FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-18553
Ashworth, Inc.
Delaware 84-1052000
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
2791 LOKER AVENUE WEST
CARLSBAD, CA 92008
(Address of Principal Executive Offices)
(619) 438-6610
(Telephone No. Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Title Outstanding at September 5, 1996
$.001 par value Common Stock 12,040,626
<PAGE>
INDEX
PAGE
Part I. Financial Information
Item 1. Financial Statements.
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Consolidated Statements of Cash Flows 3
Notes to consolidated financial statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 5
Part II. Other Information 7
Signature 8
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<TABLE>
<CAPTION>
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
July 31 October 31
1996 1995
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 1,569,116 $ 1,613,029
Accounts receivable-trade 15,029,927 10,040,200
Accounts receivable-other 231,187 1,133,771
Inventories 24,939,573 27,845,721
Deferred income tax benefit 1,137,946 1,684,776
Income tax refund receivable 624,146 1,239,648
Other current assets 1,623,862 1,650,792
----------- -----------
Total current assets 45,155,757 45,207,937
PROPERTY AND EQUIPMENT 17,440,244 13,778,742
Less accumulated depreciation (6,147,810) (4,169,348)
----------- -----------
11,292,434 9,609,394
CAPITAL LEASES - EQUIPMENT 1,974,414 3,561,512
Less accumulated amortization (959,942) (1,401,653)
----------- -----------
1,014,472 2,159,859
OTHER ASSETS 968,480 1,094,834
----------- -----------
$58,431,143 $58,072,024
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 3,725,000 $ 6,670,000
Current portion of long-term debt 1,469,915 1,557,006
Accounts payable-trade 2,519,163 5,865,878
Income tax payable 0 0
Accrued salaries and commissions 1,173,411 972,094
Accrued liabilities-other 2,922,137 926,857
----------- -----------
Total current liabilities 11,809,626 15,991,835
LONG-TERM DEBT, less current portion 5,741,306 5,195,434
DEFERRED INCOME TAX LIABILITY 558,394 494,747
STOCKHOLDERS' EQUITY:
Common stock 12,041 11,902
Capital in excess of par value 23,586,551 23,242,390
Retained earnings 16,845,866 13,296,418
Deferred compensation (122,641) (160,702)
----------- -----------
Total stockholders' equity 40,321,817 36,390,008
----------- -----------
$58,431,143 $58,072,024
=========== ===========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended July 31 Nine months ended July 31
1996 1995 1996 1995
<S> <C> <C> <C> <C>
NET SALES $17,883,768 $20,385,985 $61,309,316 $61,415,534
COST OF GOODS SOLD 11,191,121 12,764,800 37,060,820 39,261,421
----------- ----------- ----------- -----------
Gross profit 6,692,647 7,621,185 24,248,496 22,154,113
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 6,125,132 5,960,483 17,481,438 15,709,794
----------- ----------- ---------- -----------
Operating profit 567,515 1,660,702 6,767,058 6,444,319
OTHER INCOME (EXPENSE):
Interest income 6,048 12,428 28,462 40,662
Interest expense (262,668) (322,142) (960,754) (797,835)
Other income (expense) 84,471 (13,146) 49,987 (18,066)
----------- ----------- ---------- ----------
Total other income
(expense) (172,149) (322,860) (882,305) (775,259)
Net profit before
income tax 395,366 1,337,842 5,884,753 5,669,060
INCOME TAX PROVISION 197,166 529,625 2,335,305 2,244,774
----------- ----------- ---------- -----------
Net earnings $ 198,200 $ 808,217 $ 3,549,448 $ 3,424,286
=========== =========== =========== ===========
NET INCOME PER COMMON AND
COMMON SHARE EQUIVALENT:
Primary:
Weighted average shares
outstanding 12,154,206 12,235,566 12,093,234 12,137,042
Net earnings per share $0.02 $0.07 $0.29 $0.28
Fully Diluted:
Weighted average shares
outstanding 12,154,206 12,236,827 12,093,053 12,109.560
Net earnings per share $0.02 $0.07 $0.29 $0.28
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended July 31
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net cash used in operating activities $ 4,207,779 ($ 8,812,347)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,111,474) (1,599,774)
Proceeds from sale of equipment 1,701 2,800
----------- -----------
Net cash used in investing activities (2,109,773) (1,596,974)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 344,300 964,355
Proceeds from revolving line of credit 19,630,000 10,775,000
Principal payments on revolving
line of credit (22,575,000) (5,050,000)
Proceeds from long-term borrowings 1,930,013 713,323
Principal payments on long-term debt (896,457) (569,229)
Principal payments on
capital lease obligations (574,775) (528,727)
----------- -----------
Net cash provided by
financing activities (2,141,919) 6,304,722
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (43,913) (4,104,599)
CASH AND CASH EQUIVALENTS,
beginning of period 1,613,029 5,344,244
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,569,116 $ 1,239,645
=========== ===========
</TABLE>
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ASHWORTH, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1996
NOTE 1 - Basis of presentation.
In the opinion of management, the accompanying balance sheets and related
interim statements of operations and cash flows include all adjustments
(consisting only of normal recurring items) necessary for their fair
presentation. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses. Actual results could differ from those
estimates. Interim results are not necessarily indicative of results for a
full year.
Certain information in footnote disclosure normally included in financial
statements has been condensed or omitted in accordance with the rules and
regulations of the Securities and Exchange Commission. The information
included in this Form 10-Q should be read in conjunction with Management's
Discussion and Analysis and financial statements and notes thereto included
in the annual report on Form 10-K for the year ended October 31, 1995.
NOTE 2 - Inventories.
Inventories consisted of the following at July 31, 1996, and October 31,
1995.
<TABLE>
<CAPTION>
July 31 October 31
1996 1995
<S> <C> <C>
Raw material $ 3,824,138 $ 4,317,017
Work in process 905,499 2,839,828
Finished goods 20,209,936 20,688,876
----------- -----------
$24,939,573 $27,845,721
=========== ===========
</TABLE>
NOTE 3 - Property and Equipment - Leased or Financed.
During the nine month period, equipment leases with an original capital
value of $1,585,628 expired, or were soon to expire, and were purchased for
their residual values. The original capitalized amounts were transferred to
Property and Equipment - Company-owned.
NOTE 4 - Long term debt.
During the nine month period, long term debt and the current portion of
long term debt increased by $458,781. The Company entered into three
equipment financing agreements, one for $602,513 to purchase warehouse
racking, one for $327,500 to pay for upgrading the AS400 computer, and
another for $1,000,000 for embroidery machines and equipment and for
warehouse racking. Principal repayments on equipment financing agreements
and capital leases were $1,471,232.
NOTE 5- Per share information.
Earnings per share amounts are computed based on the weighted average
number of shares actually outstanding plus the shares that would be
outstanding assuming the conversion of the outstanding dilutive options,
all of which are considered to be Common Stock equivalents. The number
of shares that would be issued from the exercise of stock options has been
reduced by the number of shares that could have been purchased from the
proceeds at the average market price of the Company's stock.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Consolidated sales for the quarter were $17,883,768 compared to sales of
$20,385,985 for the same period in 1995. After adjusting for the discontinuation
of the Women's and Kids' divisions in fiscal 1995, sales decreased 8.4% to
$17,883,768 from $19,526,963. This decrease was primarily due to a decrease in
the volume of sales.
Sales for the nine months were $61,309,316 compared to sales of $61,415,534
for the first nine months of fiscal 1995.After adjusting for the discontinuation
of the Women's and Kids' divisions, sales increased 5.6% to $61,309,316 from
$58,068,460 in 1995.
<TABLE>
<CAPTION>
Quarter ended July 31
1996 1995
CONSOLIDATED SALES:
<S> <C> <C>
Ashworth golf apparel $11,993,332 $15,603,654
Ashworth golf headwear 961,618 1,068,298
Ashworth golf footwear 219,200 628,201
----------- -----------
Ashworth golf sales 13,174,150 17,300,153
Ashworth Harry Logan division 1,166,248 744,576
Ashworth Factory stores 2,699,783 1,536,354
Ashworth U.K., Ltd 843,587 804,902
----------- -----------
Consolidated Sales 17,883,768 20,385,985
Less Women's & Kids' 0 859,022
----------- -----------
Sales excluding Women's & Kids' $17,883,768 $19,526,963
=========== ===========
CONSOLIDATED SALES ANALYSIS - FOREIGN & DOMESTIC:
Sales from the United States
Canada $ 79,979 $ (252)
Japan 2,438,286 2,981,579
Other 2,378,237 983,548
----------- -----------
Sales from the U.S. 4,896,502 3,964,875
Ashworth UK Ltd 843,587 804,902
----------- -----------
Foreign sales 5,740,089 4,769,777
Domestic sales 12,143,679 15,616,208
----------- -----------
Consolidated Sales 17,883,768 20,385,985
Less Women's & Kids' 0 859,022
----------- -----------
Sales excluding Women's & Kids' $17,883,768 $19,526,963
=========== ===========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Nine months ended July 31
1996 1995
CONSOLIDATED SALES:
<S> <C> <C>
Ashworth golf apparel $40,203,679 $44,572,341
Ashworth golf headwear 3,128,696 3,180,462
Ashworth golf footwear 1,293,056 3,379,035
----------- -----------
Ashworth golf sales 44,625,431 51,131,838
Ashworth Harry Logan division 4,491,075 2,985,228
Ashworth Factory stores 7,345,438 3,682,859
Ashworth UK Ltd 4,847,372 3,615,609
----------- -----------
Consolidated Sales 61,309,316 61,415,534
Less Women's & Kids' 0 3,347,074
----------- -----------
Sales excluding Women's & Kids' $61,309,316 $58,068,460
=========== ===========
CONSOLIDATED SALES ANALYSIS - FOREIGN & DOMESTIC:
Sales from the United States
Canada $ 1,211,851 $ 1,305,681
Japan 5,766,081 7,526,022
Other 4,298,068 3,246,121
----------- -----------
Sales from the U.S. 11,276,000 12,077,824
Ashworth UK Ltd 4,847,372 3,615,609
----------- -----------
Foreign sales 16,123,372 15,693,433
Domestic sales 45,185,944 45,722,101
----------- -----------
Consolidated Sales 61,309,316 61,415,534
Less Women's & Kids' 0 3,347,074
----------- -----------
Sales excluding Women's & Kids' $61,309,316 $58,068,460
=========== ===========
</TABLE>
Sales for the Ashworth Harry Logan division increased in the quarter to
$1,166,248 from $744,576 in the third quarter of 1995, primarily from increased
volume.
Domestic sales of Ashworth golf apparel and hats, after adjusting for the
discontinuation of the Women's and Kid' divisions, decreased in the quarter to
$8,814,054 from $11,875,386 in the same quarter of fiscal 1995. The lower sales
volume is attributable to poor weather in late Spring, largely in the Mid-West
and in the East, which resulted in fewer re-orders, and to management's more
conservative approach to production for the Fall collections which resulted in
an early sell-out of the Fall lines.
Domestic sales of Ashworth golf footwear declined in the quarter to
$166,764 from $622,217 in the same quarter of 1995. Management believes that the
higher sales in the July quarter 1995 were a continuation of initial stocking by
its customers. For 1997, the Company is introducing a lower priced retail line
which
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<PAGE>
management believes will increase sales by appealing to a broader consumer base.
The Company's factory outlet store sales increased to $2,699,783 in the
quarter from $1,536,353 in the comparable quarter of the prior year. This
increase primarily resulted from volume increases. Additionally, ten stores were
in operation in the July 1996 quarter compared to nine in the July 1995 quarter.
The Company will open an eleventh store in September 1996, in Las Vegas, Nevada.
Management believes that sales for the fourth quarter of the year will be
approximately the same as they were in the fourth quarter of fiscal 1995.
Gross margin was 37.4% for the third quarter of both fiscal 1996 and 1995.
Gross margin for the July quarter 1995 would have been 39.8% had it not been for
an increase of $500,000 in the inventory reserve. The gross margin for the July
quarter 1996 would have been higher but for somewhat larger discounts on sales
of Ashworth golfwear and Ashworth Harry Logan and a lower margin on sales by
Ashworth UK Ltd. Additionally, in an effort to decrease inventory levels, the
Company reduced selling prices at its factory outlet stores during the quarter.
Selling, general and administrative expenses increased to 34.2% of net
sales in the quarter compared with 29.2% in the July quarter 1995 largely as a
result of a decrease in sales. Actual expenses were $6,125,132 for the quarter
compared to $5,960,483 in the July quarter 1995, an increase of 2.8%. This
increase resulted mainly from the expense of sales and marketing activities in
the U.S. and in Europe, an increase in the cost of compensating the golf
professionals who endorse the Company's products, and employment severance
expenses.
Other income (expense) shows a net decrease in expense of $150,711 for the
quarter. The major part of this is attributable to a gain on currency
transactions between Ashworth, Inc. and Ashworth U.K., Ltd. In the July quarter
1996, the Company experienced a currency gain of $87,301 on its inter-company
transactions compared to a currency loss of $31,178 in the same quarter a year
earlier.
Financial Condition
Cash flows from operating activities were a positive $4.2 million compared
with a negative $8.8 million in the first nine months of 1995. Inventory levels
for the nine months declined by $2.9 million in contrast to the first nine
months of 1995 when inventory increased by $3.7 million. The accounts receivable
(trade and other) balance increased by only $4.1 million in the first nine
months compared to an increase of $9.6 million in the first nine months of 1995.
The reduction in inventory and the slower build up of receivables combined to
produce a positive, year on year, swing of $12.1 million.
The Company has a working capital line of credit with Bank of America. At
July 31, 1996, borrowings against the line were $3,725,000 compared to
$6,670,000 at October 31, 1995, and $5,725,000 at July 31, 1995. At August 27,
1996, repayments by the Company had reduced the balance outstanding to
$2,300,000. The line of credit agreement contains certain financial covenants.
During the 1996 third fiscal quarter, the Company was in compliance with the
quick ratio requirement as of May 31 and July 31, 1996 but was not in compliance
with such requirement as of June 30, 1996. Additionally, the Company was in
compliance
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<PAGE>
with the tangible net worth requirement at May 31 and June 30, 1996, but its
tangible net worth at July 31, 1996, was $351,000 under the required net worth.
The bank has granted a waiver of the noncompliance with the financial covenants
of the agreement.
Trade receivables were $15.0 million at July 31, 1996, an increase of $5.0
million over the balance at October 31, 1995. Because the Company's business is
seasonal, the receivables balance should be compared to the balance of $18.4
million at July 31, 1995, rather than the balance at October 31, 1995. This
shows a decrease of 18.4% in receivables compared to a decrease in sales of
12.3%.
Inventory decreased to $24.9 million from $27.8 million at October 31,
1995, a reduction of 10.4%. Management believes that the inventory level is
still higher than needed for anticipated sales. Action is being taken to reduce
the inventory largely through sales at the Company's factory outlet stores and
by timing the delivery of finished goods to coincide more accurately with the
Company's own shipping schedules to its customers.
Part II. Other Information
Item 1. Legal Proceedings.
There were no material pending or threatened legal proceedings as to
which the Company or any of its subsidiaries was a party or of which any of
their property was the subject during the fiscal quarter ended July 31, 1996.
Item 2. Changes in Securities - None.
Item 3. Defaults upon Senior Securities - None.
Item 4. Submission of Matters to a Vote of Security Holders - None.
Item 5. Other Information - None.
Item 6. Exhibits and Reports on Form 8-K.
Exhibit No. Description of Exhibit
27 Financial Data Schedule.
Form 8-K:
No reports on Form 8-K were filed by the Company during the third
quarter of the fiscal year ended October 31, 1996.
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<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Ashworth, Inc
Date: September 5, 1996 By:__/s/ Gerald W. Montiel_________
Gerald W. Montiel
Chairman of Board of Directors,
President and
Chief Executive Officer
Date: September 5, 1996 By:__/s/ John Newman_____________
John Newman
Chief Financial Officer and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> JUL-31-1996
<CASH> 1,569,116
<SECURITIES> 0
<RECEIVABLES> 16,052,107
<ALLOWANCES> 790,993
<INVENTORY> 24,939,573
<CURRENT-ASSETS> 45,155,757
<PP&E> 19,414,658
<DEPRECIATION> 7,107,752
<TOTAL-ASSETS> 58,431,143
<CURRENT-LIABILITIES> 11,809,626
<BONDS> 5,741,306
<COMMON> 12,041
0
0
<OTHER-SE> 40,309,776
<TOTAL-LIABILITY-AND-EQUITY> 58,431,143
<SALES> 61,309,316
<TOTAL-REVENUES> 61,309,316
<CGS> 37,060,820
<TOTAL-COSTS> 54,542,258
<OTHER-EXPENSES> (49,987)
<LOSS-PROVISION> 123,061
<INTEREST-EXPENSE> 932,292
<INCOME-PRETAX> 5,884,753
<INCOME-TAX> 2,335,305
<INCOME-CONTINUING> 3,549,448
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,549,448
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
</TABLE>
