UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
Amendment No. 1
(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, 2003
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
AMERICAN SPORTS DEVELOPMENT GROUP, INC.
---------------------------------------
(Exact name of small business issuer as specified in its charter)
Commission File Number 0 - 26943
Delaware 95-4847818
-------- -----------
(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
155 Verdin Road, Greenville, SC 29607
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 864-672-2734
(Former Name and Former Address, if Changed Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of March 31, 2003 there were 64,100,099 shares of the Registrant's common
stock, $.001 par value per share, issued and outstanding.
Note: This report is being amended solely to correct typographical errors on
the Statement of Cash Flows. The balance of the report is as originally filed.
AMERICAN SPORTS DEVELOPMENT GROUP, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheet at March 31, 2003 and
December 31, 2002 3 - 4
Consolidated Statements of Income for the Three Months
Ended March 31, 2003 and March 31, 2002 5
Consolidated Statement of Cash Flows for the Three
Months Ended March 31, 2003 and March 31, 2002 6 - 7
Consolidated Statement of Stockholders' Equity at
March 31, 2003 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and results of Operations 14
Item 3. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
CERTIFICATIONS 23
2
Part I. Financial Information
Item 1. Financial Statements
AMERICAN SPORTS DEVELOPMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
----------- -------------
(unaudited)
ASSETS (all collateralized)
Current Assets:
Cash and cash equivalents $ 97,602 $ 332,101
Accounts receivable 1,451,668 1,561,741
Other receivables- employees 29,326 35,501
Recoverable income taxes - 8,131
Prepaid and other current assets 63,783 51,829
Inventory 1,827,928 1,929,317
----------- ----------
Total Current Assets 3,470,307 3,918,620
Property and Equipment-net of accumulated depreciation
and amoritzation of $846,684 and $631,178, respectively 443,090 469,994
Goodwill, net of accumulated amortization of $69,952 at
March 31, 2003 and December 31, 2002 1,637,580 1,637,580
Other intangibles,net of accumulated amortization of
$114,438 and $25,350, respectively 428,962 450,637
Other assets 56,874 56,852
----------- ----------
TOTAL ASSETS $ 6,036,813 $ 6,533,683
=========== ===========
See accompanying notes to consolidated financial statements.
3
AMERICAN SPORTS DEVELOPMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, continued
March 31, December 31,
2003 2002
----------- -------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank Promissory Note $ 1,454,594 $ 1,430,940
Accounts payable and accrued expenses 3,604,302 3,603,540
Due to affiliate 258,456 177,442
Notes payable-current portion 80,516 150,452
----------- ----------
Total Current Liabilities 5,397,868 5,362,374
Notes payable,less current portion 15,045 18,151
----------- ----------
TOTAL LIABILITIES 5,412,913 5,380,525
Commitments and Contingencies - -
STOCKHOLDERS' EQUITY
Preferred stock-0 par value , authorized 20,000,000 shares, - -
Common Stock - $.001 par value, authorized 100,000,000
shares, 64,100.098 shares and 5,948,295 shares
issued and outstanding at March 31, 2003 and
December 31, 2002, respectively 64,100 64,100
Additional Paid-In Capital 2,603,221 2,603,221
Note receivable - common stock subscription (149,999) (149,999)
Deficit (1,893,422) (1,364,164)
----------- -----------
Total Stockholders' Equity 623,900 1,153,158
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,036,813 $ 6,533,683
=========== ===========
See accompanying notes to consolidated financial statements.
4
AMERICAN SPORTS DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
2003 2002
---- ----
(unaudited)
-----------
Net sales $ 2,448,356 $ 6,036,136
Cost of sales 1,810,001 4,813,291
----------- -----------
Gross profit 638,355 1,222,845
Selling, general and administrative expenses 1,144,269 1,175,380
Loss from operations (505,914) 47,465
Other income (expense):
Interest expense, net (23,344) (19,522)
Other income, net - 8,053
----------- -----------
(23,344) (11,469)
Loss before income taxes (529,258) 35,996
Income tax expense - 13,888
Net loss $ (529,258) $ 22,108
=========== ===========
Net loss per common share
Basic and diluted $ (0.01) $ -
=========== ===========
Weighted average shares outstanding 64,100,099 5,948,295
=========== ===========
See accompanying notes to consolidated financial statements.
5
AMERICAN SPORTS DEVELOPMENT GROUP INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31,
2003 2002
---- ----
(unaudited)
-----------
Cash flows from operating activities:
Net (loss)/income $ (529,258) $ 22,108
Adjustments to reconcile net (loss)/income to net
cash provided by (used for) operating activities:
Depreciation and amortization 75,260 51,600
Bad debt expense 4,770 2,651
Decrease in accounts receivable 105,303 155,397
Decrease in other receivables 14,306 3,333
Decrease/(increase) in inventory 101,389 (220,364)
(Increase)/decrease in prepaid expenses (11,975) 126,700
Decrease in due from affiliates - 10,554
Increase in accounts payable and accrued expenses 762 24,086
Increase in due to affiliate 81,014 11,252
----------- ----------
Total cash (used for) provided by operating
activities (158,429) 187,317
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment (26,682) -
Acquisition of domain name (10,500)
Decrease in notes receivable 30,000
----------- ----------
Total cash (used for) provided bv investing
activities (26,682) 19,500
----------- ----------
Cash flows from financing activities:
Proceeds under bank line of credit 23,654 2,132,000
Payments under bank line of credit (2,172,000)
Repayment of notes payable (73,042) (110,417)
----------- ----------
Total cash used for financing activities (49,388) (150,417)
----------- ----------
Net (decrease)/increase in cash and cash
equivalents (234,499) 56,400
Cash and cash equivalents - beginning of period 332,101 304,239
----------- ----------
Cash and cash equivalents - end of period $ 97,602 $ 360,639
============ ============
See accompanying notes to consolidated financial statements.
6
AMERICAN SPORTS DEVELOPMENT GROUP INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS, continued
FOR THE QUARTERS ENDED MARCH 31,
2003 2002
---- ----
(unaudited)
-----------
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest $ 23,344 $ 19,926
Income taxes $ - $ -
See accompanying notes to consolidated financial statements
7
AMERICAN SPORTS DEVELOPMENT GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD ENDED MARCH 31, 2003
Common Stock Additional Total
------------------ Paid - In Note Retained Stockholders'
Shares Amount Capital Receivable Earnings Equity
-------------------------------------------------------------------------------
Balance at December 31, 2002 64,100,098 $ 64,100 $ 2,603,221 $ (149,999) $(1,364,164) $ 1,153,158
Net loss for the quarter ended
March 31, 2003 (529,258) (529,258)
================================================================================
Balance at March 31, 2003 64,100,098 $ 64,100 $ 2,603,221 $ (149,999) $(1,893,422) $ 623,900
================================================================================
See accompanying notes to consolidated financial statements
8
AMERICAN SPORTS DEVELOPMENT GROUP, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The accompanying financial statements include the accounts of American Sports
Development Group, Inc., a Delaware corporation (the "Company") and its wholly
owned subsidiaries. For accounting purposes, the Company is the successor to
Paintball Incorporated, a South Carolina corporation formerly known as "American
Sports Development Group, Inc." and "National Paintball Supply Company, Inc." On
May 17, 2002, American Inflatables, Inc., a Delaware corporation, issued stock
constituting a majority of its post-issuance shares outstanding in exchange for
all of the outstanding shares of Paintball Incorporated, and the former
shareholders of Paintball Incorporated became the controlling shareholders of
American Inflatables, Inc. For periods and dates prior to May 17, 2002, the
accompanying financial statements reflect the results of operations and
financial condition only of Paintball Incorporated and its wholly owned
subsidiaries. For periods and dates on and after May 17, 2002, the accompanying
financial statements reflect the combined results of operations and the
financial condition of Paintball Incorporated, its wholly owned subsidiaries and
American Inflatables, Inc. As a matter of corporate law, the Company is the same
entity as American Inflatables, Inc., which merely changed its name to "American
Sports Development Group, Inc." on or about June 18, 2002. . The Company's
wholly owned subsidiaries included in the accompanying financial statements are:
a) Paintball Incorporated ("Paintball") incorporated under the laws of
the State of South Carolina;
b) ILM, Inc. ("ILM"), incorporated under the laws of the State of South
Carolina;
c) American Inflatables, Inc. ("Inflatables") incorporated under the laws
of the State of Delaware;
d) PaintballGames.com ("PbGames"), incorporated under the laws of the
State of South Carolina.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
9
Line of Business
The Company is primarily a wholesaler of equipment and supplies used in the
paintball game industry. Sales are made to retailers throughout the United
States, as well as Europe. The company owns and operates retail stores in
Greenville, SC, Paramount, CA and, until March 2003, in Irving, TX. ILM is an
independent insurance agent representing several insurance companies/brokers who
insure mostly paintball fields, stores, distributors and manufacturers. ILM is
also a wholesaler of paintball related soft goods products. Inflatables
manufactures and markets inflatable products used for advertising purposes by a
wide array of retail and industrial customers. PbGames operates a web site
designed to promote the Company's paintball products.
Interim Financial Information
The accompanying unaudited interim financial statements have been prepared by
the Company in accordance with generally accepted accounting principles pursuant
to Regulation S-K of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in audited financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. Accordingly, these interim financial statements should be
read in conjunction with the Company's audited financial statements and related
notes for the year ended December 31, 2002, as contained in the Company's
reports on Form 10-KSB filed with the Securities and Exchange Commission on
April 15, 2003. In the opinion of the management of the Company, the interim
unaudited financial statements reflect all adjustments, including normal
recurring adjustments, necessary for a fair presentation of the interim periods
presented. The results of operations for the three month period ended March 31,
2003 are not necessarily indicative of results of operations to be expected for
the full year.
Revenue Recognition
The Company recognizes revenue upon shipment of its products. Revenue includes
shipping and handling charges to customers. Revenues from broker commission and
association dues are recognized when premiums are billed to clients.
NOTE 2. ACQUISITION
On May 17, 2002, American Inflatables, Inc. ("Inflatables") acquired Paintball
Incorporated, a South Carolina corporation then known as American Sports
Development Group, Inc., and formerly known as National Paintball Supply
Company, Inc. ("Paintball"). For accounting purposes, the transaction was
treated as the acquisition of Inflatables by Paintball in a reverse acquisition.
Inflatables issued 50,612,159 shares of its common stock, or 83% of the total
outstanding shares on a fully diluted basis after the issuance, to the three
shareholders of Paintball for all the issued and outstanding shares of Paintball
making Paintball a wholly owned subsidiary of Inflatables.
10
In June 2002, after the reverse acquisition, the combined companies, which
constitute the Company, were restructured as follows:
(1) Paintball's wholly-owned subsidiary Paintball Incorporated was merged
into Paintball with Paintball as the surviving company but with its name
changed from "American Sports Development Group, Inc." to "Paintball
Incorporated";
(2) Inflatables changed its name from "American Inflatables, Inc." to
"American Sports Development Group, Inc." by means of a merger with a
wholly owned shell subsidiary formed for the purpose of effecting the name
change; and
(3) The Company formed a new Delaware subsidiary named "American
Inflatables, Inc." and transferred the assets and liabilities of its
pre-acquisition inflatable advertising business down to the new subsidiary.
The result was that the Company survived as the parent company with the name
"American Sports Development Group, Inc." and with two wholly owned operating
subsidiaries: (1) Paintball, a South Carolina corporation named "Paintball
Incorporated," conducting the paintball gaming business and (2) the new American
Inflatables, Inc., a Delaware corporation, conducting the inflatable advertising
business. The Company's stock symbol was also changed from "BLMP" to "ASDP"
(sic).
The Company has assigned a value of $1,801,757 to this acquisition, based on the
publicly quoted fair value of its common stock. In accordance with Financial
Accounting Standards Board's Emerging Issues Task Force (EITF) EITF 99-12, this
value was calculated using the average closing stock price of the Company's
common stock for the five day period beginning two days before and ending two
days after the arrangement date of April 11, 2002, when all material aspects of
the transaction were agreed to by all parties.
NOTE 3. WRITE OFF OF GOODWILL RELATED TO INFLATABLES
For accounting purposes, Inflatables' business combination with Paintball is
treated as the acquisition of Inflatables by Paintball. In accordance with EITF
99-12, the Company assigned a value of approximately $1.8 million to the
acquisition, of which approximately $1,560,000 was classified as goodwill and
approximately $250,000 represented the fair value of custom design patterns and
customer lists.
Since the date of acquisition, May 17, 2002, through December 31, 2002,
Inflatables' sales, gross profit and net loss recognized by the Company have
totaled $542,480, $279,810 and $313,327, respectively. During the first quarter
of 2003, Inflatables' sales and gross profit have declined due to cutbacks in
marketing expenditures. As a result of continued losses since acquisition, the
Company believes its investment in Inflatables has suffered an impairment in
value of $500,000. Accordingly, a non-cash charge for impairment of goodwill in
this amount was recorded at December 31, 2002. The remaining value of the
Company's investment in Inflatables (approximately $1.3 million) represents the
Company's estimate of its fair market value based on tests involving both
multiples of potential annual sales and earnings before interest, taxes,
depreciation and amortization. The estimate of Inflatables' fair market value
also includes $300,000 as the estimate of Inflatables' position as a publicly
traded entity.
11
The Company believes there exists a risk it may incur certain liabilities
related to actions taken by Inflatables' former management in periods prior to
its reverse acquisition by the Company. Among these risks are potential
liabilities for sales taxes, fines for non-compliance with certain governmental
regulatory authorities and fines for workers' compensation claims. The Company
has no direct knowledge of any existing liability related to the above factors
and therefore has not made any provision for such in the accompanying financial
statements
This acquisition has been accounted for as purchase.
NOTE 4. PRO FORMA FINANCIAL INFORMATION
The following summarized unaudited pro forma financial information assumes the
acquisition described in Note 2 above had occurred on January 1, 2002. The
summarized unaudited pro forma financial information is provided for
informational purposes only and is not necessarily indicative of actual results
that would have been realized had the acquisition occurred at the assumed date
and is not necessarily indicative of future results. The following summarized
unaudited pro forma financial information does not reflect any potential
benefits from cost savings or synergies expected to be realized following the
acquisition.
Three Months Ended
March 31, 2002
--------------
Sales $6,362,548
Loss from continuing operations (128,034)
Net income (loss) (128,034)
Net income (loss) per share:
Basic and diluted $(0.0)
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, amendment of FASB Statement No. 13, and Technical Corrections". SFAS
No. 145 rescinds Statement No. 4, which required gains and losses from
extinguishments of debt to be classified as an extraordinary item, net of tax.
SFAS 145, when adopted, will require applying the criteria of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" in determining how
to classify gains and/or losses resulting from extinguishment of debt. The
effective date of adoption of SFAS No. 145 is for fiscal years beginning after
May 15, 2002. The Company does not expect the adoption of SFAS No. 145 to have a
material effect on its financial position or results of operations.
12
In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated With
Exit or Disposal Activities". This Statement requires the recognition of costs
related to exit or disposal activities at the time they are incurred, rather
than the previously accepted method of recognizing such costs at the commitment
date of such activities. SFAS 146 is effective for such activities entered into
or modified after December 31, 2002. The provisions of this statement for assets
held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities and
therefore, will depend on future actions initiated by management. As a result,
the Company cannot determine the potential effects that adoption of SFAS 146
will have on the financial statements with respect to future disposal decisions,
if any.
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure", which amended Statement No. 123.
"Accounting for Stock Based Compensation". SFAS No. 148 provides for the use of
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock based compensation. It also amends the disclosure
requirements of Statement No. 123 to require prominent disclosure of the
Company's method of accounting for such compensation and the effect of the
method used on reported results in annual and interim financial statements. SFAS
No. 148 is effective for annual periods ending after December 15, 2002 and
interim periods beginning after December 15, 2002. The Company does not expect
the adoption of SFAS No. 148 to have a material effect on its financial position
or results of operations. See "Stock Option Plan" below.
NOTE 6. CLOSURE OF TEXAS FACILITY
In March 2003, the Company decided to close its warehouse facility in Texas. The
Company believes it will be able to satisfy wholesale orders previously shipped
from Texas through its remaining warehouses in South Carolina and California.
During the year ended December 31, 2002, total operating expenses incurred by
the Texas facility approximated $285,000, consisting primarily of salaries,
property taxes, rent and utilities. Over the course of the next year, the
Company believes it will save an amount approximately equal to the 2002
expenditure
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements in this report that are not reported financial results or other
historical information are "forward-looking statements" within the meaning of
the Private Securities Litigation Act of 1995. Such statements include, but are
not limited to, statements concerning the Company's future plans and strategies,
prices of the Company's products, levels of demand for such products,
assessments of market conditions and capital spending plans. The words
"estimate", "project", "anticipate", "expect", "intend", "believe" and similar
expressions are intended to identify forward-looking statements. These forward
looking statements are management's estimates and involve numerous risks and
uncertainties and can cause actual results to differ materially from those
expressed or implied in the forward-looking statement. The risks and
uncertainties relating to the forward-looking statements in this report include,
but are not limited to, difficulties in assimilating its recent acquisition, the
Company's dependence upon its Chief Executive Officer, competitive pressures
within the industry, concentration of voting control of the Company's common
stock, lack of an established market for the Company's common stock and the need
for additional capital to be raised for future expansion, and those described
under the caption "Cautionary Statement Regarding Forward-Looking Information"
and "Risk Factors" in the Company's annual report on Form 10-KSB for the year
ended December 31, 2002 and from time to time, in the Company's other filings
with the Securities and Exchange Commission. The Company does not undertake
publicly to update or revise the forward-looking statements even if it becomes
clear that any projected results will not be realized.
RESULTS OF OPERATIONS:
"Going Concern" Qualification
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company incurred a significant
loss of approximately $1.9 million for the year ended December 31, 2002 and
incurred losses for the two years ended December 31, 2001 and incurred a loss
for quarter ending March 31, 2003 of $529,000. In addition, the Company had a
deficiency in working capital at December 31, 2002 of approximately $1.4
million. Such working capital deficit includes approximately $322,000 of unpaid
payroll taxes, substantial past due obligations and a bank promissory note,
which matured on April 30, 2003 of approximately $1.4 million. The Company has
been informed by the bank that the note will not be renewed. The above
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty. Management's plans concerning
these matters are discussed below.
Management's Plan Going Forward
As noted above, the Company's auditors indicated in their report on the
Company's financial statements as of and for the year ended December 31, 2002
that the Company's recent losses from operations and a projected loss from
operations for the year ending December 31, 2003, lack of working capital,
substantial past due obligations and a bank promissory note due April 30, 2003
raised substantial doubt about the Company's ability to continue as a going
concern.
14
Company management is currently formulating plans to improve its results of
operations and financial condition. The primary objective is to secure
appropriate financing to allow the Company to satisfy its obligation of its
promissory note and to rebuild its inventory to historical levels. To do so
would require obtaining debt or equity funding totaling approximately $2.0 to
$2.5 million. To date, the Company has contacted a number of financial
institutions and asset based lenders but has not yet obtained suitable
financing. Management is actively pursuing new equity investors and potential
acquirors of the Company or a majority of the assets or business of the Company.
Management is currently engaged in discussions with an investor contemplating an
equity investment in the Company. There can be no assurance that this or any
transaction with this party will occur. However, if such a transaction were to
occur, the Company believes there is a possibility it could take place quickly.
Management believes that it will be successful in either obtaining the necessary
capital infusion or selling all or a majority of the Company's assets or
business; however, there can be no assurance to this effect. If management's
efforts are unsuccessful, management expects the Company to become insolvent no
later than the third quarter of 2003.
The Company's customers continue to exhibit a healthy level of demand for our
products. However, without the ability to finance the purchase of appropriate
levels of fresh inventory to satisfy such demand, the Company's sales have
continued to decline through the first quarter of 2003.
While continuing to search for alternative sources of financing, the Company has
focused on cost cutting measures in an effort to minimize cash outflow. The
Company's goal is to reduce expenditures for Selling, General and Administrative
expenses by $1.5 million on an annual basis.
In March 2003, the Company decided to close its warehouse facility in Texas. The
Company believes it will be able to satisfy wholesale orders previously shipped
from Texas through its remaining warehouses in South Carolina and California.
During the year ended December 31, 2002, total operating expenses incurred by
the Texas facility approximated $285,000, consisting primarily of salaries,
property taxes, rent and utilities. Over the course of the next year, the
Company believes it will save an amount approximately equal to the 2002
expenditure.
Also, the Company expects to realize further savings in the coming year in the
Company's Paintball subsidiary in the areas of employee costs, communications,
advertising and promotion and prior years' tax audit charges. As an additional
means of keeping strict control of costs, the Company has recently cut back its
Inflatables operations, particularly in the marketing area. We continue to
market Inflatables' products, although not as aggressively as was done in fiscal
2002. The Company expects to realize total annualized savings related to
Inflatables of approximately $300,000.
15
THREE MONTHS ENDED MARCH 31, 2003 VS. MARCH 31, 2002
The Company's results of operations for the three months ended March 31, 2003
include the results of operations of American Inflatables, Inc.(Inflatables)
which was acquired on May 17, 2002. Results of operations for the same period of
the prior year do not include any effect of this acquisition. See "Acquisitions"
below and in the accompanying notes to the consolidated financial statements.
Results of operations
There is an element of seasonality to the Company's paintball distribution
business. Paintball gamers generate significant amounts of body heat due to
intense physical activity and the wearing of necessary protective clothing
during paintball games. As a result, demand for the company's products has
historically been strongest during the first and fourth quarters of the year.
The fourth quarter is also aided by holiday shopping. Demand generally trends
downward in the second quarter and is weakest during the third quarter due
mainly to warmer average temperatures nationwide during the summer months.
During the three months ended March 31, 2003, the Company's sales declined
$3,587,780 (or 59.4 percent) compared to the same period of the prior year. The
primary cause of this substantial decline stems from the Company's difficulty in
securing additional working capital financing. The Company's customers continue
to exhibit a healthy level of demand for the Company's paintball products.
However, without the ability to finance the purchase of appropriate levels of
new inventory to satisfy customer demand, the Company's sales have suffered.
This decline is most apparent in sales of paint and certain styles of name brand
markers (paintball guns). To a lesser extent, this sales decrease is
attributable to the Company's decision in 2002 to not ship paintball products to
The Sports Authority, Inc. due to disagreements in payment policies. For the
three months ended March 31, 2002, the Company shipped approximately $105,000 of
paintball products to The Sports Authority, Inc, but shipped no products to this
customer in 2003.
Partly offsetting the overall drop in sales was an increase in gross margin to
26.1 percent during the first quarter of 2003 compared to 20.3 percent during
the same period in 2002. The higher gross margin percentage in 2003 occurred as
the Company realized a larger proportion of higher margin sales of its own
proprietary products compared to last year's first quarter. This is a result of
the above-mentioned difficulties in securing financing for purchases of national
brand name inventory. In addition, in 2003 the Company recorded a higher
relative percentage of sales from its retail and Internet channels of
distribution, which realize slightly higher margins than the traditional
wholesale channel. Also, as noted above, the first quarter 2003 results included
high gross margin sales related to Inflatables, which were not included in first
quarter 2002 results.
Selling, general and administrative costs decreased by approximately $31,000
during the first quarter of 2003 compared to the first quarter of 2002. This
decrease is attributable primarily to lower expenses incurred in 2003 related to
employee costs and promotional outlays. SG&A expenses represented 46.7 percent
of sales in the first three months of 2003 compared to 19.5 percent of sales
during 2002, reflecting the lower sales level during the first quarter of 2003
compared to the first quarter of 2002, as well as the inclusion of $92,000 in
operating expense related to Inflatables in 2003.
16
Interest expense for the first quarter of 2003 increased approximately $3,800,
or 19.6 percent, compared to the first quarter of the prior year, due mainly to
higher average levels of debt outstanding and to additional bank charges related
to the conversion of the Company's line of credit to a promissory note.
A provision for income taxes based on pre-tax income was provided in 2002 at
statutory rates. No tax benefit has been provided for 2003 since the realization
of future earnings to absorb a tax loss carryforward is uncertain at this time.
..
As noted above, the results of operations for the first quarter of 2003 include
those of Inflatables, which was acquired on May 17, 2002, while no such results
are included in the comparable period of 2002. During the first quarter of 2003,
Inflatables recorded sales, gross profit and net loss of approximately $60,000,
$31,000 and $53,000, respectively. This represents a substantial decline in
sales and gross margin from Inflatables' results of operations from fiscal
quarters since May 17, 2002, as the Company decided to sharply curtail marketing
and promotional expenditures related to Inflatables.
ACQUISITION
On May 17, 2002, the Company (then known as American Inflatables, Inc.) acquired
American Sports Development Group, Inc., a South Carolina corporation formerly
known as National Paintball Supply Company, Inc. ("Paintball"). For accounting
purposes, the transaction was treated as the acquisition of the Company by
Paintball in a reverse acquisition. The Company issued 50,612,159 shares of its
common stock, or 83% of the total outstanding shares on a fully diluted basis
after the issuance, to the three shareholders of Paintball for all the issued
and outstanding shares of Paintball making Paintball a wholly owned subsidiary
of the Company.
In June 2002, after the reverse acquisition, the Company was restructured as
follows:
(1) Paintball's wholly-owned subsidiary Paintball Incorporated was merged
into Paintball with Paintball as the surviving company but with its
name changed from "American Sports Development Group, Inc." to
"Paintball Incorporated";
(2) The Company changed its name from "American Inflatables, Inc." to
"American Sports Development Group, Inc." by means of a merger with a
wholly owned shell subsidiary formed for the purpose of effecting the
name change; and
(3) The Company formed a new Delaware subsidiary named "American
Inflatables, Inc." and transferred the assets and liabilities of its
pre-acquisition inflatable advertising business down to the new
subsidiary.
The result was that the Company survived as the parent company with the name
"American Sports Development Group, Inc." and with two wholly owned operating
subsidiaries: (1) Paintball, a South Carolina corporation named "Paintball
Incorporated," conducting the paintball gaming business and (2) the new American
Inflatables, Inc., a Delaware corporation, conducting the inflatable advertising
business. The Company's stock symbol was also changed from "BLMP" to "ASDP"
(sic).
17
The Company has assigned a value of $1,801,757 to this acquisition, based on the
publicly quoted fair value of its common stock. In accordance with EITF 99-12,
this value was calculated using the average closing stock price of the Company's
common stock for the five day period beginning two days before and ending two
days after the arrangement date of April 11, 2002, when all material aspects of
the transaction were agreed to by all parties.
The excess of the purchase price over the fair value of the net assets acquired
is estimated to total approximately $1,800,000. Of this amount, $250,000 has
been accounted for as an intangible asset representing the fair value of custom
design patterns and customer lists, and is being amortized over its remaining
useful life of 5 years. Approximately $1,560,000 has been classified as
Goodwill. As a result of continued losses since acquisition, the Company
believes its investment in Inflatables has been impaired. Accordingly, at
December 31, 2002, the Company recorded a charge for impairment of Goodwill for
$500,000. The remaining value of the Company's investment in Inflatables
(approximately $1.3 million) represents the Company's estimate of its fair value
based on multiples of potential annual sales and earnings before interest,
taxes, depreciation and amortization. The estimate of fair value also includes
$300,000 related to Inflatables position as a publicly traded entity. The
Company will test this remaining value for further impairment at least annually.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically satisfied its capital requirements through a
combination of internally generated cash and borrowings on its bank line of
credit.
During the quarter ended March 31, 2003, the Company used $158,429 in cash from
operating activities compared to generating $187,317 in cash for the same period
last year. This negative variance in 2003 is due mainly to the incurrence of a
net loss of $529,258, as analyzed above, compared to net income of $22,108 in
2002's first quarter. Partly offsetting this variance were lower cash outlays
for inventory, due to the Company's difficulty in securing additional financing.
Cash flow from investing activities for the first quarter of 2003 reflects
approximately $27,000 in capital expenditures. Of this amount, about $20,000 was
spent on new software designed to increase the efficiency of the Company's
operational and financial systems. In the first quarter of the prior year, cash
flow from investing activities was favorably affected by the collection of
$30,000 in notes receivable.
Cash flows from financing activities for the three months ended March 31, 2003
included payments of notes payable of approximately $73,000 and net proceeds
from the Company's bank of $24,000.
18
BANK LINE OF CREDIT
The Company's subsidiary Paintball had a $1,327,813 line of credit with
SouthTrust Bank that matured on December 30, 2002. Paintball was unable to repay
the line at maturity. The line of credit was restructured into a Promissory Note
in the principal amount of $1,327,813, due April 30, 2003, bearing interest at
the bank's base rate (4.25% at March 31, 2003) plus one percent. The Promissory
Note is secured by all of Paintball's presently existing or hereafter acquired
inventory, intangibles, accounts receivable and furniture, fixtures and
equipment and all proceeds and products thereof. The Company was unable to pay
the Promissory Note at April 30, 2003 and is currently in discussions with
SouthTrust Bank to resolve this default. The bank has informed the Company that
it will not renew the note. The Company is actively seeking alternative sources
of credit, but there can be no assurance the Company's efforts will be
successful.
ITEM 3. CONTROLS AND PROCEDURES
The effectiveness of the design and operation of our disclosure controls and
procedures has been evaluated within 90 days of the filing date of this
quarterly report, and, based on this evaluation, the Company has concluded that
these controls and procedures are effective. There were no significant changes
in our internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the
Exchange Act is accumulated and communicated to our management as appropriate to
allow timely decisions regarding required disclosure.
PART II.
ITEM 1. LEGAL PROCEEDINGS
Lawsuit against The Sports Authority, Inc.
On July 23, 2002, the Company filed suit against The Sports Authority, Inc. in
the South Carolina court of Common Pleas in Greenville, South Carolina. The
complaint alleges that The Sports Authority, Inc. (1) conspired with certain
persons to order paintball guns from the Company, falsely claimed the paintball
guns were defective, refused to pay the Company for the paintball guns and then
resold or otherwise used the paintball guns, (2) engaged in unfair trade
practices under South Carolina law that damaged and continue to damage the
Company in an amount in excess of $1,000,000 and (3) converted the Company's
property. The Company seeks actual damages of $1,000,000, an additional amount
equal to three times actual damages, consequential and incidental damages, costs
and attorney's fees and punitive damages. The parties are in the early stages of
discovery.
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Lawsuit by Larry Cossio against the Company, Paintball Inc., ILM, Inc. and Mr.
Fairbanks
On March 6, 2003, Larry Cossio, the former President of Paintball's insurance
subsidiary ILM, Inc., filed suit against William R. Fairbanks, the Company's
President, Chief Executive Officer and majority shareholder and one of its
directors, the Company, Paintball and ILM, Inc. in the South Carolina Court of
Common Pleas in Greenville, South Carolina. On March 5, 2003, Mr. Cassio
provided Mr. Fairbanks with a letter indicating that he was resigning his
employment with "the Company" (without defining "the Company" in his letter).
Generally, Mr. Cossio alleges that:
(i) Paintball failed to pay notes in the aggregate principal amount of
$179,499 when due that were issued as part of the purchase price
Paintball paid to acquire Mr. Cossio's business in July 2001;
(ii) Paintball consummated the business combination with Inflatables
knowing it would have a material adverse effect on Paintball;
(iii) Mr. Fairbanks fraudulently induced Mr. Cossio and his wife with
material misrepresentations to accept 897,495 shares of the Company's
common stock in satisfaction of the principal amounts on the notes and
failed to convey the stock so purchased;
(iv) Mr. Fairbanks has diverted over $1.3 million in funds from the Company
to Genesis Racing (a company majority-owned and controlled by Mr.
Fairbanks that races automobiles and for which Mr. Fairbanks is a race
car driver) for Mr. Fairbanks' personal benefit; and
(v) The Defendants have failed to pay Mr. Cossio a bonus earned under his
employment agreement with the Company.
Mr. Cossio's complaint includes several claims based on South Carolina state law
theories including fraud, breach of contract, negligence and negligent
misrepresentation, breach of fiduciary duty, promissory estoppel, quantum meruit
and failure to pay wages. Generally, Mr. Cossio is seeking (a) rescission of
Paintball's July 2001 acquisition of his business, (b) damages, including actual
damages and with respect to some claims, consequential damages, compensatory
damages, treble damages, punitive damages, costs, attorneys' fees and interest,
and (c) specific performance, injunctive relief and other equitable remedies
with respect to some of his causes of action. Mr. Cossio has also moved for a
temporary restraining order to restrain the defendants from conveying any
substantial asses of the Company, other than in the ordinary course of business,
and from entering into any agreements to convey such assets or the shares of the
corporate defendants and for and the appointment of a receiver to manage the
affairs of the Company. On March 11, 2003, the Court heard and denied a motion
by Mr. Cossio for a restraining order.
This matter is in early stages of litigation, and the Company is evaluating Mr.
Cossio's claims in order to determine what response to make. The Company
currently believes that Mr. Cossio's complaints are without merit.
20
California sales tax audit
In 2002, Paintball underwent a California state sales tax audit by the
California State Board of Equalization (the "California SBE") related to sales
Paintball made from Texas during the period October 1, 1998 to December 31,
2001. On September 23, 2002, the Company received a Notice of Determination from
the California SBE providing that Paintball owed $224,282 in unpaid sales taxes,
interest and penalties for this period. The Company petitioned for a
redetermination. In March 2003, the Company received a report of Field Audit -
Reaudit indicating that the Company's total liability had been redetermined to
be $75,536. The Company has already paid $10,100 of the amount owed, and has
recorded a current liability of $65,436 for the balance of this liability.
From time to time, the Company is party to ordinary routine product liability
litigation, contract breach litigation, or employment litigation incident to its
business that does not depart from the normal kind of such actions. The Company
believes that none of these actions, if adversely decided, would have a material
adverse effect on its results of operations or financial condition taken as a
whole.
ITEM 5. OTHER INFORMATION
Subsequent Events
- -----------------
1. The Company was not able to secure an extension from South Trust Bank on its
line of credit or renegotiate its terms. The Bank has informed the Company that
it intends to commence litigation if the obligation remains unpaid. The Company
has informed the Bank that it will forthwith turn over its receivables until the
obligation is paid in full. As of May 20, 2003 the Company has not been served
with a lawsuit.
2. The Company has sold its Paintball Division to Camden Holdings, Inc. In
payment for the Paintball Division, Camden Holdings, Inc. has agreed to assume
certain liabilities of the Company in an amount in excess of $5,000,000. The
direct investment in the Company by Camden Holdings, Inc. will not occur in lieu
of their purchase of the Paintball division on May 19, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Description
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
21
AMERICAN SPORTS DEVELOPMENT GROUP, INC.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly authorized this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 20, 2003
AMERICAN SPORTS DEVELOPMENT GROUP, INC.
By: /s/ Matt Brown
-----------------------------
Matt Brown
President and Chief Executive Officer
By: /s/ John Pope
-----------------------------
John Pope
Chief Financial Officer
22
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
In connection with the Quarterly Report of American Sports Development Group
Inc. (the "Company") on Form 10-QSB for the period ending March 31, 2003 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Matt Brown, Chief Executive Officer of the Company, certify,
pursuant to Rules 13a-14 and 15-d14 of the Securities Exchange Act of 1934, as
adopted pursuant to ss.302 of the Sarbanes-Oxley Act of 2002, that:
1. I have reviewed the Report;
2. Based upon my knowledge, the Report does not contain any untrue statement
of a material fact or omit to state a material fact necessary in order to
make the statements made, in light of the circumstances under which such
statements were made, not misleading;
3. Based upon my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects
the financial condition and results of operations of the Company, as of,
and for, the periods presented in the Report;
4. I and the other certifying officers of the Company:
a) are responsible for establishing and maintaining disclosure controls
and procedures for the Company;
b) have designed such disclosure controls and procedures to ensure that
material information is made known to us, particularly during the
period in which the Report is being prepared;
c) have evaluated the effectiveness of the Company's disclosure controls
and procedures within 90 days of the date of the Report; and
d) have presented in the Report our conclusions about the effectiveness
of the disclosure controls and procedures based on the required
evaluation.
5. I and the other certifying officers have disclosed to the Company's
auditors and to the audit committee of the board of directors (or persons
fulfilling the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls (a pre-existing term relating to internal controls regarding
financial reporting) which could adversely affect the Company's
ability to record, process, summarize and report financial data and
have identified for the Company's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls.
6. I and the other certifying officers have indicated in the Report whether or
not there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of
their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Matt Brown
- --------------
Matt Brown
Chief Executive Officer
Dated: May 20, 2003
23
CERTIFICATION OF CHIEF FINANCIAL OFFICER
In connection with the Quarterly Report of American Sports Development Group
Inc. (the "Company") on Form 10-QSB for the period ending March 31, 2003 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, John Pope, Chief Financial Officer of the Company, certify,
pursuant to Rules 13a-14 and 15-d14 of the Securities Exchange Act of 1934, as
adopted pursuant to ss.302 of the Sarbanes-Oxley Act of 2002, that:
1. I have reviewed the Report;
2. Based upon my knowledge, the Report does not contain any untrue statement
of a material fact or omit to state a material fact necessary in order to
make the statements made, in light of the circumstances under which such
statements were made, not misleading;
3. Based upon my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects
the financial condition and results of operations of the Company, as of,
and for, the periods presented in the Report;
4. I and the other certifying officers of the Company:
a) are responsible for establishing and maintaining disclosure controls
and procedures for the Company;
b) have designed such disclosure controls and procedures to ensure that
material information is made known to us, particularly during the
period in which the Report is being prepared;
c) have evaluated the effectiveness of the Company's disclosure controls
and procedures within 90 days of the date of the Report; and
d) have presented in the Report our conclusions about the effectiveness
of the disclosure controls and procedures based on the required
evaluation.
5. I and the other certifying officers have disclosed to the Company's
auditors and to the audit committee of the board of directors (or persons
fulfilling the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls (a pre-existing term relating to internal controls regarding
financial reporting) which could adversely affect the Company's
ability to record, process, summarize and report financial data and
have identified for the Company's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls.
6. I and the other certifying officers have indicated in the Report whether or
not there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of
their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ John Pope
- --------------
John Pope
Chief Financial Officer
Dated: May 20, 2003
24