Item 1. BUSINESS GENERAL DESCRIPTION OF THE COMPANY
GENERAL DESCRIPTION
Ashworth, Inc., based in Southern California was incorporated in Delaware on March 19, 1987. It changed its corporate name from Charter Golf, Inc. to Ashworth, Inc. on April 6, 1994. The Company designs, markets and distributes a full line of quality sports apparel, headwear, and shoes under the Ashworth(R) label. The Ashworth products have been retailed in golf pro shops, resorts and in the international market, and at better department and specialty retail stores.
The Company has wholly owned subsidiaries which own and operate the company stores. A wholly owned United Kingdom subsidiary distributes the Company's products in Europe. The Company also established a wholly owned subsidiary in the Virgin Islands as a foreign sales corporation to take advantage of certain federal income tax benefits with respect to profits from foreign sales. Ashworth, Inc. and its wholly owned subsidiary, Ashworth U.K., Ltd., are partners of a Luxembourg partnership, Ashworth, Inc. et Cie., formed to qualify for trademark registration in Europe under the Madrid Convention.
NARRATIVE DESCRIPTION OF BUSINESS
At its inception, the Company began designing and marketing classically-styled, natural fiber golfwear distributed in the United States under the Ashworth(R) brand exclusively to golf pro shops and resort. The Company has been credited with developing the new look in golfwear over the past nine years, using natural fibers and a loose relaxed fit emphasizing quality in product and presentation, which are now industry standards. Its golf lifestyle apparel is aimed at predominately the younger active male consumer in the middle/upper middle income range and is priced in the middle to upper middle price range for golf apparel. For the past four years, Ashworth has been the leading golf apparel line sold at pro shops in the United States with a market share of approximately 10%.
ASHWORTH PRODUCTS
All Ashworth products are designed in-house. The Company designs two Spring, two Summer, two Fall, one Resort and one Holiday line per year. Each line consists of approximately 30 to 60 styles. Product design is largely one of classic, timeless designs with an emphasis on quality and natural fibers.
Through the fall lines of 1996, the Company designed two labels, Ashworth and Ashworth Harry Logan(R). The Ashworth label products were sold to golf pro shops with the Ashworth Harry Logan line sold to the department and speciality store trade. Going forward, the Company will continue to design some different product for the department store trade, however, the label will be Ashworth. This will provide management with better control over inventory, design and distribution costs.
The Company's line consists of knit and woven shirts, pullovers, sweaters, vests, pants, shorts, hats, shoes and accessories. In 1996, the Company designed the new Weather Systems(TM) collection. These products are made largely of micro fibers and are produced for a variety of
weather conditions including cold and rainy as well as hot and humid.
Going forward, the Company intends to place less emphasis on growing its golf shoe business, in an effort to improve inventory turns and reduce costs. The product focus on shoes will be in casual and golf training shoes rather than spiked golf shoes.
In 1996, the Company introduced for the first time a new Basics line which consists of shirts, pants and shorts. This line consists of popular styles and colors which do not change significantly from year to year in customer preference. This line is projected to be the Company's highest volume line in 1997.
DISTRIBUTION CHANNELS
The Company distributes and sells its products through the following four channels of distribution.
Golf Pro Shops and Resorts
The Company's core business is selling to golf pro shops located at golf courses. According to surveys by GOLF PRO MAGAZINE, the Company is the leading golf apparel company in golf pro shops in the United States with an approximately 10% market share. The Company presently distributes to pro shops in all 50 states.
Department Stores and Specialty Stores
The Company presently sells its products to selected upscale department and specialty stores which include Nordstrom, Dillards, Parisians, Dayton Hudson, and Saks Fifth Avenue.
International Market
The Company operates a wholly owned subsidiary in Essex England that distributes Ashworth products to customers in the United Kingdom and other European countries such as Germany, France, Spain, Sweden and Portugal.
The Company also uses distributors who resale the Ashworth products in other countries such as Canada, Japan, Korea, Taiwan, Singapore, and Indonesia.
Ashworth Retail Stores
The Company operates, through wholly owned subsidiaries, eleven retail stores in California, Texas, Nebraska, Colorado, Arizona, Utah and Nevada. The main purpose of these stores is to help control inventory by selling prior season and irregular merchandise.
SALES AND MARKETING
The Company's products are sold in the United States and Europe largely by independent sales representatives. The Company presently has 44 sales representatives in the United States and 12 sales representatives in Europe. The Company uses 13 different distributors in other international locations.
In an effort to add exposure and consumer credibility to its Ashworth brand, the Company has five popular and well known golf celebrities who wear and endorse the Company's products. They are: (1) Fred Couples, considered by many as the most popular golfer in the world; (2) John Cook, who won two PGA events in 1996; (3) Ernie Els, who won the 1995 U.S. Open; (4) Dave Stockton, who was "Player of the Year" on the PGA senior tour two of the past four years; and (5) Jim Nantz the popular CBS golf announcer.
As part of its marketing strategy, the Company plans to use more of these players and celebrities in advertisements, in store displays, and for special appearances for trade shows and store appearances.
In 1996, the Company developed a new in-store fixture program that will be expanded in 1997. This modular fixture program is designed to help create a dedicated in-store shop for Ashworth products coupled with pictures and displays of our golf professionals.
In an effort to introduce new young customers to the Ashworth brand, the Company is the national apparel sponsor of American Junior Golf Association. Additionally, Ashworth supports collegiate golf by providing team uniforms to numerous college and university golf teams.
The Company's future marketing and sales growth efforts will focus on (1) increasing the annual sales amounts to existing customers; (2) the addition of new customers; (3) increasing the number of trained sales representatives; (4) emphasizing Ashworth "in-store shop" concept stores utilizing the Company's new fixture program.
The Company's domestic market for the Ashworth apparel has been seasonal, with the highest sales volume traditionally in the period January through August and the lowest volume in the months of September through December. However, the addition of the department and specialty retail store market, which is a year-round business, and additional fall and winter European market has reduced the impact of the seasonality of the Company's business.
After adjusting for the discontinuation of the Women's and Kids' divisions in fiscal 1995, sales increased 6.2% to $75,413,000 from $71,018,000. This increase was primarily due to an increase in the volume of sales.
During the last three fiscal years, the Company had the following domestic and international sales of Ashworth products:
At December 31, 1996, the Company had backlog orders of approximately $27,824,000 compared with approximately $31,007,000 at December 31, 1995. The amount of backlog orders at a particular time is affected by a number of factors, including the scheduling of manufacture and shipping of the product which, in some instances, depends on the customers' demands. Accordingly, a comparison of backlog orders from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments during the quarter. Orders may be changed or canceled up to 45 days prior to the ship date of the order. The Company's experience has been that the cancellations, rejections or returns of orders do not materially reduce the amount of sales realized from its backlog.
The Company's trading terms generally require payment from customers within 30 days after shipment. The Company extends discounts of 3%-5% for early payment.
COMPETITION
The golf apparel market is not dominated by any single company, yet it is highly competitive both in the United States and abroad. However, the Ashworth brand is the market leader with approximately 10% of the market share. The Company competes not only with golf apparel manufactures, but also other branded sports and sportswear apparel manufactures who have entered the growing golf apparel market in recent years. Although many of the Company's competitors have greater financial resources and greater experience, the Ashworth brand has been the market leader in the golf pro shop business for the past four years.
PRODUCT SOURCING
The Company sources its products in the following three ways:
1. Contract Manufacturing: Most of the Company's knit shirts and pullovers are manufactured through arrangements with independent cutting and sewing contractors in the San Diego area. Although the Company uses numerous contractors, over 80% of its contract work is performed by two main contractors. The Company has no written agreements with these firms but has used these contractors since the Company's inception. The Company considers its relations with these contractors to be excellent. The Company purchases most of its fabric from United States mills and then distributes the fabrics to its contractors after quality inspection.
2. Finished Goods Sourcing: The Company also sources finished garments made to the Company's quality and styling specifications from manufactures in Asia, Europe and Central America. Approximately 255 of the Company's products are now being made from manufacturers outside of the United States. Ashworth is now importing products from Italy, Scotland, China, India, the Phillippines and Costa Rica. In 1996, the Company entered into an agreement with an American mill to have a significant amount of its new basics line made in Costa Rica.
In the future years, the Company plans to source more product outside the United States in such areas as Central America and Mexico to help increase gross profits. The Company will, at the same time, continue to emphasize quality.
In-House Manufacturing
The Company operates its own in-house hat manufacturing facility. Approximately 95% of the Company's hats are made in this facility with the balance purchased from other hat manufacturing companies. Presently, the Company's hat factory is running at close to 100% capacity. The factory could be easily expanded, however, as needed.
In-House Embroidery
The embroidery of custom golf course logos and logos for tournaments is done in-house by the Company. The Company operates 39 multi-head, computer-controlled embroidery machines. The machines consist of 2-head, 6-head, 12-head, 15-head and 20-head capacity, totaling 399 heads. The Company embroiders either the Company's or customer's designs which total over 20,000 designs at the present time. Embroidery is applied on garments as well as custom made caps. The Company averages 90,000 logos per week which amounts to 65,000 garments. One to three logos are applied to a single garment. The Company runs a second shift to accommodate seasonal demand during the period from January through July. The Company's
embroidery department has been ranked by two major trade publications as one of the top 100 embroidery plants in the country.
OPERATIONS
Approximately 97% of the Company's products are warehoused in and distributed from its distribution facilities in Carlsbad and Vista, California. The remaining 3% are products drop-shipped from off-shore factories directly to our international distributors.
All products delivered to the Company's distribution facilities must pass a quality inspection before acceptance. The Company uses a state-of-the- art rail and trolley garment handling system designed specifically for the garment industry. This system holds the majority of the inventory at a second and third floor level that frees the ground floor space for order processing, embroidery, packing and shipping functions.
The Company's computer operations run on an IBM AS400 computer. The Company has completed a software conversion project that has significantly enhanced the Company's management information systems. The new package is an established, fully integrated, relational database for manufacturing companies that has been adapted for the apparel industry.
PATENTS, TRADEMARKS AND COPYRIGHTS
The Company owns and utilizes several trademarks, principal among which are the Ashworth word and design marks, the Golfman word and design marks, the Ashworth Harry Logan word mark, and the Weather Systems word mark. The Ashworth word and design marks, Ashworth Harry Logan word mark, and Golfman design marks have been registered on the Principal Register of the United States Patent and Trademark Office. The Company filed an application in January 1997 for registration of the Golfman and Weather Systems word marks in the United States and intends to register these marks throughout its major international markets.
The Company has obtained registration of the Ashworth word and design marks and the Golfman design marks in 32 countries and is processing applications for registration of these trademarks in 20 additional countries. The application process takes from six months to two years to complete.
The Company regards its trademarks and other proprietary rights as valuable assets and believes that they have significant value in the marketing of its products. Although the Company believes that it has the exclusive right to use the trademarks and intends to vigorously protect its trademarks against infringement, there can be no assurance that the Company can successfully protect the trademarks from conflicting uses or claims of ownership.
John L. Ashworth, an officer, director and stockholder of the Company, has no personal rights to the Ashworth trademark and will receive no compensation from the Company for its use of the trademark.
EMPLOYEES
At January 17, 1996, the Company had approximately 436 regular and 119 seasonal full-time employees.
Item 2.
Item 2. PROPERTIES
The Company owns two buildings located on Loker Avenue West in Carlsbad, California, which were purchased on December 9, 1993, for $3,500,000. The buildings total approximately 77,000 square feet, consisting of space for administrative, embroidery, warehousing and distribution functions. The purchase was financed with a down payment of $700,000 and a mortgage of $2,800,000 amortized over thirty years but due and payable in seven years.
The Company and its subsidiaries have the following leases for manufacturing and distribution facilities, as well as leases for retail space for its stores:
- --------------------- (a) The rate increase for years 6-10 is to be negotiated at the end of year 5. (b) The rate increase for years 5-9 is to be negotiated at the end of year 4.
The tenant also pays percentage rent based on sales which exceed certain breakpoints for all of the leases except the Carlsbad, California, lease. All of the leases require the tenant to pay its pro rata share of taxes, insurance, and maintenance expenses. The Company has entered into guaranties for some portion or all of certain of the subsidiaries' leases.
The Company's subsidiary, Ashworth Store II, Inc., has also entered into a lease for retail store space in the San Marcos, Texas, Sports Center, which was planned to be completed in 1996. However, the project has been put on hold for at least a year. The Sports Center lease will replace the above-referenced San Marcos lease if and when the Sports Center is completed.
Item 3.
Item 3. LEGAL PROCEEDINGS.
There were no material pending or threatened legal proceedings as to which the Company or any of its subsidiaries was a party or of which any of their property was the subject during fiscal 1996.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year covered by this report, either by proxy solicitation or otherwise.
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded in the over-the-counter market on the NASDAQ National Market System under the symbol "ASHW". The following table sets forth the high and low sale prices on the NASDAQ National Market System for the quarters indicated.
HIGH LOW January 31 11 1/2 7 1/8 April 30 10 7/8 7 1/2 July 31 10 5/8 7 October 31 8 7/8 5 7/8
January 31 7 3/4 5 April 30 7 3/8 6 July 31 7 4 1/2 October 31 7 5/8 4 7/8
Holders
There is only one class of Common Stock. As of January 27, 1997 there were 885 stockholders of record and approximately 10,000 beneficial owners of the Company's Common Stock.
Dividends
No dividends have been declared during the past two fiscal years with respect to the Common Stock.
Item 6.
Item 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and the Notes thereto which are included elsewhere in this report. The statement of income data set forth below with respect to the fiscal years ended October 31, 1996, 1995, and 1994 and the balance sheet data at October 31, 1996 and 1995 are derived from, and should be read in conjunction with the audited Consolidated Financial Statements included elsewhere in this report. The statement of income data set forth below with respect to the fiscal years ended October 31, 1993 and 1992 and the balance sheet data at October 31, 1994, 1993, and 1992 are derived from audited financial statements not included in this report. No dividends have been paid for any of the periods presented.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
RESULTS OF OPERATIONS
1996 Compared to 1995
Consolidated net sales were $75,413,000 for fiscal 1996, an increase of 1.2% over net sales of $74,524,000 in fiscal 1995. Management's focus in 1996 was not to increase sales, but was rather to reposition the Company for growth in 1997 and in future years. The Company discontinued its Women's and Kids' lines in fiscal year 1995 which accounted for 4.7% of that year's sales. Excluding these discontinued lines, sales increased 6.2% in fiscal 1996 in comparison to fiscal 1995.
Cost of goods sold decreased from 66.4% of net sales in fiscal 1995 to 63.7% in fiscal 1996. This resulted in improved gross margins of 2.7%. This improvement was the result of improved and more conservative forecasting and fewer mark downs.
Consolidated selling, general and administrative expenses for fiscal 1996 increased 11.9% to $24,087,000 or 31.9% of net sales compared to $21,522,000 or 28.9% of net sales in fiscal 1995. This increase resulted mainly from the expense of sales and marketing activities in the U.S. and Europe, and an increase in the cost of compensating the golf professionals who endorse the Company's products.
Additional marketing expenses were incurred during the year in an effort to position the Company for increased sales growth in 1997. These marketing expenses included increased endorsement fees of our PGA professionals and costs associated with the Company's new integrated marketing plan which includes in-store shop fixture and display programs, color catalogs and salaries associated with new marketing personnel.
Other expenses decreased to $948,000 for 1996 compared to $1,088,000 in 1995. Increased bank borrowings in fiscal 1996 resulted in higher interest payments of $86,000 for the year which was offset by a currency transaction gain in fiscal 1996 of $131,000 by Ashworth U.K., Ltd. compared with a transaction loss of $117,000 in fiscal 1995 (See Liquidity and Capital Resources - Currency Fluctuation.)
1995 compared to 1994
Consolidated net sales were $74,524,000 for fiscal 1995, an increase of $13,685,000 over net sales of $60,839,000 in fiscal 1994. The increase was primarily due to increased sales volume in the main areas of the Company's business, price increases in the outlet stores, and the introduction of golf footwear. Ashworth brand apparel sales to golf pro shops increased by only 2.3% in the year due in large part to incomplete or late shipments resulting from the slower than expected conversion of the Company's Management Information System (MIS). Total sales increased by 22.5% over fiscal 1994. An analysis of sales for the two years is shown under Business - Sales and Marketing.
The increase in cost of sales was due primarily to the inventory reserve markdown as a result of discontinuing the women's and kid's apparel lines. Additionally, the conversion to the new MIS software resulted in problems in the area of forecasting and production scheduling. This resulted in an excess of finished goods being produced for the spring and summer seasons. The MIS conversion is now completed, and the Company is better equipped to monitor inventory levels through better forecasting and production scheduling.
Consolidated selling, general and administrative expenses for fiscal 1995 increased 38.6% to $21,522,000 or 28.9% of net sales compared to $15,525,000 or 25.5% of sales in fiscal 1994. The increase was primarily attributed to increased sales volume.
Income from operations decreased to $3,504,000 in fiscal 1995 from $8,373,000 in 1994. The decrease was primarily due to lower gross profits and higher selling, general and administrative expenses.
Other expenses increased to $1,088,000 for 1995 compared to $313,000 in 1994. This was primarily a result of interest payments on increased bank borrowings in fiscal 1995 and a currency exchange rate loss of $117,000 on the transactions between Ashworth U.K., Ltd. and the Company compared to a gain of $210,000 in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's need for working capital is seasonal with the greatest requirements from approximately October through the end of April each year. The inventory buildup during this period is to provide product for shipment for the primary spring/summer selling season. However, management believes that cash from operations and the bank line of credit will be sufficient to meet the Company's working capital requirements through fiscal 1997.
Cash from operations in fiscal 1996 generated a positive cash flow of $8,469,000, compared to a negative cash flow of $9,727,000 in fiscal 1995. The primary reasons were a reduction in overall inventory levels, improved control over future season inventory levels, and increased sales of prior season merchandise at the Company's outlet stores.
In December 1996, the Company entered into a new business loan agreement with its bank. The agreement provides a revolving line of credit of $20,000,000 compared to $17,000,000 under the old agreement. The new agreement no longer restricts borrowings to a specified asset base. Interest is charged at the bank's reference (prime) rate and loans are collateralized by substantially all of the assets of the Company. The loan agreement contains certain financial covenants, the most restrictive of which require the Company to maintain, as defined, a minimum tangible net worth, a liabilities to tangible net worth ratio, and a minimum ratio of cash and accounts receivable to current liabilities. The line of credit may also be used to finance up to $5,000,000 in commercial letters of credit and standby letters of credit. At October 31, 1996, no standby letters or commercial letters of credit were outstanding on this line of credit. Additionally, the loan agreement may be used to enter into spot and forward foreign exchange contracts.
At October 31, 1996, the Company had no loan outstanding with the bank compared to $6,670,000 outstanding at October 31, 1995. At January 15, 1997, the loan balance outstanding was $435,000.
During fiscal 1996, the Company invested approximately $2,500,000 in personal property and equipment, primarily for a new show booth, rack and rail equipment, computer hardware, embroidery machines, and outlet store fixtures and fittings. For fiscal 1997, the Company has a capital equipment budget of approximately $1,900,000 primarily for the acquisition of computer equipment, leasehold improvements for stores, embroidery equipment and warehouse improvements. Management currently intends to use leases or equipment financing agreements to finance the purchase of much of its capital equipment.
If cash from operations and debt financing are either insufficient or not available, or if working capital requirements are greater than estimated, the Company may be required to raise additional capital. There can be no assurance that the Company will continue to successfully raise sufficient working capital to meet its requirements. Lack of sufficient working capital could have a material adverse effect upon the Company, its business, and its ability to grow.
Currency Fluctuations
Ashworth U.K., Ltd., a wholly owned subsidiary in England, maintains its books of account in British pounds. For consolidation purposes, the assets and liabilities of Ashworth U.K., Ltd., are converted to U.S. dollars at the month end exchange rate. A translation difference arises for share capital and retained earnings, which are converted at rates other than the month end rate, and this amount is reported in the shareholders' equity section of the balance sheet.
Ashworth U.K., Ltd. sells Ashworth product to other countries in the European Union, largely with sales denominated in the currencies of those other countries. Fluctuations in the currency rates between the United Kingdom and those other countries give rise to a loss or gain which is reported in earnings. The amount in fiscal year 1996 was not material.
All export sales by Ashworth, Inc., are U.S. Dollar denominated, and ordinarily there is no currency exchange rate problem for the Company. However, with respect to export sales to Ashworth U.K., Ltd., that subsidiary may be at risk. The subsidiary maintains its account with Ashworth, Inc., in British pounds, but owes Ashworth, Inc., in U.S. Dollars. At the end of every accounting period, the debt is adjusted to pounds by multiplying the indebtedness by the closing dollar/pound exchange rate to ensure that the account has sufficient pounds to meet its dollar obligation. This remeasurement is either income or an expense in the subsidiary's financial statement.
The Company purchases some garments and shoes from off-shore manufacturers which are U.S. Dollar denominated; consequently, there is no currency exchange rate problem for the Company in connection with these purchases.
The Company has not used derivative instruments or other arrangements to hedge against currency fluctuations. However, management may use hedging arrangements in the future to reduce the Company's exposure to risk with Ashworth U.K., Ltd.
Inflation.
Management believes that inflation has not had a material effect on the Company's results of operations.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements with respect to the Company are submitted herewith:
1. Report of Independent Public Accountants, page. 2. Consolidated Balance Sheets-October 31, 1996 and 1995, pages and. 3. Consolidated Statements of Income for the years ended October 31, 1996, 1995, and 1994, Page. 4. Consolidated Statements of Stockholders' Equity for the years ended October 31, 1996, 1995, and 1994, page. 5. Consolidated Statements of Cash Flows for the years ended October 31, 1996, 1995, and 1994, and pages and. 6. Notes to Consolidated Financial Statements, pages through. 7. Report of Independent Public Accountants on Supplementary Schedule,page . 8. Supplementary Schedule, page.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with accountants on accounting and financial disclosure during the past three fiscal years.
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's directors and executive officers are:
Richard H. Werschkul, formerly the Company's president and chief executive officer, resigned effective January 15, 1996, to pursue personal and business interests. Mr. Montiel was appointed to these positions by the board of directors, which positions he held until December 8, 1996. Randall L. Herrel, Sr., joined the Company as president and chief executive officer on December 9, 1996.
The directors are divided into three classes, each class as nearly equal in number as possible, with an annual election of each class for a term of three years. The terms of Messrs. Herrel and Hanson expire in 1997, the terms of Messrs. Ashworth and Gambucci expire in 1998, and Mr. Montiel's term expires in 1999. The directors serve until their terms expire and until their successors are duly elected and qualified or until their death, resignation or removal. The executive officers of the Company are elected at the annual meeting of the board of directors and serve at its discretion.
Business Experience
Gerald W. Montiel is a founder of the Company and has been its chairman of the board of directors since the inception of the Company in March 1987. He served as chief executive officer from 1988 to April 1995 and president from the Company's inception to October 1993 and again from January 15, 1996, to December 8, 1996. Mr. Montiel also served as treasurer from October 1989 to December 1991 and chief financial officer from January 1990 to December 1991.
Randall L. Herrel, Sr. has been a director, president, and chief executive officer since December 9, 1996. Mr. Herrel served as president and chief operating officer of Quiksilver, Inc., a sports apparel company in Newport Beach, California for the past two years. Mr. Herrel joined Quiksilver in June 1989 and also served at various times as chief financial officer, treasurer and secretary. Mr. Herrel holds a B.S. degree in Engineering from Purdue University, an M.S. degree in Engineering from Northrop University and an M.B.A. from Stanford University.
John L. Ashworth is a founder of the Company and has been a director since its inception. Mr. Ashworth has served as a vice president since October 1989 and currently serves as senior executive vice president - creative director. He served as secretary from March 1987 to January 1990.
Andre P. Gambucci has been a director of the Company since June 1991. Mr. Gambucci was a senior vice president and director of marketing of Acordia of
Colorado, a general insurance agency and insurance brokerage firm in Colorado Springs, Colorado, from 1982 until December 31, 1995, when he retired. He is now a consultant for Acordia National and special assistant to the president of American Specialty Services, an insurance company.
John M. Hanson, Jr. has been a director of the Company since April 1994. Mr. Hanson has been a shareholder and officer of John M. Hanson & Company, a professional corporation practicing accounting, from 1968 to the present. The firm has been retained to prepare the Company's tax returns for fiscal 1996.
John Newman has served as chief accounting officer since January 1990 and vice president-finance, treasurer, and chief financial officer since December 1991. He also served as the company's controller from 1988 to January 1990 and secretary from January 1990 until May 1993.
Mary Montiel was elected vice president - manufacturing and design in December 1994. She served as production manager from April 1991 until December 1994. She was president and chief financial officer of Mondav Corporation, an auto parts supplier, from 1988 to April 1991. Ms. Montiel is the sister of Gerald Montiel, the Company's chairman of the board.
Monica M. McKenzie has served as general counsel since April 1993 and was elected to the position of secretary in May 1993. She was formerly a partner of the Denver, Colorado, law firm of Gorsuch Kirgis L.L.C., the Company's outside legal counsel.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires executive officers, directors, and persons who beneficially own more than ten percent (10%) of the Company's Common Stock to file initial reports of ownership and reports of changes in ownership of the Company's securities with the Securities and Exchange Commission. To the best of the Company's information and belief, no person beneficially owns more than ten percent of the Company's securities. The executive officers and directors are required to furnish the Company with information concerning their ownership of the securities and with copies of such filings.
Based solely on a review of such information and the copies of the filings furnished by executive officers and directors to the Company, the Company believes that all Section 16(a) filing requirements applicable to its executive officers and directors were complied with during fiscal 1996.
Item 11.
Item 11. EXECUTIVE COMPENSATION.
The following information sets forth the executive compensation of the Company's chief executive officer and each of the four most highly compensated executive officers other than the CEO who were serving as executive officers at the end of the last fiscal year.
(a) Upon termination on January 15, 1996, Mr. Werschkul entered into a two-year non-compete and consulting agreement for which the Company agreed to pay him $240,000 during the first year.
Compensation of Directors
Directors who are not employees of the Company each receive annual compensation of $10,000 plus $1,000 and expenses for attendance at each board meeting. Such directors also receive quarterly stock options to purchase shares of the Company's $.001 par value Common Stock for each quarter during which they serve as directors and for each committee on which they serve during each quarter. All directors receive an annual $1,000 apparel allowance. No other arrangement exists pursuant to which any director of the Company was compensated during the Company's last fiscal year for any service provided as a director.
Employment Contracts and Termination of Employment and Change of Control Arrangements
The Company has executive employment agreements with Gerald W. Montiel, Randall L. Herrel, Sr., and John L. Ashworth. Under the terms of the agreements with Messrs. Montiel and Ashworth, the Company may terminate the executive's employment upon 30 days notice, and the executive may terminate his employment upon 90 days notice to the Company. The agreement with Mr. Herrel provides for employment for an initial term of three years through November 30, 1999, with automatic renewal each year unless either party gives to the other six-month written notice of non-renewal. The agreements provide that base salary is to be determined periodically at the discretion of the board of directors on the basis of merit and the Company's financial success and progress. A bonus is to be paid to Mr. Herrel on January 15, 1998, based on the Company's earnings per share and Mr. Herrel's then base salary. If the earnings per share are from $.46 to $.54, the bonus will be from 15% to 85% of his then base salary. The Company agreed to pay the executives an annual bonus equal to the premium due on life insurance policies with a face value of $1,000,000 for Messrs. Montiel and Herrel and $2,000,000 for Mr. Ashworth. The Company also pays the premium on a split dollar insurance policy with a face value of $1,000,000 on the life of Mr. Montiel. The agreements with Messrs. Montiel and Ashworth include noncompete provisions following termination of employment for which the Company has agreed to pay each executive compensation based upon a percentage of his then current salary as consideration for the noncompete agreement. The noncompete period is ten years with the noncompete consideration to be an amount equal to 100% of the executive's then current salary for the first year and 40% of such salary for
the next nine years. In the event of the executive's death during employment with the Company, his beneficiary or estate will receive an amount equal to the noncompete consideration. The Company has purchased term life insurance to provide the funds in such event. The agreement with Mr. Herrel includes severance payments upon termination of employment under specific circumstances, such payments ranging from one-half to two times his then annual base salary.
The Company has key person life insurance payable to the Company on the lives of Messrs. Montiel and Ashworth in the amount of $1,000,000 and $300,000, respectively.
STOCK OPTION PLANS
Amended and Restated Nonqualified Stock Option Plan
In August 1987 the Company adopted a nonqualified stock option plan which was subsequently amended (as amended to date, the "Plan"). The Company's board of directors or any committee as the board of directors may designate from time to time (reference hereafter to the "Committee" includes either the board or its designated committee) administers the Plan and selects the persons to whom options are granted.
The Company has reserved 5,700,000 shares of Common Stock for issuance upon exercise of options granted under the Plan, all of which shares have been registered pursuant to the Securities Act and, upon issuance, will be freely tradable without restriction, except for shares held by an "affiliate" of the Company. Under the Plan, as of December 31, 1996, options to purchase 1,439,145 shares were outstanding, options to purchase 1,695,500 shares had been exercised, and 2,565,355 shares were available for options to be granted at a future date. Of the outstanding options under the Plan, options to purchase additional shares were exercisable or will become exercisable in the fiscal years and at the weighted average exercise prices indicated below:
Founders' Nonqualified Stock Option Plan
In November 1992 the Company adopted a Founders' nonqualified stock option plan (the "Founders' Plan") to provide a means for recognizing and rewarding officers, directors, consultants and advisors of the Company who have played a substantial role in the founding or early development of the Company. The Founders' Plan is administered by a committee of directors appointed by the board of directors (the "Compensation Committee") which is presently comprised of the Company's two outside directors. The Compensation Committee has the sole and absolute authority and discretion to interpret the Founders' Plan and to prescribe, amend and rescind rules and regulations relating to the Founders' Plan. The Committee may grant options at less than the fair market value of the stock on the date of grant.
The Company has reserved 1,000,000 shares of Common Stock for issuance upon exercise of options granted under the Plan, all of which shares have been registered pursuant to the Securities Act and, upon issuance, will be freely tradable without restriction, except for shares held by an "affiliate" of the Company.
Under the Plan, as of December 31, 1996, options to purchase 535,000 shares were outstanding, options to purchase 464,000 shares had been exercised, and 1,000 shares were available for options to be granted at a future date. All of the outstanding options are currently exercisable at a weighted average exercise price of $8.41
Incentive Stock Option Plan
The Company adopted the Incentive Stock Option Plan in May 1993 following stockholder approval, and the Plan was subsequently amended (as amended, the ISOP). The Company's board of directors or any committee as the board of directors may designate from time to time (reference hereafter to the "Committee" includes either the board or its designated committee) administers the ISOP. The Committee selects the persons to whom the options are granted from among the Company's full-time employees who are regular salaried officers or key employees of the Company and certain other persons in connection with offers of employment. Any options granted under the ISOP to an employee during a calendar year in excess of $100,000 of aggregate fair market value (determined at the time the option is granted) will not qualify as incentive stock options under the ISOP.
The grant or exercise of an incentive stock option (ISO) under the ISOP is not taxable to the employee. The employee generally will be taxed when and if the stock received on exercise of the ISO is sold at a gain. In order to receive this tax treatment under the Internal Revenue Code, certain provisions of the Plan were required to be approved by the stockholders, the options must be granted within 10 years of the date of the Plan, an option by its terms must be exercisable only within 10 years of the date it is granted (an option granted to an employee who owns more than 10% of the voting power or value of the Company's stock must be exercisable within five years of the date it is granted), and the exercise price must equal or exceed the fair market value of the Company's Common Stock on the date of the grant (the exercise price of options granted to employees who own more than 10% of the voting power or value of the Company's stock must be at least 110% of the fair market value on the grant date). Any gain on the sale of shares received upon exercise of an option will be treated as capital gain if the optionee does not dispose of the shares within two years from the date the option was granted and one year from the date the option is exercised. If the optionee does not meet the holding requirements, any gain on the sale will be treated as ordinary income.
The Company has reserved 3,000,000 shares of Common Stock for issuance upon exercise of options granted under the Plan, all of which shares have been registered pursuant to the Securities Act and, upon issuance, will be freely tradable without restriction, except for shares held by an "affiliate" of the Company.
Under the ISOP, as of December 31, 1996, options to purchase 2,318,792 shares were outstanding, 7,000 options to purchase shares had been exercised, and 674,208 shares were available for options to be granted at a future date. Of the outstanding options under the Plan, options to purchase additional shares were exercisable or will become exercisable in the fiscal years and at the weighted average exercise prices indicated below:
Options granted under the above described stock option plans may not be transferred by the optionee other than by will or the laws of descent and distribution, pursuant to a qualified domestic relations order as defined by the Internal Revenue Code, or, at the discretion of the Committee, to immediate family members or trusts, provided, however, incentive stock options are not transferable other than by will or the laws of descent and distribution. EaTch option is exercisable during the lifetime of the optionee only by such optionee or by his or her guardian or legal representative. An optionee must exercise the options within thirty days after the date of termination of employment disability, unless the option is extended by the Committee for an additional period. Options exercised more than three months after termination of employment (12 months in the case of a disabled employee) do not qualify as incentive stock options. This requirement is waived in the case of the death of the optionee. The Committee may in its discretion permit options to be exercised for a period not to exceed the option's stated expiration date. If an optionee dies while still employed or engaged by the Company or at any time prior to the expiration or termination of his or her option, the option may be exercised within one year after death or at such later date as the Committee may specify. Options held by persons whose employment is terminated because of retirement or disability are fully exercisable for a period of twelve months after the date of such termination, unless either the option or the ISOP provides for earlier termination. In no event may an option be exercisable after expiration of the term of the option.
401(k) PLAN
The Company adopted a defined contribution savings plan (the "401(k) plan") to provide retirement income to employees of the Company effective January 1, 1990. The 401(k) Plan is intended to be qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended. The 401(k) Plan covers all employees who are at least 21 and have been employed by the Company for at least six months. It is funded by voluntary pre-tax contributions from employees up to a maximum amount equal to 15% of annual compensation and by 50% matching contributions by the Company up to 3% of an employee's annual compensation.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the number and percentage of 12,179,626 issued and outstanding shares of the Company's $.001 par value Common Stock owned beneficially, as of January 8, 1997 by (1) any person who is known to the Company to be, or to claim to be, the beneficial owner of more than 5% of such Common Stock, (2) by each of the directors, (3) each of the executive officers, and (4) all directors and officers as a group. Each person has sole voting power and sole investment powers with respect to the shares. Information as to beneficial ownership is based upon statements furnished to the Company by such persons.
* Less than one percent. (1) Represents shares of Common Stock which may be acquired pursuant to presently exercisable stock options, including stock options exercisable within 60 days of January 15, 1997. (2) Only the below indicated options have exercise prices which are less than the market price of the Company's Common Stock on January 8, 1997 ($6.50):
Mr. Montiel 500,000 Mr. Herrel 0 Mr. Ashworth 95,000 Mr. Newman 20,000 Ms. Montiel 3,000 Ms. McKenzie 8,000 Mr. Gambucci 2,500 Mr. Hanson 2,500 Mr. Couples 150,000
(3) For the purpose of computing the percentage of outstanding shares owned by each of the above persons, the shares issuable pursuant to presently exercisable stock options held by such person are deemed to be outstanding nd have been added to the shares actually issued and outstanding, at January 8, 1997, pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934. Such options are not deemed to be outstanding for the purpose of computing the percentage owned by any other person, except for all officers and directors as a group.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
John L. Ashworth, the Company's senior executive vice president-creative director, was extended a loan by the Company on May 1, 1995 in connection with the exercise of an option expiring May 1, 1995. The full recourse loan was in the principal amount of $306,000 and bore interest at a variable annual rate based upon the Bank of America prime rate on the 1st day of each month. Interest was payable in quarterly installments. The principal was paid in full on April 12, 1996.
Mary Montiel, sister of Mr. Montiel, is an executive officer and employee of the Company. Her compensation is set forth above under Executive Compensation. She is currently receiving an annual salary of $160,000. Ms. Montiel has been an employee of the Company serving in various positions since April 16, 1992. She served as production manager from April 1992 until December 1994 and vice president of manufacturing and design since that date.
Carol Kettela, sister of Jerry Montiel and Mary Montiel, is an employee of the Company, presently serving as human resources manager. In the year ended October 31, 1996, she had earned a salary of $61,143 and is currently receiving an annual salary of $63,000. Ms. Kettela has been an employee of the Company since April 7, 1992, initially in the position of administrative assistant to the chief executive officer and investor relations. She was appointed to the position of human resources manager in January 1996.
David Kettela, brother-in-law of Mr. Montiel and husband of Carol Kettela, is an employee of the Company, presently serving as operations manager of the Outlet Stores Division. In the year ended October 31, 1996, he had earned a salary of $68,106 and is currently receiving an annual salary of $72,500. Mr. Kettela has been an employee of the Company serving in various positions since January 25, 1993. He was appointed the operations manager of the Outlet Stores Division in March 28, 1994.
Michelle Zafiropoulos, daughter of Gerald W. Montiel, is an employee in the Company's Design and Product Development Department as a design manager. In the year ended October 31, 1996, she had earned a salary of $61,067 and is currently receiving an annual salary of $72,500. Ms. Zafiropoulos has been an employee of the Company since March 18, 1991, except for a brief period from April 28, 1995 to January 1, 1996
Hank Ashworth, brother of Mr. Ashworth, is a sales representative of the Company. During the fiscal year ended October 31, 1996, he was paid sales commissions in the amount of $69,764. Mr. Ashworth also received severance pay of $32,533 for September 18, 1995 through January 31, 1996. He was national sales manager for the Ashworth core business from April 1994 through October 1996.
Laura Gambucci, daughter of Mr. Gambucci, is an employee in the Company's Design and Product Development Department as a design manager. In the year ended October 31, 1996, she earned a salary of $84,646 and is currently receiving an annual salary of $84,000. Ms. Gambucci has been an employee of the Company since November 6, 1989.
Eric Montiel, son of Gerald W. Montiel, is an employee of the Company, presently serving as excess resource materials manager. In the year ended October 31, 1996, he had earned a salary of $44,183 and is currently receiving an annual salary of $62,500. Eric Montiel has been an employee or sales representative of the Company from time to time since May 1991, his most recent employment period commencing January 1996.
The Company has also entered into a promotion agreement with Fred Couples, who owns of record or beneficially more than 5% of the Company's Common Stock. The agreement requires Mr. Couples' exclusive endorsement and promotion of Ashworth products during his lifetime. The Company has agreed to compensate Mr. Couples for such services, the present value of which compensation is approximately $5,600,000. In addition, the Company has granted to Mr. Couples the right to receive options to purchase the Company's Common Stock upon his performance of specified services, including his participation in PGA tourna ments. The exercise price of the options will be the fair market value of the Company's Common Stock at the time the options are granted, and the options will be exercisable for a period of seven years. The Company has also made certain price guaranties with respect to the options.
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements
Report of independent public accountants Consolidated Balance Sheets - October 31, 1996 and 1995 Consolidated Statements of Income for the years ended October 31, 1996, 1995, and 1994 Consolidated Statements of Stockholders' Equity for the years ended October 31, 1996, 1995, and 1994 Consolidated Statements of Cash Flows for the years ended October 31, 1996, 1995, and 1994 Notes to Consolidated Financial Statements - October 31, 1996, 1995, and
2. Financial Statement Schedules
Report of independent public accountants on supplementary schedules Schedule II - Valuation and Qualifying Accounts
3. Exhibits.
See Item (c) below.
(b) Report on Form 8-K
No Forms 8-K were filed during the last quarter of the fiscal year ended October 31, 1996.
(c) Exhibits
3(a) Certificate of Incorporation as filed March 19, 1987 with the Secretary of State of Delaware, Amendment to Certificate of Incorporation as filed August 3, 1987 and Amendment to Certificate of Incorporation as filed April 26, 1991 (filed as Exhibit 3(a) to Registrant's Registration Statement dated February 21, 1992 (File No.33-45078)) and incorporated herein by reference) and Amendment to Certificate of Incorporation as filed April 6, 1995 (filed as Exhibit 3(a) to the Registrant's Form 10-K for fiscal year ended October 31, 1994 (File No. 0-18553), and incorporated herein by reference)
3(b) Bylaws of the Registrant as adopted by its board of directors on March 19, 1987, and amended February 13, 1991, October 15, 1993, and November 30, 1993 (filed as Exhibit 3(b) to Registrant's Form 10-K for the fiscal year ended October 31, 1993 (File No. 0-18553) and incorporated herein by reference).
4(a) Specimen certificate for Common Stock, par value $.001, of the Registrant (filed as Exhibit 4(a) to Registrant's Registration Statement dated November 4, 1987 (File No.33-16714-D)) and incorporated herein by reference.
4(b)(1) Specimen certificate for Options granted under the Amended and Restated Nonqualified Stock Option Plan dated March 12, 1992 (filed as Exhibit 4(b) to Registrant's Form 10-K for the fiscal year ended October 31, 1993 (File No. 0-18553) and incorporated herein by reference).
4(b)(2) Specimen certificate for Options granted under the Founders Stock Option Plan dated November 6, 1992 (filed as Exhibit 4(b)(2) to Registrant's Form 10-K for the fiscal year ended October 31, 1993 (File No. 0-18553) and incorporated herein by reference)..
4(c) Specimen certificate for Options granted under the Incentive Stock Option Plan dated June 15, 1993 (filed as Exhibit 4(c) to Registrant's Form 10-K for the fiscal year ended October 31, 1993 (File No. 0-18553) and incorporated herein by reference).
10(r)(2) Business Loan Agreement dated December 9, 1996, between the Registrant and Bank of America, expiring March 1, 1999. Under the agreement, the Bank provides the Company with a revolving line of credit of up to $20,000,000 collateralized by most of the Company's assets.
10(r)(3) Foreign Exchange Agreement dated December 9, 1996, between the Registrant and Bank of America, expiring March 1, 1999. Under the agreement, the Bank provides the Company with a spot and forward foreign exchange contract up to a maximum of $2,500,000.
11 Schedule computing net income per common share.
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Ashworth, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of ASHWORTH, INC., (a Delaware corporation) and subsidiaries as of October 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended October 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ashworth, Inc. and subsidiaries as of October 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California December 13, 1996
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-OCTOBER 31, 1996 AND 1995
ASSETS
The accompanying notes are an integral part of these consolidated balance sheets.
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-OCTOBER 31, 1996 AND 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated balance sheets.
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these consolidated statements.
ASHWORTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these consolidated statements.
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these consolidated statements.
ASHWORTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996, 1995 AND 1994
1. The Company and Summary of Significant Accounting Policies
a. Business
Ashworth, Inc. and subsidiaries (collectively referred to as the "Company") designs, markets, and distributes golf apparel, headwear, and footwear. The Company's operations are located primarily in the western part of the United States and the United Kingdom.
The Company sells its products primarily on credit to golf course pro shops, country clubs, resorts, department stores, and retail outlet stores worldwide. The Company had aggregate foreign sales in Europe, Canada, Mexico, Japan, Singapore, United Arab Emirates, Australia, Hong Kong, Puerto Rico, Taiwan, South Africa, Guam and South Korea of approximately $19,400,000, $18,178,000 and $12,095,000 in the years ended October 31, 1996, 1995 and 1994, respectively.
b. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
c. Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market. Cost includes materials, labor and manufacturing overhead.
Below is a summary of the components of inventory at October 31, 1996 and 1995:
d. Depreciation and Amortization
Depreciation and amortization have been provided using straight-line and accelerated methods over the following estimated useful lives:
Buildings and improvements 20 to 30 years Production equipment 5 to 12 years Furniture and equipment 5 to 7 years Leasehold improvements Life of lease
All maintenance and repair costs are charged to operations as incurred. When assets are sold or otherwise disposed of, the costs and accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is reflected in operations.
e. Organization Costs
Organization and trademark costs, which are included in other non-current assets, are capitalized and amortized over periods ranging from two to five years.
f. Advertising Expenses
Advertising costs, which consist primarily of product advertising costs, are expensed in the period the costs are incurred. Advertising expenses for the years ended October 31, 1996, 1995 and 1994 were $434,952, $532,559 and $379,564, respectively.
g. Income Per Common and Equivalent Share
Income per common share amounts are computed based on the weighted average number of common shares outstanding during the year, including common stock equivalents resulting from dilutive stock options.
h. Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
i. Income Taxes
The Company accounts for income taxes in accordance with the Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes." This statement requires that income taxes be accounted for using the liability method.
j. Foreign Currency
The Company's primary functional currency is the U.S. dollar. Assets and liabilities of the Company denominated in foreign currencies are translated at the rate of exchange at the balance sheet date, while revenues and expenses are translated using the average exchange rate. Gains and losses on foreign currency transactions are recognized as incurred. Gains and losses on remeasurement of transactions denominated in currency other than the reporting currency of individual subsidiaries are recognized at each balance sheet date. Cumulative translation adjustments resulting from the translation of the financial statements of foreign subsidiaries are included as a separate component of stockholers' equity and have not been material prior to October 31,
1996.
k. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
l. Postretirement and Postemployment Benefits
The Company does not provide postretirement or postemployment benefits to employees. Accordingly, SFAS No. 106, "Employers' Accounting for Postretirement Benefits other than Pensions" and SFAS No. 112 "Employers' Accounting for Postemployment Benefits" do not impact the Company's consolidated financial statements.
m. Fair Value of Financial Instruments
Based on borrowing rates currently available to the Company for bank loans with similar terms and maturities, the fair value of the Company's long-term debt approximates the carrying value. Furthermore, the carrying value of all other financial instruments potentially subject to valuation risk (principally consisting of cash and cash equivalents, accounts receivable and accounts payable) also approximate fair value.
n. Impact of New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on the estimated future cash flows (undiscounted and without interest charges). SFAS 121 also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less costs to sell. The Company adopted SFAS 121 in the current year. The impact of adoption was not material to the financial statements.
In October 1995, the Financial Accounting Standards Board issue SFAS 123 "Accounting for Stock-Based Compensation." Under SFAS 123, companies have the option to implement a fair value-based accounting method or continue to account for employee stock options and stock purchase plans using the intrinsic value-based method of accounting as prescribed by Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees." Entities electing to remain under APB Opinion No. 25 must make pro-forma disclosures of net income or loss and earnings per share as if the fair value-based method of accounting defined in SFAS 123 had been applied. SFAS 123 is effective for financial statements for fiscal years beginning after December 15, 1995. The Company has tentatively determined it will continue to account for stock options under APB Opinion No. 25 and will adopt this new standard effective October 31, 1997.
o. Reclassifications
Certain reclassifications have been made to certain prior year balances in order to conform with current year presentation.
2. Equipment Under Capital Lease
During the years ended October 31, 1995 and 1994, the Company acquired $94,307 and $277,720, respectively, of various equipment under capital leases. Future minimum lease payments are as follows:
Year Ended October 31:
1997 $480,414 1998 89,494 1999 17,094 -------- Total future minimum payments 587,002 Less--Amount representing interest 28,035 -------- Present value of future minimum capital lease payments (Note 4) $558,967 ========
At October 31, 1996 and 1995, the accompanying consolidated balance sheets include the following equipment under capital leases:
3. Line of Credit Agreement
The Company has a $20 million working capital line of credit agreement with a bank which expires on March 1, 1999 and is collateralized by substantially all assets of the Company. The interest rate on borrowings is at the bank's reference rate which was 8.25 percent at October 31, 1996. The line of credit agreement contains certain financial covenants, the most restrictive of which require the Company to maintain, as defined, a minimum tangible net worth, a maximum debt-to-equity ratio and a maximum ratio of cash and accounts receivable to current liabilities. The line of credit agreement also limits the purchase of capital equipment and requires that the Company have no loss for two consecutive quarters. The line of credit may also be used to finance up to $5 million in commercial letters of credit and standby letters of credit. At October 31, 1996, no borrowings or commercial letters of credit were outstanding on this line of credit.
ASHWORTH, INC. AND SUBSIDIARIES
Additional information for years ended October 31, 1996, 1995 and 1994, is as follows:
4. Long-Term Debt
Amounts outstanding under long-term debt agreements at October 31, 1996 and 1995, consist of the following:
Future maturities of long-term debt at October 31, 1996, are as follows:
5. Employees' 401(k) Plan
The Company maintains a retirement plan covering substantially all employees. Company contributions, which are voluntary and at the discretion of the Company's board of directors, are currently being made at 50 percent of the amount the employee contributes, up to three percent of compensation. The Company's expense for the years ended October 31, 1996, 1995 and 1994, was $107,004, $113,709 and $79,020, respectively.
6. Stockholders' Equity
a. Common Stock Options
The Company maintains several nonqualified and incentive stock option plans. The plans (as amended) provide for the Compensation Committee or such other committee that the Company's board of directors may appoint to administer the plans. The plans provide for an aggregate reservation of 9,700,000 shares of common stock for issuance upon the exercise of granted options. As of October 31, 1996, the Company had 4,334,437 options outstanding under the above plans to purchase common stock at prices ranging from $4.50 to $11.63 with expiration dates between November 1996 and December 2006. A total of 3,215,063 options remained available for grant, and 1,139,500 options with exercise prices ranging from $6.00 to $11.00 were not exercisable at October 31, 1996.
The following is a summary of common stock option activity:
b. Common Stock for Services
In January 1993, the Company entered into an agreement with a PGA professional to endorse the Company's product from January 1, 1993 through December 31, 1998. Upon meeting certain annual obligations, the PGA professional will be issued 7,000 shares of the Company's common stock at the end of each year under the agreement. If the market value of the 7,000 shares of common stock does not reach and maintain at least $14.29 per share for at least five days during each agreement year, the PGA professional will be entitled to receive cash per share equal to the difference between $14.29 and the highest closing market price of the Company's common stock for any five days for that year. The Company incurred approximately $48,000, $22,000 and $10,000 in charges related to the difference in stock prices in 1996, 1995 and 1994, respectively.
c. Deferred Compensation
During fiscal 1993, common stock was issued to a golf professional for future services to the Company for a total value of $304,500. The service arrangements cover a six year period and the value of the stock is being amortized over this period. The unamortized portion of the stock is reported as a reduction in stockholders' equity and the remainder will be amortized to operating expenses through fiscal 1998. Additionally, during fiscal 1993, the Company issued stock options to a golf professional and an outside consultant for current and future services to the Company for a total value of $125,725. This compensation was amortized over the period of the service agreement of twelve months during 1993 and 1994.
7. Operating Leases
The Company leases certain production, warehouse and outlet store facilities under operating leases. These leases expire in various fiscal years through January 2008. Rent expense for the years ended October 31, 1996, 1995 and 1994, was $1,288,560, $757,438 and $554,795 respectively. Future minimum rental payments are as follows:
Year Ended October 31:
1997 $1,124,272 1998 1,105,587 1999 1,065,309 2000 1,029,200 2001 502,302 Thereafter 2,534,427 ---------- $7,361,097 ==========
8. Commitments and Contingencies
a. Promotion Agreements with PGA Professionals and a Television Personality
The Company has promotional agreements with several PGA professionals and a Television Personality. Under the terms of these agreements, the Company is obligated to pay cash compensation and to issue options (at fair market value) to purchase shares of the Company's common stock. The aggregate annual compensation under these agreements totals $782,000 payable in 1997, $744,500 payable in 1998, $665,333 payable in 1999, $657,000 payable in the years 2000 through 2010 and $547,500 payable in 2011. The number of options granted to purchase shares of the Company's common stock will vest as follows: 209,500 in 1997, 217,500 in 1998, 185,000 in 1999 and 150,000 per year from years 2000 through 2011. The majority of these stock options were granted on the understanding that the market value of the Company's common stock will increase to certain predetermined minimum levels during certain time periods, as defined under the various agreements. If the market value of the Company's common stock does not increase to these predetermined minimum levels, the Company is obligated to pay additional cash compensation to these option holders. Obligations under this provision, if any, are accrued and charged to operations during the period in which they arise. The Company incurred approximately $546,000, $253,000 and $57,000 in charges related to the difference in stock prices in 1996, 1995 and 1994, respectively.
b. Executive Employment Agreements
The Company entered into employment agreements with its key executives, effective January 1, 1995. The agreements specify the amount of annual compensation each executive is to receive and also contain a noncompete arrangement. These noncompete arrangements (which if based upon current salary levels would aggregate approximately $2,587,500) are based upon a percentage of the executives' then current salary, as defined, and are in effect for the term of the agreements and for a period of ten years after termination of employment. The present value of the estimated future cash payments to be made is accrued and charged to operations over the periods benefited. In 1996 and 1995, $40,504 and $37,503, respectively, was accrued and charged to operations for existing executives and is reflected in other accrued liabilities in the balance sheet.
c. Legal Proceedings
The Company is party to claims and litigation proceedings arising in the normal course of business. Although the legal responsibility and financial impact with respect to such claims and litigation cannot presently be ascertained, the Company does not believe that these matters will result in the payment by the Company of monetary damages, net of any applicable insurance proceeds, that, in the aggregate, would be material in relation to the consolidated financial position of the Company. It is reasonably possible that the reserves provided by the Company with respect to such claims and litigation could change in the near term.
9. Related-Party Transactions
At October 31, 1995, the Company had a note receivable from an officer for $320,238. During 1996, the entire balance of the note was collected.
At October 31, 1996, the Company has a note receivable from a former officer for $50,000 which is included in other assets on the balance sheet. Principal payments begin December 1997 and continue until maturity at May 1999.
10. Income Taxes
The provision for income taxes for the years ended October 31, 1996, 1995 and 1994, is as follows:
The components of the Company's deferred income tax provision (benefit) for the years ended October 31, 1996, 1995 and 1994, are as follows:
The components of the Company's deferred income tax benefit and liability as of October 31, 1996 and 1995 are as follows:
1996 1995 Current deferred income tax benefit: Allowance for doubtful accounts $ 125,653 $ 252,816 Inventory reserves 1,229,710 1,109,267 Other non-deductible accruals 428,641 362,436 Other deductible capitalized costs (28,788) (39,743) ---------- ---------- $1,755,216 $1,684,776 ========== ========== Long-term deferred income tax liability: Depreciation $ (585,815) $ (494,747) ========== ==========
The Company has recorded a net consolidated deferred income tax asset of approximately $1.2 million. The realization of this net asset may be dependent upon the Company's ability to generate sufficient taxable income in future years. Although realization is not assured, management believes it is more likely than not that the net deferred income tax asset will be realized. The amount of the net deferred income tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced or if tax rates are lowered.
A reconciliation of the provision for income taxes at the statutory rate to the Company's effective rate is as follows:
11. Statement of Cash Flows, Noncash Transactions
The Company completed the following noncash transactions which are not reflected in the statement of cash flows:
12. Results by Quarter (Unaudited)
The unaudited results by quarter for the years ended October 31, 1996 and 1995 are shown below:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Ashworth, Inc. and subsidiaries:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Ashworth, Inc. and subsidiaries' annual report to shareholders included in this Form 10-K, and have issued our report thereon dated December 13, 1996. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index of consolidated financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Orange County, California December 13, 1996
ASHWORTH, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ASHWORTH, INC. (Registrant)
Date: January 27, 1997 BY: /s/ Randall L. Herrel, Sr. -------------------------- Randall L. Herrel, Sr. Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.