-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JbtBH3oGSTigTq8JaK88+fj2cJUnilavzMiWNuDmcFcbntk8AdkA6Gtjp4SV6RQn V1XyjGCFyFgTpwXAuKmC8A== 0000753557-99-000005.txt : 19990416 0000753557-99-000005.hdr.sgml : 19990416 ACCESSION NUMBER: 0000753557-99-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LBO CAPITAL CORP CENTRAL INDEX KEY: 0000753557 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 382780733 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-19107 FILM NUMBER: 99594249 BUSINESS ADDRESS: STREET 1: 7001 ORCHARD LAKE RD STREET 2: STE 424 CITY: WEST BLOOMFIELD STATE: MI ZIP: 48322-3608 BUSINESS PHONE: 2488515651 MAIL ADDRESS: STREET 1: 7001 ORCHARD LAKE ROAD STREET 2: SUITE 424 CITY: WEST BLOOMFIELD STATE: MI ZIP: 48322 10-K 1 LBO CAPITAL CORP.'S FORM 10-K FOR Y/E 12/31/98 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 December 31, 1998 33-19107 - -------------------------- ---------------------- (For the fiscal year ended) (Commission File No.) LBO CAPITAL CORP. (Exact name of Registrant as specified in its charter) Colorado 38-2780733 - ---------------------------- ----------------------- (State or other jurisdiction (I.R.S. Employer of organization) Identification Number) 7001 Orchard Lake Road, Suite 424 West Bloomfield, MI 48322 - ------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (248) 851-5651 Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $.0001 Par Value ------------------------------ (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 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 As of December 31, 1998, a total of 12,100,000 shares of common stock, $.0001 par value, were outstanding and the aggregate market value of the voting stock held by nonaffiliates of the Registrant was approximately $97,073 based on the average of the bid and asked prices on that date ($ .025) as reported by The National Quotation Bureau, Inc. LBO CAPITAL CORP. FORM 10-K PART 1 ITEM 1. BUSINESS General LBO Capital Corp. (the "Registrant") was organized under the laws of the State of Colorado on October 8, 1987. The Registrant was formed based on the belief of its management that there are business opportunities that, for one or more reasons, are available for acquisition by the Registrant. On March 15, 1988, the Registrant completed a public offering of 3,000,000 Units, each Unit consisting of one share of its common stock, one Callable Class A Warrant, one Callable Class B Warrant and one Callable Class C Warrant. The Warrants are detachable from the Units and may be traded separately in the over-the-counter market. Each Class A Warrant entitles the holder thereof to purchase at a price of $0.50, one share of Common Stock at any time until February 26, 1989. Each Class B Warrant entitled the holder thereof to purchase at a price of $0.75 one share of Common Stock at any time until August 26, 1989. Each Class C Warrant entitled the holder thereof to purchase at a price of $1.00, one share of Common Stock at any time until February 26, 1990. The expiration dates of these warrants were subsequently extended by the Board of Directors to expire on various dates, the latest being July 25, 1999. A Form 8-K was filed on July 20, 1998 reporting this extension. The Registrant received net proceeds of approximately $474,300 after payment of all costs of the offering. Since its inception, the Registrant has directed its activities toward evaluating potential business opportunities with the goal of acquiring and continuing one or more business opportunities. The Registrant may acquire an existing business which may be a corporation, partnership or sole proprietorship. One form which such a business combination might take would be an exchange of the Registrant's stock for stock of the acquired business. However, the Registrant may exchange its common stock to acquire the assets of this entity, or may purchase a percentage of the entity outright. The Registrant has evaluated and attempted to acquire a number of entities to date. ACQUISITION OF ASSETS - --------------------- Ajay Sports, Inc. - ----------------- On April 3, 1989 LBO acquired an aggregate of 1,880,000 shares of the restricted common stock of Ajay Sports, Inc. ("Ajay") for a total cash purchase price of $182,000. In 1991, the Registrant pledged 400,000 shares of Ajay to a bank as collateral for $300,000 in loans to Hendricks Manufacturing Company. On July 1, 1991, this bank declared the loan in default and foreclosed on the shares. On August 13, 1998, Ajay announced that its board of directors had authorized the implementation of a 1-for-6 reverse split of the company's common stock, effective with the commencement of trading on August 14, 1998. The reverse split was approved by the stockholders of Ajay at the company's annual meeting on May 29, 1998. Following the reverse split, holders of Ajay's common stock received one new share of $.01 par value common stock for every six shares of common stock currently held. Therefore, the number of Ajay shares held by the Company is 246,667. The reverse split also affected the number and exercise price of the Company's warrants, such that the Company now holds 33,333 warrants entitling it to purchase one share of Ajay's common stock at $1.08 per share. The 246,667 common stock and 33,333 warrants owned by the Registrant represented 6.7% of the total shares of Ajay common stock outstanding as of December 31, 1998. The decrease is the result of new shares issued. Ajay's Common Stock ("AJAY") and Units ("AJAYU") are trading on the Nasdaq Small Cap and the Warrants ("AJAYW") have been traded over-the-counter since 1989 and are reported by the National Quotation Service. The following table sets forth the range of high and low trade prices for the common stock: HI LOW ------ ------ 1998 ---- First Quarter $ 1.50 $ .78 Second Quarter $ 2.28 $ .78 Third Quarter $ 3.78 $ .75 Fourth Quarter $ 1.03 $ .34 On June 10, 1993, Thomas W. Itin, President and Chairman of the Board of Directors of the Registrant, was elected to the positions of Chairman of the Board of Directors and Chief Executive Officer of Ajay Sports, Inc. It is felt that the direct intervention by the Registrant's management into the operations of Ajay would have a positive effect on the Ajay earnings and the value of the Ajay stock held by the Registrant. Business Ajay Sports, Inc., through its operating subsidiaries Ajay Leisure Products, Inc., Palm Springs Golf and Leisure Life, Inc., is a leading manufacturer and distributor of golf bags, clubs, carts, accessories and casual living furniture throughout the United States. Enercorp, Inc. - ------------- On November 21, 1994, the Registrant bought 2,667 shares of Enercorp, Inc. for $8,702. During 1996, the Registrant bought 12,674 additional shares of Enercorp, Inc. for $39,694. Enercorp, Inc. is a business development company under the Investment Company Act of 1940, as amended. Competition - ----------- The Registrant expects to encounter substantial competition in its efforts to locate businesses for acquisition. The primary competition for desirable business acquisitions is expected to come from other small companies organized and funded for purposes similar to the Registrant, small venture capital partnerships and corporations, small business investment companies and wealthy individuals. Should the Registrant elect to engage in a leveraged buyout acquisition, competition may also be anticipated from investment bankers. Many of these entities have significantly greater experience, resources and managerial capabilities than the Registrant and are therefore in a better position than the Registrant to obtain access to businesses. Employees - --------- As of December 31, 1998, the Registrant had no employees. ITEM 2. PROPERTIES The Registrant currently uses office space provided by Acrodyne Corporation, a company whose Chairman and President is also Chairman and President of the Registrant. The space is used for purposes of administration and development. While the Registrant does not pay any rent, it does pay a monthly fee of $150 for the direct operating expenses. The Registrant believes its current facilities are sufficient for its present business activity. ITEM 3. LEGAL PROCEEDINGS The Registrant is not a present party to any material pending legal proceedings and no such proceedings were known as of the filing date. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Registrant's shareholders during the fiscal year ended December 31, 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Common Stock - ------------ The principal market on which the Registrant's common stock, $.0001 par value, is traded on the Over-The-Counter market. Prices for the Common Stock have been reported in the National Daily Quotation Service "Pink Sheets" published by the National Quotation Bureau since March 15, 1988. The high and low trade price quotations for the Registrant's Common Stock during the quarters ended on the dates listed below is as follows: Trade Prices ------------ HI LOW ------ ------ 1997 ----- First Quarter $ .03 $ .06 Second Quarter $ .03 $ .08 Third Quarter $ .03 $ .08 Fourth Quarter $ .03 $ .08 1998 ----- First Quarter $ .035 $ .03 Second Quarter $ .03 $ .025 Third Quarter $ .03 $ .02 Fourth Quarter $ .03 $ .02 On December 31, 1998, the high trade price reported for the Common Stock was $ .03* and the low trade price was $.02*. As of December 31, 1998, the number of record holders of the Registrant's Common Stock was 243. This figure excludes an undetermined number of shareholders whose shares are held in "street" or "nominee" name. The Registrant has never paid a dividend with respect to its Common Stock and does not intend to pay a dividend in the foreseeable future. Units - ------ Prices for the Units have been reported in the National Daily Quotation Service "Pink Sheets" published by the National Quotation Bureau since March 15, 1988. The high and low quotations for the Registrant's Units during the quarters ended on the dates listed below is as follows: Trade Price ------------ HI LOW ----- ------ 1997 ----- First Quarter $ .03 $ .08 Second Quarter $ .03 $ .08 Third Quarter $ .03 $ .08 Fourth Quarter $ .03 $ .08 1998 ----- First Quarter $ .035 $ .03 Second Quarter $ .03 $ .025 Third Quarter $ .03 $ .02 Fourth Quarter $ .03 $ .02 Each Unit consists of one share of the Registrant's Common Stock, one Callable Class A Warrant, one Callable Class B Warrant and one Callable Class C Warrant. On December 31, 1998, the high and the low prices reported for the Units were $ .03* and $ .02*, respectively. Warrants - -------- No ask or bid quotations were reported by the National Quotation Bureau, Inc. since December, 1989. *Prices are inter-dealer quotations as reported by the National Quotation Bureau, Inc., New York, New York, without adjustment for retail mark-up, mark-down or commission and may not necessarily represent actual transactions. ITEM 6. SELECTED FINANCIAL DATA December 31 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------- Working Capital $(599,097) $(560,736) $(498,352) $(427,094) $(397,542) Cash 73 43 78 78 811 Marketable Securities 46,023 24,972 28,765 8,000 0 Notes Receivable 0 0 0 0 0 Investments in operating companies 0 0 0 0 0 Total Assets 46,023 24,972 28,843 8,251 15,887 Total Liabilities 645,193 585,708 527,195 435,345 407,106 Shareholders' Equity (599,097) (560,736) (498,352) (427,094) (391,219) December 31 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------- Total Operating Revenue $0 $0 $0 $0 $0 Total Operating Exp. 59,454 58,549 52,328 35,173 60,014 Net income (loss) before equity loss of affiliate (59,454) (58,549) (52,328) (35,173) (60,014) Equity in net loss of affiliated company 0 0 0 0 0 Net income (loss) (59,454) (58,549) (52,328) (35,173) (60,014) Net Income (loss) per common share ( .00) ( .00) ( .00) ( .00) ( .00) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources - ------------------------------- Working capital at December 31, 1998 was decreased by $38,360 from the period ended December 31, 1997. This was mainly caused by a net loss of $59,454 and an increase of $21,094 in the market value of securities available for sale. On December 2, 1996, the Registrat had a change in its borrowing arrangements. The Registrant borrowed $325,790 from Dearborn Wheels, Inc. to repay a note payable to Michigan National Bank. The principal balance as of December 31, 1998, was $514,901. The loan is at prime plus 2% interest and is secured by all the intangible assets of the Registrant. Dearborn Wheels, Inc. is held in majority by the Registrant's President's spouse. Year 2000 Compliance - --------------------- The Company does not anticipate the year 2000 compliance requirements will have a material impact on earnings. The Company has initiated replacement of the Company's most significant computer programs with new updates that are warranted to be year 2000 compliant. Installation of these updates is anticipated to be completed prior to June 30, 1999. All other programs subject to year 2000 concerns will be evaluated utilizing internal and external resources to reprogram, replace or test each of them. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements required to be furnished hereunder are attached hereto under Item 14. Supplementary Financial Schedules for which provision is made in applicable Regulations of the Securities and Exchange Commission, have been omitted or the required information is not required under the related instructions, or the information is presented in the Financial Statements and Notes thereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Identification of Directors and Executive Officers The following table sets forth the name, address, age and position of each officer and director of the Registrant: Term Name and Address Age Position as Director - -------------------------------------------------------------------------------- Thomas W. Itin 64 President and Since 7001 Orchard Lake Rd. Chairman of the Inception West Bloomfield, MI 48322 Board of Directors Anthony B. Cashen 62 Secretary, Since RD 2 Box 203 Treasurer and Inception Ghent, NY 12075 Director Robert W. Schwartz 54 Director Since 120 DeFreest Drive March 28, Troy, NY 12180 1991 All directors of the Registrant will hold office until their successors have been elected and qualified or until their death, resignation or removal. The bylaws of the Registrant provide that the number on the Board of Directors shall be determined by resolution of the Board of Directors. The officers of the Registrant are elected at the annual meeting of the Board of Directors and hold office until their successors are chosen and qualified or until their death, resignation or removal. The Registrant is subject to Section 13(a) of the Securities Exchange Act of 1934 and is therefore not required to identify or disclose information concerning its significant employees. There are no family relationships between any director, executive officer or person nominated or chosen by the Registrant to become a director or executive officer. Below is a summary description of educational and professional background of each executive officer and director of the Registrant. Thomas W. Itin. Mr. Itin has served as the Chairman and President of the Board of Directors of the Registrant since inception. Mr. Itin was elected Chairman of the Board and President of the Ajay Sports, Inc. in June of 1993, and is the largest single stockholder. Mr. Itin has been a director of Williams Controls, Inc., a publicly held company since its inception in November 1988. 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. Anthony B. Cashen. Mr. Cashen has served as the Registrant's Secretary, Treasurer and Director since inception. He has also served as a director of Ajay Sports, Inc. since 1993. For more than the past five years, Mr. Cashen has served as managing partner or senior partner of LAI Ward Howell a publicly held management consulting and executive recruiting firm located in New York City. He currently serves as a Director of Immucel Corp., and Williams Controls, Inc., both publicly held companies. Previously, Mr. Cashen has been an officer and principal of the investment firms A.G. Becker Inc. and Donaldson, Lukin and Jenrette, Inc. He received an MBA from the Johnson Graduate School of Management at Cornell University, and a Bachelor of Science degree fromCornell University. Robert W. Schwartz Mr. Schwartz has served as Director of the Registrant since March 28, 1991. Since 1985 he has been Chairman and President of Schwartz, Gordon, Heslin & Associates, Inc., a management and financial consulting firm in Troy, New York. From 1987 until 1991 he was a Director and Vice President and Treasurer of ESARCO International, Inc., a publicly held company which licenses and markets all-terrain trucks. Previously Mr. Schwartz was President and Director of Winsources, Inc., a telephone equipment supplier, President and Director of Cordian Corporation of Latham, New York, a telephone equipment manufacturer, and Vice President of Finance of Garden Way Manufacturing Company, Inc., a manufacturer of rototillers and outdoor equipment. Mr. Schwartz received a B.S. degree in industrial and labor relations from Cornell University and did graduate work at State University of New York at Albany. ITEM 11. EXECUTIVE COMPENSATION The Registrant reimburses its directors for expenses incurred by them in connection with business performed on the Registrant's behalf, including expenses incurred in attending meetings. In addition, directors receive a fee of $250 for each Board of Directors meeting attended. No such reimbursements were made for the period from January 1, 1990 to December 31, 1998. While none of the officers received any salary, such individuals are reimbursed for all accountable expenses incurred on behalf of the Registrant. See Item 13 - Certain Business Relationships and Related Transactions under Acrodyne Corporation for additional information. The Registrant has no defined benefit and actuarial plan providing for payments to employees upon retirement. The Registrant also has no plans for awarding stock options. No other compensation was paid to officers or directors of the Registrant from January 1, 1990 to December 31, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table contains information as of March 31, 1998 with respect to beneficial ownership of the Registrant's Common stock by each person known by the Registrant to be the beneficial owner of more than five percent thereof, by the executive officers and directors of the Registrant and by all executive officers and directors of the Registrant as a group: Common Stock Beneficially Percent Owned (1) of Class ------------------------------------------ Thomas W. Itin 7,717,073 (3)(4) 57.2% Anthony B. Cashen 400,000 (4) 3.3% Robert W. Schwartz 100,000 (4) .8% Officers and Directors 8,217,073 (3) 60.9% as a group (3 persons) James T. Emerson 695,000 5.7% 221 E. Colonial Drive Orlando, FL 32801 (1) Without giving effect to the exercise of outstanding Warrants except as noted in footnote 4 below. (2) These shares are held of record by entities of which Mr. Itin is either a principal or a beneficiary. (3) Includes 300,000 shares held by Mr. Itin's wife, Shirley B. Itin, either as beneficiary or custodian, of which Mr. Itin disclaims any beneficial ownership. (4) These shares include warrants granted on June 3, 1992 expiring December 4, 1999, to purchase one share of common stock per warrant for $.04. (Thomas W. Itin, 1,000,000, Anthony B. Cashen, 200,000, Robert W. Schwartz, 100,000) ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Transactions with Management and Others. - ---------------------------------------- None of the Registrant's officers and directors devote their full time to the Registrant's affairs and such persons may be affiliated with other business entities and enterprises, some of which may be formed for similar purposes as the Registrant and thus be in direct competition with the Registrant. Such activities may result in such persons being exposed to conflicts of interests from time to time. The Registrant has adopted no conflict of interest policy with respect to such transactions. However, the officers and directors of the Registrant recognize their fiduciary obligation to treat the Registrant and its shareholders fairly in any such future activities. Certain Business Relationships. - ------------------------------- In the Registrant's last full fiscal year the Registrant made payments for property and services in excess of five percent of the Registrant's consolidated gross revenues to Acrodyne, a company whose Chairman, President and major stockholder of the Registrant. The Board of Directors of the Registrant has reviewed and approved the use of Acrodyne and has determined that the fees charged the Registrant by Acrodyne are as favorable as could be incurred by any other independent, third party business consultant. It is anticipated that the Registrant will continue to utilize Acrodyne in the future. The total sum which the Registrant paid Acrodyne for the year ended December 31, 1998 was $2,790 for the above mentioned consulting services and out-of-pocket travel expenses, staff time spent for accounting, record keeping, and utilities, but did not include fees for services of the Chairman. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements The Financial Statements are listed in the "Index to Financial Statements" filed as part of this Annual Report, on page F-2. (a) (2) Financial Statement Schedules Supplementary Financial Schedules for which provision is made in applicable Regulations of the Securities and Exchange Commission, have been omitted or the required information is not required under the related instructions, or the information is presented in the Financial Statements and Notes thereto. Pursuant to the provisions of Rule 3-09 of Regulation S-X, the Registrant is required to file separate audited financial statements of its equity basis investee, Ajay Sports, Inc. ("Ajay"). Ajay's audited financial statements for December 31, 1998 are filed within this report. (a) (3) Exhibits The Articles of Incorporation and By-Laws of the Corporation are incorporated by reference to the Registrant's Registration Statement on Form S-18, effective December 16, 1987. Exhibit 27.0 Financial Data Schedule is filed herewith. (b) Reports on Form 8-K. A Form 8-K was filed on July 20, 1998 regarding the extension of the expiration date of the Registrant's warrants from July 25, 1998 to July 25, 1999. A Form 8-K was filed on December 1, 1998 to extend the exercise period of the Registrant's warrants issued to its directors from December 4, 1998 to December 4, 1999. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. LBO CAPITAL CORP. (Registrant) By: s\Thomas W. Itin ------------------------- Thomas W. Itin, President & Chief Financial Officer Date: April 14, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the (date) Signature Title - --------------------- ------------------------------------ s\Thomas W. Itin Chairman of the Board of Directors, - --------------------- Chief Executive Officer and President Thomas W. Itin s\Anthony B. Cashen Secretary, Treasurer and Director - --------------------- Anthony B. Cashen s\Robert W. Schwartz Director - --------------------- Robert W. Schwartz LBO CAPITAL CORP. TABLE OF CONTENTS Page Independent Auditor's Report Financial Statements: Balance Sheets ......................................................... F2 Statements of Operations ............................................... F3 Statements of Changes in Stockholders' Deficit ......................... F4 Statements of Cash Flows ............................................... F5 Notes to Consolidated Financial Statements ............................ F6-F10 INDEPENDENT AUDITOR'S REPORT Board of Directors LBO Capital Corp. We have audited the accompanying balance sheets of LBO Capital Corp. as of December 31, 1998 and 1997, and the related statements of operations, changes in stockholders' deficit, and cash flows for the years ended December 31, 1998, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the account 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 financial statements referred to above present fairly, in all material respects, the financial position of LBO Capital Corp. as of December 31, 1998 and 1997 and the results of its operations and its cash flows for the years ended December 31, 1998, 1997 and 1996 in conformity with generally accepted accounting principles. s/Hirsch Silberstein & Subelsky, P.C. - ------------------------------------- Hirsch Silberstein & Subelsky, P.C. Farmington Hills, Michigan March 23, 1999 F-1
LBO CAPITAL CORP. BALANCE SHEETS As of December 31, 1998 and 1997 -------------------------------- ASSETS 1998 1997 ------ ----------------- ------------------ Current Assets Cash and Equivalents $ 73 $ 43 Marketable Securities - Available for Sale 46,023 24,929 ----------------- ------------------ Total Current Assets 46,096 24,972 Other Assets Investments -0- -0- Total Assets $ 46,096 $ 24,972 ================= ================== LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities Accounts Payable $ 3,763 $ 4,202 Accounts Payable - Related Entities 210 1,060 Notes Payable - Other 514,901 506,971 Accrued Expenses and Taxes 126,319 73,475 ----------------- ------------------ Total Current Liabilities 645,193 585,708 Stockholders' Deficit Common Stock, $.0001 Par Value Authorized 100,000,000 Shares: Issued and Outstanding 12,100,000 in 1998 and 1997 1,210 1,210 Additional Paid-In Capital 623,094 623,094 Unrealized (Loss) on Available for Sale Securities (2,373) (23,467) Accumulated Deficit (1,221,027) (1,161,573) ----------------- ------------------ Total Stockholders' Deficit (599,097) (560,736) ----------------- ------------------ Total Liabilities and Stockholders' Deficit 46,096 24,972 ================= ================== The accompanying notes are an integral part of this financial statement F2
LBO CAPITAL CORP. STATEMENTS OF OPERATIONS For the Years Ended December 31, 1998, 1997, and 1996 1998 1997 1996 ------------------ ------------------ ----------------- Revenues $ -0- $ -0- $ -0- ------------------ ------------------ ----------------- Expenses Professional Services 3,659 3,820 3,351 Management Fees 2,790 2,900 3,410 Interest Expenses 52,843 52,735 44,651 Other Expenses 162 (906) 916 ------------------ ------------------ ----------------- Total Expenses 59,454 58,549 52,328 ------------------ ------------------ ----------------- Loss before Income Taxes (59,454) (58,549) (52,328) Income Tax Expense -0- -0- -0- ------------------ ------------------ ----------------- Net Loss $ (59,454) $ (58,549) $ (52,328) =================== =================== ================= Net Loss Per Share $ (0.00) $ (0.00) $ (0.00) =================== =================== ================== Weighted Average Number of 12,100,000 12,100,000 12,100,000 =================== =================== ================== Common Shares Outstanding
The accompanying notes are an integral part of this financial statement F3
LBO CAPITAL CORP. STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT For the Years Ended December 31, 1998, 1997, and 1996 Unrealized (Loss) on Common Stock Additional Available Total --------------------------------- Paid-In Accumulated For Sale Stockholders' Shares Amount Capital Deficit Securities Deficit ------------ ------------ -------------- -------------- -------------- -------------- Balances at December 31, 1995 12,100,000 $ 1,210 $ 623,094 $ (1,050,696) $ (702) $ (427,094) Net Loss for the Year Ended December 31, 1996 -0- -0- -0- (52,328) (18,930) (71,258) ---------------- ------------- ------------- ---------------- --------------- ------------- Balances at December 31, 1996 12,100,000 $ 1,210 $ 623,094 $ (1,103,024) $ (19,632) $ (498,352) Net Loss for the Year Ended December 31, 1997 -0- -0- -0- (58,549) (3,835) (62,384) ---------------- -------------- ------------- ---------------- -------------- -------------- Balances at December 31, 1997 12,100,000 $ 1,210 $ 623,094 $ (1,161,573) $ (23,467) $ (560,736) COMPREHENSIVE INCOME Net Loss for the Year Ended December 31, 1998 -0- -0- -0- (59,454) 21,094 (38,361) ---------------- --------------- ------------ ----------------- -------------- ------------- Balances at December 31, 1998 12,100,000 $ 1,210 $ 623,094 $ (1,221,027) $ (2,373) $ (599,097) ================ ============== ============= ================= ============== ============= The accompanying notes are an integral part of this financial statement F4
LBO CAPITAL CORP. STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1998, 1997, and 1996 1998 1997 1996 ---------------- ---------------- ---------------- Cash Flow From Operating Activities Net Loss $ (59,454) $ (58,549) $ (52,328) ---------------- ---------------- ----------------- Adjustment to Reconcile Net Loss to Net Cash Provided by (Used For) Operating Activities Depreciation and Amortization -0- -0- -0- Decrease In: Prepaid Expenses and Deposits -0- -0- 173 Increase (Decrease) In: Accounts Payable (440) 499 (2,371) Accrued Expenses and Taxes 51,994 52,836 17,231 ---------------- ---------------- ---------------- Total Adjustments 51,554 53,335 15,033 ---------------- ---------------- ---------------- Net Cash Used For Operations (7,900) (5,214) (37,295) ---------------- ---------------- ---------------- Cash Used For Investing Activities Purchase of Marketable Securities -0- -0- (39,695) ---------------- ---------------- ---------------- Cash Provided by (Used For) Financing Activities Payments on Notes - Bank -0- -0- (325,000) Proceeds from Notes - Other 7,930 5,180 401,990 ---------------- ---------------- ---------------- Net Cash Provided By Financing Activities 7,930 5,180 76,990 ---------------- ---------------- ---------------- Increase (Decrease) in Cash and Equivalents 30 (35) 0 Cash and Equivalents at Beginning of Year 43 78 78 ---------------- ---------------- ---------------- Cash and Equivalents at End of Year $ 73 $ 43 $ 78 ================ ================ ================ The accompanying notes are an integral part of this financial statement F5
LBO CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 Note 1. Summary of Significant Accounting Policies Organization and Business LBO Capital Corp. (the "Company") was incorporated on October 8, 1987 under the laws of the State of Colorado. The Company is engaged in evaluating and investing in other companies. The Company was considered to be in the development stage in 1987 and began operations on March 15, 1988. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less cash equivalents. Equipment and Depreciation Equipment was stated at cost. Depreciation was computed for financial reporting purposes on a straight-line basis over an estimated life of 5 years. Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was $0, $0 and $0 respectively. At December 31, 1995, the remaining computer equipment that was previously leased to an investee was determined to be obsolete and written off the books of the Company. Income Taxes At December 31, 1998, the Company has a net operating loss available for carryforward totaling approximately $963,332. The operating loss carryforward expires in various amounts by the year ended December 31, 2018. LBO CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 Net Loss Per Share Net loss per share is computed using weighted average shares outstanding without giving effect to the common stock warrants, as the effect would be antidilutive. Note 2. Marketable Securities The Company's marketable securities available for sale are recorded at fair market value. Market Value ------------------------------------------- Investment Per Share Aggregate 1998 Enercorp, Inc. $48,397 $3.00 $46,023 1997 Enercorp, Inc. $ 48,397 $1.625 $ 24,929 Note 3. Investments On April 3, 1989, the Company acquired an aggregate of 1,880,000 restricted common shares of Ajay Sports, Inc. ("Ajay") for a total purchase price of $182,000. As a result of recording the Company's equity in net losses of Ajay, the carrying value of this investment is zero at December 31, 1998 and 1997. The Company also obtained 200,000 stock warrants of Ajay at that time. In March 1991, the Company pledged 400,000 shares of its Ajay investment as security for bank loans to an acquisition candidate. On June 1 1991, the bank declared the loan in default and foreclosed on the shares. LBO CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 On August 13, 1998, Ajay announced that its board of directors had authorized the implementation of a 1-for-6 reverse split of the company's common stock, effective with the commencement of trading on August 14, 1998. The stockholders of Ajay at the company's annual meeting on May 29, 1998 approved the reverse split. Following the reverse split, holders of Ajay's common stock received one new share of $.01 par value common stock for every six shares of common stock currently held. Therefore, the number of Ajay shares held by the Company is 246,667. The reverse split also affected the number and exercise price of the Company's warrants, such that the Company now holds 33,333 warrants entitling it to purchase one share of Ajay's common stock at $1.08 per share. These warrants expire June 13, 1999. All of the Ajay shares are pledged as security for a note payable (see note 4). The stock of Ajay is traded over-the-counter and is reported by the National Quotation Service. The following table sets forth the range of high and low trade prices given quarterly by NASDAQ. HI LOW ------ ------ 1997 First Quarter $ 1.50 $ .78 Second Quarter $ 2.28 $ .78 Third Quarter $ 3.78 $ .75 Fourth Quarter $ 1.03 $ .34 Note 4. Notes Payable During 1998, the Company borrowed $7,930 from Dearborn Wheels, Inc. The proceeds were used to meet current operating needs. On December 2, 1996, the Registrant had a change in its borrowing arrangements. The Registrant borrowed $325,790 from Dearborn Wheels, Inc. to repay a note payable to Michigan National Bank. The principal balance as of December 31, 1998, was $514,901. The loan is at prime plus 2% interest and is secured by all the intangible assets of the Registrant. Dearborn Wheels, Inc. is held in majority by the Registrant's President's spouse. This note bears interest of prime plus 2%, matures on June 20, 1999 and is secured by all the assets of the Company. LBO CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 Note 5. Capital Stock The Company completed a public offering on March 15, 1988 consisting of 3,000,000 units at $.20 each. Each unit consisted of one common share, one callable class A common stock purchase warrant, one callable Class B common stock purchase warrant and one callable Class C common stock purchase warrant. Each Class A warrant entitles the warrant holder to purchase one share of common stock for $.50, each Class B warrant entitles the warrant holder to purchase one share of common stock for $.75, and each Class C common stock purchase warrant entitles the warrant holder to purchase one share of common for $1.00. The Class A, B and C warrants were originally exercisable within twelve, eighteen and twenty-four months respectively, from February 26, 1988. All warrants have been extended until July 25, 1999. As of December 31, 1998, no warrants had been exercised. The Company has the right to call any or all warrants at a redemption price of $.0001 per warrant. On June 3, 1992 the Company issued 3,000,000 shares of its common stock, valued at $.04 per share (fair market value on that date, per the National Quotation Bureau, Inc.), to an officer and director in exchange for a reduction of $120,000 in a note to a related company. The Company granted to its directors a total of 1,300,000 warrants, expiring December 4, 1999. Each warrant enables the owner to purchase one share of common stock for $.04 per share. LBO CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 Note 6. Management Fees The Company does not employ any personnel. Per a management fee agreement with Acrodyne Corporation, a related entity, the Company pays direct labor costs plus overhead for management services rendered. Note 7. Cash Flows Disclosure Interest and income taxes paid for the years ended December 31, 1998, 1997 and 1996 were as follows: 1998 1997 1996 ---------- ---------- ----------- Interest $ -0- $ -0- $ 27,420 ============ ============== ============ Income Taxes $ -0- $ -0- $ -0- ============ ============== ============ Note 8. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Note 9: Year 2000 Compliance The Company does not anticipate the year 2000 compliance requirements will have a material impact on earnings. The Company has initiated replacement of the Company's most significant computer programs with new updates that are warranted to be year 2000 compliant. Installation of these updates is anticipated to be completed prior to June 30, 1999. All other programs subject to year 2000 concerns will be evaluated utilizing internal and external resources to reprogram, replace or test each of them. EX-27 2 FDS --
5 (Replace this text with the legend) 0000753557 LBO Capital Corp. 1 US Dollars 12-MOS Dec-31-1998 Jan-01-1998 Dec-31-1998 1 73 46,023 0 0 0 46,096 0 0 46,096 645,193 0 0 0 1,210 (600,307) 46,096 0 0 0 6,611 0 0 52,843 (59,454) 0 0 0 0 0 (59,454) (0.00) (0.00)
EX-99 3 AJS FINANCIAL STATEMENTS FOR Y/E 12/31/98
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 -----END PRIVACY-ENHANCED MESSAGE-----