Jack Remington stood well over six feet tall. He had a highly competitive and winner-take-all approach to business. He was an ambitious, hard-working executive who worked long hours and bragged publicly about his and his family's successes. He brought some brilliant ideas to TechTennis-USA and aggressively implemented many of them. He often stated in public that his primary management goal was to be the leading seller of tennis rackets in the U.S. and global markets. Fiscal 2016 was his unofficial target date for achieving the number one spot in the industry. He systematically and aggressively pursued that goal. He monitored internal operating performance closely, followed the stock price performance with the eye of an eagle, and was always eager to take direct action to keep his stock buoyant. Remington subscribed to the principle that in order to maintain investor confidence and keep the stock buoyant, earnings must always be moving upward. The company's budgets reflected this principle and Remington assertively monitored performance to ensure that profit targets were always met. In his first annual report to the stockholders (2012), Remington wrote the following:

The "TechTennis-USA Personality" is one characterized by our basic approach to business—Commitment to ambitious goals and aggressive pursuit of those goals. We set ambitious goals fully expecting to achieve them. We establish high-performance standards for our employees and reward them based on their contributions. "Trying your best" is not enough at TechTennis-USA:you must make a contribution to the achievement of company goals.

Commitment to goals, however, must be accompanied by an aggressive approach to problems and opportunities. We are not afraid to take calculated gambles or to make mistakes. We believe we have set up controls and systems to minimize the downside. We also believe that the highest rewards go to those companies that recognize opportunities and take well thought out chances.

People who worked directly with Remington often complained that his drive to succeed intimidated and alienated them. During his tenure at TechTennis-USA, particularly in his capacity as CEO, he always let people know that he was in charge. He developed a reputation among his subordinates for going after and eventually getting exactly what he wants. Turnover in the management ranks, and in departments headed by the CtO were high. Table 3 lists the officers and directors of the company from 2011 to 2014 and provides some insight into the levels of turnover among their ranks.

Management Compensation

The ratio of senior management compensation to sales in their industry averaged between 3% and 8% of net sales. TechTennis-USA's executive compensation statistics are provided in Table 3. Executive compensation at TechTennis-USA included both cash and deferred component. The deferred component includes a savings plan, a retirement plan, and a stock option plan.

Over 40% of the cash compensation paid to senior officers came from bonuses that were directly tied to reported sales and earnings. The stock option plan, established in July 2011 and before TechTennis-USA was formed, provided for the issuance of up to 200,000 shares of common stock to qualified senior officers and employees. A 2:1 stock split in August 2011 increased the number of shares committed to the plan to 400,000. The option plan was administered by a three-member committee of the board of directors. Largely as a result of the 2011 stock option plan, over 93% of salaried employees and more than 50% of non-unionized employees held stock in the company. All senior officers and directors listed in Table 3 had beneficial ownership of the company's stock at the time of their tenure.

Senior management at TechTennis-USA, and in particular Jack Remington (who had a 39.7% interest), had significant holdings in the stock of the company. As a group, the directors and officers held a 51.1% beneficial ownership of the company. Thus, their wealth and compensation were directly affected by the company's reported sales and profit performance.

The company advertised extensively. The advertising budget for the fiscal year 2014 was approximately $25 million, up from approximately $9 million in each of the previous two previous years. Actual advertising expense for 2014, 2013, and 2012 was $26.4 million, $18.56 million, and $9.42 million, respectively. The 44.18% increase in advertising expenses between 2013 and 2014 resulted from new campaigns to promote domestic sales and from costs incurred to expand into Canada, Great Britain, and Italy. Growth in research and development (R&D) averaged over $400,000 between 2011 and 2013. R&D expenses grew from $673,000 in 2011 to $1.18 million, $1.53 million, and $2.4 million in 2012, 2013, and 2014, respectively. The company had a reliable and stable source of raw materials. Significant raw material purchases included titanium mesh for the racquets, ultra-light cloth for the shirts, leather for the shoes and racquet handles, and corrugated containers for shipping. As of 2012, management expected no significant increases in the cost of raw material for the foreseeable future, and no raw material procurement problems were expected.

In the 2014 Remington stated:

I feel especially good about the significant change in the company's product mix over the past four years. As early as 2011, virtually 100% of earnings came from just one line—Power-Racquets. Now, four years later, we have a broad base with three major lines contributing to our growth. TechTennis-USA is no longer the 'runt' of the tennis racquet and apparel industry in the United States. We have now positioned ourselves as a leader in the industry, as we continue our drive to become "the leader."

Significant portions of the company's assets were pledged to secure long-term financing. Various loan agreements contained several restrictive covenants, including restrictions on the incurrence of debt, declaration of cash dividends, maintenance of working capital, tangible net worth, retained earnings, and many revenues and operating income-based ratios.

Internal Audit

For efficiency, TechTennis-U.SA's internal audit department was an integral part of the accounting department. The audit committee, which met once a year to hire the external auditor, had three outside directors and two other members of the standing board of directors.

QUESTIONS

Identify and classify any additional risk factors that came to light through the information in Part II of the case. Do not repeat factors already identified in Part I. Document the new risk factors using the same Triangle of Fraud format found in Part I, Question 2.

Risk assessment is a cumulative process. Does the information in Question 6 change your risk assessment in Question 3?

Are risks due to control issues different from risks due to non-control issues?

Discuss your specific response, if any, to the newly identified risk factors. Use Question 4 as a guideline.

Do you have enough evidence to determine if fraud occurred?

As always, please post at least two substantive responses to classmate posts.

 Table 3

TechTennis-USA Company—Officers, Directors, and Executive Compensation

Position

2011

2012

2013

2014

Chairman/CEO

J.D. Remington

J. D. Remington $262,500 Salary $131,250 Bonus

J. D. Remington $288,144 Salary $288,750 Bonus

J.D. Remington $288,750 Salary $288,750 Bonus

Vice-Chairman/ ExecVP

M. Harkness

M. Harkness $153,000 Salary$76,500 Bonus

M. Harkness $168,147 Salary$168,300 Bonus

M. Harkness $168,300 Salary$168,950 Bonus

Vice President/ CFO

K. Green

K Green $79544 Salary $45,000 bonus

K. Green $22,731* Salary

M.Bocade $23,538* Salary

M.Bocade $89,083 Salary $42,500 Bonus

Vice Presidents-Operations

 G. Calderon

G. Calderon $111,269 Salary $78,750 Bonus

G. Calderon $143,000 Salary$108,750 Bonus

Other Vice Presidents

M, Green J. Helmuth B. Bublitz

J. Helmuth, Sates $74,904 Salary $22,219 Bonus

A. Montgomery HR $62,590 Salary $17,000 Bonus

 Total cash compensation to executives (Salary/Bonus)

 $725,711/$291,969

$613,329/$535,800

$689,088/$608,950

Directors

Remington K. Green

McHugh

Remington K. Green

McHugh M. Green B. Bublitz

Remington K. Green

Jamison Murphy

M. Green B. Bublitz

Remington K. Green Jamison Murphy

M. Green B. Bublitz Bocsde

Answer rating: 100% (QA)

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