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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, 1995
[ ] 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. [ ]
The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of January 15, 1996, was $63,341,308 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 12,008,626
DOCUMENTS INCORPORATED BY REFERENCE: None
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION OF THE COMPANY
Ashworth, Inc., was incorporated in Delaware on March 19, 1987, and
changed its corporate name from Charter Golf, 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) and Ashworth Harry Logan(TM) labels.
The Ashworth line is retailed in golf pro shops and resorts and in the
international market. The Ashworth Harry Logan line is distributed to better
department and specialty retail stores and in limited international markets.
The Company has wholly owned subsidiaries which own and operate the
outlet stores and distribute 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 resorts. The
Company has redefined golfwear, restoring a sense of style to the sport that
reflects the nature of the game and the surroundings in which it is played.
Natural fibers and colors, flowing lines, a loose relaxed fit, and unprecedented
attention to quality in product and presentation are the innovations the Company
brought to golfwear which are now industry standards. Its golf lifestyle
apparel is aimed at predominantly the younger active male consumer in the
middle/upper middle income range and is priced at the middle to upper middle
price range for golf apparel.
Based in Southern California, the Company now designs, markets and
distributes men's shirts, sweaters, shorts, vests, pants, pullovers, jackets,
hats, weathergear, and accessories. In 1994 the Company began manufacturing
hats in its own production facility as part of the Ashworth(R) golfwear
collection. The Company began shipping its golf footwear line to pro shops and
resorts in early 1995, further expanding its product offering in the golf niche
market.
Recognizing the everyday use of Ashworth golfwear for casual wear, in
1994 the Company introduced its golf-inspired line of men's casual sportswear
under the Ashworth Harry Logan(TM) brand to better department stores and
specialty retail stores, creating a new niche market: golf-inspired men's casual
sportswear. Along with the international expansion for Ashworth golfwear, the
Ashworth Harry Logan sportswear collection represents the fastest growing
segment of the Company's business.
The Company discontinued the women's and kids' apparel lines after the
close of the 1995 Fall season. Management decided that the relatively small
volume of sales in these apparel lines did not justify the considerable
resources spent on design and production.
2
From the solid foundations established in 1987, the Company is
emerging as an internationally recognized branded consumer products company,
both in golf with its Ashworth apparel, headwear and footwear lines and at
retail with its expanding Ashworth Harry Logan men's casual sportswear
collection.
GOLF PRO SHOPS AND RESORTS
Since its inception in 1987, the Company's core business has been the
Ashworth brand golf apparel which it markets and distributes in the United
States and internationally. In the United States, the Ashworth brand apparel is
marketed and distributed exclusively to golf pro shops, resorts, and the
corporate and tournament market. The Company utilized this niche marketing
strategy to develop the Ashworth brand name.
ASHWORTH(R) APPAREL
The Company's design focus for the Ashworth(R) apparel, headwear and
footwear is on a classic style with contemporary influences intended to develop
and maintain consumer recognition and loyalty across product lines from season
to season. Ashworth brand apparel includes Spring, Summer, Fall/Holiday, and
Holiday/Resort lines, as well as an annual basic line. The basics line consists
of 27 styles, and each of the other lines consists of between 54 and 64 styles
in various colors and sizes.
The Ashworth brand golf apparel is experiencing a lesser rate of
growth as a result of the volume the Company presently distributes to the golf
pro shop and resort market. However, the Ashworth apparel business has not yet
reached maturity as the 1995 golf industry survey indicates the Ashworth apparel
continued to be the top seller and fastest growing in its market. A survey of
the brand shares of shirts in use among approximately 4,100 golfers observed
during play in June/July/August 1995 at private and public courses nationwide
reported that the Ashworth shirt was worn by more of the golfers than any other
brand.
ASHWORTH(R) HEADWEAR
The Company designs and distributes three styles of headwear in a
variety of fabrics and colors under the Ashworth brand. The 1995 golf industry
survey also indicates that the Ashworth headwear is the fastest growing headwear
in the golf industry.
ASHWORTH(R) FOOTWEAR
The golf footwear consists of four styles in selected color ways which
are marketed and distributed in the United States and all international markets
except Japan. The initial reaction to the footwear from the golf pro shops and
other Ashworth apparel customers has been very positive.
DEPARTMENT AND SPECIALTY RETAIL STORES
The Company designs, markets, and distributes to better department and
specialty retail stores a line of golf-inspired men's casual sportswear under
the Ashworth Harry Logan trademark. The line is distinguished from its
Ashworth brand products by the designs, different distribution, and separate
sales force. The Ashworth Harry Logan brand apparel consists of Spring, Summer,
Fall, and Holiday lines, as well as an annual basics line. The basic line
consists of 18 styles, and each of the other lines consists of between 24 and 44
styles in various colors and sizes.
3
The Company designed the Ashworth Harry Logan apparel in response to
the retail market demand for the Company's Ashworth golfwear, which is marketed
exclusively to golf pro shops and resorts. The Ashworth Harry Logan apparel
complements the Company's present business by leveling out the seasonal nature
of the Ashworth golfwear business and expanding its distribution in the United
States to department and specialty retail stores.
Among the Company's department store customers are Dillards,
Nordstrom, Macy's, Neiman Marcus, Marshall Fields, and Saks Fifth Avenue.
INTERNATIONAL MARKET
Ashworth apparel is marketed and distributed internationally,
primarily in Japan, the United Kingdom, Europe, Canada, the Caribbean, and
Southeast Asia. The Ashworth brand footwear is distributed in the same
international markets except Japan. The international distributors market these
products through golf pro shops, department stores, off-course golf retail
outlets, and Ashworth retail stores. At the present time, one Ashworth retail
store has been opened in Japan and four in Taiwan.
In January 1996, the Company terminated the distribution agreement
with its Europe distributor, transferring the distribution of the Europe
business, except for Switzerland, to the Company's wholly owned subsidiary,
Ashworth U.K., Ltd. The former Europe distributor will continue to serve as the
distributor in Switzerland.
FACTORY OUTLET STORES
As part of its inventory control measures, the Company operates,
through wholly owned subsidiaries, ten retail stores in California, Texas,
Nebraska, Colorado, Arizona, and Utah. It will be opening an additional store
in Las Vegas, Nevada, during fiscal 1996. In selecting the sites for the outlet
stores, management seeks to avoid directly competing with the Company's
customers. The outlet stores sell only seconds and past season overruns, with
overruns held in inventory until three to six months after the end of the
respective season before placing them in the stores.
PRODUCT DESIGN
The Company's products are designed by an in-house staff under the
direction of John Ashworth. The design staff meets regularly with the Company's
sales, marketing, and production staffs to review the status of each collection
and to discuss adjustments in line composition, fabric selection, product mix
and manufacturing. In addition, members of the design staff attend the
Company's principal trade shows in each design cycle to discuss and consult with
customers concerning current retail trends. The Company designs its products
using a variety of natural fabrics, including interlock, pique, jersey, french
terry, twill, seersucker and poplin.
4
SALES AND MARKETING
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 Ashworth Harry Logan apparel, which is
year-round, and additional fall and winter Ashworth apparel for the European
market reduces the impact of the seasonality of the Company's business.
During the last three fiscal years, the Company had the following
domestic and international sales of Ashworth products:
Year ended October 31,
1995 1994 1993
------- ------- -------
(In Thousands)
CONSOLIDATED SALES:
Ashworth Apparel $55,250 $51,771 $44,141
Ashworth Headwear 4,016 3,672 800
Ashworth Footwear 3,486 N/A N/A
------- ------- -------
Ashworth Brand Sales 62,752 55,443 44,941
Ashworth Harry Logan Apparel 4,414 1,287 N/A
Outlet stores 5,572 3,469 882
Ashworth U.K., Ltd. (Net of InterCo. Transfers) 1,786 640 N/A
------- ------- -------
TOTAL CONSOLIDATED SALES $74,524 $60,839 $45,823
======= ======= =======
CONSOLIDATED SALES ANALYSIS - DOMESTIC & FOREIGN:
Exports from the United States
Japan $ 7,860 $ 4,880 $ 2,717
England - Ashworth U.K., Ltd. 2,994 2,432 N/A
Other Foreign Jurisdictions 5,538 4,143 3,208
------- ------- -------
Total Exports 16,392 11,455 5,925
Ashworth U.K., Ltd., (Net of InterCo. Transfers) 1,786 640 N/A
------- ------- -------
Total Foreign Sales 18,178 12,095 5,925
Total Domestic Sales 56,346 48,744 39,898
------- ------- -------
TOTAL CONSOLIDATED SALES $74,524 $60,839 $45,823
======= ======= =======
5
At December 31, 1995, the Company had backlog orders of approximately
$31,007,000 compared with approximately $29,342,000 at December 31, 1994. 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 cancelled 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 advertises its Ashworth brand products through trade and
consumer golf-related periodicals. The Ashworth Harry Logan products are
advertised through trade publications and cooperative advertising programs with
its account base. In connection with the distribution in the golf pro shops,
the Company provides and sells Company-designed fixtures for the display of the
products. The fixture program for the retail market includes a full set of
fixtures, shelves, and displays constituting a "shop within a shop" presentation
of the Ashworth Harry Logan products in a dedicated retail space within the
department and men's specialty retail stores.
The Company receives valuable exposure of its Ashworth products
through television and print media coverage of golf celebrities who endorse and
wear Ashworth apparel, including golf professionals Fred Couples, Ernie Els,
John Cook, and Dave Stockton, and lead CBS golf and sports announcer Jim Nantz.
In September 1994, the Company entered into a lifetime contract with Fred
Couples who also serves on the Company's board of directors as a nonvoting
adviser. Each of these golf celebrities has agreed to endorse and wear Ashworth
products and assist in advertising and promotion programs for the Company.
The Company is the sponsor of the American Junior Golf Association and
also supports collegiate golf by providing complimentary golf apparel to
collegiate golf teams.
The Company's trading terms generally require payment from customers
within 30 days after shipment. However, in fiscal 1995, the Company continued
its incentive sales program to encourage its customers to make early placement
of minimum volume orders, under which program the Company extended its payment
terms to 60 days. The Company will have a similar sales incentive program in
fiscal 1996.
The Company's strategy for sales growth of the Ashworth products is to
continue its emphasis on (1) promoting the Ashworth and Ashworth Harry Logan
brand names; (2) increasing its average sales to existing customers, (3) adding
new customers, (4) expanding its product lines, and (5) increasing its
international marketing and sales efforts.
APPAREL COMPETITION
The golf apparel business is not dominated by any single company or
small group of companies and is highly competitive, both within the United
States and abroad. The golf shirt market is a fragmented manufacturing segment
of the golf industry. The three leading brands total 24% of the shirt market,
Ashworth being the leader with approximately 10% of this market. The Company
competes not only with golf apparel manufacturers but also with manufacturers of
apparel suitable for other sports, recreation and general leisure wear. Among
the Company's competitors are numerous companies which have substantially
greater experience, financial resources, manufacturing capabilities, and/or
larger design, sales and marketing staffs than the Company.
6
The Company believes that the ability to effectively anticipate, gauge
and respond to changing consumer demand relatively far in advance, as well as
the ability to operate within substantial production and delivery constraints,
is necessary to compete successfully in the golf apparel business. Other
competitive factors include quality, price, availability of retail space and
service. As measured by sales of golf apparel, a recent survey of the golf
industry indicates that the Company is now one of the top two manufacturers in
the United States. The Company believes that its future success will depend
upon its ability to remain competitive in these areas.
PRODUCTION SOURCING
The Company sources its products in three ways: 1) the Company
purchases raw materials and then contracts the manufacturing with independent
contractors, 2) the Company purchases finished goods from private label
manufacturers made to the Company's specifications, and 3) the Company operates
an in-house manufacturing facility.
CONTRACT MANUFACTURING
Almost all of the Company's knit shirts and pullovers are manufactured
through arrangements with independent cutting and sewing contractors located in
northern San Diego county, near the Company's principal offices. Although up to
fifteen individual contractors are utilized, approximately 79% of the Company's
contract work is done with two primary contractors. The Company has no long-
term formal arrangements with these two primary contractors, but the Company
represents over 90% of their business and considers its relations with these
contractors to be excellent.
To date, the Company has experienced little difficulty in satisfying
its contract manufacturing requirements. The two primary contractors have
increased the scale and efficiency of their operations to keep pace with the
Company's growth. However, in order to continue on the present growth path, the
Company's management is aware of the need to continually develop additional
sources and capacity. The Company's production and management staff has worked
closely with the two primary contractors to plan for the additional capacity
needed through at least 1996, and will continue to do so for requirements beyond
that. The Company is also developing relationships with other similarly capable
contractors to ensure adequate capacity.
The Company purchases almost all of its fabric from mills in the
Southeastern United States. Approximately ten mills are regular suppliers, but
the Company buys approximately 72% of its fabric from three primary suppliers.
Fabric represents 75%-90% of the material cost of knit products. Quality,
availability, flexibility, and on-time delivery are as important as price in
every purchase decision.
The Company maintains close working relationships with these primary
mills and gives planning projections as needed to ensure uninterrupted supply.
Because of the Company's high quality image, brand awareness, and price point,
the Company is an important customer to even the largest mills, and the Company
considers its relationships with these mills to be excellent. The mills have
adequate capacity to supply the Company's basic fabric needs well into the
future. However, to support future growth in certain specialty fabrics,
relationships with additional mills have been started.
7
The Company also purchases trim items, such as collars, buttons,
bands, linings, labels, and zippers from suppliers most of whom are located on
the east coast. One trim supplier provides approximately 79% of the Company's
needs. For the foreseeable future, management believes the Company will be able
to satisfy its raw material requirements.
The Company's product development staff designs most of its fabric at
the Company's design center on computer-aided design equipment. The colors,
yarns, and knitting specifications are then digitally sent to the mills where
they are recreated and produced.
The Company's production staff coordinates product engineering, sample
making, raw material purchasing and warehousing, and management of the
independent contractors. The Company's cutting markers are produced on in-house
computer equipment that maximizes accuracy and utilization of fabric. All raw
materials must pass a sample inspection before acceptance from the mills. The
Company's field quality control staff is physically in the major cut and sew
contractors' facilities every day to maintain the Company's quality standards.
FINISHED GOODS SOURCING
The Company sources most finished garments, other than knit shirts,
from private label manufacturers in the United States, Asia and Mexico. The
Company deals directly with the manufacturers in the United States and Mexico,
and through sourcing agents in Asia. The Company's distributors in Japan and
Europe also manufacture certain products distributed in their markets pursuant
to license agreements with the Company. All of these products are produced to
the Company's specifications.
The Company sources all of its shoes in Asia through sourcing agents,
who also perform quality control in the factories.
IN-HOUSE MANUFACTURING
The Company manufactures 95% of its headwear in its own headwear
manufacturing operation. The other 5% are headwear styles the Company's
machinery cannot produce and are purchased from private label headwear
manufacturers. The Company's headwear operation employs approximately 66 people
and has the capability of producing and embroidering 2,400 baseball style caps
per day.
The Company manufactures headwear in-house to guarantee the quality of
the hats and the logo embroidery, to guarantee uninterrupted supply, and to
increase profit margins. Operating its own headwear factory also allows the
Company to develop innovative styling and provide highly flexible customer
service.
In all three methods of production sourcing, the Company operates
under substantial time constraints in producing each of its lines. Proposed
production schedules and budgets are prepared substantially in advance of the
Company's initial commitments from customers. If the Company materially
misjudges the market for a particular line, it could be faced with excessive or
insufficient inventory. Any such misjudgment could adversely affect the
Company's operations.
8
OPERATIONS
Approximately 98% of the Company's products are warehoused in and
distributed from its distribution facilities in Carlsbad. The remaining 2% 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 operates 39 multi-head, computer-controlled embroidery
machines, and embroiders either the Company's or customers' logos on 61% of its
products. The machines can produce up to 8,700 custom logos per eight-hour
shift. The Company runs a second shift to accommodate seasonal demand during
the period from January through July.
The Company's computer operations run on an IBM AS400 computer. The
Company has completed a software conversion project that will significantly
enhance 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 design marks, and
Ashworth Harry Logan word mark. The Ashworth and golfman trademarks have been
registered on the Principal Register of the United States Patent and Trademark
Office. The Company filed applications for registration of the Ashworth Harry
Logan trademark on February 1, 1995. The application process generally takes one
year to complete.
The Company has either obtained registration or is processing
applications for registration of its trademarks throughout its international
market. 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.
EMPLOYEES
At December 31, 1995, the Company had approximately 400 regular and
104 temporary full-time employees.
9
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 have a total of 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 outlet 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 $20,203 $24,000
Vista, CA. 42,000 10/31/97 15,960 16,800
Essex, England 5,500 10/31/03 2,974 2,974 (a)
Essex,England 5,500 10/31/03 3,346 3,346 (b)
OUTLET STORES
San Ysidro, CA 2,448 4/30/98 $ 4,280 $ 4,588
San Marcos, TX 3,000 8/31/00 4,012 4,514
Vacaville, CA 2,500 10/31/00 4,217 5,060
Gretna, NE 2,000 2/28/99 2,500 2,500
Carlsbad, CA 1,600 6/30/97 957 995
Barstow, CA 2,300 12/31/99 4,036 4,420
Phoenix, AZ 3,984 9/30/0 5,312 5,976
Park City, UT 2,257 5/31/00 2,915 3,103
Hillsboro, TX 2,700 5/31/00 4,163 4,613
Silverthorne, CO 2,250 6/30/0 3,656 4,031
(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 Company also pays percentage rate based on sales for the leases on all of
the outlet stores except the Carlsbad, California, store.
The Company has also entered into leases for retail store space in Las
Vegas, Nevada, and San Marcos, Texas, outlet malls, which are under construction
and expected to completed in the summer and fall of 1996. The lease for the San
Marcos, Texas, space will replace the existing San Marcos store space.
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 1995.
10
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
1994
January 31 11 7/8 8 3/4
April 30 13 1/4 9 5/8
July 31 11 1/2 7 3/4
October 31 11 1/8 8
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
HOLDERS
There is only one class of Common Stock. As of January 15, 1996,
there were 998 stockholders of record and approximately 13,000 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.
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
included elsewhere herein. The statement of income data set forth below with
respect to the fiscal years ended October 31, 1995, 1994 and 1993 and the
balance sheet data at October 31, 1995 and 1994 are derived from, and should be
read in conjunction with the audited Consolidated Financial Statements included
elsewhere herein. The statement of income data set forth below with respect to
the fiscal years ended October 31, 1992 and 1991 and the balance sheet data at
October 31, 1993, 1992 and 1991 are derived from audited financial statements
not included in this Form 10-K. No dividends have been paid for any of the
periods presented.
11
Years Ended October 31,
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(In thousands, except per share amount)
STATEMENT OF INCOME DATA:
Net Sales $74,524 $60,839 $45,823 $28,562 $17,023
Gross Profit 25,025 23,898 17,816 10,605 6,171
Selling, general, and
administrative expense 21,522 15,525 11,161 7,120 3,888
Income from operations 3,504 8,373 6,655 3,485 2,283
Net Income 1,401 4,860 3,946 2,020 1,244
Net income per common
and equivalent share 0.12 0.40 0.34 0.19 0.13
Weighted average common and
equivalent shares outstanding 12,112 12,224 11,766 10,910 9,396
October 31
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(In thousands)
BALANCE SHEET DATA:
Working capital $29,216 $26,368 $22,128 $17,461 $ 5,422
Total assets 58,072 47,694 33,757 25,681 10,132
Long-term debt (less current portion) 5,195 5,774 2,885 1,713 741
Stockholders' equity 36,390 32,926 26,050 20,203 6,414
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain income
statement items expressed as a percentage of net sales.
Years Ended October 31,
1995 1994 1993
------- ------- ------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 66.4 60.7 61.1
Gross margin 33.6 39.3 38.9
Selling, general and administrative expense 28.9 25.5 24.4
Income from operations 4.7 13.8 14.5
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 Com-
12
pany's Management Information System (MIS). However, 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 increase of the
inventory reserve. Firstly, the Company announced that it was discontinuing
the women's and kid's apparel lines. In connection with this decision, the
Company recorded an inventory reserve of $1.8 million in the second quarter. At
the end of the third quarter, the inventory reserve was increased by a further
$500,000. Lastly, at year end, after further prudent examination of both raw
material and finished goods inventories, the reserve was increased by an
additional $1.3 million. Apart from the decision to discontinue the women's and
kid's lines, the conversion to the new MIS software resulted in significant
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.
Management believes such excess inventory can be disposed of through the
Company's outlet stores. The MIS conversion is now completed, and the Company
is better equipped to monitor inventory levels through better forecasting and
production scheduling.
Selling, general and administrative expenses increased to 28.9% of net
sales compared to 25.5% in fiscal 1994. The dollar amount increased to $21.5
million in fiscal 1995 from $15.5 million in fiscal 1994. Much of this increase
can be attributed to cost increases associated with increased sales volume.
However, items contributing to the disproportionate percentage increase were
marketing and selling expenses for the Ashworth Harry Logan and Ashworth
footwear lines, higher endorsement fees, programming costs for the MIS
conversion, severance pay in connection with workforce consolidation, and start-
up costs for three new retail outlet stores. Additionally, the reserve for bad
debts was increased during the year from $255,000 to $767,000.
Other income (expense) produced a net expense of $1,088,000 for 1995
compared to $313,000 in 1994. Increased bank borrowings in fiscal 1995 resulted
in higher interest payments of $414,000 and Ashworth U.K., Ltd. had a currency
exchange rate loss of $117,000 on its transactions with the Company in 1995
compared to a gain of $210,000 in 1994. (See Liquidity and Capital
Resources--Currency Fluctuation.)
Sales at the Company's outlet stores increased to $5.6 million in fiscal
1995 as compared to $3.5 million in 1994. The gross margin improved to 25.9% in
the year, up from 12.4% in fiscal 1994. This improvement stems from management's
decision to more aggressively price the Company's products. The outlet stores
operating loss was $313,000 in fiscal 1995, an improvement over the loss of
$616,000 in fiscal 1994.
1994 COMPARED TO 1993
Net sales were $60,839,000 for fiscal 1994, an increase of $15,016,000 over
net sales of $45,823,000 in fiscal 1993. Domestic sales increased 22% over the
prior year, foreign sales by 104% and sales through outlet stores by 293%,
resulting in a total consolidated sales increase of 33%. Foreign sales were
$12,095,000 for the year compared to $5,925,000 in 1993.
Cost of goods sold as a percentage of net sales was 61% in fiscal 1994,
the same percentage as in fiscal 1993. The Company's gross profit margin also
remained unchanged for the year at 39%. The gross margin in the final quarter
of 1994 was 33% compared to 39% for the same quarter in 1993. The lower gross
margin is attributable to increased manufacturing costs associated with special
make-ups, sales of lower margin goods, and to some increase in overhead costs.
Selling, general and administrative expenses increased to 25.5% as a
percentage of net sales from 24.4% in fiscal 1993. The dollar amount increased
to $15,525,000 in fiscal 1994 from
13
$11,161,000 in fiscal 1993, primarily the result of cost increases associated
with increased sales volume, start-up costs for the Ashworth Harry Logan line
and the cost of converting to a new computer software package.
The increase in income from operations in fiscal 1994 to $8,373,000 from
$6,655,000 in fiscal 1993 resulted primarily from the strong increase in net
sales. As a percentage of net sales, income from operations decreased to 13.8%
in fiscal 1994 from 14.5% in fiscal 1993 primarily due to the increase in
selling, general and administrative expenses.
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. Working capital requirements increase
with sales growth, primarily because of the approximate two to four month gap
between the time the Company must pay its suppliers and production costs and the
time the Company receives payment from its customers. However, management
believes that cash from operations together with the bank line of credit will
be sufficient to meet the Company's working capital requirements through fiscal
1996.
Operating activities in 1995 produced a negative cash flow of $9,727,000,
compared to a negative cash flow of $500,000 in 1994. The major portion of the
increase in negative cash flow is attributed to the increase in inventory in
fiscal 1995. As discussed above under Results of Operations, the inventory
increase was primarily caused by an inability to accurately forecast sales and
production needs during the conversion of the Company's management information
system. Management believes that the Company can sell a substantial portion of
the inventory surplus in its outlet stores in fiscal 1996, converting such
surplus to cash. With the MIS conversion now completed, management believes
that, through control over the inventory, cash flows from operations will be
improved.
In October 1995, the Company's working capital financing arrangement with
its bank was extended through February 28, 1997, with a borrowing limit of
$13,000,000 for eight months of the year and $17,000,000 for the period when
inventory build-up is at its peak. This financing arrangement provides a
revolving line of credit with interest at the bank's reference (prime) rate and
is collateralized by substantially all of the assets of the Company. 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 Company did not achieve the required
minimum net income for its fourth quarter in 1995, nor did it achieve the
required quick ratio or tangible net worth amount for the year. The bank has
granted a waiver for these violations, and the Company has agreed to pay a
minimal fee and enter into an amended agreement. The line of credit may also be
used to finance up to $1 million in commercial letters of credit and standby
letters of credit. At October 31, 1995, no standby letters or commercial letters
of credit were outstanding on this line of credit. As of October 31, 1995 and
January 15, 1996, the Company's outstanding balances under the line of credit
were $6,670,000 and $10,700,000, respectively.
During fiscal 1995 the Company invested $2,129,000 in personal property and
equipment, primarily embroidery machines, outlet store fixtures and fittings,
and computer equipment. For fiscal 1996 the Company has budgeted $2,300,000 for
capital equipment acquisitions. The expected additional equipment includes
primarily embroidery machines, warehouse racks, and computer equipment.
Management currently intends to use leases or other financing arrangements for
the acquisition 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.
14
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 transferred to current year earnings. The difference was not
material in fiscal 1996.
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 adjustment is
a loss or gain on currency transactions and is either income or an expense in
the subsidiary's financial statement. The Company's management determined,
therefore, to accept 50,000 additional shares of Ashworth U.K. in satisfaction
of $2,088,840 (1,300,000 pounds) of that subsidiary's indebtedness to the
Company. This additional capitalization of Ashworth U.K. in the form of
cancellation of indebtedness reduced the exposure by at least half in months
when indebtedness is high due to large shipments of product.
The Company's purchases of some garments and shoes from off-shore
manufacturers are also 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.
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, 1995 and 1994, pages F2 and F3.
3. Consolidated Statements of Income for the years ended October 31, 1995,
1994 and 1993, Page F4.
4. Consolidated Statements of Stockholders' Equity for the years ended October
31, 1995, 1994, and 1993, page F5.
5. Consolidated Statements of Cash Flows for the years ended October 31, 1995,
1994, and 1993, pages F6 and F7.
6. Notes to Consolidated Financial Statements, pages F8 through F16.
7. Report of Independent Public Accountants on Supplementary Schedule, page
F17.
8. Supplementary Schedule, page F18.
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 49 Chairman of the Board, President
Chief Executive Officer
John L. Ashworth 36 Senior Executive Vice President - Creative
Director
A. John Newman 59 Vice President - Finance, Treasurer, Chief Finan-
cial Officer, and Chief Accounting Officer
Mary Montiel 43 Vice President - Manufacturing & Design
Monica M. McKenzie 62 General Counsel and Secretary
Andre P. Gambucci 67 Director
John M. Hanson, Jr. 55 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.
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. Mr. Montiel's term expires in 1996, Mr. Hanson's term in 1997, and terms
of Messrs. Ashworth and Gambucci expire in 1998. 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 the
present. Mr. Montiel also served as treasurer from October 1989 to December
1991 and chief financial officer from January 1990 to December 1991.
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
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 1995.
16
A. 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, chief executive officer and
president.
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.
COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 with the exception of the late filing by two months of the initial
Form 3 of Mary Montiel upon her appointment as an executive vice president, all
Section 16(a) filing requirements applicable to its executive officers and
directors were complied with during fiscal 1995.
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. Since the end of the fiscal year, Mr.
Coykendall resigned effective November 1, 1995, and Mr. Werschkul resigned
effective January 15, 1996. Mr. Montiel was appointed chief executive officer
and president to fill the vacancy created by Mr. Werschkul's resignation.
17
SUMMARY COMPENSATION TABLE
Long-Term Compensation All Other Compensation
----------------------------- -----------------------
Annual Awards Split 401(k)
Name and Compensation Stock Dollar Savings
Principal Position Year Salary Options Policy Plan
------------------ ---- ------------ ------- --------- -------
($) (#) ($) ($)
Richard H. Werschkul 1995 242,740 200,000 0 3,088
President and Chief 1994 220,462 150,000 0 2,740
Executive Officer 1993 168,269 40,000 0 2,019
Gerald W. Montiel 1995 315,065 300,000 1,062 4,011
Chairman of the 1994 312,693 0 1,283 3,538
Board of Directors 1993 260,000 350,000 1,196 3,264
John L. Ashworth, Sr. 1995 264,741 260,000 9 3,385
Exec. Vice President - 1994 263,514 40,000 0 3,367
Creative Director 1993 175,910 295,000 0 2,287
A. John Newman 1995 160,385 0 0 2,430
Vice President - 1994 145,173 20,000 0 1,976
Finance 1993 125,000 20,000 0 1,571
Kent R. Coykendall, 1995 160,385 0 0 2,430
Vice President - 1994 145,173 20,000 0 1,976
Operations 1993 125,000 20,000 0 1,571
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
EMPLOYEES OR BASE
IN FISCAL PRICE EXERCISE
NAME YEAR ($/SH) PERIOD (5%) (10%)
---- ---------- -------- -------- ---- -----
Gerald W. Montiel 100,000 10.50 7/01/95-6/30/00 290,096 641,036
100,000 10.50 7/01/96-6/30/01 357,100 810,139
100,000 39.5 10.50 7/01/97-6/30/02 427,455 996,153
John L. Ashworth 60,000 10.50 7/01/95-6/30/00 174,057 384,621
100,000 10.50 7/01/96-6/30/01 357,100 810,139
100,000 34.2 10.50 7/01/97-6/30/02 427,455 996,153
Richard H. Werschkul(1) 40,000 10.50 7/01/95-6/30/00 116,038 256,414
40,000 10.50 7/01/96-6/30/01 142,840 324,056
40,000 10.50 7/01/97-6/30/02 170,982 398,461
40,000 10.50 7/01/98-6/30/03 200,531 480,307
40,000 26.3 10.50 7/01/99-6/30/04 231,558 570,338
- ---------------------
(1) On January 15, 1996, following Mr. Werschkul's resignation, the exercise
period for the option to purchase the 40,000 shares exercisable on 7/02/95
was extended to December 31, 1999, the exercise period for the option to
purchase 60,000 of the remaining shares was changed to commence on January
15, 1996, and expire on December 31, 1999; the remaining option for 100,000
shares was cancelled.
18
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END (#) FY-END
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE
- ----------------------- ----------------- --------------- ---------------- ---------------
(#) (%) (#) ($)
Gerald W. Montiel 125,000 512,875 540,000/200,000 239,500/0
John L. Ashworth 105,000 417,750 470,000/200,000 193,850/0
Richard H. Werschkul -0- -0- 290,000/160,000 60,000/0
John Newman -0- -0- 50,000/0 15,000/0
Kent R. Coykendall -0- -0- 50,000/0 15,000/0
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 stock options to purchase 2,000 shares of
the Company's $.001 par value Common Stock for each quarter during which they
serve as directors and 250 shares 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
and John L. Ashworth. 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. The Company agreed
to pay the executive an annual bonus equal to the premium due on life insurance
policies with a face value of $1,000,000 for Mr. Montiel 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 also
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 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. Under the terms of the
agreement, 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 Company had a similar agreement with Mr. Werschkul, which agreement
was terminated upon his resignation. The Company and Mr. Werschkul entered into
a noncompete and consulting agreement, whereby Mr. Werschkul agreed to a
noncompete provision and consulting arrangement for two years for which the
Company agreed to pay him $240,000, payable during the first year in biweekly
installments. The
19
Company's Compensation Committee also agreed to an extension and repricing of
certain of Mr. Werschkul's options in exchange for cancellation of 155,000
options held by him. The exercise price of all options extended and repriced
was above the closing price of the Company's stock at the date of modifications.
The Company has an agreement with Monica M. McKenzie, the Company's
General Counsel and Secretary, whereby the Company agreed to one year's
severance pay if the Company is acquired before April 12, 1996, and as a result,
her employment is terminated. Her current salary is $125,000.
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.
BOARD COMPENSATION COMMITTEE REPORT
The members of the Compensation Committee of the Board of Directors
during fiscal 1995 included Andre Gambucci and John M. Hanson, Jr.
Under the supervision of the Compensation Committee of the Board of
Directors, the Company has developed and implemented compensation policies
intended to attract, retain, and stimulate the performance of the Company's
executive officers, provide such officers the opportunity to acquire a
proprietary interest in the Company and an increased personal interest in the
profitability of the Company, and thus stockholders' value, and provide
competitive levels of long-term compensation for such officers. The criteria
for determining a specific officer's compensation includes length of employment,
level of responsibility, contribution to the overall success of the Company, and
individual performance with respect to achievement of the Company's goals. The
goals, which include individual, department, and Company goals, are set at the
beginning of each fiscal year and reviewed quarterly. The goals include sales,
market share, quality control, production, inventory, and earnings per share.
In reviewing management performance and compensation, the Committee also
considers management's commitment to the long-term success of the Company
through expansion of its international as well as domestic market, development
of new products, and operational improvements. Compensation of the executive
officers includes a base salary and annual and long-term incentive compensation
consisting primarily of stock options.
The compensation for the Company's chief executive officer is primarily
based upon the rate of the Company's growth from year to year in terms of sales,
expenses, and earnings per share.
This report was furnished by Mr. Gambucci and Mr. Hanson.
PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change
in the Company's cumulative total shareholder returns on the Company's Common
Stock with the cumulative total return of the Nasdaq Stock Market (U. S.
Companies) and Nasdaq Stocks in the same Standard Industrial Classification as
the Company (SIC 2300-2399), as published by the Center for Research in Security
Prices, University of Chicago, Chicago, Illinois.
20
10/31/90 10/31/91 10/31/92 10/31/93 10/31/94 10/31/95
-------- -------- -------- -------- -------- --------
Ashworth, Inc. 100.0 255.5 185.8 432.1 390.3 250.9
Nasdaq Stock Market
(U.S. Companies) 100.0 169.2 190.8 245.9 247.2 332.6
NASDAQ Stocks
(SIC 2300-2399 Companies)
Apparel & other finished
products - fabrics & like
materials 100.0 178.3 107.7 126.0 126.1 85.3
Notes:
A. The lines represent monthly index levels derived from compound daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading
day, the preceding trading day is used.
D. The index level for all series was set to $100.0 on 10/31/90.
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
compensation committee or such other committee as the Board of Directors may
designate from time to time (the "Committee") administers the Plan and, except
for options granted to members of the Committee, selects the persons to whom
options are granted. (See 10-K for year ended October 31, 1991 for fuller
detail).
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, 1995, options to purchase 1,294,645
shares are outstanding, options to purchase 1,562,500 shares had been exercised,
and 2,842,855 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
------- ----------------- ----------------
1,122,145 1995 $ 7.49
62,500 1996 $ 9.82
47,500 1997 $10.02
47,500 1998 $10.02
15,000 1999 $ 8.25
21
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.
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, 1995, options to purchase 570,000 shares
were outstanding, options to purchase 429,000 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 $8.05.
INCENTIVE STOCK OPTION PLAN
The Company adopted the Incentive Stock Option Plan (the ISOP) in May 1993
following stockholder approval. The Company's compensation committee or such
other committee as the Board of Directors may designate from time to time (the
Committee) administers the Plan. 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 plan.
The grant or exercise of an incentive stock option 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, the Plan was 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, except 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, the exercise price must
equal or exceed the fair market value of the Company's Common Stock on the date
of the grant, except 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 at the time the option is granted. The
option will qualify as an incentive stock option for tax purposes only if the
optionee does not dispose of the stock received upon exercise of the option
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 in the sale will be treated as ordinary income.
22
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, 1995, options to purchase 1,261,292
shares were outstanding, 5,000 options to purchase shares had been exercised,
and 1,733,708 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
------- ----------------- ----------------
701,292 1995 $ 9.27
240,000 1996 $10.50
240,000 1997 $10.50
40,000 1998 $10.50
40,000 1999 $10.50
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. Each 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 three months after the date of
termination of employment or engagement by the Company unless the option is
extended by the Committee for an additional period. 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 will terminate no earlier than one year after
death or at such later date as the Committee may specify.
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, have been employed by the Company for at least six months,
and work at least an annualized 1000 hours per year. 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. (See the Company's 10-K for the period ended
October 31, 1992 for fuller details).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the number and percentage of 12,008,626
issued and outstanding shares of the Company's $.001 par value Common Stock
owned beneficially, as of January 15, 1996, 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
23
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.
Shares Beneficially Owned
-------------------------------------- Percent
Name Shares Options(1)(2) Total Owned(3)
---- -------- ------------- ----------- --------
(#) (#) (#) (%)
Gerald W. Montiel 50,840 540,000 590,840 4.71
John L. Ashworth 111,609 470,000 581,609 4.66
A. John Newman -0- 50,000 50,000 *
Mary Montiel -0- 20,500 20,500 *
Monica M. McKenzie -0- 25,500 25,500 *
Andre P. Gambucci 67,500 27,500 95,000 *
John M. Hanson, Jr. -0- 17,500 17,500 *
All executive officers and
directors as a group (7 persons) 229,949 1,151,000 1,380,949 10.49
Fred Couples 518,000 575,000 1,093,000 8.69
* 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, 1996.
(2) Only the below indicated options have exercise prices which are less than
the market price of the Company's Common Stock on January 15, 1996
($5.625):
Mr. Montiel 50,000
Mr. Ashworth 75,000
Mr. Couples 25,000
(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
and have been added to the shares actually issued and outstanding, at
January 15, 1996, 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 is in the
principal amount of $306,000 and bears interest at a variable annual rate based
upon the Bank of America prime rate on the 1st day of each month. Interest is
payable in quarterly installments, and the principal is due and payable on April
30, 1996.
Mary Montiel, sister of Mr. Montiel, is an executive officer and employee
of the Company. In the year ended October 31, 1995, she had earned a salary of
$111,193 and was granted an option to purchase 5,000 shares of the Company's
Common Stock at $8.50, the then fair market value of such stock. She is
currently receiving an annual salary of $120,000.
24
Carol Kettela, sister of Mr. Montiel, is an employee of the Company. In
the year ended October 31, 1995, she had earned a salary of $59,269 and is
currently receiving an annual salary of $60,000.
David Kettela, brother-in-law of Mr. Montiel and husband of Carol Kettela,
is an employee of the Company. In the year ended October 31, 1995, he had
earned a salary of $54,287 and is currently receiving an annual salary of
$60,000.
Michelle Zafiropoulos, daughter of Gerald W. Montiel, is an employee of the
Company. On April 6, 1995, Ms. Montiel exercised an option for 4,000 shares
held by her and received a benefit of $15,365. In the year ended October 31,
1995, she had earned a salary of $38,068 and is currently receiving an annual
salary of $72,500.
Hank Ashworth, brother of John L. Ashworth, is a sales representative of
the Company. From April 17, 1994, through October 31, 1995, he was national
sales manager for ASHWORTH core business. On December 20, 1994, Mr. Ashworth
exercised an option for 3,000 shares held by him and received a benefit of
$10,500. During the fiscal year ended October 31, 1995, he earned a salary of
$76,461 and is currently being paid commissions for sales generated by him.
Laura Gambucci, daughter of Andre Gambucci, a director, is an employee of
the Company. In the year ended October 31, 1995, she earned a salary of $73,062
and is currently receiving an annual salary of $84,000.
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 the
ASHWORTH products during his lifetime. The Company has agreed to compensate Mr.
Couples for such services, the present value of which compensation is
approximately $4.6 million. 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
tournaments. 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.
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, 1995 and 1994
Consolidated Statements of Income for the years ended October 31,
1995, 1994, and 1993
Consolidated Statements of Stockholders' Equity for the years ended
October 31, 1995, 1994, and 1993
Consolidated Statements of Cash Flows for the years ended October 31,
1995, 1994, and 1993
Notes to Consolidated Financial Statements - October 31, 1995, 1994,
and 1993
25
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
The Company filed a Form 8-K on November 30, 1995, concerning the
resignation of its vice president of operations. No other Forms 8-K were filed
during the last quarter of the fiscal year ended October 31, 1995.
(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).
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).
9 Not applicable
26
10(j)(1) Lease Agreement dated August 17, 1995 between Pacific Gulf
Properties, Inc., (Lessor) and the Registrant (Lessee) for an office
and distribution facility in Vista, California.
10(o)(7) Lease Agreement dated April 6, 1995, between the Registrant's wholly
owned subsidiary, Ashworth Store I, Inc. (Lessee) and R. R. Park City,
Inc., (Lessor) for the Park City, Utah, Outlet Store.
10(o)(8) Lease Agreement dated May 11, 1995, between the Registrant's wholly
owned subsidiary, Ashworth Store I, Inc. (Lessee) and Arizona Factory
Shops Partnership (Lessor) for the Phoenix, Arizona, Outlet Store.
11 Schedule computing net income per common share.
12 Not Applicable
13 Not Applicable
16 Not Applicable
18 Not Applicable
21 Subsidiaries of the Registrant
22 Not Applicable
23 Consent of Arthur Andersen LLP
24 Not Applicable
27 Article 5 Financial Data Schedule
28 Not Applicable
99 None
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, 1995 and 1994, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended October 31, 1995. 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, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended October 31, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
December 18, 1995
F-1
ASHWORTH, INC. AND SUBSIDIARIES
-------------------------------
CONSOLIDATED BALANCE SHEETS-OCTOBER 31, 1995 AND 1994
-----------------------------------------------------
ASSETS
1995 1994
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 1,613,029 $ 5,344,244
Accounts receivable-
Trade, net of allowance for doubtful accounts
of $767,000 and $255,000 in 1995 and 1994,
respectively 10,040,200 8,697,118
Other 1,133,771 706,995
Inventories 27,845,721 18,891,063
Deferred income tax benefit 1,684,776 443,972
Income tax refund receivable 1,239,648 -
Other current assets 1,650,792 904,497
----------- -----------
Total current assets 45,207,937 34,987,889
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 1,200,000 1,200,000
Buildings and improvements 2,714,357 2,689,276
Production equipment 7,272,234 6,105,754
Furniture and equipment 5,473,237 4,817,871
Leasehold improvements 680,426 498,363
----------- -----------
17,340,254 15,311,264
Less--Accumulated depreciation and amortization 5,571,001 3,577,926
----------- -----------
11,769,253 11,733,338
----------- -----------
OTHER ASSETS 1,094,834 972,669
----------- -----------
$58,072,024 $47,693,896
=========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-2
ASHWORTH, INC. AND SUBSIDIARIES
-------------------------------
CONSOLIDATED BALANCE SHEETS-OCTOBER 31, 1995 AND 1994
-----------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
1995 1994
----------- -----------
CURRENT LIABILITIES:
Line of credit $ 6,670,000 $ -
Current portion of long-term debt 1,557,006 1,445,500
Accounts payable 5,865,878 6,037,529
Accrued liabilities-
Income taxes - 24,364
Salaries and commissions 972,094 757,949
Other 926,857 354,326
----------- -----------
Total current liabilities 15,991,835 8,619,668
----------- -----------
LONG-TERM DEBT, net of current portion 5,195,434 5,773,504
----------- -----------
DEFERRED INCOME TAX LIABILITY 494,747 374,750
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value
authorized--50,000,000 shares; issued
and outstanding--11,901,626 shares and
11,574,468 shares at October 31, 1995
and 1994, respectively 11,902 11,575
Capital in excess of par value 23,242,390 21,085,858
Retained earnings 13,296,418 12,039,991
Deferred compensation (160,702) (211,450)
----------- -----------
36,390,008 32,925,974
----------- -----------
$58,072,024 $47,693,896
=========== ===========
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, 1995, 1994 AND 1993
---------------------------------------------------
1995 1994 1993
------------ ----------- -----------
NET SALES $74,524,311 $60,839,179 $45,823,232
COST OF GOODS SOLD 49,498,975 36,941,376 28,007,167
----------- ----------- -----------
Gross profit 25,025,336 23,897,803 17,816,065
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 21,521,662 15,525,021 11,160,751
----------- ----------- -----------
Income from operations 3,503,674 8,372,782 6,655,314
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 62,538 85,841 120,496
Interest expense (1,050,838) (614,494) (305,493)
Other income (expense) (99,678) 215,567 59,679
----------- ----------- -----------
(1,087,978) (313,086) (125,318)
----------- ----------- -----------
Income before provision for
income taxes 2,415,696 8,059,696 6,529,996
PROVISION FOR INCOME TAXES 1,015,114 3,199,340 2,584,277
----------- ----------- -----------
Net income $ 1,400,582 $ 4,860,356 $ 3,945,719
=========== =========== ===========
NET INCOME PER COMMON AND
EQUIVALENT SHARE $.12 $.40 $.34
=========== =========== ===========
WEIGHTED AVERAGE COMMON AND
EQUIVALENT SHARES OUTSTANDING 12,111,633 12,223,721 11,765,771
=========== =========== ===========
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, 1995, 1994 AND 1993
---------------------------------------------------
Common Stock Capital in
------------------------ Excess of
Shares Amount Par Value Earnings Compensation Total
---------- ---------- ------------- ------------- ------------- -------------
BALANCE,
October 31, 1992 10,780,129 $10,780 $17,116,224 $ 3,233,916 $(157,570) $20,203,350
Options exercised 474,100 474 1,606,009 - - 1,606,483
Stock for services 42,000 42 304,458 - (304,500) -
Options for services - - 125,725 - (125,725) -
Amortization of deferred
compensation - - - - 294,520 294,520
Net income - - - 3,945,719 - 3,945,719
---------- ------- ----------- ----------- --------- -----------
BALANCE,
October 31, 1993 11,296,229 11,296 19,152,416 7,179,635 (293,275) 26,050,072
Options exercised 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 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
========== ======= =========== =========== ========= ===========
The accompanying notes are an integral part of these consolidated statements.
F-5
ASHWORTH, INC. AND SUBSIDIARIES
-------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
---------------------------------------------------
1995 1994 1993
-------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 72,215,663 $ 57,191,522 $ 44,473,069
Cash paid to suppliers and employees (78,166,721) (53,323,129) (40,238,798)
Interest received 50,931 88,804 113,243
Interest paid (1,050,838) (620,883) (299,104)
Income taxes paid (2,775,861) (3,835,966) (2,085,720)
------------ ------------ ------------
Net cash provided by (used in) operating activities (9,726,826) (499,652) 1,962,690
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,129,072) (6,767,392) (2,742,350)
Proceeds from sale of property, plant and equipment 2,850 - -
------------ ------------ ------------
Net cash used in investing activities (2,126,222) (6,767,392) (2,742,350)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (718,783) (648,185) (667,994)
Borrowings on line of credit 34,670,000 8,445,000 1,700,000
Payments on line of credit (28,000,000) (8,445,000) (1,700,000)
Borrowings on notes payable and long-term debt 944,586 4,170,190 1,882,333
Principal payments on notes payable and long-term debt (786,674) (539,777) (160,881)
Proceeds from issuance of common stock 2,435,316 1,928,283 1,606,483
Treasury stock acquired (422,612) - -
------------ ------------ ------------
Net cash provided by financing activities 8,121,833 4,910,511 2,659,941
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ( 3,731,215) ( 2,356,533) 1,880,281
CASH AND CASH EQUIVALENTS, beginning of year 5,344,244 7,700,777 5,820,496
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 1,613,029 $ 5,344,244 $ 7,700,777
============ ============ ============
F-6
1995 1994 1993
------------ ----------- -----------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 1,400,582 $ 4,860,356 $ 3,945,719
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities
Amortization of deferred compensation 50,748 87,263 294,520
Depreciation and amortization 2,513,760 1,868,103 1,049,596
Loss (gain) on disposal of property, plant and equipment 33,181 41,780 (2,404)
Provision for doubtful accounts and sales returns 557,756 101,272 96,278
Increase in accounts receivable (2,327,613) (3,670,229) (1,412,246)
Increase in inventories (8,954,658) (6,559,074) (2,399,003)
Increase in deferred income tax benefit (1,240,804) (153,939) (136,971)
Increase in deferred income tax liability 119,997 156,168 153,201
Increase on income tax refund receivable (1,239,648) - -
(Increase) decrease in other assets (1,230,788) (876,978) 65,658
Increase (decrease) in accounts payable (171,651) 3,442,435 29,675
Increase (decrease) in accrued income taxes (24,364) (103,386) 49,399
Increase in accrued liabilities 786,676 306,577 229,268
------------ ----------- -----------
Total adjustments (11,127,408) (5,360,008) (1,983,029)
------------ ----------- -----------
Net cash provided by (used in) operating activities $ (9,726,826) $ (499,652) $ 1,962,690
============ =========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-7
ASHWORTH, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995, 1994 AND 1993
-------------------------------
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 principally in the western part of the
United States.
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, Bermuda, Japan, South America, Indonesia, Thailand, Africa, Guam
and the Bahamas of approximately $18,178,000, $12,095,000 and $5,925,000 in
the years ended October 31, 1995, 1994 and 1993, respectively.
b. 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, 1995 and
1994:
1995 1994
----------- -----------
Raw materials $ 4,317,017 $ 5,767,455
Work in process 2,839,828 1,668,014
Finished products 20,688,876 11,455,594
----------- -----------
$27,845,721 $18,891,063
=========== ===========
c. 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.
F-8
d. Organization Costs
------------------
Organization and trademark costs, which are included in other assets, are
capitalized and amortized over periods ranging from two to five years.
e. Income Per Common and Equivalent Share
--------------------------------------
Income per common share amounts are computed based on the weighted average
number of shares outstanding during the year, including common stock
equivalents resulting from dilutive stock options.
f. Consolidated Statements of Cash Flows
-------------------------------------
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
g. Income Taxes
------------
The Company accounts for income taxes in accordance with the Statement of
Financial Accounting Standards (SFAS) No. 109 "Accounting for Income
Taxes". This statement requires that income taxes be accounted for using
the liability method.
h. 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.
i. 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.
j. 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.
k. Impact of New Accounting Pronouncements
---------------------------------------
In 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" and SFAS 123 "Accounting for Stock-Based
Compensation" which the Company must adopt no later than fiscal year ended
1997. Management anticipates that the impact of implementing these new
statements will not have a material effect on the Company's financial
position or results of operations. Management has not yet decided if they
will elect to adopt SFAS 123.
F-9
l. Reclassifications
-----------------
Certain amounts have been reclassified in the 1994 financial statements to
conform to the 1995 presentation.
2. Equipment Under Capital Lease
-----------------------------
During the years ended October 31, 1995, 1994 and 1993, the Company acquired
$94,307, $277,720 and $648,660, respectively, of various equipment under capital
leases. Future minimum lease payments are as follows:
Year Ended
October 31:
-----------
1996 $ 664,428
1997 443,415
1998 188,867
1999 17,094
2000 -
----------
Total future minimum payments 1,313,804
Less--Amount representing interest 87,441
----------
Present value of future minimum
capital lease payments (Note 4) $1,226,363
==========
At October 31, 1995 and 1994, the accompanying consolidated balance sheets
include the following equipment under capital leases:
1995 1994
---------- ----------
Production equipment $3,034,631 $3,106,736
Furniture and equipment 431,640 431,640
---------- ----------
3,466,271 3,538,376
Less--Accumulated amortization 1,377,843 1,032,665
---------- ----------
$2,088,428 $2,505,711
========== ==========
3. Line of Credit Agreement
------------------------
The Company has a $13 million working capital line of credit agreement with a
bank which expires on February 28, 1997 and is collateralized by substantially
all assets. The Company has the option to increase the line up to $17 million
for its peak inventory buildup period. 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 Company did not achieve the required minimum net income for its
fourth quarter in 1995, nor did it achieve the required quick ratio or tangible
net worth amount for the year. The bank has granted a waiver for these
violations, and the Company has agreed to pay a mimimal fee and enter into an
amended agreement. The line of credit may also be used to finance up to $1
million in commercial letters of credit and standby letters of credit. At
October 31, 1995, no standby letters or commercial letters of credit were
outstanding on this line of credit.
F-10
Additional information for years ended October 31, 1995, 1994 and 1993, is as
follows:
1995 1994 1993
----------- ---------- ---------
Interest rate at year-end 8.75% 8.25% 6.50%
Weighted average interest rate during the year 8.90% 6.80% 6.50%
Maximum amount outstanding $10,775,000 $4,195,000 $ 750,000
Average amount outstanding $ 5,130,000 $ 610,000 $ 38,000
4. Long-Term Debt
--------------
Amounts outstanding under long-term debt agreements at October 31, 1995 and
1994, consist of the following:
1995 1994
---------- ----------
Installment notes bearing interest ranging from
7.58 to 8.67 percent, with due dates through
October 1, 2000 collateralized by various equipment $2,771,720 $2,591,628
Note payable 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 2,754,357 2,776,536
Capital lease obligations (Note 2) 1,226,363 1,850,840
---------- ----------
6,752,440 7,219,004
Less--Current portion 1,557,006 1,445,500
---------- ----------
Long-term debt $5,195,434 $5,773,504
========== ==========
Future maturities of long-term debt at October 31, 1995, are as follows:
Year Ended
October 31:
-----------
1996 $1,557,006
1997 1,126,575
1998 746,581
1999 498,226
2000 197,679
Thereafter 2,626,373
----------
$6,752,440
==========
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, 1995, 1994 and 1993, was
$113,709, $79,020 and $49,730, respectively.
F-11
6. Stockholders' Equity
--------------------
a. Common Stock Options
--------------------
The Company maintains several nonqualified and incentive stock option plans
to provide incentives for selected persons to promote the financial success
and progress of the Company. As amended, the plans 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, 1995, the Company had
3,347,437 options outstanding under the above plans to purchase common stock
at prices ranging from $2.25 to $12.50 with expiration dates between
December 31, 1995 and April 30, 2006. A total of 4,463,063 options remained
available for grant, and 739,500 options with exercise prices ranging from
$8.25 to $11.00 were not exercisable at October 31, 1995.
The following is a summary of common stock option transactions:
1995 1994 1993
--------- --------- ---------
Outstanding, beginning of year 2,680,761 1,935,500 1,504,600
Granted 1,076,937 1,025,000 912,000
Exercised (374,761) (277,739) (474,100)
Expired (35,500) (2,000) (7,000)
--------- --------- ---------
Outstanding, end of year 3,347,437 2,680,761 1,935,500
========= ========= =========
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 $22,000, $10,000
and $17,000 in charges related to the difference in stock prices in 1995,
1994 and 1993, respectively.
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.
F-12
7. Operating Leases
----------------
The Company leases certain production, warehouse and outlet store facilities
under operating leases. These leases expire in various fiscal years through
2001. Rent expense for the years ended October 31, 1995, 1994 and 1993, was
$757,438, $554,795 and $527,568, respectively. Future minimum rental payments
are as follows:
Year Ended
October 31:
-----------
1996 $ 961,587
1997 1,029,169
1998 824,702
1999 791,970
2000 720,688
Thereafter 269,056
----------
$4,597,172
==========
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 to purchase shares
of the Company's common stock. The aggregate annual cash compensation under
these agreements totals $782,000 payable in 1996 and 1997, $732,000 payable
in 1998, $707,000 payable in 1999 and $657,000 payable in the years 2000
through 2011. The number of options granted to purchase shares of the
Company's common stock will vest as follows: 200,500 in 1996, 192,500 in
1997, 167,500 in 1998, 165,000 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 the
optionees. Obligations under this provision, if any, are accrued and
charged to operations during the period in which they arise. The Company
incurred approximately $253,000, $57,000 and $17,000 in charges related to
the difference in stock prices in 1995, 1994 and 1993, respectively.
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 $3,268,000) are based upon a
percentage of the executive's 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 future cash payments to
be made is accrued and charged to operations over the periods benefited. In
1995, $52,811 was accrued and charged to operations and is reflected in
other accrued liabilities on the balance sheet.
F-13
c. Legal Matters
-------------
The Company is involved in litigation and other disputes arising in the
normal course of its business. In the opinion of management the Company's
liability, if any, under pending litigation or disputes would not materially
affect its financial condition or operations.
9. Related-Party Transactions
--------------------------
At October 31, 1995, the Company had a note receivable from an officer for
$320,238 which represents principal and interest and is included in other
receivables in the accompanying 1995 balance sheet.
10. Income Taxes
------------
The provision for income taxes for the years ended October 31, 1995, 1994
and 1993, is as follows:
1995 1994 1993
----------- ---------- ----------
Current provision:
Federal $ 1,625,392 $2,475,245 $1,977,396
State 510,529 721,866 590,651
----------- ---------- ----------
Total 2,135,921 3,197,111 2,568,047
----------- ---------- ----------
Deferred provision (benefit):
Federal (856,889) 1,863 12,497
State (263,918) 366 3,733
----------- ---------- ----------
Total (1,120,807) 2,229 16,230
----------- ---------- ----------
$ 1,105,114 $3,199,340 $2,584,277
=========== ========== ==========
The components of the Company's deferred income tax provision (benefit) for the
year ended October 31, 1995, 1994 and 1993, are as follows:
1995 1994 1993
------------ --------- ---------
Depreciation $ 119,997 $156,168 $153,201
Allowance for doubtful accounts (197,607) (7,261) (10,999)
Inventory reserves (818,252) (58,203) (86,489)
Other non-deductible accruals (232,463) (51,890) (29,987)
Other deductible capitalized costs 7,518 (36,585) (9,496)
----------- -------- --------
$(1,120,807) $ 2,229 $ 16,230
=========== ======== ========
F-14
The components of the Company's net deferred income tax benefit as of October
31, 1995 and 1994 are as follows:
1995 1994
--------- ---------
Current deferred income tax
benefit:
Allowance for doubtful
accounts $ 252,816 $ 55,209
Inventory reserves 1,109,267 291,015
Other non-deductible accruals 362,436 129,973
Other deductible capitalized
costs (39,743) (32,225)
---------- ---------
1,684,776 443,972
---------- ---------
Long-term deferred income
tax liability:
Depreciation (494,747) (374,750)
---------- ---------
$1,190,029 $ 69,222
========== =========
Based on historical and current pre-tax earnings of the Company's continuing
operations, management believes it is more likely than not that the Company will
realize the deferred tax asset existing at October 31, 1995.
A reconciliation of the provision for income taxes at the statutory rate to the
Company's effective rate is as follows:
1995 1994 1993
----------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- -------
Computed tax at the
expected statutory rate $ 837,797 34.0% $2,740,296 34.0% $2,220,198 34.0%
State income tax, net of
federal tax benefits 150,311 6.1 491,641 6.1 398,330 6.1
Non-deductible expenses 42,190 1.7 15,601 0.2 11,240 0.2
Foreign sales corporation
tax benefit (60,087) (2.4) (48,198) (0.6) (54,206) (0.8)
Other 44,903 1.8 - - 8,715 0.1
---------- -------- ---------- ------- ---------- ----
Income tax provision $1,015,114 41.2% $3,199,340 39.7% $2,584,277 39.6%
========== ======== ========== ======= ========== ====
11. Statement of Cash Flows, Noncash Transactions
---------------------------------------------
The Company completed the following noncash transactions which are not reflected
in the statement of cash flows:
1995 1994 1993
--------- -------- ----------
Capital lease equipment acquired and related capital
lease obligations $94,307 $277,720 $ 648,660
Common stock issued in payment for services,
including deferred compensation - 5,438 304,500
Stock options issued in payment for services,
including deferred compensation - - 125,725
F-15
12. Results by Quarter (Unaudited)
------------------------------
The unaudited results by quarter for the years ended October 31, 1995 and 1994
are shown below:
Year Ended First Second Third Fourth
October 31, 1995 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 2,871,222
Net income (1) 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
Year Ended First Second Third Fourth
October 31, 1994 Quarter Quarter Quarter Quarter
- ---------------- ----------- ----------- ----------- -----------
Net sales $11,041,377 $21,268,233 $16,959,106 $11,570,463
Gross profit 4,082,621 8,767,909 7,264,219 3,783,054
Net income (1) 719,906 2,479,671 1,527,654 133,125
Net income per common and equivalent share .06 .20 .13 .01
Weighted average common and equivalent
shares outstanding 12,181,238 12,325,780 12,185,444 12,197,910
(1) The Company's gross profit in the final quarter of 1995 was lower than that
reported for the same quarter 1994 primarily because of an increase to the
inventory reserve of approximately $1.3 million. Net income was further
negatively impacted by an increase to the allowance for doubtful accounts
of approximately $224,000.
F-16
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 stockholders included in this Form 10-K, and have issued our
report thereon dated December 18, 1995. 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 18, 1995
F-17
ASHWORTH, INC. AND SUBSIDIARIES
-------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
Additions
-----------------------
Balance 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, 1993:
Allowance for doubtful accounts $188,000 $ 98,000 $ - $71,000 $215,000
======== ======== === ======= ========
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
======== ======== === ======= ========
F-18
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 25, 1996 BY: /S/ GERALD W. MONTIEL
---------------------------------
GERALD W. MONTIEL
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 CHIEF EXECUTIVE OFFICER JANUARY 25, 1996
- --------------------------- (PRINCIPAL EXECUTIVE OFFICER)
GERALD W. MONTIEL PRESIDENT AND
CHAIRMAN OF THE BOARD
OF DIRECTORS
/S/ JOHN L. ASHWORTH SENIOR EXECUTIVE VICE PRESIDENT JANUARY 25, 1996
- --------------------------- AND DIRECTOR
JOHN L. ASHWORTH
/S/ A. JOHN NEWMAN VICE PRESIDENT - FINANCE, JANUARY 25, 1996
- --------------------------- TREASURER, CHIEF FINANCIAL
A. JOHN NEWMAN OFFICER (PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER)
/S/ ANDRE P. GAMBUCCI DIRECTOR JANUARY 25, 1996
- ---------------------------
ANDRE P. GAMBUCCI
/S/ JOHN M. HANSON, JR. DIRECTOR JANUARY 25, 1996
- ---------------------------
JOHN M. HANSON, JR.