<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 March 31, 1998.
[ ] 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) (Zip Code)
Registrant's telephone number, including area code: (800) 927-4730
Indicate by check mark whether Registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during
the preceding 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. Yes [X] No [ ]
As of March 31, 1998, there were 2,538,844 shares of the Registrant's common
stock outstanding, 3 shares of the Registrant's Series A Preferred Stock
outstanding, 6,481,385 shares of the Registrant's Series B Preferred Stock
outstanding, and 124 shares of the Registrant's Series C Preferred Stock
outstanding.
Transitional Small Business Disclosure Format
Yes [ ] No [X]
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and 1997
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1998 1997
------------ -----------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 2,482,077 $ 86,339
Accounts receivable, net 1,034,155
540,023
Inventories 5,037,467 3,464,240
Notes receivable - Related Party - 546,335
Prepaid expenses and other current assets 460,376 58,058
------------ -----------
Total current assets 9,014,075 4,694,995
Property, equipment and capitalized leases, net 999,726 1,120,896
Goodwill 3,457,365 3,078,015
Deposits and other assets 139,726 31,370
------------ -----------
Total assets $ 13,610,892 $ 8,925,276
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 503,094 $ 952,355
Other accrued expenses 1,455,636 1,118,523
Current portion of long-term debt 92,640 83,545
Current portion of notes payable 8,709 2,230,022
Notes payable to shareholders 24,000 36,000
------------ -----------
Total current liabilities 2,084,079 4,420,445
Deferred rent 62,899 69,313
Notes payable, less current portion 2,575,211 2,629,054
Long-term debt, less current portion 256,263 348,891
Notes payable to shareholders - 36,000
------------ -----------
Total liabilities 4,978,452 7,503,703
Shareholders' equity:
Convertible preferred stock, Series A
30 shares authorized, 3 shares 402,500 1,102,500
issued and outstanding at March 31,
1998
Convertible preferred stock, Series B
8,000,000 shares authorized, 6,481,385 -
1,296,277 shares issued and
outstanding at March 31, 1998
Convertible preferred stock, Series C
300 shares authorized, 124 shares 3,100,000 -
issued and outstanding at March 31,
1998
Common stock
25,000,000 shares authorized at 11,269,995 7,571,417
March 31, 1998; 2,538,844 and 1,749,736
issued and outstanding at
March 31, 1998 and March 31, 1997
Accumulated deficit (12,621,440) (7,252,344)
------------ -----------
Total shareholders equity 8,632,440 1,421,573
------------ -----------
Total liabilities and shareholders'
equity $ 13,610,892 $ 8,925,276
============ ===========
</TABLE>
See the accompanying notes to these financial statements
2
<PAGE> 3
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Quarters Ended March 31, 1998, and 1997
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1998 1997
---------- ----------
<S> <C> <C>
REVENUES $4,992,789 $3,179,668
COST OF GOODS SOLD 4,272,424 2,601,370
---------- ----------
GROSS PROFIT 720,365 578,298
EXPENSES
Selling, general and administrative 1,118,646 1,069,788
expenses
Depreciation and amortization 130,633 57,843
---------- ----------
Total expenses 1,249,279 1,127,631
---------- ----------
OPERATING LOSS (528,914) (549,333)
---------- ----------
OTHER EXPENSE
Interest Expense 101,926 109,445
Other expense, net - 9,374
---------- ----------
Total other expense 101,926 118,819
---------- ----------
LOSS BEFORE PROVISION FOR INCOME TAXES (630,840) (668,152)
PROVISION FOR INCOME TAX - -
---------- ----------
NET LOSS $ (630,840) $ (668,152)
========== ==========
BASIC LOSS PER SHARE $ (0.25) $ (0.60)
========== ==========
DILUTED LOSS PER SHARE $ (0.25) $ (0.60)
========== ==========
WEIGHTED-AVERAGE SHARES OUTSTANDING 2,538,844 1,121,821
========== ==========
</TABLE>
See the accompanying notes to these financial statements
3
<PAGE> 4
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Quarters Ended March 31, 1998, and 1997
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (630,840) $ (668,152)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 130,633 57,843
(Increase) decrease in:
Accounts receivable (72,495) (397,896)
Inventories (583,376) (2,021,814)
Prepaid expenses and other current
assets 2,937 (525,279)
Increase (decrease) in:
Accounts payable (38,687) 511,423
Other accrued expenses (71,007) 99,828
----------- -----------
Net cash used in operating
activities (1,262,835) (2,944,047)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in deposits - (1,862)
Payments for purchases of furniture and
equipment (15,693) (420,590)
Increase (decrease) in deferred rent (2,011) 1,776
Investment - Joint Venture - 1,508,855
Goodwill - Ultra Acquisition Corporation - (3,078,015)
Other 30,960 -
----------- -----------
Net cash used in investing
activities 13,256 (1,989,836)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt - 2,545,123
Principal payments made on long-term debt and
capitalized leases (21,567) (20,598)
Proceeds from issuance of preferred stock 3,100,000 -
Costs associated with issuance of preferred
stock - -
Proceeds from issuance of common stock - -
Costs associated with issuance of common stock - 93,504
Proceeds from issuance of convertible notes
payable 800,000 -
Proceeds from issuance of notes payable - 2,210,000
Principal payments made on notes payable (802,035) (33,489)
Payments made on notes payable to shareholders (12,000) (12,000)
Preferred dividend - (10,209)
----------- -----------
Net cash provided by financing
activities 3,064,398 4,772,331
----------- -----------
Net increase in cash and cash
equivalents 1,814,819 (161,552)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 667,258 247,891
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,482,077 $ 86,339
=========== ===========
</TABLE>
See the accompanying notes to these financial statements
4
<PAGE> 5
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, and 1997
1. The consolidated financial statements include the accounts of Bikers Dream,
Inc. and all of its wholly-owned subsidiaries, including the accounts of
Ultra Acquisition Corporation, Bikers Dream International, Inc., Bikers
Dream Distribution, Inc., Bikers Dream Management Services, Inc. and Bikers
Dream Eagle Enterprises, Inc. All significant inter-company accounts and
transactions are eliminated in consolidation.
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, 1997. The results of operations for the three months ended
March 31, 1998 are not necessarily indicative of the results to be expected
for the year ending December 31, 1998. Net loss per share was computed by
dividing net loss by the weighted average number of common shares
outstanding during the respective quarters.
2. Summary Of Significant Accounting Policies:
Revenue Recognition:
Product Sales - Motorcycle Manufacturing revenue from the sale of
product is recognized at the time of shipment. Retail revenue from the
sale of products is recognized at the time of sale to a retail customer.
Financing Income - Financing income is the Company's commission revenue
resulting from certain motorcycle sales. Such revenue is recognized at
the time finance company or other third-party lender remits payment to
the Company.
Superstore Pre-Opening Costs:
All costs associated with opening a Company-owned and operated
Superstore, with the exception of capitalized furniture, fixtures and
equipment, are expensed when incurred.
Advertising Costs:
Those costs associated with placement of advertisements in various
periodicals are expensed when the advertisement is run. Internal
development costs are expensed as incurred.
Catalog Costs:
Internal costs associated with the development of mail order catalogs
are expensed as incurred. External costs, excluding printing, relating
to the development of the catalog are capitalized and amortized over 12
months from the first publication. Costs associated with printing
catalogs are inventoried when purchased and expensed as catalogs are
sold or distributed.
Continued
5
<PAGE> 6
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
March 31, 1998 and 1997
2. Summary Of Significant Accounting Policies, Continued:
Income Taxes:
The Company utilizes Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," which requires the recognition of
deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
Net Loss Per Common Share:
The computation of fully diluted net loss per share was anti-dilutive in
each of the periods presented; therefore, the amounts reported for basic
and diluted are the same. Net loss per common share was determined by
dividing net loss by the weighted average shares outstanding in each
period. Effective February 5, 1998, the Company effected a 1-for-5
reverse stock split of its common stock. All shares and per share data
have been stated to reflect the stock split.
Cash and Cash Equivalents:
For purposes of the balance sheet and the statement of cash flows, the
Company considers all highly liquid debt instruments purchased with an
original maturity at date of purchase of three months or less to be cash
equivalents.
Accounts Receivable:
At March 31, 1998, the allowance for doubtful accounts was $237,719.
This balance was $53,872 as of March 31, 1997.
Inventories:
Inventories are valued using a cost method which approximates the
first-in, first-out (FIFO) method at the lower of cost or market. The
entire inventory consists of purchased items categorized as finished
goods. At March 31, 1998, the reserve for obsolescence and slow-moving
inventory was $796,776. The reserve at March 31, 1997 was $100,000.
Continued
6
<PAGE> 7
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
March 31, 1998 and 1997
2. Summary Of Significant Accounting Policies, Continued:
Property, Equipment and Capitalized 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 the lesser. Repairs and
maintenance are expensed as 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.
Goodwill:
Goodwill reflects the excess cost over the fair value of the Ultra
Kustom Cycles division motorcycle manufacturing assets acquired in
January, 1997 from Mull Acres Investments, Inc. ("MAI"). Goodwill is
being amortized over 15 years, and for 1998, includes notes receivable
from the former owners, previously classified as a current asset.
Deferred Rent:
Deferred rent arises from rent abatements negotiated at the beginning of
certain property leases. The total amount of the base rent payments is
being charged to expense on the straight-line method over the term of
the lease. The Company has recorded deferred rent to reflect the excess
of rent expense over the cash payments since the inception of the lease.
Concentration of Risk:
The Company is operating in a growing market due to the current
nationwide popularity of cruiser motorcycles. Its future success is
dependent on the continuation of interest in the recreational motorcycle
industry and cruiser motorcycles in particular.
Concentration of Credit Risk:
Other financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
These concentrations are limited due to the large number of customers
comprising the Company's customer base and their dispersion across
different geographic regions. The Company performs ongoing credit
evaluations of customers and generally does not require collateral.
Allowances are maintained for potential credit losses, and such losses
have been within management's expectations. As of March 31, 1998 and
1997, the Company has no significant concentrations of credit risk.
Continued
7
<PAGE> 8
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
March 31, 1998 and 1997
2. Summary of Significant Accounting Policies, Continued:
Estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenue
and expenses during the reported period. Actual results could differ
from those estimates.
3. Property, Equipment and Capitalized Leases
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Estimated March 31, March 31,
Useful Life 1998 1997
---------------------------------------------
<S> <C> <C> <C>
Furniture and Fixtures 7 years $ 154,329 $ 139,900
Leasehold improvements 5 - 7 years 257,849 188,263
Equipment 5 years 279,098 385,545
Computer 5 years 223,528 188,731
Autos and trucks 3 - 10 years 581,486 472,042
--------------------------
1,496,290 1,374,481
Less, accumulated depreciation (496,564) (253,585)
and amortization
--------------------------
$ 999,726 $1,120,896
========== ==========
</TABLE>
Assessments of whether there has been a permanent impairment in the
value of long-lived assets are periodically performed by considering
factors such as expected future operating results, trends and prospects,
as well as the effects of demand, competition and other economic
factors. The method used is to determine if an impairment has occurred
based upon a change in circumstances regarding the long lived assets,
followed by an analysis of cash flows regarding the assets in question.
If an impairment is determined to have occurred as a result of the
analysis, then the Company recognizes and measures that impairment using
discounted cash flow as provided by FAS 121.
Continued
8
<PAGE> 9
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
March 31, 1998 and 1997
3. Property, Equipment and Capitalized Leases, Continued:
The Company leases certain computer equipment under agreements
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 March 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
--------- ---------
<S> <C> <C>
Computers $ 91,651 $132,600
Less, accumulated (49,610) (34,255)
depreciation
--------- --------
$ 42,041 $ 98,345
========= --------
</TABLE>
4. Series C Preferred Stock
In April 1998, the Company sold, through a private offering 155 Units at
$25,000 per Unit. Each Unit consisted of one share of the Company's
Series C Preferred Stock (the "Preferred C") and 1,250 Series F Common
Stock Purchase Warrants (the " F Warrants") to purchase one share of the
Company's common stock at $5.00 per share. Each share of the Company's
Preferred C is convertible, at the option of the holder, at any time
after the date of issuance (the "Conversion Date"), into shares of the
Company's common stock.
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.
Continued
9
<PAGE> 10
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
March 31, 1998 and 1997
9. Related Party Transactions:
In February 1998, Meyer Duffy & Associates, through various
partnerships, provided the Company an $800,000 "bridge loan", bearing
interest at 12% per annum, pending completion of the Series C Preferred
Stock offering described in Note 11. Donald Duffy, a principal of Meyer,
Duffy & Associates, is Chairman of the Board of the Company.
11. Subsequent Events
UNIT OFFERING
On April 16, 1998, the Company sold through a private offering 155 Units
at $25,000 per Unit. Each Unit consisted of one share of the Company's
Series C Preferred Stock (the "Preferred C") and 1,250 Series F Common
Stock Purchase Warrants (the "F Warrants") to purchase one share of the
Company's common stock at $5.00 per share for total consideration of
$3,875,000. Each share of the Company's Preferred C is convertible, at
the option of the holder, at any time after the date of issuance (the
"Conversion Date"), into shares of the Company's common stock. The price
at which the shares of Preferred C convert into the Company's common
stock (the "Conversion Price"), is determined by dividing $25,000 by the
greater of: (1) seventy-five percent (75%) of the average closing price
of the Company's common stock for the ten trading days immediately
preceding the Conversion Date, or (2) $2.50, provided, however, that
under no circumstance shall the Conversion Price exceed $4.00. Under
certain circumstances, the Conversion Price is subject to adjustment.
The Preferred C shall be automatically converted into the Company's
common stock in the event the closing price equals or exceeds $8 per
share for any period of twenty (20) consecutive trading days. Each F
Warrant entitles the holder to purchase one (1) share of the Company's
common stock at a purchase price of $5.00 per share.
Continued
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain matters discussed in this Quarterly Report 10-Q are "forward-looking
statements" intended to qualify for the safe harbors from liability established
by the Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as the Company "believes," "anticipates,"
"expects," "estimates," or words of similar meaning. Similarly, references to
the Company's future plans, objectives or goals are forward-looking statements.
Such forward-looking statements are subject to certain risks and uncertainties
which are described in close proximity to such statements and which could cause
actual results to differ materially from those anticipated as of the date of
this report. Shareholders, potential investors, and other readers are urged to
consider these factors in evaluating the forward-looking statements, and are
cautioned not to rely on such forward-looking statements. The forward-looking
statements included herein are only made as of the date of this report and the
Company undertakes no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1997
The following table sets forth for the period indicated the unaudited income and
expense items.
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
March 31, March 31,
1998 1997
----------------------------
<S> <C> <C>
Net Revenue 4,992,789 3,179,668
Cost of Goods Sold 4,272,424 2,601,370
Gross Profit 720,365 578,298
Other (Income) and Expenses
Selling, general and 1,118,646 1,069,788
administrative expenses
Depreciation and 130,633 57,843
amortization
Interest (income) expense 101,926 109,445
Other (income) expense - 9,374
---------- ----------
1,351,205 1,246,450
Income (Loss) Before Provision for
Income Tax (630,840) (668,152)
(Provision) for Income Tax - -
---------- ----------
Net Income (Loss) $ (630,840) $ (668,152)
========== ==========
</TABLE>
Continued
11
<PAGE> 12
COMPARISON OF FIRST QUARTER ENDED MARCH 31, 1998 AND 1997:
Net sales for the three months ended March 31, 1998, was $4,992,789, an increase
of $1,813,121 or 57 % from the same period in 1997. The increase in net sales
was primarily attributable to Motorcycle Manufacturing, as units shipments
increased to 220, and higher sales from Retail Stores, which benefited from a
full quarter of the San Diego Superstore, which opened in February 1997.
Gross profit for the three months ended March 31, 1998, was $720,365, an
increase of $142,067 or 25% from the same period in 1997. The increase in gross
profit was primarily attributable to increased motorcycle unit shipments and
higher sales from the Retail Stores, which benefited from a full quarter of the
San Diego Superstore, which opened in February 1997. The gross profit margin for
the three months ended March 31, 1998, was 14.4% compared to 18.2% for the three
months ended March 31, 1997. The decrease in gross margin is primarily related
to higher sales from the Motorcycle Manufacturing division which experiences
lower gross margins than the Retail division.
Selling, general and administrative expenses were $1,118,646 for the quarter
ended March 31, 1998, an increase of $48,858 or 5% from the same period in 1997.
This increase is mainly a result of the selling, general and administrative
expenses of Motorcycle Manufacturing and the San Diego Superstore, offset by
lower corporate administrative expenses.
Operating losses decreased to $528,914, or 3.7% for the three months ended March
31, 1998, from the same period in 1997. The decrease in operating losses
resulted from higher gross profit offset by an increase in selling, general, and
administrative expenses.
Depreciation and amortization expense was $130,633 for the quarter ended March
31, 1998, which was $72,790 or 126% higher than the same period in 1997. The
increase is due to the addition of the machinery and equipment acquired through
Ultra Kustom Cycles and Ultra Kustom Parts and the addition of the San Diego
Superstore.
Interest expense declined to $101,926, or 6.9%, for the three months ended March
31, 1998, from the same period in 1997.
Losses before provision for income taxes declined to $630,840, or 5.6%, for the
three months ended March 31, 1998, from the same period in 1997.
There was no provision for income taxes in 1998. The Company has fully reserved
for the deferred tax asset primarily related to its net operating loss
carry-forwards beginning in the second quarter of 1995. The Company's management
has concluded that, based upon its assessment of all available evidence, the
future benefit of this asset cannot be projected accurately at this time.
The net loss for the quarter ended March 31, 1998 was $630,840 as compared to a
loss of $668,152 in the same period in 1997. This decrease of $37,312 was mainly
due to a loss in manufacturing operations, offset by the opening the new San
Diego Superstore, and improved profitability in the other retail Superstores.
While the Company does not expect inflation to have a material impact upon its
operating results, there can be no assurance that inflation will not affect the
Company's business in the future. The Company expects to mitigate inflationary
increases through securing additional purchase volume discounts as net sales
increase through the opening of future Superstores.
Continued
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
The Company used $1,262,835 of cash in operating activities during the first
three months of 1998, compared to $2,944,047 in the same period in 1997. Net
losses adjusted for depreciation and amortization, used $500,207 of cash in the
first three months of 1998. The Company invested $583,376 in additional
inventory during the first three months of 1998.
The following are forward looking statements: The Company is pursuing a
long-term strategy to significantly increase motorcycle production capacity with
a goal of having the capacity to manufacture in excess of 200 units a month by
the end of 1998 and 400 units a month by the end of 1999. The Company's strategy
includes the establishment of a new manufacturing facility in the next twelve
months. Although the Company does not know the exact range of capital it will
invest to increase its manufacturing capacity and establish a new manufacturing
facility, it estimates the capital required will approximate $5-$8 million. The
Company anticipates funding its production increase with cash on hand,
internally generated funds, and additional equity and or debt offerings.
The Company has relied substantially on equity capital and debt financing to
meet its operating and growth needs. The Company's ability to increase its
manufacturing capacity and establish a new manufacturing facility will depend
upon, among other factors, the Company's ability to raise additional equity
capital and/or debt financing, implement changes to the existing manufacturing
facility, establish a new manufacturing facility, and work with existing and new
suppliers to expand their capacity. However, there can be no assurance that the
Company will be able to raise additional equity capital or debt financing. In
addition, the Company could experience delays in implementing changes to the
existing manufacturing facility and/or establishing a new manufacturing facility
as a result of the risks associated with the establishment and operation of new
manufacturing facility. There is no assurance that the Company will have the
ability to sell all the motorcycles it has the capacity to produce.
13
<PAGE> 14
Part II
Item 5. Other Events.
1. Legal Proceedings
In April 1998, the Company finalized a settlement agreement with
Harley-Davidson, Inc. ("Harley-Davidson") ending all disputes between
them. Harley-Davidson had brought actions against the Company for
trademark infringement and infringement of "trade dress" issues.
Without admitting or denying any violations of Harley-Davidson's
trademarks, or debating the subject of "trade dress", the Company
agreed to make certain changes to some of the components it uses to
manufacture motorcycles under the Company brand and to pay, together
with its insurers, an amount approximating Harley-Davidson's legal
expenses in the matter.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
4 Certificate of Determination of Bikers Dream, Inc.
27 Financial Data Schedule
14
<PAGE> 15
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: May 14, 1998 BIKERS DREAM, INC.
By: /s/ HERM ROSENMAN
--------------------------------
Herm Rosenman, Chief Executive Officer
By: /s/ ANNE TODD
--------------------------------
Anne Todd, Chief Accounting Officer
15
<PAGE> 1
EXHIBIT 4
CERTIFICATE OF DETERMINATION
OF
BIKERS DREAM, INC.
Herm Rosenman 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 C Convertible Preferred Stock is 300,
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 C Convertible Preferred Stock.
As used herein, the term "Convertible Preferred Stock" shall refer to shares of
Series C 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, 300.
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, 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
<PAGE> 2
senior to 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 one year 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 $2,250 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, however, that
the corporation may elect to pay, 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 be made by written notice to the holders and
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 share per $25,000 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 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
<PAGE> 3
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 however, 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 $25,000 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.
(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 at the option of the
holder of such shares at
<PAGE> 4
any time or from time to time in whole or in part commencing four years after
the date of issuance at a redemption price of $25,000 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 holder of Preferred Shares to be redeemed
shall cause a written notice to be mailed to the corporation, notifying the
corporation of the holder's intention to redeem such Preferred Shares and
stating the Redemption Date.
On or after the Redemption Date, each holder of Preferred
Shares to be redeemed, shall present and surrender his or its certificate or
certificates representing such Preferred Shares to the corporation. 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 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.
8. Conversion Rights, Mandatory Conversion.
(a) Each Preferred Share shall be convertible at the option of
the holder thereof, at any time after 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 $25,000 by the Conversion Price in effect at the time of conversion.
The "Conversion Price," subject to adjustment as set forth in Section 9, shall
be the greater of (i) seventy-five percent (75%) of the average Closing Price of
the Common Stock (as defined below) for the ten (10) trading days immediately
preceding the Conversion Date (as defined below); or (ii) $2.50; provided,
however, that under no circumstances shall the Conversion Price exceed $4.00,
except as provided in Sections 9(c) or (d).
(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 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 cause to be issued and delivered
to such holder 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
<PAGE> 5
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, 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 shall be automatically
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 $8.00 for any period of twenty (20) consecutive trading days. 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 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 canceled 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.
<PAGE> 6
9. Adjustment of Conversion Price. Subject to the provisions of this
Section 9, the Conversion Price shall be subject to adjustment from time to time
as follows:
(a) Issuance of Shares. In the event that the corporation
shall issue, sell or distribute, at any time during the one year period
commencing on the date of the completion of the Series C Preferred Stock
placement, any Shares for a consideration per Share less than the Conversion
Price, then, subject to the approval of a majority of the holders of Series C
Convertible of Preferred Stock as a class, the Conversion Price shall be reduced
so as to equal such consideration per Share (as determined pursuant to Section
9(f)).
(b) Options or Convertible Securities.
(i) 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 pursuant to Section 9(f)) 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 the Conversion Price in effect
immediately prior to the time of the granting of such rights or options or such
Convertible Securities, 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) 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
(c) below.
(ii) In the event (a) the purchase price per Share
provided for in any rights, options or Convertible Securities referred to in
subsection 9(b)(i) above, (b) the number of Shares or Convertible Securities
that would be delivered under such rights, options or Convertible Securities,
(c) the additional consideration, if any, payable upon exercise of such rights
or options or the conversion or exchange of such Convertible Securities, or (d)
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 may be readjusted as set forth in Section 9(a)
as if such change had been in effect upon the original issue of such securities.
(c) 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.
(d) Reorganization, Reclassification or Recapitalization of
Corporation. In the
<PAGE> 7
case of any capital reorganization or reclassification or recapitalization of
the capital stock of the corporation (other than that referred to in Section
9(c)), 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.
(e) 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 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.
(f) 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:
(i) 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;
(ii) 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 greater of (1) the Closing Price per share of the
security for which such consideration was received, or (2) the fair
<PAGE> 8
value of such consideration;
(iii) 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 (i) and (ii) above)
shall be allocable to such additional Shares as determined in good faith by the
Board of Directors (except as otherwise provided in subsection (iv) below);
(iv) 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;
(v) 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;
(vi) 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;
(vii) 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
<PAGE> 9
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.
(g) Record Date. In case the corporation shall take a record
of the holders of Shares for the purpose of entitling them to receive a dividend
or other distribution payable in Shares or in Convertible Securities, or 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;
(h) Shares Outstanding. The number of Shares deemed to be
outstanding at any given time shall not include Shares in the treasury of the
corporation or any subsidiary and Shares not yet purchased pursuant to
outstanding warrants, but shall include all Shares ultimately issuable pursuant
to Convertible Securities then outstanding, plus the number of Shares covered by
"in the money" options or warrants (i.e., those having exercise prices less than
the Conversion Price), 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;
(i) Maximum Exercise Price. At no time shall the Conversion
Price exceed $4.00 except as provided in Section 9(b)(ii) or (iii); and
(j) 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.
(k) Issuances Which Shall Not Trigger Adjustment. 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, joint venture, merger
or acquisition provided such issuance or grant is approved by the Board of
Directors.
(l) Notice of Adjustments or Events.
(i) Adjustments to Conversion Price. Upon any
adjustment of the Conversion
<PAGE> 10
Price, a certificate signed by the Chief Executive Officer of the corporation,
or 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).
(ii) Extraordinary Corporate Events. In case the
corporation after the date hereof shall propose to (a) 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, (b) 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 (d) 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 (a) or (b) 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 (c) 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(l) 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. Preemptive Rights. In the event of any future offerings by the
corporation of equity securities or securities which may be converted into
equity securities by the corporation, except as set forth in Section 9(l), the
holders of the Preferred Shares shall have the right to purchase, for cash only,
a pro rata share of such offered securities.
11. 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).
<PAGE> 11
/s/ Herm Rosenman
----------------------------------
Herm Rosenman
/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 March 27, 1998.
/s/ Herm Rosenman
----------------------------------
Herm Rosenman
/s/ Anne Todd
----------------------------------
Anne Todd
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<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,482,077
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0
9,983,885
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