UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Mark One
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
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 Identification No.)
Incorporation or Organization)
1501 E. Wisconsin Street
Delavan, Wisconsin 53115 (414) 728-5521
- --------------------------------------- --------------------------------
(Address of Principal Executive Offices (Registrant's Telephone Number,
including Zip Code) including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Units (each consisting of 5 shares of
Common Stock and 2 Warrants)
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
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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.
The aggregate market value of the voting stock held by nonaffiliates as of
February 12, 1998 was $1,598,711. The number of shares outstanding of the
Registrant's $.01 par value common stock at February 12, 1998 was 23,274,039.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for annual meeting to be held
May 29, 1998 ("1998 Proxy Statement") have
been incorporated by reference into
Part III of this Form 10-K.
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Ajay Sports, Inc.
Index
December 31, 1997
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 14-17
Item 8. Financial Statements F-1 - F-19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 17
PART III.
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners and
Management 18
Item 13. Certain Relationships and Related Transactions 18
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 10-K 19-22
SIGNATURE PAGE 23
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PART I
Item 1. Description of Business
General
Ajay Sports, Inc. (the "Company") markets and distributes golf clubs, golf
bags, golf accessories, hand-pulled golf carts and 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
under the Spalding(R), Palm Springs(R), Pro Classic(R), Leisure Life(R), Pro
USA(R) and private label 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 (248) 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
Ajay Leisure Products, Inc. and Palm Springs Golf, Inc. are located at 1501 E.
Wisconsin St., Delavan, WI 53115.
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 for quality control. 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. In addition, the Company maintains a
sourcing office in its largest foreign source markets to assure quality,
reliability, new product ideas and a constant commercial interface.
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Tradition of Innovation. Throughout its history, the Company has maintained
a tradition of new product development. New bag styles, new accessories, new
gloves, new furniture and other new product designs for 1998 are continuing
examples of the Company's commitment in this area.
Breadth of Product Lines. The Company offers a wide selection of golf
clubs, golf bags, golf gloves, golf carts and golf accessories, and a growing
list of outdoor and indoor casual living 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 mainly of
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 have historically accounted
for approximately 96% of Ajay's gross sales. Golf clubs historically have
accounted for 65% of Palm Springs sales. In the future, beginning with 1998,
Palm Springs is emphasizing bags, accessories, gloves and carts over clubs.
Leisure Life's sales 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.
Accordingly, and particularly with the new distribution channel opened as a
result of the Palm Springs 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 and personnel.
The Company is developing new products for sports, other than golf, that
utilize the Company's existing manufacturing capabilities, specifically its cut
and sew operations, with the goal of commencing sales during the summer and fall
to offset the historical 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.
Leisure Life has introduced a new line of swing furniture for the 1998
sales year. This line is again less expensive than its previous line of swing
furniture and incorporates improved product performance features, design
features, improved illustration based instructions, improved packaging, improved
quality and several cost reduction features. It also plans to expand on the
convertible combination bench/table product. Other new products include a line
of leisure dining tables, storage shelving, book cases and painted indoor
furniture.
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 2.7% fewer rounds of golf
played in 1996 than 1995 which was up 5.5% from 1994. The pace of golf course
development also continues steadily. NGF reports that 429 golf courses were
opened for play in 1997 compared to 442 in 1996 and marking the
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3rd straight year where openings exceeded 400. According to NGF market research,
the number of U. S. golfers is approximately 25 million. This group consists of
80% male and 20% female and 78% are between the ages of 17 and 60. The Company
believes there is a great opportunity for increased participation by females and
golfers under 18 and over 60. This belief is based on expected increased
interest by younger players influenced by Tiger Woods and Karrie Webb, increased
emphasis on women's golf and improvements in health, leisure time and increasing
numbers of people moving into the over 60 group.
Licensing. A significant portion of Ajay's revenues result from the sale of
products manufactured and sold pursuant to various license 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 Company is
currently reviewing a proposal from Spalding Sports Worldwide to extend its
current license agreement, due to expire June 30, 1998, through June 30, 2000.
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.
According to the proposed agreement, 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 75%, 69%, and 67% of
Ajay's total sales related to products sold under the Spalding license agreement
during the years ended December 31, 1997, 1996, and 1995, 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 for Ajay and Palm Springs products
occurs at facilities located in Delavan, Wisconsin. The Palm Springs facility,
formerly located in California, was integrated into Delavan beginning November
14, 1997.
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 30% of the Company's
sales in 1997. The second and third largest customers accounted for 15% and 11%
of the Company's sales. The loss of any 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 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.
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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 in a relaxed casual
manner.
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 or
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 20% 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.
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Competition
Ajay competes in the golf bag, cart and accessory business with several
other domestic companies including Wilson, Gold Eagle, MacGregor, Dunlop, Knight
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.
Palm Springs 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. Other
competitors are Datrek, Miller, Burton, Gold Eagle and Mitsushiba. 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. Competitions include Richie Industries, Palmetto
Mfg., Lakeland Mills, Rivenwood and Atwood. 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 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 and Trademarks
Ajay, Leisure Life and Palm Springs own several patents and trademarks 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 13, 1998, the Company had a total of 418 employees: 120
employees at the Delavan, Wisconsin facility, 223 employees at the Mexicali,
Mexico facility and 75 employees at the Baxter, Tennessee 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.
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Through its wholly-owned subsidiary, Ajay Leisure de Mexico, S.A. de C.V.,
Ajay leases an additional manufacturing facility consisting of approximately
30,000 square feet in Mexicali, Mexico. The lease expires on January 14, 2005.
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 $210,000.
Although relocated in November 1997 to Delavan, Wisconsin, Palm Springs
still leases an empty facility in Cathedral City, California, which consists of
approximately 17,000 square feet. The lease expires March 1, 2002. The Company
is attempting to sublease or otherwise renegotiate a settlement with the owner.
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 insurance 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.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
The Company's Common Stock, Units, 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 trade prices
given quarterly by NASDAQ for the last two years.
COMMON STOCK TRADE PRICES
- ------------ ------------
1996 HIGH LOW
- ---- ---- ---
First Quarter $ .75 $ .41
Second Quarter $ .75 $ .30
Third Quarter $ .47 $ .34
Fourth Quarter $ .44 $ .25
1997
- ----
First Quarter $ .31 $ .16
Second Quarter $ .34 $ .13
Third Quarter $ .28 $ .19
Fourth Quarter $ .34 $ .13
UNITS
1996 HIGH LOW
- ---- ---- ---
First Quarter $ 4.00 $ 3.00
Second Quarter N/A N/A
Third Quarter $ 2.75 $ 2.75
Fourth Quarter $ 1.50 $ 1.50
1997
- ----
First Quarter $ 1.00 $ 1.00
Second Quarter N/A N/A
Third Quarter N/A N/A
Fourth Quarter $ .75 $ .75
WARRANTS (Delisted 11/13/1997)
1996 HIGH LOW
- ---- ---- ---
First Quarter $ .25 $ .06
Second Quarter $ .25 $ .16
Third Quarter $ .19 $ .06
Fourth Quarter $ .13 $ .03
1997
- ----
First Quarter $ .03 $ .03
Second Quarter $ .05 $ .02
Third Quarter $ .03 $ .02
Fourth Quarter $ .02 $ .02
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SERIES C PREFERRED STOCK TRADE PRICES
- ------------------------ ------------
1996 HIGH LOW
- ---- ---- ---
First Quarter $ 9.63 $ 6.25
Second Quarter $ 9.75 $ 7.50
Third Quarter $ 8.25 $ 7.00
Fourth Quarter $ 7.50 $ 6.00
1997
- ----
First Quarter $ 6.75 $ 5.25
Second Quarter $ 6.00 $ 4.38
Third Quarter $ 5.00 $ 4.38
Fourth Quarter $ 6.13 $ 3.00
The NASDAQ Stock Market, Inc. issued new standards for continued listing of
SmallCap Market participants which became effective on February 23, 1998. Ajay
is a SmallCap Market participant and as such falls under these new rules. On
that effective date, Ajay did not meet two of the quantitative criteria
established by NASDAQ. Under these criteria, net tangible assets must exceed $2
million and the minimum bid price must exceed $1.00 per share. Under the new
standards, NASDAQ has established a review process for SmallCap companies
temporarily out of compliance. If, after the hearing, NASDAQ is satisfied with a
company's plan to achieve compliance with the new standards in a reasonable
period of time, NASDAQ may issue a temporary waiver to prevent delisting. The
Company has requested a hearing and forwarded to NASDAQ its plan to achieve
compliance. The NASDAQ listing qualifications panel will consider the matter
during the week of April 6, 1998. The panel's final determination will be issued
in the form of a written decision letter.
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
February 12, 1998 are as follows:
Common Stock 391
Preferred C 11
Warrant A 58
Warrant B 3
The Company believes that its round lot common shareholders total over
1,500 based on a street name shareholder listing breakdown with a record date of
2/12/98.
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. Due to a shortage of operating funds to run
the business, dividends have not been paid since January 1997. Until the Company
has cash available for dividends, it does not anticipate declaring or paying
dividends on its Series C preferred stock.
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The Company has declared the following Series C 10% Cumulative Convertible
Preferred Stock dividends during the prior two years:
<TABLE>
<CAPTION>
Declaration Date Amount per Share Record Date Payment Date
----------------- ----------------- ----------- --------------
<S> <C> <C> <C> <C>
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
</TABLE>
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Item 6. Selected Financial Data
Overview
The following table presents summary historical consolidated
financial data derived from audited financial statements of the Company (in
thousands, except per share amounts).
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
------ ------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Net sales $30,330 $24,341 $18,728 $12,899 $15,902
Cost of sales 26,585 20,759 15,291 12,291 14,172
------ ------ ------ ------ ------
Gross profit 3,745 3,582 3,437 608 1,730
Selling, general and
administrative expenses 5,837 5,067 3,247 2,747 2,834
------- ------- ------ ------ -------
Operating income (loss) (2,092) (1,485) 190 (2,139) (1,104)
Nonoperating income (expense):
Interest expense - net (1,280) (1,103) (801) (614) (697)
Loss on write down of advances
to affiliate - - - - (123)
Gain (loss) on disposition of
investment in affiliate, net - - - (38) -
Other, net (144) (38) (41) (289) 3
------- ------- ------- ------ --------
Income (loss) from operations before
income taxes (3,516) (2,626) (652) (3,080) (1,921)
------ ------ ------ ------ ------
Income tax expense (benefit) 0 (893) (208) - -
--------- ------- ------- ---------- ----------
Net income (loss) $(3,516) $(1,733) $ (444) $(3,080) $(1,921)
====== ====== ======= ======== ========
Net income (loss) per common share $ (.17) $ (.09) $ (.03) $ (.27) $ (.24)
======== ======== ======== ======== ========
Weighted average common and common
stock equivalent shares outstanding 23,274 23,242 22,722 12,218 8,812
====== ====== ======= ======= ========
Cash dividends per common share - - - - -
</TABLE>
<TABLE>
<CAPTION>
December 31,
Balance sheet data: 1997 1996 1995 1994 1993
--------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Working capital $ 8,200 $ 3,348 $ 6,323 $ 593 $ 903
Total assets $ 16,614 $ 18,495 $ 18,486 $ 9,365 $ 10,507
Long term debt $ 13,229 $ 5,196 $ 5,111 $ 121 -
</TABLE>
13
<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.
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.
During August, 1994 the Company acquired a leisure furniture business,
Leisure Life, Inc. which has its offices and operations in Tennessee. During
October, 1995 the Company acquired the assets of two golf businesses - Korex
Corporation and Palm Springs Golf Company, Inc.. Korex was subsequently absorbed
within the product lines of Ajay Leisure Products, Inc.. Palm Springs Golf
continued to operate in its California facility until November 14, 1997 when its
operations were consolidated into Delavan, Wisconsin where it now shares
facilities and functions of Ajay Leisure Products, Inc. This consolidation step
was taken in order to gain more effective business control, reduce costs and
expenses and de-emphasize the golf club business, while growing its other
product lines (bags, gloves, accessories, carts). As can be seen in the
accompanying financial statements, footnote 8, Ajay Sports' operating loss was a
result of the poor performance of Palm Springs Golf. The golf club line was the
major contributor to its losses. By consolidating operations, de-emphasizing
clubs and expanding other lines, the Company believes it can significantly
reduce Palm Springs' operating loss in 1998.
Results of Operations
Net Sales
Net sales in 1997 were $30.3 million, an increase of $6.0 million, or 25%
when compared to 1996 sales. The sales increase in the golf product line was
$4.3 million or a 20% increase. This occurred totally in mass market golf sales.
The Company registered no sales increase to specialty golf stores. Furniture
sales increased $1.7 million or 63%. Sales increases in the mass merchant
channel represent increased sales to existing customers and furniture sales
increases represent an increase in the customer base, both foreign and domestic.
Historically, mass market sales has been Ajay's core business. In October 1995,
the Company acquired Palm Springs Golf, Inc. which opened another channel,
specialty golf stores. Palm Springs was primarily a golf club manufacturer and
marketer. Due to the difficulty incurred by Palm Springs in marketing its clubs,
the Company has de-emphasized club sales and is emphasizing the sale of bags,
carts, gloves and accessories to the specialty golf store channel. In November
1997, the Company moved the Palm Springs operations to its Delavan, Wisconsin
facility with the goal of achieving administrative and operating efficiencies
and reducing the losses experienced by the Palm Springs subsidiary.
Sales in 1996 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. 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 the acquisition of Palm Springs Golf in October 1995.
The mass market sales increase was due to increased sales as a result of the
purchase of a golf product line 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.
Gross Margin
The Company's gross margin increased 4.6% to $3,745,000 compared to
$3,582,000 for the 1996 year. Gross margin as a percent of sales declined to
12.3% as compared to 14.7% of sales for 1996. Contributing to this decline were
three factors. The first was the lack of sufficient operating liquidity during
1997 which resulted in increased costs in manufacturing, logistics and product
substitutions. The second factor was the poor performance of Palm Springs' golf
club product line in the marketplace. The final factor was the closing of the
Palm Springs Golf facility in California and
14
<PAGE>
consolidating it into Delavan, Wisconsin. These factors reduced gross profit
margin by approximately 2.0%, 1.6% and 0.7% respectively.
The gross profit amount for the year 1996 of $3,582,000 increased 4.2% over
the previous year, 1995. As a percent of sales, the gross margin in 1996
declined 3.7 % when compared to 1995. The decline was due to adverse results in
the Palm Springs Golf product lines, most particularly in golf clubs. Palm
Springs Golf had been acquired in October 1995 and the turnaround effort in 1996
diluted management focus and vital operating and financial resources from the
companies other business areas resulting in higher costs of production.
Selling, General and Administrative Expenses
As a percent of sales, SG&A was 19.2% for 1997 compared to 20.8% of sales
for the prior year of 1996. SG&A expenses during 1997 increased by $770,000 or
15.2% compared to 1996. The largest contributor to increased expenses was the
cost of refinancing the Company which contributed nearly 1 percentage point to
SG&A. SG&A expenses during 1996 were $5.1 million which compared to $3.2 million
in the prior year 1995. Approximately $1.4 million of the total SG&A expense for
1996 was attributable to the acquisition of Palm Springs Golf. This added $1.4
million to the year 1996.
Interest Expense
Interest expense was $1,280,000 for 1997, an increase of $177,000 over the
prior year. The increase in interest expense in 1997 was primarily the result of
increased debt to finance Palm Springs losses. Interest expense in 1996 was
$1,103,000 representing an increase of $302,000 compared to interest expense of
$801,000 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 Corporation and Palm Springs Golf
Company, Inc.
Income Taxes
The Company had no income tax liability during the years ended December 31,
1997, 1996 and 1995.
Financial Condition
At December 31, 1997 the Company had working capital of $8,011,000, compared
with $3,348,000 at December 31, 1996. This $4,663,000 increase resulted from a
reclassification of short term debt to long term debt as a result of refinancing
during 1997. The ratio of current assets to current liabilities at December 31,
1997 was 2.8, an increase of 1.5 from the December 31, 1996 current ratio of
1.3.
Inventories at December 31, 1997 were $6,398,000 compared to $7,957,000 at
December 31, 1996. Trade accounts receivable were $5,060,000 at December 31,
1997 compared to $5,274,000 at December 31, 1996. The decrease in inventories
was due to the reduction in Palm Springs Golf's inventory.
At December 31, 1997 and 1996 net fixed assets were $1,723,000 and
$1,822,000, respectively. The decrease reflects depreciation in excess of
capital expenditures and disposals related to the Palm Springs Golf
consolidation.
Capital Resources
The Company expended $250,000 in 1997 for capital expenditures, over half of
which was used for improvements in its furniture business manufacturing, with
most of the balance allocated to golf bag manufacturing.
Liquidity
Cash flow from operations for 1997 was negative by $800,000, reflecting the
effect from a $3.5 million net loss and a partial offset from decreases in
inventories of $1.6 million, receivables of $0.2 million, prepaids and other
assets of $0.3 million and depreciation and amortization provisions of $0.4
million. Financing of the negative cash flow came from increased loans from
affiliated parties.
15
<PAGE>
The Company's liquidity varies with the seasonality of its business which,
in turn, influences 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.
In November 1996, U. S. Bank advised the Company that the Company was in
non-compliance with certain covenants of its loan 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 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 forced the Company to rely on extended credit terms from its
vendors and additional funds from affiliated parties. On April 14, the bank
agreed to restructure the line to its former $8.5 million limit although
requiring a $500,000 (subsequently reduced to $250,000) term loan payment in
June and less favorable formula borrowing rates and an increased interest rate.
The restructured facility terminated on July 11, 1997 when the Company obtained
a new line from Wells Fargo Bank.
On July 11, 1997, the Company refinanced its bank debt through a joint
$34,088,000 three-year revolving credit and term loan agreement with Wells Fargo
Bank (the "Loan"). This Loan is a joint and several obligation of the Company
with an affiliate, Williams Controls, Inc. ("Williams"), under which Williams is
the agent for all of the borrowers. The combined Loan facility consists of a
$26,000,000 revolving loan facility (the "Revolver"), a $2,658,000 real estate
loan (the "Real Estate Loan"), a $4,430,000 machinery and equipment loan ("Term
Loan I"), and a $1,000,000 term loan II ("Term Loan II").
At the closing date, the Company borrowed $6,825,000 under the Revolver and
$566,000 under Term Loan I. At the date of closing, Williams borrowed a total of
$17,141,000, consisting of $9,619,000 under the Revolver, $2,658,000 under the
Real Estate Loan, $3,864,000 under Term Loan I, and $1,000,000 under Term Loan
II. The proceeds from the Company's and Williams' borrowings under the Loan were
used to repay the Company's and Williams' loans from their previous lender,
except for $2,340,000 which represents a bridge loan to the Company by the
previous lender. This bridge loan is to be repaid from the sale of assets and/or
excess cash flow and is guaranteed up to $1,000,000 by the Company's President.
Under the Revolver, the Company and Williams can borrow up to $26,000,000
based upon a borrowing base availability calculated using specified percentages
of eligible accounts receivable and inventory. The Revolver bears interest at
the Bank's prime rate (8.5% at December 31, 1997) plus 0.5%. The Real Estate
Loan and Term Loan I bear interest at the Bank's prime rate plus 0.75%. At the
Agent's option, funds may be borrowed under the Revolver, the Real Estate Loan
and the Term Loan I at the London InterBank Offering Rate ("Libor") plus 2.75%,
3% and 3% respectively. The Revolver, Real Estate Loan and Term Loan I each
mature on July 11, 2000 and are secured by substantially all of the assets of
the Company and Williams. The Real Estate Loan is being amortized over 20 years
and the machinery and Term Loan are being amortized over seven years with all
remaining principal outstanding due on July 11, 2000. Term Loan II matures on
June 1, 1999 with principal payments based upon an amortization period of 24
months plus additional principal payments equal to any excess proceeds from the
sale of one of Williams' subsidiaries after repayment of any indebtedness under
the Revolver borrowing due from the Williams subsidiary being sold plus
principal payments equal to 50% of the Company's and Williams' annual
consolidated excess cash flow as defined. The Loan agreement restricts payment
of any dividends by the Company, requires the Company and Williams in the
aggregate to maintain minimum working capital of $25,000,000 exclusive of the
Revolver and maintain minimum tangible net worth of $11,000,000. The Loan also
restricts additional indebtedness and common stock repurchases and restricts
combined Company and Williams' annual capital expenditures and increased
operating lease obligations to $2,500,000 and $600,000, respectively. The
Company is in compliance with the covenants of the Loan Agreement as of
12/31/97. The Loan agreement imposes a prepayment penalty of 3%-5%, which is
waived if the Loan is repaid with proceeds from the sale of assets or equity or
is refinanced with an affiliate of the Bank.
On March 13, 1998 the Company's bank, Wells Fargo Bank, agreed to make
revisions in the existing revolving loan availability calculations. The result
is to increase availability on its revolver by approximately $750,000. In
addition, Wells Fargo has committed to provide the Company with a separate loan
facility. Williams Controls and the President of the
16
<PAGE>
Company would be relieved of their guarantees in exchange for a $1 million
investment in Ajay Sports by Williams. It is anticipated that this financing
plan would be completed by the end of April 1998. Completion of the refinancing
plan should provide the Company with sufficient capital to operate through the
next 12 months.
Item 7A. Derivative Securities and Financial Instruments
Not applicable.
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
Not applicable.
17
<PAGE>
PART III
Item 10. Directors and Executive Officers of the registrant
The applicable information set forth in the Registrant's 1998 Proxy
Statement to be filed on or before April 30, 1998 is incorporated herein by
reference.
Item 11. Executive Compensation
The applicable information set forth in the Registrant's 1998 Proxy
Statement to be filed on or before April 30, 1998 is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The applicable information set forth in the Registrant's 1998 Proxy
Statement to be filed on or before April 30, 1998 is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The applicable information set forth in the Registrant's 1998 Proxy
Statement to be filed on or before April 30, 1998 is incorporated herein by
reference.
18
<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, 1997
and 1996
Consolidated Statements of Operations - Years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity Years ended December
31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended December 31,
1997, 1996 and 1995
Notes to Financial Statements
2. Financial Statement Schedules:
Ajay Sports, Inc. and Subsidiaries:
Schedule VIII - Valuation and Qualifying Accounts - Years ended
December 31, 1997, 1996 and 1995
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)
19
<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)
20
<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 10.13 Credit Agreement dated July 11, 1997, among registrant
and its subsidiaries and Williams Controls, Inc. and its
subsidiaries, as borrowers, and Wells Fargo Bank, National
Association, including Guaranties, Security Agreements, Intercreditor
Agreement and other Loan Documents (10)
Exhibit 10.14 Consent Reaffirmation and Release Agreement
with U. S. Bank and Promissory Note of the Registrant (11)
Exhibit 10.15 Security Agreement dated July 14, 1997, among registrant
and its subsidiaries, as debtors, and Williams Controls and its
subsidiaries as secured parties (12)
Exhibit 21.0 List of Subsidiaries
Exhibit 23.1 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)
21
<PAGE>
PART IV
CONTINUED
(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)
(10) Previously filed with and incorporated by reference from the
Registrant's Form 10-Q for the Quarterly period ended June 30, 1997.
(SEC file No. 0-18204)
(11) Previously filed with and incorporated by reference from the
Registrant's Form 10-Q for the Quarterly period ended June 30, 1997.
(SEC filed No. 0-18204)
(12) Currently filed herein.
(b) Reports on Form 8-K
During the last quarter of the 1997 fiscal year, the Company filed one
report on Form 8-K.
Date of
Report Subject
-------- --------
12/10/97 Item 5. Other Events - Extension of the common stock
purchase warrants to June 30, 1998.
22
<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 27th day of March, 1998.
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 March 27, 1998
- ---------------------- and Principal
Thomas W. Itin Executive Officer
\s\Duane R. Stiverson Chief Financial March 27, 1998
- ---------------------- Officer and
Duane R. Stiverson Principal Accounting
Officer
\s\Robert R. Hebard Director March 27, 1998
- -----------------------
Robert R. Hebard
\s\Anthony B. Cashen Director March 27, 1998
- -----------------------
Anthony B. Cashen
\s\ Clarence H. Yahn Director March 27, 1998
- ----------------------
Clarence H. Yahn
\s\ Robert D. Newman Director March 27, 1998
- --------------------
Robert D. Newman
23
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Ajay Sports, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Ajay
Sports, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. 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, 1997. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements 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,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
\s\Hirsch & Silberstein, P. C.
- ------------------------------
Hirsch & Silberstein, P.C.
Farmington Hills, Michigan
March 13, 1998
F-1
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
as of December 31, 1997 and 1996
(in thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS December 31, December 31,
1997 1996
---------------- ----------------
<S> <C> <C>
Current assets:
Cash $ 234 $ 64
Accounts receivable, net of allowance of $243 and $140,
respectively 5,060 5,274
Inventories 6,398 7,957
Prepaid expenses and other 304 362
Deferred tax benefit 363 363
---------------- ----------------
Total current assets 12,359 14,020
Fixed assets, net 1,723 1,822
Other assets 106 320
Deferred tax benefit 756 756
Goodwill 1,670 1,709
---------------- ----------------
Total assets $ 16,614 $ 18,627
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable to affiliates $ 160 $ 885
Notes payable to banks 107 6,104
Current portion of capital lease 4 9
Accounts payable 3,204 3,107
Accrued expenses 684 567
---------------- ----------------
Total current liabilities 4,159 10,672
Notes payable to affiliates - long term 4,212 -0-
Notes payable to banks - long term 9,017 5,213
Commitments and contingencies -0- -0-
---------------- ----------------
17,388 15,885
---------------- ----------------
Stockholders' equity (deficit):
Preferred stock - 10,000,000 shares authorized
Series B, $0.01 par value, 12,500
shares outstanding at liquidation value 1,250 1,250
Series C, $10.00 par value, 296,170 shares
outstanding at stated value 2,962 2,962
Common stock, $0.01 par value, 100,000,000 shares authorized,
23,274,039 shares outstanding 233 233
Additional paid-in capital 9,313 9,313
Accumulated deficit (14,532) (11,016)
---------------- ----------------
Total stockholders' equity (deficit) (774) 2,742
---------------- ----------------
Total liabilities and stockholders' equity $ 16,614 $ 18,627
================ ================
The accompanying notes are an integral part of the consolidated financial statements.
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
for the years ended December 31, 1997, 1996 and 1995
(in thousands, except per share amounts)
Year Ended
------------------------------------------------------
December 31, December 31, December 31,
1997 1996 1995
---------------- ---------------- ---------------
<S> <C> <C> <C>
Operating data:
Net sales $ 30,330 $ 24,341 $ 18,728
Cost of sales 26,585 20,759 15,291
---------------- ---------------- ---------------
Gross profit 3,745 3,582 3,437
Selling, general and administrative expenses 5,837 5,067 3,247
---------------- ---------------- ---------------
Operating income (loss) (2,092) (1,485) 190
---------------- ---------------- ---------------
Nonoperating income (expense):
Interest expense - net (1,280) (1,103) (801)
Other, net (144) (38) (41)
---------------- ---------------- ---------------
Total non operating expense (1,424) (1,141) (842)
---------------- ---------------- ---------------
Income (loss) before income taxes (3,516) (2,626) (652)
Income tax expense (benefit) -0- (893) (208)
---------------- ---------------- ---------------
Net loss $ (3,516) $ (1,733) $ (444)
================ ================ ===============
Basic and diluted earnings per share $ (0.17)$ (0.09) $ (0.03)
================ ================ ===============
Weighted average common and common stock
equivalent shares outstanding 23,274 23,242 22,722
================ ================ ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995
(in thousands, except shares)
Preferred Stock Common Stock Total
----------------------------------------------- Add'l Paid-in Accum Stockholders-
Shares Amount Shares Amount Capital (Deficit) Equity
----------- --------- -------------- --------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1995 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 adjustment - - (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
Net loss - - - - - (3,516) (3,516)
--------------------------------------------------------------------------------------------
Balances at December 31, 1997 308,670 $ 4,212 23,274,039 $ 233 $ 9,313 $ (14,531) (774)
=========== ========= ============== ========= ============== =========== ==============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,516) $ (1,733) $ (444)
Adjustments to reconcile to net cash flows from operating
activities:
Loss on sale of assets 42 6 -0-
Depreciation and amortization 358 366 219
(Increase) decrease in accounts receivable, net 214 (78) (3,496)
(Increase) decrease in inventories 1,559 952 (3,123)
(Increase) in deferred tax benefits -0- (911) (208)
(Increase) decrease in prepaid expenses 58 3 (154)
(Increase) decrease in other assets 202 (84) (66)
Increase in accounts payable 97 945 852
Increase (decrease) in accrued expenses 186 (64) 141
------------ ------------ -------------
Net cash (used in) operating activities (800) (598) (6,279)
------------ ------------ -------------
Cash flows from investing activities:
Acquisitions of property plant and equipment (250) (276) (787)
Goodwill associated with acquisitions -0- (387) (1,329)
Proceeds from sale of equipment -0- -0- 5
Disposal of equipment -0- (29) -0-
------------ ------------ -------------
Net cash (used in) investing activities (250) (692) (2,111)
------------ ------------ -------------
Cash flows from financing activities:
Proceeds from issuance of notes payable to affiliates 3,487 885 -0-
Net increase (decrease) in bank notes payable (2,193) 396 10,777
Payments on notes payable - affiliate -0- -0- (5,369)
Dividends paid (74) (301) (58)
Proceeds from preferred stock offering, net of related costs -0- -0- 2,864
Stock issued in acquisitions -0- -0- 433
Stock options exercised -0- 12 -0-
------------ ------------ -------------
Net cash provided by financing activities 1,220 992 8,647
------------ ------------ -------------
Net increase (decrease) in cash 170 (298) 257
Cash at beginning of period 64 362 105
------------ ------------ -------------
-------------
Cash at end of period $ 234 $ 64 $ 362
============ ============ =============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F -5
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 $1,026,000 and $864,000 as of December 31, 1997 and
1996 respectively. Fixed assets of the Company consist primarily of
machinery and equipment, office equipment, and a building.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which range from three to
thirty-nine years.
GOODWILL - The Company has recorded goodwill as a result of the 1995
acquisitions of Palm Springs and Korex. The goodwill is being
amortized over forty years. Amortization expense related to the
goodwill was $39,000 for the year ended December 31, 1997.
OTHER ASSETS - Other assets at December 31, 1997 and 1996 consist of
patents and trademarks held and applied for by Leisure Life.
PRODUCT LIABILITY AND WARRANTY COSTS - Product liability exposure is
insured with insurance premiums provided during the year. Product
warranty costs are based on experience and attempt to match such costs
with the related product sales.
REVENUE RECOGNITION - The Company recognizes revenue when goods are
shipped.
INCOME TAXES - Effective January 1, 1992, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes. Under SFAS No. 109, deferred income taxes are
recognized for the tax consequences of temporary differences between
the financial statement carrying amounts and the tax bases of existing
assets and liabilities, using enacted statutory rates applicable to
future years.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-6
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. RELATED PARTY TRANSACTIONS
The Company's related parties include the following:
First Equity Corporation ("First Equity") - First Equity is owned by a
family member of the president, chief executive officer, and chairman
of the Company. First Equity holds demand notes in the amount of
$748,000 as a result of loans made to the company in 1996 and 1997.
Enercorp, Inc. - ("Enercorp") is a business development company engaged
in the business of investing in and providing managerial assistance to
developing companies. The Company's president, chief executive officer,
chairman and principal shareholder is a significant shareholder in
Enercorp. Enercorp acquired 1,764,706 common shares on October 3, 1994.
In 1995 Enercorp acquired 2,000 shares of series C preferred stock, and
also received 100,000 shares of common stock for services rendered in
connection with the Palm Springs acquisition. Enercorp also holds a
note in the amount of $200,000 payable by the company on demand.
Williams Controls, Inc. - ("Williams") - Williams has the same
chairman as the Company, which individual is a major shareholder of
each company. Williams owns 4,117,647 shares of the Company's common
stock as of December 31, 1997.
The Company has agreed to pay Williams 0.25% per annum of the
outstanding revolving loan balances on a quarterly basis in
consideration for providing its guarantee of the revolving loan. Fees
totaled $39,750 and $60,411 for the years ended December 31, 1997 and
1996 respectively.
The Company's interest expense paid to Williams was $194,450 and
$448,000 for the years ended December 31, 1997 and 1996 respectively.
(See Notes 4 and 14).
During 1997 and 1996 the Company borrowed from related and affiliated
parties. As of December 31, 1997 and 1996, the Company owed $4,372,000
and $885,000 respectively to related and affiliated parties at interest
rates ranging from 9.0% to 9.5%. (See Note 4).
3. INVENTORIES
Inventories consist of the following (in thousands):
December 31,
1997 1996
------ ------
Raw materials $1,499 $4,153
Work-in-progress 1,026 995
Finished goods 3,873 2,809
------ -----
Total $6,398 $7,957
===== =====
F-7
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. DEBT
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, at which time a term loan from
Williams was paid off. 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. 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. In November
1996, U. S. Bank advised the Company that the Company was in
noncompliance with certain covenants under its loan 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. This caused the Company to rely on extended credit
terms from its venders and additional funds from related and 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
requiring a $250,000 term loan payment in June, less favorable formula
borrowing rates and an increased interest rate.
On July 11, 1997, the Company refinanced its bank debt through a
$34,088,000 three-year revolving credit and term loan agreement with a
new lender (the "Loan"). This loan is a joint and several obligation of
the Company with Williams Controls, Inc. ("Williams"), under which
Williams is the agent for all of the borrowers. The combined Loan
facility consists of a $26,000,000 revolving loan facility (the
"Revolver"), a $2,658,000 real estate loan (the "Real Estate Loan"), a
$4,430,000 machinery and equipment loan ("Term Loan I"), and a
$1,000,000 term loan II ("Term Loan II").
At the closing date, the Company borrowed $6,825,000 under the
Revolver and $566,000 under Term Loan I. At the date of closing,
Williams borrowed a total of $17,141,000, consisting of $9,619,000
under the Revolver, $2,658,000 under the Real Estate Loan, $3,864,000
under Term Loan I, and $1,000,000 under Term Loan II. The proceeds from
the Company's and Williams' borrowings under the Loan were used to
repay the Company's and Williams' loans from their previous lender,
except for $2,340,000 which represents a bridge loan to the Company by
the previous lender. This bridge loan is to be repaid from the sale of
assets and/or excess cash flow and is guaranteed up to $1,000,000 by
the Company's President.
F-8
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Under the Revolver, the Company and Williams can borrow up to
$26,000,000 based upon a borrowing base availability calculated using
specified percentages of eligible accounts receivable and inventory.
The Revolver bears interest at the Bank's prime rate (8.5% at December
31, 1997) plus 0.5%. The Real Estate Loan and Term Loan I bear interest
at the Bank's prime rate plus 0.75%. At the Agent's option, funds may
be borrowed under the Revolver, the Real Estate Loan and the Term Loan
I at the London InterBank Offering Rate ("Libor") plus 2.75%, 3% and 3%
respectively. The Revolver, Real Estate Loan and Term Loan I mature on
July 11, 2000 and are secured by substantially all of the assets of the
Company and Williams. The Real Estate Loan is being amortized over 20
years and the machinery and Term Loan are being amortized over seven
years with all remaining principal outstanding due on July 11, 2000. At
July 11, 1997, after the Loan closing, approximately $1,545,000 was
available for borrowing under the New Loan. Term Loan II matures on
June 1, 1999 with principal payments based upon an amortization period
of 24 months plus additional principal payments equal to any excess
proceeds from the sale of one of Williams' subsidiaries after repayment
of any indebtedness under the Revolver borrowing due from the Williams
subsidiary being sold plus principal payments equal to 50% of the
Company's and Williams' annual consolidated excess cash flow as
defined. The Loan agreement restricts payment of any dividends by the
Company, requires the Company and Williams in the aggregate to maintain
minimum working capital of $25,000,000 exclusive of the Revolver and
maintain minimum tangible net worth of $11,000,000. The Loan also
restricts additional indebtedness and common stock repurchases and
restricts combined Company and Williams' annual capital expenditures
and increased operating lease obligations to $2,500,000 and $600,000,
respectively. The Loan agreement imposes a prepayment penalty of 3%-5%,
which is waived if the Loan is repaid with proceeds from the sale of
assets or equity or is refinanced with an affiliate of the Bank. (See
Note 14).
The Company agreed to pay Williams 0.25% 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 $39,750 in 1997 and $60,411 in 1996.
F-9
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The Company's Bank borrowings consisted of the following:
December 31,
Revolving credit facility: 1997 1996
------------ -------------
Balance $6,016,985 $11,103,844
Interest rate 9.0% 8.25%
Unused amount of facility $ 95,800 $ 2,396,156
Average amount outstanding
during the period 6,091,000 11,059,660
Weighted average interest rate 9.0% 8.25%
Maximum amount outstanding
during the period 7,218,000 13,481,108
Outstanding commercial letters of credit totaled approximately
$526,000 and $322,000 at December 31, 1997 and 1996 respectively.
Other December 31, 1997 debt consisted of $4,372,000 from
related and affiliated parties, a $539,000 machinery and equipment term
loan with Wells Fargo, a $2,340,000 term loan with U. S.
Bank and a $210,000 real estate loan.
Debt payments are as scheduled (in thousands):
1998 $ 267
1999 107
2000 107
2001 8,785 (Term Loans & Revolver)
2002 -
2003 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. (See
Note 14).
F-10
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. INCOME TAXES
As discussed in Note 2, the Company adopted SFAS No. 109 at
the beginning of 1992. There was no cumulative effect of this
accounting change and its adoption had no impact on 1992 net income.
The actual income tax expense (benefit) differs from the
statutory income tax expense (benefit) as follows (in thousands):
Year Ended December 31,
1997 1996 1995
Statutory tax expense
(benefit) at 34% $(1,195) $ (893) $ (208)
Utilization of net
operating loss
carry forward - - -
Loss producing no current
tax benefit 1,195 893 208
----- ----- -----
$ - $ - $ -
========= ======== =======
The components of the net deferred tax asset/liability were as follows (in
thousands):
December 31,
1997 1996
------ ------
Deferred tax asset, principally accrued
expenses, reserves and loss carry forwards $ 4,443 $ 3,274
Deferred tax liability,
principally depreciation and amortization (97) (107)
Valuation allowance (3,227) (2,048)
------- --------
Net $1,119 $ 1,119
======= ========
The Company has assessed its past earnings history and trends,
sales backlog, budgeted sales, and expiration dates of carryforwards and
has determined that it is more likely than not that $1,119,000 of deferred
tax assets will be realized. The remaining valuation allowance of
$3,227,000 is maintained on deferred tax assets which the Company has not
determined to be more likely than not realizable at this time. The Company
will continue to review this valuation allowance on a quarterly basis and
make adjustments as appropriate.
F-11
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The Company had net operating loss carry forwards for Federal
tax purposes of approximately $11,975,000 at December 31, 1997, which
expire in varying amounts in the years 2006 through 2012. Operating loss
carry forwards totaling $723,000, $4,799,000 and $1,562,000 are available
to offset future state taxable income of Sports, Ajay and Leisure Life
respectively, which expire in varying amounts in the years 2006 through
2012. Future changes in ownership, as defined by section 382 of the
Internal Revenue Code, could limit the amount of net operating loss
carryforwards used in any one year.
6. STOCKHOLDERS' EQUITY
(a) Preferred Stock
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 allowed
for a conversion rate of 1 share of Series B Preferred Stock
for 294.12 shares of the Company's Common Stock. In November
1997, the conversion rate was revised to 555.56.
Cumulative dividends are payable on the Series C
Preferred Stock at an annual rate of $1.00 per share. The
Warrants are redeemable by the Company at $0.05 per Warrant
under certain conditions. The terms of these Warrants are
identical to the Company's publicly-held Warrants to purchase
Common Stock. In 1995 the Company used the $2.8 million of net
proceeds for inventory and accounts receivable financing and
to acquire certain assets of Korex and Palm Springs.
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.
F-12
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
At December 31, 1997, 1996 and 1995, dividends in
arrears on the 8% cumulative convertible preferred series B
stock were $906,575 ($72.53 per share), $806,575 ($64.53 per
share) and $706,575 ($56.53 per share), respectively.
Dividends on the series C cumulative convertible preferred
stock have been declared and paid through December 31, 1996.
At December 31, 1997 dividends in arrears on the 10%
cumulative convertible preferred series C stock were $296,000
($1.00 per share). This represents the undeclared dividend for
1997. The Company has dedicated all available funds to support
continuing operations of the Company until sufficient cash
availability allows payment of dividends.
(See Note 14)
(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 1995 the Company
issued 34,000 shares to an officer in lieu of compensation. No
stock was issued to officers under this plan in 1996 or 1997.
(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.
F-13
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(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, 1995 15,737,577 $ .34 - 1.00
Issued to employees 295,000 .625 - .6875 (I)
Williams options adjusted (1,046,234) .50 - 1.00 (ii)
Issued - public offering 373,750 1.00 (iii)
Issued to Directors 10,000 .66 (iv)
-------------
Balance, December 31, 1995 15,370,093 $ .34 - 1.00
Exercised by Employees (30,000) .40
Issued to Directors 10,000 .625 (v)
Issued to Employees 700,000 .40 (vi)
Issued for Acquisition 800,000 .75 - .90 (vii)
Expired (242,500) .80 - 1.00
-----------
Balance, December 31, 1996 16,607,593 $ .34 - 1.00
Issued to Employees 50,000 .40 (viii)
Expired (165,000) .40 - .625
Repriced options (12,907,873) .34 - .50 (ix)
Repriced options 12,907,873 .18 (ix)
------------
Balance, December 31, 1997 16,492,593 $ .18 - 1.00
F-14
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(I) Employee stock options of which 146,250 shares are vested and
100,000 have been canceled since issuance.
(ii) Warrants returned by Williams as consideration for early loan
payoff.
(iii) Public offering of July 26, 1995.
(iv) Director stock options of which 6,666 have vested.
(v) Director stock options of which 3,333 have vested.
(vi) Employee stock options of which 257,500 are vested and 185,000
have been canceled since issuance.
(vii) Issued to former shareholders of Palm Springs Golf Company,
Inc., a business acquired by the Company in October 1995.
(viii) Employee stock options of which none have vested.
(ix) All non-public, non-employee, non-board member options were
repriced to $.18 market in November 1997.
7. MAJOR CUSTOMERS
The Company operates in two lines of business, the manufacture and
distribution of sports equipment and outdoor leisure furniture. The
Company's customers are principally in the retail sales market. The
Company performs ongoing credit evaluations of its customers' financial
conditions and does not generally require collateral.
Sales to customers which represent over 10% of the Company's net
sales are as follows:
Year ended December 31,
Customer 1997 1996 1995
-------- ---- ---- ----
A 30% 29% 36%
B 15% 14% *
C 11% * *
* Amounts are less than 10% of net sales.
F-15
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. BUSINESS SEGMENT REPORTING
The relative contributions to net sales, operating profit and
identifiable assets of the Company's two industry segments for the year
ended December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
GOLF
Mass Specialty
1997 Furniture Merchant Golf Stores Corporate Consolidated
--------------------------- --------- -------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
Sales $4,358 $21,623 $ 4,349 - $ 30,330
Operating profit/(loss) (186) 915 (2,090) (731) (2,092)
Assets 2,456 10,914 3,244 - 16,614
Depreciation/Amortization 80 215 63 - 358
Capital Expenditures 136 103 11 - 250
GOLF
Mass Specialty
1996 Furniture Merchant Golf Stores Corporate Consolidated
--------------------------- --------- -------- ----------- --------- ------------
Sales $2,701 $17,290 $4,350 - $24,341
Operating profit/(loss) (193) 262 (1,068) (486) (1,485)
Assets 2,512 10,554 5,429 - 18,495
Depreciation/Amortization 98 222 46 - 366
Capital Expenditures 63 145 68 - 276
</TABLE>
9 . 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 57% of the Company's 1997 and 52% of 1996 sales were
Spalding products. (See Note 14).
Earned royalty expense due Spalding was $553,000, $480,000, and
$484,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
F-16
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. LEASES
Future aggregate minimum lease payments under noncancelable
operating leases with initial or remaining terms in excess of one year
are as follows (in thousands):
1998 $ 697
1999 682
2000 646
2001 440
2002 177
2003 and thereafter 447
-----
$3,089
======
Total rental expense (in thousands) under operating leases
(net of sublease rental income from an affiliate of $0, $8 and $13,
respectively) was $701, $618, and $627 for the years ended December 31,
1997, 1996 and 1995, respectively.
11. NET (LOSS) PER COMMON SHARE
Earnings or loss per share has been computed by dividing net
income or loss, after reduction for preferred stock dividends in 1997
($396,000), in 1996 ($401,000) and 1995 ($236,000) by the weighted
average number of common shares outstanding. No exercise of warrants
outstanding was assumed in 1997, 1996, or 1995, since any exercise of
warrants would be antidilutive.
The Financial Accounting Standards Board ("FASB") recently
issued SFAS No. 128, "Earnings Per Share", which is effective for
fiscal years ending after December 15, 1997. This statement replaces
the presentation of primary earnings per share ("EPS") with a
presentation of basic EPS. It also requires dual presentation of basic
and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires reconciliation of the
numerator and denominator of the basic EPS computations to the
numerator and denominator of the diluted EPS computation. Basic EPS
excludes dilution. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared the earnings of the entity. Diluted EPS
is computed similar to fully diluted EPS. SFAS No. 128 requires
restatement of all EPS data that was presented in previously filed
reports. Earnings per share amounts for 1996 and 1995 have not changed
under SFAS No. 128 since the warrants outstanding are anti-dilutive.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $776,077, $1,098,819 and $762,157
for the years ended December 31, 1997, 1996 and 1995, respectively.
F-17
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Non cash financing and investing transactions were as follows:
o 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.
o In 1995, 11,210 preferred stock shares were converted into
163,055 shares of common stock.
o 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
o During 1996, 17,620 preferred stock shares were converted into
256,293 shares of common stock.
o In 1996 an employee exercised options to acquire 30,000 common
shares.
o In 1997 there were no stock transactions.
o The Company added new leases during 1997 which represent asset
values, if purchased, of approximately $57,000 and result in
annual lease payments of $18,732 with terms expiring in the
year 2000.
13. COMMITMENTS AND CONTINGENCIES
The Company is subject to certain claims in the normal course
of business which management intends to vigorously contest. The
outcomes of these claims are not expected to have a material adverse
affect on the Company's consolidated financial position or results of
operations.
F-18
<PAGE>
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. SUBSEQUENT EVENTS
a. The Company is currently reviewing a proposal from Spalding Sports
Worldwide to extend its current license agreement, due to expire June 30,
1998, through June 30, 2000 under the same terms and conditions as
presently exist. The Company's sales of Spalding brand merchandise and
gross profit represented 57%, 52% and 53% of Ajay's total sales and gross
profit for the years ended December 31, 1997, 1996 and 1995, respectively.
b. At a civil action jury trial that concluded on February 6, 1998 under
which Ajay Sports, Inc. was plaintiff, a judgment was entered against the
defendants. The jury awarded the Company damages of $210,000, interest of
$40,000 and $4,000 of expenses. Since post trial motions have been made and
are under consideration by the court, thus raising uncertainties at this
time, the amount of damages plus interest has not been reflected in the
accompanying financial statements.
c. On March 13, 1998, the Company's bank, Wells Fargo Bank, agreed to
increase availability to Ajay on the Company's existing revolving loan. In
addition, Wells has agreed to separate the current joint and several loan
wherein Ajay Sports, Inc. and Williams Controls, Inc. are combined under
one loan. Under this new financing plan, Williams Controls, Inc. would
advance $1 million in loans to Ajay Sports. On March 27, 1998, the increase
in availability from Wells in the amount of $750,000 was completed. It is
anticipated that this refinancing plan would be completed by the end of
April.
F-19
<PAGE>
Schedule VIII
AJAY SPORTS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1997, 1996, and 1995
(Amounts in Thousands)
<TABLE>
<CAPTION>
Balance
Beginning Charged to Deducted from at end
Balance expense Reserve of period
<S> <C> <C> <C> <C>
Reserve for Product Warranty:
Year ended:
December 31, 1997 $ 85 $309 $242 (1) $152
December 31, 1996 136 203 254 85
December 31, 1995 139 198 201 136
Reserve for Doubtful Receivables:
Year ended:
December 31, 1997 $140 $ 355 $252 (2) $243
December 31, 1996 287 91 238 140
December 31, 1995 101 330 144 287
Reserve for Inventory Obsolescence:
Year ended:
December 31, 1997 $491 $398 $464 $425
December 31, 1996 384 498 391 491
December 31, 1995 430 378 424 384
Notes:
(1) Represents amounts paid for product warranty claims.
(2) Represents amounts charged off as uncollectible.
</TABLE>
F-20
<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
F-21
<PAGE>
EXHIBIT 23.1
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 March 13, 1998 appearing in this Annual Report on
Form 10-K of Ajay Sports, Inc. and Subsidiaries for the year ended December 31,
1997.
\s\Hirsch & Silberstein, P.C.
- -----------------------------
Hirsch & Silberstein, P.C.
March 13, 1998
F-22
<PAGE>
SECURITY AGREEMENT
DATE: Effective July 14, 1997
BETWEEN: AJAY SPORTS, INC., a Delaware corporation and
AJAY LEISURE PRODUCTS, INC., a Delaware corporation
AJAY LEISURE DE MEXICO C.V. DE S.A.,a Mexicali,Mexico corporation
PALM SPRINGS GOLF, INC., a Colorado corporation
1501 E. Wisconsin Street
Delavan, Wisconsin 53115
Attention: Thomas W. Itin
LEISURE LIFE, INC., a Tennessee corporation
215 4th Avenue North
Baxter, Tennessee 38544
Attention: Thomas W. Itin
(collectively, the "Debtors")
AND: WILLIAMS CONTROLS, INC., a Delaware corporation
on its own behalf and on behalf of its subsidiaries, WILLIAMS CONTROLS
INDUSTRIES, INC., AGROTEC WILLIAMS, INC., APTEK WILLIAMS,
INC., GEOFOCUS, INC., HARDEE WILLIAMS, INC., KENCO
WILLIAMS, INC., NESC WILLIAMS, INC., PREMIER PLASTIC
TECHNOLOGIES, INC., WACCAMAW WHEEL WILLIAMS, INC.,
WILLIAMS TECHNOLOGIES, INC., WILLIAMS WORLD TRADE, INC.,
WILLIAMS AUTOMOTIVE, INC. and TECHWOOD WILLIAMS, INC.
14100 S.W. 72nd Avenue
Portland, Oregon 97224
Attention: Gerard A. Herlihy, CFO
(collectively, the "Secured Party")
1. Grant of Security Interest. For valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and to secure payment and
performance of the obligations described in Section 2, Debtors hereby grant to
Secured Party, a security interest in and to the following (collectively, the
"Collateral"):
(a) all of Debtors' inventory (including finished inventory,
work-in-process, and raw materials), equipment, machinery, furniture and
fixtures, vehicles, supplies, all accounts
-1-
<PAGE>
(including all rights under contracts to sell or lease goods or equipment
or to render services, whether or not earned by performance, which are not
evidenced by an instrument or chattel paper), contract rights, drafts,
acceptances, notes, securities and other instruments, all chattel paper,
documents, records, computer software and data general intangibles and other
forms of receivables, and all guaranties and securities therefor, including
without limitation the property described below, now owned or hereafter acquired
by Debtors, as well as the products and proceeds thereof:
(i) any and all patents, copyrights, registered and common law trademarks,
trade names, service marks, service names, slogans, assumed names and other
similar rights owned by Debtors or which they have the right to use in the
conduct of their respective businesses, including, without limitation, any
rights to Debtors' trade names;
(ii) all claims, causes of action, and other rights of Debtors that relate
in any way to the ownership, operation, use, or lease of any of the Collateral;
(iii) all rents, income, receipts, revenues, issues, profits and other
income, liens, and security interests of any nature to which Debtors may now be
or shall hereafter become entitled arising from the Collateral; and
(b) all equipment, fixtures, and goods described on Exhibit A as it may
from time to time be amended to include additional equipment, fixtures, and
goods, together with all accessions, parts, additions, substitutions, and
replacements affixed thereto, as well as the products and proceeds thereof.
2. Obligations Secured. This Agreement is given to secure (a) performance
of the covenants and agreements hereinafter made, (b) payment of all
indebtedness now or hereafter owing to Secured Party by Debtors, including,
without limitation, performance of the covenants and agreements under (a) that
certain Consent, Reaffirmation and Release Agreement dated July 14, 1997 by and
among United States National Bank of Oregon ("US Bank"), Secured Party and
Debtors and the related promissory note dated July 14, 1997 in the initial
principal amount of $2,340,000 made by Ajay Sports, Inc. in favor of US Bank
(collectively, the "US Bank Term Loan"); (b) any and renewals and extensions of
the foregoing instruments, whether or not evidenced by new or additional
instruments; (c) performance of the covenants and provisions in all other
agreements, certificates, guaranties, or other documents executed by Debtors in
connection with the US Bank Term Loan; (d) full performance of Debtors' joint
and several obligations with Secured Party under the joint credit facility dated
July 11, 1997 by and among Wells Fargo Bank, National Association, as lender,
and Debtors and Secured Party as borrowers; (e) full performance or repayment of
any and all obligations of Debtors to Secured Party resulting from advances,
either direct or indirect, to Debtor by Secured Party and any other obligations
incurred, either direct or indirect, for the benefit of Debtors by Secured
Party, and (e) payment of all costs, expenses and reasonable attorney fees at
trial, on appeal, or in any bankruptcy proceeding incurred by Secured Party in
enforcing the debts, obligations and
-2-
<PAGE>
liabilities of Debtors and in preserving, handling, protecting, collecting,
foreclosing, disposing and otherwise realizing on any and all security therefor.
Notwithstanding any provision contained herein as to the rights of Secured
Party hereunder, Secured Party shall take no action, including, without
limitation, enforcement of any of its rights with respect to the Collateral that
would be in conflict with or contrary to the rights of either of US Bank or
Wells Fargo Bank as to the Collateral under the US Bank Term Loan or the Wells
Fargo Credit Facility, it being understood and agreed by the Secured Party that
its rights hereunder are and shall remain subordinate to the rights of US Bank
and/or Wells Fargo until Debtors' obligations to them are paid in full in
accordance with the terms of the US Bank Term Loan and the Wells Fargo Credit
Facility.
3. Warranties, Representations and Covenants of Debtors. Each Debtor
represents, warrants and covenants as follows:
(a) Except for Permitted Liens (as defined below): (i) It will keep its
portion of the Collateral free and clear of any lien, encumbrance or security
interest; (ii) It will not mortgage, pledge, grant, or permit to exist a
security interest or lien upon any of the Collateral, now owned or hereafter
acquired by it; (iii) It is, and as to portions of the Collateral it acquires
after the date hereof, it will be, the sole owner of the Collateral, free from
any adverse lien, security interest, or adverse claim of any kind whatsoever,
except for claims of persons claiming solely by, through or under Secured Party.
"Permitted Liens" means (i) liens arising by operation of law for taxes,
assessments or governmental charges not yet due; (ii) statutory liens of
mechanics, materialmen, shippers, warehousemen, carriers and other similar
persons for services or materials arising in the ordinary course of business for
which payment is not yet due; (iii) non-consensual liens incurred or deposits
made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security; (iv)
liens for taxes or statutory liens of mechanics, materialmen, shippers,
warehousemen, carriers and other similar persons for services or materials which
are due but are being contested in good faith and by appropriate and lawful
proceedings promptly initiated and diligently conducted and for which reserves
satisfactory to Secured Party have been established; (v) liens listed on
Schedule I, (vi) liens in favor of Secured Party; (vii) liens in favor of United
States National Bank of Oregon; and (viii) liens in favor of Wells Fargo Bank,
National Association created in connection with the Wells Fargo Credit Facility.
No financing statement or other instrument affecting the Collateral, or rights
therein, bearing the signature of, or otherwise authorized by, Debtor is on file
in any public filing office, other than those giving rise to Permitted Liens.
Debtor will notify Secured Party of any claim or demand against the Collateral
and will defend the Collateral against all claims and demands of all persons at
any time claiming the same or any interest therein, other than those persons
whose claims or demands are based on Permitted Liens, and other than those
persons claiming solely by, through or under Secured Party.
-3-
<PAGE>
(b) Debtors' equipment and inventory are located in the States of Wisconsin
and Tennessee and/or in Mexicali, Mexico. Each Debtor will notify Secured Party
in the event it opens places of business in other states or comes to have
Collateral located in other states. The Collateral is not used or bought for
personal, family or household purposes.
(c) Debtors' principal place of business is in Delavan, Wisconsin except
that Debtor Leisure Life, Inc.'s principal place of business is located in
Baxter, Tennessee and Debtor Ajay Leisure De Mexico C.V. de S.A.'s principal
place of business is in Mexicali, Mexico. Debtor will not move its principal
place of business outside its present location. Debtor will not do business
under any assumed business names except those of which Debtor has notified
Secured Party in writing of the adoption or change of any assumed business name,
and will, upon request of Secured Party, execute any additional financing
statements or other certificates necessary to reflect the adoption or change in
such name or names.
(d) Debtor will not sell, lease, transfer or otherwise dispose of any
interest in any Collateral (other than in the ordinary course of business)
without the prior written consent of Secured Party.
(e) Debtor will keep the Collateral in good condition and repair, and will
not misuse, abuse, destroy, or allow to deteriorate or waste the Collateral or
any part thereof, except for ordinary wear and tear of its normal and excepted
use in Debtor's business. Debtor will not use any of the Collateral in violation
or any governmental law, rule, or regulation. Secured Party or its designee may
examine and inspect the Collateral at all reasonable times, wherever located,
and for that purpose is authorized by Debtor to enter any place or places where
any part of the Collateral may be.
(f) Debtor will keep the Collateral fully insured against loss or damage by
fire, theft, collision, and such other hazards.
(g) Debtor will pay promptly when due all taxes, license fees, and
assessments on the Collateral. Debtor may withhold payment of any tax, license
fee, or assessment in connection with a good faith dispute over the obligation
to pay, so long as Secured Party's interest in the Collateral is not
jeopardized. If a lien arises or is filed as a result of nonpayment, Debtor
shall within 20 days after the lien arises or, if a lien is filed, within 15
days after Debtor has notice of the filing, secure the discharge of the lien or
deposit with Secured Party cash or a sufficient corporate surety bond or other
security satisfactory to Secured Party in an amount sufficient to discharge the
lien plus any costs, attorney fees, or other charges that could accrue as a
result of a foreclosure or sale under the lien.
(h) Debtor will promptly execute any document, alone or with Secured Party,
procure any document, give any notices, do all other acts, and pay all costs
associated with the foregoing that Secured Party determines are necessary to
protect the Collateral against rights, claims or interest of third parties
(except those arising from Permitted Liens or those claiming
-4-
<PAGE>
solely by, through or under Secured Party) and will otherwise preserve the
Collateral as security hereunder.
(i) Debtor will not assert against Secured Party any claim or defense which
Debtor may have against any other person with respect to the Collateral or any
part thereof.
(j) Until foreclosure, Debtor will indemnify, defend and hold Secured Party
harmless from and against any loss, liability, damage, cost and expense
whatsoever arising from the use, operation, ownership or possession of the
Collateral or any part thereof.
(k) Debtor shall promptly replace any material loss, theft, damage or
destruction of any Collateral; provided that if all insurance proceeds covering
such loss, theft, damage or destruction are promptly applied to the reduction of
indebtedness under the Note, then such failure to replace shall not constitute
an Event of Default.
(l) At such time as the US Bank Term Loans are repaid and the security
interests and financing statements related thereto are terminated, Debtors
promptly will deliver to Secured Party all appropriate financing statements and
such other documents or instruments as Secured Party may reasonably request to
perfect the Security Interest created hereby which will be subordinate only to
the security interests granted in connection with the Wells Fargo Credit
Facility.
4. Preservation of Collateral by Secured Party. If Debtors should fail to
make any payment, perform or observe any other covenant, obligation or
agreement, or take any other action which Debtors are obligated hereunder to
make, perform, observe, take or do, then Secured Party may, at Secured Party's
sole discretion, without notice to or demand upon Debtors and without releasing
Debtors from any obligation, covenant, or agreement hereof, make, perform,
observe, take or do the same in such manner and to such extent as Secured Party
may deem necessary to protect the security interest in or the value of the
Collateral. Furthermore, Secured Party, in its sole discretion, may commence,
appear or otherwise participate in any action or proceeding purporting to affect
Secured Party's security interest in or the value or ownership of the
Collateral. All sums expended or incurred by Secured Party pursuant to the
foregoing authorizations (including reasonable attorney fees) shall be secured
hereby and shall be due and payable within ten days after demand and shall bear
interest from the date of expenditure until the date of reimbursement at two
percent above the prime lending rate of Wells Fargo Bank, National Association.
5. Use of Collateral by Debtor. So long as no Event of Default shall have
occurred, Debtors may have possession of the Collateral (other than instruments
delivered to Secured Party pursuant to this Agreement) and may use the
Collateral in any lawful manner not inconsistent with any other agreement or
policy of insurance which affects the Collateral. Secured Party acknowledges and
agrees that any buyer in the ordinary course of Debtors' businesses takes free
of Secured Party's security interest.
-5-
<PAGE>
6. Events of Default. TIME IS OF THE ESSENCE. Any of the following shall
constitute an event of default under this Agreement ("Event of Default"):
(a) An Event of Default shall occur under this Agreement, the US Bank Term
Loans or any other agreement to which Debtors are party;
(b) Secured Party receives any evidence that any Debtor has taken any
action that is contrary to its grant to Secured Party of a security interest in
the Collateral, and such default is not remedied within 20 days after notice to
Debtor by Secured Party;
(c) Debtor fails to perform or observe any covenant, agreement, term, or
promise contained herein or in any other agreement with Secured Party to which
Debtor is a party, and such performance or observance is not remedied within 20
days from the earlier of the time an officer or director of Debtor obtains
actual acknowledge thereof or notice from Secured Party or the Banks;
(d) Any representation, warranty, or statement made herein proves to have
been false or misleading in any material respect as of the time made; or
(e) Material loss, theft, destruction or disappearance of, or damage to,
the Collateral, and such Collateral is not replaced within 20 days of such event
(or such additional time as may be necessary to replace such Collateral by the
exercise of reasonable diligence) or all insurance proceeds covering such loss,
theft, destruction or disappearance are not promptly applied to the reduction of
any indebtedness to US Bank, Wells Fargo or Secured Party, as appropriate.
7. Remedies Upon Default.
(a) Upon the occurrence of any Event of Default, Secured Party may, at its
option and in addition to any other remedies provided by law, in this Agreement
or in any other agreement with Secured Party to which Debtor is a party, do any
one or more of the following, successively or concurrently:
(i) Declare all indebtedness secured hereby to be immediately due and
payable.
(ii) Either personally, or by means of a court appointed receiver, take
possession of all or any of the Collateral and exclude therefrom Debtors and all
others claiming under Debtors, and thereafter hold, store, use, operate, manage,
lease, maintain and control the Collateral, make repairs, replacements,
alterations, additions and improvements to the Collateral and exercise all
rights and powers of Debtors with respect to the Collateral or any part thereof.
Debtors hereby expressly waive any requirement that Secured Party or the
receiver post a bond upon such appointment. If Secured Party demands or attempts
to take possession of the
-6-
<PAGE>
Collateral in the exercise of any rights under this Agreement, Debtors shall
turn over promptly and deliver complete possession thereof to Secured Party.
(iii) Without notice to or demand upon Debtors, make such payments and do
such acts as Secured Party may deem necessary to protect Secured Party's
security interest in the Collateral, including without limitation, (1) paying,
purchasing, contesting or compromising any encumbrance, charge or lien which is
prior to or superior to the security interest granted hereunder, and in
exercising any such powers or authority to pay all expenses incurred in
connection therewith, and (2) in exercising its rights under this Section 7,
collect, compromise, endorse, sell, or otherwise deal with Collateral or
proceeds thereof in its own name or that of Debtors, with full power to endorse
any certificates of title.
(iv) Require Debtors to deliver to Secured Party all original documents,
drafts, acceptances, notes, securities, other instruments and chattel paper. If
any of the chattel paper covers property that is covered by certificates of
title, then Debtors shall also deliver such certificates.
(v) Require Debtors to assemble the Collateral, or any portion thereof, at
a place designated by Secured Party and reasonably convenient to both parties,
and promptly to deliver such Collateral to Secured Party or its designee.
Secured Party, and its agents and representatives and designees, shall have the
right to enter upon any or all of Debtors' premises and property to exercise
Secured Party's rights thereunder.
(vi) Notify account debtors or lessees of any Collateral that the
Collateral has been assigned to Secured Party and the proceeds, lease payments,
or other payments thereon shall be paid to Secured Party. Upon request of
Secured Party, Debtors will also promptly notify account debtors and will
indicate on all billings to account debtors that the accounts are payable to
Secured Party, and will promptly notify lessees of Collateral that all lease
payments are payable to Secured Party. Any and all proceeds thereafter received
by Debtors shall be turned over to Secured Party daily in the exact form in
which they are received.
(vii) Foreclose on the Collateral as herein provided or in any manner
permitted by law, and exercise any and all lawful rights and remedies conferred
upon Secured Party by Debtor in connection with the indebtedness secured hereby,
either concurrently or in such order as Secured Party may determine; and sell or
cause to be sold in such order as Secured Party may determine, as a whole or in
such parcels as Secured Party may determine, the Collateral without affecting in
any way other rights or remedies to which Secured Party may be entitled.
(viii) Sell, lease or otherwise dispose of the Collateral at public sale,
without having the Collateral at the place of sale, and upon terms and in such
manner as Secured Party may determine. Secured Party, or any Debtor may be a
purchaser at any sale.
-7-
<PAGE>
(ix) Exercise any remedies of a secured party under the Uniform Commercial
Code of Wisconsin and/or Tennessee and of any other state in which Collateral is
located.
(b) Unless the Collateral is perishable or threatens to decline rapidly in
value or is of a type customarily sold on a recognized market, Secured Party
shall give Debtor at least ten days' prior written notice of the time and place
of any intended public sale or of the time after which any intended private sale
or other disposition of the Collateral is to be made, which notice shall be
deemed reasonable.
(c) In the event of a public or private sale of the Collateral, the
proceeds, after payment therefrom of Secured Party's reasonable expenses of
sale, reasonable attorney fees and other legal expenses incurred in connection
therewith, shall be applied in satisfaction of the obligations secured hereby,
and any surplus remaining shall be paid by Secured Party to Debtor. If proceeds
applied to such obligations are insufficient to pay the same in full, Debtors
shall be jointly and severally liable for any deficiency and shall promptly pay
the same to Secured Party. Any repossession or retaking or sale of the
Collateral pursuant to the terms hereof shall not operate to release Debtors
until full payment of any deficiency has been made in cash.
8. Payment of Costs of Collection. In case of an Event of Default, or in
case litigation is commenced to enforce or construe any term of this Agreement
or any other instrument evidencing indebtedness of Debtors to Secured Party or
of any other document or agreement executed hereunder, the losing party will pay
to the prevailing party such amounts as shall be sufficient to cover the cost
and expense of collection or enforcement, including, without limitation,
reasonable attorney's fees and costs at trial, on appeal, and in any bankruptcy
proceeding.
9. Power of Attorney. Debtors do hereby irrevocably appoint Secured Party
as their attorney-in-fact, with full power of substitution, upon the occurrence
of an Event of Default, to execute any document or instrument, including any
proofs of claim, to endorse any draft or other instrument for the payment of
money, to execute releases, to negotiate settlements, to cancel any insurance
referred to herein and to do all other things necessary or required to effect a
settlement under any insurance policy or to take any action or perform any
obligation or enforce any right with respect to the Collateral Debtors would
have the right or power to do, all of which actions may be taken in Secured
Party's own name. Secured Party agrees to give Debtors notice of any actions it
has taken pursuant to its appointment as attorney-in-fact within a reasonable
time after such action is taken, it being understood that the failure to give
such notice will not revoke Secured Party's appointment as attorney-in-fact or
invalidate any actions taken in such capacity. This power of attorney is a power
coupled with an interest which cannot be revoked until payment in full of the
whole amount then due and unpaid of the indebtedness of Debtor to Secured Party.
-8-
<PAGE>
10. Miscellaneous.
(a) Notices. All notices or other communications required or permitted
hereunder shall be given to the appropriate party or parties and shall be
effective as provided in the Wells Fargo Credit Facility; provided, that,
notices given to or by US Bank shall be given as provided in the US Bank Term
Loan.
(b) Remedies Cumulative. Any and all remedies herein expressly conferred
upon Secured Party shall be deemed cumulative with and not exclusive of any
other remedy conferred hereby or by law on Secured Party, and the exercise of
any one remedy shall not preclude the exercise of any other.
(c) Waiver. Secured Party shall not be deemed to have waived any power,
right or remedy under this or any other agreement executed by Debtors unless the
waiver is in writing signed by Secured Party. No delay in exercising Secured
Party's power, right or remedy shall be a waiver nor shall a waiver on one
occasion operate as a waiver of such power, right or remedy on a future
occasion.
(d) Further Assurances. Debtors will join with Secured Party in executing,
filing and doing whatever may be necessary under applicable law to perfect and
continue Secured Party's security interest in the Collateral now owned or
hereafter acquired by Debtors, all at Debtors' expense.
(e) Attorneys Fees. If Secured Party exercises its rights or remedies under
this Agreement or under the Uniform Commercial Code, Debtor agrees to pay all
costs, expenses and reasonable attorney fees as the trial court or any appellate
court may adjudge reasonable in any matter arising from or related to this
Agreement, including claims and adversary proceedings in bankruptcy.
(f) Successors and Assigns. This Agreement may not be assigned by Debtors
without the prior written consent of Secured Party. This Agreement shall be
binding upon and shall inure to the benefit of the parties and their permitted
respective successors and assigns. The US Bank Term Loans constitute a separate
instrument and may be negotiated, extended or renewed by Secured Party without
releasing Debtor, the Collateral, or any guarantor or co- maker.
(g) Validity; Severability. If any provision of this Agreement is held to
be invalid, such event shall not affect, in any respect whatsoever, the validity
of the remainder of this Agreement, and the remainder shall be construed without
the invalid provision so as to carry out the intent of the parties to the extent
possible without the invalid provision.
-9-
<PAGE>
(h) Exhibits and Schedules. Any exhibits or schedules attached to this
Agreement and referred to herein are incorporated in this Agreement as if they
were fully set forth in the text hereof.
(i) Governing Law. This Agreement shall be governed by and construed under
the laws of the State of Oregon.
(j) Counterparts; Hearings. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but such counterparts
shall together constitute but one and the same Agreement. Section headings in
this Agreement are inserted for convenience of reference only and shall not
constitute a part hereof.
(k) Amendment. This agreement can be modified or terminated only by a
writing signed by Secured Party and Debtors.
(l) Term of Security Agreement. This Agreement shall remain in full force
and effect as long as any indebtedness of Debtors to Secured Party remains
unpaid or outstanding.
(m) Capitalized Terms. Capitalized terms not defined herein shall have the
respective meanings ascribed thereto in the US Bank Term Loans or the Wells
Fargo Credit Facility.
(n) Include. The terms "include," "including," and similar terms shall be
construed as if followed by the phrase "without limitation."
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first above written.
SECURED PARTY:
WILLIAMS CONTROLS, INC., a Delaware
corporation, on its own behalf and as agent on
behalf of its subsidiaries, Williams Controls
Industries, Agrotec Williams, Inc., Aptek
Williams, Inc., GeoFocus, Inc., Hardee
Williams, Inc., Kenco Williams, Inc., NESC
Williams, Inc., Premier Plastic Technologies,
Inc., Waccamaw Wheel Williams, Inc.,
Williams Technologies, Inc., Williams World
Trade, Inc., Williams Automotive, Inc. and
Techwood Williams, Inc.
By______________________________________
Gerard A. Herlihy, CFO
DEBTORS:
AJAY SPORTS, INC.
By______________________________________
Duane R. Stiverson
Chief Financial Officer
AJAY LEISURE PRODUCTS, INC.
By______________________________________
Duane R. Stiverson
Chief Financial Officer
-11-
<PAGE>
LEISURE LIFE, INC.
By______________________________________
Duane R. Stiverson
Chief Financial Officer
PALM SPRINGS GOLF, INC.
By_____________________________________
Duane R. Stiverson
Chief Financial Officer
AJAY LEISURE de MEXICO D.V. de S.A.
By_____________________________________
Clarence H. Yahn
Sole Administrator
-12-
<PAGE>
EXHIBIT A
(Description of the Equipment, Fixtures and Goods of Each Debtor
Identified by Debtor)
-13-
<PAGE>
SCHEDULE I
(ATTACH SCHEDULE I FROM WELLS FARGO CREDIT AGREEMENT)
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000854858
<NAME> Ajay Sports, Inc.
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 234
<SECURITIES> 0
<RECEIVABLES> 5,060
<ALLOWANCES> 0
<INVENTORY> 6,398
<CURRENT-ASSETS> 12,359
<PP&E> 2,749
<DEPRECIATION> 1,026
<TOTAL-ASSETS> 16,614
<CURRENT-LIABILITIES> 4,159
<BONDS> 0
2,962
1,250
<COMMON> 233
<OTHER-SE> (774)
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<CGS> 26,585
<TOTAL-COSTS> 5,837
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<INTEREST-EXPENSE> (1,280)
<INCOME-PRETAX> (3,516)
<INCOME-TAX> 0
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<EPS-PRIMARY> (0.17)
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</TABLE>
