UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended January 31, 2008
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number: 001-14547
Ashworth, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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84-1052000
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(State or Other Jurisdiction of
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(I.R.S. Employer
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Incorporation or Organization)
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Identification No.)
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2765 LOKER AVENUE WEST
CARLSBAD, CA 92010
(Address of Principal Executive Offices)
(760) 438-6610
(Registrants Telephone No. Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller Reporting Company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Title
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Outstanding at February 29, 2008
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$.001 par value Common Stock
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14,713,511
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PART I
FINANCIAL INFORMATION
ASHWORTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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January 31, 2008
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October 31, 2007
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(UNAUDITED)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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4,207,000
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$
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6,104,000
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Accounts receivable trade, net
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25,086,000
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34,545,000
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Accounts receivable other, net
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75,000
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147,000
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Inventories, net
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58,199,000
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50,529,000
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Income tax refund receivable
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1,549,000
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1,117,000
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Other current assets
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6,882,000
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4,981,000
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Deferred income tax asset, net
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61,000
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48,000
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Total current assets
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96,059,000
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97,471,000
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Property, plant and equipment, at cost
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63,806,000
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68,495,000
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Less accumulated depreciation and amortization
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(27,574,000
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)
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(30,980,000
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)
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Total property, plant and equipment, net
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36,232,000
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37,515,000
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Goodwill
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15,250,000
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15,250,000
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Intangible assets, net
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9,784,000
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9,806,000
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Other assets
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390,000
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372,000
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Total assets
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$
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157,715,000
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$
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160,414,000
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Liabilities and Stockholders Equity
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Current liabilities:
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Line of credit payable
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$
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31,205,000
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$
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19,615,000
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Current portion of long-term debt
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869,000
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2,360,000
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Accounts payable
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9,224,000
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12,728,000
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Accrued liabilities:
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Salaries and commissions
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4,081,000
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5,442,000
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Other
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8,352,000
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5,235,000
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Total current liabilities
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53,731,000
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45,380,000
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Long-term debt, net of current portion
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11,104,000
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13,844,000
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Deferred income tax liability
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1,624,000
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1,469,000
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Other long-term liabilities
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84,000
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Stockholders equity:
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Common stock
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15,000
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15,000
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Capital in excess of par value
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50,513,000
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50,325,000
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Retained earnings
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34,794,000
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42,217,000
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Accumulated other comprehensive income
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5,934,000
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7,080,000
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Total stockholders equity
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91,256,000
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99,637,000
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Total liabilities and
stockholders equity
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$
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157,715,000
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$
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160,414,000
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See accompanying notes to condensed consolidated financial statements.
1
ASHWORTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three months ended January 31,
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2008
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2007
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Net revenues
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$
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34,519,000
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$
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38,272,000
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Cost of goods sold
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22,021,000
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22,655,000
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Gross profit
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12,498,000
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15,617,000
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Selling, general and administrative expenses
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19,362,000
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19,117,000
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Loss from operations
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(6,864,000
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)
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(3,500,000
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)
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Other income (expense):
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Interest income
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30,000
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37,000
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Interest expense
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(1,007,000
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(601,000
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Net foreign currency exchange gain
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686,000
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50,000
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Other expense, net
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(76,000
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(66,000
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Total other expense, net
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(367,000
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(580,000
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Loss before income tax
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(7,231,000
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)
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(4,080,000
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Provision (benefit) for income taxes
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192,000
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(1,632,000
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)
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Net loss
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$
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(7,423,000
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$
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(2,448,000
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)
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Net loss per share:
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Basic
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$
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(0.50
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$
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(0.17
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Diluted
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$
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(0.50
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$
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(0.17
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Weighted-average shares outstanding:
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Basic
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14,714,000
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14,520,000
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Diluted
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14,714,000
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14,520,000
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See accompanying notes to condensed consolidated financial statements.
2
ASHWORTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Three months ended January 31,
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2008
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2007
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CASH FLOW FROM OPERATING ACTIVITIES:
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Net cash used in operating activities
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$
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(7,433,000
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)
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$
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(5,320,000
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)
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CASH FLOWS FROM INVESTING ACTIVITIES
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Purchase of property, plant and equipment
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(623,000
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)
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(1,392,000
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)
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Purchase of intangibles
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(91,000
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(43,000
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Net cash used in investing activities
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(714,000
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)
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(1,435,000
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)
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CASH FLOWS FROM FINANCING ACTIVITIES
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Principal payments on capital lease obligations
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(101,000
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)
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(43,000
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)
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Borrowings on line of credit
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19,993,000
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12,250,000
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Payments on line of credit
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(8,403,000
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)
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(8,800,000
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)
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Principal payments on notes payable and long-term debt
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(4,130,000
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)
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(420,000
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)
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Net cash provided by financing activities
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7,359,000
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2,987,000
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Effect of exchange rate changes
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(1,109,000
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)
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226,000
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Net decrease in cash and cash equivalents
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(1,897,000
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)
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(3,542,000
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)
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Cash, beginning of period
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6,104,000
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7,508,000
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Cash, end of period
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$
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4,207,000
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$
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3,966,000
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See accompanying notes to condensed consolidated financial statements.
3
ASHWORTH, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
January 31, 2008
NOTE 1 Basis of Presentation.
In the opinion of management, the accompanying condensed consolidated balance sheets and
related interim condensed consolidated statements of operations and cash flows include all
adjustments (consisting only of normal recurring items) necessary for their fair presentation.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and
the disclosure of contingent assets and liabilities. Actual results could differ from those
estimates. Interim results are not necessarily indicative of results to be expected for the
full year.
Certain information in footnote disclosures normally included in financial statements has been
condensed or omitted in accordance with the rules and regulations of the Securities and
Exchange Commission (the SEC). The information included in this Form 10-Q should be read in
conjunction with Managements Discussion and Analysis of Financial Condition and Results of
Operations and consolidated financial statements and notes thereto included in the annual
report on Form 10-K for the year ended October 31, 2007, filed with the SEC on January 14, 2008.
Shipping and Handling Revenue
The Company includes payments from its customers for shipping and handling in its net revenues
line item in accordance with Emerging Issues Task Force (EITF) 00-10,
Accounting of Shipping
and Handling Fees and Costs
.
Cost of Goods Sold
The Company includes F.O.B. purchase price, inbound freight charges, duty, buying commissions,
embroidery conversion and overhead in its cost of goods sold line item. Overhead costs include
purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs
and other costs associated with the Companys distribution. The Company does not exclude any
of these costs from cost of goods sold.
Shipping and Handling Expenses
Shipping expenses, which consist primarily of payments made to freight companies, are reported
in selling, general and administrative expenses. Shipping expenses for the quarters ended
January 31, 2008 and 2007 were $413,000 and $472,000, respectively.
Earnings (Loss) Per Share
Basic earnings (loss) per common share are computed by dividing income available to common
stockholders by the weighted-average number of shares of common stock outstanding during the
period. Diluted earnings (loss) per common share is computed by dividing income available to
common stockholders by the weighted-average number of shares of common stock outstanding during
the period plus the number of additional shares of common stock that would have been
outstanding if the dilutive potential shares of common stock had been issued. The dilutive
effect of outstanding options is reflected in diluted earnings per share by application of the
treasury stock method. Under the treasury stock method, an increase in the fair market value of
the Companys common stock can result in a greater dilutive effect from outstanding options.
For the three months ended January 31, 2008 and 2007, shares subject to outstanding options
totaled 1,067,000 and 1,021,000, respectively.
4
The following table sets forth the computation of basic and diluted loss per share based on the
requirements of SFAS No. 128,
Earnings Per Share
:
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Three months ended January 31,
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2008
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2007
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Numerator:
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Net loss
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$
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(7,423,000
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)
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$
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(2,448,000
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)
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Denominator:
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Weighted-average shares outstanding
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14,714,000
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14,520,000
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Effect of dilutive options
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Denominator for dilutive earnings per share
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14,714,000
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|
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14,520,000
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Basic loss per share
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$
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(0.50
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)
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$
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(0.17
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)
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Diluted loss per share
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$
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(0.50
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)
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$
|
(0.17
|
)
|
For the quarters ended January 31, 2008 and 2007, the diluted weighted-average shares
outstanding computation excludes 957,000 and 557,000 options, respectively, whose impact would
have an anti-dilutive effect. For the quarters ended January 31, 2008 and 2007, the effect of
stock options was anti-dilutive because of the Companys loss position.
NOTE 2 Inventories.
Inventories consisted of the following at January 31, 2008 and October 31, 2007:
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January 31,
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October 31,
|
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2008
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2007
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Raw materials
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|
$
|
723,000
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|
|
$
|
135,000
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Finished goods
|
|
|
57,476,000
|
|
|
|
50,394,000
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
58,199,000
|
|
|
$
|
50,529,000
|
|
|
|
|
|
|
|
|
NOTE 3 Property, Plant and Equipment.
During the quarter ended January 31, 2008, the Company disposed of $4,879,000 of fully
depreciated fixed assets that were no longer in service: $3,377,000 for computer equipment,
$1,160,000 for embroidery tapes, $274,000 for furniture and fixtures, $48,000 for leasehold
improvements and $20,000 for machinery and equipment. During the quarter ended January 31, 2007,
the Company disposed of $1,067,000 of furniture and fixtures that were no longer in service with
a disposal loss of $80,000.
5
NOTE 4 Goodwill and Other Intangible Assets.
The Company accounts for goodwill and intangible assets in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets.
Under SFAS No. 142, goodwill and certain intangible
assets are not amortized but are subject to an annual impairment test. At each of January 31,
2008 and October 31, 2007, goodwill totaled $15,250,000. The following sets forth the
intangible assets, excluding goodwill, by major category:
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|
|
|
|
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January 31, 2008
|
|
|
October 31, 2007
|
|
|
|
Gross Carrying
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|
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Accumulated
|
|
|
Net Book
|
|
|
Gross Carrying
|
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Accumulated
|
|
|
Net Book
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Amount
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|
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Amortization
|
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Value
|
|
|
Amount
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|
|
Amortization
|
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|
Value
|
|
Indefinite life:
|
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|
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|
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Tradenames
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|
$
|
8,700,000
|
|
|
$
|
|
|
|
$
|
8,700,000
|
|
|
$
|
8,700,000
|
|
|
$
|
|
|
|
$
|
8,700,000
|
|
Finite life:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists
|
|
|
1,530,000
|
|
|
|
(819,000
|
)
|
|
|
711,000
|
|
|
|
1,530,000
|
|
|
|
(767,000
|
)
|
|
|
763,000
|
|
Non-competes
|
|
|
1,372,000
|
|
|
|
(1,280,000
|
)
|
|
|
92,000
|
|
|
|
1,372,000
|
|
|
|
(1,238,000
|
)
|
|
|
134,000
|
|
Customer sales backlog
|
|
|
190,000
|
|
|
|
(190,000
|
)
|
|
|
|
|
|
|
190,000
|
|
|
|
(190,000
|
)
|
|
|
|
|
Trademarks
|
|
|
1,674,000
|
|
|
|
(1,393,000
|
)
|
|
|
281,000
|
|
|
|
1,582,000
|
|
|
|
(1,373,000
|
)
|
|
|
209,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
13,466,000
|
|
|
$
|
(3,682,000
|
)
|
|
$
|
9,784,000
|
|
|
$
|
13,374,000
|
|
|
$
|
(3,568,000
|
)
|
|
$
|
9,806,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets with definite lives are amortized using the straight-line method over periods
ranging from one to seven years. During the three months ended January 31, 2008 and 2007,
aggregate amortization expense was approximately $114,000 and $111,000, respectively.
Amortization expense related to intangible assets at January 31, 2008 in each of the next five
fiscal years and beyond is expected to be as follows:
|
|
|
|
|
Remainder 2008
|
|
$
|
297,000
|
|
2009
|
|
|
305,000
|
|
2010
|
|
|
272,000
|
|
2011
|
|
|
185,000
|
|
2012
|
|
|
25,000
|
|
2013
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,084,000
|
|
|
|
|
|
NOTE 5 Business Loan Agreement.
On January 11, 2008, the Company and its material domestic subsidiaries as co-borrowers entered
into and consummated a new senior revolving credit facility (the Credit Facility) of up to
$55.0 million (subject to borrowing base availability), including a $15.0 million sub-limit for
letters of credit (letters of credit that will be 100% reserved against borrowing availability)
with Bank of America, N.A., (B of A). Proceeds of $30.9 million under the Credit Facility were
used by the Company on January 11, 2008 to payoff its existing term loan, revolving credit
facility, to cash collateralize all outstanding letters of credit with Union Bank of California,
N.A., (Union Bank) and to pay related fees and expenses. The Credit Facility is anticipated to
be used in the future by the Company to issue standby or commercial letters of credit and to
finance ongoing working capital needs. The Credit Facility expires on January 11, 2012 and is
collateralized by substantially all of the assets of the Company and its subsidiaries party
thereto (excluding real estate and certain other assets).
6
Loans under the Credit Facility bear interest at a rate based either on (i) B of As referenced
base rate or (ii) LIBOR (as defined in the Credit Facility), subject in each case to performance
pricing adjustments based on the Companys fixed charge coverage ratio that range between LIBOR
plus 1.25% and LIBOR plus 1.75%. Interest will be set at LIBOR plus 1.25% for the first six
months of the agreement and adjusting thereafter. The initial interest rate applicable to
borrowings under the Credit Facility is 7.25%. The Company also is required to pay customary fees
under the Credit Facility. At January 31, 2008, the six month LIBOR was 4.6%. All interest and
per annum fees are calculated on the basis of actual number of days elapsed in a year of 360
days.
The borrowing base under the Credit Facility at any time equals the lesser of (i) $55.0 million,
minus the amount of any outstanding letters of credit other than those that have not been cash
collateralized and those that constitute charges owing to B of A, and (ii) the sum of (a)
eighty-five percent (85%) of the value of eligible accounts receivable, provided, however that
such percentage shall be reduced by 1.0% for each whole percentage point that the dilution
percent exceeds 5.0%; plus (b) the least of (x) $45.0 million, (y) between 65% and 70% (seasonal
advance rate) of the Companys eligible inventory and eligible in-transit inventory, plus a
percentage of slow moving inventory (set at 65% for the first year, and dropping to 0% by the
fourth year) and (z) 85% of the appraised net orderly liquidation value of eligible inventory
(including eligible in-transit inventory and eligible slow moving inventory); minus (c) certain
reserves; minus (d) outstanding obligations under the loan facility anticipated to be provided by
B of A to Ashworth U.K., Ltd., as described below (the UK Loan Facility) The borrowing base as
of January 31, 2008 was approximately $42.0 million. Unused availability, as of January 31,
2008, was approximately $5.7 million.
The Credit Facility contains restrictive covenants limiting the ability of the Company and its
subsidiaries to take certain actions, including covenants limiting the Companys ability to incur
or guarantee additional debt, incur liens, pay dividends, repurchase stock or make other
distributions, sell assets, make loans and investments, prepay certain indebtedness, enter into
consolidations or mergers, and enter into transactions with affiliates. The Credit Facility
limits the ability of the Company to agree to certain change of control transactions, because a
change of control (as defined in the Credit Facility) is an event of default. The Credit
Facility also contains customary representations and warranties, affirmative covenants, events of
default, indemnities and other terms and conditions.
The foregoing summary of the Credit Facility is qualified by reference to the Loan and Security
Agreement dated as of January 11, 2008 attached as Exhibit 10(aq) to the Companys Form 10-K
filed with the SEC on January 14, 2008. Please see the Loan and Security Agreement for a more
detailed description of the terms of the Credit Facility.
On February 29, 2008, the Companys U.K. subsidiary entered into and consummated a revolving
credit facility (the UK Loan Facility) of up to $10.0 million (subject to borrowing base
availability), including a $2.0 million sub-limit for letters of credit with B of A. The
applicable interest rate and fees under the UK Loan Facility are comparable to the applicable
interest rate and fees under the Credit Facility. As noted above, loans and letters of credit
under the UK Loan Facility will reduce the borrowing base under the Credit Facility. The Company
believes that the UK Loan Facility will enhance the Companys ability to meet its current and
long-term operating needs in the UK. The borrowing base as of January 31, 2008 was approximately
$9.0 million. Unused availability, as of January 31, 2008, was approximately $8.0 million.
7
NOTE 6 Common Stock and Capital in Excess of Par Value.
The Company did not issue any shares of common stock on exercise of options during the three
months ended January 31, 2008 and 2007. Common stock and capital in excess of par value
increased by $188,000 and $178,000 in the three months ended January 31, 2008 and 2007,
respectively, due entirely to SFAS No. 123R compensation expense.
NOTE 7 Stock-Based Compensation.
SFAS No. 123R requires the use of a valuation model to calculate the fair value of stock-based
awards. The Company has elected to use the Black-Scholes-Merton option-pricing model, which
incorporates various assumptions including volatility, expected life, interest rates and
dividend yields. The expected volatility is based on the historic volatility of the Companys
common stock over the most recent period commensurate with the estimated expected life of the
Companys stock options, adjusted for the impact of unusual fluctuations not reasonably
expected to recur. The expected life of an award is based on historical experience and on the
terms and conditions of the stock awards granted to employees and directors.
The assumptions used for the three-month periods ended January 31, 2008 and 2007 and the
resulting estimates of weighted-average fair value of options granted during those periods are
as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended January 31,
|
|
|
2008
|
|
2007
|
Expected life (years)
|
|
|
3.51
|
|
|
|
4.96
|
|
Risk-free interest rate
|
|
|
2.74
|
%
|
|
|
4.62
|
%
|
Volatility
|
|
|
50.6
|
%
|
|
|
37.5
|
%
|
Dividend yields
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of options
during the period
|
|
$
|
1.00
|
|
|
$
|
2.95
|
|
SFAS No. 123R requires all companies to measure and recognize compensation expense at an amount
equal to the fair value of share-based payments granted under compensation arrangements. The fair
value for the employee stock options granted during the respective periods were estimated at the
date of grant using the Black-Scholes option-pricing model and are amortized on an accrual method
basis as compensation expense over the vesting periods of the options. Stock-based compensation
expense during the three months ended January 31, 2008 and 2007 was $188,000 and $178,000,
respectively.
NOTE 8 Comprehensive Loss.
The Company includes the cumulative foreign currency translation adjustment as a component of
the comprehensive loss in addition to net loss for the period. The following table sets forth
the components of comprehensive loss for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Three months ended January 31,
|
|
|
|
2008
|
|
|
2007
|
|
Net loss
|
|
$
|
(7,423,000
|
)
|
|
$
|
(2,448,000
|
)
|
Effects of foreign currency translation
|
|
|
(1,146,000
|
)
|
|
|
268,000
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
$
|
(8,569,000
|
)
|
|
$
|
(2,180,000
|
)
|
|
|
|
|
|
|
|
8
NOTE 9 Legal Proceedings.
The Company has in place a License Agreement, as amended to date (the License Agreement), with
Callaway Golf Company (Callaway). Callaway has recently objected to the Companys announced
plans to launch a new golf-related technical outerwear line in connection with the Companys
acquisition of the Sun Ice® and Sunice® trademarks in January 2008, claiming that this activity is
a material breach of the License Agreement which justifies one or more remedies, including the
right to terminate the License Agreement at Callaways election. The Company strongly denies that
its activities with the Sun Ice line breach the License Agreement and has responded by pointing to
specific language in the License Agreement that addresses the topic. The Company is in discussions
with Callaway to resolve this and any other contractual issues, and is optimistic that the matter
will be amicably resolved. If no agreement is reached, however, the dispute will likely be
referred to binding arbitration where, among other matters, the Company may seek damages or other
relief against Callaway for any attempted wrongful termination or other wrongful interference with
the Companys existing contract rights.
In February 2007, the Law Offices of Herbert Hafif filed a class action in the United States
District Court for the Central District of California alleging that the Company willfully violated
the Fair Credit Reporting Act by printing on credit or debit card receipts more than the last five
digits of the credit or debit card number and/or the expiration date. The plaintiff sought
statutory and punitive damages, attorneys fees and injunctive relief of the purported class. The
suit against Ashworth was one of hundreds of suits filed against different retailers nationwide.
The proposed class representative for the punitive class filed his motion to certify this matter as
a class action. The Company filed an opposition to the motion and the court entered an order
denying the class certification. In November 2007, the parties entered into a settlement on the
record whereby Ashworth would pay the plaintiff $1,000 and the plaintiff would dismiss his
individual claim without prejudice. Ashworth admitted no liability and continues to dispute any
allegation that it willfully violated the Fair Credit Reporting Act. The parties subsequently
entered into a written stipulation to that effect and the court dismissed the complaint.
The Company is party to other claims and litigation proceedings arising in the normal course of
business. Although the legal responsibility and financial impact with respect to such other claims
and litigation cannot currently be ascertained, the Company does not believe that these other
matters will result in payment by the Company of monetary damages, net of any applicable insurance
proceeds, that, in the aggregate, would be material in relation to the consolidated financial
position or results of operations of the Company.
NOTE 10 Income Taxes.
During the financial close for the quarter ended January 31, 2008, the Company performed its
quarterly assessment of its net deferred tax assets in accordance with Statement of Financial
Accounting Standard No. 109,
Accounting for Income Taxes
, (SFAS No. 109). SFAS No. 109
establishes financial accounting and reporting standards for the effect of income taxes. The
objectives of accounting for income taxes are to recognize the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in an entitys financial statements or tax
returns. Judgment is required in assessing the future tax consequences of events that have been
recognized in the Companys financial statements or tax returns.
9
SFAS No. 109 limits the ability to use future taxable income to support the realization of deferred
tax assets when a company has experienced recent losses even if the future taxable income is
supported by detailed forecasts and projections. After considering the Companys three-year average
taxable loss, the Company concluded that it can not rely on future taxable income as the basis for
realization of its net deferred tax asset.
Accordingly, the Company recorded tax charges in the first quarter of 2008 of $3.0 million to
increase a valuation allowance against corresponding increases in deferred tax assets related to
net operating losses of $3.0 million. These tax charges are included in the provision for income
taxes in the accompanying condensed consolidated statements of operations. The Company expects to
continue to record the valuation allowance against its deferred tax assets until positive evidence
is sufficient to justify realization.
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
An Interpretation of FASB Statement No. 109
(FIN No. 48). FIN No. 48 clarifies the accounting for
uncertainty in income taxes recognized in an entitys financial statements in accordance with FASB
Statement No. 109,
Accounting for Income Taxes
, and prescribes a recognition threshold and
measurement attributes for financial statement disclosure of tax positions taken or expected to be
taken on a tax return. Under FIN No. 48, the impact of an uncertain income tax position must be
recognized at the largest amount that is more likely than not to be sustained upon audit by the
relevant taxing authority. An uncertain income tax position will not be recognized if it has less
than a 50% likelihood of being sustained. Additionally, FIN No. 48 provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition.
The Company adopted the provisions of FIN No. 48 on November 1, 2007. The total liability for
unrecognized tax benefits as of the date of adoption was $227,000. There was no change in the
unrecognized tax benefits as a result of the implementation of FIN No. 48, and therefore, no amount
was recorded as a cumulative effect adjustment to equity.
As of January 31, 2008, the liability for income tax associated with uncertain tax positions was
$36,000. The total $36,000 of unrecognized tax benefits, if recognized, would affect the effective
tax rate.
The Company believes that it is reasonably possible that during the next 12 months, the amount of
unrecognized tax benefits may be reduced by up to $36,000. The reduction in unrecognized tax
benefits would relate to the settlement of pending state voluntary disclosures.
The Company recognizes interest and penalties related to unrecognized tax benefits in its provision
for income taxes. As of January 31, 2008, the Company recorded $7,900 of interest.
The Company is subject to taxation in the United States, various state and foreign tax
jurisdictions. Generally, the Companys tax returns for fiscal 2005 and forward are subject to
examination by the U.S. federal tax authorities and fiscal 2004 and forward are subject to
examination by state tax authorities. The Companys tax returns for fiscal 2006 and forward are
subject to examination by the U.K. tax authorities.
10
NOTE 11 Segment Information.
The Company defines its operating segments as components of an enterprise for which separate
financial information is available and regularly reviewed by the Companys senior management.
The Company has the following four reportable segments: Domestic; Gekko Brands, LLC; Ashworth,
U.K., Ltd.; and Other International. Management evaluates segment performance based primarily on
revenues and income from operations. Interest income and expense, unusual and infrequent items
and income tax expense are evaluated on a consolidated basis and are not allocated to the
Companys business segments. Segment information is summarized below for the periods or dates
presented:
|
|
|
|
|
|
|
|
|
|
|
Three months ended January 31,
|
|
|
|
2008
|
|
|
2007
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
19,231,000
|
|
|
$
|
21,579,000
|
|
Gekko Brands, LLC
|
|
|
10,908,000
|
|
|
|
10,428,000
|
|
Ashworth, U.K., Ltd.
|
|
|
2,641,000
|
|
|
|
4,813,000
|
|
Other International
|
|
|
1,739,000
|
|
|
|
1,452,000
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,519,000
|
|
|
$
|
38,272,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(6,724,000
|
)
|
|
$
|
(4,467,000
|
)
|
Gekko Brands, LLC
|
|
|
185,000
|
|
|
|
653,000
|
|
Ashworth, U.K., Ltd.
|
|
|
(571,000
|
)
|
|
|
80,000
|
|
Other International
|
|
|
246,000
|
|
|
|
234,000
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(6,864,000
|
)
|
|
$
|
(3,500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
518,000
|
|
|
$
|
1,266,000
|
|
Gekko Brands, LLC
|
|
|
96,000
|
|
|
|
102,000
|
|
Ashworth, U.K., Ltd.
|
|
|
9,000
|
|
|
|
24,000
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
623,000
|
|
|
$
|
1,392,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense:
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
1,314,000
|
|
|
$
|
1,267,000
|
|
Gekko Brands, LLC
|
|
|
134,000
|
|
|
|
101,000
|
|
Ashworth, U.K., Ltd.
|
|
|
58,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,506,000
|
|
|
$
|
1,418,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
October 31,
|
|
|
|
2008
|
|
|
2007
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
77,193,000
|
|
|
$
|
80,715,000
|
|
Gekko Brands, LLC
|
|
|
45,761,000
|
|
|
|
45,217,000
|
|
Ashworth, U.K., Ltd.
|
|
|
25,753,000
|
|
|
|
25,733,000
|
|
Other International
|
|
|
9,008,000
|
|
|
|
8,749,000
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
157,715,000
|
|
|
$
|
160,414,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets, at cost:
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
62,225,000
|
|
|
$
|
65,533,000
|
|
Gekko Brands, LLC
|
|
|
28,495,000
|
|
|
|
29,653,000
|
|
Ashworth, U.K., Ltd.
|
|
|
2,192,000
|
|
|
|
2,306,000
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
92,912,000
|
|
|
$
|
97,492,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
Gekko Brands, LLC
|
|
$
|
15,250,000
|
|
|
$
|
15,250,000
|
|
|
|
|
|
|
|
|
11
NOTE 12 Recent Accounting Pronouncements.
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157,
Fair
Value Measurements
(SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157
clarifies the definition of exchange price as the price between market participants in an orderly
transaction to sell an asset or transfer a liability in the market in which the reporting entity
would transact for the asset or liability, which market is the principal or most advantageous
market for the asset or liability. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The
Company is currently evaluating the impact, if any, this new standard will have on its consolidated
financial statements.
On February 15, 2007, the FASB issued SFAS No. 159,
Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115
(SFAS No. 159). The fair
value option established by SFAS No. 159 permits all entities to choose to measure eligible items
at fair value at specified elections dates. A business entity will report unrealized gains and
losses on items for which the fair value option has been elected in earnings at each subsequent
reporting date. SFAS No. 159 is effective as of the beginning of an entitys first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the beginning of the previous
fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year
and also elects to apply the provisions of SFAS No. 157
, Fair Value Measurements
. The Company is
currently evaluating the impact, if any, this new standard will have on its consolidated financial
statements.
In December 2007, the FASB issued FAS No. 141R,
Business Combinations
(FAS No. 141R), which
replaces FAS No. 141. FAS No. 141R establishes principles and requirements for how an acquirer in a
business combination recognizes and measures in its financial statements the identifiable assets
acquired, liabilities assumed, and any noncontrolling interests in the acquiree, as well as the
goodwill acquired. Significant changes from current practice resulting from FAS No.141R include the
expansion of the definitions of a business and a business combination; for all business
combinations (whether partial, full or step acquisitions), the acquirer will record 100% of all
assets and liabilities of the acquired business, including goodwill, generally at their fair
values; contingent consideration will be recognized at its fair value on the acquisition date and,
for certain arrangements, changes in fair value will be recognized in earnings until settlement;
and acquisition-related transaction and restructuring costs will be expensed rather than treated as
part of the cost of the acquisition. FAS No. 141R also establishes disclosure requirements to
enable users to evaluate the nature and financial effects of the business combination. FAS No. 141R
is effective for the Company as of the beginning of Fiscal 2010 and will be applied prospectively
to business combinations on or after November 1, 2009.
From time to time, new accounting pronouncements are issued by the FASB that are adopted by the
Company as of the specified effective date. Unless otherwise discussed, management believes
that the impact of recently issued standards, which are not yet effective, will not have a
material impact on the Companys consolidated financial statements upon adoption.
12
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company operates in an industry that is highly competitive, and it must accurately
anticipate fashion trends and consumer demand for its products. There are many factors that could
cause actual results to differ materially from the projected results contained in certain
forward-looking statements in this report. See Cautionary Statements and Risk Factors below.
Because the Companys business is seasonal, the current balance sheet balances at January 31,
2008 may more meaningfully be compared to the balance sheet balances at January 31, 2007, rather
than to the balance sheet balances at October 31, 2007.
Cautionary Statements and Risk Factors
This report contains certain forward-looking statements related to the Companys market
position, finances, operating results, marketing and business plans and strategies within the
meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements may contain the words
believes, anticipates, expects, predicts, estimates, projects, will be, will
continue, will likely result, or other similar words and phrases. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of the date hereof.
The Company undertakes no obligation to update any forward-looking statements, whether as a result
of new information, changed circumstances or unanticipated events unless required by law. These
statements involve risks and uncertainties that could cause actual results to differ materially
from those projected. These risks include the uncertainties associated with implementing a
successful transition in executive leadership, successful resolution of the current dispute with
Callaway Golf, the impact of borrowing base limitations in the Companys new credit facility, the
evaluation of strategic alternatives that may be presented, timely development and acceptance of
new products, as well as strategic alliances, the integration of the Companys acquisition of Gekko
Brands, LLC, the impact of competitive products and pricing, the success of the Sun Ice
®
and
Callaway Golf apparel product line, the preliminary nature of bookings information, the ongoing
risk of excess or obsolete inventory, the potential inadequacy of booked reserves, the successful
operation of the distribution facility in Oceanside, CA, the successful implementation of the
Companys ERP system, and other risks described in Ashworth, Inc.s SEC reports, including the
annual report on Form 10-K for the year ended October 31, 2007 and amendments to any of the
foregoing reports, including the Form 10-K/A for the year ended October 31, 2007.
Critical Accounting Policies and Estimates
The SECs Financial Reporting Release No. 60,
Cautionary Advice Regarding Disclosure About
Critical Accounting Policies
(FRR 60), encourages companies to provide additional disclosure and
commentary on those accounting policies considered to be critical. The Company has identified the
following critical accounting policies that affect its significant judgments and estimates used in
the preparation of its consolidated financial statements.
Revenue Recognition.
Based on its terms of F.O.B. shipping point, where risk of loss and
title transfer to the buyer at the time of shipment, the Company recognizes revenue at the time
products are shipped or, for Company stores, at the point of sale. The Company records sales in
accordance with SEC Staff Accounting Bulletin No. 104,
Revenue Recognition
. Under these
guidelines, revenue is recognized when all of the following exist: persuasive evidence of a
sale arrangement exists; delivery of the product has occurred; the price is fixed or determinable;
and payment is reasonably assured. The Company also includes payments from its customers for
shipping and handling in its net revenues line item in accordance with Emerging Issues Task Force
(EITF) 00-10,
Accounting of Shipping and Handling Fees and Costs
. Provisions are made for
estimated sales returns and other allowances.
13
Sales Returns and Other Allowances.
Management must make estimates of potential future
product returns related to current period product revenues. The Company also makes payments and/or
grants credits to its customers as markdown (buy-down) allowances and must make estimates of such
potential future allowances. Management analyzes historical returns and allowances, current
economic trends, changes in customer demand, and sell-through of the Companys products when
evaluating the adequacy of the provisions for sales returns and other allowances. Significant
management judgment and estimates must be made and used in connection with establishing the
provisions for sales returns and other allowances in any accounting period. These markdown
allowances are reported as a reduction of the Companys net revenues. Material differences may
result in the amount and timing of the Companys revenues for any period if management makes
different judgments or utilizes different estimates. The reserves for sales returns and other
allowances amounted to $2.5 million at January 31, 2008 compared to $3.9 million at
October 31, 2007 and $3.6 million at January 31, 2007.
Allowance for Doubtful Accounts.
Management must make estimates of the collectability of
accounts receivable. The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments, which results in bad debt
expense. Management determines the adequacy of this allowance by analyzing accounts receivable
aging, current economic conditions and historical bad debts and continually evaluating individual
customer receivables considering the customers financial condition. If the financial condition of
any significant customers were to deteriorate, resulting in the impairment of their ability to make
payments, material additional allowances for doubtful accounts may be required. The Company
maintains credit insurance to cover many of its major accounts. The Companys trade accounts
receivable balance was $25.1 million, net of allowances for doubtful accounts of $1.2 million, at
January 31, 2008, as compared to the balance of $34.6 million, net of allowances for doubtful
accounts of $1.0 million, at October 31, 2007. At January 31, 2007, the trade accounts receivable
balance was $27.6 million, net of allowances for doubtful accounts of $1.2 million.
Inventory.
The Company writes down its inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the estimated net realizable
value based on assumptions about age of the inventory, future demand and market conditions. This
process provides for a new basis for the inventory until it is sold. If actual market conditions
are less favorable than those projected by management, additional inventory write-downs may be
required. The Companys inventory balance was $58.2 million, net of inventory write-downs of $3.7
million, at January 31, 2008, as compared to an inventory balance of $50.5 million, net of
inventory write-downs of $4.6 million, at October 31, 2007. At January 31, 2007, the inventory
balance was $56.4 million, net of inventory write-downs of $3.7 million.
Deferred Taxes and Uncertain Tax Positions.
SFAS No. 109,
Accounting for Income Taxes
,
establishes financial accounting and reporting standards for the effect of income taxes. The
objectives of accounting for income taxes are to recognize the amount of taxes payable or
refundable for the
current year and deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in an entitys financial statements or tax returns. Judgment is required
in assessing the future tax consequences of events that have been recognized in the Companys
financial statements or tax returns. Variations in the actual outcome of these future tax
consequences could materially impact the Companys financial position, results of operations or
cash flows.
14
Significant judgment is required in determining the Companys consolidated income tax
provision and evaluating its U.S. and foreign tax positions. In July 2006, the FASB issued
Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN No. 48), which became
effective for the Company beginning November 1, 2007. FIN No. 48 addressed the determination of
how tax benefits claimed on a tax return should be recorded in the financial statements. Under FIN
No. 48, the Company must recognize the tax benefit from an uncertain tax position only if it is
more likely than not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits recognized in the
financial statements from such a position are measured based on the largest benefit that has a
greater than 50% likelihood of being realized upon ultimate settlement. The total liability for
unrecognized tax benefits as of the date of adoption was $227,000. There was no change in the
unrecognized tax benefits as a result of the implementation of FIN No. 48. If the Company is
unable to uphold its position upon ultimate settlement, it may impact its results of operations,
financial position or cash flows.
Stock-Based Compensation.
The Company accounts for stock-based compensation in accordance
with SFAS No. 123R,
Share-Based Payment
. Under the fair value recognition provisions of this
statement, stock-based compensation cost is measured at the grant date based on the value of the
award and is recognized as expense over the vesting period. Determining the fair value of
share-based awards at the grant date requires significant judgment, including estimating the amount
of share-based awards that is expected to be forfeited. If actual results differ significantly from
these estimates, stock-based compensation expense and the Companys results of operations could be
materially impacted.
Off-Balance Sheet Arrangements
At January 31, 2008, the Company did not have any relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as structured finance or special
purpose entities, which would constitute off-balance sheet arrangements as defined in Item 303 of
SEC Regulation S-K. In addition, the Company does not engage in trading activities involving
non-exchange traded contracts which rely on estimation techniques to calculate fair value. As
such, the Company is not exposed to any financing, liquidity, market or credit risk that could
arise if the Company had engaged in such relationships.
Overview
The Company earns revenues and generates cash through the design, marketing and distribution
of mens and womens apparel, headwear and accessories under the Ashworth®, Callaway Golf apparel,
Kudzu®, The Game® and Sun Ice® brands. The Companys products are sold in the United States,
Europe, Canada and various other international markets to selected golf pro shops, resorts,
off-course specialty shops, upscale department stores, Company-owned retail outlet
stores, colleges and universities, entertainment complexes, sporting goods dealers that serve
the high school and college markets, NASCAR/racing markets, outdoor sports distribution channels,
and to top specialty-advertising firms for the corporate market. Generally, the Companys
production is performed in Asian countries by third parties. The Company embroiders a significant
portion of these garments with custom golf course, tournament, collegiate and corporate logos for
its customers.
While the Company has historically held a leading market share of apparel within its core
market and channel of distribution, on-course golf retailers, this market share has eroded in the
recent past, giving way to a few well-capitalized shoe and sporting goods competitors. During the
first quarter ending January 31, 2008, net revenues decreased 9.8% as compared to the same period
of fiscal 2007. Gross profit decreased by 20.0% with gross margins declining from 40.8% of net
revenue in the first quarter ended January 31, 2007 to 36.2% in the first quarter ended January 31,
2008. Management is evaluating and implementing initiatives that it believes will strengthen its
overall market share and improve operating results. Specific areas of focus are product design and
quality, channels of distribution, sales force and supply chain management, and operating costs.
15
In January 2008, the Company announced the acquisition of the Sun Ice
®
and Sunice
®
trade marks
from Fletcher Leisure Group Inc. The Company expects to launch a new golf-related technical
outerwear line during 2008 under this brand in the United States, the United Kingdom, Ireland and
Europe.
During the financial close for the quarter ended January 31, 2008, the Company performed its
quarterly assessment of its net deferred tax assets in accordance with Statement of Financial
Accounting Standard No. 109,
Accounting for Income Taxes (SFAS No. 109
). SFAS No.109 limits the
ability to use future taxable income to support the realization of deferred tax assets when a
company has experienced recent losses even if the future taxable income is supported by detailed
forecasts and projections. After considering the Companys three-year average taxable loss, the
Company concluded that it could no longer rely on future taxable income as the basis for
realization of its net deferred tax asset.
Accordingly, the Company recorded tax charges in the first quarter of fiscal 2008 of $3.0
million to increase a valuation allowance against corresponding increases in deferred tax assets
related to net operating losses of $3.0 million. These tax charges are included in the provision
for income taxes in the accompanying consolidated condensed statement of operations. The Company
expects to continue to record the valuation allowance against its deferred tax asset until other
positive evidence is sufficient to justify realization.
16
Results of Operations
First quarter 2008 compared to first quarter 2007
The following table discloses certain financial information for the periods presented, expressed in
terms of dollars, dollar change, percentage change and as a percent of total revenue (all dollar
amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
January 31,
|
|
|
Change
|
|
|
Revenue
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
2008
|
|
|
2007
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail distribution
|
|
$
|
3,124
|
|
|
$
|
4,118
|
|
|
$
|
(994
|
)
|
|
|
(24.1
|
)%
|
|
|
9.0
|
%
|
|
|
10.8
|
%
|
Domestic green grass
|
|
|
9,530
|
|
|
|
9,028
|
|
|
|
502
|
|
|
|
5.6
|
%
|
|
|
27.6
|
%
|
|
|
23.6
|
%
|
Domestic corporate
|
|
|
4,061
|
|
|
|
5,701
|
|
|
|
(1,640
|
)
|
|
|
(28.8
|
)%
|
|
|
11.8
|
%
|
|
|
14.9
|
%
|
Domestic outlet store
|
|
|
2,516
|
|
|
|
2,732
|
|
|
|
(216
|
)
|
|
|
(7.9
|
)%
|
|
|
7.3
|
%
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total domestic
|
|
|
19,231
|
|
|
|
21,579
|
|
|
|
(2,348
|
)
|
|
|
(10.9
|
)%
|
|
|
55.7
|
%
|
|
|
56.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gekko
|
|
|
10,908
|
|
|
|
10,428
|
|
|
|
480
|
|
|
|
4.6
|
%
|
|
|
31.6
|
%
|
|
|
27.2
|
%
|
Ashworth U.K.
|
|
|
2,641
|
|
|
|
4,813
|
|
|
|
(2,172
|
)
|
|
|
(45.1
|
)%
|
|
|
7.7
|
%
|
|
|
12.6
|
%
|
Other international
|
|
|
1,739
|
|
|
|
1,452
|
|
|
|
287
|
|
|
|
19.8
|
%
|
|
|
5.0
|
%
|
|
|
3.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
34,519
|
|
|
|
38,272
|
|
|
|
(3,753
|
)
|
|
|
(9.8
|
)%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
22,021
|
|
|
|
22,655
|
|
|
|
(634
|
)
|
|
|
(2.8
|
)%
|
|
|
63.8
|
%
|
|
|
59.2
|
%
|
Selling, general and administrative
expenses
|
|
|
19,362
|
|
|
|
19,117
|
|
|
|
245
|
|
|
|
1.3
|
%
|
|
|
56.1
|
%
|
|
|
50.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
41,383
|
|
|
|
41,772
|
|
|
|
(389
|
)
|
|
|
(0.9
|
)%
|
|
|
119.9
|
%
|
|
|
109.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(6,864
|
)
|
|
|
(3,500
|
)
|
|
|
(3,364
|
)
|
|
|
96.1
|
%
|
|
|
(19.9
|
)%
|
|
|
(9.2
|
)%
|
Interest expense, net
|
|
|
(977
|
)
|
|
|
(564
|
)
|
|
|
(413
|
)
|
|
|
73.2
|
%
|
|
|
(2.8
|
)%
|
|
|
(1.5
|
)%
|
Other income (expense), net
|
|
|
610
|
|
|
|
(16
|
)
|
|
|
626
|
|
|
|
(3,912.5
|
)%
|
|
|
1.8
|
%
|
|
|
(0.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(7,231
|
)
|
|
|
(4,080
|
)
|
|
|
(3,151
|
)
|
|
|
77.2
|
%
|
|
|
(20.9
|
)%
|
|
|
(10.7
|
)%
|
Provision (benefit) for income taxes
|
|
|
192
|
|
|
|
(1,632
|
)
|
|
|
1,824
|
|
|
|
(111.8
|
)%
|
|
|
0.6
|
%
|
|
|
(4.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,423
|
)
|
|
$
|
(2,448
|
)
|
|
$
|
(4,975
|
)
|
|
|
203.2
|
%
|
|
|
(21.5
|
)%
|
|
|
(6.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net revenues for the first quarter of fiscal 2008 decreased by 9.8% to $34.5
million from $38.3 million for the same period of the prior fiscal year, primarily due to sales
decreases from Ashworth U.K. as well as the Companys corporate distribution and retail channels.
These decreases were partly offset by increases in sales from the Companys domestic on-course golf
distribution channel and Gekko Brands, LLC (Gekko).
Net revenues for the domestic segment (excluding Gekko) decreased 10.9% to $19.2 million for
the first quarter of fiscal 2008 from $21.6 million for the same period of the prior fiscal year.
Net revenues from the Companys retail distribution channel decreased from $4.1 million in the
first quarter of fiscal 2007 to $3.1 million in the first quarter of fiscal 2008. This decrease
was driven by the consolidation of retail accounts and their associated location closures and a
decision by the management team to exit a number of large accounts.
Net revenues from the Companys corporate distribution channel decreased 28.8% or $1.6 million
for the first quarter of fiscal 2008 as compared to the same period of fiscal 2007. The decrease
in the corporate channel primarily resulted from certain customer events that occurred in the prior
year quarter that did not recur in the comparable 2008 quarter and the Companys strategic decision
to discontinue sales to certain accounts. As with its other channels of distribution,
management is implementing a revised distribution strategy for this channel including
narrowing the assortment of product available to this channel which will allow the Company to
improve in-stocks.
17
First quarter 2008 net revenues from the Companys core channel of distribution, on-course
golf retailers, increased 8.9%, or $578,000, over the comparable prior year quarter, but this
increase was partially off-set by a decrease of $76,000 in revenues from off-course golf retailers.
The Company continues to experience significant competitive pressure and market consolidation
within the off-course channel of distribution. As part of the Companys effort to restore sales
growth, management is implementing new sales management processes in both the on-course and
off-course channels of distribution.
Net revenues from the Company-owned outlet stores decreased 7.9%, or $216,000, for the first
quarter of fiscal 2008 as compared to the same period of fiscal 2007. The decrease was driven
largely by an increase in promotional activity.
Net revenues for Gekko increased 4.6%, or $480,000, to $10.9 million for the first quarter of
fiscal 2008 as compared to $10.4 million for the same period of the prior fiscal year. This
increase was primarily driven by improved penetration within its NASCAR channel combined with an
additional increase as a result of having exclusive vendor rights for the 50
th
running
of the Daytona 500. These increases were partially offset by a delay in production due to a labor
stoppage at a key vendor and the absence in the first quarter of 2008 of certain corporate event
revenues that occurred during the first quarter of fiscal 2007.
Net revenues for Ashworth U.K., Ltd. decreased 45.1%, or $2.2 million, to $2.6 million for the
first quarter of fiscal 2008 from $4.8 million for the same period of the prior fiscal year. The
decrease is largely due to distribution center inefficiencies
resulting from the implementation of a
new ERP system at the U.K. facility together with changes in sales management.
Net revenues for the other international segment increased 19.8%, or $287,000, to $1.7 million
for the first quarter of fiscal 2008 from $1.4 million for the same period of the prior fiscal
year. The increase is primarily due to increased purchases from the Companys international
distributors and the favorable effect of currency exchange rates, specifically versus the Canadian
dollar, when compared to the prior year quarter.
Consolidated gross margin for the first quarter of fiscal 2008 decreased 460 basis points to
36.2% as compared to 40.8% for the same period of the prior fiscal year. The decrease in
consolidated gross margin was driven by the deleveraging effects of the decrease in revenue and an
increase in product costs not offset by price increases. In addition, as a result of a labor
stoppage at a key headwear vendor, the Company incurred approximately $700,000 of additional costs
to divert the production of its NASCAR products to other manufacturing facilities and expedite
manufacturing and transportation.
Consolidated selling, general and administrative (SG&A) expenses increased $245,000, or
1.3%, to $19.4 million for the first quarter of fiscal 2008 from $19.1 million for the same period
of the prior fiscal year. As a percent of net revenues, SG&A expenses were 56.1% for the first
quarter of fiscal 2008 as compared to 50.0% for the same period of the prior fiscal year. The
increase is largely due to increased consulting fees, primarily associated with design and to
supplement the accounting function during the executive transition period, combined with the
expense related to the employment and non-compete agreements entered into with the principals of
Gekko on June 4, 2007. These increases were partially offset by a decrease in commission expense primarily as a
result of the reduction in revenues.
18
Total net other expense decreased 36.7%, or $213,000, to $367,000 for the first quarter of
fiscal 2008 as compared to $580,000 for the same period of the prior fiscal year. The decrease in
other expense was primarily driven by favorable currency translation effects of $636,000, partially
offset by a $406,000 increase in interest expense. The increase in interest expense was the result
of (i) a write-off of capitalized bank fees associated with the change of credit facilities and
(ii) an increase in the average balances outstanding under the credit facility during the first
quarter of fiscal 2008 compared to the first quarter of fiscal 2007.
It is the Companys policy to report income tax expense for interim periods using an estimated
annual effective income tax rate. However, the tax effects of significant or unusual items are not
considered in the estimated annual effective tax rate. The tax effect of such discrete items is
recognized in the interim period in which the event occurs.
The effective rate for the income tax provision for the three months ended January 31, 2008
and 2007 was negligible and 40%, respectively. The change in the effective rate for the current
period as compared to the same period of the prior fiscal year is due primarily to current taxable
losses and an increase in the valuation allowance against deferred tax assets. After considering
the Companys three-year average taxable loss, the Company concluded that it can not rely on
future taxable income as the basis for realization of its net deferred tax asset. The Company
expects to continue to record the valuation allowance against its deferred tax assets until
positive evidence is sufficient to justify realization.
Consolidated net loss increased $5.0 million to a loss of $7.4 million for the first quarter
of fiscal 2008 from a net loss of $2.4 million for the same period of the prior fiscal year. The
increase is primarily due to the $3.8 million decrease in revenue, the $3.1 million decrease in
gross profit and the $1.8 million change in the tax benefit / provision.
Capital Resources and Liquidity
The Companys primary sources of liquidity are expected to be cash flows from operations, the
working capital line of credit with its bank and other financial alternatives such as leasing. The
Company requires cash for capital expenditures and other requirements associated with its domestic
and international production, distribution and sales activities, as well as for general working
capital purposes. The Companys need for working capital is seasonal, with the greatest
requirements existing from approximately December through the end of July each year. The Company
typically builds up its inventory early during this period to provide product for shipment for the
Spring/Summer selling season.
During the first three months ended January 31, 2008, net cash used in operating activities
was $7.4 million as compared to $5.3 million used in operating activities during the same period of
the prior fiscal year. The increase in cash used in operations was primarily due to a net
operating loss of $7.4 million as compared to an operating loss of $2.4 million for the same period
of the prior fiscal year, partially offset by reductions in working capital requirements during the
period of $2.9 million.
Net cash used in investing activities was $714,000 for the first three months ended January
31, 2008 as compared to $1.4 million used in investing activities during the same period of the
prior fiscal year. The decrease in cash used in investing activities was primarily attributable to
reduced capital purchases associated with the Companys U.K. deployment of a new ERP system and
furniture and fixtures associated with tradeshow and in-store assets.
19
Net cash provided in financing activities was $7.4 million for the first three months ended
January 31, 2008 as compared to $3.0 million provided by financing activities during the same
period of the prior fiscal year. The increase in cash provided from financing activities was
primarily attributable to an increase of $4.4 million in borrowings net of repayments associated
with the Companys revolving credit facility and long-term debt.
On January 11, 2008, the Company and its material domestic subsidiaries as co-borrowers
entered into and consummated a new senior revolving credit facility (the Credit Facility) of up
to $55.0 million (subject to borrowing base availability), including a $15.0 million sub-limit for
letters of credit (letters of credit that will be 100% reserved against borrowing availability)
with Bank of America, N.A., (B of A). Proceeds of $30.9 million under the Credit Facility were
used by the Company on January 11, 2008 to payoff its existing term loan, revolving credit
facility, to cash collateralize all outstanding letters of credit with Union Bank of California,
N.A., (Union Bank) and to pay related fees and expenses. The Credit Facility is anticipated to
be used in the future by the Company to issue standby or commercial letters of credit and to
finance ongoing working capital needs. The Credit Facility expires on January 11, 2012 and is
collateralized by substantially all of the assets of the Company and its subsidiaries party thereto
(excluding real estate and certain other assets).
Loans under the Credit Facility bear interest at a rate based either on (i) B of As
referenced base rate or (ii) LIBOR (as defined in the Credit Facility), subject in each case to
performance pricing adjustments based on the Companys fixed charge coverage ratio that range
between LIBOR plus 1.25% and LIBOR plus 1.75%. Interest will be set at LIBOR plus 1.25% for the
first six months of the agreement and adjusting thereafter. The initial interest rate applicable
to borrowings under the Credit Facility is 7.25%. The Company also is required to pay customary
fees under the Credit Facility. At January 31, 2008, the six month LIBOR was 4.6%. All interest
and per annum fees are calculated on the basis of actual number of days elapsed in a year of 360
days.
The borrowing base under the Credit Facility at any time equals the lesser of (i) $55.0
million, minus the amount of any outstanding letters of credit other than those that have not been
cash collateralized and those that constitute charges owing to B of A, and (ii) the sum of (a)
eighty-five percent (85%) of the value of eligible accounts receivable, provided, however that such
percentage shall be reduced by 1.0% for each whole percentage point that the dilution percent
exceeds 5.0%; plus (b) the least of (x) $45.0 million, (y) between 65% and 70% (seasonal advance
rate) of the Companys eligible inventory and eligible in-transit inventory, plus a percentage of
slow moving inventory (set at 65% for the first year, and dropping to 0% by the fourth year) and
(z) 85% of the appraised net orderly liquidation value of eligible inventory (including eligible
in-transit inventory and eligible slow moving inventory); minus (c) certain reserves; minus (d)
outstanding obligations under the loan facility anticipated to be provided by B of A to Ashworth
U.K., Ltd., as described below (the UK Loan Facility) The borrowing base as of January 31, 2008
was approximately $42.0 million. Unused availability, as of January 31, 2008, was approximately
$5.7 million.
The Credit Facility contains restrictive covenants limiting the ability of the Company and its
subsidiaries to take certain actions, including covenants limiting the Companys ability to incur
or guarantee additional debt, incur liens, pay dividends, repurchase stock or make other
distributions, sell assets, make loans and investments, prepay certain indebtedness, enter into
consolidations or mergers, and
enter into transactions with affiliates. The Credit
Facility limits the ability of the
Company to agree to certain change of control transactions, because a change of control (as
defined in the Credit Facility) is an event of default. The Credit Facility also contains
customary representations and warranties, affirmative covenants, events of default, indemnities and
other terms and conditions.
The foregoing summary of the Credit Facility is qualified by reference to the Loan and
Security Agreement dated as of January 11, 2008 attached as Exhibit 10(aq) to the Companys Form
10-K filed with the SEC on January 14, 2008. Please see the Loan and Security Agreement for a more
detailed description of the terms of the Credit Facility.
20
On February 29, 2008, the Companys U.K. subsidiary entered into and consummated a revolving
credit facility (the UK Loan Facility) of up to $10.0 million (subject to borrowing base
availability), including a $2.0 million sub-limit for letters of credit with B of A. The
applicable interest rate and fees under the UK Loan Facility are comparable to the applicable
interest rate and fees under the Credit Facility. As noted above, loans and letters of credit
under the UK Loan Facility will reduce the borrowing base under the Credit Facility. The Company
believes that the UK Loan Facility will enhance the Companys ability to meet its current and
long-term operating needs in the UK. The borrowing base as of January 31, 2008 was approximately
$9.0 million. Unused availability, as of January 31, 2008, was approximately $8.0 million.
The Company had no commercial letters of credit outstanding under the Credit Facility at
January 31, 2008 as compared to $4.4 million outstanding on the Union Bank Credit Agreement at
January 31, 2007. The Company had $31.2 million outstanding against the Credit Facility as of
January 31, 2008 compared to $17.5 million outstanding at January 31, 2007 against the Union Bank
revolving credit facility, and $5.2 million outstanding on the Union Bank term loan at January
31, 2007. At January 31, 2008, approximately $5.7 million was available for borrowing against the
Credit Facility, subject to the Borrowing Base limitations.
Consolidated net trade receivables were $25.1 million at January 31, 2008, a decrease of $9.5
million from the balance at October 31, 2007. Because the Companys business is seasonal, the net
receivables balance may be more meaningfully compared to the balance of $27.6 million at January
31, 2007, rather than the year-end balance. Compared to net trade receivables at January 31, 2007,
net trade receivables decreased by $2.5 million primarily due to a decrease in sales of $3.8
million during the three months ended January 31, 2008 as compared to the prior years quarter.
Consolidated net inventories increased to $58.2 million at January 31, 2008 from $50.5 million
at October 31, 2007, primarily due to the seasonal nature of the Companys business and the
Companys inventory requirements to meet expected market demand in the Spring/Summer selling
season. Compared to net inventories of $56.4 million at January 31, 2007, net inventories at
January 31, 2008 increased 3.2% or $1.8 million. This increase was primarily the result of earlier
deliveries of inventory to the Companys international subsidiaries.
Consolidated current liabilities increased to $53.7 million at January 31, 2008 from $45.4
million at October 31, 2007. Compared to current liabilities of $45.6 million at January 31, 2007,
current liabilities increased 17.8% primarily due to an increase in the Companys line of credit
payable and accrued liabilities, partly offset by a reduction in the current portion of long-term
debt and accounts payable.
During the first three months of fiscal 2008, the Company incurred capital expenditures of
$623,000, primarily for computer systems. The Company anticipates capital spending of
approximately $2.0 million during the remainder of fiscal 2008, primarily related to in-store
fixtures and information systems improvements. Management currently intends to finance the purchase of
additional capital equipment from the Companys cash resources, but may use leases or equipment
financing agreements if deemed appropriate.
Common stock and capital in excess of par value increased by $188,000 in the three months
ended January 31, 2008, due entirely to SFAS No. 123R compensation expense.
Based on current levels of operations, the Company expects that sufficient cash flow will be
generated from operations so that, combined with other financing alternatives available, including
cash on hand, borrowings under its bank credit facility and leasing alternatives, the Company will
be able to meet all of its debt service, capital expenditure and working capital requirements for
at least the next 12 months.
21
Contractual Obligations
We have summarized our significant financial contractual obligations as of October 31, 2007 in our
Annual Report on Form 10-K for the year ended October 31, 2007. There have been no subsequent
material changes to our contractual obligations from that date with the exception of refinancing
the $4.1 million balance on the Union Bank term loan with proceeds from the Credit Facility with B
of A. This refinancing resulted in a change of $2.6 million from due in one to three years under
the Union Bank term loan to due in less than one year under the B of A credit facility.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No.157). SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. SFAS No. 157 clarifies the definition of exchange price
as the price between market participants in an orderly transaction to sell an asset or transfer a
liability in the market in which the reporting entity would transact for the asset or liability,
which market is the principal or most advantageous market for the asset or liability. SFAS No. 157
is effective for financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company is currently evaluating the impact, if
any, this new standard will have on its consolidated financial statements.
On February 15, 2007, the FASB issued SFAS No. 159,
Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115
(SFAS No. 159). The fair
value option established by SFAS No. 159 permits all entities to choose to measure eligible items
at fair value at specified elections dates. A business entity will report unrealized gains and
losses on items for which the fair value option has been elected in earnings at each subsequent
reporting date. SFAS No. 159 is effective as of the beginning of an entitys first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the beginning of the previous
fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year
and also elects to apply the provisions of SFAS No. 157
, Fair Value Measurements
. The Company is
currently evaluating the impact, if any, this new standard will have on its consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations
(SFAS No. 141R),
which replaces SFAS No. 141. SFAS No. 141R establishes principles and requirements for how an
acquirer in a business combination recognizes and measures in its financial statements the
identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the
acquiree, as well as the goodwill acquired. Significant changes from current practice resulting from SFAS
No. 141R include the expansion of the definitions of a business and a business combination; for
all business combinations (whether partial, full or step acquisitions), the acquirer will record
100% of all assets and liabilities of the acquired business, including goodwill, generally at their
fair values; contingent consideration will be recognized at its fair value on the acquisition date
and, for certain arrangements, changes in fair value will be recognized in earnings until
settlement; and acquisition-related transaction and restructuring costs will be expensed rather
than treated as part of the cost of the acquisition. SFAS No. 141R also establishes disclosure
requirements to enable users to evaluate the nature and financial effects of the business
combination. SFAS No. 141R is effective for the Company as of the beginning of Fiscal 2010 and will
be applied prospectively to business combinations on or after November 1, 2009.
22
From time to time, new accounting pronouncements are issued by the FASB that are adopted by
the Company as of the specified effective date. Unless otherwise discussed, management believes
that the impact of recently issued standards, which are not yet effective, will not have a material
impact on the Companys consolidated financial statements upon adoption.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Companys outstanding indebtedness as of January 31, 2008 includes a mortgage note, notes
payable and capital lease obligations totaling $12.0 million, which approximates fair value based
on current rates offered for debt with similar risks and maturities. These instruments bear
interest at fixed rates ranging from 3.5% to 9.1%. The Company also had $31.2 million outstanding
at January 31, 2008 on its Credit Facility with interest charged at the banks reference rate plus
a pre-defined spread based on the Companys fixed charge coverage ratio or average daily borrowing
base availability (the Applicable Rate). At January 31, 2008, the Applicable Rate was 7.25%.
The Credit Facility also provides for optional interest rates based on LIBOR for periods between
one and six months. A hypothetical 10% increase in interest rates during the three months ended
January 31, 2008 would have resulted in a $70,000 increase in net loss. For details regarding the
Companys variable and fixed rate debt, see Item 2, Managements Discussion and Analysis of
Financial Condition and Results of Operations Capital Resources and Liquidity.
Foreign Currency Exchange Rate Risk
The Companys ability to sell its products in foreign markets and the U.S. dollar value of the
sales made in foreign currencies can be significantly influenced by foreign currency fluctuations.
A decrease in the value of foreign currencies relative to the U.S. dollar could result in downward
price pressure for the Companys products or losses from currency exchange rates. From time to
time the Company enters into short-term foreign exchange contracts with its bank to hedge against
the impact of currency fluctuations between the U.S. dollar and the British pound and the U.S.
dollar and the Canadian dollar. Additionally, from time to time the Companys U.K. subsidiary
enters into similar contracts with its bank to hedge against currency fluctuations between the
British pound and the U.S. dollar and the British pound and other European currencies. Realized
gains and losses on these contracts are recognized in the same period as the hedged transaction.
Such contracts have maturity dates that do not normally exceed 12 months. The Company had no
foreign currency related derivatives at January 31, 2008 or October 31, 2007. The Company
continues to assess the benefits and risks of strategies to manage the risks presented by currency
exchange rate fluctuations. There is no assurance that any strategy will be successful in avoiding
losses due to exchange rate fluctuations, or that the failure to manage currency risks effectively
would not have a material adverse effect on the Companys results of operations.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure that information
required to be disclosed in the reports it files pursuant to the Securities Exchange Act of 1934,
as amended (the Exchange Act) are recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange Commission, and that such
information is accumulated and communicated to the Companys management, including the Companys
Chief Executive Officer (CEO) and Chief Financial Officer (CFO) as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter how well designed and
operated, can only provide a reasonable assurance of achieving the desired control objectives, and
in reaching a reasonable level of
assurance, management necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Management designed the disclosure
controls and procedures to provide reasonable assurance of achieving the desired control
objectives.
23
The Company carried out an evaluation, under the supervision and with the participation of its
management, including the CEO and CFO, of the design and operation of the Companys disclosure
controls and procedures as of January 31, 2008. Based on this evaluation, the Companys CEO and
CFO concluded that the Companys disclosure controls and procedures were effective at the
reasonable assurance level as of January 31, 2008.
Changes in Internal Control over Financial Reporting
On December 1, 2007, the Company implemented a new enterprise resource planning (ERP) system
at the Companys wholly-owned U.K. subsidiary. Post-implementation testing and management reviews
have been conducted on this system to provide reasonable assurance regarding the reliability and
accuracy of this subsidiarys financial results.
Other than the ERP system implementation noted above, there are no changes in the Companys
internal control over financial reporting that occurred during the
three month period ending January 31, 2008
that materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company has in place a License Agreement, as amended to date (the License Agreement),
with Callaway Golf Company (Callaway). Callaway has recently objected to the Companys announced
plans to launch a new golf-related technical outerwear line in connection with the Companys
acquisition of the Sun Ice® and Sunice® trademarks in January 2008, claiming that this activity is
a material breach of the License Agreement which justifies one or more remedies, including the
right to terminate the License Agreement at Callaways election. The Company strongly denies that
its activities with the Sun Ice line breach the License Agreement and has responded by pointing to
specific language in the License Agreement that addresses the topic. The Company is in discussions
with Callaway to resolve this and any other contractual issues, and is optimistic that the matter
will be amicably resolved. If no agreement is reached, however, the dispute will likely be
referred to binding arbitration where, among other matters, the Company may seek damages or other
relief against Callaway for any attempted wrongful termination or other wrongful interference with
the Companys existing contract rights.
In February 2007, the Law Offices of Herbert Hafif filed a class action in the United States
District Court for the Central District of California alleging that the Company willfully violated
the Fair Credit Reporting Act by printing on credit or debit card receipts more than the last five
digits of the credit or debit card number and/or the expiration date. The plaintiff sought
statutory and punitive damages, attorneys fees and injunctive relief of the purported class. The
suit against Ashworth was one of hundreds of suits filed against different retailers nationwide.
The proposed class representative for the punitive class filed his motion to certify this matter as
a class action. The Company filed an opposition to the motion and the court entered an order
denying the class certification. In November 2007, the parties entered into a settlement on the
record whereby Ashworth would pay the plaintiff $1,000 and the plaintiff would dismiss
his individual claim without prejudice. Ashworth admitted no liability and continues to
dispute any allegation that it willfully violated the Fair Credit Reporting Act. The parties
subsequently entered into a written stipulation to that effect and the court dismissed the
complaint.
24
The Company is party to other claims and litigation proceedings arising in the normal course
of business. Although the legal responsibility and financial impact with respect to such other
claims and litigation cannot currently be ascertained, the Company does not believe that these
other matters will result in payment by the Company of monetary damages, net of any applicable
insurance proceeds, that, in the aggregate, would be material in relation to the consolidated
financial position or results of operations of the Company.
Item 1A. Risk Factors
The following Risk Factor is hereby added to the risk factor disclosure provided in the
Companys Form 10-K for the year ended October 31, 2007.
Callaway Golf Company has claimed a material breach of the Companys exclusive licensing
agreement.
As detailed above under Item 1. Legal Proceedings, Callaway Golf Company
(Callaway) has recently claimed that the Companys launch of the Sun Ice® line constitutes a
material breach of the License Agreement with Callaway. The Company strongly disputes this claim
as without any merit, and the parties are engaged in discussions seeking to resolve any contract
issues. It is possible that the result of these discussions could lead to an amendment of the
License Agreement incorporating terms less favorable to the Company than those currently in place.
Alternatively, if the discussions do not result in a resolution, an arbitration will likely be
conducted to determine whether Callaway has the right to any remedial relief (including the right
to terminate the License Agreement at Callaways election). While the Company is confident it
would prevail in the arbitration and may seek damages against Callaway for any improper
interference with the Companys rights, the uncertainties associated with the results of any
arbitration or litigation process create a risk, since the loss of the Companys expected revenues
from the sale of Callaway-branded products would have a significant and material adverse effect on
the Companys business and financial results.
Item 6. EXHIBITS
3(a)
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Certificate of Incorporation as filed March 19, 1987 with the Secretary of State of Delaware,
Amendment to Certificate of Incorporation as filed August 3, 1987 and Amendment to Certificate
of Incorporation as filed April 26, 1991 (filed as Exhibit 3(a) to the Companys Registration
Statement dated February 21, 1992 (File No. 33-45078) and incorporated herein by reference)
and Amendment to Certificate of Incorporation as filed April 6, 1995 (filed as Exhibit 3(a) to
the Companys Form 10-K for the fiscal year ended October 31, 1994 (File No. 001-14547) and
incorporated herein by reference).
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3(b)
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Amended and Restated Bylaws of the Company (filed as Exhibit 3.1 to the Companys Current
Report on Form 8-K on February 23, 2000 (File No. 001-14547) and incorporated herein by
reference).
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4(a)
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Specimen certificate for Common Stock, par value $.001 per share, of the Company (filed as
Exhibit 4(a) to the Companys Registration Statement dated November 4, 1987 (File No.
33-16714-D) and incorporated herein by reference).
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4(b)
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Specimen certificate for Options granted under the Amended and Restated Nonqualified Stock
Option Plan dated March 12, 1992 (filed as Exhibit 4(b) to the Companys Form 10-K
for the fiscal year ended October 31, 1993 (File No. 001-14547) and incorporated herein
by reference).
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25
4(c)
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Specimen certificate for Options granted under the Incentive Stock Option Plan dated
June 15, 1993 (filed as Exhibit 4(c) to the Companys Form 10-K for the fiscal year ended
October 31, 1993 (File No. 001-14547) and incorporated herein by reference).
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4(d)
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Rights Agreement dated as of October 6, 1998 and amended on February 22, 2000 by and between
Ashworth, Inc. and American Securities Transfer & Trust, Inc. (filed as Exhibit 4.1 to the
Companys Form 8-K filed on March 14, 2000 (File No. 001-14547) and incorporated herein by
reference).
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4(e)
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Amendment No. 1 effective as of July 3, 2007 to the Rights Agreement dated as of February
22, 2000 by and between Ashworth, Inc. and Computershare Trust Company, N. A., as successor
Rights Agent (filed as Exhibit 4.1 to the Companys Form 8-K filed on July 3. 2007 (File No.
001-14547) and incorporated herein by reference).
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10(a)
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Amendment to License Agreement, effective March 29, 2007, by and between Ashworth, Inc. and
Callaway Golf Company (filed as Exhibit 99.1 to the Companys Form 8-K on December 7, 2007
(File No. 001-14547) and incorporated herein by reference.
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10(a)(2)
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Amendment to License Agreement, effective December 3, 2007, by and between Ashworth, Inc.
and Callaway Golf Company (filed as Exhibit 99.2 to the Companys Form 8-K on December 7, 2007
(File No. 001-14547) and incorporated herein by reference.
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10(b)
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Amendment to the Companys Code of Business Conduct and Ethics effective December 12,
2007 (filed as Exhibit 14.1 to the Companys Form 8-K on December 14, 2007 (File No.
001-14547) and incorporated herein by reference).
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10(c)
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Consulting agreement between Fletcher Leisure Group Ltd. and the Company, effective January
11, 2008 (filed as Exhibit 10(ap) to the Companys Form 10-K on January 14, 2008 (File No.
001-14547) and incorporated herein by reference).
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10(d)
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Loan agreement, effective January 11, 2008 by and between the Company and Bank of America,
N. A. (filed as Exhibit 10(aq) to the Companys Form 10-K on January 14, 2008 (File No.
001-14547) and incorporated herein by reference.
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10(e)
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Loan agreement, effective February 29, 2008 by and between Ashworth U.K. and Bank of
America, N. A.
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31.1
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Certification Pursuant to Rules 13a-14 and 15d-14, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 by Allan H. Fletcher.
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31.2
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Certification Pursuant to Rules 13a-14 and 15d-14, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 by Greg W. Slack.
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32.1
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 by Allan H. Fletcher.
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32.2
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 by Greg W. Slack.
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26
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.
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ASHWORTH, INC
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Date: March 11, 2008
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By:
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/s/ Allan H. Fletcher
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Allan H. Fletcher
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Chief Executive Officer
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Date: March 11, 2008
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By:
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/s/ Greg W. Slack
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Greg W. Slack
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Chief Financial Officer and
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Principal Accounting Officer
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27
EXHIBIT INDEX
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Exhibit
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Number
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Description of Exhibit
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10(e)
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Loan agreement, effective February
29, 2008 by and between Ashworth U.K. and Bank of America, N.A.
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31.1
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Certification Pursuant to Rules 13a-14 and 15d-14, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 by Allan H. Fletcher.
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31.2
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Certification Pursuant to Rules 13a-14 and 15d-14, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 by Greg W. Slack.
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32.1
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Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 by Allan H. Fletcher.
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32.2
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Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 by Greg W. Slack.
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28
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