<PAGE>
As filed with the Securities and Exchange Commission on June 20, 1995
Registration No. 33-58753
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
_______________
AMENDMENT NO.1 TO FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933*
_______________
AJAY SPORTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
39-1644025
(I.R.S. Employer Identification No.)
1501 E. WISCONSIN STREET, DELAVAN, WISCONSIN 53115
(414) 728-5521
(Address, including zip code, and telephone number, including area code, of
registrant's
principal executive offices)
THOMAS W. ITIN, PRESIDENT
AJAY SPORTS, INC.
1501 E. WISCONSIN STREET, DELAVAN, WISCONSIN 53115
(414) 728-5521
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
FAY M. MATSUKAGE, ESQ. HAROLD M. GOLZ, ESQ.
LAW OFFICES OF FAY M. MATSUKAGE KRYS BOYLE GOLZ REICH
STANFORD PLACE 3, SUITE 201 FREEDMAN & SCOTT, P.C.
4582 SOUTH ULSTER STREET PARKWAY DOMINION PLAZA, SUITE 2700 SOUTH TOWER
DENVER, COLORADO 80237 600 SEVENTEENTH STREET
(303) 721-9495 DENVER, COLORADO 80202-5427
(303) 893-2300
Approximate date of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [x]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [ ]
*Pursuant to Rule 429, this Registration Statement on Form S-2 also constitutes
Post-Effective Amendment No. 6 to Registration Statement No. 33-30760.
Exhibit index on consecutive page _____ Consecutive page 1 of ____
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=========================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURI- AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series C 10% Cumulative 603,750 $10.00 $6,037,500 $2,081.90
Convertible Preferred Stock, shares
including shares covering the
Over-Allotment option
- ----------------------------------------------------------------------------------------------------------
Common Stock underlying (1) (2) (2) (2)
Series C 10% Cumulative
Convertible Preferred Stock
conversion
- ----------------------------------------------------------------------------------------------------------
Common Stock Purchase 603,750 $0.10 $60,375 $20.82
Warrants, including warrants warrants
covering the Over-Allotment
option
- ----------------------------------------------------------------------------------------------------------
Common Stock issuable up- 1,487,220 $1.00 $1,487,220 $512.83
on exercise of Common shares (3)
Stock Purchase Warrants (4)
==========================================================================================================
Underwriter's Warrants to 52,500 $0.00095 $50 $0.02
purchase Series C 10% Cu- warrants
mulative Convertible Preferred
Stock
- ----------------------------------------------------------------------------------------------------------
Series C 10% Cumulative 52,500 $12.00 $630,000 $217.24
Convertible Preferred Stock shares (3)
underlying Underwriter's War-
rants
- -----------------------------------------------------------------------------------------------------------
Common Stock underlying (1)(3) (2) (2) (2)
Series C 10% Cumulative
Convertible Preferred Stock
conversion
- -----------------------------------------------------------------------------------------------------------
Underwriter's Warrants to 52,500 $0.00095 $50 $0.02
purchase Common Stock warrants
Purchase Warrants
- -----------------------------------------------------------------------------------------------------------
Common Stock Purchase 52,500 $0.12 $6,300 $2.17
Warrants underlying warrants (3)
Underwriter's Warrants
- -----------------------------------------------------------------------------------------------------------
Common Stock issuable up- 52,500 $1.20 $63,000 $21.72
on exercise of Common shares (3)
Stock Purchase Warrants
- -----------------------------------------------------------------------------------------------------------
Total $8,284,495 $2,856.72
===========================================================================================================
</TABLE>
<PAGE>
(1) The conversion rate will be determined prior to effectiveness by an
amendment.
(2) Pursuant to Rule 457(i), the registration fee has been calculated based on
the proposed offering price of the Series C 10% Cumulative Convertible
Preferred Stock.
(3) An indeterminate number of additional securities are registered hereunder
which may be issued, as provided in the Underwriter's Warrants and Warrant
Agreement, in the event provisions against dilution become operative. No
additional consideration will be received by the registrant upon issuance
of such additional securities.
(4) The prospectus included herein covers the securities being registered
hereunder, plus 883,470 shares of Common Stock registered by the
Registrant on Registration Statement No. 33-30760 on Form S-18. The
registration fee for 883,470 of the shares registered hereunder ($304.64)
was paid in connection with the filing of Registration Statement No. 33-
30760.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION CAPTION IN PROSPECTUS
<S> <C>
1. Forepart of the Registration Outside Front Cover
Statement and Outside Front Cover
Page of Prospectus
2. Inside Front and Outside Back Inside Front Cover and Outside Back
Cover Pages of Prospectus Cover
3. Summary Information, Risk Factors Prospectus Summary; Risk Factors
and Ratio of Earnings to Fixed
Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not applicable
6. Dilution Dilution
7. Selling Security Holders Not applicable
8. Plan of Distribution Underwriting
9. Description of Securities to be Description of Securities
Registered
10. Interests of Named Experts and Not applicable
Counsel
11. Information with Respect to the Business; Market for the Company's
Registrant Common Stock and Related Stockholder
Matters; Selected Financial
Information; Management's Discussion
and Analysis of Financial Condition
and Results of Operations; Changes in
and Disagreements with Accountants on
Accounting and Financial Disclosure
12. Incorporation of Certain Incorporation of Certain Documents by
Information by Reference Reference
13. Disclosure of Commission Not applicable
Position on Indemnification for
Securities Act Liabilities
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUT NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS Subject to Completion, dated June 20, 1995
[LOGO OF AJAY SPORTS, INC. APPEARS HERE]
525,000 Shares of Series C 10% Cumulative Convertible Preferred Stock 525,000
Common Stock Purchase Warrants
All of the securities offered hereby are being sold by Ajay Sports, Inc. (the
"Company"). The Series C 10% Cumulative Convertible Preferred Stock (the
"Series C Preferred Stock") and Common Stock Purchase Warrants (the "Warrants")
offered hereby must be purchased together on the basis of one share of Series C
Preferred Stock and one Warrant. The Series C Preferred Stock and Warrants will
be separately transferable immediately. Each share of Series C Preferred Stock
is convertible into shares of the Company's Common Stock. The Series C
Preferred Stock will be redeemable at any time at the stated value of $11.00
per share plus all accrued and unpaid cumulative dividends. See "Description of
Securities--Series C Preferred Stock."
Each Warrant entitles the holder thereof to purchase, at a price of $1.00
(the "Warrant Exercise Price"), one share of Common Stock at any time through
December 31, 1996. The Warrants are subject to redemption by the Company at
$.05 per Warrant at any time on 45 days' prior written notice provided that the
closing high bid price of the Common Stock has exceeded the Warrant Exercise
Price by 50% or more for 20 consecutive trading days. The Company must have on
file a current registration statement pertaining to the Common Stock underlying
the Warrants in order for a holder to exercise the Warrants or in order for the
Warrants to be redeemed by the Company. See "Description of Securities--
Warrants."
Prior to this offering, there has been no public market for the Series C
Preferred Stock. The Company's Common Stock is traded on the NASDAQ Small-Cap
Market under the symbol "AJAY". On June 14, 1995, the closing high bid price
for the Common Stock on NASDAQ was $.56.
See "Risk Factors" for a discussion of certain risks associated with an
investment in the securities offered hereby.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
===============================================================================
<TABLE>
<CAPTION>
Price Underwriting Proceeds to
to Public Discounts (1) Company(2)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................................... $10.00 $100,000 $9.00
- ------------------------------------------------------------------------------------------
Per Warrant................................... $.10 $.01 $.09
- ------------------------------------------------------------------------------------------
Total(3)...................................... $5,302,500 $530,250 $4,772,250
- ------------------------------------------------------------------------------------------
</TABLE>
===============================================================================
(1) The Company has agreed to pay the Representative a nonaccountable expense
allowance, to pay a financial consulting fee, and to issue warrants to the
Representative (the "Representative's Warrants"). The Company has also
agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933 (the "ACT"). See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $325,000,
including the nonaccountable expense allowance payable to the
Representative. See "Underwriting."
(3) The Company has granted the Representative an option for 45 days to
purchase up to 78,750 additional shares of Series C Preferred Stock and up
to 78,750 additional Warrants on the same terms set forth above, solely to
cover over-allotments, if any. If such option is exercised in full, the
total Price to Public, Underwriting Discounts, and Proceeds to Company will
be $6,097,875.00, $609,787.50, and $5,488,087.00, respectively. See
"Underwriting."
The Series C Preferred Stock and Warrants are offered severally by the
Underwriters, subject to prior sale when, as and if accepted by the
Underwriters and subject to the right to reject orders in whole or in part and
certain other conditions. It is expected that delivery of certificates
representing the Series C Preferred Stock and Warrants will be made on or about
, 1995.
SCHNEIDER SECURITIES, INC.
, 1995
<PAGE>
[photographs of golf products here]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES C
PREFERRED STOCK, COMMON STOCK, OR WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS, SELLING GROUP MEMBERS
AND THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
SERIES C PREFERRED STOCK, COMMON STOCK, OR WARRANTS ON NASDAQ IN ACCORDANCE WITH
RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and related notes appearing elsewhere in
this Prospectus.
THE COMPANY
Ajay Sports, Inc. (the "Company") markets and distributes golf bags, golf
accessories, and hand-pulled carts through its wholly-owned subsidiary, Ajay
Leisure Products, Inc. ("Ajay"). The golf products are sold by Ajay under the
Spalding(R), Pro Classic(R), and Private Pro(R) brand names, primarily
to large retailers, such as discount stores, department stores, catalog
showrooms, and other mass merchandise outlets. Ajay has the exclusive right to
market and distribute golf bags, hand-pulled carts, gloves, and other golf
accessories under the Spalding(R) brand name through the mass merchandise
channel. This channel includes national retailers, such as Wal-Mart, K-Mart,
and Target. Based on industry reports, management believes that sales through
the mass merchandise channel will experience continued growth.
Ajay designs and manufactures its golf bags. The preliminary production
of the golf bags is undertaken at its Delavan, Wisconsin facility, where raw
materials are designed and fabricated in preparation for sewing and assembly at
its Mexicali, Mexico facility. Final manufacturing, assembly, and distribution
occur at Ajay's Delavan, Wisconsin facility. Ajay believes that this
manufacturing arrangement enables the Company to manufacture products of high
quality while maintaining competitive costs.
Ajay sells its products through a recently strengthened network of
independent sales representatives throughout the United States. This network
was upgraded in 1994, under new management, through additional sales coverage in
key markets and a focus on representatives that concentrate principally on the
sports business.
The Company also designs, manufactures, and markets casual living
furniture through another wholly-owned subsidiary, Leisure Life, Inc. ("Leisure
Life"). Leisure Life's products are sold under the In-Motion(R) name. The
products utilize a patented design which emphasizes comfort, adjustability,
durability, and value for the porch and patio. The Company expects sales by
Leisure Life, which was acquired in August 1994, to become significant as a
percentage of total sales in 1995. Leisure Life plans to develop an economical
line of indoor furniture later in 1995 for introduction in 1996.
Throughout 1994, new management, experienced in "turnaround" situations,
implemented a plan of action to attain profitability in 1995. Management
instituted a cost reduction program which included a reduction in salary and
labor positions, along with related fringe benefits. The Company also obtained
more favorable material costs, enhanced its material utilization methods, and
instituted more efficient manufacturing techniques. The Company strengthened its
sales coverage by appointing additional experienced independent sales
representatives and increased its emphasis on product development, which
resulted in several new product introductions in late 1994. See "Business."
Based on results of operations for the first quarter of 1995, management
believes that its plan of action will be successful. In 1994, entities with whom
management of the Company is affiliated made an additional commitment to the
Company by providing the Company with its credit facility and $2,400,000 in new
equity. See "Management" and "Certain Transactions."
The Company intends to use the proceeds of this offering to implement its
growth strategy. Following this offering, the enhanced financial resources
available to the Company will provide it with additional inventory and accounts
receivable financing, permit it to improve and enhance its manufacturing
capabilities, and provide it with working capital which may be used to expand
product lines, develop new markets and possibly acquire companies or product
lines compatible with or complementary to its present products in order to
expand its leisure and recreational business. See "Use of Proceeds."
3
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Securities offered (1)................ 525,000 shares of Series C Preferred
Stock and 525,000 Warrants. Each
share of Series C Preferred Stock is
convertible into shares of the
Company's Common Stock. Cumulative
dividends are payable on the Series C
Preferred Stock. Each Warrant
entitles the holder to purchase one
share of Common Stock at any time
through December 31, 1996 at a price
of $1.00. The Warrants are
redeemable by the Company at $.05 per
Warrant under certain conditions.
The terms of these Warrants are
identical to publicly-held warrants
to purchase Common Stock.
Accordingly, "Warrants" refers to
those offered hereby and the
outstanding publicly-held warrants.
See "Description of Securities."
Common Stock outstanding:
Before the Offering (2)............. 22,545,537
After the Offering assuming
full conversion of Preferred
Stock (2)....................... ____________
NASDAQ symbols
Common Stock........................ AJAY
Preferred Stock..................... AJAYP (Proposed)
Warrants............................ AJAYW
Use of net proceeds................... The Company intends to use the
proceeds of this offering for inventory
and accounts receivable financing, to
improve and enhance its manufacturing
capabilities, and to provide working
capital which may be used to expand
product lines, develop new markets, and
possibly acquire companies or product
lines compatible with or complementary
to its present products in order to
expand its leisure and recreational
business. See "Use of Proceeds."
________________
</TABLE>
(1) Does not include up to 78,750 shares of Series C Preferred Stock and
78,750 Warrants that may be sold by the Company pursuant to the
Representative's over-allotment option. See "Underwriting."
(2) Assumes no exercise of (i) the Warrants offered hereby, (ii) the over-
allotment option, (iii) presently outstanding Series B Preferred Stock,
warrants and options, and (iv) the Representative's Warrants. See
"Description of Securities" and "Underwriting."
RISK FACTORS
This Offering involves substantial risks associated with the Company and its
business including, among others, risks associated with substantial industry
competition, significant indebtedness, reliance on a few significant customers
and dependence on management. See "Risk Factors."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
------------------------------------------------ ---------------
(in thousands, except per share amounts and ratios)
Statement of Operations: 1990 1991 1992 1993 1994 1994 1995
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales...................... $16,937 $20,049 $21,014 $15,902 $12,899 $ 3,663 $ 5,454
Gross profit................... 2,519 3,914 3,858 1,730 608 476 1,092
Operating income (loss)........ (344) 677 962 (1,104) (2,139) (156) 340
Net income (loss).............. (1,080) (2,121) 381 (1,921) (3,080) (320) 155
Net income (loss)
per common share............. (.14) (.26) .02 (.24) (.27) (.04) .01
Weighted average common
shares outstanding........... 7,602 8,270 8,457 8,812 12,218 8,825 22,546
Ratio of earnings to combined
fixed charges and preferred
stock dividends.............. .01 (.51) .86 (.67) (1.44) 1.00
Coverage deficiency............ 1,705 2,746 244 2,546 3,705 --
<CAPTION>
March 31, 1995
-----------------
(in thousands)
As Ad-
Balance Sheet Data: Actual justed (1)
------- -------
<S> <C> <C>
Working capital................................................................... $ 737 $ 5,184
Total assets...................................................................... 11,125 15,572
Long-term debt.................................................................... 106 106
Stockholders' equity.............................................................. 2,195 6,642
</TABLE>
(1) Adjusted to reflect the sale by the Company of 525,000 shares of Series C
Preferred Stock and 525,000 Warrants and the application of the estimated
net proceeds of this offering of $4,447,250 as indicated under "Use of
Proceeds."
The operating and balance sheet data shown above were derived from
audited financial statements of the Company for full fiscal years, as well as
unaudited interim period financial statements. The data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," as well as the Consolidated Financial Statements of
the Company and notes thereto, included elsewhere in the Prospectus. The results
of operations for the three months ended March 31, 1995 are not necessarily
indicative of the operating results for the full year.
5
<PAGE>
THE COMPANY
The Company was organized under Delaware law on August 18, 1988.
Principal manufacturing, distribution and executive offices are located at 1501
E. Wisconsin Street, Delavan, Wisconsin 53115, and its telephone number is (414)
728 5521. The Company's administrative office is at 7001 Orchard Lake Road,
Suite 424, West Bloomfield, Michigan 48322. The Company has an additional
manufacturing and distribution facility at 215 4th Avenue North, Baxter,
Tennessee 38544, headquarters for its Leisure Life subsidiary, and a
manufacturing facility in Mexicali, Mexico.
RISK FACTORS
THIS OFFERING INVOLVES SUBSTANTIAL RISKS ASSOCIATED WITH THE COMPANY AND
ITS BUSINESS INCLUDING, AMONG OTHERS, RISKS ASSOCIATED WITH SUBSTANTIAL INDUSTRY
COMPETITION, SIGNIFICANT INDEBTEDNESS, RELIANCE ON SIGNIFICANT CUSTOMERS AND
DEPENDENCE ON MANAGEMENT.
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY, AMONG OTHER FACTORS, THE
RISK FACTORS AND OTHER SPECIAL CONSIDERATIONS RELATING TO THE COMPANY AND THIS
OFFERING SET FORTH BELOW.
THE COMPANY
QUALIFIED AUDITORS' OPINIONS. The report of the Company's auditors on the
financial statements for the last fiscal year contains an explanatory paragraph
related to substantial doubt regarding the Company's ability to continue as a
going concern due to the Company's significant losses for the 1994 and 1993
fiscal years and its reliance upon affiliated companies to fund cash flow
deficiencies through equity infusions. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements.
LOSSES FROM OPERATIONS. With the exception of the 1992 fiscal year, the
Company has incurred losses from operations since its inception. At March 31,
1995, the accumulated deficit was $8,241,000 (unaudited) and the net loss for
the 1994 fiscal year was $3,080,000. There is no assurance that the Company will
be profitable in 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements.
SIGNIFICANT INDEBTEDNESS. Ajay has a current indebtedness at March 31,
1995 of $6.8 million due February 1, 1996 under a Loan Agreement with Williams
Controls Industries, Inc. ("Williams Controls"), which is secured by
substantially all of the assets of Ajay. While Ajay continues to work on the
refinancing of its working capital loan, there is no assurance that such
financing can be accomplished on acceptable terms. The Company has guaranteed
payment of this loan and has pledged all of the outstanding stock of Ajay. In
addition, Williams Controls was granted options which can increase its stock
ownership to 45.2% of the Company's outstanding Common Stock (without giving
effect to this offering) if the loan is repaid in full by August 1, 1995, or
56.3% of the Company's outstanding Common Stock (without giving effect to this
offering) if the loan is not repaid in full by August 1, 1995. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Certain Transactions."
PRICE SENSITIVITY. Sales of golf accessories, golf bags, hand-pulled golf
carts, billiard accessories, indoor and outdoor leisure furniture to mass
merchandisers and regional retailers are highly price-sensitive. Increases in
labor, material and manufacturing costs could adversely affect the Company's
margins and, therefore, its profits. See "Business."
RELIANCE ON FOREIGN SUPPLIES AND THE CONDUCT OF BUSINESS IN FOREIGN
JURISDICTIONS. Ajay purchases certain parts, components, and products abroad.
Accordingly, the relative value of the U.S. dollar against foreign currencies,
the imposition of tariffs, import and export controls, and changes in
governmental policies could significantly affect its margins and, therefore, its
profits. Furthermore, a portion of its manufacturing operations are conducted in
Mexico, where such operations may be subject
6
<PAGE>
to local economic, social and political influences, including but not limited
to, transportation delays and interruptions, political and economic uncertainty
and disruptions, and labor strikes, any of which could adversely affect its
operations. To date, the Company has not experienced any material adverse
effects as a result of its foreign operations. During 1994, Ajay expended
approximately $60,000 to terminate the employment of some of its Mexican
employees; however, since the fourth quarter of 1994, the Mexican currency has
suffered a devaluation, thereby lowering the cost of work done in Mexico in
terms of U.S. dollars. See "Business - Competition."
COMPETITION. Ajay competes with other manufacturers of golf accessories,
golf bags, hand-pulled golf carts and related sports accessories, some of which
have greater assets, name recognition, broader product lines, distribution
networks, and financial, managerial, and marketing resources than the Company.
Leisure Life, the other operating subsidiary of the Company, has had only
limited operations and sales to date. At this time, as compared to the large
number of manufacturers of indoor and outdoor furniture, it is not a significant
competitor. See "Business - Competition."
RELIANCE ON SIGNIFICANT CUSTOMERS. During the years ended December 31,
1993 and 1994 approximately 70% and 72%, respectively, of the Company's sales
were attributable to its top ten customers, most of whom were mass
merchandisers. Furthermore, Ajay's largest customer accounted for approximately
41% of Ajay's sales in 1994. The Company has experienced the loss of a
significant customer in the past, resulting in a marked decrease in sales. The
loss of any of these customers could adversely affect the Company's business.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations" and "Business -Marketing and Distribution."
DEPENDENCE ON DISCRETIONARY CONSUMER SPENDING. Over 92% of the Company's
sales in 1994 were related to sales of golf products. The demand for golf
products is related to the number of persons playing golf and the number of
rounds of golf played, as well as the amount of discretionary spending by
consumers. Each of these factors may be adversely affected by general economic
conditions. A decrease in consumer spending on golf could have an adverse effect
on the Company's financial condition and results of operations. Seasonal weather
condition patterns can significantly affect the golf business and all products
involved. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations" and "Business."
DEPENDENCE ON MANAGEMENT. The Company is dependent upon the management of
Ajay and Leisure Life for the day-to-day operation of its business and in
particular is dependent upon the services of Mr. Thomas W. Itin, Chairman and
President of the Company, and Mr. Clarence H. Yahn, President of Ajay and
Leisure Life. The loss of services of either of these officers for any reason
could have a material adverse effect on the Company's business. The Company has
entered into an agreement with Mr. Itin under which he will be paid $1 per year
for fiscal 1995. There is no agreement with Mr. Yahn. No assurance can be given
that the Company would be able to replace either of these men should the Company
lose their services. The Company does not have key man insurance on Mr. Yahn or
Mr. Itin. See "Management and Key Personnel."
PRODUCT LIABILITY. The Company faces the risk of exposure to product
liability claims if consumers using its products are injured in connection with
their use. While the Company will continue to attempt to take appropriate
precautions, there can be no assurance that they will avoid significant product
liability exposure. Although management believes that the Company has adequate
product liability insurance based on its historical coverage, there can be no
assurance that its current insurance coverage is adequate, that economically
affordable insurance coverage can be maintained or will be available at all in
the future, or that a product liability claim would not materially adversely
affect the business or financial condition of the Company. See "Business - Legal
Proceedings."
DEPENDENCE ON LICENSE AGREEMENTS. A significant portion of the Company's
revenues result from the sale of products manufactured and sold pursuant to
various license agreements. No assurance can be given that the Company will be
able to remain a licensee under such agreements and the loss of any such license
could have a material adverse effect on the Company's business. See "Business -
Licensing."
7
<PAGE>
ALLOCATION OF WORKING CAPITAL AND POTENTIAL ACQUISITIONS. The net
Offering proceeds have been allocated for additional inventory and accounts
receivable financing, the improvement and enhancement of the Company's
manufacturing capabilities, and working capital which may be used to expand
product lines, develop new markets and possibly acquire companies or product
lines compatible with or complementary to its products. Investors in this
Offering will not be able to directly control the use of such funds or have any
opportunity to review any such acquisition before the occurrence of such an
event. Accordingly, investors must therefore rely on management of the Company
for directing the expenditure of these funds. Further, there can be no assurance
that any such acquisition will prove successful. See "Use of Proceeds."
GOVERNMENTAL REGULATIONS. The Company is subject to a variety of
regulations at the state, local and federal level and also operates under the
jurisdiction of foreign governments in countries in which the Company does
business. Adverse changes in these regulations could seriously impact the
Company's operations and profits. See "Business - Governmental Regulations."
AUTHORIZATION OF PREFERRED STOCK. The Company is authorized to issue up to
10,000,000 shares of preferred stock, in one or more series, with such rights,
preferences, qualifications, limitations, and restrictions as shall be fixed and
determined by the Company's Board of Directors from time to time. Any such
preferences may operate to the detriment of the rights of the holders of the
Common Stock. There are issued and outstanding 12,500 shares of Series B
Preferred Stock. Prior to this offering, no shares of Series C Preferred Stock
were issued or outstanding. See "Description of Securities - Preferred Stock."
LIMITATIONS ON CHANGE OF CONTROL. The "takeover" statute of the Delaware
General Corporation Law to which the Company is subject could have the effect of
delaying, deferring or preventing a change of control of the Company or the
removal of existing management and, as a result, could prevent the stockholders
of the Company from being paid a premium for their shares of Common Stock. See
"Description of Securities - Certain Provisions of Delaware Law and the
Company's Certificate of Incorporation."
INDEMNIFICATION AND LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS.
Pursuant to the Certificate of Incorporation and Bylaws of the Company, the
officers, directors, employees and agents of the Company are entitled to
indemnification from the Company for liabilities incurred in connection with the
business or activities undertaken in their official capacities where the acts
involved did not constitute intentional misconduct, a knowing violation of the
law, or the receipt of an impermissible personal benefit. Furthermore, the
Certificate of Incorporation of the Company limits the personal liability of
directors to the Company and its shareholders for monetary damages, except for
liability for any breach of the director's duty of loyalty, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, for unlawful payment of dividends, for unlawful stock purchase
or redemption, or for any transaction from which the director derived any
improper personal benefit. Therefore, while the directors and officers may be
accountable to the Company and its shareholders as fiduciaries, the Company and
its shareholders have a more limited right of action than they would, absent the
indemnification and limitation of liability provisions contained in the
Company's Certificate of Incorporation and Bylaws.
THE OFFERING
CONTROL BY MANAGEMENT. Following completion of this Offering, the present
management of the Company will own, assuming no exercise of the Warrants or
other stock options and no conversion of the outstanding Preferred Stock,
approximately 68% of the outstanding Common Stock. Given the magnitude of
convertible securities owned by management, the lack of cumulative voting, and
the fact that one-third of the Company's outstanding Common Stock constitutes a
quorum, persons not affiliated with management may not have the power to elect a
single director. As a practical matter, the current management will continue to
effectively control the Company. See "Principal Shareholders."
ABSENCE OF A PUBLIC MARKET. While there currently is a public market for
the Common Stock and the Warrants of the Company, there is no public market for
the Series C Preferred Stock, and no assurance can be given that a market will
develop subsequent to this Offering or that purchasers will be able to resell
their securities at the public offering price, or that a purchaser will be able
to liquidate his/her investment without considerable delay, if at all. If a
market does develop, the price may be highly volatile. Factors such as those
discussed in this "Risk Factors" section may have a significant effect on the
market price of the securities being offered. See "Market for the Company's
Stock and Related Stockholder Matters."
ACQUISITION BY OTHER STOCKHOLDERS AT LESS COST THAN INVESTORS IN THIS
OFFERING. The holder of the Series B Preferred Stock acquired its shares of
Common Stock, and has the right to acquire additional shares of Common Stock,
pursuant to the conversion privileges of that class of stock at a cost ($.34 per
share) substantially less than that which the investors will be able to convert
their Series C Preferred Stock to Common Stock ($ __ per share). Additionally,
certain outstanding options and warrants are exercisable to purchase Common
Stock at prices ranging between $.34 to $.80, which are less than the Warrant
Exercise Price of $1.00. To the extent that shares of Common Stock are issued
pursuant to the conversion of the Series B Preferred Stock or the exercise of
these other options and warrants, investors in this Offering will experience
dilution in ownership of the Company and in their investment See "Dilution".
POTENTIAL FUTURE SALES UNDER RULE 144; EXERCISE OF REGISTRATION RIGHTS.
Of the 22,545,537 shares of Common Stock currently outstanding, 14,261,353 are
"restricted securities" and may in the future be sold in compliance with Rule
144 under the Securities Act of 1933, as amended (the "Securities Act"). Rule
144 generally provides that beneficial owners of shares who have held such
shares for two years may sell within a three-month period a number of shares not
exceeding 1% of the total outstanding shares or the average trading volume of
the shares during the four calendar weeks preceding such sale. Sales of
substantial amounts of Common Stock in the public market after the Offering
pursuant to Rule 144 or otherwise, or the perception that such sales could occur
may adversely affect prevailing market prices
8
<PAGE>
of the Common Stock. With regard to the restricted shares, 5,552,529 are
currently eligible for sale under Rule 144, 1,650,000 will become eligible in
August 1996, and 7,058,824 will become eligible for sale in October 1996. See
"Shares Eligible for Future Sale."
Whenever the Company proposes to register shares of Common Stock under
the Securities Act, either for its own account or for the account of
stockholders exercising registration rights, holders subject to outstanding
options may require the Company, subject to certain limitations, to include all
or part of their shares in the registration. The exercise of any of these
registration rights may hinder the Company in making public offerings of its
securities in the future and may adversely affect the market price of the Common
Stock.
DIVIDENDS. The Company expects to pay dividends on the Series B Preferred
Stock and Series C Preferred Stock, which have a preference as to the payment of
any dividend on any other shares of capital stock of the Company. In addition,
Ajay's Loan Agreement with Williams Controls restricts Ajay from paying
dividends to the Company except in certain circumstances. Accordingly, the
Company does not contemplate paying cash dividends on Common Stock in the
foreseeable future since it will use all of its earnings, if any, after the
payment of dividends on the Series B Preferred Stock and Series C Preferred
Stock, to finance expansion of its operations. See "Dividend Policy" and
"Description of Securities."
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS.
The ratio of earnings to combined fixed charges and preferred stock dividends
for the last five fiscal years indicates a less than one-to-one coverage. Only
the ratio for the three months ended March 31, 1995 indicates a one-to-one
coverage. There can be no assurance that the Company will continue to generate
sufficient earnings to cover fixed charges and dividends on the Series B
Preferred Stock which is presently outstanding and the Series C Preferred Stock
which is being offered hereby. See "Prospectus Summary - Summary Consolidated
Financial Information" and the Consolidated Financial Statements.
UNDERWRITERS' INFLUENCE ON THE MARKET. A significant amount of the Series
C Preferred Stock and Warrants may be sold to customers of the Underwriters.
Such customers subsequently may engage in transactions for the sale or purchase
of such securities through or with the Underwriters. Although they have no legal
obligation to do so, the Underwriters from time to time in the future may make a
market in and otherwise effect transactions in the Company's securities. To the
extent the Underwriters do so, they may be a dominating influence in any market
that might develop and the degree of participation by the Underwriters may
significantly affect the price and liquidity of the Company's securities. Such
market making activities, if commenced, may be discontinued at any time or from
time to time by the Underwriters without obligation or prior notice. If a
dominating influence at such time, the Underwriters' discontinuance of market
making activities could adversely affect the price and liquidity of the
securities.
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS.
Holders of Warrants may exercise them only if a current prospectus relating to
the Common Stock underlying the Warrants is then in effect and only if such
shares are qualified for sale or exempt from qualification under applicable
state securities laws of the states in which holders of the Warrants reside. In
the Warrant Agreement, the Company has agreed to register or qualify the shares
in all of the jurisdictions in which the securities offered hereby are
registered or qualified. Although the Company has undertaken to make a good
faith effort to maintain the effectiveness of a current prospectus covering the
Common Stock underlying the Warrants and to register or qualify the shares for
sale in jurisdictions where the holders of Warrants reside, there can be no
assurance that the Company will be able to do so. The Company may determine not
to register or qualify the shares underlying the warrants in certain
jurisdictions where the time and expense involved would not justify such
registration and qualification. The Warrants may be deprived of any value in the
event this Prospectus or another prospectus covering the shares issuable upon
exercise of the Warrants is not kept effective or if such shares are not
registered in the states in which holders of the Warrants reside. See
"Description of Securities - Warrants."
OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES; POTENTIAL DILUTION AND
ADVERSE IMPACT ON ADDITIONAL FINANCING. As of May 25, 1995, the Company had
outstanding options, warrants, and
9
<PAGE>
convertible securities to acquire an aggregate of 18,322,843 shares of Common
Stock. In addition, upon the conclusion of this offering, additional convertible
shares of Series C Preferred Stock and Warrants will be issued. To the extent
that the outstanding options, warrants, and convertible securities are exercised
or converted, dilution to the interests of the Company's shareholders may occur.
For the life of the options, warrants, and convertible securities described
above, the holders will have the opportunity to profit from a rise in the price
of the underlying Common Stock. The existence of such options, warrants, and
convertible securities may adversely affect the terms on which the Company can
obtain additional financing, and the holders of such options, warrants, and
convertible securities can be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain additional capital by an
offering of its unissued capital stock on terms more favorable to the Company
than those provided by such options, warrants, and convertible securities. See
"Description of Securities" and "Shares Eligible for Future Sale."
DILUTION
At March 31, 1995, the Company had a net tangible book value of $750,000 or
$.03 per share of Common Stock. Net tangible book value per share of Common
Stock represents total tangible assets reduced by total liabilities and the
liquidation value of outstanding Series B Preferred Stock, divided by the number
of outstanding shares of Common Stock. Without taking into account any changes
in net tangible book value after March 31, 1995, after giving effect to the sale
by the Company of 525,000 shares of Series C Preferred Stock and 525,000
Warrants for net proceeds of $4,447,250 (and attributing no part of the proceeds
to the Warrants), and assuming that all of the shares of Series C Preferred
Stock are converted into shares of Common Stock at a conversion rate of ten
shares of Common Stock for one share of Preferred Stock, the pro forma net
tangible book value of the Company's Common Stock at March 31, 1995 would have
been $5,197,000 or $.19 per share. Accordingly, after the offering, the net
tangible book value of the shares of Common Stock held by the present
shareholders would have increased $.16 per share. Concurrently, new investors
converting shares of Series C Preferred Stock to Common Stock would suffer
substantial immediate dilution of $.81 per share.
The following table illustrates the foregoing dilution of a new investor's
equity in a share of Common Stock assuming the conversion of all Series C
Preferred Stock to Common Stock at a conversion rate of ten shares of Common
Stock for one share of Preferred Stock:
<TABLE>
<S> <C>
Conversion price per share of Common Stock........ $1.00
Net tangible book value per common share
before offering................................. $0.03
Increase per share attributable to new investors.. $0.16
Pro forma net tangible book value per common
share after offering............................ $0.19
Dilution per common share to new investors........ $0.81
</TABLE>
The following table sets forth, as of the date of this Prospectus, a
comparison of the respective investment and equity of the current holders of the
Common Stock and investors purchasing shares of Series C Preferred Stock in this
offering. Such table assumes that the investors purchasing shares of Series C
Preferred Stock in this offering will convert such shares into shares of Common
Stock at a conversion rate of ten shares of Common Stock for one share of
Preferred Stock.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------- -------------------- Price per
Number Percent Amount Percent Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Officers, directors, and
affiliates............. 15,600,764 56.1% $ 5,040,014 33.7% $0.32
Other existing
shareholders........... 6,944,773 25.0% 4,670,880 31.2% $0.67
New investors............ 5,250,000 18.9% 5,250,000 35.1% $1.00
---------- ----- ----------- -----
Total.................... 27,795,537 100.0% $14,960,894 100.0%
========== ===== =========== =====
</TABLE>
MARKET FOR THE COMPANY'S STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded over-the-counter since
November 1989 and is reported by Nasdaq. The following table sets forth the
range of high and low bid quotations given quarterly by Nasdaq for the last two
years. These over-the-counter market quotations reflect inter-dealer prices
without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
1993 HIGH BID LOW BID
<S> <C> <C>
First Quarter..................... $.69 $.47
Second Quarter.................... .69 .38
Third Quarter..................... .47 .31
Fourth Quarter.................... .41 .31
1994
First Quarter..................... $.44 $.31
Second Quarter.................... .44 .13
Third Quarter..................... .59 .25
Fourth Quarter.................... .59 .34
1995
First Quarter..................... $.59 $.38
</TABLE>
On June 14, 1995, the closing high bid price for the Common Stock on
NASDAQ was $.56.
The number of record holders of the Company's Common Stock as of June 8,
1995 was 400 according to the Company's transfer agent.
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company are estimated to be $4,447,250
($5,163,087.50 if the Representative's over-allotment option is exercised in
full) after deduction of underwriting discounts, the Representative's
nonaccountable expense allowance and consulting fee, and other expenses of this
Offering.
The Company anticipates such net proceeds will be utilized substantially
as follows:
<TABLE>
<CAPTION>
APPLICATION OF PROCEEDS AMOUNT
<S> <C>
Inventory and accounts receivable financing.................................. $3,000,000
Enhancement/improvement of manufacturing capabilities:
Acquisition of additional manufacturing equipment for Mexicali facility... 100,000
Acquisition of containers for transport of work in process
inventory between the Delavan and Mexicali facilities................ 40,000
Mexicali plant improvements and repair.................................... 60,000
Purchase of additional equipment for Leisure Life's
manufacturing operations............................................. 30,000
Construction of additional storage for Leisure Life's finished
product inventory and building improvements.......................... 70,000
Working capital.............................................................. 1,147,250
----------
Total............................................................. $4,447,250
==========
</TABLE>
The Company anticipates that conventional revolving credit facilities,
which are typically based on 80-85% of existing accounts receivable and 50-60%
of inventory, will not provide sufficient working capital for expansion. Such
financing tends to lag behind a company whose sales are increasing. Accordingly,
$3,000,000 of the proceeds from this offering has been allocated to furnish
additional financing for the Company's anticipated growth. It should be noted
that all $3,000,000 will not be used at all times. The amount of financing
required fluctuates during the year, since the sales of the Company are
seasonal. Any amounts not being used for financing may be added to the general
working capital of the Company. The amount allocated for working capital will be
used for general corporate purposes, including expanding the Company's product
lines and developing additional markets for its products.
The proceeds from this Offering are expected to be adequate to meet the
Company's cash requirements during the one year period following this Offering.
The amounts set forth above merely indicate the Company's present intentions for
the use of proceeds. However, future events may require a change in the
allocation of funds. The Company's business plan contemplates that the Company
may acquire companies or product lines compatible with or complementary to the
Company's present products. Although the Company has had and will have
discussions with potential acquisition candidates, it does not have any plans,
agreements or understandings with respect to any acquisitions. Moreover, it may
not be able to consummate any such transaction. The amount, if any, to be
applied to any acquisition cannot be determined at this time. Any changes in
proposed expenditures will be made at the discretion of the Board of Directors
of the Company.
The proceeds from the exercise of the Representative's over-allotment
option and Warrants, if any, will be added to working capital.
To the extent that the net proceeds of this Offering are not used
immediately, they will be invested in certificates of deposit, savings deposits,
short-term obligations of the United States Government, other suitable money
market instruments or shares of regulated investment companies investing in such
instruments; or they will be left in checking accounts bearing interest. The
Company does not intend to engage in the business of investing, reinvesting,
owning, holding or trading in securities or otherwise engaging in activities
which would render the Company an "investment company" as that term is defined
in the Investment Company Act of 1940.
11
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company as of March 31, 1995, and as adjusted to give effect to the sale by
the Company of 525,000 shares of Series C Preferred Stock and 525,000 Warrants
for net proceeds of $4,447,250. The table should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
March 31, 1995
---------------------
Actual As Adjusted
------ -----------
<S> <C> <C>
(in thousands)
Short-term obligations................................. $ 8,824 $ 8,824
======= =======
Long-term debt......................................... $ 106 $ 106
------- -------
Stockholders' equity:
Preferred stock, $.01 par value per share;
10,000,000 shares authorized; 12,500 shares issued
at liquidation value, 537,500 issued as adjusted
for the offering at liquidation value.............. 1,250 6,500
Common stock, $.01 par value per share;
100,000,000 shares authorized, 22,545,537
shares issued and as adjusted for the offering..... 225 225
Additional paid-in capital........................... 8,961 8,158
Accumulated deficit.................................. (8,241) (8,241)
------- -------
Total stockholders' equity............................. 2,195 6,642
------- -------
Total capitalization................................... $ 2,301 $ 6,748
======= =======
</TABLE>
DIVIDEND POLICY
Holders of shares of Common Stock are entitled to dividends when, and if,
declared by the Board of Directors out of funds legally available therefor. The
Company has never paid any cash dividends on its Common Stock and intends to
retain future earnings, if any, to finance the development and expansion of its
business. The Company's future dividend policy is subject to the discretion of
the Board of Directors and will depend upon a number of factors, including
future earnings, capital requirements, limitation on distributions from Ajay to
the Company, and the financial condition of the Company.
Holders of both the Series B Preferred Stock and Series C Preferred Stock
have a right to dividends in preference to the payment of any dividend on any
other shares of capital stock of the Company. See "Description of Securities."
In addition, Ajay's Loan Agreement with Williams Controls restricts Ajay from
paying dividends to the Company except (1) to the extent required to satisfy tax
obligations for the combined operations of Ajay and the Company, and (2) in an
amount not to exceed $100,000 in the aggregate to cover legal, accounting, and
other operating expenses, so long as Ajay is not in default under the Loan
Agreement. This restriction may have the effect of reducing the amount of cash
available to the Company to pay any dividends.
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The operating and balance sheet data shown below were derived from audited
financial statements of the Company for full fiscal years, as well as unaudited
interim period financial statements. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as the Consolidated Financial Statements of the Company and
notes thereto, included elsewhere in the Prospectus. The results of operations
for the three months ended March 31, 1995 are not necessarily indicative of the
operating results for the full year.
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
----------------------------------------------------------- --------------------
Statement of Operations: 1990 1991 1992 1993 1994 1994 1995
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $16,937 $20,049 $21,014 $15,902 $12,899 $ 3,663 $ 5,454
Cost of sales............... 14,418 16,135 17,156 14,172 12,291 3,187 4,362
------- ------- ------- ------- ------- ------- -------
Gross profit................ 2,519 3,914 3,858 1,730 608 476 1,092
Selling, general, and
administrative expenses.... 2,863 3,237 2,896 2,834 2,747 632 752
------- ------- ------- ------- ------- ------- -------
Operating income (loss)..... (344) 677 962 (1,104) (2,139) (156) 340
------- ------- ------- ------- ------- ------- -------
Non-operating income
(expense):
Interest expense - net...... (780) (854) (906) (697) (614) (154) (185)
Loss on write-down of
investment in affiliate.... (36) (2,014) -- (123) -- -- --
Gain on disposition of
investment................. -- -- 275 -- (38) -- --
Other, net.................. 80 70 50 3 (289) (10) --
------- ------- ------- ------- ------- ------- -------
Income (loss) from opera-
tions before income taxes.. (1,080) (2,121) 381 (1,921) (3,080) (320) 155
Income tax expense
(benefit).................. -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)........... $(1,080) $(2,121) $ 381 $(1,921) $(3,080) $ (320) $ 155
======= ======= ======= ======= ======= ======= =======
Net income (loss)
per common share........... $(.14) $(.26) $.02 $(.24) $(.27) $(.04) $.01
======= ======= ======= ======= ======= ======= =======
Weighted average common
and common stock equiva-
lent shares outstanding.... 7,602 8,270 8,457 8,812 12,218 8,825 32,629
======= ======= ======= ======= ======= ======= =======
<CAPTION>
December 31, March 31, 1995
----------------------------------------------------------- --------------------
As Ad-
Balance Sheet Data: 1990 1991 1992 1993 1994 Actual justed (1)
------- ------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital............. $ 1,434 $ 6,954 $ 2,754 $ 903 $ 593 $ 737 $ 5,184
Total assets................ 11,959 11,792 12,783 10,507 9,365 11,125 15,572
Long-term debt.............. 2,450 8,254 -- -- 121 106 106
Stockholders' equity........ 1,680 (51) 3,855 1,963 2,035 2,195 6,642
- ----------------------
</TABLE>
(1) Adjusted to reflect the sale by the Company of 525,000 shares of Series C
Preferred Stock and 525,000 Warrants and the application of the estimated
net proceeds of this offering of $4,447,250 as indicated under "Use of
Proceeds."
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company was formed in 1988 to acquire certain assets, liabilities and
operations of the sports accessory business of Roadmaster Corporation
("Roadmaster"). The Company was capitalized initially through a private
placement of stock and an initial public offering (approximately $3.1 million in
net proceeds), a long-term debt of $4 million owed to Roadmaster for the
purchase of the business, and a revolving credit facility guaranteed by Equitex,
Inc., an affiliate of Roadmaster.
Until October 1993, the Company was controlled, in part, by Roadmaster
and Equitex. TICO, an entity controlled by Thomas W. Itin, the Chairman and
President of the Company, obtained control from Roadmaster and Equitex in
October 1993. Since that date, Mr.Itin has obtained a new credit facility from
an affiliate, brought in new management with experience in "turnaround"
situations, and provided additional capital through various affiliated entities.
Management, through the capital it has provided and the efforts it has expended,
is committed to reversing the losses that occurred in 1993 and 1994, obtaining a
credit facility from an asset-based lender, and improving the financial
condition of the Company.
RESULTS OF OPERATIONS
Quarters Ended March 31, 1994 and 1995. During the quarter ended March 31,
1995 the Company had net sales of $5,454,000, compared to $3,663,000 for the
same period in 1994. The overall sales increase of 49% occurred throughout all
of the golf product lines, with significant percentage increases in golf gloves
and carts (78% and 182%, respectively). The sales increase was attributable to
increased sales to both existing and new customers and with respect to both
large and small retailers. Since Leisure Life was acquired in August 1994,
there were no 1994 comparable period sales. However, sales for the first
quarter of 1995 were $361,000, as compared to sales from August through December
of 1994 of $154,000.
Net Sales by Product Line
(in thousands)
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Golf bags $2,095 $2,714
Golf accessories 759 893
Golf gloves 594 1,060
Golf carts 118 333
Billiard accessories 97 93
Leisure furniture 0 361
------ ------
Total $3,663 $5,454
====== ======
</TABLE>
Gross profit for the three months ended March 31, 1995 expressed as a
percentage of net sales increased to 20%, compared to 13% for the same period in
1994.
Selling, general, and administrative expenses for the three months ended
March 31, 1995 increased by $120,000 as compared to the same period in 1994, but
decreased as a percentage of sales (13.8% for the first quarter of 1995, versus
17.3% for 1994). The lower percentage in 1995 resulted from increased sales
volume.
Operating income for the first quarter of 1995 was $340,000, an increase of
$496,000 when compared to the operating loss of $156,000 for the first quarter
of 1994. This was due primarily to a decrease in the cost of sales, which was
80% for 1995 and 87% for 1994, plus the positive effect of a 49% increase in
sales.
Interest expense increased by $31,000 in the first quarter of 1995 compared
to 1994, as a result of higher debt and higher interest rates.
As a result of the above, the net income for the first quarter ending March
31, 1995 was $155,000, compared to a net loss of $320,000 for the same period in
1994.
Years Ended December 31, 1992, 1993 and 1994. In 1994 the Company's net
sales were $12.9 million, or a decrease of $3.0 million, or 18.9% compared to
1993. The overall sales decline occurred throughout all of the Company's product
lines and with respect to both major and secondary customers categories. Sales
declines reflected the trend of major customers reducing the number of their
suppliers. Billiard accessories increased by $155,000 as a result of increased
emphasis on distribution of this product line.
In 1993 the Company's net sales were $15.9 million, or a decrease of $5.1
million, or 24.3% compared to 1992. Management believes this decline was
attributable to poor weather conditions, purchasing delays as major customers
stretched out their buying programs and one customer discontinuing purchases of
two product lines. In the first quarter of 1993 one of the Company's major
customers began purchasing directly from the manufacturer two product lines
which the Company had previously sold to this customer. The sales to this
customer for these two products were $200,000 for the twelve months ended
December 31, 1993, compared to sales of $3,000,000 to that customer in those
product lines during the same period in 1992.
NET SALES BY PRODUCT LINE
(in thousands)
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Golf bags $ 9,135 $ 8,047 $ 6,003
Golf accessories 5,842 4,215 3,720
Golf gloves 3,821 2,030 1,553
Golf carts 1,651 938 642
Billiard accessories 565 672 827
Leisure furniture 0 0 154
------ ------ ------
Total $21,014 $15,902 $12,899
====== ====== ======
</TABLE>
During the years ended December 31, 1993 and 1994 approximately 70% and
72%, respectively, of the Company's sales were attributable to its top ten
customers, most of whom were mass merchandisers. Furthermore, Ajay's largest
customer, Wal-Mart, accounted for approximately 41% of Ajay's sales in 1994.
There were no other customers in 1994 which accounted individually for 10% or
more of sales. As described above, the Company has experienced the loss of a
significant customer in the past, resulting in a marked decrease in sales. The
loss of Wal-Mart would adversely affect Ajay's revenues and the Company's
chances for profitability.
Ajay has undertaken steps to improve results in its 1995 sales programs.
With new product designs, new sales representation, and improved product lines,
management is optimistic that customers will increase their share of Ajay
product purchases for the 1995 season. New product designs include an entirely
new golf cart line with three new carts and Leisure Life's new convertible
combination bench/table product. Improvements have been made to the golf glove
line, including the addition of a washable cabretta leather glove, and the golf
bag line which has been upgraded with new colors, designs, and materials. During
1994, new manufacturer's representatives were hired to replace existing poor
performing representatives and to cover new territory not previously covered.
Management believes that this has resulted in increased sales to existing
customers and sales to new customers, thereby increasing sales in 1995. Based on
results of operations for the first quarter of 1995, management believes its
plan of action will be successful. The acquisition of Leisure Life in August
1994 had minimal impact on the sales and gross profit results for 1994.
14
<PAGE>
Operating loss for the Company was $2.1 million for 1994, an increase of
$1.0 million, compared to an operating loss of $1.1 million in 1993. The higher
loss directly resulted from reduced net sales and losses from closeout sales
tied to the decision to reduce inventory levels plus write-off of $120,000 of
tooling on a discontinued product. A charge off in the amount of $115,000 was
also necessary to write off royalties that were under-absorbed on the reduced
sales volume. Operating loss for the Company was $1.1 million for 1993, a
decrease of $2.0 million, compared to operating income of $0.9 million for 1992.
The decrease in operating earnings attributed to lost sales was $1.0 million.
Additional contributing factors were increased closeout sales resulting in a
$300,000 loss, excessive inventory carrying costs of $100,000, excessive loan
fees of $100,000, and inventory write-offs of $200,000.
Selling, general and administrative expenses were $2.7 million and $2.8
million, representing 21.1% and 17.8% of sales in 1994 and 1993, respectively.
This reflects the acquisition of Leisure Life, which contributed $110,000 to
selling, general and administrative expenses, along with special consulting and
termination allowances of $107,000 during 1994. The 18.9% sales volume decline
in 1994 was not equivalently matched by expense reductions due to expenses being
more fixed than variable. Selling, general and administrative expenses for the
Company were $2.8 million for 1993, a decrease of $0.1 million compared to 1992.
In an effort to create additional sales momentum in 1993, the Company increased
sales personnel and also experienced costs of new product introductions, which
resulted in a higher fixed sales, general and administrative expenses in 1993,
as compared to 1992. In an effort to stimulate sales volume, certain advertising
expenses were increased, which did not result in a corresponding sales increase.
The decrease in interest expense in 1994 was a result of less debt to
finance inventory. The decrease in 1993 was a result of eliminating a temporary
increase in letter of credit financing in 1992 to finance inventory purchases.
In 1991 based upon consideration paid by new shareholders, the Company
reduced the carrying value of its investment in affiliate by $2,014,000. In 1992
the Company transferred shares of its investment to Roadmaster in satisfaction
of various obligations in the amount of $376,000 and in exchange for machinery
and equipment previously leased from Roadmaster with an appraised value of
$490,000. A gain of $275,000 was recognized as a result of these transactions in
1992. In 1993 the Company wrote off $123,000 of advances to affiliates as
uncollectible.
The Company provides severance pay to certain employees. Currently, the
liability for such compensation is reflected when the event giving rise to such
payments is known. Under Statement of Financial Accounting Standards No. 112,
Employers' Accounting for Postemployment Benefits, which must be applied in the
preparation of the Company's 1994 financial statements, these liabilities must
be accrued over employees' service lives. The adoption of this new standard did
not significantly impact the Company's financial statements.
The Company had no income tax liability for 1994, 1993 and 1992. The
Company had net operating loss carryforwards for federal tax purposes of
approximately $5,293,000 at December 31, 1994, which expire in varying amounts
in the years 2006 through 2009. Operating loss carryforwards totaling $845,000
and $4,248,000 are available to offset future state taxable income of Sports and
Ajay, respectively, which expire in varying amounts in the years 2006 through
2009.
FINANCIAL CONDITION
March 31, 1995. At March 31, 1995 the Company had working capital of
$737,000, as compared with $593,000 at December 31, 1994. The ratio of current
assets to current liabilities at March 31, 1995 was 1.1, which was unchanged
from December 31, 1994. Working capital was primarily used to finance seasonal
growth in accounts receivable.
At March 31, 1995 the Company had increased its short term borrowings by
$1,420,000 since December 31, 1994. This was primarily due to seasonal
increases in accounts receivable which increased by $2,112,000 because of
increases in sales.
Fiscal Year-End. At December 31, 1994 the Company had working capital of
$593,000, compared with $903,000 at December 31, 1993. This reflects a reduction
in inventories of $1.6 million and a reduction of $1.3 million in payables and
debt. The ratio of current assets to current liabilities at December 31, 1994
was 1.1, which was unchanged from the December 31, 1993 ratio.
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Inventories at December 31, 1994 were $5,786,000 compared to $7,381,000
at December 31, 1993. The decrease was a result of management's efforts to
reduce inventory levels to more appropriately correspond to the lower sales
base. This has been accomplished through disposal of excess inventories and an
emphasis on working closely with customers and resulting forecasts to more
appropriately access, communicate, and commit to their needs.
Trade accounts receivable were $1,700,000 at December 31, 1994 compared
to $1,975,000 at December 31, 1993. The lower trade accounts receivable are
principally due to lower fourth quarter sales.
Net machinery and equipment at December 31, 1994 and 1993 were $1,357,000
and $778,000, respectively. As of September 30, 1992 the Company purchased
machinery and equipment at the appraised value of $490,000 from Roadmaster and
cancelled operating leases for these respective assets. The consideration given
in the transaction was 250,000 shares of common stock of MacGregor Sports and
Fitness, Inc. ("MacGregor").
In June 1992 the Company transferred 188,100 shares of MacGregor common
stock and assigned advances due from MacGregor to Roadmaster in satisfaction of
obligations to Roadmaster of $376,000. Also in 1992 additional shares of
MacGregor common stock were transferred to Roadmaster in exchange for machinery
and equipment previously leased from Roadmaster with an appraised value of
$490,000. A gain of $275,000 was recognized as a result of this transaction. See
"Certain Transactions" and Notes 3 and 5 of the Notes to the Consolidated
Financial Statements.
CAPITAL RESOURCES
The Company expended $115,000 in 1994 for capital expenditures, which was
used principally for tooling of new products introduced in 1994. The Company's
capital expenditures for 1993 were $226,000, principally for tooling of new
products introduced in 1993. Capital expenditures for 1995 will be similar to
1994 and financed from operations.
LIQUIDITY
Cash flow from operations was negative by $2,618,000 for the 1994 fiscal
year. This reflects a net loss of $3,080,000. The net loss was primarily a
result of reduced sales volume and liquidation of certain inventory items at
prices which resulted in losses. These inventory items consisted of golf carts
that had been discontinued, golf bags which were unable to be sold, golf
accessory items which exceeded a one-year supply, certain obsolete golf gloves,
and raw materials that were no longer needed due to the discontinuation of the
product. Also contributing were substantial legal and financing fees of
approximately $400,000 connected to financing matters as described in Note 3 of
the Notes to the Consolidated Financial Statements. An inventory reduction of
$1,595,000 has helped to generate funds to reduce accounts payable and partially
offset the net loss.
The Company's liquidity is primarily affected by its financing
requirements. 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 credit facilities for its working
capital requirements.
On April 14, 1992, Ajay entered into an amended lending arrangement with
BankAmerica (the "Total Credit Facility"), which included a revolving credit
facility of the lesser of $10,000,000 (including $2.5 million for the purchase
of finished goods and component parts inventory), or an amount based on eligible
accounts receivable and raw materials and finished goods inventories, along with
a seasonal inventory subline of up to $500,000. The Total Credit Facility
contained various wide-ranging restrictive covenants, including restrictions on
capital expenditures, dividends and limitations on distributions to the Company.
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On April 14, 1994, the Company was advised by BankAmerica that the Total
Credit Facility had been purchased by Roadmaster Industries, Inc.
("Roadmaster"). On May 5, 1994, Ajay paid Roadmaster in full all outstanding
obligations under the Total Credit Facility and entered into a Loan and Security
Agreement ("Loan Agreement") with Williams Controls for a loan of up to
$7,000,000. On October 3, 1994 the outstanding balance was reduced by $1,400,000
as a result of the election by Williams Controls to exercise its option to
purchase 4,117,647 shares of the Company's Common Stock. At December 31, 1994
and March 31, 1995 Ajay had $5,369,000 and $6,790,000, respectively, outstanding
under this agreement. The Loan Agreement requires monthly interest only payments
at the prime rate of First Interstate Bank of Oregon plus 3.25% and was
originally scheduled to expire on November 4, 1994 and has been extended to
February 1, 1996. The Loan Agreement is secured by a lien on substantially all
of the assets of Ajay and is guaranteed by the Company and is personally
guaranteed by the Company's Chairman, Thomas W. Itin. The Company's guaranty is
secured by a pledge of all of the outstanding stock of Ajay. See "Certain
Transactions."
If Williams Controls does not extend maturity beyond February 1, 1996
and the Company is unable to refinance its indebtedness to Williams Controls,
the Company will not have sufficient funds to repay the outstanding balance,
which would affect the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might be
necessary if the Company was unable to continue as a going concern.
The Company is continuing to work on the refinancing of its working
capital loan with asset based lenders to put this financing in place, however,
no commitment for an extension or refinancing has been given.
The Company received an equity infusion in early October 1994 of
$2,400,000, as a result of a private placement of 2,941,177 shares of Common
Stock for $1,000,000 and the exercise of options by Williams Controls for
4,117,647 shares. Proceeds from the purchase of Common Stock by Williams
Controls were used to reduce Ajay's loan balance to Williams Controls by
$1,400,000. Also in early October 1994, the holder of the Company's Series B
Preferred Stock converted 17,000 shares of Series B Preferred Stock into
5,000,040 shares of Common Stock.
Additionally, management, recognizing the narrow profit margins which
exist in the mass merchandise market segment, has instituted a cost reduction
program which includes a reduction in salary and labor positions, along with
related fringe benefits. The Company has also obtained more favorable material
costs, enhanced its material utilization methods and instituted more efficient
manufacturing techniques. The Company has strengthened its sales coverage by
appointment of additional experienced independent sales representatives and
increased its emphasis of product development which will result in several new
product line introductions for the 1995 and 1996 selling seasons. Management
believes these factors will contribute to achieving profitability.
With the current Loan Agreement with Williams Controls having been extended
to February 1, 1996, and assuming that it will be able to extend or refinance
this loan, management believes that its current operations will not require
proceeds from this offering if the Company is profitable for the remainder of
the current fiscal year. Proceeds from this offering would enable the Company
to finance its accounts receivable and inventory which would increase as a
result of growth, enhance and improve its manufacturing capabilities, and
provide it with working capital which may be used to expand product lines,
develop additional markets for its products, and possibly acquire companies or
product lines compatible with or complementary to its present products.
Accordingly, proceeds from this offering are expected to meet the needs of the
Company for a period of at least twelve months.
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CHANGES IN AND DISAGREEMENTS WITH THE ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On July 21, 1994, the Company engaged Hirsch & Silberstein, P.C., as the
independent accountants to audit the Company's financial statements for the year
ending December 31, 1994. Hirsch & Silberstein replaced Coopers & Lybrand,
L.L.P. ("Coopers") which, on June 3, 1994, informed the Company that the client-
auditor relationship between the Company and Coopers had ceased.
The report of Coopers on the Company's financial statements for the
fiscal year ended December 31, 1993 included an explanatory paragraph related to
an uncertainty concerning the Company's ability to continue as a going concern
due to significant losses during 1993 and the Company not being in compliance
with certain debt covenants under its bank loan. The bank loan was subsequently
repaid in full on May 5, 1994, at which time the Company entered into the new
loan agreement with Williams Controls Industries, Inc. See Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity."
In connection with the audit for the years ended December 31, 1992 and
1993, there were no disagreements with Coopers on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which if not resolved to the satisfaction of Coopers would have
caused them to make reference to the matter in their report. The same was true
as of June 3, 1994, the date that the client-auditor relationship between the
Company and Coopers ceased.
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BUSINESS
GENERAL
Ajay Sports, Inc. (the "Company") markets and distributes golf bags, golf
accessories, golf gloves, hand-pulled golf carts, and additional items such as
billiard accessories (such lines of business hereinafter collectively referred
to as the "Sports Business" or "Sports"). The Company operates the sports
business through Ajay Leisure Products, Inc. ("Ajay") a wholly owned subsidiary.
Leisure Life, Inc. ("Leisure Life"), another operating subsidiary, manufactures
and markets casual living furniture for the porch and patio. All references to
the Company include Ajay and Leisure Life unless otherwise specified. Leisure
Life was acquired August 1, 1994.
Ajay designs and manufactures its golf bags. The preliminary production
of the golf bags is undertaken at its Delavan, Wisconsin facility, where raw
materials are designed and fabricated in preparation for sewing and assembly at
its Mexicali, Mexico facility. Final manufacturing, assembly, and distribution
occur at Ajay's Delavan, Wisconsin facility. Ajay believes that this
manufacturing arrangement enables the Company to manufacture products of high
quality while maintaining competitive costs.
Ajay's products primarily are sold nationwide to large retailers such as
Wal-Mart, K-Mart, and Target, discount stores, department stores, catalog
showrooms and other mass merchandise outlets. The products manufactured by the
Company are sold primarily under the Spalding(R), Pro Classic(R), and Private
Pro(R) brand names. Leisure Life's products are sold through independent
retailers and larger chains of home and garden stores.
BUSINESS STRATEGY
The Company's strategy is to maintain and improve its position as a
leading supplier of golf bags, golf accessories, golf gloves, golf carts, and
billiard accessories to the mass merchandise distribution channel. The Company
believes that the following competitive strengths contribute to its position as
a significant competitor in the Sports Business in this market segment:
STRONG BRAND RECOGNITION. Spalding(R), Pro Classic(R), and Private Pro(R)
are highly recognized names in the golf accessory industry and the Company
believes that many of its products hold strong market positions. The Company
believes that its brand recognition and market position enhance its ability to
sell products through both mass merchandisers and regional retailers. A
significant portion of the Company's revenues result from the sale of products
manufactured and sold pursuant to a license agreement with Spalding Sports
Worldwide ("Spalding"), the loss of which could have a material adverse effect
on Ajay's business. The Company has been selling golf bags, golf carts, golf
gloves and a broad range of general sports accessories pursuant to this
agreement, which expires June 30, 1998. The predecessor business to the Company
originally obtained its license with Spalding in 1983 and has renewed the
license a number of times since that time through the current June 1998
expiration.
REPUTATION FOR QUALITY. The Company believes that the performance of its
products equals or exceeds the performance of its competitors' products marketed
through the mass merchandise distribution channel. To assure the quality of its
products, the Company continually invests in technical design and support, and
tests and monitors the performance of its products. At its own facilities, the
Company relies on its skilled and experienced work force. To assure the quality
of products sourced from third-party manufacturers, the Company has established
and works to maintain close, long-term sourcing relationships that emphasize
service, quality, reliability, loyalty and commitment.
EMPHASIS ON INNOVATION. Management of the Company is dedicated to working
with its customers to design and maintain a current line of products. Examples
of the Company's commitment in this area are an entirely new golf cart line with
three new carts, improvements to the golf glove line to include a washable
cabretta leather glove, and upgrading the golf bag line with new colors,
designs, and materials.
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BREADTH OF PRODUCT LINES. The Company offers a broad selection of golf
bags, golf carts, golf accessories and billiard accessories. Through its broad
product lines, the Company offers mass merchants and regional retailers the
ability to fulfill product demands and needs from a single source. The Company's
product lines have established its strong position among manufacturers of golf
bags and suppliers of golf related accessories category. Its models of golf bags
consist of over 50 models which vary by size, color, type of material and
related features. The line of golf related accessories consists of mainly
consumable items such as tees, head covers, golf ball retrievers, umbrellas and
golf training devices. The accessory category includes over 100 individual
items.
Golf bags, golf carts, and related accessories historically account for
approximately 96% of Ajay's gross sales. Billiard accessories account for
approximately 4%. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations." The Company
expects sales by Leisure Life, which was acquired in August 1994, to become a
more significant percentage of total sales for the Company over the next three
to five years.
With regard to the leisure furniture business, the Company believes that
the following factors have contributed to Leisure Life's success to date and
will position Leisure Life for future growth: the simplified design of the
furniture permitting ease of assembly, the quality and durability of the
construction, the versatility of the furniture to indoor or outdoor uses, and
the ease of manufacturing which can permit the establishment of satellite
factories in strategic geographic locations and in turn provide nationwide
distribution with the lowest possible freight costs.
The Company believes that the strengths described above, combined with
its management team which is experienced in turnaround situations, as well as
manufacturing, marketing, and distribution, should position it for future
growth.
GROWTH OPPORTUNITIES
The Company believes that its strong brand recognition, reputation for
quality, tradition of innovation and breadth of product lines position it to
take advantage of opportunities for future growth including:
INCREASED DISTRIBUTION. The Company's products are currently sold to
customers through mass merchants and regional retailers. Management believes
that those who purchase golf products from mass merchants and regional retailers
generally play golf at municipal and other public golf courses. Based on the
increase in these types of courses in the last few years (as provided in a 1994
study by the National Golf Foundation ("NGF")), and the growth in sales of golf
equipment through the mass merchandiser channel, management believes that this
market segment will experience continued growth in the near future. The Company
also believes that many of its principal competitors service substantially more
accounts, primarily those of smaller stores. Accordingly, the Company intends to
focus on increasing its direct sales efforts to include smaller stores where it
has historically had limited marketing emphasis, but where better profit margins
can generally be realized, while continuing to maintain and build upon its
strong position with mass merchandisers and regional retailers.
NEW PRODUCT DEVELOPMENT. The Company believes that it is possible to
increase its sales of products through design improvements and modifications to
existing products as well as the development and introduction of new products.
With regard to existing products, the Company uses its own designer to work with
a customer to create a customized look to its golf bags, using design features,
such as color, decals, specialized components and decorative accessories. By
working with the customer, management believes that this builds enhanced
commitment for the resulting product.
The Company is working on new products for sports other than golf that
utilize the Company's existing manufacturing capabilities, specifically its cut
and sew operations, and that may result in sales during the summer and fall to
offset the seasonality of the golf lines. Management believes that it will be
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able to determine the market acceptance for these new products without incurring
a significant amount of expense. As an example, Ajay is in the process of
developing a line of sports-specific bag products, initially focusing on
hunting/shooting and in-line skating. The seasonality of these products would
tend to be summer, fall, and early winter. Ajay is developing prototypes of
these bag products, with test marketing scheduled for the fourth quarter of 1995
and, depending upon the results of the test marketing, market introduction
scheduled for mid-1996.
Leisure Life plans to introduce a new line of swing furniture in 1995 for
the 1996 sales year. This line would be less expensive than its existing line
of swing furniture, featuring a smaller frame and different canopies. It also
plans to expand on the convertible combination bench/table product, which was
just recently introduced. Other planned new products include a line of leisure
dining tables and a table with a removable top that can be folded for storage.
SPORTS BUSINESS
Golf, which is the primary market of Ajay's product and accessory
business, continues to be a popular form of recreation. According to the
National Golf Foundation ("NGF"), a trade association, there were 2.5% more
rounds of golf played in 1994 than 1993. The pace of golf course development
also continues to grow steadily. NGF reports that 381 golf courses were opened
for play in 1994, versus 345 in the previous record year of 1993. This marks the
------
fourth straight year that the number of courses opened increased from the
previous year.
Ajay's products include golf bags, golf accessories, golf gloves, hand-
pulled golf carts, and billiard accessories. Ajay has over 50 models of golf
bags which vary by size, color, type of material and related features. The line
of golf related sports accessories consists mainly of consumable items such as
tees, spikes, gloves, head covers, golf ball retrievers, umbrellas and consists
of over 100 individual items. Its line of golf carts consists of 4 models which
differ by frame style, size, color, handle, and wheels.
LICENSING. A significant portion of Ajay's revenues result from the sale
of products manufactured and sold pursuant to various agreements, the loss of
which could have a material adverse effect on the Company's business.
Ajay has been selling golf bags, hand-pulled golf carts and a broad range
of general sports accessories through a license agreement with Spalding. The
current agreement expires June 30, 1998. 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 $550,000, $550,000 and $550,000, for the years
ended June 30, 1995, 1996, 1997 and 1998 respectively. Other conditions of the
agreement require Ajay to expend 2% of sales under the agreement on advertising
and related costs, with 1% remitted to Spalding. Ajay must also maintain a ratio
of total current assets to total liabilities on a monthly basis of 1.0 to 1.0.
Spalding has the right to terminate the license agreement in the event of any
substantial change in the ownership, control, officership or management of Ajay.
The license agreement also prohibits Ajay from acquiring any new companies
without the prior approval of Spalding. Approximately 61%, 61%, and 68% of
Ajay's total sales related to products sold under the Spalding license agreement
during the years ended December 31, 1994, 1993, and 1992, respectively. The
termination of the license agreement would have a material adverse effect on the
revenues of Ajay.
MANUFACTURING AND DESIGN. The preliminary production of Ajay's golf bags
is undertaken at its Delavan, Wisconsin facility, where raw materials are
fabricated in preparation for sewing and assembly at its Mexicali, Mexico
facility. In addition, Ajay supplements in-house production through utilization
of subcontractors to produce products according to its specifications. Final
manufacturing, assembly and distribution occur at its facility located in
Delavan, Wisconsin.
Design features, such as color, decals, specialized components and
decorative accessories, often determine whether a model is successful. In order
to attract and retain consumers the Company updates and refines its designs on a
continuous basis.
The Company's lines of various accessory products are acquired primarily
from foreign sources, principally from the Pacific Rim, and repackaged at the
Company's Delavan, Wisconsin facility for domestic distribution. The packaging
designed by Ajay highlights the various features of the products. Ajay's hand-
pulled golf carts are manufactured overseas. Ajay is responsible for all
warehousing and shipping of the golf carts. The Company is not dependent upon
any single source for any of its significant products.
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MARKETING AND DISTRIBUTION. Ajay's product lines traditionally have been
distributed primarily through discount stores, department stores, catalog stores
and other mass merchandise outlets. The Company also sells through most major
chain retailers. Ajay's largest customer, Wal-Mart, accounted for approximately
41% of Ajay's sales in 1994.
Except for certain major accounts, the majority of the Company's accounts
are serviced exclusively by approximately 40 manufacturers' representatives
working on a commission basis. These representatives concentrate principally on
the sports business. Ajay services its major accounts through a combination of
manufacturers' representatives and its own in-house sales force. Ajay's
management regularly consults with major customers to discuss merchandising
plans and programs, anticipated needs and product development.
The Company believes it has good name recognition in the industry and
attempts to expand that recognition through participation in trade shows,
advertising in trade publications and supplying large numbers of catalogs to the
retail trade and consumers.
LEISURE FURNITURE BUSINESS
Demographic changes have driven a shift for the last ten years toward a
casual living lifestyle, as evidenced by the proliferation of decks, patios, and
sunrooms. Americans are spending more time at home in a relaxed casual manner.
Home Furnishings Daily reported that for the year ended December 31, 1992, the
largest 25 outdoor furniture retailers sold $517 million of product. Adding the
2,000 plus other retailers of outdoor furniture to those selling porch and great
room sets, the market is believed by management to exceed $2.5 billion annually.
Leisure furniture, used on porches, decks and patios, and in sunrooms and
yards has principally consisted of aluminum, resin, wrought iron and low to
medium priced wood products. The designs of wood products have not been stylish
nor particularly comfortable for seating. Management believes that Leisure
Life's "In Motion(R)" furniture products, which feature adjustability and
comfort, have the potential to be received favorably in the leisure furniture
market.
Leisure Life's furniture is constructed of a high grade of pine which is
pressure-treated and kiln-dried to prevent deterioration, warping, and bending
and to withstand varying climate conditions. The seating products utilize a
patented suspension seating system which permits simple adjustment to
accommodate users of different heights and weights. This system also
incorporates an ergonomically designed sling and deep cushion seating to provide
lower back support. Management believes that its seating products are superior
in comfort to any other leisure furniture product. The patented system is used
on swings, rocking chairs, stationary chairs, love seats, and couches.
In addition to the seating products, Leisure Life also manufactures
matching dining tables, cocktail and end tables, a bench, ottoman, and stool to
comprise a coordinated line of leisure furniture. Management believes that a
coordinated casual wood furniture line can be marketed for indoor as well as
outdoor use.
MANUFACTURING. The pressure treated pine purchased by Leisure Life is
planed, cut, drilled, and sanded in the Baxter, Tennessee facility to form the
frames and tables. A small portion of the wood pieces used in the frame are
purchased pre-manufactured. Fabric for pillows and slings are cut and partially
sewn primarily by a third party subcontractor in Alabama and then shipped back
to Baxter, Tennessee, where the pillows are stuffed and finally sewn and
assembly takes place. Furniture items are packaged in kits containing the wood
frame pieces, slings, pillows, and necessary hardware, requiring the customer to
assemble the final product.
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MARKETING AND DISTRIBUTION. Initially, marketing focused on individual
retailers of outdoor and unfinished furniture within a 300-mile radius of the
manufacturing facility. Currently, Leisure Life supplies nearly 600 selected
small dealers, several with multiple stores. As opposed to Ajay's distribution
through mass merchandise outlets, Leisure Life distributes through specialty
stores, such as nurseries, hardware stores, pool and patio dealers, and garden
shops. Leisure Life services its accounts primarily through two in-house sales
people.
Since management believes that the comfort of its seating products is
what Leisure Life from other manufacturers, it is important for prospective
customers to sit in the furniture. Accordingly, Leisure Life has two display
trucks containing samples of its furniture line, which are used to attract more
dealers. Sales are being developed with regional chains. In addition, more
national coverage is being developed through the use of 15 manufacturers'
representatives on a commission basis and through exhibits at trade shows
targeted at hardware and nursery stores.
INVENTORIES AND BACKLOG
Due to the relatively short lapse of time between placement of orders for
products and shipments, Ajay and Leisure Life normally do not consider their
backlog of orders to be significant to their business. Because of rapid delivery
requirements of its customers, Ajay and Leisure Life maintain significant
quantities of finished goods inventories to provide acceptable service levels to
its customers. The majority of Ajay's products are shipped directly from its
Delavan plant.
Ajay's products tend to have varying degrees of seasonality. Shipments
from February to May historically have been significantly higher than the rest
of the year, due to the nature of the golf business.
Shipments of Leisure Life's outdoor furniture line tend to be higher from
February to May than the rest of the year. Management expects that the indoor
line being developed will have higher shipments in the fall.
COMPETITION
Within the mass merchandise distribution segment where Ajay presently has
the majority of its sales, Ajay competes in the golf bag, cart and accessory
business with several other domestic companies including in particular, Voit,
Wilson, MacGregor, Dunlop, Korex and others. While increased imports of low cost
competitive products, primarily from the Pacific Rim, continue to subject
domestic producers to intense price competition and have created extreme price
sensitivity, it also provides a source of competitive products for the Company
to offer. As Ajay increases sales to smaller retailers, it is anticipated that
it will compete with different companies.
There are no dominant furniture manufacturers supplying, on a national
basis, products specifically targeted for porches, decks, patios, and sunrooms.
There are small firms supplying on a regional basis. Management does not believe
that there are any other wood furniture products that are adjustable. However,
there is competition for display space in stores, along with competition from
other wood, resin, aluminum, cushion, and plastic furniture products.
RAW MATERIALS AND COMPONENTS
Basic materials such as vinyl, nylon, steel and aluminum tubing, plastics
and paint used in the golf bag manufacturing and assembly process are purchased
primarily from domestic sources. Many of the component parts such as golf
headcovers, golf gloves, billiard cues, billiard accessories, light weight carry
golf bags and various other golf accessories are obtainable economically only
from foreign suppliers and, therefore, are subject to changes in price as a
result of fluctuations in foreign currencies against the U.S. dollar.
Alternative sources for raw materials and component supplies are available and
Ajay
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anticipates no significant difficulty in obtaining raw materials or components,
although some such purchases may be at increased prices.
Leisure Life purchases pressure treated pine, fabric, pillow stuffing,
and miscellaneous hardware used in the manufacturing and assembly process from
domestic sources. Alternative sources for raw materials are available and
Leisure Life does not experience difficulty in obtaining raw materials.
PATENTS
Ajay and Leisure Life own several patents and have proprietary knowledge
relating to their product lines. Except for the patented suspension seating
system used by Leisure Life, management does not believe that its patents are
significant in the conduct of the Company's business or that the loss of any of
its patents would have a material adverse effect on its business.
GOVERNMENTAL REGULATIONS
The Company is subject to a variety of laws and regulations at the state,
local and federal level, such as those concerning occupational safety and
health, labor and employment, environmental protection, sales taxes, business
and building code regulations, and the import and export of goods. Ajay,
through its subsidiary, Ajay de Mexico, S.A. de C.V., operates under the
jurisdiction of the Mexican government. Its laws and regulations concern the
same areas noted above. Items sent by Ajay to Mexico for assembly and
subsequent return to the United States are subject to the imposition of tariffs
and quotas. Under the North American Free Trade Agreement, the tariffs are
being phased out over a ten-year period. Compliance with governmental
regulations has not had a material adverse effect on the Company.
EMPLOYEES
As of March 17, 1995, the Company, Ajay and Leisure Life had a total of
333 employees: 98 employees at the Delavan, Wisconsin facility, 190 employees at
the Mexicali, Mexico facility, and 45 employees at the Baxter, Tennessee
facility. The Company's employees are not covered by any collective bargaining
agreement and management considers its current relations with its employees to
be good.
PROPERTIES
The Company's executive, and Ajay's primary manufacturing, assembly and
warehouse facility, is located in Delavan, Wisconsin, and consists of 186,300
square feet of manufacturing and warehousing space. This space is leased from an
unaffiliated third party under a long term lease arrangement expiring June 2001,
with an option to renew for an additional ten-year period. The monthly rental is
$27,623, net of the Company's obligation to pay property taxes and all
utilities. The Company has an option to purchase the property at its fair market
value at the end of either the initial or renewal lease term.
Through its wholly-owned subsidiary, Ajay de Mexico, S.A. de C.V., Ajay
leases an additional manufacturing facility consisting of approximately 31,500
square feet in Mexicali, Mexico. The lease expires on January 14, 1998, but is
automatically renewed for an additional five-year period if Ajay does not give
written notice six months prior to January 14, 1998. The monthly rent until
January 15, 1996 is $11,173 and subsequent years are subject to annual Consumer
Price Index adjustment with an annual cap of 4%.
Leisure Life owns its manufacturing, assembly, and warehouse facility in
Baxter, Tennessee, which consists of approximately 32,000 square feet of
manufacturing and warehousing space, located on 2.8 acres.
These facilities adequately meet the Company's production capacity
requirements. The Company, on average, utilizes approximately 70% of its
facility square footage in Delavan and Mexicali. In order to avoid periodic
total plant shutdowns, the Company adjusts its product production schedules to
maintain sufficient inventory levels and to maintain a full work force.
Recognizing the excess capacity which currently exists at the Delavan and
Mexicali facilities, the Company granted Williams Controls the right, until
August 1, 2002, to establish a manufacturing operation in those facilities,
subject to the availability of space. If manufacturing operations are
established, Williams Controls would have to pay its pro rata share of the space
occupied in the plant and personnel costs, as well as all incremental expenses
to modify the plant, obtain permits, hire personnel, and perform other tasks to
suit its requirements. See "Certain Transactions."
24
<PAGE>
LEGAL PROCEEDINGS
The Company, through its operating subsidiaries, Ajay and Leisure Life,
are involved in various legal proceedings which are normal to its business,
including product liability and workers' compensation claims. The Company
believes that none of this litigation is likely to have a material adverse
effect on its financial condition or operations. Ajay faces the risk of exposure
to product liability claims if consumers using Ajay's products are injured in
connection with their use. While Ajay will continue to attempt to take
appropriate precautions, there can be no assurance that it will avoid
significant product liability exposure. Based on historical experience, Ajay and
Leisure Life have product liability coverage which the Company believes is
adequate.
On July 7, 1994, Ajay filed a complaint in Walworth County Circuit Court,
State of Wisconsin, against Roadmaster Industries, Inc., Roadmaster Corporation,
Henry Fong, Edward E. Shake and Charles Sanders, seeking damages for claims
arising out of the defendants' alleged misappropriation and/or conversion of
Ajay's confidential business information. The lawsuit is in its early stages and
no prediction can be made of the outcome of this matter at this time. The
parties are in the process of conducting discovery. A status conference with the
Court is scheduled for July 1995.
MANAGEMENT AND KEY PERSONNEL
OFFICERS AND DIRECTORS
The officers and directors of the Company, Ajay and of Leisure Life are as
follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Thomas W. Itin 60 Chairman of the Board, President, Chief Executive Officer
and Treasurer
Clarence H. Yahn 58 Director, President of Ajay and Leisure Life
Duane R. Stiverson 53 Chief Financial Officer of the Company, Ajay and Leisure
Life; Director of Leisure Life
Stanley V. Intihar 61 Director
Anthony B. Cashen 60 Director
Robert R. Hebard 42 Director and Secretary
Robert D. Newman 53 Director, Vice President of Leisure Life
</TABLE>
The directors of the Company and Ajay are elected to hold office until
the next annual meeting of stockholders and until their respective successors
have been elected and qualified. Officers of the Company, Ajay and Leisure Life
are elected annually by the Board of Directors and hold office until their
successors are duly elected and qualified.
Thomas W. Itin. Mr. Itin was elected Chairman of the Board and President
of the Company in June of 1993. Mr. Itin provides the Company with expertise on
long term strategic planning, financing and mergers/acquisitions. Mr. Itin has
been the Chairman, President, Treasurer, Chief Executive Officer, and Chief
Operating Officer of Williams Controls, a publicly held corporation, since March
1989. Mr. Itin has served as Chairman of the Board, Chief Executive Officer and
Chief Operating Officer of LBO Capital Corp. since its inception, and is the
Company's largest single
25
<PAGE>
stockholder. In 1987, Mr. Itin was a co-founder of Roadmaster Industries, Inc.
Mr. Itin has been Chairman, President and Owner of TWI International,
Inc. ("TWI") since he founded the firm in 1967. TWI acts as a consultant for
mergers, acquisitions, financial structuring, new ventures and asset management.
Mr. Itin also has been the Owner and Principal Officer of Acrodyne Corporation
since 1962. From August 1989 to February 1991, Mr. Itin has been an officer and
director of MacGregor Sporting Goods Corporation ("MacGregor Corporation"),
formerly MGS Acquisitions, Inc. a privately held company which acquired
substantially all of the assets of MacGregor Sporting Goods, Inc. from a filing
of Chapter 11 Bankruptcy. In February 1991, MacGregor Sports, Inc., the wholly-
owned operating subsidiary of MacGregor Corporation, filed for protection under
Chapter 11 of the United States Bankruptcy Code. Mr. Itin was a co-founder of
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, a publicly held
company. Mr. Itin received a B.S. degree from Cornell University and was awarded
a Masters of Business Administration degree from New York University. Mr. Itin
spends less than 100% of his working time on the business of the Company.
Clarence H. Yahn. Mr. Yahn is the President of both Ajay and Leisure
Life. He has experience in manufacturing, marketing and general management at
the organizations in which he has worked, and has substantial experience in the
management of company turnarounds for such firms as Wesray Capital Corporation
and Leach McMicking and Company.
Mr. Yahn became a director of the Company in September 1994, and has
served as director of Ajay, since September 1993 and as Ajay Leisure's President
since January 1994. Mr. Yahn is on the Board of Directors of Leisure Life, Inc.,
a subsidiary of the Company. Mr. Yahn received his Bachelor's degree in
mathematics and physics from the University of Wisconsin in 1959 and his Masters
in International Business from the American Graduate School of International
Management in 1962, where he currently serves on their Board of Trustees. He
worked for various divisions of the Sunbeam Corporation including Vice President
of Manufacturing for the Sunbeam Appliance Company and Group President of
European Operations, while resident in London, England. In 1982 he was
transferred by Sunbeam to Aircap Industries as President. From 1988 to May 1991,
Mr. Yahn served as President of Gold Medal, Inc., a manufacturer of
leisure/lifestyle furniture based on Richmond, Virginia. He was a consultant to
Blount Lumber Co., located in Lacona, New York, which manufactured wood products
and was a millwork distributor. Prior to joining Ajay Leisure Products, Mr. Yahn
served as Chief Executive Officer of Melnor, Inc., Moonachie, New Jersey, from
May 1992 to June 1993. Melnor manufactured and distributed lawn and garden
products.
Duane R. Stiverson has been Chief Financial Officer since July 19, 1994.
Prior to joining the Company, Mr. Stiverson was the Vice President of Operations
for VariQuest Technologies, Inc. and held that position since 1991. From 1987 to
1990, Mr. Stiverson was Vice President of Materials for the Ambrosia Chocolate
Company. From 1978-1987 he was the Vice President of Finance for Ambrosia, and
from 1976-78 was its Controller. Mr. Stiverson held various controller and
corporate finance positions with the Bendix Corporation. Mr. Stiverson has a
Bachelor of Science from the University of Nebraska and was later awarded a
Master of Business Administration from Michigan State University.
Stanley V. Intihar. Mr. Intihar became a director of the Company in
September 1994, having been appointed as the designee of Williams Controls,
pursuant to its right granted in the Loan Agreement to have one member on the
board. From March 1994 to the present, Mr. Intihar has been Senior Vice
President of Williams Controls Industries, Inc. and has been a director of
Williams Controls Industries, Inc. since December of 1992. From 1992 to 1994, he
was an independent consultant for Williams. From 1988 to 1991, Mr. Intihar held
various offices with Park Ohio Industries, Inc., including President and Chief
26
<PAGE>
Operating Officer and most recently Chairman of the Board and Chief Executive
Officer. From 1958 to 1988, Mr. Intihar was employed by TRW, Inc., a publicly-
held corporation, in a variety of executive positions including Vice President
and General Manager Engine Components Worldwide, and Vice President, Corporate
Planning and Development Staff. Since 1978, Mr. Intihar has been a director of
Horsburgh & Scott Co., a private company. Mr. Intihar received a B.S. degree in
Mechanical Engineering from Cornell University and graduated from the Harvard
School of Business, Advanced Management Program.
Anthony B. Cashen. Mr. Cashen has served as director of the Company and
Ajay since November 1993. Mr. Cashen has served as Secretary, Treasurer and
director of LBO Capital Corp., since inception. He is currently a Managing
Partner in Lamalie Amrop International, a management consulting and executive
recruiting firm located in New York City. Prior to his joining Lamalie Amrop
International (formerly Flanagan & Webster), he was President and owner of
Elliott 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 MBA from the Graduate School of Management (1958) and a B.S.
degree from Cornell University.
Robert R. Hebard. Mr. Hebard has served as a director of the Company and
Ajay Leisure Products, Inc. since June 1989 and as Secretary of the Company
since September of 1990. After receiving a Bachelors Degree in
Marketing/Management from Cornell University in 1975, Mr. Hebard held various
marketing/product management positions with Goldome Bank, a $10 billion savings
bank in Buffalo, N.Y. While there, he received his MBA in 1982 from Canisius
College. Mr. Hebard joined Comerica Bank, Detroit, Michigan as an Assistant Vice
President in September 1982. In July 1984 he became Vice President of Marketing
for U.S. Mutual Financial Corporation, then returned to Comerica as Vice
President and Group Product Manager for Consumer Products. In June 1986 he was
named First Vice President/Director of Product Management for Comerica and in
February 1992 was named director of Retail Marketing for the merged
Comerica/Manufacturers Bank. Mr. Hebard is also currently serving as Vice
President of Woodward Partners, Inc., a real estate development company in
suburban Detroit, Michigan. In June 1993, he was named Chairman of the Board and
President of Enercorp, Inc., a publicly traded business development company
under the Investment Company Act of 1940, as amended, a shareholder of the
Company. In 1993, Mr. Hebard was also named Chief Executive Officer, Chief
Financial Officer, and Treasurer of CompuSonics Video Corporation, a publicly
held company. From December 1993 to August 1994 Mr. Hebard served as director of
Kimbro Imaging Systems, Inc. Mr. Hebard spends less than 100% of his working
time on the business of the Company.
Robert D. Newman. Mr. Newman became a director of the Company in August
1994. Mr. Newman has served as General Manager of Leisure Life, Inc., a wholly
owned subsidiary of the Company since August 1994. Mr. Newman founded Leisure
Life, Inc. in October, 1990 and has served as President since its inception,
until its purchase by the Company in August 1994. Mr. Newman was President and
Chief Executive Officer of Stone Mountain Millworks from 1985 to 1989. Mr.
Newman served as director of Product Development for Gold Medal, Inc. from 1989
to October 1990. Mr. Newman was owner and President of three Atlanta based
consumer products sales agencies: 1981 to 1985 - Southeastern Regional
Representatives, 1979 to 1980 - Newman, Jamison, and Associates, from 1969 to
1979 - Bob Newman Sales. Mr. Newman worked in several sales positions for Ekco
Housewares Company during the period of 1961 to 1969. He attended Northern
Illinois University.
Robert R. Hebard is the son-in-law of Thomas W. Itin. Other than this
relationship, there are no other family relationships between any director or
executive officer.
27
<PAGE>
EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ending December 31, 1994,
1993 and 1992, the cash compensation paid by the Company and its subsidiaries,
as well as certain other compensation paid or accrued for those years, to each
of the executive officers of the Company in all capacities in which they serve:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
============================================================================================================
Long-Term
Annual Compensation Compensation
-------------------------------------------
Awards
------------------
Securities All Other
Underlying Op- Compen-
Name and Principal Position Year Salary $ Bonus $ tions (#) sation
============================================================================================================
<S> <C> <C> <C> <C> <C>
Thomas W. Itin (1) 1994 $ 1 $ --- --- $ ---
President, Treasurer and Director of 1993 $ --- $ --- --- $ ---
the Company and Treasurer and 1992 $ --- $ --- --- $ ---
Director of Ajay
- -------------------------------------------------------------------------------------------------------------
Clarence H. Yahn (2) 1994 $101,000 $ --- 350,000 $ ---
Director of the Company and 1993 $ --- $ --- --- $ ---
President of Ajay 1992 $ --- $ --- --- $ ---
- -------------------------------------------------------------------------------------------------------------
Duane R. Stiverson (3) 1994 $ 28,000 $ --- 45,000 $ ---
Chief Financial Officer of the Company 1993 $ --- $ --- --- $ ---
and Vice President and Chief Financial 1992 $ --- $ --- --- $ ---
Officer of Ajay
=============================================================================================================
</TABLE>
(1) On June 21, 1993 Mr. Itin was elected Chairman of the Board, President,
Treasurer and Director of the Company, and Chairman of the Board,
Treasurer and Director of Ajay. Mr Itin's salary for 1995 is $1.
(2) Mr. Yahn joined the Company at year-end 1993. Mr Yahn's salary for 1995
is $90,000.
(3) Mr. Stiverson joined the Company in July 1994. Mr. Stiverson's salary for
1995 is $65,000
The following table sets forth information with respect to the named
executives concerning individual grants of stock options made during the last
fiscal year.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
====================================================================================================================================
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Individual Grants Term
- ------------------------------------------------------------------------------------------------------------------------------------
Number of % of Total Op-
Securities Un- tions Granted to
derlying Options Employees in Exercise or Base
Name Granted (#) Fiscal Year Price ($/Sh) Expiration Date 5% ($) 10% ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Thomas W. Itin 0 0 N/A N/A N/A N/A
CEO
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Individual Grants Term
- ------------------------------------------------------------------------------------------------------------------------------------
Number of % of Total Op-
Securities Un- tions Granted to
derlying Options Employees in Exercise or Base
Name Granted (#) Fiscal Year Price ($/Sh) Expiration Date 5% ($) 10% ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Clarence H. Yahn 66,667 (a) 7.9% $.40 12/31/99 $ (3,300) $ 2,000
President, Ajay 66,667 (b) 7.9% $.40 12/31/99 $ (3,300) $ 2,000
66,666 (c) 7.9% $.40 12/31/99 $ (3,300) $ 2,000
50,000 (a) 6.0% $.45 12/31/99 $ (5,000) $ (1,000)
50,000 (b) 6.0% $.45 12/31/99 $ (5,000) $ (1,000)
50,000 (c) 6.0% $.45 12/31/99 $ (5,000) $ (1,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Duane R. Stiverson 15,000 (a) 1.8% $.40 12/31/96 $ 800 $ 1,600
VP & CFO 15,000 (b) 1.8% $.40 12/31/97 $ 1,100 $ 2,400
15,000 (d) 1.8% market 07/19/95 07/19/97 $ 600 $ 1,300
15,000 (e) 1.8% market 01/19/96 01/19/98 $ 700 $ 1,300
15,000 (f) 1.8% market 07/19/96 07/19/98 $ 700 $ 1,400
- ------------------------------------------------------------------------------------------------------------------------------------
Robert D. Newman 100,000 (b) 11.9% $.60 12/31/97 $(27,000) $(21,000)
General Manager 100,000 (c) 11.9% $.80 12/31/98 $(45,000) $(37,000)
of Leisure Life
====================================================================================================================================
</TABLE>
(a) Vesting 12/31/94 (c) Vesting 12/31/96 (e) Vesting 01/19/96
(b) Vesting 12/31/95 (d) Vesting 07/19/95 (f) Vesting 07/19/96
The following table sets forth information with respect to the named
executives concerning the unexercised warrants to purchase the Company's Common
Stock held as of the end of the fiscal year. No such executives exercised any
warrants in the last fiscal year.
AGGREGATED OPTION EXERCISES
IN 1994 AND DECEMBER 31, 1994 OPTION VALUES
<TABLE>
<CAPTION>
====================================================================================================================================
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options at FY-End (#) Options at FY-End ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Acquired
Name on Exercise (#) Value Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Thomas W. Itin 0 0 0 0 N/A N/A
CEO
- ------------------------------------------------------------------------------------------------------------------------------------
Clarence H. Yahn 0 0 66,667 133,333 $2,666 $5,333
President, Ajay 50,000 100,000 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Duane R. Stiverson 0 0 15,000 60,000 $ 600 $ 600
VP & CFO
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options at FY-End (#) Options at FY-End ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Acquired
Name on Exercise (#) Value Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert D. 0 0 0 200,000 -- --
Newman
General Manager
of Leisure Life
====================================================================================================================================
</TABLE>
BENEFIT PLANS
During April 1992, Ajay implemented a 401(K) benefit plan to cover all
employees with one year of service and had attained 18 years of age. On July 1,
1994, the plan was amended to allow employees with six months of service to
enroll in the plan. Employees may contribute up to 15% of compensation and the
Company has a discretionary matching contribution which will be determined on an
annual basis. The Company's matching contribution for 1992, 1993, and 1994 was
25% of the first 6% of employee contributions.
The Company has no retirement, pension, profit sharing or insurance or
medical reimbursement plans, exclusively covering its officers and directors.
EMPLOYMENT AND CONSULTING AGREEMENTS
On April 14, 1992, Ajay entered into an employment agreement with L. Dean
Cassell, then President of Ajay. Under the terms of the agreement, Mr. Cassell
was to receive an annual salary of $140,000 from June 30, 1992 through June 30,
1994 . Mr. Cassell was also to receive an incentive bonus equal to 8% of Ajay's
operating profits in excess of $500,000 and other fringe benefits as determined
by the Board of Directors. This employment agreement was terminated as of
February 26, 1994 and the Company entered into a consulting agreement with Mr.
Cassell for the period of February 27, 1994 through June 30, 1995. Under the
consulting agreement, Mr. Cassell was to provide a minimum of 4 days of service
per month for $4,000 per month during the period from February 27, 1994 through
June 30, 1994. During the period from July 1, 1994 through June 30, 1995, he is
to provide a minimum of 27 days of service for $27,000. On January 1, 1995, the
consulting agreement was changed to $1,000 per month.
The Company entered into an agreement with Thomas W. Itin on December 10,
1993 pursuant to which Mr. Itin agreed to serve as Chairman and President of the
Company through December 31, 1996, receiving salary of $1 per year for 1994 and
1995, with salary for 1996 to be determined by the Company's Board of Directors.
Such salary is to be at an appropriate level, given the contributions made by
Mr. Itin to the Company's success. This agreement also provided for the
conversion of certain instruments acquired by TICO into preferred stock of the
Company and the repricing and issuance of certain Common Stock purchase
warrants. See "Certain Transactions - TICO/Roadmaster Exchange."
The Company entered into an employment agreement with Robert D. Newman
effective July 31, 1994, pursuant to which Mr. Newman is paid an annual salary
of $65,000 for serving as the Vice President and General Manager of Leisure
Life. If Mr. Newman's employment is terminated within the first year of the
agreement, he is to be paid six months of severance pay. If termination occurs
after the first year of the agreement, he is to be paid nine months of severance
pay. The agreement continues unless and until terminated by Ajay or Leisure
Life.
DIRECTORS' COMPENSATION
The directors receive no compensation for their services as such, but are
reimbursed for reasonable costs incurred on behalf of the Company.
STOCK OPTION PLAN
On October 31, 1994, the shareholders of the Company adopted the 1994
Stock Option Plan, which provides for the granting of both incentive stock
options and non-qualified options to eligible
30
<PAGE>
employees, officers, and directors of the Company. an aggregate of 2,100,000
shares of Common Stock have been reserved for issuance pursuant to the exercise
of stock options under this Plan. The Plan is administered by the Compensation
Committee of the Board of Directors.
The Plan provides that disinterested directors, defined as non-employee
directors, will receive automatic option grants to purchase 5,000 shares of
Common Stock beginning with the 1994 annual shareholders meeting, and on the
date of each subsequent annual shareholders meeting. Options shall have an
option price equal to 100% of the fair market value of the Common Stock on the
grant date and shall vest in 33-1/3% installments commencing on the first
anniversary of the grant date.
Each option granted under the Plan will be evidenced by a written option
agreement between the Company and the optionee. Incentive stock options may be
granted only to employees (as defined by the Internal Revenue Code). The option
price of any incentive stock option may not be less than 100% of the fair market
value per share on the date of grant of the option; provided, however, that any
incentive stock option granted under the Plan to a person owning more than 10%
of the total combined voting power of the Common Stock will have an option price
of not less than 110% of the fair market value per share on the date of grant of
the incentive stock option. Each non-qualified stock option granted under the
Plan will be at a price no less than 80% of the fair market value per share on
the date of grant thereof, except that the automatic stock option grants to
disinterested directors will be at a price equal to the fair market value per
share on the date of grant. The exercise period of options granted under the
Plan may not exceed ten years from the date of grant thereof. Incentive stock
options granted to a person owning more than 10% of the total combined voting
power of the Common Stock will be for no more than five years.
An option may not be exercised unless the optionee then is an employee,
officer, or director of the Company or a subsidiary of the Company, and unless
the optionee has remained continuously as an employee, officer, or director of
the Company since the date of grant of the option. If the optionee ceases to be
an employee, officer, or director of the Company or subsidiary of the Company
other than by reason of death, disability, retirement, or for cause, all options
granted to such optionee, fully vested to such optionee but not yet exercised,
will terminate three months after the date the optionee ceases to be an
employee, officer, or director of the Company. All options which are not vested
to an optionee, under the conditions stated in this paragraph for which
employment ceases, will immediately terminate on the date the optionee ceases
employment or association.
During 1994, 840,000 options were granted and at December 31, 1994,
131,667 were vested and became exercisable. On May 24, 1995, an additional
180,000 options were granted.
CONFLICTS OF INTEREST
As described more fully in "Certain Transactions," Thomas W. Itin, the
Chairman and President of the Company, is also the chairman, president,
treasurer, chief executive officer, chief operating officer, and a 26.8%
beneficial owner of Williams Controls. Ajay has a current indebtedness at
December 31, 1994 of $5.4 million due February 1, 1996 pursuant to a Loan
Agreement with Williams Controls. The Company has guaranteed payment of this
loan and has pledged all of the outstanding stock of Ajay. Mr. Itin has
personally guaranteed this debt. In addition, in connection with the loan in May
1994 Williams Controls was granted options which can increase its stock
ownership to 15,228,520 shares (45.2%) of the Company's outstanding Common Stock
(without giving effect to this offering) if the loan is repaid in full by August
1, 1995, or 23,714,641 shares (56.3%) of the Company's outstanding Common Stock
(without giving effect to this offering) if the loan is not repaid in full by
August 1, 1995. Mr. Itin has indicated that he, as well as the other officers of
the Company, intend to do everything possible to enable the Company to pay the
loan to Williams Controls in full by August 1, 1995, even though this would
reduce the number of options available to Williams Controls.
The Bylaws of the Company permit the Company to buy from, sell to, or
otherwise deal with the officers and directors of the Company and firms,
partnerships, associations, or corporations of which the
31
<PAGE>
directors and officers of the Company may be members, directors, or officers, or
in which they have pecuniary interests. Further, the Bylaws provide that no
contract or other transaction between the Company and its directors, or any
other corporation, firm, association, or entity in which one or more of the
directors are officers or directors or are financially interested, shall be void
or voidable solely because of such relationship or interest, solely because such
directors are present at the meeting of the Company's Board of Directors which
authorizes, approves, or ratifies such contract or transaction, or solely
because their votes are counted for such purpose if any of the following exist:
(1) the fact of such relationship or interest is disclosed or known to the Board
of Directors which authorizes, approves, or ratifies the contract or transaction
by a sufficient vote without counting the votes or consents of the interested
directors; (2) the fact of such relationship is disclosed or known to the
stockholders entitled to vote and the stockholders authorize, approve, or ratify
such contract or transaction; or (3) the contract or transaction is fair and
reasonable to the Company.
Neither Mr. Itin nor Stanley V. Intihar, both of whom are officers and
directors of Williams Controls, vote in any meetings of the Company's Board of
Directors on matters pertaining to Williams Controls. Similarly, neither Mr.
Itin nor Anthony B. Cashen, both of whom are officers and directors of LBO
Capital Corp., vote in any meetings of the Company's Board of Directors on
matters pertaining to LBO Capital Corp.
PRINCIPAL SHAREHOLDERS
The following table sets forth information, as of May 25, 1995 with
respect to the beneficial ownership of shares of Common Stock of the Company,
its only class of voting securities outstanding, by each person known by the
Company to be the beneficial owner of more than five percent thereof, by its
directors, and by its officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
NAME AND ADDRESS BENEFICIALLY OWNED OF CLASS (1)
<S> <C> <C>
Thomas W. Itin 13,281,225 47.4%
7001 Orchard Lake Road (2)(3)
Suite 424
West Bloomfield, MI 48322
Williams Controls Industries, Inc. 15,228,520 45.2%
14100 S.W. 72nd Avenue (4)
Portland, OR 97204
TICO 8,676,540 33.1%
7001 Orchard Lake Road (5)
Suite 424
West Bloomfield, MI 48322
Acrodyne Profit Sharing Trust 2,773,471 11.5%
7001 Orchard Lake Road (6)
Suite 424
West Bloomfield, MI 48322
Robert R. Hebard 1,799,706 8.0%
7001 Orchard Lake Road (7)
Suite 426
West Bloomfield, MI 48322
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
NAME AND ADDRESS BENEFICIALLY OWNED OF CLASS (1)
<S> <C> <C>
Enercorp, Inc. 1,764,706 7.8%
7001 Orchard Lake Road
Suite 426
West Bloomfield, MI 48322
LBO Capital Corp. 1,680,000 7.4%
7001 Orchard Lake Road (8)
Suite 424
West Bloomfield, MI 48322
Robert D. Newman 1,426,000 6.3%
215 4th Avenue North (9)
P.O. Box 60
Baxter, TN 38544
Clarence H. Yahn 266,667 0.7%
(10)
Duane R. Stiverson 50,000 0.2%
(11)
Stanley V. Intihar 20,000 0.1%
Anthony B. Cashen 0 --
All officers and directors as a 32,072,118 80.8%
group (seven persons) (2)(4)(7)
(9)(10)(11)
</TABLE>
- ---------------
(1) Where persons listed on this table have the right to obtain additional
shares of Common Stock through the exercise of outstanding options or
warrants or the conversion of convertible securities within 60 days from
May 25, 1995, these additional shares are deemed to be outstanding for
the purpose of computing the percentage of Common Stock owned by such
persons, but are not deemed to be outstanding for the purpose of
computing the percentage owned by any other person. Percentages are based
on 22,545,537 shares outstanding.
(2) Includes Common Stock and shares of Common Stock issuable upon the
exercise of presently exercisable warrants and the conversion of
presently convertible Preferred Stock beneficially owned by Mr. Itin's
spouse and affiliates of Mr. Itin as follows:
<TABLE>
<S> <C> <C>
TICO 5,000,040 Common Stock
First Equity Corporation 151,214 Common Stock
Acrodyne Profit Sharing Trust 2,773,471 Common Stock and Warrants
LBO Capital Corp. 1,680,000 Common Stock and Warrants
----------
9,604,725
TICO (12,500 shares of Series B Preferred Stock
convertible at one share for 294.12 shares of Common Stock 3,676,500 Preferred Stock Conversion
----------
13,281,225
==========
</TABLE>
Mr. Itin disclaims beneficial ownership in the securities owned by LBO
Capital Corp. and First Equity Corporation in excess of his pecuniary
interest.
33
<PAGE>
(3) Does not include 4,117,647 shares of Common Stock and 11,110,873 warrants
owned by Williams Controls Industries, Inc. Mr. Itin is Chairman of the
Board, President, Chief Executive Officer, Chief Operating Officer,
Treasurer and 26.8% beneficial owner of Williams Controls. Even though
Mr. Itin is a director of Williams Controls, he abstains from voting on
matters pertaining to the Company in meetings of the directors of
Williams Controls. If the shares and warrants owned by Williams were
included, the number of shares beneficially owned would be 28,509,745 and
the percentage of class would be 72.9%.
(4) Includes 11,110,873 shares of Common Stock issuable upon exercise of
certain options. If the Company does not repay the loan to Williams
Controls by August 1, 1995, the number of options will increase to
19,596,994. See "Certain Transactions."
(5) Includes 3,676,500 shares of Common Stock issuable upon conversion of
12,500 shares of presently convertible Series B Preferred Stock, at a
rate of 294.12 shares of Common Stock for every one share of Preferred
Stock. TICO is a Michigan partnership of which Mr. Itin is the Managing
Partner.
(6) Includes 1,597,000 shares of Common Stock issuable upon exercise of
options. Mr. Itin is trustee and beneficiary of Acrodyne Profit Sharing
Trust.
(7) Includes 1,764,706 shares owned by Enercorp, Inc., a Colorado corporation
of which Mr. Hebard is Chairman of the Board of Directors and President.
(8) Includes 200,000 shares of Common Stock issuable upon exercise of
warrants. LBO Capital Corp. is a Colorado corporation of which Mr. Itin
is a 51% shareholder, Chairman of the Board of Directors, and president.
(9) Includes 400,000 shares of Common Stock being held in escrow pending
release subject to subsequent conditions.
(10) Includes 116,667 shares of Common Stock issuable upon the exercise of
outstanding stock options.
(11) Includes 30,000 shares of Common Stock issuable upon the exercise of
outstanding stock options.
POSSIBLE CHANGE IN CONTROL
Ajay has a current indebtedness at March 31, 1995 of $6.8 million due
February 1, 1996 pursuant to a Loan Agreement with Williams Controls. The
Company has guaranteed payment of this loan and has pledged all of the
outstanding stock of Ajay. In addition, the Company entered into a Joint
Venture Implementation Agreement with Williams Controls concurrently with the
execution of the Loan Agreement. Pursuant to the Joint Venture Implementation
Agreement, the Company granted to Williams Controls the option to purchase
shares of the Common Stock of the Company at various option prices. Williams
Controls would have to exercise options to purchase 14,384,113 shares of Common
Stock, and retain the 4,117,647 shares currently owned, in order to obtain
ownership of more than 50% of the Company's outstanding Common Stock. This
assumes that the Company does not issue any other shares of Common Stock. See
"Certain Transactions" for more information on the Joint Venture Implementation
Agreement.
CERTAIN TRANSACTIONS
With regard to transactions involving affiliates of the Company, including
those described below, the Company utilizes fairness opinions or obtains the
approval of the disinterested directors of the Company. See "Management and Key
Personnel - Conflicts of Interest." Management of the Company believes that the
terms of the transactions described below were no less favorable than those
which could be obtained from unaffiliated sources. It is likely that officers,
directors, and affiliates of the Company will continue to provide financial
assistance in the future. If provided, such assistance will be at a fair market
value (i.e., on terms no less favorable to the Company than those that can be
obtained from unaffiliated sources) and approved by a majority of the
disinterested directors of the Company.
TICO/ROADMASTER EXCHANGE
The Company was formed in 1988 to acquire certain assets, liabilities and
operations of the sports accessory business of Roadmaster Corporation
("Roadmaster"). The Company was capitalized initially through a private
placement of stock and an initial public offering (approximately $3.1 million),
a long-term debt of $4 million owed to Roadmaster for the purchase of the
business, and a revolving credit facility guaranteed by Equitex, Inc., an
affiliate of Roadmaster. Until October 1993, the Company was controlled, in
part, by Roadmaster and Equitex. TICO, a partnership of which Thomas W. Itin is
the general partner, obtained control from Roadmaster and Equitex in October
1993, pursuant to the terms of an Exchange Agreement. Mr. Itin is the Chairman
and President of the Company.
In the Exchange Agreement, Roadmaster and Equitex agreed to substantially
divest all of their interest in the Company by transferring to TICO all of the
Company's outstanding Common Stock purchase warrants held by them, a $217,000
principal amount note payable to Roadmaster, 29,500 shares of the Company's
Series A 8% cumulative convertible preferred stock, and all outstanding accounts
receivable due Roadmaster. 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 ten 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 obligations, guarantees, and
collateral of Equitex under the credit facility,
34
<PAGE>
including the release of 1,000,000 shares of Roadmaster common stock owned by
Equitex and pledged to a bank as collateral. Mr. Itin and TICO further agreed to
transfer to Roadmaster all the Roadmaster common stock purchase warrants held by
Mr. Itin, along with TICO's payment of $200,000 to Roadmaster.
Based upon completion of the Exchange Agreement and refinancing of debt
obligations, the Board of Directors of the Company approved a plan to convert
the value of instruments transferred to TICO, into preferred stock, which could
be converted to Common Stock of the Company at a price of $.34 per share. The
Board further approved a reduction in the price of the Common Stock purchase
warrants received by TICO under the Exchange Agreement to $.34 per share and to
issue warrants in like amount of warrants received at the date of exchange that
had subsequently expired. These warrants were transferred by TICO to Acrodyne
Profit Sharing Trust.
In accordance with the refinancing plan previously approved by the Board
of Directors, on August 12, 1994, the Board authorized a new Series B 8%
Cumulative Convertible Preferred Stock issue (the "Series B Preferred Stock"),
which contains a provision whereby holders of the Series A 8% Cumulative
Convertible Preferred Stock (the "Series A Preferred Stock") could exchange
shares, on a one-for-one share basis, for Series B shares. Holders of the Series
B Preferred Stock may convert one share of the Series B Preferred Stock for
294.12 shares of the Common Stock of the Company. On October 3, 1994 the Company
was notified by TICO, the only holder of the Series A Preferred Stock, that it
wished to exchange its 29,500 Series A shares for the same number of Series B
shares. In addition, TICO then converted 17,000 shares of the Series B
Preferred Stock into 5,000,040 shares of the Common Stock of the Company.
LOAN FROM WILLIAMS CONTROLS.
On April 14, 1994 the Company was advised by BankAmerica that the Second
Amended Restated Loan and Security Agreement ("Credit Agreement") between
BankAmerica and the Company's wholly-owned subsidiary, Ajay, had been purchased
by Roadmaster Industries, Inc. On May 5, 1994, Ajay paid Roadmaster Industries
in full all outstanding obligations due under its Credit Agreement and entered
into its Loan Agreement with Williams Controls for a loan of up to $7,000,000.
The Loan Agreement requires monthly interest only payments at the prime rate of
First Interstate Bank of Oregon plus 3.25% and was originally scheduled to
expire on November 4, 1994 and is currently extended to February 1, 1996. The
Loan Agreement is secured by a lien on substantially all of the assets of Ajay
and is guaranteed by the Company and the Company's President. The Company's
guaranty is secured by a pledge of all of the outstanding stock of Ajay.
In addition, concurrent with the establishment of the Loan Agreement with
Williams Controls, in May 1994 the Company and Ajay entered into a Joint Venture
Implementation Agreement with Williams Controls in which the Company granted
Williams Controls an option to purchase up to 51% of the then outstanding Common
Stock of the Company at various option prices ranging between $.34 and $1.00 per
share, together with a one-time right to demand registration of the shares
underlying the options and piggy-back registration rights.
On April 5, 1995, the Company and Williams Controls agreed to
modifications of the terms of the Loan Agreement and the Joint Venture
Implementation Agreement. The changes include (1) a waiver of Williams Controls'
preemptive right to purchase up to 51% so long as the Company completes this
Offering by May 31, 1995 (which date may be extended for up to 120 days), (2) an
extension of the due date of the loan until February 1, 1996, (3) a reduction in
the maximum loan amount from $7.0 million to $5.6 million as of August 1, 1995,
(4) a reduction in the number of $1.00 options granted to Williams Controls from
1,394,979 to 348,745 exercisable at $.50 per share if the loan is repaid by
August 1, 1995, (5) a reduction in the exercise price of all unexercised options
with an exercise price greater than $.50 per share to $.50 if the loan is not
repaid by August 1, 1995, (6) an extension of the expiration date of all options
granted to Williams Controls from
35
<PAGE>
May 5, 1998 to August 1, 1999, and (7) an additional four-year extension of the
manufacturing joint venture at the Company's Delavan, Wisconsin, and Mexicali,
Mexico, facilities from May 5, 1998 to August 1, 2002. See
"Business-Properties."
The agreement, with the modifications, provides Williams Controls with
the following options to purchase the Company's Common Stock:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS IF NUMBER OF OPTIONS IF
OPTION PRICE LOAN IS REPAID BY 8/1/95 LOAN IS NOT REPAID BY 8/1/95
<S> <C> <C>
$ .34 8,834,866 (1) 8,834,866 (1)
$ .40 3,487,447 6,974,894
$ .50 2,906,207 7,904,881
---------- ----------
15,228,520 23,714,641
</TABLE>
- ---------------------
(1) On October 3, 1994, Williams Controls exercised its option to purchase
4,117,647 shares of the Company's Common Stock at a price of $.34 per
share and, in so doing, reduced the outstanding loan balance from the
Company by $1,400,000. Williams Controls retains the right to purchase
another 4,717,219 shares of the Company's Common Stock at $.34 per share.
Mr. Itin, the Chairman and President of the Company, is, and was at the
time of the Loan Agreement, chairman, president, treasurer, chief executive
officer, and chief operating officer of Williams Controls, a publicly-held
corporation. Mr. Itin has personally guaranteed the obligations of the Company
to Williams Controls.
OTHER TRANSACTIONS
On October 3, 1994, the Acrodyne Profit Sharing Trust, an entity
controlled by Mr. Itin, purchased 1,176,471 shares of Common Stock for $400,000.
Also on that date, Enercorp, Inc., a business development company purchased
1,764,706 shares of Common Stock for $600,000. The closing bid price of the
Common Stock on October 3, 1994 was $.53, as compared to the purchase price of
$.34 per share. The agreements to purchase the shares were negotiated with the
Company in early August 1994, when the market prices for the stock were between
$.28 and $.41. Robert R. Hebard, the Secretary and a Director of the Company, is
chairman of the board of directors and president of Enercorp, Inc. Mr. Itin is a
significant shareholder of Enercorp, Inc. As of May 25, 1995, Mr. Itin
controlled directly and indirectly 7,807,725 (34.6%) of the outstanding Common
Stock of the Company. See "Principal Shareholders."
In December 1993, First Equity Corporation established a letter of credit
on behalf of the Company, which was amended during 1994, totaling $271,000. This
letter of credit was used to purchase inventory. In addition, First Equity
Corporation advanced the Company $250,000 during January 1994 and was repaid in
June 1994 from the Company's working capital. The total amount of principal and
interest paid was $258,235. First Equity Corporation is a Michigan corporation
of which Mr. Itin's wife is a shareholder, president, and chairman of the board
of directors.
DESCRIPTION OF SECURITIES
The Company is authorized to issue 100,000,000 shares of $.01 par value
common stock (the "Common Stock") and 10,000,000 shares of $.01 par value
preferred stock. As of the date of this Prospectus, there are issued and
outstanding 22,545,537 shares of Common Stock and 12,500 shares of Series B
Preferred Stock.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of the Common Stock
are entitled to receive dividends when, as, and if declared by the Board of
Directors out of funds legally available therefor, and to share ratably in the
assets of the Company legally available for distribution to the common
shareholders in the event of liquidation or dissolution. The Common Stock does
not have cumulative voting rights, which means the holder or holders of more
than half of the shares voting for the election of directors can elect all the
directors then being elected. The holders of Common Stock do not have preemptive
or other rights to acquire or subscribe for additional unissued or treasury
shares. All outstanding shares of Common Stock,
36
<PAGE>
and shares of Common Stock issuable upon conversion of the Series C Preferred
Stock or exercise of the Warrants, when issued and paid for, will be fully paid
and not liable for further call or assessment.
PREFERRED STOCK
Under the Company's Certificate of Incorporation, the Company is
authorized to issue up to 10,000,000 shares of preferred stock, in one or more
series, with such rights, preferences, qualifications, limitations, and
restrictions as shall be set forth in the Certificate of Designation authorizing
the issuance of such stock. The Company has established a Series A 8% Cumulative
Convertible Preferred Stock consisting of 100,000 shares (the "Series A
Preferred Stock), a Series B 8% Cumulative Convertible Preferred Stock
consisting of 100,000 shares (the "Series B Preferred Stock"), and a Series C
10% Cumulative Convertible Preferred Stock consisting of 700,000 shares (the
"Series C Preferred Stock").
As described in "Certain Transactions - TICO/Roadmaster Exchange," all of
the issued and outstanding shares of Series A Preferred Stock were exchanged for
shares of Series B Preferred Stock. Accordingly, there are no shares of Series A
Preferred Stock issued or outstanding. Although the Company can issue shares of
Series A Preferred Stock, it has no plans to issue any such shares. There are
issued and outstanding 12,500 shares of Series B Preferred Stock. Prior to this
offering, no shares of Series C Preferred Stock were issued or outstanding.
SERIES B PREFERRED STOCK
DIVIDENDS. The holders of Series B Preferred Stock will be entitled to
receive, when, as and if declared by the Board of Directors of the Company, out
of funds legally available therefor, cumulative dividends at the rate of 8% per
annum on the stated value of $100.00 per share, or $8.00 per share per annum,
and no more, such dividends to accrue from the date of first issuance. Such
dividends shall be payable in equal preference and priority to the obligation to
pay dividends on the Company's Series C Preferred Stock, and in preference to
any payment of any dividend on any other shares of capital stock of the Company.
To the extent that the Company does not have a sufficient amount of cash to pay
any dividends declared on both the Series B and Series C Preferred Stock, the
Series C Preferred Stock shall have priority as to payment in cash and dividends
may be paid to holders of the Series B Preferred Stock in additional shares of
Series B Preferred Stock, based on the stated value of $100.00 per share.
LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution or
winding up of the Company, whether voluntary of involuntary, any holder of the
Series B Preferred Stock shall, for each share of Series B Preferred Stock, be
entitled to receive a distribution of $100.00 plus any accrued and unpaid
dividends out of the assets of the Company, on an equal preference basis to the
Series C Preferred Stock, except that such Series C Preferred Stock is entitled
to a distribution of $10.00 per share, but prior to any distribution of assets
with respect to any other shares of capital stock of the Company other than the
Series C Preferred Stock, as a result of such liquidation, distribution or
winding up of the Company.
CONVERSION. Each share of Series B Preferred Stock is convertible into
294.12 shares of Common Stock at the sole discretion of the holder.
OPTIONAL REDEMPTION. The Company shall have the right and option upon
notice to the holders of the Series B Preferred Stock to call, redeem and
acquire any or all of the shares of Series B Preferred Stock at a price equal to
$100.00 per share, plus any accrued and unpaid dividends, at any time to the
extent such shares have not been previously converted to Common Stock pursuant
to the terms described above; provided, however, that the holders of the Series
B Preferred Stock shall, in any event, have the right during the 30-day period
immediately following the date of the Notice of Redemption, which shall fix the
date for redemption (the "Redemption Date"), to convert their shares of Series B
Preferred Stock in accordance with the terms described above. If the shares are
converted during such 30-day
37
<PAGE>
period, this call option shall be deemed not to have been exercised by the
Company with respect to such shares so converted. Said Notice of Redemption
shall require the holders to surrender to the Company, on or before the
Redemption Date, to the Company's transfer agent, the certificates representing
the shares of Series B Preferred Stock to be redeemed. Notwithstanding the fact
the certificates representing the shares called for redemption have not been
surrendered for redemption and cancellation on or after the Redemption Date,
such shares shall be deemed to be expired and all rights of the holders thereof
shall cease and terminate.
VOTING AND PREEMPTIVE RIGHTS. The holders of the Series B Preferred
Stock shall have no voting rights except to the extent required by the Delaware
General Corporation Law and the Series B Preferred Stock shall be entitled to no
preemptive rights.
SERIES C PREFERRED STOCK
DIVIDENDS. The holders of Series C Preferred Stock will be entitled to
receive, out of assets legally available for such purpose, in equal preference
and priority to the obligations to pay dividends on the Series B Preferred
Stock, but before any distributions shall be declared, paid, or set aside, or
any other distribution shall be declared or made, upon any other shares of
capital stock of the Company, distributions in cash at the rate of 10% per annum
on the stated value of $10.00 per share, or $1.00 per share per annum. Such
dividend shall be paid on or before the 30th day after the last day of the
fiscal quarter with respect to which such distribution shall be payable
commencing July 1, 1995, such dividends to accrue from the date of first
issuance. If any distributions payable on any share of Series C Preferred Stock
shall not be paid for any reason, the right of the holders of such shares of
Series C Preferred Stock to receive payment of such distribution shall not lapse
or terminate, but each such unpaid distribution (the "Unpaid Dividends") shall
accumulate and shall be paid without interest to such holders, when and as
authorized by the Board of Directors of the Company. To the extent that the
Company does not have a sufficient amount of cash to pay any dividends declared
on both the Series B and Series C Preferred Stock, the Series C Preferred Stock
shall have priority as to payment in cash and dividends may be paid to holders
of the Series B Preferred Stock in additional shares of Series B Preferred
Stock, based on the stated value of $100.00 per share. Holders of shares of
Series C Preferred Stock are not entitled to any dividend, whether payable in
cash, property, or stock, in excess of full cumulative dividends. No
distribution shall be declared, ordered, or made upon any other class of stock
of the Company, nor shall any sums be set aside for or applied to the purchase
or redemption of any shares of any other class of stock of the Company, unless
and until all Unpaid Dividends payable upon each issued and outstanding share of
Series C Preferred Stock shall have been fully paid or a distribution shall have
been declared and a sum sufficient for full payment of the Unpaid Dividends set
apart therefor.
LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution or
winding up of the Company, whether voluntary of involuntary, any holder of the
Series C Preferred Stock shall, for each share of Series C Preferred Stock, be
entitled to receive a distribution of $10.00 plus any accrued and unpaid
dividends out of the assets of the Company, on an equal preference basis to the
Series B Preferred Stock, except that such Series B Preferred Stock is entitled
to a distribution of $100.00 per share, but prior to any distribution of assets
with respect to any other shares of capital stock of the Company other than the
Series B Preferred Stock, as a result of such liquidation, distribution or
winding up of the Company.
CONVERSION. At any time at the option of the holder, each share of
Series C Preferred Stock shall be convertible into shares of Common Stock.
Should the price of the Company's Common Stock reach or exceed a closing high
bid price of $ for ten (10) consecutive business days (the "Mandatory
Conversion Event"), each share of the Series C Preferred Stock shall
automatically convert to shares of Common Stock of the Company. The
effective date of such automatic conversion shall be the day following the
Mandatory Conversion Event for the purpose of determining dividends payable and
other rights and preferences. Upon the occurrence of the Mandatory Conversion
Event, and the subsequent automatic conversion, all dividends
38
<PAGE>
accruing as of the Mandatory Conversion Event shall become payable within 30
days of such date, and additional dividends shall not accrue nor require payment
subsequent to such date.
OPTIONAL REDEMPTION. The Company shall have the right and option upon
notice to the holders of the Series C Preferred Stock to call, redeem and
acquire any or all of the shares of Series C Preferred Stock at a price equal to
$11.00 per share, plus any accrued and unpaid dividends, at any time to the
extent such shares have not been previously converted to Common Stock pursuant
to the terms described above; provided, however, that the holders of the Series
C Preferred Stock shall, in any event, have the right during the 30-day period
immediately following the date of the Notice of Redemption, which shall fix the
date for redemption (the "Redemption Date"), to convert their shares of Series C
Preferred Stock in accordance with the terms described above. If the shares are
converted during such 30-day period, this call option shall be deemed not to
have been exercised by the Company with respect to such shares so converted.
Said Notice of Redemption shall require the holders to surrender to the Company,
on or before the Redemption Date, to the Company's transfer agent, the
certificates representing the shares of Series C Preferred Stock to be redeemed.
Notwithstanding the fact the certificates representing the shares called for
redemption have not been surrendered for redemption and cancellation on or after
the Redemption Date, such shares shall be deemed to be expired and all rights of
the holders thereof shall cease and terminate.
VOTING AND PREEMPTIVE RIGHTS. The holders of the Series C Preferred
Stock shall have no voting rights except to the extent required by the Delaware
General Corporation Law and the Series C Preferred Stock shall be entitled to no
preemptive rights.
WARRANTS
The Warrants will be issued in registered form under, governed by, and
subject to the terms of a warrant agreement (the "Warrant Agreement") between
the Company and American Securities Transfer, Inc. as warrant agent (the
"Warrant Agent"). The following statements are brief summaries of certain
provisions of the Warrant Agreement. Copies of the Warrant Agreement may be
obtained from the Company or the Warrant Agent and have been filed with the
Securities and Exchange Commission as an exhibit to the Registration Statement
of which this Prospectus is a part. See "Additional Information."
The Company has authorized the issuance of Warrants to purchase an
aggregate of up to 603,750 shares of Common Stock (including Warrants to
purchase up to 78,750 shares of Common Stock issuable pursuant to the
Underwriters' over-allotment option but excluding Warrants underlying the
Representative's Warrants) and has reserved an equivalent number of shares of
Common Stock for issuance upon exercise of such Warrants.
The terms of these Warrants are identical to outstanding publicly-held
warrants to purchase an aggregate of 883,470 shares of Common Stock, which were
sold in the Company's initial public offering. Accordingly, "Warrants" refers to
those offered hereby and the outstanding publicly-held warrants.
The Warrants are subject to redemption by the Company at $.05 per Warrant
at any time on forty-five (45) days written notice provided that the closing
high bid price of the Common Stock has exceeded the Warrant Exercise Price by
50% or more for twenty (20) consecutive trading days within twenty (20) calendar
days preceding the mailing of the notice of redemption. In addition, the Company
must have on file a current registration statement pertaining to the Common
Stock underlying the Warrants in order for the Warrants to be redeemed by the
Company.
Each Warrant entitles the holder thereof to purchase one share of Common
Stock at a price of $1.00 (the "Warrant Exercise Price"). The right to exercise
the Warrants will commence immediately and will terminate at the close of
business on December 31, 1996. The Warrants contain provisions that protect the
Warrant holders against dilution by adjustment of the exercise price in certain
events including,
39
<PAGE>
but not limited to, stock dividends, stock splits, reclassifications, or
mergers. A Warrant holder will not possess any rights as a stockholder of the
Company. The shares of Common Stock, when issued upon the exercise of the
Warrants in accordance with the terms thereof, will be fully paid and non-
assessable.
At any time when the Warrants are exercisable and as a condition to
redemption of the Warrants, the Company is required to have a current
registration statement on file with the Securities and Exchange Commission and
to effect appropriate qualifications under the laws and regulations of the
states in which the holders of Warrants reside in order to comply with
applicable laws in connection with the exercise of the Warrants and the resale
of the Common Stock issued upon such exercise. So long as the Warrants are
outstanding, the Company will undertake to file all post-effective amendments to
the registration statement required to be filed under the Securities Act, and to
take appropriate action under federal and state securities laws to permit the
issuance and resale of Common Stock issuable upon exercise of the Warrants. In
the Warrant Agreement, the Company has agreed to register or qualify the shares
in all of the jurisdictions in which the securities offered hereby are
registered or qualified. The Company may determine not to register or qualify
the shares underlying the warrants in certain other jurisdictions where the time
and expense involved would not justify such registration and qualification.
There can be no assurance that the Company will be in a position to effect such
action under the federal and applicable state securities laws, and the failure
of the Company to effect such action may cause the exercise of the Warrants and
the resale or other disposition of the Common Stock issued upon such exercise to
become unlawful. The Company may amend the terms of the Warrants but only by
extending the termination date or lowering the exercise price. The Company has
no present intention of amending such terms.
CERTAIN PROVISIONS OF DELAWARE LAW AND THE COMPANY'S CERTIFICATE OF
INCORPORATION
TAKEOVER STATUTE. Section 203 of the Delaware General Corporation Law
prohibits business combinations between a public corporation and an "interested
stockholder" for a period of three years subsequent to the interested
stockholder becoming such. An "interested stockholder" is defined as the owner
of 15 percent or more of the outstanding voting stock of the corporation and
includes affiliates and associates of a 15 percent owner, so as to prevent
business combinations with entities related to an interested stockholder.
Prohibited business combinations include a wide range of transactions with or
caused by an interested stockholder in which the interested stockholder receives
or could receive something the other stockholders do not.
The statute contains a number of ways by which one intending to become,
or who has become, an interested stockholder may avoid the three-year
proscription. The following are applicable to the Company: (1) the board of
directors of the corporation approves either the business combination or the
stockholder becoming an interested stockholder prior to his acquiring 15 percent
of the voting stock; (2) the stockholder acquires 85 percent or more of the
outstanding voting stock of the corporation in the transaction by which the
stockholder becomes an interested stockholder; or (3) the combination is
approved by the board of directors of the corporation and is approved by the
holders of two-thirds of the outstanding voting stock of the corporation which
is not owned by the interested stockholder at an annual or special meeting of
stockholders.
Section 203 may deter any potential unfriendly offers or other efforts to
obtain control of the Company that are not approved by the Board of Directors.
Such provisions could also deprive the stockholders of opportunities to realize
a premium on their Common Stock. At the same time, these provisions may have the
effect of inducing any persons seeking control of the Company or a business
combination with the Company to negotiate terms acceptable to the Board of
Directors.
"COMPROMISE" PROVISION. The Company's Certificate of Incorporation
contains a provision pursuant to which application may be made to a court of
equitable jurisdiction in the State of Delaware to order a meeting of the
stockholders of the Company for the purpose of approving a compromise or
arrangement between the Company and its stockholders. Such compromise or
arrangement may be
40
<PAGE>
binding on all stockholders if sanctioned by the court and if holders
representing three-fourths of the outstanding shares agree to any compromise or
arrangement. This provision is also applicable to a compromise or arrangement
with creditors or any class of creditors or any class of stockholders of the
Company.
TRANSFER AGENT AND WARRANT AGENT
The Transfer Agent for the Company's Common and Preferred Stock and the
Warrant Agent is American Securities Transfer, Inc., 938 Quail Street, Suite
101, Lakewood, Colorado 80215.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, 22,545,537 shares of Common Stock will
be outstanding. Of these shares, 8,284,184 shares are freely tradable without
restriction under the Act and 14,261,353 are restricted. Of the restricted
shares, 13,634,864 are held by "affiliates" of the Company. An "affiliate" of an
issuer is a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
such issuer. Shares held by an "affiliate" may be sold only if registered under
the Act or pursuant to an applicable exemption from registration, including the
applicable provisions of Rule 144. With respect to the remaining 626,489
restricted shares, 552,489 are currently eligible for sale under Rule 144 and
74,000 will become eligible in August 1996.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for at
least two years, is entitled to sell, within any three-month period, that number
of shares that does not exceed the greater of one percent of the then
outstanding shares or the average weekly trading volume of the then outstanding
shares during the four calendar weeks preceding each such sale. Furthermore, a
person who is not deemed an "affiliate" of the Company and who has beneficially
owned shares for at least three years is entitled to sell such shares under Rule
144 without regard to the volume limitations described above.
The Representative has required in the underwriting agreement that sales
of the outstanding restricted Common Stock held by officers, directors, and
holders of 5% or more of the outstanding Common Stock may not commence until 12
months from the date of this Prospectus, without the prior written consent of
the Representative. Of the restricted shares held by persons who are officers,
directors, and holders of 5% or more of the outstanding Common Stock, 5,000,040
shares are currently eligible for sale under Rule 144, 1,576,000 shares will
become eligible for sale under Rule 144 in August 1996 and 7,058,864 shares will
become eligible for sale in October 1996.
There are also outstanding as of the date of this Prospectus, Warrants to
purchase 883,470 shares of Common Stock and options to purchase 2,867,000 shares
of Common Stock, of which 2,032,300 options vested are currently exercisable,
and the remaining 834,700 options will vest and become exercisable at various
times beginning October 31, 1995. Williams Controls has a conditional right to
purchase up to 19,596,994 shares of Common Stock. See "Certain Transactions."
In addition, the 12,500 outstanding shares of Series B Preferred Stock
may be converted into 3,676,500 shares of Common Stock at any time.
No predictions can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Stock prevailing from time to time. The Company is unable to
estimate the number of shares that may be sold in the public market under Rule
144, since this will depend on the trading volume, the market price for the
Common Stock, and other factors. Nevertheless, sales of substantial amounts of
Common Stock, or the perception that such sales could occur, could have a
material adverse effect on prevailing market prices.
41
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Schneider Securities, Inc., is
acting as Representative, have severally agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company the
number of shares of Series C Preferred Stock and Warrants set forth opposite
their names in the table below:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
NAME SHARES WARRANTS
<S> <C> <C>
Schneider Securities, Inc...............
------- -------
Total................................... 525,000 525,000
======= =======
</TABLE>
The Series C Preferred Stock and Warrants are being offered by the
several Underwriters, when, as and if delivered to and accepted by the
Underwriters and subject to their rights to reject orders in whole or in part
and subject to approval of certain legal matters by counsel, to the accuracy of
each of the representations and warranties contained in the Underwriting
Agreement on the part of the Company, to the performance by the Company of all
its agreements contained in the Underwriting Agreement, to the fulfillment of or
compliance by the Company with all of the covenants and conditions contained in
the Underwriting Agreement, and to various other conditions set forth in the
Underwriting Agreement.
The Company has been advised by the Representative that the Underwriters
propose to offer the Series C Preferred Stock and Warrants purchased by them
directly to the public at the initial public offering prices set forth on the
cover of this Prospectus and to certain selected dealers at those prices less a
concession within the discretion of the Representative. The Underwriters may
allow, and such dealers may reallow, a concession within the discretion of the
Representative. The Underwriters are committed to purchase and pay for all of
the Series C Preferred Stock and Warrants (other than the Series C Preferred
Stock and Warrants subject to the over-allotment option) if any are purchased.
There are no restrictions on the purchase of Series C Preferred Stock and
Warrants by affiliates or persons otherwise associated with the Company or any
subsidiary. The Underwriters do not intend to sell any Series C Preferred Stock
or Warrants offered hereby through the use of discretionary authority. After the
commencement of the offering, the offering prices and the selling terms may be
changed by the Underwriters should market conditions require.
The Company has granted the Representative an over-allotment option,
exercisable during the 45-day period after the date of this Prospectus, to
purchase up to a maximum of an additional 78,750 shares of Series C Preferred
Stock and/or 78,750 Warrants on the same terms as the Series C Preferred Stock
and Warrants being purchased by the Underwriters from the Company. The
Representative may exercise the over-allotment option only to cover over-
allotments in the sale of the Series C Preferred Stock and Warrants offered
hereby.
The Underwriters will purchase the Series C Preferred Stock and Warrants
(including the Series C Preferred Stock and Warrants subject to the over-
allotment option) from the Company at prices per share of Series C Preferred
Stock and per Warrant representing a discount of 10% from the public offering
prices. In addition, the Company has agreed to pay the Representative a
nonaccountable expense allowance of 3% of the aggregate public offering price of
the Series C Preferred Stock and Warrants, which will include the over-allotment
option, if exercised. The payment of this allowance at closing will be reduced
by $35,000 previously advanced to the Representative.
The Company has agreed to enter into a financial consulting agreement
with the Representative at the Closing, pursuant to which the Company will agree
to pay the Representative $2,291.67 per month for a period of 24 months, with
the entire consulting fee payable in advance upon the Closing. The consulting
services shall include, but shall not be limited to, advising the Company in
connection with business and financial planning, corporate organization and
structure, financial matters in connection with the operation of the business of
the Company, private and public equity and debt financing, acquisitions,
42
<PAGE>
mergers, and other similar business combinations, the Company's relations with
its stockholders, preparation and distribution of periodic reports, and analysis
of the Company's financial statements.
The Company has entered into a corporate consulting agreement with the
Representative pursuant to which the Company has paid $35,000 for the services
described in the agreement. At the time of Closing, the $35,000 payment shall be
deducted from the non-accountable expense allowance due the Underwriter,
described above.
If, upon request by the Company, the Representative arranges for equity
or debt financing accepted by and closed with the Company (other than this
Offering) at any time prior to December 9, 1997, the Company has agreed to pay a
10% or 5% commission, respectively, to the Representative based on the amount of
equity or debt financing. If the Representative obtains an increase in the
Company's line of credit, which is accepted by and closed with the Company, the
Company has agreed to pay the Representative a fee equal to 1% of the amount of
increase. If the Representative arranges for the purchase or sale of assets, for
a merger, acquisition, or joint venture accepted by and closed with the Company,
at any time prior to December 9, 1997, the Company has agreed to pay the
Representative a fee based on the value of the transaction ranging from 5% for
the first $1,000,000 to 1% in excess of $4,000,000.
The Company has also agreed to indemnify the Underwriters against certain
liabilities that may be incurred in connection with the Offering, including
liabilities under the Securities Act of 1933, or to contribute the payments that
the Underwriters may be required to make in respect thereof.
The Company's directors, officers, and each holder of 5% or more of the
Company's Common Stock have agreed not to sell their shares of Common Stock in
the Company without the Representative's prior written consent for a period of
one year from the date of this Prospectus.
In connection with this Offering, all or some of the Underwriters may
engage in market making activities in the Common Stock and the Warrants on the
NASDAQ Small-Cap Market in accordance with Rule 10b-6A under the Exchange Act
during the distribution of such securities pursuant to this Offering.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which is filed as an exhibit to the Registration
Statement. See "Additional Information."
REPRESENTATIVE'S WARRANTS
The Company has agreed to sell to the Representative at the close of this
offering, for $100, Warrants to purchase 52,500 shares of Series C Preferred
Stock and 52,500 Warrants at 120% of the public offering prices set forth on the
cover page of this Prospectus (the "Representative's Warrants"). The
Representative's Warrants will not be transferable or assignable except to the
officers of the Representative, or to selected dealers and their officers or
partners and will not be exercisable for a period of one year after the date of
this Prospectus. After such one year period, the Representative's Warrants will
be assignable and transferable and will be exercisable for a period of four
years, except that the Representative's Warrants to purchase Warrants will be
exercisable during the period provided in the Warrant. If the Representative's
Warrants are not exercised during their term, they will automatically expire.
The Company has agreed to set aside and at all times have available a sufficient
number of shares of Series C Preferred Stock and Warrants to be issued upon the
exercise of the Representative's Warrants.
The Representative's Warrants provide that during the period commencing
one year after the date of this Prospectus and ending five years after the date
of this Prospectus, the Company will, upon written request by the holders of at
least 50% of the Representative's Warrants or the Series C Preferred
43
<PAGE>
Stock or Warrants issuable on exercise of the Representative's Warrants, file
one registration statement or Regulation A offering statement under the
Securities Act of 1933, as amended with the Securities and Exchange Commission
and certain states to permit the public sale of such Representative's Warrants,
Series C Preferred Stock or Warrants.
In addition, the holders of the Representative's Warrants and securities
issued upon exercise of the Representative's Warrants will be entitled,
commencing one year after the date of this Prospectus and ending five years
after the date of this Prospectus, to include all or any portion of the
securities issued upon exercise of the Representative's Warrants in any
registration statement (except for registration statements filed by the Company
on Form S-4, Form S-8, or any other inappropriate form), or in any offering
statement on Form 1-A to the maximum extent permissible, filed by the Company.
In no event will the Company be required to pay any selling commissions
or nonaccountable expenses relating to the sale of such securities.
Holders of the Representative's Warrants are protected against dilution
of the equity interest represented by the underlying securities upon the
occurrence of certain events, including, but not limited to, stock dividends.
Holders of the Representative's Warrants shall have no voting rights, dividend
rights, or any other rights of any equity holder of the Company's securities. In
the event of liquidation, dissolution, or winding up of the Company, holders of
the Representative's Warrants are not entitled to participate in the Company's
assets.
LEGAL MATTERS
Certain legal matters in connection with the Offering, including the
legality of the Series C Preferred Stock, will be passed upon for the Company by
counsel to the Company, Fay M. Matsukage. Krys Boyle Golz Reich Freedman &
Scott, P.C. has acted as counsel to the Representative in connection with
certain legal matters relating to this Offering.
EXPERTS
The consolidated financial statements of Ajay Sports, Inc. and subsidiary
for the year ended December 31, 1994 included herein and elsewhere in the
Registration Statement have been included herein and in the Registration
Statement in reliance upon the report of Hirsch & Silberstein, P.C., independent
certified public accountants, whose report, which includes an explanatory
paragraph related to substantial doubt about the Company's ability to continue
as a going concern, has been included in the Prospectus and elsewhere in the
Registration Statement upon the authority of that firm as experts in accounting
and auditing.
The consolidated financial statements of Ajay Sports, Inc. and subsidiary
for the years ended December 31, 1992 and 1993 included herein and elsewhere in
the Registration Statement have been included herein and in the Registration
Statement in reliance upon the report of Coopers & Lybrand, L.L.P., independent
certified public accountants, whose report, which includes an explanatory
paragraph related to substantial doubt about the Company's ability to continue
as a going concern, has been included in the Prospectus and elsewhere in the
Registration Statement upon the authority of that firm as experts in accounting
and auditing.
44
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the
Commission are incorporated herein by reference:
(a) the Company's Annual Report on Commission Form 10-K for the
fiscal year ended December 31, 1994 (the "Annual Report"), filed pursuant
to Section 13 of the Exchange Act;
(b) the Company's Quarterly Report on Commission Form 10-Q for the
period ended March 31, 1995, filed pursuant to Section 13 of the Exchange
Act; and
(c) the Company's Current Report on Commission Form 8-K dated April
28, 1995.
The Company will provide without charge to each person to whom this
Prospectus is delivered, on written or oral request of such person, a copy
(without exhibits) of any or all documents incorporated by reference in this
Prospectus. Requests for such copies should be addressed to Ajay Sports, Inc.,
Attention: Duane R. Stiverson, CFO, 1501 E. Wisconsin Street, Delavan, WI 53115,
(414) 728 5521.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements, and other information with
the Securities and Exchange Commission (the "Commission"). Reports, proxy
statements, and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at 7 World Trade Center, New York, New
York 10048, and at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-
2511. Copies of such materials can be obtained by mail from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Company has filed with the Commission a registration
statement on Form S-2 (herein, together with all amendments and exhibits,
referred to as the "Registration Statement") under the Securities Act of 1933,
as amended. This Prospectus does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission.
The Company furnishes its stockholders with annual reports containing
financial statements audited by its independent certified public accountants and
intends to distribute quarterly reports for the first three quarters of each
fiscal year containing unaudited interim financial information.
45
<PAGE>
[LETTERHEAD OF HIRSCH & SILBERSTEIN, P.C.]
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, 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of Ajay
Sports, Inc. and Subsidiaries as of December 31, 1993 and 1992 were audited by
other auditors whose report dated March 25, 1994, included an explanatory
paragraph related to substantial doubt about the Company's ability to continue
as a going concern, as discussed in Note 1 to the consolidated financial
statements.
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 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Ajay Sports, Inc. and Subsidiaries as of December 31, 1994, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has suffered
significant losses in the years ended December 31, 1994 and 1993. The Company
has also relied upon affiliated companies to fund it's cash flow deficiencies
through equity infusions. Those conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Hirsch & Silberstein
- -----------------------------------
Hirsch & Silberstein, P.C.
Farmington Hills, Michigan
March 7, 1995
F-1
<PAGE>
[LETTERHEAD OF COOPERS & LYBRAND APPEARS HERE]
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Shareholders and
Board of Directors
Ajay Sports, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Ajay
Sports, Inc. and Subsidiary as of December 31, 1993 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1993 and 1992. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Ajay Sports, Inc. and Subsidiary as of December 31, 1993 and the consolidated
results of their operations and their cash flows for the years ended December
31, 1993 and 1992, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered significant
losses in the current year and is not in compliance with certain of its debt
covenants, which raises substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ COOPERS & LYBRAND LLP
Milwaukee, Wisconsin
March 25, 1994
F-2
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
---------------------- --------
1993 1994 1995
-------- -------- --------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2 $ 105 $ 22
Trade accounts receivable, net of allowance of
$101, $230 and $117 respectively 1,975 1,700 3,812
Inventories 7,381 5,786 5,478
Prepaid expenses and other current assets 89 211 249
-------- -------- --------
Total current assets 9,447 7,802 9,561
Fixed assets, net 778 1,357 1,369
Investments in and advances to affiliates 125 -- --
Other assets 157 206 195
-------- -------- --------
Total assets $ 10,507 $ 9,365 $ 11,125
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to affiliate $ -- $ 5,369 $ 6,790
Notes payable to banks 5,019 12 12
Current portion of capital lease -- 9 7
Accounts payable 2,813 1,329 1,492
Accrued expenses 472 490 523
Due to affiliates 240 -- --
-------- -------- --------
Total current liabilities 8,544 7,209 8,824
Notes payable - long term -- 121 106
Stockholders' equity:
Preferred stock, $.01 par value, 100,000 shares
authorized, 29,500, 12,500 and 12,500 shares
issued, respectively, at liquidation value 2,950 1,250 1,250
Common stock, $.01 par value, 100,000,000 shares
authorized, 8,824,773, 22,533,637 and
22,545,537 shares outstanding, respectively 88 225 225
Additional paid-in capital 4,246 8,961 8,961
Accumulated deficit (5,321) (8,401) (8,241)
-------- -------- --------
Total stockholders' equity 1,963 2,035 2,195
-------- -------- --------
Total liabilities and stockholders' equity $ 10,507 $ 9,365 $ 11,125
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
---------------------------------------------------- --------------------------------
1992 1993 1994 1994 1995
------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Operating data:
Net sales $ 21,014 $ 15,902 $ 12,899 $ 3,663 $ 5,454
Cost of sales 17,156 14,172 12,291 3,187 4,362
------------ ------------ ------------ ------------ ------------
Gross profit 3,858 1,730 608 476 1,092
Selling, general and admin-
istrative expenses 2,896 2,834 2,747 632 752
------------ ------------ ------------ ------------ ------------
Operating income (loss) 962 (1,104) (2,139) (156) 340
------------ ------------ ------------ ------------ ------------
Nonoperating income
(expense):
Interest expense - net (906) (697) (614) (154) (185)
Loss on write down of
investment in
affiliate -- (123) -- -- --
Gain (loss) on
disposition of
investment 275 -- (38) -- --
Other, net 50 3 (289) (10) --
------------ ------------ ------------ ------------ ------------
(581) (817) (941) (164) (185)
------------ ------------ ------------ ------------ ------------
Income (loss) from
operations before
income taxes 381 (1,921) (3,080) (320) 155
Income tax expense
(benefit) -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 381 $ (1,921) $ (3,080) $ (320) $ 155
============ ============ ============ ============ ============
Net income (loss) per
common share
outstanding* $.02 $(.24) $(.27) $(.04) $ .01
============ ============ ============ ============ ============
Net income (loss) per
common share and
equivalents
outstanding** $.02 $(.24) $(.27) $(.04) $ .00
============ ============ ============ ============ ============
Weighted average common
shares outstanding 8,457 8,812 12,218 8,825 22,546
============ ============ ============ ============ ============
Weighted average common
and common stock
equivalent shares
outstanding 8,457 8,812 12,218 8,825 32,629
============ ============ ============ ============ ============
</TABLE>
* Computed by dividing net income or loss, after reduction for preferred stock
dividends, by the weighted average number of common shares outstanding.
** Computed by dividing net income or loss, after reduction for preferred stock
dividends, by the weighted average number of common share and common share
equivalents outstanding.
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Total
Preferred Stock Common Stock Additional Unamortized Stockholders'
----------------- ----------------- Paid-In Accumulated Compensation Equity
Shares Amount Shares Amount Capital Deficit Expense (Deficit)
-------- ------ -------- ------ ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1992 -- $ -- 8,278,675 $ 83 $3,848 $(3,781) $(201) $ (51)
Subordinated note converted
into preferred stock 29,500 2,950 -- -- -- -- -- 2,950
Shares forfeited upon termination
of employment of former officer -- -- (233,333) (2) (136) -- 138 --
Amortization of compensa-
tion expense -- -- -- -- -- -- 63 63
Private placement issue,
net of fees of $107 -- -- 729,431 7 505 -- -- 512
Net income -- -- -- -- -- 381 -- 381
------- ------- ---------- ---- ------ ------- ----- -------
Balances at December 31, 1992 29,500 2,950 8,774,773 88 4,217 (3,400) -- 3,855
Common stock grant to
management -- -- 50,000 -- 29 -- -- 29
Net loss -- -- -- -- -- (1,921) -- (1,921)
------- ------- ---------- ---- ------ ------- ----- -------
Balances at December 31, 1993 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 -- -- --
Stock issued to affiliate
to reduce debt -- -- 4,117,647 41 1,359 -- -- 1,400
Common stock sold to affiliates -- -- 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
employees -- -- 11,900 -- -- -- -- --
Adjust retained earnings -- -- -- -- -- 5 -- 5
Net income -- -- -- -- -- 155 -- 155
------- ------- ---------- ---- ------ ------- ----- -------
Balances at March 31, 1995
(Unaudited) 12,500 $ 1,250 22,545,537 $225 $8,961 $(8,241) $ -- $ 2,195
======= ======= ========== ==== ====== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------------------ ----------------------
1992 1993 1994 1994 1995
-------- -------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 381 $ (1,921) $ (3,080) $ (320) $ 155
Adjustments to reconcile to net cash
flows from operating activities:
Loss on sale of assets -- -- 162 -- --
(Gain) on disposition of
investment in affiliate (275) -- -- -- --
Depreciation and amortization 86 128 129 47 52
Loss on write down of investment
in and advances to affiliate -- 123 -- -- --
Stock issued to officer in lieu
of compensation -- -- 52 -- --
Adjustment to retained earnings -- -- -- -- 5
Changes in assets [(increase)/decrease]
& liabilities [increase/(decrease)]:
Accounts receivable, net (116) 980 299 (618) (2,112)
Inventories (903) 1,144 1,662 745 308
Prepaid expenses (98) 114 (112) (80) (38)
Other assets -- -- 22 -- 11
Accounts payable 250 611 (1,530) (168) 162
Accrued expenses (57) (108) 18 19 33
Due to affiliates (337) (17) (240) 250 --
-------- -------- -------- -------- --------
Net cash flows provided by
(used in) operating activities (1,069) 1,054 (2,618) (125) (1,424)
-------- -------- -------- -------- --------
Cash flows from investing activities:
Additions to property, plant
and equipment (161) (226) (115) -- (64)
Proceeds from sale of equipment -- -- 4 7 --
Proceeds from sale of investment -- -- 86 -- --
Investments in and advances
to affiliates 151 15 -- 18 --
-------- -------- -------- -------- --------
Net cash (used in)
investing activities (10) (211) (25) 25 (64)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Cash acquired in acquisition
via non-cash financing -- -- 2 -- --
Proceeds from note payable
to affiliate -- -- 6,770 -- 1,420
Increase (decrease) in bank
notes payable 556 (841) (5,026) 102 (15)
Proceeds from private place-
ments, net of related costs 512 -- 1,000 -- --
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities 1,068 (841) 2,746 102 1,405
-------- -------- -------- -------- --------
Net increase (decrease) in cash (11) 2 103 2 (83)
Cash at beginning of period 11 -- 2 2 105
-------- -------- -------- -------- --------
Cash at end of period $ -- $ 2 $ 105 $ 4 $ 22
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------
1. GOING CONCERN PRESENTATION
--------------------------
As discussed in Note 6 to the consolidated financial statements, as of
December 31, 1993 the Company was not in compliance with certain of its debt
covenants. In May, 1994 the existing borrowings were replaced by a Loan
Agreement with an affiliate due November 1, 1994, which has been extended to
February 1, 1996 (See Note 16). If this financing had not been replaced or
extended, the Company would not have had sufficient funds to repay the
outstanding balance. The Company has suffered declines in sales and
significant net losses in 1994 and 1993. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going concern.
The Company continues to work on the refinancing of its working capital
loan and is negotiating with asset based lenders to put this financing in
place. The Company received an equity infusion in October, 1994 of
$2,400,000 as a result of a private placement of 2,941,177 shares of common
stock with affiliated Companies and through the exercise of options to
purchase 4,117,647 shares by a related party, Williams Controls Industries,
Inc. Also in October, 1994 the holder of the Company's Series B 8% Cumulative
Convertible Preferred Stock (the "Series B Preferred Stock") converted 17,000
shares of Series B Preferred Stock into 5,000,040 shares of common stock.
Additionally, throughout 1994, management instituted a cost reduction
program which included a reduction in salary and labor positions, along with
related fringe benefits. The Company also obtained more favorable material
costs, enhanced its material utilization methods and instituted more
efficient manufacturing techniques. The Company strengthened its sales
coverage by appointment of additional experienced independent sales
representatives and increased its emphasis on product development which
resulted in several new product introductions in late 1994. Management feels
these factors will contribute to achieving future profitability.
2. 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") and Leisure Life,
Inc. ("Leisure"), collectively referred to herein as the "Company". All
significant intercompany balances and transactions have been eliminated.
F-7
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------
2. SIGNIFICANT ACCOUNTING POLICIES, Continued
-------------------------------
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 $144,000, $181,000 and $223,000 as of December 31, 1993 and 1994 and March
31, 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.
OTHER ASSETS - Other assets at December 31, 1994 and March 31, 1995 consists
of patents and trademarks held and applied for by Leisure Life (See Note 8c).
Other assets at December 31, 1993 consists primarily of a receivable of
$318,000, less an allowance for estimated uncollectibility of $162,000, from
a customer then operating under Chapter 11 of the U.S. Bankruptcy Code. This
receivable was collected in June, 1994.
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.
RECLASSIFICATION - Certain amounts as originally reported in the 1992
financial statements were reclassified to conform with the 1993 presentation.
F-8
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------
3. 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.
Pro Mark, Inc. ("Pro Mark") - The Company owns 40% of the outstanding shares
of Pro Mark.
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, the
chairman of Roadmaster is 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 significant shareholder in Enercorp
and its president is a Director of the Company. Enercorp acquired 1,764,706
common shares on October 3, 1994.
WILLIAMS CONTROLS INDUSTRIES, INC. - ("Williams") - Williams has the same
chairman as the Company, which individual is a major shareholder of each
company.
F-9
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------
3. RELATED PARTY TRANSACTIONS, Continued
--------------------------
(a) Roadmaster
Ajay purchased various finished goods inventory, primarily hand-pulled
golf carts, from Roadmaster. Purchases in 1993 and 1992 were
approximately $123,000 and $788,000, respectively. Prior to 1993, Ajay
leased certain machinery and equipment from Roadmaster. Rent expense to
Roadmaster was $139,000 for the year ended December 31, 1992. The net
result of this activity represented amounts due to Roadmaster of $42,000
and $39,000 at December 31, 1993 and 1992, respectively. The December
31, 1993 balance was transferred to TICO as part of the Exchange
Agreement and paid during the six months ended June 30, 1994.
During 1992, approximately $2,431,000 in letters of credit were opened by
Roadmaster for inventory purchases by Ajay. Consideration paid to
Roadmaster for use of these facilities totaled $200,000 in 1992.
In June, 1992, the Company transferred 188,100 shares of MacGregor Sports
and Fitness, Inc. ("MacGregor") common stock and assigned advances due
from MacGregor to Roadmaster in satisfaction of obligations to Roadmaster
of $376,000.
Also in 1992, 250,000 shares of MacGregor common stock were transferred
to Roadmaster in exchange for machinery and equipment previously leased
from Roadmaster with an appraised value of $490,000. A gain of $275,000
was recognized as a result of this transaction.
Prior to its conversion to preferred stock (as described in Note 8), the
Company owed Roadmaster $2,950,000 under a subordinated note, and
interest expense on the note for the year ended December 31, 1992 was
$61,000.
During 1993, the Company entered into an agreement with certain parties
(as described in Note 3c), whereby the promissory note owed to Roadmaster
in the amount of $217,000 on December 31, 1992 would be transferred to
TICO. As of December 31, 1993, Ajay owed $197,000 on the promissory note
with accrued interest of $17,000. During the year ended December, 1994
the $197,000 and interest of $24,719 were paid to TICO.
F-10
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------
3. RELATED PARTY TRANSACTIONS, Continued
--------------------------
(b) Pro Mark
On April 2, 1991, the Company executed a letter of intent with Pro Mark
for the sale of the Company's "Double Eagle" brand of golf products for
$300,000 ($210,000, net of expenses) and 1,000,000 shares of restricted
common stock of Pro Mark. In order to permit Pro Mark to commence
marketing this product line at the earliest possible date and to allow
time for the completion of the sale, the parties on May 3, 1991 entered
into an exclusive sales representation agreement pursuant to which, for
the same consideration, Pro Mark was provided the exclusive right to
market the "Double Eagle" product line. The exclusive sales
representation agreement was subsequently replaced by an exclusive
marketing agreement for an initial 20 year period with renewal clauses.
Due to operating losses of Pro Mark, the Company did not assign any value
to the shares of Pro Mark common stock received in the transaction and no
gain or loss was recognized on this transaction.
During 1993, the Company wrote off advances to Pro Mark totaling $87,000.
(c) 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.
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 tradename.
F-11
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------
3. RELATED PARTY TRANSACTIONS, Continued
--------------------------
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.
(d) Other
In May, 1994 Williams entered into a Loan Agreement with the Company (See
Note 6).
In 1992, the Company paid Equitex $100,000 for services rendered and
reimbursement of costs associated with the private placement. In 1994,
Equitex earned a fee of
F-12
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------
3. RELATED PARTY TRANSACTIONS, Continued
--------------------------
$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.
4. INVENTORIES
-----------
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
---------------------- --------
1993 1994 1995
-------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Raw materials $ 4,014 $ 2,901 $ 3,164
Work-in-progress 1,010 919 908
Finished goods 2,357 1,966 1,406
-------- -------- --------
$ 7,381 $ 5,786 $ 5,478
======== ======== ========
</TABLE>
5. INVESTMENT IN AND ADVANCES TO AFFILIATES
----------------------------------------
Investment in and advances to affiliates includes the following as of
December 31, 1993 and 1994 and March 31, 1995 (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
---------------------- --------
1993 1994 1995
-------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Investment in MacGregor $ 107 $ -- $ --
Interest receivable - MacGregor $ -- $ -- $ --
Advances to:
Pro Mark, Inc. $ -- $ -- $ --
Roadmaster $ 18 $ -- $ --
-------- -------- --------
$ 125 $ -- $ --
======== ======== ========
</TABLE>
The investment in MacGregor represented 125,106 shares of MacGregor
(which was less than 5% of MacGregor's outstanding stock) as of December 31,
1993. A former officer of the Company is an officer of MacGregor, and
MacGregor and the Company have common investors. During 1992, as disclosed in
Notes 3 and 13,
F-13
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------
5. INVESTMENT IN AND ADVANCES TO AFFILIATES, Continued
----------------------------------------
the Company disposed of 188,100 and 250,000 shares of this investment in
satisfaction of payables to Roadmaster and to acquire equipment from
Roadmaster, respectively. In conjunction with the disposition of the 188,100
shares of MacGregor, the Company assigned, to Roadmaster, its rights to
collection of amounts due from MacGregor totalling $215,000. During the year
ended December 31, 1994 the remaining 125,106 shares were disposed of for
$69,000, resulting in a loss of $38,000.
6. DEBT
----
The December 31, 1993 note payable to bank represented Ajay's revolving
credit facility with BankAmerica Business Credit, Inc. ("BankAmerica"),
maturing April 30, 1994, not to exceed the lesser of $7.5 million or an
amount based on eligible trade accounts receivable and inventories, including
a letter of credit facility not to exceed $2.5 million. Borrowings under the
revolving credit facility bore interest at prime plus 2%. A $500,000
seasonal subline bore interest at prime plus 3%. This subline was cancelled
in the fourth quarter of 1993. The letter of credit facility required a fee
of 1.5% per annum on outstanding letters of credit. A commitment fee of .5%
per year on the unused balance of the revolving credit facility and the
letter of credit facility was required. The note contained certain
restrictions on the payment of dividends. The note was collateralized by
substantially all assets of Ajay and was guaranteed by the Company and up to
$1.5 million by Equitex.
Primarily as a result of net losses experienced in 1993, the Company was
not in compliance with financial covenants regarding interest coverage ratios
and adjusted tangible net worth under its revolving credit facility. As a
result, the revolving credit facility was reduced to $6 million effective
April 1, 1994.
On April 14, 1994 the Company was advised by BankAmerica that the Second
Amended Restated Loan and Security Agreement ("Credit Agreement") between
BankAmerica 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 loan of up to $7,000,000. The Loan Agreement
requires monthly interest only payments at
F-14
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------
6. DEBT, Continued
----
the prime rate of First Interstate Bank of Oregon plus 3.25%, was originally
scheduled to expire on November 4, 1994, and has been extended to February 1,
1996 (See Note 16). The Loan Agreement is secured by a lien on substantially
all of the assets of Ajay and is guaranteed by the Company and the Company's
President. The Company's guaranty is secured by a pledge of all of the
outstanding common stock of Ajay. At December 31, 1994 and March 31, 1995 the
borrowing under the loan was $5,369,000 and $6,790,000, respectively. In
connection with the Loan Agreement Williams was granted certain options (See
Note 8d).
Ajay's borrowings consisted of the following:
<TABLE>
<CAPTION>
December 31, March 31,
----------------------- ----------
1993 1994 1995
---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Revolving credit facility:
Balance $5,019,000 $5,369,000 $6,790,000
Interest rate 8.0% 10.5% 12.25%
Unused amount of facility $2,481,000 $1,631,000 $ 210,000
Average amount outstanding
during the period $6,100,261 $5,626,861 $6,430,733
Weighted average interest rate 8.3% 8.0% 11.7%
Maximum amount outstanding
during the period $7,748,959 $6,651,341 $6,790,000
</TABLE>
Ajay had outstanding commercial letters of credit totaling approximately
$62,000, $1,100,000 and $700,000 at December 31, 1993 and 1994 and March 31,
1995 respectively.
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 credit facility for its working
capital requirements.
7. 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-15
<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):
<TABLE>
<CAPTION>
Three
Months
Ended
Year Ended December 31, March 31,
------------------------------------ --------
1992 1993 1994 1995
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Statutory tax expense
(benefit) at 34% $ 130 $ (653) $ (1,047) $ 53
Utilization of net operating
loss carryforward (130) -- -- (53)
Loss producing no current
tax benefit -- 653 1,047 --
-------- -------- -------- --------
$ -- $ -- $ -- $ --
======== ======== ======== ========
</TABLE>
The components of the net deferred tax asset/liability were as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, March 31,
---------------------- --------
1993 1994 1995
-------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Deferred tax asset, principally accrued
expenses, reserves and loss carryforwards $ 1,086 $ 2,116 $ 2,065
Deferred tax liability, principally depreciation (52) (68) (72)
Valuation allowance (1,034) (2,048) (1,993)
-------- -------- --------
Net $ -- $ -- $ --
======== ======== ========
</TABLE>
The Company had net operating loss carryforwards for Federal tax
purposes of approximately $5,293,000 at December 31, 1994, which expire in
varying amounts in the years 2006 through 2009. Operating loss carryforwards
totaling $845,000 and $4,248,000 are available to offset future state taxable
income of Sports and Ajay, respectively, which expire in varying amounts in
the years 2006 through 2009.
F-16
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------
8. STOCKHOLDERS' EQUITY
--------------------
(a) Preferred Stock
Effective March 31, 1992, the Company designated 100,000 shares of its
$.01 par value preferred stock as Series A 8% Cumulative Convertible
Preferred Stock (the "Series A Preferred Stock"). The Series A Preferred
Stock was convertible into the Company's common stock at a conversion price
of $2.25 per share beginning January 1, 1994. Beginning January 1, 1994, the
Series A Preferred Stock was entitled to receive annual dividends of 8% per
share that are cumulative from the date of issuance, and it participated
equally in any dividends on common stock. Cumulative dividends as of
December 31, 1993 totaled $413,000. The Series A Preferred Stock, which had
no voting rights, had a liquidation preference value of $100 per share plus
accrued and unpaid dividends. The Company had the right to redeem the Series
A Preferred Stock at a price equal to $100 per share plus accrued and unpaid
dividends.
Effective March 31, 1992, 29,500 shares of Series A Preferred Stock were
issued to Roadmaster in full satisfaction of the remaining balance due on a
$2,950,000 subordinated note due to Roadmaster. No gain or loss was recorded
as a result of this debt restructuring.
During 1993, the Company entered into an agreement, finalized in 1994,
whereby Roadmaster transferred to TICO the 29,500 shares of the Company's
Series 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.
F-17
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------
8. STOCKHOLDERS' EQUITY, Continued
--------------------
(b) Stock issued to officers
In 1992, the Company established a stock incentive plan for an
officer of the Company, under which up to 150,000 shares of the Company's
stock may be granted. During 1993, 50,000 shares were issued under this
plan. In 1994, the Company issued 150,000 shares of common stock to an
officer in lieu of compensation.
(c) Stock Issued for Acquisition
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. The purchase method was used to
account for the acquisition. Results of operations of Leisure Life are
included in the Company's statements effective on August 1, 1994. The
purchase value was established at $700,000 based on fair value of assets
acquired consisting of working capital, patents, machinery, land and
building. The full value of the purchase was represented by 1,100,000
shares. Goodwill was not booked; however 400,000 shares were placed in
escrow to be distributed based on profit performance of Leisure Life
during 1995. It is unlikely that the escrow shares will be distributed.
(d) Warrants and Options
A summary of activity related to warrants and options to purchase
Company common stock is as follows:
<TABLE>
<CAPTION>
Warrants Price
and Options per Share
----------- ---------
<S> <C> <C>
Balance, January 1, 1992 2,585,970 $.34-1.00
Issued 250,000 .34 (i)
Issued 250,000 .34 (i)
Issued 270,217 .34 (ii)
Issued 94,500 .34 (iii)
---------- ---------
Balance, December 31, 1992 3,450,687 .34-1.00
Expired (564,717) .34
---------- ---------
Balance, December 31, 1993 2,885,970 .34-1.00
Expired (450,000) .80-1.00
Reissued 200,000 .34 (iv)
Reissued 94,500 .34 (v)
Issued to Employees 840,000 .40- .80 (vi)
Issued to Williams 16,274,754 .34-1.00 (vii)
Exercised by Williams (4,117,647) .34 (viii)
---------- ---------
Balance, December 31, 1994 15,727,577 $.34-1.00
Adjustment to Williams' Options (1,046,234) .50-1.00 (vii)
---------- ---------
Balance, March 31, 1995 (Unaudited) 14,681,343 $.34-1.00
========== =========
</TABLE>
F-18
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------
8. STOCKHOLDERS' EQUITY, Continued
--------------------
(i) Warrants originally issued to Equitex which were transferred
to TICO under the Exchange Agreement (as described in Note 3c)
and subsequently assigned to Acrodyne, exercisable through
December 2000, replacing the previously issued warrants to
purchase 2,500,000 shares at an exercise price of $1.50 to
$1.00, subject to adjustment. During 1994, the exercise price
was adjusted to $.34.
(ii) Warrants issued in connection with the Company's private
placement. As a result of the reset provision provided for in
the Warrant Agreement, the exercise price dropped from $1.00
to $.33 per share. The warrants expired in October, 1993.
(iii) Warrants originally issued to Equitex in connection with the
Company's private placement. Warrants were transferred to TICO
under the Exchange Agreement (as described in Note 3c), and
subsequently assigned to Acrodyne. The exercise price was
adjusted to $.34 in 1994.
(iv) Warrants originally issued to Roadmaster in 1990. Transferred
to TICO under the Exchange Agreement, expired and reissued to
Acrodyne.
(v) Warrants originally issued to Equitex in connection the
Company's private placement. Transferred to Acrodyne, expired
and reissued.
(vi) Employee stock options of which 131,667 shares have vested at
December 31, 1994.
(vii) In May 1994 the Company and Williams entered into a Joint
Venture Implementation Agreement in which Williams was granted
an option to purchase up to 51% of the then outstanding Common
Stock (23,714,641 shares) of the Company. That agreement
provided that if the loan were repaid in full by May 5, 1995,
Williams would lose 7,439,887 of the options. This agreement
was been modified. (See Note 16.)
(viii) See Note 8e.
(e) Private Placements
In 1992, the Company issued, via private placement, 729,431
shares of common stock and warrants to purchase 364,717 shares and
received proceeds of $512,000, net of related costs.
F-19
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------
8. STOCKHOLDERS' EQUITY, Continued
--------------------
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 resulting in a reduction of debt totalling
$1,400,000.
9. MAJOR CUSTOMERS
---------------
The Company operates in two lines of business, the manufacture and
distribution of sports equipment and in outdoor leisure furniture. The
Company's customers are principally in the retail sales market.
To reduce credit risk, 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:
<TABLE>
<CAPTION>
Three
Months
Ended
Year Ended December 31, March 31,
---------------------------------- --------
Customer 1992 1993 1994 1995
- -------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
A 25% 32% 41% 35%
B 20% * * *
C 19% 12% * 11%
</TABLE>
* Amounts are less than 10% of net sales.
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 $650,000, $500,000 and $550,000, for the years ended June 30,
1994, 1995 and 1996, respectively. The current agreement expires June 30,
1996. Other conditions of the agreement require the Company to expend 2% of
sales under the agreement on advertising and related costs, with 1%
F-20
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------
10. SPALDING LICENSE AGREEMENT, Continued
--------------------------
remitted to Spalding. The Company must also maintain a current ratio of 1.0 to
1.0. Approximately 61% of the Company's 1994 and 1993 sales were Spalding
products. See Note 16.
Royalty expense due Spalding was $735,000, $702,000 and $494,000 for the
years ended December 31, 1992, 1993 and 1994 respectively , and $165,000 for
the three months ended March 31, 1995.
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):
<TABLE>
<S> <C>
1995 $ 518
1996 378
1997 352
1998 337
1999 336
2000 and thereafter 497
------
$2,418
======
</TABLE>
Total rental expense (in thousands) under operating leases (net of
sublease rental income from an affiliate of $37, $38 and $8, respectively)
was $524, $409 and $556 for the years ended December 31, 1992, 1993 and
1994, respectively. Total rental expense (in thousands) under operating
leases was $130 for the three months ended March 31, 1995.
12. NET INCOME (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 1992 ($177,000),
1993 ($236,000), 1994 ($202,000), and the quarter ended March 31, 1995
($25,000), by the weighted average number of common shares outstanding. No
exercise of warrants outstanding was assumed in 1992, 1993 or 1994, since
any exercise of warrants would be antidilutive. For the quarter ended March
31, 1995, the exercise prices of 10,083,000 warrants were less than the
market price and therefore were considered as exercised for purposes of
calculating fully diluted earnings per share.
F-21
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------
13. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Cash paid for interest was $876,000, $633,000, and $607,000 for the
years ended December 31, 1992, 1993, and 1994, respectively, and $185,000
for the three months ended March 31, 1995.
Noncash financing and investing transactions were as follows:
. As discussed in Note 3, the Company exchanged 250,000 shares of
MacGregor in 1992 for certain machinery and equipment with an appraised
value of $490,000. A gain of $275,000 was recognized on the
transaction.
. The Company also settled certain obligations to Roadmaster totaling
$376,000 by transferring 188,100 shares of MacGregor to those affiliates
in 1992. The book value of the shares was $161,000 (see Note 3.)
Additionally, in conjunction with this transaction, the Company assigned
its rights to collection of amounts due from MacGregor totalling
$215,000.
. A subordinated note payable to Roadmaster of $2,950,000 was converted to
29,500 shares of preferred stock during 1992.
. During 1993, 50,000 shares of the Company's common stock valued at
$29,500 were issued to an officer of the Company. This was recorded in
accrued expenses at December 31, 1992.
. 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 owners of Leisure Life.
. During 1994, 4,117,647 shares of the Company's common stock were issued
to a related party resulting in a reduction in debt totaling $1,400.000.
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.
15. BUSINESS SEGMENT REPORTING - MARCH 31, 1995
-------------------------------------------
The relative contributions to net sales, operating profit and identifiable
assets of the Company's two industry segments for the quarter ended March
31, 1995 (unaudited) are as follows (in thousands):
<TABLE>
<CAPTION>
Business Segment
--------------------------------------------
Furniture Sports Consolidated
------------ ------------ ------------
<S> <C> <C> <C>
Sales $ 361 $ 5,093 $ 5,454
Operating profit/(loss) (134) 474 340
Interest expense -- -- 185
Income before taxes -- -- 155
Assets 1,767 9,358 11,125
Depreciation 19 33 52
Capital expenditures 35 29 64
</TABLE>
16. SUBSEQUENT EVENTS
-----------------
On April 5, 1995, the Company and Williams agreed to modifications of the
terms of the Loan Agreement and Joint Venture Implementation Agreement. The
changes include (1) a waiver of Williams' preemptive right to purchase up
to 51% so long as the Company completes its proposed offering of securities
by May 31, 1995 (which date may be extended for up to 120 days), (2) an
extension of the due date of the loan until February 1, 1996, (3) a
reduction in the maximum loan amount from $7.0 million to $5.6 million as
of August 1, 1995, (4) a reduction in the number of $1.00 options granted
to Williams Controls from 1,394,979 to 348,745 exercisable at $.50 per
share if the loan is repaid by August 1, 1995, (5) a reduction in the
exercise price of all unexercised options with an exercise price greater
than $.50 per share to $.50 if the loan is not repaid by August 1, 1995,
(6) an extension of the expiration date of all options granted to Williams
Controls from May 5, 1998 to August 1, 1999, and (7) an additional four-
year extension of the manufacturing joint venture at the Company's Delavan,
Wisconsin, and Mexicali, Mexico, facilities from May 5, 1998 to August 1,
2002.
On June 5, 1995, the Company extended its agreement with Spalding. The
current agreement expires June 30, 1998. 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, $550,000, $550,000 and
$550,000, for the years ended June 30, 1995, 1996, 1997 and 1998,
respectively.
F-22
<PAGE>
Schedule VIII
AJAY SPORTS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
(Amounts in Thousands)
-----
<TABLE>
<CAPTION>
Balance Charged to Balance
beginning costs and Deductions at end
expenses expenses (describe) of period
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Reserve for Product Warranty:
Three months ended:
March 31, 1995 (Unaudited) $ 139 $ 52 $ 52 $ 139
Year ended:
December 31, 1994 $ 112 $ 276 $ 249 (1) $ 139
December 31, 1993 105 360 353 112
December 31, 1992 165 297 357 105
Allowance for Doubtful Receivables:
Three months ended:
March 31, 1995 (Unaudited) $ 101 $ 17 $ 1 $ 117
Year ended:
December 31, 1994 $ 230 $ 62 $ 191 (2) $ 101
December 31, 1993 150 159 79 230
December 31, 1992 150 40 40 150
Reserve for Inventory Obsolescence:
Three months ended:
March 31, 1995 (Unaudited) $ 430 $ -- $ 222 $ 208
Year ended:
December 31, 1994 $ 160 $ 430 $ 160 $ 430
December 31, 1993 150 87 77 160
December 31, 1992 210 84 144 150
</TABLE>
Notes:
- -----
(1) Represents amounts paid for product warranty claims.
(2) Represents amounts charged off as uncollectible.
F-23
<PAGE>
[photographs of leisure furniture products here]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
pROSPECTUS. ANY INFORMATION OR REPRESENTATIONS NOT HEREIN CONTAINED, IF GIVEN
OR MADE, MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR
THE uNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PROSPECTUS SUMMARY......................................................... 3
THE COMPANY................................................................ 6
RISK FACTORS............................................................... 6
DILUTION................................................................... 12
MARKET FOR THE COMPANY'S STOCK AND RELATED STOCKHOLDER MATTERS............. 13
USE OF PROCEEDS............................................................ 13
CAPITALIZATION............................................................. 15
DIVIDEND POLICY............................................................ 15
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA......................... 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................ 17
CHANGES IN AND DISAGREEMENTS WITH THE ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...................................................... 22
BUSINESS................................................................... 23
MANAGEMENT AND KEY PERSONNEL............................................... 30
PRINCIPAL SHAREHOLDERS..................................................... 37
CERTAIN TRANSACTIONS....................................................... 39
DESCRIPTION OF SECURITIES.................................................. 42
SHARES ELIGIBLE FOR FUTURE SALE............................................ 46
UNDERWRITING............................................................... 47
LEGAL MATTERS.............................................................. 50
EXPERTS.................................................................... 50
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ 50
ADDITIONAL INFORMATION..................................................... 51
FINANCIAL STATEMENTS....................................................... F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
525,000 Shares of Series C
10% Cumulative Convertible
Preferred Stock
and 525,000 Common Stock
Purchase Warrants
[LOGO OF AJAY SPORTS, INC. APPEARS HERE]
------------------
PROSPECTUS
------------------
SCHNEIDER SECURITIES, INC.
June , 1995
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<CAPTION>
CATEGORY OF EXPENSE
AMOUNT
<S> <C>
Registration fee.............................................$ 2,553
NASD filing fee.............................................. 1,328
NASDAQ listing fee........................................... 2,000*
Blue sky filing fees......................................... 12,000*
Transfer agent fees.......................................... 500
Printing costs............................................... 10,000*
Stock certificate printing costs............................. 1,230
Legal fees................................................... 50,000*
Accounting fees.............................................. 10,300
Road Show expenses........................................... 45,000*
Representative's nonaccountable expense allowance............ 159,075
Financial consulting fee payable to Representative........... 30,000
Miscellaneous................................................ 1,014*
---------
Total........................................................$ 325,000
=========
</TABLE>
_____________
*Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of Delaware and Article 11 of the Registrant's
Restated Certificate of Incorporation permit the Registrant to indemnify its
officers and directors and certain other persons against expenses in defense of
a suit to which they are parties by reason of such office, so long as the
persons conducted themselves in good faith and the persons reasonably believed
that their conduct was in the corporation's best interests, not opposed to the
corporation's best interests, or unlawful. Indemnification is not permitted in
connection with a proceeding by or in the right of the corporation in which the
officer or director was adjudged liable to the corporation or in connection with
any other proceeding charging that the officer or director derived an improper
personal benefit, whether or not involving action in an official capacity, in
which proceeding the officer or director was adjudged liable on the basis that
he or she derived an improper personal benefit.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT CONSECUTIVE
NUMBER EXHIBIT PAGE NUMBER
<C> <S> <C>
1.1 Form of Underwriting Agreement ___
1.2 Form of Agreement Among Underwriters ___
1.3 Form of Underwriter's Warrants ___
1.4 Form of Selected Dealers Agreement ___
1.5 Form of Corporate Finance Consulting Agreement ___
2.1 Agreement of Purchase and Sale of Business, Including Purchase N/A
of Stock dated July 31, 1994 between Robert Newman and Ajay
Sports, Inc. (1)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT CONSECUTIVE
NUMBER EXHIBIT PAGE NUMBER
<C> <S> <C>
4.1 Certificate of Designation of Rights and Preferences of the Series N/A
B 8% Cumulative Convertible Preferred Stock of Ajay Sports, Inc.
(1)
4.2 Certificate of Designation of Rights and Preferences of the Series ___
C 10% Cumulative Convertible Preferred Stock
4.3 Form of Warrant Agreement (8) N/A
5.1 Opinion Regarding Legality ___
10.1 License Agreement dated April 14, 1992 between Spalding Sports N/A
Worldwide and Ajay Leisure Products, Inc. (2)
10.2 Employment Agreement dated April 14, 1992 between Ajay Lei- N/A
sure Products, Inc. and L. Dean Cassell (2)
10.3 Second Amended and Restated Loan and Security Agreement N/A
dated April 14, 1992 between Ajay Leisure Products, Inc. and
Security Pacific Business Credit, Inc. (2)
10.4 Allocation Agreement dated April 14, 1992 between Roadmaster N/A
Corporation, Roadmaster Leisure Inc. and Ajay Leisure Products,
Inc. and Security Pacific Business Credit, Inc. (2)
10.5 Second Amended and Restated Guaranty dated April 14, 1992 N/A
between Ajay Sports, Inc. and Security Pacific Business Credit,
Inc. (2)
10.6 Second Amended and Restated Pledge Agreement dated April 14, N/A
1992 between Ajay Sports, Inc. and Security Pacific Business
Credit, Inc. (2)
10.7 Letter Agreement dated November 18, 1992 between Ajay Sports, N/A
Inc., Ajay Leisure Products, Inc., Equitex, Inc. and Roadmaster
Industries, Inc. (3)
10.8 Dennis L. Carnes Stock Incentive Plan of Ajay Sports, Inc. dated N/A
February 9, 1993 (4)
10.9 Licensing Agreement dated June 15, 1989 between Roadmaster N/A
Corporation and Ajay Leisure Products, Inc. (5)
10.10 First Amendment to the April 14, 1992 Spalding License Agree- N/A
ment dated April 2, 1993 (4)
10.11 Exchange Agreement dated October 13, 1993 between TICO, Ajay N/A
Sports, Inc., Ajay Leisure Products, Inc., Roadmaster Industries,
Inc., Roadmaster Corporation and Equitex, Inc. (6)
10.12 Loan and Security Agreement Dated as of May 5, 1994 between N/A
Ajay Leisure Products, Inc. and Williams Controls Industries, Inc.,
together with Guaranty, Pledge Agreement and Collateral Assign-
ment of Loan Agreement, Promissory Note, Pledge Agreement
and Other Loan Documents (1)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT CONSECUTIVE
NUMBER EXHIBIT PAGE NUMBER
<C> <S> <C>
10.13 Williams/Ajay Loan and Joint Venture Implementation Agreement N/A
dated May 6, 1994 (1)
10.14 Second Amendment to the April 14, 1992 Spalding License Agree- N/A
ment dated July 1, 1994 (1)
10.15 Employment Agreement dated July 31, 1994 between Robert D. N/A
Newman, Leisure Life, Inc. and Ajay Sports, Inc. (1)
10.16 1994 Stock Option Plan (7) N/A
10.17 1995 Stock Bonus Plan (7) N/A
10.18 Third Amendment to the April 14, 1992 Spalding License
Agreement dated June 5, 1995 ___
23.1 Consent of Hirsch & Silberstein, P.C. ___
23.2 Consent of Coopers & Lybrand, L.L.P. ___
</TABLE>
_______________
(1) Previously filed with and incorporated by reference from the Registrant's
Form 10-K filed for December 31, 1994 (SEC File No. 0-18204).
(2) Previously filed with and incorporated by reference from the Registrant's
Form 10-K filed for December 31, 1991 (SEC File No. 0-18204).
(3) Previously filed with and incorporated by reference from the Registrant's
Form 10-Q filed for September 30, 1992 (SEC File No. 0-18204).
(4) Previously filed with and incorporated by reference from the Registrant's
Form 10-K filed for December 31, 1992 (SEC File No. 0-18204).
(5) Previously filed with and incorporated by reference from the Registrant's
Registration Statement on Form S-18 (File No. 33-30760).
(6) Previously filed with and incorporated by reference from the Registrant's
Form 10-K filed for December 31, 1993 (SEC File No. 0-18204).
(7) Previously filed with and incorporated by reference from the Registrant's
Registration Statement on Form S-8 (File No. 33-89650).
(8) Previously filed with this Registration Statement on Form S-2 (No.
33-58753).
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Delavan, State of Wisconsin, on June 19, 1995.
AJAY SPORTS, INC.
By: /s/ Thomas W. Itin
------------------------------------
Thomas W. Itin, President
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
President, Chief Executive
Officer and Director (Principal
/s/ Thomas W. Itin Executive June 19, 1995
- --------------------------------- ------------------
Thomas W. Itin
/s/ Robert R. Hebard Secretary and Director June 19, 1995
- --------------------------------- ------------------
Robert R. Hebard
Chief Financial Officer (Principal
/s/ Duane R. Stiverson Financial and Accounting Officer) June 19, 1995
- --------------------------------- ------------------
Duane R. Stiverson
/s/ Clarence H. Yahn Director June 19, 1995
- --------------------------------- ------------------
Clarence H. Yahn
/s/ Stanley V. Intihar Director June 19, 1995
- --------------------------------- ------------------
Stanley V. Intihar
/s/ Anthony B. Cashen Director June 19, 1995
- -------------------------------- ------------------
Anthony B. Cashen
/s/ Robert D. Newman Director June 19, 1995
- -------------------------------- ------------------
Robert D. Newman
</TABLE>
II-5
<PAGE>
UNDERWRITING AGREEMENT
____________________, 1995
Schneider Securities, Inc.
As Representative of the Several
Underwriters Named in Schedule I Hereto
104 Broadway, Suite 400
Denver, CO 80203
Gentlemen:
Ajay Sports, Inc., a Delaware corporation (the "Company"), hereby confirms its
agreement with you (the "Representative") and with the other Members of the
Underwriting Group, including the Representative, named in Schedule I hereto
(hereinafter "the Underwriting Group") as follows:
SECTION 1
DESCRIPTION OF SECURITIES
The Company's authorized and outstanding capitalization when the offering of
the securities contemplated hereby is permitted to commence and at the Closing
Date (hereinafter defined), will be as set forth in the Registration Statement
and Prospectus (hereinafter defined) included therein. The Company proposes to
issue and sell to the Underwriting Group an aggregate of 525,000 shares of
Series C 10% Cumulative Convertible Preferred Stock ("Preferred Stock") and
525,000 Warrants ("Warrants") (together the "Securities"), at a price of
$_______________ per share of Preferred Stock and $_______________ per Warrant.
Each Warrant will entitle the holder to purchase one share of Common Stock at
an anticipated price of $1.00 per Share ("Warrant Exercise Price") during the
period commencing on the effective date of the Registration Statement
("Effective Date") and ending on December 31, 1996. The Warrants will be
redeemable on 45 days prior written notice at a redemption price of $.05 per
Warrant if (a) the closing high bid price of the Common Stock has exceeded the
Warrant Exercise Price by 50% or more for 20 consecutive trading days
immediately preceding the mailing of the notice of redemption, (b) the Company
has in effect a current registration statement with the applicable regulatory
authorities registering the Common Stock issuable upon exercise of the Warrants,
and (c) the Representative consents in writing to such redemption if it occurs
within one year from the effective date.
The Representative shall also have an over-allotment option to purchase up to
an additional 78,750 Securities as provided in Section 3.1 hereof.
The Company proposes to issue and sell to the Representative on the Closing
Date for an aggregate purchase price of $100 a warrant to purchase that number
of Preferred Stock (the "Underwriter's Preferred Stock Warrant") and Warrants
(the "Underwriter's Warrant Warrant") equal to 10% of the Preferred Stock and
Warrants bought by the Underwriting Group, as provided in Section 3.3 hereof.
The Underwriter's Preferred Stock Warrant and the Underwriter's Warrant Warrant
are sometimes hereinafter referred to as the "Underwriter's Warrants."
SECTION 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
In order to induce the Underwriting Group to enter into this Agreement, the
Company hereby represents and warrants to and agrees with each member of the
Underwriting Group that:
<PAGE>
2.1 Registration Statement and Prospectus. A Registration Statement on Form
-------------------------------------
S-2 (File No. _______________) with respect to the Securities, including the
related Prospectus, copies of which have heretofore been delivered by the
Company to the Representative, has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"), and
the rules and regulations ("Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and said Registration
Statement has been filed with the Commission under the Act; one or more
amendments to said Registration Statement, copies of which have heretofore been
delivered to the Representative, has or have heretofore been filed; and the
Company may file on or prior to the Effective Date of the Registration Statement
additional amendments to said Registration Statement, including the final
Prospectus. Included in such Registration Statement are a sufficient number of
additional shares of the Company's Securities which are reserved against
exercise of the over-allotment option.
As of the Effective Date, the capitalization of the Company shall consist of
no more than 50,000,000 shares of capital stock, either outstanding or subject
to issuance upon the exercise of outstanding options, warrants or purchase
rights or upon the conversion of outstanding convertible securities. Any
changes in the number of shares of Common Stock or Preferred Stock issued and
outstanding at or prior to the Effective Date of the Registration Statement must
be approved by the Representative. Without the Representative's prior consent,
there shall be no warrants, options or rights outstanding as of the Effective
Date of the Registration Statement to purchase Common Stock or Preferred Stock
other than as described in the Registration Statement.
As used in this Agreement, the term "Registration Statement" refers to and
means said Registration Statement on Form S-2 and all amendments thereto,
including the Prospectus, the information incorporated therein by reference, all
exhibits and financial statements, as it becomes effective; the term
"Prospectus" refers to and means the Prospectus included in the Registration
Statement when it becomes effective or as filed in final form in accordance with
the requirements of Rule 424(b) of the Rules and Regulations; and the term
"Preliminary Prospectus" refers to and means any prospectus included in said
Registration Statement before it becomes effective. The term "Effective Date"
throughout this Agreement refers to the date the Commission declares the
Registration Statement effective pursuant to Section 8 of the Act.
2.2 Accuracy of Registration Statement and Prospectus. The Commission has
-------------------------------------------------
not issued any order preventing or suspending the use of any Preliminary
Prospectus with respect to the Securities, and each Preliminary Prospectus has
conformed in all material respects with the requirements of the Act and the
applicable Rules and Regulations of the Commission thereunder and to the best of
the Company's knowledge has not included at the time of filing any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein not misleading, except with respect to matters
subsequently amended prior to the Effective Date. On the Effective Date and on
the Closing Date, the Registration Statement and Prospectus will contain all
statements which are required to be stated therein in accordance with the Act
and the Rules and Regulations for the purposes of the public offering of the
Securities, and all statements of material fact contained in the Registration
Statement and Prospectus will be true and correct, and neither the Registration
Statement nor the Prospectus will include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, the
Company does not make any representations or warranties as to information
contained in or omitted from the Registration Statement or the Prospectus in
reliance upon written information furnished on behalf of the Underwriting Group
specifically for use therein. The Company will not at any time hereafter file
any amendments to the Registration Statement or in accordance with Rule 424(b)
of the Rules and Regulations of which the Representative shall not have been
previously advised in advance of filing or to which the Representative shall
reasonably object in writing.
2.3 Financial Statements. The financial statements of the Company together
--------------------
with related schedules and notes as set forth in the Registration Statement and
Prospectus will present fairly the
2
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financial position of the Company and the results of its operations and the
changes in its financial position at the respective dates and for the respective
periods for which they apply; such financial statements have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods concerned except as otherwise stated therein.
2.4 Independent Public Accountant. Hirsch & Silberstein, P.C. has certified
-----------------------------
or shall certify certain of the fiscal year end financial statements filed or to
be filed with the Commission as part of the Registration Statement and
Prospectus and are independent certified public accountants within the meaning
of the Act and the Rules and Regulations.
2.5 No Material Adverse Change. Except as may be reflected in or
--------------------------
contemplated by the Registration Statement or the Prospectus, subsequent to the
dates as of which information is given in the Registration Statement and
Prospectus, and prior to the Closing Date, (i) there shall not be any material
adverse change in the condition, financial or otherwise, of the Company or in
its business taken as a whole; (ii) there shall not have been any material
transaction entered into by the Company other than transactions in the ordinary
course of business; (iii) the Company shall not have incurred any material
liabilities, obligations or claims, contingent or otherwise, which are not
disclosed in the Prospectus; (iv) except in the ordinary course of business and
with the consent of the Representative, there shall not have been nor will there
be any change in the capital stock or long-term debt (except current payments)
of the Company; and (v) the Company has not and will not have paid or declared
any dividends or other distributions on its capital stock.
2.6 No Defaults. Other than as disclosed in the Registration Statement or
-----------
Prospectus, the Company is not in any material default which has not been waived
in the performance of any obligation, agreement or condition contained in any
debenture, note or other evidence of indebtedness or any indenture or loan
agreement of the Company. The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated, and compliance with the
terms of this Agreement will not conflict with or result in a breach of any of
the terms, conditions or provisions of, or constitute a default under, the
articles of incorporation, as amended, or by-laws of the Company, any note,
indenture, mortgage, deed of trust, or other agreement or instrument to which
the Company is a party or by which it or any of its property is bound, or any
existing law, order, rule, regulation, writ, injunction, or decree of any
government, governmental instrumentality, agency or body, arbitration tribunal
or court, domestic or foreign, having jurisdiction over the Company or its
property. The consent, approval, authorization, or order of any court or
governmental instrumentality, agency or body is not required for the
consummation of the transactions herein contemplated except such as may be
required under the Act or under the securities laws of any state or
jurisdiction.
2.7 Incorporation and Standing. The Company is and at the Closing Date and
--------------------------
the Over-Allotment Closing Date will be duly incorporated and validly existing
in good standing as a corporation under the laws of Delaware with authorized and
outstanding capital stock as set forth in the Registration Statement and the
Prospectus, and with full power and authority (corporate and other) to own its
property and conduct its business, present and proposed, as described in the
Registration Statement and Prospectus; the Company has full power and authority
to enter into this Agreement; and the Company is duly qualified and in good
standing as a foreign corporation in each jurisdiction in which the character or
location of its properties (owned or leased) or the nature of its business makes
such qualification necessary.
2.8 Legality of Outstanding Stock. The outstanding capital stock of the
-----------------------------
Company has been duly and validly authorized, issued and is fully paid and
nonassessable and will conform to all statements with regard thereto contained
in the Registration Statement and Prospectus. No sales of securities have been
made by the Company in violation of the registration or anti-fraud provisions of
the Act or in violation of any other federal law or laws of any state or
jurisdiction.
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2.9 Legality of Securities. The Preferred Stock, Warrants, Warrant Shares,
----------------------
Underwriter's Warrants, and the Preferred Stock and Warrants issuable upon the
exercise of the Underwriter's Warrants have been duly and validly authorized
and, when issued and delivered against payment therefor as provided in this
Agreement, will be validly issued, fully paid and nonassessable. The Preferred
Stock and Warrant Shares and the Preferred Stock underlying the Underwriter's
Warrants, upon issuance, will not be subject to the preemptive rights of any
shareholders of the Company. The Warrants and the Underwriter's Warrants, when
sold and delivered, will constitute valid and binding obligations of the Company
enforceable in accordance with the terms thereof. A sufficient number of shares
of Preferred Stock and Common Stock of the Company has been reserved for
issuance upon exercise of the Warrants, the Underwriter's Preferred Stock
Warrants and the Warrants issuable upon the exercise of the Underwriter's
Warrant Warrants. The Preferred Stock, the Warrants, the Warrant Shares, the
Underwriter's Warrants and the Preferred Stock and Warrants issuable upon the
exercise of the Underwriter's Warrants will conform to all statements with
regard thereto in the Registration Statement and Prospectus.
2.10 Prior Sales. No unregistered securities of the Company, of an affiliate
-----------
or of a predecessor of the Company have been sold within three years prior to
the date hereof, except as set forth in the Registration or otherwise disclosed
to the Representative in writing.
2.11 Litigation. Except as set forth in the Registration Statement and
----------
Prospectus, there is and at the Closing Date there will be no action, suit or
proceeding before any court, arbitration tribunal or governmental agency,
authority or body pending or to the knowledge of the Company threatened which
might result in judgments against the Company not adequately covered by
insurance or which collectively might result in any material adverse change in
the condition (financial or otherwise), the business or the prospects of the
Company, or would materially affect the properties or assets of the Company.
2.12 Underwriter's Warrants. Upon delivery of and payment for the
----------------------
Underwriter's Warrants to be sold by the Company as set forth in Section 3.3 of
this Agreement, the Representative and designees of the Representative will
receive good and marketable title thereto, free and clear of all liens,
encumbrances, charges and claims whatsoever; and the Company will have on the
Effective Date and at the time of delivery of such Underwriter's Warrants full
legal right and power and all authorization and approval required by law to
sell, transfer and deliver such Underwriter's Warrants in the manner provided
hereunder.
2.13 Finder. The Company knows of no outstanding claims against it for
------
compensation for services in the nature of a finder's fee, origination fee or
financial consulting fee with respect to the offer and sale of the Securities
hereunder except as previously disclosed in writing to the Representative.
2.14 Exhibits. There are no contracts or other documents which are required
--------
to be filed as exhibits to the Registration Statement by the Act or by the Rules
and Regulations which have not been so filed and each contract to which the
Company is a party and to which reference is made in the Prospectus has been
duly and validly executed, is in full force and effect in all material respects
in accordance with their respective terms, and none of such contracts have been
assigned by the Company; and the Company knows of no present situation or
condition or fact which would prevent compliance with the terms of such
contracts, as amended to date. Except for amendments or modifications of such
contracts in the ordinary course of business, the Company has no intention of
exercising any right which it may have to cancel any of its obligations under
any of such contracts, and has no knowledge that any other party to any of such
contracts has any intention not to render full performance under such contracts.
2.15 Tax Returns. The Company has filed all federal and state tax returns
-----------
which are required to be filed by it and has paid all taxes shown on such
returns and on all assessments received by it to the
4
<PAGE>
extent such taxes have become due. All taxes with respect to which the Company
is obligated have been paid or adequate accruals have been set up to cover any
such unpaid taxes.
2.16 Property. Except as otherwise set forth in or contemplated by the
--------
Registration Statement and Prospectus, the Company has good title, free and
clear of all liens, encumbrances and defects, except liens for current taxes not
due and payable, to all property and assets which are described in the
Registration Statement and the Prospectus as being owned by the Company, subject
only to such exceptions as are not material and do not adversely affect the
present or prospective business of the Company.
2.17 Authority. The execution and delivery by the Company of this Agreement
---------
has been duly authorized by all necessary corporate action and this Agreement is
the valid, binding and legally enforceable obligation of the Company.
2.18 Lock-Up. The Company has obtained an agreement acceptable to the
-------
Representative from each of its officers, directors and 5% or greater
shareholders that for a period of one year from the date of the Prospectus they
will not, without the prior written consent of the Representative, sell or
otherwise dispose of any shares of Common Stock of the Company owned directly or
indirectly or beneficially by them.
2.19 Use of Form S-2. The Company is eligible to use Form S-2 for the offer
---------------
and sale of the Preferred Stock, the Warrants and the Underwriter's Warrants and
the underlying Preferred Stock and securities underlying such Underwriter's
Warrants.
All of the above representations and warranties shall survive the performance
or termination of this Agreement.
SECTION 3
PURCHASE AND SALE OF THE SECURITIES
3.1 Purchase of Securities and Over-Allotment Option. The Company hereby
------------------------------------------------
agrees to sell to members of the Underwriting Group named in Schedule I hereto
(individually referred to as "Member" and collectively referred to as "Members")
(for all of whom the Representative is acting), severally and not jointly, and
each Member of the Underwriting Group, upon the basis of the representations and
warranties herein obtained, but subject to the conditions hereinafter stated,
agrees to purchase from the Company, severally and not jointly, the number of
Preferred Stock and Warrants set forth opposite their respective names in
Schedule I hereto at a purchase price of $_______________ per share of Preferred
Stock and $_______________ per Warrant.
The Company hereby grants to the Representative an over-allotment option for a
period of forty-five (45) days after the Effective Date to purchase at a
purchase price of $________________ per share of Preferred Stock and
$_________________ per Warrant up to _______________ additional Preferred Stock
and Warrants, such Securities to be identical in all respects to the Securities
as described in Section 1 hereof, solely to cover over-allotments, if any.
3.1.1 Default by a Member. If for any reason one or more Members of the
-------------------
Underwriting Group shall fail or refuse (otherwise than for a reason
sufficient to justify the termination of this Agreement under the provisions
of Section 9 hereof) to purchase and pay for the number of Securities agreed
to be purchased by such Member, the Company shall immediately give notice
thereof to the Representative, and the non-defaulting Members shall have the
right within 24 hours after the receipt by the Representative of such notice,
to purchase or procure one or more other Members to purchase, in such
proportions as may be agreed upon among the Representative and such purchasing
Member or Members and upon the terms herein set forth, the Securities which
such
5
<PAGE>
defaulting Member or Members agreed to purchase. If the non-defaulting
Members fail so to make such arrangements with respect to all such Securities,
the number of Securities which each non-defaulting Member is otherwise
obligated to purchase under the Agreement shall be automatically increased pro
rata to absorb the remaining Securities which the defaulting Member or Members
agreed to purchase; provided, however, that the non-defaulting Members shall
not be obligated to purchase the Securities which the defaulting Member or
Members agreed to purchase in excess of 10% of the total number of Securities
which such non-defaulting Member agreed to purchase hereunder, and provided
further that the non-defaulting Members shall not be obligated to purchase any
Securities which the defaulting Member or Members agreed to purchase if such
additional purchase would cause the Member to be in violation of the net
capital rule of the Commission or other applicable law. If the total number
of Securities which the defaulting Member or Members agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences,
the Company shall have the right, within 24 hours next succeeding the 24-hour
period above referred to, to make arrangements with other underwriters or
purchasers satisfactory to the Representative for the purchase of such
Securities on the terms herein set forth. In any such case, either the
Representative or the Company shall have the right to postpone the Closing
determined as provided in Section 3.2.2 hereof for not more than seven
business days after the date originally fixed as the Closing pursuant to said
Subsection 3.2.2 in order that any necessary changes in the Registration
Statement, the Prospectus or any other documents or arrangements may be made.
If neither the non-defaulting Members nor the Company shall make arrangements
within the 24-hour periods stated above for the purchase of all the Securities
which the defaulting Member or Members agreed to purchase hereunder, this
Agreement shall be terminated without further act or deed and without any
liability on the part of the Company to any non-defaulting Member, except the
Company shall be liable for actual expenses incurred by the Representative as
provided in Section 3.4 hereof, and without any liability on the part of any
non-defaulting Member to the Company.
3.1.2 Liability of Defaulting Member. Nothing contained in this Section
------------------------------
3.1 shall relieve any defaulting Member of its liability, if any, to the
Company or to the remaining Members of the Underwriting Group for damages
occasioned by its default hereunder.
3.2 Public Offering Price. After the Commission notifies the Company that
---------------------
the Registration Statement has become effective, the Members of the Underwriting
Group propose to offer the Securities to the public at an initial public
offering price of $_______________ per share of Preferred Stock and
$____________ per Warrant, for a total offering price of $_______________ per
Security as set forth in the Prospectus. The Members of the Underwriting Group
may allow such discounts and concessions upon sales to selected dealers as may
be determined from time to time by the Representative.
3.2.1 Payment For Securities. Payment for the Securities (including
----------------------
Securities included in the over-allotment option which the Representative
agrees to purchase) shall be made to the Company or its order by certified or
official bank check or checks, in the amount of the purchase price by or on
behalf of the Representative at the offices of the Representative in Denver,
Colorado, upon delivery to the Representative or its designee of certificates
for the Preferred Stock and Warrants in definitive form in such numbers and
registered in such names as the Representative requests in writing at least
three full business days prior to such delivery. At the request of the
Representative, the Company shall deliver the Securities to the Members of the
Underwriting Group through the facilities of The Depository Trust Company or
as otherwise directed.
3.2.2 Closing. The time and date of delivery and payment hereunder is
-------
herein called the "Closing Date" and shall take place at the office of the
Representative in Denver, Colorado, or at such other location as may be
specified by the Representative, at 10:00 a.m. on the fifth business day
following the date of the Prospectus; provided, however, that such date may be
extended for not more than an additional seven business days by the
Representative. Should the Representative elect to exercise any part of the
over-allotment option pursuant to Section 3.1 hereinabove, the time
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<PAGE>
and date of delivery and payment for said over-allotment Securities shall be
as mutually agreed, but not later than the forty-fifth (45th) calendar day
after the Effective Date or the date of the Prospectus, whichever is later.
Said date is referred to as the "Over-Allotment Closing Date."
3.2.3 Inspection of Certificates. For the purpose of expediting the
--------------------------
checking and packaging of the certificates for the Securities and the
Underwriter's Warrants, the Company agrees to make the certificates available
for inspection by the Representative at the main office of the Representative
in Denver, Colorado, at least two full business days prior to the proposed
delivery date.
3.3 Sale of Underwriter's Warrants. The Company will sell and deliver to the
------------------------------
Representative, for itself alone and not on behalf of the other members of the
Underwriting Group, at a purchase price of $50 per Warrant ($100 aggregate), an
Underwriter's Preferred Stock Warrant and an Underwriter's Warrant Warrant dated
as of the date of the Prospectus substantially in the form filed as an Exhibit
to the Registration Statement with such changes therein, if any, as may be
agreed upon by the Company and the Representative or by its counsel, evidencing
the right of the Representative to purchase a number of Securities equal to 10%
of the Securities bought by the Underwriting Group exclusive of the over-
allotment option (_______________ shares of Preferred Stock and _______________
Warrants) at the price per Security and upon the terms and conditions provided
in the Underwriter's Warrants. The Company shall not be obligated to sell and
deliver the Underwriter's Warrants, and the Representative will not be obligated
to purchase and pay for the Underwriter's Warrants, except upon payment for the
Securities pursuant to Subsection 3.2.1 hereof.
3.4 Representative's Expense Allowance. It is understood that the Company
----------------------------------
shall reimburse the Representative, for itself alone and not on behalf of the
other Members of the Underwriting Group, for its expenses on a nonaccountable
basis in the amount of 3% of the gross proceeds from the sale of the Securities
($ per Security) including proceeds from the sale of the Securities
included in the over-allotment option. The Representative acknowledges receipt
of $35,000 of said nonaccountable expense allowance. By the Closing Date and,
if applicable, on the Over-Allotment Closing Date, the Representative shall be
entitled to withhold the unpaid balance of such nonaccountable expense
allowance. The Representative shall be solely responsible for all expenses
incurred by it in connection with the offering including, but not limited to,
the expenses of its own counsel except as set forth in Section 5.7 hereof.
Notwithstanding the foregoing, if the Registration Statement does not become
effective, or the offering is never commenced after it becomes effective, or if
this Agreement is terminated as provided herein, the Representative will retain
so much of the nonaccountable expense allowance which has been or should have
been received by the Representative from the Company as is equal to its actual
accountable out-of-pocket expenses and reimburse the remainder, if any to the
Company, provided that the amount to be reimbursed will not exceed the amount of
the nonaccountable expense allowance. The Representative's expenses shall
include, but are not to be limited to, a fee to compensate the Representative
for the services and time of Representative's counsel, plus any additional
expenses and fees, including but not limited to, travel expenses, postage
expenses, duplication expenses, confirmation and other record preparation
expenses, long-distance telephone expenses, consultant and investigator expenses
and other expenses incurred by the Representative in connection with the
proposed offering.
3.5 Additional Financing. If, upon request by the Company, the Underwriter
--------------------
arranges for equity financing accepted by and closed with the Company other than
as contemplated herein during a period of three years from the date of the
Letter of Intent entered into between the Representative and the Company, the
Company will pay a ten percent (10%) commission to the Underwriter based on the
amount of equity financing. "Arranges," as used in this section, means locating
the financing, introducing the Company to the source of the financing, and
assisting the Company, in all reasonable ways as the Company may request, to
negotiate and complete the financing.
7
<PAGE>
If the Underwriter arranges for debt financing accepted by and closed with the
Company during a period of three years from the date of the Letter of Intent
entered into between the Representative and the Company, the Company will pay a
five percent (5%) commission to the Underwriter based on the amount of debt
financing.
If the Underwriter obtains an increase in the Company's line of credit, which
is accepted by and closed with the Company, the Company will pay a fee equal to
1% of the amount of increase.
If the Underwriter arranges for the purchase or sale of assets, for a merger,
acquisition or joint venture accepted by and closed with the Company, during a
period of three years from the date of the Letter of Intent entered into between
the Representative and the Company, the Company will pay a fee to the
Underwriter for its services calculated as follows:
5% of the value of the transaction to the Company up to and including
$1,000,000
4% of the value of the transaction to the Company greater than $1,000,000
and up to and including $2,000,000
3% of the value of the transaction to the Company greater than $2,000,000 and
up to and including $3,000,000
2% of the value of the transaction to the Company greater than $3,000,000 and
up to and including $4,000,000, and
1% of the value of the transaction to the Company in excess of $4,000,000, all
from such income as received.
If the Company contemplates the purchase or sale of assets out of the ordinary
course of business, a merger, acquisition or joint venture, or a material
investment is to be made in the Company, during a period of three years from the
date hereof, and the Underwriter did not introduce or arrange for the
transaction, the Company will allow the Underwriter to review, comment and make
recommendations on the transaction.
In addition, the Company shall reimburse the Underwriter for any reasonable
expenses it incurs in arranging and closing such funding or transactions,
including fees of its counsel after receiving written approval from the Company.
All payments described shall occur within ten (10) business days of the date
or dates that funds are received by the Company for which services were
performed.
In addition, the Company shall reimburse the Representative for any reasonable
expenses that it incurs in arranging such funding or transactions, including
fees of its counsel.
The provisions of this Section 3.5 shall survive the performance or
termination of this Agreement in accordance with Section 12.2 of this Agreement.
3.6 Financial Consulting Agreement. On the Closing Date, the Company shall
------------------------------
enter into a Financial Consulting Agreement with the Underwriter pursuant to
which the Underwriter shall receive a consulting fee of $2,500 per month for
twelve (12) months from the Closing Date of the Offering, for services
which shall include, but are not limited to, advising the Company in connection
with business and financial planning, corporate organization and structure,
financial matters in connection with the operation of the business of the
Company, private and public equity and debt financing, acquisitions, mergers and
other similar business combinations, the Company's relations with its securities
holders, preparation and distribution of periodic reports, and shall
periodically provide to the Company analysis of the Company's financial
statements. The Underwriter shall not be required to spend in excess of
8
<PAGE>
twenty (20) hours per month in providing the above services to the Company. The
entire consulting fee ($30,000) shall be payable to the Underwriter on the
Closing Date of the Offering.
3.7 Representations of the Parties. The parties hereto respectively
------------------------------
represent that as of the Closing Date the representations herein contained and
the statements contained in all the certificates theretofore or simultaneously
delivered by any party to another, pursuant to this Agreement, shall in all
material respects be true and correct.
3.8 Post-Closing Information. The Representative covenants that reasonably
------------------------
promptly after the Closing Date, it will supply the Company with all information
required from the Representative which must be supplied to the Commission, if
any, and such additional information as the Company may reasonably request to be
supplied to the securities authorities for such states in which the Securities
have been qualified for sale.
3.9 Re-Offers By Selected Dealers. On each sale by the Representative of any
-----------------------------
of the Securities to selected dealers, the Representative shall require the
selected dealer purchasing any such Securities to agree to re-offer the same on
the terms and conditions of the offering set forth in the Registration Statement
and Prospectus.
SECTION 4
REGISTRATION STATEMENT AND PROSPECTUS
4.1 Delivery of Registration Statements. The Company shall deliver to the
-----------------------------------
Representative without charge two (2) manually signed copies of the Registration
Statement, including all financial statements and exhibits filed therewith and
any amendments or supplements thereto, and shall deliver without charge to the
Representative ten (10) conformed copies of the Registration Statement and any
amendment or supplement thereto, including such financial statements and
exhibits. The signed copies of the Registration Statement so furnished to the
Representative will include manually signed copies of any and all consents and
certificates of the independent public accountant certifying to the financial
statements included in the Registration Statement and Prospectus and signed
copies of any and all opinions, consents and certificates of any other persons
whose profession gives authority to statements made by them and who are named in
the Registration Statement or Prospectus as having prepared, certified, or
reviewed any part thereof.
4.2 Delivery of Preliminary Prospectus. The Company will cause to be
----------------------------------
delivered to Members of the Underwriting Group and to other broker-dealers,
without charge, prior to the Effective Date as many copies of each Preliminary
Prospectus filed with the Commission bearing in red ink the statement required
by Item 501(c)(8) of Regulation S-K (Reg. 229.501(c)(8)) as may be required by
the Representative. The Company consents to the use of such documents by
Members of the Underwriting Group and by selected dealers prior to the Effective
Date of the Registration Statement.
4.3 Delivery of Prospectus. The Company will deliver, without charge, copies
----------------------
of the Prospectus at such addresses and in such quantities as may be required by
the Representative for the purposes contemplated by this Agreement and shall
deliver said printed copies of the Prospectus to Members of the Underwriting
Group and to selected dealers within one business day after the Effective Date.
4.4 Further Amendments and Supplements. If during such period of time as in
----------------------------------
the opinion of the Representative or its counsel the Prospectus is required to
be delivered under the Act, any event occurs or any event known to the Company
relating to or affecting the Company shall occur as a result of which the
Prospectus as then amended or supplemented would include an untrue statement of
a material fact, or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or if it is necessary at any time after the Effective Date to
amend or supplement the Prospectus to comply with the Act, the Company will
9
<PAGE>
forthwith notify the Representative thereof and prepare and file with the
Commission such further amendment to the Registration Statement or supplemental
or amended Prospectus as may be required and furnish and deliver to the
Representative and to others whose names and addresses are designated by the
Representative, all at the cost of the Company, a reasonable number of copies of
the amended or supplemented Prospectus which as so amended or supplemented will
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the Prospectus not misleading in the
light of the circumstances as of the date of such Prospectus, amendment, or
supplement, and which will comply in all respects with the Act; and in the event
the Representative is required to deliver a Prospectus beyond completion of its
participation in the public offering, upon request will prepare promptly such
Prospectus or Prospectuses as may be necessary to permit continued compliance
with the requirements of the Act.
4.5 Use of Prospectus. The Company authorizes the Members of the
-----------------
Underwriting Group in connection with the distribution of the Securities and all
selected dealers to whom any of the Securities may be sold to use the Prospectus
as from time to time amended or supplemented, in connection with the offer and
sale of the Securities and in accordance with the applicable provisions of the
Act, the Rules and Regulations and state Blue Sky or securities laws.
SECTION 5
COVENANTS OF THE COMPANY
The Company covenants and agrees with the Representative and other Members of
the Underwriting Group that:
5.1 Objection of Representative to Amendments or Supplements. After the date
--------------------------------------------------------
hereof, the Company will not at any time, whether before or after the Effective
Date, file any amendment or supplement to the Registration Statement or
Prospectus unless and until a copy of such amendment or supplement has been
previously furnished to the Representative a reasonable period prior to the
proposed filing thereof, or to which the Representative or counsel for the
Representative have reasonably objected, in writing, on the ground that such
amendment or supplement is not in compliance with the Act or the Rules and
Regulations.
5.2 Company's Best Efforts to Cause Registration Statement to Become
----------------------------------------------------------------
Effective. The Company will use its best efforts to cause the Registration
- ---------
Statement and any post-effective amendment subsequently filed, to become
effective as promptly as reasonably practicable and will promptly advise the
Representative, and will confirm such advice in writing (i) when the
Registration Statement shall become effective and when any amendment thereto
shall have become effective and when any amendment of or supplement to the
Prospectus shall be filed with the Commission, (ii) when the Commission shall
make a request or suggestion for any amendment to the Registration Statement or
the Prospectus or for additional information and the nature and substance
thereof, (iii) of the issuance by the Commission of an order suspending the
effectiveness of the Registration Statement pursuant to Section 8 of the Act or
of the initiation of any proceedings for that purpose, (iv) of the happening of
any event which in the judgment of the Company makes any material statement in
the Registration Statement or Prospectus untrue or which requires the making of
any changes in the Registration Statement or Prospectus in order to make the
statements therein not misleading, and (v) of the refusal to qualify or the
suspension of the qualification of the Securities for offer or sale in any
jurisdiction, or of the institution of any proceedings for any of such purposes.
The Company will use every reasonable effort to prevent the issuance of any such
order or of any order preventing or suspending such use, to prevent any such
refusal to qualify or any such suspension, and to obtain as soon as possible a
lifting of any such order, the reversal of any such refusal and the termination
of any such suspension.
5.3 Preparation and Filing of Amendments and Supplements. The Company agrees
----------------------------------------------------
to prepare and file promptly with the Commission, upon request of the
Representative, such amendments or
10
<PAGE>
supplements to the Registration Statement or Prospectus, in form satisfactory to
counsel to the Company, as in the opinion of counsel to the Representative and
of counsel to the Company may be necessary in connection with the offer and sale
of the Securities and will use its best efforts to cause the same to become
effective as promptly as possible.
5.4 Blue Sky Qualification. It is understood and agreed by the Company and
----------------------
the Representative that it shall be a condition of closing that the Company will
use its best efforts to qualify (blue-sky) the sale of the Securities in those
states as may be agreed upon by the Company and the Representative. Copies of
all applications for the registration of securities and related documents
(except for the Registration Statement and Prospectus) filed with the various
states shall be supplied to the Representative's counsel, concurrently with
their transmission to the various states, and copies of all comments and orders
received from the various states shall be immediately supplied to the
Representative's counsel. Immediately prior to the Effective Date, counsel for
the Company shall advise the Representative in writing of all states wherein the
offering is exempt or has been registered for sale, canceled, withdrawn or
denied, the date of such event(s) and the number of Securities registered for
sale in each such state. After settlement and closing, the Representative may
confirm the qualification of the Company's Securities in writing to the Company
and the Company's counsel. Failure by the Company or Company's counsel to
refute such confirmation shall constitute an affirmative statement by the same
advising the Representative that such qualification in fact has taken place.
5.5 Financial Statements. The Company at its own expense will prepare and
--------------------
give and will continue to give such financial statements and other information
to and as may be required by the Commission, or the proper public bodies of the
states in which the Securities and underlying Securities may be registered or
qualified.
5.6 Reports and Financial Statements to the Representative. During the
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period of three years from the Closing Date, the Company will deliver to the
Representative, copies of each annual report of the Company, and will deliver to
the Representative: (i) within 90 days after the close of each fiscal year of
the Company, a financial report of the Company and its subsidiaries, if any, on
a consolidated basis, and a similar financial report of all unconsolidated
subsidiaries, if any, all such reports to include a balance sheet as of the end
of the preceding fiscal year, a statement of operations, a statement of cash
flows and an analysis of shareholders' equity covering such fiscal year, and all
to be in reasonable detail and certified by independent public accountants for
the Company; (ii) copies of all other statements, documents, or other
information which the Company shall mail or otherwise make available to any
class of its security holders, or shall file with the Commission; and (iii) upon
request in writing from the Representative, furnish to the Representative such
other information as may reasonably be requested and which may be properly
disclosed to the Representative with reference to the property, business and
affairs of the Company and its subsidiaries, if any; provided such written
request includes an agreement to keep confidential any information which should
not be disclosed to the public.
The requirements of subparagraph (i) in the above paragraph will be satisfied
if the Company provides to the Representative copies of its Form 10-K, Form 10-Q
and Form 8-K in the form and at the time it is filed with the Securities and
Exchange Commission.
If the Company shall fail to furnish the Representative with financial
statements as herein provided, within the times specified herein, the
Representative, after giving reasonable notice of not less than 30 days, shall
have the right to have such financial statements prepared by independent public
accountants of its own choosing and the Company agrees to furnish such
independent public accountants such data and assistance and access to such
records as they may reasonably require to enable them to prepare such statements
and to pay their reasonable fees and expenses in preparing the same.
5.7 Expenses Paid by the Company. The Company will pay, whether or not the
----------------------------
transactions contemplated hereunder are consummated or the Registration
Statement is prevented from becoming
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effective or this Agreement is terminated, all costs and expenses incident to
the issuance, offer, sale, and delivery of the Securities, including all
expenses and fees incident to the filing of the Registration Statement with the
Commission, the costs and counsel fees of qualification under state securities
laws, fees and disbursements of counsel and accountants for the Company, costs
of preparing, printing and delivering the Registration Statement and as many
copies of the Prospectus (preliminary and definitive) and related exhibits, as
the Representative may deem necessary, including all amendments and supplements
to the Registration Statement, the Underwriting Agreement, Selected Dealers
Agreement, and any sales literature requested by the Representative; provided,
however, that any amounts paid to the Representative as an expense allowance
shall not exceed the amounts provided in Section 3.4.
5.8 Reports to Shareholders. During the period of five years from the
-----------------------
Closing Date, the Company will, as promptly as possible, not to exceed 180 days,
after each annual fiscal period render and distribute reports to its
shareholders which will include audited statements of its operations and cash
flows during such period and its balance sheet as of the end of such period, as
to which statements the Company's independent certified public accountants shall
have rendered an opinion.
5.9 Section 11(a) Financials. The Company will make generally available to
------------------------
its security holders and will deliver to the Representative, as soon as
practicable, an earnings statement (as to which no opinion need be rendered but
which will satisfy the provisions of Section 11(a) of the Act) covering a period
of at least 12 months beginning after the Effective Date. Compliance by the
Company with Rule 158 promulgated under the Act shall satisfy the requirements
of this Section 5.9.
5.10 Post-Effective Availability of Prospectus. Within the time during which
-----------------------------------------
the Prospectus is required to be delivered under the Act, the Company will
comply, at its own expense, with all requirements imposed upon it by the Act, as
now or hereafter amended, by the Rules and Regulations, as from time to time may
be in force, and by any order of the Commission, so far as necessary to permit
the continuance of sales or dealings in the Securities and the exercise of the
Warrants.
5.11 Application of Proceeds. The Company will adopt procedures for the
-----------------------
stewardship of the net proceeds it receives from the sale of the Securities and
will apply the net proceeds from the sale of the Securities substantially in the
manner specifically set forth in the Registration Statement and Prospectus
unless any deviation from such application is in accordance with the
Registration Statement and occurs only after approval by the Board of Directors
of the Company and then only after the Board of Directors has obtained the
written opinion of recognized legal counsel well versed in the federal and state
securities laws as to the propriety of any such deviation.
5.12 Undertakings of Certain Shareholders. The Company will deliver to the
------------------------------------
Representative, prior to the execution of this Agreement, the undertaking of
each officer, director and 5% or greater shareholder that such persons shall not
sell or otherwise dispose of any portion of the shares of common stock owned
directly, indirectly or beneficially prior to the Effective Date for a period of
one year from the Effective Date without the Representative's prior written
consent.
5.13 Delivery of Documents. At the Closing, the Company will deliver to the
---------------------
Representative true and correct copies of the articles of incorporation of the
Company and all amendments thereto, all such copies to be certified by the
Secretary of the Company; true and correct copies of the by-laws of the Company
and of the minutes of all meetings of the directors and shareholders of the
Company held prior to the Closing Date which in any way relate to the subject
matter of this Agreement.
5.14 Cooperation With Representative's Due Diligence. At all times prior to
-----------------------------------------------
the Closing Date, the Company will cooperate with the Representative in such
investigation as the Representative may make or cause to be made of all the
properties, management, business and operations of the Company in connection
with the purchase and public offering of the Securities, and the Company will
make available
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to the Representative in connection therewith such information in its possession
as the Representative may reasonably request.
5.15 Appointment of Transfer Agent and Warrant Agent. The Company has
-----------------------------------------------
appointed American Securities Transfer, Inc., Denver, Colorado, as Transfer
Agent for the Securities and Warrant Agent for the Warrants, subject to the
Closing. The Company will not change or terminate such appointment for a period
of three years from the Effective Date without first obtaining the written
consent of the Representative, which consent shall not be unreasonably withheld.
5.16 Compliance With Conditions Precedent. The Company will use all
------------------------------------
reasonable efforts to comply or cause to be complied with the conditions
precedent to the several obligations of the Members of the Underwriting Group in
Section 8 hereof.
5.17 Filing of Form SR. If required under the Act, the Company agrees to
-----------------
file with the Commission all required reports on Form SR in accordance with the
provisions of Rule 463 promulgated under the Act and to provide a copy of such
reports to the Representative and its counsel.
5.18 Bound Volume. The Company shall supply to the Representative and the
------------
Representative's counsel, at the Company's cost, two bound volumes each of all
of the public offering materials within a reasonable time after the closing, not
to exceed three months.
5.19 Listing in Moody's and Standard & Poor's. As soon as possible prior to
----------------------------------------
the Effective Date, the Company agrees to use its best efforts to have the
Company listed in Moody's Over-The-Counter Manual and Standard & Poor's Standard
Corporation Records, or if already listed, the Company agrees to use its best
efforts to maintain such listings.
5.20 NASDAQ . The Company agrees to have the Preferred Stock and Warrants
-------
eligible for quotation on NASDAQ on the Effective Date, on the Closing Date and
on the Over-Allotment Closing Date and continuing thereafter during the entire
period that the Company is in compliance with NASDAQ maintenance requirements.
The NASDAQ symbols shall be mutually agreeable to the Company and the
Representative. On the Effective Date, the Company must be qualified for
initial inclusion or maintaining inclusion on the NASDAQ National Market System
or listing on a national securities exchange satisfactory to the Underwriter if
the Company meets the qualifications for inclusion or listing. The Company
agrees to have its eligible securities designated as a NASDAQ National Market
System security or listing on a national securities exchange as soon as the
Company meets the qualifications for such designation or listing.
5.21 Secondary Trading Qualification. The Company agrees to qualify the
-------------------------------
Preferred Stock and Warrants for secondary trading, as soon as legally possible,
for secondary trading in such states as are requested by the Representative from
time to time.
5.22 Right of Inspection. The Company agrees that for a period of three
-------------------
years after the Effective Date, the Representative, at the Representative's
expense, will have the right to have a person or persons selected by the
Representative review the books and records of the Company upon seven days'
written notice and at reasonable times. Such person or persons will be required
to execute a confidentiality agreement which will, in part, prohibit disclosure
of information to any party except the Representative, which information shall
be held in confidence unless otherwise specifically agreed to by the Company in
writing.
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SECTION 6
INDEMNIFICATION AND CONTRIBUTION
6.1 Indemnification By Company. The Company agrees to indemnify and hold
--------------------------
harmless the Representative and the other Members of the Underwriting Group (for
the purposes of this Section 6 collectively the "Underwriters") and each
officer, director, employee, representative, agent, surety, guarantor, and each
person who controls each of the Underwriters within the meaning of Section 15 of
the Act against any and all losses, claims, damages or liabilities, joint or
several, to which they or any of them may become subject under the Act, any
other statute, at common law, NASD requirements or otherwise and to reimburse
the persons indemnified above for any legal or other expenses (including the
cost of any investigation and preparation) incurred by them in connection with
any litigation, arbitration or any other proceeding (hereinafter referred to as
"litigation" in this Section 6), whether or not resulting in any liability, but
only insofar as such losses, claims, damages, liabilities and litigation arise
out of or are based upon this Agreement or any matter relating to the offer or
sale of the Securities, including, but not limited to, any violation of any
registration requirements, any improper use of sales literature or any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereto or any application or other
document filed in order to qualify the Securities under the securities laws of
the states where filings were made, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, all as of the date when the Registration
Statement or such amendment, as the case may be, becomes effective, or any
untrue statement or alleged untrue statement of a material fact contained in the
Prospectus (as amended or supplemented if the Company shall have filed with the
Commission any amendments thereof or supplements thereto), or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading as of the date of the Prospectus or such amendment or
supplement; provided, however, that the indemnity agreement contained in this
Section 6.1 shall not apply to amounts paid in settlement of any such litigation
if such settlements are effected without the consent of the Company, nor shall
it apply to the Underwriters or any other person indemnified as provided above
in respect of any such losses, claims, damages, liabilities or actions arising
out of or based upon any such untrue statements or alleged untrue statement, or
any such omission or alleged omission, if such statement or omission was made in
reliance upon information peculiarly within the knowledge of the Underwriters
and furnished in writing to the Company by the Underwriters specifically for use
in connection with the preparation of the Registration Statement and Prospectus
or any such amendment or supplement thereto. This paragraph 6.1 shall likewise
not apply to any liability incurred by the Underwriters as a result of a knowing
and willful violation of applicable laws by the Underwriters. This indemnity
agreement is in addition to any other liability which the Company may otherwise
have to the Underwriters or any other person indemnified as provided above. The
Underwriters or any other person indemnified as provided above agree within
twenty days after the receipt by them of written notice of the commencement of
any action against them in respect of which indemnity may be sought from the
Company on account of the indemnity agreement contained in this Section 6.1 to
notify the Company in writing of the commencement thereof. The failure of the
Underwriters or any other person indemnified as provided above so to notify the
Company of any such action shall relieve the Company from any liability which it
may have to such person on account of the indemnity agreement contained in this
Section 6.1, but shall not relieve the Company from any other liability which it
may have to the Underwriters or any person identified above. In case any such
action shall be brought against the Underwriters or any other person indemnified
as provided above and the Underwriters shall notify the Company of the
commencement thereof, the Company shall be entitled to participate in (and, to
the extent that it shall wish, to direct) the defense thereof at its own
expense, but such defense shall be conducted by counsel of recognized standing
and reasonably satisfactory to the Underwriters or any other person indemnified
as provided above, defendant or defendants in such litigation. The Company
agrees to notify the Underwriters promptly of commencement of any litigation
against it or any of its officers or directors, of which it may be advised, in
connection with the issue and sale of any of the Securities or any securities
included therein and to furnish to the Underwriters, at their request, copies of
all pleadings therein and permit the Underwriters to be observers therein and
apprise the Underwriters of all developments therein, all at the Company's
expense.
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6.2 Indemnification By Underwriters. The Underwriters agree to indemnify and
-------------------------------
hold harmless the Company, and each director, officer, employee and agent of the
Company and each person who controls the Company within the meaning of Section
15 of the Act against any and all losses, claims, damages or liabilities, joint
or several, to which they or any of them may become subject under the Act or any
other statute or at common law and to reimburse persons indemnified as above for
any legal or other expenses (including the cost of any investigation and
preparation) incurred by them in connection with any litigation, whether or not
resulting in any liability, but only insofar as such losses, claims, damages,
liabilities and litigation arise out of or are based upon any statement in or
omission from the Registration Statement or any amendment thereto, or the
Prospectus (as amended or as supplemented, if amended or supplemented as
aforesaid) or any application or other document filed in any state or
jurisdiction in order to qualify the Securities under the securities laws
thereof, if such statement or omission was made in reliance upon information
peculiarly within its knowledge and furnished in writing to the Company by the
Underwriters on their behalf specifically for use in connection with the
preparation thereof or supplement thereto. Provided, however, that this
paragraph 6.2 shall not apply to any liability incurred by the Company or any of
its officers, directors, employees, agents, or persons who control the Company
within the meaning of Section 15 of the Act as a result of a knowing and willful
violation of applicable law by any of the above individuals or entities. This
indemnity agreement is in addition to any other liability which the Underwriters
may otherwise have to the Company and any other person indemnified as provided
above. The Underwriters shall not be liable for amounts paid in settlement of
any such litigation if such settlement was effected without the consent of the
Underwriters. In case of commencement of any action in respect of which
indemnity may be sought from the Underwriters on account of the indemnity
agreement contained in this Section 6.2, each person agreed to be indemnified by
the Underwriters shall have the same obligation to notify the Underwriters as
the Underwriters have toward the Company in Section 6.1 above, subject to the
same loss of indemnity in the event such notice is not given, and the
Underwriters shall have the same right to participate in (and, to the extent
that they shall wish, to direct) the defense of such action at their own
expense, but such defense shall be conducted by counsel of recognized standing
and satisfactory to the Company or any other person indemnified as provided
above. The Underwriters agree to notify the Company promptly of the commencement
of any litigation against the Underwriters (and any other person indemnified as
provided above), of which it may be advised, in connection with the issue and
sale of any of the securities of the Company, and to furnish to the Company at
its request copies of all pleadings therein and apprise it of all the
developments therein, all at the Underwriters' expense, and permit the Company
to be an observer therein.
6.3 Contribution. If the indemnification provided for in Sections 6.1 and
------------
6.2 of this Agreement are, for any reason other than as specified in such
Sections, held by a court to be unavailable and the Company or any Member of the
Underwriting Group has been required to pay damages as a result of a
determination by a court, arbitration tribunal or any other person having
jurisdiction over any Member of the Underwriting Group that the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto contains an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, then the Company shall contribute to the
damage paid by the Member of the Underwriting Group and the Member of the
Underwriting Group shall contribute to the damages paid by the Company, but in
each case only to the extent that such damages arise out of or are based upon
such untrue statement or omission, (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Member of the Underwriting Group on the other from the offering of the
Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect the
relative benefits referred to in clause (i) above but also the relative fault of
the Company and the Member of the Underwriting Group in connection with the
statements or omissions which resulted in such damages, as well as any other
relevant equitable considerations. The relative benefits received by the
Company and the Member of the Underwriting Group shall be deemed to be in the
same proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts and
unitemized expenses received by the Member of the Underwriting Group. The
relative fault shall be determined by reference to, among other things, whether
the untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Company or the Member of the Underwriting
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<PAGE>
Group and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such untrue statement or omission. For
purposes of this Section 6.3, the term "damages" shall include any counsel fees
or other expenses reasonably incurred by the Company or the Member of the
Underwriting Group in connection with investigating or defending any action or
claim which is the subject of the contribution provisions of this Section 6.3.
Notwithstanding the provisions of this Section 6.3, no Member of the
Underwriting Group shall be required to contribute any amount in excess of the
amount by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Member of the Underwriting Group has otherwise been required
to pay by reason of any such untrue statements or omissions. No person adjudged
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. Under this Section 6.3, each Member of the
Underwriting Group's obligations to contribute are several in proportion to
their respective underwriting obligations and not joint.
The agreements contained in this Section 6 and the representations and
warranties of the Company set forth in this Underwriting Agreement shall remain
operative and in full force and effect, regardless of (a) any investigation made
by or on behalf of any Member of the Underwriting Group or any person
controlling any Member of the Underwriting Group or by or on behalf of the
Company, or any person controlling the Company, (b) acceptance of any Securities
and payment therefor hereunder, and (c) any termination of any other provision
of this Underwriting Agreement. A successor of any Member of the Underwriting
Group or of the Company, or any director or officer thereof or any person
controlling any Member of the Underwriting Group or the Company, as the case may
be, shall be entitled to the benefits of the agreements contained in this
Section 6.
SECTION 7
EFFECTIVENESS OF AGREEMENT
This Agreement shall become effective (i) at 10:00 a.m., Denver time, on the
first full business day after the Effective Date, or (ii) upon release by the
Representative of the Securities for sale after the Effective Date, whichever
shall first occur. The Representative agrees to notify the Company immediately
after the Representative shall have taken any action, by release or otherwise,
whereby this Agreement shall have become effective. This Agreement shall,
nevertheless, become effective at such time earlier than the time specified
above, after the Effective Date, as the Representative may determine by notice
to the Company.
SECTION 8
CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS
The obligations of the Underwriting Group hereunder to purchase the Securities
and to make payment to the Company hereunder on the Closing Date and on the
Over-Allotment Closing Date, if any, shall be subject to the accuracy, as of the
Closing Date and the Over-Allotment Closing Date, of each of the representations
and warranties on the part of the Company herein contained, to the performance
by the Company of all its agreements herein contained, to the fulfillment of or
compliance by the Company with all covenants and conditions hereof, and to the
following additional conditions:
8.1 Effectiveness of Registration Statement. The Registration Statement
---------------------------------------
shall have become effective and no order suspending the effectiveness of the
Registration Statement shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission or be pending; any
request for additional information on the part of the Commission (to be included
in the Registration Statement or Prospectus or otherwise) shall have been
complied with to the satisfaction of the Commission; and neither the
Registration Statement or the Prospectus nor any amendment thereto shall have
been filed to which counsel to the Representative shall have reasonably objected
in writing or have not given their consent.
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8.2 Accuracy of Registration Statement. The Representative shall not have
----------------------------------
disclosed in writing to the Company that the Registration Statement or the
Prospectus or any amendment thereof or supplement thereto contains an untrue
statement of a fact which, in the opinion of counsel to the Representative, is
material or omits to state a fact which, in the opinion of such counsel, is
material and is required to be stated therein, or is necessary to make the
statements therein not misleading.
8.3 Casualty and Other Calamity. The Company shall not have sustained any
---------------------------
loss on account of fire, explosion, flood, accident, calamity or any other
cause, of such character as materially adversely affects its business or
property considered as an entire entity, whether or not such loss is covered by
insurance, and no officer or director of the Company shall have suffered any
injury, sickness or disability of a nature which would materially adversely
affect his or her ability to properly function as an officer or director of the
Company.
8.4 Litigation and Other Proceedings. Other than as disclosed in the
--------------------------------
Registration Statement or Prospectus, there shall be no litigation instituted or
threatened against the Company and there shall be no proceeding instituted or
threatened against the Company before or by any federal or state commission,
regulatory body or administrative agency or other governmental body, domestic or
foreign, wherein an unfavorable ruling, decision or finding would materially
adversely affect the business, management, licenses, operations or financial
condition or income of the Company considered as an entity.
8.5 Lack of Material Change. Except as contemplated herein or as set forth
-----------------------
in the Registration Statement and Prospectus, during the period subsequent to
the date of the last audited balance sheet included in the Registration
Statement, the Company (a) shall have conducted its business in the usual and
ordinary manner as the same was being conducted on the date of the last audited
balance sheet included in the Registration Statement, and (b) except in the
ordinary course of its business, the Company shall not have incurred any
liabilities, claims or obligations (direct or contingent) or disposed of any of
its assets, or entered into any material transaction or suffered or experienced
any substantially adverse change in its condition, financial or otherwise. The
capital stock and surplus accounts of the Company shall be substantially the
same as at the date of the last audited balance sheet included in the
Registration Statement, without considering the proceeds from the sale of the
Securities, other than as may be set forth in the Prospectus, and except as the
surplus reflects the result of continued losses from operations consistent with
the trend established by prior periods.
8.6 Review By Representative's Counsel. The authorization of the Preferred
----------------------------------
Stock, the Warrants, the Warrant Shares, the Underwriter's Warrants and the
Preferred Stock and Warrants issuable upon the exercise of the Underwriter's
Warrants, the Registration Statement, the Prospectus and all corporate
proceedings and other legal matters incident thereto and to this Agreement shall
be reasonably satisfactory in all respects to counsel to the Representative.
8.7 Opinion of Counsel. The Company shall have furnished to the
------------------
Representative an opinion, dated the Effective Date, the Closing Date and, if
applicable, the Over-Allotment Closing Date, addressed to the Representative,
from Fay M. Matsukage, Esq., counsel to the Company, to the effect that based
upon a review by them of the Registration Statement, Prospectus, the Company's
certificate of incorporation, by-laws, and relevant corporate proceedings and
contracts, and examination of such laws they deem necessary and such other
investigation by such counsel as they deem necessary to express such opinion:
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware, and has
the corporate power and authority to own its properties and to carry on its
business as described in the Registration Statement and Prospectus.
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(ii) The Company is duly qualified and in good standing as a foreign
corporation authorized to do business in all jurisdictions in which the
character of the properties owned or held under lease or the nature of the
business conducted requires such qualification and in which the failure to
qualify would have a materially adverse effect on the business of the Company.
(iii) The authorized and outstanding capital stock of the Company is as
set forth in the Registration Statement and Prospectus; the outstanding common
stock of the Company, the Preferred Stock, the Warrants, and the Underwriter's
Warrants conform to the statements concerning them in the Registration
Statement and Prospectus; the outstanding common stock of the Company contains
no preemptive rights; the Securities and Underwriter's Warrants have been, and
the Warrant Shares issuable upon exercise of the Warrants, and the securities
issuable upon exercise of the Underwriter's Warrants will be, duly and validly
authorized and, upon issuance thereof and payment therefor in accordance with
this Agreement, validly issued, fully paid and nonassessable, and will not be
subject to the preemptive rights of any shareholder of the Company.
(iv) The Warrants, the Underwriter's Warrants and the Warrants underlying
the Underwriter's Warrants have been duly and validly authorized and are valid
and binding obligations of the Company enforceable in accordance with their
respective terms.
(v) A sufficient number of shares of Common Stock and Preferred Stock has
been duly reserved for issuance upon the exercise of the Warrants, the
Underwriter's Warrants and the Warrants issuable upon exercise of the
Underwriter's Warrants.
(vi) To such counsel's knowledge, no consents, approvals, authorizations
or orders of agencies, officers or other regulatory authorities are required
for the valid authorization, issuance or sale of the Preferred Stock, the
Warrants and the Underwriter's Warrants contemplated by this Agreement, except
as such have been obtained and are in full force and effect under the Act and
such as may be required under applicable state securities laws in connection
with the purchase and distribution of such securities by the Representative
and the Underwriting Group and the approval of the underwriting terms and
compensation by the NASD.
(vii) The issuance and sale of the Securities, the Underwriter's Warrants,
and the consummation of the transactions herein contemplated and compliance
with the terms of this Agreement will not conflict with or result in a breach
of any of the terms, conditions, or provisions of or constitute a default
under the certificate of incorporation, or by-laws of the Company, or, to
their knowledge, any note, indenture, mortgage, deed of trust, or other
agreement or instrument known to such counsel without any specific
investigation to which the Company is a party or by which the Company or any
of its property is bound or any existing law (provided this paragraph shall
not relate to federal or state securities laws), order, rule, regulation,
writ, injunction, or decree known to such counsel of any government,
governmental instrumentality, agency, body, arbitration tribunal, or court,
domestic or foreign, having jurisdiction over the Company or its property.
(viii) On the basis of a reasonable inquiry by such counsel, including
their participation in conferences with representatives of the Company and its
accountants at which the contents of the Registration Statement and the
Prospectus and related matters were discussed, and without expressing any
opinion as to the financial statements or other financial data contained
therein: (A) nothing has come to such counsel's attention which leads them to
believe that the Registration Statement and the Prospectus, as amended or
supplemented by any amendments or supplements thereto made by the Company
prior to the Closing Date, do not comply as to form in all material respects
with the requirements of the Act; (B) nothing has come to their attention
which leads them to believe that the Registration Statement or the Prospectus,
as amended or supplemented by any such amendments or supplements thereto,
contains any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the
statements therein
18
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not misleading; (C) they do not know of any contract or other document
required to be described in or filed as an exhibit to the Registration
Statement which is not so described or filed; and (D) the Registration
Statement has become effective under the Act, and, to the best of their
knowledge, no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or contemplated by the Commission.
(ix) This Agreement has been duly authorized and executed by the Company
and is a valid and binding agreement of the Company.
(x) The Company is not in default of any of the contracts, licenses,
leases or agreements to which it is a party, and the offering of the Preferred
Stock, the Warrants and the Underwriter's Warrants will not cause the Company
to become in default of any of its contracts, licenses, leases or agreements.
(xi) The Company is not currently offering any securities for sale except
as described in the Registration Statement.
(xii) Counsel has no knowledge of any promoter, affiliate, parent or
subsidiaries of the Company except as are described in the Registration
Statement and Prospectus.
(xiii) To the knowledge of counsel, and without making any statement as to
title, the Company owns all properties described in the Registration Statement
as being owned by it; the properties are free and clear of all liens, charges,
encumbrances or restrictions except as described in the Registration
Statement; all of the leases, subleases and other agreements under which the
Company holds its properties are in full force and effect; the Company is not
in default under any of the material terms or provisions of any of the leases,
subleases or other agreements; and there are no claims against the Company
concerning its rights under the leases, subleases and other agreements and
concerning its right to continued possession of its properties.
(xiv) To the knowledge of counsel, the Company possesses the required
licenses, certificates, authorizations or permits issued by the appropriate
federal, state and local regulatory authorities necessary to conduct its
business as described in the Registration Statement and to retain possession
of its properties. Counsel is unaware of any notice of any proceeding
relating to the revocation or modification of any of these licenses,
certificates, authorizations or permits having been received by the Company.
(xv) To the knowledge of counsel, the Company has paid all taxes which are
shown as due and owing on the financial statements included in the
Registration Statement and Prospectus.
(xvi) The Preferred Stock and Warrants of the Company are qualified for
trading on the NASDAQ system upon completion of the distribution of the
Securities by the respective participant.
As to all factual matters including without limitation the issuance of stock
and warrant certificates and receipt of payment therefor, the states in which
the Company transacts business, the adoption of resolutions reflected by the
Company's minute book and the like, such counsel may rely on the certificate of
an appropriate officer of the Company. Counsel's opinion as to the validity and
enforceability of any and all contracts and agreements referenced herein may
exclude any opinion as to the validity or enforceability of any indemnification
or contribution provisions thereof, or as the validity or enforceability of any
such contract or agreement may be limited by bankruptcy or other laws relating
to or affecting creditors' rights generally and by equitable principles.
19
<PAGE>
8.8.1 Accountant's Letter. The Representative shall have received letters
-------------------
addressed to it dated the Effective Date, the Closing Date and, if applicable,
the Over-Allotment Closing Date, respectively, and a draft of such letter at
least five days prior to the Effective Date, the Closing Date and, if
applicable, the Over-Allotment Closing Date, from Hirsch & Silberstein, P.C.,
independent public accountants for the Company, stating that (i) with respect
to the Company they are independent public accountants within the meaning of
the Act and the applicable published Rules and Regulations thereunder and the
response to Item 509 of Regulation S-K as reflected by the Registration
Statement is correct insofar as it relates to them; (ii) in their opinion, the
financial statements examined by them of the Company at all dates and for all
periods referred to in their opinion and included in the Registration
Statement and Prospectus, comply in all material respects with the applicable
accounting requirements of the Act and the published Rules and Regulations
thereunder with respect to registration statements on Form S-2; (iii) on the
basis of certain indicated procedures (but not an examination in accordance
with generally accepted accounting principles), including a reading of the
latest available interim unaudited financial statements of the Company,
whether or not appearing in the Prospectus, inquiries of the officers of the
Company or other persons responsible for its financial and accounting matters
regarding the specific items for which representations are requested below and
a reading of the minute books of the Company, nothing has come to their
attention which would cause them to believe that during the period from the
last audited balance sheet included in the Registration Statement to a
specified date not more than five days prior to the date of such letter (a)
there has been any change in the capital stock or other securities of the
Company or any payment or declaration of any dividend or other distribution in
respect thereof or exchange therefor other than as set forth in or
contemplated by the Registration Statement or Prospectus; (b) there have been
any material decreases in net current assets or net assets as compared with
amounts shown in the last audited balance sheet included in the Prospectus so
as to make said financial statements misleading other than as set forth in or
contemplated by the Registration Statement or Prospectus; and (c) on the basis
of the indicated procedures and discussions referred to in clause (iii) above,
nothing has come to their attention which, in their judgment, would cause them
to believe or indicate that (1) the unaudited financial statements and
schedules set forth in the Registration Statement and Prospectus do not
present fairly the financial position and results of the Company, for the
periods indicated, in conformity with the generally accepted accounting
principles applied on a consistent basis with the audited financial
statements, and (2) the dollar amounts, percentages and other financial
information set forth in the Registration Statement and Prospectus under the
captions "Summary", "Risk Factors", and "Dilution", are not in agreement with
the Company's general ledger, financial records or computations made by the
Company therefrom.
8.8.2 Conformed Copies of Accountant's Letter. The Representative shall be
---------------------------------------
furnished without charge, in addition to the original signed copies, such
number of signed or photostatic or conformed copies of such letters as the
Representative shall reasonably request.
8.9 Officer's Certificate. The Company shall have furnished to the
---------------------
Representative certificates, each signed by the President and Chief Financial
Officer of the Company, one dated as of the Effective Date, one dated as of the
Closing Date, and, if applicable, one dated as of the Over-Allotment Closing
Date, to the effect that:
(i) The representations and warranties of the Company in this Agreement
are true and correct at and as of the date of the certificate, and the Company
has complied with all the agreements and has satisfied all the conditions on
its part to be performed or satisfied at or prior to the date of the
certificate.
(ii) The Registration Statement has become effective and no order
suspending the effectiveness of the Registration Statement has been issued and
to the best of the knowledge of the respective signers, no proceeding for that
purpose has been initiated or is threatened by the Commission.
20
<PAGE>
(iii) The respective signers have each carefully examined the Registration
Statement and Prospectus and any amendments and supplements thereto, and to
the best of their knowledge the Registration Statement and the Prospectus and
any amendments and supplements thereto contain all statements required to be
stated therein, and all statements contained therein are true and correct, and
neither the Registration Statement nor Prospectus nor any amendment or
supplement thereto includes any untrue statement of a material fact or omits
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading and, since the Effective Date of the
Registration Statement, there has occurred no event required to be set forth
in an amended or a supplemented Prospectus which has not been so set forth.
(iv) Except as set forth in the Registration Statement and Prospectus
since the respective dates of the periods for which information is given in
the Registration Statement and Prospectus and prior to the date of the
certificate, (a) there has not been any substantially adverse change,
financial or otherwise, in the affairs or condition of the Company, and (b)
the Company has not incurred any material liabilities, direct or contingent,
or entered into any material transactions, otherwise than in the ordinary
course of business.
(v) Subsequent to the respective dates as of which information is given in
the Registration Statement and Prospectus, no dividends or distribution
whatever have been declared and/or paid on or with respect to the common stock
of the Company.
8.10 Tender of Delivery of Securities. All of the Securities being offered
--------------------------------
by the Company and the Underwriter's Warrants being purchased from the Company
shall be tendered for delivery in accordance with the terms and provisions of
this Agreement.
8.11 Blue-Sky Registration or Qualification. The Securities shall be
--------------------------------------
registered or qualified in such states as the Representative and the Company may
agree pursuant to Section 5.4, and each such registration or qualification shall
be in effect and not subject to any stop order or other proceeding on the
Closing Date or the Over-Allotment Closing Date. On the Effective Date of the
Registration Statement, on the Closing Date and, if applicable, the Over-
Allotment Closing Date, the Representative shall receive from counsel for the
Representative, written information which contains the following:
(i) the names of the states in which applications to register or qualify
the Preferred Stock, the Warrants and the Warrant Shares have been filed;
(ii) the status of such registrations or qualifications in such states as
of the date of such letter;
(iii) a list containing the name of each such state in which the Preferred
Stock, the Warrants and the Warrant Shares may be legally offered and sold by
a dealer licensed in such state and the number of each which may be legally
offered and sold in each such state as of the date of such letter.
(iv) with respect to the written information dated on the Effective Date,
a representation that such counsel will continuously update such written
opinion if any material changes occur, of which counsel received actual
notice, in the information provided therein between the Effective Date and the
Closing Date and, if applicable, Over-Allotment Closing Date;
(v) the names of the states in which the offer and sale of the Securities
is exempt from registration or qualification; and
(vi) a statement that the Members of the Underwriting Group and selected
dealers in the offering may rely upon the information contained therein.
21
<PAGE>
8.12 Approval of Representative's Counsel. All opinions, letters,
------------------------------------
certificates and evidence mentioned above or elsewhere in this Agreement shall
be deemed to be in compliance with the provisions hereof only if they are in
form and substance satisfactory to counsel to the Representative, whose approval
shall not be unreasonably withheld. The suggested form of such documents shall
be provided to the counsel for the Representative at least three business days
before the Closing Date. The Representative's counsel will provide a written
memorandum stating such closing documents which it deems necessary for its
review.
8.13 Officers' Certificate as a Company Representative. Any certificate
-------------------------------------------------
signed by an officer of the Company and delivered to the Representative or
counsel for the Representative shall be deemed a representation and warranty by
the Company to the Representative as to the statements made therein.
SECTION 9
TERMINATION
9.1 Termination Because of Noncompliance. This Agreement may be terminated
------------------------------------
in its entirety by the Representative by notice to the Company prior to its
effectiveness or in the event that the Company shall have failed or been unable
to comply with any of the terms, conditions or provisions of this Agreement on
the part of the Company to be performed, complied with or fulfilled (including
but not limited to those specified in Sections 2, 3, 4, 5, and 8 hereof) within
the respective times herein provided for, unless compliance therewith or
performance or satisfaction thereof shall have been expressly waived by the
Representative in writing.
9.2 Other Grounds for Termination by Representative. This Agreement may be
-----------------------------------------------
terminated by the Representative by notice to the Company at any time if, in the
sole judgment of the Representative, payment for and delivery of the Securities
is rendered impracticable or inadvisable because of:
(a) Material adverse changes in the Company's business, business
prospects, licenses, management, earnings, properties or conditions, financial
or otherwise;
(b) Any action, suit or proceedings, threatened or pending, at law or
equity against the Company, or by any federal, state or other commissions,
board or agency wherein any unfavorable result or decision could materially
adversely affect the business, business prospects, licenses, properties,
financial condition or income or earnings of the Company;
(c) Additional material governmental restrictions not in force and effect
on the date hereof shall have been imposed upon the trading in securities
generally, or new offering or trading restrictions shall have been generally
established by a registered securities exchange, Commission, NASD or other
applicable regulatory authority, or trading in securities generally on any
such exchange, NASDAQ or otherwise, shall have been suspended, or a general
moratorium shall have been established by federal or state authorities;
(d) Substantial and material changes in the condition of the market beyond
normal fluctuations such that it would be undesirable, impracticable or
inadvisable in the judgment of the Representative to proceed with this
Agreement or with the public offering of the Securities;
(e) Any outbreak or escalation of major hostilities in which the United
States is involved, any declaration of war by Congress or any other
substantial national or international calamity or emergency if, in the
judgment of the Representative, the effect of any such outbreak, escalation,
declaration, calamity or emergency makes it impractical or inadvisable to
proceed with completion of the sale of and payment for the Securities; or
22
<PAGE>
(f) Any suspension of trading in the securities of the Company in the
over-the-counter market or the interruption or termination of quotations of
any security of the Company on the NASDAQ System.
9.3 Effect of Termination Hereunder. Any termination of this Agreement
-------------------------------
pursuant to this Section 9 shall be without liability of any character
(including, but not limited to, loss of anticipated profits or consequential
damages) on the part of any party hereto, except that the Company shall remain
obligated to pay the costs and expenses provided to be paid by it specified in
Sections 3.4 and 5.7; and the Company and the Underwriting Group shall be
obligated to pay, respectively, all losses, claims, damages or liabilities,
joint or several, under Section 6.1 in the case of the Company and Section 6.2
in the case of the Underwriting Group.
SECTION 10
REPRESENTATIVE'S REPRESENTATIONS AND WARRANTIES
The Representative represents and warrants to and agrees with the Company
that:
10.1 Registration as Broker-Dealer and Member of NASD. The Representative is
------------------------------------------------
registered as a broker-dealer with the Securities and Exchange Commission and is
registered as a securities broker-dealer in all states in which it will sell
Securities and is a member in good standing of the National Association of
Securities Dealers, Inc.
10.2 No Pending Proceedings. There is not now pending or threatened against
----------------------
the Representative any action or proceeding of which it has been advised, either
in any court of competent jurisdiction, before the Commission or any state
securities regulatory authority concerning activities as a broker or dealer
which are foreseen as affecting the Representative's capacity to complete the
terms of this Agreement.
10.3 Company's Right to Terminate. In the event any action or proceeding of
----------------------------
the type referred to in Section 10.2 above shall be instituted against the
Representative at any time prior to the Effective Date hereunder, or in the
event there shall be filed by or against the Representative in any court
pursuant to any federal, state, local or municipal statute, a petition in
bankruptcy or insolvency or for reorganization or for the appointment of a
receiver or trustee of its assets or if it makes an assignment for the benefit
of creditors, the Company shall have the right on three days' written notice to
the Representative to terminate this Agreement without any liability to the
Representative of any kind except for the payment of all expenses as provided
herein.
10.4 Representative's Covenants. The Representative covenants and agrees
--------------------------
with the Company that (i) it will not offer or sell the Securities in any state
or other jurisdiction where it has not been advised in writing that the
Securities are qualified for the offer and sale therein or exempt from such
requirements; (ii) it will not make any representation to any person in
connection with the offer and sale of the Securities covered hereby except as
set forth in the Registration Statement or as authorized in writing by the
Company; and (iii) it will comply in good faith with all laws, rules and
regulations applicable to the distribution of the securities, including the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
23
<PAGE>
SECTION 11
NOTICE
Except as otherwise expressly provided in this Agreement:
11.1 Notice to the Company. Whenever notice is required by the provisions of
---------------------
this Underwriting Agreement to be given to the Company, such notice shall be in
writing addressed to the Company as follows:
Ajay Sports, Inc.
Attn: Thomas W. Itin, President
1501 East Wisconsin Street
Delavan, WI 53115
with a copy to:
Fay M. Matsukage, Esq.
Law Offices of Fay M. Matsukage
Stanford Place 3, Suite 201
4582 South Ulster Street Parkway
Denver, CO 80237-2633
11.2 Notice to the Representative. Whenever notice is required by the
----------------------------
provisions of this Agreement to be given to the Representative, such notice
shall be given in writing addressed to the Representative as follows:
Schneider Securities, Inc.
Attn: Thomas W. Schneider, Chief Executive Officer
104 Broadway, Suite 400
Denver, CO 80203
with a copy to:
Krys Boyle Golz Reich Freedman Bean & Scott, P.C.
Attn: Harold M. Golz, Esq.
Suite 2700 South Tower
600 Seventeenth Street
Denver, Colorado 80202
11.3 Effective Date of Notices. Such notices shall be effective the date
-------------------------
actually received, three days from the day of mailing, or on the date of
delivery set forth on the receipt if the notice is sent by registered mail or
any expedited delivery service.
SECTION 12
MISCELLANEOUS
12.1 Benefit. This Agreement is made solely for the benefit of the
-------
Representative, the other Members of the Underwriting Group, the Company, their
respective officers, directors and controlling persons referred to in Section 15
of the Act and such other persons as are identified in this Agreement, and their
respective successors and assigns, and no other person shall acquire or have any
right under or by virtue of this Agreement. The term "successor" or the term
"successors and assigns" as used in this Agreement shall not include any
purchasers, as such, of any of the Securities.
24
<PAGE>
12.2 Survival. The respective indemnities, agreements, representations,
--------
warranties, covenants and other statements of the Company or its officers and
the Representative or the Members of the Underwriting Group as set forth in or
made pursuant to this Agreement and the indemnity agreements contained in
Section 6 hereof of the Company and the Underwriters (as defined in Section 6)
shall survive and remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company or the Underwriters or any
such officer or director thereof or any controlling person of the Company or of
the Underwriters, (ii) delivery of or payment for the Securities, and (iii) the
Closing Date and Over-Allotment Closing Date, and any successor of the Company
and the Underwriters or any controlling person, officer or director thereof, as
the case may be, shall be entitled to the benefits hereof.
12.3 Governing Law. The validity, interpretation and construction of this
-------------
Agreement and of each part hereof will be governed by the laws of the State of
Colorado.
12.4 Entire Agreement. This Agreement contains the entire agreement and
----------------
understanding between the parties hereto, and supersedes all agreements and
understandings including, but not limited to, the Letter of Intent dated
December 9, 1994, as amended.
12.5 Representative's Information. The statements with respect to the public
----------------------------
offering of the Securities on the inside and outside of both the front and back
cover pages of the Prospectus and under the caption "Underwriting" in the
Prospectus constitute the written information furnished by or on behalf of the
Representative referred to in Section 2.2 hereof, in Section 6.1 hereof and
Section 6.2 hereof.
12.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which may be deemed an original and all of which together
will constitute one and the same instrument.
Please confirm that the foregoing correctly sets forth the Agreement between
you and the Company.
Very truly yours,
AJAY SPORTS, INC.
ATTEST:
By By
-------------------------------- -------------------------------
Robert R. Hebard, Secretary Thomas W. Itin, President
WE HEREBY CONFIRM AS OF THE DATE HEREOF THAT THE ABOVE SETS FORTH THE
AGREEMENT BETWEEN THE COMPANY AND US.
SCHNEIDER SECURITIES, INC.
(for itself and as Representative of
the several Underwriters named in
Schedule I hereto)
By
------------------------------------
Thomas W. Schneider, Chief Executive
Officer
25
<PAGE>
AJAY SPORTS, INC.
(A Delaware Corporation)
SCHEDULE I
This Schedule sets forth the name of each Underwriter referred to in the
Underwriting Agreement and the number of Securities to be purchased by each
Underwriter.
Number
Name of Securities
---- -------------
Schneider Securities, Inc.
-------
Total
=======
26
<PAGE>
525,000 Shares of Preferred Stock
525,000 Warrants
AJAY SPORTS, INC.
AGREEMENT AMONG UNDERWRITERS
____________________, 1995
Schneider Securities, Inc.
As Representative of the Several Underwriters
104 Broadway, Suite 400
Denver, CO 80203
Dear Sirs:
We wish to confirm as follows the agreement among you, the Representative, and
each of the other Underwriters named in Schedule I to the Underwriting Agreement
which is attached hereto as Exhibit A and by reference incorporated herein
---------
("Underwriting Agreement") (all such parties being herein called the
"Underwriters"), with respect to the purchase by the Underwriters severally, and
not jointly, from Ajay Sports, Inc. (the "Company") of the respective numbers of
shares of Preferred Stock and Warrants (the "Securities") set forth and
described in the Underwriting Agreement.
We understand that changes may be made in those who are to be Underwriters and
in the respective numbers of Securities to be purchased by them, but that the
number of Securities to be purchased by us as set forth in the Underwriting
Agreement will not be changed without our consent except as provided herein or
in the Underwriting Agreement. The aggregate number of the Securities which any
Underwriter will be obligated to purchase from the Company pursuant to the terms
of the Underwriting Agreement or as subject to adjustment pursuant to the terms
of the Underwriting Agreement is herein called the "Underwriting Obligation" of
that Underwriter. Unless otherwise indicated, the definition of terms used
herein shall have the same meaning as in the Underwriting Agreement.
1. Authority and General Position of the Representative. We hereby authorize
----------------------------------------------------
you, as our Representative and on our behalf, (a) to enter into the Underwriting
Agreement with the Company, substantially in the form attached hereto as Exhibit
A, but with such changes therein as you deem advisable, in your sole discretion,
providing for the purchase by us, severally, from the Company at a price per
Security equal to the public offering price less the Underwriting Discount as
set forth in the Registration Statement (equal to 10% of the initial offering
price of the Security), of the number of the Securities set opposite our name in
Schedule I of the Underwriting Agreement, (b) to exercise all the authority and
discretion vested in the Underwriters and in you by the provisions of the
Underwriting Agreement, and (c) to take all such action as you in your
discretion may deem necessary and advisable in order to carry out the provisions
of the Underwriting Agreement and of this Agreement and in furtherance of the
offering of the Securities. We authorize you to file with any governmental
agency or authority any report which in your judgment is necessary or desirable
in connection with the offering of the Securities, and we agree to furnish you
any information needed for each such report.
Without limiting the foregoing, you are authorized, with respect to the
Underwriting Agreement and this Agreement, in your sole discretion, to (i)
postpone the Closing Date or any other time or date specified therein, (ii)
exercise any right of cancellation or termination, (iii) arrange for the
purchase by
<PAGE>
other persons (including yourselves or any other Underwriter) of any Securities
not taken up by any defaulting Underwriter or by the other Underwriters, (iv)
consent to such changes in the Underwriting Agreement as you deem advisable in
your sole discretion, and (v) enter into agreements on behalf of the
Underwriters in furtherance of any of any other conferred authority.
Your authority as Representative of the several Underwriters shall include the
taking of such action as you may deem advisable in respect of all matters
pertaining to any and all offers and sales of the Securities, including the
right to make any modifications which you consider necessary or desirable in the
arrangements with Selected Dealers or others. You shall be under no liability,
for or in respect of, (i) the value, validity or form of the Securities and
underlying securities, (ii) the form, accuracy or legal sufficiency of the
Registration Statement, the Prospectus, agreements or other instruments executed
by the Company or others, (iii) the delivery of the Securities, or (iv) the
performance by the Company or by others of any agreement on its or their part.
Nor shall you as such Representative or otherwise be liable under any of the
provisions hereof or for any matters connected herewith, except for liabilities
arising from actions not taken in good faith and no obligation not expressly
assumed by you as such Representative herein shall be implied from this
Agreement.
In representing the Underwriters hereunder, you shall act as the
Representative of each of them, respectively. Nothing herein contained shall
constitute the several Underwriters partners with you or with each other, or
render any Underwriter liable for the commitments of any other Underwriter,
except as otherwise provided herein or in the Underwriting Agreement. The
commitments and liabilities of each of the Underwriters are several in
accordance with their respective Underwriting Obligation and are not joint.
2. Public Offering. We authorize you to manage the offering of the
---------------
Securities and to take such action as you deem advisable with respect thereto.
The public offering of the Securities is to be made as soon after the
Registration Statement becomes effective as in your judgment is advisable, and
the public offering of the Securities is to be made at the public offering price
specified in the Prospectus, subject to other terms and conditions as you
determine in accordance with the Underwriting Agreement. We authorize you as
our Representative to make any changes in the public offering price and other
terms of the Offering as you deem advisable, in your sole discretion, by reason
of changes in general market conditions or otherwise. We understand that you
will advise us when the Securities are released for public offering, when the
Registration Statement relating to such Offering becomes effective and the price
at which the Securities are to be offered.
3. Accounting for Sales of Securities. The Underwriting Discount, as set
----------------------------------
forth in the Registration Statement, shall consist of a Management Fee, an
Underwriting Fee, and a Selling Concession. You shall inform us, by facsimile,
telephone or similar communication, on or before the Effective Date of the
Registration Statement of the Underwriting Discount that is allocated to the
respective portion of the Management Fee, Underwriting Fee and Selling
Concession.
The Securities constituting our Underwriting Obligation may be delivered to us
for resale by us or may be sold by you for our account as provided in Section 5
hereof. With respect to Securities delivered to us, you shall be entitled to
the Management Fee and we shall be entitled to the Selling Concession and the
Underwriting Fee. With respect to Securities retained by you and sold for our
account, you shall be entitled to the Management Fee and the Selling Concession
and we shall be entitled to the Underwriting Fee.
You shall maintain a separate account with respect to our participation in
this Offering. With respect to Securities to be delivered to us for resale by
us, such account shall be debited in the amount we have agreed to pay the
Company for the Securities plus the amount of the Management Fee with respect to
such Securities. With respect to Securities sold by you for our account and for
which payment in full has been received by you, the account shall be credited
with the amount of the Underwriting Fee with respect to such Securities. With
respect to Securities reserved for sale by you for our account and that
2
<PAGE>
have not been sold or for which payment in full has not been received by you,
our account shall be debited by the amount that we have agreed to pay to the
Company for such Securities; provided, however, that we may request delivery to
us of any such Securities remaining unsold or unpaid for on the Closing Date, in
which event such Securities shall be accounted for as provided above for
Securities delivered to us for resale by us. Our account shall be credited in
the amount of funds delivered or credited to you as provided in Section 4
hereof.
If we agree at any time to purchase Securities in addition to those
constituting our Underwriting Obligation, our account shall be adjusted with
respect to such Securities in the same manner as if those Securities had been a
part of our Underwriting Obligation.
4. Settlement of Account. At or before the close of business, Denver,
---------------------
Colorado time, on the last business day prior to the Closing Date, we shall
deliver to you, by wire or by certified or official bank check in United States
funds payable to your order, the full aggregate public offering price of the
Securities delivered to us for resale by us. After the Closing Date, we agree
to promptly remit to you any debit balance in our account and you agree to remit
to us any credit balance in our account after such adjustments as are provided
for herein and in the Underwriting Agreement. You shall not be accountable for
any interest on any credit balance in our account. The determination by you of
the amounts to be paid to or by us shall be final and conclusive.
If we fail (whether or not such failure shall constitute a default hereunder)
to deliver to you, or you fail to receive, our delivery of funds for the
Securities which we have agreed to purchase, at the time and in the manner
provided in this Section 4, you, individually and not as Representative of the
Underwriters, are authorized (but shall not be obligated) to make payment to the
Company for such Securities for our account, but any such payment by you shall
not relieve us of any of our obligations hereunder or under the Underwriting
Agreement, and we agree to repay you on demand the amount, together with
associated costs, so advanced for our account.
On the Closing Date of the Offering, you are authorized to accept delivery of
the certificates representing the securities underlying the Securities purchased
for our account and to give a receipt therefor.
We authorize you to deliver our Securities, and any other securities of the
Company purchased by you for our account pursuant to the provisions of Section 7
hereof, against sales of the Company's securities made by you for our account
pursuant to any provisions of this Agreement. You agree to cause to be
delivered to us, as soon as practicable after the Closing Date referred to in
the Underwriting Agreement or earlier in your discretion, the Securities
representing such part of our Underwriting Obligation as shall not have been
sold or reserved for sale by you for our account. In any case, any of the
Securities reserved for sale in Retail Sales or to Selected Dealers and foreign
dealers shall not be purchased and paid for in due course as contemplated
hereby, we agree (i) to accept delivery when tendered by you of any of the
Securities so reserved for our account and not so purchased and paid for, and
(ii) in case we shall have received payment from you in respect of any such
Securities, to reimburse you on demand for the full amount which you shall have
paid us in respect of such Securities.
Notwithstanding anything above to the contrary, you may in your discretion
deliver to us through the facilities of The Depository Trust Company ("DTC") the
certificates representing the Securities purchased by us that are not sold or
reserved for sale by you and cause DTC to debit us and to credit you an amount
representing the full aggregate public offering price of such Securities and
you, in turn, shall credit our account by such amount in accordance with Section
3 hereof.
5. Reservation of Securities. We authorize you, with respect to our
-------------------------
Underwriting Obligation, to reserve for sale and sell and deliver for our
account any or all of such Securities in amounts determined in your discretion
(a) to institutional and other retail purchasers selected by you, (b) to dealers
(including any Underwriters) selected by you who are members of the National
Association of Securities Dealers,
3
<PAGE>
Inc. (the "NASD"), and (c) to foreign dealers (including any Underwriters) who
are not eligible for membership in the NASD who agree to make no sales in the
United States, its territories, or its possessions or to persons who are
citizens thereof or residents therein and to comply with the Interpretation of
the NASD with respect to Free-Riding and Withholding. You will advise us of the
number of Securities purchased by us that we will retain for sale for our
account and, if applicable, that number of Securities not purchased by us, that
you have allocated to us for resale and for which our account as provided in
Section 3 hereof shall be debited the amount the Underwriters have agreed to pay
the Company for the Securities plus the Management Fee and Underwriting Fee with
respect to such Securities. With your consent, any Securities reserved by you
for sale for our account, but not sold and paid for, may be released to us for
direct sale, in which event the number of Securities reserved shall be
correspondingly reduced. We authorize you to fix the concession to dealers and
the reallowance to dealers and, after initial public offering of the Securities,
to make changes therein you deem advisable.
We will advise you from time to time, at your request, of the number of
Securities retained by, released, or allocated to us for resale that remain
unsold. You may at any time prior to the Closing Date (a) reserve such
Securities for sale by you for our account or (b) purchase any such Securities
that, in your opinion, are needed to enable you to make deliveries on your
behalf or for the accounts of the several Underwriters pursuant to this
Agreement. Such purchases, if made, will be accounted for as Securities
retained by you to be sold for our account.
6. Credit Arrangements. We authorize you, in carrying out the provisions of
-------------------
this Agreement, to advance your own funds (charging then current interest rates)
or to arrange loans for our account, and in connection therewith to execute and
deliver any notes or other instruments and to hold or pledge as security
therefor any Securities or other securities of the Company purchased pursuant to
this Agreement for our account that you may be holding for our account. Any
third party lender is hereby authorized to accept your instructions with respect
to all matters relating to such loans. You shall promptly remit to us on credit
to our account the proceeds of any loan made on our behalf. Nothing contained
in the foregoing, however, shall be construed as requiring you to advance funds
or negotiate for loans with third parties for the purpose of meeting any of our
obligations under this Agreement or the Underwriting Agreement.
7. Stabilization; Trading. We authorize you, at any time during the term of
-----------------------
this Agreement or for such longer period necessary to cover any short position
or to liquidate any long position incurred under the provisions of this
Agreement, (a) to make purchases and sales of Securities in the open market or
otherwise, in addition to purchases and sales made under the authority of
Section 5 hereof, either for long or short account, on terms and at prices as
you determine and (b) in arranging for sales of Securities pursuant to Section 5
hereof to over-allot and to make purchases for the purpose of covering any over-
allotments made. Any such purchases, sales, and over-allotments may, but are
not required to, be made, at your sole discretion, for the accounts of the
several Underwriters and if so made shall be as nearly as is practicable in
proportion to their respective Underwriting Obligation; provided, however, that
at no time shall our net commitment under this Section 7 for long and short
account exceed 15 percent of our Underwriting Obligation. Any securities that
have been purchased by you for stabilizing purposes before the execution of this
Agreement may at your option be treated as having been purchased for the
accounts of the several Underwriters pursuant to the foregoing authorization.
We agree to take up at cost on demand any securities so purchased for our
account and deliver on demand any securities sold or over-allotted for our
account. We will advise you from time to time, at your request, of the amount
of securities remaining unsold that were delivered to us pursuant to this
Section 7.
You will notify us promptly if you engage in any transaction hereunder that in
your judgment may be deemed a "stabilizing transaction" within the meaning of
the applicable rules of the Securities and Exchange Commission. We will not
effect any stabilizing purchases without your prior written consent.
4
<PAGE>
If, pursuant to the provisions of the first paragraph of this Section 7 and
prior to the termination of this Agreement (or prior to an earlier date
determined by you), you purchase or contract to purchase for the accounts of the
several Underwriters in the open market or otherwise any Securities or component
securities that were retained by or released to us for direct sale or any
Securities or component securities that may have been issued in exchange for
such Securities or component securities, we authorize you either to charge our
account with an amount equal to the Selling Concession with respect thereto,
which amount shall be credited against the cost of such Securities or component
securities, or to require us to repurchase such Securities or component
securities, and to debit our account for such purchase, at a price equal to the
total cost of such purchase, including commissions, if any, and transfer taxes
on the redelivery.
8. Open Market Transactions. We agree that, except with your consent and
------------------------
except as herein provided upon advice from you, we will not make purchases or
sales on the open market or otherwise or attempt to induce others to make
purchases or sales, either before or after the purchase of the Securities, of
any securities of the Company, and prior to the completion of our participation
in the distribution of the Securities (as defined in Rule 10b-6 of the
Securities and Exchange Commission under the Securities Exchange Act of 1934).
We will otherwise comply with all applicable law and requirements, including
Rule 10b-6. We further agree that we will not effect any transactions as a
passive market maker pursuant to Rule 10b-6A without obtaining your prior
written consent. Nothing contained in this Section 8 shall prohibit us from
acting as broker or agent in the execution of unsolicited orders of customers
for the purchase or sale of any securities of the Company.
9. Blue Sky. Prior to the commencement of the Offering by the Underwriters,
--------
you will inform us as to the states under the respective securities or blue sky
laws of which it is believed that the Securities have been qualified or are
exempt for sale, but you do not assume any responsibility or obligation as to
the accuracy of such information or as to the right of any Underwriter or dealer
to sell the Securities in any jurisdiction.
We authorize you, if you, because of the securities or blue sky laws of any
jurisdiction, deem it advisable in arranging sales of the Securities for our
account hereunder, to sell our Securities to any particular Selected Dealer or
other buyer or to one or more other Underwriters at the Offering Price less such
amount, not in excess of the Selling Concession as you may determine. The
transfer tax on any such sales among Underwriters shall be treated as an expense
and charge to the respective accounts of the several Underwriters in proportion
to their respective Underwriting Obligation.
10. Termination and Settlement. Unless sooner terminated by you, this
--------------------------
Agreement shall terminate 45 full calendar days from the Effective Date or the
date of the Prospectus, whichever is later, but may be extended by you for a
period of time not exceeding an additional 30 calendar days by notice to us to
such effect. You may in your discretion on notice to us, prior to the
termination of this Agreement, terminate or suspend any of the terms or
conditions of the Offering.
Upon termination of this Agreement, all authorizations, rights, and
obligations hereunder will cease, except (a) the mutual obligations to settle
accounts hereunder, (b) our obligations to pay any amounts referred to in the
last paragraph of this Section 10, and (c) the indemnity and other agreements
set forth in Section 11 hereof, all of which shall continue until fully
discharged. No such termination shall affect any obligations of any defaulting
Underwriter.
If any Underwriter defaults in its obligations to pay amounts due from the
Underwriter pursuant to the Underwriting Agreement and this Agreement, we will
assume our proportionate share (determined on the basis of the respective
Underwriting Obligations of the nondefaulting Underwriters) of its obligation to
the extent required by the Underwriting Agreement, but this assumption shall not
affect any obligations of any defaulting Underwriter. Such obligation shall be
eliminated to the extent that such obligation would cause the Underwriter to be
in violation of any financial responsibility rule of the Securities and Exchange
Commission.
5
<PAGE>
We authorize you to charge our account with any transfer taxes on sales or
other transfers made for our account.
Notwithstanding any settlement on the termination of this Agreement, we agree
to pay our proportionate share (based on our Underwriting Obligation) of (a) all
expenses incurred by you in investigating or defending against any claim,
proceeding, or inquiry that is asserted, instituted, or initiated by any person
(including any governmental or regulatory body), other than an Underwriter, in
connection with the Registration Statement or Prospectus or any amendment or
supplement thereto, or any Preliminary Prospectus relating to the Offering, or
any claim of invalidity of the Underwriting Agreement and (b) any liability,
including counsel fees and expenses, incurred by you in respect of any such
claim, proceeding, or inquiry, whether such liability is the result of a
judgment or the result of any settlement agreed to by you, other than any
liability, fee, or expense as to which you receive indemnity pursuant to Section
11 hereof or pursuant to the Underwriting Agreement. We also agree to pay any
transfer taxes that may be assessed and paid after settlement on account of any
sales or transfer hereunder for our account.
11. Indemnity. Each Underwriter, including yourselves, agrees to indemnify
---------
and hold harmless each other Underwriter, any person who controls any other
Underwriter within the meaning of either Section 15 of the Securities Act of
1933 or Section 20 of the Securities Exchange Act of 1934, and any successor of
any other Underwriter or of any such controlling person, all to the extent that
each Underwriter will be obligated in the Underwriting Agreement to indemnify
and hold harmless the Company and its respective directors, officers and
controlling persons, and regardless of any investigation made by or on behalf of
any Underwriter or any person controlling an Underwriter.
10. Miscellaneous.
-------------
We hereby confirm that we have examined the Registration Statement relating to
the Securities, including the related Prospectus and the amendment(s) thereto
filed with the Securities and Exchange Commission in respect of the Securities,
that we are willing to accept the responsibilities of an Underwriter thereunder
and that we are willing to proceed as contemplated therein. We are familiar
with the terms of the offering that are to be set forth in the proposed
amendment to the Registration Statement. In addition, we confirm that the
information relating to us that has been furnished to the Company for use
therein is correct. You are authorized to approve on our behalf such proposed
amendment and any further amendments or supplements to the Registration
Statement or the Prospectus.
WE CONFIRM THAT WE ARE EITHER (a) A MEMBER OF THE NASD AND THAT OUR OBLIGATION
TO PURCHASE SECURITIES PURSUANT TO THE UNDERWRITING AGREEMENT WILL NOT RESULT IN
A VIOLATION OF THE FINANCIAL RESPONSIBILITY REQUIREMENTS OF RULE 15c3-1 OF THE
SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES EXCHANGE ACT OF 1934 OR
OF ANY SIMILAR PROVISIONS OF ANY APPLICABLE RULES OF ANY SECURITIES EXCHANGE OR
ASSOCIATION TO WHICH WE ARE SUBJECT OR OF ANY RESTRICTION IMPOSED UPON US BY ANY
SUCH EXCHANGE OR ANY GOVERNMENTAL AUTHORITY OR (b) A FOREIGN DEALER WHO IS NOT
ELIGIBLE FOR MEMBERSHIP IN THE NASD WHO HEREBY AGREES TO MAKE NO SALES WITHIN
THE UNITED STATES, ITS TERRITORIES, OR ITS POSSESSIONS (EXCEPT THAT WE MAY
PARTICIPATE IN GROUP SALES) OR TO PERSONS WHO ARE CITIZENS THEREOF OR RESIDENT
THEREIN AND IN MAKING OTHER SALES TO COMPLY WITH THE NASD INTERPRETATION ON
FREE-RIDING AND WITHHOLDING.
WE AGREE THAT WE WILL NOT SELL ANY OF THE SECURITIES TO BE DELIVERED TO US TO
ACCOUNTS AS TO WHICH WE HAVE DISCRETIONARY AUTHORITY WITHOUT THE PRIOR SPECIFIC
WRITTEN APPROVAL OF THE CUSTOMER. WE REPRESENT TO YOU THAT ANY SUCH SALES WILL
BE MADE IN CONFORMITY WITH ALL APPLICABLE RULES CONCERNING SUITABILITY,
DISCLOSURE, AND THE LIKE.
6
<PAGE>
We represent that we will comply with the provisions of Sections 8, 24, 25,
and 36 of the NASD Rules of Fair Practice with respect to our participation in
this Offering. If a foreign dealer, we will comply with such sections as if we
were a member of the NASD.
We will not advertise over our name with respect to the offering or sale of
the Securities until after the first public advertisement made by you on behalf
of the Underwriters and then only with your consent and at our own expense.
We agree that with respect to any matters connected with, or action taken by
you pursuant to, this Agreement, you shall act only as agent of the Underwriters
and shall be under no liability to use in any such respect or in respect of the
form of, or the statements contained in, or the validity of, any Preliminary
Prospectus, the Registration Statement, the Prospectus, or any amendment or
supplement to any of them, or for any report or other filing made by you for us
or on our behalf under this Agreement, or for or in respect of the validity or
value of or title to any Securities, the performance by the Company or others of
any agreement on its or their part, the qualification of the sale of Securities
under the laws of any jurisdiction, except for lack of good faith, for
obligations expressly assumed by you in this Agreement (and no obligations on
your part will be implied or inferred from confirmation or acceptance of this
Agreement), and for any liability imposed by the Securities Act of 1933.
Any notice from you to us shall be deemed to have been duly given if sent or
transmitted by mail, facsimile or similar means to us at our address as set
forth in the current CCH NASD Manual or at such other address of which we shall
have advised you in writing.
This Agreement shall be governed by and construed in accordance with the laws
of the State of Colorado.
The section headings in this Agreement have been inserted as a matter of
convenience of reference and are not part of this Agreement.
This Agreement is being executed by us and delivered to you in duplicate.
Please indicate your receipt of identical agreements for each of the other
Underwriters by confirming this Agreement, whereupon it shall constitute a
binding contract between us.
Very truly yours,
By:
-----------------------------------------------------
Attorney-in-fact for each of the several Underwriters
named in Schedule I to the Underwriting Agreement
Confirmed as of the date first mentioned above:
SCHNEIDER SECURITIES, INC.
By:
----------------------
Title:
----------------------
7
<PAGE>
WARRANT NO. 1
WARRANT TO PURCHASE WARRANTS
OF
AJAY SPORTS, INC.
Warrant to Purchase 52,500 Warrants
(subject to adjustment as set forth herein)
Exercise Price $______________ Per Warrant
(subject to adjustment as set forth herein)
VOID AFTER 3:00 P.M., DENVER, COLORADO, TIME, _______________
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") OR REGISTERED OR QUALIFIED UNDER ANY OTHER
APPLICABLE FEDERAL OR STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE
OFFERED FOR SALE, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR QUALIFICATION FILED IN
ACCORDANCE WITH THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
ACT.
Ajay Sports, Inc., (the "Company"), hereby certifies that, for value received,
Schneider Securities, Inc., 104 Broadway, Suite 400, Denver, Colorado, 80203,
(the "Holder"), is entitled, subject to the terms and conditions set forth
below, to purchase from the Company at any time on or after _______________,
19_____, but before 3:00 p.m., Denver time, on _______________, 19_____, up to
_______________ Warrants (the "Public Warrants") of the Company's securities at
a purchase price of $0.001 per Warrant (the "Exercise Price").
The number and character of the securities purchasable upon exercise of this
Warrant and the Exercise Price are subject to adjustment as provided below. The
term "Warrant" as used herein shall include this Warrant and any Warrants issued
in substitution for or replacement of this Warrant, or any Warrants into which
this Warrant may be divided or exchanged. The Public Warrants purchasable upon
the exercise of this Warrant and the common stock purchasable upon their
exercise are hereinafter referred to as "Warrant Securities." Except as
otherwise provided herein, the Public Warrants shall be the same Public Warrants
as are issued as a part of the offering described in the Company 's prospectus
dated ____________________ ("Effective Date"). Provided, however, that the
exercise price of the Public Warrants shall be $1.20.
This Warrant may be assigned, transferred, sold, offered for sale, or
exercised by the Holder upon compliance with all the pertinent provisions
hereof.
1. Exercise of Warrant.
-------------------
(a) Subject to the other terms and conditions of this Warrant, the purchase
rights evidenced by this Warrant may be exercised in whole or in part at any
time, and from time to time, on or after ____________________, but before 3:00
p.m., Denver time, on ____________________, by the Holder's presentation and
surrender of this Warrant to the Company at its principal office or at the
office of the Company's stock transfer agent, if any, accompanied by a duly
executed Notice of Exercise, in the form attached to and by this reference
incorporated in this Warrant as Exhibit A, and by payment of the aggregate
Exercise Price, in certified funds or a bank cashier's check, for the number of
Warrant Securities specified in the Notice of Exercise. In the event this
Warrant is exercised in part only, as soon as is practicable after the
presentation and surrender of this Warrant to the Company for exercise, the
Company shall execute and deliver to the Holder a new Warrant, containing the
same terms and conditions as this Warrant, evidencing the right of the Holder to
purchase the number of Warrant Securities as to which this Warrant has not been
exercised.
<PAGE>
(b) Upon receipt of this Warrant by the Company as described in subsection (a)
above, the Holder shall be deemed to be the holder of record of the Warrant
Securities issuable upon such exercise, notwithstanding that the transfer books
of the Company may then be closed or that certificates representing such Warrant
Securities may not have been prepared or actually delivered to the Holder.
2. Exchange, Assignment or Loss of Warrant.
---------------------------------------
(a) This Warrant may not be sold, transferred, assigned, pledged or
hypothecated until _____________, except for (i) the sale, transfer, or
assignment, in whole or in part, to or among the officers of Schneider
Securities, Inc. and other securities broker-dealers which are members of the
National Association of Securities Dealers, Inc. ("NASD") and which
participated in the public offering of the Company's __________________________
and the officers or partners of those NASD member firms, (ii) the transfer by
operation of law as a result of the death of any transferee to whom all or a
portion of this Warrant may be transferred, and (iii) the transfer to any
successor to the business of Schneider Securities, Inc. All sales, transfers,
assignments or hypothecations of this Warrant must be in compliance with Section
8 hereof. Any assignment or transfer of this Warrant shall be made by the
presentation and surrender of this Warrant to the Company at its principal
office or the office of its transfer agent, if any, accompanied by a duly
executed Assignment Form, in the form attached to and by this reference
incorporated in this Warrant as Exhibit B. Upon the presentation and surrender
of these items to the Company, the Company, at its sole expense, shall execute
and deliver to the new Holder or Holders a new Warrant or Warrants, containing
the same terms and conditions as this Warrant, in the name of the new Holder or
Holders as named in the Assignment Form, and this Warrant shall at that time be
cancelled.
(b) This Warrant, alone or with other Warrants containing substantially the
same terms and conditions and owned by the same Holder, is exchangeable at the
option of the Holder but at the Company's sole expense, at any time prior to its
expiration either by its terms or by its exercise in full upon presentation and
surrender to the Company at its principal office or at the office of its
transfer agent, if any, for another Warrant or other Warrants, of different
denominations but containing the same terms and conditions as this Warrant,
entitling the Holder to purchase the same aggregate number of Warrant Securities
that were purchasable pursuant to the Warrant or Warrants presented and
surrendered. At the time of presentation and surrender by the Holder to the
Company, the Holder also shall deliver to the Company a written notice, signed
by the Holder, specifying the denominations in which new Warrants are to be
issued to the Holder.
(c) The Company will execute and deliver to the Holder a new Warrant
containing the same terms and conditions as this Warrant upon receipt by the
Company of evidence reasonably satisfactory to it of the loss, theft,
destruction, or mutilation of this Warrant, provided that (i) in the case of
loss, theft, or destruction, the Company receives from the Holder a reasonably
satisfactory indemnification, and (ii) in the case of mutilation, the Holder
presents and surrenders this Warrant to the Company for cancellation. Any new
Warrant executed and delivered shall constitute an additional contractual
obligation on the part of the Company regardless of whether the Warrant that was
lost, stolen, destroyed, or mutilated shall be enforceable by anyone at any
time.
3. Adjustments: Stock Dividends, Reclassification, Reorganization, Merger and
--------------------------------------------------------------------------
Anti-Dilution Provisions.
- ------------------------
(a) If the Company increases or decreases the number of its issued and
outstanding shares of Common Stock, or changes in any way the rights and
privileges of such shares, by means of (i) the payment of a stock dividend or
the making of any other distribution on such shares payable in its Common Stock,
(ii) a forward or reverse stock split or other subdivision of shares, (iii) a
consolidation or combination involving its Common Stock, or (iv) a
reclassification or recapitalization involving its Common Stock, then the
Exercise Price in effect at the time of such action and the number of Warrant
Securities purchasable pursuant to this Warrant at that time shall be
proportionately adjusted so that the numbers, rights, and privileges relating to
the Warrant Securities then purchasable pursuant to this Warrant shall be
increased, decreased or changed in like manner, for the same aggregate purchase
price as set forth in this Warrant, as if the Warrant Securities purchasable
pursuant to this Warrant immediately prior to the event at issue had been
issued, outstanding, fully paid and nonassessable at the time of that event. As
an example, if the Company were to declare a two-for-one forward stock split or
a 100 percent stock dividend, then the unpurchased number of
2
<PAGE>
Warrant Securities subject to this Warrant would be doubled and the Exercise
Price for all unpurchased Warrant Securities would be reduced by 50 percent.
These adjustments would result in the Holder's rights under this Warrant not
being diluted by the stock split or stock dividend and the Holder paying the
same aggregate exercise price.
If the Company shall declare a dividend payable in money on its Common Stock
and at substantially the same time shall offer to its shareholders a right to
purchase new shares of Common Stock from the proceeds of such dividend or for an
amount substantially equal to the dividend, all shares of Common Stock so issued
shall, for purposes of this Warrant, be deemed to have been issued as a stock
dividend.
(b) If the Company pays or makes any dividend or other distribution upon its
Common Stock payable in securities or other property, excluding money or the
Company's Common Stock but including (without limitation) shares of any other
class of the Company's stock or stock or other securities convertible into or
exchangeable for shares of Common Stock or any other class of the Company's
stock or other interests in the Company or its assets ("Convertible
Securities"), a proportionate part of those securities or that other property
shall be set aside by the Company and delivered to the Holder in the event that
the Holder exercises this Warrant. The securities and other property then
deliverable to the Holder upon the exercise of this Warrant shall be in the same
ratio to the total securities and property set aside for the Holder as the
number of Warrant Securities with respect to which the Warrant is then exercised
is to the total Warrant Securities purchasable pursuant to this Warrant at the
time the securities or property were set aside for the Holder.
If the Company shall declare a dividend payable in money on its Common Stock
and at substantially the same time shall offer to its shareholders a right to
purchase new shares of a class of stock (other than Common Stock), Convertible
Securities, property or other interests from the proceeds of such dividend or
for an amount substantially equal to the dividend, all shares of stock,
Convertible Securities, property or other interests so issued or transferred
shall, for purposes of this Warrant, be deemed to have been issued as a dividend
or other distribution subject to this subsection (b).
(c) If at any time the Company grants to its shareholders rights to subscribe
pro rata for additional securities of the Company, whether Common Stock,
Convertible Securities, or other classifications, or for any other securities,
property or interests that the Holder would have been entitled to subscribe for
if, immediately prior to such grant, the Holder had exercised this Warrant, then
the Company shall also grant to the Holder the same subscription rights that the
Holder would be entitled to if the Holder had exercised this Warrant in full
immediately prior to such grant.
(d) The Company agrees that it will not merge, reorganize or take any other
action which would terminate this Warrant, unless the Company and each party to
such reorganization or merger shall cause effective provision to be made so that
the Holder shall have the right thereafter, by the exercise of this Warrant, to
purchase for the aggregate Exercise Price described in this Warrant the kind and
amount of shares of stock and other securities, and property and interests, as
would be issued or payable with respect to or in exchange for the number of
Warrant Securities of the Company that are then purchasable pursuant to this
Warrant as if such Warrant Securities had been issued to the Holder immediately
before the occurrence of any of the following events: (i) the reclassification,
capital reorganization, or other similar change of outstanding shares of Common
Stock of the Company, other than as described and provided for in subsection (a)
above; (ii) the merger or consolidation of the Company with one or more other
corporations or other entities, other than a merger with a subsidiary or
affiliate pursuant to which the Company is the continuing entity and the
outstanding shares of Common Stock, including the Warrant Securities purchasable
pursuant to this Warrant, are not affected; or (iii) the spin-off of assets to a
subsidiary or an affiliated entity, or the sale, lease, or exchange of a
significant portion of the Company's assets, in a transaction pursuant to which
the Company's shareholders of record are to receive securities or other
interests in another entity. Any such provision made by the Company for
adjustments with respect to this Warrant shall be as nearly equivalent to the
adjustments otherwise provided for in this Warrant as is reasonably practicable.
The foregoing provisions of this subsection (d) shall similarly apply to
successive reclassifications, capital reorganizations and similar changes of
shares of Common Stock and to successive consolidations, mergers, spin-offs,
sales, leases or exchanges. In the event that in any such reclassification,
3
<PAGE>
capital reorganization, change, consolidation, merger, spin-off, sale, lease or
exchange additional shares of Common Stock are issued in exchange, conversion,
substitution or payment, in whole or in part, for securities of the Company
other than Common Stock, any such issue shall be treated as an issue of Common
Stock covered by the provisions of subsection (f) below, with the amount of the
consideration received upon the issue to be determined in accordance with
subsection (g) below.
(e) If any sale, lease or exchange of all, or substantially all, of the
Company's assets or business or any dissolution, liquidation or winding up of
the Company (a "Termination of Business") shall be proposed, the Company shall
deliver written notice to the Holder or Holders of this Warrant in accordance
with Section 4 below as a condition precedent to the consummation of that
Termination of Business. If the result of the Termination of Business is that
shareholders of the Company are to receive securities or other interests of
another entity, the provisions of subsection (d) above shall apply. However, if
the result of the Termination of Business is that shareholders of the Company
are to receive money or property other than securities or other interests in
another entity, the Holder or Holders of this Warrant shall be entitled to
exercise this Warrant prior to the consummation of the event at issue and, with
respect to any Warrant Securities so purchased, shall be entitled to all of the
rights of the other shareholders of Common Stock with respect to any
distribution by the Company in connection with the Termination of Business. In
the event no other entity is involved and subsection (d) does not apply, all
purchase rights under this Warrant shall terminate at the close of business on
the date as of which shareholders of record of the Common Stock shall be
entitled to participate in a distribution of the assets of the Company in
connection with the Termination of Business; provided, that in no event shall
that date be less than 30 days after delivery to the Holder or Holders of this
Warrant of the written notice described above and in Section 4. If the
termination of purchase rights under this Warrant is to occur as a result of the
event at issue, a statement to that effect shall be included in that written
notice.
Notwithstanding anything herein to the contrary, in the event that Termination
of Business is to occur prior to ________________, then provisions shall be made
by the Company, by setting aside money or other assets to be distributed to
shareholders in an amount sufficient for distribution to Holder or Holders of
this Warrant as if the Warrant had been previously exercised, to ensure that the
Holder or Holders of this Warrant will have an opportunity to participate in
such distribution by exercising the Warrant within 90 days after its earliest
exercise date. The Company will take no steps to dissolve the Company prior to
such date.
(f) Except as otherwise provided in this Section 3, upon any adjustment of the
Exercise Price, the Holder shall be entitled to purchase, at the new Exercise
Price, the number of shares of Common Stock, calculated to the nearest full
share, obtained by multiplying the number of Warrant Securities purchasable
pursuant to this Warrant immediately prior to the adjustment of the Exercise
Price by the Exercise Price in effect immediately prior to its adjustment and
dividing the product so obtained by the new Exercise Price.
(g) If consideration other than money is received by the Company upon the
issuance or sale of Common Stock, Convertible Securities, or other securities or
interests, the fair market value of such consideration, as reasonably determined
by the Board of Directors of the Company, shall be used for purposes of any
adjustment required by this Section 3. The fair market value of such
consideration shall be determined as of the date of the adoption of the
resolution of the Board of Directors of the Company that authorizes the
transaction giving rise to the adjustment. In case of the issuance or sale of
Common Stock, Convertible Securities, or other securities or interests in
conjunction with the issuance or sale of other securities or property without a
separate allocation of the purchase price, the Board of Directors of the Company
shall reasonably determine an allocation of the consideration among the items
being issued or sold. The reclassification of securities other than Common
Stock into securities including Common Stock shall be deemed to involve the
issuance of that Common Stock for a consideration other than money immediately
prior to the close of business on the date fixed for the determination of
shareholders entitled to receive that Common Stock.
The Company shall promptly deliver written notice of all such determinations
by its Board of Directors to the Holder or Holders of this Warrant, and those
determinations shall be final and binding on the Holder or Holders if, and only
if, no Holder of this Warrant delivers written notice to the Company of an
objection to a determination within 30 days after written notice of that
determination is delivered to the Holder. If written
4
<PAGE>
notice of an objection is delivered to the Company and the parties cannot
reconcile their dispute, the dispute shall be arbitrated pursuant to Section 15
below.
(h) The provisions of this Section 3 shall apply to successive events that may
occur from time to time but shall only apply to a particular event if it occurs
prior to the expiration of this Warrant either by its terms or by its exercise
in full.
(i) Unless the context requires otherwise, whenever reference is made in this
Section 3 to the issue or sale of shares of Common Stock, the term "Common
Stock" shall mean (i) the $.01 par value common stock of the Company, (ii) any
other class of stock ranking on a parity with, and having substantially similar
rights and privileges as the Company's $.01 par value common stock, and (iii)
any Convertible Security convertible into either (i) or (ii). However, subject
to the provisions of subsection (d) above, Warrant Securities issuable upon
exercise of this Warrant shall include only shares of the common stock
designated as $.01 par value common stock of the Company as of the date of this
Warrant and warrants to purchase such common stock.
(j) For purposes of subsections (a) and (b) above, shares of Common Stock
owned or held at any relevant time by, or for the account of, the Company, in
its treasury or otherwise, shall not be deemed to be outstanding for purposes of
the calculations and adjustments described.
4. Notice to Holders. If, prior to the expiration of this Warrant either by
-----------------
its terms or by its exercise in full, any of the following shall occur:
(i) the Company shall declare a dividend or authorize any other distribution
on its Common Stock; or
(ii) the Company shall authorize the granting to the shareholders of its
Common Stock of rights to subscribe for or purchase any securities or any
other similar rights; or
(iii) any reclassification, reorganization or similar change of the Common
Stock, or any consolidation or merger to which the Company is a party, or
the sale, lease, or exchange of any significant portion of the assets of
the Company; or
(iv) the voluntary or involuntary dissolution, liquidation or winding up of
the Company; or
(v) any purchase, retirement or redemption by the Company of its Common
Stock;
then, and in any such case, the Company shall deliver to the Holder or Holders
written notice thereof at least 30 days prior to the earliest applicable date
specified below with respect to which notice is to be given, which notice shall
state the following:
(i) the date on which a record is to be taken for the purpose of such
dividend, distribution or rights, or, if a record is not to be taken, the
date as of which the shareholders of Common Stock of record to be
entitled to such dividend, distribution or rights are to be determined;
(ii) the date on which such reclassification, reorganization, consolidation,
merger, sale, transfer, dissolution, liquidation, winding up or purchase,
retirement or redemption is expected to become effective, and the date,
if any, as of which the Company's shareholders of Common Stock of record
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reclassification, reorganization,
consolidation, merger, sale, transfer, dissolution, liquidation, winding
up, purchase, retirement or redemption; and
(iii) if any matters referred to in the foregoing clauses (i) and (ii) are to
be voted upon by shareholders of Common Stock, the date as of which those
shareholders to be entitled to vote are to be determined.
5. Officers' Certificate. Whenever the Exercise Price or the aggregate number
---------------------
of Warrant Securities purchasable pursuant to this Warrant shall be adjusted as
required by the provisions of Section 3 above, the
5
<PAGE>
Company shall promptly file with its Secretary or an Assistant Secretary at its
principal office, and with its transfer agent, if any, an officers' certificate
executed by the Company's President and Secretary or Assistant Secretary,
describing the adjustment and setting forth, in reasonable detail, the facts
requiring such adjustment and the basis for and calculation of such adjustment
in accordance with the provisions of this Warrant. Each such officers'
certificate shall be made available to the Holder or Holders of this Warrant for
inspection at all reasonable times, and the Company, after each such adjustment,
shall promptly deliver a copy of the officers' certificate relating to that
adjustment to the Holder or Holders of this Warrant. The officers' certificate
described in this Section 5 shall be deemed to be conclusive as to the
correctness of the adjustment reflected therein if, and only if, no Holder of
this Warrant delivers written notice to the Company of an objection to the
adjustment within 30 days after the officers' certificate is delivered to the
Holder or Holders of this Warrant. The Company will make its books and records
available for inspection and copying during normal business hours by the Holder
so as to permit a determination as to the correctness of the adjustment. If
written notice of an objection is delivered by a Holder to the Company and the
parties cannot reconcile the dispute, the Holder and the Company shall submit
the dispute to arbitration pursuant to the provisions of Section 15 below.
Failure to prepare or provide the officers' certificate shall not modify the
parties' rights hereunder.
6. Reservation of Warrant Securities. The Company hereby agrees that at all
---------------------------------
times prior to ____________________, it will have authorized and will reserve
and keep available for issuance and delivery to the Holder that number of shares
of its Common Stock that may be required from time to time for issuance and
delivery upon the exercise of the then unexercised portion of this Warrant and
all other similar Warrants then outstanding and unexercised and upon the
exercise of any Warrant Securities.
7. Registration Under the Securities Act of 1933.
---------------------------------------------
(a) If at any time prior to ____________________, (five years from the
Effective Date), the Company files a registration statement with the United
States Securities and Exchange Commission pursuant to the Securities Act of
1933, as amended (the "Act"), or pursuant to any other act passed after the date
of this Agreement, which filing provides for the sale of securities by the
Company to the public, or files a Regulation A Offering Statement under the Act,
the Company shall offer to the Holder or Holders of this Warrant and the holders
of any Warrant Securities the opportunity to register or qualify the Warrant (if
prior to its expiration), Warrant Securities and any Warrant Securities
underlying the unexercised portion of this Warrant, if any, at the Company's
sole expense, regardless of whether the Holder or Holders of this Warrant or the
holders of Warrant Securities or both may have previously availed themselves of
any of the registration rights described in this Section 7; provided, however,
that in the case of a Regulation A offering, the opportunity to qualify shall be
limited to the amount of the available exemption after taking into account the
securities that the Company wishes to qualify. Notwithstanding anything to the
contrary, this subsection (a) shall not be applicable to a registration
statement on Forms S-4, S-8 or their successors or any other inappropriate forms
filed by the Company with the United States Securities and Exchange Commission.
The Company shall deliver written notice to the Holder or Holders of this
Warrant and to any holders of the Warrant Securities of its intention to file a
registration statement or Regulation A Offering Statement under the Act at least
60 days prior to the filing of such registration statement or offering
statement, and the Holder or Holders and holders of Warrant Securities shall
have 30 days thereafter to request in writing that the Company register or
qualify the Warrant, Warrant Securities, or the Warrant Securities underlying
the unexercised portion of this Warrant in accordance with this subsection (a).
Upon the delivery of such a written request within the specified time, the
Company shall be obligated to include in its contemplated registration statement
or offering statement all information necessary or advisable to register or
qualify the Warrant, Warrant Securities or Warrant Securities underlying the
unexercised portion of this Warrant for a public offering, if the Company does
file the contemplated registration statement or offering statement; provided,
however, that neither the delivery of the notice by the Company nor the delivery
of a request by a Holder or by a holder of Warrant Securities shall in any way
obligate the Company to file a registration statement or offering statement.
Furthermore, notwithstanding the filing of a registration statement or offering
statement, the Company may, at any time prior to the effective date thereof,
determine not to offer the securities to which the registration statement or
offering statement relates, other than the Warrant, Warrant Securities and
Warrant Securities underlying the unexercised portion of this Warrant.
6
<PAGE>
The Company shall comply with the requirements of this subsection (a) and the
related requirements of subsection (g) at its own expense. That expense shall
include, but not be limited to, legal, accounting, consulting, printing, federal
and state filing fees, NASD fees, out-of-pocket expenses incurred by counsel,
accountants and consultants retained by the Company, and miscellaneous expenses
directly related to the registration statement or offering statement and the
offering. However, this expense shall not include the portion of any
underwriting commissions, transfer taxes and the underwriter's accountable and
nonaccountable expense allowances attributable to the offer and sale of the
Warrant, Warrant Securities and the Warrant Securities underlying the
unexercised portion of this Warrant, all of which expenses shall be borne by the
Holder or Holders of this Warrant and the holders of the Warrant Securities
registered or qualified.
(b) In addition to the rights described in subsection (a), upon the written
request of a majority holder, as defined in subsection (h) below (the "Majority
Holder"), made at any time after ____________________, but before
____________________ (five years from the Effective Date), the Company shall
file within 90 days of such written request a registration statement or
Regulation A Offering Statement pursuant to the Act, and all necessary
amendments thereto, to register or qualify the Warrant, Warrant Securities and
the Warrant Securities underlying the unexercised portion of this Warrant. No
additional securities shall be included in such registration statement or
Offering Statement without the written consent of the Majority Holder. The
Company may use the Regulation A exemption if available, but the Company must
file a registration statement if the securities that are to be covered cannot be
sold pursuant to Regulation A because of the limitations applicable to the use
of the Regulation A exemption. The Company agrees to use its best efforts to
cause this registration or qualification to become effective as promptly as
practicable, and its officers, directors, consultants, auditors and counsel
shall cooperate in all matters necessary or advisable to pursue this objective.
All of the expenses of this registration or qualification shall be borne by the
Company, including, but not limited to, legal, accounting, consulting, printing,
filing and NASD fees, out-of-pocket expenses incurred by counsel, accountants,
and consultants retained by the Company and miscellaneous expenses directly
related to the registration statement or offering statement and the offering,
and the underwriter's accountable and nonaccountable expense allowances and
fees; but the Company shall not pay any brokerage fees, commissions or
underwriting discounts except to the extent they are attributable to other
securities that the Company has been permitted to register or qualify or to
offer in conjunction with the registration and qualification of the Warrant,
Warrant Securities or the Warrant Securities underlying the unexercised portion
of this Warrant. The Majority Holder shall be entitled to exercise the rights
described in this subsection (b) one time only.
Within 10 days after the delivery by the Majority Holder to the Company of the
notice described above, the Company shall deliver written notice to all other
Holders of this Warrant and holders of the Warrant Securities, if any, advising
them that the Company is proceeding with a registration statement or offering
statement and offering them the right to include the Warrant and Warrant
Securities of those Holders or holders therein. If any Holder of a Warrant and
Warrant Securities delivers written acceptance of that offer to the Company
within 30 days after the delivery of the Company's notice, the Company shall be
obligated to include that holder's Warrant and that holder's Warrant Securities
in the contemplated registration statement or offering statement.
(c) In the event that the Company registers or qualifies the Warrant, Warrant
Securities or the Warrant Securities underlying the unexercised portion of this
Warrant pursuant to subsections (a) or (b) above, the Company shall include in
the registration statement or qualification, and the prospectus included
therein, all information and materials necessary or advisable to comply with the
applicable statutes and regulations so as to permit the public sale of the
Warrant, Warrant Securities or the Warrant Securities underlying the unexercised
portion of this Warrant. As used in subsections (a) and (b) of this Section 7,
reference to the Company's securities shall include, but not be limited to, any
class or type of the Company's securities or the securities of any of the
Company's subsidiaries or affiliates.
(d) In addition to the registration rights described in subsections (a) and
(b) above, upon the written request of any Holder of this Warrant or any holder
of Warrant Securities, the Company, as promptly as possible after delivery of
such request, shall cooperate with the requesting Holder or holder in preparing
and signing any registration statement or offering statement that the Holder or
holder may desire to file in order
7
<PAGE>
to sell or transfer the Warrant and Warrant Securities. Within 10 days after
the delivery of the written request described above, the Company shall deliver
written notice to all other Holders of this Warrant and holders of Warrant
Securities, if any, advising them that the Company is proceeding with a
registration statement or offering statement and that their Warrant and Warrant
Securities will be included therein if they so desire and agree to pay their pro
rata share of the cost of registration or qualification and provided that the
Holder or holder delivers written notice to the Company of their desire to be
included and their agreement to pay their pro rata share of the cost within 30
days after the delivery of the Company's notice to them. The Company will
supply all information necessary or advisable for any such registration
statements or offering statements; provided, however, that all the costs and
expenses of such registration statements or offering statements shall be borne,
in a manner proportionate to the number of securities for which they indicate a
desire to register, by the Holders of this Warrant and the holders of Warrant
Securities who seek the registration or qualification of their Warrant, Warrant
Securities or Warrant Securities underlying the unexercised portion of their
Warrant. In determining the amount of costs and expenses to be borne by those
Holders or holders, the only costs and expenses of the Company to be included
are the additional costs and expenses that would not have otherwise been
incurred by the Company if those Holders or holders had not desired to file a
registration statement or offering statement. As an example, and without
limitation, audit fees would not be charged to those Holders or holders if or to
the extent that the Company would have incurred the same audit fees for its
year-end or other use in the absence of the registration statement or offering
statement. The Holders or holders responsible for the costs and expenses shall
reimburse the Company for those reimbursable costs and expenses reasonably
incurred by the Company within 30 days after the initial effective date of the
registration statement or qualification at issue.
No other securities of the Company of any type shall be included in, be the
subject of, or be publicly offered pursuant to any registration statement or
offering statement filed within 180 days following the latest effective date of
any registration statement or offering statement filed pursuant to this
subsection (d) unless (i) the Company obtains the prior written consent of
Schneider Securities, Inc. upon such terms and conditions as Schneider
Securities, Inc. in its sole discretion may deem desirable, and (ii) the owners
or holders of those other securities, including, without limitation, the
Company, agree to bear an equitable portion, acceptable to Schneider Securities,
Inc. of the costs and expenses of the registration statement or offering
statement filed pursuant to this subsection (d).
(e) As to each registration statement or offering statement, the Company's
obligations contained in this Section 7 shall be conditioned upon a timely
receipt by the Company in writing of the following:
(i) Information as to the terms of the contemplated public offering furnished
by and on behalf of each Holder or holder intending to make a public
distribution of the Warrant, Warrant Securities or Warrant Securities
underlying the unexercised portion of the Warrant; and
(ii) Such other information as the Company may reasonably require from such
Holders or holders, or any underwriter for any of them, for inclusion in
the registration statement or offering statement.
(f) In each instance in which the Company shall take any action to register or
qualify the Warrant, Warrant Securities or the Warrant Securities underlying the
unexercised portion of this Warrant, if any, pursuant to this Section 7, the
Company shall do the following:
(i) supply to Schneider Securities, Inc., as the representative of the
Holders of the Warrant and the holders of Warrant Securities whose
Warrant and Warrant Securities are being registered or qualified, 2
manually signed copies of each registration statement or offering
statement, and all amendments thereto, and a reasonable number of copies
of the preliminary, final or other prospectus or offering circular, all
prepared in conformity with the requirements of the Act and the rules and
regulations promulgated thereunder, and such other documents as Schneider
Securities, Inc. shall reasonably request;
(ii) cooperate with respect to (A) all necessary or advisable actions relating
to the preparation and the filing of any registration statements or
offering statements, and all amendments thereto, arising from the
provisions of this Section 7, (B) all reasonable efforts to establish an
exemption from the
8
<PAGE>
provisions of the Act or any other federal or state securities statutes,
(C) all necessary or advisable actions to register or qualify the public
offering at issue pursuant to federal securities statutes and the state
"blue sky" securities statutes of each jurisdiction that the Holders of
the Warrant or holders of Warrant Securities shall reasonably request,
and (D) all other necessary or advisable actions to enable the Holders of
the Warrant and holders of the Warrant Securities to complete the
contemplated disposition of their securities in each reasonably requested
jurisdiction;
(iii) keep all registration statements or offering statements to which this
Section 7 applies, and all amendments thereto, effective under the Act
for a period of at least 9 months after their initial effective date and
cooperate with respect to all necessary or advisable actions to permit
the completion of the public sale or other disposition of the securities
subject to a registration statement or offering statement; and
(iv) indemnify and hold harmless each Holder of the Warrant, each holder of
Warrant Securities, and each underwriter within the meaning of the Act
for each such Holder or holder, from and against all losses, claims,
damages, and liabilities, including, but not limited to, any and all
expenses reasonably incurred in investigating, preparing, defending or
settling any claim, arising from or relating to (A) any untrue or alleged
untrue statement of a material fact contained in any registration
statement or offering statement to which this Section 7 applies, or (B)
any omission or alleged omission to state a material fact necessary to
make the statements contained in a registration statement or offering
statement to which this Section 7 applies not misleading; provided,
however, that the indemnification contained in this provision (iv) shall
not apply if the untrue statement or omission, or alleged untrue
statement or omission, was the result of information furnished in writing
to the Company by the Holder, holder or underwriter seeking
indemnification expressly for use in the registration statement or
offering statement at issue. To the extent that the indemnification
contained in this provision applies, the Company also shall indemnify and
hold harmless each officer, director, employee, controlling person or
agent of an indemnified Holder, holder or underwriter.
(g) In each instance in which pursuant to this Section 7 the Company shall
take any action to register or qualify the Warrant, Warrant Securities or the
Warrant Securities underlying the unexercised portion of this Warrant, prior to
the effective date of any registration statement or offering statement, the
Company and each Holder or holder of Warrants or Warrant Securities being
registered or qualified shall enter into reciprocal indemnification agreements,
in the form customarily used by reputable investment bankers with respect to
public offerings of securities, containing substantially the same terms as
described in subsection (f)(iv) above. These indemnification agreements also
shall contain an agreement by the Holder or shareholder at issue to indemnify
and hold harmless the Company, its officers, directors from and against any and
all losses, claims, damages and liabilities, including, but not limited to, all
expenses reasonably incurred in investigating, preparing, defending or settling
any claim, directly resulting from any untrue statements of material facts, or
omissions to state a material fact necessary to make a statement not misleading,
contained in a registration statement or offering statement to which this
Section 7 applies, if, and only if, the untrue statement or omission directly
resulted from information provided in writing to the Company by the indemnifying
Holder or shareholder expressly for use in the registration statement or
offering statement at issue.
(h) The term "Majority Holder" as used in this Section 7 shall include any
Holder, any holder of Warrant Securities, or any combination of Holders and such
holders of Warrant Securities, if they hold, in the aggregate, unexercised
Warrants plus issued and outstanding Warrant Securities equal to more than 50%
of the total of (i) all Warrant Securities issued and outstanding as a result of
the exercise of the Warrant, and (ii) all Warrant Securities that may at that
time be purchased by exercising the unexercised portion of the Warrant. For
purposes hereof, a Warrant entitling the Holder to purchase more than one share
shall be deemed to hold Warrants equal to the number of shares which may be
acquired pursuant to any such Warrant.
9
<PAGE>
(i) For purposes of subsection (f)(i) above, by the receipt of this Warrant or
any Warrant Securities, all Holders and all holders of Warrant Securities
acknowledge and agree that Schneider Securities, Inc. is and shall be their
representative.
(j) The Company's obligations described in this Section 7 shall continue in
full force and effect regardless of the exercise, surrender, cancellation or
expiration of this Warrant.
8. Transfer to Comply With the Securities Act of 1933.
--------------------------------------------------
(a) This Warrant, the Warrant Securities, and all other securities issued or
issuable upon exercise of this Warrant, may not be offered, sold or transferred,
in whole or in part, except in compliance with the Securities Act of 1933, as
amended (the "Act"), and except in compliance with all applicable state
securities statutes.
(b) The Company may cause the following legend, or its equivalent, to be set
forth on each certificate representing the Warrant Securities, or any other
security issued or issuable upon exercise of this Warrant, not theretofore
distributed to the public or sold to underwriters, as defined by the Act, for
distribution to the public pursuant to Section 7 above:
"The Warrants represented by this Certificate have not been registered under
the Securities Act of 1933 ("the Act") and are 'restricted securities' as that
term is defined in Rule 144 under the Act. The Warrants may not be offered
for sale, sold or otherwise transferred except pursuant to an effective
registration statement under the Act or pursuant to an exemption from
registration under the Act, the availability of which is to be established to
the satisfaction of the Company."
9. Fractional Shares. No fractional shares or scrip representing fractional
-----------------
shares shall be issued upon the exercise of all or any part of this Warrant.
With respect to any fraction of a share of any security called for upon any
exercise of this Warrant, the Company shall pay to the Holder an amount in money
equal to that fraction multiplied by the current market value of that share.
The current market value shall be determined as follows:
(i) if the security at issue is listed on a national securities exchange or
admitted to unlisted trading privileges on such an exchange or listed on
the National Association of Securities Dealers National Market System,
the current value shall be the last reported sale price of that security
on such exchange or system on the last business day prior to the date of
the applicable exercise of this Warrant or, if no such sale is made on
such day, the average of the highest closing bid and lowest asked price
for such day on such exchange or system; or
(ii) if the security at issue is not so listed or admitted to unlisted
trading privileges, the current market value shall be the average of the
last reported highest bid and lowest asked prices quoted on the National
Association of Securities Dealers Automated Quotations System or, if not
so quoted, then by the National Quotation Bureau, Inc. on the last
business day prior to the day of the applicable exercise of this
Warrant; or
(iii) if the security at issue is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not reported, the
current market value shall be determined in such reasonable manner as
may be prescribed from time to time by the Board of Directors of the
Company, subject to the objection and arbitration procedure as described
in Section 5 above.
10. Rights of the Holder. The Holder shall not be entitled to any rights as
--------------------
a shareholder in the Company by reason of this Warrant, either at law or equity,
except as specifically provided for herein. The Company covenants, however,
that for so long as this Warrant is at least partially unexercised, it will
furnish any Holder of this Warrant with copies of all reports and communications
furnished to the shareholders of the Company.
11. Charges Due Upon Exercise. The Company shall pay any and all issue or
-------------------------
transfer taxes, including, but not limited to, all federal or state taxes, that
may be payable with respect to the transfer of this Warrant or the issue or
delivery of Warrant Securities upon the exercise of this Warrant.
10
<PAGE>
12. Warrant Securities to be Fully Paid. The Company covenants that all
-----------------------------------
Warrant Securities that may be issued and delivered to a Holder of this Warrant
upon the exercise of this Warrant will be, upon such delivery, validly and duly
issued, fully paid and nonassessable.
13. Notices. All notices, certificates, requests, or other similar items
-------
provided for in this Warrant shall be in writing and shall be personally
delivered or deposited in the United States mail, postage prepaid, addressed to
the respective party as indicated in the portions of this Warrant preceding
Section 1. All notices shall be deemed to be delivered upon personal delivery
or upon the expiration of 3 business days following deposit in the United States
mail, postage prepaid. The addresses of the parties may be changed, and
addresses of other Holders and holders of Warrant Securities may be specified,
by written notice delivered pursuant to this Section 13. The Company's
principal office shall be deemed to be the address provided pursuant to this
Section for the delivery of notices to the Company.
14. Applicable Law. This Warrant shall be governed by and construed in
--------------
accordance with the laws of the State of Colorado, and courts located in
Colorado shall have exclusive jurisdiction over all disputes arising hereunder.
15. Arbitration. The Company and the Holder, and by receipt of this Warrant
-----------
or any Warrant Securities, all subsequent Holders or holders of Warrant
Securities, agree to submit all controversies, claims, disputes and matters of
difference with respect to this Warrant, including, without limitation, the
application of this Section 15 to arbitration in Denver, Colorado, according to
the rules and practices of the American Arbitration Association from time to
time in force; provided, however, that if such rules and practices conflict with
the applicable procedures of Colorado courts of general jurisdiction or any
other provisions of Colorado law then in force, those Colorado rules and
provisions shall govern. This agreement to arbitrate shall be specifically
enforceable. Arbitration may proceed in the absence of any party if notice of
the proceeding has been given to that party. The parties agree to abide by all
awards rendered in any such proceeding. These awards shall be final and binding
on all parties to the extent and in the manner provided by the rules of civil
procedure enacted in Colorado. All awards may be filed, as a basis of judgment
and of the issuance of execution for its collection, with the clerk of one or
more courts, state or federal, having jurisdiction over either the party against
whom that award is rendered or its property. No party shall be considered in
default hereunder during the pendency of arbitration proceedings relating to
that default.
16. Miscellaneous Provisions.
------------------------
(a) Subject to the terms and conditions contained herein, this Warrant shall
be binding on the Company and its successors and shall inure to the benefit of
the original Holder, its successors and assigns and all holders of Warrant
Securities and the exercise of this Warrant in full shall not terminate the
provisions of this Warrant as it relates to holders of Warrant Securities.
(b) If the Company fails to perform any of its obligations hereunder, it shall
be liable to the Holder for all damages, costs and expenses resulting from the
failure, including, but not limited to, all reasonable attorney's fees and
disbursements.
(c) This Warrant cannot be changed or terminated or any performance or
condition waived in whole or in part except by an agreement in writing signed by
the party against whom enforcement of the change, termination or waiver is
sought.
(d) If any provision of this Warrant shall be held to be invalid, illegal or
unenforceable, such provision shall be severed, enforced to the extent possible,
or modified in such a way as to make it enforceable, and the invalidity,
illegality or unenforceability shall not affect the remainder of this Warrant.
(e) The Company agrees to execute such further agreements, conveyances,
certificates and other documents as may be reasonably requested by the Holder to
effectuate the intent and provisions of this Warrant.
11
<PAGE>
(f) Paragraph headings used in this Warrant are for convenience only and shall
not be taken or construed to define or limit any of the terms or provisions of
this Warrant. Unless otherwise provided, or unless the context shall otherwise
require, the use of the singular shall include the plural and the use of any
gender shall include all genders.
AJAY SPORTS, INC.
ATTEST:
By ________________________________ By ______________________________
Robert R. Hebard, Secretary Thomas W. Itin, President
12
<PAGE>
EXHIBIT A
---------
NOTICE OF EXERCISE
------------------
(To be executed by a Holder desiring to exercise the right to purchase Warrants
pursuant to a Warrant.)
The undersigned Holder of a Warrant hereby
(a) irrevocably elects to exercise the Warrant to the extent of purchasing
_______________ Warrants;
(b) makes payment in full of the aggregate Exercise Price for those
Warrants in the amount of $_________________ by the delivery of certified
funds or a bank cashier's check in the amount of $_________________;
(c) requests that certificates evidencing the securities underlying such
Warrants be issued in the name of the undersigned, or, if the name and address
of some other person is specified below, in the name of such other person:
_______________________________________________
_______________________________________________
_______________________________________________
(Name and address of person other than the
-----
undersigned in whose name Warrants are to be registered)
(d) requests, if the number of Warrants purchased are not all the Warrants
purchasable pursuant to the unexercised portion of the Warrant, that a new
Warrant of like tenor for the remaining Warrants purchasable pursuant to the
Warrant be issued and delivered to the undersigned at the address stated
below.
Dated: _____________________ _______________________________________
Signature
(This signature must conform in all respects
to the name of the Holder as specified on the
face of the Warrant.)
_____________________________
Social Security Number _______________________________________
or Employer ID Number Printed Name
Address: _______________________________________
_______________________________________
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<PAGE>
EXHIBIT B
---------
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED, the undersigned, __________________________________, hereby
sells, assigns and transfers unto:
Name: _________________________________________________
(Please type or print in block letters)
Address: ______________________________________________
______________________________________________
the right to purchase _________________ Warrants of Ajay Sports, Inc. (the
"Company") pursuant to the terms and conditions of the Warrant held by the
undersigned. The undersigned hereby authorizes and directs the Company (i) to
issue and deliver to the above-named assignee at the above address a new Warrant
pursuant to which the rights to purchase being assigned may be exercised, and
(ii) if there are rights to purchase Warrants remaining pursuant to the
undersigned's Warrant after the assignment contemplated herein, to issue and
deliver to the undersigned at the address stated below a new Warrant evidencing
the right to purchase the number of Warrants remaining after issuance and
delivery of the Warrant to the above-named assignee. Except for the number of
Warrants purchasable, the new Warrants to be issued and delivered by the Company
are to contain the same terms and conditions as the undersigned's Warrant. To
complete the assignment contemplated by this Assignment Form, the undersigned
hereby irrevocably constitutes and appoints _________________________________
________ as the undersigned's attorney-in-fact to transfer the Warrants and the
rights thereunder on the books of the Company with full power of substitution
for these purposes.
Dated: _____________________ __________________________________________
Signature
(This signature must conform in all respects
to the name of the Holder as specified on the
face of the Warrant.)
__________________________________________
Printed Name
Address: _______________________________________
_______________________________________
14
<PAGE>
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. NO OFFER
TO BUY THE SECURITIES CAN BE ACCEPTED AND NO PART OF THE PURCHASE PRICE CAN BE
RECEIVED UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE, AND ANY SUCH
OFFER MAY BE WITHDRAWN OR REVOKED, WITHOUT OBLIGATION OR COMMITMENT OF ANY KIND,
AT ANY TIME PRIOR TO NOTICE OF ITS ACCEPTANCE GIVEN AFTER THE EFFECTIVE DATE.
AJAY SPORTS, INC.
SELECTED DEALERS AGREEMENT
Dear Sirs:
1. Schneider Securities, Inc. ("Representative"), as Representative of the
several Underwriters, proposes to offer on a firm commitment basis, subject to
the terms and conditions and execution of the Underwriting Agreement, 525,000
shares of Preferred Stock and 525,000 Warrants (the "Securities") of Ajay
Sports, Inc. (the "Company"). The Securities are more particularly described in
the enclosed Preliminary Prospectus, additional copies of which as well as the
Final Prospectus, after the effective date of the registration statement, will
be supplied in reasonable quantities upon request.
2. The Representative is soliciting offers to buy upon the terms and
conditions hereof for a part of the Securities from Selected Dealers, who are to
act as principal, including you, who are (i) registered with the Securities and
Exchange Commission (the "Commission") as dealers under the Securities Exchange
Act of 1934, as amended (the "1934 Act"), and members in good standing with the
National Association of Securities Dealers, Inc., (the "NASD"), or (ii) dealers
or institutions with their principal place of business located outside the
United States, its territories and possessions and not registered under the 1934
Act who agree to make no sales within the United States, its territories and
possessions or to persons who are nationals thereof or residents therein. The
Securities are to be initially offered to the public at a price of
$_______________ per share of Preferred Stock and $_______________ per Warrant,
for a total offering price of $_______________. Selected Dealers will be
allowed a concession of not less than ___% of the offering price. You will be
notified of the precise amount of such concession prior to the effective date of
the Registration Statement. The offer is solicited subject to the issuance and
delivery of the Securities and their acceptance by the Representative, to the
approval of legal matters by counsel and to the terms and conditions as herein
set forth.
3. Your offer to become a selected dealer and to purchase any of the
Securities may be revoked in whole or in part without obligation or commitment
of any kind by you any time prior to acceptance and no offer may be accepted by
us and no sale can be made until after the registration statement covering the
Securities has become effective with the Commission. This Agreement shall
become effective upon the effectiveness of the Registration Statement and the
representative's acceptance of your offer. Subject to the foregoing, upon
execution by you of the Offer to Purchase below and the return of same to us,
you shall be deemed to have offered to purchase the number of Securities set
forth in your offer on the basis set forth in paragraph 2 above. Any oral
notice by us of acceptance of your offer shall be immediately followed by
written or telegraphic confirmation preceded or accompanied by a copy of the
Prospectus. If a contractual commitment arises hereunder, all the terms of this
Selected Dealers Agreement shall be applicable. We may also make available to
you an allotment to purchase Securities, but such allotment shall be subject to
modification or termination upon notice from us any time prior to an exchange of
confirmations reflecting completed transactions. All references hereafter in
this Agreement to the purchase and sale of the Securities assume and are
applicable only if contractual commitments to purchase are completed in
accordance with the foregoing.
<PAGE>
4. You agree that in reoffering the Securities, if your offer is accepted
after the effective date, you will make a bona fide public distribution of same.
You will advise us upon request of the Securities purchased by you remaining
unsold, and we shall have the right to repurchase such Securities upon demand at
the public offering price less the concession. Any of the Securities purchased
by you pursuant to this Agreement are to be reoffered by you to the public at
the public offering price, subject to the terms hereof. Securities shall not be
offered or sold by you below the public offering price before the termination of
this Agreement or without prior written approval of the Representative.
5. Payment for Securities which you purchase hereunder shall be made by you
on or before five (5) business days after the date of each confirmation by
settlement through the Depository Trust Company, by certified or bank cashier's
check, or by wire payable to the Representative in the amount of the offering
price. Certificates for the securities shall be delivered through the
Depository Trust Company or otherwise as soon as practicable after delivery
instructions are received by the Representative. The manner of settlements,
both as to the means of settlement and the funds, shall be at the sole option of
the Representative.
6. A registration statement covering the offering has been filed with the
Securities and Exchange Commission in respect to the Securities. You will be
promptly advised when the registration statement becomes effective. Each
Selected Dealer in selling the Securities pursuant hereto agrees (which
agreement shall also be for the benefit of the Company) that it will comply with
all applicable laws, including the applicable requirements of the Securities Act
of 1933 and of the Securities Exchange Act of 1934 and any applicable rules and
regulations issued under said Acts. No person is authorized by the Company or
by the Representative to give any information or to make any representations
other than those contained in the Prospectus in connection with the sale of the
Securities. Nothing contained herein shall render the Selected Dealers a member
of the Underwriting Group or partners with the Representative or with one
another.
7. You will be informed by us as to the states in which we have been advised
by counsel the Securities have been qualified for sale or are exempt under the
respective securities or blue sky laws of such states, but we have not assumed
and will not assume any obligation or responsibility as to accuracy of such
information or as to the right of any Selected Dealer to sell Securities in any
jurisdiction.
8. The Representative shall have full authority to take such action as we may
deem advisable in respect of all matters pertaining to the offering or arising
thereunder. The Representative shall not be under any liability to you, except
such as may be incurred under the Securities Act of 1933 and the rules and
regulations thereunder, except for lack of good faith and except for obligations
assumed by us in this Agreement, and no obligation on our part shall be implied
or inferred herefrom.
9. Selected Dealers will be governed by the conditions herein set forth until
this Agreement is terminated. Nothing herein contained shall be deemed a
commitment on our part to sell you any Securities; such contractual commitment
can only be made in accordance with the provisions of paragraph 3 hereof. This
Agreement will terminate at the close of business on the 30th full business day
after the date hereof; provided, however, that we shall have the right to extend
this Agreement for an additional period or periods not exceeding 30 full
business days in the aggregate upon written notice to you.
10. You represent that you are a member in good standing of the NASD and
registered as a dealer with the Commission, or that you are a foreign dealer not
eligible for membership under Section I of the By-Laws of the Association who
agree to make no sales within the United States, its territories or possessions
or to persons who are nationals thereof or residents therein and, in making
sales, to comply with Sections 8, 24, 25 and 36 of the NASD's Rules of Fair
Practice and with the NASD's interpretation with respect to free-riding and
withholding. Your attention is called to the following: (a) Article III,
Section 1 of the Rules of Fair Practice of the NASD and the interpretations of
said Section promulgated
2
<PAGE>
by its Board of Governors including the interpretation with respect to "Free-
Riding and Withholding;" (b) Section 10(b) of the 1934 Act and Rules 10b-6, 10b-
6A and 10b-10 of the general rules and regulations promulgated under said Act;
(c) Securities Act Release #3907; (d) Securities Act Release #4150; and (e) Rule
15c2-8 requiring, among other things, the distribution of a Preliminary
Prospectus to all persons reasonably expected to be purchasers of shares from
you at least 48 hours prior to the time you expect to mail confirmations. You,
if a member of the NASD, by signing this Agreement, acknowledge that you are
familiar with the cited law, rules and releases, and agree that you will not
directly and/or indirectly violate any provisions of applicable law in
connection with your participation in the distribution of the Securities.
11. In addition to compliance with the provisions of paragraph 10 hereof, you
will not, until advised by us in writing or by wire of completion of the
offering (as defined in Rule 10b-6 promulgated under the Securities Exchange Act
of 1934), bid for or purchase Securities in the open market or otherwise make a
market in the Securities or otherwise attempt to induce others to purchase Units
in the open market, and will otherwise comply with Rule 10b-6. You further
agree that you will not effect any transaction as a passive market maker
pursuant to Rule 10b-6A without obtaining the Representative's prior written
consent. Nothing contained in this paragraph 11 shall, however, preclude you
from acting as agent in the execution of unsolicited orders of customers in
transactions effectuated for them through a market maker.
12. It is assumed that Units sold by you will be effectively placed for
investment. If the Representative contracts for or purchases for the account of
any Underwriter any Units sold to you hereunder and not effectively placed by
you, the Representative may charge you the Selected Dealer's concession
originally allowed you on the Units so repurchased, plus brokerage commissions
and transfer taxes paid in connection with such purchase or contract to
purchase, and you agree to pay such charges on demand.
13. By submitting an Offer to Purchase you confirm that your net capital is
such that you may, in accordance with Rule 15c3-1 adopted under the Exchange Act
of 1934, agree to purchase the number of Units you may become obligated to
purchase under the provisions of this Agreement.
14. All communications from you should be directed to us at the office of
Schneider Securities, Inc., 104 Broadway, Suite 400, Denver, Colorado, 80203.
All communications from us to you shall be directed to the address to which this
letter is mailed.
Very truly yours,
SCHNEIDER SECURITIES, INC.
By
--------------------------------------------
Thomas W. Schneider, Chief Executive Officer
3
<PAGE>
OFFER TO PURCHASE
-----------------
The undersigned does hereby offer to purchase (subject to the right to
revoke as set forth in paragraph 3) _______________ Securities or such lesser
number as the Representative determines in accordance with the terms and
conditions set forth above.
--------------------------------------------
By
-----------------------------------------
Authorized Officer
4
<PAGE>
CORPORATE FINANCE CONSULTING AGREEMENT
This Agreement is entered into this ______ day of ____________________,
1995, by and between Ajay Sports, Inc., 1501 East Wisconsin Street, Delavan,
Wisconsin, 53115 (the "Company") and Schneider Securities, Inc., 104 Broadway,
Suite 400, Denver, Colorado, 80203 (the "Consultant").
WHEREAS, Company is seeking financing for various business projects, and
WHEREAS, Company desires to engage Consultant to advise it with regard to
financial matters and methods of financing, and
WHEREAS, Company and Consultant desire to enter into this arrangement upon
the terms and conditions hereof,
NOW THEREFORE, upon the consideration of the mutual promises and agreements
contained herein, the parties agree as follows:
AGREEMENT
1. Engagement of Consultant. The Company hereby engages Consultant and
------------------------
Consultant hereby agrees to render services to the Company as a corporate
finance consultant.
2. Services. During the term of this Agreement, Consultant shall provide
--------
advice to, and consult with, the Company concerning business and financial
planning, corporate organization and structure, financial matters in connection
with the operation of the business of the Company, private and public equity and
debt financing, acquisitions, mergers and other similar business combinations,
Company's relations with its securities holders, preparation and distribution of
periodic reports, and shall periodically provide to the Company analysis of the
Company's financial statements ("Financial Services"). Said advice and
consultation shall be provided to the Company in such form, manner and place as
the Company reasonably requests. In connection therewith, a representative of
Consultant shall attend directors' meetings and participate in executive
management discussions upon request of the Company's management. Except as
provided in Paragraph 9, Consultant shall not by this Agreement be prevented or
barred from rendering services of the same or similar nature, as herein
described, or services of any nature whatsoever for, or on behalf of, persons,
firms, or corporations other than Company. Similarly, Company shall not be
prevented or barred from seeking or requiring services of a same or similar
nature from persons other than Consultant.
3. Extent of Consulting Services Provided. Consultant shall be available
--------------------------------------
to provide Financial Services for not more than twenty (20) hours per month
during the term of this Agreement ("Minimum Financial Services"). In addition,
Consultant shall be available, during the term of this Agreement, for an
additional one person/days per month at the request of Company for the purpose
of providing additional Financial Services ("Additional Financial Services").
Consultant may, but shall not be required to, devote such additional time to
Company as may be requested by Company. For purposes of this Agreement, a
person/day shall be a total of eight hours of work by Consultant.
4. Term. The term of this Agreement shall be a twenty-four month period
----
commencing on the date of this Agreement and continuing through
_________________________, 1997.
5. Compensation. As compensation for the Minimum Financial Services,
------------
Company shall pay to Consultant a fee of $2,291.65 per month, which fee shall be
payable ($55,000) on the date of this Agreement. In addition, subject to the
provisions of Section 6 hereof, if Consultant provides Additional Financial
Services to Company, it shall be compensated for such Additional Financial
Services at the rate of $2,291.65 for each such additional person/day, payable
on the first day of the month following the month in which such Additional
Financial Services were rendered.
<PAGE>
6. Accumulation of Minimum Financial Services. During the term of this
------------------------------------------
Agreement, any person/days of Minimum Financial Services not requested in the
month in which Company is entitled thereto may be requested at any time during
the immediately following month's period. If not requested during such
following period, the Company waives receipt of such Financial Services.
7. Disclaimer of Responsibility for Acts of Company. The obligations of
------------------------------------------------
the Consultant described in this Agreement consist solely of Financial Services
to Company. In no event shall Consultant be required by this Agreement to act
as the agent of Company or otherwise to represent or make decisions for Company.
All final decisions with respect to acts of Company or its affiliates, whether
or not made pursuant to or in reliance on information or advice furnished by
Consultant hereunder, shall be those of Company or such affiliates and
Consultant shall under no circumstances be liable for any expense incurred or
loss suffered by Company as a consequence of such decisions.
8. Indemnity. The Company agrees to indemnify and hold Consultant, its
---------
affiliates, control persons, officers, employees, agents and sureties harmless
from and against all losses, claims, damages, liabilities, costs or expenses
(including reasonable attorneys' and accountants' fees and the cost of any of
Consultant's personnel involved in any such matter) arising out of Consultant's
entering into or performing under this Agreement, including costs arising out of
any dispute whether or not Consultant is a party to such dispute.
If for any reason the foregoing indemnification is unavailable to
Consultant, or insufficient to hold it harmless, then the Company shall
contribute to the amount paid or payable by Consultant as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect not
only the relative benefits received by the Company and its stockholders on the
one hand and Consultant on the other hand but also the relative fault of the
Company and Consultant, as well as any relevant equitable considerations. The
reimbursement, indemnity and contribution obligations of the Company under this
paragraph 9 shall be in addition to any liability which the Company may
otherwise have and shall be binding upon and inure to the benefit of any
successor, assigns, heirs and personal representatives of the Company,
Consultant and any such person. Consultant agrees to indemnify and hold the
Company, its affiliates, control persons, officers, employees and agents
harmless to the same extent and subject to the same contribution obligations and
same limitations as the Company has agreed to indemnify Consultant as set forth
above. The provisions of this paragraph 9 shall survive the termination and
expiration of this Agreement.
9. Amendment. No amendment to this Agreement shall be valid unless such
---------
amendment is in writing and is signed by authorized representatives of all the
parties to this Agreement.
10. Waiver. Any of the terms and conditions of this Agreement may be
------
waived at any time and from time to time in writing by the party entitled to the
benefit thereof, but a waiver in one instance shall not be deemed to constitute
a waiver in any other instance. A failure to enforce any provision of this
Agreement shall not operate as a waiver of this provision or of any other
provision hereof.
11. Severability. In the event that any provision of this Agreement shall
------------
be held to be invalid, illegal or unenforceable in any circumstances, the
remaining provisions shall nevertheless remain in full force and effect and
shall be construed as if the unenforceable portion or portions were deleted.
12. Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of the parties and their respective successors and permitted assigns.
Any attempt by either party to assign any rights, duties or obligations which
may arise under this Agreement without the prior written consent of the other
party shall be void.
13. Governing Law. The validity, interpretation and construction of this
-------------
Agreement and each part thereof will be governed by the laws of the State of
Colorado.
2
<PAGE>
14. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which may be deemed an original and all of which together
will constitute one and the same instrument.
15. Arbitration. The parties agree that all controversies which may arise
-----------
between them concerning any transaction, the construction, performance or breach
of this or any other agreement between them, whether entered into prior, on or
subsequent to the date hereof, or any other matter, including but not limited
to, securities activity, investment advice or in any way related thereto, shall
be determined by arbitration in accordance with the rules of the NASD. This
shall enure to the benefit of and be binding on the Company, its officers,
directors, registered representatives, agents, independent contractors,
employees, controlling persons and be binding on the Consultant, its
representatives, agents, independent contractors, employees, sureties and any
person acting on its behalf in relation to acting subject to this Agreement.
Any award rendered in arbitration may be enforced in any court of competent
jurisdiction.
COMPANY:
AJAY SPORTS, INC.
By
--------------------------------------------
Thomas W. Itin, President
CONSULTANT:
SCHNEIDER SECURITIES, INC.
By
--------------------------------------------
Thomas W. Schneider, Chief Executive Officer
3
<PAGE>
EXHIBIT 4.2
CERTIFICATE OF
DESIGNATIONS OF RIGHTS AND PREFERENCES
OF THE SERIES C 10% CUMULATIVE CONVERTIBLE PREFERRED STOCK
OF
AJAY SPORTS, INC.
----------
PURSUANT TO SECTION 151 OF THE
------------------------------
DELAWARE GENERAL CORPORATION LAW
----------
Ajay Sports, Inc., a corporation organized and existing under the laws of
the State of Delaware (the "Company") DOES HEREBY CERTIFY that the following
resolution was duly adopted by the Board of Directors of the Company at a
meeting duly held on __________, 1995:
RESOLVED, that the Board of Directors, pursuant to the authority vested in
it by the provisions of the Company's Certificate of Incorporation, hereby
establishes a series of preferred stock, consisting of 700,000 shares,
which shall be designated as the "Series C 10% Cumulative Convertible
Preferred Stock", and shall have the powers, preferences, rights,
qualifications, limitations and restrictions as set forth in Exhibit A
attached hereto.
IN WITNESS WHEREOF, the undersigned hereby acknowledges under penalty of
perjury that the execution of this instrument is the undersigned's act and deed,
that the undersigned is an authorized officer of the Company, that the
undersigned has read this Designation of Rights and Preferences and all
attachments thereto and knows the contents thereof and the facts stated therein
are true.
AJAY SPORTS, INC.
DATE:_________________________ By:__________________________________
Robert R. Hebard, Corporate Secretary
ATTEST:
- ------------------------------
Thomas W. Itin, President
<PAGE>
EXHIBIT A
DESIGNATIONS OF PREFERENCES AND RELATIVE RIGHTS OF THE SERIES C
10% CUMULATIVE CONVERTIBLE PREFERRED STOCK OF AJAY SPORTS, INC.
RESOLVED, that 700,000 shares of the Company's $.01 par value Preferred Stock
are hereby designated as shares of Series C 10% Cumulative Convertible Preferred
Stock (the "Series C Preferred Stock"), for issuance in accordance with such
actions of the Board of Directors as may be required under Delaware law, with
the following rights and preferences:
DIVIDENDS. The holders of Series C Preferred Stock will be entitled to receive,
out of assets legally available for such purpose, in equal preference and
priority to the obligations to pay dividends on the Series B Preferred Stock,
but before any distributions shall be declared, paid, or set aside, or any other
distribution shall be declared or made, upon any other shares of capital stock
of the Company, distributions in cash at the rate of 10% per annum on the stated
value of $10.00 per share, or $1.00 per share per annum. Such dividend shall be
paid on or before the 30th day after the last day of the fiscal quarter with
respect to which such distribution shall be payable commencing July 1, 1995,
such dividends to accrue from the date of first issuance. If any distributions
payable on any share of Series C Preferred Stock shall not be paid for any
reason, the right of the holders of such shares of Series C Preferred Stock to
receive payment of such distribution shall not lapse or terminate, but each such
unpaid distribution (the "Unpaid Dividends") shall accumulate and shall be paid
without interest to such holders, when and as authorized by the Board of
Directors of the Company. To the extent that the Company does not have a
sufficient amount of cash to pay any dividends declared on both the Series B and
Series C Preferred Stock, the Series C Preferred Stock shall have priority as to
payment in cash and dividends may be paid to holders of the Series B Preferred
Stock in additional shares of Series B Preferred Stock, based on the stated
value of $100.00 per share. Holders of shares of Series C Preferred Stock are
not entitled to any dividend, whether payable in cash, property, or stock, in
excess of full cumulative dividends. No distribution shall be declared,
ordered, or made upon any other class of stock of the Company, nor shall any
sums be set aside for or applied to the purchase or redemption of any shares of
any other class of stock of the Company, unless and until all Unpaid Dividends
payable upon each issued and outstanding share of Series C Preferred Stock shall
have been fully paid or a distribution shall have been declared and a sum
sufficient for full payment of the Unpaid Dividends set apart therefor.
LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution or winding
up of the Company, whether voluntary of involuntary, any holder of the Series C
Preferred Stock shall, for each share of Series C Preferred Stock, be entitled
to receive a distribution of $10.00 plus any accrued and unpaid dividends out of
the assets of the Company, on an equal preference basis to the Series B
Preferred Stock, except that such Series B Preferred Stock is entitled to a
distribution of $100.00 per share, but prior to any
Exhibit A - Page 1
<PAGE>
distribution of assets with respect to any other shares of capital stock of the
Company other than the Series B Preferred Stock, as a result of such
liquidation, distribution or winding up of the Company.
CONVERSION. At any time at the option of the holder, each share of Series C
Preferred Stock shall be convertible into shares of Common Stock. The
holders of Series C Preferred Stock who desire to convert shares of Series C
Preferred Stock to shares of Common Stock shall give the Company 30 days prior
written notice of their intention to convert, which notice shall specify that
all or a part of the shares of Series C Preferred Stock held by such holder
shall be converted to shares of Common Stock and the date upon which such
conversion shall be effective.
Should the price of the Company's Common Stock reach or exceed a closing high
bid price of $ for ten (10) consecutive business days (the "Mandatory
Conversion Event"), each share of the Series C Preferred Stock shall
automatically convert to shares of Common Stock of the Company. The
effective date of such automatic conversion shall be the day following the
Mandatory Conversion Event for the purpose of determining dividends payable and
other rights and preferences. Upon the occurrence of the Mandatory Conversion
Event, and the subsequent automatic conversion, all dividends accruing as of the
Mandatory Conversion Event shall become payable within 30 days of such date, and
additional dividends shall not accrue nor require payment subsequent to such
date.
In the event of a stock dividend or stock split with respect to the Company's
outstanding shares of Common Stock, the number of shares into which each share
of Series C Preferred Stock shall be convertible shall be proportionately
adjusted.
OPTIONAL REDEMPTION. The Company shall have the right and option upon notice to
the holders of the Series C Preferred Stock to call, redeem and acquire any or
all of the shares of Series C Preferred Stock at a price equal to $11.00 per
share, plus any accrued and unpaid dividends, at any time to the extent such
shares have not been previously converted to Common Stock pursuant to the terms
described above; provided, however, that the holders of the Series C Preferred
Stock shall, in any event, have the right during the 30-day period immediately
following the date of the Notice of Redemption, which shall fix the date for
redemption (the "Redemption Date"), to convert their shares of Series C
Preferred Stock in accordance with the terms described above. If the shares are
converted during such 30-day period, this call option shall be deemed not to
have been exercised by the Company with respect to such shares so converted.
Said Notice of Redemption shall require the holders to surrender to the Company,
on or before the Redemption Date, to the Company's transfer agent, the
certificates representing the shares of Series C Preferred Stock to be redeemed.
Notwithstanding the fact the certificates representing the shares called for
redemption have not been surrendered for redemption and cancellation on or after
the Redemption Date, such shares shall be deemed to be expired and all rights of
the holders thereof shall cease and terminate.
Exhibit A - Page 2
<PAGE>
VOTING RIGHTS. The holders of the Series C Preferred Stock shall have no voting
rights except to the extent required by the Delaware General Corporation Law.
PREEMPTIVE RIGHTS. The Series C Preferred Stock shall be entitled to no
preemptive rights.
RESOLVED FURTHER, that the appropriate officers of the Company are hereby
authorized and directed to prepare, execute and file an appropriate Certificate
of Designation of Rights and Preferences of Series C Preferred Stock with the
Delaware Secretary of State as soon as is practicable; and
RESOLVED FURTHER, that the appropriate officers of the Company are hereby
authorized and directed to prepare, execute and issue certificates representing
such shares of Series C Preferred Stock at such time as the Company has received
the consideration therefor, such shares to be issued as registered securities as
defined in the Securities Act of 1933, as amended.
Exhibit A - Page 3
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF FAY M. MATSUKAGE APPEARS HERE]
JUNE 19, 1995
Ajay Sports, Inc.
7001 Orchard Lake Road, Suite 424
West Bloomfield, Michigan 48322-3608
Gentlemen:
As counsel for your company, I have obtained an opinion letter from your
general counsel as to your Certificate of Incorporation, Bylaws, and such other
corporate records, documents, and proceedings and such questions of law as I
have deemed relevant for the purpose of this opinion.
I have also examined the Registration Statement of your company on Form S-2
which was transmitted for filing with the Securities and Exchange Commission
(the "Commission") on April 21, 1995, as well as Amendment No. 1 thereto, to be
filed with the Commission on June 20, 1995, covering the registration under the
Securities Act of 1933, as amended, of the following:
(a) 603,750 shares of Series C 10% Cumulative Convertible Preferred Stock
(the "Preferred Stock") to be sold to the public pursuant to the terms of the
Underwriting Agreement;
(b) shares of Common Stock underlying the Preferred Stock Conversion;
(c) 603,750 Common Stock Purchase Warrants (the "Warrants") to be sold to
the public pursuant to the terms of the Underwriting Agreement;
(d) 1,487,220 shares of Common Stock issuable upon exercise of the
Warrants;
(e) 52,500 Underwriter's Warrants to purchase shares of the Preferred
Stock;
(f) 52,500 shares of Preferred Stock underlying the Underwriter's Warrants;
(g) shares of Common Stock underlying the Preferred Stock conversion;
(h) 52,500 Underwriter's Warrants to purchase Warrants;
<PAGE>
Ajay Sports, Inc.
June 19, 1995
Page 2
(i) 52,500 Warrants underlying the Underwriter's Warrants; and
(j) 52,500 shares of Common Stock issuable upon exercise of the Warrants,
including the exhibits and form of prospectus (the "Prospectus") filed
therewith.
On the basis of such examination, I am of the opinion that:
1. The Company is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Delaware with all requisite
corporate power and authority to own, lease, license, and use its properties and
assets and to carry on the businesses in which it is now engaged.
2. The Company has an authorized capitalization as set forth in the
Prospectus.
3. Upon filing a certificate of designation with the Secretary of State of
Delaware, the shares of Preferred Stock of the Company to be issued pursuant to
the Underwriting Agreement or the exercise of the Underwriter's Warrants will be
validly authorized and, when (a) the pertinent provisions of the Securities Act
of 1933 and such "blue sky" and securities laws as may be applicable have been
complied with and (b) such shares have been duly delivered against payment
therefor as contemplated by the Underwriting Agreement or the Underwriter's
Warrants, such shares will be validly issued, fully paid, and nonassessable.
4. The shares of Common Stock of the Company to be issued upon the
conversion of the Preferred Stock of the Company are validly authorized and,
assuming (a) the shares of Common Stock so issuable will be validly authorized
on the dates of conversion, (b) such shares of Preferred Stock will be validly
authorized, validly issued, fully paid, and nonassessable on the dates of
conversion, and (c) no change occurs in the applicable law or the pertinent
facts, when (d) the pertinent provisions of such "blue sky" and securities laws
as may be applicable have been complied with and (e) such shares of Preferred
Stock are converted in accordance with the terms of the Certificate of
Incorporation of the Company, the shares of Common Stock so issuable will be
validly issued, fully paid, and nonassessable.
5. The Warrants have been duly authorized and, when (a) the pertinent
provisions of the Securities Act of 1933 and of such "blue sky" and securities
laws as may be applicable have been complied with, (b) the Warrants have been
executed and authenticated in the manner set forth in the Warrant Agreement, and
(c) the Warrants have been issued and delivered in the manner set forth in the
Prospectus or the Underwriter's Warrants against payment therefor, the Warrants
will have been validly executed, authenticated, issued, and delivered, will
constitute the legal, valid, and binding obligations of the Company,
<PAGE>
Ajay Sports, Inc.
June 19, 1995
Page 3
will (subject to applicable bankruptcy, insolvency, and other laws affecting the
enforceability of creditors' rights generally) be enforceable as to the Company
in accordance with their terms and the terms of the Warrant Agreement or the
Underwriter's Warrants, and will be entitled to the benefits provided by the
Warrant Agreement or the Underwriter's Warrants.
6. The shares of Common Stock of the Company to be issued upon the
exercise of the Warrants are validly authorized and, assuming (a) the shares of
Common Stock so issuable will be validly authorized on the dates of exercise,
(b) on the dates of exercise, the Warrants will have been duly executed,
authenticated, issued, and delivered, the Warrant Agreement will have been duly
executed and delivered, the Warrants and the Warrant Agreement will constitute
the legal, valid, and binding obligations of the Company, the Warrants and the
Warrant Agreement will (subject to applicable bankruptcy, insolvency, and other
laws affecting the enforceability of creditors' right generally) be enforceable
as to the Company in accordance with their terms and the terms of the Warrant
Agreement (in the case of the Warrants) and in accordance with its terms (in the
case of the Warrant Agreement), and the Warrants will be entitled to the
benefits provided by the Warrant Agreement, and (c) no change occurs in the
applicable law or the pertinent facts, when (d) the pertinent provisions of such
"blue sky" and securities laws as may be applicable have been complied with and
(e) the Warrants are exercised in accordance with their terms and the terms of
the Warrant Agreement, the shares of Common Stock so issuable will be validly
issued, fully paid, and nonassessable.
7. The Underwriter's Warrants have been duly authorized and, when (a) the
pertinent provisions of the Securities Act of 1933 and of such "blue sky" and
securities laws as may be applicable have been complied with, (b) the
Underwriter's Warrants have been executed and (c) the Underwriter's Warrants
have been issued and delivered in the manner set forth in the Prospectus against
payment therefor, the Underwriter's Warrants will have been validly executed,
issued, and delivered, will constitute the legal, valid, and binding obligations
of the Company, will (subject to applicable bankruptcy, insolvency, and other
laws affecting the enforceability of creditors' rights generally) be enforceable
as to the Company in accordance with their terms.
I hereby consent to the use of my name in the Registration Statement and
Prospectus in the section captioned "Legal Matters," and I also consent to the
filing of this opinion as an exhibit thereto. In giving this consent, I do not
thereby admit that I am within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933 or the rules and regulations of
the Commission thereunder.
Very truly yours,
/s/ FAY M. MATSUKAGE
--------------------
Fay M. Matsukage
<PAGE>
THIRD AMENDMENT TO LICENSE AGREEMENT
------------------------------------
THE LICENSE AGREEMENT made and entered into the 14th day of April 1992 and
amended on April 2, 1993, May 11, 1993 and July 1, 1994, by and between Spalding
Sports Worldwide, a division of Spalding & Evenflo Companies, Inc., (hereinafter
referred to as "Spalding") and Ajay Leisure Products Inc., (hereinafter referred
to as "Company") is further amended as follows:
Section 3.1: Term - is modified to add the following language:
-----------------
Company shall have the right to exercise an additional two year option
period July 1, 1996 to June 30, 1998 based on Spalding earning and receiving
on Company's actual net sale the minimum royalties as set forth in Exhibit D
for the year ended June 30, 1995 and further provided that as of March 31,
1996 Spalding has earned and received on actual net sales sixty percent
(60%) of the minimum royalties for the contract year ended June 30, 1996,
provided this Agreement has not been terminated in accordance with its
provisions.
Section 4.2: Minimum Royalty - The second and third paragraphs are deleted
----------------------------
in its entirety and are replaced by the following language:
Except for the balance of the current contract year which covers July 1,
1994 to June 30, 1995, effective July 1, 1995 on or before the 25th of the
first month of each quarter of any contact year (July 25, October 25,
January 25, April 25) Company shall pay Spalding a percentage of the total
annual minimum as designated in Exhibit E. However, if during the course of
a contract year Company's total royalty payments to Spalding (earned and
minimum royalties) exceed the total minimum royalty for that year, then only
earned royalties shall be paid to Spalding by Company during the balance of
that year (See Exhibit E).
Section 6.4: Trademark Notice - Paragraph 1 is deleted in its entirety and
-----------------------------
is replaced by the following language:
"Company agrees that whenever the Trademark is used, there will be notice of
the fact that "Trademark is owned by Lisco Inc., a Spalding company" or such
other notice as specified by Spalding from time to time in form, size, and
location approved by Spalding in writing".
Exhibits "D", "E" and "G" are deleted in their entirety and are replaced by
revised Exhibits "D", "E", and "G" which are attached.
Except as modified herein, the provisions of this License Agreement as
amended shall remain in full force and effect.
IN WITNESS WHEREOF the parties have caused this Amendment to the License
Agreement to be effective the 5th day of June 1995.
--- ----
SPALDING & EVENFLO COMPANIES, INC. AJAY LEISURE PRODUCTS INC.
By: /s/ PAUL L. WHITING By: /s/ C.N. YAHN
------------------------------ ------------------------
Title & Date: President 6/5/95 Title & Date: President 4-24-95
------------------- -----------------
<PAGE>
[LETTERHEAD OF HIRSCH & SILBERSTEIN, P.C. APPEARS HERE]
INDEPENDENT AUDITORS' CONSENT
-----------------------------
We consent to the use in this Registration Statement of Ajay Sports,
Inc. and Subsidiaries on Form S-2 of our report dated March 7, 1995, appearing
in the Prospectus, which is part of this Registration Statement. Such report
includes an explanatory paragraph relating to Ajay Sports, Inc. and
Subsidiaries' ability to continue as a going concern.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ HIRSCH & SILBERSTEIN
Farmington Hills, Michigan
June 12, 1995
<PAGE>
[LETTERHEAD OF COOPERS & LYBRAND APPEARS HERE]
Consent of Independent Accountants
----------------------------------
We consent to the inclusion in this registration statement on Form S-2 of our
report, which includes an explanatory paragraph related to substantial doubt
about the Company's ability to continue as a going concern, dated March 25,
1994, on our audits of the financial statements and the financial statement
schedules of Ajay Sports, Inc. and Subsidiary. We also consent to the reference
to our firm under the captions "Experts" and "Changes in and Disagreements with
Accountants or Accounting and Financial Disclosures."
/s/ COOPERS & LYBRAND LLP
Coopers & Lybrand L.L.P.
Milwaukee, WI
June 9, 1995
