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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, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition period from _______________ to _______________
Commission File Number 0-18204
AJAY SPORTS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 39-1644025
- ------------------------------- ---------------------
(State or other jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1501 E. Wisconsin Street
Delavan, Wisconsin 53115 (414) 728-5521
- -------------------------------------- ---------------------
(Address of Principal Executive Offices (Registrant's
including Zip Code) Telephone 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
------ ------
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
March 12, 1999 was $1,311,579. The number of shares outstanding of the
Registrant's $.01 par value common stock at March 12, 1999 was 3,956,815.
Documents Incorporated by Reference
None
2
Ajay Sports, Inc.
Index
December 31, 1998
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 13-16
Item 8. Financial Statements F-1 - F-18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 16
PART III.
Item 10 Directors and Executive Officers of the Registrant 17-18
Item 11. Executive Compensation 19-20
Item 12. Security Ownership of Certain Beneficial Owners and
Management 20-23
Item 13. Certain Relationships and Related Transactions 23-24
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 10-K 25-28
SIGNATURE PAGE 29
3
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 above and other factors described elsewhere in this report.
Item 1. Description of Business
-----------------------
General
- -------
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 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. All references to the Company include Ajay, Leisure Life and Palm
Springs unless otherwise specified.
Ajay's products primarily are sold nationwide to large retailers such as
discount stores, department stores, catalog showrooms and other mass merchandise
and sports specialty outlets. The products manufactured by the Company are sold
under the Spalding(R), Palm Springs(R), Pro Classic(R), Leisure Life(R), Pro
USA(R) and private label brand names. 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. 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, (414) 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 Leisure Products, Inc.
and Palm Springs Golf, Inc. are located at 1501 E. Wisconsin St., Delavan, WI
53115.
Business Strategy
- -----------------
The Company's strategy is to maintain and improve its position as a leading
supplier of golf clubs, golf bags, golf carts, golf accessories and leisure
indoor and outdoor furniture. The Company believes that the following
competitive strengths contribute to its position as a market leader:
4
Strong Brand Recognition. Spalding(R), Palm Springs(R), and Pro Classic(R)
are highly recognized names in the golf product 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. The phase out of the
Spalding brand is being replaced with the Company's newly licensed Gary Player
brand.
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.
Tradition of Innovation. Throughout its history, the Company has maintained a
tradition of new product development. New bag styles, new accessories, new
gloves, new furniture and other new product designs for 1999 are continuing
examples of the Company's commitment in this area.
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 several product lines, the Company
offers mass merchants and regional retailers the ability to fulfill product
demands and needs from a single source. The Company's product lines establish it
as one of the nation's leading manufacturers of golf bags along with being a
leader in the golf related accessories category. Its line of golf bags consist
of 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.
Golf carts, golf bags, golf gloves and related accessories have historically
accounted for approximately 96% of Ajay's gross sales. Golf clubs historically
through 1997 accounted for 65% of Palm Springs' sales. Beginning with 1998, Palm
Springs emphasized bags, accessories, gloves and carts over clubs. Leisure
Life's sales consist 100% of indoor and outdoor leisure furniture.
Growth Opportunities
- --------------------
The Company believes that its strong brand recognition, reputation for
quality, tradition of innovation and breadth of product lines position it to
take advantage of opportunities for future growth including:
Increased Distribution. 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
1998 particularly in golf club sales. The Company is focusing on improving
results in this channel and expects to regain its former sales position in the
year 2000.
New Product Development. The Company believes that it is important to
increase its sales of products through design improvements and modifications to
existing products as well as the development and introduction of new products.
The Company has continued to introduce new and redesigned products to the
market. The Company has also increased its emphasis in this area by devoting
additional resources in equipment and personnel.
The Company is 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.
Leisure Life introduced a new line of swing, rocker and stationary furniture
for the 1999 sales year. This line is less expensive than its previous line of
furniture and incorporates improved product performance features, design
features, improved illustration based instructions, improved packaging, improved
quality and several cost reduction features and thus offers better value to the
end customer. Other new products with future potential include storage shelving,
book cases and stained furniture.
5
In spite of its increased distribution and new product development efforts,
the Company experienced a contraction of its sales base during 1998. The major
contributing factors to the contraction were brought on by economic problems in
Asian economies. This reduced sharply furniture shipment opportunities and added
to competition in the U. S. marketplace by major customers importing Asian golf
products directly.
Sports Business
- ---------------
Golf, which is the primary market for Ajay's and Palm Springs' business,
continues to be a popular form of recreation. According to the National Golf
Foundation ("NGF"), a trade association, there were 14.6% more rounds of golf
played in 1997 than 1996 which was down 2.7% from 1995. 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 26.5 million. This group consists of 78% male
and 22% female and 77% are between the ages of 17 and 60. The Company believes
there is a great opportunity for increased participation by females and golfers
under 18 and over 60. This belief is based on expected increased interest by
younger players, increased emphasis on women's golf and improvements in health,
leisure time and increasing numbers of people moving into the over 60 group.
Licensing. A significant portion of Ajay's revenues result from the sale of
products manufactured and sold pursuant to various license agreements, the loss
of which could have a material adverse effect on the Company's business.
Since 1983, Ajay has sold golf bags, hand-pulled golf carts and a range of
general sports accessories through a license agreement with Spalding. As
consideration for this license, Ajay paid royalties to Spalding based on a
percentage of sales, subject to annual minimums of $550,000 for the years ended
June 30, 1997 and 1998, and expended 2% of sales under the agreement on
advertising, with 1% remitted direct to Spalding. Approximately 75%, 75% and 69%
of Ajay's total sales related to products sold under the Spalding license
agreement during the years ended December 31, 1998, 1997, and 1996,
respectively. Beginning in March of 1999, the Company began to implement a new
licensing strategy. The Company recognized that changes in the golf marketplace
called for a brand name focused specifically on the golf niche. As a first step
in implementing its new brand strategy, a phase out agreement was executed with
Spalding Sports Worldwide which provides for a Spalding name phaseout over the
next 18 months. The second step was the entering of a 5 year license agreement
with the Gary Player Group, Inc. to use the Gary Player name that will cover the
sale of Ajay's golf products throughout the USA.
Gary Player is one of the best known golfers of all time. He is one of only 4
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 marketing efforts. Effective March 1999 through
agreements with Spalding and Gary Player, Ajay began an immediate phase in of
the Gary Player branded line and initiated an 18-month phase out of the Spalding
branded line.
Manufacturing and Design. The preliminary production of Ajay's golf bags is
undertaken at its Delavan, Wisconsin facility, where raw materials are
fabricated in preparation for sewing and assembly at its Mexicali, Mexico
facility. In addition, Ajay supplements in-house production through utilization
of subcontractors to produce products according to its specifications. Final
manufacturing, assembly and distribution for Ajay and Palm Springs products
occurs at facilities located in Delavan, Wisconsin.
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.
6
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 28% of the Company's
sales in 1998. The second largest customer accounted for 26% 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, most of Ajay's accounts are serviced by
manufacturers' representatives working on a commission basis. Ajay services its
major accounts through a combination of manufacturers' representatives and its
own in-house sales force. Palm Springs services its customers through its
in-house and regional sales representatives. The Company's management regularly
consults with major customers to discuss merchandising plans and programs,
anticipated needs and product development.
The Company believes it has good name recognition in the industry and
attempts to expand that recognition through participation in trade shows,
advertising in trade publications and supplying literature and catalogs to the
retail trade and consumers.
Leisure Furniture Business
- --------------------------
Demographic changes have driven a shift for the last ten years toward a
casual living lifestyle. This is evidenced by the proliferation of decks,
patios, and sun rooms. Americans are spending more 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 which permits simple adjustment to
accommodate users of different heights and weights. This system also
incorporates an ergonomically designed sling and deep cushion seating to provide
lower back support. Management believes that its seating products are superior
in comfort to any other leisure furniture 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. A small portion of the wood pieces are purchased pre-manufactured.
Fabric for pillows, cushions, slings and canopies are cut and sewn in-house and
by third party subcontractors for final assembly in the Baxter, Tennessee
facility. Furniture items are packaged in kits containing the wood frame pieces,
slings, pillows, and necessary hardware, requiring the customer to assemble the
final product.
7
Marketing and Distribution. Currently, Leisure life supplies nearly 4,500
storefronts worldwide and supplies to 30 distributors in various countries
around the world. Large chains such as Wal-Mart, Lowes, Heckingers, Meijers and
Price Costco represent 29% of Leisure Life's customer storefront base.
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 have varying degrees of seasonality. Shipments
from February to May historically have been significantly higher than the rest
of the year, due to the nature of the golf and furniture 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
- -----------
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 Cobra, Callaway, Carsten and Taylor. Other
competitors are Datrek, Burton, Sun Mountain, Ogio, Izzo, Gold Eagle and
Mitsushiba. Palm Springs offers a line of high quality and feature filled
products which sell at moderate price levels and offer consumers high value to
price ratios.
Leisure Life has had limited but 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.
8
Patents and Trademarks
- ----------------------
Ajay, Leisure Life and Palm Springs own several patents and trademarks and
have proprietary knowledge relating to their product lines. Management does not
believe that the loss of any of its patents would have a material adverse effect
on its business.
Employees
- ---------
As of March 5, 1999, the Company had a total of 307 employees: 77 employees
at the Delavan, Wisconsin facility, 129 employees at the Mexicali, Mexico
facility and 101 employees at the Baxter, Tennessee facility. The Company
considers its current relations with its employees to be good.
Item 2. Description of Property
-----------------------
The Company's executive, and Ajay's primary manufacturing, assembly and
warehouse facility, is located in Delavan, Wisconsin, and consists of 186,300
square feet of 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 $197,000.
These facilities adequately meet the Company's production capacity
requirements. The Company, on average, utilizes approximately 80% of its
facility square footage. In order to avoid periodic total plant shutdowns, the
Company adjusts its product production schedules to maintain sufficient
inventory levels and to maintain a full work force.
Item 3. Legal Proceedings
-----------------
The Company, through its operating subsidiaries, Ajay, Palm Springs and
Leisure Life, are involved in various legal proceedings which are normal to its
business, including product liability and workers' compensation claims. The
Company believes that none of this litigation is likely to have a material
adverse effect on its financial condition or operations. The Company faces the
risk of exposure to product liability claims if consumers using the Company's
products are injured in connection with their use. While the Company will
continue to attempt to take appropriate precautions, there can be no assurance
that it will avoid significant product liability exposure. Based on historical
experience, Ajay, Leisure Life and Palm Springs have product liability insurance
coverage which the Company believes is adequate.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
There were no matters submitted to a vote of security holders during the
fourth quarter.
9
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 Stock Market's
Small Cap Market until September 4, 1998 at which time they began to trade on
the OTC Bulletin Board. The Company's Series C 10% cumulative convertible
preferred stock trades on the NASDAQ Small Cap market. 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.
COMMON STOCK TRADE PRICES
- ------------ ------------
1997
- ----- HIGH LOW
First Quarter $ 1.86 $ .96
Second Quarter $ 2.04 $ .78
Third Quarter $ 1.68 $ 1.14
Fourth Quarter $ 2.04 $ .78
1998
- -----
First Quarter $ 1.50 $ .78
Second Quarter $ 2.28 $ .78
Third Quarter $ 3.78 $ .75
Fourth Quarter $ 1.03 $ .34
UNITS
- -----
1997
- ----- HIGH LOW
First Quarter $ 6.00 $ 6.00
Second Quarter N/A N/A
Third Quarter N/A N/A
Fourth Quarter $ 4.50 $ 4.50
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
WARRANTS (Delisted 11/13/1997)
- --------
1997
- ----- HIGH LOW
First Quarter $ .18 $ .18
Second Quarter $ .30 $ .12
Third Quarter $ .18 $ .12
Fourth Quarter $ .12 $ .12
10
SERIES C PREFERRED STOCK TRADE PRICES
1997 HIGH LOW
First Quarter $ 6.75 $ 5.25
Second Quarter $ 6.00 $ 4.38
Third Quarter $ 5.00 $ 4.38
Fourth Quarter $ 6.13 $ 3.00
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
The NASDAQ Stock Market, Inc. issued new standards for continued listing of
Small Cap Market participants which became effective on February 23, 1998. Ajay
was a Small Cap Market participant and as such fell under these new rules. In
spite of efforts to meet the minimum $1.00 bid price, Ajay stock traded below
this newly established requirement and therefore the stock was delisted on
September 4, 1998. The common stock now trades on the OTC Bulletin Board.
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, 1998 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 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.
11
Item 6. Selected Financial Data
-----------------------
Overview
- --------
The following table presents summary historical consolidated
financial data derived from audited financial statements of the Company (in
thousands, except per share amounts).
Year Ended December 31,
-----------------------------------------
Statement of Operations: 1998 1997 1996 1995 1994
----- ----- ----- ----- -----
Net sales $22,925 $30,330 $24,341 $18,728 $12,899
Cost of sales 19,477 26,585 20,759 15,291 12,291
------- ------- ------- ------- -------
Gross profit 3,448 3,745 3,582 3,437 608
Selling, general and
administrative expenses 3,868 5,837 5,067 3,247 2,747
------- ------- ------- ------- -------
Operating income (loss) (420) (2,092) (1,485) 190 (2,139)
Nonoperating income (expense):
Interest expense - net (1,139) (1,280) (1,103) (801) (614)
Gain (loss) on disposition of
investment in affiliate, net - - - - (38)
Other, net 84 (144) (38) (41) (289)
------- -------- -------- -------- ------
Income (loss) from operations before
income taxes (1,475) (3,516) (2,626) (652) (3,080)
-------- -------- -------- -------- ------
Income tax expense (benefit) - - (893) (208) -
-------- -------- -------- -------- ------
Net income (loss) $(1,475) $(3,516) $(1,733) $ (444) $(3,080)
======== ======== ======== ======= ========
Net income (loss) per common share @
$ (0.47) $ (1.01) $ (0.55) $(0.18) $ (1.61)
======== ======== ======== ======= ========
Weighted average common and common
stock equivalent shares outstanding @
3,909 3,879 3,874 3,787 2,036
======== ======== ======== ======= =======
Cash dividends per common share - - - - -
December 31,
------------------------------------------
Balance sheet data: 1998 1997 1996 1995 1994
----- ----- ----- ----- -----
Working capital $ 5,652 $ 8,200 $ 3,348 $ 6,323 $ 593
Total assets $13,083 $16,614 $18,495 $18,486 $ 9,365
Long term debt $ 7,538 $13,229 $ 5,196 $ 5,111 $ 121
@ Current and prior years restated to reflect result of reverse 1 for 6 common
stock split effective August 14, 1998.
12
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Results of Operations
- ---------------------
Net Sales
Net sales in 1998 were $22.9 million, a decrease of $7.4 million, or 24% when
compared to 1997 sales. 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 decreased to specialty golf stores by $3.1 million. Furniture sales
decreased $0.6 million or 13%. 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 1998. This delayed the start up of new commitments for 1999
and reduced volume of sale of new lines. Sales to specialty golf stores were off
due to the Company de-emphasizing its golf club lines, a reduced product
offering and contraction of the sales force. Furniture sales decreases represent
lower export sales due to weak economic factors in Asia and competition from
foreign imports due to the same reason. Historically, mass market sales have
been Ajay's core business. .
Sales in 1997 were $30.3 million, an increase of $6.0 million or 25% compared
to 1996. The overall sales increase occurred in both the golf and furniture
product lines. Sales of golf products increased by $4.3 million in the mass
market. Furniture sales increased $1.7 million or 63% reflecting a customer base
increase in both foreign and domestic markets.
Gross Margin
The Company's 1998 gross margin decreased 8% to $3,448,000 compared to
$3,745,000 for the 1997 year. Gross margin as a percent of sales increased to
15.0% as compared to 12.3% of sales for 1997. The gross profit amount decrease
of 8% was a result of a sales volume decrease of 24% partly offset by
de-emphasizing sales of golf clubs formerly sold at gross profit level losses in
1997. An improvement in manufacturing efficiency brought on by improved
liquidity also contributed to increased percentage and absolute margins.
The Company's 1997 gross margin increased 4.6% to $3,745,000 compared to
$3,582,000 for the 1996 year. Gross margin as a percent of sales declined to
12.3% as compared to 14.7% of sales for 1996. Contributing to this decline were
three factors. The first was the lack of sufficient operating liquidity during
1997 which resulted in increased costs in manufacturing, logistics and product
substitutions. The second factor was the poor performance of Palm Springs' golf
club product line in the marketplace. The final factor was the closing of the
Palm Springs 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 1998 was $3.9 million and 16.9% of sales compared to $5.8 million
and 19.2% of sales for 1997. $1.2 million was saved by consolidating Palm
Springs into the Delavan operation. A further reduction of $570,000 in mass
market golf resulted from sales volume decreases, head count reduction and
efficiency improvements.
As a percent of sales, SG&A was 19.2% for 1997 compared to 20.8% of sales for
1996. SG&A expenses during 1997 increased by $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 1998 was $1,139,000 a decrease of $141,000 from the
prior year. The decrease resulted from lower sales and operating levels.
Interest expense was $1,280,000 for 1997, an increase of $177,000 over the prior
year. The increase in interest expense in 1997 was primarily the result of
increased debt to finance Palm Springs losses.
13
Income Taxes
The Company had no income tax liability during the years ended December 31,
1998, 1997 and 1996.
Financial Condition
- -------------------
At December 31, 1998, the Company had working capital of $5,652,000, compared
with $8,200,000 at December 31, 1997. This $2,548,000 decrease resulted from
lower receivables, inventories and payables as a result of lower sales levels in
the 4th quarter of 1998 and a reduction in delinquent receivables. The ratio of
current assets to current liabilities at December 31, 1998 and 1997 was 3.0.
Inventories at December 31, 1998 were $5.7 million compared to $6.4 million
at December 31, 1997. Trade accounts receivable were $1.9 million at December
31, 1998 compared to $5.1 million at December 31, 1997.
At December 31, 1998 and 1997, net fixed assets were $1,708,000 and
$1,723,000, respectively. The decrease reflects depreciation in excess of
capital expenditures.
Capital Resources
- -----------------
The Company expended $319,000 in 1998 for capital expenditures, over half of
which was used for improvements in its furniture business manufacturing, with
most of the balance allocated to golf bag manufacturing.
Liquidity
- ---------
Cash flow from operations for 1998 was positive by $861,000 in spite of a net
loss. The positive operating cash flow was primarily generated by reduced
working capital from lower sales levels in the fourth quarter of 1998. The
positive operating cash flow was used to pay down loans and buy equipment.
The Company's liquidity varies with the seasonality of its business which, in
turn, influences its financing requirements. The seasonal nature of the
Company's sales creates fluctuating cash flow, due to the temporary build-up of
inventories in anticipation of, and receivables during, the peak seasonal period
which historically has been from February through May of each year. The Company
has relied on Williams and bank revolving credit facilities in the past and
continues to rely heavily on revolving credit facilities 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 liability, cross collateral agreements or guarantees with Williams with
respect to Williams' Wells Fargo facility. The Company's new asset-based credit
facility from Wells provides the Company with approximately $700,000 of
increased loan availabilities and borrowing capability against inventory and
accounts receivable. The interest rate is prime plus 1% on the revolver and
prime plus 1.5% on the term loan. The Company has a temporary over advance line
and anticipates the need for additional capital later in the year.
14
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 the Company's common stock at the rate of 0.55556
common shares for each preferred share. 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. Williams continues to own approximately 17.3% of the outstanding
common stock of the Company and holds options to purchase an additional
1,851,813 shares of common stock. Williams also 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 Company believes that the combination of the Wells and Williams
refinancing agreements has resulted in an improved working capital position
which enabled the Company to pay down past due accounts payable. It also has
increased liquidity, providing the Company with additional availability under
its bank credit facility and strengthened the Company's capital structure by
increasing equity.
Year 2000 Compliance
- --------------------
State of Readiness. During the past two years, the Company has been 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 will
be Y2K compliant by May 31, 1999.
Personal computers are being evaluated using a software tool provided by IBM.
This evaluation phase will be completed by April 30, 1999. The remediation phase
will start on May 1, 1999, with an anticipated completion date of June 30, 1999.
Internal systems and equipment that depend upon embedded microchips have been
certified to by Y2K compliant. The Company's utility providers have assured us
that there will be no century-related problems.
The Company has contacted all of its suppliers to determine their Y2K status.
A majority have responded positively. The remaining suppliers will be contacted
again and alternate sources will be found where needed.
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 anticipates that
its Y2K costs related to information technology that are beyond the scope of
normal operations will not be significant.
Contingency Plans.The Company is developing plans to obtain secondary sources
for key raw material. Manual backup for certain functions will be implemented on
a short-term basis, if necessary. Unanticipated problems will be addressed as
they occur.
15
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 $396,000 as of December 31, 1998. 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 $2.375 per share, which is the
last trade for 1998. 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. The intention is to liquidate the remaining shares as necessary
during 1999. High and low closing prices per share for 1998 were $3.34 and $2.00
respectively. Since year end and through March 17, 1999 the lowest closing price
has been $2.375.
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.
16
PART III
--------
Item 10. Directors and Executive Officers of the registrant
--------------------------------------------------
The Registrant's directors and executive officers as of March 26, 1999 are as
follows:
Positions and 1st Yr. As
Name Age Offices with Director
Company
- ------------------ ---- -------------- -----------
Anthony B. Cashen 63 Director 1993
Robert R. Hebard 46 Director & Corporate Secretary 1989
Thomas W. Itin 64 Chairman, CEO & President 1993
Robert D. Newman 57 Director 1994
Clarence H. Yahn 62 Director & Chief Operating 1994
Officer
Duane R. Stiverson 57 Chief Financial Officer
Anthony B. Cashen. Mr. Cashen has served as a director of the Company since
1993. For more than the past five years, 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 Corporation, 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. 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. 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.
17
Robert D. Newman. Mr. Newman became a Director of the Company in August 1994. He
has served as Vice President and General Manager of Leisure Life, Inc., a wholly
owned subsidiary of the Company since August 1994. Recently his position was
redefined to enable him to focus on new product development, with his former
General Manager responsibilities assigned to another individual. Mr. Newman
founded Leisure Life, Inc. in October, 1990 and served as President from its
inception until its purchase by the Company in August 1994. Mr. Newman was
President and Chief Executive Officer of Stone Mountain Millworks from 1985 to
1989. He served as Director of Product Development for Gold Medal, Inc. from
1989 to October 1990. Mr. Newman attended Northern Illinois University.
Clarence H. Yahn. Mr. Yahn became a Director of the Company in September 1994,
and has served as Director of Ajay since September 1993 and as Ajay's President
since January 1994. Mr. Yahn has served as the Chief Operating Officer of the
Company since January 1996. From December 1996 to December 1998, Mr. Yahn also
served as Executive Vice President of Williams Controls, Inc. responsible for
the Company's Consumer Durables Group. In 1988, Mr. Yahn joined Gold Medal, Inc.
as its President. Prior to joining Ajay Leisure Products, Mr. Yahn served as
Chief Executive Officer of Melnor, Inc. a consumer durables company from 1992 to
1993. He received a Bachelor of Science degree in mathematics and physics from
the University of Wisconsin and received a Masters degree in International
Business from the American Graduate School of International Management.
Duane R. Stiverson has been Chief Financial Officer of Ajay Sports, Inc. since
July 1994. Prior to joining the Company, Mr. Stiverson was the Vice President of
Operations for VariQuest Technologies, Inc. and held that position from 1991
until he joined the Company in July 1994. From 1987 to 1990, Mr. Stiverson was
Vice President of Materials for the Ambrosia Chocolate Company. From 1978 to
1987, he was the Vice President of Finance for Ambrosia, and from 1976 to 1978
was its Controller. Prior to 1978, Mr. Stiverson held various controller and
corporate finance positions with Bendix Corporation. Mr. Stiverson is a CPA, has
a Bachelor of Science degree from the University of Nebraska and an MBA degree
from Michigan State University.
Robert R. Hebard is the son-in-law of Thomas W. Itin, the Company's chairman.
Other than this relationship, there are no other family relationships between
any director or executive officers.
18
Item 11 Executive Compensation
- ------- ----------------------
Summary of Cash and Certain Other Compensation
- ----------------------------------------------
The following table shows, for the years ending December 31, 1998, 1997 and
1996, 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 1998 $ 1 (1) -
Director and Principal 1997 $ 1 (1) -
Executive Officer of the 1996 $ 1 (1) -
Company, and Director and
Principal Executive Officer of
Ajay Leisure Products, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Clarence H. Yahn 1998 $120,000 -
Director of the Company and 1997 $117,502 -
President of Ajay Leisure 1996 $100,000 33,334 (2)
Products
- --------------------------------------------------------------------------------
(1) See "Employment contracts" below.
(2) Represents number of shares of common stock underlying stock options granted
in December 1996.
19
Options/SAR Grants
- ------------------
During 1998, no options or SARs were granted to the executive officers named in
the Summary Compensation Table.
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, 1998 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 1998 and December 31, 1998 Option Values
------------------------------------------------
Number of Securities Underlying Unexercised
Options / FY - End (#)
Name Exercisable Unexercisable
------------------------------------------------
------------------------------------------------
Thomas W. Itin 0 0
CEO
------------------------------------------------
------------------------------------------------
Clarence H. 25,000 8,334
Yahn
President, Ajay
------------------------------------------------
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. Grants during 1998 to members of
the Compensation Committee totaled 1,668 options to purchase 1,668 shares of
common stock exercisable at $1.50 per share for five years.
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 during the years ended December 31, 1994 through 1997. This arrangement
expired on December 31, 1997 and Mr. Itin's continued arrangement during 1998
was compensated at an annual salary of $1.00.
20
Further Information
-------------------
Item 12 Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------
The table below sets forth, as of March 24, 1999, 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)(6)(9) 50.9%
7001 Orchard Lake Road, Suite
424
West Bloomfield, MI 48322
Williams Controls Industries, 5,871,422 (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 6,112 (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
Robert D. Newman 112,667 2.8%
215 4th Avenue North, P.O.
Box 60
Baxter, TN 38544
Clarence H. Yahn 55,667 (10) 1.4%
1501 E. Wisconsin Street
Delavan, WI 53115
Duane R. Stiverson 11,476 (11) 0.3%
1501 E. Wisconsin Street
Delavan, WI 53115
Anthony B. Cashen 4,778 (12) 0.1%
LAI WARD HOWELL
99 Park Avenue, 20th Floor
New York, NY 10016
All executive officers and 2,948,897 (2)(3)(7)(10) 54.2%
directors (11)(12)
as a group
(6 persons)
21
1) Where persons listed on this table have the right to obtain 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, 1999, 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
3,956,815 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 Corporation 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 56% 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 686,275 Common Shares, 1,851,813 options and 3,333,334
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 3,333,334 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 option granted under the 1994 stock option plan.
22
(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 25,000 shares of Common Stock issuable upon the exercise of
outstanding stock options.
(11) Includes 3,125 shares of Common Stock issuable upon the exercise of
outstanding stock options.
(12) 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, 1998,
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 686,275 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, 1999. Thomas W. Itin, the Company's Chairman, President, Chief
Executive Officer, Treasurer and beneficial owner of approximately 50.9% of the
Company's common stock, is also the Chairman, President, Chief Executive
Officer, Treasurer and beneficial owner of approximately 30.5% of the common
stock of Williams. Another director of the Company, Anthony B. Cashen, was
elected to serve a three-year term on the Board of Directors of Williams at the
annual meeting of the stockholders of Williams held in February 1999.
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.
23
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.
At December 31, 1998, the Company owed $1,587,000 under the Williams Note. In
addition, it owed $1,985,00 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 which 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 three years.
During 1997 and 1998, an executive officer of the company provided management
services to Williams for which the Company was paid $75,000 in 1998 for his time
and services. Effective December 1998, the Company officer is providing
significantly reduced services to Williams.
24
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, 1998
and 1997
Consolidated Statements of Operations - Years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity Years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended December 31, 1998,
1997 and 1996
Notes to Financial Statements
2. Financial Statement Schedules:
Ajay Sports, Inc. and Subsidiaries:
Schedule II - Valuation and Qualifying Accounts - Years ended December 31,
1998, 1997 and 1996
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 Bylaws 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. (7)
Exhibit 3.1 (c) Certificate of Designations of Rights and
Preferences of the Series C 10% Cumulative Preferred
Stock of Ajay Sports, Inc. (8)
Exhibit 3.1 (d) Certificate of Designations of Rights and
Preferences of the Registrant's Series D Cumulative
Convertible Non-Voting Preferred Stock (12)
25
PART IV
-------
CONTINUED
Exhibit 3.1 (e) Certificate of Amendment to Restated Certificate
of Incorporation Dated August 11, 1998 for common stock split
effective August 14, 1998. (13) Filed Herewith
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 (4)
Exhibit 10.1 (c) Second Amendment to the April 14, 1992 Spalding License
Agreement dated July 1, 1994 (7)
Exhibit 10.1 (d) Third Amendment to the April 14, 1992 Spalding License
Agreement dated June 5, 1995 (8)
Exhibit 10.1 (e) License Agreement dated March 8, 1999 between Spalding
Sports Worldwide, Inc. and Ajay Leisure Products, Inc.(13)
Filed Herewith
Exhibit 10.2 Williams/Ajay Loan and Joint Venture Implementation Agreement
dated May 6, 1994 as amended by Letter Agreement dated April 3, 1995 (7)
+ Exhibit 10.3 Employment Agreement dated July 31,
1994 between Robert D. Newman, Leisure Life, Inc.
and Ajay Sports, Inc. (7)
Exhibit 10.4 1994 Stock Option Plan (6)
Exhibit 10.5 1995 Stock Bonus Plan (6)
Exhibit 10.6 (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 (8)
Exhibit 10.6 (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 (9)
Exhibit 10.7 Credit Agreement dated July 11, 1997,
among Registrant and its subsidiaries and Williams Controls,
Inc. and its subsidiaries, as borrowers, and Wells Fargo Bank,
National Association, including Guaranties, Security Agreements,
Intercreditor Agreement and other Loan Documents (10)
26
PART IV
-------
CONTINUED
Exhibit 10.8 Consent Reaffirmation and Release Agreement
with U. S. Bank and Promissory Note of the Registrant (10)
Exhibit 10.9 Security Agreement dated July 14, 1997, among Registrant and
its subsidiaries, as debtors, and Williams Controls and its subsidiaries
as secured parties (11)
Exhibit 10.10 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 (12)
Exhibit 10.11 Restructuring agreement, dated June 30, 1998, by
and among Registrant and its subsidiaries and Williams Controls,
Inc. including promissory note (12)
Exhibit 10.12 License Agreement dated March 8, 1999 between
Gary Player Group, Inc. and Ajay Leisure Products, Inc. (13)
Filed Herewith
Exhibit 21.0 List of Subsidiaries Filed Herewith
Exhibit 27.0 Financial Data Schedule
(1) Previously filed with and incorporated by reference from the
Registrant's Registration Statement on Form S-18 No. 33-30760.
(2) Previously filed with and incorporated by reference from the
Registrant's Form 10-K filed for the year ended December 31, 1991.
(SEC File No. 0-18204)
(3) Previously filed and incorporated by reference from the Registrant's
Form 10-Q for the quarterly period ended September 30, 1992.
(SEC File No. 0-18204)
(4) Previously filed with and incorporated by reference from the
Registrant's Form 10-K filed for December 31, 1992.
(SEC File No. 0-18204)
(5) Previously filed with and incorporated by reference from the
Registrant's Form 10-K filed for December 31, 1993.
(SEC File No. 0-18204)
(6) Previously filed with and incorporated by reference from the
Registrant's Registration Statement on Form S-8, No. 33-89,650.
(7) Previously filed with and incorporated by reference from the
Registrant's form 10-K filed for December 31, 1994.
(SEC File No. 0-18204)
(8) Previously filed with and incorporated by reference from the
Registrant's Registration Statement on Form S-2, File No. 33-58753.
(9) Previously filed with and incorporated by reference from the
Registrant's Form 10-Q for the Quarterly period ended
September 30, 1995. (SEC file No. 0-18204)
27
PART IV
-------
CONTINUED
(10) Previously filed with and incorporated by reference from the
Registrant's Form 10-Q for the Quarterly period ended June 30, 1997.
(SEC file No. 0-18204)
(11) Previously filed with and incorporated by reference from the
Registrant's 10-K filed for December 31, 1997. (SEC file No. 0-18204)
(12) Previously filed with and incorporated by reference from the
Registrant's Form 10-Q for the Quarterly period ended June 30, 1998.
(SEC file No. 0-18204)
(13) Currently filed herein.
(b) Reports on Form 8-K
During the last quarter of the 1998 fiscal year, the Company filed one
report on Form 8-K.
Date of
Report Subject
------- -------
12/4/98 Item 5, Other Events - Extension of the common stock purchase
warrants to June 30, 1999.
28
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 29th day of March, 1999.
AJAY SPORTS, INC.
By: \s\Thomas W. Itin
-------------------------
Thomas W. Itin, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed below by the following persons in the
capacities indicated and on the dates indicated.
SIGNATURES TITLE DATE
- ---------- ------ -----
\s\Thomas W. Itin
- ----------------- Director March 29, 1999
Thomas W. Itin and Principal --------------
Executive Officer
\s\Duane R. Stiverson
- --------------------- Chief Financial March 29, 1999
Duane R. Stiverson Officer and --------------
Principal Accounting
Officer
\s\Robert R. Hebard
- ------------------- Director March 29, 1999
Robert R. Hebard --------------
\s\Anthony B. Cashen
- -------------------- Director March 29, 1999
Anthony B. Cashen --------------
\s\ Clarence H. Yahn
- -------------------- Director March 29, 1999
Clarence H. Yahn --------------
\s\ Robert D. Newman
- -------------------- Director March 29, 1999
Robert D. Newman --------------
29
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Ajay Sports, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Ajay
Sports, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' 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. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements and financial
statement schedules referred to above present fairly, in all material respects,
the financial position of Ajay Sports, Inc. and Subsidiaries as of December 31,
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
F-1
AJAY SPORTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
as of December 31, 1998 and 1997
(in thousands, except share amounts)
ASSETS December 31, December 31,
1998 1997
---------------- ---------------
Current assets:
Cash $ 6 $ 234
Marketable securities 396 -
Accounts receivable, net of allowance of $95 and $243,
respectively 1,889 5,060
Inventories 5,680 6,398
Prepaid expenses and other 485 304
Deferred tax benefit - 363
----------------
---------------- ---------------
Total current assets 8,456 12,359
Fixed assets, net 1,708 1,723
Other assets 179 106
Deferred tax benefit 1,119 756
Goodwill 1,621 1,670
---------------- ---------------
Total assets $ 13,083 $ 16,614
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable to affiliates $ - $ 160 $
Notes payable to banks 195 107
Current portion of capital lease 4 4
Accounts payable 2,225 3,204
Accrued expenses 380 684
---------------- ---------------
Total current liabilities 2,804 4,159
Notes payable to affiliates - long term 1,587 4,212
Notes payable to banks - long term 5,951 9,017
Commitments and contingencies - -
---------------- ---------------
10,342 17,388
---------------- ---------------
Stockholders' equity (deficit):
Preferred stock - 10,000,000 shares authorized
Series B, $0.01 par value, 12,500
shares outstanding at liquidation value 1,250 1,250
Series C, $10.00 par value, 264,177 and 296,170 shares
outstanding, respectively at stated value 2,642 2,962
Series D, $0.01 par value, 6,000,000 shares 60 -
Common stock, $0.01 par value, 100,000,000 shares authorized,
3,956,815 and 3,879,007 shares outstanding, respectively 40 233
Additional paid-in capital 14,762 9,313
Accumulated deficit (16,006) (14,532)
Accumulated unrealized losses on securities (7) -
---------------- ---------------
Total stockholders' equity (deficit) 2,741 (774)
---------------- ---------------
Total liabilities and stockholders' equity $ 13,083 $ 16,614
================ ===============
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, 1998, 1997 and 1996
(in thousands, except per share amounts)
Year Ended
-----------------------------------------------------------------
December 31, December 31, December 31,
1998 1997 1996
---------------- --------------- ----------------
Operating data:
Net sales $ 22,925 $ 30,330 $ 24,341
Cost of sales 19,477 26,585 20,759
---------------- --------------- ----------------
Gross profit 3,448 3,745 3,582
Selling, general and administrative expenses 3,868 5,837 5,067
---------------- --------------- ----------------
Operating income (loss) (420) (2,092) (1,485)
---------------- --------------- ----------------
Nonoperating income (expense):
Interest expense - affiliates (337) (194) (60)
Interest expense - non-affiliates (802) (1,086) (1,043)
Other, net 84 (144) (38)
---------------- --------------- ----------------
Total non operating expense (1,055) (1,424) (1,141)
---------------- --------------- ----------------
Income (loss) before income taxes (1,475) (3,516) (2,626)
Income tax expense (benefit) - - (893)
---------------- --------------- ----------------
Net loss $ (1,475) $ (3,516) $ (1,733)
================ =============== ================
Basic and diluted earnings per share (a) $ (0.47) $ (1.01) $ (0.55)
================ =============== ================
Weighted average common shares
outstanding (b) 3,909 3,879 3,874
================ ================ ================
Net loss as reported above (1,475) (3,516) (1,733)
Undeclared cumulative preferred dividends (380) (396) (396)
---------------- --------------- ----------------
Loss applicable to common stock $ (1,855) $ (3,912) $ (2,129)
================ =============== ================
(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, 1998, 1997 and 1996 (in thousands, except shares)
Total
Preferred Stock Common Stock Add'l Paid-in Accum Unrealized Stockholders'
--------------------- -----------------------
Shares Amount Shares Amount Capital (Deficit) Loss on Secs Equity
----------- --------- ------------ --------- ------------ -------- ------------- -------------
Balances at January 1, 1996 326,290 4,388 3,889,625 $ 234 $ 9,123 $ (8,981)$ - $ 4,764
Common shares received as an
acquisition incentive adjustment - - (58,334) (3) 4 - - -
Preferred stock converted into
common stock (17,620) (176) 42,716 2 174 - - -
Stock option exercise - - 5,000 - 12 - - 12
Dividends - - - - - (301) - (301)
Net loss - - - - - (1,733) - (1,733)
----------- --------- ------------ --------- ------------ -------- -------------- -----------
Balances at December 31, 1996 308,670 4,212 3,879,007 233 9,313 (11,015) - 2,743
Net loss - - - - - (3,516) - (3,516)
----------- --------- ------------ --------- ------------ -------- -------------- -----------
Balances at December 31, 1997 308,670 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)
Unrealized loss on securities - - - - - - (7) (7)
----------- --------- ------------ --------- ------------ -------- -------------- -----------
Balances at December 31, 1998 6,276,677 $ 3,952 3,956,815 $ 40 $ 14,762 $ 16,006) $ (7) $ 2,741
=========== ========= ============ ========= ============ ======== ============== ===========
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, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
------------ ------------ -------------
Cash flows from operating activities:
Net loss $ (1,475) $ (3,516) $ (1,733)
Adjustments to reconcile to net cash flows from operating
activities:
Loss on sale of assets - 42 6
Depreciation and amortization 381 358 366
(Increase) in investments (396) - -
(Increase) decrease in accounts receivable, net 3,171 214 (78)
Decrease in inventories 718 1,559 952
(Increase) in deferred tax benefits - - (911)
(Increase) decrease in prepaid expenses (181) 58 3
(Increase) decrease in other assets (75) 202 (84)
Increase in accounts payable (979) 97 945
Increase (decrease) in accrued expenses (303) 186 (64)
------------ ------------ -------------
Net cash provided by (used in) operating activities 861 (800) (598)
------------ ------------ -------------
Cash flows from investing activities:
Acquisitions of property plant and equipment (319) (250) (276)
Goodwill associated with acquisitions - - (387)
Disposal of equipment - - (29)
------------ ------------ -------------
Net cash (used in) investing activities (319) (250) (692)
------------ ------------ -------------
Cash flows from financing activities:
Net increase in advances from affiliates 2,215 3,487 885
Net increase (decrease) in bank notes payable (2,978) (2,193) 396
Dividends paid - (74) (301)
Unrealized losses from securities (7) - -
Stock options exercised - - 12
------------ ------------ -------------
Net cash provided by (used in) financing activities (770) 1,220 992
------------ ------------ -------------
Net increase (decrease) in cash (228) 170 (298)
Cash at beginning of period 234 64 362
------------ ------------ -------------
Cash at end of period $ 6 $ 234 $ 64
============ ============ =============
Supplemental schedule of non-cash financing activities:
The Company issued 6,000,000 shares of preferred stock
series D upon the conversion of $5,000,000 of long-term
debt owed to affiliates during 1998. (See Note 12)
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"), and Palm Springs Golf, Inc. ("Palm
Springs"), collectively referred to herein as the "Company". The
inventories and fixed assets purchased from Korex Corporation on
October 2, 1995 have been merged with Ajay Leisure Products, Inc. All
significant intercompany balances and transactions hav e 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 $1,329,000 and $1,026,000 as of December 31, 1998 and
1997 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
$44,000 for the year ended December 31, 1998. 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 cashflow is expected to exceed the carrying
value of goodwill, the asset is considered to be unimpaired.
OTHER ASSETS - Other assets at December 31, 1998 and 1997 consist of
patents and trademarks held and applied for by Leisure, and
additionally, at December 31, 1998 a lawsuit judgment.
PRODUCT LIABILITY AND WARRANTY COSTS - Product liability exposure is
insured with insurance premiums provided during the year. Product
warranty costs are based on experience and attempt to match such costs
with the related product sales.
REVENUE RECOGNITION - The Company recognizes revenue when goods are
shipped.
INCOME TAXES - Effective January 1, 1992, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes. Under SFAS No. 109, deferred income taxes are recognized for the
tax consequences of temporary differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities, using enacted statutory rates applicable to future years.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-6
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 which 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. These notes were assumed by Williams in the financial
restructuring in 1998.
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. These notes were assumed by Williams in
the financial restructuring in 1998.
Williams Controls, Inc. ("Williams") - Williams has the same chairman
as the Company, which individual is a major shareholder of each
company. Williams owns 686,275 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, 1998.
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.
F-7
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The Company's interest expense paid to Williams was $346,000 and $194,450
for the years ended December 31, 1998 and 1997 respectively. (See Note 4).
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,
------------------
1998 1997
------ ------
Raw materials $1,493 $1,499
Work-in-progress 1,052 1,026
Finished goods 3,135 3,873
------ ------
Total $5,680 $6,398
====== ======
4. DEBT
----
On December 31, 1998 the Company's total debt was $7,724,000 owed to banks
and Williams. This compares to $13,479,000 for December 31, 1997 which was
owed banks, Williams and other affiliates. 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, 1998 is $1,985,000. 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.
F-8
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The Company's Bank borrowings consisted of the following:
($000)
December 31,
-------------------------
Revolving credit facility: 1998 1997
------ ------
Balance $ 3,467 $ 6,017
Interest rate 8.75% 9.0%
Unused amount of facility $ 350 $ 96
Average amount outstanding
during the period $ 4,997 $ 6,091
Weighted average interest rate 9.1% 9.0%
Maximum amount outstanding
during the period $ 6,771 $ 7,218
Outstanding commercial letters of credit totaled approximately $60,000 and
$526,000 at December 31, 1998 and 1997 respectively.
Other December 31, 1998 debt consisted of $1,587,000 from related and
affiliated parties, a $488,000 machinery and equipment term loan with
Wells Fargo, the $1,985,000 (bridge) term loan with U. S. Bank and a
$197,000 real estate loan.
Debt payments are as scheduled ($000):
1999 $ 216
2000 1,954
2001 5,554 (Term Loans & Revolver)
2002 0
2003 0
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 for its working capital requirements.
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.
F-9
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The actual income tax expense (benefit) differs from the statutory income
tax expense (benefit) as follows (in thousands):
Year Ended December 31,
-------------------------
1998 1997 1996
----- ----- -----
Statutory tax expense
(benefit) at 34% $(502) $(1,195) $ (893)
Utilization of net
operating loss
carry forward - - -
Loss producing no current
tax benefit 502 1,195 893
------ ------- -------
$ - $ - $ -
====== ======= =======
The components of the net deferred tax asset/liability were as follows (in
thousands):
December 31,
---------------
1998 1997
----- -----
Deferred tax assets:
Accrued expenses $ 45 $ 42
Reserves 151 329
NOL carryforwards 4,766 4,072
Sub total $4,962 $4,443
Deferred tax liability,
principally depreciation and amortization (99) (97)
Valuation allowance (3,744) (3,227)
------- -------
Net $1,119 $1,119
======= ========
The Company has assessed its past earnings history and trends, sales
backlog, budgeted sales, and expiration dates of carryforwards and has
determined that it is more likely than not that $1,119,000 of deferred tax
assets will be realized. The remaining valuation allowance of $3,744,000
is maintained on deferred tax assets which the Company has not determined
to be more likely than not realizable at this time. The Company will
continue to review this valuation allowance on a quarterly basis and make
adjustments as appropriate.
F-10
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The Company had net operating loss carry forwards for Federal tax purposes of
approximately $14,018,000 at December 31, 1998, which expire in varying amounts
in the years 2006 through 2018. Operating loss carry forwards totaling
$1,144,000, $4,270,000, $2,139,000 and $727,000 are available to offset future
state taxable income of Sports, Ajay, Leisure Life and Palm Springs Golf
respectively, which expire in varying amounts in the years 2006 through 2018.
Future changes in ownership, as defined by section 382 of the Internal Revenue
Code, could limit the amount of net operating loss carryforwards used in any one
year.
6. STOCKHOLDERS' EQUITY
--------------------
(a) Preferred Stock
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, 1998, 1997 and 1996, dividends in arrears on the 8%
cumulative convertible preferred Series B stock were $1,006,575
($80.53 per share), $906,575 ($72.53 per share) and $806,575 ($64.53
per share) 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 1998 or 1997. At
December 31, 1998 and 1997, dividends in arrears on the 10%
cumulative convertible preferred Series C stock were $576,174 ($2.00
per share) and $296,000 ($1.00 per share). 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
1996, 1997 or 1998.
F-11
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(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, January 1, 1996 2,561,683 $ 2.04 - 6.00
Exercised by Employees (5,000) 2.40
Issued to Directors 1,668 3.75 (ii)
Issued to Employees 116,667 2.40 (iii)
Issued for Acquisition 133,334 4.50 - 5.40 (iv)
Expired (40,417) 4.80 - 6.00
----------
Balance, December 31, 1996 2,767,935 $ 2.04 - 6.00
Issued to Employees 8,334 2.40 (v)
Expired (27,500) 2.40 - 3.75
Repriced options (2,151,313) 2.04 - 3.00 (vi)
Repriced options 2,151,313 1.08 (vi)
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 (vii)
-----------
Balance, December 31, 1998 2,628,150 $ 1.08 - 6.00
(i) All options were adjusted for the effect of a 1:6 reverse common
stock split effective August 14, 1998.
(ii) Director stock options.
F-12
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(iii) Employee stock options of which 42,917 were vested and 30,834 were
canceled since issuance.
(iv) Issued to former shareholders of Palm Springs Golf Company, Inc., a
business acquired by the Company in October 1995.
(v) Employee stock options of which none were vested.
(vi) All non-public, non-employee, non-board member options were repriced
to $.18 market in November 1997.
(vii) Director options - 33% vested.
7. MAJOR CUSTOMERS
---------------
The Company operates in two lines of business, the manufacture and
distribution of sports equipment and outdoor leisure furniture. The
Company's customers are principally in the retail sales market. The
Company performs ongoing credit evaluations of its customers' financial
conditions and does not generally require collateral.
Sales to customers which represent over 10% of the Company's net sales are
as follows:
Year ended December 31,
------------------------------
Customer 1998 1997 1996
-------- ------- ------ ------
A 28% 30% 29%
B 26% 15% 14%
C * 11% *
* Amounts are less than 10% of net sales.
F-13
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. BUSINESS SEGMENT REPORTING
--------------------------
The relative contributions to net sales, operating profit and identifiable
assets of the Company's two industry segments for the years ended December
31, 1998 and 1997 are as follows (in thousands):
GOLF
--------------------
Mass Specialty
1998 Furniture Merchant Golf Stores 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
GOLF
-------------------
Mass Specialty
1997 Furniture Merchant Golf Stores Corporate Consolidated
---------- --------- -------- ----------- --------- -------------
Sales $ 4,358 $21,623 $ 4,349 - $30,330
Operating profit/(loss) (186) 915 (2,090) (731) (2,092)
Assets 2,456 10,914 3,244 - 16,614
Depreciation/Amortization 80 215 63 - 358
Capital Expenditures 136 103 11 - 250
9 . SPALDING AND GARY PLAYER LICENSE AGREEMENTS
-------------------------------------------
Ajay has 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 will pay Spalding $240,000 during the phase out period. The
most recent Spalding agreement previously contained a minimum annual
royalty of $550,000 plus 2% advertising of which 1% was paid direct. 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 new 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. The newly executed Gary Player
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. (See Note 14).
Earned royalty expense due Spalding was $448,000, $553,000 and $480,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
F-14
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. LEASES
------
Future aggregate minimum lease payments under noncancelable operating
leases with initial or remaining terms in excess of one year are as
follows ($000):
1999 $ 613
2000 581
2001 372
2002 176
2003 170
2004 and thereafter 0
---------
$ 1,912
=========
Total rental expense ($000) under operating leases (net of sublease rental
income from an affiliate of $0, $0 and $8, respectively) was $605, $701
and $618 for the years ended December 31, 1998, 1997 and 1996,
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 1998 ($380,000),
1997 ($396,000), and 1996 ($401,000) by the weighted average number of
common shares outstanding. No exercise of outstanding warrants was assumed
in 1998, 1997 or 1996, 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. Diluted EPS is computed similar to fully diluted EPS. SFAS No.
128 requires restatement of all EPS data that was presented in previously
filed reports. Earnings per share for 1996 has not changed under SFAS No.
128 since the warrants outstanding are anti-dilutive.
F-15
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Cash paid for interest was $1,209,693, $776,077 and $1,098,819 for the
years ended December 31, 1998, 1997 and 1996, 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.
During 1996 ,17,620 preferred stock shares were converted into
42,716 shares of common stock.
In 1996 an employee exercised options to acquire 5,000 common
shares.
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 which 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.
13. COMMITMENTS AND CONTINGENCIES
-------------------------------
The Company is subject to certain claims in the normal course of
business which management intends to vigorously contest. The outcomes of
these claims are not expected to have a material adverse affect on the
Company's consolidated financial position or results of operations. (See
also notes 4 and 9).
F-16
AJAY SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. SUBSEQUENT EVENTS
------------------
a. Spalding and Gary Player License Agreements
-------------------------------------------
Ajay has 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 will pay Spalding
$240,000 during the phase out period. The most recent Spalding
agreement previously contained a minimum annual royalty of $550,000
plus 2% advertising of which 1% was paid direct.
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 new 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.
The newly executed Gary Player 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.
F-17
Schedule II
AJAY SPORTS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1998, 1997, and 1996
(Amounts in Thousands)
Balance
Beginning Charged to Deducted from at end
Balance expense Reserve of period
--------- ---------- ------------- ---------
Reserve for Product Warranty:
Year ended:
December 31, 1998 $152 $ 70 $119 (1) $103
December 31, 1997 85 309 242 152
December 31, 1996 136 203 254 85
Reserve for Doubtful Receivables:
Year ended:
December 31, 1998 $243 $ 50 $198 (2) $ 95
December 31, 1997 140 355 252 243
December 31, 1996 287 91 238 140
Reserve for Inventory Obsolescence:
Year ended:
December 31, 1998 $425 $292 $417 $300
December 31, 1997 491 398 464 425
December 31, 1996 384 498 391 491
Notes:
- ------
(1) Represents amounts paid for product warranty claims.
(2) Represents amounts charged off as uncollectible.
F-18