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 SEPTEMBER 30, 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
----------------------------------------------------
(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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 6,863,788 common shares, par value
$.01 per share, outstanding at November 5, 1996.
Transitional Small Business Disclosure Format YES [ ] NO [X]
Page 1 of __ 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, 1997
(UNAUDITED)
ASSETS
------
Current assets:
Cash .................................................... $ 737,858
Accounts receivable, less allowance
for doubtful accounts ................................. 701,252
Escrow receivable (Note 4) .............................. 997,127
Inventories (Note 6) .................................... 613,360
Prepaid expenses and other .............................. 331,229
----------
Total current assets ........................................ 3,380,826
----------
Property and equipment, net of
accumulated depreciation ................................ 195,150
Intangible and other assets, net
of accumulated amortization (Note 2) .................... 965,582
----------
1,160,732
----------
$4,541,558
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable:
Officers/shareholders (Note 3) ........................ $ 100
Convertible promissory notes, related parties ......... 1,569,000
Other ................................................. 767,717
Accounts payable and accrued expenses ................... 769,390
----------
Total current liabilities ................................... 3,106,207
----------
Deferred income taxes ....................................... 60,149
----------
Minority interest ........................................... 315,744
----------
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 6,863,788 shares .......................... 68,638
Warrants ................................................ 394,200
Capital in excess of par ................................ 9,467,423
Deficit ................................................. (8,880,863)
Cumulative foreign currency
translation adjustment ................................ 10,060
----------
Total shareholders' equity .................................. 1,059,458
----------
$4,541,558
==========
See notes to consolidated financial statements.
3
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net sales .............................. $ 2,073,117 $ 6,230,078
----------- -----------
Cost of sales:
Substantially from a related party ... 683,391
Other ................................ 1,459,838 3,506,398
----------- -----------
1,459,838 4,189,789
----------- -----------
Gross profit ........................... 613,279 2,040,289
----------- -----------
Operating expenses:
Sales and marketing expense .......... 366,138 684,091
General and administrative expense ... 1,172,878 1,057,253
Depreciation and amortization ........ 174,542 320,340
Consulting fees, related party ....... 60,000 60,000
----------- -----------
1,773,558 2,121,684
----------- -----------
Loss from operations ................... (1,160,279) (81,395)
----------- -----------
Other expenses (income):
Interest expense:
Related party ...................... 148,598 50,682
Other .............................. 177,635 384,905
Foreign currency loss (gain) ......... (25,437) 4,962
Royalty income and other ............. (22,262) (67,966)
Net unrealized holding loss .......... 394,872
Loss on sale of USA assets ........... 538,414
Other ................................ 314,743
----------- -----------
1,131,691 767,455
----------- -----------
Loss before income taxes and
minority interest .................... (2,291,970) (848,850)
Income tax benefit ..................... 128,208 261,000
----------- -----------
Loss before minority interest .......... (2,163,762) (587,850)
Minority interest ...................... (71,425) 43,334
----------- -----------
Loss before extraordinary item ......... (2,092,337) (631,184)
Extraordinary item, debt forgiveness ... 185,804
----------- -----------
Net loss ............................... $(1,906,533) $ (631,184)
=========== ===========
Loss per share before extraordinary item $ (.35) $ (.15)
Extraordinary item ..................... .03
----------- -----------
Loss per share ......................... $ (.32) $ (.15)
=========== ===========
Weighted average number
of shares outstanding ................ 5,895,039 4,219,511
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net sales .............................. $ 8,849,356 $13,987,601
----------- -----------
Cost of sales:
Substantially from a related party . 42,516 3,112,007
Other .............................. 6,389,469 6,806,406
----------- -----------
6,431,985 9,918,413
----------- -----------
Gross profit ........................... 2,417,371 4,069,188
----------- -----------
Operating expenses:
Sales and marketing expense ........ 1,203,309 1,674,394
General and administrative expense . 3,162,518 2,101,290
Depreciation and amortization ...... 566,510 739,575
Consulting fees, related party ..... 180,000 140,000
----------- -----------
5,112,337 4,655,259
----------- -----------
Loss from operations ................... (2,694,966) (586,071)
----------- -----------
Other expenses (income):
Interest expense:
Related party ........................ 297,337 87,284
Other ............................ 708,502 824,398
Foreign currency loss (gain) ....... (59,791) 40,783
Royalty income and other ........... (48,724) (170,073)
Net unrealized holding gain ........ (21,765)
Gain from issuance of common stock by subsidiary (479,100)
Gain on sale of investment in subsidiary (Note 8) (87,593) (111,366)
Loss on sale of marketable securities 62,392
Loss on sale of USA assets (Note 4). 538,414
Other .............................. 314,743
----------- -----------
1,725,280 170,161
----------- -----------
Loss before income taxes, minority interest
and extraordinary expense .......... (4,420,246) (756,232)
Income tax benefit ..................... 128,208 225,000
----------- -----------
Loss before minority interest and
extraordinary items ................ (4,292,038) (531,232)
Minority interest ...................... (772,968) 35,978
----------- -----------
Loss before extraordinary item ......... $(3,519,070) $ (567,210)
Extraordinary item, debt forgiveness ... 383,705
----------- -----------
Net loss ............................... $(3,135,365) $ (567,210)
=========== ===========
Loss per share before extraordinary item $ (.66) $ (.14)
Extraordinary item ..................... .07
----------- -----------
Loss per share ......................... $ (.59) $ (.14)
=========== ===========
Weighted average number
of shares outstanding .............. 5,293,473 4,029,779
=========== ===========
</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, 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 371,493 shares
of common stock in exchange
for 480,417 shares of the
Company's subsidiary stock (Note 9) 371,493 3,715 407,677 411,392
Issuance of 75,000 shares of
common stock in satisfaction
of 300,000 options to purchase
common stock (Note 5) ............. 75,000 750 69,563 70,313
Issuance of 175,000 shares of
common stock for consulting
and financial services (Note 5) ... 175,000 1,750 264,917 266,667
Issuance of 1,337,371 shares of
common stock in satisfaction of
$1,967,119 of liabilities (Note 5) 1,337,371 13,374 1,953,745 1,967,119
Issuance of stock options (Note 5) ... 42,500 42,500
Issuance of 175,413 shares of
common stock for extending
maturity date on certain
notes (Note 3) .................... 175,413 1,754 312,989 314,743
Issuance of 30,000 shares of
common stock upon the
exercise of options (Note 5) ....... 30,000 300 29,700 30,000
Net loss for the nine months
ended September 30, 1997 .......... (3,135,365) (3,135,365)
Foreign currency translation
adjustment ........................ 17,834 17,834
----------- -------- --------- ----------- ----------- -------- ----------
6,863,788 $ 68,638 $ 394,200 $ 9,467,423 $(8,880,863) $ 10,060 $1,059,458
=========== ======== ========= =========== =========== ======== ==========
</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, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ......................................... $(3,135,365) $ (567,210)
----------- -----------
Adjustments to reconcile net loss to net
cash used in operating activities:
Net unrealized holding gain .................. (21,765)
Extraordinary gain ........................... (383,705)
Gain on sale of investment in subsidiary ..... (87,593) (111,366)
Loss on sale of marketable securities ........ 62,392
Loss on sale of USA Assets ................... 538,414
Expense incurred upon issuance of common
stock and options .......................... 724,223
Gain on issuance of common stock by subsidiary (479,100)
Foreign currency (gain) loss ................. (59,791) 40,783
Depreciation and amortization ................ 566,510 739,575
Provision for bad debt ....................... 50,836 100,397
Minority interest ............................ (772,968) 35,978
Decrease (increase) in assets:
Accounts receivable ........................ (55,727) (3,384,720)
Escrow receivable .......................... (997,127)
Income taxes receivable .................... 221,624
Due from related parties ................... 479,976
Inventories ................................ 1,193,218 1,875,561
Prepaid expenses and other ................. 133,024 (564,992)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses ...... (31,472) 447,062
Payable to officers/shareholders and
other related parties .................... (171,928)
----------- -----------
Total adjustments ................................ 1,101,858 (1,014,539)
----------- -----------
Net cash used in operating activities ................ (2,033,507) (1,581,749)
----------- -----------
Cash flows from investing activities:
Payment from sale of USA Skate Co., Inc. ......... 14,500,000
Payment for purchase of USA Skate Co., Inc.,
net of cash acquired ........................... (3,551,760)
Payments for intangible assets ................... (1,507,773)
Capital expenditures ............................. (66,548) (317,886)
Proceeds from sale of marketable securities ...... 166,260
----------- -----------
Net cash provided by (used in) investing activities .. 14,599,712 (5,377,419)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable and long term debt ... 1,812,347 11,534,625
Repayment of notes payable, license fees
payable and long term debt ..................... (13,699,792) (4,496,302)
Net proceeds from issuance of common stock
by subsidiary .................................. 961,600
----------- -----------
Net cash provided by (used in) financing activities .. (11,887,445) 7,999,923
----------- -----------
Net increase in cash ................................. 678,760 1,040,755
Cash beginning ....................................... 59,098 8,210
----------- -----------
Cash ending .......................................... $ 737,858 $ 1,048,965
=========== ===========
</TABLE>
(Continued)
7
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest ......................... $ 768,932 $ 820,161
=========== ===========
Cash paid for income taxes ..................... $ 0 $ 57,847
=========== ===========
Supplemental disclosure of noncash
investing and financing activities:
Issuance of 371,493 shares of common
stock in exchange for 480,417 shares
of Company's subsidiary stock ................ $ 411,392
===========
Issuance of 1,337,371 shares in 1997
and 36,000 shares in 1996 of common
stock in satisfaction of amounts due ......... $ 1,967,119 $ 108,000
=========== ===========
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 (disposition) of USA Skate Co., Inc.,
net of cash acquired:
Fair value (cost) of assets acquired
(disposed of) .............................. $(16,937,947) $11,334,200
Intangibles ................................ 2,777,774
Liabilities (assumed) disposed of .......... 1,899,533 (9,210,214)
Fair value of assets exchanged ............. $(1,350,000)
Loss on disposition ........................ 538,414
------------ -----------
Total cash paid (received), net of cash acquired . $(14,500,000) $ 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, 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, and the Form 8-K filed September 29, 1997, which reported the sale
of substantially all of the assets of the Company's majority owned
subsidiary USA Skate Corporation ("USA"), the disclosures are adequate to
make the information presented not misleading. The results of operations for
the three and nine months ended September 30, 1997 and 1996 are not
necessarily indicative of the operating results for the full year. Certain
amounts reported in the 1996 financial statements have been reclassified to
conform with the 1997 presentation.
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 and nine months ended September 30, 1997, USA Skate
Corporation. USA was formed in 1995 to acquire USA Skate Co., Inc. (Note 3).
Intercompany transactions have been eliminated in consolidation. At
September 30, 1997, the Company owns 100% of the outstanding CP capital
stock and 62% of the outstanding USA capital stock. Minority interest
represents USA's minority shareholders' 38% share of the equity and net loss
of USA.
CP sells in-line skates and accessories under the brand names California
Pro(TM) 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(R) 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. 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 $1,061,000, the
issuance of $1,080,000 of 9% notes payable to certain officers/ shareholders
in July 1997, and the issuance of $2,518,000 of 9% convertible promissory
notes originally due January 1997. In January 1997 the Company extended the
convertible notes to July 1997 with interest adjusted to 12% during the
extension period. In July 1997, the Company negotiated with the convertible
noteholders to issue California Pro stock as additional consideration for
9
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
3. Acquisition (continued):
the noteholders to further extend their notes. The Company will issue stock
at the ten day average market price to equal 10% of each noteholder's
principal balance as of July 1, 1997 to extend the note until September 15,
1997. Beginning on September 15th and every thirty days thereafter, an
additional 5% of the outstanding principal (up to a maximum of 25%) will be
issued to extend the notes for an additional thirty days based on the ten
day average closing price as of each extension date.
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 non-compete 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 a substantial portion of the debt assumed
and issued in the transaction.
The cost of raising the capital necessary to complete the acquisition was
approximately $242,000.
4. Disposition of assets:
On September 12, 1997, the Company, through its majority-owned subsidiary,
USA, completed the sale of substantially all of the assets of USA's direct
and indirect operating subsidiaries, USA Skate and Davtec to Rawlings
Sporting Goods Company, Inc. and Rawlings Canada. Consideration to USA
consisted of $14.5 million cash, inclusive of $1 million retained in escrow
for purchase price adjustments and proven claims by the purchasers, and
assumption of trade payables and accrued liabilities related to the assets
purchased.
5. Shareholders' equity:
During the nine months ended September 30, 1997, the Company issued 507,926
shares of its common stock at prices from $1.00 to $2.00 per share (the
market value of the stock at the effective dates of issuance) to a third
party in consideration of its assumption of $719,479 of amounts due.
Additionally, the Company issued 172,645 shares of its common stock at $1.00
per share (the market value of the stock at the effective date of issuance)
in satisfaction of $172,645 of an amount payable and issued 390,133 shares
of common stock to two officers/directors at $1.00 to $2.00 per share (the
market value of the stock at the dates the Board of Directors authorized the
issuance) in satisfaction of $664,995 of accrued expenses and a $10,000 note
payable.
Effective April 1, 1997, the Company entered into an agreement with a third
party to provide financial consulting services. The agreement provides for
payment of compensation for up to 300,000 shares of the Company's stock
based on certain criteria and performance and, through September 30, 1997,
the Company has issued 175,000 shares at from $1.00 to $2.00 per share (the
market value of the stock on the effective date of the issuance). The
Company has recorded $266,667 of expenses for these services.
10
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
5. Shareholders' equity (continued):
The Company previously had issued 300,000 warrants to purchase common stock
of the Company. In exchange for those warrants, the Company issued 75,000
shares of its common stock at $.9375 per share (the market value of the
stock at the date the Board of Directors authorized the issuance). Of the
shares issued, 68,100 were issued to a third party and 6,900 were issued to
an officer/director who had previously purchased 27,500 of the warrants from
the third party.
During the quarter ended June 30, 1997, the Company agreed to issue 15,000
options at $1.00 at each of its three outside Board members. Additionally,
two individuals received 50,000 and 100,000 options, respectively, for
services provided to the Company. During the quarter ended September 30,
1997 one of the individuals exercised 30,000 options. The exercise price for
all of these options was below the fair market value of the stock the day of
the grants and, accordingly, the Company has recognized $42,500 of expenses.
During the quarter ended June 30, 1997, the Company granted options under
the 1994 Stock Option Plan to purchase 100,000 shares of common stock, at an
exercise price of $1.00 per share (the market value on the date of the
grant).
6. 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.
7. Inventories:
Inventories at September 30, 1997 were $613,360, all of which were finished
goods.
8. Export sales:
Sales by geographic region were as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Canada ......... $ 903,421 $ 1,881,500 $ 3,185,923 $ 3,124,363
Japan .......... 22,091 93,257 101,595 428,884
Europe and other 207,314 758,743 1,395,330 1,970,902
----------- ----------- ----------- -----------
Total exports 1,132,826 2,733,500 4,682,848 5,524,149
US sales ....... 940,291 3,496,578 4,166,508 8,463,452
----------- ----------- ----------- -----------
Total sales .... $ 2,073,117 $ 6,230,078 $ 8,849,356 $13,987,601
=========== =========== =========== ===========
</TABLE>
11
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
9. 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 costs of the USA shares transferred was $61,238 and the fair
value of these 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 these shares was $99,600 ($1.20 per share) resulting in a gain of
$42,550.
In June 1997, the Company issued 170,000 shares of its common stock to an
officer/director for 141,667 shares of USA common stock. Additionally, the
Company issued 133,333 shares of its common stock to acquire 250,000 shares
of USA stock that otherwise the Company would have been obligated to redeem.
The Company accounted for these transactions under the purchase method of
accounting, based upon the market value of the common stock issued by the
Company. The Company's ownership of USA was increased from 51% to 62.5% due
to these transactions.
In September 1997, the Company issued 68,160 shares of its common stock to a
third party for 88,750 shares of USA common stock.
10. Subsequent event:
On October 20, 1997, the Company signed a letter of intent to acquire, in a
stock exchange, all of the outstanding stock of ImaginOn, Inc. Exact terms
of the proposed merger are currently being negotiated, however, it is
anticipated that on a fully diluted basis, ImaginOn will receive at least
67% of the Company's outstanding common stock following completion of the
transaction. The companies expect to negotiate and sign a definitive
agreement within the next 60 days with closing scheduled for completion by
January 31, 1998. The letter of intent between the parties is subject to
certain conditions including completion of a satisfactory due diligence
investigation by both parties, the negotiation of a mutually acceptable
definitive agreement and required approval by the boards of directors and
stockholders of both companies. ImaginOn, Inc., based in San Carlos,
California, is a development stage company engaged in the business of
designing, manufacturing and selling consumer software products for the
rapidly growing "edutainment" CD/DVD ROM market as well as an internet
utility and an authoring tool. ImaginOn's proprietary technology,
Transformational Database Processing and Playback ("TDPP"), enables the
creation of new business and consumer products that provide user-friendly
and entertaining access to multimedia and mixed-format databases distributed
across local disk storage and networks.
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
have been marketed under the brand names California Pro(R) and Rolling
Thunder(TM) and since August 1994, snowboards and snowboard accessory products
are marketed under the Kemper(R) brand; and from May 1996 to September 12, 1997,
ice and street/roller hockey skates, sticks, related gear and accessories, as
well as figure skates were marketed under the Victoriaville(TM), Vic(R) and
McMartin(R) brands. The Company purchases most of its in-line skate and
snowboard 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 were manufactured by
Davtec and skates and related gear were purchased from foreign suppliers.
The Company sells its skate products principally to major retail sporting
goods chains in North America and to U.S. military exchanges world-wide, 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. Internationally, hockey products are sold to and distributed through
independent distributors located primarily in Germany, Switzerland, Italy,
Austria, Czech Republic, Sweden, France, Finland and Brazil.
On September 30, 1997, the Company had purchase orders for future delivery
of products of approximately $114,000, compared with approximately $1.5 million
at September 30, 1996. The decrease in the Company's backlog of orders is mostly
attributable to the sale of the Company's hockey business and reduction of
orders for the Company's in-line skate and snowboard products. The cause of such
reduction is due to the Company having lost market share as a result of
competitive pressures and new product development within these categories.
Additionally, new competitors, some with greater financial and other resources,
have entered the marketplace. New in-line soft boot technology and step-in
bindings for snowboards have been introduced by other competitors of the
Company. The decrease in product orders for future delivery is also a result of
USA Skate ("the hockey business") selling substantially all of its assets.
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
1997.
13
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the Company's sales by operating subsidiary
for the period indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
$ % $ % $ % $ %
--- --- --- --- --- --- --- ---
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
In-line skates, snowboards
and related accessories $ 116 6% $1,491 24% $1,072 12% $5,878 42%
Ice and street/roller
hockey (1) 1,957 94% 4,739 76% 7,777 88% 8,110 58%
------ ---- ----- --- ------ --- ----- ---
$2,073 100% $6,230 100% $8,849 100% $13,988 100%
====== ==== ====== ==== ====== ==== ======= ====
</TABLE>
____________
(1) Sale of hockey products began May 1, 1996 and ended September 12, 1997
due to the sale of the Company's hockey product business.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996
NET SALES. Sales for the three months ended September 30, 1997 decreased to
$2,073,117 from $6,230,078 for the three months ended September 30, 1996, or by
$4,136,961. Sales by USA Skate during the three months ended September 30, 1997
decreased to $1,957,000 from $4,739,000 for the three months ended September 30,
1996. The decrease was caused by the 1996 period included sales for the entire
three month period while the 1997 period included sales activity only through
August 31, 1997 as the Company was finalizing the sale of the assets of the
hockey business effective September 12, 1997. Sales of the Company's in-line
skate and snowboard products decreased from $1,491,000 to $116,000. The main
reasons for this decline was due to competitors entering the in-line skate
market with new product features that took away market share from the Company.
Sales for the nine months ended September 30, 1997 decreased to $8,849,000 from
$13,988,000 for the nine months ended September 30, 1996. Sales of the Company's
hockey products decreased to $7,777,000 from $8,110,000 in the 1997 period
compared to 1996. CP sales decreased to $1,072,000 for the nine months ended
September 30, 1997 from $5,878,000 for the comparable 1996 period. The reduction
in the CP sales was a result of the Company losing market share as new
competitors have entered the market as well as poor retail sell through of
retailers' existing inventory. This has caused some of the Company's competitors
to offer product significantly below their normal selling prices.
GROSS PROFIT. For the three months ended September 30, 1997, gross profit
decreased to $613,279 from $2,040,289 for the three months ended September 30,
1996 or by $1,427,010. The dollar decrease is mostly attributable to the lower
revenues. Gross profit as a percent of sales decreased from 32.7% for the three
months ended September 30, 1996 to 29.6% for the three months ended September
30, 1997. Gross profit for the nine months ended September 30, 1997 decreased to
$2,417,371 from $4,069,188 for the nine months ended September 30, 1996 or by
$1,651,817. Most of this decrease is attributable to lower revenues of all of
the Company's products in the 1997 period compared to the 1996 period.
Additionally, gross profit as a percent of sales decreased to 27.3% for the nine
months ended September 30, 1997 from 29.1% for the nine months ended September
30, 1996.
14
<PAGE>
SALES AND MARKETING EXPENSES. Sales and marketing expenses decreased to
$366,138 for the quarter ended September 30, 1996 from $684,091 for the quarter
ended September 30, 1996. The sales and marketing expense related to the
revenues of the Company's hockey business decreased to $308,720 for the quarter
ended September 30, 1997 from $345,421 for the quarter ended September 30, 1996.
Sales and marketing expenses for CP were reduced to $57,419 for the quarter
ended September 30, 1997 from $338,670 for the quarter ended September 30, 1996.
The CP decrease was mostly attributable to lower commissions of $39,225 due to
the lower revenues of CP products in the 1997 quarter compared to the 1996
quarter. Additionally, CP reduced its overall advertising $154,656 an other
marketing expenses (trade shows, catalogs and graphic design) by $109,214. Sales
and marketing expenses of the Company's hockey business for the nine months
ended September 30, 1997 increased to $989,842 from $665,249 for the nine months
ended September 30, 1996. This increase of $324,593 was as a result of including
sales and marketing expenses for all of 1997 through September 12, 1997 (the
date the assets were sold) compared to May 1, 1996 (the date the hockey business
was acquired) through September 30, 1996 for the nine months ended September 30,
1996. The increase of $324,593 was offset by a decrease in the sales and
marketing expenses of CP to $213,468 from $1,009,145 for the nine months ended
September 30, 1997 and 1996 respectively, or by $795,677. The decrease of
$795,677 related to CP's reduced commission expense of $211,473 in 1997 compared
to 1996 due to the lower revenues of CP. Additionally, CP reduced its overall
advertising programs by $457,582 and other marketing expenses (trade shows,
catalogs and graphic design) decreased by $126,622.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $1,172,878 for the three month period in 1997 from $1,057,253 for
the three month period in 1996. The general and administrative expenses of the
Company's hockey business increased to $605,298 for the three months ended
September 30, 1997 from $549,863 for the three months ended September 30, 1996.
Additionally, the general and administrative expenses of CP increased to
$567,580 for the three months ended September 30, 1997 from $507,350, or by
$60,190.
General and administrative expenses for the nine months ended September 30,
1997 were $3,162,518 compared to $2,101,290 for the nine months ended September
30, 1996. The general and administrative expenses of the Company's hockey
business increased to $1,774,302 for the nine months ended September 30, 1997
from $723,544 for the nine months ended September 30, 1996. The reason for the
increase was the inclusion through September 12, 1997 of the general and
administrative expenses in the 1997 period, compared to only May 1, 1996 through
September 30, 1996 for the nine month period ended September 30, 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
decreased to $174,542 for the three months ended September 30, 1997 from
$320,340 for the three months ended September 30, 1996. The depreciation and
amortization expense for the Company's ice hockey business was $226,987 for the
three months ended September 30, 1996 compared to $113,862 for the three months
ended September 30, 1997 or a reduction of $113,125. For the nine months ended
September 30, 1997, overall depreciation and amortization expense decreased to
$566,510 from $739,575 for the nine months ended September 30, 1996. This
decrease for the 1997 period reflects the decrease in the carrying value of
certain intangible assets related to the Company's in-line skate and snowboard
businesses, thereby reducing amortization as well as other intangible assets
becoming fully amortized at the end of the first quarter of 1996 which in effect
reduces the 1997 expense. Also, in the nine month period for 1997, depreciation
and amortization expense related to the Company's hockey business was $395,409
compared to $405,566 for the nine months ended September 30, 1996.
15
<PAGE>
CONSULTING FEES. Consulting fees remained the same at $60,000 for the three
months ended September 30, 1997 and 1996. For the nine months ended September
30, 1997, consulting fees increased to $180,000 from $140,000 for the nine
months ended September 30, 1996. The increase is attributable to including USA
fees for the full nine months in 1997 period compared to five months (acquired
in May 1996) for the 1996 period.
INCOME (LOSS) FROM OPERATIONS. For the three months ended September 30,
1997, the loss from operations was $1,160,279 compared to a loss of $81,395 for
the three months ended September 30, 1996. The primary reason for the increase
in the loss from operations is the reduced gross profit of $1,420,010 related to
the lower sales the Company experienced in the 1997 period compared to the 1996
period. The reduced gross profit was partially offset by lower operating
expenses of $348,126 in the 1997 period compared to the 1996 period as explained
in the above captioned expenses. For the nine months ended September 30, 1997,
the loss from operations was $2,694,966 compared to a loss of $586,071 for the
nine months ended September 30, 1996. The primary reasons for the increase in
the loss from operations are the reduced gross profit of $1,651,817 in the 1997
period compared to the 1996 period as a result of lower sales in 1997 than in
1996. Additionally, increased operating expenses of $457,078 as described in the
above-captioned explanation of expenses contributed to the increase in the
operating loss.
OTHER INCOME/EXPENSES. For the three months ended September 30, 1997, other
expenses were $1,1331,691 compared to $767,455 for the three months ended
September 30, 1996. The 1997 other expenses include total interest of $326,233,
foreign currency gains and royalty income of $47,699, note extension fees of
$314,743 and loss on the sale of substantially all the assets of the Company's
hockey business of $538,414. The 1996 three month period ending September 30,
1996 included interest of $435,587, a net unrealized holding loss of $394,872,
and royalty and other income of $67,966. For the nine months ended September 30,
1997, total other expenses were $1,725,280 compared to $170,161 for the nine
months ended September 30, 1996. The 1996 amount included gains from issuances
of common stock by a subsidiary of $479,100 and from sales of an investment in a
subsidiary of $111,366. Additionally, the 1997 period includes the loss on the
sale of USA assets of $538,414 as well as the note extension fee of $314,743.
INCOME TAX BENEFIT/EXPENSE. The Company had an income tax benefit for the
three and nine months ended September 30, 1997 of $128,208 compared to an income
tax benefit of $261,000 and $225,000 for the three and nine months periods ended
September 30, 1997 and 1996, respectively.
NET LOSS. The Company had a net loss for the three month period ended
September 30, 1997 of $1,906,533 compared to a net loss of $631,184 for the
three months ended September 30, 1996. The net loss for the nine months ended
September 30, 1997 was $3,133,365 compared to a net loss of $567,210 for the
nine months ended September 30, 1996. The primary reasons for the increases in
the net loss in the 1997 periods compared to 1996 were the increased operating
losses as described above, other income of $590,466 in 1996 and the loss on the
sale of the Company's hockey business assets and note extension fees of $538,414
and $314,743, respectively.
LIQUIDITY AND CAPITAL RESOURCES
On September 12, 1997, the Company sold substantially all of the asset of
its hockey business for $14,500,000 inclusive of $1,000,000 retained in escrow
for purchase price adjustments and proven claims by the purchasers, and
assumption of trade payables and accrued liabilities of approximately $1,600,000
related to the asset purchased. The proceeds were utilizied as follows:
16
<PAGE>
Secured revolving lines of credit $ 7,984,000
Convertible noteholders 949,000
Secured debt 519,000
Other notes 100,000
Shareholder notes 505,000
Payment to previous
USA Skate owners 2,678,000
Interest payments 85,000
Cash to escrow account 1,000,000
Cash in bank 680,000
-----------
$14,500,000
===========
At September 30, 1997, the Company had a working capital deficit of
approximately $_,125,381 compared to a working capital deficit of approximately
$5,264,000 at December 31, 1996. The change in working capital is primarily
related to reducing the amounts payable from proceeds received from the sale of
the Company's hockey business as well as converting debt to equity and
negotiating settlements less than the recorded liability. In conjunction with
this transaction, the Company acquired 141,667 shares of USA stock from an
officer/director in exchange for 170,000 shares of the Company's stock, and
acquired 250,000 shares of USA stock that otherwise the Company would have been
obligated to redeem. Management's plans to resolve the Company's immediate
financial difficulties and improve its liquidity position are described below:
On October 20, 1997, the Company signed a letter of intent to acquire, in a
stock exchange, all of the outstanding stock of ImaginOn, Inc. Exact terms of
the proposed merger are currently being negotiated, however, it is anticipated
that on a fully diluted basis, ImaginOn will receive at least 67% of the
Company's outstanding common stock following completion of the transaction. The
companies expect to negotiate and sign a definitive agreement within the next 60
days with closing scheduled for completion by January 31, 1998. The letter of
intent between the parties is subject to certain conditions including completion
of a satisfactory due diligence investigation by both parties, the negotiation
of a mutually acceptable definitive agreement and required approval by the
boards of directors and stockholders of both companies. ImaginOn, Inc., based in
San Carlos, California, is a development stage company engaged in the business
of designing, manufacturing and selling consumer software products for the
rapidly growing "edutainment" CD/DVD ROM market as well as an internet utility
and an authoring tool. ImaginOn's proprietary technology, Transformational
Database Processing and Playback ("TDPP"), enables the creation of new business
and consumer products that provide user-friendly and entertaining access to
multimedia and mixed-format databases distributed across local disk storage and
networks.
In addition, the Company announced that the exercise price of its publicly
traded common stock purchase warrants has been reduced from $6.00 to $2.50 per
share and the expiration date has been extended from January 18, 1998 to June
30, 1998.
Management is currently exploring the possibility of various other options,
including the sale of its license and trademark rights to the CP and Kemper
brands. Management believes that the successful implementation of one or more of
these options will provide the Company with the liquidity necessary to continue
as a going concern.
17
<PAGE>
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 of 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 USA, including the private placement of 884,667 shares of USA common
stock 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 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.
SEASONALITY
The Company's in-line skate 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.
FOREIGN EXCHANGE
The Company's non-manufactured products are principally purchased from
suppliers located in Taiwan, mainland China, Korea, Austria and Canada. The
Company purchases its in-line skate products in U.S. dollars. The Company
purchases its snowboards in Deutsche Marks. The Company sells its snowboard
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.
EFFECT OF INFLATION
Management believes that inflation has not had a significant impact on its
business.
18
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. Changes in Securities.
(a) N/A.
(b) N/A.
(c) During the three-month period covered by this report, the
Registrant issued the following securities:
On August 1, 1997, the Registrant issued 138,923 shares of its
common stock in exchange for the extension of the maturity date to September 15,
1997 on notes of USA (the Registrant's majority owned subsidiary). The amount
owed was based upon 10% of the outstanding principal and payment was made based
on $1.8125 per share of common stock, representing the average closing bid price
for the 10 days immediately preceding the date of issuance. The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.
In August 1997, 30,000 warrants were exercised, purchasing 30,000
shares of common stock.
On September 11, 1997, the Registrant issued 258,857 shares of its
common stock as payment for fees and forgiveness of debt to two
officers/shareholders of the Company. Payment was made based on $1.75 per share.
The Registrant relied on the exemption from registration provided by Section
4(6) of the Securities Act related to the issuance of these shares.
On September 12, 1997, the Registrant issued 68,160 shares of its
common stock to a third party, valued at $1.5625 per share representing the
closing price on the date the agreement was reached. These shares were issued in
exchange for 88,750 shares of common stock of USA. The Registrant transferred
the 88,750 shares of USA owned by the Registrant in payment of rent and other
related expenses based on a valuation of $1.20 per USA common share. The
individual returned the 88,750 shares of USA in exchange for 68,160 shares of
common stock of the Registrant.
On September 15, 1997, the Registrant issued 36,490 shares of its
common stock in exchange for the extensions of the maturity date to October 15,
1997 on notes of USA. The amount owed was based upon 5% of the outstanding
principal balance, and payment was based on $1.725 per share.
On September 30, 1997, the Registrant issued 114,979 shares of
common stock to an entity in exchange for assumption of certain trade payables
of the Registrant totalling $214,463. The Registrant relied on the exemptions
from registration provided by Section 4(2) and/or 4(6) of the Securities Act
because the recipient of these shares was an accredited investor.
On September 30, 1997, the Registrant issued 100,000 shares of
common stock to a consultant for services rendered during the three month period
ended September 30, 1997. Payment was made based on $1.92 per share,
representing the average close price of the common stock at the end of each
calendar month during the quarter ended September 30, 1997. The Registrant
relied on the exemption from registration provided by Section 4(b) of the
Securities Act related to the issuance of these shares.
On September 30, 1997, the Registrant issued 90,500 shares of its
common stock to an officer/shareholder in exchange for assumption of certain
note payables of the Registrant assumed by the officer/shareholder. The
Registrant relied on the exemption from registration provided by Section 4(b) of
the Securities Act related to the issuance of these shares.
ITEM 4. Submission of matters to a vote of security holders.
None.
19
<PAGE>
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, reporting an event of September 12,
1997, filed with the Securities and Exchange
Commission on September 29, 1997.
20
<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 5, 1997 By /S/ HENRY FONG
----------------------------
Henry Fong, Chairman
Dated: November 5, 1997 By /S/ BARRY S. HOLLANDER
----------------------------
Barry S. Hollander
Chief Financial Officer
21
<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 September 30, 1997, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 737,858
<SECURITIES> 0
<RECEIVABLES> 1,698,379
<ALLOWANCES> 0
<INVENTORY> 613,360
<CURRENT-ASSETS> 3,380,826
<PP&E> 195,150
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,541,558
<CURRENT-LIABILITIES> 3,106,207
<BONDS> 0
0
0
<COMMON> 68,638
<OTHER-SE> 970,700
<TOTAL-LIABILITY-AND-EQUITY> 1,059,458
<SALES> 8,849,356
<TOTAL-REVENUES> 8,849,356
<CGS> 6,431,985
<TOTAL-COSTS> 5,112,337
<OTHER-EXPENSES> 1,725,280
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,005,839
<INCOME-PRETAX> 4,420,246
<INCOME-TAX> 128,208
<INCOME-CONTINUING> (3,159,070)
<DISCONTINUED> 0
<EXTRAORDINARY> 383,705
<CHANGES> 0
<NET-INCOME> (3,135,365)
<EPS-PRIMARY> (.59)
<EPS-DILUTED> (.59)
</TABLE>
