SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 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
Incorporation or Organization) Identification No.)
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 [ ] No [X]
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 June 28, 2003
--------------------- ----------------------------
$.001 20,161,264 Shares
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at June 28, 2003 (unaudited) and
December 28, 2002 1
Consolidated Statements of Operations for the three and six months
ended June 28, 2003 and June 29, 2002 (unaudited) 3
Consolidated Statements of Cash Flows for the six
months ended June 28, 2003 and June 29, 2002 (unaudited) 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 32
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 28, DECEMBER 28,
2003 2002
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 20,010,160 $ 11,412,460
Receivables, net of allowances of $323,679 at June 28, 2003 and $242,643 at
December 28, 2002 4,899,201 1,639,120
Inventories, net of reserves of $1,495,966 at June 28, 2003 and $818,816 at
December 28, 2002 45,018,264 32,351,880
Deferred tax assets 67,905 67,905
Prepaids and other current assets 2,150,256 2,119,390
------------ ------------
Total current assets 72,145,786 47,590,755
Property and equipment:
Land and buildings 21,029,531 21,017,551
Equipment, furniture, fixtures and autos 10,117,486 9,270,340
Leasehold improvements and construction in progress 7,921,515 7,015,985
------------ ------------
39,068,532 37,303,876
Less: accumulated depreciation and amortization (3,685,549) (1,258,676)
------------ ------------
Net property and equipment 35,382,983 36,045,200
Goodwill 34,995,233 34,948,016
Tradename 11,158,000 11,158,000
Trademarks 15,344,771 15,093,396
Customer database, net of accumulated amortization of $283,267 at
June 28, 2003 and $94,422 at December 28, 2002 3,115,938 3,304,783
Deferred tax assets 4,274,161 4,274,161
Debt issuance costs 7,240,468 7,596,561
------------ ------------
Total assets $183,657,340 $160,010,872
============ ============
1
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 28, DECEMBER 28,
2003 2002
------------ ------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 38,207,345 $ 17,822,015
Accrued expenses and other current liabilities 13,738,460 12,822,302
Lines of credit - -
------------ ------------
Total current liabilities 51,945,805 30,644,317
Long-term debt, less current maturities 76,386,700 75,380,045
Deferred rent 798,247 513,324
------------ ------------
Total liabilities 129,130,752 106,537,686
Stockholders' equity:
Common stock -$.001 par value; 40,000,000 shares authorized; 20,161,264 and
20,077,931 shares issued and outstanding at June 28, 2003 and December 28,
2002, respectively 20,161 20,078
Restricted common stock units -$.001 par value; 755,935 and 839,268 shares
issued and outstanding at June 28, 2003 and December 28, 2002, respectively 756 839
Additional paid-in capital 55,990,042 55,990,042
Other comprehensive income 97,739 48,148
Accumulated deficit (1,582,110) (2,585,921)
------------ ------------
Total stockholders' equity 54,526,588 53,473,186
------------ ------------
Total liabilities and stockholders' equity $183,657,340 $160,010,872
============ ============
See accompanying notes.
2
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
--------------------------------- ----------------------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
2003 2002 2003 2002
(SUCCESSOR) (PREDECESSOR) (SUCCESSOR) (PREDECESSOR)
------------ ------------- ----------- -------------
Net revenues $125,086,226 $117,616,105 $79,256,107 $ 70,155,932
Cost of products sold 84,424,961 75,872,738 53,452,618 45,164,727
------------ ------------ ----------- ------------
Gross profit 40,661,265 41,743,367 25,803,489 24,991,205
Selling, general and administrative 33,439,639 32,003,879 19,180,801 17,571,536
Store pre-opening expenses 162,808 86,518 162,808 86,518
Amortization of deferred compensation - 1,114,444 - 968,597
------------ ------------ ----------- ------------
Total operating expenses 33,602,447 33,204,841 19,343,609 18,626,651
Operating income 7,058,818 8,538,526 6,459,880 6,364,554
------------ ------------ ----------- ------------
Interest expense 5,451,022 3,121,676 2,812,526 1,532,720
Interest income (21,627) (200,879) (14,150) (88,467)
Other income (47,591) (2,301,620) (41,898) (75,381)
Other expense 4,043 - 1,709 -
Minority interest - 624,853 - 401,445
------------ ------------ ----------- ------------
Income before income taxes 1,672,971 7,294,496 3,701,693 4,594,237
Income tax expense 669,160 457,830 1,480,479 340,882
------------ ------------ ----------- ------------
Income from continuing operations 1,003,811 6,836,666 2,221,214 4,253,355
------------ ------------ ----------- ------------
Loss from discontinued operations, including
loss on disposal of $274,777 for the six
month period ended June 29, 2002 - (244,589) - (270,798)
------------ ------------ ----------- ------------
Net income $ 1,003,811 $ 6,592,077 $ 2,221,214 $ 3,982,557
============ ============ =========== ============
See accompanying notes.
3
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
------------------------------------
JUNE 28, JUNE 29,
2003 2002
(SUCCESSOR) (PREDECESSOR)
----------- -------------
OPERATING ACTIVITIES
Net income $ 1,003,811 $ 6,592,077
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 2,421,441 2,762,294
Amortization of intangible assets 188,845 31,959
Amortization of deferred compensation - 1,114,444
Amortization of debt issue costs and debt discount 1,445,159 1,019,824
Stock compensation to non-employee - 19,127
Minority interest - 624,853
Gainon sale of intellectual property - (2,215,735)
Changes in operating assets and liabilities:
Accounts receivable (3,260,081) (2,953,768)
Inventories (12,222,069) (7,114,047)
Prepaid and other assets (30,866) (1,125,066)
Accounts payable 20,385,330 4,386,994
Accrued expenses and other current liabilities 603,658 (1,123,283)
Deferred rent 284,923 (76,512)
------------ ------------
Net cash provided by operating activities 10,820,151 1,943,161
INVESTING ACTIVITIES
Capital expenditures (1,758,141) (1,033,534)
Proceeds from sale of intellectual property - 3,313,022
Purchase of assets and other (430,407) -
------------ ------------
Net cash provided by (used in) investing activities (2,188,548) 2,279,488
FINANCING ACTIVITIES
Principal payments on lines of credit (7,801,478) (9,717,963)
Proceeds from lines of credit 7,801,478 9,684,400
Principal payments on term note - (8,916,671)
Dividends paid - (262,500)
Dividends paid to minority interest owners - (3,237,500)
Proceeds from issuance of common stock 249,999 -
Repurchase of restricted common stock units (249,999) -
Debt issuance costs (82,411) -
------------ ------------
Net cash used in financing activities (82,411) (12,450,234)
Effect of exchange rate changes on cash 48,508 100,919
------------ ------------
Change in cash and cash equivalents 8,597,700 (8,126,666)
Cash and cash equivalents, beginning of period 11,412,460 39,549,924
------------ ------------
Cash and cash equivalents, end of period $ 20,010,160 $ 31,423,258
============ ============
4
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
SIX MONTHS ENDED
-------------------------------
JUNE 28, JUNE 29,
2003 2002
(SUCCESSOR) (PREDECESSOR)
----------- -------------
Supplemental cash flow information:
Interest payments $ 2,999,874 $ 2,193,164
Tax payments $ 84,537 $ 200,391
Amortization of discount on senior subordinated notes - $ 855,616
Amortization of discount on senior secured notes $ 1,006,655 -
See accompanying notes.
5
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 28, 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 28 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 six months ended June 29, 2002 and cash flows for the six months ended
June 29, 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 six months ended June 28, 2003 and cash flows for
the six months ended June 28, 2003 reflects 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 six month periods ended June 28, 2003 and June 29,
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.
6
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 28, 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 June 28, 2003 and June 29, 2002 both consist of thirteen
weeks. The year to date periods ended June 28, 2003 and June 29, 2002 both
consist of twenty-six 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:
SIX MONTHS ENDED THREE MONTHS ENDED
------------------------------ ------------------------------
JUNE 28, 2003 JUNE 29, 2002 JUNE 28, 2003 JUNE 29, 2002
(SUCCESSOR) (PREDECESSOR) (SUCCESSOR) (PREDECESSOR)
------------- ------------- ------------- -------------
Net income - as reported $ 1,003,811 $ 6,592,077 $ 2,221,214 $ 3,982,557
Total stock-based compensation cost, net of related tax effects
included in the determination of net income as reported - 1,114,444 - 968,597
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 (7,948) (1,203,842) (7,948) (959,812)
----------- ----------- ----------- -----------
Pro forma net income $ 995,863 $ 6,502,679 $ 2,213,266 $ 3,991,342
=========== =========== =========== ===========
7
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 28, 2003
2. BUSINESS COMBINATIONS
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 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.
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 142") was issued. SFAS 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 142. As a result, the Company no
longer amortizes its acquired trademarks, thereby eliminating estimated
amortization of approximately $41,000 and $74,000, respectively, for the three
and six months ended June 29, 2002.
8
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 28, 2003
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 $ (283,267) $ 3,115,938
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 six months ended June 28, 2003 was
$94,422 and $188,845, 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 June 28, 2003 there was no
amounts outstanding on the Senior Credit Facility and $76.4 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.
The following represents certain stand-alone information for the six and three
months ended June 28, 2003 for the issuer and certain guarantors of the Senior
Secured Notes and the Senior Credit Facility:
Golfsmith Golfsmith
Holdings Golfsmith Canada Europe Total
-------- ------------- ----------- ----------- -------------
Assets...................... $ - $ 179,732,155 $ 744,404 $ 3,180,781 $ 183,657,340
Debt........................ - $ 76,386,700 - - $ 76,386,700
Net revenues for the six
months ended June
28, 2003.................... - $ 120,100,376 $ 1,866,070 $ 3,119,780 $ 125,086,226
Net income for the six
months ended June
28, 2003.................... - $ 265,833 $ 446,881 $ 291,097 $ 1,003,811
Net revenues for the
three months ended
June 28, 2003............... - $ 75,668,513 $ 1,320,641 $ 2,266,953 $ 79,256,107
Net income for the
three months ended
June 28, 2003............... - $ 1,521,305 $ 350,039 $ 349,870 $ 2,221,214
The Company offers warranties to its customers depending on the specific product
and terms of the goods purchased. A typical warranty program requires that the
Company replace defective products within a specified time period from the date
of sale. The Company records warranty costs as they are incurred and
historically such costs have not been material. During the three and six months
ended June 28, 2003, no amounts have been accrued or paid relating to product
warranties. The Company accrued approximately $0.3 million for product
warranties during the three and six month period ended June 29, 2002.
9
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 28, 2003
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The Company's accrued expenses and other current liabilities are comprised of
the following at June 28, 2003 and December 28, 2002, respectively:
JUNE 28, DECEMBER 28,
2003 2002
----------- ------------
Salaries and benefits $ 2,069,399 $ 2,206,568
Interest 2,666,234 1,660,246
Allowance for returns reserve 1,156,056 1,098,029
Gift certificates 3,317,866 3,785,669
Taxes 2,758,033 2,456,960
Other 1,770,872 1,614,830
----------- -----------
Total $13,738,460 $12,822,302
=========== ===========
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 require variable
accounting treatment until exercised or expired. Golfsmith recorded deferred
compensation of $0 and $3,711,054 related to the repriced options during the six
months ended June 28, 2003 and June 29, 2002, respectively. The deferred charge
was being amortized over the average remaining life of the repriced options. For
the three and six months ended June 29, 2002, Golfsmith recorded $968,597 and
$1,114,444 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 six month period ended June 29, 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 six months ended June 29, 2002. Revenues
generated by this closed store during the three and six month period ended June
29, 2002 were $983,000 and $2.0 million, respectively. Cash flows used by this
closed store during the three and six months ended June 29, 2002 were $348,000
and $383,000, respectively. 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.
10
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 28, 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 (in thousands):
SIX MONTHS ENDED THREE MONTHS ENDED
--------------------------------------------------------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
(Successor) (Predecessor) (Successor) (Predecessor)
----------- ------------- ----------- -------------
Net income...................... $ 1,003,811 $ 6,592,077 $ 2,221,214 $ 3,982,557
Translation adjustments......... 49,592 102,571 59,865 128,471
----------- ----------- ----------- -----------
Total comprehensive income...... $ 1,053,403 $ 6,694,648 $ 2,281,079 $ 4,111,028
=========== =========== =========== ===========
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 six months ended June 29, 2002.
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.
12. RECENTLY ISSUED ACCOUNTING STANDARDS
Costs Associated with Exit or Disposal Activities
In June 2002 the FASB issued SFAS No. 146, Accounting For Costs Associated With
Exit or Disposal Activities. SFAS No. 146 requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of commitment to an exit or disposal plan. This Statement is
effective for exit or disposal activities initiated after December 31, 2002. The
adoption of SFAS No. 146 has not had a material impact on the Company's
financial statements.
Financial Guarantees
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ("FIN 45"). FIN 45 requires a company to recognize an
initial liability for the fair value of an obligation it assumes under a
guarantee, as well as its ongoing obligation over the term of the guarantee. The
offsetting entry of recognizing a liability depends on the circumstances in
which the guarantee was issued. Additionally, FIN 45 elaborates on and clarifies
existing disclosure requirements for most guarantees. The initial recognition
provisions of FIN 45 apply to guarantees issued or modified after December 31,
2002. The adoption of FIN 45's initial recognition and measurement provisions
has not had a material effect on the Company's consolidated financial
statements. The disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002, and have been
incorporated into the Company's disclosures of guarantees in its financial
statements.
Consideration Received from a Vendor
In January 2003, the Emerging Issues Task Force ("EITF") issued Issue No. 02-16,
Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor. Issue No. 02-16, Issue No. 1, states that cash
consideration received
11
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 28, 2003
by a customer (or a reseller) from a vendor is presumed to be a reduction of the
prices of the vendor's products or services and should, therefore, be
characterized as a reduction of cost of sales when recognized in the customer's
income statement. However, that presumption is overcome when the consideration
is either (a) a payment for assets or services delivered to the vendor, in which
case the cash consideration should be characterized as revenue (or other income,
as appropriate) when recognized in the customer's income statement, or (b) a
reimbursement of costs incurred by the customer to sell the vendor's products,
in which case the cash consideration should be characterized as a reduction of
that cost when recognized in the customer's income statement. The consensus on
Issue 1 should be applied to fiscal periods beginning after December 15, 2002.
Upon application of the consensus on Issue 1, income statements for prior
periods presented should be reclassified to comply with that consensus, provided
that the recasting of prior-period financial statements does not result in a
change to net income of those prior periods. The adoption of Issue No. 02-16,
Issue 1 did not have a material impact on the Company's financial statements and
no prior period reclassifications were necessary.
Issue No. 02-16, Issue No. 2, states that a rebate or refund of a specified
amount of cash consideration that is payable pursuant to a binding arrangement
only if the customer completes a specified cumulative level of purchases or
remains a customer for a specified time period should be recognized as a
reduction of the cost of sales based on a systematic and rational allocation of
the cash consideration offered to each of the underlying transactions that
results in progress by the customer toward earning the rebate or refund provided
the amounts are probable and reasonably estimable. If the rebate or refund is
not probable and reasonably estimable, it should be recognized as the milestones
are achieved. Issue 2 is effective for arrangements entered into after November
21, 2002. The adoption of Issue No. 02-16, Issue 2 did not have a material
impact on the Company's financial statements.
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 to this majority stockholder of the Company. During the three and six
months ended June 28, 2003, the Company paid $150,000 and $300,000,
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 June 28, 2003, the Company
had no amounts payable to this majority stockholder.
14. SUBSEQUENT EVENTS
On July 24, 2003, $1,107,579 was paid to the Company from the selling
stockholders escrow account (see Note 2) for the repayment of certain
obligations owed by the selling stockholders that were paid by the Company. The
remaining contingent consideration will be released from escrow on April 15,
2004 as discussed in Note 2.
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
approximately $8.8 million, excluding acquisition costs. 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. The purchase price will be allocated to the
assets acquired and liabilities assumed based on their respective fair values.
Any excess purchase price over the net assets acquired will be allocated to cost
in excess of acquired net assets.
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.
12
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:
- 28 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.
13
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 six months ended June 28, 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 6 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
14
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 six months ended June 28,
2003, we do not expect the inventory shrinkage as a percentage of net revenues
to exceed fiscal 2002 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 based on our projection of estimated future
discounted cash flows annually, as well as whenever events or changes in
circumstances indicate that the carrying amounts of these assets may not be
recoverable. 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, which supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, based on our projection of estimated future undiscounted cash
flows annually, as well as 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 discount rate determined to be
commensurate with the risk inherent in our current business model. 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 7% 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.
15
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 six months ended June 29, 2002. We
did not close any stores in the six months ended June 28, 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
Costs Associated with Exit or Disposal Activities
In June 2002 the FASB issued SFAS No. 146, Accounting For Costs Associated With
Exit or Disposal Activities. SFAS No. 146 requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of commitment to an exit or disposal plan. SFAS No. 146 is effective
for exit or disposal activities initiated after December 31, 2002. The adoption
of SFAS No. 146 has not had a material impact on our financial statements.
Financial Guarantees
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ("FIN 45"). FIN 45 requires a company to recognize an
initial liability for the fair value of an obligation it assumes under a
guarantee, as well as its ongoing obligation over the term of the guarantee. The
offsetting entry of recognizing a liability depends on the circumstances in
which the guarantee was issued. Additionally, FIN 45 elaborates on and clarifies
existing disclosure requirements for most guarantees. The initial recognition
provisions of FIN 45 apply to guarantees issued or modified after December 31,
2002. The adoption of FIN 45's initial recognition and measurement provisions
has not had a material effect on our consolidated financial statements. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002, and have been incorporated into
our disclosures of guarantees in our financial statements included in Item 1,
"Financial Statements," in this quarterly report.
Consideration Received from a Vendor
In January 2003, the Emerging Issues Task Force ("EITF") issued Issue No. 02-16,
Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor. Issue No. 1 of Issue No. 02-16 states that cash
consideration received by a customer (or a reseller) from a vendor is presumed
to be a reduction of the prices of the vendor's products or services and should,
therefore, be characterized as a reduction of cost of sales when recognized in
the customer's income statement. However, that presumption is overcome when the
consideration is either (a) a payment for assets or services delivered to the
vendor, in which case the cash consideration should be characterized as revenue
(or other income, as appropriate) when recognized in the customer's income
statement, or (b) a reimbursement of costs incurred by the customer to sell the
vendor's products, in which case the cash consideration should be characterized
as a reduction of that cost when recognized in the customer's income statement.
The consensus on Issue 1 should be applied to fiscal periods beginning after
December 15, 2002. Upon application of the consensus on Issue 1, income
statements for prior periods presented should be reclassified to comply with
that consensus, provided that the recasting of prior-period financial statements
does not result in a change to net income of those prior periods. The adoption
of Issue No. 02-16, Issue 1 did not have a material impact on our financial
statements and no prior period reclassifications were necessary.
Issue No. 2 of Issue No. 02-16 states that a rebate or refund of a specified
amount of cash consideration that is payable pursuant to a binding arrangement
only if the customer completes a specified cumulative level of purchases or
remains a customer for a specified time period should be recognized as a
reduction of the cost of sales based on a systematic and rational allocation of
the cash consideration offered to each of the underlying transactions that
results in progress by the customer toward earning the rebate or refund provided
the amounts are probable and reasonably estimable. If the rebate or refund is
not probable and reasonably
16
estimable, it should be recognized as the milestones are achieved. Issue 2 is
effective for arrangements entered into after November 21, 2002. The adoption of
Issue No. 02-16, Issue 2 did not have a material impact on our financial
statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 28, 2003 (SUCCESSOR) COMPARED TO THREE MONTHS ENDED JUNE
29, 2002 (PREDECESSOR)
We had net revenues of $79.3 million, operating income of $6.5 million
and net income of $2.2 million in the three months ended June 28, 2003 compared
to net revenues of $70.2 million, operating income of $6.4 million and net
income of $4.0 million in the three months ended June 29, 2002.
The $9.1 million increase in net revenues from the three months ended
June 29, 2002 to the three months ended June 28, 2003 was comprised of a $3.4
million increase, or 8.4%, in comparable store revenues, a $4.5 million increase
in revenue generated by five retail stores that were opened subsequent to June
29, 2002, a $0.9 million increase in revenues in our direct to consumer channel,
and a $0.3 million increase in international revenues.
For the three months ended June 28, 2003, gross profit was $25.8
million, or 32.6% of net revenues, compared to $25.0 million, or 35.6% of net
revenues, for the three months ended June 29, 2002. Increased net revenues in
the three months ended June 28, 2003 compared to the three months ended June 29,
2002 led to slightly 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. Additionally, in the three month
period ended June 28, 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 $1.6 million to
$19.2 million for the three months ended June 28, 2003 from $17.6 million for
the three months ended June 29, 2002. We had five additional retail stores in
operation during the three months ended June 28, 2003 compared to the three
months ended June 29, 2002, resulting in an increase in selling, general and
administrative expenses of $0.9 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 the redesign of our website.
During the three months ended June 28, 2003, we incurred approximately
$0.2 million in pre-opening expenses related to the opening of two new retail
locations during the second quarter of fiscal 2003. During the three months
ended June 29, 2002, we incurred approximately $0.1 million in pre-opening
expenses related to the opening of one new retail location during the second
quarter of fiscal 2002. Costs associated with the opening of a new store are
expensed as incurred.
Amortization of deferred compensation was approximately $1.0 million
for the three months ended June 29, 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 June 28, 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 June 29, 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 $2.8 million and $1.5 million in the
three months ended June 28, 2003 and June 29, 2002, respectively. Interest
expense increased as debt balances during the three months ended June 28, 2003
were almost three times higher than during the three months ended June 29, 2002.
Approximately $0.2 million of amortization of debt issuance costs resulting from
the new senior secured notes during the three months ended June 28, 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 June 29,
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 $14,000 and $88,000 in the three months ended June 28, 2003 and
June 29, 2002, respectively. The decrease in interest income was the result of
overall lower cash and cash equivalent balances combined with lower interest
rates.
17
Other income, net of other expenses was approximately $40,000 for the
three months ended June 28, 2003, compared to other income, net of other
expenses of $75,000 for the three months ended June 29, 2002. The decrease is
attributable to the difference in the exchange rate variance for the two
periods.
We recognized a loss of $0.3 million in the three months ended June 29,
2002 from discontinued operations related to the operations and final closing
costs associated with closing one retail location during the three months ended
June 29, 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 three months ended June 29, 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 have been eliminated from each of the consolidated
balance sheets presented in this quarterly report.
Minority interest expense during the three months ended June 29, 2002
of $0.4 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 June 28, 2003, our income tax expense was $1.5 million,
compared to income tax expense of $0.3 million for the three months ended June
29, 2002 which related to our European and Canadian operations as well as
certain state income taxes.
SIX MONTHS ENDED JUNE 28, 2003 (SUCCESSOR) COMPARED TO SIX MONTHS ENDED JUNE 29,
2002 (PREDECESSOR)
We had net revenues of $125.1 million, operating income of $7.1 million
and net income of $1.0 million in the six months ended June 28, 2003 compared to
net revenues of $117.6 million, operating income of $8.5 million and net income
of $6.6 million in the six months ended June 29, 2002.
The $7.5 million increase in net revenues from the six months ended
June 29, 2002 to the six months ended June 28, 2003 was comprised of a $2.8
million increase, or 4.4%, in comparable store revenues, a $6.3 million increase
in revenues generated by five retail stores that were opened subsequent to June
29, 2002, and a $0.1 million increase in international revenues. These revenue
increases were partially offset by a decline of $1.7 million in revenues in our
direct to consumer channel.
For the six months ended June 28, 2003, gross profit was $40.7 million,
or 32.5% of net revenues, compared to $41.7 million, or 35.5% of net revenues,
for the six months ended June 29, 2002. The decline in gross profit was largely
the result of higher sales in lower margin merchandise categories such as
equipment. Additional declines in gross profit were realized as a result of
multiple sales promotions that occurred during the six months ended June 28,
2003. Additionally, in the six month period ended June 28, 2003, we incurred
approximately $0.4 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 $1.4 million to
$33.4 million for the six months ended June 28, 2003 from $32.0 million for the
six months ended June 29, 2002. We had five additional retail stores in
operation during the six months ended June 28, 2003 compared to the six months
ended June 29, 2002, resulting in an increase in selling, general and
administrative expenses of $0.3 million. We also incurred increased costs
relating to and resulting from the merger transaction on October 15, 2002,
including a $0.5 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 $0.6 million related to
professional fees associated with our filings with the Securities and Exchange
Commission and the redesign of our website.
During the six months ended June 28, 2003, we incurred approximately
$0.2 million in pre-opening expenses related to the opening of two new retail
locations during the second quarter of fiscal 2003. During the six months ended
June 29, 2002, we incurred approximately $0.1 million in pre-opening expenses
related to the opening of one new retail location during the second quarter of
fiscal 2002. Costs associated with the opening of a new store are expensed as
incurred.
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Amortization of deferred compensation was approximately $1.1 million
for the six months ended June 29, 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 six months ended June 28, 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 six months ended June 29, 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 $5.5 million and $3.1 million in the six
months ended June 28, 2003 and June 29, 2002, respectively. Interest expense
increased as debt balances during the six months ended June 28, 2003 were almost
three times higher than during the six months ended June 29, 2002. Approximately
$0.4 million of amortization of debt issuance costs resulting from the new
senior secured notes during the six months ended June 28, 2003 as compared to
approximately $0.2 million of amortization of debt issuance costs related to the
senior subordinated notes during the six months ended June 29, 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
$22,000 and $0.2 million in the six months ended June 28, 2003 and June 29,
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 $44,000 for the
six months ended June 28, 2003, compared to other income, net of other expenses
of $2.3 million for the six months ended June 29, 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 six months ended June 29,
2002 from discontinued operations related to the operations and final closing
costs associated with closing one retail location during the three months ended
June 29, 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 six months ended June 29, 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 six months ended June 29, 2002 of
$0.6 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 six
months ended June 28, 2003, our income tax expense was $0.7 million, compared to
income tax expense of $0.5 million for the six months ended June 29, 2002 which
related to our European and Canadian operations as well as certain state income
taxes.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
As of June 28, 2003 we had $20.0 million in cash and cash equivalents
and outstanding debt obligations of $76.4 million.
Operating activities
Net cash provided by operating activities was $10.8 million for the six
months ended June 28, 2003, compared to $1.9 million net cash used in operating
activities for the six months ended June 29, 2002. The increase in net cash
provided by operations during the six months ended June 28, 2003 as compared to
the six months ended June 29, 2002 is primarily attributable to the increase of
accounts payable to $20.4 million in the six months ended June 28, 2003 as
compared to $4.4 million in the six months ended June 29, 2002. This increase in
accounts payable resulted from extended payment terms from vendors as well as
having five more store locations during the second quarter of 2003 than the
second quarter of 2002, which required higher
19
inventory levels. This increase was partially offset by a decrease in net income
for the six months ended June 28, 2003 to $1.0 million as compared to $6.6
million for the six months ended June 29, 2002 and by an increase in cash used
to purchase inventory from $7.1 million for the six months ended June 29, 2002
to $12.2 million for the six months ended June 28, 2003. This increase in cash
used for inventory relates largely to having five additional stores during the
second 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. In addition, in the six months ended June 29, 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 $2.2 million for the six
months ended June 28, 2003, compared to net cash provided by investing
activities of $2.3 million for the six months ended June 29, 2002.
Net cash used in investing activities for the six months ended June 28,
2003 of $2.2 million was the result of capital expenditures of $1.8 million and
$0.4 million relating to asset purchases. For the six months ended June 28,
2003, capital expenditures were comprised of $1.4 million for new and existing
stores and $0.4 million for corporate projects.
Net cash provided by investing activities for the six months ended June
29, 2002 of $2.3 million was the result of proceeds from the sale of certain
intellectual property of $3.3 million, which was partially offset by $1.0
million in capital expenditures. For the six months ended June 29, 2002, capital
expenditures were comprised of $0.4 million for new and existing stores and $0.6
million for corporate projects.
Financing activities
Net cash used in financing activities was $0.1 million for the six
months ended June 28, 2003, compared to net cash used in financing activities of
$12.5 million for the six months ended June 29, 2002.
Net cash used in financing activities for the six months ended June 28,
2003 of $0.1 million was comprised of various debt issuance costs associated
with the issuance of our senior secured notes. Our borrowings of $7.8 million
under our senior credit facility were repaid in full during the period.
For the six months ended June 29, 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
20
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 June 28, 2003, we had no 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 June 28, 2003 are as follows:
PAYMENTS DUE BY PERIOD
----------------------
LESS THAN AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS YEARS
-------------------------- ---------- ---------- ----------- ---------- ----------
(IN THOUSANDS)
Long-term debt............ $ 93,750 $ -- $ -- $ 18,750 $ 75,000
Operating leases.......... $ 90,602 $ 9,791 $ 20,198 $ 19,139 $ 41,474
---------- ---------- ----------- ---------- ----------
TOTAL..................... $ 184,352 $ 9,791 $ 20,198 $ 37,889 $ 116,474
========== ========== =========== ========== ==========
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 provided by
operations of $10.8 million during the six months ended June 28, 2003 was
largely a result of increased accounts payable resulting from extended payment
terms from vendors as well as certain large purchases with specific vendors
during the six months ended June 28, 2003. 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.
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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.
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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.
23
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
May of 2003 have dropped 2.7%. 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 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 the notes effectively preclude us from
borrowing additional funds, other than under our new 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.
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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 six-month period ended June 28, 2003, we opened two new
stores, incurring $0.2 million in pre-opening expenses and $1.0 million in
capital expenditures. We expect to open four 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 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. We intend to fund new store openings
through cash flow from operations. Our senior credit facility and the indenture
governing the 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.
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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 revenue 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 27 of our 28 superstores. As of June 28, 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.
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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 79.7% 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 or Holdings' stock, including
adopting certain amendments to our or Holdings' 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 or Holdings 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.
27
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 AFFECT 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.
A disruption in the operations of the port in Long Beach, California
could interrupt the supply of our products. 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. A significant amount of these shipments arrive in the United States at the
port in Long Beach. The contract between the International Longshore and
Warehouse Union, the union that represents the workers at the port in Long
Beach, and the Pacific Maritime Association, which represents terminal operators
and ocean ship companies, expired on July 1, 2002 and on September 30, 2002, the
Pacific Maritime Association locked out the union workers. The two parties
subsequently agreed on a new contract, but we cannot assure you that another
disruption will not occur in the future. If another disruption occurs 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 renewed disruption at the port in Long Beach 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 six months ended June 29, 2002, we recognized $0.3 million in
product return and replacement expenses. In the six months ended June 28, 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. In the six months ended June 28, 2003, we spent approximately
$4.2 million on paper, printing and postage 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
28
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 six month period ended June 28, 2003, we generated
approximately 36.2% and 38.9% 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
29
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.
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ITEM 4. CONTROLS AND PROCEDURES
During the 90-day period prior to the filing of this report,
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. 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 as and when required.
There have been no significant changes in the company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date the company carried out its evaluation. There were not
significant deficiencies or material weaknesses identified in the evaluation
and, therefore, no corrective actions were taken.
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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.
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.
32
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: August 12, 2003
By: /s/ Virginia Bunte
----------------------------------
Virginia Bunte
Chief Financial Officer
(Principal Financial Officer and Authorized
Signatory)
Date: August 12, 2003
33