<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Mark One
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition period from _____ to _____
Commission File Number 0-18204
AJAY SPORTS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 39-1644025
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1501 E. Wisconsin Street
Delavan, Wisconsin 53115 (414) 728-5521
(Address of Principal Executive Offices (Registrant's Telephone Number,
including Zip Code) including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Units (each consisting of 5 shares of Common Stock and 2 Warrants)
Warrants to purchase 1 share of Common Stock
Series C 10% Cumulative Convertible Preferred Stock
Common Stock Purchase Warrants
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the past 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
1
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The aggregate market value of the voting stock held by nonaffiliates as of
March 8, 1996 was $4,229,970. The number of shares outstanding of the
Registrant's $.01 par value common stock at March 8, 1996 was 23,345,018.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for annual meeting to be held
May 23, 1996 ("1996 Proxy Statement") have been incorporated by
reference into Part III of this Form 10-K.
2
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Ajay Sports, Inc.
Index
December 31, 1995
PART I. Page
Item 1. Description of Business 4-8
Item 2. Description of Property 9
Item 3. Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 9
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10-11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis 13-15
Item 8. Financial Statements F-1 - F-19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 15
Item 10 Directors and Executive Officers of the Registrant 16
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners and
Management 16
Item 13. Certain Relationships and Related Transactions 16
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 10-K 17-20
SIGNATURE PAGE 21
3
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PART I
Item 1. Description of Business
General
Ajay Sports, Inc. (the "Company") markets and distributes golf clubs, golf
bags, golf accessories, 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 is presently one of the
largest United States distributors of golf accessories, as well as one of the
nation's largest manufacturers and distributors of golf bags and hand-pulled
golf carts.
The Company operates the mass market segment of its 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. Palm Springs Golf, Inc. ("Palm Springs"), another
operating subsidiary, manufactures and/or markets golf clubs, golf bags, golf
gloves and clothing for distribution to the off-course pro shop markets. All
references to the Company include Ajay, Leisure Life and Palm Springs unless
otherwise specified. Palm Springs was acquired in October, 1995.
Ajay's products primarily are sold nationwide to large retailers such as
discount stores, department stores, catalog showrooms and other mass merchandise
and sports specialty outlets. The products manufactured by the Company are sold
primarily under the Spalding(R), Palm Springs(R), Rawlings(R), Pro Classic(R)
and Private Pro(R) brand names. Leisure Life's furniture products are sold
through independent retailers hardware store cooperatives and larger chains of
home and garden stores. Palm Springs products are sold through off-course golf
specialty shops.
The Company was organized under Delaware law on August 18, 1988. Its
administrative office is located at 7001 Orchard Lake Road, Suite 424, W.
Bloomfield, MI 48322, where its telephone number is (810) 851-5651, and its
executive and principal manufacturing and distribution facilities are located at
1501 E. Wisconsin Street, Delavan, Wisconsin 53115, (414) 728-5521. The Company
also operates a manufacturing and distribution facility at 215 4th Avenue North,
Baxter, TN 38544, headquarters for its Leisure Life subsidiary. Headquarters for
Palm Springs Golf, Inc. is located at 68-625 Perez Road, Ste.15, Cathedral City,
CA 92234.
Business Strategy
The Company's strategy is to maintain and improve its position as a leading
supplier of golf clubs, golf bags, golf carts, golf accessories, billiards and
leisure indoor and outdoor furniture. The Company believes that the following
competitive strengths contribute to its position as a market leader:
Strong Brand Recognition. Spalding(R), Palm Springs(R), Pro Classic(R),
Private Pro(R), and Rawlings(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 the ability to sell products through various channels,
including 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
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.
Reputation for Quality. The Company believes that the performance of its
products equals or exceeds the performance of its competitors' products at each
price point. 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 relationships that emphasize service, quality, reliability,
loyalty and commitment.
The Company maintains a sourcing office in its largest source market to
assure quality, reliability, new product ideas and a constant commercial
interface.
4
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Tradition of Innovation. Throughout its history, the Company has maintained
a tradition of new product development. A new cart line, new bag styles, new
clubs, new furniture and other new product designs for 1996 are current examples
of the Company's commitment in this area.
Breadth of Product Lines. The Company offers one of the broadest selections
of golf clubs, golf bags, golf carts, golf accessories and billiards, and a
growing list of outdoor and indoor furniture. 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
establish it as one of the nation's leading manufacturers of golf bags along
with being a leader in the golf related accessories category. Its line 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, gloves, head covers, practice balls, spikes, golf
ball retrievers, umbrellas and golf training devices. The accessory category
includes over 100 individual items.
Golf carts, golf bags and related accessories historically account for
approximately 96% of Ajay's gross sales with billiard accessories accounting for
approximately 4%. Golf clubs account for 80% of Palm Springs sales. The Company
expects Leisure Life's products to contribute over 10% of the Company's sales in
1996, increasing to 20% over the next three to five years. Palm Springs Golf's
share of total sales is expected to increase from 20% in 1996 to over 30% in
three to five years.
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 traditionally were sold to
customers through mass merchants and regional retailers. With the acquisition of
certain assets of Palm Springs in October, 1995 the Company now has distribution
through off-course golf specialty shops. 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, 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, and particularly with
the new distribution channel opened as a result of the Palm Springs Golf
acquisition, the Company intends to focus on increasing its direct sales efforts
to include smaller stores where it has historically been under-represented,
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 important to
increase its sales of products through design improvements and modifications to
existing products as well as the development and introduction of new products.
Over the past few years, the Company has introduced a number of new and
redesigned products to the market. The Company has increased its emphasis in
this area devoting additional resources in equipment, people and effort.
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
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 completed in the fourth quarter of 1995
and market introduction scheduled for mid-1996.
Leisure Life has introduced a new line of swing furniture for the 1996
sales year. This line is less expensive than its previous 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 recently
introduced. Other planned new products include a line of leisure dining tables
and multi-purpose stools.
Sports Business
5
<PAGE>
Golf, which is the primary market for 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 468 golf courses were opened
for play in 1995, versus 381 in the previous record year of 1994. This marks the
fifth straight year that the number of courses opened has increased.
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 for the year ended June 30, 1996 and $550,000,
for the years ended June 30, 1997 and 1998. 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 current liabilities on a monthly basis in excess
of 1.0. Spalding has the right to terminate the license agreement in the event
of any substantial change in the ownership, control, officers or management of
Ajay. The license agreement also prohibits Ajay from acquiring any new companies
without the prior approval of Spalding. Approximately 67%, 61%, and 61% of
Ajay's total sales related to products sold under the Spalding license agreement
during the years ended December 31, 1995, 1994, and 1993, respectively.
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 in-house and overseas. The Company is
not dependent upon any single source for any of its significant products.
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 along with off-course golf specialty shops. The Company's
largest customer is Wal-Mart, which accounted for approximately 36% of the
Company's sales in 1995.
Except for certain major accounts, the majority of Ajay's accounts are
serviced by manufacturers' representatives working on a commission basis. Ajay
services its major accounts through a combination of manufacturers'
representatives and its own in-house sales force. Palm Springs Golf services the
majority of its customers through its in-house sales staff. The furniture
business is serviced by both house sales and commissioned representatives. The
Company'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. This is evidenced by the proliferation of decks,
patios, and sun rooms. Americans are spending more time at home in a relaxed
casual manner. Home Furnishings Daily ("HFD") reported that for the year ended
December 31, 1992, the largest
6
<PAGE>
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 sun rooms 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" 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 sewn
in-house and by third party subcontractors and then shipped to Baxter,
Tennessee, where the pillows are stuffed and 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.
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 its in-house sales
force. Leisure Life has display trucks containing samples of its furniture line,
which are used to attract more dealers. Sales are also being developed with
regional chains. In addition, more national coverage is being developed through
the use of commissioned manufacturer's representatives and through exhibits at
trade shows targeted at hardware and nursery markets. The export market shows
promise of potential with current sales exceeding 5% of total sales.
Inventories and Backlog
Due to the relatively short lapse of time between placement of orders for
products and shipments, the Company normally does not consider its backlog of
orders to be significant to its business. Because of rapid delivery requirements
of its customers, the Company maintains significant quantities of finished goods
inventories to provide acceptable service levels to its customers. Inventory
turnover in mass market products is lower than for furniture and reflects
maintenance of high service standards for its mass market customer base.
The Company'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 and furniture business.
Management expects that the indoor line being developed will have higher
shipments in the fall.
To reflect the seasonality of the business, inventories will tend to be
higher from November to May.
Competition
Ajay competes in the golf bag, cart and accessory business with several
other domestic companies including in particular, Voit, Wilson, MacGregor,
Dunlop 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.
7
<PAGE>
Palm Springs Golf competes for specialty golf store retail space with over
50 competitors. Retail golf specialty stores carry many lines. The premium
brands are represented by names such as Cobra, Callaway, Carsten and Taylor.
Palm Springs offers a line of high quality and feature filled products which
sell at moderate price levels and offer high value to price ratios.
Leisure Life has had only limited operations. At this time, Leisure Life,
as compared to the large number of manufacturers of indoor and outdoor
furniture, it is not a significant competitor. There are no dominant furniture
manufacturers supplying, on a national basis, comparable cushioned, suspended
sling back comfort products specifically targeted for porches, decks, patios,
and sun rooms. There are small firms supplying on a regional basis. Management
does not believe that there are any other similar 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 tubing, plastics and paint used
in the golf product manufacturing and assembly process are purchased primarily
from domestic sources. Many of the component parts such as golf head covers,
graphite shafts, club heads, 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 the Company anticipates no significant difficulty in obtaining raw
materials or components, although some such purchases may be at increased
prices.
Leisure Life also 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 has not experienced difficulty in obtaining raw materials.
Patents
Ajay, Leisure Life and Palm Springs own numerous patents and have
proprietary knowledge relating to their product lines. Management does not
believe that the loss of any of its patents would have a material adverse effect
on its business.
Employees
As of March 8, 1996, the Company had a total of 409 employees: 110
employees at the Delavan, Wisconsin facility, 214 employees at the Mexicali,
Mexico facility, 62 employees at the Baxter, Tennessee facility and 23 at the
Cathedral City, California facility. The Company considers its current relations
with its employees to be good.
Item 2. Description of Property
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 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 Leisure de Mexico, S.A. de C.V.,
Ajay leases an additional manufacturing facility consisting of approximately
40,000 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.
Leisure Life owns its manufacturing, assembly, and warehouse facility in
Baxter, Tennessee, which consists of approximately 40,000 square feet of
manufacturing and warehousing space, located on 2.8 acres.
Palm Springs leases an administrative, assembly and warehouse facility in
Cathedral City, California, which consists of approximately 17,000 square feet.
8
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These facilities adequately meet the Company's production capacity
requirements. The Company, on average, utilizes approximately 80% of its
facility square footage. 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.
Item 3. Legal Proceedings
The Company, through its operating subsidiaries, Ajay, Palm Springs 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. The Company faces the
risk of exposure to product liability claims if consumers using the Company's
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 it will avoid significant product liability exposure. Based on historical
experience, Ajay, Leisure Life and Palm Springs 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.
Depositions continued to be taken during March of 1996.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter.
9
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
The Company's Common Stock, Units and Warrants are traded on the NASDAQ
Stock Market's Small Cap Market. 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>
BID ASK
High Low High Low
COMMON STOCK ---- --- ---- ---
1994
<S> <C> <C> <C> <C>
First Quarter $ .44 $ .31 $ .47 $ .38
Second Quarter $ .44 $ .13 $ .50 $ .19
Third Quarter $ .59 $ .25 $ .63 $ .31
Fourth Quarter $ .59 $ .34 $ .69 $ .41
1995
First Quarter $ .59 $ .38 $ .66 $ .44
Second Quarter $ .75 $ .47 $ .78 $ .53
Third Quarter $ .69 $ .56 $ .75 $ .59
Fourth Quarter $ .63 $ .34 $ .66 $ .41
UNITS
1994
First Quarter $ 2.00 $ 1.00 $ 2.50 $ 2.00
Second Quarter $ 2.38 $ 0.50 $ 2.88 $ 1.00
Third Quarter $ 3.25 $ 1.38 $ 4.00 $ 2.00
Fourth Quarter $ 3.00 $ 2.00 $ 4.00 $ 2.88
1995
First Quarter $ 2.75 $ 2.00 $ 3.75 $ 2.75
Second Quarter $ 3.75 $ 2.38 $ 4.63 $ 3.13
Third Quarter $ 4.00 $ 3.13 $ 4.50 $ 4.00
Fourth Quarter $ 4.25 $ 2.00 $ 4.75 $ 2.75
WARRANTS
1994
First Quarter $ .06 $ .03 $ .13 $ .09
Second Quarter $ .03 $ .03 $ .13 $ .09
Third Quarter $ .34 $ .03 $ .41 $ .06
Fourth Quarter $ .25 $ .13 $ .28 $ .19
1995
First Quarter $ .19 $ .13 $ .25 $ .19
Second Quarter $ .28 $ .16 $ .31 $ .22
Third Quarter $ .41 $ .19 $ .44 $ .25
Fourth Quarter $ .22 $ .06 $ .25 $ .13
</TABLE>
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PREFERRED STOCK
<TABLE>
<S> <C> <C> <C> <C>
1995
First Quarter NA NA NA NA
Second Quarter NA NA NA NA
Third Quarter $10.13 $ 9.00 $11.00 $ 9.50
Fourth Quarter $ 9.13 $ 5.88 $ 9.50 $ 6.50
</TABLE>
Holders
The number of record holders of the Company's stock and warrants according
to the Company's transfer agent, as of March 8, 1996 are as follows:
Common Stock 388
Preferred B 1
Preferred C 10
Warrant A 50
Warrant B 3
The Company believes that it has at least an additional 1,400 beneficial owners
of its common stock whose shares are held in "street" or "nominee" name.
Dividends
Holders of shares of Common Stock are entitled to dividends when, and if,
declared by the Board of Directors out of funds legally available. The Company
has not paid any dividends on its Common Stock and intends to retain future
earnings 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. In addition, Ajay's Loan Agreement with U.S.
Bank restricts Ajay from paying common dividends.
On July 26, 1995 the Company's Registration Statement filed in connection
with an offering of 325,000 shares of Series C 10% Cumulative Convertible
Preferred Stock and 325,000 Warrants was declared effective. The Series C
Preferred Stock with a stated value of $10.00 per share is convertible into
shares of the Company's Common Stock at a conversion price of $0.6875 for each
share of common stock. Cumulative dividends at an annual rate of $1.00 per share
are payable on the Series C Preferred Stock. The Warrants are redeemable by the
Company at $.05 per Warrant under certain conditions. The terms of these
Warrants are identical to the Company's publicly-held Warrants to purchase
Common Stock. The Company has used the net proceeds for inventory and accounts
receivable financing and to acquire certain assets of Korex Corporation (a
former competitor in golf bags and accessories) and Palm Springs Golf Company,
Inc..
The Company has declared the following Series C 10% Cumulative Convertible
Preferred Stock dividends:
Declaration Date Amount per Share Record Date Payment Date
09/25/95 $0.1825 10/03/95 10/25/95
12/19/95 $0.2500 12/31/95 01/25/96
02/29/96 $0.2500 03/29/96 04/25/96
11
<PAGE>
Item 6. Selected Financial Data
Overview
The following table presents summary historical consolidated
financial data derived from audited financial statements of the Company (in
thousands, except per share amounts).
<TABLE>
<CAPTION>
Year Ended December 31,
Statement of Operations: 1995 1994 1993 1992 1991
-------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Net sales $18,728 $12,899 $15,902 $21,014 $20,049
Cost of sales 15,291 12,291 14,172 17,156 16,135
------ ------ ------ ------ ------
Gross profit 3,437 608 1,730 3,858 3,914
Selling, general and
administrative expenses 3,247 2,747 2,834 2,896 3,237
------ ------ ------ ------ ------
Operating income (loss) 190 (2,139) (1,104) 962 677
Nonoperating income (expense):
Interest expense - net (801) (614) (697) (906) (854)
Loss on write down of investment in
(advances to) affiliate - - (123) - (2,014)
Gain (loss) on disposition of
investment in affiliate, net - (38) - 275 -
Other, net (41) (289) 3 50 70
------ ------ ------ ------ ------
Income (loss) from operations before
income taxes (652) (3,080) (1,921) 381 (2,121)
------ ------ ------ ------ ------
Income tax expense (benefit) (208) - - - -
------ ------ ------ ------ ------
Net income (loss) $ (444) $(3,080) $(1,921) $ 381 $ (2,121)
====== ====== ====== ====== ======
Net income (loss) per common share $ (.03) $ (.27) $ (.24) $ .02 $ (.26)
====== ====== ====== ====== ======
Weighted average common and
common stock equivalent
shares outstanding 22,722 12,218 8,812 8,457 8,270
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
Balance sheet data: 1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Working capital $ 6,323 $ 593 $ 903 $ 2,754$ $ 6,954
Total assets $ 18,486 $ 9,365 $ 10,507 $ 12,783 $ 11,792
Long term debt $ 5,111 $ 121 - - $ 8,254
</TABLE>
12
<PAGE>
Item 7. 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, 1994 and 1995
and improving the financial condition of the Company.
Results of Operations
In 1995 the Company's net sales were $18.7 million, an increase of $5.8
million, or 45.0% compared to 1994. The overall sales increase occurred
throughout all of the Company's product lines and with respect to both major and
secondary customers categories except for accessories and billiards. Sales of
golf product lines increased by $568,000 for carts, $2,158,000 for gloves,
$1,500,000 for bags and decreased by $179,000 for golf accessories. Sales of
billiard accessories decreased by $323,000. Through the acquisition of Palm
Springs, the Company has added several golf club lines. Sales of golf clubs in
1995, since the acquisition in October 1995, was $836,000. Ajay has undertaken
steps to continue to improve results in its 1996 sales programs. With new
product designs, new sales representation, and improved product lines,
management is optimistic that customers will continue to increase their share of
Ajay product purchases for the 1996 season. The Company's sales for 1996 are
expected to increase significantly as a result of the acquisitions of certain
assets of Palm Springs Golf Company, Inc., Korex Corp. and growth of the golf
and furniture businesses.
In 1994 the Company's net sales were $12.9 million, 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 in 1994 reflected the trend of
supply base consolidation by major customers. In 1994, sales of golf product
lines decreased by $295,000 for carts, $477,000 for gloves , $2 million for bags
and $495,000 for golf accessories. Billiard accessories increased by $155,000 as
a result of increased emphasis on distribution of this product line. 1994
represented the low point of a 2 year business decline which was reversed in
1995 as a result of a company-wide commitment to improving the financial
condition and results of the Company.
Operating profit for the Company was $190,000 for 1995, an increase of $2.3
million compared to an operating loss of $2.1 million in 1994. The $2.3 million
turnaround in operating profit resulted from management's plan to improve 1995
sales programs, new product designs, new sales representation and improved
product lines. Management was also successful in reducing cost and improving
efficiency. Operating loss for the Company was $2.1 million for 1994, a decrease
of $1.0 million, compared to an operating loss of $1.1 million for 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.
Selling, general and administrative expenses were $3.2 million, $2.7 million
and $2.8 million, representing 17.3%, 21.3% and 17.6% of sales in 1995, 1994 and
1993 respectively. The 1995 results reflect the acquisition of Palm Springs
Golf, which contributed $101,000 to selling, general and administrative
expenses. The 4 percentage point improvement in selling, general and
administrative expenses, as a percent to sales is due to managements' plan to
improve efficiency along with the benefit of increased sales.
Interest expense was $801,590 for 1995, an increase of 187,365, or 30.5%
compared to interest expense of $614,225 in 1994. The increase in interest
expense in 1995 was a result of more debt to finance inventory, fund Leisure
Life's start-up losses and to finance the acquisitions of certain assets of
Korex Corp. and Palm Springs Golf, Co. Inc. Acquisition financing accounted for
68% of the increase in interest expense. The decrease in interest expense in
1994 compared with 1993 was a result of less debt to finance inventory.
13
<PAGE>
The Company had no income tax liability for 1995, 1994 and 1993.
Financial Condition
At December 31, 1995 the Company had working capital of $6,324,000, compared
with $593,000 at December 31, 1994. This $5.7 million increase reflects capital
received from the Preferred Stock offering, benefits from the restructuring of
debt through a newly established loan agreement with U. S. National Bank of
Oregon (see liquidity) and increased inventory and receivables due to the Korex
and Palm Springs Golf acquisitions. The ratio of current assets to current
liabilities at December 31, 1995 was 1.7, an increase of .6 over December 31,
1994's current ratio of 1.1.
Inventories at December 31, 1995 were $8,909,000 compared to $5,786,000 at
December 31, 1994. Trade accounts receivable were $5,196,000 at December 31,
1995 compared to $1,700,000 at December 31, 1994. The increases in both
inventories and trade accounts receivable were due primarily to the additional
inventory of $2,930,000 and receivables of $2,380,000 as a result of the Korex
and Palm Springs acquisitions. Sales of non-acquired businesses were up 44% in
the 4th quarter which also added $940,000 to year-end receivables.
Net machinery and equipment at December 31, 1995 and 1994 were $1,888,000
and $1,357,000, respectively. The increase reflects the acquisitions of Korex
and Palm Springs Golf.
Capital Resources
The Company expended $236,000 in 1995 for capital expenditures, which was
used principally for tooling of new products introduced in 1995 and for
construction of additional factory space for Leisure Life. The Company's capital
expenditures for 1994 were $115,000 which was used principally for tooling of
new products introduced in 1994. Capital expenditures for 1996 will be similar
to 1995 and financed from operations.
Liquidity
Cash flow from operations was negative by $6,266,000, reflecting the
increases in working capital requirements of $5.5 million from two acquisitions
and a net loss of $644,000. These working capital increases resulted from the
acquisitions of Korex and Palm Springs.
Financing of the increased cash out flow came from proceeds of a stock
offering and proceeds from an increased credit line.
The Company's liquidity is primarily affected by its financing requirements.
The seasonal nature of the Company's sales creates fluctuating cash flow, due to
the temporary build-up of inventories in anticipation of, and receivables
during, the peak seasonal period which historically has been from February
through May of each year. The Company has relied and continues to rely heavily
on revolving credit facilities for its working capital requirements.
On July 25, 1995 the Company entered into a Revolving Loan Agreement with
United States National Bank of Oregon ("U.S. Bank") for a credit facility of up
to $8,500,000, replacing a Loan Agreement with an affiliate, Williams Controls,
Inc. ("Williams"). All of the Company's subsidiaries and Williams have
guaranteed payment of this credit facility and the Company and its subsidiaries
have pledged their inventory and receivables as collateral. The Revolving Loan
is evidenced by demand notes, requires monthly interest only payments at the
prime rate of U. S. Bank (currently 8.25%) plus a loan guaranty fee of 0.5%
payable to Williams Controls, Inc. and will be reviewed on May 31, 1996. On
October 2, 1995 the Company and U.S. Bank agreed to modifications to the
Revolving Loan Agreement increasing the credit facility from $8,500,000 to
$13,500,000 in order to accommodate two proposed acquisitions. The Company may
now borrow up to $8,500,000 against 80% of eligible accounts receivable and 50%
of eligible inventory and up to an additional $5,000,000 through its 2-year
bulge loan facility. The increased facility provided the Company the funds
necessary to acquire certain assets of both Korex Corporation ("Korex") and Palm
Springs Golf Company, Inc. in early October, 1995. The Company is required to
maintain a minimum tangible net worth of $2,000,000 and a ratio of liabilities
to tangible net worth of not greater than 4.5 to 1. The Company has requested
from U. S. Bank that the liabilities to tangible net worth ratio be temporarily
increased to allow for the effect on the debt leverage ratio of $1.3 million of
intangibles obtained through its acquisitions of Korex and Palm Springs in
October 1995.
The Company has agreed to pay Williams 0.5% per annum of the outstanding
loan balance on a quarterly basis in consideration for providing its guarantee
of the Revolving Loan. From May 5, 1994 through July 25, 1995 Ajay had
14
<PAGE>
operated within a $7,000,000 Loan Agreement and Joint Venture Implementation
Agreement with Williams . The loan with Williams was paid off on July 25, 1995
with funds made available from the present Loan Agreement with U. S. Bank. Prior
to paying off the loan with Williams, the Company and Williams agreed on April
5, 1995 to modifications of the terms of the Loan Agreement and the Joint
Venture Implementation Agreement.
On July 26, 1995 the Company's Registration Statement filed in connection
with an offering of 325,000 shares of Series C 10% Cumulative Convertible
Preferred Stock and 325,000 Warrants was declared effective. This offering
generated $2.8 million of net proceeds to the Company. The Series C Preferred
Stock is convertible into shares of the Company's Common Stock at a conversion
price of $0.6875. Cumulative dividends are payable on the Series C Preferred
Stock at $1.00 per share annually. The Warrants are redeemable by the Company at
$.05 per Warrant under certain conditions. The terms of these Warrants are
identical to the Company's publicly-held Warrants to purchase Common Stock. The
Company has used the $2.8 million net proceeds for inventory and accounts
receivable financing and to acquire certain assets of Korex and Palm Springs.
The Company believes it has the ability to generate sufficient internal cash
flow to finance its present operations for the ensuing 12-month period.
Item 8. Financial Statements
Financial statements are attached hereto following Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On July 21, 1994, the Company engaged Hirsch & Silberstein, P.C., 31731
Northwestern Highway, Suite 156W, Farmington Hills, Michigan 48334, as the
independent accountants to audit the Company's financial statements for the year
ending December 31, 1994. Hirsch & Silberstein replaced Coopers & Lybrand who,
on June 2, 1994, informed the Company that the client-auditor relationship
between the Company and Coopers had ceased.
The report of Hirsch and Silberstein on the Company's financial statements
for the fiscal year ended December 31, 1994 was qualified as to uncertainty
concerning the Company's ability to continue as a going concern due to
significant losses during 1993 and 1994. That qualification was removed as part
of the completion of the 1995 audit.
The report of Coopers on the Company's financial statements for the fiscal
year ended December 31, 1993 was qualified as to 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 a new loan agreement with another
company.
In connection with the audit for the years ended December 31, 1992 and 1993,
there have been 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 had ceased.
15
<PAGE>
PART III
Item 10. Directors and Executive Officers of the registrant
The applicable information set forth in the Registrant's 1996 Proxy
Statement is incorporated herein by reference.
Item 11. Executive Compensation
The applicable information set forth in the Registrant's 1996 Proxy
Statement is incorporated herein by reference.
Item 12. security Ownership of Certain Beneficial Owners and Management
The applicable information set forth in the Registrant's 1996 Proxy
Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The applicable information set forth in the Registrant's 1996 Proxy
Statement is incorporated herein by reference.
16
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 10-K
(a) 1. Financial Statements:
Ajay Sports, Inc. and Subsidiary
Consolidated Financial Statements of Ajay
Sports, Inc. and Subsidiary:
Reports of Independent Accountants
Consolidated Balance Sheets - December 31, 1995
and 1994
Consolidated Statements of Operations - Years
ended December 31, 1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity Years ended December
31, 1995, 1994 and 1993
Consolidated Statements of Cash Flow - Years ended December 31, 1995,
1994 and 1993
Notes to Financial Statements
2. Financial Statement Schedules:
Ajay Sports, Inc. and Subsidiary:
Schedule VIII - Valuation and Qualifying Accounts - Years ended
December 31, 1995, 1994 and 1993
3. Exhibits required by Item 601 of Regulation S-K
The following exhibits designated with a "-" symbol represent the
Company's Management Contracts or Compensatory Plans or arrangements
for executive officers:
Exhibit 2.1 Agreement of Purchase and Sale of Business,
Including Purchase of Stock - Leisure Life, Inc. 8/94 (7)
Exhibit 3.1 Articles of Incorporation and
Bylaws and all amendments thereto (1)
Exhibit 4.1 Certificate of Designations of
Rights and Preferences of the Series A 8%
Cumulative Convertible Preferred Stock of Ajay
Sports, Inc. (2)
17
<PAGE>
PART IV
CONTINUED
Exhibit 4.2 Amendment dated February 9, 1992 to the Certificate of
Designations of Rights and Preferences of the Series A 8% Cumulative
Preferred Stock of Ajay Sports, Inc. (4)
Exhibit 4.3 Certificate of Designations of Rights
and Preferences of the Series B 8% Cumulative
Convertible Preferred Stock of Ajay Sports, Inc. (7)
Exhibit 4.4 Certificate of Designations of Rights and
Preferences of the Series C 10% Cumulative Preferred Stock
of Ajay Sports, Inc. (8)
Exhibit 10.1 License Agreement dated April 14,
1992 between Spalding Sports Worldwide and Ajay
Leisure Products, Inc. (2)
Exhibit 10.2 Licensing Agreement dated
June 15, 1989 between Roadmaster Corporation and
Ajay Leisure Products, Inc. (1)
Exhibit 10.3 First Amendment to the April 14, 1992 Spalding License
Agreement dated April 2, 1993 (4)
Exhibit 10.4 Exchange Agreement dated
October 13, 1993 between TICO, Ajay Sports,
Inc., Ajay Leisure Products, Inc., Roadmaster
Industries, Inc., Roadmaster Corporation
and Equitex, Inc. (5)
Exhibit 10.5 Williams/Ajay Loan and Joint Venture
Implementation Agreement dated May 6, 1994 (7)
Exhibit 10.6 Second Amendment to the April 14, 1992 Spalding License
Agreement dated July 1, 1994 (7)
- Exhibit 10.7 Employment Agreement dated July 31,
1994 between Robert D. Newman, Leisure Life, Inc.
and Ajay Sports, Inc. (7)
Exhibit 10.8 1994 Stock Option Plan (6)
Exhibit 10.9 1995 Stock Bonus Plan (6)
Exhibit 10.10 Third Amendment to the April 14, 1992 Spalding License
Agreement dated June 5, 1995 (8)
Exhibit 10.11 Revolving Loan Agreement dated July 25, 1995
Between Ajay Sports, Inc. and United States National Bank of
Oregon, including Guaranties, Security Agreements, and Other
Loan Documents (8)
18
<PAGE>
PART IV
CONTINUED
Exhibit 10.12 First Amendment to the July 25, 1995 Revolving Loan
Agreement dated October 2, 1995, including amendment to Bulge Loan
Note, Supplement to Guaranty and Amendment to Revolving Loan Note (9)
Exhibit 99.1 Proxy Statement for the Registrant's 1996 Annual Meeting
of Stockholders - filed by the Registrant pursuant to Regulation 14A
and incorporated herein by reference
Exhibit 21.0 List of Subsidiaries
Exhibit 23.0 Consent of Independent Accountants
(1) Previously filed with and incorporated by reference from the
Registrant's Registration Statement on Form S-18 No. 33-30760.
(2) Previously filed with and incorporated by reference from the
Registrant's Form 10-K filed for the year ended December 31,
1991. (SEC File No. 0-18204)
(3) Previously filed and incorporated by reference from the
Registrant's Form 10-Q for the quarterly period ended 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 Form 10-K filed for December 31, 1993. (SEC File No.
0-18204)
(6) Previously filed with and incorporated by reference from the
Registrant's Registration Statement on Form S-8, No. 33-89,650.
(7) Previously filed with and incorporated by reference from the
Registrant's form 10-K filed for December 31, 1994. (SEC File No.
0-18204)
(8) Previously filed with and incorporated by reference from the
Registrant's Registration Statement on Form S-2, File No.
33-58753.
(9) Previously filed with and incorporated by reference from the
Registrant's Form 10-Q for the Quarterly period ended September
30, 1995. (SEC file No. 0-18204)
19
<PAGE>
PART IV
CONTINUED
(b) Reports on Form 8-K
During the last quarter of the 1995 fiscal year the Company filed two
reports on Form 8-K and one report on 8-K/A.
Date of
Report Subject
10/2/95 Item 5, Other Events - Purchase by Ajay Leisure Products of
certain assets of Korex Corporation.
10/6/95 Item 2, Acquisition or Disposition of Assets - Registrant
reported the acquisition of substantially all of the assets
of Palm Springs Golf Company, Inc.
10/6/95 Item 7, Financial Statements and Exhibits - Registrant
reported the audited financial statements and pro forma
financial information related to the acquisition of Palm
Springs Golf Co., Inc.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, Ajay Sports, Inc. has duly caused this Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in West Bloomfield, Michigan on the 26th day of March, 1996.
AJAY SPORTS, INC.
By: \s\Thomas W. Itin
-------------------------
Thomas W. Itin, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report on Form 10-K has been signed below by the following persons in the
capacities indicated and on the dates indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
\s\Thomas W. Itin President, March 26, 1996
- ---------------------- Treasurer,
Thomas W. Itin and Director
\s\Duane R. Stiverson Vice President March 26, 1996
- ---------------------- and Chief
Duane R. Stiverson Financial Officer
\s\Robert R. Hebard Secretary March 26, 1996
- ---------------------- and Director
Robert R. Hebard
\s\Anthony B. Cashen Director March 26, 1996
- ----------------------
Anthony B. Cashen
\s\ Clarence H. Yahn Director March 26, 1996
- ----------------------
Clarence H. Yahn
\s\ Stanley V. Intihar Director March 26, 1996
- ----------------------
Stanley V. Intihar
\s\ Robert D. Newman Director March 26, 1996
- --------------------
Robert D. Newman
21
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
Board of Directors
Ajay Sports, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Ajay
Sports, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. We have also audited the related consolidated financial
statement schedule listed in the index in Item 14 of this Form 10-K for the
years ended December 31, 1995 and 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial
statements and financial statement schedule of Ajay Sports, Inc. and
Subsidiaries as of December 31, 1993 were audited by other auditors whose report
dated March 25, 1994, included an explanatory paragraph describing going concern
uncertainties.
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, 1995 and 1994, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
- -------------------------------
Hirsch & Silberstein, P.C.
Farmington Hills, Michigan
March 21, 1996
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Shareholders and Board of Directors
Ajay Sports, Inc. and Subsidiary
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Ajay Sports, Inc. and Subsidiary for the
year ended December 31, 1993. We have also audited the related consolidated
financial statement schedule listed in the index in item 14 of this Form 10-K.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Ajay Sports, Inc. and Subsidiary for the year ended December
31, 1993, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
The accompanying consolidated financial statements and financial
statement schedule 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 and financial statement schedule do not include any
adjustments that might result from the outcome of this uncertainty.
Coopers & Lybrand, L.L.P.
Milwaukee, Wisconsin
March 25, 1994
F-1a
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
as of December 31, 1995 and 1994
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 362 $ 105
Accounts receivable, net of allowance of $287 and $101,
respectively 5,196 1,700
Inventories 8,909 5,786
Prepaid expenses and other 365 211
Deferred tax benefit 102 -0-
------ ------
Total current assets 14,934 7,802
Fixed assets, net 1,888 1,357
Other assets 236 206
Deferred tax benefit 106 -0-
Goodwill 1,322 -0-
------ ------
Total assets $ 18,486 $ 9,365
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to affiliate $ -0- $ 5,369
Notes payable to banks 5,793 12
Current portion of capital lease 6 9
Accounts payable 2,181 1,329
Accrued expenses 631 490
------ ------
Total current liabilities 8,611 7,209
Notes payable - long term 5,111 121
Stockholders equity:
Preferred stock - 10,000,000 shares authorized
Series B, $0.01 par value, 12,500
shares outstanding at liquidation valu 1,250 1,250
Series C, $10.00 par value 313,790 shares outstanding at stated
value 3,138 -0-
Common stock, $0.01 par value, 100,000,000 shares authorized,
23,337,746 and 22,686,873 shares outstanding, respectively 234 225
Additional paid-in capital 9,123 8,961
Accumulated deficit (8,981) (8,401)
------ ------
Total stockholders' equity 4,764 2,035
------ ------
Total liabilities and stockholders' equity $ 18,486 $ 9,365
====== ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations for the years ended December 31, 1995,
1994, and 1993 (in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended
------------------------------------------
December 31, December 31, December 31,
1995 1994 1993
----------- ----------- ------------
<S> <C> <C> <C>
Operating data:
Net sales $ 18,728 $ 12,899 $ 15,902
Cost of sales 15,291 12,291 14,172
Gross profit 3,437 608 1,730
Selling, general and administrative expenses 3,247 2,747 2,834
Operating income (loss) 190 (2,139) (1,104)
Nonoperating income (expense):
Interest expense - net (801) (614) (697)
Loss on write down of investment in affiliate -0- -0- (123)
Gain (loss) on disposition of investment -0- (38) -0-
Other, net (842) (941) (817)
Income (loss) from operations before income taxes (652) (3,080) (1,921)
Income tax expense (benefit) (208) -0- -0-
Net loss $ (444) $ (3,080) $ (1,921)
Net loss per share $ (0.03) $ (0.27) $ (0.24)
Weighted average common and common stock
equivalent shares outstanding 22,722 12,218 8,812
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1995, 1994 and 1993
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Additional Total
Preferred Stock Common Stock Paid - in Accum Stockholders'
Shares Amount Shares Amount Capital (Deficit) Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1993 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)
Balance 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 - -
Common stock issued to
affiliate to reduce debt - - 4,117,647 41 1,359 - 1,400
Common stock sold to affiliate - - 2,941,177 29 971 - 1,000
Net loss - - - - - (3,080) (3,080)
Balances at December 31, 1994 12,500 1,250 22,533,637 225 8,961 (8,401) 2,035
Common stock issued to ESOP - - 12,000 - 4 - 4
Common stock issued to
fund acquisition - - 895,054 9 572 - 581
Common stock issued to affiliate
for acquisition services - - 100,000 1 37 - 38
Common stock issued in lieu of
wages to officer - - 34,000 1 9 - 10
Preferred stock public offer 325,000 3,250 - - (386) - 2,864
Preferred stock converted into
common stock (11,210) (112) 163,055 2 110 - -
Common shares received as
an acquisition cost adjust - - (400,000) (4) (184) - (188)
Dividends - - - - - (136) (136)
Net loss - - - - - (444) (444)
Balances at December 31, 1995 326,290 $ 4,388 23,337,746 $ 234 $ 9,123 $ (8,981) $ 4,764
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-4
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended December 31, 1995, 1994 and 1993 (in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (444) $(3,080) $ (1,921)
Adjustments to reconcile to net cash flows from operating
activities:
Loss on sale of assets -0- 162 -0-
Depreciation and amortization 219 129 128
Loss on write down of investment in and advances to affilate -0- -0- 123
Stock issued to officer and employees -0- 52 -0-
(Increase) decrease in accounts receivable, net (3,496) 299 980
(Increase) decrease in inventories (3,123) 1,662 1,144
(Increase) in deferred tax benefits (208) -0- -0-
(Increase) decrease in prepaid expenses (154) (112) 114
(Increase) decrease in other assets (66) 22 -0-
Increase (decrease) in accounts payable 852 (1,530) 611
Increase (decrease) in accrued expenses 141 18 (108)
(Decrease) in due to affiliates - (240) (17)
------ ------ ------
Net cash provided by (used in) operating activit (6,279) (2,618) 1,054
------ ------ ------
Cash flows from investing activities:
Acquisitions of property plant and equipment (787) (115) (226)
Goodwill associated with acquisitions (1,329) -0-
Proceeds from sale of equipment 5 4 -0-
Proceeds from sale of investment -0- 86 -0-
Investments in and advances to affiliates -0- -0- 15
------ ------ ------
Net cash (used in) investing activities (2,111) (25) (211)
------ ------ ------
Cash flows from financing activities:
Cash acquired (expended) in acquisitions -0- 2 -0-
Proceeds from issuance of notes payables to affili -0- 6,770 -0-
Net increase (decrease) in bank notes payable 10,777 (5,026) (841)
Payments on notes payable - affiliate (5,369) -0- -0-
Dividends paid (58) -0- -0-
Proceeds from preferred stock offering, net of rel 2,864 -0- -0-
Stock issued in acquisitions 433 -0- -0-
Proceeds from private placements, net of related c -0- 1,000 -0-
------ ------ ------
Net cash provided by (used in) financing activit 8,647 2,746 (841)
------ ------ ------
Net increase in cash 257 103 2
Cash at beginning of period 105 2 -0-
------ ------ ------
Cash at end of period $ 362 $ 105 $ 2
====== ====== ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 5
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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. The Company was also relying on related parties to
fund its operations. As a result of sales declines and significant net
losses, the Company was uncertain of its ability to extend and/or
refinance its debt. These factors raised substantial doubt about the
Company's ability to continue as a going concern as of December 31, 1994
and 1993. The consolidated financial statements for the years 1994 and
1993 do not include any adjustments that might have been necessary if the
Company was unable to continue as a going concern.
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, 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, late in the third quarter of 1993, 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.
In July 1995 the Company was able to obtain new financing with
United States National Bank of Oregon which enabled it to reduce its
reliance on related parties for funding. Also during July 1995 the Company
completed a Preferred Stock Offering which provided approximately
$2,800,000 for working capital, net of related fees and costs. See Notes 6
and 8.
In October 1995 the Company acquired substantially all of the
operating assets of Korex Corporation and Palm Springs Golf Company, Inc..
Management has instituted certain expense reducing programs related to
these acquisitions along with expansion of sales, marketing, and product
development activities.
The above factors contributed to the substantial improvement in
operating performance during 1995 and management feels these factors will
enable the Company to achieve profitability during 1996.
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"), Leisure Life,
Inc. ("Leisure"), and Palm Springs Golf Company ("Palm Springs"),
collectively referred to herein as the "Company". The inventories and
fixed assets purchased from Korex Corporation have been merged with Ajay
Leisure Products, Inc. All significant intercompany balances and
transactions have been eliminated.
INVENTORIES - Inventories are stated at the lower of cost or market with
cost determined using the first-in, first-out method.
F-6
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SIGNIFICANT ACCOUNTING POLICIES, Continued
FIXED ASSETS - Fixed assets are stated at cost, less accumulated
depreciation of $545,000 and $243,000 as of December 31, 1995 and 1994
respectively. Fixed assets of the Company consist primarily of machinery
and equipment, office equipment, and a building. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets, which range from four to thirty-nine years.
GOODWILL - The Company has recorded goodwill as a result of the
acquisitions of Palm Springs and Korex. The goodwill is being amortized
over forty years. Amortization expense related to the goodwill was $7,000
for the year ended December 31, 1995.
OTHER ASSETS - Other assets at December 31, 1995 consists of patents and
trademarks held and applied for by Leisure Life and Palm Springs (See Note
8c). Other assets at December 31, 1994 consists of patents and trademarks
held and applied for by Leisure Life.
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.
F-7
<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 major shareholder in Enercorp and
a Director of the Company. Enercorp acquired 1,764,706 common shares on
October 3, 1994. In 1995 Enercorp acquired 2,000 shares of series C
preferred stock. In 1995 Enercorp also received 100,000 shares of common
stock for services rendered in connection with the Palm Springs
acquisition.
WILLIAMS CONTROLS, INC. - ("Williams") - Williams has the same chairman as
the Company, which individual is a major shareholder of each company.
F-8
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(a) Roadmaster
Ajay purchased various finished goods inventory, primarily
hand-pulled golf carts, from Roadmaster. Purchases in 1993 were
approximately $123,000. Prior to 1993, Ajay leased certain
machinery and equipment from Roadmaster. The net result of this
activity represented amounts due to Roadmaster of $42,000 at
December 31, 1993. 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 1993, the Company entered into an agreement with certain
parties (as described in Note 3c). 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.
(b) Pro Mark, Inc.
The Company had an exclusive marketing agreement with Pro Mark for
the "Double Eagle" product line. In 1993 Pro Mark discontinued
operations.
Due to operating losses of Pro Mark and the cessation of
operations in 1993, 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, Inc.
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 trade
name.
The Company and TICO agreed to obtain the release and satisfaction
in full of any and all obligation, guarantees and collateral of
Equitex under the revolving credit facility, described in Note 6
including the release of 1,000,000 shares of Roadmaster common
stock owned by Equitex and pledged to a bank as collateral. The
Company's president and TICO further agreed to transfer to
Roadmaster all the Roadmaster common stock purchase warrants held
by the Company's president along with TICO's payment of $200,000
to Roadmaster.
Based upon completion of the Exchange Agreement in 1994 and
refinancing of debt obligations, the Board of Directors of the
Company approved a plan to, at the option of TICO or its assigns,
convert the value of instruments transferred to TICO under the
Exchange Agreement, in whole
F-9
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 1994, Equitex earned a fee of $40,000 as a result of the
extension of the revolving credit facility with the bank. As part
of the Exchange Agreement this amount was transferred to TICO and
paid in June, 1994
First Equity established a letter of credit on behalf of the
Company in December, 1993, which was amended during 1994, totaling
$271,200. This letter was established to purchase inventory. In
addition, First Equity advanced the Company $250,000 during
January, 1994 which was repaid in June, 1994.
The Company has agreed to pay Williams 0.5% per annum of the
outstanding U. S. Bank revolving loan balances on a quarterly
basis in consideration for providing its guarantee of the
revolving loan. This fee was $18,083 for the year ended December
31, 1995.
The Company's interest expense for Williams was $448,000 and
$385,000 for the years ended December 31, 1995 and 1994.
In 1995 the Company issued Enercorp 100,000 shares of common stock
for services rendered in connection with the Palm Springs
acquisition.
F-10
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. INVENTORIES
Inventories consist of the following (in thousands):
December 31,
1995 1994
Raw materials $4,608 $ 2,901
Work-in-progress 1,014 919
Finished goods 3,287 1,966
------ ------
$8,909 $ 5,786
===== ======
5. INVESTMENT IN AND ADVANCES TO AFFILIATES
A former officer of the Company is an officer of MacGregor, and
MacGregor and the Company have common investors. During the year ended
December 31, 1994 the Company sold its remaining 125,106 shares of
MacGregor for $69,000, resulting in a loss of $38,000.
6. DEBT
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 Bank America that the
Second Amended Restated Loan and Security Agreement ("Credit Agreement")
between Bank America and Ajay had been purchased by Roadmaster. On May 5,
1994 Ajay paid Roadmaster in full all outstanding obligations due under
its Credit Agreement and entered into a Loan and Security Agreement ("Loan
Agreement") with Williams for a term loan of up to $7,000,000. The Loan
Agreement required monthly interest only payments at the prime rate of
First Interstate Bank of Oregon plus 2%, was originally scheduled to
expire on November 4, 1994 and was extended to May 5, 1995. The terms and
conditions of the Loan Agreement were substantially the same as the prior
Credit Agreement with Bank America, except that the Loan Agreement was a
term loan.
The Williams loan was paid on July 25, 1995, when the Company entered into
a Revolving Loan Agreement with United States National Bank of Oregon ("U.
S. Bank") for a credit facility of up to $8,500,000. All of the Company's
subsidiaries and Williams have guaranteed payment of this credit facility
and the Company and its subsidiaries have pledged their inventory and
receivables as collateral. The Revolving Loan is evidenced by demand
notes, requires monthly interest only payments at the prime rate of U. S.
Bank (currently 8.25%) and will be reviewed on May 31, 1996. On October 2,
1995 the Company and U. S. Bank agreed to modifications to the Revolving
Loan Agreement increasing the credit facility from $8,500,000 to
$13,500,000. The Company may now borrow up to $8,500,000 against 80% of
eligible accounts receivable and 50% of eligible inventory and up to an
additional $5,000,000 through its 2-year bulge loan facility. The
increased facility provided the Company the funds necessary to acquire
certain assets of both Korex Corporation and Palm Springs Golf Company,
Inc. in early October, 1995. The Company is required to maintain a minimum
tangible net worth of $2,000,000 and a debt leverage ratio of not greater
than 4.5 to 1. The Company has requested that U. S. Bank increase the debt
leverage ratio to 6.0 from January, 1996 through June 1996 and to 5.5 from
July, 1996 to December 1996. The Company has agreed to pay Williams 0.5%
per annum of the outstanding Revolving Loan balance on a quarterly basis
in consideration for providing its guarantee of the Revolving Loan.
F-11
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The Company's borrowings consisted of the following:
<TABLE>
<CAPTION>
December 31,
1995 1994
---------- ---------
<S> <C> <C>
Revolving credit facility:
Balance $10,792,706 $5,369,000
Interest rate 10.5%
Unused amount of facility $ 2,707,294 $1,631,000
Average amount outstanding
during the period $ 9,758,991 $5,626,861
Weighted average interest
rate 8.72% 8.0%
Maximum amount outstanding
during the period $10,936,687 $6,651,341
</TABLE>
Outstanding commercial letters of credit totaled approximately
$717,000 and $1,100,000 at December 31, 1995 and 1994 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 revolving 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-12
<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>
Year Ended December 31,
--------------------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Statutory tax expense
(benefit) at 34% $(208) $(1,047) $(653)
Utilization of net
operating loss
carry forward - - -
Loss producing no current
tax benefit 208 1,047 653
----- ------ ------
$ - $ - $ -
===== ====== ======
</TABLE>
The components of the net deferred tax asset/liability were as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
1995 1994
------ -----
<S> <C> <C>
Deferred tax asset,
principally accrued
expenses, reserves
and loss carry forwards $2,339 $ 2,116
Deferred tax liability,
principally depreciation (83) (68)
Valuation allowance (2,048) (2,048)
------- ------
Net $ 208 $ -
======= ======
</TABLE>
The Company has assessed its past earnings history and trends,
sales backlog, budgeted sales, and expiration dates of carryforwards and
has determined that it is more likely than not that $208,000 of deferred
tax assets will be realized. The remaining valuation allowance of
$2,048,000 is maintained on deferred tax assets which the Company has not
determined to be more likily than not realizable at this time. The Company
will continue to review this vauluation allowance on a quarterly basis and
make adjustments as appropriate.
The Company had net operating loss carry forwards for Federal
tax purposes of approximately $5,785,000 at December 31, 1995, which
expire in varying amounts in the years 2006 through 2010. Operating loss
carry forwards totaling $210,000, $4,325,000, $856,000 and $179,000 are
available to offset future state taxable income of Sports, Ajay, Leisure
Life and Palm Springs respectively, which expire in varying amounts in the
years 2006 through 2010. Future changes in ownership, as defined by
section 382 of the Internal Revenue Code, could limit the amount of net
operating loss carryforwards used in any one year.
F-13
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. STOCKHOLDERS' EQUITY
(a) Preferred Stock
On October 3, 1994 the Company created a new class of
Series B 8% Cumulative Convertible Preferred Stock and allowed for
its exchange, on a share-for-share basis, with the Company's
Series A Preferred Stock. On that same day, TICO notified the
Company that it wished to exchange the 29,500 shares of Series A
Preferred Stock for 29,500 shares of the newly issued Series B
Preferred Stock, as was permitted under the Certificate of
Designations of Rights and Preferences of the Series B Preferred
Stock. On that same day, TICO notified the Company that it wished
to convert 17,000 shares of its Series B Preferred Stock for
5,040,000 shares of the Common Stock of the Company, as the Series
B Preferred Stock allows for a conversion rate of 1 share of
Series B Preferred Stock for 294.12 shares of the Company's Common
Stock.
Cumulative dividends are payable on the Series C Preferred
Stock at any time through December 31, 1996 at an annual rate of
$1.00 per share. The Warrants are redeemable by the Company at
$0.5 per Warrant under certain conditions. The terms of these
Warrants are identical to the Company's publicly-held Warrants to
purchase Common Stock. The Company used the $2.8 million of net
proceeds for inventory and accounts receivable financing and to
acquire certain assets of Korex and Palm Springs.
On July 26, 1995 the Company's Registration Statement filed
in connection with an offering of 325,000 shares of Series C 10%
cumulative Convertible Preferred Stock and 325,000 Warrants was
declared effective. The Series C Preferred Stock is convertible
into shares of the Company's Common Stock based on a value of
$10.00 for each Preferred share and $.6875 for the Common.
(b) Stock issued to officers
The Company has a stock incentive plan for officers of the
Company, under which up to 150,000 shares of the Company's stock
may be granted. In 1994, the Company issued 150,000 shares of
common stock to an officer in lieu of compensation and in 1995 the
Company issued 34,000 shares.
F-14
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(c) Stock Issued for Acquisitions
On August 1, 1994 the Company reached an agreement in
principle to acquire the outstanding common stock of Leisure Life,
Inc. In exchange for acquiring all the common stock of Leisure
Life, the Company issued 1,500,000 shares of its common stock to
the owners of Leisure Life, with 400,000 of those shares being
issued subject to certain performance requirements being met by
Leisure Life.
In November 1995 the former owner of Leisure Life returned
400,000 shares of stock to the Company and in March 1996 returned
200,000 shares due to unmet performance requirements.
(d) Warrants and Options
A summary of activity related to warrants and options to
purchase Company common stock is as follows:
<TABLE>
<CAPTION>
Warrants and Price
Options Per Share
------------ ---------
<S> <C> <C>
Balance, January 1, 1993 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 (i)
Reissued 94,500 .34 (ii)
Issued to Williams 16,274,754 .34 - 1.00 (iii)
Exercised by Williams (4,117,647) .34 (iv)
Issued to Directors 10,000 .44 (v)
Issued to Employees 840,000 .40 - .80 (vi)
----------
Balance, December 31, 1994 15,737,577 .34 - 1.00
Issued to employees 295,000 .625 -.6875 (vii)
Williams options adjusted (1,046,234) .50 - 1.00 (viii)
Issued - public offering 373,750 1.00 (ix)
Issued to Directors 10,000 .66 (x)
----------
Balance, December 31, 1995 15,370,093 $ .34 - 1.00
</TABLE>
(i) Warrants originally issued to Roadmaster in 1990. Transferred to
Acrodyne under the Exchange Agreement, expired and reissued.
(ii) Warrants originally issued to Equitex in connection with the
Company's private placement. Transferred to Acrodyne, expired and
reissued.
(iii)Warrants issued to Williams as consideration for loans to Ajay
Leisure as part of a joint venture implementation agreement dated
May 1994.
(iv) Exercised and applied proceeds ($1,400,000) against debt.
(v) Director stock options of which 3,333 have vested.
(vi) Employee stock options of which 499,584 shares have vested.
F-15
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(vii) Employee stock options of which 45,000 shares have vested.
(viii) Warrants referred by Williams as consideration for early loan
payoff.
(ix) Public offering of 7/26/95.
(x) Director stock options of which none have vested.
(e) Private Placements
In 1994, the Company issued to related parties, via private
placement, 2,941,177 shares of common stock and received proceeds of
$1,000,000. The Company also issued 4,117,647 shares of common stock to
a related party in exchange for a reduction of debt totaling
$1,400,000.
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. The
Company performs ongoing credit evaluations of its customers' financial
conditions and does not generally require collateral.
Sales to customers which represent over 10% of the Company's net
sales are as follows:
Year ended December 31,
Customer 1995 1994 1993
-------- ---- ---- ----
A 36% 41% 32%
B * * 12%
* Amounts are less than 10% of net sales.
As a result of acquisitions made by the Company during 1994 and
1995, sales to Customer A are expected to be less than 10% of consolidated
net sales for 1996.
10. BUSINESS SEGMENT REPORTING
The relative contributions to net sales, operating profit and
identifiable assets of the Company's two industry segments for the year
ended December 31, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
Golf and
Furniture Billiards Consolidated
--------- --------- ------------
<S> <C> <C> <C>
Sales $1,414 $17,314 $18,728
Operating profit/(loss) (591) 781 190
Assets 2,041 16,445 18,486
Depreciation/Amortization 82 137 219
Capital Expenditures 130 106 236
</TABLE>
F-16
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. SPALDING LICENSE AGREEMENT
Ajay has a license from Spalding Sports Worldwide to utilize the
Spalding trademark in conjunction with the sale and distribution of golf
bags, golf gloves, hand pulled golf carts and certain other golf
accessories in the United States. As consideration for this license,
Ajay is required to pay royalties to Spalding based on a percentage of
sales, subject to annual minimums of $500,000 for the year ended June
30, 1995, and $550,000 for the years ended June 30, 1996 through June
30, 1998. The current agreement expires June 30, 1998. Other conditions
of the agreement require the Company to expend 2% of sales under the
agreement on advertising and related costs, with 1% remitted to
Spalding. The Company must also maintain a current ratio of 1.0 to 1.0.
Approximately 53% of the Company's 1995 and 61% of 1994 sales were
Spalding products.
Royalty expense due Spalding was $484,000, $494,000, and $702,000
for the years ended December 31, 1995, 1994 and 1993, respectively.
12. 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):
1996 $ 766
1997 623
1998 469
1999 452
2000 448
2001 and thereafter 170
-------
$2,928
Total rental expense (in thousands) under operating leases
(net of sublease rental income from an affiliate of $13, $8 and $38,
respectively) was $627, $556 and $409 for the years ended December 31,
1995, 1994 and 1993, respectively.
13. NET (LOSS) PER COMMON SHARE
Earnings or loss per share has been computed by dividing net
income or loss, after reduction for preferred stock dividends in 1995
($136,000), 1994 ($202,000) and 1993 ($236,000) by the weighted average
number of common shares outstanding. No exercise of warrants
outstanding was assumed in 1995, 1994, or 1993, since any exercise of
warrants would be antidilutive.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $762,157, $607,000, and $633,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
Noncash financing and investing transactions were as follows:
. 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.
F-17
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
. During 1994, 150,000 shares of the Company's common stock were
issued to an officer of the Company in lieu of wages.
. In exchange for acquiring in 1994 all of the common stock of
Leisure Life, Inc. the Company issued 1,500,000 shares of its
common stock to the owner of Leisure Life. In November, 1995 the
former owner of Leisure Life surrendered 400,000 shares of the
Company's common stock and in March, 1996 surrendered 200,000
shares of the Company's common stock due to unmet performance
requirements.
. During 1994, 4,117,647 shares of the Company's common stock were
issued to a related party in exchange for a reduction in debt
totaling $1,400,000.
. In 1995 11,210 preferred stock shares were converted into 163,055
shares of common stock.
. During 1995 the Company issued common stock to the following:
Issued to Shares
--------- ------
Employees 12,000
Fund acquisitions 895,054
Affiliate in lieu of payment for services 100,000
Officer in lieu of bonus 34,000
15. 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.
F-18
<PAGE>
Schedule VIII
AJAY SPORTS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1995, 1994, and 1993
(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:
Year ended:
December 31, 1995 $ 139 $ 198 $ 201 (1) $ 136
December 31, 1994 112 276 249 139
December 31, 1993 105 360 353 112
Allowance for Doubtful Receivables:
Year ended:
December 31, 1995 $ 101 $ 330 $ 144 (2) $ 287
December 31, 1994 230 62 191 101
December 31, 1993 150 159 79 230
Reserve for Inventory Obsolescence:
Year ended:
December 31, 1995 $ 430 $ 378 $ 424 $ 384
December 31, 1994 160 430 160 430
December 31, 1993 150 87 77 160
</TABLE>
Notes:
(1) Represents amounts paid for product warranty claims.
(2) Represents amounts charged off as uncollectible.
F-19
<PAGE>
EXHIBIT 21.0
LISTING OF SUBSIDIARIES
SUBSIDIARIES STATE OF INCORPORATION
------------ ----------------------
Ajay Leisure Products, Inc. Delaware
Leisure Life, Inc. Tennessee
Palm Springs Golf, Inc. Colorado
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Ajay Sports, Inc. and Subsidiary on Form S-8 of our report dated March 25, 1994,
on our audits of the consolidated statements of operations, stockholders' equity
and cash flows of Ajay Sports, Inc. and Subsidiary for the year ended December
31, 1993, which report is included in this Annual Report on Form 10-K. Such
report includes an explanatory paragraph relating to Ajay Sports, Inc. and
Subsidiary's ability to continue as a going concern.
Coopers & Lybrand, L.L.P.
Milwaukee, Wisconsin
March 25, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 362
<SECURITIES> 0
<RECEIVABLES> 5,483
<ALLOWANCES> 287
<INVENTORY> 8,909
<CURRENT-ASSETS> 14,934
<PP&E> 2,433
<DEPRECIATION> 545
<TOTAL-ASSETS> 18,486
<CURRENT-LIABILITIES> 8,611
<BONDS> 0
0
4,388
<COMMON> 234
<OTHER-SE> 142
<TOTAL-LIABILITY-AND-EQUITY> 18,486
<SALES> 18,728
<TOTAL-REVENUES> 18,728
<CGS> 15,291
<TOTAL-COSTS> 3,247
<OTHER-EXPENSES> 41
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 801
<INCOME-PRETAX> (652)
<INCOME-TAX> (208)
<INCOME-CONTINUING> (444)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (444)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
