<PAGE>
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, 1996
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 10/31/96 is 23,274,039.
<PAGE>
Item 1. FINANCIAL STATEMENTS
AJAY SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 1996 December 31,
(Unaudited) 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 239 $ 362
Trade accounts receivable, net 4,603 5,196
Inventories 8,206 8,909
Prepaid expenses and other current assets 540 365
Deferred tax benefit 363 102
------- -------
Total current assets 13,951 14,934
Fixed assets, net 1,884 1,888
Other assets 397 236
Deferred tax benefit 223 106
Goodwill 1,597 1,322
------- -------
Total assets $ 18,052 $ 18,486
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 5,407 $ 5,793
Note payable to affiliate 560 -
Current portion of capital lease 9 6
Accounts payable 2,538 2,181
Accrued expenses 594 631
------- -------
Total current liabilities 9,108 8,611
Note payable - long term 5,099 5,111
Long term portion of capital lease 17 --
Stockholders' equity:
Preferred stock, 10,000,000 shares authorized,
Series B, $0.01 par value,12,500 shares out at liquidation value 1,250 1,250
Series C, $10.00 par value, 296,170 and 313,790 shares
outstanding at stated value, respectively 2,962 3,138
Common stock, $.01 par value 50,000,000 shares authorized, 23,274,039 and
23,337,746 shares outstanding, respectively 233 234
Additional paid-in capital 9,313 9,123
Accumulated deficit (9,930) (8,981)
------- -------
Total stockholders' equity 3,828 4,764
------- -------
Total liabilities and stockholders' equity $ 18,052 $ 18,486
======= =======
</TABLE>
2
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 4,730 $ 3,437 $19,317 $13,376
Cost of sales 4,022 2,926 15,824 10,858
----- ----- ------ ------
Gross profit 708 511 3,493 2,518
Selling, general and
administrative expenses 1,253 670 3,711 2,118
----- ----- ------ ------
Operating income (loss) (545) (159) (218) 400
Non-operating (income) expense:
Interest expense, net 263 167 840 564
Other, net 14 14 19 12
----- ----- ------ ------
Total non-operating expense 277 181 859 576
----- ----- ------ ------
Income (loss) before income taxes (822) (340) (1,077) (176)
Income tax expense (benefit) (280) --- (360) ---
----- ----- ------ ------
Net income (loss) $ (542) $ (340) $ (717) $ (176)
===== ===== ====== ======
Income (loss) per common share outstanding* $ (.03)$ $ (.01) $ (.04) $ (.01)
===== ===== ====== ======
Income (loss) per common share & equivalents $ (.03)$ $ (.01) $ (.04) $ (.01)
===== ===== ====== ======
outstanding**
Weighted average common shares outstanding 23,257 22,687 23,264 22,687
====== ====== ====== ======
</TABLE>
* Computed by dividing net income or loss, after reduction for preferred stock
dividends, by the weighted average number of common shares outstanding.
** Computed by dividing net income or loss, after reduction for preferred stock
dividends, by the weighted average number of common share and common share
equivalents outstanding.
3
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS), (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (717) $ (176)
Adjustments to reconcile to net cash
provided by operating activities:
Loss on sale of assets - 1
Depreciation and amortization 286 142
Change in assets [(increase)/decrease] and liabilities [increase/(decrease)]:
Trade accounts receivable, net 592 (1,923)
Inventories 703 530
Prepaid expenses and other current assets (192) (162)
Investments - (74)
Other assets (162) (10)
Deferred tax benefits (360) -
Accounts payable 356 (196)
Accrued expenses (19) 1
Goodwill (300) -
------- -------
Net cash used in
operating activities 187 (1,867)
------- -------
Cash flows from investing activities:
Purchase of property, plant, equipment (194) (99)
Disposition of fixed assets (64) 6
------- -------
Net cash used in
investing activities (258) (93)
------- -------
Cash flows from financing activities:
Net change in bank loan (396) 4,705
Net change in note payable to affiliate 560 (5,370)
Issuance of preferred shares - 2,731
Preferred stock conversion 12 -
Dividends (228) (58)
------- -------
Net cash provided by
financing activities (52) 2,008
------- -------
Net increase in cash and cash equivalents (123) 48
Cash and cash equivalents at beginning of period 362 105
------- -------
Cash and cash equivalents at end of period $ 239 $ 153
======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest $ 881 $ 570
======= =======
Cash paid for income tax - -
======= =======
</TABLE>
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 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, 1996 and the results of operations for
the three-month and nine-month periods ended September 30, 1996 and 1995 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. It is suggested that
these condensed financial statements 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, 1995.
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.
Note 2. INVENTORIES
The major classes of inventories (rounded to thousands) are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
Raw Materials $4,559 $ 4,608
Work in Process 846 1,014
Finished Goods 2,801 3,287
------ ------
$8,206 $ 8,909
====== =====
</TABLE>
5
<PAGE>
Note 3. LIQUIDITY
The Company's loan agreement with the United States National Bank of Oregon ("U.
S. Bank") has been renewed as of July 31, 1996 and is subject to a future review
date of May 31,1997. The renewal includes an increase in the tangible net worth
minimum covenant from $2.0 million to $2.5 million. Additionally, the debt
leverage ratio maximum was increased from 4.5 to 5.5 for 1996 and 6.0 for 1997.
At September 30, 1996 the Company's tangible net worth was $2,111,000 and the
debt leverage ratio was 6.74. During the quarter the Company has made use of a
significant amount of liquidity as a result of funding additional needs for its
October 1995 acquisition, Palm Springs Golf, Inc. Since the acquisition the
Company has invested $1.8 million to reposition Palm Springs Golf for the 1997
product year. This is expected to increase through March 1997. The Company has
taken the position of investing in the future by totally closing out all old
products and shifting to totally new products for future growth and
profitability. This has had a short term adverse effect on profitability for
1996 and requires additional funds for the transition to growth and
profitability. In this effort the Company has strengthened its market position
and created, through new product development, a multi-faceted line of golf clubs
and golf bags unique to Palm Springs Golf, Inc. This will be the most innovative
and expanded line of bags in the history of Palm Springs Golf. The new golf club
line incorporates the latest features and technology including oversize woods
and irons and titanium clubs. The line is totally new and is expected to be very
strong in the marketplace. Additionally, the Company has added golf accessory
and golf cart lines to Palm Springs' product offerings for 1997, thus creating a
broad lines supplier. In support of this effort, Ajay has also upgraded its
production capacity in its Mexicali plant for both club manufacturing and bag
manufacturing. This will support the expected sales increases for the 1997
product year. To support the present transition to growth and profitability and
to provide financing for its short and long-term needs, the Company is presently
working on a plan to raise additional capital and debt. The Company anticipates
additional funds will be available by the end of 1996. The Company had increased
debt of $560,000 as a result of notes to affiliates.
Note 4. BUSINESS SEGMENT REPORTING
The relative contributions to net sales, operating profit and identifiable
assets of the Company's two industry segments for the quarter and nine months
ended September 30, 1996 (unaudited) are as follows (in thousands):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, 1996 September 30, 1996
Furniture Golf Consolidated Furniture Golf Consolidated
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 178 $ 4,552 $ 4,730 $1,901 $17,416 $19,317
Operating Profit/(Loss) (237) (308) (545) (175) (43) (218)
Total Assets 1,695 16,357 18,052 1,695 16,357 18,052
Depreciation/Amortization 21 36 57 75 211 286
Capital Expenditures 2 31 33 11 183 194
</TABLE>
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION - At September 30, 1996 the Company had working capital of
$4,843,000 as compared with $6,324,000 at December 31, 1995. The ratio of
current assets to current liabilities at September 30, 1996 was 1.5 to 1,
compared to 1.7 at December 31, 1995.
At September 30, 1996 the Company had decreased its short term borrowings by
$386,000 since December 31, 1995.
LIQUIDITY - At September 30, 1996 the Company had $10,407,000 outstanding under
its $13,500,000 loan agreement with U. S. Bank. The seasonal nature of the
Company's sales creates fluctuating cash flow. With the October 1995 acquisition
of Palm Springs Golf, Inc. the Company has undertaken an effort to discontinue
existing products within Palm Springs Golf's lines and replaced them with all
new product for 1997. This has had an adverse impact on Palm Springs Golf's
earnings for 1996 and additional demands for working capital. The effort will
result in a complete new line-up for golf clubs, golf bags, gloves and two
additional lines not heretofore carried, those being golf accessories and golf
carts. All of this is targeted to provide the off-course specialty golf shop
market with one source purchasing. The off course golf specialty sporting goods
market is believed to be four times the size of the mass market. The company has
expanded its golf bag and golf club production facilities to accommodate
anticipated additional volume for 1997. This effort has resulted in an increased
cash use at Palm Springs Golf of $1.8 million and is expected to continue
through March 1997. To provide for the additional short and long-term cash needs
and to improve liquidity, the Company is working on a plan to raise additional
capital and debt but it is uncertain if this can be concluded by year end 1996.
RESULTS OF OPERATIONS - During the quarter ended September 30, 1996 the Company
had net sales of $4,730,000, compared to $3,437,000 for the same period in 1995.
For the nine-month period sales were $19,317,000 compared to $13,376,000 for the
same period in 1995. The overall sales increase respectively of 38% and 44% was
a result of the two fourth quarter 1995 acquisitions and respectively a 23% and
26% increase in sales on existing operations.
Gross profit for the three months ended September 30, 1996 was 15% of net sales,
compared to 15% for the same period in 1995. Gross profit for the nine-month
period was 18.1% in 1996 and 18.8% in 1995. The decrease in margin is attributed
to the acquisition of Palm Springs Golf in October 1995 and the subsequent
inclusion of its results for the nine-month period in 1996.
Selling, general and administrative expenses expressed as a percentage of sales
were 26.5% for the third quarter of 1996, versus 20% for 1995. SG&A for the
nine-month period was 19.2% of sales in 1996 and 15.8% in 1995. The percentage
increase is due to a soft furniture sales quarter and the inclusion of Palm
Springs Golf's financial results in the 1996 periods. They were not part of the
Company in the same periods of 1995.
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Cont'd)
Operating loss for the third quarter of 1996 was $545,000 compared to an
operating loss of $159,000 for the third quarter of 1995. The operating loss for
the nine-month period was $218,000 which compares to an operating profit of
$400,000 for the same period of 1995. The increased operating loss is
attributable to the inclusion of Palm Springs Golf.
Interest expense increased $96,000 in the third quarter of 1996 compared to the
third quarter of 1995 as a result of higher debt to finance the needs of two 4th
quarter acquisitions, offset by a lower rate that the Company paid on its bank
lines in the third quarter of 1996 versus the same period of 1995.
As a result of the above, the net loss for the third quarter ending September
30, 1996 was $542,000 compared to net loss of $340,000 for the same period last
year.
8
<PAGE>
PART II. OTHER INFORMATION
Item 5. In October 1996 the billiards line was discontinued and the
inventory was sold to a third party. Billiard sales aggregated
less than 3% of annual sales.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
b) Exhibit #27: Financial Data Schedule
9
<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
--------------------
Robert R. Hebard
Its: Corporate Secretary
By: /s/Duane R. Stiverson
------------------------
Duane Stiverson
Its: Chief Financial Officer
Date: November 12, 1996
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Sep-30-1996
<CASH> 239
<SECURITIES> 0
<RECEIVABLES> 4603
<ALLOWANCES> 0
<INVENTORY> 8206
<CURRENT-ASSETS> 13951
<PP&E> 1884
<DEPRECIATION> 766600
<TOTAL-ASSETS> 18052
<CURRENT-LIABILITIES> 9108
<BONDS> 0
2962
1250
<COMMON> 233
<OTHER-SE> 9313
<TOTAL-LIABILITY-AND-EQUITY> 18052
<SALES> 4730
<TOTAL-REVENUES> 4730
<CGS> 4022
<TOTAL-COSTS> 1253
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 263
<INCOME-PRETAX> (822)
<INCOME-TAX> (280)
<INCOME-CONTINUING> (542)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (542)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
