UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-25114
CALIFORNIA PRO SPORTS. INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1217733
- ---------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
1221 B South Batesville Road, Greer, South Carolina 29650
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(864) 848-5160
---------------------------------------------------
(Registrants telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such report(s)
and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 7,203,744 common shares, par value
$.01 per share, outstanding at May 15, 1998.
Transitional Small Business Disclosure Format: YES [ ] NO [X]
Page 1 of ___ total pages on this document.
<PAGE>
CALIFORNIA PRO SPORTS, INC.
AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
PART II. OTHER INFORMATION
2
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
ASSETS
------
<TABLE>
<CAPTION>
Pro forma Historical
------------ ------------
(Note 4)
<S> <C> <C>
Current assets:
Cash .................................................. $ 1,944,412 $ 9,912
Accounts receivable, less allowance for
doubtful accounts of $216,000:
Trade ............................................. 3,148 3,148
Related parties ................................... 121,726 121,726
Other ............................................. 120,000 120,000
Prepaid expenses and other ............................ 4,275 4,275
Assets of subsidiary held for sale (Note 3) ........... 1,049,803
------------ ------------
Total current assets ................... 2,193,561 1,308,864
------------ ------------
Furniture and equipment, net of accumulated
depreciation of $361,629 .................................... 110,424 110,424
------------ ------------
Receivable, related parties (Notes 3 and 4) .................. 90,000
------------ ------------
Intangible assets, net of accumulated
amortization of $86,463:
Trademark license and other costs ..................... 544,129 544,129
Goodwill .............................................. 152,847
------------ ------------
544,129 696,976
------------ ------------
$ 2,938,114 $ 2,116,264
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ................. $ 373,117 $ 179,617
Liabilities of subsidiary held for sale (Note 3) ...... 1,426,183
------------ ------------
Total liabilities (all current) ........ 373,117 1,605,800
------------ ------------
Minority interest ............................................ 408,857
------------ ------------
Shareholders' equity (Note 5):
Preferred stock, $0.01 par value;
authorized 5,000,000 shares:
Series A Preferred stock, issued 1,118,185 ..... 12,860 11,182
Series B Preferred stock, no shares issued ..... 14
Common stock, $0.01 par value; authorized
10,000,000 shares; issued 7,003,744 ............... 72,532 70,037
Warrants .............................................. 394,200 394,200
Capital in excess of par .............................. 13,330,528 11,593,715
Accumulated deficit ................................... (11,245,137) (11,245,137)
Treasury stock held by subsidiary;
consisting of 750,471 shares of
preferred stock; 86,000 shares of common
stock ............................................... (722,390)
------------ ------------
Total shareholders' equity ............. 2,564,997 101,607
------------ ------------
$ 2,938,114 $ 2,116,264
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net sales .................................................... $ $ 2,765,809
------------ ------------
Cost of sales:
Substantially from a related party .................... 19,647
Other ................................................. 2,199,509
------------ ------------
2,219,156
------------ ------------
Gross profit ................................................. 546,653
------------ ------------
Operating expenses:
Sales and marketing expense ........................... 4,084 442,196
General and administrative expense .................... 398,468 859,537
Depreciation and amortization ......................... 62,091 193,783
Consulting fees, related party ........................ 30,000 30,000
------------ ------------
494,643 1,525,516
------------ ------------
Loss from operations ......................................... (494,643) (978,863)
------------ ------------
Other expenses (income):
Interest expense:
Related party ..................................... 77,156
Other ............................................. 32,599 246,727
Foreign currency loss ................................. (45,943)
Royalty income and other .............................. (41,134) (7,262)
Gain on sale of investment in subsidiary (Note 8) ..... (87,593)
Loss on sale of marketable securities (Note 6) ........ 62,392
Finance fees and other (Note 5) ....................... 180,608
------------ ------------
172,073 245,477
------------ ------------
Loss before minority interest and extraordinary item ......... (666,716) (1,224,340)
Minority interest ............................................ 23,708 (529,196)
------------ ------------
Loss before extraordinary item ............................... (690,424) (695,144)
Extraordinary item, debt forgiveness (Note 9) ................ 197,901
------------ ------------
Net loss ..................................................... $ (690,424) $ (497,243)
============ ============
Loss per share before extraordinary item ..................... $ (.10) $ (.15)
Extraordinary item ........................................... .04
------------ ------------
Net loss per share ........................................... $ (.10) $ (.11)
============ ============
Weighted average number of shares outstanding ................ 6,916,360 4,704,214
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
CALIFORNIA PRO SPORTS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Common stock Preferred stock Capital in
------------------- ------------------ excess of Treasury
Shares Amount Shares Amount Warrants par Deficit Stock Total
--------- -------- --------- ------- -------- ----------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1998 6,734,430 $ 67,344 1,099,685 $10,997 $394,200 $11,080,758 $(10,554,713) $(893,640) $104,946
Issuance of 111,814
shares of common stock
in consideration for
extending the date on
certain notes (Note 5) 111,814 1,118 159,404 160,522
Issuance of 50,000 shares
of common stock for
consulting services (Note
5) 50,000 500 68,250 68,750
Issuance of 107,500
shares of common stock
upon exercise of options 107,500 1,075 106,425 107,500
(Note 5)
Issuance of 18,500 shares
of Series A
preferred stock (Note 5) 18,500 185 76,128 76,313
Issuance of 274,000
treasury stock, owned by
Skate Corp. in satisfaction
of $274,000 of liabilities 102,750 171,250 274,000
(Note 5)
Net loss for the three
months ended
March 31, 1998 (690,424) (690,424)
--------- -------- --------- ------- -------- ----------- ------------ --------- --------
Balances, March
31, 1998 7,003,744 $ 70,037 1,118,185 $11,182 $394,200 $11,593,715 $(11,245,137) $(722,390) $101,607
========= ======== ========= ======= ======== =========== ============ ========= ========
</TABLE>
5
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss .............................................. $ (690,424) $ (497,243)
------------ ------------
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Extraordinary gain .................................. (197,901)
Gain on sale of investment in subsidiary ............ (87,593)
Loss on sale of marketable securities ............... 62,392
Foreign currency gain ............................... (45,943)
Depreciation and amortization ....................... 82,177 193,783
Provision for bad debts ............................. 19,805
Expense incurred upon issuance
of common stock (Note 5) .......................... 305,585
Minority interest ................................... 23,708 (529,196)
Decrease (increase) in assets:
Accounts receivable ............................... (13,604) 1,379,809
Income taxes receivable ........................... (3,446)
Inventories ....................................... 15,346
Prepaid expenses and other ........................ 25,009 123,706
Assets of subsidiary held for sale ................ 54,724
Increase (decrease) in liabilities:
Accounts payable and accrued expenses ............. 115,224 1,039,586
Payable to officers/shareholders and
other related parties ............................ 30,000
Liabilities of subsidiary held for sale ........... (13,956)
------------ ------------
Total adjustments ................................... 578,867 2,000,348
------------ ------------
Net cash provided by (used in) operating activities .......... (111,557) 1,503,105
------------ ------------
Cash flows from investing activities:
Capital expenditures .................................. (3,350)
Proceeds from sale of marketable securities ........... 166,260
------------ ------------
Net cash provided by investing activities .................... 162,910
------------ ------------
</TABLE>
(Continued)
6
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATES STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from notes payable and long term debt ........ 125,000
Repayments of notes payable and long term debt ........ (1,850,113)
Proceeds from exercise of options ..................... 107,500
------------ ------------
Net cash provided by (used in) financing activities .......... 107,500 (1,725,113)
------------ ------------
Net decrease in cash ......................................... (4,057) (59,098)
Cash, beginning .............................................. 13,969 59,098
------------ ------------
Cash, ending ................................................. $ 9,912
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest ................................ $ 48,627 $ 205,407
============ ============
Supplemental disclosure of noncash
investing and financing activities:
Issuance of 274,000 shares of
treasury stock in 1998 and 423,245
shares in 1997, in settlement
of amounts owed ..................................... $ 274,000 $ 423,245
============ ============
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1. The interim financial statements:
The interim financial statements have been prepared by California Pro
Sports, Inc. (the "Company") and in the opinion of management, reflect all
material adjustments which are necessary to a fair statement of results
for the interim periods presented, including normal recurring adjustments.
Certain information and footnote disclosures made in the last annual
report on Form 10-KSB have been condensed or omitted for the interim
statements. It is the Company's opinion that, when the interim statements
are read in conjunction with the December 31, 1997 Annual Report on Form
10-KSB, the disclosures are adequate to make the information presented not
misleading. The results of operations for the three months ended March 31,
1998 and 1997 are not necessarily indicative of the operating results for
the full year.
2. Organization:
The accompanying consolidated financial statements include the accounts of
California Pro Sports, Inc. and its subsidiaries, California Pro, Inc.
("CP") and USA Skate Corporation ("Skate Corp."). Skate Corp. was formed
in 1995 to acquire USA Skate Co., Inc. ("USA Skate"). At March 31, 1998,
the Company owned 100% of the outstanding CP capital stock and 62.3% of
the the outstanding Skate Corp. capital stock. Minority interest
represents Skate Corp.'s minority shareholders' 37.7% ownership interest
in Skate Corp. Intercompany transactions have been eliminated in
consolidation.
In 1996 and 1997, due to continuing operating losses, management decided to
restructure and deleverage the Company. Prior to the second quarter of
1997, the Company sold 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, and sold snowboards and
accessories under the Kemper (R) brand name to retail sporting goods
stores in North America and distributors in Europe and Japan. A majority
of the in-line skates were manufactured for the Company by Playmaker Co.
Ltd. ("Playmaker"), a minority shareholder of the Company. In September
1997, Skate Corp. sold substantially all of the operating assets of USA
Skate and Davtec, which manufactured, imported and marketed VICTORIAVILLE
(TM), VIC (R), and McMartin (TM) ice and street/roller hockey skates,
sticks and related protective gear and accessories for sale to retail
sporting goods stores in the United States and Canada and independent
distributors primarily located in Europe.
8
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
3. Sale of USA Skate assets and subsequent sale of the Company's investment in
Skate Corp:
Sale of USA Skate assets:
On September 12, 1997, the Company sold substantially all of the operating
assets of USA Skate for $14,500,000, with $1,000,000 held in escrow for
potential purchase price adjustments and other claims. The proceeds of the
sale were used to repay the Company's outstanding lines of credit and
other liabilities. Subsequent to September, purchase price and other
adjustments have reduced the escrow account by approximately $422,000 and
approximately $105,000 was disbursed and used to repay a trade liability.
The balance of the escrow account is to be disbursed to the Company in
June 1998, subject to resolution of any additional adjustments or claims
that arise.
The remaining account balances of Skate Corp. have been classified as
assets and liabilities of subsidiary held for sale in the accompanying
consolidated balance sheet and consist of the following at March 31, 1998:
Assets of subsidiary held for sale:
Cash ................................. $ 332
Cash held in escrow .................. 472,002
Accounts receivable:
Trade .............................. 47,525
Related parties .................... 529,944
----------
$1,049,803
==========
Liabilities of subsidiary held for sale:
Accounts payable and accrued expenses $ 565,033
Convertible promissory notes payable . 861,150
----------
$1,426,183
==========
9
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
3. Sale of USA Skate assets and subsequent sale of the Company's investment in
Skate Corp (continued):
Subsequent sale of the Company's investment in Skate Corp.:
In April 1998, the Company received commitments from a group of accredited
investors to purchase for $1,400,000 the shares of common stock of Skate
Corp. that are currently owned by the Company along with an option to
acquire shares of the Company in exchange for the purchased shares of
Skate Corp. The options allowed the investors to exchange each common
share of Skate Corp. for 1.5 shares of the Company's common stock. In
April and May 1998, the Company received $255,000 from investors acquiring
335,507 shares of Skate Corp. Each of the investors exercised their
options to exchange those shares for 167,754 shares of the Company's
Series A preferred stock, which will automatically convert to 503,261
shares of the Company's common stock upon shareholder approval. Subsequent
to the receipt of the $255,000, this offering was closed to further
investors, and two officers/shareholders of the Company have agreed to
purchase the shares of Skate Corp. from the Company for $90,000 with no
conversion rights. This purchase price is based on the net book value of
the Company's investment in Skate Corp. The offering was closed to further
investors as the Company was able to obtain similar financing on terms
more beneficial to the Company as discussed in Note 4.
4. Preferred stock offering and proforma balance sheet:
Preferred stock offering:
During the second quarter of 1998, the Company began working with a
business and financial consultant to assist the Company in completing a
private placement and engaged the consultant to refer potential investors
to the Company. The Company has received a commitment from the consultant
to introduce the Company to accredited investors who will purchase 1,400
shares of Series B Convertible Preferred Stock, par value $.01 ("Series
B") at a price of $1,000 per share. The Series B stock is convertible at
the option of the holder at any time after 90 days from the closing date,
into a number of shares of common stock equal to $1,000 divided by the
lower of 65% of the average market price of the common stock for the five
trading days immediately prior to the conversion date, or the market price
on the day of first closing. The consultant has advised the Company that
the private placement should be completed by June 1998.
10
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
4. Preferred stock offering and proforma balance sheet (continued):
Proforma balance sheet:
The unaudited pro forma balance sheet includes pro forma adjustments to
record the receipt of $255,000 cash from investors who acquired 335,507
shares of Skate Corp., who in turn exercised their options to exchange
those shares for shares of the Company's Series A Convertible Preferred
Stock. The proforma balance sheet also includes the receipt of $274,500
cash received in exchange for purchases of common stock resulting from the
exercises of previously granted options to purchase 249,500 shares of the
Company's common stock, and the receipt of committed funds from accredited
investors of $1,400,000 cash to purchase 1,400 Series B Convertible
Preferred Stock, less estimated consulting fees associated with the
offering. In addition, the proforma balance sheet includes a $90,000
receivable from two officers/shareholders of the Company to purchase the
shares of Skate Corp.
The accompanying unaudited consolidated balance sheet includes an unaudited
proforma consolidated balance sheet as of March 31, 1998, that gives
effect to the above transactions as if they had been consummated on March
31, 1998. The unaudited pro forma consolidated balance sheet should be
read in conjunction with the historical financial statements of the
Company. The unaudited pro forma consolidated balance sheet does not
purport to be indicative of the financial position of the Company had the
transactions occurred on March 31, 1998.
5. Shareholders' equity:
Preferred stock:
The Company's Series A Convertible Preferred Stock currently is the only
series of preferred stock outstanding. The holders of the Company's Series
A Preferred Stock are entitled to vote on any matter submitted to the
shareholders of the Company. Each share of Series A Convertible Preferred
Stock is entitled to one vote. Each share of outstanding Series A
Convertible Preferred Stock will immediately and automatically convert to
three shares of common stock upon shareholder approval of a
recapitalization measure that increases the authorized number of common
shares of the Company.
During the first quarter of 1998, the Company issued 18,500 shares of
preferred stock to an officer of the Company. The shares were valued based
upon the trading price of the Company's common stock, adjusted for the one
for three conversion feature of the preferred stock, and accordingly, the
Company recognized an expense of approximately $76,313 in the three months
ended March 31, 1998.
11
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
5. Shareholders' equity (continued):
Issuances of common stock:
During the three months ended March 31, 1998, the Company issued 111,814
shares of its common stock at prices from $1.36 to $1.43 per share in
exchange for the extensions of the maturity date on notes of Skate Corp.
The Company recognized finance fee expense of $160,522 related to these
services. Additionally, the Company issued 50,000 shares of its common
stock at $1.375 per share (the market value of the stock on the effective
date of issuance) to a consultant who was a former director and officer of
the Company. The Company recognized $68,750 of consulting expenses related
to this issuance. During the quarter ended March 31, 1998, 107,500 options
were exercised at $1.00 per share, by an officer (85,000 options),
director (15,000 shares) and an employee (7,500 shares).
Issuance of treasury stock:
During the three months ended March 31, 1998, the Company issued 274,000
treasury shares owned by Skate Corp. with a carrying value of $171,250 in
satisfaction of $274,000 of Skate Corp. liabilities held for sale. As a
result, the treasury stock balance has been reduced by $171,250.
6. Marketable securities:
In 1996, the Company received marketable securities from an affiliate in
payment of an amount owed to the Company by a related party, which the
Company classified as trading securities under SFAS No. 115. During the
quarter ended March 31, 1997, the Company sold the securities for $166,260
and reduced its bank indebtedness with the proceeds. The Company recorded
a loss of $62,392 on the transaction.
7. Export sales:
Sales by geographic regions were as follows for the three months ended
March 31, 1997:
Canada ................................. $1,100,451
Europe and other ....................... 455,975
----------
Total exports ........................ 1,556,426
US sales ............................... 1,209,383
----------
Total sales ............................ $2,765,809
==========
12
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
8. Gain on sale of investment in subsidiary:
In March 1997, the Company satisfied $106,500 of payables by exchanging
88,750 shares of Skate Corp. common stock held by the Company. The
recorded cost of the USA shares transferred was $61,237 and the fair value
of those shares at the date of exchange was $106,500 ($1.20 per share).
The Company also sold 83,000 shares of Skate Corp. common stock held by
the Company to a third party. The carrying value of the Skate Corp. shares
was $57,270 and the fair value of those shares was $99,600 ($1.20 per
share). These transactions resulted in total gains of $87,593
9. Extraordinary item:
In March 1997, the Company recognized an extraordinary gain of $197,901
from the extinguishment of debt for amounts less than the carrying value
of the liabilities.
10. Merger agreement:
On January 30, 1998, the Company, through ImaginOn Acquisition Corp., a
newly formed, wholly-owned subsidiary of the Company, signed an agreement
and plan of merger with ImaginOn, Inc. of San Carlos, California
("ImaginOn"), a privately held company. The agreement provides for an
exchange of 100% of the outstanding shares of ImaginOn for an amount equal
to 60% of the outstanding post-merger common stock of California Pro,
subject to certain adjustments.
ImaginOn designs, manufactures and sells consumer software products for
Internet users. The merger transaction, which is expected to be completed
by mid-summer 1998, is contingent upon certain customary conditions
including, but not limited to, approval by the boards of directors of both
companies, a vote by the Company's shareholders (to approve the merger and
increase the authorized shares the Company may issue), and the completion
of a fairness opinion by an independent valuation company.
13
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
THIS REPORT MAY CONTAIN CERTAIN "FORWARD-LOOKING" STATEMENTS AS SUCH TERM IS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 OR BY THE
SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH
REPRESENT THE REGISTRANT'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED
TO, STATEMENTS CONCERNING THE REGISTRANT'S OPERATIONS, ECONOMIC PERFORMANCE,
FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE
OPERATIONAL PLANS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE
NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS
"MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE," "INTENT," "COULD," "ESTIMATE,"
"MIGHT," OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE
TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN
OF WHICH ARE BEYOND THE REGISTRANT'S CONTROL, AND ACTUAL RESULTS MAY DIFFER
MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY
RELATED TO ACQUISITIONS, GOVERNMENTAL REGULATION, MANAGING AND MAINTAINING
GROWTH, VOLATILITY OF STOCK PRICE AND ANY OTHER FACTORS DISCUSSED IN THIS AND
OTHER REGISTRANT FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
During 1997, the Company had limited revenues in its in-line skate and
snowboard businesses, and in September 1997, sold substantially all of the
assets of its ice and street/roller hockey business ("Hockey"). In 1998,
the Company had no revenues, but did realize income from sub-licensing
agreements. The following discussion pertains to the business operations
for in-line skates, snowboards and Hockey for the three months ended March
31, 1997.
The Company imported and distributed products in three participant sports
categories. In-line skates and related accessory products were marketed
under the brand names California Pro(R) and Rolling Thunder(TM); since
August 1, 1994, snowboards and snowboard accessory products were marketed
under the Kemper(R) brand; and from May 1996 to September 1, 1997, ice and
street/roller hockey skates, sticks, related gear and accessories, as well
as figure skates were marketed under the VICTORIAVILLE(TM), VIC(R),
Hespeler(TM) and McMartin(R) brands. The Company purchased 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 were purchased from domestic suppliers. Approximately 70% of all
hockey products sold were manufactured by Davtec and skates and related
gear were purchased from foreign suppliers.
The Company sold its in-line skate products principally to major retail
sporting goods chains in North America and to U.S. military exchanges
worldwide, through independent sales representative groups, under an
exclusive royalty free perpetual license. Snowboard products were 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 were 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 were sold to and distributed
by independent distributors located primarily in Germany, Switzerland,
Italy, Austria, Czech Republic, Sweden, France, Finland and Brazil.
14
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
In 1997, due to continuing operating losses, management decided to
restructure and deleverage the Company. In connection with these plans,
the Company:
a. Ceased operating the California Pro and Kemper licenses, eliminated
most of the operating and overhead expenses associated with its
sporting goods business and began to concentrate on sub- licensing the
Company's trademark rights. Accordingly, in 1996 the Company recorded
restructuring charges of $1,229,000 and in the second quarter of 1997,
the Company began liquidating remaining in-line skate, snowboard and
accessories inventories.
b. Completed the sale of substantially all of the operating assets of USA
Skate and Davtec. The proceeds of the sale of the Company's hockey
business were substantially utilized to pay secured revolving lines of
credit, purchase the remainder of the trademarks from the previous
owner, and partially reduce notes payable of Skate Corp.
c. Commenced a search for sub-licensees of its California Pro and Kemper
licenses.
d. Commenced a search for a merger candidate. As a result of its search,
on October 2, 1997, the Company signed a letter of intent to merge
with ImaginOn, Inc. ("ImaginOn"), a privately held company, and on
January 30, 1998, the Company signed an agreement and plan of merger
with ImaginOn.
e. Began investigating other options, including the sale of subsidiaries
and potential private offerings.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred
significant operating losses in 1997 and in the quarter ended March 31,
1998 and has a working capital deficiency and a accumulated deficit at
March 31, 1998. 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.
As a result of the sale of the Company's hockey business to Rawlings, and
other restructuring and de-leveraging activities, including the assumption
and assignment of certain notes and trade payables to third parties in
exchange for common and/or preferred stock of the Company, the Company has
reduced its liabilities from approximately $18,988,000 as of December 31,
1996 to approximately $1,607,000 as of March 31, 1998.
Having taken major steps to de-leverage and redirect the Company towards
profitability, three other parts of the Company's plan remain to be
completed. The Company is in the process of completing a sale of its
interest in Skate Corp. and a private placement in order to generate
aggregate proceeds of $1,745,000. Of this amount, $255,000 has been
received. In addition, $279,500 has been received from the exercise of
stock options for the purchase of 249,500 shares of the Company's common
stock. Additionally, in conjunction with dramatically reduced overhead, a
plan to restore operating profitability to the remaining sporting goods
businesses is in place through licensing programs. Finally, the Company is
seeking to diversify its business through a merger with ImaginOn. Each
part of the Company's plan is discussed in detail below.
15
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
On March 13, 1998, the Company began a private placement for the sale of
the 1,842,000 shares of Skate Corp. common stock it owns, which includes
an option to acquire 2,763,000 shares of the Company's common stock in
exchange for the Skate Corp. shares. The Company intended to sell 14 units
at $100,000 each for total aggregate proceeds of $1,400,000. Each unit
consist of 131,571 shares of Skate Corp. with an option to acquire 197,357
shares of the Company's common stock in exchange for the Skate Corp.
shares. The Company received $255,000 cash from purchasers acquiring
335,507 shares of Skate Corp. Each of the investors exercised their
options to exchange those shares for 167,754 shares of the Company's
Series A preferred stock which will automatically convert to 503,261
shares of the Company's common stock upon shareholder approval. Subsequent
to the receipt of the $255,000, this offering was closed to further
investors, and two officers/shareholders of the Company have agreed to
purchase the shares of Skate Corp. from the Company for $90,000.
The Company's business and financial consultant has informed the Company
that it has located an investor willing to purchase a combination of the
Company's Series B Preferred Stock and restricted common stock for $1.4
million. The Series B Preferred Stock will be convertible at the option of
the holder at any time after 90 days from the closing date into a number
of shares of common stock equal to $1,000 divided by the lower of 65% of
the average market price of the common stock for five days immediately
prior to the conversion date, or the market price at the first day of
closing. The consultant advised the Company that the private placement
will be completed by June 1998.
As part of its restructuring plan, the Company has eliminated most of the
overhead expenses associated with its sporting goods business and has
begun to concentrate on sub- licensing its trademark rights to the Kemper
and California Pro trade names.
The Company recently entered into two sub-license agreements regarding the
use of the Kemper name. After considerable consolidation in the snowboard
industry in 1997, the Company believes the snowboard market is rebounding.
Kemper, one of the original snowboard brands, should prosper in this new
environment. The combined minimum annual royalty of these licenses is
$55,000, and based upon discussions with the sub-licensors and review of
their sales plans, management projects that the actual combined royalty
income from these two licenses may be $125,000 and $175,000 in 1998 and
1999, respectively.
The Company also believes that there is value in the marketplace for the
California Pro brand, not only in-line skates, but in other sporting goods
categories such as skateboards and waterskis. The Company has begun to
discuss these, as well as other product categories, with various
sub-licenses.
The Company believes it can achieve profits based on its sub-licenses of
its existing sporting goods brands in conjunction with the limited
overhead expenses associated with licensing operations.
In August 1997, the Company began negotiating with ImaginOn to acquire, in
an exchange of stock, all of the outstanding capital stock of ImaginOn.
ImaginOn, formed in March 1996, designs, manufactures and sells: (i)
consumer software products for the CD/DVD-ROM market and (ii) a
navigational tool for sophisticated Internet users. ImaginOn's proprietary
technology, called "Transformational Database Processing and Playback"
("TDPP"), enables the creation of new business and consumer products that
provide user-friendly and entertaining access to multimedia databases.
16
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The Company signed an Agreement and Plan of Merger as of January 30, 1998
whereby there would be an exchange of 100% of the outstanding shares of
ImaginOn for an amount equal to 60% of the outstanding post-merger common
stock of the Company, subject to certain adjustments. The transaction,
which is expected to be completed by mid-summer 1998, is contingent upon
certain customary conditions including, but not limited to, approval by
the boards of directors of both companies, a vote by the Company's
shareholders (to approve the merger and increase the authorized shares the
Company may issue), and the completion of a fairness opinion by an
independent valuation company.
ImaginOn has developed and manufactured a general purpose software
application, named "WebZinger" for internet browsers. WebZinger(TM)
mediates Web searches for both naive and sophisticated users, increasing
efficiency and saving time. ImaginOn's core technology, TDPP, has enabled
the creation of a new class of business and consumer products; a hybrid of
local and remote database content with seamless real-time access to video,
audio, graphics and text. ImaginOn has designed eleven software tools
based on TDPP. The first software title "World Cities 2000 San Francisco,"
an interactive travelogue is complete.
ImaginOn's potentially largest marketing partner for WorldCities 2000
travelogues has requested that four cities be completed prior to starting
their marketing effort: San Francisco, New York, London and Paris. At the
current rate of production, management anticipates that all four will be
complete by December 1998.
WebZinger(TM) will be marketed during 1998 via electronic downloads from
multiple websites by distributors who specialize in that channel. In
addition, WebZinger(TM) will be distributed on CD-ROM within conventional
retail channels. ImaginOn has entered into a co- marketing arrangement
with AT&T whereby the WebZinger(TM) CD includes the built-in option of
using AT&T WorldNet as an internet service provider. WebZinger(TM) can
also be purchased through Netscape's Software Depot and Testdrive Com.
Additionally, co-marketing arrangements are under negotiation with other
leading software providers.
Management believes it has begun the successful implementation of a plan
that will provide the Company with the liquidity necessary to continue as
a going concern.
17
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION (CONTINUED)
RESULTS OF OPERATIONS:
The following table sets forth the Company's sales by major product category for
the period indicated:
Three Months Ended
March 31
1997
----
Dollars Percent
------- -------
In-line skates and accessories . $ 451 16%
Snowboards and accessories ..... 94 4%
Ice and street/roller hockey (1) 2,221 80%
------ ------
$2,766 100%
====== ======
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO MARCH 31, 1997
NET SALES: Sales for the three months ended March 31, 1997 were $2,765,809. For
the three months ended March 31, 1998, the Company recorded royalty income of
$35,106.
GROSS PROFIT: For the three months ended March 31, 1997, gross profit was
$546,653.
SALES AND MARKETING EXPENSES: Sales and marketing expenses for the three months
ended March 31, 1998, decreased to $4,084 from $442,196 or by $438,112 compared
to the three months ended March 31, 1997. The decrease was a result of the
Company ceasing its sales and marketing activities in 1998, as it sub-licensed
its rights to the Kemper trademark and no longer incurred any significant sales
and marketing expense.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses for the
three months ended March 31, 1998 decreased to $398,468 from $859,537 or by
$461,169 compared to the same period in 1997. The decrease was attributable to
significantly reduced general and administrative expenses due to the sale of the
Company's hockey business in September 1997.
The primary expenses for the quarter ended March 31, 1998 were legal and
accounting expenses of $107,293; consulting expenses of $108,750, stock related
compensation of $76,313 and wages and related benefits including travel expense
reimbursement of $61,226.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization decreased to
$62,091 for the three months ended March 31, 1998 from $193,783 for the three
months ended March 31, 1997, or by $131,692. The decrease is primarily
attributable to the disposition of USA Skate, effective September 12, 1997, and
the corresponding decrease in amortization expense associated with such sale.
CONSULTING FEES: Consulting fees for the three months ended March 31, 1998
remained the same as compared to the quarter ended March 31, 1997.
18
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION (CONTINUED)
LOSS FROM OPERATIONS: For the three months ended March 31, 1998, the loss from
operations was $494,643 compared to a loss from operations of $978,863 for the
three months ended March 31, 1997. The primary reason for the decrease of
$484,220 in the operating losses in the 1998 period compared to the 1997 period
are decreases in operating costs of $1,030,873. This decrease was caused by
reduced operating expenses due to the sale of the Company's ice hockey business
and the restructuring from operating the remaining Company's trademarks and
licenses to entering into sub-license agreements. This decrease of expenses of
$1,030,773 was partially offered by the gross profit realized of $546,653 in the
quarter ended March 31, 1997.
OTHER EXPENSE/INCOME: Other expenses decreased from $245,477 for the three
months ended March 31, 1997 to $172,073 for the three months ended March 31,
1998. Interest expense other and interest expense related party decreased by
$214,128 and $77,156, respectively. The main reason for the decrease is a result
of paying off the bank lines of credit and certain notes payable from the
proceeds of the sale of the hockey operations. Additionally, interest expense
for the quarter ending March 31, 1997, was increased by the issuance of
promissory notes to the former shareholders of USA Skate in connection with the
acquisition of USA Skate and USA's issuance of convertible promissory notes and
officer/shareholder notes of $2,518,000 and $679,000, respectively.
NET LOSS: Net loss was $690,424 for the three months ended March 31, 1998
compared to a loss of $497,243 for the three months ended March 31, 1997. The
primary reasons for the change were decreases in the losses from operations of
$484,220 as described above and decreases in interest and other expenses in 1998
compared to the 1997 period of $73,404. These decrease in losses were offset by
extraordinary income of $197,901 for debt forgiveness and $529,196 of minority
interest, in the 1997 period.
LIQUIDITY AND CAPITAL RESOURCES: The Independent Auditors' Report on the
Company's consolidated financial statements for the year ended December 31, 1997
included a "going concern" explanatory paragraph which means that the Auditors
have expressed substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regards to the factors which prompted the
explanatory paragraph are discussed in Note 1 to those financial statements.
Through September 1, 1997, the Company funded its operations principally through
a revolving credit facility with a bank, and, to a lesser degree, loans from
private investors and trade credit. Concurrent with the sale of the USA Skate
assets, the revolving line of credit facility was repaid in full and other
indebtedness of the Company was significantly reduced.
On September 12, 1997, the Company sold substantially all of the assets of its
hockey business for $14,500,000 inclusive of $1,000,000 retained in escrow for
purchase price adjustments and proven claims by the purchasers, and assumption
of trade payables and accrued liabilities of approximately $1,600,000 related to
the assets purchased. The proceeds were utilized as follows:
Secured revolving lines of credit ...... $ 7,984,000
Convertible noteholders ................ 949,000
Secured debt ........................... 519,000
Other notes ............................ 100,000
Shareholder notes ...................... 505,000
Payment to previous USA Skate owners ... 2,678,000
Interest payments ...................... 85,000
Cash to escrow account ................. 1,000,000
Cash in bank ........................... 680,000
-----------
$14,500,000
===========
In February 1998, Rawlings and the Company agreed to a purchase price reduction
of $395,108 due to a final valuation by Rawlings of the fair value of the net
assets purchased.
19
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION (CONTINUED)
At March 31, 1998, the Company had a working capital deficit of approximately
$296,936 compared to $400,625 at December 31, 1997. The reduction in the working
capital deficit is primarily related to converting $209,000 of debt to equity.
Management's plans to resolve the Company's immediate financial difficulties and
improve its liquidity position are described in this section above under
Overview.
In addition, the Company announced that the exercise price of its publicly
traded common stock purchase warrants has been reduced from $6.00 to $1.50 per
share and the expiration date has been extended from January 18, 1998 to
December 31, 1998.
For payments to foreign suppliers, the Company 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.
20
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
(a) N/A
(b) N/A
(c) During the three month period covered by this report,
the Registrant issued the following securities:
On January 5, 1998, the Registrant issued 37,467 shares of its common
stock in exchange for the extensions of the maturity date to February
5, 1998 on notes of Skate Corp. The amount was owed based upon 5% of
the outstanding principal balance, and payment was based on $1.43 per
share. The Registrant relied on the exemption from registration
provided by Section 4(6) of the Securities Act related to the issuance
of these shares.
On January 12, 1998, the Registrant issued 50,000 shares of its common
stock to a consultant for services rendered. Payment was made based on
$1.375 per share representing the market price of the common stock. The
Registrant relied on the exemption from registration provided by
Section 4(6) of the Securities Act related to the issuance of these
shares.
On January 16, 1998, the Registrant issued 85,000 shares to an officer
of the Company upon the exercise of a previously granted option under
the Company's 1994 Stock Option Plan. The Registrant relied on the
exemption from registration provided by Section 4(6) of the Securities
Act related to the issuance of these shares.
On January 8, 1998, the Registrant issued 18,500 Series A Convertible
Preferred Stock to an officer of the Company for among other things,
his agreement to exercise 85,000 options so as to infuse the Company
with short-term working capital. The Registrant relied on the exemption
from registration provided by Section 4(6) of the Securities Act
related to the issuance of these shares.
On February 5, 1998, the Registrant issued 35,125 shares of its common
stock in exchange for the extensions of the maturity date to March 5,
1998 on notes of Skate Corp. The amount was owed based upon 5% of the
outstanding principal balance and payment was made based on $1.52 per
share. The Registrant relied on the exemption from registration
provided by Section 4(6) of the Securities Act related to the issuance
of these shares.
On March 5, 1998, the Registrant issued 39,222 shares of its common
stock in exchange for the extensions of the maturity date to April 5,
1998 on notes of Skate Corp.. The amount owed was based upon 5% of the
outstanding principal balance and payment was made based on $1.35 per
share. The Registrant relied on the exemption from registration
provided by Section 4(6) of the Securities Act related to the issuance
of these shares.
On March 26, 1998, the Registrant issued 15,000 shares to a director of
the Company upon the exercise of a previously granted option under the
Company's 1994 Stock Option Plan.
On March 31, 1998, the Company issued 7,500 shares of its common stock
to an employee of the Company upon the exercise of a previously granted
option under the Company's 1994 Stock Option Plan.
21
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
3.(I).1 Certificate of Designation of California Pro
Sports, Inc. - Desigation of Preferences,
Limitations and Relative Rights of the Series A
Preferred Convertible Stock of California Pro
Sports, Inc.
3.(I).2 Certificate of Designation of California Pro
Sports, Inc. - Desigation of Preferences,
Limitations and Relative Rights of the Series B
Preferred Convertible Stock of California Pro
Sports, Inc.(To be filed by Amendment)
10.1 Amendment No. 1 to Warrant Agreement dated October
21, 1997
10.2 Amendment No. 2 to Warrant Agreement dated March
27, 1998
(b) Reports on Form 8-K
1. Form 8-K dated February 24, 1998 reporting "Other Events"
under Item 5, and "Pro Forma Financial Statements" under
Item 7(b).
2. Form 8-K dated March 25, 1998 reporting "Other Events"
under Item 5 and "Pro Forma Financial Statements" under
Item 7(b).
22
<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CALIFORNIA PRO SPORTS, INC.
Dated: May 20, 1998 By: /s/Henry Fong
-------------------------------
Henry Fong
Chairman
Dated: May 20, 1998 By: /s/Barry S. Hollander
-------------------------------
Barry S. Hollander
Acting President,
Chief Financial Officer
23
CERTIFICATE OF DESIGNATIONS
OF
CALIFORNIA PRO SPORTS, INC.
--------------------
Designation of Preferences, Limitations and Relative Rights
of the
Series A Convertible Preferred Stock
Pursuant to Section 151
of the
Delaware General Corporation Law
--------------------
California Pro Sports, Inc., a corporation organized and existing under
the laws of the State of Delaware (the "Company"), DOES HEREBY CERTIFY that the
following resolution was duly adopted by the Board of Directors of the Company
on December 31, 1997:
RESOLVED, that the Board of Directors, pursuant to the authority vested
in it by the provisions of the Company's Certificate of Incorporation,
hereby establishes a series of convertible preferred stock, consisting
of 4,000,000 shares, which shall be designated as the "Series A
Convertible Preferred Stock," and shall have the powers, preferences,
rights, qualifications, limitations and restrictions as set forth in
Attachment A attached hereto.
IN WITNESS WHEREOF, the undersigned hereby acknowledges under penalty
of perjury that the execution of this instrument is the Company's act and deed.
CALIFORNIA PRO SPORTS, INC.
May 15, 1998 By /s/Gerald Raskin
--------------------------------
Gerald Raskin, Secretary
33291_1
<PAGE>
DESIGNATION OF PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS
OF THE
SERIES A CONVERTIBLE PREFERRED STOCK
OF
CALIFORNIA PRO SPORTS, INC.
1. Designation and Amount. The distinctive designation of such series
is "Series A Convertible Preferred Stock, $.01 par value" (the "Series A
Preferred Stock") of California Pro Sports, Inc., a Delaware corporation (the
"Company"), the number of shares constituting this series shall be 4,000,000,
and the aggregate stated value of such shares shall be $40,000, or $.01 per
share.
2. Dividend Rights. The holders of the Series A Preferred Stock shall
not be entitled to dividends.
3. Liquidation Preference. The Series A Preferred Stock shall have no
liquidation preferences with respect to any other class or series of the
Company's common stock, $.01 par value per share (the "Common Stock") or
preferred stock.
4. Voting Rights. The holders of outstanding shares of Series A
Preferred Stock shall be entitled to vote on any matter submitted to the
stockholders of the Company, and every share Series A Preferred Stock shall be
entitled to one vote for each such matter.
5. Conversion of the Series A Preferred Stock.
(a) Automatic Conversion. The outstanding shares of Series A
Preferred Stock shall immediately and automatically and without any further
action on the part of the owner and holder thereof, convert upon the earlier of
(1) stockholder approval of a recapitalization measure to be put before the
stockholders for consideration at the first of the next annual or special
meeting of stockholders of the Company, or (2) the availability of sufficient
shares of Common Stock to permit a conversion (the "Automatic Conversion Date")
at the office of the Company or any transfer agent for the Series A Preferred
Stock. On the Automatic Conversion Date, each outstanding share of Series A
Preferred Stock will be converted into three shares of Common Stock (the
"Conversion Rate").
(b) Voluntary Conversion. The Company and the holder(s) of the
Series A Preferred Stock may mutually agree to partial or full conversion at any
time prior to the Automatic Conversion Date, with each outstanding share of
Series A Preferred Stock being converted early being converted into three shares
of Common Stock (also, the "Conversion Rate").
33291_1
<PAGE>
(c) Mechanics of Conversion. Upon surrender of the
certificates representing the Series A Preferred Stock being converted, the
Company shall within three business days of receipt of the original certificates
or certificates representing the shares of Series A Preferred Stock to be
converted, issue and deliver or cause to be issued and delivered to such holder
of Series A Preferred Stock, or to its nominee or nominees, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled.
(d) Fractional Shares. Any fractional shares resulting from a
conversion shall be rounded to the next highest whole share of Common Stock.
(e) Stock Splits; Stock Dividends. If the Company shall at any
time subdivide its outstanding shares of Common Stock into a greater number of
shares of Common Stock, or declare a dividend or make any other distribution
upon the Common Stock payable in shares of Common Stock, the Conversion Rate in
effect immediately prior to such subdivision or dividend or other distribution
shall be proportionately reduced, and conversely, in case the outstanding shares
of Common Stock shall be combined into a smaller number of shares of Common
Stock, the Conversion Rate in effect immediately prior to such combination shall
be proportionately increased.
6. Notices. Any notice required by the provisions of this Certificate
to be given to the holder of shares of the Series A Preferred Stock shall be
deemed given when personally delivered to such holder or five business days
after the same has been deposited in the United States mail, certified or
registered mail, return receipt requested, postage prepaid, and addressed to
each holder of record at such holder's address appearing on the books of the
Company. All notices shall state the date of conversion or redemption, as the
case may be.
7. Payment of Taxes. The holder of the Series A Preferred Stock will
pay all taxes and other governmental charges that may be imposed in respect of
the issue or delivery of shares of Common Stock upon conversion of shares of
Series A Preferred Stock.
33291_1
AMENDMENT NO. 1 TO WARRANT AGREEMENT
Amendment No.1 dated October 21, 1997, to the warrant agreement dated January
18, 1995, by and between California Pro Sports, Inc., a Delaware corporation
(the "Company") and Corporate Stock Transfer, Inc., as warrant agent (the
"Warrant Agent").
WHEREAS, Section 1(f) of the Warrant Agreement sets 5:00 p.m. (Mountain time)
on January 17, 1998 as the expiration date (the "Expiration Date") of the
warrants issued thereunder;
WHEREAS, Sections 1(f) and 4(a) of the Warrant Agreement provide that the
Board of Directors of the Company may extend the Expiration Date beyond the
date set in Section 1(f) of the Warrant Agreement;
WHEREAS, the Board of Directors of the Company has taken the appropriate
actions to extend the Expiration Date to 5:00 p.m. on June 30, 1998;
WHEREAS, Section 1(h) of the Warrant Agreement sets the exercise price at
$6.00 per share (the "Exercise Price");
WHEREAS, the Board of Directors of the Company has taken the appropriate
actions to reduce the Exercise Price to $2.50.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
set forth herein, the parties agree that the Warrant Agreement shall be
amended as follows:
1. In Section 1(f) the date "January 17, 1998" shall be deleted
and replaced with the date "June 30, 1998."
2. In Section 1(h) the dollar amount "$6.00" shall be deleted and
replaced with the dollar amount "$2.50."
3. All other terms and conditions contained in the Warrant
Agreement shall remain in full force and effect.
The parties hereto have caused this Amendment to be duly executed by
their authorized agents as of the date first above written.
CALIFORNIA PRO SPORTS, INC.
By /s/ Barry S. Hollander
--------------------------------
Barry S. Hollander
Chief Financial Officer
CORPORATE STOCK TRANSFER, INC.
By /s/ Carylyn Bell
--------------------------------
Carylyn Bell
-----------------------------------
(Print Name)
President
-----------------------------------
(Title)
AMENDMENT NO. 2 TO WARRANT AGREEMENT
Amendment No.2 dated March 27, 1998, to the Warrant Agreement, as
amended, originally dated January 18, 1995, by and among California Pro Sports,
Inc., a Delaware corporation (the "Company") and Corporate Stock Transfer, Inc.,
as warrant agent (the "Warrant Agent").
WHEREAS, Section 1(f) of the Warrant Agreement, as amended, sets 5:00
p.m. (Mountain time) on June 31, 1998 as the expiration date (the
"Expiration Date") of the warrants issued thereunder;
WHEREAS, Sections 1(f) and 4(a) of the Warrant Agreement provide that
the Board of Directors of the Company may extend the Expiration Date
beyond the date set in Section 1(f) of the Warrant Agreement;
WHEREAS, the Board of Directors of the Company has taken the
appropriate actions to extend the Expiration Date to 5:00 p.m. on
December 31, 1998;
WHEREAS, Section 1(h) of the Warrant Agreement, as amended, sets the
exercise price at $2.50 per share (the "Exercise Price");
WHEREAS, the Board of Directors of the Company has taken the
appropriate actions to reduce the Exercise Price to $1.50.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements set forth herein, the parties agree that the Warrant
Agreement shall be amended as follows:
4. In Section 1(f), as amended, the date "June 30, 1998" shall
be deleted and replaced with the date "December 31, 1998."
5. In Section 1(h), as amended, the dollar amount "$2.50" shall
be deleted and replaced with the dollar amount "$1.50."
6. All other terms and conditions contained in the Warrant
Agreement shall remain in full force and effect.
The parties hereto have caused this Amendment to be duly executed by
their authorized agents as of the date first above written.
CALIFORNIA PRO SPORTS, INC.
By /s/ Barry S. Hollander
--------------------------------
Barry S. Hollander
Chief Financial Officer
CORPORATE STOCK TRANSFER, INC.
By /s/ Carylyn Bell
--------------------------------
Carylyn Bell
-----------------------------------
(Print Name)
President
-----------------------------------
(Title)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Registrant's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1998, and is qualified in its
entirety by reference to such financial statments
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 9,912
<SECURITIES> 0
<RECEIVABLES> 244,874
<ALLOWANCES> 216,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,308,864
<PP&E> 110,424
<DEPRECIATION> 361,629
<TOTAL-ASSETS> 2,116,264
<CURRENT-LIABILITIES> 1,605,800
<BONDS> 0
0
11,182
<COMMON> 70,037
<OTHER-SE> 20,388
<TOTAL-LIABILITY-AND-EQUITY> 2,116,264
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 494,643
<OTHER-EXPENSES> 172,073
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,599
<INCOME-PRETAX> (666,716)
<INCOME-TAX> 0
<INCOME-CONTINUING> (666,716)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (690,424)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
