**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM 10-Q**

(Mark One)

| **x** |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------|--------------------------------------------------------------------------------------------------------|

 

For the quarterlyperiod ended**November 25, 2006**

or

| **o** |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------|---------------------------------------------------------------------------------------------------------|

 

For the transitionperiod from**                    **to **                    **

Commission FileNumber:**000-51460**

**GOLFGALAXY, INC.******(Exact name of registrant as specified in its charter)

| **Minnesota**                                                   |   | **41-1831724**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **7275  Flying Cloud Drive**                                    |   | ** **                            |
| **Eden  Prairie, Minnesota**                                    |   | **55344**                             |
| (Address of  principal executive offices)                       |   | (Zip Code)                            |

 

**(952)941-8848**(Registrant’s telephone number, including area code)

**N/A**(Former name, former address and former fiscal year, ifchanged from last report)

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.                                                                         Yes x No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):
| Large accelerated  filer o | Accelerated  filer o | Non-accelerated  filer x |
|---------------------------------|---------------------------|-------------------------------|

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

As ofDecember 29, 2006, the Company had 11,147,875 shares of common stock, par value$0.01 per share, outstanding.

 

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**GOLFGALAXY, INC.FORM 10-Q FOR THE QUARTERLY PERIOD ENDED NOVEMBER 25, 2006INDEX**
| PART I-FINANCIAL  INFORMATION                                                                                              |   |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Item 1. Financial  Statements.                                                                                                  |   |   |
| Consolidated  Balance Sheets as of November 25, 2006 (unaudited), November 26, 2005  (unaudited) and February 25, 2006     |   |   |
| Consolidated  Statements of Operations for the Three and Nine Months Ended November 25,  2006 and November 26, 2005 (unaudited) |   |   |
| Consolidated  Statements of Cash Flows for the Nine Months Ended November 25, 2006 and  November 26, 2005 (unaudited)           |   |   |
| Notes to  Unaudited Consolidated Financial Statements                                                                           |   |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations.                           |   |   |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk.                                                            |   |   |
| Item 4. Controls and  Procedures.                                                                                               |   |   |
| PART II-OTHER  INFORMATION                                                                                                 |   |   |
| Item 1A. Risk Factors.                                                                                                          |   |   |
| Item 6. Exhibits.                                                                                                               |   |   |
| SIGNATURES                                                                                                                      |   |   |

 

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**PART I—FINANCIALINFORMATION**

**Item1. Financial Statements.**

**GOLFGALAXY, INC.****CONSOLIDATED BALANCESHEETS(*In Thousands, Except Share and Per Share Amounts*)**
| ** **                                                                                                               | ** ** | **November 25,  2006  (unaudited)** | ** ** | **November 26,  2005  (unaudited)** | ** ** | **February 25,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                               |       |                                     |       |                                     |       |                        |       |
| Current assets:                                                                                                          |       |                                     |       |                                     |       |                        |       |
| Cash and cash  equivalents                                                                                               |       | $                                        | 2,300      |                                     | $          | 15,465                      |       | $ | 11,075 |   |
| Accounts  receivable, net of allowances of $257, $70 and $70, respectively                                               |       | 8,735                                    |       | 6,143                                    |       | 4,523                       |       |
| Inventories, net                                                                                                         |       | 62,065                                   |       | 43,305                                   |       | 45,278                      |       |
| Deferred tax  assets                                                                                                     |       | 2,897                                    |       | 2,219                                    |       | 2,275                       |       |
| Prepaid expenses  and other current assets                                                                               |       | 2,749                                    |       | 2,459                                    |       | 2,921                       |       |
| Total current assets                                                                                                     |       | 78,746                                   |       | 69,591                                   |       | 66,072                      |       |
|                                                                                                                     |       |                                     |       |                                     |       |                        |       |
| Property and equipment,  net                                                                                             |       | 42,453                                   |       | 26,043                                   |       | 35,218                      |       |
| Intangibles, net                                                                                                         |       | 1,970                                    |       | —                                   |       | —                      |       |
| Goodwill                                                                                                                 |       | 7,450                                    |       | —                                   |       | —                      |       |
| Deferred tax assets                                                                                                      |       | 5,041                                    |       | 2,272                                    |       | 4,700                       |       |
| Other assets                                                                                                             |       | 255                                      |       | 236                                      |       | 557                         |       |
| Total assets                                                                                                             |       | $                                        | 135,915    |                                     | $          | 98,142                      |       | $ | 106,547 |   |
| **Liabilities and shareholders’  equity**                                                                           |       |                                     |       |                                     |       |                        |       |
| Current liabilities:                                                                                                     |       |                                     |       |                                     |       |                        |       |
| Accounts payable                                                                                                         |       | $                                        | 23,272     |                                     | $          | 21,923                      |       | $ | 23,224 |   |
| Borrowings under  the credit agreement                                                                                   |       | 8,250                                    |       | —                                   |       | —                      |       |
| Accrued  liabilities                                                                                                     |       | 15,694                                   |       | 9,987                                    |       | 16,453                      |       |
| Total current  liabilities                                                                                               |       | 47,216                                   |       | 31,910                                   |       | 39,677                      |       |
|                                                                                                                     |       |                                     |       |                                     |       |                        |       |
| Deferred tax  liabilities                                                                                                |       | 1,836                                    |       | —                                   |       | —                      |       |
| Deferred rent credits  and other                                                                                         |       | 16,991                                   |       | 11,403                                   |       | 12,177                      |       |
|                                                                                                                     |       |                                     |       |                                     |       |                        |       |
| Shareholders’ equity:                                                                                               |       |                                     |       |                                     |       |                        |       |
| Common stock,  par value $0.01 per share:                                                                                |       |                                     |       |                                     |       |                        |       |
| Authorized  shares — 40,000,000; Issued and outstanding — 11,136,466, 10,661,969 and  10,671,803, respectively |       | 111                                      |       | 107                                      |       | 107                         |       |
| Additional  paid-in capital                                                                                              |       | 77,971                                   |       | 68,832                                   |       | 68,961                      |       |
| Accumulated  deficit                                                                                                     |       | (8,232                                   | )          | (14,110                                  | )          | (14,375                     | )          |
| Accumulated  other comprehensive income                                                                                  |       | 22                                       |       | —                                   |       | —                      |       |
| Total shareholders’  equity                                                                                         |       | 69,872                                   |       | 54,829                                   |       | 54,693                      |       |
| Total liabilities and shareholders’ equity                                                                          |       | $                                        | 135,915    |                                     | $          | 98,142                      |       | $ | 106,547 |   |

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NOTE:The Balance Sheet as of February 25, 2006, has been derived from theaudited financial statements.

 

*See accompanying notes.*

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**GOLF GALAXY, INC.****CONSOLIDATED STATEMENTS OFOPERATIONS(*In Thousands, Except Share and Per Share Amounts*)(Unaudited)**

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **November 25,  2006**      | ** ** | **November 26,  2005**     | ** ** | **November 25,  2006** | ** ** | **November 26,  2005** | ** ** |
| ** **                                           | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                            |       | $                                | 46,146     |                            | $          | 31,800 |   | $ | 224,309 |   | $ | 160,005 |   |
| Cost of sales                                        |       | 34,062                           |       | 23,915                          |       | 154,603 |   | 111,822 |   |
| Gross profit                                         |       | 12,084                           |       | 7,885                           |       | 69,706 |   | 48,183 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Operating  expenses:                                 |       |                             |       |                            |       |   |   |   |   |
| Retail operating                                     |       | 11,302                           |       | 7,594                           |       | 42,014 |   | 29,299 |   |
| General and administrative                           |       | 4,215                            |       | 2,527                           |       | 13,154 |   | 7,784 |   |
| Preopening                                           |       | 718                              |       | 662                             |       | 2,492 |   | 2,012 |   |
| Total operating  expenses                            |       | 16,235                           |       | 10,783                          |       | 57,660 |   | 39,095 |   |
| (Loss) income  from operations                       |       | (4,151                           | )          | (2,898                          | )          | 12,046 |   | 9,088 |   |
| Acquisition-related  expenses                        |       | (965                             | )          | —                          |       | (965 | ) | — |   |
| Interest  (expense) income, net                      |       | (33                              | )          | 172                             |       | 50 |   | 287 |   |
| (Loss) income  before income taxes                   |       | (5,149                           | )          | (2,726                          | )          | 11,131 |   | 9,375 |   |
| Income tax  benefit (expense)                        |       | 1,719                            |       | 1,117                           |       | (4,988 | ) | (3,844 | ) |
| Net (loss)  income                                   |       | (3,430                           | )          | (1,609                          | )          | 6,143 |   | 5,531 |   |
| Less preferred  stock dividends                      |       | —                           |       | —                          |       | — |   | (1,721 | ) |
| Net (loss)  income applicable to common shareholders |       | $                                | (3,430     | )                               | $          | (1,609 | ) | $ | 6,143 |   | $ | 3,810 |   |
| Net (loss)  income per share:                        |       |                             |       |                            |       |   |   |   |   |
| Basic                                                |       | $                                | (0.31      | )                               | $          | (0.15 | ) | $ | 0.56 |   | $ | 0.66 |   |
| Diluted                                              |       | $                                | (0.31      | )                               | $          | (0.15 | ) | $ | 0.54 |   | $ | 0.58 |   |
| Weighted average  number of shares outstanding:      |       |                             |       |                            |       |   |   |   |   |
| Basic                                                |       | 11,074,449                       |       | 10,653,135                      |       | 10,988,214 |   | 5,768,834 |   |
| Diluted                                              |       | 11,074,449                       |       | 10,653,135                      |       | 11,478,627 |   | 9,480,569 |   |

 

*See accompanying notes.*

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**GOLF GALAXY, INC.****CONSOLIDATED STATEMENTS OFCASH FLOWS*(InThousands)*(Unaudited)**
| ** **                                                                                             | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                             | ** ** | **November 25,  2006**     | ** ** | **November 26,  2005** | ** ** |
| **Operating  activities**                                                                              |       |                            |       |   |   |
| Net income                                                                                             |       | $                               | 6,143      |   | $ | 5,531 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                     |       |                            |       |   |   |
| Depreciation and amortization                                                                          |       | 6,046                           |       | 3,714 |   |
| Disposal of property and equipment                                                                     |       | 49                              |       | 15 |   |
| Stock-based compensation                                                                               |       | 858                             |       | 81 |   |
| Change in operating assets and liabilities:                                                            |       |                            |       |   |   |
| Accounts receivable                                                                                    |       | (2,618                          | )          | (2,688 | ) |
| Inventories                                                                                            |       | (11,302                         | )          | (12,890 | ) |
| Prepaid expenses and other                                                                             |       | 213                             |       | (1,168 | ) |
| Accounts payable                                                                                       |       | (3,418                          | )          | 6,097 |   |
| Accrued liabilities and other                                                                          |       | 6,582                           |       | 4,622 |   |
| Net cash  provided by operating activities                                                             |       | 2,553                           |       | 3,314 |   |
| **Investing  activities**                                                                              |       |                            |       |   |   |
| Acquisition of  The GolfWorks, net of $501 cash acquired                                               |       | (3,589                          | )          | — |   |
| Additions to  property and equipment                                                                   |       | (12,575                         | )          | (9,504 | ) |
| Net cash used in  investing activities                                                                 |       | (16,164                         | )          | (9,504 | ) |
| **Financing  activities**                                                                              |       |                            |       |   |   |
| Proceeds from  initial public offering, net                                                            |       | —                          |       | 37,903 |   |
| Payment of  preferred stock dividends                                                                  |       | —                          |       | (19,562 | ) |
| Proceeds from  the exercise of stock options and warrants                                              |       | 1,202                           |       | 69 |   |
| Excess tax  benefits from stock-based compensation                                                     |       | 729                             |       | — |   |
| Short-term  borrowings under the credit agreement, net                                                 |       | 8,250                           |       | — |   |
| Repayment of  debt assumed from The GolfWorks                                                          |       | (5,403                          | )          | — |   |
| Net cash  provided by financing activities                                                             |       | 4,778                           |       | 18,410 |   |
| Effect of  exchange rate changes on cash and cash equivalents                                          |       | 58                              |       | — |   |
| Net (decrease)  increase in cash and cash equivalents                                                  |       | (8,775                          | )          | 12,220 |   |
| Cash and cash  equivalents, beginning of year                                                          |       | 11,075                          |       | 3,245 |   |
| Cash and cash  equivalents, end of quarter                                                             |       | $                               | 2,300      |   | $ | 15,465 |   |
| **Supplemental  disclosure of cash flow information**                                                  |       |                            |       |   |   |
| Cash paid during  the year for:                                                                        |       |                            |       |   |   |
| Interest                                                                                               |       | $                               | 60         |   | $ | 2 |   |
| Income taxes                                                                                           |       | $                               | 4,898      |   | $ | 4,618 |   |
| **Supplemental  disclosure of non-cash investing and financing activities**                            |       |                            |       |   |   |
| Conversion of preferred stock into common stock                                                        |       | $                               | —     |   | $ | 30,900 |   |
| Common stock and common stock warrants issued in  connection with the acquisition of The GolfWorks     |       | $                               | 6,226      |   | $ | — |   |
| Purchases of  property and equipment awaiting processing for payment, included in accrued  liabilities |       | $                               | 1,825      |   | $ | 853 |   |

 

*See accompanying notes.*

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**GOLFGALAXY, INC.****NOTES TO UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS**

**1. Basisof Presentation**

The accompanyingunaudited consolidated financial statements of Golf Galaxy, Inc. (“Company”)have been prepared in accordance with U.S. generally accepted accountingprinciples (“GAAP”) for interim financial information. In the opinion ofmanagement, all adjustments (consisting of normal recurring adjustments)considered necessary for a fair presentation have been included. Due to theseasonal nature of the Company’s business, interim results are not necessarilyindicative of results for the entire fiscal year.

Certain information andfootnote disclosures normally included in the annual financial statementsprepared in accordance with GAAP have been condensed or omitted pursuant to therules and regulations of the Securities and Exchange Commission (“SEC”) forinterim financial reporting. Theseinterim unaudited consolidated financial statements and the related notesshould be read in conjunction with the annual financial statements and notesincluded in the Company’s Annual Report on Form 10-K for the fiscalyear ended February 25, 2006 (“fiscal 2006”).

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of net sales and expensesduring the period. Ultimate results could differ from those estimates.

Theunaudited consolidated financial statements include the accounts of Golf Galaxyand its wholly-owned subsidiary from the date of acquisition. All intercompanytransactions have been eliminated in consolidation.

The Company operates one reportable business segment -Retail. The Retail segment is engaged in specialty golf retail primarily withinthe United States. The Retail segment includes all of the Company’s retailchannels including stores, catalog and eCommerce businesses. The Companyidentifies segments based on the nature of the business activities and theprocesses by which management makes strategic and operating decisions, assessesperformance and allocates resources. No single customer accounts for 10% ormore of the Company’s net sales.

**2.Pending Acquisition by Dick’s Sporting Goods, Inc.**

On November 13, 2006, the Company announcedthat it had entered into an Agreement and Plan of Merger, dated as of November13, 2006 (the “Merger Agreement”), with Dick’s Sporting Goods, Inc. (“Purchaser”)and Yankees Acquisition Corp., a wholly-owned subsidiary of Purchaser (“Sub”).The Merger Agreement was unanimously approved by the Boards of Directors ofboth Purchaser and the Company.

The Merger Agreement provides that at theclosing, Sub will be merged with and into the Company (the “Merger”) and eachoutstanding share of common stock of the Company, other than shares owned byPurchaser or Sub and other than shares with respect to which dissenters’ rightshave been properly asserted, will be converted into the right to receive $18.82per share in cash, without interest (the “Merger Consideration”). As a resultof the Merger, the Company will become a wholly-owned subsidiary of Purchaser.

Consummation of the Merger is subject to customary conditions,including shareholder approval of the Merger Agreement, and the absence of anyother legal or regulatory restraints on consummation of the Merger. In December2006, the Company was notified that early termination of the Hart-Scott-Rodinowaiting period had been granted.  TheMerger currently is expected to be completed in February 2007. If the MergerAgreement is terminated under certain specified circumstances, the Company willbe required to pay Purchaser a termination fee of $8,000,000. If the MergerAgreement is terminated under certain other circumstances, Purchaser or theCompany may be required to reimburse the other party for that party’sout-of-pocket fees and expenses, up to a maximum of $2,000,000.

Inconnection with the Merger, certain of the Company’s shareholders, includingRandall K. Zanatta and Gregory B. Maanum, who are also executive officers ofthe Company, have entered into a voting agreement with Purchaser and Sub,covering an aggregate number of Company shares and stock options representingat the time of signing 19.99% of the Company’s outstanding shares of commonstock. Under the voting agreement, such shareholders have agreed to votein favor of the approval of the Merger Agreement and the transactionscontemplated thereby, including the Merger, and against any

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proposalfrom any other party or any action that would or is designed to delay, preventor frustrate the Merger.  The voting agreement also prohibits the transferof the Company’s securities unless the transferee agrees to be bound by thevoting agreement.  In the event the Merger Agreement is terminated,Purchaser or Sub materially breach the Merger Agreement or the Merger Agreementis amended in a manner adverse to the shareholders that are parties to thevoting agreement, the voting agreement will terminate.

TheCompany incurred acquisition-related expenses totaling $965,000, before taxes,during the quarter and nine-month periods ended November 25, 2006.Acquisition-related expenses consist of non-recurring, incremental costsarising as a direct result of the pending Merger and include fees paid to theCompany’s financial advisor and legal expenses. With the exception of $50,000in legal fees, the Company has accounted for the remainder of theacquisition-related expenses as non-deductible for income tax purposes. TheCompany plans to perform a detailed analysis regarding the deductibility ofcertain acquisition-related costs, which may result in a change to theaccounting treatment for the costs incurred to-date. Due to the currentaccounting treatment of these costs, the after-tax impact of the non-recurringacquisition-related expenses on net (loss) income was $944,000, or $0.09 and$0.08 per diluted share, for the third quarter and first nine months of fiscal2007, respectively.

**3.Public Offerings of Common Stock**

### *InitialPublic Offering*

The Company completed its initial public offering (“IPO”)as of August 3, 2005, issuing 3,000,000 common shares at an offering priceof $14.00 per share. As part of the IPO, all of the then outstanding preferredstock was converted into 5,752,467 shares of common stock, of which 1,542,500were sold in the IPO, resulting in a total offering of 4,542,500 common shares.The Company’s common stock trades on the Nasdaq Global Select Market under thesymbol “GGXY.”

After issuance costs, the Company received netproceeds of $37.9 million, of which $19.6 million was used to pay preferredshareholders all of the accrued and unpaid dividends due upon the conversion oftheir shares of preferred stock into shares of the Company’s common stock. Theremainder of the net proceeds was used primarily to fund capital expendituresto open new stores and for the March 2006 acquisition of Ralph MaltbyEnterprises, Inc., now known as Golf Galaxy GolfWorks, Inc. (“TheGolfWorks”).

*Withdrawn Follow-on Offering*

Certain holders of theunregistered shares of common stock remaining from the conversion of theirpreferred stock concurrent with the IPO exercised their demand registrationrights during the first quarter of fiscal 2007. In May 2006, the Companyinitially filed a Registration Statement on Form S-1 (the “RegistrationStatement”) for anunderwritten public offering by the Company, with the majority of the shares inthe offering provided by certain selling shareholders. The Registration Statement was laterwithdrawn due to a decline in the Company’s stock price. The related costs ofthe withdrawn offering of $327,000 were included in general and administrativeexpenses for the first nine months of fiscal 2007. The former preferredshareholders retain specified demand registration rights for the existingunregistered common shares.

**4. Acquisition ofThe GolfWorks**

In the first quarter of fiscal 2007, Golf Galaxyacquired all of the outstanding shares of The GolfWorks for a combination ofcash, common stock and warrants to purchase common stock. The aggregatepurchase price, including direct acquisition costs of $345,000, consisted of$4.1 million in cash ($500,000 of which was deposited into an indemnificationescrow); 250,862 shares of the Company’s common stock valued at $4.8 millionand warrants to purchase 150,000 shares of the Company’s common stock with afair value of $1.4 million. The value of the common stock was based on theaverage closing price of the Company’s common stock during a five-day tradingperiod beginning three trading days prior to the announcement of theacquisition; the value of the warrants was determined using the Black-Scholesoption pricing model. The warrants are immediately exercisable at $17.94 pershare with a 10-year term expiring on March 16, 2016. The Companyalso assumed $5.4 million in existing debt from The GolfWorks. Following theacquisition, the Company repaid all outstanding debt of The GolfWorks with acombination of available cash and borrowings under Golf Galaxy’s creditfacility.

The GolfWorks primarily is a retailer of golf-relatedproducts including proprietary clubheads, components and tools for club-making,as well as golf accessories and name brand shafts and grips. In addition to itsretail catalogs and eCommerce website, The GolfWorks’ products and fittingsystems are featured in all of the Company’s stores. The Company believes TheGolfWorks brand provides an opportunity to expand its retail offerings to newand existing customers. The Company intends to grow The GolfWorks brand throughan expanded store-in-store service area, which combined with integrated

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marketing and product offerings, highlights theCompany’s technical expertise in club repair and upgrade services. Thestore-in-store also features a wide assortment of golf club components, tools,shafts and grips for customers interested in building or servicing their ownequipment. The acquisition also facilitates the continued growth of the Company’sdirect-to-consumer channel on a cost efficient basis. The acquired GolfWorksfacilities include a customer contact center; distribution center; research,design and light assembly facilities; and a school for club builders. InApril 2006, the Company combined its contact centers to create a moreefficient and lower-cost operation.

The acquisition of The GolfWorks was accounted forunder the purchase method of accounting. Accordingly, the results of TheGolfWorks have been included in the Company’s consolidated financial statementsas a wholly-owned subsidiary beginning March 16, 2006. The purchase pricehas been allocated to the acquired assets and liabilities of The GolfWorksbased on an estimate of their fair values. The Company considered a number offactors in developing an estimate of fair value, including historical operatingresults, expectations of future operations and strategies, and the use ofindependent appraisals. The excess of the purchase price over the estimatedfair value of the acquired assets and assumed liabilities has been assigned togoodwill.  The goodwill is not deductiblefor tax purposes and the acquired assets retain their original income taxbasis. The allocation of the purchase price is subject to revision as theCompany finalizes its analysis of asset valuations, liabilities assumed andrevisions of preliminary estimates of fair values made at the date of purchase.

The following summarizes the components of theaggregate purchase price and the allocation of the aggregate purchase price tothe estimated fair values of the acquired assets and assumed liabilities of TheGolfWorks at the date of acquisition.

 
| **Aggregate Purchase Price  ($ in  thousands)** |   |   |   |
|-----------------------------------------------------------|--------|--------|--------|
| Cash                                                      |   | $      | 3,745  |   |
| Golf  Galaxy, Inc. common stock                      |   | 4,778  |   |
| Warrants to  purchase common stock                        |   | 1,448  |   |
| Direct  acquisition costs                                 |   | 345    |   |
| Aggregate  purchase price                                 |   | $      | 10,316 |   |

 
| **Allocation of aggregate purchase price to the fair value of acquired  assets and assumed liabilities ($ in thousands):** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| Cash and cash equivalents                                                                                                       |       | $          | 501        |   |
| Accounts receivable, net of allowances                                                                                          |       | 1,590      |       |
| Inventories, net                                                                                                                |       | 5,474      |       |
| Prepaid expenses and other                                                                                                      |       | 44         |       |
| Property and equipment, net                                                                                                     |       | 3,429      |       |
| Intangible assets                                                                                                               |       | 2,230      |       |
| Goodwill                                                                                                                        |       | 7,450      |       |
| Deferred tax assets                                                                                                             |       | 791        |       |
| Accounts payable                                                                                                                |       | (3,424     | )          |
| Accrued liabilities and other                                                                                                   |       | (702       | )          |
| Borrowings under credit facility and debt  outstanding                                                                          |       | (5,403     | )          |
| Deferred tax liabilities                                                                                                        |       | (1,664     | )          |
| Aggregate purchase  price                                                                                                       |       | $          | 10,316     |   |

 

Theestimated fair values of the intangible assets as of the acquisition date weredetermined based on an independent third party appraisal, and are as follows:
| **Intangible asset description ($ in thousands)** | ** ** | **Amount** | ** ** | **Estimated useful life** | ** ** |
|----------------------------------------------------------------------------|------------|------------|------------|-------------------------------------|------------|
| Trademarks                                                                 |       | $          | 1,000      |                                | Indefinite |   |
| Customer lists                                                             |       | 800        |       | 4  years                            |       |
| Non-compete  agreements                                                    |       | 320        |       | 5  years                            |       |
| Copyrights                                                                 |       | 90         |       | Indefinite                          |       |
| Patents                                                                    |       | 20         |       | 8  years                            |       |
| Total                                                                      |       | $          | 2,230      |                                |       |   |

 

Theintangible assets will be amortized over their estimated useful lives whereapplicable. Based on the results of the independent appraisal, the trademarksand copyrights were deemed to have indefinite lives and accordingly, will notbe amortized. Goodwill and the indefinite-lived intangible assets are subjectto periodic evaluation for impairment in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 142, *Goodwilland Other Intangible Assets*.

8

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**5.Intangibles**

Intangible assets consisted of the following (inthousands):
| ** **                    | ** ** | **November 25,  2006  (unaudited)** | ** ** |
|-------------------------------|------------|------------------------------------------|------------|
| Indefinite-lived  intangibles |       |                                     |       |
| Trademarks                    |       | $                                        | 1,000      |   |
| Copyrights                    |       | 90                                       |       |
|                          |       | 1,090                                    |       |
| Amortized  intangibles        |       |                                     |       |
| Customer lists                |       | 800                                      |       |
| Non-compete agreements        |       | 320                                      |       |
| Patents                       |       | 20                                       |       |
|                          |       | 1,140                                    |       |
| Less accumulated amortization |       | (260                                     | )          |
|                          |       | 880                                      |       |
|                          |       |                                     |       |
| Intangibles, net              |       | $                                        | 1,970      |   |

 

**6.Stock-Based Compensation**

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 123 (revised), *Share-BasedPayment* (“SFAS No. 123(R)”). SFAS No. 123(R) requirescompensation expense to be measured based on the grant-date fair value of theaward and recognized over the requisite service period for awards that vest.SFAS No. 123(R) also requires a change in the classification of thebenefits of tax deductions in excess of recognized compensation cost fromoperating cash flow to a financing cash flow in periods after adoption. TheCompany adopted SFAS No. 123(R) effective February 26, 2006. TheCompany recognizes compensation expense on a straight-line basis over therequisite service period of the award. Prior to February 26, 2006, theCompany accounted for stock-based compensation using the intrinsic value methodprescribed in Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*,and related Interpretations. Compensation expense for stock options wasmeasured as the excess, if any, of the fair value of the Company’s common stockat the date of grant over the stock option exercise price. Prior to fiscal2006, all stock options had an exercise price equal to the estimated fair valueof the common stock at the time of grant, resulting in no compensation expenserecorded for the issuance of stock options.

Pursuant to thetransition requirements of SFAS No. 123(R) for a newly public entity,the Company is applying the modified prospective method only to unvested awardsthat were granted on or after its IPO. The unrecognized compensation costrelating to those awards will be recognized in the financial statements overthe remaining requisite service period. The Company is applying the prospectivetransition method to unvested awards granted prior to its IPO. The unrecognizedcompensation cost relating to those awards will continue to be recognized inthe financial statements using the intrinsic value method under APB OpinionNo. 25. Accordingly, other than the stock options granted inMay 2005, no compensation expense will be recognized on unvested stockoptions granted prior to the Company’s IPO unless such awards are subsequentlymodified.

In May 2005, theCompany’s Board of Directors granted options to purchase 138,000 shares ofcommon stock at an exercise price of $8.00 per share based on an independentlyappraised value as of the most recent fiscal year-end. In addition to theCompany’s financial results and growth prospects, the appraisal consideredother factors, including the Company’s capital structure as a private companyand the relative subordination of the common stock in relation to the preferredstock at the date of the appraisal. Because the exercise price of the stockoptions granted in May 2005 was below the then-anticipated price range of theCompany’s proposed IPO, the Company is recognizing compensation expense ratablyover the four-year vesting period of the options based on the differencebetween the mid-point of the anticipated IPO price range at the time of grantand the exercise price of the options.

9

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Thefollowing table summarizes the impact adopting SFAS No. 123(R) had onthe Company’s income before income taxes, net income, as well as basic anddiluted net income per share, for the three and nine month periods endedNovember 25, 2006.
| ** **                                                                  | ** ** | **Three Months Ended  (Unaudited)** | ** ** | **Nine Months Ended  (Unaudited)** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| **($ in thousands except per share amounts)** | ** ** | **November 25,  2006**                   | ** ** | **November 25,  2006**                  | ** ** |
| (Loss) income  before income taxes                                          |       | $                                             | (267       | )                                            | $          | (792 | ) |
| Net (loss)  income                                                          |       | (181                                          | )          | (528                                         | )          |
| Net (loss)  income per share:                                               |       |                                          |       |                                         |       |
| Basic                                                                       |       | $                                             | (0.02      | )                                            | $          | (0.05 | ) |
| Diluted                                                                     |       | $                                             | (0.02      | )                                            | $          | (0.05 | ) |

 

Priorto the adoption of SFAS No. 123(R), the Company reported all tax benefitsresulting from the exercise of stock options as operating cash flows in thestatement of cash flows. In accordance with SFAS No. 123(R), the statementof cash flows for the nine months ended November 25, 2006, presents the excesstax benefits from the exercise of stock options as financing cash flows. Forthe first nine months of fiscal 2007, $729,000 of excess tax benefits werereported as financing cash flows rather than operating cash flows.

Inaccordance with the transition methods described above, financial results forthe third quarter and first nine months of fiscal 2006 have not been restated.If the Company had elected to apply the fair value recognition provisions underSFAS No. 123, *Accounting forStock-Based Compensation*, for the three and nine month periods endedNovember 26, 2005, the Company’s net income and net income per share would havebeen adjusted to the following pro forma amounts:
| ** **                                                                                                  | ** ** | **Three Months Ended  (Unaudited)** | ** ** | **Nine Months Ended  (Unaudited)** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| **($ in thousands except per share amounts)**                                 | ** ** | **November 26,  2005**                   | ** ** | **November 26,  2005**                  | ** ** |
| Net (loss)  income applicable to common shareholders                                                        |       | $                                             | (1,609     | )                                            | $          | 3,810 |   |
| Add stock-based  compensation expense, net of tax                                                           |       | 20                                            |       | 48                                           |       |
| Deduct total  stock-based compensation determined under fair-value-based method for all  awards, net of tax |       | (96                                           | )          | (200                                         | )          |
| Pro forma net  (loss) income applicable to common shareholders                                              |       | $                                             | (1,685     | )                                            | $          | 3,658 |   |
|                                                                                                        |       |                                          |       |                                         |       |
| Net (loss)  income per share:                                                                               |       |                                          |       |                                         |       |
| Basic—as reported                                                                                      |       | $                                             | (0.15      | )                                            | $          | 0.66 |   |
| Basic—pro forma                                                                                        |       | $                                             | (0.16      | )                                            | $          | 0.63 |   |
| Diluted—as reported                                                                                    |       | $                                             | (0.15      | )                                            | $          | 0.58 |   |
| Diluted—pro  forma                                                                                     |       | $                                             | (0.16      | )                                            | $          | 0.57 |   |

 

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### *Stock Options*

TheCompany’s 1996 Stock Option and Incentive Plan and 2004 Amended and RestatedStock Incentive Plan (together, “Plans”) provide for the issuance of incentiveand non-qualified stock options. Options are generally granted at the fairmarket value as of the grant date, are exercisable ratably over various periodsand expire up to ten years after the date of grant. As of November 25, 2006,there were 2,500,000 common shares authorized for issuance under the Plans.

Stockoption activity under the Plans for the nine months ended November 25, 2006,was as follows:
| ** **                        | ** ** | **Options** | ** ** | **Weighted Average  Exercise Price  per Share** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-----------------------------------|------------|-------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding,  beginning of period |       | 1,238,944   |       | $                                                              | 7.58       |                                                        |       |                                |       |   |
| Granted                           |       | 368,250     |       | 17.16                                                          |       |                                                        |       |                                |       |
| Forfeited                         |       | (110,264    | )          | 10.33                                                          |       |                                                        |       |                                |       |
| Exercised                         |       | (213,801    | )          | 5.62                                                           |       |                                                        |       |                                |       |
| Outstanding, end  of period       |       | 1,283,129   |       | $                                                              | 10.41      |                                                        | 6.8 years  |                                | $          | 8.39 |   |
| Exercisable, end of  period       |       | 606,027     |       | $                                                              | 6.52       |                                                        | 4.4 years  |                                | $          | 11.94 |   |

 

Thefair value of each option was estimated on the date of grant using the weightedaverage assumptions provided below. Prior to the Company’s IPO, fair value wasestimated using the minimum value method. Subsequent to the IPO, the Companyestimates the fair value of each option on the grant date using theBlack-Scholes option-pricing model. Because of the limited history of markettrading in the Company’s common stock, estimated volatility for fiscal 2007 wasbased on an average of the volatility reported by a peer group of publiclytraded companies. Beginning with stock options granted in the first quarter offiscal 2007, the expected term is presumed to be the mid-point between thevesting date and the end of the contractual term. According to SEC StaffAccounting Bulletin No. 107, this approach is permitted until December 31,2007, for a “plain vanilla” employee stock option for which the value isestimated using a Black-Scholes formula. 
| ** **                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **November 25,  2006**      | ** ** | **November 26,  2005** | ** ** |
| Weighted Average Assumptions: |       |                             |       |   |   |
| Risk-free interest rate                 |       | N/A                              |       | 4.2 | % |
| Expected dividends                      |       | N/A                              |       | — |   |
| Estimated average life                  |       | N/A                              |       | 5.00 years |   |
| Volatility                              |       | N/A                              |       | 50 | % |

 

Basedon these assumptions, the estimated weighted average fair value of the optionsgranted in the third quarter of fiscal 2006 was $7.70. The Company did notgrant any stock options during the third quarter of fiscal 2007.

During the third quarterof fiscal 2007 and 2006, the Company received proceeds of $793,000 and $69,000,respectively, from the exercise of stock options and warrants. The aggregateintrinsic value of options exercised (the amount by which the market price ofthe stock on the date of exercise exceeded the exercise price of the option)during the three months ended November 25, 2006, and November 26, 2005, was$817,000 and $196,000, respectively. The Company received proceeds of $1.2million and $69,000, respectively, from the exercise of stock options andwarrants during the first nine months of fiscal 2007 and 2006. The aggregateintrinsic value of options exercised during the first nine months of fiscal2007 and 2006 was $2.3 million and $196,000, respectively.

As of November 25, 2006,there was $3.7 million of measured but unrecognized compensation expenserelated to stock options that is expected to be recognized over a weightedaverage period of 3.0 years.

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**7. Net(Loss) Income Per Share**

Basic net (loss) incomeper share is computed based on the weighted average number of common sharesoutstanding. Diluted net (loss) income per share is computed based on theweighted average number of common shares outstanding adjusted by the number ofadditional shares that would have been outstanding had all potentially dilutivecommon shares been issued. Potentially dilutive shares of common stock includecertain common stock options, warrants and convertible preferred stock,depending on the estimated fair market value of the common stock and amount ofnet income for the period measured. The computation of net (loss) per dilutedshare for the third quarters of fiscal 2007 and fiscal 2006 excludes all outstandingcommon stock options because they were anti-dilutive (i.e., including suchoptions would result in a smaller loss per share). The calculation of netincome per share for the first nine months of fiscal 2007 excludes 437,438outstanding common stock options because such outstanding options’ exerciseprices were greater than the average market price of the Company’s commonshares and, therefore, the effect would be antidilutive (i.e., including suchoptions would result in higher earnings per share).

Thefollowing table presents a reconciliation of the numerators and denominators ofbasic and diluted net (loss) income per share (in thousands, except share andper share amounts):
| ** **                                           | ** ** | **Three Months Ended  (Unaudited)** | ** ** | **Nine Months Ended  (Unaudited)** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                           | ** ** | **November 25,  2006**                   | ** ** | **November 26,  2005**                  | ** ** | **November 25,  2006** | ** ** | **November 26,  2005** | ** ** |
| Numerator:                                           |       |                                          |       |                                         |       |   |   |   |   |
| Net (loss) income applicable to common shareholders  |       | $                                             | (3,430     | )                                            | $          | (1,609 | ) | $ | 6,143 |   | $ | 3,810 |   |
| Add preferred stock dividends                        |       | —                                        |       | —                                       |       | — |   | 1,721 |   |
| Numerator for  diluted net (loss) income per share   |       | $                                             | (3,430     | )                                            | $          | (1,609 | ) | $ | 6,143 |   | $ | 5,531 |   |
| Denominator:                                         |       |                                          |       |                                         |       |   |   |   |   |
| Weighted average number of common shares outstanding |       | 11,074,449                                    |       | 10,653,135                                   |       | 10,988,214 |   | 5,768,834 |   |
| Effect of dilutive securities:                       |       |                                          |       |                                         |       |   |   |   |   |
| Outstanding stock options and warrants               |       | —                                        |       | —                                       |       | 490,413 |   | 508,896 |   |
| Convertible preferred stock                          |       | —                                        |       | —                                       |       | — |   | 3,202,839 |   |
| Denominator for  diluted net (loss) income per share |       | 11,074,449                                    |       | 10,653,135                                   |       | 11,478,627 |   | 9,480,569 |   |
| Net (loss)  income per share:                        |       |                                          |       |                                         |       |   |   |   |   |
| Basic                                                |       | $                                             | (0.31      | )                                            | $          | (0.15 | ) | $ | 0.56 |   | $ | 0.66 |   |
| Diluted                                              |       | $                                             | (0.31      | )                                            | $          | (0.15 | ) | $ | 0.54 |   | $ | 0.58 |   |

 

**8.Property and Equipment**

Major classes of depreciable assets are as follows (inthousands):
| ** **                                      | ** ** | **November 25,  2006  (unaudited)** | ** ** | **November 26,  2005  (unaudited)** | ** ** | **February 25,  2006** | ** ** |
|-------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|
| Fixtures and  equipment                         |       | $                                        | 34,086     |                                     | $          | 23,579                      |       | $ | 24,755 |   |
| Leasehold  improvements                         |       | 27,830                                   |       | 18,951                                   |       | 19,831                      |       |
| Land and  buildings                             |       | 2,830                                    |       | —                                   |       | —                      |       |
| Construction in  process                        |       | 2,403                                    |       | 1,280                                    |       | 9,671                       |       |
|                                            |       | 67,149                                   |       | 43,810                                   |       | 54,257                      |       |
| Less accumulated  depreciation and amortization |       | (24,696                                  | )          | (17,767                                  | )          | (19,039                     | )          |
| Property and equipment,  net                    |       | $                                        | 42,453     |                                     | $          | 26,043                      |       | $ | 35,218 |   |

 

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**9. Revolving Credit Facility**

The Company has a revolvingcredit facility with a commercial bank that provides borrowing capacity forworking capital financing and funding for other general corporatepurposes.  Borrowings under the creditfacility are secured by the Company’s inventories, accounts receivable,financial and intangible assets.  Interestexpense on outstanding borrowings is calculated based on the prime rate or anadjusted LIBOR as defined in the credit agreement.  At November 25, 2006, the Company hadoutstanding borrowings of $8.3 million at annualized interest ratesranging from 6.82% to 8.25%.

Availability under thecredit agreement is based on certain percentages of inventory and accountsreceivable as defined.  At November 25,2006, the full facility of $15 million was available to the Company.  In December 2006, the Company exercised itsoption to expand the borrowing capacity of the revolving credit facility from$15 million to $20 million, the full amount of which is available to theCompany.

As discussed in Note 2, theCompany entered into a Merger Agreement to be acquired by Dick’s SportingGoods, Inc.  Completion of thistransaction will cause a default under the current terms of the creditfacility, requiring an amendment to the facility or the immediate repayment ofany outstanding borrowings.

**10.Employee Benefit Plan**

The Company has a defined contribution401(k) profit sharing plan (“401(k) Plan”) for eligible employees,which is qualified under Sections 401(a) and 401(k) of the InternalRevenue Code of 1986, as amended. Employees are entitled to make tax-deferredcontributions of up to 75% of their eligible compensation. Effective July 1,2005, the Company began a discretionary match of 50% of the first 4% ofeligible compensation contributed to the 401(k) Plan by each participant.The Company’s matching contribution vests after four years of service, at age591¤2 regardless of service, or upon thedeath of the employee. The Company’s matching contributions to the401(k) Plan for the third quarter and first nine months of fiscal 2007were $49,000 and $137,000, respectively. The Company’s  matching contributions to the401(k) Plan for the third quarter and first nine months of fiscal 2006were $24,000 and $40,000, respectively. Future matching contributions to the401(k) Plan are at the Company’s sole discretion.

**11.New Accounting Pronouncements**

In June 2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109*. This Interpretationclarifies the accounting for uncertainty in income taxes recognized in thefinancial statements in accordance with FASB Statement No. 109, *Accounting for Income Taxes.* ThisInterpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. This Interpretation also provides guidanceon derecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. This Interpretation is effective forfiscal years beginning after December 15, 2006. The Company plans to adopt thisInterpretation at the beginning of fiscal 2008, and is currently assessing theimpact, if any, the adoption will have on its consolidated results ofoperations or financial position.

In September 2006, the SEC issued StaffAccounting Bulletin (“SAB”) No. 108, *Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements*, which provides interpretiveguidance on the consideration of the effects of prior year misstatements inquantifying current year misstatements for the purpose of a materialityassessment. SAB No. 108 is effective for fiscal years ending afterNovember 15, 2006. The Company expects the effect of adopting SAB No. 108,if any, to be immaterial to its consolidated results of operations or financialposition.

InSeptember 2006, the FASB issued SFAS No. 157, *FairValue Measurements*. SFAS No. 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements. SFAS No. 157 iseffective for fiscal years beginning after December 15, 2007. The Company plansto adopt SFAS No. 157 at the beginning of fiscal 2009, and is currentlyassessing the impact, if any, the adoption will have on its consolidatedresults of operations or financial position.

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**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

**Overview**

Golf Galaxy, Inc. isa multi-channel golf specialty retailer offering a distinctive combination ofcompetitively priced merchandise from the leading national brands in golfequipment, apparel and accessories, along with golf services and golf instruction byon-staff certified PGA professionals. We opened 15 new stores during thefirst nine months of fiscal 2007. As of November 25, 2006, we operated 65 superstoresin 24 states, e-Commerce websites and catalog operations. Our “*Everything for the Game.®*” core strategyis to provide avid and casual golfers, as well as gift purchasers, a categorydominant selection of leading national brand products, expert non-commissionedsales assistance and professional services, the combination of which generallyis not available elsewhere. We offer our customers an exciting, interactiveenvironment that compares favorably with the shopping experience at smallerindependent golf stores, on-course pro shops and the golf departments ofgeneral sporting goods retailers.

We completed an initialpublic offering of our common stock on August 3, 2005, selling 3,000,000shares at an offering price of $14.00 per share. Our stock is traded on theNasdaq Global Select Market under the ticker symbol “GGXY.” As part of theoffering, all of the then outstanding preferred stock converted into 5,752,467shares of our common stock, of which 1,542,500 were sold in the initial publicoffering, resulting in a total offering of 4,542,500 shares. After deductingthe underwriting discounts and commissions, and other offering expenses, wereceived net proceeds from our initial public offering of $37.9million. We used $19.6 million of the net proceeds to pay our preferredshareholders all of the accrued and unpaid dividends due upon conversion oftheir shares of preferred stock into shares of our common stock. The remainderof the net proceeds was used primarily to fund capital expenditures to open newstores and for the March 2006 acquisition of Ralph MaltbyEnterprises, Inc. now known as Golf Galaxy GolfWorks, Inc. (“TheGolfWorks”).

In the first quarter of fiscal 2007, we acquired allof the outstanding shares of The GolfWorks for a combination of cash, commonstock and warrants to purchase common stock. The aggregate purchase price,including direct acquisition costs of $345,000, consisted of $4.1 million incash ($500,000 of which was deposited into an indemnification escrow); 250,862shares of our common stock valued at $4.8 million and warrants to purchase150,000 shares of our common stock with a fair value of $1.4 million. We alsoassumed $5.4 million in existing debt from The GolfWorks. Following theacquisition, we repaid all outstanding debt of The GolfWorks with a combinationof available cash and borrowings under our credit facility. The results of TheGolfWorks have been included in our consolidated financial statements as awholly-owned subsidiary beginning March 16, 2006.

The GolfWorks primarily is a retailer of golf-relatedproducts including proprietary clubheads, components and tools for club-making,as well as golf accessories and name brand shafts and grips. In addition to itsretail catalogs and eCommerce website, The GolfWorks’ products and fittingsystems are featured in all of our stores. We believe The GolfWorks brandprovides us an opportunity to expand our offerings to new and existingcustomers. We intend to grow The GolfWorks brand through an expandedstore-in-store service area, which combined with integrated marketing andproduct offerings, highlights our technical expertise in club repair andupgrade services. The store-in-store area also features a wide assortment ofgolf club components, tools, shafts and grips for customers interested inbuilding or servicing their own equipment. The acquisition also facilitates thecontinued growth of our direct-to-consumer channel on a cost efficient basis.The acquired GolfWorks facilities include a customer contact center; distributioncenter; research, design and light assembly facilities; and a school for clubbuilders. In April 2006, we combined our contact centers to create a moreefficient and lower-cost operation.

On November 13, 2006, we announced that wehad entered into an Agreement and Plan of Merger, dated as of November 13, 2006(the “Merger Agreement”), with Dick’s Sporting Goods, Inc. (“Purchaser”) andYankees Acquisition Corp., a wholly-owned subsidiary of Purchaser (“Sub”). TheMerger Agreement was unanimously approved by our Board of Directors and theBoard of Directors of Purchaser.

The Merger Agreement provides that at theclosing, Sub will be merged with and into us (the “Merger”) and eachoutstanding share of our common stock, other than shares owned by Purchaser or Suband other than shares with respect to which dissenters’ rights have beenproperly asserted, will be converted into the right to receive $18.82 per sharein cash, without interest (the “Merger Consideration”).  As a result of the Merger, we will become awholly-owned subsidiary of Purchaser.

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Consummation of the Merger is subject to customary conditions,including shareholder approval of the Merger Agreement, and the absence of anyother legal or regulatory restraints on consummation of the Merger. In December2006, we were notified that early termination of the Hart-Scott-Rodino waitingperiod had been granted.  The Mergercurrently is expected to be completed in February 2007. If the Merger Agreementis terminated under certain specified circumstances, we will be required to payPurchaser a termination fee of $8,000,000. If the Merger Agreement isterminated under certain other circumstances, we or Purchaser may be requiredto reimburse the other party for that party’s out-of-pocket fees and expenses,up to a maximum of $2,000,000.

In connection with the Merger, certain of our shareholders, includingRandall K. Zanatta, our President and Chief Executive Officer, and Gregory B.Maanum, our Chief Operating Officer, have entered into a voting agreement with Purchaserand Sub, covering an aggregate number of shares and stock options representingat the time of signing 19.99% of the outstanding shares of our CommonStock. Under the voting agreement, such shareholders have agreed to votein favor of the approval of the Merger Agreement and the transactionscontemplated thereby, including the Merger, and against any proposal from anyother party or any action that would or is designed to delay, prevent orfrustrate the Merger.  The voting agreement also prohibits the transfer ofour securities unless the transferee agrees to be bound by the votingagreement.  In the event the Merger Agreement is terminated, Purchaser orSub materially breach the Merger Agreement or the Merger Agreement is amendedin a manner adverse to the shareholders that are parties to the votingagreement, the voting agreement will terminate.

We incurred acquisition-related expenses totaling $965,000, beforetaxes, during the quarter and nine-month periods ended November 25, 2006.Acquisition-related expenses consist of non-recurring, incremental costsarising as a direct result of the pending Merger and include fees paid to ourfinancial advisor and legal expenses. With the exception of $50,000 in legalfees, we have accounted for the remainder of the acquisition-related expensesas non-deductible for income tax purposes. We plan to perform a detailedanalysis regarding the deductibility of certain acquisition-related costs,which may result in a change to the accounting treatment for the costs incurredto-date. Due to the current accounting treatment of these costs, the after-taximpact of the non-recurring acquisition-related expenses on net (loss) incomewas $944,000, or $0.09 and $0.08 per diluted share, for the third quarter andfirst nine months of fiscal 2007, respectively.

Due to the seasonal nature of our business, interim results are notnecessarily indicative of results for the entire fiscal year. Our net sales andnet income generally are greatest during the first and second quarters of ourfiscal year. The interim financial statements included in this Quarterly Reporton Form 10-Q (“Report”) and the related discussions contained hereinshould be read in conjunction with the audited financial statements and notesincluded in our Annual Report on Form 10-K for the fiscal year endedFebruary 25, 2006 (“fiscal 2006”).

**Resultsof Operations**

Thefollowing table presents selected items in the unaudited statements ofoperations as a percentage of our net sales.
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **November 25,  2006**      | ** ** | **November 26,  2005**     | ** ** | **November 25,  2006** | ** ** | **November 26,  2005** | ** ** |
| **Statements  of Operations Data**   |       |                             |       |                            |       |   |   |   |   |
| Net sales                            |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |
| Cost of sales                        |       | 73.8                             |       | 75.2                            |       | 68.9 |   | 69.9 |   |
| Gross profit                         |       | 26.2                             |       | 24.8                            |       | 31.1 |   | 30.1 |   |
| Retail operating  expenses           |       | 24.5                             |       | 23.9                            |       | 18.7 |   | 18.3 |   |
| General and  administrative expenses |       | 9.1                              |       | 7.9                             |       | 5.9 |   | 4.9 |   |
| Preopening  expenses                 |       | 1.6                              |       | 2.1                             |       | 1.1 |   | 1.2 |   |
| (Loss) income  from operations       |       | (9.0                             | )          | (9.1                            | )          | 5.4 |   | 5.7 |   |
| Acquisition-related  expenses        |       | (2.1                             | )          | —                          |       | (0.4 | ) | — |   |
| Interest  (expense) income, net      |       | (0.1                             | )          | 0.5                             |       | 0.0 |   | 0.2 |   |
| (Loss) income  before income taxes   |       | (11.2                            | )          | (8.6                            | )          | 5.0 |   | 5.9 |   |
| Income tax  benefit (expense)        |       | 3.7                              |       | 3.5                             |       | (2.2 | ) | (2.4 | ) |
| Net (loss) income                    |       | (7.5                             | )%         | (5.1                            | )%         | 2.8 | % | 3.5 | % |

 

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Net sales consistof sales, net of returns, from comparable stores and new stores, as well assales from our eCommerce and catalog operations. A store is included incomparable store results after it has been in operation for 12 full fiscalmonths following the month of the store’s grand opening weekend, typically astore’s 13th full month of operations. Sales from our eCommerce and catalogoperations are not included in comparable store results. New store salesinclude net sales from stores that have not yet become comparable.

Cost of sales includes the cost of merchandise soldnet of certain vendor allowances, direct costs of services, freight, inventoryshrinkage, other inventory valuation adjustments and retail occupancy costs.Vendor allowances include promotional support, rebates and volume discounts.Retail occupancy costs include rent, real estate taxes and common areamaintenance charges.

Retail operating expenses primarily include storeassociate payroll and related employee benefits, advertising and depreciation.Retail operating expenses also include maintenance, utilities, insurance, bankand credit card charges, other store level expenses, as well as expensesassociated with the operation of our catalog and eCommerce Internet sites.

General and administrative expenses include all expensesassociated with operating our retail support offices.

Preopeningexpenses consist primarily of occupancy, payroll, recruiting and other costsincurred prior to a new store opening as well as incremental advertising inconnection with the store opening.

## **Three andNine Months Ended Nov. 25, 2006 Compared with Three and Nine Months Ended Nov.26, 2005**

***Net Sales.***Net saleswere $46.1 million for the third quarter of fiscal 2007, an increase of 45.1%,compared with $31.8 million for the third quarter of fiscal 2006. Netsales for the first nine months of fiscal 2007 were $224.3 million, an increaseof 40.2%, compared with $160.0 million for the same period of the prior fiscalyear. The increase in net sales for both the third quarter and first ninemonths of fiscal 2007 resulted primarily from sales at new stores opened in thecurrent or prior fiscal year, before becoming comparable stores; sales throughThe GolfWorks, which we acquired on March 16, 2006; and, to a lesser degree, anincrease in comparable store sales. Our comparable store sales increased by3.8% and 1.5%, respectively, for the third quarter and first nine months offiscal 2007.

***Gross Profit.***Our gross profit rate increased by 1.4% to 26.2% of net sales for thethird quarter of fiscal 2007, compared with 24.8% for the same quarter of theprior fiscal year. For the first nine months of fiscal 2007, our gross profitrate increased by 1.0% to 31.1% of net sales, compared with 30.1% for the firstnine months of fiscal 2006. The increase in our gross profit rate for the thirdquarter was due primarily to higher retail gross margins in many productcategories, most notably in pre-owned clubs, apparel and shoes, reflecting amore disciplined promotional strategy and better product transition management.  Margin rates also improved in the thirdquarter due to a more favorable sales mix, driven by sales growth ofhigher-margin categories such as services and accessories. These increases werepartially offset by a decrease in the margin rate impact of vendor allowances.The increase in our gross profit rate for the nine-month period resultedprimarily from higher retail margins due to the factors noted above, partiallyoffset by increases in store occupancy as a percentage of sales.

Weexpect that continued focus on our strategic initiatives, including initiativesto drive sales of services and accessories, will have a positive impact on ourgross profit rate over the remainder of fiscal 2007 relative to fiscal 2006.

***Retail Operating Expenses.***Retailoperating expenses increased to 24.5% of net sales for the third quarter offiscal 2007, compared with 23.9% for the third quarter of fiscal 2006. For thefirst nine months of fiscal 2007, retail operating expenses increased to 18.7%of net sales, compared with 18.3% for the same period of the prior fiscal year.The increase in retail operating expenses as a percentage of net sales was dueprimarily to the impact of new stores opened in the current and prior fiscalyear. New stores generally have higher operating expenses as a percentage ofnet sales in comparison to mature stores due to the impact of a partial year ofnet sales in the year opened and because mature stores generally have highersales volumes relative to their operating expenses.

Due toour store growth and the high percentage of new stores in our store base, weexpect retail operating expenses as a percentage of net sales to be modestlyhigher for fiscal 2007 when compared with the prior fiscal year.

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***General and Administrative Expenses.***General and administrative expenses increasedto 9.1% of net sales for the third quarter of fiscal 2007, up from 7.9% for thethird quarter of the prior fiscal year. For the first nine months of fiscal2007, general and administrative expenses as a percentage of net salesincreased to 5.9%, compared with 4.9% for the same period of fiscal 2006. Theincrease in our general and administrative expenses rate for the third quarterwas due primarily to additional general and administrative costs following theacquisition of The GolfWorks in the first quarter of fiscal 2007.  Incremental costs related to operating as apublic company, including costs of preparing to comply with Section 404 of theSarbanes-Oxley Act and the recognition of stock-based compensation expense alsocontributed to the increase in our general and administrative expenses rate forthe third quarter of fiscal 2007, partially offset by leverage of non-storepayroll costs. The increase for the nine-month period was due primarily to theimpact of The GolfWorks general and administrative costs following itsacquisition, higher public company costs, stock-based compensation expense, anda charge from the write-off of costs from a secondary common stock offeringcancelled in the first quarter. These factors were partially offset by leverageof non-store payroll costs and a reduction in performance-based compensationexpense, compared with the corresponding period of fiscal 2006.

***Preopening Expenses.***Preopeningexpenses were $718,000 for the third quarter of fiscal 2007, compared with$662,000 for the third quarter of fiscal 2006. For the first nine months offiscal 2007, preopening expenses were $2.5 million compared with $2.0 millionfor the same period of the prior fiscal year. We opened 15 new stores during thefirst nine months of fiscal 2007 and 2006, respectively. The increase inpreopening expenses for the third quarter and first nine months of fiscal 2007was due primarily to a higher level of advertising to establish certain newmarkets. In addition to higher advertising costs, the increase in preopeningexpenses for the nine-month period reflects an increase in preopening occupancycosts, which can vary due to the location, lease terms and timing of each newstore opening.

***Acquisition-related Expenses.***  Acquisition-relatedexpenses were $965,000 for the third quarter and first nine months of fiscal2007, compared with $0 for the corresponding periods of the prior fiscal year.Acquisition-related expenses consist of non-recurring, incremental costsarising as a direct result of the pending Merger described more fully in the “Overview”section above and include fees paid to our financial advisor and legalexpenses. With the exception of $50,000 in legal fees, we have accounted forthe remainder of the acquisition-related expenses as non-deductible for incometax purposes. We plan to perform a detailed analysis regarding thedeductibility of certain acquisition-related costs, which may result in achange to the accounting treatment for the costs incurred to-date. Due to thecurrent accounting treatment of these costs, the after-tax impact of thenon-recurring acquisition-related expenses on net (loss) income was $944,000,or $0.09 and $0.08 per diluted share, for the third quarter and first ninemonths of fiscal 2007, respectively.

Asdiscussed above, consummation of the Merger is subject to customary conditions,including shareholder approval of the Merger Agreement, and the absence of anyother legal or regulatory restraints on consummation of the Merger. The Mergercurrently is expected to be completed in February 2007. We expect to incuradditional acquisition-related expenses during our fiscal fourth quarter.Further, consummation of the Merger will trigger additional contingentacquisition-related expenses, including a success-based fee for our financialadvisor and a bonus for certain of our employees.

***Net Interest (Expense) Income.***Net interest expense for the third quarter of fiscal 2007 was $33,000, comparedwith net interest income of $172,000 for the third quarter of the prior fiscalyear. The change was due primarily to interest expense from borrowings andmaintenance fees under our revolving credit facility in the third quarter offiscal 2007, compared with net interest income earned on the remaining net cashproceeds from our initial public offering in the prior year period. For thefirst nine months of fiscal 2007, net interest income was $50,000, comparedwith $287,000 for the first nine months of the prior fiscal year. The decreasein net interest income for the nine-month period was due primarily to interestearned on positive cash balances through most of the first three quarters offiscal 2007 being partially offset by the expense factors noted above, incomparison to the net interest income earned in the second and third quartersof fiscal 2006 on the net cash proceeds from our initial public offering inAugust 2005.

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***Income Tax Benefit (Expense).***Werecorded income tax benefits of $1.7 million and $1.1 million,respectively, for the third quarters of fiscal 2007 and 2006. For the firstnine months of fiscal 2007, we recorded an income tax provision of $5.0million, compared with $3.8 million for the first nine months of the priorfiscal year. Our income tax benefit/provision for interim periods is determinedusing an estimate of our annual effective tax rate. The income tax benefit forthe third quarter of fiscal 2007 was based on an estimated annual effectiveincome tax rate of 41.3% applied to our pre-tax loss, excluding the majority ofthe acquisition-related expenses recorded in the period. With the exception of$50,000 in legal fees, we have accounted for the remainder of theacquisition-related expenses as non-deductible for income tax purposes. We planto perform a detailed analysis regarding the deductibility of certainacquisition-related costs, which may result in a change to the accountingtreatment for the costs incurred to-date. Afavorable determination regarding the deductibility of certainacquisition-related costs would be recognized as a reduction in our effectiveincome tax rate in a future period. The income tax benefit for the thirdquarter of fiscal 2006 was based on an effective income tax rate of 41.0%. Thechange in the estimated effective income tax rates was due primarily to theimpact of certain permanent book/tax differences and fluctuations in the impactof state income taxes. The permanent book/tax differences relate primarily tothe non-deductibility of stock option expense recognized for book purposes infiscal 2007, following the adoption of SFAS No. 123(R).

***Net (Loss) Income.***We reported a net loss of $3.4 million, or($0.31) per diluted share, for the third quarter of fiscal 2007, compared witha net loss of $1.6 million, or ($0.15) per diluted share, for the same periodof fiscal 2006. For the first nine months of fiscal 2007, net income was$6.1 million, or $0.54 per diluted share, compared with $5.5 million, or $0.58per diluted share, for the same period of the prior fiscal year.

***Pro-Forma Net (Loss) Income Per Share.*** Pro-formaresults for the three and nine-month periods ended November 25, 2006, exclude costs of $944,000, net of tax, related to thepending Merger. Pro-forma results for the nine months ended November 26, 2005, arepresented as if our initial public offering and the conversion of preferredstock into shares of common stock had occurred immediately prior to thebeginning of fiscal 2006. We believe the use of pro-forma net (loss)income per share provides a consistent measure of profitability as well as importantsupplemental information due to the significant impact the acquisition-related expenses had on ourfinancial results for the third quarter of fiscal 2007 and due to thesignificant increase in common shares outstanding resulting from the completionof our initial public offering and the conversion of the convertible preferredstock into shares of common stock as of August 3, 2005. Pro-forma net(loss) income per share is considered a non-GAAP financial measure and is notin accordance with, or preferable to, net (loss) income per share determined inaccordance with GAAP. The most directly comparable GAAP financial measure topro-forma net (loss) income per share is net (loss) income per share. Pro-formanet (loss) income per share is intended to be a supplement to, but not asubstitute for, net (loss) income per share prepared in accordance with GAAP.Further, pro-forma net (loss) income per share, as we define it, may not becomparable to a similarly titled measure used by other companies.

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Thefollowing table presents a reconciliation of the numerator and denominator usedin the calculation of pro-forma net (loss) income per share (in thousands,except share and per share amounts):
| ** **                                                       | ** ** | **Three Months  Ended  (Unaudited)** | ** ** | **Nine Months Ended  (Unaudited)** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                       | ** ** | **November 25,  2006**               | ** ** | **November 25,  2006**                  | ** ** | **November 26,  2005** | ** ** |
| **Pro-forma Information**                                        |       |                                      |       |                                         |       |   |   |
| Pro-forma net (loss)  income applicable to common shareholders   |       | $                                         | (2,486     | )                                            | $          | 7,087 |   | $ | 5,531 |   |
| Pro-forma net (loss)  income per share:                          |       |                                      |       |                                         |       |   |   |
| Basic                                                            |       | $                                         | (0.22      | )                                            | $          | 0.64 |   | $ | 0.52 |   |
| Diluted                                                          |       | $                                         | (0.22      | )                                            | $          | 0.62 |   | $ | 0.50 |   |
| Pro-forma weighted  average number of shares outstanding:        |       |                                      |       |                                         |       |   |   |
| Basic                                                            |       | 11,074,449                                |       | 10,988,214                                   |       | 10,642,003 |   |
| Diluted                                                          |       | 11,074,449                                |       | 11,478,627                                   |       | 11,150,899 |   |
| **Reconciliation of pro-forma  information to GAAP**             |       |                                      |       |                                         |       |   |   |
| Net (loss) income  applicable to common shareholders (GAAP)      |       | $                                         | (3,430     | )                                            | $          | 6,143 |   | $ | 3,810 |   |
| Acquisition-related  expenses, net of tax                        |       | 944                                       |       | 944                                          |       | — |   |
| Preferred stock  dividends                                       |       | —                                    |       | —                                       |       | 1,721 |   |
| Net (loss) income  applicable to common shareholders (pro-forma) |       | $                                         | (2,486     | )                                            | $          | 7,087 |   | $ | 5,531 |   |
| ***Basic***                                                      | * *   | * *                                  | * *   | * *                                     | * *   | * * | * * |
| Weighted average number  of shares outstanding (GAAP)            |       | 11,074,449                                |       | 10,988,214                                   |       | 5,768,834 |   |
| Conversion of preferred  stock to common                         |       | —                                    |       | —                                       |       | 3,202,839 |   |
| Weighted average  additional shares issued in IPO                |       | —                                    |       | —                                       |       | 1,670,330 |   |
| Weighted average number  of shares outstanding (pro-forma)       |       | 11,074,449                                |       | 10,988,214                                   |       | 10,642,003 |   |
| ***Diluted***                                                    | * *   | * *                                  | * *   | * *                                     | * *   | * * | * * |
| Weighted average number  of shares outstanding (GAAP)            |       | 11,074,449                                |       | 11,478,627                                   |       | 9,480,569 |   |
| Weighted average  additional shares issued in IPO                |       | —                                    |       | —                                       |       | 1,670,330 |   |
| Weighted average number of shares outstanding (pro-forma)        |       | 11,074,449                                |       | 11,478,627                                   |       | 11,150,899 |   |

 

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#### **QuarterlyResults of Operations and Seasonality**

Thefollowing table sets forth certain unaudited financial and operating data foreach quarter of fiscal 2006 and the first three quarters of fiscal 2007. Theaccompanying unaudited financial and operating data has been prepared inaccordance with U.S. generally accepted accounting principles (“GAAP”) forinterim financial information. In the opinion of management, the unauditedquarterly information reflects all adjustments, which include only normal andrecurring adjustments, considered necessary to present fairly the informationshown.
|                                            | ** ** | **Fiscal 2006**                                                      | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Quarter Ended  May 28, 2005**                            | ** ** | **Quarter Ended  Aug. 27, 2005** | ** ** | **Quarter Ended  Nov. 26, 2005** | ** ** | **Quarter Ended  Feb. 25, 2006** | ** ** |
| ** **                                 | ** ** | **($ in thousands, except per share data)** | ** ** |
| Net sales                                  |       | $                                                                         | 58,570     |   | $ | 69,635 |   | $ | 31,800 |   | $ | 40,125 |   |
| Gross profit                               |       | 18,228                                                                    |       | 22,070 |   | 7,885 |   | 10,555 |   |
| Gross profit as  a percentage of net sales |       | 31.1                                                                      | %          | 31.7 | % | 24.8 | % | 26.3 | % |
| Retail operating  expenses                 |       | $                                                                         | 10,932     |   | $ | 10,773 |   | $ | 7,594 |   | $ | 8,213 |   |
| General and  administrative expenses       |       | 3,102                                                                     |       | 2,155 |   | 2,527 |   | 2,249 |   |
| Preopening  expenses                       |       | 1,310                                                                     |       | 40 |   | 662 |   | 911 |   |
| Income (loss)  from operations             |       | 2,884                                                                     |       | 9,102 |   | (2,898 | ) | (818 | ) |
| Income (loss)  before income taxes         |       | 2,899                                                                     |       | 9,202 |   | (2,726 | ) | (666 | ) |
| Net income  (loss)                         |       | $                                                                         | 1,693      |   | $ | 5,447 |   | $ | (1,609 | ) | $ | (265 | ) |
| Basic net income  (loss) per share         |       | $                                                                         | 0.37       |   | $ | 0.98 |   | $ | (0.15 | ) | $ | (0.02 | ) |
| Diluted net  income (loss) per share       |       | $                                                                         | 0.21       |   | $ | 0.59 |   | $ | (0.15 | ) | $ | (0.02 | ) |
| Weighted average  shares outstanding:      |       |                                                                      |       |   |   |   |   |   |   |
| Basic                                      |       | 1,883,969                                                                 |       | 4,801,458 |   | 10,653,135 |   | 10,665,848 |   |
| Diluted                                    |       | 8,042,819                                                                 |       | 9,211,662 |   | 10,653,135 |   | 10,665,848 |   |
| Comparable store  sales increase(1)        |       | 10.5                                                                      | %          | 7.4 | % | 6.7 | % | 2.5 | % |
| Stores opened  during the period           |       | 11                                                                        |       | — |   | 4 |   | 1 |   |
| Number of stores  at end of period         |       | 45                                                                        |       | 45 |   | 49 |   | 50 |   |
| Selling square feet at  end of period      |       | 671,953                                                                   |       | 671,953 |   | 727,112 |   | 738,615 |   |

 
|                                            | ** ** | **Fiscal 2007**                                                      | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Quarter Ended  May 27, 2006**                            | ** ** | **Quarter Ended  Aug. 26, 2006** | ** ** | **Quarter Ended  Nov. 25, 2006** | ** ** |
| ** **                                 | ** ** | **($ in thousands, except per share data)** | ** ** |
| Net sales                                  |       | $                                                                         | 82,517     |   | $ | 95,646 |   | $ | 46,146 |   |
| Gross profit                               |       | 26,298                                                                    |       | 31,324 |   | 12,084 |   |
| Gross profit as  a percentage of net sales |       | 31.9                                                                      | %          | 32.7 | % | 26.2 | % |
| Retail operating  expenses                 |       | $                                                                         | 15,817     |   | $ | 14,895 |   | $ | 11,302 |   |
| General and  administrative expenses       |       | 4,482                                                                     |       | 4,457 |   | 4,215 |   |
| Preopening  expenses                       |       | 1,648                                                                     |       | 126 |   | 718 |   |
| Income (loss)  from operations             |       | 4,351                                                                     |       | 11,846 |   | (4,151 | ) |
| Acquisition-related  expenses              |       | —                                                                    |       | — |   | (965 | ) |
| Income (loss)  before income taxes         |       | 4,359                                                                     |       | 11,921 |   | (5,149 | ) |
| Net income  (loss)                         |       | $                                                                         | 2,572      |   | $ | 7,001 |   | $ | (3,430 | ) |
| Basic net income  (loss) per share         |       | $                                                                         | 0.24       |   | $ | 0.64 |   | $ | (0.31 | ) |
| Diluted net  income (loss) per share       |       | $                                                                         | 0.22       |   | $ | 0.61 |   | $ | (0.31 | ) |
| Weighted average  shares outstanding:      |       |                                                                      |       |   |   |   |   |
| Basic                                      |       | 10,890,837                                                                |       | 10,999,356 |   | 11,074,449 |   |
| Diluted                                    |       | 11,590,229                                                                |       | 11,432,419 |   | 11,074,449 |   |
| Comparable store  sales increase(1)        |       | 1.0                                                                       | %          | 0.8 | % | 3.8 | % |
| Stores opened  during the period           |       | 11                                                                        |       | — |   | 4 |   |
| Number of stores  at end of period         |       | 61                                                                        |       | 61 |   | 65 |   |
| Selling square feet at  end of period      |       | 884,146                                                                   |       | 884,146 |   | 941,059 |   |

 

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(1)       Anew or relocated store is included in the comparable store base after it hasbeen in operation for 12 full fiscal months following the month of the store’sgrand opening weekend, typically a store’s 13th full month of operations. A store that isclosed for remodel or repair is excluded from the comparable store salescalculation during the period of closure and the comparable period of thesucceeding year. Sales from our catalog and eCommerce operations are notincluded in the comparable store sales calculation. Comparable store resultsfor a 53-week fiscal year are presented on a 52/52-week basis.

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Our business is subject to seasonal fluctuations, withthe highest sales activity and substantially all of our income from operationsoccurring during the first and second quarters of our fiscal year. Many of ourstores are located in midwestern and northeastern states where late spring andsummer represent the peak of the golf season. It is possible the impact ofseasonal fluctuations could change as we continue to expand into additionalgeographic regions. The Father’s Day holiday in June drives a significantseasonal sales increase, and sales also increase during theDecember holiday season, albeit to a lesser extent.

Ourquarterly operating results also may fluctuate significantly because of otherfactors. Customer demand for our products and services, and consequently oursales, also can be significantly impacted by weather. The timing of new storeopenings and related expenses; the profitability of new stores; the impact onstore results during remodeling; changes in retail competition in our markets;and general economic conditions, can affect our quarterly results. The fixedcosts of our operations make our operating results sensitive to changes,favorable and unfavorable, in demand for our products and services. Due tothese factors, results for any individual quarter may not be indicative ofresults to be expected for any other quarter or for a full fiscal year.

Ourpreopening expenses have varied from quarter to quarter due primarily to thetiming of store openings. We have historically opened the majority of our newstores in the first and third quarters of the fiscal year, and expect tocontinue this pattern going forward. We typically incur most preopeningexpenses for a new store during the three months immediately preceding itsopening. In addition, our labor and operating costs for a newly opened storeare typically higher than a mature store. Accordingly, the volume and timing ofnew store openings is expected to continue to have a significant impact onquarterly preopening costs and store labor and operating expenses.

**Liquidity and Capital Resources**

**Summary**

Ourprimary capital requirements are related to the growth of the business. Newstores require capital for inventory, capital expenditures such as tenantimprovements and fixtures, and preopening expenses. In addition, capital may berequired for strategic growth opportunities, such as the acquisition of TheGolfWorks in the first quarter of fiscal 2007, and to remodel existing storesto updated formats. Periodically, capital resources may be needed for systemsor facility improvements to support our growth. Sources of capital to fund ourgrowth have included proceeds from our equity financings, cash generated fromoperations and cash proceeds from the sale of our equity in Golf Town CanadaInc., a golf specialty retailer operating stores across Canada.

Ourworking capital liquidity needs change significantly from quarter to quarterdue to the impact of seasonality, the timing of new store openings and thetiming of inventory payments. Our primary source of working capital liquidityis cash provided by operations, and we utilize the borrowing capacity availableunder our revolving credit facility, if needed.

In thefirst quarter of fiscal 2007, we acquired The GolfWorks, with a combination ofavailable cash, common stock and warrants to purchase common stock. Inaddition, we assumed approximately $5.4 million of existing debt from TheGolfWorks, which we repaid with our remaining available cash and short-termborrowings under our revolving credit facility. We generated sufficientoperating cash flow to fully pay off the revolving debt by the end of the firstfiscal quarter.  During the third quarterof fiscal 2007, we accessed our revolving line of credit for working capitalfunding due to the seasonal reduction in sales volume combined with relativelyfixed costs for rent and payroll, and the timing of inventory and constructionrelated payments.  As of November 25,2006, we had $8.3 million in borrowings outstanding under the line of credit.

**Cash Flows**

***Operating Activities.*** Net cash provided by operating activities was$2.6 million through the first three quarters of fiscal 2007, compared with$3.3 million for the same period of fiscal 2006. The decrease resultedprimarily from a decrease in leverage from accounts payable relative toincreased inventory levels. Net inventory increased year-over-year due to theincrease in the number of open stores and, to a lesser degree, the inventoryheld by The GolfWorks, which was acquired in the first quarter of fiscal 2007.These factors were partially offset by an increase in net income afteradjusting for the non-cash impact of depreciation and stock option expense, aswell as an increase in deferred rent credits reflecting landlord incentivesreceived for the opening of new stores.

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***Investing Activities.*** Net cash used in investing activities was$16.2 million for the first three quarters of fiscal 2007, compared with $9.5million for the same period of fiscal 2006. Capital expenditures, primarilyrelated to new stores including the purchase of leaseholds, fixtures andoperating equipment, utilized $12.6 million and $9.5 million, respectively, inthese periods. The March 2006 acquisition of The GolfWorks reduced netcash by $3.6 million in the first quarter of fiscal 2007, net of cash acquiredof $501,000.

***Financing Activities.*** Net cash provided by financing activities was$4.8 million for the first three quarters of fiscal 2007 resulting primarilyfrom $8.3 million in net borrowings from our revolving line of credit and theproceeds and tax benefits from the exercise of vested stock options during theperiod, partially offset by the use of $5.4 million to extinguish the debtacquired from The GolfWorks. In the first three quarters of fiscal 2006, netcash provided by financing activities was $18.4 million, resulting from $37.9million in net proceeds from our initial public offering in the second quarterof fiscal 2006, partially offset by a dividend payment of $19.6 million to theholders of the Company’s preferred stock as part of the conversion of thepreferred stock to common stock to facilitate the IPO.

***Sources of Liquidity*.** In addition to cash provided by operations, wemaintain a revolving credit facility as an additional source of short-termliquidity and working capital, if needed. The credit facility has a term endingOctober 2008 and provides for revolving loans, of which up to$5.0 million may be in the form of letters of credit.  In December 2006, the Company exercised itsoption to expand the borrowing capacity under the line of credit from$15 million to $20 million.  The exerciseof the option was in anticipation of near-term working capital requirements,including construction and pre-opening costs for new stores planned to open inthe first quarter of fiscal 2008. Borrowings under the credit facility are secured by our inventories,accounts receivable, and financial and intangible assets. Availability underthe credit facility is calculated on the basis of eligible inventory andcertain accounts receivable, net of specified reserves, and less anyoutstanding letters of credit. Interest on any outstanding indebtedness underour credit facility accrues at the prime lending rate or an adjusted LIBOR asdefined in the agreement for the credit facility. Borrowings under the creditfacility were $8.3 million at November 25, 2006.  There were no borrowings outstanding as ofNovember 26, 2005.

**CapitalResources**

Ourfuture capital requirements will depend primarily on the number and timing ofnew stores opened and capital needed for strategic growth opportunities, suchas the acquisition of The GolfWorks in the first quarter of fiscal 2007. Weexpect capital expenditures of approximately $20 million to$22 million for fiscal 2007, including stores opened in this fiscal yearand planned for the first quarter of fiscal 2008. In the third quarter, weopened four new stores for a total of 15 new stores in fiscal 2007, and wecurrently expect to open 16 to 18 new stores in fiscal 2008. Capital also mightbe needed to remodel or relocate existing stores in the future, as well asadditional capital investments in our infrastructure to support a growing storebase.

As noted above, we entered into a Merger Agreement tobe acquired by Dick’s Sporting Goods, Inc. Completion of this transaction will cause a default under the terms ofthe current credit facility, requiring an amendment to the facility or theimmediate repayment of any outstanding borrowings.  Following the acquisition, we believe anysubstantial future capital requirements can be funded through the combinedcompany’s resources.

Absentthe acquisition, we believe we would have sufficient resources to fund ourcapital requirements through cash provided by operations, our revolving creditfacility and additional equity or debt financing, if necessary.

**Off-Balance-SheetArrangements and Contractual Obligations**

Welease our retail store locations, office space and certain office equipmentprimarily through operating leases and, to a much lesser degree, capital leasesfor certain technology equipment. Our liquidity is not dependent on the use ofoff-balance sheet financing arrangements other than in connection with ouroperating leases. There has been no material change in our contractualobligations other than in the ordinary course of business since the end offiscal 2006.

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**CriticalAccounting Policies and Use of Estimates**

Ourconsolidated financial statements are prepared in accordance with GAAP. Inconnection with the preparation of the financial statements, we are required tomake assumptions, estimates and judgments that affect the reported amounts ofassets, liabilities, net sales, cost of sales, expenses and the relateddisclosures. We base our assumptions, estimates and judgments on historicalexperience, current trends and other factors that we believe to be relevant atthe time the consolidated financial statements are prepared. On a regularbasis, we review our accounting policies, assumptions, estimates and judgmentsto ensure that our financial statements are presented fairly and in accordancewith GAAP. However, because future events and their effects cannot bedetermined with certainty, actual results could differ from our assumptions andestimates, and such differences could be material.

Oursignificant accounting policies are discussed in the “Notes to UnauditedConsolidated Financial Statements” included in this Report and should be readin conjunction with Note 2 of the “Notes to Financial Statements” includedin our Annual Report on Form 10-K for the fiscal year endedFebruary 25, 2006.

**Impact of Recent Accounting Pronouncements**

In June 2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109*. This Interpretationclarifies the accounting for uncertainty in income taxes recognized in thefinancial statements in accordance with FASB Statement No. 109, *Accounting for Income Taxes.* ThisInterpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. This Interpretation also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition. This Interpretation iseffective for fiscal years beginning after December 15, 2006. We plan to adoptthis Interpretation at the beginning of fiscal 2008, and we are currentlyassessing the impact, if any, the adoption will have on our consolidatedresults of operations or financial position.

In September 2006, the SEC issued StaffAccounting Bulletin (“SAB”) No. 108, *Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements*, which provides interpretiveguidance on the consideration of the effects of prior year misstatements inquantifying current year misstatements for the purpose of a materialityassessment. SAB No. 108 is effective for fiscal years ending afterNovember 15, 2006. We expect the effect of adopting SAB No. 108, if any, tobe immaterial to our consolidated results of operations or financial position.

In September 2006,the FASB issued SFAS No. 157, *Fair ValueMeasurements*. SFAS No. 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements. SFAS No. 157 iseffective for fiscal years beginning after December 15, 2007. We plan to adoptSFAS No. 157 at the beginning of fiscal 2009, and we are currently assessing theimpact, if any, the adoption will have on our consolidated results ofoperations or financial position.

**ASpecial Note Regarding Forward-Looking Statements**

This Report contains forward-looking statements thatare based on our beliefs, assumptions and expectations of future events takinginto account the information currently available to us. All statements otherthan statements of historical fact contained in this Report are forward-lookingstatements. These statements involve known and unknown risks, uncertainties andother factors that may cause our actual results, performances, financialcondition or achievements to differ materially from the expected futureresults, performances, financial condition or achievements as expressed orimplied in any forward-looking statements. In some cases forward-lookingstatements can be identified by terms such as “anticipates,” “believes,” “estimates,”“expects,” “intends,” “plans,” “seeks,” “predicts,” “projects,” “strives,” “potential,”“objective,” “may,” “could,” “should,” “would,” “will” and similar expressionsintended to identify forward-looking statements.

The following factors, among others, could cause ouractual financial performance to differ materially from that expressed in anyforward-looking statement: a decline in the popularity of golf or golf-relatedproducts and services; limitations imposed by suppliers on the amount orvariety of products; failure by suppliers to develop and introduce new productsor if new products result in excessive close-outs of existing inventories;seasonal fluctuation in demand for products; weather conditions; the ability toimplement our growth plan successfully; competition in the golf and sportinggoods industry; a decline in discretionary spending; availability of adequatecapital to fund growth; loss of key management; the ability to integrateacquired companies successfully, including The GolfWorks; the failure to obtainshareholder adoption and approval

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of the Merger Agreement or the failure to satisfyother closing conditions with respect to the proposed Merger; the occurrence ofany event, change or other circumstance that could give rise to the terminationof the Merger Agreement; the failure of the proposed Merger to close for anyother reason; and the amount of costs, fees, expenses and other chargesrelating to the Merger. The foregoing list should not be construed asexhaustive. Additional information concerning these and other factors thatcould cause actual results to differ materially from those in the forward-lookingstatements is included in our Annual Report on Form 10-K for thefiscal year ended February 25, 2006.

Forward-looking statements reflect our current viewswith respect to future events, are based on our assumptions and are subject torisks and uncertainties. Given these uncertainties, readers should not placeundue reliance on these forward-looking statements. Our forward-lookingstatements speak only as of the date of this Report. We assume no obligation toupdate or revise any forward-looking statements publicly, or to update thereasons actual results could differ materially from those anticipated in anyforward-looking statements, even if new information becomes available in thefuture.

**Item3. Quantitative and Qualitative Disclosures About Market Risk.**

Historically, we haveborrowed under our revolving credit facility for seasonal liquidity needs.Borrowings under the revolving credit facility incur interest at floating ratesbased either on the prime rate or an adjusted LIBOR, and to the extent thereare outstanding borrowings, we are exposed to market risk related to changes ininterest rates. At November 25, 2006 we had outstanding borrowings under therevolving credit facility of  $8.3million, at annualized interest rates ranging from 6.82% to 8.25%.  At November 26, 2005, we did not have anyborrowings outstanding, although any prime-based borrowings at that time wouldhave had an annualized interest rate of 7.00%. Given the amount of borrowingsduring the three and nine month periods ended November 25, 2006, and November26, 2005, there would have been no material effect on our income before incometaxes if interest rates would have increased by 100 basis points. We are not aparty to any derivative financial instruments.

**Item4. Controls and Procedures.**

As of the end of the period covered by this Report, weconducted an evaluation, under the supervision and with the participation ofour principal executive officer and our principal financial and accountingofficer, of our disclosure controls and procedures, as defined inRules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended (“Exchange Act”). Based on this evaluation,our principal executive officer and our principal financial and accountingofficer concluded that our disclosure controls and procedures are effective toensure that information required to be disclosed by us in reports that we fileor submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the rules and forms of theSecurities and Exchange Commission.

There have been no changes in internal control overfinancial reporting during the quarter ended November 25, 2006, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

#### **PART II—OTHER INFORMATION**

#### **Item 1A. Risk Factors.**

Our business is subjectto numerous risks as discussed in Item 1A of our Annual Report on Form 10-K forthe fiscal year ended February 25, 2006. In addition, the following risks relate specifically to the pendingacquisition of the Company by Dick’s Sporting Goods, Inc. described in Note 2of our “Notes to Unauditied Consolidated Financial Statements” in Item 1 ofPart I above:

·                  thefailure to obtain shareholder adoption and approval of the merger agreement orthe failure to satisfy other closing conditions with respect to the proposedmerger;

·                  theoccurrence of any event, change or other circumstance that could give rise tothe termination of the merger agreement;

·                  thefailure of the proposed merger to close for any other reason; and

·                  theamounts of costs, fees, expenses and other charges relating to the merger.

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#### **Item 6. Exhibits.**

| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                        |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Agreement and Plan of Merger, dated as of November 13, 2006, by and among Golf  Galaxy, Inc., Dick’s Sporting Goods,  Inc. and Yankees Acquisition Corp. (incorporated by reference to Exhibit  2.1 to the Registrant’s Current Report on Form 8-K dated November 13, 2006). |
| 3.1              |       | Amended and Restated Articles of Incorporation  (incorporated by reference to Exhibit 3.1 to the Registrant’s  Registration Statement on Form S-1 (File No. 333-125007)  as declared effective by the Commission on July 28, 2005 (the “S-1”)).     |
| 3.2              |       | Amended and Restated Bylaws (incorporated by  reference to Exhibit 3.2 to the S-1).                                                                                                                                                                                               |
| 4.1              |       | Specimen of common stock certificate (incorporated  by reference to Exhibit 4.1 to the S-1).                                                                                                                                                                                      |
| 4.2              |       | Amended and Restated Registration Rights Agreement  dated as of October 3, 2000 among the holders of preferred stock,  Randall K. Zanatta, Gregory B. Maanum and the Registrant (incorporated by  reference to Exhibit 4.3 to the S-1).                                      |
| 4.3              |       | Conversion Agreement dated May 16, 2005 among  the holders of preferred stock and the Registrant (incorporated by reference  to Exhibit 4.4 to the S-1).                                                                                                                     |
| 10.1             |       | Amended and Restated Employment Agreement between  the Registrant and Randall K. Zanatta, dated October 9, 2006 (incorporated by  reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended August 26, 2006)                             |
| 10.2             |       | Amended and Restated Employment Agreement between  the Registrant and Gregory B. Maanum, dated October 9, 2006 (incorporated by  reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended August 26, 2006)                              |
| 10.3             |       | Amended and Restated Employment Agreement between  the Registrant and Richard C. Nordvold, dated October 9, 2006 (incorporated  by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form  10-Q for the quarter ended August 26, 2006)                            |
| 10.4             |       | Amended and Restated Employment Agreement between  the Registrant and Ronald G. Hornbaker, dated October 9, 2006 (incorporated  by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form  10-Q for the quarter ended August 26, 2006)                            |
| 10.5             |       | Amended and Restated Retention Agreement between the  Registrant and Randall K. Zanatta, dated October 9, 2006 (incorporated by  reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended August 26, 2006)                              |
| 10.6             |       | Amended and Restated Retention Agreement between the  Registrant and Gregory B. Maanum, dated October 9, 2006 (incorporated by  reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended August 26, 2006)                               |
| 10.7             |       | Retention Agreement between the Registrant and  Richard C. Nordvold, dated October 9, 2006 (incorporated by reference to  Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended August 26, 2006)                                                  |
| 10.8             |       | Retention Agreement between the Registrant and  Ronald G. Hornbaker, dated October 9, 2006 (incorporated by reference to  Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended August 26, 2006)                                                  |
| 31.1             |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).                                                                                                                                                       |
| 31.2             |       | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).                                                                                                                                                       |
| 32.1             |       | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).                                                                                                                                                       |
| 32.2             |       | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).                                                                                                                                                       |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                      |     | GOLF GALAXY, INC.                                 |
|----------------------|----------|---------------------------------------------------|
|                 |     | (Registrant)                                      |
|                 |     |                                              |
| Date January 9, 2007 |     | /s/ RANDALL K. ZANATTA                            |   |
|                 |     | Randall K. Zanatta                                |
|                 | * * | *President, Chief Executive Officer and Chairman* |
|                 | * * | *(Principal Executive Officer)*                   |
|                 |     |                                              |
| Date January 9, 2007 |     | /s/ RICHARD C. NORDVOLD                           |   |
|                 |     | Richard C. Nordvold                               |
|                 | * * | *Chief Financial Officer*                         |
|                 | * * | *(Principal Financial and Accounting Officer)*    |

 

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**EXHIBIT INDEX TO FORM 10-Q**
| 2.1  |   | Agreement and Plan of Merger, dated as of November 13, 2006, by and among Golf  Galaxy, Inc., Dick’s Sporting Goods,  Inc. and Yankees Acquisition Corp. (incorporated by reference to  Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated November 13,  2006). |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1  |   | Amended and Restated Articles of Incorporation  (incorporated by reference to Exhibit 3.1 to the Registrant’s  Registration Statement on Form S-1 (File No. 333-125007)  as declared effective by the Commission on July 28, 2005 (the “S-1”)).      |
| 3.2  |   | Amended and Restated Bylaws (incorporated by  reference to Exhibit 3.2 to the S-1).                                                                                                                                                                                                |
| 4.1  |   | Specimen of common stock certificate (incorporated  by reference to Exhibit 4.1 to the S-1).                                                                                                                                                                                       |
| 4.2  |   | Amended and Restated Registration Rights Agreement  dated as of October 3, 2000 among the holders of preferred stock,  Randall K. Zanatta, Gregory B. Maanum and the Registrant (incorporated by  reference to Exhibit 4.3 to the S-1).                                       |
| 4.3  |   | Conversion Agreement dated May 16, 2005 among  the holders of preferred stock and the Registrant (incorporated by reference  to Exhibit 4.4 to the S-1).                                                                                                                      |
| 10.1 |   | Amended and Restated Employment Agreement between  the Registrant and Randall K. Zanatta, dated October 9, 2006 (incorporated by  reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended August 26, 2006)                              |
| 10.2 |   | Amended and Restated Employment Agreement between  the Registrant and Gregory B. Maanum, dated October 9, 2006 (incorporated by  reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended August 26, 2006)                               |
| 10.3 |   | Amended and Restated Employment Agreement between  the Registrant and Richard C. Nordvold, dated October 9, 2006 (incorporated  by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form  10-Q for the quarter ended August 26, 2006)                             |
| 10.4 |   | Amended and Restated Employment Agreement between  the Registrant and Ronald G. Hornbaker, dated October 9, 2006 (incorporated  by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form  10-Q for the quarter ended August 26, 2006)                             |
| 10.5 |   | Amended and Restated Retention Agreement between the  Registrant and Randall K. Zanatta, dated October 9, 2006 (incorporated by  reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended August 26, 2006)                               |
| 10.6 |   | Amended and Restated Retention Agreement between the  Registrant and Gregory B. Maanum, dated October 9, 2006 (incorporated by  reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended August 26, 2006)                                |
| 10.7 |   | Retention Agreement between the Registrant and  Richard C. Nordvold, dated October 9, 2006 (incorporated by reference to  Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended August 26, 2006)                                                   |
| 10.8 |   | Retention Agreement between the Registrant and  Ronald G. Hornbaker, dated October 9, 2006 (incorporated by reference to  Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended August 26, 2006)                                                   |
| 31.1 |   | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).                                                                                                                                                        |
| 31.2 |   | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).                                                                                                                                                        |
| 32.1 |   | Certification of Chief Executive Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).                                                                                                                                                        |
| 32.2 |   | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).                                                                                                                                                        |

 

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