| TVI CORP ITEM 1A RISK FACTORS Our business, results of operations and financial condition are subject to a number of risks, including the risks set forth below |
| You should carefully consider these risks |
| Additional risks and uncertainties, including those that are not yet identified or that we currently believe are insignificant, may also adversely affect our business, results of operations and financial condition |
| A significant portion of our sales are to federal, state and local governmental entities the loss or significant reduction of which would have a material adverse impact on our operating results |
| The loss or significant reduction in government funding of programs in which we participate or the funded agency’s decision not to spend appropriated funds could materially adversely affect our future revenues, earnings and cash flows and thus our ability to meet our financial obligations |
| US government contracts are conditioned upon Congress’ continuing approval of the amount of necessary spending |
| Congress usually appropriates funds for a given program each fiscal year even though contract periods of performance may exceed one year |
| Consequently, at the beginning of a major program, the contract is usually partially funded, and additional monies are normally committed to the contract only if Congress makes appropriations for future fiscal years |
| State contracts are generally subject to the same funding considerations |
| Therefore, if Congress does not appropriate funds for programs under which the government procures our products, the lack of funds may result in a loss or significant reduction the government procurement of our products |
| In addition, even if funded, an agency may elect not to spend appropriated funds for various reasons which would have a similar potential adverse effect on our results of operations and financial condition |
| For example, during 2005 our sales were negatively affected by widespread delays at the state and local agency level in the actual release of appropriated federal funds, in part due to significant organizational changes within the DHS that caused delays in the issuance of needed standardization protocols and directives |
| Selling to the US Government subjects us to unfavorable termination provisions and other review and regulation |
| Companies such as ours that are engaged in supplying defense-related services and equipment to US government agencies are subject to certain business risks peculiar to the defense industry |
| These risks include the ability of the US government to unilaterally suspend us from receiving new orders or contracts pending 8 ______________________________________________________________________ [37]Table of Contents resolution of alleged violations of procurement laws or regulations; terminate existing orders or contracts; reduce the value of existing orders or contracts; audit our contract-related costs and fees, including allocated indirect costs; and control and potentially prohibit the export of our products |
| Because we rely heavily on a limited number of third party distributors for the marketing, sale and support of our products, the termination or disruption of these relationships may materially adversely affect our revenue |
| We sell the majority of our products through a limited number of independent distributors and third party sales agents, such as Fisher Scientific in the US and Canada and Professional Protection Systems Ltd |
| and OPEC Systems internationally |
| Approximately 60prca of our total 2005 sales were made through Fisher |
| We anticipate that our distributors will continue to account for most of our sales for the foreseeable future |
| We have a limited ability to influence our distributors’ marketing efforts and relying on distributors could harm our business for various reasons, including that the agreements with our distributors may contain unfavorable terms, such as exclusivity provisions or early termination rights; such agreements may terminate prematurely or result in litigation due to disagreements; our distributors may not devote sufficient resources to the sale of our products or may be unsuccessful in their efforts to sell our products or otherwise impair our reputation; existing relationships with our distributors may preclude us from entering into new arrangements; and we may not be able to negotiate new distributor agreements on acceptable terms |
| Our growth strategy includes capital expenditures and pursuing strategic acquisitions and investments, which may not prove to be successful and may dilute our current stockholders’ percentage ownership |
| Our business strategy includes making capital outlays, such as for the construction of our filter line, and acquiring or making strategic investments in other companies with a view to expanding our portfolio of products, expanding into new markets, acquiring new technologies, and accelerating the development of new or improved products |
| To do so, we may use a significant amount of our cash reserves, incur debt or assume indebtedness or issue equity that would dilute our current stockholders’ percentage ownership |
| In addition, we may incur significant amortization expense related to intangible assets and depreciation expense related to plant and equipment |
| We also may incur significant write-offs of goodwill, intangible assets, and property, plant and equipment associated with the companies, businesses or technologies that we acquire |
| Acquisitions and strategic investments involve numerous risks, including those identified below in connection with the STI acquisition |
| In addition, capital expenditures for new product lines, acquisitions and strategic investments may involve risks of entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions and of obtaining insufficient revenues to offset increased expenses associated with acquisitions |
| We are subject to economic, political and other risks associated with our international sales, which could materially adversely affect our business |
| A portion of our revenue is generated from the international sale of our products through distributors, predominately in Canada, Western Europe and Australia |
| Net sales outside the United States were approximately 3prca and 13prca of our total net sales in 2005 and 2004, respectively |
| Our international sales are subject to a variety of factors, including changes in the political or economic conditions in a country or region; future fluctuations in exchange rates; trade protection measures and import or export licensing requirements; difficulty in effectively managing our international distributors; and differing tax laws and regulatory requirements, and changes in those laws and requirements |
| If we are unable to adapt to the requirements of our international customers or the markets in which they operate, we may experience a material adverse effect on our international sales |
| 9 ______________________________________________________________________ [38]Table of Contents We face integration and other risks related to our recent STI acquisition |
| STI is an established presence in the PAPR market, and we believe that our acquisition of STI may accelerate our growth in the personal protection equipment market |
| The STI acquisition involves various risks, including: difficulties in integrating STI’s operations, technologies, and products; the risk of diverting management’s attention from normal daily operations of the business; potential difficulties in completing projects associated with in-process research and development; risks of entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions; initial dependence on unfamiliar supply chains or relatively small supply partners; insufficient revenues to offset increased expenses associated with the acquisition; and the potential loss of key STI employees |
| There can be no assurance that our STI acquisition will be successful and will not materially adversely affect our business, operating results, or financial condition |
| We must also manage any growth resulting from the acquisition effectively |
| Failure to manage such growth effectively and successfully integrate STI’s operations could have a material adverse effect on our business and operating results |
| The purchase orders and contracts governing the purchase for our products may commit us to unfavorable terms |
| We generally sell our shelter, decontamination systems and most other products pursuant to purchase orders issued by the purchasing party |
| Although we attempt to ensure that the terms of such purchase orders are acceptable to us, some purchase orders may contain unfavorable terms, such as heightened performance or warranty obligations or return rights |
| Additionally, we generally provide certain products, including our thermal products, through formal contracts with the US and state governments |
| These contracts generally can be terminated by the government either for its convenience or if we default by failing to perform under the contract |
| Termination for convenience provisions provide only for our recovery of costs incurred or committed settlement expenses and profit on the work completed prior to termination |
| Termination for default provisions provide for the contractor to be liable for excess costs incurred by the US government in procuring undelivered items from another source |
| These contracts are generally fixed price contracts, as the price we charge is not subject to adjustment based on cost incurred to perform the required work under the contract |
| Therefore, we fully absorb cost overruns on these fixed price contracts and this reduces our profit margin on the contract |
| Failure to anticipate technical problems, estimate costs accurately or control costs during performance of a fixed price contract may reduce our profit or cause a loss on such contracts |
| We may not be able to obtain critical components |
| We purchase a number of critical custom components from single source vendors for which alternative sources may not be available |
| Delays or interruptions in the supply of these components could result in delays or reductions in product shipments |
| The purchase of these components from outside suppliers on a single source basis subjects us to risks, including the continued availability of supplies, price increases and potential quality assurance problems |
| While alternative suppliers may be available, these suppliers must be identified and qualified |
| We cannot be certain that any such suppliers will meet our required qualifications or that alternative suppliers can be identified in a timely fashion, if at all |
| Consolidations involving suppliers could further reduce the number of component alternatives and affect the cost of such supplies |
| An increase in the cost of such supplies could make our products less competitive |
| Production delays, lower margins or less competitive product pricing could have a material adverse effect on our business and results of operations |
| Our future financial performance will depend in large part on the successful development, demand for and acceptance of our products |
| The market for our shelter, decontamination, PAPRs and other products and systems may not continue to grow, may grow at a slower rate than we expect or may even diminish |
| Furthermore, the market may not accept 10 ______________________________________________________________________ [39]Table of Contents our products |
| Additionally, we must enhance the functionality of our products to maintain successful commercialization and continued acceptance of our product offerings |
| If we are unable to identify and develop new enhancements to existing products on a timely and cost-effective basis, or if new enhancements do not achieve market acceptance, we may experience customer dissatisfaction, reduction or cancellation of orders and loss of revenue |
| The life cycle of our products is difficult to predict because the market for the majority of our products is new and emerging and is characterized by rapid technological change, changing customer preferences and evolving industry standards |
| The introduction of products employing new technologies and emerging industry standards could render our existing products obsolete and unmarketable |
| We are subject to significant government regulation |
| The US legal and regulatory environment governing our products is subject to constant change |
| Further changes in the regulatory environment relating to the marketing of our shelter, decontamination systems, PAPRs and our other products, that increase the administrative and operational costs associated with the marketing of our systems and other products or that increase the likelihood or scope of competition, could harm our business and financial results |
| We currently have several PAPR products and our planned filter production line under review with NIOSH If regulatory review and approval takes longer than we anticipate or if NIOSH does not grant the approvals that we seek, the delay or lack of regulatory approval may have a material adverse effect on our business and financial results |
| The regulation of our shelter, decontamination systems and other products outside the United States will vary by country |
| Noncompliance with foreign country requirements may include some or all of the risks associated with noncompliance with US regulation as well as other risks |
| The planned expansion of our operations will place a significant strain on our management, financial controls, operations systems, personnel, and other resources |
| Our ability to manage our future growth, should it occur, will depend in large part upon a number of factors including our ability to rapidly: build and train sales and marketing staff to create an expanding presence in the rapidly evolving market for our decontamination systems and other products and keep them fully informed over time regarding the technical features, issues and key selling points of our products; build, provide incentives for and support strong distribution channel partners and keep them informed regarding technical features, issues and key selling points of our products; develop our customer support capacity for direct and indirect sales personnel so that we can provide customer support without diverting engineering resources from product development efforts; and expand our internal management and financial controls significantly, so that we can maintain control over our operations and provide support to other functional areas as the number of our personnel and size of our organization increases |
| Our failure to efficiently expand and develop these areas could cause our expenses to grow, could cause our revenues to decline or grow more slowly than expected and could otherwise impair our growth |
| The variable and often long sales cycles of our products could cause significant fluctuation in our quarterly and annual results |
| The typical sales cycle of our shelter, decontamination systems and our other products is unpredictable and generally involves a significant commitment of resources by our customers |
| A customer’s decision to purchase 11 ______________________________________________________________________ [40]Table of Contents our products generally involves the evaluation of the available alternatives by a significant number of personnel in various functional areas and often is subject to delays over which we may have little or no control, including budgeting constraints, internal procurement and other purchase review procedures and the inclusion or exclusion of our products on customers’ approved standards list |
| Accordingly, we typically must expend substantial resources educating prospective customers about our products |
| Therefore, the length of time between the date of initial contact with the potential customer or distribution channel partner and the related sale of our products may be as much as one year, with the larger sales generally requiring significantly more time |
| Additionally, the length of time between the date of initial contact and the sale is often subject to delays over which we may have little or no control, including the receipt of necessary government funding |
| If we experience any delay or failure in complete sales, we incur significant expense without generating any associated revenue which, if significant, could have a material adverse effect on our business and could cause operating results to vary significantly from quarter-to-quarter |
| Our products rely on intellectual property rights |
| Any failure by us to obtain and protect these rights could enable our competitors to market products with similar features that may reduce demand for our products which would adversely affect our revenues |
| Additionally, we could be subject to claims that our products violate the intellectual property rights of others |
| Although we seek to protect our shelter, decontamination systems and our other products through a combination of patent, trade secret, copyright, and trademark law, there is no guarantee that our methods of protecting our intellectual property rights in the United States or abroad will be adequate |
| Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technologies |
| Policing unauthorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our intellectual property rights as fully as those in the United States |
| If we are unable to protect our proprietary technology or that of our customers, our results of operations and any competitive advantage that we may have may be materially and adversely affected |
| We generally enter into confidentiality or other agreements with our employees, consultants, channel partners and other corporate partners, and do control access to our intellectual properties and the distribution of our proprietary information |
| These measures afford only limited protection and may prove to be inadequate |
| Others may develop technologies that are similar or superior to our technology or design around the intellectual properties we own or utilize |
| We expect that products may be increasingly subject to third-party infringement claims as the number of competitors in our industry segment grows and the functionality of products in different industry segments grows and overlaps |
| Although we are not aware that our products employ technology that infringes any proprietary rights of third parties, there has been significant litigation in recent years in the United States involving patents and other intellectual property rights, and third parties may assert infringement claims against us |
| Consequently, third parties may claim that we infringe their intellectual property rights |
| Regardless of whether these claims have any merit, they could be time-consuming to defend; result in costly litigation; divert our management’s attention and resources; cause product shipment delays; or require us to enter into royalty or licensing agreements, which may not be available on terms acceptable to us, if at all |
| A successful claim of product infringement against us or our failure or inability to license the infringed or similar technology could damage our business because we would not be able to sell our products without redeveloping them or otherwise incurring significant additional expenses and we may be judged liable for significant damages |
| 12 ______________________________________________________________________ [41]Table of Contents Our products may contain unknown defects that could result in product liability claims or decrease market acceptance of our products and have a material adverse effect on our business, results of operations and financial condition |
| We have offered, and continue to offer, various warranties on our products |
| Our products may contain unknown defects or result in failures, which are not detected until after commercial distribution and use |
| Any of these defects could be significant and could harm our business and ongoing results |
| Any significant defects or errors may result in costly litigation; diversion of management’s attention and resources; loss of sales; delay in market acceptance of our products; increase in our product development costs; or damage to our reputation |
| In addition, the sale and support of our products may entail the risk of product liability or warranty claims based on personal injury or other damages due to such defects or failures |
| Although we maintain reserves for warranty-related claims that we believe to be adequate, we cannot assure you that warranty expense levels or the results of any warranty-related legal proceedings will not exceed our reserves |
| Additionally, although we carry comprehensive general liability insurance and product liability insurance for damages that may arise from our products, our current insurance coverage may be insufficient to protect us from all liability that may be imposed under these types of claims |
| Consequently, the marketing of our products entails product liability and other risks and could have a material adverse effect on our business, results of operations and financial condition |
| Intense competition in our industry could limit our ability to attract and retain customers |
| The market for our shelter, decontamination systems and our other products is intensely competitive; characterized by evolving industry standards, changes in customer needs and preferences and opportunities relating to technological advancement; and is significantly affected by new product introductions and improvements |
| Many of our existing and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, greater name recognition, broader product offerings and a larger installed base of customers than us, any of which could provide them with a significant competitive advantage |
| Increased competition could also result in price reductions for our products and lower profit margins, either of which could materially and adversely affect our business, results of operations and financial condition |
| We expect to face increased competition in the future from our current competitors |
| In addition, new competitors or alliances among existing and future competitors may emerge and rapidly gain significant market share, many of which may possess significantly greater financial, marketing, technical, personnel and other resources |
| If we are unable to attract, retain and motivate key management and personnel, we may become unable to operate our business effectively |
| We depend to a significant degree on the skills, experience and efforts of our key executive officers and our employees, as well as members of our sales, administrative, technical and services personnel |
| Qualified personnel are in great demand throughout our industry, and our future success depends in large part on our ability to attract, train, motivate and retain highly skilled employees and the ability of our executive officers and other members of senior management to work effectively as a team |
| The loss of the services of any executive officer or the failure to attract and retain the highly trained technical personnel that are integral to our sales, product development, service and support teams, could have a material adverse effect on our business |
| Our Common Stock is subject to significant price fluctuations |
| Effective August 2004, our Common Stock was listed and began trading on the NASDAQ Small Cap Market, now known as the NASDAQ Capital Market |
| Previously, our Common Stock traded on the OTC Bulletin Board |
| Historically, there has been a limited public market for our Common Stock |
| The trading price of our Common Stock is likely to be volatile and sporadic |
| The stock market in general and, in particular, the market for small capitalization companies, has experienced extreme volatility in recent 13 ______________________________________________________________________ [42]Table of Contents years |
| This volatility has often been unrelated to the operating performance of particular companies |
| Volatility in the market price of our Common Stock may prevent investors from being able to sell their Common Stock at or above the price such investors paid for their shares or at any price at all |
| In addition, in the event our operating results fall below the expectations of public market analysts, the market price of our Common Stock would likely be materially adversely affected |
| We have adopted certain anti-takeover provisions that could prevent or delay a change in control |
| Our Articles of Incorporation and Bylaws contain the following provisions: an “advance notice” provision setting forth procedures governing stockholder proposals and the nomination of directors, other than by or at the direction of the Board or a Board committee; and a “classified” Board structure, generally providing for three-year staggered terms of office for all members of our Board of Directors |
| Additionally, in 2003 we adopted a Stockholders Rights Plan, which is designed to enable all TVI stockholders to realize the full value of their investment and to provide for fair and equal treatment for all TVI stockholders in the event that an unsolicited attempt is made to acquire the Company |
| Although we believe that each of the above measures are designed to promote both effective corporate governance and orderly Board deliberations of important business matters, these provisions may discourage, delay or prevent a third party from acquiring or merging with TVI, even if such action may be considered favorable to some of TVI’s stockholders |