| ATLANTIS PLASTICS INC ITEM 1A RISK FACTORS An investment in our common stock involves a high degree of risk |
| You should carefully consider the factors described below, in addition to those discussed elsewhere in this report, in analyzing an investment in the common stock |
| If any of the events described below occurs, our business, financial condition and results of operations would likely suffer and the trading price of our common stock could fall |
| The following factors could cause our actual results to differ materially from those projected in forward-looking statements, whether made in this 10-K, annual or quarterly reports to shareholders, future press releases, SEC filings or orally, whether in presentations, responses to questions or otherwise |
| See “Note Regarding Forward-Looking Statements |
| ” Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling future obligations |
| As of February 28, 2006 we had dlra211dtta8 million of outstanding indebtedness, approximately dlra0dtta1 million in cash and cash equivalents and an additional approximate dlra9dtta1 million of unused availability under our credit facilities, net of outstanding letters of credit of dlra1dtta6 million |
| Our substantial indebtedness could have negative consequences |
| For example, it could: • increase our vulnerability to general adverse economic and industry conditions; • require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, product development efforts and other general corporate purposes; • limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate, including our ability to pursue attractive acquisition opportunities; • place us at a competitive disadvantage compared to our competitors that have less debt; and • limit our ability to borrow additional funds |
| In addition, our credit agreements contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long term best interests |
| Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debts |
| We face intense competition that could result in our losing or failing to gain market share and adversely affect our results of operations |
| -10- _________________________________________________________________ [41]Table of Contents We face intense competition from numerous competitors, several of which have greater financial resources than us |
| In addition, the markets for certain of our products are characterized by low cost of entry or competition based primarily on price |
| This intense competition could result in pricing pressures, lower sales, reduced margins and lower market share |
| Plastic Films competes with a limited number of producers capable of national distribution and a greater number of smaller manufacturers that target specific regional markets and specialty film segments competing on the basis of quality, price, service (including the manufacturer’s ability to supply customers in a timely manner) and product differentiation |
| Injection Molding competes in a highly fragmented segment of the plastics industry, with a large number of regional manufacturers competing on the basis of customer service (including timely delivery and engineering/design capabilities), quality, product differentiation and price |
| Our building products business competes with large and well established suppliers to the industry, competing on the basis of product differentiation and service |
| Profile Extrusion competes regionally with a number of smaller extruders that focus on specialized niche markets, competing on the basis of cost, quality and service levels |
| There can be no assurance that we will continue to compete successfully in the markets for our products or that competition in such markets will not intensify |
| Our financial performance is dependent on raw material prices and our ability to pass on price increases to customers |
| The primary raw materials we use in the manufacture of our products are various plastic resins, primarily polyethylene |
| Our financial performance therefore is dependent to a substantial extent on the polyethylene resin market |
| The capacity, supply and demand for plastic resins and the petrochemical intermediates from which they are produced are subject to substantial cyclical price fluctuations and other market disturbances, including supply shortages |
| Consequently, plastic resin prices may fluctuate as a result of changes in natural gas and crude oil prices |
| While we attempt to pass through changes in the cost of our raw materials to our customers in the form of price increases, we cannot be assured that we will be able to do so in the future |
| To the extent that increases in the cost of plastic resins cannot be passed on to our customers, or the duration of time lags associated with a pass through becomes significant, such increases may have a material adverse effect on our profitability |
| Furthermore, during periods when resin prices are falling, gross profits may suffer, as we will be selling products manufactured with resin purchased one to two months prior at higher prices |
| Sales to one of our customers accounted for 12prca of our net sales in 2005, and the loss of sales to that customer could harm our business, financial condition and results of operations |
| Sales to Whirlpool Corporation accounted for 12prca of our net sales in 2005 |
| A significant reduction in Whirlpool’s volume, or the loss of Whirlpool as a customer, could have a material adverse effect on our business, financial condition and results of operations |
| Our acquisitions carry risks |
| Acquisitions and investments involve numerous risks such as diversion of senior management’s attention, unsuccessful integration of the acquired entity’s personnel, operations, technologies and products, lack of market acceptance of new services and technologies or a shift in industry dynamics that negatively impacts the forecasted demand for the new products |
| Impairment of goodwill and other intangible assets may result if these risks materialize |
| There can be no assurance that an acquired business will perform as expected or generate significant net sales or profits |
| In addition, acquisitions may involve the assumption of obligations or significant one-time write-offs |
| In order to finance any future acquisitions, we may need to raise additional funds through public or private financings |
| Our business may suffer if any of our key senior executives discontinues employment with us or if we are unable to recruit and retain highly qualified employees |
| Our future success depends to a large extent on the services of our key managerial employees |
| We may not be able to retain our executive officers and key personnel or attract additional qualified management in the future |
| Our business also depends on our continuing ability to recruit, train and retain highly qualified employees |
| The competition for these employees is intense, and the loss of these employees could harm our business |
| Our intellectual property rights may be inadequate to protect our business |
| We attempt to protect our intellectual property rights through a combination of intellectual property laws, including patents |
| Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, results of operations and financial condition |
| -11- _________________________________________________________________ [42]Table of Contents We also rely on unpatented proprietary technology |
| It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology |
| If we are unable to maintain the proprietary nature of our technologies, we could be materially adversely affected |
| We rely on our trademarks, trade names and brand names to distinguish our products from the products of our competitors, and have registered or applied to register many of these trademarks |
| There can be no assurance that our trademark applications will be approved |
| Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks |
| In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote resources to advertising and marketing new brands |
| Further, we cannot be assured that competitors will not infringe our trademarks, or that we will have adequate resources to enforce our trademarks |
| If third parties claim that we infringe upon their intellectual property rights, our operating profits could be adversely affected |
| We face the risk of claims that we have infringed third parties’ intellectual property rights |
| Any claims of patent or other intellectual property infringement, even those without merit, could: • be expensive and time consuming to defend; • cause us to cease making, licensing or using products that incorporate the challenged intellectual property; • require us to redesign, reengineer, or rebrand our products, if feasible; • divert management’s attention and resources; or • require us to enter into royalty or licensing agreements in order to obtain the right to use a third party’s intellectual property |
| Any royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all |
| A successful claim of infringement against us could result in our being required to pay significant damages, enter into costly license or royalty agreements, or stop the sale of certain products, any of which could have a negative impact on our operating profits and harm our future prospects |
| If our products infringe on the intellectual property rights of others, we may be required to indemnify our customers for any damages they suffer |
| We generally indemnify our customers with respect to infringement by our products of the proprietary rights of third parties |
| Third parties may assert infringement claims against our customers |
| These claims may require us to initiate or defend protracted and costly litigation on behalf of our customers, regardless of the merits of these claims |
| If any of these claims succeed, we may be forced to pay damages on behalf of our customers or may be required to obtain licenses for the products they use |
| If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our products |
| Environmental, health and safety matters could require material expenditures and changes in our operations |
| We are subject to various environmental, health and safety laws and regulations which govern our operations and which may adversely affect our production costs |
| Actions by federal, state and local governments concerning environmental, health and safety matters could result in laws or regulations that could increase the cost of producing the products we manufacture or otherwise adversely affect the demand for our products |
| Certain local governments have adopted ordinances prohibiting or restricting the use or disposal of certain plastic products that are among the types we produce |
| If such prohibitions or restrictions were widely adopted, it could have a material adverse effect on our business, financial condition and results of operations |
| In addition, a decline in consumer preference for plastic products due to environmental considerations could have a material adverse effect on our business, financial condition and results of operations |
| In addition, certain of our operations are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes |
| Non-compliance could subject us to material liabilities, such as fines, damages, criminal or civil sanctions and remediation costs, or result in interruptions in our operations |
| We believe our operations are -12- _________________________________________________________________ [43]Table of Contents currently in substantial compliance with these laws and regulations |
| However, there is no assurance that we have been or will be at all times in compliance with all of these requirements and that the resolution of these environmental matters will not have an adverse effect on our results of operations, financial condition and cash flows in any given period |
| Under certain environmental laws, liability for the cleanup of contaminated sites can be imposed retroactively and on a joint and several basis |
| We could be held responsible for all cleanup costs at a site, whether currently or formerly owned or operated as well as third party sites to which we may have sent waste, and regardless of fault or the legality of the original disposal |
| While we are not currently aware of contaminated or Superfund sites as to which material outstanding claims or obligations exist, there may be additional sites or contaminants of which we are unaware |
| The discovery of currently unknown contaminants or the imposition of cleanup obligations could have a material adverse effect on our results of operations or financial condition |
| Environmental laws and regulations are complex, and both the laws and regulations and the interpretation thereof, change frequently and have tended to become more stringent over time |
| Future developments could restrict or eliminate the use of, or require us to make modifications to our products, which could have a material adverse effect on our results of operations, financial condition and cash flows in any given period |
| Although we cannot predict with any certainty our future capital expenditure requirements for environmental regulatory compliance, we have not currently identified any of our facilities as requiring major expenditures for environmental remediation or to achieve compliance with environmental regulations |
| Accordingly, we have not accrued any amounts relating to such expenditures |
| We do not currently have any insurance coverage for environmental liabilities and do not anticipate obtaining such coverage in the future |
| Our major shareholder has significant influence over our business and could delay, deter or prevent a change of control or other business combination |
| As of December 31, 2005, Earl Powell, our Chairman of the Board, holds approximately 47dtta2prca of our voting power, and is able to exert significant control over our affairs, including the election of a majority of our board, the appointment of our management, the entering into of mergers, sales of substantially all of our assets and other extraordinary transactions |
| His interests could conflict with those of our other shareholders |