UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 25, 2006
or
o | | 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: 000-51460
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GOLF GALAXY, INC.
(Exact name of registrant as specified in its charter)
Minnesota | | 41-1831724 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
7275 Flying Cloud Drive | | |
Eden Prairie, Minnesota | | 55344 |
(Address of principal executive offices) | | (Zip Code) |
(952) 941-8848
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed from last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of December 29, 2006, the Company had 11,147,875 shares of common stock, par value $0.01 per share, outstanding.
GOLF GALAXY, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED NOVEMBER 25, 2006
INDEX
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
GOLF GALAXY, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
| | November 25, 2006 (unaudited) | | November 26, 2005 (unaudited) | | February 25, 2006 | |
Assets | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 2,300 | | $ | 15,465 | | $ | 11,075 | |
Accounts receivable, net of allowances of $257, $70 and $70, respectively | | 8,735 | | 6,143 | | 4,523 | |
Inventories, net | | 62,065 | | 43,305 | | 45,278 | |
Deferred tax assets | | 2,897 | | 2,219 | | 2,275 | |
Prepaid expenses and other current assets | | 2,749 | | 2,459 | | 2,921 | |
Total current assets | | 78,746 | | 69,591 | | 66,072 | |
| | | | | | | |
Property and equipment, net | | 42,453 | | 26,043 | | 35,218 | |
Intangibles, net | | 1,970 | | — | | — | |
Goodwill | | 7,450 | | — | | — | |
Deferred tax assets | | 5,041 | | 2,272 | | 4,700 | |
Other assets | | 255 | | 236 | | 557 | |
Total assets | | $ | 135,915 | | $ | 98,142 | | $ | 106,547 | |
Liabilities and shareholders’ equity | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | | $ | 23,272 | | $ | 21,923 | | $ | 23,224 | |
Borrowings under the credit agreement | | 8,250 | | — | | — | |
Accrued liabilities | | 15,694 | | 9,987 | | 16,453 | |
Total current liabilities | | 47,216 | | 31,910 | | 39,677 | |
| | | | | | | |
Deferred tax liabilities | | 1,836 | | — | | — | |
Deferred rent credits and other | | 16,991 | | 11,403 | | 12,177 | |
| | | | | | | |
Shareholders’ equity: | | | | | | | |
Common stock, par value $0.01 per share: | | | | | | | |
Authorized shares — 40,000,000; Issued and outstanding — 11,136,466, 10,661,969 and 10,671,803, respectively | | 111 | | 107 | | 107 | |
Additional paid-in capital | | 77,971 | | 68,832 | | 68,961 | |
Accumulated deficit | | (8,232 | ) | (14,110 | ) | (14,375 | ) |
Accumulated other comprehensive income | | 22 | | — | | — | |
Total shareholders’ equity | | 69,872 | | 54,829 | | 54,693 | |
Total liabilities and shareholders’ equity | | $ | 135,915 | | $ | 98,142 | | $ | 106,547 | |
NOTE: The Balance Sheet as of February 25, 2006, has been derived from the audited financial statements.
See accompanying notes.
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GOLF GALAXY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
| | Three Months Ended | | Nine Months Ended | |
| | November 25, 2006 | | November 26, 2005 | | November 25, 2006 | | November 26, 2005 | |
| | | | | | | | | |
Net sales | | $ | 46,146 | | $ | 31,800 | | $ | 224,309 | | $ | 160,005 | |
Cost of sales | | 34,062 | | 23,915 | | 154,603 | | 111,822 | |
Gross profit | | 12,084 | | 7,885 | | 69,706 | | 48,183 | |
| | | | | | | | | |
Operating expenses: | | | | | | | | | |
Retail operating | | 11,302 | | 7,594 | | 42,014 | | 29,299 | |
General and administrative | | 4,215 | | 2,527 | | 13,154 | | 7,784 | |
Preopening | | 718 | | 662 | | 2,492 | | 2,012 | |
Total operating expenses | | 16,235 | | 10,783 | | 57,660 | | 39,095 | |
(Loss) income from operations | | (4,151 | ) | (2,898 | ) | 12,046 | | 9,088 | |
Acquisition-related expenses | | (965 | ) | — | | (965 | ) | — | |
Interest (expense) income, net | | (33 | ) | 172 | | 50 | | 287 | |
(Loss) income before income taxes | | (5,149 | ) | (2,726 | ) | 11,131 | | 9,375 | |
Income tax benefit (expense) | | 1,719 | | 1,117 | | (4,988 | ) | (3,844 | ) |
Net (loss) income | | (3,430 | ) | (1,609 | ) | 6,143 | | 5,531 | |
Less preferred stock dividends | | — | | — | | — | | (1,721 | ) |
Net (loss) income applicable to common shareholders | | $ | (3,430 | ) | $ | (1,609 | ) | $ | 6,143 | | $ | 3,810 | |
Net (loss) income per share: | | | | | | | | | |
Basic | | $ | (0.31 | ) | $ | (0.15 | ) | $ | 0.56 | | $ | 0.66 | |
Diluted | | $ | (0.31 | ) | $ | (0.15 | ) | $ | 0.54 | | $ | 0.58 | |
Weighted average number of shares outstanding: | | | | | | | | | |
Basic | | 11,074,449 | | 10,653,135 | | 10,988,214 | | 5,768,834 | |
Diluted | | 11,074,449 | | 10,653,135 | | 11,478,627 | | 9,480,569 | |
See accompanying notes.
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GOLF GALAXY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
| | Nine Months Ended | |
| | November 25, 2006 | | November 26, 2005 | |
Operating activities | | | | | |
Net income | | $ | 6,143 | | $ | 5,531 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | | 6,046 | | 3,714 | |
Disposal of property and equipment | | 49 | | 15 | |
Stock-based compensation | | 858 | | 81 | |
Change in operating assets and liabilities: | | | | | |
Accounts receivable | | (2,618 | ) | (2,688 | ) |
Inventories | | (11,302 | ) | (12,890 | ) |
Prepaid expenses and other | | 213 | | (1,168 | ) |
Accounts payable | | (3,418 | ) | 6,097 | |
Accrued liabilities and other | | 6,582 | | 4,622 | |
Net cash provided by operating activities | | 2,553 | | 3,314 | |
Investing activities | | | | | |
Acquisition of The GolfWorks, net of $501 cash acquired | | (3,589 | ) | — | |
Additions to property and equipment | | (12,575 | ) | (9,504 | ) |
Net cash used in investing activities | | (16,164 | ) | (9,504 | ) |
Financing activities | | | | | |
Proceeds from initial public offering, net | | — | | 37,903 | |
Payment of preferred stock dividends | | — | | (19,562 | ) |
Proceeds from the exercise of stock options and warrants | | 1,202 | | 69 | |
Excess tax benefits from stock-based compensation | | 729 | | — | |
Short-term borrowings under the credit agreement, net | | 8,250 | | — | |
Repayment of debt assumed from The GolfWorks | | (5,403 | ) | — | |
Net cash provided by financing activities | | 4,778 | | 18,410 | |
Effect of exchange rate changes on cash and cash equivalents | | 58 | | — | |
Net (decrease) increase in cash and cash equivalents | | (8,775 | ) | 12,220 | |
Cash and cash equivalents, beginning of year | | 11,075 | | 3,245 | |
Cash and cash equivalents, end of quarter | | $ | 2,300 | | $ | 15,465 | |
Supplemental disclosure of cash flow information | | | | | |
Cash paid during the year for: | | | | | |
Interest | | $ | 60 | | $ | 2 | |
Income taxes | | $ | 4,898 | | $ | 4,618 | |
Supplemental disclosure of non-cash investing and financing activities | | | | | |
Conversion of preferred stock into common stock | | $ | — | | $ | 30,900 | |
Common stock and common stock warrants issued in connection with the acquisition of The GolfWorks | | $ | 6,226 | | $ | — | |
Purchases of property and equipment awaiting processing for payment, included in accrued liabilities | | $ | 1,825 | | $ | 853 | |
See accompanying notes.
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GOLF GALAXY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Golf Galaxy, Inc. (“Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Due to the seasonal nature of the Company’s business, interim results are not necessarily indicative of results for the entire fiscal year.
Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. These interim unaudited consolidated financial statements and the related notes should be read in conjunction with the annual financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 25, 2006 (“fiscal 2006”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the period. Ultimate results could differ from those estimates.
The unaudited consolidated financial statements include the accounts of Golf Galaxy and its wholly-owned subsidiary from the date of acquisition. All intercompany transactions have been eliminated in consolidation.
The Company operates one reportable business segment - Retail. The Retail segment is engaged in specialty golf retail primarily within the United States. The Retail segment includes all of the Company’s retail channels including stores, catalog and eCommerce businesses. The Company identifies segments based on the nature of the business activities and the processes by which management makes strategic and operating decisions, assesses performance and allocates resources. No single customer accounts for 10% or more of the Company’s net sales.
2. Pending Acquisition by Dick’s Sporting Goods, Inc.
On November 13, 2006, the Company announced that it had entered into an Agreement and Plan of Merger, dated as of November 13, 2006 (the “Merger Agreement”), with Dick’s Sporting Goods, Inc. (“Purchaser”) and Yankees Acquisition Corp., a wholly-owned subsidiary of Purchaser (“Sub”). The Merger Agreement was unanimously approved by the Boards of Directors of both Purchaser and the Company.
The Merger Agreement provides that at the closing, Sub will be merged with and into the Company (the “Merger”) and each outstanding share of common stock of the Company, other than shares owned by Purchaser or Sub and other than shares with respect to which dissenters’ rights have been properly asserted, will be converted into the right to receive $18.82 per share in cash, without interest (the “Merger Consideration”). As a result of the Merger, the Company will become a wholly-owned subsidiary of Purchaser.
Consummation of the Merger is subject to customary conditions, including shareholder approval of the Merger Agreement, and the absence of any other legal or regulatory restraints on consummation of the Merger. In December 2006, the Company was notified that early termination of the Hart-Scott-Rodino waiting period had been granted. The Merger currently is expected to be completed in February 2007. If the Merger Agreement is terminated under certain specified circumstances, the Company will be required to pay Purchaser a termination fee of $8,000,000. If the Merger Agreement is terminated under certain other circumstances, Purchaser or the Company may be required to reimburse the other party for that party’s out-of-pocket fees and expenses, up to a maximum of $2,000,000.
In connection with the Merger, certain of the Company’s shareholders, including Randall K. Zanatta and Gregory B. Maanum, who are also executive officers of the Company, have entered into a voting agreement with Purchaser and Sub, covering an aggregate number of Company shares and stock options representing at the time of signing 19.99% of the Company’s outstanding shares of common stock. Under the voting agreement, such shareholders have agreed to vote in favor of the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger, and against any
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proposal from any other party or any action that would or is designed to delay, prevent or frustrate the Merger. The voting agreement also prohibits the transfer of the Company’s securities unless the transferee agrees to be bound by the voting agreement. In the event the Merger Agreement is terminated, Purchaser or Sub materially breach the Merger Agreement or the Merger Agreement is amended in a manner adverse to the shareholders that are parties to the voting agreement, the voting agreement will terminate.
The Company incurred acquisition-related expenses totaling $965,000, before taxes, during the quarter and nine-month periods ended November 25, 2006. Acquisition-related expenses consist of non-recurring, incremental costs arising as a direct result of the pending Merger and include fees paid to the Company’s financial advisor and legal expenses. With the exception of $50,000 in legal fees, the Company has accounted for the remainder of the acquisition-related expenses as non-deductible for income tax purposes. The Company plans to perform a detailed analysis regarding the deductibility of certain acquisition-related costs, which may result in a change to the accounting treatment for the costs incurred to-date. Due to the current accounting treatment of these costs, the after-tax impact of the non-recurring acquisition-related expenses on net (loss) income was $944,000, or $0.09 and $0.08 per diluted share, for the third quarter and first nine months of fiscal 2007, respectively.
3. Public Offerings of Common Stock
Initial Public Offering
The Company completed its initial public offering (“IPO”) as of August 3, 2005, issuing 3,000,000 common shares at an offering price of $14.00 per share. As part of the IPO, all of the then outstanding preferred stock was converted into 5,752,467 shares of common stock, of which 1,542,500 were sold in the IPO, resulting in a total offering of 4,542,500 common shares. The Company’s common stock trades on the Nasdaq Global Select Market under the symbol “GGXY.”
After issuance costs, the Company received net proceeds of $37.9 million, of which $19.6 million was used to pay preferred shareholders all of the accrued and unpaid dividends due upon the conversion of their shares of preferred stock into shares of the Company’s common stock. The remainder of the net proceeds was used primarily to fund capital expenditures to open new stores and for the March 2006 acquisition of Ralph Maltby Enterprises, Inc., now known as Golf Galaxy GolfWorks, Inc. (“The GolfWorks”).
Withdrawn Follow-on Offering
Certain holders of the unregistered shares of common stock remaining from the conversion of their preferred stock concurrent with the IPO exercised their demand registration rights during the first quarter of fiscal 2007. In May 2006, the Company initially filed a Registration Statement on Form S-1 (the “Registration Statement”) for an underwritten public offering by the Company, with the majority of the shares in the offering provided by certain selling shareholders. The Registration Statement was later withdrawn due to a decline in the Company’s stock price. The related costs of the withdrawn offering of $327,000 were included in general and administrative expenses for the first nine months of fiscal 2007. The former preferred shareholders retain specified demand registration rights for the existing unregistered common shares.
4. Acquisition of The GolfWorks
In the first quarter of fiscal 2007, Golf Galaxy acquired all of the outstanding shares of The GolfWorks for a combination of cash, common stock and warrants to purchase common stock. The aggregate purchase price, including direct acquisition costs of $345,000, consisted of $4.1 million in cash ($500,000 of which was deposited into an indemnification escrow); 250,862 shares of the Company’s common stock valued at $4.8 million and warrants to purchase 150,000 shares of the Company’s common stock with a fair value of $1.4 million. The value of the common stock was based on the average closing price of the Company’s common stock during a five-day trading period beginning three trading days prior to the announcement of the acquisition; the value of the warrants was determined using the Black-Scholes option pricing model. The warrants are immediately exercisable at $17.94 per share with a 10-year term expiring on March 16, 2016. The Company also assumed $5.4 million in existing debt from The GolfWorks. Following the acquisition, the Company repaid all outstanding debt of The GolfWorks with a combination of available cash and borrowings under Golf Galaxy’s credit facility.
The GolfWorks primarily is a retailer of golf-related products including proprietary clubheads, components and tools for club-making, as well as golf accessories and name brand shafts and grips. In addition to its retail catalogs and eCommerce website, The GolfWorks’ products and fitting systems are featured in all of the Company’s stores. The Company believes The GolfWorks brand provides an opportunity to expand its retail offerings to new and existing customers. The Company intends to grow The GolfWorks brand through an expanded store-in-store service area, which combined with integrated
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marketing and product offerings, highlights the Company’s technical expertise in club repair and upgrade services. The store-in-store also features a wide assortment of golf club components, tools, shafts and grips for customers interested in building or servicing their own equipment. The acquisition also facilitates the continued growth of the Company’s direct-to-consumer channel on a cost efficient basis. The acquired GolfWorks facilities include a customer contact center; distribution center; research, design and light assembly facilities; and a school for club builders. In April 2006, the Company combined its contact centers to create a more efficient and lower-cost operation.
The acquisition of The GolfWorks was accounted for under the purchase method of accounting. Accordingly, the results of The GolfWorks have been included in the Company’s consolidated financial statements as a wholly-owned subsidiary beginning March 16, 2006. The purchase price has been allocated to the acquired assets and liabilities of The GolfWorks based on an estimate of their fair values. The Company considered a number of factors in developing an estimate of fair value, including historical operating results, expectations of future operations and strategies, and the use of independent appraisals. The excess of the purchase price over the estimated fair value of the acquired assets and assumed liabilities has been assigned to goodwill. The goodwill is not deductible for tax purposes and the acquired assets retain their original income tax basis. The allocation of the purchase price is subject to revision as the Company finalizes its analysis of asset valuations, liabilities assumed and revisions of preliminary estimates of fair values made at the date of purchase.
The following summarizes the components of the aggregate purchase price and the allocation of the aggregate purchase price to the estimated fair values of the acquired assets and assumed liabilities of The GolfWorks at the date of acquisition.
Aggregate Purchase Price ($ in thousands) | | | |
Cash | | $ | 3,745 | |
Golf Galaxy, Inc. common stock | | 4,778 | |
Warrants to purchase common stock | | 1,448 | |
Direct acquisition costs | | 345 | |
Aggregate purchase price | | $ | 10,316 | |
Allocation of aggregate purchase price to the fair value of acquired assets and assumed liabilities ($ in thousands): | | | |
Cash and cash equivalents | | $ | 501 | |
Accounts receivable, net of allowances | | 1,590 | |
Inventories, net | | 5,474 | |
Prepaid expenses and other | | 44 | |
Property and equipment, net | | 3,429 | |
Intangible assets | | 2,230 | |
Goodwill | | 7,450 | |
Deferred tax assets | | 791 | |
Accounts payable | | (3,424 | ) |
Accrued liabilities and other | | (702 | ) |
Borrowings under credit facility and debt outstanding | | (5,403 | ) |
Deferred tax liabilities | | (1,664 | ) |
Aggregate purchase price | | $ | 10,316 | |
The estimated fair values of the intangible assets as of the acquisition date were determined based on an independent third party appraisal, and are as follows:
Intangible asset description ($ in thousands) | | Amount | | Estimated useful life | |
Trademarks | | $ | 1,000 | | Indefinite | |
Customer lists | | 800 | | 4 years | |
Non-compete agreements | | 320 | | 5 years | |
Copyrights | | 90 | | Indefinite | |
Patents | | 20 | | 8 years | |
Total | | $ | 2,230 | | | |
The intangible assets will be amortized over their estimated useful lives where applicable. Based on the results of the independent appraisal, the trademarks and copyrights were deemed to have indefinite lives and accordingly, will not be amortized. Goodwill and the indefinite-lived intangible assets are subject to periodic evaluation for impairment in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets.
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5. Intangibles
Intangible assets consisted of the following (in thousands):
| | November 25, 2006 (unaudited) | |
Indefinite-lived intangibles | | | |
Trademarks | | $ | 1,000 | |
Copyrights | | 90 | |
| | 1,090 | |
Amortized intangibles | | | |
Customer lists | | 800 | |
Non-compete agreements | | 320 | |
Patents | | 20 | |
| | 1,140 | |
Less accumulated amortization | | (260 | ) |
| | 880 | |
| | | |
Intangibles, net | | $ | 1,970 | |
6. Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised), Share-Based Payment (“SFAS No. 123(R)”). SFAS No. 123(R) requires compensation expense to be measured based on the grant-date fair value of the award and recognized over the requisite service period for awards that vest. SFAS No. 123(R) also requires a change in the classification of the benefits of tax deductions in excess of recognized compensation cost from operating cash flow to a financing cash flow in periods after adoption. The Company adopted SFAS No. 123(R) effective February 26, 2006. The Company recognizes compensation expense on a straight-line basis over the requisite service period of the award. Prior to February 26, 2006, the Company accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Compensation expense for stock options was measured as the excess, if any, of the fair value of the Company’s common stock at the date of grant over the stock option exercise price. Prior to fiscal 2006, all stock options had an exercise price equal to the estimated fair value of the common stock at the time of grant, resulting in no compensation expense recorded for the issuance of stock options.
Pursuant to the transition requirements of SFAS No. 123(R) for a newly public entity, the Company is applying the modified prospective method only to unvested awards that were granted on or after its IPO. The unrecognized compensation cost relating to those awards will be recognized in the financial statements over the remaining requisite service period. The Company is applying the prospective transition method to unvested awards granted prior to its IPO. The unrecognized compensation cost relating to those awards will continue to be recognized in the financial statements using the intrinsic value method under APB Opinion No. 25. Accordingly, other than the stock options granted in May 2005, no compensation expense will be recognized on unvested stock options granted prior to the Company’s IPO unless such awards are subsequently modified.
In May 2005, the Company’s Board of Directors granted options to purchase 138,000 shares of common stock at an exercise price of $8.00 per share based on an independently appraised value as of the most recent fiscal year-end. In addition to the Company’s financial results and growth prospects, the appraisal considered other factors, including the Company’s capital structure as a private company and the relative subordination of the common stock in relation to the preferred stock at the date of the appraisal. Because the exercise price of the stock options granted in May 2005 was below the then-anticipated price range of the Company’s proposed IPO, the Company is recognizing compensation expense ratably over the four-year vesting period of the options based on the difference between the mid-point of the anticipated IPO price range at the time of grant and the exercise price of the options.
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The following table summarizes the impact adopting SFAS No. 123(R) had on the Company’s income before income taxes, net income, as well as basic and diluted net income per share, for the three and nine month periods ended November 25, 2006.
| | Three Months Ended (Unaudited) | | Nine Months Ended (Unaudited) | |
($ in thousands except per share amounts) | | November 25, 2006 | | November 25, 2006 | |
(Loss) income before income taxes | | $ | (267 | ) | $ | (792 | ) |
Net (loss) income | | (181 | ) | (528 | ) |
Net (loss) income per share: | | | | | |
Basic | | $ | (0.02 | ) | $ | (0.05 | ) |
Diluted | | $ | (0.02 | ) | $ | (0.05 | ) |
Prior to the adoption of SFAS No. 123(R), the Company reported all tax benefits resulting from the exercise of stock options as operating cash flows in the statement of cash flows. In accordance with SFAS No. 123(R), the statement of cash flows for the nine months ended November 25, 2006, presents the excess tax benefits from the exercise of stock options as financing cash flows. For the first nine months of fiscal 2007, $729,000 of excess tax benefits were reported as financing cash flows rather than operating cash flows.
In accordance with the transition methods described above, financial results for the third quarter and first nine months of fiscal 2006 have not been restated. If the Company had elected to apply the fair value recognition provisions under SFAS No. 123, Accounting for Stock-Based Compensation, for the three and nine month periods ended November 26, 2005, the Company’s net income and net income per share would have been adjusted to the following pro forma amounts:
| | Three Months Ended (Unaudited) | | Nine Months Ended (Unaudited) | |
($ in thousands except per share amounts) | | November 26, 2005 | | November 26, 2005 | |
Net (loss) income applicable to common shareholders | | $ | (1,609 | ) | $ | 3,810 | |
Add stock-based compensation expense, net of tax | | 20 | | 48 | |
Deduct total stock-based compensation determined under fair-value-based method for all awards, net of tax | | (96 | ) | (200 | ) |
Pro forma net (loss) income applicable to common shareholders | | $ | (1,685 | ) | $ | 3,658 | |
| | | | | |
Net (loss) income per share: | | | | | |
Basic—as reported | | $ | (0.15 | ) | $ | 0.66 | |
Basic—pro forma | | $ | (0.16 | ) | $ | 0.63 | |
Diluted—as reported | | $ | (0.15 | ) | $ | 0.58 | |
Diluted—pro forma | | $ | (0.16 | ) | $ | 0.57 | |
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Stock Options
The Company’s 1996 Stock Option and Incentive Plan and 2004 Amended and Restated Stock Incentive Plan (together, “Plans”) provide for the issuance of incentive and non-qualified stock options. Options are generally granted at the fair market value as of the grant date, are exercisable ratably over various periods and expire up to ten years after the date of grant. As of November 25, 2006, there were 2,500,000 common shares authorized for issuance under the Plans.
Stock option activity under the Plans for the nine months ended November 25, 2006, was as follows:
| | Options | | Weighted Average Exercise Price per Share | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value | |
Outstanding, beginning of period | | 1,238,944 | | $ | 7.58 | | | | | |
Granted | | 368,250 | | 17.16 | | | | | |
Forfeited | | (110,264 | ) | 10.33 | | | | | |
Exercised | | (213,801 | ) | 5.62 | | | | | |
Outstanding, end of period | | 1,283,129 | | $ | 10.41 | | 6.8 years | | $ | 8.39 | |
Exercisable, end of period | | 606,027 | | $ | 6.52 | | 4.4 years | | $ | 11.94 | |
The fair value of each option was estimated on the date of grant using the weighted average assumptions provided below. Prior to the Company’s IPO, fair value was estimated using the minimum value method. Subsequent to the IPO, the Company estimates the fair value of each option on the grant date using the Black-Scholes option-pricing model. Because of the limited history of market trading in the Company’s common stock, estimated volatility for fiscal 2007 was based on an average of the volatility reported by a peer group of publicly traded companies. Beginning with stock options granted in the first quarter of fiscal 2007, the expected term is presumed to be the mid-point between the vesting date and the end of the contractual term. According to SEC Staff Accounting Bulletin No. 107, this approach is permitted until December 31, 2007, for a “plain vanilla” employee stock option for which the value is estimated using a Black-Scholes formula.
| | Three Months Ended | |
| | November 25, 2006 | | November 26, 2005 | |
Weighted Average Assumptions: | | | | | |
Risk-free interest rate | | N/A | | 4.2 | % |
Expected dividends | | N/A | | — | |
Estimated average life | | N/A | | 5.00 years | |
Volatility | | N/A | | 50 | % |
Based on these assumptions, the estimated weighted average fair value of the options granted in the third quarter of fiscal 2006 was $7.70. The Company did not grant any stock options during the third quarter of fiscal 2007.
During the third quarter of fiscal 2007 and 2006, the Company received proceeds of $793,000 and $69,000, respectively, from the exercise of stock options and warrants. The aggregate intrinsic value of options exercised (the amount by which the market price of the stock on the date of exercise exceeded the exercise price of the option) during the three months ended November 25, 2006, and November 26, 2005, was $817,000 and $196,000, respectively. The Company received proceeds of $1.2 million and $69,000, respectively, from the exercise of stock options and warrants during the first nine months of fiscal 2007 and 2006. The aggregate intrinsic value of options exercised during the first nine months of fiscal 2007 and 2006 was $2.3 million and $196,000, respectively.
As of November 25, 2006, there was $3.7 million of measured but unrecognized compensation expense related to stock options that is expected to be recognized over a weighted average period of 3.0 years.
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7. Net (Loss) Income Per Share
Basic net (loss) income per share is computed based on the weighted average number of common shares outstanding. Diluted net (loss) income per share is computed based on the weighted average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had all potentially dilutive common shares been issued. Potentially dilutive shares of common stock include certain common stock options, warrants and convertible preferred stock, depending on the estimated fair market value of the common stock and amount of net income for the period measured. The computation of net (loss) per diluted share for the third quarters of fiscal 2007 and fiscal 2006 excludes all outstanding common stock options because they were anti-dilutive (i.e., including such options would result in a smaller loss per share). The calculation of net income per share for the first nine months of fiscal 2007 excludes 437,438 outstanding common stock options because such outstanding options’ exercise prices were greater than the average market price of the Company’s common shares and, therefore, the effect would be antidilutive (i.e., including such options would result in higher earnings per share).
The following table presents a reconciliation of the numerators and denominators of basic and diluted net (loss) income per share (in thousands, except share and per share amounts):
| | Three Months Ended (Unaudited) | | Nine Months Ended (Unaudited) | |
| | November 25, 2006 | | November 26, 2005 | | November 25, 2006 | | November 26, 2005 | |
Numerator: | | | | | | | | | |
Net (loss) income applicable to common shareholders | | $ | (3,430 | ) | $ | (1,609 | ) | $ | 6,143 | | $ | 3,810 | |
Add preferred stock dividends | | — | | — | | — | | 1,721 | |
Numerator for diluted net (loss) income per share | | $ | (3,430 | ) | $ | (1,609 | ) | $ | 6,143 | | $ | 5,531 | |
Denominator: | | | | | | | | | |
Weighted average number of common shares outstanding | | 11,074,449 | | 10,653,135 | | 10,988,214 | | 5,768,834 | |
Effect of dilutive securities: | | | | | | | | | |
Outstanding stock options and warrants | | — | | — | | 490,413 | | 508,896 | |
Convertible preferred stock | | — | | — | | — | | 3,202,839 | |
Denominator for diluted net (loss) income per share | | 11,074,449 | | 10,653,135 | | 11,478,627 | | 9,480,569 | |
Net (loss) income per share: | | | | | | | | | |
Basic | | $ | (0.31 | ) | $ | (0.15 | ) | $ | 0.56 | | $ | 0.66 | |
Diluted | | $ | (0.31 | ) | $ | (0.15 | ) | $ | 0.54 | | $ | 0.58 | |
8. Property and Equipment
Major classes of depreciable assets are as follows (in thousands):
| | November 25, 2006 (unaudited) | | November 26, 2005 (unaudited) | | February 25, 2006 | |
Fixtures and equipment | | $ | 34,086 | | $ | 23,579 | | $ | 24,755 | |
Leasehold improvements | | 27,830 | | 18,951 | | 19,831 | |
Land and buildings | | 2,830 | | — | | — | |
Construction in process | | 2,403 | | 1,280 | | 9,671 | |
| | 67,149 | | 43,810 | | 54,257 | |
Less accumulated depreciation and amortization | | (24,696 | ) | (17,767 | ) | (19,039 | ) |
Property and equipment, net | | $ | 42,453 | | $ | 26,043 | | $ | 35,218 | |
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9. Revolving Credit Facility
The Company has a revolving credit facility with a commercial bank that provides borrowing capacity for working capital financing and funding for other general corporate purposes. Borrowings under the credit facility are secured by the Company’s inventories, accounts receivable, financial and intangible assets. Interest expense on outstanding borrowings is calculated based on the prime rate or an adjusted LIBOR as defined in the credit agreement. At November 25, 2006, the Company had outstanding borrowings of $8.3 million at annualized interest rates ranging from 6.82% to 8.25%.
Availability under the credit agreement is based on certain percentages of inventory and accounts receivable as defined. At November 25, 2006, the full facility of $15 million was available to the Company. In December 2006, the Company exercised its option to expand the borrowing capacity of the revolving credit facility from $15 million to $20 million, the full amount of which is available to the Company.
As discussed in Note 2, the Company entered into a Merger Agreement to be acquired by Dick’s Sporting Goods, Inc. Completion of this transaction will cause a default under the current terms of the credit facility, requiring an amendment to the facility or the immediate repayment of any outstanding borrowings.
10. Employee Benefit Plan
The Company has a defined contribution 401(k) profit sharing plan (“401(k) Plan”) for eligible employees, which is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. Employees are entitled to make tax-deferred contributions of up to 75% of their eligible compensation. Effective July 1, 2005, the Company began a discretionary match of 50% of the first 4% of eligible compensation contributed to the 401(k) Plan by each participant. The Company’s matching contribution vests after four years of service, at age 591¤2 regardless of service, or upon the death of the employee. The Company’s matching contributions to the 401(k) Plan for the third quarter and first nine months of fiscal 2007 were $49,000 and $137,000, respectively. The Company’s matching contributions to the 401(k) Plan for the third quarter and first nine months of fiscal 2006 were $24,000 and $40,000, respectively. Future matching contributions to the 401(k) Plan are at the Company’s sole discretion.
11. New Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company plans to adopt this Interpretation at the beginning of fiscal 2008, and is currently assessing the impact, if any, the adoption will have on its consolidated results of operations or financial position.
In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 is effective for fiscal years ending after November 15, 2006. The Company expects the effect of adopting SAB No. 108, if any, to be immaterial to its consolidated results of operations or financial position.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. The Company plans to adopt SFAS No. 157 at the beginning of fiscal 2009, and is currently assessing the impact, if any, the adoption will have on its consolidated results of operations or financial position.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Golf Galaxy, Inc. is a multi-channel golf specialty retailer offering a distinctive combination of competitively priced merchandise from the leading national brands in golf equipment, apparel and accessories, along with golf services and golf instruction by on-staff certified PGA professionals. We opened 15 new stores during the first nine months of fiscal 2007. As of November 25, 2006, we operated 65 superstores in 24 states, e-Commerce websites and catalog operations. Our “Everything for the Game.®” core strategy is to provide avid and casual golfers, as well as gift purchasers, a category dominant selection of leading national brand products, expert non-commissioned sales assistance and professional services, the combination of which generally is not available elsewhere. We offer our customers an exciting, interactive environment that compares favorably with the shopping experience at smaller independent golf stores, on-course pro shops and the golf departments of general sporting goods retailers.
We completed an initial public offering of our common stock on August 3, 2005, selling 3,000,000 shares at an offering price of $14.00 per share. Our stock is traded on the Nasdaq Global Select Market under the ticker symbol “GGXY.” As part of the offering, all of the then outstanding preferred stock converted into 5,752,467 shares of our common stock, of which 1,542,500 were sold in the initial public offering, resulting in a total offering of 4,542,500 shares. After deducting the underwriting discounts and commissions, and other offering expenses, we received net proceeds from our initial public offering of $37.9 million. We used $19.6 million of the net proceeds to pay our preferred shareholders all of the accrued and unpaid dividends due upon conversion of their shares of preferred stock into shares of our common stock. The remainder of the net proceeds was used primarily to fund capital expenditures to open new stores and for the March 2006 acquisition of Ralph Maltby Enterprises, Inc. now known as Golf Galaxy GolfWorks, Inc. (“The GolfWorks”).
In the first quarter of fiscal 2007, we acquired all of the outstanding shares of The GolfWorks for a combination of cash, common stock and warrants to purchase common stock. The aggregate purchase price, including direct acquisition costs of $345,000, consisted of $4.1 million in cash ($500,000 of which was deposited into an indemnification escrow); 250,862 shares of our common stock valued at $4.8 million and warrants to purchase 150,000 shares of our common stock with a fair value of $1.4 million. We also assumed $5.4 million in existing debt from The GolfWorks. Following the acquisition, we repaid all outstanding debt of The GolfWorks with a combination of available cash and borrowings under our credit facility. The results of The GolfWorks have been included in our consolidated financial statements as a wholly-owned subsidiary beginning March 16, 2006.
The GolfWorks primarily is a retailer of golf-related products including proprietary clubheads, components and tools for club-making, as well as golf accessories and name brand shafts and grips. In addition to its retail catalogs and eCommerce website, The GolfWorks’ products and fitting systems are featured in all of our stores. We believe The GolfWorks brand provides us an opportunity to expand our offerings to new and existing customers. We intend to grow The GolfWorks brand through an expanded store-in-store service area, which combined with integrated marketing and product offerings, highlights our technical expertise in club repair and upgrade services. The store-in-store area also features a wide assortment of golf club components, tools, shafts and grips for customers interested in building or servicing their own equipment. The acquisition also facilitates the continued growth of our direct-to-consumer channel on a cost efficient basis. The acquired GolfWorks facilities include a customer contact center; distribution center; research, design and light assembly facilities; and a school for club builders. In April 2006, we combined our contact centers to create a more efficient and lower-cost operation.
On November 13, 2006, we announced that we had entered into an Agreement and Plan of Merger, dated as of November 13, 2006 (the “Merger Agreement”), with Dick’s Sporting Goods, Inc. (“Purchaser”) and Yankees Acquisition Corp., a wholly-owned subsidiary of Purchaser (“Sub”). The Merger Agreement was unanimously approved by our Board of Directors and the Board of Directors of Purchaser.
The Merger Agreement provides that at the closing, Sub will be merged with and into us (the “Merger”) and each outstanding share of our common stock, other than shares owned by Purchaser or Sub and other than shares with respect to which dissenters’ rights have been properly asserted, will be converted into the right to receive $18.82 per share in cash, without interest (the “Merger Consideration”). As a result of the Merger, we will become a wholly-owned subsidiary of Purchaser.
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Consummation of the Merger is subject to customary conditions, including shareholder approval of the Merger Agreement, and the absence of any other legal or regulatory restraints on consummation of the Merger. In December 2006, we were notified that early termination of the Hart-Scott-Rodino waiting period had been granted. The Merger currently is expected to be completed in February 2007. If the Merger Agreement is terminated under certain specified circumstances, we will be required to pay Purchaser a termination fee of $8,000,000. If the Merger Agreement is terminated under certain other circumstances, we or Purchaser may be required to reimburse the other party for that party’s out-of-pocket fees and expenses, up to a maximum of $2,000,000.
In connection with the Merger, certain of our shareholders, including Randall K. Zanatta, our President and Chief Executive Officer, and Gregory B. Maanum, our Chief Operating Officer, have entered into a voting agreement with Purchaser and Sub, covering an aggregate number of shares and stock options representing at the time of signing 19.99% of the outstanding shares of our Common Stock. Under the voting agreement, such shareholders have agreed to vote in favor of the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger, and against any proposal from any other party or any action that would or is designed to delay, prevent or frustrate the Merger. The voting agreement also prohibits the transfer of our securities unless the transferee agrees to be bound by the voting agreement. In the event the Merger Agreement is terminated, Purchaser or Sub materially breach the Merger Agreement or the Merger Agreement is amended in a manner adverse to the shareholders that are parties to the voting agreement, the voting agreement will terminate.
We incurred acquisition-related expenses totaling $965,000, before taxes, during the quarter and nine-month periods ended November 25, 2006. Acquisition-related expenses consist of non-recurring, incremental costs arising as a direct result of the pending Merger and include fees paid to our financial advisor and legal expenses. With the exception of $50,000 in legal fees, we have accounted for the remainder of the acquisition-related expenses as non-deductible for income tax purposes. We plan to perform a detailed analysis regarding the deductibility of certain acquisition-related costs, which may result in a change to the accounting treatment for the costs incurred to-date. Due to the current accounting treatment of these costs, the after-tax impact of the non-recurring acquisition-related expenses on net (loss) income was $944,000, or $0.09 and $0.08 per diluted share, for the third quarter and first nine months of fiscal 2007, respectively.
Due to the seasonal nature of our business, interim results are not necessarily indicative of results for the entire fiscal year. Our net sales and net income generally are greatest during the first and second quarters of our fiscal year. The interim financial statements included in this Quarterly Report on Form 10-Q (“Report”) and the related discussions contained herein should be read in conjunction with the audited financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended February 25, 2006 (“fiscal 2006”).
Results of Operations
The following table presents selected items in the unaudited statements of operations as a percentage of our net sales.
| | Three Months Ended | | Nine Months Ended | |
| | November 25, 2006 | | November 26, 2005 | | November 25, 2006 | | November 26, 2005 | |
Statements of Operations Data | | | | | | | | | |
Net sales | | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Cost of sales | | 73.8 | | 75.2 | | 68.9 | | 69.9 | |
Gross profit | | 26.2 | | 24.8 | | 31.1 | | 30.1 | |
Retail operating expenses | | 24.5 | | 23.9 | | 18.7 | | 18.3 | |
General and administrative expenses | | 9.1 | | 7.9 | | 5.9 | | 4.9 | |
Preopening expenses | | 1.6 | | 2.1 | | 1.1 | | 1.2 | |
(Loss) income from operations | | (9.0 | ) | (9.1 | ) | 5.4 | | 5.7 | |
Acquisition-related expenses | | (2.1 | ) | — | | (0.4 | ) | — | |
Interest (expense) income, net | | (0.1 | ) | 0.5 | | 0.0 | | 0.2 | |
(Loss) income before income taxes | | (11.2 | ) | (8.6 | ) | 5.0 | | 5.9 | |
Income tax benefit (expense) | | 3.7 | | 3.5 | | (2.2 | ) | (2.4 | ) |
Net (loss) income | | (7.5 | )% | (5.1 | )% | 2.8 | % | 3.5 | % |
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Net sales consist of sales, net of returns, from comparable stores and new stores, as well as sales from our eCommerce and catalog operations. A store is included in comparable store results after it has been in operation for 12 full fiscal months following the month of the store’s grand opening weekend, typically a store’s 13th full month of operations. Sales from our eCommerce and catalog operations are not included in comparable store results. New store sales include net sales from stores that have not yet become comparable.
Cost of sales includes the cost of merchandise sold net of certain vendor allowances, direct costs of services, freight, inventory shrinkage, other inventory valuation adjustments and retail occupancy costs. Vendor allowances include promotional support, rebates and volume discounts. Retail occupancy costs include rent, real estate taxes and common area maintenance charges.
Retail operating expenses primarily include store associate payroll and related employee benefits, advertising and depreciation. Retail operating expenses also include maintenance, utilities, insurance, bank and credit card charges, other store level expenses, as well as expenses associated with the operation of our catalog and eCommerce Internet sites.
General and administrative expenses include all expenses associated with operating our retail support offices.
Preopening expenses consist primarily of occupancy, payroll, recruiting and other costs incurred prior to a new store opening as well as incremental advertising in connection with the store opening.
Three and Nine Months Ended Nov. 25, 2006 Compared with Three and Nine Months Ended Nov. 26, 2005
Net Sales. Net sales were $46.1 million for the third quarter of fiscal 2007, an increase of 45.1%, compared with $31.8 million for the third quarter of fiscal 2006. Net sales for the first nine months of fiscal 2007 were $224.3 million, an increase of 40.2%, compared with $160.0 million for the same period of the prior fiscal year. The increase in net sales for both the third quarter and first nine months of fiscal 2007 resulted primarily from sales at new stores opened in the current or prior fiscal year, before becoming comparable stores; sales through The GolfWorks, which we acquired on March 16, 2006; and, to a lesser degree, an increase in comparable store sales. Our comparable store sales increased by 3.8% and 1.5%, respectively, for the third quarter and first nine months of fiscal 2007.
Gross Profit. Our gross profit rate increased by 1.4% to 26.2% of net sales for the third quarter of fiscal 2007, compared with 24.8% for the same quarter of the prior fiscal year. For the first nine months of fiscal 2007, our gross profit rate increased by 1.0% to 31.1% of net sales, compared with 30.1% for the first nine months of fiscal 2006. The increase in our gross profit rate for the third quarter was due primarily to higher retail gross margins in many product categories, most notably in pre-owned clubs, apparel and shoes, reflecting a more disciplined promotional strategy and better product transition management. Margin rates also improved in the third quarter due to a more favorable sales mix, driven by sales growth of higher-margin categories such as services and accessories. These increases were partially offset by a decrease in the margin rate impact of vendor allowances. The increase in our gross profit rate for the nine-month period resulted primarily from higher retail margins due to the factors noted above, partially offset by increases in store occupancy as a percentage of sales.
We expect that continued focus on our strategic initiatives, including initiatives to drive sales of services and accessories, will have a positive impact on our gross profit rate over the remainder of fiscal 2007 relative to fiscal 2006.
Retail Operating Expenses. Retail operating expenses increased to 24.5% of net sales for the third quarter of fiscal 2007, compared with 23.9% for the third quarter of fiscal 2006. For the first nine months of fiscal 2007, retail operating expenses increased to 18.7% of net sales, compared with 18.3% for the same period of the prior fiscal year. The increase in retail operating expenses as a percentage of net sales was due primarily to the impact of new stores opened in the current and prior fiscal year. New stores generally have higher operating expenses as a percentage of net sales in comparison to mature stores due to the impact of a partial year of net sales in the year opened and because mature stores generally have higher sales volumes relative to their operating expenses.
Due to our store growth and the high percentage of new stores in our store base, we expect retail operating expenses as a percentage of net sales to be modestly higher for fiscal 2007 when compared with the prior fiscal year.
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General and Administrative Expenses. General and administrative expenses increased to 9.1% of net sales for the third quarter of fiscal 2007, up from 7.9% for the third quarter of the prior fiscal year. For the first nine months of fiscal 2007, general and administrative expenses as a percentage of net sales increased to 5.9%, compared with 4.9% for the same period of fiscal 2006. The increase in our general and administrative expenses rate for the third quarter was due primarily to additional general and administrative costs following the acquisition of The GolfWorks in the first quarter of fiscal 2007. Incremental costs related to operating as a public company, including costs of preparing to comply with Section 404 of the Sarbanes-Oxley Act and the recognition of stock-based compensation expense also contributed to the increase in our general and administrative expenses rate for the third quarter of fiscal 2007, partially offset by leverage of non-store payroll costs. The increase for the nine-month period was due primarily to the impact of The GolfWorks general and administrative costs following its acquisition, higher public company costs, stock-based compensation expense, and a charge from the write-off of costs from a secondary common stock offering cancelled in the first quarter. These factors were partially offset by leverage of non-store payroll costs and a reduction in performance-based compensation expense, compared with the corresponding period of fiscal 2006.
Preopening Expenses. Preopening expenses were $718,000 for the third quarter of fiscal 2007, compared with $662,000 for the third quarter of fiscal 2006. For the first nine months of fiscal 2007, preopening expenses were $2.5 million compared with $2.0 million for the same period of the prior fiscal year. We opened 15 new stores during the first nine months of fiscal 2007 and 2006, respectively. The increase in preopening expenses for the third quarter and first nine months of fiscal 2007 was due primarily to a higher level of advertising to establish certain new markets. In addition to higher advertising costs, the increase in preopening expenses for the nine-month period reflects an increase in preopening occupancy costs, which can vary due to the location, lease terms and timing of each new store opening.
Acquisition-related Expenses. Acquisition-related expenses were $965,000 for the third quarter and first nine months of fiscal 2007, compared with $0 for the corresponding periods of the prior fiscal year. Acquisition-related expenses consist of non-recurring, incremental costs arising as a direct result of the pending Merger described more fully in the “Overview” section above and include fees paid to our financial advisor and legal expenses. With the exception of $50,000 in legal fees, we have accounted for the remainder of the acquisition-related expenses as non-deductible for income tax purposes. We plan to perform a detailed analysis regarding the deductibility of certain acquisition-related costs, which may result in a change to the accounting treatment for the costs incurred to-date. Due to the current accounting treatment of these costs, the after-tax impact of the non-recurring acquisition-related expenses on net (loss) income was $944,000, or $0.09 and $0.08 per diluted share, for the third quarter and first nine months of fiscal 2007, respectively.
As discussed above, consummation of the Merger is subject to customary conditions, including shareholder approval of the Merger Agreement, and the absence of any other legal or regulatory restraints on consummation of the Merger. The Merger currently is expected to be completed in February 2007. We expect to incur additional acquisition-related expenses during our fiscal fourth quarter. Further, consummation of the Merger will trigger additional contingent acquisition-related expenses, including a success-based fee for our financial advisor and a bonus for certain of our employees.
Net Interest (Expense) Income. Net interest expense for the third quarter of fiscal 2007 was $33,000, compared with net interest income of $172,000 for the third quarter of the prior fiscal year. The change was due primarily to interest expense from borrowings and maintenance fees under our revolving credit facility in the third quarter of fiscal 2007, compared with net interest income earned on the remaining net cash proceeds from our initial public offering in the prior year period. For the first nine months of fiscal 2007, net interest income was $50,000, compared with $287,000 for the first nine months of the prior fiscal year. The decrease in net interest income for the nine-month period was due primarily to interest earned on positive cash balances through most of the first three quarters of fiscal 2007 being partially offset by the expense factors noted above, in comparison to the net interest income earned in the second and third quarters of fiscal 2006 on the net cash proceeds from our initial public offering in August 2005.
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Income Tax Benefit (Expense). We recorded income tax benefits of $1.7 million and $1.1 million, respectively, for the third quarters of fiscal 2007 and 2006. For the first nine months of fiscal 2007, we recorded an income tax provision of $5.0 million, compared with $3.8 million for the first nine months of the prior fiscal year. Our income tax benefit/provision for interim periods is determined using an estimate of our annual effective tax rate. The income tax benefit for the third quarter of fiscal 2007 was based on an estimated annual effective income tax rate of 41.3% applied to our pre-tax loss, excluding the majority of the acquisition-related expenses recorded in the period. With the exception of $50,000 in legal fees, we have accounted for the remainder of the acquisition-related expenses as non-deductible for income tax purposes. We plan to perform a detailed analysis regarding the deductibility of certain acquisition-related costs, which may result in a change to the accounting treatment for the costs incurred to-date. A favorable determination regarding the deductibility of certain acquisition-related costs would be recognized as a reduction in our effective income tax rate in a future period. The income tax benefit for the third quarter of fiscal 2006 was based on an effective income tax rate of 41.0%. The change in the estimated effective income tax rates was due primarily to the impact of certain permanent book/tax differences and fluctuations in the impact of state income taxes. The permanent book/tax differences relate primarily to the non-deductibility of stock option expense recognized for book purposes in fiscal 2007, following the adoption of SFAS No. 123(R).
Net (Loss) Income. We reported a net loss of $3.4 million, or ($0.31) per diluted share, for the third quarter of fiscal 2007, compared with a net loss of $1.6 million, or ($0.15) per diluted share, for the same period of fiscal 2006. For the first nine months of fiscal 2007, net income was $6.1 million, or $0.54 per diluted share, compared with $5.5 million, or $0.58 per diluted share, for the same period of the prior fiscal year.
Pro-Forma Net (Loss) Income Per Share. Pro-forma results for the three and nine-month periods ended November 25, 2006, exclude costs of $944,000, net of tax, related to the pending Merger. Pro-forma results for the nine months ended November 26, 2005, are presented as if our initial public offering and the conversion of preferred stock into shares of common stock had occurred immediately prior to the beginning of fiscal 2006. We believe the use of pro-forma net (loss) income per share provides a consistent measure of profitability as well as important supplemental information due to the significant impact the acquisition-related expenses had on our financial results for the third quarter of fiscal 2007 and due to the significant increase in common shares outstanding resulting from the completion of our initial public offering and the conversion of the convertible preferred stock into shares of common stock as of August 3, 2005. Pro-forma net (loss) income per share is considered a non-GAAP financial measure and is not in accordance with, or preferable to, net (loss) income per share determined in accordance with GAAP. The most directly comparable GAAP financial measure to pro-forma net (loss) income per share is net (loss) income per share. Pro-forma net (loss) income per share is intended to be a supplement to, but not a substitute for, net (loss) income per share prepared in accordance with GAAP. Further, pro-forma net (loss) income per share, as we define it, may not be comparable to a similarly titled measure used by other companies.
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The following table presents a reconciliation of the numerator and denominator used in the calculation of pro-forma net (loss) income per share (in thousands, except share and per share amounts):
| | Three Months Ended (Unaudited) | | Nine Months Ended (Unaudited) | |
| | November 25, 2006 | | November 25, 2006 | | November 26, 2005 | |
Pro-forma Information | | | | | | | |
Pro-forma net (loss) income applicable to common shareholders | | $ | (2,486 | ) | $ | 7,087 | | $ | 5,531 | |
Pro-forma net (loss) income per share: | | | | | | | |
Basic | | $ | (0.22 | ) | $ | 0.64 | | $ | 0.52 | |
Diluted | | $ | (0.22 | ) | $ | 0.62 | | $ | 0.50 | |
Pro-forma weighted average number of shares outstanding: | | | | | | | |
Basic | | 11,074,449 | | 10,988,214 | | 10,642,003 | |
Diluted | | 11,074,449 | | 11,478,627 | | 11,150,899 | |
Reconciliation of pro-forma information to GAAP | | | | | | | |
Net (loss) income applicable to common shareholders (GAAP) | | $ | (3,430 | ) | $ | 6,143 | | $ | 3,810 | |
Acquisition-related expenses, net of tax | | 944 | | 944 | | — | |
Preferred stock dividends | | — | | — | | 1,721 | |
Net (loss) income applicable to common shareholders (pro-forma) | | $ | (2,486 | ) | $ | 7,087 | | $ | 5,531 | |
Basic | | | | | | | |
Weighted average number of shares outstanding (GAAP) | | 11,074,449 | | 10,988,214 | | 5,768,834 | |
Conversion of preferred stock to common | | — | | — | | 3,202,839 | |
Weighted average additional shares issued in IPO | | — | | — | | 1,670,330 | |
Weighted average number of shares outstanding (pro-forma) | | 11,074,449 | | 10,988,214 | | 10,642,003 | |
Diluted | | | | | | | |
Weighted average number of shares outstanding (GAAP) | | 11,074,449 | | 11,478,627 | | 9,480,569 | |
Weighted average additional shares issued in IPO | | — | | — | | 1,670,330 | |
Weighted average number of shares outstanding (pro-forma) | | 11,074,449 | | 11,478,627 | | 11,150,899 | |
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Quarterly Results of Operations and Seasonality
The following table sets forth certain unaudited financial and operating data for each quarter of fiscal 2006 and the first three quarters of fiscal 2007. The accompanying unaudited financial and operating data has been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. In the opinion of management, the unaudited quarterly information reflects all adjustments, which include only normal and recurring adjustments, considered necessary to present fairly the information shown.
| | Fiscal 2006 | |
| | Quarter Ended May 28, 2005 | | Quarter Ended Aug. 27, 2005 | | Quarter Ended Nov. 26, 2005 | | Quarter Ended Feb. 25, 2006 | |
| | ($ in thousands, except per share data) | |
Net sales | | $ | 58,570 | | $ | 69,635 | | $ | 31,800 | | $ | 40,125 | |
Gross profit | | 18,228 | | 22,070 | | 7,885 | | 10,555 | |
Gross profit as a percentage of net sales | | 31.1 | % | 31.7 | % | 24.8 | % | 26.3 | % |
Retail operating expenses | | $ | 10,932 | | $ | 10,773 | | $ | 7,594 | | $ | 8,213 | |
General and administrative expenses | | 3,102 | | 2,155 | | 2,527 | | 2,249 | |
Preopening expenses | | 1,310 | | 40 | | 662 | | 911 | |
Income (loss) from operations | | 2,884 | | 9,102 | | (2,898 | ) | (818 | ) |
Income (loss) before income taxes | | 2,899 | | 9,202 | | (2,726 | ) | (666 | ) |
Net income (loss) | | $ | 1,693 | | $ | 5,447 | | $ | (1,609 | ) | $ | (265 | ) |
Basic net income (loss) per share | | $ | 0.37 | | $ | 0.98 | | $ | (0.15 | ) | $ | (0.02 | ) |
Diluted net income (loss) per share | | $ | 0.21 | | $ | 0.59 | | $ | (0.15 | ) | $ | (0.02 | ) |
Weighted average shares outstanding: | | | | | | | | | |
Basic | | 1,883,969 | | 4,801,458 | | 10,653,135 | | 10,665,848 | |
Diluted | | 8,042,819 | | 9,211,662 | | 10,653,135 | | 10,665,848 | |
Comparable store sales increase(1) | | 10.5 | % | 7.4 | % | 6.7 | % | 2.5 | % |
Stores opened during the period | | 11 | | — | | 4 | | 1 | |
Number of stores at end of period | | 45 | | 45 | | 49 | | 50 | |
Selling square feet at end of period | | 671,953 | | 671,953 | | 727,112 | | 738,615 | |
| | Fiscal 2007 | |
| | Quarter Ended May 27, 2006 | | Quarter Ended Aug. 26, 2006 | | Quarter Ended Nov. 25, 2006 | |
| | ($ in thousands, except per share data) | |
Net sales | | $ | 82,517 | | $ | 95,646 | | $ | 46,146 | |
Gross profit | | 26,298 | | 31,324 | | 12,084 | |
Gross profit as a percentage of net sales | | 31.9 | % | 32.7 | % | 26.2 | % |
Retail operating expenses | | $ | 15,817 | | $ | 14,895 | | $ | 11,302 | |
General and administrative expenses | | 4,482 | | 4,457 | | 4,215 | |
Preopening expenses | | 1,648 | | 126 | | 718 | |
Income (loss) from operations | | 4,351 | | 11,846 | | (4,151 | ) |
Acquisition-related expenses | | — | | — | | (965 | ) |
Income (loss) before income taxes | | 4,359 | | 11,921 | | (5,149 | ) |
Net income (loss) | | $ | 2,572 | | $ | 7,001 | | $ | (3,430 | ) |
Basic net income (loss) per share | | $ | 0.24 | | $ | 0.64 | | $ | (0.31 | ) |
Diluted net income (loss) per share | | $ | 0.22 | | $ | 0.61 | | $ | (0.31 | ) |
Weighted average shares outstanding: | | | | | | | |
Basic | | 10,890,837 | | 10,999,356 | | 11,074,449 | |
Diluted | | 11,590,229 | | 11,432,419 | | 11,074,449 | |
Comparable store sales increase(1) | | 1.0 | % | 0.8 | % | 3.8 | % |
Stores opened during the period | | 11 | | — | | 4 | |
Number of stores at end of period | | 61 | | 61 | | 65 | |
Selling square feet at end of period | | 884,146 | | 884,146 | | 941,059 | |
(1) A new or relocated store is included in the comparable store base after it has been in operation for 12 full fiscal months following the month of the store’s grand opening weekend, typically a store’s 13th full month of operations. A store that is closed for remodel or repair is excluded from the comparable store sales calculation during the period of closure and the comparable period of the succeeding year. Sales from our catalog and eCommerce operations are not included in the comparable store sales calculation. Comparable store results for a 53-week fiscal year are presented on a 52/52-week basis.
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Our business is subject to seasonal fluctuations, with the highest sales activity and substantially all of our income from operations occurring during the first and second quarters of our fiscal year. Many of our stores are located in midwestern and northeastern states where late spring and summer represent the peak of the golf season. It is possible the impact of seasonal fluctuations could change as we continue to expand into additional geographic regions. The Father’s Day holiday in June drives a significant seasonal sales increase, and sales also increase during the December holiday season, albeit to a lesser extent.
Our quarterly operating results also may fluctuate significantly because of other factors. Customer demand for our products and services, and consequently our sales, also can be significantly impacted by weather. The timing of new store openings and related expenses; the profitability of new stores; the impact on store results during remodeling; changes in retail competition in our markets; and general economic conditions, can affect our quarterly results. The fixed costs of our operations make our operating results sensitive to changes, favorable and unfavorable, in demand for our products and services. Due to these factors, results for any individual quarter may not be indicative of results to be expected for any other quarter or for a full fiscal year.
Our preopening expenses have varied from quarter to quarter due primarily to the timing of store openings. We have historically opened the majority of our new stores in the first and third quarters of the fiscal year, and expect to continue this pattern going forward. We typically incur most preopening expenses for a new store during the three months immediately preceding its opening. In addition, our labor and operating costs for a newly opened store are typically higher than a mature store. Accordingly, the volume and timing of new store openings is expected to continue to have a significant impact on quarterly preopening costs and store labor and operating expenses.
Liquidity and Capital Resources
Summary
Our primary capital requirements are related to the growth of the business. New stores require capital for inventory, capital expenditures such as tenant improvements and fixtures, and preopening expenses. In addition, capital may be required for strategic growth opportunities, such as the acquisition of The GolfWorks in the first quarter of fiscal 2007, and to remodel existing stores to updated formats. Periodically, capital resources may be needed for systems or facility improvements to support our growth. Sources of capital to fund our growth have included proceeds from our equity financings, cash generated from operations and cash proceeds from the sale of our equity in Golf Town Canada Inc., a golf specialty retailer operating stores across Canada.
Our working capital liquidity needs change significantly from quarter to quarter due to the impact of seasonality, the timing of new store openings and the timing of inventory payments. Our primary source of working capital liquidity is cash provided by operations, and we utilize the borrowing capacity available under our revolving credit facility, if needed.
In the first quarter of fiscal 2007, we acquired The GolfWorks, with a combination of available cash, common stock and warrants to purchase common stock. In addition, we assumed approximately $5.4 million of existing debt from The GolfWorks, which we repaid with our remaining available cash and short-term borrowings under our revolving credit facility. We generated sufficient operating cash flow to fully pay off the revolving debt by the end of the first fiscal quarter. During the third quarter of fiscal 2007, we accessed our revolving line of credit for working capital funding due to the seasonal reduction in sales volume combined with relatively fixed costs for rent and payroll, and the timing of inventory and construction related payments. As of November 25, 2006, we had $8.3 million in borrowings outstanding under the line of credit.
Cash Flows
Operating Activities. Net cash provided by operating activities was $2.6 million through the first three quarters of fiscal 2007, compared with $3.3 million for the same period of fiscal 2006. The decrease resulted primarily from a decrease in leverage from accounts payable relative to increased inventory levels. Net inventory increased year-over-year due to the increase in the number of open stores and, to a lesser degree, the inventory held by The GolfWorks, which was acquired in the first quarter of fiscal 2007. These factors were partially offset by an increase in net income after adjusting for the non-cash impact of depreciation and stock option expense, as well as an increase in deferred rent credits reflecting landlord incentives received for the opening of new stores.
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Investing Activities. Net cash used in investing activities was $16.2 million for the first three quarters of fiscal 2007, compared with $9.5 million for the same period of fiscal 2006. Capital expenditures, primarily related to new stores including the purchase of leaseholds, fixtures and operating equipment, utilized $12.6 million and $9.5 million, respectively, in these periods. The March 2006 acquisition of The GolfWorks reduced net cash by $3.6 million in the first quarter of fiscal 2007, net of cash acquired of $501,000.
Financing Activities. Net cash provided by financing activities was $4.8 million for the first three quarters of fiscal 2007 resulting primarily from $8.3 million in net borrowings from our revolving line of credit and the proceeds and tax benefits from the exercise of vested stock options during the period, partially offset by the use of $5.4 million to extinguish the debt acquired from The GolfWorks. In the first three quarters of fiscal 2006, net cash provided by financing activities was $18.4 million, resulting from $37.9 million in net proceeds from our initial public offering in the second quarter of fiscal 2006, partially offset by a dividend payment of $19.6 million to the holders of the Company’s preferred stock as part of the conversion of the preferred stock to common stock to facilitate the IPO.
Sources of Liquidity. In addition to cash provided by operations, we maintain a revolving credit facility as an additional source of short-term liquidity and working capital, if needed. The credit facility has a term ending October 2008 and provides for revolving loans, of which up to $5.0 million may be in the form of letters of credit. In December 2006, the Company exercised its option to expand the borrowing capacity under the line of credit from $15 million to $20 million. The exercise of the option was in anticipation of near-term working capital requirements, including construction and pre-opening costs for new stores planned to open in the first quarter of fiscal 2008. Borrowings under the credit facility are secured by our inventories, accounts receivable, and financial and intangible assets. Availability under the credit facility is calculated on the basis of eligible inventory and certain accounts receivable, net of specified reserves, and less any outstanding letters of credit. Interest on any outstanding indebtedness under our credit facility accrues at the prime lending rate or an adjusted LIBOR as defined in the agreement for the credit facility. Borrowings under the credit facility were $8.3 million at November 25, 2006. There were no borrowings outstanding as of November 26, 2005.
Capital Resources
Our future capital requirements will depend primarily on the number and timing of new stores opened and capital needed for strategic growth opportunities, such as the acquisition of The GolfWorks in the first quarter of fiscal 2007. We expect capital expenditures of approximately $20 million to $22 million for fiscal 2007, including stores opened in this fiscal year and planned for the first quarter of fiscal 2008. In the third quarter, we opened four new stores for a total of 15 new stores in fiscal 2007, and we currently expect to open 16 to 18 new stores in fiscal 2008. Capital also might be needed to remodel or relocate existing stores in the future, as well as additional capital investments in our infrastructure to support a growing store base.
As noted above, we entered into a Merger Agreement to be acquired by Dick’s Sporting Goods, Inc. Completion of this transaction will cause a default under the terms of the current credit facility, requiring an amendment to the facility or the immediate repayment of any outstanding borrowings. Following the acquisition, we believe any substantial future capital requirements can be funded through the combined company’s resources.
Absent the acquisition, we believe we would have sufficient resources to fund our capital requirements through cash provided by operations, our revolving credit facility and additional equity or debt financing, if necessary.
Off-Balance-Sheet Arrangements and Contractual Obligations
We lease our retail store locations, office space and certain office equipment primarily through operating leases and, to a much lesser degree, capital leases for certain technology equipment. Our liquidity is not dependent on the use of off-balance sheet financing arrangements other than in connection with our operating leases. There has been no material change in our contractual obligations other than in the ordinary course of business since the end of fiscal 2006.
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Critical Accounting Policies and Use of Estimates
Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of the financial statements, we are required to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, net sales, cost of sales, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time the consolidated financial statements are prepared. On a regular basis, we review our accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in the “Notes to Unaudited Consolidated Financial Statements” included in this Report and should be read in conjunction with Note 2 of the “Notes to Financial Statements” included in our Annual Report on Form 10-K for the fiscal year ended February 25, 2006.
Impact of Recent Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. We plan to adopt this Interpretation at the beginning of fiscal 2008, and we are currently assessing the impact, if any, the adoption will have on our consolidated results of operations or financial position.
In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 is effective for fiscal years ending after November 15, 2006. We expect the effect of adopting SAB No. 108, if any, to be immaterial to our consolidated results of operations or financial position.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. We plan to adopt SFAS No. 157 at the beginning of fiscal 2009, and we are currently assessing the impact, if any, the adoption will have on our consolidated results of operations or financial position.
A Special Note Regarding Forward-Looking Statements
This Report contains forward-looking statements that are based on our beliefs, assumptions and expectations of future events taking into account the information currently available to us. All statements other than statements of historical fact contained in this Report are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performances, financial condition or achievements to differ materially from the expected future results, performances, financial condition or achievements as expressed or implied in any forward-looking statements. In some cases forward-looking statements can be identified by terms such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “seeks,” “predicts,” “projects,” “strives,” “potential,” “objective,” “may,” “could,” “should,” “would,” “will” and similar expressions intended to identify forward-looking statements.
The following factors, among others, could cause our actual financial performance to differ materially from that expressed in any forward-looking statement: a decline in the popularity of golf or golf-related products and services; limitations imposed by suppliers on the amount or variety of products; failure by suppliers to develop and introduce new products or if new products result in excessive close-outs of existing inventories; seasonal fluctuation in demand for products; weather conditions; the ability to implement our growth plan successfully; competition in the golf and sporting goods industry; a decline in discretionary spending; availability of adequate capital to fund growth; loss of key management; the ability to integrate acquired companies successfully, including The GolfWorks; the failure to obtain shareholder adoption and approval
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of the Merger Agreement or the failure to satisfy other closing conditions with respect to the proposed Merger; the occurrence of any event, change or other circumstance that could give rise to the termination of the Merger Agreement; the failure of the proposed Merger to close for any other reason; and the amount of costs, fees, expenses and other charges relating to the Merger. The foregoing list should not be construed as exhaustive. Additional information concerning these and other factors that could cause actual results to differ materially from those in the forward-looking statements is included in our Annual Report on Form 10-K for the fiscal year ended February 25, 2006.
Forward-looking statements reflect our current views with respect to future events, are based on our assumptions and are subject to risks and uncertainties. Given these uncertainties, readers should not place undue reliance on these forward-looking statements. Our forward-looking statements speak only as of the date of this Report. We assume no obligation to update or revise any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Historically, we have borrowed under our revolving credit facility for seasonal liquidity needs. Borrowings under the revolving credit facility incur interest at floating rates based either on the prime rate or an adjusted LIBOR, and to the extent there are outstanding borrowings, we are exposed to market risk related to changes in interest rates. At November 25, 2006 we had outstanding borrowings under the revolving credit facility of $8.3 million, at annualized interest rates ranging from 6.82% to 8.25%. At November 26, 2005, we did not have any borrowings outstanding, although any prime-based borrowings at that time would have had an annualized interest rate of 7.00%. Given the amount of borrowings during the three and nine month periods ended November 25, 2006, and November 26, 2005, there would have been no material effect on our income before income taxes if interest rates would have increased by 100 basis points. We are not a party to any derivative financial instruments.
Item 4. Controls and Procedures.
As of the end of the period covered by this Report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and our principal financial and accounting officer, of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based on this evaluation, our principal executive officer and our principal financial and accounting officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
There have been no changes in internal control over financial reporting during the quarter ended November 25, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1A. Risk Factors.
Our business is subject to numerous risks as discussed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 25, 2006. In addition, the following risks relate specifically to the pending acquisition of the Company by Dick’s Sporting Goods, Inc. described in Note 2 of our “Notes to Unauditied Consolidated Financial Statements” in Item 1 of Part I above:
· the failure to obtain shareholder adoption and approval of the merger agreement or the failure to satisfy other closing conditions with respect to the proposed merger;
· the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement;
· the failure of the proposed merger to close for any other reason; and
· the amounts of costs, fees, expenses and other charges relating to the merger.
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Item 6. Exhibits.
Exhibit No. | | Description |
2.1 | | Agreement and Plan of Merger, dated as of November 13, 2006, by and among Golf Galaxy, Inc., Dick’s Sporting Goods, Inc. and Yankees Acquisition Corp. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated November 13, 2006). |
3.1 | | Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-125007) as declared effective by the Commission on July 28, 2005 (the “S-1”)). |
3.2 | | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the S-1). |
4.1 | | Specimen of common stock certificate (incorporated by reference to Exhibit 4.1 to the S-1). |
4.2 | | Amended and Restated Registration Rights Agreement dated as of October 3, 2000 among the holders of preferred stock, Randall K. Zanatta, Gregory B. Maanum and the Registrant (incorporated by reference to Exhibit 4.3 to the S-1). |
4.3 | | Conversion Agreement dated May 16, 2005 among the holders of preferred stock and the Registrant (incorporated by reference to Exhibit 4.4 to the S-1). |
10.1 | | Amended and Restated Employment Agreement between the Registrant and Randall K. Zanatta, dated October 9, 2006 (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 26, 2006) |
10.2 | | Amended and Restated Employment Agreement between the Registrant and Gregory B. Maanum, dated October 9, 2006 (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 26, 2006) |
10.3 | | Amended and Restated Employment Agreement between the Registrant and Richard C. Nordvold, dated October 9, 2006 (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 26, 2006) |
10.4 | | Amended and Restated Employment Agreement between the Registrant and Ronald G. Hornbaker, dated October 9, 2006 (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 26, 2006) |
10.5 | | Amended and Restated Retention Agreement between the Registrant and Randall K. Zanatta, dated October 9, 2006 (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 26, 2006) |
10.6 | | Amended and Restated Retention Agreement between the Registrant and Gregory B. Maanum, dated October 9, 2006 (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 26, 2006) |
10.7 | | Retention Agreement between the Registrant and Richard C. Nordvold, dated October 9, 2006 (incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 26, 2006) |
10.8 | | Retention Agreement between the Registrant and Ronald G. Hornbaker, dated October 9, 2006 (incorporated by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 26, 2006) |
31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
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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.
| | GOLF GALAXY, INC. |
| | (Registrant) |
| | |
Date January 9, 2007 | | /s/ RANDALL K. ZANATTA | |
| | Randall K. Zanatta |
| | President, Chief Executive Officer and Chairman |
| | (Principal Executive Officer) |
| | |
Date January 9, 2007 | | /s/ RICHARD C. NORDVOLD | |
| | Richard C. Nordvold |
| | Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |
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EXHIBIT INDEX TO FORM 10-Q
2.1 | | Agreement and Plan of Merger, dated as of November 13, 2006, by and among Golf Galaxy, Inc., Dick’s Sporting Goods, Inc. and Yankees Acquisition Corp. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated November 13, 2006). |
3.1 | | Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-125007) as declared effective by the Commission on July 28, 2005 (the “S-1”)). |
3.2 | | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the S-1). |
4.1 | | Specimen of common stock certificate (incorporated by reference to Exhibit 4.1 to the S-1). |
4.2 | | Amended and Restated Registration Rights Agreement dated as of October 3, 2000 among the holders of preferred stock, Randall K. Zanatta, Gregory B. Maanum and the Registrant (incorporated by reference to Exhibit 4.3 to the S-1). |
4.3 | | Conversion Agreement dated May 16, 2005 among the holders of preferred stock and the Registrant (incorporated by reference to Exhibit 4.4 to the S-1). |
10.1 | | Amended and Restated Employment Agreement between the Registrant and Randall K. Zanatta, dated October 9, 2006 (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 26, 2006) |
10.2 | | Amended and Restated Employment Agreement between the Registrant and Gregory B. Maanum, dated October 9, 2006 (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 26, 2006) |
10.3 | | Amended and Restated Employment Agreement between the Registrant and Richard C. Nordvold, dated October 9, 2006 (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 26, 2006) |
10.4 | | Amended and Restated Employment Agreement between the Registrant and Ronald G. Hornbaker, dated October 9, 2006 (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 26, 2006) |
10.5 | | Amended and Restated Retention Agreement between the Registrant and Randall K. Zanatta, dated October 9, 2006 (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 26, 2006) |
10.6 | | Amended and Restated Retention Agreement between the Registrant and Gregory B. Maanum, dated October 9, 2006 (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 26, 2006) |
10.7 | | Retention Agreement between the Registrant and Richard C. Nordvold, dated October 9, 2006 (incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 26, 2006) |
10.8 | | Retention Agreement between the Registrant and Ronald G. Hornbaker, dated October 9, 2006 (incorporated by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 26, 2006) |
31.1 | | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
31.2 | | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
32.1 | | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
32.2 | | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
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