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 July 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):
Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
þ
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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 August 31, 2008
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$.001 par value Common Stock
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14,746,844
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PART I
FINANCIAL INFORMATION
ASHWORTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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July 31, 2008
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October 31, 2007
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(UNAUDITED)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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1,556,000
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$
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6,104,000
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Accounts receivable trade, net
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32,500,000
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34,545,000
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Accounts receivable other, net
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188,000
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147,000
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Inventories, net
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55,365,000
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50,529,000
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Income tax refund receivable
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202,000
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1,117,000
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Other current assets
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4,189,000
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4,981,000
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Deferred income tax asset, net
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112,000
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48,000
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Total current assets
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94,112,000
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97,471,000
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Property, plant and equipment, at cost
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64,040,000
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68,495,000
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Less accumulated depreciation and amortization
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(30,178,000
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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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33,862,000
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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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9,629,000
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9,806,000
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Other assets
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126,000
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372,000
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Total assets
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$
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152,979,000
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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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34,928,000
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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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591,000
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2,360,000
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Accounts payable
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11,779,000
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12,728,000
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Accrued liabilities:
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Salaries and commissions
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3,290,000
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5,442,000
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Other
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6,723,000
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5,235,000
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Total current liabilities
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57,311,000
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45,380,000
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Long-term debt, net of current portion
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10,828,000
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13,844,000
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Deferred income tax liability
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2,415,000
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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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50,671,000
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50,325,000
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Retained earnings
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26,140,000
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42,217,000
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Accumulated other comprehensive income
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5,599,000
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7,080,000
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Total stockholders equity
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82,425,000
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99,637,000
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Total liabilities and stockholders equity
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$
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152,979,000
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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 July 31,
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Nine months ended July 31,
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2008
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2007
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2008
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2007
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Net revenues
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$
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45,155,000
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$
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49,461,000
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$
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137,500,000
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$
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147,597,000
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Cost of goods sold
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29,399,000
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30,578,000
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84,858,000
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89,856,000
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Gross profit
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15,756,000
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18,883,000
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52,642,000
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57,741,000
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Selling, general and
administrative expenses
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22,807,000
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21,841,000
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64,950,000
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62,799,000
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Loss from operations
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(7,051,000
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(2,958,000
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(12,308,000
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(5,058,000
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Other income (expense):
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Interest income
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13,000
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24,000
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63,000
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82,000
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Interest expense
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(840,000
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)
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(837,000
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(2,562,000
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(2,209,000
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Net foreign currency
exchange gain (loss)
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130,000
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(49,000
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)
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1,253,000
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69,000
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Other expense, net
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(117,000
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(5,000
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(184,000
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(183,000
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)
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Total other expense, net
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(814,000
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)
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(867,000
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(1,430,000
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)
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(2,241,000
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)
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Loss before income tax
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(7,865,000
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)
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(3,825,000
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)
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(13,738,000
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(7,299,000
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Provision for income taxes
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1,716,000
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1,824,000
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2,339,000
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3,331,000
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Net loss
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$
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(9,581,000
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)
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$
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(5,649,000
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)
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$
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(16,077,000
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)
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$
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(10,630,000
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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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(0.65
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)
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$
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(0.39
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)
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$
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(1.09
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)
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$
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(0.73
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)
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Diluted
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$
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(0.65
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)
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$
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(0.39
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)
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$
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(1.09
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)
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$
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(0.73
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)
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Weighted-average shares
outstanding:
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Basic
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14,714,000
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14,602,000
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14,714,000
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14,548,000
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Diluted
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14,714,000
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14,602,000
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14,714,000
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14,548,000
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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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Nine months ended July 31,
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2008
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2007
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CASH FLOWS FROM OPERATING ACTIVITIES
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Net loss
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$
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(16,077,000
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)
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$
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(10,630,000
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)
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Adjustments to reconcile net income to net cash:
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Depreciation of property and equipment
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4,155,000
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4,235,000
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Amortization of trademarks and distribution rights
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303,000
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346,000
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Loss on disposal of fixed assets
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6,000
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80,000
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Decrease in net deferred income taxes
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882,000
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2,676,000
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Stock compensation expense
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346,000
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572,000
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(Increase)/decrease in:
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Accounts receivable
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2,004,000
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2,982,000
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Inventories
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(4,836,000
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)
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(8,637,000
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)
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Prepaid expenses
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792,000
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888,000
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Other assets (net of amortization)
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982,000
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(272,000
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)
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(Increase)/decrease in:
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Accounts payable
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(949,000
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)
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(437,000
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)
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Accrued liabilities
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(664,000
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)
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(656,000
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)
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Income taxes payable
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915,000
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2,820,000
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Other long term liabilities
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(84,000
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)
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(98,000
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)
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Net cash used in operating activities
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(12,225,000
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)
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(6,131,000
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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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(1,574,000
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)
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(3,189,000
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)
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Proceeds from trade-in of equipment
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27,000
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Purchase of intangibles
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(126,000
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)
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(64,000
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)
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Net cash used in investing activities
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(1,673,000
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)
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(3,253,000
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)
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CASH FLOWS FROM FINANCING ACTIVITIES
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Decrease in restricted cash
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261,000
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|
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Principal payments on capital lease obligations
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(310,000
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)
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|
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(229,000
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)
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Borrowings on line of credit
|
|
|
105,896,000
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|
|
|
31,250,000
|
|
Payments on line of credit
|
|
|
(90,583,000
|
)
|
|
|
(22,950,000
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)
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Borrowings on notes payable and long-term debt
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|
|
|
|
|
|
683,000
|
|
Principal payments on notes payable and long-term debt
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|
|
(4,475,000
|
)
|
|
|
(1,518,000
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)
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Proceeds from issuance of common stock
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|
|
|
|
|
|
881,000
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|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
10,789,000
|
|
|
|
8,117,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
|
|
|
(1,439,000
|
)
|
|
|
1,628,000
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(4,548,000
|
)
|
|
|
361,000
|
|
Cash, beginning of period
|
|
|
6,104,000
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|
|
|
7,508,000
|
|
|
|
|
|
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Cash, end of period
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|
$
|
1,556,000
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|
|
$
|
7,869,000
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
3
ASHWORTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
July 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 July
31, 2008 and 2007 were $687,000 and $617,000, respectively. For the nine-month periods ended
July 31, 2008 and 2007, shipping expenses were $1,809,000 and $1,811,000, 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.
4
The following table sets forth the computation of basic and diluted loss per share based on the
requirements of Statement of Financial Accounting Standard (SFAS) No. 128,
Earnings Per
Share
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31,
|
|
|
Nine months ended July 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,581,000
|
)
|
|
$
|
(5,649,000
|
)
|
|
$
|
(16,077,000
|
)
|
|
$
|
(10,630,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
14,714,000
|
|
|
|
14,602,000
|
|
|
|
14,714,000
|
|
|
|
14,548,000
|
|
Effect of dilutive options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted loss per share
|
|
|
14,714,000
|
|
|
|
14,602,000
|
|
|
|
14,714,000
|
|
|
|
14,548,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(0.65
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(1.09
|
)
|
|
$
|
(0.73
|
)
|
Diluted loss per share
|
|
$
|
(0.65
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(1.09
|
)
|
|
$
|
(0.73
|
)
|
For the quarters ended July 31, 2008 and 2007, the diluted weighted-average shares outstanding
computation excludes 1,035,000 and 510,000 options, respectively, whose impact would have an
anti-dilutive effect. For the nine-month periods ended July 31, 2008 and 2007, the diluted
weighted-average shares outstanding computation excludes 740,000 and 564,000 options,
respectively, whose impact would have an anti-dilutive effect.
NOTE 2 Inventories.
Inventories consisted of the following at July 31, 2008 and October 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
October 31,
|
|
|
|
2008
|
|
|
2007
|
|
Raw materials
|
|
$
|
379,000
|
|
|
$
|
135,000
|
|
Finished Goods
|
|
|
54,986,000
|
|
|
|
50,394,000
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
55,365,000
|
|
|
$
|
50,529,000
|
|
|
|
|
|
|
|
|
NOTE 3 Property, Plant and Equipment.
During the first nine months of fiscal year 2008, the Company disposed of $4,938,000 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, $20,000 for machinery and equipment. Also, during the first nine months of fiscal
year 2008, the Company disposed of $59,000 for a vehicle with accumulated depreciation of $32,000
on a trade-in for another vehicle and $14,000 of furniture and fixtures that were no longer in
service with a disposal loss of $6,000. During the first nine months of fiscal year 2007, the
Company disposed of $1,802,000 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
(SFAS No. 142). Under SFAS No. 142, goodwill and
certain intangible assets are not amortized but are subject to an annual impairment test. At
each of July 31, 2008 and October 31, 2007, goodwill totaled $15,250,000. The following sets
forth the intangible assets, excluding goodwill, by major category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2008
|
|
|
October 31, 2007
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
Indefinite life:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
|
$
|
8,700,000
|
|
|
$
|
|
|
|
$
|
8,700,000
|
|
|
$
|
8,700,000
|
|
|
$
|
|
|
|
$
|
8,700,000
|
|
Finite life:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists
|
|
|
1,530,000
|
|
|
|
(923,000
|
)
|
|
|
607,000
|
|
|
|
1,530,000
|
|
|
|
(767,000
|
)
|
|
|
763,000
|
|
Non-competes
|
|
|
1,372,000
|
|
|
|
(1,325,000
|
)
|
|
|
47,000
|
|
|
|
1,372,000
|
|
|
|
(1,238,000
|
)
|
|
|
134,000
|
|
Customer sales backlog
|
|
|
190,000
|
|
|
|
(190,000
|
)
|
|
|
|
|
|
|
190,000
|
|
|
|
(190,000
|
)
|
|
|
|
|
Trademarks
|
|
|
1,708,000
|
|
|
|
(1,433,000
|
)
|
|
|
275,000
|
|
|
|
1,582,000
|
|
|
|
(1,373,000
|
)
|
|
|
209,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
13,500,000
|
|
|
$
|
(3,871,000
|
)
|
|
$
|
9,629,000
|
|
|
$
|
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 nine months ended July 31, 2008 and 2007,
aggregate amortization expense was approximately $303,000 and $346,000, respectively.
Amortization expense related to intangible assets at July 31, 2008 in each of the next five
fiscal years and beyond is expected to be as follows:
|
|
|
|
|
Remainder 2008
|
|
$
|
112,000
|
|
2009
|
|
|
312,000
|
|
2010
|
|
|
279,000
|
|
2011
|
|
|
192,000
|
|
2012
|
|
|
32,000
|
|
2013
|
|
|
2,000
|
|
Thereafter
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
929,000
|
|
|
|
|
|
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 then existing term loan, revolving credit
facility, to cash collateralize all outstanding letters of credit with Union Bank of California,
N.A. 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 was set at LIBOR plus 1.25% for the first six months
of the agreement and adjusts thereafter. At July 31, 2008, the interest rate applicable to
borrowings under the Credit Facilitys base rate was 5.00% and 3.98% for balances using the LIBOR
election. The Company also is required to pay customary fees under the Credit Facility. All
interest and per annum fees are calculated on the basis of actual number of days elapsed in a
year of 360 days.
The consolidated 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
provided by B of A to Ashworth U.K., Ltd., as described below. The consolidated borrowing base
as of July 31, 2008 was $55.0 million; unused availability,
as of July 31, 2008, was $9.3 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 also
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 U.K.
The
foregoing summary of the U.K. Loan Facility is qualified by reference to the Loan and Security
Agreement dated as of February 9, 2008 attached as Exhibit 10(e) to the Companys Form 10-Q filed
with the SEC on March 11, 2008. Please see the Loan and Security Agreement for a more detailed
description of the terms of the Credit Facility.
7
NOTE 6 Common Stock and Capital in Excess of Par Value.
During the nine months ended July 31, 2008 and 2007, common stock and capital in excess of par
value increased by $346,000 and $1,453,000, respectively, of which $0 and $881,000 was due to
the issuance of 0 and 130,000 shares of common stock on exercise of options. For the nine
months ended July 31, 2008 and 2007, $346,000 and $572,000, respectively, was due to SFAS No.
123R compensation expense. See Note 7, below.
NOTE 7 Stock-Based Compensation.
SFAS No. 123R,
Share-Based Payment
(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 and nine-month periods ended July 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 July 31,
|
|
Nine months ended July 31,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (years)
|
|
|
|
|
|
|
4.64
|
|
|
|
3.51
|
|
|
|
4.91
|
|
Risk-free interest rate
|
|
|
|
|
|
|
4.89
|
%
|
|
|
2.74
|
%
|
|
|
4.65
|
%
|
Volatility
|
|
|
|
|
|
|
37.4
|
%
|
|
|
50.6
|
%
|
|
|
37.4
|
%
|
Dividend yields
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of options
granted during the period
|
|
$
|
|
|
|
$
|
3.24
|
|
|
$
|
1.00
|
|
|
$
|
3.06
|
|
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-Merton 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 July 31, 2008 and 2007 was $85,000 and
$193,000, respectively. Stock-based compensation expense during the nine months ended July 31,
2008 and 2007 was $346,000 and $572,000, respectively.
8
There was no income tax benefit related to stock-based compensation expense for the third
quarter of fiscal 2008 and 2007 or for the first nine months of fiscal 2008 and 2007. As of
July 31, 2008 and 2007, $75,000 and $365,000, respectively, of total unrecognized compensation
cost related to stock options is expected to be recognized over a weighted-average period of
eight and a half months and two and a half years, respectively. The compensation cost to be
recognized in future periods as of July 31, 2008 and 2007 does not consider or include the
effect of stock options that may be issued in subsequent periods.
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 July 31,
|
|
|
Nine months ended July 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net loss
|
|
$
|
(9,581,000
|
)
|
|
$
|
(5,649,000
|
)
|
|
$
|
(16,077,000
|
)
|
|
$
|
(10,630,000
|
)
|
Effects of foreign
currency translation
|
|
|
(107,000
|
)
|
|
|
618,000
|
|
|
|
(1,481,000
|
)
|
|
|
1,704,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
$
|
(9,688,000
|
)
|
|
$
|
(5,031,000
|
)
|
|
$
|
(17,558,000
|
)
|
|
$
|
(8,926,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 objected to the Companys launch of a new
golf-related technical outerwear line in connection with the Companys acquisition of the Sun Ice®
and Sunice® trademarks in January 2008. Callaway claims that this activity is a material breach of
the License Agreement which entitles Callaway to terminate the License Agreement. The Company
strongly denies that its activities with the Sun Ice line breach the License Agreement and has
pointed to specific language in the License Agreement that permits the Company to market products
under any trademarks owned by itself or its subsidiaries. The Company is engaged in binding
arbitration proceedings to resolve the dispute and such proceedings are in a preliminary phase.
The arbitration is currently scheduled for early November 2008. The Company has informed Callaway
that any attempt to terminate the License Agreement in advance of an arbitral ruling in Callaways
favor would, in the Companys view, constitute wrongful termination, and Callaway has indicated
that it will likely forego any termination at least until the arbitration is completed. The
Company is evaluating whether it will seek damages or other relief against Callaway for any
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 on behalf 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 putative 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.
9
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 July 31, 2008, the Company performed its quarterly
assessment of its net deferred tax assets in accordance with SFAS 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.
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, as of July 31, 2008, the Company has an additional $7.1 million valuation allowance
recorded against corresponding increases in deferred tax assets of $7.1 million, primarily related
to net operating losses. This is a $4.3 million increase from the second quarter of 2008, due
primarily to an increase in estimated net operating losses. 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 Financial Accounting Standards Board (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 SFAS 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.
10
As of July 31, 2008, the liability for income tax associated with uncertain tax positions was
$41,000. The total $41,000 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 $41,000. 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 July 31, 2008, the Company had accrued $12,000 of interest.
The Company is subject to taxation in the United States and 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 tax returns for 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.
(11) Related-Party Transactions
In October 2007, the Company announced the appointment of Allan H. Fletcher to the position of
Chief Executive Officer. Mr. Fletcher is the founder of Fletcher Leisure Group, Inc. (FLG) which
has been one of Canadas leading suppliers of branded golf apparel, sportswear and golf equipment
for over 40 years and is a long-standing business partner of the Company. The Company distributes
Ashworth and Callaway Golf apparel, headwear and accessories in Canada through two separate
divisions operated by FLG. The Company pays FLG a management fee
equal to 19% of net revenues. For the 19% fee, FLG provides various
services including, but not limited to, inventory receiving,
warehousing, distribution, sales, customer service, credit analysis,
collection of receivables and general accounting. Mr. Fletcher was responsible for the
operations and strategic direction
of FLG and served as its President until December 2003 when he became the Chairman of FLG. Mr.
Fletchers son, Mark Fletcher, currently serves as the President of FLG and oversees its
operations.
In January 2008, the Company announced the acquisition of the Sun Ice
®
and
Sunice
®
trademarks from FLG. The Company has launched a new golf-related technical
outerwear line under this brand in the United States, the United Kingdom, Ireland and Europe. The
purchase price for the trademarks consists primarily of a $50,000 up front payment and
participation in the future EBITDA of the Sunice brand. In addition, initial purchases of Sunice
product and samples were purchased directly from FLG.
On January 15, 2008, Sunice Holdings,
Inc. (Sunice), a wholly owned subsidiary of the Company, entered into a purchase agreement (the
Agreement) with FLG. Under the Agreement, Sunice agreed to purchase certain trademarks and
related assets of FLG (the Acquired Assets), and FLG agreed to provide certain services to Sunice
in connection therewith. The aggregate consideration to be paid by Sunice for the Acquired Assets
and certain non-competition covenants included in the Agreement was $50,000 plus a profit sharing
amount to be paid during the ten years after the closing of the
acquisition (the Profit Sharing).
Under the Agreement, for the term of the Agreement, FLG agreed not to, directly or indirectly, sell
or distribute golf related apparel or similar designs that are developed by FLG for sale by Sunice
to on-course and off-course golf specialty accounts, corporate accounts, and specialty retailers
and department stores.
After the closing of the acquisition of
the Acquired Assets (the Closing Date), Sunice licensed to FLG certain trademarks included in the
Acquired Assets for limited circumstances and uses that do not
materially impact Sunices use of
the trademarks within the United States, the United Kingdom, Ireland and Europe.
FLG has the right and option (the
Re-Purchase Option) to purchase all of the Acquired Assets for a cash price that is generally
based on Sunices operating income for a period of time prior to the exercise of the Re-Purchase
Option. The Re-Purchase Option shall be exercisable upon certain events during the term of the
Agreement, including if Sunice fails to pay FLG certain profit sharing amounts in the fiscal year
ended October 31, 2009 or in any subsequent fiscal year, and during the 12 month period following
the tenth anniversary of the Closing Date.
On the Closing Date, Sunice and FLG
entered into a Service Agreement under which FLG agreed to provide all designs for Sun Ice Golf
Apparel for production, marketing and sale by Sunice, as requested by the Sunice. FLG also agreed
to identify and facilitate the requisite relationships with vendors for all sourcing aspects of the
Sun Ice Golf Apparel.
Certain
procedures, including the appointment of Edward J. Fadel, President of Ashworth, to oversee
all operational aspects of the Sunice brand, have been put in place to ensure that all purchases
from FLG are on terms consistent with those offered to other, unrelated parties.
11
During the three months and nine months ended July 31, 2008 and 2007 the Company had the following
transactions with FLG:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31,
|
|
|
Nine months ended July 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Sunice inventory purchased
|
|
$
|
40,000
|
|
|
$
|
|
|
|
$
|
775,000
|
|
|
$
|
|
|
Management fees paid
|
|
|
347,000
|
|
|
|
337,000
|
|
|
|
1,182,000
|
|
|
|
1,199,000
|
|
Expenses and supplies
reimbursed
|
|
|
44,000
|
|
|
|
|
|
|
|
275,000
|
|
|
|
|
|
Sunice trademark purchase
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total transactions with FLG
|
|
$
|
431,000
|
|
|
$
|
337,000
|
|
|
$
|
2,232,000
|
|
|
$
|
1,199,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no material outstanding amounts due to or due from FLG at July 31, 2008 or 2007.
Effective January 11, 2008, the Company entered into a consulting agreement with Fletcher Leisure
Group, Ltd., (FLG Ltd.), a New York corporation, under which FLG Ltd. provides the services of a
management consultant to act as the Companys Chief Executive Officer. The initial management
consultant designated by FLG Ltd. is Mr. Fletcher, and FLG Ltd. may not designate any other
management consultant without the Companys written permission. During the three months ended July
31, 2008 and 2007, the Company paid consulting fees to FLG Ltd. of $36,000 and $0, respectively.
During the nine months ended July 31, 2008 and 2007, the Company paid consulting fees to FLG Ltd.
of $138,000 and $0, respectively. There were no material outstanding amounts due to or due from
FLG Ltd. at July 31, 2008 or 2007.
The Company purchases inventoried products from Seidensticker (Overseas) Limited (Seidensticker),
a stockholder whose President and Chief Executive Officer was elected to the Companys Board of
Directors effective January 1, 2006. During the three months ended July 31, 2008 and 2007, the
Company purchased from Seidensticker $240,000 and $151,000 of inventory, respectively. During the
nine months ended July 31, 2008 and 2007, the Company purchased $535,000 and $869,000,
respectively. The Company believes that the terms upon which it purchased the inventoried products
from Seidensticker are consistent with the terms offered to other, unrelated parties. There were
no material outstanding amounts due to or due from Seidensticker at July 31, 2008 or 2007.
NOTE 12 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:
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31,
|
|
|
Nine months ended July 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
26,195,000
|
|
|
$
|
28,368,000
|
|
|
$
|
78,418,000
|
|
|
$
|
87,291,000
|
|
Gekko Brands, LLC
|
|
|
11,666,000
|
|
|
|
12,574,000
|
|
|
|
34,344,000
|
|
|
|
32,809,000
|
|
Ashworth, U.K., Ltd.
|
|
|
4,663,000
|
|
|
|
6,065,000
|
|
|
|
16,162,000
|
|
|
|
19,395,000
|
|
Other International
|
|
|
2,631,000
|
|
|
|
2,454,000
|
|
|
|
8,576,000
|
|
|
|
8,102,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
45,155,000
|
|
|
$
|
49,461,000
|
|
|
$
|
137,500,000
|
|
|
$
|
147,597,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(8,764,000
|
)
|
|
$
|
(5,433,000
|
)
|
|
$
|
(16,891,000
|
)
|
|
$
|
(10,753,000
|
)
|
Gekko Brands, LLC
|
|
|
698,000
|
|
|
|
813,000
|
|
|
|
1,429,000
|
|
|
|
2,112,000
|
|
Ashworth, U.K., Ltd.
|
|
|
499,000
|
|
|
|
1,094,000
|
|
|
|
1,086,000
|
|
|
|
1,604,000
|
|
Other International
|
|
|
516,000
|
|
|
|
568,000
|
|
|
|
2,068,000
|
|
|
|
1,979,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(7,051,000
|
)
|
|
$
|
(2,958,000
|
)
|
|
$
|
(12,308,000
|
)
|
|
$
|
(5,058,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
235,000
|
|
|
$
|
755,000
|
|
|
$
|
1,151,000
|
|
|
$
|
2,710,000
|
|
Gekko Brands, LLC
|
|
|
147,000
|
|
|
|
112,000
|
|
|
|
396,000
|
|
|
|
313,000
|
|
Ashworth, U.K., Ltd.
|
|
|
5,000
|
|
|
|
2,000
|
|
|
|
27,000
|
|
|
|
166,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
387,000
|
|
|
$
|
869,000
|
|
|
$
|
1,574,000
|
|
|
$
|
3,189,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
944,000
|
|
|
$
|
1,196,000
|
|
|
$
|
3,578,000
|
|
|
$
|
3,735,000
|
|
Gekko Brands, LLC
|
|
|
136,000
|
|
|
|
121,000
|
|
|
|
408,000
|
|
|
|
332,000
|
|
Ashworth, U.K., Ltd.
|
|
|
54,000
|
|
|
|
63,000
|
|
|
|
169,000
|
|
|
|
168,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,134,000
|
|
|
$
|
1,380,000
|
|
|
$
|
4,155,000
|
|
|
$
|
4,235,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
October 31,
|
|
|
|
2008
|
|
|
2007
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
72,392,000
|
|
|
$
|
80,715,000
|
|
Gekko Brands, LLC
|
|
|
45,534,000
|
|
|
|
45,217,000
|
|
Ashworth, U.K., Ltd.
|
|
|
25,274,000
|
|
|
|
25,733,000
|
|
Other International
|
|
|
12,779,000
|
|
|
|
8,749,000
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
155,979,000
|
|
|
$
|
160,414,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets, at cost:
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
55,429,000
|
|
|
$
|
65,532,000
|
|
Gekko Brands, LLC
|
|
|
31,645,000
|
|
|
|
29,653,000
|
|
Ashworth, U.K., Ltd.
|
|
|
5,842,000
|
|
|
|
2,306,000
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
92,916,000
|
|
|
$
|
97,491,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
Gekko Brands, LLC
|
|
$
|
15,250,000
|
|
|
$
|
15,250,000
|
|
|
|
|
|
|
|
|
13
NOTE 13 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 election 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.
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.
14
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 July 31,
2008 may more meaningfully be compared to the balance sheet balances at July 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 of 1933, 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 a potential liquidity
shortfall in the first half of fiscal 2009, implementing a successful transition in executive
leadership, successful resolution of the current dispute with Callaway Golf, the evaluation of
strategic alternatives that may be presented, timely development and acceptance of new products, as
well as strategic alliances, the impact of competitive products and pricing, the success of the Sun
Ice® and Callaway Golf apparel product lines, 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.
15
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 July 31, 2008 compared to $3.9 million at October 31, 2007
and $3.4 million at July 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 $32.5 million, net of allowances for doubtful accounts of $1.0 million, at
July 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 July 31, 2007, the trade accounts receivable balance was
$31.3 million, net of allowances for doubtful accounts of $0.9 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 $55.4 million, net of inventory write-downs of $4.0
million, at July 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 July 31, 2007, the inventory balance was
$53.6 million, net of inventory write-downs of $5.1 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.
16
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. As of July 31, 2008, the liability for income tax
associated with uncertain tax positions was $41,000. 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 July 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.
Current trends in the Companys liquidity indicate that, absent operational improvements or
additional funds from a financing or asset sale, the Company could face a liquidity shortfall in
the first half of fiscal 2009. As a result, management and the Board of Directors are actively
focused on operational and other initiatives to increase cash flow.
While no assurances can be given that these initiatives will be
successful, management believes that the Company will be able to meet
all of its debt service, capital expenditure and working capital
requirements for the next 12 months.
17
The Companys ability to generate sufficient cash flow from operations to make scheduled
payments on its debt will depend on a range of economic, competitive and business factors, many of
which are outside its control. The Companys business may not generate sufficient cash flow from
operations to meet its debt service and other obligations, and currently anticipated cost savings
and operating improvements may not be realized on schedule, or at all. If the Company is unable to
meet its expenses, debt service and other obligations, it may need to refinance all or a portion of
its indebtedness on or before maturity, sell assets or raise equity. The Company may not be able to
refinance any of its indebtedness, sell assets or raise equity on commercially reasonable terms or
at all, which could cause it to default on its obligations and impair its liquidity. The Companys
inability to generate sufficient cash flow to satisfy its debt obligations or to refinance its
obligations on commercially reasonable terms would have a material adverse effect on its business,
financial condition and results of operations.
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
third quarter ending July 31, 2008, consolidated net revenues decreased 8.7% as compared to the
same period of fiscal 2007. Consolidated gross profit decreased by 16.6% with gross margins
decreasing from 38.2% of net revenue in the third quarter ended July 31, 2007 to 34.9% in the third
quarter ended July 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.
In January 2008, the Company announced the acquisition of the Sun Ice® and Sunice® trade marks
from Fletcher Leisure Group Inc. The Company has launched a new golf-related technical outerwear
line during 2008 under this brand in the United States, the United Kingdom, Ireland and Europe.
18
Results of Operations
Third quarter 2008 compared to Third 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
|
|
|
|
July 31,
|
|
|
Change
|
|
|
Revenue
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
2008
|
|
|
2007
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail distribution
|
|
$
|
1,142
|
|
|
$
|
1,652
|
|
|
$
|
(510
|
)
|
|
|
(30.9
|
)%
|
|
|
2.5
|
%
|
|
|
3.3
|
%
|
Domestic green grass
|
|
|
18,183
|
|
|
|
17,240
|
|
|
|
943
|
|
|
|
5.5
|
%
|
|
|
40.3
|
%
|
|
|
34.8
|
%
|
Domestic corporate
|
|
|
4,290
|
|
|
|
6,259
|
|
|
|
(1,969
|
)
|
|
|
(31.5
|
)%
|
|
|
9.5
|
%
|
|
|
12.7
|
%
|
Domestic outlet store
|
|
|
2,580
|
|
|
|
3,217
|
|
|
|
(637
|
)
|
|
|
(19.8
|
)%
|
|
|
5.7
|
%
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total domestic
|
|
|
26,195
|
|
|
|
28,368
|
|
|
|
(2,173
|
)
|
|
|
(7.7
|
)%
|
|
|
58.0
|
%
|
|
|
57.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gekko
|
|
|
11,666
|
|
|
|
12,574
|
|
|
|
(908
|
)
|
|
|
(7.2
|
)%
|
|
|
25.9
|
%
|
|
|
25.4
|
%
|
Ashworth U.K.
|
|
|
4,663
|
|
|
|
6,065
|
|
|
|
(1,402
|
)
|
|
|
(23.1
|
)%
|
|
|
10.3
|
%
|
|
|
12.3
|
%
|
Other international
|
|
|
2,631
|
|
|
|
2,454
|
|
|
|
177
|
|
|
|
7.2
|
%
|
|
|
5.8
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
45,155
|
|
|
|
49,461
|
|
|
|
(4,306
|
)
|
|
|
(8.7
|
)%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
29,399
|
|
|
|
30,578
|
|
|
|
(1,179
|
)
|
|
|
(3.9
|
)%
|
|
|
65.1
|
%
|
|
|
61.9
|
%
|
Selling, general and administrative expenses
|
|
|
22,807
|
|
|
|
21,841
|
|
|
|
966
|
|
|
|
4.4
|
%
|
|
|
50.5
|
%
|
|
|
44.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
52,206
|
|
|
|
52,419
|
|
|
|
(213
|
)
|
|
|
(0.4
|
)%
|
|
|
115.6
|
%
|
|
|
106.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7,051
|
)
|
|
|
(2,958
|
)
|
|
|
(4,093
|
)
|
|
|
138.4
|
%
|
|
|
(15.6
|
)%
|
|
|
(6.1
|
)%
|
Interest expense, net
|
|
|
(827
|
)
|
|
|
(813
|
)
|
|
|
(14
|
)
|
|
|
1.7
|
%
|
|
|
(1.9
|
)%
|
|
|
(1.4
|
)%
|
Other income (expense), net
|
|
|
13
|
|
|
|
(54
|
)
|
|
|
67
|
|
|
|
(124.1
|
)%
|
|
|
0.0
|
%
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(7,865
|
)
|
|
|
(3,825
|
)
|
|
|
(4,040
|
)
|
|
|
105.6
|
%
|
|
|
(17.5
|
)%
|
|
|
(7.6
|
)%
|
Provision for income taxes
|
|
|
1,716
|
|
|
|
1,824
|
|
|
|
(108
|
)
|
|
|
(5.9
|
)%
|
|
|
3.7
|
%
|
|
|
3.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,581
|
)
|
|
$
|
(5,649
|
)
|
|
$
|
(3,932
|
)
|
|
|
69.6
|
%
|
|
|
(21.2
|
)%
|
|
|
(11.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net revenues for the third quarter of fiscal 2008 decreased by 8.7% to $45.2
million from $49.5 million for the same period of the prior fiscal year, primarily due to sales
decreases from the Companys corporate distribution channel, Ashworth U.K., Gekko Brands, LLC
(Gekko) and the Company-owned outlets. These decreases were partly offset by increases in sales
from the domestic green grass distribution and other international channels.
Net revenues for the domestic segment, which excludes Gekko, decreased 7.7% to $26.2 million
for the third quarter of fiscal 2008 from $28.4 million for the same period of the prior fiscal
year.
Net revenues from the Companys retail distribution channel decreased from $1.7 million in the
third quarter of fiscal 2007 to $1.1 million in the third quarter of fiscal 2008. This decrease
was driven by a consolidation of retail accounts and their associated location closures and a
decision by the Companys management team to strategically exit a number of large accounts.
Net revenues from the Companys corporate distribution channel decreased 31.5% or $2.0 million
for the third quarter of fiscal 2008 as compared to the same period of fiscal 2007. The decrease
in the corporate channel primarily resulted from weakness in the economy and lower corporate
spending.
19
Third quarter 2008 net revenues from the Companys core channel of distribution, on-course
golf retailers, increased 2.8%, or $0.4 million, over the comparable prior year quarter.
Additionally, revenues from the Companys off-course retailers increased 22.1%, or $0.5 million.
The Company continues to experience significant competitive pressure within the off-course channel
of distribution. This growth is the result of the implementation of new sales management
processes, in both the on-course and off-course channels of distribution, and a strengthening of
the sales team in both quantity and quality. However, as a result of the difficult economy, retail
sell-through during the third quarter of 2008 has been below expectations and the Company expects
revenues from this channel to decrease for the remainder of the fiscal year as compared to prior
year periods.
Net revenues from the Company-owned outlet stores decreased 19.8%, or $0.6 million, for the
third quarter of fiscal 2008 as compared to the same period of fiscal 2007. The decrease was
driven largely due to the difficult economic environment combined
with product assortment and merchandising issues.
Net revenues for Gekko decreased 7.2%, or $0.9 million, to $11.7 million for the third quarter
of fiscal 2008 as compared to $12.6 million for the same period of the prior fiscal year. This
decrease was primarily driven by a softness in the collegiate and green grass markets as well as a
continued deterioration from the Outdoor Direct catalog sales.
Net revenues for Ashworth U.K., Ltd. decreased 23.1%, or $1.4 million, to $4.7 million for the
third quarter of fiscal 2008 from $6.1 million for the same period of the prior fiscal year. The
decrease is due to reduced in-season replenishments orders from the Companys resort, golf and
retail customers as well as lower corporate revenues, all a result of the slowing economy in
Europe.
Net revenues for the other international segment increased 7.2% or $0.2 million for the third
quarter of fiscal 2008. The increase was due primarily to the favorable effect of currency
exchange rates as a result of the U.S. dollar weakening against the Canadian dollar, when compared
to the prior year.
Consolidated gross margin for the third quarter of fiscal 2008 decreased 330 basis points to
34.9% as compared to 38.2% for the same period of the prior fiscal year. The decrease in
consolidated gross margin was driven by increased discounting, higher product costs as a result of
fixed overhead allocated to lower sales volumes, higher material and transportation costs and an
increase in inventory reserves due to the aging of certain inventory during the difficult economy.
Sales of the Companys off-price products were at significantly higher discounts during the third
quarter of 2008 as compared to the same quarter of the prior year. In addition, the European
channel experienced larger discounts within its resort, golf and retail customers.
Consolidated selling, general and administrative (SG&A) expenses increased $1.0 million, or
4.4%, to $22.8 million for the third quarter of fiscal 2008 from $21.8 million for the same period
of the prior fiscal year. As a percent of net revenues, SG&A expenses were 50.5% for the third
quarter of fiscal
2008 as compared to 44.2% for the same period of the prior fiscal year. The increase is
largely due to increased consulting fees, primarily associated with a review of the Companys
operations, cost structures and strategic plans. Also contributing to higher SG&A expenses were
increases in tradeshow/tournament/sales meeting expenses, royalties as a result of a higher
concentration of revenues from licensed products and an increase in incentive compensation as a
result of the reversal of the fiscal year 2007 year-to-date performance-based bonus accrual during
the third quarter of 2007. These increases were partially offset by a decrease in severance, a
decrease in the expense related to the employment and non-compete agreement entered into with the
principals of Gekko on June 4, 2007, and lower commissions.
20
Total net other expense decreased 6.1%, or $0.1 million, to $0.8 million for the third quarter
of fiscal 2008 as compared to $0.9 million for the same period of the prior fiscal year. The
decrease in other expense was primarily driven by favorable currency translation effects of $0.2
million, partially offset by an increase in other expenses of $0.1 million.
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 tax rate for the income tax provision for the three months ended July 31, 2008
and 2007 was (22%) and (48%), respectively. The increase in the effective rate for the current
period as compared to the same period of the prior fiscal year is due to discrete one-time charges
in the third quarter of the current fiscal year of $4.3 million to increase the valuation allowance
against net deferred tax assets, primarily consisting of estimated net operating losses.
Consolidated net loss increased $4.0 million to $9.6 million for the third quarter of fiscal
2008 from a net loss of $5.6 million for the same period of the prior fiscal year. The increased
loss is primarily due to the $4.3 million decrease in net revenues offset by the $0.2 million
decrease in total operating expenses, the $0.1 million decrease in other expenses and the $0.1
million decrease in provision for income taxes.
21
Nine months ended July 31, 2008 compared to Nine months ended July 31, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
July 31,
|
|
|
Change
|
|
|
Revenue
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
2008
|
|
|
2007
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail distribution
|
|
$
|
7,332
|
|
|
$
|
12,160
|
|
|
$
|
(4,828
|
)
|
|
|
(39.7
|
)%
|
|
|
5.3
|
%
|
|
|
8.2
|
%
|
Domestic green grass
|
|
|
50,036
|
|
|
|
48,059
|
|
|
|
1,977
|
|
|
|
4.1
|
%
|
|
|
36.4
|
%
|
|
|
32.6
|
%
|
Domestic corporate
|
|
|
13,718
|
|
|
|
18,515
|
|
|
|
(4,797
|
)
|
|
|
(25.9
|
)%
|
|
|
10.0
|
%
|
|
|
12.5
|
%
|
Domestic outlet store
|
|
|
7,332
|
|
|
|
8,557
|
|
|
|
(1,225
|
)
|
|
|
(14.3
|
)%
|
|
|
5.3
|
%
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total domestic
|
|
|
78,418
|
|
|
|
87,291
|
|
|
|
(8,873
|
)
|
|
|
(10.2
|
)%
|
|
|
57.0
|
%
|
|
|
59.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gekko
|
|
|
34,344
|
|
|
|
32,809
|
|
|
|
1,535
|
|
|
|
4.7
|
%
|
|
|
25.0
|
%
|
|
|
22.3
|
%
|
Ashworth U.K.
|
|
|
16,162
|
|
|
|
19,395
|
|
|
|
(3,233
|
)
|
|
|
(16.7
|
)%
|
|
|
11.8
|
%
|
|
|
13.1
|
%
|
Other international
|
|
|
8,576
|
|
|
|
8,102
|
|
|
|
474
|
|
|
|
5.9
|
%
|
|
|
6.2
|
%
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
137,500
|
|
|
|
147,597
|
|
|
|
(10,097
|
)
|
|
|
(6.8
|
)%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
84,858
|
|
|
|
89,856
|
|
|
|
(4,998
|
)
|
|
|
(5.6
|
)%
|
|
|
61.7
|
%
|
|
|
61.0
|
%
|
Selling, general and administrative expenses
|
|
|
64,950
|
|
|
|
62,799
|
|
|
|
2,151
|
|
|
|
3.4
|
%
|
|
|
47.2
|
%
|
|
|
42.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
149,808
|
|
|
|
152,655
|
|
|
|
(2,847
|
)
|
|
|
(1.9
|
)%
|
|
|
108.9
|
%
|
|
|
103.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(12,308
|
)
|
|
|
(5,058
|
)
|
|
|
(7,250
|
)
|
|
|
143.3
|
%
|
|
|
(8.9
|
)%
|
|
|
(3.5
|
)%
|
Interest expense, net
|
|
|
(2,499
|
)
|
|
|
(2,127
|
)
|
|
|
(372
|
)
|
|
|
17.5
|
%
|
|
|
(1.8
|
)%
|
|
|
(1.3
|
)%
|
Other income (expense), net
|
|
|
1,069
|
|
|
|
(114
|
)
|
|
|
1,183
|
|
|
|
(1037.7
|
)%
|
|
|
0.8
|
%
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(13,738
|
)
|
|
|
(7,299
|
)
|
|
|
(6,439
|
)
|
|
|
88.2
|
%
|
|
|
(9.9
|
)%
|
|
|
(4.9
|
)%
|
Provision for income taxes
|
|
|
2,339
|
|
|
|
3,331
|
|
|
|
(992
|
)
|
|
|
(29.8
|
)%
|
|
|
1.7
|
%
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,077
|
)
|
|
$
|
(10,630
|
)
|
|
$
|
(5,447
|
)
|
|
|
51.2
|
%
|
|
|
(11.6
|
)%
|
|
|
(7.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net revenues for the first nine months of fiscal 2008 decreased 6.8% to $137.5
million from $147.6 million for the same period of the prior fiscal year. This decrease was due
primarily to decreased sales in the Companys retail and corporate distribution channels, the
Company-owned outlets and Ashworth U.K., Ltd. These decreases were partly offset by increases in
sales from the domestic green grass channel, Gekko (primarily the racing channel), and the other
international segment.
Net revenues for the domestic segment, which excludes Gekko, decreased 10.2%, or $8.9 million,
to $78.4 million in the first nine months of fiscal 2008 from $87.3 million for the same period of
the prior fiscal year.
Net revenues from the Companys retail distribution channel decreased 39.7%, or $4.8 million,
in the first nine months of fiscal 2008 as compared to the same period of the prior fiscal year.
This decrease was
driven by a consolidation of retail accounts and their associated location closures, a
challenging retail environment and a strategic decision by the management team to exit a number of
large accounts.
Net revenues from the Companys core distribution channel, on-course golf retailers, increased
6.9%, or $2.5 million, in the first nine months of fiscal 2008 as compared to the same period of
the prior fiscal year. However, this increase was partially offset by a decrease of $0.6 million
in revenues from off-course and off-price retailers. The Company continues to experience
significant competitive pressure within the off-course channel of distribution. This growth from
on-course retailers is the result of the implementation of new sales management processes in the
on-course channel of distribution, and a strengthening of the sales team in both quantity and
quality.
22
Net revenues from the Companys corporate distribution channel decreased 25.9%, or $4.8
million, in the first nine months of fiscal 2008 as compared to the same period of the prior fiscal
year. The decrease in the corporate channel resulted from lower corporate spending as a result of
the difficult economy and certain customer events that occurred in the prior year period that did
not recur in the comparable 2008 quarter as well as the Companys strategic decision to discontinue
sales to certain accounts.
Net revenues from the Company outlet stores decreased 14.3%, or $1.2 million, in the first
nine months of fiscal 2008 as compared to the same period of the prior fiscal year. The decrease
was driven largely by the difficult retail environment combined with
a product assortment issue and an increase in reduced price
promotional activity.
Net revenues for Gekko increased 4.7%, or $1.5 million, to $34.3 million for the first nine
months of fiscal 2008 as compared to $32.8 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 lower sales from the
collegiate and golf channels as a result of the slowing economy, the absence in the first nine
months of 2008 of certain corporate event revenues that occurred during the comparable period of
fiscal 2007 and the deterioration of its Outdoor Direct catalog sales.
Net revenues for Ashworth U.K., Ltd. decreased 16.7%, or $3.2 million, to $16.2 million in the
first nine months of fiscal 2008 from $19.4 million for the same period of the prior fiscal year.
The decrease is due to reduced in-season replenishment orders from the Companys resort, golf and
retail customers as well as lower corporate revenues, all a result of the slowing economy in
Europe. Also contributing to the decrease was a loss of revenue as a result of the shut-down of
the warehouse facility during the first quarter of fiscal 2008 related to the ERP implementation.
Net revenues for the other international segment increased 5.9% to $8.6 million in the first
nine months of fiscal 2008 from $8.1 million for the same period of the prior fiscal year. The
increase was due primarily to the favorable effect of currency exchange rates as a result of the
U.S. dollar weakening against the Canadian dollar, when compared to the prior year.
Consolidated gross margin for the first nine months of fiscal 2008 decreased 80 basis points
to 38.3% as compared to 39.1% for the same period of the prior fiscal year. The decrease in
consolidated gross margin was primarily due to approximately $0.7 million of additional costs to
divert the production of Gekkos NASCAR products to alternate manufacturing facilities and expedite
manufacturing and transportation as a result of a labor stoppage at a key headwear vendor in the
first quarter, a higher concentration of lower margin revenues from Gekkos NASCAR channel and an
increase in inventory reserves due to the aging of certain inventory during the difficult economy.
Partially offsetting these
decreases was an increase in average sales prices out pacing the increase in average cost per
unit combined with a lower concentration of lower margin off-price revenues.
Consolidated SG&A expenses increased 3.4%, or $2.2 million, to $65.0 million for the first
nine months of fiscal 2008 from $62.8 million for the same period of the prior fiscal year. As a
percentage of revenues, SG&A expenses increased to 47.2% of net revenues for the first nine months
of fiscal 2008, as compared to 42.5% for the same period of the prior fiscal year. This increase in
SG&A is largely due to increased consulting fees, primarily associated with athlete endorsements,
reviewing the Companys operations, cost structures and strategic plans, design consultants and the
consulting agreement for the services of our CEO. Also contributing was an increase in
tradeshow/tournament/sales meeting expenses as a result of the timing and locations of certain
events and the addition of the Sunice brand, and 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 salaries and wages, primarily performance-based bonuses and
severance.
23
Total net other expense decreased 36.2%, or $0.8 million, to $1.4 million in the first nine
months of fiscal 2008 as compared to $2.2 million for the same period of the prior fiscal year,
primarily driven by favorable currency exchange rates of $1.2 million, partially offset by an
increase in interest expense of $0.4 million.
The effective tax rate for the income tax provision for the nine months ended July 31, 2008
and 2007 was (17%) and (46%), respectively. The increase in the effective rate for the nine month
period ended July 31, 2008 as compared to the same period a year ago is due to discrete one-time
charges in the first nine months of the current fiscal year of $7.1 million to increase the
valuation allowance against net deferred tax assets, primarily consisting of estimated net
operating losses.
Consolidated net loss increased $5.4 million to a loss of $16.1 million for the nine months
ended July 31, 2008 from a net loss of $10.6 million for the same period of the prior fiscal year.
The increase is primarily due to the $10.1 million decrease in revenue, partially offset by the
$2.8 million decrease in total operating expenses, a $0.8 million decrease in other expenses and
the $1.0 million decrease in the tax 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 nine months ended July 31, 2008, net cash used in operating activities was $12.2
million as compared to $6.1 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 $16.1 million as compared to a net operating loss of $10.6 million for the same period of
the prior fiscal year, as well as a net increase in working capital and non-cash expenses during
the nine months ended July 31, 2008 of $0.6 million.
Net cash used in investing activities was $1.7 million for the nine months ended July 31, 2008
as compared to $3.3 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.
Net cash provided by financing activities increased by $2.7 million to $10.8 million for the
nine months ended July 31, 2008 as compared to $8.1 million provided by financing activities during
the same period of the prior fiscal year. The increase in cash provided in financing activities
was primarily attributable to a net increase in borrowing on the line of credit of $7.0 million and
$0.3 million in restricted cash held at Ashworth U.K. being released for use. This was offset by a
net increase in payments on long-term debt of $3.0 million, a decrease in borrowings on long-term
debt of $0.7 million and a decrease in proceeds from issuance of common stock, from the exercise of
stock options, of $0.9 million.
24
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 then 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 was set at LIBOR plus 1.25% for the first
six months of the agreement and adjusts thereafter. At July 31, 2008, the interest rate applicable
to borrowings under the Credit Facilitys base rate was 5.00% and 3.98% for balances using the
LIBOR election. The Company also is required to pay customary fees under the Credit Facility. All
interest and per annum fees are calculated on the basis of actual number of days elapsed in a year
of 360 days.
The consolidated 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 provided by B of A to Ashworth U.K., Ltd., as
described below. The consolidated borrowing base as of July 31, 2008 was $55.0 million; unused
availability, as of July 31, 2008, was $3.0 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 also 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.
25
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 U.K.
The foregoing summary
of the U.K. Loan Facility is qualified by reference to the Loan and
Security Agreement dated as of February 9, 2008 attached as Exhibit 10(e) to the Companys Form
10-Q filed with the SEC on March 11, 2008. Please see the Loan and Security Agreement for a more
detailed description of the terms of the Credit Facility.
The Company had $1.2 million of commercial letters of credit outstanding under the Credit
Facility at July 31, 2008 as compared to $1.2 million outstanding on the Union Bank Credit
Agreement at July 31, 2007. The Company had $34.9 million outstanding against the Credit Facility
as of July 31, 2008 compared to $22.3 million outstanding at July 31, 2007 against the Union Bank
revolving credit facility, and $4.5 million outstanding on the Union Bank term loan at July 31,
2007. The consolidated borrowing base as of July 31, 2008 was $55.0 million; unused availability,
as of July 31, 2008, was $9.3 million.
Consolidated net trade receivables were $32.5 million at July 31, 2008, a decrease of $2.1
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 $31.3 million at July 31,
2007, rather than the year-end balance. Compared to net trade receivables at July 31, 2007, net
trade receivables increased by $1.2 million primarily due to a reduction in reserves for markdown
allowances of $0.8 million and an increase in trade receivables of $0.4 million
due to the timing of shipments during the three months ended July 31, 2008.
Consolidated net inventories increased to $55.4 million at July 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 $53.6 million at July 31, 2007, net inventories at July 31, 2008
increased 3.4% or $1.8 million. This increase was due primarily to the addition of the Sunice®
brand.
Consolidated current liabilities increased to $57.3 million at July 31, 2008 from $45.4
million at
October 31, 2007. Compared to current liabilities of $45.0 million at July 31, 2007, current
liabilities increased 27.3% primarily due to an increase in the Companys line of credit payable of
$15.3 million and an increase of other accrued liabilities of $1.5 million, partly offset by a $1.7
million reduction in the current portion of long-term debt, a $0.9 million reduction in accounts
payable and a reduction in accrued salaries and commissions of $2.2 million.
During the first nine months of fiscal 2008, the Company incurred capital expenditures of $1.6
million, primarily for computer systems, furniture and fixtures, and leasehold improvements. The
Company anticipates capital spending of approximately $0.2 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 $0.3 million in the nine months
ended July 31, 2008, due entirely to SFAS No. 123R compensation expense.
26
Current trends in the Companys liquidity indicate that, absent operational changes or
additional funds from a financing or asset sale, the Company could face a liquidity shortfall in
the first half of fiscal 2009. As a result, management and the Board of Directors are actively
focused on operational and other initiatives to increase cash flow.
While no assurances can be given that these initiatives will be
successful, management believes that the Company will be able to meet
all of its debt service, capital expenditure and working capital
requirements for the next 12 months.
The Companys ability to generate sufficient cash flow from operations to make scheduled
payments on its debt will depend on a range of economic, competitive and business factors, many of
which are outside its control. The Companys business may not generate sufficient cash flow from
operations to meet its debt service and other obligations, and currently anticipated cost savings
and operating improvements may not be realized on schedule, or at all. If the Company is unable to
meet its expenses, debt service and other obligations, it may need to refinance all or a portion of
its indebtedness on or before maturity, sell assets or raise equity. The Company may not be able to
refinance any of its indebtedness, sell assets or raise equity on commercially reasonable terms or
at all, which could cause it to default on its obligations and impair its liquidity. The Companys
inability to generate sufficient cash flow to satisfy its debt obligations or to refinance its
obligations on commercially reasonable terms would have a material adverse effect on its business,
financial condition and results of operations.
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, which was updated by our
Quarterly Report on Form 10-Q for the quarter ended April 30, 2008. There have been no subsequent
material changes to our contractual obligations, as disclosed in these filings.
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 election 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.
27
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.
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 July 31, 2008 includes a mortgage note, notes
payable and capital lease obligations totaling $11.4 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 5.0% to 9.1%. The Company also had $34.9 million outstanding
at July 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 July 31, 2008, the Applicable Rate was 5.00%. 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 nine months ended July
31, 2008 would have resulted in a $218,000 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 July 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.
28
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to provide reasonable
assurance 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 ( the CEO) and the Chief Financial
Officer (the 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.
The Company carried out an evaluation, under the supervision and with the participation of its
management, including the CEO and the CFO, of the design and operation of the Companys disclosure
controls and procedures as of July 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 July 31, 2008.
Changes in Internal Control over Financial Reporting
There have been no changes in the Companys internal control over financial reporting that
occurred during the three month period ending July 31, 2008 that materially affected, or are
reasonably likely to materially affect, the Companys 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 objected to the Companys launch of a new
golf-related technical outerwear line in connection with the Companys acquisition of the Sun Ice®
and Sunice® trademarks in January 2008. Callaway claims that this activity is a material breach of
the License Agreement which entitles Callaway to terminate the License Agreement. The Company
strongly denies that its activities with the Sun Ice line breach the License Agreement and has
pointed to specific language in the License Agreement that permits the Company to market products
under any trademarks owned by itself or its subsidiaries. The Company is engaged in binding
arbitration proceedings to resolve the dispute and such proceedings are in a preliminary phase.
The arbitration is currently scheduled for early November 2008. The Company has informed Callaway
that any attempt to terminate the License Agreement in advance of an arbitral ruling in Callaways
favor would, in the Companys view, constitute wrongful termination, and Callaway has indicated
that it will likely forego any termination at least until the arbitration is completed. The
Company is evaluating whether it will seek damages or other relief against Callaway for any
wrongful interference with the Companys existing contract rights.
29
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 on behalf 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 putative 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.
Item 1A. Risk Factors
The following Risk Factors are 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 being without
any merit, and the parties are engaged in binding arbitration to determine whether a breach has
occurred and whether Callaway has the right to terminate the License Agreement. While the Company
is confident that the arbitrator will conclude that no breach has occurred, the uncertainties
associated with the arbitration 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. There is a further risk that the Companys expected
revenues from the sale of Callaway-branded products could be impacted by the uncertainty associated
with the ongoing arbitration even if the Company ultimately prevails.
The Company will need to improve cash flow from operations or through a financing or sale of
assets to avoid a future liquidity shortfall.
As discussed above under Part I, Item 2
Managements Discussion and Analysis of Financial Condition and Results of Operations Capital
Resources and Liquidity, current trends in the Companys liquidity indicate that, absent
operational improvements or additional funds from a financing or asset sale, the Company could face
a liquidity shortfall in the first half of fiscal 2009. While the Company is actively focused on
operational and other initiatives to increase cash flow, no assurances can be given that these
initiatives will be successful. The Companys ability to generate sufficient cash flow from
operations to make scheduled payments on its debt will depend on a range of economic, competitive
and business factors, many of which are outside its control. The Companys business may not
generate sufficient cash flow from operations to meet its debt service and other obligations, and
currently anticipated cost savings and operating improvements may not be realized on schedule, or
at all. If the Company is unable to meet its expenses, debt service and other obligations, it may
need to refinance all or a portion of its indebtedness on or before maturity, sell assets or raise
equity. The Company may not be able to refinance any of its indebtedness, sell assets or raise
equity on commercially reasonable terms or at all, which could cause it to default on its
obligations and impair its liquidity. The Companys inability to generate sufficient cash flow to
satisfy its debt obligations or to refinance its obligations on commercially reasonable terms would
have a material adverse effect on its business, financial condition and results of operations.
30
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The results of the stockholder votes at the May 29, 2008 Annual Meeting were previously
disclosed in the Companys Form 10-Q for the quarter ended April 30, 2008.
Item 6. EXHIBITS
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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, 1994 (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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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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31
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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. (filed as Exhibit 10(e) to the Companys Form 10-Q on March 11, 2008 (File No.
001-14547) and incorporated herein by reference).
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10(f)
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Compensation agreement dated August 6, 2008 between Ashworth, Inc., a Delaware corporation,
and Michael S. Koeneke.
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10(g)
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Compensation agreement dated August 6, 2008 between Ashworth, Inc., a Delaware corporation,
and David M. Meyer.
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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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32
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: September 9, 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: September 9, 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
Principal Accounting Officer
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33
EXHIBIT INDEX
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Exhibit
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Number
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Description of Exhibit
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10(f)
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Compensation agreement dated August 6, 2008 between
Ashworth, Inc., a Delaware corporation, and Michael S.
Koeneke.
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10(g)
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Compensation agreement dated August 6, 2008 between
Ashworth, Inc., a Delaware corporation, and David M. Meyer.
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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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|
|
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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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|
|
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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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34
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