and related rules and regulations of the Securities and Exchange Commission and the American Stock Exchange impose new duties on us and our executives, directors, attorneys and independent registered public accounting firm |
| In order to comply with the Sarbanes-Oxley Act and such rules and regulations, we are evaluating our internal control over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, our internal control over financial reporting |
| These reports will be required as of December 31, 2006, if we qualify as an “accelerated filer” as of the end of the second quarter of 2006, or as of December 31, 2007 if we are not an accelerated filer at such time |
| We are 9 ______________________________________________________________________ [10]Table of Contents currently performing the system and process evaluation and testing (and any necessary remediation) required in an effort to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act |
| As a result, we expect to incur additional expenses and diversion of management’s time, which could materially increase our operating expenses and accordingly reduce our net income |
| While we anticipate being able to fully implement the requirements relating to internal control over financial reporting and all other aspects of Section 404 in a timely fashion, we cannot be certain as to the outcome of our testing and resulting remediation |
| If our independent registered public accounting firm is not satisfied with our internal control over financial reporting or the level at which these controls are documented, designed, operated or reviewed, or if the independent registered public accounting firm’s interpretation of the requirements, rules or regulations are different than ours, then they may decline to attest to management’s assessment or issue an adverse opinion on management’s assessment and/or our internal control over financial reporting |
| This could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which ultimately could negatively impact the market price of our common stock |