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 September 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
Incorporation or Organization) Identification No.)
1501 E. Wisconsin Street,
Delavan, Wisconsin 53115 (414) 728-5521
- -------------------------------------- -------------------------
(Address of principal executive offices (Registrant's Telephone
including Zip Code) Number, 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 9/30/99 is 4,204,871
Transitional Small Business Disclosure Format
Yes No X
---- ----
<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.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AJAY SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, 1999 December 31,
(Unaudited) 1998
ASSETS ------------------- ---------------
<S> <C> <C>
Current assets:
Cash $ 434 $ 6
Marketable securities 387 396
Trade accounts receivable, net 2,914 1,889
Inventories 4,232 5,680
Prepaid expenses and other 863 485
-------------- -------------
Total current assets 8,830 8,456
Fixed assets, net 1,677 1,708
Other assets 213 179
Deferred tax benefit 5,741 1,119
Goodwill 1,588 1,621
Trademarks 6,989 -
-------------- -------------
Total assets $ 25,038 $ 13,083
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 8,538 $ 195
Current portion of capital lease 4 4
Accounts payable 3,770 2,225
Accrued expenses 1,036 380
-------------- --------------
Total current liabilities 13,348 2,804
Notes payable to affiliates - long term 2,087 1,587
Notes payable to banks - long term 5,547 5,951
Notes payable 2,070 -
-------------- --------------
Total liabilities 23,052 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, 217,939 shares
outstanding at stated value 2,179 2,642
Series D, $0.01 par value, 6,000,000 shares 60 60
Common stock, $.01 par value 100,000,000 shares authorized,
4,091,091 and 3,956,815 shares outstanding, respectively 41 40
Additional paid-in capital 15,527 14,762
Accumulated deficit (17,104) (16,006)
Accumulated unrealized (losses) gains on securities 9 (7)
-------------- --------------
Total stockholders' equity 1,962 2,741
-------------- --------------
Total liabilities and stockholders' equity $ 25,038 $ 13,083
============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AJAY SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
Net sales $ 2,684 $ 4,214 $ 11,507 $ 20,803
Cost of sales 2,081 3,619 9,719 17,284
--------- --------- --------- ---------
Gross profit 603 595 1,788 3,519
Selling, general and 1,855 857 3,692 3,063
administrative expenses --------- --------- --------- ---------
Operating income (1,252) (262) (1,904) 456
Non-operating expense:
Interest expense, net 409 263 937 913
Other, net 61 100 (131) 2
--------- --------- ---------- ---------
Total non-operating expense 470 363 1,068 915
--------- --------- ---------- ---------
Income (loss) before income taxes (1,722) (625) (2,971) (459)
Income tax expense (benefit) (603) - (878) -
--------- --------- ---------- ---------
Net income (loss) $ (1,119) $ (625) $ (2,093) $ (459)
========= ========= ========== =========
Basic and diluted earnings per share* $ (0.28) $ (0.18) $ (0.53) $ (0.19)
========= ========= ========== =========
Weighted average common shares outstanding 3,957 3,920 3,957 3,892
========= ========= ========== =========
* Computed by dividing net income or loss, after reduction for preferred stock
dividends, by the weighted average number of common shares outstanding.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AJAY SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSAN)S), (UNAUDITED)
Nine Months
Ended September 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,093) $ (459)
Adjustments to reconcile to net cash flows from
operating activities:
Depreciation and amortization 303 273
Change in assets [(increase)/decrease] and
liabilities [increase/(decrease)]:
Trade accounts receivable, net (1,025) 2,237
Inventories 1,448 1,066
Prepaid expenses and other current assets (377) (242)
Other assets (34) (81)
Deferred tax benefits (3,624)
Accounts payable 1,545 (1,985)
Accrued expenses 656 (172)
Trademarks (6,989) -
-------------- --------------
Net cash used in operating activities (10,190) 637
-------------- --------------
Cash flows from investing activities:
Acquisitions of fixed assets (234) (153)
-------------- --------------
Net cash used in investing activities (234) (153)
-------------- --------------
Cash flows from financing activities:
Net change in notes payable to banks 7,939 (2,513)
Net proceeds from notes payable to affiliates 500 2,315
Net proceeds from notes payable 2,070 -
Net change from conversion of preferred stock 303 -
Net change in marketable securities 16 (500)
Net change to minority interest 24 -
-------------- ---------------
Net cash provided by financing activities 10,852 (698)
-------------- ---------------
Net increase (decrease) in cash 428 (214)
Cash at beginning of period 6 234
-------------- ---------------
Cash at end of period $ 434 $ 20
============== ===============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 622 $ 899
============== ===============
Cash paid for income tax - -
============== ===============
</TABLE>
<PAGE>
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 September 30, 1999 and the results of operations for
the three and nine-month periods ended September 30, 1999 and 1998 and the cash
flows for the same nine-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:
September 30, December 31,
1999 1998
Raw Materials $1,086 $1,493
Work in Process 1,103 1,052
Finished Goods 2,043 3,135
----- -----
$4,232 $ 5,680
===== =====
3. NOTES PAYABLE TO BANKS
On February 2, 1999, the Company entered an agreement with Wells Fargo Bank for
a seasonal over advance of up to $750,000 beginning February 2, 1999. The full
amount of this over advance is due on December 1,1999. The interest rate on
advances outstanding on the over advance is prime plus 2%.
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. The loan is
due on the earlier of demand or March 15, 2000. The company is in the process of
converting this loan into long-term financing. The Company expects the
refinancing to be completed during the first quarter of 2000.
<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 nine months ended
September 30, 1999 and 1998 (unaudited) are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Quarter Ended September 30, 1999
GOLF
----------------------
Mass
Furniture Merchant Specialty Franchise Corporate Consolidated
--------- -------- Golf --------- --------- -------------
Stores
----------
Net Sales $ 260 $ 1,264 $ 165 $ 995 $ - $ 2,684
Operating Profit/(Loss) (483) (639) (30) 45 (146) (1,253)
Total Assets 2,137 7,822 1,623 12,854 - 24,436
Depreciation/Amortization 30 58 13 6 - 107
Capital Expenditures 0 25 - 81 - 106
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Quarter Ended September 30, 1998
GOLF
----------------------
Mass Specialty
Furniture Merchant Golf Franchise Corporate Consolidated
--------- -------- Stores --------- --------- ------------
---------
Net Sales $ 285 $ 3,795 $ 134 $ - $ - $ 4,214
Operating Profit/(Loss) (286) 211 (104) - (83) (262)
Total Assets 1,875 9,879 2,042 - - 13,797
Depreciation/Amortization 24 57 11 - - 92
Capital Expenditures 40 38 - - - 78
- --------------------------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1999
GOLF
----------------------
Mass
Furniture Merchant Specialty Franchise Corporate Consolidated
--------- -------- Golf --------- --------- -------------
Stores
---------
Net Sales $ 4,425 $ 5,690 $ 397 $ 995 $ - $ 11,507
Operating Profit/(Loss) (71) (1,224) (100) 45 (554) (1,904)
Total Assets 2,137 8,425 1,623 12,854 - 25,038
Depreciation/Amortization 84 174 39 6 - 303
Capital Expenditures 77 69 - (12) - 134
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1998
GOLF
----------------------
Mass Specialty
Furniture Merchant Golf Franchise Corporate Consolidated
--------- -------- Stores --------- --------- ------------
---------
Net Sales $ 3,235 $16,442 $ 1,126 $ - $ - $ 20,803
Operating Profit/(Loss) (27) 1,229 (344) - (402) 456
Total Assets 1,875 9,879 2,043 - - 13,797
Depreciation/Amortization 73 167 33 - - 273
Capital Expenditures 102 51 - 81 - 234
- ----------------------------------------------------------------------------------------------------
The franchise segment was added late during the second quarter of 1999 upon the
completion of 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 $1,081,575 and on Series C in
the amount of $762,747. 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 - At September 30, 1999, the Company had negative working
capital of $4,518,000 as compared with positive $5,652,000 at December 31, 1998.
The ratio of current assets to current liabilities at September 30, 1999 was
(.7) to 1, as compared to 3.0 as of December 31, 1998. The Company's borrowings
increased $10,509,000 since December 31, 1998. The acquisition of Pro Golf
during June, 1999 increased borrowings $10,570,000 through a combination of bank
note payable and private investment. Operations reduced borrowings during this
time by $61,000. Contributing to the negative working capital is the temporary
classification of the Comerica loan for $8,343,000 as a current liability. The
Company has temporarily extended this short-term financing arrangement while it
negotiates the terms of converting it to long-term financing with the same
lender. The Company expects to have the long-term financing completed during the
first quarter of 2000.
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. At
September 30,1999, the Company had not repaid its seasonal overadvance of
$750,000 obtained from Wells Fargo Bank in February 1999. The full amount of the
overadvance has been extended through December 1, 1999. During the third
quarter, the Company has not been able to comply with the tangible net worth and
aggregate working capital financial covenants in its credit agreement with
Wells. Wells has granted a waiver to the Company relative to its non-compliance
with these covenants. Wells is in the process of reviewing the covenants
relative to the Company's financial position for the purpose of resetting them
on or before December 1, 1999.
During the first nine months of the year, the operating cash flow was positive
by $428,000, attributable to the Pro Golf acquisition.
During 1999, the Company has had fewer opportunities to supply its products to
mass merchants. The loss of mass merchant customers has resulted in increased
inventory levels and lower sales than anticipated. This has had a material
adverse effect on the Company's liquidity position. The Company is in need of
substantial additional capital. Management is considering various alternatives
for raising additional capital, including the sale of equity securities,
possible acquisitions and dispositions of assets, although no specific plan has
been adopted at the date of this report. The Company is negotiating with a
financial advisor to assist in its capital raising efforts.
<PAGE>
The Company acquired the franchising operations of Pro Golf Discount late in the
second quarter of 1999. Management effected this acquisition because it believed
that the long-term potential of the franchising operations, combined with the
ability of the franchise operations to provide additional avenues of
distribution for the Company's products through sales to the franchise system
and through Internet online distribution, would be a good strategic fit for the
Company. During the second half of 1999 a substantial amount of time and
financial resources were required to effect the transition, which included
implementation of major revisions to the franchise offering documents and
franchise agreement. Based on the strategic plan developed by the Company for
expansion of the Pro Golf franchising operations and the changes made in the
franchising documents the Company believes the asset value of this new
subsidiary has increased substantially since completion of the acquisition.
Although some positive financial benefits are expected during the fourth quarter
of 1999, the Company anticipates that the positive financial benefits from the
synergies which made this acquisition an attractive opportunity for the Company
will increase significantly during 2000.
<PAGE>
RESULT OF OPERATIONS - During the quarter ended September 30, 1999, the Company
had net sales of $2,684,000, a 36% decrease compared to $4,214,000 for the same
period in 1998. Outdoor furniture sales increased $61,000 primarily due to
increased volume. Sales decreased $2,518,000 in the mass merchant golf segment
and were flat in the specialty golf store segment. Sales during the third
quarter of 1998 reflected $1.3 million in golf glove and golf cart sales
achieved under a special program not repeated in 1999. The accessory line
decreased $108,000 resulting from discontinuation of certain accessory products
by two major customers. A decline in sales of $156,000 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 being experienced throughout the industry.
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 and
additional private label products 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 September 30, 1999 was 22% of sales,
compared to 14% for the same period of the prior year. Gross profit for the nine
months ended September 30, 1999 was 15% of sales compared to 17% for the same
period of the prior year. The significant increase in gross profit is due to the
acquisition of Pro Golf.
Selling, general and administrative expenses were $1,855,000 for the current
quarter as compared to $857,000 for the same quarter of the prior year. On a
year to date nine months basis, SG&A was $3,692,000 for the current year
compared to $3,063,000 in the prior year. As a percent of sales, SG&A increased
from 20% for the current quarter of the prior year to 69% for the current
quarter of the current year and it increased by 8 percentage points for the nine
months period to 21% for the current year from 15% for the prior year. The
higher expenses are related to the acquisition of Pro Golf. Subsequent to June
30, 1999, the Company began a significant expense-reduction program and
anticipates implementing actions that will reduce operating expenses by up to
$1,000,000 (annualized) by the end of 1999.
Interest expense increased by $146,000 during the quarter and on a year to date
basis by $24,000 for the nine months as compared to the prior year due to the
acquisition of Pro Golf.
<PAGE>
Net loss for the quarter ended September 30, 1999 was $1,119,000 compared to
$625,000 net loss for the same quarter of the prior year. On a year to date
basis, net loss is $2,093,000 compared to $459,000 year to date net loss for the
comparable prior year 9-month period.
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION.
During October 1999 Pro Golf signed internationally known golf pro Gary player
to be its corporate spokesman through, at least, December 31, 2001. An
advertising campaign featuring Mr. Player is in production, targeted at both
increasing retail sales in stores and helping to sell new franchises. Ajay also
has a license to produce and sell certain Gary Player golf products. Pro Golf is
also planning to begin providing additional services to its franchisees designed
to help them increase sales and become more profitable.
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
A) Exhibits:
27 Financial Data Schedule.
B) Forms 8-K:
On July 8, 1999 the Company filed a Form 8-K dated June 23, 1999
reporting under Item 2 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.
On September 1, 1999, the Company filed a Form 8-K dated August
27, 1999 to report a change in certifying accountant under Item 4.
On September 7, 1999, the Company filed a Form 8-K/A dated June 23,
1999 reporting financial Statements for the Pro Golf acquisition.
<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: November 22, 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. Dollar
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 434
<SECURITIES> 387
<RECEIVABLES> 2,914
<ALLOWANCES> 0
<INVENTORY> 4,232
<CURRENT-ASSETS> 8,830
<PP&E> 1,677
<DEPRECIATION> 107
<TOTAL-ASSETS> 25,038
<CURRENT-LIABILITIES> 13,348
<BONDS> 0
2,239
1,250
<COMMON> 41
<OTHER-SE> (1,568)
<TOTAL-LIABILITY-AND-EQUITY> 24,435
<SALES> 2,684
<TOTAL-REVENUES> 2,684
<CGS> 2,081
<TOTAL-COSTS> 1,855
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 409
<INCOME-PRETAX> (1,722)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,722)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,722)
<EPS-BASIC> (0.53)
<EPS-DILUTED> (0.53)
</TABLE>
