SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGEACT OF 1934
For the quarterly period ended September 27, 2003
OR
[ ] 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)
Delaware 22-1957337
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
11000 N. IH-35, Austin, Texas 78753
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (512) 837-8810
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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class of Common Stock Outstanding at November 7, 2003
--------------------- -------------------------------
$.001 par value 21,594,597 Shares
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at September 27, 2003 (unaudited) and
December 28, 2002 3
Consolidated Statements of Operations for the three and nine months
ended September 27, 2003 and September 28, 2002 (unaudited) 5
Consolidated Statements of Cash Flows for the nine
months ended September 27, 2003 and September 28, 2002 (unaudited) 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 33
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 34
Item 6. Exhibits and Reports on Form 8-K 34
Signatures 35
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 27, DECEMBER 28,
2003 2002
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 3,363,409 $ 11,412,460
Receivables, net of allowances of $228,996 at September 27, 2003 and $242,643
at December 28, 2002 3,548,096 1,639,120
Inventories, net of reserves of $2,134,923 at September 27, 2003 and $818,816
at December 28, 2002 49,663,224 32,351,880
Deferred tax assets 67,905 67,905
Prepaids and other current assets 1,253,830 2,119,390
------------ ------------
Total current assets 57,896,464 47,590,755
Property and equipment:
Land and buildings 21,034,850 21,017,551
Equipment, furniture, fixtures and autos 11,416,426 9,270,340
Leasehold improvements and construction in progress 9,795,679 7,015,985
------------ ------------
42,246,955 37,303,876
Less: accumulated depreciation and amortization (4,869,823) (1,258,676)
------------ ------------
Net property and equipment 37,377,132 36,045,200
Goodwill 41,269,371 34,948,016
Tradenames 11,227,393 11,158,000
Trademarks 15,386,296 15,093,396
Customer database, net of accumulated amortization of $377,689 at
September 27, 2003 and $94,422 at December 28, 2002 3,021,516 3,304,783
Deferred tax assets 4,274,161 4,274,161
Debt issuance costs, net of accumulated amortization of $842,713 at September 27, 7,015,002 7,596,561
2003 and $178,744 at December 28, 2002
Other long-term assets -
25,812
============ ============
Total assets $177,493,147 $160,010,872
============ ============
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 27, DECEMBER 28,
2003 2002
------------- ------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 26,122,982 $ 17,822,015
Accrued expenses and other current liabilities 11,962,590 12,822,302
Current maturities of notes payable 17,882 -
Lines of credit 1,750,000 -
------------ ------------
Total current liabilities 39,853,454 30,644,317
Long-term debt, less current maturities 76,900,109 75,380,045
Deferred rent 878,797 513,324
Notes payable 13,169 -
------------ ------------
Total liabilities 117,645,529 106,537,686
Stockholders' equity:
Common stock - $.001 par value; 40,000,000 shares authorized; 21,594,597 and
20,077,931 shares issued and outstanding at September 27, 2003 and December 21,594 20,078
28, 2002, respectively
Restricted common stock units - $.001 par value; 755,935 and 839,268 shares
issued and outstanding at September 27, 2003 and December 28, 2002, 756 839
respectively
Additional paid-in capital 60,288,607 55,990,042
Other comprehensive income 106,962 48,148
Accumulated deficit (570,301) (2,585,921)
------------ ------------
Total stockholders' equity 59,847,618 53,473,186
------------ ------------
Total liabilities and stockholders' equity $177,493,147 $160,010,872
============ ============
See accompanying notes.
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED
-------------------------------- ---------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
2003 2002 2003 2002
(SUCCESSOR) (PREDECESSOR) (SUCCESSOR) (PREDECESSOR)
------------- ------------- ------------- -------------
Net revenues $196,226,918 $173,578,292 $71,140,692 $55,962,187
Cost of products sold 132,205,182 112,488,824 47,780,221 36,616,086
------------ ------------ ----------- -----------
Gross profit 64,021,736 61,089,468 23,360,471 19,346,101
Selling, general and administrative 52,112,577 45,753,180 18,672,938 13,749,301
Store pre-opening expenses 488,413 121,685 325,605 35,167
Amortization of deferred compensation - 1,312,339 - 197,895
------------ ------------ ----------- -----------
Total operating expenses 52,600,990 47,187,204 18,998,543 13,982,363
Operating income 11,420,746 13,902,264 4,361,928 5,363,738
------------ ------------ ----------- -----------
Interest expense 8,171,461 4,678,371 2,720,439 1,556,695
Interest income (38,012) (310,091) (16,385) (109,212)
Other income (114,838) (2,364,316) (67,247) (62,696)
Other expense 4,000 - (43) -
Minority interest - 920,414 - 295,561
------------ ------------ ----------- -----------
Income before income taxes 3,398,135 10,977,886 1,725,164 3,683,390
Income tax expense 1,382,515 708,574 713,355 250,744
------------ ------------ ----------- -----------
Income from continuing operations 2,015,620 10,269,312 1,011,809 3,432,646
------------ ------------ ----------- -----------
Income (loss) from discontinued operations,
including loss on disposal of $274,777
for the nine month period ended September
28, 2002 - (229,878) - 14,711
------------ ------------ ----------- -----------
Net income $ 2,015,620 $ 10,039,434 $ 1,011,809 $ 3,447,357
============ ============ =========== ===========
See accompanying notes.
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
---------------------------------
SEPTEMBER 27, SEPTEMBER 28,
2003 2002
(SUCCESSOR) (PREDECESSOR)
------------ -------------
OPERATING ACTIVITIES
Net income $ 2,015,620 $10,039,434
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 3,629,615 4,512,897
Amortization of intangible assets 283,267 31,959
Amortization of deferred compensation - 1,312,339
Amortization of debt issue costs and debt discount 2,184,033 1,542,305
Stock compensation to non-employee - 28,690
Minority interest - 920,414
Gain on sale of intellectual property - (2,215,735)
Gain on sale of assets (1,473) -
Changes in operating assets and liabilities:
Accounts receivable (1,670,837) 395,069
Inventories (12,647,473) 2,040,485
Prepaid and other assets 978,029 (808,436)
Accounts payable 5,885,713 (7,934,194)
Accrued expenses and other current liabilities (2,013,611) (2,843,578)
Deferred rent 365,473 (48,708)
----------- -----------
Net cash provided by (used in) operating activities (991,644) 6,972,941
INVESTING ACTIVITIES
Capital expenditures (3,815,053) (1,827,888)
Proceeds from sale of intellectual property - 3,313,022
Proceeds from sale of assets 1,473
Purchase of assets and other (784,432) -
Purchase of business, net of cash received (8,481,157) -
----------- -----------
Net cash provided by (used in) investing activities (13,079,169) 1,485,134
FINANCING ACTIVITIES
Principal payments on lines of credit (7,801,478) (9,717,963)
Proceeds from lines of credit 9,551,478 9,684,400
Principal payments on term note - (8,916,671)
Payments on notes payable (3,474) -
Dividends paid - (262,500)
Dividends paid to minority interest owners - (3,237,500)
Proceeds from issuance of common stock 4,549,997 -
Repurchase of restricted common stock units (249,999) -
Debt issuance costs (82,411) -
----------- -----------
Net cash provided by (used in) financing activities 5,964,113 (12,450,234)
Effect of exchange rate changes on cash 57,649 221,771
----------- -----------
Change in cash and cash equivalents (8,049,051) (3,770,388)
Cash and cash equivalents, beginning of period 11,412,460 39,549,924
----------- -----------
Cash and cash equivalents, end of period $ 3,363,409 $35,779,536
=========== ===========
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED
-------------------------------------
SEPTEMBER 27, SEPTEMBER 28,
2003 2002
(SUCCESSOR) (PREDECESSOR)
------------ --------------
Supplemental cash flow information:
Interest payments $7,069,742 $3,227,182
Tax payments $ 145,752 $ 409,242
Amortization of discount on senior subordinated notes - $1,295,276
Amortization of discount on senior secured notes $1,520,064 -
See accompanying notes.
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 27, 2003
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Golfsmith is one of the largest, multi-channel, specialty retailers of golf
equipment and related accessories in the industry and is an established designer
and marketer of golf equipment. Golfsmith offers equipment from leading
manufacturers, including Callaway(R) Cobra(R), FootJoy(R), Nike(R), Ping(R),
Taylor Made(R) and Titleist(R). In addition, Golfsmith offers its own
proprietary brands, including Golfsmith(R), Lynx(R), Snake Eyes(R), Killer
Bee(R) and Zevo (R). The Company markets its products through 36 superstores as
well as through its direct-to-consumer channel, which includes its clubmaking
and accessory catalogs and its Internet site. The Company also operates a
clubmaker training program and is the exclusive operator of the Harvey Penick
Golf Academy, an instructional school incorporating the techniques of the
renowned golf instructor, Harvey Penick.
Basis of Presentation and Change in Reporting Entity
The accompanying consolidated financial statements include the accounts of
Golfsmith International Holdings, Inc. ("Holdings", the "Company", or
"Successor") and its wholly owned subsidiary Golfsmith International, Inc.
("Golfsmith" or "Predecessor"). Holdings was formed on September 4, 2002 as a
Delaware corporation to acquire all of the outstanding shares of common stock of
Golfsmith. Holdings acquired Golfsmith on October 15, 2002 (See Note 2).
Holdings has no assets or liabilities other than its investment in its wholly
owned subsidiary Golfsmith and did not have operations prior to the acquisition
of Golfsmith; 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.
For purposes of presentation, the accompanying statements of operations for the
three and nine months ended September 28, 2002 and cash flows for the nine
months ended September 28, 2002 reflect the operating results and cash flows of
Golfsmith prior to its acquisition by Holdings on October 15, 2002. The
accompanying statements of operations for the three and nine months ended
September 27, 2003 and cash flows for the nine months ended September 27, 2003
reflect the sum of the consolidated operating results and cash flows of
Golfsmith and Holdings.
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States. As information in this report relates to interim financial
information, certain footnote disclosures have been condensed or omitted. In the
Company's opinion, the unaudited interim consolidated financial statements
reflect all adjustments (consisting of only normal recurring adjustments)
necessary for a fair presentation of the Company's financial position, results
of operations and cash flows for the periods presented. These financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto for the year ended December 28, 2002 as
filed in the Company's registration statement on Form S-4. The results of
operations for the three and nine month periods ended September 27, 2003 and
September 28, 2002 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 28, 2002 has been derived from audited 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
consolidated financial statements and footnotes thereto for the year ended
December 28, 2002 as filed in the Company's registration statement on Form S-4.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and use assumptions that affect certain reported amounts and disclosures.
Although management uses the best information available, it is reasonably
possible that the estimates used by the Company will be materially different
from the actual results. These differences could have a material effect on the
Company's future results of operations and financial position.
Revenue Subject to Seasonal Variations
The Company's business is highly seasonal, reflecting peak sales and earnings
during the Father's Day and holiday seasons. A substantial portion of the
Company's total revenues and an even larger portion of the Company's operating
income occur in its second fiscal quarter. The results of these interim quarters
may not be representative of the results for the full fiscal year.
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 27, 2003
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fiscal Year
The Company's fiscal year ends on the Saturday closest to December 31. The three
month periods ended September 27, 2003 and September 28, 2002 both consist of
thirteen weeks. The year to date periods ended September 27, 2003 and September
28, 2002 both consist of thirty-nine weeks.
Store Pre-Opening and Closing Expenses
Costs associated with the opening of a new store are expensed as incurred. When
the Company decides to close a store, the Company recognizes an expense related
to the future net lease obligation, non-recoverable investments in related fixed
assets 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 the Company 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.
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, prescribes accounting and
reporting standards for all stock-based compensation plans, including employee
stock options. As allowed by SFAS No. 123, the Company has elected to continue
to account for its employee stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB No. 25").
In December 2002, the FASB issued SFAS No. 148, Accounting For Stock-Based
Compensation - - Transition and Disclosure, An Amendment of FASB Statement No.
123. This Statement amends SFAS No. 123, Accounting For Stock-Based
Compensation, to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. Since the Company is continuing to account for
stock-based compensation according to APB 25, adoption of SFAS No. 148 requires
the Company to provide prominent disclosures about the affects of FASB No. 123
on reported net income.
In June 2003, the Company issued 1,840,500 options to purchase common stock
under the Golfsmith International Holdings, Inc. 2002 Incentive Stock Plan. The
options were issued with an exercise price of $3.00 per share and have a ten
year term.
The following table illustrates the effect on net income, if the Company had
applied the fair value recognition provisions of SFAS No. 123:
NINE MONTHS ENDED THREE MONTHS ENDED
------------------------------ ----------------------------
SEPTEMBER SEPTEMBER 28, SEPTEMBER SEPTEMBER 28,
27, 2003 2002 27, 2003 2002
(SUCCESSOR) (PREDECESSOR) (SUCCESSOR) (PREDECESSOR)
---------- ------------- ---------- ------------
Net income - as reported $2,015,620 $10,039,432 $1,011,809 $3,447,357
Total stock-based compensation cost, net of related tax
effects included in the determination of net income as
reported - 1,312,339 - 197,895
The stock-based employee compensation cost, net of related
tax effects, that would have been included in the
determination of net income if the fair value based
method had been applied to all awards (54,128) (1,399,606) (46,180) (195,764)
---------- ----------- ---------- ----------
Pro forma net income $1,961,492 $ 9,952,165 $ 965,629 $3,449,488
========== =========== ========== ==========
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 27, 2003
2. BUSINESS COMBINATIONS
Golfsmith International, Inc.
On October 15, 2002, the Company acquired all issued and outstanding shares of
Golfsmith. The total purchase price was $121.0 million including related
acquisition costs of $6.7 million. Atlantic Equity Partners III, L.P., the
Company's majority stockholder, acquires profitable companies that it believes
to be leaders in their respective markets and that it believes will increase in
value over time. The Company believed that Golfsmith satisfied these criteria
based on its profitable business, its investment in infrastructure to support
additional growth, and its private label brands. The Company believed that these
attributes would allow Golfsmith opportunities to increase in value, and
therefore justified the purchase price that exceeded the fair market value of
the assets.
In conjunction with the acquisition of Golfsmith, the Company issued 20,077,931
shares of common stock and 839,268 restricted stock units to investors for
approximately $62.8 million, excluding related issuance costs. Golfsmith
International, Inc., being the surviving wholly owned subsidiary of the Company,
issued Senior Secured Notes at a 20% discount off of face value for
consideration of $75.0 million. The proceeds from the issuance of common and
restricted stock units and the new Senior Secured Notes were utilized to fund
the acquisition of Golfsmith.
The total purchase consideration has been allocated to the assets acquired and
liabilities assumed, including identifiable intangible assets, based on their
respective fair values at the date of acquisition as determined by an
independent valuation obtained by the Company. Such allocation resulted in
goodwill of $34.9 million. Goodwill is assigned at the enterprise level and is
deductible for income tax purposes.
The consolidated financial statements have been prepared giving effect to the
recapitalization of the Company in accordance with EITF 88-16, Basis in
Leveraged Buyout Transactions, as a partial purchase. Under EITF 88-16, the
Company was revalued at the merger date to fair value to the extent of the
majority stockholder's 79.7% controlling interest in the Company. The remaining
20.3% is accounted for at the continuing stockholders' carryover basis in the
Company. The excess of the purchase price over the historical basis of the net
assets acquired has been applied to adjust net assets to their fair values to
the extent of the majority stockholder's 79.7% ownership.
Contingent consideration of $6,250,000 has been placed in an escrow account by
the selling stockholders to secure certain indemnification obligations of the
sellers. In accordance with the merger agreement, on May 20, 2003, the parties
determined that an adjustment in the merger consideration of $25,000 was payable
to the Company based on the post-merger review of Golfsmith's working capital.
This amount was paid out of the escrow account on June 20, 2003. The Company has
adjusted the purchase price allocation accordingly. On July 24, 2003, $1,107,579
was paid to the Company from the selling stockholders escrow account for the
repayment of certain obligations owed by the selling stockholders that were paid
by the Company. On April 15, 2004, any remaining escrow funds will be dispersed.
Concurrent with the acquisition, Golfsmith changed status from a Subchapter S
Corporation to a C Corporation that is subject to federal income taxes.
Don Sherwood Golf and Tennis World
On July 24, 2003, the Company acquired all issued and outstanding shares of Don
Sherwood Golf and Tennis World ("Sherwood") for a total purchase price of $9.2
million, including related acquisition costs of $0.4 million. The Company
believes that the Sherwood acquisition supports the Company's goals of expanding
its national presence while gaining exposure to one of the country's top golf
markets in San Francisco, California. The Company acquired all six Sherwood
retail stores as part of the acquisition. The operations of Sherwood stores are
included in the three and nine month ended September 27, 2003 income statements
as of July 25, 2003.
In conjunction with the acquisition of Sherwood, the Company issued 1,433,333
shares of common stock to existing stockholders, including its majority
stockholder, for consideration of $4.3 million. The proceeds from the issuance
of common stock were used to fund the acquisition of Sherwood. The issuance of
these additional shares increased the majority stockholder's 79.7% controlling
interest in the Company to an 80.9% controlling interest.
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 27, 2003
The total purchase consideration has been allocated to the assets acquired and
liabilities assumed, including identifiable intangible assets, based on their
respective fair values at the date of acquisition. Such allocation resulted in
goodwill of $6.3 million. Goodwill is assigned at the enterprise level and is
deductible for income tax purposes.
Contingent consideration of $1.3 million has been placed in an escrow account by
the Company to secure certain indemnification obligations of the selling
shareholder. The escrow funds will be released on the earlier of one year from
the acquisition date or 90 days after the Company's audited financial statements
for fiscal 2003 are completed.
3. ASSET ACQUISITION
On May 22, 2003, the Company acquired the assets and technology of Zevo Golf
Co., Inc. ("Zevo"). The total purchase consideration has been allocated to the
assets acquired, including identifiable intangible assets, based on their
respective fair values at the date of acquisition. As a result of the
acquisition, Golfsmith has obtained additional technology through the patented
"PreLoaded" technology for drivers and "Flying Buttress" design for irons as
well as an additional proprietary label.
4. INTANGIBLE ASSETS
In July 2001, Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets ("SFAS No. 142") was issued. SFAS No. 142 requires that
ratable amortization of intangible assets with indefinite lives, including
goodwill, be replaced with periodic review and analysis for possible impairment.
Intangible assets with definite lives must be amortized over their estimated
useful lives. On January 1, 2002, the Company adopted SFAS No. 142. As a result,
the Company no longer amortizes its acquired trademarks, thereby eliminating
estimated amortization of approximately $41,000 and $115,000, respectively, for
the three and nine months ended September 28, 2002.
Intangible assets with definite lives
Following is a summary of the Company's intangible assets that are subject to
amortization:
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
------ ------------ ------
Customer databases................ $ 3,399,205 $ (377,689) $ 3,021,516
The net carrying amount of customer databases intangible assets relates solely
to the merger transaction between Golfsmith and Holdings discussed in Note 2.
Total amortization expense for the three and nine months ended September 27,
2003 was $94,422 and $283,267, respectively, and is recorded in selling,
general, and administration costs on the consolidated statement of operations.
5. GUARANTEES
Holdings fully and unconditionally guarantees both the Senior Secured Notes
issued by Golfsmith in October 2002 and the Senior Credit Facility. The Senior
Secured Notes mature in October 2009 with certain mandatory redemption features.
Interest payments are required on a semi-annual basis on the Senior Secured
Notes at an annual interest rate of 8.375%. At September 27, 2003 there was $1.8
million outstanding on the Senior Credit Facility and $76.9 million outstanding
on the Senior Secured Notes. Holdings' guarantee of Golfsmith's Senior Secured
Notes and Senior Credit Facility is explicitly excluded from the initial
recognition and initial measurement requirements of FASB Interpretation No. 45
as it meets the definition of an intercompany guarantee.
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 27, 2003
The following represents certain stand-alone information for the nine and three
months ended September 27, 2003 for the issuer and certain guarantors of the
Senior Secured Notes and the Senior Credit Facility:
Holdings Golfsmith Golfsmith Canada Golfsmith Europe Total
-------- ------------- ---------------- ---------------- ------------
Assets....................... $ - $173,825,243 $ 594,665 $3,073,239 $177,493,147
Debt......................... - $ 76,900,109 - - $ 76,900,109
Net revenues for the nine
months ended September
27, 2003..................... - $188,825,744 $2,775,485 $4,625,689 $196,226,918
Net income for the nine
months ended September
27, 2003..................... - $ 1,128,421 $ 552,208 $ 334,991 $ 2,015,620
Net revenues for the
three months ended
September 27, 2003........... - $ 68,725,368 $ 909,415 $1,505,909 $ 71,140,692
Net income for the three
months ended September
27, 2003..................... - $ 862,589 $ 105,326 $ 43,894 $ 1,011,809
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 nine months
ended September 27, 2003, no amounts have been accrued or paid relating to
product warranties. The Company accrued $0 and approximately $0.3 million for
product warranties during the three and nine month period ended September 28,
2002, respectively.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The Company's accrued expenses and other current liabilities are comprised of
the following at September 27, 2003 and December 28, 2002, respectively:
SEPTEMBER 27, DECEMBER 28,
2003 2002
------------ ------------
Salaries and benefits $ 1,416,422 $ 2,206,568
Interest 577,931 1,660,246
Allowance for returns reserve 1,094,948 1,098,029
Gift certificates 4,077,533 3,785,669
Taxes 3,345,199 2,456,960
Other 1,450,557 1,614,830
----------- -----------
Total $11,962,590 $12,822,302
=========== ===========
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 27, 2003
7. DEFERRED STOCK COMPENSATION
Due to the decline in the market value of Golfsmith's common stock, the Board of
Directors authorized Golfsmith to reprice stock options granted to employees and
officers with exercise prices in excess of the fair market value on July 11,
2000. Stock options held by optionees other than non-employees, which were
granted under the incentive stock plans and which had an exercise price greater
than $4.00 per share, were amended to reduce their exercise price to $4.00 per
share, which was the market value of Golfsmith's common stock on July 11, 2000.
No other terms were changed. Options to purchase a total of 1,716,780 shares of
common stock with a weighted average exercise price of $13.94 were repriced.
Under FASB Interpretation No. 44, these repriced options required variable
accounting treatment until exercised or expired. Golfsmith recorded deferred
compensation of $0 and $3,711,054 related to the repriced options during the
nine months ended September 27, 2003 and September 28, 2002, respectively. The
deferred charge was being amortized over the average remaining life of the
repriced options. For the three and nine months ended September 28, 2002,
Golfsmith recorded $197,895 and $1,312,339 to compensation expense related to
these repriced options. As of December 28, 2002, there was no remaining deferred
compensation relating to these repriced options as all remaining historical
Golfsmith options were either canceled in exchange for the right to receive cash
or surrendered in exchange for stock units as part of the merger transaction
discussed in Note 2.
8. STORE CLOSURE AND ASSET IMPAIRMENTS
During the three and nine month period ended September 28, 2002, the Company
closed one retail location due to poor operating performance and the lack of
market penetration being derived from this store. Store closure costs include
writedowns of leasehold improvements and store equipment to estimated fair
values and lease termination costs. These store closing expenses in fiscal 2002
are reported in discontinued operations under the accounting guidance of SFAF
No. 144, Impairment of Long-Lived Assets. Amounts related to these closings from
previously presented periods have been reclassified as discontinued operations
in the income statement for the nine months ended September 28, 2002. Revenues
generated by this closed store during the three and nine month period ended
September 28, 2002 were $0 and $2.0 million, respectively. Cash flows provided
by this closed store during the three months ended September 28, 2002 were
$15,000 and cash flows used by this closed store during the nine months ended
September 28, 2002 were $368,000. All related assets and liabilities for this
closed location have been eliminated from the consolidated balance sheet as the
net assets were disposed of prior to December 28, 2002. There have been no store
closures in fiscal 2003.
9. COMPREHENSIVE INCOME
The Company's comprehensive income is composed of net income and translation
adjustments. The following table presents the calculation of comprehensive
income:
NINE MONTHS ENDED THREE MONTHS ENDED
-----------------------------------------------------------------------------
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
(Successor) (Predecessor) (Successor) (Predecessor)
------------- -------------- ------------- --------------
Net income.......................... $2,015,620 $10,039,432 $1,011,809 $3,447,357
Translation adjustments............. 58,814 224,126 9,222 121,555
---------- ----------- ---------- ----------
Total comprehensive income.......... $2,074,434 $10,263,558 $1,021,031 $3,568,912
========== =========== ========== ==========
10. SALE OF LYNX JAPAN TRADEMARK
In March 2002, the Company sold rights to their trademarks for Lynx in Japan to
a third party. The Company received proceeds of approximately $3.3 million, net
of direct costs associated with the sale. The gain on the sale was approximately
$2.2 million. The gain is recorded in other income in the statement of
operations for the nine months ended September 28, 2002.
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 27, 2003
11. INCOME TAXES
From commencement through October 15, 2002, Golfsmith and its subsidiaries had
elected to be treated as an S Corporation under Subchapter S of the Internal
Revenue Code of 1986, as amended. As such, federal income taxes were the
responsibility of the individual stockholders. Accordingly, no provision for
U.S. federal income taxes was included in the financial statements. However,
certain foreign and state taxes were incurred and were recorded as income tax
expense for these periods. Concurrent with the merger transaction with Holdings
(see Note 2) on October 15, 2002, Golfsmith's Subchapter S status was terminated
and the Company became subject to corporate income taxes. Subsequent to October
15, 2002, Golfsmith accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 prescribes the use of the liability
method whereby deferred tax asset and liability account balances are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
12. RECENTLY ISSUED ACCOUNTING STANDARDS
Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). FIN 46 requires that if an entity has a
controlling financial interest in a variable interest entity, the assets,
liabilities and results of activities of the variable interest entity should be
included in the consolidated financial statements of the entity. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after December 31, 2003. The adoption of FIN
46 is not expected to have a material impact on the Company's results of
operations or financial position.
Financial Instruments with Characteristics of Both Liabilities and Equity
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS No. 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
We are currently evaluating the impact of SFAS No. 150, but do not expect it to
have a material impact on the Company's results of operations or financial
position.
13. RELATED PARTY TRANSACTIONS
In October 2002, the Company entered into an agreement with a majority
stockholder whereby the Company pays a management fee expense of $600,000 per
year, plus out of pocket expenses, to this majority stockholder of the Company.
During the three and nine months ended September 27, 2003, the Company paid
$181,000 and $521,000, respectively, to this majority stockholder under this
agreement. These amounts are recognized in the consolidated statement of
operations in the selling, general and administrative expense line item. As of
September 27, 2003, the Company had no amounts payable to this majority
stockholder.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
Golfsmith International Holdings, Inc. became the parent company of
Golfsmith International, Inc. on October 15, 2002 as a result of a purchase
business combination, which we refer to as the merger. Holdings has no assets or
liabilities other than its investment in its wholly owned subsidiary Golfsmith
and did not have assets or operations prior to its acquisition of Golfsmith. The
following discussion and analysis of historical financial condition and results
of operations is therefore based on the financial condition and results of
operations of Golfsmith International, Inc. with respect to periods prior to the
merger. The discussion for periods following the merger is based on the
financial condition and results of operations of Golfsmith International
Holdings, Inc.
We sell brand name golf equipment from the industry's leading
manufacturers including Callaway(R), FootJoy(R), Ping(R), Nike(R), Taylor
Made(R) and Titleist(R) as well as our own proprietary brands, Golfsmith(R),
Lynx(R), Snake Eyes(R), Killer Bee(R) and Zevo (R). We sell through multiple
distribution channels consisting of:
- 36 golf superstores;
- regular mailings of our clubmakers' catalogs, which offer golf club
components, and our accessory catalogs, which offer golf accessories,
clothing and equipment; and
- golfsmith.com, our online e-commerce website.
We also operate a clubmaker training program and are the exclusive
operator of the Harvey Penick Golf Academy, an instructional school
incorporating the techniques of the well-known golf instructor, the late Harvey
Penick.
Over the past few years we have implemented a number of initiatives to
improve our competitive position and financial performance, including closing
under-performing stores, reducing headcount, updating stores, narrowing product
assortments and upgrading our technology and infrastructure. While some of these
initiatives have reduced sales, we believe that these actions have contributed
to improved cash flow, earnings and asset management.
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 credit card. Catalog and e-commerce sales are recorded upon shipment of
merchandise. Revenue from the Harvey Penick Golf Academy instructional school is
recognized at the time the services are performed. Revenues from the sale of
gift certificates are recorded upon the redemption of the gift certificate for
the purchase of tangible products at the time the customer takes possession of
the merchandise.
Our business is highly seasonal with sales peaks during the Father's
Day and Christmas Holiday seasons. A substantial portion of our net revenues and
an even larger portion of our operating income occur in our second fiscal
quarter. You should read the information set forth under "Additional Factors
That May Affect Future Results" for discussion of the effects and risks of the
seasonality of our business.
Sales of our products are affected by increases and declines in the
golf industry as a whole. Growth in the segments of the American population that
include the group that generally plays the most rounds of golf and people in
their 20's, the age when many people start playing golf, along with increased
interest in golf by women, junior and minority golfers indicate that the golf
industry will continue to grow in the next decade. These trends may however be
offset by further declines in the U.S. economy and reductions in the
discretionary consumer spending. We believe that since 1997, the worldwide
premium golf club market has experienced little growth in dollar volume from
year to year and that the number of rounds played has not increased since 1999.
As sales of golf products increase and decrease in the industry as a whole,
these fluctuations may impact our sales similarly.
We capitalize inbound freight and vendor discount charges into
inventory upon receipt of inventory. These costs are then subsequently included
in cost of goods sold upon the sale of that inventory. Since some retailers
exclude their costs from cost of goods sold, and instead include them in a line
item like selling and administrative expenses, our gross margins may not be
comparable to those of these other retailers.
Our fiscal year ends on the last Saturday in December and generally
consists of 52 weeks, though occasionally our fiscal years will consist of 53
weeks. This will next occur in 2003. Fiscal year 2002 consisted of 52 weeks.
Each quarter of each fiscal year generally consists of 13 weeks. The fourth
fiscal quarter of 2003 will consist of 14 weeks.
IMPACT OF MERGER
On October 15, 2002, BGA Acquisition Corp., a wholly owned subsidiary
of Golfsmith International Holdings, Inc., merged with and into Golfsmith
International, Inc. We accounted for the merger under the purchase method of
accounting for business combinations. In accordance with the purchase method of
accounting, in connection with the merger, Holdings, our parent after the
merger, allocated the excess purchase price over the value of our net assets
between a write-up of certain of our assets, which reflect an adjustment to the
fair values of these assets, and goodwill. The assets that have had their fair
values adjusted include inventory, property and equipment, and certain
intangible assets.
As a result of applying the required purchase accounting rules, the
financial statements of Golfsmith International Holdings, Inc. are significantly
affected. The application of purchase accounting rules results in different
accounting bases and hence financial information for the periods beginning on
October 16, 2002. The term "successor" refers to Golfsmith International
Holdings, Inc. and all of its subsidiaries, including Golfsmith International,
Inc. following the acquisition on October 15, 2002. The term "predecessor"
refers to Golfsmith International, Inc. prior to being acquired by Golfsmith
International Holdings, Inc.
Immediately prior to the merger, we repaid in full our 12% senior
subordinated notes for $34.4 million and terminated our then existing revolving
credit facility. Deferred debt financing costs of $1.6 million were written-off
in connection with the termination of these agreements. We sold 8.375% Senior
Secured Notes due 2009 with an aggregate principal amount at maturity of $93.75
million for gross proceeds of $75.0 million in a private placement offering to
finance part of the cash portion of the merger consideration, and entered into a
new senior credit facility to fund our future working capital requirements and
for general corporate purposes as described below.
As a result of the merger and the offering of the senior secured notes,
we currently have total debt in amounts substantially greater than historical
levels. This amount of debt and associated debt service costs will lower our net
income and cash provided by operating activities and will limit our ability to
obtain additional debt financing, fund capital expenditures or operating
requirements, open new or retrofit existing stores, and make acquisitions.
Historically, we operated as a Subchapter S corporation under the
Internal Revenue Code. Consequently, we were not generally subject to federal
income taxes because our stockholders included our income in their personal
income tax returns. Simultaneously with the completion of the merger, we
converted from a Subchapter S corporation to a Subchapter C corporation and
consequently became subject to federal income taxes from that date. This
conversion will lower our future net income and cash provided by operating
activities.
In connection with the merger, all stock options held by our employees
vested and were either canceled in exchange for the right to receive cash or
surrendered in exchange for stock units. As a result, we incurred a non-cash
compensation charge of $4.6 million which was equal to the difference between
the market value of our common stock and the exercise price of these options at
that vesting date. Total non-cash compensation expense for the year ended
December 28, 2002 and the nine months ended September 27, 2003 was $6.0 million
and $0, respectively. As all options were either canceled in exchange for the
right to receive cash or surrendered in exchange for stock units concurrent with
the merger, there is no future amortization expense associated with these
pre-merger options. For further information about our stock-based compensation,
see Note 1 and Note 7 to our unaudited consolidated financial statements
included in Item 1, "Financial Statements," in this quarterly report.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of financial condition and results
of operations is based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosures of contingent assets and
liabilities. The estimates and assumptions are evaluated on an ongoing basis and
are based on historical experience and other various factors that are believed
to be reasonable under the circumstances. Actual results may differ from these
estimates.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
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 estimate a reserve for damaged, obsolete, excess and slow-moving
inventory and for inventory shrinkage due to anticipated book-to-physical
adjustments. We periodically review these reserves by comparing them to on-hand
quantities, historical and projected rates of sale, changes in selling price and
inventory cycle counts. 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. Reserves are
booked on a monthly basis at 0.5% to 1.0% of net revenues depending on the
distribution channel (direct-to-consumer channel or retail channel) in which the
sales occur. Historical shrinkage experience has been within this range. In
fiscal 2002, inventory shrinkage was 0.53% of net revenues. Based on our current
trends through the nine months ended September 27, 2003, we do not expect the
inventory shrinkage as a percentage of net revenues to exceed historical levels.
Long-lived Assets, Including Goodwill and Identifiable Intangible
Assets
We evaluate the impairment of the book value of our indefinite lived
intangibles and related goodwill in accordance with SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. We
evaluate impairment annually, as well as whenever events or changes in
circumstances indicate that the carrying amounts of these assets may not be
recoverable based on a combination of our projection of estimated future
discounted cash flows and other valuation methodologies. We evaluate the
impairment of the book value of our long-lived assets including intangible
assets subject to amortization in accordance with SFAS No. 144, Impairment of
Long-Lived Assets, based on our projection of estimated future undiscounted cash
flows whenever events or changes in circumstances indicate that the carrying
amounts of these assets may not be recoverable. 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
acquired assets and our strategy for our overall business, as well as industry
and economic trends. In the event that the book value of intangibles, long-lived
assets and related goodwill is determined to be impaired, such impairments are
measured using a combination of 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. In
accordance with Statement of Financial Accounting Standard No. 142, Goodwill and
Other Intangible Assets, we determined that our recorded trademarks have
indefinite useful lives and therefore are not amortized.
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 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 could 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 2% to 10% 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.
Deferred Catalog Expenses
Prepaid catalog expenses consist of third party incremental costs,
including primarily paper, printing, postage and mailing costs. We capitalize
these costs as prepaid catalog expenses and amortize them over their expected
period of future revenues. We base our estimates of expected future revenue
streams upon our historical results. If the carrying amount is in excess of the
estimated probable remaining future revenues, we expense the excess in the
reporting period.
Self-Insured Liabilities
We are primarily self-insured for employee health benefits. We record
our self-insurance liability based on claims filed and an estimate of claims
incurred but not yet reported. If more claims are made than were estimated or if
the costs of actual claims increases beyond what was anticipated, reserves
recorded may not be sufficient and additional accruals may be required in future
periods.
Store Closure Costs
When we decide to close a store, we recognize an expense related to the
future net lease obligation, non-recoverable investments in related fixed assets
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 closed two stores in fiscal 2000, one store in fiscal 2001, two
stores in fiscal 2002, and one store in the nine months ended September 28,
2002. We did not close any stores in the nine months ended September 27, 2003.
These stores were selected for closure by evaluating the historical and
projected financial performance of all of our stores in accordance with our
store strategy. In each case, the stores that have been closed were the only
Golfsmith store in that market and were substantially larger in size than our
current store prototype. We do not currently have any plans to close any
additional stores, although we regularly evaluate our stores.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). FIN 46 requires that if an entity has a
controlling financial interest in a variable interest entity, the assets,
liabilities and results of activities of the variable interest entity should be
included in the consolidated financial statements of the entity. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after December 31, 2003. The adoption of Fin
46 is not expected to have a material impact on the Company's results of
operations or financial position.
Financial Instruments with Characteristics of Both Liabilities and Equity
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS No. 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
We are currently evaluating the impact of SFAS No. 150, but do not expect it to
have a material impact on the Company's results of operations or financial
position.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 27, 2003 (SUCCESSOR) COMPARED TO THREE MONTHS ENDED
SEPTEMBER 28, 2002 (PREDECESSOR)
We had net revenues of $71.1 million, operating income of $4.4 million
and net income of $1.0 million in the three months ended September 27, 2003
compared to net revenues of $56.0 million, operating income of $5.4 million and
net income of $3.4 million in the three months ended September 28, 2002.
The $15.1 million increase in net revenues from the three months ended
September 28, 2002 to the three months ended September 27, 2003 was comprised of
a $4.2 million increase, or 12.6%, in comparable store revenues, a $10.2 million
increase in revenue generated by twelve retail stores that were opened or
acquired subsequent to September 28, 2002 (including six stores acquired in the
acquisition of Don Sherwood Golf and Tennis World on July 24, 2003), and a $0.7
million increase, or 3.5%, in revenues in our direct to consumer channel.
International revenues remained consistent during both comparative three-month
periods. Comparable store revenue increases of 12.6% for the three months ended
September 27, 2003 represent an increase of 8.3% over comparable store revenues
for the three months ended September 28, 2002.
For the three months ended September 27, 2003, gross profit was $23.4
million, or 32.9% of net revenues, compared to $19.3 million, or 34.6% of net
revenues, for the three months ended September 28, 2002. Increased net revenues
in the three
months ended September 27, 2003 compared to the three months ended September 28,
2002 led to higher gross profits for the quarter. The decline in gross profit
percentage resulted principally from higher sales in lower margin merchandise
categories such as equipment. Additional declines in gross profit percentage
were realized as a result of multiple sales promotions that occurred during the
three months ended September 27, 2003. Additionally, in the three month period
ended September 27, 2003, we incurred approximately $0.2 million of costs
included in cost of goods sold resulting from the fair value adjustment made to
inventory as part of the merger transaction in October 2002.
Selling, general and administrative expenses increased $4.9 million to
$18.7 million for the three months ended September 27, 2003 from $13.8 million
for the three months ended September 28, 2002. We had twelve additional retail
stores in operation during the three months ended September 27, 2003 compared to
the three months ended September 28, 2002 (including six stores acquired in the
acquisition of Don Sherwood Golf and Tennis World on July 24, 2003), resulting
in an increase in selling, general and administrative expenses of $3.7 million.
We also incurred increased costs relating to and resulting from the merger
transaction on October 15, 2002, including a $0.2 million increase in
depreciation and amortization resulting from the fair value adjustments made as
part of the merger transaction. Additionally, we incurred increased expenses of
$0.5 million related to professional fees associated with our filings with the
Securities and Exchange Commission and other company initiatives, $0.2 million
related to management fees paid to our majority stockholder, $0.6 million
related to salaries and benefits, and $0.6 million related to advertising
expenses. These increases were offset by a $0.9 million decrease in depreciation
expense.
During the three months ended September 27, 2003, we incurred
approximately $0.3 million in pre-opening expenses related to the opening of two
new retail locations during the third quarter of fiscal 2003. During the three
months ended September 28, 2002, we incurred approximately $35,000 in
pre-opening expenses related to the opening of one new retail location during
the third quarter of fiscal 2002. Costs associated with the opening of a new
store are expensed as incurred.
Amortization of deferred compensation was approximately $0.2 million
for the three months ended September 28, 2002. Deferred compensation is related
to the accounting for stock options under variable plan accounting guidance.
These non-cash charges did not exist in the three months ended September 27,
2003 due to all remaining outstanding options becoming vested and being either
canceled in exchange for the right to receive cash or surrendered in exchange
for stock units on the merger date of October 15, 2002. See " -- Impact of
Merger" for further discussion.
For the three months ended September 28, 2002, interest expense
consisted of costs related to our 12% senior subordinated notes, a mortgage note
and a bank line of credit. Immediately prior to the merger in October 2002, we
repaid our senior subordinated notes and other pre-existing debt and a new line
of credit was put in place. Interest expense was $2.7 million and $1.6 million
in the three months ended September 27, 2003 and September 28, 2002,
respectively. Interest expense increased as debt balances during the three
months ended September 27, 2003 were almost three times higher than during the
three months ended September 28, 2002. Approximately $0.2 million of
amortization of debt issuance costs resulting from the new senior secured notes
during the three months ended September 27, 2003 as compared to approximately
$0.1 million of amortization of debt issuance costs related to the senior
subordinated notes during the three months ended September 28, 2002 also
contributed to the increase in interest expense. For further discussion see " --
Liquidity and Capital Resources -- Senior Secured Notes" and " -- Liquidity and
Capital Resources -- Credit Facility" below. Interest income was approximately
$16,000 and $109,000 in the three months ended September 27, 2003 and September
28, 2002, respectively. The decrease in interest income was the result of
overall lower cash and cash equivalent balances combined with lower interest
rates.
Other income, net of other expenses was approximately $67,000 for the
three months ended September 27, 2003, compared to other income, net of other
expenses of $63,000 for the three months ended September 28, 2002. The increase
is attributable to the difference in the exchange rate variance for the two
periods.
We recognized income of $15,000 in the three months ended September 28,
2002 from discontinued operations related to the operations and final closing
costs associated with closing one retail location during the three months ended
September 28, 2002 due to poor operating performance and the lack of market
penetration being derived from this single-store market. Store closure costs
include writedowns of remaining leasehold improvements and store equipment to
estimated fair values and lease termination costs. We recorded income on the
disposal of these assets in the three months ended September 28, 2002 of $15,000
which is reported in discontinued operations under the accounting guidance of
SFAS No. 144, Impairment of Long-Lived Assets. All related assets and
liabilities for this location have been eliminated from each of the consolidated
balance sheets presented in this quarterly report.
Minority interest expense during the three months ended September 28,
2002 of $0.3 million relates to an obligation that was associated with
partnership interests issued in 1998. Immediately prior to the merger, Golfsmith
repurchased this minority
interest obligation. The minority interest obligation had a carrying value of
$13.1 million and was repurchased for $9.0 million, resulting in the recording
of negative goodwill during the fourth quarter of fiscal 2002.
Historically, we elected to be treated as a Subchapter S Corporation
under the Internal Revenue Code. Consequently, we were not generally subject to
federal income taxes because our stockholders included our income in their
personal income tax returns. Concurrently with the completion of the merger, we
converted from a Subchapter S corporation to a Subchapter C corporation and
consequently became subject to federal income taxes from that date. For the
three months ended September 27, 2003, our income tax expense was $0.7 million,
compared to income tax expense of $0.3 million for the three months ended
September 28, 2002 which related to our European and Canadian operations as well
as certain state income taxes.
NINE MONTHS ENDED SEPTEMBER 27, 2003 (SUCCESSOR) COMPARED TO NINE MONTHS ENDED
SEPTEMBER 28, 2002 (PREDECESSOR)
We had net revenues of $196.2 million, operating income of $11.4
million and net income of $2.0 million in the nine months ended September 27,
2003 compared to net revenues of $173.6 million, operating income of $13.9
million and net income of $10.0 million in the nine months ended September 28,
2002.
The $22.6 million increase in net revenues from the nine months ended
September 28, 2002 to the nine months ended September 27, 2003 was comprised of
a $7.0 million increase, or 7.2%, in comparable store revenues, a $14.7 million
increase in revenues generated by twelve retail stores that were opened or
acquired subsequent to September 28, 2002 (including six stores acquired in the
acquisition of Don Sherwood Golf and Tennis World on July 24, 2003), a $1.8
million increase in existing non-comparable store revenues, and a $0.1 million
increase in international revenues. These revenue increases were partially
offset by a decline of $1.0 million in revenues in our direct to consumer
channel. Comparable store revenue increases of 7.2% for the nine months ended
September 27, 2003 represent an increase of 6.2% over comparable store revenues
for the nine month period ended September 28, 2002.
For the nine months ended September 27, 2003, gross profit was $64.0
million, or 32.7% of net revenues, compared to $61.1 million, or 35.2% of net
revenues, for the nine months ended September 28, 2002. Increased net revenues
in the nine months ended September 27, 2003 compared to the nine months ended
September 28, 2002 led to higher gross profits for the nine month period. The
decline in gross profit percentage resulted principally from higher sales in
lower margin merchandise categories such as equipment. Additional declines in
gross profit percentage were realized as a result of multiple sales promotions
that occurred during the nine months ended September 27, 2003. Additionally, in
the nine month period ended September 27, 2003, we incurred approximately $0.7
million of costs included in cost of goods sold resulting from the fair value
adjustment made to inventory as part of the merger transaction in October 2002.
Selling, general and administrative expenses increased $6.3 million to
$52.1 million for the nine months ended September 27, 2003 from $45.8 million
for the nine months ended September 28, 2002. However, selling, general and
administrative expenses as a percentage of net revenues increased only 0.1% to
26.5% of net revenues for the nine months ended September 27, 2003 as compared
to 26.4% of net revenues for the nine months ended September 28, 2002. We had
twelve additional retail stores in operation during the nine months ended
September 27, 2003 compared to the nine months ended September 28, 2002
(including six stores acquired in the acquisition of Don Sherwood Golf and
Tennis World on July 24, 2003), resulting in an increase in selling, general and
administrative expenses of $5.5 million. We also incurred increased costs
relating to and resulting from the merger transaction on October 15, 2002,
including a $0.7 million increase in depreciation and amortization resulting
from the fair value adjustments made as part of the merger transaction.
Additionally, we incurred increased expenses of $0.8 million related to
professional service fees associated with our filings with the Securities and
Exchange Commission and other company initiatives, $0.4 million related to
management fees paid to our majority stockholder and $0.5 million related to
salaries and benefits. These increases were offset by a $1.6 million decrease in
depreciation expense.
During the nine months ended September 27, 2003, we incurred
approximately $0.5 million in pre-opening expenses related to the opening of
four new retail locations during fiscal 2003. During the nine months ended
September 28, 2002, we incurred approximately $0.1 million in pre-opening
expenses related to the opening of one new retail location during fiscal 2002.
Costs associated with the opening of a new store are expensed as incurred.
Amortization of deferred compensation was approximately $1.3 million
for the nine months ended September 28, 2002. Deferred compensation is related
to the accounting for stock options under variable plan accounting guidance.
These non-cash charges did not exist in the nine months ended September 27, 2003
due to all remaining outstanding options becoming vested and
being either canceled in exchange for the right to receive cash or surrendered
in exchange for stock units on the merger date of October 15, 2002. See " --
Impact of Merger" for further discussion.
For the nine months ended September 28, 2002, interest expense
consisted of costs related to our 12% senior subordinated notes, a mortgage note
and a bank line of credit. Immediately prior to the merger in October 2002, we
repaid our senior subordinated notes and other pre-existing debt and a new line
of credit was put in place. Interest expense was $8.2 million and $4.7 million
in the nine months ended September 27, 2003 and September 28, 2002,
respectively. Interest expense increased as debt balances during the nine months
ended September 27, 2003 were almost three times higher than during the nine
months ended September 28, 2002. Approximately $0.7 million of amortization of
debt issuance costs resulting from the new senior secured notes during the nine
months ended September 27, 2003 as compared to approximately $0.2 million of
amortization of debt issuance costs related to the senior subordinated notes
during the nine months ended September 28, 2002 also contributed to the increase
in interest expense. For further discussion see " -- Liquidity and Capital
Resources -- Senior Secured Notes" and " -- Liquidity and Capital Resources --
Credit Facility" below. Interest income was approximately $38,000 and $0.3
million in the nine months ended September 27, 2003 and September 28, 2002,
respectively. The decrease in interest income was the result of overall lower
cash and cash equivalent balances combined with lower interest rates.
Other income, net of other expenses was approximately $0.1 million for
the nine months ended September 27, 2003, compared to other income, net of other
expenses of $2.4 million for the nine months ended September 28, 2002. The
decrease was due to a gain on the sale of assets during the first quarter of
2002. In March 2002, we sold the rights to certain intellectual property for
gross proceeds of $3.3 million, resulting in a $2.2 million gain.
We recognized a loss of $0.2 million in the nine months ended September
28, 2002 from discontinued operations related to the operations and final
closing costs associated with closing one retail location during the three
months ended September 28, 2002 due to poor operating performance and the lack
of market penetration being derived from this single-store market. Store closure
costs include writedowns of remaining leasehold improvements and store equipment
to estimated fair values and lease termination costs. We recorded a loss on the
disposal of these assets in the nine months ended September 28, 2002 of $0.3
million which is reported in discontinued operations under the accounting
guidance of SFAS No. 144, Impairment of Long-Lived Assets. All related assets
and liabilities for this location has been eliminated from each of the
consolidated balance sheets presented in this quarterly report.
Minority interest expense during the nine months ended September 28,
2002 of $0.9 million relates to an obligation that was associated with
partnership interests issued in 1998. Immediately prior to the merger, Golfsmith
repurchased this minority interest obligation. The minority interest obligation
had a carrying value of $13.1 million and was repurchased for $9.0 million,
resulting in the recording of negative goodwill during the fourth quarter of
fiscal 2002.
Historically, we elected to be treated as a Subchapter S Corporation
under the Internal Revenue Code. Consequently, we were not generally subject to
federal income taxes because our stockholders included our income in their
personal income tax returns. Concurrently with the completion of the merger, we
converted from a Subchapter S corporation to a Subchapter C corporation and
consequently became subject to federal income taxes from that date. For the nine
months ended September 27, 2003, our income tax expense was $1.4 million,
compared to income tax expense of $0.7 million for the nine months ended
September 28, 2002 which related to our European and Canadian operations as well
as certain state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
As of September 27, 2003 we had $3.4 million in cash and cash
equivalents and outstanding debt obligations of $78.7 million. We had $7.7
million in borrowing availability under our credit facility as of September 27,
2003.
Operating activities
Net cash used in operating activities was $1.0 million for the nine
months ended September 27, 2003, compared to $7.0 million net cash provided by
operating activities for the nine months ended September 28, 2002. This decrease
in net cash provided by operations during the nine months ended September 27,
2003 as compared to the nine months ended September 28, 2002 is primarily
attributable to a decrease in net income for the nine months ended September 27,
2003 to $2.0 million as compared to $10.0 million for the nine months ended
September 28, 2002. Additional cash of approximately $14.7 million was used
during the nine months ended September 27, 2003 as compared to the nine months
ended September 28, 2002 to fund normal inventory requirements. These
requirements were primarily the result of having twelve additional retail stores
in operation since
September 28, 2002. The cash used to fund inventory requirements was offset by
an increase of $14.7 million in cash generated from working capital accounts
during the nine months ended September 27, 2003 as compared to the nine months
ended September 28, 2002. In addition, in the nine months ended September 28,
2002, we recognized a gain on the sale of certain intellectual property of $2.2
million, reducing cash provided by operations.
Investing activities
Net cash used in investing activities was $12.8 million for the nine
months ended September 27, 2003, compared to net cash provided by investing
activities of $1.5 million for the nine months ended September 28, 2002.
Net cash used in investing activities for the nine months ended
September 27, 2003 of $13.1 million was the result of capital expenditures of
$3.8 million, $0.8 million related to asset purchases and other, and $8.5
million related to the acquisition of Don Sherwood Golf and Tennis World. For
the nine months ended September 27, 2003, capital expenditures were comprised of
$3.4 million for new and existing stores and $0.4 million for corporate
projects.
Net cash provided by investing activities for the nine months ended
September 28, 2002 of $1.5 million was the result of proceeds from the sale of
certain intellectual property of $3.3 million, which was partially offset by
$1.8 million in capital expenditures. For the nine months ended September 28,
2002, capital expenditures were comprised of $1.3 million for new and existing
stores and $0.5 million for corporate projects.
Financing activities
Net cash provided by financing activities was $6.0 million for the nine
months ended September 27, 2003, compared to net cash used in financing
activities of $12.5 million for the nine months ended September 28, 2002.
Net cash provided by financing activities for the nine months ended
September 27, 2003 of $6.0 million was comprised of proceeds from a line of
credit of $1.8 million, net of payments, $4.5 million in proceeds from the
issuance of common stock primarily related to the purchase of Don Sherwood Golf
and Tennis World, offset by $0.3 resulting from the repurchase of restricted
stock units.
For the nine months ended September 28, 2002, net cash used in
financing activities of $12.5 million was comprised of principal payments on
long-term debt of $8.9 million, principal payments on lines of credit of $0.1
million, net of borrowings, and $3.5 million in dividends paid.
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, for gross proceeds of $75.0 million. As a result of the covenants in the
indenture governing the senior secured notes, our ability to borrow under our
revolving credit facility is restricted to a maximum of $12.5 million and the
payments of dividends or repurchases of stock are limited. The proceeds from the
sale of the senior secured notes were used by us to pay a portion of the cash
portion of the merger consideration and for fees and expenses of the offering
and merger.
As a result of the merger and the offering of the senior secured notes,
we currently have total debt in amounts substantially greater than historical
levels. This amount of debt and associated debt service costs could lower our
net income and cash provided by operating activities and will limit our ability
to obtain additional debt financing, fund capital expenditures or operating
requirements, open new or retrofit existing stores, and make acquisitions.
CREDIT FACILITY
Historically, our principal sources of liquidity have consisted of cash
from operations and financing sources. In fiscal 2000, we entered into a credit
facility providing for term loan borrowings of $15.0 million and revolver
borrowings up to $40.0 million, subject to certain limitations. The term loan
was secured by a pledge of the company's land and buildings. The revolver was
secured by a pledge of our inventory, receivables, and certain other assets, and
was repaid and re-borrowed from time to time until such maturity date subject to
the satisfaction of certain conditions. This credit facility was repaid in full
and terminated in connection with the merger. In fiscal 1998, we issued in a
private placement $30.0 million of our 12% senior subordinated notes
and partnership interests that could have been converted into warrants to
purchase shares of our common stock under certain circumstances. We also repaid
in full the 12% senior subordinated notes in connection with the merger.
Concurrently with the merger, we entered into a new revolving credit
facility with $9.5 million availability (after giving effect to required
reserves of $500,000), subject to customary conditions, to fund our working
capital requirements and for general corporate purposes. The credit agreement is
secured by a pledge of our inventory, receivables, and certain other assets. The
credit agreement provides for same day funding, and letter of credit
availability, and contains maximum leverage and minimum earnings covenants. As
of September 27, 2003, we had $1.8 million in borrowings outstanding under the
credit agreement.
Borrowings under the credit agreement are expected to increase as
working capital increases in anticipation of the important selling period in
advance of the Christmas holiday, and then decline following this period. In the
event sales results are less than anticipated and our working capital
requirements remain constant, the amount available under the credit agreement
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.
Our ability to borrow under our credit agreement is limited in some
circumstances.
CAPITAL EXPENDITURES
Subject to our ability to generate sufficient cash flow, we currently
plan to spend $5.0 million to $7.0 million to open additional stores and/or
retrofit existing stores in fiscal 2003. However, to the extent that we use
capital for acquisitions, our budget for store openings and retrofittings will
be reduced. Typically, we estimate that we incur $0.6 million in net working
capital costs and $0.6 million in capital expenditures in connection with the
opening of a new store. These amounts are estimates and actual store opening
costs may vary.
CONTRACTUAL OBLIGATIONS
Our future contractual obligations related to long-term debt and
noncancellable operating leases at September 27, 2003 are as follows:
PAYMENTS DUE BY PERIOD
----------------------
CONTRACTUAL LESS THAN 1 FTER 5
OBLIGATIONS TOTAL YEAR 1-3 YEARS 4-5 YEARS YEARS
----------- ----- ---- --------- --------- -----
(IN THOUSANDS)
Long-term debt............ $ 93,750 $ -- $ -- $ 18,750 $ 75,000
Operating leases.......... $ 163,398 $ 15,798 $ 34,221 $ 32,081 $ 81,298
---------- ----------- ------------ ----------- ----------
TOTAL..................... $ 257,148 $ 15,798 $ 34,221 $ 50,831 $ 156,298
========== =========== ============ =========== ==========
We expect that our principal uses of cash for the next several years
will be interest payments on our senior secured notes and the senior credit
facility, capital expenditures, primarily for new store openings, possible
acquisitions (to the extent permitted by the lenders under our senior credit
facility and under the indenture governing our senior secured notes) and working
capital requirements. Additionally, subsequent to fiscal 2003, we will be
required to (1) offer to repurchase a portion of the senior secured notes at
100% of their accreted value within 120 days after the end of each fiscal year
with 50% of our excess cash flow and (2) under certain circumstances, purchase
senior secured notes at 101% of their accreted value plus accrued and unpaid
interest, if any, to the date of purchase. We believe that cash from operations
will be sufficient to meet our expected debt service requirements, planned
capital expenditures, and operating needs. However, we have limited ability to
obtain additional debt financing to fund working capital needs and capital
expenditures should cash from operations be insufficient. Net cash used in
operations of $1.0 million during the nine months ended September 27, 2003 was
largely a result of increased cash used to purchase inventory resulting from
having twelve additional stores during the third quarter of 2003 and an overall
lower inventory balance at December 28, 2002 as compared to December 29, 2001
due to continued improvement in inventory management. We believe that the
financial support of our principal stockholder and the use of our senior credit
facility offer us potential funding avenues to meet working capital
requirements. If cash from operations is not sufficient, 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 under "Additional
Factors That May Affect Future Results" for a discussion of the risks affecting
our operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks, which include changes in U.S. interest
rates and, to a lesser extent, foreign exchange rates. We do not engage in
financial transactions for trading or speculative purposes.
Interest Rate Risk
The interest payable on our existing credit facility is based on
variable interest rates and therefore affected by changes in market interest
rates. If we draw the maximum available under the credit facility of $9.5
million and interest rates on existing variable rate debt rose to greater than
15.25%, our results from operations and cash flows may be materially affected.
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. To achieve these objectives, we manage our exposure to fluctuations in
market interest rate for a portion of our borrowings through the use of fixed
rate debt instruments to the extent that reasonably favorable rates are
obtainable with such arrangements. We may enter into derivative financial
instruments such as interest rate swaps or caps and treasury options or locks to
mitigate 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 minimize 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.
FORWARD-LOOKING STATEMENTS
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 management's 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 under "Additional Factors That May Affect
Future Results" and the following:
- the continued popularity of golf and golf-related products;
- our ability to borrow funds to expand our business or compete
effectively;
- economic conditions and their effect on discretionary spending
by consumers;
- our ability and our suppliers' ability to develop and
introduce new products;
- new competitors entering the market;
- the diversion of our limited capital resources away from other
areas when we open new superstores and the profitability of
new superstores that we may open;
- our expansion in new and existing markets;
- our ability to accurately predict our sales during our peak
seasons;
- the impact of standards developed by golf associations;
- our ability to maintain or negotiate new leases for our
superstores;
- fluctuations in comparable store sales;
- our ability to achieve adequate response rates to our
catalogs;
- our ability to attract and retain quality employees;
- the continued service of our key executive officers;
- being controlled by our principal stockholder;
- our ability to enforce our intellectual property rights and
defend infringement claims;
- the operation of our management information systems;
- our dependence on our Austin call center and distribution
center;
- interruptions in the supply of the products we sell, including
at the port in Long Beach, California;
- claims against us from users of our products;
- fluctuations in the costs of mailing, paper and printing;
- interruptions in the operations of our delivery service;
- the impact of state tax regulations and regulation of the
Internet;
- changing preferences of our customers;
- potential environmental liabilities;
- increased traffic and possible security breaches on our
website; and
- our ability to successfully integrate any businesses we
acquire, including Don Sherwood Golf and Tennis World.
We believe the forward-looking statements in this document are
reasonable; however, you should not place undue reliance 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 updated publicly any of them in light of new information or future
events.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
OUR SUCCESS DEPENDS ON THE CONTINUED POPULARITY OF GOLF AND THE GROWTH OF THE
MARKET FOR GOLF-RELATED PRODUCTS. IF GOLF DECLINES IN POPULARITY, OUR SALES
COULD MATERIALLY DECLINE.
We generate substantially all of our net revenues from the sale of
golf-related equipment and accessories. The demand for our 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. If golf
participation decreases, sales of our products would be adversely affected. In
addition, the popularity of golf organizations, such as the Professional Golfers
Association, also affects the sales of our golf equipment and golf-related
apparel. We depend on the exposure of our brands to increase brand recognition
and reinforce the quality of our products. Any significant reduction in
television coverage of PGA or other golf tournaments, or any other significant
decreases in either attendance at golf tournaments or viewership of golf
tournaments, will reduce the visibility of our brand and could adversely affect
our sales.
In addition, we do not believe there has been any material increase in
golf participation or the number of golf rounds played in 1999, 2000, 2001 and
2002. In fact, the number of rounds played in the U.S. dropped to 502.4 million
in 2002 from 518.4 million in 2000, perhaps reflecting the general decline in
the U.S. economy. In addition, the number of rounds played year-to-date through
September of 2003 have dropped 3.9%. Furthermore, we believe that since 1997,
the overall worldwide premium golf club market has experienced little growth in
dollar volume from year to year. We can not assure you that the overall dollar
volume of the worldwide market for golf-related products will grow, or that it
will not decline, in the future.
WE MAY NOT BE ABLE TO BORROW ADDITIONAL FUNDS, IF NEEDED, TO EXPAND OUR BUSINESS
OR COMPETE EFFECTIVELY AND, AS A RESULT, OUR NET REVENUES AND PROFITABILITY MAY
BE MATERIALLY ADVERSELY AFFECTED.
The indenture governing our senior secured notes and our senior credit
facility limit almost completely our ability to borrow additional funds. We
believe that the terms of the liens securing our senior credit facility and our
senior secured notes effectively preclude us from borrowing additional funds,
other than under our senior credit facility. As a result, to the extent that we
do not have borrowing availability under our senior credit facility, we will
have to fund our operations, including new store openings and capital
expenditures as well as any future acquisitions, with cash flow from operations.
If we do not generate sufficient cash flow from our operations to fund these
expenditures, we may not be able to compete effectively and our sales and
profitability would likely be materially adversely affected.
A REDUCTION IN DISCRETIONARY CONSUMER SPENDING COULD REDUCE SALES OF OUR
PRODUCTS.
Our products are recreational in nature and are therefore discretionary
purchases for consumers. Consumers are generally more willing to make
discretionary purchases of golf products during favorable economic conditions.
Discretionary spending is affected by many factors, including, among others,
general business conditions, interest rates, the availability of consumer
credit, taxation, and consumer confidence in future economic conditions. Our
customers' purchases of discretionary items, including our products, could
decline during periods when disposable income is lower, or periods of actual or
perceived unfavorable economic conditions. Any significant decline in these
general economic conditions or uncertainties regarding future economic prospects
that adversely affect discretionary consumer spending could lead to reduced
sales of our products. In addition, our sales could be adversely affected by a
downturn in the economic conditions in the markets in which our superstores
operate. The general slowdown in the United States economy and the uncertain
economic outlook have adversely affected consumer spending habits, which has
adversely affected our net revenues. A prolonged economic downturn could have a
material adverse effect on our business, financial condition, and results of
operations.
OUR SALES AND PROFITS MAY BE ADVERSELY AFFECTED IF WE AND OUR SUPPLIERS FAIL TO
SUCCESSFULLY DEVELOP AND INTRODUCE NEW PRODUCTS.
Our future success will depend, in part, upon our and our suppliers'
continued ability to develop and introduce innovative products in the golf
equipment market. The success of new products depends in part upon the various
subjective preferences of golfers, including a golf club's look and "feel," and
the level of acceptance that a golf club has among professional and recreational
golfers. The subjective preferences of golf club purchasers are difficult to
predict and may be subject to rapid and unanticipated changes. If we or our
suppliers fail to successfully develop and introduce innovative products on a
timely basis, then our sales and profits may suffer.
In addition, if we or our suppliers introduce new golf clubs too
rapidly, it could result in close-outs of existing inventories. Close-outs 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.
OUR SALES AND PROFITABILITY MAY BE ADVERSELY AFFECTED IF NEW COMPETITORS ENTER
THE GOLF PRODUCTS INDUSTRY.
Increased competition in our markets due to the entry of new
competitors, including companies which currently supply us with products that we
sell, could reduce our net revenues. Our competitors currently include other
specialty retailers, mass merchandise retailers, conventional sporting goods
retailers, on-course pro shops, and online retailers of golf equipment. These
businesses compete with us in one or more product categories. In addition,
traditional and specialty golf retailers are expanding more aggressively in
marketing brand-name golf equipment, thereby competing directly with us for
products, customers and locations. Some of these potential competitors have been
in business longer than us and/or have greater financial or marketing resources
than we do and may be able to devote greater resources to sourcing, promoting
and selling their products. Several of our key vendors have begun to operate
retail stores or websites that sell directly to consumers and may compete with
us and reduce our sales. As a result of this competition, we may experience
lower sales or greater operating costs, such as marketing costs, which would
have an adverse effect on our profitability.
NEW SUPERSTORES THAT WE MAY OPEN MAY DIVERT OUR LIMITED CAPITAL RESOURCES AWAY
FROM OTHER AREAS OF OUR BUSINESS AND MAY NOT BE PROFITABLE WHICH COULD ADVERSELY
AFFECT THE PROFITABILITY OF OUR COMPANY AS A WHOLE.
Our growth strategy involves opening additional superstores in new and
existing markets. In the nine-month period ended September 27, 2003, we opened
four new stores, incurring $0.5 million in pre-opening expenses and $2.8 million
in capital expenditures. We expect to open two additional stores during the
remainder of fiscal 2003. Subject to our ability to generate sufficient cash
flow, we currently plan to spend $5.0 million to $7.0 million to open stores
and/or retrofit existing stores in fiscal 2003. However, to the extent that we
use capital for acquisitions, our budget for store openings and retrofittings
will be reduced. Typically, we estimate that we incur $0.6 million in net
working capital costs and $0.6 million in capital expenditures in connection
with the opening of a new store. These amounts are estimates and actual store
opening costs may vary. We intend to fund new store openings through cash flow
from operations. Our senior credit facility and the indenture governing our
senior secured notes significantly restrict our ability to incur indebtedness
and to make capital expenditures. We may not have or be able to obtain
sufficient funds to fund our planned expansion.
Our ability to open new stores on a timely and profitable basis is
subject to various contingencies, some of which are beyond our control. These
contingencies include our ability to locate suitable store sites, negotiate
acceptable lease terms, build-out or refurbish sites on a timely and
cost-effective basis, hire, train and retain skilled managers and personnel,
obtain adequate capital resources and successfully integrate new stores into
existing operations. We can not assure you that our new stores will be a
profitable deployment of our limited capital resources. If any of our new stores
are not profitable, then the profitability of our company as a whole may be
adversely affected.
OUR EXPANSION IN NEW AND EXISTING MARKETS, IF UNSUCCESSFUL, COULD CAUSE OUR NET
REVENUES TO DECREASE.
Our expansion in 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 store design and concept, added strain on our
distribution center and management information systems and diversion of
management attention from existing operations. To the extent that we are not
able to meet these new challenges, our net revenues could decrease.
IF WE DO NOT ACCURATELY PREDICT OUR SALES DURING OUR PEAK SEASONS AND THEY ARE
LOWER THAN WE EXPECT, OUR PROFITABILITY MAY BE MATERIALLY ADVERSELY AFFECTED.
Our business is highly seasonal. Our sales during our second fiscal
quarter of each year, which includes the Father's Day selling season, and the
Christmas holiday selling season have historically contributed a
disproportionate percentage of our net revenues and most of our net income for
the entire year. We make decisions regarding merchandise well in advance of the
season in which it will be sold, particularly for the Father's Day and Christmas
holiday selling seasons. We incur significant additional expenses leading up to
and during our second fiscal quarter and the month of December in anticipation
of higher sales in those periods, including acquiring additional inventory,
preparing and mailing our catalogs, advertising, creating in-store promotions
and hiring additional employees. If our sales during our peak seasons are lower
than we expect for any reason, we may not be able to adjust our expenses in a
timely fashion. As a result, our profitability may be materially adversely
affected.
IF THE PRODUCTS WE SELL DO NOT SATISFY THE STANDARDS OF THE UNITED STATES GOLF
ASSOCIATION AND THE ROYAL AND ANCIENT GOLF CLUB OF ST. ANDREWS IN THE FUTURE,
OUR NET REVENUES ATTRIBUTABLE TO THOSE PRODUCTS AND OUR PROFITABILITY MAY BE
REDUCED.
We and our suppliers generally seek to satisfy the standards
established by the United States Golf Association and the Royal and Ancient Golf
Club of St. Andrews in the design of golf clubs because these standards are
generally followed by golfers within their respective geographic areas. We
believe that all of the products we sell conform to these standards, except
where expressly marketed as non-conforming. However, we cannot assure you that
our products will satisfy these standards in the future or that the standards of
these organizations will not be changed in a way that makes our products
non-conforming. If our products that are intended to conform are determined to
be non-conforming, our net revenues attributable to those products and, as a
result, our profitability may be reduced.
WE LEASE MOST OF OUR SUPERSTORE LOCATIONS. IF WE ARE UNABLE TO MAINTAIN THOSE
LEASES OR LOCATE ALTERNATIVE SITES FOR OUR SUPERSTORES ON TERMS THAT ARE
ACCEPTABLE US, OUR NET REVENUES AND PROFITABILITY COULD BE REDUCED.
We lease 35 of our 36 superstores. As of September 27, 2003, we
operated one of our superstores under a lease with a term that expires in less
than one year. We cannot assure you that we will be able to maintain our
existing store locations as leases expire, or that we will be able to locate
alternative sites on favorable terms. If we cannot maintain our existing store
locations or locate alternative sites on favorable or acceptable terms, our net
revenues and profitability could be reduced.
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:
- customer demand in different geographic regions;
- our ability to efficiently source and distribute products;
- changes in our product mix;
- promotional events;
- effects of competition;
- our ability to effectively execute our business strategy; and
- general economic conditions.
Our comparable store sales have fluctuated significantly in the past and we
believe that such fluctuations may continue. Our historic results are not
necessarily indicative of our future results, and we cannot assure you that our
comparable store sales will not decrease again in the future. Any reduction in
or failure to increase our comparable store sales could negatively impact our
future operating performance.
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
RESULTS OF OPERATIONS MAY SUFFER.
Our results of operations depend in part on the success of our catalog
operations. We believe that the success of our catalog operations depends on our
ability to:
- achieve adequate response rates to our mailings;
- continue to offer a merchandise mix that is attractive to our
mail order customers;
- cost-effectively add new customers;
- cost-effectively design and produce appealing catalogs; and
- 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 would adversely affect our results of operations, perhaps
materially.
IF WE ARE UNABLE TO MEET OUR LABOR NEEDS, OUR PERFORMANCE WILL SUFFER.
Many of our employees are in entry-level or part-time positions that
historically have high rates of turnover. We may be unable to meet our labor
needs and control our costs due to external factors such as unemployment levels,
minimum wage legislation, and wage inflation. If we cannot attract and retain
quality employees, our performance will suffer and we may not be able to
successfully execute our growth strategy.
IF WE LOSE THE SERVICES OF KEY MEMBERS OF OUR MANAGEMENT, WE MAY NOT BE ABLE TO
MANAGE OUR OPERATIONS AND IMPLEMENT OUR GROWTH STRATEGY EFFECTIVELY.
Our future success depends, in large part, on the continued service of
Jim Thompson, our chief executive officer, and some of our other key executive
officers and managers who possess significant expertise and knowledge of our
business and markets. We do not maintain key person insurance on any of our
officers or managers. Any loss or interruption of the services of these
individuals could significantly reduce our ability to effectively manage our
operations and implement our growth strategy because we cannot assure you that
we would be able to find appropriate replacements for our key executives and
managers should the need arise.
WE ARE CONTROLLED BY ONE STOCKHOLDER, WHICH MAY GIVE RISE TO A CONFLICT OF
INTEREST.
Atlantic Equity Partners III, L.P. owns approximately 80.9% of
Holdings' common stock on a fully diluted basis. All of the stockholders of
Holdings are parties to a stockholders agreement that contains voting
arrangements that give Atlantic Equity Partners III voting control over the
election of all but one of our directors. As a result, Atlantic Equity Partners
III controls us and Holdings and effectively has the power to approve any action
requiring the approval of the holders of our stock, including adopting certain
amendments to our certificate of incorporation and approving mergers or sales of
all of our assets. In addition, as a result of Atlantic Equity Partners III's
ownership interest, conflicts of interest could arise with respect to
transactions involving business dealings between us and Atlantic Equity Partners
III or First Atlantic Capital Ltd., which operates Atlantic Equity Partners III,
potential acquisitions of businesses or properties, the issuance of additional
securities, the payment of dividends by us and other matters.
IF WE ARE UNABLE TO ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, OR IF WE ARE
ACCUSED OF INFRINGING ON A THIRD PARTY'S INTELLECTUAL PROPERTY RIGHTS, OUR NET
REVENUES AND PROFITS MAY DECLINE.
We currently hold a substantial number of industrial designs and
trademarks. The exclusive right to use these designs and trademarks has helped
establish our market share. The loss or reduction of any of our significant
proprietary rights could hurt our ability to distinguish our products from
competitors' products and retain our market share. In addition, our proprietary
products generate substantially higher margins than products we sell that are
produced by other manufacturers. If we are unable to effectively protect our
proprietary rights and less of our sales come from our proprietary products, our
net revenues and profits may decline.
Additionally, third parties may 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 could require us to cease using and
selling the allegedly infringing products, which may have a significant impact
on our net revenues and cause us to incur significant litigation costs and
expenses.
WE RELY ON OUR MANAGEMENT INFORMATION SYSTEMS FOR INVENTORY MANAGEMENT,
DISTRIBUTION AND OTHER FUNCTIONS. IF OUR INFORMATION SYSTEMS FAIL TO ADEQUATELY
PERFORM THESE FUNCTIONS OR IF WE EXPERIENCE AN INTERRUPTION IN THEIR OPERATION,
OUR BUSINESS AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.
The efficient operation of our business is dependent on our management
information systems. We rely on our management information systems to
effectively manage order entry, order fulfillment, point-of-sale, and inventory
replenishment processes. In 2000, we replaced our existing systems with a new,
company-wide, integrated management information system. In connection with
implementing this new system, we experienced significant difficulties that
resulted in lost sales, higher customer returns, increased operating costs and
higher inventory levels. Although we believe we have resolved these
difficulties, the failure of our management information systems to perform as we
anticipate could disrupt our business and could result in decreased sales,
increased overhead costs, excess inventory and product shortages, causing our
business and results of operations to suffer.
In addition, our management information systems are vulnerable to
damage or interruption from:
- earthquake, fire, flood and other natural disasters; and
- power loss, computer systems failure, Internet and
telecommunications or data network failure.
Any such interruption could have a material adverse effect on our business.
OUR PROFITABILITY WOULD BE ADVERSELY AFFECTED IF THE OPERATION OF OUR AUSTIN
CALL CENTER OR DISTRIBUTION CENTER WERE INTERRUPTED OR SHUT DOWN.
We operate a centralized call center and distribution center in Austin,
Texas. We receive most of our catalog orders and receive and ship a substantial
portion of our merchandise at our Austin facility. Any natural disaster or other
serious disruption to this facility due to fire, tornado or any other cause
would substantially disrupt our sales and would damage a portion of our
inventory, impairing our ability to adequately stock our stores. 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, disruption at our Austin facility would adversely affect our
profitability.
IF OUR SUPPLIERS FAIL TO DELIVER PRODUCTS ON A TIMELY BASIS AND IN SUFFICIENT
QUANTITIES, INCLUDING AS A RESULT OF A DISRUPTION AT THE PORT IN LONG BEACH,
CALIFORNIA, SUCH FAILURE COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS.
We depend on a limited number of suppliers for our clubheads and
shafts. In addition, some of our products require specifically developed
manufacturing techniques and processes which make it difficult to identify and
utilize alternative suppliers quickly. Any significant production delay or
inability of current suppliers to timely deliver products including clubheads
and shafts in sufficient quantities, or the transition to other suppliers, could
have a material adverse effect on our results of operations.
We import substantially all of our proprietary products from Asia, and
a significant amount of the products we buy from vendors to resell through our
distribution channels is shipped to us from Asia If a disruption occurs in the
operations of used ports, we may begin to ship some of our products from Asia by
air freight, and many of our suppliers may also begin to ship their products by
air freight. Shipping by air freight is 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 used ports would have a material
adverse effect on our results of operations.
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 products, including
product liability. Our existing or future 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 operation 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
private label products sold in the last 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 the nine months ended September 28, 2002, we recognized $0.3 million
in product return and replacement expenses. In the nine months ended September
27, 2003, we did not recognize any product-return and replacement expenses.
AN INCREASE IN THE COSTS OF MAILING, PAPER, AND PRINTING OUR CATALOGS WOULD
DECREASE OUR NET INCOME.
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 net income.
A DISRUPTION IN THE SERVICE OF OUR PRIMARY DELIVERY SERVICE FOR OUR
DIRECT-TO-CONSUMER SALES MAY DECREASE OUR PROFITABILITY.
During the three and nine month period ended September 27, 2003, we
generated approximately 30.6% and 35.9% of our net revenues through our
direct-to-consumer sales. We use UPS for substantially all of our ground
shipments of products sold through our catalogs and Internet site to our
customers in the United States. Any significant interruption in UPS's services
would
impede our ability to deliver our products to our direct-to-consumer channel,
which could cause us to lose sales and/or customers. In the event of an
interruption in UPS's services, we may not be able to engage alternative
carriers to deliver our products in a timely manner on equally favorable terms.
If we incur higher shipping costs, we may be unable to pass these costs on to
our customers, which could decrease our profitability.
CURRENT AND FUTURE TAX REGULATIONS MAY ADVERSELY AFFECT OUR DIRECT-TO-CONSUMER
BUSINESS AND NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS.
Our direct-to-consumer business may be adversely affected by state
sales and use taxes as well as the regulation of Internet commerce. We currently
must collect taxes for less than half of our catalog and Internet sales. An
unfavorable change in state sales and use taxes could adversely affect our
business and results of operations. In addition, future regulation of the
Internet, including the imposition of taxes on Internet commerce, could affect
the development of our Internet business and negatively affect our ability to
increase our net revenues.
IF WE DO NOT ANTICIPATE AND RESPOND TO THE CHANGING PREFERENCES OF OUR
CUSTOMERS, OUR REVENUES COULD SIGNIFICANTLY DECLINE AND WE COULD BE REQUIRED TO
TAKE SIGNIFICANT MARKDOWNS IN INVENTORY.
Our success depends, in large part, on our ability to identify and
anticipate the changing preferences of our customers and stock our stores with a
wide selection of quality merchandise that appeals to their preferences. Our
customers' preferences for merchandise and particular brands vary from location
to location, and may vary significantly over time. We cannot guarantee that we
will accurately identify or anticipate the changing preferences of our customers
or stock our stores with merchandise that appeals to them. If we do not
accurately identify and anticipate our customers' preferences, we may lose sales
or we may overstock merchandise, which may require us to take significant
markdowns on our inventory. In either case, our revenues could significantly
decline and our business and financial results may suffer.
WE MAY INCUR MATERIAL COSTS OR LIABILITIES UNDER ENVIRONMENTAL LAWS, WHICH MAY
MATERIALLY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
We are subject to various foreign, federal, state, and local
environmental protection, chemical control, and health and safety laws and
regulations. We own and lease real property, and some environmental laws hold
current or previous owners or operators of businesses and real property liable
for contamination on or originating from that property, even if they did not
know of and were not responsible for the contamination. The presence of
hazardous substances on any of our properties or the failure to meet
environmental regulatory requirements may materially adversely affect our
ability to use or to sell the property or to use the property as collateral for
borrowing, and may cause us to incur substantial remediation or compliance
costs. If hazardous substances are released from or located on any of our
properties, we could incur substantial liabilities through a private party
personal injury or property damage claim or a claim by a governmental entity for
other damages.
In addition, some of the products we sell contain hazardous or
regulated substances, such as solvents and lead. Environmental laws may impose
liability on any person who disposes of hazardous substances, regardless of
whether the disposal site is owned or operated by such person.
If we incur material costs or liabilities in the future under
environmental laws for any reason, our results of operations may be materially
adversely affected.
OUR SALES COULD DECLINE IF WE ARE UNABLE TO PROCESS INCREASED TRAFFIC OR OUR
WEBSITE OR TO PREVENT UNAUTHORIZED SECURITY BREACHES.
A key element of our strategy is to generate a high volume of traffic
on, and use of, our website. Accordingly, the satisfactory performance,
reliability and availability of our website, transaction processing systems and
network infrastructure are critical to our reputation and our ability to attract
and retain customers, as well as maintain adequate customer service levels. Our
Internet revenues will depend on the number of visitors who shop on our website
and the volume of orders we can fill on a timely basis. Problems with our
website or order fulfillment performance would reduce the volume of goods sold
and the attractiveness of our merchandise and could also adversely affect
consumer perception of our brand name. We may experience periodic system
interruptions from time to time. If there is a substantial increase in the
volume of traffic on our website or the number of orders placed by customers, we
may be required to expand and upgrade further our technology, transaction
processing systems and network infrastructure. There can be no assurance that we
will be able to accurately project the rate or timing of increases, if any, in
the use of our website, or that we will be able to expand and upgrade our
systems and infrastructure to accommodate such increases on a timely basis.
The success of our website depends on the secure transmission of
confidential information over public networks. We rely on encryption and
authentication technology licensed from third parties to provide the security
and authentication necessary to effect secure transmission of confidential
information, such as customer credit card numbers. In addition, we maintain an
extensive confidential database of customer profiles and transaction
information. There can be no assurance 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 algorithms we use to protect
customer transaction and personal data contained in our customer database. If
any such compromise of our security were to occur, it could have a material
adverse effect on our reputation, business, operating results and financial
condition. A party who is able to circumvent our security measures could
misappropriate proprietary information or cause interruptions in our operations.
We may be required to expend significant capital and other resources to protect
against such security breaches or to alleviate problems caused by such breaches.
OUR ACQUISITION OF DON SHERWOOD GOLF AND TENNIS WORLD, AND ANY FUTURE
ACQUISITIONS, COULD NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS IF UNANTICIPATED
LIABILITIES ARE DISCOVERED OR IF WE FAIL TO SUCCESSFULLY INTEGRATE THE ACQUIRED
BUSINESSES INTO OUR EXISTING OPERATIONS.
We completed our acquisition of Don Sherwood Golf and Tennis World in
July 2003. Our failure to successfully address the risks associated with this
acquisition could harm our ability to fully integrate and market products. We
may discover liabilities and risks associated with this acquisition that were
not discovered in our due diligence prior to completing the acquisition.
Although a portion of the purchase price was placed in escrow to cover such
liabilities, it is possible that the actual amounts required to cover such
liabilities will exceed the escrow amount. Additionally, we may acquire other
businesses in the future, which would complicate our management tasks. We may
need to integrate widely dispersed operations that have different and unfamiliar
corporate cultures. These integration efforts may not succeed or may distract
management's attention from existing business operations. Our failure to
successfully integrate Don Sherwood Golf and Tennis World and future
acquisitions into our existing operations could materially harm our business.
Item 4. Controls and Procedures
Our management, including our chief executive officer and chief
financial offer, evaluated the effectiveness of the design and operation of the
company's disclosure controls and procedures as of September 27, 2003. Based
upon, and as of the date of, that evaluation, our chief executive officer and
chief financial offer concluded that the disclosure controls and procedures were
effective to ensure that information required to be disclosed in the reports we
file and submit under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
There have been no significant changes in our internal control over
financial reporting during the quarter ended September 27, 2003 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART II- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On May 28, 2003, we issued 83,333 shares of our common stock to Thomas
G. Hardy, one of our directors, for an aggregate purchase price of $249,999, or
$3.00 per share. We issued these shares without registration under the
Securities Act of 1933, as amended, in reliance on the exemption provided by
Section 4(2) of the Securities Act as a transaction by an issuer not involving a
public offering.
On July 24, 2003, we issued 1,427,623 shares of our common stock to
Atlantic Equity Partners III, L.P., our majority stockholder, for an aggregate
purchase price of $4,282,869, or $3.00 per share. We issued these shares without
registration under the Securities Act of 1933, as amended, in reliance on the
exemption provided by Section 4(2) of the Securities Act as a transaction by an
issuer not involving a public offering. The proceeds from the issuance of common
stock were used to fund the acquisition of Don Sherwood Golf and Tennis World.
On July 24, 2003, we issued 5,710 shares of our common stock to Thomas
G. Hardy, one of our directors, for an aggregate purchase price of $17,131, or
$3.00 per share. We issued these shares without registration under the
Securities Act of 1933, as amended, in reliance on the exemption provided by
Section 4(2) of the Securities Act as a transaction by an issuer not involving a
public offering. The proceeds from the issuance of common stock were used to
fund the acquisition of Don Sherwood Golf and Tennis World.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
31.1 Rule 13a-14(a)/15d-14(a) Certification of James D. Thompson
31.2 Rule 13a-14(a)/15d-14(a) Certification of Virginia Bunte
32 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
None.
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 thereunto duly authorized.
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
By: /s/ James D. Thompson
----------------------------
James D. Thompson
Chief Executive Officer, President and Director
(Principal Executive Officer and Authorized Signatory)
Date: November 10, 2003
By: /s/ Virginia Bunte
----------------------------
Virginia Bunte
Chief Financial Officer
(Principal Financial Officer and Authorized Signatory)
Date: November 10, 2003
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
31.1 Rule 13a-14(a)/15d-14(a) Certification of James D. Thompson
31.2 Rule 13a-14(a)/15d-14(a) Certification of Virginia Bunte
32 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002