<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission File Number
AUGUST 31, 1996 0-25682
BULLET SPORTS INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3561882
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2803 S. YALE STREET
SANTA ANA, CALIFORNIA 92704
(Address of principal executive offices)
Issuer's telephone number, including area code:
(714) 966-0310
Check whether the issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
------- -------
4,428,867 shares of the Registrant's Common Stock, par value $.001 per share
were outstanding as of October 10, 1996.
Transitional Small Business Disclosure Format (check one): Yes No X
------ -------
This document consists of 16 pages, of which this is page 1
<PAGE>
BULLET SPORTS INTERNATIONAL, INC.
FORM 10-QSB
FOR THE QUARTER ENDED AUGUST 31, 1996
INDEX
Facing sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Part I FINANCIAL INFORMATION
Item 1 Financial Statements:
a) Consolidated Balance Sheet at August 31, 1996
(Unaudited). . . . . . . . . . . . . . . . . . . . . . . 3
b) Consolidated Statements of Operations and
Accumulated Deficit for the three and six months ended
August 31, 1996 and 1995 (Unaudited) . . . . . . . . . . 4
c) Consolidated Statements of Cash Flows for the
six months ended August 31, 1996 and 1995 (Unaudited). . .5
d) Notes to Consolidated Financial Statements
(Unaudited). . . . . . . . . . . . . . . . . . . . . . . .6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . .10
Part II OTHER INFORMATION
Item 1 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . .14
Item 3 Defaults Upon Senior Securities. . . . . . . . . . . . . . . .14
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . .15
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . .16
-2-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
August 31, 1996
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 995,760
Accounts receivable, less allowance for sales returns
and doubtful accounts of $161,579............................ 1,461,864
Inventories.................................................... 2,673,178
Prepaid expenses and other..................................... 341,563
Restricted certificates of deposit............................. 1,500,000
-----------
Total current assets....................................... 6,972,365
-----------
Property and equipment, at cost:
Automotive Equipment........................................... 15,194
Computer systems............................................... 120,527
Furniture, fixtures and equipment.............................. 468,562
Leasehold improvements......................................... 65,172
-----------
669,455
Less accumulated depreciation and amortization................. (168,982)
-----------
Total property and equipment, net.......................... 500,473
-----------
Other assets:
Deposits....................................................... 21,574
-----------
$ 7,494,412
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit....................................... $ 1,660,970
Short-term notes payable....................................... 16,520
Accounts payable............................................... 1,352,618
Accrued expenses and other..................................... 1,069,644
Accrued preferred stock dividends.............................. 364,083
Current portion of capital lease obligations................... 18,923
-----------
Total current liabilities.................................. 4,482,758
-----------
Long-term liabilities:
Capital lease obligations, less current portion................ 75,533
-----------
Total long-term liabilities................................ 75,533
-----------
Stockholders' equity:
Series A, 6% non-voting cumulative convertible preferred
stock - par value $.001; 500,000 shares authorized, 2,500
issued and outstanding....................................... 22,500
Series B, 8.75% non-voting cumulative convertible preferred
stock - par value $.001; 8,700 shares authorized, 6,950
issued and outstanding....................................... 5,359,959
Series C, 8.75% non-voting cumulative convertible preferred
stock - par value $.001; 2,000 authorized, issued and
outstanding.................................................. 1,815,727
Series D, 8.75% non-voting cumulative convertible preferred
stock - par value $.001; 25,000 authorized, 11,475 issued
and outstanding.............................................. 791,975
Common stock - par value $.001; 10,000,000 shares authorized,
4,278,867 issued and outstanding............................. 4,279
Additional paid-in capital..................................... 4,534,649
Accumulated deficit............................................ (9,592,968)
-----------
Total stockholders' equity................................. 2,936,121
-----------
$ 7,494,412
-----------
-----------
See accompanying notes to consolidated financial statements
-3-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended August 31, Six Months Ended August 31,
------------------------------ -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales................................... $ 1,730,235 $ 4,271,527 $ 4,174,476 $ 8,894,763
Cost of goods sold.......................... 1,377,649 3,146,247 3,455,411 6,441,539
------------ ------------ ------------ -----------
Gross profit................................ 352,586 1,125,280 719,065 2,453,224
------------ ------------ ------------ -----------
Operating expenses:
Product development....................... 17,126 - 17,126 -
Selling, general and administrative....... 1,761,202 1,764,993 2,819,834 3,092,710
------------ ------------ ------------ -----------
Loss from operations........................ (1,425,742) (639,713) (2,117,895) (639,486)
------------ ------------ ------------ -----------
Other income (expense):
Interest income........................... 22,584 747 39,290 3,029
Interest expense.......................... (64,990) (111,853) (140,795) (204,728)
Other, net................................ (11,711) 23 (11,711) 23
------------ ------------ ------------ -----------
Net other income (expense).............. (54,117) (111,083) (113,216) (201,676)
------------ ------------ ------------ -----------
Loss before provision for income taxes...... (1,479,859) (750,796) (2,231,111) (841,162)
Provision (credit) for Income taxes......... - (9,448) 1,650 800
------------ ------------ ------------ -----------
Net loss.................................... $ (1,479,859) $ (741,348) $ (2,232,761) $ (841,962)
------------ ------------ ------------ -----------
Accumulated deficit, beginning of period.... (7,749,026) (332,591) (6,996,124) (231,977)
Less preferred stock dividends.............. (364,083) - (364,083) -
------------ ------------ ------------ -----------
Accumulated deficit, end of period.......... (9,592,968) (1,073,939) (9,592,968) (1,073,939)
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
Per share information:
Net loss per common share................. $ (0.45) (0.29) (0.66) (0.53)
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
Weighted average shares outstanding....... 4,086,367 2,716,890 3,917,617 1,794,146
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements
-4-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................. $ (2,232,761) $ (841,962)
------------ -----------
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization.......................................... 70,807 278,583
Loss (Gain) on disposal of assets...................................... 11,711 (23)
Common stock issued for compensation and services...................... 596,250 144,375
Changes in operating assets and liabilities:
Decrease (Increase) in accounts receivable........................... 98,000 (252,266)
Decrease (Increase) in inventories................................... 793,594 (1,124,775)
Increase in prepaid expenses and other............................... (219,513) (296,072)
Increase (Decrease) in accounts payable.............................. (1,909,020) 772,597
Increase in accrued expenses......................................... 359,044 100,737
Increase in non-compete agreement.................................... - 3,236
------------ -----------
Net cash used in operating activities................................ (2,431,888) (1,215,570)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment...................................... (101,354) (70,420)
Increase in restricted certificate of deposit............................ (500,000) -
Purchases of patents and trademarks...................................... - (3,093)
Proceeds from disposal of vehicles....................................... - 2,900
Other, net............................................................... (11,090) (3,419)
------------ -----------
Net cash used in investing activities................................ (612,444) (74,032)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuances of preferred stock........................... 2,603,800 -
Net proceeds from issuances of common stock.............................. 632,500 1,518,750
Collection of subscription receivable.................................... 1,261,157 -
Proceeds from issuance of notes payable.................................. - 78,000
Repayments of notes payable.............................................. (34,907) (37,524)
Net repayments of revolving credit facility.............................. (481,454) (400,000)
Repayment of capital lease obligations................................... (7,533) (817)
------------ -----------
Net cash provided by financing activities............................ 3,973,563 1,158,409
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... 929,231 (131,193)
CASH AND CASH EQUIVALENTS, beginning of period............................. 66,529 661,900
------------ -----------
CASH AND CASH EQUIVALENTS, end of period................................... $ 995,760 $ 530,707
------------ -----------
------------ -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION, cash paid for:
Interest............................................................... $ 127,960 $ 214,193
------------ -----------
------------ -----------
Income taxes........................................................... $ 1,650 $ 800
------------ -----------
------------ -----------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES, 1996:
The Company issued 250 shares of Series C Preferred Stock for notes
payable, related accrued interest and less exchange costs for a net
total of $224,142.
The Company issued 135,000 shares of common stock valued at $286,875 to a
key employee, two Company officer/directors and a legal firm in
settlement of liabilities recorded at February 29, 1996.
The Company issued 50,000 shares of common stock valued at $109,375 to a
financial public relations consultant for a one year services contract
which commenced March 18, 1996.
The Company issued 60,000 shares of common stock valued at $200,000 to a
legal firm for services performed in the current and prior fiscal
years.
Dividends of $364,083 on preferred stock were accrued but not paid for the
six months ended August 31, 1996.
See accompanying notes to consolidated financial statements
-5-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BUSINESS OF THE COMPANY, BASIS OF PRESENTATION AND GOING CONCERN
DESCRIPTION OF THE BUSINESS - Bullet Sports International, Inc. ("Company") and
the business acquired by its subsidiary, Bullet-Cougar Golf Corporation
("Bullet-Cougar"), on January 18, 1995 have been engaged since 1979 in the
design and assembling of golf clubs and the wholesale distribution of golf
clubs, bags and accessories.
INTERIM FINANCIAL INFORMATION - The accompanying condensed consolidated
financial statements which present the financial position of Bullet Sports
International, Inc. and subsidiary as of August 31, 1996 and the results of
operations for the three and six month periods ended August 31, 1996 and 1995
have been prepared by the Company without audit. All significant intercompany
accounts and transactions have been eliminated in consolidation. In the opinion
of management, all adjustments (consisting only of normal recurring accruals)
have been made which are necessary to present fairly the financial position,
results of operations and cash flows of the Company at August 31, 1996 and for
the three and six month periods then ended.
Although the Company believes that the disclosure in the unaudited condensed
consolidated financial statements is adequate for a fair presentation thereof,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. Audited financial statements were included in the
Company's annual report on Form 10-KSB under the Securities Exchange Act of 1934
for the year ended February 29, 1996. These August 31, 1996 unaudited condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-KSB for the year ended February 29, 1996.
The results of operations for the interim period ended August 31, 1996 are not
necessarily indicative of the results for the full year.
GOING CONCERN - The Company experienced operating losses during the fiscal year
ended February 29, 1996 and continues to suffer operating losses, declining
revenues, negative cash flows from operations, loss of liquidity as a result of
cash assets pledged to the lender, and continuing noncompliance with existing
lender covenants. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management believes that the Company
will not have sufficient cash to meet minimum operating requirements through
fiscal 1997 unless the Company is successful in raising additional capital.
The Company is exploring alternative financing options to fund ongoing
operations. Management is also attempting to reduce selling, general and
administrative expenses and restructure its marketing and sales efforts to
reverse the declining sales trend and to attain profitability.
Management believes that unless the Company is able to restructure its credit
facility, reduce collateral requirements pledged on its line of credit, improve
profitability by increasing revenues and gross margins while at the same time
reducing selling, general and administrative expenses, the Company will not
attain profitable operating levels nor generate sufficient cash to meet minimum
operating requirements. If management's plans in connection with these matters
are not successful, it would have a material adverse effect on the Company's
financial condition. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
PER SHARE INFORMATION - Net loss per share information is computed based on the
weighted average shares of common stock and common stock equivalents outstanding
during the periods presented. No stock options are included in the computation
of per share information as their effect would be anti-dilutive. Additionally,
the net loss is adjusted for the effect of accrued cumulative preferred stock
dividends of $364,083 or $.09 per common share for the three and six months
ended August 31, 1996.
-6-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2 - INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market.
Costs include materials, labor and manufacturing overhead. Below is a summary
of the components of inventories at August 31, 1996:
Raw materials $1,154,438
Work in process 49,314
Finished goods 1,469,426
---------
$2,673,178
---------
---------
NOTE 3 - FINANCING TRANSACTIONS
On August 25, 1995, Bullet-Cougar entered into a revolving line of credit with a
financial services corporation. The $3,000,000 line of credit extends to August
31, 1997 with interest at 1.50% over the prime rate (8.25% at August 31, 1996),
payable monthly. The credit line is secured by Bullet-Cougar's inventory and
accounts receivable, as defined, and a $1,500,000 letter of credit secured by a
certificate of deposit. During the six months ended August 31, 1996, Bullet-
Cougar increased the letter of credit to $1,500,000 from $1,000,000 and the
lender rescinded the termination notice it issued in the prior fiscal year.
However, Bullet-Cougar continues to be in a state of noncompliance with
certain financial covenants under the revolving line of credit, and is subject
to additional demands for collateral from the lender or to a termination of the
revolving line of credit.
On May 23, 1996, note holders exchanged four short-term notes payable and
related accrued interest for preferred stock as set forth in Note 4.
NOTE 4 - STOCKHOLDERS' EQUITY
On March 21, 1996, 235,050 shares of Series A, 6% Non-Voting Cumulative
Convertible Preferred Stock were converted into 3,134 shares of Series B 8.75%
Non-Voting Cumulative Convertible Preferred Stock at $675.00 per share for a
total value of $2,115,450. The Company received no proceeds from this
conversion. In conjunction with the above conversion, the Company granted
warrants to purchase 313,400 shares of the Company's common stock at $2.95 per
share through February 2001.
On March 21, 1996, the Company issued 250 shares of Series B, 8.75% Non-Voting
Cumulative Convertible Preferred Stock in a private offering at $880.96 per
share for net proceeds of $220,240 and granted warrants to purchase 25,000
shares of the Company's common stock at $2.95 per share through February 2001.
From April 18, 1996 through May 22, 1996, the Company issued 1,750 shares of
Series C, 8.75% Non-Voting Cumulative Convertible Preferred Stock, which has
similar terms and liquidation preferences as the Series B Preferred Stock, in a
private offering at $888.52 to $911.47 per share for total net proceeds of
$1,591,585 and granted warrants to purchase 271,582 shares of the Company's
common stock at $2.95 per share through February 2001.
On May 23, 1996, the Company issued 250 shares of Series C, 8.75% Non-Voting
Cumulative Convertible Preferred Stock in exchange for four short-term
promissory notes, related accrued interest and less exchange costs for a net
total of $224,142. The Company received no proceeds from this exchange. The
note holders received warrants to purchase 40,290 shares of the Company's common
stock at $2.87 per share through February 2001.
-7-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Company did not meet certain deadlines with respect to filing and gaining
effectiveness of a "shelf" registration statement with the Securities and
Exchange Commission covering shares of common stock underlying 6,950 shares of
Series C and 550 shares of Series B Preferred Stock causing the Company to incur
additional charges for payment to the preferred shareholders. The initial
additional charges total $188,925 and increase at the rate of $6,298 per day
until the registration statement becomes effective. As of August 31, 1996, the
Company recorded additional cost of $498,133. The initial additional charges
are calculated at 3% of the funding provided by the preferred shareholders and
the on going additional cost is calculated at 3% per month with proration for
periods of less than 30 days. The Company filed a Registration statement
with the Securities and Exchange Commission on October 17, 1996, and expects
to gain effectiveness in the near Term (see Note 6).
Dividends payable to the holders of Series B, C and D 8.75% Non-Voting
Cumulative Convertable Preferred Stock are payable on February 1, May 1,
August 1 and November 1 of each year. Dividends payable but not paid on the
due dates bear interest at the rate of 12% per annum until paid. Subject to
the terms of the Certificate of Declaration, dividends may, at the option of
the Board of Directors, be paid in stock in lieu of cash. To date, the Board
of Directors has not declared any dividends on the Series B, C or D Preferred
Stock; however, due to the terms for preferred stock dividends, the Company
has accrued Series B, C and D Preferred Stock dividends of $364,083 for the
six months ended August 31, 1996.
On June 24, 1996, the Company issued a key employee 5,000 shares and two Company
officers/directors 50,000 shares each of common stock under the Company's 1994
Employee Stock Compensation Plan in settlement of liabilities recorded as of
February 29, 1996. These issuances were recorded at an estimated fair market
value of $2.13 per share based on the closing price of the common stock on March
11, 1996 (the date the Company approved the number of shares to be issued for
services performed).
On June 24, 1996, the Company issued its principal legal firm 30,000 shares of
common stock under the Company's 1994 Employee Stock Compensation Plan in
settlement of liabilities recorded as of February 29, 1996. This issuance was
recorded at an estimated fair market value of $2.13 per share based on the
closing price of the common stock on March 11, 1996 (the date the Company
approved the number of shares to be issued for the legal services performed).
On June 24, 1996, the Company issued a financial public relations consultant
50,000 shares of common stock under the Company's 1994 Employee Stock
Compensation Plan at an estimated fair market value of $2.19 per share based on
the closing price of the common stock on March 18, 1996, the effective date of
the one year financial public relations contract with the consultant for which
the shares are compensation.
On June 24, 1996, the Company issued a legal firm 60,000 shares of common stock
under the Company's 1994 Employee Stock Compensation Plan for legal services
related to securities work that was performed during the current and prior
fiscal years. Under the terms of the common stock grant, no gain or loss was to
be recognized by the legal firm, the full net proceeds from the sale of the
common stock totaling $200,000 or $3.33 per share were applied in settlement for
services.
On July 19, 1996, warrants for the purchase 200,000 shares of common stock were
exercised at $2.95 per share for net proceeds of $590,000. In a related
transaction on July 19th, the Company issued 11,475 shares of Series D, 8.75%
Non-Voting Cumulative Convertible Preferred Stock at $69.02 per share for net
proceeds of $791,975 after offering costs of $4,525. The issuance of these
preferred stock was in lieu of issuing 270,000 shares of common stock for
warrants having an exercise price of $2.95 per share.
During the six months ended August 31, 1996, options to purchase 85,000 shares
of common stock were exercised at $.50 per share for net proceeds of $42,500.
-8-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5 - COMMON STOCK OPTIONS AND WARRANTS
The following table summarizes stock option and warrant transactions for the six
months ended August 31, 1996:
<TABLE>
<CAPTION>
Number of Weighted
options and Exercise average price
warrants price per share per share .
----------- --------------- -------------
<S> <C> <C> <C>
Outstanding at February 29, 1996:
Options. . . . . . . . . . . . 855,000 $0.50 to $6.00 $3.13
Warrants . . . . . . . . . . . 319,100 $2.95 to $2.95 $2.95
Granted . . . . . . . . . . . . . 1,650,272 $2.00 to $4.81 $4.08
Exercised . . . . . . . . . . . . (555,000) $0.50 to $2.95 $2.57
Forfeited . . . . . . . . . . . . (300,000) $5.75 to $5.75 $5.75
--------- -------------- -----
Outstanding at August 31, 1996. . 1,969,372 $1.00 to $6.00 $3.68
--------- -------------- -----
--------- -------------- -----
Exercisable at August 31, 1996. . 969,372 $1.00 to $6.00 $2.51
--------- -------------- -----
--------- -------------- -----
</TABLE>
On August 31, 1996, the Compensation Committee of the Board of Directors granted
options to three officer/directors and the Chairman of the Board to each
purchase 250,000 shares of the Company's common stock for $4.81 per share (then
estimated fair market value) under the Company's 1994 and 1995 Compensatory
Stock Option Plans. The options vest at 20% per year starting on the first
anniversary date and expire on August 31, 2006.
On August 23, 1996, the Board of Directors approved the 1996 Long Term Incentive
Stock Plan ("Plan") which provides for the issuance of stock options or common
stock to directors, officers, key employees, and key consultants/advisors to
purchase up to 3,000,000 shares of the Company's common stock for a ten year
period. The Plan is subject to stockholder approval.
NOTE 6 - SUBSEQUENT EVENTS
On September 10 and October 10, 1996, The Company received $100,000 and $50,000,
respectively, upon the exercise of options for 100,000 and 50,000 commons
shares, respectively.
Subsequent to August 31, 1996, the Company did not meet certain deadlines with
respect to filing and gaining effectiveness of a "shelf" registration statement
with the Securities and Exchange Commission, covering shares of common stock
underlying 1,450 shares of Series C Preferred Stock causing the Company to incur
additional charges for payment to preferred shareholders. The initial
additional charges total $42,793 and increase at the rate of $1,426 per day
until the registration becomes effective.
On October 17, 1996 the Company filed a Form S-3 with the Securities and
Exchange Commission to register 3,773,905 shares of the Company's common stock.
The registration is for common shares underlying preferred shares, certain
restricted common shares and shares related to certain non-plan options. The
effective date of the registration statement, if any, cannot be reasonably
estimated.
-9-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion is intended to assist in an understanding of the
Company's financial position and results of operations for the three and six
month periods ended August 31, 1996 as compared to the same periods for the
prior year. The Company's financial statements and the notes thereto contain
detailed information that should be referred to in conjunction with the
following discussion.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain qualifying forward-looking statements. Certain information
included in this Report and other materials filed or to be filed by the
Company with the Securities and Exchange Commission (as well as certain
information included in oral statements or the written statements made or to
be made by the Company) contains statements that are forward-looking, such as
statements relating to projected financial items and results, plans for
future expansion and other business development activities, capital spending
or financing sources, capital structure and the effects or regulation and
competition. Such forward-looking information involves important risks and
uncertainties that could significantly impact anticipated results in the
future and, accordingly, such results may materially differ from those
expressed in any forward-looking statements by or on behalf of the Company.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED AUGUST 31, 1996
NET SALES - The Company generated net sales of $4,174,000 for the six months
ended August 31, 1996 compared to $8,895,000 for the same period last year,
which represents a decrease of 53%. Several separate factors have
contributed to this reduction in net sales. First, the Company is currently
operating with approximately a third less independent sales representatives
compared to the corresponding period of the prior year and has a new group of
in-house salesmen, both of which unfavorably affected our sales levels. The
Company combined the distribution of its lower priced Cougar product line
with its higher end Bullet product line which is primarily sold though
independent sales representative and a staff of in-house salesmen.
Previously, the Cougar product line was primarily sold to large accounts by a
separate sales force. This strategy resulted in the loss of significant
sales and therefore the Company is returning to a separate sales force in an
attempt to build back these sales. The Company has operated under a
restriction in working capital which has restricted the Company's ability to
make certain purchases of products which has impacted sales and has limited
funds available for the desired level of marketing. In addition, the Company
experienced a significant reduction in revenue from a large customer who
introduced its own in-house product line. Finally, the Company believes that
demand for the Company's products has decreased as certain customers were
unsure of the Company's ability to continue as a going concern.
GROSS PROFIT ON SALES - The gross profit decreased in the six months ended
August 31, 1996 by $1,734,000 or 71% to $719,000 from $2,453,000 for the same
period in 1995 and the gross profit percentage decreased significantly in the
current six month period to 17.2% compared to 27.6% in the corresponding period
of the prior year. The decrease in gross profit resulted from the decrease in
sales volumes, higher relative production cost due to lower sales and production
volumes, and an inability to increase unit sales prices to offset higher cost of
purchased products and raw materials.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses decreased by $273,000 or 8.8% to $2,820,000 in the
first six months of the current fiscal year compared to $3,093,000
corresponding period in 1995. The largest decrease in these expenses was due
to the elimination of amortization expense this fiscal year compared to
$242,000 during the first six months of the prior fiscal year. The decrease
is a result of the Company writing-off its investments in goodwill,
trademarks and patents on February 29, 1996. The Company also experienced a
decrease in advertising and endorsement expense to $264,000 for the six
months ended August 31, 1996 from $379,000 for the corresponding period of
the prior year which represents a $115,000 or 30% decrease. Commission and
other expenses that related directly to sales decreased as sales decreased.
The Company recorded an expense of $498,000 during the last three months of
the six months ended August 31, 1996 as the Company did not meet certain
deadlines with respect to filing and gaining effectiveness of a "shelf"
registration statement with the Securities and Exchange Commission covering
the shares of common stock underlying the convertible preferred stock (see
Note 4 to the financial statements).
-10-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
INTEREST INCOME - Interest income increased from $3,000 in the six months
ended August 31, 1995 to $39,000 in the six months ended August 31, 1996, as
a result of the Company's required investment in a restricted certificate of
deposit. This investment is required under terms of the Company's revolving
line of credit. In the comparable period of fiscal 1995, the Company was not
required to obtain such security for its revolving line of credit.
INTEREST EXPENSE - Interest expense for the six months ended August 31, 1996
decreased by $64,000 to $141,000, from $205,000 for the same period last year,
principally due to a lower average principal balance on the Company's revolving
line of credit during the current reporting period.
OTHER EXPENSE - During the second quarter ended August 31, 1996, the Company
wrote off its carrying value in certain previously used computer software
following its conversion to new software.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 31, 1996
NET SALES - Net revenues decreased to $1,730,000 for the three months ended
August 31, 1996 compared to $4,272,000 for the corresponding period of the
prior year, a decrease of $2,542,000 or 60%. Several factors have
contributed to this reduction. First, the Company combined the distribution
of its lower priced Cougar product line with its higher end Bullet product
line which is primarily sold though independent sales representative and a
staff of in-house salesmen. Previously, the Cougar product line was
primarily sold to large accounts by a separate sales force. This strategy
has resulted in the loss of significant sales and therefore the Company is
returning to a separate sales force in an attempt to build back these sales.
In addition, the Company has operated under a restriction in working capital
which has restricted the Company's ability to make certain purchases of
products which has impacted sales and has limited funds available for the
desired level of marketing. Further, the Company experienced a significant
reduction in revenue from a large customer who introduced its own in house
product line. Finally, the Company believes that demand for the Company's
products has decreased as certain customers were unsure of the Company's
ability to continue as a going concern.
GROSS PROFIT ON SALES - The gross profit decreased in the three months ended
August 31, 1996 by $772,000 or 69% to $353,000 from $1,125,000 in the three
months ended August 31, 1995, and the gross profit percentage decreased
significantly in the current period to 20.4% compared to 26.3% in the
corresponding period of the prior year. The decrease in gross profit resulted
from the decrease in sales volumes, higher relative production cost due to lower
sales and production volumes, and an inability to increase unit sales prices to
offset higher cost of purchased products and raw materials.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses were $1,761,000 and $1,765,000 for the three months
ended August 31, 1996 and 1995, respectively, or 102% and 41% of related net
sales. The largest decrease in expenses was due to the elimination of
amortization expense during the three month period ended August 31, 1996
compared to $129,000 during the first six months of the prior fiscal year.
This decrease is a result of the Company writing-off its investments in
goodwill, trademarks and patents on February 29, 1996. The Company also
experienced a decrease in advertising and endorsement expense to $163,000 for
the three months ended August 31, 1996 from $264,000 for the corresponding
period of the prior year which represents a $101,000 or 38% decrease.
Commission and other expenses that related directly to sales decreased as
sales decreased. The Company recorded an expense of $498,000 during the
three months ended August 31, 1996 as the Company did not meet certain
deadlines with respect to filing and gaining effectiveness of a "shelf"
registration statement with the Securities and Exchange Commission covering
the shares of common stock underlying the convertible preferred stock (see
Note 4 to the financial statements).
-11-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
INTEREST INCOME - Interest income increased to $23,000 in the three months
ended August 31, 1996 from $1,000 in the comparable three month period of the
prior year, as a result of the Company's required investment in a restricted
certificate of deposit. This investment is required under terms of the
Company's revolving line of credit. During the comparable period of fiscal
1995, the Company was not required to obtain such security for its revolving
line of credit.
INTEREST EXPENSE - Interest expense for the three months ended August 31, 1996
decreased by $47,000 to $65,000, principally due to a lower average principal
balance on the Company's revolving line of credit during the reporting period
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at August 31, 1996, was $2,490,000 which
represents a $2,683,000 increase from the deficit of $193,000 at the
beginning of the fiscal year. Cash and cash equivalents increased by
$929,000 to $996,000 at August 31, 1996, due to an increase in equity capital
raised through the issuance of preferred and common stock. Accounts
receivable decreased by $98,000 or 6% to $1,462,000 at August 31, 1996 with
the effect of decreasing sales somewhat offset by a slowing in collection of
accounts. Inventories decreased by $794,000 or 23% to $2,673,000 at August
31, 1996, due to reduced buying. Accounts payable decreased by $1,909,000 or
59% to $1,353,000 at August 31, 1996 resulting from the use of new equity
capital to reduce payables and because of lower product and raw material
purchases.
In the prior fiscal year, the Company fell out of compliance with certain
financial covenants, causing the lender to lower the borrowing limit to
$3,000,000 and to increase the securing letter of credit to $1,500,000
($1,000,000 on February 14, 1996 and $1,500,000 since April 2, 1996). The
letter of credit is secured by a certificate of deposit which matures October
26, 1996 and is shown on the August 31, 1996 Balance Sheet as a restricted
certificate of deposit. The letter of credit and securing certificate of
deposit adversely effect the Company's liquidity and have the effect of
substantially lowering the effective borrowings under the revolving credit
facility and, also, effectively increasing the cost of funds. At August 31,
1996, borrowings under the credit facility totaled $1,661,000 and as of
September 30, 1996, the borrowings totaled $1,553,000 with a $1,624,000
borrowing limit. The Company continues to be in the state of noncompliance with
financial covenant for net earnings and is therefore subject to additional
demands for collateral from the lender or to a termination of the revolving line
of credit. The Company is seeking replacement financing as more fully discussed
below.
For the quarter ended August 31, 1996, the Company utilized cash flows from
operations and investing activities of $2,432,000 and $612,000 respectively.
The cash requirements of the Company in the quarter ended August 31, 1996 were
principally met by funds received from financing activities as outlined below:
On February 29, 1996, the Company entered into a subscription agreement with two
significant stockholders for the purchase of 2,000 shares of Series B Preferred
Stock for $1,000 per share and a total value of $2,000,000. Prior to the Series
B Preferred Stock subscription, the Company had $500,000 in notes payable to
these stockholders. As a result, $500,000 of the Series B Preferred Stock
subscription was used to retire the notes on February 29, 1996. The $1,500,000
remainder of the subscription agreement, net of issuance costs, were received on
March 6, 1996.
During March, April and May 1996, the Company issued 2,000 shares of Series B
and Series C Preferred Stock for net cash proceeds of $1,812,000, after offering
costs of $188,000. In addition, on May 23, 1996, the Company issued 250 shares
of Series C, Preferred Stock in exchange for four short-term promissory notes,
related accrued interest and less exchange costs for a net total of $224,000.
-12-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
On July 19, the Company issued 11,475 shares of Series D Preferred Stock for net
cash proceeds of $792,000 and in a related transaction issued 200,000 shares of
common stock for proceeds of $590,000.
The Company is exploring alternative financing options to fund ongoing
operations. Management believes that the Company will not have sufficient cash
to meet minimum operating requirements through fiscal 1997 unless the Company is
successful in raising additional capital. Management is also attempting to
reduce selling, general and administrative expenses and restructure its
marketing and sales efforts to reverse the declining sales trend and to attain
profitability. Management believes that unless the Company is able to
restructure its credit facility, reduce collateral requirements pledged on its
line of credit, improve profitability by increasing revenues and gross margins
while at the same time reducing selling, general and administrative expenses,
the Company, will not have sufficient cash to meet minimum operating
requirements. If management's plans in connection with these matters are not
successful, it would have a material adverse effect on the Company's financial
condition.
-13-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In March 1996, W. O. Crisman, III, individually, and W. O. Crisman,
III, d/b/a Otey Crisman Golf Company, a sole proprietorship, filed an
action in the United States District Court for the Southern District
of Alabama against the Company seeking declaratory relief and damages
for claimed breaches of contract and fraud arising out of the
Company's June 13, 1995 acquisition of the business and assets of the
Otey Crisman Golf Company. The Company disputed these claims. The
Otey Crisman Golf Company was a supplier to the Company prior to the
initiation of the lawsuit. Discovery in this case is ongoing.
In March 1996, KZ-Golf, Inc. filed an action in the Orange County
Superior Court (California) against the Company seeking damages for
breach of contract. The complaint alleges that the plaintiff
contracted on behalf of itself and as agent for two Taiwanese
manufacturers to supply Bullet-Cougar with titanium and zirconium
insert golf club heads. Plaintiff filed the action on its own behalf
and on behalf of the Taiwanese manufacturers, Wonderswing Development
Corp. and Performax Golf and Composite, Inc. and seeks approximately
$337,000 in lost profit damages based on Bullet-Cougar's purported
anticipatory repudiation of the purported contract. Bullet-Cougar
denies the existence of any such contract. Furthermore, it is Bullet-
Cougar's position that even if a contract is found to have existed,
several conditions precedent did not occur and/or were not performed
by plaintiff. Discovery in this case is ongoing.
The Company has become subject to various other lawsuits, claims and
other legal matters in the ordinary course of conducting its business.
The Company believes, based on experience to date, that the ultimate
resolution of such items, individually or in the aggregate, will not
have a material adverse effect on the Company's financial position or
results of operations.
ITEM 2: CHANGES IN SECURITIES
(a) NOT APPLICABLE
(b) NOT APPLICABLE
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Under the terms for the private offerings of the Company's Series B
and C 8.75% Non-Voting Cumulative Convertible Preferred Stock, the
Company was required (within 120 day of funding) to file and gain
effectiveness of a "shelf" registration statement with the Securities
and Exchange Commission covering shares of common stock underlying
6,950 shares of Series B and 550 shares (increased to 2,000 shares on
September 21, 1996) of Series C Preferred Stock causing the Company to
incur additional charges for payment to the preferred shareholders.
As of August 31, the Company had not obtained registration for these
securities having total funding of $6,297,500. As a result, the
Company is obligated to pay 3% of $6,297,500 or $188,925 to the
preferred shareholders. In addition, the Company is required to pay
an additional 3% to the preferred shareholder for each addition 30 day
period with proration of the 3% for periods of less than 30 days. As
of August 31, 1996, the Company was obligated for $309,208 for the
additional 30 day periods resulting in total additional cost of
$498,133 as of August 31, 1996. Subsequent to August 31, 1996, the
Company did not obtain registration for an additional 1,750 shares of
Series C preferred stock and therefor incurred additional costs of
$42,793 related to the initial 120 day period. Currently, the Company
must pay an additional $7,724 per day until the registration statement
becomes effective.
-14-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
PART II
OTHER INFORMATION (CONTINUED)
The Company is out of compliance on its revolving line of credit
because it doesn't meet the financial covenant for minimum net
earnings.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5: OTHER INFORMATION
NOT APPLICABLE
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) NOT APPLICABLE
(b) Reports on Form 8-K
On July 24, 1996, the Company announced its results of operations for
the first quarter ended May 31, 1996 and the infusion of approximately
$1,380,000 in equity capital.
On October 11, 1996, the Company announced its results of operations
for the 2nd quarter and six months ended August 31, 1996, the
anticipated filling of a registration with the SEC covering shares of
common stock underlying convertible preferred stock and the
introduction at the Las Vegas International PGA trade show of a new
golf product incorporating an advanced technology graphite shaft.
-15-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BULLET SPORTS INTERNATIONAL, INC.
Registrant
Date: October 17, 1996
/S/ John A. Haas
----------------
John A. Haas
President and Chief Executive Officer
/S/ Mark Green
--------------
Mark Green
Chief Financial Officer (Principal
Financial Officer)
-16-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUGUST 31,
1996 FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> AUG-31-1996
<CASH> 995,760
<SECURITIES> 0
<RECEIVABLES> 1,461,864
<ALLOWANCES> 161,159
<INVENTORY> 2,673,178
<CURRENT-ASSETS> 6,972,365
<PP&E> 669,455
<DEPRECIATION> 168,982
<TOTAL-ASSETS> 7,494,412
<CURRENT-LIABILITIES> 4,482,758
<BONDS> 0
0
7,990,161
<COMMON> 4,279
<OTHER-SE> (5,058,319)
<TOTAL-LIABILITY-AND-EQUITY> 7,494,412
<SALES> 4,174,476
<TOTAL-REVENUES> 4,174,476
<CGS> 3,455,411
<TOTAL-COSTS> 6,292,371
<OTHER-EXPENSES> 11,711
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 140,795
<INCOME-PRETAX> (2,231,111)
<INCOME-TAX> 1,650
<INCOME-CONTINUING> (2,232,761)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,232,761)
<EPS-PRIMARY> (.57)
<EPS-DILUTED> (.66)
</TABLE>
