U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
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 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. 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 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
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No matters were submitted to a vote of stockholders during the fourth
quarter of 1997.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
(a) MARKET INFORMATION.
The Company's Common Stock and Warrants have been traded over-the-counter
since January 18, 1995 and are quoted on the Nasdaq SmallCap Market under the
symbols CALP and CALPW, respectively. The following table sets forth the range
of high and low bid prices as quoted by Nasdaq. These market quotations reflect
inter-dealer prices without retail mark-up, mark-down or commissions and may not
represent actual transactions.
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>
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
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<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. 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
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<PAGE>
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.
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
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<PAGE>
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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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 $_____________ 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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(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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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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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. In August 1997, RDM filed
for Chapter 11 bankruptcy. 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."
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<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
-24-
<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
-25-
<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.
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<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>
-27-
<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 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. -- -- 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 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.
-28-
<PAGE>
CHANGES IN CONTROL. None.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
In April 1994, the Company issued warrants to Henry Fong to purchase up to
148,600 shares of Common Stock and issued warrants to Michael S. Casazza to
purchase up to 51,400 shares of Common Stock, exercisable at $4.50 per share
through April 14, 1997 (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.
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
-29-
<PAGE>
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) 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.
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<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.)
-31-
<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").)
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<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.)
-35-
<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. FILED HEREWITH.
11.1 Statement Re: Computation of Per Share Earnings. FILED
HEREWITH.
21.1 List of Subsidiaries. (INCORPORATED BY REFERENCE TO EXHIBIT
21.1 IN REGISTRATION STATEMENT 33-98898.)
27.1 Financial Data Schedule. FILED HEREWITH.
(b) REPORTS ON FORM 8-K.
None.
-36-
<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: April 15, 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: April 15, 1998 /s/ Henry Fong
-----------------------------------------
Henry Fong, Chief Executive
Officer and Director
Date: April 15, 1998 /s/ Barry S. Hollander
-----------------------------------------
Barry S. Hollander, Chief Financial
Officer and Principal Accounting Officer
Date: April 15, 1998 /s/ Brian C. Simpson
-----------------------------------------
Brian C. Simpson, Director
Date: April 15, 1998 /s/ Hung-Chang Yang
-----------------------------------------
Hung-Chang Yang, Director
-37-
<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.
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
<PAGE>
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
write downs Accruals 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
EXHIBIT 11.1
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
COMPUTATION OF NET LOSS PER SHARE
Year ended December 31,
1997 1996
Net Loss . ..................... $ (4,809,215) ($ 5,575,882)
============= =============
Weighted average number
of common shares outstanding ... 5,544,833 4,078,964
============= =============
Net income (loss) per share .... $ ($ 1.37)
============= =============
Diluted loss per share is not presented as the amounts are not dilutively
or incrementally different from net loss per share amounts.
AGREEMENT AND PLAN OF MERGER
AMONG
IMAGINON, INC. (A CALIFORNIA CORPORATION)
AND
CALIFORNIA PRO SPORTS, INC. (A DELAWARE CORPORATION)
AND
IMAGINON ACQUISITION CORP. (A CALIFORNIA CORPORATION)
AS OF JANUARY 30, 1998
30698_8
<PAGE>
This Agreement and Plan of Merger (the "Agreement") is made as of the
30th day of January, 1998, among California Pro Sports, Inc., a Delaware
corporation ("Cal Pro"); ImaginOn Acquisition Corp., a California corporation
(the "Merger Subsidiary"), which is wholly owned by Cal Pro; and ImaginOn, Inc.,
a California corporation ("ImaginOn").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of Cal Pro, the Merger
Subsidiary and ImaginOn each have determined that it is in the best interests of
their respective stockholders for Cal Pro to acquire ImaginOn through the merger
of Merger Subsidiary with and into the ImaginOn upon the terms and conditions
set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and certain other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties hereto covenant and
agree as follows:
ARTICLE 1
The Merger
1.1 MERGER. In accordance with the provisions of the business
corporation laws of the State of California at the Effective Date (as
hereinafter defined), Merger Subsidiary shall be merged (the "Merger") into
ImaginOn, as soon as practicable following the satisfaction or waiver, if
permissible, of the conditions set forth in Articles 6 and 7. Following the
Merger, ImaginOn shall continue as the surviving corporation (the "Surviving
Corporation") and shall continue to be governed by the laws of the State of
California.
1.2 CONTINUING OF CORPORATE EXISTENCE. Except as may otherwise be set
forth herein, the corporate existence and identity of ImaginOn, with all its
purposes, powers, franchises, privileges, rights and immunities, shall continue
unaffected and unimpaired by the Merger, and the corporate existence and
identity of Merger Subsidiary, with all its purposes, powers, franchises,
privileges, rights and immunities, at the Effective Date shall be merged with
and into that of ImaginOn, and ImaginOn shall be vested fully therewith and the
separate corporate existence and identity of Merger Subsidiary shall thereafter
cease except to the extent continued by statute.
1.3 EFFECTIVE DATE. The Merger shall become effective upon the filing
of the Certificate of Merger with the Secretary of State of California pursuant
to the provisions of the California General Corporation Law. The date and time
when the Merger shall become effective is hereinafter referred to as the
"Effective Date".
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1.4 CORPORATE GOVERNANCE OF THE SURVIVING CORPORATION.
(a) The Certificate of Incorporation of ImaginOn, as in effect on
the Effective Date, shall continue in full force and effect and shall
be the Certificate of Incorporation of the Surviving Corporation.
(b) The Bylaws of ImaginOn, as in effect as of the Effective Date,
shall continue in full force and effect and shall be the Bylaws of the
Surviving Corporation.
(c) The members of the Board of Directors of the Surviving
Corporation shall be the persons holding such office in ImaginOn as of
the Effective Date.
(d) The officers of the Surviving Corporation shall be the persons
holding such offices in ImaginOn as of the Effective Date.
1.5 RIGHTS AND LIABILITIES OF THE SURVIVING CORPORATION. The Surviving
Corporation shall have the following rights and obligations:
(a) The Surviving Corporation shall have all the rights,
privileges, immunities and powers and shall be subject to all the
duties and liabilities of a corporation organized under the laws of the
State of California.
(b) The title to all real estate and other property owned by each
of ImaginOn and the Merger Subsidiary shall be, at the Effective Date,
transferred to and vested in the Surviving Corporation without
reversion or impairment; and such transfer to and vesting in the
Surviving Corporation shall be deemed to occur by operation of law, and
no consent or approval of any other person shall be required in
connection with any such transfer or vesting unless such consent or
approval is specifically required in the event of merger by law or by
express provision in any contract, agreement, decree, order, or other
instrument to which ImaginOn or the Merger Subsidiary is a party or by
which it is bound.
(c) At the Effective Date, the Surviving Corporation shall
thenceforth have all liabilities of ImaginOn and the Merger Subsidiary,
and any proceeding pending against ImaginOn or the Merger Subsidiary
may be continued as if the Merger did not occur or the Surviving
Corporation may be substituted in the proceeding for the Merger
Subsidiary.
1.6 CLOSING. Consummation of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of ImaginOn located at
864 Laurel Street, 2nd Floor, San Carlos, California, commencing at 10:00 a.m.,
local time, as soon as practicable after the last to be fulfilled or waived of
the conditions set forth in Articles 6 and 7 or at such other place, time and
date as shall be fixed by mutual agreement between Cal Pro and ImaginOn. The day
on which the Closing shall occur is referred to herein as the "Closing Date."
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Each party will cause to be prepared, executed and delivered the Certificate of
Merger to be filed with the Secretary of State of California and all other
appropriate and customary documents as any party or its counsel may reasonably
request for the purpose of consummating the transactions contemplated by this
Agreement. All actions taken at the Closing shall be deemed to have been taken
simultaneously at the time the last of any such actions is taken or completed.
1.7 TAX CONSEQUENCES. It is intended that the Merger shall constitute a
reorganization within the meaning of Section 368(a)(2)(E) of the Internal
Revenue Code of 1986, as amended (the "Code"), and that this Agreement shall
constitute a "plan of reorganization" for the purposes of Section 368 of the
Code.
ARTICLE 2
Conversion of Shares; Treatment of Options
2.1 CONVERSION OF SHARES. At the Effective Date, by virtue of the
Merger and without any action on the part of the holder thereof:
(a) Except as noted on Exhibit 2.1, the holders of ImaginOn common
stock, par value $.001 per share (the "ImaginOn Common Stock") shall
hold 60% of the post-Merger issued and outstanding Cal Pro common
stock, par value $.01 per share (the "Cal Pro Common Stock").
Consequently, the ImaginOn Common Stock outstanding immediately prior
to the Effective Date (the "Converted Shares") shall as of the
Effective Date, by virtue of the Merger and without any action on the
part of the holder thereof, be converted into and represent 16,789,205
shares of issued and outstanding Cal Pro Common Stock. To the extent
that the proceeds from the sale by Cal Pro of its interest in USA Skate
Corporation to a third party (the "USA Transaction") are not available
to ImaginOn or the Surviving Corporation in the form of a loan, working
capital or otherwise, then the number of shares of Cal Pro Common Stock
to be issued to holders of ImaginOn Common Stock shall be adjusted so
that they receive additional shares equal to 1.5 times the number of
shares attributable to the proceeds from the USA Transaction which are
not available to ImaginOn or the Surviving Corporation.
(b) Each share of Common Stock, $.01 par value, of the Merger
Subsidiary which shall be outstanding immediately prior to the
Effective Date shall at the Effective Date, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into
one share of newly issued Cal Pro Common Stock.
2.2 FRACTIONAL SHARES. No scrip or fractional shares of Cal Pro Common
Stock shall be issued in the Merger. All fractional shares of Cal Pro Common
Stock to which a holder of ImaginOn Common Stock immediately prior to the
Effective Date would otherwise be entitled at the Effective Date shall be
aggregated. If a fractional share results from such aggregation, such
stockholder shall be entitled, after the later of (a) the Effective Date or (b)
the surrender of such stockholder's "Certificate" (as defined in Section 2.5) or
Certificates that represent such shares of ImaginOn Common Stock, to receive
from Cal Pro an amount in cash in lieu of such fractional share. The amount of
such cash payment shall be equal to such fractional proportion of the "Average
Closing Price" of Cal Pro's common stock, $0.01 par value ("Cal Pro Common
Stock"). Cal Pro will make available to the "Exchange Agent" (as defined in
Section 2.5) the cash necessary for the purpose of paying cash for fractional
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shares. For purposes of this Agreement, "Average Closing Price" shall mean the
average per share closing price of Cal Pro Common Stock as reported on the
Nasdaq SmallCap Market ("NSM") over the 20 trading days immediately preceding
the fifth trading day prior to the Effective Date.
2.3 STOCK OPTIONS AND WARRANTS.
(a) Except as set forth on Schedule 2.3, there are no options,
warrants or convertible securities outstanding entitling the holder
thereof to purchase Cal Pro capital stock.
(b) At the Effective Date, all options and warrants (collectively
the "Options") then outstanding to acquire shares of ImaginOn Common
Stock shall remain outstanding following the Effective Date and such
Options shall, by virtue of the Merger and without any further action
on the part of ImaginOn or the holder of any such Option, be assumed by
Cal Pro in accordance with the terms and conditions of the Options,
except that (A) each such Option shall be exercisable in accordance
with its terms for that whole number of shares of Cal Pro Common Stock
(rounded to the nearest whole share) into which the number of shares of
ImaginOn Common Stock subject to such Option immediately prior to the
Effective Date would be converted under Section 2.1 at an exercise
price per share of Cal Pro Common Stock (rounded to the nearest cent)
equal to the exercise price per share of ImaginOn Common Stock
applicable to such Option divided by the exchange ratio as finally
determined by the parties; (B) all actions to be taken thereunder by
the Board of Directors of ImaginOn or a committee thereof shall be
taken by the Board of Directors of Cal Pro or a committee thereof; and
(C) no payment shall be made for fractional interests. From and after
the date of this Agreement, no additional options shall be granted by
ImaginOn.
(c) It is intended that the assumed Options, as set forth herein,
shall not give to any holder thereof any benefits in addition to those
which such holder had prior to the assumption of the Option. Cal Pro
shall take all necessary corporate action necessary to reserve for
issuance a sufficient number of shares of Cal Pro Common Stock for
delivery upon exercise of the Options.
2.4 EXCHANGE AGENT.
(a) Cal Pro shall authorize Corporate Stock Transfer to serve as
exchange agent hereunder (the "Exchange Agent"). Promptly after the
Effective Date, Cal Pro shall deposit or shall cause to be deposited in
trust with the Exchange Agent the aggregate of the following: (i) the
Merger Consideration with respect to each Converted Share; and (ii)
cash sufficient to pay for fractional shares then known to Cal Pro, if
applicable (such cash amounts and certificates being hereinafter
referred to as the "Exchange Fund"). The Exchange Agent shall, pursuant
to irrevocable instructions received from Cal Pro, pay the Merger
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Consideration with respect to such Converted Shares as provided for in
this Article 2 out of the Exchange Fund. Any cash needed from time to
time by the Exchange Agent to make payments for fractional shares shall
be provided by Cal Pro and shall become part of the Exchange Fund. The
Exchange Fund shall not be used for any other purpose, except as
provided in this Agreement, or as otherwise agreed to by Cal Pro, the
Merger Subsidiary and ImaginOn prior to the Effective Date.
(b) As soon as practicable after the Effective Date, the Exchange
Agent shall mail and otherwise make available to each record holder
who, as of the Effective Date, was a holder of an outstanding
certificate or certificates which immediately prior to the Effective
Date represented shares of the Converted Shares (the "Certificates") a
form of letter of transmittal and instructions for use in effecting the
surrender of the Certificates for payment therefor and conversion
thereof, which letter of transmittal shall comply with all applicable
rules of the NSM.
(c) Delivery of Certificates shall be effected, and risk of loss
and title to the Certificates shall pass, only upon proper delivery of
the Certificates to the Exchange Agent and the form of letter of
transmittal shall so reflect. Upon surrender to the Exchange Agent of a
Certificate, together with such letter of transmittal duly executed,
the holder of such Certificate shall be entitled to receive in exchange
therefor one or more certificates as requested by the holder (properly
issued, executed and countersigned, as appropriate) representing that
number of whole shares of Cal Pro Common Stock to which such holder of
ImaginOn Common Stock shall have become entitled pursuant to the
provisions of this Article 2, and the Certificate so surrendered shall
forthwith be canceled.
(d) Cal Pro shall pay any transfer or other taxes required by
reason of the issuance of a certificate representing shares of Cal Pro
Common Stock; provided, however, that such certificate is issued in the
name of the person in whose name the Certificate surrendered in
exchange therefor is registered. If any portion of the consideration to
be received pursuant to this Article 2 upon exchange of a Certificate
is to be issued or paid to a person other than the person in whose name
the Certificate surrendered in exchange therefor is registered, it
shall be a condition of such issuance and payment that the Certificate
so surrendered shall be properly endorsed or otherwise in proper form
for transfer and that the person requesting such exchange shall pay in
advance any transfer or other taxes required by reason of the issuance
of a certificate representing shares of Cal Pro Common Stock to such
other person, or establish to the satisfaction of the Exchange Agent
that such tax has been paid or that no such tax is applicable. From the
Effective Date until surrender in accordance with the provisions of
this Section 2.5, each Certificate shall represent for all purposes
only the right to receive the consideration provided in Sections 2.1
and 2.2. No dividends that are otherwise payable on Cal Pro Common
Stock will be paid to persons entitled to receive Cal Pro Common Stock
until such persons surrender their Certificates. After such surrender,
there shall be paid to the person in whose name Cal Pro Common Stock
shall be issued any dividends on such Cal Pro Common Stock that shall
have a record date on or after the Effective Date and prior to such
surrender. In no event shall the persons entitled to receive
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surrender. In no event shall the persons entitled to receive such
dividends be entitled to receive interest on such dividends. All
payments in respect of shares of ImaginOn Common Stock that are made in
accordance with the terms hereof shall be deemed to have been made in
full satisfaction of all rights pertaining to such securities.
(e) In the case of any lost, mislaid, stolen or destroyed
Certificates, the holder thereof may be required, as a condition
precedent to the delivery to such holder of the consideration described
in this Article 2, to deliver to Cal Pro a bond, in such reasonable sum
as Cal Pro may direct, or other form of indemnity satisfactory to Cal
Pro, as indemnity against any claim that may be made against the
Exchange Agent, Cal Pro or the Surviving Corporation with respect to
the Certificate alleged to have been lost, mislaid, stolen or
destroyed.
(f) After the Effective Date, there shall be no transfers on the
stock transfer books of the Surviving Corporation of the shares of
ImaginOn Common Stock that were outstanding immediately prior to the
Effective Date. If, after the Effective Date, Certificates are
presented to the Surviving Corporation for transfer, they shall be
canceled and exchanged for the consideration described in this Article
2.
2.5 ADJUSTMENT. If, between the date of this Agreement and the Closing
Date or the Effective Date, as the case may be, the outstanding shares of
ImaginOn Common Stock or Cal Pro Common Stock shall have been changed into a
different number of shares or a different class by reason of any classification,
recapitalization, split-up, combination, exchange of shares, or readjustment or
a stock dividend thereon shall be declared with a record date within such
period, then the consideration to be received pursuant to Section 2.1(a) hereof
by the holders of shares of ImaginOn Common Stock shall be adjusted to
accurately reflect such change.
2.6 STATUS OF CAL PRO SECURITIES. The shares of Cal Pro Common Stock
being issued in the Merger are "restricted securities" as defined in Rule 144
under the Securities Act (the "Rule"), and (unless registered for resale or some
other exemption from registration, are available for any transfer) the Cal Pro
Common Stock must be held for a minimum of one year following the Merger, and
thereafter Cal Pro Common Stock may be sold in only limited amounts in a
specified manner in accordance with the terms and conditions of the Rule, if the
Rule is applicable (there being no representation by Cal Pro that it will be
applicable). In case the Rule is applicable, any sales of Cal Pro Common Stock
may be made only pursuant to an effective registration statement or an available
exemption from registration. Cal Pro will cause its stock transfer agent to
reflect such restrictions in Cal Pro's stock transfer books and to place an
appropriate restrictive legend or legend on any certificates evidencing the Cal
Pro Common Stock and any certificates issued in replacement or exchange
therefor. The Rule 144 holding period for the Cal Pro Common Stock will begin on
the Effective Date. Cal Pro has no intention of registering Cal Pro Common
Stock.
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ARTICLE 3
Representations and Warranties of ImaginOn
ImaginOn represents and warrants to Cal Pro and the Merger Subsidiary
that the statements contained in Article 3 are true and correct in all material
respects, except as set forth on the schedules attached hereto.
3.1 ORGANIZATION AND GOOD STANDING OF IMAGINON. ImaginOn is a
corporation duly organized, validly existing and in good standing under the laws
of California.
3.2 NO SUBSIDIARIES OR INVESTMENTS. ImaginOn owns no equity or debt
interest in any subsidiary corporation, limited liability company, partnership
or other business entity.
3.3 FOREIGN QUALIFICATION. ImaginOn is duly qualified or licensed to do
business and is in good standing as a foreign corporation in every jurisdiction
where the failure so to qualify would have a material adverse effect (a
"ImaginOn Material Adverse Effect") on (a) the business, operations, assets or
financial condition of ImaginOn or (b) the validity or enforceability of, or the
ability of ImaginOn to perform its obligations under, this Agreement. ImaginOn
is qualified to do business in no state other than California.
3.4 COMPANY POWER AND AUTHORITY. ImaginOn has the corporate or company
power and authority to own, lease and operate its properties and assets and to
carry on its business as currently being conducted. ImaginOn has the corporate
power and authority to execute and deliver this Agreement and, subject to the
approval of this Agreement and the Merger by its stockholders, to perform its
obligations under this Agreement and to consummate the Merger. The execution,
delivery and performance by ImaginOn of this Agreement has been duly authorized
by all necessary corporate action.
3.5 BINDING EFFECT. This Agreement has been duly executed and delivered
by ImaginOn and is the legal, valid and binding obligation of ImaginOn
enforceable in accordance with its terms except that:
(a) enforceability may be limited by bankruptcy, insolvency or
other similar laws affecting creditors' rights;
(b) the availability of equitable remedies may be limited by
equitable principles of general applicability; and
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(c) rights to indemnification may be limited by considerations of
public policy.
3.6 ABSENCE OF RESTRICTIONS AND CONFLICTS. The execution, delivery and
performance of this Agreement and the consummation of the Merger and the
fulfillment of and compliance with the terms and conditions of this Agreement do
not and will not, with the passing of time or the giving of notice or both,
violate or conflict with, constitute a breach of or default under, result in the
loss of any material benefit under, or permit the acceleration of any obligation
under, (i) any term or provision of the Certificate of Incorporation or Bylaws
of ImaginOn, (ii) any "Material Contract" (as defined in Section 3.13), (iii)
any judgment, decree or order of any court or governmental authority or agency
to which ImaginOn is a party or by which ImaginOn or any of its properties is
bound, or (iv) any statute, law, regulation or rule applicable to ImaginOn other
than such violations, conflicts, breaches or defaults which would not have an
ImaginOn Material Adverse Effect. Except for the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware and the Secretary of
State of the State of California, compliance with the applicable requirements of
the Securities Act, Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and applicable state securities laws, no consent, approval, order or
authorization of, or registration, declaration or filing with, any governmental
agency or public or regulatory unit, agency, body or authority with respect to
ImaginOn is required in connection with the execution, delivery or performance
of this Agreement by ImaginOn or the consummation of the transactions
contemplated hereby.
3.7 CAPITALIZATION OF IMAGINON.
(a) The capitalization of ImaginOn is set forth on Schedule 3.7(a).
(b) All of the issued and outstanding shares of ImaginOn Common
Stock have been duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights.
(c) There are no voting trusts, stockholder agreements or other
voting arrangements by the stockholders of ImaginOn.
(d) There is no outstanding subscription, contract, convertible or
exchangeable security, option, warrant, call or other right obligating
ImaginOn to issue, sell, exchange, or otherwise dispose of, or to
purchase, redeem or otherwise acquire, shares of, or securities
convertible into or exchangeable for, capital stock of ImaginOn.
3.8 IMAGINON INFORMATION. ImaginOn has made or will make available to
Cal Pro and the Merger Subsidiary all information that ImaginOn has available
(including all tax returns, financial statements given to any other person,
contracts, payroll schedules, financial books and records), and all other
information ImaginOn, its business, its customers, its management, and its
financial condition which Cal Pro may have requested (all such information being
referred to herein as the "ImaginOn Information"). As of their respective dates,
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the ImaginOn Information did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
3.9 FINANCIAL STATEMENTS AND RECORDS OF IMAGINON. ImaginOn has made
available to Cal Pro and the Merger Subsidiary true, correct and complete copies
of the following financial statements (the "ImaginOn Financial Statements"). The
consolidated financial statements of ImaginOn and its subsidiaries as of
December 31, 1996 and 1997 and for the years then ended, including the notes
thereto, in each case examined by and accompanied by the report of Murdock &
Assoc. (collectively, the "ImaginOn Year-End Statements").
The ImaginOn Year-End Statements have been prepared from, and are in
accordance with, the books and records of ImaginOn and present fairly,
in all material respects, the financial position of ImaginOn as of the
dates thereof and the results of operations and cash flows thereof for
the periods then ended, in each case in conformity with generally
accepted accounting principles, consistently applied, except as noted
therein. Adequate reserves are set forth on the ImaginOn Year-End
Statements, and the amount of such reserves are reasonable. The books
and records of ImaginOn have been and are being maintained in
accordance with good business practice, reflect only valid
transactions, are complete and correct in all material respects and
present fairly in all material respects the basis for the financial
position and results of operations of ImaginOn as set forth on the
ImaginOn Year Statements.
3.10 ABSENCE OF CERTAIN CHANGES. Since December 31, 1997, ImaginOn has
not, except as otherwise set forth in the ImaginOn Information or the ImaginOn
Financial Statements:
(a) suffered any adverse change in the business, operations,
assets, or financial condition, except for such changes that would not
result in an ImaginOn Material Adverse Effect;
(b) suffered any material damage or destruction to or loss of the
assets of ImaginOn, whether or not covered by insurance, which property
or assets are material to the operations or business of ImaginOn;
(c) settled, forgiven, compromised, canceled, released, waived or
permitted to lapse any material rights or claims other than in the
ordinary course of business;
(d) entered into or terminated any Material Contract or agreed or
made any changes in any Material Contract, other than renewals or
extensions thereof and leases, agreements, transactions and commitments
entered into or terminated in the ordinary course of business;
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(e) written up, written down or written off the book value of any
material amount of assets other than in the ordinary course of
business;
(f) declared, paid or set aside for payment any dividend or
distribution with respect to ImaginOn's capital stock;
(g) redeemed, purchased or otherwise acquired, or sold, granted or
otherwise disposed of, directly or indirectly, any of ImaginOn's
capital stock or securities or any rights to acquire such capital stock
or securities, or agreed to changes in the terms and conditions of any
such rights outstanding as of the date of this Agreement;
(h) increased the compensation of or paid any bonuses to any
employees or contributed to any employee benefit plan, other than in
accordance with established policies, practices or requirements and as
provided in Section 5.1 hereof;
(i) entered into any employment, consulting or compensation
agreement with any person or group, except for agreements which would
not have an ImaginOn Material Adverse Effect;
(j) entered into any collective bargaining agreement with any
person or group;
(k) entered into, adopted or amended any employee benefit plan; or
(l) entered into any agreement to do any of the foregoing.
3.11 NO MATERIAL UNDISCLOSED LIABILITIES. There are no liabilities or
obligations of ImaginOn of any nature, whether absolute, accrued, contingent, or
otherwise, other than:
(a) the liabilities and obligations that are reflected, accrued or
reserved against on the ImaginOn Financial Statements, or referred to
in the footnotes thereto, or incurred in the ordinary course of
business and consistent with past practices since December 31, 1997; or
(b) liabilities and obligations which in the aggregate would not
result in an ImaginOn Material Adverse Effect.
3.12 TAX RETURNS; TAXES. ImaginOn has duly filed all U.S. federal and
material state, county, local and foreign tax returns and reports required to be
filed by it and all such returns and reports are correct in all material
respects; have either paid in full all taxes that have become due and any
interest and penalties with respect thereto or have fully accrued on its books
or have established adequate reserves for all taxes payable but not yet due; and
have made cash deposits with appropriate governmental authorities representing
estimated required payments of taxes. No extension or waiver of any statute of
limitations or time within which to file any return has been granted to or
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requested by ImaginOn with respect to any tax. No unsatisfied deficiency,
delinquency or default for any tax, assessment or governmental charge has been
claimed, proposed or assessed against ImaginOn, nor has ImaginOn received notice
of any such deficiency, delinquency or default. ImaginOn has no material tax
liabilities other than those reflected on the ImaginOn Financial Statements and
those arising in the ordinary course of business since the date thereof.
ImaginOn will make available to Cal Pro true, complete and correct copies of
ImaginOn's tax returns. There is no dispute or claim concerning any tax
liability of ImaginOn or any of its subsidiaries either: (a) raised by any
taxing authority in writing; (b) as to which ImaginOn has received notice
concerning a potential audit of any return filed by ImaginOn; and (c) there is
no outstanding audit or pending audit of any tax return filed by ImaginOn,
except as set forth on Schedule 3.12.
3.13 MATERIAL CONTRACTS. ImaginOn has furnished or made available to
Cal Pro accurate and complete copies of the Material Contracts (as defined
herein) applicable to ImaginOn. Except as set forth on Schedule 3.13, there is
not under any of the Material Contracts any existing breach, default or event of
default by ImaginOn nor any event that with notice or lapse of time or both
would constitute a breach, default or event of default by ImaginOn other than
breaches, defaults or events of default which would not have an ImaginOn
Material Adverse Effect nor does ImaginOn know of, and ImaginOn has not received
notice of, or made a claim with respect to, any breach or default by any other
party thereto which would, severally or in the aggregate, have an ImaginOn
Material Adverse Effect. As used herein, the term "Material Contracts" shall
mean all contracts and agreements providing for expenditures or commitments by
ImaginOn in excess of $10,000 over more than a 12-month period.
3.14 LITIGATION AND GOVERNMENT CLAIMS. There is no pending suit, claim,
action or litigation, or administrative, arbitration or other proceeding or
governmental investigation or inquiry against ImaginOn to which its business or
assets are subject which would, severally or in the aggregate, reasonably be
expected to result in an ImaginOn Material Adverse Effect nor have any such
proceedings been threatened or contemplated. ImaginOn is not subject to any
judgment, decree, injunction, rule or order of any court, or, to the knowledge
of ImaginOn, any governmental restriction applicable to ImaginOn which is
reasonably likely (i) to have an ImaginOn Material Adverse Effect or (ii) to
cause a material limitation on Cal Pro's ability to operate the business of
ImaginOn (as it is currently operated) after the Closing.
3.15 COMPLIANCE WITH LAWS. ImaginOn has all material authorizations,
approvals, licenses and orders to carry on its business as it is now being
conducted, to own or hold under lease the properties and assets it owns or hold
under lease and to perform all of its obligations under the agreements to which
it is a party, except for instances which would not have a ImaginOn Material
Adverse Effect. ImaginOn has been and is, to the knowledge of ImaginOn, in
compliance with all applicable laws (including those related to environmental
matters referenced in the ImaginOn Information), regulations and administrative
orders of any country, state or municipality or of any subdivision of any
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thereof to which its business and its employment of labor or its use or
occupancy of properties or any part hereof are subject, the violation of which
would have a ImaginOn Material Adverse Effect.
3.16 EMPLOYEE BENEFIT PLANS. ImaginOn has no employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
3.17 EMPLOYMENT AGREEMENTS; LABOR RELATIONS.
(a) Schedule 3.16 sets forth a complete and accurate list of all
material employee benefit or compensation plans, agreements and
arrangements to which ImaginOn is a party and which is not disclosed in
the ImaginOn Information, including without limitation (i) all
severance, employment, consulting or similar contracts, (ii) all
material agreements and contracts with "change of control" provisions
or similar provisions and (iii) all indemnification agreements or
arrangements with directors or officers.
(b) ImaginOn is in compliance in all material respects with all
laws (including Federal and state laws) respecting employment and
employment practices, terms and conditions of employment, wages and
hours, and is not engaged in any unfair labor or unlawful employment
practice.
3.18 INTELLECTUAL PROPERTY. ImaginOn owns or has valid, binding and
enforceable rights to use all material patents, trademarks, trade names, service
marks, service names, copyrights, applications therefor and licenses or other
rights in respect thereof ("Intellectual Property") used or held for use in
connection with the business of ImaginOn, without any known conflict with the
rights of others, except for such conflicts as do not have an ImaginOn Material
Adverse Effect. ImaginOn has not received any notice from any other person
pertaining to or challenging the right of ImaginOn to use any Intellectual
Property or any trade secrets, proprietary information, inventions, know-how,
processes and procedures owned or used or licensed to ImaginOn, except with
respect to rights the loss of which, individually or in the aggregate, would not
have an ImaginOn Material Adverse Effect.
3.19 PROPERTIES AND RELATED MATTERS. ImaginOn owns no real estate.
3.20 BROKERS AND FINDERS. Neither ImaginOn, nor to ImaginOn's
knowledge, any of its officers, directors and employees has employed any broker,
finder or investment bank or incurred any liability for any investment banking
fees, financial advisory fees, brokerage fees or finders' fees in connection
with the transactions contemplated hereby. ImaginOn is not aware of any claim
for payment of any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby.
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ARTICLE 4
Representations and Warranties of Cal Pro
and the Merger Subsidiary
Cal Pro and the Merger Subsidiary represent and warrant to ImaginOn
that the statements contained in Article 4 are true and correct in all material
respects. As used in this Article 4 and elsewhere in this Agreement, the phrase
"to Cal Pro's or the Merger Subsidiary's knowledge" or "to Cal Pro's or the
Merger Subsidiary's actual knowledge" shall mean to the knowledge of the officer
of Cal Pro or the Merger Subsidiary who has the principal responsibility for the
matter being stated.
4.1 ORGANIZATION AND GOOD STANDING. Each of Cal Pro, the Merger
Subsidiary and all corporations, partnerships and other entities in which Cal
Pro owns any equity interest (the "Cal Pro Subsidiaries" which includes the
Merger Subsidiary) is duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or organization. All
shares of capital stock or other equity interests of each of the material Cal
Pro Subsidiaries are owned by Cal Pro, either directly or indirectly, free and
clear of all material liens, encumbrances, equities or claims.
4.2 FOREIGN QUALIFICATION. Cal Pro and each of the Cal Pro Subsidiaries
are duly qualified or licensed to do business and are in good standing as a
foreign corporation in every jurisdiction where the failure so to qualify would
have a material adverse effect (a "Cal Pro Material Adverse Effect") on (a) the
business, operations, assets or financial condition of Cal Pro and the Cal Pro
Subsidiaries taken as a whole or (b) the validity or enforceability of, or the
ability of Cal Pro to perform its obligations under, this Agreement.
4.3 CORPORATE POWER AND AUTHORITY. Cal Pro and the Cal Pro Subsidiaries
have the corporate power and authority and all material licenses and permits to
own, lease and operate their respective properties and assets and to carry on
their respective businesses as currently being conducted. Each of Cal Pro and
the Merger Subsidiary has the corporate power and authority to execute and
deliver this Agreement and to perform its obligations under this Agreement and
to consummate the Merger. The execution, delivery and performance by Cal Pro and
the Merger Subsidiary of this Agreement has been duly authorized by all
necessary corporate action.
4.4 BINDING EFFECT. This Agreement has been duly executed and delivered
by Cal Pro and the Merger Subsidiary and is the legal, valid and binding
obligations of Cal Pro and the Merger Subsidiary, enforceable in accordance with
its terms except that:
(a) enforceability may be limited by bankruptcy, insolvency or
other similar laws affecting creditors' rights;
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(b) the availability of equitable remedies may be limited by
equitable principles of general applicability; and
(c) rights to indemnification may be limited by considerations of
public policy.
4.5 ABSENCE OF RESTRICTIONS AND CONFLICTS. The execution, delivery and
performance of this Agreement and the consummation of the Merger and the
fulfillment of and compliance with the terms and conditions of this Agreement do
not and will not, with the passing of time or the giving of notice or both,
violate or conflict with, constitute a breach of or default under, result in the
loss of any material benefit under, or permit the acceleration of any obligation
under, (i) any term or provision of the Certificate of Incorporation or Bylaws
of Cal Pro or the Merger Subsidiary, (ii) any "Cal Pro Material Contract" (as
defined in Section 4.12), (iii) any judgment, decree or order of any court or
governmental authority or agency to which Cal Pro or any of the Cal Pro
Subsidiaries is a party or by which Cal Pro or any of the Cal Pro Subsidiaries
or any of their respective properties is bound, or (iv) any statute, law,
regulation or rule applicable to Cal Pro or any of the Cal Pro Subsidiaries
other than such violations, conflicts, breaches or defaults as would not have a
Cal Pro Material Adverse Effect. Except for the filing of the Certificate of
Merger with the Secretary of State of California, compliance with the Securities
Act, the Exchange Act and applicable state securities laws, no consent,
approval, order or authorization of, or registration, declaration or filing
with, any governmental agency or public or regulatory unit, agency, body or
authority with respect to Cal Pro or the Cal Pro Subsidiaries is required in
connection with the execution, delivery or performance of this Agreement by Cal
Pro or the consummation of the transactions contemplated hereby.
4.6 CAPITALIZATION OF CAL PRO.
(a) The capitalization of Cal Pro is set forth on Schedule 4.6(a).
All of the issued and outstanding shares of Cal Pro Preferred Stock
have been duly authorized and validly issued and are fully paid and
nonassessable.
(b) All of the issued and outstanding shares of Cal Pro Common
Stock have been duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights.
(c) The shares of Cal Pro Common Stock to be issued in the Merger
will be duly authorized and validly issued and will be fully paid,
nonassessable shares of Cal Pro Common Stock free of preemptive rights.
(d) The shares of Cal Pro Common Stock to be issued upon the
conversion of the Cal Pro Preferred Stock will be duly authorized and
validly issued and will be fully paid, nonassessable shares of Cal Pro
Common Stock free of preemptive rights.
(e) To Cal Pro's knowledge, there are no voting trusts, stockholder
agreements or other voting arrangements by the stockholders of Cal Pro.
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(f) Except as set forth in subsection (a) above, there is no
outstanding subscription, contract, convertible or exchangeable
security, option, warrant, call or other right obligating Cal Pro or
its subsidiaries to issue, sell, exchange, or otherwise dispose of, or
to purchase, redeem or otherwise acquire, shares of, or securities
convertible into or exchangeable for, capital stock of Cal Pro.
4.7 CAL PRO SEC REPORTS. Cal Pro has made available to ImaginOn (i) Cal
Pro's Annual Reports on Form 10-K, including all exhibits filed thereto and
items incorporated therein by reference, (ii) Cal Pro's Quarterly Reports on
Form 10-Q, including all exhibits thereto and items incorporated therein by
reference, (iii) proxy statements relating to Cal Pro's meetings of stockholders
and (iv) all other reports or registration statements (as amended or
supplemented prior to the date hereof), filed by Cal Pro with the Securities and
Exchange Commission ("SEC") since January 1, 1996, including all exhibits
thereto and items incorporated therein by reference (items (i) through (iv)
being referred to as the "Cal Pro SEC Reports"). As of their respective dates,
Cal Pro SEC Reports did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. Since January 1, 1996, Cal Pro has filed all material
forms (and necessary amendments), reports and documents with the SEC required to
be filed by it pursuant to the federal securities laws and the SEC rules and
regulations thereunder, each of which complied as to form, at the time such
form, report or document was filed, in all material respects with the applicable
requirements of the Securities Act and the Exchange Act and the applicable rules
and regulations thereunder.
4.8 FINANCIAL STATEMENTS AND RECORDS OF CAL PRO. Cal Pro has made
available to ImaginOn true, correct and complete copies of the following
financial statements (the "Cal Pro Financial Statements"):
(a) the consolidated balance sheets of Cal Pro and its consolidated
subsidiaries as of December 31, 1995 and 1996, and the consolidated
statements of income, stockholders' equity and cash flows for the
fiscal years then ended, including the notes thereto, in each case
examined by and accompanied by the report of Gelfond Hochstadt Pangburn
& Co.; and
(b) the unaudited balance sheet of Cal Pro as of December 31, 1997
(the "Cal Pro Balance Sheet"), with any notes thereto, and the related
unaudited statement of income for the fiscal quarter then ended
(collectively, the "Cal Pro Quarterly Statements") as set forth on
Schedule 4.8(b).
The Cal Pro Financial Statements present fairly, in all material
respects, the financial position of Cal Pro as of the dates thereof and
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the results of operations and changes in financial position thereof for
the periods then ended, in each case in conformity with generally
accepted accounting principles, consistently applied, except as noted
therein. Since December 31, 1997, there has been no change in
accounting principles applicable to, or methods of accounting utilized
by, Cal Pro, except as noted in the Cal Pro Financial Statements. The
books and records of Cal Pro have been and are being maintained in
accordance with good business practice, reflect only valid
transactions, are complete and correct in all material respects, and
present fairly in all material respects the basis for the financial
position and results of operations of Cal Pro set forth in the Cal Pro
Financial Statements.
4.9 ABSENCE OF CERTAIN CHANGES. Since December 31, 1997, Cal Pro has
not, except as otherwise set forth in the Cal Pro SEC Reports or on Schedule
4.9:
(a) suffered any adverse change in the business, operations,
assets, or financial condition except for such changes that would not
have a Cal Pro Material Adverse Effect;
(b) suffered any material damage or destruction to or loss of the
assets of Cal Pro or any of the Cal Pro Subsidiaries, whether or not
covered by insurance, which property or assets are material to the
operations or business of Cal Pro and its subsidiaries taken as a
whole;
(c) settled, forgiven, compromised, canceled, released, waived or
permitted to lapse any material rights or claims other than in the
ordinary course of business;
(d) entered into or terminated any Material Contract or agreed or
made any changes in any Material Contract, other than renewals or
extensions thereof and leases, agreements, transactions and commitments
entered into or terminated in the ordinary course of business;
(e) written up, written down or written off the book value of any
material amount of assets other than in the ordinary course of
business;
(f) declared, paid or set aside for payment any dividend or
distribution with respect to Cal Pro's capital stock;
(g) redeemed, purchased or otherwise acquired, or sold, granted or
otherwise disposed of, directly or indirectly, any of Cal Pro's capital
stock or securities (other than shares issued upon exercise of the Cal
Pro Options) or any rights to acquire such capital stock or securities,
or agreed to changes in the terms and conditions of any such rights
outstanding as of the date of this Agreement;
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(h) increased the compensation of or paid any bonuses to any
employees or contributed to any employee benefit plan, other than in
accordance with established policies, practices or requirements and as
provided in Section 5.2 hereof;
(i) entered into any employment, consulting or compensation
agreement with any person or group, except for agreements which would
not have a Cal Pro Material Adverse Effect;
(j) entered into any collective bargaining agreement with any
person or group;
(k) entered into, adopted or amended any employee benefit plan; or
(l) entered into any agreement to do any of the foregoing.
4.10 NO MATERIAL UNDISCLOSED LIABILITIES. There are no liabilities or
obligations of Cal Pro and its consolidated subsidiaries of any nature, whether
absolute, accrued, contingent, or otherwise, other than:
(a) liabilities and obligations that are reflected, accrued or
reserved against on the Cal Pro Balance Sheet or referred to in the
footnotes to the Cal Pro Balance Sheet, or incurred in the ordinary
course of business and consistent with past practices since December
31, 1997; or
(b) liabilities and obligations which in the aggregate would not
result in a Cal Pro Material Adverse Effect.
4.11 TAX RETURNS; TAXES. Each of Cal Pro and the Cal Pro Subsidiaries
have duly filed all U.S. federal and material state, county, local and foreign
tax returns and reports required to be filed by it and all such returns and
reports are correct in all material respects; have either paid in full all taxes
that have become due and any interest and penalties with respect thereto or have
fully accrued on its books or have established adequate reserves for all taxes
payable but not yet due; and have made cash deposits with appropriate
governmental authorities representing required estimated payments of taxes. No
extension or waiver of any statute of limitations or time within which to file
any return has been granted to or requested by Cal Pro or the Cal Pro
Subsidiaries with respect to any tax. No unsatisfied deficiency, delinquency or
default for any tax, assessment or governmental charge has been claimed,
proposed or assessed against Cal Pro or the Cal Pro Subsidiaries, nor has Cal
Pro or the Cal Pro Subsidiaries received notice of any such deficiency,
delinquency or default. Cal Pro and the Cal Pro Subsidiaries have no material
tax liabilities other than those reflected on the Cal Pro Balance Sheet and
those arising in the ordinary course of business since the date thereof. Cal Pro
will make available to ImaginOn true, complete and correct copies of Cal Pro's
consolidated tax returns. There is no dispute or claim concerning any material
tax liability of Cal Pro or any of its subsidiaries either: (a) raised by any
taxing authority in writing; (b) as to which Cal Pro or any of its subsidiaries
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has received notice concerning a potential audit of any return filed by Cal Pro;
and (c) there is no outstanding audit or pending audit of any tax return filed
by Cal Pro, except as set forth on Schedule 4.11.
4.12 MATERIAL CONTRACTS. Cal Pro has furnished or made available to
ImaginOn accurate and complete copies of the Cal Pro Material Contracts (as
defined herein) applicable to Cal Pro or any of the Cal Pro Subsidiaries. Except
as set forth on Schedule 4.12, there is not under any of the Cal Pro Material
Contracts any existing breach, default or event of default by Cal Pro or any of
the Cal Pro Subsidiaries nor event that with notice or lapse of time or both
would constitute a breach, default or event of default by Cal Pro or any of the
Cal Pro Subsidiaries other than breaches, defaults or events of default which
would not have a Cal Pro Material Adverse Effect nor does Cal Pro know of, and
Cal Pro has not received notice of, or made a claim with respect to, any breach
or default by any other party thereto which would, severally or in the
aggregate, have a Cal Pro Material Adverse Effect. As used herein, the term "Cal
Pro Material Contracts" shall mean all contracts and agreements filed, or
required to be filed, as exhibits to Cal Pro's Annual Report on Form 10-K for
the year ended December 31, 1996 and any contracts and agreements entered into
since December 31, 1996 which would be required to be filed or incorporated by
reference therein as an exhibit to Cal Pro's Annual Report on Form 10-K for the
year ending December 31, 1997.
4.13 LITIGATION AND GOVERNMENT CLAIMS. Except as disclosed in the Cal
Pro SEC Reports, there is no pending suit, claim, action or litigation, or
administrative, arbitration or other proceeding or governmental investigation or
inquiry against Cal Pro or the Cal Pro Subsidiaries to which their businesses or
assets are subject which would, severally or in the aggregate, reasonably be
expected to result in a Cal Pro Material Adverse Effect nor have any such
proceedings been threatened or contemplated. Neither Cal Pro nor any Cal Pro
Subsidiary is subject to any judgment, decree, injunction, rule or order of any
court, or, to the knowledge of Cal Pro, any governmental restriction applicable
to Cal Pro or any Cal Pro Subsidiary which is reasonably likely to have a Cal
Pro Material Adverse Effect.
4.14 COMPLIANCE WITH LAWS. Cal Pro and the Cal Pro Subsidiaries each
own or hold under lease the properties or assets they own or hold under lease
and perform all of their obligations under the agreements to which they are a
party, except for instances which would not have a Cal Pro Material Adverse
Effect. Cal Pro and the Cal Pro Subsidiaries have been and are, to the knowledge
of Cal Pro, in compliance with all applicable laws (including those referenced
in the Cal Pro SEC Reports), regulations and administrative orders of any
country, state or municipality or any subdivision of any thereof to which their
respective business and their employment of labor or their use or occupancy of
properties or any part hereof are subject, the violation of which would have a
Cal Pro Material Adverse Effect.
4.15 EMPLOYMENT AGREEMENTS; LABOR RELATIONS. Each of Cal Pro and the
Cal Pro Subsidiaries is in compliance in all material respects with all laws
(including Federal and state laws) respecting employment and employment
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practices, terms and conditions of employment, wages and hours, and is not
engaged in any unfair labor or unlawful employment practice. There is no
unlawful employment practice discrimination charge pending before the EEOC or
EEOC recognized state "referral agency." There is no unfair labor practice
charge or complaint against Cal Pro or any of the Cal Pro Subsidiaries pending
before the National Labor Review Board. There is no collective bargaining
agreement that is binding on Cal Pro or any of the Cal Pro Subsidiaries.
4.16 CAL PRO EMPLOYEE BENEFIT PLANS. Cal Pro has no employee benefit
plans subject to ERISA.
4.17 INTELLECTUAL PROPERTY. Cal Pro and the Cal Pro Subsidiaries own or
have valid, binding and enforceable rights to use all material patents,
trademarks, trade names, service marks, service names, copyrights, applications
therefor and licenses or other rights in respect thereof ("Cal Pro Intellectual
Property") used or held for use in connection with the business of Cal Pro or
the Cal Pro Subsidiaries, without any known conflict with the rights of others,
except for such conflicts as do not have a Cal Pro Material Adverse Effect.
Neither Cal Pro nor any of the Cal Pro Subsidiaries has received any notice from
any other person pertaining to or challenging the right of Cal Pro or any of the
Cal Pro Subsidiaries to use any Cal Pro Intellectual Property or any trade
secrets, proprietary information, inventions, know-how, processes and procedures
owned or used or licensed to Cal Pro or the Cal Pro Subsidiaries, except with
respect to rights the loss of which, individually or in the aggregate, would not
have a Cal Pro Material Adverse Effect.
4.18 PROPERTIES AND RELATED MATTERS. Neither Cal Pro nor the Merger
Subsidiary owns any real property.
4.19 NASDAQ FEES. Except as set forth on Schedule 4.19, Cal Pro has
paid all fees due and owing to Nasdaq with respect to Cal Pro Common Stock on
the NSM and Cal Pro will pay all such fees arising out of the issuance of any
shares of Cal Pro Common Stock in connection with the transactions contemplated
hereby.
ARTICLE 5
Certain Covenants and Agreements
5.1 CONDUCT OF BUSINESS BY IMAGINON. From the date hereof to the
Effective Date, ImaginOn will, except as required in connection with the Merger
and the other transactions contemplated by this Agreement and except as
otherwise disclosed in the ImaginOn Information or consented to in writing by
Cal Pro:
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(a) not engage in any new line of business or enter into any
Material Contract, transaction or activity or make any material
commitment except those in the ordinary and regular course of business
and not otherwise prohibited under this Section 5.1;
(b) neither change nor amend its Articles of Incorporation or
Bylaws;
(c) not issue or sell shares of capital stock of ImaginOn (other
than upon the exercise of ImaginOn Options) or issue, sell or grant
options, warrants or rights to purchase or subscribe to, or enter into
any arrangement or contract with respect to the issuance or sale of any
of the capital stock of ImaginOn or rights or obligations convertible
into or exchangeable for any shares of the capital stock of ImaginOn,
not alter the terms of any outstanding ImaginOn Options and not make
any changes (by split-up, combination, reorganization or otherwise) in
the capital structure of ImaginOn;
(d) not declare, pay or set aside for payment any dividend or other
distribution in respect of the capital stock or other equity securities
of ImaginOn and not redeem, purchase or otherwise acquire any shares of
the capital stock or other securities of ImaginOn or rights or
obligations convertible into or exchangeable for any shares of the
capital stock or other securities of ImaginOn or obligations
convertible into such, or any options, warrants or other rights to
purchase or subscribe to any of the foregoing;
(e) not acquire or enter into any agreement to acquire, by merger,
consolidation or purchase of stock or assets, any business or entity;
(f) use its reasonable efforts to preserve intact the corporate
existence, goodwill and business organization of ImaginOn;
(g) perform all of its obligations under all Material Contracts
(except those being contested in good faith) and not enter into, assume
or amend any contract or commitment that would be a Material Contract
other than contracts to provide services entered into in the ordinary
course of business; and
(h) except in instances which would not have an ImaginOn Material
Adverse Effect, prepare and file all federal, state, local and foreign
returns for taxes and other tax reports, filings and amendments thereto
required to be filed by it, and allow Cal Pro, at its request, to
review all such returns, reports, filings and amendments at ImaginOn's
offices prior to the filing thereof, which review shall not interfere
with the timely filing of such returns.
In connection with the continued operation of the business of ImaginOn
between the date of this Agreement and the Effective Date, ImaginOn shall confer
in good faith and on a regular and frequent basis with one or more
representatives of Cal Pro designated in writing to report operational matters
of materiality and the general status of ongoing operations. ImaginOn
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acknowledges that Cal Pro does not and will not waive any rights it may have
under this Agreement as a result of such consultations nor shall Cal Pro be
responsible for any decisions made by ImaginOn's officers and directors with
respect to matters which are the subject of such consultation.
5.2 CONDUCT OF BUSINESS BY CAL PRO. From the date hereof to the
Effective Date, Cal Pro will, and will cause the Merger Subsidiary and each of
the Cal Pro Subsidiaries to, except as required in connection with the Merger
and the other transactions contemplated by this Agreement and except as
otherwise disclosed in the Cal Pro Information hereto or consented to in writing
by ImaginOn:
(a) not engage in any new line of business or enter into any
agreement, transaction or activity or make any commitment;
(b) neither change nor amend its Certificate of Incorporation or
Bylaws;
(c) not make any changes (by split-up, combination, reorganization
or otherwise) in the capital structure of Cal Pro, the Merger
Subsidiary or any of the Cal Pro Subsidiaries; provided, however, Cal
Pro may sell all or a portion of the shares it owns in USA Skate Corp.
for which it is currently negotiating the sale;
(d) except as set forth on Schedule 5.2(d), not issue or sell
shares of capital stock of Cal Pro (other than upon the exercise of Cal
Pro Options) or issue, sell or grant options, warrants or rights to
purchase or subscribe to, or enter into any arrangement or contract
with respect to the issuance or sale of any of the capital stock of Cal
Pro or rights or obligations convertible into or exchangeable for any
shares of the capital stock of ImaginOn and not alter the terms of any
outstanding Cal Pro Options or the Cal Pro Option Plans;
(e) not declare, pay or set aside for payment any dividend or other
distribution in respect of the capital stock or other equity securities
of Cal Pro and not redeem, purchase or otherwise acquire any shares of
the capital stock or other securities of Cal Pro or any of the Cal Pro
Subsidiaries, or rights or obligations convertible into or exchangeable
for any shares of the capital stock or other securities of Cal Pro, the
Merger Subsidiary or any of the Cal Pro Subsidiaries or obligations
convertible into such, or any options, warrants or other rights to
purchase or subscribe to any of the foregoing;
(f) not acquire or enter into any agreement to acquire, by merger,
consolidation or purchase of stock or assets, any business or entity;
and
(g) use its reasonable efforts to preserve intact the corporate
existence of Cal Pro and the Cal Pro Subsidiaries.
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(h) not make or incur (other than in the ordinary course of
business) any capital expenditures;
(i) perform all of its obligations under all Material Contracts
(except those being contested in good faith) and not enter into, assume
or amend any contract or commitment that would be a Material Contract;
and
(j) prepare and file all federal, state, local and foreign returns
for taxes and other tax reports, filings and amendments thereto
required to be filed by it, and allow ImaginOn, at its request, to
review all such returns, reports, filings and amendments at Cal Pro's
office prior to the filing thereof, which review shall not interfere
with the timely filing of such returns.
In connection with the wind-down of the business of Cal Pro between the
date of this Agreement and the Effective Date, Cal Pro shall confer in
good faith and on a regular and frequent basis with one or more
representatives of ImaginOn designated in writing to report operational
matters of materiality and the general status of ongoing operations.
Cal Pro acknowledges that ImaginOn does not and will not waive any
rights it may have under this Agreement as a result of such
consultations nor shall ImaginOn be responsible for any decisions made
by Cal Pro's officers and directors with respect to matters which are
the subject of such consultation.
5.3 NOTICE OF ANY MATERIAL CHANGE. Each of ImaginOn and Cal Pro shall,
promptly after the first notice or occurrence thereof but not later than the
Closing Date, advise the other in writing of any event or the existence of any
state of facts that (i) would make any of its representations and warranties in
this Agreement untrue in any material respect, or (ii) would otherwise
constitute either an ImaginOn Material Adverse Effect or a Cal Pro Material
Adverse Effect.
5.4 INSPECTION AND ACCESS TO INFORMATION.
(a) Between the date of this Agreement and the Effective Date,
ImaginOn will provide to the Merger Subsidiary and Cal Pro and their
accountants, counsel and other authorized representatives reasonable
access, during normal business hours to its premises, and will cause
its officers to furnish to Cal Pro and the Merger Subsidiary and their
authorized representatives such financial, technical and operating data
and other information pertaining to its business, as the Merger
Subsidiary and Cal Pro shall from time to time reasonably request.
(b) Between the date of this Agreement and the Effective Date, Cal
Pro will, and will cause each of the Cal Pro Subsidiaries to, provide
to ImaginOn and its accountants, counsel and other authorized
representatives reasonable access, during normal business hours to its
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premises, and will cause its officers to furnish to ImaginOn and its
authorized representatives such financial, technical and operating data
and other information pertaining to its business, as ImaginOn shall
from time to time reasonably request.
(c) Each of the parties hereto and their respective representatives
shall maintain the confidentiality of all information (other than
information which is generally available to the public) concerning the
other parties hereto acquired pursuant to the transactions contemplated
hereby in the event that the Merger is not consummated. Each of the
parties hereto and their representatives shall not use such information
so obtained to the detriment or competitive disadvantage of the other
party hereto. All files, records, documents, information, data and
similar items relating to the confidential information of ImaginOn,
whether prepared by Cal Pro or otherwise coming into Cal Pro's
possession, shall remain the exclusive property of ImaginOn and shall
be promptly delivered to ImaginOn upon termination of this Agreement.
All files, records, documents, information, data and similar items
relating to the confidential information of Cal Pro, whether prepared
by ImaginOn or otherwise coming into ImaginOn's possession, shall
remain the exclusive property of Cal Pro and shall be promptly
delivered to Cal Pro upon termination of this Agreement.
5.5 CAL PRO EXCHANGE ACT REPORTS. ImaginOn acknowledges that Cal Pro
will be required to report its acquisition of ImaginOn promptly following the
Effective Date. ImaginOn agrees to provide as promptly as practicable to Cal Pro
such information concerning its business and financial statements and affairs
as, in the reasonable judgment of Cal Pro, may be required or appropriate for
inclusion in the required report, or in any amendments or supplements thereto,
and to cause its counsel and auditors to cooperate with Cal Pro's counsel and
auditors in the preparation of such report.
5.6 REASONABLE EFFORTS; FURTHER ASSURANCES; COOPERATION. Subject to the
other provisions of this Agreement, the parties hereby shall each use their
reasonable efforts to perform their obligations herein and to take, or cause to
be taken or do, or cause to be done, all things reasonably necessary, proper or
advisable under applicable law to obtain all regulatory approvals and satisfy
all conditions to the obligations of the parties under this Agreement and to
cause the Merger and the other transactions contemplated herein to be carried
out promptly in accordance with the terms hereof. The parties agree to use their
reasonable best efforts to consummate the transactions contemplated hereby as
promptly as possible. The parties shall cooperate fully with each other and
their respective officers, directors, employees, agents, counsel, accountants
and other designees in connection with any steps required to be taken as a part
of their respective obligations under this Agreement, including without
limitation:
(a) In the event any claim, action, suit, investigation or other
proceeding by any governmental body or other person is commenced which
questions the validity or legality of the Merger or any of the other
transactions contemplated hereby or seeks damages in connection
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therewith, the parties agree to cooperate and use all reasonable
efforts to defend against such claim, action, suit, investigation or
other proceeding and, if an injunction or other order is issued in any
such action, suit or other proceeding, to use all reasonable efforts to
have such injunction or other order lifted, and to cooperate reasonably
regarding any other impediment to the consummation of the transactions
contemplated by this Agreement.
(b) Each party shall give prompt written notice to the other of (i)
the occurrence, or failure to occur, of any event which occurrence or
failure would be likely to cause any representation or warranty of
ImaginOn or Cal Pro, as the case may be, contained in this Agreement to
be untrue or inaccurate in any material respect at any time from the
date hereof to the Effective Date or that will or may result in the
failure to satisfy the conditions specified in Article 6 or 7 and (ii)
any failure of ImaginOn or Cal Pro, as the case may be, to comply with
or satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder.
5.7 PUBLIC ANNOUNCEMENTS. The timing and content of all announcements
regarding any aspect of this Agreement or the Merger to the financial community,
government agencies, employees or the general public shall be mutually agreed
upon in advance (unless Cal Pro or ImaginOn is advised by counsel that any such
announcement or other disclosure not mutually agreed upon in advance is required
to be made by law or applicable NSM rule and then only after making a reasonable
attempt to comply with the provisions of this Section).
5.8 NO SOLICITATIONS. (a) From the date hereof until the Effective Date
or until this Agreement is terminated or abandoned as provided in this
Agreement, ImaginOn shall not directly or indirectly (i) solicit or initiate
discussion with or (ii) enter into negotiations or agreements with, or furnish
any information to, any corporation, partnership, person or other entity or
group (other than Cal Pro, an affiliate of Cal Pro or their authorized
representatives pursuant to this Agreement) concerning any proposal for a
merger, sale of substantial assets, sale of shares of stock or securities or
other takeover or business combination transaction (the "Acquisition Proposal")
involving ImaginOn, and ImaginOn will instruct its officers, directors, advisors
and its financial and legal representatives and consultants not to take any
action contrary to the foregoing provisions of this sentence; provided, however,
that ImaginOn, its officers, directors, advisors and its financial and legal
representatives and consultants will not be prohibited from taking any action
described in (ii) above to the extent such action is taken by, or upon the
authority of, the Board of Directors of ImaginOn in the exercise of good faith
judgment as to its fiduciary duties to the shareholders of ImaginOn, which
judgment is based upon the advice of independent, outside legal counsel that a
failure of the Board of Directors of ImaginOn to take such action would be
likely to constitute a breach of its fiduciary duties to such shareholders.
ImaginOn will notify Cal Pro promptly if ImaginOn becomes aware that any
inquiries or proposals are received by, any information is requested from or any
negotiations or discussions are sought to be initiated with, ImaginOn with
respect to an Acquisition Proposal, and ImaginOn shall promptly deliver to Cal
Pro any written inquiries or proposals received by ImaginOn relating to an
Acquisition Proposal.
30698_8
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<PAGE>
5.9 NO SOLICITATIONS. (a) From the date hereof until the Effective Date
or until this Agreement is terminated or abandoned as provided in this
Agreement, Cal Pro shall not directly or indirectly (i) solicit or initiate
discussion with or (ii) enter into negotiations or agreements with, or furnish
any information to, any corporation, partnership, person or other entity or
group (other than ImaginOn, an affiliate of ImaginOn or its authorized
representatives pursuant to this Agreement) concerning any proposal for a
merger, sale of substantial assets, sale of shares of stock or securities or
other takeover or business combination transaction (the "Acquisition Proposal")
involving Cal Pro, and Cal Pro will instruct its officers, directors, advisors
and its financial and legal representatives and consultants not to take any
action contrary to the foregoing provisions of this sentence; provided, however,
that Cal Pro, its officers, directors, advisors and its financial and legal
representatives and consultants will not be prohibited from taking any action
described in (ii) above to the extent such action is taken by, or upon the
authority of, the Board of Directors of Cal Pro in the exercise of good faith
judgment as to its fiduciary duties to the shareholders of Cal Pro, which
judgment is based upon the advice of independent, outside legal counsel that a
failure of the Board of Directors of Cal Pro to take such action would be likely
to constitute a breach of its fiduciary duties to such shareholders. Cal Pro
will notify ImaginOn promptly if Cal Pro becomes aware that any inquiries or
proposals are received by, any information is requested from or any negotiations
or discussions are sought to be initiated with, Cal Pro with respect to an
Acquisition Proposal, and Cal Pro shall promptly deliver to ImaginOn any written
inquiries or proposals received by Cal Pro relating to an Acquisition Proposal.
5.10 CAL PRO BOARD OF DIRECTORS. Not later than the Effective Date, Cal
Pro's current directors shall have resigned and have elected David M. Schwartz
and his nominees as directors of Cal Pro.
5.11 PROXY STATEMENT. As soon as possible after the date hereof, Cal
Pro shall prepare and file with the SEC and mail to its stockholders, as soon as
permitted, proxy materials requesting that the Cal Pro stockholders approve (i)
the Merger; (ii) a recapitalization or other amendment to its charter documents
that will result in there being sufficient shares of Cal Pro Common Stock
available for the Merger Consideration and for other corporate purposes; (iii) a
reverse stock split; (iv) a change of the name of Cal Pro to ImaginOn, Inc.; and
(v) election of a new board of directors.
5.12 EXERCISE OF PUBLIC WARRANTS. If, within 12 months after the
Effective Date Cal Pro shall not have received at least $2 million from the
exercise of its publicly traded warrants (the "Warrants") and/or alternative
financing, then the persons who were stockholders of ImaginOn immediately prior
to the Effective Date ("ImaginOn Stockholders") shall be entitled to receive
additional shares of Cal Pro Common Stock, or Cal Pro Common Stock if Cal Pro
shall not yet have complied with the provisions of Section 5.11 hereof, so that
the ImaginOn Stockholders shall have received 80% of the outstanding voting
shares of Cal Pro capital stock as of the Effective Date.
30698_8
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<PAGE>
5.13 SUBSCRIPTION AGREEMENTS. All of the ImaginOn shareholders who are
to receive shares of Cal Pro Common Stock in the Merger shall have executed the
Subscription Agreement attached as Exhibit 5.13.
ARTICLE 6
Conditions Precedent to Obligations of ImaginOn
Except as may be waived by ImaginOn, the obligations of ImaginOn to
consummate the transactions contemplated by this Agreement shall be subject to
the satisfaction on or before the Closing Date of each of the following
conditions:
6.1 COMPLIANCE. Cal Pro shall have, or shall have caused to be,
satisfied or complied with and performed in all material respects all terms,
covenants and conditions of this Agreement to be complied with or performed by
Cal Pro on or before the Closing Date.
6.2 REPRESENTATIONS AND WARRANTIES. ALl of the representations and
warranties made by Cal Pro in this Agreement shall be true and correct in all
material respects at and as of the Closing Date with the same force and effect
as if such representations and warranties had been made at and as of the Closing
Date, except for changes permitted or contemplated by this Agreement.
6.3 MATERIAL ADVERSE CHANGES. Subsequent to December 31, 1997, there
shall have occurred no Cal Pro Material Adverse Effect other than any such
change that affects both Cal Pro and ImaginOn in a substantially similar manner.
6.4 RESOLUTIONS. Cal Pro shall have delivered to ImaginOn a copy of
resolutions duly adopted by the board of directors, authorizing and approving
the execution and delivery by Cal Pro of this Agreement, and the completion by
Cal Pro of the Merger.
6.5 CERTIFICATES. ImaginOn shall have received a certificate or
certificates, executed on behalf of Cal Pro by an executive officer of Cal Pro,
to the effect that the conditions contained in Sections 6.1, 6.2, 6.3 and 6.4
hereof have been satisfied.
6.6 PREPARATION AND DELIVERY OF SCHEDULES. Cal Pro shall have delivered
all Cal Pro Schedules referred to in this Agreement and ImaginOn shall have
accepted them, which acceptance shall not be unreasonably withheld.
6.7 RESERVATION OF SHARES FOR OPTIONS. Cal Pro shall have reserved
200,000 shares of Common Stock for issuance after the Effective Date (a) upon
exercise of options or (b) granting of stock bonuses.
30698_8
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<PAGE>
6.8 CAL PRO'S BUSINESS. Cal Pro shall have no ongoing business
operations, other than sales of existing inventory, and shall have no full time
employees.
6.9 APPROVAL OF STOCKHOLDERS. The stockholders of Cal Pro shall have
approved the matters set forth in Section 5.11 and elected a new board of
directors.
6.10 QUOTATION OF COMMON STOCK. Quotations of Cal Pro Common Stock
shall be available through a system maintained by the National Association of
Securities Dealers or as otherwise available to registered broker-dealers.
6.11 OUTSTANDING PUBLIC WARRANTS. Cal Pro shall have reduced the
exercise price of the Warrants from $6.00 to $1.50 per share or such other price
as to which Cal Pro and ImaginOn shall have agreed.
6.12 SATISFACTION OF DEBTS AND LIABILITIES. Cal Pro shall have
satisfied all of its debts and outstanding liabilities, except as the parties
may reasonably agree.
ARTICLE 7
Conditions Precedent to obligations of Cal Pro
and the Merger Subsidiary
Except as may be waived by Cal Pro and the Merger Subsidiary, the
obligations of Cal Pro and the Merger Subsidiary to consummate the transactions
contemplated by this Agreement shall be subject to the satisfaction, on or
before the Closing Date, of each of the following conditions:
7.1 COMPLIANCE. ImaginOn shall have, or shall have caused to be,
satisfied or complied with and performed in all material respects all terms,
covenants, and conditions of this Agreement to be complied with or performed by
it on or before the Closing Date.
7.2 REPRESENTATIONS AND WARRANTIES. All of the representations and
warranties made by ImaginOn in this Agreement shall be true and correct in all
material respects at and as of the Closing Date with the same force and effect
as if such representations and warranties had been made at and as of the Closing
Date, except for changes permitted or contemplated by this Agreement.
7.3 MATERIAL ADVERSE CHANGE. Since December 31, 1997, except as set
forth in this Agreement or on the schedules hereto, there shall have occurred no
ImaginOn Material Adverse Effect other than any such change that affects both
Cal Pro and ImaginOn in a substantially similar manner.
30698_8
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<PAGE>
7.4 RESOLUTIONS. ImaginOn shall have delivered to Cal Pro a copy of
resolutions duly adopted by the board of directors, authorizing and approving
the execution and delivery by ImaginOn of this Agreement, and the completion by
ImaginOn of the Merger.
7.5 CERTIFICATES. Cal Pro shall have received a certificate or
certificates, executed on behalf of ImaginOn by an executive officer of
ImaginOn, to the effect that the conditions in Sections 7.1, 7.2, 7.3 and 7.4
hereof have been satisfied.
7.6 PREPARATION AND DELIVERY OF SCHEDULES. ImaginOn shall have
delivered all ImaginOn Schedules referred to in this Agreement and Cal Pro shall
have accepted them, which acceptance shall not be unreasonably withheld.
7.7 OPINION OF COUNSEL. Cal Pro shall have received the opinion of
Pennie & Edmonds LLP, special counsel to ImaginOn, reasonably acceptable to Cal
Pro, including, but not limited to the following:
(a) ImaginOn is the exclusive owner of, and has sole, full and
clear title to, the ImaginOn Patents set forth on Schedule 7.7(a)
issued by the United States Patent and Trademark Office, and is the
owner of the patent applications set forth on Schedule 7.7(a), free and
clear of any encumbrances, liens or adverse claims of any kind, and all
of the registrations of said Patents are valid and subsisting in the
records of the United States Patent and Trademark Office.
(b) ImaginOn is the exclusive owner of, and has sole, full and
clear title to, the registrations for the Trademarks (described in
Schedule 7.7(b)) currently registered in the United States Patent and
Trademark Office, free and clear of any encumbrances, liens or adverse
claims of any kind, and all of the registrations of said Trademarks are
valid and subsisting in the records of the United States Patent and
Trademark Office.
(c) To the best of such counsel's knowledge, ImaginOn's present use
of the Patents and Trademarks does not infringe on any rights of third
parties, and there are no third parties infringing on or otherwise
interfering with the use of the Patents and Trademarks. Such counsel is
not aware of any adverse claims with respect to any of the Patents or
Trademarks.
(d) The status of the license agreement between ImaginOn and
JTS/Atari Corp.
(e) Upon the Merger of Merger Subsidiary into ImaginOn, ImaginOn,
without more, will continue to be the exclusive owner of and have the
sole full and clear title to the Patents and the Trademarks and the
good will associated therewith, free and clear of any encumbrances,
liens or adverse claims of any kind.
30698_8
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<PAGE>
7.8 OPINION OF INVESTMENT BANKER. Cal Pro shall have received an
opinion from an investment banking firm that the transaction is fair to the Cal
Pro shareholders from a financial point of view.
7.9 APPROVAL OF STOCKHOLDERS. The stockholders of Cal Pro shall have
approved the matters set forth in Section 5.11 and elected a new board of
directors.
7.10 CONSENTS; LITIGATION. Other than the filing of the Certificate of
Merger as described in Article 1, all authorizations, consents, orders or
approvals of, or declarations or filings with, or expirations or terminations of
waiting periods imposed by, any governmental entity, and all required
third-party consents, the failure to obtain which would have an ImaginOn
Material Adverse Effect or a Cal Pro Material Effect, shall have been obtained.
In addition, no preliminary or permanent injunction or other order shall have
been issued by any court or by any governmental or regulatory agency, body or
authority which prohibits the consummation of the Merger and the transactions
contemplated by this Agreement and which is in effect at the Effective Date.
7.11 APPRAISAL RIGHTS. All of the ImaginOn shareholders shall have
voted for the Merger and none shall have asserted dissenter or appraisal rights.
ARTICLE 8
Indemnification; Directors' and Officers' Insurance
8.1 INDEMNIFICATION. In the event of any threatened or actual claim,
action, suit, proceeding or investigation (including any claims regarding
securities law matters), whether civil, criminal or administrative, including,
without limitation, any such claim, action, suit, proceeding or investigation in
which any of the present or former officers or directors (the "Managers") of
ImaginOn is, or is threatened to be, made a party by reason of the fact that he
or she is or was a stockholder, director, officer, employee or agent of
ImaginOn, or is or was serving at the request of ImaginOn as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, whether before or after the Effective Date, ImaginOn
shall indemnify and hold harmless, and from and after the Effective Date each of
the Surviving Corporation and Cal Pro shall indemnify and hold harmless, as and
to the full extent permitted by applicable law (including by advancing expenses
promptly as statements therefor are received), each such Manager against any
losses, claims, damages, liabilities, costs, expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement in connection with any
such claim, action, suit, proceeding or investigation, and in the event of any
such claim, action, suit proceeding or investigation (whether arising before or
after the Effective Date), (i) if ImaginOn (prior to the Effective Date) or Cal
Pro or the Surviving Corporation (after the Effective Date) have not promptly
assumed the defense of such matter, the Managers may retain counsel satisfactory
to them, and ImaginOn, or the Surviving Corporation and Cal Pro after the
30698_8
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<PAGE>
Effective Date, shall pay all fees and expenses of such counsel for the Managers
promptly, as statements therefor are received, and (ii) ImaginOn, or the
Surviving Corporation and Cal Pro after the Effective Date, will use their
respective best efforts to assist in the vigorous defense of any such matter;
provided that neither ImaginOn nor the Surviving Corporation or Cal Pro shall be
liable for any settlement effected without its prior written consent (which
consent shall not be unreasonably withheld); and provided further that the
Surviving Corporation and Cal Pro shall have no obligation under the foregoing
provisions of this Section 8.1 to any Manager if (x) the indemnification of such
Manager in the manner contemplated hereby is prohibited by applicable law, and
(y) ImaginOn has breached a representation or warranty hereunder with respect to
the same matters for which indemnification is being sought by such Manager and
such Manager fails to prove that such Manager had no actual knowledge of such
breach at the Effective Date. Upon the determination that the Surviving
Corporation or Cal Pro is not liable for any such indemnification claims, the
Manager will reimburse Cal Pro and the Surviving Corporation for any fees,
expenses and costs incurred by Cal Pro or the Surviving Corporation in
connection with the defense of such claims. Any Manager wishing to claim
indemnification under this Section 8.1, upon learning of any such claim, action,
suit, proceeding or investigation, shall notify ImaginOn and, after the
Effective Date, the Surviving Corporation and Cal Pro, thereof (provided that
the failure to give such notice shall not affect any obligations hereunder,
except to the extent that the indemnifying party is actually and materially
prejudiced thereby). Cal Pro and ImaginOn agree that all rights to
indemnification existing in favor of the Managers as provided in ImaginOn's
Certificate of Incorporation or Bylaws as in effect as of the date hereof, and
in any agreement between ImaginOn and any Manager with respect to matters
occurring prior to the Effective Date, shall survive the Merger. Cal Pro further
covenants not to amend or repeal any provisions of the Certificate of
Incorporation or Bylaws of ImaginOn in any manner which would adversely affect
the indemnification or exculpatory provisions contained therein. The provisions
of this Section 8.1 are intended to be for the benefit of, and shall be
enforceable by, each indemnified party and his or her heirs and representatives.
ARTICLE 9
Miscellaneous
9.1 TERMINATION. In addition to the provisions regarding termination
set forth elsewhere herein, this Agreement and the transactions contemplated
hereby may be terminated at any time on or before the Closing Date:
(a) by mutual consent of ImaginOn and Cal Pro;
(b) by either Cal Pro or ImaginOn if the transactions contemplated
by this Agreement have not been consummated by August 31, 1998, unless
such failure of consummation is due to the failure of the terminating
30698_8
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<PAGE>
party to perform or observe the covenants, agreements, and conditions
hereof to be performed or observed by it at or before the Closing Date;
(c) by either ImaginOn or Cal Pro if the transactions contemplated
hereby violate any nonappealable final order, decree, or judgment of
any court or governmental body or agency having competent jurisdiction;
(d) by Cal Pro if the ImaginOn Board of Directors withdraws or
materially modifies or changes its recommendation to the stockholders
of ImaginOn to approve this Agreement and the Merger if there exists at
such time an Acquisition Proposal;.
(e) by Cal Pro if the Cal Pro Board of Directors reasonably
determines that the ImaginOn Schedules are not acceptable to Cal Pro;
or
(f) by ImaginOn if the ImaginOn Board of Directors reasonably
determines that the Cal Pro Schedules are not acceptable to ImaginOn.
9.2 EXPENSES. If the transactions contemplated by this Agreement are
not consummated, each party hereto shall pay its own expenses incurred in
connection with this Agreement and the transactions contemplated hereby.
9.3 ENTIRE AGREEMENT. This Agreement and the exhibits hereto contain
the complete agreement among the parties with respect to the transactions
contemplated hereby and supersede all prior agreements and understandings among
the parties with respect to such transactions. Section and other headings are
for reference purposes only and shall not affect the interpretation or
construction of this Agreement. The parties hereto have not made any
representation or warranty except as expressly set forth in this Agreement or in
any certificate or schedule delivered pursuant hereto. The obligations of any
party under any agreement executed pursuant to this Agreement shall not be
affected by this section.
9.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of each party contained herein or in any exhibit, certificate,
document or instrument delivered pursuant to this Agreement shall not survive
the Closing.
9.5 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, and such counterparts together shall constitute only one original.
9.6 NOTICES. All notices, demands, requests, or other communications
that may be or are required to be given, served, or sent by any party to any
other party pursuant to this Agreement shall be in writing and shall be sent by
facsimile transmission, next-day courier or mailed by first-class, registered or
certified mail, return receipt requested, postage prepaid, or transmitted by
hand delivery, addressed as follows:
30698_8
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<PAGE>
(a) If to ImaginOn:
864 Laurel Street, 2nd Floor
San Carlos, CA 94070
ATTN: David M. Schwartz, President
(b) If to Cal Pro or the Merger Subsidiary:
Barry S. Hollander, Chief Financial Officer
California Pro Sports, Inc.
1221-B South Batesville Road
Greer, South Carolina 29650
with a copy (which shall not constitute notice) to:
Friedlob Sanderson Raskin Paulson & Tourtillott, LLC
1400 Glenarm Pl., Suite 300
Denver, Colorado 80202
ATTN: Gerald Raskin
Each party may designate by notice in writing a new address to which
any notice, demand, request, or communication may thereafter be so
given, served, or sent. Each notice, demand, request, or communication
that is mailed, delivered, or transmitted in the manner described
above shall be deemed sufficiently given, served, sent, and received
for all purposes at such time as it is delivered to the addressee (with
the return receipt, the delivery receipt or the affidavit of messenger
being deemed conclusive evidence of such delivery) or at such time as
delivery is refused by the addressee upon presentation.
9.7 SUCCESSORS; ASSIGNMENTS. This Agreement and the rights, interests,
and obligations hereunder shall be binding upon and shall inure to the benefit
of the parties hereto and their respective successors and assigns. Neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned, by operation of law or otherwise, by any of the parties hereto without
the prior written consent of the other.
9.8 GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Delaware.
9.9 WAIVER AND OTHER ACTION. This Agreement may be amended, modified,
or supplemented only by a written instrument executed by the parties against
which enforcement of the amendment, modification or supplement is sought.
30698_8
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<PAGE>
9.10 SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable, such provision shall be fully severable, and
this Agreement shall be construed and enforced as if such illegal, invalid, or
unenforceable provision were never a part hereof; the remaining provisions
hereof shall remain in full force and effect and shall not be affected by the
illegal, invalid, or unenforceable provision or by its severance; and in lieu of
such illegal, invalid, or unenforceable provision, there shall be added
automatically as part of this Agreement, a provision as similar in its terms to
such illegal, invalid, or unenforceable provision as may be possible and be
legal, valid, and enforceable.
9.11 NO THIRD PARTY BENEFICIARIES. Article 8 is intended for the
benefit of each "Manager" (as defined in Article 8) and may be enforced by such
persons, their heirs and representatives. Other than as expressly set forth in
this Section 9.11, nothing expressed or implied in this Agreement is intended,
or shall be construed, to confer upon or give any person, firm or corporation
other than the parties hereto and their stockholders, any rights, remedies,
obligations or liabilities under or by reason of this Agreement or result in
such person, firm or corporation being deemed a third party beneficiary of this
Agreement.
9.12 MUTUAL CONTRIBUTION. The parties to this Agreement and their
counsel have mutually contributed to its drafting. Consequently, no provision of
this Agreement shall be construed against any party on the ground that such
party drafted the provision or caused it to be drafted or the provision contains
a covenant of such party.
9.13 ARBITRATION. Any controversy or dispute among the parties arising
in connection with this Agreement shall be submitted to a panel of three
arbitrators and finally settled by arbitration in accordance with the commercial
arbitration rules of the American Arbitration Association. Each of the disputing
parties shall appoint one arbitrator, and these two arbitrators shall
independently select a third arbitrator. Arbitration shall take place in Los
Angeles, California. The prevailing party in such arbitration shall be entitled
to the award of all costs and attorneys' fees in connection with such action.
Judgment upon the award rendered may be entered in any court having jurisdiction
or application may be made to such court for judicial acceptance of the award
and an order of enforcement, as the case may be.
30698_8
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
ImaginOn, Inc.
/s/ David M. Schwartz
By:__________________________________
David M. Schwartz, President
California Pro Sports, Inc.
/s/ Henry Fong
By:__________________________________
Henry Fong, Chairman
/s/ Barry S. Hollander
By:__________________________________
Barry S. Hollander, President
ImaginOn Acquisition Corp.
/s/ Barry S. Hollander
By:__________________________________
Barry S. Hollander, President
30698_8
-35-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Registrants Annual Report on Form
10-KSB for the year ended December 31, 1997, and is qualifited in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,969
<SECURITIES> 0
<RECEIVABLES> 231,270
<ALLOWANCES> (216,000)
<INVENTORY> 0
<CURRENT-ASSETS> 1,377,907
<PP&E> 153,387
<DEPRECIATION> (319,866)
<TOTAL-ASSETS> 2,268,627
<CURRENT-LIABILITIES> 1,778,532
<BONDS> 0
0
10,997
<COMMON> 67,344
<OTHER-SE> 26,605
<TOTAL-LIABILITY-AND-EQUITY> 2,268,627
<SALES> 9,087,767
<TOTAL-REVENUES> 9,087,767
<CGS> 7,045,344
<TOTAL-COSTS> 6,117,605
<OTHER-EXPENSES> 2,011,339
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 966,478
<INCOME-PRETAX> (6,086,521)
<INCOME-TAX> (166,404)
<INCOME-CONTINUING> (5,192,920)
<DISCONTINUED> 0
<EXTRAORDINARY> 383,705
<CHANGES> 0
<NET-INCOME> (4,809,215)
<EPS-PRIMARY> (0.87)
<EPS-DILUTED> (0.87)
</TABLE>
