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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1996
[ ] 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: 0-18553
Ashworth, Inc.
Delaware 84-1052000
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2791 LOKER AVENUE WEST, CARLSBAD, CA 92008 (Address of
Principal Executive Office, including Zip Code)
(619) 438-6610
(Registrant's Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common Stock,
$.001 Par Value
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 X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of January 8, 1997, was $74,231,151 based upon the last reported
sale price of the Company's Common Stock as reported by the NASDAQ National
Market System.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
Common Stock, $.001 Par Value 12,179,626
DOCUMENTS INCORPORATED BY REFERENCE: None
PART I
Item 1. BUSINESS
GENERAL DESCRIPTION OF THE COMPANY
GENERAL DESCRIPTION
Ashworth, Inc., based in Southern California was incorporated in
Delaware on March 19, 1987. It changed its corporate name from Charter Golf,
Inc. to Ashworth, Inc. on April 6, 1994. The Company designs, markets and
distributes a full line of quality sports apparel, headwear, and shoes under the
Ashworth(R) label. The Ashworth products have been retailed in golf pro shops,
resorts and in the international market, and at better department and specialty
retail stores.
The Company has wholly owned subsidiaries which own and operate the
company stores. A wholly owned United Kingdom subsidiary distributes the
Company's products in Europe. The Company also established a wholly owned
subsidiary in the Virgin Islands as a foreign sales corporation to take
advantage of certain federal income tax benefits with respect to profits from
foreign sales. Ashworth, Inc. and its wholly owned subsidiary, Ashworth U.K.,
Ltd., are partners of a Luxembourg partnership, Ashworth, Inc. et Cie., formed
to qualify for trademark registration in Europe under the Madrid Convention.
NARRATIVE DESCRIPTION OF BUSINESS
At its inception, the Company began designing and marketing
classically-styled, natural fiber golfwear distributed in the United States
under the Ashworth(R) brand exclusively to golf pro shops and resort. The
Company has been credited with developing the new look in golfwear over the past
nine years, using natural fibers and a loose relaxed fit emphasizing quality in
product and presentation, which are now industry standards. Its golf lifestyle
apparel is aimed at predominately the younger active male consumer in the
middle/upper middle income range and is priced in the middle to upper middle
price range for golf apparel. For the past four years, Ashworth has been the
leading golf apparel line sold at pro shops in the United States with a market
share of approximately 10%.
ASHWORTH PRODUCTS
All Ashworth products are designed in-house. The Company designs two
Spring, two Summer, two Fall, one Resort and one Holiday line per year. Each
line consists of approximately 30 to 60 styles. Product design is largely one of
classic, timeless designs with an emphasis on quality and natural fibers.
Through the fall lines of 1996, the Company designed two labels,
Ashworth and Ashworth Harry Logan(R). The Ashworth label products were sold to
golf pro shops with the Ashworth Harry Logan line sold to the department and
speciality store trade. Going forward, the Company will continue to design some
different product for the department store trade, however, the label will be
Ashworth. This will provide management with better control over inventory,
design and distribution costs.
The Company's line consists of knit and woven shirts, pullovers,
sweaters, vests, pants, shorts, hats, shoes and accessories. In 1996, the
Company designed the new Weather Systems(TM) collection. These products are made
largely of micro fibers and are produced for a variety of
weather conditions including cold and rainy as well as hot and humid.
Going forward, the Company intends to place less emphasis on growing
its golf shoe business, in an effort to improve inventory turns and reduce
costs. The product focus on shoes will be in casual and golf training shoes
rather than spiked golf shoes.
In 1996, the Company introduced for the first time a new Basics line
which consists of shirts, pants and shorts. This line consists of popular styles
and colors which do not change significantly from year to year in customer
preference. This line is projected to be the Company's highest volume line in
1997.
DISTRIBUTION CHANNELS
The Company distributes and sells its products through the following
four channels of distribution.
Golf Pro Shops and Resorts
The Company's core business is selling to golf pro shops located at
golf courses. According to surveys by GOLF PRO MAGAZINE, the Company is the
leading golf apparel company in golf pro shops in the United States with an
approximately 10% market share. The Company presently distributes to pro shops
in all 50 states.
Department Stores and Specialty Stores
The Company presently sells its products to selected upscale department
and specialty stores which include Nordstrom, Dillards, Parisians, Dayton
Hudson, and Saks Fifth Avenue.
International Market
The Company operates a wholly owned subsidiary in Essex England that
distributes Ashworth products to customers in the United Kingdom and other
European countries such as Germany, France, Spain, Sweden and Portugal.
The Company also uses distributors who resale the Ashworth products in
other countries such as Canada, Japan, Korea, Taiwan, Singapore, and Indonesia.
Ashworth Retail Stores
The Company operates, through wholly owned subsidiaries, eleven retail
stores in California, Texas, Nebraska, Colorado, Arizona, Utah and Nevada. The
main purpose of these stores is to help control inventory by selling prior
season and irregular merchandise.
SALES AND MARKETING
The Company's products are sold in the United States and Europe largely
by independent sales representatives. The Company presently has 44 sales
representatives in the United States and 12 sales representatives in Europe. The
Company uses 13 different distributors in other international locations.
In an effort to add exposure and consumer credibility to its Ashworth
brand, the Company has five popular and well known golf celebrities who wear and
endorse the Company's products. They are: (1) Fred Couples, considered by many
as the most popular golfer in the world; (2) John Cook, who won two PGA events
in 1996; (3) Ernie Els, who won the 1995 U.S. Open; (4) Dave Stockton, who was
"Player of the Year" on the PGA senior tour two of the past four years; and (5)
Jim Nantz the popular CBS golf announcer.
As part of its marketing strategy, the Company plans to use more of
these players and celebrities in advertisements, in store displays, and for
special appearances for trade shows and store appearances.
In 1996, the Company developed a new in-store fixture program that will
be expanded in 1997. This modular fixture program is designed to help create a
dedicated in-store shop for Ashworth products coupled with pictures and displays
of our golf professionals.
In an effort to introduce new young customers to the Ashworth brand,
the Company is the national apparel sponsor of American Junior Golf Association.
Additionally, Ashworth supports collegiate golf by providing team uniforms to
numerous college and university golf teams.
The Company's future marketing and sales growth efforts will focus on
(1) increasing the annual sales amounts to existing customers; (2) the addition
of new customers; (3) increasing the number of trained sales representatives;
(4) emphasizing Ashworth "in-store shop" concept stores utilizing the Company's
new fixture program.
The Company's domestic market for the Ashworth apparel has been
seasonal, with the highest sales volume traditionally in the period January
through August and the lowest volume in the months of September through
December. However, the addition of the department and specialty retail store
market, which is a year-round business, and additional fall and winter European
market has reduced the impact of the seasonality of the Company's business.
After adjusting for the discontinuation of the Women's and Kids'
divisions in fiscal 1995, sales increased 6.2% to $75,413,000 from $71,018,000.
This increase was primarily due to an increase in the volume of sales.
During the last three fiscal years, the Company had the following
domestic and international sales of Ashworth products:
Year ended October 31,
1996 1995 1994
(In Thousands)
Consolidated Sales:
Ashworth Apparel $50,615 $55,250 $51,771
Ashworth Headwear 3,614 4,016 3,672
Ashworth Footwear 1,645 3,486 N/A
-------- -------- --------
Ashworth Brand Sales 55,874 62,752 55,443
Ashworth Harry Logan Apparel 6,057 4,414 1,287
Company stores 10,104 5,572 3,469
Ashworth U.K., Ltd. Net of InterCo. Transfers 3,378 1,786 640
-------- -------- --------
Total Consolidated Sales $75,413 $74,524 $60,839
Less Women's & Kids' 0 3,506 4,058
------------ -------- --------
Sales excluding Women's & Kids' $75,413 $71,018 $56,781
====== ====== ======
Consolidated Sales Analysis - Domestic & Foreign:
Exports from the United States to:
Japan $ 6,515 $ 7,860 $ 4,880
England - Ashworth U.K., Ltd. 3,103 2,994 2,432
Other Foreign Jurisdictions 6,372 5,538 4,143
-------- -------- --------
Total Exports 15,990 16,392 11,455
Ashworth U.K., Ltd., Net of InterCo. Transfers 3,378 1,786 640
-------- ------- --------
Total Foreign Sales 19,368 18,178 12,095
Total Domestic Sales 56,045 56,346 48,744
------ -------- ------
Total Consolidated Sales $75,413 $74,524 $60,839
Less Women's & Kids' 0 3,506 4,058
------------ -------- --------
Sales excluding Women's & Kids' $75,413 $71,018 $56,781
====== ====== ======
At December 31, 1996, the Company had backlog orders of approximately
$27,824,000 compared with approximately $31,007,000 at December 31, 1995. The
amount of backlog orders at a particular time is affected by a number of
factors, including the scheduling of manufacture and shipping of the product
which, in some instances, depends on the customers' demands. Accordingly, a
comparison of backlog orders from period to period is not necessarily meaningful
and may not be indicative of eventual actual shipments during the quarter.
Orders may be changed or canceled up to 45 days prior to the ship date of the
order. The Company's experience has been that the cancellations, rejections or
returns of orders do not materially reduce the amount of sales realized from its
backlog.
The Company's trading terms generally require payment from customers
within 30 days after shipment. The Company extends discounts of 3%-5% for early
payment.
COMPETITION
The golf apparel market is not dominated by any single company, yet it
is highly competitive both in the United States and abroad. However, the
Ashworth brand is the market leader with approximately 10% of the market share.
The Company competes not only with golf apparel manufactures, but also other
branded sports and sportswear apparel manufactures who have entered the growing
golf apparel market in recent years. Although many of the Company's competitors
have greater financial resources and greater experience, the Ashworth brand has
been the market leader in the golf pro shop business for the past four years.
PRODUCT SOURCING
The Company sources its products in the following three ways:
1. Contract Manufacturing: Most of the Company's knit shirts and pullovers are
manufactured through arrangements with independent cutting and sewing
contractors in the San Diego area. Although the Company uses numerous
contractors, over 80% of its contract work is performed by two main contractors.
The Company has no written agreements with these firms but has used these
contractors since the Company's inception. The Company considers its relations
with these contractors to be excellent. The Company purchases most of its fabric
from United States mills and then distributes the fabrics to its contractors
after quality inspection.
2. Finished Goods Sourcing: The Company also sources finished
garments made to the Company's quality and styling
specifications from manufactures in Asia, Europe and Central
America. Approximately 255 of the Company's products are now
being made from manufacturers outside of the United States.
Ashworth is now importing products from Italy, Scotland,
China, India, the Phillippines and Costa Rica. In 1996, the
Company entered into an agreement with an American mill to
have a significant amount of its new basics line made in Costa
Rica.
In the future years, the Company plans to source more product outside
the United States in such areas as Central America and Mexico to help increase
gross profits. The Company will, at the same time, continue to emphasize
quality.
In-House Manufacturing
The Company operates its own in-house hat manufacturing facility.
Approximately 95% of the Company's hats are made in this facility with the
balance purchased from other hat manufacturing companies. Presently, the
Company's hat factory is running at close to 100% capacity. The factory could be
easily expanded, however, as needed.
In-House Embroidery
The embroidery of custom golf course logos and logos for tournaments is
done in-house by the Company. The Company operates 39 multi-head,
computer-controlled embroidery machines. The machines consist of 2-head, 6-head,
12-head, 15-head and 20-head capacity, totaling 399 heads. The Company
embroiders either the Company's or customer's designs which total over 20,000
designs at the present time. Embroidery is applied on garments as well as custom
made caps. The Company averages 90,000 logos per week which amounts to 65,000
garments. One to three logos are applied to a single garment. The Company runs a
second shift to accommodate seasonal demand during the period from January
through July. The Company's
embroidery department has been ranked by two major trade publications as one of
the top 100 embroidery plants in the country.
OPERATIONS
Approximately 97% of the Company's products are warehoused in and
distributed from its distribution facilities in Carlsbad and Vista, California.
The remaining 3% are products drop-shipped from off-shore factories directly to
our international distributors.
All products delivered to the Company's distribution facilities must
pass a quality inspection before acceptance. The Company uses a state-of-the-
art rail and trolley garment handling system designed specifically for the
garment industry. This system holds the majority of the inventory at a second
and third floor level that frees the ground floor space for order processing,
embroidery, packing and shipping functions.
The Company's computer operations run on an IBM AS400 computer. The
Company has completed a software conversion project that has significantly
enhanced the Company's management information systems. The new package is an
established, fully integrated, relational database for manufacturing companies
that has been adapted for the apparel industry.
PATENTS, TRADEMARKS AND COPYRIGHTS
The Company owns and utilizes several trademarks, principal among which
are the Ashworth word and design marks, the Golfman word and design marks, the
Ashworth Harry Logan word mark, and the Weather Systems word mark. The Ashworth
word and design marks, Ashworth Harry Logan word mark, and Golfman design marks
have been registered on the Principal Register of the United States Patent and
Trademark Office. The Company filed an application in January 1997 for
registration of the Golfman and Weather Systems word marks in the United States
and intends to register these marks throughout its major international markets.
The Company has obtained registration of the Ashworth word and design
marks and the Golfman design marks in 32 countries and is processing
applications for registration of these trademarks in 20 additional countries.
The application process takes from six months to two years to complete.
The Company regards its trademarks and other proprietary rights as
valuable assets and believes that they have significant value in the marketing
of its products. Although the Company believes that it has the exclusive right
to use the trademarks and intends to vigorously protect its trademarks against
infringement, there can be no assurance that the Company can successfully
protect the trademarks from conflicting uses or claims of ownership.
John L. Ashworth, an officer, director and stockholder of the Company,
has no personal rights to the Ashworth trademark and will receive no
compensation from the Company for its use of the trademark.
-9-
EMPLOYEES
At January 17, 1996, the Company had approximately 436 regular and 119
seasonal full-time employees.
Item 2. PROPERTIES
The Company owns two buildings located on Loker Avenue West in
Carlsbad, California, which were purchased on December 9, 1993, for $3,500,000.
The buildings total approximately 77,000 square feet, consisting of space for
administrative, embroidery, warehousing and distribution functions. The purchase
was financed with a down payment of $700,000 and a mortgage of $2,800,000
amortized over thirty years but due and payable in seven years.
The Company and its subsidiaries have the following leases for
manufacturing and distribution facilities, as well as leases for retail space
for its stores:
Lease Min/Current Maximum
Square Expiration Base Rent Base Rent
Location Footage Date per Month per Month
($) ($)
Manufacturing and Distribution Centers:
Carlsbad, CA. 47,800 10/31/00 21,443 24,000
Vista, CA. 42,000 10/31/97 16,800 16,800
Essex, England 5,500 10/31/03 3,062 3,062 (a)
Essex, England 5,500 10/31/03 3,445 3,445 (b)
Retail Stores
San Ysidro, CA 2,450 4/30/98 4,451 4,629
San Marcos, TX 3,000 8/31/00 4,263 4,514
Vacaville, CA 2,500 11/30/00 4,428 5,060
Gretna, NE 2,000 2/28/99 2,500 2,500
Carlsbad, CA 1,600 6/30/97 995 995
Barstow, CA 2,300 12/31/00 4,420 4,420
Phoenix, AZ 4,000 9/30/00 5,312 5,976
Park City, UT 2,250 5/31/00 2,915 3,103
Hillsboro, TX 2,700 5/31/00 4,163 4,613
Silverthorne, CO 2,250 6/30/00 3,656 4,031
Las Vegas, NV 2,450 9/30/01 4,088 4,088
Costa Mesa, CA 6,020 1/31/08 25,088 32,613
- ---------------------
(a) The rate increase for years 6-10 is to be negotiated at the end of
year 5.
(b) The rate increase for years 5-9 is to be negotiated at the end of year 4.
The tenant also pays percentage rent based on sales which exceed certain
breakpoints for all of the leases except the Carlsbad, California, lease. All of
the leases require the tenant to pay its pro rata share of taxes, insurance, and
maintenance expenses. The Company has entered into guaranties for some portion
or all of certain of the subsidiaries' leases.
The Company's subsidiary, Ashworth Store II, Inc., has also entered into
a lease for retail store space in the San Marcos, Texas, Sports Center, which
was planned to be completed in 1996. However, the project has been put on hold
for at least a year. The Sports Center lease will replace the above-referenced
San Marcos lease if and when the Sports Center is completed.
-10-
Item 3. LEGAL PROCEEDINGS.
There were no material pending or threatened legal proceedings as to
which the Company or any of its subsidiaries was a party or of which any of
their property was the subject during fiscal 1996.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year covered by this report, either by
proxy solicitation or otherwise.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded in the over-the-counter market on
the NASDAQ National Market System under the symbol "ASHW". The following table
sets forth the high and low sale prices on the NASDAQ National Market System for
the quarters indicated.
HIGH LOW
1995
January 31 11 1/2 7 1/8
April 30 10 7/8 7 1/2
July 31 10 5/8 7
October 31 8 7/8 5 7/8
1996
January 31 7 3/4 5
April 30 7 3/8 6
July 31 7 4 1/2
October 31 7 5/8 4 7/8
Holders
There is only one class of Common Stock. As of January 27, 1997 there
were 885 stockholders of record and approximately 10,000 beneficial owners of
the Company's Common Stock.
Dividends
No dividends have been declared during the past two fiscal years with
respect to the Common Stock.
-11-
Item 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
which are included elsewhere in this report. The statement of income data set
forth below with respect to the fiscal years ended October 31, 1996, 1995, and
1994 and the balance sheet data at October 31, 1996 and 1995 are derived from,
and should be read in conjunction with the audited Consolidated Financial
Statements included elsewhere in this report. The statement of income data set
forth below with respect to the fiscal years ended October 31, 1993 and 1992 and
the balance sheet data at October 31, 1994, 1993, and 1992 are derived from
audited financial statements not included in this report. No dividends have been
paid for any of the periods presented.
Years Ended October 31,
1996 1995 1994 1993 1992
(In thousands, except per share amount)
Statement of Income Data:
Net Sales $75,413 $74,524 $60,839 $45,823 $28,562
Gross Profit 27,395 25,025 23,898 17,816 10,605
Selling, general, and
administrative expense 24,086 21,521 15,525 11,161 7,120
Income from operations 3,309 3,504 8,373 6,655 3,485
Net Income 1,403 1,401 4,860 3,946 2,020
Net income per common
and equivalent share 0.12 0.12 0.40 0.34 0.19
Weighted average common and
equivalent shares outstanding 12,098 12,112 12,224 11,766 10,910
October 31
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Working capital $31,583 $29,216 $26,368 $22,128 $17,461
Total assets 54,912 58,072 47,694 33,757 25,681
Long-term debt
(less current portion) 5,307 5,195 5,774 2,885 1,713
Stockholders' equity 38,867 36,390 32,926 26,050 20,203
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.
RESULTS OF OPERATIONS
1996 Compared to 1995
Consolidated net sales were $75,413,000 for fiscal 1996, an increase of
1.2% over net sales of $74,524,000 in fiscal 1995. Management's focus in 1996
was not to increase sales, but was rather to reposition the Company for growth
in 1997 and in future years. The Company discontinued its Women's and Kids'
lines in fiscal year 1995 which accounted for 4.7% of that year's sales.
Excluding these discontinued lines, sales increased 6.2% in fiscal 1996 in
comparison to fiscal 1995.
Cost of goods sold decreased from 66.4% of net sales in fiscal 1995 to
63.7% in fiscal 1996. This resulted in improved gross margins of 2.7%. This
improvement was the result of improved and more conservative forecasting and
fewer mark downs.
Consolidated selling, general and administrative expenses for fiscal
1996 increased 11.9% to $24,087,000 or 31.9% of net sales compared to
$21,522,000 or 28.9% of net sales in fiscal 1995. This increase resulted mainly
from the expense of sales and marketing activities in the U.S. and Europe, and
an increase in the cost of compensating the golf professionals who endorse the
Company's products.
Additional marketing expenses were incurred during the year in an
effort to position the Company for increased sales growth in 1997. These
marketing expenses included increased endorsement fees of our PGA professionals
and costs associated with the Company's new integrated marketing plan which
includes in-store shop fixture and display programs, color catalogs and salaries
associated with new marketing personnel.
Other expenses decreased to $948,000 for 1996 compared to $1,088,000 in
1995. Increased bank borrowings in fiscal 1996 resulted in higher interest
payments of $86,000 for the year which was offset by a currency transaction gain
in fiscal 1996 of $131,000 by Ashworth U.K., Ltd. compared with a transaction
loss of $117,000 in fiscal 1995 (See Liquidity and Capital Resources - Currency
Fluctuation.)
1995 compared to 1994
Consolidated net sales were $74,524,000 for fiscal 1995, an increase of
$13,685,000 over net sales of $60,839,000 in fiscal 1994. The increase was
primarily due to increased sales volume in the main areas of the Company's
business, price increases in the outlet stores, and the introduction of golf
footwear. Ashworth brand apparel sales to golf pro shops increased by only 2.3%
in the year due in large part to incomplete or late shipments resulting from the
slower than expected conversion of the Company's Management Information System
(MIS). Total sales increased by 22.5% over fiscal 1994. An analysis of
sales for the two years is shown under Business - Sales and Marketing.
The increase in cost of sales was due primarily to the inventory reserve
markdown as a result of discontinuing the women's and kid's apparel lines.
Additionally, the conversion to the new MIS software resulted in problems in the
area of forecasting and production scheduling. This resulted in an excess of
finished goods being produced for the spring and summer seasons. The MIS
conversion is now completed, and the Company is better equipped
to monitor inventory levels through better forecasting and production
scheduling.
Consolidated selling, general and administrative expenses for fiscal 1995
increased 38.6% to $21,522,000 or 28.9% of net sales compared to $15,525,000 or
25.5% of sales in fiscal 1994. The increase was primarily attributed to
increased sales volume.
Income from operations decreased to $3,504,000 in fiscal 1995 from
$8,373,000 in 1994. The decrease was primarily due to lower gross profits and
higher selling, general and administrative expenses.
Other expenses increased to $1,088,000 for 1995 compared to $313,000 in
1994. This was primarily a result of interest payments on increased bank
borrowings in fiscal 1995 and a currency exchange rate loss of $117,000 on the
transactions between Ashworth U.K., Ltd. and the Company compared to a gain of
$210,000 in 1994.
-13-
LIQUIDITY AND CAPITAL RESOURCES
The Company's need for working capital is seasonal with the greatest
requirements from approximately October through the end of April each year. The
inventory buildup during this period is to provide product for shipment for the
primary spring/summer selling season. However, management believes that cash
from operations and the bank line of credit will be sufficient to meet the
Company's working capital requirements through fiscal 1997.
Cash from operations in fiscal 1996 generated a positive cash flow of
$8,469,000, compared to a negative cash flow of $9,727,000 in fiscal 1995. The
primary reasons were a reduction in overall inventory levels, improved control
over future season inventory levels, and increased sales of prior season
merchandise at the Company's outlet stores.
In December 1996, the Company entered into a new business loan agreement
with its bank. The agreement provides a revolving line of credit of $20,000,000
compared to $17,000,000 under the old agreement. The new agreement no longer
restricts borrowings to a specified asset base. Interest is charged at the
bank's reference (prime) rate and loans are collateralized by substantially all
of the assets of the Company. The loan agreement contains certain financial
covenants, the most restrictive of which require the Company to maintain, as
defined, a minimum tangible net worth, a liabilities to tangible net worth
ratio, and a minimum ratio of cash and accounts receivable to current
liabilities. The line of credit may also be used to finance up to $5,000,000 in
commercial letters of credit and standby letters of credit. At October 31, 1996,
no standby letters or commercial letters of credit were outstanding on this line
of credit. Additionally, the loan agreement may be used to enter into spot and
forward foreign exchange contracts.
At October 31, 1996, the Company had no loan outstanding with the bank
compared to $6,670,000 outstanding at October 31, 1995. At January 15, 1997, the
loan balance outstanding was $435,000.
During fiscal 1996, the Company invested approximately $2,500,000 in
personal property
and equipment, primarily for a new show booth, rack and rail equipment, computer
hardware, embroidery machines, and outlet store fixtures and fittings. For
fiscal 1997, the Company has a capital equipment budget of approximately
$1,900,000 primarily
for the acquisition of computer equipment, leasehold improvements for stores,
embroidery equipment and warehouse improvements. Management currently intends to
use leases or equipment financing agreements to finance the purchase of much of
its capital equipment.
If cash from operations and debt financing are either insufficient or not
available, or if working capital requirements are greater than estimated, the
Company may be required to raise additional capital. There can be no assurance
that the Company will continue to successfully raise sufficient working capital
to meet its requirements. Lack of sufficient working capital could have a
material adverse effect upon the Company, its business, and its ability to grow.
Currency Fluctuations
Ashworth U.K., Ltd., a wholly owned subsidiary in England, maintains its
books of account in British pounds. For consolidation purposes, the assets and
liabilities of Ashworth U.K., Ltd., are converted to U.S. dollars at the month
end exchange rate. A translation difference arises for share capital and
retained earnings, which are converted at rates other than the month end rate,
and this amount is reported in the shareholders' equity section of the balance
sheet.
-14-
Ashworth U.K., Ltd. sells Ashworth product to other countries in the
European Union, largely with sales denominated in the currencies of those other
countries. Fluctuations in the currency rates between the United Kingdom and
those other countries give rise to a loss or gain which is reported in earnings.
The amount in fiscal year 1996 was not material.
All export sales by Ashworth, Inc., are U.S. Dollar denominated, and
ordinarily there is no currency exchange rate problem for the Company. However,
with respect to export sales to Ashworth U.K., Ltd., that subsidiary may be at
risk. The subsidiary maintains its account with Ashworth, Inc., in British
pounds, but owes Ashworth, Inc., in U.S. Dollars. At the end of every accounting
period, the debt is adjusted to pounds by multiplying the indebtedness by the
closing dollar/pound exchange rate to ensure that the account has sufficient
pounds to meet its dollar obligation. This remeasurement is either income or an
expense in the subsidiary's financial statement.
The Company purchases some garments and shoes from off-shore manufacturers
which are U.S. Dollar denominated; consequently, there is no currency exchange
rate problem for the Company in connection with these purchases.
The Company has not used derivative instruments or other arrangements to
hedge against currency fluctuations. However, management may use hedging
arrangements in the future to reduce the Company's exposure to risk with
Ashworth U.K., Ltd.
Inflation.
Management believes that inflation has not had a material effect on the
Company's results of operations.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements with respect to the Company are
submitted herewith:
1. Report of Independent Public Accountants, page F1.
2. Consolidated Balance Sheets-October 31, 1996 and 1995, pages F2 and F3.
3. Consolidated Statements of Income for the years ended October 31, 1996,
1995, and 1994, Page F4.
4. Consolidated Statements of Stockholders' Equity for the years ended
October 31, 1996, 1995, and 1994, page F5.
5. Consolidated Statements of Cash Flows for the years ended October 31,
1996, 1995, and 1994, and pages F6 and F7.
6. Notes to Consolidated Financial Statements, pages F8 through F18.
7. Report of Independent Public Accountants on Supplementary Schedule,page
F19.
8. Supplementary Schedule, page F20.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with accountants on
accounting and financial disclosure during the past three fiscal years.
-15-
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's directors and executive officers are:
Name Age Position
Gerald W. Montiel 50 Chairman of the Board of Directors
Randall L. Herrel, Sr. 46 President and Chief Executive Officer
and Director
John L. Ashworth 37 Senior Executive Vice President -
Creative Director and Director
John Newman 60 Vice President - Finance, Treasurer,
Chief Financial Officer, and
Chief Accounting Officer
Mary Montiel 44 Vice President - Manufacturing & Design
Monica M. McKenzie 63 General Counsel and Secretary
Andre P. Gambucci 68 Director
John M. Hanson, Jr. 56 Director
Richard H. Werschkul, formerly the Company's president and chief executive
officer, resigned effective January 15, 1996, to pursue personal and business
interests. Mr. Montiel was appointed to these positions by the board of
directors, which positions he held until December 8, 1996. Randall L. Herrel,
Sr., joined the Company as president and chief executive officer on December 9,
1996.
The directors are divided into three classes, each class as nearly equal in
number as possible, with an annual election of each class for a term of three
years. The terms of Messrs. Herrel and Hanson expire in 1997, the terms of
Messrs. Ashworth and Gambucci expire in 1998, and Mr. Montiel's term expires in
1999. The directors serve until their terms expire and until their successors
are duly elected and qualified or until their death, resignation or removal. The
executive officers of the Company are elected at the annual meeting of the board
of directors and serve at its discretion.
Business Experience
Gerald W. Montiel is a founder of the Company and has been its chairman of
the board of directors since the inception of the Company in March 1987. He
served as chief executive officer from 1988 to April 1995 and president from the
Company's inception to October 1993 and again from January 15, 1996, to December
8, 1996. Mr. Montiel also served as treasurer from October 1989 to December 1991
and chief financial officer from January 1990 to December 1991.
Randall L. Herrel, Sr. has been a director, president, and chief executive
officer since December 9, 1996. Mr. Herrel served as president and chief
operating officer of Quiksilver, Inc., a sports apparel company in Newport
Beach, California for the past two years. Mr. Herrel joined Quiksilver in
June 1989 and also served at various times as chief financial officer,
treasurer and secretary. Mr. Herrel holds a B.S. degree in Engineering from
Purdue University, an M.S. degree in Engineering from Northrop University and
an M.B.A. from Stanford University.
John L. Ashworth is a founder of the Company and has been a director since
its inception. Mr. Ashworth has served as a vice president since October 1989
and currently serves as senior executive vice president - creative director.
He served as secretary from March 1987 to January 1990.
Andre P. Gambucci has been a director of the Company since June 1991. Mr.
Gambucci was a senior vice president and director of marketing of Acordia of
-16-
Colorado, a general insurance agency and insurance brokerage firm in Colorado
Springs, Colorado, from 1982 until December 31, 1995, when he retired. He is now
a consultant for Acordia National and special assistant to the president of
American Specialty Services, an insurance company.
John M. Hanson, Jr. has been a director of the Company since April 1994.
Mr. Hanson has been a shareholder and officer of John M. Hanson & Company, a
professional corporation practicing accounting, from 1968 to the present. The
firm has been retained to prepare the Company's tax returns for fiscal 1996.
John Newman has served as chief accounting officer since January 1990 and
vice president-finance, treasurer, and chief financial officer since December
1991. He also served as the company's controller from 1988 to January 1990 and
secretary from January 1990 until May 1993.
Mary Montiel was elected vice president - manufacturing and design in
December 1994. She served as production manager from April 1991 until December
1994. She was president and chief financial officer of Mondav Corporation, an
auto parts supplier, from 1988 to April 1991. Ms. Montiel is the sister of
Gerald Montiel, the Company's chairman of the board.
Monica M. McKenzie has served as general counsel since April 1993 and was
elected to the position of secretary in May 1993. She was formerly a partner of
the Denver, Colorado, law firm of Gorsuch Kirgis L.L.C., the Company's outside
legal counsel.
Section 16(a) Beneficial Ownership
Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires executive
officers, directors, and persons who beneficially own more than ten percent
(10%) of the Company's Common Stock to file initial reports of ownership and
reports of changes in ownership of the Company's securities with the Securities
and Exchange Commission. To the best of the Company's information and belief, no
person beneficially owns more than ten percent of the Company's securities. The
executive officers and directors are required to furnish the Company with
information concerning their ownership of the securities and with copies of such
filings.
Based solely on a review of such information and the copies of the filings
furnished by executive officers and directors to the Company, the Company
believes that all Section 16(a) filing requirements applicable to its executive
officers and directors were complied with during fiscal 1996.
Item 11. EXECUTIVE COMPENSATION.
The following information sets forth the executive compensation of the
Company's chief executive officer and each of the four most highly compensated
executive officers other than the CEO who were serving as executive officers at
the end of the last fiscal year.
-17-
SUMMARY COMPENSATION TABLE
Long-Term All Other
Compensation Compensation
Annual Awards Split 401(k)
Name and Compensation Stock Dollar Savings
Principal Position Year Salary Options Policy Plan
($) (#) ($) ($)
Gerald W. Montiel 1996 314,483 450,000 996 4,726
Chief Executive 1995 315,065 300,000 1,062 4,011
Officer (from 1994 312,693 0 1,283 3,538
January 16, 1996)
Richard H.
Werschkul (a) 1996 63,705 0 0 810
Chief Executive 1995 242,740 200,000 0 3,088
Office (until 1994 220,462 150,000 0 2,740
January 15, 1996)
John L. Ashworth, Sr. 1996 264,668 125,000 0 2,795
Exec. Vice President- 1995 264,741 260,000 0 3,385
Creative Director 1994 263,514 40,000 0 3,367
A. John Newman 1996 161,230 45,000 0 2,551
Vice President - 1995 160,385 0 0 2,430
Finance 1994 145,173 20,000 0 1,976
Mary Montiel 1996 146,904 60,000 0 1,043
Vice President - 1995 112,693 5,000 0 0
Mfg. & Design 1994 65,077 12,500 0 0
Monica M. McKenzie 1996 127,324 25,000 0 2,010
General Counsel & 1995 125,480 0 0 1,832
Secretary 1994 112,001 12,500 0 1,185
(a) Upon termination on January 15, 1996, Mr. Werschkul entered into a two-year
non-compete and consulting agreement for which the Company agreed to pay him
$240,000 during the first year.
-18-
Option/SAR Grants in Last Fiscal Year
Potential
Realizable Value
at
Assumed Annual
Rate of Stock
Price
Appreciation
Individual Grants For Option Term
Number of % of
Securities Total
Underlying Options/
Options/ SARS
SARS Granted to Exercise
Granted Employees or Base
(#) in Fiscal Price Expiration
Name Year ($/sh) Date (5%) (10%)
- ---- ------ ---------- ------ ------------- ------- ------
Gerald W. Montiel 150,000 5.50 01/21/04 335,858 782,692
150,000 6.00 12/31/04 429,710 1,029,230
150,000 35.6 6.50 12/31/95(a) 537,545 1,323,999
John L. Ashworth 125,000 9.9 6.50 12/31/00 175,099 377,081
John Newman 10,000 6.00 12/31/98(b) 6,150 12,600
10,000 6.50 12/31/00 14,008 30,167
10,000 6.50 12/31/01 17,958 39,683
15,000 3.6 6.50 09/17/01 26,937 59,525
Mary Montiel 10,000 6.50 12/31/00 14,008 30,167
25,000 6.50 09/17/01 44,896 99,208
25,000 4.7 6.50 12/31/02(a) 55,266 125,379
Monica M. McKenzie 10,000 6.50 12/31/00 14,008 30,167
15,000 2.0 6.50 09/17/01 26,937 59,525
- -------------------
(a) These options are not exercisable until January 1, 1998.
(b) This option replaced an option to purchase 10,000 shares at $6.00 which expired on 12/31/95.
-19-
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
Shares FY-End FY-End
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
(#) ($) (#) ($)
Gerald W. Montiel 50,000 159,500 700,000/400,000 250,000/125,000
Richard H. Werschkul 0 0 275,000/0 87,500/0
John L. Ashworth 75,000 267,375 520,000/200,000 47,500/100,000
John Newman 0 0 85,000/0 10,000/0
Mary Montiel 0 0 55,500/25,000 1,500/0
Monica McKenzie 0 0 50,500/0 4,000/0
Compensation of Directors
Directors who are not employees of the Company each receive annual
compensation of $10,000 plus $1,000 and expenses for attendance at each board
meeting. Such directors also receive quarterly stock options to purchase shares
of the Company's $.001 par value Common Stock for each quarter during which they
serve as directors and for each committee on which they serve during each
quarter. All directors receive an annual $1,000 apparel allowance. No other
arrangement exists pursuant to which any director of the Company was compensated
during the Company's last fiscal year for any service provided as a director.
Employment Contracts and
Termination of Employment and
Change of Control Arrangements
The Company has executive employment agreements with Gerald W. Montiel,
Randall L. Herrel, Sr., and John L. Ashworth. Under the terms of the agreements
with Messrs. Montiel and Ashworth, the Company may terminate the executive's
employment upon 30 days notice, and the executive may terminate his employment
upon 90 days notice to the Company. The agreement with Mr. Herrel provides for
employment for an initial term of three years through November 30, 1999, with
automatic renewal each year unless either party gives to the other six-month
written notice of non-renewal. The agreements provide that base salary is to be
determined periodically at the discretion of the board of directors on the basis
of merit and the Company's financial success and progress. A bonus is to be paid
to Mr. Herrel on January 15, 1998, based on the Company's earnings per share and
Mr. Herrel's then base salary. If the earnings per share are from $.46 to $.54,
the bonus will be from 15% to 85% of his then base salary. The Company agreed to
pay the executives an annual bonus equal to the premium due on life insurance
policies with a face value of $1,000,000 for Messrs. Montiel and Herrel and
$2,000,000 for Mr. Ashworth. The Company also pays the premium on a split dollar
insurance policy with a face value of $1,000,000 on the life of Mr. Montiel. The
agreements with Messrs. Montiel and Ashworth include noncompete provisions
following termination of employment for which the Company has agreed to pay each
executive compensation based upon a percentage of his then current salary as
consideration for the noncompete agreement. The noncompete period is ten years
with the noncompete consideration to be an amount equal to 100% of the
executive's then current salary for the first year and 40% of such salary for
-20-
the next nine years. In the event of the executive's death during employment
with the Company, his beneficiary or estate will receive an amount equal to the
noncompete consideration. The Company has purchased term life insurance to
provide the funds in such event. The agreement with Mr. Herrel includes
severance payments upon termination of employment under specific circumstances,
such payments ranging from one-half to two times his then annual base salary.
The Company has key person life insurance payable to the Company on the
lives of Messrs. Montiel and Ashworth in the amount of $1,000,000 and $300,000,
respectively.
STOCK OPTION PLANS
Amended and Restated Nonqualified Stock Option Plan
In August 1987 the Company adopted a nonqualified stock option plan which
was subsequently amended (as amended to date, the "Plan"). The Company's board
of directors or any committee as the board of directors may designate from time
to time (reference hereafter to the "Committee" includes either the board or its
designated committee) administers the Plan and selects the persons to whom
options are granted.
The Company has reserved 5,700,000 shares of Common Stock for issuance upon
exercise of options granted under the Plan, all of which shares have been
registered pursuant to the Securities Act and, upon issuance, will be freely
tradable without restriction, except for shares held by an "affiliate" of the
Company. Under the Plan, as of December 31, 1996, options to purchase 1,439,145
shares were outstanding, options to purchase 1,695,500 shares had been
exercised, and 2,565,355 shares were available for options to be granted at a
future date. Of the outstanding options under the Plan, options to purchase
additional shares were exercisable or will become exercisable in the fiscal
years and at the weighted average exercise prices indicated below:
No. Of Exercisable as of Weighted Average
Options December 31 Exercise Price
1,237,145 1996 $ 7.59
74,500 1997 $ 8.75
62,500 1998 $ 9.18
65,000 1999 $ 7.67
---------
1,439,145
Founders' Nonqualified Stock Option Plan
In November 1992 the Company adopted a Founders' nonqualified stock
option plan (the "Founders' Plan") to provide a means for recognizing and
rewarding officers, directors, consultants and advisors of the Company who have
played a substantial role in the founding or early development of the Company.
The Founders' Plan is administered by a committee of directors appointed by the
board of directors (the "Compensation Committee") which is presently comprised
of the Company's two outside directors. The Compensation Committee has the sole
and absolute authority and discretion to interpret the Founders' Plan and to
prescribe, amend and rescind rules and regulations relating to the Founders'
Plan. The Committee may grant options at less than the fair market value of the
stock on the date of grant.
-21-
The Company has reserved 1,000,000 shares of Common Stock for issuance
upon exercise of options granted under the Plan, all of which shares have been
registered pursuant to the Securities Act and, upon issuance, will be freely
tradable without restriction, except for shares held by an "affiliate" of the
Company.
Under the Plan, as of December 31, 1996, options to purchase 535,000
shares were outstanding, options to purchase 464,000 shares had been exercised,
and 1,000 shares were available for options to be granted at a future date. All
of the outstanding options are currently exercisable at a weighted average
exercise price of $8.41
Incentive Stock Option Plan
The Company adopted the Incentive Stock Option Plan in May 1993
following stockholder approval, and the Plan was subsequently amended (as
amended, the ISOP). The Company's board of directors or any committee as the
board of directors may designate from time to time (reference hereafter to the
"Committee" includes either the board or its designated committee) administers
the ISOP. The Committee selects the persons to whom the options are granted from
among the Company's full-time employees who are regular salaried officers or key
employees of the Company and certain other persons in connection with offers of
employment. Any options granted under the ISOP to an employee during a calendar
year in excess of $100,000 of aggregate fair market value (determined at the
time the option is granted) will not qualify as incentive stock options under
the ISOP.
The grant or exercise of an incentive stock option (ISO) under the ISOP
is not taxable to the employee. The employee generally will be taxed when and if
the stock received on exercise of the ISO is sold at a gain. In order to receive
this tax treatment under the Internal Revenue Code, certain provisions of the
Plan were required to be approved by the stockholders, the options must be
granted within 10 years of the date of the Plan, an option by its terms must be
exercisable only within 10 years of the date it is granted (an option granted to
an employee who owns more than 10% of the voting power or value of the Company's
stock must be exercisable within five years of the date it is granted), and the
exercise price must equal or exceed the fair market value of the Company's
Common Stock on the date of the grant (the exercise price of options granted to
employees who own more than 10% of the voting power or value of the Company's
stock must be at least 110% of the fair market value on the grant date). Any
gain on the sale of shares received upon exercise of an option will be treated
as capital gain if the optionee does not dispose of the shares within two years
from the date the option was granted and one year from the date the option is
exercised. If the optionee does not meet the holding requirements, any gain on
the sale will be treated as ordinary income.
The Company has reserved 3,000,000 shares of Common Stock for issuance
upon exercise of options granted under the Plan, all of which shares have been
registered pursuant to the Securities Act and, upon issuance, will be freely
tradable without restriction, except for shares held by an "affiliate" of the
Company.
Under the ISOP, as of December 31, 1996, options to purchase 2,318,792
shares were outstanding, 7,000 options to purchase shares had been exercised,
and 674,208 shares were available for options to be granted at a future date. Of
the outstanding options under the Plan, options to purchase additional shares
were exercisable or will become exercisable in the fiscal years and at the
weighted average exercise prices indicated below:
-22-
No. Of Exercisable as of Weighted Average
Options December 31, Exercise Price
1,365,792 1996 $ 6.89
456,750 1997 $ 6.07
296,250 1998 $ 6.42
100,000 1999 $ 6.00
100,000 2000 $ 6.00
---------
2,318,792
=========
Options granted under the above described stock option plans may not be
transferred by the optionee other than by will or the laws of descent and
distribution, pursuant to a qualified domestic relations order as defined by the
Internal Revenue Code, or, at the discretion of the Committee, to immediate
family members or trusts, provided, however, incentive stock options are not
transferable other than by will or the laws of descent and distribution. EaTch
option is exercisable during the lifetime of the optionee only by such optionee
or by his or her guardian or legal representative. An optionee must exercise the
options within thirty days after the date of termination of employment
disability, unless the option is extended by the Committee for an additional
period. Options exercised more than three months after termination of employment
(12 months in the case of a disabled employee) do not qualify as incentive stock
options. This requirement is waived in the case of the death of the optionee.
The Committee may in its discretion permit options to be exercised for a period
not to exceed the option's stated expiration date. If an optionee dies while
still employed or engaged by the Company or at any time prior to the expiration
or termination of his or her option, the option may be exercised within one year
after death or at such later date as the Committee may specify. Options held by
persons whose employment is terminated because of retirement or disability are
fully exercisable for a period of twelve months after the date of such
termination, unless either the option or the ISOP provides for earlier
termination. In no event may an option be exercisable after expiration of the
term of the option.
401(k) PLAN
The Company adopted a defined contribution savings plan (the "401(k)
plan") to provide retirement income to employees of the Company effective
January 1, 1990. The 401(k) Plan is intended to be qualified under Section
401(a) of the Internal Revenue Code of 1986, as amended. The 401(k) Plan covers
all employees who are at least 21 and have been employed by the Company for at
least six months. It is funded by voluntary pre-tax contributions from employees
up to a maximum amount equal to 15% of annual compensation and by 50% matching
contributions by the Company up to 3% of an employee's annual compensation.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the number and percentage of 12,179,626
issued and outstanding shares of the Company's $.001 par value Common Stock
owned beneficially, as of January 8, 1997 by (1) any person who is known to the
Company to be, or to claim to be, the beneficial owner of more than 5% of such
Common Stock, (2) by each of the directors, (3) each of the executive officers,
and (4) all directors and officers as a group. Each person has sole voting power
and sole investment powers with respect to the shares. Information as to
beneficial ownership is based upon statements furnished to the Company by such
persons.
-23-
Shares Beneficially Owned Percent
Name Shares Options(1)(2) Total Owned(3)
(#) (#) (#) (%)
Gerald W. Montiel 50,840 850,000 900,840 6.9
Randall L. Herrel 0 0 0 0
John L. Ashworth 98,109 520,000 618,109 4.9
A. John Newman -0- 85,000 85,000 *
Mary Montiel -0- 55,500 55,500 *
Monica M. McKenzie -0- 50,500 50,500 *
Andre P. Gambucci 67,500 37,500 105,000 *
John M. Hanson, Jr. -0- 27,500 27,500 *
All executive officers
and directors as a
group (8 persons) 216,449 1,626,000 1,842,449 13.4
Fred Couples 543,000 700,000 1,243,000 9.7
* Less than one percent.
(1) Represents shares of Common Stock which may be acquired pursuant to
presently exercisable stock options, including stock options exercisable
within 60 days of January 15, 1997.
(2) Only the below indicated options have exercise prices which are less than
the market price of the Company's Common Stock on January 8, 1997
($6.50):
Mr. Montiel 500,000
Mr. Herrel 0
Mr. Ashworth 95,000
Mr. Newman 20,000
Ms. Montiel 3,000
Ms. McKenzie 8,000
Mr. Gambucci 2,500
Mr. Hanson 2,500
Mr. Couples 150,000
(3) For the purpose of computing the percentage of outstanding shares owned by
each of the above persons, the shares issuable pursuant to presently
exercisable stock options held by such person are deemed to be outstanding
nd have been added to the shares actually issued and outstanding, at
January 8, 1997, pursuant to Rule 13d-3(d)(1) of the Securities Exchange
Act of 1934. Such options are not deemed to be outstanding for the purpose
of computing the percentage owned by any other person, except for all
officers and directors as a group.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
John L. Ashworth, the Company's senior executive vice president-creative
director, was extended a loan by the Company on May 1, 1995 in connection with
the exercise of an option expiring May 1, 1995. The full recourse loan was in
the principal amount of $306,000 and bore interest at a variable annual rate
based upon the Bank of America prime rate on the 1st day of each month. Interest
was payable in quarterly installments. The principal was paid in full on April
12, 1996.
Mary Montiel, sister of Mr. Montiel, is an executive officer and employee
of the Company. Her compensation is set forth above under Executive
Compensation. She is currently receiving an annual salary of $160,000. Ms.
Montiel has been an employee of the Company serving in various positions since
April 16, 1992. She served as production manager from April 1992 until December
1994 and vice president of manufacturing and design since that date.
-24-
Carol Kettela, sister of Jerry Montiel and Mary Montiel, is an employee
of the Company, presently serving as human resources manager. In the year ended
October 31, 1996, she had earned a salary of $61,143 and is currently receiving
an annual salary of $63,000. Ms. Kettela has been an employee of the Company
since April 7, 1992, initially in the position of administrative assistant to
the chief executive officer and investor relations. She was appointed to the
position of human resources manager in January 1996.
David Kettela, brother-in-law of Mr. Montiel and husband of Carol
Kettela, is an employee of the Company, presently serving as operations manager
of the Outlet Stores Division. In the year ended October 31, 1996, he had earned
a salary of $68,106 and is currently receiving an annual salary of $72,500. Mr.
Kettela has been an employee of the Company serving in various positions since
January 25, 1993. He was appointed the operations manager of the Outlet Stores
Division in March 28, 1994.
Michelle Zafiropoulos, daughter of Gerald W. Montiel, is an employee in
the Company's Design and Product Development Department as a design manager. In
the year ended October 31, 1996, she had earned a salary of $61,067 and is
currently receiving an annual salary of $72,500. Ms. Zafiropoulos has been an
employee of the Company since March 18, 1991, except for a brief period from
April 28, 1995 to January 1, 1996
Hank Ashworth, brother of Mr. Ashworth, is a sales representative of the
Company. During the fiscal year ended October 31, 1996, he was paid sales
commissions in the amount of $69,764. Mr. Ashworth also received severance pay
of $32,533 for September 18, 1995 through January 31, 1996. He was national
sales manager for the Ashworth core business from April 1994 through October
1996.
Laura Gambucci, daughter of Mr. Gambucci, is an employee in the Company's
Design and Product Development Department as a design manager. In the year ended
October 31, 1996, she earned a salary of $84,646 and is currently receiving an
annual salary of $84,000. Ms. Gambucci has been an employee of the Company since
November 6, 1989.
Eric Montiel, son of Gerald W. Montiel, is an employee of the Company,
presently serving as excess resource materials manager. In the year ended
October 31, 1996, he had earned a salary of $44,183 and is currently receiving
an annual salary of $62,500. Eric Montiel has been an employee or sales
representative of the Company from time to time since May 1991, his most recent
employment period commencing January 1996.
The Company has also entered into a promotion agreement with Fred
Couples, who owns of record or beneficially more than 5% of the Company's Common
Stock. The agreement requires Mr. Couples' exclusive endorsement and promotion
of Ashworth products during his lifetime. The Company has agreed to compensate
Mr. Couples for such services, the present value of which compensation is
approximately $5,600,000. In addition, the Company has granted to Mr. Couples
the right to receive options to purchase the Company's Common Stock upon his
performance of specified services, including his participation in PGA tourna
ments. The exercise price of the options will be the fair market value of the
Company's Common Stock at the time the options are granted, and the options will
be exercisable for a period of seven years. The Company has also made certain
price guaranties with respect to the options.
-25-
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements
Report of independent public accountants
Consolidated Balance Sheets - October 31, 1996 and 1995
Consolidated Statements of Income for the years ended October 31, 1996,
1995, and 1994
Consolidated Statements of Stockholders' Equity for the years ended
October 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the years ended October 31,
1996, 1995, and 1994
Notes to Consolidated Financial Statements - October 31, 1996, 1995, and
1994
2. Financial Statement Schedules
Report of independent public accountants on supplementary schedules
Schedule II - Valuation and Qualifying Accounts
3. Exhibits.
See Item (c) below.
(b) Report on Form 8-K
No Forms 8-K were filed during the last quarter of the fiscal year ended
October 31, 1996.
(c) Exhibits
3(a) 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 Registrant's Registration
Statement dated February 21, 1992 (File No.33-45078)) and incorporated
herein by reference) and Amendment to Certificate of Incorporation as
filed April 6, 1995 (filed as Exhibit 3(a) to the Registrant's Form 10-K
for fiscal year ended October 31, 1994 (File No. 0-18553), and
incorporated herein by reference)
3(b) Bylaws of the Registrant as adopted by its board of directors on March
19, 1987, and amended February 13, 1991, October 15, 1993, and November
30, 1993 (filed as Exhibit 3(b) to Registrant's Form 10-K for the
fiscal year ended October 31, 1993 (File No. 0-18553) and
incorporated herein by reference).
4(a) Specimen certificate for Common Stock, par value $.001, of the
Registrant (filed as Exhibit 4(a) to Registrant's Registration
Statement dated November 4, 1987 (File No.33-16714-D)) and incorporated
herein by reference.
4(b)(1) Specimen certificate for Options granted under the Amended and Restated
Nonqualified Stock Option Plan dated March 12, 1992 (filed as Exhibit
4(b) to Registrant's Form 10-K for the fiscal year ended October 31,
1993 (File No. 0-18553) and incorporated herein by reference).
-26-
4(b)(2) Specimen certificate for Options granted under the Founders Stock
Option Plan dated November 6, 1992 (filed as Exhibit 4(b)(2) to
Registrant's Form 10-K for the fiscal year ended October 31, 1993 (File
No. 0-18553) and incorporated
herein by reference)..
4(c) Specimen certificate for Options granted under the Incentive Stock
Option Plan dated June 15, 1993 (filed as Exhibit 4(c) to Registrant's
Form 10-K for the fiscal year ended October 31, 1993 (File No. 0-18553)
and incorporated herein by reference).
10(r)(2) Business Loan Agreement dated December 9, 1996, between the Registrant
and Bank of America, expiring March 1, 1999. Under the agreement, the
Bank provides the Company with a revolving line of credit of up to
$20,000,000 collateralized by most of the Company's assets.
10(r)(3) Foreign Exchange Agreement dated December 9, 1996, between the
Registrant and Bank of America, expiring March 1, 1999. Under the
agreement, the Bank provides the Company with a spot and forward
foreign exchange contract up to a maximum of $2,500,000.
11 Schedule computing net income per common share.
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
-27-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Ashworth, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of ASHWORTH, INC.,
(a Delaware corporation) and subsidiaries as of October 31, 1996 and 1995, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended October 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ashworth, Inc. and subsidiaries
as of October 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended October 31, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
December 13, 1996
F-1
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-OCTOBER 31, 1996 AND 1995
ASSETS
1996 1995
CURRENT ASSETS:
Cash and cash equivalents $ 1,953,918 $ 1,613,029
Accounts receivable-
Trade, net of allowance for
doubtful accounts
of $480,000 and $767,000 in
1996 and 1995, respectively 8,835,663 10,040,200
Other 877,471 1,133,771
Inventories 24,729,179 27,845,721
Income tax refund receivable 1,769,119 1,239,648
Other current assets 1,815,128 1,650,792
Deferred income tax benefit 1,755,216 1,684,776
----------- -----------
Total current assets 41,735,694 45,207,937
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 1,200,000 1,200,000
Buildings and improvements 2,726,534 2,714,357
Production equipment 8,408,622 7,272,234
Furniture and equipment 6,836,164 5,473,237
Leasehold improvements 680,338 680,426
----------- -----------
19,851,658 17,340,254
Less--Accumulated depreciation and
amortization 7,657,905 5,571,001
----------- -----------
12,193,753 11,769,253
----------- -----------
OTHER ASSETS 982,714 1,094,834
----------- -----------
$54,912,161 $58,072,024
=========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-2
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-OCTOBER 31, 1996 AND 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
----------- -------
CURRENT LIABILITIES:
Line of credit $ - $ 6,670,000
Current portion of long-term debt 1,512,051 1,557,006
Accounts payable 5,969,495 5,865,878
Accrued liabilities-
Salaries and commissions 965,465 972,094
Endorsement fees 731,608 318,996
Other 973,872 607,861
----------- -----------
Total current liabilities 10,152,491 15,991,835
----------- -----------
LONG-TERM DEBT, net of current portion 5,307,284 5,195,434
----------- -----------
DEFERRED INCOME TAX LIABILITY 585,815 494,747
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, authorized--50,000,000
shares of $.001 par value; issued
and outstanding-- 12,162,626 shares
and 11,901,626 shares at October 31,
1996 and 1995, respectively 12,163 11,902
Capital in excess of par value 24,217,654 23,242,390
Retained earnings 14,699,461 13,296,418
Deferred compensation (109,954) (160,702)
Cumulative translation adjustment 47,247 -
----------- -----------
38,866,571 36,390,008
----------- -----------
$54,912,161 $58,072,024
=========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -------
NET SALES $75,412,847 $74,524,311 $60,839,179
COST OF GOODS SOLD 48,017,486 49,498,975 36,941,376
----------- ----------- -----------
Gross profit 27,395,361 25,025,336 23,897,803
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 24,086,780 21,521,662 15,525,021
----------- ----------- -----------
Income from operations 3,308,581 3,503,674 8,372,782
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 35,013 62,538 85,841
Interest expense (1,151,693) (1,050,838) (614,494)
Other income (expense) 168,526 (99,678) 215,567
----------- ----------- -----------
(948,154) (1,087,978) (313,086)
----------- ----------- -----------
Income before provision for
income taxes 2,360,427 2,415,696 8,059,696
PROVISION FOR INCOME TAXES 957,384 1,015,114 3,199,340
----------- ----------- -----------
Net income $ 1,403,043 $ 1,400,582 $ 4,860,356
=========== =========== ===========
NET INCOME PER COMMON AND
EQUIVALENT SHARE $ .12 $ .12 $ .40
=========== =========== ===========
WEIGHTED AVERAGE COMMON AND
EQUIVALENT SHARES OUTSTANDING 12,098,273 12,111,633 12,223,721
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-4
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
Cumulative
Trans-
Common Stock Capital in Deferred lations
------------ Excess of Retained Compen- Adjust-
Shares Amount Par Value Earnings sation ment Total
------- ------ --------- -------- -------- ---- --------
BALANCE,
October 31,
1993 11,296,229 $11,296 $19,152,416 $7,179,635 $ (293,275) $ - $26,050,072
Options
exercised,
including
stock option
tax benefit 277,739 278 1,928,005 - - - 1,928,283
Stock for
services 500 1 5,437 - (5,438) - -
Amortization
of deferred
compensation - - - - 87,263 - 87,263
Net income - - - 4,860,356 - - 4,860,356
---------- ------- ---------- ---------- ---------- ----- ----------
BALANCE,
October 31,
1994 11,574,468 11,575 21,085,858 12,039,991 $ (211,450) - $32,925,974
Options
exercised,
including
stock option
tax benefit 374,761 375 2,434,941 - - - 2,435,316
Treasury Stock
acquired and
retired (47,603) (48) (278,409) (144,155) - - (422,612)
Amortization
of deferred
compensation - - - - 50,748 - 50,748
Net income - - - 1,400,582 - - 1,400,582
---------- ------- ---------- ---------- ---------- ----- ----------
BALANCE,
October 31,
1995 11,901,626 11,902 $23,242,390 13,296,418 (160,702) - $36,390,008
Options
exercised,
including
stock option
tax benefit 261,000 261 975,264 - - - 975,525
Amortization
of deferred
compensation - - - - 50,748 - 50,748
Net income - - - 1,403,043 - - 1,403,043
Translation
adjustment - - - - - 47,247 47,247
---------- ------- ---------- ---------- ---------- ----- ------
BALANCE,
October 31,
1996 12,162,626 $12,163 $24,217,654 $14,699,461 $(109,954) $47,247 $38,866,571
F-5
The accompanying notes are an integral part of these consolidated statements.
F-6
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 76,619,682 $ 72,215,663 $ 57,191,522
Cash paid to suppliers and employees (66,013,018) (78,166,721) (53,323,129)
Interest received 49,479 50,931 88,804
Interest paid (1,151,694) (1,050,838) (620,883)
Income taxes paid (1,037,924) (2,775,861) (3,835,966)
------------ ------------ ------------
Net cash provided by (used in)
operating activities 8,466,525 (9,726,826) (499,652)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and
equipment (2,547,304) (2,129,072) (6,767,392)
Proceeds from sale of property, plant
and equipment 2,001 2,850 -
Translation gain 47,247 - -
------------ ------------ ------------
Net cash used in investing
activities (2,498,056) (2,126,222) (6,767,392)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease
obligations (667,395) (718,783) (648,185)
Borrowings on line of credit 21,755,000 34,670,000 8,445,000
Payments on line of credit (28,425,000) (28,000,000) (8,445,000)
Borrowings on notes payable and
long-term debt 1,930,013 944,586 4,170,190
Principal payments on notes payable
and long-term debt (1,195,723) (786,674) (539,777)
Proceeds from issuance of common stock 975,525 2,435,316 1,928,283
Treasury stock acquired - (422,612) -
------------ ------------ ------------
Net cash (used in) provided
by financing activities (5,627,580) 8,121,833 4,910,511
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 340,889 (3,731,215) (2,356,533)
CASH AND CASH EQUIVALENTS, beginning
of year 1,613,029 5,344,244 7,700,777
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 1,953,918 $ 1,613,029 $ 5,344,244
============ ============ ============
F-7
1996 1995 1994
------------ ------------ --------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Net income $1,403,043 $ 1,400,582 $ 4,860,356
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities-
Amortization of deferred
compensation 50,748 50,748 87,263
Depreciation and amortization 2,303,459 2,513,760 1,868,103
Loss on disposal of
property, plant and equipment 17,237 33,181 41,780
Provision for doubtful accounts
and sales returns 64,000 557,756 101,272
Decrease (increase) in accounts
receivable 1,396,836 (2,327,613) (3,670,229)
Decrease (increase) in inventories 3,116,542 (8,954,658) (6,559,074)
Increase in other current assets (164,335) (746,295) (331,743)
Increase in deferred income
tax benefit (70,440) (1,240,804) (153,939)
Increase in other assets (87,773) (484,493) (545,235)
Increase in income tax
refund receivable (529,471) (1,239,648) -
Increase (decrease) in accounts
payable 103,617 (171,651) 3,442,435
Decrease in accrued
income taxes - (24,364) (103,386)
Increase in accrued liabilities 771,994 786,676 306,577
Increase in deferred income
tax liability 91,068 119,997 156,168
---------- ----------- -----------
Total adjustments 7,063,482 (11,127,408) (5,360,008)
---------- ----------- -----------
Net cash provided by (used in)
operating activities $8,466,525 $(9,726,826) $ (499,652)
========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-8
ASHWORTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996, 1995 AND 1994
1. The Company and Summary of Significant Accounting Policies
a. Business
Ashworth, Inc. and subsidiaries (collectively referred to as the
"Company") designs, markets, and distributes golf apparel, headwear, and
footwear. The Company's operations are located primarily in the western
part of the United States and the United Kingdom.
The Company sells its products primarily on credit to golf course pro shops,
country clubs, resorts, department stores, and retail outlet stores worldwide.
The Company had aggregate foreign sales in Europe, Canada, Mexico, Japan,
Singapore, United Arab Emirates, Australia, Hong Kong, Puerto Rico, Taiwan,
South Africa, Guam and South Korea of approximately $19,400,000, $18,178,000 and
$12,095,000 in the years ended October 31, 1996, 1995 and 1994, respectively.
b. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
c. Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market.
Cost includes materials, labor and manufacturing overhead.
Below is a summary of the components of inventory at October 31, 1996 and 1995:
1996 1995
----------- --------
Raw materials $ 3,258,555 $ 4,317,017
Work in process 1,937,069 2,839,828
Finished products 19,533,555 20,688,876
----------- -----------
$24,729,179 $27,845,721
=========== ===========
F-9
d. Depreciation and Amortization
Depreciation and amortization have been provided using straight-line and
accelerated methods over the following estimated useful lives:
Buildings and improvements 20 to 30 years
Production equipment 5 to 12 years
Furniture and equipment 5 to 7 years
Leasehold improvements Life of lease
All maintenance and repair costs are charged to operations as incurred. When
assets are sold or otherwise disposed of, the costs and accumulated depreciation
or amortization are removed from the accounts and any resulting gain or loss is
reflected in operations.
e. Organization Costs
Organization and trademark costs, which are included in other non-current
assets, are capitalized and amortized over periods ranging from two to five
years.
f. Advertising Expenses
Advertising costs, which consist primarily of product advertising costs, are
expensed in the period the costs are incurred. Advertising expenses for the
years ended October 31, 1996, 1995 and 1994 were $434,952, $532,559 and
$379,564, respectively.
g. Income Per Common and Equivalent Share
Income per common share amounts are computed based on the weighted average
number of common shares outstanding during the year, including common stock
equivalents resulting from dilutive stock options.
h. Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
i. Income Taxes
The Company accounts for income taxes in accordance with the Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes." This
statement requires that income taxes be accounted for using the liability
method.
j. Foreign Currency
The Company's primary functional currency is the U.S. dollar. Assets and
liabilities of the Company denominated in foreign currencies are translated at
the rate of exchange at the balance sheet date, while revenues and expenses are
translated using the average exchange rate. Gains and losses on foreign currency
transactions are recognized as incurred. Gains and losses on remeasurement of
transactions denominated in currency other than the reporting currency of
individual subsidiaries are recognized at each balance sheet date. Cumulative
translation adjustments resulting from the translation of the financial
statements of foreign subsidiaries are included as a separate component of
stockholers' equity and have not been material prior to October 31,
F-10
1996.
k. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all of its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
l. Postretirement and Postemployment Benefits
The Company does not provide postretirement or postemployment benefits
to employees. Accordingly, SFAS No. 106, "Employers' Accounting for
Postretirement Benefits other than Pensions" and SFAS No. 112
"Employers' Accounting for Postemployment Benefits" do not impact the
Company's consolidated financial statements.
m. Fair Value of Financial Instruments
Based on borrowing rates currently available to the Company for bank loans with
similar terms and maturities, the fair value of the Company's long-term debt
approximates the carrying value. Furthermore, the carrying value of all other
financial instruments potentially subject to valuation risk (principally
consisting of cash and cash equivalents, accounts receivable and accounts
payable) also approximate fair value.
n. Impact of New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used to be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable based on the estimated future cash flows
(undiscounted and without interest charges). SFAS 121 also requires that
long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less costs to sell. The
Company adopted SFAS 121 in the current year. The impact of adoption was not
material to the financial statements.
In October 1995, the Financial Accounting Standards Board issue SFAS 123
"Accounting for Stock-Based Compensation." Under SFAS 123, companies have the
option to implement a fair value-based accounting method or continue to account
for employee stock options and stock purchase plans using the intrinsic
value-based method of accounting as prescribed by Accounting Principles Board
(APB) Opinion No. 25 "Accounting for Stock Issued to Employees." Entities
electing to remain under APB Opinion No. 25 must make pro-forma disclosures of
net income or loss and earnings per share as if the fair value-based method of
accounting defined in SFAS 123 had been applied. SFAS 123 is effective for
financial statements for fiscal years beginning after December 15, 1995. The
Company has tentatively determined it will continue to account for stock options
under APB Opinion No. 25 and will adopt this new standard effective October 31,
1997.
F-11
o. Reclassifications
Certain reclassifications have been made to certain prior year balances in order
to conform with current year presentation.
2. Equipment Under Capital Lease
During the years ended October 31, 1995 and 1994, the Company acquired $94,307
and $277,720, respectively, of various equipment under capital leases. Future
minimum lease payments are as follows:
Year Ended
October 31:
1997 $480,414
1998 89,494
1999 17,094
--------
Total future minimum payments 587,002
Less--Amount representing interest 28,035
--------
Present value of future minimum
capital lease payments (Note 4) $558,967
========
At October 31, 1996 and 1995, the accompanying consolidated balance sheets
include the following equipment under capital leases:
1996 1995
---------- ----------
Production equipment $1,619,772 $3,129,872
Furniture and equipment 351,449 431,640
---------- ----------
1,971,221 3,561,512
Less--Accumulated amortization 963,556 1,401,653
---------- ----------
$1,007,665 $2,159,859
========== ==========
3. Line of Credit Agreement
The Company has a $20 million working capital line of credit agreement with a
bank which expires on March 1, 1999 and is collateralized by substantially all
assets of the Company. The interest rate on borrowings is at the bank's
reference rate which was 8.25 percent at October 31, 1996. The line of credit
agreement contains certain financial covenants, the most restrictive of which
require the Company to maintain, as defined, a minimum tangible net worth, a
maximum debt-to-equity ratio and a maximum ratio of cash and accounts receivable
to current liabilities. The line of credit agreement also limits the purchase of
capital equipment and requires that the Company have no loss for two consecutive
quarters. The line of credit may also be used to finance up to $5 million in
commercial letters of credit and standby letters of credit. At October 31, 1996,
no borrowings or commercial letters of credit were outstanding on this line of
credit.
F-12
ASHWORTH, INC. AND SUBSIDIARIES
Additional information for years ended October 31, 1996, 1995 and 1994, is as
follows:
1996 1995 1994
-------- -------- ------
Interest rate at year-end 8.25% 8.75% 8.25%
Weighted average interest rate
during the year 8.40% 8.90% 6.80%
Maximum amount outstanding $12,195,000 $10,775,000 $4,195,000
Average amount outstanding $ 6,430,000 $ 5,130,000 $ 610,000
4. Long-Term Debt
Amounts outstanding under long-term debt agreements at October 31, 1996 and
1995, consist of the following:
1996 1995
----------- -------
Installment notes bearing interest ranging from 7.3 to 8.7 percent, with
due dates through February 2001
collateralized by various equipment $3,529,413 $2,771,720
Notepayable to a bank, bearing interest at 8.0 percent, payable in
monthly principal and interest payments of $20,245 through November
2000 with a balloon payment of approximately $2.6 million payable on
November 30, 2000 collateralized by land and
buildings 2,730,955 2,754,357
Capital lease obligations (Note 2) 558,967 1,226,363
---------- ----------
6,819,335 6,752,440
Less--Current portion 1,512,051 1,557,006
---------- ----------
Long-term debt $5,307,284 $5,195,434
========== ==========
Future maturities of long-term debt at October 31, 1996, are as follows:
Year Ended
October 31:
1997 $1,512,051
1998 1,023,542
1999 904,330
2000 649,409
2001 2,730,003
----------
$6,819,335
==========
F-13
5. Employees' 401(k) Plan
The Company maintains a retirement plan covering substantially all employees.
Company contributions, which are voluntary and at the discretion of the
Company's board of directors, are currently being made at 50 percent of the
amount the employee contributes, up to three percent of compensation. The
Company's expense for the years ended October 31, 1996, 1995 and 1994, was
$107,004, $113,709 and $79,020, respectively.
6. Stockholders' Equity
a. Common Stock Options
The Company maintains several nonqualified and incentive stock option plans. The
plans (as amended) provide for the Compensation Committee or such other
committee that the Company's board of directors may appoint to administer the
plans. The plans provide for an aggregate reservation of 9,700,000 shares of
common stock for issuance upon the exercise of granted options. As of October
31, 1996, the Company had 4,334,437 options outstanding under the above plans to
purchase common stock at prices ranging from $4.50 to $11.63 with expiration
dates between November 1996 and December 2006. A total of 3,215,063 options
remained available for grant, and 1,139,500 options with exercise prices ranging
from $6.00 to $11.00 were not exercisable at October 31, 1996.
The following is a summary of common stock option activity:
1996 1995 1994
---------- ---------- -------
Outstanding, beginning
of year 3,347,437 2,680,761 1,935,500
Granted 2,306,986 1,076,937 1,025,000
Exercised (261,000) (374,761) (277,739)
Expired (1,058,986) (35,500) (2,000)
---------- ---------- ----------
Outstanding, end of year 4,334,437 3,347,437 2,680,761
========== ========== ==========
b. Common Stock for Services
In January 1993, the Company entered into an agreement with a PGA professional
to endorse the Company's product from January 1, 1993 through December 31, 1998.
Upon meeting certain annual obligations, the PGA professional will be issued
7,000 shares of the Company's common stock at the end of each year under the
agreement. If the market value of the 7,000 shares of common stock does not
reach and maintain at least $14.29 per share for at least five days during each
agreement year, the PGA professional will be entitled to receive cash per share
equal to the difference between $14.29 and the highest closing market price of
the Company's common stock for any five days for that year. The Company incurred
approximately $48,000, $22,000 and $10,000 in charges related to the difference
in stock prices in 1996, 1995 and 1994, respectively.
F-14
c. Deferred Compensation
During fiscal 1993, common stock was issued to a golf professional for future
services to the Company for a total value of $304,500. The service arrangements
cover a six year period and the value of the stock is being amortized over this
period. The unamortized portion of the stock is reported as a reduction in
stockholders' equity and the remainder will be amortized to operating expenses
through fiscal 1998. Additionally, during fiscal 1993, the Company issued stock
options to a golf professional and an outside consultant for current and future
services to the Company for a total value of $125,725. This compensation was
amortized over the period of the service agreement of twelve months during 1993
and 1994.
7. Operating Leases
The Company leases certain production, warehouse and outlet store facilities
under operating leases. These leases expire in various fiscal years through
January 2008. Rent expense for the years ended October 31, 1996, 1995 and 1994,
was $1,288,560, $757,438 and $554,795 respectively. Future minimum rental
payments are as follows:
Year Ended
October 31:
1997 $1,124,272
1998 1,105,587
1999 1,065,309
2000 1,029,200
2001 502,302
Thereafter 2,534,427
----------
$7,361,097
==========
8. Commitments and Contingencies
a. Promotion Agreements with PGA Professionals and a Television Personality
The Company has promotional agreements with several PGA professionals and a
Television Personality. Under the terms of these agreements, the Company is
obligated to pay cash compensation and to issue options (at fair market value)
to purchase shares of the Company's common stock. The aggregate annual
compensation under these agreements totals $782,000 payable in 1997, $744,500
payable in 1998, $665,333 payable in 1999, $657,000 payable in the years 2000
through 2010 and $547,500 payable in 2011. The number of options granted to
purchase shares of the Company's common stock will vest as follows: 209,500 in
1997, 217,500 in 1998, 185,000 in 1999 and 150,000 per year from years 2000
through 2011. The majority of these stock options were granted on the
understanding that the market value of the Company's common stock will increase
to certain predetermined minimum levels during certain time periods, as defined
under the various agreements. If the market value of the Company's common stock
does not increase to these predetermined minimum levels, the Company is
obligated to pay additional cash compensation to these option holders.
Obligations under this provision, if any, are accrued and charged to operations
during the period in which they arise. The Company incurred approximately
$546,000, $253,000 and $57,000 in charges related to the difference in stock
prices in 1996, 1995 and 1994, respectively.
F-15
b. Executive Employment Agreements
The Company entered into employment agreements with its key executives,
effective January 1, 1995. The agreements specify the amount of annual
compensation each executive is to receive and also contain a noncompete
arrangement. These noncompete arrangements (which if based upon current salary
levels would aggregate approximately $2,587,500) are based upon a percentage of
the executives' then current salary, as defined, and are in effect for the term
of the agreements and for a period of ten years after termination of employment.
The present value of the estimated future cash payments to be made is accrued
and charged to operations over the periods benefited. In 1996 and 1995, $40,504
and $37,503, respectively, was accrued and charged to operations for existing
executives and is reflected in other accrued liabilities in the balance sheet.
c. Legal Proceedings
The Company is party to claims and litigation proceedings arising in the normal
course of business. Although the legal responsibility and financial impact with
respect to such claims and litigation cannot presently be ascertained, the
Company does not believe that these matters will result in the 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 of the Company. It is reasonably possible that the reserves provided by
the Company with respect to such claims and litigation could change in the near
term.
9. Related-Party Transactions
At October 31, 1995, the Company had a note receivable from an officer for
$320,238. During 1996, the entire balance of the note was collected.
At October 31, 1996, the Company has a note receivable from a former officer for
$50,000 which is included in other assets on the balance sheet. Principal
payments begin December 1997 and continue until maturity at May 1999.
10. Income Taxes
The provision for income taxes for the years ended October 31, 1996, 1995 and
1994, is as follows:
1996 1995 1994
-------- ---------- ---------
Current provision:
Federal $697,134 $1,625,392 $2,475,245
State 239,622 510,529 721,866
-------- ---------- ----------
Total 936,756 2,135,921 3,197,111
-------- ---------- ----------
Deferred provision (benefit):
Federal 17,337 (856,889) 1,863
State 3,291 (263,918) 366
-------- ---------- ----------
Total 20,628 (1,120,807) 2,229
-------- ---------- ----------
$957,384 $1,015,114 $3,199,340
======== ========== ==========
F-16
The components of the Company's deferred income tax provision (benefit) for the
years ended October 31, 1996, 1995 and 1994, are as follows:
1996 1995 1994
---------- ------------ ---------
Depreciation $ 91,068 $ 119,997 $156,168
Allowance for doubtful accounts 127,163 (197,607) (7,261)
Inventory reserves (120,443) (818,252) (58,203)
Other non-deductible accruals (66,205) (232,463) (51,890)
Other deductible capitalized costs (10,955) 7,518 (36,585)
--------- ----------- --------
$ 20,628 $(1,120,807) $ 2,229
========= =========== ========
The components of the Company's deferred income tax benefit and liability as of
October 31, 1996 and 1995 are as follows:
1996 1995
Current deferred income tax benefit:
Allowance for doubtful accounts $ 125,653 $ 252,816
Inventory reserves 1,229,710 1,109,267
Other non-deductible accruals 428,641 362,436
Other deductible capitalized costs (28,788) (39,743)
---------- ----------
$1,755,216 $1,684,776
========== ==========
Long-term deferred income tax liability:
Depreciation $ (585,815) $ (494,747)
========== ==========
The Company has recorded a net consolidated deferred income tax asset of
approximately $1.2 million. The realization of this net asset may be dependent
upon the Company's ability to generate sufficient taxable income in future
years. Although realization is not assured, management believes it is more
likely than not that the net deferred income tax asset will be realized. The
amount of the net deferred income tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income are
reduced or if tax rates are lowered.
F-17
A reconciliation of the provision for income taxes at the statutory rate to the
Company's effective rate is as follows:
1996 1995 1994
---------------- --------------- ------------------
Amount Percent Amount Percent Amount Percent
Computed tax at
the expected
statutory rate $802,545 34.0% $821,337 34.0% $2,740,296 34.0%
State income tax,
net of federal
tax benefits 143,986 6.1 147,357 6.1 491,641 6.1
Non-deductible
expenses 46,034 2.0 42,190 1.7 15,601 0.2
Foreign sales
corporation
tax benefit (53,981) (2.3) (60,087) (2.5) (48,198) (0.6)
Other 18,800 0.8 64,317 2.7 - -
-------- ----- -------- ----- --------- ----
Income tax
provision $957,384 40.6% $1,015,114 42.0% $3,199,340 39.7%
======== ====== ========== ====== ========== ======
11. Statement of Cash Flows, Noncash Transactions
The Company completed the following noncash transactions which are not reflected
in the statement of cash flows:
1996 1995 1994
---------- ---------- -------
Capital lease equipment
acquired and related
capital lease obligations $ - $ 94,307 $ 277,720
Common stock issued in payment for
services, including deferred
compensation - - 5,438
12. Results by Quarter (Unaudited)
The unaudited results by quarter for the years ended October 31, 1996 and 1995
are shown below:
Year Ended First Second Third Fourth
October 31, 1996 Quarter Quarter Quarter Quarter
---------------- ----------- ----------- ----------- ---------
Net sales $17,069,864 $26,355,684 $17,883,768 $14,103,531
Gross profit 6,600,711 10,955,138 6,692,647 3,146,865
Net income 834,063 2,517,185 198,200 (2,146,405)
Net income per common
and equivalent
share .07 .21 .02 (.18)
Weighted average common
and equivalent
shares outstanding 11,958,206 12,232,755 12,154,206 12,063,050
F-18
Year Ended First Second Third Fourth
October 31, 1996 Quarter Quarter Quarter Quarter
---------------- ----------- ----------- ----------- ---------
Net sales $14,590,696 $26,438,854 $20,385,985 $13,108,776
Gross profit 5,497,664 9,035,266 7,621,185 2,871,221
Net income 805,931 1,810,137 808,217 (2,023,703)
Net income per common
and equivalent share .07 .15 .07 (.17)
Weighted average common
and equivalent
shares outstanding 12,020,191 12,187,819 12,235,566 11,882,143
F-19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Ashworth, Inc. and subsidiaries:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Ashworth, Inc. and subsidiaries'
annual report to shareholders included in this Form 10-K, and have issued our
report thereon dated December 13, 1996. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed in
the index of consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Orange County, California
December 13, 1996
F-20
ASHWORTH, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
---------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Year Expenses Accounts Deductions of Year
FOR THE YEAR ENDED
OCTOBER 31, 1994:
Allowance for
doubtful
accounts $215,000 $101,000 $ - $ 61,000 $255,000
======== ======== ======== ======== ========
FOR THE YEAR ENDED
OCTOBER 31, 1995:
Allowance for
doubtful
accounts $255,000 $558,000 $ - $ 46,000 $767,000
======== ======== ======== ======== ========
FOR THE YEAR ENDED
OCTOBER 31, 1996:
Allowance for
doubtful
accounts $767,000 $64,000 $ - $351,000 $480,000
======== ======== ======== ======== ========
F-21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ASHWORTH, INC.
(Registrant)
Date: January 27, 1997 BY: /s/ Randall L. Herrel, Sr.
--------------------------
Randall L. Herrel, Sr.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Gerald W. Montiel Chairman of the Board January 27, 1997
- --------------------------
Gerald W. Montiel
/s/ Randall L. Herrel, Sr. President and January 27, 1997
- --------------------------
Randall L. Herrel, Sr. Chief Executive Officer
(Principal Executive Officer)
/s/ John L. Ashworth Sr. Executive Vice President January 27, 1997
- --------------------------
John L. Ashworth and Director
/s/ A. John Newman Vice President - Finance, January 27, 1997
- --------------------------
A. John Newman Treasurer, Chief Financial
Officer (Principal Financial
and Accounting Officer)
/s/ Andre P. Gambucci Director January 27, 1997
- --------------------------
Andre P. Gambucci
/s/ John M. Hanson, Jr. Director January 27, 1997
- --------------------------
John M. Hanson, Jr.