SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-18553
Ashworth, Inc.
| Delaware (State or other jurisdiction of incorporation or organization) |
84-1052000 (I.R.S. Employer Identification No.) |
2765 LOKER AVENUE WEST
CARLSBAD, CA 92008
(Address of Principal Executive Offices)
(760) 438-6610
(Telephone No. Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
| Title | Outstanding at March 7, 2003 | |||
| $.001 par value Common Stock | 12,949,047 |
INDEX
| PAGE | |||||||||
| Part I. | Financial Information |
||||||||
| Item 1. | Financial Statements |
||||||||
Condensed Consolidated Balance Sheets |
1 | ||||||||
Condensed Consolidated Statements of Income |
2 | ||||||||
Condensed Consolidated Statements of Cash Flows |
3 | ||||||||
Notes to Condensed Consolidated Financial Statements |
4 | ||||||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition
and Results of Operations |
7 | |||||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
14 | |||||||
| Item 4. | Controls and Procedures |
15 | |||||||
| Part II. | Other Information |
||||||||
| Item 1. | Legal Proceedings |
15 | |||||||
| Item 2. | Changes in Securities and Use of Proceeds |
15 | |||||||
| Item 3. | Defaults Upon Senior Securities |
16 | |||||||
| Item 4. | Submission of Matters to a Vote of Security Holders |
16 | |||||||
| Item 5. | Other Information |
16 | |||||||
| Item 6. | Exhibits and Reports on Form 8-K |
16 | |||||||
Signatures |
19 | ||||||||
Certifications |
20 | ||||||||
Exhibit Index |
22 | ||||||||
ASHWORTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| January 31, | October 31, | |||||||||||
| 2003 | 2002 | |||||||||||
| (UNAUDITED) | ||||||||||||
ASSETS
|
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 881,000 | $ | 2,336,000 | ||||||||
Accounts receivable – trade, net |
28,268,000 | 33,572,000 | ||||||||||
Accounts receivable – other |
2,079,000 | 1,821,000 | ||||||||||
Inventories, net |
52,730,000 | 41,188,000 | ||||||||||
Income tax refund receivable |
345,000 | 246,000 | ||||||||||
Other current assets |
5,412,000 | 3,284,000 | ||||||||||
Deferred income tax asset |
1,959,000 | 1,748,000 | ||||||||||
Total current assets |
91,674,000 | 84,195,000 | ||||||||||
Property, plant and equipment, at cost |
39,822,000 | 39,167,000 | ||||||||||
Less accumulated depreciation and amortization |
(22,283,000 | ) | (21,278,000 | ) | ||||||||
Total property, plant and equipment, net |
17,539,000 | 17,889,000 | ||||||||||
Other assets, net |
831,000 | 891,000 | ||||||||||
Total assets |
$ | 110,044,000 | $ | 102,975,000 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||||||
Current liabilities: |
||||||||||||
Line of credit payable |
$ | 17,320,000 | $ | 11,125,000 | ||||||||
Current portion of long-term debt |
420,000 | 553,000 | ||||||||||
Accounts payable – trade |
6,233,000 | 6,338,000 | ||||||||||
Accrued liabilities |
3,225,000 | 3,014,000 | ||||||||||
Total current liabilities |
27,198,000 | 21,030,000 | ||||||||||
Long-term debt, net of current portion |
2,848,000 | 2,921,000 | ||||||||||
Deferred income tax liability |
1,134,000 | 904,000 | ||||||||||
Other long-term liabilities |
419,000 | 535,000 | ||||||||||
Stockholders’ equity: |
||||||||||||
Common stock |
13,000 | 13,000 | ||||||||||
Capital in excess of par value |
37,233,000 | 37,185,000 | ||||||||||
Retained earnings |
40,684,000 | 40,578,000 | ||||||||||
Accumulated other comprehensive income (loss) |
515,000 | (191,000 | ) | |||||||||
Total stockholders’ equity |
78,445,000 | 77,585,000 | ||||||||||
Total liabilities and stockholders’ equity |
$ | 110,044,000 | $ | 102,975,000 | ||||||||
See accompanying notes to condensed consolidated financial statements.
1
ASHWORTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
| Three months ended January 31, | |||||||||
| 2003 | 2002 | ||||||||
Net revenues |
$ | 26,563,000 | $ | 20,104,000 | |||||
Cost of goods sold |
16,596,000 | 12,793,000 | |||||||
Gross profit |
9,967,000 | 7,311,000 | |||||||
Selling, general and administrative expenses |
9,682,000 | 8,790,000 | |||||||
Income (loss) from operations |
285,000 | (1,479,000 | ) | ||||||
Other income (expense): |
|||||||||
Interest income |
10,000 | 7,000 | |||||||
Interest expense |
(192,000 | ) | (151,000 | ) | |||||
Other income |
73,000 | 13,000 | |||||||
Total other expense |
(109,000 | ) | (131,000 | ) | |||||
Income (loss) before provision for income tax
expense (benefit) |
176,000 | (1,610,000 | ) | ||||||
Provision for income tax expense (benefit) |
70,000 | (644,000 | ) | ||||||
Net income (loss) |
$ | 106,000 | ($ | 966,000 | ) | ||||
Net income (loss) per share |
|||||||||
Basic: |
|||||||||
Weighted average shares outstanding |
12,952,000 | 13,161,000 | |||||||
Net income (loss) per share |
$ | 0.01 | ($ | 0.07 | ) | ||||
Diluted: |
|||||||||
Weighted average shares outstanding |
13,080,000 | 13,161,000 | |||||||
Net income (loss) per share |
$ | 0.01 | ($ | 0.07 | ) | ||||
See accompanying notes to condensed consolidated financial statements.
2
ASHWORTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Three months ended January 31, | |||||||||
| 2003 | 2002 | ||||||||
Cash flows from operating activities: |
|||||||||
Net cash used in operating activities |
($ | 7,434,000 | ) | ($ | 4,042,000 | ) | |||
Cash flows from investing activities: |
|||||||||
Purchases of property and equipment |
(764,000 | ) | (345,000 | ) | |||||
Net cash used in investing activities |
(764,000 | ) | (345,000 | ) | |||||
Cash flows from financing activities: |
|||||||||
Principal payments on capital lease obligations |
(43,000 | ) | (10,000 | ) | |||||
Borrowings on line of credit |
15,595,000 | 7,250,000 | |||||||
Payments on line of credit |
(9,400,000 | ) | (2,100,000 | ) | |||||
Principal payments on notes payable and long-term debt |
(163,000 | ) | (154,000 | ) | |||||
Proceeds from issuance of common stock |
48,000 | 278,000 | |||||||
Net cash provided by financing activities |
6,037,000 | 5,264,000 | |||||||
Effect of exchange rate changes on cash |
706,000 | (306,000 | ) | ||||||
Net increase (decrease) in cash and cash equivalents |
(1,455,000 | ) | 571,000 | ||||||
Cash and cash equivalents, beginning of period |
2,336,000 | 1,055,000 | |||||||
Cash and cash equivalents, end of period |
$ | 881,000 | $ | 1,626,000 | |||||
See accompanying notes to condensed consolidated financial statements.
3
ASHWORTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2003
NOTE 1 - Basis of Presentation.
| In the opinion of management, the accompanying condensed consolidated balance sheets and related interim condensed consolidated statements of operations and cash flows include all adjustments (consisting only of normal recurring items) necessary for their fair presentation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Interim results are not necessarily indicative of results to be expected for the full year. | ||
| Certain information in footnote disclosures normally included in financial statements has been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, and consolidated financial statements and notes thereto included in the annual report on Form 10-K for the year ended October 31, 2002, filed with the SEC on January 30, 2003. | ||
| Certain reclassifications have been made to the prior year’s condensed consolidated financial statements to conform to classifications used in the current year. These reclassifications had no impact on previously reported results. | ||
| Shipping and Handling Expenses | ||
| The shipping expenses, which consist primarily of payments made to freight companies, are reported in SG&A expenses. Shipping expenses for the quarters ended January 31, 2003 and 2002 were $312,000 and $294,000 respectively. |
NOTE 2 - Inventories.
| Inventories consisted of the following at January 31, 2003 and October 31, 2002: |
| January 31, | October 31, | |||||||
| 2003 | 2002 | |||||||
Raw materials |
$ | 25,000 | $ | 121,000 | ||||
Work in process |
123,000 | 356,000 | ||||||
Finished goods |
52,582,000 | 40,711,000 | ||||||
Total inventories, net |
$ | 52,730,000 | $ | 41,188,000 | ||||
NOTE 3 - Net Income Per Share Information.
| Basic net income per share has been computed based upon the weighted average number of |
4
| common shares outstanding during the period. Diluted net income per share has been computed based upon the weighted average number of common shares outstanding plus the dilutive effects of common shares potentially issuable from the exercise of common stock options. Common stock options are excluded from the computation of net income per share if their effect is anti-dilutive. The following table sets forth the computation of basic and diluted net income per share based upon the requirements of SFAS No. 128: |
| Three months ended January 31, | |||||||||
| 2003 | 2002 | ||||||||
Numerator: |
|||||||||
Net income (loss) numerator for basic and diluted income (loss) per share – income (loss) available to common stockholders |
$ | 106,000 | ($ | 966,000 | ) | ||||
Denominator: |
|||||||||
Denominator
for basic income (loss) per share – weighted average shares |
12,952,000 | 13,161,000 | |||||||
Effect of dilutive securities: |
|||||||||
stock options |
128,000 | – | |||||||
Denominator for diluted income (loss) per share – adjusted weighted average shares and assumed conversions |
13,080,000 | 13,161,000 | |||||||
Basic net income (loss) per share |
$ | 0.01 | ($ | 0.07 | ) | ||||
Diluted net income (loss) per share |
$ | 0.01 | ($ | 0.07 | ) | ||||
| For the quarters ended January 31, 2003 and 2002, the diluted weighted average shares outstanding computation excludes 1,827,000 and 1,401,000 options, respectively, whose impact would have an anti-dilutive effect. |
NOTE 4 – Comprehensive Income.
| The Company includes the cumulative foreign currency translation adjustment as a component of the comprehensive income in addition to net income for the period. For the quarters ended January 31, 2003 and 2002, total comprehensive income (loss) was $812,000 and ($1,272,000), respectively. |
NOTE 5 – Legal Proceedings.
| On January 22, 1999, Milberg Weiss Bershad Hynes & Lerach LLP filed a class action in the United States District Court for the Southern District of California (“U.S. District Court”) on behalf of purchasers of the Company’s common stock during the period between September 4, 1997 and July 15, 1998. The action was subsequently consolidated with two similar suits and plaintiffs filed their Amended and Consolidated Complaint on December 17, 1999. Upon the Company’s motion, the U.S. District Court dismissed the Complaint with leave to amend on July 18, 2000. On September 18, 2000, plaintiffs served their Second Consolidated Amended Complaint (“Second Amended Complaint”). On November 6, 2000, the Company filed its |
5
| motion to dismiss the Second Amended Complaint, which the U.S. District Court granted, in part, and denied, in part. The remaining portions of the Second Amended Complaint allege that, among other things, during the class period and in violation of the Securities Exchange Act of 1934, the Company’s financial statements, as reported, did not conform to generally accepted accounting principles with respect to revenues and inventory levels. It further alleges that certain Company executives made false or misleading statements or omissions concerning product demand and that two former executives engaged in insider trading. The plaintiffs seek unspecified damages. The parties are currently in the discovery process. | ||
| The Company is party to other claims and litigation proceedings arising in the normal course of business. Although the legal responsibility and financial impact with respect to such other claims and litigation cannot currently be ascertained, the Company does not believe that these other matters will result in payment by the Company of monetary damages, net of any applicable insurance proceeds, that, in the aggregate, would be material in relation to the consolidated financial position or results of operations of the Company. |
NOTE 6 – Segment Information.
| The Company defines its operating segments as components of an enterprise for which separate financial information is available and regularly reviewed by the Company’s senior management. The Company has the following two reportable segments: domestic and international. Management evaluates segment performance based primarily on revenues and income from operations. Interest income and expense is evaluated on a consolidated basis and is not allocated to the Company’s business segments. Segment information is summarized (for the dates or periods presented) below: |
| Three months ended January 31, | ||||||||||
| 2003 | 2002 | |||||||||
Net Revenues: |
||||||||||
Domestic |
$ | 23,537,000 | $ | 17,870,000 | ||||||
International |
3,026,000 | 2,234,000 | ||||||||
Total |
$ | 26,563,000 | $ | 20,104,000 | ||||||
Income (Loss) From Operations: |
||||||||||
Domestic |
$ | 252,000 | ($ | 964,000 | ) | |||||
International |
33,000 | (515,000 | ) | |||||||
Total |
$ | 285,000 | ($ | 1,479,000 | ) | |||||
| January 31, | October 31, | |||||||||
| 2003 | 2002 | |||||||||
Total Assets: |
||||||||||
Domestic |
$ | 93,242,000 | $ | 86,198,000 | ||||||
International |
16,802,000 | 16,777,000 | ||||||||
Total |
$ | 110,044,000 | $ | 102,975,000 | ||||||
6
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company operates in an industry that is highly competitive and must accurately anticipate fashion trends and consumer demand for its products. There are many factors that could cause actual results to differ materially from the projected results contained in certain forward-looking statements in this report. For additional information, see “Cautionary Statements and Risk Factors,” below.
Because the Company’s business is seasonal, the current balance sheet balances at January 31, 2003 may more meaningfully be compared to the balances at January 31, 2002, rather than to the balances at October 31, 2002.
Critical Accounting Policies
In response to the SEC’s Release Numbers 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” and 33-8056, “Commission Statement About Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Company has identified the following critical accounting policies that affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Revenue Recognition. Based on its terms of F.O.B. shipping point, where risk of loss and title transfer to the buyer at time of shipment, the Company recognizes revenue at the time products are shipped or, for Company stores, at the point of sale. The Company records sales in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. Under these guidelines, revenue is recognized when all of the following exist: persuasive evidence of a sale arrangement exists, delivery of the product has occurred, the price is fixed or determinable and payment is reasonably assured. Provisions are made currently for estimated product returns and sales allowances.
Sales Returns and Other Allowances. Management must make estimates of potential future product returns related to current period product revenues. Management analyzes historical returns, current economic trends, changes in customer demand and sell-through of our products when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Material differences may result in the amount and timing of our revenues for any period if management makes different judgments or utilizes different estimates. The reserves for sales returns and other allowances amounted to $466,000 at January 31, 2003 compared to $535,000 at October 31, 2002 and $420,000 at January 31, 2002.
Allowance for Doubtful Accounts. Management must also make estimates of the uncollectability of accounts receivable. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, which results in bad debt expense. Management determines the adequacy of this allowance by analyzing historical bad debts, continually evaluating individual customer receivables considering the customer’s financial condition and current economic conditions. As of January 31, 2003, the Company had reserved $2.5 million for the unpaid principal balance of an unsecured promissory note and approximately $2.0 million of receivables due from a national retail customer which has filed for protection under U.S. bankruptcy laws, as well as $1.4 million for other estimated uncollectible receivables based on Management analysis. If the financial condition of other
7
significant customers of ours were to deteriorate, resulting in the impairment of their ability to make payments, material additional allowances for doubtful accounts may be required. In October 2002, the Company acquired credit insurance to cover many of its major accounts. Our trade accounts receivable balance was $28.3 million, net of allowances for doubtful accounts of $3.4 million, at January 31, 2003, as compared to the balance of $33.6 million, net of allowances for doubtful accounts of $3.2 million, at October 31, 2002. At January 31, 2002, the trade accounts receivable balance was $27.8 million, net of allowances for doubtful accounts of $1.4 million.
Inventory. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated net realizable value based on assumptions about age of the inventory, future demand and market conditions. This process provides for a new basis for the inventory until it is sold. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Our inventory balance was $52.7 million, net of inventory write-downs of $1.1 million, at January 31, 2003, as compared to an inventory balance of $41.2 million, net of inventory write-downs of $1.0 million, at October 31, 2002. At January 31, 2002, the inventory balance was $36.5 million, net of inventory write-downs of $0.9 million.
Asset Purchase Credits. In November 2000, the Company entered into an agreement with a third party whereby inventory was exchanged for future asset purchase credits (“APCs”), which may be utilized by the Company to purchase future goods and services over a four-year period. The original value of the inventory exchanged (at cost) was $1.4 million resulting in $1.4 million in future APCs. The Company has entered into contracts with several third party suppliers who have agreed to accept these APCs, in part, as payment for goods and services. From time to time the Company may enter into additional contracts with such third party suppliers to use the APCs. At January 31, 2003, the Company had $820,000 of the APCs remaining and management expects to fully utilize them over their remaining life.
At January 31, 2003 and 2002, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, the Company does not engage in trading activities involving non-exchange traded contracts which rely on estimation techniques to calculate fair value. As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships.
Results of Operations
First quarter 2003 compared to first quarter 2002
Consolidated net revenues for the first quarter of fiscal 2003 increased 32.1% to $26,563,000 from $20,104,000 for the same period in 2002 primarily due to the addition of the Callaway Golf apparel product line. Ashworth entered into an exclusive licensing agreement with Callaway Golf Company in May 2001 and began shipping the Callaway Golf apparel line in April 2002. Callaway Golf is a trademark of the Callaway Golf Company. Ashworth, Inc. is an Official Apparel Licensee of Callaway Golf Company. Net revenues for the domestic segment increased 31.7% to $23,537,000 for the current quarter from $17,870,000 in the first quarter of 2002, primarily due to increased revenues from the Company’s golf related distribution channel which increased $3,422,000 or 28.5%, the corporate distribution channel which increased $1,316,000 or 42.0% and the retail distribution channel which increased $864,000 or 79.8%, each as compared to the same quarter in the prior fiscal year. Net revenues for the international segment increased 35.5% to $3,026,000 for the current quarter from $2,234,000 for the same period of the prior fiscal year. The increase
8
was primarily due to higher revenues in the Company’s U.K. subsidiary and Canadian divisions as well as a slight increase in other international territories.
Consolidated gross margin for the quarter increased 110 basis points to 37.5% as compared to 36.4% for the same quarter a year earlier. This improvement was primarily due to improved product sourcing as well as to the positive leverage received from the higher revenues.
Consolidated selling, general and administrative (“SG&A”) expenses increased 10.2% to $9,682,000 for the first quarter of fiscal 2003 from $8,790,000 for the same period in fiscal 2002 primarily due to sales related expenses increasing as a result of higher revenues. As a percent of net revenues, SG&A decreased to 36.5% in the current quarter as compared to 43.7% for the same quarter of the prior fiscal year. The decrease in SG&A as a percent of net revenues is a direct result of fixed expenses being spread over the higher net revenues base, as well as cost controls implemented last year.
Total other expense decreased to $109,000 for the first quarter of fiscal 2003 from $131,000 in the first quarter of fiscal 2002, primarily due to higher currency transaction gains in the current quarter as compared to the same quarter of the prior fiscal year at the Company’s U.K. subsidiary and Canadian divisions, offset by higher interest expense resulting from higher average borrowings under the Company’s line of credit of $16,045,000 during the first quarter of fiscal 2002 as compared to $9,710,000 during the same quarter of fiscal 2002.
The effective income tax rate for the first quarter of fiscal 2003 remained at 40.0% of pre-tax income.
Liquidity and Capital Resources
The Company’s primary sources of liquidity for fiscal 2003 are expected to be its cash flows from operations, the working capital line of credit with its bank and other financial alternatives such as leasing. The Company requires cash for capital expenditures and other requirements associated with the expansion of its domestic and international production, distribution and sales, as well as for general working capital purposes. In May 2002, the Company extended its business loan agreement with its bank through March 1, 2003. The loan agreement provides a revolving line of credit of $25,000,000 with a seasonal increase in the line of credit to $35,000,000 through January 1, 2003 and again for the period of February 1, 2003 through March 1, 2003. On November 26, 2002 the Company negotiated an amendment to the loan agreement that accelerated the increase in line of credit limit to $35,000,000, effective November 26, 2002 and on February 4, 2003 the Company negotiated an amendment to extend its business loan agreement through May 1, 2003. The Company is currently in the process of negotiating a new business loan agreement and expects the agreement to be finalized in April 2003.
Interest under the existing loan agreement is currently charged at the bank’s reference (prime) rate, minus one-half of one percentage point. At January 31, 2003, the prime rate was 4.25%. The loan agreement also provides for optional interest rates based on inter-bank offered rates (“IBOR”) for periods of at least 30 days in increments of $500,000. The loan agreement is unsecured but contains various restrictive covenants requiring, among other matters, the maintenance of certain financial ratios. Management believes the Company was in compliance with, or has obtained a waiver for, all such covenants as of January 31, 2003. The loan agreement permitted the Company to acquire, for value, shares of Ashworth stock in an aggregate amount not to exceed $10,200,000 during the term of the agreement. However, as part of the November 26, 2002 amendment, the Company agreed to stop further acquisition of Ashworth stock. As of November 26, 2002, the Company had acquired 739,450 shares of Ashworth stock on the open market for $3,884,272 at an average price of $5.25 per share under the original agreement. The line of credit may also
9
be used to finance commercial letters of credit and standby letters of credit. Commercial letters of credit outstanding under this loan agreement totaled $9,635,000 at January 31, 2003 and $11,227,000 at October 31, 2002. The Company had $17,320,000 outstanding against the line of credit at January 31, 2003, compared to $11,125,000 outstanding at October 31, 2002. The increases in outstanding letters of credit and borrowings are primarily due to the seasonality of the Company’s business and the addition of the Callaway Golf apparel product line. At January 31, 2003, $8,045,000 was available for borrowings under this loan agreement.
Net trade receivables were $28,268,000 at January 31, 2003, a decrease of $5,304,000 from the balance at October 31, 2002. Because the Company’s business is seasonal, the net receivables balance may more meaningfully be compared to the balance of $27,769,000 at January 31, 2002, rather than the year-end balance. The comparison to the first quarter of fiscal 2002 shows an increase of 1.8% in net trade receivables. Excluding the additional bad debt reserve booked during the quarter ended July 31, 2002, the receivable balance at January 31, 2003 increased 14.4% from the prior year and is below the increase in net revenues for the quarter.
Net inventories increased 28.0% to $52,730,000 at January 31, 2003 from $41,188,000 at October 31, 2002. Compared to net inventories of $36,512,000 at January 31, 2002, net inventories at January 31, 2003 increased 44.4%, primarily due to the addition of the Callaway Golf apparel brand. The January 31, 2003 Ashworth brand inventory increased approximately 12.1% over the prior year. The Callaway Golf apparel brand inventory is approximately $11,872,000 in the current year as compared to $71,000 in the prior year. The Company believes that its current inventory mix and amounts are appropriate to respond to market demand.
During the first three months of fiscal 2003, the Company incurred capital expenditures of $764,000 primarily for upgrades of computer systems and equipment as well as warehouse automation. The Company anticipates spending approximately $3,436,000 during the remainder of fiscal 2003, primarily on upgrades of computer systems and equipment, distribution center automation and outlet stores renovations. Management currently intends to finance the purchase of the Company’s capital equipment from cash on hand and leases or equipment financing arrangements as deemed appropriate.
The Company is party to an exclusive licensing agreement with Callaway Golf Company which requires certain minimum royalty payments beginning in January 2003. The Company believes that revenues from the Callaway Golf apparel product line will be sufficient to cover such minimum royalty payments.
Common stock and capital in excess of par value increased by $48,000 in the three months ended January 31, 2003, due to the issuance of shares on exercise of options.
Based upon current levels of operations, the Company expects that sufficient cash flow will be generated from operations so that, combined with other financing alternatives available, including cash on hand, borrowings under its bank credit facilities and leasing alternatives, the Company will be able to meet all of its debt service, capital expenditure and working capital requirements for at least the next 12 months.
Derivatives
Although the Company and its subsidiaries did not do so during the first three months of fiscal 2003, from time to time the Company enters into short-term foreign exchange contracts with its bank to hedge against the impact of currency fluctuations between the U.S. dollar and the British pound and the U.S. dollar and the Canadian dollar. The contracts provide that, on specified dates, the Company would sell the bank a specified number of British pounds or Canadian dollars in exchange for a specified number of U.S. dollars.
10
Additionally, from time to time the Company’s U.K. subsidiary enters into similar contracts with its bank to hedge against currency fluctuations between the British pound and other European currencies. Realized gains and losses on these contracts are recognized in the same period as the hedged transactions. These contracts have maturity dates that do not normally exceed 12 months. At January 31, 2003, neither the Company nor any of its subsidiaries was a party to any outstanding foreign exchange contracts.