| PORTEC RAIL PRODUCTS INC ITEM 1A RISK FACTORS Risk Factors Relating to Our Business Currency fluctuations between the US dollar, Canadian dollar and British pound sterling can adversely affect our reported financial results |
| Fluctuations in the relative values of the US dollar, Canadian dollar and British pound sterling could significantly increase the cost of our products to the ultimate purchaser |
| Under such circumstances our sales may decrease or we may have to reduce the prices for our products and services, thereby reducing our income |
| We report our financial condition and results of operations in US dollars |
| Fluctuations in the relative values of the US dollar, Canadian dollar and British pound sterling will require adjustments in our reported earnings and operations to reflect exchange rate translation in our Canadian and United Kingdom sales and operations |
| Our reported financial results will be impacted in response to such currency fluctuations |
| If the US dollar strengthens in value as compared to the value of the Canadian dollar or British pound sterling, our reported earnings in dollars from sales in those currencies will be unfavorable |
| We have limited international protection of our intellectual property |
| We own a number of patents and trademarks under the intellectual property laws of the United States, Canada and the United Kingdom |
| Our patent protections begin expiring in 2014 |
| However, we have not perfected patent and trademark protection of our proprietary intellectual property in other countries |
| The failure to obtain 10 _________________________________________________________________ patent and trademark protection in other countries may result in other companies copying and marketing products that are based upon our proprietary intellectual property |
| This could impede our growth into new markets where we do not have such protections and result in greater supplies of similar products, which in turn could result in a loss of pricing power and reduced revenue |
| We may not achieve benefits from future acquisitions |
| Our business strategy includes the potential acquisition of businesses that we expect would complement and expand our existing products and services |
| We may not be able to successfully identify suitable acquisition opportunities or complete any particular acquisition, combination or other transaction on acceptable terms |
| In addition, the timing and success of our efforts to acquire any particular business and integrate the acquired business into our existing operations cannot be predicted |
| Acquisitions involve a number of risks and challenges, including: • diversion of management’s attention; • the need to integrate acquired operations, internal controls and operational functions; • potential loss of key employees and customers of the acquired companies; • an increase in our expenses and working capital requirements; and • increased debt or dilution from issuance of common stock |
| Any of these factors could adversely affect our ability to achieve anticipated benefits from an acquisition |
| Disruption of our relationships with key suppliers would adversely affect our business |
| We rely upon third party steel mills to manufacture steel for our railroad track products based upon specifications that we provide |
| In 2005, approximately 90prca of our domestic requirements for steel were purchased from two primary suppliers, and approximately 80prca of our Canadian requirements were purchased from Norambar Inc |
| In the event our steel suppliers for railroad track products were to go out of business, refuse to continue their business relationship with us or become subject to work stoppages, our business would be disrupted |
| While management believes that it could secure alternative manufacturing sources, there can be no assurance that we would not incur substantial delays and significant expense in securing such alternative suppliers |
| Furthermore, alternative suppliers might charge significantly higher prices than we currently pay |
| Under such circumstances, the disruption to our business may have a material adverse impact on our financial condition or results of operations |
| If we lose key personnel or qualified technical staff, our ability to manage the day-to-day aspects of our business will be adversely affected |
| We believe that the attraction and retention of qualified personnel is critical to our success |
| If we lose key personnel or are unable to recruit qualified personnel, our ability to manage the day-to-day aspects of our business will be adversely affected |
| Our operations and prospects depend in large part on the performance of our senior management team, which consists of our President and Chief Executive Officer, John S Cooper, and Group Vice Presidents Richard J Jarosinski and Konstantinos Papazoglou |
| The loss of the services of one or more members of our senior management team could have a material adverse effect on our business, financial condition or results of operations |
| Because our senior management team has many years experience with our company and within the industries in which we operate, it would be difficult to replace them without adversely affecting our business operations |
| We do not have employment or non-compete agreements with any members of our senior management team |
| As we expand our sales of products and services internationally, we will increase our exposure to international economic and political risks |
| Historically, substantially all of our business was conducted in the United States, Canada and the United Kingdom |
| International revenues outside of our core United States, Canada and United Kingdom markets accounted for 9prca and 8prca of our revenues for the years ended December 31, 2005 and 2004, respectively |
| We are placing increased emphasis on the expansion of our international sales opportunities |
| Doing business outside the United States subjects us to various risks, including changing economic and political conditions, work stoppages, exchange controls, currency fluctuations, armed conflicts and unexpected changes in United States and foreign laws relating to 11 _________________________________________________________________ tariffs, trade restrictions, transportation regulations, foreign investments and taxation |
| Increasing sales to foreign countries will expose us to increased risk of loss from foreign currency fluctuations and exchange controls as well as longer accounts receivable payment cycles |
| We have no control over most of these risks and may be unable to anticipate changes in international economic and political conditions and, therefore, unable to alter our business practices in time to avoid the adverse effect of any of these possible changes |
| We have a significant pension liability, which negatively impacts our retained earnings and may significantly increase our funding requirements under ERISA and other applicable regulations |
| We maintain defined benefit pension plans in the United States and United Kingdom that cover a significant number of our current employees, former employees and retirees |
| These defined benefit pension plans were frozen effective December 31, 2003 |
| Our actuaries currently project that our obligations to the pension plan’s beneficiaries exceed the plan’s assets |
| The shortfall in plan assets may cause us to fund significant amounts of cash into these plans to cover any minimum funding requirements under regulatory requirements |
| As a result, for the years ended December 31, 2005 and 2004, our shareholders’ equity was reduced by dlra87cmam000 and dlra882cmam000, respectively, in order to reflect our minimum pension liability |
| Further declines in the market value of these defined benefit pension plan assets will have an adverse impact on our retained earnings and uses of cash for other investment opportunities |
| We may be required to record a significant charge to earnings if our goodwill or intangible assets become impaired |
| We are required under generally accepted accounting principles to review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable |
| Goodwill is required to be tested for impairment at least annually |
| Factors that may be considered to be a change in circumstances indicating that the carrying value of our intangible assets may not be recoverable include a decline in stock price and market capitalization, a significant decrease in the market value of an asset, and slower growth rates in our industry |
| We may be required to record a significant charge to earnings during the period in which any impairment of our goodwill or intangible assets is determined |
| This may adversely impact our results of operations or financial condition |
| Risk Factors Relating to Our Industry Our sales can fluctuate from quarter to quarter due to seasonal factors or the our railroad customers’ capital spending programs |
| Our sales can fluctuate from quarter to quarter because of several factors |
| First, the demand for certain of our railroad product lines, including rail joints, rail anchors and spikes, is subject to seasonal fluctuations |
| We generally experience strong sales in the second quarter as a result of seasonal pick-up in construction and trackwork due to favorable spring weather conditions, compared with an expected downturn in the fourth quarter of each year due largely to reductions in construction and trackwork in the winter months |
| Notwithstanding expected seasonal fluctuations, many of our customers are large companies which, as a matter of routine purchasing practices, place large orders for our products and services that can have a disproportionate impact on our revenues in a particular quarter |
| Such large orders in any given quarter improve the sales performance of that quarter |
| Conversely, if a major customer delays spending in a particular quarter, our revenue decreases in that quarter |
| A decrease in rail traffic or rail capital expenditures due to weakness in the general economy or competitive factors could adversely affect our operating results |
| Weakness in the general economy, or factors such as work stoppage or competition from other modes of transportation, can cause a decrease in rail transportation or rail capital expenditures, which could have an adverse impact on our financial condition or results of operations |
| For example, railroads directly compete with the trucking industry for the transportation of freight |
| In the event that the transportation of freight by truck becomes preferable as a result of pricing, legislative developments or other factors, the profitability of railroads would be adversely affected resulting in a decrease in capital spending |
| A decrease in capital spending by our railroad customers would result in lower sales of our products and decreased revenue |
| 12 _________________________________________________________________ Competition and innovation by our competitors may adversely affect our business |
| The markets for our products are highly competitive |
| Competition is based on price, product performance, technological leadership, customer service and other factors |
| Technological innovation in the railroad and railroad supply industry has evolved and continues to evolve |
| Technological innovation by any of our existing competitors, or new competitors entering any of the markets in which we do business, could put us at a competitive disadvantage |
| In particular, our business would be adversely affected if any existing or new competitors developed improved or less expensive products |
| New or existing competitors may import track component products for sale in the North American market at reduced prices |
| Our rail joint, rail anchor, rail spike and other track component market share could be reduced by new or existing competitors importing either raw material steel for these products or finished products from lower cost foreign sources |
| Standard rail joints are currently available, imported from Asia, and have been approved for use and are being purchased by Class I and short line railroads |
| Further consolidation of the railroad industry may adversely affect our business |
| Over the past 10 years there has been a consolidation of railroad carriers operating in North America |
| Currently, seven Class I railroads operate in the United States, along with two major railroads in Canada and two major railroads in Mexico |
| Future consolidation of the railroad industry may affect our sales and result in reduced income because the loss of a Class I account to competitors would have greater significance |
| Risk Factors Relating to Our Stock Ownership Potential voting control by directors, management and employees could make a takeover attempt more difficult to achieve |
| Our directors, management and employees control a significant percentage of our common stock |
| Executive officers and directors as a group own 3cmam282cmam352 shares, or 34dtta2prca of the outstanding shares as of December 31, 2005 |
| If these individuals were to act together, they could have significant influence over or control the outcome of any shareholder vote |
| This voting power may discourage takeover attempts that other shareholders may desire |