SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File No.
1-13261
Dynacraft Golf Products, Inc.
(Exact name of registrant as specified in its charter)
OHIO 31-1040532
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
98 James Street
Newark, Ohio 43055
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(address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (740) 344-1191
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: COMMON SHARES,
WITHOUT PAR VALUE
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 reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes___X_____ No___________.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB
Issuer's revenues for its most recent fiscal year: $20,024,374.
The aggregate market value of voting stock held by nonaffiliates of the
registrant's common stock computed by reference to the price at which stock was
sold or the average bid and asked price of such stock, as of March 31, 1998 was
$0.
The number of shares outstanding of the registrant's common stock, as of March
31, 1998 was 2,033,746.
PART I
This Form 10-KSB contains forward looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in those forward-looking statements as a result of certain
factors, including but not limited to those set forth elsewhere in this
Form 10-KSB.
ITEM 1. DESCRIPTION OF BUSINESS
Background
The Dynacraft Companies include Dynacraft Golf Products, Inc., Pal Joey
Custom Golf Inc. (which includes Pal Joey Pro Shop as a division), Dynacraft
Real Estate Holding Inc. and Diamond Golf International Limited. Dynacraft Golf
Products, Inc. owns 100% of all the companies, except Diamond Golf, in which it
is a 51% owner.
The Dynacraft Companies help golfers customize their clubs and equipment to
their own personal specifications. Our customers can design clubs with unique
combinations of loft, lie, weight, face angle, grip type and size, shaft length
<PAGE>
and flex and cosmetics. We contract production of our own clubheads and work
with major shaft and grip companies to be within the golf industry's standards
of tolerances. Customer service includes a lifetime warranty on clubheads and a
return/replacement policy on any product.
Dynacraft Golf Products, Inc. ("Dynacraft") is the parent company and
successor to a business founded in 1980. It is one of the large U.S. supplier
of components for individuals who make clubs for themselves and other golfers.
Dynacraft does not sell finished clubs. We also educate our customers through
the Dynacraft Clubmaking Institute, the golf industry's premier clubmaking and
fitting class facility, and maintains a full-time technical staff. We believe
that our Internet site is the largest of any golf component company and includes
a technical chat room and tutorial for online questions and answers. We publish
an annual catalog of over 150 pages and a quarterly customer magazine,
Clubmakers' Quarterly..
Pal Joey Custom Golf Inc. ("Pal Joey") was created in 1981 to build clubs
to specific customer requirements for resale. Our market includes golf
professionals, green grass golf shops and specialty off-course golf stores. We
believe that quality, fast turnaround time and the Company's lifetime warranty
provide Pal Joey with a competitive advantage. We have also contracted sourcing
and assembly functions for golf stores.
Pal Joey Pro Shop, a division of Pal Joey, opened in 1982 as a store for
golfers to visit for custom clubs and other equipment and golf accessories. It
provides the Company with a model for possible expansion into additional retail
store operations.
Diamond Golf International Limited ("Dynacraft Europe") serves Europe with
both component Dynacraft clubs and finished Pal Joey Customer Clubs. Begun as
an acquisition in 1991, it is one of the component suppliers in Europe.
Dynacraft Europe operates on the same Dynacraft principles of customer education
and technical service, provided by mail order and on-site custom fitting.
Public Offering
On November 25, 1997, the Company's Registration Statement on Form SB-2
covering the offering of up to 700,000 Common Shares was declared effective by
the Securities and Exchange Commission and the Company commenced a public
offering of its Common Shares. The offering is being sold directly by the
Company on a best efforts basis at a price of $5.00 per share for a minimum of
300,000 ($1,500,000) and a maximum of 700,000 shares ($3,500,000). All funds
are being held in escrow until the earliest to occur of (1) acceptance of
subscription for the minimum, (2) May 31, 1998, or (3) the date upon which the
Company terminates the Offering prior to the subsription of the minimum. In the
event that the minimum is not reached by May 31, 1998 (or the Company terminates
the Offering before then), the escrowed funds will be returned to the
subscribers with interest and without any deduction for expenses
General
DYNACRAFT GOLF PRODUCTS, INC.
Dynacraft Golf Products, is one of the largest supplier of component golf
club equipment and supplies for clubmaking. The business was started by Joseph
Altomonte, Sr. in his garage. Dynacraft has grown into a component company with
a presence in Europe and distributorships in Japan, Canada and Australia. The
company offers its worldwide customers a wide selection of club heads, shafts,
grips, tools, and accessories.
Dynacraft strives for quality and playability in its wide variety of head
designs. All clubheads adhere to the industry's standards for tolerances of
such specifications as loft, lie, weight, face angle and cosmetics. Heads can
even be modified for unique fitting situations prior to shipment to the
customer. Nearly all products are developed, tested and reviewed, not only by a
team of our technical experts, but by average, better than average and below
average golfers prior to market introduction. We work closely not only with
foundries that produce our clubheads (visits are made as needed to overseas
foundry suppliers), but with major shaft companies such as True Temper, Rapport,
Fenwick, and Aldila to develop shafts that best match current head designs.
Dynacraft-branded grips are produced to specifications to allow customers to
completely customize their Dynacraft purchases. We maintain a lifetime warranty
on all of our golf club heads and offer what we believe to be the industry's
most comprehensive return/replacement policy on any product we sell.
Dynacraft offers a full range of clubmaking and fitting classes in our
Dynacraft Clubmaking Institute (DCI). The DCI educates both novice and
experienced clubmakers as well as industry experts. Coupled with a full-time
technical staff, the DCI and Dynacraft provide education and information to the
clubmaker. Our internet includes, not only information about our products and
services, but also a technical forum and tutorial where customers may receive
answers to their questions via the Internet.
Dynacraft offers a complementary magazine to its active customers.
Clubmakers' Quarterly is published at least four times a year and includes
up-to-date technical information provided by the technical staff as well as new
products and sale items. We publish our full line catalog once each year, with
over 150 pages showcasing all the products we have developed and carry, in a
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design and presentation that have won numerous awards. We have a complete
accessory line of products with the Dynacraft logo, including golf bags in a
variety of sizes and styles, hats, umbrellas, towels, and apparel.
Dynacraft offers its customers a toll free telephone order line, customer
service line and technical information line. The order line is staffed fifteen
hours a day, while the other lines are staffed for nine hours per day. The
Shipping Department runs two shifts when needed to offer timely and accurate
fulfillment. Orders are shipped the same day they are received in most cases;
most orders are shipped within 24 hours. The Customer Service Department deals
with special order items, unique customer requests and any consumer problems
that may arise. All Customer Service and Sales Representatives receive
technical training at the DCI in an effort to make them the most knowledgeable
staff in the business.
PAL JOEY CUSTOM GOLF
Founded in 1981, Pal Joey Custom Golf Inc. offers its customers custom made
and fitted golf equipment at reasonable prices. Pal Joey Custom Golf is a
wholesale operation selling finished goods under the Pal Joey brand name. The
models are unique to Pal Joey and are custom made to order. The custom made
club market, while in its infancy in the early 1980's, has grown rapidly in the
mid-1990's, and we believe that Pal Joey is positioned for a rapid growth in
this area. Clubs manufactured at Pal Joey are built to specific customer
requirements. The clubs are typically sold to golf professionals, to green
grass golf shops, or to upscale off-course golf stores. Our turnaround time is
as short as five days. We offer a lifetime warranty on all Pal Joey clubheads
and have among the most comprehensive repair/replacement policy in the club
manufacturing industry.
Since fall 1995, Pal Joey has provided sourcing and assembly work, through a
sales representative, to a significant percentage of the franchises of Pro Golf
of America, one of the largest off-course golf store chains in North America and
Pro Golf of America has recommended Pal Joey products to its franchisees. Such
sales represented approximately 16.0% of the Company's total sales in 1996 and
approximately 22.7% of the Company's total sales in 1997. We also have several
other smaller assembly and/or sourcing customers. No other customer of the
Company accounts for more than .8% of the Company's sales in any of the past
three years, except one and they accounted for approximately 4% of the Company's
total 1996 sales. Pal Joey's 1996 sales increased 85% over 1995 and it's 1997
sales increased 30% over 1996.
PAL JOEY PRO SHOP
The Pal Joey Pro shop was opened as a division of Pal Joey Custom Golf in
1982, allowing local customers to purchase custom made golf equipment and
accessories. It is located on the Dynacraft property and includes a showroom
and two custom fitting areas. We offer custom fitting, which may include Pal
Joey labeled shafts, grips and heads, and prompt delivery in the Central Ohio
area, with some custom-made items deliverable within 24 hours. The Pal Joey Pro
Shop also carries an inventory of brand name clubs such as Cobra, Cleveland,
Callaway, and other golf equipment, attire and accessories. This retail
location has generated sales of nearly one million dollars in each of the past
three years.
DIAMOND GOLF INTERNATIONAL LIMITED
An acquisition of Diamond Golf was begun in 1991 and completed by 1993 to
broaden Dynacraft's presence in Europe. Its trade name changed to Dynacraft
Europe in 1998. One of the two largest component suppliers in Europe, the
company serves the whole of Europe with the same component Dynacraft clubs and
completed Pal Joey Custom clubs, as well as many of the same shafts, grips,
tools and accessories available from the parent. Dynacraft Europe offers both
mail order and custom fitting on-site.
Dynacraft Europe also stresses the education of the clubmaker and golf
professional and is staffed to accommodate technical questions, customer service
situations, warehouse and order entry. Chris Treacy, President of Dynacraft
Europe travels throughout Europe providing quality education to interested
customers.
DYNACRAFT REAL ESTATE HOLDING INC.
The Dynacraft Real Estate Holding Inc. "DREHI" includes all of the
properties owned by the Company. These include five commercial buildings, one
of which houses Pal Joey Custom Golf and the Pal Joey Pro Shop The other four
buildings are used by Dynacraft, one for Customer Service and order entry; a
building for office staff, marketing and design; a shipping and receiving
warehouse; and the Dynacraft Clubmaking Institute. All of the buildings are in
fine working order.
DREHI also includes five rental properties, all of which are consistently
occupied. The rental properties generate monthly revenue for the company. All
are well-maintained and are considered to be in fine condition.
THE CUSTOMER
The Company's customers are those who actively enjoy the game of golf along
with the opportunity to construct their own equipment for that game. Many of
these individuals become skilled enough in the assembly process to begin making
clubs for sale to others and they often become full time clubmakers. Golf Shop
Operations, the leading industry publication, estimated that 500,000 persons
purchased a golf club component part (head, shaft and/or grip) in 1996. Of that
number, approximately 3,500 are full time clubmakers, with some type of store
front or retail space, who earn their living through the trade. Approximately
300,000 are hobbyists who may work exclusively on their own clubs and the
remaining approximately 200,000 are part-time clubmakers. These people
typically work a "nine to five" job, but supplement their income by building
golf clubs. They may work from their basements or garages and normally do not
have a retail location.
Currently the Company maintains a complete customer file of approximately
65,000 customers. This number includes any customer who has placed an order
with the Company within the past five years. We mail approximately 100,000
catalogs a year to our customers and to people who come to us from magazine and
Internet catalog requests or from word of mouth referrals. Dynacraft's "active
customer" list includes approximately 20,000 names of customers who have
purchased products during the past calendar year. That list has been steadily
growing at over 5% per year.
Pal Joey is a wholesaler, selling to those in the golf business. Its Sales
Representatives regularly call on golf course pro shops throughout the United
States and it maintains several "house accounts" that are serviced by telephone.
The Company maintains approximately 2,500 "active" pro shop accounts. Pal Joey
has recently had rapid growth in accounts from off-course stores and buying
groups, including Pro Golf Discount, Sam's Golf, and Jumbo Sports.
Since fall 1995, Pal Joey has provided sourcing and assembly work, through
a sales representative, to a significant percentage of the franchisees of Pro
Golf of America, one of the largest off-course golf store chains in North
America and Pro Golf of America has recommended Pal Joey products to its
franchisees. Such sales represented approximately 16.0% of the Company's total
sales in 1996 and approximately 22.7% of the Company's total sales in 1997.
While Pal Joey could still provide such sales to individual franchisees, if Pro
Golf of America ceased to recommend Pal Joey's products or ceased to provide
marketing support, it could have an adverse effect on the Company. No other
customer of the Company accounted for more than .08% of the Company's sales in
any of the past three years, except one and they accounted for approximately 4%
of the Company's total 1996 sales.
CUSTOMER LOYALTY
Most clubmakers and retailers prefer to do business with a "one stop shop"
where they may buy all of the products and services required to assemble and
market a golf club. We try to use the top foundries to produce their club heads
and to distribute only nationally recognized, high quality heads, shafts and
grips. We believe our toll free telephone technical service and the Internet
technical support are among the best in the industry. Dynacraft Clubmaking
Institute attendees form a growing core of customers. In a high percentage of
cases, former students have increased their purchases after attending the
schools. All of these serve to promote customer loyalty and additional
purchases.
MARKETING AND STRATEGIC DIRECTION
The Company will strive for continued growth, service and customer
satisfaction. Our marketing and strategic directions include:
For Dynacraft Golf Products: (1) gather information from current customers
and non-customers on market share, market growth, issues, demographics,
psychographics and perceptions of Dynacraft; (2) study trends in club design and
club technology, so that we can be a leader in new technology and club design,
positioning Dynacraft as a leading edge innovator; (3) extend our customer
training, making a nationwide program; and (4) increase our international market
share.
Beginning in March 1998, Dynacraft and Ohio State University will act as
partners in the design and development of a golf club with state of the art
performance characteristics. The project goal is the development and testing of
a new metal wood model that will feature verfiable playing advantages as
compared to current woods on the market today. Design, materials and cosmetics
will be determined through computer modeling, CAD design, and metallurgical
analysis. A finished product from this joint effort could be ready for
distribution in late 1998.
Dynacraft also formed an Advisory Staff of clubmakers for 1998. It is comprised
of eight accomplished clubmakers from various parts of the country. At their
first meeting in February, they discussed topics such as head design,
advertising, technical support and marketing in an effort to provide feedback
for improved customer service and products.
For Pal Joey: (1) introduce new sets and specialty clubs and add customer
services requested by the market; (2) gain market share in the PGA golf
professional ("green grass") segment; (3) acquire more targeted private label
accounts; (4) hire and train an in-house sales force to serve key accounts in
the private label, retail and "concrete" golf shop markets and (5) consider
increasing the number of Pro Shop retail outlets in Central Ohio.
COMPETITION
Dynacraft competes for customers who want more customization of their clubs
<PAGE>
than found in sets sold through most golf and sports stores. During the past
ten years, this segment of the golf market has been dominated by a few major
players, such as Callaway Golf Company, Cobra, Karsten Manufacturing Corporation
(Ping), Taylor-Made Golf Company and Titleist. Many of these companies began as
small, one-club companies. For example, Callaway began as a single wedge
company less than 15 years ago. Odyssey, which sells a putter as its only
product, has grown rapidly over just the past two years. Karsten, which began
in the early 1960's with a single putter that made a "ping" noise when stuck,
has grown to worldwide acceptance. Products selling well recently include
oversized titanium drivers, oversize irons, specialty wedges and uniquely
designed putters.
Dynacraft sells a high percentage of its products to custom club makers.
Pal Joey wholesales custom made clubs to the retailers' specifications. Both
companies have products unique to their markets. For example, Dynacraft offers
a full line of titanium woods and offers many variations on wedges, each suited
to specific player needs. The use of exotic materials, such a beryllium copper,
carbon steel and tungsten, position Dynacraft in specialty niches of the custom
component market. Pal Joey offers forged titanium drivers for less than $150,
compared to some competitors' prices of $650. Pal Joey is also actively
pursuing the "one of a kind" club market, by experimenting with face insert
wedges and tungsten-titanium irons, each of which will be custom made for the
retailer.
For Dynacraft Products: Competition for Dynacraft is principally from
other component suppliers, which have grown in number from 10 in 1982 to over
120 in 1996. Dynacraft's main competition comes from three sources: Golfsmith,
located in Austin, Texas which is the largest golf club component company;
Golfworks, in Newark, Ohio, and the combination of a number of smaller
"knock-off" component companies.
For Pal Joey products. Pal Joey's prime competition comes from
approximately 225 small golf club companies located throughout the United
States. Both Pal Joey and many of these companies have staffs of sales
representatives visiting golf shops on a regular basis and competition for
business is intense. Some of the more competitive brands to Pal Joey are
MacGregor Golf, Albany, Georgia; Dunlop in Greenville, South Carolina; Wilson
from Morton Grove, Illinois; and Spalding in Chicopee, Massachusetts. All of
these companies have recently offered lower pricing in order to stay
competitive. During the past couple of years, as custom fitting has experienced
a great growth, many large companies, such as Slazenger, Hogan, Henry-Griffitts,
Zevo, to name a few, have capitalized on the custom fitting segment of the golf
market. Pal Joey is able to effectively compete with these entities by offering
the ability to custom make clubs designed to meet particular customer needs.
The Pal Joey Pro Shop's main competition comes from discount golf stores in
the greater Columbus, Ohio, area. There are a number of on-course pro shops
within a 50 mile radius of the Pal Joey Pro Shop, but most do not stock a wide
selection of equipment, nor do many offer any type of custom fitting. The Pal
Joey Pro Shop maintains its position with little direct competition through
prompt service, custom fitting, delivery and fair pricing.
EMPLOYEES
As of March 31, 1998, The Company employs 83 people. Dynacraft includes 42
full time and 8 part time seasonal workers. Pal Joey Custom Golf includes 27
full time and no part time/seasonal employees. The Pal Joey Pro Shop has 4 full
time and 2 part time employee. The Company employs temporary staff as the need
arises and the Company believes that its relations with its employees are
excellent. The Company's work force is not unionized.
TRADEMARKS
The Company currently owns 12 trademarks. These are set to expire at
various times between 2000 and 2009. The Company currently intends to renew
each such trademark prior to its expiration. Dynacraft aggressively and actively
preserves its rights to all trademarked and patented material. Among the
trademarked names held by the company and used on golf equipment, including club
heads are: Dynacraft, Pal Joey, the Pal Joey Kangaroo logo, Copperhead,
Genesis, Accusteel, Greyshadow, On Line, Outback, TD-1000 and Topaz. The
company also has trademarked its shaft fitting system, the Dynacraft Shaft
Fitting Index (DSFI). The Company is also under license agreement to use the
following names: Big Johnson, ESS, and Mad Dog. All of the Company's
trademarks are registered as property of either Dynacraft Golf Products, Inc.,
or Pal Joey Custom Golf Inc. Dynacraft owns U.S. Patent #5,333,871 related to
the non-fibrous injection molding process for golf iron heads.
ENVIRONMENTAL
Dynacraft learned that an Ohio Department of Transportation (ODOT) garage
located geographically upstream from its property dumped paint, solvents, and
other materials and has contaminated the water table under Dynacraft's land.
Although there are no recognizable concerns or issues with current Dynacraft
operations as a result of this act, Dynacraft's future ability to utilize its
real estate to secure loans could be impaired until the contamination is
removed. Because of this, Dynacraft is participating in Ohio's Voluntary Action
Program ("VAP") and is investigating the extent of the contamination of its
groundwater and reporting to the Ohio EPA. It currently appears that the
<PAGE>
migration of contamination from the ODOT property is limited in scope. Once its
site assessment is complete, Dynacraft intends to request that the Ohio EPA
commit that it will take "no further action" against Dynacraft, its successors
and assigns, because of the residual contamination on Dynacraft's property and
will consider it "clean". The Company has filed a legal action against ODOT to
recover the assessment and remediation costs of its participation in VAP. At
present, however, the total costs of this project cannot be estimated with any
degree of certainty and there is no assurance that the Company will be able to
recover such costs from ODOT. If the Company is unable to recover such costs or
if the migration of contaminants is greater than presently believed and the
Company were to be held liable by a third party in connection with such
migration, it could have a material adverse effect on the company.
ITEM 2. Description of Property.
PROPERTIES/FACILITIES
The Company owns five commercial/industrial facilities and five single
family residences on 3.36 acres in Newark, Ohio. The commercial/industrial
properties include 60,745 sq. ft., broken down as follows:
<TABLE>
<CAPTION>
<S> <C>
Office 25,076 sq. ft.
Retail 4,440 sq. ft.
Manufacturing/Warehouse 15,550 sq. ft.
Warehouse 15,679 sq. ft.
--------------
TOTAL 60,745 sq. ft.
==============
</TABLE>
All of the buildings are in close proximity. There are separate buildings
for sales and customer service; marketing and administration; training, research
and development; warehouse and product showroom; manufacturing, warehouse and
pro shop.
All public utilities, including water, sewer, gas, electricity and public
telephone are available to the property through local utility companies. The
five single family residences are rented primarily by employees and generate
monthly rental income to the Company.
In summary, the property located within the Center of the City of Newark in
an area that is primarily residential in nature. It benefits from its location
being in close proximity to two interstate highways, commercial development,
shopping facilities and employment centers. All of the real estate is pledged
as collateral on two bank loans. See Note D to the Company's Consolidated
Financial Statements.
<PAGE>
ITEM 3. Legal Proceedings
The Company is not currently involved in any material litigation or legal
proceedings other than with ODOT as described above under "Environmental" and is
not aware of any material litigation or proceeding pending or threatened against
it.
ITEM 4. Submission of Matters to a Vote of Security-Holders
None.
PART II
ITEM 5. Market For Common Equity And Related Stock Holder Matters
The Company's Common Shares have been approved for listing on the Chicago
Stock Exchange upon the closing of the Company's initial public offering. The
public offering price per share of Common Shares is $5.00. However, the Company
has not yet closed on its direct public offering and therefore the Company's
Common Shares are not currently traded and have no public market price. As of
March 31, 1998, there were 5 record holders of the Company's Common Shares.
The Company's loan agreement with its bank restricts the Company's ability
to pay dividends. Therefore, future dividends, if any, will depend on the bank
lifting that restriction, the Company's profitability, financial condition,
capital requirements and other considerations determined by the Board of
Directors.
ITEM 6. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
GENERAL BACKGROUND
The business (which later became known as Dynacraft Golf Products, Inc.) was
started in 1980 by Joseph A. Altomonte, Sr. He began the business after a long
career in the golf industry with Faultless Golf Ball Company and its successive
<PAGE>
owners, including Rawlings Sporting Goods Division, ATO. The business began in
Mr. Altomonte's garage with the purchase of component golf parts and assembly of
finished clubs.
The component parts distribution and sales to custom golf clubmakers became a
corporation named Dynacraft Golf Products, Inc. The assembly of finished clubs
eventually evolved into a separate company, Pal Joey Custom Golf, Inc. The
corporate separation of Dynacraft and Pal Joey was a function of serving
separate markets. Dynacraft sells to custom clubmakers who sell a finished club
to the golfer. Pal Joey is a clubmaker selling finished clubs to pro shops and
distributors for resale. The same products are not sold by both companies.
Later, Pal Joey Pro Shop, a division of Pal Joey, was formed to serve as a
retail store for finished clubs and other golf accessories. In October 1990,
Pal Joey, became a wholly-owned subsidiary of Dynacraft.
Dynacraft received a 50% equity investment from its principal Taiwanese clubhead
component supplier, Dynamic Precision Casting Mfg. Co, LTD.
In mid 1990, Mr. Altomonte sought greater employee ownership of Dynacraft.
To achieve this he personally made an offer to buy out the four Taiwanese
investors for $1 million dollars. Except for the owner of Dynamic, Chinneng
Lin, who kept an interest which was converted to 100 shares of $1,000 par value,
noncumulative preferred stock, the investors accepted the cash offer. In
January 1991 the Dynacraft ESOP came into existence.
In 1992, Dynacraft completed the purchase of a 51% interest in Diamond Golf for
$221,209. Diamond Golf is an England based component parts distributor serving
Europe.
During 1994, in a series of transactions, Dynacraft issued 51,462 new Common
Shares to the partners of J & J Enterprises, and acquired all the real estate
previously leased to the Company by J & J Enterprises at a value, less
outstanding debt, of $214,269 or $4.16 per share. J & J Enterprises was owned
equally by Joseph Altomonte, Sr. and Jr
OVERVIEW
The Company intends to apply approximately $300,000 of the net proceeds of the
offering to improve and expand its assembly facilities, approximately $120,000
for research and development ($30,000 if only the minimum is reached),
approximately $620,000 for market research and advertising activities ($607,500
if only the minimum is reached), approximately $150,000 for upgrading the
inventory system ($75,000 if only the minimum is reached), approximately
$425,000 to be set aside to fund the repurchase of ESOP shares ($225,000 if only
the minimum is reached) and approximately $430,000 to repay shareholders loans
(none if only the minimum is reached). The remaining $1,192,500 (none if only
the minimum is reached) will be used for working capital and general corporate
purposes.
Throughout most of Dynacraft's history the market for component parts has
grown at double digit rates. This changed in 1993 and the market has declined
since. Dynacraft's component sales have fallen from a high of $18.3 million and
a net income of $550,000 to $12.4 million and net income of $39,500 between 1993
and 1997. Management projects 1998 sales will remain at the 1997 level or
slightly less. However, Dynacraft's market share remains as one of the largest
in the industry.
During that same period of time Pal Joey's sales have increased from $4.3
million to $6.7 million and its projected 1998 sales of assembled clubs is $7.5
million. These increases have offset the drop in component sales.
The primary investment risk for the Dynacraft Companies is inventory
management and cost controls. The Company's major investment is in inventories.
Over or under buying certain items is one of the primary risks to profitability.
Also, both the economy and weather can affect retail and component sales of golf
equipment. In 1995, Dynacraft staffed for a down sales year and further staff
and expense cuts were made in the fall of 1996 as sales remained flat.
Management believes that these staffing and expense cuts have helped the Company
return to profitability in 1997 as have the sales gains recorded by Pal Joey.
Control of expenses in line with sales performance has become a management
priority during this current period and is expected to continue to be in the
future.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 compared to Year Ended December 31, 1996
Net Sales
Consolidated net sales increased by $564,745 or 2.9% from $19,459,629 for
the year ending December 31, 1996 to $20,024,374 for the year ending December
31, 1997. Net sales of assembled custom clubs accounted for the majority of the
increase, primarily because of servicing new accounts that started in mid 1996.
This was offset by a $758,372 decline in sales of component golf club equipment
and supplies and a decline in Pal Joey Pro Shop sales of $21,568.
Gross Profit
Consolidated gross profit increased by $621,339 or 11.8% from $5,248,931
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for the year ending December 31, 1996 to $5,870,270 for the year ending December
31, 1997. This improvement was the result of minor price increases and better
control of the inventory and associated costs.
Other Operating Revenue
Consolidated other operating revenue decreased to $271,805 for the year
ended December 31, 1997 compared to $399,367 for the year ended December 31,
1996.
Advertising and golf school revenue were lower by some $148,313. The
primary reasons for this was that the Digest that the Company's suppliers
advertise in was reduced from a monthly publication to a quarterly publication
and the 1997 school tuition was lowered in an effort to attract more students
who hopefully later on would become customers.
Selling and Administrative Expenses
Consolidated selling and administrative expenses decreased by $459,547 from
$6,059,312 for the year ending December 31, 1996 to $5,599,765 for the year
ended December 31, 1997. The staff and expense cuts initiated in the fall of
1996 were felt in 1997 as over all administrative expenses were down by
approximately $749,000. This decrease was offset by an increase in commission
and royalty expense of approximately $290,000 because of increased Pal Joey
sales over the prior period.
Other Income or (Deductions)
Consolidated other income or (deductions) increased $61,987 from $(216,489)
for the year ending December 31, 1996 to $(278,476) for the year ended December
31, 1997. Consolidated interest expense was lower during this period as
compared to the same period of last year by some $51,535 because a new business
loan agreement was entered into. This decrease was offset by the cost of
environmental remediations of $79,669 (see Part I - Environmental).
Year Ended December 31, 1996 compared to Year Ended December 31, 1995
Net Sales
Consolidated net sales were $19,459,629 for 1996, an increase of 2.6%
compared to consolidated net sales of $18,963,572 in 1995. Management's focus
in 1996 was not necessarily to increase overall sales, but rather was to explore
ways to start to reposition the Company for growth and profitability in 1997 and
future years. The component sales decrease of approximately $2,000,000 in 1996
and approximately $750,000 in 1997 was offset by the increase in sales of
assembled clubs by Pal Joey.
Gross Profit
Consolidated gross profit was $5,248,931 for 1996, a decrease of 4.8%
compared to consolidated gross profit of $5,511,028 in 1995. This decrease was
attributable to a decrease in component sales gross profit of $977,433 which is
the result of the increasing Taiwan dollar exchange rate, price competition and
shorter product life cycles resulting in more out-of-date inventory which had to
be sold at smaller margins. That decrease was partially offset by increased
gross profit of Pal Joey because of increased sales volume.
Other Operating Revenue
Consolidated other operating revenue decreased to $399,367 for 1996
compared to $487,653 in 1995. The primary reason for the decrease is that
school attendance was lower in 1996 and advertising income was down due to a
reduction in the number of publications produced in 1996.
Selling and Administrative Expenses
Consolidated selling and administrative expenses for 1996 increased 5.5% to
$6,059,312 compared to $5,747,157 in 1995. This increase resulted from an
increase in the commission and royalty expense due to increased Pal Joey sales;
bad debt write offs; professional fees; and utilities and telephone increases
due to more volume and rate hikes. Those increases were partially offset by
significant decreases in salaries and wages and advertising and marketing
expenses.
Other Income or (Deduction)
Consolidated other income or (deduction) was decreased to $(216,489) for
1996 compared to $(265,646) in 1995. Lower interest expense because of a new
business loan agreement was offset by an increase in interest income and an
increase in the equity in net earnings of Diamond Golf.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997 the Company had working capital of $2,155,168 as compared
to working capital of $2,236,526 at December 31, 1996. This decrease is
primarily due to an increase in accounts receivable which was offset by a larger
reduction in trade accounts payable.
<PAGE>
For the year ended December 31, 1997, the Company had net cash provided by
operating activities of $557,362, consisting primarily of net earnings,
depreciation and amortization, and a decrease in accounts payable.
Investing activities provided $65,966 of cash flow primarily from the
proceeds of the repayment of Dynacraft Europe's note receivable.
Through the repayment of debt and deferred offering costs related to the
Company's direct public offering $679,363 of cash was consumed. Overall cash
decreased $56,035.
For the year ended December 31, 1996, the Company had net cash provided by
operating activities of $483,258, despite a net loss of $498,545. This was the
result primarily of an increase in trade accounts payable which the Company used
as a source of financing.
Investing activities consumed $63,127 of cash flow primarily from the
purchase of fixed assets. Because of the loan refinancing, repayment of debt
caused only $122,939 of cash to be consumed. Overall cash increased $297,192.
The Company had accounts receivable, less allowance for doubtful accounts
of $1,430,208 at December 31, 1997. Pal Joey's net accounts receivable were
$1,055,531 of that total as they have provided extended payment terms to a large
franchise account in order to encourage initial purchases of its clubs. Pal
Joey does not anticipate that it will continue to extend such liberal payment
terms. However, as it continues to expand its activities, it may do so again in
order to increase its market exposure.
In June 1996, the Company entered into a seven year loan with Huntington
National Bank which provided for a $1,860,315 term loan at the U.S. Treasury
constant maturities rate (8.100% as of December 31, 1997) secured by the
Company's accounts receivable and inventories, a second mortgage on real estate
and personal guarantees of Joseph A. Altomonte, Sr. and Joseph A. Altomonte, Jr.
The Loan Agreement contains certain financial and operating covenants including
compliance with certain financial ratios, and restrictions on, among other
things, the Company's ability to pay cash dividends. The proceeds from this
loan were used to payoff two revolving line of credit agreements that had been
established at $2,450,000.
From 1993 to 1996, the Company's internally generated cash flow was not
sufficient to finance operations. This has restricted the Company's ability to
conduct its business as anticipated. As a result, the Company has been
substantially dependent upon loans from its current shareholders in order to
maintain its operations. Upon the closing of the Maximum Offering, these
shareholders will have approximately $430,000 of that debt repayed.
The Company believes that the minimum net proceeds of the offering together
with internally generated cash flow and borrowing availability will be
sufficient to meet its operating working capital and capital expenditures
requirements through the next twelve months. In the event the Company's plans
require more capital than is presently anticipated, the Company's remaining cash
balances may be consumed and additional sources of liquidity, such as debt or
equity financings, may be required to meet capital needs. There can be no
assurances that additional capital beyond the amounts the Company currently
requires will be available on reasonable terms, if at all.
SEASONALITY
The Company's need for working capital is seasonal with the greatest
requirements for working capital occuring from approximately October through the
end of February each year. This period is when sales are the lowest and the
inventories need to be built up to provide product for shipment for the
spring/summer selling season. The Company's sales from March to September
represent approximately 70% of the Company's yearly sales.
CURRENCY FLUCTUATIONS
Dynacraft Europe, a 51% owned company in England, maintains its books of
account in British Pounds. The Company accounts for this investment under the
equity method. For consolidation purposes, net profit or loss of Dynacraft
Europe is converted to U.S. dollars at the average month end exchange rate for
the year.
All export sales by the Company are U.S. dollar denominated, and ordinarily
there is no currency exchange rate problem for the Company. However, with
respect to export sales to Dynacraft Europe, they may be at risk. Dynacraft
Europe maintains its account with the Company in British pounds, but owes the
Company in U.S. dollars. At the end of every accounting period, the debt is
adjusted to pounds by multiplying the indebtedness by the closing dollar pound
exchange rate to ensure that the account has sufficient pounds to meet its
dollar obligation. This remeasurement is either income or expense in Dynacraft
Europe's financial statement
YEAR 2000 COMPLIANCE
The Company will continue to make certain investments in its software
systems and applications to ensure the Company is year 2000 compliant. The
financial impact to the Company to ensure year 2000 compliance has not been and
is not anticipated to be material to its financial position or results of
operations.
<PAGE>
ITEM 7. Financial Statements
The financial statements of the Company are included (with an index listing
all such statements) in a separate financial section at the end of this Annual
Report on Form 10-KSB.
ITEM 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
NONE.
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons.
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ --- -----------------------------------------------
<S> <C> <C>
Joseph A. Altomonte, Sr. 73 Chairman of the Board and Director
Joseph A. Altomonte, Jr. 41 Chief Executive Officer and Director
Jeff Jackson 40 President, Dynacraft, and Director
Jack Kehl 57 President, Pal Joey, and Director
Duane R. Egeland 59 Chief Financial Officer and Director
Chris Treacy 53 President of Diamond Golf International Limited
and Director
</TABLE>
The size of the Board of Directors has been increased to 9 and will be
divided into three classes each consisting of approximately one-third of the
total number of directors. After the subscriptions for the minimum is achieved,
the existing directors will fill the vacancies in the Board of Directors.
The members of the Board of Directors hold office until the next annual
meeting of stockholders or until their successors have been elected and
qualified. Officers are appointed by, and serve at the pleasure of, the Board
of Directors. The Company expects to add three additional Directors, who will
have no affiliation with the Company, shortly after the subscriptions for the
minimum is reached. The following is a description of the Company's current
Directors and executive officers.
Joseph A. Altomonte, Sr.
Mr. Joseph Altomonte, Sr., is Chairman of the Board of the Company. He
founded what is now known as Dynacraft in 1980 and has acted as Chairman of the
Board since that time. Mr. Altomonte presides over all of the Dynacraft
entities, including Dynacraft, Pal Joey, the Pal Joey Pro Shop and
Diamond/Dynacraft.
Mr. Altomonte has been in the golf business for over 35 years, beginning in
a sales position with the Faultless Golf Company. He was responsible for
signing such legendary PGA Tour stars as Lee Trevino, Jerry Heard and Lee Elder
to their first endorsement contracts with Faultless. Australian PGA rookie Bob
Shaw and LPGA star Cynthia Sullivan were also signed by Mr. Altomonte. He
became Executive Vice President of Faultless in 1971 and continued with the
company during their subsequent acquisitions by Abbott Laboratories and Rawlings
Sporting Goods Company.
In 1980, Mr. Altomonte started Dynamic Golf in the basement of his home.
The name of the operation was changed to Dynacraft Golf Products in 1982. As a
result of his efforts, Mr. Altomonte was awarded an Honorable Mention in 1985 by
Governor George Voinovich as Ohio Small Businessman of the Year.
Joseph Altomonte, Jr.
Joseph Altomonte, Jr., has been Chief Executive Officer of the since 1993.
Prior to that position, Mr. Altomonte served as President of Pal Joey Golf from
1981-1992, a company he helped start in 1981.
Mr. Altomonte was chosen in a nationwide search to be a Sales
Representative for the prestigious Ernie Sabayrac Organization, better known as
Izod, in 1977. Later he was Vice President of a major golf retail franchise
located in Miami, Florida, from 1977-78.
Mr. Altomonte attended Ashland College, Ohio University and The Ohio State
University majoring in Political Science and Art.
Jeff Jackson
Jeff Jackson has been the President since the fall of 1996. Prior to
holding that position, he was Executive Vice President of Dynacraft from 1993 to
1996. He joined Dynacraft in 1991 as Product Manager. As President of
Dynacraft, Mr. Jackson oversees the day-to-day operations of the all facets of
<PAGE>
the company, including product development, technical support, the Dynacraft
Clubmaking Institute, as well as sales, customer service and purchasing.
Mr. Jackson is a respected author and speaker in the golf industry. He has
written two complete texts, "The Modern Guide to Clubmaking" and "Total
Clubfitting." He has developed a video program of each. He is a regular
contributor to many United States' golf publications, including Golf Tips,
Junior Golf Magazine, Golf For Women, Tee Time Golf, The Professional
Clubmakers' Society Journal, and to the international journals, Clubmaker's
Digest and Golf The Scientific Way. He is a frequent speaker at PGA educational
seminars, the Canadian Clubmaking Symposium and at the Dynacraft Clubmaking
Institute. In 1997, Mr. Jackson was named Educational Presenter for the
Australian PGA.
Mr. Jackson graduated from Western Maryland College in 1979 with a
Bachelor's Degree and received his Master's Degree from Frostburg State
University in 1983.
Jack Kehl
Jack Kehl has been President of Pal since the fall of 1996. Prior to that
position, he was Vice President of Sales for Pal Joey since rejoining the
Company in 1995. As President of Pal Joey, Mr. Kehl is responsible for all
day-to-day operations including sales, customer service, manufacturing,
accounting, and other divisions. Since rejoining Pal Joey, Mr. Kehl has been
instrumental in increasing sales from $2.8 million in 1995 to $5.3 million at
the close of 1996.
Mr. Kehl has been involved in sales and marketing for over 35 years. Of
those years, 32 have been in the golf and/or sporting goods fields. From 1990
to 1995, he was Vice President and Co- Manager of PGI Golf in Loudonville, Ohio,
a major golf ball supplier to the industry.
During his tenure in the golf industry, Mr. Kehl has worked with such
companies as Faultless, Rawlings and Abbott Labs. He has been involved with
sales team development and sales force management, promotional program
development and implementation, international market development, domestic and
international purchasing, product marketing strategies, advertising support, and
product costing and pricing.
Mr. Kehl attended Ashland University in Ashland, Ohio, and has completed
the American Management Association's School of Marketing Program.
<PAGE>
Duane R. Egeland
Duane R. Egeland , a CPA, is the Chief Financial Officer of the Company.
He joined the Company in the fall of 1996. As CFO, Mr. Egeland coordinates all
financial functions for the Dynacraft Companies, including Diamond/Dynacraft in
England.
Prior to joining the Company, Mr. Egeland was associated with the Knoll
Group Management Company, concentrating on commercial real estate development
and apartment management. Prior to his tenure with the Knoll Group in 1991, Mr.
Egeland was a self-employed financial and business advisor to companies involved
in real estate development and management in Atlanta, Georgia. During this
time, he advised international investors concerning American investment
opportunities. He also became registered with the National Association of
Securities Dealers and the Commission as a Financial and Operational Principal.
Prior to selling it in 1986, Mr. Egeland owned a general securities firm, Harwin
Securities, Inc., which did private placements. Mr. Egeland acted as a general
partner of Belmont Towers Limited Partnership which owned 240 condominium units
in Texas and developed townhouse units in Pensacola, Florida, and a shopping
center in Nashville, Tennessee.
Mr. Egeland was an associate of the Chicago office of the international
public accounting firm of Laventahl and Horwath, becoming a partner in 1967. In
1969 he became the managing partner of the firm's Cleveland office and in 1979
assumed similar responsibilities for the Houston office. In 1981, he sold his
interest back to the firm.
Chris Treacy
Chris Treacy is President of Diamond Golf International, Limited, a
position he has held since Dynacraft acquired a 51% ownership in that business
in 1991. As such he is responsible for all facets of the European operation,
including, but not limited to, sales and customer service, advertising,
purchasing, inventory management, and education.
Prior to 1991, Mr. Treacy was owner operator of Diamond Golfworks along
with his wife and son, a position he held since 1978. Immediately prior to
that, Mr. Treacy was a golf course manager whose duties included operating a
golf course pro shop and a green fee operation. Mr. Treacy has operated a
repair stand at numerous British Open Championships and is well known to golf
professionals in Europe as well as in the United States. He has done repair and
custom club work for such pros as Tom Watson, Brian Barnes, and Tony Jacklin, to
name a few. He introduced a teaching facility to all of Europe, specializing in
teaching pros and clubmakers the craft of making and repairing all types of golf
<PAGE>
clubs. Mr. Treacy currently travels throughout Europe offering expanded
versions of these instructional curricula for those interested in clubmaking.
Mr. Treacy has authored numerous articles in European publications
concerning the assembly, fitting and repair of golf clubs. He is a regular
contributor to the international journal, Clubmaker's Digest and has assisted in
------------------
authoring at least two international texts, "The Modern Guide to Clubmaking" and
"Total Clubfitting."
AUDIT COMMITTEE
The Board of Directors intends to appoint an audit committee of three
non-management directors. The Audit Committee's responsibilities include
reviewing the results and scope of the audit and other services provided by the
Company's independent accountants and all transactions between the Company and
any of its officers, directors or principal stockholders.
DIRECTOR COMPENSATION
The Company intends to compensate non-employee directors $500 per Board or
committee meeting attended plus any out of pocket expenses.
ITEM 10. Executive Compensation
The following table sets forth, for the year ended December 31, 1997
compensation, including salary, bonuses and certain other compensation, paid by
the Company to its Chief Executive Officer and each other executive officers
whose annual compensation exceeded $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- ----------------------------------- -------- ------- ------------
<S> <C> <C> <C>
Joseph A. Altomonte, Sr.
Chairman of the Board of Directors
December 31, 1997 $115,000 $41,750 --
Joseph A. Altomonte, Jr.
Chief Executive Officer
December 31, 1997 $115,000 $69,600 --
</TABLE>
<PAGE>
ITEM 11. Security Ownership of Certain Beneficial Owners and Management.
The following table shows the beneficial ownership of the Company's common
stock as of March 31, 1998 and as adjusted to reflect the sale of the shares
being offered, for (i) each director and executive officer of the Company, (ii)
each shareowner known by the Company to own beneficially 5% or more of the
outstanding shares of its common stock and (iii) all directors and officers as a
group for each class of capital stock of the Company. The Company believes that
the beneficial owners of the common stock listed below, based on information
they furnished, have sole investment and voting power over their shares.
COMMON STOCK:
<TABLE>
<CAPTION>
DIRECTORS, SHARES PERCENTAGE OF COMMON SHARES OUTSTANDING:
EXECUTIVE OFFICERS ---------------------------------------
AND 5% SHAREHOLDERS BENEFICIALLY BEFORE OFFERING MINIMUM SOLD MAXIMUM SOLD
OWNED
- ------------------------------- ------------ ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Joseph A. Altomonte, Sr. (1)(2) 968,110 47.60% 41.48% 35.41%
Joseph A. Altomonte, Jr. (3)(4) 684,723 33.67% 29.34% 25.05%
Dynacraft Employee Stock 380,913 18.73% 16.32% 13.93%
Ownership Plan
All directors and executive 1,652,833 81.27% 70.82% 60.46%
officers as a group
(6 persons) (5)
<FN>
(1) Includes 87,100 Common Shares held in the Joseph A. Altomonte, Sr. 1994 Irrevocable
Trust, Ruth E. Altomonte, Trustee.
(2) Does not include, as of December 31, 1996, 15,650.6181 Common Shares issuable from
the ESOP at the close of the plan year in which the ESOP Loan is repaid in full.
(3) Includes 7,800 Common Shares owned by his wife Gretchen Altomonte.
(4) Does not include, as of December 31, 1996, 14,068.8964 Common Shares issuable from
the ESOP at the close of the Plan year in which the ESOP Loan is repaid in full.
(5) Does not include, as of December 31 1996 35,538.8641 Common Shares issuable from the
ESOP at the close of the Plan year in which the ESOP Loan is repaid in full.
</TABLE>
ITEM 12. Certain Relationships and Related Transactions.
In June 1996, two shareholders, Joseph A. Altomonte, Sr. and Joseph A.
Altomonte, Jr. each personally borrowed $250,000 from Huntington Bank. These
borrowed funds were in turn loaned to the Company, to help pay off the existing
line of credit, at the same terms as those of the banks, namely, monthly
installments of $4,102 each which includes interest at an interest rate of
9.625% and a final payment due June 1, 2001.
In November 1996 to help fund negative cash flow, Joseph A. Altomonte, Sr. also
lent the Company $326,554, taking back three promissory notes. Interest on
$200,000 is at prime plus 1%; at 7% on $90,770 and 7.2% on $35,784. All three
notes are due on demand.
Again in January 1997 to help fund negative cash flow, Joseph A. Altomonte, Sr.
lent the Company $52,500 at 8.25% interest. The principle of this note is due
on demand and was repaid in September 1997 by reducing shareholders receivables
in a like amount.
In May 1997, the Company arranged for an Irrevocable Standby Letter of
Credit from Huntington National Bank for 58,000 British pounds or approximately
94,000 US dollars to be used to facilitate the acquisition of a loan for Diamond
Golf International Limited from Lloyds Bank. The proceeds of the loan are to be
used to repay Dynacraft's advance to them of $92,980 plus unpaid interest of
$688 and then Dynacraft will reduce the principal balance on its existing term
note with Huntington National Bank by a like amount. The balance of the
Irrevocable Standby Letter of Credit is to be reduced each three months by 1/12
of the original amount and expires in May 2000. The Letter of Credit is
guaranteed by Joseph A. Altomonte, Sr. and Joseph A. Altomonte, Jr., who
received no consideration for their guarantee.
The Company believes that each of the foregoing transactions are on terms
no less favorable to the Company than could be obtained from unrelated third
Parties.
All future transactions between the Company and its officers, directors and
principal shareowners and their affiliates will be approved by a majority of the
disinterested Directors, who do not have an interest in the transaction and who
had access, at the Company's expense, to the Company's or independent legal
Counsel, and will be on terms no less favorable to the Company than could be
obtained from unrelated third parties.
<PAGE>
PART IV
ITEM 13. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------------------------------------------------------------------------------
<S> <C>
*3.1 Form of Second Amended and Restated articles of Incorporation
*3.2 Form of Code of Regulations
*4.1 Form of common stock certificate
*9 Lock in Agreement for Shares of the Common Shares of Dynacraft Golf Products, Inc.
*10.1 Bank One-Letter of Agreement-June 4, 1996
*10.2 Huntington National Bank-June 20, 1996
a) Loan Agreement
b) Commercial Loan Note
c) Guarantor: Joseph A. Altomonte, Sr. and
Joseph A. Altomonte, Jr.
d) Security Agreement: Dynacraft Golf Products, Inc. and
Pal Joey Custom Golf, Inc.
e) Commercial Loan Note and Subordination Agreement:
Joseph A. Altomonte, Sr. and
Joseph A. Altomonte, Jr.
*10.3 Letter of Credit Agreement and Irrevocable Stanby Letter of Credit
*10.4 Modification to June 20, 1996 Loan Agreement
*10.5 Four Shareholder Promissory Notes
*10.6 401(k) Profit Sharing Plan and Trust
*10.7 Employees Stock Ownership Plan and Amendments
*18. Letter on change in accounting principles
**21. Subsidiaries of Registrant
**23.1 Consent of Wilson, Shannon & Snow, Inc.
**27 Financial Data Schedule
**99.3 Approval letter from the Chicago Stock Exchange, dated September 29, 1997.
- -------
<FN>
- - Previously filed with the Securities and Exchange Commission as an Exhibit to the
Company's Registration Statement on Form SB-2, Amendment No. 2 (File No. 333-31501) and
incorporated herein by reference.
** Filed herewith.
(b) Reports on Form 8-K
No reports are filed on Form 8-K during the quarter ended December 31, 1997.
</TABLE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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, in the City of Newark, Ohio, on
March 30, 1998.
By: /s/ Joseph A. Altomonte, Jr.
---------------------------
Joseph A. Altomonte, Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capabilities and on the dates stated.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE
- ---------------------------- ---------------------------------- --------------
/s/_Joseph A. Altomonte, Sr. Chairman of the Board, Director March 30, 1998
- ----------------------------
JOSEPH A. ALTOMONTE, SR.
/s/_Joseph A. Altomonte, Jr. Chief Executive Officer, Director March 30, 1998
- ----------------------------
JOSEPH A. ALTOMONTE, JR Principal Executive Officer
/s/ Jeff Jackson President of Dynacraft, Director March 30, 1998
- ----------------------------
JEFF JACKSON
/s/ Jack Keh President of Pal Joey, Director March 30, 1998
- ----------------------------
JACK KEHL
/s/ Duane R. Egeland Chief Financial Officer, Director March 30, 1998
- ----------------------------
DUANE R. EGELAND Principal Financial and Accounting
Officer
/s/ Chris Treacy President of Diamond Golf, March 30, 1998
- ----------------------------
CHRIS TREACY Director
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
- ----------------------------------------------
<S> <C>
Independent Auditor's Report F-1
Consolidated Balance Sheet F-2
Consolidated Statements of Operations F-4
Consolidated Statement of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Dynacraft Golf Products, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Dynacraft Golf
Products, Inc. (an Ohio corporation) and Subsidiary as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Dynacraft Golf
Products, Inc. and Subsidiary as of December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
As described in Note L to the financial statements, in 1996 the Company changed
its method for valuing inventory from lower of average cost or market to lower
of absorption costing or market.
/s/ Wilson, Shannon & Snow, Inc.
Wilson, Shannon & Snow, Inc.
Newark, Ohio
February 19, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
Dynacraft Golf Products, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEET
December 31
------------
ASSETS 1997 1996
------------ ----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 241,157 $ 297,192
Accounts and notes receivable
Trade - net of allowance for
doubtful accounts of $55,110 in
1997 and $75,868 in 1996 1,430,208 1,363,445
Stockholders and employees 4,919 52,889
Diamond Golf 0 96,125
Other 154,325 68,806
Inventories
Raw materials 1,604,941 1,262,855
Finished goods 2,026,052 2,362,138
Prepaid expenses 321,074 331,483
------------ ----------
Total current assets 5,782,676 5,834,933
PROPERTY AND EQUIPMENT - AT COST
Buildings and improvements 1,961,576 1,961,576
Equipment, furniture and fixtures 1,222,525 1,290,786
Vehicles 13,084 25,318
------------ ----------
3,197,185 3,277,680
Less accumulated depreciation 1,865,087 1,821,584
------------ ----------
1,332,098 1,456,096
Land 73,220 73,220
------------ ----------
1,405,318 1,529,316
OTHER ASSETS 408,882 235,309
------------ ----------
$ 7,596,876 $7,599,558
============ ==========
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
Dynacraft Golf Products, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEET
December 31
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt $ 521,571 $ 515,134
Current portion of capital leases 12,441 47,484
Accounts payable - trade 3,066,725 2,876,415
Accrued liabilities 205,968 159,374
------------- -----------
Total current liabilities 3,806,705 3,598,407
LONG-TERM DEBT
Notes payable, net of current maturities 2,190,693 2,808,915
Capital lease obligations, net of current portion 15,055 27,776
------------- -----------
Total long-term debt 2,205,748 2,836,691
------------- -----------
Total liabilities 6,012,453 6,435,098
OBLIGATION TO REPURCHASE STOCK
Preferred stock 100,000 100,000
ESOP stock (32,650) (325,907)
------------- -----------
67,350 (225,907)
STOCKHOLDERS' EQUITY
Common stock 500 500
Additional paid-in capital 229,295 229,295
Retained earnings 1,736,755 1,472,921
Repurchase obligation - ESOP (449,477) (312,349)
------------- -----------
1,517,073 1,390,367
------------- -----------
$ 7,596,876 $7,599,558
============= ===========
<FN>
The accompanying notes are an integral part of this statement.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
Dynacraft Golf Products, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31
----------------------
1997 1996
------------ ------------
<S> <C> <C>
Sales $20,024,374 $19,459,629
Cost of goods sold 14,154,104 14,210,698
------------ ------------
Gross profit 5,870,270 5,248,931
Other operating revenue 271,805 399,367
Selling and administrative expenses (5,599,765) (6,059,312)
------------ ------------
Operating profit (loss) 542,310 (411,014)
Other income or (deductions)
Interest income 18,232 33,514
Interest expense (219,051) (270,586)
Environmental remediation (79,669) 0
Gain on sale of fixed assets 4,872 1,954
Equity in net (loss) earnings of Diamond Golf (2,860) 18,629
------------ ------------
(278,476) (216,489)
------------ ------------
Net earnings (loss) before income taxes and
cumulative effect of a change in
accounting principle 263,834 (627,503)
Income taxes - currently refundable 0 23,147
------------ ------------
Net earnings (loss) before cumulative effect
of a change in accounting principle 263,834 (604,356)
Cumulative effect on prior years of an
accounting change 0 105,811
------------ ------------
NET EARNINGS (LOSS) $ 263,834 $ (498,545)
============ ============
Earnings (loss) per common share before cumulative
effect of a change in accounting principle $ 0.13 $ (0.30)
Earnings per common share on cumulative effect
on prior years of an accounting change 0.00 0.06
------------ ------------
Net earnings (loss) per common share $ 0.13 $ (0.24)
============ ============
<FN>
The accompanying notes are an integral part of this statement.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Dynacraft Golf Products, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Additional ESOP
------------
Shares Paid-in Retained Repurchase
Outstanding Amount Capital Earnings Obligation
----------- -------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 2,033,746 $ 500 $ 229,295 $ 1,971,466 $ (323,776)
Net (loss) for the year 0 0 0 (498,545) 0
Change in fair value of ESOP shares 0 0 0 0 11,427
----------- -------- --------- ------------ ------------
Balance at December 31, 1996 2,033,746 500 229,295 1,472,921 (312,349)
Net earnings for the year 0 0 0 263,834 0
Change in fair value of ESOP shares 0 0 0 0 (137,128)
----------- -------- --------- ------------ ------------
Balance at December 31, 1997 2,033,746 $ 500 $ 229,295 $ 1,736,755 $ (449,477)
=========== ======== ========= ============ ============
<FN>
The accompanying notes are an integral part of this statement.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Dynacraft Golf Products, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31
----------------------
1997 1996
---------- ------------
<S> <C> <C>
Cash flows from operating activities
Net earnings (loss) for the year $ 263,834 $ (498,545)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities
Depreciation and amortization 151,705 173,533
(Gain) on sale of fixed assets (4,872) (1,954)
Equity in net loss (earnings) of Diamond Golf 2,860 (18,629)
Changes in assets and liabilities
Accounts and notes receivable (97,478) 1,495
Inventories (6,000) (270,350)
Prepaid expenses 10,409 (157,369)
Other assets 0 (19,346)
Book overdrafts 0 (100,024)
Accounts payable 190,310 1,370,178
Accrued liabilities 46,594 4,269
---------- ------------
Net cash provided by operating activities 557,362 483,258
Cash flows from investing activities
Proceeds from sale of fixed assets 0 2,100
Purchases of fixed assets (27,014) (83,813)
Payments received on notes receivable 92,980 18,586
---------- ------------
Net cash provided by (used in) investing activities 65,966 (63,127)
Cash flows from financing activities
Deferred offering costs (179,197) 0
Lines of credit payable - net 0 (2,260,315)
Principal payments on long-term debt (608,531) (567,787)
Principal payments on capital leases (47,764) (37,859)
Principal payments on note payable guarantee - ESOP 156,129 156,130
Proceeds from issuance of long-term debt 0 2,586,892
---------- ------------
Net cash (used in) financing activities (679,363) (122,939)
---------- ------------
Net (decrease) increase in cash (56,035) 297,192
Cash at beginning of year 297,192 0
---------- ------------
Cash at end of year $ 241,157 $ 297,192
========== ============
<FN>
The accompanying notes are an integral part of this statement.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
Dynacraft Golf Products, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
Year ended December 31
----------------------
1997 1996
-------- ----------
<S> <C> <C>
Supplemental Cash Flow Disclosures
- -----------------------------------------------------
Cash paid (refunded) during the year for:
Interest $232,091 $ 271,046
======== ==========
Income taxes $ 0 $(211,423)
======== ==========
Supplemental Schedule of Noncash Financing Activities
- -----------------------------------------------------
Equipment acquired by capital lease agreement $ 0 $ 11,025
======== ==========
Advance to Diamond Golf paid from proceeds
from issuance of long-term debt $ 0 $ 99,980
======== ==========
Sale of fixed asset to stockholder
Payment of debt $ 3,254 $ 0
Increase in stockholder account receivable 3,689 0
-------- ----------
$ 6,943 $ 0
======== ==========
<FN>
The accompanying notes are an integral part of this statement.
</TABLE>
F-7
<PAGE>
Dynacraft Golf Products, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND ACCOUNTING POLICIES
Dynacraft Golf Products, Inc. (the Company) is a supplier of component golf
club equipment (golf clubheads, shafts, grips and other accessory golf products)
to clubmakers through its catalog and showroom. The Subsidiary, Pal Joey Custom
Golf, Inc., is a wholesaler of finished golf clubs to golf distributors for
resale. Through its Pro Shop Division it is a retailer of golf equipment, attire
and accessories.
Consolidation
-------------
The consolidated financial statements include the accounts of Dynacraft
Golf Products, Inc. and its wholly-owned subsidiary, Pal Joey Custom Golf, Inc.
Pal Joey Custom Golf, Inc. includes the accounts of its wholly-owned subsidiary
Dynacraft Real Estate Holdings, Inc. All significant intercompany transactions
have been eliminated.
Cash Equivalents
-----------------
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents. There were no cash equivalents at December 31, 1997
and 1996.
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any losses
in such accounts. The Company believes it is not exposed to any significant
credit risk on cash and cash equivalents.
Inventories
-----------
Inventory consists primarily of golf clubs, golf clubheads, shafts, grips,
golf attire and accessories valued at the lower of absorption costing or market
which approximates the first-in, first-out (FIFO) method.
Advertising Costs
------------------
The Company's policy is to expense advertising costs as incurred, except
for catalog expenses which are capitalized and amortized over their expected
period of future benefits, twelve months.
At December 31, 1997, $198,654 of advertising costs were reported as
prepaid assets and $180,495 at December 31, 1996. Advertising expense was
$301,050 and $287,016 for the years ended December 31, 1997 and 1996,
respectively.
F-8
<PAGE>
DYNACRAFT GOLF PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - ORGANIZATION AND ACCOUNTING POLICIES - CONTINUED
Revenue Recognition
--------------------
Revenue is recognized when orders are shipped.
Reclassifications
-----------------
Certain reclassifications have been made to the December 31, 1996 financial
statements to conform with the December 31, 1997 financial statement
presentation. Such reclassifications have had no effect on net income as
previously reported.
Property and Equipment
------------------------
Major improvements and additions to property and equipment are charged to
the property accounts while replacements, maintenance and repairs which do not
improve or extend the life of the assets are expensed currently.
Upon the sale or retirement of property and equipment, the costs and
related accumulated depreciation are eliminated from the respective accounts.
Depreciation
------------
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated services lives,
principally on the declining-balance method.
Estimates
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Income Taxes
-------------
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes,
which requires the use of the asset and liability approach of accounting for
deferred income taxes. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial statement carrying
amounts of assets and liabilities and their respective tax bases.
F-9
<PAGE>
DYNACRAFT GOLF PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - ORGANIZATION AND ACCOUNTING POLICIES - CONTINUED
Significant Customers
----------------------
One group of customers represent in excess of 19% and 16% of consolidated
sales in the years ended December 31, 1997 and 1996, respectively.
NOTE B - ACCUMULATED DEPRECIATION
A summary of the accumulated depreciation, including methods and lives, was
as follows at December 31:
<TABLE>
<CAPTION>
Live
Classification Method (Years) 1997 1996
- ----------------- ----------------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Buildings and
improvements Straight-line 10-31 $ 789,359 $ 713,575
Equipment,
furniture and Straight-line and
fixtures declining-balance 5 - 7 1,063,751 1,089,120
Vehicles Declining-balance 5 - 10 11,977 18,889
---------- ----------
$1,865,087 $1,821,584
========== ==========
</TABLE>
NOTE C - LEASE OBLIGATIONS
The Company leases equipment under various operating leases expiring in
1998 - 1999 and also leases equipment on a short-term basis as needed. Total
rent expense for the years ended December 31, 1997 and 1996 was $15,170 and
$15,905, respectively.
The Company is leasing computer and other equipment under capital lease
agreements. These assets are recorded as equipment on the balance sheet.
<TABLE>
<CAPTION>
<S> <C>
Equipment $ 364,913
Accumulated depreciation 343,179
---------
$ 21,734
=========
</TABLE>
F-10
<PAGE>
DYNACRAFT GOLF PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - LEASE OBLIGATIONS - CONTINUED
Future minimum lease payments under capital leases, together with the
present value of the minimum lease payments as of December 31, 1997, were as
follows:
<TABLE>
<CAPTION>
Year Amount
- -------- ------
<S> <C> <C>
1998 $ 14,899
1999 13,315
2000 2,854
--------
31,068
Less: Amounts representing interest 3,572
--------
Present value of net lease payments 27,496
Current portion 12,441
--------
Long-term portion $ 15,055
========
</TABLE>
NOTE D - LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consisted of the following at December 31:
1997 1996
-------- --------
<S> <C> <C>
Note payable to a bank in 60 monthly principal
and interest payments of $243 at an interest
rate of 7.11% collateralized by a truck. $ - $ 3,916
ESOP note payable to a bank due in monthly
installments of $13,011 plus interest at
prime plus 1% (currently 9.50%). The
monthly installment increases to $20,872
plus interest on March 31, 1998. Final
payment due December 31, 1999. Collateralized
by inventory, equipment, accounts receivable
and real estate 482,127 638,256
</TABLE>
F-11
<PAGE>
Dynacraft Golf Products, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
<S> <C> <C>
NOTE D - LONG-TERM DEBT - CONTINUED
Note payable to a bank in monthly installments
of $7,861 plus interest at prime plus 1%
(currently 9.50%). Final payment due March 30,
1998. Collateralized by property and
equipment 12,367 106,705
Note payable to a bank in monthly installments of
$29,344 plus interest at the U.S. Treasury constant
maturities rate (currently 8.100%). Final payment
due June 20, 2003. Collateralized by cash, accounts
receivable inventory, intangibles, equipment, and
real estate. 1,480,329 1,781,808
Subordinated note payable to a stockholder in
monthly installments of $4,102 which includes
interest at an interest rate of 9.625%. Final
payment due June 1, 2001. 205,411 233,407
Subordinated note payable to a stockholder in
monthly installments of $4,102 which includes
interest at an interest rate of 9.625%. Final
payment due June 1, 2001. 205,476 233,407
Note payable to a stockholder on demand.
Interest is at prime plus 1% (currently 9.50%).
This note is currently subordinate to bank debt
whose final payment is due June 20, 2003. 200,000 200,000
Note payable to a stockholder on demand. Interest
is at 7.20%. This note is currently subordinate to
bank debt whose final payment is due June 20, 2003. 35,784 35,784
Note payable to a stockholder on demand. Interest
is at 7.00%. This note is currently subordinate to
bank debt whose final payment is due June 20, 2003. 90,770 90,770
---------- ----------
2,712,264 3,324,049
Less current maturities 521,571 515,134
---------- ----------
Long-term portion $2,190,693 $2,808,915
========== ==========
</TABLE>
F-12
<PAGE>
Dynacraft Golf Products, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - LONG-TERM DEBT - CONTINUED
<TABLE>
<CAPTION>
As of December 31, 1997, long-term debt matures as follows:
Year Amount
- ---- ----------
<S> <C>
1998 $ 521,571
1999 544,222
2000 326,540
2001 487,248
2002 296,808
Thereafter 535,875
----------
2,712,264
==========
</TABLE>
At December 31, 1997 the Company had a $93,000 letter of credit agreement
with a bank. The letter of credit was used to facilitate the acquisition of a
loan for Diamond Golf International Limited. The letter of credit expires April
1, 2000.
NOTE E - RELATED PARTY TRANSACTIONS
The Company is related to Dynamic Precision Casting Manufacturing Company,
Ltd. (Dynamic) since one of the Company's preferred stockholders is also a
stockholder in Dynamic. During the years ended December 31, 1997 and 1996, the
Company purchased products from Dynamic totaling $1,922,378 and $2,351,155
respectively. At December 31, 1997 and 1996 the Company had accounts payable to
Dynamic of $871,096 and $838,167, respectively.
The Company has advances of $4,919 to employees at December 31, 1997 and
$52,889 to stockholders and employees at December 31, 1996, respectively, which
are receivable upon demand.
NOTE F - STOCKHOLDERS' EQUITY
At December 31, 1997, the Company had 3,500,000 common shares authorized
without par value with 2,033,746 shares issued and outstanding, of which 380,913
are shares in the Company's ESOP. In addition, the Company has 100 shares
authorized, issued and outstanding of Class A preferred stock with a par value
of $1,000 per share noncumulative and a liquidating preference of $1,000 per
share. The Company is obligated to redeem these shares upon demand of the
stockholder. Because of this obligation these shares have been classified
outside of permanent equity.
F-13
<PAGE>
Dynacraft Golf Products, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan. All employees are eligible to
participate on January 1 or July 1 following six months of service. The Company
currently matches 25% of the employee contributions to the plan. Contributions
were $13,292 and $33,022 for the years ended December 31, 1997 and 1996,
respectively.
NOTE H - EMPLOYEE STOCK OWNERSHIP PLAN
On January 1, 1991, the Company established an employee stock ownership
plan (ESOP) for purposes of assisting employees who retire.
Under the plan, a stockholder sold to the ESOP 380,913 shares of common
stock for $1,500,000 during 1991. The purchase price was based upon an appraisal
performed by an independent appraiser. In order to have the funds available to
acquire the Dynacraft Golf Products, Inc. stock, the Company borrowed $1,500,000
from a bank and loaned it to the ESOP (see Note D).
The recording of the note payable amount is offset by a corresponding
reduction of stockholders' equity. Both amounts are reduced by principal
payments made during the year. At December 31, 1997 and 1996, the outstanding
principal balance was $482,127 and $638,256, respectively.
Contributions to the plan are at the discretion of management but may not
exceed 15% of total participants' compensation paid or accrued: compensation
includes regular and overtime wages, salary, bonuses, commissions, and amounts
deferred under a salary reduction agreement. Compensation is limited to amounts
established in IRC Section 415(d).
Under the ESOP agreement, each employee who has completed six months of
service may participate in the plan. Participating employees of the Company are
able to acquire shares of the Company stock allocated to them based on their
annual compensation. The shares are held by a trustee and allocated to the
employees based on principal payments made by the Company on the outstanding
loan.
All Company stock held by the ESOP is included in the earnings per share
calculation. The payment of dividends is restricted by current loan covenants.
F-14
<PAGE>
Dynacraft Golf Products, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - EMPLOYEE STOCK OWNERSHIP PLAN - CONTINUED
The total amounts contributed to the ESOP for the years ended December 31,
1997 and 1996, were $210,515 and $229,449, respectively, with $156,129
representing the principal portions which were allocated to the participants'
accounts.
<TABLE>
<CAPTION>
The following summarizes the ESOP shares at December 31:
1997 1996
------- -------
<S> <C> <C>
Committed to be released 380,913 380,913
Released 287,794 243,196
Suspended 93,119 137,717
</TABLE>
The Company is obligated to repurchase and has a first offer requirement
for those shares issued to employees by the ESOP unless the Company's shares
become publicly traded, then the first offer requirement does not apply. Due to
this repurchase obligation, the fair market value of the ESOP shares along with
the related debt is classified outside of the permanent equity. The obligation
to repurchase ESOP shares will vary depending on fair market value of the
shares. As the fair market value increases, additional amounts will be
reclassified out of stockholders' equity and increase the obligation to
repurchase shares. Conversely, as the fair market value decreases, the
obligation to repurchase will also decrease. The values of the ESOP shares for
the year ended December 31, 1997 and 1996 are $1.18 and $.82 per share and are
based upon the fair market value as determined by an independent appraiser.
The balance of the ESOP shares classified out of permanent equity consisted
of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Fair market value of the ESOP shares
repurchase obligation $449,477 $ 312,349
Less: Debt related to the acquisition
of the ESOP shares 482,127 638,256
--------- ----------
$(32,650) $(325,907)
========= ==========
</TABLE>
F-15
<PAGE>
Dynacraft Golf Products, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - INVESTMENT IN FOREIGN COMPANY
The Company has a 51% (32,845 shares) ownership interest in Diamond Golf
International Limited (Diamond Golf). Diamond Golf is a limited company under
English law in Great Britain, which engages in the sale of golf club components
and other golfing-related items throughout the countries of the European
Economic Community.
The Company's investment in Diamond Golf is accounted for under the equity
method. The Company's investment was $212,032 and $214,892 at December 31, 1997
and 1996, respectively. The Company's equity in the (loss) gain of Diamond Golf
International Limited was $(2,860) and $18,629 for the years ended December 31,
1997 and 1996, respectively. Diamond Golf had total assets of $409,237 and total
liabilities of $371,356 at December 31, 1997. Net (loss) for the year ended
December 31, 1997 was $(5,606). The lack of the consolidation of Diamond Golf
does not materially impact the Company's financial statements.
During the years ended December 31, 1997 and 1996, the Company sold
$285,950 and $275,973, respectively, of products to Diamond Golf. As of December
31, 1997 and 1996, the Company had accounts receivable from Diamond Golf in the
amount of $86,682 and $100,883, respectively. In addition, the Company had a
short-term note receivable from Diamond Golf in the amount of $96,125 in 1996.
NOTE J - INCOME TAXES
Deferred income taxes reflect the impact of "temporary differences" between
the amounts of assets and liabilities for financial reporting purposes and such
amounts as determined by tax regulations. These temporary differences are
determined in accordance with SFAS No. 109.
The components of deferred taxes consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Bad debt $ 22,000 $ 30,300
Inventories 59,200 60,000
Net operating loss carryforwards 148,600 275,700
Contribution carryforwards 4,200 15,000
Officer wages 2,400 1,800
Depreciation (6,100) (700)
----------- ----------
Total deferred tax assets 230,300 382,100
Less valuation allowance (230,300) (382,100)
----------- ----------
Net deferred income taxes $ - $ -
=========== ==========
</TABLE>
F-16
<PAGE>
Dynacraft Golf Products, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - INCOME TAXES - CONTINUED
Due to the uncertainty surrounding the realization of these favorable tax
attributes in future tax returns, all of the net deferred tax assets have been
fully offset by a valuation allowance.
Operating loss carryforwards expire as follows: $371,587 in 2011.
Charitable contribution carryforwards expire as follows: $4,290 in 1999 and
$4,610 in 2000 and $1,500 in 2001.
The principal items accounting for the difference in expected tax expense
on income before income taxes computed at the United States statutory rate was
as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Computed expense at 35% of pretax income $ 92,300 $(182,600)
Valuation allowance for net operating loss carryforward (93,800) 169,400
Refund of prior years' tax from carryback of net
operating losses - 23,147
Nondeductible dues 8,700 9,600
IRC Section 263A adjustment 1,500 (16,300)
Adjustment to allowance for bad debts (7,300) 18,000
Nondeductible meals 10,400 9,000
Earnings on foreign subsidiary 1,000 (6,500)
Contribution carryforward (10,000) -
Other 1,200 -
Depreciation difference (4,000) (600)
--------- ----------
$ - $ 23,147
========= ==========
</TABLE>
During the year ended December 31, 1996 a settlement was reached with the
Internal Revenue Service regarding an examination of the Company's federal
income tax returns for 1990, 1991 and 1992. The Company accrued $42,911 at
December 31, 1995 for taxes due on the settlement. Total actual additional
taxes, penalties and interest paid in 1996 amounted to $56,411.
NOTE K - CONTINGENCIES
During the year ended December 31, 1995 it was discovered that the site of
the Company's manufacturing, warehousing and office facility contained ground
water that was deemed to be contaminated. The contamination appears to have come
from a neighboring property owned by the State of Ohio. The Company is taking
legal action against the State of Ohio for reimbursement of legal fees and other
costs relating to this matter. The costs incurred during the year ending
December 31, 1997 amounts to $79,669. No amounts have been accrued on the
balance sheet for the clean up as the cost is not yet estimable, nor is it
probable that the Company will be required to pay for any clean up.
F-17
<PAGE>
Dynacraft Golf Products, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - CHANGE IN ACCOUNTING PRINCIPLE
During the year ended December 31, 1996 the Company changed its method for
valuing inventory from lower of average cost or market to lower of absorption
costing or market. Absorption costing is preferable to average cost for
manufacturing and warehousing business.
The effect of this change in 1996 income is an increase of $73,149. In
addition to this effect, a cumulative effect of the accounting change for prior
periods of $105,811 is recognized in the current year. The total increase in
income from the accounting change is $178,960.
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following presents the carrying amounts of the Company's financial
instruments at December 31, 1997 and 1996. FASB Statement 107, Disclosures About
Fair Values of Financial Instruments, defines fair value of financial
instruments as the amount at which the instrument could be exchanged in a
current transaction between willing parties.
Accounts receivable stockholders and employees, account receivable -
Diamond Golf, and accounts receivable - other: The carrying amounts approximate
fair value because of the short maturity of these instruments.
Notes payable and capital lease obligations: The carrying amounts
approximate fair value. Several of the notes payable have interest rates that
are adjusted annually. The notes that are not adjusted annually are either due
in the short-term or have rates that are similar to the current rates available
to the Company.
NOTE N - STOCK SPLIT
The Board of Directors authorized a 13-for-1 stock split, thereby
increasing the number of issued and outstanding shares to 2,033,746. The stock
split took effect on August 14, 1997 and all shares referred to in this report
have been adjusted to reflect that split. Additionally the Company's Articles of
Incorporation were amended to authorize 3,500,000 shares of common stock.
NOTE O - PUBLIC STOCK OFFERING
During the year ended December 31, 1997, the Company offered 700,000 shares
for sale in an initial public stock offering. A minimum of 300,000 shares must
be sold to complete the offering. Until the minimum is fully subscribed,
purchases will be deposited into an escrow account. If the minimum is not
subscribed, all deposits to the escrow account will be refunded. The minimum has
not been fully subscribed as of the date of this report.
The Company has accumulated $179,197 of costs relating to the initial
public stock offering as of December 31, 1997. These costs have been recorded on
the balance sheet as other assets. When the minimum is fully subscribed, these
costs will be offset against the proceeds of the stock offering. If the minimum
is not fully subscribed, the costs will be expensed.
F-18
<PAGE>
Dynacraft Golf Products, Inc.
Subsidiaries of Registrant
<TABLE>
<CAPTION>
Name of Subsidiary Incorporated In Doing Business as Name
- ------------------ --------------- ---------------------
<S> <C> <C>
Pal Joey Custom Golf Inc. (A) Ohio Pal Joey and Pal Joey Pro Shop
Dynacraft Real Estate (B) Ohio Dynacraft Real Estate Holding Inc.
Holding Inc.
Diamond Golf International (C)Great Britain Diamond Golf International (also)
Limited (C) Dynacraft Europe
(A) 100% owed by Dynacraft Golf Products, Inc.
(B) 100% owed by Pal Joey Custom Golf, Inc.
(C) 51% owed by Dynacraft Golf Products, Inc.
</TABLE>
EXHIBIT 21
<PAGE>
Independent Auditor's Consent
Board Of Directors
Dynacraft Golf Products, Inc. and Susidiary
98 James Street
Newark, OH 43055
We consent to the use of our report dated February 19, 1998 appearing in the
Annual Report Form 10-KSB of Dynacraft Golf Products, Inc. for the year ended
December 31, 1997.
/s/ Wilson, Shannon & Snow, Inc.
Wilson, Shannon & Snow, Inc.
Newark, Ohio
March 12, 1998
EXHIBIT 23.1
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR 1996 AND FOR THE YEAR 1997.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 297,192 241,157
<SECURITIES> 0 0
<RECEIVABLES> 1,440,721 1,485,318
<ALLOWANCES> 75,868 55,110
<INVENTORY> 3,624,993 3,630,993
<CURRENT-ASSETS> 5,834,933 5,782,676
<PP&E> 3,277,680 3,197,185
<DEPRECIATION> 1,821,584 1,865,087
<TOTAL-ASSETS> 7,599,558 7,596,876
<CURRENT-LIABILITIES> 3,598,407 3,806,705
<BONDS> 0 0
100,000 100,000
0 0
<COMMON> 500 500
<OTHER-SE> 1,389,867 1,489,909
<TOTAL-LIABILITY-AND-EQUITY> 7,599,558 7,596,876
<SALES> 19,459,629 20,024,374
<TOTAL-REVENUES> 19,858,996 20,024,374
<CGS> 14,210,698 14,154,104
<TOTAL-COSTS> 6,059,312 5,599,765
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 101,442 40,830
<INTEREST-EXPENSE> 270,586 219,051
<INCOME-PRETAX> (627,503) 263,834
<INCOME-TAX> (23,147) 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 105,811 0
<NET-INCOME> (498,545) 263,834
<EPS-PRIMARY> (.24) .13
<EPS-DILUTED> (.24) .13
<PAGE>
</TABLE>
September 29, 1997
Mr. Duane Egeland
Chief Financial Officer
Dynacraft Golf Products, Inc.
98 James Street
Newark, Ohio 43055
Re: Listing on the Chicago Stock Exchange
------------------------------------------
Dear Mr. Egeland:
This notice is to certify that the Chicago Stock Exchange ("Exchange") has
approved the Common Stock, without par value (the "Issue"), of Dynacraft Golf
Products, Inc. ("Company") for listing. This approval and admission of the
Issue to trading is subject to the following:
<TABLE>
<CAPTION>
<C> <S>
1. Assignment to a qualified Chicago Stock Exchange specialist firm.
2. Completion and submission of an originally executed Application for Listing, all
required supporting documentation and payment of appropriate listing fees.
3. Completion and closure of the initial public offering at or above the Minimum
Offering as defined in the Company's Form SB-2 as filed with the Securities
and Exchange Commission ("SEC").
4. Confirmation of the issuance and distribution, within two days of the day the
Company ceases the sale of stock, of all stock certificates to all persons
purchasing shares of the Company's common stock in the initial public
offering.
5. Receipt of a representation and confirmation from the Company that a CUSIP
number identifying the Company's common stock has been included in the file
of eligible securities maintained by a securities depository registered as a
clearing agency under Section 17A of the Securities Exchange Act of 1934 (the
"1934 Act"), specifically, the Depository Trust Company ("DTC").
6. Submission to the Exchange and the SEC of the appropriate 1934 Act
Registration Statement and notice of effectiveness thereof from the SEC.
</TABLE>
<PAGE>
Mr. Duane Egeland
September 29, 1997
Page 2
<TABLE>
<CAPTION>
<C> <S>
7. Receipt, within 30 trading days of the first day of trading on the Exchange, of
certified Schedules of Distribution indicating that there are at least 500
beneficial holders of the Company's common stock. If the Company is unable
to demonstrate that there are at least 500 beneficial holders of the common stock,
the issue may be suspended from trading.
</TABLE>
Please do not hesitate to contact me at (312) 663-2423 with any question or
concern you may have.
Sincerely,
/s/ Craig a. Gray
---------------
Supervisor, Listing Department
cc: Mr. Gerald R. Broz
Mr. Gerald Sadowski
Mr. Drew Field
EXHIBIT 99.3
