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, 1997
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 10/31/97 is 23,274,039.
<PAGE>
Item 1. FINANCIAL STATEMENTS
<TABLE>
AJAY SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<CAPTION>
September 30, 1997 December 31,
(Unaudited) 1996
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 118 $ 64
Trade accounts receivable, net 6,004 5,274
Inventories 6,999 7,957
Prepaid expenses and other current assets 780 362
Deferred tax benefit 363 363
------ ------
Total current assets 14,264 14,020
Fixed assets, net 1,791 1,822
Other assets 226 320
Deferred tax benefit 756 756
Goodwill 1,676 1,709
-------- -------
Total assets $ 18,713 $ 18,627
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to affiliates $ 1,108 $ 885
Notes payable to bank 2,340 6,104
Current portion of capital lease 6 9
Accounts payable 3,508 3,107
Accrued expenses 828 567
-------- -------
Total current liabilities 7,790 10,672
Notes payable to affiliates - long term 2,828 -
Notes payable to banks - long term 6,460 5,196
Long term portion of capital lease 14 17
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, $10.00 par value, 296,170 shares
outstanding at stated value 2,962 2,962
Common stock, $.01 par value 100,000,000 shares authorized, 23,274,039
shares outstanding 233 233
Additional paid-in capital 9,313 9,313
Accumulated deficit (12,137) (11,016)
------- --------
Total stockholders' equity 1,621 2,742
------- --------
Total liabilities and stockholders' equity $ 18,713 $ 18,627
======= ========
1
</TABLE>
<PAGE>
<TABLE>
AJAY SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales $ 6,854 $ 4,730 $ 24,039 $ 19,317
Cost of sales 6,248 4,022 20,356 15,824
------ ------ ------- -------
Gross profit 606 708 3,683 3,493
Selling, general and 1,248 1,253 3,710 3,711
administrative expenses
------ ------ ------- -------
Operating income (642) (545) (27) (218)
Non-operating expense:
Interest expense, net 330 263 1046 840
Other, net 24 14 44 19
------ ------ ------- -------
Total non-operating expense 354 277 1090 859
------ ------ ------- -------
Income (loss) before income taxes (996) (822) (1,117) (1,077)
Income tax expense (benefit) - (280) - (360)
------ ------ ------- -------
Net income (loss) $ (996) $ (542) $ (1,117) $ (717)
======= ======= ======= =======
Income (loss) per common share outstanding* $ (.05) $ (.03) $ (.06) $ (.04)
======= ======= ======= =======
Income (loss) per common share & equivalents $ (.05) $ (.03) $ (.06) $ (.04)
outstanding**
======= ======= ======= =======
Weighted average common shares outstanding 23,274 23,257 23,274 23,264
======= ======= ======= =======
* 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.
2
</TABLE>
<PAGE>
<TABLE>
AJAY SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS), (UNAUDITED)
<CAPTION>
Nine Months
Ended September 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,117) $ (717)
Adjustments to reconcile net cash flows from
operating activities:
Depreciation and amortization 292 286
Change in assets [(increase)/decrease] and
liabilities [increase/(decrease)]:
Trade accounts receivable, net (730) 592
Inventories 958 703
Prepaid expenses and other current assets (418) (192)
Other assets 86 (162)
Deferred tax benefits - (360)
Accounts payable 401 356
Accrued expenses 333 (19)
Goodwill - (300)
--------- ---------
Net cash used in
operating activities (195) 187
--------- ---------
Cash flows from investing activities:
Acquisitions of property, plant, equipment (220) (194)
Dispositions of fixed assets - (64)
--------- ---------
Net cash used in
investing activities (220) (258)
--------- ---------
Cash flows from financing activities:
Net change in bank loans (2,500) (396)
Net change in notes payable to affiliates 3,051 560
Preferred stock conversion - 12
Dividends (82) (228)
--------- ---------
Net cash provided by
financing activities 469 (52)
--------- ---------
Net increase in cash and cash equivalents 54 (123)
Cash and cash equivalents at beginning of period 64 362
--------- ---------
Cash and cash equivalents at end of period $ 118 $ 239
========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 880 $ 881
========= =========
Cash paid for income tax - -
========= =========
3
</TABLE>
<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, 1997 and the results of operations for
the three-month and nine-month periods ended September 30, 1997 and 1996 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, 1996.
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 preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
The interim period results are not necessarily indicative of results which may
be expected for any other interim or for the full year. Certain costs are
estimated for the full year and allocated to interim periods based on activity
associated with the interim period.
Accordingly, such costs are subject to year end adjustment.
Note 2. INVENTORIES
The major classes of inventories (rounded to thousands) are as follows:
September 30, December 31,
1997 1996
------------------- ------------------
Raw Materials $2,042 $4,153
Work in Process 825 995
Finished Goods 4,132 2,809
----- -----
$6,999 $ 7,957
===== =====
4
<PAGE>
Note 3. DEBT
On July 11, 1997, the Company refinanced its bank debt through a $34,088,000
three-year revolving credit and term loan agreement with a new lender (the
"Loan"). This Loan is a joint and several obligation of the Company with
Williams Controls, Inc. ("Williams"), under which Williams is the agent for all
of the borrowers. The combined Loan facility consists of a $26,000,000 revolving
loan facility (the "Revolver"), a $2,658,000 real estate loan (the "Real Estate
Loan"), a $4, 430,000 machinery and equipment loan ("Term Loan I"), and a
$1,000,000 term loan II ("Term Loan II").
At the closing date, the Company borrowed $6,825,000 under the Revolver and
$566,000 under Term Loan I. At the date of closing, Williams borrowed a total of
$17,141,000, consisting of $9,619,000 under the Revolver, $2,658,000 under the
Real Estate Loan, $3,864,000 under Term Loan I, and $1,000,000 under Term Loan
II. The proceeds from the Company's and Williams' borrowings under the Loan were
used to repay the Company's and Williams' loans from their previous lender,
except for $2,340,000 which represents a bridge loan to the Company by the
previous lender. This bridge loan is to be repaid from the sale of assets and/or
excess cash flow and is guaranteed up to $1,000,000 by the Company's President.
Under the Revolver, the Company and Williams can borrow up to $26,000,000 based
upon a borrowing base availability calculated using specified percentages of
eligible accounts receivable and inventory. The Revolver bears interest at the
Bank's prime rate plus 0.5%. The Real Estate Loan and Term Loan I bear interest
at the Bank's prime rate plus 0.75%. At the Agent's option, funds may be
borrowed under the Revolver, the Real Estate Loan and the Term Loan I at the
London InterBank Offering Rate ("Libor") plus 2.75%, 3% and 3% respectively. The
Revolver, Real Estate Loan and Term Loan I mature on July 11, 2000 and are
secured by substantially all of the assets of the Company and Williams. The Real
Estate Loan is being amortized over 20 years and the machinery and Term Loan are
being amortized over seven years with all remaining principal outstanding due on
July 11, 2000. At July 11, 1997, after the Loan closing, approximately
$1,545,000 was available for borrowing under the New Loan. Term Loan II matures
on June 1, 1999 with principal payments based upon an amortization period of 24
months plus additional principal payments equal to any excess proceeds from the
sale of one of Williams' subsidiaries after repayment of any indebtedness under
the Revolver borrowing due from the Williams subsidiary being sold plus
principal payments equal to 50% of the Company's and Williams' annual
consolidated excess cash flow as defined. The Loan agreement restricts payment
of any dividends by the Company, requires the Company and Williams in the
aggregate to maintain minimum working capital of $25,000,000 exclusive of the
Revolver and maintain minimum tangible net worth of $11,000,000. The Loan also
restricts additional indebtedness and common stock repurchases and restricts
combined Company and Williams' annual capital expenditures and increased
operating lease obligations to $2,500,000 and $600,000, respectively. The
Company is in compliance with the covenants of the Loan Agreement as of 9/30/97.
The Loan agreement imposes a prepayment penalty of 3%-5%, which is waived if the
Loan is repaid with proceeds from the sale of assets or equity or is refinanced
with an affiliate of the Bank.
5
<PAGE>
Note 3. DEBT (Cont'd)
Williams has made loans and provided capital to the Company to assist the
Company in meeting its financing requirements. In addition to $560,000 at
closing, the Company borrowed $2,268,000 from Williams in order to close the
loan. The Company agreed to grant Williams a security interest junior to the
bank's security interest. The characterization of the Company's obligation to
Williams as equity or debt has not yet been determined. The Company and Williams
have, however, agreed that this is a long-term investment. Accordingly, the
obligation is reported as a long-term liability. The Company, however, continues
to rely on extended vendor terms and affiliate financing to meet its financing
needs.
Ajay continues to focus on obtaining additional financing availability.
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, 1997 (unaudited) are as follows (in thousands):
<TABLE>
Quarter Ended September 30, 1997
<CAPTION>
Furniture Golf Corporate Consolidated
---------- -------- --------- ------------
<S> <C> <C> <C> <C>
Net Sales $ 403 $6,451 $ - $ 6,854
Operating Profit/(Loss) (340) (174) (128) (642)
Total Assets 2,365 16,348 - 18,713
Depreciation/Amortization 31 68 - 99
Capital Expenditures 47 74 - 121
Nine Months Ended September 30, 1997
Furniture Golf Corporate Consolidated
---------- --------- --------- ------------
Net Sales $3,764 $20,275 $ - $ 24,039
Operating Profit/(Loss) 103 107 (237) (27)
Total Assets 2,365 16,348 - 18,713
Depreciation/Amortization 67 225 - 292
Capital Expenditures 102 118 - 220
</TABLE>
Note 5. DIVIDENDS
Dividends on Series C Convertible Preferred Stock have not been declared for the
first three quarters of 1997 due to unavailability of funds. Series C dividends
are permitted to be paid under the new loan agreement when sufficient funds
become available.
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION - At September 30, 1997 the Company had working capital of
$6,474,000 as compared with $3,348,000 at December 31, 1996. The ratio of
current assets to current liabilities at September 30, 1997 was 1.8 to 1,
compared to 1.3 at December 31, 1996. The improvement in working capital was a
result of the successful refinancing of debt and the resulting reclassification
of a portion of the short-term debt to long-term debt.
At September 30, 1997 the Company had increased its borrowings by $551,000 since
December 31, 1996. This was primarily due to operating losses sustained by its
Palm Springs Golf, Inc. subsidiary.
LIQUIDITY - The Company's liquidity is primarily affected by its financing
requirements. 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 and financial support from affiliates for
its working capital requirements.
Ajay and Williams jointly entered into a loan agreement with Wells Fargo Bank
dated as of July 11, 1997. The new loan was funded during the subsequent week
and the Company's former bank loan of $12,052,000 was paid down to $2,340,000.
This remaining balance represents a bridge loan payable to the former bank.
The new loan agreement with Wells Fargo Bank provides a combined
Company/Williams facility with a three year expiration. Ajay's portion of the
facility includes a revolver, the availability of which is based on receivable
and inventory collateral values subject to specified rates and ineligible
factors. At the time of funding, the new revolver balance was $6,825,000 and is
$5,662,000 as of September 30, 1997. The facility also includes a $566,000 term
loan secured by machinery and equipment and a $2,340,000 term loan participation
by its former bank, and Williams provided $2,268,000 to repay the previous loan
in full.
Williams has made loans and provided capital to the Company to assist the
Company in meeting its financing requirements. The Company, however, continues
to rely on extended vendor terms and affiliate financing to meet its financing
needs.
Ajay and Williams will continue to focus on obtaining additional financing from
debt and equity sources as well as through the sale of certain assets.
Dividends on Series C Cumulative Convertible Preferred Stock have not been
declared for the first three quarters of 1997 due to unavailability of funds.
Series C dividends are permitted to be paid under the new loan agreement when
sufficient funds become available.
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Cont'd)
RESULTS OF OPERATIONS - The Company's operations are highly seasonal with the
greatest revenue and operating profits traditionally generated during the
January to June period of its year. Operating losses are typical during its
second half ending December 31.
During the quarter ended September 30, 1997 the Company had net sales of
$6,854,000, compared to $4,730,000 for the same period in 1996. The overall
sales increase of 45% was a result of a 126% increase ($225,000) in furniture
sales and a 42% increase in golf sales. For the nine-month period ended
September 30, 1997 overall sales were up 24% with furniture up 98% and golf
sales up 16%.
Gross profit for the three months ended September 30 1997 was 9% of net sales,
compared to 15% for the same period in 1996. Furniture gross profit for the
present quarter, as compared to the same quarter of the prior year, was down
$103K because of the introduction of a new product line. As a result,
manufacturing expenses increased in developing the new line and keeping staffing
levels higher in anticipation of introducing the new line during the 4th
quarter. Gross profit on sales of golf clubs was down $159K due to market
conditions which required the lowering of prices to reduce inventories of golf
club products. During the quarter, additional costs of $140,000 were incurred
from expediting shipments of raw and finished goods and production
inefficiencies due to a shortage of cash. Gross profit for the nine-months ended
September 30, 1997 was 15% compared to 18% for the same period of the prior
year. Margins as a percent of sales were further reduced by a shift in sales mix
where increased sales consisted of a larger percentage of purchased-for-resale
goods as compared to manufactured-for-sale goods. Purchased-for-resale goods
carry lower gross profit margins and correspondingly lower selling and
administrative expenses.
Selling, general and administrative expenses expressed as a percentage of sales
were 18.2% for the third quarter of 1997, versus 26.4% for the same period in
1996. This reflects a growth in sales. For the nine-months ended 9/30/97, SG&A
was unchanged as to amount when compared to the same period for the prior year.
As a percent of sales, SG&A declined from 19.2% for the nine-months ended
9/30/96 to 15.4% in the nine-months ended 9/30/97.
Operating loss for the third quarter of 1997 was $642,000 compared to operating
loss of $545,000 for the third quarter of 1996. As discussed above, this
reflects increased manufacturing expenses in developing and staffing for a new
shelving product line, low margins from sales of golf clubs and additional costs
from expediting raw materials and production inefficiencies due to a shortage of
cash. Operating loss for the nine-months ended 9/30/97 was $27,000 which
compares to a loss of $218,000 in the same period of the prior year.
Interest expense increased $67,000 or 25% in the third quarter of 1997 compared
to the third quarter of 1996 as a result of a 15% increase in interest bearing
debt and an increase in interest rates. Interest expense for the nine-months
ended September 30, 1997 was up $206,000 due to rate increases and increased
interest bearing debt.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Cont'd)
As a result of the above, the third quarter loss before income taxes increased
$174,000 when compared to the same period in the prior year. The nine-month loss
before income taxes was $40,000 more than for the same period in the prior year.
The Company has maintained golf manufacturing and administrative operations in
two locations, Cathedral City, California (Palm Springs Golf, Inc.), and
Delavan, Wisconsin (Ajay Leisure Products, Inc.). This dual facility operation
results in duplicate expenses, less efficiency in execution and reduced service
levels. In its continuing effort to improve results, the Company plans to
consolidate the manufacturing and administration facility into the Delavan
facility during the quarter ending 12/31/97. Management anticipates that this
consolidation and its resulting benefits will contribute significantly to
improving the future financial results of the Company.
9
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) No reports on Form 8-K were filed during the quarter ended September 30,
1997.
b) Exhibit #27: Financial Data Schedule.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AJAY SPORTS, INC.
By: /s/Robert R. Hebard
-----------------------
Its: Corporate Secretary
By: /s/Duane R. Stiverson
-------------------------
Its: Chief Financial Officer
Date: November 14, 1997
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000854858
<NAME> Ajay Sports, Inc. & Subs.
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 118
<SECURITIES> 0
<RECEIVABLES> 6,004
<ALLOWANCES> 0
<INVENTORY> 6,999
<CURRENT-ASSETS> 14,264
<PP&E> 2,905
<DEPRECIATION> 1,114
<TOTAL-ASSETS> 18,713
<CURRENT-LIABILITIES> 7,790
<BONDS> 0
2,962
1,250
<COMMON> 233
<OTHER-SE> 1,621
<TOTAL-LIABILITY-AND-EQUITY> 18,713
<SALES> 6,854
<TOTAL-REVENUES> 6,854
<CGS> 6,248
<TOTAL-COSTS> 1,248
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 330
<INCOME-PRETAX> (996)
<INCOME-TAX> 0
<INCOME-CONTINUING> (996)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (996)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
