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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1998
[__] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-18553
ASHWORTH, INC.
DELAWARE 84-1052000
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2791 LOKER AVENUE WEST, CARLSBAD, CA 92008
(Address of Principal Executive Office, including Zip Code)
(760) 438-6610
(Registrant's Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [__]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [__]
The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of December 31, 1998, was $ 75,371,000 based upon the last
reported sale price of the Company's Common Stock as reported by the Nasdaq
National Market System.
There were 14,079,773 shares of common stock, $.001 par value, outstanding at
the close of business on December 31, 1998.
PART III is incorporated by reference from the Registrant's definitive Proxy
Statement for its 1999 Annual Meeting of Stockholders to be filed with the
Commission within 120 days of October 31, 1998.
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CAUTIONARY STATEMENTS AND RISK FACTORS
This report on Form 10-K contains certain forward looking statements, including
without limitation those regarding the Company's plans and expectations for
revenue growth, product lines, designs and seasonal collections, marketing
programs, foreign sourcing, cost controls, inventory levels, 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 to direct fashion within its industry. The Company's results of
operations could suffer if it fails to develop fashions and styles that are
well received in any season.
. The Company's business is seasonal, and sales in the fourth calendar quarter
have historically been particularly weak.
. The market for golf apparel and sportswear is extremely competitive. While
the Company is the leader in the core green grass market, it has several
strong competitors that are better capitalized and have stronger distribution
systems. Outside 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 continue to
increase at the rate experienced for fiscal year 1998 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 robust 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 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.
2
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PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION OF THE COMPANY
Ashworth, Inc., based in Carlsbad, California, was incorporated in Delaware
on March 19, 1987. It changed its corporate name from Charter Golf, Inc. to
Ashworth, Inc. on April 6, 1994. The Company designs, markets and distributes a
full line of quality sports apparel, headwear, and accessories under the
Ashworth(R) label. The Ashworth products 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. A division was opened on November 1,
1998 to distribute the Company' s products in Canada. Ashworth, Inc. and its
wholly-owned subsidiary, Ashworth U.K., Ltd., were partners of a Luxembourg
partnership, Ashworth, Inc. et Cie., formed to qualify for trademark
registration in Europe under the Madrid Convention until September 1, 1998 when
the partnership was dissolved.
NARRATIVE DESCRIPTION OF BUSINESS
At its inception, the Company designed and marketed classically-styled,
natural fiber golfwear and distributed it in the United States under the
Ashworth(R) brand exclusively to golf pro shops and resorts. The Company has
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 men's and women's golf
lifestyle apparel is aimed predominately at the younger active male and female
consumers in the middle/upper middle income range and is priced in the middle to
upper middle price range for golf apparel. For the past few years, Ashworth has
been a leading golf apparel line sold at pro shops in the United States. The
Company also sells lifestyle products including home office and home theatre
furnishings, bathroom accessories and small gift items through its concept
retail store opened in October 1997.
ASHWORTH PRODUCTS
All Ashworth products are designed in-house with the exception of footwear.
IGF, the exclusive licensee of Ashworth footwear, designs, produces and markets
the Ashworth footwear line through its own independent sales force.
The Ashworth Men's Division designs two Spring, two Summer, three Fall, one
Resort, one Holiday, one Weather Systems and one Basics collection per year.
Each collection consists of approximately 30 to 40 styles. Product design is
largely one of classic, timeless designs with an emphasis on quality and natural
fibers.
The Ashworth Men's collections consists of knit and woven shirts,
pullovers, sweaters, vests, pants, shorts, hats, and accessories. The Company
also designs a Weather Systems(TM) collection made largely of technical fabrics
and produced for a variety of weather conditions including cold and rainy as
well as hot and humid. In 1996, the Company introduced a Basics line of shirts,
pants and shorts in popular styles and colors that do not change significantly
from season to season.
Ashworth introduced its new Women's Line in 1998. The Women's Division
designs three Spring/Summer, four Fall/Holiday and one Basics collection per
year. Each collection consists of approximately 20 to 30 styles. Product
design incorporates casual elegance and timeless simplicity with an emphasis on
quality.
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DISTRIBUTION CHANNELS
Approximately 93% of the Company's products are warehoused in and shipped
from its distribution facilities in Carlsbad, California. Drop-shipments from
off-shore factories directly to international distributors account for 2% and
approximately 5% are made in Europe for delivery to Ashworth U.K. Ltd.
The Company distributes and sells its products through the following six
channels of distribution.
U.S. GOLF PRO SHOPS, RESORTS AND OFF-COURSE GOLF SPECIALTY SHOPS
The Company's core customers are golf pro shops located at golf courses.
According to the 1998 Darrell Survey, a leading golf industry consumer usage
survey, the Company is the leading golf apparel company in the United States
with a 10.6% market share. The Company presently distributes to pro shops in
nearly all of the 50 states.
U.S. 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,
Belk, Bloomingdales and Barneys of New York.
U.S. CORPORATE MARKET
The Company has established a corporate division to leverage its brand name
and product line into corporate America. It has a dedicated sales force that
markets its clothing through top specialty-advertising firms that sell Ashworth
to Fortune 500 companies and other major corporations for use in their company
stores, sales meetings, company catalogs and recognition awards.
INTERNATIONAL MARKET
The Company operates a wholly-owned subsidiary in Essex, England that
distributes Ashworth products to customers, either directly or through
independent sales representatives in the United Kingdom and other European
countries such as Germany, France, Spain, Sweden, Switzerland and Portugal. On
November 1, 1998, the Company opened a division, operated by Almec Leisure
Group, which will distribute Ashworth products in Canada.
The Company also uses distributors to sell the Ashworth products in other
countries such as 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, without limitation,
Ashworth apparel, home office and home theater furnishings, bathroom
accessories, soft furnishings and small gift items.
4
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SALES AND MARKETING
The Company's products are sold in the United States and Europe largely by
independent sales representatives who are not employees of the Company or its
subsidiaries. The Company presently has 61 sales representatives in the United
States and 34 sales representatives in Europe and Canada. The Company uses 10
different distributors in other international locations.
In an effort to add exposure and consumer credibility to its Ashworth
brand, the Company has five popular and well known golf celebrities who wear and
endorse the Company's products. They are: (1) Fred Couples, considered by many
to be the most popular golfer in the world; (2) John Cook, the 1998 Champion of
the GTE Byron Nelson Tournament; (3) Dave Stockton, Sr., a player on the Senior
PGA tour; (4) Scott Verplank; and (5) Jim Nantz, the popular CBS golf announcer.
The Company is using these players and celebrities increasingly in
advertisements, in store displays, and for trade shows, store and other special
appearances.
The Company expanded its in-store shop program in 1998 and now has a
presence in approximately 600 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's domestic market for the Ashworth apparel has been seasonal,
with the highest sales traditionally in the period January through August and
the lowest volume in the months of September through December. The Company
hopes that the addition of the department and specialty retail store market, the
Corporate market, and additional business for fall and winter in the European
market will help to reduce the seasonality of the Company's business.
Sales in fiscal 1998 were $107,341,000, an increase of 20.4% over sales of
$89,148,000 in fiscal 1997. This increase was primarily due to an increase in
the volume of sales of Ashworth apparel due to increased number of accounts as
well as increased average order size.
During the last three fiscal years, the Company had the following domestic
and international sales of Ashworth products:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1998 1997 1996
-------------- ----------------- --------------
CONSOLIDATED SALES: (In Thousands)
<S> <C> <C> <C>
Domestic sales $ 89,389 $70,129 $56,045
Foreign sales:
Ashworth U.K. Ltd. 10,637 9,091 6,481
Other Foreign Jurisdictions 7,315 9,928 12,887
-------- ------- -------
Total Foreign sales 17,952 19,019 19,368
TOTAL SALES $107,341 $89,148 $75,413
======== ======= =======
</TABLE>
See Note 1 of Notes to the Consolidated Financial Statements for sales,
operating income or loss and identifiable assets of Ashworth U.K. Ltd.
At December 31, 1998, the Company had backlog orders of approximately
$38,300,000 compared with approximately $32,800,000 at December 31, 1997.
Backlog reflects orders placed with the Company
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prior to the quarter in which the goods are to be shipped, as opposed to
"at-once" orders which are received in the quarter in which the goods are
expected to be shipped. The current backlog covers orders for goods expected to
be shipped through approximately July 1999. The amount of backlog orders at a
particular time is affected by a number of factors, including the timely flow of
product from suppliers and local contractors which can impact the Company's
ability to ship on time, and the timing of customers' orders. Accordingly, a
comparison of backlog orders from period to period is not necessarily meaningful
and may not be indicative of eventual actual shipments in any period. In
addition, orders may be changed or canceled prior to the ship date of the order,
preventing the Company from converting backlog into revenue.
INVENTORY
The Company's goal is to increase the inventory turns and lower the overall
inventory levels relative to sales. However, disposal of its inventory of excess
prior season merchandise may result in the gross margin for fiscal year 1999
being lower than historical gross margin levels.
COMPETITION
According to the 1998 Darrell Survey, the Ashworth brand is the leader in
the Company's core green grass market, with a 10.6% market share, and the
Ashworth brand has been the market leader in the golf pro shop business for the
past five years. The Company's share of other markets it has more recently
entered, including upscale department stores and the corporate market, is minor.
The golf apparel market is not dominated by any single company, and is highly
competitive both in the United States and abroad. The Company competes not only
with golf apparel manufacturers, but also with other branded sports and
sportswear apparel manufacturers who have entered the growing golf apparel
market in recent years. Many of the Company's competitors have greater
financial resources and greater experience than the Company.
PRODUCT SOURCING
The Company sources its products in the following ways:
CONTRACT MANUFACTURING: Approximately 80% of the cutting and sewing work
for the Company's knit shirts and pullovers is performed by two main independent
cutting and sewing contractors in the San Diego area. 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.
READY-MADE FINISHED GOODS: The Company also purchases ready-made goods,
manufactured to the Company's quality and styling specifications, domestically
and from sources outside of the United States. In fiscal 1998, the Company
increased the proportion of the goods made offshore. Ashworth is now importing
products from China, Hong Kong, India, Italy, Mexico, the Phillippines, Peru,
Scotland, Taiwan, Turkey and other countries. Although the general purpose of
purchasing goods offshore is to improve the gross profit margin, the Company
will continue to place great emphasis on quality.
IN-HOUSE MANUFACTURING: The Company operated its own in-house hat
manufacturing facility until July 1998. At that time, the Company began
purchasing the headwear offshore, primarily Taiwan and China, in an effort to
increase the profitability of headwear merchandise sales.
IN-HOUSE EMBROIDERY: The embroidery of custom golf course logos and
tournament logos is done in-house by the Company. The Company operates 44
multi-head, computer-controlled embroidery machines with a total of 442 sewing
heads. The embroidery design library contains over 25,000 Company and customer
designs. Embroidery is applied to both garments and finished headwear. On
average, the Company embroiders 95,000 logos per week on approximately 70,000
garments.
6
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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 which 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 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 running on the Company's computer will have to be
modified to accommodate the Year 2000. Certain of the Company's manufacturing
equipment has embedded chips which 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 October 31, 1998, 60% of the
system changes were completed with implementation of all changes scheduled for
March 31, 1999. The Company's ancillary systems are on schedule to be Year 2000
compliant by June 30, 1999. The Company has tested 70% of its renovated systems
and has determined that 50% of these systems are now Year 2000 compliant. The
Company is scheduled to complete testing by May 31, 1999. 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 $180,000 in fiscal 1999 with costs being
paid out of working capital. This estimate, based on 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 is not compliant. The target
date for completion of the security system upgrade is June 30, 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 requested by January 31, 1999. The Company is in the process of
identifying which of those vendors it considers to be 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
develop contingency plans for alternate sources of goods and services for those
currently supplied by non-critical third party vendors.
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
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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.
The Company is in the initial stages of developing a business contingency
plan to address unavoided or unavoidable Year 2000 risks. Although the Company
expects to have a plan developed by March 31, 1999, enhancements and revisions
will be continually made during the balance of 1999.
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, and the Weather Systems word mark. The Ashworth word and
design marks and the Golfman design marks have been registered for apparel,
shoes, leather goods, including golf bags on the Principal Register of the
United States Patent and Trademark Office.
The Company has obtained registration of the Ashworth word and design marks
and the Golfman design marks for apparel and shoes in approximately 65 countries
and is processing applications for registration of these trademarks for these
goods in approximately 18 additional countries. The application process usually
takes from six months to two years to complete. The marks also have been
registered or applications to register them have been filed for luggage/golf
bags in many of the same countries.
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.
EMPLOYEES
At December 31, 1998, the Company had approximately 461 regular and 154
seasonal temporary employees.
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,
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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 $2,800,000 amortized over thirty years but due and payable in seven
years.
The Company and its subsidiaries have the following leases for
manufacturing and distribution facilities, as well as leases for retail space
for its stores:
<TABLE>
<CAPTION>
Lease Min/Current Maximum
Square Expiration Base Rent Base Rent
Location Footage Date Per Month per Month
- ------------------ ------------ --------------- ----------------- --------------
($) ($)
MANUFACTURING AND DISTRIBUTION CENTERS:
<S> <C> <C> <C> <C>
Carlsbad, CA 47,800 10/31/00 23,000 24,000
Vista, CA 42,000 10/31/99 18,060 18,060
Essex, England 5,500 10/31/03 3,791 3,791
Essex, England 5,500 10/31/03 3,791 3,791
RETAIL STORES
San Ysidro, CA 2,450 4/30/03 4,252 4,974
San Marcos, TX 3,000 8/31/00 4,514 4,514
Vacaville, CA 2,500 11/30/00 4,849 5,060
Gretna, NE 2,000 2/28/99 2,500 2,500
Barstow, CA 2,300 12/31/99 4,420 4,420
Phoenix, AZ 4,000 9/30/00 5,976 5,976
Park City, UT 2,250 5/31/00 3,103 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
</TABLE>
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 1998.
On January 22, 1999, Milberg Weiss Bershad Hynes & Lerach LLP filed a class
action in the United States District Court for the Southern District of
California 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 alleges 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 alleges that the defendants knew these statements to be false
and concealed adverse conditions and trends in the Company's business during the
class period. The plaintiff seeks to recover unspecified damages on behalf of
all purchasers of the Company's common stock during the period September 4, 1997
to July 15, 1998. The Company was served a copy of the complaint on January 26,
1999 and is currently in the process of reviewing it.
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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "ASHW". The following table sets forth the high and low sale prices
on the Nasdaq National Market for the quarters indicated.
HIGH LOW
FISCAL YEAR 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
FISCAL YEAR 1998
Quarter ended January 31, 1998 14 3/8 10
Quarter ended April 30, 1998 18 3/8 13 1/4
Quarter ended July 31, 1998 18 1/16 6 14/16
Quarter ended October 31, 1998 8 1/4 5 7/16
HOLDERS
There is only one class of Common Stock. As of December 31, 1998 there
were 682 stockholders of record and approximately 10,000 beneficial owners of
the Company's Common Stock.
DIVIDENDS
No dividends have been declared during the past two fiscal years with
respect to the Common Stock.
ITEM 6. 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, 1998, 1997, and
1996 and the balance sheet data at October 31, 1998 and 1997 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, 1995 and 1994 and
the balance sheet data at October 31, 1996, 1995, and 1994 are derived from
audited financial statements not included in this report. No dividends have
been paid for any of the periods presented.
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<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
1998 1997 1996 1995 1994
------------ ---------- ---------- ---------- ----------
STATEMENT OF INCOME DATA: (In thousands, except per share amount)
<S> <C> <C> <C> <C> <C>
Net Sales $107,341 $89,148 $75,413 $74,524 $60,839
Gross Profit 40,622 34,103 27,395 25,025 23,898
Selling, general and administrative expense 31,691 25,282 24,087 21,521 15,525
Income from operations 8,931 8,821 3,308 3,504 8,373
Net income 5,300 4,827 1,403 1,401 4,860
Net income per basic share 0.37 0.39 0.12 0.12 0.42
Weighted average basic shares outstanding 14,185 12,403 12,026 11,798 11,455
Net income per diluted share 0.36 0.38 0.12 0.12 0.41
Weighted average diluted shares outstanding 14,805 12,564 12,078 12,008 11,930
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31,
1998 1997 1996 1995 1994
------------ ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $56,315 $44,828 $31,583 $29,216 $26,368
Total assets 81,634 68,817 54,912 58,072 47,694
Long-term debt (less current portion) 3,445 4,336 5,307 5,195 5,774
Stockholders' equity 67,105 53,001 38,867 36,390 32,926
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
Consolidated net sales were $107,341,000 for fiscal 1998, an increase of
20.4% over net sales of $89,148,000 in fiscal 1997. Domestic sales for fiscal
1998 increased 27.5% to $89,389,000 from $70,129,000 in fiscal 1997 primarily
from larger volume sales of Ashworth apparel due to increased number of accounts
as well as increased average order size. Foreign sales decreased by 5.6% to
$17,952,000 in fiscal 1998 from $19,019,000 in fiscal 1997 due primarily to
lower sales in Asia. Sales from the Company's subsidiary in England, in fiscal
1998, increased by 17.0% over sales from the prior year. There can be no
assurance that net sales will continue to increase at the rate experienced in
1998, including as a result of the risks described under "Cautionary Statements
and Risk Factors."
The Company's management anticipates that sales in the first quarter of fiscal
year 1999 will be lower than in the first quarter of fiscal year 1998. Sales to
Canada in the first quarter of 1998 were made to an independent distributor
whereas they will be made through an Ashworth-owned division in 1999 that will
ship the sales in the second and third quarter. Additionally, preliminary
bookings for Asia are lower for the first quarter 1999 than they were for the
first quarter of 1998. Also, early bookings at the Ashworth subsidiary in
England indicate that sales will be lower in the first quarter of 1999.
The gross profit margin for fiscal 1998 decreased to 37.8% from 38.3% in
fiscal 1997. The Company has experienced a reduction in its average unit cost
from offshore sourcing of some of its product but this improvement was offset by
sales discounts and increased mark downs of prior season inventory. The
Company's goal is to increase the inventory turns and lower the overall
inventory levels relative to sales. However, aggressive sales plans, discounting
and disposal of its inventory of excess prior season merchandise may result in
gross margin for fiscal year 1999 being lower than historical gross margin
levels.
11
<PAGE>
Selling, general and administrative expenses ("SG&A") for fiscal 1998
increased to 29.5% of net sales compared to 28.4% in 1997. Actual SG & A
expenses were $31,691,000 in fiscal 1998 compared to $25,282,000 in 1997. This
25.4% increase is higher than the sales increase of 20.4% for the year and is
due primarily to investment in sales and marketing programs and increased
distribution expenses. The Company spent more on advertising and sales
incentive programs in fiscal 1998 than in 1997 and also incurred start-up costs
associated with the launch of the Women's line and the development of the new
Corporate sales division. The Company also incurred additional sales and
customer service expenses and additional distribution expenses in fiscal year
1998 because of problems encountered with the quality and timeliness of certain
products produced in Central and South America. Management is currently in the
process of addressing these issues.
Net other expenses were $241,000 for fiscal 1998 compared to $952,000 in
fiscal 1997. Interest expense declined to $451,000 in fiscal year 1998 from
$606,000 in fiscal year 1997 due primarily to reduced borrowing on the Company's
line of credit with the bank. Interest income increased to $152,000 in the
current year as compared to $67,000 in 1997 as a result of increased cash. In
fiscal 1998, currency transaction gains were $45,000 as compared to currency
transaction losses of $400,000 in fiscal 1997. This improvement resulted from
the use of forward foreign exchange contracts by the Ashworth subsidiary in
England in its business with customers in continental Europe.
The effective income tax rate for fiscal 1998 increased slightly to 39.0%
from 38.7% in fiscal 1997, due primarily to expenses which are non-deductible
for tax purposes being higher in fiscal 1998 than they were in fiscal 1997.
During the fourth quarter of fiscal year 1998 the Company incurred a net
loss of $1,861,000 as compared to a net income of $4,000 in the same period of
the prior year. The net loss in the fourth quarter of fiscal year 1998 was
primarily attributable to adjustments related to excess prior season inventory,
the decision to discontinue the Company's young men's (AGCo label) line,
additional investment in sales and marketing programs to increase the
Fall/Holiday account base and increased expenditures to market the Company's new
women's and corporate divisions.
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.
Net other expenses were $952,000 for fiscal 1997 compared to $948,000 in
fiscal 1996. Bank borrowings 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.
12
<PAGE>
The effective income tax rate for fiscal 1997 decreased to 38.7% from 40.6%
in fiscal 1996. This decrease was due primarily to expenses which are non-
deductible for tax purposes being lower in fiscal 1997 than they were in fiscal
1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are expected to be cash flows
from operations, a working capital line of credit with its bank, and other
financial alternatives such as leasing. 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, the bank line of credit and
leasing alternatives will be sufficient to meet the Company's working capital
requirements through fiscal 1999.
Operations in fiscal 1998 produced a negative cash flow of $4,284,000,
compared to a negative cash flow of $3,673,000 in fiscal 1997. The primary
reasons for the negative cash flow were an increase in the accounts receivable
balance and an increase in inventories. The accounts receivable balance of
$19,924,000 at October 31, 1998, was 66.4% higher than the balance at October
31, 1997. Early in the 1998 fiscal year, the Company promoted its Basics and
Fixtures programs by giving extended payment terms to customers. The Company has
discontinued these extended payment terms and believes that such discontinuation
should tend to move the trade receivables closer to historical levels.
Inventory increased by 4.9% to $35,288,000 at October 31, 1998 compared to
$33,645,000 at October 31, 1997. The Company's excess prior season inventory
was higher at October 31, 1998, than at October 31, 1997, because the Company
did not achieve its projected level of sales for the second half of the year.
Additionally, at the Ashworth subsidiary in England, converting to a new
computer system created a temporary problem in matching orders to inventory, and
poor weather conditions resulted in lower than anticipated in-season orders.
The Company is developing an alternative process to match orders and is
currently working on correcting the system problem.
In May 1998, the Company extended its business loan agreement with Bank of
America through March 1, 2000. The agreement provides a revolving line of
credit of $20,000,000. Interest is charged at the bank's reference (prime)
rate, minus one-half of a percentage point. The loan agreement contains certain
financial covenants that include a requirement for the Company to maintain, as
defined, a minimum tangible net worth and a minimum ratio of cash and accounts
receivable to current liabilities. The Bank amended the agreement on May 29,
1998 to permit the Company to acquire, for value, shares of the Company's
capital stock in an amount not to exceed $7,500,000 during the term of the
agreement. The line of credit may also be used to finance up to $12,000,000 in
commercial letters of credit and standby letters of credit. Commercial letters
of credit outstanding under this agreement totaled $4,163,000 at October 31,
1998 and $2,844,000 at December 31, 1998. Additionally, the agreement allows
the Company to enter into spot and forward foreign exchange contracts. (See
Note 1, Foreign Currency.) At October 31, 1998, the Company had no loan
outstanding with the bank. At December 31, 1998, the loan balance outstanding
was $900,000.
During fiscal 1998, the Company invested $2,430,000 in personal property
and equipment, including capital leases, primarily for computer equipment,
embroidery machines, fixtures and fittings and leasehold improvements. For
fiscal 1999, the Company's management anticipates spending approximately
$2,200,000 primarily for upgrades of computer systems and equipment, new
embroidery machines and systems, and leasehold improvements. Management intends
to finance the purchase of its capital equipment from its own cash resources,
but may use leases or equipment financing agreements if appropriate.
The Company's long-term debt on October 31, 1998, 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
$2,676,000 notes payable on equipment purchases totaling $1,590,000 and
capitalized leases with principal sum liabilities of $119,000.
During fiscal 1998, share capital and additional paid in capital increased
by $7,983,000. In the year, options for 1,327,000 shares of common stock were
exercised in exchange for cash and tax benefits of $13,199,000; the Company
repurchased 677,000 shares of its common stock for $5,216,000. A note
13
<PAGE>
receivable for $850,000, issued in fiscal year 1997 for the exercise of options
to purchase shares of the Company's common stock, was paid in full during the
first quarter of fiscal 1998.
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 and results of operations are converted using an average rate
during the month. A translation difference arises for share capital and
retained earnings, which are converted at rates other than the month-end rate,
and this amount is reported in the stockholders' equity section of the balance
sheet.
Ashworth U.K. Ltd. sells Ashworth products to other countries in the
European Union, largely with sales denominated in the currencies of those other
countries. Fluctuations in the currency rates between the United Kingdom and
those other countries give rise to a loss or gain which is reported in earnings.
The Company has considered the impact of the Euro conversion to its business and
does not believe that it will have a material impact on its future results from
operations or its financial condition. (See Note 1, Foreign Currency.)
All export sales by Ashworth, Inc. are U.S. Dollar denominated and
ordinarily there is no transaction adjustment for currency exchange rate for the
Company. However, with respect to export sales to Ashworth U.K. Ltd., 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 is purchasing increasing quantities of its products from
offshore manufacturers. All of these purchases were U.S. Dollar denominated, or
in British pounds for the Ashworth subsidiary in England and, consequently,
there was no foreign currency exchange risk.
INFLATION
Management believes that inflation has not had a material effect on the
Company's results of operations during the three most recent fiscal years.
NEW ACCOUNTING STANDARDS
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
14
<PAGE>
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. This Statement is effective for all fiscal years beginning after
June 15, 1999. SFAS No. 133 is effective for the Company's fiscal year ending
October 31, 2000 and is not expected to have a material effect on the Company's
financial position or results of operations.
Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company entered into eight foreign exchange contracts with its bank
during fiscal 1997 to hedge against the impact of currency fluctuations between
the U.S. dollar and the British pound. These contracts provided that the Company
would sell the bank pounds for a specified number of U.S. dollars. Four
contracts were for 300,000 pounds, three were for 100,000 pounds and one was for
200,000 pounds. The Company has entered into four similar contracts for 350,000
pounds each for fiscal 1999 and will add to these during the year. The Company
will also arrange foreign exchange contracts for its Canadian division in fiscal
1999. Additionally, Ashworth U.K. Ltd. entered into similar contracts with the
National Westminster Bank, in England, to hedge against currency fluctuations
between the pound and other European currencies during fiscal 1998, and will do
the same in fiscal 1999. These contracts have maturity dates that do not
normally exceed 12 months. As of October 31, 1998, the Company had outstanding
the following material purchased foreign currency forward exchange contracts (in
thousands, except average contract rate):
<TABLE>
<CAPTION>
Contract Weighted-Average Unrealized
Amount Rate Against Gain (loss)
Foreign Currency Forward Contracts US $ Equivalent Sterling US $ Equivalent
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
British Pounds Sterling $2,321.7 1.658 $5.8
Portuguese Escudos 390.4 296.013 (9.6)
Spanish Pesetas 256.7 244.219 (5.5)
Danish Krone 329.2 10.891 (6.3)
French Francs 488.3 9.556 (8.0)
Deutsche Marks 1,074.7 2.855 (19.2)
Irish Punts 294.0 1.150 (5.6)
Swedish Krona 160.7 12.750 2.4
-------- ------
$5,315.7 ($46.0)
======== ======
</TABLE>
The British Pounds Sterling contracts are for the sale of British Pounds
Sterling in exchange for U.S. Dollars. The remaining contracts are for the sale
of the listed foreign currency in exchange for British Pounds Sterling.
15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements with respect to the Company are
submitted herewith:
1. Independent auditors' reports, pages F-1 and F-2.
2. Consolidated Balance Sheets October 31, 1998 and 1997, pages F-3 and
F-4.
3. Consolidated Statements of Income for the years ended October 31, 1998,
1997 and 1996, page F-5.
4. Consolidated Statements of Stockholders' Equity for the years ended
October 31, 1998, 1997 and 1996, page F-6.
5. Consolidated Statements of Cash Flows for the years ended October 31,
1998, 1997 and 1996, page F-7.
6. Notes to Consolidated Financial Statements, pages F-8 through F-21.
7. Independent auditors' reports on Supplementary Schedule, pages F-22
and F-23.
8. Supplementary Schedule, page F-24.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
There is incorporated herein by reference the information required by this
Item included in the Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders under the caption "Directors and Executive Officers" which will be
filed with the Securities and Exchange Commission no later than 120 days after
the close of the fiscal year ended October 31, 1998.
ITEM 11 EXECUTIVE COMPENSATION.
There is incorporated herein by reference the information required by this
Item included in the Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders under the caption "Executive Compensation" which will be filed with
the Securities and Exchange Commission no later than 120 days after the close of
the fiscal year ended October 31, 1998.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
There is incorporated herein by reference the information required by this
Item included in the Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders under the caption "Security Ownership of Certain Beneficial Owners
and Management" which will be filed with the Securities and Exchange Commission
no later than 120 days after the close of the fiscal year ended October 31,
1998.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There is incorporated herein by reference the information required by this
Item included in the Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders under the caption "Certain Relationships and Related Transactions"
which will be filed with the Securities and Exchange Commission no later than
120 days after the close of the fiscal year ended October 31, 1998.
16
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
Independent auditors' reports
Consolidated Balance Sheets - October 31, 1998 and 1997
Consolidated Statements of Income for the years ended October 31, 1998,
1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended
October 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended October 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements - October 31, 1998, 1997 and
1996
2. Financial Statement Schedule
Independent auditors' reports on supplementary schedule
Schedule II - Valuation and Qualifying Accounts
3. Exhibits.
See Item (c) below.
(b) Report on Form 8-K
The Company filed a report on Form 8-K dated September 23, 1998 reporting
that the board of directors of the Company had adopted a stockholder rights
plan.
(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).
17
<PAGE>
4(c) Specimen certificate for Options granted under the Incentive Stock
Option Plan dated June 15, 1993 (filed as Exhibit 4(c) to Registrant's
Form 10-K for the fiscal year ended October 31, 1993 (File No. 0-18553)
and incorporated herein by reference).
4(d) Rights Agreement dated as of October 6, 1998 by and between Ashworth,
Inc. and American Securities Transfer & Trust, Inc. (filed as Exhibit
99.1 to Registrant's Form 8-A of Registration Statement filed on
October 9, 1998, (File No. 001-14547) and incorporated herein by
reference).
10(a)* Executive Employment Agreement effective January 1, 1995 by and between
Ashworth, Inc. and Gerald W. Montiel.
10(b)* Personal Services Agreement and Acknowledgement of Termination of
Executive Employment effective December 31, 1998 by and between
Ashworth, Inc. and Gerald W. Montiel.
10(c)* Amendment to Personal Services Agreement effective January 1, 1999 by
and between Ashworth, Inc. and Gerald W. Montiel.
10(d) Promotion Agreement effective June 1, 1998 by and among Ashworth, Inc.,
James W. Nantz, III and Nantz Communications, Inc.
10(r)(2) Business Loan Agreement dated May 29, 1998, between the Registrant and
Bank of America, expiring March 1, 2000. Under the agreement, the Bank
provides the Company with a revolving line of credit of up to
$20,000,000 (filed as Exhibit 10(r)(2) to Registrant's Form 10-Q for
the quarter ended April 30, 1998 (File No. 0-18553) and incorporated
herein by reference).
10(r)(3) Foreign Exchange Agreement dated May 29, 1998, between the Registrant
and Bank of America, expiring March 1, 2000. Under the agreement, the
Bank provides the Company with a spot and forward foreign exchange
contract up to a maximum of $5,000,000 (filed as Exhibit 10(r)(2) to
Registrant's Form 10-Q for the quarter ended April 30, 1998 (File
No. 0-18553) and incorporated herein by reference).
21 Subsidiaries of the Registrant
23 Consent of KPMG LLP
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
27.1 Restated Financial Data Schedule for fiscal year 1997
* Compensation plan, contract or agreement required to be filed as an Exhibit
pursuant to applicable rules of the Securities and Exchange Commission.
18
<PAGE>
Independent Auditors' Report
To the Stockholders of
Ashworth, Inc.:
We have audited the accompanying consolidated balance sheets of Ashworth, Inc.
(a Delaware corporation) and subsidiaries as of October 31, 1998 and 1997, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ashworth, Inc. and
subsidiaries as of October 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
KPMG LLP
San Diego, California
December 14, 1998, except for the ninth
paragraph of Note 8, as to which the
date is January 27, 1999
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders of
Ashworth, Inc. and subsidiaries:
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of ASHWORTH, INC., (a Delaware corporation)
and subsidiaries for the year 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 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 financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Ashworth,
Inc. and subsidiaries for the year ended October 31, 1996 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
December 13, 1996
F-2
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
October 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
-------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,763,000 $ 3,787,000
Accounts receivable - trade, net of allowance for doubtful accounts
of $1,039,000 and $648,000 in 1998 and 1997, respectively 19,924,000 11,971,000
Accounts receivable -- other 459,000 735,000
Inventories 35,288,000 33,645,000
Income tax receivable 1,149,000 1,522,000
Other current assets 3,160,000 2,089,000
Deferred income tax asset 1,486,000 1,218,000
-------------- --------------
Total current assets 66,229,000 54,967,000
-------------- --------------
Property, plant and equipment, at cost:
Land 1,200,000 1,200,000
Buildings and improvements 2,809,000 2,738,000
Production equipment 9,180,000 8,921,000
Furniture and equipment 9,298,000 7,460,000
Leasehold improvements 1,652,000 1,500,000
-------------- --------------
24,139,000 21,819,000
Less accumulated depreciation and amortization (11,823,000) (9,729,000)
-------------- --------------
12,316,000 12,090,000
Other assets 3,089,000 1,760,000
-------------- --------------
$ 81,634,000 $ 68,817,000
============== ==============
</TABLE>
(Continued)
F-3
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
October 31, 1998 and 1997
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------- --------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 940,000 $ 1,114,000
Accounts payable 6,260,000 6,146,000
Accrued liabilities:
Salaries and commissions 1,596,000 979,000
Other 1,118,000 1,900,000
-------------- --------------
Total current liabilities 9,914,000 10,139,000
-------------- --------------
Long-term debt, net of current portion 3,445,000 4,336,000
Deferred income tax liability 738,000 676,000
Other long-term liabilities 432,000 665,000
Stockholders' equity:
Common stock, $.001 par value; authorized 50,000,000 shares;
issued and outstanding 14,080,000 and 13,430,000 shares
in 1998 and 1997, respectively 14,000 13,000
Capital in excess of par value 42,259,000 34,277,000
Retained earnings 24,827,000 19,527,000
Deferred compensation (8,000) (59,000)
Note receivable from stockholder - (850,000)
Cumulative translation adjustment 13,000 93,000
-------------- --------------
67,105,000 53,001,000
Commitments and contingencies -------------- --------------
$ 81,634,000 $ 68,817,000
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the years ended October 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net sales $ 107,341,000 $ 89,148,000 $ 75,413,000
Cost of goods sold 66,719,000 55,045,000 48,018,000
----------------- ----------------- -----------------
Gross profit 40,622,000 34,103,000 27,395,000
Selling, general and administrative expenses 31,691,000 25,282,000 24,087,000
----------------- ----------------- -----------------
Income from operations 8,931,000 8,821,000 3,308,000
----------------- ----------------- -----------------
Other income (expense):
Interest income 152,000 67,000 35,000
Interest expense (451,000) (606,000) (1,152,000)
Net foreign currency exchange gain (loss) 45,000 (400,000) 131,000
Other income (expense), net 13,000 (13,000) 38,000
----------------- ----------------- -----------------
(241,000) (952,000) (948,000)
----------------- ----------------- -----------------
Income before provision for income taxes 8,690,000 7,869,000 2,360,000
Provision for income taxes 3,390,000 3,042,000 957,000
----------------- ----------------- -----------------
Net income $ 5,300,000 $ 4,827,000 $ 1,403,000
================= ================= =================
Net income per share:
Basic .37 .39 .12
Diluted .36 .38 .12
Weighted-average common shares and
equivalents outstanding:
Basic 14,185,000 12,403,000 12,026,000
Diluted 14,805,000 12,564,000 12,078,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the years ended October 31, 1998, 1997 and 1996
---------------------------------------------------
<TABLE>
<CAPTION>
Note
Common stock Capital in Receivable Cumulative
excess of Retained Deferred from Translation
Shares Amount par value Earnings compensation Stockholder Adjustment Total
------- ------- ---------- ---------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
OCTOBER 31, 1995 11,902,000 $12,000 $23,243,000 $13,297,000 $ (161,000) $ -- $ -- $36,391,000
Options exercised,
including stock
option tax benefit 261,000 -- 975,000 -- -- -- -- 975,000
Amortization of
deferred
compensation -- -- -- -- 51,000 -- -- 51,000
Net income -- -- -- 1,403,000 -- -- -- 1,403,000
Translation
adjustment -- -- -- -- -- -- 47,000 47,000
---------- ------- ----------- ----------- --------- ---------- --------- -----------
BALANCE,
OCTOBER 31, 1996 12,163,000 12,000 24,218,000 14,700,000 (110,000) -- 47,000 38,867,000
Options
exercised,
including stock
option tax benefit 1,267,000 1,000 10,059,000 -- -- -- -- 10,060,000
Amortization of
deferred compensation -- -- -- -- 51,000 -- -- 51,000
Net income -- -- -- 4,827,000 -- -- -- 4,827,000
Note receivable
from stockholder -- -- -- -- -- (850,000) -- (850,000)
Translation
adjustment -- -- -- -- -- -- 46,000 46,000
---------- ------- ----------- ----------- ---------- ---------- --------- -----------
BALANCE,
OCTOBER 31, 1997 13,430,000 13,000 34,277,000 19,527,000 (59,000) (850,000) 93,000 53,001,000
Options exercised,
including stock
option tax benefit 1,327,000 2,000 13,197,000 -- -- -- -- 13,199,000
Treasury stock
acquired and retired (677,000) (1,000) (5,215,000) -- -- -- -- (5,216,000)
Amortization of
deferred
compensation -- -- -- -- 51,000 -- -- 51,000
Net income -- -- -- 5,300,000 -- -- -- 5,300,000
Note receivable
from stockholder -- -- -- -- -- 850,000 -- 850,000
Translation
adjustment -- -- -- -- -- -- (80,000) (80,000)
---------- -------- ----------- ----------- ---------- ---------- --------- -----------
BALANCE,
OCTOBER 31, 1998 14,080,000 $ 14,000 $42,259,000 $24,827,000 $ (8,000) $ -- $ 13,000 $67,105,000
========== ======== =========== =========== ========== ========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended October 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,300,000 $ 4,827,000 $ 1,403,000
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 2,215,000 2,142,000 2,303,000
(Gain) loss on disposal of property, plant and equipment (2,000) 39,000 17,000
Deferred income tax provision (benefit) (206,000) 627,000 20,000
Compensation related to grant of stock options -- 323,000 --
Provision for doubtful accounts and sales returns 608,000 323,000 64,000
Decrease (increase) in accounts receivable (8,285,000) (3,316,000) 1,397,000
Decrease (increase) in inventories (1,643,000) (8,916,000) 3,117,000
Decrease (increase) in income tax receivable 373,000 247,000 (529,000)
Increase in other current assets (1,071,000) (274,000) (164,000)
Increase in other assets (1,340,000) (796,000) (88,000)
Increase in accounts payable 114,000 177,000 104,000
Increase (decrease) in accrued liabilities (165,000) 208,000 772,000
Increase (decrease) in other long-term liabilities (233,000) 665,000 --
--------------- --------------- ---------------
Net cash provided by (used in) operating activities (4,284,000) (3,673,000) 8,467,000
--------------- --------------- ---------------
Cash flows from investing activities:
Net purchases of property, plant and equipment (2,365,000) (1,980,000) (2,547,000)
Proceeds from sale of property, plant and equipment 2,000 21,000 2,000
--------------- --------------- ---------------
Net cash used in investing activities (2,363,000) (1,959,000) (2,545,000)
--------------- --------------- ---------------
Cash flows from financing activities:
Principal payments on capital lease obligations (189,000) (415,000) (668,000)
Borrowings on line of credit 3,025,000 16,355,000 21,755,000
Payments on line of credit (3,025,000) (16,355,000) (28,425,000)
Borrowings on notes payable and long-term debt -- -- 1,930,000
Principal payments on notes payable and long-term debt (941,000) (1,053,000) (1,196,000)
Proceeds from exercise of stock options 13,199,000 8,887,000 976,000
Treasury stock acquired (5,216,000) -- --
Repayment of note receivable issued to stockholder for common stock 850,000 -- --
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 7,703,000 7,419,000 (5,628,000)
--------------- --------------- ---------------
Effect of exchange rate changes on cash (80,000) 46,000 47,000
Net increase in cash and cash equivalents 976,000 1,833,000 341,000
Cash and cash equivalents, beginning of year 3,787,000 1,954,000 1,613,000
--------------- --------------- ---------------
Cash and cash equivalents, end of year $ 4,763,000 $ 3,787,000 $ 1,954,000
=============== =============== ===============
Supplemental disclosure of cash flow information:
Interest paid $ 451,000 $ 606,000 $ 1,152,000
Income taxes paid 395,000 2,167,000 1,038,000
Supplemental disclosures of noncash transactions:
Capital lease equipment acquired and related capital lease obligations 65,000 99,000 --
Note receivable issued to stockholder for common stock -- 850,000 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1998, 1997 and 1996
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Ashworth, Inc. (the "Company"), based in Carlsbad, California was
incorporated in Delaware on March 19, 1987. It changed its corporate name
from Charter Golf, Inc. to Ashworth, Inc. on April 6, 1994. The Company
designs, markets and distributes a full line of quality sports apparel,
headwear, and accessories under the Ashworth(R) label. The Ashworth
products 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. A division was opened
on November 1, 1998 to distribute the Company's products in Canada.
Ashworth, Inc. and its wholly-owned subsidiary, Ashworth U.K., Ltd., were
partners of a Luxembourg partnership, Ashworth, Inc. et Cie., formed to
qualify for trademark registration in Europe under the Madrid Convention
until September 1, 1998 when the partnership was dissolved.
The Company and the Company's subsidiaries had aggregate foreign sales in
Europe, Canada, Taiwan, Singapore, United Arab Emirates, Guam, Japan, South
Africa, Hong Kong and others of approximately $17,952,000, $19,019,000 and
$19,368,000 in the years ended October 31, 1998, 1997 and 1996,
respectively. The Company's wholly-owned United Kingdom subsidiary had
sales of $10,637,000, $9,091,000 and $6,481,000 and operating income/(loss)
of ($458,000), $382,000 and ($167,000) in the years ended October 31, 1998,
1997 and 1996, respectively. Ashworth U.K., Ltd. had identifiable assets of
$2,931,000 and $2,920,000 as of October 31, 1998 and 1997, respectively.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market. Cost includes materials, labor and manufacturing overhead.
F-8
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Below is a summary of the components of inventory at October 31, 1998 and
1997:
1998 1997
----------- -----------
Raw materials $ 4,221,000 $ 5,055,000
Work in process 1,949,000 3,664,000
Finished products 29,118,000 24,926,000
----------- -----------
$35,288,000 $33,645,000
=========== ===========
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost.
Depreciation and amortization have been provided using straight-line and
accelerated methods over the following estimated useful lives:
Buildings and improvements 20 to 30 years
Production equipment 5 to 12 years
Furniture and equipment 5 to 7 years
Leasehold improvements Shorter of life of lease
or useful life
All maintenance and repair costs are charged to operations as incurred.
When assets are sold or otherwise disposed of, the costs and accumulated
depreciation or amortization are removed from the accounts and any
resulting gain or loss is reflected in operations.
INTANGIBLE ASSETS
Intangible assets, including 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, 1998, 1997 and 1996 were $1,512,000, $559,000
and $435,000, 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.
F-9
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
NET INCOME PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS No. 128") in fiscal year 1998. SFAS No. 128
simplifies the computation of earnings per share (EPS) previously required
in Accounting Principles Board ("APB") Opinion No. 15, Earnings Per Share,
by replacing primary and fully diluted EPS with basic and diluted EPS.
Under SFAS No. 128, basic EPS is calculated by dividing net income by the
weighted-average common shares outstanding during the period. Diluted EPS
reflects the potential dilution to basic EPS that could occur upon
conversion or exercise of securities, options, or other such items, to
common shares using the treasury stock method based upon the weighted-
average fair value of the Company's common shares during the period.
Earnings per share for prior periods have been restated in accordance with
SFAS No. 128. (See Note 7, "Net Income Per Share" for computation of EPS.)
STOCK OPTION PLAN
Prior to November 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On November 1, 1996, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation, which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro
forma net income and pro forma income per share disclosures for employee
stock option grants made in 1996 and future years as if the fair-value-
based method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123. (See Note 6,
Stockholders' Equity.)
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, on November 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amounts of the assets exceed the fair
values of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
FOREIGN CURRENCY
The Company's primary functional currency is the U.S. Dollar. Assets and
liabilities of the Company denominated in foreign currencies are translated
at the rate of exchange at the balance sheet date, while revenue and
expenses are translated using the average exchange rate. Gains and losses
on foreign currency transactions are recognized as incurred. Gains and
losses on remeasurement of transactions denominated in currency other than
the reporting currency of individual subsidiaries are recognized at each
balance sheet date. Cumulative translation adjustments resulting from the
translation of the financial statements of foreign subsidiaries are
included as a separate component of stockholders'
F-10
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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. These contracts have maturity dates that do not normally
exceed 12 months. As of October 31, 1998 the Company had outstanding
foreign currency forward exchange contracts with a notational value of
approximately $5.3 million dollars and had an unrealized loss of $46,000.
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, 1998, 1997 and 1996, the Company
acquired $65,000, $99,000 and $0, respectively, of various equipment under
capital leases.
At October 31, 1998 and 1997, the accompanying consolidated balance sheets
include the following equipment under capital leases:
1998 1997
---------- ----------
Production equipment $ 267,000 $ 863,000
Furniture and equipment 278,000 277,000
---------- ----------
545,000 1,140,000
Less accumulated amortization (391,000) (561,000)
---------- ----------
$ 154,000 $ 579,000
========== ==========
Amortization of assets held under capital leases is included with
depreciation expense.
F-11
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company also leases certain production, warehouse and outlet store
facilities under operating leases. These leases expire in various fiscal
years through January 2008. Rent expense for the years ended October 31,
1998, 1997 and 1996 was $1,771,000, $1,467,000 and $1,289,000,
respectively. Future minimum lease payments under noncancelable operating
leases and future minimum capital lease payments as of October 31, 1998
are:
CAPITAL OPERATING
YEAR ENDING OCTOBER 31, LEASES LEASES
----------------------- ---------- ------------
1999 $ 62,000 $ 1,260,000
2000 38,000 1,000,000
2001 15,000 558,000
2002 15,000 511,000
2003 10,000 505,000
Thereafter -- 1,663,000
---------- ------------
Total minimum lease payments 140,000 $ 5,497,000
============
Less amount representing interest
(at rates ranging from 5.37%
to 10.99%) (21,000)
----------
Present value of future minimum
capital lease payments (Note 4) $ 119,000
==========
(3) LINE OF CREDIT AGREEMENT
The Company has a $20 million working capital line of credit agreement with
a bank, which expires on March 1, 2000 and is collateralized by
substantially all assets of the Company. The interest rate on borrowings is
0.5% below the bank's reference rate, which was 8.0% at October 31, 1998.
The line of credit agreement requires the payment of a commitment fee of
approximately 0.25% of the unused portion. The line of credit agreement
contains certain financial covenants, the most restrictive of which require
the Company to maintain, as defined, a minimum tangible net worth, a
maximum debt-to-equity ratio, and a minimum ratio of cash and accounts
receivable to current liabilities. The line of credit agreement also limits
the purchase of capital equipment and requires the Company not to incur a
net loss in any two consecutive quarters. At October 31, 1998, no
borrowings were outstanding on this line of credit. The line of credit also
provides for a maximum of $12 million in commercial letters of credit and
standby letters of credit, of which $4.2 million were outstanding at
October 31, 1998. The total amount of unused revolving credit available to
the Company at October 31, 1998 was $15.8 million.
F-12
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) LONG-TERM DEBT
Amounts outstanding under long-term debt agreements at October 31, 1998 and
1997 consist of the following:
1998 1997
---------- -----------
Installment notes bearing interest ranging
from 7.3% to 8.7%, with due dates through
February 2001, collateralized by various
equipment $1,590,000 $2,502,000
Note payable to a bank, bearing interest at
8.0%, payable in monthly principal and
interest payments of $20,545 through
November 2000 with a balloon payment of
approximately $2.6 million payable on
November 30, 2000, collateralized by
land and buildings 2,676,000 2,705,000
Capital lease obligations (Note 2) 119,000 243,000
---------- -----------
4,385,000 5,450,000
Less current portion (940,000) (1,114,000)
---------- -----------
Long-term debt $3,445,000 $ 4,336,000
---------- -----------
Future maturities of long-term debt at October 31, 1998 are as follows:
YEAR ENDED OCTOBER 31,
----------------------
1999 $ 940,000
2000 681,000
2001 2,742,000
2002 13,000
2003 9,000
----------
$4,385,000
==========
(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, 1998, 1997 and 1996, was $144,000,
$142,000 and $107,000, respectively.
F-13
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) STOCKHOLDERS' EQUITY
COMMON STOCK OPTIONS
The Company maintains three nonqualified and incentive stock option plans.
In August 1987, the Company adopted a nonqualified stock option plan which
was subsequently amended (as amended to date, the "Plan"). The Company's
Board of Directors, or any committee as the Board of Directors may
designate from time to time, administers the Plan and selects the persons
to whom options are granted. The Company has reserved 5,700,000 shares of
common stock for issuance upon exercise of options granted under the Plan,
all of which shares have been registered pursuant to the Securities Act
and, upon issuance, will be freely tradable without restriction, except for
shares held by an "affiliate" of the Company.
In November 1992, the Company adopted a Founders' nonqualified stock option
plan (the "Founders' Plan") to provide a means for recognizing and
rewarding officers, directors, consultants and advisors of the Company who
have played a substantial role in the founding or early development of the
Company. The Founders' Plan is administered by a committee of directors
appointed by the Board of Directors, which is presently comprised of three
of the Company's outside directors. The Company has reserved 1,000,000
shares of common stock for issuance upon exercise of options granted under
the Plan, which shares have been registered pursuant to the Securities Act.
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, 1998, the Company had 2,403,000 options outstanding under
the above plans to purchase common stock at prices ranging from $5.00 to
$16.94 with expiration dates between November 1998 and December 2006. At
October 31, 1998, a total of 2,552,000 options remained available for
grant.
F-14
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following is a summary of stock option activity for the three fiscal
years ended October 31, 1998:
<TABLE>
<CAPTION>
OPTION EXERCISE
PRICE PER SHARE
-----------------------------
WEIGHTED-
SHARES RANGE AVERAGE
---------- --------------- ---------
<S> <C> <C> <C>
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
Granted 557,000 9.94 -- 16.94 11.54
Exercised (1,327,000) 4.50 -- 11.00 7.05
Canceled (127,000) 6.50 -- 11.13 8.60
---------- --------------- -----
Balance at October 31, 1998 2,403,000 $5.00 -- $16.94 $8.52
========== =============== =====
</TABLE>
The following is a summary of stock options outstanding at October 31,
1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -----------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------------- ----------- ------------ --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$5.00 -- 7.00 941,000 5.3 $ 6.31 631,000 $ 6.39
7.50 -- 11.00 1,281,000 3.5 9.33 967,000 9.05
11.50 -- 16.94 181,000 6.8 13.76 150,000 13.75
--------- --- ------ --------- ------
2,403,000 4.4 $ 8.52 1,748,000 $ 8.49
========= === ====== ========= ======
</TABLE>
At October 31, 1998, 1997 and 1996, the number of options exercisable were
1,748,000, 2,376,000 and 3,212,000, respectively, and the weighted-average
exercise price of those options were $8.49, $7.72 and $7.42, respectively.
Effective fiscal year 1997, the Company adopted the disclosure requirements
of SFAS No. 123. As permitted under this Statement, the Company will
continue to measure stock-based compensation cost using the current
"intrinsic" accounting method under APB Opinion No. 25.
F-15
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
For purposes of the following pro forma disclosures required by SFAS No.
123, the fair value of each option granted after fiscal 1995 has been
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants: risk-free
interest rates of 5.41% to 5.94% in 1998, 5.55% to 6.65% in 1997 and 5.08%
to 6.83% in 1996; expected volatility of 56.4% to 57.5% in 1998 and 44.2%
to 46.6% in 1997 and 1996; and expected life of 5 to 8 years in 1998 and 1
to 7 years in 1997 and 1996. 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 $7.60 in 1998, $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 No. 123, the Company would have
recorded net income of $2,501,000 or $0.17 per diluted share in 1998 and
net income of $3,246,000 or $0.26 per diluted share in 1997 and a loss of
($861,000) or ($0.07) per share, in 1996. These pro forma calculations only
include the effects of 1998, 1997 and 1996 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 calling for issuance to the PGA professional of 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 $0, $27,000 and $48,000 in charges
related to the difference in stock prices in 1998, 1997 and 1996,
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 1999.
F-16
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) NET INCOME PER SHARE
In accordance with SFAS No. 128, the following is a reconciliation of the
numerators and denominators of the basic and diluted EPS computations:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
NUMERATOR:
Net Income -
Numerator for basic and diluted earnings
per share--income available to common shareholders $ 5,300,000 $ 4,827,000 $ 1,403,000
=========== =========== ===========
DENOMINATOR:
Denominator for basic earnings per share
- weighted average shares 14,185,000 12,403,000 12,026,000
Effect of dilutive securities
- employee stock options 620,000 161,000 52,000
----------- ----------- -----------
Denominator for diluted earnings per share
- adjusted weighted average shares and
assumed conversions 14,805,000 12,564,000 12,078,000
=========== =========== ===========
</TABLE>
The diluted weighted average shares outstanding computation excludes
226,000, 1,333,000, and 2,601,000 anti-dilutive shares in 1998, 1997 and
1996, respectively.
(8) COMMITMENTS AND CONTINGENCIES
PROMOTIONAL AGREEMENTS WITH PGA PROFESSIONALS AND A TELEVISION PERSONALITY
The Company had promotional agreements with several PGA professionals
(including Fred Couples, a significant stockholder of the Company), all of
which are related parties, Jim Nantz, a television personality and member
of the Company's board of directors, also a related party and a management
company. Under the terms of these agreements, the Company is obligated to
pay cash compensation and to issue options (at fair market value) to
purchase shares of the Company's common stock. During 1998 the majority of
these agreements were modified to reflect the individuals' current status
as employees.
The aggregate annual cash compensation recognized under these agreements in
fiscal year 1998, 1997 and 1996 was $760,000, $803,000 and $803,000,
respectively, of which in 1998, $699,000 of the $760,000 was paid to the
related parties. Future minimum commitments under these agreements are
$765,000 payable in 1999, $783,000 payable in 2000, $736,000 payable in
2001, $657,000 payable in the years 2002 through 2010 and $548,000 payable
in 2011 to the related party, and $30,000 payable in 1999 through 2000 and
$18,000 payable in 2001 to others.
The Company issued 261,000 options in 1997 under these agreements at prices
ranging from $5.13 to $9.88 per share. The Company recognized $323,000 of
compensation expense related to the grant of these stock options in 1997
using the Black-Scholes option-pricing model. The Company determined that
the per share weighted-average fair value of these stock options granted
during 1997 was $3.38 on the date of grant. The following weighted-average
assumptions used for the grant of these stock options were: risk-free
interest rates of 5.55% to 6.65%; expected volatility of 44.2% to 46.4%;
and
F-17
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
expected life of 1 to 6 years; and no expected dividend yield. The number
of options granted to purchase shares of the Company's common stock will
vest as follows: 230,000 in 1999, 224,000 in 2000, 208,000 in 2001 and
150,000 per year from years 2002 through 2011.
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 $0, $214,000 and $546,000 in charges related to the
difference in stock prices in 1998, 1997 and 1996, respectively, of which
$0, $0 and $340,000 in 1998, 1997 and 1996, respectively, was paid to a
related party.
EXECUTIVE EMPLOYMENT AGREEMENTS
In fiscal year 1998, the Company had executive employment agreements with
Gerald W. Montiel and Randall L. Herrel, Sr.
Mr. Montiel resigned as chairman, director and executive employee effective
December 31, 1998. Under the terms of the executive employment agreement
with Mr. Montiel he could terminate his employment upon 90 days notice to
the Company. The executive employment agreement contains a noncompetion
provision covering the term of employment and the ten-year post-termination
period which provides that, as consideration for Montiel's non-compete
agreement, the Company shall pay Montiel compensation equal to (i) 100% of
his then current salary plus (ii) nine times an amount equal to 40% of his
then current salary, provided, however, such compensation shall not be less
than $1,437,500. At the time of his resignation, Mr. Montiel entered into a
personal services agreement to provide consulting services to the Company
for a maximum of 30 days a year, during the term of the personal services
arrangement.
The agreement with Mr. Herrel provides for a base salary of $325,000 and
bonuses to be determined periodically at the discretion of the Board of
Directors on the basis of merit and the Company's financial success and
progress. A $50,000 bonus was awarded to Mr. Herrel in 1998, based on the
Company's improved earnings per share in fiscal year 1997 and no bonus was
paid to him for fiscal year 1998. The Company maintains a life insurance
policy for $1,000,000, the beneficiary of which may be named by Mr. Herrel.
The agreement with Mr. Herrel includes severance payments upon termination
of employment under specific circumstances, such payments ranging from one-
half to two times his then annual base salary.
Effective June 25, 1997, the Company entered into a non-compete agreement
with John Ashworth pursuant to the termination of his executive employment,
which specifies an initial payment of $263,000 for the first year, and 40%
of such amount over the next nine years. The present value of the estimated
cash payments to be made is accrued and recorded in the accompanying
consolidated balance sheets. The corresponding asset is being amortized
using the straight-line method over the ten-year term of the agreement.
LEGAL PROCEEDINGS
On January 22, 1999, Milberg Weiss Bershad Hynes & Lerach LLP filed a class
action in the United States District Court for the Southern District of
California on behalf of purchasers of the Company's common stock during the
period between September 4, 1997 and July 15, 1998 alleging violations of
F-18
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
the Securities Exchange Act of 1934 by the Company and certain of its
officers and directors. The complaint alleges 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 alleges that the
defendants knew these statements to be false and concealed adverse
conditions and trends in the Company's business during the class period.
The plaintiff seeks to recover unspecified damages on behalf of all
purchasers of the Company's common stock during the period September 4,
1997 to July 15, 1998. The Company was served a copy of the complaint on
January 26, 1999 and is currently in the process of reviewing it.
The Company is party to other claims and litigation proceedings arising in
the normal course of business. Although the legal responsibility and
financial impact with respect to such other claims and litigation cannot
presently be ascertained, the Company does not believe that these other
matters will result in payment by the Company of monetary damages, net of
any applicable insurance proceeds, that, in the aggregate, would be
material in relation to the consolidated financial position or results of
operations of the Company.
(9) RELATED-PARTY TRANSACTIONS
At October 31, 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%. The entire
balance of the note was collected during 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 $323,000 and $255,000
for the years ended October 31, 1998 and 1997, respectively.
The Company has promotional agreements with a director and certain
stockholders. (See Note 8.)
(10) INCOME TAXES
The provision for income taxes for the years ended October 31, 1998, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Current provision:
Federal $3,000,000 $1,966,000 $697,000
State 596,000 449,000 240,000
---------- ---------- --------
Total 3,596,000 2,415,000 937,000
---------- ---------- --------
Deferred provision (benefit):
Federal (98,000) 434,000 17,000
State (108,000) 193,000 3,000
---------- ---------- --------
Total (206,000) 627,000 20,000
---------- ---------- --------
$3,390,000 $3,042,000 $957,000
========== ========== ========
</TABLE>
F-19
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The components of the Company's deferred income tax benefit and liability as
of October 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Current deferred income tax benefit:
Allowance for doubtful accounts $257,000 $176,000
Inventory reserves 704,000 383,000
Other nondeductible accruals 421,000 617,000
Other deductible capitalized costs 104,000 42,000
---------- ----------
$1,486,000 $1,218,000
========== ==========
Long-term deferred income tax liability--depreciation $738,000 $676,000
========== ==========
</TABLE>
The Company has recorded a net deferred income tax asset of $748,000 and
$542,000 as of October 31, 1998 and 1997, 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:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Computed income tax at the expected statutory rate $2,955,000 $2,675,000 $802,000
State income tax, net of federal tax benefits 349,000 411,000 144,000
Nondeductible expenses 110,000 33,000 46,000
Foreign sales corporation tax benefit (30,000) (48,000) (54,000)
Other 6,000 (29,000) 19,000
---------- ---------- --------
Income tax provision $3,390,000 $3,042,000 $957,000
========== ========== ========
</TABLE>
F-20
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) RESULTS BY QUARTER (UNAUDITED)
The unaudited results by quarter for the years ended October 31, 1998 and
1997 are shown below:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
YEAR ENDED OCTOBER 31, 1998 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales $24,026,000 $38,057,000 $25,598,000 $19,660,000
Gross profit 9,525,000 16,204,000 9,218,000 5,675,000
Net income (loss) 1,859,000 4,520,000 782,000 (1,861,000)
Net income (loss) per basic share .14 .32 .05 (.13)
Weighted-average basic shares outstanding 13,593,000 14,343,000 14,702,000 14,112,000
Net income (loss) per diluted share .13 .30 .05 (.13)
Weighted-average diluted shares outstanding 14,350,000 15,280,000 15,253,000 14,112,000
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
YEAR ENDED OCTOBER 31, 1997 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
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 basic share .10 .24 .06 .00
Weighted-average basic shares outstanding 12,175,000 12,196,000 12,315,000 12,918,000
Net income per diluted share .10 .24 .06 .00
Weighted-average diluted shares outstanding 12,191,000 12,267,000 12,968,000 13,679,000
</TABLE>
During the fourth quarter of fiscal year 1998 the Company incurred a net
loss of $1,861,000 as compared to a net income of $4,000 in the same
period of the prior year. The net loss in the fourth quarter of fiscal
year 1998 was primarily attributable to adjustments related to excess
prior season inventory, the decision to discontinue the Company's young
men's (AGCo label) line, additional investment in sales and marketing
programs to increase the Fall/Holiday account base and increased
expenditures to market the Company's new women's and corporate divisions.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Ashworth, Inc.:
Under date of December 14, 1998, except for the ninth paragraph of Note 8, as to
which the date is January 27, 1999, we reported on the consolidated balance
sheets of Ashworth, Inc. and subsidiaries as of October 31, 1998 and 1997, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the years then ended, which are included in this Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule in this Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
San Diego, California
December 14, 1998
F-22
<PAGE>
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 statements of income, stockholders' equity and cash flows for the
year 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.
F-23
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
--------------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Year Expense Accounts Deductions of Year
- ---------------------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
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
=========== ========== ========== ========== ==========
FOR THE YEAR ENDED
OCTOBER 31, 1998:
Allowance for
Doubtful accounts $ 648,000 $ 608,000 $ -- $ 217,000 $1,039,000
=========== ========== ========== ========== ==========
</TABLE>
F-24
<PAGE>
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, 1999 BY: /s/ RANDALL L. HERREL, SR.
--------------------------
Randall L. Herrel, Sr.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ RANDALL L. HERREL, SR. President and January 28, 1999
- -------------------------- Chief Executive Officer
Randall L. Herrel, Sr. (Principal Executive Officer)
Director
/s/ JOHN NEWMAN Vice President - Finance, January 28, 1999
- --------------- Treasurer, Chief Financial
John Newman Officer (Principal Financial
and Accounting Officer)
/s/ JOHN M. HANSON, JR. Director January 28, 1999
- -----------------------
John M. Hanson, Jr.
/s/ ANDRE P. GAMBUCCI Director January 28, 1999
- ---------------------
Andre P. Gambucci
/s/ JAMES W. NANTZ, III Director January 28, 1999
- -----------------------
James W. Nantz, III
/s/ STEPHEN BARTOLIN, JR. Director January 28, 1999
- -------------------------
Stephen Bartolin, Jr.
<PAGE>
EXHIBIT 10(a)
ASHWORTH, INC.
EXECUTIVE EMPLOYMENT AGREEMENT
GERALD W. MONTIEL
THIS AGREEMENT effective January 1, 1995, is made and entered into by and
between ASHWORTH, INC. (the Company) and GERALD W. MONTIEL (Montiel).
1. EMPLOYMENT. The Company hereby employs Montiel, and Montiel hereby
----------
accepts employment upon the terms and conditions hereinafter set forth.
2. TERM. Subject to the provisions for termination as hereinafter
----
provided, the term of this Agreement shall commence January 1, 1995.
3. COMPENSATION. For all services rendered by Montiel under this
------------
Agreement, the Company shall pay Montiel an annual base salary no less than
Three Hundred and Twelve Thousand Five Hundred ($312,500) Dollars, payable in
bi-weekly installments. Such compensation shall be reviewed periodically in the
sole discretion of the Board's Compensation Committee on the basis of merit and
the Company's financial success and progress.
4. DUTIES. Montiel is engaged as Chief Executive Officer; however, at his
------
option at any time during the term of this Agreement upon thirty days notice to
the Company, Montiel can relinquish his title as Chief Executive Officer and
remain as only Chairman of the Board without a change in salary or benefits. As
Chief Executive Officer he shall have complete responsibility for the management
of the operations of the Company, and shall have full authority and
responsibility, subject to the general direction and control of the board of
directors, for formulating policies and administering the Company in all
respects. His power shall include authority to hire and fire personnel of the
Company and to retain consultants when he deems necessary to implement the
Company's policies. The precise services of Montiel may be extended or reduced
from time to time at the direction of the board of directors, provided any such
expanded services are services normally associated with the position held by
Montiel. Should Montiel exercise his option to relinquish his title as Chief
Executive Officer and remain as only Chairman of the Board, his services and
duties shall be those normally associated with the position of Chairman of the
Board.
5. EXTENT OF SERVICES. Montiel agrees to devote his best efforts to the
------------------
business of the Company and shall not allow any other business interests to
adversely affect his obligations and responsibilities in a material way under
this Agreement. Nothing in this Agreement shall be construed as preventing
Montiel from (a) investing his assets in any form or manner, (b) serving as a
Chairman, officer, director, advisor, or consultant to another company or
companies; provided, however, that such services are not in connection with a
business which is in direct competition with the Company; or (c) starting and
participating in a new apparel business with members of his family and others,
which consists of a retail chain of sportswear apparel stores, hereinafter
referred to as the "Family Business." The concept regarding said Family
Business has been previously proposed to the Board of Directors of the Company
and has been determined by the Board not to be a corporate opportunity. The
Company hereby acknowledges and agrees that
<PAGE>
Montiel's involvement in such Family Business would not be a conflict of
interest or in direct competition with the Company.
6. WORKING FACILITIES. Montiel shall be furnished with a private office,
------------------
stenographic help, and such other facilities and services suitable to Montiel's
position and adequate for the performance of the duties required by this
Agreement.
7. EMPLOYEE BENEFITS. Except as otherwise provided herein, Montiel shall
-----------------
be entitled to receive all of the rights, benefits, and privileges of a
principal executive under any retirement, pension, profit-sharing, insurance,
health and hospital, and other employee benefit plans which may be now in effect
or hereafter adopted.
8. LIFE INSURANCE. The Company shall maintain life insurance in the
--------------
amount of $2,000,000, the beneficiary of which may be named by Montiel. Upon
termination of employment, the ownership of the life insurance shall be
transferable to Montiel upon his payment to the company of one-half of the then
cash value of such insurance.
9. AUTOMOBILE ALLOWANCE. The Company shall pay Montiel an automobile
--------------------
expense allowance of $500 per month.
10. VACATION. Montiel shall be entitled to annual vacations in a manner
--------
commensurate with Montiel's status as a principal executive.
11. DISABILITY. In the event Montiel shall become disabled during the
----------
term of employment for a continuous period up to ninety days, Montiel's salary
shall continue at the same rate as on the date of such disability. As
additional compensation, the Company agrees to pay to Montiel his cost of
disability insurance which will provide him with disability benefits after a
waiting period of ninety days in an amount no less than two-thirds of his then
current salary, such benefits to continue until the earlier of termination of
Montiel's disability or to age 65. For the purpose of this Agreement,
disability shall mean mental or physical illness or condition rendering Montiel
incapable of performing his normal duties with the Company.
12. PROPRIETARY INTERESTS OF COMPANY. Recognizing and acknowledging that
--------------------------------
nothing in this Agreement prevents Montiel from providing services to other
companies which are not in direct competition with the Company and nothing
prevents Montiel from starting up and participating in a new Family Business,
Montiel agrees that he will not, during or after the term of his employment,
disclose confidential and proprietary information of the Company which are
valuable, special, and unique assets of the Company's business (Trade Secrets).
In the event of a breach or threatened breach by Montiel of the provisions
of this section, the Company shall be entitled to an injunction restraining
Montiel from such breach. Nothing herein shall be construed as prohibiting the
Company from pursuing any other remedies available to the Company for such
breach or threatened breach, including the recovery of damages, costs, and
attorney fees.
13. NONCOMPETE. Recognizing and acknowledging that nothing in this
----------
Agreement prevents Montiel from providing services to other companies which are
not in direct competition
2
<PAGE>
and nothing prevents Montiel from starting up and participating in a new Family
Business as described above, Montiel agrees that during the term of this
Agreement and for a period of ten years after termination of employment, Montiel
will not, directly or indirectly, own, manage, operate, control, be employed by,
participate in, or be connected in any manner with the ownership, management,
operation, or control of any business which manufactures or sells golf-inspired
sportswear which is substantially the same as that of the Company through either
the same channels of distribution as the then current channels of distribution
of the Company or specialty retail golf shops.
As consideration for Montiel's noncompete agreement, the Company shall pay
Montiel compensation equal to the total of (i) 100% of his then current salary
plus (ii) nine times an amount equal to 40% of his then current salary,
provided, however, such compensation shall not be less than $1,437,500. Such
compensation shall be paid in advance annual installments with the first
installment to be in the amount of 100% of his then current salary but not less
than $312,500 and paid on the first day of the first month following his last
day of employment and nine additional advance installments each to be in an
amount equal to 40% of his then current salary but not less than $125,000 and
paid on the anniversary of the first installment date in each of the subsequent
years; provided, however, that in the event of Montiel's death during the
noncompete period, any remaining installments shall be paid to any beneficiary
designated by Montiel or, if no such beneficiary has been designated, to his
estate. The Company also agrees to continue to provide Montiel full employee
benefits for the first year following termination of his employment.
In the event of Montiel's actual or threatened breach of the provisions of
this paragraph, the company shall be entitled to an injunction restraining
Montiel therefrom. Nothing shall be construed as prohibiting the Company from
pursuing any other available remedies for such breach or threatened breach,
including the recovery of the noncompete compensation described above, damages,
costs, and attorney fees.
14. EXPENSES. Montiel is authorized to incur reasonable expenses for
--------
promoting and conducting the business of the Company, including expenses for
entertainment, travel and similar items. The Company will reimburse Montiel for
all such expenses upon the presentation by Montiel, from time to time, of an
itemized account of such expenditures.
15. TERMINATION OF EMPLOYMENT.
-------------------------
a. Death. In the event of Montiel's death during his employment, the
-----
Company shall pay to any beneficiary designated by Montiel or, if no such
beneficiary has been designated, to his estate, an amount equal to the
compensation which is then due to Montiel as provided by this Agreement, plus an
amount equal to the total of (i) 100% of his then current salary plus (ii) nine
times an amount equal to 40% of his then current salary, provided, however, the
sum of (i) and (ii) shall not be less than $1,437,500. The payment schedule for
the sum of (i) and (ii) above shall be the same as that set forth in Section 13
above.
b. Termination or Resignation. The Company may terminate Montiel's
--------------------------
employment without notice. Montiel may resign from such employment upon 90 days
written
3
<PAGE>
notice to the Company. Upon either such event, Montiel, if requested by the
Company, shall continue to render his services, and shall be paid the then
current salary and benefits up to the effective date of termination or
resignation, as the case may be.
c. Stock Options. Upon Montiel's death or termination of his
-------------
employment without cause or as a result of a change of control of the Company
(as defined by the Compensation Committee and attached to the minutes of
November 4, 1994), all options then held by Montiel shall become immediately
exercisable for a period of one year in the event of death and for a five-year
period in the event of termination of his employment without cause or as a
result of a change of control of the Company.
16. NOTICES. Any notice required or permitted to be given under this
-------
Agreement shall be sufficient if in writing and delivered in person or sent by
registered or certified mail to Montiel's residence in the case of Montiel or to
its principal office in the case of the Company.
17. WAIVER. The waiver of any provision of this Agreement shall not
------
operate or be construed as a waiver of any other provision of this Agreement.
No waiver shall be valid unless in writing and executed by the party to be
charged therewith.
18. SEVERABILITY/MODIFICATION. In the event that any clause or provision
-------------------------
of this Agreement shall be determined to be invalid, illegal or unenforceable,
such clause or provision may be severed or modified to the extent necessary,
and, as severed and/or modified, this Agreement shall remain in full force and
effect.
19. ASSIGNMENT. The rights and obligations of the Company under this
----------
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of the Company. Montiel acknowledges that the services to be
rendered under this Agreement are unique and personal. Accordingly, Montiel may
not assign his rights and obligations under this Agreement.
20. ENTIRE AGREEMENT. This instrument contains the entire agreement
----------------
concerning the employment arrangement between the parties and shall, as of the
effective date hereof, supersede all other such agreements between the parties.
It may not be amended except by an agreement in writing signed by both parties.
21. GOVERNING LAW AND JURISDICTION. This Agreement shall be interpreted,
------------------------------
construed, and enforced under the laws of the State of California. The courts
and authorities of
4
<PAGE>
the State of California shall have sole jurisdiction and venue over all
controversies which may arise with respect to this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement the date and
year indicated below, effective January 1, 1995.
THE COMPANY:
ASHWORTH, INC.
Dated: By: /s/ RICHARD H. WERSCHKUL
--------------------- -------------------------------------
Richard H. Werschkul, President
MONTIEL:
Dated: /s/ GERALD W. MONTIEL
--------------------- -------------------------------------
Gerald W. Montiel
5
<PAGE>
EXHIBIT 10(b)
ASHWORTH, INC. AND GERALD W. MONTIEL
PERSONAL SERVICES AGREEMENT AND
ACKNOWLEDGMENT OF TERMINATION OF EXECUTIVE EMPLOYMENT
THIS AGREEMENT effective December 31, 1998, is made and entered into by and
between ASHWORTH, INC. (the "Company") and GERALD W. MONTIEL ("Montiel").
WHEREAS, the Company and Montiel wish to terminate Montiel's employment by
the Company effective December 31, 1998, pursuant to the terms and conditions of
the Executive Employment Agreement between the Company and Montiel dated January
1, 1995, a copy of which is attached hereto as Exhibit A (the 1995 Agreement);
and
WHEREAS, the Company and Montiel wish, instead, to enter into a personal
services agreement effective December 31, 1998;
NOW, THEREFORE, the parties hereto acknowledge and agree as follows:
1. Termination and Resignation. Montiel and the Company hereby mutually
---------------------------
agree that Montiel's employment as Chairman of the Board is terminated pursuant
to the terms and conditions of the 1995 Agreement effective December 31, 1998.
Montiel hereby resigns as an officer and a director of the Company effective
December 31, 1998.
2. Retention. Montiel is hereby retained as a consultant effective
---------
December 31, 1998, pursuant to the terms and conditions set forth below, which
terms and conditions supersede the employment terms and conditions of the 1995
Agreement.
3. Term. The Agreement for Montiel's personal services as a consultant
----
shall become effective on December 31, 1998, and continue for a term of five
years, provided, however, that either party may terminate the terms and
conditions related to Montiel's personal services as a consultant at any time
upon thirty days' written notice.
4. Services. Upon reasonable request of the Company's Chief Executive
--------
Officer as requested by the Board of Directors and availability of Montiel,
Montiel shall work with the Company's Chief Executive Officer and staff as a
special consultant to the Board to visualize and identify Company direction and
evolve brand image, attend Board of Directors meetings, provided, however, that
Montiel shall not be required to provide such services for more than 30 days in
any 12-month period during the term of this Agreement. To the extent required in
order for Montiel to provide the requested services, the Company will provide
the hardware and technical links from Montiel's home office to the Company.
5. Compensation. The Company shall pay Montiel $1,000 for each day he
------------
agrees to and does provide services to the Company, as more fully described
below. If Montiel is elected or appointed a director or officer of the Company
during the term of this Agreement, Montiel shall serve in such capacity or
capacities without further compensation; but nothing herein shall be construed
as requiring the Company or anyone else, to cause the election or appointment of
Montiel as such director or officer.
<PAGE>
6. Health and Hospital Insurance. The Company shall continue to provide
-----------------------------
Montiel with health insurance through December 31, 1999, pursuant to the terms
of the 1995 Agreement.
7. Life Insurance. The Company shall maintain life insurance in the
--------------
amount of $2,000,000, through December 31, 1999, pursuant to the terms of the
1995 Agreement. Upon expiration of this Agreement, and at Montiel's election,
the ownership of such life insurance shall be transferable to Montiel upon his
payment to the Company of one-half of the then cash value, if any, of such
insurance. Additionally, upon payment by Montiel to the Company of one-half of
the December 31, 1999, cash value of a split-dollar life insurance policy in the
name of Montiel for $1,000,000, the Company will relinquish all interest in the
said policy.
8. Stock Options. All options held by Montiel shall become immediately
-------------
exercisable for a period of five years pursuant to the terms of the 1995
Agreement. The following is a list of the options:
GRANT DATE OPTION PRICE NO. OF SHARES
---------- ------------ -------------
10/02/93 $ 8.50 133,236
10/02/93 $ 8.50 11,764
01/22/96 $ 6.50 15,384
01/22/96 $ 6.50 5,241
11/11/97 $10.1875 1,132
11/11/97 $10.1875 18,868
11/11/97 $10.1875 9,815
11/11/97 $10.1875 10,185
11/11/97 $10.1875 9,815
11/11/97 $10.1875 10,185
-------
Total Options 225,625
9. Expenses. Montiel is authorized to incur reasonable expenses for
--------
promoting and conducting the business of the Company, including expenses for
entertainment, travel and similar items, provided such expenses are preapproved
by the Company's Chief Executive Officer. The Company will reimburse Montiel for
all such expenses upon the presentation by Montiel, from time to time, of an
itemized account of such expenditures.
10. Golf Club Membership. Montiel owns a membership in Rancho Santa Fe
--------------------
Farms Golf Club (the "Club") which was purchased for him by the company in
(approximately) 1991. Montiel offers, and the Company accepts, use of his
membership at the Club for entertaining the Company's customers, employees and
associates for a period of five years from January 1, 1999, provided prior
approval has been obtained from Montiel or the management of the Club. The
Company agrees to reimburse Montiel for fees and expenses incurred by Company
customers, employees and associates. The Company will continue to pay the
monthly membership fee until December 31, 1999.
2
<PAGE>
11. Proprietary Interests of Company. Recognizing and acknowledging that
--------------------------------
nothing in this Agreement prevents Montiel from providing services to other
companies which are not in direct competition with the Company, Montiel
acknowledges and agrees that all of the terms and conditions of Section 12 of
the 1995 Agreement are applicable, and Montiel hereby affirms that he will
comply with such terms and conditions.
12. Goodwill and Reputation of the Company and Montiel. Montiel shall at
--------------------------------------------------
all times conduct himself in such manner as to preserve and protect the
reputation and goodwill of the Company. The Company shall at all times conduct
its affairs in such manner as to preserve and protect the goodwill and
reputation of Montiel.
13. Noncompete. The Company and Montiel acknowledge and agree that,
----------
effective with the termination of Montiel's employment, all of the terms and
conditions of Section 13 of the 1995 Agreement are applicable, and the Company
and Montiel hereby affirm their compliance with such terms and conditions;
provided, however, (1) upon request by Montiel, the Company shall prepay, up to
a maximum of $312,500, in the second year of the noncompete period the then
present value of the payment due the second year; and (2) upon request by
Montiel at any time from and after the second year of the noncompete period, the
Company may consent to prepay, up to a maximum of $312,500 in any year of the
noncompete period, the then present value of any future payment due during the
third through tenth years at a discounted rate of eight percent (8%), such
consent not be unreasonably withheld. Such prepayments shall not relieve
Montiel of his obligations under the noncompete provisions of the 1995
Agreement. Notwithstanding the foregoing, at any time after the third
anniversary of the date of this Agreement, Montiel may deliver written notice to
the Company (the "Election Notice") that Montiel no longer desires to receive
payments under the terms of Section 13 of the 1995 Agreement. In such event
Montiel shall elect to (1) reimburse the Company for any advance annual
installments attributable to the terminated noncompete period or (2) extend the
noncompete period through the date for which Montiel received compensation,
based upon the compensation agreed upon under Section 13 of the 1995 Agreement.
14. Notices. Any notice required or permitted to be given under this
-------
Agreement shall be sufficient if in writing and delivered in person or sent by
registered or certified mail to Montiel's residence in the case of Montiel or to
its principal office in the case of the Company.
15. Waiver. The waiver of any provision of this Agreement shall not
------
operate or be construed as a waiver of any other provision of this Agreement.
No waiver shall be valid unless in writing and executed by the party to be
charged therewith.
16. Severability/Modification. In the event that any clause or provision
-------------------------
of this Agreement shall be determined to be invalid, illegal or unenforceable,
such clause or provision may be severed or modified to the extent necessary, as,
as severed and/or modified, this Agreement shall remain in full force and
effect.
17. Assignment. The rights and obligations of the Company under this
----------
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of the Company. Montiel acknowledges that the services to be
rendered under this Agreement are
3
<PAGE>
unique and personal. Accordingly, Montiel may not assign his rights and
obligations under this Agreement.
18. Entire Agreement. This instrument contained the entire agreement
----------------
concerning the employment arrangement between the parties and shall, as of the
effective date hereof, supersede all other such agreements between the parties.
It may not be amended except by an agreement in writing signed by both parties.
19. Governing Law and Jurisdiction. This Agreement shall be interpreted,
------------------------------
construed, and enforced under the laws of the State of California The courts and
authorities of the State of California shall have sole jurisdiction and venue
over all controversies which may arise with respect to this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement the date and
year indicated below, effective the date indicated above.
THE COMPANY:
ASHWORTH, INC.
Date: By: /s/ RANDALL L. HERREL, SR.
--------------- ----------------------------
Randall L. Herrel, Sr.
President & Chief Executive Officer
MONTIEL:
Date: /s/ GERALD W. MONTIEL
--------------- -----------------------
Gerald W. Montiel
4
<PAGE>
EXHIBIT 10(c)
AMENDMENT TO PERSONAL SERVICES AGREEMENT
This Amendment (this "AMENDMENT") to that certain Personal Services
Agreement and Acknowledgment of Termination of Executive Employment (the
"PERSONAL SERVICES AGREEMENT") is effective as of January 1, 1999 by and between
Ashworth, Inc., a Delaware corporation (the "COMPANY") and Gerald W. Montiel
("MONTIEL").
BACKGROUND
A. Montiel retired from his position as Chairman of the Board of
Directors of the Company effective December 31, 1998.
B. The Personal Services Agreement provides, among other things, that
(i) Montiel will provide consulting services to the Board of Directors of the
Company and (ii) all options held by him shall become immediately exercisable
for a five-year period.
C. Montiel holds an option granted on October 2, 1993 under the Company's
Amended and Restated Incentive Stock Option Plan (the "INCENTIVE PLAN") which
may not, by its terms and the terms of the Incentive Plan, remain exercisable
for a five-year post-retirement period (i.e., until December 31, 2004).
D. The parties wish to (i) terminate the option granted to Montiel on
October 2, 1993 under the Incentive Plan, (ii) amend the terms of the Personal
Services Agreement to exclude such option from the list of options to be
exercisable for the five-year post-retirement period, and (iii) grant a new
option to Montiel under the Company's Amended and Restated Nonqualified Stock
Option Plan (the "NONQUALIFIED PLAN").
NOW, THEREFORE, the parties agree as follows:
1. TERMINATION OF OPTION. All outstanding stock options granted by the
---------------------
Company to Montiel under the Incentive Plan on October 2, 1993 are hereby
terminated to the extent they have not yet been exercised. The parties
acknowledge that one stock option to purchase 11,764 shares of the Company's
Common Stock at an exercise price of $8.50 per share is terminated by this
Section 1.
- ---------
2. AMENDMENT TO PERSONAL SERVICES AGREEMENT.
----------------------------------------
a. Section 8 (Stock Options) of the Personal Services Agreement is
hereby deleted in its entirety and the following is inserted in lieu thereof:
"8. Stock Options. All options held by Montiel shall become immediately
-------------
exercisable for a period of five years pursuant to the terms of the
1995 Agreement. The following is a list of the options:
<PAGE>
GRANT DATE OPTION PRICE NO. OF SHARES
---------- ------------ -------------
10/02/93 $ 8.50 133,236
01/22/96 $ 6.50 15,384
01/22/96 $ 6.50 5,241
11/11/97 $10.1875 1,132
11/11/97 $10.1875 18,868
11/11/97 $10.1875 9,815
11/11/97 $10.1875 10,185
11/11/97 $10.1875 9,815
11/11/97 $10.1875 10,185
---------
Total Options 213,861."
b. Except as expressly set forth in this Amendment all other terms of
the Personal Services Agreement shall remain in full force and effect.
3. GRANT OF OPTION.
---------------
a. The Company hereby grants to Montiel a stock option (the "OPTION")
under the Nonqualified Plan to purchase shares of the Company's Common Stock
upon the following terms and conditions:
Option Grant Date: January 1, 1999
Maximum Number of Shares of Common
Stock Issuable Upon Exercise of Option: 11,764
Purchase Price Per Share: $8.50
Vesting Schedule: Fully Vested
Expiration Date: December 31, 2004
b. Montiel has received a copy of the Nonqualified Plan. This
Section 3 is subject in all respects to the applicable provisions of the
- ---------
Nonqualified Plan, which are incorporated herein by reference. In the case of
any conflict between the provisions of the Nonqualified Plan and this Section 3,
---------
the provisions of the Nonqualified Plan shall control.
4. GOVERNING LAW. This Agreement shall be governed by, interpreted
-------------
under, and construed and enforced in accordance with the internal laws, and not
the laws pertaining to conflicts or choice of laws, of the State of California
applicable to agreements made or to be performed wholly within the State of
California.
2
<PAGE>
5. COUNTERPARTS. This Amendment may be executed in any number of
------------
counterparts, each of which shall be an original and all of which together shall
constitute one and the same instrument.
6. FACSIMILE. This Amendment may be executed and delivered by facsimile
---------
and, upon such execution and delivery, shall have the same force and effect as
an originally executed instrument.
IN WITNESS WHEREOF, the Company and Montiel have executed this
Agreement effective as of the date first above written.
ASHWORTH, INC.,
A DELAWARE CORPORATION
By: /s/ RANDALL L. HERREL
-----------------------------------
Randall L. Herrel
President and Chief Executive Officer
/s/ GERALD W. MONTIEL
-----------------------------------
Gerald W. Montiel
3
<PAGE>
EXHIBIT 10(d)
PROMOTION AGREEMENT
ASHWORTH, INC., JAMES W. NANTZ III
AND NANTZ COMMUNICATIONS, INC.
THIS AGREEMENT is entered into by and among ASHWORTH, INC. (The "Company"
or "Ashworth"), JAMES W. NANTZ III ("Nantz") and NANTZ COMMUNICATIONS, INC.
("Nantz Communications"), effective as of June 1, 1998.
WHEREAS, the Company desires to retain Nantz Communications and Nantz to
provide certain promotional and other services and Nantz Communications and
Nantz are willing to provide such services on the terms and conditions set forth
herein; and
WHEREAS, the parties hereto desire to set forth in writing their agreement
as to such promotion arrangement;
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:
DEFINITIONS
As used herein, the terms set forth below shall be defined as follows:
ENDORSEMENT shall include only the right to use the name, any nickname,
initials, autograph, facsimile signature, photograph, portrait, likeness, and/or
endorsement of Nantz.
ASHWORTH APPAREL shall mean all ASHWORTH(R) brand sportswear apparel
contained in the Company's present and future collections (during the Term (as
defined below)).
ASHWORTH PRODUCTS shall mean, collectively, Ashworth Apparel and Ashworth
hats and shoes.
DISABILITY shall mean mental or physical illness or condition rendering
Nantz incapable of fulfilling the services to be provided by him under this
Agreement for a continuous period of at least 60 days.
PREMIUM PROGRAM shall mean any traffic builder or other program involving
the use of a premium to sell products or services other than Ashworth products
and shall include any program primarily designed to attract the consumer to
purchase a product or service other than Ashworth Products themselves.
CONTRACT YEAR shall mean a period of twelve (12) successive months
commencing on any first day of June during the Term.
<PAGE>
Ashworth/Nantz
Promotion Agreement
- -------------------
TERM OF RELATIONSHIP
1. GRANT AND ACCEPTANCE. The Company hereby retains Nantz Communications and
Nantz to provide the below described services (the "Services") and Nantz
Communications and Nantz agree to provide the Services upon the terms and
conditions herein set forth.
2. TERM. Except as otherwise provided herein, this Agreement shall commence
effective June 1, 1998, and shall continue for a term of three (3) years
expiring May 31, 2001 (the "Term").
SERVICES
Nantz Communications and Nantz shall furnish the following Services:
1. ENDORSEMENT. Subject to the terms and conditions hereof, Nantz
Communications grants to the Company the Endorsement throughout the world
during the Term in connection with the advertisement, promotion and sale by
the Company of Ashworth Products except in connection with Premium
Programs.
2. ASHWORTH APPAREL AND PRODUCTS. Subject to any restrictions, contractual or
otherwise, on Nantz Communications or Nantz (collectively, the
"Restrictions"), Nantz shall wear Ashworth Products, when possible and as
reasonably appropriate, while broadcasting all professional sports
tournaments and other professional sports outings, and during any
professional sports clinics or instructions given by Nantz Communications
or Nantz; provided that the Company has provided Nantz, at no charge, with
sufficient amounts of Ashworth Products in styles and sizes Nantz finds
suitable and appropriate for his use, subject to the restriction under
Paragraph 4 of Section COMPENSATION AND CONSULTING FEES.
3. LOGOS. Except as otherwise provided herein, and subject to the
Restrictions, Nantz Communications agrees that such Products may
prominently bear the Company's logo and shall not bear any other logos.
4. PHOTOGRAPHY, SPEAKING AND STORE APPEARANCES. Nantz agrees to be available
for up to four photography sessions (2 in Southern California during the
week and 2 to be at Nantz's site locations or tournaments), two speaking
engagements, and three store appearances each Contract Year, at times and
places mutually convenient for Nantz and the Company but in no event at
times which adversely impact on the schedules of Nantz Communications or
Nantz. Nantz Communications shall have the right to review and reject in
good faith the use of any advertising, promotion or other programs and
materials which include Nantz or his image. No use shall be made of any
such programs or materials hereunder unless and until the same has been
approved by Nantz
<PAGE>
Ashworth/Nantz
Promotion Agreement
- -------------------
Communications. The Company agrees that each photography session shall not
exceed one and one-half days and each speaking engagement and store
appearance shall not exceed one-half day. The Company further understands
that failure to utilize services of Nantz pursuant to this section shall
not result in any reduction in payments to Nantz Communications hereunder,
nor may the obligations to provide Services be carried forward from one
Contract Year to another Contract year. The obligations of Nantz
Communications and Nantz to provide the Services hereunder are subject to
the condition that payments to Nantz Communications are current and up to
date.
5. NEW ACCOUNTS, CELEBRITIES. Nantz agrees to assist Ashworth in locating
potential new accounts based on his professional contacts, assist Ashworth
in gaining access to celebrities and CBS executives which Ashworth could
provide clothes for special events and also assist in gaining access to
non-golf professionals who potentially would wear Ashworth clothes.
6. SPECIAL EVENTS. Nantz will assist Ashworth in creating, promoting and
participating in an event (i.e., golf tournament, cocktail reception, etc.)
----
to be associated with a major sporting event (i.e., PGA Championship,
----
Masters, etc.).
7. EMPLOYEE STATUS. Nantz will be a full time Ashworth employee rather than
an independent contractor.
8. BOARD OF DIRECTORS. Nantz agrees to be nominated, elected to and serve on
the Board of Directors of Company in the capacity of voting director.
9. OTHER OBLIGATIONS. The Company acknowledges that Nantz Communications' and
Nantz's obligations to CBS or any other television station or network with
which Nantz Communications or Nantz has a contract or arrangement shall
take precedence over any other commitments of Nantz Communications or Nantz
under this Agreement.
INDEMNIFICATION
Neither Nantz Communications nor Nantz shall be liable for any obligations
of the Company resulting directly or indirectly from the Endorsement of Ashworth
Products. The Company shall protect, indemnify and hold harmless each of Nantz
Communications and Nantz against any and all expenses, damages, claims, suits,
actions, judgments and costs whatsoever, arising out of, or in any way connected
with such Endorsement, in any advertising or promotional materials furnished by
or on behalf of the Company, actions or omissions of the Company or any claim or
action for personal injury, death or other cause of action involving alleged
defects in Ashworth Products, including but not limited to indemnification of
reasonable legal expenses incurred in defense of all such claims. Further,
Nantz Communications or Nantz shall have the
<PAGE>
Ashworth/Nantz
Promotion Agreement
- -------------------
right to select legal counsel to represent it or him in the event of any such
claims or legal proceedings, and the costs of such legal representation shall be
paid by the Company.
INSURANCE
The Company agrees to provide and maintain, at its own expense, advertising
and product liability insurance each with limits no less than $5,000,000 and
within thirty (30) days from the date hereof, the Company will submit to Nantz
Communications a fully paid policy or certificate of insurance naming Nantz
Communications and Nantz as insured parties, requiring that the insurer shall
not terminate or materially modify such without written notice to Nantz
Communications at least twenty (20) days in advance thereof.
The Company further agrees to provide and maintain, at its own expense, a
policy of Directors and Officers Insurance with limits no less than
$25,000,000 and within thirty (30) days from the date hereof, the Company will
submit to Nantz Communications a fully paid policy or certificate of insurance
naming Nantz as an insured party, requiring that the insurer shall not terminate
or materially modify such without written notice to Nantz Communications at
least twenty (20) days in advance hereof.
COMPENSATION AND CONSULTING FEES
As full compensation for Services, the Company shall pay Nantz
Communications the following fees:
10. CONSULTING FEE. The Company shall pay Nantz Communications an annual
consulting fee of $30,000, such fee to be paid in equal quarterly
installments of $7,500 on the 1st day of each June, September, December and
March of each Contract year.
11. ADDITIONAL FEES. If Nantz agrees to participate in more than three store
appearances in any given Contract Year, the Company shall pay Nantz
Communications an additional fee of $7,500 for such additional appearance
prior to or simultaneously with such appearances.
12. REIMBURSEMENT OF EXPENSES. The Company shall reimburse Nantz
Communications for expenses reasonably incurred by Nantz or Nantz
Communications in connection with the Services to the Company including,
but not limited to, first-class air fare, hotel accommodations, local
transportation and meals. Nantz Communications shall furnish the Company
with an itemized statement from time to time, together with, whenever
possible, actual bills, receipts, and other evidence of expenditure. Nantz
Communications shall be reimbursed within thirty (30) days after receipt by
the Company of such itemized statements and attachments.
<PAGE>
Ashworth/Nantz
Promotion Agreement
- -------------------
As full compensation for Services, the Company shall provide and issue to
Nantz the following:
13. APPAREL. The Company shall furnish Nantz, at no cost, with sufficient
Ashworth Products to be used by him in connection with the Services and for
the personal use of Nantz and his immediate family. The cost of said
Product shall not exceed $12,000 (at wholesale) during any single Contract
Year.
14. STOCK OPTIONS. a) As consideration for the rights granted and the services
to be rendered hereunder, the Company hereby grants to Nantz options (the
"Options"), to purchase shares of the common stock of the Company par value
$.001 per share (the "Share"), which are exercisable as follows:
15. The first Option to purchase 40,000 Shares upon payment of the aggregate
Option Share Price (as defined below) for the number of Shares so purchased
shall become exercisable on June 1, 1999, unless this Agreement is
terminated as provided herein prior to such date, in which case this Option
shall be canceled. Once exercisable, this Option may be exercised in full
or in any number of partial exercises or in combination with the full or
partial exercise of any other Option for a period terminating upon the
earlier to occur of (A) the fifth anniversary of the initial exercisability
date or (B) the date of termination of this Agreement, as provided herein,
if this Agreement is terminated prior to May 30, 2001.
16. The second Option to purchase up to an additional 40,000 shares upon
payment of the aggregate Option Share Price for the number of Shares so
purchased shall become exercisable on June 1, 2000, unless this Agreement
is terminated as provided herein prior to such date, in which case this
Option shall be canceled. Once exercisable, this Option may be exercised
in full or in any number of partial exercises or in combination with the
full or partial exercise of any other Option for a period terminating upon
the earlier to occur of (A) the fifth anniversary of the initial
exercisability date or (B) the date of termination of this Agreement, as
provided herein, if this Agreement is terminated prior to May 30, 2001;
17. The third Option to purchase up to an additional 40,000 shares upon payment
of the aggregate Option Share Price for the number of Shares so purchased
shall become exercisable on June 1, 2001, unless this Agreement is
terminated as provided herein prior to such date, in which case this Option
shall be canceled. Once exercisable, this Option may be exercised in full
or in any number of partial exercises or in combination with the full or
partial exercise of any other Option for a period terminating upon the
earlier to occur of (A) the fifth anniversary of the initial exercisability
date or (B) the date of termination of this Agreement, as provided herein,
if this Agreement is terminated prior to May 30, 2001;
The "Option Share Price" shall initially be $6 per Share as approved by the
Compensation Committee at its regular meeting held on December 15, 1998.
<PAGE>
Ashworth/Nantz
Promotion Agreement
- -------------------
b) The Options being granted hereunder are being granted under and subject
to the terms and conditions of the Ashworth, Inc. Amended and Restated Incentive
Stock Option Plan, dated November 1, 1996, ("Amended Plan") and all Shares
issued upon the exercise of any Option shall be registered under the Securities
Act of 1933, as amended.
EXCLUSIVITY
During the Term, neither Nantz Communications nor Nantz shall enter into
any activity, employment, independent contract, or other business arrangement
which conflicts with Nantz Communications' or Nantz's obligations under this
Agreement or perform any service which reasonably appears to be an endorsement
of the sportswear apparel, hats and shoes of a third party without the Company's
prior written approval. Nantz Communications and Nantz expressly agree that the
Endorsement will not be granted to anyone other than the Company for use during
the Term in connection with the advertisement and promotion of sportswear
apparel, hats and shoes. Notwithstanding the foregoing Nantz shall be permitted
to wear a Lynx hat or clothing logo when performing promotional services for
Lynx and to use Lynx equipment when performing any promotional services for the
Company in which equipment will be used.
TERMINATION
This Agreement may be terminated by any party in the following
circumstances:
18. Upon mutual consent of the Company, on the one hand, and Nantz
Communications and Nantz, on the other hand;
19. Nantz's Disability or death, in which event the Agreement shall terminate
on the May 1 following such Disability or death;
20. Repeated misconduct of Nantz which subjects Nantz to continued public
ridicule causing a substantial loss of Nantz's positive public image;
21. Nantz's conviction or plea of guilty or no contest to a felony involving
moral turpitude;
22. A finding of insolvency or bankruptcy against the other party (which, in
the case of a desired termination by the Company, shall mean Nantz
Communications or Nantz); and
23. Failure to comply with the terms and conditions of this Agreement after
being given notice thereof and, where applicable, a reasonable opportunity
to cure the failure (which shall be 10 days in the event of a failure to
timely make a payment pursuant hereto; 30 days otherwise). In order to be
a sufficient notice hereunder, any such written notice shall specify in
detail each item of default, and shall specify in detail the action the
defaulting party is required to take in order to cure each item.
<PAGE>
Ashworth/Nantz
Promotion Agreement
- -------------------
Notwithstanding the foregoing, upon the occurrence of repeated intentional
failures to comply with the terms and conditions of this Agreement, which have
been noticed in accordance with the terms hereof (regardless of whether such
failures have been cured), the non-defaulting party may immediately terminate
this Agreement upon written notice to the defaulting party without affording a
further opportunity to cure.
Should Nantz Communications or Nantz disagree with the Company as to the
existence of a condition affording the Company the right to so terminate this
Agreement, Nantz Communications or Nantz shall, within thirty (30) days
following the receipt of any such notice of termination, submit the matter to
arbitration pursuant to the provisions of this Agreement.
The termination rights set forth in this section shall not constitute the
exclusive remedy of the non-defaulting party hereunder, however, and if a
default is made by either party hereunder, the other may resort to such other
remedies as said party would have been entitled to if this section had been
omitted from this Agreement. Termination under the provisions of this section
shall be without prejudice to any rights or claims which the terminating party
may otherwise have against the defaulting party.
From and after the termination of the Term all of the rights of the Company to
the use of the Endorsement shall cease absolutely and the Company shall not
thereafter use or refer to the Endorsement in advertising or promotion in any
manner whatsoever. The Company shall not advertise, promote, distribute or sell
any item whatsoever in connection with the use of any name, figure, design,
logo, trademark or trade name confusingly similar to or suggestive of the
Endorsement following the termination of the Term.
ASSIGNMENT
This Agreement shall bind and inure to the benefit of the parties hereto
and their respective successors and permitted assigns. Nantz Communications and
Nantz acknowledge that the Services to be rendered by Nantz Communications and
Nantz are unique and personal. Accordingly, except as otherwise expressly
provided below, neither Nantz Communications nor Nantz shall assign any of their
respective rights or delegate any of their respective duties or obligations
under this Agreement without the written consent of the Company. Nothing herein
shall prevent Nantz Communications from assigning the monetary benefits of this
Agreement as it may so desire. Further, inasmuch as it is recognized that Nantz
Communications is the representative of Nantz, Nantz Communications may at any
time assign this Agreement to Nantz and, in such event, Nantz Communications
shall have no further obligation or liability in connection herewith and Nantz
Communications' position vis-a'-vis the Company in connection herewith shall be
in all respects the same as if Nantz Communications had signed this Agreement as
agent rather than as a principal from the beginning. The rights granted the
Company hereunder shall be used only by it and shall not, without the prior
written consent of Nantz Communications or Nantz, be transferred or assigned to
any other. In the event of the merger or consolidation of the Company with any
other entity, Nantz Communications shall have the right to terminate the
Agreement by so notifying the Company in writing on or before sixty (60) days
<PAGE>
Ashworth/Nantz
Promotion Agreement
- -------------------
after Nantz Communications has received notice of such merger or consolidation
if and only if, by virtue of such merger or consolidation Nantz Communications
or Nantz would be in default under or violating any provisions of any agreement
to which he or it is subject entered into prior to June 1, 1994.
ARBITRATION
Unless otherwise mutually agreed to in writing by the Company, Nantz
Communications and Nantz, any controversy or claim arising out of or related to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the Rules of the American Arbitration Association or any
successor. Each of the Company, on the one hand, and Nantz Communications and
Nantz, on the other hand, shall select one arbitrator and the two so selected
shall select a third. Failing the selection of an arbitrator by either party or
by the two so selected, the claim or controversy shall be settled by the
American Arbitration Association upon the application of either party. Judgment
upon any award of a majority of the arbitrators filed in a court of competent
jurisdiction shall be binding.
MISCELLANEOUS
24. NOTICES. Any and all notices required pursuant to this Agreement shall be
deemed given if in writing and delivered in person, sent by certified or
registered mail, return receipt requested, or set by telefax at or to the
addresses and telefax numbers set forth below or such other addresses and
telefax numbers as the parties may direct by notice given as herein
provided:
Ashworth, Inc.
Attention: President and Chief Executive Officer
2791 Loker Avenue West
Carlsbad, California 92008
Telephone: (619) 438-6610
Telefax: (619) 438-9107
James W. Nantz III
Nantz Communications, Inc.
c/o International Merchandising Corporation
22 East 71st Street
New York, New York 10021
Attention: Barry Frank
Telephone: (212) 774-8900
Telefax: (212) 772-2617
<PAGE>
Ashworth/Nantz
Promotion Agreement
- -------------------
25. GOVERNING LAW. This Agreement and its formation, operation and performance
shall be governed, construed, performed, and enforced in accordance with
the laws of the State of California.
26. JURISDICTION AND VENUE. For the purposes of any dispute arising hereunder,
jurisdiction and venue shall lie in the appropriate court in California.
27. ATTORNEY FEES AND EXPENSES. In any legal action or alternative dispute
resolution instituted to interpret or enforce the terms and/or conditions
of this Agreement, the prevailing party shall be entitled to recover
reasonable attorney fees and expenses.
28. WAIVER. A waiver by either party of any provision of this Agreement shall
not be deemed a waiver of any other portion of this Agreement. Failure to
require performance of any provision of this Agreement shall not be deemed
a continuing waiver of that provision or any other provision of this
Agreement.
29. SEVERABILITY. In the event that any provision or any portion of any
provision of this Agreement shall be held invalid, illegal or
unenforceable, the remainder of this Agreement shall remain valid,
enforceable, the remainder of this Agreement shall remain valid,
enforceable, and in effect.
30. CAPTION REFERENCES. All items headings and captions are for reference
purposes only and do not in any way modify or limit the provisions set
forth thereunder.
31. ENTIRE AGREEMENT. This Agreement contains the entire understandings and
agreement of the parties and supersedes any prior understandings and/or
agreement of the parties. This Agreement may not be modified or amended
without the written consent of all parties hereto.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
Ashworth/Nantz
Promotion Agreement
- -------------------
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date indicated below, effective the date first above mentioned.
THE COMPANY:
ASHWORTH, INC.
a Delaware corporation
Date: December 16, 1998 By: /s/ RANDALL L. HERRAL, SR.
------------------------------
Randall L. Herrel, Sr.
President & Chief Executive Officer
NANTZ COMMUNICATIONS, INC.
Date: December 16, 1998 By: /s/ JAMES W. NANTZ III
--------------------------
James W. Nantz III
President
Date: December 16, 1998 /s/ JAMES W. NANTZ III
--------------------------
James W. Nantz III
<PAGE>
EXHIBIT 21
ASHWORTH, INC
SUBSIDIARIES OF THE REGISTRANT.
STATE OR OTHER JURISDICTION
NAME OF SUBSIDIARY OF INCORPORATION
Ashworth International, Inc. US Virgin Islands
(Foreign Sales Corporation)
Ashworth Store I, Inc. Delaware
Ashworth Store II, Inc. Delaware
Ashworth Store III, Inc. Delaware
Ashworth UK Ltd. England
Ashworth Inc et Compagnie Luxemburg (dissolved 9/1/98)
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
To the Stockholders of
Ashworth, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-35516, 33-41455, 33-47502, 33-54206 and 33-66040) on Form S-8 of Ashworth,
Inc. of our reports dated December 14, 1998, except for the ninth paragraph of
Note 8, as to which the date is January 27, 1999, relating to the consolidated
balance sheets of Ashworth, Inc. and subsidiaries as of October 31, 1998 and
1997 and the related consolidated statements of income, stockholders' equity and
cash flows for the years then ended and the related schedule, which reports
appear in the October 31, 1998 annual report on Form 10-K of Ashworth, Inc.
KPMG LLP
San Diego, California
January 27, 1999
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
reports included in this form 10-K, into the Company's previously filed
Registration Statement Files No. 33-35516, No. 33-41455, No. 33-47502, No. 33-
54206 and No. 33-66040.
ARTHUR ANDERSEN LLP
Orange County, California
January 27, 1999
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
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