U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A-1
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission file number 0-25114
California Pro Sports, Inc.
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(Name of small business issuer in its charter)
Delaware 84-1217733
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1221-B South Batesville Road
Greer, South Carolina 29650
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(Address of principal executive office) (zip code)
Issuer's telephone number (864) 848-5160
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Warrants to Purchase Common Stock
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. (1) Yes /x/ No / / (2) Yes /x/ No / /
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of the issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State the issuer's revenues for its most recent fiscal year. $9,087,767
As of February 28, 1998, 6,942,021 shares of Common Stock were outstanding
and aggregate market value of the shares (based upon the average of the bid and
asked price of the shares on the over-the-counter market) of California Pro
Sports, Inc. held by nonaffiliates was approximately $7,999,217.
Documents Incorporated by Reference - None
Transitional Small Business disclosure format (check one): Yes / / No /x/
<PAGE>
CALIFORNIA PRO SPORTS, INC.
AND SUBSIDIARIES
FORM 10-KSB/A-1
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.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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(a) BUSINESS DEVELOPMENT.
California Pro Sports, Inc., (hereinafter referred to as the "Company" or
"Registrant"), is a Delaware corporation organized on January 4, 1993 to acquire
the California Pro(TM) in-line skate business from California Pro USA Corp.,
subsequently renamed SCYL, Inc. ("SCYL") and later dissolved. Playmaker Co., LTD
("Playmaker"), the Taiwanese in-line skate manufacturer and majority owner of
the seller, granted the Company an exclusive, perpetual, non-royalty bearing
license to the California Pro(TM) names and trademarks and entered into a
five-year manufacturing agreement to supply substantially all of the Company's
in-line skate products. This acquisition was a taxable transaction and was
accounted for as a purchase. Due to the significant continuing ownership
participation of Playmaker in the Company, the assets acquired were recorded at
historical cost. Cash paid and notes given by the Company for the agreements not
to compete, management buy-out and consulting fees, and the guaranty fees, were
recorded as intangible assets.
In another acquisition completed on August 1, 1994, the Company purchased
certain assets, including an exclusive, perpetual world-wide license to the
Kemper(R) name and trademark, subject to a royalty. The Company acquired its
license directly from the registered owner of the Kemper(R) name and trademark,
Front 500 Corporation ("Front 500").
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In 1995, the Company formed USA Skate Corporation, a Delaware corporation,
("Skate Corp."). Skate Corp. is a majority owned (approximately 62%) subsidiary
of the Company and its financial statements are consolidated with those of the
Company in this report. Effective as of April 30, 1996, Skate Corp. acquired
100% of USA Skate Co., Inc. ("USA Skate"), a New York corporation, in a stock
purchase transaction. USA Skate owns, directly or indirectly, all of the capital
stock of Les Equipements Sportifs Davtec, Inc. ("Davtec"), a Canadian
corporation. The acquisition was accounted for as a purchase. Consideration for
the purchase was $10.5 million, consisting of $3.65 million of cash (including
approximately $98,000 of cash acquired), a $1.05 million 8% installment note
payable due through November 1998, 250,000 shares of Skate Corp. common stock
valued at $300,000, and assumption of approximately $5.5 million of debt.
The cash portion of the purchase price for USA Skate was paid with funds
raised by Skate Corp., including the private placement of 884,667 shares of
common stock of Skate Corp. for approximately $1.06 million; the issuance of
approximately $1.08 million of 9% promissory notes payable to certain
officers/stockholders due June 30, 1997; and the issuance of approximately $2.5
million of 9% promissory notes due January 1997 (the "Skate Notes"). As
permitted under the terms of the Skate Notes, the due date of the Skate Notes
has been extended to May 5, 1998 and bear interest at 12% during the extension
period and are convertible under certain circumstances.
The debt assumption portion of this acquisition was financed in part by a
bank loan to USA Skate by LaSalle National Bank, the proceeds of which were used
to repay the outstanding indebtedness under the credit facility in place for USA
Skate prior to completion of the acquisition. The LaSalle loan agreement allowed
for advances up to 75% of qualifying accounts receivable, 50% of qualifying
inventories and 50% of outstanding letters of credit, with a maximum limit of $5
million. Loans under the agreement bear interest at 1% above the bank's prime
rate and are due on demand. The loan agreement required payment of initial
financing fees of $100,000 and fees of $50,000 annually and contained certain
financial covenants and restrictions regarding payment of dividends, officers'
compensation and consulting fees, as well as restrictions on USA Skate's loans
and investments. The loan was collateralized by substantially all of USA Skate's
assets and was guaranteed by Skate Corp. and certain of its affiliates and
stockholders. At December 31, 1996, Skate Corp. was in technical default under
this lending arrangement primarily due to the Company's wholly-owned subsidiary
being in default under its loan with LaSalle. At year-end 1996, California Pro,
Inc. was undercollateralized by approximately $800,000 and was not in compliance
with certain of its financial covenants. As a result, LaSalle could have
accelerated both loans and required immediate full repayment. However, based on
an oral arrangement with the Company, LaSalle did not accelerate either loan nor
did it require full repayment.
At the time of the acquisition, Skate Corp. made a capital contribution of
$500,000 to Davtec, and the former controlling shareholder of USA Skate paid
Davtec $165,000 in return for a $125,000, 8% promissory note due December 31,
1996 and payment of a $40,000 outstanding receivable. The proceeds of $665,000
were used to reduce Davtec's indebtedness to its Canadian bank lender. In
connection with the payments, and subject to certain other terms and conditions,
the Canadian bank agreed to extend the existing line of credit with Davtec
through July 31, 1997. In March 1997, the Company repaid $50,000 under the note
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to the former controlling shareholder of USA Skate, Warren Amendola, and entered
into a modification agreement extending the due date of the remaining $75,000 to
October 1, 1997. In February 1997, the Company received notice that it was in
violation of a loan covenant and in March 1997, the bank filed a notice of
intention to enforce security and to demand payment of the loan.
At the time of the USA Skate acquisition, the Company, Skate Corp. and USA
Skate also entered into certain other agreements with the former controlling
shareholder of USA Skate, Warren Amendola. USA Skate entered into a one-year
employment agreement with the former controlling shareholder of USA Skate, which
provided for annual compensation of $90,000. The former controlling shareholder
of USA Skate entered into a five-year consulting agreement with the Company,
Skate Corp. and USA Skate and a ten-year noncompete agreement in consideration
for receipt of 400,000 shares of the Company's common stock valued at $900,000.
USA Skate also entered into a worldwide, exclusive license agreement for use of
certain trademarks owned by the former controlling shareholder of USA Skate,
Warren Amendola, in exchange for minimum royalty payments of $3 million due on
or before December 2001. Finder's fees, bank origination, legal, accounting and
other costs of the acquisition were approximately $1.53 million, including
guarantee fees to two officers/stockholders of $600,000 related to the
officers'/stockholders' providing personal guarantees of certain of the debt
assumed and issued in the transaction.
In 1996 and 1997, due to continuing operating losses, management decided to
restructure and de-leverage the Company. Accordingly, in September 1997, the
Company completed the sale of substantially all of the assets of Skate Corp.'s
direct and indirect operating subsidiaries, USA Skate and Davtec, to Rawlings
Sporting Goods Company, Inc. and Rawlings Canada, Inc. (collectively
"Rawlings"). Consideration to Skate Corp. consisted of $14.5 million cash,
inclusive of $1.0 million retained in escrow for purchase price adjustments and
proven claims by the purchasers, and assumption of trade payables and accrued
liabilities related to the assets purchased.
An additional component of the restructuring plan included management's
decision to cease operating its California Pro and Kemper licenses, eliminate
most of the operating and overhead expenses associated with its sporting goods
business and begin to concentrate on sub- licensing its trademark rights.
Accordingly, in the second quarter of 1997, the Company began liquidating any
remaining inventories and commenced a search for sub-licensees and 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") of San Carlos, California, a
privately held company. Thereafter, 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 California Pro.
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
"Transformation Database Processing and Playback" ("TDPP"), enables the creation
of new business and consumer products that provide user-friendly and
entertaining access to multimedia databases.
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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
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.
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.
Prior to implementation of the restructuring and de-leveraging plan, the
Company operated its in-line skate and snowboard businesses through its
wholly-owned subsidiary, California Pro, Inc., also a Delaware corporation
("CP"). The Company's only significant assets are the capital stock of CP and
Skate Corp. CP and USA Skate were the borrowers under bank loan agreements
described above and the Company was a guarantor of each of their obligations
thereunder. In addition, CP's bank loan was guaranteed by USA Skate and USA
Skate's bank loan was guaranteed by CP.
(b) BUSINESS OF ISSUER.
The Company licenses California Pro(R) in-line skates, and related
protective gear and accessories from Playmaker. Kemper(R) snowboards and related
snowboard accessories are licensed from Front 500. VIC(R), VICTORIAVILLE(TM) and
McMartin(TM) ice and street/roller hockey skates, sticks and related protective
gear and accessories were licensed until September 1997 from the former
controlling shareholder of USA Skate. Davtec, USA Skate's wholly-owned Canadian
subsidiary, manufactured hockey sticks, pants and gloves for USA Skate and was
the Canadian distributor for all of the hockey related VICTORIAVILLE(TM) and
VIC(R) product lines.
The Company's in-line skate products were sold in the United States,
Canada, the Caribbean and U.S. military bases world wide. Its snowboards and
related accessories were sold primarily in the United States and European
countries. The Company sold through September 1997 its hockey-related products
in the United States and Canada through independent sales representatives and
internationally through independent distributors located in Germany,
Switzerland, Italy, Austria, Czech Republic, Sweden, Finland, France and Brazil.
As part of management's restructuring plan [see Item 1(a)--Business
Development], the Company recently entered into two sub-license agreements
regarding the use of the Kemper name. Additionally, the Company is seeking
sub-licensees for the California Pro brand, not only for in-line skates but for
other sporting goods categories such as snowboards and waterskis.
The Company will rely on the expertise of their sub-licensees to develop,
import or manufacture, and market and distribute within their licensed product
categories and territories.
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One of the Kemper sub-licensees, a major west coast sporting goods
retailer, designs, imports and sells directly to consumers a line of snowboard
apparel. The other Kemper sub- licensee is one of the leading manufacturers and
marketers of snowboards and related products such as bindings, boots and other
accessories.
Each of the Kemper sub-licensees offer a full line of products at various
price points within their respective product categories.
PRODUCTS
The Company, until September 1997, had five major hockey product categories
consisting of (1) hockey sticks; (2) hockey protective gear; (3) figure and ice
hockey skates; (4) hockey bags and related accessories; and (5) street/roller
hockey skates and protective gear. These products were marketed under the
VICTORIAVILLE(TM), VIC(R) and McMartin(R) brands. Davtec, the Canadian
subsidiary of the Company's hockey division, manufactured hockey sticks, pants
and gloves for the Company and was the Canadian distributor for all of the
hockey related VIC(R) and VICTORIAVILLE(TM) product lines. The Company's hockey
product lines were constructed of various materials and incorporated the latest
designs, graphics and technology. Approximately 70% of Skate Corp.'s products
were manufactured by the Canadian subsidiary.
PRODUCT DESIGN AND DEVELOPMENT
Design and development of the Company's hockey products sold through
September 1997 was undertaken by the Company's research and development
personnel in conjunction with outside design firms and vendors, where
appropriate. The Company believes its manufacturing facilities were state of the
art and produced consistent and competitive products from innovative designs.
USA Skate redesigned its logo in 1997 and all of its products through September
1, 1997 incorporated the new logo.
SALES AND MARKETING
The Company marketed its ice hockey products primarily in retail sporting
goods chains and specialty shops. Distribution was accomplished primarily
through national networks of independent sales representative groups who sell
directly to buyers and retail accounts.
USA Skate had oral agreements with ten sales representative groups covering
the United States and Canada. These sales representative groups were paid on a
standard, commission-only basis. In addition, there were distributors located in
Germany, Switzerland, Italy, Austria, Czech Republic, Sweden, Finland, France
and Brazil.
The Company's marketing strategy emphasized the price/value relationship of
its branded products. In particular, the Company believed that within its hockey
business, retailers were afforded an excellent mark-up for VICTORIAVILLE(TM),
VIC(R) and McMartin(R) hockey products when the features were compared to the
features of the competitors at virtually all price points.
USA Skate advertised and promoted its hockey products through multiple
methods customary within the industry. It participated in all major trade
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exhibits, conducted special promotions and advertised in trade and consumer
publications on a national, regional and local basis. Point of purchase material
and promotional items were made available to the customer base as well as
directly to consumers through USA Skate and trade supported programs. A critical
component of USA Skate's promotional strategy had lain in its ability to attract
NHL and other professional league players to use and promote the Company's
products, thereby reinforcing the brand's authenticity and performance. In 1997,
over 100 NHL players used the Company's VICTORIAVILLE(TM), VIC(R) and
Hespeler(TM) branded products, including NHL All- Stars Steve Yzerman, John
Vanbiesbrouck and Jeff Richter.
SUPPLIERS AND MANUFACTURING
IN-LINE SKATE PRODUCTS. The Company has an exclusive manufacturing
agreement with Playmaker which expires in 1998, under which Playmaker supplied
most of the Company's in-line skates and in-line skate accessory products. Prior
to the Company's decision to temporarily suspend marketing of in-line skates and
related accessories while it searches for sub-licensees and a merger candidate,
Playmaker manufactured, assembled and packaged its in-line skate products at its
facilities in Taiwan and China for set prices, in U.S. dollars, negotiated
annually. In 1996, the Company began sourcing certain in-line skate models from
an alternative Pacific Rim supplier.
HOCKEY PRODUCTS. The Company, prior to selling certain assets in September
1997, had three manufacturing facilities; one in London, Ontario, one in
Montreal and the other in Daveluyville, Quebec, Canada. The Daveluyville plant
manufactured the Company's hockey sticks, the Montreal plant manufactured the
Company's premium pants and gloves and the London facility manufactured the
Company's goalie protective equipment under the McMartin brand. Products
representing approximately 70% of USA Skate's sales were manufactured by Davtec.
The other products marketed by the Company were sourced from a variety of
suppliers throughout the world. Cortina International Corporation and Superior
Sports were the Company's main suppliers of ice and street/roller hockey
protection products. Figure and hockey skates were supplied by Taiwan Sakurai
and premium quality figure skates were manufactured in the Czech Republic and
supplied to the Company by Benal.
LICENSES, PATENTS AND TRADEMARKS
The Company derives its proprietary protection primarily from licenses with
others who own patents and trademarks. The Company owns no patents and has
applied for or owns a limited number of trademarks.
IN-LINE SKATE PRODUCTS. The Company entered into a perpetual license
agreement with Playmaker under which the Company has the exclusive, royalty-free
right to use the California Pro(R) and Rolling Thunder(TM) names and trademarks
on in-line skates, accessories and any other products in the United States,
Canada, certain areas of the Caribbean and U.S. military exchanges worldwide.
The Company has also entered into an agreement with Playmaker under which
Playmaker will pay the Company a five percent royalty on all sales of any
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product made by Playmaker to any new customer of Playmaker generated by the
Company. No royalties have been agreed to or paid to date under this agreement.
The Company and Playmaker each have non-exclusive royalty bearing patent
license agreements with Rollerblade, Inc. related to one feature on several of
the Company's in-line skate models. These agreements require payment to
Rollerblade, Inc. of a percentage of the net sales price to retail merchants.
Playmaker reimburses the Company for 90% of the royalties paid by the Company to
Rollerblade under these agreements.
The Company, after continuing to analyze the competitive position of the
California Pro brand in the marketplace, has decided to seek potential
sub-licensing candidates. Management feels there is value in the brand, not only
for in-line skates but in other sporting goods categories such as skateboards
and waterskis.
SNOWBOARD PRODUCTS. In August 1994, the Company entered into an agreement
with Front 500 Corporation, for an exclusive, perpetual, worldwide license to
use the name "Kemper Snowboards Inc." and the Kemper(R) design and all
derivations thereof in the manufacture, import, export, design, marketing,
promotion and distribution of Kemper(R) snowboards and related equipment,
clothing and accessories. In return for these license rights, the Company pays a
royalty of net sales for products sold under this license.
In February 1998, the Company reached a two-year agreement with an
international manufacturer and marketer of snowboards and related products. The
agreement, in effect, assigns all the license rights the Company had from Front
500 to the sub-licensee. The Company has no further obligations to Front 500 and
is entitled to the greater of a royalty-based payment on net sales by the
sub-licensee, or an annual minimum guaranteed payment.
In 1997, the Company entered into a three year non-exclusive sub-license
agreement with a major west coast sporting goods chain retailer. The agreement
allows for the sub-licensee to manufacture, or cause to be manufactured,
snowboard apparel (jackets, pants, fleece garments, socks, etc.) bearing the
name and/or logo of Kemper, and to sell such products in retail stores. The
agreement requires the retailer to pay to the Company the greater of a
percentage of their cost to manufacture the apparel or an annual minimum
guaranteed payment.
HOCKEY PRODUCTS. The Company, through September 1997, owned the exclusive
worldwide trademark rights to the VICTORIAVILLE(TM) and VIC(R) trademarks under
a royalty bearing license. Included with the sale of certain assets of the
Company's hockey business were these trademarks. Accordingly, the Company paid
$2,678,000 of the proceeds from Rawlings to the former controlling shareholder
of USA Skate for, primarily, the purchase price of these trademarks.
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COMPETITION
IN-LINE SKATE BUSINESS. The in-line skate business is a highly competitive
industry. Some of the Company's competitors have greater financial and other
resources than the Company. The Company believes that there has been lower
consumer demand for in-line skates as well as retailers not quickly selling
through their existing inventory. With respect to the Company's in-line skate
business its primary competitors are Rollerblade, Inc., Ultra Wheels (First Team
Sports, Inc.), Bauer and Variflex. With regard to in-line skate protective
equipment, Rollerblade, First Team Sports and Franklin are the primary
competitors. Management believes that these competitors collectively have a
market share of over 50%.
The primary competitive factors in the in-line skate business are product
features, quality, price, service and name recognition. Although Rollerblade is
still the most recognized name in the in-line skate industry, consumers are now
comparing features and price more closely.
SNOWBOARD BUSINESS. The Company's sub-licensees compete with Burton
Snowboards, with a world market share estimated at approximately 50%. Other
competitors include Sims Snowboards and Ride Snowboard Company. Additionally,
many of the ski manufacturers (i.e. K2 and Rossignol) have also entered the
market. Management believes that these companies have greater financial and
other resources than the Company's sub-licensees.
HOCKEY BUSINESS. Both ice and street/roller hockey businesses are highly
competitive, with competition predominantly focused on product innovation,
performance and styling, price, marketing and delivery and name recognition. The
hockey markets are dominated by a relatively small number of large companies,
most of whom have greater financial and other resources than the Company. The
primary competitors of USA Skate are Bauer, CCM, Sherwood and Karhu Corp. The
Company believes that these competitors collectively have a market share of over
50%. USA Skate enjoys strong brand recognition and believes it also competes
favorably with respect to the other major competitive factors. There are no
significant technological or capital barriers to entry into markets for many
sporting goods products. These markets compete with other leisure activities
markets for discretionary income spending in a continuously evolving consumer
market.
CUSTOMERS
For the year ended December 31, 1997, no customers accounted for 10% or
more of the Company's sales.
EMPLOYEES
As of December 31, 1997, reflecting the Company's limited operations, the
Company had 2 full-time employees, 2 part-time employees and 3 consultants. The
Company believes its relations with its employees and consultants are good. The
Company's employees are not subject to collective bargaining agreements.
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SPECIAL CONSIDERATIONS AFFECTING THE COMPANY
Inevaluating the Company, readers of this Report should carefully consider
the following special considerations affecting the Company, its business,
markets, operations and competitive environment. Any one or a combination of
these considerations may have a material adverse effect on the Company and its
operations and management's beliefs or predictions about future performance.
LIMITED OPERATIONS. The Company and ImaginOn have limited business
operations. The Company is currently receiving income from sub-licenses it has
entered into regarding the use of the Kemper name and trademark for which it has
a license. The Company also licenses the California Pro name and trademark and
is pursuing entering into sub-licenses. The Company has received no commitment
from any party for such sub-license and there can be no assurance that a
sub-license will be entered into.
NO INVENTORIES. The Company has liquidated its remaining inventory and,
therefore, it does not maintain, nor does it intend to accumulate, an inventory
of in-line skate, snowboard or hockey products.
Working Capital Shortages and Operating Losses. Recently, the Company has
generated significant operating losses and has failed to generate positive cash
flow. As a result, the Company has, and continue to experience, shortages of
working capital to fund day to day operations. ImaginOn also has generated
significant operating losses and has failed to generate positive cash flow.
The shortages of working capital and insufficient cash flow have, from time
to time, prevented the Company from making prompt payment of current
obligations. As a result, the Company is subject to numerous claims for
collection of past due amounts and are past due on certain of its debt
obligations.
LIMITED CAPITALIZATION. The Company and ImaginOn have only limited
financing available to it and is dependent on significant additional financing
being available to continue as a going concern.
On March 13, 1998, the Company began a private placement for the sale of
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 is selling 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
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exchange for the Skate Corp. shares. Although the Company has received
commitments to purchase all of the units there can be no assurance that the sale
of the units will be completed or that, if completed, the proceeds from the sale
will be received in a timely manner and thus be available as working capital to
fund day to day operations. The failure to complete this private placement would
hinder the Company's ability to complete the merger with ImaginOn, which could
materially adversely affect results of operations.
The Company may also seek additional equity or debt financing to further
fund day to day operations. There can be no assurance that such financing will
be available when needed, or that, if available, it will be on satisfactory
terms.
Merger with ImaginOn; Change of Business. The Company has signed a
definitive Agreement and Plan of Merger with ImaginOn, Inc. ("ImaginOn"). The
closing of this transaction is subject to certain contingencies, including
shareholder approval. If the transaction is consummated, the Company's line of
business will change to include computer software manufacturing, production and
other related activities. Although the Company's management believes the
transaction will close upon satisfaction of certain contingencies, there can be
no such assurance.
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ITEM 2. DESCRIPTION OF PROPERTY
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(a) FACILITIES
Lease (L) Annual
Location Use Sq. Ft. Own (O) Rent
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Greer, SC Corporate Offices 3,900 L $36,000 *
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* Leased on a month-to-month basis.
(b) and (c)
Not applicable
ITEM 3. LEGAL PROCEEDINGS
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The Company was a named defendant in a lawsuit styled Basquiat v. Kemper
Snowboards, et al. The action was filed on January 11, 1996 in the United States
District Court for the Southern District of New York alleging copyright
infringement with respect to snowboards allegedly distributed by the Company's
Kemper Snowboard division which allegedly included reproductions of the
plaintiff's copyrighted works. Plaintiff sought damages in an amount not less
than $200,000. The Company referred the complaint to its insurer, which
thereafter provided a defense. On October 14, 1997, a jury verdict in the amount
of $450,000 was awarded against the defendants, including the Company. The Court
has not yet entered judgment on the jury verdict, in light of certain post-
trial motions filed by the Company to overturn or reduce the amount of the
verdict. The Company believes that there are meritorious grounds for such a
motion, which is still pending a decision by the court. In the event such motion
is denied, the Company intends to appeal the verdict and any judgment entered
thereon, and believes it has meritorious grounds for such an appeal. As
previously noted, the Company's insurer has preliminarily indicated that it will
provide coverage, subject to relevant deductibles and a reservation of rights
with respect to certain matters the Company strongly believes will be resolved
in its favor.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of stockholders during the fourth
quarter of 1997.
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<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
(a) MARKET INFORMATION.
The Company's Common Stock and Warrants have been traded over-the-counter
since January 18, 1995 and are quoted on the Nasdaq SmallCap Market under the
symbols CALP and CALPW, respectively. The following table sets forth the range
of high and low bid prices as quoted by Nasdaq. These market quotations reflect
inter-dealer prices without retail mark-up, mark-down or commissions and may not
represent actual transactions.
Common Stock Warrants
Bid Prices Bid Prices
--------------- ---------------
1997 High Low High Low
- - ---- ---- --- ---- ---
First Quarter (1/1/97-3/31/97) .. $1.53 $ .81 $ .40 $ .25
Second Quarter (4/1/97-6/30/97) . $2.00 $ .93 $ .68 $ .21875
Third Quarter (7/1/97-9/30/97) .. $2.37 $1.37 $ .75 $ .4375
Fourth Quarter (10/1/97-12/31/97) $3.06 $1.06 $1.15 $ .6875
1996
- - ----
First Quarter (1/1/96-3/31/96) .. $4.62 $2.56 $1.92 $ .65625
Second Quarter (4/1/96-6/30/96) . $4.00 $2.25 $1.00 $ .50
Third Quarter (7/1/96-9/30/96) .. $3.06 $1.87 $ .90 $ .375
Fourth Quarter (10/1/96-12/31/96) $2.31 $1.25 $ .56 $ .21875
NASDAQ NOTIFICATION OF DELISTING. The NASDAQ Stock Market, Inc. issued new
standards for continued listing of SmallCap Market participants which became
effective February 23, 1998. The Company is a SmallCap Market participant and
must meet these new requirements. On the effective date, the Company did not
meet one of the new requirements of having net tangible assets that exceed $2
million. Under the new standards, NASDAQ has established a review process for
companies temporarily out of compliance. The Company filed its written request
for a temporary exemption to the new standards on March 27, 1998 and NASDAQ is
scheduled to review the matter during the week of April 13, 1998. Along with the
written request, the Company filed a Form 8-K which, on a pro-forma basis, shows
compliance with the new continued listing requirements.
(b) HOLDERS.
The number of record holders of the Company's Common Stock as of April 14,
1998 was approximately 117. Based on information from the brokerage community,
the Company believes that its Common Stock and Warrants each are held
beneficially by more than 300 persons.
(c) DIVIDENDS.
The Company has not declared or paid dividends on its Common Stock, nor
does it anticipate paying any cash dividends in the foreseeable future. The
Company currently intends to retain any future earnings to fund operations and
for the continued development of its business.
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<PAGE>
(d) RECENT SALES OF UNREGISTERED SECURITIES.
On October 10, 1997, the Company issued 28,059 shares of its common stock
in exchange for the extensions of the maturity date to November 5, 1998 on notes
of Skate Corp. The amount was owed based upon 5% of the oustanding principal
balance and payment was made based on $2.24 per share. The Company relied on the
exemption from registration provided by Section 4(6) of the Securities Act
related to the issuance of these shares.
On November 16, 1997, the Company issued 32,230 shares of its common stock
in exchange for the extensions of the maturity date to December 5, 1997 on notes
of Skate Corp. The amount was owed based upon 5% of the outstanding principal
balance and payment was made based on $1.95 per share. The company relied on the
exemption from registration provided by Section 4(6) of the Securities Act
related to the issuance of these shares.
On November 26, 1997, the Company 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 December 11, 1997, the Company issued an aggregate of 7,500 shares to
one present and one former employee of the Company upon the exercise of
previously granted options under the Company's 1994 Stock Option Plan.
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<PAGE>
ITEM 6. 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"). The following
discussion pertains to the business operations for 1996 and 1997 for in-line
skates and snowboards and from May 1996 (the acquisition date of USA Skate) to
September 1, 1997 (the asset disposition date of USA Skate) for ice &
street/roller hockey products.
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
-15-
<PAGE>
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.
MANAGEMENT'S PLAN OF RESTRUCTURE
As a result of the 1996 operating loss of $4,690,853, the Board of
Directors, early in 1997, decided to restructure and de-leverage the Company.
Accordingly, in September 1997, the Company and Skate Corp. sold assets of the
ice hockey related business (including the trademark rights to VIC(R),
VICTORIAVILLE(TM) and McMartin(TM) to Rawlings for $14.5 million and certain
debt assumption. The proceeds of the sale 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. to
unaffiliated noteholders.
As a result of the sale 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 $2,297,000 as
of December 31, 1997.
Having taken major steps to de-leverage the Company 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. in order to generate aggregate proceeds of $1,400,000.
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, Inc. Each part of the Company's
plan is discussed in detail below.
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 is selling 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 has received
commitments to purchase all of the units and the Company anticipates receiving
the proceeds no later than April 30, 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. Effective May 1, 1997 the Company entered into an
agreement through April 30, 2000 with United Merchandising Corp., A California
corporation ("UMC"). The Company granted UMC a non-exclusive, non-transferable
license to manufacture and/or purchase and sell various snowboarding apparel
bearing the name and/or logo of "Kemper", in its retail stores in the United
States. The royalty rate is 7.5% of the cost to UMC with a minimum of $30,000
per annum. UMC has an option to renew for one or two additional years. During
the first contract year (May 1, 1997 through April 30, 1998) the Company
received royalties of approximately $34,300.
-16-
<PAGE>
Effective in February 1998 the Company entered into a two year exclusive
Licensing Agreement with Jaysport International, Inc., a California corporation
("Jaysport"). Subject to the prior sub-license granted to UMC, the Company
sub-licensed to Jaysport the exclusive worldwide right to use the Kemper name
and trademark on snowboards, related equipment, clothing and accessories (the
"Products"). Jaysport has the option to renew the agreement for additional two
year periods thereafter. The agreement includes a royalty payment of 3% of net
sales on all Products with a minimum royalty of $25,000 per annum.
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 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 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.
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. The transaction, which is expected to be completed by mid-summer, 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.
-17-
<PAGE>
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, 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.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128 during 1997. This statement requires dual presentation of basic and
diluted earnings per share ("EPS") with a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS amounts are based on the weighted average
shares of common stock outstanding. Diluted reflects the potential dilution that
could occur if securities other than contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. The Company had no
potential common stock instruments which would result in diluted EPS in 1997 and
1996. The adoption of SFAS No. 128 did not impact previously reported EPS.
The Financial Accounting Standard's Board recently issued SFAS Nos. 130 and
131, "Reporting Comprehensive Income" and "Disclosures about Segments of an
Enterprise and Related Information," respectively. Both of these statements are
effective for fiscal years beginning after December 15, 1997. SFAS No. 130
establishes requirements for disclosure of comprehensive income which includes
certain items previously not included in the statement of income including
minimum pension liability adjustments and foreign currency translation
adjustments, among others. Reclassification of earlier financial statements for
comparative purposes is required. SFAS No. 131 revises existing standards for
reporting information about operating segments and requires the reporting of
selected information in interim financial reports. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. Management believes that implementation of SFAS Nos. 130
and 131 will materially impact the Company's financial statements.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the Company's sales by major product
category for the periods indicated:
Year ended December 31,
1997 1996
----------------- -----------------
(dollars in thousands)
$ % $ %
--- --- --- ---
In-line skates, snowboards
and related accessories $1,311 14% $5,948 35%
Ice and street/roller hockey (1) 7,777 86% 11,005 65%
------ ---- ------- ----
$9,088 100% $16,953 100%
====== ==== ======= ====
(1) Sale of hockey products began May 1, 1996 and ceased on September 12, 1997.
The following table sets forth for the periods indicated the percentages
which selected items in the Consolidated Statements of Operations bear to net
sales:
Year ended
December 31,
-----------------
1997 1996
---- ----
Net Sales 100.0 100.0
Cost of Goods Sold 77.5 82.9
Gross Profit 22.5 17.1
Sales & Marketing Expenses 13.8 14.3
General & Administrative Expenses 41.7 17.9
Depreciation and Amortization 6.9 4.0
Consulting & Management Fees 2.3 1.2
Restructuring Charges 2.6 7.3
Loss from Operations (44.8) (27.7)
Interest and Other Expenses (Income) 22.1 5.5
Income Tax Expense (Benefit) (1.8) (1.4)
Minority Interest 8.0 1.1
Extraordinary Item 4.2 --
----- -----
Net Loss (52.9) (32.8)
===== ======
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales. Net sales for the year ended December 31, 1997 decreased to
$9,087,767 from $16,952,904 or by $7,865,137 representing an approximate
decrease of 46%. This decrease was primarily caused by a reduction of sales of
the Company's hockey products from $11,005,000 in the 1996 period (May 1 through
December 31) to $7,777,000 for the 1997 period (January 1 through August 31).
The reason for the decline in sales of the Company's hockey products was
primarily due to the timing of the Company's majority ownership position. The
1996 (May through December) period included the months when sales activity is
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<PAGE>
highest while the 1997 time of majority ownership (January through August)
excluded some of the historically higher sales months. Additionally, sales for
the Company's in-line skate and snowboard products decreased from $5,948,000 in
the 1996 period to $1,311,000 in the 1997 period. The cause of this decrease
included new competitors entering both the in-line skate and snowboard markets
with new product features that took away market share from the Company. This
significant decrease was a major factor in management's decision to cease
operating its California Pro and Kemper licenses (see Item 1(a) - Business
Development) and to begin to concentrate on sub-licensing its trademark rights.
GROSS PROFIT. Gross profit decreased to $1,642,423 for the year ended
December 31, 1997 compared to $2,891,870 for the year ended December 31, 1996.
As a percent of sales, gross profit increased to 18.2% in 1997 from 17.1% in
1996. The primary reason for the increase in gross profit percentage was the
inventory markdowns and adjustments of $1,059,750 incurred by the Company in
1996 attributable to remaining in-line skate and snowboard inventory. The
Company believes these writedowns and adjustments, which accounted for an
approximate 6.3% decline in its gross profit, were necessary to reflect the then
current market value of its inventory.
SALES AND MARKETING EXPENSES. Sales and marketing expenses decreased to
$1,253,670 for the year ended December 31, 1997, compared to $2,434,255 for the
year ended December 31, 1996. This represents a decrease of $1,180,585 or 48.4%.
Of this decrease, sales and marketing expenses related to the Company's in-line
skate and snowboard business decreased by $1,059,319 to $263,829 in 1997
compared to $1,359,148 in 1996. This decrease was due to management's decision
to cease acting distribution of its California Pro and Kemper licensed products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $3,387,882 for the year ended December 31, 1997, compared to
$3,037,751 for the year ended December 31, 1996. This represents an increase of
$350,131. The primary reason for the increase is attributable to increases in
the following 1997 general and administrative expenses related to USA Skate;
professional fees ($209,250), consulting ($147,375) and bad debt expense
($293,672). Additionally in 1996, USA Skate reduced its accounts receivable
reserve by $208,000. These 1997 increases were partially offset by a reduction
in the Company's general and administrative expenses related to in-line skates
and snowboards of approximately $778,000 due to managements decision to cease
active distribution of its California Pro and Kemper licensed products.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased to
$628,601 for the year ended December 31, 1997 from $681,717 for the year ended
December 31, 1996. The decrease of $53,116 was mainly attributable to decreased
depreciation and amortization of intangible assets as a result of the USA Skate
sale on September 12, 1997.
CONSULTING FEES, RELATED PARTY. Consulting fees, related party increased to
$210,000 for the year ended December 31, 1997 from $200,000 for the year ended
December 31, 1996. The Company pays an officer/stockholder $10,000 per month for
services primarily related to long-term strategic planning, financing and
acquisitions and an additional $5,000 from USA Skate during the time of the
Company's majority ownership position. Another officer/stockholder received
$5,000 per month from USA Skate during the time of the Company's majority
ownership position.
RESTRUCTURING CHARGES. For the year ended December 31, 1997 the Company
recorded a restructuring charge of $237,452 related to the write down of the
Company's investment in Skate Corp. (See Note 4 to the financial statements) For
the year ended December 31, 1996, the Company had restructuring charges of
$1,229,000. These charges related to management's plan for restructuring
operations, whereby, the Company wrote off $411,700 related to certain equipment
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<PAGE>
(molds) for certain of its in-line skate and snowboard product lines.
Additionally, the Company re-evaluated certain trademarks and licenses and other
intangibles and recorded expenses of $368,000 and $205,700, respectively. As
further described in Note 1 to the financial statements, the Company has signed
a distribution agreement with Skate Corp. to distribute California Pro and
Kemper branded products, resulting in the closure of the previous distribution
facility and termination of warehouse employees at an expense of $76,500 and
$22,100, respectively. Finally, the Company wrote off previously deferred
expenses related to a potential acquisition that the Company elected not to
pursue to completion.
LOSS FROM OPERATIONS. For the year ended December 31, 1997, the Company had
a loss from operations of $3,837,730 compared to $4,690,853 for the year ended
December 31, 1996. The decrease in loss of $853,123 was a result of a decrease
in gross profit of $849,447 and an increase in general and administrative of
$853,865, offset by decreases in sales and marketing expenses of $1,180,855, as
described above. Additionally, the restructure charge of $1,229,000 negatively
affected the 1996 results of operations.
OTHER INCOME/EXPENSES. Other expenses for the year ended December 31, 1997
were $2,011,339 compared to $935,848 for the year ended December 31, 1996. The
increase of $1,055,491 was primarily attributable to the loss on the sale of USA
Skate assets (see Note 4 of the financial statements) of $751,522 and other
finance fees for the refinancing of the USA Skate notes of $440,643. These
increases were offset by decreases in interest expense/other of $414,134 and a
gain recorded in 1996 of $479,100 on the book value of Skate Corp. stock held by
California Pro (See Note 4 to the financial statements). The 1996 gain was
offset by a loss on marketable securities of $144,457 (see Note 3 to the
financial statements) that the Company had received in settlement of certain
obligations.
INCOME TAX BENEFIT. For the year ended December 31, 1997, the Company had
an income tax benefit of $166,404 compared to $244,500 for the year ended
December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES. During 1996 and 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
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<PAGE>
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.
At December 31, 1997, the Company had a working capital deficit of
approximately $384,312 compared to $5,264,000 at December 31, 1996. The
reduction in the working capital deficit is primarily related to the sale of USA
Skate as well as converting debt to equity and negotiating settlements at less
than the recorded liability. Management's plans to resolve the Company's
immediate financial difficulties and improve its liquidity position are
described in this section above under Overview and in Note 1 to the financial
statements.
On October 2, 1997, the Company signed a letter of intent to merge with
ImaginOn, Inc. of San Carlos, California, a privately held company.
Subsequently, the Company signed an agreement and plan of merger as of January
30, 1998 whereby there will 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 California Pro. ImaginOn is a developmental stage company engaged in the
business of designing, manufacturing and selling consumer software products for
the rapidly growing "edutainment" CD/DVD ROM market as well as an internet
utility and an authoring tool. ImaginOn's proprietary technology,
Transformational Database Processing and Playback, enables the creation of new
business and consumer products that provide user-friendly and entertaining
access to multimedia and mixed- format databases distributed across local disk
storage and networks.
In addition, the Company announced that the exercise price of its publicly
traded common stock purchase warrants has been reduced from $6.00 to $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.
SEASONALITY. The Company's in-line skate and hockey related sales were
strongest in the second and third quarters of each calendar year. Snowboard
product sales were strongest during the third and fourth quarters of each
calendar year. However, industry trade shows and other sales, marketing and
administrative costs typically precede the strong selling season and, therefore,
the Company anticipates that it may incur a significant loss in the first
quarter of each year, including 1997.
FOREIGN EXCHANGE. The Company's products were principally purchased from
suppliers located in Taiwan, mainland China, Korea, Austria and Canada. The
Company purchased its in-line skate products for set prices negotiated annually
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<PAGE>
in U.S. dollars at exchange rates reset annually. The Company purchased its
snowboards in Deutsche Marks. The Company sold its snowboard and hockey products
both domestically and internationally. As a result, extreme exchange rate
fluctuations could have had a significant effect on its sales, costs of goods
sold and the Company's gross margins.
EFFECT OF INFLATION. Management believes that inflation has not had a
significant impact on its business.
ITEM 7. FINANCIAL STATEMENTS
The Company's audited financial statements, described as follows, are
included in this report following the signature page of this report.
California Pro Sports, Inc. Consolidated Financial Statements
- - -------------------------------------------------------------
Independent auditors' report................................... F-1
Consolidated financial statements:
Balance Sheet at December 31, 1997.......................... F-2
Statements of operations - for the years
ended December 31, 1997 and 1996............................ F-3
Statement of stockholders' equity
for the years ended
December 31, 1997 and 1996................................. F-4
Statements of cash flows - for the years
ended December 31, 1997 and 1996............................ F-8
Notes to consolidated financial statements.................. F-10
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
---------------------------------------------------------------
None
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
-------------------------------------------------------------
(a) IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS.
The officers and directors of the Company are listed below. The directors
of the Company are elected to hold office until the next annual meeting of
stockholders and until their respective successors have been elected and
qualified. Officers of the Company are elected by the Board of Directors and
hold office until their successors are elected and qualified.
The chart below identifies persons who, at any time during the fiscal year,
served as officers and/or directors of the Company.
Name Age Positions
- - ---- --- ---------
Henry Fong 62 Chairman of the Board of Directors
and Chief Executive Officer
Michael S. Casazza 48 President, Chief Operating Officer and
Director, resigned September 1997
Barry S. Hollander 40 Acting President, Treasurer and
Chief Financial Officer
Steve C.Y. Lin 35 Director, resigned June 1997
Brian C. Simpson 64 Director
Hung-Chang Yang 52 Director
Jonathan C. Hodgins 34 President and Chief Executive Officer
of USA Skate, resigned September 1997
HENRY FONG has been the Chief Executive Officer and a director of the
Company since its inception in January 1993. In addition, Mr. Fong serves as a
member of the executive committee of the Company's Board of Directors. Mr. Fong,
a founder of the Company, provides the Company with expertise on long-term
strategic planning, financing and acquisitions, but is not involved in the
Company's day-to-day operations. From 1987 to June 1997, Mr. Fong was chairman
of the board and chief executive officer of RDM Sports Group, Inc. (f/k/a
Roadmaster Industries, Inc. ("RDM")), a New York Stock Exchange listed company,
and was its president and treasurer from 1987 to 1996. Mr. Fong resigned from
his positions with RDM on June 20, 1997 concurrent with the closing of a $100
million refinancing. In August 1997, RDM filed for Chapter 11 bankruptcy. Mr.
Fong has been named as a defendant in a class action suit filed by former RDM
shareholders. Since 1983, Mr. Fong also has served as the President and a
director and is a significant stockholder of Equitex, Inc., a publicly-held
business development company. In March 1994, Mr. Fong was one of twelve CEOs
selected as Silver Award winners in Financial World magazine's Corporate
American "Dream Team."
-24-
<PAGE>
MICHAEL S. CASAZZA, a founder of the Company, was President and a director
of the Company since the Company's inception in 1993 through September 1997. In
addition, Mr. Casazza served as a member of the executive committee of the
Company's Board of Directors until September 1997. Since the Company's inception
through September 1997 he acted as Chief Operating Officer and was formally
designated to that position in September 1994. While a director and officer of
the Company, Mr. Casazza devoted substantially all of his time to the business
of the Company. From 1991 through July 1996, Mr. Casazza served as President,
Chief Executive Officer and a Director of MacGregor Sports & Fitness, Inc.
(subsequently renamed IntraNet Solutions, Inc.), a publicly-held company. From
1988 to 1990, Mr. Casazza served as Vice President/General Manager, Golf
Division for Wilson Sporting Goods Company. From 1972 to 1988, Mr. Casazza held
various positions with Dunlop-Slazenger Corporation, including President of its
Racket Sports Division and National Sales Manager of its Golf Division. Mr.
Casazza resigned from all his positions with the Company in September 1997.
BARRY S. HOLLANDER has served as Treasurer and Chief Financial Officer of
the Company since March 1993 and as Acting President since September 1997. Mr.
Hollander devotes substantially all of his business time to the business of the
Company. From May 1991 through July 1996, Mr. Hollander served as Vice President
of Operations and Chief Financial Officer of MacGregor Sports and Fitness, Inc.
(subsequently renamed IntraNet Solutions, Inc.), a publicly-held company. From
August 1986 to 1989, Mr. Hollander held various positions with MacGregor
Sporting Goods, Inc., including Accounting Manager and Chief Financial Officer
of the Athletic Products Division. Mr. Hollander is a certified public
accountant.
STEVE C.Y. LIN was a director of the Company from May 1994 through June
1997. Since 1989, he also has served as Chairman of the Board of Yuan Fu
Brothers Co. Ltd., a Taiwanese petroleum equipment distribution company, and
executive assistant to the president of Aicello Taiwan Ltd., a Taiwanese
environmental engineering services company. From 1989 until it was dissolved in
1995, Mr. Lin served as chairman of the board of the Company's predecessor,
SCYL. Mr. Lin resigned his position with the Company in June 1997.
BRIAN C. SIMPSON has been a director of the Company since November 1994. In
addition, Mr. Simpson serves as a member of the executive, compensation and
audit committees of the Company's Board of Directors. Since 1992, his principal
occupation has been that of an international management consultant, providing
management support and strategic planning services for various companies,
Dunlop-Slazenger and BTR Industries. From 1989 to 1992, Mr. Simpson served as
Strategic Planning Director on a worldwide basis for Dunlop-Slazenger
International Limited. Prior to 1989, Mr. Simpson served as president of
Dunlop-Slazenger Corporation USA and as regional director, North America for
Dunlop-Slazenger Corporation International Limited, UK. Mr. Simpson has
extensive experience in sales, licensing, distribution and manufacturing, both
nationally and internationally, in the sporting goods business.
HUNG-CHANG (HERO) YANG was elected as a director of the Company in November
1994. In addition, Mr. Yang serves as a member of the compensation and audit
committees of the Company's Board of Directors. Since 1984, Mr. Yang's principal
occupation has been that of president of Precision Golf Associates, Ltd., a
-25-
<PAGE>
Taiwanese company which engages in the manufacture and sale of golf equipment.
From time-to-time, Mr. Yang has served as an unpaid consultant to the Company in
areas such as quality control of products and components.
JONATHAN C. HODGINS joined the Company in September 1996 as President and
Chief Executive Officer of USA Skate. Mr. Hodgins was the principal person
responsible for the Company's hockey division. He has extensive experience in
developing sporting goods sales through marketing, research and development,
team sales, offshore licensing, sales forecasting and budgeting. From 1990 until
he joined the Company in September 1996, Mr. Hodgins was employed by CCM/Sports
Maska, Inc., Saint Laurent, Quebec, Canada in various management and executive
capacities. From 1986 to 1990, Mr. Hodgins was employed by Canstar Sports Group
Inc., Missasauga, Ontario, Canada, in product management. Mr. Hodgins earned a
Bachelor of Arts degree in business administration from the University of
Western Ontario in 1985. Mr. Hodgins resigned his position in September 1997.
(b) SIGNIFICANT EMPLOYEES.
None.
(c) FAMILY RELATIONSHIPS.
None.
(d) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS.
None.
(e) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the officers and directors of the Company and persons
who own more than ten percent of a registered class of the Company's securities
(collectively, "reporting persons"), to file reports of ownership and changes in
ownership on Forms 3, 4, and 5 with the Securities and Exchange Commission
("SEC"). Reporting Persons are required by SEC regulation to furnish the Company
with copies of all Forms 3, 4, and 5 filed.
Based solely upon a review of the copies of such forms it has received and
representations from the Reporting Persons, the Company believes all reporting
persons have complied with the applicable filing requirements, except that Mr.
Casazza filed three late Forms 4 reporting transactions in the Company's common
stock.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
SUMMARY COMPENSATION TABLE.
The following table sets forth information regarding compensation
paid to (i) the Company's Chief Executive Officer and (ii) each of its other
executive officers whose total annual compensation exceeded $100,000 for the
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<PAGE>
years ended December 31, 1995, 1996 and 1997. No executive officer received
awards or payments of any long-term compensation from the Company during the
period covered.
<TABLE>
<CAPTION>
Annual Long Term All Other
Compensation Compensation Compensation
--------------------------------------- ------------ ------------
($$) ($$)
Securities
Underlying
Name and Position Year Salary Bonus Other Options
- - ----------------- ---- ------ ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Henry Fong, ................... 1997 165,000(1) -0- -0- -0- -0-
Chief Executive Officer ....... 1996 160,000(1) -0- -0- -0- $300,000(3)
and Chairman of the Board ..... 1995 120,000(1) -0- -0- 150,000(2) -0-
Michael S. Casazza, ........... 1997 157,500 413,000(4) -0- -0- -0-
President, Chief .............. 1996 190,000 -0- -0- -0- $300,000(3)
Operating Officer & Director .. 1995 137,000 -0- -0- 150,000(2) -0-
Resigned September 1997
Barry S. Hollander, ........... 1997 117,738 -0- -0- -0- -0-
Acting President, Treasurer and 1996 125,000 -0- -0- -0- -0-
Chief Financial Officer ....... 1995 116,923 -0- -0- -0- -0-
- - ------------
</TABLE>
(1) Mr. Fong is not an employee of the Company and he receives fees of $10,000
per month for consulting services rendered to the Company and received an
additional $5,000 per month from USA Skate effective May 1, 1996 through
September 1997, primarily related to long-term strategic planning,
financing and acquisitions and is not involved in the day-to-day operations
of the Company. $30,000 of Mr. Fong's salary was non-cash and was paid
through common stock of the Company. An additional $14,000 of Mr. Fong's
salary remains unpaid and is an accrued liability of the Company.
(2) Warrants granted in 1995 were repriced during 1996 from $4.50 and $3.56 per
share to $2.38 per share, representing market value at the time of
repricing.
(3) Represents Guaranty fees accrued in connection with the USA Skate
acquisition. These fees were paid at December 31, 1996 in shares of common
stock based on a price of $1.375 per share, the December 31, 1996 market
price.
(4) Represents a bonus of 236,000 shares of common stock of the Company for,
among other things, the forgiveness of the remaining amount of $149,000 of
the $400,000 promissory note, making other loans to the Company and/or its
subsidiaries in order for the Company to meet immediately due obligations,
and his efforts in negotiating and moving the USA Skate asset sale forward
to completion, as well as for his past services to the Company.
OPTION/SAR GRANTS IN LAST FISCAL YEAR.
During 1997, 85,000 incentive stock options were granted at an exercise
price of $1.00 to Mr. Hollander under the Company's 1994 Stock Option Plan.
-27-
<PAGE>
AGGREGATED OPTION/SAR EXERCISES AND YEAR-END 1997 OPTION/SAR VALUES.
The following table sets forth information concerning the value of
unexercised options held by each of the named executive officers at December 31,
1997. No stock appreciation rights are outstanding and no options were exercised
by the named officers during 1997.
Number of Value of
Securities Underlying Unexercised
Unexercised Options In-the-Money options
at December 31, 1997 (#) at December 31, 1997 (#)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- - ---- ------------------------- -------------------------
Henry Fong 298,600/0 $0/0
Michael S. Casazza 201,400/0 $0/0
Barry S. Hollander 105,000/0 $37,188/0
COMPENSATION OF DIRECTORS. During 1997, Messrs. Lin, Simpson and Yang, the
outside directors of the Company, received a retainer of $10,000 per year, paid
quarterly, and $1,000 for each Board of Directors meeting attended in person. In
addition, they are reimbursed for expenses incurred to attend meetings of the
Board of Directors or otherwise in connection with their services as directors
of the Company. Directors also are eligible to receive grants of stock options
under the Company's 1994 Stock Option Plan. During 1997, 10,000 incentive stock
options were granted to the then outside directors of the Company at an exercise
price of $1.00.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Set forth below is certain information as of February 28, 1998, with
respect to ownership of the Company's Common and Preferred Stock held of record
or beneficially by (i) the Company's executive officers named in the summary
compensation table, (ii) each director of the Company, (iii) each person who
owns beneficially more than five percent of the Company's outstanding Common and
Preferred Stock; and (iv) all directors and executive officers as a group:
<TABLE>
<CAPTION>
Percentage Percentage
Number of Owned of Number of Owned of
Name and Address Common Common Preferred Preferred
of Beneficial Owner Shares Owned Shares Shares Owned Shares
- - ------------------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Henry Fong ................. 898,715 (1) 12.4 30,167 2.7
2401 PGA Blvd., Suite 280F
Palm Beach Gardens, FL 33410
</TABLE>
-28-
<PAGE>
<TABLE>
<CAPTION>
Percentage Percentage
Number of Owned of Number of Owned of
Name and Address Common Common Preferred Preferred
of Beneficial Owner Shares Owned Shares Shares Owned Shares
- - ------------------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Michael S. Casazza 422,087 (2) 5.9 -- --
1221-B South Batesville Road
Greer, South Carolina 29650
Resource Preservation, LLC(5) 526,280 7.6 26,660 2.4
c/o Fred LeBaron
Ross & Hardies
150 N. Michigan Ave.
Suite 2500
Chicago, IL 60601
CLB Investment Corp.(6) -- -- 228,606 20.4
c/o Dave Schaper
11 Oxford Drive
Lincolnshire, IL 60069
Barry S. Hollander (Officer) 78,500 (3) 1.1 18,500 1.7
1221-B South Batesville Road
Greer, South Carolina 29650
Brian C. Simpson -- -- -- --
15 Langhams Way
Wargrave, Berkshire
RG 10 8AX U.K.
Hung-Chang Yang (Director) 15,000 (4) .2 -- --
First Floor, No. 16
Lane 238
Taipei, Taiwan
USA Skate Corporation(7)(8) 360,000 5.2 750,471 67.1
1221-B South Batesville Road
Greer, SC 29650
All directors and executive 992,215 (1)(3)(4) 13.6 48,667 4.4
officers as a group(4 persons)
- - ----------
</TABLE>
(1) Includes warrants currently exercisable to acquire 298,600 shares of Common
Stock and 148,636 shares of Common Stock owned by a charitable trust of
which Mr. Fong and his spouse are trustees.
(2) Includes warrants currently exercisable to acquire 201,400 shares of Common
Stock.
(3) Includes options currently exercisable to acquire 49,500 shares of Common
Stock.
(4) Includes options currently exercisable to acquire 15,000 shares of Common
Stock.
-29-
<PAGE>
(5) Fred LeBaron controls the voting of the shares of Resource Preservation,
LLC.
(6) Dave Schaper, president of CLB Investment Corp., controls the voting shares
of this entity.
(7) CalPro controls the voting of the shares of USA Skate Corporation
(8) As long as CalPro owns a majority of the shares of USA Skate Corporation
("USA Skate") entitled to vote in the election of directors of USA Skate,
the shares of CalPro held by USA Skate shall neither be entitled to vote
nor be counted for quorum purposes.
CHANGES IN CONTROL. None.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
In April 1994, the Company issued warrants to Henry Fong, a founder of the
Company, to purchase up to 148,600 shares of Common Stock and issued warrants to
Michael S. Casazza, a founder of the Company, to purchase up to 51,400 shares of
Common Stock, exercisable at $4.50 per share through April 14, 1997 (the "April
Warrants"). In August 1995, the Company issued warrants to Messrs. Fong and
Casazza each to purchase up to 150,000 shares of Common Stock, exercisable at
$3.56 per share through August 1, 1998 (the "August Warrants"). The exercise
price of these warrants represented 100% of the closing bid price of the Common
Stock as reported by Nasdaq on the date of grant. The warrants issued to Messrs.
Fong and Casazza in April 1994 and August 1995 were issued as additional
compensation for their valuable services rendered to the Company. In April 1996,
as compensation for their extra efforts in causing the USA Skate acquisition to
close, the Company lowered the exercise price of all of the warrants held by
Messrs. Fong and Casazza to $2.38 per share, the closing bid price of the Common
Stock on the date the warrants were repriced. Additionally, the exercise date
for the April Warrants was extended to April 14, 2002 and the exercise date for
the August Warrants was extended to August 1, 2003.
At December 31, 1995, the Company owed Mr. Fong $90,000 of accrued but
unpaid fees. During the second quarter of 1996, the Company transferred 75,000
shares of USA Skate common stock to Mr. Fong in satisfaction of this debt, based
on a price of $1.20 per share of USA Skate common stock.
Messrs. Fong and Casazza have personally guaranteed the Company's in-line
skate/snowboard related bank line of credit up to $5.5 million and its hockey
related bank line of credit up to $5 million. In addition, Messrs. Fong and
Casazza have each guaranteed, jointly and severally with other guarantors, an
additional $5.25 million of indebtedness of the Company incurred in connection
with the USA Skate acquisition, and Messrs. Fong and Casazza have guaranteed,
jointly and severally with another guarantor, approximately CDN $650,000 owed by
the Canadian subsidiary to a Canadian bank. The Company has accrued fees of
$300,000 each for Messrs. Fong and Casazza as compensation for their extensive
personal guaranties. As of December 31, 1996 Messrs. Fong and Casazza agreed to
accept payment of these fees in common stock of the Company based on the
December 31, 1996 market price of $1.375 per share.
-30-
<PAGE>
In March 1996, the Chief Operating Officer loaned the Company $170,000.
During the second quarter of 1996, the Company transferred 141,667 shares of USA
Skate common stock to Mr. Casazza in satisfaction of this debt, based on a price
of $1.20 per share of USA Skate common stock. In May 1997, the 141,667 shares of
USA Skate common stock were returned to the Company in exchange for 170,000
shares of common stock of the Company.
In May 1996, Mr. Fong loaned $680,000, and Mr. Casazza loaned $400,000 to
the Company's majority owned subsidiary, which funds were used to pay a portion
of the purchase price for the USA Skate acquisition. In return for these loans,
the subsidiary issued promissory notes for the principal amount of each loan
with interest at nine percent payable quarterly, due July 1, 1997. In addition,
the subsidiary granted warrants to Mr. Fong to purchase 566,667 shares of USA
Skate common stock and to Mr. Casazza to purchase 333,333 shares of USA Skate
common stock, all exercisable through April 30, 1998 at $1.20 per share of USA
Skate common stock.
In December 1996, Mr. Fong agreed to convert $60,000 owed to him by the
Company for consulting services for the period July 1 through December 31, 1996
into shares of the Company, at the December 31, 1996 market price of $1.375 per
share.
In March 1997, Mr. Fong agreed to convert $30,000 owed to him by the
Company for consulting services for the period January 1, 1997 through March 31,
1997, and $10,000 for a note payable into shares of the Company, at the March
31, 1997 market price of $1.00 per share.
In September 1997, Mr. Fong agreed to convert $181,000 owed to him by the
Company, for a note payable of the Company, assumed by Mr. Fong, at the
September 30, 1997 market price of $2.00 per share. In December 1997, Mr. Fong
agreed to convert the common shares issued September 30, 1997 to Series A
Preferred Shares of the Company. The Series A Preferred Shares are entitled to
three votes for each preferred share on any matter submitted to the stockholders
of the Company, and every preferred share shall immediately and automatically
convert to three shares of common stock upon stockholder approval of a
recapitalization measure.
In September 1997, the Company awarded Mr. Casazza a bonus of 236,000
shares of common stock (at a value of $1.75 per share, a discount of $.031 from
the September 11, 1997 market price of $1,781) of the Company for, among other
things, the forgiveness of the remaining amount of $149,000 of the $400,000
promissory note, making other loans to the Company and/or its subsidiaries in
order for the Company to meet immediately due obligations, and his efforts in
negotiating and moving the USA Skate asset sale forward to completion, as well
as for his past services to the Company. Additionally, Mr. Casazza resigned from
all positions effective with the completion of the sale of USA Skate, however he
agreed to assist, as requested and act as a consultant to the Company.
From time to time as deemed appropriate and in amounts determined by the
Company's Board of Directors, fees may be paid by the Company to persons who
facilitate acquisitions and/or financing transactions for the Company, which
persons may be directors and/or officers of the Company.
Transactions between the Company and its officers, directors, employees and
affiliates will be on terms no less favorable to the Company than would be
available from unaffiliated parties. Any such transactions will be subject to
the approval of a majority of the disinterested members of the Board of
Directors.
-31-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) EXHIBITS.
Exhibits being filed herewith are listed below.
Number Description
------ -----------
3.1 Certificate of Incorporation of the Registrant.
(INCORPORATED BY REFERENCE TO EXHIBIT 3.1 TO THE
REGISTRANT'S REGISTRATION STATEMENT ON FORM SB-2,
REGISTRATION NO. 33-85108 AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION "SEC" ON OCTOBER 13, 1994 (THE "1994
REGISTRATION STATEMENT").)
3.2 Bylaws as currently in effect. (INCORPORATED BY REFERENCE TO
EXHIBIT 3.2 TO THE 1994 REGISTRATION STATEMENT.)
4.1 Specimen of Common Stock certificate. (INCORPORATED BY
REFERENCE TO EXHIBIT 4.1 TO AMENDMENT NO. 4 TO THE 1994
REGISTRATION STATEMENT, FILED WITH THE SEC ON DECEMBER 22,
1994 (" 1994 AMENDMENT #4).)
10.1 Manufacturing Agreement, dated April 1, 1993, between the
Registrant and Playmaker. (INCORPORATED BY REFERENCE TO
EXHIBIT 10.2 TO THE 1994 REGISTRATION STATEMENT.)
10.2 Exclusive License Agreement, dated April 1, 1993, between
the Registrant and Playmaker. (INCORPORATED BY REFERENCE TO
EXHIBIT 10.4 TO THE 1994 REGISTRATION STATEMENT.)
10.3(a) Indemnity letter agreement, dated April 1, 1993, between the
Registrant and Playmaker. (INCORPORATED BY REFERENCE TO
EXHIBIT 10.8(A) TO THE 1994 REGISTRATION STATEMENT.)
10.3(b) Patent License Agreement, dated April 1, 1993 and Assignment
thereof. (INCORPORATED BY REFERENCE TO EXHIBIT 10.8(B) TO
THE 1994 REGISTRATION STATEMENT.)
10.4 Loan and Security Agreement, dated April 1, 1993, with
LaSalle National Bank, N.A. ("Loan Agreement").
(INCORPORATED BY REFERENCE TO EXHIBIT 10.10 TO THE 1994
REGISTRATION STATEMENT.)
10.5(a) Amendment, dated June 15, 1994, to Loan Agreement.
(INCORPORATED BY REFERENCE TO EXHIBIT 10.10(A) TO AMENDMENT
NO. 1 TO THE 1994 REGISTRATION STATEMENT, FILED WITH THE SEC
ON OCTOBER 28, 1994 ("1994 AMENDMENT #1).)
10.5(b) Consent and Amendment, dated August 3, 1994, to Loan
Agreement. (INCORPORATED BY REFERENCE TO EXHIBIT 10.10(B) TO
1994 AMENDMENT #1.)
-32-
<PAGE>
Number Description
------ -----------
10.5(c) Amendment, dated August 30, 1995, to Loan Agreement.
(INCORPORATED BY REFERENCE TO EXHIBIT 10.10(C) TO
REGISTRATION STATEMENT ON FORM SB-2, REGISTRATION NO.
33-98898 ("REGISTRATION STATEMENT 33-98898.")
10.6 Demand Note, dated April 1, 1993. (INCORPORATED BY REFERENCE
TO EXHIBIT 10.11 TO THE 1994 REGISTRATION STATEMENT.)
10.7 Continuing Unconditional Guaranties, dated April 1, 1993, of
Henry Fong and Michael S. Casazza. (INCORPORATED BY
REFERENCE TO EXHIBIT 10.12 TO THE 1994 REGISTRATION
STATEMENT.)
10.8 Letter Agreement, dated April 1, 1993, from the Registrant
to LaSalle. (INCORPORATED BY REFERENCE TO EXHIBIT 10.13 TO
THE 1994 REGISTRATION STATEMENT.)
10.9 1994 Stock Option Plan. (INCORPORATED BY REFERENCE TO
EXHIBIT 10.14 TO THE 1994 REGISTRATION STATEMENT.)
10.10 License Agreement, dated July 28, 1994, between Front 500
Corporation and CP. (INCORPORATED BY REFERENCE TO EXHIBIT
10.16 TO THE 1994 REGISTRATION STATEMENT.)
10.11 Exclusive Distributorship Agreement, dated March 1994, with
Maneuverline Co. Ltd. (INCORPORATED BY REFERENCE TO EXHIBIT
10.20 TO THE 1994 REGISTRATION STATEMENT.)
10.12 Exclusive Distributorship Agreement, dated March 1, 1991,
with Airtool Ltd. (Incorporated by reference to Exhibit
10.21 to the 1994 Registration Statement.)
10.13 Exclusive Distributorship Agreement, dated June 15, 1994,
with Wolf Strobel Sportswear GMBH. (INCORPORATED BY
REFERENCE TO EXHIBIT 10.22 TO THE 1994 REGISTRATION
STATEMENT.)
10.14 License Agreement, dated May 10, 1995, granted by California
Pro, Inc. to Big5 Co., Ltd. (INCORPORATED BY REFERENCE TO
EXHIBIT 10.23 IN REGISTRATION STATEMENT 33-98898.)
10.15 Form of Warrant related to the Registrant's issuance of
warrants to purchase up to 200,000 shares of Common Stock.
(INCORPORATED BY REFERENCE TO EXHIBIT 10.29(A) TO THE 1994
REGISTRATION STATEMENT.)
10.16 Form of Warrant related to the issuance of warrants to
purchase up to 21,000 shares of Common Stock. (INCORPORATED
BY REFERENCE TO EXHIBIT 10.29(C) TO 1994 AMENDMENT #1.)
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<PAGE>
Number Description
------ -----------
10.17 Form of Indemnity Agreements for the Registrant's directors
and officers. (INCORPORATED BY REFERENCE TO EXHIBIT 10.31 TO
THE 1994 REGISTRATION STATEMENT.)
10.18 Lease Agreement, dated February 16, 1993, for office space,
as amended by letter agreement dated February 16, 1994.
(INCORPORATED BY REFERENCE TO EXHIBIT 10.32 TO THE 1994
REGISTRATION STATEMENT.)
10.19 Patent License Agreement, with Out of Line Sports, Inc.
dated as of September 30, 1994. (INCORPORATED BY REFERENCE
TO EXHIBIT 10.33 TO THE 1994 REGISTRATION STATEMENT.)
10.20 Trademark License Agreement, dated as of September 30, 1994.
(INCORPORATED BY REFERENCE TO EXHIBIT 10.34 TO THE 1994
REGISTRATION STATEMENT.)
10.21 Agreement, dated October 31, 1994, between California Pro
Sports, Inc. and Playmaker related to royalty payments.
(INCORPORATED BY REFERENCE TO EXHIBIT 10.35 TO AMENDMENT NO.
2 TO THE REGISTRATION STATEMENT, FILED WITH THE SEC ON
NOVEMBER 16, 1994 ("1994 AMENDMENT #2").)
10.22 Form of Warrant related to the Registrant's issuance of
warrants to purchase up to 300,000 shares of Common Stock.
(INCORPORATED BY REFERENCE TO EXHIBIT 10.37 IN REGISTRATION
STATEMENT 33-98898.)
10.23 Letter Agreement dated August 24, 1995 among the Registrant
and Warren Amendola, Patricia Amendola, Three R Sales, Inc.,
Three R Profit Sharing Retirement Plan and USA Skate
Company, Inc. (Incorporated by reference to Exhibit 10.38 in
Registration Statement 33-98898.)
10.24 Form of Warrant related to the Registrant's issuance of
warrants to purchase up to 150,000 shares of Common Stock
with Registration Rights Agreement. (INCORPORATED BY
REFERENCE TO EXHIBIT 10.39 IN REGISTRATION STATEMENT 33-
98898.)
10.25 Stock Purchase Agreement effective as of April 30, 1996 by
and among Warren Amendola, Sr., Patricia Amendola, Three R
Profit Sharing Retirement Plan, Warren Amendola, Jr.,
Richard Amendola and Russell Amendola, as sellers, and USA,
as purchaser, and the Registrant, including the following
exhibit agreements thereto. (INCORPORATED BY REFERENCE TO
EXHIBIT 10.1 TO THE REGISTRANT'S FORM 8-K, FILED MAY 30,
1996, REPORTING AN EVENT ON MAY 15, 1996, COMMISSION FILE
NO. 0-25114 (THE "1996 FORM 8- K").)
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<PAGE>
Number Description
------ -----------
10.26(a) Exhibit A - USA's Promissory Note to sellers in the
principal amount of $1,050,000, with related Guaranty.
(INCORPORATED BY REFERENCE TO EXHIBIT 10.1(A) TO THE 1996
FORM 8-K.)
10.26(b) Exhibit B - License Agreement from Warren Amendola, Sr. to
USA Skate, with related Guaranty. (INCORPORATED BY REFERENCE
TO EXHIBIT 10.1(B) TO THE 1996 FORM 8-K.)
10.26(c) Exhibit C - Consulting and Non-Competition Agreement among
Warren Amendola, Sr., USA and the Registrant, with related
Guaranty. (INCORPORATED BY REFERENCE TO EXHIBIT 10.1(C) TO
THE 1996 FORM 8-K.)
10.26(d) Exhibit D - Escrow Agreement by and among Warren Amendola,
Sr., USA, the Registrant and Blau, Kramer, Wactlar &
Lieberman, P.C. (INCORPORATED BY REFERENCE TO EXHIBIT
10.1(D) TO THE 1996 FORM 8-K.)
10.26(e)(1) Exhibit E1 - Employment Agreement between USA Skate and
Warren Amendola, Sr. (INCORPORATED BY REFERENCE TO EXHIBIT
10.1(E)(1) TO THE 1996 FORM 8-K.)
10.26(e)(2) Exhibit E2 - Non-Disclosure and Non-Competition Agreement by
and among Warren Amendola, Jr., USA Skate, USA and the
Registrant. (INCORPORATED BY REFERENCE TO EXHIBIT 10.1(E)(2)
TO THE 1996 FORM 8-K.)
10.26(e)(3) Exhibit E3 - Non-Disclosure and Non-Competition Agreement by
and among Richard Amendola, USA Skate, USA and the
Registrant. (INCORPORATED BY REFERENCE TO EXHIBIT 10.1(E)(3)
TO THE 1996 FORM 8-K.)
10.26(f) Exhibit F - Registration Rights Agreement by and among the
sellers and USA, with related Guaranty. (INCORPORATED BY
REFERENCE TO EXHIBIT 10.1(F) TO THE 1996 FORM 8-K.)
10.26(g) Exhibit G - Guaranty for the benefit of Patricia Amendola.
(INCORPORATED BY REFERENCE TO EXHIBIT 10.1(G) TO THE 1996
FORM 8-K.)
10.26(h) Exhibit H - Davtec's Promissory Note to Warren Amendola, Sr.
in the principal amount of $125,000, with related Guaranty.
(INCORPORATED BY REFERENCE TO EXHIBIT 10.1(H) TO THE 1996
FORM 8-K.)
10.27(a) Loan and Security Agreement between USA Skate and LaSalle
National Bank (the "USA Skate Loan Agreement) (INCORPORATED
BY REFERENCED TO EXHIBIT 10.27(A) TO THE COMPANY'S FORM
10-KSB FOR THE YEAR ENDED DECEMBER 31, 1996 (THE "1996 FORM
10-KSB").)
-35-
<PAGE>
Number Description
------ -----------
10.27(b) Demand Note related to the USA Skate Loan Agreement.
(INCORPORATED BY REFERENCE TO EXHIBIT 10.2(A) TO THE 1996
FORM 8-K.)
10.27(c)(1) Guaranty of the USA Skate Loan by the Registrant, California
Pro, Inc. and USA. (INCORPORATED BY REFERENCE TO EXHIBIT
10.27(C)(1) TO THE 1996 FORM 10-KSB.)
10.27(c)(2) Guaranty of the USA Skate Loan by Henry Fong. (INCORPORATED
BY REFERENCE TO EXHIBIT 10.27(C)(2) TO THE 1996 FORM
10-KSB.)
10.27(c)(3) Guaranty of the USA Skate Loan by Michael Casazza.
(INCORPORATED BY REFERENCE TO EXHIBIT 10.27(C)(3) TO THE
1996 FORM 10-KSB.)
10.27(d) Letter from the Registrant, USA and Three R Sales, Inc. to
LaSalle National Bank. (INCORPORATED BY REFERENCE TO EXHIBIT
10.2(C) TO THE 1996 FORM 8-K.)
10.28(a) Letter Amendment, dated as of April 30, 1996, to the Loan
Agreement dated April 1, 1993 between California Pro, Inc.
and LaSalle National Bank, as amended (the "CP Loan").
(INCORPORATED BY REFERENCE TO EXHIBIT 10.3(A) TO THE FORM
8-K.)
10.28(b) Guaranty of the CP Loan by USA Skate. (Incorporated by
reference to Exhibit 10.3(b) to the 1996 Form 8-K.)
10.29 Lease Agreement, dated November 1, 1996, between Philip
Calabrese and USA Skate Co., Inc. (INCORPORATED BY REFERENCE
TO EXHIBIT 10.31 IN REGISTRATION STATEMENT 33-98898.)
10.30(a) Asset Purchase Agreement, dated September 10, 1997 by and
among Les Equipements Sportifs Davtec Inc., USA Skate Co.,
Inc., USA Skate Corporation, the Registrant, Rawlings Canada
Inc. and Rawlings Sporting Goods Company, Inc. (INCORPORATED
BY REFERENCE TO EXHIBIT 10.1(A) TO REGISTRANT'S FORM 8-K,
FILED SEPTEMBER 29, 1997, REPORTING AN EVENT ON SEPTEMBER
12, 1997, COMMISSION FILE NO. 0-25114 (THE "1997 FORM
8-K").)
10.30(b) Exhibit A - Escrow Agreement, dated September 12, 1997 by
and among Les Equipements Sportifs Davtec Inc., USA Skate
Co., Inc., Rawlings Canada Inc., Rawlings Sporting Goods
Company, Inc. and the Bank of New York. (INCORPORATED BY
REFERENCE TO EXHIBIT 10.1(B) TO REGISTRANT'S 1997 FORM 8-K.)
10.30(c) Exhibit C - Guaranty, dated September 12, 1997 for Rawlings
Canada Inc. and Rawlings Sporting Goods Company, Inc.
(INCORPORATED BY REFERENCE TO EXHIBIT 10.1(C) TO
REGISTRANT'S 1997 FORM 8-K.)
-36-
<PAGE>
Number Description
------ -----------
10.31 Agreement and Plan of Merger, dated January 30, 1998 by and
among the Registrant, ImaginOn, Inc. and ImaginOn
Acquisition Corp. (INCORPORATED BY REFERENCE TO EXHIBIT
10.31 TO THE COMPANY'S FORM 10-KSB FOR THE YEAR ENDED
DECEMBER 31, 1997 (THE "1997 FORM 10-KSB").)
10.32 Licensing Agreement, effective May 1, 1997, by and among the
Registrant and United Merchandising Corp. FILED HEREWITH.
10.33 Licensing Agreement, effective April 1, 1997, by and among
the Registrant and Jaysport International, Inc. . FILED
HEREWITH.
11.1 Statement Re: Computation of Per Share Earnings.
(INCORPORATED BY REFERENCE TO EXHIBIT 11.1 TO THE 1997 FORM
10-KSB)
21.1 List of Subsidiaries. (INCORPORATED BY REFERENCE TO EXHIBIT
21.1 IN REGISTRATION STATEMENT 33-98898.)
27.1 Financial Data Schedule. (INCORPORATED BY REFERENCE TO
EXHIBIT 27.1 TO THE 1997 FORM 10-KSB)
(b) REPORTS ON FORM 8-K.
None.
-37-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CALIFORNIA PRO SPORTS, INC.
Date: October 23, 1998 /s/ Barry S. Hollander
-----------------------------------------
Barry S. Hollander, Acting President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Date: October 23, 1998 /s/ Henry Fong
-----------------------------------------
Henry Fong, Chief Executive
Officer and Director
Date: October 23, 1998 /s/ Barry S. Hollander
-----------------------------------------
Barry S. Hollander, Chief Financial
Officer and Principal Accounting Officer
Date: October 23, 1998 /s/ Brian C. Simpson
-----------------------------------------
Brian C. Simpson, Director
Date: October 23, 1998 /s/ Hung-Chang Yang
-----------------------------------------
Hung-Chang Yang, Director
-38-
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
California Pro Sports, Inc.
We have audited the accompanying consolidated balance sheet of California Pro
Sports, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the two-year period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of California Pro
Sports, Inc. and subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that California Pro Sports, Inc. will continue as a going concern. As more fully
described in Note 1, the Company incurred significant recurring operating losses
in 1997 and 1996, has a working capital deficiency and has an accumulated
deficit at December 31, 1997. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans with regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
GELFOND HOCHSTADT PANGBURN & CO.
Denver, Colorado
April 14, 1997
F-1
<PAGE>
CALIFORNIA PRO SPORTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997
Assets
------
<TABLE>
<CAPTION>
Unaudited
pro forma Historical
--------- ----------
(Note 4)
<S> <C> <C>
Current assets:
Cash ............................................ $ 1,413,969 $ 13,969
Accounts receivable, less allowance
for doubtful accounts of $216,000:
Trade ......................................... 10,000 10,000
Related parties ............................... 131,270 131,270
Other ......................................... 90,000 90,000
Prepaid expenses and other ...................... 28,141 28,141
Assets of subsidiary held for sale (Note 4) ..... 1,104,527
------------ ------------
Total current assets ........................ 1,673,380 1,377,907
------------ ------------
Furniture and equipment, net of accumulated
depreciation of $319,866 ............................. 153,387 153,387
------------ ------------
Intangible assets, net of accumulated
amortization of $ 66,137:
Trademark license and other costs ............... 546,212 546,212
Goodwill ........................................ 191,121
------------ ------------
546,212 737,333
------------ ------------
$ 2,372,979 $ 2,268,627
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses ........... $ 64,393 $ 64,393
Liabilities of subsidiary held for sale (Note 4) 1,714,139
------------ ------------
Total liabilities (all current) ............. 64,393 1,778,532
------------ ------------
Minority interest ..................................... 385,149
------------ ------------
Commitments and contingencies (Notes 4, 5, and 11)
Shareholders' equity (Note 7):
Preferred stock, $0.01 par value, authorized
5,000,000 shares; issued 1,099,685 ............ 10,997 10,997
Common stock, $0.01 par value, authorized
10,000,000 shares; issued 6,734,430 .......... 67,344 67,344
Warrants ........................................ 394,200 394,200
Options ......................................... 1,310,000
Capital in excess of par ........................ 11,080,758 11,080,758
Accumulated deficit ............................. (10,554,713) (10,554,713)
Treasury stock held by subsidiary; consisting of
750,471 shares of preferred stock; 360,000
shares of common stock ....................... (893,640)
------------ ------------
Total shareholders' equity .................. 2,308,586 104,946
------------ ------------
$ 2,372,979 $ 2,268,627
============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Net sales ..................................................... $ 9,087,767 $ 16,952,904
------------ ------------
Cost of sales:
Substantially from a related party (Note 1) ............. 3,148,423
Others .................................................. 7,445,344 9,852,861
Inventory markdowns and adjustments ..................... 1,059,750
------------ ------------
7,445,344 14,061,034
------------ ------------
Gross profit .......................................... 1,642,423 2,891,870
------------ ------------
Operating expenses:
Sales and marketing expenses ............................ 1,253,670 2,434,255
General and administrative expenses ..................... 3,387,882 3,037,751
Depreciation and amortization ........................... 628,601 681,717
Consulting fees, related party (Note 5) ................. 210,000 200,000
Restructuring and impairment charges (Note 11) .......... 237,452 1,229,000
------------ ------------
Total operating expenses ...................................... 5,717,605 7,582,723
------------ ------------
Loss from operations .......................................... (4,075,182) (4,690,853)
------------ ------------
Other expenses (income):
Interest expense:
Related parties ....................................... 297,338 305,947
Other ................................................. 669,140 1,083,274
Foreign currency (gains) losses ......................... (59,791) 44,012
Royalty and other income ................................ (62,312) (51,376)
Loss on marketable securities (Note 3) .................. 62,392 144,457
Gain on sale of investment in subsidiary (Note 4) ....... (87,593) (111,366)
Gain from issuance of common stock by subsidiary (Note 4) (479,100)
Finance fees (Note 4) ................................... 440,643
Loss on sale of USA Skate assets (Note 4) ............... 751,522
------------ ------------
2,011,339 935,848
------------ ------------
Loss before income taxes and minority interest ................ (6,086,521) (5,626,701)
Income tax benefit (Note 6) ................................... (166,404) (244,500)
------------ ------------
Loss before minority interest ................................. (5,920,117) (5,382,201)
Minority interest ............................................. (727,197) 193,681
------------ ------------
Loss before extraordinary item ................................ (5,192,920) (5,575,882)
Extraordinary item (Note 9) ................................... 383,705
------------ ------------
Net loss ...................................................... $ (4,809,215) $ (5,575,882)
============ ============
Loss per share:
Before extraordinary item $ (0.94) $ (1.37)
Extraordinary item 0.07
------------ ------------
Loss per common share ......................................... $ (0.87) $ (1.37)
============ ============
Weighted average number of shares outstanding ................. 5,544,833 4,078,864
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Preferred Stock Warrants
-------------------------- -------------------------- -----------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1996 ...... 3,783,511 $ 37,835 $ 394,200
Issuance of 400,000 shares
of common stock (Note 7) ...... 400,000 4,000
Issuance of 36,000 shares of
common stock in settlement of an
account payable (Note 7) ...... 36,000 360
Issuance of 480,000 shares of
common stock in
settlement of payables to
officers/shareholders (Note 7) 480,000 4,800
Net loss for 1996 ..............
Cumulative foreign currency
translation adjustment ........
----------- ----------- ----------- ----------- -----------
Balances, December 31, 1996 .... 4,699,511 46,995 394,200
</TABLE>
(Continued)
F-4
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996 (PAGE 2)
<TABLE>
<CAPTION>
Cumulative
foreign
currency
Capital in translation Treasury
excess of par Deficit adjustment Stock Total
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 ...... $ 4,727,492 $ (169,616) $ 4,989,911
Issuance of 400,000 shares
of common stock (Note 7) ...... 896,000 900,000
Issuance of 36,000 shares of
common stock in settlement of an
account payable (Note 7) ...... 107,640 108,000
Issuance of 480,000 shares of
common stock in
settlement of payables to
officers/shareholders (Note 7) 655,200 660,000
Net loss for 1996 .............. (5,575,882) (5,575,882)
Cumulative foreign currency
translation adjustment ........ $ (7,774) (7,774)
----------- ----------- ----------- ----------- -----------
Balances, December 31, 1996 .... 6,386,332 (5,745,498) (7,774) 1,074,255
</TABLE>
(Continued)
F-5
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996 (PAGE 3)
<TABLE>
<CAPTION>
Common Stock Preferred Stock Warrants
-------------------------- -------------------------- -----------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Issuance of 371,493 shares of
common stock in exchange for
480,417 shares of the Company's
subsidiary stock (Note 4) ...... 371,493 3,715
Issuance of 75,000 shares of
common stock in satisfaction of
300,000 options to purchase
common stock (Note 5) .......... 75,000 750
Issuance of 75,000 shares of
common stock for consulting
and financial services (Note 5) 75,000 750
Issuance of 865,225 shares of
common stock in satisfaction
of $1,171,656 of liabilities
(Note 7) ....................... 865,225 8,652
Issuance of 235,701 shares of
common stock for extending
maturity date on certain notes
(Note 4) ....................... 235,701 2,357
Issuance of 52,500 shares of
common stock upon the exercise
of options (Note 7) ............ 52,500 525
Issuance of 349,214 Class A
Series Preferred Stock (Note 7) 349,214 $ 3,492
Issuance of stock to subsidiary
in satisfaction of $893,640
liabilities (Note ) ............ 360,000 3,600 750,471 7,505
Net loss for 1997 ...............
Foreign currency translation
adjustment .....................
----------- ----------- ----------- ----------- -----------
Balances, December 31, 1997 ..... 6,734,430 $ 67,344 1,099,685 $ 10,997 $ 394,200
=========== =========== =========== =========== ===========
</TABLE>
(Continued)
F-6
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996 (PAGE 4)
<TABLE>
<CAPTION>
Cumulative
foreign
currency
Capital in translation Treasury
excess of par Deficit adjustment Stock Total
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Issuance of 371,493 shares of
common stock in exchange for
480,417 shares of the Company's
subsidiary stock (Note 4) ...... 407,677 411,392
Issuance of 75,000 shares of
common stock in satisfaction of
300,000 options to purchase
common stock (Note 5) .......... 69,563 70,313
Issuance of 75,000 shares of
common stock for consulting
and financial services (Note 5) 74,250 75,000
Issuance of 865,225 shares of
common stock in satisfaction
of $1,171,656 of liabilities
(Note 7) ....................... 1,163,004 1,171,656
Issuance of 235,701 shares of
common stock for extending
maturity date on certain notes
(Note 4) ....................... 438,284 440,641
Issuance of 52,500 shares of
common stock upon the exercise
of options (Note 7) ............ 94,475 95,000
Issuance of 349,214 Class A
Series Preferred Stock (Note 7) 1,564,638 1,568,130
Issuance of stock to subsidiary
in satisfaction of $893,640
liabilities (Note ) ............ 882,535 (893,640)
Net loss for 1997 ............... (4,809,215) (4,809,215)
Foreign currency translation
adjustment ..................... 7,774 7,774
----------- ----------- ----------- ----------- -----------
Balances, December 31, 1997 ..... $11,080,758 $(10,554,713) $ (893,640) $ 104,946
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................. $ (4,809,215) $ (5,575,882)
------------ ------------
Adjustments to reconcile net loss to
net cash used in operating activities:
Extraordinary gain ....................................... (383,705)
Inventory markdowns and adjustments ...................... 1,059,750
Net unrealized holding loss .............................. 62,392 144,457
Gain on sale of investment in subsidiary ................. (87,593) (111,366)
Gain from issuance of common stock by subsidiary ......... (479,100)
Loss on sale of USA Skate assets ......................... 751,522
Expense incurred upon issuance of common stock and options 724,223
Depreciation and amortization ............................ 628,601 681,717
Amortization of license fee payable and other ............ 88,867 214,688
Provision for losses on accounts receivable .............. 250,836 228,000
Foreign currency (gains) loss ............................ (59,791) 44,012
Minority interest ........................................ (727,197) 193,681
Restructuring and impairment charges ..................... 237,452 1,229,000
Decrease (increase) in assets:
Accounts receivable ...................................... (135,947) 2,432,580
Income taxes receivable .................................. 221,624 (221,624)
Due from related parties ................................. (310,369) 22,866
Inventories .............................................. 1,806,578 2,578,805
Prepaid expenses and other ............................... 436,111 (236,638)
Assets of subsidiary held for sale
Increase (decrease) in liabilities:
Accounts payable and accrued expenses .................... (394,606) (1,210,188)
Payables to officers/shareholders and other
related parties ........................................ (36,804) 136,250
Income taxes payable ..................................... (208,304)
Liabilities of subsidiary held for sale (1,340,648)
------------ ------------
Total adjustments .................................. 1,731,546 6,498,586
------------ ------------
Net cash provided by (used in) operating activities ............ (3,077,669) 922,704
------------ ------------
Cash flows from investing activities:
Payment from sale of USA Skate Co., Inc. ................. 14,500,000
Payment for purchase of subsidiary,
net of cash acquired .................................... (3,551,760)
Payments for intangible assets ........................... (436,600)
Capital expenditures ..................................... (95,141) (237,545)
Proceeds from sale of marketable securities .............. 166,260
Acquisition, offering and financing costs ................ (421,770)
------------ ------------
Net cash used in investing activities .......................... 14,571,119 (4,647,675)
------------ ------------
</TABLE>
F-8
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from notes payable and long-term debt ........... 174,545 4,543,522
Repayments of notes payable, license fees
and long-term debt ..................................... (11,713,124) (1,587,263)
Net proceeds from issuance of
common stock and warrants ............................... 819,600
------------ ------------
Net cash provided by financing activities ...................... (11,538,579 3,775,859
------------ ------------
Net increase (decrease) in cash ................................ (45,129) 50,888
Cash, beginning ................................................ 59,098 8,210
------------ ------------
Cash, ending ................................................... $ 13,969 $ 59,098
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest ................................... $ $ 1,041,900
============ ============
Cash paid for income taxes ............................... $ $ 89,300
============ ============
Supplemental disclosure of noncash investing
and financing activities:
Purchase (disposition) of USA Skate Co., Inc. ............
net of cash acquired:
Fair value (cost) of assets acquired ................... $(16,937,947) 11,334,200
Intangible assets ...................................... 2,777,774
Liabilities (assumed) disposed of ...................... 1,899,533 (9,210,214)
Fair value of assets exchanged ......................... (1,350,000)
Loss on disposition 538,414
------------ ------------
Total cash paid (received), net of cash acquired ......... $(14,500,000) $ 3,551,760
============ ============
Issuance of 371,493 shares of common stock in
exchange for 480,417 shares of Company's
Subsidiary stock ....................................... $ 411,392 $
============ ============
Issuance of 865,225 shares in 1997 and
36,000 shares in 1996 of common stock in satisfaction
of amounts due ......................................... $ 1,171,656 108,000
============ ============
Issuance of 400,000 shares of common stock
in exchange for consulting and non-compete
agreements ............................................. $ 900,000
============
Issuance of 480,000 shares of common stock
in settlement of payables to officers/shareholders ..... $ 660,000
============
Minimum royalties payable in exchange
for a license agreement ................................ $ 2,213,235
============
</TABLE>
F-9
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Basis of presentation, business and plan of restructuring:
Basis of presentation:
The accompanying consolidated financial statements include the accounts
of California Pro Sports, Inc. (the "Company") and its subsidiaries,
California Pro, Inc. ("CP") and USA Skate Corporation ("Skate
Corp."). Skate Corp. was formed in 1995 to acquire USA Skate Co.,
Inc. ("USA Skate"). On December 31, 1997, the Company owned 100% of
the outstanding CP capital stock and 62.3% of 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.
Effective April 30, 1996, the Company, through Skate Corp., completed
the acquisition of all of the outstanding capital stock of USA Skate,
a New York corporation, which owns, directly or indirectly, all of
the capital stock of Les Equipements Sportifs Davtec Inc., a Canadian
corporation ("Davtec"). The acquisition was accounted for as a
purchase. Accordingly, the consolidated statements of operations
include the results of USA Skate and Davtec beginning May 1, 1996. In
September 1997, Skate Corp., sold substantially all of the operating
assets of USA Skate and Davtec (Note 4).
Business and plan of restructuring:
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. Prior to September 1997, the
Company also 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. A majority of the in-line
skates were manufactured for the Company by Playmaker Co. Ltd.
("Playmaker"), a minority shareholder of the Company.
In 1996 and 1997, due to continuing operating losses, management
decided to restructure and deleverage the Company. In connection with
these plans, the Company:
F-10
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
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 (Note 11) 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 (Note 4).
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, 1998, the Company signed an agreement and
plan of merger with ImaginOn (Note 10).
e. Began investigating other options, including the sale of
subsidiaries and potential private offerings (Note 4).
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 1996 and has a
working capital deficiency and a accumulated deficit at December 31,
1997. 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.
2. Significant accounting policies:
Use of accounting estimates in financial statement preparation:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statement and the
F-11
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Inventories:
Inventories are stated at the lower of cost (first-in first-out method)
or market. At December 31, 1997, there are no remaining inventories.
Furniture, equipment, and depreciation:
Furniture and equipment are stated at cost. Depreciation is provided by
use of accelerated and straight-line methods over the estimated
useful lives (5 to 10 years) of the related assets.
Intangible assets:
Intangible assets at December 31, 1997 consist of trademark licence
costs related to the California Pro and Kemper perpetual license
agreements and goodwill representing the cost of the Company's
investments in Skate Corp. and its subsidiaries in excess of the net
tangible assets acquired. Trademark license costs are amortized on
the straight-line method over 5 to 11 years. Goodwill is amortized on
the straight-line method over 15 to 25 years.
Management assesses the carrying value of intangible and other
long-lived assets for impairment when circumstances warrant such a
review, primarily by comparing current and projected sales, operating
income and annual cash flows on an undiscounted basis, with the
related annual amortization expenses. In 1997, goodwill related to
Skate Corp. with a carrying value of $428,573 was written down to
$191,121 (Note 4). In 1996, intangible assets with a carrying value
of $9,192,506 were written down to $8,473,806 (Note 11). The
resulting expense of $237,452 and $718,700 for 1997 and 1996,
respectively, was included in restructuring and impairment charges.
Revenue recognition:
The Company's revenue recognition policy is to record sales as product
is shipped and recognizes royalty and other income when sub-licensees
report royalties and the Company receives payment.
Foreign currency transactions:
CP primarily purchased and sold its in-line skate products in U.S.
dollars. CP primarily purchased its snowboard products in German
Deutsche Marks ("DM") and sold to its customers in either DM or U.S.
dollars. USA Skate primarily purchased and sold its products in U.S.
dollars, and Davtec primarily purchased
F-12
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
its goods in Canadian dollars and sold to customers in both U.S. and
Canadian dollars. Gains and losses on foreign currency transactions
are included in determining consolidated net loss.
Loss per share:
The Company adopted Statement of Financial Accounting Standards (SFAS
No. 128) during 1997. This statement requires dual presentation of
basic and diluted earnings per share (EPS) with a reconciliation of
the numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. Basic EPS
amounts are based on the weighted average shares of common stock
outstanding. Diluted EPS reflects the potential dilution assuming the
conversion, exercise or issuance of all potential common stock
instruments such as options, warrants and convertible securities,
unless the effect is to reduce a loss or increase earnings per share.
Accordingly, this presentation has been adopted for all periods
presented. Diluted EPS was not materially different from basic EPS in
1997 and 1996. The adoption of SFAS No. 128 did not impact previously
reported EPS.
Fair value of financial instruments:
The carrying value of the Skate Corp. convertible promissory notes
payable, included in liabilities of subsidiary held for sale on the
consolidated balance sheet (Note 4), is not practicable to estimate
because management believes that due to the financial condition of
the Company, similar instruments with similar terms could not be
obtained elsewhere. The fair values of the Company's receivables and
payables to related parties are not practicable to estimate, due to
the related party nature of the underlying transactions and
indefinite payment terms. The carrying amounts of the Company's other
financial instruments approximates their fair values because of the
short maturities of these instruments.
Subsidiary equity transactions:
In 1996, the Company adopted an accounting policy to recognize in its
consolidated financial statements, gains and losses resulting from
the sales of previously unissued stock by its subsidiaries, which
have the effect of reducing the parent's percentage equity holding.
Stock-based compensation:
F-13
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting
for Stock-Based Compensation, defines a fair-value-based method of
accounting for stock-based employee compensation plans and
transactions in which an entity issues its equity instruments to
acquire goods or service from non-employees, and encourages but does
not require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB NO. 25") and
related interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any of the quoted market price
of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock.
Recently issued accounting standards:
The Financial Accounting Standards Board recently issued SFAS No.'s 130
and 131, "Reporting Comprehensive Income" and "Disclosures about
Segments of an Enterprise and Related Information," respectively.
Both of these statements are effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 establishes requirements for
disclosure of comprehensive income which includes certain items
previously not included in the statement of income including minimum
pension liability adjustments and foreign currency translation
adjustments, among others. Reclassification of earlier financial
statements for comparative purposes is required. SFAS No. 131 revises
existing standards for reporting information about operating segments
and requires the reporting of selected information in interim
financial reports. SFAS No. 131 also establishes standards for
related disclosures about products and services, geographic areas,
and major customers. Management believes that implementation of SFAS
No. 130 and No. 131 will not materially impact the Company's
financial statements.
Reclassifications:
Certain amounts reported in the 1996 financial statements have been
reclassified to conform to the 1997 presentation.
3. Marketable securities:
In 1996, the Company received marketable securities from an affiliate
F-14
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
in payment of an amount owed to the Company by a related party, which
the Company classified as trading securities under SFAS No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. At
December 31, 1996, the market value of these securities had
decreased, and therefore, the Company recognized a net unrealized
holding loss of $144,457. In 1997, the Company sold these securities
and recognized an additional loss of $62,392. These amounts are
included in loss on marketable securities in the consolidated
statements of operations.
4. Skate Corp. transactions:
Gain from issuance of common stock by subsidiary:
During 1996, Skate Corp. sold 884,667 shares of its common stock at
$1.20 per share in a private placement for $1,061,600 and issued
250,000 shares of common stock at $1.20 per share valued at $300,000
in connection with the acquisition of USA Skate. Before these
transactions, the Company owned 100% of Skate Corp. These
transactions resulted in a gain from the issuance of stock by the
subsidiary of $479,100.
Gain on sale of investment in subsidiary:
In June 1996, the Company satisfied $260,000 of amounts payable to
officers/shareholders by transferring to the officers/shareholders
216,667 shares of Skate Corp. common stock from the Company's
original investment in 2,000,000 Skate Corp. shares. The recorded
cost of the Skate Corp. shares transferred was $148,634, and the fair
value of those shares was $260,000 (based on sales of the Skate Corp.
shares to third parties), resulting in a gain of $111,366.
In March 1997, the Company satisfied payables in the amount of $106,500
by exchanging 88,750 shares of Skate Corp. common stock held by the
Company in satisfaction of the liability. The carrying value of the
Skate Corp. shares was $61,237 and the estimated fair value of those
shares was $106,500. 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 sales price was
$99,600. These transactions resulted in total gains of $87,593.
F-15
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
Purchase of subsidiary common stock:
In May and September 1997, the Company acquired 230,417 shares of Skate
Corp. common stock from two shareholders (one of which was an
officer) in exchange for 238,160 shares of common stock of the
Company.
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 to be
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
of the escrow account 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 Company recognized a loss of
approximately $752,000 on the sale of the USA Skate assets.
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:
Assets of subsidiary held for sale:
Cash held in escrow ................. $ 472,002
Accounts receivable:
Trade ............................. 47,525
Related parties ................... 585,000
----------
$1,104,527
==========
Liabilities of subsidiary held for sale:
Accounts payable and accrued expenses $ 589,239
Note payable, related party ......... 50,000
Convertible promissory notes payable 1,074,900
----------
$1,714,139
==========
F-16
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
The accounts receivable, related parties are non-interest bearing and
are due June through September 1998. The note payable, related party
bears interest at 10% and is currently in default. The convertible
promissory notes were originally due in January 1997 with interest at
9%. In January 1997, the due date of the notes was extended to July
1997 and the interest rate was adjusted to 12%. Beginning July 1997,
substantially all of the note holders agreed to extend the notes for
30 day intervals in exchange for the Company issuing the note holders
common stock of the Company at each extension date. Through December
31, 1997, the Company has issued 235,701 shares of common stock and
recognized financing fees of approximately $441,000. Subsequent the
December 31, 1997, the notes have been extended through May 1998 in
exchange for 149,285 shares of common stock. The Company is in
default on $95,625 of the notes held by those note holders that have
not agreed to the extensions.
Subsequent sale of the Company's investment in Skate Corp. and sale of
options:
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 allow the investors to
exchange each common share of Skate Corp. for 1.5 shares of the
Company's common stock. The transaction results in the investors
acquiring 1,842,000 shares of Skate Corp. common stock and options to
exchange those shares for 2,763,000 shares of the Company's common
stock. Of the total $1,400,000 purchase price, $1,310,000 will be
allocated to the options and $90,000 will be allocated to the sale of
the Skate Corp. stock. At December 31, 1997, the Company wrote down
its investment in Skate Corp. (Note 2). Therefore, the transaction
will not result in any gain or loss to the Company. Two
officers/shareholders of the Company have agreed to purchase the
shares of Skate Corp. from the Company for $90,000 if all of the
investors exercise their options to exchange the Skate Corp. common
shares for common shares of the Company.
The accompanying consolidated balance sheet includes an unaudited pro
forma consolidated balance sheet as of December 31, 1997, that gives
effect to the sale of the Skate Corp. stock as if the transaction had
been consummated on December 31, 1997. 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 sale occurred on
December 31, 1997.
F-17
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
The unaudited pro forma balance sheet includes pro forma adjustments to
record the receipt of $90,000 of cash in exchange for the Company's
investment in Skate Corp. and the receipt of $1,310,000 of cash in
exchange for options to acquire 2,763,000 shares of the Company's
common stock in exchange for 1,842,000 shares of Skate Corp. common
stock.
5. Commitments and contingencies:
Office lease:
The Company is currently leasing office space in South Carolina on a
month-to-month basis for $3,000 per month. Total rent expense for
1997 and 1996 was approximately $227,000 and $277,000, respectively,
and includes rent expense and lease termination fees on the Company's
prior operating warehouses and office space.
In-line skate license agreements:
The Company has various license agreements with Playmaker, under which
the Company has the exclusive, royalty-free right to use the
California Pro and Rolling Thunder names and trademarks on in-line
skates, accessories and other products in the United States, Canada,
certain areas of the Caribbean and U.S. military exchanges worldwide.
The Company has also entered into an agreement with Playmaker whereby
Playmaker will pay the Company a 5% royalty on all sales of any
product made by Playmaker to any new customer of Playmaker generated
by the Company. No royalties have been agreed to or paid to date
under this agreement. The agreements are subject to cancellation if
the Company does not meet certain sales and/or purchase requirements.
The Company has a patent license agreement related to one feature on
several of the Company's in-line skate models. Under the license
agreements, the Company pays royalty fees based on its sales of the
related items. Playmaker reimburses the Company for a portion of the
royalties paid. The royalties were not significant in 1997 or 1996.
Kemper license agreements:
The Company has a license agreement for the exclusive, perpetual use of
the Kemper name on snowboards and accessories. The Company pays a
royalty based on net
F-18
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
sales of products sold under this license.
In 1997, the Company entered into a three-year exclusive sub-license
agreement with a third party which allows the third party to
manufacture and sell certain Kemper products. The agreement provides
for the Company to receive license fees based on manufacturing costs,
or an annual minimum guaranteed payment.
In February 1998, the Company entered into a two-year agreement with a
third party snowboard manufacturer and marketer. The agreement
assigns all of the Company's license rights to the Kemper name
(except for the sub-license described above) to the third party in
exchange for the greater of a royalty fee based on sales, or an
annual minimum guaranteed payment.
Employment, consulting and non-compete agreements:
On a month to month basis, the Company pays an officer/ shareholder
consulting fees of $10,000 per month. Prior to the sale of the USA
Skate assets, the Company also paid another officer/shareholder a
monthly consulting fee.
Effective July 1995, the Company entered into a twelve-month consulting
agreement with an unrelated third party to receive financial advisory
and consulting services in exchange for fees of $24,000 in 1996 and
an agreement to issue warrants to purchase up to an aggregate of
300,000 shares of the Company's common stock. In 1997, in lieu of the
warrants to purchase 300,000 shares of common stock, the Company
issued the party 75,000 shares of common stock. A new consulting
agreement with this third party was entered into in 1997, which
expires in 1999. Under this agreement, the Company issued 75,000
shares of common stock and 33,333 shares of preferred stock to the
consultant.
Litigation:
The Company, along with other defendants, has been involved in a
copyright infringement action. In October 1997 a jury verdict in the
amount of $450,000 was awarded against the defendants. The Company
believes that any amount it may ultimately pay is covered by
insurance in its entirety, subject to relevant deductibles. The
Company has filed motions to overturn or reduce the award. The
Company is also involved in various claims and legal actions arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material effect
on the financial statements of the Company.
F-19
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NASDAQ notification of delisting:
The NASDAQ Stock Market, Inc. issued new standards for continued
listing of SmallCap Market participants which became effective in
February 1998. The Company is a SmallCap Market participant and must
meet these new requirements. On the effective date, the Company did
not meet the new requirements of having net tangible assets that
exceed $2,000,000. Under the new standards, NASDAQ has established a
review process for companies temporarily out of compliance. The
Company filed its written request for a temporary exemption to the
new standards in March 1998 and NASDAQ is scheduled to review the
matter during April 1998. Along with the written request, the Company
filed a Form 8-K which, on a pro-forma basis, shows compliance with
the new continued listing requirements.
6. Income taxes:
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized
in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax
bases of assets and liabilities using enacted tax rates in effect in
the years in which the differences are expected to reverse.
The benefit for income taxes for the years ended December 31, 1997 and
1996 consists of the following:
1997 1996
---- ----
Current:
Federal .................. $ (174,000)
State and local .......... 41,900
Foreign .................. $ (166,404) (29,300)
----------- -----------
(166,404) (161,400)
----------- -----------
Deferred:
Federal .................. (1,345,000) (1,393,000)
State and local .......... (219,000) (230,600)
Foreign .................. (120,000) 46,000
----------- -----------
(1,684,000) (1,577,600)
----------- -----------
Change in valuation allowance
for deferred tax assets ... 1,684,000 1,494,500
----------- -----------
Income tax benefit $ (166,404) $ (244,500)
=========== ===========
F-20
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
A reconciliation of the statutory federal income tax rate to the
Company's effective income tax rate for the years ended December 31,
1997 and 1996 is as follows:
1997 1996
---- ----
Statutory income tax benefit ........... (34)% (34)%
State and local income taxes ........... 1%
Deferred income tax valuation allowance 28% 24%
Nondeductible expense .................. 1% 2%
Other .................................. 2% 3$
----- -----
(3)% (4)%
===== =====
The following is a summary of the Company's deferred tax assets and
liabilities at December 31, 1997:
Deferred tax assets:
Net operating loss carryforward ... $ 2,919,000
Intangible assets ................. 308,000
Accounts receivable ............... 174,000
-----------
3,401,000
Valuation allowance
for deferred tax assets $(3,401,000)
-----------
$ -0-
===========
Net operating loss carryforwards of approximately $7,800,000 are
available to offset future taxable income, if any, through 2012. A
valuation allowance has been provided to reduce the deferred tax
assets, as realization of the assets is not assured.
7. Shareholders' equity:
Preferred stock:
The holders of the Company's preferred stock are entitled to vote on
any matter submitted to the shareholders of the Company. Each share
of preferred stock is entitled to three
F-21
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
votes. Each share of outstanding 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.
Issuances of preferred stock:
In 1997, the Company issued 349,214 shares of preferred stock
(including 30,167 to an officer/shareholder) in satisfaction of
$1,568,130 of liabilities (including $181,000 due to the
officer/shareholder). 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.
Issuances of common stock:
In 1997, the Company issued 865,225 shares of common stock (including
299,633 to officers/shareholders) in satisfaction of $1,171,656 of
liabilities (including $493,995 due to the officers/shareholders).
The shares were valued at the trading price of the Company's common
stock.
Issuance of stock to Skate Corp.:
In 1997, the Company issued 750,471 shares of preferred stock and
360,000 shares of common stock to Skate Corp. is satisfaction of
intercompany liabilities of $893,640. This transaction has been
accounted for as a treasury stock transaction in the consolidated
financial statements.
Issuances of common stock in 1996:
During 1996, the Company issued 400,000 shares of the Company's common
stock at an agreed value of $900,000, or $2.25 per share, as
compensation under a consulting and non-compete agreement; and 36,000
shares of common stock at $3.00 per share (the trading price of the
stock at the date the Board of Directors authorized the issuance) in
satisfaction of a $108,000 account payable. The Company also issued
480,000 shares of the Company's common stock to officers/shareholders
of the Company at $1.37 per share (the trading price of the stock at
the date the Board of Directors authorized the issuance) in
satisfaction of $660,000 of payables.
F-22
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
Stock options:
The Company has a stock option plan (the "1994 Stock Option Plan")
which provides for the issuance to employees, officers, directors,
and consultants of the Company options to purchase up to 200,000
shares of common stock. Options may be granted as incentive stock
options or as non-statutory options. Only employees are eligible to
receive incentive options. For options that are granted, the exercise
period may not exceed ten years. The exercise price for incentive
options may not be less than 100% of the fair market value of the
Company's common stock on the date of grant, except for options
issued to persons controlling more than 10% of the Company's common
stock, for which the option price may not be less than 110% of the
fair market value of the Company's common stock on the date of grant.
The exercise price for non-statutory options may not be less than 80%
of the fair market value of the Company's common stock on the date of
grant.
In 1997, the Company granted options to purchase 150,000 shares of
common stock to non-employees for services provided to the Company.
General and administrative expense was charged $42,500.
A summary of the status of the Company's stock options and weighted
average exercise prices is as follows:
1994 Plan Other Total
----------------- ----------------- -----------------
Shares Price Shares Price Shares Price
-------- ----- -------- ----- -------- -----
Outstanding,
January 1, 1996 . 36,500 $2.50 36,500 $2.50
Forfeited (16,500) $2.50 (16,500) $2.50
-------- ----- -------- ----- -------- -----
Outstanding,
December 31, 1996 20,000 $2.50 20,000 $2.50
Granted .......... 130,000 $1.00 150,000 $0.97 280,000 $0.95
Exercised ........ (22,500) $1.00 (30,000) $1.00 (52,500) $1.00
-------- ----- -------- ----- -------- -----
Outstanding,
December 31, 1997 127,500 $1.24 120,000 $0.89 247,500 $1.07
======== ===== ======== ===== ======== =====
F-23
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
The 1994 Plan options expire from 1999 through 2003. The other options
expire from 2000 through 2002.
Had compensation cost for the 1994 Plan options granted in 1997 been
determined based on the fair value at the grant dates consistent with
the provisions of SFAS No. 123, the Company's net loss and loss per
share would not have been materially different from that reported.
Warrants:
The Company has outstanding warrants to purchase 1,990,000 shares of
common stock at $2.50 per share that expire in June 1998 (the
"Warrants"). In 1998, the exercise price of the warrants was changed
to $1.50 per share and extended to December 1998. The Company also
has outstanding warrants to purchase 120,000 Warrants at $0.30 per
Warrant that expire in June 1998.
In 1997, the exercise price of warrants to purchase 500,000 shares of
the Company's common stock that had been granted to two
officers/shareholders of the Company were reduced from $2.38 per
share to $1.00 per share (which approximates fair value). These
warrants expire from 2002 through 2003.
The Company also has outstanding warrants to purchase 58,331 shares of
common stock at $4.81 per share that expire in 2000.
8. Extraordinary item:
The Company recognized an extraordinary gain of $383,705 (of which
$149,000 is related to debt owed to an officer/shareholder) from the
extinguishment of debt for amounts less than the carrying value of
the liabilities.
F-24
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
9. Foreign operations and export sales:
Information about the Company's operations in the United States and
Canada for the years ended December 31, 1997 and 1996 are as follows:
1997:
United Combined
States Canada Eliminations total
----------- ----------- ------------ -----------
Sales to unaffiliated
customers ......... $ 5,494,000 $ 3,594,000 $ 9,088,000
Intercompany sales .. 740,000 $ (740,000)
----------- ----------- ----------- -----------
Net sales ........... $ 5,494,000 $ 4,334,000 $ (740,000) $ 9,088,000
=========== =========== =========== ===========
Loss from operations $(3,650,000) $ (418,000) $ (7,000) $(4,075,000)
=========== =========== =========== ===========
Identifiable assets . $ 2,269,000 $ 2,269,000
=========== =========== =========== ===========
1996:
United Combined
States Canada Eliminations total
----------- ----------- ------------ -----------
Sales to unaffiliated
customers ......... $11,877,000 $ 5,076,000 $16,953,000
Intercompany sales .. 841,000 $ (841,000)
----------- ----------- ----------- -----------
Net sales ........... $11,877,000 $ 5,917,000 $ (841,000) $16,953,000
=========== =========== =========== ===========
Income (loss) from
operations ......... $(5,366,000) $ 590,000 $ 85,000 $(4,691,000)
=========== =========== =========== ===========
During the years ended December 31, 1997 and 1996, sales by geographic
regions were as follows:
1997 1996
---- ----
Europe and other ........ $ 1,395,330 $ 3,225,000
Canada .................. 3,185,923 4,949,000
Japan ................... 101,595 312,000
----------- -----------
Total exports ...... 4,682,848 8,486,000
USA sales ............... 4,404,919 8,467,000
----------- -----------
Total sales ........ $ 9,087,767 $16,953,000
=========== ===========
10. Merger agreement:
On October 2, 1997, the Company signed a letter of intent to merge with
ImaginOn, Inc. of San Carlos, California ("ImaginOn"), a privately
F-25
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CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
held company. 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 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 California Pro.
ImaginOn, formed in March 1996, designs, manufactures and sells
consumer software products for Internet users. The merger
transaction, which is expected to be completed by July 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, and certain other conditions.
11. Restructuring and impairment charges:
The Company initiated its restructuring plan in 1996, which included
the implementation of product line changes and a cost reduction
program beginning in the fourth quarter of 1996. The Company recorded
restructuring and impairment charges which consists of the following
components:
Non-cash asset Other
write downs Charges Total
---------- ---------- ----------
1996:
Equipment ............... $ 411,700 $ 411,700
Trademarks .............. 368,000 368,000
Organizational costs and
other intangibles ..... 205,700 205,700
Consulting costs ........ 145,000 145,000
Severance ............... $ 22,100 22,100
Lease termination ....... 76,500 76,500
---------- ---------- ----------
$1,130,400 $ 98,600 $1,229,000
========== ========== ==========
1997:
Goodwill $ 237,452 $ $ 237,452
========== ========== ==========
F-26
AGREEMENT
This Agreement ("Agreement") is effective as of May 1, 1997 by and
between California Pro Sports, Inc., having offices at 1221 B South Batesville
Road, Greer, South Carolina, 29650 ("CalPro") and United Merchandising Corp., a
California corporation having offices at 2525 E. El Segundo Boulevard, El
Segundo, California 90245 ("UMC").
WHEREAS, CalPro has used for several years the trademark "Kemper" and
has developed certain intellectual property rights in connection therewith;
WHEREAS, UMC desires to manufacture and sell certain items of snowboard
apparel to be sold under this trademark;
WHEREAS, CalPro is willing to grant UMC such right to manufacture and
sell, upon the terms and conditions set forth below.
THEREFORE, CalPro and UMC hereby agree as follows:
1. Term
----
The initial term of this Agreement shall be from May 1, 1997 through
April 30, 2000.
2. Rights Granted
--------------
CalPro hereby grants to UMC, and UMC accepts, upon the terms and
conditions set forth herein, a non-exclusive, non-transferrable license (with no
right to sublicense) to manufacture or cause to be manufactured snowboarding
apparel which may include shell jackets, shell pants, fleece garments, vests,
parkas, anoraks, socks, insulated pants, sweaters, thermal underwear, kneepads,
wristguards, gloves, hats and other insulated and uninsulated winter garments
bearing the name and/or logo of "Kemper" (collectively the "Licensed Products"),
and to sell such Licensed Products in its retail stores in the United States.
UMC agrees that the mark "Kemper" and all designs thereof are the sole property
of CalPro. UMC shall at all times use such marks in a manner which will not
denigrate the goodwill associated with the marks. UMC shall not attempt to
register such marks with any governmental agency or purchase or license the
registration of such marks from any party.
3. Payment for Manufacturing Rights
--------------------------------
In consideration of the right to manufacture and sell the Licensed
Products, during the initial term of this Agreement UMC shall pay to CalPro, in
U.S. dollars, the greater of (i) seven and one-half percent (7 1/2%) of the
F.O.B. Southern California cost to UMC for the manufacture of the apparel or
(ii) $30,000.00 per annum. UMC shall send copies of all invoices for such
apparel to CalPro. UMC shall pay $15,000. to CalPro within five (5) business
days following the execution and delivery (by both parties) of this Agreement.
For each subsequent year during the initial term of this agreement, UMC shall
pay $15,000. to CalPro within the first thirty (30) business days following
receipt by UMC of all Licensed Products for such year of the initial term of
this Agreement.
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<PAGE>
Agreement
September 9, 1997 (4)
In consideration of the right to manufacture and sell the Licensed
Products during each of the Option terms of this Agreement UMC shall pay to
CalPro, in U.S. dollars, seven and one-half percent (7 1/2%) of the F.O.B.
Southern California cost to UMC for the manufacture of the apparel. UMC shall
pay to CalPro an amount equal to one-half (1/2) of the total fee for the
previous year within thirty (30) days business days following the commencement
of each such option term, and the balance of all sums due and owing CalPro, for
each year of the option terms of this Agreement shall be paid by UMC within
thirty (30) days following receipt by UMC of all Licensed Products for such year
of the initial term of this Agreement.
4. Option to Extend
----------------
UMC shall have the option to extend this contract for an additional
year. Such option shall be exercised by UMC no later than April 1, 2000, and
shall be null and void if not so exercised.
UMC shall further have the option to extend this contract for a second
additional year. Such option shall be exercised by UMC no later than April 1,
2001, and shall be null and void if not so exercised.
5. Other Goods
-----------
CalPro covenants and agrees that UMC shall have a right of first
refusal to use the name "Kemper" on other snowboarding goods, including
snowboards, boots, bindings and bags. In the event UMC should desire to so use
the Kemper name, UMC shall notify CalPro, and in the event CalPro should desire
to permit the Kemper name to be so used, CalPro shall notify UMC, and the
parties shall negotiate, in good faith, a reasonable payment percentage which
shall be set forth in an amendment to this Agreement.
6. Interpretation and Enforcement
------------------------------
This Agreement shall be construed in accordance with the laws of the
state of California. In the event any legal action becomes necessary to enforce
or interpret the terms of this Agreement, the parties agree that the such action
will be brought in the state or federal Courts of Los Angeles County, and the
parties hereby submit to the jurisdiction of said courts.
7. Entire Agreement
----------------
This Agreement contains the entire understanding of the parties, and
there are no representations, warranties, promises of undertakings other than
those contained herein. This Agreement supersedes all previous agreements
between the parties hereto. No waiver or
2
<PAGE>
Agreement
September 9, 1997 (4)
modification of any of the terms or provisions of this Agreement shall be valid
unless contained in a writing signed by the parties.
California Pro Sports, Inc. United Merchandising Corp.
By: /s/ Barry S. Hollander By: /s/ Steve G. Mills
------------------------------- -------------------------
Acting President President
By: ______________________________ By: /s/ Gary S. Meade
-------------------------
Secretary
Dated: September 15, 1997 Dated: September 15, 1997
------------------ ------------------
3
EXCLUSIVE LICENSING AGREEMENT
This Exclusive Licensing Agreement ("Agreement") is entered into as of
April 1, 1998 by and between Jaysport International, Inc., a California
Corporation having its principal office at 24007 Venture Blvd., Suite 225,
Calabasas, California ("Jaysport") and California Pro Sports, Inc., a Delaware
Corporation having its principal office at 8102 White Horse Road, Greenville,
South Carolina ("Cal Pro").
RECITALS
A. On July 28, 1994, Cal Pro entered into a license agreement ("License
Agreement") with Front 500 Corporation, an Ontario, Canada Corporation ("Front
500"), the owner of all right, title and interest in the "Kemper" trademark
("Trademark") and "Kemper" name ("Name"), all derivatives thereof and all
goodwill connected with such Trademark and Name, including the rights to
manufacture and distribute any and all products bearing the Trademark and Name
and all derivatives thereof.
B. Pursuant to the License Agreement, Front 500 granted Cal Pro an exclusive
perpetual worldwide license to manufacture, import/export, design, market,
promote and distribute Products, namely, (snowboards, related equipment,
clothing, accessories and boots) bearing the Trademark or Name.
C. Cal Pro warrants that its License Agreement with Front 500 is in full force
and effect and in good standing.
D. Cal Pro now desires to grant Jaysport an exclusive sub-license on all of its
rights contained in the License Agreement to Jaysport pursuant to the terms and
conditions of this Agreement.
E. Both parties accept that this Agreement is based on the agreement entered
into in a February 13, 1998 letter from Jay Joffe, President of Jaysport to
Barry Hollander, President of Cal Pro.
F. Both parties agree that they are under an obligation to carry out the terms
and conditions of this Agreement in good faith.
NOW, THEREFORE, in consideration of the mutual covenants and promises contained
herein, the parties agree as follows:
1) DEFINITIONS.
(a) "Name" shall mean any and all trade names or business names used in
association with the manufacture, import/export, design, marketing, promotion
and distribution of the Products which can in any manner be constructed as a
derivation of the Trademark or otherwise similar to or based upon the Trademark.
1
<PAGE>
(b) "Products" shall mean all snowboards, related equipment, clothing,
accessories (including, without limitation, straps and bindings) and boots sold
bearing the Trademark or Name.
(c) "Trademark" shall mean the Kemper trademark and all derivations thereof and
any other trademarks which may be hereinafter created or acquired which may in
whole or in part use the "Kemper" name, whether or not registered under the laws
of any jurisdiction.
2) EXCLUSIVE SUB-LICENSE.
(a) Cal Pro hereby grants to Jaysport an exclusive sub-license of all of its
rights contained in the License Agreement executed between Front 500 and Cal Pro
on July 28, 1994, subject only to the prior sublicense granted to United
Merchandising Corp. ("Big 5").
(b) Without limitation, Cal Pro sub-licenses to Jaysport the exclusive worldwide
right to use the Trademark and Name in connection with the manufacture,
import/export, design, marketing, promotion and distribution of the Products.
(c) During the term of this Agreement and any renewals entered into, Cal Pro
shall not grant a license and or an assignment to any other individual, person,
corporation, partnership or any other entity with respect to the rights
contained in the License Agreement without the express written consent of
Jaysport.
3) FRONT 500 LICENSE AGREEMENT.
(a) Cal Pro warrants that the License Agreement that it entered into with Front
500 is in full force and effect and in good standing.
4) TERM.
The initial term of this Agreement is for a period of two (2) years as of the
date hereof.
5) RENEWAL.
(a) At The end of the initial two (2) year term, Jaysport has a perpetual option
to renew this Agreement for additional two (2) year periods thereafter subject
to the terms of this Section.
(b) If Jaysport desires to exercise its renewal option, it must provide Cal Pro
written notification at least forty-five (45) days prior to the expiration of
the initial term or any renewal thereafter.
(c) If written notification is provided to Cal Pro pursuant to Section 4(b),
then at least forty-five (45) days before the expiration of the initial term of
this Agreement or any renewal thereafter, both
2
<PAGE>
parties shall enter into good faith negotiations with respect to a two (2) year
renewal of this Agreement.
(d)
(i) If Jaysport and Cal Pro are unable to achieve and enter into a
renewal agreement, notwithstanding the fact that both parties carried out good
faith negotiations, Jaysport shall have a right of first refusal with respect to
any subsequent agreement that Cal Pro may negotiate with any other third party
with respect to the use of Kemper Name and Trademark.
(ii) With respect to the right of first refusal, Cal Pro shall provide
Jaysport with a FINAL written copy of its proposed agreement ("Proposed
Agreement") with the third party ("Third Party") and upon receipt of said
Proposed Agreement, Jaysport shall have thirty (30) days to decide whether it
desires to enter into the Proposed Agreement with Cal Pro.
(iii) Before the expiration of the thirty (30) day period, Jaysport
shall provide written notification to Cal Pro on whether it wants to accept or
reject the Proposed Agreement. If Jaysport accepts the Proposed Agreement, a new
agreement shall be drafted ("New Agreement") and the name of the Third Party
shall be replaced with Jaysport and any other miscellaneous items shall be
amended so that the New Agreement is reasonable and makes sense. If Jaysport
rejects the Proposed Agreement, Cal Pro shall provide to Jaysport within thirty
(30) days of the rejection of the Proposed Agreement, an executed copy of the
Proposed Agreement between Cal Pro and the Third Party.
(iv) If after the rejection of the Proposed Agreement, Cal Pro or the
Third Party amends any term or condition of the Proposed Agreement, Cal Pro
acknowledges that Jaysport has a right of first refusal with respect to the
amended Proposed Agreement and Cal Pro shall comply with the renewal obligations
of Section 4(d)(ii) and 4(d)(iii).
(e) If the initial term of this Agreement or any renewal thereafter expires
during the negotiation process between Jaysport and Cal Pro, then this Agreement
or any renewal agreement thereafter, shall continue on in full force and effect
until Jaysport and Cal Pro execute a new agreement or until a new Proposed
Agreement is executed between Cal Pro and Jaysport or between Cal Pro and a
Third Party.
6) TRANSFER AND ASSIGNMENT.
(a) During the term of this Agreement and any renewal thereafter, both parties
shall not be permitted, nor have the power, without the express written consent
of the other party, to give away, sell, assign, pledge, lease, sub-lease, devise
or otherwise transfer, either directly or indirectly, by operation of law or in
any other manner, this Agreement or any part thereof.
(b) Any attempted transfer or assignment of this Agreement, except as expressly
provided in Section 5(a), shall be null and void and shall constitute a material
breach of this Agreement.
3
<PAGE>
(c) Notwithstanding the foregoing, it is expressly acknowledged that a sale of
the assets or business of Cal Pro or Jaysport, or a merger in which either party
is not the surviving party shall not constitute an event of transfer or
assignment pursuant to this paragraph and the successor in interest of either
party shall inherit all rights and obligations under this Agreement.
7) ROYALTY PAYMENTS.
(a) During the initial two (2) year term of this Agreement, Jaysport shall pay
Cal Pro a royalty payment of three (3%) of Net Sales for all Products that it
sells.
(b) Net Sales is defined as the gross sales of Products less all sale returns,
allowances and discounts. Net Sales shall not include any freight, service fees
or taxes.
(c) During the initial two (2 ) year term of this Agreement, Jaysport guarantees
a minimum royalty payment to Cal Pro of twenty-five thousand dollars
($25,000.00) per annum, with ten thousand ($10,000.00) paid upon the execution
hereof and ten thousand dollars ($10,000.00) of the year two royalty to be paid
at the beginning of the second year of this Agreement.
(d) Royalty Payments are due thirty (30) days after the end of each calendar
quarter. In addition, Jaysport shall provide Cal Pro with a report of all
Product Sales for that calendar quarter.
(e) Jaysport agrees to keep at all times complete, accurate and true books and
records of all Product sales in sufficient detail to enable the royalties
payable under this Agreement to be computed and verified. Jaysport further
agrees to permit an independent certified public accountant or another
independent financial person acceptable to both parties, at Cal Pro's sole
expense, to have access for inspection at Jaysport's offices, to the books and
records of the Product sales; provided, however, that if such books and records
reveal an underpayment of royalties in excess of fifteen percent (15%), Cal Pro
shall be entitled to reimbursement of the cost of such inspection.
(f) With respect to any renewal agreement entered into between the parties,
royalty payments are subject to good faith negotiations.
8) MISCELLANEOUS
(a) Notices. All notices and other communications required or
authorized under this Agreement must be given in writing, and will be deemed
effective when received by a party by personal delivery, or if sent to a party
at the address or facsimile number set forth below such party's signature at the
end of this Agreement, then, upon electronic confirmation of receipt by
facsimile transmission, or five (5) days after being mailed by registered or
certified mail, return receipt requested. Either party may change its address or
facsimile number by written notice to the other party as provided herein.
4
<PAGE>
(b) Governing Law Severability. This Agreement shall be governed by the
laws of the State of California. If any provision in this Agreement is held by a
court of competent jurisdiction to be invalid, void or unenforceable, the
remaining provisions will nevertheless continue in force without being impaired
or invalidated in any way.
(c) Controversy; Attorneys' Fees. All controversies, claims and
disputes arising in connection with this Agreement shall be settled by mutual
consultation between the parties in good faith as promptly as possible, but
failing amicable settlement shall be settled finally by arbitration pursuant to
the provisions of this Section. Such arbitration shall be conducted in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association ("AAA"), in Los Angeles, California, subject to the following
provisions.
(i) Exclusivity. The parties hereby agree that the arbitration
procedure provided herein shall be the sole and exclusive method of resolving
any and all controversies, claims and disputes hereunder.
(ii) Selection of Arbitrators. The arbitration shall begin by
one party serving an arbitration demand on the other party, specifying the basis
for the demand. The parties then shall have ten (10) days to agree on an
arbitrator. If the parties fail to agree within ten (10) days of such failure,
the arbitrator shall be selected by the AAA.
(iii) Decision of Arbitrator. Within sixty (60) days after the
filing of the arbitration demand, the arbitrator shall make a final decision and
award according to the facts, the provisions of this Agreement and applicable
law. The decision shall set forth facts and reasons upon which the award is
based. Judgment upon the arbitration award may be entered in any court of
competent jurisdiction in accordance with this Section hereof.
(iv) Attorney Fees and Expenses. The parties expressly agree
that the prevailing party's costs and expenses of any arbitration and associated
legal action, including without limitation fees for attorneys, accountants,
consultants and expert witnesses, shall be paid by the losing party.
(v) Judicial Action. Legal action for entry of judgment upon
any arbitration award or adjudication of any controversy, claim or dispute
arising from a breach or alleged breach of this Section may be heard or tried
only in the courts of the State of California in the County of Los Angeles, or
the Federal District Court in the County of Los Angeles in the State of
California. Each of the parties hereby waives any defense of lack of in personam
jurisdiction of said courts and agrees that service of process in such action
may be made upon each of them by mailing it certified or registered mail to the
other party at the address provided for notices herein. Both parties hereby
submit to the jurisdiction of the court so designated, to the exclusion of any
other courts, which might have had jurisdiction apart from this Section.
(d) Successors and Assigns. This Agreement shall bind and inure to the
benefit of the respective successors and assigns of each party.
5
<PAGE>
(e) Headings; Construction; Official Version. Section headings are for
convenience only and are not a part of this Agreement, nor intended to affect
the interpretation of any provision hereof. This Agreement has been fully
negotiated between the parties. Each party has had ample opportunity to consult
an attorney, and has executed this Agreement without any coercion or duress. No
uncertainty or ambiguity in this Agreement will be construed against either
party.
(f) Entire Agreement. This Agreement constitutes the entire agreement
between Jaysport and Cal Pro and supersedes all prior and contemporaneous
representations, warranties, agreements and undertakings. The terms and
provisions of this Agreement may not be waived, altered, modified or amended
except in a writing executed by Jaysport and Cal Pro.
(g) United States Currency. All amounts payable hereunder, and all
references herein to dollar amounts, shall be in United States Dollars.
(h) Counterparts; Facsimile. This Agreement may be executed in several
counterparts, which together will constitute one binding Agreement. Facsimile
signatures are binding upon receipt, and the parties agree to exchange original
signatures within five (5) days of the facsimile transmission.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the date first written above.
JAYSPORT INTERNATIONAL, INC.
A CALIFORNIA CORPORATION.
By: /s/ Jay Joffe
-------------------------------------
Jay Joffe, President
Address: 24007 Ventura Blvd.
Calabasas, California 91302
Telephone: (818) 591-2686
Facsimile: (818) 591-0215
6
<PAGE>
CALIFORNIA PRO SPORTS, INC.
A Delaware Corporation
By: /s/ Barry Hollander
-------------------------------------
Barry Hollander, Acting President
Address: 1221 B South Batesville Road
Greer, South Carolina
Telephone: (864) 848-5160
Facsimile: (864) 848-5167
7
