| LAYNE CHRISTENSEN CO Item 1A Risk Factors You should carefully consider the risks described below before making an investment decision |
| The risks and uncertainties described below are not the only ones facing our company |
| If any of the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected |
| In that case, the trading price of our common stock could decline substantially |
| Risks Relating To Our Business And Industry A significant portion of our water resources business is dependant on municipalities and a decline in municipal spending could adversely impact our business |
| For the fiscal year ended January 31, 2006, approximately 66prca of water resources division revenues were derived from water and wastewater infrastructure contracts with governmental entities or agencies |
| Reduced tax revenues in certain regions have limited spending and new development by local municipalities which in turn has affected the demand for our services in these regions |
| Material reductions in spending by a significant number of municipalities or local governmental agencies could have a material adverse effect on our business, results of operations, liquidity and financial position |
| We depend on continued mineral exploration and development Demand for our mineral exploration drilling services and products depends in significant part upon the level of mineral exploration and development activities conducted by mining companies, particularly with respect to gold and copper |
| Mineral exploration is highly speculative and is influenced by a variety of factors, including the prevailing prices for various metals, which often fluctuate widely |
| In addition, the price of gold is affected by numerous factors, including international economic trends, currency exchange fluctuations, expectations for inflation, speculative activities, consumption patterns, purchases and sales of gold bullion holdings by central banks and others, world production levels and political events |
| In addition to prevailing prices for minerals, mineral exploration activity is influenced by the following factors: • global and domestic economic considerations; • the economic feasibility of mineral exploration and production; • the discovery rate of new mineral reserves; • national and international political conditions; and • the ability of mining companies to access or generate sufficient funds to finance capital expenditures for their activities |
| A material decrease in the rate of mineral exploration and development would reduce the revenues generated by our mineral exploration business |
| Our businesses are cyclical, and therefore our results can fluctuate significantly |
| We historically have experienced fluctuations in our quarterly results arising from a number of factors, including the following: • the timing of the award and completion of contracts; • the recording of related revenues; and • unanticipated additional costs incurred on projects |
| In addition, adverse weather conditions, natural disasters, force majeure and other similar events can curtail our operations in various regions of the world throughout the year, resulting in performance delays and increased costs |
| Moreover, our domestic activities and related revenues and earnings tend to decrease in the winter months when adverse weather conditions interfere with access to drilling or other construction sites |
| As a result, our revenues and earnings in the second and third quarters tend to be higher than revenues and earnings in the first and fourth quarters |
| Accordingly, as a result of the foregoing as well as other factors, our quarterly results should not be considered indicative of results to be expected for any other quarter or for any full fiscal year |
| Our use of the percentage-of-completion method of accounting could result in a reduction or reversal of previously recorded results Our revenues on large water and wastewater infrastructure contracts are recognized on a percentage of completion basis for individual contracts based upon the ratio of costs incurred to total estimated costs at completion |
| Contract price and cost estimates are reviewed periodically as work progresses and adjustments proportionate to the percentage of completion are reflected in contract revenues and gross profit in the reporting period when such estimates are revised |
| Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined |
| We may experience cost overruns on our fixed-price contracts, which could negatively affect our profitability A significant number of our contracts contain fixed prices and generally assign responsibility to us for cost overruns for the subject projects |
| Under such contracts, prices are established in part on cost and scheduling estimates, which are based on a number of assumptions, including assumptions about future economic conditions, prices and availability of materials and other requirements |
| Inaccurate estimates, or changes in other circumstances, such as unanticipated technical problems, difficulties obtaining permits or approvals, changes in local laws or labor conditions, weather delays, cost of raw materials, or our 9 _________________________________________________________________ suppliers’ or subcontractors’ inability to perform, could result in substantial losses |
| As a result, revenues and gross margin may vary from those originally estimated and, depending upon the size of the project, variations from estimated contract performance could affect our operating results for a particular quarter |
| Many of our contracts are also subject to cancellation by the customer upon short notice with limited damages payable to us |
| We have a substantial amount of debt and other contractual commitments, and the cost of servicing those obligations could adversely affect our business and hinder our ability to make payments on the obligations, and such risk could increase if we incur more debt We have a substantial amount of indebtedness |
| As of January 31, 2006, our total liabilities were approximately dlra278 million and our total assets were approximately dlra449 million |
| The level of our indebtedness could have important consequences to shareholders, including the following: • our ability to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements or other purposes may be limited or financing may be unavailable; • a substantial portion of our cash flows must be dedicated to the payment of principal and interest on our indebtedness and other obligations and will not be available for use in our business; • our level of indebtedness could limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we operate; and • our high degree of indebtedness will make us more vulnerable to changes in general economic conditions and/or a downturn in our business, thereby making it more difficult for us to satisfy our obligations |
| If we fail to make required debt payments, or if we fail to comply with other covenants in our debt service agreements, we would be in default under the terms of these and other indebtedness agreements |
| This may result in the holders of the indebtedness accelerating repayment of this debt |
| A significant portion of our revenues are generated from our operations in foreign countries, and we face unique risks related to these operations Our earnings are significantly impacted by the results of our operations in foreign countries, including, among others, Chile, Mexico, Peru, Italy, Australia and several countries in Africa |
| In fiscal 2006, approximately 18prca of our revenues were generated from international operations |
| Our foreign operations are subject to certain risks beyond our control, including the following: • political, social and economic instability; • war and civil disturbances; • the taking of property by nationalization or expropriation without fair compensation; • changes in government policies and regulations; • tariffs, taxes and other trade barriers; • exchange controls and limitations on remittance of dividends or other payments to us by our foreign subsidiaries and affiliates; and • devaluations and fluctuations in currency exchange rates |
| Some of our contracts are not denominated in dollars, and, other than on a selected basis, we do not engage in foreign currency hedging transactions |
| Therefore as exchange rates between the US dollar and other currencies fluctuate, the translation effect of such fluctuations may have an adverse effect on our results of operations and financial condition |
| We have mining operations in countries such as Tanzania, Guinea, Chile, Peru and Mexico, which have experienced instability in the past, or may experience instability in the future |
| The mining industry has in the past been subject to regulation by governments around the world, including the regions in which we have operations, relating to matters such as environmental protection, controls and restrictions on production, and, potentially, nationalization, expropriation or cancellation of contract rights, as well as restrictions on conducting business in such countries |
| In addition, in our foreign operations, we face operating difficulties, including, but not limited to, political instability, workforce instability, harsh environmental conditions and remote locations |
| We do not maintain political risk insurance |
| If adverse events that are beyond our control occur in the areas of our foreign operations, contractual provisions and bilateral agreements between countries may not be sufficient to guard our interests, and our foreign operations may be adversely affected |
| The volatility of natural gas prices could have a material adverse effect on our business Our revenues, profitability and future growth and the carrying value of our gas properties depend to a large degree on prevailing gas prices |
| Prices for natural gas are subject to large fluctuations in response to relatively minor changes in the supply and demand for natural gas, uncertainties within the market and a variety of other factors beyond our control |
| These factors include weather conditions in the United States, the condition of the United States economy, governmental regulation and the availability of alternative fuel sources |
| A sharp decline in the price of natural gas would result in a commensurate reduction in our revenues, income and cash flows from the production of methane gas and could have a material adverse effect on the carrying value of our oil and gas properties |
| In the event prices fall substantially, we may not be able to realize a profit from our production |
| In recent decades, there have been periods of both worldwide overproduction and underproduction of hydrocarbons and periods of both increased and relaxed energy conservation efforts |
| Such conditions have resulted in periods of excess supply of, and reduced demand for, crude oil on a worldwide basis and for natural gas on a domestic basis |
| These periods have been followed by periods of short supply of, and increased demand for, natural gas |
| The excess or 10 _________________________________________________________________ short supply of crude oil has placed pressures on prices and has resulted in dramatic price fluctuations even during relatively short periods of seasonal market demand |
| Our profitability can vary significantly with fluctuations in the market price of gold as a substantial portion of our mineral exploration business is comprised of drilling for gold World gold prices have historically fluctuated widely and are affected by numerous factors beyond our control, including: • the strength of the United States economy and the economies of other industrialized and developing nations; • global or regional political or economic crises; • the relative strength of the United States dollar and other currencies; • expectations with respect to the rate of inflation; • interest rates; • sales of gold by central banks and other holders; • demand for jewelry containing gold; and • speculation |
| Any material decrease in the market price of gold would materially and adversely affect our results of operations and financial condition |
| The development of unconventional gas properties is capital intensive and involves numerous risks that may result in a total loss of investment The business of exploring for and, to a lesser extent, developing and operating unconventional natural gas properties involves a high degree of business and financial risk that even a combination of experience, knowledge and careful evaluation may not be able to overcome |
| We intend to make substantial additional investments in our unconventional gas business and intend to aggressively develop our existing properties and seek opportunities to lease additional areas in the Cherokee basin and other areas |
| Such expansion will require significant capital expenditure |
| We may drill wells that are unproductive or, although productive, do not produce gas in economic quantities |
| Acquisition and completion decisions generally are based on subjective judgments and assumptions that are speculative |
| It is impossible to predict with certainty the production potential of a particular property or well |
| Furthermore, a successful completion of a well does not ensure a profitable return on the investment |
| A variety of geological, operational, or market-related factors, including, but not limited to, unusual or unexpected geological formations, pressures, equipment failures or accidents, fires, explosions, blowouts, cratering, pollution and other environmental risks, shortages or delays in the availability of drilling rigs and the delivery of equipment, inability to renew leases relating to producing properties, loss of circulation of drilling fluids or other conditions may substantially delay or prevent completion of any well, or otherwise prevent a property or well from being profitable |
| Our future success depends upon our ability to find, develop and acquire additional unconventional gas reserves that will be commercially viable for production |
| Without successful exploration or acquisition activities, our reserves and revenues from our energy segment will decline |
| Some of our competitors in the energy business are larger, more established companies with substantially greater resources, and in many instances they have been engaged in the unconventional gas extraction business for longer than we have |
| These companies may have acquisition and development strategies that are more aggressive than ours and may be able to acquire more unconventional natural gas properties or develop their existing properties much faster than we can |
| We endeavor to discover new economically feasible gas reserves at least commensurate with the depletion of our existing reserves through production |
| Our inability to acquire larger reserves of unconventional gas and potential delays in the expansion of our unconventional gas business may prevent us from gaining market share and adversely affect our results of operations and profitability |
| We may not be able to find and develop or acquire additional reserves at an acceptable cost or have necessary financing for these activities in the future |
| In addition, drilling activity within a particular area that we lease may be unsuccessful and exploration activities may not lead to commercial discoveries of unconventional natural gas |
| Further, we may also have to venture into more hostile environments, both politically and geographically, where exploration, development and production of unconventional gas will be more technologically challenging and expensive |
| Our bonding capacity may be limited in certain circumstances A significant portion of our projects requires us to procure a bond to secure performance |
| With a decreasing number of insurance participants in that market, it may be difficult to find sureties who will continue to provide contract required bonding at acceptable rates |
| With respect to our joint ventures, our ability to obtain a bond may also depend on the credit and performance risks of our joint venture partners, some of whom may also depend on the credit and performance risks of our joint venture partners, some of whom may not be as financially strong as we are |
| Our inability to obtain bonding on favorable terms would have a material adverse effect on our business |
| We are subject to market fluctuations of certain commodities in connection with the operation of our business The manufacture of products used in our rehabilitation business is dependent upon the availability of resin, a petroleum-based product |
| Resin prices have fluctuated on the basis of the prevailing prices of oil and we anticipate that prices will continue to be heavily influenced by the events affecting the oil market |
| We also purchase a significant amount of steel for use in connection with our water resources, mineral and geoconstruction businesses |
| In addition, we purchase a significant volume of fuel to 11 _________________________________________________________________ operate our trucks and equipment |
| At present, we do not engage in any type of hedging activities to mitigate the risks of fluctuating market prices for oil, steel or fuel and increases in the price of oil or steel may cause an adverse effect on our cost structure which we may not be able to recover from our customers |
| The dollar amount of our backlog, as stated at any given time, is not necessarily indicative of our future earnings As of January 31, 2006, our backlog was approximately dlra237dtta9 million |
| There can be no assurance that the revenues projected in our backlog will be realized or, if realized, will result in profits |
| Further, project terminations, suspensions or adjustments in scope may occur with respect to contracts reflected in our backlog |
| Reductions in backlog due to cancellation by a customer or scope adjustments adversely affect, potentially to a material extent, the revenue and profit we actually receive from such backlog |
| We may be unable to complete some projects included in our backlog in the estimated time and, as a result, such projects could remain in the backlog for extended periods of time |
| Estimates are reviewed periodically and appropriate adjustments are made to the amounts included in backlog |
| Our backlog does not include any awards for work expected to be performed more than three years after the date of our financial statements |
| The amount of future actual awards may be more or less than our estimates |
| Our failure to meet the schedule or performance requirements of our contracts could adversely affect us In certain circumstances, we guarantee contract completion by a scheduled acceptance date |
| Failure to meet any such schedule could result in additional costs, and the amount of such additional costs could exceed projected profit margins |
| These additional costs include liquidated damages paid under contractual penalty provisions, which can be substantial and can accrue on a daily basis |
| In addition, our actual costs could exceed our projections |
| Performance problems for existing and future contracts could cause actual results of operations to differ materially from those anticipated by us and could cause us to suffer damage to our reputation within our industry and our client base |
| To the extent that we cannot engage subcontractors, our ability to complete a project in a timely fashion or at a profit may be impaired |
| If the amount we are required to pay for subcontracted services exceeds the amount we have estimated in bidding for fixed-price work, we could experience losses in the performance of these contracts |
| In addition, if a subcontractor is unable to deliver its services according to the negotiated terms for any reason, including the deterioration of its financial condition, we may be required to purchase the services from another source at a higher price |
| Our projects expose us to potential professional liability, product liability, warranty and other claims Any accidents or system failures in excess of insurance limits at locations engineered or constructed by us or where our products are installed or services performed could result in significant professional liability, product liability, warranty and other claims against us |
| Further, the construction projects we perform expose us to additional risks including cost overruns, equipment failures, personal injuries, property damage, shortages of materials and labor, work stoppages, labor disputes, weather problems and unforeseen engineering, architectural, environmental and geological problems |
| In addition, once our construction is complete, we may face claims with respect to the work performed |
| We may be liable to complete work under our joint venture arrangements We enter into contractual joint ventures in order to develop joint bids on contracts |
| The success of these joint ventures depends largely on the satisfactory performance of our joint venture partners of their obligations under the joint venture |
| Under these joint venture arrangements, we may be required to complete our joint venture partner’s portion of the contract if the partner is unable to complete its portion and a bond is not available |
| In such case, the additional obligations could result in reduced profits or, in some cases, significant losses for us with respect to the joint venture |
| Our drilling and other construction activities are subject to various risks and natural disasters, and resulting losses could have a material adverse effect on us Our drilling and other construction activities involve operating hazards that can result in personal injury or loss of life, damage and destruction of property and equipment, damage to the surrounding areas, release of hazardous substances or wastes and other damage to the environment, interruption or suspension of drill site operations and loss of revenues and future business |
| The magnitude of these operating risks is amplified when we, as is frequently the case, conduct a project on a fixed-price, “turnkey” basis in which we delegate specified functions to subcontractors but remain responsible to the customer for the subcontracted work |
| Whether or not we or our subcontractor causes an accident, we could be named as a defendant in lawsuits asserting large claims arising from such occurrences |
| Although we maintain insurance protection that we consider economically prudent, we do not know whether this insurance will be sufficient or effective under all circumstances or against all claims or hazards to which we may be subject or whether we will be able to continue to obtain this insurance protection in the future at rates that we consider reasonable |
| A successful claim or damage resulting from a hazard for which we are not fully insured could have a material adverse effect on our business, results of operations, liquidity and financial position |
| In addition, our business is subject to curtailed or suspended operations as a result of the following: • adverse weather conditions; 12 _________________________________________________________________ • natural disasters; • work stoppages; • mine closings; and • force majeure and other similar events |
| A majority of our projects have fixed prices and assign responsibility to us for project overruns and, as a result, delays in completion of a project due to any of the above mentioned factors could affect our operating results |
| In addition, the costs of drilling, completing and operating wells could be subject to shortages of or delays in obtaining equipment, supplies, mobilization of rigs and the inadequacy or unavailability of, or other problems with, transportation facilities |
| This in particular, is a risk related to our foreign rigs that are often located in remote locations with limited infrastructure support |
| The occurrence of any of these events could have a material adverse impact on our business, results of operations, liquidity and financial position |
| We require skilled workers to conduct our operations Our ability to remain productive, profitable and competitive depends substantially on our ability to retain and attract skilled workers with expert geological and other engineering knowledge and capabilities |
| As of January 31, 2006, approximately 12prca of our workforce is unionized and 6 of our 28 collective bargaining agreements will expire within the next 12 months |
| An inability to attract and retain trained drillers and other skilled employees in the United States and overseas could have a material adverse effect on our business, results of operations, liquidity and financial position |
| We will lose business to our competitors if we are not able to demonstrate our technical competence, competitive pricing and reliable performance to potential customers We face significant competition and a large part of our business is dependent upon obtaining work through a competitive bidding process |
| In our water resources drilling business and our geoconstruction services business, we compete with many smaller firms on a local or regional level |
| There are no proprietary technologies or other significant factors which prevent other firms from entering these local or regional markets or from consolidating together into larger companies more comparable in size to our company |
| Our competitors for our turnkey construction services are primarily local and national specialty general contractors |
| In our mineral exploration business, we compete with a number of drilling companies, the largest being Boart Longyear Group, a private company, and Major Drilling, a Canadian public company |
| Competition also places downward pressure on our contract prices and profit margins |
| Intense competition is expected to continue in these markets, and we face challenges in our ability to maintain strong growth rates |
| If we are unable to meet these competitive challenges, we could lose market share to our competitors and experience an overall reduction in our profits |
| Additional competition could adversely affect our business, results of operations, liquidity and financial position |
| Our businesses are subject to complex governmental regulations which could have a material adverse affect on our results of operations and financial condition Our drilling and other construction services are subject to various licensing, permitting, approval and reporting requirements imposed by federal, state, local and foreign laws |
| Our operations are subject to inspection and regulation by various governmental agencies, including the Department of Transportation, Occupational and Safety Health Administration and the Mine Safety and Health Administration of the Department of Labor in the United States, as well as their counterparts in foreign countries |
| A major risk inherent in drilling and other construction is the need to obtain permits from local authorities |
| Delays in obtaining permits, the failure to obtain a permit for a project or a permit with unreasonable conditions or costs could have a material adverse effect on our ability to effectively provide our services |
| In addition, these regulations also affect our mining customers and may influence their determination to conduct mineral exploration and development |
| Future changes in these laws and regulations, domestically or in foreign countries, could cause our customers to incur additional expenses or result in significant restrictions to their operations and possible expansion plans, which in turn could have a material adverse impact on us |
| Our water treatment business is impacted by legislation and municipal requirements that set forth discharge parameters, constrain water source availability and set quality and treatment standards |
| The success of our groundwater treatment services business depends on our ability to comply with the stringent standards set forth by the regulations governing the industry and our ability to provide adequate design and construction solutions in a cost-effective manner |
| Presently, the exploration, development and production of unconventional natural gas is subject to various types of regulation by local, state, foreign and federal agencies, including laws relating to the environment and pollution |
| We incur certain capital costs to comply with such regulations and expect to continue to make capital expenditures to comply with these regulatory requirements |
| In addition, these requirements may prevent or delay the commencement or continuance of a given operation and have a substantial impact on the growth of our coalbed methane business |
| Legislation affecting the gas industry is under constant review for amendment and expansion of scope and future changes to legislation may impose significant burdens on our business, financial or otherwise |
| Also, numerous departments and agencies, both federal and state, are authorized by statute to issue and have issued rules and regulations binding on the gas industry and its individual members, some of which carry substantial penalties and other sanctions for failure to comply |
| Any increases in the regulatory burden on the gas industry created by new legislation would increase our cost of doing business and, consequently, adversely affect our profitability |
| Our business is subject to environmental regulation that could result in substantial costs or liabilities We are required to comply with foreign, federal, state and local laws and regulations regarding health and safety and the protection 13 _________________________________________________________________ of the environment, including those governing the storage, use, handling, transportation, discharge and disposal of hazardous substances in the ordinary course of our operations |
| We are also required to obtain and comply with various permits under current environmental laws and regulations, and new laws and regulations may require us to obtain and comply with additional permits |
| We may be unable to obtain or comply with, and could be subject to revocation of, permits necessary to conduct our business |
| Costs to comply with environmental laws, regulations and permits may be substantial and any failure to comply could result in fines, penalties or other sanctions |
| Various foreign, federal, state and local environmental laws and regulations may impose liability on us with respect to conditions at our current or former facilities, sites at which we conduct or have conducted operations or activities or any third party waste disposal site that we, directly or indirectly, sent hazardous wastes |
| The costs of investigation or remediation at these sites may be substantial |
| Environmental laws are complex, change frequently and have tended to become more stringent over time |
| Compliance with, and liability under, current and future environmental laws, as well as more vigorous enforcement policies or discovery of previously unknown conditions requiring remediation, could have a material adverse effect on our business, results of operations, liquidity and financial position |
| We have high deductibles for our health insurance, workers’ compensation insurance and liability insurance Although we maintain insurance protection that we consider economically prudent for major losses, we have high deductible amounts for each claim under our health insurance, workers’ compensation insurance and liability insurance |
| Our deductible amount for each health insurance claim, liability insurance and workers’ compensation claim is currently dlra200cmam000, dlra1cmam000cmam000 and dlra1cmam000cmam000, respectively |
| There can be no assurance that we will have adequate funds to cover our deductible obligations or that our insurance will be sufficient or effective under all circumstances or against all claims or hazards to which we may be subject or that we will be able to continue to obtain such insurance protection |
| A successful claim or damage resulting from a hazard for which we are not fully insured could have a material adverse effect on us |
| Our actual results could differ from the estimates and assumptions that we use to prepare our financial statements To prepare financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions, as of the date of the financial statements, which affect the reported values of assets and liabilities and revenues and expenses and disclosures of contingent assets and liabilities |
| Areas requiring significant estimates by our management include: • contract costs and profits and application of percentage-of-completion accounting and revenue recognition of contract claims; • recoverability of inventory and application of lower of cost or market accounting; • provisions for uncollectible receivables and customer claims and recoveries of costs from subcontractors, vendors and others; • provisions for income taxes and related valuation allowances; • recoverability of goodwill; • recoverability of other intangibles and related estimated lives; • valuation of assets acquired and liabilities assumed in connection with business combinations; and • accruals for estimated liabilities, including litigation and insurance reserves |
| Our actual results could differ from those estimates |
| We are and will continue to be involved in litigation We have been and may from time to time be named as a defendant in legal actions claiming damages in connection with drilling or other construction projects and other matters |
| These are typically actions that arise in the normal course of business, including employment-related claims and contractual disputes or claims for personal injury or property damage which occurs in connection with services performed relating to drilling or construction sites |
| Our contractual disputes normally involve claims relating to the drilling or other construction services we have provided |
| To date, we have been able to obtain liability insurance for the operation of our business |
| However, if we sustain damages that materially exceed our insurance coverage or that are not insured, there could be a material adverse effect on our liquidity, which could impair our operations |
| If we must write off a significant amount of intangible assets or long-lived assets, our earnings will be negatively impacted Because we have grown in part through acquisitions, goodwill and other acquired intangible assets represent a substantial portion of our assets |
| If we make additional acquisitions, it is likely that we will record additional intangible assets on our books |
| We also have long-lived assets consisting of property and equipment and other identifiable intangible assets of dlra175dtta1 million as of January 31, 2006 which are reviewed for impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable |
| If a determination that a significant impairment in value of our unamortized intangible assets or long-lived assets occurs, such determination would require us to write off a substantial portion of our assets |
| Such a write-off would negatively affect our earnings |
| Difficulties integrating our acquisitions could adversely affect us From time to time, we have made acquisitions to pursue market opportunities, increase our existing capabilities and expand into new areas of operation |
| We plan to pursue select acquisitions in the future |
| If we are unable to complete acquisitions we have 14 _________________________________________________________________ identified, our business could be materially adversely affected |
| In addition, we may encounter difficulties integrating our acquisitions and in successfully managing the growth we expect from the acquisitions |
| Furthermore, our expansion into new businesses, such as with our Reynolds, Inc |
| acquisition, may expose us to additional business risks that are different from those we have traditionally experienced |
| To the extent we encounter problems in identifying acquisition risks or integrating our acquisitions, we could be materially adversely affected |
| Because we may pursue acquisitions around the world and may actively pursue a number of opportunities simultaneously, we may encounter unforeseen expenses, complications and delays, including difficulties in employing sufficient staff and maintaining operational and management oversight |
| Risks Related To Our Common Stock Provisions in our organizational documents could prevent or frustrate attempts by shareholders to replace our current management |
| Our certificate of incorporation and bylaws contain provisions that could make it more difficult for a third party to acquire us without consent of our board of directors |
| Our certificate of incorporation provides for a staggered board |
| Accordingly, shareholders may elect only a minority of our board at any annual meeting, which may have the effect of delaying or preventing changes in management |
| Our certificate of incorporation requires the affirmative vote of shareholders holding at least 80prca of our capital stock to amend the provision in our certificate of incorporation providing for the classification of our directors |
| In addition, under our certificate of incorporation, our board of directors may issue shares of preferred stock and determine the terms of those shares of stock without any further action by our shareholders |
| Our issuance of preferred stock could make it more difficult for a third party to acquire a majority of our outstanding voting stock and thereby effect a change in the composition of our board of directors |
| Our certificate of incorporation also provides that our shareholders may not take action by written consent |
| Our bylaws require advance notice of shareholder proposals and nominations, and permit only our board of directors, or authorized committee designated by our board of directors, to call a special shareholder meeting |
| These provisions may have the effect of preventing or hindering attempts by our shareholders to replace our current management |
| In addition, Delaware law prohibits a corporation from engaging in a business combination with any holder of 15prca or more of its capital stock until the holder has held the stock for three years unless, among other possibilities, the board of directors approves the transaction |
| The board may use this provision to prevent changes in our management |
| Also, under applicable Delaware law, our board of directors may adopt additional anti-takeover measures in the future |
| We have also approved a shareholders’ rights agreement (the “Rights Agreement”) between us and National City Bank, as rights agent |
| Pursuant to the Rights Agreement, holders of our common stock are entitled to purchase one one-hundredth (1/100) of a share (a “Unit”) of Series A Junior Participating Preferred Stock at a price of dlra45 per Unit upon certain events |
| The purchase price is subject to appropriate adjustment for stock splits and other similar events |
| Generally, in the event a person or entity acquires, or initiates a tender offer to acquire, at least 25prca of our then outstanding common stock, the rights will become exercisable for common stock having a value equal to two times the purchase price of the right |
| The existence of the Rights Agreement may discourage, delay or prevent a change of control or takeover attempt of our company by a third party that is opposed to by our management and board of directors |
| Because we are a relatively small company, we are disproportionately negatively impacted by changes in the securities laws and regulations, which are likely to increase our costs and require additional management resources The Sarbanes-Oxley Act of 2002, which became law in July 2002, has required changes in some of our corporate governance, securities disclosure and compliance practices |
| In response to the requirements of that Act, the SEC and the Nasdaq have promulgated new rules and listing standards covering a variety of subjects |
| Compliance with these new rules and listing standards has significantly increased our legal and financial and accounting costs, and we expect these increased costs to continue |
| In addition, the requirements have taxed a significant amount of management’s and the Board of Directors’ time and resources |
| Likewise, these developments may make it more difficult for us to attract and retain qualified members of our board of directors, particularly independent directors, or qualified executive officers |
| Because we are a relatively small company, we expect to be disproportionately negatively impacted by these changes in securities laws and regulations which will increase our costs, require additional management resources and may, in the event that we receive anything other than an unqualified report on our internal controls over financial reporting, result in greater difficulty in raising funding for our operations and negatively impact our stock price |
| As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the company’s internal controls over financial reporting in their annual reports on Form 10-K that contains an assessment by management of the effectiveness of the company’s internal controls over financial reporting |
| In addition, the public accounting firm auditing the company’s financial statements must attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting |
| These reports currently exclude any assessment of the financial controls at the Reynolds, Inc |
| business, which was acquired on September 28, 2005 |
| in our evaluation of the design and effectiveness of internal control over financial reporting as of January 31, 2007 |
| If we are unable to conclude that we have effective internal controls over financial reporting or, if our independent auditors are unable to provide us with an unqualified report as to the effectiveness of our internal controls over financial reporting as of each fiscal year-end as required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability of our financial statements, 15 _________________________________________________________________ which could result in a decrease in the value of our securities |
| We are a small company with limited resources |
| The number and qualifications of our finance and accounting staff are limited, and we have limited monetary resources |
| We experience difficulties in attracting qualified staff with requisite expertise due to the profile of our company and a generally tight market for staff with expertise in these areas |
| A key risk is that as we complete our evaluation of internal controls each year a material weakness could be identified |
| A small number of shareholders own a significant amount of our common stock and have influence over our business regardless of the opposition of other shareholders A small number of shareholders own in excess of a majority of our outstanding common stock |
| As of January 31, 2006, approximately 36dtta5prca of our common stock was held by five investors |
| The interests of these shareholders may not always coincide with our interests or those of our other shareholders |
| These shareholders, acting together, have significant influence over all matters submitted to our shareholders, including the election of our directors and approval of business combinations, and could accelerate, delay, deter or prevent a change of control of us |
| These shareholders are able to exercise significant control over our business, policies and affairs |
| We are restricted from paying dividends We have not paid any cash dividends on our common stock since our initial public offering in August 1992, and we do not anticipate paying any cash dividends in the foreseeable future |
| In addition, our current credit arrangements restrict our ability to pay cash dividends |