UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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)
(864) 848-5160
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(Registrants 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 5,122,746 common shares, par value
$.01 per share, outstanding at May 16, 1997.
Transitional Small Business Disclosure Format YES [ ] NO [ X ]
Page 1 of 18 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
MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current assets:
Accounts receivable, less allowance for
doubtful accounts of $565,000 .................................. $ 3,072,307
Income taxes receivable .......................................... 225,070
Inventories (Note 6) ............................................. 5,199,571
Prepaid expenses and other ....................................... 455,864
-------------
Total current assets ........................................ 8,952,812
-------------
Property and equipment, net of accumulated depreciation ............. 1,886,717
Intangible and other assets, net of accumulated amortization (Note 2) 8,342,781
-------------
10,229,498
-------------
$ 19,182,310
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of:
Long-term debt ................................................. $ 177,289
License fee payable, seller .................................... 8,358
Notes payable:
Banks .......................................................... 6,387,307
Seller ......................................................... 606,250
Officers/shareholders (Note 3) ................................. 819,000
Convertible promissory notes, related parties .................. 2,518,000
Other .......................................................... 968,172
Accounts payable and accrued expenses ............................ 2,796,425
Payable to officers/shareholders ................................. 88,982
Income taxes payable and other ................................... 152,201
-------------
Total current liabilities .................................... 14,521,984
-------------
Long-term debt, net of current portion .............................. 383,849
Note payable, seller, net of current portion ........................ 287,500
License fee payable, seller, net of current portion ................. 2,309,523
Deferred income taxes ............................................... 59,989
-------------
Total long-term debt ......................................... 3,040,861
-------------
Minority interest ................................................... 611,516
-------------
Commitments and contingencies
Shareholders' equity (Note 4):
Preferred stock, $0.01 par value, authorized
5,000,000 shares; no shares issued
Common stock, $.01 par value; authorized
10,000,000 shares; issued and outstanding 5,122,746 shares ..... 51,227
Warrants ......................................................... 394,200
Capital in excess of par ......................................... 6,805,345
Deficit .......................................................... (6,242,741)
Cumulative foreign currency translation adjustment................ (82)
-------------
Total shareholders' equity 1,007,949
-------------
$ 19,182,310
=============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net sales .................................................. $ 2,765,809 $ 1,786,675
----------- -----------
Cost of sales:
Substantially from a related party ...................... 19,647 889,096
Other ................................................... 2,199,509 546,300
----------- -----------
2,219,156 1,435,396
----------- -----------
Gross profit ............................................... 546,653 351,279
----------- -----------
Operating expenses:
Sales and marketing expense ............................. 442,196 303,094
General and administrative expense ...................... 859,537 473,851
Depreciation and amortization ........................... 193,783 152,766
Consulting fees, related party .......................... 30,000 30,000
----------- -----------
1,525,516 959,711
----------- -----------
Loss from operations ....................................... (978,863) (608,432)
----------- -----------
Other expenses (income):
Interest expense:
Related party ......................................... 77,156
Other ................................................. 246,727 89,691
Foreign currency loss (gain) ............................ (45,943) 1,161
Royalty income and other ................................ (7,262) (15,000)
Gain on sale of investment in subsidiary (Note 8) ....... (87,593)
Loss on sale of marketable securities (Note 5) .......... 62,392
----------- -----------
245,477 75,852
----------- -----------
Loss before income taxes,
minority interest and extraordinary item................... (1,224,340) (684,284)
Income tax benefit ......................................... 293,000
----------- -----------
Loss before minority interest and extraordinary item ....... (1,224,340) (391,284)
Minority interest .......................................... (529,196)
----------- -----------
Loss before extraordinary item ............................. (695,144) (391,284)
Extraordinary item, debt forgiveness ....................... 197,901
----------- -----------
Net loss ................................................... $ (497,243) $ (391,284)
=========== ===========
Loss per share before extraordinary item ................... $ (.15) $ (.10)
Extraordiary item .......................................... .04
----------- -----------
Net loss per share ......................................... $ (.11) $ (.10)
=========== ===========
Weighted average number
of shares outstanding ................................... 4,704,214 3,783,511
=========== ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
CALIFORNIA PRO SPORTS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1997
(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> <C>
Balances, January 1, 1997 .......... 4,699,511 $ 46,995 $ 394,200 $6,386,332 $ (5,745,498) $ (7,774) $1,074,255
Issuance of 423,245 shares
of common stock in settlement
of accounts payable ($383,245),
accrued fees related ($30,000) and
notes payable shareholder ($10,000) 423,245 4,232 419,013 423,245
Net loss for the three months
ended March 31, 1997 .............. (497,243) (497,243)
Foreign currency
translation adjustment ............ 7,692 7,692
---------- ---------- ---------- ---------- ------------- ---------- ----------
Balances, March 31, 1997 ........... 5,122,756 $ 51,227 $ 394,200 $6,805,345 $ (6,242,741) $ (82) $1,007,949
========== ========== ========== ========== ============= ========== ==========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $ (497,243) $ (391,284)
----------- -----------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Extraordinary gain .................................. (197,901)
Gain on sale of investment in subsidiary ............ (87,593)
Loss on sale of marketable securities ............... 62,392
Foreign currency gain ............................... (45,943)
Depreciation and amortization ....................... 193,783 152,766
Provision for bad debts ............................. 19,805 10,215
Minority interest ................................... (529,196)
Decrease (increase) in assets:
Accounts receivable ............................... 1,379,809 1,742,592
Income taxes receivable ........................... (3,446)
Due from related parties .......................... (20,381)
Inventories ....................................... 15,346 (850,421)
Prepaid expenses and other ........................ 123,706 (185,801)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses ............. 1,039,586 (586,775)
Payables to officers/shareholders and
other related parties ............................ 30,000 688,131
----------- -----------
Total adjustments ..................................... 2,000,348 950,326
----------- -----------
Net cash provided by operating activities .................. 1,503,105 559,042
----------- -----------
Cash flows from investing activities:
Capital expenditures ..................................... (3,350) (40,035)
Proceeds from sale of marketable securities ............. 166,260
----------- -----------
Net cash provided by (used in) investing activities ........ 162,910 (40,035)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable and long term debt .......... 125,000 170,000
Repayments of notes payable, license fees payable
and long term debt .................................... (1,850,113) (584,844)
Deferred financing costs ................................ (95,806)
----------- -----------
Net cash used in financing activities ...................... (1,725,113) (510,650)
----------- -----------
Net increase (decrease) in cash ............................ (59,098) 8,357
Cash beginning ............................................. 59,098 8,210
----------- -----------
Cash ending ................................................ $ $ 16,567
=========== ===========
</TABLE>
(Continued)
6
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest .................................. $ 205,407 $ 75,941
=========== ===========
Cash paid for income taxes .............................. $ 0 $ 98,479
=========== ===========
Supplemental disclosure of noncash
investing and financing activities:
Issuance of 423,245 shares of common
stock in settlement of amounts due .................... $ 423,245
===========
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(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, 1996 Annual Report on Form
10-KSB, the disclosures are adequate to make the information presented not
misleading. The results of operations for the three months ended March 31,
1997 and 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 for the three months ended March 31, 1997, 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 March
31, 1997, the Company owns 100% of the outstanding CP capital stock and 51%
of the outstanding USA capital stock. Minority interest represents USA's
minority shareholders 49% share of the equity and net 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 portion 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 for the three
months ended March 31, 1997. Consideration for the purchase was $10.5
million and consisted of $3,650,000 (including approximately $98,000 of
cash acquired), 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 cash
portion of the purchase price was paid with funds raised by USA, including
the private placement of 884,667 shares of common stock of USA for
$1,061,600, the issuance of $1,080,000 of 9% notes payable to certain
officers/shareholders due in July 1997, and the issuance of $2,518,000 of
9% convertible promissory notes due July 1997.
8
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
3. Acquisition (continued):
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 also entered
into a worldwide, exclusive license agreement for use of certain trademarks
owned by the former shareholder in exchange for minimum royalty payments of
$3 million due on or before December 2001, recorded with a present value of
$2,213,235. The license agreement was modified in March 1997 to provide for
guaranteed minimum royalty payments as follows: $300,000 payable in
installments in 1997; $450,000 installments in June and December 1998; and
$300,000 semi-annual installments beginning in June 1999. Finder's fees,
bank origination, legal, accounting and other costs of the acquisition were
approximately $1.5 million, 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. 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.
The costs of raising the capital necessary to complete the acquisition was
approximately $242,000.
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.
4. Shareholders' equity:
During the quarter ended March 31, 1997, the company issued 383,245 shares
of its common stock at $1.00 per share (the market value of the stock at
the date the Board of Directors authorized the issuance) to a third party
in consideration of their assumption of $383,245 of accounts payable.
Additionally, the Company issued 40,000 shares of common stock at $1.00 per
share (the market value of the stock at the date the Board of Directors
authorized the issuance) in satisfaction of $30,000 of accrued but unpaid
consulting fees and $10,000 of a note payable.
9
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(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 December
31, 1996, the market value of these securities was $228,652. During the
quarter ended March 31, 1997, the Company sold the securities for $166,260
and reduced its bank indebtedness with the proceeds. The Company recorded a
loss of $62,392 on the transaction.
6. Inventories:
Inventories at March 31, 1997, consist of:
Raw materials $ 774,392
Work-in-process 460,607
Finished goods 3,964,572
----------
$5,199,571
==========
7. Export sales:
Sales by geographic regions were as follows:
Three months ended
March 31,
-----------------------
1997 1996
---------- ----------
Canada ......... $1,100,451 $ 34,365
Europe and other 455,975 569,894
---------- ----------
Total exports 1,556,426 604,259
US sales ....... 1,209,383 1,182,416
---------- ----------
Total sales .... $2,765,809 $1,786,675
========== ==========
8. Gain on sale of investment in subsidiary:
In March 1997, the Company satisfied $106,500 of payables by exchanging
88,750 shares of USA common stock from the Company's 1,783,333 USA shares.
The recorded cost of the USA shares transferred was $61,238 and the fair
value of those shares at the date of exchange was $106,500 ($1.20 per
share) resulting in a gain of $45,262 on this transaction.
In March 1997, the Company entered into an agreement with a third party for
that party to purchase 83,000 shares of USA common stock that the Company
owned. The recorded cost of the shares sold was $57,270 and the fair value
of those shares was $99,600 ($1.20 per share) resulting in a gain of
$42,330. The Company's ownership of USA was reduced from 56.5% to 51% due
to these two transactions.
10
<PAGE>
ITEM TWO
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), since August
1, 1994, 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 (TM) and McMartin brands.
Management believes that continual 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 the most of its in-line
skate products from manufacturers in Taiwan, mainland China, Austria and Canada.
Some of the company's accessory products are purchased from domestic suppliers.
Approximately 70% of all hockey sticks sold are manufactured by Davtec 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.
On March 31, 1997, the Company had purchase orders for future delivery of
products of approximately $2.3 million, compared with $2.6 million at March 31,
1996. The decrease in the Company's backlog of orders is attributable to a
reduction of orders for the Company's in-line skate and snowboard products of
approximately $160,000 and $1,814,000, respectively. The cause of such reduction
is due to the Company having lost market share as a result of competitive
pressures and new product development problems within these categories. New
competitors, some with greater financial and other resources, have entered the
market place. New in-line soft boot technology and step-in bindings for
snowboards have been introduced by other competitors of the Company. This
reduction has been partially offset by including $1,726,000 of USA Skate orders
related to the Company's ice hockey business acquired effective April 30, 1996.
Although purchase orders are subject to cancellation in the normal course of
business, the Company expects to fill most of the current orders by the end of
the third quarter of 1997.
11
<PAGE>
ITEM TWO
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 period indicated:
Three Months Ended
March 31
1997 1996
----------------- -----------------
Dollars Percent Dollars Percent
------- ------- ------- -------
(Dollars in thousands)
In-line skates and accessories . $ 451 16% $1,438 80%
Snowboards and accessories ..... 94 4% 349 20%
Ice and street/roller hockey (1) 2,221 80%
------ ------ ------ ------
$2,766 100% $1,787 100%
====== ====== ====== ======
------------
(1) Sale of hockey products began May 1, 1996
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO MARCH 31, 1996
NET SALES: Sales for the three months ended March 31, 1997 increased to
$2,765,809 from $1,786,675 for the three months ended March 31, 1996 or by
$979,134, representing a 54.8% increase. This increase was attributable to the
inclusion of approximately $2,221,000 of sales by USA Skate during the three
months ended March 31, 1997. This increase was offset by reduced sales of the
Company's in-line skate and snowboard products of $987,000 and $255,000,
respectively. The reduction in the in-line skate and snowboard sales was
primarily caused by high inventory levels 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 1997 than previously. Additionally, in-line and snowboard sales
decreased in 1997 compared to the same period in 1996 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 March 31, 1997, gross profit increased
to $546,653 from $351,279 or by $195,374 due to the higher sales volume in the
1997 period compared to the 1996 period. The increase in gross profit was
primarily attributable to the gross profit of USA Skate subsequent to the
acquisition. In both periods, the gross profit percentage was approximately 20%.
12
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SALES AND MARKETING EXPENSES: Sales and marketing expenses for the three months
ended March 31, 1997, increased to $442,196 from $303,094 or by $139,102
compared to the three months ended March 31, 1996. The increase was a result of
sales and marketing expenses of $351,000 related to the Company's hockey
business which it acquired April 30, 1996. This increase was partially offset by
a reduction of the Company's in-line skate and snowboard related sales and
marketing expenses of $212,000 comprised of a reduction of commissions of
$31,000, due to the lower sales volume in the current period, reduced
advertising and promotion expenses of $149,000, and reductions in other expenses
of $32,000.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses for the
three months ended March 31, 1997 increased to $859,537 from $473,851 or by
$385,686 compared to the same period in 1996. The increase was attributable to
$521,000 of general and administrative expenses within the Company's recently
acquired hockey business, offset by a reduction of $165,000 of expense related
to the Comapny's in-line skate and snowboard operations.
The primary reasons for the decrease are reduced wages and related benefits of
approximately $100,000, and reductions in other general and miscellaneous
expenses of $65,000.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization increased to
$193,783 for the three months ended March 31, 1997, or by $41,017 compared to
the period ended March 31, 1996. The increase is primarily attributable to the
acquisition of USA Skate, effective April 30, 1996, and the corresponding
increase in amortization expense associated with such purchase.
CONSULTING FEES: Consulting fees for the three months ended March 31, 1997
remained the same as compared to the quarter ended March 31, 1996.
LOSS FROM OPERATIONS: For the three months ended March 31, 1997, the loss from
operations was $978,863 compared to a loss from operations of $608,432 for the
three months ended March 31, 1996. The primary reason for the increase of
$370,431 in the operating losses in the 1997 period compared to the 1996 period
are increases in operating costs of $566,000. This increase was caused by
expenses incurred within the Company's newly acquired hockey business of
$912,000 offset by reduction in the Company's in-line skate and snowboard
operating costs pf $346,000. The increase in operating losses were also reduced
by the gross profit generated by the Company's hockey business of $196,000.
13
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OTHER EXPENSE/INCOME: Other expenses increased from $75,852 for the three months
ended March 31, 1996 to $245,477 for the three months ended March 31, 1997.
Interest expense other and interest expense related party increased by $157,036
and $77,156, respectively. The main reason for the increase was additional bank
lines of credit assumed in the acquisition of the hockey operations.
Additionally, interest expense was increased 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 $679,000, respectively.
In 1996, the Company received marketable securities form 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 December 31, 1996, the market value
of these securities was $228,652. During the quarter ended March 31, 1997, the
Company sold the securities for 166,260 and used the proceeds to reduce bank
indebtedness. The Company recorded a loss on the sale of $62,392.
INCOME TAX BENEFIT/EXPENSE: The Company had an income tax benefit for the three
months ended March 31, 1996 of $293,000.
NET LOSS: Net loss was $497,243 for the three months ended March 31, 1997
compared to a loss of $391,284 for the three months ended March 31, 1996. The
primary reasons for the change were increases in the losses from operations of
$370,431 as described above and increases in interest and other expenses in 1997
compared to the 1996 period of $169,625, as well as an income for benefit of
$293,000 in the 1996 period. These were offset by extraordinary income of
$197,901 for debt forgiveness and $529,196 of minority interest.
LIQUIDITY AND CAPITAL RESOURCES: During 1997, the Company has continued to fund
its U.S. operations principally through a $5.0 million revolving credit facility
with a bank, and, to a lesser degree, loans from private investors and trade
credit.
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. As of March 31, 1997, based
upon the agreed to formulas, the bank was undercollaterlized by $1,191,000.
Accordingly, there can be no further advances under the in-line skate and
snowboard line of credit. 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 the 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 to 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.
14
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
At March 31, 1997, based on the limitations described above, under the U.S.
hockey line of credit, the Company was eligible to borrow $2,221,000, and the
outstanding balance was approximately $2,211,000. Under the Canadian hockey line
of credit, the Company was eligible to borrow $1,908,000, and the outstanding
balance was approximately $2,663,000.
At March 31, 1997, the Company had a working capital deficit of approximately
$5,569,000 compared to a working capital deficit of approximately $5,264,000 at
December 31, 1996. the decrease in working capital is primarily related to
operating losses. In addition, as described in the foregoing paragraph, the
Company is in default on all three of its bank loan agreements. Management's
plans to resolve the Company's immediate financial difficulties and improve its
liquidity position and has already implemented some of these plans as further
described below:
During the fourth quarter of 1996, management implemented a plan for
restructuring the Company's operations. The plan's objectives are to return the
Company to profitability, primarily through implementation of product line
changes and a cost reduction program.
In addition, the Company has signed a distribution agreement with Skate Corp.
for California Pro and Kemper branded products, which management believes will
result in substantial selling and general and administrative cost reductions due
to consolidation of Company-wide activities at one location. Management is also
in the process of renegotiating its bank loan agreements in order to extend
their maturities.
Management is currently exploring the possibility of various other options,
including the sale of subsidiaries or license and trademark rights and an
initial public offering for Skate Corp. Management believes that the successful
implementation of one or more of these options, coupled with the restructuring
which has been implemented, and the renegotiated bank loan agreements will
provide the Company with the liquidity necessary to continue as a going concern.
In May 1996, the Company, through USA, completed the acquisition of the
outstanding capital stock of USA Skate. Consideration for the purchase was
$10,500,000 which consisted of $3,650,000 of cash (including approximately
$98,000 o cash acquired), 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 cash portion of the purchase price was paid with funds
raised by Skate Corp. including the private placement of 884,667 shares of Skate
Corp. common stock for $1,061,600, the issuance of $1,080,000 of 9% notes
payable to certain officers/shareholders, and the issuance of
15
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
$2,518,000 of 9% convertible promissory notes due January 1997 (which have been
extended to July 1, 1997 with interest adjusted to 12% during the extension
period, and are convertible into Skate Corp. 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 also
entered into a worldwide exclusive license agreement for use of certain
trademarks owned by the former 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.
For payments to foreign suppliers, the Company has utilized 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. For 1997, the Company has negotiated with its
suppliers to be paid 50% upon shipment and 50% on 90 day terms.
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 season 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
snowboard 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.
Management believes that inflation has not had a significant impact on its
business.
16
<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
None.
17
<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: May 20, 1997 By: /s/Michael S. Casazza
---------------------------------
Michael S. Casazza
President/Chief Operating Officer
Dated: May 20, 1997 By: /s/Barry S. Hollander
---------------------------------
Barry S. Hollander
Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Registrant's Quarterly Report on form
10-QSB for the quarter ended March 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 3,072,307
<ALLOWANCES> 565,000
<INVENTORY> 5,199,571
<CURRENT-ASSETS> 8,952,812
<PP&E> 1,886,717
<DEPRECIATION> 193,783
<TOTAL-ASSETS> 19,182,310
<CURRENT-LIABILITIES> 14,521,984
<BONDS> 0
0
0
<COMMON> 51,227
<OTHER-SE> 956,722
<TOTAL-LIABILITY-AND-EQUITY> 19,182,310
<SALES> 2,765,809
<TOTAL-REVENUES> 2,765,809
<CGS> 2,219,156
<TOTAL-COSTS> 1,525,516
<OTHER-EXPENSES> 245,477
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 323,883
<INCOME-PRETAX> (695,144)
<INCOME-TAX> 0
<INCOME-CONTINUING> (695,144)
<DISCONTINUED> 0
<EXTRAORDINARY> (197,901)
<CHANGES> 0
<NET-INCOME> (497,243)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
