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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1999
[ ] 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)
(760) 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 December 31, 1999, was $56,828,000 based upon the last reported
sale price of the Company's Common Stock as reported by the Nasdaq National
Market System.
There were 13,776,573 shares of common stock, $.001 par value, outstanding at
the close of business on December 31, 1999.
PART III is incorporated by reference from the Registrant's definitive Proxy
Statement for its 2000 Annual Meeting of Stockholders to be filed with the
Commission within 120 days of October 31, 1999.
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CAUTIONARY STATEMENTS AND RISK FACTORS
This report on Form 10-K contains certain forward looking statements, including
without limitation those regarding the Company's plans and expectations for
revenue growth, product lines, designs and seasonal collections, marketing
programs, foreign sourcing, cost controls, inventory levels and availability of
working capital. These forward looking statements may contain the words,
"believe", "anticipate", "except", "estimate", "project", "will be", "will
continue", "will likely result", or other similar words and phrases. Forward
looking statements and the Company's plans and expectations are subject to a
number of risks and uncertainties that could cause actual results to differ
materially from those anticipated, and the Company's business in general is
subject to certain risks that could affect the value of the Company's stock.
These risks include, but are not limited to, the following:
- - Demand for the Company's products may decrease significantly if the
popularity of golf decreases. Demand may also be adversely affected if there
is a weakening in the economy of the United States or the foreign countries
in which the Company sells its apparel products.
- - Like other apparel manufacturers, the Company must correctly anticipate and
help direct fashion within its industry. The Company's results of operations
could suffer if it fails to develop fashions and styles that are well
received.
- - The Company's business is seasonal, and sales in the fourth calendar quarter
have historically been particularly weak.
- - The market for golf apparel and sportswear is extremely competitive. While
the Company is currently a leader in the core green grass market, it has
several strong competitors that are better capitalized and have stronger
distribution systems. Outside the green grass market, the Company's market
share is not significant. Price competition or industry consolidation could
weaken the Company's competitive position.
- - Certain of the Company's competitors may be better positioned to capitalize
on the opportunities provided by e-commerce (i.e. sales and marketing over
the Internet). This could result in weakening the Company's competitive
position.
- - The Company relies upon domestic and foreign contractors to manufacture
various products. If these contractors deliver goods late or fail to meet
the Company's quality standards, the Company could lose sales.
- - The Company maintains high levels of inventory to support its Basics
program, and additional products, greater sales volume, and customer trends
toward increased "at-once" ordering may require increased inventory.
Disposal of excess prior season inventory is an ongoing part of the
Company's business, and inventory writedowns may impair the Company's
financial performance in any period. Particular inventory may be subject to
multiple writedowns if the Company's initial reserve estimates for inventory
obsolescence or lack of throughput prove to be too low. These risks increase
as inventory grows.
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PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION OF THE COMPANY
Ashworth, Inc., based in Carlsbad, California, was incorporated in
Delaware on March 19, 1987. As used in this report, the terms "we", "us",
"Ashworth", and the "Company" refer to Ashworth, Inc., its predecessors,
subsidiaries and affiliates, unless the context indicates otherwise. The Company
designs, markets and distributes a full line of quality sports apparel,
headwear, and accessories under the Ashworth(R) label. Ashworth products are
sold in golf pro shops, resorts, at better department and specialty retail
stores, and in selected international markets.
The Company has wholly-owned subsidiaries that own and operate the nine
Company outlet stores and the Ashworth Concept Store. A wholly-owned United
Kingdom subsidiary distributes our 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. The Company opened a new division on
November 1, 1998 to distribute Ashworth products in Canada. Ashworth, Inc. and
its wholly-owned subsidiary, Ashworth U.K., Ltd., were partners of a Luxembourg
partnership, Ashworth, Inc. et Cie., formed to qualify for trademark
registration in Europe under the Madrid Convention until September 1, 1998 when
the partnership was dissolved.
At its inception, Ashworth designed and marketed classically styled,
natural fiber golfwear and distributed it in the United States under the
Ashworth(R) brand exclusively to golf pro shops and resorts. The Company has
focused on developing a new look in golfwear over the past ten years, using
natural fibers and a loose relaxed fit emphasizing quality in product and
presentation, which are now industry standards. Its men's and women's golf
lifestyle apparel is aimed predominately at the younger active male and female
consumers in the middle/upper middle income range and is priced in the middle to
upper middle price range for golf apparel. For the past few years, Ashworth has
been a leading golf apparel line sold at pro shops in the United States.
ASHWORTH PRODUCTS
All of our products are designed in-house with the exception of
footwear. IGF, the exclusive licensee of Ashworth footwear, designs, produces
and markets the Ashworth footwear line through its own independent sales force.
The Ashworth Men's Division designs two Spring, two Summer, three Fall,
one Resort, one Holiday, one Weather Systems and one Basics collection per year.
Each collection consists of approximately 30 to 40 styles. Product design focus
is on classic, timeless designs with an emphasis on quality and natural fibers.
The Ashworth Men's collections consist of knit and woven shirts,
pullovers, sweaters, vests, pants, shorts, hats, and accessories. The Company
also designs a Weather Systems(TM) collection made largely of technical fabrics
and produced for a variety of weather conditions including cold and rainy as
well as hot and humid. In 1996, the Company introduced a Basics line of shirts,
pants and shorts in popular styles and colors that have not changed
significantly from season to season.
Ashworth introduced its new Women's Line in 1998. The Women's Division
designs three Spring/Summer, four Fall/Holiday and one Basics collection per
year. Each collection consists of approximately 20 to 30 styles. Product design
focus is on incorporating casual elegance and timeless simplicity with an
emphasis on quality.
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DISTRIBUTION CHANNELS
Approximately 92% of our products are warehoused in and shipped from our
distribution facilities in Carlsbad, California. Drop-shipments from off-shore
factories directly to international distributors account for 3% of the Company's
products. Approximately 5% of the Company's products are made in Europe for
delivery to Ashworth U.K., Ltd.
The Company currently distributes and sells its products primarily
through the following six channels of distribution:
U.S. GOLF PRO SHOPS, RESORTS AND OFF-COURSE GOLF SPECIALTY SHOPS
The Company's core customers are golf pro shops located at golf courses.
According to the 1999 Darrell Survey, a leading golf industry consumer usage
survey, Ashworth was the leading golf apparel company in the United States with
an 11.4% market share. We currently distribute to pro shops in nearly all of the
50 states.
U.S. DEPARTMENT STORES AND SPECIALTY STORES
Ashworth currently sells its products to selected upscale department and
specialty stores, including Nordstrom, Parisians, Dayton Hudson, Belk and
Bloomingdales.
U.S. CORPORATE MARKET
The Company has established a Corporate division to leverage its brand
name and product line into corporate America. It has a dedicated sales force
that markets its clothing through top specialty-advertising firms that sell
Ashworth to Fortune 500 companies and other major corporations for use in their
company stores, sales meetings, company catalogs and recognition awards.
INTERNATIONAL MARKET
The Company operates a wholly-owned subsidiary in Essex, England that
distributes Ashworth products to customers, either directly or through
independent sales representatives, in the United Kingdom and other European
countries such as Germany, France, Spain, Sweden, Switzerland and Portugal. On
November 1, 1998, the Company opened a division, operated by Almec Leisure
Group, which distributes Ashworth products in Canada.
On October 11, 1999, the Company entered into a three-year licensing and
distribution agreement with Kosugi Sangyo Co., Ltd. in Japan. Under the
agreement, Kosugi Sangyo will import certain product lines from Ashworth and
manufacture other licensed products designed specifically for the Japanese
market. Kosugi will distribute the Ashworth product to better golf specialty
shops and other upscale distribution channels beginning with Spring 2000.
The Company also uses distributors to sell Ashworth products in other
countries such as Taiwan, Singapore, Guam, Indonesia and the United Arab
Emirates.
ASHWORTH RETAIL STORES
The Company operates, through wholly-owned subsidiaries, nine retail
stores in California, Texas, Colorado, Arizona, Utah and Nevada. The main
purpose of these stores is to help control and manage inventory by selling prior
season and irregular merchandise. Occasionally the Company sells excess
inventory through third party discount stores.
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ASHWORTH CONCEPT STORE
The Company opened an Ashworth Concept Store in Costa Mesa, California
in October 1997 to retail lifestyle products. These include products such as
Ashworth apparel, soft furnishings and small gift items.
SALES AND MARKETING
The Company's products are sold in the United States and Europe largely
by independent sales representatives who are not employees of the Company or its
subsidiaries. The Company currently has 71 sales representatives in the United
States and 35 sales representatives in Europe and Canada. The Company uses 11
different distributors in other international locations.
In an effort to add exposure and consumer credibility to its Ashworth
brand, the Company currently has five popular and well-known golf celebrities
who wear and endorse the Company's products. They are: (1) Fred Couples,
considered by many to be the most popular golfer in the world; (2) John Cook;
(3) Dave Stockton, Sr., a player on the Senior PGA tour; (4) Scott Verplank; and
(5) Jim Nantz, a popular CBS golf announcer. The Company is using these players
and celebrities in advertisements, in store displays, and for trade shows, store
and other special appearances.
The Company has also created an Ashworth Advisory Team made up of
outstanding individuals from around the world who will act as ambassadors and
brand spokespersons as well as wear-test all products. The Ashworth marketing
platform is designed to heighten brand awareness, brand strength and brand
growth globally through print, moving media, communications and promotional
initiatives.
Ashworth expanded its in-store shop program in 1999 and now has a
presence in approximately 800 locations throughout the United States. This
modular fixture program is designed to help create a dedicated in-store shop for
Ashworth products coupled with pictures and displays of our spokespersons and
golf professionals.
In an effort to introduce new young customers to the Ashworth brand, we
support collegiate golf by providing team uniforms to numerous college and
university golf teams.
The domestic market for Ashworth apparel has been seasonal, with the
highest sales traditionally in the period January through August and the lowest
sales volume in the months of September through December. The Company hopes that
the addition of department and specialty retail store markets, the corporate
market, and additional business for fall and winter in the European market will
help to reduce the seasonality of the Company's business.
Sales in fiscal 1999 were $107,921,000, an increase of 0.5% over sales
of $107,341,000 in fiscal 1998. This increase was primarily the result of an
increase in domestic sales largely offset by the decline in foreign sales.
During the last three fiscal years, the Company had the following
domestic and international sales of Ashworth products:
YEAR ENDED OCTOBER 31,
1999 1998 1997
-------- -------- --------
CONSOLIDATED SALES: (In Thousands)
Domestic Sales $ 93,527 $ 89,389 $ 70,129
International Sales:
Ashworth U.K. Ltd. 7,950 10,637 9,091
Other International Jurisdictions 6,444 7,315 9,928
-------- -------- --------
Total International Sales 14,394 17,952 19,019
TOTAL SALES $107,921 $107,341 $ 89,148
======== ======== ========
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See Note 1 of Notes to the Consolidated Financial Statements for sales,
operating income or loss and identifiable assets of Ashworth U.K., Ltd., and
Note 11 for market segment information.
At December 31, 1999, we had backlog orders of approximately $41,316,000
compared with approximately $38,300,000 at December 31, 1998. Backlog reflects
orders that are placed with the Company prior to the quarter in which the goods
are to be shipped, as opposed to "at-once" orders which are received in the
quarter in which the goods are expected to be shipped. The current backlog
covers orders for goods expected to be shipped through approximately July 2000.
The amount of backlog orders at a particular time is affected by a number of
factors, including the timely flow of product from suppliers and local
contractors which can impact the Company's ability to ship on time, and the
timing of customers' orders. Accordingly, a comparison of backlog orders from
period to period is not necessarily meaningful and may not be indicative of
eventual actual shipments in any period. In addition, orders may be changed or
canceled prior to shipment, preventing the Company from converting backlog into
revenue.
INVENTORY
The Company maintains high levels of inventory to support its Basics
program, and additional products, greater sales volume, and customer trends
toward increased "at-once" ordering may require increased inventory. Disposal of
excess prior season inventory is an ongoing part of the Company's business, and
inventory writedowns may impair the Company's financial performance in any
period. Particular inventory may be subject to multiple writedowns if the
Company's initial reserve estimates for inventory obsolescence or lack of
throughput prove to be too low. These risks increase as inventory grows. The
Company's goal is to increase the inventory turns and lower the overall
inventory levels relative to sales.
COMPETITION
According to the 1999 Darrell Survey, the Ashworth brand was the leader
in the Company's core green grass market in 1999, with an 11.4% market share.
The Company's share of other markets it has more recently entered, including
upscale department stores and the corporate market, is minor, however. The golf
apparel market is not dominated by any single company, and is highly competitive
both in the United States and abroad. The Company competes not only with golf
apparel manufacturers, but also with other branded sports and sportswear apparel
manufacturers that have entered the growing golf apparel market in recent years.
Many of the Company's competitors have greater financial resources and greater
experience than the Company. Ashworth competes with other golf apparel
manufacturers on design, product quality and brand image.
PRODUCT SOURCING
Ashworth sources its products in the following ways:
CONTRACT MANUFACTURING: Approximately 70% of our production in fiscal
1999 was sourced domestically with the majority of the cutting and sewing work
being performed by two main independent cutting and sewing contractors in the
San Diego area. We have no written agreements with these firms but have used
their services since our inception. We consider our relations with these
contractors to be excellent. We purchase most of our fabric from domestic mills
and then distribute the fabrics to our contractors after quality inspection. We
are currently in the process of changing from cut and sew operations to
purchasing finished goods from these contractors.
READY-MADE FINISHED GOODS: Approximately 30% of our production in fiscal
1999 was through purchases of ready-made goods, manufactured to our quality and
styling specifications domestically and from sources outside of the United
States. In fiscal 1999, we again increased the proportion of finished goods made
offshore. We now import products from China, Hong Kong, Italy, Korea, Macau,
Malaysia, Mexico, the Philippines, Singapore, Sri Lanka, Taiwan, Thailand and
other countries.
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IN-HOUSE MANUFACTURING: We discontinued our in-house hat manufacturing
facility in July 1998 and we are currently purchasing the headwear offshore,
primarily from Taiwan and China. Following this change in 1998, the Company has
no in-house manufacturing operations.
IN-HOUSE EMBROIDERY: We embroider custom golf course logos and
tournament logos in-house on 44 multi-head, computer-controlled embroidery
machines with a total of 455 sewing heads. The embroidery design library
contains over 25,000 Ashworth and customer designs. Embroidery is applied to
both garments and finished headwear. On average, the Company embroiders 95,000
logos per week on approximately 70,000 garments.
YEAR 2000 COMPUTER CONVERSION
As of January 25, 2000, neither Ashworth nor any key vendors have
experienced any material adverse effects related to the Year 2000 issue. At this
time, Ashworth does not expect to encounter any Year 2000 issues that would have
a material adverse effect on the results of operations, liquidity and financial
condition of the Company.
TRADEMARKS
The Company owns and utilizes several trademarks, principal among which
are the Ashworth word and design marks, the Golfman word and design marks, the
Ashworth Harry Logan word mark, and the Weather Systems word mark. The Ashworth
word and design marks and the Golfman design marks have been registered for
apparel, shoes and leather goods (including golf bags) on the Principal Register
of the United States Patent and Trademark Office.
The Company has registered the Ashworth word and design marks and the
Golfman design marks for apparel and shoes in approximately 70 countries and is
applying for registration of these trademarks in approximately 13 additional
countries. The application process usually takes from six months to two years to
complete. The marks also have been registered or applications to register them
have been filed for luggage/golf bags in many of the same countries.
We regard our trademarks and other proprietary rights as valuable assets
and believe that they have significant value in the marketing of our products.
Although we believe that we have the exclusive right to use the trademarks and
intend to vigorously protect our trademarks against infringement, there can be
no assurance that we can successfully protect the trademarks from conflicting
uses or claims of ownership.
EMPLOYEES
At December 31, 1999, Ashworth had approximately 466 regular employees
and 156 seasonal temporary employees. We consider our labor relations to be
generally good.
ITEM 2. PROPERTIES
The Company owns two buildings located on Loker Avenue West in Carlsbad,
California which were purchased on December 9, 1993 for $3,500,000. The
buildings total approximately 77,000 square feet, consisting of space for
administrative, embroidery, warehousing and distribution functions. The purchase
was financed with a down payment of $700,000 and a mortgage of $2,800,000
amortized over thirty years but due and payable in seven years.
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The Company and its subsidiaries have the following leases for
manufacturing and distribution facilities, as well as leases for retail space
for its stores:
Lease Min/Current Maximum
Square Expiration Base Rent Base Rent
Location Footage Date Per Month per Month
- -------- ------- ---- --------- ---------
($) ($)
MANUFACTURING AND DISTRIBUTION CENTERS:
Carlsbad, CA 47,800 10/31/00 24,000 24,000
Vista, CA 42,000 10/31/00 18,060 18,060
Essex, England 5,500 10/31/03 4,052 4,052
Essex, England 5,500 10/31/03 4,052 4,052
Leeds, England 600 7/15/00 822 822
RETAIL STORES
San Ysidro, CA 2,450 4/30/03 4,422 4,974
San Marcos, TX 3,000 8/31/00 4,514 4,514
Vacaville, CA 2,500 11/30/00 4,849 5,060
Barstow, CA 3,400 9/30/04 5,667 6,378
Phoenix, AZ 4,000 9/30/00 5,976 5,976
Park City, UT 2,250 5/31/05 3,103 3,762
Hillsboro, TX 2,700 5/31/00 4,613 4,613
Silverthorne, CO 2,250 6/30/05 4,031 4,031
Las Vegas, NV 2,450 9/30/01 4,088 4,088
CONCEPT STORE
Costa Mesa, CA 6,020 1/31/08 25,088 32,613
The Company also pays percentage rent based on sales which exceed
certain breakpoints for all of the retail store leases. All of the leases
require the Company to pay its pro rata share of taxes, insurance and
maintenance expenses. The Company guarantees at least some portion of several
leases held by Ashworth subsidiaries.
ITEM 3. LEGAL PROCEEDINGS.
On January 22, 1999, Milberg Weiss Bershad Hynes & Lerach LLP filed a
class action in the United States District Court for the Southern District of
California ("U.S. District Court") on behalf of purchasers of the Company's
common stock during the period between September 4, 1997 and July 15, 1998
alleging violations of the Securities Exchange Act of 1934 by the Company and
certain Ashworth officers and directors. The complaint alleged that, during the
class period, Ashworth executives made positive statements about the Company's
business including statements concerning product demand, offshore production and
inventories. The complaint further alleged that the defendants knew these
statements to be false and concealed adverse conditions and trends in the
Company's business during the class period. The plaintiff seeks to recover
unspecified damages on behalf of all purchasers of Ashworth common stock during
the period September 4, 1997 to July 15, 1998. The Company was served a copy of
the complaint on January 26, 1999. Subsequently, two other suits were served
upon the Company making similar allegations. The three actions have been
consolidated by order of the United States District Court and lead counsel for
the plaintiffs has been appointed. Per order of the Court, Plaintiffs filed
their Amended and Consolidated Complaint on December 17, 1999. The Company has
approximately 60 days to respond by way of a motion to dismiss or other
responsive pleading. Under the scheduling order entered by the United States
District Court, a hearing on the Company's motion to dismiss, if filed, will
occur no sooner than May of 2000. Until that time, under the applicable
provisions of the Private Securities Litigation Reform Act of 1995, plaintiffs
cannot conduct discovery against the Company until resolution of the motion to
dismiss. Accordingly, no discovery has occurred to date. The Company has
retained counsel, conducted an internal investigation of the allegations of the
various complaints and intends to vigorously defend against the action.
Ashworth is party to other claims and litigation proceedings arising in
the normal course of business. Although the legal responsibility and financial
impact with respect to such other claims and litigation cannot
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currently be ascertained, the Company does not believe that these other matters
will result in payment by the Company of monetary damages, net of any applicable
insurance proceeds, that, in the aggregate, would be material in relation to the
consolidated financial position or results of operations of the Company.
ITEM 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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "ASHW". The following table sets forth the high and low sale prices
on the Nasdaq National Market for the quarters indicated.
HIGH LOW
FISCAL YEAR 1998
Quarter ended January 31, 1998 14 3/8 10
Quarter ended April 30, 1998 18 3/8 13 1/4
Quarter ended July 31, 1998 18 1/16 6 14/16
Quarter ended October 31, 1998 8 1/4 5 7/16
HIGH LOW
FISCAL YEAR 1999
Quarter ended January 31, 1999 6 3/4 4 1/8
Quarter ended April 30, 1999 5 1/2 3 1/8
Quarter ended July 31, 1999 6 3 9/16
Quarter ended October 31, 1999 5 1/2 3 7/8
HOLDERS
There is only one class of Common Stock. As of December 31, 1999, there
were 663 stockholders of record and approximately 9,000 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 CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
which are included elsewhere in this report. The statement of income data set
forth below with respect to the fiscal years ended October 31, 1999, 1998 and
1997 and the balance sheet data at October 31, 1999 and 1998 are derived from,
and should be read in conjunction with the audited Consolidated Financial
Statements included elsewhere in this report. The statement of income data set
forth below with respect to the fiscal years ended October 31, 1996 and 1995
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and the balance sheet data at October 31, 1997, 1996 and 1995 are derived from
audited financial statements not included in this report. No dividends have been
paid for any of the periods presented.
YEARS ENDED OCTOBER 31,
1999 1998 1997 1996 1995
--------- -------- ------- ------- -------
STATEMENT OF INCOME DATA: (In thousands, except per share amounts)
Net Sales $107,921 $107,341 $89,148 $75,413 $74,524
Gross Profit 39,363 40,622 34,103 27,395 25,025
Selling, general and administrative expenses 32,867 31,691 25,282 24,087 21,521
Income from operations 6,496 8,931 8,821 3,308 3,504
Net income 3,817 5,300 4,827 1,403 1,401
Net income per basic share 0.27 0.37 0.39 0.12 0.12
Weighted average basic shares outstanding 14,035 14,185 12,403 12,026 11,798
Net income per diluted share 0.27 0.36 0.38 0.12 0.12
Weighted average diluted shares outstanding 14,045 14,805 12,564 12,078 12,008
AS OF OCTOBER 31,
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In thousands)
BALANCE SHEET DATA:
Working capital $57,734 $54,768 $44,828 $31,583 $29,216
Total assets 80,106 81,634 68,817 54,912 58,072
Long-term debt (less current portion) 2,764 3,445 4,336 5,307 5,195
Stockholders' equity 69,426 67,105 53,001 38,867 36,390
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
Consolidated net sales were $107,921,000 for fiscal 1999, an increase of
0.5% over net sales of $107,341,000 in fiscal 1998. An increase in domestic
sales was largely offset by a decline in foreign sales. Domestic sales for
fiscal 1999 increased 4.6% to $93,527,000 from $89,389,000 in fiscal 1998
primarily due to increased wholesale distribution. Foreign sales decreased by
19.8% to $14,394,000 in fiscal 1999 from $17,952,000 in fiscal 1998 due
primarily to lower sales in the Company's U.K. Subsidiary. Sales from the
Company's subsidiary in England, in fiscal 1999 decreased by 25.3% or
$2,687,000, as compared to sales in the prior year due to softened demand.
The gross profit margin for fiscal 1999 decreased to 36.5% from 37.8% in
fiscal 1998. The decrease was primarily a result of sales discounts and
increased markdowns of prior season inventory.
Selling, general and administrative ("SG&A") expenses for fiscal 1999
increased to 30.5% of net sales compared to 29.5% in 1998. Actual SG&A expenses
were $32,867,000 in fiscal 1999 compared to $31,691,000 in 1998. This 3.7%
increase is higher than the sales increase of 0.5% for the year and is due
primarily to the addition of the Canadian division following the third quarter
of fiscal 1998 as well as increased costs of distribution.
Net other expenses were $229,000 for fiscal 1999 compared to $241,000 in
fiscal 1998. Interest expense declined to $431,000 in fiscal year 1999 from
$451,000 in fiscal year 1998 due primarily to reduced borrowing on the Company's
line of credit with the bank.
The effective income tax rate for fiscal 1999 increased slightly to
39.1% from 39.0% in fiscal 1998.
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During fiscal year 1999, the Company earned a net income of $3,817,000
as compared to a net income of $5,300,000 in the prior year. The reduction in
net income for fiscal year 1999 was primarily attributable to a lower gross
margin and higher SG&A expenses.
1998 COMPARED TO 1997
Consolidated net sales were $107,341,000 for fiscal 1998, an increase of
20.4% over net sales of $89,148,000 in fiscal 1997. Domestic sales for fiscal
1998 increased 27.5% to $89,389,000 from $70,129,000 in fiscal 1997 primarily
from larger volume sales of Ashworth apparel due to increased number of accounts
as well as increased average order size. Foreign sales decreased by 5.6% to
$17,952,000 in fiscal 1998 from $19,019,000 in fiscal 1997 due primarily to
lower sales in Asia. Sales from the Company's subsidiary in England in fiscal
1998 increased by 17.0% over sales from the prior year.
The gross profit margin for fiscal 1998 decreased to 37.8% from 38.3% in
fiscal 1997. The Company experienced a reduction in its average unit cost from
offshore sourcing of some of its products but this improvement was offset by
sales discounts and increased mark downs of prior season inventory.
SG&A expenses for fiscal 1998 increased to 29.5% of net sales compared
to 28.4% in 1997. Actual SG&A expenses were $31,691,000 in fiscal 1998 compared
to $25,282,000 in 1997. This 25.4% increase is higher than the sales increase of
20.4% for the year and is due primarily to investment in sales and marketing
programs and increased distribution expenses. The Company spent more on
advertising and sales incentive programs in fiscal 1998 than in 1997 and also
incurred start-up costs associated with the launch of the Women's line and the
development of the new Corporate sales division. The Company also incurred
additional sales and customer service expenses and additional distribution
expenses in fiscal year 1998 because of problems encountered with the quality
and timeliness of certain products produced in Central and South America.
Net other expenses were $241,000 for fiscal 1998 compared to $952,000 in
fiscal 1997. Interest expense declined to $451,000 in fiscal year 1998 from
$606,000 in fiscal year 1997 due primarily to reduced borrowing on the Company's
line of credit with the bank. Interest income increased to $152,000 in the
current year as compared to $67,000 in 1997 as a result of increased cash. In
fiscal 1998, currency transaction gains were $45,000 as compared to currency
transaction losses of $400,000 in fiscal 1997. This improvement resulted from
the use of forward foreign exchange contracts by the Ashworth subsidiary in
England in its business with customers in continental Europe.
The effective income tax rate for fiscal 1998 increased slightly to
39.0% from 38.7% in fiscal 1997, due primarily to expenses which are
non-deductible for tax purposes being higher in fiscal 1998 than they were in
fiscal 1997.
During the fourth quarter of fiscal year 1998 the Company incurred a net
loss of $1,861,000 as compared to a net income of $4,000 in the same period of
the prior year. The net loss in the fourth quarter of fiscal year 1998 was
primarily attributable to adjustments related to excess prior season inventory,
the decision to discontinue the Company's young men's line (AGCo label),
additional investment in sales and marketing programs to increase the
Fall/Holiday account base and increased expenditures to market the Company's new
Women's and Corporate divisions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are expected to be cash flows
from operations, a working capital line of credit with its bank, and other
financial alternatives such as leasing. Ashworth's need for working capital is
seasonal with the greatest requirements from approximately October through the
end of April each year. The inventory build-up during this period is to provide
product for shipment for the spring/summer selling season. Management believes
that cash from operations, the bank line of credit and leasing alternatives will
be sufficient to meet our working capital requirements through fiscal 2000.
11
12
Operations in fiscal 1999 produced a positive cash flow of $5,646,000,
compared to a negative cash flow of $4,284,000 in fiscal 1998. The primary
reasons for the positive cash flow from operations was a decrease in inventories
and a slower growth in accounts receivable. Inventory decreased by 13.2% to
$30,644,000 at October 31, 1999 compared to $35,288,000 at October 31, 1998.
In May 1998, the Company extended its business loan agreement with Bank
of America through March 1, 2000. The agreement provides a revolving line of
credit of $20,000,000. Interest is charged at the bank's reference (prime) rate,
minus one-half of a percentage point. The loan agreement contains certain
financial covenants that include a requirement for Ashworth to maintain a
certain minimum tangible net worth and a minimum ratio of cash and accounts
receivable to current liabilities. The Bank amended the agreement on May 29,
1998 to permit the Company to acquire, for value, shares of Ashworth stock in an
amount not to exceed $7,500,000 during the term of the agreement. The line of
credit may also be used to finance up to $12,000,000 in commercial letters of
credit and standby letters of credit. Commercial letters of credit outstanding
under this agreement totaled $8,550,000 at October 31, 1999 and $11,820,000 at
December 31, 1999. Additionally, the agreement allows the Company to enter into
spot and forward foreign exchange contracts. (See Note 1, Foreign Currency and
Item 7A, Quantitative and Qualitative Disclosures about Market Risk.) At October
31, 1999, the Company had no loan amounts outstanding with the bank. At December
31, 1999, the loan balance outstanding was $600,000. Ashworth is currently in
the process of negotiating a new business loan agreement with the bank.
During fiscal 1999, the Company invested $1,459,000 in property and
equipment, primarily for computer equipment, embroidery machines, and fittings
and leasehold improvements. For fiscal 2000, Ashworth management anticipates
spending approximately $3,700,000 primarily for upgrades of computer systems and
equipment, warehouse automation, and leasehold improvements. Management intends
to finance the purchase of its capital equipment from its own cash resources,
but may use leases or equipment financing agreements if appropriate.
Ashworth's long-term debt on October 31, 1999, including the current
portion, is comprised of a mortgage on the two buildings it owns at 2791 & 2793
Loker Avenue West, Carlsbad, California, which had a balance outstanding of
$2,646,000, notes payable on equipment purchases totaling $733,000 and
capitalized leases with principal sum liabilities of $66,000.
During fiscal 1999, share capital and capital in excess of par value
decreased by $1,429,000, as a result of the Company repurchasing 303,000 shares
of its common stock.
CURRENCY FLUCTUATIONS
Ashworth U.K., Ltd., a wholly-owned subsidiary in England, maintains its
books of account in British pounds and Ashworth Canada, a division in Montreal,
Canada, maintains its books of account in Canadian dollars. For consolidation
purposes, the assets and liabilities of Ashworth U.K. Ltd. and Ashworth Canada
are converted to U.S. dollars at the month-end exchange rate and results of
operations are converted using an average rate during the month. A translation
difference arises for share capital and retained earnings, which are converted
at rates other than the month-end rate, and these amounts are reported in the
stockholders' equity section of the balance sheets.
Ashworth U.K. Ltd. sells Ashworth products to other countries in the
European Union, largely with sales denominated in the local currency.
Fluctuations in the currency rates between the United Kingdom and those other
countries give rise to a loss or gain that is reported in earnings. The Company
has considered the impact of the Euro conversion to its business and does not
believe that it will have a material impact on its future results from
operations or its financial condition. (See Note 1, Foreign Currency.)
Ashworth Canada sells Ashworth products within Canada with the sales
denominated in Canadian dollars and ordinarily there is no transaction
adjustment for currency exchange rate for the Company.
All export sales by Ashworth, Inc. are U.S. dollar denominated and
ordinarily there is no transaction adjustment for currency exchange rate for the
Company. However, with respect to export sales to Ashworth U.K., Ltd. and
Ashworth Canada, the foreign subsidiaries are at risk on their indebtedness to
Ashworth, Inc.
12
13
The subsidiaries maintain their accounts with Ashworth, Inc., in British pounds
or Canadian dollars, but owe Ashworth, Inc. in U.S. dollars. At the end of every
accounting period, the debt is adjusted to pounds or Canadian dollars by
multiplying the indebtedness by the closing pound/U.S. dollar or U.S.
dollar/Canadian dollar exchange rate to ensure that the account has sufficient
pounds or Canadian dollars to meet its U.S. dollar obligation. This
remeasurement is either income or an expense in each subsidiary's financial
statement. When the financial statements of Ashworth U.K., Ltd. and Ashworth
Canada are consolidated with the financial statement of the parent company, the
gain or loss on transactions, relating to the long-term portion of the inter
company indebtedness, is eliminated from the income statement and appears in the
Stockholders' Equity section of the consolidated balance sheet under
"Accumulated other comprehensive income (loss)".
The Company is purchasing increasing quantities of its products from
offshore manufacturers. All of these purchases were U.S. dollar denominated, or
in British pounds for the Ashworth subsidiary in England and, consequently,
there was no foreign currency exchange risk.
INFLATION
Management believes that inflation has not had a material effect on our
results of operations during the three most recent fiscal years.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. This Statement established standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. This Statement is effective for fiscal years beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. The Company has adopted SFAS
No. 131 in fiscal year 1999.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. In July 1998, the FASB issued SFAS No. 137 which delays the
effective date of SFAS No. 133 to all fiscal years beginning after July 15,
2000. Thus SFAS No. 133 is effective for our fiscal year ending October 31, 2001
and is not expected to have a material effect on the Company's financial
position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's only long-term debt are notes payable, secured by the
Company's equipment, land and buildings with a total balance of $3,445,000 at
October 31, 1999. These notes bear interest with rates ranging from 7.3% to
11.0%. Due to the relative immateriality of these notes payable, an immediate
10% change in interest rates would not have material effect on the Company's
financial results of operations.
The Company entered into five foreign exchange contracts with its bank
for fiscal 1999 to hedge against the impact of currency fluctuations between the
U.S. dollar and the British pound. These contracts provided that the Company
would sell the bank pounds for a specified number of U.S. dollars. Four
contracts were for 350,000 pounds and one was for 300,000 pounds. Additionally,
Ashworth U.K. Ltd. entered into similar contracts with the National Westminster
Bank, in England, to hedge against currency fluctuations between the pound and
other European currencies during fiscal 1999. These contracts have maturity
dates
13
14
that do not normally exceed 12 months. As of October 31, 1999, the Company had
outstanding the following material purchased foreign currency forward exchange
contracts (in thousands, except average contract rate):
Contract Weighted-Average Unrealized
Amount Rate Against Gain
Foreign Currency Forward Contracts US $ Equivalent Sterling US $ Equivalent
-----------------------------------------------------------------------------------------------
Danish Kroner 166.4 11.157 6.5
French Francs 117.1 9.815 4.9
Deutsche Marks 340.5 2.928 14.0
Irish Punts 64.0 1.180 2.6
------- -------
$688.0 $28.0
======= =======
The contracts are for the sale of the listed foreign currency in
exchange for British Pounds Sterling.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements with respect to the Company are submitted
herewith:
1. Independent auditors' report, page F-1.
2. Consolidated Balance Sheets - October 31, 1999 and 1998, pages F-2 and
F-3.
3. Consolidated Statements of Income for the years ended October 31, 1999,
1998 and 1997, page F-4.
4. Consolidated Statements of Stockholders' Equity for the years ended
October 31, 1999, 1998 and 1997, page F-5.
5. Consolidated Statements of Cash Flows for the years ended October 31,
1999, 1998 and 1997, page F-6.
6. Notes to Consolidated Financial Statements, pages F-7 through F-21.
7. Independent auditors' report on Supplementary Schedule, page F-22.
8. Supplementary Schedule, page F-23.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is included in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders under the caption
"Directors and Executive Officers" which will be filed with the Securities and
Exchange Commission no later than February 28, 2000 and is incorporated into
this Item by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is included in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders under the caption
"Executive Compensation" which will be filed with the Securities and Exchange
Commission no later than February 28, 2000 and is incorporated into this Item by
reference.
14
15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is included in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders under the caption
"Security Ownership of Certain Beneficial Owners and Management" which will be
filed with the Securities and Exchange Commission no later than February 28,
2000 and is incorporated into this Item by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is included in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders under the caption "Certain
Relationships and Related Transactions" which will be filed with the Securities
and Exchange Commission no later than February 28, 2000 and is incorporated into
this Item by reference.
PART IV
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
Independent auditors' report
Consolidated Balance Sheets - October 31, 1999 and 1998
Consolidated Statements of Income for the years ended October 31, 1999,
1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended
October 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended October 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements - October 31, 1999, 1998 and
1997
2. Financial Statement Schedule
Independent auditors' report on supplementary schedule
Schedule II - Valuation and Qualifying Accounts
3. Exhibits.
See Item (c) below.
(b) Report on Form 8-K
None
(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
15
16
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).
4(d) Rights Agreement dated as of October 6, 1998 by and between Ashworth,
Inc. and American Securities Transfer & Trust, Inc. (filed as Exhibit
99.1 to Registrant's Form 8-A of Registration Statement filed on
October 9, 1998, (File No. 001-14547) and incorporated herein by
reference).
10(a)* Executive Employment Agreement effective January 1, 1995 by and between
Ashworth, Inc. and Gerald W. Montiel (filed as Exhibit 10(a) to
Registrant's Form 10-K for the year ended October 31, 1998 (File No.
0-18553) and incorporated herein by reference).
10(b)* Personal Services Agreement and Acknowledgement of Termination of
Executive Employment effective December 31, 1998 by and between
Ashworth, Inc. and Gerald W. Montiel. (filed as Exhibit 10(b) to
Registrant's Form 10-K for the year ended October 31, 1998 (File No.
0-18553) and incorporated herein by reference).
10(c)* Amendment to Personal Services Agreement effective January 1, 1999 by
and between Ashworth, Inc. and Gerald W. Montiel (filed as Exhibit
10(c) to Registrant's Form 10-K for the year ended October 31, 1998
(File No. 0-18553) and incorporated herein by reference).
10(d) Promotion Agreement effective June 1, 1998 by and among Ashworth, Inc.,
James W. Nantz, III and Nantz Communications, Inc. (filed as Exhibit
10(d) to Registrant's Form 10-K for the year ended October 31, 1998
(File No. 0-18553) and incorporated herein by reference).
10(e)* First Amended and Restated Executive Employment Agreement effective
February 22, 1999 by and between Ashworth, Inc. and Randall L. Herrel,
Sr. (filed as Exhibit 10(a) to Registrant's Form 10-Q for the quarter
ended April 30, 1999 (File No. 0-18553) and incorporated herein by
reference).
10(f)* Personal Services Agreement and Acknowledgement of Termination of
Executive Employment effective May 31, 1999 by and between Ashworth,
Inc. and A. John Newman. (filed as Exhibit 10(b) to Registrant's Form
10-Q for the quarter ended April 30, 1999 (File No. 0-18553) and
incorporated herein by reference).
10(g)* Offer and Acceptance of Executive Employment effective March 2, 1999 by
and between Ashworth, Inc. and Gabrielle Sampietro (filed as Exhibit
10(c) to Registrant's Form 10-Q for the quarter ended April 30, 1999
(File No. 0-18553) and incorporated herein by reference).
16
17
10(h)* Offer and Acceptance of Executive Employment effective March 15, 1999
by and between Ashworth, Inc. and Terence W. Tsang (filed as Exhibit
10(d) to Registrant's Form 10-Q for the quarter ended April 30, 1999
(File No. 0-18553) and incorporated herein by reference).
10(i)* Offer and Acceptance of Executive Employment effective June 1, 1999 by
and between Ashworth, Inc. and Suzi Chauvel (filed as Exhibit 10(a) to
Registrant's Form 10-Q for the quarter ended July 31, 1999 (File No.
0-18553) and incorporated herein by reference).
10(j) Founders Stock Option Plan dated November 6, 1992 (filed as Exhibit
10(g) to Registrant's Form 10-K for the year ended October 31, 1993
(File No. 0-18553) and incorporated herein by reference).
10(k) Amended and Restated Nonqualified Stock Option Plan dated June 17, 1994
(filed as Exhibit 10(f) to Registrant's Form 10-K for the year ended
October 31, 1994 (File No. 0-18553) and incorporated herein by
reference).
10(l) Amended and Restated Incentive Stock Option Plan dated June 17, 1994
(filed as Exhibit 10(h) to Registrant's Form 10-K for the year ended
October 31, 1994 (File No. 0-18553) and incorporated herein by
reference).
10(r)(2) Business Loan Agreement dated May 29, 1998, between the Registrant and
Bank of America, expiring March 1, 2000. Under the agreement, the Bank
provides the Company with a revolving line of credit of up to
$20,000,000 (filed as Exhibit 10(r)(2) to Registrant's Form 10-Q for
the quarter ended April 30, 1998 (File No. 0-18553) and incorporated
herein by reference).
10(r)(3) Foreign Exchange Agreement dated May 29, 1998, between the Registrant
and Bank of America, expiring March 1, 2000. Under the agreement, the
Bank provides the Company with a spot and forward foreign exchange
contract up to a maximum of $5,000,000 (filed as Exhibit 10(r)(2) to
Registrant's Form 10-Q for the quarter ended April 30, 1998 (File No.
0-18553) and incorporated herein by reference).
21 Subsidiaries of the Registrant
23 Consent of KPMG LLP
27 Financial Data Schedule
* Compensation plan, contract or agreement required to be filed as an Exhibit
pursuant to applicable rules of the Securities and Exchange Commission.
17
18
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Ashworth, Inc.:
We have audited the accompanying consolidated balance sheets of Ashworth, Inc.
(a Delaware corporation) and subsidiaries as of October 31, 1999 and 1998, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three year period ended October 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ashworth, Inc. and
subsidiaries as of October 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three year period
ended October 31, 1999 in conformity with generally accepted accounting
principles.
KPMG LLP
San Diego, California
December 10, 1999
F-1
19
ASHWORTH, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
October 31, 1999 and 1998
ASSETS
1999 1998
------------ ------------
Current assets:
Cash and cash equivalents $ 6,507,000 $ 4,763,000
Accounts receivable - trade, net of allowance for doubtful
accounts of $889,000 and $1,039,000 in 1999 and 1998,
respectively 21,194,000 19,924,000
Accounts receivable - other 1,686,000 459,000
Inventories 30,644,000 35,288,000
Income tax receivable 1,099,000 1,149,000
Other current assets 1,928,000 1,613,000
Deferred income tax asset 1,503,000 1,486,000
------------ ------------
Total current assets 64,561,000 64,682,000
------------ ------------
Property, plant and equipment, at cost:
Land 1,200,000 1,200,000
Buildings and improvements 2,809,000 2,809,000
Production equipment 9,996,000 9,180,000
Furniture and equipment 11,152,000 10,845,000
Leasehold improvements 1,798,000 1,652,000
------------ ------------
26,955,000 25,686,000
Less accumulated depreciation and amortization (13,852,000) (11,823,000)
------------ ------------
13,103,000 13,863,000
Other assets 2,442,000 3,089,000
------------ ------------
$ 80,106,000 $ 81,634,000
============ ============
(Continued)
F-2
20
ASHWORTH, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
October 31, 1999 and 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
------------ ------------
Current liabilities:
Current portion of long-term debt $ 681,000 $ 940,000
Accounts payable 3,460,000 6,260,000
Accrued liabilities:
Salaries and commissions 1,332,000 1,596,000
Other 1,354,000 1,118,000
------------ ------------
Total current liabilities 6,827,000 9,914,000
------------ ------------
Long-term debt, net of current portion 2,764,000 3,445,000
Deferred income tax liability 750,000 738,000
Other long-term liabilities 339,000 432,000
Stockholders' equity:
Common stock, $.001 par value; authorized 50,000,000
shares; issued and outstanding 13,777,000 and
14,080,000 shares in 1999 and 1998, respectively 14,000 14,000
Capital in excess of par value 40,830,000 42,259,000
Retained earnings 28,644,000 24,827,000
Deferred compensation -- (8,000)
Accumulated other comprehensive income (loss) (62,000) 13,000
------------ ------------
69,426,000 67,105,000
------------ ------------
Commitments and contingencies
$ 80,106,000 $ 81,634,000
============ ============
See accompanying notes to consolidated financial statements.
F-3
21
ASHWORTH, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the years ended October 31, 1999, 1998 and 1997
1999 1998 1997
------------- ------------- -------------
Net sales $ 107,921,000 $ 107,341,000 $ 89,148,000
Cost of goods sold 68,558,000 66,719,000 55,045,000
------------- ------------- -------------
Gross profit 39,363,000 40,622,000 34,103,000
Selling, general and administrative expenses 32,867,000 31,691,000 25,282,000
------------- ------------- -------------
Income from operations 6,496,000 8,931,000 8,821,000
------------- ------------- -------------
Other income (expense):
Interest income 112,000 152,000 67,000
Interest expense (431,000) (451,000) (606,000)
Net foreign currency exchange gain (loss) (23,000) 45,000 (400,000)
Other income (expense), net 113,000 13,000 (13,000)
------------- ------------- -------------
(229,000) (241,000) (952,000)
------------- ------------- -------------
Income before provision for income taxes 6,267,000 8,690,000 7,869,000
Provision for income taxes 2,450,000 3,390,000 3,042,000
------------- ------------- -------------
Net income $ 3,817,000 $ 5,300,000 $ 4,827,000
============= ============= =============
Net income per share:
Basic .27 .37 .39
Diluted .27 .36 .38
Weighted-average shares outstanding:
Basic 14,035,000 14,185,000 12,403,000
Diluted 14,045,000 14,805,000 12,564,000
See accompanying notes to consolidated financial statements.
F-4
22
ASHWORTH, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the years ended October 31, 1999, 1998 and 1997
Accumulated
Note Other
Capital in Deferred Receivable Comprehen-
Common Stock Excess of Retained Compen- from sive Income/
Shares Amount Par Value Earnings sation Stockholder (Loss) Total
---------- -------- ------------ ----------- ---------- ----------- ------------ -----------
BALANCE,
OCTOBER 31, 1996 12,163,000 $ 12,000 $ 24,218,000 $14,700,000 $(110,000) $ -- $ 47,000 $38,867,000
Options exercised 1,267,000 1,000 10,059,000 -- -- -- -- 10,060,000
Amortization of
deferred compensation -- -- -- -- 51,000 -- -- 51,000
Net income -- -- -- 4,827,000 -- -- -- 4,827,000
Note receivable from
stockholder -- -- -- -- -- (850,000) -- (850,000)
Translation adjustment -- -- -- -- -- -- 46,000 46,000
---------- -------- ------------ ----------- --------- --------- -------- -----------
BALANCE,
OCTOBER 31, 1997 13,430,000 13,000 34,277,000 19,527,000 (59,000) (850,000) 93,000 53,001,000
Options exercised 1,327,000 2,000 13,197,000 -- -- -- -- 13,199,000
Treasury stock acquired
and retired (677,000) (1,000) (5,215,000) -- -- -- -- (5,216,000)
Amortization of deferred
compensation -- -- -- -- 51,000 -- -- 51,000
Net income -- -- -- 5,300,000 -- -- -- 5,300,000
Note receivable from
stockholder -- -- -- -- -- 850,000 -- 850,000
Translation adjustment -- -- -- -- -- -- (80,000) (80,000)
---------- -------- ------------ ----------- --------- --------- -------- -----------
OCTOBER 31, 1998 14,080,000 14,000 42,259,000 24,827,000 (8,000) -- 13,000 67,105,000
Treasury stock acquired
and retired (303,000) -- (1,429,000) -- -- -- -- (1,429,000)
Amortization of deferred
compensation -- -- -- -- 8,000 -- -- 8,000
Net income -- -- -- 3,817,000 -- -- -- 3,817,000
Translation adjustment -- -- -- -- -- -- (75,000) (75,000)
---------- -------- ------------ ----------- --------- --------- -------- -----------
BALANCE,
OCTOBER 31, 1999 13,777,000 $ 14,000 $ 40,830,000 $28,644,000 $ -- $ -- $(62,000) $69,426,000
========== ======== ============ =========== ========= ========= ======== ===========
See accompanying notes to consolidated financial statements.
F-5
23
ASHWORTH, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended October 31, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 3,817,000 $ 5,300,000 $ 4,827,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of deferred compensation 8,000 51,000 51,000
Depreciation and amortization 2,067,000 2,215,000 2,142,000
(Gain) loss on disposal of property, plant and 11,000 (2,000) 39,000
equipment
Deferred income tax provision (benefit) (5,000) (206,000) 627,000
Compensation related to grant of stock options -- -- 323,000
Provision for doubtful accounts and sales returns 309,000 608,000 323,000
Increase in accounts receivable (2,806,000) (8,285,000) (3,316,000)
Decrease (increase) in inventories 4,644,000 (1,643,000) (8,916,000)
Decrease in income tax receivable 50,000 373,000 247,000
Increase in other current assets (162,000) (1,071,000) (274,000)
Decrease (increase) in other assets 634,000 (1,340,000) (796,000)
Increase (decrease) in accounts payable (2,800,000) 114,000 177,000
Increase (decrease) in accrued liabilities (28,000) (165,000) 208,000
Increase (decrease) in other long-term (93,000) (233,000) 665,000
liabilities
------------ ------------ ------------
Net cash provided by (used in) operating 5,646,000 (4,284,000) (3,673,000)
activities
------------ ------------ ------------
Cash flows from investing activities:
Net purchases of property, plant and equipment (1,459,000) (2,365,000) (1,980,000)
Proceeds from sale of property, plant and equipment 1,000 2,000 21,000
------------ ------------ ------------
Net cash used in investing activities (1,458,000) (2,363,000) (1,959,000)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on capital lease obligations (53,000) (189,000) (415,000)
Borrowings on line of credit 16,065,000 3,025,000 16,355,000
Payments on line of credit (16,065,000) (3,025,000) (16,355,000)
Principal payments on notes payable and long-term (887,000) (941,000) (1,053,000)
debt
Proceeds from exercise of stock options -- 13,199,000 8,887,000
Treasury stock acquired (1,429,000) (5,216,000) --
Repayment of note receivable issued to stockholder -- 850,000 --
for common stock
------------ ------------ ------------
Net cash provided by (used in) financing (2,369,000) 7,703,000 7,419,000
activities
------------ ------------ ------------
Effect of exchange rate changes on cash (75,000) (80,000) 46,000
------------ ------------ ------------
Net increase in cash and cash equivalents 1,744,000 976,000 1,833,000
Cash and cash equivalents, beginning of year 4,763,000 3,787,000 1,954,000
------------ ------------ ------------
Cash and cash equivalents, end of year $ 6,507,000 $ 4,763,000 $ 3,787,000
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 431,000 $ 451,000 $ 606,000
Income taxes paid, net of refunds 2,400,000 395,000 2,167,000
Supplemental disclosures of noncash transactions:
Capital lease equipment acquired and related capital -- 65,000 99,000
lease obligations
Note receivable issued to stockholder for common stock -- -- 850,000
See accompanying notes to consolidated financial statements.
F-6
24
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999, 1998 and 1997
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Ashworth, Inc. (the "Company"), based in Carlsbad, California, was
incorporated in Delaware on March 19, 1987. It changed its corporate
name from Charter Golf, Inc. to Ashworth, Inc. on April 6, 1994. The
Company designs, markets and distributes a full line of quality sports
apparel, headwear, and accessories under the Ashworth(R) label. The
Ashworth products are sold in golf pro shops, resorts, at better
department and specialty retail stores, and in selected international
markets.
The Company has wholly-owned subsidiaries that own and operate the nine
Company outlet stores and the Ashworth Concept Store. A wholly-owned
United Kingdom subsidiary distributes the Company's products in Europe.
The Company also established a wholly-owned subsidiary in the Virgin
Islands as a foreign sales corporation to take advantage of certain
federal income tax benefits with respect to profits from foreign sales.
A division was opened on November 1, 1998 to distribute the Company's
products in Canada. Ashworth, Inc. and its wholly-owned subsidiary,
Ashworth U.K., Ltd., were partners of a Luxembourg partnership,
Ashworth, Inc. et Cie., formed to qualify for trademark registration in
Europe under the Madrid Convention until September 1, 1998 when the
partnership was dissolved.
The Company and the Company's subsidiaries had aggregate foreign sales
in Europe, Canada, Taiwan, Singapore, United Arab Emirates, Guam, Japan,
South Africa, Hong Kong and other countries of approximately
$14,394,000, $17,952,000 and $19,019,000 in the years ended October 31,
1999, 1998 and 1997, respectively. The Company's wholly-owned United
Kingdom subsidiary had sales of $7,950,000, $10,637,000 and $9,091,000
and operating income/(loss) of $26,000, $(458,000) and $382,000 in the
years ended October 31, 1999, 1998 and 1997, respectively. Ashworth
U.K., Ltd. had identifiable assets of $5,927,000 and $2,931,000 as of
October 31, 1999 and 1998, respectively.
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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market. Cost includes materials, labor and manufacturing overhead.
F-7
25
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Below is a summary of the components of inventory at October 31, 1999 and
1998:
1999 1998
----------- -----------
Raw materials $ 2,499,000 $ 4,221,000
Work in process 3,427,000 1,949,000
Finished products 24,718,000 29,118,000
----------- -----------
$30,644,000 $35,288,000
=========== ===========
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost.
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 Shorter of life of lease or useful life
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.
INTANGIBLE ASSETS
Intangible assets, including trademark costs and goodwill, which are included in
other non-current assets, are capitalized and amortized over periods ranging
from two to ten years.
ADVERTISING EXPENSES
Advertising costs, which consist primarily of product advertising costs, are
included in SG&A and are expensed in the period the costs are incurred.
Advertising expenses for the years ended October 31, 1999, 1998 and 1997 were
$1,204,000, $1,512,000 and $559,000, respectively.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
NET INCOME PER SHARE
The Company calculates basic EPS by dividing net income by the weighted-average
common shares
F-8
26
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
outstanding during the period. Diluted EPS reflects the potential dilution
to basic EPS that could occur upon conversion or exercise of securities,
options, or other such items, to common shares using the treasury stock
method based upon the weighted-average fair value of the Company's common
shares during the period (See Note 7, "Net Income Per Share" for
computation of EPS.)
STOCK OPTION PLAN
Prior to November 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On November 1, 1996, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation, which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards
on the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro
forma net income and pro forma income per share disclosures for employee
stock option grants made in 1996 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS No. 123. (See
Note 6, "Stockholders' Equity".)
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, on November 1, 1996. This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amounts of the assets exceed the fair
values of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
FOREIGN CURRENCY
The Company's primary functional currency is the U.S. dollar. Assets and
liabilities of the Company denominated in foreign currencies are
translated at the rate of exchange at the balance sheet date, while
revenue and expenses are translated using the average exchange rate. Gains
and losses on foreign currency transactions are recognized as incurred.
Gains and losses on remeasurement of transactions denominated in currency
other than the reporting currency of individual subsidiaries are
recognized at each balance sheet date. Cumulative translation adjustments
resulting from the translation of the financial statements of foreign
subsidiaries are included as a separate component of stockholders' equity
and have historically not been material. The Company enters into
short-term foreign exchange contracts with its bank to hedge against the
impact of currency fluctuations. Realized gains and losses on these
contracts are recognized in the same period as the hedged transactions.
These contracts have maturity dates that do not normally exceed 12 months.
As of October 31, 1999 the Company had outstanding foreign currency
forward exchange contracts with a notional value of approximately
$688,000 dollars and had an unrealized gain of $28,000.
F-9
27
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
REVENUE RECOGNITION
The Company recognizes revenue at the time products are shipped or, for
retail sales, at the point of sale. Provisions are made currently for
estimated product returns and sales allowances.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
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. The carrying value of all
other financial instruments potentially subject to valuation risk
(principally consisting of cash and cash equivalents, accounts receivable,
accounts payable and capital leases) also approximate fair value due to
the short term nature of those instruments.
RECLASSIFICATIONS
Certain reclassifications have been made to certain prior year balances in
order to conform with current year presentation.
(2) LEASES
During the years ended October 31, 1999, 1998 and 1997, the Company
acquired $0, $65,000 and $99,000, respectively, of various equipment under
capital leases.
At October 31, 1999 and 1998, the accompanying consolidated balance sheets
include the following equipment under capital leases:
1999 1998
--------- ---------
Production equipment $ 266,000 $ 267,000
Furniture and equipment -- 278,000
--------- ---------
266,000 545,000
Less accumulated amortization (163,000) (391,000)
--------- ---------
$ 103,000 $ 154,000
========= =========
Amortization of assets held under capital leases is included in
depreciation and amortization expense.
F-10
28
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company also leases certain production, warehouse and outlet store
facilities under operating leases. These leases expire in various fiscal
years through January 2008. Rent expense for the years ended October 31,
1999, 1998 and 1997 was $1,813,000, $1,771,000 and $1,467,000,
respectively. Future minimum lease payments under noncancelable operating
leases and future minimum capital lease payments as of October 31, 1999
are:
CAPITAL OPERATING
YEAR ENDING OCTOBER 31, LEASES LEASES
------------------------ ---------- -----------
2000 $ 38,000 $1,436,000
2001 15,000 724,000
2002 15,000 680,000
2003 10,000 559,000
2004 -- 548,000
Thereafter -- 1,330,000
---------- ----------
Total minimum lease payments 78,000 $5,277,000
==========
Less amount representing interest
(at rates ranging from 8.08% to 10.99%) (12,000)
----------
Present value of future minimum capital
lease payments (Note 4) $ 66,000
==========
(3) LINE OF CREDIT AGREEMENT
The Company has a $20 million working capital line of credit agreement
with a bank, which expires on March 1, 2000 and is collateralized by
substantially all assets of the Company. The interest rate on borrowings
is 0.5% below the bank's reference rate, which was 8.25% at October 31,
1999. The line of credit agreement requires the payment of a commitment
fee of approximately 0.25% of the unused portion. 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 minimum ratio of cash and
accounts receivable to current liabilities. The line of credit agreement
also limits the purchase of capital equipment and requires the Company not
to incur a net loss in any two consecutive quarters. At October 31, 1999
and 1998, no borrowings were outstanding on this line of credit. The line
of credit also provides for a maximum of $12 million in commercial letters
of credit and standby letters of credit, of which $8.5 million were
outstanding at October 31, 1999. The total amount of unused revolving
credit available to the Company at October 31, 1999 was $11.5 million.
Ashworth is currently in the process of negotiating a new business loan
agreement with the bank.
F-11
29
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) LONG-TERM DEBT
Amounts outstanding under long-term debt agreements at October 31, 1999
and 1998 consist of the following:
1999 1998
----------- -----------
Installment notes bearing interest ranging from
7.3% to 8.7%, with due dates through February 2001,
collateralized by various equipment $ 733,000 $ 1,590,000
Note payable to a bank, bearing interest at 8.0%,
payable in monthly principal and interest payments
of $20,545 through November 2000 with a balloon
payment of approximately $2.6 million payable on
November 30, 2000, collateralized by land
and buildings 2,646,000 2,676,000
Capital lease obligations (Note 2) 66,000 119,000
----------- -----------
3,445,000 4,385,000
Less current portion (681,000) (940,000)
----------- -----------
Long-term debt $ 2,764,000 $ 3,445,000
=========== ===========
Future maturities of long-term debt at October 31, 1999 are as follows:
YEAR ENDED OCTOBER 31,
-------------------------------------
2000 $ 681,000
2001 2,742,000
2002 13,000
2003 9,000
--------------
$3,445,000
==============
(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% of the amount the employee contributes, up to 3% of compensation.
The Company's expense for the years ended October 31, 1999, 1998 and 1997
was $136,000, $144,000 and $142,000, respectively.
F-12
30
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) STOCKHOLDERS' EQUITY
COMMON STOCK OPTIONS
The Company maintains three nonqualified and incentive stock option plans.
In August 1987, the Company adopted a nonqualified stock option plan which
was subsequently amended (as amended to date, the "Plan"). The Company's
Board of Directors, or any committee as the Board of Directors may
designate from time to time, administers the Plan and selects the persons
to whom options are granted. The Company has reserved 5,700,000 shares of
common stock for issuance upon exercise of options granted under the Plan,
all of which shares have been registered pursuant to the Securities Act of
1933 and, upon issuance, will be freely tradable without restriction,
except for shares held by an "affiliate" of the Company.
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, which is presently comprised of three
of the Company's outside directors. The Company has reserved 1,000,000
shares of common stock for issuance upon exercise of options granted under
the Plan, which shares have been registered pursuant to the Securities Act
of 1933.
The Company adopted the Incentive Stock Option Plan in May 1993 following
stockholder approval, and the Plan was subsequently amended (as amended,
the "ISOP"). The Company's Board of Directors, or any committee as the
Board of Directors may designate from time to time, administers the ISOP.
Any options granted under the ISOP to an employee during a calendar year
in excess of $100,000 of aggregate fair market value (determined at the
time the option is granted) will not qualify as incentive stock options
under the ISOP. The Company has reserved 3,000,000 shares of common stock
for issuance upon exercise of options granted under the Plan.
The plans described above 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, 1999, the Company had 2,792,000 options
outstanding under the above plans to purchase common stock at prices
ranging from $3.50 to $16.94 with expiration dates between December 1999
and July 2008. At October 31, 1999, a total of 2,163,000 options remained
available for grant.
F-13
31
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following is a summary of stock option activity for the three fiscal
years ended October 31, 1999:
OPTION EXERCISE PRICE PER SHARE
-------------------------------------
WEIGHTED-
SHARES RANGE AVERAGE
-------------- -------------------- ---------------
Balance at October 31, 1996 4,334,000 $4.50 - $11.63 $7.20
Granted 529,000 5.50 - 11.00 6.58
Exercised (1,267,000) 4.50 - 8.50 6.19
Canceled (296,000) 4.50 - 11.63 7.97
-------------- -------------------- ---------------
Balance at October 31, 1997 3,300,000 4.50 - 11.00 7.43
Granted 557,000 9.94 - 16.94 11.54
Exercised (1,327,000) 4.50 - 11.00 7.05
Canceled (127,000) 6.50 - 11.13 8.60
-------------- -------------------- ---------------
Balance at October 31, 1998 2,403,000 5.00 - 16.94 8.52
Granted 650,000 3.50 - 6.00 5.16
Exercised 0 0.00 - 0.00 0.00
Canceled (261,000) 5.50 - 10.81 8.23
-------------- -------------------- ---------------
Balance at October 31, 1999 2,792,000 $3.50 - $16.94 $7.80
============== ==================== ===============
The following is a summary of stock options outstanding at October 31,
1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ----------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------ -------------- -------------- ------------- ------------- -------------
$3.50 - 7.75 1,510,000 4.8 $5.87 1,090,000 $6.09
8.00 - 11.75 1,101,000 3.0 9.39 977,000 9.29
12.00 - 16.94 181,000 5.7 14.28 161,000 13.95
-------------- -------------- ------------- ------------- -------------
2,792,000 4.1 $7.80 2,228,000 $8.06
============== ============== ============= ============= =============
At October 31, 1999, 1998 and 1997, the number of options exercisable was
2,228,000, 1,748,000 and 2,376,000, respectively, and the weighted-average
exercise price of those options was $8.06, $8.49 and $7.72, respectively.
Effective fiscal year 1997, the Company adopted the disclosure
requirements of SFAS No. 123. As permitted under this Statement, the
Company will continue to measure stock-based compensation cost using the
current "intrinsic" accounting method under APB Opinion No. 25.
For purposes of the following pro forma disclosures required by SFAS No.
123, the fair value of each option granted after fiscal 1995 has been
estimated on the date of grant using the Black-Scholes option-
F-14
32
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
pricing model with the following weighted-average assumptions used for
grants: risk-free interest rates of 4.39% to 6.20% in 1999, 5.41% to 5.94%
in 1998 and 5.55% to 6.65% in 1997; expected volatility of 57.8% to 60.2%
in 1999 and 56.4% to 57.5% in 1998 and 44.2% to 46.6% in 1997; and
expected life of 5 to 7 years in 1999 and 5 to 8 years in 1998 and 1 to 7
years in 1997. The Company has not paid any cash or other dividends and
does not anticipate paying dividends in the foreseeable future, therefore
the expected dividend yield is zero. The weighted-average fair value of
options granted was $2.63 in 1999, $7.60 in 1998 and $3.00 in 1997. Had
compensation cost for the Company's employee-based stock option plans been
determined consistent with SFAS No. 123, the Company would have recorded
net income of $2,646,000 or $0.19 per diluted share in 1999, net income of
$2,501,000 or $0.17 per diluted share in 1998 and net income of $3,246,000
or $0.26 per share, in 1997. These pro forma calculations only include the
effects of 1999, 1998 and 1997 grants. As such, the impacts may not be
representative of the effects on reported net income in future years.
DEFERRED COMPENSATION
During fiscal 1993, common stock was issued to a golf professional for
future services to the Company for a total value of $305,000. The service
arrangements cover a six-year period and the value of the stock is being
amortized to operating expenses over this period. The unamortized portion
of the deferred compensation is reported as a reduction in stockholders'
equity.
COMPREHENSIVE INCOME.
As of November 1, 1998 the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for the reporting
and display of comprehensive income and its components. SFAS No. 130
requires the cumulative translation adjustment to be included as a
component of the comprehensive income (loss) in addition to net income
(loss) for the period. For the quarters ended October 31, 1999 and 1998,
total comprehensive income (loss) was $476,000 and $(1,807,000),
respectively. For the twelve-month periods ended October 31, 1999 and
1998, total comprehensive income was $3,742,000 and $5,220,000,
respectively.
(7) NET INCOME PER SHARE
In accordance with SFAS No. 128, the following is a reconciliation of the
numerators and denominators of the basic and diluted EPS computations:
YEAR ENDED OCTOBER 31,
1999 1998 1997
----------- ----------- -----------
NUMERATOR:
Net Income -
Numerator for basic and diluted earnings per
share - income available to common shareholders $ 3,817,000 $ 5,300,000 $ 4,827,000
=========== =========== ===========
DENOMINATOR:
Denominator for basic earnings per share
- weighted average shares 14,035,000 14,185,000 12,403,000
Effect of dilutive securities
- stock options 10,000 620,000 161,000
----------- ----------- -----------
Denominator for diluted earnings per share
- adjusted weighted average shares and
assumed conversions 14,045,000 14,805,000 12,564,000
=========== =========== ===========
F-15
33
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The diluted weighted average shares outstanding computation excludes
2,502,000, 226,000, and 1,333,000 anti-dilutive shares in 1999, 1998 and
1997, respectively.
(8) COMMITMENTS AND CONTINGENCIES
PROMOTIONAL AGREEMENTS WITH PGA PROFESSIONALS AND A TELEVISION PERSONALITY
The Company had promotional agreements with several PGA professionals
(including Fred Couples, a significant stockholder of the Company), all of
whom are related parties, Jim Nantz, a television personality and member
of the Company's board of directors, also a related party, and a
management company. Under the terms of these agreements, the Company is
obligated to pay cash compensation and to issue options (at fair market
value) to purchase shares of the Company's common stock. During 1998 the
majority of these agreements were modified to reflect the individuals'
current status as employees.
The aggregate annual cash compensation recognized under these agreements
in fiscal year 1999, 1998 and 1997 was $814,000, $760,000 and $803,000,
respectively, of which in 1999, $784,000 of the $814,000 was paid to the
related parties. Future minimum commitments under these agreements are
$776,000 payable in 2000, $725,000 payable in 2001, $657,000 payable in
the years 2002 through 2010 and $548,000 payable in 2011 to the related
parties, and $34,000 payable in 2000 and $23,000 payable in 2001 to
others.
The Company issued 261,000 options in 1997 under these agreements at
prices ranging from $5.13 to $9.88 per share. The Company recognized
$323,000 of compensation expense related to the grant of these stock
options in 1997 using the Black-Scholes option-pricing model. The Company
determined that the per share weighted-average fair value of these stock
options granted during 1997 was $3.38 on the date of grant. The following
weighted-average assumptions used for the grant of these stock options
were: risk-free interest rates of 5.55% to 6.65%; expected volatility of
44.2% to 46.4% ; and expected life of 1 to 6 years; and no expected
dividend yield. The number of options granted to purchase shares of the
Company's common stock will vest as follows: 230,000 in 1999, 224,000 in
2000, 208,000 in 2001 and 150,000 per year from years 2002 through 2011.
These agreements have certain performance requirements that allow the
players to earn additional cash compensation. Obligations under this
provision, if any, are accrued and charged to operations during the period
in which they arise. The Company incurred approximately $56,000, $0 and
$214,000 in charges related to performance requirements in 1999, 1998 and
1997, respectively, of which $45,000, $0 and $0 in 1999, 1998 and 1997,
respectively, was paid to a related party.
EXECUTIVE EMPLOYMENT AGREEMENTS
In fiscal years 1999 and 1998, the Company had executive employment
agreements with Gerald W. Montiel and Randall L. Herrel, Sr.
Mr. Montiel resigned as chairman, director and executive employee
effective December 31, 1998. Under the terms of the executive employment
agreement with Mr. Montiel he could terminate his employment upon 90 days
notice to the Company. The executive employment agreement contains a
noncompetition provision covering the term of employment and the ten-year
post-termination period which provides that, as consideration for
Montiel's non-compete agreement, the Company shall pay
F-16
34
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Montiel compensation equal to (i) 100% of his then current salary plus
(ii) nine times an amount equal to 40% of his then current salary,
provided, however, such compensation shall not be less than $1,437,500.
The agreement with Mr. Herrel provides for a base salary of $325,000 and
bonuses to be determined periodically at the discretion of the Board of
Directors on the basis of merit and the Company's financial success and
progress. A $50,000 bonus was awarded to Mr. Herrel in 1998, based on the
Company's improved earnings per share in fiscal year 1997 and no bonus was
paid to him for fiscal years 1998 and 1999. The Company maintains a life
insurance policy for $1,000,000, the beneficiary of which may be named by
Mr. Herrel. The agreement with Mr. Herrel includes severance payments upon
termination of employment under specific circumstances, such payments
ranging from one-half to two times his then annual base salary.
Effective June 25, 1997, the Company entered into a non-compete agreement
with John Ashworth pursuant to the termination of his executive
employment, which specifies an initial payment of $263,000 for the first
year, and 40% of such amount over the next nine years. The present value
of the estimated cash payments to be made is accrued and recorded in the
accompanying consolidated balance sheets. The corresponding asset is being
amortized using the straight-line method over the ten-year term of the
agreement.
LEGAL PROCEEDINGS
On January 22, 1999, Milberg Weiss Bershad Hynes & Lerach LLP filed a
class action in the United States District Court for the Southern District
of California ("U.S. District Court") on behalf of purchasers of the
Company's common stock during the period between September 4, 1997 and
July 15, 1998 alleging violations of the Securities Exchange Act of 1934
by the Company and certain of its officers and directors. The complaint
alleged that, during the class period, Company executives made positive
statements about the Company's business including statements concerning
product demand, offshore production and inventories. The complaint further
alleged that the defendants knew these statements to be false and
concealed adverse conditions and trends in the Company's business during
the class period. The plaintiff seeks to recover unspecified damages on
behalf of all purchasers of the Company's common stock during the period
September 4, 1997 to July 15, 1998. The Company was served a copy of the
complaint on January 26, 1999. Subsequently, two other suits were served
upon the Company making similar allegations. The three actions have been
consolidated by order of the United States District Court and lead counsel
for the plaintiffs has been appointed. Per order of the Court, Plaintiffs
filed their Amended and Consolidated Complaint on December 17, 1999. The
Company has approximately 60 days to respond by way of a motion to dismiss
or other responsive pleading. Under the scheduling order entered by the
United States District Court, a hearing on the Company's motion to
dismiss, if filed, will occur no sooner than May of 2000. Until that time,
under the applicable provisions of the Private Securities Litigation
Reform Act of 1995, plaintiffs cannot conduct discovery against the
Company until resolution of the motion to dismiss. Accordingly, no
discovery has occurred to date. The Company has retained counsel,
conducted an internal investigation of the allegations of the various
complaints and intends to vigorously defend against the action.
F-17
35
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company is party to other claims and litigation proceedings arising in
the normal course of business. Although the legal responsibility and
financial impact with respect to such other claims and litigation cannot
currently be ascertained, the Company does not believe that these other
matters will result in payment by the Company of monetary damages, net of
any applicable insurance proceeds, that, in the aggregate, would be
material in relation to the consolidated financial position or results of
operations of the Company.
(9) RELATED-PARTY TRANSACTIONS
At October 31, 1999, the Company had a note receivable from an officer for
$70,000. The note is secured by a Short Form Deed of Trust and accrues
interest annually at 6%.
In September 1997, a stockholder of the Company exercised stock options in
exchange for a note receivable of $850,000. The note was secured by the
underlying common stock, and accrued interest annually at 8%. The entire
balance of the note was collected during 1998.
Starting in 1997, the Company began using as one of its external sales
representatives a company which is owned in part by a related party. Sales
commissions paid to that company were approximately $228,000, $323,000 and
$255,000 for the years ended October 31, 1999, 1998 and 1997,
respectively.
The Company has promotional agreements with a director and certain
stockholders. (See Note 8.)
(10) INCOME TAXES
The provision for income taxes for the years ended October 31, 1999, 1998
and 1997 is as follows:
1999 1998 1997
----------- ----------- -----------
Current provision:
Federal $ 2,047,000 $ 3,000,000 $ 1,966,000
State 408,000 596,000 449,000
----------- ----------- -----------
Total 2,455,000 3,596,000 2,415,000
----------- ----------- -----------
Deferred provision (benefit):
Federal (4,000) (98,000) 434,000
State (1,000) (108,000) 193,000
----------- ----------- -----------
Total (5,000) (206,000) 627,000
----------- ----------- -----------
$ 2,450,000 $ 3,390,000 $ 3,042,000
=========== =========== ===========
F-18
36
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The components of the Company's deferred income tax benefit and liability
as of October 31, 1999 and 1998 are as follows:
1999 1998
---------- ----------
Current deferred income tax benefit:
Allowance for doubtful accounts $ 95,000 $ 257,000
Inventory reserves 579,000 704,000
Unearned royalty 117,000 --
Other nondeductible accruals 639,000 421,000
Other deductible capitalized costs 73,000 104,000
---------- ----------
$1,503,000 $1,486,000
========== ==========
Long-term deferred income tax liability - depreciation $ 750,000 $ 738,000
========== ==========
The Company has recorded a net deferred income tax asset of $753,000 and
$748,000 as of October 31, 1999 and 1998, respectively. The realization of
this net asset may be dependent upon the Company's ability to generate
sufficient taxable income in future years. Although realization is not
assured, management believes it is more likely than not that the net
deferred income tax asset will be realized. The amount of the net deferred
income tax asset considered realizable, however, could be reduced in the
near term if tax rates are lowered.
A reconciliation of the provision for income taxes at the statutory rate
to the Company's effective rate is as follows:
1999 1998 1997
------------ ------------ ------------
Computed income tax at the
expected statutory rate $ 2,131,000 $ 2,955,000 $ 2,675,000
State income tax, net of
federal tax benefits 306,000 349,000 411,000
Nondeductible expenses 113,000 110,000 33,000
Foreign sales corporation
tax benefit (31,000) (30,000) (48,000)
Other (69,000) 6,000 (29,000)
------------ ------------ ------------
Income tax provision $ 2,450,000 $ 3,390,000 $ 3,042,000
============ ============ ============
F-19
37
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related
Information", which established reporting disclosure standards for an
enterprise's operating segments. Operating segments are defined as
components of an enterprise for which separate financial information is
available and regularly reviewed by the Company's senior management. The
Company has the following two reportable segments: Domestic and
International. Management evaluates segment performance based primarily on
revenues and earnings from operations. Interest income and expense is
evaluated on a consolidated basis and is not allocated to the Company's
business segments. Segment information is summarized as follows for the
years ended October 31, 1999, 1998 and 1997 (in thousands).
1999 1998 1997
-------- -------- --------
NET REVENUE:
Domestic 93,527 89,389 70,129
International 14,394 17,952 19,019
-------- -------- --------
Total 107,921 107,341 89,148
======== ======== ========
EARNINGS FROM OPERATIONS:
Domestic 7,009 8,079 7,105
International (513) 852 1,716
-------- -------- --------
Total 6,496 8,931 8,821
======== ======== ========
CAPITAL EXPENDITURES:
Domestic 1,199 2,120 1,857
International 260 245 123
-------- -------- --------
Total 1,459 2,365 1,980
======== ======== ========
TOTAL ASSETS:
Domestic 73,768 78,998 66,104
International 6,338 2,636 2,713
-------- -------- --------
Total 80,106 81,634 68,817
======== ======== ========
DEPRECIATION:
Domestic 1,910 2,063 2,054
International 144 141 72
-------- -------- --------
Total 2,054 2,204 2,126
======== ======== ========
F-20
38
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) RESULTS BY QUARTER (UNAUDITED)
The unaudited results by quarter for the years ended October 31, 1999 and
1998 are shown below:
FIRST SECOND THIRD FOURTH
YEAR ENDED OCTOBER 31, 1999 QUARTER QUARTER QUARTER QUARTER
--------------------------- ------------ ------------ ------------ ------------
Net sales $ 19,662,000 $ 35,690,000 $ 30,067,000 $ 22,502,000
Gross profit 6,241,000 13,570,000 10,854,000 8,698,000
Net income (loss) (487,000) 2,328,000 1,481,000 495,000
Net income (loss) per
basic share (.03) .17 .11 .04
Weighted-average basic
shares outstanding 14,080,000 14,080,000 14,064,000 13,917,000
Net income (loss) per
diluted share (.03) .17 .11 .04
Weighted-average diluted
shares outstanding 14,080,000 14,082,000 14,085,000 13,929,000
FIRST SECOND THIRD FOURTH
YEAR ENDED OCTOBER 31, 1998 QUARTER QUARTER QUARTER QUARTER
--------------------------- ------------ ------------ ------------ ------------
Net sales $ 24,026,000 $ 38,057,000 $ 25,598,000 $ 19,660,000
Gross profit 9,525,000 16,204,000 9,218,000 5,675,000
Net income (loss) 1,859,000 4,520,000 782,000 (1,861,000)
Net income (loss) per
basic share .14 .32 .05 (.13)
Weighted-average basic
shares outstanding 13,593,000 14,343,000 14,702,000 14,112,000
Net income (loss) per
diluted share .13 .30 .05 (.13)
Weighted-average diluted
shares outstanding 14,350,000 15,280,000 15,253,000 14,112,000
During the fourth quarter of fiscal year 1999 the Company had a net income
of $495,000 as compared to net loss of $1,861,000 in the same period of
the prior year. The net loss in the fourth quarter of fiscal year 1998 was
primarily attributable to adjustments related to excess prior season
inventory, the decision to discontinue the Company's young men's (AGCo
label) line, additional investment in sales and marketing programs to
increase the Fall/Holiday account base and increased expenditures to
market the Company's new Women's and Corporate divisions.
F-21
39
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Ashworth, Inc.:
Under date of December 10, 1999, we reported on the consolidated balance sheets
of Ashworth, Inc. and subsidiaries as of October 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three year period ended October 31, 1999. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
San Diego, California
December 10, 1999
F-22
40
ASHWORTH, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
-----------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Year Expense Accounts Deductions of Year
- ------------------ ---------- ---------- ---------- ---------- ----------
FOR THE YEAR ENDED
OCTOBER 31, 1997:
Allowance for
Doubtful accounts $ 480,000 $ 323,000 $ -- $ 155,000 $ 648,000
========== ========== ====== ========== ==========
FOR THE YEAR ENDED
OCTOBER 31, 1998:
Allowance for
Doubtful accounts $ 648,000 $ 608,000 $ -- $ 217,000 $1,039,000
========== ========== ====== ========== ==========
FOR THE YEAR ENDED
OCTOBER 31, 1999:
Allowance for
Doubtful accounts $1,039,000 $ 309,000 $ -- $ 459,000 $ 889,000
========== ========== ====== ========== ==========
F-23
41
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 28, 2000 BY: /s/ RANDALL L. HERREL, SR.
------------------------------------
RANDALL L. HERREL, SR.
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RANDALL L. HERREL, SR. PRESIDENT AND JANUARY 28, 2000
- ---------------------------------- CHIEF EXECUTIVE OFFICER
RANDALL L. HERREL, SR. (PRINCIPAL EXECUTIVE OFFICER)
DIRECTOR
/s/ TERENCE W. TSANG SR. VICE PRESIDENT - FINANCE, JANUARY 28, 2000
- ---------------------------------- CHIEF FINANCIAL OFFICER
TERENCE W. TSANG (PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER)
/s/ JOHN M. HANSON, JR. DIRECTOR JANUARY 28, 2000
- ----------------------------------
JOHN M. HANSON, JR.
/s/ ANDRE P. GAMBUCCI DIRECTOR JANUARY 28, 2000
- ----------------------------------
ANDRE P. GAMBUCCI
/s/ JAMES W. NANTZ, III DIRECTOR JANUARY 28, 2000
- ----------------------------------
JAMES W. NANTZ, III
/s/ STEPHEN BARTOLIN, JR. DIRECTOR JANUARY 28, 2000
- ----------------------------------
STEPHEN BARTOLIN, JR.
/s/ STEPHEN G. CARPRNTER DIRECTOR JANUARY 28, 2000
- ----------------------------------
STEPHEN G. CARPENTER
/s/ H. MICHAEL HECHT DIRECTOR JANUARY 28, 2000
- ----------------------------------
H. MICHAEL HECHT