UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
MARK ONE:
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the transition period from to
Commission File No. 0-18204
AJAY SPORTS, INC.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 39-1644025
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1501 E. Wisconsin Street,
Delavan, Wisconsin 53115 (414) 728-5521
- --------------------------------------- ------------------------
(Address of principal executive offices (Registrant's Telephone
Number, including Zip Code) 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 report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /x/ No / /
Number of shares of common stock outstanding at March 31, 1999 is 3,956,815.
Transitional Small Business Disclosure Format
Yes No x
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<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. FINANCIAL STATEMENTS
AJAY SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 31, 1999 December 31,
(Unaudited) 1998
<S> <C> <C>
ASSETS - -
Current assets:
Cash $ 27 $ 6
Marketable securities 418 396
Trade accounts receivable, net 3,351 1,889
Inventories 5,882 5,680
Prepaid expenses and other 597 485
- -
Total current assets 10,275 8,456
Fixed assets, net 1,656 1,708
Other assets 142 179
Deferred tax benefit 1,119 1,119
Goodwill 1,610 1,621
- -
Total assets $ 14,802 $ 13,083
= =
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 195 $ 195
Current portion of capital lease 4 4
Accounts payable 2,268 2,225
Accrued expenses 567 380
- -
Total current liabilities 3,034 2,804
Notes payable to affiliates - long term 1,587 1,587
Notes payable to banks - long term 7,856 5,951
Stockholders' equity:
Preferred stock, 10,000,000 shares authorized,
Series B, $0.01 par value,
12,500 shares outstanding at liquidation value 1,250 1,250
Series C, $0.01 par value, 264,177 shares
outstanding at stated value 2,642 2,642
Series D, $0.01 par value, 6,000,000 shares 60 60
Common stock, $.01 par value 100,000,000 shares authorized,
3,956,815 shares outstanding 40 40
Additional paid-in capital 14,766 14,762
Accumulated deficit (16,472) (16,006)
Accumulated unrealized (losses) gains on securities 39 (7)
- -
------------ -------------
Total stockholders' equity 2,325 2,741
------------ -------------
Total liabilities and stockholders' equity $ 14,802 $ 13,083
============ =============
</TABLE>
2
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months
Ended March 31,
1999 1998
------------ ------------
Net sales $ 4,263 $ 7,598
Cost of sales 3,595 6,330
Gross profit 668 1,268
Selling, general and 851 1,028
administrative expenses
Operating income (loss) (183) 240
Non-operating expense:
Interest expense, net 253 335
Other, net 26 (136)
----------- ------------
Total non-operating expense 279 199
----------- ------------
Income (loss) before income taxes (462) 41
Income tax expense (benefit) - -
----------- ------------
Net income (loss) $ (462) $ 41
============ ============
Basic and diluted earnings per share * $ (0.14) $ (0.01)
============ ============
Weighted average common shares
outstanding 3,957 3,879
============ ============
Net income (loss) as reported above (462) 41
Undeclared cumulative preferred dividends (91) (99)
------------- ------------
Loss applicable to common stock $ (553) $ (58)
============= ============
* Computed by dividing net income or loss, after reduction for preferred stock
dividends, by the weighted average number of common shares outstanding.
3
<PAGE>
<TABLE>
<CAPTION>
AJAY SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS), (UNAUDITED)
Three Months
Ended March 31,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (462) $ 41
Adjustments to reconcile to net cash flows from
operating activities:
Depreciation and amortization 95 101
Change in assets [(increase)/decrease] and
liabilities [increase/(decrease)]:
Trade accounts receivable, net (1,462) (939)
Inventories (202) (367)
Prepaid expenses and other current assets (112) -
Other assets 3 (155)
Deferred tax benefits - -
Accounts payable 43 796
Accrued expenses 187 25
-
-------- ---------
Net cash used in operating activities (1,910) (498)
-------- ---------
Cash flows from investing activities:
Acquisitions of fixed assets (19) (23)
-------- ---------
Net cash used in investing activities (19) (23)
-------- ---------
Cash flows from financing activities:
Proceeds from notes payable to affiliates - 12
Net change in notes payable to banks 1,904 374
Net change in marketable securities 46 -
-------- ---------
Net cash provided by financing activities 1,950 386
-------- ---------
Net increase (decrease) in cash 21 (135)
Cash at beginning of period 6 234
-------- ---------
Cash at end of period $ 27 $ 99
======== =========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 254 $ 286
======== =========
Cash paid for income tax - -
======== =========
</TABLE>
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This report contains forward-looking statements including statements containing
words such as "believes", "anticipates", "expects" and the like. All statements
other than statements of historical fact included in this report are forward
looking statements. The Company believes that its expectations reflected in its
forward looking statements are reasonable, but it can give no assurance that the
expectations ultimately will prove to be correct. Important factors including,
without limitation, statements relating to planned acquisitions, development of
new products, the financial condition of the Company, the ability to increase
distribution of the Company's products, integration of businesses the Company
has acquired, disposition of any current business of the Company, and the
Company's relationship with Williams Controls, Inc., a related company, could
cause the Company's actual results to differ materially from those anticipated
in these forward-looking statements. The Company does not intend to update the
forward looking statements contained in this report.
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by Ajay Sports, Inc. (the "Company") without audit and pursuant to the
rules and regulations of the Securities and Exchange Commission. In the opinion
of the Company, the financial statements reflect all material adjustments, which
consist only of normal recurring adjustments, necessary to present fairly the
financial position of the Company at March 31, 1999 and the results of
operations for the three-month periods ended March 31, 1999 and 1998 and the
cash flows for the same three-month periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the SEC rules and regulations dealing
with interim financial statements. However, the Company believes that the
disclosures made in the condensed financial statements included herein are
adequate to make the information presented not misleading. These condensed
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
The year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles.
The interim period results are not necessarily indicative of results which may
be expected for any other interim or for the full year. Certain costs are
estimated for the full year and allocated to interim periods based on activity
associated with the interim period. Accordingly, such costs are subject to year
end adjustment.
5
<PAGE>
2. INVENTORIES
The major classes of inventories (rounded to thousands) are as follows:
March 31,1999 December 31,1998
Raw Materials $1,439 $1,493
Work in Process 1,301 1,052
Finished Goods 3,142 3,135
--------- ---------
$5,882 $5,680
========= =========
3. NOTES PAYABLE TO BANKS
On February 2, 1999, the Company entered an agreement with Wells for a seasonal
over advance of up to $750,000 beginning February 2, 1999. Half of the over
advance, or up to $375,000, is due to Wells by June 1, 1999 with the other half,
or up to $375,000, due to Wells by July 1, 1999. The interest rate on advances
outstanding on the over advance is prime plus 2%. The Company does not believe
it will have the funds to repay the over advance due on June 1, 1999 and July 1,
1999 and has requested an extension of the over advance. The over advance would
be paid back with the collection of seasonal trade accounts receivable.
4. SEGMENT INFORMATION
The contribution to net sales, operating income (loss) and identifiable assets
of the Company's two industry segments for the quarter ended March 31, 1999 and
1998 (unaudited) are as follows (in thousands):
- ------------------------------------------------------------------------------
Quarter Ended March 31, 1999
----------------------------------------------------------
GOLF
Mass Specialty
Furniture Merchant Golf Stores Corporate Consolidated
--------- -------- ----------- --------- ------------
Net Sales $ 2,268 $ 1,954 $ 41 $ - $ 4,263
Operating 316 (310) (35) (154) (183)
Profit/(Loss)
Total Assets 4,019 8,997 1,786 - 14,802
Depreciation/ 24 58 13 - 95
Amortization
Capital 19 - - - 19
Expenditures
6
<PAGE>
- ------------------------------------------------------------------------------
Quarter Ended March 31, 1998
- ------------------------------------------------------------------------------
GOLF
Mass Specialty
Furniture Merchant Golf Stores Corporate Consolidated
--------- -------- ----------- --------- ------------
Net Sales $ 1,760 $ 520 $ - $ - $ 7,598
Operating 220 273 (110) (143) 240
Profit/(Loss)
Total Assets 2,930 12,061 2,872 - 17,863
Depreciation/ 26 55 20 - 101
Amortization
Capital 23 - - - 23
Expenditures
- ------------------------------------------------------------------------------
5. DIVIDENDS
Dividends on Series B and C Convertible Preferred Stock have not been declared
in 1998 or 1999 due to unavailability of funds. Dividends are permitted to be
paid under the Wells loan agreement when sufficient funds become available.
Dividends are in arrears on Series B in the amount of $1,031,575 and on Series C
in the amount of $642,218.
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
See "Cautionary Statement" at the beginning of the "Notes to Consolidated
Financial Statements".
FINANCIAL CONDITION - At March 31, 1999 the Company had working capital of
$7,241,000 as compared with $5,652,000 at December 31, 1998. The ratio of
current assets to current liabilities at March 31, 1999 was 3.4 to 1, as
compared to 3.0 at December 31, 1998. The Company's borrowings increased
$1,905,000 since December 31, 1998. This financed a $1,462,000 increase in trade
accounts receivables and a $202,000 increase in inventories during the quarter
as a result of a seasonally increase in sales during the quarter.
LIQUIDITY - The seasonal nature of the Company's sales creates fluctuating cash
flow due to the temporary build up of inventories in anticipation of, and
receivables during, the peak seasonal period, which historically has been from
February through May of each year. The Company has relied and continues to rely
heavily on revolving credit facilities for its working capital requirements.
During the Company's first quarter, operating cash flow was negative by
$1,910,000 which was primarily financed by increased borrowing from banks.
On February 2, 1999, the Company entered an agreement with Wells for a seasonal
over advance of up to $750,000 to begin February 2, 1999. Half of the over
advance, or up to $375,000, is due to Wells by June 1, 1999 with the other half,
or up to $375,000, due to Wells by July 1, 1999. The interest rate on advances
outstanding on the over advance is prime plus 2%. The Company does not believe
it will have the funds to repay the over advance due on June 1, 1999 and July 1,
1999 and has requested an extension of the over advance. The over advance would
be paid back with the collection of seasonal trade accounts receivable.
On April 9, 1999, the Registrant announced that it has signed an agreement to
purchase all outstanding capital stock of Pro Golf of America, Inc., franchiser
of Pro Golf(R) Discount retail golf stores for $10,500,000 cash. Pro Golf is the
largest `golf-only' store franchiser in the world, with approximately 160-170
stores in the US, Canada and the Philippines. Pro Golf opened one of America's
first `off-course' retail golf stores in 1962, virtually inventing the retail
and discount golf store concept. The company began franchising in 1975, and
today its franchised stores generate over $230 million in golf equipment and
apparel sales through the off-course golf shop distribution channel each year.
The stores offer a full line of golf products from major golf manufacturers,
exclusive private label product lines, and specialized services including
computer swing analysis and custom club fitting. A $100,000 deposit has been
made toward the acquisition. The Company's due diligence efforts are underway
and it has retained an investment banker to raise a combination of bank debt,
mezzanine financing and equity to finance the purchase price. This acquisition
is expected to be completed through a newly formed subsidiary which will be a
majority, but not wholly owned, subsidiary of the company. The company needs
additional funds to continue operations and is in the process of raising capital
through the acquisition of Pro Golf of America, Inc. If the financing plan for
this transaction is successful, management expects that it will generate some
additional funds for Ajay cash flow needs, although the amount
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Cont'd)
which may be available to the company cannot be predicted with any certainty at
the date of this report.
RESULTS OF OPERATIONS - During the quarter ended March 31, 1999, the Company
reported net sales of $4,263,000, a 44% decrease compared to net sales of
$7,598,000 for the same period in 1998. Outdoor furniture sales increased
$508,000 primarily due to increased volume. Sales decreased $3,364,000 in the
mass merchant golf segment and $479,000 in the specialty golf store segment.
Sales during first quarter of 1998 reflected $1.8 million in golf glove and golf
cart sales achieved under a special program not repeated in 1999. The accessory
line decreased $600,000 resulting from discontinuation of certain accessory
products by two major customers. A decline in sales of $800,000 attributable to
bags and the decline in the sales in the specialty golf store segment were due
to a market wide over stock of bags.
Gross profit for the three months ended March 31, 1999 was $668,000 or 16% of
sales, compared to $1,268,000 or 17% for the same period in 1998. Gross profit
on furniture sales was $587,000 or 26% of sales this year compared to $414,000
or 24% last year. The slight improvement in gross profit in the furniture
segment is attributable to better material utilization in the production
process. Gross profit on golf sales was $80,000 or 4% of sales this year
compared to $781,000 or 14% of sales last year. This significant decrease in
gross profit is due to the unfavorable absorption of fixed overheads due to the
lower sales level.
Selling, general and administrative expenses were $851,000 or 20% of sales for
the first quarter of 1999, versus $1,028,000 or 14% in the same period the prior
year. The lower expenses are related to reduced volume.
Interest expense decreased by $82,000 reflecting a lower interest rate. Last
year non-operating income of $136,000 reflected the result of a favorable
judgment from a lawsuit settlement. As a result of the above factors, net loss
for the first quarter ended March 31,1999 was $(462,000) which compares to a
prior year income of $41,000 for the same period.
9
<PAGE>
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION
On April 9, 1999, the Registrant announced that it has signed an agreement to
purchase all outstanding capital stock of Pro Golf of America, Inc., franchiser
of Pro Golf(R) Discount retail golf stores. Pro Golf is the largest `golf-only'
store franchiser in the world, with approximately 160-170 stores in the US,
Canada and the Philippines. Pro Golf opened one of America's first `off-course'
retail golf stores in 1962, virtually inventing the retail and discount golf
store concept. The company began franchising in 1975, and today its franchised
stores generate over $230 million in golf equipment and apparel sales through
the off-course golf shop distribution channel each year. The stores offer a full
line of golf products from major golf manufacturers, exclusive private label
product lines, and specialized services including computer swing analysis and
custom club fitting. A $100,000 deposit has been made toward the acquisition.
The Company's due diligence efforts are underway and it has retained an
investment banker to raise a combination of bank debt, mezzanine financing and
equity to finance the purchase price. This acquisition is expected to be
completed through a newly formed subsidiary which will be a majority, but not
wholly owned, subsidiary of the company.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits
10.1 Stock Purchase Agreement dated April 8, 1999 for the purchase
of Pro Golf of America, Inc.
27 Financial Data Schedule
B) Forms 8-K
1) The Company filed a Form 8-K dated March 8, 1999 reporting under
Item 5 that it had signed a license agreement with Gary Player
Group, Inc.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AJAY SPORTS, INC.
By: /s/Robert R. Hebard
-------------------------
Its: Duly Authorized Officer
By: /s/Barb Wargolet
----------------------
Its: Corporate Controller
Date: May 14, 1999
--------------------
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000854858
<NAME> Ajay Sports, Inc.
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 27
<SECURITIES> 418
<RECEIVABLES> 3,351
<ALLOWANCES> 0
<INVENTORY> 5,882
<CURRENT-ASSETS> 10,275
<PP&E> 1,446
<DEPRECIATION> 95
<TOTAL-ASSETS> 14,802
<CURRENT-LIABILITIES> 3,034
<BONDS> 0
2,702
1,250
<COMMON> 40
<OTHER-SE> 2,325
<TOTAL-LIABILITY-AND-EQUITY> 14,802
<SALES> 4,263
<TOTAL-REVENUES> 4,263
<CGS> 3,595
<TOTAL-COSTS> 851
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 253
<INCOME-PRETAX> (462)
<INCOME-TAX> 0
<INCOME-CONTINUING> (462)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (462)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
