| Additional risks that we do not yet know of, or that we currently think are immaterial, may also impair our business operations or financial results |
| If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could suffer and the trading price of our common stock or our senior notes could decline |
| You should consider the following risks before deciding to invest in our common stock or senior notes |
| Many factors may cause our net revenues, operating results and cash flows to fluctuate and possibly decline which may result in declines in our stock price |
| Our net revenues, operating results and cash flows may fluctuate significantly because of a number of factors, many of which are outside of our control |
| These factors may include, but may not be limited to, the following: • fluctuations in market demand for our products; • increased competition and pricing pressures; • our ability to anticipate changing customer demands and preferences; • our failure to efficiently manage our inventory levels; • our inability to manage and maintain our debt obligations; • seasonality in our business; • maintaining our existing, or entry into new, sponsorships with our professional athletes; • changes in our, and our competitors’, business strategy or pricing; • the timing of certain general and administrative expenses; • completing acquisitions and the costs of integrating acquired operations; • international currency fluctuations, operating challenges and trade regulations; and • expenses related to the issuance of stock options to our employees |
| One or more of the foregoing factors may cause our operating expenses to be unexpectedly high or result in a decrease in our revenue during any given period |
| If these or any other variables or unknowns were to cause a shortfall in revenues or earnings, an increase in our operating costs or otherwise cause a failure to meet public market expectations, our stock price may decline and our business could be adversely affected |
| The apparel, sporting goods and footwear industries are each highly competitive, and if we fail to compete effectively, we could lose our market position |
| The apparel, sporting goods and footwear industries are each highly competitive |
| We compete against a number of domestic and international designers, manufacturers, retailers and distributors of apparel, sporting goods and footwear, some of whom are significantly larger and have significantly greater financial resources than we do |
| In order to compete effectively, we must (1) maintain the image of our brands and our reputation for authenticity in our core boardriding and outdoor sports markets; (2) be flexible and innovative in responding to rapidly changing market demands on the basis of brand image, style, performance and quality; and (3) offer consumers a wide variety of high quality products at competitive prices |
| The purchasing decisions of consumers are highly subjective and can be influenced by many factors, such as brand image, marketing programs and product design |
| Several of our competitors enjoy substantial competitive advantages, including greater brand recognition and greater financial resources for competitive activities, such as sales and marketing and strategic acquisitions |
| The number of our direct competitors and the intensity of competition may increase as we expand into other product lines or as other companies expand into our product lines |
| Our competitors may enter into business combinations or alliances that strengthen their competitive positions or prevent us from taking advantage of such combinations or alliances |
| Our competitors also may be able to respond more quickly and effectively than we can to new or changing opportunities, standards or consumer preferences |
| Our results of operations 12 _________________________________________________________________ [88]Table of Contents and market position may be adversely impacted by our competitors and the competitive pressures in the apparel, sporting goods and footwear industries |
| If we are unable to develop innovative and stylish products in response to rapid changes in consumer demands and fashion trends, we may suffer a decline in our revenues and market share |
| The apparel, sporting goods and footwear industries are subject to constantly and rapidly changing consumer demands based on fashion trends and performance features |
| Our success depends, in part, on our ability to anticipate, gauge and respond to these changing consumer preferences in a timely manner while preserving the authenticity and quality of our brands |
| Our success also depends upon our ability to continue to develop innovative products |
| Our future success will depend, in part, upon our continued ability to develop and introduce innovative products reflective of technological advances in the respective markets in which we compete |
| If we are unable to successfully introduce new outdoor sporting goods products, or if our competitors introduce superior products, customers may purchase outdoor sporting goods products from our competitors, which could adversely affect our revenues and results of operations |
| As is typical with new products, market acceptance of new designs and products we may introduce is subject to uncertainty |
| In addition, we generally make decisions regarding product designs several months in advance of the time when consumer acceptance can be measured |
| If trends shift away from our products, or if we misjudge the market for our product lines, we may be faced with significant amounts of unsold inventory or other conditions which could have a material adverse effect on our results of operations |
| The failure of new product designs or new product lines to gain market acceptance could also adversely affect our business and the image of our brands |
| Achieving market acceptance for new products may also require substantial marketing efforts and expenditures to expand consumer demand |
| These requirements could strain our management, financial and operational resources |
| If we do not continue to develop stylish and innovative products that provide better design and performance attributes than the products of our competitors and that are accepted by consumers, or if our future product lines misjudge consumer demands, we may lose consumer loyalty, which could result in a decline in our revenues and market share |
| War, acts of terrorism, or the threat of either could have an adverse effect on our ability to procure our products and on the United States and/or international economies |
| In the event of war or acts of terrorism or the escalation of existing hostilities, or if any are threatened, our ability to procure our products from our manufacturers for sale to our customers may be negatively affected |
| We import a substantial portion of our products from other countries |
| If it becomes difficult or impossible to import our products into the countries in which we sell our products, our sales and profit margins may be adversely affected |
| Additionally, war, military responses to future international conflicts and possible future terrorist attacks may lead to a downturn in the US and/or international economies, which could have a material adverse effect on our results of operations |
| We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, royalty income, and product purchases of our international subsidiaries that are denominated in currencies other than their functional currencies |
| We are also exposed to foreign currency gains and losses resulting from domestic transactions that are not denominated in US dollars, and to fluctuations in interest rates related to our variable rate debt |
| If we are unsuccessful in using various foreign currency exchange contracts or interest rate swaps to hedge these potential losses, our profits and cash flows could be significantly reduced |
| In some cases, as part of our risk management strategies, we may choose not to hedge our exposure to foreign currency exchange rate changes, or we may choose to maintain variable interest rate debt |
| If we misjudge these risks, there could be a material adverse effect on our operating results and financial position |
| Furthermore, we are exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in our consolidated financial statements due to the translation of the statements of income and balance sheets of our international subsidiaries into US dollars |
| We use foreign currency exchange contracts to hedge the profit and loss effects of this 13 _________________________________________________________________ [89]Table of Contents translation effect; however, accounting rules do not allow us to classify these contracts as hedges, but require us to mark these contracts to fair value at the end of each financial reporting period and translate our revenues and expenses at average exchange rates during the period |
| As a result, the reported revenues and expenses of our international subsidiaries would decrease if the US dollar increased in value in relation to other currencies, including, the euro, Australian dollar or Japanese yen |
| Our business could be harmed if we fail to maintain proper inventory levels |
| We maintain an inventory of selected products that we anticipate will be in high demand |
| We may be unable to sell the products we have ordered in advance from manufacturers or that we have in our inventory |
| Inventory levels in excess of customer demand may result in inventory write-downs or the sale of excess inventory at discounted or closeout prices |
| These events could significantly harm our operating results and impair the image of our brands |
| Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply quality products in a timely manner, we may experience inventory shortages, which might result in unfilled orders, negatively impact customer relationships, diminish brand loyalty and result in lost revenues, any of which could harm our business |
| Our current and potential future acquisitions and related financings may place a significant debt burden on us |
| From time to time, we have pursued, and may continue to pursue, acquisitions which involve the incurrence of additional debt, such as was incurred in connection with our acquisitions of DC Shoes and Rossignol |
| If one or more acquisitions results in our becoming substantially more leveraged on a consolidated basis, our flexibility in responding to adverse changes in economic, business or market conditions may be adversely affected, which could have a material adverse effect on our results of operations |
| Our significant debt obligations could limit our flexibility in managing our business and expose us to certain risks |
| We are highly leveraged |
| Our high degree of leverage may have important consequences to you, including the following: • we may have difficulty satisfying our obligations under our senior notes or other indebtedness and, if we fail to comply with these requirements, an event of default could result; • we may be required to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures and other general corporate activities; • covenants relating to our indebtedness may limit our ability to obtain additional financing for working capital, capital expenditures and other general corporate activities; • covenants relating to our indebtedness may limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; • we may be more vulnerable to the impact of economic downturns and adverse developments in our business; and • we may be placed at a competitive disadvantage against any less leveraged competitors |
| The occurrence of any one of these events could have a material adverse effect on our business, financial condition, results of operations, prospects and ability to satisfy our obligations under our senior notes |
| Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly |
| Borrowings under our revolving credit facility are at variable rates of interest and expose us to interest rate risk |
| If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows would decrease |
| Our success is dependent on our ability to protect our worldwide intellectual property rights, and our inability to enforce these rights could harm our business |
| Our success depends to a significant degree upon our ability to protect and preserve our intellectual property, including copyrights, trademarks, patents, service marks, trade dress, trade secrets and similar 14 _________________________________________________________________ [90]Table of Contents intellectual property |
| We rely on the intellectual property, patent, trademark and copyright laws of the United States and other countries to protect our proprietary rights |
| However, we may be unable to prevent third parties from using our intellectual property without our authorization, particularly in those countries where the laws do not protect our proprietary rights as fully as in the United States |
| The use of our intellectual property or similar intellectual property by others could reduce or eliminate any competitive advantage we have developed, causing us to lose sales or otherwise harm our business |
| If it became necessary for us to resort to litigation to protect these rights, any proceedings could be burdensome and costly and we may not prevail |
| We have obtained some US and foreign trademark, patents and service mark registrations, and have applied for additional ones, but cannot guarantee that any of our pending applications will be approved by the applicable governmental authorities |
| Moreover, even if the applications are approved, third parties may seek to oppose or otherwise challenge these or other registrations |
| A failure to obtain trademark, patents or service mark registrations in the United States and in other countries could limit our ability to protect our trademarks, patents and service marks and impede our marketing efforts in those jurisdictions |
| The loss of such trademarks, patents and service marks, or the loss of the exclusive use of our trademarks, patents and service marks, could have a material adverse effect on our business, financial condition and results of operations |
| Accordingly, we devote substantial resources to the establishment and protection of our trademarks, patents and service marks on a worldwide basis and continue to evaluate the registration of additional trademarks, patents and service marks, as appropriate |
| We cannot assure you that our actions taken to establish and protect our trademarks, patents and service marks will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violative of their trademark or other proprietary rights |
| Our products may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products |
| We cannot be certain that our products do not and will not infringe the intellectual property rights of others |
| We may be subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of the intellectual property rights of third parties by us or our customers in connection with their use of our products |
| Any such claims, whether or not meritorious, could result in costly litigation and divert the efforts of our personnel |
| Moreover, should we be found liable for infringement, we may be required to enter into licensing agreements (if available on acceptable terms or at all) or to pay damages and cease making or selling certain products |
| Moreover, we may need to redesign or rename some of our products to avoid future infringement liability |
| Any of the foregoing could cause us to incur significant costs and prevent us from manufacturing or selling our products |
| Our current executive officers and management are critical to our success, and the loss of any of these individuals could harm our business, brands and image |
| We are heavily dependent on our current executive officers and management |
| We believe that our success depends to a significant degree upon the continued contributions of our executive officers and other key personnel, both individually and as a group |
| The loss of any of our executive officers or management or the inability to attract or retain qualified personnel could delay the development and introduction of new products, harm our ability to sell our products, damage the image of our brands and prevent us from executing our business strategy |
| If we are unable to maintain and expand our endorsements by professional athletes, our ability to market and sell our products may be harmed |
| A key element of our marketing strategy has been to obtain endorsements from prominent athletes, which contributes to the authenticity and image of our brands |
| We believe that this strategy has been an effective means of gaining brand exposure worldwide and creating broad appeal for our products |
| We cannot assure you that we will be able to maintain our existing relationships with these individuals in the future or that we will be able to attract new athletes to endorse our products |
| Larger companies with greater access to capital for athlete sponsorships may in the future increase the cost of sponsorships for these athletes to levels we may choose not to match |
| If this were to occur, our sponsored athletes may terminate their relationships with us and endorse the products of our competitors and we may be unable to obtain endorsements from other comparable athletes |
| We also are subject to risks related to the selection of athletes whom we choose to endorse our products |
| We may select athletes who are unable to perform at expected levels or who are not sufficiently 15 _________________________________________________________________ [91]Table of Contents marketable |
| In addition, negative publicity concerning any of our athletes could harm our brand and adversely impact our business |
| If we are unable in the future to secure prominent athletes and arrange athlete endorsements of our products on terms we deem to be reasonable, we may be required to modify our marketing platform and to rely more heavily on other forms of marketing and promotion, which may not prove to be effective |
| In either case, our inability to obtain endorsements from professional athletes could adversely affect our ability to market and sell our products, resulting in loss of revenues and a loss of profitability |
| We could be negatively impacted if we fail to successfully integrate the businesses we acquire |
| We have acquired businesses that we believe could enhance our business opportunities and our growth prospects |
| All acquisitions involve risks that could materially and adversely affect our business and operating results |
| These risks include: • distracting management from our business operations; • losing key personnel and other employees; • costs, delays, and inefficiencies associated with integrating acquired operations and personnel; • the impairment of acquired assets and goodwill; and • acquiring the contingent and other liabilities of the businesses we acquire |
| In addition, acquired businesses may not provide us with increased business opportunities, or result in the growth that we anticipate |
| Furthermore, integrating acquired operations is a complex, time-consuming, and expensive process |
| Combining acquired operations with us may result in lower overall operating margins, greater stock price volatility, and quarterly earnings fluctuations |
| Cultural incompatibilities, career uncertainties, and other factors associated with such acquisitions may also result in the loss of employees |
| Failing to acquire and successfully integrate complementary practices, or failing to achieve the business synergies or other anticipated benefits, could materially adversely affect our business and results of operations |
| For example, in July 2005 we acquired Rossignol, and we expect that the acquisition of Rossignol will result in certain synergies, business opportunities and growth prospects |
| We, however, may never realize these expected synergies, business opportunities and growth prospects |
| In addition, integrating operations will require significant efforts and expenses |
| Personnel may leave or be terminated because of the acquisition and our management time and attention may be diverted from their other responsibilities |
| If these or other factors limit our ability to successfully integrate the operations of Rossignol on a timely basis, our expectations of future results of operations, including certain cost savings and synergies expected to result from the acquisition, may not be achieved |
| In addition, if the growth and operating strategies of Rossignol are not effective, it could have a material adverse effect on our business, financial condition and results of operations |
| As a result of our acquisition of Rossignol, we face greater challenges in managing several brands |
| While we believe that we have significant experience in managing our apparel and footwear brands and their respective channels of distribution, with our acquisition of Rossignol, we have further penetrated the wintersports and golf markets |
| If we are unable to effectively manage our multiple product lines in multiple markets, our profitability may be reduced and our image and reputation could be harmed |
| Employment related matters, such as unionization, may affect our profitability |
| As of October 31, 2005, less than 75 of our employees were unionized, all outside of the United States and certain French employees are represented by workers councils |
| We have little control over the union activities in these areas and could face difficulties in the future |
| There can be no assurance that we will not experience work stoppages or other labor problems in the future with our unionized employees, non-unionized employees or employees represented by workers councils or that we will be able to renew the collective bargaining agreements on similar or more favorable terms |
| We may be subject to restrictions due to our minority interest in Cleveland Golf |
| We directly or indirectly own approximately 64prca of the outstanding capital stock of Roger Cleveland Golf Company, Inc, with the remaining approximately 36prca held by minority shareholders |
| As a result, conflicts of interest may develop between us and the minority shareholders of Cleveland Golf, and we may need to devote significant management attention to dealing with the minority shareholders |
| In addition, we owe 16 _________________________________________________________________ [92]Table of Contents fiduciary duties to such minority shareholders which may restrict our control of Cleveland Golf and impede our ability to transfer cash and assets to and from Cleveland Golf or to realize the full benefits of capital that we provide to Cleveland Golf |
| Although we have entered into a shareholders agreement with these minority shareholders which addresses some of these concerns, no assurances can be given that the minority interest in Cleveland Golf will not cause conflicts in the future |
| Cyclical trends in apparel, sporting goods and footwear retailing could have a material adverse effect on our results of operations |
| The apparel, sporting goods and footwear industries historically have been subject to substantial cyclical variations |
| As domestic and international economic conditions change, trends in discretionary consumer spending become unpredictable and could be subject to reductions due to uncertainties about the future |
| When consumers reduce discretionary spending, purchases of specialty apparel, footwear and sporting goods may decline |
| In addition, a general reduction in consumer discretionary spending due to a recession in the domestic and/or international economies or uncertainties regarding future economic prospects could have a material adverse effect on our results of operations |
| The demand for our products is seasonal and sales are dependent upon the weather |
| Our revenues and operating results are subject to seasonal trends when measured on a quarterly basis |
| For example, sales of apparel products are typically lower during our first fiscal quarter when compared with our other fiscal quarters, while Rossignol’s sales have historically been higher between August and December at the peak of it’s winter equipment shipping activities |
| These trends are dependent on many factors, including the holiday seasons, weather, consumer demand, markets in which we operate and numerous other factors beyond our control |
| The seasonality of our business, unseasonable weather during our peak selling periods and/or misjudgment in consumer demands could have a material adverse effect on our financial condition and results of operations |
| Factors affecting international commerce and our international operations may seriously harm our financial condition |
| We generate a majority of our revenues from outside of the United States, and we anticipate that revenue from our international operations could account for an increasingly larger portion of our revenues |
| Our international operations are directly related to, and dependent on, the volume of international trade and foreign market conditions |
| International commerce and our international operations are subject to many risks, including: • recessions in foreign economies; • the adoption and expansion of trade restrictions; • limitations on repatriation of earnings; • difficulties in protecting our intellectual property or enforcing our intellectual property rights under the laws of other countries; • longer receivables collection periods and greater difficulty in collecting accounts receivable; • difficulties in managing foreign operations; • social, political and economic instability; • unexpected changes in regulatory requirements; • our ability to finance foreign operations; • tariffs and other trade barriers; and • US government licensing requirements for exports |
| The occurrence or consequences of any of these risks may restrict our ability to operate in the affected regions and decrease the profitability of our international operations, which may seriously harm our financial condition |
| If the popularity of the sports associated with our brands were to decrease, our revenues could be adversely affected and our results of operations could be impaired |
| We generate a significant portion of our revenues from the sale of products directly associated with boardriding, wintersports and golf |
| The demand for such products is directly related to the popularity of boardriding activities, wintersports and golf and the number of respective participants worldwide |
| If the 17 _________________________________________________________________ [93]Table of Contents demand for boardriding, wintersports and/or golf equipment and accessories decreases, our revenues could be adversely affected and our results of operations could be impaired |
| In addition, if participation in boardriding activities, wintersports and/or golf were to decrease, sales of many of our products could decrease |
| Our industry is subject to pricing pressures that may adversely impact our financial performance |
| We manufacture many of our products offshore because such products generally cost less to make, primarily because labor costs are lower |
| Many of our competitors also source their product requirements offshore to achieve lower costs, possibly in locations with lower costs than our offshore operations, and those competitors may use these cost savings to reduce prices |
| To remain competitive, we must adjust our prices from time to time in response to these industry-wide pricing pressures |
| Our financial performance may be negatively affected by these pricing pressures if: • we are forced to reduce our prices and we cannot reduce our production costs; or • our production costs increase and we cannot increase our prices |
| Changing international trade regulations and the elimination of quotas on imports of textiles and apparel may increase competition in the apparel industry |
| Future quotas, duties or tariffs may have a material adverse effect on our business, financial condition and results of operations |
| We currently import raw materials and/or finished garments into the majority of countries in which we sell our apparel products |
| Substantially all of our import operations are subject to: • quotas imposed by bilateral textile agreements between the countries where our apparel-producing facilities are located and foreign countries; and • customs duties imposed by the governments where our apparel-producing facilities are located on imported products, including raw materials |
| In addition, the countries in which our apparel products are manufactured or to which they are imported may from time to time impose additional new quotas, duties, tariffs, requirements as to where raw materials must be purchased, additional workplace regulations or other restrictions on our imports, or otherwise adversely modify existing restrictions |
| Adverse changes in these costs and restrictions could harm our business |
| We cannot assure you that future trade agreements will not provide our competitors with an advantage over us, or increase our costs, either of which could have a material adverse effect on our business, results of operations and financial condition |
| Our apparel-producing operations are also subject to the effects of international trade agreements and regulations such as the North American Free Trade Agreement, and the activities and regulations of the World Trade Organization, referred to as the WTO Generally, such trade agreements benefit our apparel business by reducing or eliminating the duties and/or quotas assessed on products manufactured in a particular country |
| However, trade agreements can also impose requirements that negatively impact our apparel business, such as limiting the countries from which we can purchase raw materials and setting quotas on products that may be imported into the United States from a particular country |
| In addition, the WTO may commence a new round of trade negotiations that liberalize textile trade |
| This increased competition could have a material adverse effect on our business, results of operations and financial condition |
| We rely on third-party manufacturers and problems with, or loss of, our suppliers or raw materials could harm our business and results of operations |
| Substantially all of our apparel products are produced by independent manufacturers |
| We face the risk that these third-party manufacturers with whom we contract to produce our products may not produce and deliver our products on a timely basis, or at all |
| We cannot be certain that we will not experience operational difficulties with our manufacturers, such as reductions in the availability of production capacity, errors in complying with product specifications, insufficient quality control, failures to meet production deadlines or increases in manufacturing costs |
| The failure of any manufacturer to perform to our expectations could result in supply shortages for certain products and harm our business |
| The capacity of our manufacturers to manufacture our products also is dependent, in part, upon the availability of raw materials |
| Our manufacturers may experience shortages of raw materials, which could result in delays in deliveries of our products by our manufacturers or in increased costs to us |
| Any shortage of raw materials or inability of a manufacturer to manufacture or ship our products in a timely 18 _________________________________________________________________ [94]Table of Contents manner, or at all, could impair our ability to ship orders of our products in a cost-efficient, timely manner and could cause us to miss the delivery requirements of our customers |
| As a result, we could experience cancellations of orders, refusals to accept deliveries or reductions in our prices and margins, any of which could harm our financial performance and results of operations |
| In addition, substantially all of the raw materials for our wintersports equipment are sold to us by unaffiliated suppliers located primarily in Europe and Asia |
| We have no exclusive or significant long-term contracts with these suppliers and we compete with other companies for such suppliers’ output |
| Although we believe that we have established solid relationships with such suppliers, the inability to maintain such relationships or to find additional sources to cover future growth could have a material adverse effect on our business |
| Our failure to comply with, or the imposition of liability under, environmental laws and regulations could result in significant costs |
| Some of our facilities and operations are subject to various environmental laws and regulations which govern, among other things, the use and storage of hazardous materials, the storage and disposal of solid and hazardous wastes, the discharge of pollutants into the air, water and land, and the cleanup of contamination |
| Violations of these requirements could result in significant fines or penalties being imposed on us |
| Discovery of contamination for which we are responsible, the enactment of new laws and regulations, or changes in how existing requirements are enforced, could require us to incur additional costs for compliance or subject us to unexpected liabilities |
| Any such costs or liabilities could have a material adverse effect on our business and results of operation |