Letter to the Stockholders
Dear Fellow Investors:
The performance of your company over the past year has shown many positive
results, a number of challenges, and some areas of continued disappointment. Two
of our businesses continue to show improvement, but the continued substandard
performance of one business dramatically hurt the overall performance of Ajay
Sports during the past year.
On the positive side, overall sales eclipsed the $30 million mark for the first
time in the company's history, reaching $30,300,000 for the year ended December
31, 1997. This was a 25% increase over the sales of the prior year and is nearly
two and half times the sales of just three years ago. This result was
accomplished by a continued focused on new product development, the desire to
increase distribution through existing retailers, and the addition of new
retailers.
This was especially true in the case of our mass-market golf business, Ajay
Leisure Products, and in our casual furniture business, Leisure Life. These
subsidiaries continued to show significant improvement in sales, and, in the
case of Ajay Leisure, a dramatic gain in operating profit. Offsetting these
results was the disappointing performance of our off-course golf business, Palm
Springs Golf. Sales were little changed in this business and the operation lost
nearly $3 million in the past year. Overall, including some one-time charges
related to Palm Springs Golf, the company reported a net loss of $3.5 million
for the year.
This bottom-line performance was not acceptable. Part of this problem will be
solved by not having the extraordinary charges with which we had to deal this
year, and we are working diligently to fix the causes of the operating problems
that, when solved, will help to turn around the financial performance of the
company.
As I mentioned before, the performance of our principal subsidiary, Ajay Leisure
Products, continued to show solid improvement. Sales increased 25% to $21.6
million and operating profit increased 250% to $915,000 for the year. There were
a number of factors that contributed to this performance:
- -the market was demanding larger bags with more features, and Ajay responded
with a number of new designs at higher price points. Many customers told us that
the golf bag line we presented to them was the strongest we have ever had, and
very competitive in the marketplace
- -the area of licensed products continued to grow, witnessed by the exceptional
popularity of National Football League head covers and a similar product
licensed from a number of major colleges and universities in the United States.
This is an area that we expect to continue to expand in 1998
- -we were able to produce a hand-pulled golf cart in the United States with a
number of attractive features and at a cost that was extremely competitive with
foreign imports
- -inventories were reduced by over $1 million and inventory turnover was
increased through the consolidation of five product lines into two principal
product groups
- - production lines were overhauled to improve manufacturing efficiency
The golf bag product line is one in which the company has made significant
improvements over the past few years. It is clear from the results obtained in
1997 that our strategy - to deliver the style and features of the best-known bag
manufacturers at a better value to our customers -- is working.
Many of our higher priced bags involve a far greater amount of time in sewing
due to the added features that are required. To ensure that we could compete, a
major accomplishment during 1997 was a strategic manufacturing alliance with a
mainland Chinese company. Combined with Ajay's own capabilities in Mexico and
Wisconsin, this allowed us to be able to deliver higher price point bags that
our customers were demanding, and do so at a very competitive price.
<PAGE>
The results at Ajay Leisure Products and our other subsidiaries were
accomplished despite significant cash shortages throughout the year. This caused
the company to incur higher costs to ship supplies and finished product by air
freight, decreased our ability to purchase components and supplies at the best
prices and terms, and resulted in inefficiencies in our manufacturing operation
from having to stop and restart production when shortages occurred. This was
especially true in the first half of the year, prior to the completion of a new
credit facility that made additional capital available to operate our business.
Despite the 250% gain in operating profit, there were still a number of costs
that Ajay Leisure Products incurred that, had they not been there, would have
resulted in even greater gains in operating profit.
As previously mentioned, there have been a number of opportunities on which we
have just begun to capitalize in this business. The first of these is licensed
products, and we are looking to expand this category through licensing
arrangements with sports and non-sports entities. We will also look to sell
these products in distribution channels other than those in which we have
historically sold our products. In addition, the number of children who are
taking up the game of golf has increased dramatically, due in large part to the
popularity of the rising young stars of the PGA Tour. Ajay Leisure designed a
junior products line that has been very well received and which we expect to
grow in sales in the coming years. We also expect to introduce a new look in
golf carts that will be rolled out later in 1998, and we will continue to focus
on higher price point bags this year and in the future.
Our Leisure Life subsidiary continued its impressive increase in sales during
1997. Sales grew to $4.4 million, a 63% increase compared to the prior year.
Despite the sales gain, Leisure Life recorded a $186,000 operating loss during
the year, which was a slight improvement over 1996. We believe much of this
operating loss can be attributed to "growing pains" experienced in this
relatively new business as well as development costs related to the new line of
indoor shelving.
We decided that if Leisure Life were to grow and be a valuable business to Ajay
Sports over the long term, it would have to follow a two-part strategy. First,
the company would have to expand and improve its product line. Second, it would
have to dramatically increase its access to the distribution channels in which
its products were most likely to be sold. We were successful in both of these
areas, but in our desire to fill the product pipeline to the stores to which we
were selling, quality issues arose that had to be addressed. Through the hiring
of a Quality Control Manager, totally redesigned owner's instruction manuals,
new manufacturing processes and new equipment, we believe we have addressed the
quality problem that caused unexpected expenditures during the year.
On the positive side, the number of storefronts that sell Leisure Life products
increased 40% to nearly 3,000 by the end of 1997. We are now selling our
products in 16 countries around the world, and exports now account for nearly
20% of Leisure Life's sales. This is a testament to the type of products that
are being produced at our factory in Tennessee -- ones with simple (and
sometimes patentable) designs, made of durable materials, with unique features
that deliver a very functional piece of furniture and a great value for the
customer's money.
We are now expanding our Leisure Life product line to include new categories.
These include the shelving product and an exciting new product line that Leisure
Life will be selling in the United States. We will be working with Jobek Gmbh in
Germany to represent their line of hammocks in the United States, while Jobek
will sell Leisure Life products through their distribution channels in Europe.
This is an excellent opportunity to add a quality product line to that of
Leisure Life while gaining exposure in the European market in a very
cost-effective manner.
During 1998, we expect that the financial problems in Asia will have some impact
on the sales of Leisure Life products in that market. We had made significant
sales inroads in South Korea, but it appears that this problem may cause our
progress in Korea to temporarily slow down. To offset this, we have opened
distribution in Australia and Chile and are attempting to do the same in Brazil
and Argentina.
To improve the acceptance of our indoor shelving product, we will be evaluating
every element of the supply chain to determine how we can become more cost
competitive. We are also targeting the porch furniture market, for which we have
not had products up to this point. The high quality pressure treated wood used
in outdoor furniture is not required for this market. As such, we are looking to
select different types of raw materials that are less expensive and allow us to
deliver a high quality product at a significantly reduced cost. In addition, we
have redesigned our patented height adjustment system for a new porch swing
product, and we will offer stained finishes on these products in the near
future.
<PAGE>
Our biggest challenge of 1997 was to deal with the continuing problems at our
Palm Springs Golf operation. Sales were flat at $4.3 million for the year, as
compared to the prior year, and this subsidiary recorded an operating loss of
$2.1 million and a net loss of $2.8 million. The challenge we faced was from a
golf club market that was undergoing radical change, even from what it was just
two or three years ago. The market has become dominated by five large and well
financed companies who are spending significant amounts of money on product
development and marketing, and they have set the tempo for the rest of the club
market. As a result, product life cycles in clubs that used to be five to seven
years are now one year or less. This product change created inventory
difficulties that we were unable to effectively manage.
As a result, we made a strategic decision in late 1997 to scale back our
involvement in the golf club business and close our manufacturing and
distribution operation in Palm Springs. This was done to attempt to deal with
the excessive overhead that we had in this operation by consolidating it into
our Delavan, Wisconsin manufacturing facility. This move will reduce operating
costs, allow us to gain better control over inventory and accounts receivable,
and improve customer service. It is an important step in the right direction. As
part of the decision, we will focus on four areas where we believe we have a
competitive advantage in the marketplace -- golf bags, pull carts, gloves and
accessories.
In 1998, we believe the key to turning around this business is the same as we
have done with our other two subsidiaries -- focus on new product development,
refine manufacturing, and expand distribution. We are in the process of
finalizing designs on two new bags that we believe will have patentable
characteristics and which we expect to introduce in the fourth quarter of 1998.
In addition, at Palm Springs Golf we have changed from a singular focus on
in-house sales representatives and moved to the recruiting and hiring of outside
sales reps. These people will cover high margin accounts that could not be
previously handled by our in-house reps on a cost-effective basis. In addition,
we have begun to examine a selling system that would utilize the Internet and
World Wide Web to market and distribute the products of Palm Springs Golf.
In summary, we believe we are going in the right direction in fine tuning the
two operations that are performing well, and that we are taking the necessary
actions to improve the one that is not. Financing the business is a key part of
this, and we continue to examine alternatives that will provide financing
resources required to fuel the continuation of the significant sales growth we
have seen over the past three years.
We believe the basic elements of our strategy are sound. They include the
development of new products, the need to continually take costs out of our
operations, the development of strategic supplier resources, and the need to
expand our customer base. We continue to work diligently in all four of these
areas. In the end, customers want value and we believe that if we have the right
cost structure and value for the customer's money, we can be successful in this
business in the future. We appreciate your continued support of our efforts.
Thomas W. Itin Clarence H. Yahn
<PAGE>
CORPORATE INFORMATION
Board of Directors
- ------------------
Thomas W. Itin Anthony B. Cashen
Chairman of the Board, President and Senior Partner
Chief Executive Officer Lamalie Amrop International
New York, NY
Clarence H. Yahn Robert R. Hebard
Chief Operating Officer President
Enercorp, Inc.
West Bloomfield, MI
Robert D. Newman
Vice President and General Manager
Leisure Life, Inc.
Executive Officers
Thomas W. Itin Duane R. Stiverson
Chairman of the Board, President and Chief Financial Officer
Chief Executive Officer
Robert R. Hebard
Clarence H. Yahn Corporate Secretary
Chief Operating Officer
- ------------------------------------------------------------------------------
Corporate Office Administrative Office
- ---------------- ---------------------
1501 E. Wisconsin Street 7001 Orchard Lake Road, Suite 424
Delavan, WI 53115 West Bloomfield, MI 48322
(414) 728 5521 (248) 851 5651
(414) 728 8119-fax (248) 851 9080-fax
Transfer Agent Auditors
- -------------- --------
American Securities Transfer & Trust, Inc. Hirsch & Silberstein, P.C.
1825 Lawrence Street, Suite 444 31731 Northwestern Hwy., Suite 156W
Denver, CO 80202 Farmington Hills, MI 48334
Common Stock Information
- ------------------------
The Company's securities trade on the Nasdaq SmallCap Market or other OTC
markets under the following symbols: Common: AJAY Warrants: AJAYW Preferred:
AJAYP Units: AJAYU
Annual Meeting
- --------------
The Annual Meeting of the Stockholders of Ajay Sports, Inc. will take place at
the Company's Corporate Office in Delavan, WI on Friday, May 29, 1998 at 11:00am
CDT.
