| Risk Factors In addition to the risks and uncertainties discussed elsewhere in this Annual Report on Form 10-K (particularly in Item 7 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations), the following are some important factors that could materially impact our results of operations and financial condition |
| Risks related to our business Our substantial indebtedness could adversely affect our financial health |
| As of June 30, 2006, our total debt was approximately dlra522 million and our total debt, as a percentage of total capitalization, was 64prca |
| Our level of debt could have a significant adverse future effect on our business |
| For example: - we may have limited ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of our growth strategy, research and development costs or other purposes; - a substantial portion of our cash flow may be used to pay principal and interest on our debt, which will reduce the funds available for working capital, capital expenditures, acquisitions and other purposes; - our senior secured credit facility covenants require us to meet certain financial objectives and impose other restrictions on business operations |
| These covenants and the covenants contained in the indentures governing our senior subordinated notes will limit our ability to borrow additional funds or dispose of assets and limit our flexibility in planning for and reacting to changes in our business; - we may be more vulnerable to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulation; - our high debt level and the various covenants contained in the indentures related to our senior notes, senior subordinated notes and the documents governing our other existing indebtedness may place us at a relative competitive disadvantage as compared to certain of our competitors; - our borrowings under our senior secured credit facility are at floating rates of interest, which could result in higher interest expense in the event of an increase in interest rates |
| Our ability to pay principal of and interest on our senior notes and senior subordinated notes, to service our other debt and to refinance indebtedness when necessary depends on our financial and operating performance, each of which is subject to prevailing economic conditions and to financial, business and other factors beyond our control |
| We cannot assure you that we will generate sufficient cash flow from operations or that we will be able to obtain sufficient funding to satisfy all of our obligations |
| If we are unable to pay our debts, we will be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our indebtedness or selling additional equity capital |
| However, we cannot assure you that any alternative strategies will be feasible at the time or prove adequate |
| Also, certain alternative strategies will require the consent of our senior secured lenders before we engage in any such strategy |
| 8 _________________________________________________________________ If our significant customer changes its purchasing habits, our business could be adversely impacted |
| Procter & Gamble is our largest single customer |
| We supply Procter & Gamble with fluff pulp and airlaid nonwovens |
| While Procter & Gamble has previously accounted for a higher percentage of our total revenues, sales to Procter & Gamble accounted for approximately 13prca of our sales in fiscal year 2006 |
| In the event that Procter & Gamble fails to continue to purchase these products from us in substantial volume, our results of operations and financial condition could be materially and adversely affected |
| Compliance with extensive general and industry specific environmental laws and regulations requires significant resources, and the significant associated costs may adversely impact our business |
| Our operations are subject to extensive general and industry specific federal, state, local and foreign environmental laws and regulations |
| We devote significant resources to maintaining compliance with these laws and regulations |
| We expect that, due to the nature of our operations, we will be subject to increasingly stringent environmental requirements (including standards applicable to wastewater discharges and air emissions) and will continue to incur substantial costs to comply with these requirements |
| Because it is difficult to predict the scope of future requirements, there can be no assurance that we will not in the future incur material environmental compliance costs or liabilities |
| The Foley Plant, located in Perry, Florida, discharges treated wastewater into the Fenholloway River |
| Under the terms of an agreement with the Florida Department of Environmental Protection (“FDEP”), approved by the U S Environmental Protection Agency (the “EPA”) in 1995, we agreed to a comprehensive plan to attain Class III (“fishable/swimmable”) status for the Fenholloway River under applicable Florida law (the “Fenholloway Agreement”) |
| The Fenholloway Agreement requires us, among other things, to (i) make process changes within the Foley Plant to reduce the coloration of its wastewater discharge, (ii) restore certain wetlands areas, (iii) relocate the wastewater discharge point into the Fenholloway River to a point closer to the mouth of the river, and (iv) provide oxygen enrichment to the treated wastewater prior to discharge at the new location |
| We have completed the process changes within the Foley Plant as required by the Fenholloway Agreement |
| In making these in-plant process changes, we incurred significant expenditures, and, as discussed in the following paragraph, we expect to incur significant additional capital expenditures to comply with the remaining obligations under the Fenholloway Agreement |
| Based on the requirements, we expect to incur additional capital expenditures of approximately dlra60 million over 8 to 10 years, possibly beginning as early as fiscal year 2007 |
| The amount and timing of these capital expenditures may vary depending on a number of factors |
| For additional information on environmental matters, see Note 20 to the Consolidated Financial Statements |
| These possible expenditures could have a material adverse effect on our business, results of operations or financial condition |
| Because approximately 68prca of our sales are to customers outside the United States, we are subject to the economic and political conditions of foreign nations |
| We have manufacturing facilities in four countries and sell products in approximately 60 countries |
| For the fiscal year ended June 30, 2006, sales of our products outside the United States represented approximately 68prca of our sales |
| The global economy and relative strength or weakness of the U S dollar can have a significant impact on our sales |
| In addition, although approximately 83prca of our sales are denominated in US dollars, it is possible that as we expand globally, we will face increased risks associated with operating in foreign countries, including: - the risk that foreign currencies will be devalued or that currency exchange rates will fluctuate; - the risk that limitations will be imposed on our ability to convert foreign currencies into US dollars or on our foreign subsidiaries &apos ability to remit dividends and other payments to the United States; - the risk that our foreign subsidiaries will be required to pay withholding or other taxes on remittances and other payments to the United States or that the amount of any such taxes will be increased; - the risk that certain foreign countries may experience hyperinflation; and - the risk that foreign governments may impose or increase investment or other restrictions affecting our business |
| Exposure to commodity products creates volatility in pricing and profits |
| If our research and development efforts do not result in the commercialization of new, proprietary products, we will continue to have significant exposure to fluff pulp, which could result in volatility in sales prices and profits |
| 9 _________________________________________________________________ Our failure to maintain satisfactory labor relations could have a material adverse effect on our business |
| If our negotiations with the representatives of the unions, to which many of our employees belong, are not successful, our operations could be subject to interruptions at many of our facilities |
| As of August 25, 2006, we employed approximately 1cmam600 employees, of whom approximately 1cmam130 are employed at our facilities in the United States |
| Approximately 55prca of the US employees are represented by unions at two plants in Perry, Florida; and Memphis, Tennessee |
| On October 21, 2003, the union at our Foley Plant ratified a new labor agreement effective through March 31, 2008 |
| The agreement for the Memphis Plant is in effect through March 18, 2009 |
| The union at our Canadian facility ratified a new labor agreement effective through June 30, 2009 |
| Works councils provide employee representation for non-management workers at our specialty fibers plant in Americana, Brazil, and our nonwoven materials plant in Steinfurt, Germany |
| None of our facilities has had labor disputes or work stoppages in recent history |
| The Foley and Memphis Plants have not experienced any work stoppages due to labor disputes in over 30 years and 50 years, respectively |
| We consider our relationships with our employees and their representative organizations to be good |
| An extended interruption of operations at any of our facilities could have a material adverse effect on our business |
| Risks related to our industry We are subject to the cyclicality of our industry |
| The demand and pricing of our products, particularly fluff pulp, are influenced by the much larger market for papermaking pulps which is highly cyclical |
| The markets for most cellulose and absorbent products are sensitive to both changes in general global economic conditions and to changes in industry capacity |
| The price of these products can fluctuate significantly when supply and demand become imbalanced for any reason |
| Our financial performance can be heavily influenced by these pricing fluctuations and the general cyclicality of the industries in which we compete |
| We cannot assure you that current prices will be maintained, that any price increases will be achieved, or that industry capacity utilization will reach favorable levels |
| The demand, cost and prices for our products may thus fluctuate substantially in the future and downturns in market conditions could have a material adverse effect on our business, results of operations and financial condition |
| Competition and surplus capacity could adversely affect our operating results and financial condition |
| The markets for our products are all competitive |
| Actions by competitors can affect our ability to sell our products and can affect the volatility of the prices at which our products are sold |
| Other actions by competitors, such as reducing costs or adding low-cost capacity, may adversely affect our competitive position in the products we manufacture and, consequently, our sales, operating income and cash flows |
| Market fluctuations in the availability and cost of energy and raw materials are beyond our control and may adversely impact our business |
| Energy, chemicals, and raw material costs, including fuel oil, natural gas, electricity, cotton linters, wood, and caustic and other chemicals are a significant operating expense |
| The prices and availability of raw materials and energy can be volatile and are susceptible to rapid and substantial changes due to factors beyond our control such as changing economic conditions, currency fluctuations, weather conditions, political unrest and instability in energy-producing nations, and supply and demand considerations |
| For example, energy and chemical costs have increased substantially which has resulted in increased production costs for our products |
| Increases in production costs could have a material adverse effect on our business, financial condition and results of operations |
| In addition to increased costs, it is possible that a disruption in supply of natural gas or other fossil fuels could limit our ability to operate our facilities |
| Market fluctuations in the availability and cost of transportation are beyond our control and may adversely impact our business |
| Our business depends on the transportation of a large number of products, both domestically and internationally |
| In the United States, an increase in transportation rates or fuel surcharges and/or a reduction in transport availability in truck and rail could negatively impact our ability to provide products to our customers in a timely manner |
| While we have had adequate transportation availability, there is no assurance that such availability can continue to be effectively managed in the future |