UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2005
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 001-14547
Ashworth, Inc.
| Delaware | 84-1052000 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
2765 LOKER AVENUE WEST
CARLSBAD, CA 92008
(Address of Principal Executive Offices)
(760) 438-6610
(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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Title | Outstanding at February 28, 2005 | |
| $.001 par value Common Stock | 13,768,535 |
INDEX
| PAGE | ||||||||
Item 1. Financial Statements |
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| 1 | ||||||||
| 2 | ||||||||
| 3 | ||||||||
| 4 | ||||||||
| 11 | ||||||||
| 22 | ||||||||
| 22 | ||||||||
| 23 | ||||||||
| 23 | ||||||||
| 23 | ||||||||
| 23 | ||||||||
| 24 | ||||||||
| 24 | ||||||||
| 30 | ||||||||
| 31 | ||||||||
| EXHIBIT 10.1 | ||||||||
| EXHIBIT 31.1 | ||||||||
| EXHIBIT 31.2 | ||||||||
| EXHIBIT 32.1 | ||||||||
| EXHIBIT 32.2 | ||||||||
PART I
FINANCIAL INFORMATION
ASHWORTH, INC. AND SUBSIDIARIES
| January 31, 2005 | October 31, 2004 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 3,983,000 | $ | 5,541,000 | ||||
Accounts
receivable - trade, net |
30,519,000 | 39,264,000 | ||||||
Accounts
receivable - other |
746,000 | 1,055,000 | ||||||
Inventories, net |
59,248,000 | 49,249,000 | ||||||
Other current assets |
6,882,000 | 4,014,000 | ||||||
Deferred income tax asset |
1,697,000 | 1,697,000 | ||||||
Total current assets |
103,075,000 | 100,820,000 | ||||||
Property, plant and equipment, at cost |
54,779,000 | 52,396,000 | ||||||
Less accumulated depreciation and
amortization |
(18,930,000 | ) | (17,865,000 | ) | ||||
Total property, plant and equipment, net |
35,849,000 | 34,531,000 | ||||||
Goodwill |
12,642,000 | 12,640,000 | ||||||
Intangible assets, net |
10,885,000 | 11,028,000 | ||||||
Other assets |
619,000 | 467,000 | ||||||
Total assets |
$ | 163,070,000 | $ | 159,486,000 | ||||
Liabilities and Stockholders’ Equity |
||||||||
Current liabilities: |
||||||||
Line of credit payable |
$ | 8,250,000 | $ | 2,500,000 | ||||
Current portion of long-term debt |
4,497,000 | 4,502,000 | ||||||
Accounts payable |
13,852,000 | 13,959,000 | ||||||
Income tax payable |
— | 1,157,000 | ||||||
Accrued liabilities: |
||||||||
Salaries and commissions |
2,378,000 | 2,809,000 | ||||||
Other |
3,954,000 | 4,135,000 | ||||||
Total current liabilities |
32,931,000 | 29,062,000 | ||||||
Long-term debt, net of current portion |
26,105,000 | 27,186,000 | ||||||
Deferred income tax liability |
1,667,000 | 1,667,000 | ||||||
Other long-term liabilities |
238,000 | 355,000 | ||||||
Stockholders’ equity: |
||||||||
Common stock |
14,000 | 14,000 | ||||||
Capital in excess of par value |
42,634,000 | 42,171,000 | ||||||
Retained earnings |
56,192,000 | 56,109,000 | ||||||
Accumulated other comprehensive income |
3,289,000 | 2,922,000 | ||||||
Total stockholders’ equity |
102,129,000 | 101,216,000 | ||||||
Total liabilities and stockholders’ equity |
$ | 163,070,000 | $ | 159,486,000 | ||||
See accompanying notes to
unaudited condensed consolidated financial statements.
1
ASHWORTH, INC. AND SUBSIDIARIES
| Three months ended January 31, | ||||||||
| 2005 | 2004 | |||||||
Net revenues |
$ | 36,513,000 | $ | 27,338,000 | ||||
Cost of goods sold |
21,878,000 | 16,647,000 | ||||||
Gross profit |
14,635,000 | 10,691,000 | ||||||
Selling, general and administrative expenses |
14,091,000 | 10,405,000 | ||||||
Income from operations |
544,000 | 286,000 | ||||||
Other income (expense): |
||||||||
Interest income |
20,000 | 21,000 | ||||||
Interest expense |
(533,000 | ) | (169,000 | ) | ||||
Net foreign currency exchange gain |
43,000 | 148,000 | ||||||
Other income (expense), net |
64,000 | (63,000 | ) | |||||
Total other expense |
(406,000 | ) | (63,000 | ) | ||||
Income before provision for income taxes |
138,000 | 223,000 | ||||||
Provision for income taxes |
55,000 | 89,000 | ||||||
Net income |
$ | 83,000 | $ | 134,000 | ||||
Net income per share: |
||||||||
Basic |
$ | 0.01 | $ | 0.01 | ||||
Diluted |
$ | 0.01 | $ | 0.01 | ||||
Weighted-average shares outstanding: |
||||||||
Basic |
13,726,000 | 13,302,000 | ||||||
Diluted |
14,110,000 | 13,644,000 | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
ASHWORTH, INC. AND SUBSIDIARIES
| Three months ended January 31, | ||||||||
| 2005 | 2004 | |||||||
Cash flows from operating activities: |
||||||||
Net cash used in operating activities |
$ | (4,387,000 | ) | $ | (2,018,000 | ) | ||
Cash flows from investing activities: |
||||||||
Net purchases of property, plant and equipment |
(2,533,000 | ) | (989,000 | ) | ||||
Net cash used in investing activities |
(2,533,000 | ) | (989,000 | ) | ||||
Cash flows from financing activities: |
||||||||
Principal payments on capital lease obligations |
(45,000 | ) | (41,000 | ) | ||||
Borrowings on line of credit |
13,500,000 | 7,800,000 | ||||||
Payments on line of credit |
(7,750,000 | ) | (7,400,000 | ) | ||||
Principal payments on notes payable and long-term debt |
(1,042,000 | ) | (30,000 | ) | ||||
Proceeds from exercise of stock options |
357,000 | 398,000 | ||||||
Change in
restricted cash |
(25,000 | ) | (17,000 | ) | ||||
Net cash provided by financing activities |
4,995,000 | 710,000 | ||||||
Effect of exchange rate changes on cash |
367,000 | 1,104,000 | ||||||
Net decrease in cash and cash equivalents |
(1,558,000 | ) | (1,193,000 | ) | ||||
Cash and cash equivalents, beginning of period |
5,541,000 | 5,024,000 | ||||||
Cash and cash equivalents, end of period |
$ | 3,983,000 | $ | 3,831,000 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
ASHWORTH, INC. AND SUBSIDIARIES
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 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 Management’s 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, 2004, filed with the SEC on January 28, 2005.
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 for Shipping and Handling Fees and Costs.
Cost of Goods Sold
The Company includes F.O.B. purchase price, inbound freight charges, duty, buying commissions and overhead in its cost of goods sold line item. Overhead costs include purchasing and receiving costs, inspection costs, warehousing costs, internal transfers costs and other costs associated with the Company’s distribution. The Company does not exclude any of these costs from cost of goods sold.
Shipping and Handling Expenses
Shipping expenses, which consist primarily of payments made to freight companies, are reported in selling, general and administrative expenses. Shipping expenses for the quarters ended January 31, 2005 and 2004 were $530,000 and $314,000, respectively.
Reclassifications
Certain reclassifications have been made to the prior periods’ condensed consolidated financial statements to conform to classifications used in the current period. These reclassifications had no impact on previously reported results.
4
NOTE 2 — Inventories.
Inventories consisted of the following at January 31, 2005 and October 31, 2004:
| January 31, | October 31, | |||||||
| 2005 | 2004 | |||||||
Raw materials |
$ | 106,000 | $ | 123,000 | ||||
Finished goods |
59,142,000 | 49,126,000 | ||||||
Total inventories, net |
$ | 59,248,000 | $ | 49,249,000 | ||||
NOTE 3 — Goodwill and Other Intangible Assets.
The Company accounts for goodwill and intangible assets in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill and certain intangible assets are not amortized but are subject to an annual impairment test. At January 31, 2005 and October 31, 2004 goodwill totaled $12,642,000 and $12,640,000, respectively. During the quarter ended January 31, 2005, the Company adjusted goodwill by approximately $2,000 for certain preacquisition contingencies relating to its acquisition of Gekko Brands, LLC on July 7, 2004. The following sets forth the intangible assets, excluding goodwill, by major category:
| January 31, 2005 | October 31, 2004 | |||||||||||||||||||||||
| Gross Carrying | Accumulated | Gross Carrying | Accumulated | |||||||||||||||||||||
| Amount | Amortization | Net Book Value | Amount | Amortization | Net Book Value | |||||||||||||||||||
Indefinite life: |
||||||||||||||||||||||||
Tradenames |
$ | 8,700,000 | $ | — | $ | 8,700,000 | $ | 8,700,000 | $ | — | $ | 8,700,000 | ||||||||||||
Finite life: |
||||||||||||||||||||||||
Customer lists |
1,530,000 | (131,000 | ) | 1,399,000 | 1,530,000 | (72,000 | ) | 1,458,000 | ||||||||||||||||
Non-competes |
1,372,000 | (721,000 | ) | 651,000 | 1,372,000 | (680,000 | ) | 692,000 | ||||||||||||||||
Customer sales backlog |
190,000 | (143,000 | ) | 47,000 | 190,000 | (71,000 | ) | 119,000 | ||||||||||||||||
Trademarks |
1,332,000 | (1,244,000 | ) | 88,000 | 1,299,000 | (1,240,000 | ) | 59,000 | ||||||||||||||||
Total intangible assets |
$ | 13,124,000 | $ | (2,239,000 | ) | $ | 10,885,000 | $ | 13,091,000 | $ | (2,063,000 | ) | $ | 11,028,000 | ||||||||||
Intangible assets with definite lives are amortized using the straight-line method over periods ranging from 1 to 7 years. During the three months ended January 31, 2005 and 2004, aggregate amortization expense was approximately $176,000 and $54,000, respectively.
5
Amortization expense related to intangible assets at January 31, 2005 in each of the next five fiscal years and beyond is expected to be as follows:
Remainder 2005 |
$ | 361,000 | ||
2006 |
420,000 | |||
2007 |
411,000 | |||
2008 |
393,000 | |||
2009 |
251,000 | |||
2010 |
210,000 | |||
Thereafter |
139,000 | |||
Total |
$ | 2,185,000 | ||
NOTE 4 — Line of Credit Agreement.
On July 6, 2004, the Company entered into a new business loan agreement with Union Bank of California, N.A., as the administrative agent, and two other lenders. The new loan agreement is comprised of a $20,000,000 term loan and a $35,000,000 revolving credit facility, which expires on July 6, 2009 and is collateralized by substantially all of the assets of the Company other than the Company’s real estate.
Under this loan agreement, interest on the $20,000,000 term loan is fixed at 5.4% for the term of the loan. Interest on the revolving credit facility is charged at the bank’s reference rate. At January 31, 2005, the bank’s reference rate was 5.25%. The loan agreement also provides for optional interest rates based on London interbank offered rates (“LIBOR”) for periods of at least 30 days in increments of $500,000.
On September 3, 2004, the Company entered into the First Amendment to the loan agreement to amend Section 6.12(a), Tangible Net Worth. The loan agreement, as amended, contains certain financial covenants that include requirements that the Company maintain (1) a minimum tangible net worth of $74,000,000 plus the net proceeds from any equity securities issued (including net proceeds from stock option exercises) after the date of the loan agreement for the period ending October 31, 2004, and a minimum tangible net worth of $74,000,000, plus 90% of net income after taxes (without subtracting losses) earned in each quarterly accounting period commencing after January 31, 2005, plus the net proceeds from any equity securities issued (including net proceeds from stock option exercises) after the date of the loan agreement, (2) a minimum earnings before interest, income taxes, depreciation and amortization (“EBITDA”) determined on a rolling four quarters basis ranging from $16,500,000 at July 6, 2004 and increasing over time to $27,000,000 at October 31, 2008 and thereafter, (3) a minimum ratio of cash and accounts receivable to current liabilities of 0.75:1.00 for fiscal quarters ending January 31 and April 30 and 1.00:1.00 for fiscal quarters ending July 31 and October 31, and (4) a minimum fixed charge coverage ratio of 1.10:1.00 at April 30, 2004 and 1.25:1.00 thereafter. The loan agreement limits annual lease and rental expense associated with the Company’s new distribution center in Oceanside, California as well as annual capital expenditures in any single fiscal year on a consolidated basis in excess of certain amounts allowed for the acquisition of real property and equipment in connection with the new distribution center. The loan agreement has an additional requirement where, for any period of 30 consecutive days, the total indebtedness under the revolving credit facility may not be more than $15,000,000. The loan agreement also limits the annual aggregate amount the Company may spend to acquire shares of its common stock. The Company is in compliance with all of the loan agreement’s financial covenants as of January 31, 2005.
The line of credit under the loan agreement may also be used to finance commercial letters of credit
6
and standby letters of credit. Commercial letters of credit outstanding under this loan agreement totaled $4,037,000 at January 31, 2005 as compared to $4,108,000 outstanding at October 31, 2004. The Company had $8,250,000 outstanding against the revolving credit facility under this loan agreement at January 31, 2005, compared to $2,500,000 outstanding at October 31, 2004. The Company had $18,000,000 outstanding on the term loan under this loan agreement at January 31, 2005 compared to $19,000,000 at October 31, 2004. At January 31, 2005, $22,713,000 was available for borrowings against the revolving credit facility under this loan agreement.
NOTE 5 — Net Income Per Share Information.
Basic net income per share has been computed based on the weighted average number of common shares outstanding during the period. Diluted net income per share has been computed based on the weighted average number of common shares outstanding plus the dilutive effects of common shares potentially issuable from the exercise of common stock options. Common stock options are excluded from the computation of net income per share if their effect is anti-dilutive. The following table sets forth the computation of basic and diluted net income per share based on the requirements SFAS No. 128, Earnings Per Share:
| Three months ended January 31, | ||||||||
| 2005 | 2004 | |||||||
Numerator: |
||||||||
Net income |
||||||||
Numerator for basic and diluted
Income per share - income
available to common stockholders |
$ | 83,000 | $ | 134,000 | ||||
Denominator: |
||||||||
Denominator for basic income
per share - weighted average shares |
13,726,000 | 13,302,000 | ||||||
Effect of dilutive securities: |
||||||||
Stock options |
384,000 | 342,000 | ||||||
Denominator for diluted income
per share - adjusted weighted average
shares and assumed conversions |
14,110,000 | 13,644,000 | ||||||
Basic net income per share |
$ | 0.01 | $ | 0.01 | ||||
Diluted net income per share |
$ | 0.01 | $ | 0.01 | ||||
For the quarters ended January 31, 2005 and 2004, the diluted weighted average shares outstanding computation excludes 412,000 and 411,000 options whose impact would have an anti-dilutive effect, respectively.
NOTE 6 — Issuance of Common Stock.
Common stock and capital in excess of par value increased by $463,000 in the three months ended January 31, 2005, of which $357,000 is due to the issuance of 62,866 shares of common stock on exercise of options and $106,000 is the tax benefit related to the exercise of those options.
NOTE 7 — Stock-Based Compensation.
The Company has elected to follow Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its employee stock options. Under APB No. 25, because the exercise price of the Company’s employee stock
7
options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The interim information regarding pro forma net income and earnings per share is required by SFAS No. 123, Accounting for Stock Based Compensation, and SFAS No. 148, Accounting for Stock Based Compensation — Transition and Disclosure. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the options.
Compensation expense for options issued to non-employees is based on the fair value of each option estimated at date of grant using the Black-Scholes option-pricing model. The Company made no such grants to non-employees during the first three months of either fiscal year 2005 or fiscal year 2004.
For purposes of the following pro forma disclosures required by SFAS No. 123, the fair value of each option granted after fiscal 1995 has been estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants made during the three months ended January 31, 2005 and 2004, respectively: risk-free interest rate of 2.89% to 3.22% in 2005 and 2.37% to 2.63% in 2004; expected volatility of 43.36% in 2005 and 44.48% in 2004; and expected life of 3.6 years in 2005 and 3.2 years in 2004.
The Company has not paid any cash or other dividends and does not anticipate paying dividends in the foreseeable future; therefore, the expected dividend yield is zero for all periods.
The Company’s pro forma information for stock-based employee compensation is as follows:
| Three months ended January 31, | ||||||||
| 2005 | 2004 | |||||||
Net income, as reported |
$ | 83,000 | $ | 134,000 | ||||
Deduct: Stock-based employee
compensation expense determined
under fair value based method
for all awards, net of tax
effect |
(279,000 | ) | (78,000 | ) | ||||
Pro forma net income (loss) |
($ | 194,000 | ) | $ | 56,000 | |||
Pro forma net income (loss) per
share: |
||||||||
Basic - as reported |
$ | 0.01 | $ | 0.01 | ||||
Basic - pro forma |
($ | 0.01 | ) | $ | 0.00 | |||
Diluted - as reported |
$ | 0.01 | $ | 0.01 | ||||
Diluted - pro forma |
($ | 0.01 | ) | $ | 0.00 | |||
Diluted pro forma per share information is calculated by including the additional common shares issuable upon exercise of outstanding options in the basic weighted average share calculation unless the effect of their inclusion is antidilutive. For the three months ended January 31, 2005, outstanding options totaled 1,711,000. As these securities were antidilutive, diluted pro forma net loss per share equaled basic pro forma net loss per share during that period.
The Company did not reflect any stock-based employee compensation expense in the consolidated financial statements for the periods presented in the above table.
8
NOTE 8 — Comprehensive Income.
The Company includes the cumulative foreign currency translation adjustment as well as the net unrealized gains and loss on cash flow hedges as components of the comprehensive income in addition to net income for the period. The following table sets forth the computation of comprehensive income for the periods presented:
| Three months ended January 31, | ||||||||
| 2005 | 2004 | |||||||
Net income |
$ | 83,000 | $ | 134,000 | ||||
Net unrealized gains on cash flow
hedges, net of tax of $0 and $53,000,
respectively |
— | 80,000 | ||||||
Effects of foreign currency translation |
367,000 | 1,024,000 | ||||||
Total comprehensive income |
$ | 450,000 | $ | 1,238,000 | ||||
NOTE 9 — Legal Proceedings.
On January 22, 1999, Milberg Weiss Bershad Hynes & Lerach LLP filed a class action in the United States District Court for the Southern District of California (“U.S. District Court”) on behalf of purchasers of the Company’s common stock during the period between September 4, 1997 and July 15, 1998. The action was subsequently consolidated with two similar suits and plaintiffs filed their Amended and Consolidated Complaint on December 17, 1999. Upon the Company’s motion, the U.S. District Court dismissed the Complaint with leave to amend on July 18, 2000. On September 18, 2000, plaintiffs served their Second Consolidated Amended Complaint (“Second Amended Complaint”). On November 6, 2000, the Company filed its motion to dismiss the Second Amended Complaint, which the U.S. District Court granted, in part, and denied, in part. The remaining portions of the Second Amended Complaint alleged that, among other things, during the class period and in violation of the Securities Exchange Act of 1934, the Company’s financial statements, as reported, did not conform to generally accepted accounting principles with respect to revenues and inventory levels. It further alleged that certain Company executives made false or misleading statements or omissions concerning product demand and that two former executives engaged in insider trading. On November 8, 2004, the U.S. District Court entered a Final Approval of Settlement. Under the settlement, all claims will be dismissed and the litigation has been concluded in exchange for a payment of $15.25 million, approximately 82% of which was paid by Ashworth’s insurance carriers. As part of the settlement, Ashworth has adopted modifications to certain corporate governance policies. Ashworth recorded a pre-tax charge in the third quarter of fiscal year 2004 of $3 million related to settlement of this suit.
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, liquidity or results of operations of the Company.
9
NOTE 10 — 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 Company’s senior management. The Company has the following three reportable segments: Domestic, Ashworth, U.K., Ltd. and Other International. The chief operating decision maker 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 Company’s business segments. Segment information is summarized (for the periods or dates presented) below:
| Three months January 31, | ||||||||
| 2005 | 2004 | |||||||
Net revenues: |
||||||||
Domestic |
$ | 31,569,000 | $ | 23,061,000 | ||||
Ashworth, U.K., Ltd. |
3,415,000 | 2,818,000 | ||||||
Other International |
1,529,000 | 1,459,000 | ||||||
Total |
$ | 36,513,000 | $ | 27,338,000 | ||||
Income (loss) from operations: |
||||||||
Domestic |
$ | (181,000 | ) | $ | 9,000 | |||
Ashworth, U.K., Ltd. |
346,000 | (145,000 | ) | |||||
Other International |
379,000 | 422,000 | ||||||
Total |
$ | 544,000 | $ | 286,000 | ||||
Capital expenditures: |
||||||||
Domestic |
$ | 2,395,000 | $ | 804,000 | ||||
Ashworth, U.K., Ltd. |
138,000 | 185,000 | ||||||
Total |
$ | 2,533,000 | $ | 989,000 | ||||
Depreciation expense: |
||||||||
Domestic |
$ | 972,000 | $ | 798,000 | ||||
Ashworth, U.K., Ltd. |
77,000 | 55,000 | ||||||
Total |
$ | 1,049,000 | $ | 853,000 | ||||
| January 31, | October 31, | |||||||
| 2005 | 2004 | |||||||
Total assets: |
||||||||
Domestic |
$ | 140,896,000 | $ | 137,605,000 | ||||
Ashworth, U.K., Ltd. |
18,353,000 | 18,430,000 | ||||||
Other International |
3,821,000 | 3,451,000 | ||||||
Total |
$ | 163,070,000 | $ | 159,486,000 | ||||
Long lived assets, at cost: |
||||||||
Domestic |
$ | 79,242,000 | $ | 76,805,000 | ||||
Ashworth, U.K., Ltd. |
1,921,000 | 1,789,000 | ||||||
Total |
$ | 81,163,000 | $ | 78,594,000 | ||||
Goodwill: |
||||||||
Domestic |
$ | 12,642,000 | $ | 12,640,000 | ||||
10
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company operates in an industry that is highly competitive and 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. For additional information, see “Cautionary Statements and Risk Factors,” below.
Because the Company’s business is seasonal, the current balance sheet balances at January 31, 2005 may more meaningfully be compared to the balances at January 31, 2004, rather than to the balances at October 31, 2004.
Critical Accounting Policies
In response to the SEC’s Release Numbers 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” and 33-8056, “Commission Statement About Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Company has identified the following critical accounting policies that affect its more 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. Provisions are made in the period of the sale for estimated product returns and sales allowances. 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.
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 (buydown) 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 Company’s products when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. These markdown allowances are reported as a reduction of the Company’s net revenues. Material differences may result in the amount and timing of the Company’s revenues for any period if management makes different judgments or utilizes different estimates. The reserves for sales returns and other allowances amounted to $1.1 million at January 31, 2005 compared to $1.3 million at October 31, 2004 and $0.9 million at January 31, 2004.
Allowance for Doubtful Accounts. Management must make estimates of the uncollectability 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 current economic conditions, historical bad debts and continually evaluating individual customer receivables considering the customer’s
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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 Company’s trade accounts receivable balance was $30.5 million, net of allowances for doubtful accounts of $1.3 million, at January 31, 2005, as compared to the balance of $39.3 million, net of allowances for doubtful accounts of $1.2 million, at October 31, 2004. At January 31, 2004, the trade accounts receivable balance was $27.4 million, net of allowances for doubtful accounts of $1.1 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 Company’s inventory balance wa