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