**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-Q**

(Mark One)

**x****              ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

For the quarterlyperiod ended**May 27, 2006**

or

**o****                 ****TRANSITION REPORT PURSUANTTO 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) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the 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.(Check one):

| Large accelerated  filer o | Accelerated  filer o | Non-accelerated  filer ý |
|---------------------------------|---------------------------|------------------------------------|

 

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 of July 1,2006, the Company had 10,978,859 shares of common stock, par value $0.01 pershare, outstanding.

 

 

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**GOLFGALAXY, INC.FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MAY 27, 2006INDEX**

 
| PART I-FINANCIAL  INFORMATION                                                                                          |   |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Item 1.  Financial Statements.                                                                                              |   |   |
| Consolidated  Balance Sheets as of May 27, 2006 (unaudited), May 28, 2005  (unaudited) and February 25, 2006 |   |   |
| Consolidated  Statements of Operations for the Three Months Ended May 27, 2006 and  May 28, 2005 (unaudited)      |   |   |
| Consolidated  Statements of Cash Flows for the Three Months Ended May 27, 2006 and  May 28, 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  5. Other Information.                                                                                                 |   |   |
| Item 6.  Exhibits.                                                                                                          |   |   |
| SIGNATURES                                                                                                                  |   |   |

####  

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####  

#### **PART I—FINANCIAL INFORMATION**

**Item1. Financial Statements.**

**GOLFGALAXY, INC.****CONSOLIDATED BALANCESHEETS(*In Thousands, Except Share and Per Share Amounts*)**
| ** **                                                                                                                                 | ** ** | **May 27, 2006  (unaudited)** | ** ** | **May 28, 2005  (unaudited)** | ** ** | **February 25,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                 |       |                                    |       |                                    |       |                        |       |
| Current assets:                                                                                                                            |       |                                    |       |                                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                 |       | $                                       | 2,854      |                                    | $          | 9,159                       |       | $ | 11,075 |   |
| Accounts  receivable, net of allowances of $204, $50 and $70, respectively                                                                 |       | 11,373                                  |       | 9,523                                   |       | 4,523                       |       |
| Inventories, net                                                                                                                           |       | 69,856                                  |       | 44,492                                  |       | 45,278                      |       |
| Deferred tax  assets                                                                                                                       |       | 2,903                                   |       | 2,219                                   |       | 2,275                       |       |
| Prepaid expenses  and other current assets                                                                                                 |       | 2,978                                   |       | 1,510                                   |       | 2,921                       |       |
| Total current assets                                                                                                                       |       | 89,964                                  |       | 66,903                                  |       | 66,072                      |       |
|                                                                                                                                       |       |                                    |       |                                    |       |                        |       |
| Property and equipment,  net                                                                                                               |       | 40,338                                  |       | 23,856                                  |       | 35,218                      |       |
| Intangibles, net                                                                                                                           |       | 2,154                                   |       | —                                  |       | —                      |       |
| Goodwill                                                                                                                                   |       | 7,420                                   |       | —                                  |       | —                      |       |
| Deferred tax assets                                                                                                                        |       | 5,041                                   |       | 2,272                                   |       | 4,700                       |       |
| Other assets                                                                                                                               |       | 301                                     |       | 447                                     |       | 557                         |       |
| Total assets                                                                                                                               |       | $                                       | 145,218    |                                    | $          | 93,478                      |       | $ | 106,547 |   |
| **Liabilities and shareholders’  equity (deficit)**                                                                                   |       |                                    |       |                                    |       |                        |       |
| Current liabilities:                                                                                                                       |       |                                    |       |                                    |       |                        |       |
| Accounts payable                                                                                                                           |       | $                                       | 47,487     |                                    | $          | 39,399                      |       | $ | 23,224 |   |
| Accrued  liabilities                                                                                                                       |       | 16,628                                  |       | 10,880                                  |       | 16,453                      |       |
| Total current  liabilities                                                                                                                 |       | 64,115                                  |       | 50,279                                  |       | 39,677                      |       |
|                                                                                                                                       |       |                                    |       |                                    |       |                        |       |
| Deferred tax liabilities                                                                                                                   |       | 1,836                                   |       | —                                  |       | —                      |       |
| Deferred rent credits  and other                                                                                                           |       | 15,017                                  |       | 10,701                                  |       | 12,177                      |       |
|                                                                                                                                       |       |                                    |       |                                    |       |                        |       |
| Redeemable convertible  preferred stock, including accumulated preferred stock dividends:                                                  |       |                                    |       |                                    |       |                        |       |
| Preferred  Series A, par value $1.00, Authorized shares — 80,000; Issued and  outstanding — 0, 80,000 and 0, respectively   |       | —                                  |       | 14,338                                  |       | —                      |       |
| Preferred  Series B, par value $1.00, Authorized shares — 35,000; Issued and  outstanding — 0, 35,000 and 0, respectively   |       | —                                  |       | 5,863                                   |       | —                      |       |
| Preferred  Series C, par value $1.00, Authorized shares — 100,000; Issued and  outstanding — 0, 100,000 and 0, respectively |       | —                                  |       | 15,945                                  |       | —                      |       |
| Preferred  Series D, par value $1.00, Authorized shares — 150,000; Issued and  outstanding — 0, 94,000 and 0, respectively  |       | —                                  |       | 13,593                                  |       | —                      |       |
|                                                                                                                                       |       | —                                  |       | 49,739                                  |       | —                      |       |
| Shareholders’ equity (deficit):                                                                                                       |       |                                    |       |                                    |       |                        |       |
| Common stock,  par value $0.01 per share:                                                                                                  |       |                                    |       |                                    |       |                        |       |
| Authorized  shares — 40,000,000; Issued and outstanding — 10,978,859, 1,883,969 and  10,671,803, respectively                    |       | 110                                     |       | 19                                      |       | 107                         |       |
| Additional  paid-in capital                                                                                                                |       | 75,895                                  |       | —                                  |       | 68,961                      |       |
| Accumulated  deficit                                                                                                                       |       | (11,803                                 | )          | (17,260                                 | )          | (14,375                     | )          |
| Accumulated  other comprehensive income                                                                                                    |       | 48                                      |       | —                                  |       | —                      |       |
| Total shareholders’  equity (deficit)                                                                                                 |       | 64,250                                  |       | (17,241                                 | )          | 54,693                      |       |
| Total liabilities and shareholders’ equity (deficit)                                                                                  |       | $                                       | 145,218    |                                    | $          | 93,478                      |       | $ | 106,547 |   |

 

NOTE: The Balance Sheetas of February 25, 2006, has been derived from the audited financialstatements.

*Seeaccompanying notes.*

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**GOLFGALAXY, INC.****CONSOLIDATED STATEMENTS OFOPERATIONS(*In Thousands, Except Share and Per Share Amounts*)(Unaudited)**
| ** **                                      | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **May 27,  2006**           | ** ** | **May 28,  2005** | ** ** |
| ** **                                      | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net sales                                       |       | $                                | 82,517     |   | $ | 58,570 |   |
| Cost of sales                                   |       | 56,219                           |       | 40,342 |   |
| Gross profit                                    |       | 26,298                           |       | 18,228 |   |
| Operating expenses:                             |       |                             |       |   |   |
| Retail operating                                |       | 15,817                           |       | 10,932 |   |
| General and  administrative                     |       | 4,482                            |       | 3,102 |   |
| Preopening                                      |       | 1,648                            |       | 1,310 |   |
| Total operating  expenses                       |       | 21,947                           |       | 15,344 |   |
| Income from operations                          |       | 4,351                            |       | 2,884 |   |
| Interest income, net                            |       | 8                                |       | 15 |   |
| Income before income  taxes                     |       | 4,359                            |       | 2,899 |   |
| Income tax expense                              |       | (1,787                           | )          | (1,206 | ) |
| Net income                                      |       | 2,572                            |       | 1,693 |   |
| Less preferred stock  dividends                 |       | —                           |       | (998 | ) |
| Net income applicable  to common shareholders   |       | $                                | 2,572      |   | $ | 695 |   |
| Net income per share:                           |       |                             |       |   |   |
| Basic                                           |       | $                                | 0.24       |   | $ | 0.37 |   |
| Diluted                                         |       | $                                | 0.22       |   | $ | 0.21 |   |
| Weighted average number  of shares outstanding: |       |                             |       |   |   |
| Basic                                           |       | 10,890,837                       |       | 1,883,969 |   |
| Diluted                                         |       | 11,590,229                       |       | 8,042,819 |   |

 

*See accompanying notes.*

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**GOLFGALAXY, INC.****CONSOLIDATED STATEMENTS OFCASH FLOWS*(InThousands)*(Unaudited)**
| ** **                                                                                             | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                             | ** ** | **May 27,  2006**           | ** ** | **May 28,  2005** | ** ** |
| **Operating activities**                                                                               |       |                             |       |   |   |
| Net income                                                                                             |       | $                                | 2,572      |   | $ | 1,693 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities:                     |       |                             |       |   |   |
| Depreciation and  amortization                                                                         |       | 1,842                            |       | 1,142 |   |
| Disposal of  property and equipment                                                                    |       | 22                               |       | 4 |   |
| Amortization of  debt issuance costs                                                                   |       | 3                                |       | 3 |   |
| Stock-based  compensation                                                                              |       | 247                              |       | — |   |
| Change in operating  assets and liabilities:                                                           |       |                             |       |   |   |
| Accounts  receivable                                                                                   |       | (5,248                           | )          | (6,068 | ) |
| Inventories                                                                                            |       | (19,086                          | )          | (14,077 | ) |
| Prepaid expenses  and other                                                                            |       | (10                              | )          | (219 | ) |
| Accounts payable                                                                                       |       | 20,804                           |       | 23,573 |   |
| Accrued  liabilities and other                                                                         |       | 5,460                            |       | 4,989 |   |
| Net cash provided by  operating activities                                                             |       | 6,606                            |       | 11,040 |   |
| **Investing activities**                                                                               |       |                             |       |   |   |
| Acquisition of The  GolfWorks, net of $501 cash acquired                                               |       | (3,559                           | )          | — |   |
| Additions to property  and equipment                                                                   |       | (6,377                           | )          | (5,126 | ) |
| Net cash used in  investing activities                                                                 |       | (9,936                           | )          | (5,126 | ) |
| **Financing activities**                                                                               |       |                             |       |   |   |
| Proceeds from the  exercise of stock options and warrants                                              |       | 242                              |       | — |   |
| Excess tax benefits  from stock-based compensation                                                     |       | 222                              |       | — |   |
| Repayment of debt  assumed from The GolfWorks                                                          |       | (5,403                           | )          | — |   |
| Net cash used in  financing activities                                                                 |       | (4,939                           | )          | — |   |
| Effect of exchange rate  changes on cash and cash equivalents                                          |       | 48                               |       | — |   |
| Net (decrease) increase  in cash and cash equivalents                                                  |       | (8,221                           | )          | 5,914 |   |
| Cash and cash  equivalents, beginning of year                                                          |       | 11,075                           |       | 3,245 |   |
| Cash and cash  equivalents, end of quarter                                                             |       | $                                | 2,854      |   | $ | 9,159 |   |
| **Supplemental disclosure of cash  flow information**                                                  |       |                             |       |   |   |
| Cash paid during the  year for:                                                                        |       |                             |       |   |   |
| Interest                                                                                               |       | $                                | 46         |   | $ | 2 |   |
| Taxes                                                                                                  |       | $                                | 1,198      |   | $ | 1,319 |   |
| **Supplemental disclosure of  non-cash investing and financing activities**                            |       |                             |       |   |   |
| 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 |       | $                                | 1,860      |   | $ | 461 |   |

 

*Seeaccompanying notes.*

 

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

**1. Basis of Presentation**

Theaccompanying unaudited 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.

These interim unaudited consolidated financialstatements and the related notes should be read in conjunction with the annualfinancial statements and notes included in the Company’s Annual Report on Form 10-Kfor the fiscal year ended February 25, 2006.

The preparation of financial statements inconformity with GAAP requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of net sales and expenses during the period. Ultimateresults could differ from those estimates.

The unaudited consolidated financial statements include the accounts ofGolf Galaxy and its wholly owned subsidiary from the date of acquisition. Allintercompany transactions have been eliminated in consolidation.

The Company operates one reportable business segment -Retail. The Retail segment is primarily engaged in specialty golf retail 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. Public Offerings of Common Stock**

### *Initial Public Offering*

The Company completed itsinitial public offering (“IPO”), as of August 3, 2005, issuing 3,000,000common shares at an offering price of $14.00. As part of the IPO, all of thethen outstanding preferred stock was converted into 5,752,467 shares of commonstock, of which 1,542,500 were sold in the IPO, resulting in a total offeringof 4,542,500 common shares. The Company’s common stock trades on the NasdaqNational Market under the symbol “GGXY.”

After issuance costs, theCompany received net proceeds of $37.9 million, of which $19.6 million was usedto pay preferred shareholders all of the accrued and unpaid dividends due uponthe conversion of their shares of preferred stock into shares of the Company’scommon stock. The remainder of the net proceeds was used primarily to fundcapital expenditures to open new stores and the March 2006 acquisition ofRalph Maltby Enterprises, Inc., now known as Golf Galaxy GolfWorks, Inc.(“The GolfWorks”).

*WithdrawnFollow-on Offering*

Certainholders of the unregistered shares of common stock remaining from theconversion of their preferred stock concurrent with the IPO exercised theirdemand registration rights during the first quarter of fiscal 2007. In May 2006,the Company initially filed a registration statement on Form S-1 for an underwritten public offering by theCompany, with the majority of the shares in the offering provided by certainselling shareholders. Theregistration statement was later withdrawn due to a decline in the Company’sstock price and the related costs of the withdrawn offering of $346,000,pre-tax, were included in general and administrative expenses in the firstquarter of fiscal 2007. The former preferred shareholders retain their demandregistration rights for the existing unregistered common shares.

**3.Acquisition of The GolfWorks**

In the first quarter offiscal 2007, Golf Galaxy acquired all of the outstanding shares of TheGolfWorks for a combination of cash, common stock and warrants to purchasecommon stock. The aggregate purchase price, including direct acquisition costsof $315,000, consisted of $4.1 million in cash ($500,000 of which was depositedinto an indemnification escrow); 250,862 shares of the Company’s common stockvalued at $4.8 million and warrants to purchase 150,000 shares of the Company’scommon stock with a fair value of $1.4 million. The value of the common stockwas based on the average closing price of the Company’s common stock on theNasdaq National Market during a five-day trading period beginning three tradingdays prior to the announcement of the acquisition; the value of the warrantswas determined using the Black-Scholes option pricing model. The warrants are 

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immediately exercisableat $17.94 per share with a 10-year term expiring on March 16, 2016.The Company also assumed $5.4 million in existing debt from The GolfWorks.Following the acquisition, the Company repaid all outstanding debt of TheGolfWorks with a combination of available cash and borrowings under Golf Galaxy’scredit facility.

The GolfWorks isprimarily a retailer of golf-related products including proprietary clubheads,components and tools for club-making, as well as golf accessories and namebrand shafts and grips. In addition to its retail catalogs and eCommerce website,The GolfWorks’ products and fitting systems are featured in many Golf Galaxystores and are planned to be included in all Golf Galaxy retail stores by theend of fiscal 2007. The Company believes The GolfWorks brand provides anopportunity to expand our retail offerings to new and existing customers. TheCompany intends to grow The GolfWorks brand through an expanded store-in-storeservice area in the Company’s stores combined with integrated marketing andproduct offerings. The expanded service area features The GolfWorks brand tohighlight the Company’s technical expertise in club repair and upgradeservices. The store-in-store also features a wide assortment of golf clubcomponents, tools, shafts and grips for customers interested in building or servicingtheir own equipment. In addition, the acquisition facilitates the continuedgrowth of the Company’s direct-to-consumer channel on a cost efficient basis. Theacquired GolfWorks facilities include a customer contact center; distributioncenter; research, design and light assembly facilities; and a school for clubbuilders. In April 2006, Golf Galaxy combined its contact center with TheGolfWorks’ contact center to create a more efficient and lower-cost operation.

The acquisition of TheGolfWorks was accounted for under the purchase method of accounting. Accordingly,the results of The GolfWorks have been included in the Company’s consolidatedfinancial statements as a wholly owned subsidiary beginning March 16,2006. The Company allocated the purchase price to the acquired assets andliabilities of The GolfWorks, based on an estimate of their fair values. Indeveloping an estimate of fair value, a number of factors were considered,including historical operating results, expectations of future operations andstrategies, and the use of independent appraisals. The excess of the purchaseprice over the estimated fair value of the acquired assets and assumedliabilities has been assigned to goodwill.  The goodwill is not deductible for taxpurposes and the acquired assets retain their original income tax basis. Thefollowing summarizes the estimated fair values of the acquired assets andliabilities of The GolfWorks at the date of acquisition. The allocation of thepurchase price is subject to revision as the Company completes its evaluationof the fair values of the acquired assets and liabilities. Any subsequentrevisions to the purchase price allocation are not expected to be material.
| **Acquisition Allocation**                                                     | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------|------------|
| **($ in thousands)**                                                      | ** ** | ** ** | ** ** |
| Cash                                                                                |       | $          | 3,745      |   |
| Golf Galaxy, Inc.  common stock                                                |       | 4,778      |       |
| Warrants to  purchase common stock                                                  |       | 1,448      |       |
| Direct  acquisition costs                                                           |       | 315        |       |
| Total purchase  price                                                               |       | $          | 10,286     |   |
|                                                                                |       |       |       |
| Allocation of  purchase price to the fair value of acquired assets and liabilities: |       |       |       |
| 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                                                                            |       | 7,420      |       |
| 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     | )          |
| Total purchase price                                                                |       | $          | 10,286     |   |

 

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Theestimated fair values of the intangible assets as of the acquisition date weredetermined based on an independent third party appraisal, and are as follows ($in thousands):
| **Intangible asset description** | ** ** | **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 will besubject to periodic evaluation for impairment in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 142, *Goodwill and Other Intangible Assets*.

**4. Stock-Based Compensation**

In December 2004,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(revised), *Share-Based Payment* (“SFASNo. 123(R)”). SFAS No. 123(R) requires compensation expense tobe measured based on the grant-date fair value of the award and recognized overthe requisite service period for awards that vest. SFAS No. 123(R) alsorequires a change in the classification of the benefits of tax deductions inexcess of recognized compensation cost from operating cash flow to a financingcash flow in periods after adoption. The Company adopted SFAS No. 123(R) effectiveFebruary 26, 2006. Prior to February 26, 2006, the Company accountedfor stock-based compensation using the intrinsic value method prescribed inAccounting 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.

Pursuantto the transition requirements of SFAS No. 123(R) for a newly publicentity, the Company is applying the modified prospective method only tounvested awards that were granted on or after its IPO. The unrecognizedcompensation cost relating to those awards will be recognized in the financialstatements over the remaining requisite service period subsequent to adoptionof SFAS No. 123(R). The Company is applying the prospective transitionmethod to unvested awards granted prior to its IPO. The unrecognizedcompensation cost relating to those awards will continue to be recognized inthe financial statements subsequent to adoption of SFAS No. 123(R) usingthe intrinsic value method under APB Opinion No. 25.Accordingly, other than the stock optionsgranted in May 2005, no compensation expense will be recognized onunvested stock options granted prior to the Company’s IPO unless such awardsare subsequently modified.

In May 2005,the Company’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 ofthe Company’s proposed IPO, the Company is recognizing compensation expenseratably over the four-year vesting period of the options based on thedifference between the mid-point of the anticipated IPO price range at the timeof grant and the exercise price of the options.

As aresult of adopting SFAS No. 123(R) on February 26, 2006, theCompany’s income before income taxes and net income for the quarter ended May 27,2006, were $215,000 and $155,000 lower, respectively, than if it had continuedto account for share-based compensation under APB Opinion No. 25. Basicand diluted earnings per share for the quarter ended May 27, 2006, were$0.01 lower than if the Company had continued to account for share-basedcompensation under APB Opinion No. 25.

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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 quarter ended May 27, 2006, presents the excess taxbenefits from the exercise of stock options as financing cash flows. For thefirst quarter of fiscal 2007, $222,000 of excess tax benefits were reported asfinancing cash flows rather than operating cash flows.

Inaccordance with the transition methods described above, financial results forthe first quarter of fiscal 2006 have not been restated. If the Company hadelected to apply the fair value recognition provisions under SFAS No. 123,*Accounting for Stock-Based Compensation*,for the three months ended May 28, 2005, the Company’s net income and netincome per share would have been adjusted to the following pro forma amounts(in thousands, except per share amounts):
| ** **                                                                                                  | ** ** | **Three Months Ended  (Unaudited)** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **May 28, 2005**                         | ** ** |
| Net income  applicable to common shareholders                                                               |       | $                                             | 695        |   |
| Add stock-based  compensation expense, net of tax                                                           |       | —                                        |       |
| Deduct total  stock-based compensation determined under fair-value-based method for all  awards, net of tax |       | (34                                           | )          |
| Pro forma net  income applicable to common shareholders                                                     |       | $                                             | 661        |   |
|                                                                                                        |       |                                          |       |
| Net income per  share:                                                                                      |       |                                          |       |
| Basic—as reported                                                                                      |       | $                                             | 0.37       |   |
| Basic—pro forma                                                                                        |       | $                                             | 0.35       |   |
| Diluted—as reported                                                                                    |       | $                                             | 0.21       |   |
| Diluted—pro  forma                                                                                     |       | $                                             | 0.21       |   |

 

### *Stock Options*

TheCompany’s 1996 Stock Option and Incentive Plan and 2004 Stock Incentive Plan(together, “Plans”) provide for the issuance of incentive and non-qualifiedstock options. Options are generally granted at the fair market value as of thegrant date, are exercisable ratably over various periods and expire up to tenyears after the date of grant. As of May 27, 2006, there were 2,000,000common shares authorized for issuance under the Plans.

Stockoption activity under the Plans for the three months ended May 27, 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       |                                                        |       |                                |       |   |
| Issued                            |       | 200,000     |       | 20.66                                                          |       |                                                        |       |                                |       |
| Forfeited                         |       | (2,950      | )          | 8.55                                                           |       |                                                        |       |                                |       |
| Exercised                         |       | (56,194     | )          | 4.31                                                           |       |                                                        |       |                                |       |
| Outstanding, end  of period       |       | 1,379,800   |       | $                                                              | 9.60       |                                                        | 6.9 years  |                                | $          | 10,533,000 |   |
| Exercisable, end of  period       |       | 696,198     |       | $                                                              | 5.78       |                                                        | 4.5 years  |                                | $          | 7,548,000 |   |

 

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. Based on these assumptions, the estimatedweighted average fair value of the options granted in the first quarter offiscal 2007 and 2006 was $11.25 and $1.43, respectively. Because of the limitedhistory of market trading in the Company’s common stock, estimated volatilityfor the first quarter of fiscal 2007 was based on an average of the volatilityreported by a peer group of publicly traded companies. Beginning with stockoptions granted in the first quarter of fiscal 2007, the expected term ispresumed to be the mid-point between the vesting date and the end of thecontractual term. According to SEC Staff Accounting Bulletin No. 107, thisapproach is permitted until December 31, 2007, for a “plain vanilla” employeestock option for which the value is estimated using a Black-Scholes-Mertonformula.

9

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| ** **                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **May 27, 2006**       | ** ** | **May 28, 2005** | ** ** |
| Weighted Average Assumptions: |       |                             |       |   |   |
| Risk-free interest rate                 |       | 4.7                              | %          | 4.0 | % |
| Expected dividends                      |       | —                           |       | — |   |
| Estimated average life                  |       | 6.25 years                       |       | 5 years |   |
| Volatility                              |       | 50                               | %          | — |   |

 

The aggregateintrinsic value of options (the amount by which the market price of the stockon the date of exercise exceeded the exercise price of the option) exercisedduring the three months ended May 27, 2006, and May 28, 2005, was$1.0 million and $0, respectively. As of May 27, 2006, there was $3.3million of measured but unrecognized compensation expense related to stockoptions that is expected to be recognized over a weighted average period of 3.3years. During the first quarter of fiscal 2007 and 2006, the Company receivedproceeds of $242,000 and $0, respectively, from the exercise of stock optionsand warrants.

**5. Net Income Per Share**

Basicnet income per share is computed based on the weighted average number of commonshares outstanding. Diluted net 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. Net income per diluted share for the firstquarter of fiscal 2007 excludes 209,000 outstanding common stock optionsbecause they were anti-dilutive.

Thefollowing table presents a reconciliation of the numerators and denominators ofbasic and diluted net income per share (in thousands, except share and pershare amounts):
| ** **                                           | ** ** | **Three Months Ended  (Unaudited)** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **May 27,  2006**                        | ** ** | **May 28,  2005** | ** ** |
| Numerator:                                           |       |                                          |       |   |   |
| Net income applicable to common shareholders         |       | $                                             | 2,572      |   | $ | 695 |   |
| Add preferred stock dividends                        |       | —                                        |       | 998 |   |
| Numerator for  diluted net income per share          |       | $                                             | 2,572      |   | $ | 1,693 |   |
| Denominator:                                         |       |                                          |       |   |   |
| Weighted average number of common shares outstanding |       | 10,890,837                                    |       | 1,883,969 |   |
| Effect of dilutive securities:                       |       |                                          |       |   |   |
| Outstanding stock options and warrants               |       | 699,392                                       |       | 406,383 |   |
| Convertible preferred stock                          |       | —                                        |       | 5,752,467 |   |
| Denominator for  diluted net income per share        |       | 11,590,229                                    |       | 8,042,819 |   |
| Net income per  share:                               |       |                                          |       |   |   |
| Basic                                                |       | $                                             | 0.24       |   | $ | 0.37 |   |
| Diluted                                              |       | $                                             | 0.22       |   | $ | 0.21 |   |

 

**6.Property and Equipment**

Major classes of depreciable assets are as follows (inthousands):
| ** **                                      | ** ** | **May 27,  2006  (unaudited)** | ** ** | **May 28,  2005  (unaudited)** | ** ** | **February 25,  2006** | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|
| Fixtures and  equipment                         |       | $                                   | 31,205     |                                | $          | 21,280                      |       | $ | 24,755 |   |
| Leasehold  improvements                         |       | 24,829                              |       | 17,177                              |       | 19,831                      |       |
| Land and  buildings                             |       | 2,830                               |       | —                              |       | —                      |       |
| Construction in  process                        |       | 2,232                               |       | 625                                 |       | 9,671                       |       |
|                                            |       | 61,096                              |       | 39,082                              |       | 54,257                      |       |
| Less accumulated  depreciation and amortization |       | (20,758                             | )          | (15,226                             | )          | (19,039                     | )          |
| Property and equipment,  net                    |       | $                                   | 40,338     |                                | $          | 23,856                      |       | $ | 35,218 |   |

 

10

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**7.Intangibles**

Intangible assets consisted of the following (inthousands):
| ** **                    | ** ** | **May 27,  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 |       | (76                                 | )          |
|                          |       | $                                   | 1,064      |   |
|                          |       |                                |       |
| Intangibles, net              |       | $                                   | 2,154      |   |

 

**8.Employee Benefit Plan**

The Company has a defined contribution 401(k) profitsharing plan (“401(k) Plan”) for eligible employees, which is qualifiedunder Sections 401(a) and 401(k) of the Internal Revenue Code of1986, as amended. Employees are entitled to make tax-deferred contributions ofup to 75% of their eligible compensation. Effective July 1, 2005, theCompany began matching 50% of the first 4% of eligible compensation contributedto the 401(k) Plan by each participant. The Company’s matchingcontribution vests after four years of service, at age 591¤2 regardless of service, orupon the death of the employee. The Company’s matching contribution to the 401(k) Planfor the first quarter of fiscal 2007 was $40,000. The Company did not make amatching contribution to the 401(k) Plan during the first quarter offiscal 2006. Future matching contributions to the 401(k) Plan are at theCompany’s sole discretion.

**9.New Accounting Pronouncements**

In May 2005,the FASB issued SFAS No. 154, *AccountingChanges and Error Corrections, a Replacement of APB Opinion No. 20 andFASB Statement No. 3*. This statement changes the requirementsfor the accounting and reporting of a change in accounting principle. Ratherthan recognizing in net income a cumulative effect adjustment, this statementgenerally requires retroactive application of a change in accounting principleto prior periods’ financial statements. This statement was effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. The adoption of this statement did not have animpact on net income, cash flows or financial position.

In October 2005,the FASB issued FASB Staff Position (“FSP”) FSP 13-1, *Accounting for Rental Costs Incurred During aConstruction Period*. FSP 13-1 requires that rental costsassociated with ground or building operating leases that are incurred during aconstruction period be recognized as rental expense. FSP 13-1 waseffective for the first reporting period after December 15, 2005. We havehistorically expensed rental costs incurred during a construction period;therefore, the adoption of this FSP did not have an impact on our net income,cash flows or financial position.

11

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

**Overview**

GolfGalaxy, Inc. is a leading golf specialty retailer offering a distinctivecombination of competitively priced merchandise from the leading national brandsin golf equipment and apparel, along with non-commissioned sales assistance andpro shop services. We opened 11 new stores during the first quarter of fiscal2007. As of May 27, 2006, we operated 61 superstores, generally rangingfrom 13,000 to 18,000 selling square feet, located in 24 states. 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 sales assistanceand professional services, the combination of which is generally not availableelsewhere. We offer our customers an exciting, interactive environment thatcompares favorably with the shopping experience at smaller independent golfstores, on-course pro shops and the golf departments of general sporting goodsretailers.

Wecompleted an initial public offering of our common stock on August 3,2005, selling 3,000,000 shares at an offering price of $14.00 per shareresulting in gross proceeds of $42.0 million. Our stock is traded on the NasdaqNational Market under the ticker symbol “GGXY.” As part of the offering, all ofthe then outstanding preferred stock converted into 5,752,467 shares of ourcommon stock, of which 1,542,500 were sold in the initial public offering, resultingin a total offering of 4,542,500 shares. After deducting the underwritingdiscounts and commissions, and other offering expenses, we received netproceeds from our initial public offering of $37.9 million. We used $19.6million of the net proceeds to pay our preferred shareholders all of theaccrued and unpaid dividends due upon conversion of their shares of preferredstock into shares of our common stock. The remainder of the net proceeds wasused primarily to fund capital expenditures to open new stores and for the March 2006acquisition of Ralph Maltby Enterprises, Inc. now known as Golf GalaxyGolfWorks, Inc. (“The GolfWorks”).

In the first quarter offiscal 2007, we acquired all of the outstanding shares of The GolfWorks for acombination of cash, common stock and warrants to purchase common stock. Theaggregate purchase price, including direct acquisition costs of $315,000,consisted of $4.1 million in cash ($500,000 of which was deposited into anindemnification escrow); 250,862 shares of our common stock valued at $4.8million and warrants to purchase 150,000 shares of our common stock with a fairvalue of $1.4 million. The value of the common stock was based on the averageclosing price of our common stock on the Nasdaq National Market during afive-day trading period beginning three trading days prior to the announcementof the acquisition; the value of the warrants was determined using theBlack-Scholes option pricing model. The warrants are immediately exercisable at$17.94 per share with a 10-year term expiring on March 16, 2016. Wealso assumed $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 the Company’s consolidated financial statementsas a wholly owned subsidiary beginning March 16, 2006.

The GolfWorks isprimarily a retailer of golf-related products including proprietary clubheads,components and tools for club-making, as well as golf accessories and namebrand shafts and grips. In addition to its retail catalogs and eCommercewebsite, The GolfWorks’ products and fitting systems are featured in many GolfGalaxy stores and are planned to be included in all Golf Galaxy retail storesby the end of fiscal 2007. We believe The GolfWorks brand provides anopportunity to expand our retail offerings to new and existing customers. Weintend to grow The GolfWorks brand through an expanded store-in-store servicearea in Golf Galaxy’s stores combined with integrated marketing and productofferings. The expanded service area features The GolfWorks brand to highlightour technical expertise in club repair and upgrade services. The store-in-storealso features a wide assortment of golf club components, tools, shafts andgrips for customers interested in building or servicing their own equipment. Inaddition, the acquisition facilitates the continued growth of ourdirect-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. In April 2006,we combined our contact centers to create a more efficient and lower-costoperation.

Due tothe seasonal nature of our business, interim results are not necessarilyindicative of results for the entire fiscal year. Our net sales and net incomeare generally greatest during the first and second quarters of our fiscal year.

The interim financial statements filed in thisQuarterly Report on Form 10-Q (“Report”) and the related discussionscontained herein should be read in conjunction with the audited financialstatements and notes included in our Annual Report on Form 10-K forthe fiscal year ended February 25, 2006.

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**Results of Operations**

Thefollowing table presents selected items in the unaudited statements ofoperations as a percentage of our net sales.
| ** **                           | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **May 27,  2006**           | ** ** | **May 28,  2005** | ** ** |
| **Statements  of Operations Data**   |       |                             |       |   |   |
| Net sales                            |       | 100.0                            | %          | 100.0 | % |
| Cost of sales                        |       | 68.1                             |       | 68.9 |   |
| Gross profit                         |       | 31.9                             |       | 31.1 |   |
| Retail operating  expenses           |       | 19.2                             |       | 18.6 |   |
| General and  administrative expenses |       | 5.4                              |       | 5.3 |   |
| Preopening  expenses                 |       | 2.0                              |       | 2.2 |   |
| Income from  operations              |       | 5.3                              |       | 5.0 |   |
| Interest income,  net                |       | 0.0                              |       | 0.0 |   |
| Income before  income taxes          |       | 5.3                              |       | 5.0 |   |
| Income tax  expense                  |       | (2.2                             | )          | (2.1 | ) |
| Net income                           |       | 3.1                              | %          | 2.9 | % |

 

Net sales consist ofsales, net of returns, from comparable stores and new stores, as well as salesfrom our eCommerce and catalog operations. A store is included in comparablestore results after it has been in operation for 12 full fiscal monthsfollowing the month of the store’s grand opening weekend, typically a store’s13th full month of operations. Sales from our eCommerce and catalog operationsare not included in comparable store results. New store sales include net salesfrom stores that have not yet become comparable.

Cost of sales includesthe cost of merchandise sold net of certain vendor allowances, direct costs ofservices, freight, inventory shrinkage, other inventory valuation adjustmentsand store occupancy costs. Vendor allowances include promotional support,rebates and volume discounts. Store occupancy costs include rent, real estatetaxes and common area maintenance charges.

Retail operating expensesprimarily include store associate payroll and related employee benefits,advertising and depreciation. Retail operating expenses also includemaintenance, utilities, insurance, bank and credit card charges, other storelevel expenses, as well as expenses associated with the operation of ourcatalog operations and eCommerce Internet sites.

General andadministrative expenses include all expenses associated with operating ourcorporate headquarters.

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

## **Three Months Ended May 27,2006 Compared with the Three Months Ended May 28, 2005**

***Net Sales.***Net sales for the firstquarter of fiscal 2007 increased $23.9 million, or 40.8%, to$82.5 million, compared with $58.6 million for the first quarter offiscal 2006. The increase resulted primarily from $17.4 million in salesfrom new stores opened in the current or prior fiscal year, before becomingcomparable stores. The remainder of the increase was contributed by incrementalsales following the acquisition of The GolfWorks and a comparable store salesgain of 1.0%. The increase in comparable store sales for the first quarter offiscal 2007, which was on top of a comparable store sales gain of 10.5% for thefirst quarter of the prior fiscal year, was driven primarily by growth inservices, accessories and women’s apparel, reflecting our strategic initiativesin these categories, including the implementation of The GolfWorksstore-in-store concept in approximately half of our stores. The increase inthese categories was substantially offset by a decrease in sales of golf clubs.We believe net sales for the first quarter of fiscal 2007 overall wereadversely impacted by a number of factors, including inclement weather, cautiousconsumer behavior related to economic uncertainty and a less promotionalenvironment.

***Gross Profit.***Grossprofit increased by $8.1 million, or 44.5%, to $26.3 million for the firstquarter of fiscal 2007, up from $18.2 million for the first quarter offiscal 2006. As a percentage of net sales, the gross profit rate increased by0.8% to 31.9% for the first quarter of fiscal 2007, compared with 31.1% for thefirst quarter of the prior fiscal year. The increase in our gross profit ratewas due primarily to changes in the sales mix, including increased sales ofhigher-margin categories such as services and accessories. The gross profitrate also benefited from higher retail margins in certain categories and anincrease in vendor support. These factors were partially offset by an increasein store occupancy and in-bound freight costs as a percentage of net sales.

13

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Weexpect our continued focus on our strategic initiatives, including services andaccessories, will continue to have a positive impact on our gross profit rateover the remainder of fiscal 2007 relative to fiscal 2006.

***Retail Operating Expenses.***Retailoperating expenses for the first quarter of fiscal 2007 were$15.8 million, an increase of $4.9 million, or 45.0%, compared with$10.9 million for the first quarter of fiscal 2006. The retail operatingexpenses rate for the first quarter of fiscal 2007 increased to 19.2% of netsales, up from 18.6% of net sales for the first quarter of fiscal 2006. Theincrease in retail operating expenses as a percentage of net sales was dueprimarily to the new stores opened in the current and prior fiscal year. Newstores generally have higher operating expenses as a percentage of net sales incomparison to mature stores due to the impact of a partial year of net sales inthe year opened and because mature stores generally have higher sales volumesrelative 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 remainmodestly higher through the remainder of this fiscal year when compared with priorperiods.

***General and Administrative Expenses.***Generaland administrative expenses were $4.5 million for the first quarter offiscal 2007, an increase of $1.4 million, or 45.2%, compared with $3.1 millionfor the same period of the prior fiscal year. As a percentage of net sales,general and administrative expenses increased to 5.4% for the first quarter offiscal 2007, up from 5.3% of net sales for the first quarter of fiscal 2006.The increase in general and administrative expenses as a percentage of netsales was due primarily to several factors, including a $346,000 charge relatedto our follow-on common stock offering initiated and withdrawn during thequarter. In addition, stock-based compensation expense and additional costsrelated to operating as a public company were incurred in the current fiscalyear and were not incurred in the prior year’s first quarter. These factorswere partially offset by a reduction in performance-based compensation expense.

Weadopted SFAS No. 123(R) at the beginning of fiscal 2007. 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.Prior to February 26, 2006, we accounted for stock-based compensationusing the intrinsic value method prescribed in APB Opinion No. 25, andrelated Interpretations. Compensation expense for stock options was measured asthe excess, if any, of the fair value of our common stock at the date of grantover the stock option exercise price. Prior to fiscal 2006, all stock optionshad an exercise price equal to the estimated fair value of the common stock atthe time of grant, resulting in no compensation expense recorded for theissuance of stock options.

Pursuantto the transition requirements of SFAS No. 123(R) for a newly publicentity, we are applying the modified prospective method only to unvested awardsthat were granted on or after our IPO. The unrecognized compensation costrelating to those awards will be recognized in the financial statements overthe remaining requisite service period subsequent to adoption of SFAS No. 123(R).We are applying the prospective transition method to unvested awards grantedprior to our IPO. The unrecognized compensation cost relating to those awardswill continue to be recognized in the financial statements subsequent toadoption of SFAS No. 123(R) using the intrinsic value method underAPB Opinion No. 25.Accordingly,other than the stock options granted in May 2005, no compensation expensewill be recognized on unvested stock options granted prior to our IPO unlesssuch awards are subsequently modified.

As aresult of adopting SFAS No. 123(R) on February 26, 2006, ourgeneral and administrative expenses for the quarter ended May 27, 2006,were $215,000 higher than if we had continued to account for share-basedcompensation under APB Opinion No. 25. For fiscal 2007, we expect generaland administrative expenses to be approximately $1.2 million, pre-tax, higheras a result of expensing stock options in accordance with SFAS No. 123(R).

***Preopening Expenses.***Preopeningexpenses increased by $0.3 million to $1.6 million for the first quarter offiscal 2007, compared with $1.3 million for the same period of fiscal 2006. Weopened 11 new stores during both periods. The increase was related primarily tothe higher cost of opening stores in certain markets, including the New YorkCity metro market. The increase in preopening expenses also reflected a higherlevel of advertising to establish our new markets and variances in the timingof preopening activities for stores opened in each fiscal quarter.

***Income Tax Expense.***Werecorded an income tax provision of $1.8 million for the first quarter offiscal 2007, compared with $1.2 million for the first quarter of fiscal2006. The income tax provisions were based on estimated annual effective incometax rates of 41.0% and 41.6% for the first quarter of fiscal 2007 and 2006,respectively. The change in the effective income tax rate was due primarily to fluctuationsin the impact of state income taxes.

 

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***Net Income.***Net income was $2.6 million for thefirst quarter of fiscal 2007, compared with $1.7 million for the first quarterof the prior fiscal year, an increase of $0.9 million, or 52.9%.

***Pro-Forma Net Income Per Share.*** Pro-forma net income per share ispresented as if our initial public offering had occurred immediately prior tothe beginning of fiscal 2006. We believe the use of pro-forma net income pershare provides a consistent measure of profitability as well as importantsupplemental information due to the significant increase in common sharesoutstanding resulting from the completion of our initial public offering andthe conversion of the convertible preferred stock into shares of common stockas of August 3, 2005. Pro-forma net income per share is considered anon-GAAP financial measure and is not in accordance with, or preferable to, theratio determined in accordance with GAAP. Pro-forma net income per share isintended to be a supplement to, but not a substitute for, financial informationprepared in accordance with GAAP. Further, pro-forma net income per share, aswe define it, may not be comparable to a similarly titled measure used by othercompanies. The most directly comparable GAAP financial measure to pro-forma netincome per share is net income per share.

The followingtable presents a reconciliation of the numerator and denominator used in thecalculation of pro-forma net income per share (in thousands, except share andper share amounts):

 
| ** **                                                 | ** ** | **Three Months  Ended  (Unaudited)** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                 | ** ** | **May 28,  2005**                    | ** ** |
| **Pro-forma Information**                                  |       |                                      |       |
| Pro-forma net income  applicable to common shareholders    |       | $                                         | 1,693      |   |
| Pro-forma net income  per share:                           |       |                                      |       |
| Basic                                                      |       | $                                         | 0.16       |   |
| Diluted                                                    |       | $                                         | 0.15       |   |
| Pro-forma weighted  average number of shares outstanding:  |       |                                      |       |
| Basic                                                      |       | 10,636,436                                |       |
| Diluted                                                    |       | 11,042,819                                |       |
|                                                       |       |                                      |       |
| **Reconciliation of pro-forma  information to GAAP**       |       |                                      |       |
| Net income applicable  to common shareholders (GAAP)       |       | $                                         | 695        |   |
| Preferred stock  dividends                                 |       | 998                                       |       |
| Net income applicable  to common shareholders (pro-forma)  |       | $                                         | 1,693      |   |
| ***Basic***                                                | * *   | * *                                  | * *   |
| Weighted average number  of shares outstanding (GAAP)      |       | 1,883,969                                 |       |
| Conversion of preferred  stock to common                   |       | 5,752,467                                 |       |
| Weighted average  additional shares issued in IPO          |       | 3,000,000                                 |       |
| Weighted average number  of shares outstanding (pro-forma) |       | 10,636,436                                |       |
| ***Diluted***                                              |       |                                      |       |
| Weighted average number  of shares outstanding (GAAP)      |       | 8,042,819                                 |       |
| Weighted average  additional shares issued in IPO          |       | 3,000,000                                 |       |
| Weighted average number of shares outstanding (pro-forma)  |       | 11,042,819                                |       |

 

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#### **Quarterly Results of Operations and Seasonality**

The followingtable sets forth certain unaudited financial and operating data for eachquarter of fiscal 2006 and the first quarter of fiscal 2007. The accompanyingunaudited financial and operating data has been prepared in accordance withU.S. generally accepted accounting principles for interim financialinformation. In the opinion of management, the unaudited quarterly informationreflects all adjustments, which include only normal and recurring adjustments,considered necessary to present fairly the information shown.

 
| ** **                                 | ** ** | **Fiscal 2006**                                                      | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Quarter Ended  May 28, 2005**                            | ** ** | **Quarter Ended  August 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**                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **($ in thousands,  except  per share data)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                  |       | $                                                                 | 82,517     |       |       |       |       |       |       |   |
| Gross profit                               |       | 26,298                                                            |       |       |       |       |       |       |       |
| Gross profit as  a percentage of net sales |       | 31.9                                                              | %          |       |       |       |       |       |       |
| Retail operating  expenses                 |       | 15,817                                                            |       |       |       |       |       |       |       |
| General and  administrative expenses       |       | 4,482                                                             |       |       |       |       |       |       |       |
| Preopening  expenses                       |       | 1,648                                                             |       |       |       |       |       |       |       |
| Income from  operations                    |       | 4,351                                                             |       |       |       |       |       |       |       |
| Income before  income taxes                |       | 4,359                                                             |       |       |       |       |       |       |       |
| Net income                                 |       | $                                                                 | 2,572      |       |       |       |       |       |       |   |
| Basic net income  per share                |       | $                                                                 | 0.24       |       |       |       |       |       |       |   |
| Diluted net  income per share              |       | $                                                                 | 0.22       |       |       |       |       |       |       |   |
| Weighted average  shares outstanding:      |       |                                                              |       |       |       |       |       |       |       |
| Basic                                      |       | 10,890,837                                                        |       |       |       |       |       |       |       |
| Diluted                                    |       | 11,590,229                                                        |       |       |       |       |       |       |       |
| Comparable store  sales increase (1)       |       | 1.0                                                               | %          |       |       |       |       |       |       |
| Stores opened  during the period           |       | 11                                                                |       |       |       |       |       |       |       |
| Number of stores  at end of period         |       | 61                                                                |       |       |       |       |       |       |       |
| Selling square feet at  end of period      |       | 884,146                                                           |       |       |       |       |       |       |       |

 

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(1)             A new or relocatedstore is included in the comparable store base after it has been in operationfor 12 full fiscal months following the month of the store’s grand openingweekend. A store that is closed for remodel or repair is excluded from thecomparable store sales calculation during the period of closure and thecomparable period of the succeeding year. Sales from our catalog and eCommerceoperations are not included in the comparable store sales calculation.Comparable store results for a 53-week fiscal year are presented on a52/52-week basis.

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Our business is subjectto seasonal fluctuations, with the highest sales activity and all income fromoperations occurring during the first and second quarters of our fiscal year.Many of our stores are located in midwestern and northeastern states where latespring and summer represent the peak of the golf season. It is possible theimpact of seasonal fluctuations could change as we continue to expand intoadditional geographic regions. The Father’s Day holiday in June drives asignificant seasonal sales increase, and sales also increase during the December holidayseason, albeit to a lesser extent.

Ourquarterly operating results may also fluctuate significantly because of otherfactors. Customers demand for our products and services, and consequently oursales, can also 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, also 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 primarily due 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 in any quarter has had and is expected to continue to have asignificant impact on quarterly preopening costs and store labor and operatingexpenses.

**Liquidity and Capital Resources**

**Summary**

Our primary capitalrequirements are related to the growth of the business. New stores requirecapital for inventory, capital expenditures such as tenant improvements andfixtures, and preopening expenses. In addition, capital may be required forstrategic growth opportunities, such as the acquisition of The GolfWorks in thefirst quarter of fiscal 2007, and to remodel existing stores to updatedformats. Periodically, capital resources may be needed for systems or facilityimprovements to support our growth. Sources of capital to fund our growth haveincluded proceeds from our equity financings, cash generated from operationsand cash proceeds from the sale of our equity in Golf Town Canada Inc., a golfspecialty retailer operating stores across Canada.

Our working capitalliquidity needs change significantly from quarter to quarter due to the impactof seasonality, the timing of new store openings and the timing of inventorypurchases. Our primary source of working capital liquidity is cash provided byoperations. We also have available borrowing capacity under our revolvingcredit facility, if needed.

In the first quarter offiscal 2007, we acquired The GolfWorks, with a combination of available cash,common stock and warrants to purchase common stock. In addition, we assumedapproximately $5.4 million of existing debt from The GolfWorks, which werefinanced with our remaining available cash and short-term borrowings underour revolving credit facility. We generated sufficient operating cash flow duringthe quarter to fully pay off the revolving debt by May 27, 2006.

**CashFlows**

***Operating Activities.*** Net cash provided by operating activities was$6.6 million for the first quarter of fiscal 2007, compared with $11.0 millionfor the first quarter of fiscal 2006. The decrease in cash provided fromoperations in the first quarter of fiscal 2007 resulted primarily from adecrease in leverage from accounts payable relative to increased inventorylevels, due to the timing of payments to vendors. Management expects thistiming relationship year-over-year to be substantially offset in the secondquarter. Increased accounts payable balances, net of increased inventorylevels, provided $1.7 million in cash from operations in the first quarter offiscal 2007 compared with $9.5 million in the prior years first quarter. Net inventoryrequirements increased in each period as we added 11 new stores in each ofthese quarters.

***Investing Activities.*** Net cash used in investing activities was $9.9million for the first quarter of fiscal 2007, compared with $5.1 million forthe first quarter of fiscal 2006. Capital expenditures related to new stores,including the purchase of leaseholds, fixtures and operating equipment,utilized $6.4 million and $5.1 million, respectively, in these quarters. The March 2006acquisition of The GolfWorks reduced net cash by $3.6 million in the firstquarter of fiscal 2007, including acquisition costs of $315,000 and net of cashacquired of $501,000.

***Financing Activities.*** Net cash used in financing activities was $4.9million in the first quarter of fiscal 2007, resulting primarily fromextinguishing the $5.4 million in debt acquired from The GolfWorks, partiallyoffset by $242,000 generated from the exercise of outstanding stock options. Inthe first quarter of fiscal 2006, there was no cash activity related tofinancing activities.

***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 

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for revolving loans inthe aggregate of up to $15.0 million, of which up to $5.0 million maybe in the form of letters of credit. At our option, the credit facility can beexpanded to $20.0 million. Borrowings under the credit facility aresecured by our inventories, accounts receivable, and financial and intangibleassets. Availability under the credit facility is calculated on the basis ofeligible inventory and accounts receivable, net of specified reserves, and lessany outstanding letters of credit. Interest on any outstanding indebtednessunder our credit facility accrues at the prime lending rate or an adjustedLIBOR as defined in the agreement for the credit facility. There were nooutstanding borrowings on our credit facility as of May 27, 2006 or May 28,2005.

**CapitalResources**

Our future capitalrequirements will primarily depend on the number and timing of new storesopened and capital needed for strategic growth opportunities, such as theacquisition of The GolfWorks in the first quarter of fiscal 2007. In fiscal2007, we expect capital expenditures related to new store growth ofapproximately $20 million to $22 million, including stores opened inthis fiscal year and planned for the first quarter of fiscal 2008. We currentlyplan to open an additional three to five stores in fiscal 2007 and 16 to 18 newstores in fiscal 2008. In addition, the growth of our business may also requirecapital investments in our infrastructure to support a larger store base.Capital may also be needed in the future to remodel or relocate existingstores. Based on our current plans, we expect to fund our capital requirementsthrough cash provided by operations, our revolving credit facility andadditional equity or debt financing, if necessary.

**Off-Balance-Sheet Arrangements andContractual Obligations**

We lease our retail storelocations, office space and certain office equipment primarily throughoperating leases and, to a much lesser degree, capital leases for certaintechnology equipment. Our liquidity is not dependent on the use of off-balancesheet financing arrangements other than in connection with our operating leases.There has been no material change in our contractual obligations other than inthe ordinary course of business since the end of fiscal 2006.

**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 ended February 25,2006.

**Impact of Recent Accounting Pronouncements**

In May 2005,the FASB issued SFAS No. 154, *AccountingChanges and Error Corrections, a Replacement of APB Opinion No. 20 andFASB Statement No. 3*. This statement changes the requirementsfor the accounting and reporting of a change in accounting principle. Ratherthan recognizing in net income a cumulative effect adjustment, this statementgenerally requires retroactive application of a change in accounting principleto prior periods’ financial statements. This statement was effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. The adoption of this statement did not have animpact on net income, cash flows or financial position.

In October 2005,the FASB issued FASB Staff Position (“FSP”) 13-1, *Accounting for Rental Costs Incurred During aConstruction Period*. FSP 13-1 requires that rental costsassociated with ground or building operating leases that are incurred during aconstruction period be recognized as rental expense. FSP 13-1 waseffective for the first reporting period after December 15, 2005. We havehistorically expensed rental costs incurred during a construction period;therefore, the adoption of this FSP did not have an impact on our net income,cash flows or financial position.

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**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 successfully our growth plan; competition in the golf and sportinggoods industry; a decline in discretionary spending; availability of adequatecapital to fund growth; loss of key management; and the ability to successfullyintegrate acquired companies, including The GolfWorks. The foregoing listshould not be construed as exhaustive. Additional information concerning theseand other factors that could cause actual results to differ materially fromthose in the forward-looking statements is included in our Annual Report on Form 10-Kfor the fiscal 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 have borrowed under our revolvingcredit facility for seasonal liquidity needs. Borrowings under the revolvingcredit facility incur interest at floating rates based either on the prime rateor an adjusted LIBOR, and to the extent there are outstanding borrowings, weare exposed to market risk related to changes in interest rates. During thefirst quarter of fiscal 2007, we assumed $5.4 million of existing debt from TheGolfWorks, which we refinanced with available cash and short-term borrowingsunder our revolving credit facility. At May 27, 2006, and May 28,2005, we did not have any borrowings outstanding under our credit facility,although any borrowings would have had an interest rate of 8.0% and 6.0% perannum, respectively. Given the amount of borrowings in the quarterly periodsended May 27, 2006, and May 28, 2005, there would have been nomaterial effect on our income before income taxes if interest rates would haveincreased by 100 basis points. We are not a party to any derivative financialinstruments.

**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 in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (“ExchangeAct”). Based on this evaluation, our principal executive officer and our principalfinancial and accounting officer concluded that our disclosure controls andprocedures are effective to ensure that information required to be disclosed byus in reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission.

There have been no changes in internal control overfinancial reporting during the quarter ended May 27, 2006 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

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#### **PART II—OTHER INFORMATION**

#### **Item 5. Other Information.**

On June 15,2006, the Compensation Committee (the “Committee”) of our Board of Directorsapproved a performance-based short-term incentive award for our executiveofficers and other eligible employees, conditioned on the achievement of aspecified performance goal for the fiscal year ending March 3, 2007.Executive officers will receive an amount, payable in cash, ranging from 0% to100% of the executive officer’s short-term incentive target, based on ourachievement of specified earnings before interest, taxes, depreciation andamortization as compared to a goal established by the Committee.

Attachedas Exhibit 10.1 is a summary of compensation paid to the non-employeemembers of our Board of Directors as previously disclosed in our Annual Reporton Form 10-K as filed with the Securities and Exchange Commission onMay 3, 2006.

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

| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                 |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |       | Amended and Restated Articles of Incorporation  (incorporated by reference to Exhibit 3.1 to the Company’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             |       | Summary of Director Compensation approved by the  Board of Directors and disclosed in the Registrant’s Annual Report on  Form 10-K as filed on May 3, 2006.                                                                                                 |
|             |       |                                                                                                                                                                                                                                                                            |
| 10.2             |       | Performance goal for fiscal 2007 incentive awards to  executive officers.                                                                                                                                                                                                       |
|             |       |                                                                                                                                                                                                                                                                            |
| 31.1             |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).                                                                                                                                                |
|             |       |                                                                                                                                                                                                                                                                            |
| 31.2             |       | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).                                                                                                                                                |
|             |       |                                                                                                                                                                                                                                                                            |
| 32.1             |       | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).                                                                                                                                                |
|             |       |                                                                                                                                                                                                                                                                            |
| 32.2             |       | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).                                                                                                                                                |

 

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                          | GOLF GALAXY, INC.                                 |
|--------------------------|---------------------------------------------------|
|                     | (Registrant)                                      |
|                     |                                              |   |
| Date  July 11, 2006 | /s/ RANDALL K. ZANATTA                            |   |
|                     | Randall K. Zanatta                                |   |
|                     | *President, Chief Executive Officer and Chairman* |
|                     | *(Principal Executive Officer)*                   |
|                     |                                              |   |
|                     | /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**

| 3.1  |   | Amended and Restated Articles of Incorporation  (incorporated by reference to Exhibit 3.1 to the Company’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 |   | Summary of Director Compensation approved by the  Board of Directors and disclosed in the Registrant’s Annual Report on  Form 10-K as filed on May 3, 2006.                                                                                                 |
| 10.2 |   | Performance goal for fiscal 2007 incentive awards to  executive officers.                                                                                                                                                                                                       |
| 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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