UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 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: 12,224,642 common shares, par value
$.01 per share, outstanding at October 31, 1998.
Transitional Small Business Disclosure Format: YES [ ] NO [X]
Page 1 of 31 total pages on this document.
<PAGE>
CALIFORNIA PRO SPORTS, INC.
AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
PART II. OTHER INFORMATION
2
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
Unaudited
Pro forma Historical
------------ ------------
(Note 4)
<S> <C> <C>
Current assets:
Cash ............................................................... $ 586,907 $ 586,907
Accounts receivable, related parties ............................... 155,868 155,868
Notes receivable, related parties .................................. 1,706,104 1,351,534
Prepaid expenses and other ......................................... 60,286 60,286
Assets of subsidiary held for sale (Note 3) ........................ 1,107,957
------------ ------------
Total current assets ................................ 2,509,165 3,262,552
------------ ------------
Furniture and equipment, net of accumulated
depreciation of $445,157 ................................................. 26,896 26,896
------------ ------------
Intangible assets, net of accumulated
amortization of $127,117:
Trademark license and other costs .................................. 607,121 607,121
Goodwill ........................................................... 87,603
------------ ------------
607,121 694,724
------------ ------------
$ 3,143,182 $ 3,984,172
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .............................. $ 332,816 $ 332,816
Liabilities of subsidiary held for sale (Note 3) ................... 1,283,541
------------ ------------
Total liabilities (all current) ..................... 332,816 1,616,357
------------ ------------
Minority interest ......................................................... 30,655
------------ ------------
Shareholders' equity (Note 4):
Preferred stock, $0.01 par value;
authorized 5,000,000 shares:
Series B/C Preferred stock, issued 2,080 ........................ 1,477,124 1,477,124
Common stock, $0.01 par value; authorized
20,000,000 shares; issued 12,181,451 ............................ 121,814 121,814
Warrants ........................................................... 394,200 394,200
Capital in excess of par ........................................... 13,112,635 13,112,635
Accumulated deficit ................................................ (12,295,407) (12,413,089)
Treasury stock held by subsidiary; consisting of 1,039,162
shares of common stock ........................................... (355,524)
------------ ------------
Total shareholders' equity .......................... 2,810,366 2,337,160
------------ ------------
$ 3,143,182 $ 3,984,172
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net sales ................................................................. $ 2,073,117
------------ ------------
Cost of sales ............................................................. 1,459,838
------------ ------------
Gross profit 613,279
------------ ------------
Operating expenses:
Sales and marketing expense ........................................ 366,138
General and administrative expense ................................. $ 414,431 1,172,878
Depreciation and amortization ...................................... 62,091 174,542
Consulting fees, related party ..................................... 30,000 60,000
------------ ------------
506,522 1,773,558
------------ ------------
Loss from operations ...................................................... (506,522) (1,160,279)
------------ ------------
Other expenses (income):
Interest expense:
Related party .................................................. 148,598
Other .......................................................... 24,560 177,635
Foreign currency gain .............................................. (25,437)
Royalty income and other ........................................... (10,131) (22,262)
Loss on sale of USA assets (Note 4) ................................ 538,414
Other .............................................................. 117,643 314,743
------------ ------------
132,072 1,131,691
------------ ------------
Loss before income taxes and minority interest ............................ (638,594) (2,291,970)
Income tax benefit ........................................................ (128,208)
------------ ------------
Loss before minority interest ............................................. (638,594) (2,163,762)
Minority interest ......................................................... (2,531) (71,425)
------------ ------------
Loss before extraordinary item ............................................ (636,063) (2,092,337)
Extraordinary item, debt forgiveness ...................................... 185,804
------------ ------------
Net loss .................................................................. $ (636,063) $ (1,906,533)
Other comprehensive income (loss):
Foreign currency translation adjustments ........................... (2,882)
------------ ------------
Comprehensive loss ........................................................ $ (636,063) $ (1,909,415)
============ ============
Loss per share before extraordinary item .................................. $ (.06) $ (.35)
Extraordinary item ........................................................ .03
------------ ------------
Loss per share ............................................................ $ (.06) $ (.32)
============ ============
Weighted average number of shares outstanding ............................. 11,300,999 5,895,039
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net sales ................................................................. $ 8,849,356
------------ ------------
Cost of sales:
Related party ...................................................... 42,516
Other .............................................................. 6,389,469
------------ ------------
6,431,985
------------ ------------
Gross profit .............................................................. 2,417,371
------------ ------------
Operating expenses:
Sales and marketing expense ........................................ $ 4,084 1,203,309
General and administrative expense ................................. 1,111,797 3,162,518
Depreciation and amortization ...................................... 186,272 566,510
Consulting fees, related party ..................................... 90,000 180,000
------------ ------------
1,392,153 5,112,337
------------ ------------
Loss from operations ...................................................... (1,392,153) (2,694,966)
------------ ------------
Other expenses (income):
Interest expense:
Related party .................................................. 84,905 297,337
Other .......................................................... 708,502
Foreign currency gain .............................................. (59,791)
Royalty income and other ........................................... (69,057) (48,724)
Gain on sale of investment in subsidiary (Note 8) .................. (87,593)
Loss on sale of marketable securities (Note 5) ..................... 62,392
Loss on sale of USA assets (Note 4) ................................ 538,414
Other .............................................................. 417,788 314,743
------------ ------------
433,636 1,725,280
------------ ------------
Loss before income taxes, minority interest
and extraordinary expense ............................................... (1,825,789) (4,420,246)
Income tax benefit ........................................................ (128,208)
------------ ------------
Loss before minority interest and extraordinary item ...................... (1,825,789) (4,292,038)
Minority interest ......................................................... 32,587 (772,968)
------------ ------------
Loss before extraordinary item ............................................ (1,858,376) (3,519,070)
Extraordinary item, debt forgiveness ...................................... 383,705
------------ ------------
Net loss .................................................................. $ (1,858,376) $ (3,135,365)
Other comprehensive income (loss):
Foreign currency translation adjustments ........................... (17,834)
------------ ------------
Comprehensive loss ........................................................ $ (1,858,376) $ (3,153,199)
============ ============
Loss per share before extraordinary item .................................. $ (.22) $ (.66)
Extraordinary item ........................................................ .07
------------ ------------
Loss per share ............................................................ $ (.22) $ (.59)
============ ============
Weighted average number of shares outstanding ............................. 8,527,479 5,293,473
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
CALIFORNIA PRO SPORTS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Series A Series B & C
Common stock Preferred stock Preferred stock
----------------------- ----------------------- -----------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1998 6,734,430 $ 67,344 1,099,685 $ 10,997
Issuance of 316,003
shares of common stock
in consideration
for extending the date on
certain notes (Note 5).......... 316,003 3,160
Issuance of 50,000 shares
of common stock for
consulting services
(Note5) ......................... 50,000 500
Issuance of 434,200
shares of common stock
upon exercise of options
(Note 5) ........................ 434,200 4,342
Issuance of 18,500 shares
of Series A preferred stock
(Note 5) ........................ 18,500 185
Issuance of 167,754
shares of Series A
preferred stock in a private
placement (Note 3).............. 167,754 1,678
Issuance of 3,982,818
shares of common stock
in exchange for 1,327,606
shares of Series A
Preferred Stock (Note 5) ........ 3,982,818 39,828 (1,327,606) (13,277)
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
CALIFORNIA PRO SPORTS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Capital in Treasury
excess of stock
Warrants par Deficit Total
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1998 $ 394,200 $ 11,080,758 $(10,554,713) $ (893,640) $ 104,946
Issuance of 316,003
shares of common stock
in consideration
for extending the date on
certain notes (Note 5)........... 419,956 423,116
Issuance of 50,000 shares
of common stock for
consulting services
(Note5) ......................... 68,250 68,750
Issuance of 434,200
shares of common stock
upon exercise of options
(Note 5) ........................ 460,068 464,410
Issuance of 18,500 shares
of Series A preferred stock
(Note 5) ........................ 76,128 76,313
Issuance of 167,754
shares of Series A
preferred stock in a private
placement (Note 3).............. 164,975 166,653
Issuance of 3,982,818
shares of common stock
in exchange for 1,327,606
shares of Series A
Preferred Stock (Note 5) ........ (26,551)
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
CALIFORNIA PRO SPORTS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Series A Series B & C
Common stock Preferred stock Preferred stock
----------------------- ----------------------- -----------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of 245,520
shares of common stock
owned by Skate Corp. In
satisfaction of $245,520 of
liabilities......................
Issuance of 84,000 shares
of common stock in
satisfaction of $49,500 of
liabilities...................... 84,000 840
Issuance of 41,667 shares
of Series A preferred stock
in satisfaction of $150,000
of liabilities................... 41,667 417
Issuance of 2,080 shares
of Series B and C
preferred stock in
connection with
private placement,
net of costs (Note 4)............ 2,080 1,477,124
Issuance of 1,327,000
shares of common stock
owned by Skate Corp. in
exchange for 884,667
shares of Skate Corp
(Note 5).........................
Issuance of 80,000 shares
of common stock in a
private placement (Note 5)....... 80,000 800
</TABLE>
See notes to consolidated financial statements.
8
<PAGE>
CALIFORNIA PRO SPORTS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Capital in Treasury
excess of stock
Warrants par Deficit Total
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Issuance of 245,520
shares of common stock
owned by Skate Corp. In
satisfaction of $245,520 of
liabilities...................... 161,503 84,017 245,520
Issuance of 84,000 shares
of common stock in
satisfaction of $49,500 of
liabilities...................... 48,660 49,500
Issuance of 41,667 shares
of Series A preferred stock
in satisfaction of $150,000
of liabilities................... 149,583 150,000
Issuance of 2,080 shares
of Series B and C
preferred stock in
connection with
private placement,
net of costs (Note 4)............ 182,902 1,660,026
Issuance of 1,327,000
shares of common stock
owned by Skate Corp. in
exchange for 884,667
shares of Skate Corp
(Note 5)......................... (107,797) 454,099 346,302
Issuance of 80,000 shares
of common stock in a
private placement (Note 5)....... 39,200 40,000
</TABLE>
See notes to consolidated financial statements.
9
<PAGE>
CALIFORNIA PRO SPORTS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Series A Series B & C
Common stock Preferred stock Preferred stock
----------------------- ----------------------- -----------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of 500,000
shares of common stock
for $400,000 (Note 5)............ 500,000 5,000
Net loss for the nine
months ended
September 30, 1998...............
---------- ---------- ---------- ---------- ---------- ----------
Balances, September
30, 1998....................... 12,181,451 $121,814 0 $ 0 2,080 $1,477,124
========== ========== ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
10
<PAGE>
CALIFORNIA PRO SPORTS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Capital in Treasury
excess of stock
Warrants par Deficit Total
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Issuance of 500,000
shares of common stock
for $400,000 (Note 5)............ 395,000 400,000
Net loss for the nine
months ended
September 30, 1998............... (1,858,376) (1,858,376)
---------- ------------ ------------ ------------ ------------
Balances, September
30, 1998.......................$ 394,200 $ 13,112,635 $(12,413,089) $ (355,524) $ 2,337,160
========== ============ ============ ========== ============
</TABLE>
See notes to consolidated financial statements.
11
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ........................................................... $ (1,858,376) $ (3,135,365)
------------ ------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Extraordinary gain ............................................... (383,705)
Gain on sale of investment in subsidiary ......................... (87,593)
Loss on sale of marketable securities ............................ 62,392
Loss on sale of USA assets ....................................... 538,414
Expense incurred upon issuance of common
stock and options .............................................. 568,179 724,223
Foreign currency gain ............................................ (59,791)
Depreciation and amortization .................................... 186,272 566,510
Provision for bad debt ........................................... 50,836
Minority interest ................................................ 32,587 (772,968)
Decrease (increase) in assets:
Accounts receivable ............................................ (55,727)
Escrow receivable .............................................. (997,127)
Income taxes receivable ........................................ 221,624
Due from related parties ....................................... (155,868)
Inventories .................................................... 1,193,218
Prepaid expenses and other ..................................... (32,145) 133,024
Assets of subsidiary held for sale ............................. (3,430)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses .......................... 188,607 (31,472)
Liabilities of subsidiary held for sale ........................ 40,057
------------ ------------
Total adjustments ................................................ 824,259 1,101,858
------------ ------------
Net cash used in operating activities ..................................... (1,034,117) (2,033,507)
------------ ------------
Cash flows from investing activities:
Payment from sale of USA ........................................... 14,500,000
Increase in notes receivable ....................................... (1,369,534)
Payments on notes receivable ....................................... 245,500
Capital expenditures ............................................... (66,548)
Proceeds from sale of marketable securities ........................ 166,260
------------ ------------
Net cash provided by (used in) investing activities ....................... (1,124,034) 14,599,712
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable and long term debt ..................... 1,812,347
Repayments of notes payable and long term debt ..................... (13,699,792)
Proceeds from issuance of preferred stock .......................... 1,826,679
Proceeds from issuance of common stock ............................. 440,000
Proceeds from exercise of options .................................. 464,410
------------ ------------
Net cash provided by (used in) financing activities ....................... 2,731,089 (11,887,445)
------------ ------------
</TABLE>
(Continued)
12
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATES STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net increase in cash ...................................................... 572,938 678,760
Cash beginning ............................................................ 13,969 59,098
------------ ------------
Cash ending ............................................................... $ 586,907 $ 737,858
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest ............................................. $ 96,627 $ 768,932
============ ============
Cash paid for income taxes ......................................... $ 0 $ 0
============ ============
Supplemental disclosure of noncash investing and financing activities:
Issuance of 1,572,520 shares of treasury
stock in exchange for 884,667 shares of Skate Corp. ..............
shares and in satisfaction of $245,520 of liabilities ............ $ 588,822
============
Issuance of 84,000 common shares and 41,667
preferred shares in 1998 and 1,337,371 common shares
in 1997 in satisfaction of amounts due ........................... $ 199,500 $ 1,967,119
============ ============
Issuance of 371,493 shares of
common stock in exchange for 480,417
shares of Company's subsidiary stock ............................. $ 411,392
============
Disposition of USA:
Cost of assets disposed of ..................................... $(16,937,947)
Liabilities disposed of ........................................ 1,899,533
Loss on disposition ............................................ 538,414
------------
Total cash received ............................................. $(14,500,000)
============
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 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 and nine months ended September 30, 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"), USA Skate Corporation ("Skate Corp.") and ImaginOn
Acquisition Corp. (Note 10). Skate Corp. was formed in 1995 to acquire
USA Skate Co., Inc. ("USA Skate"). At September 30, 1998, the Company
owned 100% of the outstanding CP and ImaginOn Acquisition Corp. capital
stock and 89.9% of the outstanding Skate Corp. capital stock. Minority
interest represents Skate Corp.'s minority shareholders' 11.1%
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 its subsidiary, Les Equipment
Sportif, Davtec, Inc., 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
14
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
2. Organization (continued):
independent distributors primarily located in Europe.
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 1997, 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 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 September
30, 1998:
Assets of subsidiary held for sale:
Cash................................... $ 3,430
Cash held in escrow.................... 472,002
Accounts receivable:
Trade................................ 47,525
Related parties...................... 585,000
-----------------
$ 1,107,957
=================
Liabilities of subsidiary held for sale:
Accounts payable and accrued expenses.. $ 485,636
Convertible promissory notes payable... 797,905
-----------------
$ 1,283,541
=================
15
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 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
gross proceeds of $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 automatically converted to 503,261 shares of the Company's
common stock on July 15, 1998 upon the shareholders approving an
increase in the authorized common shares of the Company from 10,000,000
to 20,000,000. 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 $1,639,750 (net of
offering costs) from the accredited investors introduced to the Company
by the consultant, for the purchase of 1,030 shares of Series B and
1,050 shares of Series C Convertible Preferred Stock, par value $.01
("Series B/C") at a price of $1,000 per share. The Series B/C 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.
16
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
4. Preferred stock offering and proforma balance sheet (continued):
Proforma balance sheet:
The unaudited 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 pro forma consolidated balance sheet as of September 30,
1998, that gives effect to the above transactions as if they had been
consummated on September 30, 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
September 30, 1998.
5. Shareholders' equity:
Preferred stock:
The Company, as of September 30, 1998, had Series B and C Convertible
Preferred Stock outstanding. As of June 30, 1998, there were 1,327,606
shares of Series A Convertible Stock outstanding. Each share of
outstanding Series A Convertible Preferred Stock automatically
converted to three shares of common stock on July 15, 1998 upon
shareholder approval of a recapitalization measure that increased the
authorized number of common shares of the Company, from 10,000,000 to
20,000,000. Upon conversion of the Series A Preferred Stock into common
stock, there were no Series A Preferred shares outstanding and
accordingly all rights for Series A stockholders have been terminated.
17
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
5. Shareholders' equity (continued):
Preferred stock (continued):
During the first quarter of 1998, the Company issued 18,500 shares of
Series A 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. The
18,500 shares of Series A Preferred Stock automatically converted to
55,500 shares of the Company's common stock on July 15, 1998 upon the
shareholders of the Company approving an increase to the authorized
shares of common stock of the Company from 10,000,000 to 20,000,000.
Issuances of common stock:
During the nine months ended September 30, 1998, the Company issued
316,003 shares of its common stock at prices from $1.00 to $1.72 per
share in exchange for the extensions of the maturity date on notes of
Skate Corp. The Company recognized finance fee expense of $423,116
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
nine months ended September 30, 1998, 434,200 options and/or warrants
were exercised at $1.00 per share, by officers (211,700), consultant
(200,000), director (15,000) and an employee (7,500).
In July 1998, the Company sold 80,000 shares of restricted common stock
in a private placement to a third party for $40,000.
During the quarter ended September 30, 1998, the Company received gross
proceeds of $400,000 cash from investors who acquired 500,000 shares of
restricted common stock from the Company.
18
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
5. Shareholders' equity (continued):
Issuances of treasury stock:
During the nine months ended September 30, 1998, the Company issued
245,520 treasury shares owned by Skate Corp. with a carrying value of
$84,017 in satisfaction of $245,520 of Skate Corp. liabilities held for
sale. As a result of this transaction, the treasury stock balance has
been reduced by $84,017.
The Company also issued 1,327,000 treasury shares owned by Skate Corp.
with a carrying value of $454,099 in exchange for 884,667 shares of
Skate Corp. As a result of this transaction, the treasury stock balance
has been reduced by $454,099.
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 transactions.
7. Export sales:
Sales by geographic regions were as follows for the three and nine months
ended September 30, 1997:
September 30, September 30,
1997 1997
Three months Nine months
------------- -------------
Canada ................................. $ 903,421 $3,185,923
Europe and other ....................... 229,405 1,496,925
---------- ----------
Total exports ........................ 1,132,826 4,682,848
US sales ............................... 940,291 4,166,508
---------- ----------
Total sales ............................ $2,073,117 $8,849,356
========== ==========
19
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 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 Skate Corp. 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.
In June 1997, the Company issued 170,000 shares of its common stock to an
officer/director for 141,667 shares of Skate Corp. common stock.
Additionally, the Company issued 133,333 shares of its common stock to
acquire 250,000 shares of Skate Corp., that otherwise the Company would
have been obligated to redeem. The Company accounted for these
transactions under the purchase method of accounting, based upon the
market value of the common stock issued by the Company. The Company's
ownership of USA was increased from 51% to 62.5% due to these
transactions.
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.
In September 1997, the Company recognized an extraordinary gain of
$185,804 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.
20
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
10. Merger agreement (continued):
ImaginOn designs, manufactures and sells consumer software products for
Internet users. The merger transaction, which is expected to be
completed in the winter of 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.
On November 12, 1998, the Company announced a special meeting of its
stockholders, to be held December 10, 1998 to consider and vote upon,
among other things, a proposal to ratify the plan of merger.
11. Comprehensive income:
On January 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 30, "Reporting Comprehensive Income." This standard
established requirements for disclosure of comprehensive income which
includes certain items previously not included in the statement of
operations including minimum pension liability adjustments and foreign
currency translation adjustments, among others. For the three and six
months ended June 30, 1998, the Company had no items of comprehensive
income. The financial statements for the three and six months ended
June 30, 1997 and 1998 ave been reclassified to disclose items of
comprehensive income. There are no significant tax effects related to
these items.
21
<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 operating 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 operating 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 and nine months ended September 30,
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 cMartin(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.
22
<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 distribution of products covered under the California Pro and
Kemper licenses, thereby eliminating 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.
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., a privately held company, and on January 30,
198, the Company signed an agreement and plan of merger with
ImaginOn.
e. Began investigating other options, including the sale of subsidiries
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 nine months ended
September 30, 1998 and has accumulated deficit at September 30, 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 deleveraging 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 $1,616,000 as of September 30,
1998.
The Company has completed private placements generating aggregate
proceeds of $2,269,250. In addition, $464,410 has been received from
the exercise of stock options for the purchase of 434,200 shares of the
Company's common stock. Having taken major steps to deleverage the
Company and redirect the Company towards profitability, two other parts
of the Company's plan remain to be completed. In conjunction with
dramatically reducing overhead, a plan to restore operating
profitability to the remaining sporting goods businesses is in place
through licensing programs. Additionally, the Company is seeking to
diversify its business through a merger with ImaginOn, Inc. Each part
of the Company's plan is discussed in detail below.
23
<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 consists 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 automatically
converted to 503,261 shares of the Company's common stock on July 15,
1998 upon shareholder approval of an increase in the authorized shares
of common stock from 10,000,000 to 20,000,000. 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 introduced to the
Company accredited investors who have purchased a combination of 2,080
shares of the Company's Series B and C Preferred Stock and restricted
common stock for net proceeds of $1,639,750. The Series B and C
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. These
private placements were completed August 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, could
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
$100,000 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, Inc.
("ImaginOn") of San Carlos, California, a privately held company, 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.
24
<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 in the Winter of 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 stockholders (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.
On November 12, 1998, the Company announced a special meeting of its
stockholders, to be held December 10, 1998, to consider and vote upon,
among other things, a proposal to ratify the plan of merger.
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 two cities be completed prior to
starting their marketing effort: San Francisco and New York. Imaginon
anticipates these two cities 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.
25
<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 Nine Months Ended
September 30 September 30
1997 1997
---- ----
Dollars Percent Dollars Percent
-------- -------- -------- --------
In-line skates, snowboards and
related accessories ........... $ 116 6% $ 1,072 12%
Ice and street/roller hockey .... 1,957 94% 7,777 88%
-------- -------- -------- --------
$ 2,073 100% $ 8,849 100%
======== ======== ======== ========
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO SEPTEMBER 30, 1997
NET SALES: Sales for the three and nine months ended September 30, 1997 were
$2,073,117 and $8,849,356, respectively. For the three and nine months ended
September 30, 1998, the Company recorded royalty and other income of $10,131 and
$69,057, respectively.
GROSS PROFIT: For the three and nine months ended September 30, 1997, gross
profit was $613,279 and $2,417,371, respectively.
SALES AND MARKETING EXPENSES: There were no sales and marketing expenses during
the three months ended September 30, 1998 compared to $366,138 for the three
months ended September 30, 1997. For the nine months ended September 30, 1998,
sales and marketing expenses were $4,084 compared to $1,203,309 for the nine
months ended September 30, 1997. These decreases were 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 sales and marketing
expense. The 1997 sales and marketing expenses also included those of USA Skate.
In September 1997, the Company completed the sale of substantially all of the
operating assets of USA Skate.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
decreased to $414,431 for the three months ended September 30, 1998 from
$1,172,878 to the three months ended September 30, 1997. During the nine months
ended September 30, 1998, general and administrative expenses decreased to
$1,111,797 from $3,162,518 for the nine months ended September 30, 1997. These
decreases were 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 three months ended September 30, 1998 were legal
and accounting $71,942, consulting expenses $200,000, payroll, payroll taxes and
expense reimbursement of $78,441. The primary expenses for the nine months ended
September 30, 1998 were legal and accounting $266,312, consulting expenses
$438,750, payroll, payroll taxes, and expense reimbursement of $296,973.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense for the
three months ended September 30, 1998 was $62,091 compared to $174,542 for the
three months ended September 30, 1997. Of the 1997 three month expense $113,862
was related to Company's hockey business which was sold in September 1997. For
the nine months ended September 30, 1998 depreciation and amortization expense
was $186,272 compared to $566,510 for the nine months ended September 30, 1997.
The 1997 nine month expenses included approximately $395,000 related to the
Company's hockey business.
26
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION (CONTINUED)
CONSULTING EXPENSES: Related party consulting expenses were $30,000 and $90,000
for the three and nine months ended September 30, 1998, respectively, compared
to $60,000 and $180,000 for the three and nine months ended September 30, 1997,
respectively. The reason for the decrease was attributable to including USA
Skate fees for the full three and nine months in 1997.
LOSS FROM OPERATIONS: For the three and nine months ended September 30, 1998,
the loss from operations was $506,522 and $1,392,153, respectively, compared to
the loss from operations for the three and nine months ended September 30, 1997
of $1,160,279 and $2,694,966, respectively. The primary reason for the decrease
in operating losses in the 1998 periods compared to the 1997 periods are
decreases in operating costs. These decreases were caused by the reduced
operating expenses due to the sale of the Company's hockey business and the
reduction in operating costs from restructuring operating the remaining
trademarks and licenses to entering into sub-license agreements.
OTHER EXPENSE/INCOME: Other expenses for the three months ended September 30,
1998 were $132,072 compared to $1,131,691 for the three months ended September
30, 1997. Other expenses for the nine months ended June 30, 1998 were $433,636
compared to $1,725,280 for the nine months ended September 30, 1997.
NET LOSS: Net loss for the three and nine months ended September 30, 1998 was
$636,063 and $1,858,376 respectively, compared to net loss for the three and
nine months ended September 30, 1997 of $1,906,533 and 3,135,365, respectively.
The primary reasons for the decreases were reductions in the losses from
operations of $653,757 and $1,302,813 for the three and nine months ended
September 30, 1998 compared to the three and nine months ended September 30,
1997 as described above, and decreases in interest and other expenses. These
decreases were offset by extraordinary income of $185,804 and $383,705 for debt
forgiveness for the three and nine month periods ended September 30, 1997,
respectively. Additionally, the decreases were offset by minority interest of
$71,425 and 772,968 for the three months and nine months ended September 30,
1997, respectively.
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
Stockholder notes...................... 505,000
Payment to previous USA Skate owners... 2,678,000
Interest payments...................... 85,000
27
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION (CONTINUED)
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.
At September 30, 1998, the Company had working capital of approximately
$1,646,195 compared to a deficit of $400,625 at December 31, 1997. The increase
in the working capital is primarily related to the Company realizing net
proceeds of approximately $7,269,000 from various private placements as further
described in Notes 3 and 4. Additionally, the Company has converted
approximately $295,000 of debt to equity.
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.
YEAR 2000 CONVERSION: The Company recognizes the need to ensure it will not be
adversely impacted by year 2000 software failures. Since the Company is
currently not distributing goods under its licenses and trademarks the Company
should not be at risk for any internal software failures. However, the Company
is communicating with its sub-licensees to the integrity and reliability of
their operational and financial systems. The total cost of compliance and its
effect on the Company's future results of operations is being determined as part
of the conversion planning process.
28
<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 July 5, 1998, the Registrant issued 30,315 shares of
its common stock in exchange for the extensions of the
maturity date to August 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 July 15, 1998, the Company issued 80,000 shares of
its common stock in exchange for $40,000. The
Registrant relied on exemptions from registration
provided by Sections 4(2) and/or 4(6) of the Securities
Act.
On July 15, 1998, the Company issued 3,982,818 shares
of its common stock in exchange for 1,327,606 shares of
the Company's Series A Preferred Stock. The Registrant
relied on exemptions from registration provided by
Sections 4(2) and/or 4(6) of the Securities Act.
On August 1, 1998, the Company issued 500,000 shares of
its common stock in exchange for $400,000. The
Registrant relied on exemptions from registration
provided by Sections 4(2) and/or 4(6) of the Securities
Act related to the issuance of these shares.
On August 5, 1998, the Registrant issued 36,774 shares
of its common stock in exchange for the extensions of
the maturity date to September 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 $1.08 per share. The Registrant relied on the
exemptions from registration provided by Sections 4(2)
and/or 4(6) of the Securities Act.
On August 30, 1998, the Registrant issued 15,000 shares
of its common stock in exchange for assumption of
certain liabilities of the Company totaling $15,000.
The Registrant relied on the exceptions from
registration provided by Sections 4(2) and/or 4/(6) of
the Securities Act because the recipient of these
shares was an accredited investor.
On September 5, 1998, the Registrant issued 39,636
shares of its common stock in exchange for the
extensions of the maturity date to October 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 $1.00 per share. The Registrant relied on
the exemption from registration provided by Section
4(6) of the Securities Act related to the issuance of
these shares.
29
<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:
None.
30
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CALIFORNIA PRO SPORTS, INC.
Dated: November 18, 1998 By:/s/ Henry Fong
-----------------------------
Henry Fong
Chairman/Chief Executive Officer
Dated: November 18, 1998 By:/s/ Barry S. Hollander
-----------------------------
Barry S. Hollander
Chief Financial Officer
31
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Registrant's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1998, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 586,907
<SECURITIES> 0
<RECEIVABLES> 1,507,402
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,262,552
<PP&E> 26,896
<DEPRECIATION> 445,157
<TOTAL-ASSETS> 3,984,172
<CURRENT-LIABILITIES> 1,616,357
<BONDS> 0
0
1,477,124
<COMMON> 121,814
<OTHER-SE> 738,222
<TOTAL-LIABILITY-AND-EQUITY> 3,984,172
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,392,153
<OTHER-EXPENSES> 433,636
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 84,905
<INCOME-PRETAX> (1,858,376)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,858,376)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
