UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number 0-25114
CALIFORNIA PRO SPORTS. INC.
---------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1217733
-------- ----------
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
8102 White Horse Road, Greenville, South Carolina 29611
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(864) 294-5370
--------------
(Registrantts telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such report(s)
and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 4,219,511 common shares, par value
$.01 per share, outstanding at August 14, 1996.
Transitional Small Business Disclosure Format (Check One) YES NO X
----- -----
Page 1 of 20 total pages on this document.
<PAGE>
CALIFORNIA PRO SPORTS, INC.
AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
PART II. OTHER INFORMATION
2
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 3O, 1996
(UNAUDITED)
ASSETS
------
Current assets:
Cash $ 1,536,047
Accounts receivable, less allowance
for doubtful accounts of $527,000 8,539,911
Due from related parties 41,087
Inventories 8,201,210
Marketable securities (Note 5) 789,745
Prepaid expenses and other 651,275
------------
Total current assets 19,759,275
------------
Property and equipment, net of
accumulated depreciation 2,178,407
Intangible and other assets, net
of accumulated amortization 9,440,043
------------
11,618,450
------------
$ 31,377,725
============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of:
Long-term debt $ 279,904
Due to related parties (Note 3) 1,168,750
License fee payable, related party (Note 3) 66,094
Notes payable:
Bank 10,537,707
Convertible promissory notes, related parties(Note 3) 2,518,000
Other 486,172
Officers/shareholders (Note 3) 1,060,000
Accounts payable and accrued expenses:
Accounts payable, PlayMaker 945,372
Other accounts payable, trade 2,394,830
Other accrued expenses 1,885,892
------------
Total current liabilities 21,342,721
------------
Long-term debt, net of current portion 528,652
Due to related parties, net of current portion (Note 3) 350,000
License fee payable, related party net of current
portion (Note 3) 2,147,141
------------
Total long-term debt 3,025,793
------------
Minority interest 924,140
------------
Shareholders' equity:
Common stock, $.01 par value; authorized
10,000,000 shares; issued and
outstanding 4,219,511 42,195
Warrants 394,200
Capital in excess of par 5,731,132
Retained earnings (103,088)
Cumulative foreign currency translation adjustment 20,632
-------------
Total shareholders' equity 6,085,071
-------------
$ 31,377,725
=============
See notes to consolidated financial statements.
3
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATlONS
THREE MONTHS ENDED JUNE 30 1996 AND 1995
(UNAUDITED)
1996 1995
----------- -----------
Net sales $ 5,970,847 $ 4,968,691
----------- -----------
Cost of sales:
Substantially from a related party 1,865,614 2,599,128
Other 2,557,587 919,246
----------- -----------
4,423,201 3,518,374
----------- -----------
Gross profit 1,547,646 1,450,317
----------- -----------
Operating expenses:
Sales and marketing expense 676,974 532,718
General and administrative expense 416,428 597,630
Depreciation and amortization 252,719 137,549
Consulting fees, related party 54,000 30,000
----------- -----------
1,400,121 1,297,897
----------- -----------
Income from operations 147,525 152,420
----------- -----------
Other expenses (income):
Interest expense:
Related party 36,622
Other 363,554 82,494
Foreign currency loss 34,659 4,023
Royalty and other income (57,106) (16,572)
Net unrealized holding gain (Note 5) (416,637)
Gain on sale of investment
in subsidiary (Note 6) (111,366)
Gain from issuance of common stock
by subsidiary (Note 7) (479,100)
----------- -----------
(629,374) 69,945
----------- -----------
Income before income taxes and
minority interest 776,899 82,475
Income tax expense 303,000 27,940
----------- -----------
Income before minority interest 473,899 54,535
Minority interest 9,914
----------- -----------
Net income $ 483,813 $ 54,535
=========== ===========
Net income per share $ 0.12 $ 0.02
=========== ===========
Weighted average number
of shares outstanding 4,081,313 3,623,182
=========== ===========
See notes to consolidated financial statements.
4
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 3O, 1996 AND 1995
(UNAUDITED)
1996 1995
---------- -----------
Net sales $ 7,757,522 $ 7,907,938
----------- -----------
Cost of sales:
Substantially from a related party 2,987,275 4,588,574
Other 2,871,322 1,037,885
----------- -----------
5,858,597 5,626,459
----------- -----------
Gross profit 1,898,925 2,281,479
----------- -----------
Operating expenses:
Sales and marketing expense 990,282 1,008,974
General and administrative expense 880,065 1,149,234
Depreciation and amortization 419,235 274,266
Consulting fees, related party 84,000 60,000
----------- -----------
2,373,582 2,492,474
----------- -----------
Loss from operations (474,657) (210,995)
----------- -----------
Other expenses (income):
Interest expense:
Related party 36,622 2,840
Other 439,495 160,619
Foreign currency loss 35,821 30,624
Royalty and other income (72,106) (16,572)
Net unrealized holding gain (Note 5) (416,637)
Gain on sale of investment in
subsidiary (Note 6) (111,366)
Gain from issuance of common stock
by subsidiary (Note 7) (479,100)
----------- -----------
(567,271) 177,511
----------- -----------
Income (loss) before income taxes and
minority interest 92,614 (388,506)
Income tax (expense) benefit (36,000) 132,360
----------- -----------
Income (loss) before minority interest 56,614 (256,146)
Minority interest 9,914
----------- -----------
Net income (loss) $ 66,528 $ (256,146)
=========== ===========
Net income (loss) per share $ 0.02 $ (0.07)
=========== ===========
Weighted average number
of shares outstanding 3,933,235 3,421,931
=========== ===========
See notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA PRO SPORTS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
Cumulative
foreign
Common stock Capital currency
---------------------- in excess translation
Shares Amount Warrants of par Deficit adjustment Total
------ ------ -------- ------ ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 3,783,511 $ 37,835 $ 394,200 $ 4,727,492 $(169,616) $4,989,911
Issuance of 400,000 shares
of common stock (Note 3) 400,000 4,000 896,000 900,000
Issuance of 36,000 shares of
common stock in settlement of
an account payable 36,000 360 107,640 108,000
Net income for the six months
ended June 30, 1996 66,528 66,528
Cumulative foreign currency
translation adjustment $20,632 20,632
--------- --------- --------- ----------- --------- ------- ---------
Balances, June 30, 1996 4,219,511 $ 42,195 394,200 $ 5,731,132 $(103,088) $20,632 $6,085,071
========= ========= ========= =========== ========= ======= ==========
See notes to consolidated financial statements.
6
</TABLE>
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
1996 1995
---------- ----------
Net income (loss) $ 66,528 $ (256,146)
---------- ----------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Net unrealized holding gain (416,637)
Gain on sale of investment in subsidiary (111,366)
Gain from issuance of common stock by subsidiary (479,100)
Depreciation and amortization 419,235 274,160
Provision for bad debt 57,300 2,625
Minority interest (9,914)
Decrease (increase) in assets:
Accounts receivable (1,568,774) 528,324
Due from related parties 478,853 5,460
Inventories 652,262 (54,736)
Prepaid expenses (308,323) (353,040)
Increase (decrease) in liabilities:
Accounts payable Playmaker 736,640 (3,077,140)
Other (508,285) (964,384)
---------- ----------
Total adjustments (508,285) (3,638,731)
---------- ----------
Net cash provided by (used in)
operating activities (441,757) (3,894,877)
---------- ----------
Cash flows from investing activities:
Payment for purchase of USA Skate Corporation,
net of cash acquired (3,551,760)
Payments for intangible assets (1,507,773)
Capital expenditures (141,064) (263,147)
---------- ----------
Net cash used in investing activities (5,200,597) (263,147)
---------- ----------
Cash flows from financing activities:
Decrease in bank overdraft (35,499)
Proceeds from notes payable and long term debt 10,146,443
Repayment of notes payable and long term debt (3,937,852) (885,824)
Net proceeds from issuance of common stock
by subsidiary 961,600
Net proceeds from issuance
of common stock and warrants 5,127,966
Deferred financing costs (40,000)
---------- ----------
Net cash provided by
financing activities 7,170,191 4,166,643
---------- ----------
Net increase in cash 1,527,837 8,619
Cash beginning 8,210
---------- ----------
Cash ending 1,536,047 8,619
========== ==========
Supplemental disclosure of
cash flow information:
Cash paid for interest $ 490,411 $ 216,186
========== ==========
Cash paid for income taxes $ 51,448 $ 36,575
========== ==========
Supplemental disclosure of noncash
investing and financing activities:
Issuance of 36,000 shares of common
stock in settlement of an account payable $ 108,000
==========
Issuance of 80,000 shares of common
stock in cancellation of note payable $ 200,000
==========
Issuance of 100,000 shares of common stock
in cancellation of convertible note payable $ 225,000
==========
Deferred offering costs deducted from the
proceeds of the initial public offering $ 816,452
==========
See notes to consolidated financial statements.
7
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
1996 1995
---------- ----------
Issuance of 400,000 shares of common stock
in exchange for consulting and non-compete
agreements $ 900,000
==========
Minimum royalties payable in exchange for
a license agreement $2,213,235
==========
Purchase of USA Skate Corporation,
net of cash acquired:
Fair value of assets acquired $11,334,200
Goodwill 2,777,774
Liabilities assumed (9,210,214)
Fair value of assets exchanged (1,350,000)
-----------
Total cash paid, net of cash acquired $ 3,551,760
===========
See notes to consolidated financial statements.
8
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months and Six Months Ended June 30, 1996 and 1995
(Unaudited)
1. The interim financial statements:
The interim financial statements have been prepared by California Pro
Sports, Inc. ("CPS" or the "Company") and in the opinion of management,
reflect all material adjustments which are necessary to a fair statement of
results for the interim periods presented, including normal recurring
adjustments. Certain information and footnote disclosures made in the last
annual report on Form 10-KSB have been condensed or omitted for the interim
statements. It is the Company's opinion that, when the interim statements
are read in conjunction with the December 31, 1995 Annual Report on Form
10-KSB, and the Forms 8-K and 8-K/A dated May 15, 1996 which reported the
acquisition of USA Skate Co., Inc., the disclosures are adequate to make the
information presented not misleading. The results of operations for the six
months ended June 30, 1996 are not necessarily indicative of the operating
results for the full year.
2. Organization:
The accompanying consolidated financial statements include the accounts of
California Pro Sports, Inc. and its subsidiaries, California Pro, Inc.
("CP") and USA Skate Corporation ("USA"). USA was formed in 1995 to acquire
USA Skate Co., Inc. (Note 3). Intercompany transactions have been eliminated
in consolidation.
CP sells in-line skates and accessories under the brand names California Pro
and Rolling Thunder to retail sporting goods stores principally in North
America. A majority of in-line skates are manufactured by PlayMaker Co.,
Ltd.("PlayMaker"), a minority shareholder of the Company. In August 1994, CP
began selling snowboards and accessories under the Kemper brand name to
retail sporting goods stores in North America, and distributors in Europe
and Japan.
3. Acquisition:
On May 15, 1996, the Company, through USA, completed the acquisition of all
of the outstanding capital stock of USA Skate Co., Inc., a New York
corporation ("USA Skate"). USA Skate owns, directly or indirectly, all of
the capital stock of Les Equipements Sportifs Davtec Inc., a Canadian
corporation ("Davtec"). The acquisition was effective as of April 30, 1996
and was accounted for as a purchase. Accordingly, the consolidated
statements of operations include the results of USA Skate beginning May 1,
1996. Consideration for the purchase consisted of $3,650,000 of cash, a
$1,050,000 8% installment note payable due through November 1998, 250,000
shares of USA common stock valued at $300,000, and assumption of
approximately $5,500,000 of debt. The purchase price was paid with funds
raised by USA, including the private placement of 884,667 shares of common
stock of USA for $961,600 (net of costs of $100,000), the issuance of
$1,080,000 of 9% notes payable to certain officers/shareholders due in
January 1997, and the issuance of $2,515,000 of 9% convertible promissory
notes due January 1997
9
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Three Months and Six Months Ended June 30, 1996 and 1995
(Unaudited)
3. Acquisition (continued):
(convertible to USA common stock under certain conditions). The debt
assumption was financed in part by a bank loan to
USA Skate. Additionally, the former controlling shareholder of USA Skate
signed consulting and noncompete agreements in consideration for the
issuance of 400,000 shares of CPS common stock valued at $900,000, and USA
also entered into a worldwide exclusive license agreement for use of certain
trademarks owned by the former shareholder in exchange for minimum royalty
payments due on or before December 2001, with a
value of $2,213,235.
USA Skate is based in Long Island, New York, and markets and distributes ice
and street/roller hockey skates, related gear and accessories under the
VICTORIAVILLE(TM), VIC(R) and McMartin brands as well as figure skates. USA
Skate has an exclusive worldwide license for use of the VICTORIAVILLE(TM)
and VIC(R) brands. For 1995, USA Skate had revenues of approximately $14.3
million. Davtec, USA Skate's wholly-owned subsidiary, manufactures hockey
sticks, pants and gloves for USA Skate and is the Canadian distributor for
all of the hockey related VICTORIAVILLE(TM) and VIC(R) product lines. Davtec
also manufactures the Hespeler(TM) premium brand of hockey sticks which are
marketed worldwide.
USA Skate sells its skates and related accessories through a network of
independent sales representative groups to over 1,000 accounts.
Internationally, USA Skate's products are sold and distributed through
independent distributors located primarily in Germany, Switzerland, Italy,
Austria, Czechoslovakia, Sweden, Finland, France and Brazil.
The unaudited results of operations of the Company, for the six months ended
June 30, 1996 and 1995, on a pro forma basis as though USA Skate had been
acquired as of January 1, 1996 and 1995, respectively, are as follows:
1996 1995
---- ----
Revenue $10,897,000 $14,971,000
=========== ===========
Net income (loss) $ 125,000 $ (445,000)
=========== ===========
Income (loss) per share $ .03 $ (0.12)
=========== ===========
10
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Three Months and Six Months Ended June 30, 1996 and 1995
(Unaudited)
4. Shareholders' equity:
1996 Transactions:
Warrants:
The exercise prices of warrants to purchase 501,400 shares of the Company's
common stock that had been granted to two officers/shareholders of the
Company were reduced from $3.56 and $4.50 per share to $2.38 per share (the
market value of the stock at the date the Board of Directors authorized the
price reduction in April 1996).
Issuance of stock:
During the six months ended June 30, 1996, the Company issued 36,000 shares
of common stock at $3.00 per share (the market value of the stock at the
date the Board of directors authorized the issue), in satisfaction of
$108,000 of an amount payable.
1995 Transactions:
Initial public offering:
On January 25,1995, the Company completed an initial public offering of
1,200,000 shares of common stock at $4.50 per share, and 1,200,000 warrants
(the "Warrants") at $0.25 per warrant. Each Warrant is exercisable through
January 1998 and allows for the purchase of one share of common stock at an
exercise price of $6.00 per share. In March 1995, the Representative of the
underwriters exercised its option to purchase an additional 180,000 Warrants
at $0.25 per Warrant to cover over allotments. The Company sold the
securities to the Representative at a discount of 10% of the public offering
price and paid the Representexpense allowance of 3% of the gross proceeds of
the public offering. The Company also sold to the Representative for $100,
warrants to purchase 120,000 shares of common stock at $7.20 per share, and
warrants to purchase 120,000 Warrants at $.30 per Warrant. The Warrants to
11
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Three Months and Six Months Ended June 30, 1996 and 1995
(Unaudited)
4. Shareholders' equity (continued):
Initial public offering (continued):
purchase common stock and the Warrants to purchase Warrants are exercisable
beginning January 1996 through January 2000. After deducting offering
expenses, the Company received net proceeds from the offering of
approximately $4,200,000.
Exercise of warrants:
In January 1995, warrants to purchase 74,623 shares of restricted common
stock at $0.75 per share were exercised. The Company received proceeds of
$55,967.
Issuance of warrants:
In connection with the initial public offering, the holders of the Company's
convertible promissory notes exercised their option to purchase 490,000
warrants at the price of $0.10 per warrant. The Company received net
proceeds of $49,000. These warrants have been registered by the Company for
resale by the holders and have the same terms and rights as the Warrants
sold in the initial public offering.
Issuance of common stock:
In January 1995, one option holder exercised his option to purchase 80,000
shares of common stock at $2.50 per share. The holder surrendered a
promissory note made to him by the Company in the principal amount of
$200,000 in exchange for the stock.
5. Marketable securities:
In 1996, the Company received marketable securities from an affiliate in
payment of an amount owed to the Company by a related party, which the
Company classified as trading securities under SFAS No. 115. At June 30,
1996, the market value of these securities had increased and, therefore, the
Company recognized a net unrealized holding gain of $416,637 which is
included in net income for the three and six months ended June 30, 1996.
6. Gain on sale of investment in subsidiary:
In June 1996, the Company satisfied $260,000 of amounts payable to
officers/shareholders by transferring to the officers/shareholders 216,667
shares of USA common stock from the Company's 2,000,000 USA shares,
resulting in a gain of $111,366.
7. Gain from issuance of common stock by subsidiaries:
During the quarter ended June 30, 1996, the Company adopted an accounting
policy to recognize in its consolidated financial statements gains and
losses resulting from the sales of previously unissued stock by its
subsidiaries which have the effect of reducing the parent's percentage
equity holding.
As described in Note 3, during the quarter ended June 30, 1996, USA sold
884,667 shares of its common stock at $1.20 per share in a private placement
for $961,600 (net of costs of $100,000) and issued 250,000 shares of common
stock at $1.20 per share valued at $300,000 in connection with the
acquisition of USA Skate. Before these transactions, the Company owned 100%
of the outstanding common stock of USA. After these transactions, the
Company owned approximately 64% of the outstanding common stock of USA.
These transactions resulted in a gain from the issuance of stock by the
subsidiary of $479,100. Deferred income taxes related to this gain have been
included in the provision for income taxes.
12
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION:
The Company imports, manufactures, and distributes products in three participant
sports categories. In-Line Skates and related accessory products are marketed
under the brand names California Pro(R) and Rolling Thunder (TM), snowboards and
snowboard accessory products are marketed under the Kemper(R) brand, and since
May 1, 1996, ice and street roller hockey skates, sticks, related gear, and
accessories, as well as figure skates are marketed under the VICTORIAVILLE(TM),
VIC(R), Hespeler and McMartin brands. The Company purchases the majority of its
in-line skate products from a Taiwanese manufacturer which is a minority
shareholder of the Company. Substantially all of its snowboards are purchased
from an Austrian supplier, and snowboard accessory products are purchased from
both domestic and foreign suppliers. Substantially all hockey sticks sold are
manufactured by Davtec, a subsidiary, and skates and related gear are purchased
from foreign suppliers.
The Company sells its in-line skate products principally to major retail
sporting goods chains in North America and to U.S. Military Exchanges worldwide
through independent sales representative groups, under an exclusive royalty-free
perpetual license. Snowboard products are sold to regional sporting goods chains
and specialty shops through independent sales agencies in the U.S. and Canada
and directly by the Company to foreign distributors. Hockey products are sold
through a network of independent sales representative groups to major retail
sporting goods chains as well as smaller, specialized independent sporting goods
shops. The Company plans to pursue additional channels of distribution for all
of its brands. Internationally, hockey products are sold and distributed through
independent distributors located primarily in Germany, Switzerland, Italy,
Austria, Czechoslovakia, Sweden, Finland, France and Brazil.
The snowboard and hockey businesses are strongest during the third and fourth
quarters, however industry trade shows and other sales, marketing and
administrative costs are incurred during the first quarter.
13
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS:
The following table sets forth the Company's sales by major product category for
the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
---- ---- ---- ----
Dollars Percent Dollars Percent Dollars Percent Dollars Percent
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
In-line skates
and accessories $2,223 38% $3,606 72% $3,660 47% $6,384 81%
Snowboards and
accessories 377 6% 1,363 28% 727 9% 1,524 19%
Ice and street/roller
hockey(1) 3,371 56% 3,371 44%
-------- --- --------- ----- ------- --- ------ ---
$5,971 100% $4,969 100% $7,758 100% $7,908 100%
====== === ====== === ====== === ====== ===
- -----------------
(1) Sale of hockey products began May 1, 1996
</TABLE>
Three and Six Months Ended June 30, 1996 Compared to the Corresponding Periods
Ended June 30, 1995:
Net sales:
Sales for the three months ended June 30, 1996 increased by $1,002,156 or 20.2%.
This increase was attributable to the inclusion of approximately $3,371,000 of
sales by USA Skate subsequent to May 1, 1996. This increase was reduced by lower
sales of the Company's in-line skate and snowboard products of $1,383,000 and
$986,000, respectively. The reduction in the in-line skate sales was primarily
caused by high inventory levels of in-line skate products at some of the
Company's major retail accounts as well as the Company's competitors filling
their orders at a higher percent rate in 1996 than previously. Snowboard sales
decreased in 1996 compared to the same period in 1995 due to the Company's
foreign distributors taking delivery of their orders later in 1996 than in 1995.
14
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net sales (continued):
Net sales for the six months ended June 30, 1996 decreased by $150,416 or
approximately 1.9% compared to the six months ended June 30, 1995. The decrease
was caused by sales of the Company's in-line skate product lines and snowboard
product lines decreasing by approximately $2,784,000 and $797,000, respectively.
This decrease was partially offset by sales of approximately $3,371,000 related
to the acquisition of USA Skate.
Gross Profit: For the three months ended June 30, 1996 gross profit decreased by
$97,329 due to the higher sales volume in the 1996 period compared to the 1995
peroid. Gross profit as a percent of sales decreased from 29.2% to 25.9%,
primarily due to sales of some of the Company's in-line skate production at
below normal selling prices to reduce the Company's levels of in-line skate
inventory. This action was taken because management believes that some of its
competitors have excess inventory in stock which could ultimately result in
flooding the market. Gross profit decreased by $382,554 for the six month period
ended June 30, 1996 compared to the 1995 period, and as a percent of sales,
gross profit decreased from 28.9% to 24.5%.
Sales and marketing expenses:
Sales and marketing expenses for the three months ended June 30, 1996 increased
by $144,256 compared to the three months ended June 30, 1995. The increase was a
result of the sales and marketing expenses of $319,828 related to the revenues
of the Company's hockey business which it acquired May 1, 1996. This increase
was partially offset by a reduction of the Company's in-line skate and snowboard
related sales and marketing expense of commissions of $175,572, due to the lower
sales volume in the current period. Sales and marketing expenses for the six
months ended June 30,1996, decreased by $18,692 compared to the six months ended
June 30, 1995. The reduction was a result of the sales and marketing expenses of
the Company's in-line skate and snowboard business decreasing by approximately
$338,520 due to the reduction in sales, and the related reduction in commission
expense of $293,000, in those product lines. This was offset by the sales and
marketing expenses of $319,828 related to the Company's newly acquired hockey
business.
General and administrative expenses:
General and administrative expenses for the three months ended June 30, 1996
decreased by $181,202 compared to the same period in 1995. The decrease was
attributable to a reduction of general and administrative expenses within the
Company's in-line skate and snowboard business of $253,000 which was offset by
$72,000 of general and administrative expenses incurred within the Company's
recently acquired hockey business.
15
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
General and administrative expenses (continued):
During the six months ended June 30, 1996, general and administrative expenses
decreased by $269,169 compared to the six months ended June 30, 1995. General
and administrative expenses of the Company's in-line skate and snowboard related
products decreased by $257,083. The primary causes for this decrease is wages
and related benefits of $174,000, reduced insurance premiums (revenue based) of
$40,000 and other miscellaneous expenses of $44,000. This decrease was offset by
the general and administrative expenses of $72,000 associated with the newly
acquired (May 1, 1996) hockey business.
Depreciation and amortization:
Depreciation and amortization increased by $115,170 and $144,969 for the three
and six months ended June 30, 1996, respectively, compared to the periods ended
June 30, 1995. The increases are primarily attributable to the May 1 acquisition
of USA Skate and the corresponding increase in amortization expense associated
with such purchase.
Consulting fees:
Consulting fees increased for the three and six months ended June 30, 1996 by
$24,000 compared to the three and six months ended June 30, 1995 for services
provided to USA.
Income\loss from Operations:
For the three months ended June 30, 1996 and June 30, 1995 income from
operations was $147,525 and $152,420 respectively. The reason for the slight
decrease was income from operations received from the hockey business of
approximately $300,000 offset by an operating loss from the Company's in-line
skate and snow board business.
During the six months ended June 30, 1996, the Company had a loss from
operations of $474,657 compared to $210,995 for the six months ended June 30
1995. The primary reason for the increase in the loss was the lower sales and
gross profit of the Company's in-line skate business. This was partially offset
by the lower associated operating costs and income from operations from its
hockey business of approximately $300,000.
Other expense/income:
Other expenses/income improved from a net expense of $69,435 for the three
months ended June 30, 1995 to income of $629,374 for the three months ended June
30, 1996. In 1996, the Company received marketable securities from an affiliate
is payment of a related party receivable. At June 30, 1996, the market value of
such security had increased and the Company recognized an unrealized holding
gain of $416,637. Additionally, the Company satisfied $260,000 of payables to
officer/shareholders by transferring to two officers/shareholders a total of
216,667 shares of USA Skate Corporation (a subsidiary of the Company) ("USA")
common stock held by the Company. For purposes of satisfying the $260,000
payable, the USA common stock was valued at $1.20 per share which is the same
per share price as USA received in a recent private placement of its common
stock to third parties. The $1.20 per share amount exceeded the Company's
carrying value of the subsidiary's common stock by $.69 per share and,
accordingly, the Company recognized a gain of $111,366. Other income also
included an increase in royalty income of $40,534 resulting from the Company's
license for snowboard apparel being in effect for the entire period in 1996
compared to only three months for the same period in 1995. The Company also
recognized a gain of $479,100 from the issuance of USA common stock as described
in Note 7 of the consolidated financial statements. These
16
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other expense/income (continued):
increases in other income were offset by increased interest expense of $317,682
for the three months ended June 30, 1996 compared to June 30, 1995. The increase
in interest expense was attributable to increased borrowings under bank credit
lines for the Company's in-line skate and snowboard business as well as interest
expense on the lines of credit related to the hockey operations. Additionally,
interest expense has been affected by the issuance of promissory notes to the
former shareholders of USA Skate in connection with the acquisition of USA Skate
of $1,175,000, and USA's issuance of convertible promissory notes and
officer/shareholder notes of $2,515,000 and $1,080,000, respectively. For the
six months ended June 30, 1996 other expenses/income improved by $744,782 from
an expense of $177,511 to income of $567,271. The increase was attributable to
the gains recognized in the second quarter of $1,007,103 offset by increased
interest expense of $312,658.
Income tax benefit/expense:
The Company had an income tax expense of $303,000 for the three months ended
June 30, 1996 compared to $27,940 for the period ended June 30, 1995. The
increase is due directly to the increase in earnings before income taxes. For
the six months ended June 30, 1996 the Company had an income from expense of
$36,000 compared to an income tax benefit for the six months ended June 30,1995
of $132,360.
Net income:
Net income increased $429,278, or 787%, for the three months ended June 30, 1996
compared to the three months ended June 30, 1995. The net income for the six
months ended June 30, 1996 was $66,528 compared to a net loss of $256,146 for
the six months ended June 30, 1995. The primary reason for the increase in the
net income for the three month and six month periods was due to the increase in
other income discussed above plus the lower sales and gross profit in the
current six months of the Company's in-line skate business, partially offset by
a decrease in the regular operating expenses of the Company and income realized
from its newly acquired (May 1, 1996) hockey business.
Liquidity and capital resources:
At June 30, 1996, the Company had a working capital deficit of approximately
$1,583,446 compared to working capital of approximately $2,399,000 at December
31, 1995. The decrease in working capital is primarily related to debt issued
and assumed in the acquisition of USA Skate Co., Inc. ("USA Skate").
In May 1996, the Company, through its subsidiary USA Skate Corporation ("USA"),
completed the acquisition of all of the outstanding capital stock of USA Skate.
Consideration for the purchase consisted of $3,650,000 of cash, a $1,050,000 8%
installment note payable, 250,000 shares of USA common stock valued at $300,000,
and assumption of approximately $5,500,000 of debt. The purchase price was paid
with funds raised by USA, including the private placement of 884,667 shares of
common stock of USA for $961,600, the issuance of $1,080,000 of 9% notes payable
to certain officers/shareholders, and the issuance of $2,515,000 of 9%
convertible promissory notes due January 1997 (convertible to USA common stock
under certain conditions). The debt assumption was financed in part by a bank
loan from LaSalle National Bank to USA Skate. Additionally, the former
controlling shareholder of USA Skate signed consulting and noncompete agreements
in consideration for the issuance of 400,000 shares of the Company's common
stock valued at $900,000, and USA also entered into a worldwide exclusive
license agreement for use of certain trademarks owned by the former shareholder
in exchange for minimum oryalty payments due on or before December 2001, with an
imputed (9.5%) present value of $2,213,235.
The Company intends to continue to fund its hockey operations from two credit
facilities with banks, under $8,600,000 of revolving lines of credit agreements.
The Company has continued to fund its in-line skate and snowboard operations
from a separate credit facility with a bank, under a $5,500,000 revolving line
of credit agreement.
17
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and capital resources (continued):
For payments to suppliers, the Company currently utilizes trade acceptances,
which generally are payable upon receipt of documentation by the Company's bank,
but no later than time of delivery, utilizing available cash under the Company's
revolving line of credit
The Company's in-line skate sales are strongest late in the second and third
quarters of each calendar year. Snowboard product sales are strongest during the
last two quarters of each year. Hockey product sales are strongest during the
third and fourth quarters of each year.
18
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. Submission of matters to a vote of security holders.
None.
ITEM 5. Other information.
None.
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
None.
(b) Reports on Form 8-K
1. Form 8-K dated May 29, 1996, reporting "Acquisition or
Disposition of Assets" under Item 2, and reporting "Other
Events" under Item 5.
19
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CALIFORNIA PRO SPORTS, INC.
Dated: August 15, 1996 By: /s/Michael S. Casazza
---------------------------------
Michael S. Casazza
President/Chief Operating Officer
Dated: August 15, 1996 By: /s/Barry S. Hollander
--------------------------------
Barry S. Hollander
Chief Financial Officer
20
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,536,047
<SECURITIES> 789,745
<RECEIVABLES> 8,539,911
<ALLOWANCES> 527,000
<INVENTORY> 8,201,210
<CURRENT-ASSETS> 19,759,275
<PP&E> 2,178,407
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,377,725
<CURRENT-LIABILITIES> 21,342,721
<BONDS> 0
0
0
<COMMON> 42,195
<OTHER-SE> 6,042,876
<TOTAL-LIABILITY-AND-EQUITY> 31,377,725
<SALES> 7,757,522
<TOTAL-REVENUES> 7,757,522
<CGS> 5,858,597
<TOTAL-COSTS> 2,373,582
<OTHER-EXPENSES> (567,271)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 476,117
<INCOME-PRETAX> 92,614
<INCOME-TAX> 36,000
<INCOME-CONTINUING> 56,614
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,528
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