U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission file number 0-25114
CALIFORNIA PRO SPORTS, INC.
----------------------------------------------
(Name of small business issuer in its charter)
Delaware 84-1217733
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1221-B South Batesville Road
Greer, South Carolina 29650
- --------------------------------------- ----------
(Address of principal executive office) (zip code)
Issuer's telephone number (864) 848-5160
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
Warrants to Purchase Common Stock
---------------------------------
(Title of Class)
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. (1) Yes |X| No | | (2) Yes |X| No | |
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained herein, and no disclosure will be contained, to the
best of the issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State the issuer's revenues for its most recent fiscal year. $16,952,904
As of May 1, 1997, 4,699,511 shares of Common Stock were outstanding and
aggregate market value of the shares (based upon the average of the bid and
asked price of the shares on the over-the-counter market) of California Pro
Sports, Inc. held by nonaffiliates was approximately $2,633,111.
Documents Incorporated by Reference - None
Transitional Small Business disclosure format (check one): Yes | | No |X|
<PAGE>
CALIFORNIA PRO SPORTS, INC.
AND SUBSIDIARIES
FORM 10-KSB
PART I
Item 1. DESCRIPTION OF BUSINESS
-----------------------
(a) BUSINESS DEVELOPMENT.
California Pro Sports, Inc., (hereinafter referred to as the "Company"), is
a Delaware corporation organized on January 4, 1993 to acquire the California
Pro(TM) in-line skate business from California Pro USA Corp., subsequently
renamed SCYL, Inc. ("SCYL") and later dissolved. Playmaker Co., LTD
("Playmaker") the Taiwanese in-line skate manufacturer and majority owner of the
seller granted the Company an exclusive, perpetual, non-royalty bearing license
to the California Pro(TM) names and trademarks and entered into a five-year
manufacturing agreement to supply substantially all of the Company's in-line
skate products. This acquisition was a taxable transaction and was accounted for
as a purchase. Due to the significant continuing ownership participation of
Playmaker in the Company, the assets acquired were recorded at historical cost.
Cash paid and notes given by the Company for the agreements not to compete,
management buy-out and consulting fees, and the guaranty fees, were recorded as
intangible assets.
In another acquisition completed on August 1, 1994, the Company purchased
certain assets, including an exclusive, perpetual world-wide license to the
Kemper(R) name and trademark, subject to a royalty, and approximately $3.5
million of purchase orders for Kemper(R) snowboard products, for approximately
$1.1 million. The purchase orders were acquired from Kemper Snowboard
Corporation ("Kemper"). The Company acquired its license directly from the
registered owner of the Kemper(R) name and trademark, Front 500 Corporation
("Front 500"). Neither Kemper nor Front 500 were affiliates with the Company.
In 1995, the Company formed USA Skate Corporation, a Delaware corporation,
("Skate Corp."). Skate Corp. is a majority owned (approximately 57%) Subsidiary
of the Company and its financial statements are consolidated with those of the
Company in this report. Effective as of April 30, 1996, Skate Corp. acquired
100% of USA Skate Co., Inc. ("USA Skate"), a New York corporation, in a stock
purchase transaction. USA Skate owns, directly or indirectly, all of the capital
stock of Les Equipements Sportifs Davtec, Inc. ("Davtec"), a Canadian
corporation. The acquisition was accounted for as a purchase. Consideration for
the purchase was $10.5 million, consisting of $3.65 million of cash (including
approximately $98,000 of cash acquired), a $1.05 million 8% installment note
payable due through November 1998, 250,000 shares of Skate Corp. common stock
valued at $300,000, and assumption of approximately $5.5 million of debt.
The cash portion of purchase price for USA Skate was paid with funds raised
by Skate Corp., including the private placement of 884,667 shares of common
stock of Skate Corp. for approximately $1.06 million; the issuance of
approximately $1.08 million of 9% promissory notes payable to certain
officers/shareholders due June 30, 1997; and the issuance of approximately
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$2.5 million of 9% promissory notes due January 1997 (the "Skate Notes"). As
permitted under the terms of the Skate Notes, the due date of the Skate Notes
has been extended to July 1, 1997 and bear interest at 12% during the extension
period and are convertible under certain circumstances.
The debt assumption portion of this acquisition was financed in part by a
bank loan to USA Skate by LaSalle National Bank, the proceeds of which were used
to repay the outstanding indebtedness under the credit facility in place for USA
Skate prior to completion of the acquisiton. The LaSalle loan agreement allows
for advances up to 75% of qualifying accounts receivable, 50% of qualifying
inventories and 50% of outstanding letters of credit, with a maximum limit of $5
million which expires in May 1999. Loans under the agreement bear interest at 1%
above the bank's prime rate and are due on demand. The loan agreement required
payment of initial financing fees of $100,000 and fees of $50,000 annually. The
loan agreement contains certain financial covenants and restrictions regarding
payment of dividends, officers' compensation and consulting fees, as well as
restrictions on USA Skate's loans and investments. The loan is collateralized by
substantially all of USA Skate's assets and is guaranteed by Skate Corp. and
certain of its affiliates and shareholders. At December 31, 1996, Skate Corp.
was in technical default under this lending arrangement primarily due to the
Company's wholly-owned subsidiary being in default under its loan with LaSalle.
At year-end 1996, CP was under collateralized by approximately $800,000 and was
not in compliance with certain of its financial covenants. As a result, LaSalle
could accelerate both loans and require immediate full repayment although, as of
the date of this report, the Company has not received any notice to this effect
from LaSalle and it is continuing to negotiate with LaSalle to bring the loans
into compliance.
At the time of the acquisition, Skate Corp. made a capital contribution of
$500,000 to Davtec, and the former controlling shareholder of USA Skate paid
Davtec $165,000 in return for a $125,000, 8% promissory note due December 31,
1996 and payment of a $40,000 outstanding receivable. The proceeds of $665,000
were used to reduce Davtec's indebtedness to its Canadian bank lender. In
connection with the payments, and subject to certain other terms and conditions,
the Canadian bank agreed to extend the existing line of credit with Davtec
through July 31, 1997. In March 1997, the Company repaid $50,000 under the note
to the former controlling shareholder of USA Skate and entered into a
modification agreement extending the due date of the remaining $75,000 to
October 1, 1997. In February 1997, the Company received notice that it was in
violation of a loan covenant and in March 1997, the bank filed a notice of
intention to enforce security and to demand payment of the loan. The Company
currently is in negotiations with the bank to cure the default and extend the
maturity date of the agreement.
At the time of the USA Skate acquisiton, the Company, Skate Corp. and USA
Skate also entered into certain other agreements with the former controlling
shareholder of USA Skate. USA Skate entered into a one-year employment agreement
with the former controlling shareholder of USA Skate, which provides for annual
compensation of $90,000 and ends in May 1997. The former controlling shareholder
of USA Skate entered into a five-year consulting agreement with the Company,
Skate Corp. and USA Skate and a ten-year noncompete agreement in consideration
for receipt of 400,000 shares of the Company's common stock valued at $900,000.
USA Skate also entered into a worldwide, exclusive license agreement for use of
certain trademarks owned by the former controlling shareholder of USA Skate in
exchange for minimum royalty payments of $3 million due on or before December
2001. Finder's fees, bank origination, legal, accounting and other costs
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<PAGE>
of the acquisition were approximately $1.53 million, including guarantee fees to
two officers/shareholders of $600,000 related to the officers'/shareholders'
providing personal guarantees of certain of the debt assumed and issued in the
transaction.
The Company operates its in-line skate and snowboard businesses through its
wholly-owned subsidiary, California Pro, Inc., also a Delaware corporation
("CP"). The Company's only significant assets are the capital stock of CP and
Skate Corp. CP and USA Skate are the borrowers under bank loan agreements and
the Company is a guarantor of each of their obligations thereunder. In addition,
CP's bank loan is guaranteed by USA Skate and USA Skate's bank loan is
guaranteed by CP.
(b) BUSINESS OF ISSUER.
The Company markets California Pro(R) in-line skates, and related
protective gear and accessories, Kemper(R) snowboards and related snowboard
accessories and VIC(R) and VICTORIAVILLE(TM) and McMartin(TM) ice and
street/roller hockey skates, sticks and related protective gear and accessories.
Davtec, USA Skate's wholly-owned Canadian subsidiary, manufactures hockey
sticks, pants and gloves for USA Skate and is the Canadian distributor for all
of the hockey related VICTORIAVILLE(TM) and VIC(R) product lines. Davtec also
manufactures the Hespeler(TM) premium brand of hockey sticks which are marketed
worldwide.
The Company's in-line skate products are sold in the United States, Canada,
the Caribbean and U.S. military bases world wide. Its snowboards and related
accessories are sold primarily in the United States and European countries. The
Company sells its hockey-related products in the United States and Canada
through independent sales representatives and internationally through
independent distributors located in Germany, Switzerland, Italy, Austria, Czech
Republic, Sweden, Finland, France and Brazil.
PRODUCTS
IN-LINE SKATES. The Company currently markets performance, fitness,
recreational and hockey in-line skates for both the adult and youth markets, as
well as a full line of protective gear and other related accessory products. The
Company's in-line skates are constructed of durable, injected molded polymers
and incorporate the latest designs, graphics and technology. Retail prices for
the Company's skates range from approximately $50 to $200.
The Company markets a full line of in-line skate accessory products,
including protective gear, replacement parts and soft goods for use by in-line
skaters. Protective gear offered by the Company includes an assortment of wrist
guards, knee and elbow pads in both adult and youth sizes which can be purchased
separately or in combination packs. The Company also offers a variety of
replacement parts, including skate laces, brake sets and brake pads, power
straps, wheels, bearings, 8-wheel hardware kits and rink guard axle caps. Soft
goods offered under the California Pro(R) brand name include skate bags and an
assortment of tee shirts.
In addition to its standard models of skates, the Company markets special
models for some of its larger retail customers. These specially designed skates
contain one or more features which vary slightly from the corresponding standard
model based on the preference of the retailer and the retailer's desire to
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<PAGE>
offer a special model of the Company's in-line skates in their stores at a
particular price point. The Company's close relationship with its primary
in-line skate manufacturer provides the Company with additional flexibility and
ease in meeting its retail customers' market needs with these special models.
The Company offers a competitive limited warranty on workmanship and
materials for six months after the purchase of its in-line skate products from
an authorized California Pro(R) dealer.
SNOWBOARDS. The Company offers several series of Kemper(R) snowboards in
different models in various lengths. Kemper(R) snowboards come in either wood or
a polyurethane matrix, depending on the series and model, and range in suggested
retail price from approximately $200 to $520, with bindings.
The Kemper(R) snowboard designs are created and modified with the
assistance of the Kemper(R) team riders, European distributors, the manufacturer
and others.
The Kemper(R) PPS+ binding system has become a standard of the industry.
Snowboard manufacturers worldwide employ the Kemper(R) four-hole insert
technology. With the PPS+ binding system, a snowboard rider can quickly adjust
his stance from 11 to 24 inches between runs. The Kemper(R) PPS+ system
accommodates regular footed riders as well as creative footed riders because of
its base rotation feature which permits 360 degrees of rotation.
The Company offers two types of high quality soft boots. The Kemper(R) FS
boot consists of a flexible oil-tanned leather upper and a low cuff with zig zag
eyelets for a tighter fit. The Kemper(R) FR boot consists of a stiffer and
taller leather upper with a low profile instep, molded inner tongue, deep tread
sole with a cushioned heel and a velcro heel hold down.
The Company also markets snowboard accessories and clothing such as
leashes, gloves and mitts, hats, sweatshirts, tee shirts and other similar
items.
HOCKEY PRODUCTS. The Company currently has five major hockey product
categories consisting of (1) hockey sticks; (2) hockey protective gear; (3)
figure and ice hockey skates; (4) hockey bags and related accessories; and (5)
street/roller hockey skates and protective gear. These products are marketed
under the ViCTORIAVILLE(TM), VIC(R) and McMartin(R) brands. Davtec, the Canadian
subsidiary of the Company's hockey division, manufactures hockey sticks, pants
and gloves for the Company and is the Canadian distributor for all of the hockey
related VIC(R) and VICTORIAVILLE(TM) product lines. The Company's hockey product
lines are constructed of various materials and incorporate the latest designs,
graphics and technology. Approximately 70% of Skate Corp.'s products are
manufactured by the Canadian subsidiary.
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<PAGE>
PRODUCT DESIGN AND DEVELOPMENT
IN-LINE SKATES. The Company views product design and development as
integral to its growth. Since the in-line skate acquisition, the Company has
refined its current skate models by improving the componentry and appearance,
and has introduced new skate models.
The Company offers a competitive limited warranty on workmanship and
materials for six months after the purchase of its in-line skate products from
an authorized California Pro(R) dealer.
SNOWBOARDS. The Kemper(R) snowboard designs are created and modified with
the assistance of the Kemper(R) team riders, European distributors, the
manufacturer and others.
HOCKEY PRODUCTS. Design and development of the Company's hockey products is
undertaken by the Company's research and development personnel in conjunction
with outside design firms and vendors, where appropriate. The Company believes
its manufacturing facilities are state of the art and produces consistent and
competitive products from innovative designs. USA Skate has redesigned its logo
and all its products for 1997 will incorporate the new logo.
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<PAGE>
SALES AND MARKETING
The Company markets its products primarily in retail sporting goods chains
and specialty shops. Distribution is accomplished primarily through national
networks of independent sales representative groups who sell directly to buyers
and retail accounts. The Company has oral agreements with sales representative
groups which cover the United States, Canada, the Caribbean and U.S. military
exchanges world wide. These sales representative groups are paid on a standard,
commission-only basis. In addition, the Company has foreign distributors, mostly
in European countries, for distribution of Kemper(R) snowboards and accessories,
as well as VIC(R) and VICTORIAVILLE(TM) hockey products.
IN-LINE SKATE ADVERTISING AND PROMOTION. The Company advertises and
promotes its in-line skate products through multiple methods customary within
the industry. It participates in all major trade exhibitions, conducts special
promotions and has advertised in trade and consumer publications such as Spin
and Outside on a national, regional and local basis. Point of purchase materials
and promotional items are made available to the Company's customer base as well
as directly to consumers through Company and trade supported programs. The
Company also sponsors consumer demonstration days to further promote the
California Pro(R) brand and the sport of in-line skating.
SNOWBOARD ADVERTISING AND PROMOTION. A Company objective is to promote
Kemper(R) as a leading brand within the snowboard industry. The Company believes
that world class customer service is an essential ingredient to successful
promotion of the Kemper(R) brand. The Company focuses its trade and consumer
advertising on leading industry publications such as Transworld Snowboarding and
Snowboarder. To promote its Kemper(R) brand, the Company sponsors various
professional snowboarders each season (the "Kemper(R) team riders") to attend
snowboarding events organized by retailers. Videos featuring the Kemper(R) team
riders also are distributed by the Company's sales representatives to consumers
and to the retail trade for promotional purposes.
HOCKEY ADVERTISING AND PROMOTION. The Company markets its hockey products
primarily to retail sporting goods chains and specialty shops. Its marketing
strategy emphasizes the price/value relationship if its branded products. In
particular, the Company believes that within its hockey business, retailers are
afforded an excellent mark-up for VICTORIAVILLE(TM), VIC(R) and McMartin(R)
hockey products when the features are compared to the features of the
competitors at virtually all price points. USA Skate is considering utilizing
multiple brands for brand positioning in different channels of distribution.
USA Skate sells it products primarily through national networks of
independent sales representative groups who sell through direct contact with
buyers and retail accounts. USA Skate has oral agreements with ten sales
representative groups which cover the United States and Canada. These sales
representative groups are paid on a standard, commission-only basis. In
addition, there are distributors located in Germany, Switzerland, Italy,
Austria, Czech Republic, Sweden, Finland, France and Brazil.
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<PAGE>
USA Skate advertises and promotes its hockey products through multiple
methods customary within the industry. It participates in all major trade
exhibits, conducts special promotions and advertises in trade and consumer
publications on a national, regional and local basis. Point of purchase material
and promotional items are made available to the customer base as well as
directly to consumers through USA Skate and trade supported programs. A critical
component of USA Skate's promotional strategy lies in its ability to attract NHL
and other professional league players to use and promote the Company's products,
thereby reinforcing the brand's authenticity and performance. At this time, over
100 NHL players use the Company's VICTORIAVILLE(TM), VIC(R) and Hespeler(TM)
branded products, including NHL All-Stars Steve Yzerman, John Vanbiesbrouck and
Jeff Richter.
SUPPLIERS AND MANUFACTURING
IN-LINE SKATE PRODUCTS. The Company has an exclusive manufacturing
agreement with Playmaker which expires in 1998, under which Playmaker supplies
most of the Company's in-line skates and in-line skate accessory products.
Playmaker manufactures, assembles and packages the Company's in-line skate
products at its facilities in Taiwan and China for set prices, in U.S. dollars,
negotiated annually. In 1996, the Company began sourcing certain in-line skate
models from an alternative Pacific Rim supplier.
SNOWBOARD PRODUCTS. The Company's major supplier of snowboards is Pale Ski
& Sport GmbH & Co. of Austria which annually manufactures approximately 40% of
all snowboards sold worldwide. In 1995, the Company began to purchase wood core
boards from a domestic supplier. The Company believes that it could readily
obtain another supplier or multiple suppliers for all of its snowboards if it
were unable to continue its current relationships.
HOCKEY PRODUCTS. The Company has three manufacturing facilities; one in
London, Ontario, one in Montreal and the other in Daveluyville, Quebec, Canada.
The Daveluyville plant manufactures hockey sticks, the Montreal plant
manufactures premium pants and gloves and the London facility manufactures
goalie protective equipment under the McMartin brand. Products representing
approximately 70% of USA Skate's sales are manufactured by Davtec. The other
products marketed by the Company are sourced from a variety of suppliers
throughout the world. Cortina International Corporation and Superior Sports are
the Company's main suppliers of ice and street/roller hockey protection
products. Figure and hockey skates are supplied by Taiwan Sakurai and premium
quality figure skates are manufactured in the Czech Republic and supplied to the
Company by Benal.
LICENSES, PATENTS AND TRADEMARKS
The Company derives its proprietary protection primarily from licenses with
others who own patents and trademarks. The Company owns no patents and has
applied for or owns a limited number of trademarks.
IN-LINE SKATE PRODUCTS. The Company entered into a perpetual license
agreement with Playmaker under which the Company has the exclusive, royalty-free
right to use the California Pro(R) and Rolling Thunder(TM) names and
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trademarks on in-line skates, accessories and any other products in the United
States, Canada, certain areas of the Caribbean and U.S. military exchanges
worldwide. The Company has also entered into an agreement with Playmaker under
which Playmaker will pay the Company a five percent royalty on all sales of any
product made by Playmaker to any new customer of Playmaker generated by the
Company. No royalties have been agreed to or paid to date under this agreement.
The Company and Playmaker each have non-exclusive royalty bearing patent
license agreements with Rollerblade, Inc. related to one feature on several of
the Company's in-line skate models. These agreements require payment to
Rollerblade, Inc. of a percentage of the net sales price to retail merchants.
Playmaker reimburses the Company for 90% of the royalties paid by the Company to
Rollerblade under these agreements.
SNOWBOARD PRODUCTS. In August 1994, the Company entered into an agreement
with Front 500 Corporation, for an exclusive, perpetual, worldwide license to
use the name "Kemper Snowboards Inc." and the Kemper(R) design and all
derivations thereof in the manufacture, import, export, design, marketing,
promotion and distribution of Kemper(R) snowboards and related equipment,
clothing and accessories. In return for these license rights, the Company pays a
royalty of net sales for products sold under this license.
HOCKEY PRODUCTS. The Company owns the exclusive worldwide trademark rights
to the VICTORIAVILLE(TM) and VIC(R) trademarks for seven years under a royalty
bearing license. If royalties of at least $3 million are paid to the licensor
under the license during the term of the agreement, ownership to the marks will
transfer automatically to the Company. The Company owns the trademark rights to
the McMartin(R) name and logo.
COMPETITION
All of the Company's businesses are extremely competitive.
IN-LINE SKATE BUSINESS. The Company operates in a highly competitive
industry. Some of the Company's competitors have greater financial and other
resources than the Company. The Company believes that there has been lower
consumer demand for in-line skates as well as retailers not quickly selling
through their existing inventory. With respect to the Company's in-line skate
business its primary competitors are Rollerblade, Inc., Ultra Wheels (First Team
Sports, Inc.) and Canstar Sports. With regard to in-line skate protective
equipment, Rollerblade, First Team Sports and Franklin are the primary
competitors. Management believes that these competitors collectively have a
market share of over 50%.
The primary competitive factors in the in-line skate business are product
features, quality, price, service and name recognition. Although Rollerblade is
still the most recognized name in the in-line skate industry, consumers are now
comparing features and price more closely.
SNOWBOARD BUSINESS. Burton Snowboards is the Company's largest competitor,
with a world market share estimated at approximately 50%. Other competitors
include Sims Snowboards and Ride Snowboard Company. Additionally, many of the
ski manufacturers (i.e. K2 and Rossignol) have also entered the market.
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Management believes that these companies have greater financial and other
resources than the Company. The Company is continuing to assess its competitive
position with respect to each of these factors.
HOCKEY BUSINESS. Both ice and street/roller hockey businesses are highly
competitive, with competition predominantly focused on product innovation,
performance and styling, price, marketing and delivery and name recognition. The
hockey markets are dominated by a relatively small number of large companies,
most of whom have greater financial and other resources than the Company. The
primary competitors of USA Skate are Bauer, CCM, Sherwood and Karhu Corp. The
Company believes that these competitors collectively have a market share of over
50%. USA Skate enjoys strong brand recognition and believes it also competes
favorably with respect to the other major competitive factors. There are no
significant technological or capital barriers to entry into markets for many
sporting goods products. These markets compete with other leisure activities
markets for discretionary income spending in a continuously evolving consumer
market.
PURCHASE ORDERS AND CUSTOMERS
At December 31, 1996, the Company had purchase orders for future delivery
of products of approximately $.7 million, compared with approximately $1.2
million at December 31, 1995. Although purchase orders are subject to
cancellation in the normal course of business, the Company expects to fill most
of these orders by May 31, 1997. The decrease in purchase orders in 1996 is in
part due to the Company's smaller backlog in its in-line skate and snowboard
businesses of $724,000, offset by the backlog of its hockey related product
lines of $220,000.
For the year ended December 31, 1996, no customers accounted for 10% or
more of the Company's sales. For the year ended December 31, 1995, a U.S.
governmental agency and C.A.S. Sports Agency accounted for 10% and 12% of the
Company's sales, respectively.
EMPLOYEES
As of December 31, 1996, the Company had 139 employees and 2 consultants.
The Company believes its relations with its employees and its consultants are
good. The Company's employees are not subject to collective bargaining
agreements, except for the employees in the Daveluyville manufacturing facility.
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Item 2. Description of Property
-----------------------
(a) FACILITIES
<TABLE>
<CAPTION>
Lease (L) Annual
Location Use Sq. Ft. Own (O) Rent
- -------- --- ------- --------- --------
<S> <C> <C> <C> <C>
Commack, NY Warehouse & Distribution 31,000 L $58,800
Commack, NY Warehouse & Distribution 31,000 L $155,800
Montreal, QC Manufacturing 9,600 L $25,000
Daveluyville, QC Manufacturing & Distribution 74,665 O(1) N/A
London, OC Manufacturing 5,000 L $15,000
Montreal QC Sales & Marketing 1,400 L $19,000
Greenville, SC Corporate Offices 3,900 L $36,000(2)
</TABLE>
- ----------
(1) Subject to mortgage. See Note 9 to the financial statements included in this
report.
(2) Leased on a month-to-month basis.
(b) and (c)
Not applicable
Item 3. Legal Proceedings
-----------------
The Company is not a party to any material legal proceedings, nor does it
have knowledge of any threatened material litigation. From time to time the
Company may be subject to various legal proceedings which are normal to its
business, including claims for product liability. The Company believes it has
adequate liability insurance for the risks arising in the normal course of its
business, including product liability insurance.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted to a vote of stockholders during the fourth
quarter of 1996.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
--------------------------------------------------------
(a) MARKET INFORMATION.
The Company's Common Stock and Warrants have been traded over-the-counter
since January 18, 1995 and are quoted on the Nasdaq SmallCap Market under the
symbols CALP and CALPW, respectively. The following table sets forth the range
of high and low bid prices as quoted by Nasdaq. These market quotations reflect
inter-dealer prices without retail mark-up, mark-down or commissions and may not
represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Warrants
Bid Prices Bid Prices
---------------- ------------------
1995 High Low High Low
---- ---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter (1/1/95-3/31/95) .. $ 5.25 $ 4.25 $ 1.125 $ .50
Second Quarter (4/1/95-6/30/95) . $ 4.75 $ 3.375 $ 1.03125 $ .625
Third Quarter (7/1/95-9/30/95) .. $ 6.875 $ 2.875 $ 2.6875 $ .50
Fourth Quarter (10/1/95-12/31/95) $ 5.25 $ 3.375 $ 2.625 $ .875
1996
----
First Quarter (1/1/96-3/31/96) .. $ 4.623 $ 2.5625 $ 1.9275 $ .65625
Second Quarter (4/1/96-6/30/96) . $ 4.00 $ 2.25 $ 1.00 $ .50
Third Quarter (7/1/96-9/30/96) .. $ 3.0625 $ 1.875 $ .90625 $ .375
Fourth Quarter (10/1/96-12/31/96) $ 2.3125 $ 1.25 $ .5625 $ .21875
</TABLE>
(b) HOLDERS.
The number of record holders of the Company's Common Stock as of April 30,
1997 was approximately 85. Based on information from the brokerage community,
the Company believes that its Common Stock and warrants each are held
beneficially by more than 300 persons.
(c) DIVIDENDS.
The Company has not declared or paid dividends on its Common Stock, nor
does it anticipate paying any cash dividends in the foreseeable future. The
Company currently intends to retain any future earnings to fund operations and
for the continued development of its business. Further, the loan agreements
provide that without the prior written consent of the lender, the Company may
not declare or pay any dividend on any class of stock until satisfaction of all
liabilities under the loan agreements.
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Item 6. Management's Discussion and Analysis or Plan of Operation
---------------------------------------------------------
OVERVIEW
The Company imports and distributes products in three participant sports
categories. In- line skates and related accessory products are marketed under
the brand names California Pro(R) and Rolling Thunder(TM); since August 1, 1994,
snowboards and snowboard accessory products have been marketed under the
Kemper(R) brand; and since May 1996, ice and street/roller hockey skates,
sticks, related gear and accessories, as well as figure skates are marketed
under the VICTORIAVILLE(TM), VIC(R), Hespeler(TM) and McMartin(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 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 products sold are
manufactured by Davtec and skates and related gear are purchased from foreign
suppliers.
The Company sells its in-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 its foreign distributors. Hockey products are
sold in North America through a network of independent sales representative
groups to major retail sporting goods chains as well as smaller, specialized
independent sporting goods shops. Internationally, hockey products are sold to
and distributed by independent distributors located primarily in Germany,
Switzerland, Italy, Austria, Czech Republic, Sweden, France, Finland and Brazil.
During the first quarter of 1995 the Company closed its IPO of 1,200,000
shares of Common Stock and 1,380,000 common stock purchase warrants. After
deducting offering expenses, the Company received net proceeds from the offering
of approximately $4,200,000.
-13-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the Company's sales by major product
category for the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995
------------------ -------------------
(dollars in thousands)
$ % $ %
------- ---- ------- ----
<S> <C> <C> <C> <C>
In-line skates and accessories $ 4,911 29% $11,037 64%
Snowboards and accessories 1,037 6% 6,092 36%
Ice and street/roller hockey (1) 11,005 65% _______ ____
------- ---- ------- ----
$16,953 100% $17,129 100%
======= ==== ======= ====
</TABLE>
(1) Sale of hockey products began May 1, 1996.
The following table sets forth for the periods indicated the percentages
which selected items in the Consolidated Statements of Operations bear to net
sales:
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Net Sales ......................................... 100.0 100.0
Cost of Goods Sold ................................ 82.9 71.0
Gross Profit ...................................... 17.1 29.0
Sales & Marketing Expenses ........................ 14.3 10.3
General & Administrative Expenses ................. 17.8 12.4
Depreciation and Amortization ..................... 4.0 3.2
Consulting & Management Fees ...................... .7 .7
Rent Expense, Related Party (Seller) .............. .6 -.-
Restructuring Charges ............................. 7.3 -.-
Income (Loss) from Operations ..................... (27.7) 2.5
Interest and Other Expenses (Income) .............. 5.5 1.6
Income Tax Expense (Benefit) ...................... (1.4) .7
Minority Interest ................................. 1.1 -.-
------ ------
Net Income (Loss) ................................. (32.8) .2
====== ======
</TABLE>
-14-
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Company commenced operations on April 1, 1993, when it acquired the
in-line skate business from SCYL, the predecessor company. As described in Note
1 of the Company's consolidated financial statements, the assets acquired from
the predecessor have been recorded at their carrying value to the predecessor.
Except for the amortization of the purchased intangibles, the accounting bases
used by the Company are the same as used by the predecessor.
On August 1, 1994 the Company acquired certain assets, including an
exclusive, perpetual worldwide license to the Kemper(R) name and trademark,
subject to a royalty, and approximately $3.5 million of existing purchase orders
for Kemper(R) snowboard products.
Effective April 30, 1996, the Company, through its recently formed
subsidiary, USA Skate Corp., began selling hockey related products under an
exclusive worldwide license to the VIC(R), VICTORIAVILLE(TM) and McMartin(R)
brand names.
NET SALES. Net sales for the year ended December 31, 1996 decreased to
$16,952,904 from $17,128,711 or by $175,807, representing an approximate
decrease of 1.0%. This decrease was primarily attributable to the decrease in
revenues of $6,126,000 and $5,055,000 of the Company's California Pro in-line
skates and Kemper(R) snowboard products, respectively. This decrease was offset
by including $10,949,000 of the Company's ice and street/roller hockey equipment
sales due to the acquisition of USA Skate effective April 30, 1996. The Company
believes the decline in sales was caused by high inventory levels of in-line
skate and snowboard products at some of the Company's major retail accounts as
well as more competitors entering the snowboard business, some with greater
financial and other resources than the Company.
GROSS PROFIT. Gross profit decreased to $2,871,870 for the year ended
December 31, 1996 compared to $4,973,168 for the year ended December 31, 1995.
As a percent of sales, gross profit decreased to 17.1% in 1996 from 29% in 1995.
The primary reasons for the decline in gross profit were sales at reduced
margins for the Company's in-line skate and snowboard products. Additionally,
the Company incurred inventory markdowns and adjustments of $1,059,750 in 1996
attributable to remaining in-line skate and snowboard inventory. The Company
believes these writedowns and adjustments, which accounted for an approximate
6.3% decline in its gross profit, were necessary to reflect the current market
value of its inventory.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$2,434,255 for the year ended December 31, 1996, compared to $1,758,221 for the
year ended December 31, 1995. This represents an increase of $676,034 or 38.4%.
Sales and marketing expenses related to the Company's in-line skate and
snowboard business were $1,359,148 in 1996 compared to $1,758,221 in 1995,
representing a decrease of $399,073. This decrease was offset by the additional
sales and marketing expenses of $1,075,107 related to the revenues of the
Company's hockey business which it acquired effective April 30, 1996.
-15-
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $3,014,419 for the year ended December 31, 1996, compared to
$2,121,855 for the year ended December 31, 1995. This represents an increase of
$892,564. The primary reason for the increase is attributable to $746,887 of
general and administrative expenses incurred within the Company's recently
acquired (effective April 30, 1996) hockey business.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$681,717 for the year ended December 31, 1996 from $544,245 for the year ended
December 31, 1995. The increase of $137,472 was mainly attributable to
depreciation and amortization of $301,437 related to the Company's acquisition
of USA Skate effective April 30, 1996.
CONSULTING FEES, RELATED PARTY. Consulting fees, related party remained
$120,000 for the years ended December 31, 1996 and 1995. The Company pays an
officer/shareholder $10,000 per month for services primarily related to
long-term strategic planning, financing and acquisitions.
RESTRUCTURING CHARGES. For the year ended December 31, 1996, the Company
had restructuring charges of $1,229,000. These charges related to Management's
plan for restructuring operations. As a result of the restructuring plan, the
Company wrote off $411,700 related to certain equipment (molds) for certain of
its in-line skate and snowboard product lines. Additionally, the Company
re-evaluated certain trademarks and licenses and other intangibles and recorded
expenses of $368,000 and $205,700, respectively. As further described in Note 1
to the financial statements, the Company has signed a distribution agreement
with Skate Corp. to distribute California Pro and Kemper branded products,
resulting in the closure of the previous distribution facility and terminating
warehouse employees at an expense of $76,500 and $22,100. Lastly, the Company
wrote off previously deferred expenses related to a potential acquisition that
the Company elected not to pursue to completion.
INCOME (LOSS) FROM OPERATIONS. For the year ended December 31, 1996, the
Company had a loss from operations of $4,690,853 compared to income from
operations of $428,847 for the year ended December 31, 1995. The decrease of
$5,119,700 was a result of a decrease in gross profit of $2,081,298 and
increases in sales and marketing and general and administrative of $676,034 and
$892,564, respectively as described above. Additionally, the restructure charge
of $1,229,000 negatively affected the results of operations.
OTHER INCOME/EXPENSES. Other expenses for the year ended December 31, 1996
were $955,848 compared to $280,491 for the year ended December 31, 1995. The
increase of $655,351 was primarily attributable to interest and other expenses
relating to the acquisition and operation of USA Skate of $1,047,308. This was
partially offset by a decrease of $391,951 within California Pro. This decrease
was a direct result of a gain recorded of $479,100 on the book value of Skate
Corp. stock held by California Pro (see Note 11) as well as a gain recognized on
debt conversion (see Note 10) of $111,366 which were offset by a loss on
marketable securities of $144,457 (see Note 3) that the Company had received in
settlement of certain obligations.
-16-
<PAGE>
INCOME TAX EXPENSE (BENEFIT). For the year ended December 31, 1996, the
Company had an income tax benefit of $244,500 compared to an income tax expense
of $112,900 for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES. During 1996, the Company funded its
in-line skate and snowboard operations principally through a $5.5 million
revolving credit facility with a bank, and, to a lesser degree, loans from
private investors and trade credit. During the first quarter of 1995, the
Company competed its IPO, realizing net proceeds of approximately $4.2 million
after payment of offering expenses.
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 December 31, 1996,
based upon the agreed to formulas, the bank was undercollateralized by $808,000.
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 of its officers and directors in excess of a
specified amount, unless the bank consents to such actions and waives or amends
the applicable restrictions in the loan agreement. At December 31, 1996, based
on the limitations described above, under the in-line skate/snowboard line of
credit the Company was eligible to borrow $1,933,000 and the outstanding balance
was approximately $2,742,000. Under the hockey products lines of credit, the
Company was eligible to borrow $4,893,000 and the outstanding balance was
approximately $5,308,000.
At December 31, 1996, the Company had a working capital deficit of
approximately $5,264,000 compared to working capital of approximately $2,399,000
at December 31, 1995. The decrease in working capital is primarily related to
operating losses as well as debt issued and assumed in the acquisition of USA
Skate. In addition, as described in the foregoing paragraph, the Company is in
default on substantially all three of its bank loan agreements. As a result, the
independent auditors' report which accompanies the financial statements included
in this report contains a going concern explanatory paragraph. Management's
plans to resolve the Company's immediate financial difficulties and improve its
liquidity position are described in this section above under RESTRUCTURING
CHARGES and in note 1 to the financial statements included in this report.
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 Skate Corp. common stock valued at $300,000, and assumption of
-17-
<PAGE>
approximately $5,500,000 of debt. The cash portion of the purchase price was
paid with funds raised by Skate Corp., including the private placement of
884,667 shares of Skate Corp. common stock for $961,000, 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 Skate
also entered into a worldwide exclusive license agreement for use of certain
trademarks owned by the former controlling shareholder of USA Skate in exchange
for minimum royalty payments due on or before December 2001, with an imputed
(9.5%^) present value of $2,213,235.
The Company intends to continue to fund its hockey operations from two
credit facilities with banks, under $8,600,000 of revolving lines of credit
agreements.
Generally, invoices for the Company's in-line skate and snowboard products
are payable within 60 days. The Company's hockey products are sold customarily
with dating terms normal in the hockey industry. Historically, the Company has
not experienced significant write-offs with respect to trade receivables due to
its credit management procedures. Management believes its allowance for doubtful
accounts is adequate.
For payments to foreign suppliers, the Company has utilized trade
acceptances, which generally are payable upon receipt of documentation by the
Company's bank, but no later than time of delivery, utilizing available cash
under the Company's revolving line of credit. For 1997 the Company has
negotiated with its suppliers to be paid 50% upon shipment and 50% on 90 day
terms.
SEASONALITY. The Company's in-line skate and hockey related sales are
strongest in the second and third quarters of each calendar year. Snowboard
product sales are strongest during the third and fourth quarters of each
calendar year. However, industry trade shows and other sales, marketing and
administrative costs typically precede the strong selling season and, therefore,
the Company anticipates that it may incur a significant loss in the first
quarter of each year, including 1997.
FOREIGN EXCHANGE. The Company's products are principally purchased from
suppliers located in Taiwan, mainland China, Korea, Austria and Canada. The
Company purchases its in-line skate products for set prices negotiated annually
in U.S. dollars at exchange rates reset annually. The Company purchases its
snowboards in Deutsche Marks. The Company sells its snowboard and hockey
products both domestically and internationally. As a result, extreme exchange
rate fluctuations could have a significant effect on its sales, costs of goods
sold and the Company's gross margins. Further, if exchange rates fluctuate
dramatically, it may become uneconomical for the relationship between the
Company and its suppliers to continue. The Company does not engage in hedging
transactions.
-18-
<PAGE>
EFFECT OF INFLATION: Management believes that inflation has not had a
significant impact on its business.
Item 7. Financial Statements
--------------------
The Company's audited financial statements, described as follows, are
included in this report following the signature page of this report.
California Pro Sports, Inc. Consolidated Financial Statements
- -------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Independent auditors' report .............. F-1
Consolidated financial statements:
Balance Sheet at December 31, 1996 ...... F-2
Statements of operations - for the years
ended December 31, 1996 and 1995 ........ F-4
Statement of shareholders' equity
for the years ended
December 31, 1996 and 1995 .............. F-5
Statements of cash flows - for the years
ended December 31, 1996 and 1995 ........ F-7
Notes to consolidated financial statments F-9
</TABLE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None
-19-
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
-------------------------------------------------------------
Compliance With Section 16(a) of the Exchange Act
-------------------------------------------------
(a) IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS.
The officers and directors of the Company are listed below. The directors
of the Company are elected to hold office until the next annual meeting of
shareholders and until their respective successors have been elected and
qualified. Officers of the Company are elected by the Board of Directors and
hold office until their successors are elected and qualified.
The current officers and directors of the Company are:
<TABLE>
<CAPTION>
Name Age Positions
- ---- --- ---------
<S> <C> <C>
Henry Fong 61 Chairman of the Board of Directors
and Chief Executive Officer
Michael S. Casazza 47 President, Chief Operating Officer
and Director
Barry S. Hollander 40 Treasurer and Chief Financial Officer
Steve C.Y. Lin 35 Director
Brian C. Simpson 63 Director
Hung-Chang Yang 51 Director
Jonathan C. Hodgins 33 President and Chief Executive Officer of
USA Skate
</TABLE>
HENRY FONG has been the Chief Executive Officer and a director of the
Company since its inception in January 1993. In addition, Mr. Fong serves as a
member of the executive committee of the Company's Board of Directors. Mr. Fong,
a founder of the Company, provides the Company with expertise on long-term
strategic planning, financing and acquisitions, but is not involved in the
Company's day-to-day operations. His principal occupation is that of President,
Chief Executive Officer, Treasurer and a director of Roadmaster Industries,
Inc., positions held since August 1987. Roadmaster Industries, Inc. is a New
York Stock Exchange listed company which is a leading manufacturer fitness
equipment and toy products in the United States. Since 1983, Mr. Fong also has
served as the President and a director and is a significant stockholder of
Equitex, Inc., a publicly-held business development company. Since December
1991, Mr. Fong also has served as Chairman of the Board of Directors of IntraNet
Solutions, Inc. (f/k/a MacGregor Sports & Fitness, Inc.), a publicly-held
company. In March 1994, Mr. Fong was one of twelve CEOs selected as Silver Award
winners in FINANCIAL WORLD magazine's Corporate American "Dream Team."
-20-
<PAGE>
MICHAEL S. CASAZZA, a founder of the Company, has been President and a
director of the Company since its inception in 1993. In addition, Mr. Casazza
serves as a member of the executive committee of the Company's Board of
Directors. Since the Company's inception he has acted as Chief Operating Officer
and was formally designated to that position in September 1994. Mr. Casazza
devotes substantially all of his time to the business of the Company. From 1991
through July 1996, Mr. Casazza served as President, Chief Executive Officer and
a Director of MacGregor Sports & Fitness, Inc. (subsequently renamed IntraNet
Solutions, Inc.), a publicly-held company. From 1988 to 1990, Mr. Casazza served
as Vice President/General Manager, Golf Division for Wilson Sporting Goods
Company. From 1972 to 1988, Mr. Casazza held various positions with
Dunlop-Slazenger Corporation, including President of its Racket Sports Division
and National Sales Manager of its Golf Division.
BARRY S. HOLLANDER has served as Treasurer and Chief Financial Officer of
the Company since March 1993. Mr. Hollander devotes substantially all of his
business time to the business of the Company. From May 1991 through July 1996,
Mr. Hollander served as Vice President of Operations and Chief Financial Officer
of MacGregor Sports and Fitness, Inc. (subsequently renamed IntraNet Solutions,
Inc.), a publicly-held company. From August 1986 to 1989, Mr. Hollander held
various positions with MacGregor Sporting Goods, Inc., including Accounting
Manager and Chief Financial Officer of the Athletic Products Division. Mr.
Hollander is a certified public accountant.
STEVE C.Y. LIN has been a director of the Company since May 1994. Since
1989, he also has served as Chairman of the Board of Yuan Fu Brothers Co. Ltd.,
a Taiwanese petroleum equipment distribution company, and executive assistant to
the president of Aicello Taiwan Ltd., a Taiwanese environmental engineering
services company. From 1989 until it was dissolved in 1995, Mr. Lin served as
chairman of the board of the Company's predecessor, SCYL.
BRIAN C. SIMPSON has been a director of the Company since November 1994. In
addition, Mr. Simpson serves as a member of the executive, compensation and
audit committees of the Company's Board of Directors. Since 1992, his principal
occupation has been that of an international management consultant, providing
management support and strategic planning services for various companies,
Dunlop-Slazenger and BTR Industries. From 1989 to 1992, Mr. Simpson served as
Strategic Planning Director on a worldwide basis for Dunlop-Slazenger
International Limited. Prior to 1989, Mr. Simpson served as president of
Dunlop-Slazenger Corporation USA and as regional director, North America for
Dunlop-Slazenger Corporation International Limited, UK. Mr. Simpson has
extensive experience in sales, licensing, distribution and manufacturing, both
nationally and internationally, in the sporting goods business.
HUNG-CHANG (HERO) YANG was elected as a director of the Company in November
1994. In addition, Mr. Yang serves as a member of the compensation and audit
committees of the Company's Board of Directors. Since 1984, Mr. Yang's principal
occupation has been that of president of Precision Golf Associates Ltd., a
Taiwanese company which engages in the manufacture and sale of golf equipment.
From time-to-time, Mr. Yang has served as an unpaid consultant to the Company in
areas such as quality control of products and components.
JONATHAN C. HODGINS joined the Company in September 1996 as President and
Chief Executive Officer of USA Skate. Mr. Hodgins is the principal person
-21-
<PAGE>
responsible for the Company's hockey division. He has extensive experience in
developing sporting goods sales through marketing, research and development,
team sales, offshore licensing, sales forecasting and budgeting. From 1990 until
the joined the Company in September 1996, Mr. Hodgins was employed by CCM/Sports
Maska, Inc., Saint Laurent, Quebec, Canada in various management and executive
capacities. From 1986 to 1990, Mr. Hodgins was employed by Canstar Sports Group
Inc., Missasauga, Ontario, Canada, in product management. Mr. Hodgins earned a
Bachelor of Arts degree in business administration from the University of
Western Ontario in 1985.
(b) SIGNIFICANT EMPLOYEES.
None.
(c) FAMILY RELATIONSHIPS.
None.
(d) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS.
None.
(e) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the officers and directors of the Company and persons
who own more than ten percent of a registered class of the Company's securities
(collectively, "reporting persons"), to file reports of ownership and changes in
ownership on Forms 3, 4, and 5 with the Securities and Exchange Commission
("SEC"). Reporting Persons are required by SEC regulation to furnish the Company
with copies of all Forms 3, 4, and 5 filed.
Based solely upon a review of the copies of such forms it has received and
representations from the Reporting Persons, the Company believes all reporting
persons have complied with the applicable filing requirements, except that Mr.
Casazza and Mr. Fong each filed one late Form 4 reporting one transaction
regarding the conversion of debt into shares of common stock.
Item 10. Executive Compensation
----------------------
SUMMARY COMPENSATION TABLE.
The following table sets forth information regarding compensation paid to
(i) the Company's Chief Executive Officer and (ii) each of its other executive
officers whose total annual compensation exceeded $100,000 for the years ended
-22-
<PAGE>
December 31, 1994, 1995 and 1996. No executive officer received awards or
payments of any long-term compensation from the Company during the period
covered.
<TABLE>
<CAPTION>
Annual Long Term All Other
Compensation Compensation Compensation
-------------------------- ------------ ------------
($$) ($$)
Securities
Underlying
Name and Position Year Salary Bonus Other Options
- ----------------- ---- ------ ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Henry Fong, 1996 160,000(1) -0- -0- -0-(2) 300,000(3)
Chief Executive Officer 1995 120,000(1) -0- -0- 150,000 -0-
and Chairman of the Board 1994 120,000(1) -0- -0- 148,600 -0-
Michael S. Casazza, 1996 190,000 -0- -0- -0-(2) 300,000(3)
President, Chief 1995 137,000 -0- -0- 150,000 -0-
Operating Officer & Director 1994 120,000 -0- -0- 51,400 -0-
Barry S. Hollander, 1996 125,000 -0- -0- -0- -0-
Treasurer and Chief Financial 1995 116,923 -0- -0- -0- -0-
Officer
- ----------
</TABLE>
(1) Mr. Fong is not an employee of the Company and he receives fees of
$10,000 per month for consulting services rendered to the Company and
an additional $5,000 per month from USA Skate effective May 1,
1996, primarily related to long-term strategic planning, financing and
acquisitions and is not involved in the day-to-day operations of the
Company.
(2) Options granted in 1994 and 1995 were repriced during 1996 from $4.50
and $3.56 per share to $2.38 per share, representing market value at
the time of repricing.
(3) Represents Guaranty fees accrued in connection with the USA Skate
acquisition. These fees were paid at year end in shares of common
stock based on a price of $1.375 per share, the December 31, market
price.
OPTION/SAR GRANTS IN LAST FISCAL YEAR TABLE.
During 1996, no stock options were granted to any of the exeutive officers
named in the Summary Compensation Table.
AGGREGATED OPTION/SAR EXERCISES AND YEAR-END 1996 OPTION/SAR VALUES.
The following table sets forth information concerning the value of
unexercised options held by each of the named executive officers at December 31,
1996. No stock appreciation rights are outstanding and no options were exercised
by the named officers during 1996.
-23-
<PAGE>
<TABLE>
<CAPTION>
Number of Value of
Securities Underlying Unexercised
Unexercised Options In-the-Money options
at December 31, 1996 (#) at December 31, 1996 (#)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
<S> <C> <C>
Henry Fong 298,600/0 $0/0
Michael S. Casazza 228,900/0 $0/0
Barry S. Hollander 20,000/0 $0/0
</TABLE>
COMPENSATION OF DIRECTORS. During 1996, Messrs. Lin, Simpson and Yang, the
outside directors of the Company, received a retainer of $10,000 per year, paid
quarterly, and $1,000 for each Board of Directors meeting attended in person. In
addition, they are reimbursed for expenses incurred to attend meetings of the
Board of Directors or otherwise in connection with their services as directors
of the Company. Directors also are eligible to receive grants of stock options
under the Company's 1994 Stock Option Plan. During 1996, no options were granted
to the directors of the Company.
Item 11. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Set forth below is certain information as of December 31, 1996, with
respect to ownership of the Company's Common Stock held of record or
beneficially by (i) the Company's executive officers named in the summary
compensation table, (ii) each director of the Company, (iii) each person who
owns beneficially more than five percent of the Company's outstanding Common
Stock; and (iv) all directors and executive officers as a group:
-24-
<PAGE>
<TABLE>
<CAPTION>
Name and Address Number of Common Percentage
of Beneficial Owner Shares Owned Owned
- ------------------- ---------------- ----------
<S> <C> <C>
Henry Fong 1,345,358 (1) 26.9
2401 PGA Blvd., Suite 280F
Palm Beach Gardens, FL 33410
Michael S. Casazza 733,542 (2) 14.9
1221-B South Batesville Road
Greer, South Carolina 29650
Steve C.Y. Lin 193,800 4.1
Rm. 906, #111
Nanking E. Road
Section 2
Taipei, Taiwan
Barry S. Hollander 25,000 (3) .5
1221-B South Batesville Road
Greer, South Carolina 29650
Playmaker Co., Ltd. 316,200 6.7
10th Floor 101
Sung Chiang Road
Taipei, Taiwan
Wayne Mills 250,000 (4) 5.3
The Colonnade, Suite 290
5500 Wayzata Blvd.
Golden Valley, MN 55416
Brian C. Simpson -- --
15 Langhams Way
Wargrave, Berkshire
RG 10 8AX U.K.
Hung-Chang Yang -- --
First Floor, No. 16
Lane 238
Taipei, Taiwan
All directors and
executive officers as
a group (7 persons) 2,297,700 (1)(2)(3) 43.8
</TABLE>
-25-
<PAGE>
- ----------
(1) Includes warrants currently exercisable to acquire 298,600 shares of Common
Stock.
(2) Includes warrants currently exercisable to acquire 228,900 shares of Common
Stock.
(3) Includes options currently exercisable to acquire 20,000 shares of Common
Stock.
(4) Information obtained from the Schedule 13D on file with the Securities and
Exchange Commission.
CHANGES IN CONTROL. None.
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
In April 1994, the Company issued warrants to Henry Fong to purchase up to
148,600 shares of Common Stock and issued warrants to Michael S. Casazza to
purchase up to 51,400 shares of Common Stock, exercisable at $4.50 per share
through April 14, 1997. In August 1995, the Company issued warrants to Messrs.
Fong and Casazza each to purchase up to 150,000 shares of Common Stock,
exercisable at $3.56 per share through August 1, 1998. The exercise price of
these warrants represented 100% of the closing bid price of the Common Stock as
reported by Nasdaq on the date of grant. The warrants issued to Messrs. Fong and
Casazza in April 1994 and August 1995 were issued as additional compensation for
their valuable services rendered to the Company. In April 1996, as compensation
for their extra efforts in causing the USA Skate acquisition to close, the
Company lowered the exercise price of all of the warrants held by Messrs. Fong
and Casazza to $2.38 per share, the closing bid price of the Common Stock on the
date the warrants were repriced.
In March 1996, the Chief Operating Officer loaned the Company $170,000.
During the second quarter of 1996, the Company transferred 141,667 shares of USA
Skate common stock to Mr. Casazza in satisfaction of this debt, based on a price
of $1.20 per share of USA Skate common stock.
At December 31, 1995, the Company owed Mr. Fong $90,000 of accrued but
unpaid fees. During the second quarter of 1996, the Company transferred 75,000
shares of USA Skate common stock to Mr. Fong in satisfaction of this debt, based
on a price of $1.20 per share of USA Skate common stock.
-26-
<PAGE>
Messrs. Fong and Casazza have personally guaranteed the Company's in-line
skate/snowboard related bank line of credit up to $5.5 million and its hockey
related bank line of credit up to $5 million. In addition, Messrs. Fong and
Casazza have each guaranteed, jointly and severally with other guarantors, an
additional $5.25 million of indebtedness of the Company incurred in connection
with the USA Skate acquisition, and Messrs. Fong and Casazza have guaranteed,
jointly and severally with another guarantor, approximately CDN $650,000 owed by
the Canadian subsidiary to a Canadian bank. The Company has accrued fees of
$300,000 each for Messrs. Fong and Casazza as compensation for their extensive
personal guaranties. As of December 31, 1996, Messrs. Fong and Casazza agreed to
accept payment of these fees in common stock of the Company based on the
December 31 market price of $1.375 per share.
In May 1996, Mr. Fong loaned $680,000, and Mr. Casazza loaned $400,000 to
the Company's majority owned subsidiary, which funds were used to pay a portion
of the purchase price for the USA Skate acquisition. In return for these loans,
the subsidiary issued promissory notes for the principal amount of each loan
with interest at nine percent payable quarterly, due July 1, 1997. In addition,
the subsidiary granted warrants to Mr. Fong to purchase 566,667 shares of USA
Skate common stock and to Mr. Casazza to purchase 333,333 shares of USA Skate
common stock, all exercisable through April 30, 1998 at $1.20 per share of USA
Skate common stock. At December 31, 1996, the balance owed Mr. Fong was $530,000
and Mr. Casazza was owed $149,000.
In November 1996, Mr. Casazza loaned $45,000 to the Company and there
remains a balance due of $26,000 at December 31, 1996.
In December 1996, Mr. Fong agreed to convert $60,000 owed to him by the
Company for consulting services for the period July 1 through December 31, 1996
into shares of the Company at the December 31, 1996 market price of $1.375 per
share.
From time to time as deemed appropriate and in amounts determined by the
Company's Board of Directors, fees may be paid by the Company to persons who
facilitate acquisitions and/or financing transactions for the Company, which
persons may be directors and/or officers of the Company.
Transactions between the Company and its officers, directors, employees and
affiliates will be on terms no less favorable to the Company than would be
available from unaffiliated parties. Any such transactions will be subject to
the approval of a majority of the disinterested members of the Board of
Directors.
-27-
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
--------------------------------
(a) EXHIBITS.
Exhibits being filed herewith are listed below.
Number Description
------ -----------
3.1 Certificate of Incorporation of the Registrant.
(Incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form SB-2,
Registration No. 33-85108 as filed with the Securities and
Exchange Commission "SEC" on October 13, 1994 (the "1994
Registration Statement").)
3.2 Bylaws as currently in effect. (Incorporated by reference to
Exhibit 3.2 to the 1994 Registration Statement.)
4.1 Specimen of Common Stock certificate. (Incorporated by
reference to Exhibit 4.1 to Amendment No. 4 to the 1994
Registration Statement, filed with the SEC on December 22,
1994 (" 1994 Amendment #4).)
10.1 Manufacturing Agreement, dated April 1, 1993, between the
Registrant and Playmaker. (Incorporated by reference to
Exhibit 10.2 to the 1994 Registration Statement.)
10.2 Exclusive License Agreement, dated April 1, 1993, between
the Registrant and Playmaker. (Incorporated by reference to
Exhibit 10.4 to the 1994 Registration Statement.)
10.3(a) Indemnity letter agreement, dated April 1, 1993, between the
Registrant and Playmaker. (Incorporated by reference to
Exhibit 10.8(a) to the 1994 Registration Statement.)
10.3(b) Patent License Agreement, dated April 1, 1993 and Assignment
thereof. (Incorporated by reference to Exhibit 10.8(b) to
the 1994 Registration Statement.)
10.4 Loan and Security Agreement, dated April 1, 1993, with
LaSalle National Bank, N.A. ("Loan Agreement").
(Incorporated by reference to Exhibit 10.10 to the 1994
Registration Statement.)
10.5(a) Amendment, dated June 15, 1994, to Loan Agreement.
(Incorporated by reference to Exhibit 10.10(a) to Amendment
No. 1 to the 1994 Registration Statement, filed with the SEC
on October 28, 1994 ("1994 Amendment #1).)
-28-
<PAGE>
Number Description
------ -----------
10.5(b) Consent and Amendment, dated August 3, 1994, to Loan
Agreement. (Incorporated by reference to Exhibit 10.10(b) to
1994 Amendment #1.)
10.5(c) Amendment, dated August 30, 1995, to Loan Agreement.
(Incorporated by reference to Exhibit 10.10(c) to
Registration Statement on Form SB-2, Registration No.
33-98898 ("Registration Statement 33-98898.")
10.6 Demand Note, dated April 1, 1993. (Incorporated by reference
to Exhibit 10.11 to the 1994 Registration Statement.)
10.7 Continuing Unconditional Guaranties, dated April 1, 1993, of
Henry Fong and Michael S. Casazza. (Incorporated by
reference to Exhibit 10.12 to the 1994 Registration
Statement.)
10.8 Letter Agreement, dated April 1, 1993, from the Registrant
to LaSalle. (Incorporated by reference to Exhibit 10.13 to
the 1994 Registration Statement.)
10.9 1994 Stock Option Plan. (Incorporated by reference to
Exhibit 10.14 to the 1994 Registration Statement.)
10.10 License Agreement, dated July 28, 1994, between Front 500
Corporation and CP. (Incorporated by reference to Exhibit
10.16 to the 1994 Registration Statement.)
10.11 Exclusive Distributorship Agreement, dated March 1994, with
Maneuverline Co. Ltd. (Incorporated by reference to Exhibit
10.20 to the 1994 Registration Statement.)
10.12 Exclusive Distributorship Agreement, dated March 1, 1991,
with Airtool Ltd. (Incorporated by reference to Exhibit
10.21 to the 1994 Registration Statement.)
10.13 Exclusive Distributorship Agreement, dated June 15, 1994,
with Wolf Strobel Sportswear GMBH. (Incorporated by
reference to Exhibit 10.22 to the 1994 Registration
Statement.)
10.14 License Agreement, dated May 10, 1995, granted by California
Pro, Inc. to Big5 Co., Ltd. (Incorporated by reference to
Exhibit 10.23 in Registration Statement 33-98898.)
-29-
<PAGE>
Number Description
------ -----------
10.15 Form of Warrant related to the Registrant's issuance of
warrants to purchase up to 200,000 shares of Common Stock.
(Incorporated by reference to Exhibit 10.29(a) to the 1994
Registration Statement.)
10.16 Form of Warrant related to the issuance of warrants to
purchase up to 21,000 shares of Common Stock. (Incorporated
by reference to Exhibit 10.29(c) to 1994 Amendment #1.)
10.17 Form of Indemnity Agreements for the Registrant's directors
and officers. (Incorporated by reference to Exhibit 10.31 to
the 1994 Registration Statement.)
10.18 Lease Agreement, dated February 16, 1993, for office space,
as amended by letter agreement dated February 16, 1994.
(Incorporated by reference to Exhibit 10.32 to the 1994
Registration Statement.)
10.19 Patent License Agreement, with Out of Line Sports, Inc.
dated as of September 30, 1994. (Incorporated by reference
to Exhibit 10.33 to the 1994 Registration Statement.)
10.20 Trademark License Agreement, dated as of September 30, 1994.
(Incorporated by reference to Exhibit 10.34 to the 1994
Registration Statement.)
10.21 Agreement, dated October 31, 1994, between California Pro
Sports, Inc. and Playmaker related to royalty payments.
(Incorporated by reference to Exhibit 10.35 to Amendment No.
2 to the Registration Statement, filed with the SEC on
November 16, 1994 ("1994 Amendment #2").)
10.22 Form of Warrant related to the Registrant's issuance of
warrants to purchase up to 300,000 shares of Common Stock.
(Incorporated by reference to Exhibit 10.37 in Registration
Statement 33-98898.)
10.23 Letter Agreement dated August 24, 1995 among the Registrant
and Warren Amendola, Patricia Amendola, Three R Sales, Inc.,
Three R Profit Sharing Retirement Plan and USA Skate
Company, Inc. (Incorporated by reference to Exhibit 10.38 in
Registration Statement 33-98898.)
10.24 Form of Warrant related to the Registrant's issuance of
warrants to purchase up to 150,000 shares of Common Stock
with Registration Rights Agreement. (Incorporated by
reference to Exhibit 10.39 in Registration Statement 33-
98898.)
-30-
<PAGE>
Number Description
------ -----------
10.25 Stock Purchase Agreement effective as of April 30, 1996 by
and among Warren Amendola, Sr., Patricia Amendola, Three R
Profit Sharing Retirement Plan, Warren Amendola, Jr.,
Richard Amendola and Russell Amendola, as sellers, and USA,
as purchaser, and the Registrant, including the following
exhibit agreements thereto. (Incorporated by reference to
Exhibit 10.1 to the Registrant's Form 8-K, filed May 30,
1996, reporting an event on May 15, 1996, Commission File
No. 0-25114 (the "Form 8-K").)
10.26(a) Exhibit A - USA's Promissory Note to sellers in the
principal amount of $1,050,000, with related Guaranty.
(Incorporated by reference to Exhibit 10.1(a) to the Form
8-K.)
10.26(b) Exhibit B - License Agreement from Warren Amendola, Sr. to
USA Skate, with related Guaranty. (Incorporated by reference
to Exhibit 10.1(b) to the Form 8-K.)
10.26(c) Exhibit C - Consulting and Non-Competition Agreement among
Warren Amendola, Sr., USA and the Registrant, with related
Guaranty. (Incorporated by reference to Exhibit 10.1(c) to
the Form 8-K.)
10.26(d) Exhibit D - Escrow Agreement by and among Warren Amendola,
Sr., USA, the Registrant and Blau, Kramer, Wactlar &
Lieberman, P.C. (Incorporated by reference to Exhibit
10.1(d) to the Form 8-K.)
10.26(e)(1) Exhibit E1 - Employment Agreement between USA Skate and
Warren Amendola, Sr. (Incorporated by reference to Exhibit
10.1(e)(1) to the Form 8-K.)
10.26(e)(2) Exhibit E2 - Non-Disclosure and Non-Competition Agreement by
and among Warren Amendola, Jr., USA Skate, USA and the
Registrant. (Incorporated by reference to Exhibit 10.1(e)(2)
to the Form 8-K.)
10.26(e)(3) Exhibit E3 - Non-Disclosure and Non-Competition Agreement by
and among Richard Amendola, USA Skate, USA and the
Registrant. (Incorporated by reference to Exhibit 10.1(e)(3)
to the Form 8-K.)
10.26(f) Exhibit F - Registration Rights Agreement by and among the
sellers and USA, with related Guaranty. (Incorporated by
reference to Exhibit 10.1(f) to the Form 8-K.)
10.26(g) Exhibit G - Guaranty for the benefit of Patricia Amendola.
(Incorporated by reference to Exhibit 10.1(g) to the Form
8-K.)
-31-
<PAGE>
Number Description
------ -----------
10.26(h) Exhibit H - Davtec's Promissory Note to Warren Amendola, Sr.
in the principal amount of $125,000, with related Guaranty.
(Incorporated by reference to Exhibit 10.1(h) to the Form
8-K.)
10.27(a) Loan and Security Agreement between USA Skate and LaSalle
National Bank (the "USA Skate Loan Agreement) FILED
HEREWITH.
10.27(b) Demand Note related to the USA Skate Loan Agreement.
(Incorporated by reference to Exhibit 10.2(a) to the Form
8-K.)
10.27(c)(1) Guaranty of the USA Skate Loan by the Registrant, California
Pro, Inc. and USA. FILED HEREWITH.
10.27(c)(2) Guaranty of the USA Skate Loan by Henry Fong. FILED
HEREWITH.
10.27(c)(3) Guaranty of the USA Skate Loan by Michael Casazza. FILED
HEREWITH.
10.27(d) Letter from the Registrant, USA and Three R Sales, Inc. to
LaSalle National Bank. (Incorporated by reference to Exhibit
10.2(c) to the Form 8-K.)
10.28(a) Letter Amendment, dated as of April 30, 1996, to the Loan
Agreement dated April 1, 1993 between California Pro, Inc.
and LaSalle National Bank, as amended (the "CP Loan").
(Incorporated by reference to Exhibit 10.3(a) to the Form
8-K.)
10.28(b) Guaranty of the CP Loan by USA Skate. (Incorporated by
reference to Exhibit 10.3(b) to the Form 8-K.)
10.29 Lease Agreement, dated November 1, 1996, between Philip
Calabrese and USA Skate Co., Inc. (Incorporated by reference
to Exhibit 10.31 in Registration Statement 33-98898.)
11.1 Statement Re: Computation of Per Share Earnings. FILED
HEREWITH.
21.1 List of Subsidiaries. (Incorporated by reference to Exhibit
21.1 in Registration Statement 33-98898.)
27.1 Financial Data Schedule. FILED HEREWITH.
(b) REPORTS ON FORM 8-K.
None.
-32-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CALIFORNIA PRO SPORTS, INC.
Date: May 4, 1997 /s/ Michael S. Casazza
-----------------------------------
Michael S. Casazza, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Date: May 4, 1997 /s/ Henry Fong
-----------------------------------
Henry Fong, Chief Executive
Officer and Director
Date: May 4, 1997 /s/ Michael S. Casazza
-----------------------------------
Michael S. Casazza, President,
Chief Operating Officer and Director
Date: May 4, 1997 /s/ Barry S. Hollander
-----------------------------------
Barry S. Hollander, Chief Financial
Officer and Principal Accounting
Officer
Date: May 4, 1997 /s/ Steve C.Y. Lin
-----------------------------------
Steve C.Y. Lin, Director
Date: May 4, 1997 /s/ Brian C. Simpson
-----------------------------------
Brian C. Simpson, Director
Date: May 4, 1997 /s/ Hung-Chang Yang
-----------------------------------
Hung-Chang Yang, Director
-33-
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1996 AND 1995
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent auditors' report ................................. F-1
Consolidated financial statements:
Balance sheet ........................................... F-2 - F-3
Statements of operations ................................ F-4
Statements of shareholders' equity ...................... F-5 - F-6
Statements of cash flows ................................ F-7 - F-8
Notes to financial statements ................................ F-9 - F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
California Pro Sports, Inc.
We have audited the accompanying consolidated balance sheet of California Pro
Sports, Inc. and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the two-year period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of California Pro
Sports, Inc. and subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that California Pro Sports, Inc. will continue as a going concern. As more fully
described in Note 1, the Company had a significant operating loss in 1996 and a
working capital deficiency at year end. In addition, the Company is in default
on substantially all of its loan agreements. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans with regard to these matters are also described in Note 1. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
GELFOND HOCHSTADT PANGBURN & CO.
Denver, Colorado
April 11, 1997
F-1
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Assets
- ------
<S> <C>
Current assets:
Cash ...................................................... $ 59,098
Accounts receivable, less allowance
for doubtful accounts of $662,000 (Note 12) .............. 4,372,320
Income taxes receivable (Note 14) ......................... 221,624
Marketable securities (Note 3) ............................ 228,652
Inventories (Note 4) ...................................... 5,214,917
Prepaid expenses and other ................................ 579,570
-----------
Total current assets ......................... 10,676,181
-----------
Property and equipment, net of accumulated
depreciation (Note 5) ....................................... 1,919,756
Intangible and other assets, net of accumulated
amortization (Note 2) ....................................... 8,473,806
-----------
10,393,562
-----------
$21,069,743
===========
</TABLE>
(Continued)
F-2
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity
- ------------------------------------
<S> <C>
Current liabilities:
Current portion of:
Long-term debt (Note 9) ............................... $ 192,726
License fee payable, seller (Note 13) ................. 99,215
Notes payable:
Banks (Note 6) ........................................ 8,050,734
Seller (Note 7) ....................................... 656,250
Officers/shareholders (Note 7) ........................ 705,000
Convertible promissory notes (Note 8) ................. 2,518,000
Other (Note 8) ........................................ 718,172
Accounts payable and accrued expenses ..................... 2,758,834
Payables to officers/shareholders (Note 7) ................ 88,982
Income taxes payable and other (Note 14) .................. 152,201
-----------
Total current liabilities .................... 15,940,114
-----------
Long-term debt, net of current portion (Note 9) .............. 430,098
Notes payable, seller, net of current portion (Note 7) ....... 287,500
License fee payable, seller, net of current portion (Note 13) 2,269,971
Deferred income taxes (Note 14) .............................. 60,600
-----------
Total long-term debt ......................................... 3,048,169
-----------
Minority interest ............................................ 1,007,205
-----------
Commitments and contingencies (Notes 6, 7, 8, 9, and 13)
Shareholders' equity (Note 15):
Preferred stock, $0.01 par value, authorized 5,000,000
shares; no shares issued
Common stock, $0.01 par value, authorized 10,000,000
shares; issued and outstanding 4,699,511 ................. 46,995
Warrants .................................................. 394,200
Capital in excess of par .................................. 6,386,332
Deficit ................................................... (5,745,498)
Cumulative foreign currency translation adjustment ........ (7,774)
-----------
Total shareholders' equity ................... 1,074,255
-----------
$21,069,743
===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Net sales ................................................... $ 16,952,904 $ 17,128,711
------------ ------------
Cost of sales:
Substantially from a related party (Note 12) ............. 3,148,423 7,649,290
Others ................................................... 9,852,861 4,506,253
Inventory markdowns and adjustments ...................... 1,059,750
------------ ------------
14,061,034 12,155,543
------------ ------------
Gross profit ......................................... 2,891,870 4,973,168
------------ ------------
Operating expenses:
Sales and marketing expenses ............................. 2,434,255 1,758,221
General and administrative expenses ...................... 3,014,417 2,121,855
Depreciation and amortization ............................ 681,717 544,245
Consulting fees, related party (Note 13) ................. 120,000 120,000
Rent expense, seller (Note 13) ........................... 103,334
Restructuring charges (Note 17) .......................... 1,229,000
------------ ------------
7,582,723 4,544,321
------------ ------------
Income (loss) from operations ............................... (4,690,853) 428,847
------------ ------------
Other expenses (income):
Interest expense:
Related parties ...................................... 305,947 2,804
Others ............................................... 1,083,274 310,379
Foreign currency loss .................................... 44,012 33,590
Royalty and other income ................................. (51,376) (66,282)
Net unrealized holding loss (Note 3) ..................... 144,457
Gain on sale of investment in Subsidiary (Note 10) ....... (111,366)
Gain from issuance of common stock by subsidiary (Note 11) (479,100)
------------ ------------
935,848 280,491
------------ ------------
Income (loss) before income taxes and minority interest ..... (5,626,701) 148,356
Income tax expense (benefit) ................................ (244,500) 112,900
------------ ------------
Income (loss) before minority interest ...................... (5,382,201) 35,456
Minority interest ........................................... 193,681
------------ ------------
Net income (loss) ........................................... $ (5,575,882) $ 35,456
============ ============
Net income (loss) per share ................................. $ (1.37) $ 0.01
============ ============
Weighted average number of
shares outstanding ......................................... 4,078,864 3,599,320
============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Cumulative
foreign currency
Capital in translation
Common stock Warrants excess of par Deficit adjustment Total
------------ -------- ------------- ------- ---------- -----
Shares Amount
------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1995 ...... 2,225,054 $ 22,251 $ 100 $ 162,912 $ (205,072) $ (19,809)
Issuance of common stock
and warrants in initial public
offering, net of offering costs
(Note 15) ..................... 1,200,000 12,000 345,100 3,848,447 4,205,547
Issuance of warrants in
connection with private
placement (Note 15) ........... 49,000 49,000
Issuance of common stock in
cancellation of a note payable
(Note 15) ..................... 80,000 800 199,200 200,000
Issuance of common stock
upon exercise of warrants
(Note 15) ..................... 74,623 746 55,221 55,967
Issuance of common stock in
conversion of notes payable
(Note 15) ..................... 183,334 1,833 410,667 412,500
Issuance of common stock from
exercise of employee stock
options (Note 15) ............. 20,500 205 51,045 51,250
Net income for 1995 ............ 35,456 35,456
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1995 .... 3,783,511 37,835 394,200 4,727,492 (169,616) 4,989,911
</TABLE>
(Continued)
F-5
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Cumulative
foreign currency
Capital in translation
Common stock Warrants excess of par Deficit adjustment Total
------------ -------- ------------- ------- ---------- -----
Shares Amount
------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of 400,000 shares
of common stock (Note 15) ..... 400,000 4,000 896,000 900,000
Issuance of 36,000 shares of
common stock in settlement
of an account payable (Note 15) 36,000 360 107,640 108,000
Issuance of 480,000 shares of
common stock in settlement of
payables to officers/shareholders
(Note 15) ..................... 480,000 4,800 655,200 660,000
Net loss for 1996 .............. (5,575,882) (5,575,882)
Cumulative foreign currency
translation adjustment ........ $ (7,774) (7,774)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1996 .... 4,699,511 $ 46,995 $ 394,200 $ 6,386,332 $(5,745,498) $ (7,774) $ 1,074,255
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................................ $(5,575,882) $ 35,456
----------- -----------
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Inventory markdowns and adjustments .......................................... 1,059,750
Net unrealized holding loss .................................................. 144,457
Gain on sale of investment in subsidiary ..................................... (111,366)
Gain from issuance of common stock by subsidiary ............................. (479,100)
Depreciation and amortization ................................................ 681,717 544,245
Amortization of license fee payable and other ................................ 214,688
Provision for losses on accounts receivable .................................. 228,000 291,488
Foreign currency loss ........................................................ 44,012 33,590
Minority interest ............................................................ 193,681
Restructuring charges ........................................................ 1,229,000
Decrease (increase) in assets:
Accounts receivable .......................................................... 2,432,580 (523,152)
Income taxes receivable ...................................................... (221,624)
Due from related parties ..................................................... 22,866 (285,203)
Inventories .................................................................. 2,578,805 234,115
Prepaid expenses and other ................................................... (236,638) 10,280
Increase (decrease) in liabilities:
Accounts payable and accrued expenses ........................................ (1,210,188) (465,671)
Payables to officers/shareholders and other related parties .................. 136,250 (3,164,769)
Income taxes payable ......................................................... (208,304)
----------- -----------
Total adjustments .................................................... 6,498,586 (3,325,077)
----------- -----------
Net cash provided by (used in) operating activities ............................. 922,704 (3,289,621)
----------- -----------
Cash flows from investing activities:
Payment for purchase of subsidiary,
net of cash acquired ........................................................ (3,551,760)
Payments for intangible assets ............................................... (436,600)
Capital expenditures ......................................................... (237,545) (879,324)
Acquisition, offering and financing costs .................................... (421,770) (343,030)
----------- -----------
Net cash used in investing activities ........................................... (4,647,675) (1,222,354)
----------- -----------
Cash flows from financing activities:
Decrease in bank overdraft ................................................... (35,499)
Proceeds from notes payable and long-term debt ............................... 4,543,522
Repayments of notes payable and long-term debt ............................... (1,587,263) (622,532)
Net proceeds from issuance of
common stock and warrants 819,600 5,178,216
----------- ------------
Net cash provided by financing activities 3,775,859 4,520,185
----------- ------------
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net increase (decrease) in cash ................................................. 50,888 8,210
Cash, beginning ................................................................. 8,210
----------- -----------
Cash, ending .................................................................... $ 59,098 $ 8,210
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest ....................................................... $ 1,041,900 $ 369,300
=========== ===========
Cash paid for income taxes ................................................... $ 89,300 $ 36,600
=========== ===========
Supplemental disclosure of noncash investing and financing activities:
Purchase of USA Skate Co., Inc. net of cash acquired:
Fair value of assets acquired ............................................ $11,334,200
Intangible assets ........................................................ 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
===========
Minimum royalties payable in exchange
for a license agreement .................................................. $ 2,213,235
===========
Issuance of 400,000 shares of common stock
in exchange for consulting and non-compete
agreements ............................................................... $ 900,000
===========
Issuance of 36,000 shares of common
stock in settlement of an account payable ................................ $ 108,000
===========
Issuance of 480,000 shares of common stock
in settlement of payables to officers/shareholders ....................... $ 660,000
===========
Deferred offering costs deducted from the
proceeds of the initial public offering .................................. $ 816,452
===========
Issuance of 183,334 shares of common stock
in conversion of notes payable ........................................... $ 412,500
===========
Issuance of 80,000 shares of common stock
in cancellation of a convertible note payable ............................ $ 200,000
===========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1. Basis of presentation and acquisition of USA Skate Co., Inc.:
The accompanying consolidated financial statements include the accounts of
California Pro Sports, Inc. (the "Company") and its subsidiaries,
California Pro, Inc. ("CP") and USA Skate Corporation ("Skate Corp.").
Skate Corp. was formed in 1995 to acquire USA Skate Co., Inc. ("USA
Skate"). On December 31, 1996, the Company owned 100% of the outstanding
CP capital stock and 56.5% of the outstanding Skate Corp. capital stock.
Minority interest represents Skate Corp.'s minority shareholders' 43.5%
share of the equity and net income of Skate Corp. Intercompany
transactions have been eliminated in consolidation.
In May 1996, the Company, through Skate Corp., completed the acquisition of
all of the outstanding capital stock of USA Skate, a New York corporation.
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 and Davtec beginning May 1, 1996. Consideration
for the purchase was $10,500,000 and consisted of $3,650,000 of cash
(including approximately $98,000 of cash acquired), a $1,050,000, 8%
installment note payable (Note 7), 250,000 shares of Skate Corp. common
stock valued at $300,000 (Note 13), and assumption of approximately
$5,500,000 of debt. The cash portion of the purchase price was paid with
funds raised by Skate Corp., including the private placement of 884,667
shares of common stock of Skate Corp. for $1,061,600, the issuance of
$1,080,000 of 9% notes payable to certain officers/shareholders (Note 7),
and the issuance of $2,515,000 of 9% convertible promissory notes (Note
8). The cost of raising the capital necessary to complete the acquisition
was approximately $242,000.
The following unaudited, consolidated pro forma condensed statements of
operations for 1996 and 1995 have been prepared to reflect the 1996
acquisition by the Company as if the acquisition had occurred January 1,
1995:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Total revenue ........... $20,026,000 $31,429,000
=========== ===========
Net income (loss) ....... $(5,686,000) $ 71,000
=========== ===========
Earnings (loss) per share $ (1.35) $ 0.02
=========== ===========
</TABLE>
F-9
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
1. Basis of presentation and acquisition of USA Skate Co., Inc. (continued):
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company incurred a
significant operating loss in 1996 and has a working capital deficiency at
December 31, 1996. In addition, the Company is in default on substantially
all of its bank loan agreements at year end. These conditions raise
substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities
that may result from the outcome of these uncertainties.
During the fourth quarter of 1996, management implemented a plan for
restructuring the Company's operations. The plan's objectives are to
return the Company to profitability, primarily through implementation of
product line changes and a cost reduction program (Note 17).
In addition, the Company has signed a distribution agreement with Skate
Corp., for California Pro and Kemper branded products, which management
believes will result in substantial selling and general and administrative
cost reductions due to consolidation of Company-wide activities at one
location. Management is also in the process of renegotiating its bank loan
agreements in order to extend their maturities.
Management is currently exploring the possibility of various other options,
including the sale of subsidiaries or license and trademark rights and an
initial public offering for Skate Corp. Management believes that the
successful implementation of one or more of these options, coupled with
the restructuring which has been implemented, and the renegotiated bank
loan agreements will provide the Company with the liquidity necessary to
continue as a going concern.
2. Business and summary of significant accounting policies:
Business of the Company:
CP sells in-line skates and accessories, under the brand names California
Pro(R) and Rolling Thunder(TM), to retail sporting goods stores
principally in North America. A majority of in-line skates are
manufactured by Playmaker Co., Ltd. ("Playmaker"), a minority shareholder
of the Company. CP also sells snowboards and accessories under the
Kemper(R) brand name to retail sporting goods stores in North America and
distributors in Europe and Japan, and through Skate Corp., it
manufactures, imports and markets VICTORIAVILLE(TM) and VIC(R) ice and
street/roller hockey skates, sticks and related protective gear and
accessories.
F-10
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
2. Business and summary of significant accounting policies (continued):
Business of the Company (continued):
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. USA Skate sells skates and related
accessories through a network of independent sales representative groups
to over 1,000 accounts. Internationally, USA Skate's products are sold and
distributed through independent distributors located primarily in Germany,
Switzerland, Italy, Austria, Czech Republic, Sweden, Finland, France, and
Brazil.
Davtec manufactures hockey sticks, pants and gloves for USA Skate and is
the Canadian distributor for all of the hockey related VICTORIAVILLE(TM)
and VIC(R) product lines. Davtec also manufactures the Hespeler(TM)
premium brand of hockey sticks which are marketed worldwide.
Use of accounting estimates in financial statement preparation:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statement and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Inventories:
Inventories are stated at the lower of cost (first-in first-out method) or
market.
F-11
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
2. Business and summary of significant accounting policies (continued):
Property, equipment, and depreciation:
Property and equipment are stated at cost. Depreciation is provided by use
of accelerated and straight-line methods over the estimated useful lives
of the related assets as follows: building and improvements, 20 years;
machinery, equipment, molds and furniture, 5 to 10 years.
Intangible and other assets:
Management assesses the carrying value of intangible and other long-lived
assets for impairment when circumstances warrant such a review, primarily
by comparing current and projected sales, operating income and annual cash
flows on an undiscounted basis, with the related annual amortization
expenses. In connection with management's restructuring plan, during the
fourth quarter of 1996, intangible assets with a carrying value of
$718,700 were written down and included in restructuring charges (Note
17). At December 31, 1996, intangible and other assets consist of:
<TABLE>
<S> <C>
Licenses for trademarks ........... $4,209,042
Goodwill .......................... 2,420,128
Non-compete/consulting agreements . 1,050,000
Loan guarantee fees ............... 600,000
Finders fees and organization costs 250,000
Deferred financing costs .......... 256,805
Deposits and other ................ 104,078
----------
8,890,053
Less accumulated amortization ..... 416,247
----------
$8,473,806
==========
</TABLE>
Trademark license costs relate to perpetual license agreements which are
amortized on the straight-line method over 15 to 25 years (Note 13).
Goodwill represents the cost of the Company's investments in subsidiaries
in excess of the net tangible assets acquired and is being amortized over
15 to 25 years.
F-12
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
2. Business and summary of significant accounting policies (continued):
Intangible and other assets (continued):
Costs of non-compete/consulting agreements are amortized on the
straight-line method, primarily over the 5 to 10 year terms of the
agreements.
Fees to two officers/shareholders of the Company relate to their guarantees
of bank and certain other debt of the Company. The guarantees are subject
to certain terms and conditions, including certain net income
requirements. If the terms are satisfied, the fees will be amortized over
the remaining terms of the agreements. If the terms are not satisfied, the
amounts will be adjusted accordingly.
Financing costs related to the bank debt and convertible promissory notes
are amortized on the straight-line method over the terms of the
agreements.
Organization and other costs incurred in connection with the acquisition of
USA Skate are being amortized over 5 years.
Foreign currency transactions:
CP primarily purchases and sells its in-line skate products in U.S.
dollars. CP primarily purchases its snowboard products in German Deutsche
Marks ("DM") and sells to its customers in either DM or U.S. dollars. USA
Skate primarily purchases and sells its products in U.S. dollars, and
Davtec primarily purchases its goods in Canadian dollars and sells to
customers in both U.S. and Canadian dollars.
The balance sheet accounts of Davtec are translated from Canadian dollars
to U.S. dollars at the rates of exchange at the balance sheet date. The
resultant translation adjustments are included in a cumulative foreign
currency translation adjustment, a separate component of shareholders'
equity. Income and expense accounts are translated at average rates of
exchange during the periods. Gains and losses on foreign currency
transactions are included in determining consolidated net earnings.
F-13
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
2. Business and summary of significant accounting policies (continued):
Fair value of financial instruments:
The carrying values of the Company's long-term debt and notes payable to
banks approximate their fair values at December 31, 1996, because they
bear interest at current market rates. The guaranteed minimum royalties
payable of $3,000,000, due under the license agreement with the parties
who sold USA Skate to the Company (the "Seller") (Note 13), have been
discounted at 9.5%, which results in a discounted license fee payable of
$2,369,971 at December 31, 1996, which approximates fair value. The fair
values of the Company's payables to officers/shareholders are not
practicable to estimate, due to the related party nature of the underlying
transactions and the indefinite payment terms. The carrying amounts of the
Company's other financial instruments approximates their fair values
because of the short maturities of these instruments.
Net income (loss) per share:
Net income (loss) per share for 1995 has been calculated based on the
weighted average number of outstanding common shares. The convertible
promissory notes, options and warrants are not considered in the 1996
calculation as they would decrease loss per share in 1996 would be
antidilutive in 1995.
Primary and fully diluted earnings per share are the same.
Subsidiary equity transactions:
In 1996, the Company adopted an accounting policy to recognize in its
consolidated financial statements, gains and losses resulting from the
sales of previously unissued stock by its subsidiaries, which have the
effect of reducing the parent's percentage equity holding.
F-14
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
2. Business and summary of significant accounting polices (continued)
Stock-based compensation:
Statement of Financial Accounting Standard ("SFAS") No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, defines a fair-value-based method of accounting
for stock-based employee compensation plans and transactions in which an
entity issues its equity instruments to acquire goods or service from
nonemployees, and encourages but does not require companies to record
compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES
("APB NO. 25") and related interpretations. Accordingly, compensation cost
for stock options is measured as the excess, if any of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock.
Reclassifications:
Certain amounts reported in the 1995 financial statements have been
reclassified to conform to the 1996 presentation.
3. 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, ACCOUNTING
FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. At December 31,
1996, the market value of these securities had decreased, and therefore,
the Company recognized a net unrealized holding loss of $144,457, which is
included in net loss for the year ended December 31, 1996.
F-15
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
4. Inventories:
At December 31, 1996, inventories consist of:
<TABLE>
<S> <C>
Raw materials ..................... $ 805,430
Work-in-process ................... 430,740
Finished goods .................... 3,978,747
----------
$5,214,917
==========
</TABLE>
The elements of cost in inventories include materials, labor, and overhead.
During 1996, $1,059,750 of inventory was written down below cost to its
estimated market value. This charge is included as a component of cost of
sales.
5. Property and equipment:
In connection with management's restructuring plan, during the fourth
quarter of 1996, property and equipment with a carrying value of $411,700
was written down and included in restructuring charges (Note 17).
At December 31, 1996, property and equipment consists of the following:
<TABLE>
<S> <C>
Land .............................. $ 27,000
Building and improvements ......... 803,105
Machinery and equipment ........... 1,431,810
Molds ............................. 236,963
Office equipment and furniture .... 571,548
----------
3,070,426
Less accumulated depreciation ..... 1,150,670
----------
$1,919,756
==========
</TABLE>
F-16
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
6. Notes payable, banks:
CP has a loan agreement with a bank for advances of up to 75% of qualifying
accounts receivable, 50% of qualifying inventory, and 50% of outstanding
letters of credit, with a maximum limit of $5,500,000, which expires in
May 1999. The agreement contains certain financial covenants and
restrictions as to the payment of dividends. At December 31, 1996,
$2,741,920 was outstanding under the loan agreement, which was
approximately $808,000 above the loan availability requirements. As a
result, the Company is in default under this loan agreement, and the loan
balance is due on demand. Loans under the agreement bear interest at 1%
above the bank's prime rate (9.25% at December 31, 1996). Loans are
collateralized by substantially all of the Company's assets and are
guaranteed by two officers/shareholders of the Company.
At December 31, 1996, USA Skate had $2,623,454 of borrowings outstanding
under a second loan agreement with the bank discussed above. The loan
agreement allows for advances up to 75% of qualifying accounts receivable,
50% of qualifying inventories and 50% of outstanding letters of credit,
with a maximum limit of $5,000,000, which expires in May 1999. Loans under
the agreement bear interest at 1% above the bank's prime rate (9.25% at
December 31, 1996). The agreement contains certain financial covenants and
restrictions regarding payment of dividends, officers' compensation and
consulting fees, as well as restrictions on USA Skate's loans and
investments. Loans are collateralized by substantially all of USA Skate's
assets, $300,000 of liquid collateral, and are guaranteed by
officers/shareholders of the Company. Additionally, $221,770 of notes due
to the Seller are subordinated to the bank loan. Due to certain
cross-default provisions, this bank loan agreement is in default at
December 31, 1996.
F-17
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
6. Notes payable, banks (continued):
At December 31, 1996, Davtec had $2,685,360 of borrowings outstanding under
a loan agreement with a Canadian bank. Advances are based on 75% of
qualifying accounts receivable, plus 50% of qualifying inventories, and
net of accounts payable less than 30 days in inventory, with a maximum
limit of $3,648,000. Loans under the Davtec bank agreement bear interest
at the bank's prime rate plus 1% (5.75% at December 31, 1996), and are due
on demand. The agreement contains provisions whereby Davtec may not,
without prior consent, provide third parties with guarantees having
precedence over the claims of the lender, pay dividends or bonuses or make
any payments to any director, or effect any share redemptions. The
agreement also contains certain financial covenants. Loans are
collateralized by Davtec's accounts receivable, inventories, and personal
guarantees from two officers/shareholders of the Company. In February
1997, the Company received notice that it was in violation of a loan
covenant and in March 1997, the bank filed a notice of intention to
enforce security and to demand payment of the loan. The Company is
currently in negotiations with the bank to cure the default and extend the
maturity date of the agreement.
The weighted average interest rate on the notes payable to banks was 8.7%
and 9.9% in 1996 and 1995, respectively.
7. Notes payable, officers/shareholders and Seller:
At December 31, 1996, $679,000 remains payable under the $1,080,000, 9%
notes payable to certain officers/shareholders of the Company. These notes
are unsecured and are due June 30, 1997. In addition, $600,000 remains due
under the $125,000, 9% note and the $1,050,000, 8% note, both issued to
the Seller in connection with the acquisition. In March 1997, $50,000 of
the $125,000 note was paid, and the remaining balance is due October 1997.
The $475,000 remaining on the 8% note is payable in installments of
$187,500, $225,000, and $62,500 in 1997, 1998, and 1999, respectively. The
Company also has a $26,000, 10% note payable to an officer/shareholder due
on demand at December 31, 1996.
At December 31, 1996, USA Skate had $343,750 of unsecured, 8% notes payable
to the Seller, which are due December 31, 1997.
Payables of $88,982 primarily represent interest due to the Seller and a
trade payable to Playmaker.
F-18
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
8. Convertible promissory notes and other:
In connection with the acquisition of USA Skate, effective April 30, 1996,
Skate Corp. issued $2,518,000 of 9% convertible promissory notes which
were originally due January 1, 1997. On January 1, 1997, Skate Corp.
exercised its right to extend the maturity date to July 1, 1997. Effective
January 1, 1997, the interest rate increased to 12%.
The terms of the convertible notes provide that 50% of the note balance
automatically converts to common stock of Skate Corp. twenty calendar days
after the effective date of a proposed Initial Public Offering ("IPO") at
the lower of 75% of the IPO price or the average closing bid and ask
prices for the twenty consecutive calendar days following the effective
date of the IPO. The remaining 50% may be converted on the same terms as
the automatic conversion at the note holders' sole option.
In connection with the acquisition, the Company assumed an unsecured note
payable to a third party of $476,172, which is non-interest bearing and
due on demand. During 1996, the Company issued $242,000 of 9%, unsecured
notes payable to third parties, due August 1, 1997.
9 Long-term debt:
Long-term debt consists of bank and other loans obtained by Davtec for
land, building, machinery and equipment purchases. The loans bear interest
at rates ranging from prime rate to prime plus 1.5%, (4.75%-6.25% at
December 31, 1996) and fixed rates of 8.38% to 11% and are generally
collateralized by land, building, machinery and equipment. The loans are
payable in aggregate monthly installments of approximately $14,000 and are
due from 1997 through 2001. Aggregate long-term debt maturities are as
follows:
<TABLE>
<S> <C>
1997 ............................. $ 192,726
1998 ............................. 144,036
1999 ............................. 143,623
2000 ............................. 96,935
2001 ............................. 45,504
----------
$ 622,824
==========
</TABLE>
F-19
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
10. Gain on sale of investment in subsidiary:
In June 1996, the Company satisfied $260,000 of amounts payable to
officers/shareholders by transferring to the officers/shareholders 216,667
shares of Skate Corp. common stock from the Company's original investment
in 2,000,000 Skate Corp. shares. The recorded cost of the Skate Corp.
shares transferred was $148,634, and the fair value of those shares was
$260,000, resulting in a gain of $111,366.
11. Gain from issuance of common stock by subsidiary:
During 1996, Skate Corp. sold 884,667 shares of its common stock at $1.20
per share in a private placement for $1,061,600 and issued 250,000 shares
of common stock at $1.20 per share valued at $300,000 in connection with
the acquisition of USA Skate. Before these transactions, the Company owned
100% of Skate Corp. After these transactions, the Company owned
approximately 57% of the outstanding common stock of Skate Corp. These
transactions resulted in a gain from the issuance of stock by the
subsidiary of $479,100.
12. Significant concentrations and major customers:
The Company grants credit, generally without collateral, to its customers
in the retail sporting goods industry. The Company's customers are not
concentrated in any specific geographic region. No customers accounted for
10% or more of sales in 1996. During 1995, one U.S. governmental agency
and one other customer accounted for 10% and 12% of sales, respectively.
During the years ended December 31, 1996 and 1995, the Company's bad debt
expense was approximately $228,000 and $291,500, respectively.
F-20
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
12. Significant concentrations and major customers (continued):
The Company currently buys substantially all of its in-line skate products
from Playmaker, and substantially all of its snowboard products from a
third party supplier. Approximately 70% of USA Skate's products sold are
manufactured by Davtec. Approximately 11% of USA Skate and Davtec
purchases in 1996 were from one supplier. Management believes that other
suppliers could provide similar products on comparable terms. A change in
suppliers, however, could cause a delay in manufacturing and a possible
loss of sales which would affect operating results adversely.
13. Commitments and contingencies:
Facility leases:
The Company leases certain facilities under non-cancelable operating
leases. USA Skate leases its warehouse facilities under a five-year lease
from the Seller which expires in 2000 and a five-year lease with a third
party which expires in 2001, and Davtec leases office and factory space
from unrelated third parties. Future minimum lease payments are as
follows:
<TABLE>
<CAPTION>
Seller Other Total
-------- -------- --------
<S> <C> <C> <C>
1997 ........ $155,800 $117,100 272,900
1998 ........ 155,800 80,900 236,700
1999 ........ 155,800 67,900 223,700
2000 ........ 129,800 62,000 191,800
2001 ........ 52,800 52,800
-------- -------- --------
$597,200 $380,700 $977,900
======== ======== ========
</TABLE>
During 1996, the Company terminated its facility lease in South Carolina,
which was originally due to expire in 1998. As a result, the Company
accrued $76,500 of lease termination expense, which was expensed as a
restructuring charge (Note 17). The Company is currently leasing office
space in South Carolina on a month-to-month basis.
Total rent expense for 1996 and 1995 was approximately $277,000 and
$120,000.
F-21
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
13. Commitments and contingencies (continued):
License agreements:
The Company has patent license agreements for certain models of in-line
skates. Under the license agreements, the Company and/or Playmaker pay
royalty fees to the licensor. The Company's share of the fees is the
greater of up to 0.2% or $0.30 per pair of applicable in-line skate sales.
Effective April 30, 1996, USA Skate entered into an exclusive license
agreement with the Seller. The agreement grants USA Skate the exclusive
worldwide rights to the VICTORIAVILLE(TM) and VIC(R) trademarks through
February 2003, in return for royalties of 1% of net sales, as defined,
subject to total guaranteed minimum royalties of $3,000,000. The license
agreement was modified in March 1997, to provide for guaranteed minimum
royalty payments as follows: $300,000 payable in installments during 1997,
$450,000 installments in June and December 1998, and $300,000 semi-annual
installments beginning in June 1999, subordinated to the USA Skate bank
credit facility. Upon the payment of $3,000,000 in royalties, the
trademarks will vest to USA Skate. Interest expense incurred in 1996
related to the license fees payable was approximately $155,000.
Davtec has an agreement with a third party to manufacture and sell certain
licensed hockey stick products in Canada in return for license fees of a
percentage of sales, as defined, through October 2002. License fees under
this agreement were approximately $15,000 in 1996.
Davtec manufactures hockey equipment under the Hespeler(TM) trademark.
Davtec pays fees based on a percentage of Hespeler(TM) sales, as defined,
to the trademark owner. Fees related to Hespeler(TM) sales were
approximately $50,800 in 1996.
Employment, consulting and non-compete agreements:
In connection with the acquisition, USA Skate entered into a one-year
employment agreement with the Seller, which provides for annual
compensation of $90,000. Compensation expense under this agreement was
$60,000 in 1996.
F-22
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
13. Commitments and contingencies (continued):
Employment, consulting and non-compete agreements (continued):
Effective April 30, 1996, the Company entered into consulting and
non-compete agreements with the Seller in exchange for 400,000 shares of
common stock (Note 15).
On a month to month basis, the Company pays an officer/shareholder
consulting fees of $10,000 per month.
The Company entered into a twelve-month consulting agreement with an
unrelated third party effective July 25, 1995, to provide financial
advisory and consulting services to the Company. As compensation, the
consultant received fees of $24,000 and the Company agreed to issue
warrants to purchase up to an aggregate of 300,000 shares of common stock,
of which 150,000 warrants have been issued (Note 15).
In November 1995, the Company terminated a consulting agreement with a
third party who was previously providing public relations consulting. As
compensation, the consultant received options to purchase 58,331 shares of
common stock at an exercise price of $4.81 per share, which expire in
October 1997.
Kemper manufacturing and distribution agreement:
In May 1995, the Company entered into a three year agreement with a third
party, whereby the third party will manufacture and distribute certain
Kemper apparel and accessories. The third party was granted nonexclusive
manufacturing rights for apparel, gloves, bags and related accessories
worldwide, and exclusive manufacturing and distributor rights for these
products in the Japanese market. The Company receives royalties based on
sales made. The Company did not receive any royalties in 1996 and received
royalties of $60,000 in 1995.
F-23
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
13. Commitments and contingencies (continued):
Registration rights agreement:
In connection with the acquisition of USA Skate, 250,000 shares of Skate
Corp. common stock, valued at $300,000, were issued to the Seller. Skate
Corp. entered into a registration rights agreement with the Seller,
modified in March 1997, which provides that Skate Corp. will use its best
efforts to register the Skate Corp. common stock, and guarantee the
$300,000 value of the common stock through June 15, 1997. At that date, if
the shares have been registered and are publicly traded, the market price
per share will be utilized to value the shares. If the shares have not
been registered by June 15, 1997, the shares will be deemed to have no
value, and Skate Corp. will be required to pay $300,000 to the Seller in
$100,000 installments through December 1997, in exchange for the shares of
Skate Corp. common stock.
Litigation:
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the
financial statements of the Company.
14. Income taxes:
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
All U.S. federal and state income taxes and foreign taxes are provided
currently on the undistributed earnings of foreign subsidiaries, giving
recognition to current tax rates and applicable foreign tax credits.
Canadian investment tax credits for Davtec are included in income in the
period the credit is earned.
F-24
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
14. Income taxes (continued):
The provision (benefit) for income taxes for the years ended December 31,
1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Current:
Federal ............. $ (174,000) $ 100,300
State and local ..... 41,900 12,600
Foreign ............. (29,300)
----------- -----------
(161,400) 112,900
----------- -----------
Deferred:
Federal ............. (1,393,000) (57,000)
State and local ..... (230,600) (7,200)
Foreign ............. 46,000
----------- -----------
(1,577,600) (64,200)
----------- -----------
Change in valuation allowance
for deferred tax assets ... 1,494,500 64,200
----------- -----------
Income tax expense (benefit) $ (244,500) $ 112,900
=========== ===========
</TABLE>
Areconciliation of the statutory federal income tax rate to the Company's
effective income tax rate for the years ended December 31, 1996 and 1995
is as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
----------- -----------
<S> <C> <C>
Statutory income tax (benefit) ........ (34)% 34 %
State and local income taxes .......... 1 % 6 %
Deferred income tax valuation allowance 24 % 34 %
Nondeductible expense ................. 2 % 4 %
Other ................................. 3 % (2)%
----------- -----------
(4)% 76 %
=========== ===========
</TABLE>
F-25
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
14. Income taxes (continued):
The following is a summary of the Company's deferred tax assets and
liabilities at December 31, 1996:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforward $1,060,000
Intangible assets ............. 200,000
Accounts receivable ........... 228,000
Inventories ................... 229,000
----------
1,717,000
Valuation allowance
for deferred tax assets ....... 1,717,000
----------
$ 0
==========
Deferred tax liabilities:
Property and equipment ......... $ 60,600
==========
</TABLE>
Net operating loss carryforwards of approximately $2,800,000 are available
to offset future taxable income, if any, through 2011. A valuation
allowance has been provided to reduce the deferred tax assets, as
realization of the assets is not assured.
F-26
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
15. Shareholders' equity:
Initial public offering:
On January 25, 1995, the Company closed an initial public offering of
1,200,000 shares of common stock at $4.50 per share, and 1,200,000
warrants (the "Warrants") at $0.25 per warrant. Each Warrant is
exercisable through January 1998 and allows for the purchase of one share
of common stock at $6.00 per share. The Company and certain selling
shareholders granted an option, exercisable through March 4, 1995, to the
underwriters to purchase up to an additional 180,000 shares of common
stock and/or 180,000 Warrants, to be exercised to cover over-allotments,
if any. The underwriter exercised its over-allotment option to purchase
180,000 Warrants. The Company also granted to the underwriter warrants to
purchase 120,000 shares of common stock at $7.20 per share, and warrants
to purchase 120,000 Warrants at $0.30 per Warrant. The warrants to
purchase common stock and the warrants to purchase Warrants are
exercisable beginning January 1996 through January 2000. The Company paid
the underwriter a non-accountable expense allowance of 3% of the gross
proceeds realized in the public offering and a 10% commission on the gross
proceeds of the public offering. After deducting offering expenses, the
Company received net proceeds from the offering of approximately
$4,200,000.
1994 Stock Option Plan:
In 1994, the Company adopted a stock option plan (the "1994 Stock Option
Plan") which provides for the issuance to employees, officers, directors,
and consultants of the Company options to purchase up to 200,000 shares of
common stock. Options may be granted as incentive stock options or as
non-statutory options. Only employees are eligible to receive incentive
options. For options that are granted, the exercise period may not exceed
ten years. The exercise price for incentive options may not be less than
100% of the fair market value of the Company's common stock on the date of
grant, except for options issued to persons controlling more than 10% of
the Company's common stock, for which the option price may not be less
than 110% of the fair market value of the Company's common stock on the
date of grant. The exercise price for non-statutory options may not be
less than 80% of the fair market value of the Company's common stock on
the date of grant. In September 1994.
F-27
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
15. Shareholders' equity (continued):
1994 Stock Option Plan (continued):
options to purchase 57,000 shares of common stock, at an exercise price of
$2.50 per share, were granted under the 1994 Stock Option Plan. These
options expire in September 1999. Management believes that the exercise
price of the options approximated the market value of the Company's common
stock on the date of grant. In 1995, options to purchase 20,500 shares of
common stock were exercised.
Warrants:
In 1996, the exercise price of warrants to purchase 500,000 shares of the
Company's common stock that had been granted to two officers/shareholders
of the Company were reduced from $3.56 and $4.50 per share to $2.38 per
share and warrants to purchase 150,000 shares of common stock issued to a
third party consultant were extended from July 1996 to October 1997 and
the exercise price was reduced from $3.25 to $2.38 per share (the market
value of the stock at the date the Board of Directors authorized the price
reduction in April 1996).
Issuance of stock:
During 1996, the Company issued 400,000 shares of the Company's common
stock to the Seller at an agreed value of $900,000, or $2.25 per share, as
compensation under a consulting and non-compete agreement; and 36,000
shares of common stock at $3.00 per share (the market value of the stock
at the date the Board of Directors authorized the issuance) in
satisfaction of a $108,000 account payable. During 1996, the Company also
issued 480,000 shares of the Company's common stock to
officers/shareholders of the Company at $1.37 per share (the market value
of the stock at the date the Board of Directors authorized the issuance)
in satisfaction of $660,000 of payables.
F-28
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
15. Shareholders' equity (continued):
In January 1995, warrants to purchase 74,623 shares of common stock at
$0.75 per share were exercised. The Company received proceeds of $55,967
In addition, the holder of a $200,000 note exercised an option to purchase
80,000 shares of common stock at $2.50 per share, in exchange for the
$200,000 note.
During 1995, $412,500 of 8%, convertible notes were converted to 183,334
shares of the Company's common stock at 2.50 per share.
16. Foreign operations and export sales:
Information about the Company's operations in the United States and Canada
for the year ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
United Combined
States Canada Eliminations total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers ......... $ 11,877,000 $ 5,076,000 $ 16,953,000
Intercompany sales .. 841,000 $ (841,000)
------------ ------------ ------------ ------------
Net sales ........... $ 11,877,000 $ 5,917,000 $ (841,000) $ 16,953,000
============ ============ ============ ============
Income (loss)
from operations .... $ (5,366,000) $ 590,000 $ 85,000 $ (4,691,000)
============ ============ ============ ============
Identifiable assets . $ 19,285,000 $ 5,417,000 $ (3,632,000) $ 21,070,000
============ ============ ============ ============
</TABLE>
During the years ended December 31, 1996 and 1995, sales by geographic
regions were as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Europe and other $ 3,225,000 $ 583,000
Canada ......... 4,949,000 1,976,000
Japan .......... 312,000 1,507,000
----------- -----------
Total exports 8,486,000 4,066,000
USA sales ...... 8,467,000 13,063,000
----------- -----------
Total sales . $16,953,000 $17,129,000
=========== ===========
</TABLE>
F-29
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
17. Restructuring charges:
In the fourth quarter of 1996, the Company adopted a plan for restructuring
its operations. This plan was developed by the Company's management and
approved by the Company's board of directors, and its objectives are to
return the Company to profitability, primarily through implementation of
product line changes and a cost reduction program.
As a result of the restructuring plan, the Company recorded restructuring
charges of $1,229,000, which consists of the following components:
<TABLE>
<CAPTION>
Non-cash asset
write downs Accruals Total
----------- ----------- -----------
<S> <C> <C> <C>
Equipment .............. $ 411,700 $ 411,700
Trademarks ............. 368,000 368,000
Organizational costs and
other intangibles .... 205,700 205,700
Consulting costs ....... 145,000 145,000
Severance .............. $ 22,100 22,100
Lease termination ...... 76,500 76,500
----------- ----------- -----------
$ 1,130,400 $ 98,600 $ 1,229,000
=========== =========== ===========
</TABLE>
F-30
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (this "AGREEMENT") made this 30th day
of April, 1996 by and between LASALLE NATIONAL BANK, a national banking
association ("BANK"), 135 S. LaSalle St., Chicago, IL 60674, and USA Skate Co.,
Inc., a New York corporation, having its principal place of business at 7
Brayton Court, Commack, New York 11725 ("BORROWER") [Insert entity
designation(s) and address(es) of principal place of business].
WITNESSETH:
WHEREAS, Borrower may, from time to time, request Loans from Bank, and
the parties wish to provide for the terms and conditions upon which such Loans,
if made by Bank, shall be made;
NOW, THEREFORE, in consideration of any Loan (including any Loan by
renewal or extension) hereafter made to Borrower by Bank, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by Borrower, the parties agree as follows:
1. DEFINITIONS
(a) "ACCOUNT," "ACCOUNT DEBTOR," "CHATTEL PAPER," "DOCUMENTS,"
"EQUIPMENT," "GENERAL INTANGIBLES," "GOODS," "INSTRUMENTS," "INVENTORY," AND
"INVESTMENT PROPERTY" shall have the respective meanings assigned to such terms,
as of the date of this Agreement, in the Illinois Uniform Commercial Code.
(b) "AFFILIATE" shall mean any Person directly or indirectly
controlling, controlled by or under common control with Borrower.
(c) "COLLATERAL" shall mean all of the property of Borrower described
in paragraph 4 hereof, together with all other real or personal property of any
Obligor or any other Person now or hereafter pledged to Bank to secure, either
directly or indirectly, repayment of any of the Liabilities.
(d) "ELIGIBLE ACCOUNT" shall mean an Account owing to Borrower which is
acceptable to Bank in its sole discretion for lending purposes. Without limiting
Bank's discretion, Bank shall, in general, consider an Account to be an Eligible
Account if it meets, and so long as it continues to meet, the following
requirements:
(i) it is genuine and in all respects what it purports to
be;
(ii) it is owned by Borrower and Borrower has the right to
subject it to a security interest in favor of Bank or assign it to
Bank;
(iii) it arises from (A) the performance of services by
Borrower and such services have been fully performed and acknowledged
and accepted by the Account Debtor thereunder; or (B) the sale or lease
of Goods by Borrower, and such Goods have been completed in accordance
with the Account Debtor's specifications (if any) and delivered to and
accepted by the Account Debtor, such Account Debtor has not refused to
accept and has not returned or offered to return any of the Goods, or
has not refused to accept any of the services, which are the subject of
such Account, and Borrower has possession of, or has delivered to Bank
at Bank's request, shipping and delivery receipts evidencing delivery
of such Goods;
(iv) [intentionally omitted];
(v) it is not subject to any prior assignment, claim, lien,
security interest or encumbrance whatsoever, other than Permitted Liens
and the security interest granted to Bank hereunder;
9207_1
-1-
<PAGE>
(vi) it is a valid, legally enforceable and unconditional
obligation of the Account Debtor thereunder, and is not subject to
setoff, counterclaim, credit, allowance or adjustment by such Account
Debtor, or to any claim by such Account Debtor denying liability
thereunder in whole or in part;
(vii) it does not arise out of a contract or order which fails
in any material respect to comply with the requirements of applicable
law;
(viii) the Account Debtor thereunder is not a director,
officer, employee or agent of Borrower, or a Subsidiary, Parent or
Affiliate, unless the Account arises out of a transaction permitted by
paragraph 10(l) hereof and is otherwise an Eligible Account;
(ix) it is not an Account with respect to which the Account
Debtor is the United States of America or any department, agency or
instrumentality thereof, unless Borrower assigns its right to payment
of such Account to Bank pursuant to, and in full compliance with, the
Assignment of Claims Act of 1940, as amended;
(x) it is not an account with respect to which the Account
Debtor is located in a state which requires Borrower, as a precondition
to commencing or maintaining an action in the courts of that state,
either to (A) receive a certificate of authority to do business and be
in good standing in such state, or (B) file a notice of business
activities report or similar report with such state's taxing authority,
unless (x) Borrower has taken one of the actions described in clauses
(A) or (B), (y) the failure to take one of the actions described in
either clause (A) or (B) may be cured retroactively by Borrower at its
election or (z) Borrower has proven, to Bank's satisfaction, that it is
exempt from any such requirements under any such state's laws;
(xi) it is an Account which arises out of a sale made in the
ordinary course of Borrower's business;
(xii) the Account Debtor is a resident or citizen of, and is
located within, the United State of America, unless the Accounts owing
by such Account Debtor are the subject of foreign credit insurance
which is in an amount satisfactory to Bank and has been assigned to
Bank in a manner satisfactory to Bank;
(xiii) it is not an Account with respect to which the Account
Debtor's obligation to pay is conditional upon the Account Debtor's
approval of the Goods or services or is otherwise subject to any
repurchase obligation or return right, as with sales made on a
bill-and-hold, guaranteed sale, sale on approval, sale or return or
consignment basis;
(xiv) it is not an Account (A) with respect to which any
representation or warranty contained in this Agreement is untrue or (B)
which violates any of the covenants of Borrower contained in this
Agreement;
(xv) it is not an Account which, when added to a particular
Account Debtor's other indebtedness to Borrower, exceeds a credit limit
determined by Bank in its sole discretion for that Account Debtor
(except that Accounts excluded from Eligible Accounts solely by reason
of this paragraph 1(d)(xv) hereof shall be Eligible Accounts to the
extent of such credit limit); and
(xvi) it is not an Account with respect to which the prospect
of payment or performance by the Account Debtor is or will be impaired,
as determined by Bank in its sole discretion.
(e) "ELIGIBLE INVENTORY" shall mean Inventory of Borrower which is
acceptable to Bank in its sole discretion for lending purposes. Without limiting
Bank's discretion, Bank shall, in general, consider Inventory to be Eligible
Inventory if it meets, and so long as it continues to meet, the following
requirements:
(i) it is owned by Borrower and Borrower has the right to
subject it to a security interest in favor of Bank;
9207_1
-2-
<PAGE>
(ii) it is located on the premises listed on Exhibit B and
is not in transit;
(iii) it is not subject to any prior assignment, claim, lien,
security interest or encumbrance whatsoever, other than Permitted Liens
and the security interest granted to Bank hereunder;
(iv) if held for sale or lease or furnishing under contracts
of service, it is (except as Bank may otherwise consent in writing) new
and unused and free from defects which would, in Bank's sole
determination, affect its market value;
(v) it is not stored with a bailee, consignee, warehouseman,
processor or similar party unless Bank has given its prior written
approval and Borrower has caused any such bailee, consignee,
warehouseman, processor or similar party to issue and deliver to Bank,
in form and substance acceptable to Bank, such UCC financing
statements, warehouse receipts, waivers and other documents as Bank
shall require;
(vi) Bank has determined in accordance with Bank's customary
business practices that it is not unacceptable due to age, type,
category or quantity; and
(vii) it is not Inventory (A) with respect to which any of the
representations and warranties contained in this Agreement are untrue
or (B) which violates any of the covenants of Borrower contained in
this Agreement.
(f) "EVENT OF DEFAULT" shall have the meaning specified in paragraph 12
hereof.
(g) "EXHIBIT A" shall mean the exhibit entitled Exhibit A - Special
Provisions which is attached hereto and made a part hereof.
(h) "EXHIBIT B" shall mean the exhibit entitled Exhibit B - Business
and Collateral Locations which is attached hereto and made a part hereof.
(i) "INDEMNIFIED PARTY" shall have the meaning specified in paragraph
14 hereof.
(j) "LIABILITIES" shall mean any and all obligations, liabilities and
indebtedness of Borrower to Bank or to any parent, affiliate or subsidiary of
Bank of any and every kind and nature, howsoever created, arising or evidenced
and howsoever owned, held or acquired, whether now or hereafter existing,
whether now due or to become due, whether primary, secondary, direct, indirect,
absolute, contingent or otherwise (including, without limitation, obligations of
performance), whether several, joint or joint and several, and whether arising
or existing under written or oral agreement or by operation of law.
(k) "LOAN" or "LOANS" shall mean all advances made by Bank to Borrower
pursuant to paragraph 2 hereof and all other loans, advances and financial
accommodations made by Bank to or on behalf of Borrower hereunder.
(l) "LOAN LIMIT" shall have the meaning specified in paragraph 1 of
Exhibit A.
(m) "LOCK BOX" and "LOCK BOX ACCOUNT" shall have the meanings specified
in paragraph 7 hereof.
(n)"OBLIGOR" shall mean Borrower and each Person who is or shall become
primarily or secondarily liable for any of the Liabilities.
(o) "ORIGINAL TERM" shall have the meaning specified in paragraph 9
hereof.
(p) "OTHER AGREEMENTS" shall mean all agreements, instruments and
documents, including, without limitation, guaranties, mortgages, trust deeds,
pledges, powers of attorney, consents, assignments, contracts, notices, security
agreements, leases, financing statements and all other writings heretofore, now
or from time to time hereafter executed by or on behalf of Borrower or
9207_1
-3-
<PAGE>
any other Person and delivered to Bank or to any parent, affiliate or subsidiary
of Bank in connection with the Liabilities or the transactions contemplated
hereby.
(q) "PARENT" shall mean any Person now or at any time or times
hereafter owning or controlling (alone or with any other Person) at least a
majority of the issued and outstanding stock of Borrower or any Subsidiary.
(r) "PERMITTED LIENS" shall mean (i) statutory liens of landlord's,
carriers, warehousemen, mechanics, materialmen or suppliers incurred in the
ordinary course of business and securing amounts not yet due or declared to be
due by the claimant thereunder, (ii) liens or security interests in favor of
Bank, (iii) zoning restrictions and easements, licenses, covenants and other
restrictions affecting the use of real property that do not individually or in
the aggregate have a material adverse effect on Borrower's ability to use such
real property for its intended purpose in connection with Borrower's business,
and (iv) liens specifically permitted by Bank in writing.
(s) "PERSON" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, institution, entity, party or foreign or United States government
(whether federal, state, county, city, municipal or otherwise), including,
without limitation, any instrumentality, division, agency, body or department
thereof.
(t) "RENEWAL TERM" shall have the meaning specified in paragraph 9
hereof.
(u) "SUBSIDIARY" shall mean any corporation of which more than fifty
percent (50%) of the outstanding capital stock having ordinary voting power to
elect a majority of the board of directors of such corporation (irrespective of
whether at the time stock of any other class of such corporation shall have or
might have voting power by reason of the happening of any contingency) is at the
time, directly or indirectly, owned by Borrower or by any partnership or joint
venture of which more than fifty percent (50%) of the outstanding equity
interests are at the time, directly or indirectly, owned by Borrower.
(v) "TANGIBLE NET WORTH" shall have the meaning specified in paragraph
11(o) hereof.
2. LOANS.
Subject to the terms and conditions of this Agreement (including
Exhibit A) and the Other Agreements, during the Original Term and any Renewal
Term, Bank may, in its sole discretion, make such Loans to Borrower as Borrower
shall from time to time request. The aggregate unpaid principal of all Loans
outstanding at any one time shall not exceed the Loan Limit set forth in Exhibit
A and shall bear interest at the rates set forth in Exhibit A. ALL LOANS SHALL
BE REPAID BY BORROWER UPON DEMAND BY BANK. Prior to Bank making such demand,
Loans shall be repaid as provided elsewhere in this Agreement. If at any time
the outstanding principal balance of the Loans exceeds the Loan Limit, or any
portion of the Loans exceeds any applicable sublimit set forth in Exhibit A,
Borrower shall immediately, and without the necessity of a demand by Bank, pay
to Bank such amount as may be necessary to eliminate such excess and Bank shall
apply such payment to the Liabilities in such order as Bank shall determine in
its sole discretion. Borrower hereby authorizes Bank, in its sole discretion, to
charge any of Borrower's accounts to make any payments of principal or interest
required by this Agreement. All Loans shall, in Bank's sole discretion, be
evidenced by one or more promissory notes in form and substance satisfactory to
Bank. However, if such Loans are not so evidenced, such Loans may be evidenced
solely by entries upon the books and records maintained by Bank.
3. FEES AND CHARGES.
Borrower shall pay to Bank, in addition to all other amounts payable
hereunder, the fees and charges set forth in Exhibit A. It is the intent of the
parties that the rate of interest and the other charges to Borrower under this
Agreement shall be lawful; therefore, if for any reason the interest or other
charges payable under this Agreement are found by a court of competent
jurisdiction, in a final determination, to exceed the limit which Bank may
lawfully charge Borrower, then the obligation to pay interest and other charges
shall automatically be reduced to such limit and, if any amount in excess of
such limit shall have been paid, then such amount shall be refunded to Borrower.
9207_1
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<PAGE>
4. GRANT OF SECURITY INTEREST TO BANK.
As security for the payment of all Loans now or in the future made by
Bank to Borrower hereunder and for the payment or other satisfaction of all
other Liabilities, Borrower hereby assigns to Bank and grants to Bank a
continuing security interest in the following property of Borrower, whether now
or hereafter owned, existing, acquired or arising and wherever now or hereafter
located: (a) all Accounts (whether or not Eligible Accounts) and all Goods whose
sale, lease or other disposition by Borrower has given rise to Accounts and have
been returned to or repossessed or stopped in transit by Borrower; (b) all
Chattel Paper, Instruments, Investment Property, Documents and General
Intangibles (including, without limitation, all patents, patent applications,
trademarks, trademark applications, tradenames, trade secrets, goodwill,
copyrights, registrations, licenses, franchises, customer lists, tax refund
claims, claims against carriers and shippers, guarantee claims, contracts
rights, security interests, security deposits and any rights to indemnification;
(c) all Inventory (whether or not Eligible Inventory); (d) all Goods (other than
Inventory), including, without limitation, Equipment, vehicles and fixtures; (e)
all deposits and cash and any other property of Borrower now or hereafter in the
possession, custody or control of Bank or any agent or any parent, affiliate or
subsidiary of Bank or any participant with Bank in the Loans for any purpose
(whether for safekeeping, deposit, collection, custody, pledge, transmission or
otherwise); and (f) all additions and accessions to, substitutions for, and
replacements, products and proceeds of the foregoing property, including,
without limitation, proceeds of all insurance policies insuring the foregoing
property, and all of Borrower's books and records relating to any of the
foregoing and to Borrower's business.
5. PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY INTERESTS
THEREIN.
Borrower shall, at Bank's request, at any time and from time to time,
execute and deliver to Bank such financing statements, documents and other
agreements and instruments (and pay the cost of filing or recording the same in
all public offices deemed necessary or desirable by Bank) and do such other acts
and things as Bank may deem necessary or desirable in order to establish and
maintain a valid, attached and perfected security interest in the Collateral in
favor of Bank (free and clear of all other liens, claims and rights of third
parties whatsoever, whether voluntarily or involuntarily created, except
Permitted Liens) to secure payment of the Liabilities, and in order to
facilitate the collection of the Collateral. Borrower irrevocably hereby makes,
constitutes and appoints Bank (and all Persons designated by Bank for that
purpose) as Borrower's true and lawful attorney and agent-in-fact to execute
such financing statements, documents and other agreements and instruments and do
such other acts and things as may be necessary to preserve and perfect Bank's
security interest in the Collateral. Borrower further agrees that a carbon,
photographic, photostatic or other reproduction of this Agreement or of a
financing statement shall be sufficient as a financing statement.
6. POSSESSION OF COLLATERAL AND RELATED MATTERS.
Until an "Event of Default" (as hereinafter defined) has occurred,
Borrower shall have the right, except as otherwise provided in this Agreement,
in the ordinary course of Borrower's business, to (a) sell, lease or furnish
under contracts of service any of Borrower's Inventory normally held by Borrower
for any such purpose, and (b) use and consume any raw materials, work in process
or other materials normally held by Borrower for such purpose; provided,
however, that a sale in the ordinary course of business shall not include any
transfer or sale in satisfaction, partial or complete, of a debt owed by
Borrower.
7. COLLECTIONS.
(a) Borrower shall direct all of its Account Debtors to make all
payments on the Accounts directly to a post office box (the "LOCK BOX")
designated by, and under the exclusive control of, Bank or another financial
institution acceptable to Bank. Borrower shall establish an account (the "LOCK
BOX ACCOUNT") in Borrower's name with Bank or such other financial institution
acceptable to Bank, into which all payments received in the Lock Box shall be
deposited, and into which Borrower will immediately deposit all payments made
for Inventory or services and received by Borrower in the identical form in
which such payments were made, whether by cash or check. If Borrower, any
Affiliate or Subsidiary, or any shareholder, officer, director, employee or
agent of Borrower or any Affiliate or Subsidiary, or any other Person acting for
or in concert with Borrower shall receive any monies, checks, notes,
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drafts or other payments relating to or as proceeds of Accounts or other
Collateral, Borrower and each such Person shall receive all such items in trust
for, and as the sole and exclusive property of, Bank and, immediately upon
receipt thereof, shall remit the same (or cause the same to be remitted) in kind
to the Lock Box Account. If the Lock Box Account is not established with Bank,
the financial institution with which the Lock Box Account is established shall
acknowledge and agree, in a manner satisfactory to Bank, that the amounts on
deposit in such Lock Box Account are the sole and exclusive property of Bank,
that such financial institution has no right to setoff against the Lock Box
Account or against any other account maintained by such financial institution
into which the contents of the Lock Box Account are transferred, and that such
financial institution shall wire, or otherwise transfer in immediately available
funds in a manner satisfactory to Bank, funds deposited in the Lock Box Account
on a daily basis as such funds are collected. Borrower agrees that all payments
made to such Lock Box Account or otherwise received by Bank, whether in respect
of the Accounts or as proceeds of other Collateral or otherwise, will be applied
on account of the Liabilities in accordance with the terms of this Agreement. If
the Lock Box Account is established with Bank, Borrower agrees to pay all fees,
costs and expenses which Bank incurs in connection with opening and maintaining
the Lock Box Account and depositing for collection by Bank any check or other
item of payment received by Bank on account of the Liabilities. All of such
fees, costs and expenses shall constitute Loans hereunder, shall be payable to
Bank by Borrower upon demand, and, until paid, shall bear interest at the
highest rate then applicable to Loans hereunder. All checks, drafts, instruments
and other items of payment or proceeds of Collateral shall be endorsed by
Borrower to Bank, and, if that endorsement of any such item shall not be made
for any reason, Bank is hereby irrevocably authorized to endorse the same on
Borrower's behalf. For the purpose of this paragraph, Borrower irrevocably
hereby makes, constitutes and appoints Bank (and all Persons designated by Bank
for that purpose) as Borrower's true and lawful attorney and agent-in-fact (i)
to endorse Borrower's name upon said items of payment and/or proceeds of
Collateral and upon any Chattel Paper, document, instrument, invoice or similar
document or agreement relating to any Account of Borrower or goods pertaining
thereto; (ii) to take control in any manner of any item of payment or proceeds
thereof; and (iii) to have access to any lock box or postal box into which any
of Borrower's mail is deposited, and open and process all mail addressed to
Borrower and deposited therein.
(b) Bank may, at any time and from time to time, whether before or
after notification to any Account Debtor and whether before or after the
maturity of any of the Liabilities, (i) enforce collection of any of Borrower's
Accounts or contract rights by suit or otherwise; (ii) exercise all of
Borrower's rights and remedies with respect to proceedings brought to collect
any Accounts; (iii) surrender, release or exchange all or any part of any
Accounts, or compromise or extend or renew for any period (whether or not longer
than the original period) any indebtedness thereunder; (iv) sell or assign any
Account of Borrower upon such terms, for such amount and at such time or times
as Bank deems advisable; (v) prepare, file and sign Borrower's name on any proof
of claim in bankruptcy or other similar document against any Account Debtor; and
(vi) do all other acts and things which are necessary, in Bank's sole
discretion, to fulfill Borrower's obligations under this Agreement and to allow
Bank to collect the Accounts. In addition to any other provision hereof, Bank
may at any time, after the occurrence of an Event of Default, at Borrower's
expense, notify any parties obligated on any of the Accounts to make payment
directly to Bank of any amounts due or to become due thereunder.
(c) Bank shall, within two (2) business days after receipt by Bank at
its office in Chicago, Illinois of cash or other immediately available funds
from collections of items of payment and proceeds of any Collateral, apply the
whole or any part of such collections or proceeds against the Liabilities in
such order as Bank shall determine in its sole discretion.
(d) Bank, in its sole discretion, without waiving or releasing any
obligation, liability or duty of Borrower under this Agreement or the Other
Agreements or any Event of Default, may at any time or times hereafter, but
shall not be obligated to, pay, acquire or accept an assignment of any security
interest, lien, encumbrance or claim asserted by any Person in, upon or against
the Collateral. All sums paid by Bank in respect thereof and all costs, fees and
expenses including, without limitation, reasonable attorney fees, all court
costs and all other charges relating thereto incurred by Bank shall constitute
Loans, payable by Borrower to Bank on demand and, until paid, shall bear
interest at the highest rate then applicable to Loans hereunder.
(e) Immediately upon Borrower's receipt of any portion of the
Collateral evidenced by an agreement, Instrument or Document, including, without
limitation, any Chattel Paper, Borrower shall deliver the original thereof to
Bank together with an appropriate endorsement or other specific evidence of
assignment thereof to Bank (in form and substance acceptable to Bank). If an
endorsement or assignment of any such items shall not be made for any reason,
Bank is hereby irrevocably authorized, as Borrower's attorney and agent-in-fact,
to endorse or assign the same on Borrower's behalf.
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8. SCHEDULES AND REPORTS.
(a) Within ten (10) days after the close of each calendar month, and at
such other times as may be requested by Bank from time to time hereafter,
Borrower shall deliver to Bank (i) a schedule identifying each Eligible Account
together with copies of the invoices when requested by Bank (with evidence of
shipment attached) pertaining to each such Eligible Account, for the month (or
other applicable period) immediately preceding; (ii) such additional schedules,
certificates, reports and information with respect to the Collateral as Bank may
from time to time require; and (iii) an assignment of any or all items of
Collateral to Bank. Bank, through its officers, employees or agents, shall have
the right, at any time and from time to time in Bank's name, in the name of a
nominee of Bank or in Borrower's name, to verify the validity, amount or any
other matter relating to any of Borrower's Accounts, by mail, telephone,
telegraph or otherwise. Borrower shall reimburse Bank, on demand, for all costs,
fees and expenses incurred by Bank in this regard.
(b) Without limiting the generality of the foregoing, Borrower shall
deliver to Bank, at least once a month (or more frequently when requested by
Bank), a report with respect to Borrower's Inventory. Borrower shall immediately
notify Bank of any event causing loss or depreciation in value of Borrower's
Inventory (other than normal depreciation occurring in the ordinary course of
business).
(c) All schedules, certificates, reports, and assignments and other
items delivered by Borrower to Bank hereunder shall be executed by an authorized
representative of Borrower and shall be in such form and contain such
information as Bank shall specify.
9. TERMINATION.
This Agreement shall be in effect from the date hereof until May 31,
1999 (the "ORIGINAL TERM") and shall automatically renew itself from year to
year thereafter (each such one-year renewal being referred to herein as a
"RENEWAL TERM") unless (a) Bank makes demand for repayment prior to the end of
the Original Term or the then current Renewal Term; (b) the due date of the
Liabilities is accelerated pursuant to paragraph 13 hereof; or (c) Borrower
elects to terminate this Agreement at the end of the Original Term or at the end
of any Renewal Term by giving Bank written notice of such election at least
ninety (90) days prior to the end of the Original Term or the then current
Renewal Term and by paying all of the Liabilities in full on the last day of
such term. If one or more of the events specified in clauses (a), (b) and (c)
occurs, this Agreement shall terminate on the date thereafter that the
Liabilities are paid in full, provided, however, that the security interests and
liens created under this Agreement and the Other Agreements shall survive such
termination until the payment of the Liabilities has become indefeasible. At
such time as Borrower has repaid all of the Liabilities and this Agreement has
terminated, Borrower shall deliver to Bank a release, in form and substance
satisfactory to Bank, of all obligations and liabilities of Bank and its
officers, directors, employees, agents, parents, subsidiaries and affiliates to
Borrower, and if Borrower is obtaining new financing from another lender,
Borrower shall deliver such lender's indemnification of Bank, in form and
substance satisfactory to Bank, for checks which Bank has credited to Borrower's
account, but which subsequently are dishonored for any reason. If, during the
term of this Agreement, Borrower prepays all or any portion of the Liabilities,
and in connection therewith, either (a) permits any security agreement,
financing statement or analogous instrument to be executed or filed with respect
to the Collateral for the benefit of someone other than Bank, or (b) creates,
incurs or assumes any liability for borrowed money (except for borrowings from
Bank and borrowings permitted pursuant to paragraph 10(q) hereof), Borrower
agrees to pay to Bank, as a prepayment fee, in addition to the payment of all
other Liabilities, an amount equal to the product of (i) fifty percent (50%) of
the average monthly interest earned by Bank on the Loans made hereunder
preceding the date of prepayment, multiplied by (ii) the number of full and
partial months remaining from the date of prepayment to the end of the Original
Term or the then current Renewal Term. At such time as Borrower has repaid all
of the Liabilities and this Agreement has terminated, Bank shall deliver to
Borrower such releases and termination statements as Borrower may reasonably
request in order to terminate the perfected status of Bank's liens and security
interests upon the Collateral.
10. REPRESENTATIONS, WARRANTIES AND COVENANTS.
Borrower hereby represents, warrants and covenants that:
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<PAGE>
(a) the financial statements delivered or to be delivered by Borrower
to Bank at or prior to the date of this Agreement and at all times subsequent
thereto accurately reflect the financial condition of Borrower, and there has
been no adverse change in the financial condition, the operations or any other
status of Borrower since the date of the financial statements delivered to Bank
most recently prior to the date of this Agreement;
(b) the office where Borrower keeps its books, records and accounts (or
copies thereof) concerning the Collateral, Borrower's principal place of
business and all of Borrower's other places of business, locations of Collateral
and post office boxes are as set forth in Exhibit B; Borrower shall promptly
(but in no event less than ten (10) days prior thereto) advise Bank in writing
of the proposed opening of any new place of business, the closing of any
existing place of business, any change in the location of Borrower's books,
records and accounts (or copies thereof) or the opening or closing of any post
office box of Borrower.
(c) the Collateral, including, without limitation, the Equipment
(except any part thereof which prior to the date of this Agreement Borrower
shall have advised Bank in writing consists of Collateral normally used in more
than one state) is and shall be kept, or, in the case of vehicles, based, only
at the addresses set forth on the first page of this Agreement or on Exhibit B,
and at other locations within the continental United States of which Bank has
been advised by Borrower in writing;
(d) if any of the Collateral consists of Goods of a type normally used
in more than one state, whether or not actually so used, Borrower shall
immediately give written notice to Bank of any use of any such Goods in any
state other than a state in which Borrower has previously advised Bank such
Goods shall be used, and such Goods shall not, unless Bank shall otherwise
consent in writing, be used outside of the continental United States;
(e) no security agreement, financing statement or analogous instrument
exists or shall exist with respect to any of the Collateral other than any
security agreement, financing statement or analogous instrument evidencing
security interests in favor of Bank or evidencing Permitted Liens;
(f) each Account or item of Inventory which Borrower shall, expressly
or by implication, request Bank to classify as an Eligible Account or as
Eligible Inventory, respectively, shall, as of the time when such request is
made, conform in all respects to the requirements of such classification as set
forth in the respective definitions of "Eligible Account" and "Eligible
Inventory" as set forth herein and as otherwise established by Bank from time to
time, and Borrower shall promptly notify Bank in writing if any such Eligible
Account or Eligible Inventory shall subsequently become ineligible;
(g) Borrower is and shall at all times during the Original Term or any
Renewal Term be the lawful owner of all Collateral now purportedly owned or
hereafter purportedly acquired by Borrower, free from all liens, claims,
security interests and encumbrances whatsoever, whether voluntarily or
involuntarily created and whether or not perfected, other than the Permitted
Liens;
(h) Borrower has the right and power and is duly authorized and
empowered to enter into, execute and deliver this Agreement and the Other
Agreements and perform its obligations hereunder and thereunder; Borrower's
execution, delivery and performance of this Agreement and the Other Agreements
does not and shall not conflict with the provisions of any statute, regulation,
ordinance or rule of law, or any agreement, contract or other document which may
now or hereafter be binding on Borrower, and Borrower's execution, delivery and
performance of this Agreement and the Other Agreements shall not result in the
imposition of any lien or other encumbrance upon any of Borrower's property
under any existing indenture, mortgage, deed of trust, loan or credit agreement
or other agreement or instrument by which Borrower or any of its property may be
bound or affected;
(i) there are no actions or proceedings which are pending or threatened
against Borrower which might result in any material adverse change in its
financial condition or materially adversely affect the Collateral and Borrower
shall, promptly upon becoming aware of any such pending or threatened action or
proceeding, give written notice thereof to Bank;
(j) Borrower has obtained all licenses, authorizations, approvals and
permits, the lack of which would have a material adverse effect on the operation
of its business, and Borrower is and shall remain in compliance in all material
respects with all applicable federal, state, local and foreign statutes, orders,
regulations, rules and ordinances (including, without limitation, statutes,
9207_1
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orders, regulations, rules and ordinances relating to taxes, employer and
employee contributions and similar items, securities, employee retirement and
welfare benefits, employee health and safety or environmental matters), the
failure to comply with which would have a material adverse effect on its
business, property, assets, operations or condition, financial or otherwise;
(k) all written information now, heretofore or hereafter furnished by
Borrower to Bank is and shall be true and correct as of the date with respect to
which such information was or is furnished;
(l) Borrower is not conducting, permitting or suffering to be
conducted, nor shall it conduct, permit or suffer to be conducted, any
activities pursuant to or in connection with which any of the Collateral is now,
or will (while any Liabilities remain outstanding) be owned by any Affiliate;
provided, however, that Borrower may enter into transactions with Affiliates in
the ordinary course of business pursuant to terms that are no less favorable to
Borrower than the terms upon which such transfers or transactions would have
been made had they been made to or with a Person that is not an Affiliate and,
in connection therewith, may transfer cash or property to Affiliates for fair
value;
(m) Borrower's name has always been as set forth on the first page of
this Agreement and Borrower uses no tradenames or division names in the
operation of its business, except as otherwise disclosed in writing to Bank;
Borrower shall notify Bank in writing within ten (10) days of the change of its
name or the use of any tradenames or division names not previously disclosed to
Bank in writing;
(n) with respect to Borrower's Equipment: (i) Borrower has good and
indefeasible and merchantable title to and ownership of all Equipment,
including, without limitation, the Equipment described or listed on the schedule
of Equipment delivered to Bank concurrently with this Agreement; (ii) Borrower
shall keep and maintain the Equipment in good operating condition and repair and
shall make all necessary replacements thereof and renewals thereto so that the
value and operating efficiency thereof shall at all times be preserved and
maintained; (iii) Borrower shall not permit any such items to become a fixture
to real estate or an accession to other personal property; and (iv) Borrower,
immediately on demand by Bank, shall deliver to Bank any and all evidence of
ownership of including, without limitation, certificates of title and
applications of title to, any of the Equipment;
(o) this Agreement and the Other Agreements to which Borrower is a
party are the legal, valid and binding obligations of Borrower and are
enforceable against Borrower in accordance with their respective terms;
(p) Borrower is solvent, is able to pay its debts as they become due
and has capital sufficient to carry on its business, now owns property having a
value both at fair valuation and at present fair saleable value greater than the
amount required to pay its debts, and will not be rendered insolvent by the
execution and delivery of this Agreement or any of the Other Agreements or by
completion of the transactions contemplated hereunder or thereunder;
(q) Borrower is not now obligated, nor shall it create, incur, assume
or become obligated (directly or indirectly), for any loans or other
indebtedness for borrowed money other than the Loans, except that Borrower may
(i) borrow money from a Person other than Bank on an unsecured and subordinated
basis if a subordination agreement in favor of Bank and in form and substance
satisfactory to Bank is executed and delivered to Bank relative thereto; (ii)
maintain any present indebtedness to any Person which has been disclosed to Bank
in writing and consented to in writing by Bank; and (iii) incur unsecured
indebtedness to trade creditors in the ordinary course of Borrower's business;
(r) Borrower does not own any margin securities, and none of the
proceeds of the Loans hereunder shall be used for the purpose of purchasing or
carrying any margin securities or for the purpose of reducing or retiring any
indebtedness which was originally incurred to purchase any margin securities or
for any other purpose not permitted by Regulation G or Regulation U of the Board
of Governors of the Federal Reserve System as in effect from time to time;
(s) except as otherwise disclosed in writing to Bank, Borrower has no
Parents, Subsidiaries or divisions, nor is the Borrower engaged in any joint
venture or partnership with any other Person;
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(t) if Borrower is a corporation or partnership, Borrower is duly
organized and in good standing in its state of organization and Borrower is duly
qualified and in good standing in all states where the nature and extent of the
business transacted by it or the ownership of its assets makes such
qualification necessary;
(u) Borrower is not in default under any material contract, lease or
commitment to which it is a party or by which it is bound, nor does Borrower
know of any dispute regarding any contract, lease or commitment which is
material to the continued financial success of Borrower;
(v) there are no controversies pending or threatened between Borrower
and any of its employees, other than employee grievances arising in the ordinary
course of business which are not, in the aggregate, material to the continued
financial success of Borrower, and Borrower is in compliance in all material
respects with all federal and state laws respecting employment and employment
terms, conditions and practices; and
(w) Borrower possesses, and shall continue to possess, adequate
licensees, patents, patent applications, copyrights, service marks, trademarks,
trademark applications, tradestyles and tradenames to continue to conduct its
business as heretofore conducted by it.
Borrower represents, warrants and covenants to Bank that all
representations, warranties and covenants of Borrower contained in this
Agreement (whether appearing in paragraphs 10 or 11 hereof or elsewhere) shall
be true at the time of Borrower's execution of this Agreement, shall survive the
execution, delivery and acceptance hereof by the parties hereto and the closing
of the transactions described herein or related hereto, shall remain true until
the repayment in full of all of the Liabilities and termination of this
Agreement, and shall be remade by Borrower at the time each Loan is made
pursuant to this Agreement.
11. ADDITIONAL COVENANTS OF BORROWER.
Until payment or satisfaction in full of all Liabilities and
termination of this Agreement, unless Borrower obtains Bank's prior written
consent waiving or modifying any of Borrower's covenants hereunder in any
specific instance, Borrower agrees as follows:
(a) Borrower shall at all times keep accurate and complete books,
records and accounts with respect to all of Borrower's business activities, in
accordance with sound accounting practices and generally accepted accounting
principles consistently applied, and shall keep such books, records and
accounts, and any copies thereof, only at the addresses indicated for such
purpose on Exhibit B;
(b) Borrower agrees to deliver to Bank the following financial
information, all of which shall be prepared in accordance with generally
accepted accounting principles consistently applied: (i) no later than twenty
(20) days after each calendar month, copies of internally prepared financial
statements, including, without limitation, balance sheets and statements of
income, retained earnings and cash flow of Borrower, certified by the Chief
Financial Officer of Borrower; (ii) no later than forty-five (45) days after the
end of each of the first three quarters of Borrower's fiscal year a balance
sheet, operating statement and reconciliation of surplus of Borrower, which
quarterly financial statements may be unaudited but shall be certified by the
Chief Financial Officer of Borrower; and (iii) no later than ninety (90) days
after the end of each of Borrower's fiscal years, annual financial statements
certified by independent certified public accountants selected by Borrower and
reasonably satisfactory to Bank, which financial statements shall be accompanied
by a letter from such accountants acknowledging that they are aware that a
primary intent of Borrower in obtaining such financial statements is to
influence Bank and that Bank is relying upon such financial statements in
connection with the exercise of its right hereunder;
(c) Borrower shall promptly advise Bank in writing of any material
adverse change in the business, assets or condition, financial or otherwise, of
Borrower, the occurrence of any Event of Default hereunder or the occurrence of
any event which, if uncured, will become an Event of Default hereunder after
notice of lapse of time (or both);
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(d) Bank, or any Persons designated by it, shall have the right, at any
time, to call at Borrower's places of business at any reasonable times, and,
without hindrance or delay, to inspect the Collateral and to inspect, audit,
check and make extracts from Borrower's books, records, journals, orders,
receipts and any correspondence and other data relating to Borrower's business,
the Collateral or any transactions between the parties hereto, and shall have
the right to make such verification concerning Borrower's business as Bank may
consider reasonable under the circumstances. Borrower shall furnish to Bank such
information relevant to Bank's rights under this Agreement as Bank shall at any
time and from time to time request. Borrower authorizes Bank to discuss the
affairs, finances and business of Borrower with any officers, employees or
directors of Borrower or with any Affiliates or the officers, employees or
directors of any Affiliate, and to discuss the financial condition of Borrower
with Borrower's independent public accountants. Any such discussions shall be
without liability to Bank or to Borrower's independent public accountants.
Borrower shall pay to Bank all customary fees and out-of-pocket expenses
incurred by Bank in the exercise of its rights hereunder, and all of such fees
and expenses shall constitute Loans hereunder, payable on demand and, until
paid, shall bear interest at the highest rate then applicable to Loans
hereunder;
(e) Borrower shall:
(i) keep the Collateral properly housed and shall keep the
Collateral insured for the full insurable value thereof against loss or
damage by fire, theft, explosion, sprinklers, collision (in the case of
motor vehicles) and such other risks as are customarily insured against
by Persons engaged in businesses similar to that of Borrower with such
companies, in such amounts and under policies in such form as shall be
satisfactory to Bank. Original (or certified) copies of such policies
of insurance have been or shall be delivered to Bank within fifteen
(15) days after the date hereof, together with evidence of payment of
all premiums therefor, and shall contain an endorsement, in form and
substance acceptable to Bank, showing loss under such insurance
policies payable to Bank. Such endorsement, or an independent
instrument furnished to Bank, shall provide that the insurance company
shall give Bank at least thirty (30) days written notice before any
such policy of insurance is altered or cancelled and that no act,
whether willful or negligent, or default of Borrower or any other
Person shall affect the right of Bank to recover under such policy of
insurance in case of loss or damage. Borrower hereby directs all
insurers under such policies of insurance to pay all proceeds payable
thereunder directly to Bank. Borrower irrevocably, makes, constitutes
and appoints Bank (and all officers, employees or agents designated by
Bank) as Borrower's true and lawful attorney (and agent-in-fact) for
the purpose of making, settling and adjusting claims under such
policies of insurance, endorsing the name of Borrower on any check,
draft, instrument or other item of payment for the proceeds of such
policies of insurance and making all determinations and decisions with
respect to such policies of insurance; and
(ii) maintain, at its expense, such public liability and third
party property damage insurance as is customary for Persons engaged in
businesses similar to that of Borrower with such companies and in such
amounts, with such deductibles and under policies in such form as shall
be satisfactory to Bank and original (or certified) copies of such
policies have been or shall be delivered to Bank within fifteen (15)
days after the date hereof, together with evidence of payment of all
premiums therefor; each such policy shall contain an endorsement
showing Bank as additional insured thereunder and providing that the
insurance company shall give Bank at least thirty (30) days written
notice before any such policy shall be altered or cancelled.
If Borrower at any time or times hereafter shall fail to obtain or
maintain any of the policies of insurance required above or to pay any premium
in whole or in part relating thereto, then Bank, without waiving or releasing
any obligation or default by Borrower hereunder, may (but shall be under no
obligation to) obtain and maintain such policies of insurance and pay such
premiums and take such other actions with respect thereto as Bank deems
advisable. All sums disbursed by Bank in connection with any such actions,
including, without limitation, court costs, expenses, other charges relating
thereto and reasonable attorneys' fees, shall constitute Loans hereunder and
shall be payable on demand by Borrower to Bank and, until paid, shall bear
interest at the highest rate then applicable to Loans hereunder.
(f) Borrower shall not use the Collateral, or any part thereof, in any
unlawful business or for any unlawful purpose or use or maintain any of the
Collateral in any manner that does or could result in material damage to the
environment or a violation of any applicable environmental laws, rules or
regulations; shall keep the Collateral in good condition, repair and order;
shall permit
9207_1
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<PAGE>
Bank to examine any of the Collateral at any time and wherever the Collateral
may be located; shall not permit the Collateral, or any part thereof, to be
levied upon under execution, attachment, distraint or other legal process; shall
not sell, lease, grant a security interest in or otherwise dispose of any of the
Collateral except as expressly permitted by this Agreement; and shall not
secrete or abandon any of the Collateral, or remove or permit removal of any of
the Collateral from any of the locations listed on Exhibit B or in any written
notice to Bank pursuant to paragraph 10(b) hereof, except for the removal of
Inventory sold in the ordinary course of Borrower's business as permitted
herein;
(g) All monies and other property obtained by Borrower from Bank
pursuant to this Agreement will be used solely for business purposes of
Borrower;
(h) Borrower shall, at the request of Bank, indicate on its records
concerning the Collateral a notation, in form satisfactory to Bank, of the
security interest of Bank hereunder, and Borrower shall not maintain duplicates
or copies of such records at any address other than Borrower's principal place
of business set forth on the first page of this Agreement;
(i) Borrower shall file all required tax returns and pay all of its
taxes when due, including, without limitation, taxes imposed by federal, state
or municipal agencies and shall cause any liens for taxes to be promptly
released; provided, that Borrower shall have the right to contest the payment of
such taxes in good faith by appropriate proceedings so long as (i) the amount so
contested is shown on Borrower's financial statements, (ii) the contesting of
any such payment does not give rise to a lien for taxes, (iii) Borrower keeps on
deposit with Bank (such deposit to be held without interest) an amount of money
which, in the sole judgment of Bank, is sufficient to pay such taxes and any
interest or penalties that may accrue thereon, and (iv) if Borrower fails to
prosecute such contest with reasonable diligence, Bank may apply the money so
deposited in payment of such taxes. If Borrower fails to pay any such taxes and
in the absence of any such contest by Borrower, Bank may (but shall be under no
obligation to) advance and pay any sums required to pay any such taxes and/or to
secure the release of any lien therefor, and any sums so advanced by Bank shall
constitute Loans hereunder, shall be payable by Borrower to Bank on demand, and,
until paid, shall bear interest at the highest rate then applicable to Loans
hereunder;
(j) Borrower shall not assume, guarantee or endorse, or otherwise
become liable in connection with, the obligations of any Person, except by
endorsement of instruments for deposit or collection or similar transactions in
the ordinary course of business;
(k) Borrower shall not enter into any merger or consolidation, or sell,
lease or otherwise dispose of all or substantially all of its assets, or enter
into any transaction outside the ordinary course of Borrower's business,
including, without limitation, any purchase, redemption or retirement of any
shares of any class of its stock, and any issuance of any shares of, or warrants
or other rights to receive or purchase any shares of, any class of its stock;
(l) Borrower shall not declare or pay any dividend or other
distribution (whether in cash or in kind) on any class of its stock (if Borrower
is a corporation) or on account of any equity interest in Borrower (if Borrower
is a partnership or other type of entity);
(m) Borrower shall not purchase or otherwise acquire, or contract to
purchase or otherwise acquire, the obligations or stock of any Person, other
than direct obligations of the United States;
(n) Borrower shall not amend its organizational documents or change
its fiscal year;
(o) Borrower's tangible net worth shall not at any time be less than
that shown on the financial statement most recently presented to Bank prior to
the date hereof; "TANGIBLE NET WORTH" being defined for purposes of this
paragraph as Borrower's shareholders' equity (including retained earnings) less
the book value of all intangible assets plus the amount of any LIFO reserve, all
as determined under generally accepted accounting principles applied on a basis
consistent with the aforesaid financial statement; and
9207_1
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<PAGE>
(p) Borrower shall reimburse Bank for all costs and expenses,
including, without limitation, legal expenses and reasonable attorneys' fees,
incurred by Bank in connection with documentation and consummation of this
transaction and any other transactions between Borrower and Bank, including,
without limitation, Uniform Commercial Code and other public record searches,
lien filings, Federal Express or similar express or messenger delivery,
appraisal costs, surveys, title insurance and environmental audit or review
costs, and in seeking to collect, protect or enforce any rights in or to the
Collateral or incurred by Bank in seeking to collect any Liabilities and to
administer and enforce any of Bank's rights under this Agreement. Borrower shall
also pay all normal service charges with respect to all accounts maintained by
Borrower with Bank and for any additional services requested by Borrower from
Bank. All such costs, expenses and charges shall constitute Loans hereunder,
shall be payable by Borrower to Bank on demand, and, until paid, shall bear
interest at the highest rate then applicable to Loans hereunder.
12. DEFAULT.
The occurrence of any one or more of the following events shall
constitute an "EVENT OF DEFAULT" by Borrower hereunder:
(a) the failure of any Obligor to pay when due, declared due, or
demanded by Bank, any of the Liabilities;
(b) the failure of any Obligor to perform, keep or observe any of the
covenants, conditions, promises, agreements or obligations of such Obligor under
this Agreement or any of the Other Agreements; provided that any such failure by
Borrower under this Agreement shall not constitute an Event of Default hereunder
until the fifth (5th) day following written notice thereof from Bank to
Borrower;
(c) the failure of any Obligor to perform, keep or observe any of the
covenants, conditions, promises, agreements or obligations of such Obligor under
any other agreement with any Person if such failure may have a material adverse
effect on such Obligor's business property, assets, operations or condition,
financial or otherwise;
(d) the making or furnishing by any Obligor to Bank of any
representation, warranty, certificate, schedule, report or other communication
within or in connection with this Agreement or the Other Agreements or in
connection with any other agreement between such Obligor and Bank, which is
untrue or misleading in any respect;
(e) the loss, theft, damage or destruction of, or (except as permitted
hereby) sale, lease or furnishing under a contract of service of, any of the
Collateral;
(f) the creation (whether voluntary or involuntary) of, or any attempt
to create, any lien or other encumbrance upon any of the Collateral, other than
the Permitted Liens, or the making or any attempt to make any levy, seizure or
attachment thereof;
(g) the commencement of any proceedings in bankruptcy by or against any
Obligor or for the liquidation or reorganization of any Obligor, or alleging
that such Obligor is insolvent or unable to pay its debts as they mature, or for
the readjustment or arrangement of any Obligor's debts, whether under the United
States Bankruptcy Code or under any other law, whether state or federal, now or
hereafter existing for the relief of debtors, or the commencement of any
analogous statutory or non-statutory proceedings involving any Obligor;
provided, however, that if such commencement of proceedings against such Obligor
is involuntary, such action shall not constitute an Event of Default unless such
proceedings are not dismissed within thirty (30) days after the commencement of
such proceedings;
(h) the appointment of a receiver or trustee for any Obligor, for any
of the Collateral or for any substantial part of any Obligor's assets or the
institution of any proceedings for the dissolution, or the full or partial
liquidation, or the merger or consolidation, of any Obligor which is a
corporation or a partnership; provided, however, that if such appointment or
commencement of proceedings against such Obligor is involuntary, such action
shall not constitute an Event of Default unless such appointment is not revoked
or such proceedings are not dismissed within thirty (30) days after the
commencement of such proceedings;
9207_1
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<PAGE>
(i) the entry of any judgment or order against any Obligor which
remains unsatisfied or undischarged and in effect for thirty (30) days after
such entry without a stay of enforcement or execution;
(j) the death of any Obligor who is a natural Person, or of any partner
of any Obligor which is a partnership, or of any natural Person who owns a
material interest in a corporate Obligor, or the dissolution of any Obligor
which is a partnership or corporation;
(k) the occurrence of an event of default under, or the revocation or
termination of, any agreement, instrument or document executed and delivered by
any Person to Bank pursuant to which such Person has guaranteed to Bank the
payment of all or any of the Liabilities or has granted Bank a security interest
in or lien upon some or all of such Person's real and/or personal property to
secure the payment of all or any of the Liabilities;
(l) the institution in any court of a criminal proceeding against any
Obligor, or the indictment of any Obligor for any crime, other than any
misdemeanor not punishable by incarceration; and
(m) Bank shall reasonably feel insecure for any material reason
whatsoever, including, without limitation, fear of removal or waste of the
Collateral, or any part thereof.
13. REMEDIES UPON AN EVENT OF DEFAULT.
(a) Upon the occurrence of an Event of Default described in paragraph
12(g) hereof, all of Borrower's Liabilities shall immediately and automatically
become due and payable, without notice of any kind. Upon the occurrence of any
other Event of Default, all Liabilities may, at the option of Bank, and without
demand, notice or legal process of any kind, be declared, and immediately shall
become, due and payable.
(b) Upon the occurrence of an Event of Default, Bank may exercise from
time to time any rights and remedies available to it under the Uniform
Commercial Code and any other applicable law in addition to, and not in lieu of,
any rights and remedies expressly granted in this Agreement or in any of the
Other Agreements and all of Bank's rights and remedies shall be cumulative and
non-exclusive to the extent permitted by law. In particular, but not by way of
limitation of the foregoing, Bank may, without notice, demand or legal process
of any kind, take possession of any or all of the Collateral (in addition to
Collateral of which it already has possession), wherever it may be found, and
for that purpose may pursue the same wherever it may be found, and may enter
into any of Borrower's premises where any of the Collateral may be, and search
for, take possession of, remove, keep and store any of the Collateral until the
same shall be sold or otherwise disposed of, and Bank shall have the right to
store the same at any of Borrower's premises without cost to Bank. At Bank's
request, Borrower shall, at Borrower's expense, assemble the Collateral and make
it available to Bank at one or more places to be designated by Bank and
reasonably convenient to Bank and Borrower. Borrower recognizes that if Borrower
fails to perform, observe or discharge any of its Liabilities under this
Agreement or the Other Agreements, no remedy at law will provide adequate relief
to Bank, and agrees that Bank shall be entitled to temporary and permanent
injunctive relief in any such case without the necessity of proving actual
damages. Any notification of intended disposition of any of the Collateral
required by law will be deemed reasonably and properly given if given at least
five (5) calendar days before such disposition. Any proceeds of any disposition
by Bank of any of the Collateral may be applied by Bank to the payment of
expenses in connection with the Collateral, including, without limitation, legal
expenses and reasonable attorneys' fees, and any balance of such proceeds may be
applied by Bank toward the payment of such of the Liabilities, and in such order
of application, as Bank may from time to time elect.
14. INDEMNIFICATION.
Borrower agrees to defend (with counsel satisfactory to Bank), protect,
indemnify and hold harmless Bank, each affiliate or subsidiary of Bank, and each
of their respective officers, directors, employees, attorneys and agents (each
an "INDEMNIFIED PARTY") from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, claims, costs, expenses
and disbursements of any kind or nature (including, without limitation, the
disbursements and the reasonable fees of counsel for each
9207_1
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<PAGE>
Indemnified Party in connection with any investigative, administrative or
judicial proceeding, whether or not the Indemnified Party shall be designated a
party thereto), which may be imposed on, incurred by, or asserted against, any
Indemnified Party (whether direct, indirect or consequential and whether based
on any federal, state or local laws and regulations, including, without
limitation, securities, environmental and commercial laws and regulations, under
common law or in equity, or based on contract or otherwise) in any manner
relating to or arising out of this Agreement or any Other Agreement, or any act,
event or transaction related or attendant thereto, the making and the management
of the Loans or any letters of credit or the use or intended use of the proceeds
of the Loans or any letters of credit; provided, however, that Borrower shall
not have any obligation hereunder to any Indemnified Party with respect to
matters caused by or resulting from the willful misconduct or gross negligence
of such Indemnified Party. To the extent that the undertaking to indemnify set
forth in the preceding sentence may be unenforceable because it is violative of
any law or public policy, Borrower shall satisfy such undertaking to the maximum
extent permitted by applicable law. Any liability, obligation, loss, damage,
penalty, cost or expense covered by this Indemnity shall be paid to each
Indemnified Party on demand, and, failing prompt payment, shall, together with
interest thereon at the highest rate then applicable to Loans hereunder from the
date incurred by each Indemnified Party until paid by Borrower, be added to the
Liabilities of Borrower and be secured by the Collateral. The provisions of this
paragraph 14 shall survive the satisfaction and payment of the Other Liabilities
and the termination of this Agreement.
15. NOTICE.
All written notices and other written communications with respect to
this Agreement shall be sent by ordinary, certified or overnight mail, by
telecopy or delivered in person, and in the case of Bank shall be sent to it at
LaSalle and Monroe Streets, Chicago, Illinois 60603, Attention: Asset Based
Lending Division, and in the case of Borrower shall be sent to it at its
principal place of business set forth on the first page of this Agreement.
16. CHOICE OF GOVERNING LAW; CONSTRUCTION; FORUM SELECTION.
This Agreement and the Other Agreements are submitted by Borrower to
Bank for Bank's acceptance or rejection at Bank's principal place of business as
an offer by Borrower to borrow monies from Bank now and from time to time
hereafter, and shall not be binding upon Bank or become effective until accepted
by Bank, in writing, at said place of business. If so accepted by Bank, this
Agreement and the Other Agreements shall be deemed to have been made at said
place of business. THIS AGREEMENT AND THE OTHER AGREEMENTS SHALL BE GOVERNED AND
CONTROLLED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS AS TO INTERPRETATION,
ENFORCEMENT, VALIDITY, CONSTRUCTION, EFFECT, AND IN ALL OTHER RESPECTS,
INCLUDING, WITHOUT LIMITATION, THE LEGALITY OF THE INTEREST RATE AND OTHER
CHARGES, BUT EXCLUDING PERFECTION OF THE SECURITY INTERESTS IN THE COLLATERAL,
WHICH SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE RELEVANT JURISDICTION.
If any provision of this Agreement shall be held to be prohibited by or invalid
under applicable law, such provision shall be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or remaining provisions of this Agreement.
To induce Bank to accept this Agreement, Borrower irrevocably agrees
that, subject to Bank's sole and absolute election, ALL ACTIONS OR PROCEEDINGS
IN ANY WAY, MANNER OR RESPECT, ARISING OUT OF OR FROM OR RELATED TO THIS
AGREEMENT, THE OTHER AGREEMENTS OR THE COLLATERAL SHALL BE LITIGATED IN COURTS
HAVING SITUS WITHIN THE CITY OF CHICAGO, STATE OF ILLINOIS. BORROWER HEREBY
CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURTS
LOCATED WITHIN SAID CITY AND STATE. Borrower hereby irrevocably appoints and
designates the Secretary of State of Illinois, whose address is Springfield,
Illinois (or any other person having and maintaining a place of business in such
state whom Borrower may from time to time hereafter designate upon ten (10) days
written notice to Bank and who Bank has agreed in its sole discretion in writing
is satisfactory and who has executed an agreement in form and substance
satisfactory to Bank agreeing to act as such attorney and agent), as Borrower's
true and lawful attorney and duly authorized agent for acceptance of service of
legal process. Borrower agrees that service of such process upon such person
shall constitute personal service of such process upon Borrower. BORROWER HEREBY
WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION
BROUGHT AGAINST BORROWER BY BANK IN ACCORDANCE WITH THIS PARAGRAPH.
9207_1
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<PAGE>
17. MODIFICATION AND BENEFIT OF AGREEMENT.
This Agreement and the Other Agreements may not be modified, altered or
amended except by an agreement in writing signed by Borrower and Bank. Borrower
may not sell, assign or transfer this Agreement, or the Other Agreements or any
portion thereof, including, without limitation, Borrower's rights, titles,
interest, remedies, powers or duties thereunder. Borrower hereby consents to
Bank's sale, assignment, transfer or other disposition, at any time and from
time to time hereafter, of this Agreement, or the Other Agreements, or of any
portion thereof, or participations therein, including, without limitation,
Bank's rights, titles, interest, remedies, powers and/or duties and agrees that
it shall execute and deliver such documents as Bank may request in connection
with any such sale, assignment, transfer or other disposition.
18. HEADINGS OF SUBDIVISIONS.
The headings of subdivisions in this Agreement are for convenience of
reference only, and shall not govern the interpretation of any of the provisions
of this Agreement.
19. POWER OF ATTORNEY.
Borrower acknowledges and agrees that its appointment of Bank as its
attorney and agent-in-fact for the purposes specified in this Agreement is an
appointment coupled with an interest and shall be irrevocable until all of the
Liabilities are paid in full and this Agreement is terminated.
20. WAIVER OF JURY TRIAL; OTHER WAIVERS.
(a) BORROWER HEREBY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS AGREEMENT, ANY OF THE
OTHER AGREEMENTS, THE LIABILITIES, THE COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT
BY BORROWER OR BANK OR WHICH, IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF
OR RELATES TO THE RELATIONSHIP BETWEEN BORROWER AND BANK. IN NO EVENT SHALL BANK
BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES.
(b) Borrower hereby waives demand, presentment, protest and notice of
nonpayment, and further waives the benefit of all valuation, appraisal and
exemption laws.
(c) BORROWER HEREBY WAIVES ALL RIGHTS TO NOTICE AND HEARING OF ANY KIND
PRIOR TO THE EXERCISE BY BANK OF ITS RIGHTS TO REPOSSESS THE COLLATERAL OF
BORROWER WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON SUCH
COLLATERAL WITHOUT PRIOR NOTICE OR HEARING.
(d) Bank's failure, at any time or times hereafter, to require strict
performance by Borrower of any provision of this Agreement or any of the Other
Agreements shall not waive, affect or diminish any right of Bank thereafter to
demand strict compliance and performance therewith. Any suspension or waiver by
Bank of an Event of Default under this Agreement or any default under any of the
Other Agreements shall not suspend, waive or affect any other Event of Default
under this Agreement or any other default under any of the Other Agreements,
whether the same is prior or subsequent thereto and whether of the same or of a
different kind or character. No delay on the part of Bank in the exercise of any
right or remedy under this Agreement or any Other Agreement shall preclude other
or further exercise thereof or the exercise of any right or remedy. None of the
undertakings, agreements, warranties, covenants and representations of Borrower
contained in this Agreement or any of the Other Agreements and no Event of
Default under this Agreement or default under any of the Other Agreements shall
be deemed to have been suspended or waived by Bank unless such suspension or
waiver is in writing, signed by a duly authorized officer of Bank and directed
to Borrower specifying such suspension or waiver.
9207_1
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the 30th day of April, 1996.
USA Skate Co., Inc. LASALLE NATIONAL BANK
By /s/ Michael S. Casazza By /s/ Joseph Fudacz
----------------------------- --------------------------
Title President Title Sr. VP
-------------------------- -----------------------
and
By /s/ Barry Hollander
-----------------------------
Title CFO
--------------------------
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<PAGE>
EXHIBIT A - SPECIAL PROVISIONS
------------------------------
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith between USA SKATE CO., INC., A NEW YORK CORPORATION ("Borrower")
and LASALLE NATIONAL BANK ("Bank").
CREDIT TERMS
- ------------
(1) LOAN LIMIT:
Bank may, in its sole discretion, advance an amount up to the sum of
the following sublimits (the "Loan Limit"):
(a) Up to seventy-five percent (75%) of the face amount (less
maximum discounts, credits and allowances which may be taken
by or granted to Account Debtors in connection therewith) of
Borrower's Eligible Accounts; plus
(b) Up to fifty percent (50%) of the lower of the cost or market
value of Borrower's Eligible Inventory, provided that the
advance rate for Inventory which is over one year old and
which is otherwise Eligible Inventory shall be twenty-five
percent (25%) less one percent (1%) for each month over twelve
(12) that such Eligible Inventory remains part of Inventory;
plus
(c) Up to fifty percent (50%) against the face amount of
Commercial Letters of Credit issued by Bank for the purpose of
purchasing Inventory, provided that such Commercial Letters of
Credit are in form and substance satisfactory to Bank; minus
(d) Such reserves as Bank elects, in its sole discretion, to
establish from time to time;
provided, that the availability described in Paragraphs (1)(b) and
(1)(c) above shall in no event exceed Two Million and No/100 Dollars
($2,000,000.00). However, the aggregate Loan Limit shall in no event
exceed Five Million Dollars ($5,000,000), except as such amount may be
increased or decreased by Bank, in its sole discretion, from time to
time.
(2) INTEREST RATE:
Each Loan shall bear interest at the rate of one percent (1%) per annum
in excess of Bank's publicly announced prime rate (which is not
intended to be Bank's lowest or most favorable rate in effect at any
time) (the "Prime Rate") in effect from time to time, payable on the
last business day of each month in arrears. Said rate of interest shall
increase or decrease by an amount equal to each increase or decrease in
the Prime Rate effective on the effective date of each such change
Borrower: USA Skate Co., Inc.
Initialed for Borrower by: MC
----
Date: April 30, 1996 Initialed for Bank by: JF
----
9207_1
<PAGE>
in the Prime Rate. Upon the occurrence of an Event of Default each Loan
shall bear interest at the rate of two percent (2%) per annum in excess
of the interest rate otherwise payable thereon, which interest shall be
payable on demand. All interest shall be calculated on the basis of a
360- day year.
(3) FEES AND CHARGES:
FACILITIES FEES: For the first year of the Original Term, Borrower
shall pay to Bank a facilities fee of One Hundred Thousand and No/100
Dollars ($100,000.00), which fee shall be fully earned by Bank and
payable on the date that Bank makes its initial disbursement under this
Agreement. Thereafter, Borrower shall pay to Bank an annual facilities
fee equal to Fifty Thousand Dollars ($50,000), which fee shall be fully
earned by Bank and payable on each anniversary of the date of this
Agreement during the Original Term and any Renewal Term.
(4) LETTERS OF CREDIT:
Subject to the terms and conditions of this Agreement, including
Exhibit A, and the Other Agreements, during the Original Term or any
Renewal Term, Bank may, in its sole discretion from time to time issue,
upon Borrower's request, Commercial and/or Standby Letters of Credit,
provided that the aggregate undrawn face amount of all such Letters of
Credit shall at no time exceed Two Million and No/100 Dollars
($2,000,000.00). Bank's contingent liability under the Letters of
Credit shall automatically reduce, dollar for dollar, the amount which
Borrower may borrow based upon the Loan Limit. Payments made by Bank to
any Person on account of any Letter of Credit shall constitute Loans
hereunder. At no time shall the aggregate of direct Loans by Bank to
Borrower plus the contingent liability of Bank under the outstanding
Letters of Credit be in excess of the Loan Limit. Borrower shall remit
to Bank a Letter of Credit fee equal to one-quarter of one percent (1/4
of 1%) per month on the aggregate undrawn face amount of all Letters of
Credit outstanding, which fee shall be payable monthly in arrears on
each day that interest is payable hereunder. Borrower shall also pay on
demand Bank's normal and customary administrative charges for issuance
of any Letter of Credit.
Borrower: USA Skate Co., Inc.
Initialed for Borrower by: MC
Date: April 30, 1996 ----
Initialed for Bank by: JF
----
-2-
9207_1
<PAGE>
(5) ELIGIBLE ACCOUNTS:
The following is inserted in lieu of clause (iv) of the definition of
the term "Eligible Account" which is contained in Paragraph 1(d) of the
Agreement:
(iv) it is evidenced by an invoice rendered to the Account
Debtor thereunder, is due and payable within ninety (90) days after the
date of the invoice and does not remain unpaid past the due date
thereof, or it is evidenced by an invoice rendered to the Account
Debtor thereunder, is due and payable more than ninety (90) but no more
than one hundred eighty (180) days after the date of the invoice and
does not remain unpaid past the due date thereof; provided, however,
that if more than twenty-five percent (25%) of the aggregate dollar
amount of invoices owing by a particular Account Debtor remain unpaid
after the respective due dates thereof, then all Accounts owing by that
Account Debtor shall be deemed ineligible;
(6) ELIGIBLE INVENTORY:
In addition to the criteria set forth in the term "Eligible Inventory",
which are set forth in Paragraph 1(e) of the Agreement, and without
limiting Bank's discretion under paragraph 1(e)(vi), work-in-process
shall not be Eligible Inventory.
ADDITIONS AND CHANGES TO COVENANTS
- ----------------------------------
(7) PERMITTED BORROWINGS:
Notwithstanding the provisions of Paragraph 10(q) of the Agreement,
Borrower may (a) finance or refinance the acquisition of Equipment
and/or real estate in an aggregate amount not to exceed One Hundred
Thousand and No/100 Dollars ($100,000.00), whether by purchase money
financing, lease or otherwise; (b) borrow money from a Person other
than Bank, provided that any such borrowing is on an unsecured and
subordinated basis, and further provided that a Subordination Agreement
in favor of Bank and in form and substance satisfactory to Bank shall
have been executed and delivered relative thereto; (c) maintain the
present indebtedness to Warren Amendola, Sr. as evidenced by that
certain License Agreement dated April 30, 1996 between Borrower and
Warren Amendola, Sr. (the "License Agreement"); (d) maintain existing
indebtedness of Six Hundred Seventy-Seven and no/100 Canadian Dollars
(CDN $677,000.00) owing to Peter Wu; (e) maintain existing indebtedness
of approximately Three Hundred Forty- Four Thousand and no/100 Dollars
($344,000.00) owing to Warren Amendola, Jr., Russell Amendola, Richard
Amendola and the Three R Profit Sharing Retirement Plan; and (f) incur
unsecured indebtedness to trade creditors of Borrower in the ordinary
course of Borrower's business.
Borrower: USA Skate Co., Inc.
Initialed for Borrower by: MC
Date: April 30, 1996 ----
Initialed for Bank by: JF
----
-3-
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<PAGE>
(8) ENVIRONMENTAL AUDITS:
Bank's rights under Paragraph 11(d) of the Agreement shall include,
without limitation, the right to cause environmental audits of
Borrower's owned and leased properties to be conducted from time to
time by environmental auditors satisfactory to Bank in its sole
discretion; provided that Bank shall endeavor, for such purposes, to
retain environmental auditors charging reasonable fees to perform such
audits.
(9) RESTRICTION ON MANAGEMENT FEES AND OTHER COMPENSATION;
PERMITTED DIVIDENDS:
In addition to the restrictions contained in Paragraph 11(l) of the
Agreement, Borrower shall not (a) pay any management or consulting fees
to any Person (other than Twelve Thousand and No/100 Dollars
($12,000.00) per month, payable to CPS) or make any loan to any Person
(except travel advances made to employees in the ordinary course of
business), or (b) pay any compensation, whether as salary, bonus or
otherwise, to any of Borrower's officers other than Ninety Thousand and
No/100 Dollars ($90,000.00) payable to Warren Amendola, Sr.
Notwithstanding the restrictions contained in Paragraph 11(l) of the
Agreement, in the absence of an Event of Default and if after giving
effect thereto the outstanding Liabilities do not exceed the Loan
Limit, Borrower may pay dividends to USA Skate to permit USA Skate to
pay regularly scheduled interest on all debt instruments of USA Skate
existing on the date hereof.
(10) CHECKING ACCOUNT PROVISIONS:
Borrower shall maintain its general checking account with Bank. Normal
charges shall be assessed thereon. Although no compensating balance is
required, Borrower must keep monthly balances in order to merit
earnings credits which will cover Bank's service charges for demand
deposit account activities.
(11) OWNERSHIP:
Henry Fong ("Fong") and Michael S. Casazza ("Casazza") shall at all
times own, on a fully diluted basis, not less than twenty percent (20%)
of the outstanding capital stock of California Pro Sports, Inc., a
Delaware corporation ("CPS"), which, together with Fong and Casazza
shall at all times own, on a fully diluted basis, not less than
thirty-five percent (35%) of the outstanding equity securities of USA
Skate Corporation, a Delaware corporation ("USA Skate"), which shall at
all times own, on a fully diluted basis, not less than fifty-eight and
one-third percent (58 1/3%) of the outstanding equity securities of
Borrower and not less one hundred percent (100%) of the outstanding
equity securities of Three R Sales, Inc., a New York corporation
("Three R Sales"). Three R Sales shall at all times own, on a fully
diluted basis,
Borrower: USA Skate Co., Inc.
Initialed for Borrower by: MC
----
Date: April 30, 1996 Initialed for Bank by: JF
----
-4-
9207_1
<PAGE>
not less than forty-one and two-thirds percent (41 2/3%) of the
outstanding equity securities of Borrower.
(12) PERMITTED GUARANTIES:
Notwithstanding the provisions of Paragraph 11(j) of the Agreement,
Borrower may execute a Continuing Unconditional Guaranty of any and all
indebtedness of California Pro, Inc.
("California Pro") to Bank.
(13) PROHIBITED LOANS:
In addition to the restrictions contained in the Agreement, Borrower
shall not make any loans to, or other investments in, any other Person,
including without limitation loans to direct or indirect stockholders
of Borrower and loans to, or other investments in, direct or indirect
subsidiaries of Borrower. Borrower may, however, make loans to USA
Skate to permit USA Skate to satisfy the costs associated with its
contemplated initial public offering and other financing arrangements,
provided that such loans are repaid with the proceeds derived
therefrom.
ADDITIONS AND CHANGES TO DEFAULT PROVISIONS
- -------------------------------------------
(14) LOSS OF COLLATERAL:
Notwithstanding the provisions of Paragraph 12(e) of the Agreement, no
Event of Default shall arise under such paragraph as the result of any
loss, theft, damage or destruction of Collateral, unless the Collateral
which is the subject thereof has a value, determined by Bank in its
sole discretion, in excess of Two Hundred Fifty Thousand and No/100
Dollars ($250,000.00).
(15) ADDITIONAL LIENS:
Notwithstanding the provisions of Paragraph 12(f) of the Agreement, no
Event of Default shall arise under such paragraph as the result of any
levy, seizure or attachment of Collateral, unless the Collateral which
is the subject thereof has a value, determined by Bank in its sole
discretion, in excess of One Hundred Thousand and No/100 Dollars
($100,000.00).
Borrower: USA Skate Co., Inc.
Initialed for Borrower by: MC
----
Date: April 30, 1996 Initialed for Bank by: JF
----
-5-
9207_1
<PAGE>
(16) CROSS DEFAULTS:
In addition to the Events of Default contained in Paragraph 12 of the
Agreement, the occurrence of any of the following shall constitute an
Event of Default by Borrower hereunder:
(a) The occurrence of an Event of Default under, or the revocation
or termination of, that certain Loan and Security Agreement
dated April 1, 1993, as amended, by and between Bank and
California Pro;
(b) The occurrence of an event of default under, or the revocation
or termination of, the License Agreement as it exists on the
date hereof; and
(c) The occurrence of an event of default under, or the revocation
or termination of, that certain Consulting and Non-Competition
Agreement dated April 30, 1996, by and between Warren
Amendola, Sr., and USA Skate (the "Consulting Agreement") as
it exists on the date hereof.
CONDITIONS TO CLOSING
- ---------------------
(17) ADDITIONAL CONDITIONS TO CLOSING:
Bank shall be under no obligation to consummate the transactions
contemplated by this Agreement until each of the conditions listed in
this Paragraph 17 has been satisfied. Whenever a condition contained
herein requires delivery of an agreement or other document to Bank,
each such agreement or other document shall be in form and substance
satisfactory to Bank in its sole discretion.
(a) ADDITIONAL RIGHTS AS COLLATERAL: Each of USA Skate and CPS
shall assign to Bank all of USA Skate's and CPS's rights and
remedies, but none of USA Skate's or CPS's duties or
obligations, under that certain Stock Purchase Agreement dated
April 30, 1996, as amended (the "Stock Purchase Agreement"),
by and among CPS, USA Skate, the Three R Profit Sharing
Retirement Plan, Warren Amendola, Sr., Patricia Amendola,
Warren Amendola, Jr., Richard Amendola and Russell Amendola
(the members of the Amendola family and Three R Plan are
collectively referred to herein as the "Sellers").
(b) GUARANTIES: Borrower shall cause to be executed in favor of
Bank and delivered to Bank the Continuing Unconditional
Guaranty of each of CPS, USA Skate, California Pro, Three R
Sales, Fong and Casazza of any and all indebtedness of
Borrower: USA Skate Co., Inc.
Initialed for Borrower by: MC
----
Date: April 30, 1996 Initialed for Bank by: JF
----
-6-
9207_1
<PAGE>
(b) GUARANTIES: Borrower shall cause to be executed in favor of
Bank and delivered to Bank the Continuing Unconditional
Guaranty of each of CPS, USA Skate, California Pro, Three R
Sales, Fong and Casazza of any and all indebtedness of
Borrower to Bank. Additionally, Borrower shall execute in
favor of Bank and deliver to Bank a Continuing Unconditional
Guaranty of any and all indebtedness of California Pro to
Bank.
(c) SUBORDINATION AGREEMENTS: Borrower shall cause its
indebtedness to Warren Amendola, Sr. under the License
Agreement and USA Skate's indebtedness to the Sellers under
the Consulting Agreement, that certain Registration Rights
Agreement dated April 30, 1996, among USA Skate and the
Sellers (the "Registration Agreement") and that certain
$1,050,000 Promissory Note dated April 30, 1996, executed by
USA Skate in favor of the Sellers (the "Promissory Note") to
be subordinated to the indebtedness of Borrower to Bank on
terms acceptable to Bank in its sole discretion and shall
cause Warren Amendola, Sr. and the other Sellers to execute
and deliver to Bank appropriate Subordination Agreements.
Borrower shall further cause Warren Amendola, Sr. and the
other Sellers to execute and deliver to Bank a Subordination
Agreement with respect to (i) the Guaranties of CPS, Fong and
Casazza under the Promissory Note, the License Agreement and
with respect to the return of a treasury bill to Patricia
Amendola; (ii) the Guaranties of Fong and Casazza under the
Registration Agreement and the Consulting Agreement; (iii) the
obligations of CPS under the Consulting Agreement; (iv) the
Guaranty of USA Skate under the License Agreement; and (v) the
Guaranty of CPS under that certain $125,000 Promissory Note
dated April 30, 1996, executed by Les Equipments Sportifs
Davtec, Inc. in favor of Warren Amendola, Sr.
(d) RELATED TRANSACTIONS: Borrower and USA Skate shall have
consummated the transactions set forth in the Stock Purchase
Agreement. Borrower shall provide Bank with copies of said
Stock Purchase Agreement and all related documentation, and
evidence satisfactory to Bank that any and all approvals of
the transactions contemplated therein have been obtained.
(e) ATTORNEY'S OPINION LETTER: Borrower shall cause to be
executed and delivered to Bank an Attorney's Opinion Letter.
Borrower: USA Skate Co., Inc.
Initialed for Borrower by: MC
----
Date: April 30, 1996 Initialed for Bank by: JF
----
-7-
9207_1
<PAGE>
(f) LANDLORD'S AGREEMENT: Borrower shall provide Bank with a
Landlord's Agreement from the lessor of property commonly
known as 7 Brayton Court, Commack, New York 11725 which
Landlord's Agreement shall include a copy of the relevant
lease.
(g) PLEDGE OF TREASURY BILL: Borrower shall cause Patricia
Amendola to pledge, as additional collateral for the
Liabilities, a treasury bill having a face value of not less
than Three Hundred Thousand and No/100 Dollars ($300,000.00)
Borrower: USA Skate Co., Inc.
Initialed for Borrower by: MC
----
Date: April 30, 1996 Initialed for Bank by: JF
----
-8-
9207_1
<PAGE>
EXHIBIT B-BUSINESS AND COLLATERAL LOCATIONS
Attached to and made a part of that certain Loan and Security Agreement
(Standard Form) of even date herewith between USA Skate Co., Inc. ("BORROWER")
and LASALLE NATIONAL BANK ("BANK").
A. Borrower's Business Locations (please indicate which location is the
principal place of business and at which locations originals and all
copies of Borrower's books, records and accounts are kept).
1. 7 Brayton Court Sole place of business and sole
Commack, New York, 11725 location of books, records and
accounts
2.
3.
B. Other locations of Collateral (including, without limitation, warehouse
locations, processing locations, consignment locations) and all post
office boxes of Borrower. Please indicate the relationship of such
location to Borrower (i.e. public warehouse, processor, etc.)
1.
2.
3.
9207_1
CONTINUING UNCONDITIONAL GUARANTY
WHEREAS, USA Skate Co., Inc., a New York corporation ("Borrower") has
entered into a Loan and Security Agreement dated April 30, 1996 (the "Loan
Agreement") with LaSalle National Bank ("Bank") pursuant to which Bank has made
or may, in its sole discretion, from time to time hereafter, make loans and
advances to or extend other financial accommodations to Borrower;
WHEREAS, the undersigned is desirous of having Bank extend and/or continue
the extension of credit to Borrower and Bank has required that Guarantor (as
hereinafter defined) execute and deliver this Guaranty to Bank as a condition to
the extension and continuation of credit by Bank; and
WHEREAS, the extension and/or continued extension of credit, as aforesaid,
by Bank is necessary and desirable to the conduct and operation of the business
of Borrower and will inure to the personal and financial benefit of Guarantor;
NOW, THEREFORE, for value received and in consideration of any loan,
advance, or financial accommodation of any kind whatsoever heretofore, now or
hereafter made, given or granted to Borrower by Bank (including, without
limitation, the Loans as defined in, and made or to be made by Bank to Borrower
pursuant to, the Loan Agreement), the undersigned, and each of them, if there be
more than one, (collectively, the "Guarantor") unconditionally guaranties (i)
the full and prompt payment when due, whether at maturity or earlier, by reason
of acceleration or otherwise, and at all times thereafter, of all of the
indebtedness, liabilities and obligations of every kind and nature of Borrower
to Bank or any parent, affiliate or subsidiary of Bank (the term "Bank" as used
hereafter shall include such parents, affiliates and subsidiaries), howsoever
created, arising or evidenced, whether direct or indirect, absolute or
contingent, joint or several, now or hereafter existing, or due or to become
due, and howsoever owned, held or acquired by Bank, whether through discount,
overdraft, purchase, direct loan or as collateral or otherwise, including
without limitation all obligations and liabilities of Borrower to Bank under the
Loan Agreement and (ii) the prompt, full and faithful discharge by Borrower of
each and every term, condition, agreement, representation and warranty now or
hereafter made by Borrower to Bank (all such indebtedness, liabilities and
obligations being hereinafter referred to as the "Borrower's Liabilities").
Guarantor further agrees to pay all costs and expenses, including, without
limitation, all court costs and reasonable attorneys' and paralegals' fees paid
or incurred by Bank in endeavoring to collect all or any part of Borrower's
Liabilities from, or in prosecuting any action against, Guarantor or any other
guarantor of all or any part of Borrower's Liabilities. All amounts payable by
Guarantor under this Guaranty shall be payable upon demand by Bank.
Notwithstanding any provision of this Guaranty to the contrary, it is
intended that this Guaranty, and any liens and security interests granted by
Guarantor to secure this Guaranty, not constitute a "Fraudulent Conveyance" (as
defined below). Consequently, Guarantor agrees that if the Guaranty, or any
liens or security interests securing this Guaranty, would, but for the
application of this sentence, constitute a Fraudulent Conveyance, this Guaranty
and each such lien and security interest shall be valid and enforceable only to
the maximum extent that would not cause this Guaranty or such lien or security
interest to constitute a Fraudulent Conveyance, and this Guaranty shall
automatically be deemed to have been amended accordingly at all relevant times.
For purposes hereof, "Fraudulent Conveyance" means a fraudulent conveyance under
Section 548 of the "Bankruptcy Code" (as hereinafter defined) or a fraudulent
conveyance or fraudulent transfer under the provisions of any applicable
fraudulent conveyance or fraudulent transfer law or similar law of any state,
nation or other governmental unit, as in effect from time to time.
Guarantor hereby agrees that, except as hereinafter provided, its
obligations under this Guaranty shall be unconditional, irrespective of (i) the
validity or enforceability of Borrower's Liabilities or any part thereof, or of
any promissory note or other document evidencing all or any part of Borrower's
Liabilities, (ii) the absence of any attempt to collect Borrower's Liabilities
from Borrower or any other guarantor or other action to enforce the same, (iii)
the waiver or consent by Bank with respect to any provision of any instrument
evidencing Borrower's Liabilities, or any part thereof, or any other agreement
heretofore, now or hereafter executed by Borrower and delivered to Bank, (iv)
failure by Bank to take any steps to perfect and maintain its security interest
in, or to preserve its rights to, any security or collateral for Borrower's
Liabilities, (v) the institution of any proceeding under Chapter 11 of Title 11
of the United States Code (11 U.S.C. ss. 101 et seq.), as amended (the
"Bankruptcy Code"), or any similar proceeding, by or against Borrower, or Bank's
election in any such proceeding of the application of Section 1111(b)(2) of the
Bankruptcy Code, (vi) any borrowing or grant of a security interest by Borrower
as debtor-in-possession, under Section 364 of the Bankruptcy Code, (vii) the
disallowance, under Section 502 of the Bankruptcy Code, of all or any portion of
Bank's claim(s) for repayment of Borrower's Liabilities, or (viii) any other
circumstance which might otherwise constitute a legal or equitable discharge or
defense of a guarantor.
Guarantor hereby waives diligence, presentment, demand of payment, filing
of claims with a court in the event of receivership or bankruptcy of Borrower,
protest or notice with respect to Borrower's Liabilities and all demands
whatsoever, and covenants that this Guaranty will not be discharged, except by
complete performance of the obligations and liabilities contained herein.
9217_1
<PAGE>
Upon any default by Borrower as provided in any instrument or document
evidencing all or any part of Borrower's Liabilities, including without
limitation the Loan Agreement, Bank may, at its sole election, proceed directly
and at once, without notice, against Guarantor to collect and recover the full
amount or any portion of Borrower's Liabilities, without first proceeding
against Borrower, or any other person, firm, or corporation, or against any
security or collateral for Borrower's Liabilities.
Bank is hereby authorized, without notice or demand and without affecting
the liability of Guarantor hereunder, to at any time and from time to time (i)
renew, extend, accelerate or otherwise change the time for payment of, or other
terms relating to, Borrower's Liabilities or otherwise modify, amend or change
the terms of any promissory note or other agreement, document or instrument now
or hereafter executed by Borrower and delivered to Bank; (ii) accept partial
payments on Borrower's Liabilities; (iii) take and hold security or collateral
for the payment of Borrower's Liabilities guaranteed hereby, or for the payment
of this Guaranty, or for the payment of any other guaranties of Borrower's
Liabilities or other liabilities of Borrower, and exchange, enforce, waive and
release any such security or collateral; (iv) apply such security or collateral
and direct the order or manner of sale thereof as in its sole discretion it may
determine; and (v) settle, release, compromise, collect or otherwise liquidate
Borrower's Liabilities and any security or collateral therefor in any manner,
without affecting or impairing the obligations of Guarantor hereunder. Bank
shall have the exclusive right to determine the time and manner of application
of any payments or credits, whether received from Borrower or any other source,
and such determination shall be binding on Guarantor. All such payments and
credits may be applied, reversed and reapplied, in whole or in part, to any of
Borrower's Liabilities as Bank shall determine in its sole discretion without
affecting the validity or enforceability of this Guaranty.
To secure the payment and performance of Guarantor's obligations and
liabilities contained herein, Guarantor grants to Bank a security interest in
all property of Guarantor delivered concurrently herewith or which is now, or at
any time hereafter in transit to, or in the possession, custody or control of
Bank, and all proceeds of all such property. Guarantor agrees that Bank shall
have the rights and remedies of a secured party under this Uniform Commercial
Code of Illinois, as now existing or hereafter amended, with respect to all of
the aforesaid property, including without limitation thereof, the right to sell
or otherwise dispose of any or all of such property and apply the proceeds of
such sale to the payment of Borrower's Liabilities. In addition, at any time
after maturity of Borrower's Liabilities by reason of acceleration or otherwise,
Bank may, in its sole discretion, without notice to Guarantor and regardless of
the acceptance of any security or collateral for the payment hereof, appropriate
and apply toward the payment of Borrower's Liabilities (i) any indebtedness due
or to become due from Bank to Guarantor, and (ii) any moneys, credits or other
property belonging to Guarantor, at any time held by or coming into the
possession of Bank whether for deposit or otherwise.
Guarantor hereby assumes responsibility for keeping itself informed of the
financial condition of Borrower, and any and all endorsers and/or other
guarantors of any instrument or document evidencing all or any part of
Borrower's Liabilities and of all other circumstances bearing upon the risk of
nonpayment of Borrower's Liabilities or any part thereof that diligent inquiry
would reveal and Guarantor hereby agrees that Bank shall have no duty to advise
Guarantor of information known to Bank regarding such condition or any such
circumstances or to undertake any investigation not a part of its regular
business routine. If Bank, in its sole discretion, undertakes at any time or
from time to time to provide any such information to any Guarantor, Bank shall
be under no obligation to update any such information or to provide any such
information to Guarantor on any subsequent occasion.
Guarantor consents and agrees that Bank shall be under no obligation to
marshall any assets in favor of Guarantor or against or in payment of any or all
of Borrower's Liabilities. Guarantor further agrees that, to the extent that
Borrower makes a payment or payments to Bank, or Bank receives any proceeds of
collateral, which payment or payments or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside and/or
required to be repaid to Borrower, its estate, trustee, receiver or any other
party, including, without limitation, Guarantor, under any bankruptcy law, state
or federal law, common law or equitable theory, then to the extent of such
payment or repayment, Borrower's Liabilities or the part thereof which has been
paid, reduced or satisfied by such amount, and Guarantor's obligations hereunder
with respect to such portion of Borrower's Liabilities, shall be reinstated and
continued in full force and effect as of the date such initial payment,
reduction or satisfaction occurred.
Guarantor agrees that any and all claims of Guarantor against Borrower, any
endorser or any other guarantor of all or any part of Borrower's Liabilities, or
against any of Borrower's properties, whether arising by reason of any payment
by Guarantor to Bank pursuant to the provisions hereof, or otherwise, shall be
subordinate and subject in right of payment to the prior payment, in full, of
all of Borrower's Liabilities.
Bank may, without notice to anyone, sell or assign Borrower's Liabilities
or any part thereof, or grant participations therein, and in any such event each
and every immediate or remote assignee or holder of, or participant in, all or
any of Borrower's Liabilities shall have the right to enforce this Guaranty, by
suit or otherwise for the benefit of such assignee, holder, or participant, as
fully as if herein by name specifically given such right, but Bank shall have an
unimpaired right, prior and superior to that of any such
9217_1
<PAGE>
assignee, holder or participant, to enforce this Guaranty for the benefit of
Bank, as to any part of Borrower's Liabilities retained by Bank.
This Guaranty shall be binding upon Guarantor and upon the successors
(including without limitation, any receiver, trustee or debtor in possession of
or for Guarantor) of Guarantor and shall inure to the benefit of Bank and its
successors and assigns. If there is more than one signatory hereto, all
references to Guarantor herein shall include each and every Guarantor and each
and every obligation of Guarantor hereunder shall be the joint and several
obligation of each Guarantor. Each Guarantor that is a corporation or a
partnership hereby represents and warrants that it has all necessary corporate
or partnership authority, as the case may be, to execute and deliver this
Guaranty and to perform its obligations hereunder.
This Guaranty shall continue in full force and effect, and Bank shall be
entitled to make loans and advances and extend financial accommodations to
Borrower on the faith hereof until such time as Bank has, in writing, notified
Guarantor that all of Borrower's Liabilities have been paid in full and
discharged and the Loan Agreement has been terminated or until Bank has actually
received written notice from any Guarantor of the discontinuance of this
Guaranty as to that Guarantor, or written notice of the death, incompetency or
dissolution of any Guarantor. In case of any discontinuance by, or death,
incompetency or dissolution of, any Guarantor (collectively, a "Termination
Event"), this Guaranty and the obligations of such Guarantor and his or its
heirs, legal representatives, successors or assigns, as the case may be, shall
remain in full force and effect with respect to all of Borrower's Liabilities
incurred prior to the receipt by Bank of written notice of the Terminating
Event. The occurrence of a Terminating Event with respect to one Guarantor shall
not affect or impair the obligations of any other Guarantor hereunder.
Wherever possible each provision of this Guaranty shall be interpreted in
such manner as to be effective and valid under applicable law, but if any
provision of this Guaranty shall be prohibited by or invalid under such law,
such provision shall be ineffective to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or the remaining
provisions of this Guaranty.
THIS GUARANTY SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS OF THE
STATE OF ILLINOIS.
Guarantor irrevocably agrees that, subject to Bank's sole and absolute
election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT, ARISING OUT
OF OR FROM OR RELATED TO THIS GUARANTY SHALL BE LITIGATED IN COURTS HAVING SITUS
WITHIN THE CITY OF CHICAGO, STATE OF ILLINOIS. GUARANTOR HEREBY CONSENTS AND
SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURTS LOCATED WITHIN
SAID CITY AND STATE. Guarantor hereby irrevocably appoints and designates the
Secretary of State of Illinois, whose address is Springfield, Illinois (or any
other person having and maintaining a place of business in such state whom
Guarantor may from time to time hereafter designate upon ten (10) days written
notice to Bank and who Bank has agreed in its sole discretion in writing is
satisfactory and who has executed an agreement in form and substance
satisfactory to Bank agreeing to act as such attorney and agent), as Guarantor's
true and lawful attorney and duly authorized agent for acceptance of service of
legal process. Guarantor agrees that service of such process upon such person
shall constitute personal service of such process upon Guarantor. GUARANTOR
HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY
LITIGATION BROUGHT AGAINST GUARANTOR BY BANK IN ACCORDANCE WITH THIS PARAGRAPH.
GUARANTOR HEREBY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS GUARANTY.
9217_1
<PAGE>
If there is attached to this Guaranty a Rider A-Special Provisions,
such Rider is by this reference incorporated into and made a part of this
Guaranty.
IN WITNESS WHEREOF, this Guaranty has been duly executed by the
undersigned as of this 30th day of April, 1996.
FOR CORPORATE OR PARTNERSHIP GUARANTOR:
FOR INDIVIDUAL GUARANTOR: CALIFORNIA PRO SPORTS, INC.
______________________________ By /s/ Michael S. Casazza
-------------------------------------
______________________________ Its President
Address -------------------------------------
______________________________ By /s/ Barry Hollander
-------------------------------------
Its CFO
-------------------------------------
Address: 8102 White Horse Road
Greenville, South Carolina 29611
USA SKATE CORPORATION
By /s/ Michael S. Casazza
-------------------------------------
Its President
-------------------------------------
By /s/ Barry Hollander
-------------------------------------
Its CFO
-------------------------------------
Address: 8102 White Horse Road
Greenville, South Carolina 29611
THREE R SALES, INC.
By /s/ Michael S. Casazza
-------------------------------------
Its President
-------------------------------------
By /s/ Barry Hollander
-------------------------------------
Its CFO
-------------------------------------
Address: 8102 White Horse Road
Greenville, South Carolina 29611
CALIFORNIA PRO, INC.
By /s/ Michael S. Casazza
-------------------------------------
Its President
-------------------------------------
By /s/ Barry Hollander
-------------------------------------
Its CFO
-------------------------------------
Address: 8102 White Horse Road
Greenville, South Carolina 29611
9217_1
<PAGE>
RIDER A - SPECIAL PROVISIONS
----------------------------
This RIDER A- SPECIAL PROVISIONS is attached to and made a part of that
certain Continuing Unconditional Guaranty (the "Guaranty") of even date herewith
executed by each of California Pro Sports, Inc., USA Skate Corporation, Three R
Sales, Inc. and California Pro, Inc. (collectively, the "Guarantor") in favor of
LaSalle National Bank ("Bank").
No payment made by or for the account of Guarantor including, without
limitation, (i) a payment made by Guarantor in respect of Borrower's Liabilities
or (ii) a payment made by any other person under any other guaranty, shall
entitle the Guarantor by subrogation or otherwise, to any payment from Borrower
or from or out of any property of Borrower and Guarantor shall not exercise any
right or remedy against Borrower or any property of Borrower by reason of any
performance by Guarantor under the Guaranty.
CALIFORNIA PRO SPORTS, INC.
By /s/ Michael S. Casazza
-------------------------------------
Its President
-------------------------------------
By /s/ Barry Hollander
-------------------------------------
Its CFO
-------------------------------------
Address:
8102 White Horse Road
Greenville, South Carolina 29611
USA SKATE CORPORATION
By /s/ Michael S. Casazza
-------------------------------------
Its President
-------------------------------------
By /s/ Barry Hollander
-------------------------------------
Its CFO
-------------------------------------
Address:
8102 White Horse Road
Greenville, South Carolina 29611
9217_1
<PAGE>
THREE R SALES, INC.
By /s/ Michael S. Casazza
-------------------------------------
Its President
-------------------------------------
By /s/ Barry Hollander
-------------------------------------
Its CFO
-------------------------------------
Address:
8102 White Horse Road
Greenville, South Carolina 29611
CALIFORNIA PRO, INC.
By /s/ Michael S. Casazza
-------------------------------------
Its President
-------------------------------------
By /s/ Barry Hollander
-------------------------------------
Its CFO
-------------------------------------
Address:
8102 White Horse Road
Greenville, South Carolina 29611
9217_1
-2-
CONTINUING UNCONDITIONAL GUARANTY
WHEREAS, USA Skate Co., Inc., a New York corporation ("Borrower") has
entered into a Loan and Security Agreement dated April 30, 1996 (the "Loan
Agreement") with LaSalle National Bank ("Bank") pursuant to which Bank has made
or may, in its sole discretion, from time to time hereafter, make loans and
advances to or extend other financial accommodations to Borrower;
WHEREAS, the undersigned is desirous of having Bank extend and/or continue
the extension of credit to Borrower and Bank has required that Guarantor (as
hereinafter defined) execute and deliver this Guaranty to Bank as a condition to
the extension and continuation of credit by Bank; and
WHEREAS, the extension and/or continued extension of credit, as aforesaid,
by Bank is necessary and desirable to the conduct and operation of the business
of Borrower and will inure to the personal and financial benefit of Guarantor;
NOW, THEREFORE, for value received and in consideration of any loan,
advance, or financial accommodation of any kind whatsoever heretofore, now or
hereafter made, given or granted to Borrower by Bank (including, without
limitation, the Loans as defined in, and made or to be made by Bank to Borrower
pursuant to, the Loan Agreement), the undersigned, and each of them, if there be
more than one, (collectively, the "Guarantor") unconditionally guaranties (i)
the full and prompt payment when due, whether at maturity or earlier, by reason
of acceleration or otherwise, and at all times thereafter, of all of the
indebtedness, liabilities and obligations of every kind and nature of Borrower
to Bank or any parent, affiliate or subsidiary of Bank (the term "Bank" as used
hereafter shall include such parents, affiliates and subsidiaries), howsoever
created, arising or evidenced, whether direct or indirect, absolute or
contingent, joint or several, now or hereafter existing, or due or to become
due, and howsoever owned, held or acquired by Bank, whether through discount,
overdraft, purchase, direct loan or as collateral or otherwise, including
without limitation all obligations and liabilities of Borrower to Bank under the
Loan Agreement and (ii) the prompt, full and faithful discharge by Borrower of
each and every term, condition, agreement, representation and warranty now or
hereafter made by Borrower to Bank (all such indebtedness, liabilities and
obligations being hereinafter referred to as the "Borrower's Liabilities").
Guarantor further agrees to pay all costs and expenses, including, without
limitation, all court costs and reasonable attorneys' and paralegals' fees paid
or incurred by Bank in endeavoring to collect all or any part of Borrower's
Liabilities from, or in prosecuting any action against, Guarantor or any other
guarantor of all or any part of Borrower's Liabilities. All amounts payable by
Guarantor under this Guaranty shall be payable upon demand by Bank.
Notwithstanding any provision of this Guaranty to the contrary, it is
intended that this Guaranty, and any liens and security interests granted by
Guarantor to secure this Guaranty, not constitute a "Fraudulent Conveyance" (as
defined below). Consequently, Guarantor agrees that if the Guaranty, or any
liens or security interests securing this Guaranty, would, but for the
application of this sentence, constitute a Fraudulent Conveyance, this Guaranty
and each such lien and security interest shall be valid and enforceable only to
the maximum extent that would not cause this Guaranty or such lien or security
interest to constitute a Fraudulent Conveyance, and this Guaranty shall
automatically be deemed to have been amended accordingly at all relevant times.
For purposes hereof, "Fraudulent Conveyance" means a fraudulent conveyance under
Section 548 of the "Bankruptcy Code" (as hereinafter defined) or a fraudulent
conveyance or fraudulent transfer under the provisions of any applicable
fraudulent conveyance or fraudulent transfer law or similar law of any state,
nation or other governmental unit, as in effect from time to time.
Guarantor hereby agrees that, except as hereinafter provided, its
obligations under this Guaranty shall be unconditional, irrespective of (i) the
validity or enforceability of Borrower's Liabilities or any part thereof, or of
any promissory note or other document evidencing all or any part of Borrower's
Liabilities, (ii) the absence of any attempt to collect Borrower's Liabilities
from Borrower or any other guarantor or other action to enforce the same, (iii)
the waiver or consent by Bank with respect to any provision of any instrument
evidencing Borrower's Liabilities, or any part thereof, or any other agreement
heretofore, now or hereafter executed by Borrower and delivered to Bank, (iv)
failure by Bank to take any steps to perfect and maintain its security interest
in, or to preserve its rights to, any security or collateral for Borrower's
Liabilities, (v) the institution of any proceeding under Chapter 11 of Title 11
of the United States Code (11 U.S.C. ss. 101 et seq.), as amended (the
"Bankruptcy Code"), or any similar proceeding, by or against Borrower, or Bank's
election in any such proceeding of the application of Section 1111(b)(2) of the
Bankruptcy Code, (vi) any borrowing or grant of a security interest by Borrower
as debtor-in-possession, under Section 364 of the Bankruptcy Code, (vii) the
disallowance, under Section 502 of the Bankruptcy Code, of all or any portion of
Bank's claim(s) for repayment of Borrower's Liabilities, or (viii) any other
circumstance which might otherwise constitute a legal or equitable discharge or
defense of a guarantor.
Guarantor hereby waives diligence, presentment, demand of payment, filing
of claims with a court in the event of receivership or bankruptcy of Borrower,
protest or notice with respect to Borrower's Liabilities and all demands
whatsoever, and covenants that this Guaranty will not be discharged, except by
complete performance of the obligations and liabilities contained herein.
16367_1
<PAGE>
Upon any default by Borrower as provided in any instrument or document
evidencing all or any part of Borrower's Liabilities, including without
limitation the Loan Agreement, Bank may, at its sole election, proceed directly
and at once, without notice, against Guarantor to collect and recover the full
amount or any portion of Borrower's Liabilities, without first proceeding
against Borrower, or any other person, firm, or corporation, or against any
security or collateral for Borrower's Liabilities.
Bank is hereby authorized, without notice or demand and without affecting
the liability of Guarantor hereunder, to at any time and from time to time (i)
renew, extend, accelerate or otherwise change the time for payment of, or other
terms relating to, Borrower's Liabilities or otherwise modify, amend or change
the terms of any promissory note or other agreement, document or instrument now
or hereafter executed by Borrower and delivered to Bank; (ii) accept partial
payments on Borrower's Liabilities; (iii) take and hold security or collateral
for the payment of Borrower's Liabilities guaranteed hereby, or for the payment
of this Guaranty, or for the payment of any other guaranties of Borrower's
Liabilities or other liabilities of Borrower, and exchange, enforce, waive and
release any such security or collateral; (iv) apply such security or collateral
and direct the order or manner of sale thereof as in its sole discretion it may
determine; and (v) settle, release, compromise, collect or otherwise liquidate
Borrower's Liabilities and any security or collateral therefor in any manner,
without affecting or impairing the obligations of Guarantor hereunder. Bank
shall have the exclusive right to determine the time and manner of application
of any payments or credits, whether received from Borrower or any other source,
and such determination shall be binding on Guarantor. All such payments and
credits may be applied, reversed and reapplied, in whole or in part, to any of
Borrower's Liabilities as Bank shall determine in its sole discretion without
affecting the validity or enforceability of this Guaranty.
To secure the payment and performance of Guarantor's obligations and
liabilities contained herein, Guarantor grants to Bank a security interest in
all property of Guarantor delivered concurrently herewith or which is now, or at
any time hereafter in transit to, or in the possession, custody or control of
Bank, and all proceeds of all such property. Guarantor agrees that Bank shall
have the rights and remedies of a secured party under this Uniform Commercial
Code of Illinois, as now existing or hereafter amended, with respect to all of
the aforesaid property, including without limitation thereof, the right to sell
or otherwise dispose of any or all of such property and apply the proceeds of
such sale to the payment of Borrower's Liabilities. In addition, at any time
after maturity of Borrower's Liabilities by reason of acceleration or otherwise,
Bank may, in its sole discretion, without notice to Guarantor and regardless of
the acceptance of any security or collateral for the payment hereof, appropriate
and apply toward the payment of Borrower's Liabilities (i) any indebtedness due
or to become due from Bank to Guarantor, and (ii) any moneys, credits or other
property belonging to Guarantor, at any time held by or coming into the
possession of Bank whether for deposit or otherwise.
Guarantor hereby assumes responsibility for keeping itself informed of the
financial condition of Borrower, and any and all endorsers and/or other
guarantors of any instrument or document evidencing all or any part of
Borrower's Liabilities and of all other circumstances bearing upon the risk of
nonpayment of Borrower's Liabilities or any part thereof that diligent inquiry
would reveal and Guarantor hereby agrees that Bank shall have no duty to advise
Guarantor of information known to Bank regarding such condition or any such
circumstances or to undertake any investigation not a part of its regular
business routine. If Bank, in its sole discretion, undertakes at any time or
from time to time to provide any such information to any Guarantor, Bank shall
be under no obligation to update any such information or to provide any such
information to Guarantor on any subsequent occasion.
Guarantor consents and agrees that Bank shall be under no obligation to
marshall any assets in favor of Guarantor or against or in payment of any or all
of Borrower's Liabilities. Guarantor further agrees that, to the extent that
Borrower makes a payment or payments to Bank, or Bank receives any proceeds of
collateral, which payment or payments or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside and/or
required to be repaid to Borrower, its estate, trustee, receiver or any other
party, including, without limitation, Guarantor, under any bankruptcy law, state
or federal law, common law or equitable theory, then to the extent of such
payment or repayment, Borrower's Liabilities or the part thereof which has been
paid, reduced or satisfied by such amount, and Guarantor's obligations hereunder
with respect to such portion of Borrower's Liabilities, shall be reinstated and
continued in full force and effect as of the date such initial payment,
reduction or satisfaction occurred.
Guarantor agrees that any and all claims of Guarantor against Borrower, any
endorser or any other guarantor of all or any part of Borrower's Liabilities, or
against any of Borrower's properties, whether arising by reason of any payment
by Guarantor to Bank pursuant to the provisions hereof, or otherwise, shall be
subordinate and subject in right of payment to the prior payment, in full, of
all of Borrower's Liabilities.
Bank may, without notice to anyone, sell or assign Borrower's Liabilities
or any part thereof, or grant participations therein, and in any such event each
and every immediate or remote assignee or holder of, or participant in, all or
any of Borrower's Liabilities shall have the right to enforce this Guaranty, by
suit or otherwise for the benefit of such assignee, holder, or participant, as
fully as if herein by name specifically given such right, but Bank shall have an
unimpaired right, prior and superior to that of any such
16367_1
<PAGE>
assignee, holder or participant, to enforce this Guaranty for the benefit of
Bank, as to any part of Borrower's Liabilities retained by Bank.
This Guaranty shall be binding upon Guarantor and upon the successors
(including without limitation, any receiver, trustee or debtor in possession of
or for Guarantor) of Guarantor and shall inure to the benefit of Bank and its
successors and assigns. If there is more than one signatory hereto, all
references to Guarantor herein shall include each and every Guarantor and each
and every obligation of Guarantor hereunder shall be the joint and several
obligation of each Guarantor. Each Guarantor that is a corporation or a
partnership hereby represents and warrants that it has all necessary corporate
or partnership authority, as the case may be, to execute and deliver this
Guaranty and to perform its obligations hereunder.
This Guaranty shall continue in full force and effect, and Bank shall be
entitled to make loans and advances and extend financial accommodations to
Borrower on the faith hereof until such time as Bank has, in writing, notified
Guarantor that all of Borrower's Liabilities have been paid in full and
discharged and the Loan Agreement has been terminated or until Bank has actually
received written notice from any Guarantor of the discontinuance of this
Guaranty as to that Guarantor, or written notice of the death, incompetency or
dissolution of any Guarantor. In case of any discontinuance by, or death,
incompetency or dissolution of, any Guarantor (collectively, a "Termination
Event"), this Guaranty and the obligations of such Guarantor and his or its
heirs, legal representatives, successors or assigns, as the case may be, shall
remain in full force and effect with respect to all of Borrower's Liabilities
incurred prior to the receipt by Bank of written notice of the Terminating
Event. The occurrence of a Terminating Event with respect to one Guarantor shall
not affect or impair the obligations of any other Guarantor hereunder.
Wherever possible each provision of this Guaranty shall be interpreted in
such manner as to be effective and valid under applicable law, but if any
provision of this Guaranty shall be prohibited by or invalid under such law,
such provision shall be ineffective to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or the remaining
provisions of this Guaranty.
THIS GUARANTY SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS OF THE
STATE OF ILLINOIS.
Guarantor irrevocably agrees that, subject to Bank's sole and absolute
election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT, ARISING OUT
OF OR FROM OR RELATED TO THIS GUARANTY SHALL BE LITIGATED IN COURTS HAVING SITUS
WITHIN THE CITY OF CHICAGO, STATE OF ILLINOIS. GUARANTOR HEREBY CONSENTS AND
SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURTS LOCATED WITHIN
SAID CITY AND STATE. Guarantor hereby irrevocably appoints and designates the
Secretary of State of Illinois, whose address is Springfield, Illinois (or any
other person having and maintaining a place of business in such state whom
Guarantor may from time to time hereafter designate upon ten (10) days written
notice to Bank and who Bank has agreed in its sole discretion in writing is
satisfactory and who has executed an agreement in form and substance
satisfactory to Bank agreeing to act as such attorney and agent), as Guarantor's
true and lawful attorney and duly authorized agent for acceptance of service of
legal process. Guarantor agrees that service of such process upon such person
shall constitute personal service of such process upon Guarantor. GUARANTOR
HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY
LITIGATION BROUGHT AGAINST GUARANTOR BY BANK IN ACCORDANCE WITH THIS PARAGRAPH.
GUARANTOR HEREBY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS GUARANTY.
16367_1
<PAGE>
If there is attached to this Guaranty a Rider A-Special Provisions, such
Rider is by this reference incorporated into and made a part of this Guaranty.
IN WITNESS WHEREOF, this Guaranty has been duly executed by the undersigned
as of this 30th day of April, 1996.
FOR INDIVIDUAL GUARANTOR: FOR CORPORATE OR PARTNERSHIP GUARANTOR:
/s/ Henry Fong By
- ------------------------------ --------------------------------------
Henry Fong Its
--------------------------------------
______________________________
Address
______________________________ By
--------------------------------------
Its
--------------------------------------
_________________________________________
Address
_________________________________________
16367_1
<PAGE>
RIDER A - SPECIAL PROVISIONS
----------------------------
This RIDER A- SPECIAL PROVISIONS is attached to and made a part of that
certain Continuing Unconditional Guaranty (the "Guaranty") of even date herewith
executed by Henry Fong ("Guarantor") in favor of LaSalle National Bank ("Bank").
No payment made by or for the account of Guarantor including, without
limitation, (i) a payment made by Guarantor in respect of Borrower's Liabilities
or (ii) a payment made by any other person under any other guaranty, shall
entitle the Guarantor by subrogation or otherwise, to any payment from Borrower
or from or out of any property of Borrower and Guarantor shall not exercise any
right or remedy against Borrower or any property of Borrower by reason of any
performance by Guarantor under the Guaranty.
/s/ Henry Fong
-----------------------------------------
Henry Fong
Address:
-----------------------------------------
-----------------------------------------
-----------------------------------------
16367_1
CONTINUING UNCONDITIONAL GUARANTY
WHEREAS, USA Skate Co., Inc., a New York corporation ("Borrower") has
entered into a Loan and Security Agreement dated April 30, 1996 (the "Loan
Agreement") with LaSalle National Bank ("Bank") pursuant to which Bank has made
or may, in its sole discretion, from time to time hereafter, make loans and
advances to or extend other financial accommodations to Borrower;
WHEREAS, the undersigned is desirous of having Bank extend and/or continue
the extension of credit to Borrower and Bank has required that Guarantor (as
hereinafter defined) execute and deliver this Guaranty to Bank as a condition to
the extension and continuation of credit by Bank; and
WHEREAS, the extension and/or continued extension of credit, as aforesaid,
by Bank is necessary and desirable to the conduct and operation of the business
of Borrower and will inure to the personal and financial benefit of Guarantor;
NOW, THEREFORE, for value received and in consideration of any loan,
advance, or financial accommodation of any kind whatsoever heretofore, now or
hereafter made, given or granted to Borrower by Bank (including, without
limitation, the Loans as defined in, and made or to be made by Bank to Borrower
pursuant to, the Loan Agreement), the undersigned, and each of them, if there be
more than one, (collectively, the "Guarantor") unconditionally guaranties (i)
the full and prompt payment when due, whether at maturity or earlier, by reason
of acceleration or otherwise, and at all times thereafter, of all of the
indebtedness, liabilities and obligations of every kind and nature of Borrower
to Bank or any parent, affiliate or subsidiary of Bank (the term "Bank" as used
hereafter shall include such parents, affiliates and subsidiaries), howsoever
created, arising or evidenced, whether direct or indirect, absolute or
contingent, joint or several, now or hereafter existing, or due or to become
due, and howsoever owned, held or acquired by Bank, whether through discount,
overdraft, purchase, direct loan or as collateral or otherwise, including
without limitation all obligations and liabilities of Borrower to Bank under the
Loan Agreement and (ii) the prompt, full and faithful discharge by Borrower of
each and every term, condition, agreement, representation and warranty now or
hereafter made by Borrower to Bank (all such indebtedness, liabilities and
obligations being hereinafter referred to as the "Borrower's Liabilities").
Guarantor further agrees to pay all costs and expenses, including, without
limitation, all court costs and reasonable attorneys' and paralegals' fees paid
or incurred by Bank in endeavoring to collect all or any part of Borrower's
Liabilities from, or in prosecuting any action against, Guarantor or any other
guarantor of all or any part of Borrower's Liabilities. All amounts payable by
Guarantor under this Guaranty shall be payable upon demand by Bank.
Notwithstanding any provision of this Guaranty to the contrary, it is
intended that this Guaranty, and any liens and security interests granted by
Guarantor to secure this Guaranty, not constitute a "Fraudulent Conveyance" (as
defined below). Consequently, Guarantor agrees that if the Guaranty, or any
liens or security interests securing this Guaranty, would, but for the
application of this sentence, constitute a Fraudulent Conveyance, this Guaranty
and each such lien and security interest shall be valid and enforceable only to
the maximum extent that would not cause this Guaranty or such lien or security
interest to constitute a Fraudulent Conveyance, and this Guaranty shall
automatically be deemed to have been amended accordingly at all relevant times.
For purposes hereof, "Fraudulent Conveyance" means a fraudulent conveyance under
Section 548 of the "Bankruptcy Code" (as hereinafter defined) or a fraudulent
conveyance or fraudulent transfer under the provisions of any applicable
fraudulent conveyance or fraudulent transfer law or similar law of any state,
nation or other governmental unit, as in effect from time to time.
Guarantor hereby agrees that, except as hereinafter provided, its
obligations under this Guaranty shall be unconditional, irrespective of (i) the
validity or enforceability of Borrower's Liabilities or any part thereof, or of
any promissory note or other document evidencing all or any part of Borrower's
Liabilities, (ii) the absence of any attempt to collect Borrower's Liabilities
from Borrower or any other guarantor or other action to enforce the same, (iii)
the waiver or consent by Bank with respect to any provision of any instrument
evidencing Borrower's Liabilities, or any part thereof, or any other agreement
heretofore, now or hereafter executed by Borrower and delivered to Bank, (iv)
failure by Bank to take any steps to perfect and maintain its security interest
in, or to preserve its rights to, any security or collateral for Borrower's
Liabilities, (v) the institution of any proceeding under Chapter 11 of Title 11
of the United States Code (11 U.S.C. ss. 101 et seq.), as amended (the
"Bankruptcy Code"), or any similar proceeding, by or against Borrower, or Bank's
election in any such proceeding of the application of Section 1111(b)(2) of the
Bankruptcy Code, (vi) any borrowing or grant of a security interest by Borrower
as debtor-in-possession, under Section 364 of the Bankruptcy Code, (vii) the
disallowance, under Section 502 of the Bankruptcy Code, of all or any portion of
Bank's claim(s) for repayment of Borrower's Liabilities, or (viii) any other
circumstance which might otherwise constitute a legal or equitable discharge or
defense of a guarantor.
Guarantor hereby waives diligence, presentment, demand of payment, filing
of claims with a court in the event of receivership or bankruptcy of Borrower,
protest or notice with respect to Borrower's Liabilities and all demands
whatsoever, and covenants that this Guaranty will not be discharged, except by
complete performance of the obligations and liabilities contained herein.
16373_1
<PAGE>
Upon any default by Borrower as provided in any instrument or document
evidencing all or any part of Borrower's Liabilities, including without
limitation the Loan Agreement, Bank may, at its sole election, proceed directly
and at once, without notice, against Guarantor to collect and recover the full
amount or any portion of Borrower's Liabilities, without first proceeding
against Borrower, or any other person, firm, or corporation, or against any
security or collateral for Borrower's Liabilities.
Bank is hereby authorized, without notice or demand and without affecting
the liability of Guarantor hereunder, to at any time and from time to time (i)
renew, extend, accelerate or otherwise change the time for payment of, or other
terms relating to, Borrower's Liabilities or otherwise modify, amend or change
the terms of any promissory note or other agreement, document or instrument now
or hereafter executed by Borrower and delivered to Bank; (ii) accept partial
payments on Borrower's Liabilities; (iii) take and hold security or collateral
for the payment of Borrower's Liabilities guaranteed hereby, or for the payment
of this Guaranty, or for the payment of any other guaranties of Borrower's
Liabilities or other liabilities of Borrower, and exchange, enforce, waive and
release any such security or collateral; (iv) apply such security or collateral
and direct the order or manner of sale thereof as in its sole discretion it may
determine; and (v) settle, release, compromise, collect or otherwise liquidate
Borrower's Liabilities and any security or collateral therefor in any manner,
without affecting or impairing the obligations of Guarantor hereunder. Bank
shall have the exclusive right to determine the time and manner of application
of any payments or credits, whether received from Borrower or any other source,
and such determination shall be binding on Guarantor. All such payments and
credits may be applied, reversed and reapplied, in whole or in part, to any of
Borrower's Liabilities as Bank shall determine in its sole discretion without
affecting the validity or enforceability of this Guaranty.
To secure the payment and performance of Guarantor's obligations and
liabilities contained herein, Guarantor grants to Bank a security interest in
all property of Guarantor delivered concurrently herewith or which is now, or at
any time hereafter in transit to, or in the possession, custody or control of
Bank, and all proceeds of all such property. Guarantor agrees that Bank shall
have the rights and remedies of a secured party under this Uniform Commercial
Code of Illinois, as now existing or hereafter amended, with respect to all of
the aforesaid property, including without limitation thereof, the right to sell
or otherwise dispose of any or all of such property and apply the proceeds of
such sale to the payment of Borrower's Liabilities. In addition, at any time
after maturity of Borrower's Liabilities by reason of acceleration or otherwise,
Bank may, in its sole discretion, without notice to Guarantor and regardless of
the acceptance of any security or collateral for the payment hereof, appropriate
and apply toward the payment of Borrower's Liabilities (i) any indebtedness due
or to become due from Bank to Guarantor, and (ii) any moneys, credits or other
property belonging to Guarantor, at any time held by or coming into the
possession of Bank whether for deposit or otherwise.
Guarantor hereby assumes responsibility for keeping itself informed of the
financial condition of Borrower, and any and all endorsers and/or other
guarantors of any instrument or document evidencing all or any part of
Borrower's Liabilities and of all other circumstances bearing upon the risk of
nonpayment of Borrower's Liabilities or any part thereof that diligent inquiry
would reveal and Guarantor hereby agrees that Bank shall have no duty to advise
Guarantor of information known to Bank regarding such condition or any such
circumstances or to undertake any investigation not a part of its regular
business routine. If Bank, in its sole discretion, undertakes at any time or
from time to time to provide any such information to any Guarantor, Bank shall
be under no obligation to update any such information or to provide any such
information to Guarantor on any subsequent occasion.
Guarantor consents and agrees that Bank shall be under no obligation to
marshall any assets in favor of Guarantor or against or in payment of any or all
of Borrower's Liabilities. Guarantor further agrees that, to the extent that
Borrower makes a payment or payments to Bank, or Bank receives any proceeds of
collateral, which payment or payments or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside and/or
required to be repaid to Borrower, its estate, trustee, receiver or any other
party, including, without limitation, Guarantor, under any bankruptcy law, state
or federal law, common law or equitable theory, then to the extent of such
payment or repayment, Borrower's Liabilities or the part thereof which has been
paid, reduced or satisfied by such amount, and Guarantor's obligations hereunder
with respect to such portion of Borrower's Liabilities, shall be reinstated and
continued in full force and effect as of the date such initial payment,
reduction or satisfaction occurred.
Guarantor agrees that any and all claims of Guarantor against Borrower, any
endorser or any other guarantor of all or any part of Borrower's Liabilities, or
against any of Borrower's properties, whether arising by reason of any payment
by Guarantor to Bank pursuant to the provisions hereof, or otherwise, shall be
subordinate and subject in right of payment to the prior payment, in full, of
all of Borrower's Liabilities.
Bank may, without notice to anyone, sell or assign Borrower's Liabilities
or any part thereof, or grant participations therein, and in any such event each
and every immediate or remote assignee or holder of, or participant in, all or
any of Borrower's Liabilities shall have the right to enforce this Guaranty, by
suit or otherwise for the benefit of such assignee, holder, or participant, as
fully as if herein by name specifically given such right, but Bank shall have an
unimpaired right, prior and superior to that of any such
16373_1
<PAGE>
assignee, holder or participant, to enforce this Guaranty for the benefit of
Bank, as to any part of Borrower's Liabilities retained by Bank.
This Guaranty shall be binding upon Guarantor and upon the successors
(including without limitation, any receiver, trustee or debtor in possession of
or for Guarantor) of Guarantor and shall inure to the benefit of Bank and its
successors and assigns. If there is more than one signatory hereto, all
references to Guarantor herein shall include each and every Guarantor and each
and every obligation of Guarantor hereunder shall be the joint and several
obligation of each Guarantor. Each Guarantor that is a corporation or a
partnership hereby represents and warrants that it has all necessary corporate
or partnership authority, as the case may be, to execute and deliver this
Guaranty and to perform its obligations hereunder.
This Guaranty shall continue in full force and effect, and Bank shall be
entitled to make loans and advances and extend financial accommodations to
Borrower on the faith hereof until such time as Bank has, in writing, notified
Guarantor that all of Borrower's Liabilities have been paid in full and
discharged and the Loan Agreement has been terminated or until Bank has actually
received written notice from any Guarantor of the discontinuance of this
Guaranty as to that Guarantor, or written notice of the death, incompetency or
dissolution of any Guarantor. In case of any discontinuance by, or death,
incompetency or dissolution of, any Guarantor (collectively, a "Termination
Event"), this Guaranty and the obligations of such Guarantor and his or its
heirs, legal representatives, successors or assigns, as the case may be, shall
remain in full force and effect with respect to all of Borrower's Liabilities
incurred prior to the receipt by Bank of written notice of the Terminating
Event. The occurrence of a Terminating Event with respect to one Guarantor shall
not affect or impair the obligations of any other Guarantor hereunder.
Wherever possible each provision of this Guaranty shall be interpreted in
such manner as to be effective and valid under applicable law, but if any
provision of this Guaranty shall be prohibited by or invalid under such law,
such provision shall be ineffective to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or the remaining
provisions of this Guaranty.
THIS GUARANTY SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS OF THE
STATE OF ILLINOIS.
Guarantor irrevocably agrees that, subject to Bank's sole and absolute
election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT, ARISING OUT
OF OR FROM OR RELATED TO THIS GUARANTY SHALL BE LITIGATED IN COURTS HAVING SITUS
WITHIN THE CITY OF CHICAGO, STATE OF ILLINOIS. GUARANTOR HEREBY CONSENTS AND
SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURTS LOCATED WITHIN
SAID CITY AND STATE. Guarantor hereby irrevocably appoints and designates the
Secretary of State of Illinois, whose address is Springfield, Illinois (or any
other person having and maintaining a place of business in such state whom
Guarantor may from time to time hereafter designate upon ten (10) days written
notice to Bank and who Bank has agreed in its sole discretion in writing is
satisfactory and who has executed an agreement in form and substance
satisfactory to Bank agreeing to act as such attorney and agent), as Guarantor's
true and lawful attorney and duly authorized agent for acceptance of service of
legal process. Guarantor agrees that service of such process upon such person
shall constitute personal service of such process upon Guarantor. GUARANTOR
HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY
LITIGATION BROUGHT AGAINST GUARANTOR BY BANK IN ACCORDANCE WITH THIS PARAGRAPH.
GUARANTOR HEREBY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS GUARANTY.
16373_1
<PAGE>
If there is attached to this Guaranty a Rider A-Special Provisions, such
Rider is by this reference incorporated into and made a part of this Guaranty.
IN WITNESS WHEREOF, this Guaranty has been duly executed by the undersigned
as of this 30th day of April, 1996.
FOR INDIVIDUAL GUARANTOR: FOR CORPORATE OR PARTNERSHIP GUARANTOR:
/s/ Michael S. Casazza By
- ----------------------------- --------------------------------------
Michael S. Casazza Its
--------------------------------------
906 Thornblade Blvd.
- -----------------------------
Address
Greer, S.C. 29650 By
- ----------------------------- --------------------------------------
Its
--------------------------------------
-----------------------------------------
Address
-----------------------------------------
16373_1
<PAGE>
RIDER A - SPECIAL PROVISIONS
----------------------------
This RIDER A- SPECIAL PROVISIONS is attached to and made a part of that
certain Continuing Unconditional Guaranty (the "Guaranty") of even date herewith
executed by Michael S. Casazza ("Guarantor") in favor of LaSalle National Bank
("Bank").
No payment made by or for the account of Guarantor including, without
limitation, (i) a payment made by Guarantor in respect of Borrower's Liabilities
or (ii) a payment made by any other person under any other guaranty, shall
entitle the Guarantor by subrogation or otherwise, to any payment from Borrower
or from or out of any property of Borrower and Guarantor shall not exercise any
right or remedy against Borrower or any property of Borrower by reason of any
performance by Guarantor under the Guaranty.
/s/ Michael S. Casazza
-----------------------------------------
Michael S. Casazza
Address:
906 Thornblade Blvd.
-----------------------------------------
Greer, S.C. 29650
-----------------------------------------
-----------------------------------------
16373_1
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1995
----------- -----------
<S> <C> <C>
Net income ($5,575,882) $35,456
=========== ===========
Weighted average number
of common shares outstanding 4,078,864 3,599,320
Common equivalent shares
representing shares
issuable upon exercise of
outstanding options and warrants -*- -*-
----------- -----------
Net income (loss) per share ($1.37) $0.01
=========== ===========
</TABLE>
* No impact to weighted average number of shares as the inclusion of additional
shares assuming the exercise of outstanding options and warrants would have been
antidilutive.
Fully diluted and supplementary net income (loss) per share are not presented as
the amounts are not dilutively or incrementally different from primary net
income (loss) per share amounts.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 59,098
<SECURITIES> 228,652
<RECEIVABLES> 4,372,320
<ALLOWANCES> 662,000
<INVENTORY> 5,214,917
<CURRENT-ASSETS> 10,676,181
<PP&E> 1,919,756
<DEPRECIATION> 681,717
<TOTAL-ASSETS> 21,069,743
<CURRENT-LIABILITIES> 15,940,114
<BONDS> 0
0
0
<COMMON> 46,995
<OTHER-SE> 1,027,260
<TOTAL-LIABILITY-AND-EQUITY> 21,069,743
<SALES> 16,952,904
<TOTAL-REVENUES> 16,952,904
<CGS> 14,061,034
<TOTAL-COSTS> 7,582,723
<OTHER-EXPENSES> 935,848
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,389,221
<INCOME-PRETAX> (5,626,701)
<INCOME-TAX> (244,500)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,575,882)
<EPS-PRIMARY> (1.37)
<EPS-DILUTED> (1.37)
</TABLE>
