| COLLEGIATE PACIFIC INC ITEM 1A RISK FACTORS There are many risk factors that affect Collegiate Pacific’s business and the results of its operations, some of which are beyond Collegiate Pacific’s control |
| The following is a description of some of the important risk factors that may cause the actual results of Collegiate Pacific’s operations in future periods to differ substantially from those currently expected or desired |
| Our success depends upon our ability to develop new, and enhance our existing relationships with, customers and suppliers |
| Our success depends upon our ability to develop new, and enhance our existing relationships with, customers and suppliers |
| Our prospects must be considered in light of the risks, expenses, and difficulties - 8 - _________________________________________________________________ [63]Table of Contents frequently encountered by companies in our industry |
| To address these risks, we must, among other things: • effectively develop new relationships and maintain and deepen existing relationships with our suppliers, advertisers and customers; • provide products at competitive prices; • respond to competitive developments; • attract, retain, and motivate qualified personnel; and • anticipate and respond to merchandise trends and consumer demands |
| We cannot assure you that we will succeed in addressing such risks |
| Our failure to do so could have a material adverse effect on our business, financial condition, or results of operations in the form of lower revenues and operating profit and higher operating costs |
| Our strategic plan, involving growth through the acquisition of other companies, may not succeed |
| Our strategic plan involves continued rapid growth through the acquisition of other companies as demonstrated by the seven acquisitions we completed since January 2004 |
| Acquisitions of other companies involve a number of risks, including: • the difficulties related to assimilating the management, products, personnel, financial controls and other systems of an acquired business and to integrating distribution and information systems and other operational capabilities; • the difficulties related to combining previously separate businesses into a single unit; • the substantial diversion of management’s attention from day-to-day operations; • the assumption of liabilities of an acquired business, including unforeseen liabilities; • unanticipated costs associated with business acquisitions; • the failure to realize anticipated benefits, such as cost savings, revenue enhancements and profitability objectives; • the dilution of existing stockholders due to the issuance of equity securities, utilization of cash reserves, or incurrence of debt in order to fund the acquisitions; • the potential to have to write-down or write-off the value of acquired assets; • the potentially substantial transaction costs associated with completed acquisitions or pursuing acquisitions that are not completed; • the loss of any key personnel of the acquired company; and • maintaining customer, supplier or other favorable business relationships of acquired operations |
| - 9 - _________________________________________________________________ [64]Table of Contents We may be unable to make additional acquisitions on attractive terms or successfully integrate them into our operations |
| The substantial majority of our recent growth has been due to our acquisitions of Tomark, Kesslers, Dixie, OTS, Salkeld, Team Print, and 73dtta2prca of SSG We expect to continue to evaluate and, where appropriate, pursue acquisition opportunities on terms our management considers favorable to us |
| We cannot assure you that we will be able to identify suitable acquisitions in the future, or that we will be able to purchase or finance these acquisitions on favorable terms or at all |
| In addition, we compete against other companies for acquisitions, and we cannot assure you that we will be successful in the acquisition of any companies appropriate for our growth strategy |
| Further, we cannot assure you that any future acquisitions that we make will be integrated successfully into our operations or will achieve desired profitability objectives |
| Our success depends on our ability to manage our growth |
| During recent years, we have experienced a period of rapid and significant growth, and our continued expansion may significantly strain our management, financial and other resources |
| We believe that improvements in management and operational controls, and operations, financial and management information systems could be needed to manage future growth |
| We cannot assure you that: • these resources will be available, or be available in a cost-effective form, to us which will allow us to sustain growth at the same levels; • our current personnel, systems, procedures, and controls will be adequate to support our future operations; or • we will identify, hire, train, motivate or manage required personnel |
| Our failure to have these resources in sufficient form or quantity during a period of significant growth could have an adverse affect on our operating results |
| We face intense competition and potential competition from companies with greater resources and our inability to compete effectively with these companies could harm our business |
| The market for sporting goods and related equipment in which we compete is highly competitive, especially as to product innovation and availability, performance and styling, price, customer relationships, name recognition, marketing, delivery and quality of service |
| We compete principally in the institutional market with local sporting goods dealers and other direct mail companies |
| Some of our competitors may have: • substantially greater financial resources; • a larger customer base; • a broader line of product offerings; and • greater name recognition within the industry |
| In addition, our competitors may have larger technical, sales and marketing resources |
| Further, there are no significant technological or capital barriers to entry into the markets for many sporting goods and recreational products |
| Our competitors may be able to secure products from vendors on terms that are more favorable, fulfill customer orders more efficiently, or adopt more aggressive pricing or inventory availability policies |
| We cannot give you assurance that we will compete successfully against our competitors in the future |
| - 10 - _________________________________________________________________ [65]Table of Contents We are dependent on competitive pricing from our suppliers |
| The general economic conditions in the United States or international countries in which we do business could affect pricing of raw materials such as metals and other commodities used by suppliers of our finished goods |
| For example, recent demand for steel and aluminum has resulted in increased prices for our products |
| We cannot assure you that any price increase we incur for our products can be passed on to our customers without adversely affecting our operating results |
| The weak financial conditions of some of our customers may adversely affect our business |
| We monitor the credit worthiness of our customer base on an ongoing basis, and we have not experienced an abnormal increase in losses in our accounts receivable portfolio |
| We believe that allowances for losses adequately reflect the risk of loss |
| However, a change in the economic condition or in the make-up of our customer base could have an adverse affect on losses associated with the credit terms that we give to our customers that would adversely affect our cash flow and involve significant risks of nonpayment |
| Our financial results vary from quarter to quarter, which could hurt our business and the market price of our stock |
| Various factors affect the Company’s quarterly operating results and some of them are not within our control |
| They include, among others: • seasonal fluctuations in demand for our products; • the timing and introduction of new products by us and our competitors; • the market acceptance of our products; • the mix of products sold; • the timing of significant orders from and shipments to customers; • the reduction, rescheduling or cancellation of orders by our customers; • product pricing and discounts; • the timing of our acquisitions of other companies and businesses; and • general economic conditions |
| These and other factors are likely to cause our financial results to fluctuate from quarter to quarter |
| If revenue or operating results fall short of the levels expected by public market analysts and investors, the trading price of our common stock could decline dramatically |
| Based on the foregoing, we believe that quarter-to-quarter comparisons of our results of operations may not be meaningful |
| Therefore, purchasers of our common stock should not view our historical results of operations as reliable indications of our future performance |
| - 11 - _________________________________________________________________ [66]Table of Contents Seasonality of our business may adversely affect our net sales and operating income |
| Seasonal demand for our products and the budgeting procedures of many of our customers cause our financial results to vary from quarter to quarter |
| We generally experience lower net sales and higher expenses as a percentage of sales in the second quarter of each fiscal year (October 1 – December 31) due to lower customer demand during those periods of decreased sports activities, adverse weather conditions inhibiting customer demand, holiday seasons, school recesses, and higher sales and earnings in the remaining quarters of the fiscal year |
| We depend on key personnel for our future success |
| Our performance is substantially dependent on the skills, experience, and performance of our Chief Executive Officer, Michael J Blumenfeld, and our President, Adam Blumenfeld, as well as our ability to retain and motivate other officers and key employees, especially our road sales professionals, certain of whom would be difficult to replace |
| We neither have an employment agreement with Michael J Blumenfeld or Adam Blumenfeld nor a “key person” life insurance on any of our officers or employees |
| Further, Michael J Blumenfeld recently announced his desire to retire from the day-to-day operations of the Company by the end of 2006 and, consequently, our future performance and rate of growth may not continue at the same rate following his retirement |
| Our ability to retain and expand our customer base depends on our ability to maintain strong relationships with our road sales professionals |
| Consequently, the loss of one or more key road sales professionals could result in our loss of the customer relationships maintained by the departing road sales professionals, which could materially adversely affect our net sales and results of operations |
| We believe we currently have a good relationship with our road sales professionals |
| We depend on international and domestic suppliers |
| A significant amount of our revenues is dependent upon products purchased from foreign suppliers, which are located primarily in the Far East |
| In addition, we believe that many of the products we purchase from our domestic suppliers are manufactured overseas |
| Accordingly, we are subject to the risks of international business, including: • shipment delays; • fluctuation in exchange rates; • increases in import duties; • changes in customs regulations; • adverse economic conditions in foreign countries; • social, political and economic instability; and • acts of war and terrorism |
| The occurrence of any one or more of the events described above could adversely affect our business, financial condition and results of operations due to an inability to make timely shipments to our customers |
| We depend on a growing number of domestic suppliers for our finished goods |
| We are dependent on a growing number of domestic suppliers for our finished goods |
| Any significant delay in the delivery of products by our domestic suppliers combined with our inability to - 12 - _________________________________________________________________ [67]Table of Contents obtain substitute sources for these products in a timely manner or on terms acceptable to us could significantly increase our backlog and could result in the cancellation of customer orders, damage our customer relationships and harm our operating results |
| We ship our products using common carriers, primarily UPS The operations of such carriers are outside our control |
| Accordingly, our business reputation and operations are subject to certain risks, including: • shipment delays caused by such carriers; • labor strikes by the employees of such carriers; • increases in shipping costs and postage rates; and • other adverse economic conditions |
| The occurrence of any one or more of the foregoing could adversely affect our business, financial condition and results of operations due to an inability to make timely shipments to our customers or by utilizing other more costly carriers or means of shipping |
| We may be subject to product liability claims if people or property is harmed by the products we sell |
| Some of the products we sell may expose us to product liability claims relating to personal injury, death, or property damage caused by such products, and may require us to take actions such as product recalls |
| Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all |
| In addition, some of our vendor agreements with our distributors, manufacturers, and third party sellers do not indemnify us from product liability |
| We have a material amount of goodwill and may be required to recognize future intangible impairment charges |
| Approximately dlra49dtta3 million, or 34dtta1prca of our total assets as of June 30, 2006, represented intangible assets, the significant majority of which is goodwill |
| Goodwill is the amount by which the costs of an acquisition accounted for using the purchase method exceeds the fair value of the net assets we acquired |
| We are required to record goodwill as an intangible asset on our balance sheet |
| Pursuant to accounting principles generally accepted in the United States of America (“US GAAP”), we are required to test goodwill and other intangible assets to determine if they are impaired |
| Such tests are required to be performed annually or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the asset below its carrying amount |
| Disruptions to our business, protracted economic weakness, unexpected significant declines in operating results and market capitalization declines may result in additional charges for goodwill and other intangible asset impairments |
| Reductions in our net income caused by the write-down of goodwill or intangible assets could materially adversely affect our results of operations |
| Acts of war or terrorism may have an adverse effect on the economy generally, and more specifically on Collegiate Pacific’s business, financial condition, results of operations and prospects |
| Among various other risks, such occurrences have the potential to adversely affect Collegiate Pacific’s ability to consummate future debt or equity financings and negatively affect Collegiate Pacific’s ability to manufacture, source and deliver products in a timely manner |
| - 13 - _________________________________________________________________ [68]Table of Contents Risks Related to our Corporate Structure and Stock Our stock price could be subject to significant volatility |
| The price of our common stock is determined in the marketplace and may be influenced by many factors, including: • the depth and liquidity of the market for our common stock; • investor perception of the Company and the industry within which we compete; • quarterly variations in operating results; and • general economic and market conditions |
| Historically, the weekly trading volume of our common stock has been relatively small |
| Any material increase in public float could have a significant impact on the price of our common stock |
| In addition, the stock market has occasionally experienced extreme price and volume fluctuations that often affect market prices for smaller companies |
| These extreme price and volume fluctuations often are unrelated or disproportionate to the operating performance of the affected companies |
| Accordingly, the price of our common stock could be affected by such fluctuations |
| A large number of our outstanding shares and shares to be issued upon exercise of our outstanding options may be sold into the market in the future, which could cause the market price of our common stock to drop significantly, even if our business is doing well |
| A substantial number of shares of our common stock are reserved for issuance pursuant to stock options |
| As of June 30, 2006, we had 1cmam144cmam600 outstanding options, each to purchase one share of our common stock, issued to key employees, officers and directors under our 1998 Collegiate Pacific Inc |
| Stock Option Plan |
| These outstanding options could have a significant adverse effect on the trading price of our common stock, especially if a significant volume of the options was exercised and the stock issued was immediately sold into the public market |
| Further, the exercise of these options could have a dilutive impact on other shareholders by decreasing their ownership percentage of our outstanding common stock |
| If we attempt to raise additional capital through the issuance of equity or convertible debt securities, the terms upon which we will be able to obtain additional equity capital, if at all, may be negatively affected because the holders of outstanding options can be expected to exercise them, to the extent they are able, at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable than those provided in such options |
| Three principal stockholders own a significant amount of our outstanding common stock |
| Based on the number of outstanding shares of our common stock as of September 19, 2006, Michael J Blumenfeld, our Chairman and Chief Executive Officer, beneficially owns 1cmam658cmam886 shares of our common stock, or 16dtta0prca, Skystone Advisors LLC beneficially owns 1cmam808cmam837 shares of our common stock, or 17dtta2prca, and Wellington Management Company LLP beneficially owns 1cmam377cmam907 shares of our common stock, or 13dtta5prca |
| As a result, these stockholders are in a position to influence significantly the outcome of elections of our directors, the adoption, amendment or repeal of our bylaws and any other actions requiring the vote or consent of our stockholders |
| - 14 - _________________________________________________________________ [69]Table of Contents Rights of our stockholders may be negatively affected if we issue any of the shares of preferred stock, which our Board of Directors has authority to issue |
| We have available for issuance 1cmam000cmam000 shares of preferred stock, par value dlra0dtta0l per share |
| Our Board of Directors is authorized to issue any or all of this preferred stock, in one or more series, without any further action on the part of stockholders |
| The rights of our stockholders may be negatively affected if we issue a series of preferred stock in the future that has preference over our common stock with respect to the payment of dividends or distribution upon our liquidation, dissolution or winding up |
| Risks Related to the Senior Subordinated Notes Due 2009 We significantly increased our leverage because of the sale of the notes |
| In connection with the sale of the notes, we incurred dlra50 million of indebtedness |
| Because of this indebtedness, our principal and interest payment obligations increased substantially |
| The degree to which we will be leveraged could materially and adversely affect our ability to obtain financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures |
| Our ability to meet our debt service obligations will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control |
| The notes are subordinated and there are no financial covenants in the indenture |
| The notes are unsecured and subordinated in right of payment to all of our existing and future “senior debt” of the Company |
| Under the terms of the indenture, we may also incur additional “senior debt” from time to time |
| In the event of our bankruptcy, liquidation or reorganization or upon acceleration of the notes due to an event of default under the indenture and in certain other events, we will not be able to repay the notes until after we have satisfied all of our senior debt obligations |
| The notes are also effectively subordinated to the liabilities, including trade payables, of our subsidiaries |
| As a result, our right to receive assets of any subsidiaries upon their liquidation or reorganization, and the rights of the holders of the notes to share in those assets, would be subject to the claims of the creditors of the subsidiaries |
| Our subsidiaries are not restricted from incurring additional debt or liabilities under the indenture |
| In addition, we are not restricted from paying dividends or issuing or repurchasing our securities under the indenture |
| If we or our subsidiaries were to incur additional debt or liabilities, our ability to pay our obligations on the notes could be adversely affected |
| As of June 30, 2006, we had borrowed approximately dlra4dtta0 million under our revolving line of credit, dlra10dtta0 million under our senior term loan, dlra50 million from the sale of the notes, and an aggregate amount of other indebtedness and liabilities of approximately dlra21dtta6 million (excluding intercompany liabilities which are not required to be recorded on the balance sheet in accordance with US GAAP) |
| We may be unable to repay, repurchase or redeem the notes |
| At maturity, the entire outstanding principal amount of the notes will become due and payable by us |
| Upon a fundamental change, as defined in the indenture, the holders may require us to repurchase all or a portion of the notes |
| We may not have enough funds or be able to arrange for additional financing to pay the principal at maturity or to repurchase the notes tendered by the holders |
| Our credit facility provides that a fundamental change constitutes an event of default |
| Future credit agreements or other agreements relating to our indebtedness might contain similar provisions |
| If the maturity date or a fundamental change occurs at a time when we are prohibited from repaying or repurchasing the notes, we could seek the consent of our lenders to purchase the notes or could attempt to refinance this debt |
| If we - 15 - _________________________________________________________________ [70]Table of Contents do not obtain the necessary consents or refinance the debt, we will be unable to repay or repurchase the notes |
| Our failure to repay the notes at maturity or repurchase tendered notes would constitute an event of default under the indenture, which might constitute a default under the terms of our other debt |
| In such circumstances, or if a fundamental change would constitute an event of default under our senior debt, the subordination provisions of the indenture would possibly limit or prohibit payments to the holders of the notes |
| The term “fundamental change” is limited to certain specified transactions and may not include other events that might harm our financial condition |
| Our obligation to offer to purchase the notes upon a fundamental change would not necessarily afford the holders of the notes protection in the event of a highly-leveraged transaction, reorganization, merger or similar transaction involving us |
| Provisions of the notes could discourage an acquisition of us by a third party |
| Certain provisions of the notes could make it more difficult or more expensive for a third party to acquire us |
| Upon the occurrence of certain transactions constituting a fundamental change, holders of the notes will have the right, at their option, to require us to repurchase all of their notes or any portion of the principal amount of such notes in integral multiples of dlra1cmam000 in cash at a price equal to 100prca of the principal amount of notes to be repurchased, plus accrued and unpaid interest and additional interest, if any, to, but excluding the repurchase date, plus the make whole premium, if applicable |
| In addition, pursuant to the terms of the notes, we may not enter into certain mergers or acquisitions unless, among other things, the surviving person or entity assumes the payment of the principal of, premium, if any, and interest (including additional interest, if any), plus the make whole premium, if applicable, on the notes |
| The make whole premium on the notes tendered for repurchase upon a fundamental change may not adequately compensate the holders for the lost option time value of notes |
| If a fundamental change occurs and at least 90prca of the consideration for the common stock in the transaction or transactions constituting the fundamental change consists of cash, holders of notes will be entitled to a make whole premium in cash in respect of notes tendered for purchase or converted in connection with the fundamental change |
| The amount of the make whole premium will be determined based on the date on which the fundamental change becomes effective and the share price of common stock when the transaction constituting the fundamental change occurs |
| While the make whole premium is designed to compensate the holders of notes for the lost option time value of notes because of a fundamental change, the amount of the make whole premium is only an approximation of the lost value and may not adequately compensate holders for such loss |
| In addition, if the share price of common stock at the time of the transaction constituting the fundamental change is less than dlra13dtta31 or more than dlra36dtta64, no make whole premium will be paid |
| A market may not develop for the notes |
| If an active market for the notes fails to develop or be sustained, the trading price of the notes could decline significantly |
| Conversion of the notes or issuance of additional securities convertible into or exercisable for shares of our common stock could dilute the ownership of existing stockholders |
| The conversion of some or all of the notes could dilute the ownership interests of existing stockholders |
| Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock |
| In addition, the existence of the notes may encourage short selling by market participants because the conversion of the notes could depress the price of our common stock |
| We may, in the future, sell additional shares of our common stock, or securities convertible into or exercisable for shares of our common stock, to raise capital |
| We may also issue additional shares of our common stock, or securities convertible into or exercisable for shares of our common stock, to finance future acquisitions |
| - 16 - _________________________________________________________________ [71]Table of Contents The price at which our common stock may be purchased on the American Stock Exchange is currently lower than the conversion price of the notes and may remain lower in the future |
| Our common stock trades on the American Stock Exchange under the symbol “BOO” On September 19, 2006, the last reported sale price of our common stock was dlra9dtta20 per share |
| The initial conversion price of the notes is approximately dlra14dtta65 per share |
| The market prices of our securities are subject to significant fluctuations |
| Such fluctuations, as well as economic conditions generally, may adversely affect the market price of our securities, including our common stock and the notes |
| If, however, one or more rating agencies rate the notes and assign the notes a rating lower than the rating expected by investors, or reduce their rating in the future, the market price of the notes and our common stock would be harmed |