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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1997
[ ] 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. [X]
The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of December 31, 1997, was $126,691,000 based upon the last
reported sale price of the Company's Common Stock as reported by the NASDAQ
National Market System.
There were 13,552,830 shares of common stock, $.001 par value, outstanding at
the close of business on December 31, 1997.
PART III is incorporated by reference from the Registrant's definitive Proxy
Statement for its 1998 Annual Meeting of Stockholders to be filed with the
Commission within 120 days of October 31, 1997.
PART I
Item 1. BUSINESS
GENERAL DESCRIPTION OF THE COMPANY
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
label. The Ashworth products have been retailed in golf pro shops, resorts, at
better department and specialty retail stores, and in selected international
markets.
The Company has wholly owned subsidiaries which own and operate the ten
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. 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 brand exclusively to golf pro shops and resorts. The Company has been
credited with developing the 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 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 five years, Ashworth has been the leading golf
apparel line sold at pro shops in the United States. The Company also opened a
concept retail store in October 1997 to sell lifestyle products.
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 40 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 . The Ashworth label products were sold to golf pro
shops and the Ashworth Harry Logan line was sold to the department and
speciality store trade. Starting with the Holiday 1996 line, the Company
decided to market all of its products under the Ashworth label to 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. The Company also designs a
Weather Systems 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 which is comprised of popular styles and colors which do not change
significantly from season to season. Sales of product from the Basics line
provided approximately 25% of the Company's sales volume in 1997.
The Company is placing a lower emphasis on its golf shoe business and will
focus on casual and golf training shoes rather than spiked golf shoes. The
Company's management is considering licensing its shoe production and sales
operations.
DISTRIBUTION CHANNELS
The Company distributes and sells its products through the following five
channels of distribution.
Golf Pro Shops, Resorts and Off-Course Golf Specialty Shops
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 approximately
a 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,
Saks Fifth Avenue, Bloomingdales and Barneys of New York.
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, Switzerland and
Portugal.
The Company also uses distributors to sell the Ashworth products in other
countries such as Canada, Japan, South Korea, Taiwan, Singapore, Guam, Indonesia
and the United Arab Emirates.
Ashworth Retail Stores
The Company operates, through wholly owned subsidiaries, ten 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.
Ashworth Concept Store.
The Company opened an Ashworth Concept Store in Costa Mesa, California in
October 1997 to retail lifestyle products. These include Ashworth apparel, home
office and home theater furnishings, bathroom accessories, 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. 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 four 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, who won two PGA
events in 1996; (3) Dave Stockton, who was "Player of the Year" on the PGA
senior tour two of the past five years; and (4) Jim Nantz the popular CBS golf
announcer.
The Company is using these players and celebrities increasingly in
advertisements, in store displays, and for special appearances for trade shows
and store appearances.
The Company expanded its in-store shop program in 1997 and now has a
presence in approximately 200 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 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 is also developing its
AGCo line which will appeal to young golfers who are in their teens or early
twenties.
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 the Ashworth "in-store shop" concept utilizing the Company's new
fixture program. The Company has appointed Phillips-Ramsey as its exclusive
advertising agency through August 15, 1998, to assist with its marketing and
promotional needs.
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 business for fall and winter in the European
market are reducing the impact of the seasonality of the Company's business.
Sales in fiscal 1997 were $89,148,000 an increase of 18.2% over sales of
$75,413,000 in fiscal 1996. This increase was primarily due to an increase in
the volume of sales in the United States and in the European market.
During the last three fiscal years, the Company had the following domestic
and international sales of Ashworth products:
Year ended October 31,
--------------------------------------
1997 1996 1995
------ ------ ------
(In Thousands)
Consolidated Sales:
Domestic sales $ 70,129 $ 56,045 $ 56,346
Foreign sales:
Ashworth U.K. Ltd. 9,091 6,481 4,780
Other Foreign Jurisdictions 9,928 12,887 13,398
------ ------ ------
Total Foreign sales 19,019 19,368 18,178
------- ------- -------
Total sales $89,148 $75,413 $74,524
======= ======= =======
(See note 1 of Notes to the Financial Statements for sales, operating profit or
loss and identifiable assets of Ashworth U.K. Ltd.)
At December 31, 1997, the Company had backlog orders of approximately
$32,800,000 compared with approximately $27,800,000 at December 31, 1996. 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 from
customers placing their orders earlier or later than in the prior year.
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.
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 with 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 five years.
PRODUCT SOURCING
The Company sources its products in the following ways:
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. Approximately 70% of the cutting and sewing
work is performed by two main contractors. The Company has no written
agreements with these firms but has used their services 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.
Finished Goods Sourcing: The Company also sources finished garments made
to the Company's quality and styling specifications from manufacturers in Asia
and Europe. Approximately 25% of the Company's products were manufactured
outside of the United States in 1997 and in fiscal 1998 this will increase to
approximately 35%. Ashworth is now importing products from Italy, Scotland,
China, India, the Phillippines, Peru and Mexico. Although the general purpose
of purchasing goods offshore is to help increase the gross profit margin, the
Company will continue to place great emphasis on 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.
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 with a combined total of 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. On average, the Company embroiders
90,000 logos per week on approximately 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 based on
the volume of logos embroidered annually.
OPERATIONS
Approximately 99% of the Company's products are warehoused in and
distributed from its distribution facilities in Carlsbad, California. Drop-
shipments from off-shore factories directly to our international distributors
account for the other 1%.
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.
YEAR 2000 COMPUTER CONVERSION
The Company's computer operations run on an IBM AS400 computer. The
Company's software is based on an established, fully integrated, relational
database system designed for manufacturing companies and adapted for the
apparel industry. The programs currently running on the Company's computer
will have to be modified to accommodate the year 2000.
During fiscal 1998, the Company will complete a detailed analysis of the
program changes required, select an outside consultant to make the changes,
test the changes by in-house programmers and user departments and anticipates
implementing the changes by October 31, 1998.
It is estimated that expenditures on the Year 2000 project will be
approximately $135,000 in fiscal year 1998. The technical problems associated
with the project have been lessened to some degree by the use of a specialized
software package that will readily identify where date changes are required in
all of the individual programs.
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 for apparel and shoes on the Principal Register of the
United States Patent and Trademark Office. The Company filed an application in
January 1997 for registration of the Weather Systems word mark for apparel in
the United States and intends to register the mark for apparel throughout its
major international markets. Applications have been filed for the Ashworth
word mark, Ashworth design mark, and Golfman design marks for luggage, and
the Company intends to file applications for registration of these marks for
cosmetics and furniture as well.
The Company has obtained registration of the Ashworth word and design marks
and the Golfman design marks for apparel and shoes in 65 countries and is
processing applications for registration of these trademarks for these goods in
18 additional countries. The application process takes from six months to two
years to complete. The marks have also been registered or applications to
register them have been filed for luggage in all of the same countries.
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, a director and stockholder of the Company, has no
personal rights to the Ashworth trademark and will receive no compensation from
the Company for its use of the trademark.
EMPLOYEES
At December 31, 1997, the Company had approximately 420 regular and 154
seasonal full-time employees.
CAUTIONARY STATEMENTS AND RISK FACTORS
This report on Form 10-K contains certain forward-looking statements within
the meaning of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are based on the beliefs of
the Company's management as well as assumptions made by and information
currently available to the Company's management. When used in this document,
the words "anticipate", "believe", "may", "estimate" and similar expressions,
variations of such terms or the negative of such terms as they relate to the
Company or its management are intended to identify such forward-looking
statements. Such statements are based on management's current expectations
and are subject to certain risks, uncertainties and assumptions. Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, the Company's actual results, performance or
achievements could differ materially from those expressed in, or implied by,
such forward-looking statements.
Item 2. PROPERTIES
The Company owns two buildings located on Loker Avenue West in Carlsbad,
California, which were purchased on December 9, 1993, for $3,500,000. The
buildings total approximately 77,000 square feet, consisting of space for
administrative, embroidery, warehousing and distribution functions. The
purchase was financed with a down payment of $700,000 and a mortgage of
$2,800,000 amortized over thirty years but due and payable in seven years.
The Company and its subsidiaries have the following leases for
manufacturing and distribution facilities, as well as leases for retail space
for its stores:
Lease Min/Current Maximum
Square Expiration Base Rent Base Rent
Location Footage Date per Month per Month
- --------------- ------- ------- --------- ---------
($) ($)
Manufacturing and Distribution Centers:
Carlsbad, CA. 47,800 10/31/00 22,587 24,000
Vista, CA. 42,000 10/31/98 17,220 17,220
Essex, England 5,500 10/31/03 3,081 3,081 (a)
Essex, England 5,500 10/31/03 3,467 3,467 (b)
Retail Stores
San Ysidro, CA 2,450 4/30/98 4,088 4,088
San Marcos, TX 3,000 8/31/00 4,514 4,514
Vacaville, CA 2,500 11/30/00 4,638 5,060
Gretna, NE 2,000 2/28/99 2,500 2,500
Barstow, CA 2,300 12/31/00 4,420 4,420
Phoenix, AZ 4,000 9/30/00 5,644 5,976
Park City, UT 2,250 5/31/00 2,915 3,103
Hillsboro, TX 2,700 5/31/00 4,613 4,613
Silverthorne, CO 2,250 6/30/00 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
(a). The rate increase for years 6-10 is to be negotiated at the end of
year 5.
(b). The rate increase for years 5-9 is to be negotiated at the end of year
4.
The Company also pays percentage 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 has entered into guaranties for some portion or all of certain of
the subsidiaries' leases.
Item 3. LEGAL PROCEEDINGS.
There were no material pending or threatened legal proceedings to which the
Company or any of its subsidiaries was a party or of which any of their property
was the subject during fiscal 1997.
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.
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
Fiscal Year 1996
Quarter ended January 31, 1996 7 3/4 5
Quarter ended April 30, 1996 7 3/8 6
Quarter ended July 31, 1996 7 4 1/2
Quarter ended October 31, 1996 7 5/8 4 7/8
Fiscal Year 1997
Quarter ended January 31, 1997 7 1/8 5 1/4
Quarter ended April 30, 1997 8 5/8 5 3/8
Quarter ended July 31, 1997 11 1/8 7 3/8
Quarter ended October 31, 1997 11 1/2 9
Holders
There is only one class of Common Stock. As of December 31, 1997 there
were 747 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, 1997, 1996, and
1995 and the balance sheet data at October 31, 1997 and 1996 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, 1994 and 1993 and
the balance sheet data at October 31, 1995, 1994, and 1993 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,
--------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In thousands, except per share amount)
Statement of Income Data:
Net Sales $89,148 $75,413 $74,524 $60,839 $45,823
Gross Profit 34,103 27,395 25,025 23,898 17,816
Selling, general, and
administrative expense 25,282 24,087 21,521 15,525 11,161
Income from operations 8,821 3,308 3,504 8,373 6,655
Net Income 4,827 1,403 1,401 4,860 3,946
Net income per common and
equivalent share 0.37 0.12 0.12 0.40 0.34
Weighted average common
and equivalent shares
outstanding 13,215 12,098 12,112 12,224 11,766
October 31,
-----------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In thousands)
Balance Sheet Data:
Working capital $44,828 $31,583 $29,216 $26,368 $22,128
Total assets 68,817 54,912 58,072 47,694 33,757
Long-term debt
(less current portion) 4,336 5,307 5,195 5,774 2,885
Stockholders' equity 53,001 38,867 36,390 32,926 26,050
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.
RESULTS OF OPERATIONS
1997 compared to 1996
Consolidated net sales were $89,148,000 for fiscal 1997, an increase of 18.2%
over net sales of $75,413,000 in fiscal 1996. This increase resulted primarily
from larger volume sales of Ashworth apparel. Domestic sales for fiscal 1997
increased 25.1% to $70,129,000 from $56,045,000 in fiscal 1996. Foreign sales
decreased by 1.8% to $19,019,000 in fiscal 1997 from $19,368,000 in fiscal 1996
due primarily to the Company's decision to change its distributor in Japan,
which resulted in lower sales in that country in 1997. Sales from the Company's
subsidiary in England, in fiscal 1997, increased by 40.3% over the sales for the
prior year.
The gross profit margin for fiscal 1997 increased to 38.3% from 36.3% in
fiscal 1996. The gross margin improved primarily because there were fewer
excess inventory mark downs during fiscal 1997 compared to fiscal 1996, but
additionally from cost reductions obtained from contractors and from raw
material suppliers.
Selling, general and administrative expenses ("SG&A") for fiscal 1997
decreased to 28.4% of net sales compared to 31.9% in 1996. This percentage
reduction was the result, primarily, of the Company's cost-cutting measures
implemented during the second quarter of fiscal 1997. Actual SG & A expenses
were $25,282,000 in fiscal 1997 compared to $24,087,000 in 1996. This 5.0%
increase is much lower than the sales increase of 18.2% for the year.
Other expenses were $952,000 for fiscal 1997 compared to $948,000 in fiscal
1996. Bank borrowing in fiscal 1997 were much lower than in 1996 resulting in
interest payments of $116,000 for the year compared to $560,000 in 1996. The
interest reduction was offset by currency transaction losses of $400,000 by the
Company's subsidiary in England on payments it received from its customers in
other European countries. In fiscal 1996, the subsidiary had gains of $131,000
on these payments. (See Liquidity and Capital Resources-Currency Fluctuation.)
The effective income tax rate for fiscal 1997 decreased to 38.7% from 40.6%
in fiscal 1996. This decrease was due primarily to the non deductible expenses
being a much lower percentage of the pre-tax income in fiscal 1997 than they
were in fiscal 1996.
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 borrowing in fiscal 1996 resulted in higher interest payments of
$86,000 for the year which were offset by a currency transaction gain 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.)
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 build-up during this period is to provide product for shipment for the
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 1998.
Operations in fiscal 1997 produced a negative cash flow of $3,673,000,
compared to a positive cash flow of $8,467,000 in fiscal 1996. The primary
reasons for the negative cash flow were an increase in inventory and an increase
in the accounts receivable balance. Inventory increased by 36.1% to $33,645,000
at October 31, 1997 compared to $24,729,000 at October 31, 1996. The growth in
inventory reflects future booking trends as well as additional inventory for the
new young men's business, additional department store penetration and, for the
Company's new corporate sales division. The accounts receivable balance at
October 31, 1997, was 35.5% higher than the balance a year earlier. The
receivables balance is related to the credit sales (cash sales excluded) in the
preceding quarter which were 29.7% higher in the October quarter 1997 than in
the October quarter 1996. The Company also increased the time allowed for
payment by customers for its new basics program.
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, minus one-half of a percentage point (amended
by the bank from base rate only on July 31, 1997), 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 Company obtained a waiver for
one of the covenants during the year to enable it to make a short-term loan
to a shareholder. The line of credit may also be used to finance up to
$10,000,000 in commercial letters of credit and standby letters of credit.
At October 31, 1997, commercial letters of credit totaling $1,704,000 were
outstanding on this line of credit and at December 31, 1997, letters of
credit commitments were $3,922,000. Additionally, the loan agreement may be
used to enter into spot and forward foreign exchange contracts. At
October 31, 1997, the Company had no loan outstanding with the bank. At
December 31, 1997, the loan balance outstanding was $1,850,000.
During fiscal 1997, the Company invested $2,079,000 in personal property and
equipment, primarily for leasehold improvements, fixtures and fittings at the
Ashworth Studio Concept store, and for computer equipment and an embroidery
machine. For fiscal 1998, the Company has a capital equipment budget of
approximately $2,200,000 primarily for the implementation of computer networking
within the Company, computer equipment and embroidery machines. 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.
The Company's long-term debt, on October 31, 1997, 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
$2,705,000; notes payable on equipment purchases totaling $2,502,000 and
capitalized leases with principal sum liabilities of $243,000.
During fiscal 1997, share capital and additional paid in capital increased by
$10,060,000. During the year, options for 1,267,000 shares of common stock were
exercised in exchange for cash of $8,887,000 and a note receivable for $850,000.
The balance of $323,000 related to the fair value of stock options granted to
non employees.
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 stockholders' 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. See above under Results of Operations - Other expense.
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 is at risk
on its indebtedness to Ashworth, Inc. 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. When the financial statement of Ashworth U.K. Ltd. is
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
"Cumulative translation adjustment".
The Company purchased approximately 25% of its products from off-shore
manufacturers during fiscal 1997. All of these purchases were U.S. Dollar
denominated and, consequently, there was no currency exchange risk.
Derivatives.
During fiscal 1997, the Company entered into four foreign exchange contracts
with its bank to hedge against the impact of currency fluctuations between the
U.S. dollar and the British pound. Each contract provided that the Company would
sell the bank 300,000 G.B. pounds for a specified number of U.S. dollars. The
Company intends to enter into similar contracts with its bank in fiscal 1998.
Additionally, Ashworth U.K. Ltd. has entered into similar contracts with the
National Westminster Bank, in England, to hedge against currency fluctuations
between the pound and other European currencies.
Inflation.
Management believes that inflation has not had a material effect on the
Company's results of operations during the three most recent fiscal years.
New Accounting Standards
In February 1997, the FASB issued SFAS No. 128 "Earnings per Share". This
Statement specifies the computation, presentation, and disclosure requirements
for earnings per share for entities with publicly held common stock or potential
common stock. This Statement shall be effective for fiscal years ending after
December 15, 1997. Earlier application is not permitted. This Statement is
effective for the Company's fiscal year ending October 31, 1998.
In February 1997, the FASB issued SFAS No. 129 "Disclosure of Information
about Capital Structure". This Statement shall be effective for fiscal years
ending after December 15, 1997. This Statement requires additional informational
disclosures and is effective for the Company's fiscal year ending October 31,
1998.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income".
This Statement sets standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general- purposes financial statements. This Statement shall be effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
This Statement requires only additional informational disclosures and is
effective for the Company's fiscal year ending October 31, 1999.
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 shall be effective for fiscal years
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. This Statement
requires only additional informational disclosures and is effective for the
Company's fiscal year ending October 31, 1999.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements with respect to the Company are submitted
herewith:
1. Reports of Independent Public Accountants, pages F1 and F2.
2. Consolidated Balance Sheets-October 31, 1997 and 1996, pages F3 and F4.
3. Consolidated Statements of Income for the years ended October 31, 1997,
1996, and 1995, page F5.
4. Consolidated Statements of Stockholders' Equity for the years ended
October 31, 1997, 1996, and 1995, page F6.
5. Consolidated Statements of Cash Flows for the years ended October 31,
1997, 1996, and 1995, page F7.
6. Notes to Consolidated Financial Statements, pages F8 through F21.
7. Reports of Independent Public Accountants on Supplementary Schedule, pages
F22 and F23.
8. Supplementary Schedule, page F24.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On April 21, 1997, the board of directors elected to engage KPMG Peat
Marwick LLP to serve as its principal accountant to audit the Company's
financial statements for the fiscal year ending October 31, 1997. The former
principal accountant, the firm of Arthur Andersen & Co LLP., was thereby
dismissed as of that date. The auditor's reports of Arthur Andersen LLP.,
on the Company's financial statements for either of the past two fiscal
years did not contain any adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope, or accounting principles.
During the Company's two most recent fiscal years and the subsequent
interim period through April 21, 1997, the Company and its management had no
disagreements with Arthur Andersen LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Arthur Andersen
LLP, would have caused it to make a reference to the subject matter of the
disagreement in connection with its report.
In addition, during the two fiscal years ended October 31, 1996 and 1995,
and the subsequent interim period through April 21, 1997, (a) Arthur Andersen
LLP never advised the Company of any reportable events as defined in
paragraphs (A) through (D) of Regulation S-K Item 304(a)(1)(v); and (b) the
Company (or someone on its behalf) did not consult KPMG Peat Marwick LLP
regarding either: (I) the application of accounting principles to a specified
transaction or (ii) any matter that was either the subject of a disagreement
or a reportable event.
PART III
Items 10 to 13:
The information required by items 10 to 13, covering directors and
executive officers of the registrant, executive compensation, security
ownership of certain beneficial owners and management, and certain
relationships and related transactions, will be included in the Company's
Proxy Statement with respect to its 1998 Annual Meeting of Stockholders to be
filed with the Commission within 120 days of October 31, 1997, and is
incorporated herein 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
Reports of independent public accountants
Consolidated Balance Sheets - October 31, 1997 and 1996
Consolidated Statements of Income for the years ended
October 31, 1997, 1996, and 1995
Consolidated Statements of Stockholders' Equity for the years ended
October 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the years ended October 31, 1997,
1996, and 1995
Notes to Consolidated Financial Statements - October 31, 1997, 1996, and
1995
2. Financial Statement Schedule
Reports of independent public accountants on supplementary schedule
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, 1997.
(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 (filed as Exhibit 10(r)(2) to Registrant's Form 10-K for
the fiscal year ended October 31, 1996 (File No. 0-18553) and
incorporated herein by reference).
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 (filed as
Exhibit 10(r)(3) to Registrant's Form 10-K for the fiscal year
ended October 31, 1996 (File No. 0-18553) and incorporated
herein by reference).
11 Schedule computing net income per common share.
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
INEDPENDENT AUDITORS' REPORT
To the Stockholders of
Ashworth, Inc.:
We have audited the accompanying consolidated balance sheet of Ashworth, Inc.,
(a Delaware corporation) and subsidiaries as of October 31, 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
San Diego, California
December 12, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Ashworth, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheet of ASHWORTH, INC.,
(a Delaware corporation) and subsidiaries as of October 31, 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the two 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 the results of their operations and
their cash flows for each of the two 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, 1997 AND 1996
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 3,787,000 $ 1,954,000
Accounts receivable - trade,
net of allowance for doubtful
accounts of $648,000 and $480,000
in 1997 and 1996, respectively 11,971,000 8,836,000
Accounts receivable - other 735,000 877,000
Inventories 33,645,000 24,729,000
Income tax receivable 1,522,000 1,769,000
Other current assets 2,089,000 1,815,000
Deferred income tax asset 1,218,000 1,755,000
----------- ----------
Total current assets 54,967,000 41,735,000
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 1,200,000 1,200,000
Buildings and improvements 2,738,000 2,727,000
Production equipment 8,921,000 8,409,000
Furniture and equipment 7,460,000 6,836,000
Leasehold improvements 1,500,000 680,000
---------- ----------
21,819,000 19,852,000
Less accumulated depreciation
and amortization (9,729,000) (7,658,000)
---------- ----------
12,090,000 12,194,000
OTHER ASSETS 1,760,000 983,000
---------- ----------
$68,817,000 $54,912,000
========== ==========
(Continued)
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
OCTOBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,114,000 $ 1,512,000
Accounts payable 6,146,000 5,969,000
Accrued liabilities:
Salaries and commissions 979,000 965,000
Endorsement fees 357,000 732,000
Other 1,543,000 974,000
---------- ----------
Total current liabilities 10,139,000 10,152,000
LONG-TERM DEBT, net of current portion 4,336,000 5,307,000
DEFERRED INCOME TAX LIABILITY 676,000 586,000
OTHER LONG-TERM LIABILITIES 665,000 --
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; authorized
50,000,000 shares; issued and
outstanding 13,430,000 and 12,163,000
shares in 1997 and 1996, respectively 13,000 12,000
Capital in excess of par value 34,277,000 24,218,000
Retained earnings 19,527,000 14,700,000
Deferred compensation (59,000) (110,000)
Note receivable from stockholder (850,000) --
Cumulative translation adjustment 93,000 47,000
---------- ----------
53,001,000 38,867,000
---------- ----------
$68,817,000 $54,912,000
========== ===========
See accompanying notes to consolidated financial statements.
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED October 31, 1997, 1996 AND 1995
1997 1996 1995
NET SALES $89,148,000 $75,413,000 $74,524,000
COST OF GOODS SOLD 55,045,000 48,018,000 49,499,000
---------- ---------- ----------
Gross profit 34,103,000 27,395,000 25,025,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 25,282,000 24,087,000 21,521,000
---------- ---------- ----------
Income from operations 8,821,000 3,308,000 3,504,000
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income 67,000 35,000 63,000
Interest expense (606,000) (1,152,000) (1,051,000)
Net exchange gain (loss) (400,000) 131,000 (117,000)
Other income (expense), net (13,000) 38,000 17,000
---------- ---------- ----------
(952,000) (948,000) (1,088,000)
---------- ---------- ----------
Income before provision
for income taxes 7,869,000 2,360,000 2,416,000
PROVISION FOR INCOME TAXES 3,042,000 957,000 1,015,000
---------- ---------- ----------
Net income $ 4,827,000 $ 1,403,000 $ 1,401,000
========== ========== ==========
NET INCOME PER COMMON AND
EQUIVALENT SHARE $ .37 $ .12 $ .12
=========== =========== ===========
WEIGHTED AVERAGE COMMON AND
EQUIVALENT SHARES OUTSTANDING 13,215,000 12,098,000 12,112,000
========== ========== ==========
See accompanying notes to consolidated financial statements.
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED October 31, 1997, 1996 AND 1995
Capital
in
excess
Common Stock of par Retained
Shares Amount Value Earnings
------- ------- ---------- ----------
BALANCE,
October 31, 1994 11,575,000 $12,000 $21,086,000 $12,040,000
Options exercised,
including stock
option tax benefit 375,000 - 2,435,000 -
Treasury stock
acquired and
retired (48,000) - (278,000) (144,000)
Amortization of
deferred
compensation - - - -
Net income - - - 1,401,000
----------- -------- ---------- ----------
BALANCE,
October 31, 1995 11,902,000 12,000 23,243,000 13,297,000
Options exercised,
including stock
option tax benefit 261,000 - 975,000 -
Amortization of
deferred
compensation - - - -
Net income - - - 1,403,000
Translation adjustment - - - -
----------- ------- ---------- ----------
BALANCE
October 31, 1996 12,163,000 12,000 24,218,000 14,700,000
Options exercised,
including stock
option tax
benefit 1,267,000 1,000 10,059,000 -
Amortization of
deferred
compensation - - - -
Net income - - - 4,827,000
Note receivable
from stockholder - - - -
Translation adjustment - - - -
---------- ------ ---------- ----------
BALANCE,
October 31, 1997 13,430,000 $13,000 $34,277,000 $19,527,000
========== ======= =========== ===========
(Continued)
See accompanying notes to consolidated financial statements.
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, Continued
FOR THE YEARS ENDED October 31, 1997, 1996 AND 1995
Note Cumula-
Recei- tive
vable Trans-
Deferred from lation
Compen- Stock- Adjust-
sation holder ment Total
--------- --------- -------- ----------
BALANCE,
October 31, 1994 $(212,000) $ - $ - $32,926,000
Options exercised,
including stock
option tax benefit - - - 2,435,000
Treasury stock
acquired and
retired - - - (422,000)
Amortization of
deferred
compensation 51,000 - - 51,000
Net income - - - 1,401,000
---------- ------- ------ ----------
BALANCE,
October 31, 1995 (161,000) - - 36,391,000
Options exercised,
including stock
option tax benefit - - - 975,000
Amortization of
deferred
compensation 51,000 - - 51,000
Net income - - - 1,403,000
Translation adjustment - - 47,000 47,000
---------- ------ ------ ----------
BALANCE
October 31, 1996 (110,000) - 47,000 38,867,000
Options exercised,
including stock
option tax
benefit - - - 10,060,000
Amortization of
deferred
compensation 51,000 - - 51,000
Net income - - - 4,827,000
Note receivable
from stockholder - (850,000) - (850,000)
Translation adjustment - - 46,000 46,000
--------- -------- ------ ----------
BALANCE,
October 31, 1997 $(59,000) $(850,000) $93,000 $53,001,000
======== ========= ======= ===========
See accompanying notes to consolidated financial statements.
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED October 31, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,827,000 $ 1,403,000 $ 1,401,000
Adjustments to reconcile net income to
net cash provided by(used in)
operating activities:
Amortization of deferred compensation 51,000 51,000 51,000
Depreciation and amortization 2,142,000 2,303,000 2,514,000
Loss on disposal of property, plant
and equipment 39,000 17,000 33,000
Deferred income tax expense (benefit) 627,000 20,000 (1,121,000)
Compensation related to grant of
stock options 323,000 - -
Provision for doubtful accounts and
sales returns 168,000 64,000 558,000
Decrease (increase) in accounts
receivable (3,161,000) 1,397,000 (2,328,000)
Decrease (increase) in inventories (8,916,000) 3,117,000 (8,955,000)
Decrease (increase) in income tax
receivable 247,000 (529,000) (1,241,000)
Increase in other current assets (274,000) (164,000) (746,000)
Increase in other assets (796,000) (88,000) (484,000)
Increase (decrease) in accounts payable 177,000 104,000 (172,000)
Decrease in accrued income taxes - - (24,000)
Increase in accrued liabilities 208,000 772,000 787,000
Increase in other long-term liabilities 665,000 - -
---------- ---------- ----------
Net cash provided by (used in)
operating activities (3,673,000) 8,467,000 (9,727,000)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant
and equipment (1,980,000) (2,547,000) (2,129,000)
Proceeds from sale of property, plant
and equipment 21,000 2,000 3,000
Translation gain 46,000 47,000 -
---------- ---------- ----------
Net cash used in investing activities (1,913,000) (2,498,000) (2,126,000)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease
obligations (415,000) (668,000) (719,000)
Borrowings on line of credit 16,335,000 21,755,000 34,670,000
Payments on line of credit (16,335,000) (28,425,000)(28,000,000)
Borrowings on notes payable and
long-term debt - 1,930,000 945,000
Principal payments on notes payable
and long-term debt (1,053,000) (1,196,000) (787,000)
Proceeds from exercise of stock options 8,887,000 976,000 2,435,000
Treasury stock acquired - - (422,000)
---------- ---------- ---------
Net cash provided by (used in)
financing activities 7,419,000 (5,628,000) 8,122,000
---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,833,000 341,000 (3,731,000)
CASH AND CASH EQUIVALENTS,
beginning of year 1,954,000 1,613,000 5,344,000
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year 3,787,000 1,954,000 1,613,000
========== ========== ==========
Supplemental disclosure of cash flow information:
Interest paid 606,000 1,152,000 1,051,000
Income taxes paid 2,167,000 1,038,000 2,776,000
Supplemental disclosures of noncash transactions:
Capital lease equipment acquired and
related capital lease obligations 99,000 - 94,000
Note receivable issued to stockholder
for common stock 850,000 - -
See accompanying notes to consolidated financial statements.
ASHWORTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997, 1996 AND 1995
(1) The Company and Summary of Significant Accounting Policies
Business
Ashworth, Inc. (the "Company"), 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 label. The Ashworth
products have been retailed in golf pro shops, resorts, at better
department and specialty retail stores, and in selected international
markets.
The Company has wholly-owned subsidiaries, which own and operate the ten
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.
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.
The Company and the Company's subsidiaries had aggregate foreign sales
in Europe, Canada, Japan, Singapore, United Arab Emirates, Taiwan, Guam,
Indonesia, South Korea and others of approximately $19,019,000,
$19,368,000 and $18,178,000 in the years ended October 31, 1997, 1996
and 1995, respectively. The Company's wholly-owned United Kingdom
subsidiary had sales of $9,091,000, $6,481,000, and $4,780,000 and
operating income/(loss) of $382,000, $(167,000), and $(35,000) in the
years ended October 31, 1997, 1996 and 1995, respectively. Ashworth
U.K., Ltd. had identifiable assets of $2,920,000 and $2,673,000 as of
October 31, 1997 and 1996, 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.
Below is a summary of the components of inventory at October 31, 1997
and 1996:
1997 1996
Raw materials $ 5,055,000 $ 3,259,000
Work in process 3,664,000 1,937,000
Finished products 24,926,000 19,533,000
----------- -----------
$33,645,000 $24,729,000
=========== ===========
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 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.
Intangible Assets
Intangible assets, including organization costs, 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 expensed in the period the costs are incurred. Advertising expenses
for the years ended October 31, 1997, 1996 and 1995 were $559,000,
$435,000 and $533,000, 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 Common and Common Equivalent Share
Net income per common share amounts are computed based on the weighted-
average number of common shares outstanding during the year, including
the effect of common stock equivalents resulting from dilutive stock
options computed using the treasury stock method.
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.
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.
Adoption of this Statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.
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 not been material prior to October 31,
1996. 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. No significant contracts were outstanding at
October 31, 1997 and 1996.
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. 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.
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, 1997, 1996 and 1995, the Company
acquired $99,000, $0 and $94,000, respectively, of various equipment
under capital leases.
At October 31, 1997 and 1996, the accompanying consolidated balance
sheets include the following equipment under capital leases:
1997 1996
Production equipment $ 863,000 $1,620,000
Furniture and equipment 277,000 351,000
--------- ----------
1,140,000 1,971,000
Less accumulated amortization (561,000) (963,000)
--------- ----------
$ 579,000 $1,008,000
========== ==========
Amortization of assets held under capital leases is included with
depreciation expense.
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, 1997, 1996 and 1995, was $1,467,000, $1,289,000 and
$757,000, respectively. Future minimum lease payments under
noncancelable operating leases and future minimum capital lease payments
as of October 31, 1997 are:
Capital Operating
Year ending October 31, leases leases
----------------------- ---------- -----------
1998 $ 186,000 $ 1,213,000
1999 37,000 1,066,000
2000 30,000 1,030,000
2001 8,000 503,000
2002 - 440,000
Thereafter - 2,106,000
---------- -----------
Total minimum lease payments $ 261,000 $ 6,358,000
===========
Less amount representing interest(at
rates ranging from 5.37%to 8.82%) (18,000)
----------
Present value of future minimum
capital lease payments (Note 4) $ 243,000
=========
(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, 1999 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 8.5% at October 31,
1997. 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. The Company obtained a waiver for one of the
covenants during the year ended October 31, 1997 to enable it to make a
short-term loan to a stockholder. At October 31, 1997, no borrowings
were outstanding on this line of credit. The line of credit also
provides for a maximum of $10 million in commercial letters of credit and
standby letters of credit, of which $1.7 million were outstanding at
October 31, 1997. The total amount of unused revolving credit available
to the Company at October 31, 1997 was $18.3 million.
(4) Long-term Debt
Amounts outstanding under long-term debt agreements at October 31, 1997
and 1996 consist of the following:
1997 1996
---------- -----------
Installment notes bearing interest
ranging from 7.3% to 8.7%, with due
dates through February 2001,
collateralized by various equipment $2,502,000 $3,529,000
Note payable to a bank, bearing
interest at 8.0%, payable in monthly
principal and interest payments
of $20,245 through November 2000 with
a balloon payment of approximately $2.6
million payable on November 30, 2000,
collateralized by land and buildings 2,705,000 2,731,000
Capital lease obligations (Note 2) 243,000 559,000
---------- ----------
5,450,000 6,819,000
Less current portion (1,114,000) (1,512,000)
---------- ----------
Long-term debt $4,336,000 $5,307,000
========== ==========
Future maturities of long-term debt at October 31, 1997 are as follows:
Year ended October 31:
----------------------
1998 $1,114,000
1999 921,000
2000 678,000
2001 2,737,000
----------
$5,450,000
==========
(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, 1997, 1996 and
1995, was $142,000, $107,000 and $114,000, respectively.
(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 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 the Company's two 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.
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, 1997, the Company had 3,300,000
options outstanding under the above plans to purchase common stock at
prices ranging from $4.50 to $11.00 with expiration dates between
November 1997 and December 2006. At October 31, 1997, a total of
2,983,000 options remained available for grant, and 924,000 options with
exercise prices ranging from $6.00 to $11.00 were not exercisable.
The following is a summary of stock option activity for the three fiscal
years ended October 31, 1997:
Option exercise price per share
-------------------------------
Weighted-
Shares Range average
---------- ---------------- ---------
Balance at
October 31, 1994 2,681,000 $ .60 - 12.50 $ 7.21
Granted 1,077,000 7.00 - 10.63 9.72
Exercised (375,000) .60 - 8.50 4.54
Canceled (36,000) 6.00 - 12.50 8.35
--------- --------------- -----
Balance at
October 31, 1995 3,347,000 $2.25 - 12.50 8.34
Granted 2,307,000 5.00 - 7.50 6.10
Exercised (261,000) 2.25 - 6.00 2.51
Canceled (1,059,000) 5.50 - 12.50 9.69
--------- --------------- -----
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
========== =============== =====
The following is a summary of stock options outstanding at
October 31,1997:
Options outstanding Options exercisable
---------------------------------- ---------------------
Weighted-
average Weighted- Weighted-
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
--------------- ------------ ----------- ---------- ------------ ---------
$4.50 - 7.00 1,639,000 5.9 $6.15 1,043,000 $6.23
7.50 - 11.00 1,661,000 3.5 8.68 1,333,000 8.99
--------- ----- ------- --------- -----
3,300,000 4.6 $7.43 2,376,000 $7.72
========= ===== ======= ========= =====
At October 31, 1997, 1996 and 1995, the number of options exercisable
were 2,376,000, 3,212,000 and 2,489,000, respectively and the weighted-
average exercise price of those options were $7.72, $7.42 and $7.77,
respectively.
Effective fiscal year 1997, the Company adopted the disclosure
requirements of SFAS 123. As permitted under this Statement, the
Company will continue to measure stock-based compensation cost using the
current "intrinsic" accounting method under APB No. 25.
For purposes of the following pro forma disclosures required by
SFAS 123, the fair value of each option granted after fiscal 1995 has
been estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted-average assumptions used for
grants: risk-free interest rates of 5.55% to 6.65% in 1997 and 5.08% to
6.83% in 1996; expected volatility of 44.2% to 46.6% in 1997 and 1996;
and expected life of 1 to 7 years. 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 $3.00 in 1997 and
$2.52 in 1996. Had compensation cost for the Company's employee-based
stock option plans been determined consistent with SFAS 123, the Company
would have recorded net income of $3,246,000 or $.25 per share, in 1997
and a loss of ($861,000) or ($.07) per share, in 1996. These pro forma
calculations only include the effects of 1996 and 1997 grants. As such,
the impacts may not be representative of the effects on reported net
income in future years.
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 $27,000, $48,000 and $22,000 in charges related
to the difference in stock prices in 1997, 1996 and 1995, respectively.
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 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 in fiscal 1998.
(7) Commitments and Contingencies
Promotion Agreements with PGA Professionals and a Television Personality
The Company has promotional agreements with several PGA professionals,
one of which is a related party, 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 cash compensation recognized under these agreements
in fiscal year 1997, 1996 and 1995 was $803,000, $803,000 and $621,000,
respectively, of which in 1997, $657,000 of the $803,000 was paid to the
related party. Future minimum commitments under these agreements are
$657,000 payable in the years 1998 through 2010 and $548,000 payable in
2011 to the related party, and $49,000 payable in 1998 to others.
The Company issued 261,000 stock options 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 in 1997 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:
192,500 in 1998, 160,000 in 1999 and 150,000 per year from years 2000
through 2011.
The majority of these stock options were granted with 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 $214,000, $546,000 and $253,000 in
charges related to the difference in stock prices in 1997, 1996 and
1995, respectively, of which $0, $340,000 and $181,000 in 1997, 1996 and
1995, respectively, was paid to a related party.
Executive Employment Agreements
The Company entered into an employment agreement with a key executive,
effective January 1, 1995. The agreement specifies the amount of annual
compensation the executive is to receive and also contains a noncompete
agreement. The noncompete agreement (which if based upon current salary
level would aggregate approximately $1,438,000) is based upon a
percentage of the executive's then current salary, as defined, and is in
effect for the term of the agreement 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 1997 and 1996, $35,000 and $32,000, respectively,
were accrued and charged to operations for the executive and are
reflected in other accrued liabilities in the accompanying consolidated
balance sheets.
The Company entered into an agreement with another key executive on
December 1, 1996, 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
agreement with the executive includes severance payments upon
termination of employment under specific circumstances, such payments
ranging from one-half to two times the executive's then annual base
salary.
Effective June 25, 1997 the Company entered into a noncompete agreement
pursuant to the termination of 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
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 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.
(8) Related-Party Transactions
At October 31, 1995, the Company had a note receivable from an officer
for $320,000. During 1996, the entire balance of the note was
collected.
At October 31, 1996, the Company had a note receivable from a former
officer for $50,000. During 1997, the entire balance of the note was
collected.
In September 1997, a stockholder of the Company exercised stock options
in exchange for a note receivable of $850,000. The note is secured by
the underlying common stock, accrues interest annually at 8% and is due
on March 26, 1998.
Starting in 1997, Ashworth, Inc. 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
$255,000 for the year ended October 31, 1997.
(9) Income Taxes
The provision for income taxes for the years ended October 31, 1997,
1996 and 1995 is as follows:
1997 1996 1995
----------- ---------- ----------
Current provision:
Federal $1,966,000 $697,000 $1,625,000
State 449,000 240,000 511,000
----------- -------- ----------
Total 2,415,000 937,000 2,136,000
----------- -------- ----------
Deferred provision
(benefit):
Federal 434,000 17,000 (857,000)
State 193,000 3,000 (264,000)
----------- -------- ----------
Total 627,000 20,000 (1,121,000)
----------- -------- -----------
$3,042,000 $957,000 $1,015,000
========== ======== ==========
The components of the Company's deferred income tax benefit and
liability as of October 31, 1997 and 1996 are as follows:
1997 1996
----------- -----------
Current deferred income tax benefit:
Allowance for doubtful accounts $ 176,000 $ 126,000
Inventory reserves 383,000 1,230,000
Other nondeductible accruals 617,000 428,000
Other deductible capitalized costs 42,000 (29,000)
---------- ----------
$1,218,000 $1,755,000
========== ==========
Long-term deferred income tax
liability - depreciation $ 676,000 $ 586,000
========== ==========
The Company has recorded a net deferred income tax asset of $542,000 and
$1,169,000 as of October 31, 1997 and 1996, 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:
1997 1996 1995
---------- --------- ----------
Computed income tax at the
expected statutory rate $2,675,000 $ 802,000 $ 822,000
State income tax, net of
federal tax benefits 411,000 144,000 147,000
Nondeductible expenses 33,000 46,000 42,000
Foreign sales corporation
tax benefit (48,000) (54,000) (60,000)
Other (29,000) 19,000 64,000
---------- --------- ---------
Income tax provision $3,042,000 $ 957,000 $1,015,000
========== ========= ==========
(10) Results By Quarter (Unaudited)
The unaudited results by quarter for the years ended October 31, 1997
and 1996 are shown below:
Year ended First Second Third Fourth
October 31, 1997 Quarter Quarter Quarter Quarter
----------------- ------------ ----------- ----------- -----------
Net sales $19,841,000 $30,618,000 $21,702,000 $16,987,000
Gross profit 7,469,000 11,655,000 7,980,000 6,999,000
Net income 1,164,000 2,892,000 767,000 4,000
Net income per
common and common
equivalent share .10 .23 .06 .00
Weighted-average
common and common
equivalent shares
outstanding 12,217,000 12,653,000 13,826,000 14,164,000
Year ended First Second Third Fourth
October 31, 1996 Quarter Quarter Quarter Quarter
---------------- ----------- ----------- ----------- -----------
Net sales $17,070,000 $26,356,000 $17,884,000 $14,104,000
Gross profit 6,601,000 10,955,000 6,693,000 3,147,000
Net income 834,000 2,517,000 198,000 (2,146,000)
Net income per
common and common
equivalent share .07 .21 .02 (.18)
Weighted-average
common and common
equivalent shares
outstanding 11,958,000 12,233,000 12,154,000 12,063,000
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Ashworth, Inc.:
Under date of December 12, 1997, we reported on the consolidated balance sheet
of Ashworth, Inc. and subsidiaries as of October 31, 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for
the year then ended, which are included in the registration statement. In
connection with our audit 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 audit.
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 Peat Marwick LLP
San Diego, California
December 12, 1997
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 as of and for the two years in the period
ended October 31, 1996 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
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, 1995:
Allowance for
doubtful account $255,000 $558,000 $ - $46,000 $767,000
======== ======== ======= ======= ========
FOR THE YEAR ENDED
OCTOBER 31, 1996:
Allowance for
Doubtful accounts $767,000 $64,000 $ - $351,000 $480,000
======== ======= ======= ======== ========
FOR THE YEAR ENDED
OCTOBER 31, 1997:
Allowance for
Doubtful accounts $480,000 $323,000 $ - $155,000 $648,000
======== ======== ======= ======== ========
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, 1998 BY: /s/ Randall L. Herrel, Sr.
Randall L. Herrel, Sr.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Gerald W. Montiel Chairman of the Board January 28, 1998
Gerald W. Montiel
/s/ Randall L. Herrel, Sr. President and January 28, 1998
Randall L. Herrel, Sr. Chief Executive Officer
(Principal Executive Officer)
/s/ John Newman Vice President-Finance, January 28, 1998
John Newman Treasurer,Chief Financial
Officer (Principal Financial
and Accounting Officer)
/s/ John M. Hanson, Jr. Director January 28, 1998
John M. Hanson, Jr.
/s/ Andre P. Gambucci Director January 28, 1998
Andre P. Gambucci