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 June 30, 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 Identification No.)
Incorporation or Organization)
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 8/18/99 is 4,237,018.
Transitional Small Business Disclosure Format
Yes No X
----- -----
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
AJAY SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, 1999 December 31,
(Unaudited) 1998
ASSETS ------------- ------------
Current assets:
Cash $ 463 $ 6
Marketable securities 484 396
Trade accounts receivable, net 4,214 1,889
Inventories 4,942 5,680
Prepaid expenses and other 821 485
------------ ------------
Total current assets 10,924 8,456
Fixed assets, net 1,754 1,708
Other assets 145 179
Deferred tax benefit 5,138 1,119
Goodwill 7,639 1,621
------------ ------------
Total assets $ 25,600 $ 13,083
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 8,695 $ 195
Current portion of capital lease 4 4
Accounts payable 3,134 2,225
Accrued expenses 769 380
------------ ------------
Total current liabilities 12,602 2,804
Notes payable to affiliates - long term 1,587 1,587
Notes payable to banks - long term 7,138 5,951
Notes payable 2,070 -
------------ ------------
Total liabilities 23,397 10,342
Minority Interest in Subsidiary 24 -
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 15,065 14,762
Accumulated deficit (16,984) (16,006)
Accumulated unrealized (losses) gains on securities 106 (7)
------------ ------------
Total stockholders' equity 2,179 2,741
------------ ------------
Total liabilities and stockholders' equity $ 25,600 $ 13,083
============ ============
<PAGE>
<TABLE>
<CAPTION>
AJAY SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $ 4,560 $ 8,991 $ 8,823 $ 16,589
Cost of sales 4,043 7,335 7,638 13,665
--------- --------- --------- ----------
Gross profit 517 1,656 1,185 2,924
Selling, general and 985 1,178 1,836 2,206
administrative expenses --------- --------- --------- ----------
Operating income (468) 478 (651) 718
Non-operating expense:
Interest expense, net 275 315 528 650
Other, net 44 38 70 (98)
--------- --------- --------- ----------
Total non-operating expense 319 353 598 552
--------- --------- --------- ----------
Income (loss) before income taxes (787) 125 (1,249) 166
Income tax expense (benefit) (275) - (275) -
--------- --------- --------- ----------
Net income (loss) $ (512) $ 125 $ (974) $ 166
========= ========= ========= ==========
Basic and diluted earnings per share* $ 0.00 $ 0.00 $ 0.00 $ 0.00
========= ========= ========= ==========
Weighted average common shares outstanding 3,957 3,879 3,957 3,879
========= ========= ========= ==========
</TABLE>
* Computed by dividing net income or loss, after reduction for preferred stock
dividends, by the weighted average number of common shares outstanding.
<PAGE>
<TABLE>
<CAPTION>
AJAY SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS), (UNAUDITED) )
Six Months
Ended June 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (974) $ 166
Adjustments to reconcile to net cash flows from
operating activities:
Depreciation and amortization 196` 181
Change in assets [(increase)/decrease] and
liabilities [increase/(decrease)]:
Trade accounts receivable, net (2,325) (1,189)
Inventories 738 639
Prepaid expenses and other current assets (336) (68)
Other assets 34 (171)
Deferred tax benefits (4,019) -
Accounts payable 913 (676)
Accrued expenses 389 (112)
Goodwill (6,044) -
-------- -------
Net cash used in operating activities (11,428) (1,230)
-------- -------
Cash flows from investing activities:
Net Acquisitions of fixed assets (215) (75)
-------- -------
Net cash used in investing activities (215) (75)
-------- -------
Cash flows from financing activities:
Net change in notes payable to banks 9,687 (163)
Net proceeds from notes payable to affiliates - 1,300
Net proceeds from notes payable 2,070 -
Net change in marketable securities 97 -
Net proceeds from minority interest in subsidiary 246
-------- -------
Net cash provided by financing activities 12,100 1,137
-------- -------
Net increase (decrease) in cash 457 (168)
Cash at beginning of period 6 234
-------- -------
Cash at end of period $ 463 $ 66
======== =======
Supplemental disclosures of cash flow information:
Cash paid for interest $ 215 $ 633
======== =======
Cash paid for income tax - -
======== =======
</TABLE>
<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 adjustments, which consist
only of normal recurring adjustments, necessary to present fairly the financial
position of the Company at June 30, 1999 and the results of operations for the
three and six-month periods ended June 30, 1999 and 1998 and the cash flows for
the same six-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 period 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.
<PAGE>
2. INVENTORIES
The major classes of inventories (rounded to thousands) are as follows:
June 30, December 31,
1999 1998
--------- --------------
Raw Materials $ 1,320 $ 1,493
Work in Process 1,146 1,052
Finished Goods 2,476 3,135
--------- ---------------
$ 4,942 $ 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, initially was due to Wells on June 1, 1999 with the
other half, or up to $375,000, due to Wells on July 1, 1999. The full amount of
this over advance has been extended through August 1999. The interest rate on
advances outstanding on the over advance is prime plus 2%. The terms and length
of the over advance loan are currently being renegotiated with the objective of
providing more availability of funds to the Company.
On June 23, 1999 the Company, through a newly formed subsidiary Pro Golf
International, Inc. increased its borrowings by $8,500,000 with a 75 day bridge
loan from Comerica Bank. The proceeds of this loan were used toward the purchase
of 100% of the outstanding common stock of Pro Golf of America, Inc. Long-term
financing is being arranged to replace this loan and is expected to be in place
by the due date of the bridge loan.
<PAGE>
4. SEGMENT INFORMATION
The contribution to net sales, operating income (loss) and identifiable assets
of the Company's industry segments for the quarter and six months ended June 30,
1999 and 1998 (unaudited) are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Quarter Ended June 30, 1999
--------------------------------------------------------------
GOLF
------------------------
Mass Specialty
Furniture Merchant Golf Stores Franchise Corporate Consolidated
Net Sales $ 1,897 $ 2,431 $ 232 $ - $ 4,560
Operating Profit/(Loss) 96 (198) (112) (254) (468)
Total Assets 3,095 9,739 1,682 12,308 - 25,600
Depreciation/Amortization 30 58 13 - 101
Capital Expenditures 58 44 - - 102
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Quarter Ended June 30, 1998
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
GOLF
------------------------
Mass Specialty
Furniture Merchant Golf Stores Franchise Corporate Consolidated
Net Sales $ 1,190 $ 7,329 $ 472 $ - $ 8,991
Operating Profit/(Loss) 39 745 (130) (176) 478
Total Assets 2,350 12,463 2,312 - 17,125
Depreciation/Amortization 23 55 2 - 80
Capital Expenditures 39 13 - - 52
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
<PAGE>
Six Months Ended June 30, 1999
- ------------------------------------------------------------------------------------------------------------------
GOLF
------------------------
Mass Specialty
Furniture Merchant Golf Stores Franchise Corporate Consolidated
Net Sales $ 4,165 $ 4,385 $ 273 $ - $ 8,823
Operating Profit/(Loss) 412 (508) (147) (408) (651)
Total Assets 3,095 8,515 1,682 12,308 - 25,600
Depreciation/Amortization 54 116 26 - 196
Capital Expenditures 77 44 - - 121
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 1998
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
GOLF
------------------------
Mass Specialty
Furniture Merchant Golf Stores Franchise Corporate Consolidated
Net Sales $ 2,950 $ 12,647 $ 992 $ - $ 16,589
Operating Profit/(Loss) 259 1,018 (240) (319) 718
Total Assets 2,350 12,463 2,312 - 17,125
Depreciation/Amortization 49 110 22 - 181
Capital Expenditures 62 13 - - 75
- ---------------------------------------------------------------------------------------------------------------------
The franchise segment is due to the acquisition of Pro Golf.
</TABLE>
<PAGE>
- ------------------------------------------------------------------------------
5. DIVIDENDS
- ------------------------------------------------------------------------------
Dividends on Series B and C Convertible Preferred Stock have not been declared
for 1997, 1998 or 1999 due to unavailability of funds. Dividends are in arrears
on Series B in the amount of $1,056,575 and on Series C in the amount of
$708,262. Dividends are permitted to be paid under the credit agreement when
sufficient funds become available.
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 AND LIQUIDITY - At June 30, 1999, the Company had negative
working capital of $1,678,000 as compared with a positive working capital of
$5,652,000 at December 31, 1998. The ratio of current assets to current
liabilities at June 30, 1999 was (.9) to 1, as compared to 3.0 as of December
31, 1998. The Company's borrowings increased $11,757,000 since December 31,
1998. The acquisition of Pro Golf increased borrowings $10,570,000 through a
combination of bank note payable and private investment. Contributing to the
negative working capital is the temporary classification of the Comerica loan
for $8,500,000 as a current liability which permanent financing will replace
during the third quarter. Operations increased borrowings during this time by
$1,187,000. This financed a $1,018,000 increase in trade accounts receivable.
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 first six months of the year, the operating cash flow was positive by
$457,000 which is due to the Pro Golf acquisition.
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, initially was due to Wells on June 1, 1999 with the
other half, or up to $375,000, due to Wells on July 1, 1999. The full amount of
this over advance has been extended through August 1999. The interest rate on
advances outstanding on the over advance is prime plus 2%. The terms and length
of the over advance loan are currently being renegotiated with the objective of
providing provide more availability of funds to the Company.
<PAGE>
- -------------------------------------------------------------------------------
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
- -------------------------------------------------------------------------------
On June 23, 1999 the Company, through Pro Golf International, increased its
borrowings by $8,500,000 with a 75 day loan with Comerica Bank. Long-term
financing is being arranged to replace this bridge loan. This was used 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 nearly 170 stores in the United States,
Canada and the Philippines. Ajay owns over 80% of the stock of Pro Golf
International, Inc. with the remaining shares held by a group of investors.
RESULT OF OPERATIONS - During the quarter ended June 30, 1999, the Company had
net sales of $4,560,000, a 48% decrease compared to $8,991,000 for the same
period in 1998. Outdoor furniture sales increased $707,000 primarily due to
increased volume. Sales decreased $4,898,000 in the mass merchant golf segment
and $240,000 in the specialty golf store segment. Sales during the second
quarter of 1998 reflected $2.9 million in golf glove and golf cart sales
achieved under a special program not repeated in 1999. The accessory line
decreased $400,000 resulting from discontinuation of certain accessory products
by two major customers. A decline is sales of $941,000 attributable to bags and
the decline in sales in the specialty golf store segment were due to a market
wide over stock of bags. The balance of the sales decrease is due to the general
decline in golf sales.
The Company has redesigned its bag line for the 2000 season and expects this to
result in increased sales. The Company also anticipates increasing its sales as
a result of its acquisition of Pro Golf of America during the remainder of 1999,
by additional sales to Pro Golf franchisees, additional profits due to the
operations of its newly formed subsidiary Prestige Golf, Inc. and expansion of
Pro Golf. Additionally, the Company is exploring acquisition candidates which
will help broaden its product line, improve its cash flow, and provide it access
to a broader customer base.
Gross profit for the three months ended June 30, 1999 was 11% of sales, compared
to 18% for the same period of the prior year. Gross profit for the six months
ended June 30, 1999 was 13% of sales compared to 18% for the same period of the
prior year. The significant decrease in gross profit is due to the unfavorable
absorption of fixed overheads due to the lower sales levels.
Selling, general and administrative expenses were $985,000 for the current
quarter as compared to $1,178,000 for the same quarter of the prior year. On a
year to date six months basis, SG&A was $1,836,000 for the current year compared
to $2,206,000 in the prior year. As a percent of sales, SG&A increased from 13%
for the current quarter of the prior year to 22% for the current quarter of the
current year and it increased by 8 percentage points for the six months period
to 21% for the current year from 13% for the prior year. The lower expenses are
related to reduced volume; the higher percentage is due to the lower sales
level. Subsequent to June 30, 1999, the Company began a significant
expense-reduction program and anticipates implementing actions that will
<PAGE>
- -------------------------------------------------------------------------------
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
- ------------------------------------------------------------------------------
reduce operating expenses by up to $1,000,000 (annualized) by the end of 1999.
Interest expense declined by $40,000 during the quarter and on a year to date
basis by $122,000 for the six months as compared to the prior year due to better
utilization of assets.
Net loss for the quarter ended June 30, 1999 was $512,000 compared to $125,000
net income for the same quarter of the prior year. On a year to date basis, net
loss is $974,000 compared to $166,000 year to date net income for the comparable
prior year 6-month period.
<PAGE>
- ------------------------------------------------------------------------------
PART II. OTHER INFORMATION
- ------------------------------------------------------------------------------
Item 5. OTHER INFORMATION.
On June 24, 1999, the Registrant announced that it has completed the
previously announced purchase of 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 nearly 170 stores in the United States, Canada and the
Philippines.
The Pro Golf stock was acquired by Pro Golf International, Inc.
("PGI"), a Delaware corporation owned more than 80% by the Company. The
Company attempted to structure the acquisition to preserve its
substantial net operating loss carry forward. The purchase price for
this acquisition was funded through an $8,500,000 short-term loan
provided by Comerica Bank, with the remaining $2,000,000 being provided
by private investors in PGI, through long-term subordinated notes and
common stock. The Company is pursuing opportunities for long-term
financing and expects to refinance the transaction during the third
quarter of 1999.
Pro Golf is in the business of franchising discount retail golf stores,
receiving initial franchise fees from each new franchisee and ongoing
royalties based on product sales by the franchised stores within its
system. Pro Golf is one of the oldest and best known names in the
off-course retail golf business. The Registrant intends to continue to
operate this business as a separate entity and believes that Pro Golf
has significant franchising growth opportunities for the future and
that it will continue to generate significant cash. Further, the
Registrant believes this acquisition will position its other
golf-related operating subsidiaries to become significant suppliers of
golf equipment and accessory products to the Pro Golf franchise system.
The Registrant is pursuing golf-related e-commerce activities by
combining online retailing business models of Pro Golf and the
Registrant's other golf-related operating subsidiaries. Product sales
resulting from online orders ultimately are expected to be fulfilled
through the Registrant's Delavan, Wisconsin manufacturing and
distribution center. The Registrant is intensifying its focus on
e-commerce activities to combine the brand name awareness of Pro Golf
with the Registrant's fulfillment capabilities.
<PAGE>
- -------------------------------------------------------------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
- -------------------------------------------------------------------------------
A) Exhibits:
27 Financial Data Schedule.
B) Forms 8-K:
The Company filed a Form 8-K dated June 23, 1999 reporting under
Item 5 that it completed its acquisition of all of the outstanding
capital stock of Pro Golf of America, Inc., all of the ownership
interests in PGD Online, LLC and certain accounts receivable and
certain other assets of State of the Art Golf, Inc.
The Company filed a Form 8-K dated June 29, 1999 extending the
expiration date of the Registrant's publicly traded common stock
warrants until June 30, 2000.
<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: Corporate Secretary
By: /s/Ronald N. Silberstein
-------------------------
Its: Chief Financial Officer
Date: August 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000854858
<NAME> Ajay Sports, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 463
<SECURITIES> 484
<RECEIVABLES> 4,214
<ALLOWANCES> 0
<INVENTORY> 4,942
<CURRENT-ASSETS> 10,294
<PP&E> 1,754
<DEPRECIATION> 101
<TOTAL-ASSETS> 25,600
<CURRENT-LIABILITIES> 12,602
<BONDS> 0
2,702
1,250
<COMMON> 40
<OTHER-SE> 2,325
<TOTAL-LIABILITY-AND-EQUITY> 25,600
<SALES> 4,560
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<INCOME-TAX> (275)
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</TABLE>
