| ” We believe that the risks described below are the most important factors which may cause our actual future results of operations to differ materially from the results projected in the forward-looking statements |
| Risks Related to Our Business A substantial portion of our revenues is derived from the sale of defense related products, primarily ceramic body armor |
| If demand for ceramic body armor declines, if federal budget appropriations involving our products are reduced, if we fail to obtain new government contracts or delivery orders under existing contracts, or if existing government contracts or orders are cancelled, our revenues, profit and cash flow would decline |
| In recent years, a substantial portion of our revenues has been derived from the sale of defense related products, particularly ceramic body armor, either directly or indirectly to the US government |
| We anticipate that a substantial portion of our revenues for the foreseeable future will continue to come from sales of defense related products; however, we cannot assure you that our rate of growth in defense related products will continue and it could decline |
| Our dependence on defense related business, and on sales of ceramic armor in particular, entails several risks, including those described below |
| Our defense related business is highly sensitive to changes in national and international defense and budget priorities |
| For example, in 2003, 2004 and 2005, our revenues from the sale of ceramic body armor increased significantly due to the US military’s acceleration of its program to equip its soldiers with ceramic body armor systems, in part, because of the war in Iraq |
| If demand for ceramic body armor declines because the number of ceramic body armor systems shipped is sufficient to equip front-line troops, conflicts in the Middle East and other high risk areas subside, US defense budget appropriations are reduced or because of other reasons, our revenues, profit and cash flow from the sale of defense related products would be reduced |
| Many defense contracts are awarded in an open competitive bidding process, and our past success in winning government contracts does not guarantee that we will win any new contracts in the future |
| Our success depends upon our ability to successfully compete for and retain such government contracts |
| If we, or if prime contractors for which we are a subcontractor, fail to win any future bids, or if we are unable to replace business lost upon cancellation, expiration or completion of a contract, our revenues, profit and cash flow could be reduced |
| Moreover, government contracts typically may be cancelled by the government at any time without penalty, other than our right to be reimbursed for certain expenses and inventory |
| If the US government were to cancel any of our government contracts, our revenues, profit and cash flow would be reduced |
| If the performance requirements for ceramic body armor are modified by the US military, we may incur delays or additional costs to change the design of our product, or we may not be able to satisfy the new requirements with our existing ceramic materials and processes |
| If this were to occur, our costs could increase and our revenues, profit and cash flow would decline |
| The ceramic body armor we manufacture must comply with stringent performance specifications established by the US military, such as weight and the level of ballistic protection it must provide, and these specifications may be modified by the military in new procurements, as well as under existing contracts |
| For example, during the quarter ended March 31, 2005, the US military directed us to modify the specifications of the lightweight ceramic body armor that we had been manufacturing, from the version commonly referred to as SAPI (small arms protective insert), to a revised requirement commonly referred to as ESAPI (enhanced small arms protective insert) |
| The revised requirement is more difficult to manufacture than the SAPI version |
| The change to this new design resulted in production delays and increased costs to us during the first quarter of 2005 as we developed new designs to meet the revised requirement and experienced manufacturing inefficiencies |
| In the future the US military may make additional changes to the performance requirements for body armor, and we may experience delays or additional costs to satisfy the new requirements, or we may be unable to meet the new requirements at all with our existing ceramic materials and processes |
| If this were to occur, our revenues from ceramic body armor would decline and our profitability would suffer |
| 19 ______________________________________________________________________ [45]Table of Contents We rely on two critical materials to make ceramic body armor |
| A delay or inability to obtain sufficient quantities of these materials could limit the amount of body armor we can manufacture and therefore result in reduced revenues, profit and cash flow |
| The critical materials required to manufacture our ceramic body armor are boron carbide powder, which is the principal raw material used in the production of the ceramic armor plates, and an ultra-high molecular weight polyethylene textile material, which we laminate to the surface of the ceramic armor plates |
| We obtain substantially all of our boron carbide powder from ESK Ceramics, which is one of the world’s leading manufacturers of boron carbide powder and has been a supplier of boron carbide powder to us for over 30 years |
| We acquired ESK Ceramics in August 2004, and it is now our subsidiary |
| ESK Ceramics is in the process of increasing its manufacturing capacity for boron carbide powder to meet our needs, as well as the needs of its other boron carbide powder customers, due to the rapidly increasing demand for ceramic body armor |
| If our ESK Ceramics subsidiary experiences production problems or delays in expanding its manufacturing capacity, supplies of boron carbide powder may be insufficient from other sources to meet our requirements for ceramic body armor |
| The ultra-high molecular weight polyethylene textile material is available in the United States only from Honeywell International, Inc, under the brand name Spectra Shield^^®^, and from Royal DSM NV, under the brand name Dyneema^^®^ |
| Due to the rapid escalation in the demand for ceramic body armor, the quantities of Spectra Shield and Dyneema materials have been in limited supply and on government-directed allocation |
| Although we believe that sufficient quantities of these materials will be available to fulfill our projected needs, a delay or interruption in the supply of either of these materials could adversely affect our ability to fulfill our current orders for ceramic body armor |
| If a delay or reduction in supplies of boron carbide powder or either Spectra Shield or Dyneema occurs, we may not be able to ship all of our orders for ceramic body armor, which could result in reduced revenues, profit and cash flow |
| We have recently added significant manufacturing capacity and anticipate the need to expand capacity further in the future |
| If our efforts to bring our new plants to full functional usage are not successful, or if demand for our products declines, we may have inefficient or under-utilized capacity, and our gross margins, profit and cash flow may suffer |
| We experienced a sudden increase in demand for ceramic body armor for military personnel and cam rollers for diesel engines during 2002 |
| This demand increased further during 2003, 2004 and 2005 |
| In 2002 we suffered from manufacturing inefficiencies, including low product yields, as a result of our efforts to meet the sudden increased demand for our products, which caused our gross profit margins on these products to suffer |
| These problems were reduced during 2003 and 2004 as we implemented a number of new programs and management initiatives to improve manufacturing efficiencies |
| In response to the increased demand for ceramic body armor and cam rollers, as well as other of our products, we have added approximately 286cmam000 square feet of facilities since early 2002, and we expect to expand our capacity further in the future |
| The foregoing is in addition to the approximately 620cmam000 square feet of facilities we acquired with our purchase of ESK Ceramics in August 2004 |
| We are also in the process of expanding ESK Ceramics’ capacity to produce boron carbide powder |
| Managing our expansion efforts has and may continue to put pressures on our operational, financial and managerial resources |
| Moreover, our increased production capacity may not enable us to manufacture the required quantities of our products in a timely manner or at gross profit margins that we have achieved in the past |
| Furthermore, demand for our products, particularly ceramic armor and cam rollers, may not remain at levels sufficient to utilize all of the added capacity |
| Much of our manufacturing facilities and production equipment, such as our furnaces and hot presses, are special purpose in nature and cannot be adapted easily to make other products |
| Also, a substantial amount of the boron carbide powder produced by ESK Ceramics is currently used by us and our competitors to make ceramic body armor |
| If the demand for ceramic body armor declines substantially from current levels, ESK Ceramics may have significant under-utilized capacity for boron carbide powder |
| Therefore, a substantial decline in demand for our ceramic body armor or cam rollers could result in significant excess manufacturing capacity, which would result in under absorption of overhead expense and reduced profit |
| 20 ______________________________________________________________________ [46]Table of Contents Next generation diesel truck engines being developed by two of our customers are designed to use steel cam rollers instead of our ceramic cam rollers |
| If our customers are successful in using steel cam rollers instead of our ceramic cam rollers, our sales of ceramic cam rollers will decline unless we can develop new customers for this product line |
| Our two largest customers for ceramic cam rollers are developing new diesel truck engines that we expect to be introduced in their diesel trucks starting in 2007 and 2008, respectively |
| These new diesel truck engines are designed to use steel cam rollers rather than our more expensive ceramic cam rollers |
| If these customers are successful in substituting steel cam rollers in some or all of the engine components in which our ceramic cam rollers currently are being used, our sales of cam rollers to them will decline |
| If we are unable to develop new customers for our ceramic cam rollers, then our revenues, profits and cash flow from this product line will decline beginning in 2007 |
| If we fail to increase our non-defense revenue, and if the demand for ceramic body armor decreases, our revenues, profit and cash flow will be materially and adversely affected |
| We currently receive the majority of our revenues and profits from sales of defense-related products, primarily ceramic body armor, to the US government |
| Because our dependence on defense-related products exposes us to significant risks, part of our business strategy is to continue to increase our non-defense revenue base by identifying new products and markets for our advanced technical ceramics, and by increasing sales to our existing non-defense customers |
| Our ability to execute this strategy successfully depends, in part, on our ability to increase market acceptance of our advanced technical ceramics as a replacement for materials such as metals, plastics and traditional ceramics |
| While advanced technical ceramics have certain advantages over other materials, such as the ability to withstand extremely high temperatures and combining hardness with light weight, they are more expensive to produce |
| As a result, the market for advanced technical ceramic products may be limited to high-end applications where price is not a critical competitive factor, where the characteristics of advanced technical ceramics may justify the higher costs compared to other materials or where other materials are not suitable |
| Due to these limitations on the market for advanced technical ceramics, the market for our products may not grow as we anticipate and we may not be able to increase our non-defense revenue base |
| If we are unable to execute this strategy, and if the demand for ceramic body armor decreases, our revenues, profit and cash flow will be materially and adversely affected |
| Growth in our operations may strain our resources, and if we fail to successfully manage potential future growth, we could incur higher operating costs and delays in the production of our products, which could result in reduced revenues, profit and cash flow |
| The increase in orders for ceramic body armor for military personnel, as well as the introduction of new products, is placing, and will continue to place, a significant strain on our operational, financial and managerial resources and personnel |
| To effectively manage potential future growth, we must continue to: • add manufacturing capacity and personnel; • implement and improve our operational, financial and management information systems; • develop the management skills of our managers and supervisors; • add new management personnel; and • train, motivate and manage our employees |
| Any failure to effectively manage growth could result in increased operating costs and delays in the development and production of our products |
| If this occurs, our revenues, profit and cash flow could decline |
| We may generate less profit than expected or even lose money on our fixed-price government contracts |
| Most of our government contracts, including the dlra461dtta0 million maximum value Indefinite Delivery/Indefinite Quantity contract for ceramic body armor awarded to us in August 2004, provide for a predetermined, fixed price for the products we sell regardless of the costs we incur |
| When making proposals for fixed-price contracts, we must rely on our ability to accurately estimate our costs and ability to manufacture and deliver the products on time and at a reasonable profit |
| Our actual production costs may, however, exceed forecasts due to unanticipated delays or increased cost of materials, components, labor, capital equipment or other factors |
| As a result, we may incur losses on fixed price contracts that we had expected to be profitable, or such contracts may be less profitable than we expected, which could have a material adverse effect on our business, financial condition and results of operations |
| 21 ______________________________________________________________________ [47]Table of Contents Our business is subject to various laws and regulations favoring the US government’s contractual position, and our failure to comply with such laws and regulations could harm our operating results and prospects |
| As a contractor to the US government, we must comply with laws and regulations relating to the formation, administration and performance of federal government contracts that affect how we do business with our customers and may impose added costs on our business |
| These rules generally favor the US government’s contractual position |
| For example, these regulations and laws include provisions that allow unsuccessful bidders to protest or challenge contracts we have been awarded, and allow the government to unilaterally terminate, reduce or modify our government contracts |
| The accuracy and appropriateness of certain costs and expenses used to substantiate our direct and indirect costs for the US government under fixed-price contracts are subject to extensive regulation and audit by the Defense Contract Audit Agency, an agency of the US Department of Defense |
| Responding to governmental audits, inquiries or investigations may involve significant expense and divert management’s attention |
| Our failure to comply with these or other laws and regulations could result in contract termination, suspension or debarment from contracting with the federal government, civil fines and damages and criminal prosecution and penalties |
| Any of these consequences could have a material adverse effect on our business, financial condition, results of operations and liquidity |
| If we are unable to maintain our existing level of business with 3M Unitek our revenues, profit and cash flow from this product line will decline |
| We sell our ceramic orthodontic brackets exclusively to 3M Unitek under five year supply agreement that we entered into with 3M Unitek on December 2, 2005 |
| This supply agreement replaces our original agreement with 3M Unitek that would have expired in September 2007, under which 3M Unitek was required to purchase all ceramic orthodontic brackets exclusively from us, and we were permitted to sell ceramic orthodontic brackets only 3M Unitek |
| Under the terms of the new agreement, 3M Unitek will continue to purchase their Clarity and Transcend brand ceramic orthodontic product lines exclusively from us for as long as 3M Unitek continues to sell those products |
| The new agreement further stipulates that Unitek must purchase from Ceradyne at least 50prca of the ceramic orthodontic brackets 3M Unitek requires for next generation designs, which it intends to introduce in 2007 |
| Except under limited circumstances, Ceradyne is not permitted to sell ceramic orthodontic brackets to any customers under the new agreement |
| As a result of our agreement with 3M Unitek, our revenue from ceramic orthodontic brackets is dependent entirely upon 3M Unitek |
| 3M Unitek also offers traditional stainless steel orthodontic brackets |
| We cannot guarantee that 3M Unitek will devote substantial marketing efforts to the sale of our ceramic orthodontic brackets, or that 3M Unitek will not reassess its commitment to our product |
| If 3M Unitek fails to actively market our ceramic orthodontic brackets or decides to promote a competing product over ours, this could cause the sales of our ceramic orthodontic brackets to decline |
| Moreover, the first of our two patents for our ceramic orthodontic brackets, which we jointly own with 3M Unitek, expires in September 2007 |
| Upon expiration of the patent, we may not be able to prevent third parties from manufacturing and selling competitive ceramic orthodontic brackets |
| Ceramic orthodontic brackets manufactured and sold by third parties may be less expensive than ours and may cause sales of our ceramic orthodontic brackets to decline either as a result of pricing pressure or loss of market share |
| In addition, the future success of our ceramic orthodontic brackets depends on our ability to maintain and increase market acceptance for our product compared to other competitive solutions, including traditional stainless steel brackets and newer products such as transparent plastic orthodontic aligners, synthetic sapphire brackets and other ceramic brackets |
| If 3M Unitek reduces its purchases of ceramic orthodontic brackets from us or if competitive products gain market share, the sales of our ceramic orthodontic brackets may decline, resulting in a decrease in our revenues, profit and cash flow |
| Our business is subject to risks associated with doing business outside the United States |
| Shipments to customers outside of the United States accounted for approximately 26dtta1prca of our sales in 2005, 20dtta5 |
| The significant increase in 2004 and 2005 was due primarily to our acquisition of ESK Ceramics in August 2004, whose operations have been consolidated with ours since September 1, 2004 |
| ESK Ceramics’ operations are located in Germany and France |
| ESK Ceramics’ sales to customers located outside of the United States represented approximately 79dtta0prca of its total sales during the period of September 1 through December 31, 2004, and approximately 64dtta4prca of its total sales during 2005 |
| We anticipate that international shipments will account for a 22 ______________________________________________________________________ [48]Table of Contents significant portion of our sales for the foreseeable future |
| Therefore, the following risks associated with international business activities could have material adverse effects on our performance: • burdens to comply with multiple and potentially conflicting foreign laws and regulations, including export requirements, tariffs and other barriers, health and safety requirements, and unexpected changes in any of these factors; • difficulty in staffing and managing international operations; • differences in intellectual property protections; • difficulty in obtaining export licenses from the US government for sales of our defense-related products; • potentially adverse tax consequences due to overlapping or differing tax structures; • fluctuations in currency exchange rates; and • risks associated with operating a business in a potentially unstable political climate |
| We have traditionally invoiced our sales from the United States to customers in foreign countries in US dollars |
| Consequently, if the US dollar becomes more expensive relative to the currencies of our foreign customers, the price of our products that we export from the United States to those countries will rise and our sales into those countries may fall |
| In addition, in the future, we may be required to denominate foreign sales in the local currencies of our customers |
| In that case, if the US dollar were to become more expensive relative to the currencies of our foreign customers, we would receive fewer US dollars for each unit of foreign currency that we receive when our customers pay us |
| Therefore, a more expensive US dollar would cause us to incur losses upon the conversion of accounts receivable denominated in foreign currencies |
| Such losses could harm our results of operations |
| Our ESK Ceramics subsidiary invoices approximately 69dtta4prca of its sales in Euros |
| ESK Ceramics’ sales to customers located in the United States are invoiced in US dollars |
| If the Euro becomes more expensive relative to the currencies of ESK Ceramics’ customers located outside the European Union, the price of its products sold to customers in those countries will rise and its sales into those countries may fall |
| We may make future acquisitions which may be difficult to integrate, divert management resources, result in unanticipated costs, or dilute our stockholders |
| Part of our continuing business strategy is to make acquisitions of, or investments in, companies, products or technologies that complement our current products, enhance our market coverage, technical capabilities or production capacity, or offer growth opportunities |
| Future acquisitions could pose numerous risks to our operations, including: • we may have difficulty integrating the purchased operations, technologies or products; • we may incur substantial unanticipated integration costs; • assimilating the acquired businesses may divert significant management attention and financial resources from our other operations and could disrupt our ongoing business; • acquisitions could result in the loss of key employees, particularly those of the acquired operations; • we may have difficulty retaining or developing the acquired businesses’ customers; • acquisitions could adversely affect our existing business relationships with suppliers and customers; • we may fail to realize the potential cost savings or other financial benefits and/or the strategic benefits of the acquisitions; and • we may incur liabilities from the acquired businesses for infringement of intellectual property rights or other claims, and we may not be successful in seeking indemnification for such liabilities or claims |
| 23 ______________________________________________________________________ [49]Table of Contents In connection with these acquisitions or investments, we could incur debt, amortization expenses related to intangible assets, large and immediate write-offs, assume liabilities, or issue stock that would dilute our current stockholders’ percentage of ownership |
| We may not be able to complete acquisitions or integrate the operations, products or personnel gained through any such acquisition without a material adverse effect on our business, financial condition and results of operations |
| The cost of electricity is a significant portion of our cost of product sales |
| An increase in the cost of electricity may cause our profit margins to decline |
| Electricity is essential for the production of our products and comprises a significant portion of our cost of product sales |
| The cost of electricity for our manufacturing operations in the United States and Europe was approximately dlra4dtta4 million during 2004, and approximately dlra8dtta4 million during 2005 |
| Over the last several years, the cost of electricity has increased, particularly in California where a significant portion of our manufacturing facilities are located |
| Fluctuations in the cost of electricity affect our ability to accurately forecast future energy costs and consequently our profitability |
| If the cost of electricity were to increase substantially, our gross profit margins may decline |
| We may not be able to adequately safeguard our intellectual property rights and trade secrets from unauthorized use, and we may become subject to claims that we infringe on others’ intellectual property rights |
| We rely on a combination of patents, trade secrets, trademarks, and other intellectual property laws, nondisclosure agreements with employees and customers and other protective measures to preserve our proprietary rights to our products and production processes |
| These measures afford only limited protection and may not preclude competitors from developing products or processes similar or superior to ours |
| Moreover, the laws of certain foreign countries do not protect intellectual property rights to the same extent as the laws of the United States |
| Although we implement protective measures and intend to defend our proprietary rights, these efforts may not be successful |
| From time to time, we may litigate within the United States or abroad to enforce our issued or licensed patents, to protect our trade secrets and know-how or to determine the enforceability, scope and validity of our proprietary rights and the proprietary rights of others |
| For example, we are currently involved in two lawsuits in Germany that we initiated to enforce our proprietary rights |
| Enforcing or defending our proprietary rights could be expensive, requires management’s attention and might not bring us timely or effective relief |
| Furthermore, third parties may assert that our products or processes infringe their patent rights |
| Our patents may be challenged, invalidated or circumvented |
| Although there are no pending or threatened intellectual property lawsuits against us, we may face litigation or infringement claims in the future |
| Infringement claims could result in substantial costs and diversion of our resources even if we ultimately prevail |
| A third party claiming infringement may also obtain an injunction or other equitable relief, which could effectively block the distribution or sale of allegedly infringing products |
| Although we may seek licenses from third parties covering intellectual property that we are allegedly infringing, we may not be able to obtain any such licenses on acceptable terms, if at all |
| Our ability to operate effectively could be impaired if we were to lose the services of our key personnel, or if we are unable to recruit qualified managers and key personnel in the future |
| Our success depends on the continued service of our management team and key personnel, including Joel P Moskowitz, our Chairman and Chief Executive Officer and President; David P Reed, our Vice President, and President of North American Operations; Jerrold J Pellizzon, our Chief Financial Officer and Corporate Secretary; and Peter Hartl, the President of our ESK Ceramics subsidiary |
| Moskowitz was diagnosed with non-Hodgkin’s lymphoma in October 2004 |
| He completed chemotherapy treatments in January 2005, and his current diagnosis indicates that the non-Hodgkin’s lymphoma is in remission |
| Moskowitz becomes unable to continue working due to health reasons, or if one or more of these individuals were to resign or otherwise terminate their employment with us, we could experience a loss of sales, delays in new product development and diversion of management resources, and we may have difficulty replacing any of these individuals |
| We do not have employment agreements or key person insurance on any of our executive employees |
| If we are unable to retain our existing managers and employees or hire and integrate new personnel, we may experience operating inefficiencies, production delays and reduced profitability |
| Our manufacturing facilities are subject to a number of operational risks, including hazards associated with ceramic manufacturing and natural disasters, any of which could have a material adverse impact on our productivity and results of operations |
| Due to the nature of our business, we are exposed to hazards associated with ceramic manufacturing, such as: • accidents or mechanical failure; • fires or explosions of furnaces; and • employee exposure to extreme temperatures or hazardous substances |
| In addition, the location of our facilities exposes us to potential earthquakes and other natural disasters |
| These hazards may cause personal injury, loss of life and damage to property, which could lead to a substantial interruption or suspension of operations, potential loss of customers and sales, government fines and lawsuits by injured persons |
| Any such consequences could have an adverse effect on the productivity and profitability of a particular manufacturing facility or on us as a whole |
| Our products have in the past contained, and may in the future contain, errors or defects that may be detected at any point in the life of the products |
| Such errors could result in delays in shipping and sales during the period required for their correction and additional expense associated with their reworking or replacement |
| Real or perceived defects in our products may result in product returns, loss of sales, delays in market acceptance, injury to our reputation and increased warranty costs, which could reduce our sales and profit |
| For example, in March 2002, the US government notified us that several lots of our SAPI lightweight ceramic body armor failed to pass ballistics reverification tests |
| As a result, we stopped production of our SAPI product, modified the design of our product and resumed shipping approximately four months later |
| In addition, we agreed to correct or replace at our expense all supplies of our SAPI product sales that did not meet the original contractual requirements |
| If we are unable to compete successfully against current and future competitors, our revenues could decline |
| Our products compete with advanced technical ceramic products from other companies, as well as with high strength steel alloys and plastic products |
| When competing with other advanced technical ceramic products, we believe the principal competitive factors are: • manufacturing capacity and the ability to deliver products; • price; • product performance; • material specifications; • application engineering capabilities; • customer support; and • reputation |
| 25 ______________________________________________________________________ [51]Table of Contents When competing with high strength steel alloys and plastic products, we may not be able to compete effectively when price is a primary consideration, because our products are typically more expensive as a result of higher manufacturing costs associated with the production of advanced technical ceramics |
| Some of our competitors include Armor Holdings, ArmorWorks, Ceramtec, the Cercom subsidiary of BAE Systems, CoorsTek, Denka, GE Advanced Ceramics, Hitachi, HC Starck, Kyocera’s Industrial Ceramics Group, Morgan, Saint Gobain, Sintec, Spectra-Mat, UK Abrasives and Vesuvius |
| Many of our current or potential competitors have greater financial, marketing and technical resources than we do |
| If we fail to compete successfully against our current or future competitors, our revenues, profit and cash flow could decline |
| Uninsured losses arising from third party claims brought against us could result in payment of substantial damages, which would decrease our cash reserves and could harm our profit and cash flow |
| Our products are used in applications where the failure to use our products properly or their malfunction could result in serious bodily injury or death |
| We may not have adequate insurance to cover the payment of any potential claim related to such injuries or deaths |
| Insurance coverage may not continue to be available to us or, if available, may be at a significantly higher cost |
| In addition, we are self-insured against workers compensation claims in an amount that exceeds our accrual for such claims |
| Our accrual is based on our historical experience with these claims, and we have excess liability insurance to cover losses beyond a specified amount |
| Our accrual may not be adequate to cover actual claims |
| Third party or workers compensation claims brought against us that exceed our insurance coverage or accruals would likely be paid out of our cash reserves, increasing our need for cash and potentially harming our profitability |
| We are subject to extensive government regulation, and our failure or inability to comply with these regulations could subject us to penalties and result in a loss of our government contracts, which could reduce our revenues, profit and cash flow |
| We must comply with and are affected by various government regulations that impact our operating costs, profit margins and our internal organization and operation of our business |
| Furthermore, we have production contracts with governmental entities and are subject to additional rules, regulations and approvals applicable to government contractors |
| We are also subject to routine audits to assure our compliance with these requirements |
| Our failure to comply with these regulations, rules and approvals could result in the impositions of penalties and the loss of our government contracts and disqualification as a US government contractor |
| In addition, a number of our employees involved with defense related business are required to obtain security clearances from the US government |
| Our business may suffer if we or our employees are unable to obtain the security clearances that are required |
| Like other companies operating internationally, we are subject to the Foreign Corrupt Practices Act and other laws which prohibit improper payments to foreign governments and their officials by US and other business entities |
| Violations of the Foreign Corrupt Practices Act may result in severe criminal penalties, which could have a material adverse effect on our business, financial condition, results of operations and liquidity |
| If we fail to comply with environmental laws and regulations, we could incur an increase in our operating costs and a decrease in our profit and cash flow |
| We are subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous materials used to manufacture our products |
| Authorities could impose fines, suspend production, alter our manufacturing processes, or stop our operations if we do not comply with these regulations |
| This powder, if inhaled, can cause chronic beryllium disease in a small percentage of the population |
| We have been sued in the past by former employees and by employees of one of our customers and by their family members alleging that they had contracted chronic beryllium disease as a result of exposure to beryllium oxide powders used in our products |
| The last of these claims was settled in 2002, and all of these claims have been dismissed without our incurring material liability |
| We may not, however, be able to avoid future liability to persons who may allege that they contracted chronic beryllium disease as a result of exposure to the beryllium oxide we used in prior years |
| 26 ______________________________________________________________________ [52]Table of Contents Any failure to comply with current or subsequently enacted environmental statutes and regulations could subject us to liabilities, fines or the suspension of production |
| Furthermore, any claims asserted against us in the future related to exposure to beryllium oxide powder may not be covered by insurance |
| Even if covered, the amount of insurance may be inadequate to cover any adverse judgment |
| Fines and other punishments imposed on us for environmental violations and expenses we incur to remedy or comply with environmental regulations and future liability for incidences of chronic beryllium disease contracted by employees or employees of customers would decrease our cash reserves and could harm our profitability |
| Risks Related to our Common Stock Our stock price has been volatile, and the value of an investment in our common stock may decline |
| The market price and trading volume of our common stock has been subject to significant volatility, and this trend may continue |
| The value of our common stock may decline regardless of our operating performance or prospects |
| Factors affecting our market price include: • initiation of coverage by securities analysts, including analysts of the underwriters in this offering, securities analysts’ buy/sell recommendations and any expressed beliefs of securities analysts regarding our business prospects or estimated trading multiples; • our perceived prospects; • variations in our operating results and whether we have achieved our key business targets; • the limited number of shares of our common stock available for purchase or sale in the public markets; • sales or purchases of large blocks of our stock; • changes in, or our failure to meet, our earnings estimates; • differences between our reported results and those expected by investors and securities analysts; • decreases in our trading multiples on an absolute basis or relative to comparable companies; • announcements of new contracts by us or our competitors; • market reaction to any future acquisitions, joint ventures or strategic investments announced by us or our competitors; • developments in the financial markets; • market reaction to any adverse publicity or news stories; and • general economic, political or stock market conditions |
| Recent events have caused stock prices for many companies, including ours, to fluctuate in ways unrelated or disproportionate to their operating performance |
| The general economic, political and stock market conditions that may affect the market price of our common stock are beyond our control |
| The market price of our common stock at any particular time may not remain the market price in the future |
| In the past, securities class action litigation has been instituted against companies following periods of volatility in the market price of their securities |
| Any such litigation, if instituted against us, could result in substantial costs and a diversion of management’s attention and resources |
| Delaware law may delay or prevent a change in control, and may discourage bids for our common stock at a premium over its market price |
| These provisions prohibit large stockholders, in particular a stockholder owning 15prca or more of the outstanding voting stock, from consummating a merger or combination with a corporation unless this stockholder receives board approval for the transaction or 66^ 2/3prca of the shares of voting stock not owned by the stockholder approve the merger or transaction |
| These provisions of Delaware law may have the effect of delaying, deferring or preventing a change in control, and may discourage bids for our common stock at a premium over its market price |