UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the transition period from ______ to ______
Commission File Number 0-25114
CALIFORNIA PRO SPORTS. INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1217733
- ---------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
1221 B South Batesville Road, Greer, South Carolina 29650
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(864) 848-5160
---------------------------------------------------
(Registrants telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such report(s)
and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 11,479,727 common shares, par value
$.01 per share, outstanding at July 31, 1998.
Transitional Small Business Disclosure Format YES [ ] NO [X]
Page 1 of ___ total pages on this document.
<PAGE>
CALIFORNIA PRO SPORTS, INC.
AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
PART II. OTHER INFORMATION
2
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(UNAUDITED)
ASSETS
------
<TABLE>
<CAPTION>
Pro forma Historical
--------- ----------
(Note 4)
<S> <C> <C>
Current assets:
Cash ............................................................... $ 2,181,599 $ 1,141,599
Accounts receivable, related parties ............................... 248,504 248,504
Notes receivable:
Related parties ................................................ 217,500 127,500
Other .......................................................... 245,500 245,500
Prepaid expenses and other ......................................... 73,322 73,322
Assets of subsidiary held for sale (Note 3) ........................ 904,358
------------ ------------
Total current assets ................................ 2,966,425 2,740,783
------------ ------------
Furniture and equipment, net of accumulated
depreciation of $403,393 ................................................. 68,660 68,660
------------ ------------
Intangible assets, net of accumulated
amortization of $106,790:
Trademark license and other costs .................................. 612,253 612,253
Goodwill ........................................................... 94,483
------------ ------------
612,253 706,736
------------ ------------
$ 3,647,338 $ 3,516,179
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .............................. $ 410,516 $ 291,516
Liabilities of subsidiary held for sale (Note 3) ................... 1,345,696
------------ ------------
Total liabilities (all current) ..................... 410,516 1,637,212
------------ ------------
Minority interest ......................................................... 420,266
------------ ------------
Shareholders' equity (Note 4):
Preferred stock, $0.01 par value;
authorized 5,000,000 shares:
Series A Preferred stock, issued 1,327,606 ...................... 13,277
Series B/C Preferred stock, issued 1,430 ........................ 20 14
Common stock, $0.01 par value; authorized
10,000,000 shares; issued 7,496,908 ............................. 120,296 74,969
Warrants ........................................................... 394,200 394,200
Capital in excess of par ........................................... 14,475,426 13,570,255
Accumulated deficit ................................................ (11,753,120) (11,777,026)
Treasury stock held by subsidiary; consisting of 750,471
shares of Series A Preferred Stock; 86,000 shares of
common stock ..................................................... (816,988)
------------ ------------
Total shareholders' equity .......................... 3,236,822 1,458,701
------------ ------------
$ 3,647,338 $ 3,516,179
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
----------- -----------
Net sales ................................... $ $ 4,010,430
----------- -----------
Cost of sales:
Substantially from a related party ... 22,869
Other ................................ 2,730,122
----------- -----------
2,752,991
----------- -----------
Gross profit ................................ 1,257,439
----------- -----------
Operating expenses:
Sales and marketing expense .......... 394,975
General and administrative expense ... 357,898 1,160,103
Depreciation and amortization ........ 62,090 198,185
Consulting fees, related party ....... 30,000 60,000
----------- -----------
449,988 1,813,263
----------- -----------
Loss from operations ........................ (449,988) (555,824)
----------- -----------
Other expenses (income):
Interest expense:
Related party .................... 27,746 71,583
Other ............................ 284,140
Foreign currency loss ................ 11,589
Royalty income and other ............. (17,792) (19,200)
Finance fees (Note 4) ................ 119,537
----------- -----------
129,491 348,112
----------- -----------
Loss before minority interest ............... (579,479) (903,936)
Minority interest ........................... 11,410 (172,347)
----------- -----------
Net loss .................................... $ (590,889) $ (731,589)
=========== ===========
Net loss per share .......................... $ (.08) $ (.14)
=========== ===========
Weighted average number of shares outstanding 7,302,939 5,270,492
=========== ===========
See notes to consolidated financial statements.
4
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
----------- -----------
Net sales ........................................ $ $ 6,776,239
----------- -----------
Cost of sales:
Substantially from a related party ........ 42,516
Other ..................................... 4,929,631
----------- -----------
4,972,147
----------- -----------
Gross profit ..................................... 1,804,092
----------- -----------
Operating expenses:
Sales and marketing expense ............... 4,084 837,171
General and administrative expense ........ 697,366 1,989,640
Depreciation and amortization ............. 124,181 391,968
Consulting fees, related party ............ 60,000 120,000
----------- -----------
885,631 3,338,779
----------- -----------
Loss from operations ............................. (885,631) (1,534,687)
----------- -----------
Other expenses (income):
Interest expense:
Related party ......................... 148,739
Other ................................. 60,345 530,867
Foreign currency gain ..................... (34,354)
Royalty income and other .................. (58,926) (26,462)
Gain on sale of investment in subsidiary (Note 8) (87,593)
Loss on sale of marketable securities (Note 5) 62,392
Finance fees and other (Note 5) ........... 300,145
----------- -----------
301,564 593,589
----------- -----------
Loss before minority interest and
extraordinary items (1,187,195) (2,128,276)
Minority interest ................................ 35,118 (701,543)
----------- -----------
Loss before extraordinary item ................... (1,222,313) (1,426,733)
----------- -----------
Extraordinary item, debt forgiveness ............. 197,901
----------- -----------
Net loss ......................................... $(1,222,313) $(1,228,832)
=========== ===========
Loss per share before extraordinary item ......... $ (.17) $ (.29)
Extraordinary item ............................... .04
----------- -----------
Loss per share ................................... $ (.17) $ (.25)
=========== ===========
Weighted average number of shares outstanding .... 7,110,717 4,986,747
=========== ===========
See notes to consolidated financial statements.
5
<PAGE>
CALIFORNIA PRO SPORTS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Series A Series B & C
Common stock Preferred stock Preferred stock
------------------------------ ----------------------------- --------------------------
Shares Amount Shares Amount Shares Amount Warrants
------------- ------------ ------------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1,
1998 6,734,430 $ 67,344 1,099,685 $ 10,997 $ 394,200
Issuance of 209,278
shares of common
stock in
consideration for
extending the date
on certain notes
(Note 5) 209,278 2,093
Issuance of 50,000
shares of common
stock for consulting
services (Note 5) 50,000 500
Issuance of 434,200
shares of common
stock upon exercise
of options (Note 5) 434,200 4,342
Issuance of 18,500
shares of series A
preferred stock
(Note 5) 18,500 185
Issuance of 167,754
shares of Series A
preferred stock in a
private placement
(Note 3)
167,754 1,678
</TABLE>
(Continued)
6
<PAGE>
CALIFORNIA PRO SPORTS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Capital in Treasury
excess of stock
par Deficit Total
-------------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C>
Balances, January 1,
1998 $ 11,080,758 $ (10,554,713) $ (893,640) $ 104,946
Issuance of 209,278
shares of common
stock in
consideration for
extending the date
on certain notes
(Note 5) 298,052 300,145
Issuance of 50,000
shares of common
stock for consulting
services (Note 5) 68,250 68,750
Issuance of 434,200
shares of common
stock upon exercise
of options (Note 5) 460,068 464,410
Issuance of 18,500
shares of series A
preferred stock
(Note 5) 76,128 76,313
Issuance of 167,754
shares of Series A
preferred stock in a
private placement
(Note 3)
164,975 166,653
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
CALIFORNIA PRO SPORTS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Series A Series B & C
Common stock Preferred stock Preferred stock
------------------------------ ----------------------------- --------------------------
Shares Amount Shares Amount Shares Amount Warrants
------------- ------------ ------------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of 224,000
shares of common
stock owned by
Skate Corp. In
satisfaction of
$224,000 of
liabilities
Issuance of 69,000
shares of common
stock in satisfaction
of $34,500 of
liabilities 69,000 690
Issuance of 41,667
shares of Series A
preferred stock in
satisfaction of
$150,000 of
liabilities 41,667 417
Issuance of 1,430
shares of Series B
and C preferred
stock in connection
with private
placement, net of
costs (Note 4) 1,430 14
Net loss for the six
months ended
June 30, 1998
------------- ------------ ------------- ----------- ----------- --------- -----------
Balances, June
30, 1998 7,496,908 $ 74,969 1,327,606 $ 13,277 1,430 $ 14 $ 394,200
============= ============ ============= =========== =========== ========= ===========
</TABLE>
(Continued)
8
<PAGE>
CALIFORNIA PRO SPORTS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Capital in Treasury
excess of stock
par Deficit Total
-------------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C>
Issuance of 224,000
shares of common
stock owned by
Skate Corp. In
satisfaction of
$224,000 of
liabilities 147,348 76,652 224,000
Issuance of 69,000
shares of common
stock in satisfaction
of $34,500 of
liabilities 33,810 34,500
Issuance of 41,667
shares of Series A
preferred stock in
satisfaction of
$150,000 of
liabilities 149,583 150,000
Issuance of 1,430
shares of Series B
and C preferred
stock in connection
with private
placement, net of
costs (Note 4) 1,091,283 1,091,297
Net loss for the six
months ended
June 30, 1998 (1,222,313) (1,222,313)
-------------- ----------------- ------------- ---------------
Balances, June
30, 1998 $ 13,570,255 $ (11,777,026) $ (816,988) $ 1,458,701
============== ================= ============= ===============
</TABLE>
See notes to consolidated financial statements.
9
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ........................................................... $ (1,222,313) $ (1,228,832)
------------ ------------
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Extraordinary gain ............................................... (197,901)
Gain on sale of investment in subsidiary ......................... (87,593)
Loss on sale of marketable securities ............................ 62,392
Foreign currency gain ............................................ (34,354)
Depreciation and amortization .................................... 124,181 391,968
Provision for bad debts .......................................... 50,836
Expense incurred upon issuance
of common stock (Note 5) ....................................... 445,208 187,813
Minority interest ................................................ 35,118 (701,543)
Decrease (increase) in assets:
Accounts receivable ............................................ (257,362) (67,404)
Income taxes receivable ........................................ 186,091
Inventories .................................................... 398,755
Prepaid expenses and other ..................................... (45,181) 154,795
Assets of subsidiary held for sale ............................. 200,169
Increase (decrease) in liabilities:
Accounts payable and accrued expenses .......................... 227,123 1,412,689
Payable to officers/shareholders and
other related parties ......................................... (22,178)
Liabilities of subsidiary held for sale ........................ 40,057
------------ ------------
Total adjustments ................................................ 769,313 1,734,366
------------ ------------
Net cash provided by (used in) operating activities ....................... (453,000) 505,534
------------ ------------
Cash flows from investing activities:
Capital expenditures ............................................... (56,962)
Proceeds from sale of marketable securities ........................ 166,260
Increase in notes receivable ....................................... (141,730)
------------ ------------
Net cash provided by (used in) investing activities ....................... (141,730) 109,298
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable and long term debt ..................... 1,449,347
Repayments of notes payable and long term debt ..................... (2,019,475)
Proceeds from issuance of preferred stock .......................... 1,257,950
Proceeds from exercise of options .................................. 464,410
------------ ------------
Net cash provided by (used in) financing activities ....................... 1,722,360 (570,128)
------------ ------------
Net increase in cash ...................................................... 1,127,630 44,704
</TABLE>
(Continued)
10
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATES STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash beginning ............................................................ 13,969 59,098
------------ ------------
Cash ending ............................................................... $ 1,141,599 $ 103,802
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest ............................................. $ 78,465 $ 458,659
============ ============
Supplemental disclosure of noncash investing and financing activities:
Issuance of 224,000 shares of
treasury stock in 1998 and 606,368
shares in 1997, in settlement
of amounts due ................................................... $ 224,000 $ 718,656
============ ============
Issuance of 303,333 shares of
common stock in exchange in for
392,667 shares of company's subsi-
diary stock ...................................................... $ 328,132
============
Issuance of 50,000 shares of common
stock in exchange for consulting services ........................ $ 68,750
============
Issuance of 69,000 shares of common stock
stock and 41,667 shares of preferred stock
in settlement of amounts due ..................................... $ 184,500
============
</TABLE>
See notes to consolidated financial statements.
11
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1. The interim financial statements:
The interim financial statements have been prepared by California Pro
Sports, Inc. (the "Company") and in the opinion of management, reflect
all material adjustments which are necessary to a fair statement of
results for the interim periods presented, including normal recurring
adjustments. Certain information and footnote disclosures made in the
last annual report on Form 10-KSB have been condensed or omitted for
the interim statements. It is the Company's opinion that, when the
interim statements are read in conjunction with the December 31, 1997
Annual Report on Form 10-KSB, the disclosures are adequate to make the
information presented not misleading. The results of operations for the
three and six months ended June 30, 1998 and 1997 are not necessarily
indicative of the operating results for the full year.
2. Organization:
The accompanying consolidated financial statements include the accounts
of California Pro Sports, Inc. and its subsidiaries, California Pro,
Inc. ("CP"), USA Skate Corporation ("Skate Corp.") and ImaginOn
Acquisition Corp. (Note 10). Skate Corp. was formed in 1995 to acquire
USA Skate Co., Inc. ("USA Skate"). At June 30, 1998, the Company owned
100% of the outstanding CP and ImaginOn Acquisition Corp. capital stock
and 62.3% of the outstanding Skate Corp. capital stock. Minority
interest represents Skate Corp.'s minority shareholders' 37.7%
ownership interest in Skate Corp. Intercompany transactions have been
eliminated in consolidation.
In 1996 and 1997, due to continuing operating losses, management decided
to restructure and deleverage the Company. Prior to the second quarter
of 1997, the Company sold in-line skates and accessories, under the
brand names California Pro(R) and Rolling Thunder(TM), to retail
sporting goods stores principally in North America, and sold snowboards
and accessories under the Kemper(R) brand name to retail sporting goods
stores in North America and distributors in Europe and Japan. A
majority of the in-line skates were manufactured for the Company by
Playmaker Co. Ltd. ("Playmaker"), a minority shareholder of the
Company. In September 1997, Skate Corp. sold substantially all of the
operating assets of USA Skate and Davtec, which manufactured, imported
and marketed VICTORIAVILLE(TM), VIC(R), and McMartin(TM) ice and
street/roller hockey skates, sticks and related protective gear and
12
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
2. Organization (continued):
accessories for sale to retail sporting goods stores in the United
States and Canada and independent distributors primarily located in
Europe.
3. Sale of USA Skate assets and subsequent sale of the Company's investment
in Skate Corp.:
Sale of USA Skate assets:
On September 12, 1997, the Company sold substantially all of the
operating assets of USA Skate for $14,500,000, with $1,000,000 held in
escrow for potential purchase price adjustments and other claims. The
proceeds of the sale were used to repay the Company's outstanding lines
of credit and other liabilities. Subsequent to September, purchase
price and other adjustments have reduced the escrow account by
approximately $422,000 and approximately $105,000 was disbursed and
used to repay a trade liability. The balance of the escrow account is
to be disbursed to the Company in 1998, subject to resolution of any
additional adjustments or claims that arise.
The remaining account balances of Skate Corp. have been classified as
assets and liabilities of subsidiary held for sale in the accompanying
consolidated balance sheet and consist of the following at June 30,
1998:
Assets of subsidiary held for sale:
Cash held in escrow $ 472,002
Accounts receivable:
Trade 40,722
Related parties 391,634
-----------------
$ 904,358
=================
Liabilities of subsidiary held for sale:
Accounts payable and accrued expenses $ 484,546
Convertible promissory notes payable 861,150
-----------------
$ 1,345,696
=================
13
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
3. Sale of USA Skate assets and subsequent sale of the Company's investment
in Skate Corp. (continued):
Subsequent sale of the Company's investment in Skate Corp.:
In April 1998, the Company received commitments from a group of
accredited investors to purchase for $1,400,000 the shares of common
stock of Skate Corp. that are currently owned by the Company along with
an option to acquire shares of the Company in exchange for the
purchased shares of Skate Corp. The options allowed the investors to
exchange each common share of Skate Corp. for 1.5 shares of the
Company's common stock. In April and May 1998, the Company received
$255,000 from investors acquiring 335,507 shares of Skate Corp. Each of
the investors exercised their options to exchange those shares for
167,754 shares of the Company's Series A preferred stock, which
automatically converted to 503,261 shares of the Company's common stock
on July 15, 1998 upon the shareholders approving an increase in the
authorized common shares of the Company from 10,000,000 to 20,000,000.
Subsequent to June 30, 1998, Skate Corp. purchased 884,667 Skate Corp.
common shares in exchange for 1,327,000 treasury shares. Subsequent to
the receipt of the $255,000, this offering was closed to further
investors, and two officers/shareholders of the Company have agreed to
purchase the shares of Skate Corp. from the Company for $90,000 with no
conversion rights. This purchase price is based on the net book value
of the Company's investment in Skate Corp. The offering was closed to
further investors as the Company was able to obtain similar financing
on terms more beneficial to the Company as discussed in Note 4.
4. Preferred stock offering and pro forma balance sheet:
Preferred stock offering:
During the second quarter of 1998, the Company began working with a
business and financial consultant to assist the Company in completing a
private placement and engaged the consultant to refer potential
investors to the Company. The Company has received $1,192,000 (net of
offering costs) from the accredited investors introduced to the Company
by the consultant, for the purchase of 1,430 shares of Series B and C
Convertible Preferred Stock, par value $.01 ("Series B/C") at a price
of $1,000 per share. The Series B/C stock is convertible at the option
of the holder at any time after 90 days from the closing date, into a
number of shares of common stock equal to $1,000 divided by the lower
of 65% of the average market price of the common stock for the five
14
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
4. Preferred stock offering and proforma balance sheet (continued):
Preferred stock offering (continued):
trading days immediately prior to the conversion date, or the market
price on the day of first closing.
Proforma balance sheet:
The unaudited pro forma balance sheet includes pro forma adjustments to
record the receipt of $400,000 cash from investors who acquired 500,000
shares of the restricted common stock from the Company. The pro forma
balance sheet also includes the receipt of committed funds from
accredited investors of $600,000 cash to purchase 600 series B/C
Convertible Preferred Stock, less estimated fees associated with the
offering. In addition, the proforma balance sheet includes a $90,000
receivable from two officers/shareholders of the Company to purchase
the shares of Skate Corp.
The accompanying unaudited consolidated balance sheet includes an
unaudited pro forma consolidated balance sheet as of June 30, 1998,
that gives effect to the above transactions as if they had been
consummated on June 30, 1998. The unaudited pro forma consolidated
balance sheet should be read in conjunction with the historical
financial statements of the Company. The unaudited pro forma
consolidated balance sheet does not purport to be indicative of the
financial position of the Company had the transactions occurred on June
30, 1998.
5. Shareholders' equity:
Preferred stock:
The Company, as of June 30, had Series A, B and C Convertible Preferred
Stock outstanding. The holders of the Company's Series A Preferred
Stock are entitled to vote on any matter submitted to the shareholders
of the Company. Each share of Series A Convertible Preferred Stock is
entitled to one vote. Each share of outstanding Series A Convertible
Preferred Stock automatically converted to three shares of common stock
on July 15, 1998 upon shareholder approval of a recapitalization
measure that increases the authorized number of common shares of the
Company, from 10,000,000 to 20,000,000. Upon the conversion of the
Series A Preferred Stock into common stock, there are no Series A
15
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
5. Shareholders' equity (continued):
Preferred stock (continued):
Preferred shares outstanding and accordingly all rights for Series A
stockholders have been terminated.
During the first quarter of 1998, the Company issued 18,500 shares of
Series A Preferred Stock to an officer of the Company. The shares were
valued based upon the trading price of the Company's common stock,
adjusted for the one for three conversion feature of the preferred
stock, and accordingly, the Company recognized an expense of
approximately $76,313 in the three months ended March 31, 1998. The
18,500 shares of Series A Preferred Stock automatically converted to
55,500 shares of the Company's common stock on July 15, 1998 upon the
shareholders of the Company approving an increase to the authorized
shares of common stock of the Company from 10,000,000 to 20,000,000.
Issuances of common stock:
During the six months ended June 30, 1998, the Company issued 209,278
shares of its common stock at prices from $1.15 to $1.72 per share in
exchange for the extensions of the maturity date on notes of Skate
Corp. The Company recognized finance fee expense of $300,145 related to
these services. Additionally, the Company issued 50,000 shares of its
common stock at $1.375 per share (the market value of the stock on the
effective date of issuance) to a consultant who was a former director
and officer of the Company. The Company recognized $68,750 of
consulting expenses related to this issuance. During the six months
ended June 30, 1998, 434,200 options and/or warrants were exercised at
$1.00 per share, by officers (211,700), consultant (200,000), director
(15,000) and an employee (7,500).
Issuance of treasury stock:
During the six months ended June 30, 1998, the Company issued 224,000
treasury shares owned by Skate Corp. with a carrying value of $76,652
in satisfaction of $224,000 of Skate Corp. liabilities held for sale.
As a result of this transaction, the treasury stock balance has been
reduced by $76,652.
16
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
6. Marketable securities:
In 1996, the Company received marketable securities from an affiliate in
payment of an amount owed to the Company by a related party, which the
Company classified as trading securities under SFAS No. 115. During the
quarter ended March 31, 1997, the Company sold the securities for
$166,260 and reduced its bank indebtedness with the proceeds. The
Company recorded a loss of $62,392 on the transactions.
7. Export sales:
Sales by geographic regions were as follows for the three and six months
ended June 30, 1997:
June 30, 1997 June 30, 1997
Three months Six months
----------------- -----------------
Canada $ 1,182,051 $ 2,282,502
Europe and other 811,545 1,267,520
----------------- -----------------
Total exports 1,993,596 3,550,022
US sales 2,016,834 3,226,217
----------------- -----------------
Total sales $ 4,010,430 $ 6,776,239
================= =================
8. Gain on sale of investment in subsidiary:
In March 1997, the Company satisfied $106,500 of payables by exchanging
88,750 shares of Skate Corp. common stock held by the Company. The
recorded cost of the Skate Corp. shares transferred was $61,237 and the
fair value of those shares at the date of exchange was $106,500 ($1.20
per share). The Company also sold 83,000 shares of Skate Corp. common
stock held by the Company to a third party. The carrying value of the
Skate Corp. shares was $57,270 and the fair value of those shares was
$99,600 ($1.20 per share). These transactions resulted in total gains
of $87,593.
17
<PAGE>
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
8. Gain on sale of investment in subsidiary (continued):
In June 1997, the Company issued 170,000 shares of its common stock to an
officer/director for 141,667 shares of Skate Corp. common stock.
Additionally, the Company issued 133,333 shares of its common stock to
acquire 250,000 shares of Skate Corp. common stock, that otherwise the
Company would have been obligated to redeem. The Company accounted for
these transactions under the purchase method of accounting, based upon
the market value of the common stock issued by the Company. The
Company's ownership of Skate Corp. was increased from 51% to 62.5% due
to these transactions.
9. Extraordinary item:
In March 1997, the Company recognized an extraordinary gain of $197,901
from the extinguishment of debt for amounts less than the carrying
value of the liabilities.
10. Merger agreement:
On January 30, 1998, the Company, through ImaginOn Acquisition Corp., a
newly formed, wholly-owned subsidiary of the Company, signed an
agreement and plan of merger with ImaginOn, Inc. of San Carlos,
California ("ImaginOn"), a privately held company. The agreement
provides for an exchange of 100% of the outstanding shares of ImaginOn
for an amount equal to 60% of the outstanding post-merger common stock
of California Pro, subject to certain adjustments.
ImaginOn designs, manufactures and sells consumer software products for
Internet users. The merger transaction, which is expected to be
completed in the fall of 1998, is contingent upon certain customary
conditions including, but not limited to, approval by the boards of
directors of both companies, a vote by the Company's shareholders (to
approve the merger and increase the authorized shares the Company may
issue), and the completion of a fairness opinion by an independent
valuation company.
18
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
THIS REPORT MAY CONTAIN CERTAIN "FORWARD-LOOKING" STATEMENTS AS SUCH TERM IS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 OR BY THE
SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH
REPRESENT THE REGISTRANT'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED
TO, STATEMENTS CONCERNING THE REGISTRANT'S OPERATIONS, ECONOMIC PERFORMANCE,
FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE
OPERATIONAL PLANS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE
NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS
"MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE," "INTENT," "COULD," "ESTIMATE,"
"MIGHT," OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE
TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN
OF WHICH ARE BEYOND THE REGISTRANT'S CONTROL, AND ACTUAL RESULTS MAY DIFFER
MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY
RELATED TO ACQUISITIONS, GOVERNMENTAL REGULATION, MANAGING AND MAINTAINING
GROWTH, VOLATILITY OF STOCK PRICE AND ANY OTHER FACTORS DISCUSSED IN THIS AND
OTHER REGISTRANT FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
During 1997, the Company had limited revenues in its in-line skate and
snowboard businesses, and in September 1997, sold substantially all of
the assets of its ice and street/roller hockey business ("Hockey"). In
1998, the Company had no revenues, but did realize income from
sub-licensing agreements. The following discussion pertains to the
business operations for in-line skates, snowboards and hockey for the
three and six months ended June 30, 1997.
The Company imported and distributed products in three participant sports
categories. In-line skates and related accessory products were marketed
under the brand names California Pro(R) and Rolling Thunder(TM); since
August 1, 1994, snowboards and snowboard accessory products were
marketed under the Kemper(R) brand; and from May 1996 to September 1,
1997, ice and street/roller hockey skates, sticks, related gear and
accessories, as well as figure skates were marketed under the
VICTORIAVILLE(TM), VIC(R), Hespeler(TM) and McMartin(R) brands. The
Company purchased most of its in-line skate and snowboard products from
manufacturers in Taiwan, mainland China, Austria and Canada. Some of
the Company's accessory products were purchased from domestic
suppliers. Approximately 70% of all hockey products sold were
manufactured by Davtec and skates and related gear were purchased from
foreign suppliers.
The Company sold its in-line skate products principally to major retail
sporting goods chains in North America and to U.S. military exchanges
worldwide, through independent sales representative groups, under an
exclusive royalty free perpetual license. Snowboard products were sold
to regional sporting goods chains and specialty shops through
independent sales agencies in the U.S. and Canada and directly by the
Company to its foreign distributors. Hockey products were sold in North
America through a network of independent sales representative groups to
major retail sporting goods chains as well as smaller, specialized
independent sporting goods shops. Internationally, hockey products were
sold to and distributed by independent distributors located primarily
in Germany, Switzerland, Italy, Austria, Czech Republic, Sweden,
France, Finland and Brazil.
19
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
In 1997, due to continuing operating losses, management decided to
restructure and deleverage the Company. In connection with these plans,
the Company:
a. Ceased operating the California Pro and Kemper licenses, eliminated
most of the operating and overhead expenses associated with its
sporting goods business and began to concentrate on sub- licensing
the Company's trademark rights. Accordingly, in 1996 the Company
recorded restructuring charges of $1,229,000 and in the second
quarter of 1997, the Company began liquidating remaining in-line
skate, snowboard and accessories inventories.
b. Completed the sale of substantially all of the operating assets of
USA Skate and Davtec.
c. Commenced a search for a sub-licensee of its California Pro trademark
and has sublicensed the Kemper trademark.
d. Commenced a search for a merger candidate. As a result of its search,
on October 2, 1997, the Company signed a letter of intent to merge
with ImaginOn, Inc., a privately held company, and on January 30,
1998, the Company signed an agreement and plan of merger with
ImaginOn.
e. Began investigating other options, including the sale of subsidiries
and potential private offerings.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has incurred
significant operating losses in 1997 and in the six months ended June
30, 1998 and has accumulated deficit at June 30, 1998. These conditions
raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of
liabilities that may result from the outcome of these uncertainties.
As a result of the sale of the Company's hockey business to Rawlings, and
other restructuring and de-leveraging activities, including the
assumption and assignment of certain notes and trade payables to third
parties in exchange for common and/or preferred stock of the Company,
the Company has reduced its liabilities from approximately $18,988,000
as of December 31, 1996 to approximately $1,637,000 as of June 30,
1998.
Having taken major steps to de-leverage the Company and redirect the
Company towards profitability, three other parts of the Company's plan
remain to be completed. The Company has completed private placements
generating aggregate proceeds of $2,342,000. In addition, $464,410 has
been received from the exercise of stock options for the purchase of
434,200 shares of the Company's common stock. Additionally, in
conjunction with dramatically reduced overhead, a plan to restore
operating profitability to the remaining sporting goods businesses is
in place through licensing programs. Finally, the Company is seeking to
diversify its business through a merger with ImaginOn, Inc. Each part
of the Company's plan is discussed in detail below.
20
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
On March 13, 1998, the Company began a private placement for the sale of
the 1,842,000 shares of Skate Corp. common stock it owns, which
includes an option to acquire 2,763,000 shares of the Company's common
stock in exchange for the Skate Corp. shares. The Company intended to
sell 14 units at $100,000 each for total aggregate proceeds of
$1,400,000. Each unit consists of 131,571 shares of Skate Corp. with an
option to acquire 197,357 shares of the Company's common stock in
exchange for the Skate Corp. shares. The Company received $255,000 cash
from purchasers acquiring 335,507 shares of Skate Corp. Each of the
investors exercised their options to exchange those shares for 167,754
shares of the Company's Series A preferred stock which automatically
converted to 503,261 shares of the Company's common stock on July 15,
1998 upon shareholder approval of increasing the authorized shares of
common stock from 10,000,000 to 20,000,000. Subsequent to June 30,
1998, Skate Corp. purchased 884,667 Skate Corp. common shares in
exchange for 1,327,000 treasury shares. Subsequent to the receipt of
the $255,000, this offering was closed to further investors, and two
officers/shareholders of the Company have agreed to purchase the shares
of Skate Corp. from the Company for $90,000.
The Company's business and financial consultant has introduced to the
Company accredited investors who have purchased a combination of the
Company's Series B and C Preferred Stock and restricted common stock
for net proceeds of $2,082,000. The Series B and C Preferred Stock will
be convertible at the option of the holder at any time after 90 days
from the closing date into a number of shares of common stock equal to
$1,000 divided by the lower of 65% of the average market price of the
common stock for five days immediately prior to the conversion date, or
the market price at the first day of closing. These private placements
were completed August 1998.
As part of its restructuring plan, the Company has eliminated most of the
overhead expenses associated with its sporting goods business and has
begun to concentrate on sub- licensing its trademark rights to the
Kemper and California Pro trade names.
The Company recently entered into two sub-license agreements regarding
the use of the Kemper name. After considerable consolidation in the
snowboard industry in 1997, the Company believes the snowboard market
is rebounding. Kemper, one of the original snowboard brands, could
prosper in this new environment. The combined minimum annual royalty of
these licenses is $55,000, and based upon discussions with the
sub-licensors and review of their sales plans, management projects that
the actual combined royalty income from these two licenses may be
$125,000 and $175,000 in 1998 and 1999, respectively.
The Company also believes that there is value in the marketplace for the
California Pro brand, not only in-line skates, but in other sporting
goods categories such as skateboards and waterskis. The Company has
begun to discuss these, as well as other product categories, with
various sub-licenses.
The Company believes it can achieve profits based on its sub-licenses of
its existing sporting goods brands in conjunction with the limited
overhead expenses associated with licensing operations.
In August 1997, the Company began negotiating with ImaginOn, Inc.
("ImaginOn") of San Carlos, California, a privately held company, to
acquire, in an exchange of stock, all of the outstanding capital stock
of ImaginOn. ImaginOn, formed in March 1996, designs, manufactures and
sells: (I) consumer software products for the CD/DVD-ROM market and
(ii) a navigational tool for sophisticated Internet users. ImaginOn's
proprietary technology, called "Transformational Database Processing
and Playback" ("TDPP"), enables the creation of new business and
consumer products that provide user-friendly and entertaining access to
multimedia databases.
21
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The Company signed an Agreement and Plan of Merger as of January 30, 1998
whereby there would be an exchange of 100% of the outstanding shares of
ImaginOn for an amount equal to 60% of the outstanding post-merger
common stock of the Company, subject to certain adjustments. The
transaction, which is expected to be completed in the fall of 1998, is
contingent upon certain customary conditions including, but not limited
to, approval by the boards of directors of both companies, a vote by
the Company's stockholders (to approve the merger and increase the
authorized shares the Company may issue), and the completion of a
fairness opinion by an independent valuation company.
ImaginOn has developed and manufactured a general purpose software
application, named "WebZinger(TM)" for internet browsers. WebZinger(TM)
mediates Web searches for both naive and sophisticated users,
increasing efficiency and saving time. ImaginOn's core technology,
TDPP, has enabled the creation of a new class of business and consumer
products; a hybrid of local and remote database content with seamless
real-time access to video, audio, graphics and text. ImaginOn has
designed eleven software tools based on TDPP. The first software title
"World Cities 2000 San Francisco," an interactive travelogue is
substantially complete.
ImaginOn's potentially largest marketing partner for WorldCities 2000
travelogues has requested that two cities be completed prior to
starting their marketing effort: San Francisco and New York which
will be complete by December 1998.
WebZinger(TM) will be marketed during 1998 via electronic downloads from
multiple websites by distributors who specialize in that channel. In
the future, WebZinger(TM) will be distributed on CD-ROM within
conventional retail channels. ImaginOn has entered into a co- marketing
arrangement with AT&T whereby the WebZinger(TM) CD includes the
built-in option of using AT&T WorldNet as an internet service provider.
WebZinger(TM) can also be purchased through Netscape's Software Depot
and Testdrive.Com. Additionally, co-marketing arrangements are under
negotiation with other leading software providers.
Management believes it has begun the successful implementation of a plan
that will provide the Company with the liquidity necessary to continue
as a going concern.
22
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION (CONTINUED)
RESULTS OF OPERATIONS:
The following table sets forth the Company's sales by major product category for
the period indicated:
Three Months Ended Six Months Ended
June 30 June 30
1997 1997
---- ----
Dollars Percent Dollars Percent
------- ------ ------- -------
In-line skates and accessories . $ 188 5% $ 639 9%
Snowboards and accessories ..... 223 6% 317 5%
Ice and street/roller hockey (1) 3,599 89% 5,820 86%
------ ------ ------ ------
$4,010 100% $6,776 100%
====== ====== ====== ======
THREE AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO JUNE 30, 1997
NET SALES: Sales for the three and six months ended June 30, 1997 were
$4,010,430 and $6,776,239, respectively. For the three and six months ended June
30, 1998, the Company recorded royalty income of $17,792 and $58,926,
respectively.
GROSS PROFIT: For the three and six months ended June 30, 1997 and 1998, gross
profit was $1,257,439 and $1,804,092, respectively.
SALES AND MARKETING EXPENSES: There were no sales and marketing expenses during
the three months ended June 30, 1998 compared to $394,975 for the three months
ended June 30, 1997. For the six months ended June 30, 1998, sales and marketing
expenses were $4,084 compared to $837,171 for the six months ended June 30,
1997. These decreases were a result of the company ceasing its sales and
marketing activities in 1998, as it sub-licensed its rights to the Kemper
Trademark, and no longer incurred sales and marketing expense. The 1997 sales
and marketing expenses also included those of USA Skate. In September 1997, the
Company completed the sale of substantially all of the operating assets of USA
Skate.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
decreased to $357,898 for the three months ended June 30, 1998 from $1,160,103
to the three months ended June 30, 1997. During the six months ended June 30,
1998, general and administrative expenses decreased to $697,366 from $1,989,640
for the six months ended June 30, 1997. These decreases were attributable to
significantly reduced general and administrative expenses due to the sale of the
Company's hockey business in September, 1997.
The primary expenses for the three months ended June 30, 1998 were legal and
accounting $80,578, consulting expenses $130,000, payroll, payroll taxes and
expense reimbursement of $60,994. The primary expenses for the six months ended
June 30, 1998 were legal and accounting $187,871, consulting expenses $238,750,
payroll, payroll taxes, and expense reimbursement of $218,532.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense for the
three months ended June 30, 1998 was $62,090 compared to $198,185 for the three
months ended June 30, 1997. Of the 1997 three month expense $142,975 was related
to Company's hockey business which was sold in September 1997. For the six
months ended June 30, 1998 depreciation and amortization expense was $124,181
compared to $391,968 for the six months ended June 30, 1997. The 1997 six month
expenses included approximately $250,000 related to the Company's hockey
business.
23
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION (CONTINUED)
CONSULTING EXPENSES: Consulting expenses were $30,000 and $60,000 for the three
and six months ended June 30, 1998, respectively, compared to $60,000
and$120,000 for the three and six months ended June 30, 1997, respectively. The
reason for the decrease was attributable to including USA Skate fees for the
full three and six months in 1997.
LOSS FROM OPERATIONS: For the three and six months ended June 30, 1998, the loss
from operations was $449, 988 and $885,631, respectively, compared to the loss
from operations for the three and six months ended June 30, 1997 of $555,824 and
$1,534,687, respectively. The primary reason for the decrease in operating
losses in the 1998 periods compared to the 1997 periods are decreases in
operating costs. These decreases were caused by the reduced operating expenses
due to the sale of the Company's hockey business and the reduction in operating
costs from restructuring operating the remaining trademarks and licenses to
entering into sub-license agreements.
OTHER EXPENSE/INCOME: Other expenses for the three months ended June 30, 1998
were $129,491 compared to $348,122 for the three months ended June 30, 1997.
Other expenses for the six months ended June 30, 1998 were $301,564 compared to
$593,589 for the six months ended June 30, 1997.
NET LOSS: Net loss for the three and six months ended June 30, 1998 was $590,889
and $1,222,313 respectively, compared to net loss for the three and six months
ended June 30, 1997 of $731,589 and 1,228,832, respectively. The primary reasons
for the decreases were reductions in the losses from operations of $105,836 and
$649,236 for the three and six months ended June 30, 1998 compared to the three
and six months ended June 30, 1997 as described above, and decreases in interest
and other expenses. These decreases were offset by extraordinary income of
$197,901 for debt forgiveness and $736,661 for minority interest in the 1997
period.
LIQUIDITY AND CAPITAL RESOURCES: The Independent Auditors' Report on the
Company's consolidated financial statements for the year ended December 31, 1997
included a "going concern" explanatory paragraph which means that the Auditors
have expressed substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regards to the factors which prompted the
explanatory paragraph are discussed in Note 1 to those financial statements.
Through September 1, 1997, the Company funded its operations principally through
a revolving credit facility with a bank, and, to a lesser degree, loans from
private investors and trade credit. Concurrent with the sale of the USA Skate
assets, the revolving line of credit facility was repaid in full and other
indebtedness of the Company was significantly reduced.
On September 12, 1997, the Company sold substantially all of the assets of its
hockey business for $14,500,000 inclusive of $1,000,000 retained in escrow for
purchase price adjustments and proven claims by the purchasers, and assumption
of trade payables and accrued liabilities of approximately $1,600,000 related to
the assets purchased. The proceeds were utilized as follows:
Secured revolving lines of credit $ 7,984,000
Convertible noteholders 949,000
Secured debt 519,000
Other notes 100,000
Stockholder notes 505,000
Payment to previous USA Skate owners 2,678,000
Interest payments 85,000
Cash to escrow account 1,000,000
Cash in bank 680,000
-------------
$ 14,500,000
=============
24
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION (CONTINUED)
In February 1998, Rawlings and the Company agreed to a purchase price reduction
of $395,108 due to a final valuation by Rawlings of the fair value of the net
assets purchased.
At June 30, 1998, the Company had working capital of approximately $1,103,571
compared to a deficit of $400,625 at December 31, 1997. The increase in the
working capital is primarily related to the Company realizing net proceeds of
approximately $1,420,000 from various private placements as further described in
Notes 3 and 4. Additionally, the Company has converted $243,000 of debt to
equity.
In addition, the Company announced that the exercise price of its publicly
traded common stock purchase warrants has been reduced from $6.00 to $1.50 per
share and the expiration date has been extended from January 18, 1998 to
December 31, 1998.
25
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
a. N/A
b. N/A
c. During the three month period covered by this report, the
Registrant issued the following securities:
On April 5, 1998, the Registrant issued 37,467 shares of its
common stock in exchange for the extensions of the maturity date
to May 5, 1998 on notes of Skate Corp. The amount was owed based
upon 5% of the outstanding principal balance, and payment was
based on $1.43 per share. The Registrant relied on the exemption
from registration provided by Section 4(6) of the Securities Act
related to the issuance of these shares.
On April 1, 1998 the registrant issued 200,000 shares of its
common stock to a consultant to the Company upon the exercise of
a previously granted option.
On May 5, 1998, the Registrant issued 25,047 shares of its common
stock in exchange for the extensions of the maturity date to June
5, 1998 on notes of Skate Corp. The amount was owed based upon 5%
of the outstanding principal balance and payment was made based
on $1.72 per share. The Registrant relied on the exemption from
registration provided by Section 4(6) of the Securities Act
related to the issuance of these shares.
On May 15, 1998, the Registrant issued 49,500 shares of its
common stock to an officer of the Company upon the exercise of
previously granted option under the Company's 1994 Stock Option
Plan.
On June 5, 1998, the Registrant issued 34,950 shares of its
common stock in exchange for the extensions of the maturity date
to July 5, 1998 on notes of Skate Corp. The amount owed was based
upon 5% of the outstanding principal balance and payment was made
based on $1.23 per share. The Registrant relied on the exemption
from registration provided by Section 4(6) of the Securities Act
related to the issuance of these shares.
On June 5, 1998, the Registrant issued 60,000 shares of its
common stock to a an officer/director of the Company upon the
exercise of previously granted warrants.
On June 20, 1998, the Company issued 17,200 shares of its common
stock to an officer/director of the Company upon the exercise of
previously granted warrants.
On June 30, 1998, the Registrant issued 69,000 shares of its
common stock to an entity in exchange for assumptionof certain
liabilities of the Company totalling $34,500. The Registrant
relied on the exemptions from registration provided by Sections
4(2) and/or 4(6) of the Securities Act because the recipient of
these shares was an accredited investor.
26
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. Submission of matters to a vote of security holders.
None.
ITEM 5. Other information.
None.
ITEM 6. Exhibits and Reports on Form 8-K:
a. Exhibits
3.(I).1 Certificate of Designation of California Pro Sports,
Inc., - Designation of Preferences, Limitations and
Relative Rights of the Series B preferred Convertible
Stock of California Pro Sports, Inc.
3.(I).2 Certificate of Designation of California Pro Sports, Inc.
- Designation of Preferences, Limitations and Relative
Rights of the Series C Preferred Cohnvertible Stock of
California Pro Sports, Inc.
3.(I).3 Certificate of Amendment to Certificate of Incorporation
of California Pro Sports, Inc. dated July 22, 1998.
b. Reports on Form 8-K
1. Form 8-K dated June 25, 1998 reporting "Other Events" under
Item 5, and "Pro Forma Financial Statements" under Item 7(b).
27
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CALIFORNIA PRO SPORTS, INC.
Dated: August 14, 1998 By: /S/ HENRY FONG
----------------------------------
Henry Fong
Chairman/Chief Executive Officer
Dated: August 14, 1998 By: /S/ BARRY S. HOLLANDER
----------------------------------
Barry S. Hollander
Chief Financial Officer
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS
OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF
CALIFORNIA PRO SPORTS, INC.
-------------------
Pursuant to Section 151 of
the General Corporation Law of the State of Delaware
-------------------
California Pro Sports, Inc., a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), hereby
certifies that the following resolutions were adopted by the Board of Directors
of the Corporation on June 30, 1998 pursuant to authority of the Board of
Directors as required by Section 151 of the General Corporation Law of the State
of Delaware;
RESOLVED, that pursuant to the authority granted to an vested in the
Board of Directors of this Corporation (the "Board of Directors" or the "Board")
in accordance with the provisions of its Certificate of Incorporation, the Board
of Directors hereby authorizes a series of the Corporation's previously
authorized Preferred Stock, par value $0.01 per share (the "Preferred Stock, par
value $0.01 per share (the "Preferred Stock"), and hereby states the designation
and number of shares, and fixes the relative rights, preferences, privileges,
powers and restrictions thereof as follows:
Series B 4% Convertible Preferred Stock;
ARTICLE 1
DEFINITIONS
SECTION 1.1 DEFINITIONS. The terms defined in this Article whenever
used in
this Certificate of Designations have the following respective meanings;
(a) "ADDITIONAL CAPITAL SHARES" has the meaning set forth in Section
6.1(c).
(b) "AFFILIATE" has the meaning ascribed to such term in Rule 12b-2
under the Securities Exchange Act of 1934, as amended.
1
<PAGE>
(c) "BUSINESS DAY" means a day other than Saturday, Sunday or any day
on which banks located in the State of New York are authorized or obligated to
close.
(d) "CAPITAL SHARES" means the Common Shares and any other shares of
any other class or series of common stock, whether now or hereafter authorized
and however designated, which have the right to participate in the distribution
of earnings and assets (upon dissolution, liquidation or winding-up) of the
Corporation.
(e) "CLOSING DATE" means July 16, 1998.
(f) "COMMON SHARES" or "COMMON STOCK" means shares of common stock,
$.01 par value, of the Corporation.
(g) "COMMON STOCK ISSUED AT CONVERSION" when used with reference to the
securities issuable upon conversion of the Series B Preferred Stock, means all
Common Shares now or hereafter Outstanding and securities of any other class or
series into which the Series B Preferred Stock hereafter shall have been changed
or substituted, whether now or hereafter created and however designated.
(h) "CONVERSION DATE" means any day on which all or any portion of
shares of the Series B Preferred Stock is converted in accordance with the
provisions hereof.
(i) "CONVERSION NOTICE" has the meaning set forth in Section 6.2.
(j) "CONVERSION PRICE" means on any date of determination the
applicable price for the conversion of shares of Series B Preferred Stock into
Common Shares on such day as set forth in Section 6.1.
(k) "CONVERSION RATIO" on any date means of determination the
applicable percentage of the Market Price for conversion of shares of Series B
Preferred Stock into Common Shares on such day as set forth in Section 6.1.
(l) "CORPORATION", means California Pro Sports, Inc., a Delaware
corporation, and any successor or resulting corporation by way of merger,
consolidation, sale or exchange of all or substantially all of the Corporation's
assets, or otherwise.
(m) "CURRENT MARKET PRICE" on any date of determination means the
closing price of a Common Share on such day as reported on the Nasdaq - Small
Cap Market ("NASDAQ").
(n) "DEFAULT DIVIDEND RATE" shall be equal to the Preferred Stock
Dividend Rate plus an additional 4% per annum.
(o) "HOLDER" means the persons to whom the Series B Preferred Stock is
issued, any successor thereto, or any Person to whom the Series B Preferred
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Stock is subsequently transferred in accordance with the provisions hereof.
(p) "MARKET DISRUPTION EVENT" means any event that results in a
material suspension or limitation of trading of Common Shares on the NASDAQ.
(q) "MARKET PRICE" per Common Share means the average of the closing
prices of the Common Shares as reported on the NASDAQ for the five Trading Days
in any valuation Period.
(r) "MAXIMUM RATE" has the meaning set forth in Section 7.3(b).
(s) "OUTSTANDING" when used with reference to Common Shares or Capital
Shares (collectively, "Shares"), means, on any date of determination, all issued
and outstanding Shares, and includes all such Shares issuable in respect of
outstanding scrip or any certificates representing fractional interests in such
Shares; PROVIDED, HOWEVER, that any such Shares directly or indirectly owned or
held by or for the account of the Corporation or any Subsidiary or the
Corporation shall not be deemed "Outstanding" for purposes hereof.
(t) "PERSON" means an individual, a corporation, a partnership, an
association, a limited liability company, a unincorporated business
organization, a trust or other entity or organization, and any government or
political subdivision or any agency or instrumentality thereof.
(u) "REGISTRATION RIGHTS AGREEMENT" means that certain Registration
Rights Agreement dated of date even herewith between the Corporation and Holder.
(v) "SEC" means the United States Securities and Exchange Commission.
(w) "SECURITIES ACT" means the Securities Act of 1933, as amended, and
the rules and regulations of the SEC thereunder, all as in effect at the time.
(x) "SECURITIES PURCHASE AGREEMENT" means that certain Securities
Purchase Agreement dated a date even herewith between the Corporation and
Holder.
(y) "SERIES B PREFERRED STOCK" means the Series B 4% Convertible
Preferred Stock of the Corporation or such other convertible Preferred Stock
exchanged therefor as provided in Section 2.1.
(aa) "STATED VALUE" has the meaning set forth in Article 2.
(bb) "SUBSIDIARY" means any entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions are owned
directly or indirectly by the Corporation.
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(cc) "TRADING DAY" means any day on which purchases and sales of
securities authorized for quotation on the NASDAQ are reported thereon and on
which no Market Disruption Event has occurred.
(dd) "Valuation Event" has the meaning set forth in Section 6.1.
(ee) "VALUATION PERIOd" means the five Trading Day period immediately
preceding the Conversion Date.
All references to "cash" or "$" herein means currency of the United
States of America.
ARTICLE 2
DESIGNATION AND AMOUNT
SECTION 2.1
The designation of this series, which consists of 10,000
shares of Preferred Stock, is Series B 4% Convertible Preferred Stock (the
"Series B Preferred Stock") and the stated value shall be One Thousand Dollars
($1,000) per share (the "Stated Value").
ARTICLE 3
RANK
SECTION 3.1
The Series B Preferred Stock shall rank (i) prior to the
Common Stock; (ii) prior to any class of series of capital stock of the
Corporation hereafter created other than "Pari Passu Securities" (collectively,
with the Common Stock, "Junior Securities"); and (iii) pari passu with any class
or series of capital stock of the Corporation hereafter created specifically
ranking on parity with the Series B Preferred Stock ("Pari Passu Securities").
ARTICLE 4
DIVIDENDS
SECTION 4.1
(a)(i) The Holder shall be entitled to receive, when, as and
if declared by the Board of Directors, out of funds legally available for the
payment of dividends, dividends (subject to Sections 4(a)(ii) hereof) at the
rate of 4% per annum (computed on the basis of a 360-day year) (the "Dividend
Rate") on the Liquidation Value (as defined below) of each share of Series B
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Preferred Stock on and as of the most recent Dividend Payment Due Date (as
defined below) with respect to each Dividend Period (as defined below).
Dividends on the Series B Preferred Stock shall be cumulative from the date of
issue, whether or not declared for any reason, including if such declaration is
prohibited under any outstanding indebtedness or borrowings of the Corporation
or any of its Subsidiaries, or any other contractual provision binding on the
Corporation or any of its Subsidiaries, and whether or not there shall be funds
legally available for the payment thereof.
(ii) Each dividend shall be payable in equal quarterly amounts
on each March 31, June 30, September 30 and December 31 of each year (each, a
"Dividend Payment Due Date"), commencing September 30, 1998, to the holders of
record of shares of the Series B Preferred Stock, as they appear on the stock
records of the Corporation at the close of business on any record date, not more
than 60 days or less than 10 days preceding the payment dates thereof, as shall
be fixed by the Board of Directors. For the purposes hereof, "Dividend Period"
means the quarterly period preceding Dividend Payment Date and ending on and
including the immediately subsequent Dividend Payment Date. Accrued and unpaid
dividends for any past Dividend Period may be declared and paid at any time,
without reference to any Dividend Payment Due Date, to holders of record on such
date, not more than 15 days preceding the payment date thereof, as may be fixed
by the Board of Directors.
(iii) At the option of the Corporation, the dividend shall be
paid in cash or through the issuance of duly and validly authorized and issued,
fully paid and non-assessable, freely tradeable shares of Common Stock valued at
the Market Price. The Common Stock to be issued in lieu of cash payments shall
be registered for resale in the Registration Statement to be filed by the
Corporation to register the Common Stock issuable upon conversion of the shares
of Series B Preferred Stock and exercise of the Warrants as set forth in the
Registration Rights Agreement. Notwithstanding the foregoing, until such
Registration Statement has been declared effective under the Securities Act by
the SEC, payment of dividends on the Series B Preferred Stock shall be in cash.
(b) The Holder shall not be entitled to any dividends in
excess of the cumulative dividends, as herein provided, on the Series B
Preferred Stock. Except as provided in this Article 4, no interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend payment
or payments on the Series B Preferred Stock that may be in arrears.
(c) So long as any shares of the Series B Preferred Stock are
outstanding, no dividends, except as described in the next succeeding sentence,
shall be declared or paid or set apart for payment on Pari Passu Securities for
any period unless full cumulative dividends required to be paid in cash have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for such payment on the Series B Preferred
Stock for all Dividend Periods terminating on or prior to the date of payment of
the dividend on such class or series of Pari Passu Securities. When dividends
are not paid in full or a sum sufficient for such payment is not set apart, as
aforesaid, all dividends declared upon shares of the Series B Preferred Stock
and all dividends declared upon any other class or series of Pari Passu
Securities shall be declared ratably in proportion to the respective amounts of
dividends accumulated and unpaid on the Series B Preferred Stock and accumulated
and unpaid on such Pari Passu Securities.
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(d) So long as any shares of the Series B Preferred stock are
outstanding, no dividends shall be declared or paid or set apart for payment or
other distribution declared or made upon Junior Securities, nor shall any Junior
Securities be redeemed, purchased or otherwise acquired (other than a
redemption, purchase or other acquisition of shares of Common Stock made for
purposes of an employee incentive or benefit plan (including a stock option
plan) of the Corporation or any subsidiary, (all such dividends, distributions,
redemptions or purchases being hereinafter referred to as a "Junior Securities
Distribution") for any consideration (or any moneys be paid to or made available
for a sinking fund for the redemption of any shares of any such stock) by the
Corporation, directly or indirectly, unless in each case (i) the full cumulative
dividends required to be paid in cash on all outstanding shares of the Series B
Preferred Stock and any other Pari Passu Securities shall have been paid or set
apart for payment for all past Dividend Periods with respect to the Series B
Preferred Stock and all past dividend periods with respect to such Pari Passu
Securities, and (ii) sufficient funds shall have been paid or set apart for the
payment of the dividend for the current Dividend Period with respect to the
Series B Preferred Stock and the current dividend period with respect to such
Pari Passu Securities.
ARTICLE 5
LIQUIDATION PREFERENCE
SECTION 5.1
(a) If the Corporation shall commence a voluntary case under
the Federal bankruptcy laws or any other applicable Federal or State bankruptcy,
insolvency or similar law, or consent to the entry of an order for relief in an
involuntary case under any law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or make an assignment
for the benefit of its creditors, or admit in writing its inability to pay its
debts generally as they become due, or if a decree or order for relief in
respect of the Corporation shall be entered by a court having jurisdiction in
the premises in an involuntary case under the Federal bankruptcy laws or any
other applicable Federal or state bankruptcy, insolvency or similar law
resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of thirty (30) consecutive days and, on account of any such event, the
Corporation shall liquidate, dissolve or wind up (each such event being
considered a "Liquidation Event"), no distribution shall be made to the holders
of any shares of capital stock of the Corporation upon liquidation, dissolution
or winding up unless prior thereto, the holders of shares of Series B Preferred
Stock, subject to Article 5, shall have received the liquidation Preference (as
defined in Article 5(c)) with respect to each share. If upon the occurrence of a
Liquidation Event, the assets and funds available for distribution among the
holders of the Series B Preferred Stock and holders of Pari Passu Securities
shall be insufficient to permit the payment to such holders of the preferential
amounts payable thereon, then the entire assets and funds of the Corporation
legally available for distribution to the Series B Preferred Stock and the Pari
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Passu Securities shall be distributed ratably among such shares in proportion to
the ratio that the Liquidation preference payable on each such share bears to
the aggregate liquidation Preference payable on all such shares.
(b) At the option of each Holder, the sale, conveyance of
disposition of all or substantially all of the assets of the Corporation, the
effectuation by the Corporation of a transaction or series of related
transactions in which more than 50% of the voting power of the Corporation is
not the survivor shall either: (i) be deemed to be a liquidation, dissolution or
winding up of the Corporation pursuant to which the Corporation shall be
required to distribute, upon consummation of and as a condition to, such
transaction an amount equal to 120% of the Liquidation Preference with respect
to each outstanding sharer of Series B Preferred Stock in accordance with and
subject to the terms of this Article 5 or (ii) be treated pursuant to Article
5(c) (iii) hereof; provided, that all holders of Series B Preferred Stock shall
be deemed to elect the option set forth in cause (i) hereof if at least a
majority in interest of such holders elect such option. "Person" shall mean any
individual, corporation, limited liability company, partnership, association,
trust or other entity or organization.
(c) For purposes hereof, the "Liquidation Preference" with
respect to a share of the Series B Preferred Stock shall mean an amount equal to
the sum of (i) the Stated Value thereof, plus (ii) an amount equal to thirty
percent (30%) of such Stated Value, plus (iii) the aggregate of all accrued and
unpaid dividends on such share of Series B Preferred Stock until the most recent
Dividend Payment Date; PROVIDED that, in the event of an actual liquidation,
dissolution or winding up of the Corporation, the amount referred to in clause
(iii) above shall be calculated by including accrued and unpaid dividends to the
actual date of such liquidation, dissolution or winding up, rather than the
Dividend Payment Due Date referred to above.
ARTICLE 6
CONVERSION OF PREFERRED STOCK
SECTION 6.1 CONVERSION; CONVERSION PRICE. At the option of the Holder,
the shares of Preferred Stock may be converted, either in whole or in part, into
Common Shares (calculated as to each such conversion to the nearest 1/100th of a
share), at any time, and from time to time following the date of issuance of the
Series B Preferred Stock (the "Issue Date") at a conversion Price equal to 65%
of the Market Price; provided, however, that the Holder shall not have the right
to convert any portion of the Series B Preferred Stock to the extent that the
issuance to the Holder of Common Shares upon such conversion would result in the
Holder being deemed the "beneficial owner" of 5% or more of the then outstanding
Common Shares within meaning of Rule 13d-3 of the Securities Exchange Act of
1934, as amended. At the Corporation's option, the amount of accrued and unpaid
dividends as of the conversion Date shall not be subject to conversion but
instead may be paid in cash as of the Conversion Date; if the Corporation elects
to convert the amount of accrued and unpaid dividends at the Conversion Date
into Common Stock, the Common Stock issued to the Holder shall be valued at the
Conversion Price. Notwithstanding the previous sentence, in no event shall the
Holder have the right to convert that portion of the Series B Preferred Stock to
the extent that the issuance of Common Shares upon the conversion of such Series
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B Preferred Stock, when combined with shares of Common Stock received upon other
conversions of Series B Preferred Stock by such Holder and any other holders of
Series B Preferred Stock, would exceed 19.99% of the Common Stock outstanding on
the Closing Date. Within ten (10) Business Days after the receipt of the
Conversion Notice which upon conversion would, when combined with shares of
Common Stock received upon other conversions of Series B Preferred Stock by such
Holder and any other holders of Series B Preferred Stock and Warrants, exceed
19.99% of the Common Stock outstanding on the Closing Date, the Corporation
shall redeem all remaining outstanding shares of Series B Preferred Stock at on
hundred twenty-five percent (125%) of the Stated Value thereof, together with
all accrued and unpaid dividends thereon, in cash, to the date of redemption.
The number of shares of Common Stock due upon conversion of
Series B Preferred Stock shall be (i) the number of shares of Series B Preferred
Stock to be converted, multiplied by (ii) the State Value and dividend by (iii)
the applicable Conversion Price.
Within two (2) Business Days of the occurrence of a Valuation
Event, the Corporation shall send notice (the "Valuation Event Notice") of such
occurrence to the Holder. Notwithstanding anything to the contrary contained
herein, if a Valuation Event occurs during any Valuation Period, a new Valuation
Period shall begin on the Trading Day immediately following the occurrence of
such Valuation Event and end on the Conversion Date; PROVIDED that, if a
Valuation Event occurs on the fifth day of any Valuation Period, then the
Conversion Price shall be the Current Market Price of the Common Shares on such
day; and PROVIDED, FURTHER, that the Holder may, in its discretion, postpone
such Conversion Date to a Trading Day which is no more than five (5) Trading
Days after the occurrence of the latest Valuation Event by delivering a
notification to the Corporation with two (2) Business Days of the receipt of the
Valuation Period to be other than the five (5) Trading Days immediately Prior to
the Conversion Date, the Holder shall give written notice of such fact to the
Corporation in the related Conversion Notice at the time of conversion.
For purposes of this Section 6.1, a "Valuation Event" shall mean an event in
which the Corporation at any time during a Valuation Period takes any of the
following actions:
(a) subdivides or combines its Capital Shares;
(b) makes any distribution of its Capital Shares;
(c) issues any additional Capital Shares (the "Additional
Capital Shares"), otherwise than as provided in the foregoing Sections 6.1(a)
and 6.1(b) above, at a price per share less, or for other consideration lower,
than the Current Market Price in effect immediately prior to such issuances, or
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without consideration, except for issuances under employee benefit plans
consistent with those presently in effect and issuances under presently
outstanding warrants, options or convertible securities;
(d) issues any warrants, options or other rights to subscribe
for or purchase any Additional Capital Shares and the price per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant to
such warrants, options or other rights shall be less than the Current Market
Price in effect immediately prior to such issuance;
(e) issues any securities convertible into or exchangeable or
exercisable for Capital Shares and the consideration per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant to the
terms of such convertible, exchangeable or exercisable securities shall be less
than the Current Market Price in effect immediately prior to such issuance;
(f) makes a distribution of its assets or evidences of
indebtedness to the holders of its Capital Shares as a dividend in liquidation
or by way of return of capital or other than as a dividend payable out of
earnings or surplus legally available for the payment of dividends under
applicable law or any distribution to such holders made in respect of the sale
of all or substantially all of the Corporation's assets (other than under the
circumstances provided for in the foregoing Sections 6.1(a) through 6.1(e)); or
(g) takes any action affecting the number of Outstanding
Capital Shares, other than an action described in any of the foregoing Sections
6.1(a) through 6.1(f) hereof, inclusive, which in the opinion of the
Corporation's Board of Directors, determined in good faith, would have a
material adverse effect upon the rights of the Holder at the time of a
conversion of the Preferred Stock.
SECTION 6.2 EXERCISE OF CONVERSION PRIVILEGE. (a) Conversion of the
Series B Preferred Stock may be exercised, in whole or in part, by the Holder by
telecopying an executed and completed notice of conversion in the form annexed
hereto as Annex I (the "Conversion Notice") to the Corporation. Each date on
which a Conversion Notice is telecopied to and received by the Corporation in
accordance with the provisions of this Section 6.2 shall constitute a Conversion
Date. The Corporation shall convert the Preferred Stock and issue the Common
Stock Issued at Conversion effective as of the Conversion Date. The Conversion
Notice also shall state the name or names (with addresses) of the persons who
are to become the holders of the Common Stock Issued at Conversion in connection
with such conversion. The Holder shall deliver the shares of Series B Preferred
Stock to the Corporation by express courier within 30 days following the date on
which the telecopied Conversion Notice has been transmitted to the Corporation.
Upon surrender for conversion, the Preferred Stock shall be accompanied by a
proper assignment hereof to the Corporation or be endorsed in blank. As promptly
as practicable after the receipt of the Conversion Notice as aforesaid, but in
any event not more than five Business Days after the Corporation's receipt of
such Conversion Notice, the Corporation shall (i) issue the Common Stock issued
at Conversion in accordance with the provisions of this Article 6, and (ii)
cause to be mailed for delivery by overnight courier to the Holder (X) a
certificate or certificate(s) representing the number of Common Shares to which
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the Holder is entitled by virtue of such conversion, (Y) cash, as provided in
Section 6.3, in respect of any fraction of a Share issuable upon such conversion
and (Z) cash in the amount of accrued and unpaid dividends as of the Conversion
Date. Such conversion shall be deemed to have been effected at the time at which
the Conversion Notice indicates so long as the Preferred Stock shall have been
surrendered as aforesaid at such time, and at such time the rights of the Holder
of the Preferred Stock, as such, shall cease and the Person and Persons in whose
name or names the Common Stock Issued at Conversion shall be issuable shall be
deemed to have become the holder or holders of record of the Common Shares
represented thereby. The Conversion Notice shall constitute a contract between
the Holder and the Corporation, whereby the Holder shall be deemed to subscribe
for the number of Common Shares which it will be entitled to receive upon such
conversion and, in payment and satisfaction of such subscription (and for any
cash adjustment to which it is entitled pursuant to Section 6.4), to surrender
the Preferred Stock and to release the Corporation from all liability thereon.
No cash payment aggregating less than $1.50 shall be required to be given unless
specifically requested by the Holder.
(b) If, at any time (i) the Corporation challenges, disputes
or denies the right of the Holder hereof to effect the conversion of the
Preferred Stock into Common Shares or otherwise dishonors or rejects any
Conversion Notice delivered in accordance with this Section 6.2 or (ii) any
third party who is not and has never been an Affiliate of the Holder commences
any lawsuit or proceeding or otherwise asserts any claim before any court or
public or governmental authority which seeks to challenge, deny enjoin, limit,
modify, delay or dispute the right of the Holder hereof to effect the conversion
of the Preferred Stock into Common Shares, then the Holder shall have the right,
by written notice to the Corporation, to require the Corporation to promptly
redeem the Series B Preferred Stock for cash at a redemption price equal to one
hundred thirty-five percent (135%) of the Stated Value thereof together with all
accrued and unpaid dividends thereon (the "Mandatory Purchase Amount"). Under
any of the circumstances set forth above, the Corporation shall be responsible
for the payment of all costs and expenses of the Holder, including reasonable
legal fees and expenses, as and when incurred in disputing any such action or
pursuing its rights hereunder (in addition to any other rights of the Holder).
SECTION 6.3 FRACTIONAL SHARES. No fractional Common Shares or scrip
representing fractional Common Shares shall be issued upon conversion of the
Series B Preferred Stock. Instead of any fractional Common Shares which
otherwise would be issuable upon conversion of the Series B Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fraction in an amount
equal to the same fraction. No cash payment of less than $1.50 shall be required
to be given unless specifically requested by the Holder.
SECTION 6.4 RECLASSIFICATION, CONSOLIDATION, MERGER OR MANDATORY SHARE
EXCHANGE. At any time while the Series B Preferred Stock remains outstanding and
any shares thereof has not been converted, in case of any reclassification or
change of Outstanding Common Shares issuable upon conversion of the Series B
Preferred Stock (other than a change in par value, or from par value to no par
value per share, of from no par value per share to par value or as a result of a
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subdivision or combination of outstanding securities issuable upon conversion of
the Series B Preferred Stock) or in case of any consolidation, merger or
mandatory share exchange of the Corporation with or into another corporation
(other than a merger or mandatory share exchange with another corporation in
which the Corporation is a continuing corporation and which does not result in
any reclassification or change, other than a change in par value, or from par
value to not par value per share, or from no par value per share to par value,
or as a result of a subdivision of combination of Outstanding Common Shares upon
conversion of the Series B Preferred Stock), or in the case of any sale or
transfer to another corporation of the property of the Corporation as an
entirety or substantially as an entirety, the Corporation, as the case may be,
shall, without payment of any additional consideration therefor, execute a new
Series B Preferred Stock providing that the Holder shall have the right to
convert such new Series B Preferred Stock (upon terms and conditions not less
favorable to the Holder than those in effect pursuant to the Series B Preferred
Stock) and to receive upon such exercise, in lieu of each Common Share
theretofore issuable upon conversion of the Series B Preferred Stock, the kind
and amount of shares of stock, other securities, money or property receivable
upon such reclassification, change, consolidation, merger, mandatory share
exchange, sale or transfer by the holder of one Common Share issuable upon
conversion of the Series B Preferred Stock had the Series B Preferred Stock been
converted immediately prior to such reclassification, change, consolidation,
merger, mandatory share exchange or sale or transfer. The provisions of this
Section 6.4 shall similarly apply to successive reclassifications, changes,
consolidations, mergers, mandatory share exchanges and sales and transfers.
SECTION 6.5 ADJUSTMENTS TO CONVERSION RATIO. For so long as any shares
of the Series B Preferred Stock are outstanding, if the Corporation (i) issues
and sells pursuant to an exemption from registration under the Securities Act
(A) Common Shares at a purchase price on the date of issuance thereof that is
lower than the Conversion Price, (B) warrants or options with an exercise price
representing a percentage of the Current Market Price with an exercise price on
the date of issuance of the warrants or options that is lower than the agreed
upon exercise price for the Holder, except for employee stock option agreements
or stock incentive agreements of the Corporation, or (C) convertible,
exchangeable or exercisable securities with a right to exchange at lower than
the Current Market Price on the date of issuance or conversion, as applicable,
of such convertible, exchangeable or exercisable securities, except for stock
option agreements or stock incentive agreements; and (ii) grants the right to
the purchaser(s) thereof to demand that the Corporation register under the
Securities Act such Common Shares issued or the Common Shares for which such
warrants or options may be exercised or such convertible, exchangeable or
exercisable securities may be converted, exercised or exchanged, then the
Conversion Ratio shall be reduced to equal the lowest of any such lower rates.
SECTION 6.6 OPTIONAL REDEMPTION UNDER CERTAIN CIRCUMSTANCES. At anytime
after the date of issuance of the Series B Preferred Stock until the Mandatory
Conversion Date (as defined below), the Corporation, upon notice delivered to
the Holder as provided in Section 6.7, may redeem the Series B Preferred Stock
(but only with respect to such shares as to which the Holder has not theretofore
furnished a Conversion Notice in compliance with Section 6.2), at one hundred
thirty-five percent (135%) of the Stated Value thereof (the "Optional Redemption
Price"), together with all accrued and unpaid dividends thereon to the date of
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redemption (the "Redemption Date"); PROVIDED, HOWEVER, that the Corporation may
only redeem the Series B Preferred Stock under this Section 6.6 if the Current
Market Price is less than the Current Market Price on the Closing Date. Except
as set forth in this Section 6.6, the Corporation shall not have the right to
prepay or redeem the Series B Preferred Stock.
SECTION 6.7 NOTICE OF REDEMPTION. Notice of redemption pursuant to
Section 6.6 shall be provided by the Corporation to the Holder in writing (by
registered mail or overnight courier at the Holder's last address appearing in
the Corporation's security registry) not less than ten (10) nor more than
fifteen (15) days prior to the Redemption Date, which notice shall specify the
Redemption Date and refer to Section 6.6 (including, a statement of the Market
Price per Common Share) and this Section 6.7.
SECTION 6.8 SURRENDER OF PREFERRED STOCK. Upon any redemption of the
Series B Preferred Stock pursuant to Sections 6.6 or 6.7, the Holder shall
either deliver the Series B Preferred Stock by hand to the Corporation at its
principal executive offices or surrender the same to the Corporation at such
address by express courier. Payment of the Optional Redemption Price specified
in Section 6.6 shall be made by the Corporation to the Holder against receipt of
the Series B Preferred Stock (as provided in this Section 6.8) by wire transfer
of immediately available funds to such account(s) as the Holder shall specify to
the Corporation. If payment of such redemption price is not made in full by the
Mandatory Redemption Date or the Redemption Date, as the case may be, the Holder
shall again have the right to convert the Series B Preferred Stock as provided
in Article 6 hereof.
SECTION 6.9 MANDATORY CONVERSION. On the third anniversary of the date
of this Agreement (the "Mandatory Conversion Date"), the Corporation shall
convert all Series B Preferred Stock outstanding at the Conversion Price.
Notwithstanding the previous sentence, in no event shall the Corporation convert
that portion of the Series B Preferred Stock to the extent that the issuance of
Common Shares upon the conversion of such Series B Preferred Stock, when
combined with shares of Common Stock by such Holder and any other holders of
Series B Preferred Stock and Warrants, would exceed 19.99% of the Common Stock
outstanding on the Closing Date. Within ten (10) Business Days after the
Mandatory Conversion Date, the Corporation shall redeem all remaining
outstanding Series B Preferred Stock at one hundred and thirty-five percent
(135%) of the Stated Value thereof, together with all accrued and unpaid
dividends thereon, in cash, to the date of redemption.
ARTICLE 7
VOTING RIGHTS
The holders of the Series B Preferred Stock have no voting
power, except as otherwise provided by the General Corporation Law of the State
of Delaware ("DGCL"), in this Article 7, and in Article 8 below.
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Notwithstanding the above, the Corporation shall provide each
holder of Series B Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed liquidation, dissolution or
winding up of the Corporation, the Corporation shall mail a notice to each
holder, at least thirty (30) days prior to the consummation of the transaction
or event, whichever is earlier), of the date on which any such action is to be
taken for the purpose of such dividend, distribution, right or other event to
the extent known at such time.
To the extent that under the DGCL the vote of the holders of
the Series B Preferred Stock, voting separately as a class or series as
applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the holders of at least a majority of the shares
of the Series B Preferred Stock represented at a duly held meeting at which a
quorum is present or by written consent of a majority of the shares of Series B
Preferred Stock (except as otherwise may be required under the DGCL) shall
constitute the approval of such action by the class. To the extent that under
the DGCL holders of the Series B Preferred Stock are entitled to vote on a
matter with holders of Common Stock, voting together as one class, each share of
Series B Preferred Stock shall be entitled to a number of votes equal to the
number of shares of Common Stock into which it is then convertible using the
record date for the taking of such vote of shareholders as the date as of which
the Conversion Price is calculated. Holders of the Series B Preferred Stock
shall be entitled to notice of all shareholder meetings or written consents (and
copies of proxy materials and other information sent to shareholders) with
respect to which they would be entitled tonight, which notice would be provided
pursuant to the Corporation's bylaws and the DGCL.
ARTICLE 8
PROTECTIVE PROVISIONS
So long as shares of Series B Preferred Stock are outstanding,
the Corporation shall not, without first obtaining the approval (by vote or
written consent, as provided by the DGCL) of the holders of at least a majority
of the then outstanding shares of Series B Preferred Stock:
(a) alter or change the rights, preferences or
privileges of the Series B Preferred Stock;
(b) create any new class or series of capital stock
having a preference over the Series B Preferred Stock as to distribution of
assets upon liquidation, dissolution or winding up of the Corporation ("Senior
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Securities") or alter or change the rights, preferences or privileges of any
Senior Securities so as to affect adversely the Series B Preferred Stock;
(c) increase the authorized number of shares of
Series B Preferred Stock; or
(d) do any act or thing not authorized or
contemplated by this Certificate of Designation which would result in taxation
of the holders of shares of the Series B Preferred Stock under Section 305 of
the Internal Revenue Code of 1986, as amended (or any comparable provision of
the Internal Revenue Code as hereafter from time to time amended).
In the event holders of at least a majority of the then
outstanding shares of Series B Preferred Stock agree to allow the Corporation to
alter or change the rights, preferences or privileges of the shares of Series B
Preferred Stock, pursuant to subsection (a) above, so as to affect the Series B
Preferred Stock, then the Corporation will deliver notice of such approved
change to the holders of Series B Preferred Stock that did not agree to such
alteration or change (the "Dissenting Holders") and Dissenting Holders shall
have the right for a period of thirty (30) days to convert pursuant to the terms
of this Certificate of Designation as they exist prior to such alteration or
change or continue to hold their shares of Series B Preferred Stock.
ARTICLE 9
MISCELLANEOUS
SECTION 9.1 LOSS, THEFT, DESTRUCTION OF PREFERRED STOCK. Upon receipt
of evidence satisfactory to the Corporation of the loss, theft, destruction or
mutilation of shares of Series B Preferred Stock and, in the case of any such
loss, theft or destruction, upon receipt of indemnity or security reasonably
satisfactory to the Corporation, or, in the case of any such mutilation, upon
surrender and cancellation of the Series B Preferred Stock, the Corporation
shall make, issue and deliver, in lieu of such lost, stolen, destroyed or
mutilated shares of Series B Preferred Stock, new shares of Series B Preferred
Stock, new shares of Series B Preferred Stock of like tenor. The Series B
Preferred Stock shall be held and owned upon the express condition that the
provisions of this Section 10.1 are exclusive with respect to the replacement of
mutilated, destroyed, lost or stolen shares of Series B Preferred Stock and
shall preclude any and all other rights and remedies notwithstanding any law or
statute existing or hereafter enacted to the contrary with respect to the
replacement of negotiable instruments or other securities without the surrender
thereof.
SECTION 9.2 WHO DEEMED ABSOLUTE OWNER. The Corporation may deem the
Person in whose name the Series B Preferred Stock shall be registered upon the
registry books of the Corporation to be, and may treat it as, the absolute owner
of the Series B Preferred Stock for the purpose of receiving payment of
dividends on the Series B Preferred Stock, for the conversion of the Series B
Preferred Stock and for all other purposes, and the Corporation shall not be
affected by any notice to the contrary. All such payments and such conversion
shall be valid and effectual to satisfy and discharge the liability upon the
Series B Preferred Stock to the extent of the sum or sums so paid or the
conversion so made.
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SECTION 9.3 NOTICE OF CERTAIN EVENTS. In the case of the occurrence of
any event described in Sections 6.1, 6.6 or 6.7 of this Certificate of
Designations, the Corporation shall cause to be mailed to the Holder of the
Series B Preferred Stock at its last address as it appears in the Corporation's
security registry, at least twenty (20) days notice is not possible, at the
earliest possible date prior to any such record, effective or expiration date),
a notice stating (x) the date on which a record is to be taken for the purpose
of such dividend, distribution, issuance or granting rights, options or
warrants, or if a record is not to be taken, the date as of which the holders of
record of Series B Preferred Stock to be entitled to such dividend,
distribution, issuance or granting of rights, options or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding-up is expected to
become effective, and the date as of which it is expected that holders of record
of Series B Preferred Stock will be entitled to exchange their shares for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale transfer, dissolution, liquidation or winding-up.
SECTION 9.4 REGISTER. The Corporation shall keep at its principal
office a register in which the Corporation shall provide for the registration of
the Series B Preferred Stock. Upon any transfer of the Series B Preferred Stock
in accordance with the provisions hereof, the Corporation shall register such
transfer on the Series B Preferred Stock register.
The Corporation may deem the person in whose name the Series B
Preferred Stock shall be registered upon the registry books of the Corporation
to be, and may treat it as, the absolute owner of the Series B Preferred Stock
for the purpose of receiving payment of dividends on the Series B Preferred
Stock and for all other purposes, and the Corporation shall not be affected by
any notice to the contrary. All such payments and such conversions shall be
valid and effective to satisfy and discharge the liability upon the Series B
Preferred Stock to the extent of the sum or sums so paid or the conversion or
conversions so made.
SECTION 9.5 WITHHOLDING. To the extent required by applicable law, the
Corporation may withhold amounts for or on account of any taxes imposed or
levied by or on behalf of any taxing authority in the United States having
jurisdiction over the Corporation from any payments made pursuant to the Series
B Preferred Stock.
SECTION 9.6 HEADINGS. The headings of the Articles and Section s of
this Certificate of Designations are inserted for convenience only and do not
constitute a part of this Certificate of Designations.
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IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designations, Preferences and Rights to be signed by its duly authorized officer
on this 30th day of June, 1998.
CALIFORNIA PRO SPORTS, INC.
By: /S/ BARRY HOLLANDER
-------------------------------
Name: BARRY HOLLANDER
Title: ACTING PRESIDENT
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[FORM OF CONVERSION NOTICE]
TO:____________________________________
____________________________________
____________________________________
The undersigned owner of this Series B 4% Convertible Preferred Stock (the
"Series B Preferred Stock") issued by California Pro Sports, Inc. (the
"Corporation") hereby irrevocably exercises its option to convert ________
shares of the Series B Preferred Stock into shares of the common stock, $.01 par
value, of the Corporation ("Common Stock"), in accordance with the terms of the
Certificate of Designations. The undersigned hereby instructs the Corporation to
convert the number of shares of the Series B Preferred Stock specified above
into Shares of Common Stock Issued at Conversion in accordance with the
provisions of Article 6 of the Certificate of Designations. The undersigned
directs that the Common Stock issuable and certificates therefor deliverable
upon conversion, the Series B Preferred Stock recertificated, if any, not being
surrendered for conversion hereby, together with any check in payment for
fractional Common Stock, be issued in the name of and delivered to the
undersigned unless a different name has been indicated below. All capitalized
terms used and not defined herein have the respective meanings assigned to them
in the Certificate of Designations.
Dated:_________________________________
Signature______________________________
Fill in for registration of Series B Preferred Stock:
Please print name and address
(including zip code number):
________________________________________________________________________________
________________________________________________________________________________
17
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS
OF
SERIES C CONVERTIBLE PREFERRED STOCK
OF
CALIFORNIA PRO SPORTS, INC.
-------------------
Pursuant to Section 151 of
the General Corporation Law of the State of Delaware
-------------------
California Pro Sports, Inc., a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), hereby
certifies that the following resolutions were adopted by the Board of Directors
of the Corporation on June 30, 1998 pursuant to authority of the Board of
Directors as required by Section 151 of the General Corporation Law of the State
of Delaware;
RESOLVED, that pursuant to the authority granted to an vested in the
Board of Directors of this Corporation (the "Board of Directors" or the "Board")
in accordance with the provisions of its Certificate of Incorporation, the Board
of Directors hereby authorizes a series of the Corporation's previously
authorized Preferred Stock, par value $0.01 per share (the "Preferred Stock, par
value $0.01 per share (the "Preferred Stock"), and hereby states the designation
and number of shares, and fixes the relative rights, preferences, privileges,
powers and restrictions thereof as follows:
Series C 4% Convertible Preferred Stock;
ARTICLE 1
DEFINITIONS
SECTION 1.1 DEFINITIONS. The terms defined in this Article whenever
used in this Certificate of Designations have the following respective meanings;
(a) "ADDITIONAL CAPITAL SHARES" has the meaning set forth in Section
6.1(c).
(b) "AFFILIATE" has the meaning ascribed to such term in Rule 12b-2
under the Securities Exchange Act of 1934, as amended.
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(c) "BUSINESS DAY" means a day other than Saturday, Sunday or any day
on which banks located in the State of New York are authorized or obligated to
close.
(d) "CAPITAL SHARES" means the Common Shares and any other shares of
any other class or series of common stock, whether now or hereafter authorized
and however designated, which have the right to participate in the distribution
of earnings and assets (upon dissolution, liquidation or winding-up) of the
Corporation.
(e) "CLOSING DATE" means July 30, 1998.
(f) "COMMON SHARES" or "COMMON STOCK" means shares of common stock,
$.01 par value, of the Corporation.
(g) "COMMON STOCK ISSUED AT CONVERSION" when used with reference to the
securities issuable upon conversion of the Series C Preferred Stock, means all
Common Shares now or hereafter Outstanding and securities of any other class or
series into which the Series C Preferred Stock hereafter shall have been changed
or substituted, whether now or hereafter created and however designated.
(h) "CONVERSION DATE" means any day on which all or any portion of
shares of the Series C Preferred Stock is converted in accordance with the
provisions hereof.
(i) "CONVERSION NOTICE" has the meaning set forth in Section 6.2.
(j) "CONVERSION PRICE" means on any date of determination the
applicable price for the conversion of shares of Series C Preferred Stock into
Common Shares on such day as set forth in Section 6.1.
(k) "CONVERSION RATIO" on any date means of determination the
applicable percentage of the Market Price for conversion of shares of Series C
preferred Stock into Common Shares on such day as set forth in Section 6.1.
(l) "CORPORATION", means California Pro Sports, Inc., a Delaware
corporation, and any successor or resulting corporation by way of merger,
consolidation, sale or exchange of all or substantially all of the Corporation's
assets, or otherwise.
(m) "CURRENT MARKET PRICE" on any date of determination means the
closing price of a Common Share on such day as reported on the Nasdaq - Small
Cap Market ("NASDAQ").
(n) "DEFAULT DIVIDEND RATE" shall be equal to the Preferred Stock
Dividend Rate plus an additional 4% per annum.
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(o) "HOLDER" means the Shaar Fund Ltd., any successor thereto, or any
Person to whom the Series C Preferred Stock is subsequently transferred in
accordance with the provisions hereof.
(p) "MARKET DISRUPTION EVENT" means any event that results in a
material suspension or limitation of trading of Common Shares on the NASDAQ.
(q) "MARKET PRICE" per Common Share means the average of the closing
prices of the Common Shares as reported on the NASDAQ for the five Trading Days
in any valuation Period.
(r) "MAXIMUM RATE" has the meaning set forth in Section 7.3(b).
(s) "OUTSTANDING" when used with reference to Common Shares or Capital
Shares (collectively, "Shares"), means, on any date of determination, all issued
and outstanding Shares, and includes all such Shares issuable in respect of
outstanding scrip or any certificates representing fractional interests in such
Shares; PROVIDED, HOWEVER, that any such Shares directly or indirectly owned or
held by or for the account of the Corporation or any Subsidiary or the
Corporation shall not be deemed "Outstanding" for purposes hereof.
(t) "PERSON" means an individual, a corporation, a partnership, an
association, a limited liability company, a unincorporated business
organization, a trust or other entity or organization, and any government or
political subdivision or any agency or instrumentality thereof.
(u) "REGISTRATION RIGHTS AGREEMENT" means that certain Registration
Rights Agreement dated a date even herewith between the Corporation and The
Shaar Fund Ltd.
(v) "SEC" means the United States Securities and Exchange Commission.
(w) "SECURITIES ACT" means the Securities Act of 1933, as amended, and
the rules and regulations of the SEC thereunder, all as in effect at the time.
(x) "SECURITIES PURCHASE AGREEMENT" means that certain Securities
Purchase Agreement dated a date even herewith between the Corporation and The
Shaar Fund Ltd.
(y) "SERIES C PREFERRED STOCK" means the Series C 4% Convertible
Preferred Stock of the Corporation or such other convertible Preferred Stock
exchanged therefor as provided in Section 2.1.
(aa) "STATED VALUE" has the meaning set forth in Article 2.
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(bb) "SUBSIDIARY" means any entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions are owned
directly or indirectly by the Corporation.
(cc) "TRADING DAY" means any day on which purchases and sales of
securities authorized for quotation on the NASDAQ are reported thereon and on
which no Market Disruption Event has occurred.
(dd) "VALUATION EVENT" has the meaning set forth in Section 6.1.
(ee) "VALUATION PERIOD" means the five Trading Day period immediately
preceding the Conversion Date.
All references to "cash" or "$" herein means currency of the United
States of America.
ARTICLE 2
DESIGNATION AND AMOUNT
SECTION 2.1
The designation of this series, which consists of 1,030 shares
of Preferred Stock, is Series C 4% Convertible Preferred Stock (the "Series C
Preferred Stock") and the stated value shall be One Thousand Dollars ($1,000)
per share (the "Stated Value").
ARTICLE 3
RANK
SECTION 3.1
The Series C Preferred Stock shall rank (i) prior to the
Common Stock; (ii) prior to any class of series of capital stock of the
Corporation hereafter created other than "Pari Passu Securities" (collectively,
with the Common Stock, "Junior Securities"); and (iii) pari passu with any class
or series of capital stock of the Corporation hereafter created specifically
ranking on parity with the Series C Preferred Stock ("Pari Passu Securities").
ARTICLE 4
DIVIDENDS
SECTION 4.1
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(a)(i) The Holder shall be entitled to receive, when, as and
if declared by the Board of Directors, out of funds legally available for the
payment of dividends, dividends (subject to Sections 4(a)(ii) hereof) at the
rate of 4% per annum (computed on the basis of a 360-day year) (the "Dividend
Rate") on the Liquidation Value (as defined below) of each share of Series C
Preferred Stock on and as of the most recent Dividend Payment Due Date (as
defined below) with respect to each Dividend Period (as defined below).
Dividends on the Series C Preferred Stock shall be cumulative from the date of
issue, whether or not declared for any reason, including if such declaration is
prohibited under any outstanding indebtedness or borrowings of the Corporation
or any of its Subsidiaries, or any other contractual provision binding on the
Corporation or any of its Subsidiaries, and whether or not there shall be funds
legally available for the payment thereof.
(ii) Each dividend shall be payable in equal quarterly amounts
on each March 31, June 30, September 30 and December 31 of each year (each, a
"Dividend Payment Due Date"), commencing September 30, 1998, to the holders of
record of shares of the Series C Preferred Stock, as they appear on the stock
records of the Corporation at the close of business on any record date, not more
than 60 days or less than 10 days preceding the payment dates thereof, as shall
be fixed by the Board of Directors. For the purposes hereof, "Dividend Period"
means the quarterly period preceding Dividend Payment Date and ending on and
including the immediately subsequent Dividend Payment Date. Accrued and unpaid
dividends for any past Dividend Period may be declared and paid at any time,
without reference to any Dividend Payment Due Date, to holders of record on such
date, not more than 15 days preceding the payment date thereof, as may be fixed
by the Board of Directors.
(iii) At the option of the Corporation, the dividend shall be
paid in cash or through the issuance of duly and validly authorized and issued,
fully paid and non-assessable, freely tradeable shares of Common Stock valued at
the Market Price. The Common Stock to be issued in lieu of cash payments shall
be registered for resale in the Registration Statement to be filed by the
Corporation to register the Common Stock issuable upon conversion of the shares
of Series C Preferred Stock and exercise of the Warrants as set forth in the
Registration Rights Agreement. Notwithstanding the foregoing, until such
Registration Statement has been declared effective under the Securities Act by
the SEC, payment of dividends on the Series C Preferred Stock shall be in cash.
(b) The Holder shall not be entitled to any dividends in
excess of the cumulative dividends, as herein provided, on the Series C
Preferred Stock. Except as provided in this Article 4, no interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend payment
or payments on the Series C Preferred Stock that may be in arrears.
(c) So long as any shares of the Series C Preferred Stock are
outstanding, no dividends, except as described in the next succeeding sentence,
shall be declared or paid or set apart for payment on Pari Passu Securities for
any period unless full cumulative dividends required to be paid in cash have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for such payment on the Series C Preferred
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<PAGE>
Stock for all Dividend Periods terminating on or prior to the date of payment of
the dividend on such class or series of Pari Passu Securities. When dividends
are not paid in full or a sum sufficient for such payment is not set apart, as
aforesaid, all dividends declared upon shares of the Series C Preferred Stock
and all dividends declared upon any other class or series of Pari Passu
Securities shall be declared ratably in proportion to the respective amounts of
dividends accumulated and unpaid on the Series C Preferred Stock and accumulated
and unpaid on such Pari Passu Securities.
(d) So long as any shares of the Series C Preferred stock are
outstanding, no dividends shall be declared or paid or set apart for payment or
other distribution declared or made upon Junior Securities, nor shall any Junior
Securities be redeemed, purchased or otherwise acquired (other than a
redemption, purchase or other acquisition of shares of Common Stock made for
purposes of an employee incentive or benefit plan (including a stock option
plan) of the Corporation or any subsidiary, (all such dividends, distributions,
redemptions or purchases being hereinafter referred to as a "Junior Securities
Distribution") for any consideration (or any moneys be paid to or made available
for a sinking fund for the redemption of any shares of any such stock) by the
Corporation, directly or indirectly, unless in each case (i) the full cumulative
dividends required to be paid in cash on all outstanding shares of the Series C
Preferred Stock and any other Pari Passu Securities shall have been paid or set
apart for payment for all past Dividend Periods with respect to the Series C
Preferred Stock and all past dividend periods with respect to such Pari Passu
Securities, and (ii) sufficient funds shall have been paid or set apart for the
payment of the dividend for the current Dividend Period with respect to the
Series C Preferred Stock and the current dividend period with respect to such
Pari Passu Securities.
ARTICLE 5
LIQUIDATION PREFERENCE
SECTION 5.1
(a) If the Corporation shall commence a voluntary case under
the Federal bankruptcy laws or any other applicable Federal or State bankruptcy,
insolvency or similar law, or consent to the entry of an order for relief in an
involuntary case under any law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or make an assignment
for the benefit of its creditors, or admit in writing its inability to pay its
debts generally as they become due, or if a decree or order for relief in
respect of the Corporation shall be entered by a court having jurisdiction in
the premises in an involuntary case under the Federal bankruptcy laws or any
other applicable Federal or state bankruptcy, insolvency or similar law
resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of thirty (30) consecutive days and, on account of any such event, the
Corporation shall liquidate, dissolve or wind up (each such event being
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<PAGE>
considered a "Liquidation Event"), no distribution shall be made to the holders
of any shares of capital stock of the Corporation upon liquidation, dissolution
or winding up unless prior thereto, the holders of shares of Series C Preferred
Stock, subject to Article 5, shall have received the liquidation Preference (as
defined in Article 5(c)) with respect to each share. If upon the occurrence of a
Liquidation Event, the assets and funds available for distribution among the
holders of the Series C Preferred Stock and holders of Pari Passu Securities
shall be insufficient to permit the payment to such holders of the preferential
amounts payable thereon, then the entire assets and funds of the Corporation
legally available for distribution to the Series C Preferred Stock and the Pari
Passu Securities shall be distributed ratably among such shares in proportion to
the ratio that the Liquidation preference payable on each such share bears to
the aggregate liquidation Preference payable on all such shares.
(b) At the option of each Holder, the sale, conveyance of
disposition of all or substantially all of the assets of the Corporation, the
effectuation by the Corporation of a transaction or series of related
transactions in which more than 50% of the voting power of the Corporation is
not the survivor shall either: (i) be deemed to be a liquidation, dissolution or
winding up of the Corporation pursuant to which the Corporation shall be
required to distribute, upon consummation of and as a condition to, such
transaction an amount equal to 120% of the Liquidation Preference with respect
to each outstanding sharer of Series C Preferred Stock in accordance with and
subject to the terms of this Article 5 or (ii) be treated pursuant to Article
5(c) (iii) hereof; PROVIDED, that all holders of Series C Preferred Stock shall
be deemed to elect the option set forth in cause (i) hereof if at least a
majority in interest of such holders elect such option. "Person" shall mean any
individual, corporation, limited liability company, partnership, association,
trust or other entity or organization.
(c) For purposes hereof, the "Liquidation Preference" with
respect to a share of the Series C Preferred Stock shall mean an amount equal to
the sum of (i) the Stated Value thereof, plus (ii) an amount equal to thirty
percent (30%) of such Stated Value, plus (iii) the aggregate of all accrued and
unpaid dividends on such share of Series C Preferred Stock until the most recent
Dividend Payment Date; provided that, in the event of an actual liquidation,
dissolution or winding up of the Corporation, the amount referred to in clause
(iii) above shall be calculated by including accrued and unpaid dividends to the
actual date of such liquidation, dissolution or winding up, rather than the
Dividend Payment Due Date referred to above.
ARTICLE 6
CONVERSION OF PREFERRED STOCK
SECTION 6.1 CONVERSION; CONVERSION PRICE. At the option of the Holder,
the shares of Preferred Stock may be converted, either in whole or in part, into
Common Shares (calculated as to each such conversion to the nearest 1/100th of a
share), at any time, and from time to time following the date of issuance of the
Series C Preferred Stock (the "Issue Date") at a conversion Price equal to 65%
of the Market Price; provided, however, that the Holder shall not have the right
to convert any portion of the Series C Preferred Stock to the extent that the
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<PAGE>
issuance to the Holder of Common Shares upon such conversion would result in the
Holder being deemed the "beneficial owner" of 5% or more of the then outstanding
Common Shares within meaning of Rule 13d-3 of the Securities Exchange Act of
1934, as amended. At the Corporation's option, the amount of accrued and unpaid
dividends as of the conversion Date shall not be subject to conversion but
instead may be paid in cash as of the Conversion Date; if the Corporation elects
to convert the amount of accrued and unpaid dividends at the Conversion Date
into Common Stock, the Common Stock issued to the Holder shall be valued at the
Conversion Price. Notwithstanding the previous sentence, in no event shall the
Holder have the right to convert that portion of the Series C Preferred Stock to
the extent that the issuance of Common Shares upon the conversion of such Series
C Preferred Stock, when combined with shares of Common Stock received upon other
conversions of Series C Preferred Stock by such Holder and any other holders of
Series C Preferred Stock, would exceed 19.99% of the Common Stock outstanding on
the Closing Date. Within ten (10) Business Days after the receipt of the
Conversion Notice which upon conversion would, when combined with shares of
Common Stock received upon other conversions of Series C Preferred Stock by such
Holder and any other holders of Series C Preferred Stock and Warrants, exceed
19.99% of the Common Stock outstanding on the Closing Date, the Corporation
shall redeem all remaining outstanding shares of Series C Preferred Stock at on
hundred twenty-five percent (125%) of the Stated Value thereof, together with
all accrued and unpaid dividends thereon, in cash, to the date of redemption.
The number of shares of Common Stock due upon conversion of
Series C Preferred Stock shall be (i) the number of shares of Series C Preferred
Stock to be converted, multiplied by (ii) the State Value and dividend by (iii)
the applicable Conversion Price.
Within two (2) Business Days of the occurrence of a Valuation
Event, the Corporation shall send notice (the "Valuation Event Notice") of such
occurrence to the Holder. Notwithstanding anything to the contrary contained
herein, if a Valuation Event occurs during any Valuation Period, a new Valuation
Period shall begin on the Trading Day immediately following the occurrence of
such Valuation Event and end on the Conversion Date; provided that, if a
Valuation Event occurs on the fifth day of any Valuation Period, then the
Conversion Price shall be the Current Market Price of the Common Shares on such
day; and provided, further, that the Holder may, in its discretion, postpone
such Conversion Date to a Trading Day which is no more than five (5) Trading
Days after the occurrence of the latest Valuation Event by delivering a
notification to the Corporation with two (2) Business Days of the receipt of the
Valuation Period to be other than the five (5) Trading Days immediately Prior to
the Conversion Date, the Holder shall give written notice of such fact to the
Corporation in the related Conversion Notice at the time of conversion.
For purposes of this Section 6.1, a "Valuation Event" shall mean an event in
which the Corporation at any time during a Valuation Period takes any of the
following actions:
(a) subdivides or combines its Capital Shares;
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(b) makes any distribution of its Capital Shares;
(c) issues any additional Capital Shares (the "Additional
Capital Shares"), otherwise than as provided in the foregoing Sections 6.1(a)
and 6.1(b) above, at a price per share less, or for other consideration lower,
than the Current Market Price in effect immediately prior to such issuances, or
without consideration, except for issuances under employee benefit plans
consistent with those presently in effect and issuances under presently
outstanding warrants, options or convertible securities;
(d) issues any warrants, options or other rights to subscribe
for or purchase any Additional Capital Shares and the price per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant to
such warrants, options or other rights shall be less than the Current Market
Price in effect immediately prior to such issuance;
(e) issues any securities convertible into or exchangeable or
exercisable for Capital Shares and the consideration per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant to the
terms of such convertible, exchangeable or exercisable securities shall be less
than the Current Market Price in effect immediately prior to such issuance;
(f) makes a distribution of its assets or evidences of
indebtedness to the holders of its Capital Shares as a dividend in liquidation
or by way of return of capital or other than as a dividend payable out of
earnings or surplus legally available for the payment of dividends under
applicable law or any distribution to such holders made in respect of the sale
of all or substantially all of the Corporation's assets (other than under the
circumstances provided for in the foregoing Sections 6.1(a) through 6.1(e)); or
(g) takes any action affecting the number of Outstanding
Capital Shares, other than an action described in any of the foregoing Sections
6.1(a) through 6.1(f) hereof, inclusive, which in the opinion of the
Corporation's Board of Directors, determined in good faith, would have a
material adverse effect upon the rights of the Holder at the time of a
conversion of the Preferred Stock.
SECTION 6.2 EXERCISE OF CONVERSION PRIVILEGE. (a) Conversion of the
Series C Preferred Stock may be exercised, in whole or in part, by the Holder by
telecopying an executed and completed notice of conversion in the form annexed
hereto as Annex I (the "Conversion Notice") to the Corporation. Each date on
which a Conversion Notice is telecopied to and received by the Corporation in
accordance with the provisions of this Section 6.2 shall constitute a Conversion
Date. The Corporation shall convert the Preferred Stock and issue the Common
Stock Issued at Conversion effective as of the Conversion Date. The Conversion
Notice also shall state the name or names (with addresses) of the persons who
are to become the holders of the Common Stock Issued at Conversion in connection
with such conversion. The Holder shall deliver the shares of Series C Preferred
Stock to the Corporation by express courier within 30 days following the date on
which the telecopied Conversion Notice has been transmitted to the Corporation.
Upon surrender for conversion, the Preferred Stock shall be accompanied by a
9
<PAGE>
proper assignment hereof to the Corporation or be endorsed in blank. As promptly
as practicable after the receipt of the Conversion Notice as aforesaid, but in
any event not more than five Business Days after the Corporation's receipt of
such Conversion Notice, the Corporation shall (i) issue the Common Stock issued
at Conversion in accordance with the provisions of this Article 6, and (ii)
cause to be mailed for delivery by overnight courier to the Holder (X) a
certificate or certificate(s) representing the number of Common Shares to which
the Holder is entitled by virtue of such conversion, (Y) cash, as provided in
Section 6.3, in respect of any fraction of a Share issuable upon such conversion
and (Z) cash in the amount of accrued and unpaid dividends as of the Conversion
Date. Such conversion shall be deemed to have been effected at the time at which
the Conversion Notice indicates so long as the Preferred Stock shall have been
surrendered as aforesaid at such time, and at such time the rights of the Holder
of the Preferred Stock, as such, shall cease and the Person and Persons in whose
name or names the Common Stock Issued at Conversion shall be issuable shall be
deemed to have become the holder or holders of record of the Common Shares
represented thereby. The Conversion Notice shall constitute a contract between
the Holder and the Corporation, whereby the Holder shall be deemed to subscribe
for the number of Common Shares which it will be entitled to receive upon such
conversion and, in payment and satisfaction of such subscription (and for any
cash adjustment to which it is entitled pursuant to Section 6.4), to surrender
the Preferred Stock and to release the Corporation from all liability thereon.
No cash payment aggregating less than $1.50 shall be required to be given unless
specifically requested by the Holder.
(b) If, at any time (i) the Corporation challenges, disputes
or denies the right of the Holder hereof to effect the conversion of the
Preferred Stock into Common Shares or otherwise dishonors or rejects any
Conversion Notice delivered in accordance with this Section 6.2 or (ii) any
third party who is not and has never been an Affiliate of the Holder commences
any lawsuit or proceeding or otherwise asserts any claim before any court or
public or governmental authority which seeks to challenge, deny enjoin, limit,
modify, delay or dispute the right of the Holder hereof to effect the conversion
of the Preferred Stock into Common Shares, then the Holder shall have the right,
by written notice to the Corporation, to require the Corporation to promptly
redeem the Series C Preferred Stock for cash at a redemption price equal to one
hundred thirty-five percent (135%) of the Stated Value thereof together with all
accrued and unpaid dividends thereon (the "Mandatory Purchase Amount"). Under
any of the circumstances set forth above, the Corporation shall be responsible
for the payment of all costs and expenses of the Holder, including reasonable
legal fees and expenses, as and when incurred in disputing any such action or
pursuing its rights hereunder (in addition to any other rights of the Holder).
SECTION 6.3 FRACTIONAL SHARES. No fractional Common Shares or scrip
representing fractional Common Shares shall be issued upon conversion of the
Series C Preferred Stock. Instead of any fractional Common Shares which
otherwise would be issuable upon conversion of the Series C Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fraction in an amount
equal to the same fraction. No cash payment of less than $1.50 shall be required
to be given unless specifically requested by the Holder.
10
<PAGE>
SECTION 6.4 RECLASSIFICATION, CONSOLIDATION, MERGER OR MANDATORY SHARE
EXCHANGE. At any time while the Series C Preferred Stock remains outstanding and
any shares thereof has not been converted, in case of any reclassification or
change of Outstanding Common Shares issuable upon conversion of the Series C
Preferred Stock (other than a change in par value, or from par value to no par
value per share, of from no par value per share to par value or as a result of a
subdivision or combination of outstanding securities issuable upon conversion of
the Series C Preferred Stock) or in case of any consolidation, merger or
mandatory share exchange of the Corporation with or into another corporation
(other than a merger or mandatory share exchange with another corporation in
which the Corporation is a continuing corporation and which does not result in
any reclassification or change, other than a change in par value, or from par
value to not par value per share, or from no par value per share to par value,
or as a result of a subdivision of combination of Outstanding Common Shares upon
conversion of the Series C Preferred Stock), or in the case of any sale or
transfer to another corporation of the property of the Corporation as an
entirety or substantially as an entirety, the Corporation, as the case may be,
shall, without payment of any additional consideration therefor, execute a new
Series C Preferred Stock providing that the Holder shall have the right to
convert such new Series C Preferred Stock (upon terms and conditions not less
favorable to the Holder than those in effect pursuant to the Series C Preferred
Stock) and to receive upon such exercise, in lieu of each Common Share
theretofore issuable upon conversion of the Series C Preferred Stock, the kind
and amount of shares of stock, other securities, money or property receivable
upon such reclassification, change, consolidation, merger, mandatory share
exchange, sale or transfer by the holder of one Common Share issuable upon
conversion of the Series C Preferred Stock had the Series C Preferred Stock been
converted immediately prior to such reclassification, change, consolidation,
merger, mandatory share exchange or sale or transfer. The provisions of this
Section 6.4 shall similarly apply to successive reclassifications, changes,
consolidations, mergers, mandatory share exchanges and sales and transfers.
SECTION 6.5 ADJUSTMENTS TO CONVERSION RATIO. For so long as any shares
of the Series C Preferred Stock are outstanding, if the Corporation (i) issues
and sells pursuant to an exemption from registration under the Securities Act
(A) Common Shares at a purchase price on the date of issuance thereof that is
lower than the Conversion Price, (B) warrants or options with an exercise price
representing a percentage of the Current Market Price with an exercise price on
the date of issuance of the warrants or options that is lower than the agreed
upon exercise price for the Holder, except for employee stock option agreements
or stock incentive agreements of the Corporation, or (C) convertible,
exchangeable or exercisable securities with a right to exchange at lower than
the Current Market Price on the date of issuance or conversion, as applicable,
of such convertible, exchangeable or exercisable securities, except for stock
option agreements or stock incentive agreements; and (ii) grants the right to
the purchaser(s) thereof to demand that the Corporation register under the
Securities Act such Common Shares issued or the Common Shares for which such
warrants or options may be exercised or such convertible, exchangeable or
exercisable securities may be converted, exercised or exchanged, then the
Conversion Ratio shall be reduced to equal the lowest of any such lower rates.
11
<PAGE>
SECTION 6.6 OPTIONAL REDEMPTION UNDER CERTAIN CIRCUMSTANCES. At anytime
after the date of issuance of the Series C Preferred Stock until the Mandatory
Conversion Date (as defined below), the Corporation, upon notice delivered to
the Holder as provided in Section 6.7, may redeem the Series C Preferred Stock
(but only with respect to such shares as to which the Holder has not theretofore
furnished a Conversion Notice in compliance with Section 6.2), at one hundred
thirty-five percent (135%) of the Stated Value thereof (the "Optional Redemption
Price"), together with all accrued and unpaid dividends thereon to the date of
redemption (the "Redemption Date"); PROVIDED, HOWEVER, that the Corporation may
only redeem the Series C Preferred Stock under this Section 6.6 if the Current
Market Price is less than the Current Market Price on the Closing Date. Except
as set forth in this Section 6.6, the Corporation shall not have the right to
prepay or redeem the Series C Preferred Stock.
SECTION 6.7 NOTICE OF REDEMPTION. Notice of redemption pursuant to
Section 6.6 shall be provided by the Corporation to the Holder in writing (by
registered mail or overnight courier at the Holder's last address appearing in
the Corporation's security registry) not less than ten (10) nor more than
fifteen (15) days prior to the Redemption Date, which notice shall specify the
Redemption Date and refer to Section 6.6 (including, a statement of the Market
Price per Common Share) and this Section 6.7.
SECTION 6.8 SURRENDER OF PREFERRED STOCK. Upon any redemption of the
Series C Preferred Stock pursuant to Sections 6.6 or 6.7, the Holder shall
either deliver the Series C Preferred Stock by hand to the Corporation at its
principal executive offices or surrender the same to the Corporation at such
address by express courier. Payment of the Optional Redemption Price specified
in Section 6.6 shall be made by the Corporation to the Holder against receipt of
the Series C Preferred Stock (as provided in this Section 6.8) by wire transfer
of immediately available funds to such account(s) as the Holder shall specify to
the Corporation. If payment of such redemption price is not made in full by the
Mandatory Redemption Date or the Redemption Date, as the case may be, the Holder
shall again have the right to convert the Series C Preferred Stock as provided
in Article 6 hereof.
SECTION 6.9 MANDATORY CONVERSION. On the third anniversary of the date
of this Agreement (the "Mandatory Conversion Date"), the Corporation shall
convert all Series C Preferred Stock outstanding at the Conversion Price.
Notwithstanding the previous sentence, in no event shall the Corporation convert
that portion of the Series C Preferred Stock to the extent that the issuance of
Common Shares upon the conversion of such Series C Preferred Stock, when
combined with shares of Common Stock by such Holder and any other holders of
Series C Preferred Stock and Warrants, would exceed 19.99% of the Common Stock
outstanding on the Closing Date. Within ten (10) Business Days after the
Mandatory Conversion Date, the Corporation shall redeem all remaining
outstanding Series C Preferred Stock at one hundred and thirty-five percent
(135%) of the Stated Value thereof, together with all accrued and unpaid
dividends thereon, in cash, to the date of redemption.
ARTICLE 7
12
<PAGE>
VOTING RIGHTS
The holders of the Series C Preferred Stock have no voting
power, except as otherwise provided by the General Corporation Law of the State
of Delaware ("DGCL"), in this Article 7, and in Article 8 below.
Notwithstanding the above, the Corporation shall provide each
holder of Series C Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed liquidation, dissolution or
winding up of the Corporation, the Corporation shall mail a notice to each
holder, at least thirty (30) days prior to the consummation of the transaction
or event, whichever is earlier), of the date on which any such action is to be
taken for the purpose of such dividend, distribution, right or other event to
the extent known at such time.
To the extent that under the DGCL the vote of the holders of
the Series C Preferred Stock, voting separately as a class or series as
applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the holders of at least a majority of the shares
of the Series C Preferred Stock represented at a duly held meeting at which a
quorum is present or by written consent of a majority of the shares of Series C
Preferred Stock (except as otherwise may be required under the DGCL) shall
constitute the approval of such action by the class. To the extent that under
the DGCL holders of the Series C Preferred Stock are entitled to vote on a
matter with holders of Common Stock, voting together as one class, each share of
Series C Preferred Stock shall be entitled to a number of votes equal to the
number of shares of Common Stock into which it is then convertible using the
record date for the taking of such vote of shareholders as the date as of which
the Conversion Price is calculated. Holders of the Series C Preferred Stock
shall be entitled to notice of all shareholder meetings or written consents (and
copies of proxy materials and other information sent to shareholders) with
respect to which they would be entitled tonight, which notice would be provided
pursuant to the Corporation's bylaws and the DGCL.
ARTICLE 8
PROTECTIVE PROVISIONS
So long as shares of Series C Preferred Stock are outstanding,
the Corporation shall not, without first obtaining the approval (by vote or
written consent, as provided by the DGCL) of the holders of at least a majority
of the then outstanding shares of Series C Preferred Stock:
13
<PAGE>
(a) alter or change the rights, preferences or
privileges of the Series C Preferred Stock;
(b) create any new class or series of capital stock
having a preference over the Series C Preferred Stock as to distribution of
assets upon liquidation, dissolution or winding up of the Corporation ("Senior
Securities") or alter or change the rights, preferences or privileges of any
Senior Securities so as to affect adversely the Series C Preferred Stock;
(c) increase the authorized number of shares of
Series C Preferred Stock; or
(d) do any act or thing not authorized or
contemplated by this Certificate of Designation which would result in taxation
of the holders of shares of the Series C Preferred Stock under Section 305 of
the Internal Revenue Code of 1986, as amended (or any comparable provision of
the Internal Revenue Code as hereafter from time to time amended).
In the event holders of at least a majority of the then
outstanding shares of Series C Preferred Stock agree to allow the Corporation to
alter or change the rights, preferences or privileges of the shares of Series C
Preferred Stock, pursuant to subsection (a) above, so as to affect the Series C
Preferred Stock, then the Corporation will deliver notice of such approved
change to the holders of Series C Preferred Stock that did not agree to such
alteration or change (the "Dissenting Holders") and Dissenting Holders shall
have the right for a period of thirty (30) days to convert pursuant to the terms
of this Certificate of Designation as they exist prior to such alteration or
change or continue to hold their shares of Series C Preferred Stock.
ARTICLE 9
MISCELLANEOUS
SECTION 9.1 LOSS, THEFT, DESTRUCTION OF PREFERRED STOCK. Upon receipt
of evidence satisfactory to the Corporation of the loss, theft, destruction or
mutilation of shares of Series C Preferred Stock and, in the case of any such
loss, theft or destruction, upon receipt of indemnity or security reasonably
satisfactory to the Corporation, or, in the case of any such mutilation, upon
surrender and cancellation of the Series C Preferred Stock, the Corporation
shall make, issue and deliver, in lieu of such lost, stolen, destroyed or
mutilated shares of Series C Preferred Stock, new shares of Series C Preferred
Stock, new shares of Series C Preferred Stock of like tenor. The Series C
Preferred Stock shall be held and owned upon the express condition that the
provisions of this Section 10.1 are exclusive with respect to the replacement of
mutilated, destroyed, lost or stolen shares of Series C Preferred Stock and
shall preclude any and all other rights and remedies notwithstanding any law or
statute existing or hereafter enacted to the contrary with respect to the
replacement of negotiable instruments or other securities without the surrender
thereof.
14
<PAGE>
SECTION 9.2 WHO DEEMED ABSOLUTE OWNER. The Corporation may deem the
Person in whose name the Series C Preferred Stock shall be registered upon the
registry books of the Corporation to be, and may treat it as, the absolute owner
of the Series C Preferred Stock for the purpose of receiving payment of
dividends on the Series C Preferred Stock, for the conversion of the Series C
Preferred Stock and for all other purposes, and the Corporation shall not be
affected by any notice to the contrary. All such payments and such conversion
shall be valid and effectual to satisfy and discharge the liability upon the
Series C Preferred Stock to the extent of the sum or sums so paid or the
conversion so made.
SECTION 9.3 NOTICE OF CERTAIN EVENTS. In the case of the occurrence of
any event described in Sections 6.1, 6.6 or 6.7 of this Certificate of
Designations, the Corporation shall cause to be mailed to the Holder of the
Series C Preferred Stock at its last address as it appears in the Corporation's
security registry, at least twenty (20) days notice is not possible, at the
earliest possible date prior to any such record, effective or expiration date),
a notice stating (x) the date on which a record is to be taken for the purpose
of such dividend, distribution, issuance or granting rights, options or
warrants, or if a record is not to be taken, the date as of which the holders of
record of Series C Preferred Stock to be entitled to such dividend,
distribution, issuance or granting of rights, options or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding-up is expected to
become effective, and the date as of which it is expected that holders of record
of Series C Preferred Stock will be entitled to exchange their shares for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale transfer, dissolution, liquidation or winding-up.
SECTION 9.4 REGISTER. The Corporation shall keep at its principal
office a register in which the Corporation shall provide for the registration of
the Series C Preferred Stock. Upon any transfer of the Series C Preferred Stock
in accordance with the provisions hereof, the Corporation shall register such
transfer on the Series C Preferred Stock register.
The Corporation may deem the person in whose name the Series C
Preferred Stock shall be registered upon the registry books of the Corporation
to be, and may treat it as, the absolute owner of the Series C Preferred Stock
for the purpose of receiving payment of dividends on the Series C Preferred
Stock and for all other purposes, and the Corporation shall not be affected by
any notice to the contrary. All such payments and such conversions shall be
valid and effective to satisfy and discharge the liability upon the Series C
Preferred Stock to the extent of the sum or sums so paid or the conversion or
conversions so made.
SECTION 9.5 WITHHOLDING. To the extent required by applicable law, the
Corporation may withhold amounts for or on account of any taxes imposed or
levied by or on behalf of any taxing authority in the United States having
jurisdiction over the Corporation from any payments made pursuant to the Series
C Preferred Stock.
15
<PAGE>
SECTION 9.6 HEADINGS. The headings of the Articles and Section s of
this Certificate of Designations are inserted for convenience only and do not
constitute a part of this Certificate of Designations.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designations, Preferences and Rights to be signed by its duly authorized officer
on this 30th day of July, 1998.
CALIFORNIA PRO SPORTS, INC.
By: /S/ BARRY HOLLANDER
--------------------------
Name: Barry Hollander
Title: Acting President
16
<PAGE>
[FORM OF CONVERSION NOTICE]
TO:__________________________
__________________________
__________________________
The undersigned owner of this Series C 4% Convertible Preferred Stock (the
"Series C Preferred Stock") issued by California Pro Sports, Inc. (the
"Corporation") hereby irrevocably exercises its option to convert ________
shares of the Series C Preferred Stock into shares of the common stock, $.01 par
value, of the Corporation ("Common Stock"), in accordance with the terms of the
Certificate of Designations. The undersigned hereby instructs the Corporation to
convert the number of shares of the Series C Preferred Stock specified above
into Shares of Common Stock Issued at Conversion in accordance with the
provisions of Article 6 of the Certificate of Designations. The undersigned
directs that the Common Stock issuable and certificates therefor deliverable
upon conversion, the Series C Preferred Stock recertificated, if any, not being
surrendered for conversion hereby, together with any check in payment for
fractional Common Stock, be issued in the name of and delivered to the
undersigned unless a different name has been indicated below. All capitalized
terms used and not defined herein have the respective meanings assigned to them
in the Certificate of Designations.
Dated:_______________________
_____________________________
Signature
Fill in for registration of Series C Preferred Stock:
Please print name and address
(including zip code number):
________________________________________________________________________________
________________________________________________________________________________
17
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
CALIFORNIA PRO SPORTS, INC.
(a Delaware corporation)
CALIFORNIA PRO SPORTS, INC., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware:
DOES HEREBY CERTIFY:
1. The following resolution has been adopted by the board of directors
and a majority of the stockholders of the Corporation in accordance with Section
242 of the Delaware General Corporation Law for the purpose of amending the
corporation's Certificate of Incorporation. The resolution setting forth the
proposed amendment is as follows:
RESOLVED, that the Certificate of Incorporation of the
Corporation be amended by changing Section A of the Article thereof
numbered "FOURTH" so that, as amended, said Section A of Article FOURTH
shall be and read as follows:
FOURTH: A: The total number of shares of capital stock which the
corporation is shall have authorized to issue is Twenty Five Million
(25,000,000) shares, Twenty Million (20,000,000) shares of Common Stock
$.01 par value (the "Common Stock"), and Five Million (5,000,000)
shares of Preferred Stock, $.01 par value.
FURTHER RESOLVED, that the capital of said Corporation shall
be revised by reason of said amendment to transfer from capital to
surplus an amount in the recapitalization.
2. That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, CALIFORNIA PRO SPORTS, INC. has caused this
certificate to be signed by its duly authorized officer, this 22nd day of July,
1998.
CALIFORNIA PRO SPORTS, INC.
/S/ BARRY HOLLANDER
Barry Hollander, Acting President
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Registrant's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1998, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,141,599
<SECURITIES> 0
<RECEIVABLES> 621,504
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,740,783
<PP&E> 68,660
<DEPRECIATION> 403,393
<TOTAL-ASSETS> 3,516,179
<CURRENT-LIABILITIES> 1,637,212
<BONDS> 0
0
13,291
<COMMON> 74,969
<OTHER-SE> 1,370,441
<TOTAL-LIABILITY-AND-EQUITY> 3,516,179
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 885,631
<OTHER-EXPENSES> 301,564
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,345
<INCOME-PRETAX> (1,222,313)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,222,313)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
