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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
----------------------
For the quarter ended October 31, 1998
BARBEQUES GALORE LIMITED
ACN 008 577 759
327 Chisholm Road, Auburn, New South Wales, 2144, Australia
Registrant's telephone number, including area code 61-2-9704-4177
--------------
[Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.]
Form 20-F X Form 40-F
------- -------
----------------------
[Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.]
Yes No X
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<PAGE>
FORM 6-K
For the Quarter Ended October 31, 1998
INDEX
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION Page No.
----------------
<S> <C>
ITEM 1. Condensed Consolidated Balance Sheets as of October 31, 1998 and
January 31, 1998 3
Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended October 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the Three and
Nine Months Ended October 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 24
ITEM 2. Changes in Securities and Use of Proceeds 24
ITEM 3. Default Upon Senior Securities 24
ITEM 4. Submission of Matters to a Vote of Security Holders 24
ITEM 5. Other Information 24
ITEM 6. Exhibits and Current Reports on Form 6-K 25
SIGNATURES 26
</TABLE>
2
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BARBEQUES GALORE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ITEM 1. Financial Statements.
<TABLE>
<CAPTION>
January 31, October 31,
1998 1998
----------- ------------
(Unaudited)
<S> <C> <C>
In A$ thousands, except share and per share data
Assets
Current assets:
Cash and cash equivalents $ 166 $ 28
Accounts receivable, net of allowance of $409 at
October 31, 1998 and $497 at January 31, 1998 9,862 13,247
Receivables from affiliates 143 -
Inventories (note 2) 43,030 57,420
Deferred income taxes 2,031 2,368
Prepaid expenses and other current assets 1,079 1,489
---------- --------
Total current assets $ 56,311 $ 74,552
Non-current assets:
Receivables from affiliates 642 856
Property, plant and equipment, net of accumulated depreciation of
$18,841 at October 31, 1998 and $16,741 at January 31, 1998 21,038 31,819
Goodwill, net of accumulated amortization of $359 at October 31,
1998 and $293 at January 31, 1998 1,507 1,441
Deferred income taxes 1,194 1,391
Other non-current assets 1,382 1,706
---------- --------
Total assets $ 82,074 $111,765
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft - 3,622
Accounts payable and accrued liabilities 16,648 21,778
Payables to related parties - 2,610
Payables to affiliates - 166
Current maturities of long-term debt 198 103
Current portion of obligations under capital leases 1,729 1,996
Income taxes payable 819 17
---------- --------
Total current liabilities $ 19,394 $ 30,292
Non-current liabilities:
Long-term debt 14,716 29,944
Obligations under capital leases, excluding current portion 3,405 5,059
Other long-term liabilities 632 931
---------- --------
Total liabilities $ 38,147 $ 66,226
---------- --------
Shareholders' equity: Ordinary Shares, $3.64 par value; 27,437,853
authorized shares; 4,541,652 shares issued and outstanding 16,532 16,532
Additional paid-in capital 24,554 24,302
Foreign currency translation adjustment 1,177 1,693
Retained earnings 1,664 3,012
---------- --------
Total shareholders' equity $ 43,927 $ 45,539
---------- --------
Total liabilities and shareholders' equity $ 82,074 $111,765
========== ========
</TABLE>
See accompanying notes to the condensed Consolidated Financial Statements
3
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BARBEQUES GALORE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE THREE NINE NINE
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1998 1997 1998
---- ---- ---- ----
(Unaudited) (UNAUDITED)
In A$ thousands, except share and per share data
<S> <C> <C> <C> <C>
Net sales $43,539 $58,102 $113,933 $149,279
Cost of goods sold, warehouse, distribution and
occupancy costs 29,815 40,258 78,235 101,867
------- ------- -------- --------
Gross profit 13,724 17,844 35,698 47,412
Selling, general and administrative expenses 12,384 16,017 34,112 43,767
Store pre-opening costs 37 243 246 672
------- ------- -------- --------
Operating income 1,303 1,584 1,340 2,973
Equity in income of affiliates, net of tax 153 196 341 430
Interest expense 1,111 666 2,871 1,500
------- ------- -------- --------
Income (loss) before income taxes 345 1,114 (1,190) 1,903
Income tax expense (benefit) 143 255 (506) 555
------- ------- -------- --------
Net income (loss) $ 202 $ 859 $ (684) $ 1,348
======= ======= ======== ========
Basic earnings (loss) per share $0.11 $0.19 $(0.37) $0.30
======= ======= ======== ========
Diluted earnings (loss) per share $0.11 $0.19 $(0.37) $0.30
======= ======= ======== ========
Weighted average shares outstanding (in thousands) 1,844 4,542 1,844 4,542
======= ======= ======== ========
</TABLE>
See accompanying notes to the condensed Consolidated Financial Statements
4
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BARBEQUES GALORE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE THREE NINE NINE
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1998 1997 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
In A$ thousands
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 202 $ 859 $ (684) $ 1,348
Non-cash charges, net 2,348 1,221 2,920 2,263
Changes in operating assets and liabilities
Receivables and prepaid expenses (3,742) (3,928) (4,528) (3,829)
Inventories (8,224) (1,019) (16,533) (14,275)
Other assets (59) - (189) (24)
Accounts payable and accrued liabilities 4,216 1,027 5,291 6,024
------- ------- -------- --------
Net cash used in operating activities (5,259) (1,840) (13,723) (8,493)
------- ------- -------- --------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 1 13 76 24
Capital expenditures (1,408) (2,793) (2,973) (11,411)
Loan repayments received 335 26 385 123
------- ------- -------- --------
Net cash used in investing activities (1,072) (2,754) (2,512) (11,264)
------- ------- -------- --------
Cash flows from financing activities:
Repayment of long-term debt (4,262) (2,532) (10,651) (6,550)
Proceeds from long-term debt 12,284 8,918 25,303 24,293
Initial public offering ("IPO") costs (774) 99 (774) (268)
Bank overdraft (repayments) proceeds (535) (1,327) 3,823 3,622
Principal payments under capital leases (389) (586) (977) (1,478)
Dividend paid - - (499) -
------- ------- -------- --------
Net cash provided by financing activities 6,324 4,572 16,225 19,619
------- ------- -------- --------
Effects of exchange rate fluctuations 9 - 15 -
------- ------- -------- --------
Net increase (decrease) in cash and cash
equivalents 2 (22) 5 (138)
Cash and cash equivalents at beginning of period 33 50 30 166
------- ------- -------- --------
Cash and cash equivalents at end of period $ 35 $ 28 $ 35 $ 28
======= ======= ======== ========
</TABLE>
See accompanying notes to the condensed Consolidated Financial Statements
5
<PAGE>
BARBEQUES GALORE LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in conformity with generally accepted accounting principles in
the United States for interim financial information and Rule 10-01 of
Regulation S-X.
As a result, the information contained in these unaudited consolidated financial
statements and footnotes is condensed from that which would appear in annual
consolidated financial statements and does not contain all of the information
and footnotes required by United States generally accepted accounting principals
for complete financial statements. Accordingly, these condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and related notes contained in the Annual Report on Form
20-F/A for the fiscal year ended January 31, 1998, filed by Barbeques Galore
Limited (the "Company") with the Securities and Exchange Commission (the
"Commission") on May 20, 1998. The unaudited condensed consolidated financial
statements as of October 31, 1998 and for the three and nine months ended
October 31, 1998 and 1997 include all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation. The
results of operations for interim periods are not necessarily indicative of the
results that may be expected for the entire year. The preparation of financial
statements in conformity with United States generally accepted accounting
principles requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ materially from those estimates.
2 INVENTORIES
The major classes of inventories are as follows:
JANUARY 31, OCTOBER 31,
1998 1998
------------ -----------
(Unaudited)
In A$ thousands
Finished goods $37,999 $51,442
Work in progress 1,328 2,096
Raw materials 4,222 4,286
------- -------
43,549 57,824
Less: Reserve for obsolescence (519) (404)
------- -------
$43,030 $57,420
======= =======
3 EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share are computed by dividing net income (loss) by
the weighted average number of Ordinary Shares. Diluted earnings (loss) per
share are computed by dividing net income (loss) available to holders of
Ordinary Shares by the weighted average of Ordinary Shares and dilutive Ordinary
Share equivalents for the period.
During the quarter ended January 31, 1998, the Company adopted Statement of
Financial Accounting Standards No 128, "Earnings per Share" ("Statement 128").
As required by Statement 128, all prior period information has been restated to
conform with the provisions of Statement 128. The weighted average shares used
to calculate basic earnings per share was 4,542,000 and 1,844,000 for the
quarters ended October 31, 1998 and 1997, respectively. There is no difference
between basic earnings per share and diluted earnings per share as the
outstanding stock options are anti-dilutive.
6
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4 SUBSEQUENT EVENTS
As a result of recent decreases in the market price of the Company's Ordinary
Shares, the US$11.00 per Ordinary Share exercise price of those options granted
concurrently with the Company's initial public offering ("IPO") in November
1997, was significantly higher than the current market price. Consequently and
in order to provide all employees with the continuing opportunity to acquire
Ordinary Shares of the Company at an attractive purchase price, the Board of
Directors at a meeting on November 9, 1998 resolved to implement a special
option cancellation/regrant program. Under that program, each option
outstanding on that date with an exercise price of US$11.00 per Ordinary Share
(an "Old Option") was cancelled and simultaneously a new option for the
identical number of shares but with an exercise price of US$5.20 per Ordinary
Share (a "New Option") was granted in replacement thereof. The New Options are
exercisable in three equal installments on November 9, 2001, November 9, 2002
and October 9, 2003. All other terms and conditions of the New Options are
substantially the same as the Old Options. In the aggregate, Old Options to
purchase 177,200 Ordinary Shares were cancelled and regranted under the program.
In addition to the cancellation and regrant program, on November 9, 1998, the
Board of Directors granted further options to purchase a total of 47,250
Ordinary Shares at a price of US$5.20 per Ordinary Share under the 1997 Share
Option Plan and exercisable on the same dates as above.
5 REGISTRATION STATEMENT ON FORM F-1
In 1998, pursuant to an agreement with certain holders of convertible notes (all
of which were converted into Ordinary Shares in connection with the Company's
IPO, the Company registered 1,044,845 Ordinary Shares, each having a par value
of A$3.64, and each represented by one American Depositary Share (each, a
"Resale ADS") for resale by shareholders of the Company under the Securities Act
of 1933, as amended. 997,926 of these Ordinary Shares were received upon the
conversion of the convertible notes. The remainder of these Ordinary Shares
were registered voluntarily by the Company and are presently held by long-term
shareholders of the Company who may wish to divest all or portion of their
holdings in the Company. This registration will be withdrawn on or about
December 15, 1998. All shareholders on the Resale F-1 will, at that time, hold
shares saleable under Rule 144 promulgated under the Securities Act of 1933, as
amended.
6 RECENT ACCOUNTING DEVELOPMENTS
As of July 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", which establishes standards
for the reporting and display of comprehensive income and its components in the
financial statements. The only component of comprehensive income that impacts
the Company is foreign currency translation adjustments. The net gain/(loss)
associated with the foreign currency translation adjustments for the three
months ended October 31, 1998 was a loss of A$516,000 and a gain of A$416,000
for the three months ended October 31, 1997.
The Company does not provide for income taxes on foreign currency translation
adjustments since it does not provide for such taxes on undistributed earnings
of foreign subsidiaries. Accumulated other comprehensive income at October 31,
1998 and January 31, 1998 consisted solely of foreign currency translation
adjustments with credit balances of A$1.7 million and A$1.2 million,
respectively.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement 133") was issued by the
Financial Accounting Standards Board in June 1998 and is effective for the
Company's quarter ending July 31, 1999. Statement 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts. Under the standard, entities are required to carry
all derivative instruments in the statement of financial
7
<PAGE>
position at fair value. The accounting for changes in the fair value (i.e. gains
or losses) of a derivative instrument depends on whether it has been designated
and qualifies as part of a hedging relationship and, if so, on the reason for
holding it. If certain conditions are met, entities may elect to designate a
derivative instrument as a hedge of exposures to changes in fair values, cash
flows, or foreign currencies. If the hedged exposure is a fair value exposure,
the gain or loss on the derivative instrument is recognized in earnings in the
period of change together with the offsetting loss or gain on the hedged item
attributable to the risk being hedged. If the hedged exposure is a cash flow
exposure, the effective portion of the gain or loss on the derivative instrument
is reported initially as a component of other comprehensive income (outside
earnings) and subsequently reclassified into earnings when the forecasted
transaction affects earnings. Any amounts excluded from the assessment of hedge
effectiveness as well as the ineffective portion of the gain or loss is reported
in earnings immediately. Accounting for foreign currency hedges is similar to
the accounting for fair value and cash flow hedges. If the derivative instrument
is not designated as a hedge, the gain or loss is recognized in earnings in the
period of change.
The Company has not determined the impact that Statement 133 will have on its
financial statements and believes that such determination will not be meaningful
until closer to the date of initial adoption.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" at the end of this section and
elsewhere in (i) Amendment No. 1 to the Company's Annual Report on Form 20-F/A
(File No. 333-37259) for the fiscal year ended January 31, 1998, filed with the
Commission on May 20, 1998 and (ii) the Company's post-effective Amendment No. 2
to the Registration Statement on Form F-1 filed with the Commission on September
21, 1998. Factors that could cause or contribute to such differences include
those discussed herein as well as those included in the documents that the
Company files from time to time with the Commission.
OVERVIEW
Barbeques Galore believes that it is the leading specialty retail chain of
barbecue and barbecue accessory stores in Australia and the United States, based
on number of stores and sales volume. The Company's belief is based on its
years of experience in the barbecue retail industry as well as its contacts with
other industry retailers, suppliers and trade associations. The Company opened
its first store in Sydney, Australia in 1977 and opened its first U.S. store in
Los Angeles in 1980. Barbeques Galore stores carry a wide assortment of
barbecues and related accessories, a comprehensive line of fireplace products
and, in Australia, home heating products, camping equipment and outdoor
furniture. As of October 31, 1998, the Company owned and operated 33 stores in
all six states in Australia and 42 stores (including three U.S. Navy concession
stores) in nine states in the United States. In addition, as of such date,
there were 47 licensed stores in Australia and seven franchised stores in the
United States, all of which operate under the "Barbeques Galore" name.
The Company derives its revenue primarily from four categories: Australian
retail, United States retail (including royalties and sales to franchisees),
Australian licensing (including license fees and sales to licensees) and
Australian wholesale. For the nine months ended October 31, 1998, these
categories represented 33.7%, 48.8%, 7.0% and 10.1% respectively, of the
Company's net sales for such period, representing a 17.0%, 58.8%, 7.2% and 5.2%
increase over their respective net sales levels for the nine months ended
October 31, 1997.
The Company believes the majority of its future growth will result from the
continuing expansion of its U.S. retail business, primarily through the opening
of new stores, and the refurbishment of its Australian store base. Through its
vertically integrated operations, the Company manufactures a proprietary line of
barbecues and home heaters for its retail stores and licensees as well as other
barbecue and home heater products for its wholesale customers.
Results of Operations
The following table sets forth unaudited consolidated operating results of the
Company as a percentage of net sales for the three and nine months ended October
31, 1998 and 1997. Given the degree of seasonality to which the Company's
business is subject, the Company's quarterly results and comparisons of such
quarterly results to prior years' quarters are not necessarily indicative of
future results.
9
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<TABLE>
<CAPTION>
THREE THREE NINE NINE
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1998 1997 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
In A$ thousands, except share and per share data
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold, warehouse, distribution and
occupancy costs 68.5 69.3 68.7 68.2
----- ----- ----- -----
Gross profit 31.5 30.7 31.3 31.8
Selling, general and administrative expenses 28.4 27.6 29.9 29.3
Store pre-opening costs 0.1 0.4 0.2 0.5
----- ----- ----- -----
Operating income 3.0 2.7 1.2 2.0
Equity in income of affiliates, net of tax 0.4 0.3 0.3 0.3
Interest expense 2.6 1.1 2.5 1.0
----- ----- ----- -----
Income (loss) before income taxes 0.8 1.9 (1.0) 1.3
Income tax expense (benefit) 0.3 0.4 (0.4) 0.4
----- ----- ----- -----
Net income (loss) 0.5% 1.5% (0.6)% 0.9%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED OCTOBER 31, 1998 (UNAUDITED) COMPARED TO THREE MONTHS ENDED
OCTOBER 31, 1997 (UNAUDITED)
Net sales increased by approximately A$14.6 million, or 33.6%, to A$58.1 million
for the three months ended October 31, 1998 from A$43.5 million for the three
months ended October 31, 1997. One new store was opened in the United States
during the three months ended October 31, 1998. In Australia one store was
relocated and one store refurbished during this period. Comparable store sales
increased 30.3% for the three months ended October 31, 1998 as compared to the
three months ended October 31, 1997 and contributed A$8.6 million to the
increase in net sales. Comparable store sales increased 11.7% in the United
States and 26.7% in Australia. The high comparable store sales increase in
Australia was as a result of a combination of promotional activity, the diverse
product offering, apparent pent-up consumer demand and the interruption of the
gas supply in the state of Victoria. The combined comparable store sales
increase was impacted by an increase in the US$/A$ exchange rate of
approximately 21.7% for the three months ended October 31, 1998 as compared to
the three months ended October 31, 1997. Increased sales of A$3.7 million also
resulted from eleven new stores which opened in the United States in the
previous twelve months and which did not form part of the comparative store
sales. The balance of the increased sales was primarily attributable to two new
stores opened and one store refurbished in Australia which did not form part of
comparable store sales as well as increased wholesale revenues.
Gross profit increased approximately A$4.1 million, or 29.9% to A$17.8 million
for the three months ended October 31, 1998 from A$13.7 million for the three
months ended October 31, 1997. Gross margin (gross profit as a percentage of
sales ) decreased to 30.7% during the three months ended October 31, 1998 from
31.5% during the comparable period in 1997. The decrease in gross margin
reflects the impact of the weak Australian dollar on the cost of imported
componentry into Australia and the sales mix in the new U.S. stores in Texas and
the East coast.
Selling, general and administrative expenses (which exclude store pre-opening
expenses) increased approximately A$3.6 million, or 29.0%, to A$16.0 million for
the three months ended October 31, 1998 from A$12.4 million for the three months
ended October 31, 1997. As a percentage of net sales, selling, general and
administrative expenses decreased to 27.6% during the three months ended October
31, 1998 from 28.4% during the comparable period in 1997. This percentage
decrease was primarily due to a higher operating leverage off increased sales.
10
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Store pre-opening expenses increased by A$206,000 to A$243,000 for the three
months ended October 31, 1998 from A$37,000 for the three months ended October
31, 1997, due to the number and timing of United States' store opening
expenditure.
Operating income increased by A$0.3 million to A$1.6 million for the three
months ended October 31, 1998 from A$1.3 million for the three months ended
October 31, 1997. This increase resulted mainly from an increase in
profitability from the Company's Australian retail operations which increase was
partially offset by an increase in the loss of the U.S. operation during the
three months ended October 31, 1998 due to a larger store base.
Income from affiliates increased by A$43,000 to A$196,000 for the three months
ended October 31, 1998 from A$153,000 for the three months ended October 31,
1997.
Interest expense decreased by A$0.4 million to A$0.7 million in the three months
ended October 31, 1998 from A$1.1 million for the three months ended October 31,
1997. The decrease reflects the reduced debt requirements of the Company
subsequent to the capital raising as a result of its IPO in November 1997.
The Company's effective tax rate was 22.9% in the three months ended October 31,
1998 and 41.4% in the three months ended October 31, 1997. The lower effective
tax rate in the three months ended October 31, 1998 was due to the increased
loss before taxation in the U.S. operation.
NINE MONTHS ENDED OCTOBER 31, 1998 (UNAUDITED) COMPARED TO NINE MONTHS ENDED
OCTOBER 31, 1997 (UNAUDITED)
Net sales increased by approximately A$35.4 million, or 31.1%, to A$149.3
million for the nine months ended October 31, 1998 from A$113.9 million for the
nine months ended October 31, 1997. Six new stores were opened in the United
States during the nine months ended October 31, 1998. In Australia one new
store was opened, one store relocated and one store refurbished during this
period. Comparable store sales increased 23.4% for the nine months ended
October 31, 1998, as compared to the nine months ended October 31, 1997 and
contributed A$18.6 million to the increase in net sales. Comparable store sales
increased 11.2% in the United States and 13.3% in Australia. The combined
comparable store sales increase was impacted by an increase in the US$/A$
exchange rate of approximately 21.3% for the nine months ended October 31, 1998
as compared to the nine months ended October 31, 1997. Increased sales of
A$11.2 million also resulted from eleven new stores which opened in the United
States in the previous twelve months and which did not form part of the
comparative store sales. The balance of the increased sales was primarily
attributable to two new stores opened and one store refurbished in Australia
which did not form part of comparable store sales as well as increased wholesale
revenues.
Gross profit increased approximately A$11.7 million, or 32.8% to A$47.4 million
for the nine months ended October 31, 1998 from A$35.7 million for the nine
months ended October 31, 1997. Gross margin (gross profit as a percentage of
sales ) increased to 31.8% during the nine months ended October 31, 1998 from
31.3% during the comparable period in 1997. The increase in gross margin is
mainly attributable to the reduced cost of goods purchased by the U.S. operation
from Australia which reduced cost was as a result of the weak Australian dollar.
This was partially offset by product sales mix in Australia and the United
States, including the newer stores in the United States.
Selling, general and administrative expenses (which exclude store pre-opening
expenses) increased approximately A$9.7 million, or 28.4%, to A$43.8 million for
the nine months ended October 31, 1998 from A$34.1 million for the nine months
ended October 31, 1997. As a percentage of net sales, selling, general and
administrative expenses decreased to 29.3% during the nine months ended October
31, 1998 from 29.9% during the comparable period in 1997. This percentage
decrease was primarily due to a higher operating leverage from the greater
number of stores open in the United States.
Store pre-opening expenses increased by A$426,000 to A$672,000 for the nine
months ended October 31, 1998 from A$246,000 for the nine months ended October
31, 1997, due to the number and timing of United States' store opening
expenditure.
Operating income increased by A$1.7 million to A$3.0 million for the nine months
ended October 31, 1998 from A$1.3 million for the nine months ended October 31,
1997. This increase resulted from an increase in profitability from the
Company's U.S. and Australian operations.
11
<PAGE>
Income from affiliates increased by A$89,000 to A$430,000 in the nine months
ended October 31, 1998 from A$341,000 for the nine months ended October 31,
1997.
Interest expense decreased by A$1.4 million to A$1.5 million in the nine months
ended October 31, 1998 from A$2.9 million for the nine months ended October 31,
1997. The decrease reflects the reduced debt requirements of the Company
subsequent to the capital raising as a result of its IPO in November 1997.
The Company's effective tax rate was 29.2% in the nine months ended October 31,
1998 and 42.5% (benefit) in the nine months ended October 31, 1997. The benefit
in the comparable period in 1997 relates to a loss before tax. The lower
effective tax rate in the nine months ended October 31, 1998 was due to the
exclusion from Australian taxation of equity in income of affiliates.
YEAR 2000 READINESS DISCLOSURE
The Company established a Year 2000 compliance team in 1997, under the guidance
of its Chief Financial Officer, which reports periodically to the Board of
Directors and Audit Committee. To date, a full evaluation of potential Year 2000
risks has been completed and a comprehensive compliance program developed.
While the Company cannot be certain that the consequences of Year 2000
compliance issues will not have a material effect on its business, results of
operation or financial condition, it has established and is well advanced with,
a rigorous program aimed at minimizing or negating any such effects. As part of
the ongoing Year 2000 compliance process, the Company has examined the key risk
areas and considered the degree of application to its business activities and
future operations.
Information Technology ("IT") Systems: In Australia, the Company is currently
replacing its entire core IT system, along with the majority of peripheral
hardware and software components such as personal computers, printers and
desktop applications. The replacement core IT system has been certified Year
2000 compliant and should be operational by mid-1999.
In the USA, the Company's recently installed computer system has been designed
to avoid the occurrence of Year 2000 problems. Minor modifications and upgrades
are currently being undertaken and full compliance is anticipated by April 1999.
Non-IT Systems: As with any modern business operation, the Company expects that
some degree of non-compliance will be identified in certain technology assets
such as telephone systems, office equipment and security systems. The Company
believes all potential systems at risk have been identified and an inventory of
equipment and the vendors involved has been compiled. The Company is currently
in the process of contacting these vendors to ascertain whether each item of
equipment is Year 2000 compliant or, if necessary, what remedial action (and
cost) is required to achieve compliance.
Products: The Company's products do not utilize embedded technology and the
risk, therefore, associated with holding or repairing non-compliant products, is
negligible. The Company does not believe it will encounter any significant
product warranty costs or obsolete inventory write-offs arising from Year 2000
issues.
Third Party Relationships: The majority of the Company's customers and,
therefore, revenue base, is from retail sales from which little credit risk
arises. Those customers to whom credit facilities are provided have been
contacted by mail questionnaire, to allow the Company to assess their state of
readiness in relation to Year 2000 issues. Further follow-up may be required in
cases where the Company is not satisfied with a customer's level of compliance.
The Company is dependent on a large number of vendors from various countries for
a significant proportion of its merchandise, parts and raw materials. While
there are generally no long term purchase contracts, (and no vendor accounts
for more than 5% of the Company's merchandise), its results from operations
could be adversely affected by a disruption of supply from key vendors. It has
been widely reported that such disruptions could occur if a vendor was to
experience major Year 2000 compliance problems. A mail questionnaire program has
been conducted to assess the level of compliance of all current
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vendors. Again, Company policy will be to discontinue supply arrangements with
any vendor who is unable to demonstrate adequate compliance after mid-1999.
The Company has also included service providers and other key business partners
such as banks, telecommunication providers, transport and shipping companies in
the compliance program. While the Company expects that most of this group is
likely to achieve compliance, its status will be monitored for any adverse
indications of risk to the Company.
Costs to Address the Company's Year 2000 Issues
Based on the preceding evaluation of the Company's state of readiness and having
regard to the most likely outcomes in relation to each area of risk, the Company
has estimated that the total cost to address Year 2000 issues will be
approximately A$0.9 million. The vast majority of this estimate relates to the
replacement of the Australian IT systems and also includes allowances for minor
non-IT systems remediation.
To date, less than A$0.3 million of the above estimate has been expended. There
has been no material impact on the Company's results from operations to date.
Risks of the Company's Year 2000 Issues
The risks which the Company faces in relation to Year 2000 issues have been
referred to above. Although the Company has no reason to expect that any
significant third party impact will arise, no assurance can be made that the
impact of these risk areas will not be greater than currently identified or that
other risk issues will not arise. The Company is unable to estimate whether
there will be any additional significant costs arising from Year 2000 issues.
The Company's Contingency Plans for Year 2000 Issues
At the present time the Company has not developed a detailed contingency plan.
As the outcome of its compliance programs becomes known, the Company will re-
evaluate the need for, and extent of, any contingency plans.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through cash flow from
operations and bank borrowings. In November 1997, the Company completed its
IPO, raising net proceeds of approximately US$13.8 million (approximately A$19.7
million). A portion of these funds have been used to fund (i) the repayment of
approximately A$12 million (approximately US$8.4 million) of indebtedness
incurred under the credit facility between the Company and the Australian and
New Zealand Banking Group Limited ("ANZ"), and (ii) the repayment of
approximately US$1.8 million, being all indebtedness outstanding as of the
completion of the IPO in November 1997 under a term loan and revolving line of
credit facility with Merrill Lynch Business Financial Services, Inc. ("Merrill
Lynch"). The remaining US$3.6 million (approximately A$5.1 million) has been
used to fund a portion of the Company's operations and investing activities and
to continue the expansion of the Company's operations in the United States.
The Company has used cash flows from operations in the nine months ended October
31, 1998 and 1997 of A$8.5 million and A$13.7 million, respectively. The cash
used by operations primarily reflects the increase in inventory levels related
to the Company's build-up of inventories and the increased number of stores in
the United States.
Net cash flows used in investing activities in the nine months ended October 31,
1998 and 1997 were A$11.3 million and A$2.5 million respectively. The increased
cash flows used in investing activities have resulted primarily from capital
expenditures related to new store openings in the United States, store
refurbishments in Australia and the acquisition of two properties as detailed
hereafter. During the quarter ended April 30, 1998, the Company acquired a
51,000 square foot property for approximately A$3.5 million to relocate its
enameling operations to the same facilities as its barbecue and home heater
manufacturing operations adjacent to the Company's Australian headquarters.
During the quarter ended
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July 31, 1998, the Company acquired a 75,000 square foot property near its
Australian headquarters for its warehousing and distribution operations at a
cost of approximately A$1.75 million, with an additional approximately A$1.3
million capital expenditure (including A$320,000 for racking) required to
upgrade the facility before use. The Company anticipates that it will continue
to incur significant capital commitments in connection with further expansion.
The actual costs that the Company will incur in connection with the opening and
refurbishment of future stores cannot be predicted with precision because such
costs will vary based upon, among other things, geographic location, the size of
the stores and the extent of remodeling required at the selected sites. The cash
flows used in operations and investing activities have been largely sourced from
long term borrowings under the ANZ and Merrill Lynch Facilities (defined below)
and from the Company's IPO.
At October 31, 1998 the Company had working capital of A$44.3 million. At
October 31, 1998 the Company maintained minimal amounts in cash and cash
equivalents, relying instead on undrawn facilities under its borrowing
arrangements with ANZ and Merrill Lynch (the "ANZ Facility" and the "Merrill
Lynch Facility," respectively). In June 1998, the Company and ANZ entered into
the ANZ Facility, revised from a previous facility entered into in July 1994.
The ANZ Facility is subject to annual review and modification, in accordance
with standard Australian practice. Under this revised facility, the Company and
its subsidiaries have access to facilities up to A$49.8 million comprising a
multi-purpose facility in principal amount of A$36.6 million, a trade finance
facility in principal amount of A$11.0 million and a real property loan in
principal amount of A$2.2 million. The ANZ Facility is secured by a first
security interest over the Company's present and future Australian assets and a
second security interest (subordinate to a lien under the Merrill Lynch
Facility) in all the Company's assets in the United States. The ANZ Facility is
further guaranteed by each subsidiary of the Company including The Galore Group
(USA), Inc. and Barbeques Galore Inc. (referred to collectively as "Galore
USA"). The property loan accrues interest at a rate of 9.6% per annum, and is
secured by a registered first mortgage over the freehold property of the
Company.
In February 1995, Barbeques Galore Inc., the Company's U.S. operating
subsidiary, entered into a five year credit facility with Merrill Lynch which
has been amended from time to time. As of October 31, 1998, such facility
includes a term loan in aggregate principal amount of US$150,000 (the "Term
Loan") and a revolving line of credit in aggregate principal amount of US$1.0
million (the "Revolving Line," and collectively with the Term Loan, the "Merrill
Lynch Facility"). Indebtedness under the Revolving Line and Term Loan accrues
interest at the 30-day commercial paper rates plus 2.70%, and is payable
monthly. The Merrill Lynch Facility is secured by a first security interest in
all Galore USA present and future assets. The Merrill Lynch Facility is
guaranteed by the Company and The Galore Group (USA), Inc., the parent of
Barbeques Galore, Inc.
The Company believes the ANZ and Merrill Lynch Facilities are sufficient to meet
its presently anticipated working capital and capital expenditure requirements
for at least the next twelve months.
Risk Factors
The following are certain factors that should be considered in evaluating the
business, financial conditions and results of operations of the Company.
However, these factors should not be considered to be exclusive, and readers are
urged to consider the statements made elsewhere herein and in the Company's
other publicly filed documents.
IMPLEMENTATION OF GROWTH STRATEGY
The growth of the Company is dependent, in large part, upon the Company's
ability to successfully execute its Company-owned store expansion program in the
United States and its store refurbishment plan in Australia. Pursuant to the
U.S. store expansion program, the Company opened 10 new stores in calendar 1997.
The Company had opened six stores in the United States as of October 31, 1998,
with a further three stores opened in the United States during November 1998.
The Company intends to open one more store in the United States in calendar 1998
or, possibly, in early calendar 1999. The Company also currently intends to
open 15 new stores in the United States in calendar 1999, nine of which are
under construction
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(and scheduled to open during the first and second quarters of the year) and one
scheduled to open at a Navy base in Virginia. Site selection for the remaining
five stores is ongoing. The Company incurred capital expenditures relating to
this program in the United States of approximately US$1.8 million in 1997 and
expects to incur approximately US$2.0 million in calendar 1998 (US$1.6 million
of which had been incurred as of October 31, 1998) and US$2.8 million in
calendar 1999. Pursuant to the Company's Australian store refurbishment program,
in calendar 1997, the Company remodeled five existing stores, opened one new
store, relocated one store and closed one store. The Company refurbished one
store, relocated two stores and, in March, opened its one planned new store in
calendar 1998. The Company further intends to refurbish two stores, relocate two
stores and open one new store in calendar 1999. The Company incurred capital
expenditures relating to this program in Australia of approximately A$2.5
million in 1997 and expects to incur approximately A$1.5 million to A$2.5
million in each of calendar 1998 and 1999. The proposed expansion is
substantially more rapid than the Company's historical growth. The success of
these store expansion and refurbishment efforts will be dependent upon, among
other things, the identification of suitable markets and sites for new stores,
negotiation of leases on acceptable terms, construction or renovation of sites,
receipt of all necessary permits and governmental approvals therefor, and, if
necessary, obtaining additional financing for those sites. In addition, the
Company must be able to hire, train and retain competent managers and personnel
and manage the systems and operational components of its growth. There can be no
assurance that the Company will be able to locate suitable store sites or enter
into suitable lease agreements. In addition, there can be no assurance that, as
the Company opens new stores in existing markets, these new stores will not have
an adverse effect on comparable store net sales at existing stores in these
markets. The failure of the Company to open new stores or relocate or remodel
existing stores on a timely basis, obtain acceptance in markets in which it
currently has limited or no presence, attract qualified management and personnel
or appropriately adjust operational systems and procedures would adversely
affect the Company's future operating results.
The success of the Company's growth strategy may also depend upon factors beyond
its immediate control. The Company has retained outside real estate consultants
to assist in site selection and lease negotiations, and may depend, to an
increasing extent, on the services of such consultants and other real estate
experts as it accelerates the rate of new store expansion. The failure of any
such consultants or experts to render needed services on a timely basis could
adversely affect the Company's new store expansion. Similarly, changes in
national, regional or local real estate and market conditions could limit the
ability of the Company to expand into target markets or sites.
As part of its growth strategy, the Company intends to open stores in new
markets where it will not initially benefit from knowledge of local market
conditions, pre-existing retail brand name recognition or marketing,
advertising, distribution and regional management efficiencies made possible by
its store networks in existing markets. Expansion into new markets may present
operating and marketing challenges that are different from those encountered in
the past by the Company in its existing markets. As a result of its expansion
program and its entry into new markets, primarily in the United States, and its
refurbishment program in Australia, the Company has experienced, and expects to
continue to experience, an increase in store pre-opening costs and
refurbishment-related expenses. There can be no assurance that the Company will
anticipate all of the challenges and changing demands that its expansion will
impose on its management or operations, and the failure to adapt thereto would
adversely affect the Company's implementation of its growth strategy.
If the Company determined to, or was required to, close a Barbeques Galore
store, the Company would attempt to sublet the vacated store space in order to
cover ongoing lease costs. Even if the Company were able to sublet such store,
the Company may incur significant costs in writing off leasehold improvements.
In addition, the Company's proposed expansion plans will result in increased
demand on the Company's managerial, operational and administrative resources.
As a result of the foregoing, there can be no assurance that the Company will be
able to successfully implement its growth strategies, continue to open new
stores or maintain or increase its current growth levels. The Company's failure
to achieve its expansion plan could have a material adverse effect on its future
business, operating results and financial condition.
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EFFECT OF ECONOMIC CONDITIONS AND CONSUMER TRENDS
The success of the Company's operations depends upon a number of factors related
to consumer spending, including future economic conditions affecting disposable
consumer income such as employment, business conditions, interest rates and
taxation. If existing economic conditions were to deteriorate, consumer
spending may decline, thereby adversely affecting the Company's business and
results of operations. Such effects may be exacerbated by the significant
current regional concentration of the Company's business in Australia and the
Pacific West, Southwestern and East coast U.S. markets.
The success of the Company depends on its ability to anticipate and respond to
changing merchandise trends and consumer demands in a timely manner. The
Company believes it has benefited from a lifestyle trend toward consumers
spending more quality time together in outdoor family gatherings and social
activities. Any change in such trend could adversely affect consumer interest
in the Company's major product lines. Moreover, the Company's products must
appeal to a broad cross-section of consumers whose preferences (as to product
features such as colors, styles, finishes and fuel types) cannot always be
predicted with certainty and may change between sales seasons. If the Company
misjudges either the market for its merchandise or its customers' purchasing
habits, it may experience a material decline in sales or be required to sell
inventory at reduced margins. The Company could also suffer a loss of customer
goodwill if its manufacturing operations or stores do not adhere to its quality
control or service procedures or otherwise fail to ensure satisfactory quality
of the Company's products. These outcomes may have a material adverse effect on
the Company's business, operating results and financial condition.
MANAGEMENT OF OPERATIONAL CHANGES
The Company has identified a number of areas for improvement in its operations
which will have a significant impact on the implementation of its growth
strategy. The Company has, in recent years, replaced or upgraded its management
information systems and integrated its central inventory management systems with
point-of-sale terminals in Barbeques Galore stores, and currently plans to
introduce automated replenishment of store inventory in Australia in the near
term. In the United States, the Company is currently upgrading to the latest
version of software by JDA Software Group Inc. ("JDA") and is using both outside
consultants and the vendor to assist with the process. The total expected
capital expenditure for such project is not expected to be significant. In
addition, the Company intends to transfer its general ledger and accounts
payable functions from its existing computer system to the above-mentioned JDA
software system in the near future. The Company has substantially completed the
relocation of its enameling operations which are now operational, to the same
facilities as its barbecue and home heater manufacturing operations adjacent to
its Australian headquarters, with the in-line powder coating operation
commencing mid-November 1998 after successful trials during the previous month.
In addition, the Company rearranged the assembly, warehouse and Australian
distribution operations to further improve its production flow, inventory
control and distribution management. The relocation of the Company's enameling
operations and related changes resulted in the incurring of approximately
A$454,000 in costs (of which A$369,000 had already been accrued), required
additional capital expenditures of approximately A$2.8 million and the obtaining
of a number of building, environmental and other governmental permits. In
addition, as the Company expands into new regions or accelerates the rate of its
U.S. store expansion, the Company may need additional warehouse capacity. In
order to meet such needs, the Company intends to secure another distribution
center or expand its current warehouse facilities in the United States or
utilize public warehousing space, in each case depending on availability and
cost at such time. There can be no assurance as to whether or when the Company
will be able to effect its systems upgrades, enameling plant relocation plans,
any expansion or replacement of distribution facilities, or any other necessary
operational changes that may arise, or that the Company will not incur cost
overruns or disruptions in its operations in connection therewith. The failure
of the Company to effect these and any other necessary operational changes on a
timely basis would adversely affect the ability of the Company to implement its
growth strategy and, therefore, its business, financial condition and operating
results.
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COMPETITION
The retail and distribution markets for barbecues and the Company's other
product offerings are highly competitive in both the United States and
Australia. The Company's retail operations compete against a wide variety of
retailers, including mass merchandisers, discount or outlet stores, department
stores, hardware stores, home improvement centers, specialty patio, fireplace or
cooking stores, warehouse clubs and mail order companies. The Company's
manufacturing and wholesale operations compete with many other manufacturers and
distributors throughout the world, including high-volume manufacturers of
barbecues and home heaters. Barbeques Galore competes for retail customers
primarily based on its broad assortment of competitively priced, quality
products (including proprietary and exclusive products), convenience, customer
service and the attractive presentation of merchandise within its stores. Many
of the Company's competitors have greater financial, marketing, distribution and
other resources than the Company, and particularly in the United States, may
have greater name recognition than the Company. Furthermore, the lack of
significant barriers to entry into the Company's segment of the retail industry
may also result in new competition in the future.
SEASONALITY; WEATHER; FLUCTUATIONS IN RESULTS
The Company's business is subject to substantial seasonal variations which have
caused, and are expected to continue to cause, its quarterly results of
operations to fluctuate significantly. Historically, the Company has realized a
major portion of its net sales and a substantial portion of its net income for
the year during summer months and holiday seasons when consumers are more likely
to purchase barbecue products, camping equipment and outdoor furniture. In
anticipation of its peak selling seasons (late spring and early summer), the
Company substantially increases its inventory levels and hires a significant
number of part-time and temporary employees. In non-peak periods, such as late
winter and early fall, the Company has regularly experienced monthly losses.
Since the Company has historically derived a greater portion of its sales from
its larger Australian store base, these seasonal trends have generally resulted
in increased sales and income during the Australian summer months of November
through January and substantially lower-than-average sales and income during the
months of February, March, May and July. The Company believes this is the
general pattern associated with its segment of the Australian retail industry
and expects this pattern will continue in the future. Partially offsetting the
effects of seasonality, the Company operates in both the Southern and Northern
hemispheres, which have opposite seasons, and offers fireplace products and (in
Australia) home heaters in the fall and winter months. However, sales of any of
the Company's major product lines (in particular, home heaters) may vary widely
in peak seasons depending on, among other things, prevailing weather patterns,
local climate conditions, actions by competitors and shifts in timing of
holidays. The Company's quarterly and annual results of operations may also
fluctuate significantly as a result of a variety of other factors, including the
timing of new store openings, releases of new products and changes in
merchandise mix throughout the year. The Company has in the past experienced
quarterly losses, particularly in its fiscal first quarter, and expects that it
will experience such losses in the future. Because of these fluctuations in
operating results, the results of operations in any quarter are not necessarily
indicative of the results that may be achieved for a full fiscal year or any
future quarter. If for any reason the Company's sales or gross margins during
peak seasons or periods were substantially below expectations, the Company's
quarterly and annual results would be adversely affected.
RELIANCE ON SYSTEMS
In the United States, the Company has installed a JDA Software Group Inc.
("JDA") system on an IBM AS400 platform, which allows it to manage distribution,
inventory control, purchasing, sales analysis, warehousing and financial
applications. The Company currently runs its general ledger and accounts
payable applications on its pre-existing computer system, but intends to
transfer these functions to the more powerful JDA system in the near future. At
the store level, the Company has installed POS computer terminals as its cash
registers in all stores. Each POS terminal is equipped with a bar code scanner
for ease of product input and validation. Each store's transaction data is
captured by its POS terminals and transferred into the main JDA system daily.
The JDA system provides extensive reporting and inquiry
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capability at both the store and corporate levels, including daily transaction
data, margin information, exception analysis and stock levels. Additionally, the
system permits inventory and pricing updates to be electronically transmitted to
the stores on a daily basis.
In Australia, the existing Wang VS system is being replaced by a SUN Systems
Ultra 60 running a UNIX environment. The Company has also installed a Microsoft
NT Server for all its desktop applications which in the future will be the
Microsoft suite of software.
The Company's Head Office Information Systems process all distribution,
warehouse management, inventory control, purchasing, merchandising, financial
and office automation applications. Each store has PC-based Point of Sale
("POS") registers which manage all sales transactions and store based purchasing
transactions. At the end of each day's processing, the data from each register
is consolidated onto one register which has an attached modem and which is
polled daily to upload the data to the head office system. The Company relies
upon its existing management information systems in operating and monitoring all
major aspects of the Company's business, including sales, gross margins,
warehousing, distribution, purchasing, inventory control, financial accounting
and human resources. Any disruption in the operation of the Company's
management information systems, or the Company's failure to continue to upgrade,
integrate or expend capital on such systems, as its business expands, could have
a material adverse effect upon the Company's business, operating results and
financial condition.
As the head office system was not able to handle dates beyond January 1, 2000
the Company has decided to replace its existing hardware and software rather
than reworking the existing software to be Year 2000 compatible. See "Part I -
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations - Year 2000 Readiness Disclosure". The Company has appointed
Berger Software, an Australian software house, specializing in distribution and
warehousing management software to supply the main business application
software. The new system will also handle financial accounting functions and
the Company will also be integrating an Executive Information system to provide
additional interrogation capabilities. The existing store POS software is Year
2000 compatible and runs in a DOS environment on stand alone store-based PCs.
These systems are 486MHz PCs, some of which are almost five years old. The
Company is proposing the replacement of these superseded PCs with Windows based
PCs and a Windows NT Server in each store. The application software will be
converted to run in a Windows environment. This new platform will enable the
Company to create a Company Intranet and allow for implementation of the latest
in software applications.
Envisaged benefits flowing therefrom include the introduction of E-Commerce,
sophisticated customer loyalty programs and the combination of Electronic Funds
Transfer at Point of Sale ("EFTPOS") into the new POS hardware which will
improve customer throughput and reduce bank charges. It is anticipated that
this upgrade to the stores' POS systems at an approximate cost of A$1.3 million
will be undertaken during 1999, thus ensuring that the POS hardware is Year 2000
compatible. The store systems will continue to be polled on a daily basis and
the data transmitted back to head office, for loading into the new Berger
software system, producing all the necessary management reporting.
The Company expects that the Information Systems replacement and upgrade which
will be customized to its requirements will necessitate capital expenditures of
approximately A$0.9 million. Work is currently underway and implementation is
scheduled for May 1999, although no assurance can be given that these issues
can be resolved in a cost-effective or timely manner or that the Company will
not incur significant expense in resolving these issues. The Company's newly
installed computer system in the United States has been designed to avoid the
occurrence of such problems with the year 2000.
DEPENDENCE ON KEY EMPLOYEES
The Company's success is largely dependent on the efforts and abilities of its
executive officers, particularly, Sam Linz, Chairman of the Board, Robert
Gavshon, Deputy Chairman of the Board, John Price, Head of Research and Product
Development and Director, and Sydney Selati, President of Barbeques Galore,
Inc., the Company's U.S. operating subsidiary, and Director. These individuals
have an average of 15 years of experience with the Company and have chief
responsibility for the development of the Company's current business and growth
strategies. L.D. "Chip" Brown's employment terminated on August 24, 1998 and
Galore USA is seeking a suitable replacement to take on the functions of Chief
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Operating Officer for the Company's U.S. operations. The Company does not have
employment contracts with any of its executive officers. The loss of the
services of these individuals or other key employees could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company's success is also dependent upon its ability to continue
to attract and retain qualified employees to meet the Company's needs for its
new store expansion program in the United States and its store refurbishment
plans in Australia.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS; DEPENDENCE ON SIGNIFICANT
VENDORS AND SUPPLIERS
Barbeques Galore, with its headquarters, manufacturing, enameling, wholesale and
non-U.S. store operations in Australia, transacts a majority of its business in
Australia and obtains a significant portion of its merchandise, parts and raw
materials from China, Taiwan, Indonesia, Thailand, Italy and other markets
outside of the United States and Australia. There are risks inherent in doing
business in international markets, including tariffs, customs, duties and other
trade barriers, difficulties in staffing and managing foreign operations,
political instability, expropriation, nationalization and other political risks,
foreign exchange controls, technology export and import restrictions or
prohibitions, delays from customs brokers or government agencies, seasonal
reductions in business activity, subjection to multiple taxation regimes and
potentially adverse tax consequences, any of which could materially adversely
affect the Company's business, operating results and financial condition.
The Company purchases certain of its finished inventory and manufacturing parts
and all of its raw materials from numerous vendors and suppliers and generally
has no long-term purchase contracts with any vendor or supplier. During the
nine months ended October 31, 1998, the Company purchased inventory from over
400 vendors in the United States, Australia and Asia. In such period,
approximately 25% of the Company's merchandise purchases were obtained from the
Company's ten largest vendors. Although no vendor accounted for more than 5% of
the Company's merchandise purchases in such period (other than Horan's Steel Pty
Ltd., an Australian steel distributor ("Horan's Steel"), and Bromic Pty Ltd., an
Australian gas components importer ("Bromic")), the Company considers certain
barbecue brands to be significant to its business, especially in the United
States. In December 1997, the Company appointed Sheet Metal Supplies Pty Ltd
("SMS") as its steel supplier, to replace Horan's Steel, with full effect from
May 1998. During the twelve months ended January 31, 1998 and the nine months
ended October 31, 1998, the Company purchased barbecue and home heater parts
from over 50 suppliers in Asia, Australia and North America. During the twelve
months ended January 31, 1998 Horan's Steel and Bromic supplied the Company with
approximately 20% and 21%, respectively, of the Company's factory parts and raw
material purchases and approximately 80% of the Company's factory parts and raw
material purchases were obtained from the Company's ten largest suppliers.
During the nine months ended October 31, 1998, Horan's Steel, Bromic and SMS
supplied the Company with approximately 10%, 13% and 13% respectively of the
Company's factory parts and raw material purchases and approximately 83% of the
Company's factory parts and raw material purchases were obtained from the
Company's ten largest suppliers. The Company's results of operations could be
adversely affected by a disruption in purchases from any of these key vendors or
suppliers or from volatility in the prices of such parts or raw materials,
especially the price of steel, which has fluctuated in the past. In addition,
some of the Company's key suppliers currently provide the Company with certain
incentives, such as volume and trade discounts as well as other purchasing
incentives. A reduction or discontinuance of these incentives could have an
adverse effect on the Company. Although the Company believes that its
relationships with its vendors and suppliers are good, any vendor or supplier
could discontinue selling to the Company at any time.
PRODUCT LIABILITY AND GOVERNMENTAL AND OTHER REGULATION
Many of the Company's products use gas and flame and, consequently, are subject
to regulation by authorities in both the United States and Australia in order to
protect consumers, property and the environment. For example, the Company's
products and the personal use thereof are subject to regulations relating to,
among other things, the use of fire in certain locations (particularly
restrictions relating to the availability or frequency of use of wood heating in
homes and barbecues in apartments), restrictions on the sale or use of products
that enhance burning potential such as lighter fluid, restrictions on the use of
gas in specified locations (particularly restrictions relating to the use of gas
containers in confined spaces) and restrictions on the use of wood burning
heaters. Compliance with such regulations has not in the past had,
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and is not anticipated to have, a material adverse effect on the Company's
business, operating results and financial condition. Nonetheless, such
regulations have had, and can be expected to have, an increasing influence on
product claims, manufacturing, contents, packaging and heater usage. In
addition, failure of a product could give rise to product liability claims if
customers, employees or third parties are injured or any of their property is
damaged while using a Company product. Such injury could be caused, for example,
by a gas valve malfunction, gas leak or an unanticipated flame-up resulting in
injury to persons and/or property. Even if such circumstances were beyond the
Company's control, the Company's business, operating results and financial
condition could be materially adversely affected. In the event of such an
occurrence, the Company could incur substantial litigation expense, receive
adverse publicity, suffer a loss of sales or all or any of the foregoing.
Although the Company maintains liability insurance in both Australia and the
United States, there can be no assurance that such insurance will provide
sufficient coverage in any particular case. In Australia, the limit of the
Company's product liability coverage is A$50 million. In the United States, the
Company's U.S. operating subsidiary is covered by a policy having general
liability coverage limited at US$12 million and third party liability coverage
limited at US$11 million. There is no assurance that certain jurisdictions in
which the Company operates will not impose additional restrictions on the sale
or use of the Company's products.
In addition, the Company's barbecue and home heater manufacturing and enameling
operations are subject to regulations governing product safety and quality, the
discharge of materials hazardous to the environment, water usage, workplace
safety and labor relations. The Company's distribution facilities are also
subject to workplace safety and labor relations regulations. The Company
believes that it is in substantial compliance with such regulations. The sale
of certain products by the Company may result in technical violations of certain
of the Company's leases which prohibit the sale of flammable materials in or on
the leased premises. As a barbecue and barbecue accessories store, the Company
sells lighter fluid, lighters, matches and similar products which may be
considered flammable when in contact with open flame or activated. The Company
does not store containers of gas for barbecue grills in its stores. The Company
stores matches, lighters and the like in closed containers or in displays where
the chance of activation is remote, and does not store such items near open
flames. Over the Company's operating history, the Company's landlords have been
made aware that the Company sells such products. To date, no landlord has
terminated or threatened termination of any lease due to such sales.
The foregoing regulations and restrictions could have a material adverse effect
on the Company's business, operating results or financial condition.
UNCERTAINTIES REGARDING MANUFACTURING AND DISTRIBUTION OF MERCHANDISE
The Company manufactures a substantial portion of the barbecues and home heaters
sold in its stores and distributes merchandise to Barbeques Galore stores
primarily from its distribution centers located at its headquarters in Australia
and Irvine, California. Throughout the manufacturing process, the Company
utilizes heavy machinery and equipment to produce and assemble barbecues and
home heaters from parts and raw materials supplied from numerous third party
suppliers. In distributing merchandise, the Company relies upon third party sea
carriers to ship its manufactured products from Australia to the United States,
as well as third party surface freight carriers to transport all its merchandise
from its distribution centers and warehouses to stores. Accordingly, the
Company is subject to numerous risks associated with the manufacturing and
distribution of its merchandise, including supply interruptions, mechanical
risks, labor stoppages or strikes, inclement weather, import regulation, changes
in fuel prices, changes in the prices of parts and raw materials, economic
dislocations and geopolitical trends. In addition, the Company believes that,
while its distribution facilities are sufficient to meet Barbeques Galore's
current needs, the Company may need another distribution center or larger
facilities in the United States or Australia to support the further growth and
expansion of stores.
RISKS RELATED TO FRANCHISED AND LICENSED STORES
As of October 31, 1998, there were 47 licensed stores in Australia and seven
franchised stores in the United States, all of which are operated under the
"Barbeques Galore" name by independent licensees or
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franchisees who purchase proprietary and other store products, and receive
support services, from the Company. The licensees and franchisees operate such
stores pursuant to agreements which typically permit licensees and franchisees
to assign the agreements to their immediate family and provide the licensees and
franchisees with exclusive geographical sales territories. The Company monitors
its licensed and franchised stores to assure their conformity to Barbeques
Galore's standards and image and requires the licensees and franchisees to
comply with Barbeques Galore's merchandising and advertising guidelines.
Although the Company believes that its licensees and franchisees are presently
in substantial compliance with Company guidelines and that its license and
franchise arrangements have not been problematic in any material respect in the
past, serious or protracted failures by licensees or franchisees to adhere to
Company standards could adversely affect customer loyalty and diminish the
Company's brand name or reputation for quality products and services, and could
require the Company to devote significant management attention and resources to
enforcing its rights under such agreements. Conversely, if the Company fails to
provide adequate support services or otherwise breaches its contractual
obligations to any licensee or franchisee, such failure or breach could result
in termination of, or litigation relating to, the relevant licensing or
franchise agreement and the loss of fees and sales revenue thereunder. The
licensing agreements in Australia are terminable at will (absent fraud) by the
licensees only, generally upon sixty days' notice.
CURRENCY FLUCTUATIONS
The Company prepares its consolidated financial statements in Australian
dollars, but a substantial portion of the Company's revenues and expenses are
denominated in U.S. dollars and, to a lesser extent, other foreign currencies.
Accordingly, the Company is subject to risks of currency exchange to the extent
of currency fluctuations between the Australian dollar and the U.S. dollar or
other currencies in which the Company transacts its business. This currency
imbalance has resulted in, and may continue to result in, foreign currency
transaction gains and losses. Prior to the current fiscal year, the Company's
Australian operations have hedged a major portion of its imports against
exchange rate fluctuations with respect to the Australian dollar. However, in
its U.S. operations, the Company has not, and it currently does not, actively
hedge against exchange rate fluctuations, although it may elect to do so in the
future. Accordingly, changes in exchange rates may have a material adverse
effect on the Company's net sales, cost of goods sold, gross margin and net
income, any of which alone or in the aggregate may in turn have a material
adverse effect on the Company's business, operating results and financial
condition. Such currency issues could, thus, affect the market price for the
American Depositary Shares ("ADSs") representing the Company's Ordinary Shares
in the U.S. trading market. Although the Company does not anticipate paying any
regular cash dividends on the Ordinary Shares or the ADSs in the foreseeable
future, the above exchange rate fluctuations would affect the conversion into
U.S. dollars (for payment to holders of ADSs) by the Depositary of any cash
dividends paid in Australian dollars on the Ordinary Shares represented by the
ADSs.
RESTRICTIONS ON FOREIGN OWNERSHIP; ANTITAKEOVER RESTRICTIONS
Under Australian law, foreign persons are prohibited from acquiring more than a
limited percentage of the shares in an Australian company without approval from
the Australian Treasurer or in certain other limited circumstances. These
limitations are set forth in the Australian Foreign Acquisitions and Takeovers
Act (the "Takeovers Act"). Under the Takeovers Act, as currently in effect, any
foreign person, together with associates, is prohibited from acquiring 15% or
more of the outstanding shares of the Company (or else the Treasurer may make an
order requiring the acquiror to dispose of those shares within a specified
period of time). In addition, if a foreign person acquires shares in the
Company and as a result the total holdings of all foreign persons and their
associates exceeds 40% in the aggregate without the approval of the Australian
Treasurer, then the Treasurer may make an order requiring the acquiror to
dispose of those shares within a specified time. The Company has been advised
by its Australian counsel, Freehill, Hollingdale & Page, that under current
foreign investment policy, however, it is unlikely that the Treasurer would make
such an order where the level of foreign ownership exceeds 40% in the ordinary
course of trading, unless the Treasurer finds that the acquisition is contrary
to the national interest. The same rule applies if the total holdings of all
foreign persons and their associates already exceeds 40% and a foreign person
(or its associate) acquires any further shares, including in the course of
trading in the secondary market of the ADSs. In addition, if the level of
foreign ownership exceeds 40% at any time, the Company would be
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considered a foreign person under the Takeovers Act. In such event, the Company
would be required to obtain the approval of the Treasurer for the Company,
together with its associates, to acquire (i) more than 15% of an Australian
company or business with assets totaling over A$5 million or (ii) any direct or
indirect ownership interest in Australian residential real estate. In addition,
the percentage of foreign ownership of the Company would also be included in
determining the foreign ownership of any Australian company or business in which
it may choose to invest. Since the Company has no current plans for any such
acquisitions and only owns commercial property, any such approvals required to
be obtained by the Company as a foreign person under the Takeovers Act will not
affect the Company's current or future ownership or lease of property in
Australia. In addition, there would be no material tax consequence to
shareholders of the Company (including holders of ADSs) resulting from the
Company being deemed a foreign person under the Takeovers Act. If all of the
ADSs previously offered by the Company or its shareholders were acquired by
foreign persons or their associates, then the level of foreign ownership of the
Company's equity securities would be approximately 64.8%. The level of foreign
ownership could also increase in the future if additional existing Australian
investors decide to sell their shares into the U.S. market or if the Company
were to sell additional Ordinary Shares or ADSs in the future.
The Company has additionally provided that all stock options outstanding under
the Company's Executive Share Option Plan at such time as the Company becomes
subject to a takeover bid pursuant to which the offeror acquires at least thirty
percent (30%) of the outstanding Ordinary Shares of the Company shall become
immediately exercisable for a period of up to 120 days, measured from the date
the Board notifies the optionee of the takeover bid. Similarly, the Company has
provided that all stock options outstanding under the Company's 1997 Share
Option Plan at such time as the Company is acquired by merger or asset sale
pursuant to which such stock options are not assumed or replaced by the
successor corporation shall become immediately exercisable for a period of one
(1) year (or until the expiration of the stock option term, if earlier). There
are 203,038 Ordinary Shares underlying stock options outstanding pursuant to the
Executive Share Option Plan, which, barring acceleration, will become
exercisable on February 1, 1999, 224,450 Ordinary Shares underlying stock
options granted under the Company's 1997 Share Option Plan, which, barring
acceleration, will become exercisable in three equal installments on November 9,
2001, November 9, 2002 and October 9, 2003 according to the terms of the 1997
Share Option Plan and 17,646 Ordinary Shares underlying stock options granted
under the Company's 1997 Share Option Plan, which, barring acceleration, will
become exercisable in three equal installments on September 1, 2001, September
1, 2002 and August 1, 2003 according to the terms of the 1997 Share Option Plan.
The investment restrictions and dilutive acceleration events discussed above
could have a material adverse effect on the Company's ability to raise capital
as needed and could make more difficult or render impossible attempts by certain
entities (especially foreign entities, in the case of the Takeovers Act) to
acquire the Company, including attempts that might result in a premium over
market price to holders of ADSs.
The Memorandum and Articles of Association of the Company (collectively, the
"Articles") contain certain provisions that could impede any merger,
consolidation, takeover or other business combination involving the Company or
discourage a potential acquiror from making a tender offer or otherwise
attempting to obtain control of the Company. Provisions contained in the
Articles, among other things, (i) in effect divide the Board of Directors of the
Company into three classes, which serve for staggered three-year terms, (ii)
provide that the shareholders may amend or repeal special resolutions, including
changes to the Articles and extraordinary transactions, only by a vote of at
least 75% of the votes cast at a meeting at which a quorum is present, (iii)
require extended notice (of up to 21 days) for special resolutions considered by
the Board of Directors, and (iv) authorize the Board of Directors, without any
vote or action by shareholders of the Company, to issue, out of the Company's
authorized and unissued capital shares, shares in different classes, or with
special, preferred or deferred rights, which may relate to voting, dividend,
return of capital or any other matter. Although the Company currently has no
plans to issue any preferred shares, the rights of the holders of Ordinary
Shares or ADSs will be subject to, and may be adversely affected by, the rights
of the holders of any preferred or senior share that may be issued in the
future. The issuance of any preferred or senior shares, and the other
provisions of the Articles referred to above, could have the effect of making it
more difficult for a third party to acquire control of the Company.
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Australian law requires the transfer of shares in the Company to be made in
writing, and stamp duty at the rate of 0.6% is payable in relation to any
transfer of shares. No stamp duty will be payable in Australia on the transfer
of ADSs provided that any instrument by which the ADSs are transferred is
executed outside Australia.
In certain circumstances, nonresidents of Australia may be subject to Australian
tax on capital gains made on the disposal of shares or ADSs. The rate of
Australian tax on taxable gains realized by non-residents of Australia is 36%
for companies. For individuals, the rate of tax increases from 29% to a maximum
of 47%.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
As a result of recent decreases in the market price of the Company's Ordinary
Shares, the US$11.00 per Ordinary Share exercise price of those options granted
concurrently with the Company's IPO in November 1997, was significantly higher
than the current market price. Consequently and in order to provide all
employees with the continuing opportunity to acquire Ordinary Shares of the
Company at an attractive purchase price, the Board of Directors at a meeting on
November 9, 1998 resolved to implement a special option cancellation/regrant
program. Under that program, each option outstanding on that date with an
exercise price of US$11.00 per Ordinary Share (an "Old Option") was cancelled
and simultaneously a new option for the identical number of shares but with an
exercise price of US$5.20 per Ordinary Share (a "New Option") was granted in
replacement thereof. The New Options are exercisable in three equal
installments on November 9, 2001, November 9, 2002 and October 9, 2003. All
other terms and conditions of the New Options are substantially the same as the
Old Options. In the aggregate, Old Options to purchase 177,200 Ordinary Shares
were cancelled and regranted under the program.
In addition to the cancellation and regrant program on November 9, 1998, the
Board of Directors granted further options to purchase a total of 47,250
Ordinary Shares at a price of US$5.20 per Ordinary Share under the 1997 Share
Option Plan and exercisable on the same dates as above.
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ITEM 6. EXHIBITS AND CURRENT REPORTS ON FORM 6-K.
(a) Exhibits
Not applicable.
(b) There were no current reports on Form 6-K filed during the quarter ended
October 31, 1998.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
REPORT OF FOREIGN ISSUER PURSUANT TO RULE 13A-16 OR 15D-16 OF THE SECURITIES
EXCHANGE ACT OF 1934
BARBEQUES GALORE LIMITED
(Registrant)
By: /s/ Robert B. Gavshon
---------------------
Robert B. Gavshon
Executive Deputy Chairman
Date:
December 14, 1998
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