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 JUNE 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
---------------------------------------------------
(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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 5,759,212 common shares, par value
$.01 per share, outstanding at August 14, 1997.
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
JUNE 30, 1997
(UNAUDITED)
<TABLE>
ASSETS
<S> <C>
Current assets:
Cash ................................................................... $ 103,802
Accounts receivable, less allowance for
doubtful accounts of $455,000 ........................................ 4,519,519
Income taxes receivable ................................................ 35,533
Inventories (Note 6) ................................................... 4,816,162
Prepaid expenses and other ............................................. 424,775
------------
Total current assets ...................................................... 9,899,791
------------
Property and equipment, net of accumulated
depreciation .............................................................. 1,863,334
Intangible and other assets, net of
accumulated amortization (Note 2) ......................................... 8,412,773
------------
10,276,107
------------
$ 20,175,898
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of:
Long-term debt ....................................................... $ 177,763
License fee payable, seller .......................................... 62,508
Notes payable:
Banks ................................................................ 7,473,654
Seller ............................................................... 643,750
Officers/shareholders (Note 3) ....................................... 679,000
Convertible promissory notes, related parties ........................ 2,518,000
Other ................................................................ 956,172
Accounts payable and accrued expenses .................................. 3,133,536
Income taxes payable and other ......................................... 152,201
------------
Total current liabilities .......................................... 15,796,584
------------
Long-term debt, net of current portion .................................... 350,496
Note payable, seller, net of current portion .............................. 225,000
License fee payable, seller, net of current portion ....................... 2,309,523
Deferred income taxes ..................................................... 60,150
------------
Total long-term debt ............................................... 2,945,169
------------
Minority interest ......................................................... 339,169
------------
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 5,759,212 shares ........... 57,592
Warrants ............................................................... 394,200
Capital in excess of par ............................................... 7,610,336
Deficit ................................................................ (6,974,330)
Cumulative foreign currency translation adjustment ..................... 7,178
------------
Total shareholders' equity ......................................... 1,094,976
------------
$ 20,175,898
============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net sales ........................................ $ 4,010,430 $ 5,970,847
----------- -----------
Cost of sales:
Substantially from a related party ............ 22,869 1,865,614
Other ......................................... 2,730,122 2,427,615
----------- -----------
2,752,991 4,293,229
----------- -----------
Gross profit ..................................... 1,257,439 1,677,618
----------- -----------
Operating expenses:
Sales and marketing expense ................... 394,975 676,974
General and administrative expense ............ 1,160,103 550,400
Depreciation and amortization ................. 198,185 252,719
Consulting fees, related party ................ 60,000 50,000
----------- -----------
1,813,263 1,530,093
----------- -----------
Income (loss) from operations .................... (555,824) 147,525
----------- -----------
Other expenses (income):
Interest expense:
Related party ............................... 71,583 36,622
Other ....................................... 284,140 363,554
Foreign currency loss (gain) .................. 11,589 34,659
Royalty income and other ...................... (19,200) (57,106)
Net unrealized holding gain ................... (416,637)
Gain for issuance of common stock by subsidiary (479,100)
Gain on sale of investment in subsidiary ...... (111,366)
----------- -----------
348,112 (629,374)
----------- -----------
Income (loss) before income taxes, and
minority interest ............................... (903,936) 776,899
Income tax benefit ............................... (303,000)
----------- -----------
Income (loss) before minority interest ........... (903,936) 473,899
Minority interest ................................ (172,347) 9,914
----------- -----------
Net income (loss) ................................ $ (731,589) $ 483,813
=========== ===========
Net income (loss) per share ...................... $ (.14) $ .12
=========== ===========
Weighted average number
of shares outstanding ......................... 5,270,492 4,081,313
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net sales ........................................ $ 6,776,239 $ 7,757,522
----------- -----------
Cost of sales:
Substantially from a related party ............ 42,516 2,987,275
Other ......................................... 4,929,631 2,741,350
----------- -----------
4,972,147 5,728,625
----------- -----------
Gross profit ..................................... 1,804,092 2,028,897
----------- -----------
Operating expenses:
Sales and marketing expense ................... 837,171 990,282
General and administrative expense ............ 1,989,640 1,014,037
Depreciation and amortization ................. 391,968 419,235
Consulting fees, related party ................ 120,000 80,000
----------- -----------
3,338,779 2,503,554
----------- -----------
Loss from operations ............................. (1,534,687) (474,657)
----------- -----------
Other expenses (income):
Interest expense:
Related party ............................... 148,739 36,622
Other ....................................... 530,867 439,495
Foreign currency loss (gain) .................. (34,354) 35,821
Royalty income and other ...................... (26,462) (72,106)
Net unrealized holding gain ................... (416,637)
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 (Note 5) 62,392
----------- -----------
593,589 (567,271)
----------- -----------
Income (loss) before income taxes, minority
interest and extraordinary items ................ (2,128,276) 92,614
Income tax benefit ............................... (36,000)
----------- -----------
Income (loss) before minority interest and
extraordinary items ............................. (2,128,276) 56,614
Minority interest ................................ (701,543) 9,914
----------- -----------
Income (loss) before extraordinary item .......... (1,426,733) 66,528
----------- -----------
Extraordinary item, debt forgiveness ............. 197,901
----------- -----------
Net income (loss) ................................ $(1,228,832) $ 66,528
=========== ===========
Income (loss) per share before extraordinary item $ (.29) $ .02
Extraordinary item ............................... .04
----------- -----------
Net income (loss) per share ...................... $ (.25) $ .02
=========== ===========
Weighted average number
of shares outstanding ......................... 4,986,747 3,933,235
=========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
CALIFORNIA PRO SPORTS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 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 303,333 shares
of common stock in exchange
for 391,667 shares of the
Company's subsidiary stock (Note 8) 303,333 3,033 325,099 328,132
Issuance of 75,000 shares
of common stock in satisfaction
of 300,000 options to purchase
common stock (Note 4) ............. 75,000 750 69,563 70,313
Issuance of 75,000 shares of
common stock for consulting
and financial services (Note 4) ... 75,000 750 74,250 75,000
Issuance of 606,368 shares of
common stock in satisfaction of
$718,656 of liabilities (Note 4) .. 606,368 6,064 712,592 718,656
Issuance of stock options (Note 4) 42,500 42,500
Net loss for the six months ended
June 30, 1997 ..................... (1,228,832) (1,228,832)
Foreign currency
translation adjustment ........... 14,952 14,952
---------- ---------- ---------- ---------- ----------- ---------- ----------
Balances, June 30, 1997 ........... 5,759,212 $ 57,592 $ 394,200 $7,610,336 $(6,974,330) $ 7,178 $1,094,976
========== ========== ========== ========== ============ ========== ==========
</TABLE>
See notes to consolidated financia statements.
6
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................. $(1,228,832) $ 66,528
----------- -----------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Net unrealized holding gain ............... (416,637)
Extraordinary gain ........................ (197,901)
Gain on sale of investment in subsidiary .. (87,593) (111,366)
Loss on sale of marketable securities ..... 62,392
Expense incurred upon issuance of common
stock and options ........................ 187,813
Gain on issuance of common stock by subsidiary (479,100)
Foreign currency (gain) loss .............. (34,354) 35,821
Depreciation and amortization ............. 391,968 419,235
Provision for bad debts ................... 50,836 57,300
Minority interest ......................... (701,543) (9,914)
Decrease (increase) in assets:
Accounts receivable ..................... (67,404) (1,604,595)
Income taxes receivable ................. 186,091
Due from related parties ................ 478,853
Inventories ............................. 398,755 652,262
Prepaid expenses and other .............. 154,795 (308,323)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses ... 1,443,720 778,179
Payable to officers/shareholders and
other related parties .................. (22,178)
----------- -----------
Total adjustments ........................... 1,734,366 (508,285)
----------- -----------
Net cash provided by operating activities ........ 505,534 (441,757)
----------- -----------
Cash flows from investing activities:
Payment for purchase of USA Skate
Co., Inc., net of cash acquired .............. (3,551,760)
Payments for intangible assets ................ (1,507,773)
Capital expenditures .......................... (56,962) (141,064)
Proceeds from sale of marketable securities ... 166,260
----------- -----------
Net cash provided by (used in) investing activities 109,298 (5,200,597)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable and long term debt 1,449,347 10,146,443
Repayments of notes payable, license fees
payable and long term debt ................... (2,019,475) (3,937,852)
Net proceeds from issuance of
common stock by subsidiary ................... 961,600
----------- -----------
Net cash provided by (used in) financing activities (570,128) 7,170,191
----------- -----------
Net increase in cash ............................. 44,704 1,527,837
Cash beginning ................................... 59,098 8,210
----------- -----------
Cash ending ...................................... $ 103,802 $ 1,536,047
=========== ===========
</TABLE>
(Continued)
7
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Supplemental disclosure of
cash flow information:
Cash paid for interest ........................ $ 458,659 $ 490,411
=========== ===========
Cash paid for income taxes .................... $ 0 $ 51,448
=========== ===========
Supplemental disclosure of noncash
investing and financing activities:
Issuance of 303,333 shares of
common stock in exchange for
391,667 shares of Company's
subsidiary stock ............................ $ 328,132
===========
Issuance of 606,368 shares in 1997
and 36,000 shares in 1996 of common
stock in satisfaction of amounts due ........ $ 718,656 $ 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 of USA Skate Co. Inc., net
of cash acquired:
Fair value of assets acquired ............. $11,334,200
Goodwill .................................. 2,777,774
Liabilities assumed ....................... (9,210,214)
Fair value of assets exchanged ............ (1,350,000)
-----------
Total cash paid, net of cash acquired ......... $ 3,551,760
===========
</TABLE>
See notes to consolidated financial statements.
8
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 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, the disclosures are adequate to make the information presented not
misleading. The results of operations for the three and six months ended
June 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 six months ended June 30, 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 June 30, 1997, the Company owns 100% of the outstanding CP capital stock
and 62.5% of the outstanding USA capital stock. Minority interest
represents USA's minority shareholders 37.5% 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(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. 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 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. The Company is currently
negotiating with the convertible noteholders and is considering offering
some additional consideration such as California Pro stock for the
noteholders to further extend their notes.
9
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 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 a substantial portion of the debt assumed
and issued in the transaction.
The costs of raising the capital necessary to complete the acquisition was
approximately $242,000.
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.
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 six months ended June 30, 1997, the Company issued 392,947
shares of its common stock at prices from $1.00 to $1.8125 per share (the
market value of the stock at the effective dates of issuance) to a third
party in consideration of its assumption of $505,016 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
40,776 shares of common stock to two officers/directors at $1.00 to
$1.28125 per share (the market value of the stock at the dates the Board of
Directors authorized the issuance) in satisfaction of $30,995 of accrued
expenses and a $10,000 note payable.
10
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
4. Shareholders' equity (continued):
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 June 30, 1997, the
Company has issued 75,000 shares at $1.00 (the market value of the stock on
April 1, 1997.)
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 (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 ending June 30, 1997, the Company agreed to issue 15,000
options at $1.00 to each of its three outside Board members. Additionally,
two individuals received 50,000 and 100,000 options, respectively, for
services provided to the Company. The exercise price for all of these
options were 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).
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 June 30, 1997, consist of:
Raw materials $ 823,428
Work-in-process 513,598
Finished goods 3,479,136
---------------
$ 4,816,162
===============
11
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
7. Export sales:
Sales by geographic regions were as follows:
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
Canada ........... $1,182,051 $1,216,203 $2,282,502 $1,250,568
Europe and other . 811,545 1,248,521 1,267,520 1,818,415
---------- ---------- ---------- ----------
Total exports .. 1,993,596 2,464,724 3,550,022 3,068,983
US sales ......... 2,016,834 3,506,123 3,226,217 4,688,539
---------- ---------- ---------- ----------
Total sales ...... $4,010,430 $5,970,847 $6,776,239 $7,757,522
========== ========== ========== ==========
8. 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.
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.
12
<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 have been
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), and McMartin(R) 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 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 June 30, 1997, the Company had purchase orders or future delivery of products
of approximately $2.9 million, compared with $5.2 million at June 30, 1996. The
decrease in the Company's backlog of orders is mostly attributable to a
reduction of orders for the Company's in-line skate and snowboard products of
approximately $1.4 million. 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 market place. 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 orders related to the
Company's ice hockey business decreasing by $.9 million. 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.
13
<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
June 30,
1997 1996
---- ----
Dollars Percent Dollar Percent
------- ------- ------ -------
(Dollars in thousands)
In-line skates and accessories . $ 188 5% $2,223 37%
Snowboards and accessories ..... 223 6% 377 6%
Ice and street/roller hockey (1) 3,599 89% 3,371 57%
------ ------ ------ ------
$4,010 100% $5,971 100%
====== ====== ====== ======
Six Months Ended
June 30,
1997 1996
---- ----
Dollars Percent Dollar Percent
------- ------- ------ -------
(Dollars in thousands)
In-line skates and accessories $ 639 9% $3,660 47%
Snowboards and accessories 317 5% 727 9%
Ice and street/roller hockey (1) 5,820 86% 3,371 44%
------ ------ ------ ------
$6,776 100% $7,758 100%
====== ====== ====== ======
____________
(1) Sale of hockey products began May 1, 1996
THREE AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO JUNE 30, 1996
NET SALES: Sales for the three months ended June 30, 1997 decreased to
$4,010,430 from $5,970,847 for the three months ended June 30, 1996 or by
$1,960,417. Sales by USA Skate during the three months ended June 30, 1997
increased to $3,599,000 from $3,371,000 for the three months ended June 30, 1996
or by $228,000. This increase was offset by reduced sales of the Company's
in-line skate and snowboard products of
14
<PAGE>
$2,035,000 and $154,000, respectively, for the comparable three months ended
June 30, 1997 and 1996. For the six months ended June 30, 1997, sales decreased
to $6,776,239 from $7,757,522 for the six months ended June 30, 1996, or by
$981,283. Sales of the Company's ice hockey business increased from $3,371,000
to $5,820,000 as such sales reflect sales during the entire period in 1997
compared to only May and June for the six month period ended June 30, 1996
(acquired May 1, 1996). This increase was offset by decreases in the in-line
skate and snowboard sales of $3,021,000 and $410,000, 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 entered the market, some of which may have more financial resources
than the Company.
GROSS PROFIT: For the three months ended June 30, 1997, gross profit decreased
to $1,257,439 from $1,677,618 for the three months ended June 30, 1996, or by
$420,179. As a percent of sales gross margin increased from 28.1% to 31.3%. For
the six months ended June 30, 1997, gross profit decreased to $1,804,092 from
$2,028,897 for the six months ended June 30, 1996, or by $224,805. Gross profit
as a percent of sales increased from 26.1% in 1996 to 26.6% in 1997. The
increase in the gross margin for the three and six months ended June 30, 1997,
is a result of a higher percent of total sales for the period being related to
the Company's ice hockey business which generates higher margins than the
in-line skate and snowboard businesses compared to the three and six months
ended June 30, 1996.
SALES AND MARKETING EXPENSES: Sales and marketing expenses decreased from
$676,974 for the quarter ended June 30, 1996 to $394,975 for the quarter ended
June 30, 1997. The main reasons for the decrease were reduced sales and
marketing expenses related to in-line skating and snowboards of $201,097 due to
the decline in revenues of those product lines. This decrease was offset by
including expenses related to ice hockey for the entire three month period in
1997 compared to only two months in the 1996 period (acquired May 1, 1996). For
the six months ended June 30, 1997, sales and marketing expenses were $837,171
compared to $990,282 for the six months ended June 30, 1996, representing a
decrease of $153,111. Sales and marketing expense of USA Skate for the six
months ended June 30, 1997 were $681,122 compared to $319,828 for the six months
ended June 30, 1996. This increase of $361,294 was due to the fact that 1997
period included expenses for the whole six month period, while the 1996 period
included expenses only for a two-month period since USA Skate was acquired May
1, 1996. This increase of $361,294 was offset by a decrease of $514,405 of sales
and marketing expenses related to the Company's in-line skate and snowboard
business. Advertising and promotional expenses represents $430,407 of the
decrease, while other marketing expenses (trade shows, catalogs, and graphic
design) decreased by $83,998.
15
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
increased from $550,400 for the quarter ended June 30, 1996 to $1,160,103 for
the quarter ended June 30, 1997. The increase of $609,703 was primarily caused
by the inclusion of USA Skate for the full three months in 1997 of $690,050
compared to two months (acquired May 1, 1996) in 1996 of $173,681. Additionally,
a portion of the increase was attributable to an increase in consulting expense
of $215,000.
During the six months ended June 30, 1997, general and administrative expenses
increased to $1,989,640 from $1,014,037 for the six months ended June 30, 1996.
Substantially all of the increase was caused by the inclusion of $1,169,004 for
the Company's ice-hockey business for the full period in 1997 compared to
$173,681 for the 1996 period (acquired May 1, 1996). Additionally, there were
net reductions in the general and administrative expense related to the
Company's in-line skate and snowboard business. The Company had decreases in
salaries and related benefits of $118,045, other general and administrative
expenses (telephone, data processing, supplies, postage, etc) of $78,411 and a
reduction in general corporate expenses of $75,337. These reductions were offset
by increase in consulting and legal fees of $243,563 and $47,950, respectively.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense decreased
from $252,719 for the three months ended June 30, 1996 to $198,185 for the three
months ended June 30, 1997. This decrease is primarily attributable to a
reduction in the carrying value of certain intangible assets related to the
Company's in-line skate and snowboard business, which resulted in a decrease of
$42,468 of amortization expense. Deprecation and amortization for the Company's
ice hockey business was $155,041 for the three months ended June 30, 1996
compared to $142,975 for the three months ended June 30, 1997 or a reduction of
$12,066. For the six months ended June 30, 1997, overall depreciation and
amortization expense decreased to $391,968 from $419,235 for the six months
ended June 30, 1996. This decrease for the 1997 six month period reflects the
decrease in the carrying value of certain intangible assets related to the
Company's in-line skate and snowboard business, thereby reducing amortization
expense by $42,468 as well as certain other intangible assets becoming fully
amortized at the end of the first quarter of 1996 which reduced the 1997 expense
by an additional $11,305. These reductions were partially offset by an increase
in deprecation and amortization expense related to the Company's ice hockey
business, primarily as a result of the amortization due to the acquisition of
certain intangibles being included for the full six months ended June 30, 1997
compared to only two months for the six months ended June 30, 1996 (acquired May
1, 1997).
CONSULTING FEES: Consulting fees increased by $10,000 and $40,000 for the three
and six months ended June 30, 1997, respectively, compared to the periods ended
June 30, 1996. The increases are attributable to including USA Skate fees for
the full three and six month periods in 1997 compared two months (acquired May
1996) for the 1996 period.
INCOME (LOSS) FROM OPERATIONS: For the three months ended June 30, 1997, the
loss from operations was $555,824 compared to income from operations of $147,525
for the three months ended June 30, 1996. The primary reasons for the loss from
operations are the reduced gross profit of $420,179 related to the lower sales
in the Company's in-line skate business, and increased operating expenses of
$283,169 as described above.
16
<PAGE>
For the six months ended June 30, 1997, loss from operations increased to
$1,534,687 from $474,657 for the six months ended June 30, 1996. One reason for
the increase in the loss was the reduced gross profit of $224,805 due to lower
sales in the 1997 period compared to the 1996 period. Additionally, operating
expense increased $835,225 for the six months ended June 30, 1997 compared to
the six months ended June 30, 1996. Total operating expense for USA Skate was
$2,191,673 for the six month period in 1997 compared to $668,550 for the 1996
period as that period included only two months of expense of USA Skate which was
acquired in May 1996. The USA Skate increase of $1,523,123 was offset by lower
operating expenses related to the Company's in-line skate and snowboard business
of $687,898, as described above.
OTHER EXPENSES/INCOME: For the three months ended June 30, 1997, other expenses
were $348,112 compared to other income of $629,374 for the three months ended
June 30, 1996. For the six months ended June 30, 1997, other expenses were
$593,589 compared to other income for the six months ended June 30, 1996 of
$567,271. The increases of other expenses of $977,486 and $1,160,860 of the
three and six months ended June 30, 1997 were primarily a result of a gain from
issuance of common stock by subsidiary of $479,100, a net unrealized holding
gain of $416,637, and a gain on sale of investment in subsidiary of $111,366 in
the first quarter of 1996. These transactions total income of $1,007,103 in the
1996 three and six month period ended June 30, 1996, and in 1997 interest
expense has increased by $203,489 as a result of the Company extending its
convertible promissory notes from January 1, 1997 to July 1, 1997, with the
interest rate being increased from 9% to 12% in place of the previous 9%
interest rate.
INCOME TAX BENEFIT/EXPENSE: The Company had an income tax benefit for the three
and six months ended June 30, 1996 of $303,000 and $36,000, respectively.
NET LOSS: Net loss for the three months ended June 30, 1997, was $731,589
compared to net income of $483,813 for the three months ended June 30, 1996. Net
loss for the six months ended June 30, 1997 was $1,228,832 compared to net
income of $66,528 for the six months ended June 30, 1996. The primary reasons
for the change were the loss from operations as described above and other income
of $1,007,103 in 1996 as described above contributed to net income.
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 June 30, 1997, based
upon the agreed to formulas, the bank was undercollaterlized by $1,115,000.
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.
17
<PAGE>
At June 30, 1997, based on the limitations described above, under the U.S.
hockey line of credit, the Company was eligible to borrow $3,069,000, and the
outstanding balance was approximately $2,979,000. Under the Canadian hockey line
of credit, the Company was eligible to borrow $2,609,000, and the outstanding
balance was approximately $3,458,000.
The Company is currently negotiating with the convertible promissory noteholders
($2,518,000) due July 1, 1997, and is considering offering some additional
consideration such as California Pro stock for the noteholders to extend their
notes.
At June 30, 1997, the Company had a working capital deficit of approximately
$5,897,000 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, the Company is in default on all three of its
bank loan agreements and the independent auditors' report on the Company's
December 31, 1996 financial statements contained a going concern explanatory
paragraph. Management's plans to resolve the Company's immediate financial
difficulties and improve its liquidity position are described below:
The Company and its majority owned subsidiary on June 30, 1997, has entered into
a proposal as amended on August 5, 1997, with a major sporting goods firm to
sell the assets of its majority owned subsidiary USA Skate Co., Inc. The Company
anticipates that a substantial portion of the purchase price will be paid in
cash which will improve the Company's working capital position. In conjunction
with this proposed transaction, the Company acquired 141,667 shares of USA stock
from a 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 is currently exploring the possibility of various other options,
including the sale of its license and trademark rights to the California Pro and
Kemper brands. 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 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.
18
<PAGE>
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 most of its
foreign 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 non-manufactured products are principally
purchased from suppliers located in Taiwan, mainland China, Korea, Austria and
Canada. The Company purchases its in-line skate and hockey products in U.S.
dollars. 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.
19
<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 April 13, 1997, the Registrant issued warrants to purchase up to
150,000 shares of its common stock as payment for consulting services. Of these
warrants, 50,000 are exercisable at $1.00 per share and 100,000 are exercisable
at $.87 per share. The Registrant relied on the exemptions from registration
provided by Sections 4(2) and/or 4(6) of the Securities Act of 1933 (the
"Securities Act") related to the issuance of these warrants.
On April 13, 1997, the Registrant granted stock options to purchase up
to 45,000 shares of its common stock as compensation to its non-employee
directors. These options are exercisable at $1.00 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 options.
On April 13, 1997, the Registrant issued 776 shares of its common stock
as payment for a debt owed in the amount of $995. Payment was made based on
$1.25 per share, representing the closing price of the common stock on April 11,
1997 as reported on the Nasdaq SmallCap Market. 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 April 23, 1997, the Registrant issued 75,000 shares of common stock,
valued at $1.00 per share, to a consultant for services rendered prior to April
1, 1997. The Registrant relied on the exemptions from registration provided by
Sections 4(2) and/or 4(6) of the Securities Act because the recipient of these
shares was a sophisticated and/or accredited investor.
On April 23, 1997, the Registrant granted options to purchase 100,000
shares of common stock under its 1994 Stock Option Plan as additional
compensation to one officer and four other employees of the Registrant. The
exercise price for these options is $1.00 per share, representing the closing
price of the common stock as reported by the Nasdaq SmallCap Market on the date
of grant. The Registrant relied on the exemptions from registration provided by
Sections 4(2) and/or 4(6) of the Securities Act related to the grant of these
stock options.
On May 6, 1997, the Registrant issued 75,000 shares of common stock in
exchange for outstanding options to purchase 300,000 shares of common stock
initially issued to a consultant for services. The services were valued at
$75,000, or $1.00 per share. The Registrant relied on the exemption from
registration provided by Section 4(6) and 4(2) of the Securities Act because the
recipients of these shares were sophisticated and/or accredited investors.
20
<PAGE>
On May 31, 1997, the Registrant issued 214,416 shares of its common
stock, valued at $1.00 per share representing the average of the closing bid and
asked prices of the Registrant's common stock as quoted by Nasdaq for the ten
consecutive trading days immediately preceding the date of the agreement of the
parties to the transactions. Of these shares 170,000 were issued in exchange for
141,667 shares of common stock of USA Skate Corporation (the Registrant's
majority owned subsidiary). In March 1996, one of the Registrant's officers made
a loan of $170,000 to the Registrant and, in June 1996, the Registrant
transferred 141,667 shares of USA Skate Corporation owned by the Registrant to
this officer in repayment thereof based on a valuation of $1.20 per USA Skate
common share. In the May 1997 transaction, the officer returned the 141,667
shares of USA Skate Corporation to the Registrant in exchange for 170,000 shares
of common stock of the Registrant. The other 44,416 shares of common stock of
the Registrant were issued to one holder to repay a debt owed by the Registrant
for services performed and acknowledged. The Registrant relied on the exemption
from registration provided by Section 4(6) of the Securities Act because the
recipients of the 342,645 shares were accredited investors.
On June 30, 1997, the Registrant issued 271,264 shares of common stock
to an entity in exchange for assumption of certain trade payables of the
Registrant totalling $450,000. The Registrant relied on the exemptions from
registration provided by Sections 4(2) and/or 4(6) of the Securities Act because
the recipient of these shares was an accredited investor.
21
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CALIFORNIA PRO SPORTS, INC.
Dated: August 19, 1997 By: /s/Michael S. Casazza
-------------------------------------
Michael S. Casazza
President/Chief Operating Officer
Dated: August 19, 1997 By: /s/Barry S. Hollander
-------------------------------------
Barry S. Hollander
Chief Financial Officer
22
<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 June 30, 1997, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 103,802
<SECURITIES> 0
<RECEIVABLES> 4,519,519
<ALLOWANCES> 455,000
<INVENTORY> 4,816,162
<CURRENT-ASSETS> 9,899,791
<PP&E> 1,863,334
<DEPRECIATION> 458,659
<TOTAL-ASSETS> 20,175,898
<CURRENT-LIABILITIES> 15,796,584
<BONDS> 0
0
0
<COMMON> 57,592
<OTHER-SE> 1,037,384
<TOTAL-LIABILITY-AND-EQUITY> 20,175,898
<SALES> 6,776,239
<TOTAL-REVENUES> 6,776,239
<CGS> 4,972,147
<TOTAL-COSTS> 3,338,779
<OTHER-EXPENSES> 593,589
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 679,606
<INCOME-PRETAX> (1,426,733)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,426,733)
<DISCONTINUED> 0
<EXTRAORDINARY> 197,901
<CHANGES> 0
<NET-INCOME> (1,228,832)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
