| BLOUNT INTERNATIONAL INC ITEM 1A RISK FACTORS Substantial Leverage—Due to our substantial leverage, we may have difficulty operating our business and satisfying our debt obligations |
| As of December 31, 2005, we have dlra600dtta4 million of total liabilities, dlra407dtta7 million of total debt and a stockholders &apos deficit of dlra145dtta2 million |
| This substantial leverage may have important consequences for us, including the following: < Our ability to obtain additional financing for working capital, capital expenditures or other purposes may be impaired or such financing may not be available on terms favorable to us |
| < A significant portion of our cash flow from operations is dedicated to the payment of interest expense, which reduces the funds that would otherwise be available to us for operations and future business opportunities |
| < A substantial decrease in net operating income and cash flows or an increase in expenses may make it difficult for us to meet our debt service requirements or force us to modify our operations |
| < Our substantial leverage may make us more vulnerable to economic downturns and competitive pressures |
| The agreement governing our senior credit facilities and the indenture for our 8^7/[8]% senior subordinated notes due 2012 contain restrictions that affect our operations, including our and certain of our subsidiaries &apos ability to incur indebtedness or make acquisitions or capital expenditures |
| However, these restrictions do not fully prohibit us or our subsidiaries from incurring additional indebtedness |
| In addition, we have available borrowing capacity under the revolving portion of our existing senior credit facilities of dlra94dtta1 million as of December 31, 2005 |
| Our ability to make payments on our indebtedness and to fund planned capital expenditures and research and development efforts will depend on our ability to generate cash in the future |
| Our ability to generate cash, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control |
| Our historical financial results have been, and we anticipate that our future financial results will be, subject to fluctuations |
| Our business may not be able to generate sufficient cash flow from our operations or future borrowings may not be available to us in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs |
| Our inability to pay our debts would require us to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our indebtedness or selling equity capital |
| However, alternative strategies may not be feasible at the time or may not prove adequate, which could cause us to default on our obligations and would impair our liquidity |
| Also, some alternative strategies would require the prior consent of our BLOUNT INTERNATIONAL, INC 6 ______________________________________________________________________ secured lenders, which we may not be able to obtain |
| Restrictive Covenants—The terms of our indebtedness contain a number of restrictive covenants, the breach of which could result in acceleration of our senior credit facilities and our 8^7/[8]% senior subordinated notes |
| The terms of our indebtedness contain a number of restrictive covenants, the breach of which could result in acceleration of our obligations to repay amounts owed under our senior credit facilities and our 8^7/[8]% senior subordinated notes |
| An acceleration of our repayment obligation under our senior credit facilities could result in a payment or distribution of substantially all of our assets to our secured lenders, which would materially impair our ability to operate our business as a going concern |
| The indenture and our senior credit facilities, among other things, restrict our and certain of our subsidiaries &apos ability to: < borrow money and issue preferred stock; < guarantee indebtedness of others; < pay dividends on or purchase our stock or the stock of our "e restricted subsidiaries "e , a defined term; < make certain investments; < use assets as security in other transactions; < sell certain assets or merge with or into other companies; < enter into sale and leaseback transactions; < enter into certain types of transactions with affiliates; < pay dividends or make other payments to us; < enter into new businesses; and < make certain payments in respect of subordinated indebtedness |
| The senior credit facilities also restrict our ability to prepay principal in respect of the 8^7/[8]% senior subordinated notes and restrict our ability to engage in any business or operations other than those incidental to our ownership of the capital stock of Blount |
| In addition, the senior credit facilities require us to maintain certain financial ratios and satisfy certain financial condition tests, which may require that we take action to reduce debt or to act in a manner contrary to our business objectives |
| Our ability to meet those financial ratios and tests could be affected by events beyond our control, and there can b e no assurance that we will meet those ratios and tests |
| A breach of any of these covenants could, if uncured, constitute an event of default or a default under the notes or the senior credit facilities |
| Upon the occurrence of an event of default under the senior credit facilities, the lenders could elect to declare all amounts outstanding under the senior credit facilities, together with any accrued interest and commitment fees, to be immediately due and payable |
| If we and certain of our subsidiaries were unable to repay those amounts, the lenders under the senior credit facilities could enforce the guarantees from the guarantors and proceed against the collateral securing the senior credit facilities |
| The assets of the applicable guarantors could be insufficient to repay in full that indebtedness and our other indebtedness |
| Assets Pledged as Security on Credit Facilities—The majority of our assets and the capital stock of Blount, Inc |
| are pledged to secure obligations under our senior credit facilities |
| The Company and all of its domestic subsidiaries other than Blount, Inc |
| apstas obligations under the senior credit facilities |
| The obligations under the senior credit facilities are collateralized by a first priority security interest in substantially all of the assets of Blount, Inc |
| and its domestic subsidiaries, as well as a pledge of all of Blount, Inc |
| apstas capital stock held by Blount International, Inc |
| and all of the stock of domestic subsidiaries held by Blount, Inc |
| In addition, our Canadian term loan facility is secured by liens on the inventory, accounts receivable and other major assets of our Canadian subsidiaries |
| Therefore, the lenders under our Senior Credit Facilities will have claims with respect to these assets that have priority over the claims of holders of our 8^7/[8]% senior subordinated notes and priority over our stockholders &apos interest in the Company |
| Further, our senior credit facilities provide that payments on the 8^7/< /font>[8]% notes and the guarantees thereof will be blocked in the event of a default under the senior credit facilities |
| In addition, upon any distribution to Blount, Inc |
| apstas creditors or the creditors of the guarantors in a bankruptcy, liquidation, receivership, administration or reorganization or similar proceeding relating to their property that constitutes security for the senior credit facilities, the lenders under the senior credit facilities will be entitled to be paid in full in cash before any payment may be made with respect to such notes or the guarantees |
| While Blount International, Inc |
| apstas existing domestic subsidiaries guarantee the 8^7/[8]% senior subordinated notes, none of Blount, Inc |
| Other than the guarantees by, and the pledge of the assets of, our Canadian subsidiaries to secure the payment of the Canadian term loan facility, we will not permit any of our non-guarantor restricted subsidiaries to guarantee or pledge any assets to secure the payment of our senior credit facilities, unless that restricted subsidiary is a guarantor of these notes or that restricted subsidiary becomes a guarantor |
| Any existing or future non-guarantor subsidiary of Blount International, Inc |
| that we properly designate as an unrestricted subsidiary or a receivables subsidiary will not guarantee these notes |
| BLOUNT INTERNATIONAL, INC 7 ______________________________________________________________________ Competition—Competition may result in decreased sales, operating income and cash flow |
| Most of the markets in which we operate are competitive |
| We believe that design features, product quality, customer service and price are the principal factors considered by customers in each of our business segments |
| Some of our competitors may have greater financial resources, lower costs, superior technology or more favorable operating conditions than we do |
| For example, our competitors are expanding capacity or contracting with suppliers located in China and other low cost manufacturing locations as a means to lower costs |
| Although we have also established a manufacturing facility in China, international competition from emerging economies may nevertheless be formidable and thereby negatively affect our business |
| In addition, although we have made recent improvements in our Dixon product line, which resulted in increased sales and improved profitability for this segment, Dixon has lost market share from increased competition over the last three years |
| We may not be able to compete successfully with our existing or any new competitors and competitive pressures we face may result in decreased sales, operating income and cash flows |
| Competitors could also obtain knowledge of our proprietary manufacturing techniques and processes and reduce our competitive advantage by copying such techniques and processes |
| Key Customers—Loss of one or more key customers would substantially decrease our sales |
| In 2005, dlra69dtta4 million (9prca) of our sales were to one customer (The Electrolux Group) and dlra149dtta6 million (20prca) of our sales were to our top four customers |
| While we expect these business relationships to continue, the loss of any of these customers, or a substantial portion of their business, would most likely substantially decrease our sales |
| Additionally, Blountapstas Industrial and Power Equipment segment has a joint marketing, supply and distribution arrangement with Caterpillar Inc |
| Any disruption in that relationship could result in a significant decline in that segmentapstas sales |
| Key Suppliers and Raw Materials Costs—A loss of a few key suppliers or increases in raw materials costs could substantially decrease our sales or increase our costs |
| We generally do not operate under long-term written supply contracts with our suppliers |
| Although alternative sources of supply are available, the sudden elimination of certain suppliers could result in manufacturing delays, an increase in costs, a reduction in product quality and a possible loss of sales in the near term |
| In 2005, we purchased approximately dlra13dtta4 million of raw material from our largest supplier |
| Some of these raw materials, in particular cold-rolled strip steel, are subject to price volatility over periods of time |
| We have not hedged against the price volatility of any raw materials within our operating segments with any derivative instruments |
| It has been our experience that such raw materials price increases are difficult to recover from our customers in the short term through increased pricing |
| A hypothetical immediate 10prca change in the price of steel would have the estimated effect of dlra8dtta3 million on pre-tax income in 2006 |
| Key Employees—The loss of key employees could adversely affect our manufacturing efficiency |
| Many of our manufacturing processes require a high level of expertise |
| We rely on key employees to provide this expertise |
| For example, we build our own complex dies for use in cutting and shaping steel into components in our products |
| The design and manufacture of such dies is highly dependent on the expertise of key employees |
| We have also developed numerous proprietary manufacturing techniques that rely on the expertise of key employees |
| Our manufacturing efficiency and cost could be adversely affected if we are unable to retain such key employees or continue to train them and their replacements |
| Foreign Sales and Operations—We have substantial foreign sales and operations, which could be adversely affected as a result of changes in local economic or political conditions, fluctuations in currency exchange rates, unexpected changes in regulatory environments and potentially adverse tax consequences |
| In 2005, approximately 44prca of our sales by country of destination occurred outside of the US International sales are subject to inherent risks, including changes in local economic or political conditions, the imposition of currency exchange restrictions, unexpected changes in regulatory environments and potentially adverse tax consequences |
| Under some circumstances, these factors could result in significant declines in international sales |
| Some of our sales and expenses are denominated in local currencies that can be affected by fluctuations in currency exchange rates in relation to the US dollar |
| Historically, our principal exposures have been related to local currency operating costs and expenses in Canada and Brazil, and local currency sales and expenses in Europe |
| As of December 31, 2005, we do not have any derivatives outstanding to manage foreign currency exchange risk |
| Any change in the exchange rates of currencies of jurisdictions into which we sell products or incur expenses could result in a significant decrease in reported sales and operating income |
| For example, we estimate that a 10prca weaker euro in relation to the US dollar would have reduced our sales by dlra4dtta5 million in 2005 |
| In addition, we own substantial manufacturing facilities outside the US As of December 31, 2005, 597cmam626 square feet, or 31prca of our total square feet for owned facilities, BLOUNT INTERNATIONAL, INC 8 ______________________________________________________________________ are located outside of the US This foreign based property, plant and equipment is subject to inherent risks for the reasons cited above |
| Loss of these facilities, or restrictions on our ability to use them, would have an adverse effect on our manufacturing capabilities and would result in reduced sales, operating income and cash flows |
| Weather—Sales of many of our products are affected by weather patterns and the occurrence of natural disasters |
| Sales of many of our products, such as lawnmowers, yard care parts and accessories, including lawnmower blades, and timber harvesting equipment are influenced by weather patterns that are clearly outside our control |
| For example, drought conditions tend to reduce the demand for yard care products and lawnmowers |
| Excessive rainfall or drought conditions can reduce activity in the logging industry, which in turn can reduce demand for our timber harvesting equipment |
| Natural disasters such as hurricanes and typhoons can stimulate demand for our chainsaw-related products, as well as some of our timber harvesting and handling equipment |
| Conversely, a relative lack of severe weather and natural disasters can result in reduced demand for these same products |
| Cyclicality—Industrial and Power Equipment sales are influenced by the economic cycle of the forestry industry and future economic downturns in that industry could cause sales of the Industrial and Power Equipment segment to decrease |
| The results of operations of our Industrial and Power Equipment segment are closely linked to the strength of the North American forestry industry |
| In the past, the forestry industry has been cyclical, experiencing recurring periods of economic growth and slowdown, which, correspondingly, have impacted the amount of our Industrial and Power Equipment segmentapstas sales, segment contribution and cash flows to vary significantly |
| The length and extremity of these industry cycles have varied over time |
| Such factors as macro economic activity, pulp and paper demand, housing and construction activity levels, industry capacity, pulp and paper prices, lumber prices, availability of timber for harvest, foreign competition, foreign exchange rates and mill downtime, among others, affect this industry |
| Foreign Sales Growth—We may not be successful in growing our international business in our Industrial and Power Equipment and Lawnmower segments |
| Our agreements with Caterpillar were, in part, designed to grow our Industrial and Power Equipment segment by increasing our access to international markets for our timber harvesting equipment business |
| We undertook this strategy, in part, to gain geographic diversification and to lessen the impact of North American industry cycles |
| We have also expanded our international distribution network in our lawnmower segment in order to increase access to foreign markets and to grow the business |
| These efforts may not prove to be successful, and we may not be able to expand these businesses internationally |
| If we are unable to execute these strategies, our sales, operating income and cash flows may decline |
| We are subject to general economic factors that are largely out of our control, any of which could, among other things, result in a decrease in sales and net income and an increase in our interest expense |
| Our business is subject to a number of general economic factors, many of which are largely out of our control, that may, among other things, result in a decrease in sales and net income and an increase in our interest expense |
| These include recessionary economic cycles and downturns in customers &apos business cycles, particularly customers of our timber harvesting equipment (as discussed above), which accounted for approximately 30prca of our sales in 2005, as well as downturns in the principal regional economies where our operations are located |
| Our senior credit facilities permit us to make borrowings at interest rates that are floating |
| Increases in interest rates could increase our interest expense payable under the senior credit facilities to levels in excess of what we currently expect |
| We estimate a one percentage point higher average level of interest rates on our variable rate debt would have increased our interest expense in 2005 by dlra3dtta0 million |
| Economic conditions may adversely affect our customers &apos business levels and the amount of products that they need |
| For example, during the global economic downturn in 2001, our sales fell by dlra45dtta2 million from the previous year |
| Furthermore, customers encountering adverse economic conditions may have difficulty in paying for our services and actual bad debts may exceed our allowances |
| Finally, terrorist activities, anti-terrorist efforts, war or other armed conflicts involving the US or its interests abroad may result in a downturn in the US and global economies and exacerbate the risks to our business described in this paragraph |
| Litigation—We may have litigation liabilities that could result in significant costs to us |
| Our historical and current business operations, including discontinued operations, have resulted in a number of litigation matters, including litigation involving personal injury or death as a result of alleged design or manufacturing defects of our products |
| Some of these product liability suits seek significant or unspecified damages for serious personal injuries for which there are retentions or deductible amounts under our insurance policies |
| In the future we may face additional lawsuits, and it is difficult to predict the amount and type of litigation that we may face |
| Litigation and insurance and other related costs could result in future liabilities that are significant and that could significantly reduce our cash flows and cash balances |
| See "e Business—Legal Proceedings "e |
| BLOUNT INTERNATIONAL, INC 9 ______________________________________________________________________ Environmental Matters—We face potential exposure to environmental liabilities and costs |
| We are subject to various US and foreign environmental laws and regulations relating to the protection of the environment, including those governing discharges of pollutants into the air and water, the management and disposal of hazardous substances and the cleanup of contaminated sites |
| Violations of or liabilities incurred under these laws and regulations could result in an assessment of significant costs to us, including civil or criminal penalties, claims by third parties for personal injury or property damage, requirements to investigate and remediate contamination and the imposition of natural resource damages |
| Furthermore, under certain environmental laws, current and former owners and operators of contaminated property or parties who sent waste to the contaminated site can be held liable for cleanup, regardless of fault or the lawfulness of the disposal activity at the time it was performed |
| Future events, such as the discovery of additional contamination or other information concerning past releases of hazardous substances at our or otherapstas sites, changes in existing environmental laws or their interpretation and more rigorous enforcement by regulatory authorities, may require additional expenditures by us to modify operations, install pollution control equipment, clean contaminated sites or curtail our operations |
| These expenditures could significantly reduce our net income and cash balances |
| See "e Business—Environmental Matters "e and "e Business—Legal Proceedings "e |
| Dividends—We may not pay dividends on our common stock in the future |
| intends to retain future earnings for debt service and for funding growth, and therefore, Blount International, Inc |
| In addition, our senior credit facilities prohibit us from paying any dividends and the terms of the 8^7/[8]% senior subordinated notes limit our ability to pay dividends |
| See "e Item 5, Market for Registrantapstas Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities "e |
| Future sales of our common stock in the public market could lower our stock price |
| We may sell additional shares of common stock in subsequent public offerings, or our largest stockholder, Lehman Brothers Merchant Banking Partners II, LP and its affiliates ( "e Lehman Brothers "e ), may sell a substantial number of the 8dtta9 million shares they own in a secondary stock offering |
| We may also issue additional shares of common stock to finance future transactions |
| We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock |
| Sales of substantial amounts of Blount International, Inc |
| apstas common stock (including shares issued in connection with an acquisition or shares sold by existing stockholders), or the perception that such sales could occur, may adversely affect the prevailing market price of Blount International, Inc |
| The price of our common stock may fluctuate significantly, and you could lose all or part of your investment |
| Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for your shares |
| The market price of our common stock could fluctuate significantly for various reasons that include: < our quarterly or annual earnings or those of other companies in our industries; < the publicapstas reaction to events and results contained in our press releases, our other public announcements and our filings with the SEC; < changes in earnings estimates or recommendations by research analysts who track our common stock or the stock of other comparable companies; < changes in general conditions in the US and global economy, financial markets or forestry industry, including those resulting from war, incidents of terrorism or responses to such events; < sales of common stock by our largest stockholder, directors and executive officers; and < the other factors described in these "e Risk Factors "e |
| In addition, in recent years, the stock market has experienced extreme price and volume fluctuations |
| This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industries |
| The changes in prices frequently appear to occur without regard to the operating performance of these companies |
| For example, over the two preceding calendar years, our highest closing stock price has exceeded our lowest by 27prca in 2005 and by 136prca in 2004 |
| The price of our common stock could fluctuate based upon factors that have little or nothing to do with our company, and these fluctuations could materially reduce our stock price |
| Additionally, during 2005, daily trading volume for our common stock has averaged approximately 150cmam000 shares, which may reflect that there is a limited market for our stock |
| This apparent lack of liquidity may accentuate fluctuations in the price of our st ock, and may limit your ability to sell your stock |