| CALGON CARBON CORPORATION ITEM 1A RISK FACTORS: Failure to innovate new products or applications could adversely affect the Company’s ability to meet its strategic growth targets |
| One of the ways that Calgon Carbon differentiates itself from its competition is through its technological superiority in helping customers to find solutions to their problems through the application of the Company’s products or services |
| Part of Calgon Carbon’s strategic growth and profitability plans involve the development of new products or new applications for its current products in order to replace more mature products or markets that have seen increased competition |
| If the Company is unable to develop new products or applications then the Company’s financial results could be adversely affected |
| Calgon Carbon holds a variety of patents that give the Company a competitive advantage in certain markets |
| An inability to defend those patents from competitive attack could have an adverse effect on both current results as well as future growth projections |
| From time to time in the course of its business the Company has to address competitive challenges to its patented technology |
| Calgon Carbon is currently in litigation to defend its process patent for the use of ultraviolet light in the prevention of cryptosporidium infection in drinking water |
| While the Company believes it will prevail in this action, an unfavorable outcome of that patent defense would impair the Company’s ability to capitalize on substantial future revenues from the licensing of that technology |
| Delays in enactment of new state or federal regulations could restrict Calgon Carbon’s ability to reach its strategic growth targets |
| The Company’s strategic growth initiatives are reliant upon more restrictive environmental regulations being enacted for the purpose of making water and air cleaner and safer |
| If stricter regulations are delayed or are not enacted, then the Company’s sales growth targets could be adversely affected |
| Calgon Carbon’s business includes capital equipment sales which could have extreme fluctuations due to the cyclical nature of that type of business |
| Calgon Carbon’s Equipment segment approximated 13prca of the Company’s overall revenues in 2005 |
| This business generally has a long project life cycle from bid solicitation to project completion and often requires customers to make large capital commitments well in advance of project execution |
| In addition, this business is usually affected by the general health of the overall economy |
| As a result, sales and earnings from the Equipment segment could be volatile |
| Encroachment into Calgon Carbon’s markets by competitive technologies could adversely affect financial results |
| Activated carbon is utilized in various applications as a cost effective solution for solving customer problems |
| If other competitive technologies are advanced to the stage in which technologies could effectively compete with activated carbon costs and technologies, the Company could experience a decline in sales and profitability |
| 13 ______________________________________________________________________ [35]Table of Contents Increases in United States and European imports of Chinese manufactured activated carbon could have an adverse effect on Calgon Carbon’s financial results |
| Calgon Carbon faces competition in its US and European markets from brokers of low cost imported activated carbon products, primarily from China |
| This could include competition from foreign imports which could be deemed to be unfairly priced, otherwise known as “dumped imports |
| ” Calgon Carbon is currently a party to an anti-dumping petition filed with the United States Department of Commerce and the United States International Trade Commission relating to imports of Chinese carbon |
| While the Company believes it has a technically superior product, if imports increase and Chinese products are accepted in more applications, the Company could see declines in sales and profitability as it tries to remain competitive |
| Calgon Carbon uses bituminous coal as the main raw material in its granular activated carbon production process |
| An interruption of supply or an increase in coal prices could have an adverse effect on Calgon Carbon’s financial results |
| The Company has various long term contracts in place for the supply of coal that expire at various intervals |
| Interruptions in coal supply caused by mine accidents, labor disputes, transportation delays, or other events for other than a temporary period could have an adverse effect on the Company being able to meet its customer demand, in addition to increasing production costs |
| Calgon Carbon’s financial results could be adversely affected by shortages in natural gas supply or increases in natural gas prices |
| Calgon Carbon utilizes natural gas as a key component in its activated carbon manufacturing process, and has long term contracts for the supply of natural gas at each of its major facilities |
| If shortages of or restrictions on the delivery of natural gas occurs, production at the Company’s activated carbon facilities would be reduced which could result in missed deliveries or lost sales |
| Additionally, the Company hedges its future supply of natural gas by purchasing forward contracts for up to two years in duration in order to limit prices fluctuations in the near term and smooth out the cost volatility |
| These purchases however do not protect the Company from longer term trends of rising natural gas prices which could result in significant production cost increases |
| Most of Calgon Carbon’s hourly workforce is covered under union contracts; the Company’s inability to successfully negotiate contracts upon expiration could have an adverse affect on financial results |
| The Company has collective bargaining agreements in place at four of the Company’s production facilities covering approximately 309 employees that expire from 2007 to 2009 |
| Any work stoppages as a result of disagreements with any of the labor unions or the failure to renegotiate any of the contracts as they expire could disrupt production and significantly increase product costs as a result of less efficient operations brought on by temporary labor |
| An unplanned shutdown at one of the Company’s production facilities could have an adverse effect on financial results |
| The Company operates multiple facilities and sources product from strategic partners that operate facilities that are close to water or in areas susceptible to earthquakes |
| An unplanned shutdown at any of the Company’s or its strategic partners’ facilities for more than a temporary period as a result of a labor dispute, hurricane, typhoon, earthquake or other natural disaster could significantly affect the Company’s ability to meet its demand requirements, thereby resulting in lost sales and profitability in the short term or eventual loss of customers in the long term |
| Environmental compliance and remediation could result in substantially increased capital requirements and operating costs |
| The Company’s production facilities are subject to a variety of environmental laws and regulations in the jurisdictions in which they operate or maintain properties |
| Costs may be incurred in complying with such laws and regulations if environmental remediation measures are required |
| Each of the Company’s domestic production facilities has permits and licenses regulating air emissions and water discharges |
| All of the Company’s domestic production facilities are controlled under permits issued by local, state, and federal air pollution control entities |
| International environmental requirements vary and could have substantially lesser requirements that may give competitors a competitive advantage |
| Calgon Carbon’s international operations expose it to uncertainties and risks from abroad, which could negatively affect its results of operations |
| The Company has locations in Europe, China, Japan, and the 14 ______________________________________________________________________ [36]Table of Contents United Kingdom which are subject to economic conditions and political factors within the respective countries, which if changed could negatively affect the Company’s results of operations and cash flow |
| Political factors include, but are not limited to, taxation, nationalization, inflation, currency fluctuations, increased regulation and quotas, tariffs and other protectionist measures |
| Calgon Carbon has locations operating in multiple foreign countries and as a result is subject to foreign exchange translation risk which could have an adverse effect on the Company’s financial results |
| Calgon Carbon conducts business in the local currencies of each of its foreign subsidiaries or affiliates |
| Those results are then converted to US dollars at prevailing exchange rates and consolidated into the Company’s financial statements |
| Changes in exchange rates, particularly the strengthening of the US dollar, could significantly reduce the Company’s sales and profitability from foreign subsidiaries or affiliates from one period to the next as local currency amounts are translated into less US dollars |
| The Company does not hedge foreign translation risk |
| Calgon Carbon’s European and Japanese activated carbon businesses are sourced from both the United States and China which subjects the Company to foreign exchange translation risk |
| Calgon Carbon’s only source of production for virgin granular activated carbon is in the United States and China |
| Those facilities are used to supply all of the Company’s global demand of such product |
| The Company’s foreign operations all purchase from the US operations in US dollars, yet sell in local currency, resulting in foreign exchange translation risk |
| The Company attempts to mitigate that risk in the short term by executing foreign currency derivative contracts of not more than one year in duration to cover its known or projected foreign currency exposure |
| However, those contracts do not protect the Company from longer term trends of a strengthening US dollar, which could significantly increase the Company’s cost of activated carbon delivered to its European and Japanese markets and for which the Company may not be able to offset by increases in its prices |
| Calgon Carbon could find it difficult to fund the capital needed to complete its growth strategy due to borrowing restrictions under its US credit facility |
| Calgon Carbon is extended credit under its US credit facility subject to compliance with certain financial covenants |
| The Company has had to amend its credit facility several times within the past year in order to cure violations or remain compliant as financial results have declined |
| If the Company’s liquidity remains constrained for more than a temporary period the Company may need to either delay certain strategic growth projects or access higher cost capital markets in order to fund the projects |
| Calgon Carbon could be subject to significant increases in pension contributions to its defined benefit pension plans thereby restricting cash flow |
| The Company has made commitments to pay certain retirement benefits to its current and former employees under its defined benefit pension plans |
| The funded status is determined using many assumptions such as inflation, investment rates, mortality, turnover, and discount rates which could turn out to be different than projected |
| Currently those plans in the aggregate are significantly under funded, and require a certain level of mandatory contributions as prescribed by law |
| Significant increases in the Company’s pension liabilities or decreases in pension assets as a result of actual experience being materially different than the projected assumptions would result in higher levels of mandatory contributions |
| In addition, changes in pension legislation could also increase funding requirements which would have an adverse effect on the Company’s cash flow and could restrict strategic investments |
| Calgon Carbon has significant domestic and foreign net operating tax loss (NOL) carryforwards which, if they are not utilized, would have an adverse effect on the Company’s financial results |
| The Company has significant deferred tax assets associated with net operating loss carryforwards that were generated from both the Company’s domestic and foreign operations |
| The Company has reduced that value of these assets by an appropriate valuation allowance for the amounts that are deemed not likely to be realized |
| However if the Company does not meet its projections of profitability in the future, some or all of those NOL’s could expire, which would result in a reduction of the Company’s deferred tax asset and an increase in tax expense, and which would reduce the Company’s profitability |
| 15 ______________________________________________________________________ [37]Table of Contents Calgon Carbon faces risks in connection with the material weakness described in its Sarbanes-Oxley Section 404 Management Report and any related remedial measures that the Company undertakes |
| In connection with the preparation of the Company’s annual report on Form 10-K for the year ended December 31, 2005, we concluded that the Company’s internal controls were ineffective as of December 31, 2005 as a result of the failure to record invoices for professional services in a timely manner |
| We have initiated remediation measures to address the identified material weakness as described in Part II, Item 9a, Controls and Procedures, and will continue to evaluate the effectiveness of the Company’s disclosure controls and procedures and internal control over financial reporting on an ongoing basis, taking additional remedial action as appropriate |
| If we are unable to effectively remediate material weaknesses in internal control over financial reporting and to assert that disclosure controls and procedures including internal control over financial reporting are effective in any future period, the Company could lose investor confidence in the accuracy and completeness of its financial reports, which could have an adverse effect on the Company’s stock price and potentially subject it to litigation |
| Provisions of Delaware Law and our rights plan may make a takeover of the Company more difficult |
| Certain provisions of Delaware law, our certificate of incorporation and by-laws and our rights plan could make more difficult or delay our acquisition by means of a tender offer, a proxy contest or otherwise and the removal of incumbent directors |
| These provisions are intended to discourage certain types of coercive takeover practices even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price |