<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
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, 1999
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
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[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, 1999
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I.FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Balance Sheets as of October 31,
1999 and January 31, 1999......................................... 3
Condensed Consolidated Statements of Income for the Three and
Nine Months Ended October 31, 1999 and 1998....................... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended October 31, 1999 and 1998............................ 5
Notes to Condensed Consolidated Financial Statements.............. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 8
ITEM 3. Quantitative and Qualitative Disclosures about Market
Risk.............................................................. 22
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................. 23
ITEM 2. Changes in Securities and Use of Proceeds......................... 23
ITEM 3. Default Upon Senior Securities.................................... 23
ITEM 4. Submission of Matters to a Vote of Security Holders............... 23
ITEM 5. Other Information................................................. 23
ITEM 6. Exhibits and Current Reports on Form 6-K.......................... 24
Signatures.................................................................. 25
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
BARBEQUES GALORE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ITEM 1. Financial Statements.
<TABLE>
<CAPTION>
January 31, October 31,
1999 1999
----------- -----------
(Unaudited)
In A$ thousands,
except share data
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents......................................................... $ 811 $ 32
Accounts receivable, net of allowance of $409 at October 31, 1999 and $424 at
January 31, 1999................................................................ 11,916 17,550
Inventories (note 2).............................................................. 47,095 60,683
Deferred income taxes............................................................. 2,238 1,827
Prepaid expenses and other current assets......................................... 1,346 2,295
-------- --------
Total current assets.......................................................... 63,406 82,387
Non-current assets:
Receivables from affiliates....................................................... 848 748
Property, plant and equipment, net of accumulated depreciation of $23,132 at
October 31, 1999 and $20,492 at January 31, 1999................................ 32,620 35,303
Goodwill, net of accumulated amortization of $448 at October 31, 1999 and $382
at January 31, 1999............................................................. 1,418 1,352
Deferred income taxes............................................................. 1,030 2,524
Other non-current assets.......................................................... 1,880 1,594
-------- --------
Total assets.................................................................. $101,202 $123,908
======== ========
Liabilities and shareholders' equity
Current liabilities:
Bank overdraft.................................................................... $ -- $ 4,473
Accounts payable and accrued liabilities.......................................... 16,753 27,471
Payables to related parties....................................................... 1,060 645
Payables to affiliates............................................................ 168 404
Current maturities of long-term debt.............................................. 172 40
Current portion of obligations under capital leases............................... 2,029 2,257
Income taxes payable.............................................................. 2,062 --
-------- --------
Total current liabilities..................................................... 22,244 35,290
Non-current liabilities:
Long-term debt.................................................................... 24,171 32,270
Obligations under capital leases, excluding current portion....................... 4,859 5,705
Other long-term liabilities....................................................... 815 974
-------- --------
Total liabilities............................................................. 52,089 74,239
-------- --------
Shareholders' equity:
Ordinary shares, no par value--authorized 27,437,853 shares; 4,541,652 issued
shares.......................................................................... 40,733 40,733
Accumulated other comprehensive income............................................ 1,509 955
Retained earnings................................................................. 6,871 7,981
-------- --------
Total shareholders' equity.................................................... 49,113 49,669
-------- --------
Total liabilities and shareholders' equity.................................... $101,202 $123,908
======== ========
</TABLE>
See accompanying notes to the condensed Consolidated Financial Statements
3
<PAGE>
BARBEQUES GALORE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
October 31, October 31, October 31, October 31,
1998 1999 1998 1999
----------- ----------- ----------- -----------
(Unaudited)
In A$ thousands, except share and per share
data
<S> <C> <C> <C> <C>
Net sales................... $58,102 $65,158 $149,279 $174,520
Cost of goods sold,
warehouse, distribution and
occupancy costs............ 40,258 44,319 101,867 119,156
------- ------- -------- --------
Gross margin................ 17,844 20,839 47,412 55,364
Selling, general and
administrative expenses.... 16,028 18,599 43,763 51,402
Store pre-opening costs..... 232 42 676 638
------- ------- -------- --------
Operating income............ 1,584 2,198 2,973 3,324
Equity in income of
affiliates, net of tax..... 196 70 430 235
Interest expense............ 666 626 1,500 1,713
------- ------- -------- --------
Income before income tax.... 1,114 1,642 1,903 1,846
Income tax expense.......... 255 537 555 736
------- ------- -------- --------
Net income.................. 859 1,105 1,348 1,110
Other comprehensive income
(loss)..................... (515) 318 517 (554)
------- ------- -------- --------
Net income after other
comprehensive income
(loss)..................... $ 344 $ 1,423 $ 1,865 $ 556
======= ======= ======== ========
Basic earnings per share.... $ 0.19 $ 0.24 $ 0.30 $ 0.24
======= ======= ======== ========
Diluted earnings per share.. $ 0.19 $ 0.24 $ 0.30 $ 0.24
======= ======= ======== ========
Weighted average shares
outstanding (in
thousands)................. 4,542 4,542 4,542 4,542
======= ======= ======== ========
</TABLE>
See accompanying notes to the condensed Consolidated Financial Statements
4
<PAGE>
BARBEQUES GALORE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
October 31, October 31,
1998 1999
----------- -----------
(Unaudited)
In A$ thousands
<S> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 1,348 $ 1,110
Non-cash charges, net................................. 2,263 2,630
Changes in operating assets and liabilities:
Receivables and prepaid expenses...................... (3,829) (7,071)
Inventories........................................... (14,275) (13,640)
Other assets.......................................... (24) 3
Accounts payable and accrued liabilities.............. 6,024 10,445
-------- --------
Net cash (used in) operating activities................. (8,493) (6,523)
-------- --------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment... 24 41
Capital expenditures.................................. (11,411) (4,865)
Loan repayments received.............................. 123 286
-------- --------
Net cash (used in) investing activities................. (11,264) (4,538)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt........................... (6,550) (4,388)
Proceeds from long-term debt.......................... 24,293 11,940
Initial public offering ("IPO") costs................. (268) --
Bank overdraft proceeds............................... 3,622 4,473
Principal payments under capital leases............... (1,478) (1,743)
-------- --------
Net cash provided by financing activities............... 19,619 10,282
-------- --------
Net (decrease) in cash and cash equivalents............. (138) (779)
Cash and cash equivalents at beginning of period........ 166 811
-------- --------
Cash and cash equivalents at end of period.............. $ 28 $ 32
======== ========
Supplemental disclosure of cash flow information:
Income taxes paid..................................... $ 1,884 $ 3,527
======== ========
Interest paid......................................... $ 1,628 $ 2,033
======== ========
</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 principles 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 for the fiscal year ended January 31, 1999,
filed by Barbeques Galore Limited (the "Company") with the Securities and
Exchange Commission (the "Commission") on May 3, 1999. The unaudited condensed
consolidated financial statements as of October 31, 1999 and for the three and
nine months ended October 31, 1999 and 1998 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:
<TABLE>
<CAPTION>
January 31, October 31,
1999 1999
----------- -----------
(Unaudited)
In A$ thousands
<S> <C> <C>
Finished goods.................................... $42,524 $55,425
Work in progress.................................. 1,542 1,960
Raw materials..................................... 3,283 3,604
------- -------
47,349 60,989
Less: Reserve for obsolescence.................... (254) (306)
------- -------
$47,095 $60,683
======= =======
</TABLE>
3 Earnings per share
Basic earnings per share are computed by dividing net income available to
ordinary shareholders by the weighted average number of ordinary shares.
Diluted earnings per share are computed by dividing net income available to
ordinary shareholders by the weighted average of ordinary shares and dilutive
ordinary share equivalents for the period. In calculating the dilutive effect
of share options, the Company uses the treasury stock method.
4 Recent Accounting Developments
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 fiscal year commencing February 1, 2001. 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
position at fair value. The accounting for changes in the fair value (i.e.
gains or losses) of a derivative instrument
6
<PAGE>
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 in
fair value. 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.
5 Segments and Related Information
The Company is engaged in the retail industry and operates through stores
located in two geographic segments, Australia and the United States.
The Company measures the performance of its operating segments based on
gross margin and operating income, which is defined as income before equity
income of affiliates, net of tax, interest expense and income taxes. In
addition, the operating income of the United States does not include all the
income attributable to it for product manufactured and purchased for the
United States by the Australian subsidiaries.
Summarized financial information concerning the Company's reportable segments
is as follows:
<TABLE>
<CAPTION>
Australia United States Total
--------- ------------- --------
(in A$ thousands)
<S> <C> <C> <C>
3 months to October 31, 1999
Revenues from external customers.............. $39,029 $26,129 $ 65,158
======= ======= ========
Gross margin.................................. $13,121 $ 7,718 $ 20,839
======= ======= ========
Operating income (loss)....................... $ 3,394 $(1,196) $ 2,198
======= ======= ========
Total assets.................................. $79,965 $43,943 $123,908
======= ======= ========
3 months to October 31, 1998
Revenues from external customers.............. $36,905 $21,197 $ 58,102
======= ======= ========
Gross margin.................................. $11,737 $ 6,107 $ 17,844
======= ======= ========
Operating income (loss)....................... $ 2,940 $(1,356) $ 1,584
======= ======= ========
Total assets.................................. $77,144 $34,621 $111,765
======= ======= ========
<CAPTION>
Australia United States Total
--------- ------------- --------
(in A$ thousands)
<S> <C> <C> <C>
9 months to October 31, 1999
Revenues from external customers.............. $81,413 $93,107 $174,520
======= ======= ========
Gross margin.................................. $25,644 $29,720 $ 55,364
======= ======= ========
Operating income.............................. $ 1,277 $ 2,047 $ 3,324
======= ======= ========
Total assets.................................. $79,965 $43,943 $123,908
======= ======= ========
9 months to October 31, 1998
Revenues from external customers.............. $76,403 $72,876 $149,279
======= ======= ========
Gross margin.................................. $24,596 $22,816 $ 47,412
======= ======= ========
Operating income.............................. $ 1,812 $ 1,161 $ 2,973
======= ======= ========
Total assets.................................. $77,144 $34,621 $111,765
======= ======= ========
</TABLE>
7
<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 the Company's Annual Report on Form 20-F (File No.
333-37259) for the fiscal year ended January 31, 1999, filed with the
Commission on May 3, 1999. 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, 1999, the Company owned and operated
35 stores in all six states in Australia and 54 stores (including three U.S.
Navy concession stores) in ten states in the United States. In addition, as of
such date, there were 49 licensed stores in Australia and ten 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, 1999, these
categories represented 31.3%, 53.4%, 6.8% and 7.9% respectively, of the
Company's net sales for such period, representing a 7.8%, 27.8%, 13.1% and
(8.1%) increase (decrease) over their respective net sales levels for the nine
months ended October 31, 1998.
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, 1999 and 1998. 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.
8
<PAGE>
BARBEQUES GALORE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Three
Months Months Nine Months Nine Months
Ended Ended Ended Ended
October 31, October 31, October 31, October 31,
1998 1999 1998 1999
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales..................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold, warehouse,
distribution and occupancy
costs........................ 69.3 68.0 68.2 68.3
----- ----- ----- -----
Gross margin.................. 30.7 32.0 31.8 31.7
Selling, general and
administrative expenses...... 27.6 28.5 29.3 29.4
Store pre-opening costs....... 0.4 0.1 0.5 0.4
----- ----- ----- -----
Operating income.............. 2.7 3.4 2.0 1.9
Equity in income of
affiliates, net of tax....... 0.3 0.1 0.3 0.1
Interest expense.............. 1.1 1.0 1.0 1.0
----- ----- ----- -----
Income before income tax...... 1.9 2.5 1.3 1.0
Income tax expense............ 0.4 0.8 0.4 0.4
----- ----- ----- -----
Net income.................... 1.5% 1.7% 0.9% 0.6%
===== ===== ===== =====
</TABLE>
There has been no material impact of inflation and changing prices on the
Company's net sales and operating income for the three and nine months ended
October 31, 1997 through 1999, respectively.
Three Months Ended October 31, 1999 (Unaudited) Compared to Three Months Ended
October 31, 1998 (Unaudited)
Net sales increased by approximately A$7.1 million, or 12.2%, to A$65.2
million for the three months ended October 31, 1999 from A$58.1 million for
the three months ended October 31, 1998. One new store was opened in the
United States during the three months ended October 31, 1999. In Australia one
new store was opened and one store relocated during this period. Comparable
group store sales increased 1.3% for the three months ended October 31, 1999
as compared to the three months ended October 31, 1998 and contributed A$0.5
million to the increase in net sales. Comparable store sales increased 14.1%
in the United States and decreased 2.3% in Australia. Increased sales of A$6.2
million also resulted from stores not forming part of the comparative store
sales, including 12 new stores which opened in the United States in the
previous twelve months. The balance of the increased sales was primarily
attributable to a A$1.0 million increase in sales to Australian licensees,
partially offset by a A$0.8 million decrease in Australian wholesale.
Gross margin increased approximately A$3.0 million, or 16.9% to A$20.8
million for the three months ended October 31, 1999 from A$17.8 million for
the three months ended October 31, 1998. Gross margin percentage increased to
32.0% during the three months ended October 31, 1999 from 30.7% during the
comparable period in 1998. The increase in gross margin percentage was mainly
attributable to an improved product mix and buying efficiencies.
Selling, general and administrative expenses (which exclude store pre-
opening expenses) increased approximately A$2.6 million, or 16.3%, to A$18.6
million for the three months ended October 31, 1999 from A$16.0 million for
the three months ended October 31, 1998. As a percentage of net sales,
selling, general and administrative expenses increased to 28.5% during the
three months ended October 31, 1999 from 27.6% during the comparable period in
1998. This percentage increase was primarily due to increased U.S.A. staffing
in the marketing, purchasing and accounting departments as well as an increase
in Australian retail advertising.
9
<PAGE>
Store pre-opening expenses decreased by A$190,000 to A$42,000 for the three
months ended October 31, 1999 from A$232,000 for the three months ended
October 31, 1998, due to the number and timing of United States' store opening
expenditure.
Operating income increased by A$0.6 million to A$2.2 million for the three
months ended October 31, 1999 from A$1.6 million for the three months ended
October 31, 1998 and resulted mainly from increased Australian licensing
operating income.
Income from affiliates decreased by A$126,000 to A$70,000 for the three
months ended October 31, 1999 from A$196,000 for the three months ended
October 31, 1998.
Interest expense decreased by A$0.1 million to A$0.6 million for the three
months ended October 31, 1999 from A$0.7 million for the three months ended
October 31, 1998. The decrease resulted mainly from a decrease in general
working capital requirements.
The Company's effective tax rate was 32.7% in the three months ended October
31, 1999 and 22.9% in the three months ended October 31, 1998. The effective
tax rate is a result of the taxing of Australian profits at a tax rate of
36.0%, offset by a tax benefit calculated at 40.5% on U.S.A. losses.
Nine Months Ended October 31, 1999 (Unaudited) Compared to Nine Months Ended
October 31, 1998 (Unaudited)
Net sales increased by approximately A$25.2 million, or 16.9%, to A$174.5
million for the nine months ended October 31, 1999 from A$149.3 million for
the nine months ended October 31, 1998. Eight new stores were opened in the
United States during the nine months ended October 31, 1999 as well as two
franchise stores. In Australia two new stores were opened and three stores
relocated during this period. Comparable group store sales increased 5.8% for
the nine months ended October 31, 1999 as compared to the nine months ended
October 31, 1998 and contributed A$6.3 million to the increase in net sales.
Comparable store sales increased 14.0% in the United States and 1.5% in
Australia. Increased sales of A$17.8 million also resulted from stores not
forming part of the comparative store sales, including 12 new stores which
opened in the United States in the previous twelve months. The balance of the
increased sales was primarily attributable to a A$1.4 million increase in
sales to Australian licensees, a A$1.2 million decrease in Australian
wholesale and a A$1.0 million increase in export sales mainly to the Company's
distributor in the United Kingdom.
Gross margin increased approximately A$8.0 million, or 16.9% to A$55.4
million for the nine months ended October 31, 1999 from A$47.4 million for the
nine months ended October 31, 1998. Gross margin percentage decreased to 31.7%
during the nine months ended October 31, 1999 from 31.8% during the comparable
period in 1998. The decrease in gross margin percentage was mainly
attributable to the new East Coast U.S.A. stores opened during the first
quarter as well as the time required to ramp up sales of higher margin
products, including the Company's proprietary grills.
Selling, general and administrative expenses (which exclude store pre-
opening expenses) increased approximately A$7.6 million, or 17.4%, to A$51.4
million for the nine months ended October 31, 1999 from A$43.8 million for the
nine months ended October 31, 1998. As a percentage of net sales, selling,
general and administrative expenses increased to 29.4% during the nine months
ended October 31, 1999 from 29.3% during the comparable period in 1998. This
percentage increase was primarily due to increased U.S.A. advertising and
staffing in the marketing, purchasing and accounting departments as well as an
increase in Australian retail advertising.
Store pre-opening expenses decreased by A$38,000 to A$638,000 for the nine
months ended October 31, 1999 from A$676,000 for the nine months ended October
31, 1998, due to the number and timing of United States' store opening
expenditure.
Operating income increased by A$0.3 million to A$3.3 million for the nine
months ended October 31, 1999 from A$3.0 million for the nine months ended
October 31, 1998. This increase resulted mainly from the increased Australian
licensing operating income partially offset by increased store pre-opening
expenses and lower gross margin during the first quarter.
10
<PAGE>
Income from affiliates decreased by A$195,000 to A$235,000 for the nine
months ended October 31, 1999 from A$430,000 for the nine months ended October
31, 1998.
Interest expense increased by A$0.2 million to A$1.7 million for the nine
months ended October 31, 1999 from A$1.5 million for the nine months ended
October 31, 1998. The increase resulted mainly from the increase in the number
of new stores in the U.S.A. and general working capital requirements.
The Company's effective tax rate was 39.9% for the nine months ended October
31, 1999 and 29.2% in the nine months ended October 31, 1998. The effective
tax rate is a result of the taxing of U.S.A. profits at an average tax rate of
40.0%, offset by a tax benefit calculated at 36.0% on Australian losses.
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 has 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 approximately 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, 1999 and 1998 of A$6.5 million and A$8.5 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, 1999 and 1998 were A$4.5 million and A$11.3 million respectively. The cash
flows used in investing activities for the current nine months have resulted
primarily from capital expenditures related to new store openings in the
United States and the relocation of three stores and the opening of two new
stores in Australia. In the corresponding nine months for the previous year,
cash flows used in investing activities resulted primarily from capital
expenditures related to new store openings in the United States, store
refurbishments in Australia and the acquisition of two properties relating to
the company's enameling and warehousing and distribution operations,
respectively. 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.
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At October 31, 1999 the Company had working capital of A$47.1 million and
maintained minimal amounts in cash and cash equivalents, relying instead on
undrawn facilities under its borrowing arrangements with ANZ and Merrill
Lynch.
In June 1998, the Company and ANZ entered into a credit facility (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$47.6 million comprising a
multi-purpose facility in principal amount of A$16.6 million, a trade finance
facility in principal amount of A$16.5 million, real property loans in
principal amount of A$8.5 million and a further seasonal trade finance
facility of A$6.0 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 loans accrue interest at rates varying from 6.8% to 7.4% per
annum and are secured by registered first mortgages over the respective
freehold properties 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, 1999, such facility
comprises a revolving line of credit in aggregate principal amount of US$1.0
million, (the "Merrill Lynch Facility"). Indebtedness under the revolving line
of credit 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 U.S.A. present and future assets and 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.
Year 2000 Readiness Disclosure
The Company established a Year 2000 compliance team in 1997, under the
guidance of the 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 replaced
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 represented Year 2000
compliant and was commissioned on August 1, 1999. 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 and the Company is proposing to address the Year 2000 risk
associated with these PCs, either by rectification work or the replacement of
these superseded PCs with IBM PCs running a Windows NT network with Divergent
Technologies' ARS (Applied Retail Solutions) software. Furthermore, the
Company is currently in the process of updating the existing Point of Sale
("POS") system with a software patch which will enable all dates beyond
January 1, 2000 to be correctly handled by the operating system.
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 December 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. All
potential systems at risk have been identified and an inventory of equipment
and the
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vendors involved, 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 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. Based on the responses received, it
appears unlikely that the Company will perform further follow-up procedures
with customers' 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 vendors. Based on the responses received, it appears unlikely that
the Company will discontinue supply arrangements with any vendor who is unable
to demonstrate adequate Year 2000 compliance.
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$1.3 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, approximately A$1.1 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, given the compliance program now in
place, no assurance can be made that the impact of these risk areas will not
be greater than currently identified nor that no other risk issues may 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.
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.
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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 ten new stores and closed
one store in fiscal 1999. The Company intends to open 12 new stores (including
four franchise stores) in the United States in fiscal 2000. As of November 30,
1999, eight Company-owned stores and three franchise stores had been opened
pursuant to this store expansion program. The Company also currently intends
to open approximately 15 new stores in fiscal 2001 in the United States. The
Company incurred capital expenditures relating to this program in the United
States of approximately US$1.9 million in fiscal 1999 and expects to incur
approximately US$1.4 million in fiscal 2000 (US$1.3 million of which had been
incurred as of October 31, 1999) and US$3.5 million in fiscal 2001. Pursuant
to the Company's Australian store refurbishment program, the Company
refurbished one store, relocated two stores and opened one new store in fiscal
1999. The Company further intends to refurbish one store, relocate three
stores and open two new stores in fiscal 2000. As of November 30, 1999, two
new stores had been opened and three relocated pursuant to this store
refurbishment program. The Company incurred capital expenditures relating to
this program in Australia of approximately A$1.4 million in fiscal 1999 and
expects to incur approximately A$2.0 million in fiscal 2000. 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 was 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
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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. See "--Management of Operational
Changes" and "--Reliance on Systems".
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 has recently upgraded to the
latest version of POS software by JDA Software Group Inc. ("JDA"). The total
capital expenditure for such project was not significant. In addition, the
Company recently transferred its general ledger application from its existing
computer system to the above-mentioned JDA software system. The Company has also
completed the relocation of its enameling and in-line powder coating operations
to the same facilities as its barbecue and home heater manufacturing operations
adjacent to its Australian headquarters. 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, required additional capital
expenditures of approximately A$2.8 million and the obtaining of a number of
building, environmental and other governmental permits. 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, 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,
particularly in late winter in the United States and early fall in Australia,
the Company regularly experiences monthly losses. These seasonal trends result
in the Company experiencing a loss in its first fiscal quarter. The Company
believes this is the general pattern associated with its segment of the 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 system on an IBM AS400
platform, which allows it to manage distribution, inventory control,
purchasing, sales analysis, warehousing and financial applications. 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 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 has been 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 with the Microsoft suite
of software.
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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 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 decided to replace its existing hardware and software rather
than rework 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 appointed
Berger Software, an Australian software house, specializing in distribution
and warehousing management software to supply the main business application
software. The new system handles 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 and the
Company is proposing to address the Year 2000 risk associated with these PCs,
either by rectification work or the replacement of these superseded PCs with
IBM PCs running a Windows NT network with Divergent Technologies' ARS (Applied
Retail Solutions) software.
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. This system is
currently being tested with the intention being to pilot the software at
certain stores prior to installation throughout the group. 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$1.3 million. The replacement core IT system
has been represented Year 2000 compliant and was commissioned on August 1,
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 16 years of experience with the Company and
have chief responsibility for the development of the Company's current
business and growth strategies. Benjamin A. Ramsey, Jr. was promoted to the
newly created position of Executive Vice President of Barbeques Galore, Inc on
August 26, 1999 and simultaneously assumed responsibility for store
operations, human resources, training and development, new store development
and barbecue sales to real estate developers and contractors. 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.
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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, 1999, the Company purchased inventory
from over 500 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, the Company
considers certain barbecue brands to be significant to its business,
especially in the United States. During the twelve months ended January 31, 1999
and the nine months ended October 31, 1999, the Company purchased barbecue and
home heater parts from over 90 suppliers in Asia, Australia and North America.
No single supplier accounted for more than 5% of factory parts and raw material
purchases during the twelve months ended January 31, 1999, other than Horan's
Steel Pty Ltd, an Australian steel distributor, Bromic Pty Ltd ("Bromic"), an
Australian gas components importer, Sheet Metal Supplies Pty Ltd ("SMS"), Bright
& Bartholomew Pty Ltd and Amcor Fibre Packaging Australia, (a member of the
Amcor Ltd Group), which accounted for approximately 10%, 15%, 15%, 7% and 6% of
these purchases, respectively. Approximately 79% of the Company's factory parts
and raw material purchases were obtained in such twelve-month period from the
Company's ten largest suppliers. During the nine months ended October 31, 1999,
SMS and Bromic supplied the Company with approximately 23% and 15% 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, 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
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provide sufficient coverage in any particular case. In Australia, the limit of
the Company's product liability coverage is A$100 million, any one claim and in
the aggregate. In the United States, the Company's U.S. operating subsidiary is
covered by a policy having general 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, 1999, there were 49 licensed stores in Australia and ten
franchised stores in the United States, all of which are operated under the
"Barbeques Galore" name by independent licensees or 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
19
<PAGE>
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 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"). 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 Morgan
Guaranty Trust Company as 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 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$50 million or (ii) any direct or indirect ownership interest in Australian
urban 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. However, 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 are owned by foreign persons or
their associates, then the level of foreign ownership of the Company's equity
securities would be approximately 65.2%. The level of foreign ownership could
also increase in the future if 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.
20
<PAGE>
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 became
exercisable on February 1, 1999 and 243,096 Ordinary Shares underlying stock
options granted under the Company's 1997 Share Option Plan, which, barring
acceleration, will become exercisable as to 225,450 in three equal
installments on November 9, 2001, November 9, 2002 and October 9, 2003 and as
to 17,646 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. Such
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 Constitution of the Company contains 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 Constitution, 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 Constitution 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 28 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
Constitution referred to above, could have the effect of making it more
difficult for a third party to acquire control of the Company.
In certain circumstances, non-residents of Australia may be subject to
Australian tax on capital gains made on the disposal of Ordinary Shares or
ADSs. Under the existing law, the rate of Australian tax on capital gains
realised by non-residents of Australia is 36% for companies and, for
individuals, the rate of tax increases from 29% to a maximum of 47%.
Amendments have been introduced into the Australian Federal Parliament which,
if enacted in their current form, will (i) lower the rate of Australian tax
for non-resident companies to 34% for the 2001 income year (for most
taxpayers, the year ended June 30, 2001) and to 30% thereafter; and (ii)
exempt 50% of otherwise taxable capital gains which are derived by non-
resident individuals on the disposal of Ordinary Shares or ADSs that have been
held for 12 months or more.
21
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Market risks relating to the Company's operations result primarily from
changes in interest rates and changes in foreign exchange rates.
Foreign Currency Market Risk
The Company's functional currency is the Australian dollar although it
transacts a portion of its business in foreign currencies and accordingly has
foreign currency exposure through its sales in the United States and purchases
from overseas suppliers in U.S. dollars.
Prior to the current fiscal year, the Company's Australian operations have
hedged a 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.
The notional amount of foreign currency forward contracts used as a means of
offsetting fluctuations in the dollar value of foreign currency accounts
payable is set out below. The counterparties to the contracts are major
financial institutions and the risk of loss to the Company in the event of
non-performance by a counterparty, is not significant.
<TABLE>
<CAPTION>
January 31, October 31, January 31, October 31,
1999 1999 1999 1999
----------- ----------- ----------- -----------
(Weighted average rate) (in A$ thousands)
<S> <C> <C> <C> <C>
Buy U.S. dollars...............
Not later than one year........ 0.6335 0.6459 $604 $3,407
==== ======
</TABLE>
The notional value of foreign currency contracts approximates the fair
value.
Interest Rate Risk
As the Company has long-term debt under the facilities with ANZ and Merrill
Lynch, it is exposed to changes in interest rates.
The ANZ facility comprises bank bills which are generally taken out for
periods varying from approximately 30 to 90 days and rolled over at the end of
their respective terms. Overseas purchases are generally refinanced for
periods varying up to approximately 170 days. As of January 31, 1999 and
October 31, 1999 the weighted average interest rates accruing on the bank
bills utilized under the ANZ Facility were as follows:
<TABLE>
<CAPTION>
January 31, October 31, January 31, October 31,
1999 1999 1999 1999
----------- ----------- ------------ ------------
(in A$ thousands) (interest rate per annum)
<S> <C> <C> <C> <C>
Bank bills................... 15,721 23,820 5.7% 5.9%
Property loans............... 8,450 8,450 6.9% to 9.6% 6.8% to 7.4%
</TABLE>
As of October 31, 1999 the Merrill Lynch facility comprises a revolving line
of credit amounting to US$1.0 million. Indebtedness under the revolving line
of credit accrues interest at the 30-day commercial paper rates plus 2.70% and
is payable monthly.
The Company's total long-term debt matures as follows:
<TABLE>
<CAPTION>
12 months ending October 31, (in A$ thousands)
---------------------------- -----------------
<S> <C>
2000.................................................... $ 40
2001.................................................... 32,270
-------
$32,310
=======
</TABLE>
22
<PAGE>
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
Not applicable.
ITEM 2. Changes in Securities and Use of Proceeds
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, on Form F-1
(the "Resale F-1"), 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. On or about April 22, 1999, the Company removed from registration
979,731 Resale ADSs that remained unsold as of December 15, 1998, the date at
which all shareholders listed on the Resale F-1 became entitled to sell their
Resale ADSs pursuant to Rule 144 promulgated under the Securities Act of 1933,
as amended.
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
On December 3, 1999 the Company announced that its Board of Directors had
authorized the repurchase of up to 450,000 Ordinary Shares of Barbeques Galore
Limited common stock as market conditions became favourable. The repurchase
program will expire on January 31, 2002 or upon reaching an aggregate purchase
quantity of 450,000 Ordinary Shares. To date, the Company has not repurchased
any Ordinary Shares pursuant to the repurchase program. Purchases pursuant to
the program will be made as part of an effective use of the Company's
resources.
23
<PAGE>
ITEM 6. Exhibits and Current Reports on Form 6-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
13.1* Annual Report on Form 20-F (File No. 333-37259) for the fiscal
year ended January 31, 1999.
22.1** Materials distributed to shareholders with respect to the
Company's Annual General Meeting held on June 29, 1999 at 10:00
a.m. (Sydney, Australia time), including (i) Notice of Annual
General Meeting, (ii) form of proxy for holders of ADRs, which
represent ADSs, which in turn, represent Ordinary Shares, (iii)
form of proxy for holders of Ordinary Shares, and (iv) a letter
dated May 13, 1999 from Mr. Sam Linz, Chairman of the Board,
Mr. Robert Gavshon, Executive Deputy Chairman and Mr. Sydney
Selati, President of the Company's U.S. operating subsidiary.
</TABLE>
- --------
* Previously filed with the Commission on May 3, 1999, and incorporated by
reference herein.
** Previously filed with the Commission on June 11, 1999, and incorporated by
reference herein.
(b) There were no current reports on Form 6-K filed during the quarter ended
October 31, 1999.
24
<PAGE>
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 15, 1999
25
