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, 1998 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 (I.R.S. Employer
of organization) 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:
(248) 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, 1998, 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 $97,073 based on the
average of the bid and asked prices on that date ($ .025) 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, 1999. A Form 8-K
was filed on July 20, 1998 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 Manufacturing Company. On July 1, 1991, this
bank declared the loan in default and foreclosed on the shares.
On August 13, 1998, Ajay announced that its board of directors had authorized
the implementation of a 1-for-6 reverse split of the company's common stock,
effective with the commencement of trading on August 14, 1998. The reverse split
was approved by the stockholders of Ajay at the company's annual meeting on May
29, 1998.
Following the reverse split, holders of Ajay's common stock received one new
share of $.01 par value common stock for every six shares of common stock
currently held. Therefore, the number of Ajay shares held by the Company is
246,667. The reverse split also affected the number and exercise price of the
Company's warrants, such that the Company now holds 33,333 warrants entitling it
to purchase one share of Ajay's common stock at $1.08 per share.
The 246,667 common stock and 33,333 warrants owned by the Registrant represented
6.7% of the total shares of Ajay common stock outstanding as of December 31,
1998. The decrease is the result of new shares issued.
Ajay's Common Stock ("AJAY") and Units ("AJAYU") are trading on the Nasdaq Small
Cap and the 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 trade prices for the common stock:
HI LOW
------ ------
1998
----
First Quarter $ 1.50 $ .78
Second Quarter $ 2.28 $ .78
Third Quarter $ 3.78 $ .75
Fourth Quarter $ 1.03 $ .34
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 would 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, 1998, 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.
<PAGE>
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, 1998.
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,
is traded on 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 high and low trade price quotations for the Registrant's Common Stock
during the quarters ended on the dates listed below is as follows:
Trade Prices
------------
HI LOW
------ ------
1997
-----
First Quarter $ .03 $ .06
Second Quarter $ .03 $ .08
Third Quarter $ .03 $ .08
Fourth Quarter $ .03 $ .08
1998
-----
First Quarter $ .035 $ .03
Second Quarter $ .03 $ .025
Third Quarter $ .03 $ .02
Fourth Quarter $ .03 $ .02
On December 31, 1998, the high trade price reported for the Common Stock was $
.03* and the low trade price was $.02*.
As of December 31, 1998, the number of record holders of the Registrant's Common
Stock was 243. 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.
<PAGE>
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 high and low quotations for the Registrant's Units during the quarters ended
on the dates listed below is as follows:
Trade Price
------------
HI LOW
----- ------
1997
-----
First Quarter $ .03 $ .08
Second Quarter $ .03 $ .08
Third Quarter $ .03 $ .08
Fourth Quarter $ .03 $ .08
1998
-----
First Quarter $ .035 $ .03
Second Quarter $ .03 $ .025
Third Quarter $ .03 $ .02
Fourth Quarter $ .03 $ .02
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, 1998, the high and the low prices reported for the Units were $
.03* and $ .02*, 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.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
December 31
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Working Capital $(599,097) $(560,736) $(498,352) $(427,094) $(397,542)
Cash 73 43 78 78 811
Marketable Securities 46,023 24,972 28,765 8,000 0
Notes Receivable 0 0 0 0 0
Investments in
operating companies 0 0 0 0 0
Total Assets 46,023 24,972 28,843 8,251 15,887
Total Liabilities 645,193 585,708 527,195 435,345 407,106
Shareholders' Equity (599,097) (560,736) (498,352) (427,094) (391,219)
December 31
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Total Operating Revenue $0 $0 $0 $0 $0
Total Operating Exp. 59,454 58,549 52,328 35,173 60,014
Net income (loss) before
equity loss of affiliate (59,454) (58,549) (52,328) (35,173) (60,014)
Equity in net loss of
affiliated company 0 0 0 0 0
Net income (loss) (59,454) (58,549) (52,328) (35,173) (60,014)
Net Income (loss)
per common share ( .00) ( .00) ( .00) ( .00) ( .00)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
Working capital at December 31, 1998 was decreased by $38,360 from the period
ended December 31, 1997. This was mainly caused by a net loss of $59,454 and an
increase of $21,094 in the market value of securities available for sale.
On December 2, 1996, the Registrat 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 principal balance as of December 31,
1998, was $514,901. The loan is at prime plus 2% interest and is secured by all
the intangible assets of the Registrant. Dearborn Wheels, Inc. is held in
majority by the Registrant's President's spouse.
<PAGE>
Year 2000 Compliance
- ---------------------
The Company does not anticipate the year 2000 compliance requirements will have
a material impact on earnings. The Company has initiated replacement of the
Company's most significant computer programs with new updates that are warranted
to be year 2000 compliant. Installation of these updates is anticipated to be
completed prior to June 30, 1999. All other programs subject to year 2000
concerns will be evaluated utilizing internal and external resources to
reprogram, replace or test each of them.
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
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:
Term
Name and Address Age Position as Director
- --------------------------------------------------------------------------------
Thomas W. Itin 64 President and Since
7001 Orchard Lake Rd. Chairman of the Inception
West Bloomfield, MI 48322 Board of Directors
Anthony B. Cashen 62 Secretary, Since
RD 2 Box 203 Treasurer and Inception
Ghent, NY 12075 Director
Robert W. Schwartz 54 Director Since
120 DeFreest Drive March 28,
Troy, NY 12180 1991
<PAGE>
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. Mr. Itin was elected
Chairman of the Board and President of the Ajay Sports, Inc. in June of 1993,
and is the largest single stockholder. Mr. Itin has been a director of Williams
Controls, Inc., a publicly held company since its inception in November 1988.
Mr. Itin has been Chairman, President and Owner of TWI International Inc. since
he founded the firm in 1967. Mr. Itin also has been Owner and Principal Officer
of Acrodyne Corporation since 1962. He received a Bachelor of Science degree
from Cornell University and an MBA from New York University.
Anthony B. Cashen. Mr. Cashen has served as the Registrant's Secretary,
Treasurer and Director since inception. He has also served as a director of Ajay
Sports, Inc. since 1993. For more than the past five years, Mr. Cashen has
served as managing partner or senior partner of LAI Ward Howell a publicly
held management consulting and executive recruiting firm located in New York
City. He currently serves as a Director of Immucel Corp., and Williams Controls,
Inc., both publicly held companies. Previously, Mr. Cashen has been an officer
and principal of the investment firms A.G. Becker Inc. and Donaldson, Lukin
and Jenrette, Inc. He received an MBA from the Johnson Graduate School of
Management at Cornell University, and a Bachelor of Science degree fromCornell
University.
<PAGE>
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.
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, 1998. 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, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains information as of March 31, 1998 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:
<PAGE>
Common Stock
Beneficially Percent
Owned (1) of Class
------------------------------------------
Thomas W. Itin 7,717,073 (3)(4) 57.2%
Anthony B. Cashen 400,000 (4) 3.3%
Robert W. Schwartz 100,000 (4) .8%
Officers and Directors 8,217,073 (3) 60.9%
as a group (3 persons)
James T. Emerson 695,000 5.7%
221 E. Colonial Drive
Orlando, FL 32801
(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, 1999, 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.
<PAGE>
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, 1998 was $2,790 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.
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, 1998 are filed within this report.
<PAGE>
(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. Exhibit 27.0 Financial Data Schedule is filed herewith.
(b) Reports on Form 8-K.
A Form 8-K was filed on July 20, 1998 regarding the extension of the expiration
date of the Registrant's warrants from July 25, 1998 to July 25, 1999. A Form
8-K was filed on December 1, 1998 to extend the exercise period of the
Registrant's warrants issued to its directors from December 4, 1998 to December
4, 1999.
<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
& Chief Financial Officer
Date: April 14, 1999
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,
- --------------------- Chief Executive Officer and President
Thomas W. Itin
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, 1998 and 1997, and the related statements of operations, changes in
stockholders' deficit, and cash flows for the years ended December 31, 1998,
1997 and 1996. 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, 1998 and 1997 and the results of its operations and its cash flows
for the years ended December 31, 1998, 1997 and 1996 in conformity with
generally accepted accounting principles.
s/Hirsch Silberstein & Subelsky, P.C.
- -------------------------------------
Hirsch Silberstein & Subelsky, P.C.
Farmington Hills, Michigan
March 23, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
LBO CAPITAL CORP.
BALANCE SHEETS
As of December 31, 1998 and 1997
--------------------------------
ASSETS 1998 1997
------
----------------- ------------------
<S> <C> <C>
Current Assets
Cash and Equivalents $ 73 $ 43
Marketable Securities - Available for Sale 46,023 24,929
----------------- ------------------
Total Current Assets 46,096 24,972
Other Assets
Investments -0- -0-
Total Assets $ 46,096 $ 24,972
================= ==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts Payable $ 3,763 $ 4,202
Accounts Payable - Related Entities 210 1,060
Notes Payable - Other 514,901 506,971
Accrued Expenses and Taxes 126,319 73,475
----------------- ------------------
Total Current Liabilities 645,193 585,708
Stockholders' Deficit
Common Stock, $.0001 Par Value
Authorized 100,000,000 Shares:
Issued and Outstanding 12,100,000
in 1998 and 1997 1,210 1,210
Additional Paid-In Capital 623,094 623,094
Unrealized (Loss) on Available for Sale Securities (2,373) (23,467)
Accumulated Deficit (1,221,027) (1,161,573)
----------------- ------------------
Total Stockholders' Deficit (599,097) (560,736)
----------------- ------------------
Total Liabilities and Stockholders' Deficit 46,096 24,972
================= ==================
The accompanying notes are an integral
part of this financial statement
F2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LBO CAPITAL CORP.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Revenues $ -0- $ -0- $ -0-
------------------ ------------------ -----------------
Expenses
Professional Services 3,659 3,820 3,351
Management Fees 2,790 2,900 3,410
Interest Expenses 52,843 52,735 44,651
Other Expenses 162 (906) 916
------------------ ------------------ -----------------
Total Expenses 59,454 58,549 52,328
------------------ ------------------ -----------------
Loss before Income Taxes (59,454) (58,549) (52,328)
Income Tax Expense -0- -0- -0-
------------------ ------------------ -----------------
Net Loss $ (59,454) $ (58,549) $ (52,328)
=================== =================== =================
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
</TABLE>
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, 1998, 1997, and 1996
Unrealized
(Loss) on
Common Stock Additional Available Total
--------------------------------- Paid-In Accumulated For Sale Stockholders'
Shares Amount Capital Deficit Securities Deficit
------------ ------------ -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
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)
Net Loss for the Year
Ended December 31, 1997 -0- -0- -0- (58,549) (3,835) (62,384)
---------------- -------------- ------------- ---------------- -------------- --------------
Balances at
December 31, 1997 12,100,000 $ 1,210 $ 623,094 $ (1,161,573) $ (23,467) $ (560,736)
COMPREHENSIVE INCOME
Net Loss for the Year
Ended December 31, 1998 -0- -0- -0- (59,454) 21,094 (38,361)
---------------- --------------- ------------ ----------------- -------------- -------------
Balances at
December 31, 1998 12,100,000 $ 1,210 $ 623,094 $ (1,221,027) $ (2,373) $ (599,097)
================ ============== ============= ================= ============== =============
The accompanying notes are an integral
part of this financial statement
F4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LBO CAPITAL CORP.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash Flow From Operating Activities
Net Loss $ (59,454) $ (58,549) $ (52,328)
---------------- ---------------- -----------------
Adjustment to Reconcile Net Loss to
Net Cash Provided by (Used For)
Operating Activities
Depreciation and Amortization -0- -0- -0-
Decrease In:
Prepaid Expenses and Deposits -0- -0- 173
Increase (Decrease) In:
Accounts Payable (440) 499 (2,371)
Accrued Expenses and Taxes 51,994 52,836 17,231
---------------- ---------------- ----------------
Total Adjustments 51,554 53,335 15,033
---------------- ---------------- ----------------
Net Cash Used For Operations (7,900) (5,214) (37,295)
---------------- ---------------- ----------------
Cash Used For Investing Activities
Purchase of Marketable Securities -0- -0- (39,695)
---------------- ---------------- ----------------
Cash Provided by (Used For) Financing Activities
Payments on Notes - Bank -0- -0- (325,000)
Proceeds from Notes - Other 7,930 5,180 401,990
---------------- ---------------- ----------------
Net Cash Provided By
Financing Activities 7,930 5,180 76,990
---------------- ---------------- ----------------
Increase (Decrease) in Cash and Equivalents 30 (35) 0
Cash and Equivalents at Beginning of Year 43 78 78
---------------- ---------------- ----------------
Cash and Equivalents at End of Year $ 73 $ 43 $ 78
================ ================ ================
The accompanying notes are an integral
part of this financial statement
F5
</TABLE>
<PAGE>
LBO CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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 was stated at cost. Depreciation was 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, 1997, 1996 and 1995 was $0, $0 and $0
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, 1998, the Company has a net operating loss
available for carryforward totaling approximately $963,332.
The operating loss carryforward expires in various amounts by
the year ended December 31, 2018.
<PAGE>
LBO CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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
1998
Enercorp, Inc. $48,397 $3.00 $46,023
1997
Enercorp, Inc. $ 48,397 $1.625 $ 24,929
Note 3. 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, 1998 and 1997. The Company also obtained 200,000
stock warrants of Ajay at that time.
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.
<PAGE>
LBO CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
On August 13, 1998, Ajay announced that its board of directors had
authorized the implementation of a 1-for-6 reverse split of the
company's common stock, effective with the commencement of trading on
August 14, 1998. The stockholders of Ajay at the company's annual
meeting on May 29, 1998 approved the reverse split.
Following the reverse split, holders of Ajay's common stock received
one new share of $.01 par value common stock for every six shares of
common stock currently held. Therefore, the number of Ajay shares held
by the Company is 246,667. The reverse split also affected the number
and exercise price of the Company's warrants, such that the Company now
holds 33,333 warrants entitling it to purchase one share of Ajay's
common stock at $1.08 per share. These warrants expire June 13, 1999.
All of the Ajay shares are pledged as security for a note payable (see
note 4).
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 trade prices given quarterly by NASDAQ.
HI LOW
------ ------
1997
First Quarter $ 1.50 $ .78
Second Quarter $ 2.28 $ .78
Third Quarter $ 3.78 $ .75
Fourth Quarter $ 1.03 $ .34
Note 4. Notes Payable
During 1998, the Company borrowed $7,930 from Dearborn Wheels, Inc. The
proceeds were used to meet current operating needs.
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 principal
balance as of December 31, 1998, was $514,901. The loan is at prime
plus 2% interest and is secured by all the intangible assets of the
Registrant. Dearborn Wheels, Inc. is held in majority by the
Registrant's President's spouse. This note bears interest of prime plus
2%, matures on June 20, 1999 and is secured by all the assets of the
Company.
<PAGE>
LBO CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
Note 5. 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, 1999. As of December 31,
1998, 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, 1999. Each warrant enables the owner to purchase
one share of common stock for $.04 per share.
<PAGE>
LBO CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
Note 6. 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.
Note 7. Cash Flows Disclosure
Interest and income taxes paid for the years ended December 31, 1998,
1997 and 1996 were as follows:
1998 1997 1996
---------- ---------- -----------
Interest $ -0- $ -0- $ 27,420
============ ============== ============
Income Taxes $ -0- $ -0- $ -0-
============ ============== ============
Note 8. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Note 9: Year 2000 Compliance
The Company does not anticipate the year 2000 compliance requirements
will have a material impact on earnings. The Company has initiated
replacement of the Company's most significant computer programs with
new updates that are warranted to be year 2000 compliant. Installation
of these updates is anticipated to be completed prior to June 30, 1999.
All other programs subject to year 2000 concerns will be evaluated
utilizing internal and external resources to reprogram, replace or test
each of them.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000753557
<NAME> LBO Capital Corp.
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1
<CASH> 73
<SECURITIES> 46,023
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 46,096
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,096
<CURRENT-LIABILITIES> 645,193
<BONDS> 0
0
0
<COMMON> 1,210
<OTHER-SE> (600,307)
<TOTAL-LIABILITY-AND-EQUITY> 46,096
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 6,611
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,843
<INCOME-PRETAX> (59,454)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (59,454)
<EPS-PRIMARY> (0.00)
<EPS-DILUTED> (0.00)
</TABLE>
<TABLE>
<CAPTION>
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
as of December 31, 1998 and 1997
(in thousands, except share amounts)
ASSETS December 31, December 31,
1998 1997
---------------- ---------------
<S> <C> <C>
Current assets:
Cash $ 6 $ 234
Marketable securities 396 -
Accounts receivable, net of allowance of $95 and $243,
respectively 1,889 5,060
Inventories 5,680 6,398
Prepaid expenses and other 485 304
Deferred tax benefit - 363
----------------
---------------- ---------------
Total current assets 8,456 12,359
Fixed assets, net 1,708 1,723
Other assets 179 106
Deferred tax benefit 1,119 756
Goodwill 1,621 1,670
---------------- ---------------
Total assets $ 13,083 $ 16,614
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable to affiliates $ - $ 160 $
Notes payable to banks 195 107
Current portion of capital lease 4 4
Accounts payable 2,225 3,204
Accrued expenses 380 684
---------------- ---------------
Total current liabilities 2,804 4,159
Notes payable to affiliates - long term 1,587 4,212
Notes payable to banks - long term 5,951 9,017
Commitments and contingencies - -
---------------- ---------------
10,342 17,388
---------------- ---------------
Stockholders' equity (deficit):
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, 264,177 and 296,170 shares
outstanding, respectively at stated value 2,642 2,962
Series D, $0.01 par value, 6,000,000 shares 60 -
Common stock, $0.01 par value, 100,000,000 shares authorized,
3,956,815 and 3,879,007 shares outstanding, respectively 40 233
Additional paid-in capital 14,762 9,313
Accumulated deficit (16,006) (14,532)
Accumulated unrealized losses on securities (7) -
---------------- ---------------
Total stockholders' equity (deficit) 2,741 (774)
---------------- ---------------
Total liabilities and stockholders' equity $ 13,083 $ 16,614
================ ===============
The accompanying notes are an integral part of the
consolidated financial statements.
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
for the years ended December 31, 1998, 1997 and 1996
(in thousands, except per share amounts)
<S> <C> <C> <C>
Year Ended
-----------------------------------------------------------------
December 31, December 31, December 31,
1998 1997 1996
---------------- --------------- ----------------
Operating data:
Net sales $ 22,925 $ 30,330 $ 24,341
Cost of sales 19,477 26,585 20,759
---------------- --------------- ----------------
Gross profit 3,448 3,745 3,582
Selling, general and administrative expenses 3,868 5,837 5,067
---------------- --------------- ----------------
Operating income (loss) (420) (2,092) (1,485)
---------------- --------------- ----------------
Nonoperating income (expense):
Interest expense - affiliates (337) (194) (60)
Interest expense - non-affiliates (802) (1,086) (1,043)
Other, net 84 (144) (38)
---------------- --------------- ----------------
Total non operating expense (1,055) (1,424) (1,141)
---------------- --------------- ----------------
Income (loss) before income taxes (1,475) (3,516) (2,626)
Income tax expense (benefit) - - (893)
---------------- --------------- ----------------
Net loss $ (1,475) $ (3,516) $ (1,733)
================ =============== ================
Basic and diluted earnings per share (a) $ (0.47) $ (1.01) $ (0.55)
================ =============== ================
Weighted average common shares
outstanding (b) 3,909 3,879 3,874
================ ================ ================
Net loss as reported above (1,475) (3,516) (1,733)
Undeclared cumulative preferred dividends (380) (396) (396)
---------------- --------------- ----------------
Loss applicable to common stock $ (1,855) $ (3,912) $ (2,129)
================ =============== ================
(a) Computed by dividing net loss after deducting undeclared,
cumulative preferred stock dividends, by the weighted average
number of common shares outstanding.
(b) Current and prior years restated to reflect result of reverse 1:6
common stock split effective August 14, 1998.
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996 (in thousands, except shares)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total
Preferred Stock Common Stock Add'l Paid-in Accum Unrealized Stockholders'
--------------------- -----------------------
Shares Amount Shares Amount Capital (Deficit) Loss on Secs Equity
----------- --------- ------------ --------- ------------ -------- ------------- -------------
Balances at January 1, 1996 326,290 4,388 3,889,625 $ 234 $ 9,123 $ (8,981)$ - $ 4,764
Common shares received as an
acquisition incentive adjustment - - (58,334) (3) 4 - - -
Preferred stock converted into
common stock (17,620) (176) 42,716 2 174 - - -
Stock option exercise - - 5,000 - 12 - - 12
Dividends - - - - - (301) - (301)
Net loss - - - - - (1,733) - (1,733)
----------- --------- ------------ --------- ------------ -------- -------------- -----------
Balances at December 31, 1996 308,670 4,212 3,879,007 233 9,313 (11,015) - 2,743
Net loss - - - - - (3,516) - (3,516)
----------- --------- ------------ --------- ------------ -------- -------------- -----------
Balances at December 31, 1997 308,670 4,212 3,879,007 233 9,313 (14,531) - (773)
Common stock reverse 1:6 split - - 250 (194) 194 - - -
Other adjustments - - - - (4) - - (4)
Preferred stock converted into
common stock (31,993) (320) 77,558 1 319 - - -
Debt converted into
preferred stock 6,000,000 60 - - 4,940 - - 5,000
COMPREHENSIVE INCOME
Net loss - - - - - (1,475) - (1,475)
Unrealized loss on securities - - - - - - (7) (7)
----------- --------- ------------ --------- ------------ -------- -------------- -----------
Balances at December 31, 1998 6,276,677 $ 3,952 3,956,815 $ 40 $ 14,762 $ 16,006) $ (7) $ 2,741
=========== ========= ============ ========= ============ ======== ============== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996
(in thousands)
<S> <C> <C> <C>
1998 1997 1996
------------ ------------ -------------
Cash flows from operating activities:
Net loss $ (1,475) $ (3,516) $ (1,733)
Adjustments to reconcile to net cash flows from operating
activities:
Loss on sale of assets - 42 6
Depreciation and amortization 381 358 366
(Increase) in investments (396) - -
(Increase) decrease in accounts receivable, net 3,171 214 (78)
Decrease in inventories 718 1,559 952
(Increase) in deferred tax benefits - - (911)
(Increase) decrease in prepaid expenses (181) 58 3
(Increase) decrease in other assets (75) 202 (84)
Increase in accounts payable (979) 97 945
Increase (decrease) in accrued expenses (303) 186 (64)
------------ ------------ -------------
Net cash provided by (used in) operating activities 861 (800) (598)
------------ ------------ -------------
Cash flows from investing activities:
Acquisitions of property plant and equipment (319) (250) (276)
Goodwill associated with acquisitions - - (387)
Disposal of equipment - - (29)
------------ ------------ -------------
Net cash (used in) investing activities (319) (250) (692)
------------ ------------ -------------
Cash flows from financing activities:
Net increase in advances from affiliates 2,215 3,487 885
Net increase (decrease) in bank notes payable (2,978) (2,193) 396
Dividends paid - (74) (301)
Unrealized losses from securities (7) - -
Stock options exercised - - 12
------------ ------------ -------------
Net cash provided by (used in) financing activities (770) 1,220 992
------------ ------------ -------------
Net increase (decrease) in cash (228) 170 (298)
Cash at beginning of period 234 64 362
------------ ------------ -------------
Cash at end of period $ 6 $ 234 $ 64
============ ============ =============
Supplemental schedule of non-cash financing activities:
The Company issued 6,000,000 shares of preferred stock
series D upon the conversion of $5,000,000 of long-term
debt owed to affiliates during 1998. (See Note 12)
The accompanying notes are an integral part of the
consolidated financial statements.
F -5
</TABLE>
<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 hav e 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 $1,329,000 and $1,026,000 as of December 31, 1998 and
1997 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 three to thirty-nine years.
GOODWILL - The Company has recorded goodwill as a result of the 1995
acquisitions of Palm Springs and Korex. The goodwill is being amortized
over forty years. Amortization expense related to the goodwill was
$44,000 for the year ended December 31, 1998. As of each annual
year-end date, management assesses whether there has been an impairment
in the carrying value of goodwill. This assessment involves comparing
the unamortized goodwill carrying value with undiscounted cumulative
estimated future cash flows expected to be derived from utilization of
the intangibles underlying the related goodwill. To the extent that
undiscounted cumulative cashflow is expected to exceed the carrying
value of goodwill, the asset is considered to be unimpaired.
OTHER ASSETS - Other assets at December 31, 1998 and 1997 consist of
patents and trademarks held and applied for by Leisure, and
additionally, at December 31, 1998 a lawsuit judgment.
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.
USE OF 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 and disclosure of contingent 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.
F-6
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
COMMON STOCK - The Company reverse split its common stock in a 1-for-6
ratio effective with commencement of trading on August 14, 1998. As a
result of this transaction, all historic data in the financial
statements which reference common shares, options, earnings per share
or preferred conversion ratios have been restated to reflect this split
as if it preceded all prior reporting. Historic actual common shares
outstanding at December 31, 1997 were 23,274,039 and were restated to
3,879,007 in this report.
2. RELATED PARTY TRANSACTIONS
--------------------------
The Company's related parties include the following:
First Equity Corporation ("First Equity") - First Equity is owned by a
family member of the president, chief executive officer, and chairman
of the Company. First Equity held, at December 31, 1997, demand notes
in the amount of $748,000 as a result of loans made to the company in
1996 and 1997. These notes were assumed by Williams in the financial
restructuring in 1998.
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 significant shareholder in
Enercorp. Enercorp holds 310,787 common shares acquired in 1994 and
1995 and 2,000 shares of series C preferred stock. Enercorp held at
December 31, 1997, demand notes in the amount of $200,000 as a result
of loans made to the Company. These notes were assumed by Williams in
the financial restructuring in 1998.
Williams Controls, Inc. ("Williams") - Williams has the same chairman
as the Company, which individual is a major shareholder of each
company. Williams owns 686,275 shares of the Company's common stock,
1,851,813 common stock options and 6,000,000 shares of Series D
cumulative convertible preferred stock as of December 31, 1998.
During 1996 and 1997 the Company paid Williams 0.50% per annum of the
outstanding revolving loan balances in consideration for providing its
guarantee of a revolving loan from U. S. Bank. Fees totaled $39,750 and
$60,411 for the years ended December 31, 1997 and 1996 respectively.
From July 11, 1997 through June 30, 1998 the Company and Williams
shared a joint and several loan obligation. On June 30, 1998, the
Company restructured its credit facility with Wells Fargo Bank, N.A.
("Wells") to separate its credit facility from that of Williams. As a
result of this transaction, the Company will no longer have joint and
several liability, cross collateral agreements or guarantees with
Williams.
In connection with the restructuring of the Wells credit facility, the
Company was advanced $2,000,000 additional funds by Williams in the
form of a long term note and marketable securities and Williams
converted $5,000,000 of Company debt into a newly created series D
cumulative convertible preferred stock.
F-7
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The Company's interest expense paid to Williams was $346,000 and $194,450
for the years ended December 31, 1998 and 1997 respectively. (See Note 4).
During 1997 and 1996 the Company borrowed from related and affiliated
parties until it obtained bank financing in mid 1997. As of December 31,
1997, the Company owed $4,372,000 to related and affiliated parties at
interest rates ranging from 9.0% to 9.5%. These notes were converted to
preferred stock in 1998. (See Note 4).
3. INVENTORIES
-----------
Inventories consist of the following (in thousands):
December 31,
------------------
1998 1997
------ ------
Raw materials $1,493 $1,499
Work-in-progress 1,052 1,026
Finished goods 3,135 3,873
------ ------
Total $5,680 $6,398
====== ======
4. DEBT
----
On December 31, 1998 the Company's total debt was $7,724,000 owed to banks
and Williams. This compares to $13,479,000 for December 31, 1997 which was
owed banks, Williams and other affiliates. From July 11, 1997 until June
30, 1998 the Company shared in a combined credit agreement with Williams
(the "Joint Loan"). As of June 30, 1998 the Company restructured its
credit facility with Wells to separate from the joint and several credit
facility with Williams. This new credit facility eliminates cross
collateral and guarantee agreements involving the Company and Williams.
The revolving loan facility allows the Company to borrow up to the lesser
of $9,500,000 or the Borrowing Base. The Borrowing Base consists of a
formula including certain eligible receivables, inventories and letters of
credit at rates established by Wells. The present credit agreement matures
June 30, 2001.
The proceeds from the Joint Loan were used to repay the Company's and
Williams then outstanding loans from the previous lender, U. S. Bank,
except for a bridge loan in the total amount of $2,140,000 to the Company
by U. S. Bank. This bridge loan is to be repaid from the sale of assets
and/or excess cash flows of Williams and/or the Company, and is guaranteed
up to $1,000,000 by the Company's president. The balance owed on this
bridge loan at December 31, 1998 is $1,985,000. In connection with the
1998 credit facility restructuring, the Company was advanced $2,000,000 of
additional funds by Williams and Williams converted $5,000,000 of company
debt into preferred stock.
F-8
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The Company's Bank borrowings consisted of the following:
($000)
December 31,
-------------------------
Revolving credit facility: 1998 1997
------ ------
Balance $ 3,467 $ 6,017
Interest rate 8.75% 9.0%
Unused amount of facility $ 350 $ 96
Average amount outstanding
during the period $ 4,997 $ 6,091
Weighted average interest rate 9.1% 9.0%
Maximum amount outstanding
during the period $ 6,771 $ 7,218
Outstanding commercial letters of credit totaled approximately $60,000 and
$526,000 at December 31, 1998 and 1997 respectively.
Other December 31, 1998 debt consisted of $1,587,000 from related and
affiliated parties, a $488,000 machinery and equipment term loan with
Wells Fargo, the $1,985,000 (bridge) term loan with U. S. Bank and a
$197,000 real estate loan.
Debt payments are as scheduled ($000):
1999 $ 216
2000 1,954
2001 5,554 (Term Loans & Revolver)
2002 0
2003 0
2004 and thereafter 0
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.
5. 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.
F-9
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The actual income tax expense (benefit) differs from the statutory income
tax expense (benefit) as follows (in thousands):
Year Ended December 31,
-------------------------
1998 1997 1996
----- ----- -----
Statutory tax expense
(benefit) at 34% $(502) $(1,195) $ (893)
Utilization of net
operating loss
carry forward - - -
Loss producing no current
tax benefit 502 1,195 893
------ ------- -------
$ - $ - $ -
====== ======= =======
The components of the net deferred tax asset/liability were as follows (in
thousands):
December 31,
---------------
1998 1997
----- -----
Deferred tax assets:
Accrued expenses $ 45 $ 42
Reserves 151 329
NOL carryforwards 4,766 4,072
Sub total $4,962 $4,443
Deferred tax liability,
principally depreciation and amortization (99) (97)
Valuation allowance (3,744) (3,227)
------- -------
Net $1,119 $1,119
======= ========
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 $1,119,000 of deferred tax
assets will be realized. The remaining valuation allowance of $3,744,000
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.
F-10
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The Company had net operating loss carry forwards for Federal tax purposes of
approximately $14,018,000 at December 31, 1998, which expire in varying amounts
in the years 2006 through 2018. Operating loss carry forwards totaling
$1,144,000, $4,270,000, $2,139,000 and $727,000 are available to offset future
state taxable income of Sports, Ajay, Leisure Life and Palm Springs Golf
respectively, which expire in varying amounts in the years 2006 through 2018.
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.
6. STOCKHOLDERS' EQUITY
--------------------
(a) Preferred Stock
In October 1994 the Company created its 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.
The holder exchanged 29,500 shares of Series A preferred stock for
29,500 shares of the newly issued Series B preferred stock and
immediately converted 17,000 shares of its Series B preferred stock
for 5,040,000 (840,000 post split) shares of the common stock of the
Company, as the Series B preferred stock allowed for a conversion
rate of 1 share of Series B preferred stock for 294.12 shares of the
Company's common stock. In November 1997, the conversion rate on the
remaining 12,500 Series B shares was revised to 555.56 and after the
1:6 reverse common stock split of August 14, 1998 the conversion
rate as of December 31, 1998 is 92.5926.
In July 1995 the Company sold 325,000 shares of Series C 10%
cumulative convertible preferred stock and 325,000 warrants in a
registered public offering. The Series C preferred stock is
convertible into shares of the Company's common stock at a
conversion rate of 2.42424 common shares for each share of preferred
stock. Cumulative dividends are payable on the Series C preferred
stock at an annual rate of $1.00 per share. The warrants are
redeemable by the Company at $0.05 per warrant under certain
conditions. The terms of these warrants are identical to the
Company's publicly-held warrants to purchase common stock. In 1995
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.
At December 31, 1998, 1997 and 1996, dividends in arrears on the 8%
cumulative convertible preferred Series B stock were $1,006,575
($80.53 per share), $906,575 ($72.53 per share) and $806,575 ($64.53
per share) respectively. Dividends on the Series C cumulative
convertible preferred stock were declared and paid through December
31, 1996. No dividends were declared or paid for 1998 or 1997. At
December 31, 1998 and 1997, dividends in arrears on the 10%
cumulative convertible preferred Series C stock were $576,174 ($2.00
per share) and $296,000 ($1.00 per share). The Company has dedicated
all available funds to support continuing operations of the Company
until sufficient cash availability allows declaration and payment of
dividends.
(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. No stock was issued to officers under this plan in
1996, 1997 or 1998.
F-11
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(c) Stock Issued for Acquisitions
In 1994 the Company acquired the outstanding common stock of Leisure
Life, Inc. for 1,500,000 (post split 250,000) shares of its common
stock to the owner of Leisure Life. During the periods 1995, 1996
and 1997 one half of the originally issued shares were returned to
the Company due to unmet performance requirements.
(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 (i) Per Share (i)
------------ ----------
Balance, January 1, 1996 2,561,683 $ 2.04 - 6.00
Exercised by Employees (5,000) 2.40
Issued to Directors 1,668 3.75 (ii)
Issued to Employees 116,667 2.40 (iii)
Issued for Acquisition 133,334 4.50 - 5.40 (iv)
Expired (40,417) 4.80 - 6.00
----------
Balance, December 31, 1996 2,767,935 $ 2.04 - 6.00
Issued to Employees 8,334 2.40 (v)
Expired (27,500) 2.40 - 3.75
Repriced options (2,151,313) 2.04 - 3.00 (vi)
Repriced options 2,151,313 1.08 (vi)
Balance, December 31, 1997 2,748,769$ 1.08 - 6.00
Expired (122,287) 2.40 -4.125
Issued to Directors 1,668 1.50 (vii)
-----------
Balance, December 31, 1998 2,628,150 $ 1.08 - 6.00
(i) All options were adjusted for the effect of a 1:6 reverse common
stock split effective August 14, 1998.
(ii) Director stock options.
F-12
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(iii) Employee stock options of which 42,917 were vested and 30,834 were
canceled since issuance.
(iv) Issued to former shareholders of Palm Springs Golf Company, Inc., a
business acquired by the Company in October 1995.
(v) Employee stock options of which none were vested.
(vi) All non-public, non-employee, non-board member options were repriced
to $.18 market in November 1997.
(vii) Director options - 33% vested.
7. 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.
Sales to customers which represent over 10% of the Company's net sales are
as follows:
Year ended December 31,
------------------------------
Customer 1998 1997 1996
-------- ------- ------ ------
A 28% 30% 29%
B 26% 15% 14%
C * 11% *
* Amounts are less than 10% of net sales.
F-13
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. BUSINESS SEGMENT REPORTING
--------------------------
The relative contributions to net sales, operating profit and identifiable
assets of the Company's two industry segments for the years ended December
31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
GOLF
--------------------
Mass Specialty
1998 Furniture Merchant Golf Stores Corporate Consolidated
---------- --------- -------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
Sales $ 3,785 $17,916 $ 1,224 - $22,925
Operating profit/(loss) (241) 863 (494) (548) (420)
Assets 2,673 8,564 1,846 - 13,083
Depreciation/Amortization 92 229 60 - 381
Capital Expenditures 175 144 - - 319
GOLF
-------------------
Mass Specialty
1997 Furniture Merchant Golf Stores Corporate Consolidated
---------- --------- -------- ----------- --------- -------------
Sales $ 4,358 $21,623 $ 4,349 - $30,330
Operating profit/(loss) (186) 915 (2,090) (731) (2,092)
Assets 2,456 10,914 3,244 - 16,614
Depreciation/Amortization 80 215 63 - 358
Capital Expenditures 136 103 11 - 250
</TABLE>
9 . SPALDING AND GARY PLAYER LICENSE AGREEMENTS
-------------------------------------------
Ajay has operated since 1983 under 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. On March 8, 1999, the
Company announced a limited extension of its existing agreement to provide
a phaseout period of up to 18 months for its Spalding labeled products.
The Company will pay Spalding $240,000 during the phase out period. The
most recent Spalding agreement previously contained a minimum annual
royalty of $550,000 plus 2% advertising of which 1% was paid direct. On
March 8, 1999 the Company entered into a new license agreement with Gary
Player Group, Inc. The Company will work toward developing the Gary Player
brand for marketing its products. The new Gary Player agreement has a
5-year term and covers golf bags, gloves, carts and certain other golf
accessories sold into the U. S. market. The newly executed Gary Player
agreement requires an annual $25,000 rights fee and a minimum annual
royalty of $5,000 for the sixteen months commencing on March 8, 1999
through June 30, 2000 and increases annually by $5,000 for each of the
remaining 4 years of the contract. (See Note 14).
Earned royalty expense due Spalding was $448,000, $553,000 and $480,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
F-14
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. LEASES
------
Future aggregate minimum lease payments under noncancelable operating
leases with initial or remaining terms in excess of one year are as
follows ($000):
1999 $ 613
2000 581
2001 372
2002 176
2003 170
2004 and thereafter 0
---------
$ 1,912
=========
Total rental expense ($000) under operating leases (net of sublease rental
income from an affiliate of $0, $0 and $8, respectively) was $605, $701
and $618 for the years ended December 31, 1998, 1997 and 1996,
respectively.
11. 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 1998 ($380,000),
1997 ($396,000), and 1996 ($401,000) by the weighted average number of
common shares outstanding. No exercise of outstanding warrants was assumed
in 1998, 1997 or 1996, since any exercise of warrants would be
antidilutive.
SFAS No. 128, "Earnings Per Share", became effective for fiscal years
ending after December 15, 1997. This statement replaces the presentation
of primary earnings per share ("EPS") with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures and
requires reconciliation of the numerator and denominator of the basic EPS
computations to the numerator and denominator of the diluted EPS
computation. Basic EPS excludes dilution. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared the earnings of
the entity. Diluted EPS is computed similar to fully diluted EPS. SFAS No.
128 requires restatement of all EPS data that was presented in previously
filed reports. Earnings per share for 1996 has not changed under SFAS No.
128 since the warrants outstanding are anti-dilutive.
F-15
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Cash paid for interest was $1,209,693, $776,077 and $1,098,819 for the
years ended December 31, 1998, 1997 and 1996, respectively.
Non cash financing and investing transactions were as follows:
In exchange for acquiring in 1994 all of the common stock of Leisure
Life, Inc. the Company issued 1,500,000 (post split 250,000) shares
of its common stock to the owner of Leisure Life. During the periods
1995, 1996 and 1997 one half of the originally issued shares were
returned to the Company due to unmet performance requirements.
During 1996 ,17,620 preferred stock shares were converted into
42,716 shares of common stock.
In 1996 an employee exercised options to acquire 5,000 common
shares.
In 1997 there were no stock transactions.
During 1998 preferred stock in the quantity of 31,993 shares were
converted into 77,558 shares of common stock.
During 1998 long-term debt of $5,000,000 was converted into
6,000,000 shares of Series D preferred stock.
The Company added new leases during 1998 and 1997 which represent
asset values respectively, if purchased, of approximately $103,000
and $57,000 and result in annual lease payments of $27,000 and
$18,732 with terms expiring up to the year 2003.
13. COMMITMENTS AND 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. (See
also notes 4 and 9).
F-16
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. SUBSEQUENT EVENTS
------------------
a. Spalding and Gary Player License Agreements
-------------------------------------------
Ajay has operated since 1983 under 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. On
March 8, 1999, the Company announced a limited extension of its
existing agreement to provide a phaseout period of up to 18 months
for its Spalding labeled products. The Company will pay Spalding
$240,000 during the phase out period. The most recent Spalding
agreement previously contained a minimum annual royalty of $550,000
plus 2% advertising of which 1% was paid direct.
On March 8, 1999, the Company entered into a new license agreement
with Gary Player Group, Inc. The Company will work toward developing
the Gary Player brand for marketing its products. The new Gary
Player agreement has a 5-year term and covers golf bags, gloves,
carts and certain other golf accessories sold into the U. S. Market.
The newly executed Gary Player agreement requires an annual $25,000
rights fee and a minimum annual royalty of $5,000 for the sixteen
months commencing on March 8, 1999 through June 30, 2000 and
increases annually by $5,000 for each of the remaining 4 years of
the contract.
F-17
<PAGE>
Schedule II
AJAY SPORTS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1998, 1997, and 1996
(Amounts in Thousands)
Balance
Beginning Charged to Deducted from at end
Balance expense Reserve of period
--------- ---------- ------------- ---------
Reserve for Product Warranty:
Year ended:
December 31, 1998 $152 $ 70 $119 (1) $103
December 31, 1997 85 309 242 152
December 31, 1996 136 203 254 85
Reserve for Doubtful Receivables:
Year ended:
December 31, 1998 $243 $ 50 $198 (2) $ 95
December 31, 1997 140 355 252 243
December 31, 1996 287 91 238 140
Reserve for Inventory Obsolescence:
Year ended:
December 31, 1998 $425 $292 $417 $300
December 31, 1997 491 398 464 425
December 31, 1996 384 498 391 491
Notes:
- ------
(1) Represents amounts paid for product warranty claims.
(2) Represents amounts charged off as uncollectible.
F-18
<PAGE>
