<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
December 31, 1996 33-19107
- --------------------------- ---------------------
(For the fiscal year ended) (Commission File No.)
LBO CAPITAL CORP.
(Exact name of Registrant as specified in its charter)
Colorado 38-2780733
- --------------------------------------------- ------------------------------
(State or other jurisdiction of organization) (I.R.S. Employer Identification
Number)
7001 Orchard Lake Road, Suite 424
West Bloomfield, MI 48322
- ---------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(810) 851-5651
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.0001 Par Value
------------------------------
(Title of Class)
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
As of December 31, 1996, a total of 12,100,000 shares of common stock,
$.0001 par value, were outstanding and the aggregate market value of the voting
stock held by nonaffiliates of the Registrant was approximately $230,611 based
on the average of the bid and asked prices on that date ($ .055) as reported by
The National Quotation Bureau, Inc.
<PAGE>
LBO CAPITAL CORP.
FORM 10-K
PART 1
ITEM 1. BUSINESS
General
- -------
LBO Capital Corp. (the "Registrant") was organized under the laws of the
State of Colorado on October 8, 1987. The Registrant was formed based on the
belief of its management that there are business opportunities that, for one or
more reasons, are available for acquisition by the Registrant.
On March 15, 1988, the Registrant completed a public offering of 3,000,000
Units, each Unit consisting of one share of its common stock, one Callable Class
A Warrant, one Callable Class B Warrant and one Callable Class C Warrant. The
Warrants are detachable from the Units and may be traded separately in the
over-the-counter market. Each Class A Warrant entitles the holder thereof to
purchase at a price of $0.50, one share of Common Stock at any time until
February 26, 1989. Each Class B Warrant entitled the holder thereof to purchase
at a price of $0.75 one share of Common Stock at any time until August 26, 1989.
Each Class C Warrant entitled the holder thereof to purchase at a price of
$1.00, one share of Common Stock at any time until February 26, 1990. The
expiration dates of these warrants were subsequently extended by the Board of
Directors to expire on various dates, the latest being July 25, 1997. A Form 8-K
was filed on June 20, 1996 reporting this extension. The Registrant received net
proceeds of approximately $474,300 after payment of all costs of the offering.
Since its inception, the Registrant has directed its activities toward
evaluating potential business opportunities with the goal of acquiring and
continuing one or more business opportunities. The Registrant may acquire an
existing business which may be a corporation, partnership or sole
proprietorship. One form which such a business combination might take would be
an exchange of the Registrant's stock for stock of the acquired business.
However, the Registrant may exchange its common stock to acquire the assets of
this entity, or may purchase a percentage of the entity outright.
The Registrant has evaluated and attempted to acquire a number of entities
to date.
<PAGE>
ACQUISITION OF ASSETS
- ---------------------
Ajay Sports, Inc.
- -----------------
On April 3, 1989 LBO acquired an aggregate of 1,880,000 shares of the
restricted common stock of Ajay Sports, Inc. ("Ajay") for a total cash purchase
price of $182,000.
In 1991, the Registrant pledged 400,000 shares of Ajay to a bank as
collateral for $300,000 in loans to Hendricks. On July 1, 1991, this bank
declared the loan in default and foreclosed on the shares.
The 1,480,000 and 200,000 warrants owned by the Registrant represented
6.00% of the total shares of Ajay common stock outstanding as of December 31,
1996 and December 31, 1995. The decrease is the result of new shares issued.
Ajay's Common Stock ("AJAY"), Units ("AJAYU") and Warrants ("AJAYW") have
been traded over-the-counter since 1989 and are reported by the National
Quotation Service. The following table sets forth the range of high and low bid
quotes for the common stock:
BID ASK
----- -----
HI LOW HI LOW
1996 ------- ------- ------ ------
- -----
First Quarter $ .72 $ .38 $ .75 $ .44
Second Quarter $ .69 $ .38 $ .75 $ .44
Third Quarter $ .44 $ .31 $ .50 $ .38
Fourth Quarter $ .38 $ .25 $ .44 $ .28
On June 10, 1993, Thomas W. Itin, President and Chairman of the Board of
Directors of the Registrant, was elected to the positions of Chairman of the
Board of Directors and Chief Executive Officer of Ajay Sports, Inc. It is felt
that the direct intervention by the Registrant's management into the operations
of Ajay will have a positive effect on the Ajay earnings and the value of the
Ajay stock held by the Registrant.
Business Ajay Sports, Inc., through its operating subsidiaries Ajay Leisure
Products, Inc., Palm Springs Golf and Leisure Life, Inc., is a leading
manufacturer and distributor of golf bags, clubs, carts, accessories and casual
living furniture throughout the United States.
<PAGE>
Enercorp, Inc.
- --------------
On November 21, 1994, the Registrant bought 2,667 shares of Enercorp, Inc.
for $8,702. During 1996, the Registrant bought 12,674 additional shares of
Enercorp, Inc. for $39,694.
Enercorp, Inc. is a business development company under the Investment
Company Act of 1940, as amended.
Competition
- -----------
The Registrant expects to encounter substantial competition in its efforts
to locate businesses for acquisition. The primary competition for desirable
business acquisitions is expected to come from other small companies organized
and funded for purposes similar to the Registrant, small venture capital
partnerships and corporations, small business investment companies and wealthy
individuals. Should the Registrant elect to engage in a leveraged buyout
acquisition, competition may also be anticipated from investment bankers. Many
of these entities have significantly greater experience, resources and
managerial capabilities than the Registrant and are therefore in a better
position than the Registrant to obtain access to businesses.
Employees
- ---------
As of December 31, 1996, the Registrant had no employees.
ITEM 2. PROPERTIES
The Registrant currently uses office space provided by Acrodyne
Corporation, a company whose Chairman and President is also Chairman and
President of the Registrant. The space is used for purposes of administration
and development. While the Registrant does not pay any rent, it does pay a
monthly fee of $150 for the direct operating expenses. The Registrant believes
its current facilities are sufficient for its present business activity.
ITEM 3. LEGAL PROCEEDINGS
The Registrant is not a present party to any material pending legal
proceedings and no such proceedings were known as of the filing date.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Registrant's shareholders during
the fiscal year ended December 31, 1996.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common Stock
- ------------
The principal market on which the Registrant's common stock, $.0001 par
value, on traded is the over-the-counter market.
Prices for the Common Stock have been reported in the National Daily
Quotation Service "Pink Sheets" published by the National Quotation Bureau since
March 15, 1988. The range of the bid and ask quotations for the Registrant's
Common Stock during the quarters ended on the dates listed below is as follows:
Bid* Ask*
----- -----
HI LOW HI LOW
------- ----- ------- -------
1995
- -----
First Quarter $ .03 $ .02 $ .08 $ .06
Second Quarter $ .03 $ .02 $ .08 $ .06
Third Quarter $ .03 $ .03 $ .08 $ .08
Fourth Quarter $ .03 $ .03 $ .08 $ .08
1996
- -----
First Quarter $ .03 $ .03 $ .08 $ .07
Second Quarter $ .03 $ .03 $ .08 $ .06
Third Quarter $ .03 $ .03 $ .08 $ .08
Fourth Quarter $ .03 $ .03 $ .08 $ .08
On December 31, 1996, the bid reported for the Common Stock was $ .03* and
the ask price was $.08*.
As of December 31, 1996, the number of record holders of the Registrant's
Common Stock was 1,030. This figure excludes an undetermined number of
shareholders whose shares are held in "street" or "nominee" name.
The Registrant has never paid a dividend with respect to its Common Stock
and does not intend to pay a dividend in the foreseeable future.
Units
- -----
Prices for the Units have been reported in the National Daily Quotation
Service "Pink Sheets" published by the National Quotation Bureau since March 15,
1988. The range of the bid and ask quotations for the Registrant's Units during
the quarters ended on the dates listed below is as follows:
<PAGE>
Bid* Ask*
----- ------
HI LOW HI LOW
1995 ------- ------- -------- -------
- ----
First Quarter $ .03 $ .02 $ .08 $ .06
Second Quarter $ .03 $ .02 $ .08 $ .06
Third Quarter $ .03 $ .03 $ .08 $ .08
Fourth Quarter $ .03 $ .03 $ .08 $ .08
1996
- ----
First Quarter $ .03 $ .03 $ .08 $ .07
Second Quarter $ .03 $ .03 $ .08 $ .06
Third Quarter $ .03 $ .03 $ .08 $ .08
Fourth Quarter $ .03 $ .03 $ .08 $ .08
Each Unit consists of one share of the Registrant's Common Stock, one
Callable Class A Warrant, one Callable Class B Warrant and one Callable Class C
Warrant.
On December 31, 1996, the bid and the ask prices reported for the Units
were $ .03* and $ .08*, respectively.
Warrants
- --------
No ask or bid quotations were reported by the National Quotation Bureau,
Inc. since December, 1989.
*Prices are inter-dealer quotations as reported by the National Quotation
Bureau, Inc., New York, New York, without adjustment for retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
December 31
1996 1995 1994 1993 1992
---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Working Capital $(498,352) $(427,094) $(397,542) $(353,982) $(238,364)
Cash 78 78 811 11,912 577
Marketable Securities 28,765 8,000 0 0 0
Notes Receivable 0 0 0 0 0
Investments in
operating companies 0 0 0 0 0
Total Assets 28,843 8,251 15,887 44,364 62,551
Total Liabilities 527,195 435,345 407,106 375,570 282,780
Shareholders' Equity (498,352) (427,094) (391,219) (331,206) (220,229)
<PAGE>
December 31
1996 1995 1994 1993 1992
---------- --------- ---------- ----------- -----------
Total Operating Revenue $0 $0 $0 $0 $0
Total Operating Exp. 52,328 35,173 60,014 110,976 96,914
Net income (loss) before
equity loss of affiliate (52,328) (35,173) (60,014) (110,976) (96,914)
Equity in net loss of
affiliated company 0 0 0 0 0
Net income (loss) (52,328) (35,173) (60,014) (110,976) (96,914)
Net Income (loss)
per common share ( .00) ( .00) (.00) (.01) (.01)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
- --------------------------------
Working capital at December 31, 1996 was decreased by $71,258 from the
period ended December 31, 1995. This was mainly caused by a net loss of $52,328
and a decrease of $18,930 in the market value of securities available for sale.
On December 2, 1996, the Registrant had a change in its borrowing
arrangements. The Registrant borrowed $325,790 from Dearborn Wheels, Inc. to
repay a note payable to Michigan National Bank. The loan is at prime plus 2%
interest and is secured by all the intangible assets of the Registrant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements required to be furnished hereunder are attached
hereto under Item 14.
Supplementary Financial Schedules for which provision is made in applicable
Regulations of the Securities and Exchange Commission, have been omitted or the
required information is not required under the related instructions, or the
information is presented in the Financial Statements and Notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors and Executive Officers
The following table sets forth the name, address, age and position of each
officer and director of the Registrant:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Term
Name and Address Age Position as Director
- -------------------------- ---------- ------------------- -----------
Thomas W. Itin 62 President and Since
7001 Orchard Lake Rd. Chairman of the Inception
West Bloomfield, MI 48322 Board of Directors
Anthony B. Cashen 60 Secretary, Since
RD 2 Box 203 Treasurer and Inception
Ghent, NY 12075 Director
Robert W. Schwartz 52 Director Since
120 DeFreest Drive March 28, 1991
Troy, NY 12180
</TABLE>
All directors of the Registrant will hold office until their successors
have been elected and qualified or until their death, resignation or removal.
The bylaws of the Registrant provide that the number on the Board of Directors
shall be determined by resolution of the Board of Directors.
The officers of the Registrant are elected at the annual meeting of the
Board of Directors and hold office until their successors are chosen and
qualified or until their death, resignation or removal.
The Registrant is subject to Section 13(a) of the Securities Exchange Act
of 1934 and is therefore not required to identify or disclose information
concerning its significant employees.
There are no family relationships between any director, executive officer
or person nominated or chosen by the Registrant to become a director or
executive officer. Below is a summary description of educational and
professional background of each executive officer and director of the
Registrant.
Thomas W. Itin. Mr. Itin has served as the Chairman and President of the
Board of Directors of the Registrant since inception. Since 1967 Mr. Itin has
also served as the Chairman of the Board and President of TWI International,
Inc., West Bloomfield, Michigan, a firm engaged in providing consulting services
for mergers, acquisitions, financial structuring, new ventures, private
investments, joint ventures, asset management, export/import, training seminars
and executive and professional searches. Mr. Itin is Chairman of the Board and
President of Acrodyne Corporation. Mr. Itin also is Chairman of the Board of
Directors of Ajay Sports, Inc. and Chairman of the Board of Directors and
President of Williams Controls, Inc., both of which are publicly held companies.
Mr. Itin was a co-founder of RDM Sports Group, Inc. (previously known as
Roadmaster Industries, Inc.) in 1987 and served as a Director thereof from
October 1987 until June 1993. From December 1987 until October 1993, Mr. Itin
was an Officer and Director of CompuSonics Video Corporation. Mr. Itin received
a BS degree from Cornell University in 1957 at which time he also attended the
Graduate School of Business. He received his M.B.A. in 1959 from New York
University, New York.
<PAGE>
Anthony B. Cashen. Mr. Cashen has served as the Registrant's Secretary,
Treasurer and Director since inception. He is director of Ajay Sports, Inc., a
publicly held corporation. He also currently is a Managing Partner in Lamalie
Amrop, International, a management consulting and executive recruiting firm in
New York City. Prior to his joining Lamalie (formerly Flanagan & Webster), he
was President and owner of Elliot Hardwood, an integrated lumber manufacturer
located in upstate New York. Previously, Mr. Cashen had been an officer and
Principal of the investment firms of A.G. Becker, Inc. and Donaldson, Lufkin &
Jenrette, Inc. He serves as Director of PW Communications and Immucell
Corporation, both of which are publicly-held companies. Mr. Cashen is also
President of the Sagamore Institute. Mr. Cashen has an M.B.A. from the Graduate
School of Management (1958) and a B.S. degree from Cornell University.
Robert W. Schwartz Mr. Schwartz has served as Director of the Registrant
since March 28, 1991. Since 1985 he has been Chairman and President of Schwartz,
Gordon, Heslin & Associates, Inc., a management and financial consulting firm in
Troy, New York. From 1987 until 1991 he was a Director and Vice President and
Treasurer of ESARCO International, Inc., a publicly held company which licenses
and markets all-terrain trucks. Previously Mr. Schwartz was President and
Director of Winsources, Inc., a telephone equipment supplier, President and
Director of Cordian Corporation of Latham, New York, a telephone equipment
manufacturer, and Vice President of Finance of Garden Way Manufacturing Company,
Inc., a manufacturer of rototillers and outdoor equipment. Mr. Schwartz received
a B.S. degree in industrial and labor relations from Cornell University and did
graduate work at State University of New York at Albany.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The Registrant reimburses its directors for expenses incurred by them in
connection with business performed on the Registrant's behalf, including
expenses incurred in attending meetings. In addition, directors receive a fee of
$250 for each Board of Directors meeting attended. No such reimbursements were
made for the period from January 1, 1990 to December 31, 1996. While none of the
officers received any salary, such individuals are reimbursed for all
accountable expenses incurred on behalf of the Registrant.
See Item 13 - Certain Business Relationships and Related Transactions under
Acrodyne Corporation for additional information.
The Registrant has no defined benefit and actuarial plan providing for
payments to employees upon retirement. The Registrant also has no plans for
awarding stock options. No other compensation was paid to officers or directors
of the Registrant from January 1, 1990 to December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains information as of March 31, 1997 with respect
to beneficial ownership of the Registrant's Common stock by each person known by
the Registrant to be the beneficial owner of more than five percent thereof, by
the executive officers and directors of the Registrant and by all executive
officers and directors of the Registrant as a group:
Common Stock
Beneficially Percent
Owned (1) of Class
------------------ ---------
Thomas W. Itin 7,407,073 (2)(3)(4) 54.9%
Anthony B. Cashen 400,000 (4) 3.3%
Robert W. Schwartz 100,000 (4) .8%
Officers and Directors 7,907,073 (3) 59.0%
as a group (3 persons)
James T. Emerson 695,000 5.7%
221 E. Colonial Drive
Orlando, FL 60605
<PAGE>
(1) Without giving effect to the exercise of outstanding Warrants except as
noted in footnote 4 below.
(2) These shares are held of record by entities of which Mr. Itin is either
a principal or a beneficiary.
(3) Includes 300,000 shares held by Mr. Itin's wife, Shirley B. Itin,
either as beneficiary or custodian, of which Mr. Itin disclaims any beneficial
ownership.
(4) These shares include warrants granted on June 3, 1992 expiring December
4, 1997, to purchase one share of common stock per warrant for $.04. (Thomas W.
Itin, 1,000,000, Anthony B. Cashen, 200,000, Robert W. Schwartz, 100,000)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others.
- ----------------------------------------
None of the Registrant's officers and directors devote their full time to
the Registrant's affairs and such persons may be affiliated with other business
entities and enterprises, some of which may be formed for similar purposes as
the Registrant and thus be in direct competition with the Registrant. Such
activities may result in such persons being exposed to conflicts of interests
from time to time. The Registrant has adopted no conflict of interest policy
with respect to such transactions. However, the officers and directors of the
Registrant recognize their fiduciary obligation to treat the Registrant and its
shareholders fairly in any such future activities.
Certain Business Relationships.
- -------------------------------
In the Registrant's last full fiscal year the Registrant made payments for
property and services in excess of five percent of the Registrant's consolidated
gross revenues to Acrodyne, a company whose Chairman, President and major
stockholder of the Registrant. The Board of Directors of the Registrant has
reviewed and approved the use of Acrodyne and has determined that the fees
charged the Registrant by Acrodyne are as favorable as could be incurred by any
other independent, third party business consultant. It is anticipated that the
Registrant will continue to utilize Acrodyne in the future. The total sum which
the Registrant paid Acrodyne for the year ended December 31, 1996 was $5,138 for
the above mentioned consulting services and out-of-pocket travel expenses, staff
time spent for accounting, record keeping, and utilities, but did not include
fees for services of the Chairman.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The Financial Statements are listed in the "Index to Financial Statements"
filed as part of this Annual Report, on page F-2.
(a) (2) Financial Statement Schedules
Supplementary Financial Schedules for which provision is made in applicable
Regulations of the Securities and Exchange Commission, have been omitted or the
required information is not required under the related instructions, or the
information is presented in the Financial Statements and Notes thereto.
Pursuant to the provisions of Rule 3-09 of Regulation S-X, the Registrant
is required to file separate audited financial statements of its equity basis
investee, Ajay Sports, Inc. ("Ajay"). Ajay's audited financial statements for
December 31, 1996 are filed within this report.
(a) (3) Exhibits
The Articles of Incorporation and By-Laws of the Corporation are
incorporated by reference to the Registrant's Registration Statement on Form
S-18, effective December 16, 1987.
(b) Reports on Form 8-K.
A Form 8-K was filed on June 20, 1996 regarding the extension of the
expiration date of the Registrant's warrants from July 25, 1996 to July 25,
1997. A Form 8-K was filed on December 2, 1996 to extend the exercise period of
the Registrant's warrants issued to its directors from December 4, 1996 to
December 4, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of 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, thereto duly authorized.
LBO CAPITAL CORP.
(Registrant)
By: s\Thomas W. Itin
------------------------
Thomas W. Itin,
President
By: s\Frances Bucholz
-------------------------
Frances Bucholz,CPA,
Controller
Date: April 14, 1997
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 and in the capacities indicated on the (date)
Signature Title
- --------------------- ------------------------------
s\Thomas W. Itin Chairman of the Board of Directors,
- ---------------------
Thomas W. Itin Chief Executive Officer and President
s\Anthony B. Cashen Secretary, Treasurer and Director
- ---------------------
Anthony B. Cashen
s\Robert W. Schwartz Director
- ---------------------
Robert W. Schwartz
<PAGE>
LBO CAPITAL CORP.
TABLE OF CONTENTS
-------------------
Page
---------
Independent Auditor's Report
Financial Statements:
Balance Sheets ...................................................... F2
Statements of Operations ............................................. F3
Statements of Changes in Stockholders' Deficit ....................... F4
Statements of Cash Flows ............................................. F5
Notes to Consolidated Financial Statements .......................... F6-F10
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
LBO Capital Corp.
We have audited the accompanying balance sheets of LBO Capital Corp. as of
December 31, 1996 and 1995, and the related statements of operations, changes in
stockholders' deficit, and cash flows for the years ended December 31, 1996,
1995 and 1994. 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 audits 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 account 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 financial position of LBO Capital Corp. as of
December 31, 1996 and 1995 and the results of its operations and its cash flows
for the years ended December 31, 1996, 1995 and 1994 in conformity with
generally accepted accounting principles.
Hirsch & Silberstein, P.C.
Farmington Hills, Michigan
March 25, 1997
F1
<PAGE>
LBO CAPITAL CORP.
BALANCE SHEETS
As of December 31, 1996 and 1995
ASSETS 1996 1995
------------- -------------
Current Assets
Cash and Equivalents $ 78 $ 78
Marketable Securities - Available for Sale 28,765 8,000
Prepaid Expenses -0- 173
------------- -------------
Total Current Assets 28,843 8,251
Equipment, Net of Accumulated Depreciation
of $8,639 and $81,395 at December 31, 1996
and 1995 respectively -0- -0-
Other Assets
Investments -0- -0-
------------- -------------
Total Assets $ 28,843 $ 8,251
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts Payable $ 3,703 $ 4,414
Accounts Payable - Related Entities 960 2,620
Notes Payable - Other 501,791 99,801
Notes Payable - Bank -0- 325,000
Accrued Expenses and Taxes 20,741 3,510
-------------- ------------
Total Current Liabilities 527,195 435,345
Stockholders' Deficit
Common Stock, $.0001 Par Value
Authorized 100,000,000 Shares:
Issued and Outstanding 12,100,000
in 1996 and 1995 1,210 1,210
Additional Paid-In Capital 623,094 623,094
Unrealized (Loss) on Available for Sale
Securities (19,632) (702)
Accumulated Deficit (1,103,024) (1,050,696)
--------------- ------------
Total Stockholders' Deficit (498,352) (427,094)
--------------- ------------
Total Liabilities and Stockholders' Deficit 28,843 8,251
=============== ============
The accompanying notes are an integral
part of this financial statement
F2
<PAGE>
LBO CAPITAL CORP.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994
------------- ------------ ------------
Revenues $ -0- $ -0- $ -0-
------------- ------------ ------------
Expenses
Professional Services 3,351 (15,834) 12,730
Management Fees 3,410 4,780 6,537
Depreciation and Amortization -0- 6,323 16,453
Interest Expenses 44,651 38,629 29,133
Other Expenses 916 1,275 1,286
(Gain) on Disposal of Fixed Assets -0- -0- (6,125)
------------- ------------ ------------
Total Expenses 52,328 35,173 60,014
------------- ------------ ------------
Loss before Income Taxes (52,328) (35,173) (60,014)
Income Tax Expense -0- -0- -0-
------------- ------------ ------------
Net Loss $ (52,328) $ (35,173) $ (60,014)
============= ============ ===========
Net Loss Per Share $ (0.00) $ (0.00) $ (0.00)
============= ============ ===========
Weighted Average Number of 12,100,000 12,100,000 12,100,000
Common Shares Outstanding ============= ============ ===========
The accompanying notes are an integral
part of this financial statement
F3
<PAGE>
<TABLE>
<CAPTION>
LBO CAPITAL CORP.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Years Ended December 31, 1996, 1995, and 1994
Unrealized
(Loss) on
Additional Available Total
Common Stock Paid-In Accumulated For Sale Stockholders'
Shares Amount Capital Deficit Securities Deficit
---------- -------- ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1993 12,100,000 1,210 623,094 (955,509) -0- (331,205)
Net Loss for the Year
Ended December 31, 1994 -0- -0- -0- (60,014) -0- (60,014)
------------ -------- ----------- ------------ --------- ----------
Balances at
December 31, 1994 12,100,000 $ 1,210 $ 623,094 $ (1,015,523) $ -0- $ (391,219)
Net Loss for the Year
Ended December 31, 1995 -0- -0- -0- (35,173) (702) (35,875)
------------ -------- ----------- ------------ --------- ----------
Balances at
December 31, 1995 12,100,000 $ 1,210 $ 623,094 $ (1,050,696) $ (702) $ (427,094)
Net Loss for the Year
Ended December 31, 1996 -0- -0- -0- (52,328) (18,930) (71,258)
------------ --------- ----------- ----------- --------- ----------
Balances at
December 31, 1996 12,100,000 $ 1,210 $ 623,094 $ (1,103,024) $ (19,632) $ (498,352)
============ ========== =========== =========== ========= ==========
The accompanying notes are an integral
part of this financial statement
F4
</TABLE>
<PAGE>
LBO CAPITAL CORP.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Cash Flow From Operating Activities
Net Loss $ (52,328) $ (35,173) $ (60,014)
------------- ------------- ------------
Adjustment to Reconcile Net Loss to
Net Cash Provided by (Used For)
Operating Activities
Depreciation and Amortization -0- 6,323 16,453
Accounts Receivable - Other -0- -0- 9,625
Prepaid Expenses and Deposits 173 (122) -0-
(Decrease) Increase In:
Accounts Payable (2,371) (29,849) 2,908
Accrued Expenses and Taxes 17,231 (18,660) 22,642
------------- ------------- ------------
Total Adjustments 15,033 (42,308) 51,628
------------- ------------- ------------
Net Cash Used For Operations (37,295) (77,481) (8,386)
------------- ------------- ------------
Cash Used For Investing Activities
Purchase of Marketable Securities (39,695) -0- (8,702)
------------- ------------- ------------
Net Cash Used For
Investing Activities (39,695) -0- (8,702)
------------- ------------- ------------
Cash Provided by (Used For) Financing
Activities
Payments on Notes - Related -0- (5,953) (343,647)
Payments on Notes - Bank (325,000) -0- (342,066)
Payments on Notes - Other -0- (242,299) -0-
Proceeds from Notes - Other 401,990 -0- 342,100
Proceeds from Notes - Related -0- -0- 349,600
Proceeds from Notes - Bank -0- 325,000 -0-
------------- ------------- ------------
Net Cash Provided By (Used For)
Financing Activities 76,990 76,748 5,987
------------- ------------- ------------
Decrease in Cash and Equivalents 0 (733) (11,101)
Cash and Equivalents at Beginning of Year 78 811 11,912
------------- ------------- ------------
Cash and Equivalents at End of Year $ 78 $ 78 $ 811
============= ============= =============
</TABLE>
The accompanying notes are an integral
part of this financial statement
F5
<PAGE>
LBO CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
--------------------------------
Note 1. Summary of Significant Accounting Policies
Organization and Business
LBO Capital Corp. (the "Company") was incorporated on October 8, 1987
under the laws of the State of Colorado. The Company is engaged in
evaluating and investing in other companies. The Company was considered to
be in the development stage in 1987 and began operations on March 15, 1988.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less cash equivalents.
Equipment and Depreciation
Equipment is stated at cost. Depreciation is computed for financial
reporting purposes on a straight-line basis over an estimated life of 5
years. Depreciation expense for the years ended December 31, 1996, 1995 and
1994 was $0, $6,323 and $16,453 respectively. At December 31, 1995, the
remaining computer equipment that was previously leased to an investee was
determined to be obsolete and written off the books of the Company.
Income Taxes
At December 31, 1996, the Company has a net operating loss available
for carryforward totaling approximately $845,329. The operating loss
carryforward expires in various amounts by the year ended December 31,
2011.
F6
<PAGE>
Net Loss Per Share
Net loss per share is computed using weighted average shares
outstanding without giving effect to the common stock warrants, as the
effect would be antidilutive.
Note 2. Marketable Securities
The Company's marketable securities available for sale are recorded at
fair market value.
Market Value
--------------------------------------------
Investment Per Share Aggregate
1996
----
Enercorp, Inc. $ 48,397 $ 1.875 $ 28,765
1995
----
Enercorp, Inc. $ 8,702 $ 1.875 $ 8,000
Note 3. Receivables
Other
In June 1994, the Registrant received payment from an insurance
company for the theft of computer equipment in 1991 in the amount of
$15,750, which resulted in a $6,125 gain on disposal of fixed assets.
Note 4. Investments
On April 3, 1989, the Company acquired an aggregate of 1,880,000
restricted common shares of Ajay Sports, Inc. ("Ajay") for a total purchase
price of $182,000. As a result of recording the Company's equity in net
losses of Ajay, the carrying value of this investment is zero at December
31, 1996 and 1995. The Company also obtained 200,000 stock warrants of Ajay
at that time. Each warrant enables the Company to purchase one share of
Ajay common stock at $2.40 and was subsequently reduced to $.34 per share.
These warrants expire June 13, 1999.
F7
<PAGE>
In March 1991, the Company pledged 400,000 shares of its Ajay
investment as security for bank loans to an acquisition candidate. On June,
1, 1991, the bank declared the loan in default and foreclosed on the
shares.
All of the Ajay shares are pledged as security for a note payable (see
note 5).
The stock of Ajay is traded over-the-counter and is reported by the
National Quotation Service. The following table sets forth the range of
high and low bid and ask quotations.
BID ASK
------------------ -----------------------
HI LOW HI LOW
------- ------- ------- ---------
1996
- ----
First Quarter $ .72 $ .38 $ .75 $ .44
Second Quarter $ .69 $ .38 $ .75 $ .44
Third Quarter $ .44 $ .31 $ .50 $ .38
Fourth Quarter $ .38 $ .25 $ .44 $ .28
Note 5. Notes Payable - Other
During 1996, the Company borrowed $401,990 from Dearborn Wheels, Inc. The
proceeds were used to repay a note to the bank (see note 6) and to meet current
operating needs.
This note bears interest of prime plus 2%, matures on May 24, 1997 and is
secured by all the assets of the Company.
Note 6. Note Payable - Bank
On December 2, 1996, the Company borrowed $325,790 from Dearborn Wheels,
Inc. to repay Michigan National Bank (see note 5).
F8
<PAGE>
Note 7. Capital Stock
The Company completed a public offering on March 15, 1988 consisting of
3,000,000 units at $.20 each. Each unit consisted of one common share, one
callable class A common stock purchase warrant,, one callable Class B common
stock purchase warrant and one callable Class C common stock purchase warrant.
Each Class A warrant entitles the warrant holder to purchase one share of common
stock for $.50, each Class B warrant entitles the warrant holder to purchase one
share of common stock for $.75, and each Class C common stock purchase warrant
entitles the warrant holder to purchase one share of common for $1.00. The Class
A, B and C warrants were originally exercisable within twelve, eighteen and
twenty-four months respectively, from February 26, 1988. All warrants have been
extended until July 25, 1997. As of December 31, 1996, no warrants had been
exercised. The Company has the right to call any or all warrants at a redemption
price of $.0001 per warrant.
On June 3, 1992 the Company issued 3,000,000 shares of its common stock,
valued at $.04 per share (fair market value on that date, per the National
Quotation Bureau, Inc.), to an officer and director in exchange for a reduction
of $120,000 in a note to a related company.
The Company granted to its directors a total of 1,300,000 warrants,
expiring December 4, 1997. Each warrant enables the owner to purchase one share
of common stock for $.04 per share.
Note 8. Management Fees
The Company does not employ any personnel. Per a management fee agreement
with Acrodyne Corporation, a related entity, the Company pays direct labor costs
plus overhead for management services rendered.
F9
<PAGE>
Note 9. Cash Flows Disclosure
Interest and income taxes paid for the years ended December 31, 1996, 1995
and 1994 were as follows:
1996 1995 1994
--------- --------- -----------
Interest $ 27,420 $ 57,878 $ 6,374
======== ======== ===========
Income Taxes $ -0- $ -0- $ -0-
======== ======== ===========
F10
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Ajay Sports, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Ajay
Sports, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. We have also
audited the related consolidated financial statement schedules listed in the
index in Item 14 of this Form 10-K for each of the three years in the period
ended December 31, 1996. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits.
Those standards require that we plan and perform the audits 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 and financial statement schedules
referred to above present fairly, in all material respects, the financial
position of Ajay Sports, Inc. and Subsidiaries as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
\s\Hirsch & Silberstein, P. C.
Hirsch & Silberstein, P.C.
Farmington Hills, Michigan
April 14, 1997
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
as of December 31, 1996 and 1995
(in thousands, except share amounts)
December 31, December 31,
1996 1995
----------- -----------
ASSETS
Current assets:
Cash $ 64 $ 362
Accounts receivable, net of allowance
of $140 and $287, respectively 5,274 5,196
Inventories 7,957 8,909
Prepaid expenses and other 362 365
Deferred tax benefit 363 102
----------- -----------
Total current assets 14,020 14,934
Fixed assets, net 1,822 1,888
Other assets 320 236
Deferred tax benefit 756 106
Goodwill 1,709 1,322
----------- -----------
Total assets $ 18,627 $ 18,486
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to affiliates $ 885 $ -0-
Notes payable to banks 6,104 5,793
Current portion of capital lease 9 6
Accounts payable 3,107 2,181
Accrued expenses 567 631
----------- -----------
Total current liabilities 10,672 8,611
Notes payable - long term 5,213 5,111
Stockholders' equity:
Preferred stock - 10,000,000 shares authorized
Series B, $0.01 par value, 12,500
shares outstanding at liquidation value 1,250 1,250
Series C, $10.00 par value, 296,170
and 313,790 shares outstanding at
stated value, respectively 2,962 3,138
Common stock, $0.01 par value, 100,000,000
shares authorized, 23,274,039 and
23,337,746 shares outstanding, respectively 233 234
Additional paid-in capital 9,313 9,123
Accumulated deficit (11,016) (8,981)
----------- -----------
Total stockholders' equity 2,742 4,764
----------- -----------
Total liabilities and stockholders' equity $ 18,627 $ 18,486
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
for the years ended December 31, 1996, 1995 and 1994
(in thousands, except per share amounts)
Year Ended
--------------------------------------
December 31, December 31, December 31,
1996 1995 1994
----------- ---------- ----------
Operating data:
Net sales $ 24,341 $ 18,728 $ 12,899
Cost of sales 20,759 15,291 12,291
----------- ---------- -----------
Gross profit 3,582 3,437 608
Selling, general and
administrative expenses 5,067 3,247 2,747
----------- ---------- -----------
Operating income (loss) (1,485) 190 (2,139)
----------- ---------- -----------
Nonoperating income (expense):
Interest expense - net (1,103) (801) (614)
Gain (loss) on disposition of investment -0- -0- (38)
Other, net (38) (41) (289)
----------- ---------- -----------
(1,141) (842) (941)
----------- ---------- -----------
Income (loss) before income taxes (2,626) (652) (3,080)
Income tax expense (benefit) (893) (208) -0-
----------- ---------- -----------
Net loss $ (1,733) $ (444) $ (3,080)
=========== ========== ===========
Net loss per share $ (0.09) $ (0.03) $ (0.27)
=========== ========== ===========
Weighted average common and common stock
equivalent shares outstanding 23,242 22,722 12,218
=========== ========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994
(in thousands, except shares)
<S> <C> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Add'l Total
--------------- ------------------ Paid-In Accum Stockholders'
Shares Amount Shares Amount Capital (Deficit) Equity
------- ------ -------- ------ ---------- ------- ------------
Balance at January 1, 1994 29,500 $ 2,950 8,824,773 $ 88 $ 4,246 $ (5,321) $ 1,963
Common stock issued to fund
acquisition - - 1,500,000 15 685 - 700
Common stock issued in lieu of
wages to officer - - 150,000 2 50 - 52
Preferred stock converted into
common stock (17,000) (1,700) 5,000,040 50 1,650 - -
Common stock issued to
affiliate to reduce debt - - 4,117,647 41 1,359 - 1,400
Common stock sold to affiliate- - - 2,941,177 29 971 - 1,000
Net loss - - - - - (3,080) (3,080)
------- ------ ---------- ------ ---------- ------- ---------
Balances at December 31,1994 12,500 1,250 22,533,637 225 8,961 (8,401) 2,035
Common stock issued to ESOP - - 12,000 - 4 - 4
Stock issued to fund acquisition - - 895,054 9 572 - 581
Common stock issued to affiliate
for acquisition services - - 100,000 1 37 - 38
Common stock issued in lieu of
wages to officer - - 34,000 1 9 - 10
Preferred stock public offering 325,000 3,250 - - (386) - 2,864
Preferred stock converted into
common stock (11,210) (112) 163,055 2 110 - -
Common shares received as
an acquisition cost adjustment - - (400,000) (4) (184) - (188)
Dividends - - - - - (136) (136)
Net loss - - - - - (444) (444)
------- ------ ---------- ------ ---------- ------- ------------
Balances at December 31, 1995 326,290 4,388 23,337,746 234 9,123 (8,981) 4,764
Common shares received as an
acquisition incentive adjustent - - (350,000) (3) 4 - -
Preferred stock converted into
common stock (17,620) (176) 256,293 2 174 - -
Stock option exercise - - 30,000 - 12 - 12
Dividends - - - - - (301) (301)
Net loss - - - - - (1,733) (1,733)
------- ------ ---------- ----- ---------- ------- ------------
Balances at December 31, 1996 308,670 $4,212 23,274,039 $ 233 $ 9,313 $(11,015 $ 2,742
======= ====== ========== ====== ========== ======= ============
<FN>
The accompanying notes are an integral part of the consolidated financial statements
</FN>
</TABLE>
F-4
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
--------- -------- --------
Cash flows from operating activities:
Net loss $ (1,733)$ (444) $ (3,080)
Adjustments to reconcile to net cash flows
from operating activities:
Loss on sale of assets 6 -0- 162
Depreciation and amortization 366 219 129
Stock issued to officer and employees -0- -0- 52
(Increase) decrease in accounts receivable, net (78) (3,496) 299
(Increase) decrease in inventories 952 (3,123) 1,662
(Increase) in deferred tax benefits (911) (208) -0-
(Increase) decrease in prepaid expenses 3 (154) (112)
(Increase) decrease in other assets (84) (66) 22
Increase (decrease) in accounts payable 945 852 (1,530)
Increase (decrease) in accrued expenses (64) 141 18
(Decrease) in due to affiliates -0- -0- (240)
--------- -------- --------
Net cash provided by (used in) operating activities (598) (6,279) (2,618)
--------- -------- --------
Cash flows from investing activities:
Acquisitions of property plant and equipment (276) (787) (115)
Goodwill associated with acquisitions (387) (1,329) -0-
Proceeds from sale of equipment -0- 5 4
Disposal of equipment (29) -0- -0-
Proceeds from sale of investment -0- -0- 86
--------- -------- --------
Net cash (used in) investing activities (692) (2,111) (25)
--------- -------- --------
Cash flows from financing activities:
Cash acquired in acquisitions -0- -0- 2
Proceeds from issuance of notes payable to affiliates 885 -0- 6,770
Net increase (decrease) in bank notes payable 396 10,777 (5,026)
Payments on notes payable - affiliate -0- (5,369) -0-
Dividends paid (301) (58) -0-
Proceeds from preferred stock offering,
net of related costs -0- 2,864 -0-
Stock issued in acquisitions -0- 433 -0-
Proceeds from private placements, net of related costs -0- -0- 1,000
Stock options exercised 12 -0- -0-
--------- -------- --------
Net cash provided by financing activities 992 8,647 2,746
-------- -------- --------
Net increase (decrease) in cash (298) 257 103
Cash at beginning of period 362 105 2
--------- -------- --------
Cash at end of period $ 64 $ 362 $ 105
========= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F -5
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Ajay Sports, Inc. ("Sports") and its wholly-owned operating
company subsidiaries, Ajay Leisure Products, Inc. ("Ajay"), Leisure Life,
Inc. ("Leisure"), and Palm Springs Golf, Inc. ("Palm Springs"),
collectively referred to herein as the "Company". The inventories and fixed
assets purchased from Korex Corporation on October 2, 1995 have been merged
with Ajay Leisure Products, Inc. All significant intercompany balances and
transactions have been eliminated.
INVENTORIES - Inventories are stated at the lower of cost or market with
cost determined using the first-in, first-out method.
FIXED ASSETS - Fixed assets are stated at cost, less accumulated
depreciation of $864,000 and $545,000 as of December 31, 1996 and 1995
respectively. Fixed assets of the Company consist primarily of machinery
and equipment, office equipment, and a building. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets, which range from four to thirty-nine years.
GOODWILL - The Company has recorded goodwill as a result of the
acquisitions of Palm Springs and Korex. The goodwill is being amortized
over forty years. Amortization expense related to the goodwill was $35,732
for the year ended December 31, 1996.
OTHER ASSETS - Other assets at December 31, 1996 consists of patents and
trademarks held and applied for by Leisure Life and Palm Springs (See Note
8c) and a receivable from Korex at Ajay Leisure. Other assets at December
31, 1995 consists of patents and trademarks held and applied for by Leisure
Life and Palm Springs.
PRODUCT LIABILITY AND WARRANTY COSTS - Product liability exposure is
insured with insurance premiums provided during the year. Product warranty
costs are based on experience and attempt to match such costs with the
related product sales.
REVENUE RECOGNITION - The Company recognizes revenue when goods are
shipped.
INCOME TAXES - Effective January 1, 1992, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences of temporary differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities,
using enacted statutory rates applicable to future years.
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. RELATED PARTY TRANSACTIONS
The Company's related parties include the following:
Roadmaster Industries, Inc. ("Roadmaster") - Prior to June 1989, all the
Company's common stock was owned by Roadmaster and the companies had
common investors. Roadmaster owned all of the Company's preferred stock
prior to the consummation of the Exchange Agreement (described in Note 2
(a) ).
Equitex, Inc. ("Equitex") - Prior to the consummation of the Exchange
Agreement, Equitex owned 189,000 shares of the Company's common stock and
1,100,000 warrants to purchase additional common stock. Additionally,
prior to and at the time of executing the Exchange Agreement, the chairman
of Roadmaster was the president of Equitex.
First Equity Corporation ("First Equity") - First Equity is owned by a
family member of the president, chief executive officer, and chairman of
the Company.
TICO - TICO is controlled by the Company's president, chief executive
officer, and chairman.
Acrodyne Profit Sharing Trust - ("Acrodyne") is a profit sharing trust.
The Company's president, chief executive officer and chairman is trustee
and beneficiary of the trust. The trust acquired 1,176,471 common shares
on October 3, 1994.
Enercorp, Inc. - ("Enercorp") is a business development company engaged in
the business of investing in and providing managerial assistance to
developing companies. The Company's president, chief executive officer,
chairman and principal shareholder is a major shareholder in Enercorp.
Enercorp acquired 1,764,706 common shares on October 3, 1994. In 1995
Enercorp acquired 2,000 shares of series C preferred stock. In 1995
Enercorp also received 100,000 shares of common stock for services
rendered in connection with the Palm Springs acquisition.
Williams Controls, Inc. - ("Williams") - Williams has the same chairman as
the Company, which individual is a major shareholder of each company.
(a) Exchange Agreement
During 1993, the Company entered into an agreement, whereby
Roadmaster and Equitex agreed to substantially divest of all their
interest in the Company by transferring to TICO all of the Company's
outstanding common stock purchase warrants held by them, the
$217,000 principal amount note payable to Roadmaster, the 29,500
shares of the Company's Series A 8% Cumulative Convertible Preferred
Stock and all Roadmaster's outstanding accounts receivable due from
the Company.
<PAGE>
Additionally, Roadmaster agreed to transfer to TICO all marketing
and distribution rights for golf products in Canada, all tooling
exclusively associated with the manufacture of hand-pulled golf
carts, the "Ajay" name and agreed to grant TICO a 10 year exclusive
license for the use of the "Ajay" trademark and trade name.
The Company and TICO agreed to obtain the release and satisfaction
in full of any and all obligation, guarantees and collateral of
Equitex under the revolving credit facility, described in Note 6
including the release of 1,000,000 shares of Roadmaster common stock
owned by Equitex and pledged to a bank as collateral. The Company's
president and TICO further agreed to transfer to Roadmaster all the
Roadmaster common stock purchase warrants held by the Company's
president along with TICO's payment of $200,000 to Roadmaster.
Based upon completion of the Exchange Agreement in 1994 and
refinancing of debt obligations, the Board of Directors of the
Company approved a plan to, at the option of TICO or its assigns,
convert the value of instruments transferred to TICO under the
Exchange Agreement, in whole or in part, into Preferred Stock, which
could be converted to Common Stock of the Company at a price $.34
per share. On October 3, 1994 the Company created a new class of
Series B 8% Cumulative Convertible Preferred Stock and allowed for
its exchange, on a share-for-share basis, with the Company's Series
A Preferred Stock. On that same day, TICO notified the Company that
it wished to exchange the 29,500 shares of Series A Preferred Stock
for 29,500 shares of the newly issued Series B Preferred Stock, as
was permitted under the Certificate of Designations of Rights and
Preferences of the Series B Preferred Stock. On that same day, TICO
notified the Company that it wished to convert 17,000 shares of its
Series B Preferred Stock for 5,040,000 shares of the Common Stock of
the Company, as the Series B Preferred Stock allows for a conversion
rate of 1 share of Series B Preferred Stock for 294.12 shares of the
Company's Common Stock.
(b) Other
In 1994, Equitex earned a fee of $40,000 as a result of the
extension of the revolving credit facility with the bank. As part of
the Exchange Agreement this amount was transferred to TICO and paid
in June, 1994.
First Equity established a letter of credit on behalf of the Company
in December, 1993, which was amended during 1994, totaling $271,200.
This letter was established to purchase inventory. In addition,
First Equity advanced the Company $250,000 during January, 1994
which was repaid in June, 1994.
The Company has agreed to pay Williams 0.5% per annum of the
outstanding U. S. Bank revolving loan balances on a quarterly basis
in consideration for providing its guarantee of
<PAGE>
the revolving loan. This fee was $60,411 for the year ended December
31, 1996 and $18,083 for the year ended December 31, 1995.
The Company's interest expense for Williams was $448,000 for the
year ended December 31, 1995.
In 1995 the Company issued Enercorp 100,000 shares of common stock
for services rendered in connection with the Palm Springs
acquisition.
During 1996 the Company borrowed from affiliated parties by issuing
subordinated notes. As of 12/31/96, the Company owed $885,000 to the
following affiliated parties:
First Equity Corporation, Joseph Giuffre (Former Chairman
of Palm Springs), Tony Cashen (Company
Director), Enercorp, Clarence Yahn (Company Director).
3. INVENTORIES
Inventories consist of the following (in thousands):
December 31,
1996 1995
Raw materials $4,153 $4,608
Work-in-progress 995 1,014
Finished goods 2,809 3,287
----- ------
Total $7,957 $8,909
===== =====
4. INVESTMENT IN AND ADVANCES TO AFFILIATES
A former officer of the Company is an officer of MacGregor, and
MacGregor and the Company have common investors. During the year ended
December 31, 1994 the Company sold its remaining 125,106 shares of MacGregor
for $69,000, resulting in a loss of $38,000.
5. DEBT
On April 14, 1994 the Company was advised by Bank America that the
Second Amended Restated Loan and Security Agreement ("Credit Agreement")
between Bank America and Ajay had been purchased by Roadmaster. On May 5,
1994 Ajay paid Roadmaster in full all outstanding obligations due under its
Credit Agreement and entered into a Loan and Security Agreement ("Loan
Agreement") with Williams for a term loan of up to $7,000,000. The Loan
Agreement required
<PAGE>
monthly interest only payments at the prime rate of First Interstate Bank of
Oregon plus 2%, was originally scheduled to expire on November 4, 1994 and
was extended to May 5, 1995. The terms and conditions of the Loan Agreement
were substantially the same as the prior Credit Agreement with Bank America,
except that the Loan Agreement was a term loan.
The Williams loan was paid on July 25, 1995, when the Company entered
into a Revolving Loan Agreement with United States National Bank of Oregon
("U. S. Bank") for a credit facility of up to $8,500,000. All of the
Company's subsidiaries and Williams guaranteed payment of this credit
facility and the Company and its subsidiaries pledged their inventory and
receivables as collateral. The Revolving Loan is evidenced by demand notes,
requires monthly interest only payments at the prime rate of U. S. Bank
(currently 8.50% as of March 26, 1997) and will be reviewed on June 30,
1997. On October 2, 1995 the Company and U. S. Bank agreed to modifications
to the Revolving Loan Agreement increasing the credit facility from
$8,500,000 to $13,500,000. The Company was permitted to borrow up to
$8,500,000 against 80% of eligible accounts receivable and 50% of eligible
inventory and up to an additional $5,000,000 through its 2-year bulge loan
facility. The increased facility provided the Company the funds necessary
to acquire certain assets of both Korex Corporation and Palm Springs Golf
Company, Inc. in early October, 1995. The Company is required to maintain a
minimum tangible net worth of $2,500,000 and a debt leverage ratio of not
greater than 6.0 to 1. The adverse operating results of Palm Springs Golf
subsequent to its acquisition has used approximately $2.0 million of the
Company's liquidity. This resulted in U. S. Bank advising the Company that
the Company was in noncompliance with certain covenants under its loan
agreement and the bank restricted the funds available to Ajay under the
agreement. Ajay operated until February 12, 1997 on a revolver limit of
$8.5 million. On February 12, 1997 U. S. Bank reduced the line to a $7.0
million maximum facility. The Company has continued to make all interest
payments on time and has operated within the limit amounts contained in the
old and new facility lines. This caused the Company to rely on extended
credit terms from its venders and additional funds from affiliated parties.
On April 14, 1997 U. S. Bank agreed to waive the existing default and
restructure the line to its former $8.5 million limit although requiring a
$500,000 term loan payment in June, less favorable formula borrowing rates
and an increased interest rate. The restructured facility will terminate by
June 30, 1997.
The Company has worked with banks and other lending institutions in
seeking sufficient asset based financing to cover its needs through 1998.
The Company believes that it will be able to put new financing in place by
June 30, 1997.
The Company has agreed to pay Williams 0.5% per annum of the
outstanding Revolving Loan balance on a quarterly basis in consideration
for providing its guarantee of the Revolving Loan. Guarantee fees paid
Williams were $60,411 in 1996 and $18,083 in 1995.
<PAGE>
The Company's U. S. Bank borrowings consisted of the following:
December 31,
1996 1995
Revolving credit facility:
Balance $11,103,844 $10,792,706
Interest rate 8.25% 8.25%
Unused amount of facility $2,396,156 $ 2,707,294
Average amount outstanding
during the period 11,059,660 $ 9,758,991
Weighted average interest
rate 8.25% 8.72%
Maximum amount outstanding
during the period 13,481,108 $10,936,687
Outstanding commercial letters of credit totaled approximately $322,000
and $717,000 at December 31, 1996 and 1995 respectively.
Other 12/31/96 borrowings consist of $885,000 from affiliated parties
and a $195,609 real estate loan.
Debt payments are as scheduled (in thousands):
1997 $16,580
1998 22
1999 22
2000 22
2001 172
2002 and thereafter -
The seasonal nature of the Company's sales creates fluctuating demands
on its cash flow, due to the temporary build-up of inventories in
anticipation of, and receivables subsequent to, the peak seasonal period
which historically has been from February through May of each year. The
Company has relied and continues to rely heavily on its revolving credit
facility for its working capital requirements.
6. INCOME TAXES
As discussed in Note 2, the Company adopted SFAS No. 109 at the
beginning of 1992. There was no cumulative effect of this accounting change
and its adoption had no impact on 1992 net income.
<PAGE>
The actual income tax expense (benefit) differs from the statutory
income tax expense (benefit) as follows (in thousands):
Year Ended December 31,
1996 1995 1994
----- ------ ------
Statutory tax expense
(benefit) at 34% $ (893) $(208) $(1,047)
Utilization of net
operating loss
carry forward - - -
Loss producing no current
tax benefit 896 208 1,047
----- ----- -------
$ - $ - $ -
======== ======= =========
The components of the net deferred tax asset/liability were as follows (in
thousands):
December 31,
1996 1995
Deferred tax asset,
principally accrued
expenses, reserves
and loss carry forwards $ 3,274 $2,339
Deferred tax liability,
principally depreciation and amortization (107) (83)
Valuation allowance (2,048) (2,048)
------ ------
Net $ 1,119 $ 208
====== =======
The Company has assessed its past earnings history and trends, sales
backlog, budgeted sales, and expiration dates of carryforwards and has
determined that it is more likely than not that $987,000 of deferred tax
assets will be realized. The remaining valuation allowance of $2,048,000 is
maintained on deferred tax assets which the Company has not determined to be
more likely than not realizable at this time. The Company will continue to
review this valuation allowance on a quarterly basis and make adjustments as
appropriate.
The Company had net operating loss carry forwards for Federal tax
purposes of approximately $8,501,000 at December 31, 1996, which expire in
varying amounts in the years 2006 through 2011. Operating loss carry
forwards totaling $304,000, $4,735,000, $1,244,000 and $1,752,000 are
available to offset future state taxable income of Sports, Ajay, Leisure
Life and Palm Springs respectively, which expire in varying amounts in the
years 2006 through 2011. Future changes in ownership as defined by section
382 of the Internal Revenue Code, could limit the amount of net operating
loss carryforwards used in any one year.
<PAGE>
7. STOCKHOLDERS' EQUITY
(a) Preferred Stock
On October 3, 1994 the Company created a new class of Series B
8% Cumulative Convertible Preferred Stock and allowed for its
exchange, on a share-for-share basis, with the Company's Series A
Preferred Stock. On that same day, TICO notified the Company that it
wished to exchange the 29,500 shares of Series A Preferred Stock for
29,500 shares of the newly issued Series B Preferred Stock, as was
permitted under the Certificate of Designations of Rights and
Preferences of the Series B Preferred Stock. On that same day, TICO
notified the Company that it wished to convert 17,000 shares of its
Series B Preferred Stock for 5,040,000 shares of the Common Stock of
the Company, as the Series B Preferred Stock allows for a conversion
rate of 1 share of Series B Preferred Stock for 294.12 shares of the
Company's Common Stock.
Cumulative dividends are payable on the Series C Preferred
Stock at any time through December 31, 1997 at an annual rate of
$1.00 per share. The Warrants are redeemable by the Company at $0.5
per Warrant under certain conditions. The terms of these Warrants
are identical to the Company's publicly-held Warrants to purchase
Common Stock. The Company used the $2.8 million of net proceeds for
inventory and accounts receivable financing and to acquire certain
assets of Korex and Palm Springs.
On July 26, 1995 the Company's Registration Statement filed in
connection with an offering of 325,000 shares of Series C 10%
cumulative Convertible Preferred Stock and 325,000 Warrants was
declared effective. The Series C Preferred Stock is convertible into
shares of the Company's Common Stock based on a value of $10.00 for
each Preferred share and $.6875 for the Common.
Dividends on the Series C 10% Cumulative Convertible Preferred
Stock have been paid through the fourth quarter of 1996. The
dividend for the first quarter ended March 31, 1997 has not been
declared. The Company has dedicated all available funds to support
continuing operations of the Company until a new loan facility is in
place.
(b) Stock issued to officers
The Company has a stock incentive plan for officers of the
Company, under which up to 150,000 shares of the Company's stock may
be granted annually. In 1994, the Company issued 150,000 shares of
common stock to an officer in lieu of compensation and in 1995 the
Company issued 34,000 shares. No stock was issued to officers under
this plan in 1996.
<PAGE>
(c) Stock Issued for Acquisitions
On August 1, 1994 the Company reached an agreement in
principle to acquire the outstanding common stock of Leisure Life,
Inc. In exchange for acquiring all the common stock of Leisure Life,
the Company issued 1,500,000 shares of its common stock to the
owners of Leisure Life, with 400,000 of those shares being issued
subject to certain performance requirements being met by Leisure
Life.
In November 1995 the former owner of Leisure Life returned
400,000 shares of stock to the Company and in March 1996 returned
200,000 shares due to not achieving performance requirements. An
additional 150,000 1996 performance incentive shares held in escrow
since March 1996 were returned to the Company in April 1997.
(d) Warrants and Options
A summary of activity related to warrants and options to
purchase Company common stock is as follows:
Warrants and Price
Options Per Share
Balance, January 1, 1994 2,885,970 $ .34 - 1.00
Expired (450,000) .80 - 1.00
Reissued 200,000 .34 (i)
Reissued 94,500 .34 (ii)
Issued to Williams 16,274,754 .34 - 1.00 (iii)
Exercised by Williams (4,117,647) .34 (iv)
Issued to Directors 10,000 .44 (v)
Issued to Employees 840,000 .40 - .80 (vi)
-----------
Balance, December 31, 1994 15,737,577 .34 - 1.00
Issued to employees 295,000 .625 - .6875(vii)
Williams options adjusted (1,046,234) .50 - 1.00 (viii)
Issued - public offering 373,750 1.00 (ix)
Issued to Directors 10,000 .66 (x)
-------------
Balance, December 31, 1995 15,370,093 .34 - 1.00
Exercised by Employees (30,000) .40
Issued to Directors 10,000 .625 (xi)
Issued to Employees 700,000 .40 (xii)
Issued for Acquisition 800,000 .75 - .90 (xiii)
Expired (242,500) .80 - 1.00
-----------
Balance, December 31, 1996 16,607,593 $ .34 - 1.00
(I) Warrants originally issued to Roadmaster in 1990. Transferred to
Acrodyne under the Exchange Agreement, expired and reissued.
(ii) Warrants originally issued to Equitex in connection with the
Company's private placement. Transferred to Acrodyne,
expired and reissued.
(iii) Warrants issued to Williams as consideration for loans to
Ajay Leisure as part of a joint venture implementation
agreement dated May 1994.
(iv) Exercised and applied proceeds ($1,400,000) against debt.
(v) Director stock options of which 6,667 have vested.
(vi) Employee stock options of which 786,250 shares have vested.
(vii) Employee stock options of which 147,500 shares have vested.
(viii) Warrants returned by Williams as consideration for early
loan payoff.
(ix) Public offering of 7/26/95.
(x) Director stock options of which 3,333 have vested.
(xi) Director stock options of which none have vested.
(xii) Employee stock options of which none have vested.
(xiii) Issued to former shareholders of Palm Springs Golf Company,
Inc., a business acquired by the Company in October 1995.
(e) Private Placements
In 1994, the Company issued to related parties, via private
placement, 2,941,177 shares of common stock and received proceeds of
$1,000,000. The Company also issued 4,117,647 shares of common stock to a
related party in exchange for a reduction of debt totaling $1,400,000.
8. MAJOR CUSTOMERS
The Company operates in two lines of business, the manufacture and
distribution of sports equipment and outdoor leisure furniture. The
Company's customers are principally in the retail sales market. The Company
performs ongoing credit evaluations of its customers' financial conditions
and does not generally require collateral.
<PAGE>
Sales to customers which represent over 10% of the Company's net sales
are as follows:
Year ended December 31,
Customer 1996 1995 1994
A 29% 36% 41%
B 14% * *
* Amounts are less than 10% of net sales.
9. BUSINESS SEGMENT REPORTING
The relative contributions to net sales, operating profit and
identifiable assets of the Company's two industry segments for the year
ended December 31, 1996 are as follows (in thousands):
Furniture Golf Corporate Consolidated
--------- ------- --------- ------------
Sales $2,701 $21,640 - $24,341
Operating profit/(loss) (193) (806) (486) (1,485)
Assets 2,512 15,983 - 18,495
Depreciation/Amortization 98 268 - 366
Capital Expenditures 63 213 - 276
10. SPALDING LICENSE AGREEMENT
Ajay has a license from Spalding Sports Worldwide to utilize the
Spalding trademark in conjunction with the sale and distribution of golf
bags, golf gloves, hand pulled golf carts and certain other golf
accessories in the United States. As consideration for this license, Ajay
is required to pay royalties to Spalding based on a percentage of sales,
subject to annual minimums of $500,000 for the year ended June 30, 1995,
and $550,000 for the years ended June 30, 1996 through June 30, 1998. The
current agreement expires June 30, 1998. Other conditions of the agreement
require the Company to expend 2% of sales under the agreement on
advertising and related costs, with 1% remitted to Spalding. The Company
must also maintain a current ratio of 1.0 to 1.0. Approximately 52% of the
Company's 1996 and 53% of 1995 sales were Spalding products.
Royalty expense due Spalding was $480,000, $484,000, and $494,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
11. LEASES
Future aggregate minimum lease payments under noncancelable operating
leases with initial or remaining terms in excess of one year are as
follows (in thousands):
<PAGE>
1997 $ 703
1998 550
1999 527
2000 499
2001 298
2002 and thereafter 145
-------
$2,722
Total rental expense (in thousands) under operating leases (net of
sublease rental income from an affiliate of $8, $13 and $8, respectively)
was $504, $627, and $556 for the years ended December 31, 1996, 1995 and
1994, respectively.
12. NET (LOSS) PER COMMON SHARE
Earnings or loss per share has been computed by dividing net income
or loss, after reduction for preferred stock dividends in 1996 ($301,000),
in 1995 ($136,000) and 1994 ($202,000) by the weighted average number of
common shares outstanding. No exercise of warrants outstanding was assumed
in 1996, 1995, or 1994, since any exercise of warrants would be
antidilutive.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $1,098,819, $762,157, and $607,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
Non cash financing and investing transactions were as follows:
During 1994, 150,000 shares of the Company's common stock were
issued to an officer of the Company in lieu of wages.
In exchange for acquiring in 1994 all of the common stock of
Leisure Life, Inc. the Company issued 1,500,000 shares of its common
stock to the owner of Leisure Life. In November, 1995 the former
owner of Leisure Life surrendered 400,000 shares of the Company's
common stock and in March, 1996 surrendered 200,000 shares of the
Company's common stock due to unmet performance requirements.
During 1994, 4,117,647 shares of the Company's common stock were
issued to a related party in exchange for a reduction in debt
totaling $1,400,000.
In 1995 11,210 preferred stock shares were converted into 163,055
shares of common stock.
<PAGE>
During 1995 the Company issued common stock as follows:
Issued to Shares
--------- -------
Employees 12,000
Fund acquisitions 895,054
Affiliate in lieu of payment for services 100,000
Officer in lieu of bonus 34,000
During 1996, 17,620 preferred stock shares were converted into
256,293 shares of common stock.
In 1996 an employee exercised options to acquire 30,000 common
shares.
14. CONTINGENCIES
The Company is subject to certain claims in the normal course of
business which management intends to vigorously contest. The outcomes of
these claims are not expected to have a material adverse affect on the
Company's consolidated financial position or results of operations.
<PAGE>
Schedule VIII
AJAY SPORTS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1996, 1995, and 1994
(Amounts in Thousands)
Balance Charged to Balance
beginning costs and Deductions at end
expenses expenses (describe) of period
Reserve for Product Warranty:
Year ended:
December 31, 1996 $136 $203 $254 (1) $ 85
December 31, 1995 139 198 201 136
December 31, 1994 112 276 249 139
Allowance for Doubtful Receivables:
Year ended:
December 31, 1996 $287 $ 91 $238 (2) $140
December 31, 1995 101 330 144 287
December 31, 1994 230 62 191 101
Reserve for Inventory Obsolescence:
Year ended:
December 31, 1996 $384 $498 $391 $491
December 31, 1995 430 378 424 384
December 31, 1994 160 430 160 430
Notes:
(1) Represents amounts paid for product warranty claims.
(2) Represents amounts charged off as uncollectible.
<PAGE>
EXHIBIT 21.0
LISTING OF SUBSIDIARIES
SUBSIDIARIES STATE OF INCORPORATION
------------ ----------------------
Ajay Leisure Products, Inc. Delaware
Leisure Life, Inc. Tennessee
Palm Springs Golf, Inc. Colorado
<PAGE>
EXHIBIT 23.0
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements
of Ajay Sports, Inc. and Subsidiaries on Form S-3 Registration No.
333-11365 and Form S-8 of our report dated April 14, 1997, appearing in
this Annual Report on Form 10-K of Ajay Sports, Inc. and Subsidiaries for
the year ended December 31, 1996.
\s\Hirsch & Silberstein, P.C.
- ----------------------------
Hirsch & Silberstein, P.C.
April 14, 1997
1
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