Filed Pursuant to Rule 424(b)(3)
Registration No. 333-101117
GOLFSMITH INTERNATIONAL, INC.
OFFER TO EXCHANGE
$93,750,000
8.375% SENIOR SECURED NOTES DUE 2009
THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR
ALL OUTSTANDING UNREGISTERED
8.375% SENIOR SECURED NOTES DUE 2009
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THE REGISTERED NOTES
- The terms of the new notes are substantially identical to the old notes,
except that the new notes will be freely tradable.
- We will pay interest on the new notes at an annual rate of 8.375%. Interest on
the new notes is payable on March 1 and September 1 of each year, beginning
March 1, 2003.
- The new notes will be senior secured obligations and will rank equally with
all of our other senior indebtedness. As of March 29, 2003, we had $2.1
million of senior indebtedness outstanding in addition to the notes.
- The information in this prospectus is not complete and may be changed. We may
not offer these securities until the Registration Statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted. The new
notes will mature on October 15, 2009.
- Our senior credit facility and the related guarantees are secured by a first
priority lien on substantially all of our assets, the assets of our parent
(including our common stock) and the assets of our subsidiaries, other than
real property, fixtures, equipment and proceeds thereof. The new notes and the
related guarantees will be secured by a first priority lien on real property,
fixtures, equipment and the proceeds thereof and a second priority lien on
substantially all other assets.
- We may redeem some or all of the new notes at any time prior to October 15,
2006 at a make-whole redemption price. On or after October 15, 2006, we may,
at our option, redeem some or all of the new notes at a redemption price that
will decrease ratably from 106.50% of accreted value to 100.00% of accreted
value on October 15, 2008, in all cases plus accrued and unpaid interest.
Prior to October 15, 2005, we may redeem on one or more occasions new notes
and old notes, if any outstanding, in an amount equal to up to 35% in the
aggregate of the principal amount at maturity of the notes originally issued
at a redemption price equal to 113% of accreted value plus accrued and unpaid
interest with the proceeds of certain equity offerings.
- On October 15, 2007 and October 15, 2008, we must make a partial pro rata
redemption of 20% and 10% (which percentages are subject to reduction as
described in this prospectus), respectively, of the principal amount at
maturity of each new note, plus accrued and unpaid interest to the redemption
date. These redemption requirements may be reduced by the aggregate principal
amount at maturity of any notes we have previously repurchased pursuant to
excess cash flow offers.
- Within 120 days after the end of each fiscal year and beginning after the
first full fiscal year, we must offer to repurchase a portion of the notes at
100% of their accreted value with 50% of our excess cash flow.
- If we experience a change of control, we must give holders of the new notes
the opportunity to sell to us their new notes at 101% of their accreted value
plus accrued and unpaid interest.
- If we sell assets, we may have to offer to use the proceeds to repurchase new
notes at 100% of their accreted value plus accrued and unpaid interest.
- All of our existing and future domestic restricted subsidiaries and our parent
company will fully and unconditionally guarantee the new notes, jointly and
severally, on a senior secured basis.
- We do not intend to list the new notes on any securities exchange or to
include the new notes in any automated quotation system. Currently, there is
currently no public market for the new notes.
THE EXCHANGE OFFER
- The exchange offer will expire at 5:00 p.m. New York City time, on July 21,
2003, unless extended.
- The exchange offer is not subject to any conditions other than that the
exchange offer not violate applicable law or any applicable interpretation of
the staff of the SEC.
- All old notes that are validly tendered and not validly withdrawn will be
exchanged.
- Tenders of old notes may be withdrawn at any time before the expiration of the
exchange offer.
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SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF THE FACTORS
THAT YOU SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN EXCHANGE
OF OLD NOTES FOR NEW NOTES.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE
OR COMPLETE OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is June 18, 2003.
TABLE OF CONTENTS
Where You Can Find More Information......................... i
Market Share, Ranking and Other Industry Data............... ii
Summary..................................................... 1
Risk Factors................................................ 14
Forward-Looking Statements.................................. 29
Use of Proceeds............................................. 31
Capitalization.............................................. 32
The Exchange Offer.......................................... 33
Unaudited Pro Forma Condensed Financial Statements.......... 43
Selected Consolidated Financial Data........................ 46
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 47
Business.................................................... 61
Management.................................................. 71
Principal Stockholders...................................... 77
Related Party Transactions.................................. 79
Description of Senior Credit Facility....................... 82
Description of the New Notes................................ 86
Material United States Federal Income Tax Consequences...... 132
Plan of Distribution........................................ 137
Legal Matters............................................... 137
Experts..................................................... 137
Index to Consolidated Financial Statements.................. F-1
EACH BROKER-DEALER THAT RECEIVES NEW NOTES FOR ITS OWN ACCOUNT PURSUANT TO
THE EXCHANGE OFFER MUST ACKNOWLEDGE THAT IT WILL DELIVER A PROSPECTUS IN
CONNECTION WITH ANY RESALE OF THE NEW NOTES. THE LETTER OF TRANSMITTAL STATES
THAT BY SO ACKNOWLEDGING AND BY DELIVERING A PROSPECTUS, A BROKER-DEALER WILL
NOT BE DEEMED TO ADMIT THAT IT IS AN "UNDERWRITER" WITHIN THE MEANING OF THE
SECURITIES ACT OF 1933, AS AMENDED, WHICH WE REFER TO AS THE SECURITIES ACT.
THIS PROSPECTUS, AS IT MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME, MAY BE
USED BY A BROKER-DEALER IN CONNECTION WITH RESALES OF NEW NOTES RECEIVED IN
EXCHANGE FOR OLD NOTES WHERE THE OLD NOTES WERE ACQUIRED BY THE BROKER-DEALER AS
A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES. WE HAVE AGREED
THAT, FOR A PERIOD OF UP TO 180 DAYS AFTER THE EXPIRATION OF THE EXCHANGE OFFER,
WE WILL MAKE THIS PROSPECTUS AVAILABLE TO ANY BROKER-DEALER FOR USE IN
CONNECTION WITH ANY SUCH RESALE. SEE "PLAN OF DISTRIBUTION."
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4 under the Securities Act with respect to our offering of
the new notes. This prospectus does not contain all the information included in
the registration statement and the exhibits and schedules thereto. You will find
additional information about us and the new notes in the registration statement.
The registration statement and the exhibits and schedules thereto will be
available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file with the SEC
at its public reference facilities at 450 Fifth Street, N. W., Washington, D. C.
20549, 233 Broadway, New York, New York 10279 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You can also obtain
copies of the documents at prescribed rates by writing to the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, D. C. 20549. Please
call the SEC at l-800-SEC-0330 for further information on the operation of the
public reference facilities. Statements made in this prospectus about legal
documents may not necessarily be complete and you should read the documents
which are filed as exhibits to the registration statement or otherwise filed
with the SEC.
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You may also request a copy of these filings at no cost, by writing or
calling us at the following address:
Golfsmith International, Inc.
11000 N. IH-35
Austin, Texas 78753-3195
(512) 837-8810
Attention: Chief Executive Officer
TO OBTAIN TIMELY DELIVERY OF THIS INFORMATION, YOU MUST REQUEST IT NO LATER
THAN FIVE (5) BUSINESS DAYS BEFORE JULY 21, 2003, THE EXPIRATION DATE OF THE
EXCHANGE OFFER.
In addition, while any notes remain outstanding, we will make available,
upon request, to any holder and any prospective purchaser of notes the
information required pursuant to Rule 144A(d)(4) under the Securities Act during
any period in which we are not subject to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, which we refer to as the Exchange Act.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
NEITHER WE NOR ANY OF THE GUARANTORS HAVE AUTHORIZED ANYONE ELSE TO PROVIDE YOU
WITH ADDITIONAL OR DIFFERENT INFORMATION. WE ARE ONLY OFFERING TO EXCHANGE THE
OLD NOTES FOR NEW NOTES IN STATES WHERE THE OFFER IS PERMITTED. YOU SHOULD NOT
ASSUME THAT THE INFORMATION IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER
THAN THE DATE ON THE FRONT OF THIS DOCUMENT.
MARKET SHARE, RANKING AND OTHER INDUSTRY DATA
The market share, ranking and other industry data contained in this
prospectus are based either on our estimates or derived from industry data or
third-party sources and, in each case, we believe these estimates are reasonable
as of the date of this prospectus. However, market share data is subject to
change and cannot always be verified due to limits on the availability and
reliability of independent sources, the voluntary nature of the data gathering
process and other limitations and uncertainties inherent in any statistical
survey of market shares. In addition, purchasing patterns and consumer
preferences can and do change. As a result, you should be aware that market
share, ranking and other similar data set forth herein, and estimates and
beliefs based on such data, may not be accurate.
ii
SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this prospectus. Because this is a summary, it
may not contain all of the information that may be important to you. You should
read this prospectus carefully before making an investment decision. On October
15, 2002, we were acquired by a subsidiary of Atlantic Equity Partners III, L.P.
in a merger transaction described below under "-- The Merger." Unless the
context requires otherwise, references in this prospectus to (1) "Golfsmith,"
"our company," "we," "our," "us" and similar expressions refer to Golfsmith
International, Inc., a Delaware corporation, and its consolidated subsidiaries
and (2) "Holdings" refers to Golfsmith International Holdings, Inc., a Delaware
corporation, which became our parent company upon completion of the merger. As a
result of applying the required purchase accounting rules, the financial
statements of Golfsmith International Holdings, Inc. are significantly affected.
The application of purchase accounting rules results in different accounting
bases and hence financial information for the periods beginning on October 16,
2002. The term "successor" refers to Golfsmith International Holdings, Inc. and
all of its subsidiaries, including Golfsmith International, Inc. following the
acquisition on October 15, 2002. The term "predecessor" refers to Golfsmith
International, Inc. prior to being acquired by Golfsmith International Holdings,
Inc.
References to "fiscal 2002" refer to the combined financial results of our
predecessor from December 30, 2001 through October 15, 2002 and of Holdings from
October 16, 2002 through December 28, 2002. As used herein, references to any
"fiscal" year of our company refer to the fiscal year of us or our predecessor
ended or ending on the Saturday closest to December 31 of such year.
THE COMPANY
OVERVIEW
We believe we are one of the largest, multi-channel, specialty retailers of
golf equipment and related accessories in the industry, as determined by sales,
and are an established designer and marketer of golf equipment. We have a
35-year history as a retailer in the golf industry. We offer equipment from
leading manufacturers, including Callaway(R), Cobra(R), FootJoy(R), Nike(R),
Ping(R), Taylor Made(R) and Titleist(R). In addition, we offer our own
proprietary brands, including Golfsmith(R), Lynx(R), Snake Eyes(R) and Killer
Bee(R). We market our products through 26 superstores as well as through our
direct-to-consumer channel, which includes our clubmaking and accessory catalogs
and our Internet site. In fiscal 2001, fiscal 2002 and the three months ended
March 29, 2003, we generated net revenues of $221.4 million, $218.1 million and
$45.8 million, respectively. We had net income of $7.2 million in fiscal 2001
and net losses of $2.2 million and $1.2 million in fiscal 2002 and the three
months ended March 29, 2003, respectively.
We offer a complete line of golf equipment and related accessories through
multiple distribution channels:
Superstores. We opened our first golf superstore in 1992 and
currently operate 26 superstores. These stores range in size from
approximately 10,000 to 30,000 square feet. Our superstores feature a wide
selection of golf equipment from substantially all of the major name brand
manufacturers. Our superstore format enables us to provide customers a
superior shopping experience and a wide selection of golf products. Our
superstores accounted for approximately 56.7% and 54.7% of our net revenues
for fiscal 2002 and the three months ended March 29, 2003, respectively.
Direct-to-Consumer. Our principal publications are the Golfsmith
Accessory Catalog and the Golfsmith Clubmaking Catalog. We leverage our
sizable catalog business through our website, www.golfsmith.com. Through
our direct-to-consumer distribution channels, we provide customers our
extensive offering of products, including equipment, apparel, accessories
and clubmaking components and tools. Our direct-to-consumer channels
accounted for approximately 40.3% and 43.4% of our net revenues for fiscal
2002 and the three months ended March 29, 2003, respectively.
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In 1993, we partnered with Austin native and well-known golf instructor,
the late Harvey Penick, to form the Harvey Penick Golf Academy. The academy
earned a spot in GOLF Magazine's listing of golf's top 25 instructional schools
in 1999 and has attracted over 15,000 students since its inception. We believe
the academy adds to our quality image and helps contribute to sales at our
adjacent Austin superstore. We believe that the strength of the Harvey Penick
name and the academy's strong reputation could allow us to open additional
Harvey Penick Golf Academies although we do not currently have plans to open any
new academies. The academy accounted for approximately 0.5% and 0.4% of our net
revenues for fiscal 2002 and the three months ended March 29, 2003,
respectively.
We work with a group of international distributors to offer golf club
components and equipment to clubmakers and golfers in selected regions outside
the United States. In the United Kingdom, we sell our proprietary branded
equipment through a commissioned sales force directly to retailers. Throughout
most of Europe and parts of Asia and other parts of the world, we sell our
products through a network of distributors. In fiscal 2002, we shipped products
to customers, including through our direct-to-consumer channel, in more than 60
countries. Sales made through our international distributors and our
distribution center near London accounted for approximately 2.5% and 1.9% of our
net revenues for fiscal 2002 and the three months ended March 29, 2003,
respectively.
INDUSTRY OVERVIEW
The golf industry has a base of over 26 million participants in the United
States and is expected to grow steadily at 1% to 2% annually over the next ten
years. In addition to stability and growth, the golf industry is characterized
by a base of core participants and favorable demographic trends. The typical
golfer is male, just over 40 years old, has a household income of more than
$70,000, and plays 22 rounds of golf per year. As the typical golfer ages and
has more time and disposable income, the golf retailing industry is poised to
benefit. This consumer base of over 26 million mostly affluent golfers spends
approximately $6 billion annually on golf products, including range balls. In
addition, there are a number of trends indicating that the golf industry will
continue to grow through the next decade, including growth of the two largest
segments of the American population, the 40 to 60 year old age group (the group
that generally plays the most rounds and spends the most money on golf) and
people in their 20s (the age when many people start playing golf), and increased
interest in golf by women, junior and minority golfers. These trends may be
offset by risks in the golf industry, including those posed by the general
decline in the U.S. economy. We believe that since 1997, the overall worldwide
premium golf club market has experienced little growth in dollar volume from
year to year and that since 1999 there has been no material increase, and in
2001 a decrease, in the number of rounds played. We cannot assure you that
continued declines in the U.S. economy or a reduction in discretionary consumer
spending will not impede growth in the worldwide market for golf-related
products.
The retail infrastructure in the golf industry is highly fragmented. The
leading retail channel for golf equipment, apparel and accessories is the
specialty off-course distribution channel, which includes Golfsmith, other large
golf-focused retailers and golf specialty shops not located at a golf course.
The specialty off-course channel accounted for over 40% of all retail golf sales
in 1999.
BUSINESS STRENGTHS
Multi-Channel Market Leadership. We use a multi-faceted marketing
strategy, which leverages our established position in the golf industry. Our
distribution channels consist of our 26 superstores and our direct-to-consumer
channel, which includes our clubmaking and accessory catalogs and our Internet
site. This approach allows for strong sales due to the complementary nature of
our channels and higher margins as we leverage our overhead and infrastructure
across both channels. In addition, we believe our own high margin,
vertically-integrated, proprietary product brands, Golfsmith(R), Lynx(R), Snake
Eyes(R) and Killer Bee(R), benefit from traffic created by third-party
manufacturers marketing their brand name golf equipment that we sell and the
general marketing of our stores, catalogs, website and instructional golf
academy.
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Premier Brand Recognition. Through 35 years of operations serving the golf
industry and our multiple distribution channels, we believe we have built
substantial brand equity with golfers ranging from golfers who build custom
clubs to golfers who seek to improve their games through the major brands'
latest equipment offerings. We have a long history in product development and
design of golf club components. In addition, through our regular interaction
with clubmakers, we believe we stay attuned to new developments in club design
and player specifications.
Portfolio of Proprietary Brands. Sales of our proprietary brands,
including components, constituted over 21.9% and 20.8% of our net revenues in
fiscal 2002 and the three months ended March 29, 2003, respectively. These
brands generate substantially higher gross profit margins than products we sell
that are produced by other manufacturers. We offer a wide range of quality
products under several different well known brand names, which allows us to
supply beginning, casual and advanced players along various price points. In
addition to being an attractive source of revenue and profits, we believe that
our portfolio of vertically-integrated, proprietary brands enhances the appeal
of our superstores and direct-to-consumer channels and differentiates us from
our competitors.
Advanced Infrastructure. We have made significant investments in our
information systems and supply-chain capabilities, which have improved the
efficiency of our order fulfillment and inventory management capabilities. Our
240,000 square foot shipping facility, warehouse and distribution center at our
Austin, Texas-based headquarters supports our existing network of superstores,
catalog and Internet customers and should enable us to handle our expected
growth with minimal additional infrastructure. Through our implementation of an
ERP information system in fiscal 2000, we improved reporting, reduced our
inventory levels by 31.8% from the year end of fiscal 1999 to the year end of
fiscal 2002 and by 30.0% from the end of the first quarter of fiscal 1999 to the
end of the first quarter of fiscal 2003, and reduced order processing costs,
payroll, and corporate overhead. The lower inventory levels are the result of
our ability to better manage inventory at our distribution center and our retail
stores.
Proven Management Team with a Significant Equity Stake; Relationship with
First Atlantic. We have a strong management team that combines in-depth
knowledge of the golf industry with substantial large-store retailing
experience. Our senior management team has an average of over 15 years of
industry experience and an average tenure with us of over 11 years. Jim Thompson
is our chief executive officer. Mr. Thompson and his management team have had
responsibility for many of our day-to-day operations over the last few years.
Messrs. Carl Paul and Franklin Paul, our founders, along with our management
team, own approximately 20.3% of Holdings' common stock on a fully diluted basis
and Atlantic Equity Partners III, L.P., a limited partnership operated by First
Atlantic Capital Ltd., owns approximately 79.7% of Holdings' common stock on a
fully diluted basis. In connection with the merger, we entered into a management
consulting agreement with First Atlantic. Under the agreement, First Atlantic is
available to advise us in connection with proposed financial transactions,
acquisitions and other senior management matters. The management consulting
agreement is more fully described under "Related Party
Transactions -- Management Consulting Agreement."
Significant Expansion Opportunities. We intend to expand and open
additional stores. Based on our experience to date, we expect to spend
approximately $1.2 million to open each additional superstore. In addition to
internal growth opportunities, we believe that as the golf industry continues to
divide into premium brands and secondary brands, we will have opportunities to
acquire companies and market selected brands through our retail distribution
network. From time to time, we evaluate opportunities to make acquisitions in
our industry. We believe that by controlling certain product offerings from
conception through delivery to the customer, we control brand image, product
differentiation, distribution, prices and margins, and in so doing, establish an
advantage over our competitors.
BUSINESS STRATEGY
The primary objectives of our business plan are:
- to expand our store base by adding stores in existing or new markets;
3
- to leverage our existing infrastructure, scale, proprietary brands and
multi-channel distribution model to increase market share;
- to modify certain larger stores and open new stores using a smaller, more
productive layout that increases our profitability and lowers per-store
capital investments, while continuing to provide customers with value,
product selection, services and a superior shopping environment;
- to capture market segments that are under-served by major brands through
the design and development of proprietary equipment; and
- to expand our direct-to-consumer distribution channel by improving
customer acquisition and retention initiatives, and by offering an
enjoyable on-line shopping experience to our customers.
THE MERGER
On October 15, 2002, BGA Acquisition Corp., a wholly owned subsidiary of
Golfsmith International Holdings, Inc., merged with and into Golfsmith
International, Inc. Golfsmith International Inc. is the surviving corporation
and is a wholly owned subsidiary of Holdings as a result of the merger. The
aggregate purchase price for the merger was approximately $121.0 million. The
components of this purchase price included the payment to the stockholders of
Golfsmith prior to the merger of $101.5 million in cash and $12.8 million in
equity securities of Holdings, and $6.7 million in fees and expenses incurred in
connection with the merger. The cash portion of the purchase price for the
merger was funded out of:
- the net proceeds from the offering of the old notes, of approximately
$67.9 million;
- the cash contribution of $50.0 million described below; and
- existing cash.
The merger agreement required Golfsmith to repay and terminate all then existing
indebtedness and also required Holdings to put in place a new revolving credit
facility as a condition to the closing of the merger. For more information about
the purchase price and the other terms of the merger generally, you should read
the description of the merger agreement contained under the caption "Related
Party Transactions -- Merger Agreement."
Holdings was formed by Atlantic Equity Partners III, L.P., a limited
partnership operated by First Atlantic Capital Ltd. First Atlantic is a private
equity investment firm. Holdings was formed solely for the purpose of completing
the merger and had no operations, assets or properties prior to the merger. In
connection with the merger, Atlantic Equity Partners III contributed $50.0
million in return for approximately 79.7% of Holdings' common stock on a fully
diluted basis. Our stockholders prior to the merger, including members of our
management, received in the merger and currently own in the aggregate 20.3% of
Holdings' common stock on a fully diluted basis. In connection with the merger,
we entered into a management consulting agreement with First Atlantic, and all
of our stockholders, including members of our management, entered into a
stockholders agreement and certain other contractual arrangements with First
Atlantic as described under "Related Party Transactions."
---------------------
We were incorporated in Texas in 1973 and reincorporated in Delaware in
1998. Our principal offices are located at 11000 N. IH-35, Austin, Texas
78753-3195. Our telephone number is (512) 837-8810. Our website address is
www.golfsmith.com. Information on our website does not constitute part of this
prospectus.
RISK FACTORS
Our business is subject to risks. Before deciding to tender your old notes
in exchange for new notes pursuant to the exchange offer, you should consider
carefully the information included in the "Risk Factors" section, as well as all
other information set forth in this prospectus.
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THE EXCHANGE OFFER
On October 15, 2002, we completed the offering of $93,750,000 aggregate
principal amount at maturity of our 8.375% senior secured notes due 2009 in a
transaction exempt from registration under the Securities Act. In connection
with the offering, we entered into a registration rights agreement with the
initial purchaser of the old notes in which we agreed to commence this exchange
offer. Accordingly, you may exchange your old notes for new notes which have
substantially the same terms. We refer to the old notes and the new notes
together as the notes. The following summary of the exchange offer is not
intended to be complete. For a more complete description of the terms of the
exchange offer, see "The Exchange Offer" in this prospectus.
Securities Offered............ $93,750,000 aggregate principal amount at
maturity of our 8.375% senior secured notes due
2009, registered under the Securities Act. The
terms of the new notes offered in the exchange
offer are substantially identical to those of
the old notes, except that the transfer
restrictions, registration rights and penalty
interest provisions relating to the old notes
do not apply to the new notes.
The Exchange Offer............ We are offering new notes in exchange for a
like principal amount of our old notes. We are
offering these new notes to satisfy our
obligations under a registration rights
agreement which we entered into with the
initial purchaser of the old notes. You may
tender your outstanding notes for exchange by
following the procedures described under the
heading "The Exchange Offer." The exchange
offer is not subject to any federal or state
regulatory requirements other than securities
laws.
Expiration Date; Tenders;
Withdrawal.................... The exchange offer will expire at 5:00 p.m.,
New York City time, on July 21, 2003, unless we
extend it. You may withdraw any old notes that
you tender for exchange at any time prior to
the expiration date of this exchange offer. We
will accept any and all old notes validly
tendered and not validly withdrawn before the
expiration date. See "The Exchange
Offer -- Procedures for Tendering Old Notes"
and "-- Withdrawals of Tenders of Old Notes"
for a more complete description of the tender
and withdrawal period.
Material United States Federal
Income Tax Consequences....... Your exchange of old notes for new notes to be
issued in the exchange offer will not result in
any gain or loss to you for United States
federal income tax purposes. See "Material
United States Federal Income Tax Consequences"
for a summary of United States federal income
tax consequences associated with the exchange
of old notes for new notes and the ownership
and disposition of those new notes.
Use of Proceeds............... We will not receive any cash proceeds from the
exchange offer.
Exchange Agent................ U.S. Bank Trust National Association.
Shelf Registration............ If applicable interpretations of the staff of
the SEC do not permit us to effect the exchange
offer, or upon the request of any holder of old
notes under certain circumstances, we will be
required to file, and use our reasonable best
efforts to cause to
5
become effective, a shelf registration
statement under the Securities Act which would
cover resales of old notes. See "Description of
the New Notes -- Exchange Offer; Registration
Rights."
Consequences of Your Failure
to Exchange Your Old Notes.... Old notes that are not exchanged in the
exchange offer will continue to be subject to
the restrictions on transfer that are described
in the legend on the old notes. In general, you
may offer or sell your old notes only if they
are registered under, or offered or sold under
an exemption from, the Securities Act and
applicable state securities laws. We do not
currently intend to register the old notes
under the Securities Act. If your old notes are
not tendered and accepted in the exchange
offer, it may become more difficult for you to
sell or transfer your old notes.
Consequences of Exchanging
Your Old Notes................ Based on interpretations of the staff of the
SEC, we believe that you will be allowed to
resell the new notes that we issue in the
exchange offer without complying with the
registration and prospectus delivery
requirements of the Securities Act if:
- you are acquiring the new notes in the
ordinary course of your business,
- you are not engaging in and do not
intend to engage in a distribution of
the new notes,
- you have no arrangement or understanding
with any person to participate in the
distribution of the new notes, and
- you are not an "affiliate," as defined
in Rule 405 under the Securities Act, of
us or any of the guarantors.
If any of these conditions are not satisfied
and you transfer any new notes issued to you in
the exchange offer without delivering a proper
prospectus or without qualifying for a
registration exemption, you may incur liability
under the Securities Act. We will not be
responsible for, or indemnify you against, any
liability you incur.
If you are a broker-dealer and you will receive
new notes for your own account in exchange for
old notes that you acquired as a result of
market-making activities or other trading
activities, you will be required to acknowledge
that you will deliver a prospectus in
connection with any resale of the new notes.
See "Plan of Distribution" for a description of
the prospectus delivery obligations of
broker-dealers in the exchange offer.
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THE NEW NOTES
The following summary is not intended to be complete. For a more complete
description of the terms of the new notes, see "Description of the New Notes" in
this prospectus.
Issuer........................ Golfsmith International, Inc.
Securities Offered............ $93,750,000 aggregate principal amount of our
8.375% senior secured notes due 2009.
Issue Price................... The old notes were issued at an issue price of
$800 per note. Each note will have a principal
amount at maturity of $1,000.
Maturity Date................. October 15, 2009.
Interest Rate and Payment
Dates......................... We will pay interest on the new notes at a rate
equal to 8.375% per year. Interest on the new
notes will be payable semi-annually in cash in
arrears on March 1 and September 1 of each
year, beginning on March 1, 2003.
Original Issue Discount....... The new notes will be issued with original
issue discount (that is, the difference between
the stated principal amount at maturity and the
issue price of the notes) for federal income
tax purposes. Thus, original issue discount
will accrue from the issue date and be included
as interest income periodically in a holder's
gross income for federal income tax purposes in
advance of receipt of the cash payments to
which the income is attributable. See "Material
United States Federal Income Tax Consequences."
HYDO Payments................. On each interest payment date beginning March
1, 2008, in addition to accrued interest due on
that date, we will make a payment, which we
call a HYDO payment, on each new note in an
amount equal to the excess, if any, of:
- the total amount of interest and original
issue discount accrued on the new note
through that date, over
- the sum of:
- all amounts of interest and original
issue discount paid in cash with respect
to such new note through and including
that date;
- all HYDO payments previously made by us;
and
- the annual "yield to maturity"
applicable for purposes of the accrual of
original issue discount multiplied by the
original principal amount at maturity of
the new note.
Each HYDO payment will reduce the outstanding
principal amount at maturity of the applicable
new note. As a result of making these HYDO
payments, we will not be subject to special
rules (applicable to some high-yield debt
obligations with significant amounts of unpaid
original issue discount after five years from
their issue date), that would otherwise limit
the amount of interest expense we could deduct
on the new notes for U.S. federal income tax
purposes.
7
Guarantees.................... Holdings, our parent company, will guarantee
the new notes on a senior secured basis. In
addition, all of our domestic restricted
subsidiaries will guarantee the new notes on a
senior secured basis. If we are unable to make
payments on the new notes when they are due,
Holdings and our subsidiary guarantors will be
obligated to make them instead.
Security Interest............. The new notes will be secured by a first
priority lien on our real property, fixtures,
equipment and proceeds thereof and a second
priority lien on substantially all of our other
assets (including stock of subsidiaries), and
each guarantee will be secured by a first
priority lien on the real property, fixtures,
equipment and proceeds thereof of the relevant
guarantor and a second priority lien on
substantially all of the other assets
(including stock of subsidiaries) of such
guarantor. Our senior credit facility is
secured by a first priority lien on
substantially all of the assets of the
borrowers and the guarantors under the senior
credit facility, including stock of their
respective subsidiaries (including all of our
stock) but excluding real property, fixtures,
equipment and proceeds thereof.
Ranking....................... The new notes will be senior secured
obligations and will rank equal in right of
payment with all of our existing and future
senior indebtedness. The guarantees will be
senior secured obligations of Holdings and the
subsidiary guarantors and will rank equal in
right of payment with all of their respective
existing and future senior indebtedness. As of
March 29, 2003, we had $2.1 million of senior
indebtedness outstanding in addition to the
notes. In addition, we had $7.4 million of
borrowing availability (after giving effect to
required reserves of $500,000), subject to
customary conditions, under our senior credit
facility, which, if borrowed, would be senior
indebtedness. In the event of a bankruptcy, the
rights of noteholders to receive any
distribution of assets or the proceeds
therefrom from us, Holdings or the subsidiary
guarantors with respect to the collateral on
which the notes have a second priority lien
will be subject to the prior claims of the
lenders under our senior credit facility.
Optional Make-Whole
Redemption.................... We may, at our option, redeem some or all of
the new notes at any time prior to October 15,
2006 by paying the greater of (1) 100% of the
accreted value of the new notes and (2) the sum
of the present values of 106.5% of the accreted
value of the new notes plus scheduled interest
payments on the new notes through and including
October 15, 2006, discounted to the redemption
date on a semi-annual basis at the adjusted
treasury rate plus 50 basis points, plus
accrued and unpaid interest to the redemption
date. In the event that we redeem less than all
of the new notes and old notes, if any
outstanding, the trustee will select the notes
for redemption on a pro rata basis or another
method it reasonably determines is fair and
appropriate.
Optional Redemption........... On or after October 15, 2006, we may redeem all
or a portion of the new notes at our option at
the redemption prices described under
"Description of the New
Notes -- Redemption -- Optional
8
Redemption on or After October 15, 2006." In
the event that we redeem less than all of the
new notes and old notes, if any outstanding,
the trustee will select the notes for
redemption on a pro rata basis or another
method it reasonably determines is fair and
appropriate.
Equity Offering Optional
Redemption.................... Prior to October 15, 2005, we may redeem on one
or more occasions new notes and old notes, if
any outstanding, in an amount equal to up to
35% in the aggregate of the principal amount at
maturity of the notes originally issued at 113%
of the accreted value of the notes being
redeemed plus accrued and unpaid interest, if
any, to the redemption date with the net cash
proceeds realized by us from any equity
offering. In the event that we redeem less than
all of the new notes and old notes, if any
outstanding, we will redeem such notes on a pro
rata basis.
Mandatory Redemption.......... We must make a partial pro rata redemption of a
portion of the original principal amount at
maturity of each new note according to the
following schedule:
PERCENTAGE OF
DATE PRINCIPAL REDEEMED
---- ------------------
October 15, 2007........................ 20%
October 15, 2008........................ 10%
In addition, we must pay accrued and unpaid
interest on the principal amount of new notes
redeemed to the redemption date.
If we issue additional notes after the issue
date, these percentages will be reduced by
multiplying the relevant percentage by a
fraction, the numerator of which is the
principal amount at maturity of notes issued on
the issue date and the denominator of which is
the sum of the principal amount at maturity of
such notes and the principal amount at maturity
of any additional notes issued under the
indenture.
However, the principal amount at maturity of
notes we must redeem on the dates set forth
above will be reduced by the aggregate
principal amount at maturity of notes we have
previously repurchased pursuant to the excess
cash flow offers, as described below.
Excess Cash Flow Offer........ Within 120 days after the end of each fiscal
year (beginning 120 days after the end of
fiscal 2003), we must offer to repurchase the
maximum principal amount of notes that may be
purchased with 50% of our excess cash flow from
our previous fiscal year at a purchase price of
100% of the accreted value of the notes to be
purchased. We will repurchase notes pursuant to
any excess cash flow offer on a pro rata basis,
or by another method if required by law. The
indenture governing the new notes defines
excess cash flow as consolidated net income
plus interest, amortization and depreciation
expense, income taxes, and net non-cash
charges, less certain capital expenditures,
increases in working capital, cash interest
expense and income taxes.
Change of Control Offer....... If we experience a change of control, each
holder of new notes will have the right to sell
us all or a portion of its new notes at
9
101% of the accreted value of the new notes,
plus accrued and unpaid interest, if any, to
the date of purchase.
Asset Sale Offers............. If we do not reinvest the proceeds from the
sale of assets in our business, we may have to
use the proceeds to offer to repurchase new
notes at 100% of the accreted value of the new
notes, plus accrued and unpaid interest, if
any, to the date of purchase.
Restrictive Covenants......... The indenture governing the new notes contains
covenants that, among other things, limit our
ability to:
- incur additional indebtedness or issue
disqualified capital stock;
- pay dividends or make other restricted
payments;
- issue capital stock of certain
subsidiaries;
- make capital expenditures;
- enter into transactions with affiliates;
- enter into sale/leaseback transactions;
- create or incur liens;
- transfer or sell assets;
- incur dividend or other payment
restrictions affecting certain
subsidiaries; and
- consummate a merger, consolidation or sale
of all or substantially all of our assets.
These covenants are subject to a number of
important exceptions described below in
"Description of the New Notes -- Certain
Covenants."
Events of Default............. The indenture governing the new notes contains
the following as events of default, which could
result in the accreted value and all accrued
and unpaid interest on the notes becoming
immediately due and payable:
- failure to pay premium, if any, interest or
any other amount (other than principal) on
any notes for a period of 30 days or more
after it becomes due and payable;
- failure to pay the principal on any notes
when it becomes due and payable;
- a default upon certain covenants that
continues for a specified period;
- a default under any other agreement in the
indenture or any agreement contained in the
documents relating to the collateral,
including the security agreement described
below, that continues for a specified
period;
- our or any guarantor's failure to pay any
indebtedness when due, if the amount of
such indebtedness is $5.0 million or more
at any one time;
- judgments in excess of $5.0 million are
rendered against us or any of our
restricted subsidiaries and remain unpaid
for a specified period;
10
- certain events of bankruptcy affecting us
or certain of our subsidiaries;
- any agreement relating to the collateral
ceases to be effective;
- we or any of our subsidiaries contest any
agreement relating to the collateral; and
- certain guarantees cease to be in effect.
You should read the description of these events
of default below under "Description of the New
Notes -- Events of Default" for a complete
explanation of their terms and exceptions.
11
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data for fiscal 2000, 2001 and
for the period from December 30, 2001 through October 15, 2002 have been derived
from the audited consolidated financial statements of Golfsmith International,
Inc., and for the period from October 16, 2002 through December 28, 2002 have
been derived from the audited consolidated financial statements of Golfsmith
International Holdings, Inc., all periods of which have been audited by Ernst &
Young LLP. Golfsmith International Holdings, Inc. was formed on September 4,
2002 and became the parent company of Golfsmith International, Inc. on October
15, 2002 as a result of the merger. Holdings is a holding company and had no
material assets or operations prior to acquiring all of the capital stock of
Golfsmith International, Inc. in the merger. The summary financial data of
Golfsmith as of and for the three months ended March 30, 2002 and of Holdings as
of and for the three months ended March 29, 2003 have been derived from our
unaudited consolidated financial statements included elsewhere in this
prospectus and, in our opinion, reflect all adjustments, consisting of normal
accruals, necessary for a fair presentation of the data for those periods. Our
results of operations for the three months ended March 29, 2003 may not be
indicative of results that may be expected for the full year.
You should read the information set forth below in conjunction with our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the consolidated financial statements and related notes and
"Unaudited Pro Forma Combined Condensed Financial Statements" included elsewhere
in this prospectus.
PREDECESSOR SUCCESSOR
-------------------------------------------------------- ------------
PERIOD FROM PERIOD FROM
DECEMBER 30, OCTOBER 16, THREE MONTHS THREE MONTHS
FISCAL YEAR 2001 THROUGH 2002 THROUGH ENDED ENDED
----------------------------------------- OCTOBER 15, DECEMBER 28, MARCH 30, MARCH 29,
1998 1999 2000 2001 2002 2002 2002 2003
-------- -------- -------- -------- ------------ ------------ ------------- ------------
(PREDECESSOR) (SUCCESSOR)
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
RESULTS OF OPERATIONS:
Net revenues........... $253,624 $267,946 $232,080 $221,439 $180,315 $ 37,831 $48,443 $45,830
Gross profit........... 90,751 92,346 78,450 78,321 63,109 12,684 17,095 14,858
Selling, general and
administrative....... 80,204 78,360 76,352 64,081 48,308 13,581 14,749 14,259
Operating income(1).... 9,745 13,493 506 13,782 8,646 (990) 2,200 599
Income (loss) from
continuing
operations........... 5,558 7,143 (5,224) 7,753 (3,464) (2,546) 2,609 (1,217)
OTHER FINANCIAL DATA:
Depreciation and
amortization(2)...... 4,359 5,601 9,118 6,717 4,776 1,382 1,418 1,311
Capital
expenditures(3)...... 16,405 9,740 2,107 1,345 2,086 1,127 377 409
Ratio of earnings to
fixed charges........ 1.6x 1.6x 0.6x 1.6x 0.7x 0.1x 1.9x 0.5x
AS OF
MARCH 29,
2003
---------
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,775
Total assets................................................ 162,701
Total debt.................................................. 77,954
Total stockholders' equity.................................. 52,246
---------------
(1) Operating income reflects net revenues less cost of products sold, selling,
general and administrative expenses and store pre-opening/closing expenses
that are not reflected in discontinued operations and amortization of
deferred compensation.
(2) Excludes the amortization of the debt discount and deferred charges
associated with our 12% senior subordinated notes, the deferred charges
associated with our credit facility in effect prior to the
12
merger, the amortization of the debt discount and deferred charges
associated with our 8.375% senior secured notes and deferred charges
associated with our senior credit facility in effect subsequent to the
merger.
(3) Capital expenditures consist of total capital expenditures including capital
costs associated with opening new stores.
13
RISK FACTORS
You should carefully consider the following risk factors before deciding to
tender your old notes in exchange for new notes pursuant to the exchange offer.
RISK FACTORS RELATING TO THE NEW NOTES
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE NEW NOTES.
We have a significant amount of indebtedness and we are highly leveraged.
Our total debt outstanding as of March 29, 2003 was $78.0 million (consisting of
the accreted principal amount of the notes and borrowings outstanding under our
senior credit facility), and we have the ability, subject to customary
conditions, to incur $7.4 million of additional debt under our new senior credit
facility (after giving effect to required reserves of $500,000). As of March 29,
2003 we had borrowed $2.1 million under our senior credit facility. After giving
effect to the offering of the old notes and the merger,
- our ratio of total debt to total capital was 60.0% at March 29, 2003;
- our ratio of earnings to fixed charges for the three months ended March
29, 2003 was 0.5x.
Our substantial amount of indebtedness could have important consequences
for you. For example, it could:
- make it more difficult for us to satisfy our obligations with respect to
the new notes upon realization of the common collateral in any bankruptcy
proceeding because all amounts so released would be required to be used
to repay borrowings under our senior credit facility;
- limit our ability to obtain additional financing, if needed, for working
capital, capital expenditures, acquisitions, and general corporate
purposes;
- increase our vulnerability to adverse economic and industry conditions;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing funds
available for working capital, capital expenditures, acquisitions and
other purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and/or our industry; and
- place us at a competitive disadvantage compared to our competitors that
have less indebtedness.
The terms of the indenture allow us to incur additional indebtedness,
subject to certain limitations. Any such additional debt could increase the
risks associated with our substantial leverage.
THE INDENTURE AND OUR SENIOR CREDIT FACILITY IMPOSE SIGNIFICANT OPERATING AND
FINANCIAL RESTRICTIONS ON US. IF WE DEFAULT UNDER OUR SENIOR CREDIT FACILITY, WE
MAY NOT BE ABLE TO MAKE PAYMENTS ON THE NEW NOTES.
The indenture and our senior credit facility impose significant operating
and financial restrictions on us. These restrictions limit our ability and the
ability of our subsidiaries, among other things, to:
- incur additional indebtedness or issue disqualified capital stock;
- pay dividends or make other restricted payments;
- issue capital stock of subsidiaries;
- make capital expenditures;
- enter into transactions with affiliates;
- create or incur liens;
- transfer or sell assets;
14
- incur dividend or other payment restrictions affecting subsidiaries; and
- consummate a merger, consolidation or sale of all or substantially all of
our or its assets.
In addition, our senior credit facility requires us to maintain compliance
with specified financial ratios, including fixed charge coverage and total
leverage ratios, as well as achievement of a minimum level of EBITDA. Our
ability to comply with these ratios may be affected by events beyond our
control. See "Description of Senior Credit Facility."
A breach of any of the covenants contained in our senior credit facility,
or our inability to comply with the required financial ratios, could result in
an event of default, which would allow the lenders under the senior credit
facility to discontinue lending and/or to declare all borrowings outstanding to
be due and payable. We, the borrowers under the senior credit facility and the
guarantors of the senior credit facility have granted the lenders under our new
senior credit facility a first priority security interest in substantially all
of our respective assets (including, without limitation, our common stock, all
of the capital stock of our domestic subsidiaries and 65% of the voting capital
stock and 100% of the non-voting capital stock of our foreign subsidiaries that
are direct subsidiaries of us or any of our domestic subsidiaries), other than
real property, fixtures, equipment and proceeds thereof. All of the borrowers
and guarantors under our senior credit facility (other than us) are guarantors
of the notes.
In the event of any default under the senior credit facility, the lenders
thereunder could elect to discontinue lending and/or to declare all amounts
outstanding to be immediately due and payable, to foreclose upon the assets
pledged to them, or to require Golfsmith, Holdings and each of their domestic
subsidiaries to apply all of their available cash to repay borrowings under the
senior credit facility. If the amounts outstanding under the senior credit
facility or the notes were to be accelerated, we cannot assure you that our
consolidated assets would be sufficient to repay in full the money owed to the
lenders or to our other debt holders, including you as a noteholder. Although
the lenders under our senior credit facility and the holders of the notes share
in the proceeds of this collateral (other than collateral consisting of real
property, fixtures, equipment and the proceeds thereof), our obligations to the
lenders under our senior credit facility are secured on a first priority basis
and our obligations under the notes are secured on a second priority basis. As a
result, the lenders under our senior credit facility are entitled to receive
proceeds from any realization of such collateral to repay their obligations in
full before the holders of the new notes. Therefore, if the lenders under the
senior credit facility proceed against the collateral (whether held by us or any
guarantor) securing that indebtedness, including the collateral pledged by the
guarantors, the proceeds received upon the realization of the collateral upon
which the lenders under the senior credit facility have a first priority lien
would be applied first to amounts due under our senior credit facility before
any proceeds will be available to make payments on the new notes. In addition,
under the intercreditor agreement, at any time that obligations under our senior
credit facility are outstanding, any actions that may be taken with respect to
such collateral, including the ability to cause the commencement of enforcement
proceedings against such collateral and to control the conduct of such
proceedings, will be at the direction of the lenders under our senior credit
facility, and the trustee, on behalf of the holders of the notes, does not have
the ability to control or direct such actions, even if the rights of the holders
of the notes are adversely affected.
THE LENDERS UNDER OUR SENIOR CREDIT FACILITY MAY LIMIT BORROWINGS UNDER OUR
SENIOR CREDIT FACILITY WHICH COULD LIMIT OUR LIQUIDITY AND THEREBY ADVERSELY
AFFECT OUR BUSINESS AND OUR ABILITY TO FULFILL OUR OBLIGATIONS UNDER THE NEW
NOTES.
If the lenders under our credit facility limit our borrowing ability, we
may not have the liquidity we need to purchase inventory or otherwise run our
business. This could cause us to be unable to generate enough cash flow to make
payments on the notes or otherwise adversely affect our business. The amount
available to be borrowed under our senior credit facility is limited for each
borrower to 85% of the net amount of eligible receivables of such borrower plus
the lesser of 65% of the value of eligible inventory (valued on a lower of cost
or market basis) of such borrower and 60% of the net orderly liquidation value
of eligible inventory of such borrower. The lender agent under our senior credit
facility retains the right from time to time to establish or modify advance
rates, standards of eligibility and reserves against
15
availability. The borrowers have agreed with the lender agent that, in addition
to other reserves that the lender agent may impose, they will maintain an
availability reserve at all times of $0.5 million. As a result, the amount of
borrowings available to the borrowers under the senior credit facility may at no
time exceed $9.5 million, unless the lender agent releases that reserve. In
addition, the occurrence of an event of default under the senior credit
facility, or the occurrence of a material adverse change in our financial
condition, operations, business or prospects, or the inability of the borrowers
to make certain representations required to be made upon each borrowing, would
entitle the lenders to withhold further funding under the senior credit
facility. These limitations may result in the borrowers being able to borrow
less than the $9.5 million availability under the senior credit facility (after
giving effect to required reserves of $500,000).
If we are able to borrow less than the $9.5 million available under our
senior credit facility (after giving effect to required reserves of $500,000),
we may not have sufficient funds available to us for working capital, capital
expenditures, acquisitions and other purposes. As a result, we may not be able
to effectively engage in our business or to compete effectively and our
profitability, and therefore our ability to fulfill our obligations under the
new notes, may be adversely affected.
WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOW TO MAKE INTEREST PAYMENTS
UNDER THE NEW NOTES OR REQUIRED PAYMENTS UNDER OUR SENIOR CREDIT FACILITY DUE TO
EVENTS THAT ARE BEYOND OUR CONTROL WHICH COULD CAUSE US TO DEFAULT UNDER THE
CREDIT AGREEMENT AND THE INDENTURE.
Economic, financial, competitive, regulatory, and other factors beyond our
control affect our ability to generate cash flow from operations to make
payments on, or to refinance, the new notes and our other indebtedness,
including indebtedness under our senior credit facility, and to fund necessary
working capital. We cannot assure you that our operations will generate
sufficient cash flow to enable us to meet our obligations. A significant
reduction in operating cash flow would likely increase the need for alternative
sources of liquidity. If we are unable to generate sufficient cash flow to make
payments on the new notes or other debt, including debt under our senior credit
facility, we will have to pursue one or more alternatives, such as reducing or
delaying capital expenditures, refinancing the new notes or other debt, selling
assets or raising equity. We cannot assure you that any of these alternatives
could be accomplished on satisfactory terms or that they would yield sufficient
funds to retire the new notes and our other debt or to make payments on the new
notes or under our senior credit facility. In the event that our cash flow and
any alternative sources of liquidity are insufficient to make the required
payments under our senior credit facility, a default may occur under our senior
credit facility and the indebtedness under our senior credit facility could be
accelerated, which may cause an event of default under the indenture.
FRAUDULENT CONVEYANCE LAWS MAY PERMIT COURTS TO VOID THE GUARANTEE OF OUR PARENT
OR THE SUBSIDIARY GUARANTEES OF THE NEW NOTES IN SPECIFIC CIRCUMSTANCES, WHICH
WOULD INTERFERE WITH THE PAYMENT OF THESE GUARANTEES.
U.S. federal bankruptcy law and comparable state statutes may allow courts,
upon the bankruptcy or financial difficulty of a parent or subsidiary guarantor,
to void that parent's or that subsidiary's guarantee of the new notes. If a
court voids a guarantee or holds it unenforceable, you will cease to be a
creditor of, and you may be required to return payments received from, that
guarantor, and you will be a creditor solely of us and the other guarantors
whose guarantees have not been voided. In the alternative, the court could
subordinate that guarantee (including all payments thereunder) to all other debt
of the guarantor. The court could take these actions in respect of a guarantee
if, among other things, the guarantor, at the time it incurred the debt
evidenced by its guarantee:
- incurred the guarantee with the intent of hindering, delaying or
defrauding current or future creditors; or
- received less than reasonably equivalent value or fair consideration for
incurring the guarantee, and
- was insolvent or was rendered insolvent by reason of the incurrence; or
16
- was engaged, or about to engage, in a business or transaction for which
the assets remaining with it constituted unreasonably small capital to
carry on such business; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay as those debts matured; or
- was a defendant in an action for money damages, or had a judgment for
money damages entered against it, if, in either case, after final
judgment the judgment was unsatisfied.
The tests for fraudulent conveyance, including the criteria for insolvency,
will vary depending upon the law of the jurisdiction that is being applied.
Generally, however, a debtor would be considered insolvent if, at the time the
debtor incurred the debt, either:
- the sum of the debtor's debts and liabilities, including contingent
liabilities, was greater than the debtor's assets at fair valuation; or
- the present fair saleable value of the debtor's assets was less that the
amount required to pay the probable liability on the debtor's total
existing debts and liabilities, including contingent liabilities, as they
became absolute and matured.
Because certain of our subsidiaries who are guarantors of the new notes are
direct borrowers under the senior credit facility, in the event that guarantees
are voided, the lenders under our senior credit facility would continue to have
recourse to the assets of these subsidiaries; in contrast, holders of the new
notes would be forced to look to dividends and similar equity payments from
those subsidiaries, after payment of the senior credit facility obligations.
THE COLLATERAL WHICH SECURES BOTH THE NEW NOTES AND BORROWINGS UNDER OUR SENIOR
CREDIT FACILITY IS SUBJECT TO CONTROL BY THE LENDERS UNDER OUR SENIOR CREDIT
FACILITY. IF THERE IS A DEFAULT, THE PROCEEDS FROM THE COLLATERAL MAY NOT BE
SUFFICIENT TO REPAY BOTH THE LENDERS UNDER OUR SENIOR CREDIT FACILITY AND THE
HOLDERS OF THE NEW NOTES AND THE LENDERS UNDER THE SENIOR CREDIT FACILITY WILL
BE REPAID BEFORE THE HOLDERS OF THE NOTES.
The rights of the holders of the new notes with respect to the collateral
securing the new notes are limited pursuant to the terms of the intercreditor
agreement. Although our senior credit facility currently permits borrowings of
up to $9.5 million (after giving effect to required reserves of $500,000), the
intercreditor agreement permits borrowings of up to $12.5 million principal
amount under the senior credit facility in the event we amend that facility in
the future. Borrowings under the senior credit facility are secured by the same
collateral, other than collateral consisting of real property, fixtures,
equipment and proceeds thereof, that secures the new notes. Although the lenders
under our senior credit facility and the holders of the notes share in the
proceeds of this collateral (other than collateral consisting of real property,
fixtures, equipment and the proceeds thereof), our obligations to the lenders
under our senior credit facility are secured on a first priority basis and our
obligations under the notes are secured on a second priority basis. As a result,
the lenders under our senior credit facility are entitled to receive proceeds
from any realization of such collateral to repay their obligations in full
before the holders of the new notes. In addition, under the intercreditor
agreement, at any time that obligations under our senior credit facility are
outstanding, any actions that may be taken with respect to such collateral,
including the ability to cause the commencement of enforcement proceedings
against such collateral and to control the conduct of such proceedings, will be
at the direction of the lenders under our senior credit facility, and the
trustee, on behalf of the holders of the notes, does not have the ability to
control or direct such actions, even if the rights of the holders of the notes
are adversely affected. See "Description of the New Notes -- Security." We
cannot assure you that the value of this collateral will be sufficient to repay
in full all indebtedness outstanding under the senior credit facility and the
new notes.
17
THE VALUE OF THE LIMITED ASSETS SECURING THE NOTES ON A FIRST PRIORITY BASIS MAY
NOT BE SUFFICIENT TO MAKE UP ANY SHORTFALL BETWEEN OUR OBLIGATIONS UNDER THE
NOTES AND THE PROCEEDS FROM THE REALIZATION OF THE COLLATERAL WHICH SECURES THE
NOTES ON A SECOND PRIORITY BASIS.
Our obligations under the notes are secured on a first priority basis by
collateral consisting of real property, fixtures, equipment and proceeds
thereof. The lenders under our senior credit facility do not have a security
interest in such collateral. However, the proceeds from any realization of this
collateral may not be sufficient to make up any shortfall between our
obligations under the notes and any proceeds allocable to noteholders from the
realization of the collateral which secures our obligations to the lenders under
our senior credit facility on a first priority basis.
THE ASSETS EXCLUDED FROM THE LIENS SECURING OUR OBLIGATIONS UNDER THE NOTES
AND/OR OUR SENIOR CREDIT FACILITY MAY BE SUBJECT TO LIENS IN FAVOR OF OTHER
PARTIES AND, IF NOT SUBJECT TO ANY SUCH LIENS, WILL BE AVAILABLE, ON AN EQUAL
AND PRO RATA BASIS, TO SATISFY ALL SENIOR INDEBTEDNESS OF THE ENTITY OWNING SUCH
ASSETS. THESE ASSETS MAY NOT BE SUFFICIENT TO PROVIDE FOR PAYMENT OF ALL SUCH
SENIOR INDEBTEDNESS (INCLUDING THE NOTES), ESPECIALLY IF WE ISSUE ADDITIONAL
INDEBTEDNESS OR DISPOSE OF ASSETS.
Any claim for the remaining shortfall between the amount realized by the
holders of the notes from the sales of such collateral securing the notes (and
related guarantees) and the obligations under the notes (and related guarantees)
will rank equally in right of payment with all of our existing and future senior
indebtedness or that of the relevant guarantor, as applicable, and, in some
cases, junior to the claims of any person holding liens which are permitted
liens as described under "Description of the New Notes." The indenture does not
require that we maintain the current level of collateral or maintain a specific
ratio of indebtedness to asset values. Any additional notes issued pursuant to
the indenture will rank equal to the notes and be entitled to the same rights
and priority with respect to the collateral. Thus, the issuance of additional
notes pursuant to the indenture may have the effect of significantly diluting
your ability to recover in full from the then existing pool of collateral.
THE BOOK VALUE OF OUR ASSETS IS NOT A MEASURE OF THE AMOUNT OF PROCEEDS
REALIZABLE UPON A SALE. THE PROCEEDS FROM THE SALE OF THE COLLATERAL SECURING
THE NOTES AND OUR SENIOR CREDIT FACILITY IN THE EVENT OF A LIQUIDATION MAY BE
INSUFFICIENT TO REPAY THE NOTES AND OUR SENIOR CREDIT FACILITY.
The value of the collateral in the event of liquidation is not the book
value of the assets, but rather will depend on market and economic conditions,
the availability of buyers and other factors. We have not conducted any asset
appraisals in connection with the initial offering of the notes or the exchange
offer. Moreover, the amount to be received upon such a sale would be dependent
upon numerous factors, including the condition, age and useful life of the
collateral at the time of such sale, as well as the timing and manner of such
sale. By its nature all or some of the collateral will be illiquid and may have
no readily ascertainable market value. Accordingly, there can be no assurance
that the collateral, if saleable, can be sold in a short period of time or at an
appropriate price. The proceeds from any sale of the collateral will likely be
insufficient to satisfy the amounts outstanding under the notes after payment in
full of all obligations under our senior credit facility. If such proceeds are
not sufficient to repay amounts outstanding under the notes, then holders of the
notes (to the extent not repaid from the proceeds of the sale of the collateral)
would have only an unsecured claim against our remaining assets. As of March 29,
2003, we had borrowed $2.1 million under our senior credit facility and had $7.4
million of borrowing availability (after giving effect to required reserves of
$500,000).
BANKRUPTCY LAWS MAY LIMIT YOUR ABILITY TO REALIZE VALUE FROM THE COLLATERAL.
The right of the collateral agent to repossess and dispose of the
collateral upon the occurrence of an event of default under the indenture
governing the new notes is likely to be significantly impaired by applicable
bankruptcy law if a bankruptcy case were to be commenced by or against us before
the collateral agent repossessed and disposed of the collateral. Upon the
commencement of a case for relief under Title 11 of the United States Code, a
secured creditor such as the collateral agent is prohibited from
18
repossessing its security from a debtor in a bankruptcy case, or from disposing
of security repossessed from such debtor, without bankruptcy court approval.
Moreover, the bankruptcy code permits the debtor to continue to retain and use
collateral even though the debtor is in default under the applicable debt
instruments, provided that the secured creditor is given "adequate protection."
The meaning of the term "adequate protection" may vary according to
circumstances, but it is intended in general to protect the value of the secured
creditor's interest in the collateral and may include cash payments or the
granting of additional security, if and at such times as the court in its
discretion determines that the value of the secured creditor's interest in the
collateral is declining during the pendency of the bankruptcy case. A bankruptcy
court may determine that a secured creditor may not require compensation for a
diminution in the value of its collateral if the value of the collateral exceeds
the debt it secures.
In view of the lack of a precise definition of the term "adequate
protection" and the broad discretionary powers of a bankruptcy court, it is
impossible to predict:
- how long payments under the new notes could be delayed following
commencement of a bankruptcy case;
- whether or when the collateral agent could repossess or dispose of the
collateral;
- the value of the collateral at the time of the bankruptcy petition; or
- whether or to what extent holders of the new notes would be compensated
for any delay in payment or loss of value of the collateral through the
requirement of "adequate protection."
Any disposition of the collateral during a bankruptcy case would also
require permission from the bankruptcy court. Furthermore, in the event a
bankruptcy court determines the value of the collateral is not sufficient to
repay all amounts due on the notes, the holders of the notes would hold secured
claims to the extent of the value of the collateral to which the holders of the
notes are entitled, and unsecured claims with respect to such shortfall. The
bankruptcy code only permits the payment and accrual of post-petition interest,
costs and attorney's fees to a secured creditor during a debtor's bankruptcy
case to the extent the value of its collateral is determined by the bankruptcy
court to exceed the aggregate outstanding principal amount of the obligations
secured by the collateral.
The intercreditor agreement also prohibits the holders of the new notes or
the collateral agent from seeking adequate protection with respect to the
collateral which also secures the senior credit facility and prohibits the
collateral agent and holders of the new notes from objecting to the lender agent
or the lenders seeking adequate protection with respect to such collateral.
AN ACTIVE TRADING MARKET FOR THE NEW NOTES MAY NOT DEVELOP, WHICH COULD MAKE IT
DIFFICULT FOR YOU TO RESELL YOUR NOTES AT THEIR FAIR MARKET VALUE OR AT ALL.
The new notes are a new issue of securities for us for which there is
currently no public market. We do not intend to list the new notes on any
national securities exchange or automated quotation system. Accordingly, no
market for the new notes may develop, and any market that develops may not last.
If the new notes are traded, they may trade at a discount from their initial
offering price, depending on prevailing interest rates, the market for similar
securities, our performance and other factors. To the extent that an active
trading market does not develop, you may not be able to resell your new notes at
their fair market value or at all.
To the extent that old notes are surrendered and accepted in the exchange
offer, the trading market for unsurrendered old notes and for
surrendered-but-unaccepted old notes could be adversely affected due to the
limited amount of old notes that are expected to remain outstanding following
the exchange offer. Generally, when there are fewer outstanding securities of an
issue, there is less demand to purchase that security, which results in a lower
price for the security. Conversely, if many old notes are not surrendered, or
are surrendered-but-unaccepted, the trading market for the new notes could be
adversely affected. To the extent our affiliate Atlantic Equity Partners III
continues to own any old notes at the consummation of the exchange offer, these
notes will not be eligible for exchange and will remain outstanding. As of
19
May 15, 2003, Atlantic Equity Partners III held $5.8 million of old notes that
are not eligible for exchange. See "Plan of Distribution" and "The Exchange
Offer" for further information regarding the distribution of the new notes and
the consequences of failure to participate in the exchange offer.
IF YOU DO NOT EXCHANGE YOUR OLD NOTES FOR NEW NOTES, YOU WILL CONTINUE TO HAVE
RESTRICTIONS ON YOUR ABILITY TO RESELL THEM, WHICH COULD REDUCE THEIR VALUE.
The old notes were not registered under the Securities Act or under the
securities laws of any state and may not be resold, offered for resale, or
otherwise transferred unless they are subsequently registered or resold pursuant
to an exemption from the registration requirements of the Securities Act and
applicable state securities laws. If you do not exchange your old notes for new
notes pursuant to the exchange offer, you will not be able to resell, offer to
resell, or otherwise transfer the old notes unless they are registered under the
Securities Act or unless you resell them, offer to resell them or otherwise
transfer them under an exemption from the registration requirements of, or in a
transaction not subject to, the Securities Act. In addition, we will no longer
be under an obligation to register the old notes under the Securities Act except
in the limited circumstances provided in the registration rights agreement.
WE MAY BE UNABLE TO REPURCHASE THE NOTES UPON A CHANGE OF CONTROL AS REQUIRED BY
THE INDENTURE, WHICH COULD CONSTITUTE A DEFAULT UNDER THE INDENTURE.
Upon the occurrence of certain specific kinds of change of control events,
we must offer to repurchase all outstanding notes. In addition, a change of
control under the indenture would also constitute a change of control, and thus
an event of default, under our senior credit facility as well. This would
entitle the lenders to cause all of our outstanding debt under our senior credit
facility to become due and payable. As of March 29, 2003, we had $2.1 million of
borrowings outstanding under our senior credit facility. It is possible that we
will not have sufficient funds at the time of the change of control to make the
required repurchase of notes or payments under our senior credit facility, or
that restrictions in our senior credit facility will not allow such repurchases
of the notes. If we are required to repurchase the notes or to make accelerated
payments under our senior credit facility, we would probably require third party
financing. We cannot be sure that we would be able to obtain third party
financing on acceptable terms, or at all. Our failure to purchase the notes
would be a default under the indenture, which would also result in a default
under our senior credit facility.
WE ARE NOT REQUIRED BY THE CHANGE OF CONTROL PROVISIONS IN THE INDENTURE TO
REPURCHASE THE NEW NOTES IF WE SELL ASSETS THAT DO NOT CONSTITUTE "SUBSTANTIALLY
ALL" OF OUR ASSETS UNDER THE INDENTURE. WHETHER ANY GIVEN SALE OF ASSETS
CONSTITUTES A SALE OF "SUBSTANTIALLY ALL" OF OUR ASSETS IS SUBJECT TO
UNCERTAINTY, WHICH COULD MAKE IT DIFFICULT FOR NOTEHOLDERS TO DETERMINE WHETHER
A CHANGE OF CONTROL HAS OCCURRED.
The indenture requires us to offer to repurchase all outstanding notes upon
a change of control, which includes a sale of all or substantially all of our
assets. We may sell large amounts of our assets and may not be required by the
indenture to repurchase the notes if the sale is not deemed to be "substantially
all" of our assets under the indenture. Because this term is not defined in the
indenture, we must rely on the definition established under New York law, which
governs the indenture. New York law is not clear regarding what constitutes a
sale of "substantially all" of a company's assets and we can not predict how a
court might apply New York law with respect to a particular sale of assets. As a
consequence, in cases where the law is uncertain, the noteholders may have
difficulty determining whether a change of control has occurred. This could
impede the repurchase of the notes upon a possible change of control in some
cases.
WE MAY EXPERIENCE CORPORATE EVENTS OR ENTER INTO TRANSACTIONS OTHER THAN A SALE
OF ASSETS THAT WILL NOT CONSTITUTE A CHANGE OF CONTROL AND MAY ADVERSELY AFFECT
OUR ABILITY TO FULFILL OUR OBLIGATIONS UNDER THE NOTES.
Certain corporate events or transactions, such as leveraged
recapitalizations that increase the level of our indebtedness, would not
constitute a change of control under the indenture and we would not be
20
required to offer to repurchase the new notes. These corporate events, including
increases in our indebtedness, may adversely affect our ability to fulfill our
obligations under the notes.
HOLDERS OF THE NEW NOTES WILL BE REQUIRED TO INCLUDE AMOUNTS IN GROSS INCOME FOR
FEDERAL INCOME TAX PURPOSES IN ADVANCE OF RECEIPT OF CASH PAYMENTS.
The new notes will be issued with original issue discount for United States
federal income tax purposes. As a result, U.S. holders, as defined under
"Material United States Federal Income Tax Consequences," will be required to
include amounts in income in respect of the new notes on a constant yield to
maturity basis in advance of the receipt of the cash to which such income is
attributable. See "Material United States Federal Income Tax Consequences--U.S.
holders -- Original Issue Discount."
RISK FACTORS RELATING TO OUR BUSINESS
OUR SUCCESS DEPENDS ON THE CONTINUED POPULARITY OF GOLF AND THE GROWTH OF THE
MARKET FOR GOLF-RELATED PRODUCTS. IF GOLF DECLINES IN POPULARITY, OUR SALES
COULD MATERIALLY DECLINE.
We generate substantially all of our net revenues from the sale of
golf-related equipment and accessories. The demand for our golf products is
directly related to the popularity of golf, the number of golf participants and
the number of rounds of golf being played by these participants. If golf
participation decreases, sales of our products would be adversely affected. In
addition, the popularity of golf organizations, such as the Professional Golfers
Association, also affects the sales of our golf equipment and golf-related
apparel. We depend on the exposure of our brands to increase brand recognition
and reinforce the quality of our products. Any significant reduction in
television coverage of PGA or other golf tournaments, or any other significant
decreases in either attendance at golf tournaments or viewership of golf
tournaments, will reduce the visibility of our brand and could adversely affect
our sales.
In addition, we do not believe there has been any material increase in golf
participation or the number of golf rounds played in 1999, 2000, 2001 and 2002.
In fact, we believe that the number of rounds played declined in 2002, perhaps
reflecting the general decline in the U.S. economy. Furthermore, we believe that
since 1997, the overall worldwide premium golf club market has experienced
little growth in dollar volume from year to year. We can not assure you that the
overall dollar volume of the worldwide market for golf-related products will
grow, or that it will not decline, in the future.
WE MAY NOT BE ABLE TO BORROW ADDITIONAL FUNDS, IF NEEDED, TO EXPAND OUR BUSINESS
OR COMPETE EFFECTIVELY AND, AS A RESULT, OUR NET REVENUES AND PROFITABILITY MAY
BE MATERIALLY ADVERSELY AFFECTED.
The indenture and our senior credit facility limit almost completely our
ability to borrow additional funds. We believe that the terms of the liens
securing our senior credit facility and the notes effectively preclude us from
borrowing additional funds, other than under our new senior credit facility. As
a result, to the extent that we do not have borrowing availability under our
senior credit facility, we will have to fund our operations, including new store
openings and capital expenditures as well as any future acquisitions, with cash
flow from operations. If we do not generate sufficient cash flow from our
operations to fund these expenditures, we may not be able to compete effectively
and our sales and profitability would likely be materially adversely affected.
A REDUCTION IN DISCRETIONARY CONSUMER SPENDING COULD REDUCE SALES OF OUR
PRODUCTS.
Our products are recreational in nature and are therefore discretionary
purchases for consumers. Consumers are generally more willing to make
discretionary purchases of golf products during favorable economic conditions.
Discretionary spending is affected by many factors, including, among others,
general business conditions, interest rates, the availability of consumer
credit, taxation, and consumer confidence in future economic conditions. Our
customers' purchases of discretionary items, including our products, could
decline during periods when disposable income is lower, or periods of actual or
perceived unfavorable economic conditions. Any significant decline in these
general economic conditions or uncertainties regarding future economic prospects
that adversely affect discretionary consumer spending could lead to
21
reduced sales of our products. In addition, our sales could be adversely
affected by a downturn in the economic conditions in the markets in which our
superstores operate. The general slowdown in the United States economy and the
uncertain economic outlook have adversely affected consumer spending habits,
which has adversely affected our net revenues. A prolonged economic downturn
could have a material adverse effect on our business, financial condition, and
results of operations.
OUR SALES AND PROFITS MAY BE ADVERSELY AFFECTED IF WE AND OUR SUPPLIERS FAIL TO
SUCCESSFULLY DEVELOP AND INTRODUCE NEW PRODUCTS.
Our future success will depend, in part, upon our and our suppliers'
continued ability to develop and introduce innovative products in the golf
equipment market. The success of new products depends in part upon the various
subjective preferences of golfers, including a golf club's look and "feel," and
the level of acceptance that a golf club has among professional and recreational
golfers. The subjective preferences of golf club purchasers are difficult to
predict and may be subject to rapid and unanticipated changes. If we or our
suppliers fail to successfully develop and introduce innovative products on a
timely basis, then our sales and profits may suffer.
In addition, if we or our suppliers introduce new golf clubs too rapidly,
it could result in close-outs of existing inventories. Close-outs can result in
reduced margins on the sale of older products, as well as reduced sales of new
products given the availability of older products at lower prices. These reduced
margins and sales may adversely affect our results of operations.
OUR SALES AND PROFITABILITY MAY BE ADVERSELY AFFECTED IF NEW COMPETITORS ENTER
THE GOLF PRODUCTS INDUSTRY.
Increased competition in our markets due to the entry of new competitors,
including companies which currently supply us with products that we sell, could
reduce our net revenues. Our competitors currently include other specialty
retailers, mass merchandise retailers, conventional sporting goods retailers,
on-course pro shops, and online retailers of golf equipment. These businesses
compete with us in one or more product categories. In addition, traditional and
specialty golf retailers are expanding more aggressively in marketing brand-name
golf equipment, thereby competing directly with us for products, customers and
locations. Some of these potential competitors have been in business longer than
us and/or have greater financial or marketing resources than we do and may be
able to devote greater resources to sourcing, promoting and selling their
products. Several of our key vendors have begun to operate retail stores or
websites that sell directly to consumers and may compete with us and reduce our
sales. As a result of this competition, we may experience lower sales or greater
operating costs, such as marketing costs, which would have an adverse effect on
our profitability.
NEW SUPERSTORES THAT WE MAY OPEN MAY DIVERT OUR LIMITED CAPITAL RESOURCES AWAY
FROM OTHER AREAS OF OUR BUSINESS AND MAY NOT BE PROFITABLE, WHICH COULD
ADVERSELY AFFECT THE PROFITABILITY OF OUR COMPANY AS A WHOLE.
Our growth strategy involves opening additional superstores in new and
existing markets. We opened three new stores during fiscal 2002 and incurred
pre-opening expenses of $0.2 million and $1.9 million in capital expenditures.
In the three months ended March 29, 2003, we did not open any new stores. We
expect to open five new stores during the remainder of fiscal 2003. Subject to
our ability to generate sufficient cash flow, we currently plan to spend $5.0
million to $7.0 million to open additional stores and/or retrofit existing
stores in fiscal 2003. However, to the extent that we use capital for
acquisitions, our budget for store openings and retrofittings will be reduced.
Typically, we estimate that we incur $0.6 million in net working capital costs
and $0.6 million in capital expenditures in connection with the opening of a new
store. These amounts are estimates and actual store opening costs may vary. We
intend to fund new store openings through cash flow from operations. Because our
senior credit facility and the indenture governing the notes significantly
restrict our ability to incur indebtedness and to make capital expenditures, we
may not have or be able to obtain sufficient funds to fund our planned
expansion. If we use our limited capital resources to open new stores and these
stores are not profitable, our business as a whole could suffer.
22
Our ability to open new stores on a profitable basis is subject to various
contingencies, some of which are beyond our control. These contingencies include
our ability to locate suitable store sites, negotiate acceptable lease terms,
build-out or refurbish sites on a timely and cost-effective basis, hire, train
and retain skilled managers and personnel, obtain adequate capital resources and
successfully integrate new stores into existing operations. We can not assure
you that our new stores will be a profitable deployment of our limited capital
resources. If any of our new stores are not profitable, then the profitability
of our company a whole may be adversely affected.
OUR EXPANSION IN NEW AND EXISTING MARKETS, IF UNSUCCESSFUL, COULD CAUSE OUR NET
REVENUES TO DECREASE.
Our expansion in new and existing markets may present competitive,
distribution, and merchandising challenges that differ from our current
challenges, including competition among our stores clustered in a single market,
diminished novelty of our store design and concept, added strain on our
distribution center and management information systems and diversion of
management attention from existing operations. To the extent that we are not
able to meet these new challenges, our net revenues could decrease.
IF WE DO NOT ACCURATELY PREDICT OUR SALES DURING OUR PEAK SEASONS AND THEY ARE
LOWER THAN WE EXPECT, OUR PROFITABILITY MAY BE MATERIALLY ADVERSELY AFFECTED.
Our business is highly seasonal. Our sales during our second fiscal quarter
of each year, which includes the Father's Day selling season, and the Christmas
holiday selling season have historically contributed a disproportionate
percentage of our net revenues and most of our net income for the entire year.
We make decisions regarding merchandise well in advance of the season in which
it will be sold, particularly for the Father's Day and Christmas holiday selling
seasons. We incur significant additional expenses leading up to and during our
second fiscal quarter and the month of December in anticipation of higher sales
in those periods, including acquiring additional inventory, preparing and
mailing our catalogs, advertising, creating in-store promotions and hiring
additional employees. If our sales during our peak seasons are lower than we
expect for any reason, we may not be able to adjust our expenses in a timely
fashion. As a result, our profitability may be materially adversely affected.
IF THE PRODUCTS WE SELL DO NOT SATISFY THE STANDARDS OF THE UNITED STATES GOLF
ASSOCIATION AND THE ROYAL AND ANCIENT GOLF CLUB OF ST. ANDREWS IN THE FUTURE,
OUR NET REVENUES ATTRIBUTABLE TO THOSE PRODUCTS AND OUR PROFITABILITY MAY BE
REDUCED.
We and our suppliers generally seek to satisfy the standards established by
the United States Golf Association and the Royal and Ancient Golf Club of St.
Andrews in the design of golf clubs because these standards are generally
followed by golfers within their respective geographic areas. We believe that
all of the products we sell conform to these standards, except where expressly
marketed as non-conforming. However, we cannot assure you that our products will
satisfy these standards in the future or that the standards of these
organizations will not be changed in a way that makes our products
non-conforming. If our products that are intended to conform are determined to
be non-conforming, our net revenue attributable to those products and, as a
result, our profitability may be reduced.
WE LEASE MOST OF OUR SUPERSTORE LOCATIONS. IF WE ARE UNABLE TO MAINTAIN OUR
SUPERSTORE LEASES OR TO LOCATE ALTERNATIVE SITES FOR OUR SUPERSTORES ON TERMS
THAT ARE ACCEPTABLE US, OUR NET REVENUES AND PROFITABILITY COULD BE REDUCED.
We lease 25 of our 26 superstores. As of March 29, 2003, we operated one of
our superstores under a lease with a term that expires in less than one year. We
cannot assure you that we will be able to maintain our existing store locations
as leases expire, or that we will be able to locate alternative sites on
favorable terms. If we cannot maintain our existing store locations or locate
alternative sites on favorable or acceptable terms, our net revenues and
profitability could be reduced.
23
OUR COMPARABLE STORE SALES MAY FLUCTUATE, WHICH COULD NEGATIVELY IMPACT OUR
FUTURE OPERATING PERFORMANCE.
Our comparable store sales are affected by a variety of factors, including,
among others:
- customer demand in different geographic regions;
- our ability to efficiently source and distribute products;
- changes in our product mix;
- promotional events;
- effects of competition;
- our ability to effectively execute our business strategy; and
- general economic conditions.
Our comparable store sales have fluctuated significantly in the past and we
believe that such fluctuations may continue. Our historic results are not
necessarily indicative of our future results, and we cannot assure you that our
comparable store sales will not decrease again in the future. Any reduction in
or failure to increase our comparable store sales could negatively impact our
future operating performance.
IF WE FAIL TO ACCURATELY TARGET THE APPROPRIATE SEGMENT OF THE CONSUMER CATALOG
MARKET OR IF WE FAIL TO ACHIEVE ADEQUATE RESPONSE RATES TO OUR CATALOGS, OUR
RESULTS OF OPERATIONS MAY SUFFER.
Our results of operations depend in part on the success of our catalog
operations. We believe that the success of our catalog operations depends on our
ability to:
- achieve adequate response rates to our mailings;
- continue to offer a merchandise mix that is attractive to our mail order
customers;
- cost-effectively add new customers;
- cost-effectively design and produce appealing catalogs; and
- timely deliver products ordered through our catalogs to our customers.
We have historically experienced fluctuations in the response rates to our
catalog mailings. If we fail to achieve adequate response rates, we could
experience lower sales, significant markdowns or write-offs of inventory and
lower margins, which would adversely affect our results of operations, perhaps
materially.
IF WE ARE UNABLE TO MEET OUR LABOR NEEDS, OUR PERFORMANCE WILL SUFFER.
Many of our employees are in entry-level or part-time positions that
historically have high rates of turnover. We may be unable to meet our labor
needs and control our costs due to external factors such as unemployment levels,
minimum wage legislation, and wage inflation. If we cannot attract and retain
quality employees, our performance will suffer and we may not be able to
successfully execute our growth strategy.
IF WE LOSE THE SERVICES OF KEY MEMBERS OF OUR MANAGEMENT, WE MAY NOT BE ABLE TO
MANAGE OUR OPERATIONS AND IMPLEMENT OUR GROWTH STRATEGY EFFECTIVELY.
Our future success depends, in large part, on the continued service of Jim
Thompson, our chief executive officer, and some of our other key executive
officers and managers who possess significant expertise and knowledge of our
business and markets. We do not maintain key person insurance on any of our
officers or managers. Any loss or interruption of the services of these
individuals could significantly reduce our ability to effectively manage our
operations and implement our growth strategy because we cannot assure you that
we would be able to find appropriate replacements for our key executives and
managers should the need arise.
24
WE ARE CONTROLLED BY ONE STOCKHOLDER, WHICH MAY GIVE RISE TO A CONFLICT OF
INTEREST.
Atlantic Equity Partners III, L.P. owns approximately 79.7% of Holdings'
common stock on a fully diluted basis. All of the stockholders of Holdings are
parties to a stockholders agreement that contains voting arrangements that give
Atlantic Equity Partners III voting control over the election of all but one of
our directors. As a result, Atlantic Equity Partners III controls us and
Holdings and effectively has the power to approve any action requiring the
approval of the holders of our or Holdings' stock, including adopting certain
amendments to our or Holdings' certificate of incorporation and approving
mergers or sales of all of our assets. In addition, as a result of Atlantic
Equity Partners III's ownership interest, conflicts of interest could arise with
respect to transactions involving business dealings between us and Atlantic
Equity Partners III or First Atlantic Capital Ltd., which operates Atlantic
Equity Partners III, potential acquisitions of businesses or properties, the
issuance of additional securities, the payment of dividends by us or Holdings
and other matters.
IF WE ARE UNABLE TO ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, OR IF WE ARE
ACCUSED OF INFRINGING ON A THIRD PARTY'S INTELLECTUAL PROPERTY RIGHTS, OUR NET
REVENUES AND PROFITS MAY DECLINE.
We currently hold a substantial number of industrial designs, and
trademarks. The exclusive right to use these designs and trademarks has helped
establish our market share. The loss or reduction of any of our significant
proprietary rights could hurt our ability to distinguish our products from
competitors' products and retain our market share. In addition, our proprietary
products generate substantially higher margins than products we sell that are
produced by other manufacturers. If we are unable to effectively protect our
proprietary rights and less of our sales come from our proprietary products, our
net revenues and profits may decline.
Additionally, third parties may assert claims against us alleging
infringement, misappropriation or other violations of patent, trademark or other
proprietary rights, whether or not such claims have merit. Such claims can be
time consuming and expensive to defend and could require us to cease using and
selling the allegedly infringing products, which may have a significant impact
on our net revenues and cause us to incur significant litigation costs and
expenses.
WE RELY ON OUR MANAGEMENT INFORMATION SYSTEMS FOR INVENTORY MANAGEMENT,
DISTRIBUTION AND OTHER FUNCTIONS. IF OUR INFORMATION SYSTEMS FAIL TO ADEQUATELY
PERFORM THESE FUNCTIONS OR IF WE EXPERIENCE AN INTERRUPTION IN THEIR OPERATION,
OUR BUSINESS AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.
The efficient operation of our business is dependent on our management
information systems. We rely on our management information systems to
effectively manage order entry, order fulfillment, point-of-sale, and inventory
replenishment processes. In 2000, we replaced our existing systems with a new,
company-wide, integrated management information system. In connection with
implementing this new system, we experienced significant difficulties that
resulted in lost sales, higher customer returns, increased operating costs and
higher inventory levels. Although we believe we have resolved these
difficulties, the failure of our management information systems to perform as we
anticipate could disrupt our business and could result in decreased sales,
increased overhead costs, excess inventory and product shortages, causing our
business and results of operations to suffer.
In addition, our management information systems are vulnerable to damage or
interruption from:
- earthquake, fire, flood and other natural disasters; and
- power loss, computer systems failure, Internet and telecommunications or
data network failure.
Any such interruption could have a material adverse effect on our business.
25
OUR PROFITABILITY WOULD BE ADVERSELY AFFECTED IF THE OPERATION OF OUR AUSTIN
CALL CENTER OR DISTRIBUTION CENTER WERE INTERRUPTED OR SHUT DOWN.
We operate a centralized call center and distribution center in Austin,
Texas. We receive most of our catalog orders and receive and ship a substantial
portion of our merchandise at our Austin facility. Any natural disaster or other
serious disruption to this facility due to fire, tornado or any other cause
would substantially disrupt our sales and would damage a portion of our
inventory, impairing our ability to adequately stock our stores. In addition, we
could incur significantly higher costs and longer lead times associated with
fulfilling our direct-to-consumer orders and distributing our products to our
stores during the time it takes for us to reopen or replace our Austin facility.
As a result, a disruption at our Austin facility would adversely affect our
profitability.
IF OUR SUPPLIERS FAIL TO DELIVER PRODUCTS ON A TIMELY BASIS AND IN SUFFICIENT
QUANTITIES, INCLUDING AS A RESULT OF A DISRUPTION AT THE PORT IN LONG BEACH,
CALIFORNIA, SUCH FAILURE COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS.
We depend on a limited number of suppliers for our clubheads and shafts. In
addition, some of our products require specifically developed manufacturing
techniques and processes which make it difficult to identify and utilize
alternative suppliers quickly. Any significant production delay or inability of
current suppliers to timely deliver products including clubheads and shafts in
sufficient quantities, or the transition to other suppliers, could have a
material adverse effect on our results of operations.
A disruption in the operations of the port in Long Beach, California could
interrupt the supply of our products. We import substantially all of our
proprietary products from Asia, and a significant amount of the products we buy
from vendors to resell through our distribution channels is shipped to us from
Asia. A significant amount of these shipments arrive in the United States at the
port in Long Beach. The contract between the International Longshore and
Warehouse Union, the union that represents the workers at the port in Long
Beach, and the Pacific Maritime Association, which represents terminal operators
and ocean ship companies, expired on July 1, 2002 and on September 30, 2002, the
Pacific Maritime Association locked out the union workers. The two parties
subsequently agreed on a new contract, but we cannot assure you that another
disruption will not occur in the future. If another disruption occurs, we may
begin to ship some of our products from Asia by air freight, and our suppliers
may also begin to ship their products by air freight. Shipping by air freight is
more expensive than shipping by boat, and if we cannot pass these increased
shipping costs on to our customers, our profitability will be reduced. A future
disruption at the port in Long Beach would have a material adverse effect on our
results of operations.
WE MAY BE SUBJECT TO PRODUCT WARRANTY CLAIMS OR PRODUCT RECALLS WHICH COULD HARM
OUR BUSINESS, RESULTS OF OPERATIONS AND REPUTATION.
We may be subject to risks associated with our products, including product
liability. Our existing or future products may contain design or materials
defects, which could subject us to product liability claims and product recalls.
Although we maintain limited product liability insurance, if any successful
product liability claim or product recall is not covered by or exceeds our
insurance coverage, our business, results of operation and financial condition
would be harmed. In addition, product recalls could adversely affect our
reputation in the marketplace. In May 2002, we learned that some of our private
label products sold in the last two years were not manufactured in accordance
with their design specifications. Upon discovery of this discrepancy, we offered
our customers refunds, replacements or gift certificates. As a result, in the
twelve months ended December 28, 2002, we recognized approximately $0.3 million
in product return and replacement expenses. In the three months ended March 29,
2003, we did not recognize any product-return and replacement expenses.
AN INCREASE IN THE COSTS OF MAILING, PAPER, AND PRINTING OUR CATALOGS WOULD
DECREASE OUR NET INCOME.
Postal rate increases and paper and printing costs affect the cost of our
catalog mailings. We rely on discounts from the basic postal rate structure such
as discounts for bulk mailings and sorting by zip code
26
and carrier routes for our catalogs. In fiscal 2002 and the three months ended
March 29, 2003, we spent approximately $8.4 million and $1.5 million on paper,
printing and postage for our catalogs, respectively. We are not a party to any
long-term contracts for the supply of paper. Our cost of paper has fluctuated
significantly during the past three fiscal years, and our future paper costs are
subject to supply and demand forces external to our business. A material
increase in postal rates or printing or paper costs for our catalogs could
materially decrease our net income.
A DISRUPTION IN THE SERVICE OF OUR PRIMARY DELIVERY SERVICE FOR OUR
DIRECT-TO-CONSUMER SALES MAY DECREASE OUR PROFITABILITY.
During fiscal 2002 and the three months ended March 29, 2003, we generated
approximately 40.3% and 43.4% of our net revenues through our direct-to-consumer
sales, respectively. We use UPS for substantially all of our ground shipments of
products sold through our catalogs and Internet site to our customers in the
United States. Any significant interruption in UPS's services would impede our
ability to deliver our products to our direct-to-consumer channel, which could
cause us to lose sales and/or customers. In the event of an interruption in
UPS's services, we may not be able to engage alternative carriers to deliver our
products in a timely manner on equally favorable terms. If we incur higher
shipping costs, we may be unable to pass these costs on to our customers, which
could decrease our profitability.
CURRENT AND FUTURE TAX REGULATIONS MAY ADVERSELY AFFECT OUR DIRECT-TO-CONSUMER
BUSINESS AND NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS.
Our direct-to-consumer business may be adversely affected by state sales
and use taxes as well as the regulation of Internet commerce. We currently must
collect taxes for less than half of our catalog and Internet sales. An
unfavorable change in state sales and use taxes could adversely affect our
business and results of operations. In addition, future regulation of the
Internet, including the imposition of taxes on Internet commerce, could affect
the development of our Internet business and negatively affect our ability to
increase our net revenues.
IF WE DO NOT ANTICIPATE AND RESPOND TO THE CHANGING PREFERENCES OF OUR
CUSTOMERS, OUR REVENUES COULD SIGNIFICANTLY DECLINE AND WE COULD BE REQUIRED TO
TAKE SIGNIFICANT MARKDOWNS IN INVENTORY.
Our success depends, in large part, on our ability to identify and
anticipate the changing preferences of our customers and stock our stores with a
wide selection of quality merchandise that appeals to their preferences. Our
customers' preferences for merchandise and particular brands vary from location
to location, and may vary significantly over time. We cannot guarantee that we
will accurately identify or anticipate the changing preferences of our customers
or stock our stores with merchandise that appeals to them. If we do not
accurately identify and anticipate our customers' preferences, we may lose sales
or we may overstock merchandise, which may require us to take significant
markdowns on our inventory. In either case, our revenues could significantly
decline and our business and financial results may suffer.
WE MAY INCUR MATERIAL COSTS OR LIABILITIES UNDER ENVIRONMENTAL LAWS, WHICH MAY
MATERIALLY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
We are subject to various foreign, federal, state, and local environmental
protection, chemical control, and health and safety laws and regulations. We own
and lease real property, and some environmental laws hold current or previous
owners or operators of businesses and real property liable for contamination on
or originating from that property, even if they did not know of and were not
responsible for the contamination. The presence of hazardous substances on any
of our properties or the failure to meet environmental regulatory requirements
may materially adversely affect our ability to use or to sell the property or to
use the property as collateral for borrowing, and may cause us to incur
substantial remediation or compliance costs. If hazardous substances are
released from or located on any of our properties, we could incur substantial
liabilities through a private party personal injury or property damage claim or
a claim by a governmental entity for other damages.
27
In addition, some of the products we sell contain hazardous or regulated
substances, such as solvents and lead. Environmental laws may impose liability
on any person who disposes of hazardous substances, regardless of whether the
disposal site is owned or operated by such person.
If we incur material costs or liabilities in the future under environmental
laws for any reason, our results of operations may be materially adversely
affected.
OUR SALES COULD DECLINE IF WE ARE UNABLE TO PROCESS INCREASED TRAFFIC OR OUR
WEBSITE OR TO PREVENT UNAUTHORIZED SECURITY BREACHES.
A key element of our strategy is to generate a high volume of traffic on,
and use of, our website. Accordingly, the satisfactory performance, reliability
and availability of our website, transaction processing systems and network
infrastructure are critical to our reputation and our ability to attract and
retain customers, as well as maintain adequate customer service levels. Our
Internet revenues will depend on the number of visitors who shop on our website
and the volume of orders we can fill on a timely basis. Problems with our
website or order fulfillment performance would reduce the volume of goods sold
and the attractiveness of our merchandise and could also adversely affect
consumer perception of our brand name. We may experience periodic system
interruptions from time to time. If there is a substantial increase in the
volume of traffic on our website or the number of orders placed by customers, we
may be required to expand and upgrade further our technology, transaction
processing systems and network infrastructure. There can be no assurance that we
will be able to accurately project the rate or timing of increases, if any, in
the use of our website, or that we will be able to expand and upgrade our
systems and infrastructure to accommodate such increases on a timely basis.
The success of our website depends on the secure transmission of
confidential information over public networks. We rely on encryption and
authentication technology licensed from third parties to provide the security
and authentication necessary to effect secure transmission of confidential
information, such as customer credit card numbers. In addition, we maintain an
extensive confidential database of customer profiles and transaction
information. There can be no assurance that advances in computer capabilities,
new discoveries in the field of cryptography, or other events or developments
will not result in a compromise or breach of the algorithms we use to protect
customer transaction and personal data contained in our customer database. If
any such compromise of our security were to occur, it could have a material
adverse effect on our reputation, business, operating results and financial
condition. A party who is able to circumvent our security measures could
misappropriate proprietary information or cause interruptions in our operations.
We may be required to expend significant capital and other resources to protect
against such security breaches or to alleviate problems caused by such breaches.
28
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
the federal securities laws. Statements that are not historical facts, including
statements about our beliefs and expectations, are forward-looking statements.
Forward-looking statements include statements preceded by, followed by or that
include the words "may," "could," "would," "should," "believe," "expect,"
"anticipate," "plan," "estimate," "target," "project," "intend," or similar
expressions. These statements include, among others, statements regarding our
expected business outlook, anticipated financial and operating results, our
business strategy and means to implement the strategy, our objectives, the
amount and timing of future store openings, store retrofits and capital
expenditures, the likelihood of our success in expanding our business, financing
plans, working capital needs and sources of liquidity.
Forward-looking statements are only predictions and are not guarantees of
performance. These statements are based on our management's beliefs and
assumptions, which in turn are based on currently available information.
Important assumptions relating to the forward-looking statements include, among
others, assumptions regarding demand for our products, the introduction of new
product offerings, store opening costs, our ability to lease new sites on a
timely basis, expected pricing levels, the timing and cost of planned capital
expenditures, competitive conditions and general economic conditions. These
assumptions could prove inaccurate. Forward-looking statements also involve
risks and uncertainties, which could cause actual results that differ materially
from those contained in any forward-looking statement. Many of these factors are
beyond our ability to control or predict. Such factors include, but are not
limited to, the following:
- the continued popularity of golf and golf-related products;
- our ability to borrow funds to expand our business or compete
effectively;
- economic conditions and their effect on discretionary spending by
consumers;
- our ability and our suppliers' ability to develop and introduce new
products;
- new competitors entering the market;
- the diversion of our limited capital resources away from other areas when
we open new superstores and the profitability of new superstores that we
may open;
- our expansion in new and existing markets;
- our ability to accurately predict our sales during our peak seasons;
- the impact of standards developed by golf associations;
- our ability to maintain or negotiate new leases for our superstores;
- fluctuations in comparable store sales;
- our ability to achieve adequate response rates to our catalogs;
- our ability to attract and retain quality employees;
- the continued service of our key executive officers;
- being controlled by our principal stockholder;
- our ability to enforce our intellectual property rights and defend
infringement claims;
- the operation of our management information systems;
- our dependence on our Austin call center and distribution center;
- interruptions in the supply of the products we sell, including at the
port in Long Beach, California;
- claims against us from users of our products;
29
- fluctuations in the costs of mailing, paper and printing;
- interruptions in the operations of our delivery service;
- the impact of state tax regulations and regulation of the Internet;
- changing preferences of our customers;
- potential environmental liabilities;
- increased traffic and possible security breaches on our website; and
- other factors referenced in this prospectus, including those set forth
under "Risk Factors."
In addition, an investment in the new notes is subject to a number of
additional risks that may affect our ability to fulfill our obligations under
the new notes or the value of the notes. These risks include:
- our substantial indebtedness;
- significant operating and financial restrictions placed on us by the
indenture and our senior credit facility;
- restrictions on our ability to borrow under our senior credit facility;
- our ability to generate cash flow to make interest payments on the new
notes or required payments under our senior credit facility;
- our parent's and our subsidiaries' ability to make payments under their
guarantees;
- the sufficiency of the collateral which secures both the new notes and
borrowings under our senior credit facility;
- the sufficiency of the collateral securing the notes on a first priority
basis;
- the exclusion of certain assets from the liens securing the notes and/or
our senior credit facility;
- the sufficiency of the collateral securing the notes and our senior
credit facility in the event of liquidation;
- the effect of bankruptcy laws on the disposition of the collateral;
- the existence of a trading market for the new notes;
- restrictions upon transfer of the old notes if they are not exchanged for
new notes;
- our ability to repurchase the new notes upon a change in control;
- uncertainty regarding what constitutes a sale of "substantially all" of
our assets;
- our ability to enter into transactions that will not constitute a change
of control under the indenture; and
- the requirement that holders of new notes include amounts in gross income
for federal income tax purposes in advance of receipt of cash payments.
We believe the forward-looking statements in this prospectus are
reasonable; however, you should not place undue reliance on any forward-looking
statements, which are based on current expectations. Further, forward-looking
statements speak only as of the date they are made, and we undertake no
obligation to updated publicly any of them in light of new information or future
events.
30
USE OF PROCEEDS
This exchange offer is intended to satisfy our obligations under the
registration rights agreement. Neither we nor the guarantors will receive any
proceeds from the exchange offer. You will receive, in exchange for old notes
tendered by you and accepted by us in the exchange offer, new notes in the same
principal amount. The old notes surrendered in exchange for the new notes will
be retired and cancelled and cannot be reissued. Accordingly, the issuance of
the new notes will not result in any increase of our outstanding debt.
31
CAPITALIZATION
The following table sets forth our capitalization as of March 29, 2003. You
should read the table below in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our unaudited
consolidated financial statements and the related notes included elsewhere in
this prospectus.
AS OF
MARCH 29, 2003
--------------
(DOLLARS IN
THOUSANDS)
Cash and cash equivalents................................... $ 2,775
========
Total debt:
Senior credit facility(1)................................. $ 2,075
Senior secured notes due 2009............................. 75,879
--------
Total debt........................................ 77,954
Stockholders' equity........................................ 52,246
--------
Total capitalization................................... $130,200
========
---------------
(1) As of March 29, 2003, we had $7.4 million of borrowing availability, subject
to customary conditions, under our new senior credit facility entered into
in connection with the merger (after giving effect to required reserves of
$500,000).
32
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
As a condition to the initial sale of the old notes, we, the guarantors and
the initial purchaser entered into a registration rights agreement dated as of
October 15, 2002. Pursuant to the registration rights agreement, we agreed to:
- file a registration statement under the Securities Act with respect to
the new notes with the SEC by February 12, 2003; and
- use our reasonable best efforts to cause the registration statement to
become effective under the Securities Act on or before April 13, 2003.
We agreed to issue and exchange the new notes for all old notes validly
tendered and not validly withdrawn before the expiration of the exchange offer.
A copy of the registration rights agreement has been filed as an exhibit to the
registration statement which includes this prospectus. The registration
statement is intended to satisfy some of our obligations under the registration
rights agreement.
The term "holder" with respect to the exchange offer means any person in
whose name old notes are registered on the trustee's books or any other person
who has obtained a properly completed bond power from the registered holder, or
any person whose old notes are held of record by The Depository Trust Company,
which we refer to as the Depositary or DTC, who desires to deliver the old note
by book-entry transfer at DTC.
RESALE OF THE NEW NOTES
We believe that you will be allowed to resell the new notes to the public
without registration under the Securities Act, and without delivering a
prospectus that satisfies the requirements of Section 10 of the Securities Act,
if you can make the representations set forth below under "The Exchange Offer --
Procedures for Tendering Old Notes." However, if you intend to participate in a
distribution of the new notes, or you are an "affiliate" of us or any of the
guarantors as defined in Rule 405 of the Securities Act, you must comply with
the registration requirements of the Securities Act and deliver a prospectus,
unless an exemption from registration is otherwise available to you. You have to
represent to us in the letter of transmittal accompanying this prospectus that
you meet the conditions exempting you from the registration requirements.
We base our view on interpretations by the staff of the SEC in no-action
letters issued to other issuers in exchange offers like ours. However, we have
not asked the SEC to consider this particular exchange offer in the context of a
no-action letter. Therefore, you cannot be sure that the SEC will treat it in
the same way it has treated other exchange offers in the past.
A broker-dealer that has bought old notes for market-making or other
trading activities has to deliver a prospectus in order to resell any new notes
it receives for its own account in the exchange. This prospectus may be used by
a broker-dealer to resell any of its new notes. We have agreed in the
registration rights agreement to send this prospectus to any broker-dealer that
requests copies for a period of up to 180 days after the expiration of the
exchange offer. See "Plan of Distribution" for more information regarding
broker-dealers.
The exchange offer is not being made to, nor will we accept surrenders for
exchange from, holders of old notes in any jurisdiction in which this exchange
offer or the acceptance of the exchange offer would not be in compliance with
the securities or blue sky laws of such jurisdiction.
TERMS OF THE EXCHANGE OFFER
General. Based on the terms and conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all old notes validly
tendered and not validly withdrawn before the expiration date.
33
Subject to the minimum denomination requirements of the new notes, we will
issue $1,000 principal amount of new notes in exchange for each $1,000 principal
amount of outstanding old notes validly tendered pursuant to the exchange offer
and not validly withdrawn before the expiration date. Holders may tender some or
all of their old notes pursuant to the exchange offer. However, old notes may be
tendered only in amounts that are integral multiples of $1,000 principal amount.
The form and terms of the new notes are the same as the form and terms of
the old notes except that:
- the new notes will be registered under the Securities Act and, therefore,
the new notes will not bear legends restricting the transfer of the new
notes, and
- holders of the new notes will not be entitled to any of the registration
rights of holders of old notes under the registration rights agreement,
which rights will terminate upon the consummation of the exchange offer,
or to the penalty interest provisions of the registration rights
agreement.
The new notes will evidence the same indebtedness as the old notes, and
will be issued under, and be entitled to the benefits of, the same indenture
that governs the old notes. As a result, both the new notes and the old notes
will be treated as a single series of debt securities under the indenture. The
exchange offer does not depend on any minimum aggregate principal amount of old
notes being surrendered for exchange.
As of the date of this prospectus, $93,750,000 in aggregate principal
amount at maturity of the old notes is outstanding, all of which is registered
in the name of Cede & Co., as nominee for DTC. Solely for reasons of
administration, we have fixed the close of business on June 16, 2003 as the
record date for the exchange offer for purposes of determining the persons to
whom we will initially mail this prospectus and the letter of transmittal. There
will be no fixed record date for determining holders of the old notes entitled
to participate in this exchange offer.
As a holder of old notes, you do not have any appraisal or dissenters'
rights or any other right to seek monetary damages in court under the Delaware
General Corporation Law or the indenture governing the notes. We intend to
conduct the exchange offer in accordance with the provisions of the registration
rights agreement, the applicable requirements of the Exchange Act, and the
related rules and regulations of the SEC. Old notes that are not surrendered for
exchange in the exchange offer will remain outstanding and interest on these
notes will continue to accrue.
We will be deemed to have accepted validly surrendered old notes if and
when we give oral or written notice of our acceptance to U.S. Bank Trust
National Association, which is acting as the exchange agent. The exchange agent
will act as agent for the tendering holders of old notes for the purpose of
receiving the new notes from us.
If you surrender old notes in the exchange offer, you will not be required
to pay brokerage commissions or fees. In addition, subject to the instructions
in the letter of transmittal, you will not have to pay transfer taxes for the
exchange of old notes. We will pay all charges and expenses in connection with
the exchange offer, other than certain applicable taxes described under "-- Fees
and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The "expiration date" means 5:00 p.m., New York City time, on July 21,
2003, unless we extend the exchange offer, in which case the expiration date is
the latest date and time to which we extend the exchange offer.
In order to extend the exchange offer, we will:
- notify the exchange agent of any extension by oral or written
communication;
- issue a press release or other public announcement, which will report the
approximate number of old notes deposited, before 9:00 a.m., New York
City time, on the next business day after the previously scheduled
expiration date.
34
During any extension of the exchange offer, all old notes previously
surrendered and not withdrawn will remain subject to the exchange offer.
We reserve the right:
- to delay accepting any old notes,
- to amend the terms of the exchange offer in any manner,
- to extend the exchange offer, or
- if, in the opinion of our counsel, the consummation of the exchange offer
would violate any law or interpretation of the staff of the SEC, to
terminate or amend the exchange offer by giving oral or written notice to
the exchange agent.
Any delay in acceptance, extension, termination, or amendment will be
followed as soon as practicable by a press release or other public announcement.
If we amend the exchange offer in a manner that we determine constitutes a
material change, we will promptly disclose that amendment by means of a
prospectus supplement that will be distributed to the registered holders of the
old notes, and we will extend the exchange offer for a period of time that we
will determine, depending upon the significance of the amendment and the manner
of disclosure to the registered holders, if the exchange offer would have
otherwise expired.
We will have no obligation to publish, advertise, or otherwise communicate
any public announcement that we may choose to make, other than by making a
timely release to an appropriate news agency.
In all cases, issuance of the new notes for old notes that are accepted for
exchange will be made only after timely receipt by the exchange agent of a
properly completed and duly executed letter of transmittal or a book-entry
confirmation with an agent's message, in each case, with all other required
documents. However, we reserve the right to waive any conditions of the exchange
offer which we, in our reasonable discretion, determine are not satisfied or any
defects or irregularities in the surrender of old notes. All conditions of the
exchange offer will be satisfied or waived prior to the expiration of the
exchange offer. If a waiver constitutes a material change to the exchange offer,
we will promptly disclose the waiver by means of a prospectus supplement that
will be distributed to the registered holders of the old notes, and we will
extend the exchange offer for at least five business days. If we do not accept
any surrendered old notes for any reason set forth in the terms and conditions
of the exchange offer or if you submit old notes for a greater principal amount
than you want to exchange, we will return the unaccepted or non-exchanged old
notes to you, or substitute old notes evidencing the unaccepted or non-exchanged
portion, as appropriate. See "--Return of Old Notes." We will deliver new notes
to tendering holders of old notes that are accepted for exchange and we will
return any old notes that we do not accept for exchange for any reason to their
tendering holder as promptly as practicable.
INTEREST ON THE NEW NOTES
The new notes will accrue cash interest on the same terms as the old notes,
i.e., at the rate of 8.375% per year for each new note (using a 360-day year
consisting of twelve 30-day months), payable semi-annually in arrears on March 1
and September 1 of each year. Old notes accepted for exchange will not receive
accrued interest at the time of exchange. However, each new note will bear
interest:
- from the later of (1) the last interest payment date on which interest
was paid on the old note surrendered in exchange for the new note or (2)
if the old note is exchanged for the new note on a date after the record
date for an interest payment date to occur on or after the date of the
exchange and as to which that interest will be paid, the date of that
interest payment date, or
- if no interest has been paid on the old note, from October 15, 2002.
35
PROCEDURES FOR TENDERING OLD NOTES
If you wish to surrender old notes you must:
- complete and sign the letter of transmittal or send a timely confirmation
of a book-entry transfer of old notes to the exchange agent,
- have the signatures on the letter of transmittal guaranteed if required
by the letter of transmittal, and
- mail or deliver the required documents to the exchange agent at its
address set forth in the letter of transmittal for receipt before the
expiration date.
In addition, either:
- certificates for old notes must be received by the exchange agent along
with the letter of transmittal;
- a timely confirmation of a book-entry transfer of old notes into the
exchange agent's account at DTC, pursuant to the procedure for book-entry
transfer described below, must be received by the exchange agent before
the expiration date; or
- you must comply with the procedures described below under "-- Guaranteed
Delivery Procedures."
If you do not withdraw your surrender of old notes before the expiration
date, it will indicate an agreement between you and Golfsmith and the guarantors
that you have agreed to surrender the old notes, in accordance with the terms
and conditions in the letter of transmittal.
The method of delivery of old notes, the letter of transmittal, and all
other required documents to the exchange agent is at your election and risk.
Instead of delivery by mail, we recommend that you use an overnight or hand
delivery service, properly insured, with return receipt requested. In all cases,
you should allow sufficient time to assure delivery to the exchange agent before
the expiration date. Do not send any letter of transmittal or old notes to us.
You may request that your broker, dealer, commercial bank, trust company, or
nominee effect the above transactions for you.
If you are a beneficial owner of the old notes and you hold those old notes
through a broker, dealer, commercial bank, trust company, or other nominee and
you want to surrender your old notes, you should contact that intermediary
promptly and instruct it to surrender the old notes on your behalf.
Generally, an eligible institution must guarantee signatures on a letter of
transmittal unless:
- you tender your old notes as the registered holder, which term includes
any participant in DTC whose name appears on a security listing as the
owner of old notes, and the new notes issued in exchange for your old
notes are to be issued in your name and delivered to you at your
registered address appearing on the security register for the old notes,
or
- you surrender your old notes for the account of an eligible institution.
An "eligible institution" is:
- a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc.,
- a commercial bank or trust company having an office or correspondent in
the United States, or
- an "eligible guarantor institution" as defined by Rule 17Ad-15 under the
Exchange Act.
In each instance, the entity must be a member of one of the signature
guarantee programs identified in the letter of transmittal.
If the new notes or unexchanged old notes are to be delivered to an address
other than that of the registered holder appearing on the security register for
the old notes, an eligible institution must guarantee the signature in the
letter of transmittal.
36
Your surrender will be deemed to have been received as of the date when:
- the exchange agent receives a properly completed and signed letter of
transmittal accompanied by the old notes, or a confirmation of book-entry
transfer of the old notes into the exchange agent's account at DTC with
an agent's message, or
- the exchange agent receives a notice of guaranteed delivery from an
eligible institution.
Issuances of new notes in exchange for old notes surrendered pursuant to a
notice of guaranteed delivery or letter to similar effect by an eligible
institution will be made only against submission of a duly signed letter of
transmittal, and any other required documents, and deposit of the surrendered
old notes, or confirmation of a book-entry transfer of the old notes into the
exchange agent's account at DTC pursuant to the book-entry procedures described
below.
We will make the determination regarding all questions relating to the
validity, form, eligibility, including time of receipt, acceptance, and
withdrawal of surrendered old notes, and our determination will be final and
binding on all parties.
We reserve the absolute right to reject any and all old notes improperly
surrendered. We will not accept any old notes if our acceptance of them would,
in the opinion of our counsel, be unlawful. We also reserve the absolute right
to waive any defects, irregularities, or conditions of surrender as to any
particular old note. Our interpretation of the terms and conditions of the
exchange offer, including the instructions in the letter of transmittal, will be
final and binding on all parties. Unless waived, you must cure any defects or
irregularities in connection with surrenders of old notes within the time we
determine. Although we intend to notify holders of defects or irregularities in
connection with surrenders of old notes, neither we, the exchange agent, nor
anyone else will incur any liability for failure to give that notice. Surrenders
of old notes will not be deemed to have been made until any defects or
irregularities have been cured or waived.
We have no current plan to acquire any old notes that are not surrendered
in the exchange offer or to file a registration statement to permit resales of
any old notes that are not surrendered pursuant to the exchange offer. We
reserve the right in our sole discretion to purchase or make offers for any old
notes that remain outstanding after the expiration date. To the extent permitted
by law, we also reserve the right to purchase old notes in the open market, in
privately negotiated transactions, or otherwise. The terms of any future
purchases or offers could differ from the terms of the exchange offer.
Pursuant to the letter of transmittal, if you elect to surrender old notes
in exchange for new notes, you must exchange, assign, and transfer the old notes
to us and irrevocably constitute and appoint the exchange agent as your true and
lawful agent and attorney-in-fact with respect to the surrendered old notes,
with full power of substitution, among other things, to cause the old notes to
be assigned, transferred, and exchanged. By executing the letter of transmittal,
you make the representations and warranties set forth below to us. By executing
the letter of transmittal you also promise, on our request, to execute and
deliver any additional documents that we consider necessary to complete the
transactions described in the letter of transmittal.
By executing the letter of transmittal and surrendering old notes in the
exchange offer, you will be representing to us that, among other things,
- you have full power and authority to tender, exchange, assign, and
transfer the old notes surrendered,
- we will acquire good title to the old notes being surrendered, free and
clear of all security interests, liens, restrictions, charges,
encumbrances, conditional sale agreements, or other obligations relating
to their sale or transfer, and not subject to any adverse claim when we
accept the old notes,
- you are acquiring the new notes in the ordinary course of your business,
- you are not engaging in and do not intend to engage in a distribution of
the new notes,
37
- you have no arrangement or understanding with any person to participate
in the distribution of the new notes,
- you acknowledge and agree that if you are a broker-dealer registered
under the Exchange Act or you are participating in the exchange offer for
the purpose of distributing the new notes, you must comply with the
registration and prospectus delivery requirements of the Securities Act
in connection with a secondary resale of the new notes, and that you
cannot rely on the position of the SEC's staff set forth in their
no-action letters,
- you understand that a secondary resale transaction described above and
any resales of new notes obtained by you in exchange for old notes
acquired by you directly from us should be covered by an effective
registration statement containing the selling security holder information
required by Item 507 or 508, as applicable, of Regulation S-K of the SEC,
and
- you are not an "affiliate," as defined in Rule 405 under the Securities
Act, of us or any of the guarantors, or, if you are an "affiliate," that
you will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
If you are a broker-dealer and you will receive new notes for your own
account in exchange for old notes that you acquired as a result of market-making
activities or other trading activities, you will be required to acknowledge in
the letter of transmittal that you will deliver a prospectus in connection with
any resale of the new notes. See "Plan of Distribution."
Participation in the exchange offer is voluntary. You are urged to consult
your financial adviser in making your decision on whether to participate in the
exchange offer.
RETURN OF OLD NOTES
If any old notes are not accepted for any reason described in this
prospectus, or if old notes are withdrawn or are submitted for a greater
principal amount than you want to exchange, the exchange agent will return the
unaccepted, withdrawn, or non-exchanged old notes to you or, in the case of old
notes surrendered by book-entry transfer, into an account for your benefit at
DTC, unless otherwise provided in the letter of transmittal. The old notes will
be credited to an account maintained with DTC as promptly as practicable.
BOOK ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the old notes at DTC for purposes of the exchange offer within two business
days after the date of this prospectus. Any financial institution that is a
participant in DTC's system may make book-entry delivery of old notes by causing
DTC to transfer the old notes into the exchange agent's account at DTC in
accordance with DTC's procedures for transfer. To effectively tender notes
through DTC, the financial institution that is a participant in DTC will
electronically transmit its acceptance through the Automatic Transfer Offer
Program. DTC will then edit and verify the acceptance and send an agent's
message to the exchange agent for its acceptance. An agent's message is a
message transmitted by DTC to the exchange agent stating that DTC has received
an express acknowledgment from the participant in DTC tendering the old notes
that the participant has received and agrees to be bound by the terms of the
letter of transmittal, and that we may enforce this agreement against the
participant.
A delivery of old notes through a book-entry transfer into the exchange
agent's account at DTC will only be effective if an agent's message or the
letter of transmittal with any required signature guarantees and any other
required documents is transmitted to and received by the exchange agent at its
address set forth in the letter of transmittal for receipt before the expiration
date unless the guaranteed delivery procedures described below are complied
with. Delivery of documents to DTC does not constitute delivery to the exchange
agent.
38
GUARANTEED DELIVERY PROCEDURES
If you wish to surrender your old notes and (1) your old notes are not
immediately available so that you can meet the expiration date deadline, (2) you
cannot deliver your old notes or other required documents to the exchange agent
before the expiration date, or (3) the procedure for book-entry transfer cannot
be completed on a timely basis, you may nonetheless participate in the exchange
offer if:
- you surrender your notes through an eligible institution;
- before the expiration date, the exchange agent receives from the eligible
institution a properly completed and duly executed notice of guaranteed
delivery substantially in the form provided by us, by mail or hand
delivery, showing the name and address of the holder, the name(s) in
which the old notes are registered, the certificate number(s) of the old
notes, if applicable, and the principal amount of old notes surrendered;
the notice of guaranteed delivery must state that the surrender is being
made by the notice of guaranteed delivery and guaranteeing that, within
five New York Stock Exchange trading days after the expiration date, the
letter of transmittal, together with the certificate(s) representing the
old notes, in proper form for transfer, or a book-entry confirmation with
an agent's message, as the case may be, and any other required documents,
will be delivered by the eligible institution to the exchange agent, and
- the properly executed letter of transmittal, as well as the
certificate(s) representing all surrendered old notes, in proper form for
transfer, or a book-entry confirmation, as the case may be, and all other
documents required by the letter of transmittal are received by the
exchange agent within five New York Stock Exchange trading days after the
expiration date.
Unless old notes are surrendered by the above-described method and
deposited with the exchange agent within the time period set forth above, we
may, at our option, reject the surrender. The exchange agent will send you a
notice of guaranteed delivery upon your request if you want to surrender your
old notes according to the guaranteed delivery procedures described above.
WITHDRAWALS OF TENDERS OF OLD NOTES
You may withdraw your surrender of old notes at any time before the
expiration date.
To withdraw old notes surrendered in the exchange offer, the exchange agent
must receive a written notice of withdrawal at its address set forth below
before the expiration date. Any notice of withdrawal must:
- specify the name of the person having deposited the old notes to be
withdrawn,
- identify the old notes to be withdrawn, including the certificate number
or numbers, if applicable, and principal amount of the old notes,
- contain a statement that the holder is withdrawing the election to have
the old notes exchanged,
- be signed by the holder in the same manner as the original signature on
the letter of transmittal used to surrender the old notes, and
- specify the name in which any old notes are to be registered, if
different from that of the registered holder of the old notes and, unless
the old notes were tendered for the account of an eligible institution,
the signatures on the notice of withdrawal must be guaranteed by an
eligible institution. If old notes have been surrendered pursuant to the
procedure for book-entry transfer, any notice of withdrawal must specify
the name and number of the account at DTC.
We, in our sole discretion, will make the final determination on all
questions regarding the validity, form, eligibility, and time of receipt of
notices of withdrawal, and our determination will bind all parties. Any old
notes withdrawn will be deemed not to have been validly surrendered for purposes
of the exchange offer and no new notes will be issued in exchange unless the old
notes so withdrawn are validly surrendered again. Properly withdrawn old notes
may be surrendered again by following one of the procedures described above
under "-- Procedures for Tendering Old Notes" at any time before the
39
expiration date. Any old notes that are not accepted for exchange will be
returned at no cost to the holder or, in the case of old notes surrendered by
book-entry transfer, into an account for your benefit at DTC pursuant to the
book-entry transfer procedures described above, as soon as practicable after
withdrawal, rejection of surrender or termination of the exchange offer.
ADDITIONAL OBLIGATIONS
We will be required to file a shelf registration statement if:
- we are not permitted to effect the exchange offer because of any change
in law or in currently prevailing interpretations of the staff of the
SEC,
- the exchange offer is not consummated within 30 business days from the
date the registration statement with respect to the exchange offer was
declared effective,
- the initial purchaser of the old notes or Atlantic Equity Partners III
receive unregistered new notes and within 45 days after the exchange
offer request us to file a shelf registration statement, or
- in the case of any holder that participates in the exchange offer, such
holder does not receive new notes on the date of the exchange that may be
sold without restriction under state and federal securities laws (other
than due solely to the status of such holder as an affiliate of ours or
within the meaning of the Securities Act).
See "Description of the New Notes -- Exchange Offer; Registration Rights."
In any event, we are under a continuing obligation, for a period of up to 180
days after the SEC declares the registration statement of which this prospectus
is a part effective, to keep the registration statement effective and to provide
copies of the latest version of this prospectus to any broker-dealer that
requests copies for use in a resale, subject to our ability to suspend the
effectiveness of any registration statement as described in the registration
rights agreement.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other term of the exchange offer, or any extension of
the exchange offer, we do not have to accept for exchange, or exchange new notes
for, any old notes, and we may terminate the exchange offer before acceptance of
the old notes, if:
- any statute, rule, or regulation has been enacted or any action has been
taken by any court or governmental authority that, in our reasonable
judgment, seeks to or would prohibit, restrict, or otherwise render
consummation of the exchange offer illegal; or
- any change, or any development that would cause a change, in our business
or financial affairs has occurred that, in our reasonable judgment, might
materially impair our ability to proceed with the exchange offer or a
change that would materially impair the contemplated benefits to us of
the exchange offer; or
- a change occurs in the current interpretations by the staff of the SEC
that, in our reasonable judgment, might materially impair our ability to
proceed with the exchange offer.
If we, in our reasonable discretion, determine that any of the above
conditions is not satisfied, we may:
- refuse to accept any old notes and return all surrendered old notes to
the surrendering holders,
- extend the exchange offer and retain all old notes surrendered before the
expiration date, subject to the holders' right to withdraw the surrender
of the old notes, or
- waive any unsatisfied conditions regarding the exchange offer and accept
all properly surrendered old notes that have not been withdrawn. If this
waiver constitutes a material change to the exchange offer, we will
promptly disclose the waiver by means of a prospectus supplement that
will be distributed to the registered holders of the old notes, and we
will extend the exchange offer for
40
at least five business days, if the exchange offer would have otherwise
expired. All conditions of the exchange offer will be satisfied or waived
prior to the expiration of the exchange offer.
EXCHANGE AGENT
We have appointed U.S. Bank Trust National Association, as exchange agent
for the exchange offer. Questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for notices of guaranteed delivery should be directed to the exchange
agent at the following addresses:
By Overnight Courier:
U.S. Bank Trust National
Association
180 E. 5th Street, 4th Floor
St. Paul, Minnesota 55101
Attn: Shauna Thilmany,
Specialized Finance
By Mail:
(registered or certified recommended)
U.S. Bank Trust National Association
Corporate Trust Services
P.O. Box 64485
St. Paul, Minnesota 55164-9549
Attn: Specialized Finance
By Hand:
U.S. Bank Trust National
Association
Corporate Trust Services
100 Wall Street, 16th Floor
New York, New York 10005
Attn: Bond Drop Window
Barbara A. Nastro
By Facsimile:
(651) 244-1537
Attn: Shauna Thilmany
To Confirm by Telephone:
(651) 244-8112
Shauna Thilmany
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal
solicitation is being made by mail; however, additional solicitation may be made
by facsimile, telephone, or in person by our officers and regular employees or
by officers and employees of our affiliates. No additional compensation will be
paid to any officers and employees who engage in soliciting tenders.
We have not retained any dealer-manager or other soliciting agent for the
exchange offer and will not make any payments to brokers, dealers, or others
soliciting acceptance of the exchange offer. We will, however, pay the exchange
agent reasonable and customary fees for its services and will reimburse it for
related, reasonable out-of-pocket expenses. We may also reimburse brokerage
houses and other custodians, nominees, and fiduciaries for reasonable
out-of-pocket expenses they incur in forwarding copies of this prospectus, the
letter of transmittal and related documents.
We will pay all expenses incurred in connection with the performance of our
obligations in the exchange offer, including registration fees, fees and
expenses of the exchange agent, the transfer agent and registrar, and printing
costs, among others.
We will pay all transfer taxes, if any, applicable to the exchange of the
old notes. If, however, new notes, or old notes for principal amounts not
surrendered or accepted for exchange, are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of the old
notes surrendered, or if a transfer tax is imposed for any reason other than the
exchange, then the amount of any transfer taxes will be payable by the person
surrendering the notes. If you do not submit satisfactory evidence of payment of
those taxes or exemption from payment of those taxes with the letter of
transmittal, the amount of those transfer taxes will be billed directly to you.
41
CONSEQUENCES OF FAILURE TO EXCHANGE
Old notes that are not exchanged will remain "restricted securities" within
the meaning of Rule 144(a)(3) of the Securities Act. Accordingly, they may not
be offered, sold, pledged or otherwise transferred except:
- to us or to any of our subsidiaries,
- inside the United States to a qualified institutional buyer in compliance
with Rule 144A under the Securities Act,
- inside the United States to an institutional accredited investor that,
before the transfer, furnishes to the trustee a signed letter containing
certain representations and agreements relating to the restrictions on
transfer of the old notes, the form of which you can obtain from the
trustee and an opinion of counsel acceptable to us that the transfer
complies with the Securities Act,
- outside the United States in compliance with Rule 904 under the
Securities Act,
- pursuant to the exemption from registration provided by Rule 144 under
the Securities Act, if available, or
- pursuant to an effective registration statement under the Securities Act.
The liquidity of the old notes could be adversely affected by the exchange
offer. See "Risk Factors -- Risk Factors Relating to the New Notes -- An active
trading market for the notes may not develop, which could reduce their value."
ACCOUNTING TREATMENT
For accounting purposes, we will recognize no gain or loss as a result of
the exchange offer. We will amortize the expenses of the exchange offer and the
unamortized expenses related to the issuance of the old notes over the remaining
term of the notes.
42
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma statement of operations gives effect to
the purchase of our company ("predecessor") by Holdings ("successor") pursuant
to the merger and the offering of the old notes (which occurred on October 15,
2002) as if they occurred on December 30, 2001. Adjustments were made to the
predecessor statement of operations for the period from December 30, 2001
through October 15, 2002. These adjustments are described in the notes to the
pro forma condensed statement of operations. As the most recent historical
balance sheets as of March 29, 2003 and December 28, 2002 reflect the effects of
the merger transaction, no pro forma balance sheets for those periods have been
presented. Likewise, no pro forma statements of operations have been presented
for the three months ended March 29, 2003.
On October 15, 2002, Holdings acquired Golfsmith in a merger transaction
for an aggregate purchase price of approximately $121.0 million, which included
the payment of $101.5 million in cash and $12.8 million in equity securities in
Holdings to the stockholders of Golfsmith prior to the merger and $6.7 million
in fees and expenses in connection with the merger. The direct transaction costs
incurred consist primarily of investment banker, private placement fees, legal
and accounting fees and printing costs that are directly related to the merger.
There can be no assurance that Holdings and Golfsmith will not incur additional
expenses related to the merger.
The unaudited pro forma condensed statement of income gives effect to: (1)
the acquisition of our company by Holdings, (2) the offering of the old notes,
(3) the repayment of our outstanding debt as of the date of the merger and the
settlement of minority interest, and (4) provision for taxes as if the condensed
statement of operations was for a C corporation. The pro forma condensed
statement of operations has been prepared giving effect to the recapitalization
of our company in accordance with EITF 88-16, "Basis in Leveraged Buyout
Transactions" as a partial purchase. Under EITF 88-16, our business was revalued
at the merger date to fair value to the extent of Atlantic Equity Partners III,
L.P.'s 79.7% controlling interest in the business, subject to final closing
adjustments. The remaining 20.3% is accounted for at continuing stockholder's
carryover basis in the business.
The total purchase consideration has been allocated to the assets acquired
and liabilities assumed, including identifiable intangible assets, based on
their respective fair values at the date of acquisition as determined by an
independent valuation obtained by Golfsmith. Under EITF 88-16, Golfsmith was
revalued at the merger date to fair value to the extent of the majority
shareholders' 79.7% controlling interest in Golfsmith. The remaining 20.3% is
accounted for at the continuing stockholder's carryover basis in Golfsmith. The
excess of the purchase price over the historical basis of the net assets
acquired has been applied to adjust net assets to their fair values to the
extent of the majority shareholders' 79.7% ownership. Contingent consideration
of $6.25 million has been placed in an escrow account by the selling
stockholders cover a final working capital assessment and to secure certain
indemnification obligations of the sellers. In accordance with the merger
agreement, on May 20, 2003, the parties determined that an adjustment in the
merger consideration of $25,000 was payable to Holdings based on the post-merger
review of Golfsmith's working capital and will be paid out of the escrow
account. We have adjusted the purchase price allocation accordingly.
The pro forma condensed statement of operations is presented for
illustrative purposes only and is not necessarily indicative of the operating
results that would have occurred if the merger and the offering of the old notes
had been consummated at the beginning of the period presented, nor is it
necessarily indicative of future operating results. The pro forma adjustments
are based upon information and assumptions available at the time of the
preparation of this prospectus. The pro forma condensed statement of operations
should be read in conjunction with the accompanying notes thereto and our
historical consolidated financial statements and related notes thereto included
in this prospectus. In our opinion, all adjustments have been made that are
necessary to present fairly the pro forma data.
43
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
PREDECESSOR
----------------- SUCCESSOR
PERIOD FROM PERIOD FROM ----------------------
DECEMBER 30, 2001 DECEMBER 30, 2001 PERIOD FROM OCTOBER
THROUGH OCTOBER THROUGH OCTOBER 16, 2002 THROUGH
15, 2002 15, 2002 DECEMBER 28, 2002
--------------- --------------- ------------
ACTUAL ADJUSTMENTS PRO FORMA ACTUAL
----------------- ----------- ----------------- ----------------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Net revenues..................... $180,315 $ -- $ 180,315 $ 37,831
Cost of products sold............ 117,206 703(a) 117,909 25,147
-------- ------- --------- --------
Gross profit................ 63,109 (703) 62,406 12,684
Selling, general and
administrative................. 48,308 2,236(b) 50,544 13,581
Store pre-opening/closing
expenses....................... 122 -- 122 93
Amortization of deferred
compensation................... 6,033 (6,033)(f) -- --
-------- ------- --------- --------
Total operating expenses......... 54,463 (3,797) 50,666 13,674
Operating income (loss).......... 8,646 3,094 11,740 (990)
Interest expense................. 5,206 3,353(c) 8,559 2,210
Interest income.................. (331) -- (331) (7)
Other income..................... (2,365) -- (2,365) (14)
Other expense.................... -- -- -- --
Minority interest................ 844 (844)(d) -- --
Loss on debt extinguishment...... 8,047 (8,047)(g) -- --
-------- ------- --------- --------
Income (loss) from continuing
operations before income
taxes.......................... (2,755) 8,632 5,877 (3,179)
Income tax expense (benefit)..... 708 1,466(e) 2,174 (633)
-------- ------- --------- --------
Income (loss) from continuing
operations..................... $ (3,463) $ 7,166 $ 3,703 $ (2,546)
======== ======= ========= ========
44
GOLFSMITH INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
The accompanying unaudited pro forma condensed statement of operations has
been prepared as if the merger was consummated as of the beginning of fiscal
year 2002 (December 30, 2001). Pro forma adjustments were made to reflect the
following:
(a) Amortization of the purchase price adjustment to inventory to
record at fair value as determined by an independent valuation over the
period of one year, assuming the inventory turnover rate is four times a
year.
(b) The pro forma adjustments for selling, general and administrative
expense reflect the following:
Amortization of purchased intangible assets (customer
databases) over the useful life of nine years............. $ 299
Additional depreciation expense associated with the fair
value adjustments to property and equipment as determined
by an independent valuation............................... 452
Increase in rent expense associated with the recommencement
of deferred rent on the merger transaction date........... 1,010
Management fee to First Atlantic Capital Ltd................ 475
------
$2,236
======
(c) The pro forma adjustments for interest expense reflect the
following:
Elimination of historical interest expense relating to the
pre-merger 12% senior subordinated notes and bank debt.... $(5,206)
Accretion of the $18.75 million senior secured notes
discount, over the period of the notes maturity, assuming
seven years to maturity................................... 1,567
Amortization of debt issuance costs of $7.8 million of the
senior secured notes and senior credit facility over the
period of their respective debt maturities................ 684
Cash interest expense impact of the senior secured notes at
the stated rate of 8.375%................................. 6,200
Interest expense for assumed borrowings under the senior
credit facility........................................... 108
-------
$ 3,353
=======
(d) Elimination of minority interest.
(e) Impact of taxes at an estimated 37% rate as if we were a C
Corporation for the entire period.
(f) Elimination of a variable compensation charge relating to a change
of control provision in Golfsmith's employee stock option plan.
(g) Elimination of the loss on extinguishment of the outstanding
pre-merger debt, primarily related to unamortized discount, prepayment
penalties and the write-off of debt issuance costs related to the
outstanding pre-merger debt.
45
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for fiscal
1998, 1999, 2000, 2001 and for the period from December 30, 2001 through October
15, 2002 have been derived from the audited consolidated financial statements of
Golfsmith International, Inc., and for the period from October 16, 2002 through
December 28, 2002 have been derived from the audited consolidated financial
statements of Golfsmith International Holdings, Inc., all periods of which have
been audited by Ernst & Young LLP. Golfsmith International Holdings, Inc. was
formed on September 4, 2002 and became the parent company of Golfsmith
International, Inc. on October 15, 2002 as a result of the merger. Holdings is a
holding company and had no material assets or operations prior to acquiring all
of the capital stock of Golfsmith International, Inc. in the merger. The
selected financial data of Golfsmith as of and for the three months ended March
30, 2002 and of Holdings as of and for the three months ended March 29, 2003
have been derived from our unaudited consolidated financial statements included
elsewhere in this prospectus and, in our opinion, reflect all adjustments,
consisting of normal accruals, necessary for a fair presentation of the data for
those periods. Our results of operations for the three months ended March 29,
2003 may not be indicative of results that may be expected for the full year.
You should read the information set forth below in conjunction with our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes included
elsewhere in this prospectus.
PREDECESSOR
--------------------------------------------------------
PERIOD FROM
DECEMBER 30,
FISCAL YEAR 2001 THROUGH
----------------------------------------- OCTOBER 15,
1998 1999 2000 2001 2002
-------- -------- -------- -------- ------------
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
RESULTS OF OPERATIONS:
Net revenues...................... $253,624 $267,946 $232,080 $221,439 $180,315
Cost of products sold............. 162,873 175,600 153,630 143,118 117,206
-------- -------- -------- -------- --------
Gross profit...................... 90,751 92,346 78,450 78,321 63,109
Selling, general and
administrative.................. 80,204 78,360 76,352 64,081 48,308
Store pre-opening/closing
expenses........................ 802 493 1,592 -- 122
Amortization of deferred
compensation.................... -- -- -- 458 6,033
Total operating expenses.......... 81,006 78,853 77,944 64,539 54,463
-------- -------- -------- -------- --------
Operating income.................. 9,745 13,493 506 13,782 8,646
Interest expense.................. 4,058 5,775 6,905 6,825 5,206
Interest income................... (42) (22) (82) (597) (331)
Other income, net................. (24) (275) (449) (1,031) (2,365)
Minority interest................. -- 583 (454) 581 844
Loss on debt extinguishment....... -- -- -- -- 8,047
-------- -------- -------- -------- --------
Income (loss) before income
taxes........................... 5,753 7,432 (5,414) 8,004 (2,755)
Income tax expense (benefit)...... 195 289 (190) 251 709
-------- -------- -------- -------- --------
Income (loss) from continued
operations...................... 5,558 7,143 (5,224) 7,753 (3,464)
Income (loss) from discontinued
operations...................... (352) 52 (380) (590) (230)
Income (loss) before extraordinary
items........................... 5,206 7,195 (5,604) 7,163 (3,694)
Extraordinary items............... -- -- -- -- 4,122
-------- -------- -------- -------- --------
Net income (loss)................. $ 5,206 $ 7,195 $ (5,604) $ 7,163 428
======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Depreciation and
amortization(1)................. $ 4,359 $ 5,601 $ 9,118 $ 6,717 4,776
Capital expenditures(2)........... 16,405 9,740 2,107 1,345 2,086
Ratio of earnings to fixed
charges(3)...................... 1.6x 1.6x 0.6x 1.6x 0.7x
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 842 $ 3,023 $ 11,149 $ 39,550 3,788
Total assets...................... 103,013 105,882 106,902 111,500 153,135
Long-term debt.................... 23,833 23,540 37,145 33,720 75,000
Total stockholders' equity........ 25,810 33,004 24,921 32,519 56,011
SUCCESSOR
------------
PERIOD FROM
OCTOBER 16, THREE MONTHS THREE MONTHS
2002 THROUGH ENDED ENDED
DECEMBER 28, MARCH 30, MARCH 29,
2002 2002 2003
------------ ------------- ------------
(PREDECESSOR) (SUCCESSOR)
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
RESULTS OF OPERATIONS:
Net revenues...................... $ 37,831 $48,443 $ 45,830
Cost of products sold............. 25,147 31,348 30,972
-------- ------- --------
Gross profit...................... 12,684 17,095 14,858
Selling, general and
administrative.................. 13,581 14,749 14,259
Store pre-opening/closing
expenses........................ 93 -- --
Amortization of deferred
compensation.................... -- 146 --
Total operating expenses.......... 13,674 14,895 14,259
-------- ------- --------
Operating income.................. (990) 2,200 599
Interest expense.................. 2,210 1,589 2,638
Interest income................... (7) (112) (7)
Other income, net................. (14) (2,226) (3)
Minority interest................. -- 223 --
Loss on debt extinguishment....... -- -- --
-------- ------- --------
Income (loss) before income
taxes........................... (3,179) 2,726 (2,029)
Income tax expense (benefit)...... (633) 117 (812)
-------- ------- --------
Income (loss) from continued
operations...................... (2,546) 2,609 (1,217)
Income (loss) from discontinued
operations...................... (40) -- --
Income (loss) before extraordinary
items........................... (2,586) 2,609 (1,217)
Extraordinary items............... -- -- --
-------- ------- --------
Net income (loss)................. (2,586) 2,609 (1,217)
======== ======= ========
OTHER FINANCIAL DATA:
Depreciation and
amortization(1)................. 1,382 1,418 1,311
Capital expenditures(2)........... 1,127 377 409
Ratio of earnings to fixed
charges(3)...................... 0.1x 1.9x 0.5x
BALANCE SHEET DATA:
Cash and cash equivalents......... 11,412 24,597 2,775
Total assets...................... 160,011 104,733 162,701
Long-term debt.................... 75,380 26,227 77,954
Total stockholders' equity........ 53,473 35,258 52,246
---------------
(1) Excludes the amortization of the debt discount and deferred charges
associated with our 12% senior subordinated notes, the deferred charges
associated with our credit facility in effect prior to the merger, the
amortization of the debt discount and deferred charges associated with our
8.375% senior secured notes and deferred charges associated with our senior
credit facility in effect subsequent to the merger.
(2) Capital expenditures consist of total capital expenditures, including
capital costs associated with opening new stores.
(3) The ratio of earnings to fixed charges is calculated by dividing the fixed
charges into net income before taxes plus fixed charges. Fixed charges
consist of interest expense, amortization of deferred debt issuance costs
and the estimated interest component of rent expense.
46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Golfsmith International Holdings, Inc. became the parent company of
Golfsmith International, Inc. on October 15, 2002 as a result of a purchase
business combination, which we refer to as the merger. Holdings has no assets or
liabilities other than its investment in its wholly owned subsidiary Golfsmith
and did not have assets or operations prior to its acquisition of Golfsmith. The
following discussion and analysis of historical financial condition and results
of operations is therefore based on the financial condition and results of
operations of Golfsmith International, Inc. with respect to periods prior to the
merger. The discussion for periods following the merger is based on the
financial condition and results of operations of Golfsmith International
Holdings, Inc.
We sell brand name golf equipment from the industry's leading manufacturers
including Callaway(R), FootJoy(R), Ping(R), Nike(R), Taylor Made(R) and
Titleist(R) as well as our own proprietary brands, Golfsmith(R), Lynx(R), Snake
Eyes(R) and Killer Bee(R). We sell through multiple distribution channels
consisting of:
- 26 golf superstores;
- regular mailings of our clubmakers' catalogs, which offer golf club
components, and our accessory catalogs, which offer golf accessories,
clothing and equipment; and
- golfsmith.com, our online e-commerce website.
We also operate a clubmaker training program and are the exclusive operator
of the Harvey Penick Golf Academy, an instructional school incorporating the
techniques of the well-known golf instructor, the late Harvey Penick.
Over the past few years we have implemented a number of initiatives to
improve our competitive position and financial performance, including closing
under-performing stores, reducing headcount, updating stores, narrowing product
assortments and upgrading our technology and infrastructure. While some of these
initiatives have reduced sales, we believe that these actions have contributed
to improved cash flow, earnings and asset management.
In January 2000, we completed the implementation of a company-wide,
integrated management information system. This new system included substantial
revisions to, among other areas, our order entry, order fulfillment,
point-of-sale and inventory replenishment processes. We encountered difficulties
with this new system that resulted in a substantial decline in net revenues and
net income in fiscal 2000 due to lost sales, higher customer returns, increased
operating costs, an inability to collect certain accounts receivable and higher
inventory levels. These difficulties included system slowdowns that made
entering orders, shipping and receiving merchandise difficult and, at times,
impossible. The slow system performance resulted in lengthy checkout lines,
extended call wait times and slow transaction processing causing lost sales as
we were unable to process customer requests in a timely manner. Further, the
slow performance affected the movement of inventory, processing of sales,
generation of management reports and collection of accounts receivables, and
resulted in multiple shipments for a single order, inventory shrink,
uncollectible receivables and out-of-stock inventory among other problems.
Through our implementation of this system, we improved reporting, reduced our
inventory levels by 31.8% from the year end of fiscal 1999 to the year end of
fiscal 2002, reduced inventory levels by 30.0% from the end of first quarter
1999 to the end of first quarter 2003, and reduced order processing costs,
payroll and corporate overhead. Based on these improvements and the fact that
our integrated management information system no longer experiences the slowdowns
that led to the difficulties in fiscal 2000, we believe these difficulties are
behind us and that our systems have improved the efficiency of our operations
and lowered our operating costs. Inventory levels have subsequently increased
from December 28, 2002 to March 29, 2003 as we are preparing for the opening of
three new stores subsequent to March 29, 2003. In addition, inventory has been
replenished over the first quarter of 2003 from the holiday season of 2002 in
preparation for the upcoming busy spring and summer seasons.
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We recognize revenue for retail sales at the time the customer takes
possession of the merchandise and purchases are paid for, primarily with either
cash or credit card. Catalog and e-commerce sales are recorded upon shipment of
merchandise. Revenue from the Harvey Penick Golf Academy instructional school
are recognized at the time the services are performed. Revenues from the sale of
gift certificates are recorded upon the redemption of the gift certificate for
the purchase of tangible products at the time the customer takes possession of
the merchandise.
Our business is highly seasonal with sales peaks during the Father's Day
and Christmas Holiday seasons. A substantial portion of our net revenues and an
even larger portion of our operating income occur in our second fiscal quarter.
You should read the "Risk Factors" section for an explanation of the effects and
risks of the seasonality of our business.
Sales of our products are affected by increases and declines in the golf
industry as a whole. Growth in the segments of the American population that
include the group that generally plays the most rounds of golf and people in
their 20's, the age when many people start playing golf, along with increased
interest in golf by women, junior and minority golfers indicate that the golf
industry will continue to grow in the next decade. These trends may however be
offset by further declines in the U.S. economy and reductions in the
discretionary consumer spending. We believe that since 1997, the worldwide
premium golf club market has experienced little growth in dollar volume from
year to year and that the number of rounds played has not increased since 1999.
As sales of golf products increase and decrease in the industry as a whole,
these fluctuations may impact our sales similarly.
We capitalize inbound freight and vendor discount charges into inventory
upon receipt of inventory. These costs are then subsequently included in cost of
goods sold upon the sale of that inventory. Since some retailers exclude their
costs from cost of goods sold, and instead include them in a line item like
selling and administrative expenses, our gross margins may not be comparable to
those of these other retailers.
Our fiscal year ends on the last Saturday in December and generally
consists of 52 weeks, though occasionally our fiscal years will consist of 53
weeks. This will next occur in 2003. Fiscal years 2002, 2001, and 2000 each
consisted of 52 weeks. Each quarter of each fiscal year consists of 13 weeks.
IMPACT OF MERGER
On October 15, 2002, BGA Acquisition Corp., a wholly owned subsidiary of
Golfsmith International Holdings, Inc., merged with and into Golfsmith
International, Inc. We accounted for the merger under the purchase method of
accounting for business combinations. In accordance with the purchase method of
accounting, in connection with the merger, Holdings, our parent after the
merger, allocated the excess purchase price over the value of our net assets
between a write-up of certain of our assets, which reflect an adjustment to the
fair values of these assets, and goodwill. The assets that have had their fair
values adjusted include inventory, property and equipment, and certain
intangible assets.
As a result of applying the required purchase accounting rules, the
financial statements of Golfsmith International Holdings, Inc. are significantly
affected. The application of purchase accounting rules results in different
accounting bases and hence financial information for the periods beginning on
October 16, 2002. The term "successor" refers to Golfsmith International
Holdings, Inc. and all of its subsidiaries, including Golfsmith International,
Inc. following the acquisition on October 15, 2002. The term "predecessor"
refers to Golfsmith International, Inc. prior to being acquired by Golfsmith
International Holdings, Inc.
Immediately prior to the merger, we repaid in full our 12% senior
subordinated notes for $34.4 million and terminated our then existing revolving
credit facility. Deferred debt financing costs of $1.6 million were written-off
in connection with the termination of these agreements. We sold 8.375% Senior
Secured Notes due 2009 with an aggregate principal amount at maturity of $93.75
million for gross proceeds of $75.0 million in a private placement offering to
finance part of the cash portion of the merger consideration, and entered into a
new senior credit facility to fund our future working capital requirements and
for general corporate purposes as described below.
48
As a result of the merger and the offering of the senior secured notes, we
currently have total debt in amounts substantially greater than historical
levels. This amount of debt and associated debt service costs will lower our net
income and cash provided by operating activities and will limit our ability to
obtain additional debt financing, fund capital expenditures or operating
requirements, open new or retrofit existing stores, and make acquisitions.
Historically, we operated as a Subchapter S corporation under the Internal
Revenue Code. Consequently, we were not generally subject to federal income
taxes because our stockholders included our income in their personal income tax
returns. Simultaneously with the completion of the merger, we converted from a
Subchapter S corporation to a Subchapter C corporation and consequently became
subject to federal income taxes from that date. This conversion will lower our
future net income and cash provided by operating activities.
In connection with the merger, all stock options held by our employees
vested and were either canceled in exchange for the right to receive cash or
surrendered in exchange for stock units. As a result, we incurred a non-cash
compensation charge of $4.6 million which was equal to the difference between
the market value of our common stock and the exercise price of these options at
that vesting date. Total non-cash compensation expense for the year ended
December 28, 2002 and the three months ended March 29, 2003 was $6.0 million and
$0, respectively. For further information about our stock-based compensation,
see Note 1 to our audited consolidated financial statements included elsewhere
in this prospectus.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosures of contingent assets and
liabilities. The estimates and assumptions are evaluated on an ongoing basis and
are based on historical experience and other various factors that are believed
to be reasonable under the circumstances. Actual results may differ from these
estimates.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
INVENTORY VALUATION
Inventory value is presented as a current asset on our balance sheet and is
a component of cost of products sold in our statement of operations. It
therefore has a significant impact on the amount of net income reported in any
period. Merchandise inventories are carried at the lower of cost or market. Cost
is the sum of expenditures, both direct and indirect, incurred to bring
inventory to its existing condition and location. Cost is determined using the
weighted-average method. We estimate a reserve for damaged, obsolete, excess and
slow-moving inventory and for inventory shrinkage due to anticipated
book-to-physical adjustments. We periodically review these reserves by comparing
them to on-hand quantities, historical and projected rates of sale, changes in
selling price and inventory cycle counts. Based on our historical results, using
various methods of disposition, we estimate the price at which we expect to sell
this inventory to determine the potential loss if those items are later sold
below cost. The carrying value for inventories that are not expected to be sold
at or above costs are then written down. A significant adjustment in these
estimates or in actual sales may have a material adverse impact on our net
income. Reserves are booked on a monthly basis at 0.5% to 1.0% of net revenues
depending on the distribution channel (direct-to-consumer channel or retail
channel) in which the sales occur. Historical shrinkage experience has been
within this range, with the exception of fiscal 2000. In fiscal 2000, shrinkage
was 1.3% of net revenues due to problems associated with the implementation of
our new management information system. In fiscal 2001, inventory shrinkage was
0.74% of net revenues and in fiscal 2002, inventory shrinkage was 0.53% of net
revenues indicating an improvement towards the results we achieved in 1999, with
inventory shrinkage of 0.45% of net revenues before the implementation of our
new management information system. Based on
49
current trends, during the three months ended March 29, 2003, we do not expect
the inventory shrinkage as a percentage of net revenues to exceed fiscal 2002
levels.
LONG-LIVED ASSETS, INCLUDING GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
We evaluate the impairment of the book value of our identifiable
intangibles and related goodwill based on our projection of estimated discounted
cash flows annually, as well as whenever events or changes in circumstances
indicate that the carrying amounts of these assets may not be recoverable. We
evaluate the impairment of the book value of our long-lived assets in accordance
with SFAS No. 144, Impairment of Long-Lived Assets, which supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", based on our projections of estimated future
undiscounted cash flows annually, as well as whenever events or changes in
circumstances indicate that the carrying amounts of these assets may not be
recoverable. Factors that are considered by management in performing these
assessments include, but are not limited to, our performance relative to our
projected or historical results, our intended use of acquired assets and our
strategy for our overall business, as well as industry and economic trends. In
the event that the book value of intangibles, long-lived assets and related
goodwill is determined to be impaired, such impairments are measured using a
discount rate determined to be commensurate with the risk inherent in our
current business model. To the extent these future projections or our strategies
change, our estimates regarding impairment may differ from our current
estimates. In accordance with Statement of Financial Accounting Standard No.
142, Goodwill and Other Intangible Assets, we determined that our recorded
trademarks have indefinite useful lives and therefore are not amortized.
PRODUCT RETURN RESERVES
We reserve for product returns based on estimates of future sales returns
related to our current period sales. We analyze historical returns, current
economic trends and changes in customer acceptance of our products when
evaluating the adequacy of the reserve for sales returns. Any significant
increase in merchandise returns that exceeds our estimates could adversely
affect our operating results. In addition, we may be subject to risks associated
with defective products, including product liability. Our current and future
products may contain defects, which could subject us to higher defective product
returns, product liability claims and product recalls. Because our allowances
are based on historical return rates, we cannot assure you that the introduction
of new merchandise in our stores or catalogs, the opening of new stores, the
introduction of new catalogs, increased sales over the Internet, changes in the
merchandise mix or other factors will not cause actual returns to exceed return
allowances. We book reserves on a monthly basis at 2% to 7% of net revenues
depending on the distribution channel in which the sales occur. We routinely
compare actual experience to current reserves and make any necessary
adjustments.
DEFERRED CATALOG EXPENSES
Prepaid catalog expenses consist of third party incremental costs,
including primarily paper, printing, postage and mailing costs. We capitalize
these costs as prepaid catalog expenses and amortize them over their expected
period of future revenues. We base our estimates of expected future revenue
streams upon our historical results. If the carrying amount is in excess of the
estimated probable remaining future revenues, we expense the excess in the
reporting period.
SELF-INSURED LIABILITIES
We are primarily self-insured for employee health benefits. We record our
self-insurance liability based on claims filed and an estimate of claims
incurred but not yet reported. If more claims are made than were estimated or if
the costs of actual claims increases beyond what was anticipated, reserves
recorded may not be sufficient and additional accruals may be required in future
periods.
STORE CLOSURE COSTS
When we decide to close a store, we recognize an expense related to the
future net lease obligation, non-recoverable investments in related fixed assets
and other expenses directly related to the discontinuance of operations in
accordance with SFAS No. 146, Accounting for Costs Associated with Exit
50
or Disposal Activities. These charges require us to make judgments about exit
costs to be incurred for employee severance, lease terminations, inventory to be
disposed of, and other liabilities. The ability to obtain agreements with
lessors, to terminate leases or to assign leases to third parties can materially
affect the accuracy of these estimates.
We closed two stores in fiscal 2000, one store in fiscal 2001 and two
stores in fiscal 2002. We did not close any stores in the three months ended
March 29, 2003. These stores were selected for closure by evaluating the
historical and projected financial performance of all of our stores in
accordance with our store strategy. In each case, the stores that have been
closed were the only Golfsmith store in that market and were substantially
larger in size than our current store prototype. We do not currently have any
plans to close any additional stores, although we regularly evaluate our stores.
You should see "-- Fiscal 2002 Compared to Fiscal 2001" for information
regarding the costs associated with those store closures.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board, or FASB issued
Statement of Financial Accounting Standard, or SFAS, No. 144, Impairment of
Long-Lived Assets, which supercedes SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 144
retains the requirements of SFAS No. 121 to (a) recognize an impairment loss
only if the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows and (b) measure an impairment loss as the difference
between the carrying amount and the fair value of the asset. SFAS No. 144
removes goodwill from its scope. SFAS No. 144 is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. We adopted
the provisions of SFAS No. 144 in fiscal 2002 and recorded a loss on
discontinued operations in 2002 of $269,800 (including a loss on disposal of
approximately $285,000) relating to the closure of two stores considered an
"asset group" under SFAS No. 144.
In June 2002 the FASB issued SFAS No. 146, Accounting For Costs Associated
With Exit or Disposal Activities. SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of commitment to an exit or disposal plan. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002. The
adoption of SFAS No. 146 has not had a material impact on our financial
statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires a company to
recognize an initial liability for the fair value of an obligation it assumes
under a guarantee, as well as its ongoing obligation over the term of the
guarantee. The offsetting entry of recognizing a liability depends on the
circumstances in which the guarantee was issued. Additionally, FIN 45 elaborates
on and clarifies existing disclosure requirements for most guarantees. The
initial recognition provisions of FIN 45 apply to guarantees issued or modified
after December 31, 2002. The adoption of FIN 45's initial recognition and
measurement provisions has not had a material effect on our consolidated
financial statements. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002, and have
been incorporated into our disclosures of guarantees in the December 28, 2002
consolidated financial statements included elsewhere in this prospectus.
In January 2003, the Emerging Issues Task Force ("EITF") issued Issue No.
02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor. Issue No. 1 of Issue No. 02-16 states that cash
consideration received by a customer or a reseller from a vendor is presumed to
be a reduction of the prices of the vendor's products or services and should,
therefore, be characterized as a reduction of cost of sales when recognized in
the customer's income statement. However, that presumption is overcome when the
consideration is either (a) a payment for assets or services delivered to the
vendor, in which case the cash consideration should be characterized as revenue
(or other income, as appropriate) when recognized in the customer's income
statement, or (b) a reimbursement of costs incurred by the customer to sell the
vendor's products, in which case the cash consideration should be characterized
as a reduction of that cost when recognized in the customer's income statement.
The
51
consensus on Issue 1 should be applied to fiscal periods beginning after
December 15, 2002. Upon application of the consensus on Issue 1, income
statements for prior periods presented should be reclassified to comply with
that consensus, provided that the recasting of prior-period financial statements
does not result in a change to net income of those prior periods. The adoption
of Issue No. 02-16, Issue 1 did not have a material impact on our financial
statements and no prior period reclassifications were necessary.
Issue No. 2 of Issue No. 02-16 states that a rebate or refund of a
specified amount of cash consideration that is payable pursuant to a binding
arrangement only if the customer completes a specified cumulative level of
purchases or remains a customer for a specified time period should be recognized
as a reduction of the cost of sales based on a systematic and rational
allocation of the cash consideration offered to each of the underlying
transactions that results in progress by the customer toward earning the rebate
or refund provided the amounts are probable and reasonably estimable. If the
rebate or refund is not probable and reasonably estimable, it should be
recognized as the milestones are achieved. Issue 2 is effective for arrangements
entered into after November 21, 2002. The adoption of Issue No. 02-16, Issue 2
did not have a material impact on our financial statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 29, 2003 (SUCCESSOR) COMPARED TO THREE MONTHS ENDED
MARCH 30, 2002 (PREDECESSOR)
We had net revenues of $45.8 million, operating income of $0.6 million and
a net loss of $1.2 million in the three months ended March 29, 2003 compared to
net revenues of $48.4 million, operating income of $2.2 million and net income
of $2.6 million in the three months ended March 30, 2002.
The $2.6 million decline in net revenues from the three months ended March
30, 2002 to the three months ended March 29, 2003 was due to one store that
closed in 2002 and therefore did not contribute to 2003 revenues, accounting for
a reduction in revenues of $0.9 million, combined with a $2.6 million reduction
in revenues in our direct to consumer channel, a $0.3 million reduction in
international revenues and a $0.5 million reduction, or 2.2%, in comparable
retail revenues. These revenue declines were partially offset by the opening of
three new stores in fiscal 2002 which resulted in an increase of $1.7 million in
revenues.
For the three months ended March 29, 2003, gross profit was $14.9 million,
or 32.5% of net revenues, compared to $17.1 million, or 35.3% of net revenues,
for the three months ended March 30, 2002. Gross profit declined due to the
lower net revenues and lower gross profit margins resulting principally from
higher sales in lower margin merchandise categories such as equipment.
Additionally, in the three month period ended March 29, 2003, we incurred
approximately $0.2 million of costs included in cost of goods sold resulting
from the fair value adjustment made to inventory as part of the merger
transaction in October 2002.
Selling, general and administrative expenses decreased $0.5 million to
$14.3 million for the three months ended March 29, 2003 from $14.7 million for
the three months ended March 30, 2002. The decrease was the result of a decline
in salaries and benefits of $0.3 million and a reduction in advertising of $0.6
million. Those reductions were partially offset by a $0.3 million increase in
occupancy expenses and a $0.1 million increase in management fee expense to our
majority shareholder. Additionally, approximately $0.1 million related to
depreciation of fixed assets resulting from the fair value adjustment made as
part of the merger transaction and amortization of identifiable intangible
assets of approximately $0.1 million that were also a result of the merger were
included in selling, general and administrative expenses for the three month
period ended March 29, 2003. This combined $0.2 million increase resulting from
the merger transaction was offset by decreases of the same amount in deprecation
expense during the three months ended March 29, 2003 relating to fixed assets
that became fully depreciated during the fourth quarter of fiscal 2002.
Amortization of deferred compensation decreased approximately $0.1 million
to $0 for the three months ended March 29, 2003 compared to $0.1 million for the
three months ended March 30, 2002. Deferred compensation is related to the
accounting for stock options under variable plan accounting
52
guidance. These non-cash charges decreased from the three months ended March 30,
2002 to the three months ended March 29, 2003 due to all remaining outstanding
options becoming vested and being either canceled in exchange for the right to
receive cash or surrendered in exchange for stock units on the merger date of
October 15, 2002. See "-- Impact of Merger" for further discussion.
For the three months ended March 30, 2002, interest expense consisted of
costs related to our 12% senior subordinated notes, a mortgage note and a bank
line of credit. Immediately prior to the merger in October 2002, we repaid our
senior subordinated notes and other pre-existing debt and a new line of credit
was put in place. Interest expense was $2.6 million and $1.6 million in the
three months ended March 29, 2003 and March 30, 2002, respectively. Interest
expense increased as a result of increased borrowings and reduced repayments in
the first quarter of 2003 as compared to the first quarter or 2002.
Approximately $0.2 million of amortization of debt issuance costs resulting from
the old notes during the three months ended March 29, 2003 as compared to
approximately $41,000 of amortization of debt issuance costs related to the
senior subordinated notes during the three months ended March 30, 2002 also
contributed to the increase in interest expense. For further discussion see
"-- Senior Secured Notes" and "-- Credit Facility" below. Interest income was
approximately $7,400 and $0.1 million in the three months ended March 29, 2003
and March 30, 2002, respectively. The decrease in interest income was the result
of overall lower cash and cash equivalent balances combined with lower interest
rates.
Other income, net of other expenses was approximately $3,300 for the three
months ended March 29, 2003, compared to other income, net of other expenses of
$2.2 million for the three months ended March 30, 2002. The decrease is due to a
gain on the sale of assets during the first quarter of 2002. In March 2002, we
sold the rights to certain intellectual property for gross proceeds of $3.3
million resulting in a $2.2 million gain.
Minority interest expense during the three months ended March 30, 2002 of
$0.2 million relates to an obligation that was associated with partnership
interests issued in 1998. Immediately prior to the merger, Golfsmith repurchased
this minority interest obligation. The minority interest obligation had a
carrying value of $13.1 million and was repurchased for $9.0 million resulting
in the recording of negative goodwill during the fourth quarter of fiscal 2002.
Historically, we have elected to be treated as a Subchapter S Corporation
under the Internal Revenue Code. Consequently, we have not generally been
subject to federal income taxes because our stockholders include our income in
their personal income tax returns. Concurrently with the completion of the
merger, we converted from a Subchapter S corporation to a Subchapter C
corporation and consequently became subject to federal income taxes from that
date. For the three months ended March 29, 2003 our income tax benefit was $0.8
million compared to an income tax expense of $0.1 million for the three months
ended March 30, 2002, related to our European and Canadian operations, as well
as certain state income taxes.
COMBINED FISCAL 2002 COMPARED TO PREDECESSOR FISCAL 2001
For comparison purposes, references to "fiscal 2002" refer to the combined
financial results of our predecessor from December 30, 2001 through October 15,
2002 and of Holdings from October 16, 2002 through December 28, 2002.
We had net revenues of $218.1 million, operating income of $7.7 million and
a net loss of $2.2 million in fiscal 2002 compared to net revenues of $221.4
million, operating income of $13.8 million and net income of $7.2 million in
fiscal 2001.
The $3.3 million decline in net revenues from fiscal 2002 to fiscal 2001
was due to stores that closed in 2001 and therefore did not contribute to 2002
revenues, accounting for a reduction in revenues of $1.3 million combined with a
$4.7 million reduction in revenues in our direct to consumer channel. These
revenue declines were partially offset by the opening of three new stores in
fiscal 2002 resulting in $2.2 million in revenues as well as an increase in
international revenues of $0.5 million. Revenues from comparable stores remained
consistent with a 0.1% increase from fiscal 2001 to fiscal 2002.
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In fiscal 2002, gross profit was $75.8 million, or 34.8% of net revenues,
compared to $78.3 million, or 35.4% of net revenues, in fiscal 2001. Gross
profit declined due to the lower net revenues and lower gross profit margins
resulting principally from higher sales in lower margin merchandise categories
such as equipment.
Selling, general and administrative expenses, excluding store
pre-opening/closing expenses, decreased $2.2 million to $61.9 million in fiscal
2002 from $64.1 million in fiscal 2001. The decrease was the result of
improvements in management of administrative expenses which decreased by $2.6
million as well as a reduction in store payroll which decreased by $0.2 million.
Those reductions were partially offset by $0.6 million increase in advertising
expense.
During fiscal 2002, we closed two stores, opened one store in June and
opened two stores in November. The two closed stores accounted for $2.0 million
and $7.8 million in net revenues and $0.3 million and $0.6 million in operating
loses in fiscal 2002 and 2001, respectively. Store closure expenses were $0.3
million and $0.7 million in fiscal 2002 and 2001, respectively. Store closure
expenses for stores closed in 2002 are reflected in discontinued operations in
accordance with SFAS No. 144, Impairment of Long-Lived Assets. We incurred
approximately $0.2 million in store pre-opening expenses in fiscal 2002.
Amortization of deferred compensation increased $5.5 million to $6.0
million in fiscal 2002 compared to $0.5 million in 2001. Deferred compensation
is related to the accounting for stock options under variable plan accounting
guidance. These non-cash charges increased over prior year due to all remaining
outstanding options becoming vested on the merger date of October 15, 2002. See
"-- Impact of Merger" for further discussion.
For all of 2001 and a majority of 2002, interest expense consisted of costs
related to our 12% senior subordinated notes, a mortgage note and a bank line of
credit. In fiscal 2002, we repaid our senior subordinated notes and other
pre-existing debt with the net proceeds from the old notes which were $67.9
million. Interest expense was $7.4 million and $6.8 million for fiscal 2002 and
fiscal 2001, respectively. Interest expense increased as a result of increased
borrowings in fiscal 2002 compared to fiscal 2001. The senior subordinated notes
and the line of credit were repaid in connection with the merger in October 2002
and a new line of credit and the senior secured notes were put in place. For
further discussion see "-- Senior Secured Notes" and "-- Credit Facility" below.
In fiscal 2002 and fiscal 2001, interest income was $0.3 million and $0.6
million, respectively.
Other income, net of other expenses was $2.4 million in fiscal 2002,
compared to other income, net of other expenses of $1.0 million for fiscal 2001.
The increase is due primarily to a gain on the sale of assets. In March 2002, we
sold the rights to certain intellectual property for gross proceeds of $3.3
million resulting in a $2.2 million gain. In March 2001, we sold unutilized real
estate adjacent to our Austin facilities which resulted in a $1.1 million gain.
On October 15, 2002, immediately prior to the merger, all remaining
outstanding debt under the Subordinated Notes was repaid in full. We recorded a
loss of $8.0 million on the extinguishment of this debt, as reported in
continuing operations.
We recognized a loss of $0.3 million and $0.6 million in fiscal 2002 and
2001, respectively from discontinued operations related to the operations and
final closing costs associated with closing two retail locations in fiscal 2002
due to poor operating performance and the lack of market penetration being
derived from these single-market stores. Store closure costs include writedowns
of remaining leasehold improvements and store equipment to estimated fair values
and lease termination costs. We recorded a loss on the disposal of these assets
in fiscal 2002 of $0.3 million which is reported in discontinued operations
under the accounting guidance of SFAS No. 144, Impairment of Long-Lived Assets.
All related assets and liabilities for these two locations have been eliminated
from the December 28, 2002 consolidated balance sheet.
Immediately prior to the merger, Golfsmith repurchased a minority interest
obligation that was associated with partnership interests issued in 1998. The
minority interest had a carrying value of $13.1 million and was repurchased for
$9.0 million resulting in the recordation of negative goodwill. In
54
accordance with Statement of Financial Accounting Standard No. 141, Business
Combinations, this gain is recorded on the statement of operations as an
extraordinary item.
Historically, we have elected to be treated as a Subchapter S Corporation
under the Internal Revenue Code. Consequently, we have not generally been
subject to federal income taxes because our stockholders include our income in
their personal income tax returns. For fiscal 2002 income tax expense was $0.1
million compared to income tax expense of $0.3 million for fiscal 2001, related
to our European and Canadian operations, as well as certain state income taxes.
FISCAL 2001 (PREDECESSOR) COMPARED TO FISCAL 2000 (PREDECESSOR)
In fiscal 2001, we had net revenues of $221.4 million compared to net
revenues of $232.1 million in fiscal 2000. The decline in net revenues of $10.7
million was due to the closure of two stores in 2000 and one in 2001 resulting
in reduced revenues of $7.4 million. Additionally, soft consumer demand in our
direct-to-consumer channel and reduced catalog prospecting resulted in an
additional decrease in revenues of $5.9 million as well as a reduction of
international revenues of $0.5 million. These declines were offset partially by
an increase in comparable store sales of $3.1 million, or 2.9%, due in part to
the absence of system problems which lowered sales in 2000.
Gross profit in fiscal 2001 was $78.3 million, or 35.4% of net revenues,
compared with $78.4 million, or 33.8% of net revenues in fiscal 2000. Compared
to fiscal 2000, gross profit margin increased as we increased sales of our
proprietary branded products and upgraded our management information systems.
This upgrade resulted in reduced in- and out-bound freight costs, lower handling
costs and fewer product returns. These lower costs were partially offset by
markdowns on discontinued merchandise as we narrowed select merchandise
assortments and closed under-performing stores.
Selling, general and administrative expenses, excluding store pre-opening
and closing expenses, in fiscal 2001 declined $12.3 million to $64.1 million, or
28.9% of net revenues, from $76.4 million, or 32.9% of net revenues, in the
fiscal 2000. Lower selling, general and administrative expenses were the result
of reduced catalog circulation costs, particularly in prospecting for new
customers, which decreased by $5.2 million, and better management of store
payroll and other administrative expenses, which decreased by $7.1 million.
In fiscal 2001, we closed one, and began the closure of another,
under-performing store. Both stores were the only store we operated in each of
their markets and as a result, both suffered from advertising and operating
inefficiencies. These two stores accounted for $4.7 and $5.7 million in net
revenues and $1.0 and $0.5 million in operating losses in fiscal 2001 and 2000,
respectively. Store closure expenses, including amounts recorded in discontinued
operations, were $0.7 million and $1.9 million in fiscal 2001 and 2000,
respectively, and primarily consisted of writedowns of leasehold improvements,
fixtures, and equipment and lease termination and other disposal costs.
In fiscal 2001 and 2000, interest expense consisted of costs related to our
12% senior subordinated notes and borrowings under our senior credit facility.
Interest expense was $6.8 million and $6.9 million in fiscal 2001 and 2000,
respectively. Interest income increased $0.5 million due to higher balances of
marketable securities resulting from cash provided by higher earnings and
reduced working capital requirements. These notes and lines of credit were
repaid in connection with the merger as discussed under "-- Liquidity and
Capital Resources" below
Other income, net of other expenses was $1.0 million in fiscal 2001
compared to other income, net of other expenses of $0.4 million in fiscal 2000.
In both years, other income primarily related to gains from the sale of
unutilized real estate adjacent to our Austin facility. The gain on the sale of
real estate was $1.1 million and $1.0 million in fiscal 2001 and 2000,
respectively. In fiscal 2000, other expenses included $0.6 million for the
write-off of software for e-commerce web sites. Historically, we have elected to
be treated as a Subchapter S Corporation under the Internal Revenue Code.
Consequently, we have not generally been subject to federal income taxes because
our stockholders include our income in their personal income tax returns. Fiscal
2001 income tax expense of $0.3 million and fiscal 2000 income tax benefit of
$0.2 million include the result of foreign taxes relating to our European and
Canadian operations, as well as certain state income taxes.
55
The company recognized a loss of $0.6 million and $0.4 million in fiscal
2001 and 2000, respectively, from discontinued operations related to the
operations of two retail locations that closed in fiscal 2002 due to poor
operating performance and the lack of market penetration being derived from
these single-market stores. Store closure costs include writedowns of remaining
leasehold improvements and store equipment to estimated fair values and lease
termination costs.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
As of March 29, 2003 we had $2.8 million in cash and cash equivalents and
outstanding debt obligations of $78.0 million.
OPERATING ACTIVITIES
Net cash used in operating activities was $10.3 million for the three
months ended March 29, 2003, compared to $8.9 million net cash used in operating
activities for the three months ended March 30, 2002. The increase in net cash
used in operations during the three months ended March 29, 2003 as compared to
the three months ended March 30, 2002 is attributable to two causes. First, in
the three months ended March 29, 2003 we incurred a net loss of $1.2 million,
whereas in the three months ended March 30, 2002 we had net income of $2.6
million. Second, cash used in operations relating to the increase of inventory
was $11.3 million in the three months ended March 29, 2003 as compared to $9.4
million in the three months ended March 30, 2002. This increase in cash used for
inventory relates largely to the opening of three new stores subsequent to March
30, 2002, an overall lower inventory balance at December 28, 2002 as compared to
December 29, 2001 due to continued improvement in inventory management, and
lower sales during the first quarter of fiscal 2003 as compared to the first
quarter of fiscal 2002. These factors were partially offset by a net increase in
accounts payable, accounts receivable and accrued liabilities resulting in net
cash provided by operations of $0.2 million during the three months ended March
29, 2003 as compared to a net decrease in accounts payable, accounts receivable
and accrued liabilities resulting in net cash used in operations of $0.6 million
during the three months ended March 30, 2002. This $0.8 million increase in cash
provided by operations was largely a result of our taking greater advantage of
vendor payment discounts during the three months ended March 29, 2003 and the
opening of three new retail stores subsequent to March 30, 2002. Additionally,
net non-cash expenses added back to net income (loss) were $2.0 million and
$46,000 during the three month periods ended March 29, 2003 and March 30, 2002,
respectively, thus further offsetting net cash used in operations. These
expenses relate primarily to depreciation and amortization expenses recognized
during the period. However, during the first quarter of fiscal 2002, we
recognized a gain on the sale of certain intellectual property of $2.2 million,
accounting for the change in the comparative periods.
The decrease in net cash provided by operating activities in fiscal 2002 as
compared to fiscal 2001 is attributable to two causes. First, in fiscal 2002 we
had a net loss of $2.0 million, whereas in fiscal 2001 we had income of $7.2
million. Second, in fiscal 2001 we decreased our inventory and accounts
receivable and generated $16.6 million in cash. In fiscal 2002 we further
decreased our inventory and accounts receivable, but generated only $3.7 million
in cash. The difference of $12.9 million accounts for part of the decrease in
overall net cash provided in operating activities.
The increase in net cash provided by operating activities in fiscal 2001 as
compared to fiscal 2000 is attributable to the $16.6 million in cash generated
by our decrease in inventory and accounts receivable discussed above and $5.6
million net loss for the year due to problems associated with our system
conversion.
INVESTING ACTIVITIES
Net cash used in investing activities was $0.4 million for the three months
ended March 29, 2003, compared to net cash provided by investing activities of
$2.9 million for the three months ended March 30, 2002. Net cash provided by
investing activities was $0.1 million during both combined fiscal 2002 and
fiscal 2001. Net cash used in investing activities was $1.0 million in fiscal
2000.
56
Net cash used in investing activities for the three months ended March 29,
2002 of $0.4 million was primarily the result of capital expenditures of $0.4
million. For the three months ended March 29, 2003, capital expenditures
comprised of $0.2 million to retrofit existing stores, $36,000 for new stores,
$88,000 for systems development projects, $39,000 for corporate projects and
$35,000 in other capital expenditures. Net cash provided by investing activities
for the three months ended March 30, 2002 of $2.9 million was the result of
proceeds from the sale of certain intellectual property of $3.3 million
partially offset by $0.4 million in capital expenditures. For the three months
ended March 30, 2002, capital expenditures comprised of $49,000 for corporate
projects, $39,000 for system development projects and $30,000 for other capital
expenditures.
Net cash provided by investing activities in fiscal 2002 of $0.1 million
was a result of proceeds from the sale of certain intellectual property of $3.3
million partially offset by $3.2 million in capital expenditures. In fiscal
2002, capital expenditures comprised primarily of $0.5 million to retrofit
existing stores, $1.9 million for new stores, $0.3 million to relocate an
existing store and $0.5 million for systems development projects.
Net cash provided by investing activities for fiscal 2001 of $0.1 million
was the result of proceeds from the sale of excess real estate of $1.4 million
partially offset by $1.3 million in capital expenditures. For fiscal 2001
capital expenditures comprised primarily of $0.5 million to retrofit existing
stores and $0.8 million for system development projects.
Net cash used in investing activities in fiscal 2000 of $1.0 million was
the result of capital expenditures of $2.1 million offset partially by proceeds
from the sale of excess real estate of $1.1 million.
FINANCING ACTIVITIES
Net cash provided by financing activities was $2.1 million for the three
months ended March 29, 2003, compared to net cash used in financing activities
of $9.0 million for the three months ended March 30, 2002. Net cash used in
financing activities was $48.5 million and $13.1 million in combined fiscal 2002
and fiscal 2001, respectively. Net cash provided by financing activities was
$5.6 million in fiscal 2000.
Net cash provided by financing activities for the three months ended March
29, 2003 of $2.1 million was comprised primarily of borrowings under our senior
credit facility of $7.6 million offset partially by principal payments on our
senior credit facility of $5.5 million. For the three months ended March 30,
2002, net cash used in financing activities of $9.0 million was comprised of
principal payments on long-term debt of $8.9 million and principal payments on
lines of credit of $0.1 million, net of borrowings.
Net cash used in financing activities in fiscal 2002 of $48.5 million was
comprised of principal payments on long term debt of $41.7 million, payments to
satisfy debt and minority interest obligations of $10.6 million, distributions
to shareholders as a result of the merger of $35.9 million and dividends paid to
shareholders of $3.5 million. We received proceeds from the issuance of common
stock associated with the merger of $43.2 million.
In fiscal 2001, net cash used in financing activities was $13.1 million,
comprised of $7.1 million for the repayment on lines of credit, net of
borrowings, and $6.0 million in principal payments of long-term debt.
In fiscal 2000, net cash provided by financing activities was $5.6 million,
comprised primarily of $14.3 million in long-term debt borrowings ($15.0 million
in gross proceeds less $0.7 million in debt placement costs) offset by $6.2
million in debt and line of credit repayments and $2.5 million in dividends paid
to shareholders.
SENIOR SECURED NOTES
On October 15, 2002, we completed a private placement of $93.75 million
aggregate principal amount at maturity of the old notes, for gross proceeds of
$75.0 million. Among the covenants in the indenture governing the old notes, our
ability to borrow under our revolving credit facility is restricted to a maximum
of $12.5 million and the payments of dividends or repurchases of stock are
limited. The proceeds from the
57
sale of the old notes were used by us to pay a portion of the cash portion of
the merger consideration and for fees and expenses of the offering and merger.
As a result of the merger and the offering of the senior secured notes, we
currently have total debt in amounts substantially greater than historical
levels. This amount of debt and associated debt service costs could lower our
net income and cash provided by operating activities and will limit our ability
to obtain additional debt financing, fund capital expenditures or operating
requirements, open new or retrofit existing stores, and make acquisitions.
CREDIT FACILITY
Historically, our principal sources of liquidity have consisted of cash
from operations and financing sources. In fiscal 2000, we entered into a credit
facility providing for term loan borrowings of $15.0 million and revolver
borrowings up to $40.0 million, subject to certain limitations. The term loan
was secured by a pledge of the company's land and buildings. The revolver was
secured by a pledge of our inventory, receivables, and certain other assets, and
was repaid and re-borrowed from time to time until such maturity date subject to
the satisfaction of certain conditions. This credit facility was repaid in full
and terminated in connection with the merger. In fiscal 1998, we issued in a
private placement $30.0 million of our 12% senior subordinated notes and
partnership interests that could have been converted into warrants to purchase
shares of our common stock under certain circumstances. We also repaid in full
the 12% senior subordinated notes in connection with the merger.
Concurrently with the merger, we entered into a new revolving credit
facility with $9.5 million availability (after giving effect to required
reserves of $500,000), subject to customary conditions, to fund our working
capital requirements and for general corporate purposes. The credit agreement is
secured by a pledge of our inventory, receivables, and certain other assets. The
credit agreement provides for same day funding, and letter of credit
availability, and contains maximum leverage and minimum earnings covenants. As
of March 29, 2003, we had $2.1 million of borrowings outstanding under the
credit agreement.
Borrowings under the credit agreement are expected to increase as working
capital increases in anticipation of important selling periods in late spring
and in advance of the Christmas holiday, and then decline following these
periods. In the event sales results are less than anticipated and our working
capital requirements remain constant, the amount available under the credit
agreement may not be adequate to satisfy our needs. If this occurs, we may not
succeed in obtaining additional financing in sufficient amounts and on
acceptable terms. Our ability to borrow under our credit agreement is limited in
some circumstances. You should read "Risk Factors -- The lenders under our
credit facility may limit our ability to borrow under our senior credit
facility" for more information and "Description of Senior Credit Facility" for a
description of the coverage ratios we are required to maintain.
CAPITAL EXPENDITURES
Capital expenditures amounted to $0.4 million, $3.2 million and $1.3
million in the three months ended March 29, 2003, fiscal 2002 and fiscal 2001,
respectively. Capital expenditures principally relate to new stores, existing
store retrofits and system development projects. For the three months ended
March 29, 2003, capital expenditures comprised of $0.2 million to retrofit
existing stores, $36,000 for new stores, $88,000 for systems development
projects, $39,000 for corporate projects and $35,000 in other capital
expenditures. For fiscal 2002, capital expenditures comprised primarily of $0.5
million to retrofit existing stores, $1.9 million for new stores, $0.3 million
to relocate an existing store and $0.5 million for systems development projects.
In fiscal 2001 capital expenditures comprised primarily of $0.5 million to
retrofit existing stores and $0.8 million for system development projects.
In the year ended December 28, 2002, we opened three additional stores and
incurred store pre-opening expenses of $0.2 million and $1.9 million in capital
expenditures. In the three months ended March 29, 2003, we did not open any new
stores.
Subject to our ability to generate sufficient cash flow, we currently plan
to spend $5.0 million to $7.0 million to open additional stores and/or retrofit
existing stores in fiscal 2003. However, to the extent that we use capital for
acquisitions, our budget for store openings and retrofittings will be reduced.
58
Typically, we estimate that we incur $0.6 million in net working capital costs
and $0.6 million in capital expenditures in connection with the opening of a new
store. These amounts are estimates and actual store opening costs may vary.
CONTRACTUAL OBLIGATIONS
Our future contractual obligations related to long-term debt and
noncancellable operating leases at March 29, 2003 are as follows:
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
----------------------- -------- ---------------- --------- --------- -------------
(IN THOUSANDS)
Long-term debt.............. $ 93,750 $ -- $ -- $18,750 $ 75,000
Operating leases............ 65,592 7,951 15,682 14,759 27,200
-------- ------ ------- ------- --------
Total....................... $159,342 $7,951 $15,682 $33,509 $102,200
======== ====== ======= ======= ========
We expect that our principal uses of cash for the next several years will
be interest payments on the notes and the senior credit facility, capital
expenditures, primarily for new store openings, possible acquisitions (to the
extent permitted by the lenders under our senior credit facility and under the
indenture governing the notes) and working capital requirements. Additionally,
subsequent to fiscal 2003, we will be required to (1) offer to repurchase a
portion of the notes at 100% of their accreted value within 120 days after the
end of each fiscal year with 50% of our excess cash flow and (2) under certain
circumstances, purchase notes at 101% of their accreted value plus accrued and
unpaid interest, if any, to the date of purchase. We believe that cash from
operations will be sufficient to meet our expected debt service requirements,
planned capital expenditures, and operating needs. However, we have limited
ability to obtain additional debt financing to fund working capital needs and
capital expenditures should cash from operations be insufficient. Net cash used
in operations of $10.3 million during the three months ended March 29, 2003 was
largely a result of our operating in a seasonal industry that requires larger
inventory build-ups during the first quarter of each fiscal year in preparation
for the Father's Day and Spring selling seasons. We believe that the financial
support of our principal stockholder and the use of our senior credit facility
offer us potential funding avenues to meet working capital requirements. If cash
from operations is not sufficient, we cannot assure you that we will be able to
obtain additional financing in sufficient amounts and on acceptable terms. You
should read the information set forth under "Risk Factors" for a discussion of
the risks affecting our operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, which include changes in U.S. interest
rates and, to a lesser extent, foreign exchange rates. We do not engage in
financial transactions for trading or speculative purposes.
INTEREST RATE RISK
The interest payable on our existing credit facility is based on variable
interest rates and therefore affected by changes in market interest rates. If we
draw the maximum available under the credit facility of $9.5 million and
interest rates on existing variable rate debt rise to greater than 15.25%, our
results from operations and cash flows may be materially affected. Our interest
rate risk objectives are to limit the impact of interest rate fluctuations on
earnings and cash flows and to lower our overall borrowing costs. To achieve
these objectives, we manage our exposure to fluctuations in market interest rate
for a portion of our borrowings through the use of fixed rate debt instruments
to the extent that reasonably favorable rates are obtainable with such
arrangements. We may enter into derivative financial instruments such as
interest rate swaps or caps and treasury options or locks to mitigate our
interest rate risk on a related financial instrument or to effectively fix the
interest rate on a portion of our variable rate debt. Currently, we are party to
no derivative financial instruments. We do not enter into derivative or interest
rate transactions for speculative purposes. We regularly review interest rate
exposure on our outstanding borrowings in an effort to minimize the risk of
interest rate fluctuations.
59
FOREIGN CURRENCY RISKS
We purchase a significant amount of products from outside of the U.S.
However, these purchases are primarily made in U.S. dollars and only a small
percentage of our international purchase transactions are in currencies other
than the U.S. dollar. Any currency risks related to these transactions are
deemed to be immaterial to us as a whole.
We operate a fulfillment center in Toronto, Canada and a sales, marketing
and fulfillment center near London, England, which exposes us to market risk
associated with foreign currency exchange rate fluctuations. At this time, we do
not manage the risk through the use of derivative instruments. A 10% adverse
change in foreign currency exchange rates would not have a significant impact on
our results of operations or financial position.
60
BUSINESS
OVERVIEW
Carl Paul founded our company in 1967 when he began providing clubmakers
with the components necessary to offer custom-made golf clubs at a time when
most golfers could only purchase ready-made, off-the-shelf equipment. In order
to capitalize on this market opportunity, we helped pioneer the golf club
components industry by designing and selling a line of components and supplies
(principally golf clubheads, shafts, grips and tools) for custom clubmakers
through our clubmakers' catalog. Over the years we have complemented and
expanded our operations by opening our first retail outlet in 1972, mailing our
first general golf product catalog in 1975, opening our first superstore in
1992, opening the Harvey Penick Golf Academy in 1993 and launching golfsmith.com
in 1997.
We believe we are one of the largest, multi-channel, specialty retailers of
golf equipment and related accessories in the industry, as determined by sales,
and are an established designer and marketer of golf equipment. We have a
35-year history as a retailer in the golf industry. We offer equipment from
leading manufacturers, including Callaway(R), Cobra(R), FootJoy(R), Nike(R),
Ping(R), Taylor Made(R) and Titleist(R). In addition, we offer our own
proprietary brands, including Golfsmith(R), Lynx(R), Snake Eyes(R) and Killer
Bee(R). We market our products through 26 superstores as well as through our
direct-to-consumer channel, which includes our clubmaking and accessory catalogs
and our Internet site. In fiscal 2001, fiscal 2002 and the three months ended
March 29, 2003, we generated net revenues of $221.4 million, $218.1 million and
$45.8 million, respectively. We had net income of $7.2 million in fiscal 2001
and net losses of $2.2 million and $1.2 million in fiscal 2002 and the three
months ended March 29, 2003, respectively.
We offer a complete line of golf equipment and related accessories through
our multiple distribution channels. Our superstores and our direct-to-consumer
catalogs and Internet site accounted for approximately 56.7% and 40.3% of our
net revenues for fiscal 2002, respectively, and 54.7% and 43.4% of our net
revenues in the three months ended March 29, 2003, respectively.
INDUSTRY OVERVIEW
The golf industry has a base of over 26 million participants in the United
States and is expected to grow steadily at 1% to 2% annually over the next ten
years. In addition to stability and growth, the golf industry is characterized
by a base of core participants and favorable demographic trends. The typical
golfer is male, just over 40 years old, has a household income of more than
$70,000, and plays 22 rounds of golf per year. As the typical golfer ages and
has more time and disposable income, the golf retailing industry is poised to
benefit. This consumer base of over 26 million mostly affluent golfers spends
approximately $6 billion annually on golf products, including range balls. In
addition, there are a number of trends indicating that the golf industry will
continue to grow through the next decade, including growth of the two largest
segments of the American population, the 40 to 60 year old age group (the group
that generally plays the most rounds and spends the most money on golf) and
people in their 20s (the age when many people start playing golf), and increased
interest in golf by women, junior and minority golfers. These trends may however
be offset by further declines in the U.S. economy and reductions in the
discretionary consumer spending. We believe that since 1997, the worldwide
premium golf club market has experienced little growth in dollar volume from
year to year and that the number of rounds played has not increased since 1999.
As sales of golf products increase and decrease in the industry as a whole,
these fluctuations may impact our sales similarly.
The retail infrastructure in the golf industry is highly fragmented. The
leading retail channel for golf equipment, apparel and accessories is the
specialty off-course distribution channel, which includes Golfsmith, other large
golf-focused retailers and golf specialty shops not located at a golf course.
The specialty off-course channel accounted for over 40% of all retail golf sales
in 1999.
Based on our experience, we believe that retailers in the golf industry
experience a high degree of seasonality in their businesses. In our experience,
sales are higher during the spring and Christmas holiday
61
selling seasons. As a consequence, retailers incur higher expenses related to
building inventory in order to meet the higher demand during these seasons. In
keeping with this trend, a substantial portion of our sales occur in our second
fiscal quarter each year. As a consequence, we incur higher expenses during
these periods relating to building inventory in order to meet this higher
demand.
BUSINESS STRENGTHS
Multi-Channel Market Leadership. We use a multi-faceted marketing
strategy, which leverages our established position in the golf industry. Our
distribution channels consist of our 26 superstores and our direct-to-consumer
channel, which includes our clubmaking and accessory catalogs and our Internet
site. This approach allows for strong sales due to the complementary nature of
our channels and higher margins as we leverage our overhead and infrastructure
across both channels. In addition, we believe our own high margin,
vertically-integrated, proprietary product brands, Golfsmith(R), Lynx(R), Snake
Eyes(R) and Killer Bee(R), benefit from traffic created by third-party
manufacturers marketing their brand name golf equipment that we sell and the
general marketing of our stores, catalogs, website and instructional golf
academy.
Premier Brand Recognition. Through 35 years of operations serving the golf
industry and our multiple distribution channels, we believe we have built
substantial brand equity with golfers ranging from golfers who build custom
clubs to golfers who seek to improve their games through the major brands'
latest equipment offerings. We have a long history in product development and
design of golf club components. In addition, through our regular interaction
with clubmakers, we believe we stay attuned to new developments in club design
and player specifications.
Portfolio of Proprietary Brands. Sales of our proprietary brands,
including components, constituted over 21.9% and 20.8% of our net revenues in
fiscal 2002 and the three months ended March 29, 2003, respectively. These
brands generate substantially higher gross profit margins than products we sell
that are produced by other manufacturers. We offer a wide range of quality
products under several different well known brand names, which allows us to
supply beginning, casual and advanced players along various price points. In
addition to being an attractive source of revenue and profits, we believe that
our portfolio of vertically-integrated, proprietary brands enhances the appeal
of our superstores and direct-to-consumer channels and differentiates us from
our competitors.
Advanced Infrastructure. We have made significant investments in our
information systems and supply-chain capabilities, which have improved the
efficiency of our order fulfillment and inventory management capabilities. Our
240,000 square foot shipping facility, warehouse and distribution center at our
Austin, Texas-based headquarters allows us to support our network of
superstores, catalog and Internet customers and should enable us to handle our
expected growth with minimal additional infrastructure. Through our
implementation of an ERP information system in fiscal 2000, we improved
reporting, reduced our inventory levels by 31.8% from the year end of fiscal
1999 to the year end of fiscal 2002 and by 30.0% from the end of the first
quarter of fiscal 1999 to the end of the first quarter of fiscal 2003, and
reduced order processing costs, payroll, and corporate overhead. The lower
inventory levels are the result of our ability to better manage inventory at our
distribution center and at all of our retail stores.
Proven Management Team with Significant Equity Stake; Relationship with
First Atlantic. We have a strong management team that combines in-depth
knowledge of the golf industry with substantial large-store retailing
experience. Our senior management team has an average of over 15 years of
industry experience and an average tenure with us of over 11 years. Jim Thompson
is our chief executive officer. Mr. Thompson and his management team have had
responsibility for many of our day-to-day operations over the last few years.
Messrs. Carl Paul and Franklin Paul, our founders, along with our management
team, own approximately 20.3% of Holdings' common stock on a fully diluted basis
and Atlantic Equity Partners III, L.P., a limited partnership operated by First
Atlantic Capital Ltd., owns approximately 79.7% of Holdings' common stock on a
fully diluted basis. In connection with the merger, we entered into a management
consulting agreement with First Atlantic. Under the agreement, First Atlantic is
available to advise us in connection with proposed financial transactions,
acquisitions and other senior management matters. The management consulting
agreement is more fully described under "Related Party
Transactions -- Management Consulting Agreement."
62
Significant Expansion Opportunities. We intend to expand and open
additional stores. Based on our experience to date, we expect to spend
approximately $1.2 million to open each additional superstore. In addition to
internal growth opportunities, we believe that as the golf industry continues to
divide into premium brands and secondary brands, we will have opportunities to
acquire companies and market selected brands through our retail distribution
network. From time to time, we evaluate opportunities to make acquisitions in
our industry. We believe that by controlling certain product offerings from
conception through delivery to the customer, we control brand image, product
differentiation, distribution, prices and margins, and in so doing, establish an
advantage over our competitors.
BUSINESS STRATEGY
The primary objectives of our business plan are:
- to expand our store base by adding stores in existing or new markets;
- to leverage our existing infrastructure, scale, proprietary brands and
multi-channel distribution model to increase market share;
- to modify certain larger stores and open new stores using a smaller, more
productive layout that increases our profitability and lowers per-store
capital investments, while continuing to provide customers with value,
product selection, services and a superior shopping environment;
- to capture market segments that are under-served by major brands through
the design and development of proprietary equipment; and
- to expand our direct-to-consumer distribution channel by improving
customer acquisition and retention initiatives, and by offering an
enjoyable on-line shopping experience to our customers.
PRODUCTS AND SUPPLIERS
We believe the breadth of our product offerings and our ability to focus
these offerings to compete with major brands' most profitable product lines
gives us a competitive advantage. We currently derive over half of our net
revenues from clubs and components and a large portion of our club sales are of
our own proprietary brands, which have significantly higher gross profit margins
than products from original equipment manufacturers. Our products include golf
clubs and club components, club bags, golf gloves, golf shoes, and golfing
apparel.
ORIGINAL EQUIPMENT MANUFACTURERS
We offer a large selection of golf equipment from leading manufacturers,
including, but not limited to, Callaway(R), Cobra(R), FootJoy(R), Nike(R),
Ping(R), Taylor Made(R) and Titleist(R). We enjoy strong relationships with many
of the major equipment vendors in the industry. These relationships, combined
with our multi-channel distribution model, provide us access to product
offerings that are not readily available to all of their customers and lower our
cost of products sold. As a result of these relationships, we can offer unique
merchandise to our customers while also achieving higher gross profit margins.
We have a diverse network of suppliers. In fiscal 2002, Callaway Golf
supplied 14% of our consolidated purchases. No other single supplier accounted
for more than 10% of our consolidated purchases during fiscal 2002. Our top ten
suppliers for fiscal 2002 were as follows:
TOP 10 SUPPLIERS
--------------------------------------------------------------------------------
Roger Cleveland Golf
Asian Contract Manufacturer
Callaway Golf
Nike
Ping
Spalding
Taylor Made/Adidas Golf
Fortune Brands (Titleist/Cobra Golf)
True Temper
Winn, Inc.
63
PROPRIETARY BRANDS
We are the registrant of over 80 trademarks and service marks in more than
30 countries including Golfsmith(R), Lynx(R), Snake Eyes(R), Black Cat(R),
Killer Bee(R), Crystal Cat(R), Parallax(R), Predator(R) and Tigress(R). Our
trademarks are generally valid as long as they are properly in use in commerce.
The registrations are valid as long as they are properly maintained and the
registered marks have not become generic, abandoned nor the registrations
obtained fraudulently. Our trademarks may cease to be valid, for example, if we:
- license our trademarks without quality control or fail to enforce quality
control provisions in any licenses;
- fail to contest infringing uses;
- fail to use a U.S. trademark for three consecutive years;
- fail to use foreign registered trademark within the time required after
registration; and
- fail to maintain foreign registrations, in which case we may lose the
presumption of ownership in the foreign country.
Our trademarks and domain names are considered to be indefinite lived assets
under SFAS No. 142, "Goodwill and Other Intangible Assets," and therefore are
not amortized. Other definite lived intellectual property is amortized on a
straight-line basis over nine years.
We focus on developing products that are high-quality and designed to
increase the penetration of our private label offerings, fill a niche or gap in
the premium brand product offerings, and appeal to custom clubmakers and enhance
our status as equipment design experts. Three of these private labels were added
in fiscal 1998 when we purchased assets of three well-known golf companies: Lynx
Golf Inc., Snake Eyes Golf Clubs Inc. and Black Rock Golf Corp., the
manufacturer of the Killer Bee(R) line. These companies' three equipment lines
are now proprietary brands included in all of our multiple retail channels. We
source 100% of our proprietary equipment from low cost contract manufacturers in
Asia, and these suppliers manufacture our equipment according to our
specifications.
SALES AND DISTRIBUTION
SUPERSTORES
We are exploring various market expansion opportunities for our
superstores. We intend to locate superstores in clusters in either existing
markets or in markets that we determine can adequately support a cluster of
stores. We opened our first golf superstore in 1992 and currently operate 26
superstores in or around the following metropolitan areas:
LOCATION SIZE (SQ. FT.) DATE OPENED
-------- -------------- ----------------
Atlanta, Georgia..................................... 25,139 December 1997
Atlanta, Georgia..................................... 26,021 July 1998
Atlanta, Georgia..................................... 14,153 November 2002
Austin, Texas........................................ 30,000 December 1996(1)
Austin, Texas........................................ 14,745 April 1998
Chicago, Illinois.................................... 20,457 November 1997
Chicago, Illinois.................................... 30,036 November 1997
Chicago, Illinois.................................... 25,000 May 1998
Chicago, Illinois.................................... 10,800 November 2002
Columbus, Ohio....................................... 24,043 April 1998
Dallas, Texas........................................ 17,949 May 1996
Dallas, Texas........................................ 25,046 May 1998
Dallas, Texas........................................ 25,018 June 1998
Denver, Colorado..................................... 25,505 July 1996
Denver, Colorado..................................... 25,003 June 1997
64
LOCATION SIZE (SQ. FT.) DATE OPENED
-------- -------------- ----------------
Detroit, Michigan.................................... 21,000 June 1999
Detroit, Michigan.................................... 22,583 April 1999
Houston, Texas....................................... 17,282 April 1995
Houston, Texas....................................... 25,000 August 1997
Los Angeles, California.............................. 24,000 December 1999
Los Angeles, California.............................. 30,000 July 1999
Los Angeles, California.............................. 10,800 June 2002
Minneapolis, Minnesota............................... 25,775 March 1998
Moorestown, New Jersey............................... 20,700 September 1997
Phoenix, Arizona..................................... 11,795 July 1997(2)
Phoenix, Arizona..................................... 25,168 October 1998
---------------
(1) Originally opened in November 1992 as a 15,608 sq. ft. store.
(2) Originally opened in 1997 as a 30,400 sq. ft. store and was relocated and
downsized to 11,795 sq. ft. in August 2002.
Our superstores range in size from approximately 11,000 to 30,000 square
feet. Our superstores feature a wide selection of golf equipment from major name
brand manufacturers and also serve as the primary retail outlet in the United
States for our proprietary branded equipment. Our superstore format enables us
to provide customers a superior shopping experience and a wide selection of
products. Our superstores also cater to golf and sports enthusiasts by providing
golf simulators, indoor driving nets, computerized swing analyzers, putting
greens and TV monitors that display golf and major sporting events. In addition,
our superstores offer components, clubmaking tools, supplies and on-site custom
clubfitting and technical support, which we believe differentiates our stores
from those of our competitors.
We plan to modify selected larger superstores into a smaller, more
productive layout that we believe will lower our operating costs and capital
requirements and increase our profitability while providing customers with a
superior shopping environment. In June 2002, we opened our first smaller format
superstore in Pasadena, California, and in August 2002, we relocated an existing
30,400 square foot store in Phoenix Arizona to a new 11,795 square foot store
featuring elements of our new store prototype. The new superstore design
enhances sight lines and visual merchandising, while decreasing inventory
requirements and new store capital costs. We believe the newly configured stores
will enhance our customers' shopping experience. Additional benefits of the
reconfiguration of the superstores are improved merchandise presentation, better
store coverage with fewer personnel and lower inventory and occupancy cost.
We opened three stores during fiscal 2002. We did not open any new stores
in the three months ended March 29, 2003. Subject to our ability to generate
sufficient cash flow, we currently plan to spend $5.0 million to $7.0 million to
open additional stores and/or retrofit existing stores in fiscal 2003. However,
to the extent that we use capital for acquisitions, our budget for store
openings and retrofittings will be reduced.
We intend to selectively expand our existing store base in existing or new
markets where we can build upon our existing store base and capture share from
weaker competitors. The criteria for the selection of new superstore locations
include:
- demographic characteristics with a high number of avid golfers and above
average annual household incomes;
- visibility from and access to highways or other major roadways;
- the ability to obtain favorable lease terms; and
- co-tenants that are likely to draw customers whom we would otherwise
target within the site's relevant market.
65
After we have identified a potential site, we assess the cost of the site
and carefully examine the projected profitability and returns generated from
opening the additional stores.
Our superstores accounted for approximately 56.7% and 54.7% of our net
revenues for fiscal 2002 and the three months ended March 29, 2003,
respectively.
DIRECT-TO-CONSUMER
Through our direct-to-consumer distribution channels, we provide customers
our extensive offering of products, including equipment, apparel, accessories,
and clubmaking components and tools. Our direct-to-consumer channels accounted
for approximately 40.3% and 43.3% of our net revenues for fiscal 2002 and the
three months ended March 29, 2003, respectively.
Catalogs. Our principal publications are the Golfsmith Accessory Catalog
and the Golfsmith Clubmaking Catalog. We have developed a proprietary customer
database of over 4 million names, which we believe is the largest in the golf
industry. We collect customer names largely through our catalog and online
website order processing and to a lesser extent through contests and
point-of-sale registers in our superstores. The names and associated sales
information are merged periodically into our customer master file. This merge
process provides a source of current information to help assess the
effectiveness of the catalog and identifies new customers that can be added to
our in-house mailing lists.
We are pursuing a more focused strategy in our catalog business in order to
increase our net revenue and profitability per circulated catalog. We reduced
our catalog distribution by 7.4% from fiscal 2001 to fiscal 2002, cutting our
production and distribution costs while growing our net revenue per circulated
catalog. Of the four million individuals in our customer database, approximately
763,000 made a purchase from us within the past 24 months. To further enhance
the effectiveness of our catalog mailings to individuals in our customer
database, we use statistical evaluation and selection techniques to determine
which customer segments are likely to contribute the greatest revenue per
mailing.
Our two catalog titles are designed and produced by our in-house staff of
writers, photographers and graphic artists. This enables us to maintain quality
control and shorten the lead-time needed to produce the catalogs. The monthly
production and distribution schedule of our accessory catalog permits frequent
changes in the product selection and price. During fiscal 2002, our accessory
catalog contained from 60 to 64 pages for non-peak months and between 64 to 68
pages for the peak seasons of Father's Day and the holiday shopping season.
Internet. We leverage our sizable catalog business through our e-commerce
site, www.golfsmith.com. This site combines our broad product offering with a
low price guarantee. We are able to offer this low price guarantee and still
obtain attractive margins by leveraging our multi-channel operations and
distribution capabilities. We have an additional website, Lynxgolf.com, which
links to www.golfsmith.com. We believe there are many expansion opportunities
with respect to our Internet offerings and various aspects of our multi-channel
business model, such as:
- extensive database and updated information system infrastructure provides
us with an opportunity to provide distinctive Internet offerings, such as
personalized marketing and online auctions;
- our desirable, affluent customer base supports the formation of strategic
alliances and joint marketing with other organizations;
- our proprietary offering of equipment enables more direct-to-consumer
offerings similar to our Lynxgolf.com site; and
- our ability to create website offerings similar to any newly created
catalog offerings (e.g., apparel only or corporate focused).
The Internet business complements the superstore business by building
customer awareness of our brand and acting as an effective advertising vehicle
for new product introductions, unique product offerings,
66
and our proprietary brands. In addition, we believe that this channel acts as a
cost efficient means of testing market acceptance of new products.
INTERNATIONAL
Approximately half of the world's golfers reside outside the United States.
We work with a group of international distributors to offer golf club components
and equipment to clubmakers and golfers in selected regions outside the United
States. In the United Kingdom, we sell our proprietary branded equipment through
a commissioned sales force directly to retailers. Throughout most of Europe and
parts of Asia and other parts of the world, we sell our products through a
network of distributors. In fiscal 2002, we shipped products to customers,
including through our direct-to-consumer channel, in more than 60 countries.
Approximately 2.4%, 2.3%, 2.6% and 1.9% of our net revenues were derived from
sales made through our international distributors and our distribution center
near London in fiscal 2000, fiscal 2001, fiscal 2002 and the three months ended
March 29, 2003, respectively. Although we believe that there are substantial
long-term growth opportunities outside the United States, particularly in Japan,
Europe, and Canada, our current focus is on our domestic growth opportunities.
HARVEY PENICK ACADEMY
In 1993, we partnered with Austin native and well-known golf instructor,
the late Harvey Penick, to form the Harvey Penick Golf Academy. The academy
earned a spot in GOLF Magazine's listing of golf's top 25 instructional schools
in 1999 and has attracted over 15,000 students since its inception. We believe
the academy adds to our quality image and helps contribute to sales at our
adjacent Austin superstore. We believe that the strength of the Harvey Penick
name and the academy's strong reputation could allow us to open additional
Harvey Penick Golf Academies, although we do not currently have plans to open
any new academies. The academy accounted for approximately 0.5% and 0.4% of our
net revenues for fiscal 2002 and the three months ended March 29, 2003,
respectively.
RESEARCH AND DEVELOPMENT
We believe we are considered to be among the industry's leaders in product
development and design of golf club components. We design and develop private
label clubs and components. Throughout our 35-year history, our products have
incorporated our own innovations in design and materials. Our legacy of product
design has made us an established designer of components in the industry. We
focus on developing products that are:
- high quality and designed to increase the penetration of our private
label offerings;
- fill a niche or gap in the premium brand product offerings; and
- appeal to custom clubmakers and enhance our status as equipment design
experts.
MARKETING
We have a multi-faceted marketing strategy that combines direct marketing,
local advertising, supplier marketing and endorsement arrangements that maintain
Golfsmith as a presence on the professional circuits. We have two major
endorsement relationships: one with Ben Crenshaw, who plays and evaluates
Lynx(R) clubs, and the other with J.L. Lewis, who plays and evaluates
Golfsmith(R) clubs. Former endorsers have included Scott Verplank, Bruce
Lietzke, and Payne Stewart.
On the local level, we run newspaper ads to promote superstores and store
events. Additional marketing activity occurs during key shopping periods, such
as Father's Day and Christmas, and on specific sales and promotional events. On
the national level, we participate in cooperative advertising arrangements with
our vendors. Along with "vendor buy-ins" to sponsor events, these arrangements
have reduced our advertising costs. Also, on the national level, we run printed
advertisements in national magazines, such as Golf Digest and Golf Magazine. In
conjunction with this year's Masters tournament, which marks the start of the
spring buying season, we ran national ads on the Golf Channel and local
67
television ads in select markets to complement our direct marketing campaign. To
contain costs and increase effectiveness, we have expanded the use of e-mail for
direct marketing.
The catalogs that we distribute annually are also an important marketing
tool. The Golfsmith Clubmaking Catalog is distributed to many of our clubmaking
catalog customers and reinforces our place in the component market. In addition,
we believe the magazine extends the Golfsmith(R) brand and encourages additional
sales through the publicity of new product and promotional offerings.
INFRASTRUCTURE
Our order fulfillment infrastructure includes:
- a 100,000 square foot, direct-to-consumer shipping facility and
associated warehouse which can handle well over one million packages
annually;
- a state-of-the-art, 140,000 square foot distribution center with
available capacity to handle all store inventory and order fulfillment
requirements during our planned period of growth; and
- new management information systems that fully integrate all aspects of
our business and enables us to quickly obtain key operating data.
We also have two smaller distribution facilities in Toronto, Canada and
near London, England from which we service our Canadian and European customers.
FACILITIES
We own our 41-acre Austin, Texas campus, which is home to our general
offices, distribution center, call center, clubmaker training facility and
Harvey Penick Golf Academy. The Austin campus also includes a golf testing and
practice area. This area includes 80 hitting stations, chipping and putting
greens, and sand bunkers. With the exception of the Austin superstore at our
corporate headquarters, we lease all of our superstores. All leased premises are
held under long-term leases with differing provisions and expiration dates.
Leases provide for monthly rentals, typically computed on the basis of a fixed
amount. Most leases contain provisions permitting us to renew for one or more
specified terms. Details of our non-superstore properties and facilities are as
follows:
SIZE YEAR OWNED/
LOCATION (SQ. FT.) FACILITY TYPE OPENED LEASED
-------- --------- -------------------------- ------ ------
Austin, Texas................... 60,000 Office 1992 Owned
Austin, Texas................... 50,000 Warehouse 1994 Owned
Austin, Texas................... 140,000 Distribution Center 1999 Owned
Austin, Texas................... 50,000 Shipping Facility 1994 Owned
Austin, Texas................... 17 Acres Driving Range and Training 1992 Owned
Facility
Toronto, Canada................. 3,906 Direct-to-Consumer Order 2001 Leased
Fulfillment Facility
St. Ives, Cambridgeshire, 15,900 Office, Warehouse and 2001 Leased
England....................... Shipping Facility
MANAGEMENT INFORMATION SYSTEMS
We have invested more than $8.3 million in our management information
systems over the last four years. This investment provides us with a network and
applications that are scalable and easy to use, maintain, and modify. A major
portion of the investment was spent replacing most of our legacy systems with a
new ERP system. This system provides us with the infrastructure necessary to
support continued growth. This infrastructure integrates all major aspects of
our business, improves our back-office capabilities, enhances management
reporting and analysis capabilities through rapid access to data, lowers
operating costs and improves and expands our direct marketing capabilities.
68
The in-store, point-of-sale system tracks all sales by category, style and
item and allows us to routinely compare current performance with historical and
planned performance. The information gathered by this system supports automatic
replenishment of inventory and is integrated into product buying decisions. We
believe that the systems provide us with a competitive advantage through
improved customer service and operational efficiency.
Order processing through our website requires minimal human intervention.
We ship these orders directly from our shipping facility or from our retail
stores depending on product availability.
The majority of our hardware resides at our corporate headquarters. We have
implemented redundant servers and communication lines to limit downtime in the
event of power outages or other potential problems. System administrators and
network managers monitor and operate our network operations and
transactions-processing systems to ensure the continued uninterrupted operation
of our website and transaction-processing systems.
EMPLOYEES
As of March 29, 2003, we employed 882 people. From 2000 to 2002 we reduced
our employee base by 57 people. We made these workforce reductions by taking
advantage of the improved operating efficiencies created through our new
operating systems, with the largest employee reduction occurring in the
warehouse, the distribution center, and the call center. We believe we have
strong relationships with our employee force. None of our work force is
unionized. We offer a benefits package to all full-time employees, which
includes medical, life, and disability coverage. We believe our benefit packages
are competitive with comparable employers.
COMPETITION
Our competitors currently include other specialty retailers, mass
merchandise retailers, conventional sporting goods retailers, on-course pro
shops, and online retailers of golf equipment. These businesses compete with us
in one or more product categories. In addition, traditional and specialty golf
retailers are expanding more aggressively in marketing brand-name golf
equipment, thereby competing directly with us for products, customers and
locations. Some of these potential competitors have been in business longer than
us or have greater financial or marketing resources than we do and may be able
to devote greater resources to sourcing, promoting and selling their products.
Several of our key vendors have begun to operate retail stores or websites that
sell directly to consumers and may compete with us and reduce our sales. In the
specialty off-course segment our primary competitors include retail chains such
as Edwin Watts, Golf Galaxy, Pro Golf Discount, Dick's Sporting Goods, Galyan's
and Nevada Bobs. Other competitors include on-course pro shops, direct marketers
and sporting goods retailers. We compete on the basis of brand image,
technology, quality and performance of our products, method of distribution,
price, style and intellectual property protection.
ENVIRONMENTAL MATTERS
We are subject to various foreign, federal, state, and local environmental
protection, chemical control, and health and safety laws and regulations, and we
incur costs to comply with those laws. We own and lease real property, and some
environmental laws hold current or previous owners or operators of businesses
and real property liable for contamination on or originating from that property,
even if they did not know of and were not responsible for the contamination. The
presence of hazardous substances on any of our properties or the failure to meet
environmental regulatory requirements may materially adversely affect our
ability to use or to sell the property or to use the property as collateral for
borrowing, and may cause us to incur substantial remediation or compliance
costs. If hazardous substances are released from or located on any of our
properties, we could incur substantial liabilities through a private party
personal injury or property damage claim or a claim by a governmental entity for
other damages. The liability may be imposed on us under environmental laws or
common law principles.
69
In addition, some of the products we sell contain regulated substances,
such as solvents and lead. Environmental laws may impose liability on any person
who disposes of hazardous substances, regardless of whether the disposal site is
owned or operated by such person.
Although we do not currently anticipate that the costs of complying with
environmental laws or otherwise satisfying any current liabilities under
environmental laws will materially adversely affect us, we cannot assure you
that we will not incur material costs or liabilities in the future, due to the
discovery of new facts or conditions, acquisition of new properties, the
occurrence of releases of hazardous substances, the filing of new claims,
changes in operations, a change in existing environmental laws, adoption of new
environmental laws, or new interpretations of existing environmental laws.
LEGAL PROCEEDINGS
We are a party to a number of claims and lawsuits incidental to our
business. We believe that the ultimate outcome of such matters, in the
aggregate, will not have a material adverse impact on our financial position,
liquidity or results of operations.
70
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding our executive officers
and directors.
NAME AGE POSITION
---- --- ------------------------------------------
James D. Thompson......................... 40 Chief Executive Officer, President and
Director
Virginia Bunte............................ 38 Vice President -- Chief Financial Officer
Kenneth Brugh............................. 52 Vice President -- Operations
Curt Young................................ 54 Vice President -- Administration
Fred Quandt............................... 33 Vice President -- Merchandising
Kiprian Miles............................. 41 Vice President -- Chief Information
Officer
James Grover.............................. 31 Vice President, Secretary and Director
Noel Wilens............................... 40 Vice President and Director
Charles Shaw.............................. 69 Chairman of the Board
Roberto Buaron............................ 56 Director
Thomas G. Hardy........................... 57 Director
James Long................................ 60 Director
Carl Paul................................. 63 Director
James D. Thompson became our chief executive officer and president upon
completion of the merger. Mr. Thompson was our senior vice president since
September 2000. From August 1999 to September 2000, Mr. Thompson was our vice
president of merchandising, and from January 1999 to August 1999 he was director
of brand management. From 1998 to 1999, Mr. Thompson was responsible for home
computing products for Circuit City. From 1995 to 1998, Mr. Thompson served as
senior director, business solutions and in other management positions for
CompUSA. From January 1986 to July 1993, he served as national merchant and in
other management positions for Highland Superstores.
Virginia Bunte joined Golfsmith in 1995 and has been our vice president and
chief financial officer since January 2003. From 1995 to 2003, Ms. Bunte served
in positions including assistant controller, controller and vice president of
finance.
Kenneth Brugh joined Golfsmith in 1981 and has been our vice president of
operations since May 2001. From 1981 to 2001, Mr. Brugh served in positions
including vice president, general manager and sales associate.
Curt Young joined Golfsmith in 1975 and has been our vice president of
administration since May 2001. From 1975 to 2001, Mr. Young served in positions
including vice president of operations.
Fred Quandt joined Golfsmith in 1995 and has been our vice president of
merchandising since September 2002. Since 1995, Mr. Quandt has served as our
vice president of merchandising and divisional merchandise manager and in
various other merchandising positions.
Kiprian Miles joined Golfsmith in October 2002 as our vice president and
chief information officer. From April 1999 until June 2002, Mr. Miles was
responsible for technology decisions, information infrastructure and marketing
and sales support systems as vice president, marketing systems and chief
architect, at Office Depot, Inc. From August 1997 to April 1999, Mr. Miles was
chief architect at Alcoa Inc., where he was responsible for developing and
managing the technology infrastructure.
James Grover became a vice president and a director upon the completion of
the merger. Mr. Grover has been a vice president at First Atlantic since August
2000. From July 1998 until August 2000, Mr. Grover was an associate with First
Atlantic. Prior to joining First Atlantic in 1998, Mr. Grover was an associate
and business analyst at New York Consulting Partners, Inc.
71
Noel Wilens became a vice president and a director upon the completion of
the merger. Mr. Wilens has been a principal at First Atlantic since May 2001.
Prior to that, Mr. Wilens was a general partner and managing director of
Bradford Equities Fund, L.L.C., a New York-based private equity firm focused on
the acquisition of small and medium size U.S. industrial manufacturers and
distributors. Previously, Mr. Wilens was a principal of The Invus Group, Ltd., a
private equity firm specializing in food industry acquisitions on behalf of
European investors.
Charles Shaw became a director upon the completion of the merger. Mr. Shaw
has been a managing director at First Atlantic since 2001. From 1997 to 2000,
Mr. Shaw was a senior advisor to First Atlantic. He was a senior partner at
McKinsey & Company, Inc. for twenty-five of his thirty-five year tenure which
ended in 2000. In addition to consulting with many Fortune 500 companies and
their international equivalents, Mr. Shaw served on McKinsey's board for
eighteen years and had a variety of management positions worldwide. Also, he was
deeply involved in investment activities at McKinsey as a trustee of the profit
sharing retirement plan and as a member of the investment committee.
Roberto Buaron became a director upon the completion of the merger. Mr.
Buaron has been the chairman and chief executive officer of First Atlantic since
he founded the firm in 1989. Prior to that, Mr. Buaron was a senior partner with
Overseas Partners Inc., a firm which invested international funds in leveraged
buyouts in the United States. From 1983 to 1986, Mr. Buaron was a first vice
president of First Century, Inc., and a general partner of its venture capital
affiliate, First Century Partnership. Prior to joining First Century, Mr. Buaron
was a partner of McKinsey & Company, Inc. During his nine-year tenure at
McKinsey, Mr. Buaron counseled senior management at a number of Fortune 500
companies on improving their strategic position and operating performance.
Thomas G. Hardy became a director upon the completion of the merger. Mr.
Hardy is currently a business advisor to and a director of Lumenis, a leading
manufacturer of lasers used for surgical applications. From 1993 to 1999, Mr.
Hardy was the president and chief operating officer of Trans-Resources, Inc., a
multinational manufacturer and distributor of industrial and organic chemicals.
Prior to that, Mr. Hardy was a partner for 15 years with McKinsey & Company,
Inc.
James Long became a director upon the completion of the merger. Mr. Long
has been a managing director at First Atlantic since 1991. Prior to joining
First Atlantic, Mr. Long was a managing director at Kleinwort Benson North
America during 1990. From 1975 to 1989, Mr. Long was an executive vice president
of mergers, acquisitions and strategic planning at Primerica Corporation
(formerly American Can Company). From 1970 to 1975, Mr. Long was director of
acquisitions for The Sperry and Hutchinson Company.
Carl Paul founded Golfsmith in 1967 and has been a director since that
date. Mr. Paul was our chairman of the board and chief executive officer from
1967 until the merger.
BOARD COMPOSITION
Our board of directors is comprised of eight directors. Pursuant to a
stockholders agreement, which is described under "Related Party
Transactions--Stockholders Agreement," certain of our stockholders have the
right to elect one person to our board of directors for so long as Carl Paul,
Frank Paul and their families own more than 50% of the shares of Holdings common
stock that they received upon the closing of the merger. Initially, Mr. Carl
Paul is that director.
AUDIT COMMITTEE
Our audit committee makes recommendations to our board of directors
regarding the selection of independent auditors, reviews the scope of audit and
other services by our independent auditors, reviews the accounting principles
and auditing practices and procedures to be used for our financial statements
and reviews the results of those audits. The members of our audit committee are
James Grover and Thomas Hardy.
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DIRECTOR COMPENSATION
Each of our directors who is not an officer and who is affiliated with
First Atlantic receives reimbursement of reasonable and necessary costs and
expenses incurred due to attendance of board meetings. Our outside director who
is not an officer of Golfsmith and is not affiliated with First Atlantic
receives, in addition to reimbursement of reasonable and necessary costs and
expenses incurred, a fee of $5,000 for each regular and special meeting of the
board that he or she attends.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
to:
- persons who held the position of chief executive officer with us during
our last completed fiscal year;
- our four other most highly compensated executive officers for our last
completed fiscal year who were still employed by us at December 28, 2002;
and
- two additional persons who would have been among the group of our four
most highly compensated executive officers except that they ended their
employment with us prior to the end of our last completed fiscal year.
The executive officers listed in the table below are referred to as the named
executive officers.
SUMMARY COMPENSATION TABLE
RESTRICTED SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL STOCK UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS(#) OPTIONS(#)(2) COMPENSATION(3)
------------------ ---- -------- ------- --------------- ---------- ------------- ---------------
Carl Paul(4)......................... 2002 $ 348,606 $ 83,344 $ 5,500 -- -- --
Chairman of the Board 2001 344,395 -- 5,250 -- -- --
and Chief Executive Officer
James D. Thompson(5)................. 2002 212,231 50,000 4,589 -- 50,000 519,650
Chief Executive Officer 2001 177,308 25,000 3,141 -- 20,000 --
Kenneth Brugh........................ 2002 200,000 48,404 -- -- -- 786,900
Vice President -- Operations 2001 200,018 -- -- -- -- --
Curtis Young......................... 2002 150,000 33,795 4,135 -- -- 812,700
Vice President -- Administration 2001 139,649 -- 3,259 -- -- --
Barry Rinke(6)....................... 2002 151,804 31,051 905 -- -- 374,100
Vice President -- Marketing 2001 128,309 -- 2,760 -- -- --
Virginia Bunte(7).................... 2002 91,358 18,578 3,303 -- 5,000 124,463
Chief Financial Officer 2001 74,808 2,884 2,161 -- 5,000 --
Mark A. Osborn(8).................... 2002 191,346 75,000 4,976 -- 50,000 1,682,450
Executive Vice President and Chief 2001 171,154 50,000 3,995 -- -- --
Financial Officer
Ted Popp(9).......................... 2002 226,010 21,780 3,325 -- -- 200,000
Vice President -- MIS 2001 150,000 -- 3,519 -- 50,000 --
---------------
(1) Amounts represent matching contributions made by us under our Retirement
Savings Plan.
(2) In connection with the merger, all existing options, including those listed
in this column, vested and were either canceled in exchange for the right to
receive cash or surrendered in exchange for equity units entitling the
holder thereof to shares of common stock of Holdings. No options were
granted in fiscal 2002 after the merger.
(3) Represents cash received as consideration for the cancellation of options in
connection with the merger.
(4) Mr. Paul resigned as chairman of the board and chief executive officer in
connection with the merger.
(5) Mr. Thompson became our chief executive officer and president upon
completion of the merger.
(6) Mr. Rinke resigned as our vice president of marketing and ended his
employment with Golfsmith in February 2003.
(7) Ms. Bunte became our chief financial officer in January 2003. Prior to that,
Ms. Bunte was our vice president of finance.
73
(8) Mr. Osborn resigned as our executive vice president, chief financial officer
and treasurer and ended his employment with Golfsmith in November 2002.
(9) Mr. Popp resigned as our vice president of MIS and ended his employment with
Golfsmith in October 2002.
In fiscal 2002, executive compensation decisions were made by Carl Paul,
Franklin Paul (our president and a director prior to the completion of the
merger) and Mark A. Osborn, who were all officers of Golfsmith when such
decisions were made.
OPTION GRANTS IN FISCAL 2002
The following table sets forth information relating to stock options
granted during fiscal 2002 to our named executive officers. Also shown below is
the potential realizable value over the terms of the options (the period from
the grant date to the expiration date) based on assumed rates of stock
appreciation of 5% and 10%, compounded annually from the date the options were
granted. The potential realizable value is net of the applicable exercise price.
We have not granted any stock appreciation rights. All options were granted
under our 1997 stock option plan which was terminated following the merger. In
connection with the merger, all existing options under the 1997 stock option
plan vested and were either canceled in exchange for the right to receive cash
or surrendered in exchange for equity units entitling the holder thereof to
shares of common stock of Holdings. No options were granted in fiscal 2002 after
the merger.
INDIVIDUAL GRANTS
------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES FOR OPTION TERM
OPTIONS IN FISCAL EXERCISE OR ---------------------
NAME GRANTED YEAR BASE PRICE EXPIRATION DATE 5% 10%
---- ---------- ---------- ----------- --------------- --------- ---------
Carl Paul................. -- -- -- -- -- --
James D. Thompson......... 50,000 22.8% $ 6.55 January 2012 $206,000 $522,000
Kenneth Brugh............. -- -- -- -- -- --
Curtis Young.............. -- -- -- -- -- --
Barry Rinke............... -- -- -- -- -- --
Virginia Bunte............ 5,000 2.3% $ 6.55 January 2012 $ 20,600 $ 52,200
Mark A. Osborn............ 50,000 22.8% $ 6.55 January 2012 $206,000 $522,200
Ted Popp.................. -- -- -- -- -- --
FISCAL 2002 YEAR-END OPTION VALUES
As discussed above, in connection with the merger, all existing options
under the 1997 stock option plan vested and were either canceled in exchange for
the right to receive cash or surrendered in exchange for equity units entitling
the holder thereof to shares of common stock of Holdings. No options were
granted in fiscal 2002 after the merger.
EMPLOYMENT AGREEMENTS
We have entered into the employment agreements described below.
Under Mr. Thompson's employment agreement, Mr. Thompson is our president
and chief executive officer and his initial base salary is $297,000 per year
with an annual bonus calculated based upon attainment of financial targets for
that fiscal year. Mr. Thompson will receive stock options in our parent
corporation at the discretion of our board of directors, subject to the terms
and conditions of our 2002 Incentive Stock Plan. No options were granted to Mr.
Thompson in connection with the merger. The term of Mr. Thompson's employment
agreement is three years, with automatic successive one-year extensions unless
terminated by either party. If Mr. Thompson is terminated without cause, or he
resigns for good reason, he will be entitled to receive his earned but unpaid
base salary plus 100% of his current total
74
annual base salary and the earned bonus for the year of termination. Should Mr.
Thompson's employment be terminated for cause, or if he resigns without good
reason, he will have the right to receive only his earned but unpaid salary up
to the date of termination.
Under Ms. Bunte's agreement, Ms. Bunte is our chief financial officer and
her initial base salary is $165,000 per year with an annual bonus calculated
based upon attainment of financial targets for that fiscal year. Ms. Bunte will
receive stock options in our parent company at the discretion of our board of
directors, subject to the terms and conditions of our 2002 Incentive Stock Plan.
No options were granted to Ms. Bunte in connection with the merger. The term of
Ms. Bunte's employment agreement is one year, with automatic successive one-year
extensions unless terminated by either party. If Ms. Bunte is terminated without
cause, or she resigns for good reason, she will be entitled to receive her
earned but unpaid base salary plus 100% of her current total annual base salary
and the earned bonus for the year of termination. Should Ms. Bunte's employment
be terminated for cause, or if she resigns without good reason, she will have
the right to receive only her earned but unpaid salary up to the date of
termination.
Under the employment agreements for each of Carl Paul and Frank Paul, each
receives an initial base salary of $50,000 per year, with no provision for bonus
payments. Each acts as a senior advisor to Golfsmith's Golf Club Components
Division and renders services on an "as needed" basis, as mutually agreed upon
by the parties. The term of each of the agreements is one year, with automatic
successive one-year extensions unless terminated by either party. The board of
directors may terminate the employment of Carl Paul or Frank Paul at any time,
with or without cause, and either may resign from his position at any time. Upon
termination or resignation of either Carl Paul or Frank Paul, or both, Golfsmith
is only obligated to pay any earned but unpaid salary, if any, up to the date of
termination.
SEVERANCE BENEFIT PLAN
On July 1, 2000, we established a plan to provide severance benefits to
certain key employees should their employment be terminated within twelve months
of a change in control of Golfsmith. Under the terms of the severance plan, the
merger constituted a change in control. As a result, if we terminate any
employee covered by the severance plan within twelve months after the completion
of the merger, that employee would be entitled to receive a severance payment in
an amount equal to that employee's annual base salary unless the termination is
for good cause.
2002 INCENTIVE PLAN
In 2002, we established the 2002 Incentive Plan under which we agreed to
pay specified bonuses to eligible management employees based upon their
individual and company-wide performance. The bonuses are payable within 90 days
of the end of our fiscal year.
2002 INCENTIVE STOCK PLAN
Our existing 1997 stock option plan which provided for the grant of
incentive stock options to our employees was terminated following the merger. We
subsequently adopted a new stock option plan, the 2002 Incentive Stock Plan. No
options are currently outstanding under the 2002 Incentive Stock Plan.
Our 2002 Incentive Stock Plan provides for the grant of incentive stock
options to our employees and nonstatutory stock options, stock grants and stock
appreciation rights to our employees, directors and consultants. An aggregate of
2.85 million shares of the common stock of Holdings has been reserved for
issuance under this plan.
Our board of directors or compensation committee of our board of directors
administers the plan and determines the terms of options, stock grants and stock
appreciation rights, including the exercise price, the stock appreciation
rights' value, the number of shares subject to individual option awards, stock
grants and stock appreciation rights, the vesting period of options, the
exercise period for any stock appreciation rights and the conditions on any
stock grant. The exercise price of nonstatutory options will be determined by
the compensation committee. The exercise price of incentive stock options cannot
be lower than 100%
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of the fair market value of Holdings' common stock on the date of grant and, in
the case of incentive stock options granted to holders of shares representing
more than 10% of Holdings' voting power, not less than 110% of the fair market
value. The value of stock appreciation rights cannot be less than fair market
value. The term of an incentive stock option cannot exceed 10 years, and the
term of an incentive stock option granted to a holder of more than 10% of our
voting power cannot exceed five years. The exercise period for a stock
appreciation right cannot exceed ten years.
Options, stock grants and stock appreciation rights granted under the plan
will accelerate and become fully vested in the event we are acquired or merge
with another company. Under the plan, our board of directors will not be
permitted, without the adversely affected optionee's or grantee's prior written
consent, to amend, modify or terminate our stock plan if the amendment,
modification or termination would impair the rights of optionees or grantees.
The plan will terminate in 2012 unless terminated earlier by our board of
directors.
401(K) PLAN
We have a retirement savings plan which permits eligible employees to make
contributions to the plan on a pretax basis in accordance with the provisions of
Section 401(k) of the Internal Revenue Code. For employees that satisfy certain
eligibility requirements, we make a matching contribution of 50% of the
employee's pretax contribution, up to 6% of the employee's compensation, in any
calendar year.
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PRINCIPAL STOCKHOLDERS
All of our common stock is owned by Golfsmith International Holdings, Inc.,
our parent corporation. The following table sets forth information regarding the
beneficial ownership of the common stock of our parent corporation as of March
29, 2003 by:
- our named executive officers;
- each of our directors;
- all of our executive officers and directors as a group; and
- each person known to us to be a beneficial owner of more than 5% of the
outstanding common stock.
All shares indicated below as beneficially owned are held with sole voting
and investment power except as otherwise indicated. All of the stockholders of
Holdings are parties to a stockholders agreement that contains certain voting
agreements. You should read the description of the stockholders agreement set
forth under "Related Party Transactions" for more information regarding the
voting arrangements. Unless otherwise indicated, the address for each
stockholder on this table is c/o Golfsmith International, Inc., 11000 N. IH-35,
Austin, Texas 78753-3195. As of March 29, 2003, 20,917,199 shares of Holdings'
common stock were issued and outstanding.
SHARES BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED PERCENT OF CLASS
------------------------------------ ------------------- ----------------
Atlantic Equity Partners III, L.P. ................... 20,917,199(1) 100.0%
Carl Paul............................................. 20,917,199(2) 100.0%
Franklin Paul......................................... 20,917,199(3) 100.0%
Roberto Buaron........................................ 20,917,199(4) 100.0%
James D. Thompson..................................... 149,750(5) *
Mark A. Osborn........................................ 149,750(6) *
Kenneth Brugh......................................... 128,100(7) *
Curtis Young.......................................... 132,300 *
Barry Rinke........................................... 60,900 *
Virginia Bunte........................................ 12,563 *
Ted Popp.............................................. -- --
Charles Shaw(8)....................................... -- --
James Grover(9)....................................... -- --
Thomas G. Hardy(10)................................... -- --
James Long(11)........................................ -- --
Noel Wilens(12)....................................... -- --
All directors and executive officers as a group (12
persons)............................................ 20,917,199 100.0%
---------------
* Less than 1%.
(1) Includes 4,255,934 shares owned by other stockholders that are subject to
the stockholders agreement and attributable to Atlantic Equity Partners
III, L.P. Atlantic Equity Partners III disclaims beneficial ownership of
these shares. Atlantic Equity Partners III's address is c/o First Atlantic
Capital Ltd., 135 East 57th Street, New York, New York 10022.
(2) Includes (i) 2,234,158 shares of common stock, (ii) equity units entitling
the holder thereof to 39,375 shares of common stock and (iii) 18,643,666
shares owned by other stockholders that are subject to the stockholders
agreement and attributable to Carl Paul. Carl Paul disclaims beneficial
ownership of the shares listed in clause (iii) of the preceding sentence.
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(3) Includes (i) 1,182,508 shares of common stock, (ii) equity units entitling
the holder thereof to 39,375 shares of common stock and (iii) 19,695,316
shares owned by other stockholders that are subject to the stockholders
agreement and attributable to Franklin Paul. Franklin Paul disclaims
beneficial ownership of the shares listed in clause (iii) of the preceding
sentence.
(4) Includes 16,661,265 shares owned by Atlantic Equity Partners III, L.P. and
an additional 4,255,934 shares owned by other stockholders that are subject
to the stockholders agreement and attributable to Atlantic Equity Partners
III, L.P. Mr. Buaron is the sole member of Buaron Capital Corporation III,
LLC. Buaron Capital Corporation III is the managing member of Atlantic
Equity Associates III, LLC. Atlantic Equity Associates III, LLC is the sole
general partner of Atlantic Equity Associates III, L.P. which is the sole
general partner of Atlantic Equity Partners III, L.P. and, as such,
exercises voting and investment power over shares of capital stock owned by
Atlantic Equity Partners III, L.P., including shares of Holdings. Mr.
Buaron, as the sole member of Buaron Capital Corporation III, has voting
and investment power, and may be deemed to beneficially own, the shares of
Holdings owned by Atlantic Equity Partners III, L.P. Mr. Buaron disclaims
beneficial ownership of these shares. Mr. Buaron's address is c/o First
Atlantic Capital Ltd., 135 East 57th Street, New York, New York 10022.
(5) Constitutes equity units entitling the holder thereof to 149,750 shares of
common stock.
(6) Constitutes equity units entitling the holder thereof to 149,750 shares of
common stock. Mr. Osborn resigned as our executive vice president, chief
financial officer and treasurer and ended his employment with Golfsmith in
November 2002.
(7) Constitutes equity units entitling the holder thereof to 128,100 shares of
common stock.
(8) Mr. Shaw's address is c/o First Atlantic Capital Ltd., 135 East 57th
Street, New York, New York 10022.
(9) Mr. Grover's address is c/o First Atlantic Capital Ltd., 135 East 57th
Street, New York, New York 10022.
(10) Mr. Hardy's address is 935 Park Avenue, New York, New York 10028.
(11) Mr. Long's address is c/o First Atlantic Capital Ltd., 135 East 57th
Street, New York, New York 10022.
(12) Mr. Wilens's address is c/o First Atlantic Capital Ltd., 135 East 57th
Street, New York, New York 10022.
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RELATED PARTY TRANSACTIONS
MERGER AGREEMENT
On October 15, 2002, BGA Acquisition Corp., a wholly owned subsidiary of
Golfsmith International Holdings, Inc., merged with and into Golfsmith
International, Inc. Golfsmith is the surviving corporation and is a wholly owned
subsidiary of Holdings. The following table sets forth, with respect to our
executive officers and directors prior to the merger, the number of shares of
common stock of our company owned by each such officer and director prior to the
merger and the merger consideration received in respect of such shares pursuant
to the merger agreement assuming an aggregate purchase price of approximately
$121.0 million.
SHARES OF SHARES OF
GOLFSMITH HOLDINGS
OWNED PRIOR RECEIVED CASH RECEIVED
NAME TO MERGER IN MERGER IN MERGER
---- ----------- --------- -------------
Carl Paul.................................. 3,278,200(1) 2,273,533(2) $25,089,059
Franklin Paul.............................. 3,071,900(3) 1,221,883(2) 26,227,084
James D. Thompson.......................... 176,000(4) 149,750(5) 519,650
Mark A. Osborn............................. 353,000(4) 149,750(5) 1,682,450
Ken Brugh.................................. 183,000(4) 128,100(5) 786,900
Curt Young................................. 189,000(4) 132,300(5) 812,700
Barry Rinke................................ 177,600(4)(6) 60,900(5) 1,582,671
Fred Quandt................................ 25,000(4) 12,188(5) 119,687
Barbara Paul............................... 2,759,000(1) -- 26,969,225
Kelly Redding.............................. 123,600(7) -- 1,208,571
John Moriarty.............................. -- -- --
---------------
(1) Includes 40,000 options to purchase shares of common stock. Does not include
294,700 shares held in trust for Mr. and Mrs. Paul's daughter Marnie Paul
that was exchanged for $2,880,937 in the merger. Also does not include
shares held by, and merger consideration received by, Mary Rinke and Kelly
Redding, otherwise disclosed in this table.
(2) Includes equity units entitling the holder thereof to 39,375 shares of
common stock.
(3) Includes 40,000 options to purchase shares of common stock. Does not include
429,000 shares held in trust for the benefit of Mr. Paul's two sons,
Franklin B. Paul and Franklin G. Paul, that were exchanged for $4,192,302 in
the merger.
(4) Constitutes options to purchase shares of common stock.
(5) Constitutes equity units entitling the holder thereof to shares of common
stock.
(6) Includes 123,600 shares held by his wife, Mary Rinke.
(7) Includes 36,800 shares held in trust for the benefit of Ms. Redding.
The merger agreement contains a provision for post-closing adjustment to
the merger consideration paid to the existing stockholders based on the
difference between expected and actual amounts of assets and liabilities, as
detailed in a statement of working capital of Golfsmith as of the date the
merger was completed. In accordance with this provision, on May 20, 2003, the
parties determined that an adjustment in the merger consideration of $25,000 was
payable to Holdings based on the post-merger review of Golfsmith's working
capital. The merger agreement also contains customary indemnities given by
Golfsmith to Atlantic Equity Partners III and its affiliates for breaches of
representations, warranties or covenants in the merger agreement and for fraud
on the part of certain of our officers prior to the merger. The stockholders
placed $6.25 million of the purchase price into escrow, a portion of which will
cover the post-closing adjustment to the merger consideration and the remainder
of which will cover any indemnification claims against the selling stockholders.
The $25,000 post-closing adjustment to the merger
79
consideration will be paid out of this escrowed amount. Carl Paul and Frank Paul
have agreed to indemnify us or Holdings up to an additional $6.25 million for
the required post-closing adjustments to the merger consideration, or any
indemnification obligations for any losses that we or Holdings incur, that
exceed the available amounts in escrow. Carl Paul and Frank Paul have also
agreed to indemnify us or Holdings up to an additional $6.25 million for any
losses we or Holdings incur as a result of fraud by certain of our officers
prior to the merger.
STOCKHOLDERS AGREEMENT
In connection with the merger, Holdings, Atlantic Equity Partners III, L.P.
and the members of our management who own equity securities of Holdings,
including but not limited to Jim Thompson, Curt Young, Ken Brugh, Barry Rinke,
Fred Quandt, Carl Paul, Franklin Paul and all other stockholders of the company
following the merger, entered into a stockholders agreement. Under the
stockholders agreement, the parties are required:
- to vote their shares of Holdings' common stock owned by each of them in
favor of the election of one director nominated by Carl Paul, Frank Paul
and their families and all of the directors nominated by Atlantic Equity
Partners III to fill all of the remaining board seats so long as each of
the parties maintains a minimum level of stock ownership;
- to consent to a sale of Holdings if the board of directors of Holdings
and Atlantic Equity Partners III approve of such sale and if:
- stockholders would receive as consideration cash or specified kinds of
securities;
- each stockholder would receive as consideration the same proportion of
the aggregate consideration that such stockholder would receive if
Holdings were liquidated;
- if any stockholders are given an option as to the form and amount of
consideration, all stockholders are given the same option;
- all holders of rights to acquire shares of Holdings are given certain
rights with respect to proceeds from the sale;
- except in certain circumstances, any economic benefits available to any
stockholder with respect to its shares will be available to all
stockholders on a pro rata basis; and
- the expenditures required to be paid by the stockholders and any
representations and warranties required to be made by the stockholders
in connection with the sale do not exceed certain limitations.
- to cause Holdings to register shares of its common stock held by parties
to the stockholders agreement upon the request of Atlantic Equity
Partners III in certain circumstances;
- except in certain circumstances, to cause Holdings to give certain
parties to the stockholders agreement preemptive rights to purchase
common stock;
- not to transfer shares of Holdings' common stock unless certain
conditions are met; and
- in the case of certain members of our management, grant Holdings
repurchase rights with respect to the shares of Holdings owned by them.
The stockholders agreement will terminate upon the earliest of:
- the sale of Holdings;
- an initial public offering of the common stock of Holdings;
- the dissolution or liquidation of Holdings;
80
- the approval of such termination by Holdings, Atlantic Equity Partners
III and the holders of at least 50% of the shares held by the other
stockholders of Holdings; and
- October 15, 2022.
MANAGEMENT CONSULTING AGREEMENT
Upon completion of the merger, we and Holdings entered into a management
consulting agreement with First Atlantic under which First Atlantic will advise
us and Holdings on management matters that relate to proposed financial
transactions, acquisitions and other senior management matters. We and Holdings
have agreed to pay First Atlantic for these services an annual fee of $600,000
in equal monthly installments and will reimburse First Atlantic for its
expenses. In addition, First Atlantic received a closing fee of $1,252,500 and
reimbursement of its expenses for services rendered in connection with the
merger. First Atlantic may receive additional fees from us under the agreement
in connection with future financings or dispositions or acquisitions by us or
Holdings. Under the terms of the agreement, such additional fees will not exceed
an amount equal to:
- in the case of a transaction involving less than $50,000,000 in total
enterprise value, 2% of such total enterprise value;
- in the case of a transaction involving $50,000,000 or more but less than
$100,000,000 in total enterprise value, $1,000,000; and
- in the case of a transaction involving $100,000,000 or more in total
enterprise value, 1% of such total enterprise value.
With respect to a transaction involving a sale of Holdings, First Atlantic will
be paid a fee equal to 1% of the total enterprise value of Holdings.
The management consulting agreement has a term of 10 years but is
automatically terminated if Atlantic Equity Partners III and its affiliates
collectively own less than 50% of the shares of Holdings, or upon an initial
public offering of the common stock of Holdings. Five of our directors,
including our chairman of the board, hold positions with First Atlantic, as
described in "Management."
EMPLOYMENT AGREEMENTS
Upon the completion of the merger, we entered into an employment agreement
with James D. Thompson, our president and chief executive officer and with
Virginia Bunte, our chief financial officer. We also entered into employment
agreements with Carl Paul and Franklin Paul to provide advising services. You
should read the information set forth in "Management" for a description of these
agreements.
AGREEMENT TO PROVIDE HEALTH BENEFITS TO OUR FOUNDERS
We have agreed to amend our group health plan so that Carl Paul and
Franklin Paul, our founders, will continue to be eligible to participate in our
health plan on the same basis as full-time employees. Initially, we will report
these benefits under the plan as non-taxable benefits, based on our
determination that such reporting is permissible. Neither we nor Carl Paul or
Franklin Paul have agreed to indemnify the other party for any losses that
either of us may suffer as a result of this tax reporting or the amendment to
the plan.
INDEMNIFICATION AGREEMENTS WITH OUR DIRECTORS
We have agreed to indemnify John Moriarty, Kelly C. Redding, Franklin Paul,
Carl Paul and Barbara Paul, our directors prior to the completion of the merger,
in the event that any of them suffer losses as a result of actions taken or
statements made on behalf of Golfsmith and in their capacities as our directors,
officers or agents.
81
DESCRIPTION OF SENIOR CREDIT FACILITY
CREDIT FACILITY
General. Our senior credit facility is a revolving agreement in an amount
equal to $10.0 million and will have a term of 4.5 years. The senior credit
facility also provides for the issuance of letters of credit, within the overall
borrowing availability. The amount available to be borrowed under our senior
credit facility is limited for each borrower to 85% of the net amount of
eligible receivables of such borrower plus the lesser of 65% of the value of
eligible inventory (valued on a lower of cost or market basis) of such borrower
and 60% of the net orderly liquidation value of eligible inventory of such
borrower. The lender agent under our senior credit facility also retains the
right from time to time to establish or modify advance rates, standards of
eligibility and reserves against availability. The borrowers have agreed with
the lender agent that, in addition to other reserves that the lender agent may
impose, they will maintain an availability reserve at all times of $500,000. As
a result, the amount of borrowings available under the senior credit facility
may at no time exceed $9.5 million, unless the lender agent releases that
reserve. Several of our subsidiaries are borrowers under the senior credit
facility. All borrowings will be on a joint and several basis.
Interest Rate. The senior credit facility bears interest, at the
borrower's option, at either a variable rate based on the London Interbank
Offered Rate ("LIBOR") plus 2.5%, or the base rate on corporate loans quoted in
the Wall Street Journal plus 1.0%.
Borrowers. Golfsmith International, L.P., Golfsmith NU, L.L.C., and
Golfsmith USA, L.L.C.
Guarantees. Holdings and each of its domestic subsidiaries (other than the
borrowers) guarantee the borrowers' obligations pursuant to the senior credit
facility.
Security. The senior credit facility is secured by a first priority lien
on substantially all of the current and future assets (other than real property,
fixtures, equipment and proceeds thereof owned by us, Holdings or our
subsidiaries) of each borrower or guarantor, including all of our stock and
equivalent equity interests of all of our subsidiaries (limited to 65% of voting
stock and 100% of non-voting stock of foreign subsidiaries owned by a domestic
subsidiary and excluding any stock owned by a foreign subsidiary), all accounts
receivable, inventory, intellectual property rights (including patents,
trademarks and service marks) and all other tangible and intangible property.
Covenants and Events of Default. In addition to the usual and customary
affirmative and negative covenants, the senior credit facility limits our and
our subsidiaries' ability to: (1) incur additional debt, leasehold obligations
and contingent liabilities; (2) pay dividends and other distributions on capital
stock; and (3) be a party to mergers, consolidations or similar transactions.
The senior credit facility also requires satisfaction of certain financial tests
and provides for usual and customary events of default as well as other
appropriate events of default, including a cross-default to our and each
borrower's other financial obligations (including the notes).
Conditions to Borrowing. The obligations of the lenders to provide the
financing under the senior credit facility are subject to the satisfaction or
waiver of certain conditions, including, among others: (1) the accuracy of the
representations and warranties made by us with respect to the financing; (2)
compliance with certain covenants, including certain financial covenants; and
(3) the absence of any other events of default under the senior credit facility.
Interest Coverage Ratio. The senior credit facility requires us to
maintain a specified interest coverage ratio throughout the term of the senior
credit facility. Pursuant to the senior credit facility, our interest coverage
ratio is calculated by:
- dividing our interest expense deducted in the determination of our
consolidated net income,
- less the amortization of capitalized fees and expenses incurred in
connection with the merger, the offering of the old notes and the
senior credit facility, if included in such interest expense;
82
- by our EBITDA less our capital expenditures.
EBITDA is defined as:
- our consolidated net income less:
- any income tax credits;
- interest income;
- gain from extraordinary items (net of losses);
- any aggregate net gain (but not any aggregate net losses) arising from
the sale or disposition of capital assets;
- any other non-cash gains; and
- certain other expenditures made in connection with the closing of the
merger, the offering of the old notes and the senior credit facility;
- plus:
- any provision for income taxes;
- interest expenses;
- depreciation and amortization;
- amortized debt discount;
- any deduction resulting from a grant of stock to management; and
- certain expenses relating to the merger, the offering of the old notes
and the senior credit facility.
At the end of each of our fiscal quarters, we are required to have an
interest coverage ratio for the twelve months then ending of not less than the
following:
REQUIRED INTEREST
QUARTER COVERAGE RATIO
------------------------------------------------------------ -----------------
FISCAL 2002
Fourth Quarter............................................ 1.60
FISCAL 2003
First Quarter............................................. 1.60
Second Quarter............................................ 1.50
Third Quarter............................................. 1.40
Fourth Quarter............................................ 1.60
FISCAL 2004
First Quarter............................................. 1.40
Second Quarter............................................ 1.80
Third Quarter............................................. 1.80
Fourth Quarter............................................ 1.80
FISCAL 2005
First Quarter............................................. 1.80
Second Quarter............................................ 1.80
Third Quarter............................................. 1.90
Fourth Quarter............................................ 1.90
FISCAL 2006
First Quarter............................................. 1.90
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REQUIRED INTEREST
QUARTER COVERAGE RATIO
------------------------------------------------------------ -----------------
Second Quarter............................................ 2.00
Third Quarter............................................. 2.00
Fourth Quarter............................................ 2.00
FISCAL 2007
First Quarter............................................. 2.00
Pursuant to the senior credit agreement, for the fourth quarter of fiscal
2002 and the first and second quarters of fiscal 2003, both interest expense and
EBITDA are multiplied by 4.000, 2.000 and 1.333, respectively, and only the
period on and after September 29, 2002 is to be included for the purposes of
these calculations.
Minimum EBITDA. The senior credit facility requires us to have a minimum
amount of EBITDA, as calculated above, throughout the term of the senior credit
facility. At the end of each of our fiscal quarters, we are required to have
EBITDA for the twelve months then ending of not less than the following:
QUARTER MINIMUM EBITDA
------------------------------------------------------------ --------------
FISCAL 2002
Fourth Quarter............................................ $15,864,000
FISCAL 2003
First Quarter............................................. 17,292,000
Second Quarter............................................ 17,763,558
Third Quarter............................................. 18,006,000
Fourth Quarter............................................ 18,720,000
FISCAL 2004
First Quarter............................................. 19,140,000
Second Quarter............................................ 19,560,000
Third Quarter............................................. 19,980,000
Fourth Quarter............................................ 20,400,000
FISCAL 2005
First Quarter............................................. 20,760,000
Second Quarter............................................ 21,120,000
Third Quarter............................................. 21,480,000
Fourth Quarter............................................ 21,840,000
FISCAL 2006
First Quarter............................................. 22,640,000
Second Quarter............................................ 23,440,000
Third Quarter............................................. 24,240,000
Fourth Quarter............................................ 25,040,000
FISCAL 2007
First Quarter............................................. 26,020,000
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Limitation on Capital Expenditures. The senior credit facility prohibits
us from making capital expenditures that exceed in the aggregate the following
amounts in each of the specified fiscal years:
FISCAL YEAR CAPITAL EXPENDITURE LIMIT
------------------------------------------------------- -------------------------
2002................................................... $5,400,000
2003................................................... 6,250,000
2004................................................... 6,800,000
2005................................................... 7,200,000
2006................................................... 8,400,000
INTERCREDITOR AGREEMENT
An intercreditor agreement, dated as of October 15, 2002, among us, the
guarantors, General Electric Capital Corporation, as agent for the lenders under
the senior credit facility, and U.S. Bank Trust National Association, as trustee
and collateral agent under the indenture, sets forth the relative rights to our
collateral of the lenders under the senior credit facility on the one hand, and
the holders of notes on the other hand. Proceeds from the sale of collateral in
which the lenders have a security interest will be used first to satisfy
obligations under the senior credit facility and, thereafter, the notes. You
should read the information set forth under "Description of the New
Notes -- Security" and "-- Intercreditor Agreement" for more information
relating to the collateral securing the senior credit facility and the
intercreditor arrangements.
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DESCRIPTION OF THE NEW NOTES
The form and terms of the new notes and the old notes are identical in all
material respects, except that transfer restrictions, interest rate increase
provisions and registration rights applicable to the old notes do not apply to
the new notes. References in this section to the "notes" are references to both
the old notes and the new notes. The old notes were, and the new notes will be,
issued under an indenture dated as of October 15, 2002, among our company, the
Guarantors and U.S. Bank Trust National Association, as trustee. The indenture
is subject to and governed by the Trust Indenture Act of 1939. The following is
a summary of the material provisions of the indenture. It does not include all
of the provisions of the indenture. You should read the indenture, including the
definitions of certain terms contained therein and those terms made part of the
indenture by reference to the Trust Indenture Act, in its entirety for
provisions that may be important to you. The indenture will be filed as part of
the registration statement of which this prospectus is a part. You can find
definitions of certain capitalized terms used in this description under
"-- Certain Definitions." For purposes of this "Description of the New Notes,"
references to "our company," "we," "our" or "us" refer solely to Golfsmith
International, Inc. and not any of our Subsidiaries.
GENERAL
The notes are our senior obligations and rank equal in right of payment
with all of our other senior obligations and senior in right of payment with all
of our Indebtedness which by its terms is subordinated to the notes. The notes
are guaranteed, jointly and severally on a senior secured basis by the
Guarantors set forth under "-- Guarantees" below.
We will issue the notes in fully registered form in denominations of $1,000
and integral multiples thereof. The trustee will initially act as paying agent
and registrar for the notes. The notes may be presented for registration of
transfer or exchange at the offices of the registrar. No service charge will be
made for any registration of transfer or exchange or redemption of notes, but we
may require payment in certain circumstances of a sum sufficient to cover any
tax or other governmental charge that may be imposed in connection therewith. We
may change any paying agent and registrar without notice to holders of the
notes. We will pay principal (and premium, if any) on the notes at the trustee's
corporate office in New York, New York. At our option, interest may be paid at
the trustee's corporate trust office or by check mailed to the registered
address of holders.
As discussed under "-- Exchange Offer; Registration Rights," pursuant to
the registration rights agreement, we have agreed for the benefit of the holders
of the notes, at our cost, to effect this exchange offer and in certain
circumstances to register the old notes for resale under the Securities Act
through a shelf registration statement. The failure to consummate the exchange
offer or to register the notes for resale under the shelf registration statement
may result in us paying additional interest on the old notes.
PRINCIPAL, MATURITY AND INTEREST
We initially issued $93.75 million in aggregate principal amount at
maturity of old notes. We may issue additional notes from time to time after
this offering provided that we comply with the covenant described below under
the caption "-- Certain Covenants -- Limitation on Incurrence of Additional
Indebtedness." The old notes were issued at a discount to yield gross proceeds
of $75.0 million. The old notes, the new notes and any additional notes will be
substantially identical other than the issuance dates and the dates from which
interest will accrue. The old notes, the new notes and any additional notes will
be treated as a single class of notes under the indenture and will vote together
as a single class. Because, however, any additional notes may not be fungible
with the notes for federal income tax purposes, they may have a different CUSIP
number or numbers, be represented by a different global note or notes, and
otherwise be treated as a separate class or classes of notes for other purposes.
The notes will mature on October 15, 2009. Interest on the notes will
accrue at the rate of 8.375% per annum and will be payable semiannually in cash
on each March 1 and September 1, beginning on March 1, 2003, to the persons who
are registered holders at the close of business on the February 15 or
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August 15 immediately preceding the applicable interest payment date. Interest
on the notes will accrue from the most recent date to which interest has been
paid or, if no interest has been paid, from and including the date of issuance.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
On each interest payment date beginning March 1, 2008, in addition to
accrued interest due on that date, we will make a payment (the "HYDO Payment")
on each note in cash in immediately available funds, which payment will reduce
the outstanding principal amount at maturity of the note, in an amount equal to
the excess, if any, of:
- the total amount of interest and original issue discount (as determined
under the Internal Revenue Code of 1986, as amended (the "Code")) accrued
on the note through such interest payment date, over
- the sum of:
- all amounts of interest and original issue discount paid in cash with
respect to such note (or any predecessor note) through and including
such interest payment date;
- all HYDO Payments previously made by us; and
- the annual "yield to maturity" applicable for purposes of the accrual of
original issue discount under the Code multiplied by the original
principal amount at maturity of the note.
Any reduction as described above will reduce the principal amount of the
note for all purposes under the indenture. As a result of making these HYDO
payments, we will not be subject to special rules (applicable to some high-yield
debt obligations with significant amounts of unpaid original issue discount
after five years from their issue date), that would otherwise limit the amount
of interest expense we could deduct on the notes for U.S. federal income tax
purposes.
SECURITY
Pursuant to the terms of the Collateral Agreements, we and our Domestic
Restricted Subsidiaries granted to the Collateral Agent or one or more
sub-Collateral Agents appointed under the intercreditor agreement, security
interests in substantially all of our respective assets, including all of the
stock of domestic Subsidiaries directly owned by us or any Domestic Restricted
Subsidiary, 65% of the capital stock entitling the holders thereof to vote in
the election of members of the board of directors, which we refer to as voting
stock, of foreign Subsidiaries directly owned by us or any Domestic Restricted
Subsidiary and 100% of the non-voting Stock of foreign Subsidiaries directly
owned by us or any Domestic Restricted Subsidiary, but excluding certain
"excluded assets" (including leasehold interests existing on the Issue Date). In
addition, Holdings granted a security interest in all of its assets (including
its stock in our company). Security interests in all such assets (other than
real property, fixtures, equipment and proceeds thereof) secure the obligations
under the Credit Agreement on a first priority basis and the obligations under
the notes, the guarantees and the indenture on a second priority basis, subject
in each case to Permitted Liens. Security interests in real property, fixtures,
equipment and proceeds thereof will secure the obligations under the notes, the
guarantees and the indenture on a first priority basis, subject to the Permitted
Liens.
Upon an Event of Default, the proceeds from the sale of Collateral securing
the notes will likely be insufficient to satisfy our obligations under the
notes. No appraisals of any of the Collateral have been prepared in connection
with this offering. Moreover, the amount to be received upon such a sale would
be dependent upon numerous factors, including the condition, age and useful life
of the Collateral at the time of such sale, as well as the timing and manner of
such sale. By its nature, all or some of the Collateral will be illiquid and may
have no readily ascertainable market value. Accordingly, there can be no
assurance that the Collateral, if saleable, can be sold in a short period of
time or at an appropriate price.
We have the ability to issue additional notes as part of the same series of
notes, which may also be secured by the Collateral. We and the Guarantors can
increase our Indebtedness but there can be no
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assurance that there will be a proportionate increase in the value of the
Collateral as a percentage of the aggregate principal amount at maturity of
outstanding notes.
A significant portion of our assets consists of leasehold improvements.
Because leasehold improvements may be deemed to be a part of either the real
property covered by the lease (which real property is not owned by us or our
Restricted Subsidiaries) or our current real estate leasehold interests (which
interests are not included in the Collateral securing the notes), there can be
no assurance as to whether or to what extent such assets would be available as
collateral securing the notes. Moreover, the ability of the Collateral Agent to
obtain possession of Collateral located on leaseholds may be subject to
conflicting claims of landlords. We believe, however, that the realizable value
of such leasehold interests upon our liquidation would not be material.
To the extent third parties hold Permitted Liens, such third parties may
have rights and remedies with respect to the property subject to such Liens
that, if exercised, could adversely affect the value of the Collateral. Given
the intangible nature of certain of the Collateral, any sale of such Collateral
separately from our company and our Restricted Subsidiaries as a whole may not
be feasible. Additionally, the inclusion of our and our Restricted Subsidiaries'
fixtures in the Collateral securing the notes will be limited by the extent to
which (a) such fixtures are deemed not to be personal property and (b) any
applicable state laws would, for purposes of perfecting security interests with
respect thereto, require that the Collateral Agent effectuate certain filings in
applicable real estate land records. Our and our Restricted Subsidiaries'
ability to grant a first (or second) priority security interest in certain
Collateral may be limited by legal or other logistical considerations. The
ability of the holders of notes to realize upon the Collateral may be subject to
certain bankruptcy law limitations in the event of a bankruptcy. See "-- Certain
Bankruptcy Limitations."
We are only permitted to form new Subsidiaries and to transfer all or a
portion of the Collateral to one or more of our Subsidiaries if such formation
and transfer is in accordance with the provisions described under "-- Certain
Covenants -- Additional Subsidiary Guarantees."
Subject to the restrictions on incurring Indebtedness set forth herein, we
and our Subsidiaries will have the right to grant (and suffer to exist) Liens
securing Purchase Money Indebtedness respecting fixed assets and to acquire any
such assets subject to such Liens. Liens created by the Collateral Agreements
are intended to be, and will be, at all times automatically subordinate in
priority to all such Liens.
The Collateral release provisions of the indenture permit the release of
Collateral without substitution of Collateral of at least equal value under
certain circumstances, including asset sales made in compliance with the
indenture.
Neither we nor any of our Restricted Subsidiaries will encumber any asset
or property of our company or such Restricted Subsidiaries or suffer to exist
any Lien thereon, other than Permitted Liens or as otherwise expressly permitted
by the indenture.
So long as no Event of Default has occurred and is continuing, and subject
to certain terms and conditions in the indenture, the Credit Agreement, the
Collateral Agreements and the intercreditor agreement, we will be entitled to
receive all cash dividends, interest and other payments made upon or with
respect to the Capital Stock of any of our Subsidiaries held as Collateral and
to exercise any voting, consensual and other rights pertaining to such Capital
Stock. Upon the occurrence and during the continuance of an Event of Default,
subject to the terms of the intercreditor agreement and the documents securing
the Credit Agreement, upon notice from the Collateral Agent, (a) all of our
rights to exercise such voting, consensual or other rights will cease and all
such rights will become vested in the Collateral Agent, which, to the extent
permitted by law, will have the sole right to exercise such voting, consensual
or other rights, (b) all of our rights to receive all cash dividends, interest
and other payments made upon or with respect to the Collateral will cease, and
such cash dividends, interest and other payments will be paid to the Collateral
Agent or the lenders under the Credit Agreement, and (c) the Collateral Agent
may sell the Collateral or any part thereof in accordance with, and subject to
the terms of, the Collateral Agreements subject to the prior rights of the
lenders under the Credit Agreement. All funds distributed
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under the Collateral Agreements by the Collateral Agent will be distributed by
the Collateral Agent in accordance with the provisions of the intercreditor
agreement and the indenture.
The Collateral Agreements will terminate, subject to the intercreditor
agreement, and the pledged Collateral will be released from the liens created
thereunder, upon:
- payment in full of all amounts due in respect of the notes;
- satisfaction and discharge of the indenture in accordance with its terms;
and
- a legal defeasance or covenant defeasance in accordance with the
provisions described below under "-- Legal Defeasance and Covenant
Defeasance."
Liens securing the notes will be released, in part, with respect to any
asset constituting Collateral:
- that is sold or otherwise disposed of by us or one of the Subsidiary
Guarantors to a Person other than us or a Subsidiary Guarantor in a
transaction permitted by the indenture, at the time of such sale or
disposition;
- that is owned or at any time acquired by a Subsidiary Guarantor that has
been released from its Guarantee concurrently with the release of the
Guarantee (including by virtue of such Restricted Guarantor becoming an
Unrestricted Subsidiary); or
- to the extent that we mail written notice of our request to release the
lien relating to such asset to the trustee and the holders of the notes
and we do not receive written objections from holders of at least 25% in
aggregate principal amount at maturity of the notes within 20 business
days after the mailing, provided that if we receive such objections, then
we will not be entitled to the release unless we obtain the consent of
holders of at least a majority in principal amount at maturity of the
notes.
CERTAIN BANKRUPTCY LIMITATIONS
The right of the Collateral Agent to repossess and dispose of the
Collateral upon the occurrence of an Event of Default is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy proceeding
were to be commenced by or against us or any of the Guarantors prior to the
Collateral Agent having repossessed and disposed of the Collateral or otherwise
completed the realization of the Collateral securing the notes. Under the
Bankruptcy Code, a secured creditor such as the Collateral Agent is prohibited
from repossessing its security from a debtor in a bankruptcy case, or from
disposing of security repossessed from such debtor, without bankruptcy court
approval. Moreover, the Bankruptcy Code permits the debtor to continue to retain
and to use collateral even though the debtor is in default under the applicable
debt instruments; provided that, under the Bankruptcy Code, the secured creditor
is given "adequate protection." The meaning of the term "adequate protection"
may vary according to circumstances, but it is intended in general to protect
the value of the secured creditor's interest in the collateral securing the
obligations owed to it and may include cash payments or the granting of
additional security, if and at such times as the bankruptcy court in its
discretion so determines, for any diminution in the value of such collateral as
a result of the stay of repossession or disposition or any use of the Collateral
by the debtor during the pendency of the bankruptcy case. In view of the lack of
a precise definition of the term "adequate protection" and the broad
discretionary powers of a bankruptcy court, it is impossible to predict how long
payments under the notes could be delayed following commencement of a bankruptcy
case, whether or when the Collateral Agent could repossess or dispose of the
Collateral or whether or to what extent holders of the notes would be
compensated for any delay in payment or loss of value of the Collateral through
the requirement of "adequate protection."
The intercreditor agreement prohibits the holders of the notes or the
Collateral Agent from seeking adequate protection with respect to the Collateral
which also secures the Credit Agreement and requires the Collateral Agent and
the holders of the notes not to object to the Lender Agent or the Lenders
seeking adequate protection with respect to such Collateral.
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The Collateral Agent and the holders of the notes have agreed not to seek
relief from the automatic stay in respect of Collateral securing the obligations
under the Credit Agreement so long as any amounts remain outstanding under the
Credit Agreement (or if the Credit Agreement is a debtor-in-possession facility
in whole or in part, any commitment thereunder is in effect), and not to object
to any motion by the Lender Agent for relief from the automatic stay. The Lender
Agent and the Lenders agreed not to object to any motion by the Collateral Agent
or any holder of notes for relief from the automatic stay in respect of the
Collateral securing the indenture, the notes and the Guarantees on a first
priority basis. The Collateral Agent and the holders of the notes have agreed
not to object to any debtor-in-possession financing priming the security
interest with respect to the Collateral securing the notes and the Credit
Agreement so long as the Lenders agree to such financing priming the
corresponding security interest of the Lenders and certain related matters. The
holders of the notes have also agreed not to vote their secured claims for any
plan of reorganization that does not provide for the payment in full in cash on
the effective date of the plan of all obligations of the Lenders or such other
treatment that may be acceptable to the Lenders. The Collateral Agent and the
holders of the notes have agreed not to challenge the right of the Lenders to
receive post-petition interest, fees and expenses with respect to Collateral
securing the Credit Agreement and the lenders and the Lender Agent have agreed
not to challenge the right of the holders of the notes to receive post-petition
interest, fees and expenses with respect to the Collateral securing the
indenture, the notes and the Guarantees.
INTERCREDITOR AGREEMENT
On October 15, 2002, we, the Guarantors, the Lender Agent, on behalf of
itself and the Lenders, the trustee and the Collateral Agent, on behalf of the
holders of the notes, entered into the intercreditor agreement. The
intercreditor agreement, among other things, provides that the obligations of
our company and our subsidiaries under the Credit Agreement are secured by
substantially all of the assets (other than real property, fixtures, equipment
and proceeds thereof) of our company, Holdings and our domestic subsidiaries on
a first priority basis and the obligations of our company, Holdings and our
subsidiaries under the notes, the guarantees and the indenture are secured by
the real property, fixtures, equipment and proceeds thereof of our company,
Holdings and our Domestic Restricted Subsidiaries on a first priority basis and
all of the other assets of our company, Holdings and our Domestic Restricted
Subsidiaries on a second priority basis, and provides that upon and during the
continuance of an event of default under the Credit Agreement, the Lender Agent
is entitled to manage all aspects of, including exercising or refraining from
exercising all rights and remedies with respect to, the Collateral securing the
Credit Agreement.
Pursuant to the intercreditor agreement, neither the Collateral Agent nor
any holder of notes may challenge the Liens securing obligations under the
Credit Agreement and neither the Lender Agent nor any Lender may challenge the
Liens securing obligations under the indenture and the notes. In addition, while
the Credit Agreement remains in effect, or any borrowings are outstanding
thereunder, neither the Collateral Agent nor any holder of notes may take any
action to enforce the Liens securing obligations under the indenture and the
notes. The Collateral Agent and the holders of the notes also agree to turn over
to the Lender Agent any proceeds of Collateral securing the obligations under
the Credit Agreement which it or any of them obtains so long as any amounts are
outstanding under the Credit Agreement.
The Collateral Agent and all holders of notes:
- agree to waive all claims against the Lenders and the Lender Agent with
respect to the Collateral securing obligations under the Credit Agreement
(other than those arising from willful misconduct or breach of the
intercreditor agreement),
- must postpone exercising any rights with respect to such Collateral until
the Credit Agreement is terminated and paid in full, and
- acknowledge that the Lenders and the Lender Agent owe no duty to the
Collateral Agent or the holders of the notes, other than (a) turning over
control of Collateral to the trustee following the termination of the
Credit Agreement and payment of all amounts thereunder and (b) following
such events, executing and delivering such instruments as are necessary
to evidence any transfer by
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subrogation to the trustee and the holders of the notes of an interest in
the Credit Agreement resulting from, among other things, any turnover by
the trustee and/or the holders of the notes of proceeds from Collateral
to the Lender Agent and the Lenders.
DEFAULT PURCHASE OPTION
Pursuant to the Credit Agreement, one or more of the holders of the notes
will be entitled to purchase, for cash for a price equal to all amounts owing
under the Credit Agreement, all amounts owing under the Credit Agreement and all
rights under the Credit Agreement (other than obligations (excluding the
principal of, interest and premium (if any) on and fees relating to any
indebtedness and contingent reimbursement obligations in respect of amounts
drawn under letters of credit) for taxes, costs, indemnifications,
reimbursements, damages and other liabilities in respect of which no claim or
demand for payment has been made or, in the case of obligations for
indemnification, no notice for indemnification has been given at such time),
including the security interests granted under the Credit Agreement, during a
period beginning on the date that either:
- the commitment under the Credit Agreement is terminated, or
- all amounts outstanding thereunder become accelerated and any letters of
credit issued thereunder are required to be cash collateralized,
and ending on the 20th business day following the delivery by the Lender Agent
or any Lender of notice of the occurrence of either such date.
GUARANTEES
The full and prompt payment of our obligations under the notes and the
indenture are and will be guaranteed, jointly and severally, by Holdings (the
"Parent Guarantee") and by all of our present and future Domestic Restricted
Subsidiaries (the "Subsidiary Guarantees" and, together with the Parent
Guarantee, the "Guarantees"). The guarantors under the Subsidiary Guarantees are
referred to as the "Subsidiary Guarantors" and, together with Holdings are
referred to as the "Guarantors." Holdings currently has no material assets other
than the common stock of our company. As of the Issue Date, all of our
subsidiaries were Domestic Restricted Subsidiaries. Each Guarantor has fully and
unconditionally guaranteed on a senior basis, jointly and severally, to each
holder and the trustee, the full and prompt performance of our obligations under
the indenture, the notes and the Collateral Agreements, including the payment of
principal of, interest on and premium, if any, on the notes. The Guarantee of
each Guarantor ranks senior in right of payment to all subordinated indebtedness
of such Guarantor and equal in right of payment with all other senior
obligations of such Guarantor, including borrowings or guarantees of borrowings
under the Credit Agreement. The obligations of each Guarantor are limited to the
maximum amount which, after giving effect to all other contingent and fixed
liabilities of such Guarantor and after giving effect to any collections from or
payments made by or on behalf of any other Guarantor in respect of the
obligations of such other Guarantor under its Guarantee or pursuant to its
contribution obligations under the indenture, will result in the obligations of
such Guarantor under the Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under federal or state law. The net worth of any Guarantor
for such purpose will include any claim of such Guarantor against us for
reimbursement and any claim against any other Guarantor for contribution. Each
Guarantor may consolidate with or merge into or sell its assets to us or another
Guarantor without limitation. See "-- Certain Covenants -- Mergers,
Consolidation and Sale of Assets" and "-- Limitation on Asset Sales." The rights
of the holders of the notes to participate in any distribution of assets of the
guarantors (or proceeds therefrom) upon a bankruptcy will be subject to the
claims of the senior lenders under our credit facility. See "Risk Factors -- The
collateral which secures both the new notes and borrowings under our senior
credit facility is subject to control by the lenders under our senior credit
facility."
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REDEMPTION
Mandatory Redemption. On each of October 15, 2007 and October 15, 2008, we
must make a pro rata partial redemption of the principal amount of each note
equal to 20% and 10%, respectively, of the original principal amount at maturity
of such note. In addition, we must pay accrued and unpaid interest on the
principal amount of the notes redeemed to the redemption date. If we issue
additional notes after the Issue Date, these percentages will be reduced by
multiplying the relevant percentage by a fraction, the numerator of which is the
principal amount at maturity of notes issued on the Issue Date and the
denominator of which is the sum of the principal amount at maturity of such
notes and the principal amount at maturity of any additional notes.
However, the principal amount at maturity of notes we must redeem on the
dates set forth above may be reduced by the aggregate principal amount at
maturity of notes we have previously repurchased pursuant to the excess cash
flow offers described below.
Any mandatory redemption payment will be made in the same manner as
ordinary interest payments on the notes.
Any redemption as described above will reduce the principal amount at
maturity of each note for all purposes under the indenture.
We may elect to credit against these mandatory redemptions an amount equal
to 100% of the principal amount at maturity of any notes that we have redeemed
or otherwise acquired pursuant to "-- Excess Cash Flow Offer" and delivered to
the trustee for cancellation. We will, no later than the August 15 in the year
in which a mandatory redemption is required, provide the trustee with an
officers' certificate stating the aggregate principal amount of each note to be
redeemed pursuant to the provisions of the first paragraph of this section and
setting forth the aggregate principal amount at maturity of notes to be credited
against the next mandatory redemption. We will deliver the notes which are to be
so credited to the trustee with such officers' certificate (if not previously
delivered to the trustee for cancellation) for retention and credit in
accordance with such officers' certificate.
Optional Redemption Prior to October 15, 2006. At any time prior to
October 15, 2006, we may, at our option, on one or more occasions redeem all or
part of the notes at a redemption price equal to the greater of (1) 100% of the
Accreted Value of the notes being redeemed and (2) the sum of the present values
of 106.50% of the Accreted Value of the notes being redeemed and scheduled
payments of interest on such notes to and including October 15, 2006 discounted
to the date of redemption on a semi-annual basis (assuming a 360-day year
consisting of twelve 30-day months) at the Treasury Rate plus 50 basis points,
together in either case with accrued and unpaid interest, if any, to the date of
redemption.
"Treasury Rate" means, with respect to any redemption date, the rate per
annum equal to the semi-annual equivalent yield to maturity of the Comparable
Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as
a percentage of its principal amount) equal to the Comparable Treasury Price for
such redemption period.
"Comparable Treasury Issue" means the United States Treasury security
selected by a Reference Treasury Dealer appointed by us as having a maturity
comparable to the remaining term of the notes (as if the final maturity of the
notes was October 15, 2006) that would be utilized at the time of selection and
in accordance with customary financial practice in pricing new issues of
corporate debt securities of comparable maturity to the remaining term of the
notes (as if the final maturity of the notes was October 15, 2006).
"Comparable Treasury Price" means, with respect to any redemption date,
(1) the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
business day preceding such redemption date, as set forth in the daily
statistical release (or any successor release) published by the Federal Reserve
Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities" or (2) if such release (or any successor release) is not
published or does not contain such prices on such business day, (A) the
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average of the Reference Treasury Dealer Quotations (as defined below) for such
redemption date, after excluding the highest and lowest such Reference Treasury
Dealer Quotation or (B) if we obtain fewer than three such Reference Treasury
Dealer Quotations, the average of all such Reference Treasury Dealer Quotations.
"Reference Treasury Dealer Quotation" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
us, of the bid and asked prices for the Comparable Treasury Issue (expressed in
each case as a percentage of its principal amount) quoted in writing to us by
such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding
such redemption date.
"Reference Treasury Dealer" means any primary U.S. government securities
dealer in the City of New York (a "Primary Treasury Dealer") selected by us.
Optional Redemption on or After October 15, 2006. We may, at our option,
redeem the notes in whole or in part at any time on or after October 15, 2006,
at the following redemption prices (expressed as percentages of the Accreted
Value thereof) if redeemed during the twelve-month period beginning on October
15 of the year set forth below:
YEAR REDEMPTION PRICE
---- ----------------
2006........................................................ 106.50%
2007........................................................ 103.25%
2008 and thereafter......................................... 100.00%
In addition, we must pay accrued and unpaid interest on the notes redeemed
to the redemption date.
Optional Redemption upon Equity Offerings. At any time on or prior to
October 15, 2005, we may, at our option, on one or more occasions, use the net
cash proceeds of one or more Equity Offerings to redeem up to 35% of the
principal amount at maturity of the notes originally issued under the indenture
at a redemption price of 113.00% of the Accreted Value thereof, plus accrued and
unpaid interest thereon, if any, to the date of redemption; provided that:
(1) at least 65% of the principal amount at maturity of notes issued
under the indenture remains outstanding immediately after any such
redemption; and
(2) we make such redemption not more than 120 days after the
consummation of any such Equity Offering.
"Equity Offering" means any public or private offering of our Qualified
Capital Stock.
SELECTION AND NOTICE OF REDEMPTION
In the event that we are redeeming less than all of the notes pursuant to
one of our optional redemption rights, selection of the notes for redemption
will be made by the trustee either:
(1) in compliance with the requirements of the principal national
securities exchange, if any, on which the notes are listed; or
(2) on a pro rata basis, by lot or by such method as the trustee may
reasonably determine is fair and appropriate;
provided that no partial redemption will reduce the principal amount at maturity
of a note not redeemed to less than $1,000; and provided, further,that any such
partial redemption made with the proceeds of an Equity Offering will be made
only on a pro rata basis or on as nearly a pro rata basis as is practicable
(subject to the procedures of DTC or any other depository). We will mail notice
of redemption by first-class mail, postage prepaid, at least 30 but not more
than 60 days before the redemption date to each holder of notes to be redeemed
at its registered address. On and after the redemption date, interest will cease
to accrue on notes or portions thereof called for redemption as long as we have
deposited with the paying agent funds in satisfaction of the applicable
redemption price.
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REPURCHASE UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder will have the right
to require us to purchase all or a portion of such holder's notes using
immediately available funds pursuant to the offer described below, at a purchase
price equal to 101% of the Accreted Value thereof plus accrued and unpaid
interest to the date of purchase.
Within 30 days following the date upon which the Change of Control
occurred, we must send, by first-class mail, postage prepaid, an offer to each
holder, with a copy to the trustee, which offer will govern the terms of the
Change of Control offer. Such offer will state, among other things:
- the purchase price;
- the purchase date, which must be no earlier than 30 days nor later than
60 days from the date such notice is mailed, other than as may be
required by law;
- that a Change of Control has occurred;
- that any note not tendered will continue to accrue interest;
- that unless we default on the payment of the purchase price, any notes
accepted for payment pursuant to the Change of Control offer will cease
to accrue interest after the purchase date; and
- certain procedures that a holder of notes must follow to accept the
Change of Control offer or to withdraw such acceptance.
Holders electing to have a note purchased pursuant to a Change of Control
offer will be required to surrender the note, with the form entitled "Option of
Holder to Elect Purchase" on the reverse of the note completed, to the paying
agent at the address specified in the notice prior to the close of business on
the third business day prior to the purchase date.
On the purchase date, we will, to the extent lawful:
- accept for payment all notes or portions thereof properly tendered
pursuant to the Change of Control offer;
- deposit with the paying agent an amount equal to the purchase price in
respect of all notes or portions thereof so tendered; and
- deliver or cause to be delivered to the trustee the notes so accepted
together with an officers' certificate stating the aggregate principal
amount at maturity of notes or portions thereof being purchased by us.
The paying agent will promptly mail to each holder of notes so tendered the
purchase price for such notes, and the trustee will promptly authenticate and
mail (or cause to be transferred by book entry) to each holder a new note equal
in principal amount at maturity to any unpurchased portion of the notes
surrendered; provided that each such new note will be in a principal amount at
maturity of $1,000 or an integral multiple thereof.
We will not be required to make a Change of Control offer upon a Change of
Control if a third party makes the Change of Control offer in the manner, at the
times and otherwise in compliance with the requirements set forth in the
indenture applicable to a Change of Control offer made by us and purchases all
notes validly tendered and not withdrawn under such Change of Control offer.
The trustee may not waive the covenant to offer to purchase the notes upon
a Change of Control. Restrictions in the indenture on our and our Restricted
Subsidiaries' ability to incur additional Indebtedness, to grant liens on its
property, to make Restricted Payments and to make Asset Sales may also make more
difficult or discourage a takeover of our company, whether favored or opposed by
our management or our board of directors. These restrictions and the
restrictions on transactions with Affiliates may, in certain circumstances, make
more difficult or discourage any leveraged buyout of our company or any of our
Subsidiaries by our management. Consummation of any such transaction in certain
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circumstances may require a repurchase of the notes, and neither we nor the
acquiring party may have sufficient financial resources to effect such
repurchase. In addition, the terms of the Credit Agreement and the indenture may
restrict our ability to obtain the financing necessary to fund a Change of
Control offer. Our failure to purchase tendered notes following a Change of
Control, whether because of a lack of financial resources, a provision in our
Credit Agreement or in the indenture, or otherwise, would constitute an Event of
Default under the indenture which, in turn, would constitute a default under the
Credit Agreement. While such restrictions cover a wide variety of arrangements
which have traditionally been used to effect highly leveraged transactions, the
indenture may not afford the holders protection in all circumstances from the
adverse aspects of a highly leveraged transaction, reorganization,
restructuring, merger, recapitalization or similar transaction.
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of notes
pursuant to a Change of Control offer. To the extent that the provisions of any
securities laws or regulations conflict with the "Change of Control" provisions
of the indenture, we will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under the
"Change of Control" provisions of the indenture by virtue thereof.
EXCESS CASH FLOW OFFER
Within 120 days after the end of each fiscal year (beginning with the first
full fiscal year after the Issue Date), we will make an offer to purchase to all
holders to purchase the maximum principal amount of notes that may be purchased
with 50% of Excess Cash Flow for such fiscal year (the "Excess Cash Flow Offer
Amount"), at a purchase price in cash equal to 100% of the Accreted Value of the
notes to be purchased, plus accrued and unpaid interest to the date of such
purchase. The indenture provides for each Excess Cash Flow offer to remain open
for a period of 20 business days, unless a longer period is required by law.
Promptly after the termination of the Excess Cash Flow offer period, we will
purchase and mail or deliver payment for the Excess Cash Flow Offer Amount for
the notes or portions thereof tendered, pro rata or by such other method as may
be required by law, or, if less than the Excess Cash Flow Offer Amount has been
tendered, all notes tendered pursuant to the Excess Cash Flow offer. If the
aggregate amount of notes tendered pursuant to any Excess Cash Flow offer is
less than the Excess Cash Flow Offer Amount, we may, subject to the other
provisions of the indenture and the Collateral Agreements, use any such excess
cash flow for general corporate purposes. Upon receiving notice of the Excess
Cash Flow offer, holders may elect to tender their notes, in whole or in part,
in integral multiples of $1,000 in exchange for cash.
No later than 30 days prior to the required purchase date, we must send, by
first-class mail, postage prepaid, an offer to each holder, with a copy to the
trustee, which offer will govern the terms of the Excess Cash Flow offer. Such
offer will state, among other things:
- the purchase price;
- the purchase date, which must be no earlier than 30 days nor later than
60 days from the date such notice is mailed, other than as may be
required by law;
- that we are making an Excess Cash Flow offer;
- that any note not tendered will continue to accrue interest;
- that unless we default on the payment of the purchase price, any notes
accepted for payment pursuant to the Excess Cash Flow offer will cease to
accrue interest after the purchase date; and
- certain procedures that a holder of notes must follow to accept the
Excess Cash Flow offer or to withdraw such acceptance.
Holders electing to have a note purchased pursuant to an Excess Cash Flow
offer will be required to surrender the note, with the form entitled "Option of
Holder to Elect Purchase" on the reverse of the note
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completed, to the paying agent at the address specified in the notice prior to
the close of business on the third business day prior to the purchase date.
On the purchase date, we will, to the extent lawful:
- accept for payment all notes or portions thereof properly tendered
pursuant to the Excess Cash Flow offer;
- deposit with the paying agent an amount equal to the purchase price in
respect of all notes or portions thereof so tendered; and
- deliver or cause to be delivered to the trustee the notes so accepted
together with an officer's certificate stating the aggregate principal
amount at maturity of notes or portions thereof being purchased by us.
The paying agent will promptly mail to each holder of notes so tendered the
purchase price for such notes, and the trustee will promptly authenticate and
mail (or cause to be transferred by book entry) to each holder a new note equal
in principal amount at maturity to any unpurchased portion of the notes
surrendered; provided that each such new note will be in a principal amount at
maturity of $1,000 or an integral multiple thereof.
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of notes
pursuant to an Excess Cash Flow offer. To the extent that the provisions of any
securities laws or regulations conflict with the "Excess Cash Flow Offer"
provisions of the indenture, we will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations under
the "Excess Cash Flow Offer" provisions of the indenture by virtue thereof.
CERTAIN COVENANTS
The indenture contains, among others, the following covenants:
Limitation on Capital Expenditures. The aggregate amount of our and
our Restricted Subsidiaries' Capital Expenditures in any consecutive four
fiscal quarter period is limited to the greater of (1) one-third of our
EBITDA in the consecutive four fiscal quarter period ending with the latest
fiscal quarter for which financial statements are required to be delivered
pursuant to the indenture and (2) the Capital Expenditure Basket.
Limitation on Incurrence of Additional Indebtedness. We will not, and
will not permit any of our Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable with
respect to, or otherwise become responsible for payment of (collectively,
"incur") any Indebtedness (other than Permitted Indebtedness); provided,
however, that if no Default or Event of Default will have occurred and be
continuing at the time of or as a consequence of the incurrence of any such
Indebtedness, we or any of our Restricted Subsidiaries that is or, upon
such incurrence, becomes a Guarantor may incur Indebtedness (including,
without limitation, Acquired Indebtedness) and any Restricted Subsidiary
that is not or will not, upon such incurrence, become a Guarantor may incur
Acquired Indebtedness, in each case if on the date of the incurrence of
such Indebtedness, after giving effect to the incurrence thereof, our
Consolidated Fixed Charge Coverage Ratio is at least equal to:
- 2.0 to 1.0, if such proposed incurrence is to be consummated on or
prior to October 15, 2004;
- 2.25 to 1.0, if such proposed incurrence is to be consummated on or
prior to October 15, 2005; and
- 2.5 to 1.0, if such proposed incurrence is to be consummated
thereafter.
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Limitation on Restricted Payments. We will not, and will not cause or
permit any of our Restricted Subsidiaries to, directly or indirectly (each,
a "Restricted Payment"):
(1) declare or pay any dividend or make any distribution (other
than dividends or distributions payable in our Qualified Capital Stock,
dividends and distributions payable to us or any Restricted Subsidiary
and pro rata dividends or distributions made by a Restricted Subsidiary
that is not a Wholly-Owned Subsidiary) on or in respect of our Capital
Stock or Capital Stock of our Restricted Subsidiaries to holders of such
Capital Stock;
(2) purchase, redeem or otherwise acquire or retire for value any
of our Capital Stock or Capital Stock of our Restricted Subsidiaries
(other than any such Capital Stock of a Restricted Subsidiary held by us
or a Guarantor);
(3) make any principal payment on, purchase, defease, redeem,
prepay, decrease or otherwise acquire or retire for value, prior to any
scheduled final maturity, scheduled repayment or scheduled sinking fund
payment, any Indebtedness of our company or any Guarantor that is
subordinate or junior in right of payment to the notes or a Guarantee
(other than Indebtedness permitted under clause (6) of the definition of
"Permitted Indebtedness"); or
(4) make any Investment (other than any Permitted Investment);
if at the time of such Restricted Payment or immediately after giving
effect thereto,
(i) a Default or an Event of Default will have occurred and be
continuing; or
(ii) we are not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
covenant described under "-- Limitation on Incurrence of Additional
Indebtedness;" or
(iii) the aggregate amount of all Restricted Payments (including
such proposed Restricted Payment) made subsequent to the Issue Date (the
amount expended for such purposes, if other than in cash, being the Fair
Market Value of such property as determined in good faith by our board
of directors at the time of the making thereof) will exceed the sum of:
(w) 50% of our cumulative Consolidated Net Income (or if
cumulative Consolidated Net Income will be a loss, minus 100% of such
loss) earned subsequent to the Issue Date and ending on the last day
of our last fiscal quarter for which financial statements are
available (the "Reference Date") (treating such period as a single
accounting period); plus
(x) 100% of the aggregate net cash proceeds received by us from
any Person (other than a Subsidiary of ours) as a contribution to our
capital or from the issuance and sale subsequent to the Issue Date
and on or prior to the Reference Date of our Qualified Capital Stock
(including upon the exercise of options, warrants or rights); plus
(y) 100% of the aggregate net cash proceeds received from the
issuance of our Indebtedness that have been converted into or
exchanged for our Qualified Capital Stock subsequent to the Issue
Date and on or prior to the Reference Date; plus
(z) an amount equal to the sum of (i) the net reduction in the
Investments (other than Permitted Investments) made by us or any
Restricted Subsidiary in any Person resulting from repurchases,
repayments or redemptions of such Investments by such Person,
proceeds realized on the sale of such Investment and proceeds
representing the return of capital (excluding dividends and
distributions), in each case received by us or any Restricted
Subsidiary, and (ii) to the extent such Person is an Unrestricted
Subsidiary, the portion (proportionate to our equity interest in such
Subsidiary) of the fair market value of the net assets of such
Unrestricted Subsidiary at the time such Unrestricted Subsidiary is
designated a Restricted Subsidiary; provided, however, that the
foregoing sum will not exceed, in the case of any such Person or
Unrestricted Subsidiary, the amount of Investments (excluding
Permitted Investments) previously made (and treated as a Restricted
Payment) by us or
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any Restricted Subsidiary in such Person or Unrestricted Subsidiary;
provided further, however, that no amount will be included under this
clause (z) to the extent it is already included in our Consolidated
Net Income in clause (w) above.
Notwithstanding the foregoing, the provisions set forth in the
immediately preceding paragraph do not prohibit:
(1) the payment of any dividend or redemption of any Capital Stock
within 60 days after the date of declaration or call for redemption
thereof, if at such date of declaration or call for redemption such
payment or redemption would have been permitted;
(2) the purchase, redemption or other acquisition or retirement
for value of any of our Capital Stock, either (i) solely in exchange for
our Qualified Capital Stock or (ii) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a
Subsidiary) of our Qualified Capital Stock;
(3) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Indebtedness of our company or the
Guarantors that is subordinate or junior in right of payment to the
notes and Guarantees either (i) solely in exchange for our Qualified
Capital Stock, or (ii) through the application of net proceeds of a
substantially concurrent sale for cash (other than to a Subsidiary) of
(a) our Qualified Capital Stock or (b) Refinancing Indebtedness;
(4) an Investment acquired as a result of the capital contribution
or in exchange for, or out of the proceeds of a substantially concurrent
offering (other than to one or more of our Subsidiaries) of, our
Qualified Capital Stock;
(5) payments or distributions to stockholders pursuant to
appraisal rights required under applicable law in connection with any
consolidation, merger or transfer of assets that complies with the
covenant described under "-- Merger, Consolidation and Sale of Assets";
(6) if no Default or Event of Default will have occurred and be
continuing, repurchases, redemptions, acquisitions or retirements of (or
payments to Holdings to permit Holdings to repurchase, redeem, acquire
or retire) our, Holdings' or any Restricted Subsidiary's Qualified
Capital Stock from employees, former employees, directors or former
directors of our company or any of our Restricted Subsidiaries or their
authorized representatives upon the death, disability or termination of
employment of such employees, former employees, directors or former
directors; provided, however, that the aggregate amount paid for all
repurchased, redeemed, acquired or retired Qualified Capital Stock does
not exceed $500,000 during any twelve-month period (excluding any such
repurchases, redemptions, acquisitions or retirements with the proceeds
of any life insurance policy or policies maintained by us or under which
we are the beneficiary);
(7) repurchases, redemptions, acquisitions or retirements of our
Qualified Capital Stock deemed to occur upon the exercise of options,
warrants or other rights under employee benefit plans of our company or
our Subsidiaries if such Qualified Capital Stock represents all or a
portion of the exercise price thereof;
(8) if no Default or Event of Default will have occurred and be
continuing, the redemption, repurchase, acquisition or retirement of
Capital Stock of any Restricted Subsidiary; provided that if our company
or any Restricted Subsidiary incurs Indebtedness in connection with such
redemption, repurchase, acquisition or retirement, after giving effect
to such incurrence and such redemption, repurchase, acquisition or
retirement, we could incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) in compliance with the covenant described under
"--Limitation on Incurrence of Additional Indebtedness";
(9) dividends or distributions paid by us to Holdings to be used
by Holdings to pay Federal, state and local taxes payable by Holdings
and directly attributable or which arise as a result of our and our
Restricted Subsidiaries' operations; provided that such dividends or
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distributions do not exceed the amount we and our Restricted
Subsidiaries would be required to pay as a stand-alone taxpayer;
(10) any Restricted Payment pursuant to or contemplated by, or to
pay amounts due under (whether such Restricted Payment is made to third
parties or to Holdings for payment to third parties), the merger
agreement or the management consulting agreement; and
(11) if no Default or Event of Default will have occurred and be
continuing, Restricted Payments (in addition to those permitted by
clauses (1) through (10) of this paragraph) in an aggregate amount not
to exceed $2.0 million subsequent to the Issue Date.
In determining the aggregate amount of Restricted Payments made
subsequent to the Issue Date in accordance with clause (iii) of the
immediately preceding paragraph, amounts expended pursuant to clauses (1),
(2)(ii), 3(ii)(a), (4), (6) and (11) will be included in such calculation.
Not later than the date of making any Restricted Payment, we will
deliver to the trustee an officers' certificate stating that such
Restricted Payment complies with the indenture and setting forth in
reasonable detail the basis upon which the required calculations were
computed, which calculations may be based upon our latest available
internal quarterly financial statements.
Limitation on Sale/Leaseback Transactions. We will not, and will not
permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless (1) immediately after
giving effect to such transaction, we or such Restricted Subsidiary would
be entitled to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) in compliance with the "-- Limitation on Incurrence
of Additional Indebtedness" covenant and (2) to the extent such
Sale/Leaseback Transaction is an Asset Sale, we comply with the covenant
described under "-- Limitation on Asset Sales."
Limitation on Asset Sales. We will not, and will not permit any of
our Restricted Subsidiaries to, consummate an Asset Sale unless:
(1) we or the applicable Restricted Subsidiary, as the case may
be, receive consideration at the time of such Asset Sale at least equal
to the Fair Market Value of the assets sold or otherwise disposed of (as
determined in good faith by our board of directors); and
(2) at least 75% of the consideration received by us or the
Restricted Subsidiary, as the case may be, from such Asset Sale will be
in the form of cash and/or Cash Equivalents and is received at the time
of such disposition. For purposes of this provision, the following will
be deemed to be cash: (A) the amount of any liabilities (as shown on the
most recent applicable balance sheet) of our company or such Restricted
Subsidiary (other than liabilities that are by their terms subordinated
to the notes) that are assumed by the transferee of any such assets so
long as the documents governing such liabilities provide that there is
no further recourse to us or any of our Subsidiaries with respect to
such liabilities and (B) notes, securities or other similar obligations
received by us or any Restricted Subsidiary from such transferee that
are converted, sold or exchanged, within 180 days of the related Asset
Sale, by us or our Restricted Subsidiaries into cash (with such amount
actually realized being the portion deemed to be cash).
Upon the consummation of an Asset Sale, we may apply, or cause such
Restricted Subsidiary to apply, the Net Cash Proceeds relating to such
Asset Sale within 180 days of receipt thereof either:
- to repay Indebtedness under the Credit Agreement;
- to make an investment (or to enter into a legally binding agreement to
invest) in Replacement Assets or to repay any Indebtedness incurred
within 180 days prior to such Asset Sale and used to acquire
Replacement Assets in contemplation of such Asset Sale; or
- a combination of prepayment and investment permitted by the foregoing
clauses.
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Pending the application of any such Net Cash Proceeds, we may
temporarily reduce Indebtedness or otherwise invest such Net Cash Proceeds
in any manner that is not prohibited by the indenture. If any such legally
binding agreement to invest such Net Cash Proceeds is terminated, then we
may, within 90 days of such termination or within 180 days of such Asset
Sale, whichever is later, invest such Net Cash Proceeds as provided in the
immediately preceding paragraph (without regard to the parenthetical
contained in the second bullet point thereof). The amount of such Net Cash
Proceeds not so used as set forth in the immediately preceding paragraph or
in this paragraph constitutes "Excess Proceeds." Notwithstanding the
foregoing, for purposes of determining whether an Excess Proceeds offer is
required, pursuant to the immediately following paragraph, Excess Proceeds
at any time will be reduced by the Accreted Value of notes acquired (and
surrendered to the trustee for cancellation) by us through open market
purchases or optional redemption subsequent to the date of the Asset Sale
giving rise to the Excess Proceeds.
When the aggregate amount of Excess Proceeds exceeds $5.0 million, we
will, not less than 30 nor more than 60 days following such date, make an
offer to purchase from all holders and all holders of other Indebtedness
that ranks pari passu in right of payment with the notes containing
provisions requiring the redemption or prepayment or offers to purchase
with the proceeds of sales of assets on a pro rata basis, that amount of
notes equal to the amount of the Excess Proceeds at a price equal to 100%
of the Accreted Value of the notes to be purchased, plus accrued and unpaid
interest, if any, thereon to the date of purchase (provided that in the
case where such other Indebtedness is outstanding under a revolving credit
or similar agreement, the commitment to lend thereunder is concurrently or
permanently reduced). The aggregate Accreted Value of notes to be purchased
pursuant to an Excess Proceeds offer may be reduced by the Accreted Value
of notes acquired by us through open market purchases or optional
redemption subsequent to the date of the Asset Sale giving rise to the
Excess Proceeds offer and surrendered to the trustee for cancellation.
In the event of the transfer of substantially all (but not all) of the
property and assets of our company and our Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "-- Merger,
Consolidation and Sale of Assets," which transaction does not constitute a
Change of Control, the successor corporation will be deemed to have sold
the properties and assets of our company and our Restricted Subsidiaries
not so transferred for purposes of this covenant, and will comply with the
provisions of this covenant with respect to such deemed sale as if it
constituted an Asset Sale. In addition, the Fair Market Value of such
properties and assets deemed to be sold will be deemed to be Net Cash
Proceeds for purposes of this covenant.
Each notice of an Excess Proceeds offer will be mailed to the record
holders as shown on the register of holders, with a copy to the trustee,
and will comply with the procedures set forth in the indenture. Upon
receiving notice of the Excess Proceeds offer, holders may elect to tender
their notes in whole or in part in integral multiples of $1,000 in exchange
for cash. To the extent holders tender notes in an amount less than the
Excess Proceeds, we may use the deficiency for any purpose not otherwise
prohibited by the indenture. To the extent holders properly tender notes in
an amount exceeding the Excess Proceeds offer amount, we will purchase
notes of tendering holders on a pro rata basis (based on amounts tendered).
An Excess Proceeds offer will remain open for a period of 20 business days
or such longer period as may be required by law.
We will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent
such laws and regulations are applicable in connection with the repurchase
of notes pursuant to an Excess Proceeds offer. To the extent that the
provisions of any securities laws or regulations conflict with the
"Limitation on Asset Sales" provisions of the indenture, we will comply
with the applicable securities laws and regulations and will not be deemed
to have breached its obligations under the "Limitation on Asset Sales"
provisions of the indenture by virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries. We will not, and will not cause or permit any of
our Restricted Subsidiaries to, directly or indirectly, create or
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otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to:
(1) pay dividends or make any other distributions on or in respect
of its Capital Stock to us;
(2) make loans or advances or to pay any Indebtedness or other
obligation owed to us or any other Restricted Subsidiary; or
(3) transfer any of its property or assets to us or any other
Restricted Subsidiary,
except, in each case, for such encumbrances or restrictions existing
under or by reason of:
(a) applicable law;
(b) the indenture, the notes, the Guarantees and the Collateral
Agreements;
(c) customary non-assignment provisions of any contract or any
lease governing a leasehold interest of any Restricted Subsidiary;
(d) any instrument governing Acquired Indebtedness, which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person or the
properties or assets of the Person so acquired;
(e) agreements existing on the Issue Date, including, without
limitation, the Credit Agreement;
(f) any contract for sale of assets permitted by the covenant
contained in "-- Limitation on Asset Sales" with respect to the assets
to be sold pursuant to such contract;
(g) in the case of clause (3) above, restrictions contained in
security agreements or mortgages securing Indebtedness of a Restricted
Subsidiary permitted under the indenture to the extent such restrictions
restrict the transfer of the property subject to such security
agreements or mortgages; and
(h) amendments, modifications, renewals, Refinancings, replacements
or substitutions of an instrument or agreement referred to in clause
(b), (d) or (e) above; provided, however, that the provisions relating
to such encumbrances or restrictions contained in any such Indebtedness,
taken as a whole, are no less favorable to us in any material respect as
determined by our board of directors in their reasonable and good faith
judgment than the provisions relating to such encumbrances or
restrictions contained in the agreements or instruments so amended,
modified, renewed, Refinanced, replaced or substituted.
Limitation on Issuances and Sales of Capital Stock of
Subsidiaries. We will not permit or cause any of our Restricted
Subsidiaries to issue or sell any Capital Stock (other than director's
qualifying shares and other than to us or to a Wholly-Owned Subsidiary) or
permit any Person (other than us or a Wholly-Owned Subsidiary) to own or
hold any Capital Stock of any Restricted Subsidiary or any Lien or security
interest therein (other than the lenders under the Credit Agreement);
provided, however, that this provision will not prohibit the sale of all of
the Capital Stock of a Restricted Subsidiary in compliance with the
provisions of the "-- Limitation on Asset Sales" covenant.
Limitation on Liens. We will not, and will not cause or permit any of
our Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or permit or suffer to exist any Liens (other than Permitted Liens)
of any kind against or upon any property or assets of our company or any of
our Restricted Subsidiaries whether owned on the Issue Date or acquired
after the Issue Date, or any proceeds therefrom, or assign or otherwise
convey any right to receive income or profits therefrom.
Merger, Consolidation and Sale of Assets. We will not, in a single
transaction or series of related transactions, consolidate or merge with or
into any Person, or sell, assign, transfer, lease,
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convey or otherwise dispose of (or cause or permit any Restricted
Subsidiary to sell, assign, transfer, lease, convey or otherwise dispose
of) all or substantially all of our properties and assets (determined on a
consolidated basis for our company and our Restricted Subsidiaries) to any
Person unless:
(1) either:
(a) we will be the surviving or continuing corporation; or
(b) the Person (if other than our company) formed by or
surviving such consolidation or merger or the Person which acquires
by sale, assignment, transfer, lease, conveyance or other disposition
the all or substantially all of the properties and assets of our
company and our Restricted Subsidiaries:
(x) will be a corporation organized and validly existing
under the laws of the United States or any state thereof or the
District of Columbia; and
(y) will expressly assume, by supplemental indenture (in
form and substance reasonably satisfactory to the trustee),
executed and delivered to the trustee, our obligation for the due
and punctual payment of the principal of, premium, if any, and
interest on all of the notes and the performance of every
covenant of the notes, the indenture, the Collateral Agreements
and the Registration Rights Agreement on our part to be performed
or observed;
(2) immediately after giving effect to such transaction, our
company or such surviving entity, as the case may be will be able to
incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) in compliance with the "-- Limitation on Incurrence of
Additional Indebtedness" covenant; provided that this clause (2) does
not apply if, in the good faith determination of our board of directors,
whose determination will be evidenced by a board resolution, which
includes a certification of an secretary or assistant secretary and
which resolution is in full force and effect or the date of such
certification, the principal purpose of such transaction is to change
the state of incorporation of our company and any such transaction will
not have as one of its purposes the evasion of the foregoing
limitations; and
(3) immediately after giving effect to such transaction or series
of related transactions, no Default or Event of Default will have
occurred or be continuing.
In connection with any such consolidation, merger, sale, assignment,
transfer, lease, conveyance or other disposition, we or the surviving
Person must deliver to the trustee, in form and substance reasonably
satisfactory to the trustee, an officers' certificate and an opinion of
counsel, each stating that such consolidation, merger, sale, assignment,
transfer, lease, conveyance or other disposition and, if a supplemental
indenture is required in connection with such transaction, such
supplemental indenture comply with the applicable provisions of the
indenture and that all conditions precedent in the indenture relating to
such transaction have been satisfied.
The indenture provides that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of our
company in accordance with the foregoing, in which we are not the
continuing corporation, the successor Person formed by such consolidation
or into which we are merged or to which such conveyance, lease or transfer
is made will succeed to, and be substituted for, and may exercise every
right and power of, us under the indenture and the notes with the same
effect as if such surviving entity had been named as such. Upon such
substitution we and any Guarantors that remain Subsidiaries of us will be
released from the indenture and the notes.
Each Guarantor (other than any Guarantor whose Guarantee is to be
released in accordance with the terms of the Guarantee and the indenture in
connection with any transaction complying with the provisions of
"--Limitation on Asset Sales") will not, and we will not cause or permit
any Guarantor
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to, consolidate with or merge with or into any Person other than us or any
other Guarantor that is a Wholly-Owned Restricted Subsidiary unless:
(1) the entity formed by or surviving any such consolidation or
merger (if other than the Guarantor) or to which such sale, lease,
conveyance or other disposition will have been made is a corporation
organized and existing under the laws of the United States, any state
thereof or the District of Columbia;
(2) such entity assumes by supplemental indenture all of the
obligations of the Guarantor on the Guarantee;
(3) immediately after giving effect to such transaction, no Default
or Event of Default will have occurred and be continuing; and
(4) immediately after giving effect to such transaction and the use
of any net proceeds therefrom on a pro forma basis, we could satisfy the
provisions of clause (2) of the first paragraph of this covenant.
In connection with any such consolidation or merger, we must deliver
to the trustee, in form and substance reasonably satisfactory to the
trustee, an officers' certificate and an opinion of counsel, each stating
that such consolidation or merger and supplemental indenture comply with
the applicable provisions of the indenture and that all conditions
precedent in the indenture relating to such transaction have been
satisfied. Any merger or consolidation of a Guarantor with and into our
company (with our company being the surviving Person) or another Guarantor
that is a Wholly-Owned Restricted Subsidiary of our company need only
comply with this paragraph.
Limitations on Transactions with Affiliates. We will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into
any contract, agreement, understanding, loan, advance, guarantee or other
transaction or series of related transactions with, or for the benefit of,
any Affiliate of us or any Restricted Subsidiary (other than us or a
Restricted Subsidiary including any Person that becomes a Restricted
Subsidiary as a result of such transaction) (collectively, "Interested
Persons"), unless:
- such transaction or series of transactions are on terms that are no
less favorable to us or such Restricted Subsidiary, as the case may
be, than would have been able to be obtained at the time for a
comparable transaction in arm's-length dealings with third-parties
that are not Interested Persons;
- with respect to any transaction or series of related transactions
involving aggregate value equal to or greater than $500,000 and less
than $1.0 million, we will have delivered an officers' certificate to
the trustee certifying that such transaction or series of transactions
complies with the previous bullet point;
- with respect to any transaction or series of related transactions
involving aggregate value equal to or greater than $1.0 million and
less than $5.0 million, (x) such transaction or series of related
transactions will be approved by a majority of the disinterested
members of our board of directors or the board of directors of such
Restricted Subsidiary, as the case may be, such approval to be
evidenced by a board resolution stating that such board of directors
has determined that such transaction or series of related transactions
complies with the foregoing provisions or (y) we will have obtained a
written opinion from an Independent Financial Advisor certifying that
such transaction or series of related transactions is fair to us or
our Restricted Subsidiary, as the case may be, from a financial point
of view; and
- with respect to any transaction or series of related transactions
involving aggregate value equal to or greater than $5.0 million, we
will have obtained a written opinion from an Independent Financial
Advisor certifying that such transaction or series of related
transactions is fair to us or our Restricted Subsidiary, as the case
may be, from a financial point of view.
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The restrictions of this covenant will not apply to:
(1) reasonable fees and compensation (including stock options and
other awards pursuant to our or our Restricted Subsidiaries' employee
benefit plans) paid to, and indemnity provided on behalf of, officers,
directors, employees or consultants of our company or any Restricted
Subsidiary as determined in good faith by our board of directors or
senior management;
(2) transactions exclusively between or among our company and any
of our Restricted Subsidiaries or exclusively between or among such
Restricted Subsidiaries, provided such transactions are not otherwise
prohibited by the indenture;
(3) transactions pursuant to or contemplated by any agreement as in
effect as of the Issue Date (including, without limitation, the merger
agreement, the stockholders agreement and the management consulting
agreement), or any amendment, modification, renewal, Refinancing,
replacement or substitution thereof so long as any such amendment,
modification, renewal, Refinancing, replacement or substitution thereof
is not more disadvantageous to the holders in any material respect than
the original agreement as in effect on the Issue Date;
(4) loans and advances to, and reimbursement of expenses incurred
by, officers, directors and employees in the ordinary course of business
of our company or any Restricted Subsidiary;
(5) any issuance or sale of our Qualified Capital Stock; or
(6) Restricted Payments permitted by the indenture.
Additional Subsidiary Guarantees. If we or any of our Restricted
Subsidiaries transfers or causes to be transferred, in one transaction or a
series of related transactions, any property to any Subsidiary that,
following such transaction or series of related transactions is a Domestic
Restricted Subsidiary but is not a Guarantor, or if we or any of our
Subsidiaries organize, acquire or otherwise invest in another Subsidiary
that, following such organization, acquisition or investment is a Domestic
Restricted Subsidiary but is not a Guarantor, then such transferee or
acquired or other Subsidiary will:
(1) execute and deliver to the trustee a supplemental indenture in
form reasonably satisfactory to the trustee pursuant to which such
Subsidiary will unconditionally guarantee on a senior secured basis all
of our obligations under the notes and the indenture on the terms set
forth in the indenture;
(2) (a) execute and deliver to the Lender Agent such amendments to
the intercreditor agreement as the Lender Agent deems necessary or
advisable in order to make such Subsidiary a party to the intercreditor
agreement; (b) execute and deliver to the Collateral Agent and the
trustee such amendments to the Collateral Agreements as the Collateral
Agent deems necessary or advisable in order to grant to the Collateral
Agent, for the benefit of the holders and the Lenders, a perfected
security interest in the Capital Stock of such new Subsidiary and the
debt securities of such new Subsidiary, subject only to Permitted Liens,
which are owned by us or any Subsidiary and required to be pledged
pursuant to the security agreement dated as of the Issue Date and made
by us and the Guarantors in favor the Collateral Agent, which we call
the security agreement and (c) deliver to the Collateral Agent the
certificates representing such Capital Stock and debt securities,
together with (i) in the case of such Capital Stock, undated stock
powers or instruments of transfer, as applicable, endorsed in blank, and
(ii) in the case of such debt securities, endorsed in blank, in each
case executed and delivered by an officer of our company or such
Subsidiary, as the case may be;
(3) take such actions necessary or advisable to grant to the
Collateral Agent for the benefit of the holders and the trustee a
perfected security interest in the assets of such new Subsidiary,
subject only to Permitted Liens, including the filing of Uniform
Commercial Code financing statements in such jurisdictions as may be
required by the security agreement or by law or as may be reasonably
requested by the Collateral Agent;
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(4) take such further action and execute and deliver such other
documents specified in the indenture or otherwise reasonably requested
by the trustee or the Collateral Agent to effectuate the foregoing; and
(5) deliver to the trustee an opinion of counsel that such
supplemental indenture and any other documents required to be delivered
have been duly authorized, executed and delivered by such Restricted
Subsidiary and constitute legal, valid, binding and enforceable
obligations of such Restricted Subsidiary and such other opinions
regarding the perfection of such liens in the Collateral of or
consisting of the Capital Stock of such Restricted Subsidiary as
provided for in the indenture.
Thereafter, such Restricted Subsidiary will be a Subsidiary Guarantor for
all purposes of the indenture.
Impairment of Security Interest. Neither we nor any of the Guarantors
will take or omit to take any action which would adversely affect or impair
the Liens in favor of the Collateral Agent, on behalf of itself, the
trustee and the holders of the notes, with respect to the Collateral.
Neither we nor any of our Restricted Subsidiaries will grant to any Person,
or permit any Person to retain (other than the Collateral Agent or a
Sub-Collateral Agent), any interest whatsoever in the Collateral other than
Permitted Liens. Neither we nor any of our Restricted Subsidiaries will
enter into any agreement that requires the proceeds received from any sale
of Collateral to be applied to repay, redeem, defease or otherwise acquire
or retire any Indebtedness of any Person, other than as permitted or
required by the indenture, the notes, the intercreditor agreement, the
Credit Agreement or the Collateral Agreements. We will, and will cause each
Guarantor to, at our sole cost and expense, execute and deliver all such
agreements and instruments as the Collateral Agent or the trustee will
reasonably request to more fully or accurately describe the property
intended to be Collateral or the obligations intended to be secured by the
Collateral Agreements. We will, and will cause each Guarantor to, at its
sole cost and expense, file any such notice filings or other agreements or
instruments as may be reasonably necessary or desirable under applicable
law to perfect the Liens created by the Collateral Agreements at such times
and at such places as the Collateral Agent may reasonably request.
Real Estate Mortgages and Filings. With respect to any real property,
other than a leasehold (individually and collectively, the "Premises"), (i)
acquired after the Issue Date with a purchase price or (ii) as of the Issue
Date, with a Fair Market Value, of greater than $500,000:
(1) we will deliver to the Collateral Agent, as mortgagee, fully
executed counterparts of Mortgages, each dated as of the date of
acquisition of such property, duly executed by us or the applicable
Subsidiary, together with evidence of the completion (or satisfactory
arrangements for the completion), of all recordings and filings of such
Mortgage as may be necessary or, in the reasonable opinion of the
Collateral Agent desirable, to create a valid, perfected Lien, subject
to Permitted Liens, against the properties purported to be covered
thereby;
(2) the Collateral Agent will have received mortgagee's title
insurance policies in favor of the Collateral Agent, as mortgagee for
the ratable benefit of the Collateral Agent, the trustee and the holders
in amounts and in form and substance and issued by insurers reasonably
acceptable to the Collateral Agent, with respect to the property
purported to be covered by such Mortgage, insuring that title to such
property is marketable and that the interests created by the Mortgage
constitute valid Liens thereon free and clear of all liens, defects and
encumbrances other than Permitted Liens, and such policies will also
include, to the extent available, a revolving credit endorsement and
such other endorsements as the Collateral Agent will reasonably request
and will be accompanied by evidence of the payment in full of all
premiums thereon; and
(3) we will deliver to the Collateral Agent, with respect to each
of the covered Premises, filings, surveys, local counsel opinions and
fixture filings, along with such other documents, instruments,
certificates and agreements as the Collateral Agent and its counsel will
reasonably request.
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Leasehold Mortgages and Filings. We and each of our Restricted
Subsidiaries will deliver Mortgages with respect to our leasehold interests
in the premises (the "Leased Premises") occupied by us pursuant to leases
entered into after the Issue Date (collectively, the "Leases," and
individually, a "Lease"), other than renewals of leases existing on the
Issue Date.
Prior to the effective date of any Lease, we and such Restricted
Subsidiaries will provide to the trustee all of the items described in
clauses (2) and (3) of "-- Real Estate Mortgages and Filings" above and in
addition will use its reasonable commercial efforts to obtain an agreement
executed by the lessor of the Lease, whereby the lessor consents to the
Mortgage and waives or subordinates its landlord Lien (whether granted by
the instrument creating the leasehold estate or by applicable law), if any,
and which will be entered into by the Collateral Agent.
Conduct of Business. We and our Restricted Subsidiaries will not
engage in any businesses which are not the same, similar, reasonably
related or ancillary to the businesses in which we and our Restricted
Subsidiaries are engaged on the Issue Date.
Reports to Holders. Whether or not required by the rules and
regulations of the SEC, so long as any notes are outstanding, we will
furnish the trustee and, upon request, to the holders of notes:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC on Forms 10-Q and 10-K
if we were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of
operations of us and our consolidated Subsidiaries (showing in
reasonable detail, either on the face of the financial statements or in
the footnotes thereto and in Management's Discussion and Analysis of
Financial Condition and Results of Operations, the financial condition
and results of operations of us and our Restricted Subsidiaries separate
from the financial condition and results of operations of our
Unrestricted Subsidiaries, if any, but only to the extent such
Unrestricted Subsidiaries are material to our or Holdings', as
applicable, consolidated results of operations or financial condition)
and, with respect to the annual information only, a report thereon by
our certified independent accounts; and
(2) all current reports that would be required to be filed with
the SEC on Form 8-K if we were required to file such reports;
in each case within the time periods specified in the SEC's rules and
regulations; provided, however, that so long as Holdings is a Guarantor of
the notes and complies with the requirements of Rule 3-10 of Regulation S-X
promulgated by the SEC (or any successor provision), the reports,
information and other documents required to be filed and provided as
described hereunder may, at our option, be filed by and be those of
Holdings rather than us.
In addition, following the consummation of the exchange offer contemplated
by the Registration Rights Agreement, whether or not required by the rules and
regulations of the SEC, we will file a copy of all such information and reports
with the SEC for public availability within the time periods specified in the
SEC's rules and regulations (unless the SEC will not accept such a filing). In
addition, we have agreed that, prior to the consummation of the Exchange Offer,
for so long as any notes remain outstanding, it will furnish to the holders upon
their request, the information required to be delivered pursuant to Rule
144(A)(d)(4) under the Securities Act.
POSSESSION, USE AND RELEASE OF COLLATERAL
Unless an Event of Default will have occurred and be continuing, we will
have the right to remain in possession and retain exclusive control of the
Collateral (other than as set forth in the Collateral Agreements), to freely
operate the Collateral and to collect, invest and dispose of any income
therefrom.
Release of Collateral. Upon compliance by us with the conditions set forth
below in respect of any release of items of Collateral, and upon delivery by us
to the Collateral Agent of an opinion of counsel to
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the effect that such conditions have been met, the Collateral Agent will release
the Released Interests (as hereinafter defined) from the Lien of the Collateral
Agreements and reconvey the Released Interests to us.
Asset Sale Release. We have the right to obtain a release of Liens
securing the notes with respect to items of Collateral (the "Released
Interests") subject to an Asset Sale permitted hereunder upon delivery to the
Collateral Agent of the following:
(1) notice from us requesting the release of Released Interests: (i)
describing the proposed Released Interests; (ii) specifying the value of
such Released Interests on a date within 60 days of such notice (the
"Valuation Date"); (iii) stating that the purchase price received is at
least equal to the Fair Market Value of the Released Interests; (iv)
stating that the release of such Released Interests would not be expected
to interfere in any material respect with the Collateral Agent's ability to
realize the value of the remaining Collateral and will not impair in any
material respect the maintenance and operation of the remaining Collateral;
and (v) certifying that such Asset Sale complies with the terms and
conditions of the indenture with respect thereto; and
(2) an officers' certificate stating that: (i) such Asset Sale covers
only the Released Interests and complies with the terms and conditions of
the indenture with respect to Asset Sales; (ii) there is no Default or
Event of Default in effect or continuing on the date thereof, the Valuation
Date or the date of such Asset Sale; (iii) the release of the Collateral
will not result in a Default or Event of Default under the indenture; and
(iv) all conditions precedent in the indenture relating to the release in
question have been or will be complied with.
Release of Inventory and Accounts Receivable Collateral. Notwithstanding
any provision to the contrary in the indenture, Collateral comprised of accounts
receivable, inventory or (prior to an Event of Default) the proceeds of the
foregoing will be subject to release upon sales of such inventory and collection
of the proceeds of such receivables in the ordinary course of business. If we
request in writing, the Collateral Agent or the Sub-Collateral Agent will
execute and deliver such documents, instruments or statements and to take such
other action as we may reasonably request to evidence or confirm that the
Collateral falling under this "-- Release of Inventory and Accounts Receivable
Collateral" provision has been released from the Liens of each of the Security
Documents.
EVENTS OF DEFAULT
The following events are defined in the indenture as "Events of Default":
(1) the failure to pay premium, if any, interest on or any other
amount (other than principal of the notes which is covered by clause (2)
below) on any notes when the same becomes due and payable and the default
continues for a period of 30 days;
(2) the failure to pay the principal on any notes, when such
principal becomes due and payable, at maturity, upon optional or mandatory
redemption, required purchase or otherwise;
(3) a default under the covenants described above under "Repurchase
upon Change of Control" (other than a failure to purchase notes validly
tendered which is covered by clause (2) above), "Excess Cash Flow Offer"
(other than a failure to purchase notes validly tendered which is covered
by clause (2) above) or under "-- Certain Covenants" (other than a failure
to purchase notes validly tendered pursuant to "-- Limitation on Asset
Sales" which is covered by clause (2) above), which default continues for a
period of 30 days after we receive written notice specifying the default
(and demanding that such default be remedied) from the trustee or the
holders of at least 25% of the outstanding principal amount at maturity of
the notes (except in the case of a default with respect to the "-- Merger,
Consolidation and Sale of Assets" covenant, which will constitute an Event
of Default with such notice requirement but without such passage of time
requirement);
(4) a default under any other agreement contained in the indenture or
any Collateral Agreement, which default continues for a period of 60 days
after we receive written notice specifying
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the default (and demanding that such default be remedied) from the trustee
or the holders of at least 25% of the outstanding principal amount at
maturity of the notes;
(5) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness of ours or any Restricted Subsidiary, or the
acceleration of the final stated maturity of any such Indebtedness (which
acceleration is not rescinded, annulled or otherwise cured within 20 days
from the date of acceleration) if the aggregate principal amount of such
Indebtedness, together with the principal amount of any other such
Indebtedness in default for failure to pay principal at final maturity or
which has been accelerated (in each case with respect to which the 20-day
period described above has elapsed), aggregates $5.0 million or more at any
one time;
(6) one or more judgments in an aggregate amount in excess of $5.0
million (which are not covered by a reputable and solvent third party
insurer as to which such insurer has not disclaimed coverage) will have
been rendered against us or any of our Restricted Subsidiaries and such
judgments remain undischarged, unbonded, unpaid or unstayed for a period of
60 days after such judgment or judgments become final and non-appealable;
(7) certain events of bankruptcy affecting us or any of our
Significant Subsidiaries;
(8) any Collateral Agreement at any time for any reason will cease to
be in full force and effect (other than as provided by the terms of the
Collateral Agreements and the indenture), or ceases to give the Collateral
Agent the Liens, rights, powers and privileges purported to be created
thereby, superior to and prior to the rights of all third Persons other
than the Lenders and other than the holders of Permitted Liens and subject
to no other Liens except as expressly permitted by the applicable
Collateral Agreement;
(9) we or any of our Subsidiaries, directly or indirectly, contest in
any manner the effectiveness, validity, binding nature or enforceability of
any Collateral Agreement; or
(10) any Guarantee of a Significant Subsidiary ceases to be in full
force and effect or any Guarantee of a Significant Subsidiary is declared
to be null and void and unenforceable or any Guarantee of a Significant
Subsidiary is found to be invalid or any Guarantor that is a Significant
Subsidiary denies its liability under its Guarantee (in each case, other
than by reason of release of a Guarantor in accordance with the terms of
the indenture).
If an Event of Default (other than an Event of Default specified in clause
(7) above with respect to the us) will occur and be continuing and has not been
waived, the trustee or the holders of at least 25% in principal amount at
maturity of outstanding notes may declare the Accreted Value of and accrued and
unpaid interest on all the notes to be due and payable by notice in writing to
us and the trustee specifying the respective Event of Default and that it is a
"notice of acceleration" (the "Acceleration Notice"), and the same will become
immediately due and payable.
If an Event of Default specified in clause (7) above with respect to us
occurs and is continuing, then the Accreted Value of and accrued and unpaid
interest on all of the outstanding notes will become immediately due and payable
without any declaration or other act on the part of the trustee or any holder.
At any time after a declaration of acceleration with respect to the notes
as described in the preceding paragraph, the holders of a majority in principal
amount at maturity of the notes may rescind and cancel such declaration and its
consequences if:
(1) the rescission would not conflict with any judgment or decree;
(2) all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
the acceleration;
(3) to the extent the payment of such interest is lawful, interest on
overdue installments of interest and overdue principal and premium, if any,
which has become due otherwise than by such declaration of acceleration,
has been paid;
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(4) we have paid the trustee its reasonable compensation and
reimbursed the trustee for its expenses, disbursements and advances; and
(5) in the event of the cure or waiver of an Event of Default of the
type described in clause (7) of the description above of Events of Default,
the trustee will have received an officers' certificate and an opinion of
counsel that such Event of Default has been cured or waived.
No such rescission will affect any subsequent Default or impair any right
consequent thereto.
The holders of a majority in principal amount at maturity of the notes may
waive any existing Default or Event of Default under the indenture, and its
consequences, except a default in the payment of the principal of or interest on
any notes or in respect of a covenant or provision which under the indenture
cannot be modified or amended without the consent of the holder of each note
then outstanding.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture and under the Trust Indenture Act. Subject to the
provisions of the indenture relating to the duties of the trustee, the trustee
is under no obligation to exercise any of its rights or powers under the
indenture at the request, order or direction of any of the holders, unless such
holders have offered to the trustee reasonable indemnity. Subject to the
provisions of the indenture and applicable law, the holders of a majority in
aggregate principal amount at maturity of the then outstanding notes have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the trustee or exercising any trust or power conferred on
the trustee.
If a default or an Event of Default exists and is known to the trustee, the
trustee will mail to each holder of the notes notices of the default or Event of
Default within 10 days after the occurrence thereof. Except in the case of a
payment default, the trustee may withhold the notice to the holders of such
notes if a committee of its trust officers in good faith determines that
withholding the notice is in the interests of the holders of the notes.
Under the indenture, we must furnish to the trustee annual statements as to
the performance by our company and the Guarantors of their respective
obligations under the indenture and as to any default in such performance. We
also must notify the trustee promptly of the occurrence of any default or Event
of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No past, present or future director, officer, employee, incorporator, or
stockholder of our company, as such, will have any liability for any obligations
of our company or the Guarantors under the notes, the Guarantees or the
indenture or for any claim based on, in respect of, such obligations or their
creation. Each holder, by accepting a note, waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the notes.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
We may, at our option and at any time, elect to have our obligations and
the obligations of the Guarantors discharged with respect to the outstanding
notes ("Legal Defeasance"). Such Legal Defeasance means that we will be deemed
to have paid and discharged the entire indebtedness represented by the
outstanding notes, except for:
(1) the rights of holders to receive payments in respect of the
principal of, premium, if any, and interest on the notes when such payments
are due;
(2) our obligations with respect to the notes concerning issuing
temporary notes, registration of notes, replacing mutilated, destroyed,
lost or stolen notes and the maintenance of an office or agency for
payments;
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(3) the rights, powers, trusts, duties and immunities of the trustee
and our obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, we may, at our option and at any time, elect to have our and
our Restricted Subsidiaries' obligations released with respect to certain
covenants that are described in the indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations will not constitute a
Default or Event of Default with respect to the notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, reorganization and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) we must irrevocably deposit with the trustee, in trust, for the
benefit of the holders cash in U.S. dollars, non-callable U.S. government
obligations, or a combination thereof, in such amounts and at such times as
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any,
and interest on the notes on the stated dates for payment or redemption, as
the case may be;
(2) in the case of Legal Defeasance, we must have delivered to the
trustee an opinion of counsel in the United States reasonably acceptable to
the trustee confirming that:
(a) we have received from, or there has been published by, the
Internal Revenue Service a ruling; or
(b) since the date of the indenture, there has been a change in
the applicable federal income tax law,
in either case to the effect that, and based thereon such opinion of
counsel will confirm that, the holders will not recognize income, gain or
loss for federal income tax purposes as a result of such Legal Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Legal
Defeasance had not occurred;
(3) in the case of Covenant Defeasance, we must have delivered to the
trustee an opinion of counsel reasonably acceptable to the trustee
confirming that the holders will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred;
(4) no Default or Event of Default will have occurred and be
continuing on the date of such deposit or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit (other than a Default or
Event of Default resulting from the incurrence of Indebtedness, all or a
portion of which will be used to defease the notes concurrently with such
incurrence);
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the indenture) to which we or any of
our Subsidiaries is a party or by which the we or any of our Subsidiaries
is bound;
(6) we must have delivered to the trustee an officers' certificate
stating that the deposit was not made by us with the intent of preferring
the holders over any other of our creditors or with the intent of
defeating, hindering, delaying or defrauding any other of our creditors or
others;
(7) we must have delivered to the trustee an officers' certificate
and an opinion of counsel, each stating that all conditions precedent
provided for or relating to the Legal Defeasance or the Covenant Defeasance
have been complied with;
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(8) we must have delivered to the trustee an opinion of counsel to
the effect that (A) the trust funds will not be subject to the rights of
holders of our Indebtedness other than the notes and (B) assuming no
intervening bankruptcy of our company between the date of deposit and the
91st day following the date of deposit and that no holder is an insider of
our company, after the 91st day following the date of deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; and
(9) certain other customary conditions precedent must be satisfied.
Notwithstanding the foregoing, the opinion of counsel required by clause
(2) above with respect to a Legal Defeasance need not be delivered if all notes
not theretofore delivered to the trustee for cancellation (x) have become due
and payable or (y) will become due and payable on the maturity date within one
year under arrangements satisfactory to the trustee for the giving of notice of
redemption by the trustee in our name, and at our expense.
SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
notes, as expressly provided for in the indenture) as to all outstanding notes
when:
(1) either:
(a) all the notes theretofore authenticated and delivered (except
lost, stolen or destroyed notes which have been replaced or paid and
notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by us and thereafter repaid to us or
discharged from such trust) have been delivered to the trustee for
cancellation; or
(b) all notes not theretofore delivered to the trustee for
cancellation (i) have become due and payable, (ii) will become due and
payable at their stated maturity within one year or (iii) are to be
called for redemption within one year under arrangement satisfactory to
the trustee, and we have irrevocably deposited or caused to be deposited
with the trustee funds in an amount sufficient to pay and discharge the
entire Indebtedness on the notes not theretofore delivered to the
trustee for cancellation, for principal of, premium, if any, and
interest on the notes to the date of deposit together with irrevocable
instructions from us directing the trustee to apply such funds to the
payment thereof at maturity or redemption, as the case may be;
(2) we or any Guarantor have paid all other sums payable under the
indenture by us; and
(3) we have delivered to the trustee an officers' certificate and an
opinion of counsel stating that all conditions precedent under the
indenture relating to the satisfaction and discharge of the indenture have
been complied with.
MODIFICATION OF THE INDENTURE
From time to time, we, the Guarantors and the trustee, without the consent
of the holders, may amend the indenture for certain specified purposes,
including curing ambiguities, defects or inconsistencies, so long as such change
does not, in the opinion of the trustee, adversely affect the rights of any of
the holders in any material respect. In formulating its opinion on such matters,
the trustee will be entitled to rely on such evidence as it deems appropriate,
including, without limitation, solely on an opinion of counsel. Other
modifications and amendments of the indenture may be made with the consent of
the holders of a majority in principal amount at maturity of the then
outstanding notes issued under the indenture, except that, without the consent
of each holder affected thereby, no amendment may:
(1) reduce the principal amount at maturity of notes whose holders
must consent to an amendment, supplement or waiver of any provision of the
indenture or the notes;
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(2) reduce the rate of or change or have the effect of changing the
time for payment of interest, including defaulted interest, on any notes;
(3) reduce the principal of or change or have the effect of changing
the fixed maturity of any notes, or change the date on which any notes may
be subject to redemption or reduce the redemption price therefor;
(4) make any notes payable in money other than that stated in the
notes;
(5) make any change in provisions of the indenture protecting the
right of each holder to receive payment of principal of and interest on
such note on or after the due date thereof or to bring suit to enforce such
payment, or permitting holders of a majority in principal amount at
maturity of notes to waive Defaults or Events of Default;
(6) after our obligation to purchase notes arises thereunder, amend,
change or modify in any material respect our obligation to make and
consummate a Change of Control offer in the event of a Change of Control or
make and consummate an offer with respect to any Asset Sale that has been
consummated or, after such Change of Control has occurred or such Asset
Sale has been consummated, modify any of the provisions or definitions with
respect thereto;
(7) modify or change any provision of the indenture or the related
definitions affecting the ranking of the notes or any Guarantee in a manner
which adversely affects the holders;
(8) release any Guarantor that is a Significant Subsidiary from any
of its obligations under its Guarantee or the indenture otherwise than in
accordance with the terms of the indenture;
(9) release all or substantially all of the Collateral; or
(10) make any change in the preceding amendment and waiver
provisions.
GOVERNING LAW
The indenture provides that it, the notes and the Guarantees will be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law, of another jurisdiction would be
required thereby.
THE TRUSTEE
The indenture provides that, except during the continuance of an Event of
Default, the trustee will perform only such duties as are specifically set forth
in the indenture. During the existence of an Event of Default, the trustee will
exercise such rights and powers vested in it by the indenture, and use the same
degree of care and skill in its exercise as a prudent person would exercise or
use under the circumstances in the conduct of his or her own affairs.
The indenture and the provisions of the Trust Indenture Act contain certain
limitations on the rights of the trustee, should it become a creditor of ours,
to obtain payments of claims in certain cases or to realize on certain property
received in respect of any such claim as security or otherwise. Subject to the
Trust Indenture Act, the trustee will be permitted to engage in other
transactions; provided that if the trustee acquires any conflicting interest as
described in the Trust Indenture Act, it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
indenture. Reference is made to the indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
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"Accreted Value" means, as of any date (the "Specified Date"), with
respect to each $1,000 principal amount at maturity of notes:
(1) if the Specified Date is one of the following dates (each, a
"Semi-Annual Accrual Date"), the amount set forth opposite such date below:
SEMI-ANNUAL ACCRUAL DATE ACCRETED VALUE
------------------------ --------------
Issue Date.................................................. $ 800.00
March 1, 2003............................................... $ 809.64
September 1, 2003........................................... $ 822.64
March 1, 2004............................................... $ 835.86
September 1, 2004........................................... $ 849.28
March 1, 2005............................................... $ 862.93
September 1, 2005........................................... $ 876.79
March 1, 2006............................................... $ 890.87
September 1, 2006........................................... $ 905.18
March 1, 2007............................................... $ 919.72
September 1, 2007........................................... $ 934.49
March 1, 2008............................................... $ 949.51
September 1, 2008........................................... $ 964.76
March 1, 2009............................................... $ 980.25
September 1, 2009........................................... $ 996.00
October 15, 2009............................................ $1,000.00
(2) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the sum of (A) the Accreted Value for the Semi-Annual Accrual Date
immediately preceding the Specified Date and (B) an amount equal to the
product of (a) the difference of (x) the Accreted Value for the immediately
following Semi-Annual Accrual Date and (y) the Accreted Value for the
immediately preceding Semi-Annual Accrual Date and (b) a fraction, the
numerator of which is the number of days actually elapsed from the
immediately preceding Semi-Annual Accrual Date to the Specified Date and
the denominator of which is the number of days between the two Semi-Annual
Accrual Dates.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or
at the time it merges or consolidates with or into us or any of our Subsidiaries
or assumed in connection with the acquisition of assets from such Person and in
each case not incurred by such Person in connection with, or in anticipation or
contemplation of, such Person becoming a Restricted Subsidiary or such
acquisition, and which Indebtedness is without recourse to us or any of our
Restricted Subsidiaries or to any of their respective properties or assets other
than the Person or the assets to which such Indebtedness related prior to the
time such Person becomes a Restricted Subsidiary or the time of such
acquisition, merger or consolidation. Acquired Indebtedness shall be deemed to
be incurred on the date of the related acquisition of assets from any Person or
the date the acquired Person becomes a Restricted Subsidiary.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Acquisition" means (1) an Investment by us or any Restricted
Subsidiary in any other Person pursuant to which such Person will become a
Restricted Subsidiary, or will be merged with or into
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us or any Restricted Subsidiary, or (2) the acquisition by us or any Restricted
Subsidiary of the assets of any Person (other than a Restricted Subsidiary)
which constitute all or substantially all of the assets of such Person or
comprise any division or line of business of such Person or any other properties
or assets of such Person other than in the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by us or any of our
Restricted Subsidiaries (including any Sale/Leaseback Transaction) to any Person
other than our company or a Subsidiary Guarantor of: (1) any Capital Stock of
any Restricted Subsidiary; or (2) any other property or assets of our company or
any Restricted Subsidiary other than in the ordinary course of business;
provided, however, that the term "Asset Sale" will not include: (a) a
transaction or series of related transactions for which we or our Restricted
Subsidiaries receive aggregate consideration of less than $2,500,000; (b) the
sale, lease, conveyance, disposition or other transfer of all or substantially
all of the assets of our company as permitted under "-- Merger, Consolidation
and Sale of Assets"; (c) any Restricted Payment permitted by the "-- Limitation
on Restricted Payments" covenant or that constitutes a Permitted Investment; (d)
the sale of cash or Cash Equivalents, (e) the sale of used, worn out, damaged,
obsolete or surplus assets; (f) the lease, assignment or sublease of any real or
personal property in the ordinary course of business; and (g) any sale or
disposition deemed to occur in connection with creating, granting or exercising
remedies in respect of any Liens permitted pursuant to the indenture.
"Capital Expenditure Basket" means, in any four fiscal quarter period, (x)
$7.0 million plus (y) the amount, if any, of the Excess Cash Flow offer made and
not accepted by the holders during the previous four fiscal quarter period
ending immediately prior to such four fiscal quarter period plus (z) any Capital
Expenditure Basket amounts (not to exceed $1.0 million) not previously applied
by us as Capital Expenditures.
"Capital Expenditures" means for any period all direct or indirect (by way
of acquisition of securities of a Person or the expenditure of cash or the
transfer of Property or the incurrence of Indebtedness) expenditures in respect
of the purchase or other acquisition of fixed or capital assets determined in
conformity with accounting principles generally accepted in the United States,
or GAAP, excluding (i) normal replacement and maintenance programs properly
charged to current operations, and (ii) the purchase price of equipment to the
extent that the consideration therefor consists of used, worn out, damaged,
obsolete or surplus equipment being traded in at such time or the proceeds of a
concurrent sale of such used, worn out, damaged, obsolete or surplus equipment.
"Capital Stock" means, with respect to any Person:
(1) any and all shares, interests, participations, rights in or other
equivalents (however designated) of such Person's capital stock, other equity
interests, whether now outstanding or issued after the date of the indenture,
partnership interests (whether general or limited), any other interest or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person; and
(2) any warrants, options or other rights (other than debt securities
exchangeable for or convertible into any such Capital Stock referred to in the
previous bullet point) exchangeable for or convertible into such Capital Stock.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date will be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Cash Equivalents" means:
(1) securities issued or directly and fully guaranteed by the United States
government or any agency or instrumentality thereof (provided that the full
faith and credit of the United States is pledged in support thereof) having a
maturity of not more than one year from the date of acquisition thereof;
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(2) securities issued or directly and fully guaranteed by any state of the
United States of America or the District of Columbia, or any political
subdivision of any such state or the District of Columbia or any public
instrumentality thereof, having a maturity of not more than one year from the
date of acquisition thereof and, at the time of acquisition, having one of the
two highest ratings obtainable from either Standard & Poor's Ratings Group
("S&P") or Moody's Investors Service, Inc. ("Moody's");
(3) commercial paper maturing no more than one year after the date of
acquisition thereof and, at the time of acquisition, having a rating of at least
A-1 from S&P or at least P-1 from Moody's;
(4) certificates of deposit or bankers' acceptances having a maturity of
not more than one year from the date of acquisition thereof issued by any bank
organized under the laws of the United States of America or any state thereof or
the District of Columbia or any U.S. branch of a foreign bank having at the date
of acquisition thereof combined capital and surplus of not less than $250.0
million;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (1), (2) and (4) above
entered into with any bank meeting the qualifications specified in clause (4)
above; and
(6) investments in money market funds which invest substantially all their
assets in securities of the types described in clauses (1) through (5) above.
"Change of Control" means the occurrence of one or more of the following
events:
(1) prior to the earlier to occur of the first public offering of common
stock (an "IPO") of our company or Holdings, the Permitted Holders cease to be
the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, of a majority in the aggregate of the total voting
power of the voting stock of our company, whether as a result of issuance of
securities of the Parent or our company, any merger, consolidation, liquidation
or dissolution of Holdings or our company, or any direct or indirect transfer of
securities by Holdings or otherwise (for purposes of this clause (1) and clause
(2) below, the Permitted Holders will be deemed to beneficially own any voting
stock of a Person (the "specified person") held by any other Person (the "parent
entity") so long as the Permitted Holders beneficially own (as so defined),
directly or indirectly, in the aggregate a majority of the voting power of the
voting stock of the parent entity);
(2) following an IPO of our company or Holdings, any "person" (as such term
is used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more
Permitted Holders, is or becomes the beneficial owner (as defined in clause (1)
above, except that for purposes of this clause (2) such person will be deemed to
have "beneficial ownership" of all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 45% of the total voting power of
the voting stock of our company; provided, however, that the Permitted Holders
beneficially own (as defined in clause (1) above), directly or indirectly, in
the aggregate a lesser percentage of the total voting power of the voting stock
of our company than such other person and do not have the right or ability by
voting power, contract or otherwise to elect or designate for election a
majority of our board of directors (for the purposes of this clause (2), such
other person will be deemed to beneficially own any voting stock of a specified
person held by a parent entity, if such other person is the beneficial owner (as
defined in this clause (2)), directly or indirectly, of more than 35% of the
voting power of the voting stock of such parent entity and the Permitted Holders
beneficially own (as defined in clause (1) above), directly or indirectly, in
the aggregate a lesser percentage of the voting power of the voting stock of
such parent entity and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of the board
of directors of such parent entity);
(3) during any consecutive two-year period, individuals who at the
beginning of the period constituted our board of directors or the board of
directors of Holdings (together with any new directors whose election by our
board of directors or the board of directors of Holdings, as the case may be, or
whose nomination for election by the stockholders of such Person was approved by
a vote of a majority of the directors then in office who were either directors
at the beginning of the period or whose election or
115
nomination for election was previously so approved or approved by the Permitted
Holders) cease for any reason to constitute a majority of our board of directors
or the board of directors of Holdings then in office;
(4) the adoption of a plan relating to the liquidation or dissolution of
our company; or
(5) the merger or consolidation of Holdings or our company with or into
another Person or the merger of another Person with or into Holdings or our
company, or the sale of all or substantially all the assets of Holdings or our
company (determined on a consolidated basis) to another Person (other than, in
all such cases, a Person that is controlled by the Permitted Holders), other
than a transaction following which (A) in the case of a merger or consolidation
transaction, holders of securities that represented 100% of the voting stock of
Holdings or our company, as applicable, immediately prior to such transaction
(or other securities into which such securities are converted as part of such
merger or consolidation transaction) own directly or indirectly at least a
majority of the voting power of the voting stock of the surviving Person in such
merger or consolidation transaction immediately after such transaction and in
substantially the same proportion as before the transaction and (B) in the case
of a sale of assets transaction, each transferee becomes an obligor in respect
of the notes and a Subsidiary of the transferor of such assets.
"Collateral" means collateral as such term is defined in the security
agreement, all property mortgaged under the Mortgages and any other property,
whether now owned or hereafter acquired, upon which a Lien securing the
Obligations is granted or purported to be granted under any Collateral
Agreement.
"Collateral Agent" means the collateral agent appointed pursuant to the
Indenture. The trustee will be the initial Collateral Agent.
"Collateral Agreements" means, collectively, the security agreement and
each Mortgage and each other contract, agreement or instrument creating or
purporting to create a lien, security interest, charge or similar encumbrance on
Collateral in favor of the Collateral Agent for the benefit of the holders of
the notes, in each case, as the same may be in force from time to time.
"Common Stock" means, with respect to any Person, any and all shares,
interests or other participations in, and other equivalents (however designated
and whether voting or non-voting) of such Person's common stock, whether
outstanding on the Issue Date or issued after the Issue Date, and includes,
without limitation, all series and classes of such common stock.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the sum (without duplication) of:
(1) Consolidated Net Income; and
(2) to the extent Consolidated Net Income has been reduced thereby:
(a) all income taxes of such Person and our Restricted Subsidiaries
paid or accrued in accordance with GAAP for such period;
(b) Consolidated Interest Expense, amortization expense and
depreciation expense; and
(c) Consolidated Non-cash Charges less any non-cash items
increasing Consolidated Net Income for such period,
all as determined on a consolidated basis for such Person and our Restricted
Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction or event giving rise to the need to calculate the Consolidated
Fixed Charge Coverage Ratio for which financial statements are available (the
"Transaction Date") to Consolidated Fixed Charges of such Person for the Four
Quarter Period. In addition to and
116
without limitation of the foregoing, for purposes of this definition,
"Consolidated EBITDA" and "Consolidated Fixed Charges" will be calculated after
giving effect on a pro forma basis for the period of such calculation to:
(1) the incurrence or repayment of any Indebtedness of such Person or
any of our Restricted Subsidiaries (and the application of the proceeds
thereof) giving rise to the need to make such calculation and any
incurrence or repayment of other Indebtedness (and the application of the
proceeds thereof), other than the incurrence or repayment of Indebtedness
in the ordinary course of business for working capital purposes pursuant to
working capital facilities, occurring during the Four Quarter Period or at
any time subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such incurrence or repayment, as the
case may be (and the application of the proceeds thereof), occurred on the
first day of the Four Quarter Period; and
(2) any Asset Sale or other disposition or Asset Acquisition
(including, without limitation, any Asset Acquisition giving rise to the
need to make such calculation as a result of such Person or one of our
Restricted Subsidiaries (including any Person who becomes a Restricted
Subsidiary as a result of any such Asset Acquisition) incurring, assuming
or otherwise being liable for Acquired Indebtedness during the Four Quarter
Period or at any time subsequent to the last day of the Four Quarter Period
and on or prior to the Transaction Date), as if such Asset Sale or other
disposition or Asset Acquisition (including the incurrence, assumption or
liability for any such Indebtedness or Acquired Indebtedness and also
including any Consolidated EBITDA associated with such Asset Acquisition)
occurred on the first day of the Four Quarter Period; provided that the
Consolidated EBITDA of any Person acquired will be included only to the
extent that it would be includible pursuant to the definition of
"Consolidated Net Income." If such Person or any of our Restricted
Subsidiaries directly or indirectly guarantees Indebtedness of a third
Person, the preceding sentence will give effect to the incurrence of such
guaranteed Indebtedness as if such Person or any Restricted Subsidiary of
such Person had directly incurred or otherwise assumed such guaranteed
Indebtedness.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of this "Consolidated Fixed
Charge Coverage Ratio":
(1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Transaction Date (including Indebtedness actually incurred
on the Transaction Date) and which will continue to be so determined
thereafter will be deemed to have accrued at a fixed rate per annum equal
to the average rate of interest on such Indebtedness during the Four
Quarter Period ending on or prior to the Transaction Date; and
(2) notwithstanding clause (1) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered
by agreements relating to Interest Swap Obligations, will be deemed to
accrue at the rate per annum resulting after giving effect to the operation
of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of:
(1) Consolidated Interest Expense (excluding amortization or write-off
of deferred financing costs and debt issuance costs of such Person and its
consolidated Restricted Subsidiaries during such period and any premium or
penalty paid in connection with redeeming or retiring Indebtedness of such
Person and its consolidated Restricted Subsidiaries prior to the stated
maturity thereof pursuant to the agreements governing such Indebtedness);
plus
(2) the product of (x) the amount of all dividend payments on any
series of Preferred Stock of such Person (other than dividends paid in
Qualified Capital Stock) paid, accrued or scheduled to be paid or accrued
during such period times (y) a fraction, the numerator of which is one and
the denominator of which is one minus the then current effective
consolidated federal, state and local tax rate of such Person, expressed as
a decimal.
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"Consolidated Interest Expense" means, with respect to any Person for any
period, the aggregate of the interest expense of such Person and our Restricted
Subsidiaries for such period, on a consolidated basis, as determined in
accordance with GAAP, and including, without duplication, (a) all amortization
of original issue discount; (b) the interest component of Capitalized Lease
Obligations paid, accrued and/or scheduled to be paid or accrued by such Person
and our Restricted Subsidiaries during such period; and (c) net cash costs under
all Interest Swap Obligations (including amortization of fees), other than any
cash costs paid to unwind Interest Rate Obligations existing on and prior to the
Issue Date.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate net income (or loss) of such Person and our Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there will be excluded therefrom:
(1) after-tax gains and losses from Asset Sales or abandonments or
reserves relating thereto;
(2) after-tax items classified as extraordinary or nonrecurring gains
or losses;
(3) the net income (but not loss) of any Restricted Subsidiary of the
referent Person to the extent that the declaration of dividends or similar
distributions by that Restricted Subsidiary of that income is restricted by
a contract, operation of law or otherwise;
(4) the net income of any Person, other than a Restricted Subsidiary
of the referent Person, except to the extent of cash dividends or
distributions paid to the referent Person or to a Wholly-Owned Subsidiary
of the referent Person by such Person;
(5) income or loss attributable to discontinued operations (including,
without limitation, operations disposed of during such period whether or
not such operations were classified as discontinued);
(6) all gains and losses realized on or because of the purchase or
other acquisition by such Person or any of our Restricted Subsidiaries of
any securities of such Person or any of our Restricted Subsidiaries; and
(7) in the case of a successor to the referent Person by consolidation
or merger or as a transferee of the referent Person's assets, any earnings
of the successor corporation prior to such consolidation, merger or
transfer of assets.
"Consolidated Non-cash Charges" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and our Restricted Subsidiaries reducing Consolidated Net Income of
such Person and our Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges which
requires an accrual of or a reserve for cash charges for any future period).
"Credit Agreement" means the Credit Agreement dated as of the Issue Date,
among Holdings, us, the borrowers, the Lenders and the Lender Agent, together
with the related documents thereto (including, without limitation, any guarantee
agreements and security documents), in each case as such agreements may be
amended, supplemented or otherwise modified from time to time, including any
agreement (and related documents) adding Restricted Subsidiaries as additional
borrowers or guarantors thereunder, or extending the maturity of, refinancing,
replacing or otherwise restructuring or adding Restricted Subsidiaries as
additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement and
whether by the same or any other agent, lender or group of lenders, in each case
as certified by us to the Collateral Agent.
"Currency Agreement" means any spot or forward foreign exchange contract,
currency swap agreement or other similar agreement or arrangement designed to
protect us or any Restricted Subsidiary against or manage fluctuations in
currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
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"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable at the option of the holder thereof), or upon the
happening of any event (other than an event which would constitute a Change of
Control), matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the sole option of the holder
thereof (except in each case, upon the occurrence of a Change of Control) on or
prior to the first final maturity date of the notes for cash or is convertible
into or exchangeable for debt securities of our company or our Subsidiaries at
any time prior to such anniversary.
"Domestic Restricted Subsidiary" means any Restricted Subsidiary of our
company other than a Foreign Restricted Subsidiary.
"Excess Cash Flow" means, for any fiscal year, our Consolidated EBITDA for
such year, adjusted as follows: (i) minus the cash portion of our Consolidated
Interest Expense (net of interest income) for such year, (ii) minus all federal,
state and foreign income taxes accrued or paid (without duplication) by us and
our Subsidiaries during such year, (iii) minus all Capital Expenditures made
during such year by us and our Subsidiaries and (iv) minus any net increase in
the difference between (x) current assets, other than cash and Cash Equivalents,
and (y) current liabilities of our company and our Subsidiaries for such year.
"Exchange Offer" means the offer that may be made by us, pursuant to the
Registration Rights Agreement, to exchange for any and all the notes a like
aggregate principal amount at maturity of notes registered under the Securities
Act having substantially identical terms to the notes (except that the exchange
notes will not contain terms with respect to transfer restrictions or interest
rate increases as described herein).
"Fair Market Value" means, with respect to any asset or property, the price
which could be negotiated in an arm's length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair Market Value will
be determined by our board of directors acting reasonably and in good faith and
will be evidenced by a Board Resolution of our board of directors delivered to
the trustee.
"Foreign Restricted Subsidiary" means any Restricted Subsidiary of our
company which is organized under the laws of a jurisdiction other than the
United States of America, any state thereof or the District of Columbia.
"Indebtedness" means, with respect to any Person, without duplication:
(1) all Obligations of such Person for borrowed money;
(2) all Obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments;
(3) all Capitalized Lease Obligations of such Person;
(4) all Obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
Obligations under any title retention agreement (but excluding trade
accounts payable and other accrued liabilities arising in the ordinary
course of business that are not overdue by 90 days or more or are being
contested in good faith by appropriate proceedings promptly instituted and
diligently conducted and any deferred purchase price represented by earn
outs consistent with our past practice);
(5) all Obligations for the reimbursement of any obligor on any letter
of credit, banker's acceptance or similar credit transaction;
(6) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (1) through (5) above and clause (8)
below;
(7) all Obligations of any other Person of the type referred to in
clauses (1) through (6) which are secured by any lien on any property or
asset of such Person, the amount of such Obligation being
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deemed to be the lesser of the Fair Market Value of such property or asset
or the amount of the Obligation so secured;
(8) all Interest Swap Obligations and all Obligations under Currency
Agreements of such Person; and
(9) all Disqualified Capital Stock issued by such Person with the
amount of Indebtedness represented by such Disqualified Capital Stock being
equal to the greater of its voluntary or involuntary liquidation preference
and its maximum fixed repurchase price, but excluding accrued dividends, if
any.
For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price will be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
will be required to be determined pursuant to the indenture, and if such price
is based upon, or measured by, the Fair Market Value of such Disqualified
Capital Stock, such Fair Market Value will be determined reasonably and in good
faith by the board of directors of the issuer of such Disqualified Capital
Stock.
"Independent Financial Advisor" means an accounting, appraisal or
investment banking firm of national standing: (1) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in our company; and (2) which, in the judgment of
our board of directors, is otherwise independent and qualified to perform the
task for which it is to be engaged.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
will include, without limitation, interest rate swaps, caps, floors, collars and
similar agreements.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition for value by such Person of any Capital
Stock, bonds, notes, debentures or other securities or evidences of Indebtedness
issued by, any other Person. "Investment" will exclude direct or indirect
advances to customers or suppliers in the ordinary course of business that are,
in conformity with GAAP, recorded as accounts receivable, prepaid expenses or
deposits on our or any Restricted Subsidiary's balance sheet, endorsements for
collection or deposit arising in the ordinary course of business and extensions
of trade credit by our company and our Restricted Subsidiaries on commercially
reasonable terms in accordance with normal trade practices of our company or
such Restricted Subsidiary, as the case may be. For the purposes of the
"-- Limitation on Restricted Payments" covenant, the amount of any Investment
will be the original cost of such Investment plus the cost of all additional
Investments by our company or any of our Restricted Subsidiaries, without any
adjustments for increases or decreases in value, or write-ups, write-downs or
write-offs with respect to such Investment, reduced by the payment of dividends
or distributions in connection with such Investment or any other amounts
received in respect of such Investment; provided that no such payment of
dividends or distributions or receipt of any such other amounts will reduce the
amount of any Investment if such payment of dividends or distributions or
receipt of any such amounts would be included in Consolidated Net Income. If we
or any Restricted Subsidiary sell or otherwise dispose of any Common Stock of
any direct or indirect Restricted Subsidiary such that, after giving effect to
any such sale or disposition, we no longer own, directly or indirectly, 100% of
the outstanding Common Stock of such Restricted Subsidiary, we will be deemed to
have made an Investment on the date of any such sale or disposition equal to the
Fair Market Value of the Common Stock of such Restricted Subsidiary not sold or
disposed of.
"Issue Date" means the date of original issuance of the old notes.
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"Lender Agent" means General Electric Capital Corporation, as agent for the
Lenders, or any successor in that capacity.
"Lenders" means the lenders party from time to time to the Credit
Agreement.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Mortgages" means the mortgages, deeds of trust, deeds to secure debt or
other similar documents creating liens in favor of the Collateral Agent upon the
owned or leased real property constituting Collateral of our company or any of
our Domestic Restricted Subsidiaries from time to time.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
our company or any of our Restricted Subsidiaries from such Asset Sale net of:
(1) reasonable out-of-pocket expenses and fees relating to such Asset
Sale (including, without limitation, legal, accounting and investment
banking fees and sales commissions);
(2) all taxes and other costs and expenses actually paid or estimated
by us (in good faith) to be payable in cash in connection with such Asset
Sale;
(3) repayment of Indebtedness that is secured by the property or
assets that are the subject of such Asset Sale and is required to be repaid
in connection with such Asset Sale;
(4) amounts required to be paid to any Person (other than us or any
Restricted Subsidiary) owning a beneficial interest in or having a Lien on
the assets subject to the Asset Sale;
(5) all distributions and other payments required to be made to
non-majority interest holders in Subsidiaries as a result of such Asset
Sale; and
(6) appropriate amounts to be provided by our company or any
Restricted Subsidiary, as the case may be, as a reserve, in accordance with
GAAP, against any liabilities associated with such Asset Sale and retained
by our company or any Restricted Subsidiary, as the case may be, after such
Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated
with such Asset Sale.
provided, however, that if, after the payment of all taxes with respect to such
Asset Sale, the amount of estimated taxes, if any, pursuant to clause (2) above
exceeded the tax amount actually paid in cash in respect of such Asset Sale, the
aggregate amount of such excess will, at such time, constitute Net Cash
Proceeds.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Permitted Holders" means (i) Atlantic Equity Partners III, L.P., a fund
sponsored by First Atlantic Capital, Ltd., (ii) First Atlantic Capital, Ltd., or
(iii) any Affiliate thereof.
"Permitted Indebtedness" means, without duplication, each of the following:
(1) Indebtedness under the notes issued on the Issue Date (and
exchange notes issued in exchange therefor) in an aggregate outstanding
principal amount at maturity not to exceed $93.75 million or of any
Guarantor pursuant to a Guarantee thereof;
(2) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate principal amount at any one time outstanding not to exceed $10.0
million;
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(3) other Indebtedness of us and our Restricted Subsidiaries
outstanding on the Issue Date;
(4) Interest Swap Obligations of our company or any Restricted
Subsidiary covering Indebtedness of us or of any of our Restricted
Subsidiaries; provided, however, that such Interest Swap Obligations are
entered into for the purpose of fixing or hedging interest rates with
respect to any fixed or variable rate Indebtedness that is permitted by the
indenture to be outstanding to the extent that the notional amount of any
such Interest Swap Obligation does not exceed the principal amount of
Indebtedness to which such Interest Swap Obligation relates;
(5) Indebtedness under Currency Agreements; provided that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of us and our Restricted
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(6) Indebtedness of a Restricted Subsidiary to us or to another
Restricted Subsidiary for so long as such Indebtedness is held by us or a
Restricted Subsidiary, in each case subject to no Lien held by a Person
other than us or a Restricted Subsidiary; provided that (a) any such
Indebtedness is unsecured and subordinated, pursuant to a written
agreement, to such Restricted Subsidiary's obligations under the indenture
and its Guarantee, if applicable, (b) if as of any date any Person other
than us or a Restricted Subsidiary owns or holds any such Indebtedness or
holds a Lien in respect of such Indebtedness, such date will be deemed the
incurrence of Indebtedness not constituting Permitted Indebtedness by the
issuer of such Indebtedness and (c) the aggregate amount of Indebtedness of
Restricted Subsidiary that is not a Guarantor incurred pursuant to this
clause (6) may not exceed $3.0 million at any one time outstanding;
(7) our Indebtedness to a Restricted Subsidiary for so long as such
Indebtedness is held by a Restricted Subsidiary, in each case subject to no
Lien; provided that (a) any such Indebtedness is unsecured and
subordinated, pursuant to a written agreement, to our obligations under the
indenture and the notes and (b) if as of any date any Person other than a
Restricted Subsidiary owns or holds any such Indebtedness or any Person
holds a Lien in respect of such Indebtedness, such date will be deemed the
incurrence of Indebtedness not constituting Permitted Indebtedness;
(8) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within five business days of incurrence;
(9) Indebtedness of us or any of our Restricted Subsidiaries
represented by letters of credit for the account of us or such Restricted
Subsidiary, as the case may be, in order to provide security for workers'
compensation claims, payment obligations in connection with self-insurance
or similar requirements in the ordinary course of business;
(10) Indebtedness represented by Capitalized Lease Obligations and
Purchase Money Indebtedness of us and our Restricted Subsidiaries incurred
in the ordinary course of business (including Refinancings thereof that do
not result in an increase in the aggregate principal amount of Indebtedness
of such Person as of the date of such proposed Refinancing (plus the amount
of any premium required to be paid under the terms of the instrument
governing such Indebtedness and plus the amount of reasonable expenses
incurred by us in connection with such Refinancing)) not to exceed $3.0
million at any one time outstanding;
(11) Refinancing Indebtedness;
(12) Guarantees by our company or a Restricted Subsidiary of
Indebtedness incurred by our company or a Restricted Subsidiary so long as
the incurrence of such Indebtedness by our company or any such Restricted
Subsidiary is otherwise permitted by the terms of the indenture;
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(13) Indebtedness arising from agreements of our company or a
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, incurred in connection with the
disposition of any business, assets or Subsidiary, other than guarantees of
Indebtedness incurred by any person acquiring all or any portion of such
business, assets or Subsidiary for the purpose of financing such
acquisition; provided that the maximum aggregate liability in respect of
all such Indebtedness will at no time exceed the gross proceeds actually
received by our company and the Subsidiary in connection with such
disposition;
(14) Indebtedness of our company or any Restricted Subsidiary to the
extent the net proceeds thereof are promptly deposited to defease all
outstanding notes as described below under "-- Legal Defeasance and
Covenant Defeasance"; and
(15) additional Indebtedness of our company and our Restricted
Subsidiaries in an aggregate principal amount not to exceed $2.5 million at
any one time outstanding.
For purposes of determining compliance with the "-- Limitation on
Incurrence of Additional Indebtedness" covenant, in the event that an item of
Indebtedness meets the criteria of more than one of the categories of Permitted
Indebtedness described in clauses (1) through (15) above or is entitled to be
incurred pursuant to the Consolidated Fixed Charge Coverage Ratio provisions of
such covenant, we will, in our sole discretion, classify (or later reclassify)
such item of Indebtedness in any manner that complies with this covenant.
Accrual of interest, accretion or amortization of original issue discount, the
payment of interest on any Indebtedness in the form of additional Indebtedness
with the same terms, and the payment of dividends on Disqualified Capital Stock
in the form of additional shares of the same class of Disqualified Capital Stock
will not be deemed to be an incurrence of Indebtedness or an issuance of
Disqualified Capital Stock for purposes of the "-- Limitations on Incurrence of
Additional Indebtedness" covenant.
"Permitted Investments" means:
(1) Investments by our company or any Restricted Subsidiary in any
Person that is or will become immediately after such Investment a
Subsidiary Guarantor or that will merge or consolidate into our company or
a Subsidiary Guarantor;
(2) Investments in our company by any Restricted Subsidiary; provided
that any Indebtedness evidencing such Investment is unsecured (except to
the extent permitted by clause (14) of the definition of Permitted Liens),
and subordinated pursuant to a written agreement, to our obligations under
the notes and the indenture;
(3) Investments in cash and Cash Equivalents;
(4) loans and advances to employees, officers and directors of our
company and our Restricted Subsidiaries in the ordinary course of business
for bona fide business purposes not in excess of $1.0 million at any one
time outstanding;
(5) Currency Agreements and Interest Swap Obligations entered into in
the ordinary course of our or our Restricted Subsidiaries' businesses and
otherwise in compliance with the indenture;
(6) Investments in the notes;
(7) Investments in trade creditors or customers received pursuant to
any plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of such trade creditors or customers;
(8) Investments made by our company or our Restricted Subsidiaries as
a result of consideration received in connection with any Asset Sale made
in compliance with the "-- Limitation on Asset Sales" covenant;
(9) any Investment existing on the Issue Date;
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(10) Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and workers' compensation, performance and
other similar deposits made in the ordinary course of business;
(11) any Investment to the extent that the consideration therefor is
our Qualified Capital Stock;
(12) Investments in Foreign Restricted Subsidiaries in an amount not
to exceed $3.0 million at any one time outstanding; and
(13) additional Investments not to exceed $2.5 million at any one time
outstanding.
"Permitted Liens" means the following types of Liens:
(1) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which our company or our Restricted Subsidiaries will
have set aside on its books such reserves as may be required pursuant to
GAAP;
(2) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
or pursuant to customary reservations or retentions of title incurred in
the ordinary course of business for sums not yet delinquent or being
contested in good faith, if such reserve or other appropriate provision, if
any, as will be required by GAAP will have been made in respect thereof;
(3) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);
(4) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment will not have
been finally terminated or the period within which such proceedings may be
initiated will not have expired;
(5) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of our company
or any of our Restricted Subsidiaries;
(6) any interest or title of a lessor under any Capitalized Lease
Obligation permitted pursuant to clause (10) of the definition of
"Permitted Indebtedness;" provided that such Liens do not extend to any
property or assets which is not leased property subject to such Capitalized
Lease Obligation;
(7) Liens securing Capitalized Lease Obligations and Purchase Money
Indebtedness permitted pursuant to clause (10) or clause (15) of the
definition of "Permitted Indebtedness"; provided, however, that in the case
of Purchase Money Indebtedness (a) the Indebtedness will not exceed the
cost of such property or assets and will not be secured by any property or
assets of our company or any Restricted Subsidiary other than the property
and assets so acquired or constructed and (b) the Lien securing such
Indebtedness will be created within 180 days of such acquisition or
construction or, in the case of a refinancing of any Purchase Money
Indebtedness, within 180 days of such refinancing;
(8) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
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(9) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof;
(10) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual, or warranty requirements of our
company or any of our Restricted Subsidiaries, including rights of offset
and set-off;
(11) Liens securing Interest Swap Obligations, which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
indenture;
(12) Liens securing Indebtedness under Currency Agreements that are
permitted under the indenture;
(13) Liens securing Acquired Indebtedness incurred in accordance with
the "-- Limitation on Incurrence of Additional Indebtedness" covenant;
provided that:
(a) such Liens secured such Acquired Indebtedness at the time of
and prior to the incurrence of such Acquired Indebtedness by our company
or a Restricted Subsidiary and were not granted in connection with, or
in anticipation of, the incurrence of such Acquired Indebtedness by our
company or a Restricted Subsidiary; and
(b) such Liens do not extend to or cover any property or assets of
our company or of any of our Restricted Subsidiaries other than the
property or assets that secured the Acquired Indebtedness prior to the
time such Indebtedness became Acquired Indebtedness of our company or a
Restricted Subsidiary and are no more favorable to the lienholders than
those securing the Acquired Indebtedness prior to the incurrence of such
Acquired Indebtedness by our company or a Restricted Subsidiary;
(14) Liens existing as of the Issue Date and securing Indebtedness
permitted to be outstanding under clause (3) of the definition of
"Permitted Indebtedness" to the extent and in the manner such Liens are in
effect on the Issue Date;
(15) Liens securing the notes and the Guarantees;
(16) Liens securing Indebtedness under the Credit Agreement to the
extent such Indebtedness is permitted under clause (2) or clause (15) of
the definition of "Permitted Indebtedness";
(17) any interest of third parties in any escrow account established
pursuant to the Merger Agreement;
(18) Liens for the benefit of our company or a Subsidiary Guarantor on
assets of any Restricted Subsidiary;
(19) Liens securing Refinancing Indebtedness which is incurred to
Refinance any Indebtedness which has been secured by a Lien permitted under
this paragraph and which has been incurred in accordance with the
"-- Limitation on Incurrence of Additional Indebtedness" provisions of the
indenture; provided, however, that such Liens: (i) are no less favorable to
the holders and are not more favorable to the lienholders with respect to
such Liens than the Liens in respect of the Indebtedness being Refinanced;
and (ii) do not extend to or cover any property or assets of our company or
any of our Restricted Subsidiaries not securing the Indebtedness so
Refinanced; and
(20) Liens incurred in the ordinary course of business securing assets
of our company in addition to that described in clauses (1) through (19)
above, so long as the obligations secured by such Liens do not exceed $1.0
million at any one time outstanding and such obligations are not incurred
in connection with the borrowing of money or the obtaining of advances or
credit (other than trade credit in the ordinary course of business).
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
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"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Purchase Money Indebtedness" means Indebtedness of our company and our
Restricted Subsidiaries incurred for the purpose of financing all or any part of
the purchase price, or the cost of installation, construction or improvement, of
property or equipment (including Indebtedness incurred within 180 days following
such purchase, construction or improvement), including Indebtedness of a Person
existing at the time such Person becomes a Subsidiary or assumed by us or a
Subsidiary in connection with the acquisition of assets from such Person;
provided, however, that any Lien on such Indebtedness shall not extend to any
property other than the property so acquired or constructed.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
will have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by our company or any
Restricted Subsidiary of Indebtedness incurred in accordance with the
"-- Limitation on Incurrence of Additional Indebtedness" covenant (other than
pursuant to clauses (1), (2), and (11) of the definition of Permitted
Indebtedness), in each case that does not:
(1) result in an increase in the aggregate principal amount of
Indebtedness of such Person as of the date of such proposed Refinancing
(plus the amount of any premium required to be paid under the terms of the
instrument governing such Indebtedness and plus the amount of reasonable
expenses incurred by our company in connection with such Refinancing); or
(2) create Indebtedness with: (a) a Weighted Average Life to Maturity
that is less than the Weighted Average Life to Maturity of the Indebtedness
being Refinanced; or (b) a final maturity earlier than the final maturity
of the Indebtedness being Refinanced; provided that (x) if such
Indebtedness being Refinanced is Indebtedness of our company, then such
Refinancing Indebtedness will be Indebtedness solely of our company or a
Guarantor and (y) if such Indebtedness being Refinanced is subordinate or
junior to the notes, then such Refinancing Indebtedness will be subordinate
to the notes at least to the same extent and in the same manner as the
Indebtedness being Refinanced;
(3) change any of the respective obligors on such Refinancing
Indebtedness;
(4) affect the security, if any, for such Refinancing Indebtedness
(except to the extent that less security is granted to holders of such
Refinancing Indebtedness); or
(5) afford the holders of such Refinancing Indebtedness covenants,
defaults, rights or remedies more burdensome to the obligors than those
contained in the Indebtedness being refinanced.
"Registration Rights Agreement" means the Registration Rights Agreement,
dated as of the Issue Date, between our company, the Guarantors and the Initial
Purchaser, as the same may be amended or modified from time to time in
accordance with the terms thereof.
"Replacement Assets" means, with respect to any Asset Sale, properties and
assets (including Capital Stock of a Person) that replace the properties and
assets that were the subject of such Asset Sale or properties and assets
(including Capital Stock of a Person) that will be used in the business of our
company and the Restricted Subsidiaries or in businesses reasonably related or
ancillary thereto.
"Restricted Subsidiary" means, with respect to any Person, any Subsidiary
of such Person which at the time of determination is not an Unrestricted
Subsidiary.
"Sale/Leaseback Transaction" means any direct or indirect arrangement with
any Person or to which any such Person is a party, providing for the leasing to
our company or a Restricted Subsidiary of any
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property, whether owned by our company or any Restricted Subsidiary at the Issue
Date or later acquired, which has been or is to be sold or transferred by our
company or such Restricted Subsidiary to such Person or to any other Person from
whom funds have been or are to be advanced by such Person on the security of
such Property.
"Significant Subsidiary" with respect to any Person, means any Restricted
Subsidiary of such Person that satisfies the criteria for a "significant
subsidiary" set forth in Rule 1-02(w) of Regulation S-X under the Exchange Act.
"Subsidiary" means, with respect to any Person:
(1) any corporation of which the outstanding Capital Stock having at
least a majority of the votes entitled to be cast in the election of
directors under ordinary circumstances will at the time be owned, directly
or indirectly, by such Person; or
(2) any other Person of which at least a majority of the voting
interest under ordinary circumstances is at the time, directly or
indirectly, owned by such Person.
"Subsidiary Guarantor" means (1) all existing Domestic Restricted
Subsidiaries and (2) each of our Restricted Subsidiaries that in the future
executes a supplemental indenture in which such Restricted Subsidiary agrees to
be bound by the terms of the indenture as a Subsidiary Guarantor; provided that
any Person constituting a Subsidiary Guarantor as described above will cease to
constitute a Subsidiary Guarantor when its respective Guarantee is released in
accordance with the terms of the indenture.
"Unrestricted Subsidiary" of any Person means:
(1) any Subsidiary of such Person that at the time of determination
will be or continue to be designated an Unrestricted Subsidiary by our
board of directors of such Person in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
Our board of directors may designate any Subsidiary (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless
such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any
property of, our company or any other Subsidiary that is not a Subsidiary of the
Subsidiary to be so designated, provided that:
(1) we certify to the trustee that such designation complies with the
"-- Limitation on Restricted Payments" covenant; and
(2) each Subsidiary to be so designated and each of its Subsidiaries
has not at the time of designation, and does not thereafter, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable
with respect to any Indebtedness pursuant to which the lender has recourse
to any of the assets of our company or any of our Restricted Subsidiaries.
Our board of directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary only if:
(1) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such designation would, after giving
effect to the designation of the Subsidiary as an Unrestricted Subsidiary,
have been permitted to be incurred for all purposes of the indenture; and
(2) immediately before and immediately after giving effect to such
designation, no Default or Event of Default will have occurred and be
continuing.
Any such designation by the board of directors will be evidenced to the
trustee by promptly filing with the trustee a copy of the Board Resolution
giving effect to such designation and an officers' certificate certifying that
such designation complied with the foregoing provisions.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such
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Indebtedness into (b) the sum of the total of the products obtained by
multiplying (i) the amount of each then remaining installment, sinking fund,
serial maturity or other required payment of principal, including payment at
final maturity, in respect thereof, by (ii) the number of years (calculated to
the nearest one-twelfth) which will elapse between such date and the making of
such payment.
"Wholly-Owned Subsidiary" means, with respect to any Person, any Restricted
Subsidiary of such Person of which all the outstanding Capital Stock (other than
in the case of a foreign Subsidiary, directors' qualifying shares or an
immaterial amount of shares required to be owned by other Persons pursuant to
applicable law) are owned by such Person or any Wholly-Owned Subsidiary of such
Person.
"Working Capital Collateral" means that portion of the Collateral
consisting of cash, deposit accounts, receivables and inventory, together with
all documents of title, letters of credit, books, records and files (whether in
physical or electronic form) relating to the foregoing.
EXCHANGE OFFER; REGISTRATION RIGHTS
As part of the sale of the old notes to the Initial Purchaser pursuant to
the Purchase Agreement, we, the Guarantors and the Initial Purchaser entered
into the Registration Rights Agreement dated October 15, 2002 pursuant to which
each of us and the guarantors agreed that we will, at our expense, for the
benefit of the holders:
- within 120 days after the Issue Date (the "Filing Date"), file a
registration statement on an appropriate registration form (the "Exchange
Offer Registration Statement") with respect to a registered offer (the
"Exchange Offer") to exchange the notes for our notes (the "exchange
notes"), guaranteed on a senior secured basis by the guarantors, which
exchange notes will have terms substantially identical in all material
respects to the notes (except that the exchange notes will not contain
terms with respect to transfer restrictions or interest rate increases);
and
- use our and the Guarantors' reasonable best efforts to cause the Exchange
Offer Registration Statement to be declared effective under the
Securities Act within 180 days after the Issue Date.
Upon the Exchange Offer Registration Statement being declared effective, we
will offer the exchange notes (and the related guarantees) in exchange for
surrender of the notes (and the related Guarantees). We will keep the Exchange
Offer open for not less than 30 days (or longer if required by applicable law)
after the date notice of the Exchange Offer is mailed to the holders. For each
of the notes surrendered to us pursuant to the Exchange Offer, the holder who
surrendered such note will receive an Exchange Note having a principal amount
equal to that of the surrendered note. Interest on each Exchange Note will
accrue (A) from the later of:
- the last interest payment date on which interest was paid on the note
surrendered in exchange therefor, or
- if the note is surrendered for exchange on a date in a period which
includes the record date for an interest payment date to occur on or
after the date of such exchange and as to which interest will be paid,
such interest payment date;
or (B) if no interest has been paid on such note, from the Issue Date.
Under existing interpretations of the SEC contained in several no-action
letters to third parties, the exchange notes (and the related guarantees) will
be freely transferable by holders thereof (other than affiliates of ours) after
the Exchange Offer without further registration under the Securities Act;
provided, however, that each holder that wishes to exchange its notes for
exchange notes will be required to represent:
- that any exchange notes to be received by it will be acquired in the
ordinary course of its business;
- that at the time of the commencement of the Exchange Offer it has no
arrangement or understanding with any person to participate in the
distribution (within the meaning of the Securities Act) of the exchange
notes in violation of the Securities Act;
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- that it is not an "affiliate" (as defined in Rule 405 promulgated under
the Securities Act) of ours;
- if such holder is not a broker-dealer, that it is not engaged in, and
does not intend to engage in, the distribution of exchange notes; and
- if such holder is a broker-dealer (a "Participating Broker-Dealer") that
will receive exchange notes for its own account in exchange for notes
that were acquired as a result of market-making or other trading
activities, that it will deliver a prospectus in connection with any
resale of such exchange notes.
We have agreed to make available, for a period of up to 180 days after
consummation of the Exchange Offer, a prospectus meeting the requirements of the
Securities Act for use by Participating Broker-Dealers and other persons, if
any, with similar prospectus delivery requirements for use in connection with
any resale of exchange notes.
If:
- because of any change in law or in currently prevailing interpretations
of the Staff of the SEC, we are not permitted to effect an Exchange
Offer;
- the Exchange Offer is not consummated within 30 business days from the
date the Exchange Offer Registration Statement was declared effective;
- in certain circumstances, certain holders of unregistered exchange notes
so request; or
- in the case of any holder that participates in the Exchange Offer, such
holder does not receive exchange notes on the date of the exchange that
may be sold without restriction under state and federal securities laws
(other than due solely to the status of such holder as an affiliate of
ours or within the meaning of the Securities Act),
then in each case, we will (x) promptly deliver to the holders and the trustee
written notice thereof and (y) at our sole expense, (a) as promptly as
practicable, file a shelf registration statement covering resales of the notes
(the "Shelf Registration Statement"), and (b) use our reasonable best efforts to
keep effective the Shelf Registration Statement until the earlier of two years
after the Issue Date or such time as all of the applicable notes have been sold
thereunder.
We will, in the event that a Shelf Registration Statement is filed, provide
to each holder copies of the prospectus that is a part of the Shelf Registration
Statement, notify each such holder when the Shelf Registration Statement for the
notes has become effective and take certain other actions as are required to
permit unrestricted resales of the notes. A holder that sells notes pursuant to
the Shelf Registration Statement will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
Securities Act in connection with such sales and will be bound by the provisions
of the Registration Rights Agreement that are applicable to such a holder
(including certain indemnification rights and obligations).
If we fail to meet the targets listed above, then additional interest will
become payable in respect of the notes if:
(1) neither the Exchange Offer Registration Statement nor the Shelf
Registration Statement is filed with the SEC on or prior to 90 days after
the Issue Date;
(2) notwithstanding that we have consummated or will consummate an
Exchange Offer, we are required to file a Shelf Registration Statement and
such Shelf Registration Statement is not filed on or prior to the date
required by the Registration Rights Agreement;
(3) neither the Exchange Offer Registration Statement nor a Shelf
Registration Statement is declared effective by the SEC on or prior to 150
days after the Issue Date;
(4) notwithstanding that we have consummated or will consummate an
Exchange Offer, we are required to file a Shelf Registration Statement and
such Shelf Registration Statement is not declared
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effective by the SEC on or prior to the 90th day following the date such
Shelf Registration Statement was filed;
(5) we have not exchanged exchange notes for all notes validly
tendered in accordance with the terms of the Exchange Offer on or prior to
the date that is 30 business days from the date the Exchange Offer
Registration Statement was required to be declared effective; or
(6) if applicable, the Shelf Registration Statement has been declared
effective and such Shelf Registration Statement ceases to be effective at
any time prior to the second anniversary of the Issue Date (other than
after such time as all notes have been disposed of thereunder)
then, in each case, additional interest will accrue on the principal amount at
maturity of the notes at a rate of 0.25% per annum for the first 90 days
following such event and at a rate of 0.50% per annum thereafter, and shall
accrue to and including the date on which such default is cured; provided,
however, that (a) upon the filing of the Exchange Offer Registration Statement
or a Shelf Registration Statement (in the case of clauses (1) or (2) above), (b)
upon the effectiveness of the Exchange Offer Registration Statement or a Shelf
Registration Statement (in the case of clauses (3) or (4) above), or (c) upon
the exchange of exchange notes for all notes tendered (in the case of clause (5)
above), or upon the effectiveness of the Shelf Registration Statement which had
ceased to remain effective (in the case of clause (6) above), additional
interest on the notes as a result of such clause will cease to accrue.
Any amounts of additional interest will be payable in cash on the same
original interest payment dates as ordinary interest on the notes.
BOOK-ENTRY; DELIVERY AND FORM
THE GLOBAL NOTES
The new notes will be initially issued in the form of one or more global
securities registered in the name of The Depository Trust Company, which we
refer to as "DTC," or its nominee. We expect that pursuant to procedures
established by DTC (i) upon the issuance of the Global Notes, DTC or its
custodian will credit, on its internal system, the principal amount at maturity
of the individual beneficial interests represented by such Global Notes to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Notes will be shown on, and the
transfer of such ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants (with respect to interests of persons other than participants).
Such accounts initially will be designated by or on behalf of the initial
purchasers and ownership of beneficial interests in the Global Notes will be
limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants. Holders may hold their interests in the
Global Notes directly through DTC if they are participants in such system, or
indirectly through organizations that are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the notes represented by such Global Notes for all purposes
under the indenture. No beneficial owner of an interest in the Global Notes will
be able to transfer that interest except in accordance with DTC's procedures, in
addition to those provided for under the indenture with respect to the notes.
Payments of the principal of, premium (if any), interest (including
additional interest) on, the Global Notes will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of us, the trustee or any
paying agent will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global Notes or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interest.
We expect that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, interest (including additional interest) on the
Global Notes, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
at
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maturity of the Global Notes as shown on the records of DTC or its nominee. We
also expect that payments by participants to owners of beneficial interests in
the Global Notes held through such participants will be governed by standing
instructions and customary practice, as is now the case with securities held for
the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell notes to persons in
states which require physical delivery of the notes, or to pledge such
securities, such holder must transfer its interest in a Global Note, in
accordance with the normal procedures of DTC and with the procedures set forth
in the indenture.
DTC has advised us that it will take any action permitted to be taken by a
holder of notes (including the presentation of notes for exchange as described
below) only at the direction of one or more participants to whose account the
DTC interests in the Global Notes are credited and only in respect of such
portion of the aggregate principal amount at maturity of notes as to which such
participant or participants has or have given such direction. However, if there
is an event of default under the indenture, DTC will exchange the Global Notes
for Certificated Securities, which it will distribute to its participants and
which will be legended as set forth under the heading "Notice to Investors."
DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the Securities Exchange Act of 1934. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the trustee nor we will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED SECURITIES
Certificated Securities will be issued in exchange for beneficial interests
in the Global Notes (i) if requested by a holder of such interests or (ii) if
DTC is at any time unwilling or unable to continue as a depositary for the
Global Notes and a successor depositary is not appointed by us within 90 days.
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MATERIAL UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES
The following is a summary of the material U.S. federal income tax
consequences of the exchange of old notes for new notes, as well as the
ownership and disposition of new notes by persons that acquired old notes
pursuant to the initial offering. Unless otherwise stated under the heading
"Non-U.S. holders," below, this summary deals only with notes held as capital
assets by U.S. holders, as defined below. It does not deal with special classes
of holders such as banks, thrifts, real estate investment trusts, regulated
investment companies, insurance companies, dealers in securities or currency or
tax-exempt investors. This summary also does not address the tax consequences to
U.S. holders that have a functional currency other than the U.S. Dollar,
partnerships or other entities treated as partnerships that hold notes, persons
that hold notes as part of a straddle, hedging, constructive sale or conversion
transaction, or shareholders, partners or beneficiaries of a holder of notes. It
also does not include any description of any tax consequences under the tax laws
of any state or local government or of any foreign government that may be
applicable to the notes. This summary is based on the Internal Revenue Code of
1986, as amended, which we refer to in this prospectus as the Code, Treasury
regulations under the Code, which we refer to in this prospectus as the Treasury
Regulations, and administrative and judicial interpretations of the Code, as of
the date of this prospectus, all of which are subject to change, possibly on a
retroactive basis.
As used in this section, the term "U.S. holder" means any beneficial owner
of notes that is, for United States federal income tax purposes,
- a citizen or resident of the United States,
- a corporation (or other entity taxable as a corporation) created or
organized in or under the laws of the United States, any state thereof or
the District of Columbia,
- an estate the income of which is subject to United States federal income
taxation regardless of its source, or
- a trust if (1) a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more
United States persons have the authority to control all substantial
decisions of the trust or (2) the trust has in effect a valid election to
be treated as a domestic trust for United States federal income tax
purposes.
As used in this discussion, the term Non-U.S. holder means a beneficial
owner of notes that is not a U.S. holder and is not an entity organized in or
under the laws of the United States, any state thereof or the District of
Columbia.
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR TO DETERMINE THE EFFECT OF FEDERAL,
STATE, LOCAL AND FOREIGN INCOME TAX LAWS WITH RESPECT TO THE EXCHANGE OF OLD
NOTES FOR NEW NOTES AND THE CONTINUING INVESTMENT IN THE NEW NOTES.
TAX CONSEQUENCES OF THE EXCHANGE OFFER
Under current law, the exchange of old notes for new notes pursuant to this
exchange offer will not be treated as an "exchange" for federal income tax
purposes. Accordingly,
- holders will not recognize taxable gain or loss upon the receipt of new
notes in exchange for old notes in the exchange offer,
- the holding period for a new note received in the exchange offer will
include the holding period of the old note surrendered in exchange
therefor, and
- the adjusted tax basis of a new note immediately after the exchange will
be the same as the adjusted tax basis of the old note surrendered in
exchange therefor.
We are obligated to pay additional interest on the notes under certain
circumstances described under "Description of the New Notes -- Exchange Offer;
Registration Rights." Although the matter is not free
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from doubt, such additional interest should be taxable as interest under the
rules described below in the event that additional interest is paid. It is
possible, however, that the Internal Revenue Service, or the IRS, may take a
different position with respect to the treatment of such additional interest.
Holders should consult their own tax advisors about payments of such additional
interest.
U.S. HOLDERS
Interest Income. Stated interest on a new note will be includible in a
U.S. holder's gross income as ordinary interest income at the time it is accrued
or received in accordance with the U.S. holder's method of accounting for United
States federal income tax purposes.
Original Issue Discount. The old notes were issued with original issue
discount. Thus, the new notes will be treated as having been issued with
original issue discount in an amount equal to the difference between the
principal amount of the new notes and the original offering price of the old
notes. A U.S. holder of a new note must include original issue discount in
income as ordinary interest income for United States federal income tax purposes
as it accrues under a constant yield method in advance of receipt of the cash
payments attributable to such income, regardless of such U.S. holder's regular
method of tax accounting. In general, the amount of original issue discount
included in income by the holder of a new note will be the sum of the daily
portions of original issue discount with respect to such new note for each day
during the taxable year (or portion of the taxable year) on which such U.S.
holder held such new note. The "daily portion" of original issue discount on a
new note is determined by allocating to each day in any accrual period a ratable
portion of the original issue discount allocable to that accrual period. An
"accrual period" may be of any length and the accrual periods may vary in length
over the term of the new note, provided that each accrual period is no longer
than one year and each scheduled payment of principal or interest occurs either
on the final day of an accrual period or on the first day of an accrual period.
The amount of original issue discount allocable to each accrual period is
generally equal to the difference between:
- the product of the new note's adjusted issue price at the beginning of
such accrual period and its yield to maturity (determined on the basis of
compounding at the close of each accrual period and appropriately
adjusted to take into account the length of the particular accrual
period), and
- the amount of any qualified stated interest payments allocable to such
accrual period.
The "adjusted issue price" of a new note at the beginning of any accrual period
is the sum of the issue price of the new note plus the amount of original issue
discount allocable to all prior accrual periods minus the amount of any prior
payments on the note that were not stated interest payments. Under these rules,
U.S. holders generally will have to include in income increasingly greater
amounts of original issue discount in successive accrual periods.
As described in more detail under "Description of the New Notes," we are
obligated to redeem 20% of the principal amount at maturity of each new note,
plus accrued and unpaid interest to the redemption date, on October 15, 2007 and
an additional 10% of the original principal amount at maturity of each new note
on October 15, 2008. This redemption of the principal amount at maturity will be
treated for federal income tax purposes as a payment of original issue discount
to the extent of any accrued but unpaid original issue discount and thereafter
as a repayment of principal. While these payments do not affect the total amount
of original issue discount on the new notes, they will be taken into account in
the determination of the yield to maturity calculation used in determining the
amount of original issue discount allocable to any accrual period. We intend to
take the position that the yield to maturity on the notes will initially be
determined assuming that these redemption payments will be made in the full
amount of 20% and 10% of the original principal amount at maturity of the new
notes, plus accrued and unpaid interest to the redemption date, on October 15,
2007 and October 15, 2008, respectively, subject to readjustment during the
period that the new notes are outstanding to the extent that we may reduce our
obligation to make these redemptions on account of redemptions of the new notes
pursuant to an Excess Cash Flow offer, as described under "Description of the
New Notes -- Excess Cash Flow Offer" and "Description of the New
Notes -- Redemption -- Mandatory Redemption."
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We also have various optional redemption rights, some of which are subject
to contingencies and some of which are unrestricted. You also have the option to
require us to purchase all or a portion of your new notes upon the occurrence of
a Change of Control. We do not believe that these redemption options will affect
the determination of the yield or deemed maturity date of the notes or otherwise
affect the amount or timing or accrual of original issue discount on the new
notes. If this belief or our belief regarding the effect of mandatory redemption
payments described in the preceding paragraph is incorrect, the amount and
timing of original issue discount required to be taken into account by you may
be affected. You should consult your tax advisor regarding the possible effects,
if any, of these redemption rights on the calculation of original issue discount
on your new notes.
Sale, Exchange or Retirement of New Notes. Upon sale, exchange (other than
an exchange of old notes for new notes pursuant to this exchange offer), or
retirement of a new note, a U.S. holder generally will recognize gain or loss
equal to the difference between the U.S. holder's adjusted tax basis in the new
note and the amount realized on the sale, exchange, or retirement (less any
accrued but previously unpaid interest, which would be treated as a payment of
previously accrued interest on the new notes). A U.S. holder's adjusted tax
basis in a new note will generally equal the issue price of such new note,
increased by the amount of original issue discount previously included in income
by such holder with respect to such new note and reduced by any principal
payments received by the U.S. holder. Gain or loss so recognized will be capital
gain or loss and will be long-term capital gain or loss if, at the time of the
sale, exchange, or retirement, the new note was held for more than one year.
Under current law, net capital gains of non-corporate taxpayers, under certain
circumstances, are taxed at lower rates than items of ordinary income. The
deduction of capital losses is subject to certain limitations.
NON-U.S. HOLDERS
Interest Income. Generally, interest income (including original issue
discount) of a Non-U.S. holder that is not effectively connected with a United
States trade or business will be subject to a withholding tax at a 30% rate or,
if applicable, a lower tax rate specified by a treaty. However, interest income
(including original issue discount) earned on the new notes by a Non-U.S. holder
may qualify for the "portfolio interest" exemption and therefore not be subject
to United States federal income tax or withholding tax, if such interest income
is not effectively connected with a United States trade or business of the
Non-U.S. holder and if:
- the Non-U.S. holder does not actually or constructively own 10% or more
of the total combined voting power of all classes of our stock entitled
to vote,
- the Non-U.S. holder is not a controlled foreign corporation that is
related to us through stock ownership,
- the Non-U.S. holder certifies to us or our agent, under penalties of
perjury, that it is not a U.S. holder and provides its name and address
or otherwise satisfies applicable identification requirements, and
- neither we nor our paying agent knows or has reason to know that the
conditions of the exemption are, in fact, not satisfied.
In the case of new notes held by partnerships, the certification described
above must be provided by the partners, rather than by the partnerships and the
partnership must provide certain information, including a U.S. taxpayer
identification number. A look through rule applies in the case of tiered
partnerships.
Unless an applicable treaty otherwise provides, a Non-U.S. holder generally
will be taxed in the same manner as a U.S. holder with respect to interest
(including original issue discount) if the interest income is effectively
connected with a United States trade or business of the Non-U.S. holder and, in
the case of a Non-U.S. holder that is eligible for benefits of an income tax
treaty with the United States, is attributable to a permanent establishment
maintained by the Non-U.S. holder in the United States. Such effectively
connected interest received or accrued by a corporate Non-U.S. holder may also,
under certain circumstances, be subject
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to an additional "branch profits" tax at a 30% rate or, if applicable, a lower
tax rate specified by a treaty. Even though such effectively connected interest
is subject to U.S. income tax and may be subject to the branch profits tax, it
is not subject to U.S. withholding tax if the holder delivers a properly
executed IRS Form W-8ECI (or a suitable substitute form) to us or our paying
agent and neither we nor our paying agent knows or has reason to know that the
information on the form is incorrect.
Sale, Exchange, or Retirement of New Notes. A Non-U.S. holder generally
will not be subject to United States federal income tax or withholding tax on
any gain realized on the sale, exchange, or retirement of new notes unless
- the gain is effectively connected with a United States trade or business
of the Non-U.S. holder, or
- in the case of a Non-U.S. holder who is an individual, such holder is
present in the United States for a period or periods aggregating 183 days
or more during the taxable year of the disposition, and either such
holder has a "tax home" in the United States or the disposition is
attributable to an office or other fixed place of business maintained by
such holder in the United States.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
In general, information reporting on IRS Form 1099 will apply to payments
to a U.S. Holder of principal, premium, if any, and interest on a new note and
the proceeds of the sale of a new note. Backup withholding tax may apply to such
payments to a non-corporate U.S. holder if that U.S. holder:
- fails to furnish or certify its correct taxpayer identification number to
us or our paying agent in the manner required,
- is notified by the IRS that it has failed to report payments of interest
or dividends properly,
- or under certain circumstances, fails to certify that it has not been
notified by the IRS that it is subject to backup withholding for failure
to report interest or dividend payments.
Information reporting on IRS Form 1099 and backup withholding tax will not
apply to payments of interest on new notes to a Non-U.S. holder if the
certification or identification requirements described in "-- Non-U.S.
holders -- Interest Income" are satisfied by the holder, unless the payor knows
or has reason to know that the holder is not entitled to an exemption from
information reporting or backup withholding tax. However, we may report payments
of interest on the new notes to a Non-U.S. holder on IRS Form 1042-S regardless
of whether a Non-U.S. holder provides the certification or identification
requirements described above.
Information reporting requirements and backup withholding tax will not
apply to any payment of the proceeds of the sale of new notes effected outside
the United States by a foreign office of a "broker" (as defined in applicable
Treasury Regulations), unless the broker is a United States person or has
certain connections to the United States. Payment of the proceeds of any such
sale effected outside the United States by a foreign office of a broker
described in the preceding sentence will not be subject to backup withholding
tax, but will be subject to information reporting requirements, unless the
broker has documentary evidence in its records that the beneficial owner is a
Non-U.S. holder and certain other conditions are met, or the beneficial owner
otherwise establishes an exemption. Payment of the proceeds of any such sale to
or through the United States office of a broker is subject to information
reporting and backup withholding requirements unless the beneficial owner of the
new notes provides the certification described in "Non-U.S. holders -- Interest
Income" or otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be allowed as
a credit against that holder's United States federal income tax liability and
may entitle the holder to a refund, provided that the required information is
furnished to the I.R.S. The rate for backup withholding tax is 30% for
2002-2003, 29% for 2004-2005, and 28% for 2006 and later years, subject to a
scheduled increase after 2010.
You are urged to consult with your own tax advisor as the U.S. federal
income tax consequences of the exchange of old notes for new notes and the
continuing investment in the new notes as well as the consequences under state,
local and foreign income tax law. Non-U.S. holders are urged to consult their
own tax advisors as to the effect of income tax treaties and reporting
requirements with regard to an investment in the new notes.
135
EFFECT OF HYDO PAYMENTS ON OUR ABILITY TO DEDUCT INTEREST ON THE NOTES
On each payment date beginning March 1, 2008, in addition to accrued
interest due on that date, we will make a payment, which we call a HYDO payment,
on each new note in cash in an amount equal to the excess, if any, of:
- the total amount of interest and original issue discount accrued on the
new note through that date, over
- the sum of:
- all amounts of interest and original issue discount paid in cash
with respect to such new note through and including that date;
- all HYDO payments previously made by us on the note; and
- the annual "yield to maturity" applicable for purposes of the
accrual of original issue discount multiplied by the original
principal amount of the note.
As a result of making these HYDO payments, we will not be subject to
special rules that would otherwise limit the amount of interest expense we could
deduct on the new notes for U.S. federal income tax purposes. If the notes did
not provide for HYDO payments, the special rules would apply. If these rules
were to apply, we would not be allowed a deduction for the "disqualified
portion" of the original issue discount on the new notes and would not be
allowed a deduction with respect to the remainder of such original issue
discount until it was paid.
The "disqualified portion" of the original issue discount on a new note
would be calculated as the lesser of:
- the amount of such original issue discount, or
- the portion of the "total return" on the note which bears the same
ratio to such total return as the "disqualified yield" on the note
bears to the yield to maturity on the note.
For this purpose,
- the term "total return" is the amount that would have been the
original issue discount on the note if the stated interest on the
note were included in its stated redemption price at maturity, and
- the term "disqualified yield" means (i) the excess of the yield to
maturity on the note over (ii) the sum of (A) the applicable Federal
rate in effect under section 1274(d) of the Code for the calendar
month in which the note is issued and (B) six percentage points.
136
PLAN OF DISTRIBUTION
We are not using any underwriters for this exchange offer.
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of the new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of any new notes received in exchange for old notes
acquired by the broker-dealer as a result of market-making or other trading
activities. For a period of up to 180 days after the expiration of the exchange
offer, we will promptly send additional copies of this prospectus and any
amendment or supplement to this prospectus to any broker-dealer that requests
these documents. In addition, during this 180-day period, all dealers effecting
transactions in the new notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of new notes by
broker-dealers or any other persons. New notes received by broker-dealers for
their own account pursuant to the exchange offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the new notes, or a combination
of these methods of resale, at market prices prevailing at the time of resale,
at prices related to the prevailing market prices or negotiated prices. Any
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
broker-dealer and/or the purchasers of any new notes. Any broker-dealer that
resells new notes that were received by it for its own account pursuant to the
exchange offer and any broker-dealer that participates in a distribution of new
notes may be deemed to be an "underwriter" within the meaning of the Securities
Act, and any profit resulting from these resales of new notes and any
commissions or concessions received by any of these persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incident to the exchange offer other
than commissions or concessions of any brokers or dealers and will indemnify the
holders of the old notes and the new notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain matters relating to the notes will be passed upon for us by King &
Spalding LLP, New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
balance sheets as of December 28, 2002 and December 29, 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 30, 2000 and December 29, 2001, the period from
December 30, 2001 through October 15, 2002 and the period from October 16, 2002
through December 28, 2002, as set forth in their report. We have included our
financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
137
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS: PAGE
---------------------------------- ----
Report of Independent Auditors............................ F-2
Consolidated Balance Sheets at December 28, 2002
(Successor) and December 29, 2001 (Predecessor)........ F-3
Consolidated Statements of Operations for each of the two
years in the period ended December 29, 2001, for the
period from December 30, 2001 through October 15, 2002
(Predecessor) and for the period from October 16, 2002
through December 28, 2002 (Successor).................. F-4
Consolidated Statements of Stockholders' Equity for each
of the two years in the period ended December 29, 2001,
for the period from December 30, 2001 through October
15, 2002 (Predecessor) and for the period from October
16, 2002 through December 28, 2002 (Successor)......... F-5
Consolidated Statements of Cash Flows for each of the two
years in the period ended December 29, 2001, for the
period from December 30, 2001 through October 15, 2002
(Predecessor) and for the period from October 16, 2002
through December 28, 2002 (Successor).................. F-7
Notes to Consolidated Financial Statements................ F-8
Consolidated Balance Sheets at December 28, 2002 and March
29, 2003 (unaudited)................................... F-31
Consolidated Statements of Operations for the three months
ended March 29, 2003 (Successor) and March 30, 2002
(Predecessor) (unaudited).............................. F-32
Consolidated Statements of Cash Flows for the three months
ended March 29, 2003 (Successor) and March 30, 2002
(Predecessor) (unaudited).............................. F-33
Notes to Consolidated Financial Statements (unaudited).... F-34
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Golfsmith International Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Golfsmith
International Holdings, Inc. (successor to Golfsmith International, Inc.) as of
December 28, 2002 and December 29, 2001, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the years ended December
30, 2000 and December 29, 2001, the period from December 30, 2001 through
October 15, 2002, and the period from October 16, 2002 through December 28,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Golfsmith
International Holdings, Inc. (successor to Golfsmith International, Inc.) at
December 28, 2002 and December 29, 2001, and the consolidated results of their
operations and their cash flows for the years ended December 30, 2000 and
December 29, 2001, the period from December 30, 2001 through October 15, 2002,
and the period from October 16, 2002 through December 28, 2002, in conformity
with accounting principles generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, in 2002
the Company changed its method of accounting for intangible assets upon the
adoption of Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets. Also discussed in Note 1 to the consolidated financial
statements, in 2002 the Company changed its method of accounting for asset
impairments upon the adoption of Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets.
/s/ Ernst & Young LLP
Austin, Texas
March 21, 2003
F-2
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
SUCCESSOR PREDECESSOR
------------ ------------
DECEMBER 28, DECEMBER 29,
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 11,412,460 $ 39,549,924
Receivables, net of allowances of $242,643 at December 28,
2002 and $1,107,321 at December 29, 2001................ 1,639,120 3,060,653
Inventories, net of reserves of $818,816 at December 28,
2002 and $1,555,107 at December 29, 2001................ 32,351,880 33,775,851
Deferred tax assets....................................... 67,905 --
Prepaids and other current assets......................... 2,119,390 1,260,081
------------ ------------
Total current assets........................................ 47,590,755 77,646,509
Property and equipment:
Land and buildings........................................ 21,017,551 17,971,191
Equipment, furniture, fixtures and autos.................. 9,270,340 22,671,027
Leasehold improvements and construction in progress....... 7,015,985 8,893,032
------------ ------------
37,303,876 49,535,250
Less: accumulated depreciation and amortization........... (1,258,676) (20,711,794)
------------ ------------
Net property and equipment.................................. 36,045,200 28,823,456
Goodwill.................................................... 34,948,016 --
Tradename................................................... 11,158,000 --
Trademarks, net of accumulated amortization of $817,462 at
December 29, 2001......................................... 15,093,396 3,110,052
Customer database, net of accumulated amortization of
$94,422 at December 28, 2002.............................. 3,304,783 --
Deferred tax assets......................................... 4,274,161 --
Debt issuance costs......................................... 7,596,561 1,920,346
------------ ------------
Total assets................................................ $160,010,872 $111,500,363
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 17,822,015 $ 18,939,036
Accrued expenses and other current liabilities............ 12,822,302 10,522,020
Lines of credit........................................... -- 33,563
Current maturities of long-term debt...................... -- 1,000,000
------------ ------------
Total current liabilities................................... 30,644,317 30,494,619
Long-term debt, less current maturities..................... 75,380,045 33,719,826
Deferred rent............................................... 513,324 2,243,197
------------ ------------
Total liabilities........................................... 106,537,686 66,457,642
Minority interest........................................... -- 12,523,623
Stockholders' equity:
Common stock -- Golfsmith International Holdings, Inc.,
$.001 par value; 40,000,000 shares authorized;
20,077,931 shares issued and outstanding................ 20,078 --
Restricted common stock units -- Golfsmith International
Holdings, Inc., $.001 par value; 839,268 shares issued
and outstanding......................................... 839 --
Common stock -- Golfsmith International, Inc., $.01 par
value; 20,000,000 shares authorized at December 29,
2001; 10,000,000 shares issued and outstanding at
December 29, 2001....................................... -- 100,000
Additional paid-in capital................................ 55,990,042 12,886,480
Deferred interest......................................... -- (137,190)
Deferred compensation..................................... -- (1,916,532)
Other comprehensive income................................ 48,148 (337,392)
Retained earnings (deficit)............................... (2,585,921) 21,923,732
------------ ------------
Total stockholders' equity.................................. 53,473,186 32,519,098
------------ ------------
Total liabilities and stockholders' equity.................. $160,010,872 $111,500,363
============ ============
See accompanying notes.
F-3
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
SUCCESSOR PREDECESSOR
-------------- ---------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FROM FROM
OCTOBER 16, DECEMBER 30, YEAR ENDED
2002 THROUGH 2001 THROUGH ---------------------------
DECEMBER 28, OCTOBER 15, DECEMBER 29, DECEMBER 30,
2002 2002 2001 2000
-------------- --------------- ------------ ------------
Net revenues.......................... $37,830,540 $180,315,163 $221,438,496 $232,080,437
Cost of products sold................. 25,146,178 117,206,594 143,117,798 153,630,630
----------- ------------ ------------ ------------
Gross profit.......................... 12,684,362 63,108,569 78,320,698 78,449,807
Selling, general and administrative... 13,580,912 48,308,301 64,081,753 76,351,479
Store pre-opening/closing expenses.... 92,792 121,686 -- 1,592,557
Amortization of deferred
compensation........................ -- 6,033,273 457,722 --
----------- ------------ ------------ ------------
Total operating expenses.............. 13,673,704 54,463,260 64,539,475 77,944,036
----------- ------------ ------------ ------------
Operating income...................... (989,342) 8,645,309 13,781,223 505,771
Interest expense...................... 2,210,304 5,205,859 6,825,356 6,904,645
Interest income....................... (7,119) (330,587) (597,595) (82,168)
Other income.......................... (13,725) (2,365,551) (1,181,538) (1,069,309)
Other expense......................... 133 -- 150,000 620,497
Minority interest..................... -- 844,378 580,798 (454,321)
Loss on debt extinguishment........... -- 8,046,552 -- --
----------- ------------ ------------ ------------
Income (loss) from continuing
operations before income taxes...... (3,178,935) (2,755,342) 8,004,202 (5,413,573)
Income tax (expense) benefit.......... 632,934 (708,374) (251,147) 190,425
----------- ------------ ------------ ------------
Income (loss) from continuing
operations.......................... (2,546,001) (3,463,716) $ 7,753,055 $ (5,223,148)
Loss from discontinued operations,
including loss on disposal of
$285,886 for the year ended December
28, 2002 (See Note 5)............... (39,920) (229,880) (589,881) (380,146)
----------- ------------ ------------ ------------
Income (loss) before extraordinary
items............................... (2,585,921) (3,693,596) 7,163,174 (5,603,294)
Extraordinary gain -- negative
goodwill arising from purchase of
minority interest (See Note 4)...... -- 4,121,927 -- --
----------- ------------ ------------ ------------
Net income (loss)..................... $(2,585,921) $ 428,331 $ 7,163,174 $ (5,603,294)
=========== ============ ============ ============
See accompanying notes.
F-4
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
---------------------------------------------- RESTRICTED STOCK
GOLFSMITH UNITS GOLFSMITH
GOLFSMITH INTERNATIONAL INTERNATIONAL
INTERNATIONAL, INC. HOLDINGS, INC. HOLDINGS, INC. ADDITIONAL
----------------------- -------------------- ---------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL INTEREST
----------- --------- ---------- ------- ------- ------ ------------ ---------
Balance at January 1, 2000
(Predecessor).............. 10,000,000 $ 100,000 -- $ -- -- $ -- $ 10,317,604 $ --
Issuance of stock options
non-employee............. -- -- -- -- -- -- 194,622 (194,622)
Amortization of deferred
interest................. -- -- -- -- -- -- -- 19,074
Dividends paid............. -- -- -- -- -- -- -- --
Comprehensive loss:
Translation adjustments,
cumulative translation
loss of $(275,865) at
December 30, 2000...... -- -- -- -- -- -- -- --
Net loss................. -- -- -- -- -- -- -- --
Total comprehensive
loss................. -- -- -- -- -- -- -- --
----------- --------- ---------- ------- ------- ---- ------------ ---------
Balance at December 30, 2000
(Predecessor).............. 10,000,000 $ 100,000 -- -- $ 10,512,226 $(175,548)
Stock compensation-variable
employee options......... -- -- -- -- -- -- 2,374,254 --
Amortization of deferred
compensation............. -- -- -- -- -- -- -- --
Amortization of deferred
interest................. -- -- -- -- -- -- -- 38,358
Comprehensive income:
Translation adjustments,
cumulative translation
loss of $(337,392) at
December 29, 2001...... -- -- -- -- -- -- -- --
Net income............... -- -- -- -- -- -- -- --
Total comprehensive
income............... -- -- -- -- -- -- -- --
----------- --------- ---------- ------- ------- ---- ------------ ---------
OTHER
DEFERRED COMPREHENSIVE RETAINED EARNINGS CONSOLIDATED
COMPENSATION INCOME (DEFICIT) TOTAL
------------ ------------- ----------------- ------------
Balance at January 1, 2000
(Predecessor).............. $ -- $ (89,649) $ 22,676,352 $ 33,004,307
Issuance of stock options
non-employee............. -- -- -- --
Amortization of deferred
interest................. -- -- -- 19,074
Dividends paid............. -- -- (2,312,500) (2,312,500)
Comprehensive loss:
Translation adjustments,
cumulative translation
loss of $(275,865) at
December 30, 2000...... -- (186,216) -- (186,216)
Net loss................. -- -- (5,603,294) (5,603,294)
------------
Total comprehensive
loss................. -- -- -- (5,789,510)
----------- --------- ------------ ------------
Balance at December 30, 2000
(Predecessor).............. $ -- $(275,865) $ 14,760,558 $ 24,921,371
Stock compensation-variable
employee options......... (2,374,254) -- -- --
Amortization of deferred
compensation............. 457,722 -- -- 457,722
Amortization of deferred
interest................. -- -- -- 38,358
Comprehensive income:
Translation adjustments,
cumulative translation
loss of $(337,392) at
December 29, 2001...... -- (61,527) -- (61,527)
Net income............... -- -- 7,163,174 7,163,174
------------
Total comprehensive
income............... -- -- -- 7,101,647
----------- --------- ------------ ------------
F-5
COMMON STOCK
---------------------------------------------- RESTRICTED STOCK
GOLFSMITH UNITS GOLFSMITH
GOLFSMITH INTERNATIONAL INTERNATIONAL
INTERNATIONAL, INC. HOLDINGS, INC. HOLDINGS, INC. ADDITIONAL
----------------------- -------------------- ---------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL INTEREST
----------- --------- ---------- ------- ------- ------ ------------ ---------
Balance at December 29, 2001
(Predecessor).............. 10,000,000 $ 100,000 -- -- -- -- $ 12,886,480 $(137,190)
Dividends paid............. -- -- -- -- -- -- -- --
Stock compensation-variable
employee options......... -- -- -- -- -- -- 4,116,741 --
Amortization of deferred
compensation............. -- -- -- -- -- -- -- --
Amortization of deferred
interest................. -- -- -- -- -- -- -- 137,190
Pre merger net income...... -- -- -- -- -- -- -- --
Merger of Golfsmith
International, Inc. into
Golfsmith International
Holdings, Inc. .......... (10,000,000) (100,000) -- -- -- -- (17,003,221) --
Issuance of Holdings common
stock net of issuance
costs of $6,740,637...... -- -- 20,077,931 20,078 -- -- 53,473,079 --
Issuance of Holdings
restricted stock units... -- -- -- -- 839,268 839 2,516,963 --
Balance October 15, 2002
(Predecessor).............. -- -- 20,077,931 20,078 839,268 839 55,990,042 --
=========== ========= ========== ======= ======= ==== ============ =========
---------------------------------------------------------------------------------------------------------------------------
Balance October 16, 2002
(Successor)................ -- -- 20,077,931 20,078 839,268 839 55,990,042 --
Comprehensive loss:
Translation adjustments,
cumulative translation
gain of $48,148 at
December 28, 2002...... -- -- -- -- -- -- -- --
Net loss of Holdings..... -- -- -- -- -- -- -- --
Total comprehensive
loss................. -- -- -- -- -- -- -- --
----------- --------- ---------- ------- ------- ---- ------------ ---------
Balance at December 28, 2002
(Successor)................ -- -- 20,077,931 $20,078 839,268 $839 $ 55,990,042 $ --
=========== ========= ========== ======= ======= ==== ============ =========
OTHER
DEFERRED COMPREHENSIVE RETAINED EARNINGS CONSOLIDATED
COMPENSATION INCOME (DEFICIT) TOTAL
------------ ------------- ----------------- ------------
Balance at December 29, 2001
(Predecessor).............. $(1,916,532) $(337,392) $ 21,923,732 $ 32,519,098
Dividends paid............. -- -- (3,237,500) (3,237,500)
Stock compensation-variable
employee options......... (4,116,741) -- -- --
Amortization of deferred
compensation............. 6,033,273 -- -- 6,033,273
Amortization of deferred
interest................. -- -- -- 137,190
Pre merger net income...... -- -- 428,331 428,331
Merger of Golfsmith
International, Inc. into
Golfsmith International
Holdings, Inc. .......... -- 337,392 (19,114,563) (35,880,392)
Issuance of Holdings common
stock net of issuance
costs of $6,740,637...... -- -- -- 53,493,157
Issuance of Holdings
restricted stock units... -- -- -- 2,517,802
Balance October 15, 2002
(Predecessor).............. -- -- -- 56,010,959
=========== ========= ============ ============
-------------------------------------------------------------------------------------------------------------
Balance October 16, 2002
(Successor)................ -- -- -- 56,010,959
Comprehensive loss:
Translation adjustments,
cumulative translation
gain of $48,148 at
December 28, 2002...... -- 48,148 -- 48,148
Net loss of Holdings..... -- -- (2,585,921) (2,585,921)
------------
Total comprehensive
loss................. -- -- -- (2,537,773)
----------- --------- ------------ ------------
Balance at December 28, 2002
(Successor)................ $ -- $ 48,148 $ (2,585,921) $ 53,473,186
=========== ========= ============ ============
See accompanying notes.
F-6
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUCCESSOR PREDECESSOR
------------ -------------------------------------------
FOR THE FOR THE
PERIOD FROM PERIOD FROM
OCTOBER 16, DECEMBER 30, YEAR ENDED
2002 THROUGH 2001 THROUGH ----------------------------
DECEMBER 28, OCTOBER 15, DECEMBER 29, DECEMBER 30,
2002 2002 2001 2000
------------ ------------ ------------ -------------
OPERATING ACTIVITIES
Net income (loss)....................................... $(2,585,921) $ 428,331 $ 7,163,174 $ (5,603,294)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation........................................ 1,255,251 4,776,431 6,455,080 8,856,417
Amortization........................................ 653,210 1,853,033 2,262,535 1,900,168
Interest paid with issuance of in-kind debt......... -- -- 954,810 1,827,000
Minority interest................................... -- 844,378 580,798 (454,321)
Stock compensation to non-employee.................. -- 30,284 38,358 19,074
Stock compensation variable employee options........ -- 6,033,273 457,722 --
Net gain on sale of real estate and other assets.... -- (2,215,735) (980,233) (985,182)
Loss (gain) on disposal of equipment................ -- -- -- (13,914)
Loss on extinguishment of debt...................... -- 8,046,552 -- --
Extraordinary gain -- negative goodwill arising from
purchase of minority interest..................... -- (4,121,927) -- --
Changes in operating assets and liabilities:
Receivables....................................... 462,403 959,130 6,001,531 (2,291,076)
Inventories....................................... 799,837 1,512,546 10,621,937 3,063,393
Prepaid and other assets.......................... (475,753) (457,688) 992,458 (205,701)
Deferred income taxes............................. (439,814) -- -- --
Accounts payable.................................. 4,767,312 (5,884,333) 6,597,510 (1,799,134)
Accrued expenses and other liabilities and
deferred rent................................... 4,266,250 (289,234) 385,456 (639,141)
----------- ------------ ------------ -------------
Net cash provided by operating activities............... 8,702,775 11,515,041 41,531,136 3,674,289
INVESTING ACTIVITIES
Capital expenditures.................................... (1,126,683) (2,086,323) (1,344,843) (2,106,954)
Proceeds from sale of real estate and other assets...... -- 3,313,022 1,395,736 1,130,086
----------- ------------ ------------ -------------
Net cash provided by (used in) investing activities..... (1,126,683) 1,226,699 50,893 (976,868)
FINANCING ACTIVITIES
Principal payments on lines of credit................... -- (9,840,843) (20,115,977) (109,038,543)
Proceeds from lines of credit........................... -- 9,807,280 12,977,194 108,310,889
Principal payments of long-term debt.................... -- (41,698,481) (5,999,996) (5,421,734)
Borrowings from long-term debt.......................... -- -- -- 15,000,000
Debt issuance costs..................................... -- -- -- (735,304)
Proceeds from issuance of common stock.................. -- 43,243,157 -- --
Payments to satisfy debt and minority interest
obligations........................................... -- (10,634,165) -- --
Distributions to shareholders........................... -- (35,880,392) -- --
Dividends paid.......................................... -- (3,237,500) -- (2,312,500)
Dividends paid to minority interest owners.............. -- (262,500) -- (187,500)
----------- ------------ ------------ -------------
Net cash provided by (used in) financing activities..... -- (48,503,444) (13,138,779) 5,615,308
----------- ------------ ------------ -------------
Effect of exchange rate changes on cash................. $ 48,148 $ -- $ (42,475) $ (186,216)
----------- ------------ ------------ -------------
Change in cash and cash equivalents..................... 7,624,240 (35,761,704) 28,400,775 8,126,513
Cash and cash equivalents, beginning of year (period)... 3,788,220 39,549,924 11,149,149 3,022,636
----------- ------------ ------------ -------------
Cash and cash equivalents, end of year (period)......... $11,412,460 $ 3,788,220 $ 39,549,924 $ 11,149,149
=========== ============ ============ =============
Supplemental cash flow information:
Interest payments..................................... $ 6,529 $ 4,078,658 $ 4,322,284 $ 3,716,728
Tax payments.......................................... $ 15,325 $ 493,392 $ 250,591 $ 331,195
Amortization of discount on senior subordinated
notes............................................... $ -- $ 1,369,447 $ 1,620,349 $ 1,506,301
Amortization of discount on senior secured notes...... $ 142,430 $ -- $ -- $ --
Issuance of common stock units in connection with
business combination................................ $ -- $ 2,517,802 $ -- $ --
Management rollover of Golfsmith International, Inc.
equity into Golfsmith International Holdings, Inc.
equity.............................................. $ -- $ 10,250,000 $ -- $ --
Issuance of senior secured notes in business
combination......................................... $ -- $ 75,000,000 $ -- $ --
See accompanying notes.
F-7
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2002
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CHANGE IN REPORTING ENTITY
The accompanying consolidated financial statements include the accounts of
Golfsmith International Holdings, Inc. ("Holdings", the "Company" or
"Successor") and its wholly owned subsidiary Golfsmith International, Inc.
("Golfsmith" or "Predecessor"). Holdings was formed on September 4, 2002 as a
Delaware corporation to acquire all of the outstanding shares of common stock of
Golfsmith. Holdings acquired Golfsmith on October 15, 2002 (See Note 2).
Holdings has no assets or liabilities other than its investment in its wholly
owned subsidiary Golfsmith and did not have operations prior to the acquisition
of Golfsmith; accordingly these consolidated financial statements represent the
operations of Golfsmith and its subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation.
For purposes of presentation, the accompanying statements of operations and
cash flows for the period December 30, 2001 through October 15, 2002 and for the
years ended December 29, 2001 and December 30, 2000 reflect the operating
results and cash flows of Golfsmith prior to its acquisition by Holdings on
October 15, 2002. The accompanying statements of operations and cash flows for
the period from October 16, 2002 through December 28, 2002 reflects the
operating results and cash flows of Holdings subsequent to the acquisition by
Holdings on October 15, 2002.
NATURE OF OPERATIONS
Golfsmith is one of the largest, multi-channel, specialty retailers of golf
equipment and related accessories in the industry and is an established designer
and marketer of golf equipment. Golfsmith offers equipment from leading
manufacturers, including Callaway(R) Cobra(R), FootJoy(R), Nike(R), Ping(R),
Taylor Made(R) and Titleist(R). In addition, Golfsmith offers its own
proprietary brands, including Golfsmith(R), Lynx(R), Snake Eyes(R) and Killer
Bee(R). The Company markets its products through 26 superstores as well as
through its direct-to-consumer channel, which includes its clubmaking and
accessory catalogs and its Internet site. The Company also operates a clubmaker
training program and is the exclusive operator of the Harvey Penick Golf
Academy, an instructional school incorporating the techniques of the renowned
golf instructor, Harvey Penick.
RECLASSIFICATION
Certain reclassifications have been made to the prior year financial
statements to conform with the current year presentation.
CASH EQUIVALENTS
Cash equivalents consist of commercial paper and other investments that are
readily convertible into cash and have maturities when purchased of three months
or less.
INVENTORIES
Inventories consist primarily of finished goods (i.e., golf equipment and
accessories) and are stated at the lower of cost (weighted average) or market.
Inbound freight charges, import fees and vendor discount charges are capitalized
into inventory upon receipt of the purchased goods. These costs are included in
cost of products sold upon the sale of the respective inventory item.
F-8
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF FOREIGN SUPPLIERS
The Company derives a significant portion of its sales from products
supplied by manufacturers located outside the United States (primarily China).
While the Company is not dependent on any single manufacturer outside the U.S.,
the Company could be adversely affected by political or economic disruptions
affecting the business or operations of third-party manufacturers located
outside the U.S.
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation and amortization
are computed primarily using the straight-line method over the estimated useful
lives of the related assets, generally 5 to 10 years for equipment, furniture,
and fixtures and 40 years for buildings. Leasehold improvements are amortized on
a straight-line basis over the shorter of the term of the related lease or
estimated life of the leasehold improvement.
LONG-LIVED ASSETS
The Company evaluates its long-lived assets in accordance with SFAS No.
144, Accounting for the Impairment of Long-Lived Assets. Long-lived assets held
and used by the Company are reviewed for impairment whenever events or changes
in circumstances indicate that their net book value may not be recoverable. When
such factors and circumstances exist, the Company compares the projected
undiscounted future cash flows associated with the related asset or group of
assets over their estimated useful lives against their respective carrying
amounts. Impairment, if any, is based on the excess of the carrying amount over
the fair value of those assets and is recorded in the period in which the
determination was made and is recorded in continuing operations.
Long-lived assets to be disposed of by sale are classified as held-for-sale
in the period in which the established criteria of SFAS No. 144 are met.
Long-lived asset to be disposed of other than by sale are classified as
held-and-used until the disposal occurs. Impairment, if any, is based on the
excess of the carrying amount over the fair value of those assets and is
recorded in the period in which the determination was made and is recorded in
continuing operations until the related assets are disposed of. The Company
recorded a loss from discontinued operations of $0.2 million during the period
from December 30, 2001 through October 15, 2002 and $0.1 million during the
period from October 16, 2002 through December 28, 2002 related to the disposal
of assets.
FOREIGN CURRENCY TRANSLATION
In accordance with Financial Accounting Standards No. 52, Foreign Currency
Translation, the financial statements of the Company's international operations
are translated into U.S. dollars using the exchange rate at each balance sheet
date for assets and liabilities, the historical exchange rate for stockholders'
equity, and a weighted average exchange rate for each period for revenues,
expenses, and gains and losses. Foreign currency translation adjustments are
recorded as a separate component of stockholders' equity as the local currency
is the functional currency. Gains and losses from foreign currency denominated
transactions are included in "Other income" in the consolidated statement of
operations and were not significant for the years presented.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash, cash equivalents, and accounts
receivable. Excess cash is invested in high-quality, short-term, liquid money
instruments issued by highly rated financial institutions. Concentration of
credit risk
F-9
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with respect to the Company's receivables is minimized due to the large number
of customers, individually small balances, and short payment terms.
The Company maintains an allowance for estimated losses resulting from
non-collection of customer receivables based on: historical collection
experience, age of the receivable balance, both individually and in the
aggregate, and general economic conditions. The Company generally does not
require collateral.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value and carrying amounts for financial instruments may differ due to
instruments that provide fixed interest rates or contain fixed interest rate
elements. Such instruments are subject to fluctuations in fair value due to
subsequent movements in interest rates. The carrying value of the Company's
financial instruments approximates fair value, except for differences with
respect to long-term, fixed rate debt, which are not significant. Fair value for
such instruments is based on estimates using present value or other valuation
techniques.
REVENUE RECOGNITION
The Company recognizes retail sales at the time the customer takes
possession of the merchandise and purchases are paid for, primarily with either
cash or credit card.
Catalog and e-commerce sales are recorded upon shipment of merchandise.
This policy is based on: (1) the customer has already paid for the goods with a
credit card, thus minimal collectibility risk exists, (2) the equipment being
shipped is complete and ready for shipment at the time of shipment, (3) the date
of delivery is within a reasonable time of the order, generally within one week,
(4) the Company has no further obligations once the product is shipped, (5) the
Company's custodial risks are insured by a third party shipping company, and (6)
the Company records an allowance for estimated returns in the period of sale.
The Company recognizes revenue from the Harvey Penick Golf Academy
instructional school at the time the services are performed.
Revenues from the sale of gift certificates are recorded upon the
redemption of the gift certificate for the purchase of tangible products at the
time the customer takes possession of the merchandise. At the purchase of a gift
certificate, a liability is recorded until the redemption of the certificate for
merchandise occurs.
For all merchandise sales, the Company reserves for sales returns in the
period of sale through estimates based on historical experience.
SHIPPING AND HANDLING COSTS
Amounts billed to customers in sales transactions related to shipping and
handling, if any, are included in revenues. Shipping and handling costs incurred
by the Company are included in cost of products sold.
VENDOR REBATES AND PROMOTIONS
The Company receives income from certain merchandise suppliers in the form
of rebates and promotions. Agreements are made with each individual supplier and
income is earned as buying levels are met and/or cooperative advertising is
placed. Rebate income is recorded as a reduction of cost of products sold and
cooperative promotional income is recorded as a reduction of selling, general
and administrative expenses. The uncollected amounts of vendor rebate and
promotional income remaining in receivables in the accompanying consolidated
balance sheets as of December 28, 2002, and December 29, 2001 were
F-10
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $0.3 million and $0.4 million, respectively. Cooperative
promotional income received and recorded as a reduction of selling, general and
administrative expenses was approximately $0.2 million for the period from
October 16, 2002 through December 28, 2002, $0.7 million for the period from
December 30, 2001 through October 15, 2002, and $1.0 million and $0.8 million
for the fiscal years 2001 and 2000, respectively. Vendor rebate income received
and recorded as a reduction of cost of products sold was $0.1 million for the
period from October 16, 2002 through December 28, 2002, $0.4 million for the
period from December 30, 2001 through October 15, 2002, and $0.5 million and
$0.7 million for the fiscal years 2001 and 2000, respectively.
STORE PRE-OPENING AND CLOSING EXPENSES
Costs associated with the opening of a new store are expensed as incurred.
With respect to store closings, the Company provides for the future net lease
obligation, non-recoverable investment in fixed assets, and other expenses
directly related to discontinuance of operations when the decision has been made
to close a store and records store closing expenses in accordance with SFAS 146,
Accounting for Costs Associated with Exit or Disposal Activities (See Note 5).
INCOME TAXES
Prior to October 15, 2002, Golfsmith elected to be treated as a Subchapter
S Corporation under the Internal Revenue Code of 1986 as amended, whereby
federal income taxes are the responsibility of the individual stockholders.
Accordingly, Golfsmith did not provide for federal income taxes. Effective
October 15, 2002, Golfsmith merged with BGA Acquisition Corporation, a wholly
owned subsidiary of Holdings, with the surviving entity (Holdings' subsidiary)
being Golfsmith International, Inc. As part of the merger, Golfsmith's
Subchapter S status was terminated; thus, the Company is subject to corporate
income taxes beginning October 15, 2002.
In accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, deferred income taxes were provided for all
temporary differences existing at the date of Golfsmith's termination of its
Subchapter S status. Deferred taxes are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
CATALOG COSTS AND ADVERTISING
Catalog costs are amortized over the expected revenue stream, which
typically ranges between two and twelve months from the date the catalogs are
mailed. The Company capitalized approximately $0.8 million and $0.4 million in
catalog costs at December 28, 2002 and December 29, 2001, respectively.
Advertising costs are expensed as incurred. Advertising costs totaled
approximately $3.2 million for the period from October 16, 2002 through December
28, 2002, $10.0 million for the period from December 30, 2001 through October
15, 2002, and $12.8 million, and $18.0 million for the years ended December 29,
2001, and December 30, 2000, respectively. These amounts include amortization of
catalog costs of $2.0 million for the period from October 16, 2002 through
December 28, 2002, $6.4 million for the period from December 30, 2001 to October
15, 2002, and $8.6 million and $13.2 million for the fiscal years 2001 and 2000,
respectively.
DEBT ISSUANCE COSTS
Issuance costs are deferred and amortized to interest expense using the
interest method over the terms of the related debt. Amortization of such costs
for the period from October 16, 2002 through December 28, 2002, the period from
December 30, 2001 through October 15, 2002, and for fiscal years 2001 and 2000
totaled approximately $0.5 million, $0.2 million, $0.4 million and $0.1 million,
respectively.
F-11
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Approximately $1.7 million of debt issuance costs were written off on October
15, 2002 (the merger date) because the debt was paid off. Of this expense
approximately $1.5 million is included in the loss on debt extinguishment in the
accompanying statement of operations for the period from December 30, 2001
through October 15, 2002.
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess purchase price over the fair value of net
assets acquired, or net liabilities assumed, in a business combination.
Beginning in 2002, the Company adopted Statement of Financial Accounting
Standard 142, Goodwill and Other Intangible Assets ("Statement 142"). In
accordance with Statement 142, the Company periodically assesses its intangible
assets, including its newly acquired goodwill in 2002, for indications of
impairment. The Company performs its annual test for goodwill impairment on the
first day of the fourth fiscal quarter of each year.
Identifiable intangible assets consist of trademarks, the Golfsmith
tradename and customer databases acquired. The customer database intangible
asset is considered a definite lived intangible asset in accordance with
Statement 142 and is being amortized using the straight-line method over its
estimated useful life of 9 years. Both the trademark and tradename intangible
assets are considered indefinite lived intangible assets under Statement 142. As
such, amortization for these indefinite lived assets is replaced with periodic
impairment review.
It is the Company's policy to value intangible assets at the lower of
unamortized cost or fair value. Management reviews the valuation and
amortization of intangible assets on a periodic basis, taking into consideration
any events or circumstances that might result in diminished fair value. The
Company periodically reviews the estimated useful lives of its identifiable
intangible assets, taking into consideration any events or circumstances which
might result in a diminished fair value or revised useful life.
STOCK-BASED COMPENSATION
SFAS No. 123, Accounting for Stock-Based Compensation, prescribes
accounting and reporting standards for all stock-based compensation plans,
including employee stock options. As allowed by SFAS No. 123, the Company has
elected to continue to account for its employee stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB No. 25").
In December 2002, the FASB issued SFAS No. 148, Accounting For Stock-Based
Compensation -- Transition and Disclosure, An Amendment of FASB Statement No.
123. This Statement amends FASB No. 123, Accounting For Stock-Based
Compensation, to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. Since the Company is continuing to account for
stock-based compensation according to APB 25, adoption of SFAS No. 148 requires
the Company to provide prominent disclosures about the affects of FASB No. 123
on reported net income (loss).
F-12
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table illustrates the effect on net income (loss), if the
Company had applied the fair value recognition provisions of SFAS No. 123:
SUCCESSOR PREDECESSOR
---------------- -----------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FROM OCTOBER 16, FROM DECEMBER 30, YEAR ENDED
2002 THROUGH 2001 THROUGH ---------------------------
DECEMBER 28, OCTOBER 15, DECEMBER 29, DECEMBER 30,
2002 2002 2001 2000
---------------- ----------------- ------------ ------------
Net income (loss) -- as
reported.................. $(2,585,921) $ 428,331 $7,163,174 $(5,603,294)
Total stock-based
compensation cost, net of
related tax effects
included in the
determination of net
income (loss) as
reported.................. -- 6,063,557 496,080 19,074
The stock-based employee
compensation cost, net of
related tax effects, that
would have been included
in the determination of
net income (loss) if the
fair value based method
had been applied to all
awards.................... -- (6,078,057) -- (1,140,645)
----------- ----------- ---------- -----------
Pro forma net income
(loss).................... $(2,585,921) $ 413,831 $7,659,254 $(6,724,865)
=========== =========== ========== ===========
SEGMENTS
The Company applies Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information, and
considers its business activities to constitute a single segment.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and use assumptions that affect certain reported amounts and
disclosures. Although management uses the best information available, it is
reasonably possible that the estimates used by the Company will be materially
different from the actual results. These differences could have a material
effect on the Company's future results of operations and financial position.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to December 31.
RECENTLY ISSUED ACCOUNTING STANDARDS
Impairment of Long-Lived Assets
In October 2001, the FASB issued SFAS No. 144, Impairment of Long-Lived
Assets, which supercedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 144
retains the requirements of SFAS No. 121 to (a) recognize an impairment loss
only if the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows and (b) measure an impairment loss as the difference
between the carrying amount and the fair
F-13
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of the asset. SFAS No. 144 removes goodwill from its scope. SFAS No. 144
is applicable to financial statements issued for fiscal years beginning after
December 15, 2001. The Company adopted the provisions of SFAS No. 144 in fiscal
2002 and recorded a loss on discontinued operations of $229,900 for the period
from December 30, 2001 to October 15, 2002 and $39,900 for the period from
October 16, 2002 through December 28, 2002 (including a loss on disposal of
approximately $245,000 and $41,000 for the two periods, respectively) relating
to the closure of two stores considered an "asset group" under SFAS No. 144.
Costs Associated with Exit or Disposal Activities
In June 2002 the FASB issued SFAS No. 146, Accounting For Costs Associated
With Exit or Disposal Activities. SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of commitment to an exit or disposal plan. This Statement is
effective for exit or disposal activities initiated after December 31, 2002. The
Company is currently assessing whether the adoption of SFAS No. 146 will have a
material impact on its financial statements.
Financial Guarantees
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires a company to
recognize an initial liability for the fair value of an obligation it assumes
under a guarantee, as well as its ongoing obligation over the term of the
guarantee. The offsetting entry of recognizing a liability depends on the
circumstances in which the guarantee was issued. Additionally, FIN 45 elaborates
on and clarifies existing disclosure requirements for most guarantees. The
initial recognition provisions of FIN 45 apply to guarantees issued or modified
after December 31, 2002. The Company is currently evaluating the impact of FIN
45's initial recognition and measurement provisions on its consolidated
financial statements. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002, and have
been incorporated into the Company's December 28, 2002 disclosures of guarantees
in these footnotes.
2. BUSINESS COMBINATIONS
On October 15, 2002, the Company acquired all issued and outstanding shares
of Golfsmith. The total purchase price was $121.0 million including related
acquisition costs of $6.7 million. Atlantic Equity Partners III, L.P., the
Company's majority shareholder, acquires profitable companies that it believes
to be leaders in their respective markets and that it believes will increase in
value over time. The Company believed that Golfsmith satisfied these criteria
based on its profitable business, its investment in infrastructure to support
additional growth, and its private label brands. The Company believed that these
attributes would allow Golfsmith opportunities to increase in value, and
therefore justified the purchase price that exceeded the fair market value of
the assets.
In conjunction with the acquisition of Golfsmith, the Company issued
20,077,931 shares of common stock and 839,268 restricted stock units to
investors for approximately $62.8 million, excluding related issuance costs.
Golfsmith International, Inc., being the surviving wholly owned subsidiary of
the Company, issued Senior Secured Notes at a 20% discount off of face value for
consideration of $75.0 million (See Note 4). The proceeds from the issuance of
common and restricted stock units and the new Senior Secured Notes were utilized
to fund the acquisition of Golfsmith.
The total purchase consideration has been allocated to the assets acquired
and liabilities assumed, including identifiable intangible assets, based on
their respective fair values at the date of acquisition as
F-14
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined by an independent valuation obtained by the Company. Such allocation
resulted in goodwill of $34.9 million. Goodwill is assigned at the enterprise
level and is deductible for income tax purposes.
The consolidated financial statements have been prepared giving effect to
the recapitalization of the Company in accordance with EITF 88-16, Basis in
Leveraged Buyout Transactions, as a partial purchase. Under EITF 88-16, the
Company was revalued at the merger date to fair value to the extent of the
majority shareholders' 79.7% controlling interest in the Company. The remaining
20.3% is accounted for at the continuing stockholder's carryover basis in the
Company. The excess of the purchase price over the historical basis of the net
assets acquired has been applied to adjust net assets to their fair values to
the extent of the majority shareholders' 79.7% ownership.
The following unaudited condensed consolidated balance sheet data presents
the fair value of the assets acquired and liabilities assumed:
Cash and cash equivalents.................................. $ 3,788,220
Accounts receivable........................................ 2,101,523
Inventory.................................................. 33,151,717
Prepaid expenses and other current assets.................. 1,643,637
Property and equipment..................................... 36,173,768
Deferred tax assets........................................ 3,902,252
Other assets............................................... 7,775,304
Intangible assets subject to amortization
Customer database (nine year useful life)................ 3,399,205
Intangible assets not subject to amortization
Tradename................................................ 11,158,000
Trademarks............................................... 15,093,396
----------
Total intangible assets............................... 29,650,601
Goodwill................................................... 34,948,016
------------
Total assets acquired................................. 153,135,038
Accounts payable........................................... 13,054,703
Accrued other expenses..................................... 8,960,869
Deferred rent.............................................. 108,507
Long-term debt............................................. 75,000,000
------------
Total liabilities assumed............................. 97,124,079
------------
Net assets acquired.............................. $ 56,010,959
============
Contingent consideration of $6,250,000 has been placed in an escrow account
by the selling stockholders to cover a final working capital assessment and to
secure certain indemnification obligations of the sellers. In accordance with
the merger agreement, on May 20, 2003, the parties determined that an adjustment
in the merger consideration of $25,000 was payable to the Company based on the
post-merger review of Golfsmith's working capital and will be paid out of the
escrow account. The Company has adjusted the purchase price allocation
accordingly. On April 15, 2004, any remaining escrow funds will be dispersed.
Concurrent with the acquisition, Golfsmith changed status from a Subchapter S
Corporation to a C Corporation that is subject to federal income taxes.
F-15
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA RESULTS OF OPERATIONS
The following presents the unaudited pro forma combined results of
operations of the Company for the period from December 30, 2001 through October
15, 2002 and for the year ended December 29, 2001, after giving effect to
certain pro forma adjustments. These unaudited pro forma results are not
necessarily indicative of the actual consolidated results of operations had the
acquisition actually occurred on December 30, 2001 (first day of fiscal 2002)
and December 31, 2000 (first day of fiscal 2001), respectively or of future
results of operations of the consolidated entities:
(PREDECESSOR)
PERIOD FROM
DECEMBER 30,
2001 THROUGH (PREDECESSOR)
OCTOBER 15, YEAR ENDED
2002 DECEMBER 29, 2001
------------- -----------------
Revenue................................................ $180,315,163 $221,438,496
Income from continuing operations...................... 3,702,395 1,998,278
Income before extraordinary items...................... 3,472,515 --
Net income (loss)...................................... 7,594,442 1,408,397
The pro forma amounts reflected above exclude one-time acquisition charges,
including early extinguishment of debt costs of $8.0 million and an
extraordinary gain on the repurchase of minority interest of $4.1 million for
the period from December 30, 2001 through October 15, 2002. The pro forma
results reflected above do not give effect to a variable compensation charge
relating to a change of control provision in Golfsmith's employee stock option
plan.
3. INTANGIBLE ASSETS
In July 2001, Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets ("Statement 142") was issued. Statement 142 requires
that ratable amortization of intangible assets with indefinite lives, including
goodwill, be replaced with periodic review and analysis for possible impairment.
Intangible assets with definite lives must be amortized over their estimated
useful lives. On January 1, 2002, the Company adopted Statement 142. As a
result, the Company no longer amortizes its acquired trademarks thereby
eliminating estimated amortization of approximately $144,000 for the combined
fiscal year ended December 28, 2002.
As required by Statement 142, prior period results are not restated;
however, the following presents the Company's reported net income (loss) and
income (loss) as adjusted for the exclusion of trademark amortization:
SUCCESSOR PREDECESSOR
------------ ------------------------------------------
PERIOD FROM PERIOD FROM
OCTOBER 16, DECEMBER 30, YEAR ENDED
2002 THROUGH 2001 THROUGH ---------------------------
DECEMBER 28, OCTOBER 15, DECEMBER 29, DECEMBER 31,
2002 2002 2001 2000
------------ ------------ ------------ ------------
Net income (loss):
As reported..................... $(2,585,921) $428,331 $7,163,174 $(5,603,294)
Add: trademark amortization
expense...................... -- -- 261,834 261,834
----------- -------- ---------- -----------
Adjusted net income (loss)... $(2,585,921) $428,331 $7,425,008 $(5,341,460)
=========== ======== ========== ===========
F-16
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangible assets with definite lives
Following is a summary of the Company's intangible assets that are subject
to amortization:
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
-------------- ------------ ------------
Customer databases............................. 3,399,205 (94,422) 3,304,783
The net carrying amount of customer databases intangible assets relates
solely to the merger transaction between Golfsmith and Holdings discussed in
Note 2. Total amortization expense for the period from October 16, 2002 through
December 28, 2002 and for the period from December 30, 2001 through October 15,
2002 was $94,422 and $0, respectively, and is recorded in selling, general, and
administration costs on the consolidated statement of operations. Estimated
future annual amortization expense is as follows:
2003........................................................ $ 377,689
2004........................................................ 377,689
2005........................................................ 377,689
2006........................................................ 377,689
2007........................................................ 377,689
Thereafter.................................................. 1,416,338
----------
$3,304,783
==========
4. DEBT
Long-term debt at December 28, 2002 and December 29, 2001 consisted of the
following:
SUCCESSOR PREDECESSOR
------------- ------------
DECEMBER 28, DECEMBER 29,
2002 2001
------------- ------------
Senior secured notes due October 15, 2009 (see discussion
below).................................................. $ 93,750,000 $ --
Senior credit facility (see discussion below)............. -- --
Senior subordinated pay-in-kind notes due August 1, 2005
(see discussion below).................................. -- 32,781,810
Term loan payable by Golfsmith International, Inc. to
bank, floating interest rate, payable in monthly
installments through November 2003, collateralized by
land and buildings...................................... -- 8,916,671
------------ -----------
Total long-term debt...................................... 93,750,000 41,698,481
Less current maturities................................... -- (1,000,000)
------------ -----------
Long-term portion......................................... 93,750,000 40,698,481
Unamortized discount on senior secured notes.............. (18,369,955) --
Unamortized discount on senior subordinated notes......... - (6,978,655)
------------ -----------
Long-term debt, net of discount........................... $ 75,380,045 $33,719,826
============ ===========
F-17
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 28, 2002, the annual maturities of long-term debt were as
follows:
2003........................................................ $ --
2004........................................................ --
2005........................................................ --
2006........................................................ --
2007........................................................ 18,750,000
Thereafter.................................................. 75,000,000
-----------
$93,750,000
===========
SENIOR SECURED NOTES
On October 15, 2002, concurrent with the acquisition of Golfsmith by
Holdings, Golfsmith completed an offering of $93.75 million at a discount of
20%, or $18.75 million, of 8 3/8% senior secured notes (the "notes") due in
2009. Interest payments are required semi-annually on March 1 and September 1,
beginning on March 1, 2003. The notes rank equal in right with any other senior
indebtedness, including indebtedness under Golfsmith's senior credit facility.
The notes are fully and unconditionally guaranteed by both Holdings and all
existing and future Golfsmith domestic subsidiaries. As of December 28, 2002,
the notes were guaranteed by all Golfsmith subsidiaries.
The notes and each guarantee is secured by all of Golfsmith's real
property, equipment and proceeds thereof as well as by substantially all of
Golfsmith's other assets.
Golfsmith has the option to redeem some or all of the notes at any time
prior to October 15, 2006 at a make-whole redemption price. On or after October
15, 2006, Golfsmith has the option to redeem some or all of the notes at a
redemption price that will decrease ratably from 106.5% of accreted value to
100.0% of accreted value on October 15, 2008, in all cases plus accrued but
unpaid interest. Prior to October 15, 2005, the Company also has the option,
under certain circumstances, to redeem up to 35% of the aggregate principal
amount of the notes at a redemption price equal to 113% of accreted value plus
accrued but unpaid interest.
The terms of the notes require Golfsmith to make partial pro rata
redemptions of the principal amount at maturity of each note, plus accrued but
unpaid interest to the redemption date as follows:
PERCENTAGES OF NOTES
REQUIRED TO BE
MANDATORY REDEMPTION DATE REDEEMED
------------------------- --------------------
October 15, 2007............................................ 20%
October 15, 2008............................................ 10%
The redemption requirements may be reduced by the aggregate principal
amount at maturity of any notes Golfsmith has previously repurchased.
Additionally, subsequent to fiscal 2003, Golfsmith is required under the
notes to (i) offer to repurchase a portion of the notes at 100% of their
accreted value within 120 days after the end of each fiscal year with 50% of
Golfsmith's excess cash flow, as defined in the agreement; (ii) under certain
circumstances, Golfsmith is required to repurchase the notes at specified
redemption prices in the event of a change in control.
Additionally, the terms of the notes limit the ability of Golfsmith to,
among other things, incur additional indebtedness, dispose of assets, make
acquisitions, make other investments, pay dividends and make various other
payments.
F-18
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In conjunction with this offering, Golfsmith entered into a registration
rights agreement whereby Golfsmith agreed to file a registration statement
within 120 days after the close of the offering that would enable note-holders
to exchange their privately placed notes for publicly registered notes with
substantially identical terms. Additionally, Golfsmith agreed, among other
things, to use their reasonable best efforts to cause the registration statement
to become effective within 180 days after the close of the offering and to be
completed within 210 days after the close of the offering. If these terms are
not met, additional interest will accrue on the principal amount at maturity of
the notes at a rate of 0.25% per annum for the first 90 days following such
event and at a rate of 0.50% per annum thereafter, and shall accrue to and
including the date on which such default if cured. Golfsmith continues to use
its best efforts to cause the exchange offer to be declared effective. Following
the completion of the exchange offer, the interest rate will revert to the
original rate.
The notes are recorded on the December 28, 2002 balance sheet net of an
original issuance discount of $18.75 million that is being amortized to interest
expense over the term of the notes using the interest method.
SENIOR CREDIT FACILITY
On October 15, 2002, concurrent with the acquisition of Golfsmith by
Holdings, Golfsmith entered into a new senior credit facility with a third party
for up to $10.0 million in available revolver funds. Additionally, the senior
credit facility allows for up to $1.0 million in authorized letters of credit.
Borrowings under the senior credit facility are secured by substantially all of
Golfsmith's current and future assets, excluding real property, equipment and
proceeds thereof owned by Golfsmith, Holdings, or Golfsmith's subsidiaries, and
all of Golfsmith's stock and equivalent equity interest in any subsidiaries. The
senior credit facility is fully guaranteed by Holdings.
The senior credit facility has a term of 4.5 years and available amounts
under the facility are based on a borrowing base. The borrowing base is limited
to 85% of the net amount of eligible receivables, as defined in the agreement,
plus the lesser of (i) 65% of the value of eligible inventory and (ii) 60% of
the net orderly liquidation value of eligible inventory.
The senior credit facility contains covenants which, among other things,
limit: (i) additional indebtedness; (ii) dividends; (iii) capital expenditures;
and (iv) acquisitions, mergers, and consolidations. The facility also contains
certain additional covenants, including financial covenants.
Borrowings under the senior credit facility bear interest at Golfsmith's
option as follows: (i) advances on the revolver shall bear interest daily at the
higher of (a) the rate posted in the Wall Street Journal on corporate loans or
(b) the Federal Funds rate plus 50 basis points per annum plus 1.0%; (ii)
interest shall be computed daily based on LIBOR plus 2.5%. Letters of credit
bear interest at the higher of (a) the rate posted in the Wall Street Journal on
corporate loans or (b) the Federal Funds rate plus 50 basis points per annum
plus 2.5%.
SENIOR SUBORDINATED NOTES
On August 17, 1998, Golfsmith issued in a private placement $30.0 million
senior subordinated pay-in-kind notes (the "Subordinated Notes") and partnership
interests that may be converted into warrants to purchase 810,811 shares of the
Golfsmith's common stock for $.01 per share, under certain circumstances. In
1998, the partnership interests for 7.5% of Golfsmith Holdings (a wholly-owned
subsidiary of Golfsmith International, Inc.) were valued at $12.0 million. Since
the interests are related to a Golfsmith subsidiary that is consolidated, the
value of the interests is reflected as minority interest in the accompanying
December 29, 2001 consolidated balance sheet. The value of the minority interest
was offset as a discount to the Subordinated Notes. Immediately prior to the
merger Golfsmith repurchased the minority interest
F-19
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which had a carrying value of $13.1 million for cash consideration of $9.0
million resulting in negative goodwill of $4.1 million. In accordance with FAS
141, this is recorded in the period from December 30, 2001 through October 15,
2002, as an extraordinary item in the consolidated statement of operations.
Holders of the Subordinated Notes were entitled to receive interest,
payable quarterly, at Golfsmith's option in cash, or in-kind, through the
issuance of additional Subordinated Notes, both at 12%, per annum. The
Subordinated Notes were to mature on August 1, 2005, representing a yield to
maturity of 22.6%. During fiscal year 2002 and 2001, the Company issued
approximately zero and $1.0 million, respectively, in additional Subordinated
Notes for the payment of interest.
On October 15, 2002, immediately prior to the merger of Golfsmith with
Holdings, all remaining outstanding debt under the Subordinated Notes was repaid
in full. During the period from December 30, 2001 through October 15, 2002,
Golfsmith recorded a loss on this extinguishment of senior subordinated debt of
$8.0 million.
OLD BANK DEBT
In 2000, Golfsmith entered into a loan agreement (the "Loan Agreement")
providing for term loan ("Term Loan") borrowings of $15.0 million and revolver
borrowings up to $40.0 million ("Revolver"), subject to certain limitations.
This Loan Agreement replaced a 1997 credit agreement that provided for
borrowings up to $46.0 million that expired in 2000 and certain mortgage notes
totaling $2.8 million as of November 13, 2000. The Term Loan was secured by a
pledge of Golfsmith's land and buildings. The Revolver was secured by a pledge
of Golfsmith's inventory, receivables, and certain other assets and contained
significant covenants and restrictions.
Borrowings under the Loan Agreement bear interest at either (i) LIBOR plus
LIBOR margin or (ii) a Base Rate plus the Base Rate margin as defined in the
Agreement. The weighted average interest rate on Term Loan borrowings was 4.7%
and 6.5% in 2002 and 2001, respectively (4.7% at December 29, 2001). At December
29, 2001, Golfsmith had $8.9 million outstanding under the Term Loan. The
weighted average interest rate on Revolver borrowings was 5.3% and 8.2% in 2002
and 2001, respectively (5.3% at December 29, 2001). Golfsmith had $.03 million
outstanding under the Revolver at December 29, 2001.
Golfsmith had outstanding commercial letters of credit under the Loan
Agreement totaling approximately $0.2 million, as of December 29, 2001, relating
primarily to unfilled purchase orders issued to foreign suppliers.
On October 15, 2002 Golfsmith's existing line of credit was terminated.
5. STORE CLOSURE AND ASSET IMPAIRMENTS
A summary of the Company's store closures and asset impairments is as
follows:
NUMBER REVENUES GENERATED BY CASH FLOWS GENERATED BY TOTAL STORE
OF STORES THE CLOSED STORES IN THE CLOSED STORES IN CLOSURE
PERIOD CLOSED THE YEAR OF CLOSURE THE YEAR OF CLOSURE COSTS
------ --------- --------------------- ----------------------- -----------
October 16, 2002 through
December 28, 2002
(Successor)............ 0 $ -- $ (39,920) $ 39,920
December 30, 2001 through
October 15, 2002
(Predecessor).......... 1 1,987,226 (208,396) 229,880
Fiscal 2001
(Predecessor).......... 1 3,350,000 (419,672) 655,130
Fiscal 2000
(Predecessor).......... 3 8,734,000 (910,000) 1,187,000
F-20
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has closed five retail locations due to poor operating
performance and the lack of market penetration being derived from these
single-market stores. Store closure costs include writedowns of leasehold
improvements and store equipment to estimated fair values and lease termination
costs. These store-closing expenses in fiscal 2002 are reported in discontinued
operations under the accounting guidance of SFAS No. 144, Impairment of
Long-Lived Assets. All related assets and liabilities for these closed locations
have been eliminated from the consolidated balance sheet as the net assets were
disposed of prior to December 28, 2002.
6. LEASE COMMITMENTS
The Company leases certain store locations under operating leases that
provide for annual payments that, in some cases, increase over the life of the
lease. The aggregate of the minimum annual payments is expensed on a
straight-line basis over the term of the related lease without consideration of
renewal option periods. The lease agreements contain provisions that require the
Company to pay for normal repairs and maintenance, property taxes, and
insurance. Rent expense was $1.5 million for the period from October 16, 2002
through December 28, 2002, $5.9 million for the period from December 30, 2001
through October 15, 2002, and $8.1 million, and $8.2 million for the years ended
December 29, 2001, and December 30, 2000, respectively.
At December 28, 2002, future minimum payments due and sublease income to be
received, under non-cancelable operating leases with initial terms of one year
or more are as follows for each of the fiscal years ending:
OPERATING LEASE SUBLEASE
OBLIGATIONS INCOME
--------------- ----------
2003....................................................... $ 7,865,287 $ 322,575
2004....................................................... 7,870,074 327,250
2005....................................................... 7,812,039 327,250
2006....................................................... 7,679,814 327,250
2007....................................................... 7,232,872 327,250
Thereafter................................................. 28,989,111 1,811,563
------------ ----------
Total minimum lease payments............................... $ 67,449,197
============
Total minimum sublease rentals............................. $3,443,138
==========
Deferred rent consists of the step-rent accrual related to the Company's
store leases. In accordance with FASB Statement No. 13, Accounting for Leases,
rental expense for the Company's store leases is recognized on a straight-line
basis even though a majority of the store leases contain escalation clauses.
In November 2001, Golfsmith entered into a sublease agreement with a third
party to sublease retail space previously occupied by Golfsmith. The sublease
term ends in 2013. Future minimum sublease payments to be received by Golfsmith
over the term of the lease are noted in the table above.
7. GUARANTEES
Holdings fully and unconditionally guarantees both the Senior Secured Notes
issued by Golfsmith in October 2002 and the Senior Credit Facility. The Senior
Secured Notes mature in October 2009 with mandatory redemption requirements as
discussed more fully in Note 4. Interest payments are required on a semi-annual
basis on the Senior Secured Notes at an annual interest rate of 8.375%. There
were no amounts outstanding on the Senior Credit Facility at December 28, 2002.
Holdings' guarantee of Golfsmith's Senior Secured Notes and Senior Credit
Facility is explicitly excluded from the initial
F-21
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognition and initial measurement requirements of FASB Interpretation No. 45
as it meets the definition of an intercompany guarantee.
The following represents certain stand-alone information for the year ended
December 28, 2002 for the issuer and certain guarantors of the Senior Secured
Notes and the Senior Credit Facility:
GOLFSMITH GOLFSMITH
HOLDINGS GOLFSMITH CANADA EUROPE ELIMINATIONS TOTAL
-------- ------------ ---------- ---------- ------------ ------------
Assets............... -- $157,838,171 $ 616,947 $1,555,754 -- $160,010,872
Debt................. -- (75,380,045) -- (149,832) 149,832 (75,380,045)
Net Revenues
Predecessor........ -- 173,118,838 2,546,407 4,649,918 -- 180,315,163
Net Revenues
Successor.......... -- 36,936,204 273,602 620,734 -- 37,830,540
Net income (loss)
Predecessor........ -- (590,619) 372,050 646,900 -- 428,331
Net income (loss)
Successor.......... -- (3,080,176) 530,048 (35,793) -- (2,585,921)
The Company offers warranties to its customers depending on the specific
product and terms of the goods purchased. A typical warranty program requires
that the Company replace defective products within a specified time period from
the date of sale. The Company records warranty costs as they are incurred and
historically such costs have not been material. The Company accrued and settled
approximately $0.3 million for product warranties during the period from
December 30, 2001 through October 15, 2002 and had immaterial amounts in 2001
and 2000.
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The Company's accrued expenses and other current liabilities are comprised
of the following at December 28, 2002 and December 29, 2001, respectively:
SUCCESSOR PREDECESSOR
----------- -----------
2002 2001
----------- -----------
Salaries and benefits...................................... $ 2,206,568 $ 2,121,940
Interest................................................... 1,660,246 708,742
Allowance for returns reserve.............................. 1,098,029 1,220,584
Gift certificates.......................................... 3,785,669 3,128,163
Taxes...................................................... 2,456,960 2,482,833
Other...................................................... 1,614,830 859,758
----------- -----------
Total...................................................... $12,822,302 $10,522,020
=========== ===========
9. OTHER INCOME AND EXPENSE
Other income was $14,000 for the period from October 16, 2002 through
December 28, 2002, $2.4 million for the period from December 30, 2001 through
October 15, 2002, and $1.2 million and $1.1 million in 2001 and 2000,
respectively. During the period from December 30, 2001 through October 15, 2002,
the Company recorded a gain of $2.2 million on the sale of trademark rights to a
third party. The trademark rights were sold for $3.3 million and had a book
value of $1.1 million. During 2001, Golfsmith recorded a gain of $1.0 million on
the sale of property owned in Austin, Texas. The property was sold for gross
proceeds of $1.4 million and had a book value of $0.4 million. During 2000,
Golfsmith
F-22
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recorded a gain of $1.0 million on the sale of property owned in Austin, Texas.
The property was sold for gross proceeds of $1.1 million and had a book value of
$0.1 million. The proceeds from this sale were used to pay off real estate debt.
Other expense was not significant during 2002 and 2001. During 2000, the
Company recorded $0.6 million in other expense relating primarily to the
disposal of an asset that was never placed in service.
10. RETIREMENT AND PROFIT SHARING PLANS
During 1998, the Board of Directors approved a Retirement Savings Plan (the
"Plan"), which permits eligible employees to make contributions to the Plan on a
pretax basis in accordance with the provisions of Section 401(k) of the Internal
Revenue Code. The Company makes a matching contribution of 50% of the employee's
pretax contribution, up to 6% of the employee's compensation, in any calendar
year. The Company contributed approximately $35,000 for the period from October
16, 2002 through December 28, 2002, $243,000 for the period from December 30,
2001 through October 15, 2002, $292,000, and $346,000 to the Plan during the
years ended December 29, 2001, and December 30, 2000, respectively.
11. COMMON STOCK
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
Holdings has authorized 40.0 million shares of $.001 common stock of which
20,077,931 shares were issued and outstanding at December 28, 2002.
GOLFSMITH INTERNATIONAL, INC.
Prior to the merger on October 15, 2002, Golfsmith International, Inc., had
authorized 20.0 million shares of $.01 common stock of which 10.0 million shares
were outstanding at December 29, 2001.
Subsequent to the merger on October 15, 2002, the surviving operating
entity Golfsmith is authorized to issue 100 shares of its $.01 par value common
stock. All 100 shares were issued and outstanding as of December 28, 2002.
Holdings, the parent of Golfsmith, holds all of Golfsmith's outstanding common
stock.
DIVIDENDS
Golfsmith declared and paid cash dividends of $3.5 million, $0 and $2.5
million in the period from December 30, 2001 through October 15, 2002, fiscal
2001 and 2000, respectively to all common shareholders on the date of record.
Holdings has not declared or paid any dividends.
CAPITAL SHARES RESERVED FOR ISSUANCE
At December 28, 2002, the Company has reserved the following shares of
common stock for issuance:
Stock options............................................... 2,850,000
Restricted stock units...................................... 839,268
Additional authorized common shares......................... 19,922,069
----------
Total authorized common shares.............................. 23,611,337
==========
F-23
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. RESTRICTED STOCK UNITS
In October 2002, concurrent with the merger transaction between Holdings
and Golfsmith, Holdings awarded restricted stock units of Holdings' common stock
to eligible employees of Golfsmith and its subsidiaries. The stock units are
granted with certain restrictions as defined in the agreement. On December 28,
2002, 839,268 shares of restricted stock units were outstanding with a value of
$2.5 million.
The restricted stock units are fully vested at the grant date and are held
in an escrow account. The stock units become available to the employees as the
restrictions lapse. In general, the restrictions lapse after ten years unless
the occurrence of certain specified events, upon which the restrictions will
lapse earlier.
13. STOCK OPTION PLAN
GOLFSMITH INTERNATIONAL, INC. 1997 INCENTIVE PLAN
For all periods prior to the merger date of October 15, 2002, Golfsmith had
a stock incentive plan (the "1997 Incentive Plan") covering 2.8 million shares
of Golfsmith common stock. Options to acquire 0.22 million, 0.24 million and
0.57 million shares of stock were granted in fiscal years 2002, 2001, and 2000,
respectively. The exercise price on the options granted was at or above the
value of the Company's common stock on the grant date. All outstanding options
vested on the merger date, and option holders were paid in cash, restricted
stock units, or a combination of the two. The plan was then terminated.
GOLFSMITH INTERNATIONAL HOLDINGS, INC. 2002 INCENTIVE STOCK PLAN
In October 2002, Holdings adopted the 2002 Incentive Stock Plan (the "2002
Plan"). Under the 2002 Plan, certain employees, members of the Board of
Directors and third party consultants may be granted options to purchase shares
of Holdings common stock, stock appreciation rights and restricted stock grants
(collectively referred to as "options"). Options are exercisable and vest in
accordance with each option agreement. The term of each option is no more than
ten years from the date of the grant. There were 2,850,000 shares authorized
under the 2002 Plan at December 28, 2002, all of which are available for future
grant as no options have yet been issued.
A summary of the Company's stock option activity and related information
through December 28, 2002 follows:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
Outstanding at January 1, 2000 (Predecessor)............. 1,757,447 $13.94
Granted................................................ 2,285,896 4.00
Exercised.............................................. -- --
Forfeited.............................................. (1,867,138) 13.94
---------- ------
Outstanding at December 30, 2000 (Predecessor)........... 2,176,205 4.22
Granted................................................ 241,500 5.50
Exercised.............................................. -- --
Forfeited.............................................. (583,698) 4.01
---------- ------
F-24
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
Outstanding at December 29, 2001 (Predecessor)........... 1,834,007 4.45
Granted................................................ 230,120 6.55
Repurchased in connection with merger.................. (1,673,838) 4.43
Forfeited.............................................. (390,289) 4.54
---------- ------
Outstanding at October 15, 2002 (Predecessor)............ -- $ --
========== ======
Of the 1.7 million options repurchased in connection with merger above
612,201 options with a value of $2.5 million were converted into 839,268 shares
of restricted stock units of Holdings as part of the merger transaction
discussed in Note 2.
Cash consideration of $7.4 million was paid to option holders in exchange
for fully vested outstanding options concurrent with the business combination on
October 15, 2002 discussed in Note 2.
FAIR VALUE DISCLOSURES
Pro forma information regarding net income (loss) per share is required by
SFAS No. 123 and has been determined as if the Company had accounted for its
employee stock plans under the fair value method of that Statement. Fair value
was determined using the minimum value option-pricing model with a volatility
factor near zero as the Company's shares are not publicly traded, with the
following assumptions:
PREDECESSOR
------------------------------------------
PERIOD FROM
DECEMBER 30,
2001 THROUGH YEAR ENDED YEAR ENDED
OCTOBER 15, DECEMBER 29, DECEMBER 30,
2002 2001 2000
------------ ------------ ------------
Risk-free interest rate......................... 2.0% 4.8% 6.3%
Weighted-average expected life of the options
(years)....................................... 5.77 5.77 5.77
Dividend rate................................... 0.0% 0.0% 0.0%
Weighted-average fair value of options granted
Exercise price equal to fair value of stock on
date of grant.............................. $0.71 $1.39 $1.25
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is disclosed in Note 1.
Option valuation models incorporate highly subjective assumptions. Because
changes in the subjective assumptions can materially affect the fair value
estimate, the existing models do not necessarily provide a reliable single
measure of the fair value of Golfsmith's employee stock options. Because, for
pro forma disclosure purposes, the estimated fair value of Golfsmith's employee
stock options is treated as if amortized to expense over the options' vesting
period, the effects of applying SFAS No. 123 for pro forma disclosures are not
necessarily indicative of future amounts.
WARRANTS
In 1997, Golfsmith granted one warrant to purchase 60,000 options to a
third party at an exercise price of $15 per share. The warrant holder's right to
exercise such warrant is dependent upon the occurrence of a certain event. In
October 2002, immediately prior to the merger transaction discussed in Note 2,
the warrant was repurchased by Golfsmith for $0.5 million.
F-25
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEFERRED STOCK COMPENSATION
Golfsmith recorded deferred interest expense of $194,622 for options issued
to a non-employee creditor during fiscal year 2000. The deferred charge is being
amortized to interest expense over the remaining five-year term of the related
Subordinated Note. For the period from December 30, 2001 through October 15,
2002, fiscal 2001 and 2000, respectively, $30,284, $38,358 and $19,074 was
charged to interest expense relating to this option grant. On October 15, 2002,
immediately prior to the merger transaction discussed in Note 2, the remaining
unamortized deferred charge of $106,906 was recorded as a loss on the
extinguishment of the Senior Subordinated Note discussed in Note 4.
Due to the decline in the market value of Golfsmith's common stock, the
Board of Directors authorized Golfsmith to reprice stock options granted to
employees and officers with exercise prices in excess of the fair market value
on July 11, 2000. Stock options held by optionees other than non-employees,
which were granted under the incentive stock plans and which had an exercise
price greater than $4.00 per share, were amended to reduce their exercise price
to $4.00 per share, which was the market value of Golfsmith's common stock on
July 11, 2000. No other terms were changed. Options to purchase a total of
1,716,780 shares of common stock with a weighted average exercise price of
$13.94 were repriced and are included in options forfeited and granted for
fiscal year 2000.
Under FASB Interpretation No. 44, these repriced options require variable
accounting treatment until exercised or expired. Golfsmith recorded deferred
compensation of $4,116,741, $2,374,254 and $0 related to the repriced options in
fiscal 2002, 2001 and 2000, respectively. The deferred charge was being
amortized over the average remaining life of the repriced options. For the
period from December 30, 2001 through October 15, 2002, fiscal 2001 and 2000,
Golfsmith amortized $6,033,273 (including all remaining amounts as of the merger
date), $457,722 and $0 to compensation expense related to these repriced
options. There was no remaining deferred compensation relating to these repriced
options at December 28, 2002 as all remaining historical Golfsmith options
vested and were either canceled in exchange for the right to receive cash or
surrendered in exchange for stock units as part of the merger transaction
discussed in Note 2.
14. INCOME TAXES
From commencement through October 15, 2002, Golfsmith and its subsidiaries
had elected to be treated as a S Corporation under Subchapter S of the Internal
Revenue Code of 1986, as amended. As such, federal income taxes were the
responsibility of the individual stockholders. Accordingly, no provision for
U.S. federal income taxes was included in the financial statements. However,
certain foreign and state taxes were incurred and were recorded as income tax
expense for these periods. Concurrent with the merger transaction with Holdings
(see Note 2) on October 15, 2002, Golfsmith's Subchapter S status was terminated
and the Company became subject to corporate income taxes.
F-26
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the income tax provision attributable to
continuing operations are as follows:
SUCCESSOR
------------
FOR THE
PERIOD FROM
OCTOBER 16,
2002 THROUGH
DECEMBER 28,
2002
------------
Current:
Federal................................................... $ --
State..................................................... 218,750
Foreign................................................... 296,504
---------
Total current............................................... 515,254
Deferred:
Federal................................................... (404,153)
State..................................................... (35,661)
Foreign................................................... --
---------
Total deferred.............................................. (439,814)
Income tax provision........................................ $ 75,440
=========
The Company's provision for income taxes differs from the amount computed
by applying the statutory rate to income from continuing operations before taxes
as follows:
SUCCESSOR
------------
FOR THE
PERIOD FROM
OCTOBER 16,
2002 THROUGH
DECEMBER 28,
2002
------------
Income tax at U.S. statutory rate........................... 34.0%
State taxes, net of federal income tax...................... 3.0%
Foreign income taxes........................................ 5.0%
Permanent differences and other............................. 4.4%
S Corporation income not subject to tax..................... 28.9%
----
Income tax provision........................................ 1.3%
====
F-27
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes as of December 28, 2002 are as follows:
SUCCESSOR
-----------
2002
-----------
Deferred tax assets:
Accrued expenses.......................................... $ 45,068
Inventory basis........................................... 67,905
Depreciable/amortizable assets............................ 2,920,142
Federal tax carryforwards................................. 1,308,951
Other..................................................... --
-----------
Net deferred tax assets..................................... $ 4,342,066
Upon the acquisition of Golfsmith by Holdings on October 15, 2002, the
Company recorded a net deferred tax asset of approximately $3.9 million due to
differences between book and tax basis of acquired assets and assumed
liabilities.
As of December 28, 2002, the Company had federal net operating loss
carryforwards of approximately $3.5 million. The net operating loss
carryforwards will expire in 2022 if not utilized.
15. FOREIGN AND DOMESTIC OPERATIONS
The Company has operated in foreign and domestic regions. Information about
these operations is presented below:
SUCCESSOR PREDECESSOR
------------ ------------------------------------------
FOR THE FOR THE
PERIOD FROM PERIOD FROM
OCTOBER 16, DECEMBER 30, YEAR ENDED
2002 THROUGH 2001 THROUGH ---------------------------
DECEMBER 28, OCTOBER 15, DECEMBER 29, DECEMBER 30,
2002 2002 2001 2000
------------ ------------ ------------ ------------
Net revenues:
North America............... $37,147,135 $175,392,971 $216,333,270 $226,450,914
International............... 683,405 4,922,192 5,105,226 5,629,523
Operating profit (loss):
North America............... (1,326,480) 8,077,197 12,550,336 (162,320)
International............... 337,138 568,112 1,230,887 668,091
Identifiable assets:
North America............... 158,455,118 151,030,755 109,803,125 104,959,725
International............... 1,555,754 2,104,283 1,697,238 1,942,767
F-28
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. VALUATION AND QUALIFYING ACCOUNTS
AMOUNTS
CHARGED TO NET
BALANCE AT INCOME (LOSS), WRITE-OFFS BALANCE AT
BEGINNING OF NET OF AGAINST END OF
PERIOD RECOVERIES RESERVES PERIOD
------------ -------------- ---------- ----------
INVENTORY RESERVE:
Period from October 16, 2002 through
December 28, 2002 (Successor).......... 1,219,373 (58,852) (341,705) 818,816
Period from December 30, 2001 through
October 15, 2002 (Predecessor)......... 1,555,107 1,253,856 (1,589,590) 1,219,373
Year ended December 29, 2001
(Predecessor).......................... 867,510 1,745,956 (1,058,359) 1,555,107
Year ended December 30, 2000
(Predecessor).......................... 828,512 2,665,132 (2,626,134) 867,510
ALLOWANCE FOR SALES RETURNS:
Period from October 16, 2002 through
December 28, 2002 (Successor).......... 1,116,480 640,592 (659,043) 1,098,029
Period from December 30, 2001 through
October 15, 2002 (Predecessor)......... 1,220,584 4,240,901 (4,345,005) 1,116,480
Year ended December 29, 2001
(Predecessor).......................... 1,402,614 5,768,877 (5,950,907) 1,220,584
Year ended December 30, 2000
(Predecessor).......................... 1,829,108 7,076,618 (7,503,112) 1,402,614
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Period from October 16, 2002 through
December 28, 2002 (Successor).......... 403,088 (94,905) (65,540) 242,643
Period from December 30, 2001 through
October 15, 2002 (Predecessor)......... 1,107,321 27,057 (731,290) 403,088
Year ended December 29, 2001
(Predecessor).......................... 1,564,785 2,129,334 (2,586,798) 1,107,321
Year ended December 30, 2000
(Predecessor).......................... 966,926 597,859 -- 1,564,785
17. CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
PREDECESSOR SUCCESSOR
------------------------------------------------------- ------------
PERIOD FROM PERIOD FROM
SEPTEMBER 29, OCTOBER 16,
2002 THROUGH 2002 THROUGH
FIRST SECOND THIRD OCTOBER 15, DECEMBER 28,
FISCAL 2002(1) QUARTER QUARTER QUARTER 2002 2002
-------------- ----------- ----------- ----------- ------------- ------------
Net revenues.............................. $47,460,173 $70,155,932 $55,962,187 $ 6,736,871 $37,830,540
Gross profit.............................. 16,752,162 24,991,205 19,346,101 2,019,101 12,684,362
Income (loss) from continuing
operations.............................. 2,583,312 4,215,849 3,391,900 (13,654,777) (2,546,001)
Income (loss) from discontinued
operations(2)........................... 26,208 (270,798) 14,710 -- (39,920)
Income from extraordinary items(3)........ -- -- -- 4,121,927 --
Net income (loss)......................... 2,609,520 3,945,051 3,406,610 (9,532,850) (2,585,921)
F-29
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRST SECOND THIRD FOURTH FULL
FISCAL 2001 (PREDECESSOR) (1) QUARTER QUARTER QUARTER QUARTER YEAR
----------------------------- ----------- ----------- ----------- ----------- ------------
Net revenues.............................. $50,838,667 $70,779,774 $54,959,614 $44,860,441 $221,438,496
Gross profit.............................. 17,163,181 25,025,953 19,526,277 16,605,287 78,320,698
Income (loss) from continuing
operations.............................. 758,303 5,349,897 2,260,383 (615,528) 7,753,055
Income (loss) from discontinued
operations.............................. (35,252) 155,368 55,550 (765,547) (589,881)
Net income (loss)......................... 723,051 5,505,266 2,315,933 (1,381,076) 7,163,174
---------------
(1) Fiscal 2002 and 2001 each consist of 52-week periods.
(2) Store-closing expenses in fiscal 2002 are reported in discontinued
operations under the accounting guidance of SFAS No. 144, Impairment of
Long-Lived Assets. All comparative periods presented in the above quarterly
table have been reclassified to reflect the closed stores.
(3) During the period from December 30, 2001 through October 15, 2002, the
Company recorded an extraordinary gain on the repurchase of minority
interest obligations immediately prior to the merger transaction discussed
in Note 2.
18. RELATED PARTY TRANSACTIONS
In October 2002, the Company entered into an agreement with a majority
shareholder whereby the Company pays a management fee expense of $600,000 per
year to this majority shareholder of the Company. During the period from October
16, 2002 through December 28, 2002, the Company paid $150,000 to this majority
shareholder under this agreement. These amounts are recognized in the
consolidated statement of operations in the selling, general and administrative
expense line item. As of December 28, 2002, the Company had no amounts payable
to this majority shareholder.
19. SUBSEQUENT EVENTS
Subsequent to December 28, 2002, the Company entered into three additional
non-cancellable leases for long-term retail space in Santa Ana, California,
Auburn Hills, Michigan and Baybrook, Texas. The leases commence upon final
build-out of each retail space, with total minimum lease payments over the lease
terms of $9.3 million, plus operating expenses. The individual leases are as
follows: Santa Ana with a 15 year term and minimum lease payments totaling $4.6
million, Auburn Hills with a 10 year term and minimum lease payments totaling
$1.6 million, and Baybrook with a 10 year lease term and minimum lease payments
totaling $3.1 million, plus operating expenses.
In May 2003, the purchase price of the merger with Holdings was finalized,
resulting in a reduction of the purchase price of $25,000.
F-30
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
SUCCESSOR
------------
MARCH 29, DECEMBER 28,
2003 2002
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,774,954 $ 11,412,460
Receivables, net of allowances of $273,336 at March 29,
2003 and $242,643 at December 28, 2002................. 2,630,006 1,639,120
Inventories, net of reserves of $918,786 at March 29, 2003
and $818,816 at December 28, 2002...................... 43,682,345 32,351,880
Deferred tax assets....................................... 67,905 67,905
Prepaids and other current assets......................... 2,231,130 2,119,390
------------ ------------
Total current assets........................................ 51,386,340 47,590,755
Property and equipment:
Land and buildings........................................ 21,026,219 21,017,551
Equipment, furniture, fixtures and autos.................. 9,506,884 9,270,340
Leasehold improvements and construction in progress....... 7,176,192 7,015,985
------------ ------------
37,709,295 37,303,876
Less: accumulated depreciation and amortization........... (2,472,231) (1,258,676)
------------ ------------
Net property and equipment.................................. 35,237,064 36,045,200
Goodwill.................................................... 34,949,341 34,948,016
Tradename................................................... 11,158,000 11,158,000
Trademarks.................................................. 15,093,396 15,093,396
Customer database, net of accumulated amortization of
$188,844 at March 29, 2003 and $94,422 at December 28,
2002...................................................... 3,210,361 3,304,783
Deferred tax assets......................................... 4,274,161 4,274,161
Debt issuance costs......................................... 7,392,821 7,596,561
------------ ------------
Total assets................................................ $162,701,484 $160,010,872
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 23,937,890 $ 17,822,015
Accrued expenses and other current liabilities............ 7,853,848 12,822,302
Lines of credit........................................... 2,075,000 --
------------ ------------
Total current liabilities................................... 33,866,738 30,644,317
Long-term debt, less current maturities..................... 75,879,168 75,380,045
Deferred rent............................................... 710,068 513,324
------------ ------------
Total liabilities........................................... 110,455,974 106,537,686
Stockholders' equity:
Common stock -- $.001 par value; 40,000,000 shares
authorized; 20,077,931 shares issued and outstanding... 20,078 20,078
Restricted common stock units -- $.001 par value; 839,268
shares issued and outstanding.......................... 839 839
Additional paid-in capital................................ 55,990,042 55,990,042
Other comprehensive income................................ 37,875 48,148
Accumulated deficit....................................... (3,803,324) (2,585,921)
------------ ------------
Total stockholders' equity.................................. 52,245,510 53,473,186
------------ ------------
Total liabilities and stockholders' equity.................. $162,701,484 $160,010,872
============ ============
See accompanying notes.
F-31
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
---------------------------
MARCH 29, MARCH 30,
2003 2002
(SUCCESSOR) (PREDECESSOR)
----------- -------------
(UNAUDITED)
Net revenues................................................ $45,830,119 $48,443,225
Cost of products sold....................................... 30,972,343 31,348,401
----------- -----------
Gross profit................................................ 14,857,776 17,094,824
Selling, general and administrative......................... 14,258,838 14,748,796
Amortization of deferred compensation....................... -- 145,847
----------- -----------
Total operating expenses.................................... 14,258,838 14,894,643
----------- -----------
Operating income............................................ 598,938 2,200,181
Interest expense............................................ 2,638,496 1,588,956
Interest income............................................. (7,477) (112,412)
Other income................................................ (5,693) (2,226,239)
Other expense............................................... 2,334 --
Minority interest........................................... -- 223,408
----------- -----------
Income (loss) before income taxes........................... (2,028,722) 2,726,468
Income tax expense (benefit)................................ (811,319) 116,948
----------- -----------
Net income (loss)........................................... $(1,217,403) $ 2,609,520
=========== ===========
See accompanying notes.
F-32
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
----------------------------
MARCH 29, MARCH 30,
2003 2002
(SUCCESSOR) (PREDECESSOR)
------------ -------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income (loss)........................................... $ (1,217,403) $ 2,609,520
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation.............................................. 1,216,435 1,386,413
Amortization of intangible assets......................... 94,422 31,959
Amortization of deferred compensation..................... -- 145,847
Amortization of debt issue costs and debt discount........ 713,393 474,590
Minority interest......................................... -- 223,408
Gain on sale of intellectual property..................... -- (2,215,738)
Changes in operating assets and liabilities:
Accounts receivable.................................... (990,886) 531,745
Inventories............................................ (11,330,465) (9,402,990)
Prepaid and other assets............................... (111,740) (1,494,904)
Accounts payable....................................... 6,115,875 1,604,096
Accrued expenses and other current liabilities......... (4,968,454) (2,794,891)
Deferred rent.......................................... 196,744 (13,098)
------------ ------------
Net cash used in operating activities....................... (10,282,079) (8,914,043)
INVESTING ACTIVITIES
Capital expenditures........................................ (408,885) (376,604)
Proceeds from sale of intellectual property................. -- 3,313,022
Other....................................................... (1,325) --
------------ ------------
Net cash provided by (used in) investing activities......... (410,210) 2,936,418
FINANCING ACTIVITIES
Principal payments on lines of credit....................... (5,476,478) (9,428,533)
Proceeds from lines of credit............................... 7,551,478 9,394,970
Principal payments on term note............................. -- (8,916,671)
Debt issuance costs......................................... (10,530) --
------------ ------------
Net cash provided by (used in) financing activities......... 2,064,470 (8,950,234)
Effect of exchange rate changes on cash..................... (9,687) (25,376)
------------ ------------
Change in cash and cash equivalents......................... (8,637,506) (14,953,235)
Cash and cash equivalents, beginning of period.............. 11,412,460 39,549,924
------------ ------------
Cash and cash equivalents, end of period.................... $ 2,774,954 $ 24,596,689
============ ============
Supplemental cash flow information:
Interest payments......................................... $ 2,979,025 $ 1,157,865
Tax payments.............................................. $ 56,936 $ 26,490
Amortization of discount on senior subordinated notes..... $ -- $ 423,905
Amortization of discount on senior secured notes.......... $ 499,123 $ --
See accompanying notes.
F-33
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 29, 2003
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Golfsmith is one of the largest, multi-channel, specialty retailers of golf
equipment and related accessories in the industry and is an established designer
and marketer of golf equipment. Golfsmith offers equipment from leading
manufacturers, including Callaway(R) Cobra(R), FootJoy(R), Nike(R), Ping(R),
Taylor Made(R) and Titleist(R). In addition, Golfsmith offers its own
proprietary brands, including Golfsmith(R), Lynx(R), Snake Eyes(R) and Killer
Bee(R). The Company markets its products through 26 superstores as well as
through its direct-to-consumer channel, which includes its clubmaking and
accessory catalogs and its Internet site. The Company also operates a clubmaker
training program and is the exclusive operator of the Harvey Penick Golf
Academy, an instructional school incorporating the techniques of the renowned
golf instructor, Harvey Penick.
BASIS OF PRESENTATION AND CHANGE IN REPORTING ENTITY
The accompanying consolidated financial statements include the accounts of
Golfsmith International Holdings, Inc. ("Holdings", "Company" or "Successor")
and its wholly owned subsidiary Golfsmith International, Inc. ("Golfsmith" or
"Predecessor"). Holdings was formed on September 4, 2002 as a Delaware
corporation to acquire all of the outstanding shares of common stock of
Golfsmith. Holdings acquired Golfsmith on October 15, 2002 (See Note 2).
Holdings has no assets or liabilities other than its investment in its wholly
owned subsidiary Golfsmith and did not have operations prior to the acquisition
of Golfsmith; accordingly these consolidated financial statements represent the
operations of Golfsmith and its subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation.
For purposes of presentation, the accompanying statements of operations and
cash flows for the three months ended March 30, 2002 reflect the operating
results and cash flows of Golfsmith prior to its acquisition by Holdings on
October 15, 2002. The accompanying statements of operations and cash flows for
the three months ended March 29, 2003 reflects the sum of the consolidated
operating results and cash flows of Golfsmith and Holdings.
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States. As information in this report relates to interim
financial information, certain footnote disclosures have been condensed or
omitted. In the Company's opinion, the unaudited interim condensed consolidated
financial statements reflect all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation of the Company's
financial position, results of operations and cash flows for the periods
presented. These financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto for the year ended
December 28, 2002 as filed in the Company's registration statement on Form S-4.
The results of operations for the three month periods ended March 29, 2003 and
March 30, 2002 are not necessarily indicative of results that may be expected
for any other interim period or for the full fiscal year.
The balance sheet at December 28, 2002 has been derived from audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements. For further information, refer to the
consolidated financial statements and footnotes thereto for the year ended
December 28, 2002.
F-34
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and use assumptions that affect certain reported amounts and
disclosures. Although management uses the best information available, it is
reasonably possible that the estimates used by the Company will be materially
different from the actual results. These differences could have a material
effect on the Company's future results of operations and financial position.
REVENUE SUBJECT TO SEASONAL VARIATIONS
The Company's business is highly seasonal, reflecting peak sales and
earnings during the Father's Day and holiday seasons. A substantial portion of
the Company's total revenues and an even larger portion of the Company's
operating income occur in its second fiscal quarter. The results of these
interim quarters may not be representative of the results for the full fiscal
year.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to December 31. The
year to date periods ended March 29, 2003 and March 30, 2002 both consist of
thirteen weeks.
STORE PRE-OPENING AND CLOSING EXPENSES
Costs associated with the opening of a new store are expensed as incurred.
With respect to store closings, the Company provides for the future net lease
obligation, non-recoverable investment in fixed assets, and other expenses
directly related to discontinuance of operations when the decision has been made
to close a store and records store closing expenses in accordance with SFAS 146,
Accounting For Costs Associated With Exit or Disposal Activities.
STOCK-BASED COMPENSATION
SFAS No. 123, Accounting for Stock-Based Compensation, prescribes
accounting and reporting standards for all stock-based compensation plans,
including employee stock options. As allowed by SFAS No. 123, the Company has
elected to continue to account for its employee stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB No. 25").
In December 2002, the FASB issued SFAS No. 148, Accounting For Stock-Based
Compensation -- Transition and Disclosure, An Amendment of FASB Statement No.
123. This Statement amends SFAS No. 123, Accounting For Stock-Based
Compensation, to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. Since the Company is continuing to account for
stock-based compensation according to APB 25, adoption of SFAS No. 148 requires
the Company to provide prominent disclosures about the affects of FASB No. 123
on reported net income (loss).
F-35
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table illustrates the effect on net income (loss), if the
Company had applied the fair value recognition provisions of SFAS No. 123:
THREE MONTHS ENDED
-------------------------------
MARCH 29, 2003 MARCH 30, 2002
(SUCCESSOR) (PREDECESSOR)
-------------- --------------
Net income (loss) -- as reported......................... $(1,217,403) $2,609,520
Total stock-based compensation cost, net of related tax
effects included in the determination of net income
(loss) as reported..................................... -- 145,847
The stock-based employee compensation cost, net of
related tax effects, that would have been included in
the determination of net income (loss) if the fair
value based method had been applied to all awards...... -- (244,030)
----------- ----------
Pro forma net income (loss).............................. $(1,217,403) $2,511,337
=========== ==========
2. BUSINESS COMBINATIONS
On October 15, 2002, the Company acquired all issued and outstanding shares
of Golfsmith. The total purchase price was $121.0 million including related
acquisition costs of $6.7 million. Atlantic Equity Partners III, L.P., the
Company's majority shareholder, acquires profitable companies that it believes
to be leaders in their respective markets and that it believes will increase in
value over time. The Company believed that Golfsmith satisfied these criteria
based on its profitable business, its investment in infrastructure to support
additional growth, and its private label brands. The Company believed that these
attributes would allow Golfsmith opportunities to increase in value, and
therefore justified the purchase price that exceeded the fair market value of
the assets.
In conjunction with the acquisition of Golfsmith, the Company issued
20,077,931 shares of common stock and 839,268 restricted stock units to
investors for approximately $62.8 million, excluding related issuance costs.
Golfsmith International, Inc., being the surviving wholly owned subsidiary of
the Company, issued Senior Secured Notes at a 20% discount off of face value for
consideration of $75.0 million. The proceeds from the issuance of common and
restricted stock units and the new Senior Secured Notes were utilized to fund
the acquisition of Golfsmith.
The total purchase consideration has been allocated to the assets acquired
and liabilities assumed, including identifiable intangible assets, based on
their respective fair values at the date of acquisition as determined by an
independent valuation obtained by the Company. Such allocation resulted in
goodwill of $34.9 million. Goodwill is assigned at the enterprise level and is
deductible for income tax purposes.
The consolidated financial statements have been prepared giving effect to
the recapitalization of the Company in accordance with EITF 88-16, Basis in
Leveraged Buyout Transactions, as a partial purchase. Under EITF 88-16, the
Company was revalued at the merger date to fair value to the extent of the
majority shareholders' 79.7% controlling interest in the Company. The remaining
20.3% is accounted for at the continuing stockholder's carryover basis in the
Company. The excess of the purchase price over the historical basis of the net
assets acquired has been applied to adjust net assets to their fair values to
the extent of the majority shareholders' 79.7% ownership.
Contingent consideration of $6,250,000 has been placed in an escrow account
by the selling stockholders to cover a final working capital assessment and to
secure certain indemnification obligations of the sellers. In accordance with
the merger agreement, on May 20, 2003, the parties determined that an adjustment
in the merger consideration of $25,000 was payable to the Company based on the
post-merger review of Golfsmith's working capital and will be paid out of the
escrow account. The Company has adjusted the purchase price allocation
accordingly. On April 15, 2004, any remaining escrow funds will be
F-36
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dispersed. Concurrent with the acquisition, Golfsmith changed status from a
Subchapter S Corporation to a C Corporation that is subject to federal income
taxes.
PRO FORMA RESULTS OF OPERATIONS
The following presents the unaudited pro forma combined results of
operations of the Company with Golfsmith for the three months ended March 30,
2002, after giving effect to certain pro forma adjustments. These unaudited pro
forma results are not necessarily indicative of the actual consolidated results
of operations had the acquisition actually occurred on December 29, 2001 (first
day of the three month period) or of future results of operations of the
consolidated entities:
PREDECESSOR
------------------
THREE MONTHS ENDED
MARCH 30, 2002
------------------
Revenue..................................................... $48,443,225
Income from operations...................................... 643,329
Net income (loss)........................................... 643,329
3. INTANGIBLE ASSETS
In July 2001, Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets ("SFAS 142") was issued. SFAS 142 requires that
ratable amortization of intangible assets with indefinite lives, including
goodwill, be replaced with periodic review and analysis for possible impairment.
Intangible assets with definite lives must be amortized over their estimated
useful lives. On January 1, 2002, the Company adopted SFAS 142. As a result, the
Company no longer amortizes its acquired trademarks thereby eliminating
estimated amortization of approximately $17,000 for the three months March 30,
2002.
INTANGIBLE ASSETS WITH DEFINITE LIVES
Following is a summary of the Company's intangible assets that are subject
to amortization:
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
-------------- ------------ ------------
Customer databases............................. $3,399,205 $(188,844) $3,210,361
The net carrying amount of customer databases intangible assets relates
solely to the merger transaction between Golfsmith and Holdings discussed in
Note 2. Total amortization expense for the three months ended March 29, 2003 was
$94,422 and is recorded in selling, general, and administration costs on the
consolidated statement of operations. Estimated future annual amortization
expense is as follows:
2003........................................................ $ 283,267
2004........................................................ 377,689
2005........................................................ 377,689
2006........................................................ 377,689
2007........................................................ 377,689
Thereafter.................................................. 1,416,338
----------
$3,210,361
==========
F-37
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. GUARANTEES
Holdings fully and unconditionally guarantees both the Senior Secured Notes
issued by Golfsmith in October 2002 and the Senior Credit Facility. The Senior
Secured Notes mature in October 2009 with certain mandatory redemption features.
Interest payments are required on a semi-annual basis on the Senior Secured
Notes at an annual interest rate of 8.375%. At March 29, 2003 there was $2.1
million outstanding on the Senior Credit Facility and $75.9 million outstanding
on the Senior Secured Notes. Holdings' guarantee of Golfsmith's Senior Secured
Notes and Senior Credit Facility is explicitly excluded from the initial
recognition and initial measurement requirements of FASB Interpretation No. 45
as it meets the definition of an intercompany guarantee.
The following represents certain stand-alone information for the three
months ended March 29, 2003 for the issuer and certain guarantors of the Senior
Secured Notes and the Senior Credit Facility:
GOLFSMITH GOLFSMITH
HOLDINGS GOLFSMITH CANADA EUROPE TOTAL
-------- ------------ --------- ---------- ------------
Assets................... $ -- $160,121,680 $787,117 $1,792,687 $162,701,484
Debt..................... -- 77,954,168 -- -- 77,954,168
Net revenues............. -- 44,431,863 545,429 852,827 45,830,119
Net income (loss)........ -- (1,255,472) 96,842 (58,773) (1,217,403)
The Company offers warranties to its customers depending on the specific
product and terms of the goods purchased. A typical warranty program requires
that the Company replace defective products within a specified time period from
the date of sale. The Company records warranty costs as they are incurred and
historically such costs have not been material. During the quarters ended March
29, 2003 and March 30, 2002, respectively, no amounts have been accrued or paid
relating to product warranties.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The Company's accrued expenses and other current liabilities are comprised
of the following at March 29, 2003 and December 28, 2002, respectively:
MARCH 29, DECEMBER 28,
2003 2002
---------- ------------
Salaries and benefits....................................... $1,275,267 $ 2,206,568
Interest.................................................... 606,324 1,660,246
Allowance for returns reserve............................... 1,102,370 1,098,029
Gift certificates........................................... 3,071,078 3,785,669
Taxes....................................................... 559,672 2,456,960
Other....................................................... 1,239,137 1,614,830
---------- -----------
Total....................................................... $7,853,848 $12,822,302
========== ===========
6. DEFERRED STOCK COMPENSATION
Due to the decline in the market value of Golfsmith's common stock, the
Board of Directors authorized Golfsmith to reprice stock options granted to
employees and officers with exercise prices in excess of the fair market value
on July 11, 2000. Stock options held by optionees other than non-employees,
which were granted under the incentive stock plans and which had an exercise
price greater than $4.00 per share, were amended to reduce their exercise price
to $4.00 per share, which was the market value of Golfsmith's common stock on
July 11, 2000. No other terms were changed. Options to
F-38
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase a total of 1,716,780 shares of common stock with a weighted average
exercise price of $13.94 were repriced.
Under FASB Interpretation No. 44, these repriced options require variable
accounting treatment until exercised or expired. Golfsmith recorded deferred
compensation of $307,642 and $0 related to the repriced options during the three
months ended March 30, 2002 and March 29, 2003, respectively. The deferred
charge was being amortized over the average remaining life of the repriced
options. For the three months ended March 29, 2003 and March 30, 2002, Golfsmith
recorded $0 and $145,847 to compensation expense related to these repriced
options. As of December 28, 2002, there was no remaining deferred compensation
relating to these repriced options as all remaining historical Golfsmith options
were either canceled in exchange for the right to receive cash or surrendered in
exchange for stock units as part of the merger transaction discussed.
7. COMPREHENSIVE INCOME
The Company's comprehensive income is composed of net income and
translation adjustments. The following table presents the calculation of
comprehensive income (in thousands):
THREE MONTHS ENDED
---------------------------
MARCH 29, MARCH 30,
2003 2002
(SUCCESSOR) (PREDECESSOR)
----------- -------------
Net income (loss).......................................... $(1,217,403) $2,609,520
Translation adjustments.................................... (10,273) (25,901)
----------- ----------
Total comprehensive income................................. $(1,227,676) $2,583,619
=========== ==========
8. SALE OF LYNX JAPAN TRADEMARK
In March 2002, the Company sold rights to their trademarks for Lynx in
Japan to a third party. The Company received proceeds of approximately $3.3
million, net of direct costs associated with the sale. The gain on the sale was
approximately $2.2 million. The gain is recorded in other income in the March
30, 2002 statement of operations.
9. INCOME TAXES
From commencement through October 15, 2002, Golfsmith and its subsidiaries
had elected to be treated as an S Corporation under Subchapter S of the Internal
Revenue Code of 1986, as amended. As such, federal income taxes were the
responsibility of the individual stockholders. Accordingly, no provision for
U.S. federal income taxes was included in the financial statements. However,
certain foreign and state taxes were incurred and were recorded as income tax
expense for these periods. Concurrent with the merger transaction with Holdings
(see Note 2) on October 15, 2002, Golfsmith's Subchapter S status was terminated
and the Company became subject to corporate income taxes.
10. RECENTLY ISSUED ACCOUNTING STANDARDS
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
In June 2002 the FASB issued SFAS No. 146, Accounting For Costs Associated
With Exit or Disposal Activities. SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of commitment to an exit or disposal plan. This Statement is
effective for exit or disposal activities initiated after December 31, 2002. The
adoption of SFAS No. 146 has not had a material impact on our financial
statements.
F-39
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FINANCIAL GUARANTEES
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires a company to
recognize an initial liability for the fair value of an obligation it assumes
under a guarantee, as well as its ongoing obligation over the term of the
guarantee. The offsetting entry of recognizing a liability depends on the
circumstances in which the guarantee was issued. Additionally, FIN 45 elaborates
on and clarifies existing disclosure requirements for most guarantees. The
initial recognition provisions of FIN 45 apply to guarantees issued or modified
after December 31, 2002. The adoption of FIN 45's initial recognition and
measurement provisions has not had a material effect on our consolidated
financial statements. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002, and have
been incorporated into our disclosures of guarantees in our financial
statements.
10. RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
CONSIDERATION RECEIVED FROM A VENDOR
In January 2003, the Emerging Issues Task Force ("EITF") issued Issue No.
02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor. Issue No. 02-16, Issue No. 1, states that cash
consideration received by a customer (or a reseller) from a vendor is presumed
to be a reduction of the prices of the vendor's products or services and should,
therefore, be characterized as a reduction of cost of sales when recognized in
the customer's income statement. However, that presumption is overcome when the
consideration is either (a) a payment for assets or services delivered to the
vendor, in which case the cash consideration should be characterized as revenue
(or other income, as appropriate) when recognized in the customer's income
statement, or (b) a reimbursement of costs incurred by the customer to sell the
vendor's products, in which case the cash consideration should be characterized
as a reduction of that cost when recognized in the customer's income statement.
The consensus on Issue 1 should be applied to fiscal periods beginning after
December 15, 2002. Upon application of the consensus on Issue 1, income
statements for prior periods presented should be reclassified to comply with
that consensus, provided that the recasting of prior-period financial statements
does not result in a change to net income of those prior periods. The adoption
of Issue No. 02-16, Issue 1 did not have a material impact on our financial
statements and no prior period reclassifications were necessary.
Issue No. 02-16, Issue No. 2, states that a rebate or refund of a specified
amount of cash consideration that is payable pursuant to a binding arrangement
only if the customer completes a specified cumulative level of purchases or
remains a customer for a specified time period should be recognized as a
reduction of the cost of sales based on a systematic and rational allocation of
the cash consideration offered to each of the underlying transactions that
results in progress by the customer toward earning the rebate or refund provided
the amounts are probable and reasonably estimable. If the rebate or refund is
not probable and reasonably estimable, it should be recognized as the milestones
are achieved. Issue 2 is effective for arrangements entered into after November
21, 2002. The adoption of Issue No. 02-16, Issue 2 did not have a material
impact on our financial statements.
11. SUBSEQUENT EVENTS
Subsequent to March 29, 2003, the Company entered into two additional
non-cancelable leases for long-term retail space in El Segundo, California and
Scarsdale, New York. The leases commence upon final buildout of each retail
space, with total minimum lease payments over the lease terms of $9.5 million,
plus operating expenses. The individual leases are as follows: El Segundo with a
ten year term and
F-40
GOLFSMITH INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
minimum lease payments totaling $3.9 million, and Scardsale with a 15 year term
and minimum lease payments totaling $5.6 million.
In May 2003, the purchase price of the merger with Holdings was finalized,
resulting in a reduction of the purchase price of $25,000.
F-41
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF GOLFSMITH SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
GOLFSMITH INTERNATIONAL, INC.
OFFER TO EXCHANGE
$93,750,000
8.375% SENIOR SECURED NOTES DUE 2009
THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR
ALL OUTSTANDING UNREGISTERED
8.375% SENIOR SECURED NOTES DUE 2009
JUNE 18, 2003
UNTIL SEPTEMBER 17, 2003, ALL DEALERS EFFECTING TRANSACTIONS IN THE OLD NOTES OR
THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN THE EXCHANGE OFFER, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE
DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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