UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 July 31, 2003
OR
| o |
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. Employee 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 issuer’s classes of common stock, as of the latest practicable date.
| Title | Outstanding at September 8, 2003 | |||
| $.001 par value Common Stock | 13,069,547 | |||
INDEX
| PAGE | ||||
| Part I | Financial Information | |||
| Item 1.Financial Statements | ||||
| Condensed Consolidated Balance Sheets | 1 | |||
| Condensed Consolidated Statements of Operations | 2 | |||
| Condensed Consolidated Statements of Cash Flows | 3 | |||
| Notes to Condensed Consolidated Financial Statements | 4 | |||
| Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations | 8 | |||
| Item 3.Quantitative and Qualitative Disclosures About Market Risk | 15 | |||
| Item 4.Controls and Procedures | 16 | |||
| Part II | Other Information | |||
| Item 1.Legal Proceedings | 17 | |||
| Item 2.Changes in Securities and Use of Proceeds | 17 | |||
| Item 3.Defaults Upon Senior Securities | 17 | |||
| Item 4.Submission of Matters to a Vote of Security Holders | 17 | |||
| Item 5.Other Information | 17 | |||
| Item 6.Exhibits and Reports on Form 8-K | 17 | |||
| Signatures | 21 | |||
| Exhibit Index | 22 |
-i-
PART I
FINANCIAL INFORMATION
ASHWORTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| July 31, | October 31, | |||||||||||
| 2003 | 2002 | |||||||||||
| (UNAUDITED) | ||||||||||||
ASSETS |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 4,029,000 | $ | 2,336,000 | ||||||||
Accounts receivable – trade, net |
33,733,000 | 33,572,000 | ||||||||||
Accounts receivable – other |
2,054,000 | 1,821,000 | ||||||||||
Inventories, net |
42,321,000 | 41,188,000 | ||||||||||
Income tax refund receivable |
33,000 | 246,000 | ||||||||||
Other current assets |
4,448,000 | 3,284,000 | ||||||||||
Deferred income tax asset |
1,991,000 | 1,748,000 | ||||||||||
Total current assets |
88,609,000 | 84,195,000 | ||||||||||
Property, plant and equipment, at cost |
40,625,000 | 39,167,000 | ||||||||||
Less accumulated depreciation and amortization |
(23,046,000 | ) | (21,278,000 | ) | ||||||||
Total property, plant and equipment, net |
17,579,000 | 17,889,000 | ||||||||||
Other assets |
704,000 | 891,000 | ||||||||||
Total assets |
$ | 106,892,000 | $ | 102,975,000 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||
Current liabilities: |
||||||||||||
Line of credit payable |
$ | 6,000,000 | $ | 11,125,000 | ||||||||
Current portion of long-term debt |
284,000 | 553,000 | ||||||||||
Accounts payable – trade |
7,079,000 | 6,338,000 | ||||||||||
Accrued liabilities |
3,867,000 | 3,014,000 | ||||||||||
Total current liabilities |
17,230,000 | 21,030,000 | ||||||||||
Long-term debt, net of current portion |
2,706,000 | 2,921,000 | ||||||||||
Deferred income tax liability |
1,134,000 | 904,000 | ||||||||||
Other long-term liabilities |
436,000 | 535,000 | ||||||||||
Stockholders’ equity: |
||||||||||||
Common stock |
13,000 | 13,000 | ||||||||||
Capital in excess of par value |
37,867,000 | 37,185,000 | ||||||||||
Retained earnings |
47,029,000 | 40,578,000 | ||||||||||
Accumulated other comprehensive income (loss) |
477,000 | (191,000 | ) | |||||||||
Total stockholders’ equity |
85,386,000 | 77,585,000 | ||||||||||
Total liabilities and stockholders’ equity |
$ | 106,892,000 | $ | 102,975,000 | ||||||||
See accompanying notes to condensed consolidated financial statements.
1
ASHWORTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three months ended July 31, | Nine months ended July 31, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net revenues |
$ | 37,960,000 | $ | 36,236,000 | $ | 117,118,000 | $ | 99,920,000 | |||||||||
Cost of goods sold |
22,284,000 | 21,385,000 | 69,515,000 | 59,444,000 | |||||||||||||
Gross profit |
15,676,000 | 14,851,000 | 47,603,000 | 40,476,000 | |||||||||||||
Selling, general and
administrative expenses |
12,051,000 | 15,609,000 | 36,445,000 | 36,654,000 | |||||||||||||
Income (loss) from operations |
3,625,000 | (758,000 | ) | 11,158,000 | 3,822,000 | ||||||||||||
Other income (expense): |
|||||||||||||||||
Interest income |
9,000 | 7,000 | 24,000 | 39,000 | |||||||||||||
Interest expense |
(232,000 | ) | (258,000 | ) | (683,000 | ) | (655,000 | ) | |||||||||
Other income |
37,000 | 54,000 | 253,000 | 59,000 | |||||||||||||
Total other expense |
(186,000 | ) | (197,000 | ) | (406,000 | ) | (557,000 | ) | |||||||||
Income (loss) before
provision for income tax
expense (benefit) |
3,439,000 | (955,000 | ) | 10,752,000 | 3,265,000 | ||||||||||||
Provision for income tax
expense (benefit) |
1,376,000 | (382,000 | ) | 4,301,000 | 1,306,000 | ||||||||||||
Net income (loss) |
$ | 2,063,000 | $ | (573,000 | ) | $ | 6,451,000 | $ | 1,959,000 | ||||||||
Net income (loss) per share |
|||||||||||||||||
Basic: |
|||||||||||||||||
Weighted average shares
outstanding |
13,006,000 | 13,289,000 | 12,972,000 | 13,224,000 | |||||||||||||
Net income (loss) per share |
$ | 0.16 | $ | (0.04 | ) | $ | 0.50 | $ | 0.15 | ||||||||
Diluted: |
|||||||||||||||||
Weighted average shares
outstanding |
13,211,000 | 13,289,000 | 13,124,000 | 13,597,000 | |||||||||||||
Net income (loss) per share |
$ | 0.16 | $ | (0.04 | ) | $ | 0.49 | $ | 0.14 | ||||||||
See accompanying notes to condensed consolidated financial statements.
2
ASHWORTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine months ended July 31, | |||||||||
| 2003 | 2002 | ||||||||
Cash flows from operating activities: |
|||||||||
Net cash provided by (used in) operating activities |
$ | 8,374,000 | $ | (4,435,000 | ) | ||||
Cash flows from investing activities: |
|||||||||
Net cash used in investing activities–
Purchases of property and equipment |
(2,422,000 | ) | (1,854,000 | ) | |||||
Cash flows from financing activities: |
|||||||||
Principal payments on capital lease obligations |
(129,000 | ) | (84,000 | ) | |||||
Borrowings on line of credit |
37,102,000 | 32,445,000 | |||||||
Payments on line of credit |
(42,227,000 | ) | (28,045,000 | ) | |||||
Principal payments on notes payable and long-term debt |
(355,000 | ) | (464,000 | ) | |||||
Proceeds from issuance of common stock |
682,000 | 980,000 | |||||||
Net cash provided by (used in) financing activities |
(4,927,000 | ) | 4,832,000 | ||||||
Effect of exchange rate changes on cash |
668,000 | 801,000 | |||||||
Net increase (decrease) in cash and cash equivalents |
1,693,000 | (656,000 | ) | ||||||
Cash and cash equivalents, beginning of period |
2,336,000 | 1,055,000 | |||||||
Cash and cash equivalents, end of period |
$ | 4,029,000 | $ | 399,000 | |||||
See accompanying notes to condensed consolidated financial statements.
3
ASHWORTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 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 from operations. | |||
| Shipping and Handling Expenses | |||
| The shipping expenses, which consist primarily of payments made to freight companies, are reported in selling, general and administrative expenses. Shipping expenses for the quarters ended July 31, 2003 and 2002 were $525,000 and $377,000 respectively. For the nine-month periods ended July 31, 2003 and 2002, shipping expenses were $1,357,000 and $1,378,000 respectively. |
NOTE 2 — Inventories.
| Inventories consisted of the following at July 31, 2003 and October 31, 2002: |
| July 31, | October 31, | |||||||
| 2003 | 2002 | |||||||
Raw materials |
$ | 130,000 | $ | 121,000 | ||||
Work in process |
– | 356,000 | ||||||
Finished goods |
42,191,000 | 40,711,000 | ||||||
Total inventories, net |
$ | 42,321,000 | $ | 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 common shares outstanding during the period. Diluted net income per share has been computed |
4
| 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 Statement of Financial Accounting Standards (“SFAS”) No. 128: |
| Three months ended July 31, | Nine months ended July 31, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Numerator: |
|||||||||||||||||
Net income (loss)
numerator for basic and diluted
income (loss) per share – income
(loss) available to common stockholders |
$ | 2,063,000 | $ | (573,000 | ) | $ | 6,451,000 | $ | 1,959,000 | ||||||||
Denominator: |
|||||||||||||||||
Denominator for basic income (loss)
per share – weighted average shares |
13,006,000 | 13,289,000 | 12,972,000 | 13,224,000 | |||||||||||||
Effect of dilutive securities: |
|||||||||||||||||
stock options |
205,000 | – | 152,000 | 373,000 | |||||||||||||
Denominator for diluted income (loss)
per share – adjusted weighted average
shares and assumed conversions |
13,211,000 | 13,289,000 | 13,124,000 | 13,597,000 | |||||||||||||
Basic net income (loss) per share |
$ | 0.16 | $ | (0.04 | ) | $ | 0.50 | $ | 0.15 | ||||||||
Diluted net income (loss) per share |
$ | 0.16 | $ | (0.04 | ) | $ | 0.49 | $ | 0.14 | ||||||||
| For the quarters ended July 31, 2003 and 2002, the diluted weighted average shares outstanding computation excludes 916,000 and 656,000 options whose impact would have an anti-dilutive effect, respectively. For the nine-month periods ended July 31, 2003 and 2002, the diluted weighted average shares outstanding computation excludes 1,095,000 and 655,000 options whose impact would have an anti-dilutive effect, respectively. |
NOTE 4 – Stock Option Compensation.
| The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The interim information regarding pro forma net income and earnings per share is required by SFAS No. 123 and SFAS No. 148. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information is as follows: |
5
| Three months ended July 31, | Nine months ended July 31, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net income (loss), as reported |
$ | 2,063,000 | $ | (573,000 | ) | $ | 6,451,000 | $ | 1,959,000 | ||||||||
Deduct: Stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of tax effect |
(100,000 | ) | (155,000 | ) | (437,000 | ) | (602,000 | ) | |||||||||
Pro forma net income (loss) |
$ | 1,963,000 | $ | (728,000 | ) | $ | 6,014,000 | $ | 1,357,000 | ||||||||
Net income (loss) per share: |
|||||||||||||||||
Basic – as reported |
$ | 0.16 | $ | (0.04 | ) | $ | 0.50 | $ | 0.15 | ||||||||
Basic – pro forma |
$ | 0.15 | $ | (0.05 | ) | $ | 0.46 | $ | 0.10 | ||||||||
Diluted – as reported |
$ | 0.16 | $ | (0.04 | ) | $ | 0.49 | $ | 0.14 | ||||||||
Diluted – pro forma |
$ | 0.15 | $ | (0.05 | ) | $ | 0.46 | $ | 0.10 | ||||||||
| These pro forma calculations only include the effects of grants made in 1996 through July 31, 2003. As such, the impacts may not be representative of the effects on reported net income in future years. |
NOTE 5 – Comprehensive Income.
| The Company includes the cumulative foreign currency translation adjustment as well as the net unrealized gains and loss on cash flow hedges as components of the comprehensive income in addition to net income for the period. The following table sets forth the computation of comprehensive income (loss) for the periods presented: |
| Three months ended July 31, | Nine months ended July 31, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Net income (loss) |
$ | 2,063,000 | $ | (573,000 | ) | $ | 6,451,000 | $ | 1,959,000 | |||||||
Net unrealized losses on
cash flow hedges, net of tax |
(49,000 | ) | – | (49,000 | ) | – | ||||||||||
Foreign currency translation income |
151,000 | 743,000 | 717,000 | 801,000 | ||||||||||||
Total comprehensive income |
$ | 2,165,000 | $ | 170,000 | $ | 7,119,000 | $ | 2,760,000 | ||||||||
NOTE 6 – 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 |
6
| Amended Complaint (“Second Amended Complaint”). On November 6, 2000, the Company filed its 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. Based on the current status of the litigation the Company has not booked any provision for settlement charges. | ||
| 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 pos |