| SPORTS AUTHORITY INC /DE/ ITEM 1A Risk Factors Business uncertainties and contractual restrictions while the proposed merger is pending Uncertainty about the effect of the merger on employees, suppliers, partners and customers may have an adverse effect on us |
| These uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is consummated, and could cause suppliers, customers and others that deal with us to defer purchases or other decisions concerning us, or seek to change existing business relationships with us |
| Employee retention may be particularly challenging while the merger is pending, as employees may experience uncertainty about their future roles with the post-merger entity |
| In addition, the merger agreement restricts us from taking specified actions without the buyerapstas approval |
| These restrictions could prevent us from pursuing attractive business opportunities that may arise prior to the completion of the merger |
| 12 _________________________________________________________________ Failure to complete the proposed merger could negatively impact stock price, future business and financial results Although our board of directors will, subject to fiduciary exceptions, recommend that our stockholders approve and adopt the merger agreement, there is no assurance that the merger agreement and the merger will be approved, and there is no assurance that the other conditions to the completion of the merger will be satisfied |
| If the merger is not completed, we will be subject to several risks, including the following: • under certain circumstances, if the merger is not completed, we may be required to pay the buyer a termination fee of dlra30 million or reimburse the buyer for its out-of-pocket expenses in connection with the merger, up to dlra5 million, subject to possible increase (although any termination fee payable would be net of reimbursed expenses); • the current market price of our common stock may reflect a market assumption that the merger will occur, and a failure to complete the merger could result in a negative perception by the stock market of us generally and a decline in the market price of our common stock; • certain costs relating to the merger, such as legal, accounting and financial advisory fees, are payable by us whether or not the merger is completed; • there may be substantial disruption to our business and a distraction of its management and employees from day-to-day operations, because matters related to the merger may require substantial commitments of time and resources, which could otherwise have been devoted to other opportunities that could have been beneficial to us; • our business could be adversely affected if it is unable to retain key employees or attract replacements; and • we would continue to face the risks that we currently face as an independent company |
| Intense competition in the sporting goods industry could limit our growth and reduce our profitability |
| The sporting goods retail market is highly fragmented and intensely competitive |
| Our current and prospective competitors include many large companies that have substantially greater market presence, name recognition, financial, marketing and other resources than we do |
| We compete directly or indirectly with the following categories of companies: • large format full-line sporting goods retailers; • traditional sporting goods stores and chains; • specialty sporting goods retailers and pro shops; • mass merchandisers, warehouse clubs, discount stores and department stores; and • catalog and internet-based sporting goods retailers |
| Increased competition in markets in which we have stores, the adoption by competitors of innovative store formats, pricing strategies and retail sale methods, the entry of new competitors in our markets or the expansion of operations by existing competitors in our markets could cause us to lose market share, limit our growth and reduce our profitability |
| If we are unable to predict or react to changes in consumer demand, our sales may decline and we may be required to take significant markdowns in inventory |
| Our success depends on our ability to anticipate and respond in a timely manner to changing consumer demand and preferences regarding sporting goods |
| Our products must appeal to a broad 13 _________________________________________________________________ range of consumers whose preferences cannot be predicted with certainty and are subject to change |
| Additionally, we often make commitments to purchase products from our vendors several months in advance of the proposed delivery |
| If we misjudge the market for our merchandise, we may lose sales or we may overstock unpopular products, which may require us to take significant inventory markdowns |
| In either case, our revenues and profit margins could significantly decline and our business and financial results may suffer |
| We sell products that expose us to a greater risk of product liability and infringement claims, and our insurance may not be sufficient to cover damages related to those claims |
| We may be subject to lawsuits resulting from injuries associated with the use of sporting goods equipment that we sell or rent |
| We may incur losses relating to these claims or the defense of these claims |
| We may also incur losses due to lawsuits relating to our performance of background checks on firearm purchasers as mandated by state and federal law or the improper use of firearms sold by us, including lawsuits by municipalities or other organizations attempting to recover costs from firearm manufacturers and retailers relating to the misuse of firearms |
| In addition, in the future there may be increased federal, state or local regulation, including taxation, of the sale of firearms in our current markets as well as future markets in which we may operate |
| Commencement of these lawsuits against us or the establishment of new regulations could reduce our sales and decrease our profitability |
| There is a risk that claims or liabilities with respect to lawsuits will exceed our insurance coverage |
| Additionally, we may be unable to purchase adequate liability insurance in the future |
| Although we have entered into product and infringement liability indemnity agreements with many of our vendors, we cannot assure you that we will be able to collect payments sufficient to offset product liability losses |
| Furthermore, we are subject to regulation by the Consumer Product Safety Commission and similar state regulatory agencies |
| If we fail to comply with government and industry safety standards, we may be subject to claims, lawsuits, fines and adverse publicity that could have a material adverse effect on our business and results of operations |
| If our suppliers and distributors do not provide us with sufficient quantities of products, or if conditions in any of the foreign countries where they source merchandise adversely change, we may not be able to offer competitively priced merchandise or the quantities or assortment that our customers demand |
| In fiscal 2005, purchases from Nike represented approximately 15dtta1prca of our total purchases |
| Although purchases from no other vendor represented more than 10dtta0prca of our total purchases, our dependence on our principal suppliers involves risk |
| We do not have long-term agreements with our suppliers and cannot guarantee that we will be able to maintain our relationships with them |
| If there is a disruption in supply from a principal supplier or distributor, we may be unable to obtain the merchandise that we desire to sell and that consumers desire to purchase |
| Moreover, many of our suppliers provide us with incentives, such as return privileges, volume purchasing discounts, rebates and cooperative advertising allowances |
| A decline or discontinuation of these incentives could reduce our profits |
| We believe that a significant portion of the products that we purchase, including those purchased from domestic suppliers, is manufactured abroad in countries such as China, Taiwan and South Korea |
| In addition, we believe much of our private label merchandise is manufactured abroad |
| Foreign imports subject us to the risks of changes in import duties, quotas, loss of "e most favored nation "e or MFN status with the United States for a particular foreign country, work stoppages, delays in shipment, freight cost increases and economic uncertainties (including the United States imposing antidumping or countervailing duty orders, safeguards, remedies or compensation and retaliation due to illegal foreign trade practices) |
| If any of these or other factors were to cause a disruption of trade from the countries 14 _________________________________________________________________ in which the suppliers of our vendors are located, our inventory levels may be reduced or the cost of our products may increase |
| In addition, to the extent that any foreign manufacturers from whom we purchase products directly or indirectly utilize labor and other practices that vary from those commonly accepted in the United States, we could be hurt by any resulting negative publicity or, in some cases, face potential liability |
| To date, we have not experienced any difficulties of this nature |
| Historically, instability in the political and economic environments of the countries in which our vendors or we obtain our products has not had a material adverse effect on our operations |
| However, we cannot predict the effect that future changes in economic or political conditions in such foreign countries may have on our operations |
| In the event of disruptions or delays in supply due to economic or political conditions in foreign countries, such disruptions or delays could adversely affect our results of operations unless and until alternative supply arrangements could be made |
| In addition, merchandise purchased from alternative sources may be of lesser quality or more expensive than the merchandise we currently purchase abroad |
| Countries from which our vendors obtain these new products may, from time to time, impose new or adjust prevailing quotas or other restrictions on exported products, and the United States may impose new duties, quotas and other restrictions on imported products |
| The United States Congress periodically considers other restrictions on the importation of products obtained by our vendors and us |
| The cost of such products may increase for us if applicable duties are raised, or import quotas with respect to such products are imposed or made more restrictive |
| Our comparable store sales will fluctuate and may not be a meaningful indicator of future performance |
| A number of factors have historically affected, and will continue to affect, our comparable store sales results, including: • competition; • our new store openings or in existing markets and remodeling; • general regional and national economic conditions; • actions taken by our competitors; • consumer trends and preferences; • changes in the other tenants in the shopping centers in which we are located; • new product introductions and changes in our product mix; • timing and effectiveness of promotional events; • lack of new product introductions to spur growth in the sale of various kinds of sports equipment; and • weather |
| Our comparable store sales may vary from quarter to quarter, and an unanticipated decline in revenues or comparable store sales may cause the price of our common stock to fluctuate significantly |
| Our business is seasonal, and our annual results are highly dependent on the success of our holiday selling season |
| Our business is highly seasonal in nature |
| Our highest sales and operating profitability historically occur during the fourth fiscal quarter, which is due, in part, to the holiday selling season and, in part, to our strong sales of fitness equipment, apparel and accessories, and cold weather sporting goods and 15 _________________________________________________________________ apparel |
| Any decrease in our fourth quarter sales, whether because of a slow holiday selling season, poor snowfall in ski areas near our markets, or otherwise, could have a material adverse effect on our business, financial condition and operating results for the entire fiscal year |
| A downturn in the economy could significantly reduce our revenues |
| Sales of sporting goods historically depend on consumers &apos discretionary spending |
| An economic downturn in any of our major markets, or in general, could reduce consumer spending on discretionary items that could adversely impact our revenues and cause our business and financial results to suffer |
| General economic conditions and other factors that affect discretionary spending are beyond our control and are affected by: • an economic recession; • unemployment trends; • interest rates and inflation; • consumer and commercial credit availability; • consumer debt levels; • geopolitical uncertainty; • tax rates and tax policy; • natural disasters; and • other factors that influence consumer confidence and spending |
| Increasing volatility in financial markets may cause the above factors to change with an even greater degree of frequency and magnitude |
| We have a significant amount of debt that could adversely affect our business and growth prospects |
| Our existing credit facility provides for loans of up to dlra640 million |
| As of January 28, 2006, we had approximately dlra236dtta1 million of long-term debt outstanding |
| This debt could have significant adverse effects on our business |
| This debt: • makes it more difficult for us to obtain additional financing on favorable terms; • requires us to dedicate a substantial portion of our cash flows from operations to the repayment of our debt and the interest on our debt; • limits our ability to capitalize on significant business opportunities; and • makes us more vulnerable to economic downturns |
| If we are unable to generate sufficient cash flows from operations in the future, we may have to refinance all or a portion of our debt and/or obtain additional financing |
| We cannot assure you that refinancing or additional financing on favorable terms could be obtained or that we will be able to operate at a profit |
| Additionally, our credit facility imposes operating and financial restrictions that may impair our ability to respond to changing business and economic conditions or to grow our business |
| Our business depends on our ability to satisfy our labor needs |
| Many of our employees are in entry-level or part-time positions that historically have high rates of turnover |
| We may be unable to satisfy our labor needs and control our costs due to external factors 16 _________________________________________________________________ such as unemployment levels, minimum wage legislation and wage inflation |
| If general economic conditions improve, it may be more difficult to attract and retain quality employees |
| Terrorist attacks or acts of war may seriously harm our business |
| Terrorist attacks or acts of war may cause damage or disruption to us and our employees, facilities, information systems, vendors and customers, which could significantly impact our net sales, costs and expenses and financial condition |
| The potential for future terrorist attacks, the national and international responses to terrorist attacks and other acts of war or hostility may cause greater uncertainty and cause our business to suffer in ways that we currently cannot predict |
| Additionally, events such as those referred to above could cause or contribute to a general decline in consumer spending and equity valuations, which in turn could reduce the market value of your investment in us |
| Anti-takeover provisions may prevent stockholders from realizing a premium return |
| Anti-takeover provisions in our certificate of incorporation and bylaws may deter unfriendly offers or other efforts to obtain control over us |
| These anti-takeover provisions, among other things: • allow our board of directors to issue "e blank check "e preferred stock without stockholder approval, and establish the rights, including voting rights, preferences and limitations of the preferred stock; • establish advance notice requirements for stockholder nominations to the board of directors or for stockholder proxy proposals; • permit the board of directors to increase its own size and fill the resulting vacancies through a majority vote of directors, even if less than a quorum; and • require that mergers and other business combinations with certain interested stockholders, including any holder of 10prca or more of our common stock, be approved by a supermajority of the holders of our common stock that are not interested in the transaction |
| Section 203 of the Delaware General Corporate Law also imposes restrictions on mergers and other business combinations between us and any holder of 15prca or more of our common stock |
| These measures could make us less attractive to a potential acquirer and deprive stockholders of the opportunity to sell their common stock at a premium price |
| Our quarterly operating results may fluctuate substantially, which may adversely affect our business and the market price of our common stock, particularly if our quarterly results fall below the expectations of securities analysts |
| Our sales and results of operations have fluctuated in the past and may vary from quarter to quarter in the future |
| These fluctuations may adversely affect our business, financial condition and the market price of our common stock, particularly if our quarterly results fall below the expectations of securities analysts |
| A number of factors, many of which are outside our control, may cause variations in our quarterly net sales and operating results, including: • changes in consumer demand for the products that we offer in our stores; • lockouts or strikes involving professional sports teams; • adverse weather conditions; • pre-opening costs associated with new stores; • costs related to the closures of existing stores; 17 _________________________________________________________________ • litigation; • changes in merchandise mix; • pricing and promotional events sponsored by our competitors; and • general economic conditions |
| Our stock price has been volatile in the past and may remain volatile in the future |
| The value of our common stock may decline as a result of this volatility |
| The market price of our common stock has been in the past, and may in the future be, subject to wide fluctuations in response to factors such as: • fluctuations in quarterly operating results; • announcements, by us or our competitors, of actual or expected financial results, significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; • changes in recommendations or financial estimates by securities analysts; • conditions and trends in the sporting goods industry; and • general conditions in the economy or the financial markets |
| Additionally, in recent years, the stock market has experienced significant price and volume fluctuations that are often unrelated to the performance or condition of particular companies |
| Such broad market fluctuations could adversely affect the market price of our common stock |
| Following periods of volatility in the market price of a particular companyapstas securities, securities class action litigation has often been brought against a company |
| We are currently defending four securities class actions related to the proposed merger with an affiliate of Leonard Green & Partners |
| The loss of key executives could have a material adverse effect on our business |
| Our future success depends on the continued services of our senior management, particularly John Douglas Morton, our chairman of the board and chief executive officer |
| Any loss or interruption of the services of our senior management could significantly reduce our ability to effectively manage our operations and implement our key initiatives because we may not be able to find appropriate replacements for our senior management should the need arise |
| If we were to lose any key senior management, our business could be materially adversely affected |
| We rely on our information systems to operate our business, and if our information systems fail to adequately perform these functions, our business and financial results could be adversely affected |
| The efficient operation of our business is dependent on the successful integration and operation of our information systems |
| In particular, we rely on our information systems to manage effectively our sales, warehousing, distribution, merchandise planning and replenishment and to optimize our overall inventory levels |
| Most of our information systems are centrally located at our headquarters, with offsite backup at other locations |
| We continue to focus on enhancements to the inventory management systems and store point-of-sale systems |
| Systems enhancement issues are complex, time-consuming and expensive |
| Their failure to perform as we anticipate could disrupt our business, lead to unanticipated costs, adversely affect our revenues and cause our business and financial results to suffer |
| 18 _________________________________________________________________ A disruption in the operation of our distribution centers would affect our ability to deliver merchandise to our stores, which could impact adversely our revenues and harm our business and financial results |
| Most of our merchandise is shipped by our vendors to a limited number of distribution centers |
| Our distribution centers receive and allocate merchandise to our stores |
| Events such as fire or other catastrophic events, any malfunction or disruption of our centralized information systems or shipping problems may result in delays or disruptions in the timely distribution of merchandise to our stores, which could adversely impact our revenues and our business and financial results |
| Lack of available retail store sites on terms acceptable to us, rising real estate prices and other costs and risks relating to new store openings could severely limit our growth opportunities |
| Our strategy includes opening stores in new and existing markets |
| We must successfully choose store sites, execute favorable real estate transactions on terms that are acceptable to us, hire competent personnel and effectively open and operate these new stores |
| Our plans to increase the number of our retail stores will depend in part on the availability of existing retail stores or store sites |
| We may not have stores or sites available to us for purchase or lease, or available on terms acceptable to us |
| If additional retail store sites are unavailable on acceptable terms, we may not be able to carry out a significant part of our growth strategy |
| Rising real estate costs and acquisition, construction and development costs could also inhibit our ability to grow |
| If we fail to locate desirable sites, obtain lease rights to these sites on terms acceptable to us, hire adequate personnel and open and effectively operate these new stores, our financial performance could be adversely affected |
| We may pursue strategic acquisitions, which could have an adverse impact on our business |
| We may from time to time acquire complementary companies or businesses |
| Acquisitions may result in difficulties in assimilating acquired companies, and may result in the diversion of our capital and our managementapstas attention from other business issues and opportunities |
| We may not be able to successfully integrate operations that we acquire, including their personnel, financial systems, distribution, operations and general store operating procedures |
| If we fail to successfully integrate acquisitions, our business could suffer |
| In addition, the integration of any acquired business, and their financial results, into ours may adversely affect our operating results |