UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
Incorporation or Organization) Identification No.)
1501 E. Wisconsin Street
Delavan, Wisconsin 53115 (414) 728-5521
- -------------------------------------- -----------------
(Address of Principal Executive Offices (Registrant'sTelephone 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) Common Stock Purchase Warrants
Series C 10% Cumulative Convertible Preferred Stock
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.
<PAGE>
The aggregate market value of the voting stock held by nonaffiliates as of
April 7, 1997 was $1,598,711. The number of shares outstanding of the
Registrant's $.01 par value common stock at April 7, 1997 was 23,274,039.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for annual meeting to be held
May 23, 1997 ("1997 Proxy Statement") have been incorporated by
reference into Part III of this Form 10-K.
<PAGE>
Ajay Sports, Inc.
Index
December 31, 1996
PART I. Page
Item 1. Description of Business 4-8
Item 2. Description of Property 8-9
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 10-12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis 14-16
Item 8. Financial Statements F-1 - F-19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 16
PART III.
Item 10 Directors and Executive Officers of the Registrant 17
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial Owners and
Management 17
Item 13. Certain Relationships and Related Transactions 17
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 10-K 18-21
SIGNATURE PAGE 22
<PAGE>
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 casual living furniture (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 wholly owned operating subsidiary, manufactures
and markets casual living furniture. Palm Springs Golf, Inc. ("Palm Springs"),
another wholly owned operating subsidiary, manufactures and/or markets golf
clubs, golf bags, golf gloves, accessories and carts for distribution to the
off-course pro shop markets. All references to the Company include Ajay, Leisure
Life and Palm Springs unless otherwise specified.
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), Pro Classic(R), Leisure
Life(R), and Pro USA(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 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), and Pro Classic(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 foreign source markets
to assure quality, reliability, new product ideas and a constant commercial
interface.
<PAGE>
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 1997 are continuing
examples of the Company's commitment in this area.
Breadth of Product Lines. The Company offers a broad selection of golf clubs,
golf bags, golf carts and golf accessories, 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. Golf clubs account for 65% of Palm
Springs sales. Leisure Life's products consist 100% of indoor and outdoor
leisure furniture.
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 golf specialty stores where it has historically been
under-represented, while continuing to maintain and build upon its 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.
The Company has continued to introduce new and redesigned products to the
market. The Company has also increased its emphasis in this area by 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.
Leisure Life has introduced a new line of swing furniture for the 1997 sales
year. This line is again less expensive than its previous line of swing
furniture, featuring an improved frame and different canopies. It also plans to
expand on the convertible combination bench/table product. Other planned new
products include a line of leisure dining tables, storage shelving and book
cases.
Sports Business
Golf, which is the primary market for Ajay's and Palm Springs' business,
continues to be a popular form of recreation. According to the National Golf
Foundation ("NGF"), a trade association, there were 5.5% more rounds of golf
played in 1995 than 1994. The pace of golf course development also continues to
grow steadily. NGF reports that 442 golf courses were opened for play in 1996
compared to 468 in the record year of 1995.
<PAGE>
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 sells 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 $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. Approximately 69%, 67%, and 61% of
Ajay's total sales related to products sold under the Spalding license agreement
during the years ended December 31, 1996, 1995, and 1994, 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. Palm Springs' golf club components are designed and
purchased by its California facility and assembled in its Mexicali, Mexico
facility.
Design features, such as color, decals, specialized components and decorative
accessories often determine whether a golf product 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 are prepackaged or
repackaged for domestic distribution. The packaging designed by Ajay and Palm
Springs 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 and off-course golf specialty shops. The Company's largest
customer is Wal-Mart, which accounted for approximately 29% of the Company's
sales in 1996. The second largest customer accounted for 14% of the Company's
sales. The loss of either of these accounts would have a material adverse effect
on the Company's results. The Company believes its relationship with these
customers is good.
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 its
customers through its in-house and regional sales staffs. 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 literature and 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.
<PAGE>
Leisure furniture, used on porches, decks, patios, 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. Leisure Life's "In Motion" furniture
products, which feature contoured slings, adjustability and comfort, have been
received favorably in the leisure furniture market.
Leisure Life's furniture is constructed of a high grade 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 suspension
system is used on swings, rocking chairs, stationary chairs, love seats, and
couches.
In addition to the seating products, Leisure Life also manufactures bar
height dining tables with matching stools, cocktail and end tables, a bench,
canopies, A-frames, potting tables, shelving and bookcases 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 product
components. A small portion of the wood pieces are purchased pre-manufactured.
Fabric for pillows, cushions, slings and canopies are cut and sewn in-house and
by third party subcontractors for final assembly in the Baxter, Tennessee
facility. 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 and has developed sales to regional
chains. Leisure Life distributes through specialty stores, such as nurseries,
hardware stores, pool and patio dealers, home centers and garden shops. Leisure
Life services its accounts through its in-house sales force and commissioned
sales representatives. Leisure Life has display trucks containing samples of its
furniture line, which are used to attract more dealers. 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 also shows a growing potential
with current sales approaching 10% 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 and the
shorter manufacturing time cycle for furniture products.
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 leisure furniture line including shelving 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.
<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 consumers high value to price ratios.
Leisure Life has had limited but rapidly growing operations. At this time,
Leisure Life, as compared to the large number of manufacturers of indoor and
outdoor furniture, is not a significant competitor. In Leisure Life's niche
market 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 and aluminum 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, 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, cushion 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 12, 1997, the Company had a total of 435 employees: 116 employees
at the Delavan, Wisconsin facility, 240 employees at the Mexicali, Mexico
facility, 55 employees at the Baxter, Tennessee facility and 24 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. The property carries
a mortgage in the amount of $195,000.
<PAGE>
Palm Springs leases an administrative, assembly and warehouse facility in
Cathedral City, California, which consists of approximately 17,000 square feet.
The lease expires March 1, 2002.
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.
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.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
The Company's Common Stock, Units, Warrants and Series C 10% Cumulative
Convertible Preferred Stock 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.
BID ASK
High Low High Low
COMMON STOCK
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
1996
First Quarter $ .72 $ .38 $ .75 $ .44
Second Quarter $ .69 $ .38 $ .75 $ .44
Third Quarter $ .44 $ .31 $ .50 $ .38
Fourth Quarter $ .38 $ .25 $ .44 $ .28
UNITS
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
1996
First Quarter $ 4.00 $ 1.88 $ 4.94 $ 2.75
Second Quarter $ 3.50 $ 3.00 $ 4.50 $ 3.63
Third Quarter $ 3.00 $ 1.50 $ 4.00 $ 2.25
Fourth Quarter $ 1.50 $ 1.00 $ 2.50 $ 2.00
WARRANTS
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
1996
First Quarter $ .19 $ .06 $ .25 $ .13
Second Quarter $ .19 $ .16 $ .25 $ .19
Third Quarter $ .19 $ .06 $ .22 $ .13
Fourth Quarter $ .09 $ .03 $ .13 $ .09
<PAGE>
BID ASK
High Low High Low
SERIES C PREFERRED STOCK
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
1996
First Quarter $ 9.13 $ 6.25 $10.00 $ 7.00
Second Quarter $ 9.50 $ 7.50 $10.13 $ 8.00
Third Quarter $ 8.00 $ 6.88 $ 8.75 $ 7.13
Fourth Quarter $ 7.13 $ 6.00 $ 7.75 $ 6.50
Holders
The number of record holders of the Company's common stock, units, warrants
and Series C preferred stock according to the Company's transfer agent, as of
March 31, 1997 are as follows:
Common Stock 397
Preferred C 11
Warrant A 51
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 bank loan agreement
restricts Ajay from paying cash dividends.
Holders of the Company's Series C Cumulative Convertible Preferred Stock are
entitled to cumulative dividends at an annual rate of $1.00 per share. Dividends
on the Series C preferred stock have been declared and paid through the year
ended December 31, 1996. The Company's current bank lender has advised the
Company that the bank contends that the Company is in technical default under
its loan agreement, and the bank has restricted the funds available to the
Company under the loan agreement. The Company has, therefore, dedicated all
available funds to support continuing operations of the Company, until such time
as a satisfactory loan facility is obtained. As a result, there are no funds
available to pay the dividend at this time.
The Company has declared the following Series C 10% Cumulative Convertible
Preferred Stock dividends during the last two years:
<PAGE>
Declaration Date Amount per Share Record DatePayment 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
06/14/96 $0.2500 06/28/96 07/25/96
09/19/96 $0.2500 09/30/96 10/25/96
12/19/96 $0.2500 12/31/96 01/27/97
<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).
Year Ended December 31,
Statement of Operations: 1996 1995 1994 1993 1992
-------- -------- -------- -------- ------
Net sales $24,341 $18,728 $12,899 $15,902 $21,014
Cost of sales 20,759 15,291 12,291 14,172 17,156
------ ------ ------ ------ ------
Gross profit 3,582 3,437 608 1,730 3,858
Selling, general and
administrative expenses 5,067 3,247 2,747 2,834 2,896
------- ------ ------ ------- ------
Operating income (loss) (1,485) 190 (2,139) (1,104) 962
Nonoperating income (expense):
Interest expense - net (1,103) (801) (614) (697) (906)
Loss on write down of
advances to affiliate - - - (123) -
Gain (loss) on disposition of
investment in affiliate, net - - (38) - 275
Other, net (38) (41) (289) 3 50
------- ------- ------ ------- -------
Income (loss) from operations before
income taxes (2,626) (652) (3,080) (1,921) 381
------ ------ ------ ------ ------
Income tax expense (benefit) (893) (208) - - -
------- ------- ------- ------- ------
Net income (loss) $(1,733) $ (444) $(3,080) $(1,921) $381
====== ====== ====== ====== ====
Net income (loss) per common share $ (.09) $ (.03) $ (.27) $ ( .24)$ .02
======== ====== ======== ====== ======
Weighted average common and
common stock equivalent
shares outstanding 23,242 22,722 12,218 8,812 8,457
====== ====== ====== ======= =======
Cash dividends per common share - - - - -
December 31,
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Balance sheet data: 1996 1995 1994 1993 1992
--------- -------- --------- ---------- ----------
Working capital $ 3,348 $ 6,323 $ 593 $ 903 $ 2,754
Total assets $ 18,495 $ 18,486 $ 9,365 $ 10,507 $ 12,783
Long term debt $ 5,196 $ 5,111 $ 121 - -
</TABLE>
<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 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 during the period 1993 through
1996 and improving the financial condition of the Company.
Results of Operations
In 1996 the Company's net sales were $24.3 million, an increase of $5.6
million, or 30% compared to 1995. The overall sales increase occurred in both
the golf and furniture product lines and with respect to both major and
secondary customer categories. Sales of golf products increased by $1.2 million
in the mass market and $2.9 million in the golf specialty store market. The
specialty market increase was due to a full year of ownership of Palm Springs
Golf, Inc., acquired in October 1995. The mass market sales increase was due to
increased sales to the second largest customer as a result of the purchase of a
golf line of business from Korex Corporation in October 1995. Sales of furniture
products increased $1.3 million, or 93%. The furniture business began in August
1994 and contributed $140,000 of sales in that short year. During 1996, the
Company found it financially difficult to integrate the newly acquired (10/95)
Palm Springs Golf, Inc. business. During this first full year of operations, the
pre-tax loss for Palm Springs was $1.5 million. This resulted from a lack of new
product for the 1996 year, a full year of closing out old products, reorganizing
and restructuring the business, relocating production and administration,
development of totally new golf club and bag products and additions of golf
accessory and golf cart lines and deploying a regional sales organization in
both Canada and the United States. The turnaround of Palm Springs is much deeper
than originally expected, but management believes these efforts will continue to
reposition Palm Springs for a return to market competitiveness and profitability
in 1998.
The Leisure Life business continues to grow at a rapid pace. This was a
startup business acquired in August 1994. During its first full year, 1995, it
had sales of $1.4 million and grew to $2.7 million in 1996. Corresponding
pre-tax losses were $742,000 and $393,000. Management expects this business
segment to emerge to profitability in 1997 as sales continue to grow. First
quarter sales for 1997 are nearly doubled from $961,000 in 1996 to $1,900,000 in
1997.
Ajay Leisure's mass market golf and billiards business continued its growth
with a 7.5% sales increase during 1996. Although sales increased, mass market
sales were reduced by: a very late spring, (estimated effect on sales $600,000),
three customers exiting the golf category ($600,000 sales lost), reduced
closeout sales ($500,000) due to better inventory management and sale of the
billiards business line in October 1996 ($150,000). Offsetting the above
declines was the acquisition of product lines from a former competitor, Korex
Corporation, in October 1995. This contributed approximately $2.5 million of
additional sales. Ajay has undertaken steps to continue to improve results in
its 1997 sales programs.
Operating loss for the Company was $1,485,000 in 1996, a decrease of $1.7
million compared to an operating profit of $190,000 in 1995. The $1.7 million
turnaround in operating profit resulted from integrating the newly acquired Palm
Springs Golf, Inc. and the newly acquired golf product line from Korex
Corporation in October 1995 . The Palm Springs acquisition was a much deeper
turnaround effort than initially anticipated. This factor contributed operating
losses of $1.1 million and diluted management focus and vital operating and
financial resources from the Company's other business areas, resulting in
operating inefficiencies and higher costs of production. It is believed that
this phase is substantially completed.
<PAGE>
Selling, general and administrative expenses were $5.1 million, $3.2 million
and $2.7 million representing 20.8%,17.3% and 21.3% of sales in 1996, 1995 and
1994 respectively. The 1996 results reflect the acquisition of Palm Springs
Golf, which contributed $1,400,000 and 32.2% of related sales to selling,
general and administrative expenses. Without Palm Springs, the Company's
selling, general and administrative expenses are 18.3% of sales.
Interest expense was $1,103,000 for 1996, an increase of $301,000, or 38%
compared to interest expense of $802,000 in 1995. The increase in interest
expense in 1996 was a result of more debt to finance working capital, fund Palm
Springs' losses and to finance the acquisitions of certain assets of Korex Corp.
and Palm Springs Golf, Co. Inc..
The Company had no income tax liability for the period 1993 - 1996.
Financial Condition
At December 31, 1996 the Company had working capital of $3,348,000, compared
with $6,324,000 at December 31, 1995. This $3.0 million decrease reflects losses
from operations primarily related to its acquisition and subsequent turnaround
efforts relative to Palm Springs Golf. The ratio of current assets to current
liabilities at December 31, 1996 was 1.3, a decrease of .4 from the December 31,
1995 current ratio of 1.7.
Inventories at December 31, 1996 were $7,957,000 compared to $8,909,000 at
December 31, 1995. Trade accounts receivable were $5,274,000 at December 31,
1996 compared to $5,196,000 at December 31, 1995. The decrease in inventories
was due to inventory control and reduction at Ajay Leisure.
Net machinery and equipment at December 31, 1996 and 1995 were $1,822,000 and
$1,888,000, respectively. The decrease reflects depreciation in excess of
capital expenditures and minor asset disposals.
Capital Resources
The Company expended $276,000 in 1996 for capital expenditures, which was
used principally for building and equipment improvements and moving club
manufacturing to Mexico. The Company's capital expenditures for 1995 were
$236,000 which was used principally for construction of additional factory space
for Leisure Life and tooling new products.
Liquidity
Cash flow from operations was negative by $598,000, reflecting the effect
from a $1.5 million net loss and a partial offset from increased trade payables.
Financing of the negative cash flow came from increased bank loans and loans
from affiliated parties.
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.
The adverse operating results of Palm Springs Golf subsequent to its
acquisition has used approximately $2.0 million of the Company's liquidity. This
has resulted in the Company's current bank lender advising the Company that the
bank contends that the Company is in technical default under its loan agreement
and the bank has restricted the funds available to Ajay under the agreement.
Ajay had been operating up until February 12,1997 on a revolver limit of $8.5
million. On February 12, the line was reduced to a $7.0 million maximum
facility. The Company did and has continued to make all interest payments on
time and has operated within the limit amounts contained in the old and new
facility lines, although restrictions during February and March curtailed
operating capability and reduced sales and profitability opportunities otherwise
available. This constriction has forced the Company to rely on extended credit
terms from its venders and additional funds from affiliated parties. On April
14, the bank agreed to waive the existing default and restructure the line to
its former $8.5 million limit although requiring a $500,000 term loan payment in
June and contains less favorable formula borrowing rates and an increased
interest rate. The restructured facility will terminate on June 30, 1997. The
increase in the line will provide the liquidity the Company needs during the
second quarter.
In order to find a more permanent solution to easing the liquidity
situation, the Company has been seeking alternative financing. The Company has
worked with banks and other lending institutions in seeking sufficient asset
based financing to cover its needs through 1998. The company believes that it
will be able to put new financing in place by June 30, 1997.
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 8.50%) plus a loan guaranty fee of 0.5%
payable to Williams Controls, Inc. and matures on June 30, 1997. On October 2,
1995 the Company and U.S. Bank agreed to modifications to the Revolving Loan
Agreement increasing the credit facility from $8,500,000 to $13,500,000 in order
to accommodate two proposed acquisitions. The Company was allowed to borrow up
to $8,500,000 against 80% of eligible accounts receivable and 50% of eligible
inventory and up to an additional $5,000,000 through its 2-year bulge loan
facility. The increased facility provided the Company the funds necessary to
acquire certain assets of both Korex Corporation ("Korex") and Palm Springs Golf
Company, Inc. in early October, 1995. Through a waiver and modification, the
Company is required to maintain a minimum tangible net worth of $2,500,000 and a
ratio of liabilities to tangible net worth of not greater than 6.0 to 1.
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 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 used the $2.8 million net proceeds for inventory and accounts receivable
financing and to acquire certain assets of Korex and Palm Springs.
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
<PAGE>
PART III
Item 10. Directors and Executive Officers of the registrant
The applicable information set forth in the Registrant's 1997 Proxy Statement
is incorporated herein by reference.
Item 11. Executive Compensation
The applicable information set forth in the Registrant's 1997 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 1997 Proxy Statement
is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The applicable information set forth in the Registrant's 1997 Proxy Statement
is incorporated herein by reference.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 10-K
(a) 1.Financial Statements:
Ajay Sports, Inc. and Subsidiaries
Consolidated Financial Statements of Ajay
Sports, Inc. and Subsidiaries:
Reports of Independent Accountants
Consolidated Balance Sheets - December 31, 1996
and 1995
Consolidated Statements of Operations - Years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity Years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended December 31, 1996,
1995 and 1994
Notes to Financial Statements
2. Financial Statement Schedules:
Ajay Sports, Inc. and Subsidiaries:
Schedule VIII - Valuation and Qualifying Accounts - Years ended December
31, 1996, 1995 and 1994
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 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)
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)
<PAGE>
PART IV
CONTINUED
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 as amended by Letter Agreement dated April 3, 1995 (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)
<PAGE>
PART IV
CONTINUED
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)
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 21.0 List of Subsidiaries
Exhibit 23.0 Consent of Independent Accountants
Exhibit 27.0 Financial Data Schedule
(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)
<PAGE>
PART IV
CONTINUED
(b) Reports on Form 8-K
During the last quarter of the 1996 fiscal year, the Company filed one
report on Form 8-K.
Date of
Report Subject
11/11/96 Item 5, Other Events - Extension of the common stock purchase
warrants to June 30, 1997.
<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 9th day of April, 1997.
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 Director April 9, 1997
- ----------------- and Principal
Thomas W. Itin Executive Officer
\s\Duane R. Stiverson Chief Financial April 9, 1997
- ----------------------
Duane R. Stiverson Officer and
Principal Accounting
Officer
\s\Robert R. Hebard Director April 9, 1997
- -------------------
Robert R. Hebard
\s\Anthony B. Cashen Director April 9, 1997
- --------------------
Anthony B. Cashen
\s\ Clarence H. Yahn Director April 9, 1997
- ----------------------
Clarence H. Yahn
\s\ Robert D. Newman Director April 9, 1997
- --------------------
Robert D. Newman
<PAGE>
F-
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Ajay Sports, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Ajay
Sports, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. We have also
audited the related consolidated financial statement schedules listed in the
index in Item 14 of this Form 10-K for each of the three years in the period
ended December 31, 1996. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits.
Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial statement schedules
referred to above present fairly, in all material respects, the financial
position of Ajay Sports, Inc. and Subsidiaries as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
\s\Hirsch & Silberstein, P. C.
Hirsch & Silberstein, P.C.
Farmington Hills, Michigan
April 14, 1997
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
as of December 31, 1996 and 1995
(in thousands, except share amounts)
December 31, December 31,
1996 1995
----------- -----------
ASSETS
Current assets:
Cash $ 64 $ 362
Accounts receivable, net of allowance
of $140 and $287, respectively 5,274 5,196
Inventories 7,957 8,909
Prepaid expenses and other 362 365
Deferred tax benefit 363 102
----------- -----------
Total current assets 14,020 14,934
Fixed assets, net 1,822 1,888
Other assets 320 236
Deferred tax benefit 756 106
Goodwill 1,709 1,322
----------- -----------
Total assets $ 18,627 $ 18,486
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to affiliates $ 885 $ -0-
Notes payable to banks 6,104 5,793
Current portion of capital lease 9 6
Accounts payable 3,107 2,181
Accrued expenses 567 631
----------- -----------
Total current liabilities 10,672 8,611
Notes payable - long term 5,213 5,111
Stockholders' equity:
Preferred stock - 10,000,000 shares authorized
Series B, $0.01 par value, 12,500
shares outstanding at liquidation value 1,250 1,250
Series C, $10.00 par value, 296,170
and 313,790 shares outstanding at
stated value, respectively 2,962 3,138
Common stock, $0.01 par value, 100,000,000
shares authorized, 23,274,039 and
23,337,746 shares outstanding, respectively 233 234
Additional paid-in capital 9,313 9,123
Accumulated deficit (11,016) (8,981)
----------- -----------
Total stockholders' equity 2,742 4,764
----------- -----------
Total liabilities and stockholders' equity $ 18,627 $ 18,486
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
for the years ended December 31, 1996, 1995 and 1994
(in thousands, except per share amounts)
Year Ended
--------------------------------------
December 31, December 31, December 31,
1996 1995 1994
----------- ---------- ----------
Operating data:
Net sales $ 24,341 $ 18,728 $ 12,899
Cost of sales 20,759 15,291 12,291
----------- ---------- -----------
Gross profit 3,582 3,437 608
Selling, general and
administrative expenses 5,067 3,247 2,747
----------- ---------- -----------
Operating income (loss) (1,485) 190 (2,139)
----------- ---------- -----------
Nonoperating income (expense):
Interest expense - net (1,103) (801) (614)
Gain (loss) on disposition of investment -0- -0- (38)
Other, net (38) (41) (289)
----------- ---------- -----------
(1,141) (842) (941)
----------- ---------- -----------
Income (loss) before income taxes (2,626) (652) (3,080)
Income tax expense (benefit) (893) (208) -0-
----------- ---------- -----------
Net loss $ (1,733) $ (444) $ (3,080)
=========== ========== ===========
Net loss per share $ (0.09) $ (0.03) $ (0.27)
=========== ========== ===========
Weighted average common and common stock
equivalent shares outstanding 23,242 22,722 12,218
=========== ========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994
(in thousands, except shares)
<S> <C> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Add'l Total
--------------- ------------------ Paid-In Accum Stockholders'
Shares Amount Shares Amount Capital (Deficit) Equity
------- ------ -------- ------ ---------- ------- ------------
Balance at January 1, 1994 29,500 $ 2,950 8,824,773 $ 88 $ 4,246 $ (5,321) $ 1,963
Common stock issued to fund
acquisition - - 1,500,000 15 685 - 700
Common stock issued in lieu of
wages to officer - - 150,000 2 50 - 52
Preferred stock converted into
common stock (17,000) (1,700) 5,000,040 50 1,650 - -
Common stock issued to
affiliate to reduce debt - - 4,117,647 41 1,359 - 1,400
Common stock sold to affiliate- - - 2,941,177 29 971 - 1,000
Net loss - - - - - (3,080) (3,080)
------- ------ ---------- ------ ---------- ------- ---------
Balances at December 31,1994 12,500 1,250 22,533,637 225 8,961 (8,401) 2,035
Common stock issued to ESOP - - 12,000 - 4 - 4
Stock issued to fund acquisition - - 895,054 9 572 - 581
Common stock issued to affiliate
for acquisition services - - 100,000 1 37 - 38
Common stock issued in lieu of
wages to officer - - 34,000 1 9 - 10
Preferred stock public offering 325,000 3,250 - - (386) - 2,864
Preferred stock converted into
common stock (11,210) (112) 163,055 2 110 - -
Common shares received as
an acquisition cost adjustment - - (400,000) (4) (184) - (188)
Dividends - - - - - (136) (136)
Net loss - - - - - (444) (444)
------- ------ ---------- ------ ---------- ------- ------------
Balances at December 31, 1995 326,290 4,388 23,337,746 234 9,123 (8,981) 4,764
Common shares received as an
acquisition incentive adjustent - - (350,000) (3) 4 - -
Preferred stock converted into
common stock (17,620) (176) 256,293 2 174 - -
Stock option exercise - - 30,000 - 12 - 12
Dividends - - - - - (301) (301)
Net loss - - - - - (1,733) (1,733)
------- ------ ---------- ----- ---------- ------- ------------
Balances at December 31, 1996 308,670 $4,212 23,274,039 $ 233 $ 9,313 $(11,015 $ 2,742
======= ====== ========== ====== ========== ======= ============
<FN>
The accompanying notes are an integral part of the consolidated financial statements
</FN>
</TABLE>
F-4
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
--------- -------- --------
Cash flows from operating activities:
Net loss $ (1,733)$ (444) $ (3,080)
Adjustments to reconcile to net cash flows
from operating activities:
Loss on sale of assets 6 -0- 162
Depreciation and amortization 366 219 129
Stock issued to officer and employees -0- -0- 52
(Increase) decrease in accounts receivable, net (78) (3,496) 299
(Increase) decrease in inventories 952 (3,123) 1,662
(Increase) in deferred tax benefits (911) (208) -0-
(Increase) decrease in prepaid expenses 3 (154) (112)
(Increase) decrease in other assets (84) (66) 22
Increase (decrease) in accounts payable 945 852 (1,530)
Increase (decrease) in accrued expenses (64) 141 18
(Decrease) in due to affiliates -0- -0- (240)
--------- -------- --------
Net cash provided by (used in) operating activities (598) (6,279) (2,618)
--------- -------- --------
Cash flows from investing activities:
Acquisitions of property plant and equipment (276) (787) (115)
Goodwill associated with acquisitions (387) (1,329) -0-
Proceeds from sale of equipment -0- 5 4
Disposal of equipment (29) -0- -0-
Proceeds from sale of investment -0- -0- 86
--------- -------- --------
Net cash (used in) investing activities (692) (2,111) (25)
--------- -------- --------
Cash flows from financing activities:
Cash acquired in acquisitions -0- -0- 2
Proceeds from issuance of notes payable to affiliates 885 -0- 6,770
Net increase (decrease) in bank notes payable 396 10,777 (5,026)
Payments on notes payable - affiliate -0- (5,369) -0-
Dividends paid (301) (58) -0-
Proceeds from preferred stock offering,
net of related costs -0- 2,864 -0-
Stock issued in acquisitions -0- 433 -0-
Proceeds from private placements, net of related costs -0- -0- 1,000
Stock options exercised 12 -0- -0-
--------- -------- --------
Net cash provided by financing activities 992 8,647 2,746
-------- -------- --------
Net increase (decrease) in cash (298) 257 103
Cash at beginning of period 362 105 2
--------- -------- --------
Cash at end of period $ 64 $ 362 $ 105
========= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F -5
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Ajay Sports, Inc. ("Sports") and its wholly-owned operating
company subsidiaries, Ajay Leisure Products, Inc. ("Ajay"), Leisure Life,
Inc. ("Leisure"), and Palm Springs Golf, Inc. ("Palm Springs"),
collectively referred to herein as the "Company". The inventories and fixed
assets purchased from Korex Corporation on October 2, 1995 have been merged
with Ajay Leisure Products, Inc. All significant intercompany balances and
transactions have been eliminated.
INVENTORIES - Inventories are stated at the lower of cost or market with
cost determined using the first-in, first-out method.
FIXED ASSETS - Fixed assets are stated at cost, less accumulated
depreciation of $864,000 and $545,000 as of December 31, 1996 and 1995
respectively. Fixed assets of the Company consist primarily of machinery
and equipment, office equipment, and a building. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets, which range from four to thirty-nine years.
GOODWILL - The Company has recorded goodwill as a result of the
acquisitions of Palm Springs and Korex. The goodwill is being amortized
over forty years. Amortization expense related to the goodwill was $35,732
for the year ended December 31, 1996.
OTHER ASSETS - Other assets at December 31, 1996 consists of patents and
trademarks held and applied for by Leisure Life and Palm Springs (See Note
8c) and a receivable from Korex at Ajay Leisure. Other assets at December
31, 1995 consists of patents and trademarks held and applied for by Leisure
Life and Palm Springs.
PRODUCT LIABILITY AND WARRANTY COSTS - Product liability exposure is
insured with insurance premiums provided during the year. Product warranty
costs are based on experience and attempt to match such costs with the
related product sales.
REVENUE RECOGNITION - The Company recognizes revenue when goods are
shipped.
INCOME TAXES - Effective January 1, 1992, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences of temporary differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities,
using enacted statutory rates applicable to future years.
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. RELATED PARTY TRANSACTIONS
The Company's related parties include the following:
Roadmaster Industries, Inc. ("Roadmaster") - Prior to June 1989, all the
Company's common stock was owned by Roadmaster and the companies had
common investors. Roadmaster owned all of the Company's preferred stock
prior to the consummation of the Exchange Agreement (described in Note 2
(a) ).
Equitex, Inc. ("Equitex") - Prior to the consummation of the Exchange
Agreement, Equitex owned 189,000 shares of the Company's common stock and
1,100,000 warrants to purchase additional common stock. Additionally,
prior to and at the time of executing the Exchange Agreement, the chairman
of Roadmaster was the president of Equitex.
First Equity Corporation ("First Equity") - First Equity is owned by a
family member of the president, chief executive officer, and chairman of
the Company.
TICO - TICO is controlled by the Company's president, chief executive
officer, and chairman.
Acrodyne Profit Sharing Trust - ("Acrodyne") is a profit sharing trust.
The Company's president, chief executive officer and chairman is trustee
and beneficiary of the trust. The trust acquired 1,176,471 common shares
on October 3, 1994.
Enercorp, Inc. - ("Enercorp") is a business development company engaged in
the business of investing in and providing managerial assistance to
developing companies. The Company's president, chief executive officer,
chairman and principal shareholder is a major shareholder in Enercorp.
Enercorp acquired 1,764,706 common shares on October 3, 1994. In 1995
Enercorp acquired 2,000 shares of series C preferred stock. In 1995
Enercorp also received 100,000 shares of common stock for services
rendered in connection with the Palm Springs acquisition.
Williams Controls, Inc. - ("Williams") - Williams has the same chairman as
the Company, which individual is a major shareholder of each company.
(a) Exchange Agreement
During 1993, the Company entered into an agreement, whereby
Roadmaster and Equitex agreed to substantially divest of all their
interest in the Company by transferring to TICO all of the Company's
outstanding common stock purchase warrants held by them, the
$217,000 principal amount note payable to Roadmaster, the 29,500
shares of the Company's Series A 8% Cumulative Convertible Preferred
Stock and all Roadmaster's outstanding accounts receivable due from
the Company.
<PAGE>
Additionally, Roadmaster agreed to transfer to TICO all marketing
and distribution rights for golf products in Canada, all tooling
exclusively associated with the manufacture of hand-pulled golf
carts, the "Ajay" name and agreed to grant TICO a 10 year exclusive
license for the use of the "Ajay" trademark and trade name.
The Company and TICO agreed to obtain the release and satisfaction
in full of any and all obligation, guarantees and collateral of
Equitex under the revolving credit facility, described in Note 6
including the release of 1,000,000 shares of Roadmaster common stock
owned by Equitex and pledged to a bank as collateral. The Company's
president and TICO further agreed to transfer to Roadmaster all the
Roadmaster common stock purchase warrants held by the Company's
president along with TICO's payment of $200,000 to Roadmaster.
Based upon completion of the Exchange Agreement in 1994 and
refinancing of debt obligations, the Board of Directors of the
Company approved a plan to, at the option of TICO or its assigns,
convert the value of instruments transferred to TICO under the
Exchange Agreement, in whole or in part, into Preferred Stock, which
could be converted to Common Stock of the Company at a price $.34
per share. On October 3, 1994 the Company created a new class of
Series B 8% Cumulative Convertible Preferred Stock and allowed for
its exchange, on a share-for-share basis, with the Company's Series
A Preferred Stock. On that same day, TICO notified the Company that
it wished to exchange the 29,500 shares of Series A Preferred Stock
for 29,500 shares of the newly issued Series B Preferred Stock, as
was permitted under the Certificate of Designations of Rights and
Preferences of the Series B Preferred Stock. On that same day, TICO
notified the Company that it wished to convert 17,000 shares of its
Series B Preferred Stock for 5,040,000 shares of the Common Stock of
the Company, as the Series B Preferred Stock allows for a conversion
rate of 1 share of Series B Preferred Stock for 294.12 shares of the
Company's Common Stock.
(b) Other
In 1994, Equitex earned a fee of $40,000 as a result of the
extension of the revolving credit facility with the bank. As part of
the Exchange Agreement this amount was transferred to TICO and paid
in June, 1994.
First Equity established a letter of credit on behalf of the Company
in December, 1993, which was amended during 1994, totaling $271,200.
This letter was established to purchase inventory. In addition,
First Equity advanced the Company $250,000 during January, 1994
which was repaid in June, 1994.
The Company has agreed to pay Williams 0.5% per annum of the
outstanding U. S. Bank revolving loan balances on a quarterly basis
in consideration for providing its guarantee of
<PAGE>
the revolving loan. This fee was $60,411 for the year ended December
31, 1996 and $18,083 for the year ended December 31, 1995.
The Company's interest expense for Williams was $448,000 for the
year ended December 31, 1995.
In 1995 the Company issued Enercorp 100,000 shares of common stock
for services rendered in connection with the Palm Springs
acquisition.
During 1996 the Company borrowed from affiliated parties by issuing
subordinated notes. As of 12/31/96, the Company owed $885,000 to the
following affiliated parties:
First Equity Corporation, Joseph Giuffre (Former Chairman
of Palm Springs), Tony Cashen (Company
Director), Enercorp, Clarence Yahn (Company Director).
3. INVENTORIES
Inventories consist of the following (in thousands):
December 31,
1996 1995
Raw materials $4,153 $4,608
Work-in-progress 995 1,014
Finished goods 2,809 3,287
----- ------
Total $7,957 $8,909
===== =====
4. INVESTMENT IN AND ADVANCES TO AFFILIATES
A former officer of the Company is an officer of MacGregor, and
MacGregor and the Company have common investors. During the year ended
December 31, 1994 the Company sold its remaining 125,106 shares of MacGregor
for $69,000, resulting in a loss of $38,000.
5. DEBT
On April 14, 1994 the Company was advised by Bank America that the
Second Amended Restated Loan and Security Agreement ("Credit Agreement")
between Bank America and Ajay had been purchased by Roadmaster. On May 5,
1994 Ajay paid Roadmaster in full all outstanding obligations due under its
Credit Agreement and entered into a Loan and Security Agreement ("Loan
Agreement") with Williams for a term loan of up to $7,000,000. The Loan
Agreement required
<PAGE>
monthly interest only payments at the prime rate of First Interstate Bank of
Oregon plus 2%, was originally scheduled to expire on November 4, 1994 and
was extended to May 5, 1995. The terms and conditions of the Loan Agreement
were substantially the same as the prior Credit Agreement with Bank America,
except that the Loan Agreement was a term loan.
The Williams loan was paid on July 25, 1995, when the Company entered
into a Revolving Loan Agreement with United States National Bank of Oregon
("U. S. Bank") for a credit facility of up to $8,500,000. All of the
Company's subsidiaries and Williams guaranteed payment of this credit
facility and the Company and its subsidiaries pledged their inventory and
receivables as collateral. The Revolving Loan is evidenced by demand notes,
requires monthly interest only payments at the prime rate of U. S. Bank
(currently 8.50% as of March 26, 1997) and will be reviewed on June 30,
1997. On October 2, 1995 the Company and U. S. Bank agreed to modifications
to the Revolving Loan Agreement increasing the credit facility from
$8,500,000 to $13,500,000. The Company was permitted to borrow up to
$8,500,000 against 80% of eligible accounts receivable and 50% of eligible
inventory and up to an additional $5,000,000 through its 2-year bulge loan
facility. The increased facility provided the Company the funds necessary
to acquire certain assets of both Korex Corporation and Palm Springs Golf
Company, Inc. in early October, 1995. The Company is required to maintain a
minimum tangible net worth of $2,500,000 and a debt leverage ratio of not
greater than 6.0 to 1. The adverse operating results of Palm Springs Golf
subsequent to its acquisition has used approximately $2.0 million of the
Company's liquidity. This resulted in U. S. Bank advising the Company that
the Company was in noncompliance with certain covenants under its loan
agreement and the bank restricted the funds available to Ajay under the
agreement. Ajay operated until February 12, 1997 on a revolver limit of
$8.5 million. On February 12, 1997 U. S. Bank reduced the line to a $7.0
million maximum facility. The Company has continued to make all interest
payments on time and has operated within the limit amounts contained in the
old and new facility lines. This caused the Company to rely on extended
credit terms from its venders and additional funds from affiliated parties.
On April 14, 1997 U. S. Bank agreed to waive the existing default and
restructure the line to its former $8.5 million limit although requiring a
$500,000 term loan payment in June, less favorable formula borrowing rates
and an increased interest rate. The restructured facility will terminate by
June 30, 1997.
The Company has worked with banks and other lending institutions in
seeking sufficient asset based financing to cover its needs through 1998.
The Company believes that it will be able to put new financing in place by
June 30, 1997.
The Company has agreed to pay Williams 0.5% per annum of the
outstanding Revolving Loan balance on a quarterly basis in consideration
for providing its guarantee of the Revolving Loan. Guarantee fees paid
Williams were $60,411 in 1996 and $18,083 in 1995.
<PAGE>
The Company's U. S. Bank borrowings consisted of the following:
December 31,
1996 1995
Revolving credit facility:
Balance $11,103,844 $10,792,706
Interest rate 8.25% 8.25%
Unused amount of facility $2,396,156 $ 2,707,294
Average amount outstanding
during the period 11,059,660 $ 9,758,991
Weighted average interest
rate 8.25% 8.72%
Maximum amount outstanding
during the period 13,481,108 $10,936,687
Outstanding commercial letters of credit totaled approximately $322,000
and $717,000 at December 31, 1996 and 1995 respectively.
Other 12/31/96 borrowings consist of $885,000 from affiliated parties
and a $195,609 real estate loan.
Debt payments are as scheduled (in thousands):
1997 $16,580
1998 22
1999 22
2000 22
2001 172
2002 and thereafter -
The seasonal nature of the Company's sales creates fluctuating demands
on its cash flow, due to the temporary build-up of inventories in
anticipation of, and receivables subsequent to, the peak seasonal period
which historically has been from February through May of each year. The
Company has relied and continues to rely heavily on its revolving credit
facility for its working capital requirements.
6. INCOME TAXES
As discussed in Note 2, the Company adopted SFAS No. 109 at the
beginning of 1992. There was no cumulative effect of this accounting change
and its adoption had no impact on 1992 net income.
<PAGE>
The actual income tax expense (benefit) differs from the statutory
income tax expense (benefit) as follows (in thousands):
Year Ended December 31,
1996 1995 1994
----- ------ ------
Statutory tax expense
(benefit) at 34% $ (893) $(208) $(1,047)
Utilization of net
operating loss
carry forward - - -
Loss producing no current
tax benefit 896 208 1,047
----- ----- -------
$ - $ - $ -
======== ======= =========
The components of the net deferred tax asset/liability were as follows (in
thousands):
December 31,
1996 1995
Deferred tax asset,
principally accrued
expenses, reserves
and loss carry forwards $ 3,274 $2,339
Deferred tax liability,
principally depreciation and amortization (107) (83)
Valuation allowance (2,048) (2,048)
------ ------
Net $ 1,119 $ 208
====== =======
The Company has assessed its past earnings history and trends, sales
backlog, budgeted sales, and expiration dates of carryforwards and has
determined that it is more likely than not that $987,000 of deferred tax
assets will be realized. The remaining valuation allowance of $2,048,000 is
maintained on deferred tax assets which the Company has not determined to be
more likely than not realizable at this time. The Company will continue to
review this valuation allowance on a quarterly basis and make adjustments as
appropriate.
The Company had net operating loss carry forwards for Federal tax
purposes of approximately $8,501,000 at December 31, 1996, which expire in
varying amounts in the years 2006 through 2011. Operating loss carry
forwards totaling $304,000, $4,735,000, $1,244,000 and $1,752,000 are
available to offset future state taxable income of Sports, Ajay, Leisure
Life and Palm Springs respectively, which expire in varying amounts in the
years 2006 through 2011. Future changes in ownership as defined by section
382 of the Internal Revenue Code, could limit the amount of net operating
loss carryforwards used in any one year.
<PAGE>
7. STOCKHOLDERS' EQUITY
(a) Preferred Stock
On October 3, 1994 the Company created a new class of Series B
8% Cumulative Convertible Preferred Stock and allowed for its
exchange, on a share-for-share basis, with the Company's Series A
Preferred Stock. On that same day, TICO notified the Company that it
wished to exchange the 29,500 shares of Series A Preferred Stock for
29,500 shares of the newly issued Series B Preferred Stock, as was
permitted under the Certificate of Designations of Rights and
Preferences of the Series B Preferred Stock. On that same day, TICO
notified the Company that it wished to convert 17,000 shares of its
Series B Preferred Stock for 5,040,000 shares of the Common Stock of
the Company, as the Series B Preferred Stock allows for a conversion
rate of 1 share of Series B Preferred Stock for 294.12 shares of the
Company's Common Stock.
Cumulative dividends are payable on the Series C Preferred
Stock at any time through December 31, 1997 at an annual rate of
$1.00 per share. The Warrants are redeemable by the Company at $0.5
per Warrant under certain conditions. The terms of these Warrants
are identical to the Company's publicly-held Warrants to purchase
Common Stock. The Company used the $2.8 million of net proceeds for
inventory and accounts receivable financing and to acquire certain
assets of Korex and Palm Springs.
On July 26, 1995 the Company's Registration Statement filed in
connection with an offering of 325,000 shares of Series C 10%
cumulative Convertible Preferred Stock and 325,000 Warrants was
declared effective. The Series C Preferred Stock is convertible into
shares of the Company's Common Stock based on a value of $10.00 for
each Preferred share and $.6875 for the Common.
Dividends on the Series C 10% Cumulative Convertible Preferred
Stock have been paid through the fourth quarter of 1996. The
dividend for the first quarter ended March 31, 1997 has not been
declared. The Company has dedicated all available funds to support
continuing operations of the Company until a new loan facility is in
place.
(b) Stock issued to officers
The Company has a stock incentive plan for officers of the
Company, under which up to 150,000 shares of the Company's stock may
be granted annually. In 1994, the Company issued 150,000 shares of
common stock to an officer in lieu of compensation and in 1995 the
Company issued 34,000 shares. No stock was issued to officers under
this plan in 1996.
<PAGE>
(c) Stock Issued for Acquisitions
On August 1, 1994 the Company reached an agreement in
principle to acquire the outstanding common stock of Leisure Life,
Inc. In exchange for acquiring all the common stock of Leisure Life,
the Company issued 1,500,000 shares of its common stock to the
owners of Leisure Life, with 400,000 of those shares being issued
subject to certain performance requirements being met by Leisure
Life.
In November 1995 the former owner of Leisure Life returned
400,000 shares of stock to the Company and in March 1996 returned
200,000 shares due to not achieving performance requirements. An
additional 150,000 1996 performance incentive shares held in escrow
since March 1996 were returned to the Company in April 1997.
(d) Warrants and Options
A summary of activity related to warrants and options to
purchase Company common stock is as follows:
Warrants and Price
Options Per Share
Balance, January 1, 1994 2,885,970 $ .34 - 1.00
Expired (450,000) .80 - 1.00
Reissued 200,000 .34 (i)
Reissued 94,500 .34 (ii)
Issued to Williams 16,274,754 .34 - 1.00 (iii)
Exercised by Williams (4,117,647) .34 (iv)
Issued to Directors 10,000 .44 (v)
Issued to Employees 840,000 .40 - .80 (vi)
-----------
Balance, December 31, 1994 15,737,577 .34 - 1.00
Issued to employees 295,000 .625 - .6875(vii)
Williams options adjusted (1,046,234) .50 - 1.00 (viii)
Issued - public offering 373,750 1.00 (ix)
Issued to Directors 10,000 .66 (x)
-------------
Balance, December 31, 1995 15,370,093 .34 - 1.00
Exercised by Employees (30,000) .40
Issued to Directors 10,000 .625 (xi)
Issued to Employees 700,000 .40 (xii)
Issued for Acquisition 800,000 .75 - .90 (xiii)
Expired (242,500) .80 - 1.00
-----------
Balance, December 31, 1996 16,607,593 $ .34 - 1.00
(I) Warrants originally issued to Roadmaster in 1990. Transferred to
Acrodyne under the Exchange Agreement, expired and reissued.
(ii) Warrants originally issued to Equitex in connection with the
Company's private placement. Transferred to Acrodyne,
expired and reissued.
(iii) Warrants issued to Williams as consideration for loans to
Ajay Leisure as part of a joint venture implementation
agreement dated May 1994.
(iv) Exercised and applied proceeds ($1,400,000) against debt.
(v) Director stock options of which 6,667 have vested.
(vi) Employee stock options of which 786,250 shares have vested.
(vii) Employee stock options of which 147,500 shares have vested.
(viii) Warrants returned by Williams as consideration for early
loan payoff.
(ix) Public offering of 7/26/95.
(x) Director stock options of which 3,333 have vested.
(xi) Director stock options of which none have vested.
(xii) Employee stock options of which none have vested.
(xiii) Issued to former shareholders of Palm Springs Golf Company,
Inc., a business acquired by the Company in October 1995.
(e) Private Placements
In 1994, the Company issued to related parties, via private
placement, 2,941,177 shares of common stock and received proceeds of
$1,000,000. The Company also issued 4,117,647 shares of common stock to a
related party in exchange for a reduction of debt totaling $1,400,000.
8. MAJOR CUSTOMERS
The Company operates in two lines of business, the manufacture and
distribution of sports equipment and outdoor leisure furniture. The
Company's customers are principally in the retail sales market. The Company
performs ongoing credit evaluations of its customers' financial conditions
and does not generally require collateral.
<PAGE>
Sales to customers which represent over 10% of the Company's net sales
are as follows:
Year ended December 31,
Customer 1996 1995 1994
A 29% 36% 41%
B 14% * *
* Amounts are less than 10% of net sales.
9. BUSINESS SEGMENT REPORTING
The relative contributions to net sales, operating profit and
identifiable assets of the Company's two industry segments for the year
ended December 31, 1996 are as follows (in thousands):
Furniture Golf Corporate Consolidated
--------- ------- --------- ------------
Sales $2,701 $21,640 - $24,341
Operating profit/(loss) (193) (806) (486) (1,485)
Assets 2,512 15,983 - 18,495
Depreciation/Amortization 98 268 - 366
Capital Expenditures 63 213 - 276
10. SPALDING LICENSE AGREEMENT
Ajay has a license from Spalding Sports Worldwide to utilize the
Spalding trademark in conjunction with the sale and distribution of golf
bags, golf gloves, hand pulled golf carts and certain other golf
accessories in the United States. As consideration for this license, Ajay
is required to pay royalties to Spalding based on a percentage of sales,
subject to annual minimums of $500,000 for the year ended June 30, 1995,
and $550,000 for the years ended June 30, 1996 through June 30, 1998. The
current agreement expires June 30, 1998. Other conditions of the agreement
require the Company to expend 2% of sales under the agreement on
advertising and related costs, with 1% remitted to Spalding. The Company
must also maintain a current ratio of 1.0 to 1.0. Approximately 52% of the
Company's 1996 and 53% of 1995 sales were Spalding products.
Royalty expense due Spalding was $480,000, $484,000, and $494,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
11. LEASES
Future aggregate minimum lease payments under noncancelable operating
leases with initial or remaining terms in excess of one year are as
follows (in thousands):
<PAGE>
1997 $ 703
1998 550
1999 527
2000 499
2001 298
2002 and thereafter 145
-------
$2,722
Total rental expense (in thousands) under operating leases (net of
sublease rental income from an affiliate of $8, $13 and $8, respectively)
was $504, $627, and $556 for the years ended December 31, 1996, 1995 and
1994, respectively.
12. NET (LOSS) PER COMMON SHARE
Earnings or loss per share has been computed by dividing net income
or loss, after reduction for preferred stock dividends in 1996 ($301,000),
in 1995 ($136,000) and 1994 ($202,000) by the weighted average number of
common shares outstanding. No exercise of warrants outstanding was assumed
in 1996, 1995, or 1994, since any exercise of warrants would be
antidilutive.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $1,098,819, $762,157, and $607,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
Non cash financing and investing transactions were as follows:
During 1994, 150,000 shares of the Company's common stock were
issued to an officer of the Company in lieu of wages.
In exchange for acquiring in 1994 all of the common stock of
Leisure Life, Inc. the Company issued 1,500,000 shares of its common
stock to the owner of Leisure Life. In November, 1995 the former
owner of Leisure Life surrendered 400,000 shares of the Company's
common stock and in March, 1996 surrendered 200,000 shares of the
Company's common stock due to unmet performance requirements.
During 1994, 4,117,647 shares of the Company's common stock were
issued to a related party in exchange for a reduction in debt
totaling $1,400,000.
In 1995 11,210 preferred stock shares were converted into 163,055
shares of common stock.
<PAGE>
During 1995 the Company issued common stock as follows:
Issued to Shares
--------- -------
Employees 12,000
Fund acquisitions 895,054
Affiliate in lieu of payment for services 100,000
Officer in lieu of bonus 34,000
During 1996, 17,620 preferred stock shares were converted into
256,293 shares of common stock.
In 1996 an employee exercised options to acquire 30,000 common
shares.
14. CONTINGENCIES
The Company is subject to certain claims in the normal course of
business which management intends to vigorously contest. The outcomes of
these claims are not expected to have a material adverse affect on the
Company's consolidated financial position or results of operations.
<PAGE>
Schedule VIII
AJAY SPORTS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1996, 1995, and 1994
(Amounts in Thousands)
Balance Charged to Balance
beginning costs and Deductions at end
expenses expenses (describe) of period
Reserve for Product Warranty:
Year ended:
December 31, 1996 $136 $203 $254 (1) $ 85
December 31, 1995 139 198 201 136
December 31, 1994 112 276 249 139
Allowance for Doubtful Receivables:
Year ended:
December 31, 1996 $287 $ 91 $238 (2) $140
December 31, 1995 101 330 144 287
December 31, 1994 230 62 191 101
Reserve for Inventory Obsolescence:
Year ended:
December 31, 1996 $384 $498 $391 $491
December 31, 1995 430 378 424 384
December 31, 1994 160 430 160 430
Notes:
(1) Represents amounts paid for product warranty claims.
(2) Represents amounts charged off as uncollectible.
<PAGE>
EXHIBIT 21.0
LISTING OF SUBSIDIARIES
SUBSIDIARIES STATE OF INCORPORATION
------------ ----------------------
Ajay Leisure Products, Inc. Delaware
Leisure Life, Inc. Tennessee
Palm Springs Golf, Inc. Colorado
<PAGE>
EXHIBIT 23.0
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements
of Ajay Sports, Inc. and Subsidiaries on Form S-3 Registration No.
333-11365 and Form S-8 of our report dated April 14, 1997, appearing in
this Annual Report on Form 10-K of Ajay Sports, Inc. and Subsidiaries for
the year ended December 31, 1996.
\s\Hirsch & Silberstein, P.C.
- ----------------------------
Hirsch & Silberstein, P.C.
April 14, 1997
1
<PAGE>
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