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 September 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.)
1221-B South Batesville Road, Greer, South Carolina 29650
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
8102 White Horse Road, Greenville, South Carolina 29611
----------------------------------------------------------
(Former Address) (Zip Code)
(864) 848-5160
--------------------------------------------------
(Registrant's 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 reports)
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 November 1, 1996.
Transitional Small Business Disclosure Format (Check One) YES NO X
----- -----
Page 1 of 25 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
SEPTEMBER 30, 1996
(UNAUDITED)
ASSETS
------
Current assets:
Cash $ 1,048,965
Accounts receivable, less allowance for
doubtful accounts of $381,000 10,275,377
Due from related parties 39,964
Inventories 6,977,911
Marketable securities (Note 5) 394,873
Prepaid expenses and other 907,924
-----------
Total current assets 19,645,014
-----------
Property and equipment, net of accumulated depreciation 2,276,344
Intangible and other assets, net of accumulated amortization 9,245,498
-----------
11,521,842
-----------
$31,166,856
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of:
Long-term debt $ 248,628
Due to related parties (Note 3) 718,750
License fee payable, related party (Note 3) 163,554
Notes payable:
Bank 11,684,089
Convertible promissory notes (Note 3) 2,518,000
Other 718,172
Officers/shareholders (Note 3) 1,060,000
Accounts payable and accrued expenses:
Accounts payable, PlayMaker 36,804
Other accounts payable, trade 2,946,731
Officers/Shareholders 600,000
Other accrued expenses 1,110,606
-----------
Total current liabilities 21,805,334
-----------
Long-term debt, net of current portion 461,376
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 2,958,517
-----------
Minority interest 967,627
-----------
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
Deficit (736,826)
Cumulative foreign currency translation adjustment 4,677
-----------
Total shareholders' equity 5,435,378
-----------
$31,166,856
===========
See notes to consolidated financial statements.
3
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Net sales $ 6,230,078 $ 3,783,828
----------- -----------
Cost of sales:
Substantially from a related party 683,391 1,828,082
Other 3,506,398 759,571
----------- ------------
4,189,789 2,587,653
----------- -----------
Gross profit 2,040,289 1,196,175
----------- -----------
Operating expenses:
Sales and marketing expense 684,091 407,687
General and administrative expense 1,057,253 501,276
Depreciation and amortization 320,340 133,869
Consulting fees, related party 60,000 30,000
----------- -----------
2,121,684 1,072,832
----------- -----------
Income (loss) from operations (81,395) 123,343
----------- -----------
Other expenses (income):
Interest expense:
Related party 50,682
Other 384,905 67,532
Foreign currency loss 4,962 4,367
Royalty and other income (67,966) (17,998)
Net unrealized holding loss (Note 5) 394,872
----------- ------------
767,455 53,901
----------- ------------
Income (loss) before income taxes and minority interest (848,850) 69,442
Income tax expense (benefit) (261,000) 5,500
------------ ------------
Income (loss) before minority interest (587,850) 63,942
Minority interest 43,334
----------- ------------
Net income (loss) $ (631,184) $ 63,942
============ ============
Net income (loss) per share $ (0.15) $ 0.02
=========== ============
Weighted average number
of shares outstanding 4,219,511 3,746,744
=========== ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
1996 1995
------------ ------------
<S> <C> <C>
Net sales $ 13,987,601 $ 11,691,767
------------ ------------
Cost of sales:
Substantially from a related party 3,112,007 6,416,656
Other 6,806,406 1,797,456
------------ ------------
9,918,413 8,214,112
------------ ------------
Gross profit 4,069,188 3,477,655
------------ ------------
Operating expenses:
Sales and marketing expense 1,674,394 1,468,456
General and administrative expense 2,101,290 1,598,715
Depreciation and amortization 739,575 408,136
Consulting fees, related party 140,000 90,000
------------ ------------
4,655,259 3,565,307
------------ ------------
Loss from operations (586,071) (87,652)
------------ ------------
Other expenses (income):
Interest expense:
Related party 87,284 2,840
Other 824,398 228,152
Foreign currency loss 40,783 34,991
Royalty and other income (170,073) (34,570)
Net unrealized holding gain (Note 5) (21,765)
Gain on sale of investment in subsidiary (Note 6) (111,366)
Gain from issuance of common stock
by subsidiary (Note 7) (479,100)
------------ ------------
170,161 231,413
------------ ------------
Loss before income taxes and minority interest (756,232) (319,065)
Income tax benefit 225,000 126,860
------------ ------------
Loss before minority interest (531,232) (192,205)
Minority interest 35,978
------------ ------------
Net loss $ (567,210) $ (192,205)
============ ============
Net loss per share $ (0.14) $ (0.05)
============ ============
Weighted average number of shares outstanding 4,029,779 3,531,393
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
CALIFORNIA PRO SPORTS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
foreign
Common stock Capital currency
------------------------ In excess translation
Shares Amount Warrants of par Deficit adjustment Total
------ ------ -------- --------- ------- ---------- -----
<S> <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 (Note 4) 36,000 360 107,640 108,000
Net loss for the nine months
ended September 30, 1996 (567,210) (567,210)
Cumulative foreign currency
translation adjustment $4,677 4,677
---------- --------- -------- ---------- ---------- ------ ----------
Balances, September 30, 1996 4,219,511 $ 42,195 $394,200 $5,731,132 $(736,826) $4,677 $5,435,378
========== ========= ======== ========== ========= ====== ==========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
Net loss $ (567,210) $ (192,205)
------------- -----------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Net unrealized holding gain (21,765)
Gain on sale of investment in subsidiary (111,366)
Gain from issuance of common stock by subsidiary (479,100)
Depreciation and amortization 739,575 408,136
Provision for bad debt 100,897 32,894
Minority interest 35,978
Decrease (increase) in assets:
Accounts receivable (3,344,437) 1,038,145
Due from related parties 479,976 (40,503)
Inventories 1,875,561 (371,872)
Prepaid expenses (564,992) (146,020)
Increase (decrease) in liabilities:
Accounts payable, PlayMaker (171,928) (2,382,228)
Other 447,062 (743,956)
------------ ----------
Total adjustments (1,014,539) (2,205,404)
------------ ----------
Net cash used in operating activities (1,581,749) (2,397,609)
------------ ----------
Cash flows from investing activities:
Payment for purchase of USA Skate
Co., Inc., net of cash acquired (3,551,760)
Payments for intangible assets (1,507,773)
Capital expenditures (317,886) (735,358)
Deferred financing costs (320,682)
------------ ----------
Net cash used in investing activities (5,377,419) (1,056,040)
------------ ----------
Cash flows from financing activities:
Decrease in bank overdraft (35,499)
Proceeds from notes payable and long term debt 11,534,625
Repayment of notes payable and long term debt (4,496,302) (1,620,273)
Net proceeds from issuance of common
stock by subsidiary 961,600
Net proceeds from issuance
of common stock and warrants 5,153,217
------------ -----------
Net cash provided by financing activities 7,999,923 3,497,445
------------ -----------
Net increase in cash 1,040,755 43,796
Cash beginning 8,210
------------ -----------
Cash ending $ 1,048,965 $ 43,796
============ ===========
</TABLE>
(Continued)
7
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
1996 1995
------------ ----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $ 820,161 $ 283,718
=========== ==========
Cash paid for income taxes $ 57,847 $ 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 183,334 shares of common stock
in cancellation of convertible note payable $ 412,500
==========
Deferred offering costs deducted from the
proceeds of the initial public offering $ 816,452
==========
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 Co., Inc., 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
===========
</TABLE>
See notes to consolidated financial statements.
8
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 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
nine months ended September 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. At September 30, 1996, the Company owns 100%
of the outstanding CP capital stock and 56.9% of the outstanding USA
capital stock. Minority interest represents USA's minority shareholders
43.1% share of the equity and net income (loss) of USA.
CP sells in-line skates and accessories, under the brand names California
Pro(R) and Rolling Thunder(TM), 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(R) brand name to retail sporting goods stores in North America and
distributors in Europe and Japan.
9
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
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 (the due date of which may be extended for six
months and which are convertible into 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. USA Skate also
entered into a worldwide, exclusive license agreement for use of certain
trademarks owned by the former controlling shareholder of USA Skate in
exchange for minimum royalty payments due on or before December 2001, with
a value of $2,213,235. Finder's fees, bank origination, legal, accounting
and other costs of the acquisition were approximately $1,284,000, including
guarantee fees to two officers/shareholders of $600,000 related to the
officers'/shareholders' providing personal guarantees of certain of the
debt assumed and issued in the transaction.
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(R) 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 Canadian
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.
10
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
3. Acquisition (continued):
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, Czech Republic, Sweden, Finland, France and Brazil.
The unaudited results of operations of the Company, for the nine months
ended September 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 $17,128,000 $23,512,000
Net loss $ (715,000) $ (293,000)
Loss per share $ (.17) $ (.08)
4. Shareholders' equity:
1996 Transactions:
Warrants:
The exercise prices of warrants to purchase 500,000 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 and
warrants to purchase 300,000 shares of common stock issued to a third party
consultant were extended from July 1996 to October 1997 of which the
exercise price for 150,000 shares was reduced from $3.25 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 nine months ended September 30, 1996, the Company issued 400,000
shares of the Company's common stock to the former controlling shareholder
of USA Skate at an agreed value of $900,000, or $2.25 per share, as
compensation under a consulting and noncompete agreement; and 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 issuance), in satisfaction of
a $108,000 account payable.
11
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
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
$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 overallotments. The Company sold the securities to the
Representative at a discount of 10% from the public offering price and paid
the Representative an expense 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
purchase common stock and the Warrants to purchase Warrants are exercisable
from 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 $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.
12
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
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 was
included in net income for the six months ended June 30, 1996. At September
30, 1996 the market value decreased by $394,872 from June 30, 1996.
Therefore, the Company recognized a net unrealized holding loss of $394,872
during the three months ended September 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. The
recorded cost of the USA shares transferred was $148,634 and the fair value
of those shares was $260,000 ($1.20 per share) resulting in a gain of
$111,366 on this transaction.
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 USA. After these transactions, the Company owned approximately 57%
of the outstanding common stock of USA. These transactions resulted in a
gain from the issuance of stock by the subsidiary of $479,100.
13
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
8. Inventories:
Inventories consist of:
Raw materials $ 642,204
Work-in-process 352,064
Finished goods 5,983,643
----------
$6,977,911
==========
9. Export Sales:
Sales by geographic regions were as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Canada $1,881,500 $ 144,668 $ 3,124,363 $ 511,826
Japan $ 93,257 $ 302,722 $ 428,884 $ 1,017,508
Europe and other $ 758,743 $ 165,577 $ 1,970,902 $ 535,396
---------- ---------- ----------- -----------
Total exports $2,733,500 $ 612,967 $ 5,524,149 $ 2,064,730
US Sales $3,496,578 $3,170,861 $ 8,463,452 $ 9,627,037
---------- ---------- ----------- -----------
Total Sales $6,230,078 $3,783,828 $13,987,601 $11,691,767
========== ========== =========== ===========
</TABLE>
14
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company imports, manufactures, and distributes products in three participant
sports categories: (1) in-line skates and related accessory products, under the
brand names California Pro(R) and Rolling Thunder(TM); (2) since August 1994,
snowboards and snowboard accessory products, under the Kemper(R) brand; and (3)
since May 1996, ice and street/roller hockey skates, sticks, related gear, and
accessories, as well as figure skates, under the VICTORIAVILLE(TM), VIC(R),
Hespeler(TM) and McMartin(R) brands. Management believes that continued product
refinement and new product designs and development, along with attractive
packaging and first class customer service are vital to sales growth. The
Company purchases most of its products from manufacturers in Taiwan, mainland
China, Austria and Canada. Some of the Company's accessory products are
purchased from domestic suppliers. Substantially all hockey sticks sold are
manufactured by an indirect Canadian 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 in
North America through a network of independent sales representative groups to
major retail sporting goods chains as well as smaller, specialized independent
sporting goods shops. Internationally, hockey products are sold to and
distributed by independent distributors located primarily in Germany,
Switzerland, Italy, Austria, Czech Republic, Sweden, Finland, France and Brazil.
15
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During the first quarter of 1995 the Company closed its IPO of 1,200,000 shares
of common stock and 1,380,000 common stock purchase warrants. After deducting
offering expenses, the Company received net proceeds from the offering of
approximately $4,200,000.
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 Nine Months Ended
September 30, September 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 $969 16% $2,671 71% $4,629 33% $9,055 77%
Snowboards an
accessories 522 8% 1,113 29% 1,249 9% 2,637 23%
Ice and street/roller
hockey(1) 4,739 76% -- -- 8,110 58% -- --
------ --- ------ --- ------- --- ------- ---
$6,230 100% $3,784 100% $13,988 100% $11,692 100%
====== === ====== === ======= === ======= ===
</TABLE>
- ----------
(1) Sale of hockey products began May 1, 1996.
The following table sets forth for the periods indicated the percentages which
selected items in the Consolidated Statements of Operations bear to net sales:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ----------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 100.0 100.0 100.0 100.0
Cost of Goods Sold 67.3 68.4 70.9 70.3
Gross Profit 32.7 31.6 29.1 29.7
Sales & Marketing Expenses 11.0 10.8 12.0 12.6
General & Admin. Expenses 17.0 13.2 15.0 13.7
Depreciation & Amortization 5.1 3.5 5.3 3.5
Consulting & Management Fees 1.0 .8 1.0 .7
Income (loss) from Operations (1.3) 3.3 (4.2) (.8)
Interest & Other Expenses 12.3 1.4 1.2 2.0
Income Tax Expense (Benefit) (4.2) .1 (1.6) (1.1)
Minority Interest .7 0.0 .3 0.0
------ ------ ------ -------
Net Income (Loss) (10.1) 1.7 (4.1) (1.7)
====== ====== ======= =======
</TABLE>
16
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Three and Nine Months Ended September 30, 1996 Compared to the Corresponding
Periods Ended September 30, 1995:
Net sales:
Sales for the three months ended September 30, 1996 increased to $6,230,078 from
$3,783,828 or by $2,446,250, representing a 64.7% increase. This increase was
attributable to the inclusion of approximately $4,739,000 of sales by USA Skate.
This increase was reduced by lower sales of the Company's in-line skate and
snowboard products of $1,702,000 and $591,000, respectively. Net sales for the
nine months ended September 30, 1996 increased to $13,987,601 from $11,691,767
or by $2,295,834 or approximately 19.6% compared to the nine months ended
September 30, 1995. The increase results from sales of USA Skate subsequent to
May 1, 1996 of approximately $8,110,000, and was partially offset by decreased
sales of the Company's in-line skate product lines and snowboard product lines
of approximately $4,426,000 and $1,388,000, 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 losing market share as new competitors have entered the
market, some of which may have more financial resources than the Company.
Gross Profit:
For the three months ended September 30, 1996 gross profit increased to
$2,040,289 from $1,196,175 or by $844,114 due to the higher sales volume in the
1996 period compared to the 1995 period. Gross profit as a percent of sales
increased to 32.7% from 31.6%. Gross profit increased to $4,069,188 from
$3,477,655 or by $466,777 for the nine-month period ended September 30, 1996
compared to the 1995 period and, as a percent of sales, gross profit decreased
from 29.7% to 29.1%. The increase in gross profit was primarily attributable to
the gross profit of USA Skate subsequent to the acquisition. The decrease in
gross profit as a percent of sales was primarily due to sales of some of the
Company's in-line skate products at reduced selling prices to lower 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.
Sales and marketing expenses:
Sales and marketing expenses for the three months ended September 30, 1996
increased to $684,091 from $407,687 or by $276,404 compared to the three months
ended September 30, 1995. The increase was a result of the sales and marketing
expenses of $345,421 related to the revenues of the Company's hockey business
which it acquired effective April 30, 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 $37,608, due to the lower sales volume in
the current period. Sales and marketing expenses for the nine months ended
September 30, 1996, increased to $1,674,394 from $1,468,456 or by $205,938
17
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Sales and marketing expenses (continued):
compared to the nine months ended September 30, 1995. The increase was a result
of the sales and marketing expenses of $665,249 related to the revenues of
$8,109,776 of the Company's hockey business acquired effective April 30, 1996.
This was partially offset by reduced commission expenses of $331,007 related to
the Company's in-line skate and snowboard businesses due to lower commissionable
sales. Additionally, the Company eliminated some other marketing expenses
related to its snowboard business by reducing its team rider staff and their
related travel expenses.
General and administrative expenses:
General and administrative expenses for the three months ended September 30,
1996 increased to $1,057,253 from $501,276 or by $555,977 compared to the same
period in 1995. The increase was attributable to $549,863 of general and
administrative expenses incurred within the Company's recently acquired hockey
business.
During the nine months ended September 30, 1996, general and administrative
expenses increased to $2,101,290 from $1,598,715 or by $502,575 compared to the
nine months ended September 30, 1995. General and administrative expenses of the
Company's in-line skate and snowboard businesses decreased by $295,970. The
primary causes for this decrease are wages and related benefits of approximately
$185,000, reduced insurance premiums (revenue based) of $50,000 and other
general and miscellaneous expenses of $61,000. This decrease was offset by the
general and administrative expenses of $723,544 associated with the newly
acquired (effective April 30, 1996) hockey business.
Depreciation and amortization:
Depreciation and amortization increased to $320,340 and $739,575 for the three
and nine months ended September 30, 1996, or by $186,471 and $331,439,
respectively, compared to the periods ended September 30, 1995. The increases
are primarily attributable to the acquisition of USA Skate, effective April 30,
1996, and the corresponding increase in amortization expense associated with
this purchase.
Consulting fees:
Consulting fees increased for the three and nine months ended September 30, 1996
to $60,000 and $140,000 or by $30,000 and $50,000, respectively, for the three
and nine months ended September 30, 1995 for services provided to USA after May
1, 1996.
18
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Income/loss from operations:
For the three months ended September 30, 1995 there was income from operations
of $123,343 compared to a loss from operations of $81,395 for the three months
ended September 30, 1996. The main reasons for the change are lower revenues and
gross profits of $2,293,000 and $840,000, respectively, resulting in an
operating loss of $510,000 in the Company's in-line skate and snowboard
businesses. Additionally, the Company had income from operations of its hockey
related business of approximately $429,000.
For the nine months ended September 30, 1996, loss from operations increased to
$586,071 from $87,652 for the comparable period ended September 30, 1995. The
primary reason for the increase in loss was lower sales of $5,814,000 and gross
profit of $2,327,000 of the Company's in-line skate and snowboard businesses, as
19
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Income/loss from operations (continued):
partially offset by reduced operating costs of $703,000 resulting in an
operating loss of $1,250,000 related to that business and income from operations
for its hockey operations of approximately $664,000.
Other expense/income:
Other expenses increased from $53,901 for the three months ended September 30,
1995 compared to $767,455 for the three months ended September 30, 1996.
Interest expense other and interest expense related party increased by $317,373
and $50,682, respectively. The main reason for the increases was additional bank
lines of credit assumed in the acquisition 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 and USA's issuance of convertible promissory notes and
officer/shareholder notes of $2,518,000 and $1,080,000, respectively.
In 1996 the Company received marketable securities from an affiliate as payment
of a related party receivable of $373,108 which the Company classified as
trading securities under SFAS No. 115. As of June 30, 1996 the market value of
these securities increased to $789,745 and the Company recognized a net
unrealized holding gain of $416,637 in the three and six months ended June 30,
1996. At September 30, 1996 the market value of the securities decreased from
June 30, 1996 by $394,872. Therefore, the Company recognized a net unrealized
holding loss of $394,872 during the three months ended September 30, 1996.
For the nine months ended September 30, 1996 other expenses decreased from
$231,413 in 1995 to $170,161 in 1996. Interest expense other and related party
increased by $596,246 and $84,444 for the same period in 1996 compared to 1995.
As stated in the three month analysis, this is due to increased borrowings
related to the bank lines of credit assumed in the acquisition of the hockey
related business, and increased debt issued in connection with the formation of
USA and its acquisition of USA Skate.
This increase of interest expense was offset by a year-to-date net increase of
$21,765 in the marketable securities the Company received from an affiliate in
payment of a related party receivable.
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
common stock held by the Company. For purposes of satisfying the $260,000
20
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other expense/income (continued):
payable, the USA common stock was valued at $1.20 per share, 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
USA'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 in effect for
the entire period in 1996 compared to only three months for the same period in
1995. The Company recognized a gain of $479,100 from the issuance of USA common
stock as described in Note 7 of the consolidated financial statements.
Income tax benefit/expenses:
The Company recorded an income tax benefit for the three months ended September
30, 1996 of $261,000 compared to an expense of $5,500 for the period ended
September 30, 1995. For the nine months ended September 30, 1996 the Company had
an income tax benefit of $225,000 compared to a benefit for the nine months
ended September 30, 1995 of $126,860.
Net income/loss:
Net income was $63,942 for the three months ended September 30, 1995 compared to
a loss of $631,184 for the three months ended September 30, 1996. The primary
reasons for the change were losses realized from operations and increases in
interest and other expenses in 1996 compared to the 1995 period.
Net loss increased to $567,210 from $192,205 for the nine months ended September
30, 1996 compared to September 30, 1995. The primary reason was the increase in
the loss from operations of the Company's in-line skate and snowboard
businesses.
Liquidity and Capital Resources:
The Company funds its in-line and snowboard operations principally through a
$5.5 million revolving credit facility with a bank, and, to a lesser degree,
loans from private investors and trade credit. During the first quarter of 1995,
the Company completed its IPO, realizing net proceeds of approximately $4.2
million after payment of offering expenses.
21
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued):
At September 30, 1996, the Company had a working capital deficit of
approximately $2,160,320 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.
In May 1996, the Company, through USA, completed the acquisition 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 (which may be extended for six months and are
convertible into 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 the Company's common
stock valued at $900,000, and USA Skate also entered into a worldwide exclusive
license agreement for use of certain trademarks owned by the former controlling
shareholder of USA Skate in exchange for minimum royalty 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.
Generally, invoices for the Company's in-line skate and snowboard products are
payable within 60 days. The Company's hockey products are sold customarily with
dating terms normal in the hockey industry. Historically, the Company has not
experienced significant write-offs with respect to trade receivables due to its
credit management procedures. Management believes its allowance for doubtful
accounts is adequate.
For payments to foreign 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.
22
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued):
Under the bank credit facility related to the Company's in-line skate and
snowboard businesses, the amount the Company may borrow is limited by the level
of its eligible accounts receivable and inventory. The U.S. and Canadian bank
credit facilities related to the Company's hockey business are structured the
same. Borrowing is limited to 50% of eligible inventory, plus 75% of accounts
receivable, and is collateralized by accounts receivable and inventory. Loans
under the agreements bear interest at one percent above the bank's prime rate
and are due on demand. The loan agreement also requires the respective operating
subsidiaries to maintain a certain tangible net worth and restricts its ability
to (i) incur additional obligations or debt; (ii) pay dividends on its capital
stock; (iii) enter into any transaction of merger, consolidation, acquisition or
sale of assets other than in the ordinary course of business, and (iv) pay
annual aggregate compensation of its officers and directors in excess of a
specified amount, unless the bank consents to such actions and waives or amends
the applicable restrictions in the loan agreement. At September 30, 1996, based
on the limitations described above, under the in-line skate/snowboard line of
credit the Company was eligible to borrow $3,396,000 and the outstanding balance
was approximately $3,281,000. Under the hockey products lines of credit, the
Company was eligible to borrow $7,890,000 and the outstanding balance was
approximately $7,792,000.
Seasonality
The Company's in-line skate and hockey related sales are strongest in the second
and third quarters of each calendar year. Snowboard product sales are strongest
during the third and fourth quarters of each calendar year. However, industry
trade shows and other sales, marketing and administrative costs typically
precede the strong selling seasons and, therefore, the Company anticipates that
it may incur a significant loss in the first quarter of each year, including
1997.
Foreign Exchange
The Company's products are principally purchased from suppliers located in
Taiwan, mainland China, Korea, Austria and Canada. The Company purchases its
in-line skate products for set prices negotiated annually in U.S. dollars at
exchange rates reset annually. The Company purchases its snowboards in Deutsche
Marks. The Company sells its snowboard and hockey products both domestically and
internationally. As a result, extreme exchange rate fluctuations could have a
significant effect on its sales, costs of goods sold and the Company's gross
margins. Further, if exchange rates fluctuate dramatically, it may become
uneconomical for the relationship between the Company and its suppliers to
continue. The Company does not engage in hedging transactions.
23
<PAGE>
Effect of Inflation
Management believes that inflation has not had a significant impact on its
business.
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/A dated May 15, 1996 as filed with the Commission
on July 30, 1996, reporting "Acquisition or Disposition of
Assets" under Item 2, and reporting "Other Events" under
Item 5.
24
<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: November 19, 1996 By: /s/ Michael S. Casazza
---------------------------
Michael S. Casazza
President/Chief Operating Officer
Dated: November 19, 1996 By: /s/ Barry S. Hollander
---------------------------
Barry S. Hollander
Chief Financial Officer
25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,048,965
<SECURITIES> 394,873
<RECEIVABLES> 10,275,377
<ALLOWANCES> 381,000
<INVENTORY> 6,977,911
<CURRENT-ASSETS> 19,645,014
<PP&E> 11,521,842
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,166,856
<CURRENT-LIABILITIES> 21,905,334
<BONDS> 0
0
0
<COMMON> 42,195
<OTHER-SE> 5,393,183
<TOTAL-LIABILITY-AND-EQUITY> 5,435,378
<SALES> 13,987,601
<TOTAL-REVENUES> 13,987,601
<CGS> 9,418,413
<TOTAL-COSTS> 4,804,159
<OTHER-EXPENSES> 170,161
<LOSS-PROVISION> 100,879
<INTEREST-EXPENSE> 911,682
<INCOME-PRETAX> (756,232)
<INCOME-TAX> (225,000)
<INCOME-CONTINUING> (531,232)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (567,210)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
