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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, 1999
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
Incorporation or Organization) No.)
1501 E. Wisconsin Street
Delavan, Wisconsin 53115 (262 )728-5521
- ------------------------------------- ------------------------------
(Address of Principal Executive Offices (Registrant's Telephone
including Zip Code) Number, 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. X
The aggregate market value of the voting stock held by nonaffiliates as of
April 20, 2000 was $1,623,812. The number of shares outstanding of the
Registrant's $.01 par value common stock at April 20, 2000 was 4,091,091.
Documents Incorporated by Reference
None
Ajay Sports, Inc.
Index
December 31, 1999
PART I. Page
Item 1. Description of Business 4-9
Item 2. Description of Property 9
Item 3. Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 9
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10-11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis 13-15
Item 8. Financial Statements F-1 - F-18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 15
PART III.
Item 10 Directors and Executive Officers of the Registrant 16-17
Item 11. Executive Compensation 17-18
Item 12. Security Ownership of Certain Beneficial Owners and
Management 19-21
Item 13. Certain Relationships and Related Transactions 21-22
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 10-K 23-26
SIGNATURE PAGE 27
PART I
Cautionary Statement: This report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include, without limitation, those statements relating to development
of new products, the financial condition of the Company, the ability to increase
distribution of the Company's products, integration of businesses the Company
has acquired, disposition of any current business of the Company, and the
Company's relationship with Williams Controls, Inc., a related company. These
forward-looking statements are subject to the business and economic risks faced
by the Company. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of the factors
described in this report.
Item 1. Description of Business
-----------------------
General
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Ajay Sports, Inc. (the "Company") markets and distributes golf clubs, golf
bags, golf gloves, golf accessories, hand-pulled golf carts and casual living
furniture. The Company is presently one of the larger United States distributors
of golf products as well as one of the nation's larger manufacturers of golf
bags. The Company also owns Pro Golf Discount(R) the world's largest franchiser
of "golf only" retail stores, with over 165 stores in the United States, Canada,
and the Philippines.
The Company operates the mass-market golf segment of its 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, markets golf clubs, golf bags, golf
gloves, accessories and carts for distribution to the off-course pro shop
markets. Prestige Golf Corp. ("Prestige"), another wholly owned subsidiary,
purchases current in-line and closeout golf equipment for distribution mainly
through Pro Golf Discount(R) stores and an Internet site, ProGolf.com. Pro Golf
International, Inc. ("PGI"), a majority-owned subsidiary, was formed during 1999
and owns 100% of the outstanding stock of Pro Golf of America, Inc. ("PGOA") and
a majority of the stock of ProGolf.com, Inc. ("PG.com"). PGOA is the franchiser
of Pro Golf Discount(R) retail golf stores. ProGolf.com is a development stage
company that recently began selling golf equipment and other golf-related
products and services over the Internet. All references to the Company include
Ajay, Leisure Life, Palm Springs, Prestige, PGI, PGOA, and PG.com 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 Ajay are sold under
the Spalding(R), Palm Springs(R), Pro Classic(R), Leisure Life(R), Pro USA(R),
and private label brand names. As of March 1999 the Company added the licensed
name "Gary Player" for use in marketing its golf product lines. 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. PGOA provides services to its
franchisees in exchange for initial franchise fees and ongoing royalties based
on a percentage of retail sales. The Company enhances its traditional sales and
distribution methods by its recently introduced Internet sites.
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, (262) 728-5521. The Company
also operates a sewing facility in Mexicali, Mexico and a manufacturing and
distribution facility at 215 4th Avenue North, Baxter, TN 38544, headquarters
for its Leisure Life subsidiary. Headquarters for Ajay, Palm Springs and
Prestige are located at 1501 E. Wisconsin St., Delavan, WI 53115. Headquarters
for PGI, PGOA and PG.com are located at 32751 Middlebelt Road, Farmington Hills,
MI 48334.
Business Strategies
- -------------------
The Company's strategies are 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, to improve its position as the global
leader in retail golf sales at its Pro Golf Discount franchised stores, and to
have a golf category-killer website for internet sales of golf equipment and
related products and services. The Company believes that the following
competitive strengths contribute to its position as a market leader:
Strong Brand Recognition. Spalding(R), Palm Springs(R), Pro Classic(R), Gary
Player(R), and Pro Golf Discount(R) are highly recognized names in the golf
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, regional retailers, golf specialty and sporting good specialty
retailers. From 1983 through 1998 a significant portion of the Company's
revenues resulted from the sale of products manufactured and sold pursuant to a
license agreement with Spalding Sports Worldwide ("Spalding"). In March 1999 the
Company began an 18-month phase out of products bearing the Spalding name. This
phasing out process has resulted in sharply decreased sales by the Company
during 1999 because Spalding had been the Company's primary brand sold to mass
merchants. As the phase-out is completed, in place of Spalding branded products,
the Company will be offering its newly licensed Gary Player branded products. As
a complement to the Gary Player license, PGOA has contracted with international
golf legend Gary Player to be its corporate spokesperson for at least the next
two years The Company is in the process of determining the primary market it
will target with its Gary Player branded products. Previous sales of Spalding
branded products traditionally sold to mass merchants have not been successfully
transitioned to new sales of Gary Player branded products; however, in light of
the Company's acquisition of the Pro Golf businesses during 1999, the Company is
carefully considering the markets available for its new lines of Gary Player
branded products.
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 presence in its largest foreign source markets to assure quality,
reliability, new product ideas and a constant commercial interface. Its Pro Golf
Discount(R) franchised stores have an international reputation for quality name
brand and private label golf merchandise at the best prices.
Tradition of Innovation. Throughout its history, the Company has tried to
maintain a tradition of new product development. In spite of this, sales in
several product categories have been declining in recent years. New bag styles,
new accessories, new gloves, new golf clubs, new furniture and other new product
designs for 2000 are meeting with good response from the Company's customers
although, in general, sales and orders have not yet increased.
Breadth of Product Lines. The Company offers a wide selection of golf bags,
golf gloves, golf carts and golf accessories, and a growing list of outdoor and
indoor casual living furniture. Through its variety of 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 consists of approximately 25 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 approximately 100 individual items. The Company is trying to
improve its sourcing channels with the goal of having broader selections of
golf-related merchandise at better wholesale and retail margins. However, during
1999 and into 2000 the Company has lacked the cash availability necessary to
expand its product lines.
Golf carts, golf bags, golf gloves and related accessories historically have
accounted for approximately 96% of Ajay's gross sales. Golf clubs historically
through 1997 accounted for 65% of Palm Springs' sales. Since 1998, Palm Springs
has emphasized bags, accessories, gloves and carts over clubs. Leisure Life's
sales consist 100% of indoor and outdoor leisure furniture. With the acquisition
of PGOA, franchise fees and royalties are expected to account for a significant
portion of future Ajay revenues.
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. Through 1995, the Company's products were sold to
customers primarily through mass merchants and regional retailers. With its
acquisition of the business of Palm Springs in October 1995, the Company gained
a new channel of distribution through off-course golf specialty shops. The
Company has been unsuccessful in exploiting this new channel during 1996 through
1999 particularly in golf club sales. The Company is focusing on improving
results in this channel and is trying to regain its former sales position by the
year 2001, largely through increased sales of products to the Pro Golf Discount
stores and to internet retailers, including PG.com.
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. In late 1999 the Company began utilizing the expertise of outside
representatives, in particular those associated with PGOA, to help redesign its
golf bag line for the year 2000.
The Company is seeking contract sewing of products that utilize the Company's
existing manufacturing capabilities, specifically its cut and sew operations,
with the goal of increasing sales and plant utilization during the summer and
fall to offset the excess capacity created by the historical seasonality of the
golf lines. Contracts received during the first quarter of 2000 have potential
to meet or exceed the Company's near-term goals for cut and sew manufacturing
utilization.
Leisure Life introduced a new line of swing, rocker and stationary furniture
for the 1999 sales year. This line was less expensive than its previous line of
furniture and incorporated improved product performance features, design
features, improved illustration based instructions, improved packaging, improved
quality and several cost reduction features and thus offered better value to the
end customer. New products, including a stained furniture line, have met with
broad market acceptance through the first quarter of 2000.
In spite of its increased distribution and new product development efforts,
the Company experienced a contraction of its sales base during 1999. The major
contributing factors to the contraction were brought on by golf industry
competitive factors and the Company's poor liquidity and inability to
consistently deliver product on a timely basis. Other factors that the Company
believes hurt its ability to increase its customer base included the trend for
customers to increase their importing of Asian golf products directly, and a
relatively flat year in golf retail sales, which also resulted in excess
manufacturers inventories of golf bags and additional close outs on these bags.
Sports Business
- ---------------
Golf, which is the primary market for the Company's businesses other than
Leisure Life, continues to be a popular form of recreation. According to the
National Golf Foundation ("NGF"), a trade association, there were 3.4% less
rounds of golf played in 1998 than 1997 which was up 14.6% from 1996. The pace
of golf course development also continues steadily. NGF reports that 448 golf
courses were opened for play in 1998 compared to 429 in 1997 marking the fourth
consecutive year where openings exceeded 400. According to NGF market research,
the number of U. S. golfers is approximately 26.4 million. This group consists
of 78% male and 22% female and 74% 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, and that there is a great opportunity
for increased participation by minorities. These beliefs are based on expected
increased interest by younger players, increased emphasis on women's golf and
improvements in health, leisure time, increasing numbers of people moving into
the over 60 group, and the success and increased visibility of minority golfers
such as Tiger Woods and Notah Begay.
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.
Since 1983, Ajay has sold golf bags, hand-pulled golf carts and a range of
general sports accessories through a license agreement with Spalding.
Approximately 75% of Ajay's total sales related to products sold under the
Spalding license agreement during the years ended December 31, 1998 and 1997,
respectively. The changing golf market combined with the high cost of Ajay
maintaining the Spalding license prompted Ajay to implement a new licensing
strategy. In March 1999, Ajay reached an agreement with Spalding Worldwide and
began an 18-month phase out period of its Spalding licensed products and will
discontinue offering Spalding branded products after September 30, 2000. As a
result of this phase out, during 1999 approximately 46% of Ajay's total sales
related to products sold under the Spalding license agreement. This percentage
is expected to continue its decline through September 2000. Another strategic
change was for Ajay to obtain rights to a new brand name focused specifically on
the golf niche. In early 1999, Ajay entered into a 5-year license agreement with
the Gary Player Group, Inc. to use the Gary Player name on Ajay's golf products
throughout the United States.
Gary Player is one of the best-known golfers of all time. He is one of only four
golfers to achieve golf's "Grand Slam" (The Masters, U. S. Open, PGA and British
Open championships). In addition to his playing career, Gary Player and the
organization bearing his name are involved in golf course design and other golf
and charitable activities. Gary Player Design has developed over 100
championship courses throughout the world. Gary Player is regarded as the
International Ambassador of Golf. His courteous demeanor and integrity have
earned high respect as one of golf's greatest sportsmen and gentlemen. The
combination of Gary Player's success in golf tournaments worldwide, his personal
integrity and the universal feeling that he represents everything good about the
game of golf has caused the Gary Player name to become one of the strongest
brands in golf. The Company plans to capitalize on this brand awareness in its
future product development and is working toward developing the Gary Player
brand for marketing products. In October 1999, PGOA contracted with Gary Player
for him to be Pro Golf's international spokesman through at least December 31,
2001. Gary now wears the "Pro Golf" name on his golf outerwear and appears in
much of the Pro Golf advertising.
During 1999, Ajay not only began shifting its primary branded products away
from Spalding and toward the Gary Player name, it also sought to move toward
less dependence on the mass merchant markets and more on off golf course
specialty stores, including the Pro Golf Discount franchised stores. Sales
decreased for 1999, reflecting not only the transition in product branding but
also the Company's tight cash flow position which affected Ajay's ability to
source and manufacture products at a level which would ease the transition.
Manufacturing and Design. While the Company is now importing much of the
product it sells, some 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
occur at facilities located in Delavan, Wisconsin. Prestige products are also
warehoused in and shipped from Delavan.
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 these design
features on a continuous basis, both in-house and in conjunction with its
foreign suppliers. The Company has also introduced a program for its customers
whereby it designs packaging to fit with its customer's image and private label
names. This new program has received favorable response so far, although new
sales have been slow.
The Company's lines of various accessory products are purchased 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. The Company'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 25% of the Company's
sales in 1999. The second largest customer accounted for 7% of the Company's
sales. The loss 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, manufacturers' representatives working on
a commission basis service many of Ajay's accounts. Ajay services its major
accounts through a combination of manufacturers' representatives and its own
in-house sales force. Palm Springs and Prestige service their customers through
their in-house and regional sales representatives. As a result of the reduced
sales and poor liquidity at the Company during 1999, its sales force has been
scaled back both in-house and with outside representatives. Management is
currently reviewing its needs in these areas and devising a plan for moving
forward during 2000 and 2001 to increase sales and broaden the Company customer
base. The Company's management regularly consults with major customers to
discuss merchandising plans and programs, anticipated needs and product
development. PGOA services its franchisees through its in-house support staff,
and its staff is constantly attending trade shows and speaking with outside
vendors to keep in the forefront of golf and retail innovation and technology.
The Company believes that Ajay, Palm Springs, Leisure Life and PGOA have 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. PGOA's franchisees
spend approximately $10,000,000 annually on local and national advertising,
which helps expand recognition of the Pro Golf brand name. PG.com intends to
supplement this advertising with substantial advertising of its own beginning in
the latter half of 2000.
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 sunrooms. Americans are spending more of their leisure time in a
relaxed casual manner. This has led to a need for more leisure time furniture.
Leisure furniture, used on porches, decks, patios, in sun rooms and yards has
traditionally 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 that 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 seating. A 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 cocktail
and end tables, a bench, canopies, A-frames, potting tables, shelving and
bookcases as 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. Small portions 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. Currently, Leisure life supplies nearly 3,500
storefronts worldwide and supplies to 20 distributors in various countries
around the world. Large chains such as Wal-Mart, Sam's, Lowes, Meijers and Price
Costco represent 29% of Leisure Life's customer storefront base and 50% of its
sales. Independent nurseries, hardware stores, pool and patio shops, home
centers, department stores, mail order catalogs and casual furniture stores,
along with their respective co-op's and specialty distributors carry Leisure
Life swings, swing sets, seating and rockers. Export distribution also continues
to grow. Wood furniture, as an outdoor category, represents a greater portion of
sales in Great Britain, Europe, Japan, Korea, and the Far East than in the U. S.
market. Pressure treated Southern Yellow Pine is very competitive with Teak,
Mahogany, or any other solid wood outdoor furniture.
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 be very seasonal in nature. 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 businesses. Management
expects that the indoor leisure furniture line including shelving being
developed will have higher shipments in the fall. To reflect the seasonality of
the business, inventories will tend to be higher from November to May.
Competition
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The market in which the Company does business, while very fragmented, is
highly competitive, and is served by a number of well-established and
well-financed companies with recognized brand names, as well as new companies
with popular products. New product introductions and/or price reductions by
competitors continue to generate increased market competition. While the Company
believes that its products, its marketing efforts, and its franchised stores
will continue to be competitive, there can be no assurance that successful
marketing efforts by competitors will not negatively impact the Company's future
revenues. Additionally, the Company faces much competition from other internet
companies which sell golf equipment and services similar to those PG.com will be
offering, and at the present time the Company believes that online sales of golf
equipment is not a material percentage of total golf sales.
Ajay competes in the golf bag, cart and accessory business with several other
domestic companies including Wilson, Gold Eagle, Dunlop, Palmer, Pro Select,
Highlander, Knight and others. Increased imports of low cost competitive
products, primarily from Asia, continue to subject domestic producers to intense
price competition and have created extreme price sensitivity, while also
providing 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 Callaway, Ping, Taylor - Made, Cleveland, Tommy
Armour, and Orlimar. Other competitors are Datrek, Belding, Burton, Sun
Mountain, Ogio, Izzo, Miller, and Gold Eagle. 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. Palm Springs also has begun
distributing bags under Pro Golf's trademark names of Excalibur and Unique to
the Pro Golf Discount franchised stores.
Leisure Life has had limited but 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 several small
firms supplying on a regional basis. Competition includes 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 club
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, Palm Springs, and PGOA 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 businesses.
Employees
- ---------
As of March 28, 2000, the Company had a total of 198 employees: 50 employees
at the Delavan, Wisconsin facility, 98 employees at the Mexicali, Mexico
facility, 30 employees at the Baxter, Tennessee facility, and 20 employees at
its Farmington Hills, Michigan office. 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 office, manufacturing and warehousing space. This space is leased
from an unaffiliated third party under a long-term lease arrangement expiring
June 2001, with an option to renew for an additional ten-year period. The
Company has an option to purchase the property at its fair market value at the
end of either the initial or renewal lease term.
Through its wholly-owned subsidiary, Ajay Leisure de Mexico, S.A. de C.V.,
Ajay leases an additional manufacturing facility consisting of approximately
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 $172,800.
PGOA leases approximately 8,000 square feet of office space in Farmington
Hills, Michigan under an operating lease with its former owners. The lease is a
36-month operating lease that expires on March 31, 2002, with one option to
renew for an additional five years. In March 2000, PGOA leased an additional
3,150 square feet of adjacent space, which it intends to sublease to an
affiliated company. PGOA has an option, exercisable between April 2, 2000 and
March 31, 2002, to purchase the building at fair market value.
These facilities adequately meet the Company's production capacity
requirements. The Company, on average, utilizes approximately 60% 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. The Company also attempts to
enter into short-term leases for unused space in its Delavan, Wisconsin
facility.
Item 3. Legal Proceedings
-----------------
The Company is involved in various legal proceedings that are normal to its
businesses, including product liability and workers' compensation claims. As a
result of its tight cash flow, the Company is late on payments due to several of
its vendors and is involved in various collection actions against it and may
face additional actions of this type. 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, Palm Springs, Prestige, PGOA and PG.com 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.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
Market Information
- ------------------
The Company's Common Stock and Units were traded on the Nasdaq Small Cap
Market until September 4, 1998 at which time these securities were delisted and
began to trade on the OTC Bulletin Board (the "OTCBB"). The Company's Series C
10% cumulative convertible preferred stock also trades on the OTCBB. At the same
time the Company's common stock and units were delisted from the Nasdaq Smallcap
Market, the company's warrants were also delisted. No trading information exists
for the warrants. The following table sets forth the range of high and low trade
prices for the last two years. Historic prices have been converted to give
effect to a reverse 1:6 common stock split effective August 14, 1998.
TRADE PRICES
COMMON STOCK
1998 HIGH LOW
- ---- ---- ----
First Quarter $ 1.50 $ .78
Second Quarter $ 2.28 $ .78
Third Quarter $ 3.78 $ .75
Fourth Quarter $ 1.03 $ .34
1999
First Quarter $ 1.06 $ .69
Second Quarter $ 2.63 $ .69
Third Quarter $ 2.06 $ .81
Fourth Quarter $ .94 $ .47
UNITS
1998
First Quarter N/A N/A
Second Quarter $ 3.78 $ 3.78
Third Quarter $18.78 $ 8.28
Fourth Quarter N/A N/A
1999
First Quarter N/A N/A
Second Quarter N/A N/A
Third Quarter N/A N/A
Fourth Quarter N/A N/A
SERIES C PREFERRED STOCK
1998
First Quarter $ 4.00 $ 2.38
Second Quarter $ 4.75 $ 3.25
Third Quarter $ 6.13 $ 2.75
Fourth Quarter $ 3.00 $ 2.25
1999
First Quarter $ 3.00 $ 2.00
Second Quarter $ 5.88 $ 2.00
Third Quarter $ 5.00 $ 2.50
Fourth Quarter $ 3.13 $ 1.50
Holders
- -------
The number of record holders of the Company's common stock, units, warrants
and Series C preferred stock according to the Company's transfer agent, as of
December 31, 1999 are as follows:
Common Stock 369
Preferred C 9
Warrant A 66
Based on a street name shareholder listing, the Company believes that its
round lot common shareholders total approximately 900.
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, bank credit agreement restrictions and the financial condition of
the Company.
Holders of the Company's Series B Cumulative Convertible Preferred Stock
are entitled to cumulative dividends at an annual rate of 8% based on a stated
value of $100 per Series B share, or $8 per Series B share per year.
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. 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.
Item 6. Selected Financial Data
------------------------
The following table presents summary historical consolidated
financial data derived from audited financial statements of the Company (in
thousands, except per share amounts).
Year Ended December 31,
Statement of Operations: 1999 1998 1997 1996 1995
-------- --------- -------- ------- --------
Net sales $14,340 $22,925 $30,330 $24,341 $18,728
Cost of sales 12,790 19,477 26,585 20,759 15,291
-------- --------- -------- ------- --------
Gross profit 1,550 3,448 3,745 3,582 3,437
Selling, general and
administrative expenses 4,866 3,868 5,837 5,067 3,247
-------- --------- -------- -------- -------
Operating income (loss) (3,316) (420) (2,092) (1,485) 190
Nonoperating income (expense):
Interest expense - net (1,625) (1,139) (1,280) (1,103) (801)
Other, net 638 84 (144) (38) ( 41)
Minority interest in (loss)
of subsidiary 6 - - - -
Income (loss) from operations before
income taxes (4,297) (1,475) (3,516) (2,626) (652)
Income tax expense (benefit) (1,833) - - (893)
-------- --------- --------- -------- -------
Net (loss) $(2,464) $(1,475) $(3,516) $(1,733) $ (444)
======== ========= ========= ======== =======
Net (loss) per common share @ $ (.70) $ (0.47) $ (1.01) $(0.55) $(0.18)
======== ========= ========= ======== =======
Weighted average common and common
stock equivalent shares
outstanding @ 4,013 3,909 3,879 3,874 3,787
======== ========= ========= ======== =======
Cash dividends per common share - - - - -
December 31,
Balance sheet data: 1999 1998 1997 1996 1995
-----------------------------------------------
Working capital $ 1,707 $ 5,652 $ 8,200 $ 3,348 $ 6,323
Total assets $25,733 $13,083 $16,614 $18,495 $ 8,486
Long term debt $18,043 $ 7,538 $ 3,229 $ 5,196 $ 5,111
@ Current and prior years restated to reflect result of reverse 1 for 6 common
stock split effective August 14, 1998.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
Results of Operations
- ---------------------
Net Sales
Net sales in 1999 were $14.3 million, a decrease of $8.6 million, or 38%
when compared to 1998 sales. The sales decrease in the golf product line was
$9.5 million or a 50% decrease. Mass market golf sales declined $11.6 million
and sales to specialty golf stores decreased by $0.6 million. Revenues of PGOA,
which include franchise fees, royalties, and other income for the six month
period from the date of acquisition through December 31, 1999 accounted for $1.7
million of the $14.3 million total, or 11.8%. Furniture sales increased $0.9
million or 25.9%. Lower sales in the mass-merchant channel represent fewer sales
to existing customers as a result of a weak market during the second half of
1999 and the mass-merchants continuing to increase the amount of product they
were importing directly from Asia. The Company believes sales were further
decreased because it is phasing out sales of Spalding branded products and will
discontinue these products after September 30, 2000. These sales reductions
caused negative cash flow, which delayed the start up of new commitments for
2000 and reduced the volume of sales of new lines. Sales to specialty golf
stores were off due to excesses of golf bag inventories resulting in large
volumes of closeouts and contraction of the Company's sales force. Furniture
sales increased due to expansion of Leisure Life's product line and customer
base. Historically, mass-market sales have been Ajay's core business.
Sales in 1998 were $22.9 million, a decrease of $7.4 million or 24% compared
to 1997. The sales decrease in the golf product line was $6.8 million or a 26%
decrease. Mass-market golf sales declined $3.7 million and sales to specialty
golf stores decreased by $3.1 million. Furniture sales decreased due to weak
economic conditions in Asia and competition from foreign imports.
Gross Margin
The Company's 1999 gross margin decreased 56% to $1,550,000 compared to
$3,448,000 for the 1998 year. Gross margin as a percent of sales decreased to
10.8% as compared to 15.0% of sales for 1998. The gross profit amount decrease
of 56% was a result of a sales volume decrease of 38%, which caused
manufacturing overhead allocated to inventory to rise on a percentage basis. The
Company's poor liquidity also caused higher product costs including product
substitutions and additional freight charges for rush deliveries.
The Company's 1998 gross margin decreased 8% to $3,448,000 compared to
$3,582,000 for the 1997 year. Gross margin as a percent of sales declined to
12.3% as compared to 14.7% of sales for 1997. Contributing to this decline were
three factors. The first was the lack of sufficient operating liquidity during
1998, 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 facility in California and consolidating it into Delavan,
Wisconsin. These factors reduced gross profit margin by approximately 2.0%, 1.6%
and 0.7% respectively.
Selling, General and Administrative Expenses
SG&A for 1999 was $4.9 million and 33.9% of sales compared to $3.9 million
and 16.9% of sales for 1998. The large percentage increase was caused by reduced
sales. During the second half of 1999, the Company began a cost reduction
program designed to bring costs in line with the reduced sales levels. The
Company is still working to reduce certain expenses, including rent for parts of
its Delavan WI facility which are not fully utilized, insurance, and labor
costs.
During 1998, consolidating Palm Springs into the Delavan operation saved $1.2
million. A further reduction of $570,000 in mass-market golf resulted from sales
volume decreases, a reduction in the work force and efficiency improvements.
As a percent of sales, SG&A was 19.2% for 1997, an increase of $770,000 or
15.2% compared to 1996. The largest contributor to increased expenses was the
legal, accounting and other costs associated with refinancing the Company, which
contributed nearly one percent to SG&A.
Interest Expense
Interest expense for 1999 was $1,625,000, an increase of $486,000 from 1998
total of $1,139,000 . The increase resulted from lower sales and additional
borrowings to meet working capital needs. Interest expense was $1,280,000 for
1997.
Income Taxes
The Company had no income tax liability during the years ended December 31,
1999, 1998 and 1997.
Financial Condition
- -------------------
At December 31, 1999, the Company had working capital of $1,707,000, compared
with $5,652,000 at December 31, 1998. This $3,945,000 decrease resulted from
lower inventories and increased receivables and payables as a result of lower
sales levels during 1999, the Prestige Golf billing activities for major golf
suppliers of Pro Golf Discount franchised stores, and poor cash flow which
caused the Company to be past due with some of its vendors. The ratio of current
assets to current liabilities at December 31, 1999 was 1.24 compared to 3.0 at
December 31, 1998.
Inventories at December 31, 1999 were $4.0 million compared to $5.7 million
at December 31, 1998. Trade accounts receivable were $3.2 million at December
31, 1999 compared to $1.9 million at December 31, 1998.
At December 31, 1999 and 1998, net fixed assets were $1,693,000 and
$1,708,000, respectively. The decrease reflects depreciation in excess of
capital expenditures.
Capital Resources
- -----------------
The Company expended $281,000 in 1999 for capital expenditures, with $57,000
of that total used for golf bag and accessory operations and the remainder
allocated to the Pro Golf group of companies for office equipment and start-up
equipment and software development costs of ProGolf.com.
Liquidity
- ---------
Cash flow from operations for 1999 was negative by $725,000. The negative
operating cash flow was primarily caused by reductions in sales. The Company
expects that cash flow from operations will continue to be poor throughout the
first half of 2000.
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
that historically has been from February through May of each year. The Company
has relied on Williams and bank revolving credit facilities in the past and
continues to rely heavily on revolving credit facilities and loans from related
parties and affiliated companies for its working capital requirements.
On June 30, 1998, the Company restructured its credit facility with Wells
Fargo Bank, National Association ("Wells") to separate its credit facility from
that of Williams Controls, Inc. and its subsidiaries ("Williams"). The credit
facility as restructured provides for maximum borrowing capacity of $10,025,000,
consisting of a revolving credit facility of up to $9,500,000 and a term loan of
$525,000. As a result of this transaction, the Company no longer has joint and
several liabilities, cross collateral agreements or guarantees with Williams
with respect to Williams' Wells Fargo facility. The interest rate is prime plus
1% on the revolver and prime plus 1.5% on the term loan. The Company has a
temporary credit line in the amount of $750,000, which may became a permanent
loan as of May 15, 2000 with availability subject to a percentage of the fair
market value of the underlying collateral. The Company presently needs
additional capital, and is in the process of raising it through private sales of
securities of PGI and PG.com; with the goal of effecting a public offering of
PG.com stock in late 2000 or at the earliest possible time it obtains a
commitment from an underwriter to take ProGolf.com public.
In connection with the restructuring of the Wells Fargo Bank credit
facility, the Company entered into an agreement in June 1998 with Williams under
which Williams advanced $2,000,000 in cash and securities. As a result of these
additional investments plus Williams' assumption of certain liabilities and
potential additional payments to the bank, the debt and equity investments could
reach $8,650,000 with an initial 3-year effective annual cost of 8.75% inclusive
of interest, dividends and fees. On June 30, 1998, Williams converted $5,000,000
of this debt into 6,000,000 shares of a newly created series of preferred stock
of the Company, the series D cumulative convertible non-voting preferred stock.
Series D is convertible into 3,333,333 shares of the Company's common stock. No
dividends are accrued or payable on the Series D preferred stock through July
31, 2001. Beginning August 1, 2001, he dividend on this series of preferred
stock will be 17% and will increase to 24% on August 1, 2002. Rather than pay
these significant dividends, the Company's plan is to raise additional capital
and redeem the Series D preferred stock. The Company delivered a promissory note
to Williams for the unconverted portion of the debt. This note is secured by a
lien on the Company's assets, which is junior to the liens held by the Company's
bank lenders. This note accrues interest at the rate of 16% per annum, which
interest will become due and payable on December 31, 2000 with all remaining
principal and interest due at maturity on August 1, 2001. The Company has also
committed to pay Williams an annual administrative fee of $90,000 and annual
management fees of $80,000 for sourcing products overseas. Williams continues to
own 686,274 shares of the Company's common stock, representing approximately 16%
of the outstanding common stock of the Company. Williams also holds options to
purchase an additional 1,851,813 shares of common stock, and continues to have
rights, which were negotiated in 1994, to utilize for a fair market fee, excess
floor space and related resources in the Company's manufacturing facilities in
Wisconsin and Mexico.
The combination of the Wells and Williams refinancing agreements resulted in
a short-term improved working capital position, which enabled the Company to pay
down past due accounts payable and temporarily increased liquidity, providing
the Company with additional availability under its bank credit facility.
However, continued operating losses negatively affected the Company's liquidity
during 1999 and the Company has experienced severe cash shortfalls, which have
caused it to miss delivery dates and subsequently lose sales in 1999 and into
2000. This trend is expected to continue in the short-term.
During late 1999 and into 2000, the Company began selling equity in PGI in a
private placement offering and entered into an agreement to acquire developed
and undeveloped real estate for existing and planned golf-related activities,
including golf domes with retail stores inside. As of April 14, 2000, the
Company had committed to issue 138,750 shares of PGI stock at $60 per share,
which represents 12.18% of the total shares of PGI stock outstanding at that
date. Of the new shares committed to, $375,000 cash had been received with
signed subscription documents, $870,000 was a conversion of subordinated debt
into common stock, and the remaining $7,080,000 a combination of equity
securities and golf-related real property.
The Company anticipates significant additional cash flows resulting from
the debt conversions and the rents and fees to be received from the golf
properties during the initial twelve-month period beginning July 1, 2000. These
revenues are expected to increase in the future after the start-up period is
over. Additionally, the dome and retail store combination is planned as the new
PGOA franchise of the future and could substantially increase revenues and cash
flow of the Company's PGOA operations.
The Company also began an offering of PG.com common stock at $2.50 per
share in during April 2000 to raise up to $12,500,000 in gross offering
proceeds. If the maximum offering is sold, the shares sold in this offering will
represent approximately 33% of the total PG.com common shares outstanding after
the offering. Proceeds from these private placements will be used for working
capital, acquisitions, and growth.
Year 2000 Compliance
- --------------------
State of Readiness. During the past two years, the Company was actively
involved in finding and correcting Y2K problems within its information
technology structure. The Company's main computing system, an IBM AS/400, is
certified by IBM to be Y2K compliant. The Company's proprietary software that
runs on the AS/400 is Y2K compliant.
Personal computers were evaluated using a software tool provided by IBM.
This evaluation phase was completed during 1999. Internal systems and equipment
that depend upon embedded microchips were certified to be Y2K compliant.
The Company contacted all of its suppliers to determine their Y2K status. A
majority responded positively, and alternate sources were found where needed.
The Company experienced no significant problems with the Y2K year change issue
and does not anticipate any major problems internally or with any of its
suppliers going forward.
Costs.The Company hired a full-time programmer/analyst in February 1998, to
help with the Y2K conversion. The Company upgraded its EDI translation software
to accommodate the EDI Y2K solution, Version 4010. The Company's Y2K costs
related to information technology that were beyond the scope of normal
operations were not significant.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company holds only one market risk instrument. This is common stock
classified as marketable securities and carried as a current asset in the amount
of $348,000 as of December 31, 1999. This stock is subject to equity price risk.
The full carrying value represents the market value of 166,719 shares of
Williams Controls, Inc. common stock valued at $2.08 per share, which is the
last trade for 1999. This stock is traded on the Nasdaq national market. The
shares were received as part of the restructuring agreement with Williams dated
June 30, 1998. These shares have been pledged to Wells Fargo as collateral for
the Company's loans. High and low closing prices per share for 1999 were $3.25
and $2.00 respectively. Between January 1, 2000 and March 31, 2000 the lowest
closing price for these shares has been $2.00 per share.
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.
PART III
Item 10. Directors and Executive Officers of the registrant
--------------------------------------------------
The Registrant's directors and executive officers as of April 13, 2000 are as
follows:
Positions and
Name Age Offices with Date first
Company Elected
- ------------------- --- ------------------------------ -----------
Anthony B. Cashen 64 Director 1993
Robert R. Hebard 47 Director & Corporate Secretary 1989
Thomas W. Itin 65 Chairman, CEO & President 1993
Ronald N. 43 Chief Financial Officer and 1999
Silberstein Chief Administrative Officer
Anthony B. Cashen. Mr. Cashen has served as a director of the Company since
1993. For more than the past five years until his retirement in December 1999,
Mr. Cashen has served as a managing partner or senior partner of LAI Ward
Howell, a publicly held management consulting and executive recruiting firm
located in New York City. He has served as Secretary, Treasurer and Director of
LBO Capital Corp., a publicly held company, since its inception. He currently
serves as a Director of Immucell Corp., and Williams Controls, Inc., both
publicly held companies. Previously, Mr. Cashen had been an officer and
principal of the investment firms A. G. Becker, Inc. and Donaldson, Lufkin and
Jenrette, Inc. He received an MBA from the Johnson Graduate School of Management
at Cornell University, and a Bachelor of Science degree from Cornell University.
Robert R. Hebard. Mr. Hebard has served as a director of the Company since 1989
and Secretary of the Company since September 1990. From June 1993 to the
present, he has been Chairman of the Board and President of Enercorp, Inc., a
publicly traded business development company under the Investment Company Act of
1940, as amended. From June 1986 to January 1992, Mr. Hebard was First Vice
President and Director of Product Management for Comerica Bank, and from
February 1992 to October 1992 he was Director of Retail Marketing for the merged
Comerica/Manufacturers Bank. Mr. Hebard also currently serves as Vice President
of Woodward Partners, Inc., a real estate development company in West
Bloomfield, Michigan. From 1993 to the present, Mr. Hebard has served as Chief
Executive Officer of CompuSonics Video Corp., a publicly held company. He
received an MBA from Canisius College and a Bachelor of Science degree from
Cornell University.
Thomas W. Itin. Mr. Itin was elected Chairman of the Board and President of the
Company in June of 1993, and is the Company's largest single stockholder. Mr.
Itin has been a director of Williams Controls, Inc., a publicly held company
since its inception in November 1988. He has also served as Chairman of the
Board and Chief Executive Officer of Williams since March 1989 and also as
President and Treasurer since June 1993. Mr. itin serves on the Cornell
University Council and is Chariman of the Technology Transfer Committee. He has
served as Chairman of the Board, Chief Executive Officer and Chief Operating
Officer of LBO Capital Corp. since its inception. Mr. Itin has been Chairman,
President and Owner of TWI International, Inc. since he founded the firm in
1967. TWI International acts as a consultant for mergers, acquisitions,
financial structuring, new ventures and asset management. Mr Itin also has been
Owner and Principal Officer of Acrodyne Corporation since 1962. He received a
Bachelor of Science degree from Cornell University and an MBA from New York
University.
Ronald N. Silberstein has been Chief Financial Officer of the Company since
August 1999. Mr. Silberstein is a Certified Public Accountant and, prior to
joining the Company, was a partner in the CPA firm of Hirsch Silberstein &
Subelsky, P.C., a firm that he co-founded in 1993, where he consulted with
public and private companies on accounting, tax, and operational issues. Mr.
Silberstein was the partner in charge of the audit when Hirsch Silberstein &
Subelsky, P.C. acted as the Company's independent auditors. Prior to 1993, Mr.
Silberstein was a partner in a local Michigan CPA firm. From 1979 to 1988, he
was a staff accountant with various CPA firms in Southeast Michigan, including
the Detroit office of Ernst & Young. He received a Bachelor of Business
Administration degree from the University of Michigan in 1979.
There are no family relationships between any director or executive officer.
Item 11. Executive Compensation
----------------------
Summary of Cash and Certain Other Compensation
- ----------------------------------------------
The following table shows, for the years ending December 31, 1999, 1998 and
1997, the cash compensation paid by the Company and its subsidiaries, as well as
certain other compensation paid or accrued for those years, to each of the
executive officers of the Company who received compensation from all capacities
in which they serve:
Summary Compensation Table
- --------------------------------------------------------------------------------
Annual Long-Term
Compensation Compensation
Securities
Name and Principal Position Year Salary Underlying
Options (# Shares)
- --------------------------------------------------------------------------------
Thomas W. Itin 1999 $ 1 (1) -
Director and Principal 1998 $ 1 (1) -
Executive Officer of the 1997 $ 1 (1) -
Company, and Director and
Principal Executive Officer of
Ajay Leisure Products, Inc.
- --------------------------------------------------------------------------------
Ronald N. Silberstein
Chief Financial Officer and 1999 $50,884 (2) 50,000
Chief Administrative Officer
of the Company 1998 N/A
1997 N/A
- --------------------------------------------------------------------------------
Clarence H. Yahn 1999 $ 76,154 (3) -
Director of the Company and 1998 $120,000 -
President of Ajay Leisure 1997 $117,502 -
Products
- --------------------------------------------------------------------------------
(1) See "Employment contracts" below.
(2) Mr. Silberstein joined the Company on August 1, 1999. His annual base salary
is $126,000.
(3) Mr. Yahn left employment with the Company and his position on the Board of
Directors effective July 31, 1999.
Options/SAR Grants
- ------------------
During 1999, no options or SARs were granted to the executive officers named in
the Summary Compensation Table other than Mr. Silberstein's.
Aggregated Option Exercises and Fiscal Year End Option Value
The table below summarizes options, the number of securities underlying
unexercised stock options at December 31, 1999 which are held by the executive
officers listed in the Summary Compensation Table. No options were exercised
during the year and at year-end none were in-the-money.
Aggregated Option Exercises in 1999 and December 31, 1999 Option Values
------------------------------------------------
Number of Securities Underlying
Unexercised Options / FY - End (#)
------------------------------------
Name Exercisable Unexercisable
------------------------------------------------
Thomas W. Itin 0 0
CEO
------------------------------------------------
Ronald N. 0 50,000
Silberstein
CFO/CAO
------------------------------------------------
The Company does not have any restricted stock, long-term incentive, defined
benefit or pension plans.
Compensation of Directors
- -------------------------
Directors are not paid a fee for attending regular Board of Directors meetings.
However, they are reimbursed for expenses incurred in attending such board
meetings.
Under the 1994 Stock Option Plan, the non-employee directors who are members of
the Compensation Committee are to receive grants of 834 non-statutory stock
options under the plan at each Annual Meeting. There were no grants during 1999
to members of the Compensation Committee because an Annual Meeting was not held.
Employment Contracts
- --------------------
The Company has an employment arrangement with Mr. Itin under which he served as
the President and Chief Executive Officer of the Company at a salary of $1 per
year from 1994 through 1999. Mr. Itin has no obligation to continue this
arrangement although he has not given the Company any notice of intent to change
the arrangement in the near term.
Item 12 Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------
The table below sets forth, as of March 29, 2000, the number of shares of Common
Stock beneficially owned by each director and executive officer (named in the
Summary Compensation Table) of the Company individually, all such executive
officers and directors as a group, and each beneficial owner of more than five
percent of the Common Stock. The following stockholders have sole voting and
investment power with respect to their holdings unless otherwise footnoted.
Name and Address Number of Shares Beneficially Percentage of Class
Owned (1)
- ---------------- ------------------------------ --------------------
Thomas W. Itin 2,758,197 (2)(3)(5) 50.8%
7001 Orchard Lake Road, (6)(9)
Suite 424
West Bloomfield, MI 48322
Williams Controls Industries, 5,871,420 (4) 64.2%
Inc.
14100 SW 72nd Avenue
Portland, OR 97224
TICO 1,990,747 (5) 38.9%
7001 Orchard Lake Road,
Suite 424
West Bloomfield, MI 48322
Acrodyne Profit Sharing Trust 462,246 (6) 10.9%
7001 Orchard Lake Road,
Suite 424
West Bloomfield, MI 48322
Robert R. Hebard 6,666 (7) 0.2%
7001 Orchard Lake Road,
Suite 424
West Bloomfield, MI 48322
Enercorp, Inc. 315,634 (8) 8.0%
7001 Orchard Lake Road,
Suite 424
West Bloomfield, MI 48322
LBO Capital Corp. 280,001 (9) 7.0%
7001 Orchard Lake Road,
Suite 424
West Bloomfield, MI 48322
Ronald N. Silberstein 53,350 (10) 0.7%
7001 Orchard Lake Road,
Suite 424
West Bloomfield, MI 48322
Anthony B. Cashen 4,778 (11) 0.1%
101 Old Ox Rd.
Ghent, NY 12075
All executive officers and 2,822,587 (2)(3)(7) 54.2%
directors (10)(11)
as a group
(5 persons)
1) Where persons listed on this table have the right to acquire additional
shares of Common Stock through the exercise of outstanding options or
warrants or the conversion of convertible securities within 60 days from
March 31, 2000, these additional shares are deemed to be outstanding for
the purpose of computing the percentage of Common Stock owned by such
persons, but are not deemed to be outstanding for the purpose of computing
the percentage owned by any other person. Percentages are based on
4,091,091 shares outstanding.
(2) Mr. Itin may be deemed to be a "control person" of the Company. Includes
Common Stock and shares of Common Stock issuable upon the exercise of
presently exercisable warrants and the conversion of presently convertible
Preferred Stock beneficially owned by Mr. Itin's spouse and affiliates of
Mr. Itin as follows:
Entity Shares Description
- ------ ------ ------------
TICO 833,340 Common Stock
First Equity Corporation 25,203 Common Stock
Acrodyne Profit Sharing Trust 462,246 Common Stock and warrants
LBO Capital Corp. 280,001 Common Stock and warrants
-------
1,600,790
TICO (12,500 shares of Series
B preferred stock convertible Series "B" Preferred
at one share for 92.5926 1,157,407 Stock conversion
shares of Common Stock) ---------
2,758,197
Mr. Itin disclaims beneficial ownership in the securities owned by LBO
Capital Corp. and First Equity Corporation in excess of his pecuniary
interest. Mr. Itin's spouse owns an 80% equity interest in First Equity
Corp., and Mr. Itin owns 57% of the outstanding common stock of LBO Capital
Corp., a company with its common stock registered under Section 12(g) of
the Securities Exchange Act of 1934 (the "Exchange Act"). Mr. Itin is also
Chairman of the Board and President of LBO Capital.
(3) Does not include 686,274 Common Shares, 1,851,813 options and 3,333,333
shares available from series D preferred on conversion owned by Williams
Controls, Inc. Mr. Itin is Chairman of the Board, President, Chief
Executive Officer, Chief Operating Officer, Treasurer and 30.5% beneficial
owner of Williams Controls, Inc. Even though Mr. Itin is a Director of
Williams Controls, he abstains from voting on matters pertaining to the
Company in meetings of the Directors of Williams Controls.
(4) Includes 1,851,813 shares of Common Stock issuable upon the exercise of
outstanding stock options and 3,333,333 shares available from Series D
preferred on conversion.
See "Certain Relationships and Related Transactions."
(5) Includes 1,157,407 shares of Common Stock issuable upon conversion of
12,500 shares of presently convertible Series B Preferred Stock, at a rate
of 92.5926 shares of Common Stock for every one share of preferred stock.
TICO is a Michigan partnership of which Mr. Itin is the Managing Partner.
(6) Includes 266,167 shares of Common Stock issuable upon exercise of options.
Mr. Itin is trustee and beneficiary of Acrodyne Profit Sharing Trust.
(7) Does not include ownership of Enercorp, Inc. Mr. Hebard is the Chairman and
President of Enercorp.
Includes 278 vested shares issuable upon the exercise of stock options
granted under the 1994 stock option plan.
(8) Includes the following Common Stock and shares of Common Stock issuable
upon the conversion of presently convertible Preferred Stock owned by
Enercorp, Inc., a Colorado corporation, with its Common Stock registered
under Section 12(g) of the Exchange Act:
Common Stock 310,785
2,000 shares of Series C preferred stock,
convertible at one preferred share for 2.4242
shares of Common Stock 4,849
---------
315,634
(9) Includes 33,334 shares of Common Stock issuable upon exercise of warrants.
LBO Capital Corporation is a Colorado corporation of which Mr. Itin is a
56% shareholder, Chairman of the Board of Directors, and President.
(10) Includes 50,000 shares of Common Stock issuable upon the exercise of
outstanding stock options.
(11) Includes 2,778 vested shares of Common Stock issuable upon the exercise of
outstanding stock options granted under the 1994 Stock Option Plan.
Compliance with Section 16(a) of the
Securities Exchange Act of 1934
Section 16(a) of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act") requires executive officers, directors, and persons who
beneficially own more than 10% of the Company's Common Stock to file, with the
SEC, initial reports of beneficial ownership on Form 3, reports of changes in
beneficial ownership on Form 4, and annual statements of changes in beneficial
ownership on Form 5. Persons filing such reports are required under the
regulations promulgated by the SEC pursuant to Section 16 to furnish the Company
with copies of such reports. Based solely upon a review of the copies of the
reports received by the Company during the fiscal year ended December 31, 1999,
the Company believes that all reports were timely filed.
Item 13 Certain Relationships and Related Transactions
----------------------------------------------
Since 1994, Williams Controls, Inc. has made loans and provided capital to the
Company to assist the Company in meeting its financing requirements. Williams
owns 686,274 shares of the Company's common stock and holds options to purchase
an additional 1,851,813 shares of common stock exercisable at $1.08 per share
through August 1, 2000. Thomas W. Itin, the Company's Chairman, President, Chief
Executive Officer, Treasurer and beneficial owner of approximately 50.8% of the
Company's common stock, is also the Chairman, President, Chief Executive
Officer, Treasurer and beneficial owner of approximately 29.4%of the common
stock of Williams. Another director of the Company, Anthony B. Cashen serves as
a member of the Board of Directors of Williams.
From July 1997 to July 1998, the Company and its subsidiaries (the "Company
parties") were parties with Williams and its subsidiaries (the "Williams
parties") to a joint credit facility from Wells Fargo Bank, National Association
(the "Joint Wells Loan"). The proceeds of this joint financing were used to
repay the loans of the Williams parties and partially repay loans of the Company
parties from a previous bank lender, United States National Bank ("U. S. Bank").
In connection with the Joint Wells Loan, Williams provided the Company a loan in
the amount of $2,268,000 (the "Williams Bridge Loan") and U. S. Bank provided
the Company a bridge loan in the amount of $2,340,000 (the "USB Bridge Loan").
The Company is the primary obligor on the USB Bridge Loan promissory note and it
is guaranteed in full by the Williams parties, and by the Company's Chairman,
personally, up to $1,000,000.
As of June 30, 1998, the Joint Wells Loan was restructured to separate the loans
to the Company parties and the Williams parties. This restructuring eliminated
joint and several liability to Wells, as well as cross collateral and guarantee
agreements, between the Company parties and the Williams parties as they related
to the Joint Wells Loan. The Company's new credit facility with Wells allows the
Company parties to borrow up to the lesser of $9,500,000 or the Borrowing Base
(as defined in the credit agreement) and matures on June 30, 2001. The Borrowing
Base is calculated periodically based on a formula including eligible accounts
receivable, eligible inventory and certain letters of credit as determined by
Wells.
In connection with the transaction with Wells to separate the loans of the
Company parties and the Williams parties effected June 30, 1998, Williams (a)
advanced an additional $2,000,000 in the form of cash and marketable securities,
(b) purchased notes payable of approximately $948,000 by the Company to other
affiliated parties, Enercorp, Inc. and First Equity Corporation, which evidenced
loans provided by those parties during 1997 when the Company required additional
capital, (c) and agreed to convert $5,000,000 of the amount owed by the Company
to Williams into 6,000,000 shares of a newly created class of preferred stock of
the Company, its Series D cumulative convertible preferred stock. In connection
with these transactions with Williams, the Company delivered a promissory note
to Williams for the full amount owed to Williams after conversion of $5,000,000
into the Series D preferred stock (the "Williams Note"). The Williams Note is
secured by a lien on substantially all of the assets of the Company parties,
which lien is subordinate to the liens of U. S. Bank and Wells.
The Williams note accrues interest at the rate of 16% per annum. As currently
structured, the interest first will become payable on December 31, 2000, and all
remaining principal and interest will be due at maturity on August 1, 2001. At
December 31, 1999, the Company owed $2,087,000 under the Williams Note. In
addition, it owed $1,365,000 to U. S. Bank under the USB Bridge Loan. If the
Company is unable to meet its repayment obligations under the USB Bridge Loan
and Williams agrees to and makes payments on the USB Bridge Loan on the
Company's behalf, any payments made by Williams would result in an increase in
the amount the Company owes to Williams.
The Series D preferred stock is convertible at the option of Williams into
3,333,333 shares of the Company's common stock. No dividends accrue on the
Series D preferred stock until after July 31, 2001. The dividend rate on the
Series D preferred stock will be 17% per annum commencing August 1, 2001 and
will increase to 24% in 2002. The Series D preferred stock is redeemable by the
Company and the Company will attempt to raise capital from new sources in order
to redeem the Series D preferred stock in lieu of paying these premium dividend
rates.
The Company has also entered into agreements with Williams that require annual
payments of $90,000 for administrative fees and $80,000 for management fees for
sourcing products overseas on the Company's behalf. These annual obligations
continue for two more years.
During 1999, Williams reimbursed the Company approximately $114,000 for
management services provided to Williams by an officer of the Company from 1997
through early 1999.
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, 1999
and 1998
Consolidated Statements of Operations - Years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity Years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended December 31, 1999,
1998 and 1997
Notes to Financial Statements
2. Financial Statement Schedules:
Ajay Sports, Inc. and Subsidiaries:
Schedule II - Valuation and Qualifying Accounts - Years ended December 31,
1999, 1998 and 1997
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 (a) Articles of Incorporation and amendments thereto.
(1)
Exhibit 3.1 (b) Certificate of Designations of Rights
and Preferences of the Series B 8% Cumulative
Convertible Preferred Stock of Ajay Sports, Inc. (6)
Exhibit 3.1 (c) Certificate of Designations of Rights and
Preferences of the Series C 10% Cumulative Preferred
Stock of Ajay Sports, Inc. (7)
Exhibit 3.1 (d) Certificate of Designations of Rights and
Preferences of the Registrant's Series D Cumulative
Convertible Non-Voting Preferred Stock (11)
Exhibit 3.1 (e) Certificate of Amendment to Restated Certificate
of Incorporation Dated August 11, 1998 for common stock split
effective August 14, 1998. (12)
Exhibit 3.2 Bylaws (1)
Exhibit 10.1 (a) License Agreement dated April 14,
1992 between Spalding Sports Worldwide and Ajay
Leisure Products, Inc. (2)
Exhibit 10.1 (b) First Amendment to the April 14, 1992 Spalding License
Agreement dated April 2, 1993 (3)
Exhibit 10.1 (c) Second Amendment to the April 14, 1992 Spalding License
Agreement dated July 1, 1994 (6)
Exhibit 10.1 (d) Third Amendment to the April 14, 1992 Spalding License
Agreement dated June 5, 1995 (7)
Exhibit 10.1 (e) License Agreement dated March 8, 1999 between
Spalding Sports Worldwide, Inc. and Ajay Leisure Products, Inc. (12)
Exhibit 10.2 Williams/Ajay Loan and Joint Venture Implementation Agreement
dated May 6, 1994 as amended by Letter Agreement dated April 3, 1995 (6)
Exhibit 10.3 1994 Stock Option Plan (5)
Exhibit 10.4 1995 Stock Bonus Plan (5)
Exhibit 10.5 (a) 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 (7)
Exhibit 10.5 (b) 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 (8)
Exhibit 10.6 Consent Reaffirmation and Release Agreement
with U. S. Bank and Promissory Note of the Registrant (9)
Exhibit 10.7 Security Agreement dated July 14, 1997, among Registrant and
its subsidiaries, as debtors, and Williams Controls and its subsidiaries
as secured parties (10)
Exhibit 10.8(a) Credit Agreement, dated June 30, 1998, by and among the
Registrant and its subsidiaries and Wells Fargo Bank, NA including
Promissory Notes, Security Agreements and other Loan Documents (the
"1998 Wells Fargo Credit Agreement") (11)
Exhibit 10.8(b) Amendment No. 1, dated February 2, 1999, to the 1998
Wells Fargo Credit Agreement. Filed Herewith
Exhibit 10.8(c) Amendment No. 2, dated June 2, 1999 to the 1998
Wells Fargo Credit Agreement. Filed Herewith
Exhibit 10.8(d) Amendment No. 3, dated July 8, 1999, to the 1998
Wells Fargo Credit Agreement. Filed Herewith
Exhibit 10.8(e) Amendment No. 4, dated July 14, 1999 to the 1998
Wells Fargo Credit Agreement. Filed Herewith
Exhibit 10.8(f) Amendment No. 5, dated August 5, 1999, to the 1998
Wells Fargo Credit Agreement. Filed Herewith
Exhibit 10.8(g) Amendment No. 6, dated August 16, 1999 to the 1998
Wells Fargo Credit Agreement. Filed Herewith
Exhibit 10.8(h) Amendment No. 7, dated December 1, 1999, to the 1998
Wells Fargo Credit Agreement. Filed Herewith
Exhibit 10.8(i) Amendment No. 8, dated January 16, 2000, to the 1998
Wells Fargo Credit Agreement. Filed Herewith
Exhibit 10.8(j) Amendment No. 9, dated February 1, 2000, to the 1998
Wells Fargo Credit Agreement. Filed Herewith
Exhibit 10.8(k) Amendment No. 10, dated March 1, 2000 to the 1998
Wells Fargo Credit Agreement. Filed Herewith
Exhibit 10.8(l) Amendment No. 11, dated April 1, 2000, to the 1998
Wells Fargo Credit Agreement. Filed Herewith
Exhibit 10.9 Restructuring agreement, dated June 30, 1998, by
and among Registrant and its subsidiaries and Williams Controls,
Inc. including promissory note (11)
Exhibit 10.10 License Agreement dated March 8, 1999 between
Gary Player Group, Inc. and Ajay Leisure Products, Inc. (12)
Exhibit 10.11(a) Master Revolving Note dated June 22, 1999, in the
principal amount of $8.5 million between Pro Golf International, Inc. as
borrower and Comerica Bank as lender (the "Comerica Note")
Filed Herewith
Exhibit 10.11(b) Amendment No. 1 to Comerica Note. Filed Herewith
Exhibit 10.11(c) Amendment No. 2 to Comerica Note. Filed Herewith
Exhibit 10.11(d) Amendment No. 3 to Comerica Note Filed Herewith
Exhibit 10.11(e) Form of Guaranty for the Comerica Note, as signed by
the Registrant Filed Herewith
Exhibit 10.11(f) Form of Guaranty for the Comerica Note, as signed by each
of Thomas W. and Shirley B. Itin, Colorado Ridge Corporation,
Tico, Acrodyne Corporation, Sico, Pro Golf of America, Inc. and Woodward
Partners Filed Herewith
Exhibit 10.11(g) Form of Security Agreement under the Comerica Note
as signed by Pro Golf of America, Inc. and Pro Golf International, Inc.
Filed Herewith
Exhibit 10.12(a) Form of Subordinated Promissory Note (Maker Pro Golf
International, Inc.) Filed Herewith
Exhibit 10.12(b) Form of Comerica Subordination Agreement
Filed Herewith
Exhibit 10.13 Stock Purchase Agreement and Amendments related to the
Registrant's purchase of Pro Golf of America, Inc. (13)
Exhibit 10.14 Sale of Assets and Assignments related to the
Registrant's purchase of assets from State of the Art Golf Company, Inc.
(13)
Exhibit 10.15 Warrants issued to former shareholders of Pro Golf of
America, Inc. (13)
Exhibit 21.0 List of Subsidiaries Filed Herewith
Exhibit 23.1 Consent of Hirsch Silberstein & Subelsky, PC
Filed Herewith
Exhibit 23.2 Consent of J L Stephan Co., PC Filed Herewith
Exhibit 27.0 Financial Data Schedule Filed Herewith
Notes Related to Exhibits Incorporated by Reference
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-18 No. 33-30760.
(2) Incorporated by reference from the Registrant's Form 10-K filed for the
year ended December 31, 1991. (SEC File No. 0-18204)
(3) Incorporated by reference from the Registrant's Form 10-K filed for
December 31, 1992. (SEC File No. 0-18204)
(4) Incorporated by reference from the Registrant's Form 10-K filed for
December 31, 1993. (SEC File No. 0-18204)
(5) Incorporated by reference from the Registrant's Registration Statement on
Form S-8, No. 33-89,650.
(6) Incorporated by reference from the Registrant's form 10-K filed for
December 31, 1994. (SEC File No. 0-18204)
(7) Incorporated by reference from the Registrant's Registration Statement on
Form S-2, File No. 33-58753.
(8) Incorporated by reference from the Registrant's Form 10-Q for the Quarterly
period ended September 30, 1995. (SEC file No. 0-18204)
(9) Incorporated by reference from the Registrant's Form 10-Q for the Quarterly
period ended June 30, 1997. (SEC file No. 0-18204)
(10) Incorporated by reference from the Registrant's 10-K filed for December 31,
1997. (SEC file No. 0-18204)
(11) Incorporated by reference from the Registrant's Form 10-Q for the Quarterly
period ended June 30, 1998. (SEC file No. 0-18204)
(12) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998 (SEC file No. 0-18204)
(13) Incorporated by reference from the Registrant's Current Report on Form 8-K,
Date of Report June 23, 1999 as filed with the SEC on July 8, 1999 (SEC
File No. 0-18204)
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 13th day of April, 2000.
AJAY SPORTS, INC.
By: \s\Thomas W. Itin
-------------------------
Thomas W. Itin, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed below by the following persons in the
capacities indicated and on the dates indicated.
SIGNATURES TITLE DATE
- ----------- ----- ----
\s\Thomas W. Itin Director April 28, 2000
- ----------------- and Principal --------------
Thomas W. Itin Executive Officer
\s\Ronald N. Silberstein Chief Financial April 28, 2000
- ------------------------- Officer and Principal --------------
Ronald N. Silberstein Accounting Officer
\s\Robert R. Hebard Director April 28, 2000
- -------------------- --------------
Robert R. Hebard
\s\Anthony B. Cashen Director April 28, 2000
- -------------------- --------------
Anthony B. Cashen
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Stockholders
of Ajay Sports, Inc.
We have audited the accompanying balance sheet of Ajay Sports, Inc., as of
December 31, 1999, and the related statements of operations, changes in
stockholders' equity, and cash flows for the year then ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. The financial statements of Ajay Sports, Inc. as of December 31,
1998 and 1997 were audited by other auditors whose reports dated March 12, 1999
and March 13, 1998 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ajay Sports, Inc. as of
December 31, 1999, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The information on Schedule II is presented for
purposes of complying with rules of the Securities and Exchange Commission and
is not a required part of the basic financial statements. This information has
been subjected to the auditing procedures applied in our audit of the basic
financial statements and, in our opinion, fairly states in all material respects
the 1999 financial data required to be set forth therein in relation to the
basic financial statements taken as whole.
J L Stephan Co, PC
- ------------------------
Traverse City, Michigan
April 7, 2000
INDEPENDENT AUDITORS 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, 1998 and 1997, and the related
consolidated statements of operations, stockholder's equity, and cash flows for
each of the three years in the period ended December 31, 1998. 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, 1998. Theses consolidated financial statements and financial
statemnt 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 standars require the 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 or audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
\s\Hirsch Silberstein & Subelsky, P.C.
- ---------------------------------------
Hirsch Silberstein & Subelsky, P.C.
Farmington Hills, Michigan
March 12, 1999
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
as of December 31, 1999 and 1998
(in thousands, except share amounts)
December 31, December 31,
ASSETS 1999 1998
----------- -----------
Current assets:
Cash $ 101 $ 6
Marketable securities - available for sale 348 396
Accounts receivable, net of allowance of $558 and $95,
respectively 3,247 1,889
Inventories 3,969 5,680
Prepaid expenses and other 1,179 485
----------- -----------
Total current assets 8,844 8,456
Fixed assets, net 1,693 1,708
Other assets 7,037 179
Deferred tax benefit 6,582 1,119
Goodwill 1,577 1,621
----------- -----------
Total assets $ 25,733 $ 13,083
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 995 $ 199
Accounts payable 5,043 2,225
Accrued expenses 1,099 380
----------- -----------
Total current liabilities 7,137 2,804
Notes payable to affiliates - long term 2,087 1,587
Notes payable to banks - long term 13,886 5,951
Notes payable - long term 2,070 -
Commitments and contingencies - -
----------- -----------
25,180 10,342
----------- -----------
Minority interest in subsidiary 24 -
----------- -----------
Stockholders' equity:
Preferred stock - 10,000,000 shares authorized
Series B, $0.01 par value, 12,500 shares
outstanding at liquidation value 1,250 1,250
Series C, $0.01 par value, 217,939 and
264,177 shares outstanding, respectively,
at stated value 2,179 2,642
Series D, $0.01 par value, 6,000,000 shares 60 60
Common stock, $0.01 par value, 100,000,000 shares
authorized, 4,091,091 and 3,956,815 shares
outstanding, respectively 41 40
Additional paid-in capital 15,500 14,762
Accumulated deficit (18,470) (16,006)
Accumulated other comprehensive income (31) (7)
----------- -----------
Total stockholders' equity 529 2,741
----------- -----------
Total liabilities and stockholders' equity $ 25,733 $ 13,083
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
F-2
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
for the years ended December 31, 1999, 1998 and 1997
(in thousands, except per share amounts)
Year Ended
--------------------------------------------
December 31, December 31, December 31,
1999 1998 1997
---------- ---------- ----------
Operating data:
Net sales $ 14,340 $ 22,925 $ 30,330
Cost of sales 12,790 19,477 26,585
---------- ---------- ----------
Gross profit 1,550 3,448 3,745
Selling, general and administrative
expenses 4,866 3,868 5,837
---------- ---------- ----------
Operating (loss) (3,316) (420) (2,092)
---------- ---------- ----------
Nonoperating income (expense):
Interest expense (1,625) (1,139) (1,280)
Other, net 638 84 (144)
---------- ---------- ----------
Total non operating expense (987) (1,055) (1,424)
---------- ---------- ----------
(Loss) before minority interest and
income taxes (4,303) (1,475) (3,516)
Minority interest in (loss) of subsidiary 6 - -
---------- ---------- ----------
(Loss) before income taxes (4,297) (1,475) (3,516)
Income tax (benefit) (1,833) - -
---------- ---------- ----------
Net (loss) $ (2,464) $ (1,475) $ (3,516)
========== ========== ==========
Basic and diluted earnings per share (a) $ (0.70) $ (0.47) $ (1.01)
========== ========== ==========
Weighted average common shares
outstanding (b) 4,013 3,909 3,879
========== ========== ==========
Net loss as reported above (2,464) (1,475) (3,516)
Undeclared cumulative preferred dividends (341) (380) (396)
---------- ---------- ----------
Loss applicable to common stock $ (2,805) $ (1,855) $ (3,912)
========== ========== ==========
(a) Computed by dividing net loss after deducting undeclared,
cumulative preferred stock dividends, by the weighted average
number of common shares outstanding.
(b) Current and prior years restated to reflect result of reverse 1:6
common stock split effective August 14, 1998.
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997
(in thousands, except shares)
Preferred Stock Common Stock Add'l Accum Total
--------------- ------------ Paid-in Accum Comprehensive Stockholders'
Shares Amount Shares Amount Capital (Deficit) Income (Loss) Equity
-------- ------ -------- ------- -------- ---------- ------------ -----------
Balances at December 31,1996 3,086,706 $4,212 3,879,007 $ 233 $9,313 $ (11,015) $ - $ 2,743
Net loss - - - - - (3,516) - (3,516)
-------- ------ --------- ------- -------- ---------- ------------ ------------
Balances at December 31, 1997 3,086,707 4,212 3,879,007 233 9,313 (14,531) - (773)
Common stock reverse 1:6 split - - 250 (194) 194 - - -
Other adjustments - - - (4) - - - (4)
Preferred stock converted into
common stock (31,993) (320) 77,558 1 319 - - -
Debt converted into
preferred stock 6,000,000 60 - - 4,940 - - 5,000
COMPREHENSIVE INCOME
Net loss - - - - - (1,475) - (1,475)
Other Comprehesive Income (Loss) - - - - - - (7) (7)
--------- ------ -------- ------- -------- --------- ------------ ------------
Balances at December 31, 1998 6,276,677 3,952 3,956,815 40 14,762 (16,006) (7) 2,741
Preferred stock converted into
common stock (46,238) (463) 134,276 1 738 - - 276
COMPREHENSIVE INCOME
Net Loss (2,464) (2,464)
Other Comprehesive Income (Loss) (24) (24)
-------- ------ -------- ------- --------- --------- ----------- -------------
Balances at December 31, 1999 6,230,439 $3,489 4,091,09 $ 41 $15,500 $ (18,470) (31) $ 529
======== ======== ======== ======= ========= ========== =========== =============
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended December 31, 1999, 1998 and 1997
(in thousands)
December 31,
------------------------------
1999 1998 1997
-------- --------- --------
Cash flows from operating activities:
Net (loss) $ (2,464) $ (1,475) $ (3,516)
Adjustments to reconcile to net cash flows
from operating activities:
(Gain) loss on sale of assets (7) - 42
Depreciation and amortization 335 381 358
Income tax provision (1,833) - -
(Increase) decrease in marketable securities 48 (396) -
(Increase) decrease in accounts receivable, net (1,358) 3,171 214
Decrease in inventories 1,711 718 1,559
(Increase) decrease in prepaid expenses (694) (181) 58
(Increase) decrease in other assets - (75) 202
Increase(decrease) in accounts payable 2,818 (979) 97
Increase (decrease) in accrued expenses 719 (303) 186
-------- --------- --------
Net cash provided by (used in) operating
activities (725) 861 (800)
-------- --------- --------
Cash flows from investing activities:
Acquisitions of property plant and equipment (281) (319) (250)
Disposal of equipment 19 - -
-------- --------- --------
Net cash (used in) investing activities (262) (319) (250)
-------- --------- --------
Cash flows from financing activities:
Net increase in advances from affiliates 500 2,215 3,487
Net increase (decrease) in bank notes payable 306 (2,978) (2,193)
Dividends paid - - (74)
Minority interest in subsidiary 300
Unrealized losses from securities (24) (7) -
-------- --------- --------
Net cash provided by (used in) financing
activities 1,082 (770) 1,220
-------- --------- --------
Net increase (decrease) in cash 95 (228) 170
Cash at beginning of period 6 234 64
-------- --------- --------
Cash at end of period $ 101 $ 6 $ 234
======== ========= ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
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"), Palm Springs Golf, Inc. ("Palm Springs"), Prestige Golf
Corp. ("Prestige"), and majority-owned subsidiaries, Pro Golf
International, Inc. ("PGI"), Pro Golf of America, Inc. ("PGOA"), and
ProGolf.com, Inc. ("PG.com") collectively referred to herein as the
"Company". 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 $1,834,000 and $1,329,000 as of December 31, 1999 and 1998
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 $43,900
for the year ended December 31, 1999. As of each annual year-end date,
management assesses whether there has been an impairment in the carrying
value of goodwill. This assessment involves comparing the unamortized
goodwill carrying value with undiscounted cumulative estimated future cash
flows expected to be derived from utilization of the intangibles underlying
the related goodwill. To the extent that undiscounted cumulative cash flow
is expected to exceed the carrying value of goodwill, the asset is
considered to be unimpaired.
OTHER ASSETS - Other assets at December 31, 1999 and 1998 consist of
trademarks and brand names held by PGI (1999 only) and patents and
trademarks held and applied for by Leisure, and additionally, at December
31, 1998 a lawsuit judgment. Amortization expense related to trademarks and
patents is being deducted straight-line over the estimated useful lives of
these assets. Amortization expense related to the other assets was $193,000
for the year ended December 31, 1999.
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 from sales of product
when title to the product has passed, which is generally the date the
product is shipped. PGOA recognizes Initial Franchise Fee revenue when all
material services or conditions relating to the sale have been
substantially performed or satisfied by the franchiser.
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.
COMMON STOCK - The Company reverse split its common stock in a 1-for-6
ratio effective with commencement of trading on August 14, 1998. As a
result of this transaction, all historic data in the financial statements
that reference common shares, options, earnings per share or preferred
conversion ratios have been restated to reflect this split as if it
preceded all prior reporting. Historic actual common shares outstanding at
December 31, 1997 were 23,274,039 and were restated to 3,879,007 in this
report.
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 held, at December 31, 1997, demand notes in the
amount of $748,000 as a result of loans made to the company in 1996 and
1997. Williams assumed these notes in the financial restructuring in 1998.
First Equity made short-term working capital loans to Ajay during 1999,
with interest at various market rates. The balance due on these loans at
December 31, 1999 was $445,647, including accrued interest of $5,647.
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 holds 310,787 common shares acquired in 1994 and 1995
and 2,000 shares of series C preferred stock. Enercorp held at December 31,
1997, demand notes in the amount of $200,000 as a result of loans made to
the Company. Williams assumed these notes in the financial restructuring in
1998. During 1999, Enercorp loaned PGI $420,000 under a 13 month, 10%
subordinated note. In February, 2000 Enercorp converted the note and
accrued interest of $27,000 into 7,450 shares of PGI at $60 each.
Williams Controls, Inc. ("Williams") - Williams has the same chairman as
the Company, which individual is a major shareholder of each company.
Williams owns 686,274 shares of the Company's common stock, 1,851,813
common stock options and 6,000,000 shares of Series D cumulative
convertible preferred stock as of December 31, 1999, convertible into
3,333,333 shares of the Company's common stock.
During 1996 and 1997 the Company paid Williams 0.50% per annum of the
outstanding revolving loan balances in consideration for providing its
guarantee of a revolving loan from U. S. Bank. Fees totaled $39,750 and
$60,411 for the years ended December 31, 1997 and 1996 respectively. From
July 11, 1997 through June 30, 1998 the Company and Williams shared a joint
and several loan obligation. On June 30, 1998, the Company restructured its
credit facility with Wells Fargo Bank, N.A. ("Wells") to separate its
credit facility from that of Williams. As a result of this transaction, the
Company will no longer have joint and several liability, cross collateral
agreements or guarantees with Williams.
In connection with the restructuring of the Wells credit facility, the
Company was advanced $2,000,000 additional funds by Williams in the form of
a long term note and marketable securities and Williams converted
$5,000,000 of Company debt into a newly created series D cumulative
convertible preferred stock.
The Company's interest expense paid to Williams was $62,900 and $346,000
for the years ended December 31, 1999 and 1998 respectively. (See Note 4).
The Company received 166,719 shares of Williams as part of the
restructuring agreement with Williams dated June 30, 1998. These shares
have been pledged to Wells Fargo as collateral for the Company's loans. The
common stock is classified as marketable securities available for sale
and are valued at $2.08 per share, which is the last trade for 1999.
During 1999, the Company had borrowings from affiliated parties, in
addition to those mentioned above, to finance its acquisition of PGOA and
PG.com. These borrowings totalled $450,000, with interest at an annual rate
of 10%. In February, 2000, these borrowings (and accrued interest totalling
$30,000) were converted into 8,000 shares of PGI common stock at $60 per
share. During 1997 and 1996 the Company borrowed from related and
affiliated parties until it obtained bank financing in mid 1997. As of
December 31, 1997, the Company owed $4,372,000 to related and affiliated
parties at interest rates ranging from 9.0% to 9.5%. These notes were
converted to preferred stock in 1998. (See Note 4).
3. INVENTORIES
-----------
Inventories consist of the following (in thousands):
December 31
1999 1998
-------- --------
Raw materials $ 827 $ 1,493
Work-in-progress 903 1,052
Finished goods 2,239 3,135
-------- --------
Total $ 3,969 $ 5,680
======== ========
4. DEBT
----
On December 31, 1999 the Company's total debt was $19,038,000 owed to
banks, Williams, and other affiliates. This compares to $7,724,000 for
December 31, 1998. The increase from 1998 is principally due to debt
incurred to purchase the Pro Golf companies. From July 11, 1997 until June
30, 1998 the Company shared in a combined credit agreement with Williams
(the "Joint Loan"). As of June 30, 1998 the Company restructured its credit
facility with Wells to separate from the joint and several credit facility
with Williams. This new credit facility eliminates cross collateral and
guarantee agreements involving the Company and Williams. The revolving loan
facility allows the Company to borrow up to the lesser of $9,500,000 or the
Borrowing Base. The Borrowing Base consists of a formula including certain
eligible receivables, inventories and letters of credit at rates
established by Wells. The present credit agreement matures June 30, 2001.
The proceeds from the Joint Loan were used to repay the Company's and
Williams then outstanding loans from the previous lender, U. S. Bank,
except for a bridge loan in the total amount of $2,140,000 to the Company
by U. S. Bank. This bridge loan is to be repaid from the sale of assets
and/or excess cash flows of Williams and/or the Company, and is guaranteed
up to $1,000,000 by the Company's president. The balance owed on this
bridge loan at December 31, 1999 is $1,365,000. In connection with the 1998
credit facility restructuring, the Company was advanced $2,000,000 of
additional funds by Williams and Williams converted $5,000,000 of company
debt into preferred stock.
The Company's Bank borrowings consisted of the following (dollars in
thousands):
December 31,
Revolving credit facility: 1999 1998
-------- --------
Balance $ 3,862 $ 3,467
Interest rate 8.5% 8.75%
Unused amount of facility $ -0- $ 350
Average amount outstanding
during the period $ 4,258 $ 4,997
Weighted average interest rate 8.2% 9.1%
Maximum amount outstanding
during the period $ 5,295 $ 6,771
Master revolving note:
Balance $ 8,425 $ -
Weighted average interest rate 9.0% -
Average amount outstanding
during the period $ 8,479 $ -
Outstanding commercial letters of credit totaled approximately $309,000 and
$60,000 at December 31, 1999 and 1998 respectively.
Other December 31, 1999 debt consisted of $2,087,900 from related and
affiliated parties, a $412,500 machinery and equipment term loan with Wells
Fargo, the $1,364,538 (bridge) term loan with U. S. Bank, a $173,000 real
estate loan, a $8,425,000 bridge loan with Comerica Bank, and $1,200,000
with private individuals.
At December 31, 1999 the Company was liable to Comerica Bank in the amount
of $8,425,000 on a master revolving note entered into to effect the
acquisition of Pro Golf of America, Inc. and ProGolf.com, Inc. The note has
been extended through April 30, 2000. The Company anticipates refinancing
this loan into an amortizing long-term loan during the second quarter 2000.
(See Note 16).
Debt payments are as scheduled (dollars in thousands):
2000 995
2001 6,354
2002 1,000
2003 10,689
2004 and thereafter -0-
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 and loans from related parties and affiliated companies for its
working capital requirements. (See Note 16).
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,
-----------------------
1999 1998 1997
------ ------ -----
Statutory tax expense
(benefit) $(1,833) $( 502) $(1,195)
Utilization of net
operating loss
carry forward - - -
Loss producing no current
tax benefit - 502 1,195
-------- ------- ---------
$(1,833) $ - $ -
======== ======= =========
The components of the net deferred tax asset/liability were as follows (in
thousands):
December 31,
------------
1999 1998
---- ----
Deferred tax assets:
Accrued expenses $ 45 $ 45
Reserves 78 151
NOL carry forwards 6,473 4,766
------ ------
Sub total $ 6,596 $ 4,962
Deferred tax liability,
principally depreciation and
amortization (13) (99)
Valuation allowance - (3,744)
Net $ 6,583 $ 1,119
======= =======
At December 31, 1999, the Company assessed its past earnings history and
trends, sales backlog, budgeted sales, and expiration dates of carry
forwards and has determined that it is more likely than not that 100% of
deferred tax assets will be realized. This change versus 1998 is
principally due to the profits to be realized from operations of PGOA and
PG.com. The valuation allowance of $3,744,000 at December 31, 1998 was
maintained on deferred tax assets which the Company had determined to be
more likely than not unrealizable at that time.
The Company had net operating loss carry forwards for Federal tax purposes
of approximately $18,567,000 at December 31, 1999, which expire in varying
amounts in the years 2006 through 2019. Substantial operating loss carry
forwards are available to offset future state taxable income of the
Company, which expire in varying amounts in the years 2006 through 2019.
Future changes in ownership, as defined by section 382 of the Internal
Revenue Code, could limit the amount of net operating loss carry forwards
used in any one year.
6. STOCKHOLDERS' EQUITY
--------------------
(a) Preferred Stock
In October 1994 the Company created its 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. The holder exchanged 29,500
shares of Series A preferred stock for 29,500 shares of the newly issued
Series B preferred stock and immediately converted 17,000 shares of its
Series B preferred stock for 5,040,000 (840,000 post split) 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 on the
remaining 12,500 Series B shares was revised to 555.56 and after the 1:6
reverse common stock split of August 14, 1998 the conversion rate as of
December 31, 1998 is 92.5926.
In July 1995 the Company sold 325,000 shares of Series C 10% cumulative
convertible preferred stock and 325,000 warrants in a registered public
offering. The Series C preferred stock is convertible into shares of the
Company's common stock at a conversion rate of 2.42424 common shares for
each share of preferred stock. 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.
At December 31, 1999, 1998 and 1997, dividends in arrears on the 8%
cumulative convertible preferred Series B stock were $1,106,575, $1,006,575
and $906,575 respectively. Dividends on the Series C cumulative convertible
preferred stock were declared and paid through December 31, 1996. No
dividends were declared or paid for 1999, 1998 or 1997. At December 31,
1999, 1998 and 1997, dividends in arrears on the 10% cumulative convertible
preferred Series C stock were $817,232, $576,174 and $296,000. The Company
has dedicated all available funds to support continuing operations of the
Company until sufficient cash availability allows declaration and payment
of dividends.
(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.
No stock was issued to officers under this plan in 1999, 1998 or 1997.
(c) Stock Issued for Acquisitions
In 1994 the Company acquired the outstanding common stock of Leisure Life,
Inc. for 1,500,000 (post split 250,000) shares of its common stock to the
owner of Leisure Life. During the periods 1995, 1996 and 1997 one half of
the originally issued shares were returned to the Company due to unmet
performance requirements.
(d) Warrants and Options
A summary of activity related to warrants and options to purchase
Company common stock is as follows:
Warrants and Price
Options (i) Per Share(i)
------- ------------ -------------
Balance, December 31, 1996 2,767,935 $ 2.04 - 6.00
Issued to Employees 8,334 2.40 (ii)
Expired (27,500) 2.40 - 3.75
Repriced options (2,151,313) 2.04 - 3.00 (iii)
Repriced options 2,151,313 1.08 (iii)
---------
Balance, December 31, 1997 2,748,769 $ 1.08 - 6.00
Expired (122,287) 2.40 - 4.125
Issued to Directors 1,668 1.50 (iv)
------------
Balance, December 31, 1998 2,628,150 $ 1.08 - 6.00
Issued to Employees 50,000 1.00
Expired 83,334 2.40 - 4.125
------
Balance, December 31, 1999 2,594,816 $ 1.00 - 6.00
(i) All options were adjusted for the effect of a 1:6 reverse common stock
split effective August 14, 1998.
(ii) Employee stock options of which none were vested.
(iii) All non-public, non-employee, non-board member options were repriced
to $.18 market in November 1997.
(iv) Director options - 67% vested.
7. MAJOR CUSTOMERS
---------------
The Company operates in three lines of business, the manufacture and
distribution of sports equipment, outdoor leisure furniture, and
franchising. 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 1999 1998 1997
A 25% 28% 30%
B * 26% 15%
C * * 11%
* Amounts are less than 10% of net sales.
8. BUSINESS SEGMENT REPORTING
--------------------------
The relative contributions to net sales, operating profit and identifiable
assets of the Company's two industry segments for the years ended December
31, 1999 and 1998 are as follows (in thousands):
GOLF
-------------------------------------------
Mass Specialty
1999 Furniture Merchant Golf Stores Franchise Corporate Consolidated
-------------- --------- --------- ----------- --------- --------- ------------
Sales $ 4,766 $ 6,751 $ 1,080 $ 1,743 $ - $ 14,340
Oper profit/(loss) (398) (2,370) (191) 469 (704) (3,194)
Assets 2,487 2,345 6,338 14,563 - 25,733
Depn/Amort 151 223 51 318 - 425
Capital Exp. - 57 - 224 - 281
GOLF
-------------------------------------------
Mass Specialty
1998 Furniture Merchant Golf Stores Franchise Corporate Consolidated
-------------- --------- --------- ----------- --------- --------- -------------
Sales $ 3,785 $ 17,916 $ 1,224 - $ - $ 22,925
Operating profit/(loss) (241) 863 (494) - (548) (420)
Assets 2,673 8,564 1,846 - - 13,083
Depreciation/Amortization 92 229 60 - - 381
Capital Expenditures 175 144 - - - 319
9 . GARY PLAYER AND SPALDING LICENSE AGREEMENTS
-------------------------------------------
On March 8, 1999 the Company entered into a new license agreement with Gary
Player Group, Inc. The Company will work toward developing the Gary Player
brand for marketing its products. The Gary Player agreement has a 5-year
term and covers golf bags, gloves, carts and certain other golf accessories
sold into the U. S. market. This agreement requires an annual $25,000
rights fee and a minimum annual royalty of $5,000 for the sixteen months
commencing on March 8, 1999 through June 30, 2000 and increases annually by
$5,000 for each of the remaining 4 years of the contract.
Ajay had operated since 1983 under 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. On March 8, 1999, the Company
announced a limited extension of its existing agreement to provide a
phaseout period of up to 18 months for its Spalding labeled products. The
Company agreed to pay Spalding $240,000 during the phase out period. The
prior agreement contained a minimum annual royalty of $550,000 plus 2%
advertising of which 1% was paid direct.
Earned royalty expense due Spalding was $160,000, $448,000 and $553,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
10. LEASES
------
Future aggregate minimum lease payments under noncancelable operating
leases with initial or remaining terms in excess of one year are as follows
(dollars in thousands):
2000 719
2001 507
2002 213
2003 175
2004 and thereafter 149
-------
$1,763
=======
Total rental expense ($000) under operating leases was $652, $605 and $701
for the years ended December 31, 1999, 1999 and 1997, 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 1999 ($341,000),
1998 ($380,000), and 1997 ($396,000) by the weighted average number of
common shares outstanding. No exercise of outstanding warrants was assumed
in 1999, 1998 or 1997, since any exercise of warrants would be
antidilutive.
SFAS No. 128, "Earnings Per Share", became 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.
12. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Cash paid for interest was $1,124,526, $1,209,693 and $776,077 for the
years ended December 31, 1999, 1998 and 1997, respectively.
Non cash financing and investing transactions were as follows:
In exchange for acquiring in 1994 all of the common stock of Leisure
Life, Inc. the Company issued 1,500,000 (post split 250,000) shares of
its common stock to the owner of Leisure Life. During the periods
1995, 1996 and 1997 one half of the originally issued shares were
returned to the Company due to unmet performance requirements.
In 1997 there were no stock transactions.
During 1998 preferred stock in the quantity of 31,993 shares were
converted into 77,558 shares of common stock.
During 1998 long-term debt of $5,000,000 was converted into 6,000,000
shares of Series D preferred stock.
The Company added new leases during 1998 and 1997 that represent asset
values respectively, if purchased, of approximately $103,000 and
$57,000 and result in annual lease payments of $27,000 and $18,732
with terms expiring up to the year 2003.
During 1999 Series C preferred stock in the quantity of 46,238 shares
were converted into 112,085 shares of common stock.
The Company borrowed $10,750,000 from a bank and others to acquire
PGOA and acquired PGD Online, LLC during 1999.
13. COMMITMENTS AND CONTINGENCIES
-----------------------------
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial
statements, the Company has net losses before taxes of $4,297,000,
$1,475,000 and $3,516,000 for the years ended December 31, 1999, 1998 and
1997. A bank loan to one of the Companies subsidiaries has been extended to
April 30, 2000. The Company has is seeking a long-term extension of this
loan, and to raise equity capital. The Company's ability to continue as a
going concern is partially dependent on ability of management to
successfully implement these plans. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
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. (See Notes 4
and 9).
14. ACQUISITIONS
------------
In June 1999, Ajay, through a newly formed majority owned subsidiary (PGI)
acquired 100% of the outstanding ownership interests of PGOA and PG.com.
This acquisition was accounted for using the purchase method of accounting.
The results of operations of the acquired companies have been included in
Ajay's consolidated financial statements from the date of acquisition.
Intercompany accounts and transactions between the acquired companies and
Ajay, as applicable, have been eliminated.
The acquisition price of $10,500,000 was paid in cash and financed through
borrowings with a bank ($8,500,000) affiliated companies ($870,000) and
private individuals ($1,200,000). The portion of the purchase price in
excess of net book value was allocated to "Trademarks" and, net of the
related income tax benefit and related trademark amortization, is shown in
the consolidated balance sheet with "Other assets".
15. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In March 1998, the Accounting Standards Committee of the American Institute
of Certified Public Accountants issued Statement of Position ("SOP") 98-1,
"Accounting for Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 provides guidance for an enterprise on accounting
for the costs of computer software developed or obtained for internal use.
The Company adopted this statement during the year ended December 31, 1999
and has capitalized software costs according to the provisions of the
standard. These costs are amortized on a straight-line basis over the
useful life of the software once it is placed into service.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting
and reporting standards for derivative instruments and hedging activities.
The statement was amended by SFAS No. 137 and will be effective for
financial statements for fiscal years beginning after June 15, 2000. The
Company believes SFAS No. 133 will not have a material impact on its
financial statements or accounting policies. The Company will adopt the
provisions of SFAS No. 133 in the first quarter of 2001.
16. SUBSEQUENT EVENTS
-----------------
During late 1999 and into 2000, the Company began selling equity in PGI in
a private placement offering and entered into an agreement to acquire
developed and undeveloped real estate for existing and planned golf-related
activities, including golf domes with retail stores inside. As of April 14,
2000, the Company had committed to issue 138,750 shares of PGI stock at $60
per share, which represents 12.18% of the total shares of PGI stock
outstanding at that date. Of the new shares committed to, $375,000 cash had
been received with signed subscription documents, $870,000 was a conversion
of subordinated debt into common stock, and the remaining $7,080,000 a
combination of equity securities and golf-related real property.
The Company anticipates substantial additional cash flows resulting from
the debt conversions and the rents and fees to be received from the golf
properties during the initial twelve-month period beginning July 1, 2000.
These revenues are expected to increase in the future after the start-up
period is over. Additionally, the dome and retail store combination is
planned as the new PGOA franchise of the future and could substantially
increase revenues and cash flow of the Company's PGOA operations.
The Company began an offering of PG.com common stock in late April 2000 to
raise up to $12,500,000 in gross offering proceeds. If the maximum offering
is sold, the shares sold in this offering will represent approximately 33%
of the total PG.com common shares outstanding after the offering. Proceeds
from these private placements will be used for working capital,
acquisitions, and growth.
Effective March 15, 2000 PGI obtained an extension through April 30, 2000
on its master revolving note with Comerica Bank. PGI anticipates
refinancing this loan into a long-term amortizing loan during the second
quarter of 200.
Schedule II
AJAY SPORTS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1999, 1998, and 1997
(Amounts in Thousands)
Balance
Beginning Charged to Deducted from at end
Balance expense Reserve of period
--------- ---------- ------------- ----------
Reserve for Product Warranty:
Year ended:
December 31, 1999 $103 $271 $295 (1) $ 79
December 31, 1998 152 70 119 103
December 31, 1997 85 309 242 152
Reserve for Doubtful Receivables:
Year ended:
December 31, 1999 $318 (3) $263 $23 (2) $558
December 31, 1998 243 50 198 95
December 31, 1997 140 355 252 243
Reserve for Inventory Obsolescence:
Year ended:
December 31, 1999 $300 $350 $257 $393
December 31, 1998 425 292 417 300
December 31, 1997 491 398 464 425
Notes:
(1) Represents amounts paid for product warranty claims.
(2) Represents amounts charged off as uncollectible.
(3) Includes $223 balance on books of company which was acquired in June, 1999