FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1999
OR
[ ] 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. Employee
incorporation or organization) Identification No.)
2791 LOKER AVENUE WEST
CARLSBAD, CA 92008
(Address of Principal Executive Offices)
(760) 438-6610
(Telephone No. Including Area Code)
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 the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest
practicable date.
Title Outstanding at September 13, 1999
$.001 par value Common Stock 14,079,773
<PAGE>
INDEX
PAGE
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 11
Part II. Other Information 12
Signatures 14
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
------------ ------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $5,814,000 4,763,000
Account receivable-trade,net 26,999,000 19,924,000
Accounts receivable - other 2,602,000 459,000
Inventories 28,795,000 35,288,000
Income tax refund receivable 184,000 1,149,000
Other current assets 2,850,000 3,160,000
Deferred income tax asset 1,565,000 1,486,000
------------ -----------
Total current assets 68,809,000 66,229,000
PROPERTY, PLANT AND EQUIPMENT 24,952,000 24,139,000
Less accumulated depreciation
and amortization (13,397,000) (11,823,000)
------------ ------------
11,555,000 12,316,000
OTHER ASSETS 2,652,000 3,089,000
------------ ------------
$83,016,000 $81,634,000
============ ============
LIABILITIES AND STOCKHOLDERS'EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 716,000 $ 940,000
Accounts payable - trade 5,491,000 6,260,000
Accrued liabilities 2,679,000 2,714,000
----------- -----------
Total current liabilities 8,886,000 9,914,000
LONG-TERM DEBT, net of current portion 2,897,000 3,445,000
DEFERRED INCOME TAX LIABILITY 744,000 738,000
OTHER LONG TERM LIABILITIES 332,000 432,000
STOCKHOLDERS' EQUITY:
Common stock 14,000 14,000
Capital in excess of par value 42,037,000 42,259,000
Retained earnings 28,149,000 24,827,000
Deferred compensation -- (8,000)
Accumulated other comprehensive
income (loss) (43,000) 13,000
----------- -----------
70,157,000 67,105,000
----------- -----------
$83,016,000 $81,634,000
=========== ===========
</TABLE>
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
July 31, July 31,
1999 1998 1999 1998
------------------------- -------------------------
<S> <C> <C> <C> <C>
NET SALES $30,067,000 $25,598,000 $85,419,000 $87,681,000
COST OF GOODS SOLD 19,213,000 16,380,000 54,754,000 52,734,000
------------ ----------- ----------- -----------
Gross profit 10,854,000 9,218,000 30,665,000 34,947,000
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES 8,429,000 8,019,000 24,833,000 22,999,000
------------ ----------- ----------- -----------
Income from
operations 2,425,000 1,199,000 5,832,000 11,948,000
OTHER INCOME (EXPENSE):
Interest income 33,000 69,000 53,000 112,000
Interest expense (72,000) (109,000) (345,000) (341,000)
Other income(expense) 46,000 53,000 (85,000) (38,000)
--------- ---------- ----------- ----------
Total other
income (expense) 7,000 13,000 (377,000) (267,000)
Income before
provision for
income tax expense 2,432,000 1,212,000 5,455,000 11,681,000
PROVISION FOR INCOME
TAX EXPENSE 951,000 430,000 2,133,000 4,520,000
---------- ---------- ----------- ----------
Net income $1,481,000 $782,000 $3,322,000 $7,161,000
NET EARNINGS PER SHARE
Basic:
Weighted average shares
outstanding 14,064,000 14,702,000 14,074,000 14,211,000
Net earnings per
share $0.11 $0.05 $0.24 $0.50
Diluted:
Weighted average shares
outstanding 14,085,000 15,253,000 14,083,000 15,001,000
Net earnings per
share $0.11 $0.05 $0.24 $0.48
</TABLE>
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended July 31,
1999 1998
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net cash provided by (used in)
operating activities $2,954,000 ($5,287,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (854,000) (1,953,000)
Proceeds from sale of equipment 1,000 --
----------- -----------
Net cash used in investing activities (853,000) (1,953,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital
lease obligations (45,000) (160,000)
Borrowing on line of credit 16,065,000 3,025,000
Payments on line of credit (16,065,000) (3,025,000)
Principal payments on notes payable
and long-term debt (727,000) (716,000)
Proceeds from issuance of common stock 12,000 13,250,000
Payments for repurchase of common stock (234,000) (3,483,000)
Repayment of loan by stockholder -- 850,000
----------- ----------
Net cash provided by (used in)
financing activities (994,000) 9,741,000
Effect of exchange rate changes on cash (56,000) (134,000)
----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,051,000 2,367,000
CASH AND CASH EQUIVALENTS,
beginning of period 4,763,000 3,787,000
----------- ----------
CASH AND CASH EQUIVALENTS, end of period $5,814,000 $6,154,000
=========== ==========
</TABLE>
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999
NOTE 1- Basis of Presentation.
In the opinion of management, the accompanying
condensed consolidated balance sheets and related
interim condensed consolidated statements of
operations and cash flows include all
adjustments (consisting only of normal
recurring items) necessary for their fair
presentation. The preparation of financial
statements in conformity with generally
accepted accounting principles requires
management to make estimates and assumptions
that affect the reported amounts of assets,
liabilities, revenues, and expenses. Actual
results could differ from those estimates.
Interim results are not necessarily
indicative of results to be expected for the full
year.
Certain information in footnote disclosures
normally included in financial statements has
been condensed or omitted in accordance with
the rules and regulations of the Securities and
Exchange Commission. The information included
in this Form 10-Q should be read in conjunction
with Management's Discussion and Analysis of
Financial Condition and Results of
Operations, and financial statements and
notes thereto included in the annual report
on Form 10-K for the year ended October 31, 1998 filed
with the Securities and Exchange Commission.
NOTE 2 - Inventories.
Inventories consisted of the following at July 31, 1999, and October 31, 1998:
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
----------- -----------
<S> <C> <C>
Raw materials $4,692,000 $4,221,000
Work in process 1,864,000 1,949,000
Finished goods 22,239,000 29,118,000
----------- -----------
$28,795,000 $35,288,000
=========== ===========
</TABLE>
<PAGE>
NOTE 3 - Earnings Per Share Information.
Basic earnings per share has been computed
based upon the weighted average number of
common shares outstanding during the period.
Diluted earnings per share has been computed
based upon the weighted average number of
common shares outstanding plus the dilutive
effects of common shares potentially issuable from the
exercise of stock options. Common stock options
are excluded from the computation of net earnings
per share if their effect is anti-dilutive.
The following table sets forth the computation
of basic and diluted earnings per share based
upon the requirements of SFAS No. 128:
<TABLE>
<CAPTION>
Three months ended Nine months ended
July 31, July 31,
1999 1998 1999 1998
---------------------- ------------------------
Numerator:
<S> <C> <C> <C> <C>
Net income -
Numerator for basic and
diluted earnings per share-
income available to common
shareholders $1,481,000 $782,000 $3,322,000 $7,161,000
========== ========= ========== ==========
Denominator:
Denominator for basic
earnings per share -
weighted average shares 14,064,000 14,702,000 14,074,000 14,211,000
Effect of dilutive
securities:
Employee stock options 21,000 551,000 9,000 790,000
----------- ---------- ---------- ----------
Denominator for diluted
earnings per share - adjusted
weighted average shares and
assumed conversions 14,085,000 15,253,000 14,083,000 15,001,000
=========== ========== ========== ==========
Basic earnings per share $0.11 $0.05 $0.24 $0.50
Diluted earnings per share $0.11 $0.05 $0.24 $0.48
</TABLE>
For the quarters ended July 31, 1999 and 1998 the diluted
weighted average shares outstanding computation excludes
2,487,000 and 58,000 anti-dilutive options, respectively.
For the nine months ended July 31, 1999 and 1998 the diluted
weighted average shares outstanding computation excludes
2,525,000 and 58,000 anti-dilutive options, respectively.
<PAGE>
NOTE 4 - Comprehensive Income.
As of November 1, 1998 the Company adopted SFAS No. 130 Reporting
Comprehensive Income. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components.
SFAS No. 130 requires the cumulative translation adjustment to be
included as a component of the comprehensive income (loss) in addition
to net income (loss) for the period. For the quarters ended
July 31, 1999 and 1998, total comprehensive income was $1,522,000
and $613,000, respectively. For the nine-month periods ended
July 31, 1999 and 1998, total comprehensive income was $3,266,000
and $7,027,000, respectively.
NOTE 5 - Legal Proceedings.
On January 22, 1999, a class action was
commenced in the United States District Court
for the Southern District of California ("U.S.
District Court") purportedly on behalf of
purchasers of the Company's common stock during
the period between September 4, 1997 and July 15, 1998
alleging violations of the Securities Exchange Act of
1934 by the Company and certain of its officers and
directors. The complaint alleged, among other things, that,
during the class period, Company executives made
positive statements about the Company's business
including statements concerning product demand,
offshore production and inventories. The
complaint further alleged that the defendants
knew these statements to be false when made
and concealed adverse conditions and trends in
the Company's business during the class period.
The plaintiff sought to recover unspecified
damages on behalf of all purchasers of the
Company's common stock during the period
September 4, 1997 to July 15, 1998. Subsequently,
two additional class actions were commenced in
U.S. District Court which alleged similar conduct, added
certain allegations regarding financial reporting and
expanded the shareholders purportedly represented from the
above referenced period to the periods of September 4, 1997
through December 17, 1998 and December 17, 1997 through
July 15, 1998. The U.S. District Court has consolidated these
matters, appointed co-lead plaintiffs, co-lead
counsel, and ordered that plaintiffs file a
consolidated and amended complaint. However,
the filing of the consolidated and
amended complaint has been postponed, pursuant to
stipulation and court order, until the earlier
of: (i) thirty days after the Ninth Circuit
Court of Appeals decides the Silicon Graphics
case (the decision which will impact the
pleading standard for this case); or (ii) October
21, 1999. The U.S. District Court has further approved a
stipulation dismissing Company spokesperson Fred Couples as
a defendant in the action. To date, no formal discovery has
occurred in the matter, no class action has been certified and
no contested motions have been filed or heard.
Although the consolidated and amended complaint
has not been filed, it is management's intent to
vigorously defend this action.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Third Quarter 1999 compared to Third Quarter 1998
Consolidated net sales for the third quarter of
fiscal 1999 increased 17.5% to $30,067,000 from
$25,598,000 for the same period in 1998.
Domestic sales increased 20.9% to $26,465,000 from
$21,899,000 in the July quarter 1998, due to higher
sales in the Company's retail department stores,
corporate business as well as the golf distribution
channel. Foreign sales decreased 2.6% to $3,602,000
from $3,699,000 for the same period of the prior
year primarily due to the lower sales in South East
Asia. This decline was partially offset by the
increase in the Company's European subsidiary and
in Canada.
Consolidated gross profit for the quarter increased
slightly to 36.1% as compared to 36.0% a year
earlier.
Consolidated selling, general and administrative expenses
increased 5.1% to $8,429,000 primarily due to the addition of
the Canadian division. As a percent of sales,
SG&A expenses decreased to 28.0% of net sales for
the third quarter of fiscal 1999 compared to 31.3% in
the third quarter of fiscal 1998, reflecting
increased sales and continuing focus on cost
efficiencies. The Company installed an additional
70 golfman shop fixtured locations during the
third quarter, bringing the total number to 785 at
July 31, 1999.
Net other income decreased to $7,000 for the third quarter of
fiscal 1999 from $13,000 in the third quarter of 1998,
due primarily to a lower currency transaction gain by Ashworth UK Ltd.
in its transactions with Ashworth, Inc.
The effective income tax rate for the quarter was 39.1% of pretax
income and is consistent with the actual tax rate used in fiscal
year 1998.
Nine months ended July 31, 1999 compared to nine months ended July 31, 1998
Consolidated net sales for the first nine months of
fiscal 1999 decreased 2.6% to $85,419,000 from
$87,681,000 for the same period in 1998.
Domestic sales increased 2.2% to $73,695,000 from
$72,115,000 in the first nine months of fiscal
1998, primarily due to higher sales in the Company's
retail department stores business. Foreign sales
decreased 24.7% to $11,724,000 from $15,566,000
for the same period of the prior year. The
decline was primarily due to lower sales in
the Company's European subsidiary as a result of
softened demand and lower sales to South East
Asia. This decline was partially offset by
the increased sales to Canada.
Consolidated gross profit for the nine months
decreased to 35.9% as compared to 39.9% for the
same period a year earlier. This was primarily
due to a higher per unit cost resulting from
increased domestic sourcing as well as higher sales
discount and allowance expense in the first two
quarters of fiscal 1999 as compared to the same
period in fiscal 1998.
Consolidated selling, general and administrative expenses
increased 8.0% to $24,833,000 or 29.1% of net sales for the nine
months compared to 26.2% for the same period in
fiscal 1998. The increase was due primarily to the
addition of the Canadian division subsequent to the
third quarter of fiscal 1998 as well as increased
costs of distribution. The Company installed a
total of 185 golfman shop fixtured locations
during the first nine months of fiscal year 1999,
bringing the total number to 785 at July 31, 1999.
Net other expenses increased to $377,000 from
$267,000 in the first nine months of fiscal
1998, due primarily to a higher currency transaction loss
by Ashworth UK Ltd. in its transactions with Ashworth, Inc.
and lower interest income due to reduced average cash investments.
The effective tax rate in the first nine months of
fiscal 1999 was 39.1% of pre-tax income and is
consistent with the actual tax rate used in fiscal
year 1998.
Capital Resources and Liquidity
The Company's primary sources of liquidity are expected to be
its working capital line of credit with its bank
and other financial alternatives such as leasing.
The Company requires cash for expansion of its domestic and
international sales, capital expenditures and for
general working capital purposes. The Company has
a $20,000,000 working capital line of credit with
Bank of America. At July 31, 1999, and July 31,1998
the Company had no amounts outstanding against the line.
Trade receivables were $26,999,000 at July 31, 1999,
an increase of $7,075,000 over the balance at
October 31, 1998. Because the Company's business is
seasonal, the receivables balance may more
meaningfully be compared to the balance of
$25,021,000 at July 31, 1998, rather than the
year-end balance. This shows an increase of 7.9%
in receivables which is primarily due to higher sales.
Inventory decreased to $28,795,000 from $35,288,000
at October 31, 1998, a decrease of 18.4%.
Compared to the inventory of $32,839,000 at July
31, 1998, inventory decreased by 12.3%. This is
primarily attributable to the successful execution
of the inventory management initiative consisting of
reduced number of styles and a more conservative
buying philosophy, which was started in the earlier
part of the current fiscal year.
During the first nine months of fiscal 1999,
the Company incurred capital expenditures of
$854,000 mainly for computer equipment, embroidery
machines and leasehold improvements.
Common stock and capital in excess of par value
decreased by $222,000 in the nine months ended July
31, 1999 primarily due to the repurchase of shares.
The Company repurchased 50,000 shares of its
common stock in June 1999 at an aggregate cost
of $234,000 and retired those shares in September 1999.
This brings the total repurchased shares to 727,000 of the
1,000,000 shares originally authorized by the board
of directors in July 1998. In the month of
September 1999, the Company repurchased 50,000
shares of its common stock at an aggregate cost
of $232,000. The Company is currently authorized
to repurchase up to an additional 950,000 shares.
Based upon current levels of operations, the
Company expects that sufficient cash flow will be
generated from operations so that, combined with
other financing alternatives available, including
cash on hand, bank credit facilities, and
leasing alternatives, the Company expects to be able
to meet all of its debt service, capital
expenditure, and working capital requirements.
Derivatives
The Company enters into short-term foreign
exchange contracts with its bank to hedge
against the impact of currency fluctuations
between the U.S. dollar and the British pound. The
contracts provide that, on specified dates, the
Company will sell the bank a specified number of
British pounds in exchange for a specified number of U.S. dollars.
Additionally, the Company's subsidiary in England
has similar contracts with its bank to hedge
against currency fluctuations between the British
pound and other European currencies. Realized
gains and losses on these contracts are recognized
in the same period as the hedged transactions.
These contracts have maturity dates that do not
normally exceed 12 months. As of July 31, 1999
the Company had outstanding foreign currency
forward exchange contracts with a notional value
of approximately $2.3 million dollars and had an
unrealized gain of $28,000.
Year 2000 Computer Conversion
Historically, most databases, as well as
embedded microprocessors in computer systems and
industrial equipment, were designed with date data
using only two digits of the year. Most computer
programs, computers, and embedded microprocessors
controlling equipment were programmed to assume
that all two digit dates were preceded by
"19", causing "00" to be
interpreted as the year 1900. This formerly common
practice now could result in a computer system or
embedded microprocessor that fails to recognize
properly a year that begins with a "20", rather
than "19". This in turn could result in computer
system miscalculations or failures, as well as
failures of equipment controlled by the date-
sensitive microprocessors, and is
generally referred to as the "Year 2000" problem.
The Company's computer operations currently run on
an IBM AS400 computer. The Company's software is
based upon an established, fully integrated,
relational database system designed for
manufacturing companies and adapted for the
apparel industry. The programs running on the
Company's computer had to be modified to
accommodate the Year 2000. Certain of the Company's
manufacturing equipment have embedded chips
that are date sensitive and will have to be
modified to accommodate the Year 2000.
During fiscal 1998, the Company completed a detailed
analysis of the program changes required and hired
outside consultants to work with in-house staff
to make the necessary modifications. As of April 5, 1999,
100% of the system changes were completed.
The Company's ancillary systems are scheduled to be
Year 2000 compliant by October 31, 1999. The
Company has tested 100% of its renovated systems
and has determined that the majority of these
systems are now Year 2000 compliant. There can
be no guarantee that target dates will be met as a
result of a number of factors including the
continuing availability of outside consultants. It
is estimated that expenditures for the Year 2000
project were approximately $135,000 in fiscal 1998
and will be approximately $255,000 in fiscal 1999
with costs being paid out of working capital.
This estimate, based upon currently
available information, will be updated as the
Company continues its assessment and proceeds with
implementation and testing, and may need to be
revised upon receipt of more information from
vendors of material goods and services and upon the
design and implementation of the Company's
contingency plan.
The Company has assessed its non-information
technology systems such as embedded chip and
micro controllers used in its facilities and
operations and has determined that its card key
security system was not compliant. The security
system has been upgraded and is compliant as of
August 2, 1999.
The Company has identified and sent letters to
approximately 500 key vendors in an attempt to
gain assurance of vendors' Year 2000 readiness,
with responses originally requested by January 31,
1999. The Company has received a response from
approximately 15% of its vendors. The Company has
identified which of its vendors it believes are
critical to its business. The Company expects to
continue discussions with the critical vendors of
goods and services throughout 1999 to attempt to ensure the
uninterrupted supply of goods and services and to
develop contingency plans in the event of the
failure of any such vendors to become and remain
Year 2000 ready. The Company will also seek to
develop contingency plans for alternate sources of
goods and services for those currently
supplied by non-critical third party
vendors. The Company continues to develop
contingency plans to limit the effect of any
Year 2000 issues on the results of operations
and intends to complete all contingency planning by
the end of 1999.
If some or all of the Company's remediated or
replaced internal computer systems fail the
testing phase, or if any software applications
or embedded microprocessors critical to the
Company's operations are overlooked in the
assessment and implementation phases, there could
be a material adverse effect on the Company's
results of operations, liquidity and financial
condition of a magnitude which the Company has not
yet fully analyzed.
In addition, the Company has not been assured that
the computer systems of its vendors of material
goods and services will be Year 2000 ready in a
timely manner or that the computer systems of third
parties with which the Company's computer
system exchanges data will be Year 2000 ready both
in a timely manner and in a manner compatible with
continued data exchange with the Company's computer
systems.
If the vendors of the Company's most important
goods and services, or the suppliers of the
Company's necessary energy, telecommunications, and
transportation needs fail to provide the Company
with the materials and services which are necessary
to produce, distribute, and sell its products, the
electrical power and other utilities to sustain its
operations, or reliable means of obtaining
supplies and transporting products to its
customers, such failure could have a material
adverse effect on the results of operations,
liquidity and financial condition of the Company.
New Accounting Standards
In June 1997, the FASB issued SFAS No. 131
Disclosures about Segments of an Enterprise and
Related Information. This Statement established
standards for the way that public business
enterprises report information about operating
segments in annual financial statements and
requires that enterprises report selected information about
operating segments in interim
financial reports issued to stockholders. This
Statement 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.
In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, which establishes accounting and
reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires that an
entity recognize all derivatives as either assets or
liabilities in the statement of financial position
and measure those instruments at fair value. In
July 1998 the FASB issued SFAS No. 137 which
delays the effective date of SFAS No. 133 to all
fiscal years beginning after July 15, 2000. Thus
SFAS No. 133 is effective for the Company's fiscal
year ending October 31, 2001 and is not expected to
have a material effect on the Company's financial
position or results of operations.
Cautionary Statements and Risk Factors
This report on Form 10-Q contains certain
forward-looking statements, including without
limitation those regarding the Company's plans
and expectations for revenue growth, product
lines, designs and seasonal collections, marketing
programs, foreign sourcing, cost controls, inventory
levels, availability of working capital and Year
2000 readiness. These plans and expectations are
subject to a number of risks and uncertainties that
could cause actual results to differ materially from
those anticipated, and the Company's business in
general is subject to certain risks that could
affect the value of the Company's stock. These
risks include the following:
Demand for the Company's products may
decrease if the popularity of golf decreases.
Like other apparel manufacturers, the Company must
correctly anticipate and help direct fashion trends
within its industry. The Company's results of
operations could suffer if it fails to develop
fashions and styles that are well received in any
season.
The market for golf apparel and sportswear is extremely
competitive. While the Company is a leader in the
core green grass market, it has several strong
competitors that are better capitalized and have
stronger distribution systems. Outside the green
grass market, the Company's market share is not
significant. Price competition or industry
consolidation could weaken the Company's competitive
position.
The Company relies upon domestic and foreign contractors to
manufacture various products. If these contractors
deliver goods late or fail to meet the Company's
quality standards, the Company could lose sales.
There can be no assurance that the Company's future
revenues will not decline due to various factors, including
potential consolidation of the Company's core green
grass market, which could result in discounting, as
well as possible general declines in economic
conditions from the levels recently experienced.
The Company maintains high levels of inventory to support
its Basics program, and additional products, greater sales
volume, and customer trends toward increased "at-
once" ordering may require increased inventory.
Disposal of excess prior season inventory is an
ongoing part of the Company's business, and
inventory writedowns may materially impair the
Company's financial performance in any period.
Particular inventory may be subject to multiple
writedowns if the Company's initial reserve
estimates for inventory obsolescence or lack of
throughput prove to be too low. These risks
increase as inventory grows.
The Company's and/or its vendors' computer systems may not
be Year 2000 compliant which could result in the
Company's inability to produce, distribute and/or
sell its products.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company enters into short-term foreign exchange
contracts with its bank to hedge against the
impact of currency fluctuations between the U.S.
dollar and the British pound. The contracts provide
that, on specified dates, the Company will sell
the bank a specified number of British pounds in
exchange for a specified number of U.S. dollars.
Additionally, the Company's subsidiary in England
has similar contracts with its bank to hedge
against currency fluctuations between the British
pound and other European currencies. Realized
gains and losses on these contracts are recognized
in the same period as the hedged transactions.
These contracts have maturity dates that do not
normally exceed 12 months. As of July 31, 1999,
the Company had outstanding the following material
purchased foreign currency forward exchange
contracts (in thousands, except average contract
rate):
<TABLE>
<CAPTION>
Weighted-
Contract Average Unrealized
Amount Rate Gain (loss)
Foreign Currency US $ Against US $
Forward Contracts Equivalent Sterling Equivalent
----------------------- ------------ ----------- ----------
<S> <C> <C> <C>
British Pounds Sterling $1,638.9 1.639 $18.2
Danish Krone 164.1 11.157 3.6
French Francs 115.6 9.815 1.5
Deutsche Marks 336.0 2.928 4.1
Irish Punts 63.2 1.180 0.7
-------- ------
$2,317.8 $28.1
======== ======
</TABLE>
PART II
OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
On January 22, 1999, a class action was commenced
in the United States District Court for the
Southern District of California ("U.S. District
Court") purportedly on behalf of purchasers of the
Company's common stock during the period between
September 4, 1997 and July 15, 1998 alleging
violations of the Securities Exchange Act of 1934
by the Company and certain of its officers and
directors. The complaint alleged, among other
things, that, during the class period, Company
executives made positive statements about the
Company's business including statements concerning
product demand, offshore production and inventories.
The complaint further alleged that the defendants
knew these statements to be false when made
and concealed adverse conditions and trends in
the Company's business during the class period. The
plaintiff sought to recover unspecified damages on
behalf of all purchasers of the Company's common
stock during the period September 4, 1997 to July
15, 1998. Subsequently, two additional class
actions were commenced in U.S. District Court
which alleged similar conduct, added certain
allegations regarding financial reporting and
expanded the shareholders purportedly represented
from the above referenced period to the periods of
September 4, 1997 through December 17, 1998 and
December 17, 1997 through July 15, 1998. The
U.S. District Court has consolidated these
matters, appointed co-lead
plaintiffs, co-lead counsel, and ordered that
plaintiffs file a consolidated and amended
complaint. However, the filing of the consolidated
and amended complaint has been postponed, pursuant
to stipulation and court order, until the earlier
of: (i) thirty days after the Ninth Circuit
Court of Appeals decides the Silicon Graphics
case (the decision which will impact the
pleading standard for this case); or (ii) October
21, 1999. The U.S. District Court has further
approved a stipulation dismissing Company spokesperson
Fred Couples as a defendant in the action. To date, no
formal discovery has occurred in the matter, no class
action has been certified and no contested motions
have been filed or heard. Although the consolidated
and amended complaint has not been filed, it is
management's intent to vigorously defend this action.
Item 2 CHANGES IN SECURITIES AND USE OF PROCEEDS - NONE
Item 3 DEFAULTS UPON SENIOR SECURITIES - NONE
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE
Item 5 OTHER INFORMATION - NONE
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) 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.3345078) 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).
4(d) Rights Agreement dated as of October 6,
1998 by and between Ashworth, Inc. and
American Securities Transfer & Trust, Inc.
(filed as Exhibit 99.1 to Registrant's Form 8A
of Registration Statement filed on October
9, 1998, (File No. 001-14547) and
incorporated herein by reference).
10(a) Offer and Acceptance of Executive Employment
effective June 1, 1999 by and between
Ashworth, Inc. and Suzi
Chauvel.
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the
Company during the third quarter of the
fiscal year ending October 31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements 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: September 14, 1999 By: /s/ Randall L.Herrel, Sr.
Randall L. Herrel, Sr.
President and Chief Executive Officer
Date: September 14, 1999 By: /s/ Terence W. Tsang
Terence W. Tsang
Chief Financial Officer
EXHIBIT 10(a) May 24, 1999
Ms. Suzi Chauvel
P.O. Box 1994
Laguna Beach, California 92652
Re: Employment at Ashworth, Inc.
Dear Suzi:
In accordance with our recent discussions, we are
pleased to confirm our offer to you of a position
with Ashworth, Inc. (the "Company") upon the
following terms and conditions:
1. Position; Reporting; Commencement. The position shall be
Chief Marketing Officer, and you shall report to
Randall Herrel in his position of President / CEO.
You shall commence employment on June 1, 1999. (The
Company understands that you may need a few personal
days off to finalize the close of your existing
business and agrees to work with you to arrange a
smooth transition.) You will be a member of the
Company's Executive Committee and Operating Committee.
You will be required to observe the Company's
personnel and business policies and procedures. In
the event of any conflict, the terms of this letter
will control.
2. Base Salary; Reviews. You will receive an annual salary of
$150,000.00, less applicable withholding and
deductions, which is payable bi-weekly on Fridays.
Employees are generally given performance reviews on
or about October of each year.
3. Bonus Program. You have an opportunity to receive a bonus
based net income specified in the Business Plan. The
bonus will be 30% of your annual salary if the Company
meets the Plan; or 40% of annual salary if the Company
exceeds the Plan by 20% or more.
4. Stock Options. On the day your employment commences under
this agreement, the Company will grant you 35,000
options to purchase shares of the Company's common
stock at an exercise price equal to the closing share
price that same day. The options will vest over a
four year period, i.e., 8,750 vesting on the one year
anniversary of employment commencement; 8,750 vesting
on the two year anniversary of employment
commencement; 8,750 vesting on the three year
anniversary of employment commencement; and 8,750
vesting on the four year anniversary of employment
commencement. Options will be exercisable for a period
of time from the vesting date as defined by the
Company's Stock Option Plan. You have an opportunity
to receive additional stock options each year during
the annual review process.
5. Savings Plan. You will be eligible to participate in the
Company's 401(k) Plan at the first entry date
following the completion of six months continuous
employment with the Company. Under the current
provisions, you will be eligible as of January 1,
2000.
6. Insurance Benefits. The Company will provide you with
coverage under its group medical, dental, life and
long-term disability policies as more specifically
described in the group insurance materials which will
be provided to you upon your commencement of
employment. The cost of the medical and dental
coverage will be shared between you and the Company,
depending on your plan and coverage elections. Your
insurance program will be effective August 1, 1999.
The Company reserves the right to change, modify or
eliminate such benefits or coverages in its
discretion.
7. Business Expenses; Auto Allowance; Cellular Phone; Clothing
Allowance. You will receive reimbursement for normal,
ordinary and reasonable business expenses upon your
submission of receipts substantiating the expenses
claimed in accordance with Company policy. In
addition, you will receive an auto allowance of
$350.00 per month. This is a taxable fringe benefit
which will be paid bi-weekly with you regular payroll.
You will receive a Company paid cellular phone, usage
will be in accordance with Company policy. You will
receive a Clothing Allowance in accordance with
Company policy.
8. Confidentiality; Use of Licensed Software; Solicitation of
Employees; Return of Property; Termination. You
acknowledge that, in the course of your employment
with the Company, you will have access to confidential
information concerning the organization and
functioning of the business of the Company, and that
such information is a valuable trade secret and the
sole property of the Company. Accordingly, except as
required by law, legal process, or in connection with
any litigation between the parties hereto with respect
to matters arising out of this agreement, you agree
that you will not, at any time during your employment
with the Company or after such employment, whether
such employment is terminated as a result of your
resignation or discharge, disclose or furnish any such
information to any person other than an officer of the
Company, and you will make no use of any such
information for your personal benefit.
The Company licenses the use of computer software
from a variety of outside companies and, unless
authorized by the software developer, does not
have the right to reproduce it. You may use
software only in accordance with the license
agreement, whether on local area networks or on
multiple machines. If you learn of any misuse of
software or related documentation within the
Company, you must notify your department manager.
If you make, acquire or use unauthorized copies
of such computer software, you shall be
disciplined as appropriate under the
circumstances. Such discipline may include
termination.
You agree that for a period of two years from the
date of voluntary or involuntary termination, you
will not solicit on your behalf, or on behalf of
a third party, any then current employee of the
Company, to leave his or her employment with the
Company for employment with another employer.
You further agree that in the event of such
termination, whether voluntary or involuntary,
you will not remove from the offices of the
Company any personal property that does not
rightfully and legally belong to you and that you
will return on the date of your said termination,
to an authorized representative of the Company,
any and all property belonging to the Company.
You also agree that you will provide passwords on
request for personal computer files.
9. At-Will Employment. You understand and agree that you are
being employed for an unspecified term and that this
is an "atwill" employment relationship. This means
that either you or the Company may terminate your
employment at will at any time with or without cause
or notice. If the Company terminates your employment
for any reason other than gross negligence or
misconduct, the Company agrees to pay you a severance
package equal to six months of your base salary. This
at-will aspect of your employment, which includes the
right of the Company to transfer, discipline, demote
and/or reassign, may not be modified, amended or
rescinded except by an individual written agreement
signed by both you and the Company's President. This
letter sets forth the entire agreement between the
parties and there are no prior or contemporaneous
representations, promises or conditions, whether oral
or written, to the contrary.
This offer of employment is contingent upon the satisfactory
completion of a background check, verifying that the
information provided by you on your application and
resume is accurate and correct. The Company reserves
the right to withdraw an offer of employment, or to
terminate employment, at any time based on information
arising from the background check.
If you are in agreement with the terms of this letter,
please sign and return one copy of the enclosed letter
to the Human Resource Department to effect the
commencement of your employment. Please call if you
have any questions or problems.
Sincerely,
/s/Randall L. Herrel, Sr.
Randall L. Herrel, Sr.
President / CEO
ACCEPTED AND AGREED TO
THIS 27th DAY OF MAY, 1999
/s/Suzi Chauvel
Suzi Chauvel
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 5,814,000
<SECURITIES> 0
<RECEIVABLES> 27,962,000
<ALLOWANCES> 963,000
<INVENTORY> 28,795,000
<CURRENT-ASSETS> 68,809,000
<PP&E> 24,952,000
<DEPRECIATION> 13,397,000
<TOTAL-ASSETS> 83,016,000
<CURRENT-LIABILITIES> 8,886,000
<BONDS> 2,897,000
0
0
<COMMON> 14,000
<OTHER-SE> 70,143,000
<TOTAL-LIABILITY-AND-EQUITY> 83,016,000
<SALES> 85,419,000
<TOTAL-REVENUES> 85,419,000
<CGS>
54,754,000
<TOTAL-COSTS> 79,587,000
<OTHER-EXPENSES> 32,000
<LOSS-PROVISION> 277,000
<INTEREST-EXPENSE> 345,000
<INCOME-PRETAX> 5,455,000
<INCOME-TAX> 2,133,000
<INCOME-CONTINUING> 3,322,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,322,000
<EPS-BASIC> 0.24
<EPS-DILUTED> 0.24
