| STREICHER MOBILE FUELING INC Item 1A Risk Factors CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS The following important factors have affected, and may in the future continue to affect, our business results of operations and financial condition, and could cause operating results to differ materially from those expressed in any forward-looking statements made by or on behalf of us elsewhere in this report |
| No Assurances of Future Profitability; Losses from Operations; Need for Capital |
| SMF incurred net losses for the fiscal years ended June 30, 2006, 2005 and 2004 |
| In order to generate profits in the future, we need to reduce cash and non-cash interest expense, increase volumes at profitable margins, control costs and generate sufficient cash flow to support working capital and debt service requirements |
| There is no assurance that our management will be able to accomplish our business plan or continue to raise capital at terms which are acceptable to us in order to support working capital requirements or debt service shortfalls during any business downturns |
| The dlra4dtta6 million decrease primarily related to the costs of developing and maintaining our improved corporate infrastructure; continuing costs of integrating our recent acquisitions; capital expenditures related to the implementation of our new ERP system; corporate office leasehold improvements and other capital purchases; and principal payments on the August 2003 Notes; offset by proceeds from warrant exercises and an increase in net margin per gallon compared to the prior year |
| If operating results do not improve in fiscal 2007, the Company will require additional capital to fund acquisitions, significant diversification efforts and infrastructure development |
| While the Company believes that it will be able to obtain needed capital, there can be no assurance that it will do so or that such capital can be obtained on terms acceptable to the Company |
| Trading Market for Our Common Stock |
| During the year ended June 30, 2006, our common stock sometimes traded in large daily volumes and other times at much lower volumes, in many cases at wide price variances |
| This volatility, which could make it difficult for shareholders to sell shares at a predictable price or at specific times, is often due to factors beyond our control |
| Quarterly and annual operating results, changes in general conditions in the economy, the financial markets or other developments affecting us could cause the market price of our common stock to fluctuate |
| While we intend to continue to expand through acquisitions, our growth will also depend upon the ability to achieve greater penetration in existing markets and to successfully enter new markets in both additional major and secondary metropolitan areas |
| Such organic expansion will largely be dependent on our ability to demonstrate the benefits of our services and products to potential new customers; successfully establish and operate new locations; hire, train and retain qualified management, operating, marketing and sales personnel; finance acquisitions, capital expenditures and working capital requirements; secure reliable sources of product supply on a timely basis and on commercially acceptable credit terms; and successfully manage growth by effectively supervising operations, controlling costs and maintaining appropriate quality controls |
| There can be no assurance that we will be able to successfully expand our operations into new markets |
| Acquisition Availability; Integrating Acquisitions |
| SMF’s future growth strategy involves the acquisition of complementary businesses, such as wholesale fuel or petroleum lubricants marketers and distributors; wholesale fuel and other commercial mobile fueling companies; and transportation logistics services businesses |
| It is not certain that we will be able to identify or make suitable acquisitions on acceptable terms or that any future acquisitions will be effectively and profitably integrated into our operations |
| Acquisitions involve numerous risks that could adversely affect our operating results, including timely and cost effective integration of the operations and personnel of the acquired business; potential write downs of acquired assets; retention of key personnel of the acquired business; potential disruption of existing business; maintenance of uniform standards, controls, procedures and policies; additional capital needs, the effect of changes in management on existing business relationships; and profitability and cash flows generally |
| Effect of Material Weakness in Internal Controls |
| As of June 30, 2006, our management identified significant deficiencies related to policies and procedures to ensure accurate and reliable interim and annual consolidated financial statements which, considered together, constituted a material weakness in our internal controls |
| Specifically, we lacked (i) sufficient number of personnel with required technical accounting and SEC financial reporting experience; (ii) adequate segregation of duties among our accounting personnel; (iii) sufficient review controls over account reconciliations, account analyses and operating procedures, primarily in connection with acquired businesses; and (iv) policies and procedures requiring a timely and detailed review of information underlying amounts included in our financial statements and disclosures |
| We believe that the primary cause of this material weakness finding related to the integration of our Shank Services and H & W acquisitions, together with the delays in completing the implementation of our ERP System |
| While we have engaged in substantial efforts in order to address the material weakness in our internal controls over financial reporting and to improve the integrity of our reporting processes, including the development and implementation of our ongoing ERP infrastructure capability which we initiated in fiscal 2006, there is no assurance that our efforts will be successful |
| Those remediation efforts are explained in detail in Item 9A — Controls and Procedures of this report |
| Even though our management has made the correction of the identified material weakness one of its very highest priorities for fiscal 2007, it is possible that, considering our size, limited capital resources and our need to continue to expand our business by acquisitions and diversification, we will not be able to promptly rectify all of the significant deficiencies that led to our conclusion of a material weakness in our internal controls |
| We have incurred and will continue to incur substantial expenses relating to the remediation of this material weakness |
| These expenses may materially affect our financial condition, results of operations and cash flows |
| In addition, even after the remedial measures discussed in Item 9A — Controls and Procedures are fully implemented, our internal controls may not prevent all potential error and fraud, because any control system, no matter how well designed, can only provide reasonable and not absolute assurance that the objectives of the control system will be achieved |
| Dependence on Key Personnel |
| The future success of SMF will be largely dependent on the continued services and efforts of Richard E Gathright, our President and Chief Executive Officer, and on other key executive personnel |
| Gathright or other executive personnel could have a material adverse effect on our business and prospects |
| Our success and plans for future growth will also depend on our ability to attract and retain additional qualified management, operating, marketing, sales and financial personnel |
| There can be no assurance that we will be able to hire or retain such personnel on terms satisfactory to us |
| We have entered into written employment agreements with Mr |
| Gathright and certain other key executive personnel |
| Gathright’s employment agreement provides for automatic one year extensions unless either party gives notice of intent not to renew prior to such extension, there is no assurance that Mr |
| Gathright’s services or those of our other executive personnel will continue to be available to the Company |
| 11 _________________________________________________________________ Fuel Pricing and Supply Availability; Effect on Profitability |
| Diesel fuel and gasoline are commodities which are refined and distributed by numerous sources |
| SMF purchases the fuel delivered to our customers from multiple suppliers at daily market prices and in some cases qualifies for certain discounts |
| We monitor fuel prices and trends in each of our service markets on a daily basis and seek to purchase our supply at the lowest prices and under the most favorable terms |
| Commodity price risk is mitigated since we purchase and deliver our fuel supply daily and generally utilize cost-plus pricing when billing our customers |
| If we cannot continue to utilize cost-plus pricing when billing our customers, margins would likely decrease and a loss could be incurred |
| We have not engaged in derivatives or futures trading to hedge fuel price movements |
| In addition, diesel fuel and gasoline may be subject to supply interruption due to a number of factors, including natural disasters, refinery and/or pipeline outages and labor disruptions |
| The reduction of available supplies could impact our ability to provide commercial mobile and bulk fueling, and emergency response services and impact profitability |
| Risks Associated with Customer Concentration; Absence of Written Agreements |
| Although SMF provides services to many customers, a significant portion of our revenues are generated from a few of our larger customers |
| While we have formal, length of service written contracts with some of our larger customers, these types of agreements are not customary and we do not have them with the majority of our customers |
| As a result, most of our customers can terminate our services at any time and for any reason, and we can similarly discontinue service to any customer |
| SMF may discontinue service to a customer if changes in the service conditions or other factors cause us not to meet our minimum level of margins and rates, and the pricing or delivery arrangements cannot be re-negotiated |
| As a result of this customer concentration and absence of written agreements, our business, results of operations and financial condition could be materially adversely affected if one or more of our large customers were lost or if we were to experience a high rate of service terminations |
| Management of Growth; Accounting and Information Technology Systems Implementation |
| SMF’s future growth strategy is dependent on effective operational, financial and other internal systems, and the ability to attract, train, motivate, manage and retain our employees |
| If we are unable to manage growth effectively, results of operations will be adversely affected |
| In particular, the results of operations will be influenced by the redesign and implementation of our accounting and information technology systems to reduce operating costs and improve our ability to effectively manage our business and integrate acquisitions |
| There can be no assurance that such redesign and implementation will be completed as planned, or that it will have the intended results |
| SMF competes with other service providers, including several large regional, and numerous small, local independent operators who provide services similar to those which we offer to our customers |
| Our ability to compete is dependent on numerous factors, including price, complexity and technical nature of the services required, delivery dependability, credit terms, service locations as well as the type of reporting and invoicing services provided |
| There can be no assurance that we will be able to continue to compete successfully as a result of these or other factors |
| SMF’s operations are subject to the operating hazards and risks normally incidental to handling, storing and transporting diesel fuel and gasoline, which are classified as hazardous materials |
| We maintain insurance policies in amounts and with coverages and deductibles we believe are reasonable and prudent |
| However, there can be no assurance that our insurance will be adequate to protect us from liabilities and expenses that may arise from claims for personal and property damage arising in the ordinary course of business; that we will be able to maintain acceptable levels of insurance; or that insurance will be available at economical prices |
| Governmental Regulation |
| SMF’s operations are affected by numerous federal, state and local laws, regulations and ordinances, including those relating to protection of the environment and worker safety |
| There can be no assurance that we will be able to comply with existing and future regulatory requirements in the future without incurring substantial costs or otherwise adversely affecting our operations |
| See the discussion of governmental regulations and their impact on SMF in “Business-Effect of Governmental Regulation” above |
| SMF expects to generate future business by converting certain fleet operators, currently utilizing underground fuel storage tanks for their fueling needs, to commercial mobile fueling |
| The owners of underground storage tanks have been required to remove or retrofit those tanks to comply with technical regulatory requirements pertaining to their construction and operation |
| If other more economical means of compliance are developed or adopted by owners of underground storage tanks, the opportunity to market our services to these owners may be adversely affected |
| 12 _________________________________________________________________ Risk of Terrorism and Political Unrest in the Middle East may adversely affect the economy and the price and availability of petroleum products |
| Terrorist attacks, such as the attacks that occurred in New York, Pennsylvania and Washington, DC on September 11, 2001, and continuing political unrest in the Middle East may adversely impact the price and availability of fuel, our results of operations, our ability to raise capital and our future growth |
| The impact of terrorism on the oil industry in general, and on SMF in particular, is not known at this time |
| An act of terror could result in disruptions of crude oil or natural gas supplies and markets, the sources of our products, and our infrastructure facilities or our suppliers could be direct or indirect targets |
| Terrorist activity may also hinder our ability to transport fuel if the means of supply transportation, such as rail or pipelines, become damaged as a result of an attack |
| A lower level of economic activity following a terrorist attack could result in a decline in energy consumption, which could adversely affect our revenues or restrict our future growth |
| Instability in the financial markets as a result of terrorism could also impair our ability to raise capital |
| Terrorist activity could also lead to increased volatility in fuel prices, which could adversely affect our business generally |