e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the quarterly period ended July 1, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the transition period from to
Commission file number 333-101117
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
(State or Other Jurisdiction of Incorporation or Organization)
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16-1634897
(I.R.S. Employer Identification No.) |
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11000 N. IH-35, Austin, Texas
(Address of Principal Executive Offices)
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78753
(zip code) |
Registrants Telephone Number, Including Area Code: (512) 837-8810
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report: Not Applicable
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act. (check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Class of Common Stock
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Outstanding at August 11, 2006
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$.001 par value
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15,693,014 Shares |
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GOLFSMITH INTERNATIONAL HOLDINGS, INC.
QUARTERLY REPORT
FOR THE QUARTER ENDED JULY 1, 2006
TABLE OF CONTENTS
2
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Golfsmith International Holdings, Inc.
Consolidated Balance Sheets
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July 1, |
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December 31, |
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2006 |
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2005 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
152,090 |
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$ |
4,207,497 |
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Receivables, net of allowances of $155,385 at July 1, 2006 and
$146,964 at December 31, 2005 |
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2,487,339 |
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1,646,454 |
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Inventories |
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90,123,761 |
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71,472,061 |
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Prepaid expenses and other current assets |
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9,640,710 |
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6,638,109 |
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Total current assets |
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102,403,900 |
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83,964,121 |
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Property and equipment: |
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Land and buildings |
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21,412,537 |
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21,256,771 |
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Equipment, furniture, fixtures and autos |
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22,507,618 |
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19,004,608 |
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Leasehold improvements and construction in progress |
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25,716,175 |
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20,866,839 |
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69,636,330 |
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61,128,218 |
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Less: accumulated depreciation |
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(17,675,833 |
) |
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(14,558,256 |
) |
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Net property and equipment |
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51,960,497 |
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46,569,962 |
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Goodwill |
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41,634,525 |
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41,634,525 |
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Tradename |
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11,158,000 |
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11,158,000 |
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Trademarks |
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14,156,127 |
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14,156,127 |
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Customer database, net of accumulated amortization of $1,416,335 at
July 1, 2006 and $1,227,490 at December 31, 2005 |
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1,982,870 |
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2,171,715 |
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Debt issuance costs, net of accumulated amortization of $2,388 at
July 1, 2006 and $3,126,103 at December 31, 2005 |
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355,852 |
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4,731,612 |
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Other long-term assets |
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458,892 |
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450,208 |
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Total assets |
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$ |
224,110,663 |
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$ |
204,836,270 |
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3
Golfsmith
International Holdings, Inc.
Consolidated Balance Sheets (continued)
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July 1, |
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December 31, |
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2006 |
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2005 |
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(Unaudited) |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
61,417,121 |
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$ |
42,000,236 |
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Accrued expenses and other current liabilities |
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13,139,463 |
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19,163,459 |
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Line of credit |
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36,450,901 |
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Total current liabilities |
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111,007,485 |
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61,163,695 |
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Long-term debt |
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82,450,000 |
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Deferred rent |
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5,106,031 |
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4,095,442 |
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Total liabilities |
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116,113,516 |
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147,709,137 |
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Stockholders equity: |
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Common stock $.001 par value; 100,000,000 shares and 40,000,000 shares
authorized at July 1, 2006 and December 31, 2005, respectively; 15,616,611 and
9,472,143 shares issued and outstanding at July 1, 2006 and December 31, 2005,
respectively |
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15,618 |
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9,473 |
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Preferred stock $.001 par value; 10,000,000 shares and zero shares authorized
at July 1, 2006 and December 31, 2005, respectively; no shares issued and
outstanding |
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Restricted common stock units $.001 par value; 97,378 and 331,569 shares
issued and outstanding at July 1, 2006 and December 31, 2005, respectively |
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97 |
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331 |
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Additional capital |
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119,866,157 |
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60,301,153 |
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Other comprehensive income |
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248,126 |
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135,815 |
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Accumulated deficit |
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(12,132,851 |
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(3,319,639 |
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Total stockholders equity |
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107,997,147 |
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57,127,133 |
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Total liabilities and stockholders equity |
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$ |
224,110,663 |
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$ |
204,836,270 |
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See accompanying notes.
4
Golfsmith International Holdings, Inc.
Consolidated Statements of Operations
(Unaudited)
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Six Months Ended |
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Three Months Ended |
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July 1, |
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July 2, |
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July 1, |
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July 2, |
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2006 |
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2005 |
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2006 |
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2005 |
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Net revenues |
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$ |
188,948,611 |
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$ |
166,451,893 |
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$ |
114,138,315 |
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$ |
102,493,511 |
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Cost of products sold |
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121,444,970 |
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105,856,380 |
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72,437,031 |
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64,660,890 |
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Gross profit |
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67,503,641 |
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60,595,513 |
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41,701,284 |
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37,832,621 |
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Selling, general and administrative |
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57,865,696 |
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49,364,259 |
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34,163,217 |
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27,964,324 |
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Store pre-opening expenses |
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1,222,736 |
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1,403,519 |
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1,022,987 |
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886,762 |
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Total operating expenses |
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59,088,432 |
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50,767,778 |
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35,186,204 |
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28,851,086 |
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Operating income |
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8,415,209 |
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9,827,735 |
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6,515,080 |
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8,981,535 |
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Interest expense |
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(5,813,072 |
) |
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(5,750,630 |
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(2,753,646 |
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(2,888,528 |
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Interest income |
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155,475 |
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62,960 |
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144,692 |
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45,520 |
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Other income |
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1,420,776 |
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31,090 |
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1,098,712 |
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8,492 |
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Other expense |
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(108,240 |
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(71,978 |
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(65,296 |
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(48,230 |
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Loss on debt extinguishment |
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(12,775,270 |
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(12,775,270 |
) |
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Income (loss) before income taxes |
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(8,705,122 |
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4,099,177 |
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(7,835,728 |
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6,098,789 |
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Income tax expense |
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(108,090 |
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(97,102 |
) |
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(108,090 |
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(97,102 |
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Net income (loss) |
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$ |
(8,813,212 |
) |
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$ |
4,002,075 |
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$ |
(7,943,818 |
) |
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$ |
6,001,687 |
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Net income (loss) per share: |
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Basic |
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$ |
(0.85 |
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$ |
0.41 |
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$ |
(0.73 |
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$ |
0.61 |
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Diluted |
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$ |
(0.85 |
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$ |
0.40 |
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$ |
(0.73 |
) |
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$ |
0.60 |
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Weighted average number of shares outstanding: |
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Basic |
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10,330,492 |
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9,803,712 |
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10,823,558 |
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9,803,712 |
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Diluted |
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10,330,492 |
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9,946,879 |
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10,823,558 |
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9,946,879 |
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See accompanying notes.
5
Golfsmith International Holdings, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
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Six Months Ended |
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July 1, |
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July 2, |
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2006 |
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2005 |
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Operating Activities |
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(as restated) |
Net income (loss) |
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$ |
(8,813,212 |
) |
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$ |
4,002,075 |
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Adjustments to reconcile net income (loss) to net cash used in operating activities: |
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Depreciation |
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3,175,627 |
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2,695,594 |
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Amortization of intangible assets |
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188,845 |
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188,845 |
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Amortization of debt issue costs and debt discount |
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1,886,587 |
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1,800,134 |
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Loss on extinguishment of debt |
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12,775,270 |
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Stock-based compensation |
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438,304 |
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Payments of
withholding taxes for stock unit conversions |
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(1,015,263 |
) |
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Non-cash loss on write-off of property and equipment |
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9,574 |
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573,384 |
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Non-cash derivative income |
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(1,033,257 |
) |
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Gain on sale of assets |
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(22,650 |
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(11,500 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(840,885 |
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(1,273,964 |
) |
Inventories |
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(18,651,700 |
) |
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(26,480,854 |
) |
Prepaid expenses and other assets |
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(3,011,285 |
) |
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(1,237,842 |
) |
Accounts payable |
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19,416,885 |
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21,462,886 |
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Accrued expenses and other current liabilities |
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(4,455,065 |
) |
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(2,362,616 |
) |
Deferred rent |
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1,010,589 |
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569,398 |
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Net cash provided by (used in) operating activities |
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1,058,364 |
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(74,460 |
) |
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Investing Activities |
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Capital expenditures |
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(8,582,807 |
) |
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(6,924,915 |
) |
Proceeds from sale of assets |
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22,650 |
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|
11,500 |
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Net cash used in investing activities |
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(8,560,157 |
) |
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(6,913,415 |
) |
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Financing Activities |
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Principal payments on lines of credit |
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(56,883,979 |
) |
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(3,285,699 |
) |
Proceeds from lines of credit |
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93,334,880 |
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3,955,491 |
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Debt issuance costs |
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(343,240 |
) |
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Payments to satisfy debt obligations |
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(94,431,896 |
) |
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Proceeds from initial public offering, net |
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61,646,562 |
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Proceeds from exercise of stock options |
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|
4,681 |
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Other |
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(2,244 |
) |
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Net cash provided by financing activities |
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|
3,327,008 |
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|
667,548 |
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Effect of exchange rate changes on cash |
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|
119,378 |
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|
(101,657 |
) |
Change in cash and cash equivalents |
|
|
(4,055,407 |
) |
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|
(6,421,984 |
) |
Cash and cash equivalents, beginning of period |
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|
4,207,497 |
|
|
|
8,574,966 |
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|
|
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Cash and cash equivalents, end of period |
|
$ |
152,090 |
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|
$ |
2,152,982 |
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|
6
Golfsmith
International Holdings, Inc.
Consolidated
Statements of Cash Flows (continued)
(Unaudited)
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Six Months Ended |
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|
|
July 1, |
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July 2, |
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|
|
2006 |
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|
2005 |
|
Supplemental cash flow information: |
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|
|
Interest payments |
|
$ |
7,145,927 |
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|
$ |
3,959,165 |
|
Income tax payments |
|
$ |
213,234 |
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|
$ |
206,513 |
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|
|
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|
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|
Supplemental non-cash transactions: |
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|
|
|
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Amortization of discount on senior secured notes |
|
$ |
1,353,012 |
|
|
$ |
1,279,892 |
|
Write-off of debt issuance costs of senior
secured notes and senior credit facility |
|
$ |
4,200,425 |
|
|
|
|
|
See accompanying notes.
7
1. Nature of Business and Basis of Presentation
Description of Business
Golfsmith International Holdings, Inc. (Holdings, the Company or we), is a
multi-channel, specialty retailer of golf and tennis equipment and related apparel and accessories
and is a designer and marketer of golf equipment. The Company offers golf equipment from top
national brands as well as its own proprietary brands and also offers clubmaking capabilities. As
of July 1, 2006, the Company marketed its products through 58 superstores as well as through its
direct-to-consumer channels, which include its clubmaking and consumer catalogs and its Internet
site. The Company also operates the Harvey Penick Golf Academy, an instructional school
incorporating the techniques of the well-known golf instructor, the late Harvey Penick.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary Golfsmith International, Inc. (Golfsmith). The Company has no
operations nor does it have any assets or liabilities other than its investment in its wholly owned
subsidiary. Accordingly, these consolidated financial statements represent the operations of
Golfsmith and its subsidiaries. All significant inter-company accounts and transactions have been
eliminated in consolidation.
The accompanying unaudited interim consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles. As information in this report
relates to interim financial information, certain footnote disclosures have been condensed or
omitted. In the Companys opinion, the unaudited interim consolidated financial statements reflect
all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation
of the Companys financial position, results of operations and cash flows for the periods
presented. These consolidated financial statements should be read in conjunction with the
Companys audited consolidated financial statements and notes thereto for the year ended December
31, 2005, included in the Companys Annual Report on Form 10-K filed with the Securities and
Exchange Commission (SEC) on March 31, 2006. The results of operations for the three and six
month periods ended July 1, 2006 are not necessarily indicative of results that may be expected for
any other interim period or for the full fiscal year.
The balance sheet at December 31, 2005 has been derived from audited consolidated financial
statements at that date but does not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete financial statements.
For further information, refer to the audited consolidated financial statements and notes thereto
for the fiscal year ended December 31, 2005 included in the Companys Annual Report on Form 10-K
filed with the SEC on March 31, 2006.
Correction of an error
Certain adjustments have been made to the prior year financial statements related to the
correction of an error in applying generally accepted accounting principles. An adjustment of $3.6
million was made to the consolidated balance sheet as of July 2, 2005 to decrease both cash and
cash equivalents and accounts payable in connection with outstanding checks written but not
presented for payment prior to the financial statement date. The adjustment is the result of the
Company not recording the payments until the outstanding checks were presented for payment, which has
historically been after the date on which the reporting period ends, instead of the date on which
the checks were written. The adjustment has been appropriately recorded in the consolidated
statements of cash flows for the six months ended July 2, 2005, as restated. The adjustment does
not affect previously reported net income, retained earnings or earnings per share in any period
presented.
Revenue Subject to Seasonal Variations
The Companys business is seasonal. The Companys sales leading up to and during the warm
weather golf season and the Christmas holiday gift-giving season have historically contributed a
higher percentage of the Companys annual net revenues and annual net operating income than that in
other periods in its fiscal year.
8
Fiscal Year
The Companys fiscal year ends on the Saturday closest to December 31. The three-months ended
July 1, 2006 and July 2, 2005 both consist of thirteen weeks. The six months ended July 1, 2006
and July 2, 2005 both consist of twenty-six weeks.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) which clarifies the accounting for
uncertainty in income taxes recognized in accordance with SFAS No. 109, Accounting for Income Taxes
(SFAS No. 109). FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods and disclosure. FIN 48 is effective for fiscal years
beginning after December 15, 2006 and is required to be adopted by the Company effective January 1,
2007. The Company is currently evaluating the impact of this standard on its financial
statements.
In June 2006, the Emerging Issues Task Force (EITF), a task force established to assist
the FASB on significant emerging account issues, has ratified the consensus on EITF 06-3, How
Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement (EITF 06-3). EITF 06-3 provides that taxes imposed by a governmental authority on
a revenue producing transaction between a seller and a customer should be shown in the income
statement on either a gross or a net basis, based on the entitys accounting policy, which should
be disclosed pursuant to Accounting Principles Board Opinion No. 22, Disclosure of Accounting
Policies. If such taxes are significant, and are presented on a gross basis, the amounts of those
taxes should be disclosed. EITF 06-3 will be effective for interim and annual reporting periods
beginning after December 15, 2006. The Company is currently evaluating the impact EITF 06-3 will
have on its financial position or results of operations.
2. Initial Public Offering
On June 20, 2006, the Company completed its initial public offering (IPO) in which the
Company sold 6,000,000 shares of common stock at an offering price to the public of $11.50 per
share. The net proceeds of the IPO to the Company were approximately $61.2 million after deducting
underwriting discounts and offering expenses of $7.8 million. The Companys common stock trades on
the Nasdaq National Market under the symbol GOLF.
The net proceeds from the IPO, along with borrowings under the Companys Amended and Restated
Credit Facility (see Note 5) were used to retire the $93.75 million Senior Secured Notes (see
Note 5), to repay the entire outstanding balance of the Companys Old Senior Secured Credit
Facility, to pay fees and expenses related to the Companys Amended and Restated Credit Facility
and to pay a $3.0 million fee to terminate the Companys management consulting agreement
with First Atlantic Capital, Ltd., the manager of Atlantic Equity Partners III, L.P., an investment
fund which is the largest beneficial owner of the Companys shares.
In connection with the IPO, the Company granted the underwriters an option to purchase
900,000 shares of the Companys common stock at a 7% discount to the IPO price, or $10.70 per
share, for 30 days commencing on June 15, 2006 (grant date). Since this option extended beyond the
closing of the IPO, this option feature represents a call option that meets the definition of a
derivative under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
Accordingly, the call option has been separately accounted for at a fair value with the change in
fair value between the grant date and July 1, 2006 recorded as other income. The Company used the
Black-Scholes valuation model to determine the fair value of the call option at the grant date and
again at July 1, 2006 using assumptions commensurate with each measurement period as shown in the
following table:
|
|
|
|
|
|
|
At June 15, 2006 |
|
At July 1, 2006 |
Volatility |
|
56% |
|
30% |
Expected life |
|
30 days |
|
15 days |
Risk free interest rate |
|
5% |
|
5% |
At June 15, 2006, the Company recorded a liability of $1.1 million with corresponding decrease
to additional paid in capital to record the fair value of the call option on such date. The fair
value of the call option aggregated approximately $58,000 on July 1,
9
2006 and the Company recorded the decrease in such fair value aggregating $1.0 million as
other income in the statement of operations for the three and six-month periods ended July 1, 2006.
The recognition of the derivative and related change in fair value represent non-cash transactions
for statement of cash flow purposes. The underwriters did not exercise their option and it expired
on July 15, 2006.
In connection with the IPO, the Companys shareholders approved an amended and restated
articles of incorporation providing for an increase in the number of authorized shares of the
Companys common stock to 100,000,000 and the authorization of 10,000,000 shares of a new class of
preferred stock, with a par value of $0.001 per share. No shares of this new class of preferred
stock have been issued.
On May 25, 2006, the Companys Board of Directors approved a 1-for-2.2798 reverse stock split
for its issued and outstanding common stock. The par value of the common stock was maintained at
the pre-split amount of $0.001 per share. All references to common stock, stock options to
purchase common stock and per share amounts in the accompanying consolidated financial statements
have been restated to reflect the reverse stock split on a retroactive basis.
3. Stock-Based Compensation
The Company has two stock-based compensation plans, the 2002 Incentive Stock Plan (the 2002
Plan) and the 2006 Incentive Compensation Plan (the 2006 Plan), which are described below. Prior
to fiscal 2006, the Company accounted for stock-based compensation under the recognition and
measurement provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations, as permitted by the Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, (SFAS 123). Compensation costs related to stock options granted at fair
value under the plan were not recognized in the consolidated statements of operations.
In December 2004, the FASB issued SFAS 123 (revised 2004), Share-Based Payment, (SFAS 123R).
Under the new standard, companies are no longer able to account for share-based compensation
transactions using the intrinsic value method in accordance with APB Opinion No. 25. Instead,
companies are required to account for such transactions using a fair-value method and recognize the
expense in the consolidated statements of operations.
Effective January 1, 2006, the Company adopted SFAS 123R using the prospective-transition
method. Under this transition method, stock compensation cost recognized beginning January 1, 2006
includes compensation cost for all share-based payments granted on or subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R.
Previously issued share-based payments prior to January 1, 2006 are not affected and do not require
recognition of expense in the consolidated statement of operations, unless such existing awards are
modified subsequent to January 1, 2006.
In June 2006, the Board of Directors approved new stock option grants under the 2006 Plan.
Also in June 2006, existing stock option grants under the 2002 Plan were modified to accelerate a
portion of the respective grants vesting provisions. The Company applied the fair value
measurement standards of SFAS 123R and calculated the fair value of both the new stock option
grants as well as the fair value related to the modification of existing stock option grants. As a
result, the Company recorded stock compensation expense of $0.4 million during the three and
six-months ended July 1, 2006.
The Companys income before income taxes and net income for the three and six months ended
July 1, 2006, were both lower by $0.4 million than if the Company had continued to account for
share-based compensation under APB Opinion No. 25. There was no stock compensation expense
recorded in the statement of operations for either the three or six-month periods ended July 2,
2005. For both the three and six months ended July 1, 2006, basic and diluted earnings per share
was $0.04 lower due to the Company adopting SFAS 123R.
2002
Incentive Stock Plan
In October 2002, Holdings adopted the 2002 Incentive Stock Plan (the 2002 Plan). Under the
2002 Plan, certain employees, members of the Board of Directors and third party consultants may be
granted options to purchase shares of Holdings common stock, stock appreciation rights and
restricted stock grants (collectively referred to as options). The exercise price of the options
granted was equal to the value of the Companys common stock on the grant date. Options are
exercisable and vest in accordance with each option agreement. The term of each option is no more
than ten years from the date of the grant.
10
On June 16, 2006, the Board of Directors approved a modification
to all outstanding stock options such that the vesting provisions for each option holder were
modified to accelerate certain levels of vesting. As a result of this modification, the Company
calculated the fair value of the related stock options at the time of the modification and recorded
compensation expense of approximately $235,000 that is recorded in selling, general and
administrative expenses. There were no stock options granted from the 2002 Plan during the fiscal
quarter ended July 1, 2006. Following the effectiveness of the Companys 2006 Incentive
Compensation Plan on June 14, 2006, no further awards will be made under the 2002 Plan, although
each option previously granted under the plan will remain outstanding subject to its terms. At
July 1, 2006, there were 855,892 options outstanding under the 2002 Plan.
2006
Incentive Compensation Plan
In June 2006, Holdings adopted the 2006 Incentive Compensation Plan (the 2006 Plan). Under
the 2006 Plan, certain employees, members of the Board of Directors and third party consultants may
be granted options to purchase shares of Holdings common stock, stock appreciation rights and
restricted stock grants (collectively referred to as options). Options are exercisable and vest
in accordance with each option agreement. The term of each option is no more than ten years from
the date of the grant. There are 1.8 million shares of common stock reserved for issuance under
the 2006 Plan. These shares have been registered under the Securities Act of 1933 pursuant to a
registration statement on Form S-8.
In June 2006, the Company granted 283,283 options to purchase common stock under the 2006
Plan. The exercise price of the options granted was equal to the value of the Companys common
stock on the grant date. At July 1, 2006, there were 277,805 options outstanding under the 2006
Plan.
Accounting for Stock Compensation
Prior to fiscal 2006, the Company accounted for stock-based compensation by using the minimum
value method to present pro forma stock-based compensation in the notes to the consolidated
financial statements, as allowed under SFAS 123. Under SFAS 123R, the Company was classified as a
non-public entity on January 1, 2006 (date of adoption) and thus used the prospective method of
transition. Any newly issued share-based awards, or modifications to existing share-based awards,
results in a measurement date under SFAS 123R. As such, the Company is required to calculate and
record the appropriate amount of compensation expense over the estimated service period in their
consolidated statement of operations based on the fair value of the related awards at the time of
issuance or modification. This requires the Company to utilize an appropriate option-pricing
model, such as the Black-Scholes model, with specific estimates regarding risk-free rate of return,
dividend yields, expected life of the award and estimated forfeitures of awards during the service
period. Resulting compensation expense is required to be reported in the Companys consolidated
statement of operations as a component of operating income.
In June 2006, the Company granted 283,283 options to purchase common stock under the 2006
Plan. Also in June 2006, the Company modified the vesting provisions of all outstanding stock
options under the 2002 Plan. The Company calculated the fair value of both the new stock option
grant and the modification of the existing stock option grant using the Black-Scholes
option-pricing model. The fair values of these awards are amortized as compensation expense on a
straight-line basis over the vesting period of the related grants. Fair value amounts related to
the acceleration of vesting that resulted in immediate vesting of certain stock options were
recorded as compensation expense at the time of the modification. The Company recorded a stock
compensation expense of $0.4 million in the three and six-month periods ended July 1, 2006. The
expense is included in selling, general and administrative expenses in the statement of operations.
The calculation of expected volatility is based on historical volatility for comparable
industry peer groups over periods of time equivalent to the expected life of each stock option
grant. As the Companys history of trading in the public equity markets is still within the first
year following its IPO, the Company believes that comparable industry peer groups provide a more
reasonable measurement of volatility in order to calculate an accurate fair value of each stock
award. The expected term is calculated based on the average of the remaining vesting term and the
remaining contractual life of each award. The Company bases the estimate of risk-free rate on the
U.S. Treasury yield curve in effect at the time of grant or modification. The Company has never
paid cash dividends and does not currently intend to pay cash dividends, and thus has assumed a 0%
dividend yield.
As part of the requirements of SFAS 123R, the Company is required to estimate potential
forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of
forfeitures will be adjusted over the requisite service period to the extent that actual
forfeitures differ, or are expected to differ, from such estimates. Changes in estimated
forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and
will also impact the amount of stock compensation expense to be recognized in future periods.
11
The fair value of share-based payments made in the six-month period ended July 1, 2006 was
estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
Six-months Ended |
|
|
July 1, 2006 |
2002 Incentive Stock Plan |
|
|
|
|
Expected volatility |
|
|
42 |
% |
Risk-free interest rate % |
|
|
4.9 |
% |
Expected term (in years) |
|
|
4.1 |
|
Dividend Yield |
|
|
|
|
|
|
|
|
|
2006 Incentive Compensation Plan |
|
|
|
|
Expected volatility |
|
|
51 |
% |
Risk-free interest rate % |
|
|
4.9 |
% |
Expected term (in years) |
|
|
6.2 |
|
Dividend Yield |
|
|
|
|
A summary of the Companys stock option activity with respect to the six-month period ended
July 1, 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Weighted Average |
|
|
Remaining |
|
|
Intrinsic Value |
|
|
|
Options |
|
|
Exercise Price |
|
|
Contractual Term |
|
|
($000s) |
|
Outstanding at December 31, 2005 |
|
|
880,753 |
|
|
$ |
7.38 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
283,283 |
|
|
$ |
11.50 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(533 |
) |
|
$ |
8.78 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(29,806 |
) |
|
$ |
8.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 1, 2006 |
|
|
1,133,697 |
|
|
$ |
8.37 |
|
|
|
7.99 |
|
|
$ |
1,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at July 1, 2006 |
|
|
525,112 |
|
|
$ |
7.57 |
|
|
|
7.50 |
|
|
$ |
1,328 |
|
The Companys weighted average fair value per share at the date of grant for stock option
grants and modifications during the six-months ended July 1, 2006 was $4.54 per share.
The Company had approximately $1.4 million of total unrecognized compensation costs related to
stock options at July 1, 2006 that are expected to be recognized over a weighted-average period of
2.5 years. There were no stock compensation costs capitalized into assets as of July 1, 2006.
The Company received cash of approximately $4,600 for the exercise of stock options during the
three and six months ended July 1, 2006. The Company issued shares from amounts reserved under the
2002 Plan upon the exercise of these stock options. The Company does not currently expect to
repurchase shares from any source to satisfy such obligation under the Plan.
Restricted
Stock Units
In October 2002, concurrent with the merger transaction between Holdings and Golfsmith,
Holdings awarded restricted stock units of Holdings common stock to eligible employees of
Golfsmith and its subsidiaries. The stock units were granted with certain restrictions as defined
in the agreement. The restricted stock units are fully vested at the grant date and are held in an
escrow account. The stock units became available to the holders at the completion of the initial
public offering, upon which the restrictions lapsed. Upon the restrictions lapsing, the Company
was required to remit the minimum statutory federal tax withholding amounts on behalf of the unit
holders. The Company remitted $1.1 million to the federal taxing authority to satisfy this
requirement. As allowable under the stock unit agreements, the Company withheld stock units from
the holders with fair values equal to the federal tax withholding amounts paid by the Company on
behalf of the holder. The Company withheld 90,256 stock units from the holders as settlement for
this liability.
Following the lapse of the restrictions, 143,935 restricted stock units were converted into
143,935 shares of common stock in June 2006. There were 97,378 and 331,569 outstanding shares of
restricted stock units at July 1, 2006 and December 31, 2005, respectively.
12
There have been no grants of restricted stock units since October 2002. There have been no
modifications made to any restricted stock units since the grant date.
A summary of the Companys restricted stock unit activity with respect to the six-month period
ended July 1, 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Weighted Average |
|
|
Remaining Vesting |
|
|
Intrinsic Value |
|
|
|
Options |
|
|
Exercise Price |
|
|
Term |
|
|
($000s) |
|
Outstanding at December 31, 2005 |
|
|
331,569 |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
Issued |
|
|
(143,935 |
) |
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
Cancelled or expired |
|
|
(90,256 |
) |
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 1, 2006 |
|
|
97,378 |
|
|
$ |
0.00 |
|
|
|
0.00 |
|
|
$ |
984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at July 1, 2006 |
|
|
97,378 |
|
|
$ |
0.00 |
|
|
|
0.00 |
|
|
$ |
984 |
|
4. Intangible Assets
The following is a summary of the Companys intangible assets that are subject to
amortization:
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Customer database gross carrying amount |
|
$ |
3,399,205 |
|
|
$ |
3,399,205 |
|
Customer database accumulated amortization |
|
|
(1,416,335 |
) |
|
|
(1,227,490 |
) |
|
|
|
|
|
|
|
Customer database net carrying amount |
|
$ |
1,982,870 |
|
|
$ |
2,171,715 |
|
|
|
|
|
|
|
|
Amortization expense related to finite-lived intangible assets was approximately $94,000 and
$189,000 for each of the three and six months ended July 1, 2006 and July 2, 2005, respectively,
and is recorded in selling, general, and administration expenses on the consolidated statements of
operations.
5. Debt
Senior Secured Notes
On October 15, 2002, Golfsmith completed an offering of $93.75 million aggregate principal
amount at maturity of 8.375% senior secured notes due in 2009 (the Senior Secured Notes) at a
discount of 20%, or $18.75 million. Interest payments were required semi-annually on March 1 and
September 1. The terms of the Senior Secured Notes limited the ability of Golfsmith to, among
other things, incur additional indebtedness, dispose of assets, make acquisitions, make other
investments, pay dividends and make various other payments. The terms of the Senior Secured Notes
also contained certain other covenants, including a restriction on capital expenditures.
The Senior Secured Notes were fully and unconditionally guaranteed, up to an aggregate
principal amount at maturity of $93.75 million, by both Holdings and all existing and future
Golfsmith domestic subsidiaries. As of December 31, 2005, the Senior Secured Notes were
guaranteed, jointly and severally, by all Golfsmith subsidiaries. The accreted value of the
Senior Secured Notes recorded on the Companys consolidated balance sheets was $82.5 million at
December 31, 2005.
The Company used the proceeds received from the IPO, along with proceeds from the Companys
Amended and Restated Credit Facility (discussed below in this Note 5) to retire the Senior Secured
Notes. Upon the closing of the IPO on June 20, 2006, the Company remitted payment of $94.4 million
to the trustee to retire the Senior Secured Notes. Pursuant to the terms of the indenture
governing the Senior Secured Notes, the Company was obligated to call the Senior Secured Notes by
providing a 30-day notice period to the trustee. The Company provided the 30-day notice concurrent
with the remittance of the funds on June 20, 2006. The Senior Secured Notes were redeemed on July
20, 2006 for $94.4 million. As the notice to call the Senior Secured Notes was irrevocable, the
Company recorded a loss on extinguishment of debt during the three and six-month periods ended July
1, 2006 of $12.8 million related to the retirement of the Senior Secured Notes. This loss was the
result of: (1) the contractually obligated amounts to retire the debt being larger than the
accreted value of the Senior Secured Notes on the Companys balance sheet at the time of settlement
of $86.2 million, including accrued interest; (2) the write-off of debt issuance costs related to
the Senior Secured Notes of $4.2 million; and (3) transaction fees associated with the retirement
of the Senior Secured Notes of $0.3 million. During the 30-day notice period, the trustee held the funds remitted by the Company in an interest-bearing account, for which the Company
is the beneficial owner of the interest. During the period from June 20, 2006 to July 1, 2006, the
Company recorded approximately $131,000 of interest income related to these funds.
13
Amended and Restated Credit Facility
On June 20, 2006, the Old Senior Secured Credit Facility (discussed below in this Note 5) of
Holdings, as guarantor, and its subsidiaries was amended and restated by entering into an amended
and restated credit agreement by and among Golfsmith International, L.P., Golfsmith NU, L.L.C.,
Golfsmith USA, L.L.C., and Don Sherwood Golf Shop, as borrowers (the Borrowers), Holdings and the other
subsidiaries of Holdings identified therein as credit parties (the Credit Parties), General
Electric Capital Corporation, as Administrative Agent, Swing Line Lender and L/C Issuer, GE Capital
Markets, Inc., as Sole Lead Arranger and Bookrunner, and the financial institutions from time to
time parties thereto (the Amended and Restated Credit Facility). The Amended and Restated Credit
Facility consists of a $65.0 million asset-based revolving credit facility (the Revolver),
including a $5.0 million letter of credit subfacility and a $10.0 million swing line subfacility.
Pursuant to the terms of the Amended and Restated Credit Facility, the Borrowers may request the
lenders under the Revolver or certain other financial institutions to provide (at their election)
up to $25.0 million of additional commitments under the Revolver. The proceeds from the incurrence
of certain loans under the Amended and Restated Credit Facility were used, together with proceeds
from the IPO, to repay the entire outstanding balance of the
Companys Old Senior Secured Credit Facility, to retire all of the outstanding Senior Secured Notes issued by Holdings, to pay a
fee of $3.0 million to First Atlantic Capital, Ltd., and to pay related transaction fees and
expenses. On an ongoing basis, certain loans incurred under the Amended and Restated Credit
Facility will be used for the working capital and general corporate purposes of the Borrowers and
their subsidiaries (the Loans).
Loans incurred under the Amended and Restated Credit Facility bear interest per annum, for
the first three months after the closing date, at (1) LIBOR plus one and one half percent (1.50%),
or (2) the Base Rate, which is equal to the higher of (i) the Federal Funds Rate plus 0.50 basis
points and (ii) the publicly quoted rate as published by The Wall Street Journal on corporate loans
posted by at least 75% of the nations largest 30 banks. Subsequently, the Loans will bear interest
in accordance with a graduated pricing matrix based on the average excess availability under the
Revolver for the previous quarter. Borrowings under the Amended and Restated Credit Facility are
jointly and severally guaranteed by the Credit Parties, and are secured by a security interest
granted in favor of the Administrative Agent, for itself and for the benefit of the lenders, in all
of the personal and owned real property of the Credit Parties, including a lien on all of the
equity securities of the Borrowers and each of Borrowers subsidiaries. The Amended and Restated
Credit Facility has a term of five years.
The Amended and Restated Credit Facility contains customary affirmative covenants regarding,
among other things, the delivery of financial and other information to the lenders, maintenance of
records, compliance with law, maintenance of property and insurance and conduct of business. The
Amended and Restated Credit Facility also contains certain customary negative covenants that limit
the ability of the Credit Parties to, among other things, create liens, make investments, enter
into transactions with affiliates, incur debt, acquire or dispose of assets, including merging with
another entity, enter into sale-leaseback transactions, and make certain restricted payments. The
foregoing restrictions are subject to certain customary exceptions for facilities of this type. The
Amended and Restated Credit Facility includes events of default (and related remedies, including
acceleration of the loans made thereunder) usual for a facility of this type, including payment
default, covenant default (including breaches of the covenants described above), cross-default to
other indebtedness, material inaccuracy of representations and warranties, bankruptcy and
involuntary proceedings, change of control, and judgment default. Many of the defaults are subject
to certain materiality thresholds and grace periods usual for a facility of this type.
Available amounts under the Amended and Restated Credit Facility are based on a borrowing
base. The borrowing base is limited to 85% of the net amount of eligible receivables, as defined in
the Amended and Restated Credit Facility, plus the lesser of (i) 70% of the value of eligible
inventory or (ii) up to 90% of the net orderly liquidation value of eligible inventory, plus the
lesser of (i) $17,500,000 or (ii) 70% of the fair market value of eligible real estate, and minus
$2.5 million, which is an availability block used to calculate the borrowing base. At July 1,
2006, the Company had $36.5 million outstanding under the Amended and Restated Credit Facility.
Old Senior Secured Credit Facility
Golfsmith had a revolving senior secured credit facility with $12.5 million availability,
subject to a required reserve of $500,000 (the Old Senior Secured Credit Facility). Borrowings
under the Old Senior Secured Credit Facility were secured by substantially all of Golfsmiths
assets, excluding real property, equipment and proceeds thereof owned by Golfsmith, Holdings, or
Golfsmiths subsidiaries, and all of Golfsmiths stock and equivalent equity interest in any
subsidiaries. Available amounts under the Old Senior Secured Credit Facility were based on a
borrowing base. The borrowing base was limited to 85% of the net amount
14
of eligible receivables, as defined in the credit agreement, plus the lesser of (i) 65% of the
value of eligible inventory and (ii) 60% of the net orderly liquidation value of eligible
inventory, and minus $2.5 million, which was an availability block used to calculate the borrowing
base. The Old Senior Secured Credit Facility contained restrictive covenants which, among other
things, limited: (i) additional indebtedness; (ii) dividends; (iii) capital expenditures; and (iv)
acquisitions, mergers, and consolidations.
On June 20, 2006 the Old Senior Secured Credit Facility was amended and restated by entering
into the Amended and Restated Credit Facility (as described above in this Note 5) to the
consolidated financial statements herein. All remaining outstanding balances under the Old Senior
Secured Credit Facility were repaid in full.
6. Guarantees
Holdings and all of Golfsmiths existing domestic subsidiaries fully and unconditionally
guarantee, and all of Golfsmiths future domestic subsidiaries will guarantee, the Amended and
Restated Credit Facility. At July 1, 2006, there were $36.5 million in borrowings outstanding
under the Amended and Restated Credit Facility.
Holdings has no operations nor any assets or liabilities other than its investment in its
wholly owned subsidiary Golfsmith. Golfsmith has no independent operations nor any assets or
liabilities other than its investments in its wholly owned subsidiaries. Domestic subsidiaries of
Golfsmith comprise all of Golfsmiths assets, liabilities and operations. There are no restrictions
on the transfer of funds between Holdings, Golfsmith and any of Golfsmiths domestic subsidiaries.
The Company offers warranties to its customers depending on the specific product and terms of
the goods purchased. A typical warranty program requires that the Company replace defective
products within a specified time period from the date of sale. The Company records warranty costs
as they are incurred and historically such costs have not been material. During the three and six
months ended July 1, 2006 and July 2, 2005, respectively, no material amounts have been accrued or
paid relating to product warranties.
7. Accrued Expenses and Other Current Liabilities
The Companys accrued expenses and other current liabilities are comprised of the following at
July 1, 2006 and December 31, 2005, respectively:
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Salaries and benefits |
|
$ |
1,642,775 |
|
|
$ |
2,927,440 |
|
Interest |
|
|
102,910 |
|
|
|
2,654,411 |
|
Allowance for returns reserve |
|
|
629,070 |
|
|
|
671,742 |
|
Gift certificates |
|
|
6,073,919 |
|
|
|
8,091,210 |
|
Taxes |
|
|
2,525,183 |
|
|
|
2,704,282 |
|
Other |
|
|
2,165,606 |
|
|
|
2,114,374 |
|
|
|
|
|
|
|
|
Total |
|
$ |
13,139,463 |
|
|
$ |
19,163,459 |
|
|
|
|
|
|
|
|
8. Comprehensive Income (Loss)
The Companys comprehensive income (loss) is composed of net income and translation
adjustments. There were no significant differences between net income (loss) and comprehensive
income (loss) during any of the periods presented.
9. Earnings Per Share
Basic earnings per share is computed based on the weighted average number of common shares
outstanding, including outstanding restricted stock awards. Diluted earnings per share is computed
based on the weighted average number of common shares outstanding adjusted by the number of
additional shares that would have been outstanding had the potentially dilutive common shares been
issued. Potentially dilutive shares of common stock include outstanding stock options.
15
The following table sets forth the computation of basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Months Ended |
|
|
Three-Months Ended |
|
|
|
July 1, |
|
|
July 2, |
|
|
July 1, |
|
|
July 2, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income (loss) |
|
$ |
(8,813,212 |
) |
|
$ |
4,002,075 |
|
|
$ |
(7,943,818 |
) |
|
$ |
6,001,687 |
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding |
|
|
10,016,597 |
|
|
|
9,472,143 |
|
|
|
10,537,380 |
|
|
|
9,472,143 |
|
Weighted-average shares of restricted common stock
units outstanding |
|
|
313,895 |
|
|
|
331,569 |
|
|
|
286,178 |
|
|
|
331,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic net loss per share |
|
|
10,330,492 |
|
|
|
9,803,712 |
|
|
|
10,823,558 |
|
|
|
9,803,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
(0.85 |
) |
|
$ |
0.41 |
|
|
$ |
(0.73 |
) |
|
$ |
0.61 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and awards |
|
|
|
|
|
|
143,167 |
|
|
|
|
|
|
|
143,167 |
|
Shares used in computing diluted net loss per share |
|
|
10,330,492 |
|
|
|
9,946,879 |
|
|
|
10,823,558 |
|
|
|
9,946,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
(0.85 |
) |
|
$ |
0.40 |
|
|
$ |
(0.73 |
) |
|
$ |
0.60 |
|
The computation of dilutive shares outstanding in each of the above periods excluded
options to purchase 0.3 million shares because such outstanding options exercise prices were equal
to or greater than the average market price of the Companys common shares and, therefore, the
effect would be antidilutive (i.e., including such options would result in higher earnings per
share).
10. Commitments and Contingencies
Lease Commitments
The Company leases certain store locations under operating leases that provide for annual
payments that, in some cases, increase over the life of the lease. The aggregate of the minimum
annual payments is expensed on a straight-line basis over the term of the related lease without
consideration of renewal option periods. The lease agreements contain provisions that require
the Company to pay for normal repairs and maintenance, property taxes, and insurance.
At July 1, 2006, future minimum payments due under non-cancelable operating leases with
initial terms of one year or more are as follows for each of the fiscal years presented below:
|
|
|
|
|
|
|
Operating |
|
|
|
Lease |
|
|
|
Obligations |
|
2006 |
|
$ |
8,998,137 |
|
2007 |
|
|
19,206,800 |
|
2008 |
|
|
18,438,334 |
|
2009 |
|
|
17,467,528 |
|
2010 |
|
|
17,140,841 |
|
Thereafter |
|
|
75,103,789 |
|
|
|
|
|
Total minimum lease payments |
|
$ |
156,355,429 |
|
|
|
|
|
Legal Proceedings
The Company is involved in various legal proceedings arising in the ordinary course of
conducting business. The Company believes that the ultimate outcome of such matters, in the
aggregate, will not have a material adverse impact on its financial position, liquidity or results
of operations.
16
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements and related notes included
elsewhere in this report.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
the federal securities laws. Statements that are not historical facts, including statements about
our beliefs and expectations, are forward-looking statements. Forward-looking statements include
statements preceded by, followed by or that include the words may, could, would, should,
believe, expect, anticipate, plan, estimate, target, project, intend, or similar
expressions. These statements include, among others, statements regarding our expected business
outlook, anticipated financial and operating results, our business strategy and means to implement
the strategy, our objectives, the amount and timing of future store openings, store retrofits and
capital expenditures, the likelihood of our success in expanding our business, financing plans,
working capital needs and sources of liquidity.
Forward-looking statements are only predictions and are not guarantees of performance. These
statements are based on our managements beliefs and assumptions, which in turn are based on
currently available information. Important assumptions relating to the forward-looking statements
include, among others, assumptions regarding demand for our products, the introduction of new
product offerings, store opening costs, our ability to lease new sites on a timely basis, expected
pricing levels, the timing and cost of planned capital expenditures, competitive conditions and
general economic conditions. These assumptions could prove inaccurate. Forward-looking statements
also involve risks and uncertainties, which could cause actual results that differ materially from
those contained in any forward-looking statement. Many of these factors are beyond our ability to
control or predict. Such factors include, but are not limited to, the factors set forth below
under Additional Factors That May Affect Future Results.
We believe our forward-looking statements are reasonable; however, undue reliance should not
be placed on any forward-looking statements, which are based on current expectations. Further,
forward-looking statements speak only as of the date they are made, and we undertake no obligation
to update publicly any of them in light of new information or future events.
Overview
We are the nations largest specialty retailer of golf equipment, apparel and accessories
based on sales. We operate as an integrated multi-channel retailer, offering our customers, who we
refer to as guests, the convenience of shopping in our 59 stores across the nation, including one
new store opened in July 2006, and through our direct-to-consumer channel, consisting of our
Internet site, www.golfsmith.com, and our comprehensive catalogs.
We were founded in 1967 as a clubmaking company offering custom-made clubs, clubmaking
components and club repair services. In 1972, we opened our first retail store, and in 1975, we
mailed our first general golf products catalog. Over the next 25 years, we continued to expand our
product offerings, opened larger retail stores and added to our catalog titles. In 1997, we
launched our Internet site to further expand our direct-to-consumer business. In October 2002,
Atlantic Equity Partners III, L.P., an investment fund managed by First Atlantic Capital, Ltd.,
acquired us from our original founders, Carl, Barbara and Franklin Paul. We accounted for this
acquisition under the purchase method of accounting for business combinations. In accordance with
the purchase method of accounting, in connection with the transaction, we allocated the excess
purchase price over the fair value of our net assets between a write-up of certain of our assets,
which reflect an adjustment to the fair value of these assets, and goodwill. The assets that have
had their fair values adjusted included inventory, property and equipment and certain intangible
assets.
Since our acquisition, we have accelerated our growth plan by opening additional stores in new
and existing markets. We opened seven new stores in the first seven months of fiscal 2006, six new
stores during fiscal 2005, eight new stores during fiscal 2004 and 12 new stores during fiscal
2003, including six stores from the acquisition of Don Sherwood Golf & Tennis in July 2003. We plan
to open an additional three to five stores in 2006 and between 14 and 16 stores in 2007. Based on
our past experience, opening a new store within our core 15,000 to 20,000 square-foot format
requires, on average, approximately $750,000 for capital expenditures, $150,000 for pre-opening
expenses and $875,000 for inventory depending on the level of work required at the site and the
time of year that it is opened.
17
On June 20, 2006, we completed an initial public offering of our common stock (the IPO).
Our stock trades on the Nasdaq National Market under the ticker symbol, GOLF. In the IPO, we
sold 6,000,000 shares of common stock and received net proceeds of $61.2 million. We used these
net proceeds along with borrowings under our Amended and Restated Credit Facility to retire our
Senior Secured Notes with a face value of $93.75 million, to repay the entire outstanding balance
of our Old Senior Secured Credit Facility, to pay fees and expenses related to our Amended and
Restated Credit Facility and to pay a $3.0 million fee to terminate our management
consulting agreement with First Atlantic Capital, Ltd. The completion of the IPO and,
concurrently, the completion of the Amended and Restated Credit Facility that provides for
borrowings up to $65.0 million, provides us with more financial flexibility as we execute our
growth plans discussed above.
In the six months ended July 1, 2006, we generated revenues of $188.9 million and operating
income of $8.4 million. We had a net loss of $8.8 million, largely due to expenses associated with
the extinguishment of our $93.75 million face value Senior Secured Notes and $3.0 million of
expenses related to the termination of our management consulting agreement with First Atlantic Capital, Ltd. In the six months ended July 2, 2005, we generated
revenues of $166.5 million, operating income of $9.8 million and net income of $4.0 million. Our
gross margin was 35.7% in the six months ended July 1, 2006 compared to 36.4% in the six months
ended July 2, 2005. Our operating margin was 4.5% in the six months ended July 1, 2006 compared to
5.9% in the six months ended July 2, 2005.
In the three months ended July 1, 2006, we generated revenues of $114.1 million and operating
income of $6.5 million. We had a net loss of $7.9 million, largely due to expenses associated with
the extinguishment of our $93.75 million face value Senior Secured Notes and $3.0 million of
expenses related to the termination of our management consulting agreement with First Atlantic Capital, Ltd. In the three months ended July 2, 2005, we generated
revenues of $102.5 million, operating income of $9.0 million and net income of $6.0 million. Our
gross margin was 36.5% in the three months ended July 1, 2006 compared to 36.9% in the three months
ended July 2, 2005. Our operating margin was 5.7% in the three months ended July 1, 2006 compared
to 8.8% in the three months ended July 2, 2005.
Industry Trends
Sales of our products are affected by increases and decreases in participation rates. Over the
last 35 years, the golf industry has realized significant growth in both participation and
popularity. According to the National Golf Foundation, the number of rounds played in the United
States grew from 266.0 million in 1970 to a peak of 518.4 million rounds played in 2000. More
recently, however, there has been a slight decline in the number of rounds of golf played from the
peak in 2000 to 499.6 million rounds in 2005, according to the National Golf Foundation. The number
of rounds of golf played and, in turn, the amount of golf-related expenditures can be attributed to
a variety of factors affecting recreational activities including the state of the nations economy,
weather conditions and discretionary spending. As a result of the factors described above, the golf
retail industry is expected to remain stable or grow slightly. Therefore, we expect that retail
growth for any particular company will result primarily from market share gains.
According to industry sources, the golf retail industry is highly fragmented with no single
golf retailer accounting for more than 6% of sales nationally in 2005. We are in the early stages
of our store expansion and, in meeting this opportunity, we will need to implement our strategy of
rapidly opening additional stores in new and existing markets. Among other things, this will
require us to identify suitable locations for such stores at the same time as our competitors are
doing the same and successfully negotiate leases and build-out or refurbish sites on a timely and
cost-effective basis. In addition, we will need to expand and compete effectively in the
direct-to-consumer channel and continue to develop our proprietary brands.
Fiscal Year
Our fiscal year ends on the Saturday closest to December 31 and generally consists of 52
weeks, although occasionally our fiscal year will consist of 53 weeks. Each quarter of each fiscal
year generally consists of 13 weeks. The three-month periods ended July 1, 2006 and July 2, 2005
each consisted of 13 weeks and the six-month periods ended July 1, 2006 and July 2, 2005 each
consisted of 26 weeks.
18
Revenues
Revenue Trends and Drivers
Revenue channels. We generate substantially all of our revenues from sales of golf and tennis
products in our retail stores, through our direct-to-consumer distribution channels, from
international distributors and from the Harvey Penick Golf Academy. The following table provides
information about the breakdown of our revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
Three Months Ended |
|
|
July 1, 2006 |
|
July 2, 2005 |
|
July 1, 2006 |
|
July 2, 2005 |
|
|
$ |
|
% |
|
$ |
|
% |
|
$ |
|
% |
|
$ |
|
% |
|
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
|
|
|
Stores |
|
$ |
138,011 |
|
|
|
73.0 |
% |
|
$ |
117,273 |
|
|
|
70.5 |
% |
|
$ |
84,874 |
|
|
|
74.4 |
% |
|
$ |
74,376 |
|
|
|
72.6 |
% |
Direct-to-consumer |
|
|
47,161 |
|
|
|
25.0 |
|
|
|
46,118 |
|
|
|
27.7 |
|
|
|
26,954 |
|
|
|
23.6 |
|
|
|
26,269 |
|
|
|
25.6 |
|
International
distributors and
other (1) |
|
|
3,777 |
|
|
|
2.0 |
|
|
|
3,061 |
|
|
|
1.8 |
|
|
|
2,310 |
|
|
|
2.0 |
|
|
|
1,849 |
|
|
|
1.8 |
|
|
|
|
(1) |
|
Consists of (a) sales made through our international distributors and our distribution
and fulfillment center near London, England, (b) revenues from the Harvey Penick Golf
Academy, and (c) our recognition of gift card breakage, as described below. |
Our revenues have grown consistently in recent years, driven by the expansion of our store
base. The percentage of total sales from our direct-to-consumer channel has decreased due to the
increase in our store base and store revenues during the periods indicated.
Store revenues. Changes in revenues that we generate from our stores are driven primarily by
the number of stores in operation and changes in comparable store sales. We consider sales by a new
store to be comparable commencing in the fourteenth month after the store was opened or acquired.
We consider sales by a relocated store to be comparable if the relocated store is expected to serve
a comparable customer base and there is not more than a 30-day period during which neither the
original store nor the relocated store is closed for business. We consider sales by retail stores
with modified layouts to be comparable. We consider sales by stores that are closed to be
comparable in the period leading up to closure if they meet the qualifications of a comparable
store and do not meet the qualifications to be classified as discontinued operations under
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment of
Long-Lived Assets.
Branded compared to proprietary products. The majority of our sales are from premier branded
golf equipment, apparel and accessories from leading manufacturers, including Callaway®, Cobra®,
FootJoy®, Nike®, Ping®, TaylorMade® and Titleist®. In addition, we sell our own proprietary branded
equipment, components, apparel and accessories under the Golfsmith®, Killer Bee®, Lynx®, Snake
Eyes®, Zevo®, ASITM, GearForGolfTM, GiftsForGolfTM and other
product lines. Sales of our proprietary branded products constituted approximately 12.6% and 13.4%
of our net revenues for the three and six months ended July 1, 2006, respectively, and
approximately 16.4% and 16.7% of our net revenues for the three and six months ended July 2, 2005,
respectively. Increased golf club sales from leading manufacturers combined with a decline in
certain proprietary clubmaking components are the main contributors to the decline in proprietary
sales percentages.
These proprietary branded products are sold through both of our channels and generally
generate higher gross profit margins than non-proprietary branded products.
Seasonality. Our business is seasonal, and our sales leading up to and during the warm weather
golf season and the Christmas holiday gift-giving season have historically contributed a higher
percentage of our annual net revenues and annual net operating income than other periods in our
fiscal year. During fiscal 2005, the fiscal months of March through September and December, which
together comprised 36 weeks of our 52-week fiscal year, contributed over three-quarters of our
annual net revenues and substantially all of our annual operating income.
Revenue Recognition
We recognize revenue for retail sales at the time the customer takes possession of the
merchandise and purchases are paid for, primarily with either cash or a credit card. We recognize
revenues from catalog and Internet sales upon shipment of merchandise. We also operate the Harvey
Penick Golf Academy, an instructional school incorporating the techniques of the well-known golf
instructor, the late Harvey Penick. We recognize revenues from the Harvey Penick Golf Academy
at the time the services, the golf lessons, are performed.
19
We recognize revenue from gift cards when (1) the gift card is redeemed by the customer or (2)
the likelihood of the gift card being redeemed by the customer is remote (gift card breakage), and
we determine that there is no legal obligation to remit the value of the unredeemed gift cards to
the relevant jurisdictions. Gift card breakage is based on the redemption recognition method.
Estimated breakage is calculated and recognized as revenue over a 48-month period following the
gift card sale, in amounts based on the historical redemption patterns of used gift cards. During
fiscal 2005, we concluded that we had accumulated sufficient historical gift card information to
accurately calculate estimated breakage. Amounts in excess of the total estimated breakage, if any,
are recognized as revenue at the end of the 48 months following the gift card sale, at which time
we deem the likelihood of any further redemptions to be remote, and provided that such amounts are
not required to be remitted to the relevant jurisdictions. Gift card breakage income is included in
net revenue in the consolidated statements of operations. During the three and six months ended
July 1, 2006, we recognized approximately $0.1 million and $0.2 million, respectively, in net
revenues related to the recognition of gift card breakage. No breakage amounts were recognized in
net revenues during the six months ended July 2, 2005.
For all merchandise sales, we reserve for sales returns in the period of sale using estimates
based on our historical experience.
Cost of Goods Sold
We capitalize inbound freight and vendor discounts into inventory upon receipt of inventory.
These costs are then subsequently included in cost of goods sold upon the sale of that inventory.
Because some retailers exclude these costs from cost of goods sold and instead include them in a
line item such as selling and administrative expenses, our gross margins may not be comparable to
those of these other retailers. Salary and facility expenses, such as depreciation and
amortization, associated with our distribution and fulfillment center in Austin, Texas are included
in cost of goods sold. Income received from our vendors through our co-operative advertising
program that does not pertain to incremental direct advertising costs is recorded as a reduction to
cost of goods sold when the related merchandise is sold.
Operating Expenses
Selling, general and administrative. Our selling, general and administrative expenses consist
of all expenses associated with general operations for our stores and general operations for
corporate and international expenses. This includes salary expenses, occupancy expenses, including
rent and common area maintenance, advertising expenses and direct expenses, such as supplies for
all retail and corporate facilities. A portion of our occupancy expenses are offset through our
subleases with GolfTEC Learning Centers. Additionally, income received through our co-operative
advertising program for reimbursement of incremental direct advertising costs is treated as a
reduction to our selling, general and administrative expenses. Selling, general and administrative
expenses also include the fees and other expenses we pay for services rendered to us pursuant to
the management consulting agreement between us and First Atlantic Capital. Under this agreement, we
paid First Atlantic Capital fees and related expenses totaling, $0.3 million in the six months
ended July 1, 2006 and $0.4 million in the six months ended July 2, 2005, respectively. We
terminated the management consulting agreement upon the closing of our initial public offering of
common stock and paid a final $3.0 million termination fee to First Atlantic Capital, which was
expensed at such time and included in selling, general and administrative expenses. While
this agreement was terminated, we are still responsible for reimbursing future out-of-pocket
expenses of First Atlantic Capital that are related to our business.
Subsequent to the closing of the initial public offering in June 2006, we granted to certain
officers and employees options to purchase shares of our common stock at an exercise price equal to
the initial public offering price of $11.50. In addition, we modified the vesting schedule of
certain outstanding options. As a result of the stock option grant and modification, options to
purchase approximately 525,112 shares of our common stock are vested and exercisable as of July
1, 2006. We recorded a compensation expense of $0.4 million in our statement of operations in
connection with the grant of new stock options and the acceleration of outstanding stock options.
Store pre-opening expenses. Our store pre-opening expenses consist of costs associated with
the opening of a new store and include costs of hiring and training personnel, supplies and certain
occupancy and miscellaneous costs. Rent expense recorded after possession of the leased property
but prior to the opening of a new retail store is recorded as store pre-opening expenses.
Interest expense. Our interest expense consists of costs related to our Senior Secured Notes, our Old Senior Secured Credit Facility, and our Amended and Restated Credit Facility.
Interest income. Our interest income consists of amounts earned from our cash balances held in
short-term money market accounts.
20
Other income. Other income consists primarily of exchange rate variances and, for the three-
and six-month period ended July 1, 2006, of derivative income associated with the change in fair
value of the underwriters option to purchase shares of our stock at a discounted amount from the
IPO price. Additionally, other income in the six-month period ended July 1, 2006 includes $0.3
million of declared settlement income resulting from the Visa Check / MasterMoney Antitrust
Litigation class action lawsuit, in which we are a claimant, related to the overcharging of credit
card processing fees by Visa and MasterCard during the period October 25, 1992 to June 21, 2003.
Other expense. Other expense consists primarily of exchange rate variances.
Extinguishment of debt. Extinguishment of debt consists of the loss incurred to retire all of
our Senior Secured Notes and the write-off of debt issuance costs related to the Senior Secured
Notes and the Old Senior Secured Credit Facility. We recorded a loss of $12.8 million on the
extinguishment of this debt in the three and six-month periods ended July 1, 2006, as reported in
continuing operations.
Income taxes. Our income taxes consist of federal, state and foreign taxes, based on the
effective rate for the fiscal year.
Critical Accounting Policies and Estimates
Our significant accounting policies are more fully described in Note 1 of our audited
consolidated financial statements in our Annual Report filed on Form 10-K with the SEC on March 31,
2006. Certain of our accounting policies are particularly important to the portrayal of our
financial position and results of operations. In applying these critical accounting policies, our
management uses its judgment to determine the appropriate assumptions to be used in making certain
estimates. Those estimates are based on our historical experience, the terms of existing contracts,
our observance of trends in the industry, information provided by our customers and information
available from other outside sources, as appropriate. These estimates are subject to an inherent
degree of uncertainty.
Inventory Valuation
Inventory value is presented as a current asset on our balance sheet and is a component of
cost of products sold in our statement of operations. It therefore has a significant impact on the
amount of net income reported in any period. Merchandise inventories are carried at the lower of
cost or market. Cost is the sum of expenditures, both direct and indirect, incurred to bring
inventory to its existing condition and location. Cost is determined using the weighted-average
method. We write down inventory value for damaged, obsolete, excess and slow-moving inventory and
for inventory shrinkage due to anticipated book-to-physical adjustments. Based on our historical
results, using various methods of disposition, we estimate the price at which we expect to sell
this inventory to determine the potential loss if those items are later sold below cost. The
carrying value for inventories that are not expected to be sold at or above costs are then written
down. A significant adjustment in these estimates or in actual sales may have a material adverse
impact on our net income. Write-downs for inventory shrinkage are booked on a monthly basis at 0.2%
to 1.0% of net revenues depending on the distribution channel (direct-to-consumer channel or retail
channel) in which the sales occur. For the three and six months ended July 1, 2006 and July 2,
2005, inventory shrinkage expense recorded in the statements of operations was 0.7% and 0.8% of net
revenues, respectively. Inventory shrink expense recorded is a result of physical inventory counts
made during these respective periods and write-down amounts recorded for periods outside of the
physical inventory count dates. These write-down amounts are based on managements estimates of
shrinkage expense using historical experience.
Long-lived Assets, Including Goodwill and Identifiable Intangible Assets
We account for the impairment or disposal of long-lived assets in accordance with SFAS No.
144, Accounting for the Impairment of Long-Lived Assets, which requires long-lived assets, such as
property and equipment, to be evaluated for impairment whenever events or changes in circumstances
indicate the carrying value of an asset may not be recoverable. An impairment loss is recognized
when estimated future undiscounted cash flows expected to result from the use of the asset plus net
proceeds expected from disposition of the asset, if any, are less than the carrying value of the
asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to its
estimated fair value. We did not record any impairment losses in either of the three-month or
six-month periods ended July 1, 2006 or July 2, 2005.
Goodwill represents the excess purchase price over the fair value of net assets acquired, or
net liabilities assumed, in a business combination. In accordance with SFAS No. 142, Goodwill and
Other Intangible Assets, we assess the carrying value of our goodwill for indications of impairment
annually, or more frequently if events or changes in circumstances indicate that the
21
carrying amount of goodwill or intangible asset may be impaired. The goodwill impairment test is a two-step
process. The first step of the impairment analysis compares the fair value of the company or
reporting unit to the net book value of the company or reporting unit. We allocate goodwill to one
enterprise-level reporting unit for impairment testing. In determining fair value, we utilize a
blended approach and calculate fair value based on discounted cash flow analysis and revenues and
earnings multiples based on industry comparables. Step two of the analysis compares the implied
fair value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its
implied fair value, an impairment loss is recognized equal to that excess. We perform our annual
test for goodwill impairment on the first day of the fourth fiscal quarter of each year.
We test for possible impairment of intangible assets whenever events or changes in
circumstances indicate that the carrying amount of the asset is not recoverable based on
managements projections of estimated future discounted cash flows and other valuation
methodologies. Factors that are considered by management in performing this assessment include, but
are not limited to, our performance relative to our projected or historical results, our intended
use of the assets and our strategy for our overall business, as well as industry and economic
trends. In the event that the book value of intangibles is determined to be impaired, such
impairments are measured using a combination of a discounted cash flow valuation, with a discount
rate determined to be commensurate with the risk inherent in our current business model, and other
valuation methodologies. To the extent these future projections or our strategies change, our
estimates regarding impairment may differ from our current estimates.
No impairment of goodwill or identifiable intangible assets was recorded in either of the
three or six-month periods ended July 1, 2006 or July 2, 2005.
Product Return Reserves
We reserve for product returns based on estimates of future sales returns related to our
current period sales. We analyze historical returns, current economic trends, current returns
policies and changes in customer acceptance of our products when evaluating the adequacy of the
reserve for sales returns. Any significant increase in merchandise returns that exceeds our
estimates would adversely affect our operating results. In addition, we may be subject to risks
associated with defective products, including product liability. Our current and future products
may contain defects, which could subject us to higher defective product returns, product liability
claims and product recalls. Because our allowances are based on historical return rates, we cannot
assure you that the introduction of new merchandise in our stores or catalogs, the opening of new
stores, the introduction of new catalogs, increased sales over the Internet, changes in the
merchandise mix or other factors will not cause actual returns to exceed return allowances. We book
reserves on a monthly basis at 1.8% to 10.5% of net revenues depending on the distribution channel
in which the sales occur. We routinely compare actual experience to current reserves and make any
necessary adjustments.
Store Closure Costs
When we decide to close a store and meet the applicable accounting guidance criteria, we
recognize an expense related to the future net lease obligation and other expenses directly related
to the discontinuance of operations in accordance with SFAS No. 146, Accounting For Costs
Associated With Exit or Disposal Activities. These charges require us to make judgments about exit
costs to be incurred for employee severance, lease terminations, inventory to be disposed of, and
other liabilities. The ability to obtain agreements with lessors, to terminate leases or to assign
leases to third parties can materially affect the accuracy of these estimates.
We did not close any stores during the three or six months ended July 1, 2006. We closed one
store during the six months ended July 2, 2005, due to the expiration of the lease term. There were
not any expenses associated with this closed store recorded in accordance with SFAS No. 146. In
this instance, we subsequently opened a new store in fiscal 2005 to serve the same customer base of
the closed store. We do not currently have any plans to close any additional stores, although we
regularly evaluate our stores and the necessity to record expenses under SFAS No. 146.
Operating Leases
We enter into operating leases for our retail locations. Store lease agreements often include rent holidays,
rent escalation clauses and contingent rent provisions for percentage of sales in excess of
specified levels. Most of our lease agreements include renewal periods at our option. We recognize
rent holiday periods and scheduled rent increases on a straight-line basis over the lease term
beginning with the date we take possession of the leased space. We record tenant improvement
allowances and rent holidays as deferred rent liabilities on our consolidated balance sheets and
amortize the deferred rent over the term of the lease to rent expense
on our consolidated statements of operations. We record rent liabilities on our consolidated
balance sheets for contingent percentage of sales lease provisions when we determine that it is
probable that the specified levels will be reached during the fiscal year. We record direct costs
incurred to affect a lease in other long-term assets and amortize these costs on a straight-line
basis over the lease term beginning with the date we take possession of the leased space.
22
Deferred Tax Assets
A deferred income tax asset or liability is established for the expected future consequences
resulting from temporary differences in the financial reporting and tax bases of assets and
liabilities. As of July 1, 2006, we recorded a full valuation allowance against net accumulated
deferred tax assets due to the uncertainties regarding the realization of deferred tax assets
primarily based on our cumulative loss position over the past three years. If we generate taxable
income in future periods or if the facts and circumstances on which our estimates and assumptions
are based were to change, thereby impacting the likelihood of realizing the deferred tax assets,
judgment would have to be applied in determining the amount of valuation allowance no longer
required. Reversal of all or a part of this valuation allowance could have a material positive
impact on our net income in the period that it becomes more likely than not that certain of our
deferred tax assets will be realized.
Stock Compensation
Prior to fiscal 2006, we accounted for stock-based compensation by using the minimum value
method to present pro forma stock-based compensation in the notes to the consolidated financial
statements, as allowed under SFAS 123. Under SFAS 123R, we were classified as a non-public entity
on January 1, 2006 (date of adoption) and thus used the prospective method of transition. Any
newly issued share-based awards, or modifications to existing share-based awards, results in a
measurement date under SFAS 123R. As such, we are required to calculate and record the appropriate
amount of compensation expense over the estimated service period in our consolidated statement of
operations based on the fair value of the related awards at the time of issuance or modification.
This requires us to utilize an appropriate option-pricing model, such as the Black-Scholes model,
with specific estimates regarding risk-free rate of return, dividend yields, stock price volatility, expected life of the
award and estimated forfeitures of awards during the service period. Resulting compensation
expense is required to be reported our consolidated statement of operations as a component of
operating income.
In June 2006, we granted 283,283 options to purchase common stock under the 2006 Plan. Also
in June 2006, we modified the vesting provisions of all outstanding stock options under the 2002
Plan. We calculated the fair value of both the new stock option grant and the modification of the
existing stock option grant using the Black-Scholes option-pricing model. The fair values of these
awards are amortized as compensation expense on a straight-line basis over the vesting period of
the related grants. Fair value amounts related to the acceleration of vesting that resulted in
immediate vesting of certain stock options were recorded as compensation expense at the time of the
modification. We recorded a stock compensation expense of $0.4 million in the three and six-month
periods ended July 1, 2006. The expense is included in selling, general and administrative
expenses in the statement of operations.
We had approximately $1.4 million of total unrecognized compensation costs related to stock
options at July 1, 2006 that are expected to be recognized over a weighted-average period of 2.5
years. There were no stock compensation costs capitalized into assets as of July 1, 2006.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) which clarifies the accounting for
uncertainty in income taxes recognized in accordance with SFAS No. 109, Accounting for Income Taxes
(SFAS No. 109). FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods and disclosure. FIN 48 is effective for fiscal years
beginning after December 15, 2006 and is required to be adopted by us effective January 1, 2007. We
are currently evaluating the impact of this standard on our financial statements.
In June 2006, the Emerging Issues Task Force (EITF), a task force established to assist
the FASB on significant emerging account issues, has ratified the consensus on EITF 06-3, How
Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement (EITF 06-3). EITF 06-3 provides that taxes imposed by a governmental authority on
a revenue producing transaction between a seller and a customer should be shown in the income
statement on either a gross or a net basis, based on the entitys accounting policy, which should
be disclosed pursuant to Accounting Principles Board Opinion No. 22, Disclosure of Accounting
Policies. If such taxes are significant, and are presented on a gross basis, the amounts
of those taxes should be disclosed. EITF 06-3 will be effective for interim and annual
reporting periods beginning after December 15, 2006. We are currently evaluating the impact EITF
06-3 will have on our financial position or results of operations.
23
Results of Operations
The following table sets forth selected consolidated statements of operations data for each of
the periods indicated expressed as a percentage of total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Three Months Ended |
|
|
|
July 1, |
|
|
July 2, |
|
|
July 1, |
|
|
July 2, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of products sold |
|
|
64.3 |
|
|
|
63.6 |
|
|
|
63.5 |
|
|
|
63.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
35.7 |
|
|
|
36.4 |
|
|
|
36.5 |
|
|
|
36.9 |
|
Selling, general and administrative |
|
|
30.6 |
|
|
|
29.7 |
|
|
|
29.9 |
|
|
|
27.3 |
|
Store pre-opening/closing expenses |
|
|
0.6 |
|
|
|
0.8 |
|
|
|
0.9 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
31.3 |
|
|
|
30.5 |
|
|
|
30.8 |
|
|
|
28.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
4.5 |
|
|
|
6.0 |
|
|
|
5.7 |
|
|
|
8.8 |
|
Interest expense |
|
|
(3.1 |
) |
|
|
(3.5 |
) |
|
|
(2.4 |
) |
|
|
(2.8 |
) |
Interest income |
|
|
0.1 |
|
|
|
* |
|
|
|
0.1 |
|
|
|
* |
|
Other income, net |
|
|
0.7 |
|
|
|
* |
|
|
|
0.9 |
|
|
|
* |
|
Loss on debt extinguishment |
|
|
(6.8 |
) |
|
|
|
|
|
|
(11.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income
taxes |
|
|
(4.6 |
) |
|
|
2.5 |
|
|
|
(6.9 |
) |
|
|
5.9 |
|
Income tax benefit (expense) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(4.7 |
) |
|
|
2.4 |
|
|
|
(7.0 |
) |
|
|
5.8 |
|
Comparison of Three Months Ended July 1, 2006 to Three Months Ended July 2, 2005
Net revenues. Net revenues increased by $11.6 million, or 11.4%, to $114.1 million in the
three months ended July 1, 2006 from $102.5 million in the three months ended July 2, 2005. The
increase was mostly comprised of a $2.1 million, or 3.0%, increase in comparable store revenues and
an increase in non-comparable store revenues of $8.4 million. Additionally, we experienced an
increase in our direct-to-consumer channel revenues of $0.7 million, or 2.6%, as well as an
increase in our international revenues of $0.4 million, or 24.3%.
Growth in comparable store revenues from the three months ended July 2, 2005 to the three
months ended July 1, 2006 was driven by a $1.6 million increase in golf club sales, which are
higher priced products than other products we sell. Additionally, one store entered the comparable
store base for the first time during the three months ended July 1, 2006, contributing $0.2 million
to the increase in comparable store sales. We believe this growth was positively affected by the
continued effects of executing our business strategy. We believe that comparable store revenues
continued to be negatively impacted by increased competition in select markets. In comparison,
comparable store revenues for the three months ended July 2, 2005 decreased by $0.4 million, or
0.5%, compared to the second fiscal quarter of 2004.
Non-comparable store revenues primarily include revenues from nine stores in operation that
were opened subsequent to July 2, 2005 and three stores that will move into the comparable store
revenue base in the third quarter of fiscal 2006.
Gross profit. Gross profit increased by $3.9 million, or 10.2%, to $41.7 million in the three
months ended July 1, 2006 from $37.8 million in the three months ended July 2, 2005. Increased net
revenues led to higher gross profit for the three months ended July 1, 2006. Gross profit was
36.5% of net revenues in the three months ended July 1, 2006 compared to 36.9% of net revenues
in the three months ended July 2, 2005. The decrease in gross margin percentage was
largely attributable to a sales mix shift driven by strong sales of golf clubs that generally carry
lower gross margins. Additionally, increased distribution costs relating to our receiving and
shipping of products, mainly related to promotional shipping terms offered to our guests, as well
as increased freight costs due to rising gas prices accounted for decreases in gross profit of $0.5
million during the three months ended July 1, 2006 as
24
compared to the three months ended July 2, 2005. These declines in gross profit were partially offset by increases in vendor
allowances of $0.3 million and increases in capitalization of
freight costs of $0.8 million
resulting from refinements to managements estimates.
Selling, general and administrative. Selling, general and administrative expenses increased
by $6.2 million, or 22.2%, to $34.2 million in the three months ended July 1, 2006 from $28.0
million in the three months ended July 2, 2005. Selling, general and administrative expenses were
29.9% of net revenues in the three months ended July 1, 2006 compared to 27.3% of net revenues in
the three months ended July 2, 2005. The increases in selling, general and administrative expenses
were due to a $3.0 million fee paid to terminate our management consulting agreement with
First Atlantic Capital, Ltd., a $0.4 million non-cash stock compensation expense relating to new
stock option grants and modifications to existing stock option grants, and an increase of $2.8
million related to non-comparable stores.
The increase in non-comparable retail store expenses of $2.8 million was mainly related to the
opening of six new stores in the second quarter of fiscal 2006 and six new stores during fiscal
2005. The increase in non-comparable retail expenses were comprised of $1.0 million in fixed
expenses, including occupancy and depreciation costs and $1.8 million in variable expenses,
consisting mainly of payroll and advertising.
Store pre-opening expenses. Store pre-opening expenses increased by $0.1 million, or 15.4%,
to $1.0 million in the three months ended July 1, 2006 from $0.9 million in the three months ended
July 2, 2005. During the three months ended July 1, 2006, we incurred $1.0 million related to the
opening of six new retail locations during the second fiscal quarter of 2006. During the three
months ended July 2, 2005, we incurred $0.9 million related to the opening of three new retail
locations during the second fiscal quarter of 2005 and the opening of three new retail locations
during the third fiscal quarter of 2005.
Interest expense. Interest expense consists of costs related to the Senior Secured Notes, the
Old Senior Secured Credit Facility and, now, the Amended and Restated Credit Facility. Interest
expense decreased by $0.1 million, or 4.7%, to $2.8 million in the three months ended July 1, 2006
from $2.9 million in the three months ended July 2, 2005. For further discussion, see Liquidity
and Capital Resources Historical IndebtednessSenior Secured Notes, Liquidity and Capital
Resources Historical IndebtednessOld Senior Secured Credit Facility and Liquidity and Capital
Resources New Indebtedness below.
Interest income. Interest income increased by approximately $100,000 to $145,000 in the
three months ended July 1, 2006 from $46,000 in the three months ended July 2, 2005. The increase
was due to interest earned during the 30-day call period on amounts paid to the trustee to retire
the Senior Secured Notes.
Other income. Other income increased to $1.1 million in the three months ended July 1, 2006
from $8,000 in the three months ended July 2, 2005. The increase was primarily attributable to
non-cash derivative income of $1.0 million. Derivative income was recorded as a result of the
change in the fair value from the grant date of June 15, 2006 to July 1, 2006 of an option granted
to the underwriters representing us in the IPO that allowed the underwriters to purchase 900,000
shares of our common stock at a 7% discount to the IPO price of $11.50 per share.
Other expense. Other expense increased by $17,000 to $65,000 in the three months ended July
1, 2006 from $48,000 in the three months ended July 2, 2005. The increase resulted from foreign
exchange losses.
Extinguishment of debt. Upon the closing of the IPO on June 20, 2006, we remitted
payment of $94.4 million to the trustee to retire the Senior Secured Notes. We recorded a loss of
$12.8 million on the extinguishment of this debt, as reported in continuing operations.
This loss was the result of: (1) the contractually obligated amounts to retire the debt being
larger than the accreted value of the Senior Secured Notes on our balance sheet at the time of
settlement of $86.2 million, including accrued interest; (2) the write-off of debt issuance costs
related to the Senior Secured Notes of $4.2 million; and (3) transaction fees associated with the
retirement of the Senior Secured Notes of $0.3 million.
Income taxes. We record income taxes, consisting of federal, state and foreign taxes, based
on the effective rate expected for the fiscal year. Actual results may differ from these
estimates. We did not record federal income tax expense for the three months ended July 1, 2006 or
the three months ended July 2, 2005, due to a full valuation allowance being recorded. Income tax
expense of $0.1 million during the three months ended July 1, 2006 and the three months ended July
2, 2005, respectively, represents foreign income tax expense.
Comparison of Six Months Ended July 1, 2006 to Six Months Ended July 2, 2005
Net revenues. Net revenues increased by $22.5 million, or 13.5%, to $188.9 million in the six
months ended July 1, 2006 from $166.5 million in the six months ended July 2, 2005. The increase
was mostly comprised of a $7.4 million, or 6.4%, increase
25
in comparable store revenues and an
increase in non-comparable store revenues of $13.4 million. Additionally, we experienced an
increase in our direct-to-consumer channel revenues of $1.0 million, or 2.3%, as well as an
increase in our international revenues of $0.6 million, or 21.3%.
Growth in comparable store revenues from the six months ended July 2, 2005 to the six months
ended July 1, 2006 was driven by a $5.8 million increase in golf club sales, which are higher
priced products than other products we sell. Additionally, five stores entered the comparable
store base for the first time during the six months ended July 1, 2006, contributing $0.9 million
to the increase in comparable store sales. We believe this growth was positively affected by
higher levels of consumer confidence and the continued effects of executing our business strategy.
We also believe that comparable store revenues continued to be negatively impacted by increased
competition in select markets. In comparison, comparable store revenues for the six months ended
July 2, 2005 decreased by $3.6 million, or 3.4%, compared to the first fiscal quarter of 2004.
Non-comparable store revenues primarily include revenues from nine stores in operation that
were opened subsequent to July 2, 2005, three stores that will move into the comparable store
revenue base in the third quarter of fiscal 2006 and two stores that became comparable during the
six months ended July 1, 2006, but which contributed $0.9 million in non-comparable store revenues
during the six months ended July 1, 2006.
Gross profit. Gross profit increased by $6.9 million, or 11.4%, to $67.5 million in the
six months ended July 1, 2006 from $60.6 million in the six months ended July 2, 2005. Increased
net revenues led to higher gross profit for the six months ended July 1, 2006. Gross profit was
35.7% of net revenues in the six months ended July 1, 2006 compared to 36.4% of net revenues in the
six months ended July 2, 2005. The decrease in gross margin percentage was largely attributable to
a sales mix shift driven by strong sales of clubs that generally carry lower gross margins during
the six months ended July 1, 2006. Additionally, increased distribution costs relating to our
receiving and shipping of products, mainly related to promotional shipping terms offered to our
guests, as well as increased freight costs due to rising gas prices accounted for decreases in
gross profit of $1.8 million during the six months ended July 1, 2006 as compared to the six months
ended July 2, 2005. These declines in gross profit were partially offset by increases in vendor
allowances of $1.0 million and increases in capitalization of freight costs of $0.8 million resulting from refinements to management's estimates.
Selling, general and administrative. Selling, general and administrative expenses increased
by $8.5 million, or 17.2%, to $57.9 million in the six months ended July 1, 2006 from $49.4 million
in the six months ended July 2, 2005. Selling, general and administrative expenses were 30.6% of
net revenues in the six months ended July 1, 2006 compared to 29.7% of net revenues in the six
months ended July 2, 2005. The increases in selling, general and administrative expenses were due
to a $3.0 million fee paid to terminate our management consulting agreement with First
Atlantic Capital, Ltd., a $0.4 million non-cash stock compensation expense relating to new stock
option grants and modifications to existing stock option grants, an increase of $4.4 million
related to non-comparable stores and an increase of $0.7 million related to our consumer direct
channel, corporate and international operations.
The increase in non-comparable retail store expenses of $4.4 million was mainly related to the
opening of six new stores during the second quarter of fiscal 2006 and six new stores during fiscal
2005 and was comprised of $1.8 million in fixed expenses, including occupancy and depreciation
costs, and $2.6 million in variable expenses, consisting mainly of payroll and advertising. The
increase of $0.7 million related to our consumer direct channel, corporate and international
operations was primarily related to an increase of $1.2 million in variable expenses consisting
mainly of payroll and advertising offset by a decrease in professional services of $0.5 million.
Store pre-opening expenses. Store pre-opening expenses decreased by $0.2 million, or 12.9%,
to $1.2 million in the six months ended July 1, 2006 from $1.4 million in the six months ended July
2, 2005. During the six months ended July 1, 2006, we incurred $1.2 million related to the opening
of six new retail locations during the second fiscal quarter of 2006. During the six months ended
July 2, 2005, we incurred $1.4 million related to the opening of four new retail locations and the
opening of two new retail locations during the third fiscal quarter of 2005.
Interest expense. Interest expense consists of costs related to the Senior Secured Notes,
the Old Senior Secured Credit Facility and, now, the Amended and Restated Credit Facility. Interest
expense increased by approximately $60,000, or 1.1%, to $5.8 million in the six months ended July
1, 2006 from $5.7 million in the six months ended July 2, 2005 as a result of increases in the
accreted value of the Senior Secured Notes. For further discussion, see Liquidity
and Capital Resources Historical IndebtednessSenior Secured Notes, Liquidity and Capital Resources Historical
IndebtednessOld Senior Secured Credit Facility and Liquidity and Capital Resources New
Indebtedness below.
Interest income. Interest income increased by approximately $0.1 million to $0.2 million in
the six months ended July 1, 2006 from $0.1 million in the three months ended July 2, 2005. The
increase was due to interest earned during the 30-day call period on amounts paid to the trustee to
retire the Senior Secured Notes.
26
Other income. Other income increased to $1.4 million in the six months ended July 1, 2006
from $31,000 in the six months ended July 2, 2005. The increase was primarily attributable to
non-cash derivative income of $1.0 million. Derivative income was recorded as a result of the
change in the fair value from the grant date of June 15, 2006 to July 1, 2006 of an option granted
to the underwriters representing us in the IPO that allowed the underwriters to purchase 900,000
shares of our common stock at a 7% discount to the IPO price of $11.50 per share. Other income
also increased by $0.3 million as a result of declared settlement income resulting from the Visa
Check / MasterMoney Antitrust Litigation class action lawsuit, in which we are a claimant, related
to the overcharging of credit card processing fees by Visa and MasterCard during the period October
25, 1992 to June 21, 2003.
Other expense. Other expense increased by $36,000 to $108,000 in the six months ended July 1,
2006 from $72,000 in the six months ended July 2, 2005. The increase resulted from foreign
exchange losses.
Extinguishment of debt. Upon the closing of the IPO on June 20, 2006, we remitted payment of
$94.4 million to the trustee to retire the Senior Secured Notes. We recorded a loss of $12.8
million on the extinguishment of this debt, as reported in continuing operations. This
loss was the result of: (1) the contractually obligated amounts to retire the debt being larger
than the accreted value of the Senior Secured Notes on our balance sheet at the time of settlement
of $86.2 million, including accrued interest; (2) the write-off of debt issuance costs related to
the Senior Secured Notes of $4.2 million; and (3) transaction fees associated with the retirement
of the Senior Secured Notes of $0.3 million.
Income taxes. We record income taxes, consisting of federal, state and foreign taxes, based
on the effective rate expected for the fiscal year. Actual results may differ from these
estimates. We did not record federal income tax expense for the six months ended July 1, 2006 or
the six months ended July 2, 2005, due to a full valuation allowance being recorded. Income tax
expense of $0.1 million during the six months ended July 1, 2006 and the six months ended July 2,
2005, respectively, represents foreign income tax expense.
Liquidity and Capital Resources
To date, we have financed our activities through cash flow from operations, a private
placement of debt securities (subsequently exchanged for notes registered under the Securities Act
of 1933) and borrowings under our Old Senior Secured Credit Facility and Amended and Restated
Credit Facility. On June 20, 2006, we completed the IPO in which we sold 6,000,000 shares of our
common stock at an offering price to the public of $11.50 per share. The net proceeds from the IPO
were approximately $61.2 million after deducting underwriting discounts and offering expenses of
$7.8 million. Our shares of common stock trade on the Nasdaq National Market under the symbol
GOLF.
The net proceeds from the IPO, along with borrowings under our Amended and Restated Credit
Facility (see further discussion under Liquidity and Capital Resources New Indebtedness) were
used to retire the $93.75 million face value Senior Secured Notes, to repay the entire outstanding
balance of our Old Senior Secured Credit Facility, to pay fees and expenses related to our
Amended and Restated Credit Facility and to pay a $3.0 million fee to terminate our
management consulting agreement with First Atlantic Capital, Ltd.
As of July 1, 2006, we had cash and cash equivalents of $0.2 million and outstanding debt
obligations under our Amended and Restated Credit Facility of
$36.5 million. We had $8.9 million
in borrowing availability under our Amended and Restated Credit Facility as of July 1, 2006, as
defined by the agreements borrowing base definitions and after giving effect to required reserves
of $2,500,000. At July 1, 2006, the borrowing base did not include the borrowing availability
secured by eligible real estate, as defined in the agreement. Upon final completion in the third
quarter of fiscal 2006 of closing requirements related to eligible real estate, we expect the
borrowing base to increase by the lesser of $17.5 million or 70% of the fair market value of
eligible real estate.
Based on our current business plan, we believe the net proceeds from the IPO, together with
our existing cash balances and cash generated from operations, and borrowing availability under
our Amended and Restated Credit Facility, will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures. If our estimates of revenues, expenses or
capital or liquidity requirements change or are inaccurate or if cash generated from operations is
insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or arrange additional debt financing. In
addition, we may seek to sell additional equity or arrange debt financing to give us financial
flexibility to pursue attractive opportunities that may arise in the future. Further, we believe
discretionary cash outflows related to new store openings, store retrofittings, advertising and
capital expenditures can be adjusted accordingly if needed to meet working capital requirements.
If cash from operations and from our Amended and Restated Credit Facility is not sufficient to meet
our needs, we cannot assure you that we will be able to obtain additional financing in sufficient
amounts and on acceptable terms. You should read the information set forth below under Additional
Factors That May Affect Future Results for discussion of the risks affecting our operations.
27
Cash Flows
Operating activities
Net cash provided by operating activities was $1.1 million in the six months ended July 1,
2006, compared to net cash used in operating activities of $0.1 million in the six months ended
July 2, 2005. This change was principally due to a decrease in cash used for the purchase of inventory of $7.8 million,
offset by an increase in cash used for accounts payable and other working capital accounts of $5.5 million
and an increase in cash used of $1.0 million to satisfy tax withholding obligations for the conversion of restricted stock
units.
Investing activities
Net cash used in investing activities was $8.6 million for the six months ended July 1, 2006,
compared to net cash used in investing activities of
$6.9 million for the six months ended July 2, 2005. The increase was largely driven by the opening of six new stores in the six months ended July 1, 2006
compared to the opening of four new stores in the six months ended July 2, 2005. For the six months ended July 1,
2006, capital expenditures were comprised of $8.2 million for new and existing stores and $0.4
million for corporate projects. For the six months ended July 2, 2005, capital expenditures were
comprised of $6.5 million for new and existing stores and $0.4 million for corporate
projects.
Financing activities
Net cash provided by financing activities was $3.3 million for the six months ended July 1,
2006, compared to net cash provided by financing activities of $0.7 million for the six months ended July 2, 2005. Net cash provided by
financing activities for the six months ended July 1, 2006 was comprised of proceeds from the IPO,
net of transaction costs, of $61.6 million along with proceeds from our Amended and
Restated Credit Facility and Old Senior Secured Credit Facility of $93.3 million. These cash
inflows were partially offset by cash used of $94.4 million to retire the Senior Secured Notes, and
cash used of $56.9 million to repay existing indebtedness under our Old Senior Secured Credit
Facility and our Amended and Restated Credit Facility.
Net cash from financing activities for the six months ended July 2, 2005 consisted primarily
of proceeds from our Old Senior Secured Credit Facility, net of payments.
Historical Indebtedness
Senior Secured Notes
On October 15, 2002, we completed a private placement of $93.75 million aggregate principal
amount at maturity of our 8.375% senior secured notes due 2009 (Senior Secured Notes) for gross
proceeds of $75.0 million. The covenants in the indenture governing the Senior Secured Notes
restricted our ability to incur debt, make capital expenditures, pay dividends or repurchase
capital stock.
Within 120 days after the end of each fiscal year, we were required by the indenture governing
the Senior Secured Notes to offer to repurchase the maximum principal amount of the Senior Secured
Notes that may be purchased with 50% of our excess cash flow from our previous fiscal year at a
purchase price of 100% of the accreted value of the Senior Secured Notes to be purchased. The
indenture governing the Senior Secured Notes defines excess cash flow as consolidated net income
plus interest, amortization and depreciation expense, income taxes, and net non-cash charges, less
certain capital expenditures, increases in working capital, cash interest expense and income taxes.
As of the end of fiscal 2005, we determined that we did not have any excess cash flow, as defined
in the indenture, and were thus not required to offer to repurchase any of the Senior Secured
Notes. The Senior Secured Notes have a final maturity date of October 15, 2009, although we were
required by the indenture governing the Senior Secured Notes to make principal payments on the
Senior Secured Notes of $18.75 million in 2007 and $9.375 million in 2008.
The proceeds received from the IPO, along with proceeds from our Amended and Restated Credit Facility were used to retire the Senior Secured Notes. Upon the closing of the IPO
on June 20, 2006, we remitted payment of $94.4 million to the trustee to retire the Senior Secured
Notes. Pursuant to the terms of the indenture governing the Senior Secured Notes, we were
obligated to call the Senior Secured Notes by providing a 30-day notice period to the trustee. We
provided the 30-day notice concurrent with the remittance of the funds on June 20, 2006. The
Senior Secured Notes were redeemed on July 20, 2006 for $94.4 million. As the notice to call the
Senior Secured Notes was irrevocable, we recorded a loss on extinguishment of debt during the three
and six-month periods ended July 1, 2006 of $12.7 million related to the retirement of the Senior
Secured Notes. This loss was the result of: (1) the contractually obligated amounts to retire the
debt being larger than the accreted value of the Senior Secured Notes on our balance sheet at the
time of settlement of $86.2 million, including accrued interest; (2) the write-off of debt issuance
costs related to the Senior Secured Notes of $4.2 million; and (3) transaction fees associated with
the retirement of the Senior Secured Notes of
28
$0.3 million. During the 30-day notice period, the
trustee held the funds remitted by us in an interest-bearing account, for which we are the
beneficial owners of the interest. During the period from June 20, 2006 to July 1, 2006, we
recorded approximately $131,000 of interest income related to these funds.
Old Senior Secured Credit Facility
We had a senior secured credit facility with availability of up to $12.5 million (after giving
effect to required reserves of $500,000), subject to customary conditions (the Old Senior Secured
Credit Facility). The Old Senior Secured Credit Facility was secured by a pledge of our inventory,
receivables and certain other assets. The Old Senior Secured Credit Facility provided for same-day
funding of the revolver, as well as letters of credit up to a maximum of $1.0 million. Interest on
outstanding borrowings is payable, at our option, at either an index rate or a LIBOR rate. Index
rate loans bear interest at a floating rate equal to the higher of (i) the base rate on corporate
loans quoted by The Wall Street Journal or (ii) the federal funds rate plus 50 basis points per
annum, in either case plus 1.00%. LIBOR rate loans bear interest at a rate based on LIBOR plus
2.50%. We had the option to choose 1-, 2-, 3- or 6-month LIBOR periods for borrowings bearing
interest at the LIBOR rate. In addition, the Old Senior Secured Credit Facility required us to pay
a monthly fee of 2.50% per annum of the amount available under outstanding letters of credit. We
were also required to pay a monthly commitment fee equal to 0.5% per annum of the undrawn
availability, as calculated under the agreement.
Available amounts under the Old Senior Secured Credit Facility were based on a borrowing base.
The borrowing base was limited to 85% of the net amount of eligible receivables, as defined in the
credit agreement, plus the lesser of (1) 65% of the value of eligible inventory and (2) 60% of the
net orderly liquidation value of eligible inventory, and minus $2.5 million, which was an
availability block used to calculate the borrowing base.
On June 20, 2006 the Old Senior Secured Credit Facility was amended and restated by entering
into the Amended and Restated Credit Facility as described below. All remaining outstanding
balances under the Old Senior Secured Credit Facility were repaid in full.
New Indebtedness
Amended and Restated Credit Facility
On June 20, 2006, the Old Senior Secured Credit Facility of Holdings, and its subsidiaries
was amended and restated by entering into an amended and restated credit agreement by and among
Golfsmith International, L.P., Golfsmith NU, L.L.C., Golfsmith USA, L.L.C., and Don Sherwood Golf
Shop, as borrowers (the Borrowers), Holdings and the subsidiaries of Holdings identified therein
as credit parties (the Credit Parties), General Electric Capital Corporation, as Administrative
Agent, Swing Line Lender and L/C Issuer, GE Capital Markets, Inc., as Sole Lead Arranger and
Bookrunner, and the financial institutions from time to time parties thereto (the Amended and
Restated Credit Facility). The Amended and Restated Credit Facility consists of a $65.0 million
asset-based revolving credit facility (the Revolver), including a $5.0 million letter of credit
subfacility and a $10.0 million swing line subfacility. Pursuant to the terms of the Amended and
Restated Credit Facility, the Borrowers may request the lenders under the Revolver or certain other
financial institutions to provide (at their election) up to $25.0 million of additional commitments
under the Revolver. The proceeds from the incurrence of certain loans under the Amended and
Restated Credit Facility were used, together with proceeds from the IPO, to retire all of the
outstanding Senior Secured Notes issued by us, to pay a fee of $3.0 million to First Atlantic
Capital, Ltd., and to pay related transaction fees and expenses. On an ongoing basis, certain loans
incurred under the Amended and Restated Credit Facility will be used for the working capital and
general corporate purposes of the Borrowers and their subsidiaries (the Loans).
Loans incurred under the Amended and Restated Credit Facility bear interest per annum, for the
first three months after the closing date, at (1) LIBOR plus one and one half percent (1.50%), or
(2) the Base Rate, which is equal to the higher of (i) the Federal Funds Rate plus 0.50 basis
points and (ii) the publicly quoted rate as published by The Wall Street Journal on corporate loans
posted by at least 75% of the nations largest 30 banks. Subsequently, the Loans will bear interest
in accordance with a graduated pricing matrix based on the average excess availability under the
Revolver for the previous quarter. Borrowings under the Amended and Restated Credit Facility are
jointly and severally guaranteed by the Credit Parties, and are secured by a security interest
granted in favor of the Administrative Agent, for itself and for the benefit of the lenders, in all
of the personal and owned real property of the Credit Parties, including a lien on all of the
equity securities of the Borrowers and each of Borrowers subsidiaries. The Amended and Restated
Credit Facility has a term of five years.
29
The Amended and Restated Credit Facility contains customary affirmative covenants regarding,
among other things, the delivery of financial and other information to the lenders, maintenance of
records, compliance with law, maintenance of property and insurance and conduct of business. The
Amended and Restated Credit Facility also contains certain customary negative covenants that limit
the ability of the Credit Parties to, among other things, create liens, make investments, enter
into transactions with affiliates, incur debt, acquire or dispose of assets, including merging with
another entity, enter into sale-leaseback transactions, and make certain restricted payments. The
foregoing restrictions are subject to certain customary exceptions for facilities of this type. The
Amended and Restated Credit Facility includes events of default (and related remedies, including
acceleration of the loans made thereunder) usual for a facility of this type, including payment
default, covenant default (including breaches of the covenants described above), cross-default to
other indebtedness, material inaccuracy of representations and warranties, bankruptcy and
involuntary proceedings, change of control, and judgment default. Many of the defaults are subject
to certain materiality thresholds and grace periods usual for a facility of this type.
Available amounts under the Amended and Restated Credit Facility are based on a borrowing
base. The borrowing base is limited to 85% of the net amount of eligible receivables, as defined in
the Amended and Restated Credit Facility, plus the lesser of (i) 70% of the value of eligible
inventory or (ii) up to 90% of the net orderly liquidation value of eligible inventory, plus the
lesser of (i) $17,500,000 or (ii) 70% of the fair market value of eligible real estate, and minus
$2.5 million, which is an availability block used to calculate the borrowing base. At July 1,
2006, we had $36.5 million outstanding under the Amended and
Restated Credit Facility and $8.9 million of borrowing availability after giving effect to required reserves of $2,500,000.
Borrowings under our Amended and Restated Credit Facility typically increase as working
capital requirements increase in anticipation of the important selling periods in late spring and
in advance of the Christmas holiday, and then decline following these periods. In the event sales
results are less than anticipated and our working capital requirements remain constant, the amount
available under the Amended and Restated Credit Facility may not be adequate to satisfy our needs.
If this occurs, we may not succeed in obtaining additional financing in sufficient amounts and on
acceptable terms.
Contractual Obligations
The following table of our material contractual obligations as of July 1, 2006, summarizes the
aggregate effect that these obligations are expected to have on our cash flows in the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
After 5 |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
4-5 Years |
|
|
Years |
|
|
|
(in thousands) |
|
Operating leases |
|
$ |
156,356 |
|
|
$ |
18,536 |
|
|
$ |
36,931 |
|
|
$ |
34,426 |
|
|
$ |
66,463 |
|
Purchase obligations (1) |
|
$ |
6,443 |
|
|
$ |
5,510 |
|
|
$ |
778 |
|
|
$ |
155 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
162,799 |
|
|
$ |
24,046 |
|
|
$ |
37,709 |
|
|
$ |
34,581 |
|
|
$ |
66,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Purchase obligations consist of minimum royalty payments and services and goods we
are committed to purchase in the ordinary course of business. Purchase obligations do not
include contracts we can terminate without cause with little or no penalty to us.
Purchase obligations do not include borrowings under our Amended and Restated Credit
Facility. |
Capital Expenditures
Subject to
our ability to generate sufficient cash flow, for fiscal year 2006 we expect to spend up to $15.0 million in capital expenditures to open additional stores and/or retrofit,
update or remodel existing stores.
Off-Balance Sheet Arrangements
As of July 1, 2006, we do not have any off-balance sheet arrangements, as defined by the rules
and regulations of the SEC.
30
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks, which include changes in U.S. interest rates and foreign
exchange rates. We do not engage in financial transactions for trading or speculative purposes.
Interest Rate Risk
The interest payable on our Amended and Restated Credit Facility is based on variable interest
rates and is therefore affected by changes in market interest rates. As of July 1, 2006, if the
maximum available under the credit facility of $45.4 million had been drawn and the variable
interest rate applicable to our variable rate debt had increased by 10 percentage points, our
interest expense would have increased by $4.54 million on an annual basis, thereby materially
affecting our results from operations and cash flows. Our interest rate risk objectives are to
limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall
borrowing costs. We may enter into derivative financial instruments such as interest rate swaps or caps and treasury options or locks
to manage our interest rate risk on a related financial instrument or to effectively fix the
interest rate on a portion of our variable rate debt. Currently, we are not a party to any
derivative financial instruments. We do not enter into derivative or interest rate transactions for
speculative purposes. We regularly review interest rate exposure on our outstanding borrowings in
an effort to evaluate the risk of interest rate fluctuations.
Foreign Currency Risks
We purchase a significant amount of products from outside of the U.S. However, these purchases
are primarily made in U.S. dollars and only a small percentage of our international purchase
transactions are in currencies other than the U.S. dollar. Any currency risks related to these
transactions are deemed to be immaterial to us as a whole.
We operate a fulfillment center in Toronto, Canada and a sales, marketing and fulfillment
center near London, England, which exposes us to market risk associated with foreign currency
exchange rate fluctuations. At this time, we do not manage the risk through the use of derivative
instruments. A 10% adverse change in foreign currency exchange rates would not have a significant
impact on our results of operations or financial position.
31
Item 4. Controls and Procedures
Disclosure Controls and Procedures. Under the supervision and with the participation of our
management, including our principal executive officer and principal financial and accounting
officer, we conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report
(the Evaluation Date). Based on this evaluation, our principal executive officer and principal
financial officer concluded as of the Evaluation Date that our disclosure controls and procedures
were effective such that the information relating to our company, including our consolidated
subsidiaries, required to be disclosed in our Securities and Exchange Commission (SEC) reports
(i) is recorded, processed, summarized and reported within the time periods specified in SEC rules
and forms, and (ii) is accumulated and communicated to our management, including our principal
executive officer and principal financial and accounting officer, as appropriate to allow timely
decisions regarding required disclosure.
Internal Control over Financial Reporting. During the six months ended July 1, 2006, there
have been no changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
32
PART II: OTHER INFORMATION
Item 1A. Risk Factors
A revised description of the risk factors associated with our business is set forth below.
This description includes any material changes to and supersedes the description of the risk
factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report
on Form 10-K for the fiscal year ended December 31, 2005.
A reduction in the number of rounds of golf played and the popularity of golf may adversely affect
our sales of golf products.
We generate substantially all of our net revenues from the sale of golf equipment, apparel and
accessories. The demand for golf products is directly related to the popularity of golf, the number
of golf participants and the number of rounds of golf being played by these participants. According
to the National Golf Foundation, the number of rounds played annually in the United States declined
from 518.4 million in 2000 to 499.6 million in 2005. This decline is attributable to a number of
factors, including the state of the nations economy. If golf participation and the number of
rounds of golf played decreases, sales of our products may be adversely affected. We cannot assure
you that the overall dollar volume of the market for golf-related products will grow, or that it
will not decline, in the future.
The demand for golf products is also directly related to the popularity of magazines, cable
channels and other media dedicated to golf, television coverage of golf tournaments and attendance
at golf events. We depend on the exposure of the products we sell, especially the premier branded
golf merchandise, through advertising and the media or at golf tournaments and events. Any
significant reduction in television coverage of, or attendance at, golf tournaments and events or
any significant reduction in the popularity of golf magazines or golf channels, may reduce the
visibility of the brands that we sell and could adversely affect our sales of golf products.
A reduction in discretionary consumer spending could reduce our sales of golf products.
Golf products are recreational in nature and are therefore discretionary purchases for
consumers. Consumers are generally more willing to make discretionary golf product purchases during
favorable economic conditions. Discretionary spending is affected by many factors, including
general business conditions, interest rates, the availability of consumer credit, taxation, levels
of employment, and consumer confidence. Purchases of our products could decline during periods when
disposable income is lower, or during periods of actual or perceived unfavorable economic
conditions. Any significant decline in general economic conditions or uncertainties regarding
future economic prospects that adversely affect discretionary consumer spending, whether in the
United States generally or in a particular geographic area in which our stores are located, could
lead to reduced sales of our products.
Our sales and profits may be adversely affected if we or our suppliers fail to develop and
introduce innovative products that appeal to our customers.
Our future success depends, in part, upon our and our suppliers continued ability to develop
and introduce new and innovative products. This is particularly true with respect to golf clubs,
which accounted for approximately 48% and 45% of our net sales in the six-month periods ended July
1, 2006 and July 2, 2005, respectively. We believe our customers desire to test the performance of
the latest golf equipment drives traffic into our stores and increases sales. This is particularly
true when significant technological advancements in golf clubs and other equipment occur, although
such advances generally only occur every few years. Furthermore, the success of new products
depends not only upon their performance, but also upon the subjective preferences of golfers,
including how a club looks, sounds and feels, and the level of popularity that a golf club enjoys
among professional and recreational golfers. Our success depends, in large part, on our and our
suppliers ability to identify and anticipate the changing preferences of our customers and our
ability to stock our stores with a wide selection of quality merchandise that appeals to customer
preferences. If we or our suppliers fail to successfully develop and introduce on a timely basis
new and innovative products that appeal to our customers, our revenues and profitability may
materially suffer.
On the other hand, if our suppliers introduce new golf clubs too rapidly, it could result in
closeouts of existing inventories. Closeouts can result in reduced margins on the sale of older
products, as well as reduced sales of new products given the availability of older products at
lower prices. These reduced margins and sales may adversely affect our results of operations.
Competition from new and existing competitors could have an adverse effect on our sales and
profitability.
Our principal competitors are currently other off-course specialty retailers, franchise and
independent golf retailers, on-course pro shops, conventional sporting goods retailers, mass
merchants and warehouse clubs, and online retailers of golf equipment.
33
These businesses compete with us in one or more product categories. In addition, traditional
sports retailers and specialty golf retailers are expanding more aggressively in marketing and
supplying brand-name golf equipment, thereby competing directly with us for products, customers and
locations. Some of these potential competitors have greater financial or marketing resources than
we do and may be able to devote greater resources to sourcing, promoting and selling their
products. We may also face increased competition due to the entry of new competitors, including
current suppliers that decide to sell their products directly. As a result of this competition, we
may experience lower sales and margins or greater operating costs, such as marketing costs, which
would have an adverse effect on our margins and our results of operations in general.
Our
growth will be adversely affected if we are unable to open new stores and operate them profitably.
Our growth strategy involves opening additional stores in new and existing markets. We are in
the early stages of our store expansion. At July 1, 2006, we had 58 stores, more than half of which
we opened or acquired during the last three years. We opened one additional store in July 2006 and
plan to open between three and five additional new stores in 2006 and between 14 and 16 new stores
in 2007. In addition to capital requirements, our ability to open new stores on a timely and
profitable basis is subject to various contingencies, including but not limited to, our ability to
successfully:
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identify suitable store locations that meet our target demographics; |
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negotiate and enter into long-term leases upon acceptable terms; |
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build-out or refurbish sites on a timely and cost-effective basis; |
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hire, train and retain skilled managers and personnel; and |
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|
integrate new stores into existing operations. |
After identifying a new store site, we typically try to negotiate a long-term lease, generally
between 10 and 20 years. Long-term leases typically result in long-term financial obligations that
we are obligated to pay regardless of whether the store generates sufficient traffic and sales.
There can be no assurance that new stores will generate sales levels necessary to achieve
store-level profitability or profitability comparable to that of existing stores. New stores may
also have lower sales volumes or profits compared to previously opened stores or they may have
losses. In the past, we have experienced delays and cost-overruns in obtaining proper permitting,
building and refurbishing stores. We cannot assure you that we will not experience these problems
again in the future.
Furthermore, our expansion into new and existing markets may present competitive,
distribution, and merchandising challenges that differ from our current challenges, including
competition among our stores clustered in a single market, diminished novelty of our activity-based
store design and concept, added strain on our distribution and fulfillment center and management
information systems, and diversion of management attention from existing operations.
We cannot assure you that we will be successful in meeting the challenges described above or
that any of our new stores will be a profitable deployment of our capital resources. If we fail to
open additional stores successfully or if any of our new stores are not profitable, we may not be
able to grow our revenues and our results of operations and financial position may be adversely
affected.
If our key suppliers limit the amount or variety of products they sell to us or if they fail to
deliver products to us in a timely manner and upon customary pricing terms, our sales and
profitability may be reduced.
We rely on a limited number of suppliers for a significant portion of our product sales.
During fiscal 2004 and 2005, three of our suppliers each accounted for approximately 10% of our
purchases. We depend on access to the latest golf equipment, apparel and accessories from the
premier national brands in order to drive traffic into our stores and through our
direct-to-consumer channel. We do not have any long-term supply contracts with our suppliers
providing for continued supply, pricing, allowances or other terms. In addition, certain of our
vendors have established minimum advertised pricing requirements, which, if violated, could result
in our inability to obtain certain products. If our suppliers refuse to distribute their products
to us, limit the amount or variety of products they make available to us, or fail to deliver such
products on a timely basis and upon customary pricing terms, our sales and profitability could be
adversely affected.
In addition, some of our proprietary products require specially developed manufacturing molds,
techniques or processes which make it difficult to identify and utilize alternative suppliers
quickly. Any significant production delay or the inability of our current suppliers to deliver
products on a timely basis, including clubheads and shafts in sufficient quantities, or the
transition to alternate suppliers, could have a material adverse effect on our results of
operations.
34
Our sales could decline if we are unable to process increased traffic or prevent security breaches
on our Internet site and our network infrastructure.
A key element of our strategy is to generate high-volume traffic on, and increase sales
through, our Internet site. Accordingly, the satisfactory performance, reliability and availability
of our Internet site, transaction processing systems and network infrastructure are critical to our
reputation and our ability to attract and retain customers. Our Internet revenues will depend on the
number of visitors who shop on our Internet site and the volume of orders we can fill on a timely
basis. Problems with our Internet site or order fulfillment performance would reduce the volume of
goods sold and could damage our reputation. We may experience system interruptions from time to
time. If there is a substantial increase in the volume of traffic on our Internet site or the
number of orders placed by customers, we may be required to expand and further upgrade our
technology, transaction processing systems and network infrastructure. We cannot assure you that we
will be able to accurately project the rate or timing of increases, if any, in the use of our
Internet site, or that we will be able to successfully and seamlessly expand and upgrade our
systems and infrastructure to accommodate such increases on a timely and cost-effective basis.
The success of our Internet site depends on the secure transmission of confidential
information over network and the Internet and on the secure storage of data. We rely on encryption
and authentication technology licensed from third parties to provide the security and
authentication necessary to effect secure transmission and storage of confidential information,
such as customer credit card information. In addition, we maintain an extensive confidential
database of customer profiles and transaction information. We cannot assure you that advances in
computer capabilities, new discoveries in the field of cryptography, or other events or
developments will not result in a compromise or breach of the security we use to protect customer
transaction and personal data contained in our customer database. In addition, other companies in
the retail sector have from time to time experienced breaches as a result of actions by their
employees. If any compromise of our security were to occur, it could have a material adverse effect
on our reputation, business, operating results and financial condition, and could result in a loss
of customers. A party who is able to circumvent our security measures could damage our reputation,
cause interruptions in our operations and/or misappropriate proprietary information which, in turn,
could cause us to incur liability for any resulting losses and significant costs to upgrade our
systems. We may be required to expend significant capital and other resources to protect against
security breaches or to alleviate problems caused by breaches.
We may be unable to expand our business if adequate capital is not available.
Our ability to open new stores depends on the availability of adequate capital, which in turn
depends in large part on our cash flow from operations and the availability of equity and debt
financing. We currently anticipate spending approximately $1.8 million to open each additional
store, which includes pre-opening expenses, capital expenditures and inventory costs. We cannot
assure you that our cash flow from operations will be sufficient or that we will be able to obtain
equity or debt financing on acceptable terms or at all to implement our growth strategy. Our
Amended and Restated Credit Facility restricts our ability to incur additional indebtedness or make
substantial asset sales that might otherwise be used to finance our expansion. Our obligations
under the Amended and Restated Credit Facility are secured by substantially all of our assets,
which further limits our access to capital or lending sources. As a result, we cannot assure you
that adequate capital will be available to finance our current expansion plans.
We lease almost all of our store locations. If we are unable to maintain those leases or locate
alternative sites for our stores in our target markets and on terms that are acceptable us, our net
revenues and profitability could be adversely affected.
We lease 58 of our 59 current stores, including one new store opened in July 2006. In fiscal
2005, we closed two stores when the leases for those locations expired. In both instances, we
opened a new store in similar locations during fiscal 2005. We cannot assure you that we will be
able to maintain our existing store locations as leases expire, extend the leases or be able to
locate alternative sites on favorable terms. If we cannot maintain our existing store locations,
extend the leases or locate alternative sites on favorable or acceptable terms, our net revenues
and profitability could be adversely affected.
Our operating results could be adversely affected if we are unable to accurately predict and
respond to seasonal fluctuations in our business.
Our business is seasonal. The golf season and the number of rounds played in the markets we
serve fluctuate based on a number of factors, including the weather. Accordingly, our sales
leading up to and during the warm weather golf season, as well as the Christmas holiday gift-giving
season, have historically contributed a higher percentage of our annual net revenues and annual net
operating income than other periods in our fiscal year. During fiscal 2005, the fiscal months of
March through September and December, which together comprise 36 weeks of our 52-week fiscal year,
contributed over three-quarters of our annual net revenues and substantially all of our annual
operating income. We make decisions regarding merchandise well in advance of the season in which it
will be sold. We incur significant additional expenses leading up to and during these periods in
35
anticipation of higher sales in these periods, including acquiring additional inventory, preparing
and mailing our catalogs, advertising, creating in-store promotions and hiring additional
employees. In the event of unseasonable weather during the peak
season in certain markets, our sales may be lower and we may not be able to adjust our
inventory or expenses in a timely fashion. This seasonality may result in volatility or have an
adverse effect on our results of operations.
Many of our stores are clustered in particular metropolitan areas, and an economic downturn or
other adverse events in these areas may significantly reduce the sales for stores located in such
areas.
A significant portion of our stores are clustered in certain geographic areas, including eight
in the Tri-State area (New York, New Jersey and Connecticut), seven in the San Francisco Bay area,
six in Los Angeles, five in Dallas, four in Chicago, and three in each of Atlanta, Denver, Detroit,
Houston and Phoenix areas. If any of these areas were to experience a downturn in economic
conditions, natural disasters such as hurricanes, floods or earthquakes, terrorist attacks, or
other negative events, the stores in these areas may be adversely affected.
Our comparable store sales may fluctuate, which could negatively impact our future operating
performance.
Our comparable store sales are affected by a variety of factors, including, among others:
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customer demand in different geographic regions; |
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unseasonable weather during certain periods for certain geographic regions; |
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changes in our product mix; |
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our decision to relocate or refurbish certain stores; |
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the launch of promotional events; |
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the opening of new stores by us and our competitors in our existing markets; and |
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changes in economic conditions in the areas in which our stores are located. |
Our comparable store sales have fluctuated significantly in the past and such fluctuation may
continue in the future. For example, the change in comparable store sales for the six months ended
July 1, 2006 was an increase of 6.4% compared to a decrease of 3.4% for the six months ended July
2, 2005. The change in comparable stores sales for the three months ended July 1, 2006 was an
increase in 3% compared to a decrease of 0.5% for the three months ended July 2, 2005. We have
also experienced decreases in comparable store sales during certain quarterly periods during the
last two fiscal years and we cannot assure you that our comparable store sales will not decrease
again in the future. Comparable store sales is an important measure to research analysts that may
cover our company.
If we fail to accurately target the appropriate segment of the consumer catalog market or if we
fail to achieve adequate response rates to our catalogs, our sales and profitability may be
adversely affected.
Our results of operations depend in part on the success of our direct-to-consumer distribution
channels, which consist of our Internet site and multiple catalogs. Within our direct-to-consumer
distribution channel, we believe that the success of our catalog operations also contributes to the
success of our Internet site, because many of our customers who receive catalogs choose to purchase
products through our Internet site. We believe that the success of our catalogs depend on our
ability to:
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achieve adequate response rates to our mailings; |
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offer an attractive merchandise mix; |
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cost-effectively add new customers; |
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cost-effectively design and produce appealing catalogs; and |
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timely deliver products ordered through our catalogs to our
customers. |
We have historically experienced fluctuations in the response rates to our catalog mailings.
If we fail to achieve adequate response rates, we could experience lower sales, significant
markdowns or write-offs of inventory and lower margins, which could materially and adversely affect
our sales and profitability.
36
If we lose the services of our Chief Executive Officer, we may not be able to manage our operations
and implement our growth strategy effectively.
We depend on the continued service of James D. Thompson, our President and Chief Executive
Officer, who possesses significant expertise and knowledge of our business and industry. Currently,
we do not maintain key-person insurance for any of
our officers or managers. We have entered into an employment agreement with Mr. Thompson that
expires, subject to automatic one-year extensions, in May 2007. Any loss or interruption of the
services of Mr. Thompson could significantly reduce our ability to effectively manage our
operations and implement our growth strategy, and we cannot assure you that we would be able to
find a replacement with similar qualifications.
Our sales, profitability and company-wide operations would be adversely affected if the operations
of our Austin, Texas call center or distribution and fulfillment center were interrupted or shut
down.
We operate a centralized call center and distribution and fulfillment center in Austin, Texas.
We handle almost all of our Internet site and catalog orders through our Austin facility. We also
receive and ship a significant portion of our retail stores inventory through our Austin facility.
Any natural disaster or other serious disruption to this facility would substantially disrupt our
operations and could damage all or a portion of our inventory at this facility, impairing our
ability to adequately stock our stores and fulfill guest orders. In addition, we could incur
significantly higher costs and longer lead times associated with fulfilling our direct-to-consumer
orders and distributing our products to our stores during the time it takes for us to reopen or
replace our Austin facility. As a result, a disruption at our Austin facility would adversely
affect our sales, profitability and operations throughout our company.
A disruption in the service or a significant increase in the cost of our primary delivery service
for our direct-to-consumer operations would have a material adverse effect on our business.
We use United Parcel Service, or UPS, for substantially all of our ground shipments of
products sold through our Internet site and catalogs to our customers in the United States. Any
significant disruption to UPSs services would impede our ability to deliver our products through
our direct-to-consumer channel, which could cause us to lose sales or
customers. In addition, if UPS
were to significantly increase its shipping charges, we may not be able to pass these additional
shipping costs on to our customers and still maintain the same level of direct-to-consumer sales. In
the event of disruption to UPSs services or a significant increase in its shipping charges, we may
not be able to engage alternative carriers to deliver our products in a timely manner on favorable
terms, which could have a material adverse effect on our sales and profitability.
An increase in the costs of mailing, paper, and printing our catalogs would adversely affect our
profitability.
Unlike many of our competitors, we generate a significant percentage of our revenues through
our direct-to-consumer channel, including catalog orders. Postal rate increases and paper and
printing costs affect the cost of our catalog mailings. We rely on discounts from the basic postal
rate structure, such as discounts for bulk mailings and sorting by zip code and carrier routes for
our catalogs. We are not a party to any long-term contracts for the supply of paper. Our cost of
paper has fluctuated significantly during the past three fiscal years, and our future paper costs
are subject to supply and demand forces external to our business. A material increase in postal
rates or printing or paper costs for our catalogs could materially decrease our profitability.
If we are unable to enforce our intellectual property rights our net revenues and profits may
decline.
Our success and ability to compete are dependent, in part, on sales of our
proprietary-branded merchandise. We currently hold a substantial number of registrations for
trademarks and service marks to protect our own proprietary brands. We also rely to a lesser extent
on trade secret, patent and copyright protection, employee confidentiality agreements and license
agreements to protect our intellectual property rights. We believe that the exclusive right to use
trademarks and service marks has helped establish our market share. If we are unable to continue to
protect the trademarks and service marks for our proprietary brands, if such marks become generic
or if third parties adopt marks similar to our marks, our ability to differentiate our products and
services may be diminished. In the event that our trademarks or service marks are successfully
challenged by third parties, we could lose brand recognition and be forced to devote additional
resources to advertising and marketing new brands for our products.
From time to time, we may be compelled to protect our intellectual property, which may involve
litigation. Such litigation may be time-consuming and expensive and may distract our management
from running the day-to-day operations of our business, and could result in the impairment or loss
of the involved intellectual property. There is no guarantee that the steps we take to protect our
intellectual property, including litigation when necessary, will be successful. The loss or
reduction of any of our significant intellectual property rights could diminish our ability to
distinguish our products from competitors products and retain
37
our market share for our proprietary
products. Our proprietary products sold under our proprietary brands generate higher margins than
products sold under third party manufacturer brands. If we are unable to effectively protect our
proprietary intellectual property rights and fewer of our sales come from our proprietary products,
our net revenues and profits may decline.
We may become subject to intellectual property suits that could cause us to incur substantial costs
or pay substantial damages or prohibit us from selling our products.
Third parties may from time to time assert claims against us alleging infringement,
misappropriation or other violations of patent, trademark or other proprietary rights, whether or
not such claims have merit. Such claims can be time consuming and expensive to defend and may
divert the attention of our management and key personnel from our business operations. Claims for
alleged infringement and any resulting lawsuit, if successful, could subject us to significant
liability for damages, increase the costs of selling some of our products and damage our
reputation. Any potential intellectual property litigation could also force us to stop selling
certain products, obtain a license from the owner to use the relevant intellectual property, which
license may not be available on reasonable terms, if at all, or redesign our products to avoid
using the relevant intellectual property.
We may be subject to product warranty claims or product recalls which could harm our business,
results of operations, and reputation.
We may be subject to risks associated with our proprietary branded products, including product
liability. Our existing or future proprietary products may contain design or materials defects,
which could subject us to product liability claims and product recalls. Although we maintain
limited product liability insurance, if any successful product liability claim or product recall is
not covered by or exceeds our insurance coverage, our business, results of operations and financial
condition would be harmed. In addition, product recalls could adversely affect our reputation in
the marketplace. In May 2002, we learned that some of our proprietary products sold in the prior
two years were not manufactured in accordance with their design specifications. Upon discovery of
this discrepancy, we offered our customers refunds, replacements or gift certificates. As a result,
in fiscal 2002 we recognized $300,000 in product return and replacement expenses. We cannot assure
you that problems like this will not happen again in the future, or if they do, that they will not
have a material adverse effect on our business and results of operations. In addition, it is
possible that we could face similar risks with respect to the premier branded products we sell as
indemnification from third parties might be limited.
Disruption of operations of ports through which our products are imported from Asia could have a
material adverse effect on our results of operations.
We import substantially all of our proprietary products from Asia under short-term purchase
orders, and a significant amount of the premier branded products we sell is also manufactured in
Asia. If a disruption occurs in the operations of ports through which our products are imported, we
and our vendors may have to ship some or all of our products from Asia by air freight. Shipping by
air is significantly more expensive than shipping by boat, and if we cannot pass these increased
shipping costs on to our customers, our profitability will be reduced. A disruption at ports through
which our products are imported would have a material adverse effect on our sales and
profitability.
We may pursue strategic acquisitions, which could have an adverse impact on our sales and operating
results, and could have an adverse impact on our business.
Although we currently do not have any agreement or understanding to make any acquisitions,
from time to time, we may grow our business by acquiring complementary businesses, products or
technologies. In May 2003, we acquired the assets and technology of Zevo Golf Co., Inc., and in
July 2003 we acquired six Don Sherwood Golf & Tennis stores. Other acquisitions that we may make in
the future entail a number of risks that could materially and adversely affect our business and
operating results. Negotiating potential acquisitions or integrating newly acquired businesses,
products or technologies into our business could divert our managements attention from other
business concerns and could be expensive and time consuming. Acquisitions could expose our business
to unforeseen liabilities or risks associated with entering new markets or businesses. In addition,
we might lose key employees while integrating new organizations. Consequently, we might not be
successful in integrating any acquired businesses, products or technologies, and might not achieve
anticipated sales and cost benefits. In addition, future acquisitions could result in customer
dissatisfaction, performance problems with an acquired company, or issuances of equity securities
that cause dilution to our existing stockholders. Furthermore, we may incur contingent liabilities
or possible impairment charges related to goodwill or other intangible assets or other
unanticipated events or circumstances, any of which could harm our financial condition.
38
Atlantic Equity Partners III, L.P., our controlling shareholder, has significant influence over us,
including the ability to designate a majority of our board of directors, and its interests may
conflict with the interests of our other stockholders.
The largest beneficial owner of our shares, Atlantic Equity Partners III, L.P. (Atlantic
Equity Partners), an investment fund managed by First Atlantic Capital, Ltd. (First Atlantic
Capital), beneficially owns 61% of our outstanding common stock. In
addition, First Atlantic Capital has voting rights of 19.8% of our outstanding stock owned by Carl
and Franklin Paul pursuant to a voting rights and stockholders agreement among Atlantic Equity
Partners and Carl and Franklin Paul. Under the agreement, Carl and Franklin Paul have also agreed
that they will only transfer the shares subject to the agreement on a pro rata basis when Atlantic
Equity Partners transfers its shares. As a result of its own stockholdings and this agreement,
Atlantic Equity Partners, and indirectly First Atlantic Capital, will have the ability to control
all matters submitted to our stockholders for approval, including:
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the composition of our board of directors, which has the authority to direct our
business and appoint and remove our officers; |
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approving or rejecting a merger, consolidation or other business combination; and |
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amending our certificate of incorporation and bylaws which govern the rights attached to our shares of common stock. |
In addition, we and Atlantic Equity Partners have entered into a management rights agreement.
Pursuant to this agreement, following a reduction of the equity owned by Atlantic Equity Partners
to below 50% of our outstanding equity, it will retain the right to cause the board of directors to
nominate a specified number of designees for the board of directors, and continue to be able to
significantly influence our decisions.
This concentration of ownership of shares of our common stock could delay or prevent proxy
contests, mergers, tender offers, open-market purchase programs or other purchases of shares of our
common stock that might otherwise give you the opportunity to realize a premium over the
then-prevailing market price of our common stock. This concentration of ownership may also
adversely affect our stock price.
We are a controlled company within the meaning of the Nasdaq corporate governance rules and
rely on, exemptions from certain Nasdaq corporate governance requirements. As a result, our
stockholders may not have the same degree of protection as that afforded to stockholders of
companies that are subject to all of Nasdaqs corporate governance requirements.
We are a controlled company within the meaning of the Nasdaq corporate governance rules as a
result of the ownership position of Atlantic Equity Partners and its voting rights and
stockholders agreement Atlantic Equity Partners and Carl and Franklin Paul. A controlled company
is a company of which more than 50% of the voting power is held by an individual, group or another
company. As a controlled company, we are not required to comply, at present, with certain Nasdaq
corporate governance rules, including the requirements that: (1) a majority of our board of
directors consist of independent directors, and (2) we establish a nominating committee and a
compensation committee composed entirely of independent directors. Accordingly, as a controlled
company, our stockholders may not have the same degree of protection as that afforded to
stockholders of companies that are subject to all of Nasdaqs corporate governance requirements.
Our directors and executive officers who have relationships with First Atlantic Capital may
have conflicts of interest with respect to matters involving our company.
Six of our nine directors are affiliated with First Atlantic Capital, which manages Atlantic
Equity Partners. These persons will have fiduciary duties to both us and First Atlantic Capital. As
a result, they may have real or apparent conflicts of interest on matters affecting both us and
First Atlantic Capital, which in some circumstances may have interests adverse to ours. In
addition, as a result of Atlantic Equity Partners ownership interest, conflicts of interest could
arise with respect to transactions involving business dealings between us and Atlantic Equity
Partners or First Atlantic Capital including, but not limited to, potential acquisitions of
businesses or properties, the issuance of additional securities, the payment of dividends by us and
other matters.
Future sales of our common stock could cause the market price of our common stock to drop
significantly, even if our business is profitable.
We
have 15,616,611 shares of common stock outstanding as of July 1, 2006. This includes the 6,000,000 shares of
common stock sold at the IPO. Our officers, directors and the holders of substantially all of our
outstanding shares of common stock have signed lock-up agreements pursuant to which they have
agreed not to sell, transfer or otherwise dispose of any of their shares for a period of 180 days
following beginning June 15, 2006, subject to extension in the case of an earnings release or
material news or a material
39
event relating to us. The underwriters of the IPO may, in their sole
discretion and without notice, release all or any portion of the common stock subject to lock-up
agreements. The lock-up agreements are also subject to a number of exceptions. In particular, the
lock-up agreements signed by our founders, Carl and Franklin Paul, and by our officers who also
hold certain equity units (including our chief executive officer, chief financial officer, two
senior vice presidents and a vice president) permit each of them to sell up to 40% of the shares of
common stock underlying those equity units (representing approximately 68,700 shares of common
stock in the aggregate) to pay the taxes resulting from those units becoming convertible into
shares of common stock
upon the closing of the IPO. In addition, 10,965 shares held by Thomas G. Hardy, one of our
directors, are not subject to any lock-up agreement.
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Number of Shares |
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Date of Availability for Resale into the Public Market |
Approximately 240,000
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June 15, 2006 |
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Approximately 9.6 million
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180 days after the date of this prospectus, of which
approximately 9.5 million are subject to volume
limitations under Rule 144 |
Subject to the lock-up agreement described above, Atlantic Equity Partners may request that we
register some or all of the 7,934,418 shares that it holds for sale to the public and Atlantic
Equity Partners and certain other stockholders have the right to include their shares in public
offerings we undertake in the future. All of the shares of common stock that we have issued and may
issue under our incentive compensation plans may, upon issuance, be freely sold in the public
market, subject to the lock-up agreements described above.
The anti-takeover provisions in our charter documents and under Delaware law could discourage
or prevent others from acquiring our company, and, therefore, our shareholders may lose the
opportunity to sell their shares at a favorable price.
Our certificate of incorporation and amended and restated bylaws contain provisions that make
it difficult for a third party to acquire us without the consent of our board of directors. For
example, if a potential acquirer were to make a hostile bid for us, the potential acquirer would
not be able to call a special meeting of stockholders to remove our board of directors unless it
held at least 25% in voting power of all the outstanding shares entitled to vote at that meeting.
In addition, after Atlantic Equity Partners, on its own or as part of a group, beneficially owns
40% or less of our common stock, our stockholders will not be permitted to take action by written
consent without a meeting. Modifications of certain provisions of our certificate of incorporation
would require the consent of 75% of the total voting power of all outstanding shares of stock. The
potential acquirer is further required to provide advance notice of its proposal to remove
directors at an annual meeting. In addition, our board of directors will be authorized to issue
preferred stock in series, with the terms of each series to be fixed by the board of directors.
Section 203 of the Delaware General Corporation Law limits business combination transactions
with 15% stockholders that have not been approved by the board of directors. These provisions and
other similar provisions make it more difficult for a third party to acquire us without
negotiation. These provisions may apply even if the offer may be considered beneficial by some
stockholders.
Our board of directors could choose not to negotiate with a potential acquirer that it did
not feel was in our strategic interest. If the potential acquirer were discouraged from offering to
acquire us or prevented from successfully completing a hostile acquisition by the anti-takeover
measures, you could lose the opportunity to sell your shares at a favorable price.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Equity Securities
Prior to the completion of our initial public offering (IPO), on April, 28, 2006, based on
the exercise of options and pursuant to the exemption from registration provided by Rule 701 under
the Securities Act of 1933, we issued 533 shares of our common stock to an employee for an
aggregate purchase price of $4,681, or $8.78 per share.
Use of Proceeds from the Sale of Registered Securities
On June 14, 2006, our registration statement on Form S-1 (Registration No. 333-132414) was
declared effective for our IPO, pursuant to which we offered and sold 6,000,000 shares of common
stock at an offering price to the public of $11.50 per share. The IPO closed on June 20, 2006, and
the net proceeds of the IPO to us were approximately $61.2 million after deducting underwriting
discounts and offering expenses of $7.8 million. No offering expenses were paid directly or
indirectly to directors, officers (or their associates), to persons owning 10% or more of our
equity securities, or to our affiliates, with the exception that a $3.0 million fee was
paid with the net proceeds of the IPO (as discussed below) to terminate our management consulting
agreement with First Atlantic Capital, Ltd., the manager of Atlantic Equity Partners III, L.P., an
investment fund which is the largest beneficial owner of our equity securities, holding greater
than 10% of our equity securities. The underwriters of the IPO were Merrill Lynch, Pierce, Fenner
& Smith Incorporated, J.P. Morgan Securities Inc. and Lazard Capital Markets.
Upon the closing of the IPO, the net proceeds of approximately $61.2 million, along with
borrowings under the our Amended and Restated Credit Facility (see Part I, Item 2, Managements
Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital
ResourcesNew Indebtedness), were used to retire the Senior Secured Notes (see Part I, Item 2,
Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity
and Capital ResourcesHistorical IndebtednessSenior Secured Notes), which were redeemed on July
20, 2006 for $94.4 million, to repay the entire outstanding balance of the Companys Old Senior
Secured Credit Facility (see Part I, Item 2, Managements Discussion and Analysis of Financial
Condition and Results of OperationsLiquidity and Capital ResourcesHistorical IndebtednessOld
Senior Secured Credit Facility), to pay fees and expenses related to our Amended and Restated
Credit Facility and to pay a $3.0 million fee to terminate our management consulting
agreement with First Atlantic Capital, Ltd., the manager of Atlantic Equity Partners III, L.P., an
investment fund which is the largest beneficial owner of our shares.
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Item 4. Submission of Matters to a Vote of Security Holders
Prior to the completion of the IPO, our stockholders voted by written consent, dated May 23,
2006, to approve and adopt an Amendment to the Certificate of Incorporation for the Company
that authorized a reverse stock split of each outstanding share of common stock of the Company,
pursuant to which each 2.2798 issued and outstanding shares of Common Stock were combined into one
share of common stock and confirmed that fractional shares would be rounded down to the nearest
whole number. The number of shares that voted for the amendment and
restatement was 9,433,086, the number that abstained was 39,590 and the number that voted against was zero.
Prior to the completion of the IPO, our stockholders also voted by written consent, dated June
12, 2006, to approve and adopt an Amended and Restated Certificate of Incorporation for the
Company, to adopt the 2006 Incentive Compensation Plan, to reserve 1,800,000 shares of common stock
for issuance under the 2006 Incentive Compensation Plan and to authorize the officers of the
Company to take all action and to prepare, execute and deliver all documents which the officers deemed
appropriate or advisable to implement the 2006 Incentive Compensation Plan. In each case, the
number of shares that voted for the resolution was 9,433,086, the
number that abstained was 39,590 and the number that voted against was zero.
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Item 6. Exhibits
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3.1 |
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Certificate of Incorporation of Golfsmith International, Inc. (filed as Exhibit
3.1 to Golfsmith International Holdings, Inc.s Registration Statement on Form S-4 (No.
333-101117) and incorporated herein by reference). |
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3.2 |
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Form of Second Amended and Restated Certificate of Incorporation of Golfsmith
International Holdings, Inc. (filed as Exhibit 3.2 to Golfsmith International Holdings,
Inc.s Registration Statement on Form S-1 (No. 333-132414) on June 1, 2006 and
incorporated herein by reference). |
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3.2 |
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Bylaws of Golfsmith International, Inc. (filed as Exhibit 3.2 to Golfsmith
International Holdings, Inc.s Registration Statement on Form S-4 (No. 333-101117) and
incorporated herein by reference). |
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3.4 |
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Form of Amended and Restated Bylaws of Golfsmith International Holdings, Inc.
(filed as Exhibit 3.4 to Golfsmith International Holdings, Inc.s Registration Statement
on Form S-1 (No. 333-132414) on June 1, 2006 and incorporated herein by reference). |
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4.1 |
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Specimen Common Stock Certificate (filed as Exhibit 4.1 to Golfsmith
International Holdings, Inc.s Registration Statement on Form S-1 (No. 333-132414) on
June 1, 2006 and incorporated herein by reference). |
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4.2 |
|
Indenture, dated as of October 15, 2002, among Golfsmith International, Inc., the
guarantors named and defined therein and U.S. Bank Trust National Association, as
trustee (filed as Exhibit 4.1 to Golfsmith International Holdings, Inc.s Registration
Statement on Form S-4 (No. 333-101117) and incorporated herein by reference). |
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4.3 |
|
First Supplemental Indenture, dated as of September 15, 2004, among Golfsmith
International, Inc., the guarantors named and defined therein and U.S. Bank Trust
National Association, as trustee (filed as Exhibit 4.2 to Golfsmith International
Holdings, Inc.s Current Report on Form 8-K (No. 333-101117) on September 17, 2004 and
incorporated herein by reference). |
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4.4 |
|
Second Supplemental Indenture, dated as of March 21, 2005, among Golfsmith
International, Inc., the guarantors named and defined therein and U.S. Bank Trust
National Association, as trustee (filed as Exhibit 4.3 to Golfsmith International
Holdings, Inc.s Current Report on Form 8-K (No. 333-101117) on March 24, 2005 and
incorporated herein by reference). |
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10.1 |
|
Termination Agreement, dated as of May 23, 2006, terminating the Management
Consulting Agreement, dated as of October 15, 2002, among Golfsmith International
Holdings, Inc., Golfsmith International, Inc. and First Atlantic Capital, Ltd. (filed as
Exhibit 10.3 to Golfsmith International Holdings, Inc.s Registration Statement on Form
S-1 (No. 333-132414) on June 1, 2006 and incorporated herein by reference). |
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10.2 |
|
Employment Agreement, dated as of May 30, 2006, between Golfsmith International,
Inc. and James D. Thompson (filed as Exhibit 10.21 to Golfsmith International Holdings,
Inc.s Registration Statement on Form S-1 (No. 333-132414) on June 1, 2006 and
incorporated herein by reference). |
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10.3 |
|
Employment Agreement, dated as of May 30, 2006, between Golfsmith International,
Inc. and Virginia Bunte (filed as Exhibit 10.22 to Golfsmith International Holdings,
Inc.s Registration Statement on Form S-1 (No. 333-132414) on June 1, 2006 and
incorporated herein by reference). |
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10.4 |
|
Termination Agreement, dated as of May 22, 2006, terminating the Consulting
Agreement, dated as of June 9, 2005, between Mr. Larry Mondry and Golfsmith
International Holdings, Inc. (filed as Exhibit 10.24 to Golfsmith International
Holdings, Inc.s Registration Statement on Form S-1 (No. 333-132414) on June 1, 2006 and
incorporated herein by reference). |
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10.5 |
|
Golfsmith International Holdings, Inc. 2006 Incentive Compensation Plan (filed as
Exhibit 10.27 to Golfsmith International Holdings, Inc.s Registration Statement on Form
S-1 (No. 333-132414) on June 1, 2006 and incorporated herein by reference). |
43
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10.6 |
|
Form of Indemnification Agreement by Golfsmith International Holdings, Inc. in
favor of its directors, its officers and certain senior management (filed as Exhibit
10.33 to Golfsmith International Holdings, Inc.s Registration Statement on Form S-1
(No. 333-132414) on June 1, 2006 and incorporated herein by reference). |
|
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10.7 |
|
Management Rights Agreement, dated as of May 23, 2006, among Golfsmith
International Holdings, Inc. and Atlantic Equity Partners III, L.P. (filed as Exhibit
10.34 to Golfsmith International Holdings, Inc.s Registration Statement on Form S-1
(No. 333-132414) on June 1, 2006 and incorporated herein by reference). |
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10.8 |
|
Commitment Letter, dated May 31, 2006, between Golfsmith International Holdings,
Inc. and General Electric Capital Corporation (filed as Exhibit 10.35 to Golfsmith
International Holdings, Inc.s Registration Statement on Form S-1 (No. 333-132414) on
June 1, 2006 and incorporated herein by reference). |
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10.9 |
|
Amended Commitment Letter dated June 15, 2006, by and between Golfsmith
International Holdings, Inc. and General Electric Capital Corporation (filed as Exhibit
99.1 to Golfsmith International Holdings, Inc.s Current Report on Form 8-K (No.
333-101117) on June 16, 2006 and incorporated herein by reference). |
|
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10.10 |
|
Amended and Restated Credit Agreement, dated June 20, 2006, by and among
Golfsmith International, L.P., Golfsmith NU, L.L.C., Golfsmith USA, L.L.C., and Don
Sherwood Golf Shop, as borrowers, Golfsmith International Holdings, Inc. and the
subsidiaries of Golfsmith International Holdings, Inc. identified therein as credit
parties, General Electric Capital Corporation, as administrative agent, swing line
lender and L/C issuer, GE Capital Markets, Inc., as sole lead arranger and bookrunner,
and the financial institutions from time to time parties thereto (filed as Exhibit 99.1
to Golfsmith International Holdings, Inc.s Current Report on Form 8-K (No. 333-101117)
on June 26, 2006 and incorporated herein by reference). |
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10.11 |
|
Amended and Restated Revolving Note, dated as of June 20, 2006, issued by
Golfsmith International, L.P., Golfsmith NU, L.L.C., Golfsmith USA, L.L.C., and Don
Sherwood Golf Shop in favor of General Electric Capital Corporation (filed as Exhibit
99.2 to Golfsmith International Holdings, Inc.s Current Report on Form 8-K (No.
333-101117) on June 26, 2006 and incorporated herein by reference). |
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10.12 |
|
Swing Line Note, dated as of June 20, 2006, issued by Golfsmith International,
L.P., Golfsmith NU, L.L.C., Golfsmith USA, L.L.C., and Don Sherwood Golf Shop in favor
of General Electric Capital Corporation (filed as Exhibit 99.3 to Golfsmith
International Holdings, Inc.s Current Report on Form 8-K (No. 333-101117) on June 26,
2006 and incorporated herein by reference). |
|
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10.13 |
|
Amended and Restated Security Agreement, dated as of June 20, 2006, by and among
Golfsmith International, Inc., Golfsmith International Holdings, Inc., Golfsmith GP
Holdings, Inc., Golfsmith Holdings, L.P., Golfsmith International, L.P., Golfsmith GP,
L.L.C., Golfsmith Delaware, L.L.C., Golfsmith Canada, L.L.C., Golfsmith Europe, L.L.C.,
Golfsmith USA, L.L.C., Don Sherwood Golf Shop, Golfsmith NU, L.L.C., and Golfsmith
Licensing, L.L.C., as grantors, and General Electric Capital Corporation, as agent
(filed as Exhibit 99.4 to Golfsmith International Holdings, Inc.s Current Report on
Form 8-K (No. 333-101117) on June 26, 2006 and incorporated herein by reference). |
|
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10.14 |
|
Amended and Restated Guaranty, dated as of June 20, 2006, by and among Golfsmith
International, Inc., Golfsmith International Holdings, Inc., Golfsmith GP Holdings,
Inc., Golfsmith Holdings, L.P., Golfsmith GP, L.L.C., Golfsmith Delaware, L.L.C.,
Golfsmith Canada, L.L.C., Golfsmith Europe, L.L.C., and Golfsmith Licensing, L.L.C., as
guarantors, and General Electric Capital Corporation, as agent (filed as Exhibit 99.5 to
Golfsmith International Holdings, Inc.s Current Report on Form 8-K (No. 333-101117) on
June 26, 2006 and incorporated herein by reference). |
|
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10.15 |
|
Amended and Restated Trademark Security Agreement, dated as of June 20, 2006, by
and among Golfsmith International, Inc., Golfsmith International Holdings, Inc.,
Golfsmith GP Holdings, Inc., Golfsmith Holdings, L.P., Golfsmith International, L.P.,
Golfsmith GP, L.L.C., Golfsmith Delaware, L.L.C., Golfsmith Canada, L.L.C., Golfsmith
Europe, L.L.C., Golfsmith USA, L.L.C., Don Sherwood Golf Shop, Golfsmith NU, L.L.C., and
Golfsmith Licensing, L.L.C., as grantors, and General Electric Capital Corporation, as
agent (filed as Exhibit 99.6 to Golfsmith International Holdings, Inc.s Current Report
on Form 8-K (No. 333-101117) on June 26, 2006 and incorporated herein by reference). |
44
|
10.16 |
|
Patent Security Agreement, dated as of June 20, 2006, by and among Golfsmith
International, Inc., Golfsmith International Holdings, Inc., Golfsmith GP Holdings,
Inc., Golfsmith Holdings, L.P., Golfsmith International,
L.P., Golfsmith GP, L.L.C., Golfsmith Delaware, L.L.C., Golfsmith Canada, L.L.C.,
Golfsmith Europe, L.L.C., Golfsmith USA, L.L.C., Don Sherwood Golf Shop, Golfsmith NU,
L.L.C., and Golfsmith Licensing, L.L.C., as grantors, and General Electric Capital
Corporation, as agent (filed as Exhibit 99.7 to Golfsmith International Holdings,
Inc.s Current Report on Form 8-K (No. 333-101117) on June 26, 2006 and incorporated
herein by reference). |
|
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31.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of James D. Thompson. |
|
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31.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Virginia Bunte. |
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32.1 |
|
Certification of James D. Thompson Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
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32.2 |
|
Certification of Virginia Bunte Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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GOLFSMITH INTERNATIONAL HOLDINGS, INC. |
|
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By:
|
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/s/ James D. Thompson |
|
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|
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James D. Thompson |
|
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Chief Executive Officer, President and Director |
|
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(Principal Executive Officer and Authorized Signatory) |
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Date: August 15, 2006 |
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By:
|
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/s/ Virginia Bunte |
|
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Virginia Bunte |
|
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Chief Financial Officer |
|
|
(Principal Accounting Officer and Authorized Signatory) |
|
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Date: August 15, 2006 |
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46