<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30,1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________to______________.
Commission File No. 0-15501
BIKERS DREAM, INC.
(Exact name of Registrant as specified in its charter)
California 33-0140149
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
1420 Village Way, Santa Ana, California 92705
(Address of Principal Executive Offices)
(714) 835-8464
(Issuer's Telephone Number, Including Area Code)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the Issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of September 30,1997, there were 10,705,154 shares of the Registrant's common
stock outstanding.
Transitional Small Business Disclosure Format
Yes [ ] No [X]
1
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1997 And 1996
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1997 1996
---------- ----------
<S> <C> <C>
A S S E T S:
Current assets:
Cash and cash equivalents $ 99,287 $ 1,228,208
Accounts receivable, net 677,072 445,874
Inventories 4,627,187 1,527,338
Prepaid expenses and other current assets 95,746 109,293
---------- ----------
Total current assets 5,499,292 3,310,713
Property, equipment and capitalized leases, net 1,448,237 844,636
Goodwill 3,284,439 --
Deposits and other assets -- 1,000,000
---------- ----------
Total assets $10,277,758 $ 5,193,103
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 713,918 $ 525,332
Other accrued expenses 1,511,503 873,191
Current portion of long-term debt capital leases 87,703 109,633
Current portion of notes payable 10,693 104,621
Notes payable to shareholders 36,000 96,000
---------- ----------
Total current liabilities 2,844,192 1,708,777
Deferred rent 66,504 70,655
Notes payable, less current portion 79,691 91,422
Long-term debt and capital leases, less current portion 304,084 393,150
Note Payable to shareholder 12,000 --
---------- ----------
Total liabilities 3,306,471 2,264,004
---------- ----------
Commitments and contingencies (Note 5)
Shareholders' equity:
Preferred stock, no par value:
10,000,000 shares authorized, 6,481,388 issued and
outstanding at September 30, 1997 7,128,885 1,102,500
Common stock, no par value; 25,000,000 shares authorized
at September 30, 1997; 10,705,154 and 8,350,031 issued
and outstanding at September 30, 1997 and
September 30, 1996 9,561,167 6,870,624
Accumulated deficit (9,718,765) (5,044,025)
---------- ----------
Total shareholders' equity 6,971,287 (2,929,099)
---------- ----------
Total liabilities and shareholders' equity $10,277,758 $ 5,193,103
========== ==========
</TABLE>
See the accompanying notes to these consolidated financial statements.
2
<PAGE> 3
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Quarters and Nine Months Ended September 30, 1997 and 1996
(in thousands except per share)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 4,493 $ 1,776 $12,123 $ 7,329
Financing contracts 25 42 44 202
------ ------ ------ ------
Total revenues 4,518 1,818 12,167 7,531
Cost of goods sold 3,701 1,432 10,280 5,896
------ ------ ------ ------
Gross profit 817 386 1,887 1,635
------ ------ ------ ------
Expenses:
Selling, general and administrative
expenses 1,179 1,091 4,070 3,653
Depreciation and amortization 91 47 251 144
Interest expense 245 58 517 139
Franchise income -- (8) -- (40)
Other expense 160 144 184 300
------ ------ ------ ------
Total expenses 1,675 1,332 5,022 4,196
------ ------ ------ ------
Loss before (provision)
for income taxes (858) (946) (3,135) (2,561)
(Provision) for income taxes -- -- -- --
------ ------ ------ ------
Net loss $ (858) $ (946) $(3,135) $(2,561)
====== ====== ====== ======
Net loss per share $ (0.08) $ (0.14) $(0.33) $ (0.41)
====== ====== ====== ======
Weighted average shares outstanding 10,705 6,787 9,420 6,174
====== ====== ====== ======
</TABLE>
See the accompanying notes to these consolidated financial statements.
3
<PAGE> 4
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,135) $ (2,561)
-------- --------
Adjustments to reconcile net loss to net cash provided by
operating activities:
Loss from disposal of fixed assets -- 26
Store closure costs -- 135
Depreciation and amortization 251 153
Past services compensated by Company common stock -- 152
Changes in assets and liabilities:
(Increase) in accounts receivable (535) (159)
(Increase) in inventories (3,185) (336)
Decrease (increase) in prepaid expenses and other
current assets (16) 22
Increase in accounts payable 273 226
Increase in other accrued expenses 493 138
-------- --------
Total adjustments (2,719) 357
-------- --------
Net cash used in operating activities (5,854) (2,204)
-------- --------
Cash flows from investing activities:
Decrease (increase) in deposits (16) 143
Payments for purchases of fixed assets (511) (424)
Increase (decrease) in deferred rent (1) 16
Investment - Joint Venture 1,509 (1,000)
Goodwill - Ultra Acquisition Corporation (3,715) --
-------- ---------
Net cash used in investing activities (2,734) (1,265)
-------- ---------
</TABLE>
See the accompanying notes to these consolidated financial statements.
4
<PAGE> 5
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1997 1996
------------ -----------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from short-term notes $ 8,589 $ 570
Proceeds from long-term debt -- 308
Principal payments made on long-term debt and
capitalized leases (61) (46)
Proceeds from issuance of common stock 2,292 2,567
Costs associated with issuance of common stock -- (161)
Proceeds from issuance of preferred stock 6,302 1,225
Costs associated with issuance of preferred stock -- (123)
Proceeds from issuance of convertible notes payable (8,637) 451
Principal payments made on notes payable (36) (129)
Payments on notes payable to shareholders -- (101)
Preferred dividend accrual (10) --
--------- --------
Net cash provided by financing activities 8,439 4,561
--------- --------
Net (decrease) increase in cash and cash equivalents (149) 1,092
Cash and cash equivalents, beginning of period 248 136
--------- --------
Cash and cash equivalents, end of period $ 99 $ 1,228
========= ========
</TABLE>
See the accompanying notes to these consolidated financial statements.
5
<PAGE> 6
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 and 1996
1. Basis of Presentation:
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments necessary (consisting only of normal
recurring accruals) to present fairly the financial information
contained therein. These statements do not include all disclosures
required by generally accepted accounting principles and should be read
in conjunction with the audited financial statements of the Company for
the year ended December 31, 1996. The results of operations for the
three months and nine months ended September 30,1997 are not necessarily
indicative of the results to be expected for the year ending December
31, 1997. Net loss per share was computed by dividing net loss by the
weighted average number of common shares outstanding during the
respective quarters.
2. Company Operations:
Bikers Dream, Inc. (the "Company") was originally incorporated in 1991.
As of March 13, 1995, the Company acquired a publicly-traded dormant
entity formerly known as HDL Communications ("HDL") which was originally
incorporated in 1985. After the acquisition, the Company was merged into
HDL and HDL changed its name to Bikers Dream, Inc.
The substance of the transaction was a recapitalization of the Company's
shares for those of HDL's shares. Shareholders' equity has been restated
to give retroactive recognition to the recapitalization and has been
treated as a stock split for all periods presented. In addition, all
references in the financial statements to number of shares and per share
amounts of the Company's common stock have been restated.
The surviving company was in the business of selling previously owned
Harley Davidson motorcycles, custom manufactured motorcycles, parts,
accessories, apparel and service through Company-owned retail stores in
California and Texas.
In September 1996, the Company formed a joint venture with Mull Acres,
Investments Inc. ("MAI"), whose Ultra Kustom Cycles division of
Riverside, California was a manufacturer of custom V-twin motorcycles
and show-bikes. The joint venture was formed to act as the exclusive
distributor of Ultra Cycles in Southern California, Sacramento,
California, and Dallas Texas.
In February 1997, the Company, through its wholly owned subsidiary,
Ultra Acquisition Corporation, a Nevada corporation ("UAC") purchased
from MAI certain assets, including equipment and inventory, of MAI's
Ultra Kustom Cycles and Ultra Kustom Parts divisions that had been used
in connection with the manufacture, distribution and sale of motorcycles
and motorcycle parts and accessories.
Continued
6
<PAGE> 7
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
September 30, 1997 and 1996
2. Company Operations, Continued:
The Company has two lines of business: motorcycle manufacturing and
operating four retail outlets known as Bikers Dream Superstores
("Superstores"), selling motorcycles manufactured by the Company, as
well as other new and used motorcycles, complemented by a full range of
aftermarket parts, accessories and services.
At present the Company's Superstores are located in San Diego,
California, Santa Ana, California, Sacramento, California and Dallas,
Texas. The Company is also establishing a network of Bikers Dream
Superstore dealers and independent Ultra Motorcycle dealers. The
Company intends to pursue a strategy of business growth that involves
increased production of Ultra motorcycles, the opening of additional
corporate-owned Superstores, the opening of additional Bikers Dream
Superstores dealers and the continued growth of the number of
independent Ultra Motorcycle dealers.
The Company's consolidated financial statements for the three months
ended September 30, 1997, have been prepared on a going-concern basis
which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The
Company incurred a net loss of $1.2 million for the quarter ended
September 30,1997 and a net loss of $.9 million for the three months
ended September 30, 1996. As of September 30, 1997, the Company had an
accumulated deficit of $9.7 million
Principles Of Consolidation:
The consolidated financial statements include the accounts of Bikers
Dream, Inc. and all of its wholly-owned subsidiaries, including the
accounts of Bikers Dream International, Inc., Bikers Dream
Distribution, Inc., Bikers Dream Management Services, Inc., Bikers
Dream Eagle Enterprises, Inc., and Ultra Acquisition Corporation. All
significant intra-company accounts and transactions are eliminated in
consolidation.
Continued
7
<PAGE> 8
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
September 30, 1997 and 1996
3. Summary of Significant Accounting Policies:
Net Loss Per Common Share:
The computation of fully diluted net loss per share was
antidilutive in each of the periods presented; therefore, the
amounts reported for primary and fully diluted are the same.
Net loss per common share was determined by dividing net loss
by the weighted average shares outstanding in each period.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards no. 128 (SFAS No. 128), "Earning Per Share",
which is effective for financial statements issued for periods ending
after December 31, 1997. SFAS No. 128 requires public companies to
present basic earnings per share and, if applicable, diluted earnings
per share, instead of primary and fully diluted earnings per share.
The Company has not yet determined the effect of adopting SFAS No.
128.
Property, Equipment and Capital Leases:
Property, equipment and capitalized leases are recorded at
cost with depreciation and amortization provided using the
straight-line method over the estimated useful lives of the
assets which range from three to ten years or the term of the
lease, whichever is lesser. The expense of asset repair and
maintenance is recognized as it is incurred. When property and
equipment are retired or disposed of, the related costs and
accumulated depreciation and amortization are eliminated from
the accounts, and any gain or loss on such disposition is
reflected in operations.
4. Property, Equipment And Capitalized Leases:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Estimated September 30,
-------------
Useful Lives 1997
------------ ----------
<S> <C> <C>
Furniture and fixtures 7 years $ 147,505
Leasehold improvements 7 years 247,325
Equipment 5-7 years 262,220
Computers 5 years 210,150
Autos and trucks 3-10 years 581,036
----------
1,448,237
Less, Accumulated depreciation and amortization (360,607)
----------
$1,087,630
==========
</TABLE>
The Company leases certain computer equipment under agreements
which are classified as capital leases. These leases have
original terms of two to five years. These leases have bargain
purchase options at the end of the original term. Leased
capitalized assets included in property, equipment and
capitalized leases at September 30, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Computers $ 132,723 $ 132,723
Less, Accumulated amortization (82,509) (24,403)
---------- ----------
$ 50,214 $ 108,320
========== ==========
</TABLE>
8
<PAGE> 9
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
September 30, 1996 and 1997
5. Commitments And Contingencies:
Leases:
The Company leases all of its operating facilities located in Santa
Ana, California, Sacramento, California, San Diego, California,
Riverside, California, and Dallas, Texas.
Litigation:
The Company is involved in litigation arising from the sale of
one franchise, trademark infringements and related claims by
Harley-Davidson, a claim based on a judgement against MAI, and
claims arising in the ordinary course of business. Although the
final outcome of these legal matters cannot be determined,
management has estimated the Company's loss and accrued for such
amount, with the exception of the claim against MAI, in the
September 30, 1997 financial statements. The final resolution of
these matters could have a material adverse effect on the
financial position and results of operations of the Company.
9. Related Party Transactions:
In January 1997, the Company issued $2,210,000, 12% promissory
notes maturing January 1998. Several investment partnerships of
which Donald Duffy, Chairman and the then Co-CEO of the Company,
is a 10% general partner purchased a total of $750,000 of such
promissory notes. In September 1997, such promissory notes plus
accrued interest were converted into 806,749 shares of Series B
preferred stock.
In July 1997, the Company issued $2,710,000, 9.75% promissory
notes. Several investment partnerships of which Donald Duffy,
Chairman and the then Co-CEO of the Company, is a 10% general
partner purchased a total of $730,000 of such promissory notes.
In September 1997, such promissory notes plus accrued interest
were converted into 752,991 shares of Series B preferred stock.
11. Recently Issued Accounting Standard:
The Financial Accounting Standards Board has issued a Statement
of Financial Accounting Standards No. 123 (FAS 123) entitled
"Accounting for Stock-Based Compensation." Since adoption of FAS
123 in fiscal 1996, the Company has continued to account for
stock-based compensation in accordance with Accounting
Principles Board opinion No. 25 and will provide disclosure with
respect to the fair value of the Company's options. The Company
has not yet determined the impact of this disclosure on its
financial statements.
9
<PAGE> 10
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
September 30, 1997 and 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results
could differ materially from those projected in the forward-looking statements.
RESULTS OF OPERATIONS
Comparison of the three months period ended September 30, 1997 and 1996:
Net revenue increased 148% to $4,517,598 for the three months ended September
30, 1997 from $1,818,193 for the same period of the prior fiscal year. Store
operations gross revenue increased 48% to $2,697,629 for the three months ended
September 30, 1997 from $1,818,193 for the same period of the prior fiscal year.
Store operations revenue growth was primarily due to the opening of a new
Superstore in San Diego in the first quarter of 1997 and increased revenue from
existing stores. Motorcycle manufacturing revenue reached $2,857,114 for the
three months ended September 30, 1997. Intra-company revenue elimination totaled
($1,037,145) for the three months ended September 30, 1997. Intra-company
revenue elimination occurs when motorcycle manufacturing sells motorcycles to
Company-owned stores.
Gross profit increased 111% to $816,740 for the three months ended September 30,
1997 from $386,609 for the same period in the prior fiscal year. The increase in
gross profit is primarily due to gross profit generated from motorcycle
manufacturing and the San Diego superstore, which were not operating in the
prior year period, and increased gross profit from existing stores.
Selling, general and administrative expenses increased 8% to $1,178,802 for the
three months ended September 30, 1997, from $1,091,166 for the same period of
the prior fiscal year. The increase over the prior year comparable amounts was
principally the result of the selling, general and administrative expenses of
motorcycle manufacturing which the Company did not operate in the prior year
period.
Depreciation and amortization increased 91% to $90,597 for the three months
ended September 30, 1997, from $47,355 for the same period of the prior fiscal
year. The increase over the prior year comparable amounts was principally the
result of the depreciation and amortization of motorcycle manufacturing.
Interest expense increased 325% to $245,398 for the three months ended September
30, 1997 from $57,681 for the same period of the prior fiscal year. The increase
over the prior year comparable amounts was primarily the result of the issuance
of promissory notes in January and June of 1997 and the debt incurred related to
the acquisition of motorcycle manufacturing assets in January 1997.
The Company recognized no franchise income for the three months ended September
30, 1997 as franchising was suspended in 1996. Franchise income for the prior
year period was $7,987. Other expenses increased to $160,000 for the three
months ended September 30, 1997, from $144,290 for the same period of the prior
fiscal year. The increase in other expenses is primarily related to a
non-recurring charge of $150,000 relating to the termination of an agreement
with a contract manufacturer.
Continued
10
<PAGE> 11
There was no provision for income taxes for the three months ended September 30,
1997. The Company has decided to fully reserve for the deferred tax asset
primarily related to its net operating loss carry-forwards. The Company's
management has concluded that based upon its assessment of all available
evidence, the future benefit of this asset cannot be accurately projected at
this time.
Net losses decreased 9% to ($858,058) for the three months ended September 30,
1997 from ($945,896) for the same period of the prior fiscal year.
Comparison of the nine months period ended September 30, 1997 and 1996:
Net revenue increased 62% to $12,166,515 for the nine months ended September 30,
1997 from $7,530,591 for the same period of the prior fiscal year. Store
operations gross revenue increased 4% to $7,830,781 for the nine months ended
September 30, 1997 from $7,530,591 for the same period of the prior fiscal year.
Store operations gross revenue growth was primarily due to the opening of a new
Superstore in San Diego, California in the first quarter of 1997 and increased
revenue from existing superstores offset by the lost sales from the closing of a
superstore in Thousand Oaks, California and the sale of a superstore in
Clearwater, Florida. Motorcycle manufacturing revenue reached $4,335,734 for the
nine months ended September 30, 1997. Intra-company revenue elimination totaled
($3,025,711) for the nine moths ended September 30, 1997. Intra-company revenue
elimination occurs when motorcycle manufacturing sells motorcycles to
Company-owned stores.
Gross profit increased 15% to $1,887,011 for the nine months ended September 30,
1997 from $1,634,930 for the same period of the prior fiscal year. The increase
in gross profit is primarily due to gross profit generated from motorcycle
manufacturing and the San Diego superstore, which were not operating in the
prior year period, and increased gross profit from existing stores.
Selling, general and administrative expenses increased 11% to $4,070,265 for the
nine months ended September 30, 1997, from $3,653,353 for the same period of the
prior fiscal year. The increase over the prior year comparable amounts was
principally the result of the selling, general and administrative expenses of
motorcycle manufacturing, which the Company did not operate in the prior year
period.
Depreciation and amortization increased 75% to $250,843 for the nine months
ended September 30, 1997, from $143,675 for the same period of the prior fiscal
year. The increase over the prior year comparable amounts was principally the
result of the depreciation and amortization of motorcycle manufacturing.
Interest expense increased 272% to $517,065 for the nine months ended September
30, 1997 from $139,081 for the same period of the prior fiscal year. The
increase over the prior year comparable amounts was primarily the result of the
issuance of notes in January and June of 1997 and the debt incurred related to
the acquisition of motorcycle manufacturing assets in January 1997.
The Company recognized no franchise income for the nine months ended September
30, 1997 as franchising was suspended in 1996. Franchise income for the prior
year period was $40,289. Other expenses decreased to $183,410 for the nine
months ended September 30, 1997, from $300,323 for the same period of the prior
fiscal year.
There was no provision for income taxes for the nine months ended September 30,
1997. The Company has decided to fully reserve for the deferred tax asset
primarily related to its net operating loss carry-forwards. The Company's
management has concluded that based upon its assessment of all available
evidence, the future benefit of this asset cannot be accurately projected at
this time.
Net losses increased 22% to ($3,134,573) for the nine months ended September 30,
1997 from ($2,561,213) for the same period of the prior fiscal year.
Continued
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied substantially on equity capital and debt financing to
meet its operating and growth needs. Net cash used in operations for the nine
months ended September 30, 1997, was $5.9 million. Cash used in operations was
primarily utilized to fund operating costs of motorcycle manufacturing as the
Company expanded production capacity, fund the opening of a new superstore in
San Diego, California, and fund other working capital requirements.
Issuance of Notes:
In January 1997, the Company issued $2,210,000, 12% promissory notes maturing
January 1998. The proceeds from tea notes were used primarily for the
acquisition of the motorcycle manufacturing assets of Ultra Kustom Cycles and
working capital requirements.
In January 1997, the Company issued a $2,700,000 senior secured promissory note
to Mull Acres Investments, Inc. ("MAI") as partial consideration for the
purchase of the motorcycle manufacturing assets of Ultra Kustom Cycles.
In July 1997 the Company issued $2,710,000, 9.75% promissory notes. The notes
were due ninety days after issuance unless earlier converted into preferred
stock. The proceeds from the notes were used primarily to fund working capital
requirements.
Exercise of Options and Warrants:
In June 1997, Mull Acres Investments, Inc. exercised 1,370,000 common stock
options at $1.00 per share by reducing the principal amount of a $2,700,000
senior subordinated note dated January 31, 1997, by $1,370,000.
In January 1997, the Company issued $2,210,000, 12% promissory notes maturing
January 1998. In connection with the issuance of the promissory notes, the
Company issued 1,105,000 warrants ("C warrants"). Each warrant gives the holder
the right to purchase one share of the Company's common stock at $1.00 per
share. In July 1997, the Company issued $2,710,000, 9.75% promissory notes. In
connection with the issuance of the promissory notes, the Company issued
1,367,501 warrants ("E warrants"). Each warrant gives the holder the right to
purchase one share of the Company's common stock at a price of $1.00 per share.
In September 1997, holders of certain C warrants exercised 625,000 warrants to
purchase 625,000 shares of the Company's common stock for $484,375.
In October 1997, holders of certain options exercised 1,080,000 options to
purchase 1,080,000 shares of the Company's common stock for $864,000.
In order to meet its operating needs and expand motorcycle manufacturing and
retail stores, the Company is seeking additional funding from a number of
sources including the private placement of debt and equity. There can be no
assurance that such financing will be available to the Company, or if such
financing is available to the Company, that it will be on terms acceptable to
the Company.
Continued
12
<PAGE> 13
STOCKHOLDERS EQUITY
Conversion of Notes:
In September 1997, certain holders of an aggregate of $1.3 million principal 2%
notes, an aggregate of $2.7 million principal amount of 9.75% notes and an
aggregate of $2.2 million principal amount 12% notes (the "Notes") converted
such Notes, including accrued interest, into 6.4 million shares of the Company's
Series B preferred stock.
The Company has authorized the issuance of up to 8,000,000 shares of such Series
B preferred stock, no par value per share. The shares of Series B preferred
stock may be redeemed by the Company at a redemption price of $1.125 per share
plus all accumulated and unpaid dividends, commencing one year after the date of
issuance. Dividends accrue on each share of Series B preferred stock at an
annual rate of $0.0975 per share, commencing fifteen months after the date of
issuance. Holders of shares of Series B preferred stock are entitled to vote the
number of shares of common stock to be issued upon the conversion of the Series
B stock at the time the shares are voted, and are entitled to vote with the
common stock except where otherwise required.
The shares of Series B preferred stock are convertible at the option of the
holder at any time after the first anniversary of issuance and will be
automatically converted by the Company in the event that the closing price of
the common stock has equaled or exceeded $3.00 for any period of ten consecutive
trading days following January 1, 1998. The preferred stock converts into common
shares at $1.00 per share.
Exercise of Options and Warrants:
In June 1997, Mull Acres Investments, Inc. ("MAI") exercised 1,370,000 common
stock options at $1.00 Per share by reducing the principal amount of a
$2,700,000 senior subordinated note dated January 31, 1997, by $1,370,000. The
$1,330,000 outstanding balance of the senior subordinated note was subsequently
converted into 1,330,000 share of series B preferred stock in September 1997.
In September 1997 holders of certain C warrants exercised 625,000 warrants to
purchase 625,000 shares of the Company's common stock $484,375.
13
<PAGE> 14
Part II
Item 1. Legal Proceedings
1. A revised trial date of January 20, 1998 has been set in the
previously disclosed Harley-Davidson litigation, and discovery
is continuing.
2. An arbitration date of December 16, 1997 has been set in the
previously disclosed Bogert v. Bikers Dream, Inc.
franchise litigation.
Item 2. Changes in Securities
1. The rights of the holders of the Company's common stock have
been qualified to the extent that the Company has authorized
the issuance of up to 8,000,000 shares of such Series B
preferred stock, no par value per share. The shares of Series B
preferred stock may be redeemed by the Company at a redemption
price of $1.125 per share plus all accumulated and unpaid
dividends, commencing one year after the date of issuance.
Dividends accrue on each share of Series B preferred stock at
an annual rate of $0.0975 per share, commencing fifteen months
after the date of issuance. Holders of shares of Series B
preferred stock are entitled to vote the number of shares of
common stock to be issued upon the conversion of the Series B
stock at the time the shares are voted, and are entitled to
vote with the common stock except where otherwise required.
The shares of Series B preferred stock are convertible at the
option of the holder at any time after the first anniversary of
issuance and will be automatically converted by the Company in
the event that the closing price of the common stock has
equaled or exceeded $3.00 for any period of ten consecutive
trading days following January 1, 1998. The preferred stock
converts into common shares at $1.00 per share.
2. In June 1997, the Company issued 1,370,000 common shares to
Mull acres Investments, Inc. ("MAI") in exchange for a
$1,370,000 reduction in a $2,700,000 senior subordinated note.
In September of 1997, the Company issued 1,330,000 shares of
Series B preferred stock in consideration for the remaining
balance of the senior subordinated note. The Series B preferred
is convertible as described in Paragraph 1 above.
In September 1997, the Company issued 625,000 shares of the
Company's common stock upon the exercise of certain Series C
warrants.
The issuance of all such securities was exempt from
registration under the Securities Act of 1933 pursuant to
Section 4(2) thereof and Regulation D promulgated thereunder.
Item 5. Other Events
1. Effective June 30, 1997 MAI agreed, subject to certain
conditions to (a) cancel $1,370,000 of the Company's Senior
Secured Promissory Note dated January 30, 1997, held by MAI, in
the amount of $2,700,000 (the "Note") in consideration of
payment of the exercise price of options to purchase 1,370,000
shares of the Company's common stock, pursuant to the option
agreement dated September 13, 1996, as amended, at a reduced
exercise price of $1.00 per share and (b) to convert an
additional $1,330,000 of the note into preferred stock at a
conversion price of $1.00 per share, of which $730,000 will be
held in escrow pending the outcome of the Harley-Davidson and
other litigation.
2. On September 10, 1997, Herm Rosenman was appointed president
and chief executive officer. Mr. Rosenman was also appointed to
the Company's board of directors.
3. On June 20, 1997, Anne Todd was appointed controller and
secretary of the Company.
4. On November 4, 1997, the Company signed a binding letter of
intent to purchase substantially all of the assets of Illusion
Motorcycle Company of America.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3 Certificate of Correction of Certificate of Amendment
of Articles of Incorporation of Bikers Dream, Inc.
4 Certificate of Determination of Bikers Dream, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
1. On September 29, 1997, the Company filed a Form 8-K.
(i) Announcing the conversion of notes to series B preferred stock,
(ii) Setting for the terms series B preferred stock,
(iii) Announcing Herm Rosenman appointment as CEO of the Company,
(iv) A balance sheet as of 08/31/97 reflecting the conversion of
notes to series B preferred shares was filed with the 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Dated: November 14, 1997 BIKERS DREAM, INC.
By: /s/ Herm Rosenman
--------------------------------------
Herm Rosenman, Chief Executive Officer
and Chief Financial Officer
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Exhibit Index
Exhibit Number Seq. # Page
-------------- -----------
3 Certificate of Correction of Certificate of Amendment
of Articles of Incorporation of Bikers Dream, Inc.
4 Certificate of determination of Bikers Dream, Inc.
27 Financial Data Schedule
(b) Form 8-K filed September 29, 1997
<PAGE> 1
EXHIBIT 3
CERTIFICATE OF CORRECTION
OF CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION OF
BIKERS DREAM, INC.
Donald Duffy and Anne Todd certify that:
1. They are the chief executive officer and secretary, respectively, of
Bikers Dream, Inc., a California corporation.
2. The instrument being corrected is titled "Certificate of Amendment of
Articles of Incorporation of Bikers Dream, Inc." (the "Certificate of
Amendment") and the instrument was filed with the Secretary of State of the
State of California on June 21, 1996.
3. Section B of the Certificate of Amendment is corrected to read in its
entirety as follows:
Article Four of the Articles of Incorporation of this corporation
is amended to read in its entirety as follows:
"This corporation is authorized to issue two classes of shares
designated respectively "Common Stock" and "Preferred Stock."
These classes are referred to in these Articles as Common Stock
or Common Shares, or as Preferred Stock or Preferred Shares,
respectively. The total number of shares of Common Stock is
25,000,000, and the total number of shares of Preferred Stock is
10,000,000, of which thirty (30) are to be designated Series A
Preferred Stock, no par value ("Series A Preferred Stock") and
the remainder of which shall be undesignated.
The undesignated Preferred Stock may be divided into such number
of series as the board of directors may determine. The board of
directors is authorized to determine and alter the rights,
preferences, privileges and restrictions granted to or imposed
upon any wholly unissued series of Preferred Stock, and to fix
the number of shares of any series of Preferred Stock and the
designation of any such series of Preferred Stock. The board of
directors, within the limits and restrictions stated in any
resolution or resolutions of the board of directors originally
fixing the number of shares constituting any series, may increase
or decrease (but not below the number of shares of such series
then outstanding) the number of shares of any series subsequent
to the issue of shares of that series.
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The rights, preferences, privileges and restrictions granted to
or imposed upon the Series A Preferred Stock or the holders
thereof are as follows:
Series A Preferred Stock shall have preference on liquidation,
dissolution, or winding up of the assets of the corporation equal
to the sum paid therefor, which is $175,000 per share, before any
payment of any amount for, or the distribution of assets to, the
holders of Common Stock in connection with the liquidation,
dissolution, or winding up.
Each share of Series A Preferred Stock shall be entitled to an
annual dividend of shares of Common Stock. The stock dividend
will be paid each year on the anniversary date of issuance of the
Series A Preferred Stock. No dividend may be paid on Common Stock
at any time that the corporation is in arrears on payment of
dividends on Series A Preferred Stock. The number of shares of
Common Stock issuable as a stock dividend will be the product of
(i) 10% of the sum paid for the Series A Preferred Stock (which
10% fraction equals $17,500), divided by (ii) the closing bid
price of the Common Stock as quoted by the NASD on the date of
declaration. No dividend will be earned or paid on any share of
Preferred Stock in any year in which such share of Preferred
Stock is converted.
Each share of Series A Preferred Stock shall be convertible at
the option of the holder, at an initial conversion price of $2.50
per share (subject to adjustment as provided below) (as so
adjusted, the "Conversion Price"), into shares of Common Stock at
any time after a registration statement registering the Common
Stock into which the Preferred Shares are convertible has been
filed and declared effective with the Securities and Exchange
Commission. Upon conversion, the holder of Series A Preferred
Stock shall be entitled to receive the number of shares of Common
Stock determined by dividing $175,000 by the Conversion Price.
Shares of Series A Preferred Stock will automatically be
converted after the registration statement becomes effective if
(a) the average closing price of the Common Stock is $5.00 per
share or greater for ten (10) consecutive trading days or (b)
after July 6, 1999, whichever comes first. The corporation must
provide the holders of Preferred Stock with written notice within
ten (10) business days of the conversion of the Series A
Preferred Stock.
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<PAGE> 3
If the holder of the Series A Preferred Stock exercises the
conversion privilege, the Conversion Price will be 75 percent of
the greater of (a) the average of the closing bid price for the
Common Stock for the ten (10) trading days immediately preceding
receipt by this corporation of notice to convert or (b) the
closing bid price on the day immediately preceding receipt of
notice to convert, provided however, that in no event shall the
conversion price be less than $1.50 per share or greater than
$2.50 per share."
4. This certificate of correction is filed to correct misstatements of
fact in the amendment being corrected. The amendment, as corrected, conforms to
the amendment approved by the board of directors and shareholders.
/s/ Donald Duffy
------------------------
Donald Duffy
/s/ Anne Todd
------------------------
Anne Todd
The undersigned declare under penalty of perjury that the statements
contained in the foregoing certificate are true and correct of their own
knowledge and that this declaration was executed on July __, 1997.
/s/ Donald Duffy
------------------------
Donald Duffy
/s/ Anne Todd
------------------------
Anne Todd
3
<PAGE> 1
EXHIBIT 4
CERTIFICATE OF DETERMINATION
OF
BIKERS DREAM, INC.
Donald Duffy and Anne Todd hereby certify that:
A. They are the chief executive officer and secretary, respectively, of
Bikers Dream Inc., a California corporation.
B. The number of shares of Series B Convertible Preferred Stock is
8,000,000, none of which has been issued.
C. The board of directors duly adopted the following resolutions:
WHEREAS, the articles of incorporation authorize the Preferred Stock of
the corporation to be issued in series and authorize the board of directors to
determine the rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued series of Preferred Stock and to fix the number
of shares and designation of any such series, NOW THEREFORE IT IS:
RESOLVED, that the board of directors does hereby establish a new series
of Preferred Stock as follows:
1. Designation. The Board of Directors of Bikers Dream, Inc. does hereby
provide for the issue of a new series of Preferred Stock of the corporation, to
be designated and known as Series B Convertible Preferred Stock. As used herein,
the term "Convertible Preferred Stock" shall refer to shares of Series B
Convertible Preferred Stock; the term "Preferred Share" shall refer to one share
of Convertible Preferred Stock, and the term "Preferred Shares" shall refer to
more than one Preferred Share.
2. Number of Shares. The number of shares of Convertible Preferred Stock
authorized to be issued by the corporation shall be, and the same hereby is
fixed at, 8,000,000.
3. Stated Capital. The Convertible Preferred Stock has no par value per
share, and accordingly, the amount to be represented in stated capital for each
share of the Convertible Preferred Stock shall be nil.
4. Rank. The Convertible Preferred Stock shall, with respect to dividend
rights and rights on liquidation, rank (a) senior to, junior to, or on parity
with, as the case may be, any other series of Preferred Stock heretofore or
hereafter established by the Board of Directors, the terms of which shall
specifically provide that such series shall rank senior to,
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<PAGE> 2
junior to, or on parity with, as the case may be, the Convertible Preferred
Stock with respect to dividend rights and rights on liquidation, but in the
absence of specific provisions in the terms thereof, then this Convertible
Preferred Stock shall rank on a parity with such other series of Preferred
Stock; and (b) prior to any other equity securities of the corporation,
including all classes of the Common Stock, no par value per share (collectively,
the "Common Stock" or "Shares"), of the corporation.
5. Dividends.
(a) The holders of outstanding Convertible Preferred Stock shall
be entitled to receive, when and as declared by the Board of Directors out of
funds legally available therefor, dividends payable quarterly in arrears,
commencing on the date fifteen months after the date of issuance of Convertible
Preferred Stock (each such quarterly payment date referred to as a "Payment
Date" and collectively, the "Payment Dates"). Such dividends shall be paid to
the holders of record at the close of business on the date (a "Record Date")
specified by the Board of Directors at the time such dividend is declared.
Dividends shall accrue (whether or not declared) on each Preferred Share from
day to day at the annual rate of $.0975 per Preferred Share (the "Dividend
Rate"), and no more, from the date of issuance, provided that accumulated
dividends shall not bear interest (whether or not payment of dividends is made
on a Payment Date).
(b) Dividends shall be paid in cash, provided that the
corporation may elect to pay, or a holder of Convertible Preferred Stock may
elect to receive payment of, accrued and unpaid dividends through any Payment
Date in the number of Preferred Shares determined as set forth herein and which
Preferred Shares shall be issued to the holder or holders as of such Payment
Date. Such election shall, in each case, be made by written notice to the
holders, if the corporation so elects, or to the corporation, if a holder so
elects, given at least ten business days prior to a Payment Date. The issuance
of Convertible Preferred Stock as payment of dividends hereunder shall be made
at the rate of one shares per $1.00 of accrued dividend, as such rate maybe
adjusted in accordance with Section 9.
(c) Dividends shall be cumulative so that if at any time
dividends in respect of any previous period shall not have been paid, or
declared and set apart, in full for all Convertible Preferred Stock outstanding
in respect of a Payment Date, the deficiency shall be fully paid on, or declared
and set apart for, the Preferred Shares before the corporation makes any
distribution (as hereinafter defined) to holders of any capital stock ranking
junior to ("Junior Securities") or on parity with ("Equal Securities") the
Convertible Preferred Stock as to dividends or liquidation rights, provided,
however, that in the event of such failure to pay accrued dividends with respect
to the outstanding Preferred Shares and any outstanding shares of any Equal
Securities, dividends may be declared, paid or set apart for payment, pro rata,
on Preferred Shares and shares of such Equal Securities so that the amounts of
dividends declared, paid or set apart for payment on Preferred Shares and shares
of such Equal Securities, shall in all cases bear to each other the same ratio
that, at the time
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<PAGE> 3
of such declaration, payment or setting apart for payment, all accrued but
unpaid dividends on Preferred Shares and shares of such Equal Securities bear to
each other. Subject to the foregoing, the Board of Directors may declare, and
the corporation may pay or set apart for payment, dividends and distributions on
any of its securities (including Junior Securities) and may purchase or
otherwise redeem any of its securities (including Junior Securities), provided,
that no dividend shall be paid on the Common Stock at a rate greater than the
Dividend Rate (determined based on the number of shares of Common Stock into
which the Convertible Preferred Stock is convertible on the date the dividend is
declared).
(d) "Distribution" in this Section 5 means the transfer of cash
or property without consideration, whether by way of dividend or otherwise
(except a dividend in shares of Junior Securities) or the purchase or redemption
of shares of the corporation for cash or property, including any such transfer,
purchase or redemption by a subsidiary of the corporation, provided, that the
term "distribution" shall not include (and nothing in this Section 5 or
elsewhere herein shall limit or restrict the corporation or any such subsidiary
from) purchasing, redeeming or otherwise retiring any securities of the
corporation (including Junior Securities) issued to any individual who was or is
an employee, director or officer of the corporation or any subsidiary of the
corporation if such purchase, redemption or other retirement is approved by the
Board of Directors or required or permitted by any agreement, including any
employment agreement or stock option agreement, entered into by the corporation
or any such subsidiary. The time of any distribution by way of dividend shall be
the date of declaration thereof and the time of any distribution by purchase or
redemption of shares shall be the day cash or property is transferred by the
corporation, whether or not pursuant to a contract of an earlier date; provided
that, where a negotiable debt security is issued in exchange for shares, the
time of the distribution shall be the date on which the corporation acquires the
shares in such exchange.
6. Liquidation Preferences.
(a) In the event of a voluntary or involuntary liquidation,
dissolution or winding up of the corporation, and subject to the rights of the
holders of any other series of Preferred Stock that has liquidation rights
ranking prior to the Convertible Preferred Stock, the holders of Convertible
Preferred Stock shall be entitled to receive out of the assets of the
corporation, whether such assets are capital or surplus of any nature, an amount
equal to $1.00 per Share and a further amount equal to any dividends accrued and
unpaid thereon, as provided in paragraph 5, to the date that payment is made
available to the holders of Convertible Preferred Stock, whether declared or
not, and no more, before any payment shall be made or any assets distributed to
the holders of Shares or Junior Securities. Subject to all of the rights of the
holders of Convertible Preferred Stock as set forth herein and the holders of
other series of Preferred Stock, the holders of Shares shall be entitled to
receive, ratably, all remaining assets of the corporation without further
participation by holders of Convertible Preferred Stock.
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<PAGE> 4
(b) If the assets of the corporation are not sufficient to pay in
full the liquidation payments payable to the holders of outstanding Preferred
Shares and any outstanding shares of Equal Securities, then the holders of all
such securities shall share ratably in such distribution of assets in accordance
with the amount that would be payable in such distribution if the amounts to
which the holders of outstanding Preferred Shares and the holders of outstanding
shares of such other series of Preferred Stock are entitled were paid in full.
(c) A Reorganization (as defined below), or the effectuation of a
transaction or series of transactions in which more than 50% of the voting power
of the corporation is disposed of to a single person or group of affiliated
persons, may be deemed to be a liquidation, dissolution or winding up within the
meaning of this paragraph if the holders of a majority of the then outstanding
Preferred Shares so elect.
7. Redemption.
(a) Preferred Shares may be redeemed by the corporation at the
option of the Board of Directors pro rata at any time or from time to time in
whole or in part commencing one year after the date of issuance at a redemption
price of $1.125 per Preferred Share, plus all accumulated and unpaid dividends
to the date fixed for redemption (the "Redemption Price"). On and after the date
fixed for redemption (the "Redemption Date"), and if adequate funds for such
redemption are available, dividends shall cease to accumulate on the Preferred
Shares called for redemption.
(b) At least twenty (20) and not more than sixty (60) days prior
to the Redemption Date, the corporation shall cause a written notice to be
mailed to each holder of Preferred Shares to be redeemed, postage prepaid,
addressed to such holder at his or its address appearing on the books of the
corporation or given by such holder to the corporation for the purpose of such
notice, or if no such address appears or is so given, at the principal place of
business of the corporation, notifying the holder of the corporation's intention
to redeem such Preferred Shares, stating the Redemption Date and the date on
which such holder's conversion rights as to such share, as set forth in Section
8 below, terminate, which termination date shall be at least twenty (20) days
after the holder's receipt of such notice, and calling upon the holder to
surrender to the corporation at the place designated in the notice his or its
certificate or certificates representing the Preferred Shares to be redeemed
unless previously converted in accordance with Section 8 (the "Redemption
Notice").
Each holder of Preferred Shares to be redeemed, unless the holder
has exercised its right to convert such Preferred Shares as provided in Section
8, shall present and surrender his or its certificate or certificates
representing such Preferred Shares to the corporation at the place designated in
the Redemption Notice. Thereupon, the Redemption Price of such Preferred Shares
shall be payable to or on the order of the person whose name appears on such
certificate or certificates as the owner thereof and such surrendered
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<PAGE> 5
certificate shall be canceled. If fewer than all the Preferred Shares
represented by any such surrendered certificate are redeemed, a new certificate
shall be issued representing the unredeemed Preferred Shares. From and after the
Redemption Date, unless the corporation shall default in the payment of the
Redemption Price, all rights of the holder of such Preferred Shares as a
shareholder of the corporation, except the right to receive the Redemption
Price, shall cease and terminate, and such Preferred Shares shall not thereafter
be transferred on the books of the corporation or be deemed to be outstanding
for any purposes whatsoever.
(c) If, after the giving of the Redemption Notice but before the
Redemption Date, the corporation shall irrevocably deposit the funds necessary
to pay the Redemption Price for all Preferred Shares to be redeemed, in trust,
with a bank or trust company having a capital and surplus of at least
$50,000,000, to be applied to the redemption of the Preferred Shares so called
for redemption, then, from and after the date of such deposit, such Preferred
Shares shall no longer be deemed to be outstanding and all rights of the holders
of the Preferred Shares so called for redemption shall cease and terminate
excepting only (i) the right to receive the Redemption Price therefor upon the
surrender of the stock certificate as provided in the Redemption Notice; and
(ii) the right to convert such Preferred Shares, as provided in Section 8. Any
monies deposited on account of the Redemption Price of Preferred Shares
converted as aforesaid shall be repaid to the corporation forthwith upon such
conversion. If the holders of Preferred Shares that shall have been called for
redemption have not, within two years after the Redemption Date, claimed the
amount deposited with respect to the redemption thereof, any such bank or trust
company shall, upon demand, pay over to the corporation such unclaimed amounts
and thereupon such bank or trust company shall be relieved of all responsibility
to such holder in respect thereof and such holder shall look only to the
corporation for the payment of the Redemption Price. Any interest accrued on
funds so deposited shall be paid to the corporation from time to time. In any
event, if such funds become payable, or are paid, to a public official pursuant
to any abandoned property, escheat or similar law, the corporation shall have no
further obligation with respect to such funds. Preferred Shares that have been
issued and reacquired in any manner, including Preferred Shares purchased,
redeemed or exchanged, shall (upon compliance with any applicable provisions of
the laws of the State of California) have the status of authorized and unissued
shares of the class of Preferred Stock undesignated as to series and may be
redesignated and reissued as part of any series of Preferred Stock; provided,
however, that no such issued and reacquired Preferred Share shall be reissued or
sold as Convertible Preferred Stock.
8. Conversion Rights, Mandatory Conversion.
(a) Each Preferred Shares shall be convertible, at the option of
the holder thereof, at any time after the first anniversary of the date of
issuance, into shares of Common Stock at the Conversion Price (defined below).
The number of shares of Common Stock to be issued on conversion of a Preferred
Share shall be determined by dividing $1.00
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<PAGE> 6
by the Conversion Price in effect at the time of conversion. The conversion
price initially shall be $1.00, subject to adjustment as set forth in Section 9
(the "Conversion Price"). Subject to Section 7(b), a holder's right of
conversion shall terminate at the Redemption Date as to Preferred Shares
designated for redemption unless the corporation defaults in the payment of the
Redemption Price therefor.
(b) A holder of a Preferred Share may exercise his or its
conversion rights as to such Preferred Share by delivering to the corporation,
during regular business hours, at the office of the then transfer agent for the
Convertible Preferred Stock, at the principal office of the corporation or at
such other place as may be designated by the corporation in writing and
delivered to all holders of Convertible Preferred Stock, the certificate
representing the Preferred Shares to be converted, duly endorsed for transfer to
the corporation (if required by it), accompanied by written notice stating the
number of such Preferred Shares that the holder elects to convert. Conversion
shall be deemed to have been effected on the date when such delivery is made and
the Conversion Price therefor is paid (the "Conversion Date"). As promptly as
practicable thereafter, the corporation shall issue and deliver to such holder
at such office a certificate or certificates for the number of full shares of
Common Stock to which such holder is entitled and a check or cash with respect
to any fractional interest in a share of Common Stock as provided in Section
8(c). The holder shall be deemed to have become a shareholder of record of the
Common Stock on the applicable Conversion Date. Upon conversion of only a
portion of the number of shares of Convertible Preferred Stock represented by a
certificate surrendered for conversion, and subject to Section 7, the
corporation shall issue and deliver to such holder, at the expense of the
corporation, a new certificate representing the number of Preferred Shares that
have not been converted.
(c) All of the Preferred Shares will automatically be converted
into Common Shares at the then-applicable Conversion Price in the event that the
Closing Price (as defined below) of the Common Stock has equaled or exceeded
$3.00 for any period of ten consecutive trading days following January 1, 1998.
No fractional shares of Common Stock or scrip shall be issued upon conversion of
Convertible Preferred Stock, but cash shall be paid in lieu of any such
fractional shares. The corporation shall make no payment or adjustment on
account of any dividends accrued on any converted Preferred Shares after the
Conversion Date, but each holder of a Preferred Share on any Record Date who
converts such Preferred Share after the Record Date and before the succeeding
Payment Date shall be entitled to the dividends payable thereon on such Payment
Date.
(d) If any shares of Common Stock to be reserved in respect of
the conversion of Convertible Preferred Stock require registration, listing
with, or approval of, any governmental authority, stock exchange or other
regulatory body under any federal or state law or regulation or otherwise before
such shares may be validly issued or delivered upon conversion, the corporation
shall, at its sole cost and expense, in good faith and as
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<PAGE> 7
expeditiously as possible, endeavor to secure such registration, listing
or approval, as the case may be.
(e) All shares of Common Stock which may be issued upon
conversion of Convertible Preferred Stock shall, upon issuance, be validly
issued, fully paid and nonassessable. The corporation will pay any and all
documentary and other taxes that may be payable in respect of the issuance or
delivery of shares of Common Stock on conversion of Preferred Shares pursuant
hereto. The corporation shall not, however, be required to pay any tax which may
be payable in respect of any transfer of shares of Common Stock into a name
other than that in which the Preferred Shares so converted were registered, and
no such issuance or delivery shall be made unless and until the person
requesting such transfer has paid to the corporation the amount of any such tax
or has established to the satisfaction of the corporation that such tax has been
paid.
(f) All certificates representing Preferred Shares surrendered
for conversion shall be appropriately cancelled on the books of the corporation
and the shares so converted shall be restored to the status of authorized but
unissued shares of Preferred Stock of the corporation, but may not be reissued
as part of the Convertible Preferred Stock.
(g) The "Closing Price" on any day shall be the last sale price
per share of the Common Stock, regular way, as reported in a composite published
report of transactions that includes transactions on the exchange or other
principal markets in which the Common Stock is traded or, if there is no such
composite report as to any day, the last reported sale price per Share, regular
way (or if there is no such reported sale on such day, the average of the
closing reported bid and ask prices) on the principal United States securities
trading market (whether a stock exchange, NASDAQ or otherwise) in which the
Common Stock is traded.
9. Adjustment of Conversion Price.
(a) Subject to the provisions of this Section 9, the Conversion
Price and the number (and type) of Shares issuable upon the conversion of
Preferred Shares shall be subject to adjustment from time to time, as follows.
(i) Adjustment of Conversion Price. In the event the corporation
shall issue, sell, or distribute any Shares for a consideration per Share less
than (A) the Conversion Price or (ii) the Closing Price (it being understood and
agreed that, for purposes of this Section 9, there shall be no adjustment with
respect to issuances of Shares or options or other rights to subscribe for or
purchase shares at less than the Closing Price if such clause (A) is not
applicable), in effect immediately prior to the time of such issue or sale, or
for no consideration, then, forthwith upon such issue or sale, the Conversion
Price shall be reduced to the lower of the prices calculated by:
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(x) dividing (1) an amount equal to the sum of (a) the
number of Shares outstanding immediately prior to such issue or sale multiplied
by the then existing Conversion Price, plus (b) the aggregate consideration, if
any, received by the corporation upon such issue or sale, by (z) the total
number of Shares outstanding immediately after such issue or sale; or
(y) multiplying the then existing Conversion Price by a
fraction, the numerator of which is the sum of (1) the number of Shares
outstanding immediately prior to such issue or sale multiplied by the Closing
Price immediately prior to such issue or sale plus (y) the cash consideration
received by the corporation upon such issue or sale, and the denominator of
which is the total number of Shares outstanding immediately after such issue or
sale times the Closing Price immediately prior to such issue or sale.
For purposes of this Section 9(a), the date as of which the
Closing Price shall be computed shall be the earlier of the dates on which the
corporation shall have (i) entered into a firm contract for the issuance of such
Shares or (ii) issued such Shares.
(ii) Adjustment of Number of Shares Purchasable. Upon any
adjustment of the Conversion Price as provided in this Section 9(a) or in
Section 9(b), the holder shall thereafter be entitled to purchase, at the
Conversion Price resulting from such adjustment, the number of Shares
(calculated to the nearest .001 of a share) obtained by multiplying the
Conversion Price in effect immediately prior to such adjustment by the number of
Shares purchasable hereunder immediately prior to such adjustment and dividing
the product thereof by the Conversion Price resulting from such adjustment.
(iii) Minimum Adjustment. In the event any adjustment of the
Conversion Price pursuant to Section 9(a) or 9(b) shall result in an adjustment
of less than $.01 per Share, no such adjustment shall be made, but any such
lesser adjustment shall be carried forward and shall be made at the time and
together with the next subsequent adjustment which, together with any adjustment
so carried forward, shall amount to $.01 or more per Share; provided however,
upon any adjustment of the Conversion Price resulting from (x) the declaration
of a dividend upon, or the making of any distribution in respect of, any stock
of the Corporation payable in Common Stock or securities convertible into Common
Stock ("Convertible Securities") or (y) the reclassification by subdivision,
combination or otherwise, of the Common Stock into a greater or smaller number
of shares, the foregoing figure of $.01 per Share (or such figure as last
adjusted) shall be proportionately adjusted and provided further, upon the
conversion of any Preferred Shares, the corporation shall make all necessary
adjustments (to the nearest .001 of a cent) not theretofore made to the
Conversion Price up to and including the date upon which such Preferred Shares
are converted.
(b) For purposes of this Section 9, the following shall be
applicable:
8
<PAGE> 9
(i) Options, Other Rights or Convertible Securities.
(x) If the Corporation shall at any time in any manner
grant (whether directly or by assumption in a merger or otherwise) any options
or other rights to subscribe for or to purchase Shares or Convertible
Securities, or shall in any manner issue or sell Convertible Securities, whether
or not such rights or options or rights to convert or exchange any such
Convertible Securities are immediately exercisable, and the consideration per
Share (as determined under subsection 9(b)(v)) for which Shares are issuable
upon the exercise of such rights or options or upon conversion or exchange of
such Convertible Securities shall be less than (x) the Conversion Price in
effect immediately prior to the time of the granting of such rights or options
or such Convertible Securities, or (y) the Closing Price existing immediately
prior to the time such rights or options or such Convertible Securities were
granted, then the maximum number of Shares issuable upon the exercise of such
rights or options or upon conversion or exchange of the maximum amount of such
Convertible Securities shall be deemed to be outstanding and to have been issued
for such consideration per Share.
No further adjustments of the Conversion Price shall be made upon
the actual issuance of Shares, Convertible Securities or upon the actual
issuance of Shares upon conversion or exchange of Convertible Securities if
adjustments pursuant to this Section 9(b)(i)(x) have been made previously in
respect of the grant of such options or rights, or in respect of issuance or
sale of such Convertible Securities, except as otherwise provided in subsection
(ii) below.
For purposes of this Section 9(b)(i)(x), the date as of which the
Closing Price shall be computed shall be the earlier of the dates on which the
corporation shall have (A) entered into a firm contract for the issuance of such
rights or other options or (B) issued such rights or other options.
(y) In the event (A) the purchase price per Share provided for
in any rights, options or Convertible Securities referred to in subsection (x)
above, (i) the number of Shares or Convertible Securities that would be
delivered under such rights, options or Convertible Securities, (ii) the
additional consideration, if any, payable upon exercise of such rights or
options or the conversion or exchange of such Convertible Securities, or (iii)
the rate at which any Convertible Securities are convertible into or
exchangeable for Shares, in any case, shall change, the Conversion Price in
effect at the time of such event shall forthwith be readjusted to the Conversion
Price which would have been in effect at such time had such rights, options or
Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold.
On the expiration of any such option or right not exercised, or
the termination of any such unexercised right to convert or exchange Convertible
Securities, the Conversion
9
<PAGE> 10
Price then in effect hereunder shall forthwith be increased to the Conversion
Price which would have been in effect at the time of such expiration or
termination had such right, option or Convertible Security never been issued,
and the Common Stock issuable thereunder shall no longer be deemed to be
outstanding.
No readjustment of the Conversion Price pursuant to this
subsection (y) shall have the effect of increasing the Conversion Price by an
amount in excess of the adjustment initially made to the Conversion Price in
respect of the issue, sale, grant or assumption of the applicable options,
rights or Convertible Securities.
(ii) Splits and Combinations. If the corporation at any time
subdivides any of its outstanding Shares into a greater number of Shares, the
Conversion Price in effect immediately prior to such subdivision shall be
proportionately reduced and, conversely, if the outstanding Shares are combined
into a smaller number of Shares, the Conversion Price in effect immediately
prior to such combination shall be proportionately increased.
(iii) Reorganization, Reclassification or Recapitalization of
Corporation. In the case of any capital reorganization or reclassification or
recapitalization of the capital stock of the corporation (other than that
referred to in Section 9(b)(ii)), or in the case of the consolidation or merger
of the corporation with or into another corporation, or in the case of the sale
or transfer of all or substantially all of the property of the corporation, upon
the conversion of Preferred Shares or any portion hereof (in lieu of or in
addition to the number of Shares theretofore deliverable, as appropriate) the
amount of stock, other securities, or property which the holder of Preferred
Shares would have received had he or it converted Preferred Shares or such
portion thereof immediately prior to such capital reorganization or
reclassification of capital stock, consolidation, merger, or sale shall be
delivered, and the aggregate Conversion Price shall remain unchanged.
Prior to and as a condition of the consummation of any
transaction described in the preceding sentence, the corporation shall make
equitable, written adjustments in the application of the provisions set forth
herein with respect to the rights and interests of the holders of Preferred
Shares so that the provisions set forth herein shall thereafter be applicable,
in a manner as similar as possible to the methods used herein, to any shares of
stock or other securities or other property thereafter deliverable upon
conversion of Preferred Shares, which adjustments are satisfactory to the
holders of not less than 51% of the total number of Preferred Shares
outstanding. Any such adjustment shall be made by and set forth in a
supplemental agreement between the corporation and the successor entity, which
agreement shall bind such entity, shall be accompanied by an opinion of counsel
as to the enforceability of such agreement, and shall be approved by the holders
of not less than 51% of the total number of Preferred Shares outstanding.
(iv) Other Dilutive Events. In case any event shall occur as to
which the other provisions of this Section 9 are not applicable strictly, but
with respect to which the
10
<PAGE> 11
failure to make any adjustment would not protect fairly the conversion rights of
holders of Preferred Shares in accordance with the essential intent and
principles hereof then, in each such case, if requested by a holder in writing
following the inability of the corporation and such holder to agree on an
appropriate adjustment, the corporation shall appoint a firm of independent
public accountants of recognized national standing (which may be the regular
auditors of the corporation), which shall give their opinion upon the
adjustment, if any, on a basis consistent with the essential intent and
principles established in this Section 9, necessary to preserve, without
dilution, the conversion rights represented by the Preferred Shares. Upon
receipt of such opinion, the corporation will promptly mail a copy thereof to
the holders of Preferred Shares and shall make the adjustments described
therein.
(v) Determination of Consideration. For purposes of this Section
9, the consideration received by the corporation for the issue, sale, grant or
assumption of additional Shares, rights, options or Convertible Securities,
irrespective of the accounting treatment of such consideration, shall be valued
as follows:
(t) Cash Payment. In the case of cash, the net amount
received by the corporation after deduction of any accrued interest, dividends
or any expenses paid or incurred or any underwriting commissions or concessions
paid or allowed by the corporation;
(u) Securities or Other Property. In the case of
securities or other property, as of the date immediately preceding such issue,
sale, grant or assumption, the lesser of (1) the Closing Price per share of the
security for which such consideration was received, and (2) the fair value of
such consideration;
(v) Allocation Related to Common Stock. In the event
additional Shares are issued or sold together with other securities or other
assets of the corporation for a consideration which covers both, the
consideration received (computed as provided in subsection (t) and (u) above)
shall be allocable to such additional Shares as determined in good faith by the
Board of Directors (except as otherwise provided in subsection (w) below);
(w) Allocation Related to Options, Other Rights and
Convertible Securities. In case any options or other rights to purchase any
Shares or Convertible Securities shall be issued or sold together with other
securities or other assets of the corporation, in one integral transaction such
that no specific consideration is allocated to the rights or options, such
rights, options or Convertible Securities shall be deemed to have been issued
without consideration;
(x) Dividends in Securities. In case the corporation shall
declare a dividend or make any other distribution upon any stock of the
corporation payable, in either case, in Shares or Convertible Securities, such
Shares or Convertible Securities, as the case may be, issuable in payment of
such dividend or distribution shall be deemed to have been issued or sold
without consideration;
11
<PAGE> 12
(y) Warrants, Options, Other Rights and Convertible Securities.
The price per Share for which Shares are issuable upon the exercise of rights or
options to purchase any Shares or upon conversion or exchange of Convertible
Securities shall be determined by dividing (1) the sum of (i) the total amount,
if any, received or receivable by the corporation as consideration for the
granting of such rights or options or the issuance of such Convertible
Securities, plus (ii) the minimum aggregate amount of additional consideration
payable to the corporation upon the exercise of such rights or options, or, in
the case of such Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable upon the conversion or exchange
thereof, in each case after deducting any accrued interest, dividends or any
expenses paid or incurred or any underwriting commissions or concessions paid or
allowed by the corporation by, (2) the maximum number of Shares issuable upon
the exercise of such rights or options or upon the conversion or exchange of all
such Convertible Securities;
(z) Merger, Consolidation or Sale of Assets. In case any Shares
or Convertible Securities or any rights or options to purchase such Shares or
Convertible Securities shall be issued in connection with any merger or
consolidation in which the corporation is the surviving corporation, the amount
of consideration therefor shall be deemed to be the fair value of such portions
of the assets and business of the acquired corporation as the fair value opinion
shall attribute to such Shares, Convertible Securities, rights or options, as
the case may be. In the event of any merger or consolidation of the corporation
in which the corporation is not the surviving corporation or in the event of any
sale of all or substantially all of the assets of the corporation for stock or
other securities of any corporation, the corporation shall be deemed to have
issued a number of Shares for stock or securities of the other corporation
computed on the basis of the actual exchange ratio on which the transaction was
predicated and for a consideration equal to the fair value on the date of such
transaction of such stock or securities of the other corporation, and if any
such calculation results in adjustment of the Conversion Price, the
determination of the number of Shares issuable upon conversion of Preferred
Shares immediately prior to such merger, consolidation or sale shall be made
after giving effect to such adjustment of the Conversion Price.
(vi) Record Date. In case the corporation shall take a record of
the holders of Shares for the purpose of entitling them (x) to receive a
dividend or other distribution payable in Shares or in Convertible Securities,
or (y) to subscribe for or purchase Shares or Convertible Securities, then all
references in this Section 9 to the date of the issue or sale of the Shares
deemed to be issued or sold pursuant to the declaration of such dividend or
making of such other distribution or to the date of the granting of such right
of subscription or purchase, as the case may be, shall be deemed to be
references to such record date;
(vii) Shares Outstanding. The number of Shares deemed to be
outstanding at any given time shall not include (w) Shares in the treasury of
the corporation or any subsidiary and (x) Shares not yet purchased pursuant to
outstanding warrants, but shall
12
<PAGE> 13
include (y) all Shares ultimately issuable pursuant to Convertible Securities
then outstanding, plus (z)(1) the number of Shares covered by "in the money"
options or warrants (i.e., those having exercise prices less than the Conversion
Price), (z) less the number of Shares (on a fully diluted basis) that could be
purchased (if permitted under law) for an amount per share equal to the
Conversion Price with the aggregate exercise price of "in the money" options or
warrants then outstanding;
(viii) Maximum Exercise Price. At no time shall the Conversion
Price exceed $1.00 except as provided in Section 9(b)(ii) or (iii); and
(ix) Application. Except as otherwise provided herein, all
subsections of this Section 9(b) are intended to operate independently of one
another. If an event occurs that requires the application of more than one
subsection, all applicable subsections shall be given independent effect.
(c) Anything herein to the contrary notwithstanding, the
corporation shall not be required to make any adjustment of the Conversion Price
in the case of:
(i) the issuance of Shares upon the conversion in whole or part
of any of the Preferred Shares, or upon conversion of any other Preferred Stock
issued on or prior to the date hereof;
(ii) the issuance of Shares upon the exercise in whole or in part
of any warrants issued by the corporation prior to the date hereof;
(iii) the issuance of Shares, or options or other rights to
subscribe for or purchase Shares, issued or granted (x) to employees, directors
or others associated with the corporation pursuant to a stock incentive or other
plan, which plan and which grant is approved by the Board of Directors or (y) in
connection with a strategic alliance or joint venture, provided such issuance or
grant is approved by the Board of Directors.
(d) (i) Adjustments to Exercise Price. Upon any adjustment of the
Conversion Price, a certificate signed (x) by the Chief Executive Officer of the
corporation, or (y) by any independent firm of certified public accountants of
recognized national standing selected by the Corporation and at its expense,
shall be mailed promptly to each holder of Preferred Shares, which certificate
sets forth in reasonable detail the events requiring the adjustment and the
method by which such adjustment was calculated and specifies the Conversion
Price and the number of Shares purchasable upon conversion of such holder's
Preferred Shares, in each case, adjusted pursuant to this Section 9.
The certificate of any independent firm of certified public
accountants of recognized national standing selected by the Board of Directors
shall be conclusive evidence of the correctness of any computation made under
Section 9(a).
13
<PAGE> 14
(ii) Extraordinary Corporate Events. In case the corporation
after the date hereof shall propose to (x) distribute any dividend (whether
stock or cash or otherwise) to the holders of Shares or to make any other
distribution to the holders of Shares, (y) offer to the holders of Shares rights
to subscribe for or purchase any additional shares of any class of stock or any
other rights or options, or (z) effect any reclassification of the Common Stock
(other than a reclassification involving merely the subdivision or combination
of outstanding Shares), any capital reorganization, any consolidation or merger
(other than a merger in which no distribution of securities or other property is
to be made to holders of Shares), any sale, transfer or other disposition of all
or substantially all of its property, assets and business, or the liquidation,
dissolution or winding up of the Corporation, then, in each such case, the
Corporation shall mail to each holder of Preferred Shares notice of such
proposed action, which notice shall specify the date on which (1) the books of
the Corporation shall close, or (2) a record shall be taken for determining the
holders of Shares entitled to receive such stock dividends or other distribution
or such rights or options, or (3) such reclassification, reorganization,
consolidation, merger, sale, transfer, other disposition, liquidation,
dissolution or winding up shall take place or commence, as the case may be, and
the date, if any, as of which it is expected that holders of record of Shares
shall be entitled to receive securities or other property deliverable upon such
action. Such notice shall be mailed in the case of any action covered by clause
(x) or (y) above at least 10 days prior to the record date for determining
holders of Shares for purposes of receiving such payment or offer, or in the
case of any action covered by clause (z) above at least 30 days prior to the
date upon which such action takes place and 20 days prior to any record date to
determine holders of Shares entitled to receive such securities or other
property.
(iii) Effect of Failure. Failure to file any certificate or
notice or to mail any notice, or any defect in any certificate or notice,
pursuant to this Section 9(d) shall not affect the legality or validity of the
adjustment of the Conversion Price, the number of shares purchasable upon
conversion of Preferred Shares, or any transaction giving rise thereto.
10. Voting Rights. In all meetings of shareholders, the holders of
shares of Convertible Preferred Stock shall be entitled to that number of votes
equal to the number of shares of Common Stock issuable upon conversion of their
Convertible Preferred Stock at the time the shares are voted, and shall be
entitled to vote with the Common Stock (except where a separate class vote is
required by law or by terms of this instrument).
14
<PAGE> 15
/s/ Donald Duffy
------------------------------
Donald Duffy
/s/ Anne Todd
------------------------------
Anne Todd
The undersigned declare under penalty of perjury under the laws of the
State of California that they have read the foregoing certificate and know the
contents thereof and that the same is true of their own knowledge and that this
declaration was executed on August __, 1997.
/s/ Donald Duffy
------------------------------
Donald Duffy
/s/ Anne Todd
------------------------------
Anne Todd
15
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<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
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0
7,128,885
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