SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the
[X] Definitive Proxy Statement Commission Only (as permitted
[ ] Definitive Additional Materials by Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
KAHALA CORP.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
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[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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2) Aggregate number of securities to which transaction applies:
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to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
1) Amount previously paid:
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KAHALA CORP.
NOTICE OF 2002
ANNUAL MEETING OF STOCKHOLDERS
AND PROXY STATEMENT
KAHALA CORP.
November 8, 2002
Dear Stockholder:
On behalf of the Board of Directors, it is my pleasure to invite you to
attend the Annual Meeting of Stockholders of Kahala Corp. (formerly known as
Sports Group International, Inc.) on December 10, 2002 at 4:00 p.m., at Kahala
Corp.'s corporate headquarters, located at 7730 E. Greenway Road, Suite 104,
Scottsdale, Arizona 85260. Information about the meeting is presented on the
following pages.
In addition to the formal items of business to be brought before the
meeting, members of management will report on the Company's operations and
answer stockholder questions.
Your vote is very important. Please ensure that your shares will be
represented at the meeting by completing, signing, and returning your proxy card
in the envelope provided, even if you plan to attend the meeting. Sending us
your proxy will not prevent you from voting in person at the meeting should you
wish to do so.
Sincerely,
/s/ Kevin Blackwell
Kevin Blackwell
Chairman of the Board & C.E.O.
KAHALA CORP.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To our Shareholders:
The Annual Meeting of Stockholders of Kahala Corp. (the "Company") will be
held at the Company's corporate headquarters, 7730 E. Greenway Road, Suite 104,
Scottsdale, Arizona 85260 on December 10, 2002, at 4:00 p.m. local time, for the
following purposes:
1. To approve an amendment to the Company's Articles of Incorporation to
divide the Board of Directors of the Company into two classes;
2. To elect six directors of the Company, five directors in one class and one
director in the second class, to serve for the ensuing year;
3. To approve and ratify the selection of Epstein, Weber & Conover, P.L.C. as
independent auditors for the Company for the 2002 fiscal year;
4. To approve an Amendment to the Company's Articles of Incorporation to
authorize 500,000 shares of an additional series of the Company's Preferred
Stock; and
5. To transact any other business as may properly come before the Annual
Meeting.
The Board of Directors has fixed the close of business on November 15,
2002, as the record date for the determination of stockholders entitled to
notice of and to vote at the Annual Meeting. Shares of common stock can be voted
at the Annual Meeting only if the holder is present at the Annual Meeting in
person or by valid proxy.
YOUR VOTE IS IMPORTANT. TO ENSURE YOUR REPRESENTATION AT THE ANNUAL
MEETING, YOU ARE REQUESTED TO PROMPTLY DATE, SIGN AND RETURN THE ACCOMPANYING
PROXY CARD IN THE ENCLOSED ENVELOPE.
By Order of The Board of Directors,
/s/ David Guarino
David Guarino
Secretary
Scottsdale, Arizona
November 8, 2002
KAHALA CORP.
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Kahala Corp. (formerly known as Sports
Group International, Inc.) (the "Company") for use at the Annual Meeting of
Stockholders of the Company to be held at the time and place and for the
purposes set forth in the foregoing Notice of Annual Meeting of Stockholders.
THE ENCLOSED PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY. If not
otherwise specified, all proxies received pursuant to the solicitation will be
voted FOR the amendment to the Company's Articles of Incorporation to divide the
Board of Directors into two classes, FOR the nominees named below by class in
the election of Directors, FOR the ratification of Epstein, Weber & Conover,
P.L.C. as the Company's independent public accountants for the 2002 fiscal year,
and FOR the amendment to the Company's Articles of Incorporation to authorize
500,000 shares of an additional series of Preferred Stock. The address of the
Company's principal executive offices is 7730 E. Greenway Rd., Suite 104,
Scottsdale, Arizona 85260. This Proxy Statement, proxy card, and the Company's
2001 Annual Report on Form 10-KSB are being mailed on or about November 18, 2002
to the shareholders of record as of the close of business on November 15, 2002
(the "Record Date").
REVOCABILITY OF PROXY AND VOTING OF PROXY
Returning your Proxy now will not interfere with your right to attend the
Annual Meeting or to vote your shares personally at the Annual Meeting, if you
wish to do so. A proxy given by a stockholder may be revoked at any time before
it is exercised by giving another proxy bearing a later date, by notifying the
Secretary of the Company in writing of such revocation at any time before the
proxy is exercised, or by attending the meeting in person and casting a ballot.
Any proxy returned to the Company will be voted in accordance with the
instructions indicated thereon. If no instructions are indicated on the proxy,
the proxy will be voted for the election of the nominees for Directors named
herein and in favor of all other proposals described herein. Because abstentions
with respect to any matter are treated as shares present or represented and
entitled to vote for the purposes of determining whether that matter has been
approved by the stockholders, abstentions have the same effect as negative
votes. Broker non-votes and shares as to which proxy authority has been withheld
with respect to any matter are not deemed to be present or represented for
purposes of determining whether shareholder approval of that matter has been
obtained. A broker non-vote occurs when a nominee voting shares for a beneficial
owner does not vote on a particular proposal because the nominee does not have
discretionary voting power with respect to the item and has not received voting
instructions from the beneficial owner.
The Company knows of no reason why any of the nominees for the Board of
Directors named herein would be unable to serve. In the event, however, that any
nominee named should, prior to the election, become unable to serve as a
director, the proxy will be voted in accordance with the best judgments of the
persons named therein. The Board of Directors knows of no matters, other than as
described herein, that are to be presented at the meeting, but if matters other
than those herein mentioned properly come before the meeting, the proxy will be
voted by the persons named in a manner that such persons, in their judgment,
consider to be in the best interests of the Company.
COST OF PROXY SOLICITATION
The Company will bear the cost of the solicitation of proxies, which will
be nominal and will include reimbursements for the charges and expenses of
brokerage firms and others for forwarding solicitation material to beneficial
owners of the outstanding common stock and preferred stock of the Company.
Proxies will be solicited my mail, and may also be solicited personally by
directors, officers, or regular employees of the Company, who will not be
compensated for their services.
RECORD DATE AND VOTING SECURITIES OUTSTANDING
Only stockholders of record at the Record Date are entitled to vote at the
Annual Meeting, either in person or by valid proxy. Ballots cast at the Annual
Meeting will be counted by the Inspector of Elections, and the results of all
ballots cast will be announced at the Annual Meeting.
As of the Record Date, there were 22,317,875 shares of the Company's common
stock issued and outstanding ("Common Stock"), 575,000 shares of Series A
Preferred Stock issued and outstanding ("Series A Preferred"), 650,000 shares of
Series B Preferred Stock issued and outstanding ("Series B Preferred"), and
160,000 shares of Series C Preferred Stock issued and outstanding ("Series C
Preferred"). Shareholders of the Common Stock are entitled to one vote for each
share of Common Stock held as of the Record Date. Shareholders of the Series A
Preferred, Series B Preferred, and Series C Preferred are entitled to 12, 12,
and 10 votes, respectively, for each preferred share held as of the Record Date.
ANNUAL REPORT ON FORM 10-KSB
The Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2001 (the "Annual Report"), which is being mailed to stockholders
with this Proxy Statement, contains financial and other information about the
Company, but is not incorporated into this Proxy Statement and is not to be
considered a part of these proxy soliciting materials or subject to Regulations
14A or 14C or to the liabilities of Section 18 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The Company will provide to each
stockholder as of the Record Date a copy of any exhibits listed in the Annual
Report, upon receipt of a written request and a check for $20.00 to cover the
Company's expense in furnishing such exhibits. Any such requests should be
directed to the Company's Secretary at the Company's executive offices set forth
in this Proxy Statement.
PROPOSAL NUMBER ONE
APPROVAL OF AMENDMENT TO ARTICLES OF INCORPORATION
TO DIVIDE BOARD OF DIRECTORS INTO CLASSES
Currently, the Company's Board of Directors is comprised of six members,
each with equal classification and voting rights on matters before the full
Board. The Board of Directors has approved an amendment to the Company's
Articles of Incorporation that would divide the Board of Directors into two
separate classes, Class 1 Directors and Class 2 Directors.
Of the Company's total number of directors, not less than one and nor more
than two shall be designated Class 2 Directors, with all other directors being
designated Class 1 Directors. Class 1 Directors shall have one (1) vote on
matters before the Board, with the Class 2 Director having two (2) votes on
matters before the Board. Both classes of directors shall continue to be elected
by the Company's shareholders and will continue to serve one (1) year terms. The
purpose of this Amendment to divide the Board into classes with differing voting
powers is to allow individual director nominees of current and future
significant shareholders of the Company to have greater voting power on the
Company's Board of Directors.
Appendix "A" attached to this Proxy Statement sets forth the proposed
amendment to the Company's Articles of Incorporation to divide the Board into
two classes, with one class having greater voting rights.
VOTE REQUIRED AND RECOMMENDATIONS
The affirmative vote of a majority of the shares of Common Stock, Series A
Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock present
at the Annual Meeting or represented by Proxy is required for approval of this
proposal. For purposes of this proposal, abstentions shall be treated as
negative votes, and broker non-votes shall not be deemed present or represented
in determining shareholder approval. THE BOARD OF DIRECTORS RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR APPROVAL OF THE AMENDMENT TO THE COMPANY'S ARTICLES OF
INCORPORATION TO DIVIDE THE BOARD INTO TWO CLASSES, WITH ONE CLASS HAVING
GREATER VOTING RIGHTS.
PROPOSAL NUMBER TWO
ELECTION OF DIRECTORS
Subject to the adoption by the Company's shareholders of the amendment to
the Company's Articles of Incorporation contained in Proposal Number One above,
the Board of Directors has set the number of directors at six, and six directors
have been nominated for election to the Board, with five directors designated
Class 1 Directors and one director designated a Class 2 Director. The six
Directors of the Company are to be elected to hold office until the next annual
meeting and until their successors shall be duly elected and qualified.
If the amendment contained in Proposal Number One above is adopted by the
Company's shareholders, each of the Class 1 directors elected shall have one
vote and the sole Class 2 director elected shall have two votes on matters set
before the Board for vote. If the amendment contained in Proposal Number One
above is not adopted by the Company's shareholders, each of the directors
elected will not be separately classified and each will have one vote on matters
before the Board.
VOTE REQUIRED AND RECOMMENDATION
The affirmative vote of a majority of the shares of Common Stock, Series A
Preferred, Series B Preferred, and Series C Preferred present or represented by
proxy and voting at the Annual Meeting of Stockholders is required for approval
of this proposal. Stockholders may not cumulate their votes in the election of
directors. Each Nominee has consented to serve. For purposes of this proposal,
abstentions shall be treated as negative votes, and broker non-votes shall not
be deemed present or represented in determining shareholder approval.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
FOR ALL SIX OF THE DIRECTOR NOMINEES IN THE CLASSIFICATIONS SET FORTH BELOW.
Kevin Blackwell and David Guarino, who collectively have voting power over
approximately 30.0% of the issued and outstanding shares of the Company's common
and preferred stock as of the Record Date, have indicated that they will vote
their shares for the election of all Director nominees in the classifications
set forth below.
DIRECTOR DIRECTOR
NOMINEE NAME CLASS AGE SINCE POSITIONS AND OFFICES HELD
------------ ----- --- ----- --------------------------
Kevin Blackwell Class 1 47 1999 Chairman, CEO & Director
Robert Corliss Class 1 49 1999 Director
David Guarino Class 1 38 1999 Vice President & Director
Alexandria Phillips Class 2 53 2001 Director
Don Plato Class 1 47 1999 Director
Haresh Shah Class 1 44 2000 Director
BIOGRAPHICAL INFORMATION RELATED TO DIRECTORS OF THE COMPANY
Biographical Information about each nominee for director is given below:
KEVIN BLACKWELL has been Chairman, CEO and a Director of the Company since
March 15, 1999. Prior to March 1999, Mr. Blackwell was President and Director of
Surf City Squeeze, Inc. ("Surf City Squeeze"), now a wholly owned subsidiary of
the Company, for more than five years. Mr. Blackwell, and his wife Kathryn,
founded the Surf City Squeeze juice bar concept in 1981. Mr. Blackwell also
serves on the Company's Compensation Committee. Mr. Blackwell attended Eastern
Washington University, where his studies emphasized mathematics and business
law.
ROBERT CORLISS has been President and CEO of Athlete's Foot Group, Inc.
from August 1998 to the present. Prior to August 1998, he was President and CEO
of Infinity Sports, and prior to that, he was President and CEO of Herman's
Sporting Goods, Inc. Mr. Corliss also serves on the Company's Audit and
Compensation Committees.
DAVID GUARINO is currently Vice-President-Chief Financial Officer and a
director of the Company. From March 15, 1999 to October 12, 1999, Mr. Guarino
was a consultant to the Company. From April 1997 to March 1999, and again from
December 1995 to July 1996, Mr. Guarino served as Vice-President-Chief Financial
Officer of Surf City Squeeze. Mr. Guarino was also a director of Surf City
Squeeze from January 1998 to March 1999, and from December 1995 to July 1996.
Prior to his employment with Surf City Squeeze, Mr. Guarino served as Senior
Vice-President - Principal Financial Officer of TLC Beatrice International
Holdings, Inc. Mr. Guarino graduated from the University of Denver in 1985 with
a Masters and a Bachelors of Science degree in accounting.
ALEXANDRIA PHILLIPS is and has been a financial advisor and consultant to
Mr. Robert Petersen and his related companies for the past five years. Mr.
Robert Petersen, through a living trust, is the Company's largest single
shareholder. Ms. Phillips also holds a Certified Public Accountant's license in
the state of California.
DON PLATO has been Chairman of Builder's National, Inc., a commercial and
residential general contractor, for more than five years. Mr. Plato and his wife
founded Builders National in 1993. Mr. Plato was also a member of Surf City
Squeeze's Official Committee of Unsecured Creditors ("Unsecured Committee") from
January 1997 to November 1997. Since November 1997, Mr. Plato has been a member
of Surf City Squeeze's Creditors' Representative Committee, which is the
successor to the Unsecured Creditor's Committee. Mr. Plato also serves on the
Company's Audit and Compensation Committees.
HARESH SHAH is and has been an entrepreneur and private investor for the
past five years. Mr. Shah has vast holdings, including ownership of franchised
motels, franchised retail food outlets, convenience stores, commercial real
estate and apartment complexes throughout the midwestern United States and
select foreign countries. Mr. Shah is also President of Rilwala Foods, Inc., an
area developer of certain of the Company's franchise concepts in the midwest,
and President of Rilwala Group, Inc., a significant shareholder in the Company
and master developer of certain of the Company's franchise concepts throughout
the world.
There are no family relationships among the directors and director nominees
for the Company. Mr. Blackwell and Mr. Guarino were each officers of Surf City
Squeeze, Inc., which filed for Chapter 11 bankruptcy on January 13, 1997. Surf
City Squeeze, Inc. is currently operating under its Plan of Reorganization
approved by the applicable bankruptcy court.
MEETINGS AND COMPENSATION OF THE BOARD OF DIRECTORS
During 2001, the Board of Directors held two (2) formal meetings, and acted
by unanimous written consent and through teleconference meetings three times
during the fiscal year ending December 31, 2001. The Board of Directors was
comprised of six members for its first formal meeting until December 12, 2001,
when the Board of Directors was expanded to seven members at the Company's
Annual Meeting of Shareholders. The second formal meeting of the Company's Board
of Directors during 2001 took place immediately after the 2001 Annual Meeting of
Shareholders on December 12, 2001. For the first meeting, all six of then
Board's members were in attendance, constituting a quorum. For the second
meeting held on December 12, 2001, all seven of the Board's members were in
attendance, constituting a quorum. During 2001, the Compensation Committee held
one (1) meeting, at which all three members were present. The Audit Committee
also held one (1) meeting during fiscal year 2001, at which both members were
present. In addition to regularly scheduled meetings, all of the Directors were
involved in numerous informal discussions with management, offering advice,
guidance, and suggestions on a broad range of corporate matters.
The independent members of the Company's Board of Directors (directors who
are not employees or 10% shareholders of the Company) automatically receive, as
compensation for their services, a one-time grant of a nonqualified stock option
to purchase 10,000 shares of the Company's Common Stock at a price equal to 85%
of the Common Stock's fair market value on the date the option is granted. This
option grant is made upon the independent director's election to the Board of
Directors. Upon their election to the Company's Board of Directors in October,
1999, Mr. Corliss and Mr. Plato were each granted a nonqualified option to
purchase 10,000 shares of the Company's Common Stock at $0.16 per share
(calculated as 85% of the Company's Common Stock market price on the date of
grant). Upon Mr. Shah's election to the Company's Board of Directors on December
28, 2000, he was granted a nonqualified option to purchase 10,000 shares of the
Company's Common Stock at $0.13 per share (calculated as 85% of the Company's
Common Stock market price on the date of grant). Upon Ms. Phillip's election to
the Company's Board of Directors on December 12, 2001, she was granted a
nonqualified option to purchase 10,000 shares of the Company's Common Stock at
$0.07 per share (calculated as 85% of the Company's Common Stock market price on
the date of grant). The independent directors are also paid all reasonable
travel expenses to attend the Company's Board meetings, wherever held.
Otherwise, directors of the Company receive no additional compensation for their
services, including participation on committees and special assignments.
AUDIT COMMITTEE AND COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors for all of 2001 was
composed of Mr. Kevin Blackwell, Mr. Robert Corliss, and Mr. Don Plato. The
Compensation Committee's duties include administering grants under the Company's
1999 Stock Option Plan, reviewing all aspects of compensation of executive
officers of the Company, and making recommendations on such matters to the full
Board of Director. The Compensation Committee met once during 2001 to approve
the following items: (i) the Company's grant of stock options to Kevin
Blackwell, David Guarino, and Michael Reagan, the Company's Chairman & CEO, Vice
President & CFO, and Vice President & General Counsel, respectively; and (ii) to
amend the employment agreements of Mssrs. Blackwell and Guarino for the sole
purpose of increasing their annual salaries to $186,000 and $160,000 per annum,
respectively, both increases effective July 1, 2001.
The Audit Committee is responsible for reviewing the accounting principles,
policies and practices followed by the Company in accounting for and reporting
its financial results of operations and for selecting and meeting with the
Company's independent public accountants. In this function, the Audit Committee
makes recommendations to the Board of Directors concerning the selection of
independent public accountants, reviews the Company's financial reports,
earnings records, reports filed with the Securities and Exchange Commission and
consolidated financial statements, the Company's internal controls, and
considers such other matters in relation to the external and internal audit and
the financial affairs of the Company as may be necessary or appropriate in order
to facilitate accurate and timely financial reporting.
The Audit Committee of the Board of Directors for 2001 was composed of Mr.
Robert Corliss and Mr. Don Plato. The Audit Committee met once during the year
ended December 31, 2001, and also informally communicated with the Company's
independent auditors throughout the year. The Audit Committee operates under a
written Audit Committee Charter adopted by the Company's Board of Directors on
December 9, 1999.
The members of the Audit Committee are independent in that they are not
officers or employees of the Company. The members do not have relationships
which, in the opinion of the Board of Directors, would interfere with the
exercise of independent judgment in carrying out the responsibilities of a
director serving on this committee.
In performing its duties, the Audit Committee, as required by applicable
Securities & Exchange Commission Rules, issues a report recommending to the
Board of Directors that the Company's audited financial statements be included
in the Company's Annual Report on Form 10-KSB, and certain other matters,
including the independence of the Company's outside public accountants. The
REPORT OF THE AUDIT COMMITTEE is set forth below.
The REPORT OF THE AUDIT COMMITTEE shall not be deemed to be incorporated by
reference into any filing made by the Company under the Securities Act of 1933
or the Securities Exchange Act of 1934, notwithstanding any general statement
contained in any such filings incorporating this Proxy Statement by reference,
except to the extent the Company incorporates such report by specific reference.
REPORT OF
THE AUDIT COMMITTEE
OF KAHALA CORP.
The Board of Directors of the Company has appointed an Audit Committee. The
functions of the Audit Committee are focused on: (1) the adequacy of the
Company's internal controls and financial reporting process and the reliability
of the Company's financial statements, (2) the independence of the Company's
external auditors, and (3) the Company's compliance with legal and regulatory
requirements.
The Audit Committee meets periodically both formally and informally to
discuss the adequacies of the Company's internal financial controls and the
objectivity of its financial reporting. The Committee also meets with the
Company's independent auditors.
For the fiscal year ending December 31, 2001, Robert Corliss and Don Plato
comprised the Audit Committee.
The Company retains independent public accountants who are responsible for
conducting an independent audit of the Company's financial statements, in
accordance with generally accepted auditing standards and issuing a report
thereon. In performing its duties, the Audit Committee has discussed the
Company's financial statements with management and the Company's independent
auditors and, in issuing this report, has relied upon the responses and
information provided to the Audit Committee by each of them.
Management of the Company has primary responsibility for the Company's
financial statements and the overall reporting process, including maintenance of
the Company's system of internal controls. The independent auditors audit the
annual financial statements prepared by management, and express an opinion as to
whether those financial statements fairly present the financial position,
results of operation and cash flows of the Company in conformance with generally
accepted accounting principles, and discuss with the Audit Committee any issues
they believe should be raised.
For the fiscal year ending December 31, 2001, the Audit Committee:
(1) Reviewed and discussed the audited financial statements with
management of the Company;
(2) Discussed with Epstein, Weber & Conover, P.L.C., the independent
auditors of the Company, the matters required to be discussed by
Statement on Accounting Standards No. 61 (communications with Audit
Committees); and
(3) Reviewed and discussed the written disclosures and the letter from the
Company's independent auditors the matters relating to the auditor's
independence from the Company.
Based upon the Audit Committee's review and discussion of the matters
above, the Audit Committee recommends to the Board of Directors of the Company
that the audited financial statements be included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 2001, filed with the Securities
and Exchange Commission.
Robert Corliss, Member April 24, 2002
Don Plato, Member April 24, 2002
CERTAIN RELATIONSHIPS AND REALTED TRANSACTIONS
During the second quarter of 2000, the Company purchased the Rollerz
concept and related assets from a corporation owned and controlled by the
Company's President and CEO, Kevin Blackwell and his wife, Kathryn Blackwell
(the "Blackwells"), for $100,000 in cash and a $200,000 promissory note (the
"Rollerz Transaction"). The Rollerz Transaction was unanimously approved by the
independent directors of the Company's Board of Directors. From the Rollerz
Transaction, the Company obtained sole ownership of the Rollerz brand name and
concept, recipes and related intangible assets, and the assets and related
operational rights to the sole Rollerz outlet at such time located in an office
building in downtown Phoenix, Arizona. The $200,000 promissory note payable to
the Blackwells (the "Rollerz Note") has a three year maturity, bears interest at
8% per annum, and provides for monthly payments of principal and interest. As of
December 31, 2001, the outstanding principal balance of the Rollerz Note is
$119,883.
On January 10, 2000, the Company obtained a $1,000,000 credit facility
comprised of a $800,000 term note and a $200,000 revolving line of credit from
Wells Fargo, N.A. which bears interest at the Fed Funds Rate, plus 0.42%. The
term note portion is payable on January 31, 2003, and the revolving line of
credit portion is due and payable on March 1, 2003. The $1,000,000 credit
facility is personally guaranteed by the R.E.& M. Petersen Living Trust (the
"Petersen Trust"), which is also a major shareholder of the Company. In April,
2001, the credit facility was modified to increase the amount of the revolving
line of credit portion of the facility from $200,000 to $500,000. The Company
initially compensated the Petersen Trust for its guaranty of the $1,000,000
credit facility by reducing the exercise price of the Petersen Trust's warrant
to purchase 1,000,000 shares of the Company's Common Stock from $2.00 to $0.40
per share. As additional consideration for the Petersen Trust's guaranty and
actions that allowed the $200,000 revolving line of credit to be increased from
$200,000 to $500,000 in April, 2001, the Company reduced that exercise price of
the same warrant for 1,000,000 shares held by the Petersen Trust from $0.40 per
share to $0.20 per share. The Company could not have obtained the $1,000,000
credit facility or the above-referenced increase in the revolving line of credit
during 2001 without the Petersen Trust's guaranty. The entire credit facility,
including the newly expanded $500,000 line of credit, was also guaranteed by Mr.
Kevin Blackwell and Mr. Davis Guarino, each of whom is an officer, director, and
major shareholder of the Company. Mr. Blackwell and Mr. Guarino received no
additional compensation for their guarantees. Management believes that the
compensation paid for the Petersen Trust guaranties was on terms as favorable to
the Company as could have been obtained with respect to a comparable transaction
from an unrelated third party.
On February 22, 1999, the Petersen Trust loaned a subsidiary of the Company
(the "Subsidiary") $332,500 pursuant to a promissory note (the "Petersen Note").
The note bears interest at 10% per annum, matured March 1, 2001, and provided
for monthly principal and interest payments. The Petersen Note was paid off in
full during the first half of 2001. Messrs. Blackwell and Guarino personally
guaranteed the Subsidiary's obligations under the Petersen Note, but received no
additional compensation for their guarantees. The Company's management believes
the terms of the Petersen Note were as favorable or more favorable to the
Company as those terms the Company could have obtained for a loan of the same
size and maturity from an unrelated third party through arm's length
negotiation.
Mr. Plato, an independent director of the Company, is a shareholder of a
corporation that is an unsecured creditor in Surf City Squeeze, Inc.'s Chapter
11 Bankruptcy and subsequent Plan of Reorganization. Surf City Squeeze, Inc. is
an indirect subsidiary of the Company. Mr. Plato's corporation has an unsecured
claim of approximately $109,000, and is currently receiving payments from the
unsecured creditors distribution account pursuant to the terms of the Plan of
Reorganization. Additionally, Builders National, Inc., the company Mr. Plato is
a shareholder in, performed certain general contracting services for the Company
during 2000 and 2001 relating to the design and build out of certain
company-owned locations of the Company's four concepts. The Company contracted
for $356,347 and $43,497 of work with Builders National, Inc. during 2000 and
2001, respectively, of which $78,794 and $46,494 was outstanding as of December
31, 2000 and December 31, 2001, respectively. The Company's management believes
that the quality and pricing of Builders National, Inc.'s design and general
contracting services performed for the Company in 2000 and 2001 is as favorable
or more favorable to the Company as the quality and pricing the Company could
have obtained from an unrelated third party general contractor through arm's
length negotiation.
Ms. Phillips, an independent director of the Company, also serves as a
co-manager of R 1 Franchise Systems, L.L.C., a wholly-owned subsidiary of the
Company. The other manager of R 1 Franchise Systems, L.L.C. is Kahala Corp. In
her capacity as a co-manager, Ms. Phillips, along with Kahala Corp., has the
authority, power, and discretion to make decisions and take all reasonable
actions deemed necessary to accomplish the business and objectives of R 1
Franchise Systems, L.L.C.
Harry Shah, an independent director of the Company, is a significant
shareholder and controlling principal in both Rilwala Foods, Inc. and Rilwala
Group, Inc. Rilwala Foods, Inc. is an Area Representative of the Company for the
states of Illinois, Michigan, and Wisconsin, and contracted with the Company
during 2001 to receive a portion of the Company' royalties collected from its
franchised locations within the state of Illinois. Rilwala Group, Inc. owns 100%
of the Company's issued and outstanding Series C Preferred Stock. Rilwala Group,
Inc. is also the Master Developer of four of the Company's five retail food
concepts throughout the world under a Master Development Agreement with the
Company. The only concept not included under the Master Development Agreement is
Ranch * 1. Mr. Shah's wife is a shareholder in R.B. Texas Collections, Inc., an
entity who contracted with the Company during 2001 to receive a portion of the
Company's royalties collected from its franchised locations within the state of
Texas (the "Texas Royalty Financing"). As part of the Texas Royalty Financing,
Mr. Shah and another shareholder of both Rilwala Group, Inc. and Rilwala Foods,
Inc. each received a $50,000 commission from the Company for assisting with the
consummation of the Texas Royalty Financing. Mr. Shah or companies he controls,
through both direct and indirect relationships, also owns portions of an entity
that is the Area Representative of the Company for the state of Texas and
ownership interests in three franchised Frullati Cafe & Bakery locations in the
Chicago, Illinois area. Mr. Shah is the brother-in-law of one of the four
principals in the entity that is an Area Representative of the Company for the
states of New Jersey, Pennsylvania, and Delaware.
COMPLIANCE WITH SECT. 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers (including a person performing a policy-making
function) and persons who own more than 10% of a registered class of our equity
securities ("10% Holders") to file with the Securities and Exchange Commission
("SEC") initial reports of ownership and reports of changes in ownership of the
Company's common stock and other equity securities. Directors, officers and 10%
Holders are required by SEC regulations to furnish the Company with copies of
all of the Section 16(a) reports they file. Based solely upon such reports and
except as detailed below, we believe that during the fiscal year ending December
31, 2001, all of the Company's directors, advisors, officers and 10% Holders
complied with all filing requirements under Section 16(a) of the Exchange Act.
On May 23, 2002, Alexandria Phillips and Haresh Shah each filed a Form 3
required as a result of their election to the Company's Board of Directors on
December 12, 2001 and December 28, 2000, respectively. Also on May 23, 2002,
Nicole Rayborn and John Brunn each filed a Form 3 required as a result of their
respective appointments to Vice Presidents of the Company in December, 2001. On
May 23, 2002, Robert Petersen, Kevin Blackwell, David Guarino, Michael Reagan,
and Robert Corliss each filed a Form 5 to update their ownership in the Company
as of December 31, 2001.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of October 31, 2002, the number and
percentage of outstanding shares of Company's Common Stock, assuming the
Company's Series A, B, and C Preferred Stock are converted to Common Stock at
their respective conversion ratios, beneficially owned by each person known by
the Company to beneficially own more than 5% of such stock, by each director and
each named executive officer of the Company, and by all directors and executive
officers of the Company as a group. The percentage of beneficial ownership is
based on 40,844,875 common stock equivalents outstanding on October 31, 2002,
including, for each person or group, any securities that person or group has a
right to acquire within sixty (60) days thereof, pursuant to options, warrants,
conversions, privileges or other rights. Unless otherwise indicated, the
following persons or groups have sole voting and investment power with respect
to the number of shares set forth opposite their names:
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS
- ------------------------------------ --------- -----
R.E.& M. Petersen Living Trust 16,574,700 40.58%
6420 Wilshire Blvd., 20th Floor
Los Angeles, CA 90048(1,2)
Weider Health & Fitness Corp.(4) 2,262,462 5.54%
21100 Erwin Street
Woodland Hills, CA 91367
Kevin Blackwell(3,4) 6,274,336 15.36%
7730 E. Greenway Rd., Suite 104
Scottsdale, AZ 85260
David Guarino(4,5) 6,433,345 15.75%
7730 E. Greenway Rd., Suite 104
Scottsdale, AZ 85260
Robert Corliss(4,6) 297,738 0.7%
7730 E. Greenway Rd., Suite 104
Scottsdale, AZ 85260
Harry Shah/Rilwala Group, Inc.(7,8) 2,647,594 6.48%
6677 N. Lincoln Avenue
Lincolnwood, IL 60712
John Brunn(9) 115,000 0.2%
7730 E. Greenway Road, Suite 104
Scottsdale, Arizona 85260
- ----------
(1) Mr. Robert E. Petersen, and his wife, Margaret M. Petersen, are the
beneficiaries of the R.E.M. Petersen Living Trust, (the "Petersen Trust").
(2) The Petersen Trust owns 650,000 shares of Series B Preferred Stock that is
convertible into the Company's Common Stock at the ratio of 12 common
shares for each share of Series B Preferred Stock. The Petersen Trust also
holds an immediately exercisable warrant to purchase 1,000,000 common
shares of the Company at the price of $0.20 per share (the "Petersen
Warrant") at any time prior to May 20, 2007. The Petersen Trust's
beneficial ownership shown here assumes its Series B Preferred Stock is
converted into Common Stock and that the Petersen Warrant is fully
exercised.
(3) Includes 366,000 shares subject to stock options currently exercisable or
exercisable within 60 days of October 31, 2002.
(4) There are 575,000 shares of Series A Preferred Stock that are convertible
into the Company's Common Stock at the ratio of 12 common shares for each
share of Series A Preferred Stock. The Series A Preferred Stock is owned as
follows: Mr. Blackwell (225,000 shares), Mr. Guarino (237,500 shares),
Weider Health & Fitness Corporation (100,000 shares) and Mr.Corliss (12,500
shares). The beneficial ownership reported above assumes the Series A
Preferred Stock is converted into the Company's Common Stock.
(5) Includes 366,000 shares subject to stock options currently exercisable or
exercisable within 60 days of October 31, 2002.
(6) Includes 10,000 shares subject to stock options currently exercisable or
exercisable within 60 days of October 31, 2002.
(7) Rilwala Group, Inc. owns 160,000 shares of Series C Preferred Stock that is
convertible into the Company's Common Stock at the ratio of 10 common
shares for each share of the Series C Preferred Stock. Mr. Shah is a
significant shareholder and the controlling principal of Rilwala Group,
Inc. Based upon the control Mr. Shah exercises over Rilwala Group, Inc.,
Mr. Shah's beneficial ownership shown here includes all shares held by
Rilwala Group, Inc. and assumes Rilwala Group, Inc.'s Series C Preferred
Stock is converted into Common Stock.
(8) Includes 12,300 shares held by Mr. Shah's wife and 10,000 shares subject to
stock options currently exercisable or exercisable within 60 days of
October 31, 2002.
(9) Includes 100,000 shares subject to stock options currently exercisable or
exercisable within 60 days of October 31, 2002.
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS
- ------------------------------------ --------- -----
Alexandria Phillips(10) 30,000 --
2041 E. Rosecrans Avenue, Ste 363
El Segundo, CA 90245
Don Plato(11) 10,000 --
c/o Builders National, Inc.
6934 East 5th Avenue
Scottsdale, AZ 85251
Nicole Rayborn(12) 70,000 --
7730 E. Greenway Road, Suite 104
Scottsdale, Arizona 85260
Michael Reagan(13) 270,000 0.6%
7730 E. Greenway Road, Suite 104
Scottsdale, Arizona 85260
All Named Executive Officers and Directors 16,148,013 39.53%
As a Group (nine persons total)
- ----------
(10) Includes 10,000 shares subject to stock options currently exercisable or
exercisable within 60 days of October 31, 2002.
(11) Includes 10,000 shares subject to stock options currently exercisable or
exercisable within 60 days of October 31, 2002.
(12) Includes 70,000 shares subject to stock options currently exercisable or
exercisable within 60 days of October 31, 2002.
(13) Includes 270,000 shares subject to stock options currently exercisable or
exercisable within 60 days of October 31, 2002.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth all compensation
awarded to, earned by, or paid for services rendered to the Company during 1999,
2000, and 2001 by the Company's President and Chief Executive Officer, and other
executive officers who earned more than $100,000 during 2000 and 2001. Please
note that Mr. Kevin Blackwell, the Company's President and Chief Executive
Officer, is the Company's only "named executive officer" within the meaning of
Regulation S-B, Item 402(a)(2), Instruction (1) during the year ending December
31, 1999.
Securities
Other Restricted Underlying
Name and Principle Annual Stock Option / LTIP All Other
Position Year Salary ($) Bonus Compensation Award(s)($) SARs (#) Payouts ($) Compensation($)
-------- ---- ---------- ----- ------------ ----------- -------- ----------- ---------------
Kevin Blackwell 12/31/99 100,000 0 0 0 300,000 0 0
President and CEO 12/31/00 137,500 0 0 0 0 0 11,107
12/31/01 190,917 0 0 0 200,000 0 11,107
David Guarino 12/31/00 125,000 0 0 0 0 0 11,107
Vice-President and CFO 12/31/01 110,417 0 0 0 200,000 0 11,107
John Brunn 12/31/00 100,000 0 0 0 0 0 0
Vice-President - 12/31/01 100,000 0 0 0 0 0 0
Distrib.
Nicole Rayborn - 12/31/01 112,750 0 0 0 0 0 0
VP-Franchising
Other than Mr. Blackwell, no other employee of the Company received more
than $100,000 in annual compensation during fiscal year 1999.
OPTION GRANTS TO NAMED EXECUTIVE OFFICERS IN 2001 FISCAL YEAR
The following table sets forth stock options granted to Named Executive
Officers and other key employees of the Company during 2001:
Number of Percent of
Securities total options/
Underlying SARs granted Exercise of
Options/ SARs to employees base price Expiration
Name/Position granted(#) in fiscal 2000 ($/Sh) date
------------- ---------- -------------- ------ ----
Kevin Blackwell 200,000 30% See (1) Below 05/30/06
Chairman & CEO
David Guarino 200,000 30% See (2) Below 05/30/06
Vice President & CFO
Michael Reagan 270,000 40% See (3) Below 05/30/11
Vice-President
& General Counsel
(1) The following summarizes the exercise prices and vesting of the stock
options issued to Mr. Blackwell during 2001: (i) 100,000 options have an
exercise price of $0.25 per share and vest as follows: (a) one-third vest on the
first anniversary of the grant date if Mr. Blackwell is still employed by the
Company on that date; (b) one-third vest on the second anniversary of the grant
date if Mr. Blackwell is still employed by the Company on that date; and (c)
one-third vest on the third anniversary of the grant date if Mr. Blackwell is
still employed by the Company on that date; and (ii) 100,000 options have an
exercise price of $0.50 per share and vest as follows: (a) one-third vest on the
first anniversary of the grant date if Mr. Blackwell is still employed by the
Company on that date; (b) one-third vest on the second anniversary of the grant
date if Mr. Blackwell is still employed by the Company on that date; and (c)
one-third vest on the third anniversary of the grant date if Mr. Blackwell is
still employed by the Company on that date.
(2) The following summarizes the exercise prices and vesting of the stock
options issued to Mr. Guarino during 2001: (i) 100,000 options have an exercise
price of $0.25 per share and vest as follows: (a) one-third vest on the first
anniversary of the grant date if Mr. Guarino is still employed by the Company on
that date; (b) one-third vest on the second anniversary of the grant date if Mr.
Guarino is still employed by the Company on that date; and (c) one-third vest on
the third anniversary of the grant date if Mr. Guarino is still employed by the
Company on that date; and (ii) 100,000 options have an exercise price of $0.50
per share and vest as follows: (a) one-third vest on the first anniversary of
the grant date if Mr. Guarino is still employed by the Company on that date; (b)
one-third vest on the second anniversary of the grant date if Mr. Guarino is
still employed by the Company on that date; and (c) one-third vest on the third
anniversary of the grant date if Mr. Guarino is still employed by the Company on
that date.
(3) The following summarizes the exercise prices and vesting of the stock
options issued to Mr. Reagan during 2001: (i) 90,000 options have an exercise
price of $0.25 per share and vest on the first anniversary of the grant date if
Mr. Reagan is still employed by the Company on that date; (ii) 90,000 options
have an exercise price of $0.50 per share and vest on the second anniversary of
the grant date if Mr. Reagan is still employed by the Company on that date; and
(iii) 90,000 options have an exercise price of $0.75 per share and vest on the
third anniversary of the grant date if Mr. Reagan is still employed by the
Company on that date.
Vested options terminate if not exercised ten years after grant (or five
years in the case of an optionee who controls more than 10% of the total
combined voting power of all classes of stock of the Company) or 90 days after
an employee leaves the Company.
AGGREGRATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
# Shares
Acquired
on Value Number of Unexercised Securities Value of Unexercised In-The-Money
Exercise Realized Underlying Options at 12/31/01 Options at 12/31/01
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable (4)
---- -------- -------- ------------------------- -----------------------------
Kevin Blackwell 0 0 200,000/300,000 0/0
John Brunn 0 0 66,666/33,333 0/0
David Guarino 0 0 200,000/300,000 0/0
Nicole Rayborn 0 0 46,667/23,333 0/0
Michael Reagan 0 0 90,000/450,000 0/0
(4) The dollar values are calculated by determining the difference between
$0.10 per share, the fair market value of the Company's Common Stock at December
31, 2001, and the exercise price of the respective options.
EMPLOYMENT CONTRACTS
The Company currently has employment agreements in effect with two of its
Named Executive Officers. The Company is a party to a three-year employment
contract, beginning October 1, 1999, with Mr. Kevin Blackwell for his services
as President and CEO of the Company and Mr. David Guarino for his services as
Vice-President-Chief Financial Officer of the Company. Both of these employment
agreements have been approved and ratified by both of the independent directors
of the Board of Director's Compensation Committee.
The Blackwell Contract and Guarino Contract both originally provided for an
annual base salary of $150,000, an automobile allowance set by the Company's
Board of Directors, and other fringe benefits that are also made available to
other employees of the Company. Both the Blackwell Contract and the Guarino
Contract were amended effective July 1, 2001 by the independent members of the
Compensation Committee of the Company's Board of Directors at a meeting held on
May 30, 2001. The Blackwell Contract was amended to increase Mr. Blackwell's
annual base salary from $150,000 to $186,000 effective July 1, 2001 until the
end of the three year term of the Blackwell Contract on September 30, 2002. The
Guarino Contract was amended to increase Mr. Guarino's annual base salary from
$150,000 to $160,000 also effective July 1, 2001 until the end of the three year
term of the Guarino Contract on September 30, 2002. There were no other changes
to either the contracts during 2001. The Blackwell Contract and Guarino Contract
also both provide for two years of severance pay upon termination of the
employment agreements for any reason other than "for cause," as defined in the
employment agreements, in exchange for restrictive covenants regarding the
confidentiality of the Company's Proprietary Information and the return of such
information to the Company upon termination.
Except as detailed above, the Company has no additional employment
agreements, severance agreements, or change in control agreements with its Named
Executive Officers.
PROPOSAL NUMBER THREE
RATIFICATION OF APPOINTMENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Weber & Company, P.C., independent public accountants ("Weber") was the
principal accounting firm used by the Company during the fiscal year ended
December 31, 2001. Weber has served as the Company's independent public
accountant since 1998. Subsequent to the year ended December 31, 2001, Weber &
Company, P.C. changed its name to Epstein, Weber & Conover, P.L.C. ("Epstein
Weber"). The Board of Directors has appointed Epstein Weber as the principal
independent accounting firm to be used by the Company during the current 2002
fiscal year. A representative of Epstein Weber is expected to be present at the
Annual Meeting with an opportunity to make a statement if such representative
desires to do so, and is expected to respond to appropriate questions.
VOTE REQUIRED AND RECOMMENDATIONS
The affirmative vote of a majority of the shares of Common Stock, Series A
Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock present
at the Annual Meeting or represented by Proxy is required for approval of this
proposal. For purposes of this proposal, abstentions shall be treated as
negative votes, and broker non-votes shall not be deemed present or represented
in determining shareholder approval. THE BOARD OF DIRECTORS RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR RATIFICATION OF THE BOARD OF DIRECTOR'S APPOINTMENT OF
EPSTEIN, WEBER & CONOVER, P.L.C. as the Company's independent certified public
accountants for the fiscal year ending December 31, 2002.
FISCAL YEAR 2001 AUDIT FEE SUMMARY
During fiscal year 2001, Weber & Company, P.C. (nka Epstein, Weber &
Conover, P.L.C.) provided services in the following categories to the Company
and was paid the following amounts:
Financial Audit Fees and Quarterly Reviews $36,600
Financial Audit Fees for Ranch * 1, Inc. (1) $28,400
All Other Non-Audit Fees $ 4,797
-------
Total Fees $69,797
=======
(1) Ranch * 1 and its wholly-owned subsidiaries were purchased by the Company
as of May, 2002.
PROPOSAL NUMBER FOUR
APPROVAL OF AMENDMENT TO ARTICLES OF INCORPORATION
TO AUTHORIZE 500,000 SHARES OF SERIES D CONVERIBLE PREFERRED STOCK
The Board of Directors has approved and recommends to the shareholders that
they approve an amendment to the Company's Articles of Incorporation to
authorize 500,000 shares of a new Series D of convertible preferred stock in the
Company (the "Series D Preferred Stock"). The Board of Directors believes that
the availability of additional authorized but unissued shares of preferred stock
will provide the Company with the ability to raise additional equity capital
and/or make additional acquisitions through the use of its preferred stock.
The following summarizes the significant rights and features of the 500,000
shares of proposed Series D Preferred Stock:
The dividend rate for the Series D Preferred Stock shall be ten percent
(10%) per annum of the $10.00 par value for each share. Dividends on the Series
D Preferred Stock are to be paid only in the Company's Common Stock. Such
dividends on the Series D Preferred Stock shall be payable quarterly, and are
cumulative from the date of issuance. No dividends may be paid or set apart for
payment on any shares junior to the Series D Preferred Stock unless and until
all accrued and unpaid dividends on the Series D Preferred Stock have been
declared and paid.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series D Preferred Stock then
outstanding shall be entitled to be paid out of the assets of the Company
available for distribution to its shareholders, an amount per share of $10.00,
plus an amount equal to the unpaid cumulative dividends, without interest,
before any payment shall be made to the holders of any Common Stock or stock of
the Company ranking junior to the Series D Preferred Stock. For purposes of
liquidation, Series D Preferred Stock ranks junior to the Company's Series A, B,
and C Preferred Stock.
The holders of Series D Preferred Stock shall have the right, at their
option except as detailed below, to convert their shares into Common Stock at
any time after the date of issue, in the ratio of one share of Series D
Preferred Stock to 10 shares of Common Stock. A minimum of 1,000 shares of
Series D Preferred Stock must be converted; there are no maximum limitations. In
the event any of the Company's Series A Preferred Stock is converted to Common
Stock, the holders of the Series D Preferred Stock shall be required to
immediately convert all of their Series D Preferred Stock holdings to Common
Stock.
Holders of the Series D Preferred Stock shall have a general right to vote
and are entitled to notice of the meetings of shareholders of the Company, and
to participate in such meetings. Shareholders of Series D Preferred Stock are
entitled to 10 votes for each share of Series D Preferred Stock held. In
addition to these general voting rights, holders of Series D Preferred Stock
have special voting rights. If any shares of the Series D Preferred Stock are
outstanding, the Company may not (i) without the affirmative vote of at least
one-half of the votes entitled to be cast by all shares of the Series D
Preferred Stock at the time outstanding, amend or change any terms of the Series
D Preferred Stock in Article IV of the Company's Amended and Restated Articles
of Incorporation or other provisions of the Amended and Restated Articles of
Incorporation generally applicable to the Series D Preferred Stock, so as to
affect materially and adversely any such terms; (ii) without the affirmative
vote of at least one-half of the votes entitled to be cast by shares of the
Series D Preferred Stock at the time outstanding, (a) increase the authorized
number of shares of Series D Preferred Stock in excess of 500,000; (b) authorize
shares of any other class of stock ranking on a parity with or superior to
shares of Series D Preferred Stock as to dividends or assets; or (c) change the
conversion features of the Series D Preferred Stock.
Appendix "B" attached to this Proxy Statement sets forth the proposed
amendment to the Company's Articles of Incorporation to authorize this 500,000
shares of Series D Preferred Stock.
VOTE REQUIRED AND RECOMMENDATIONS
The affirmative vote of a majority of the shares of Common Stock, Series A
Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock present
at the Annual Meeting or represented by Proxy is required for approval of this
proposal. For purposes of this proposal, abstentions shall be treated as
negative votes, and broker non-votes shall not be deemed present or represented
in determining shareholder approval. THE BOARD OF DIRECTORS RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR THE AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION
TO AUTHORIZE 500,000 SHARES OF SERIES D CONVERTIBLE PREFERRED STOCK IN THE
COMPANY.
SHAREHOLDER PROPOSALS
The Board of Directors will consider proposals from shareholders for items
to be presented as the Company's 2002 Annual Meeting of Stockholders. To be
considered, the proposal(s) must be received by the Company by no later than
January 15, 2003. Shareholder proposals should be mailed via certified mail,
return receipt requested, and addressed to David Guarino, Secretary, Kahala
Corp., 7730 E. Greenway Rd., Suite 104, Scottsdale, Arizona 85260.
The Board of Directors will consider nominees to the Board of Directors
recommended by stockholders. To have a nominee considered for the 2002 Annual
Meeting of Shareholders, stockholders must provide the Company's current Board
of Directors with the name of the nominee being proposed, together with a resume
of the proposed nominee setting forth the nominee's qualifications to serve as a
Director of the Company, on or before January 15, 2003. Shareholder nominees for
the Board of Directors should be mailed via certified mail, return receipt
requested, and addressed to David Guarino, Secretary, Kahala Corp., 7730 E.
Greenway Rd., Suite 104, Scottsdale, Arizona 85260.
OTHER MATTERS
The Board of Directors does not intend to present at the Annual Meeting any
matters other than those described herein and does not presently know of any
matters that will be presented by other parties.
KAHALA CORP.
BY: /s/ Kevin Blackwell
------------------------------------
Chairman, Chief Executive Officer,
and Director
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
KAHALA ANNUAL MEETING TO BE HELD ON 12/10/02 FOR HOLDERS OF RECORD AS OF
11/15/02
CUSIP: 482833
THE UNDERSIGNED HEREBY APPOINTS KEVIN BLACKWELL AND DAVID GUARINO AS PROXIES,
EACH WITH THE POWER TO APPOINT HIS OR HER SUBSTITUTE, AND HEREBY AUTHORIZES THEM
TO REPRESENT AND TO VOTE, AS DESIGNATED, ALL OF THE SHARES OF COMMON STOCK AND
COMMON STOCK EQUIVALENT OF KAHALA CORP. HELD BY THE UNDERSIGNED ON NOVEMBER 15,
2002, AT THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON DECEMBER 10, 2002 AT
4:00 P.M. AT THE KAHALA CORP.'S CORPORATE HEADQUARTERS, LOCATED AT 7730 E.
GREENWAY ROAD, SUITE NO. 104, SCOTTSDALE, ARIZONA 85260 OR ANY ADJOURNMENT
THEREOF. IF NO INSTRUCTIONS ARE INDICATED ON THE PROXY, THE PROXY WILL BE VOTED
FOR THE ELECTION OF THE NOMINEES FOR DIRECTORS NAMED HEREIN AND IN FAVOR OF ALL
PROPOSALS DESCRIBED HEREIN.
PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE: [X]
DIRECTORS
PROPOSAL(S) RECOMMEND FOR AGAINST ABSTAIN
- ----------- --------- --- ------- -------
1. TO APROVE AN AMENDMENT TO THE FOR [ ] [ ] [ ]
COMPANY'S ARTICLES OF INCORPORATION
TO DIVIDE THE BOARD OF DIRECTORS OF
THE COMPANY INTO TWO CLASSES
DIRECTORS DIRECTORS
- --------- ---------
2. DIRECTORS RECOMMEND: A VOTE FOR (MARK X FOR ONLY ONE BOX - IF NOT
ELECTION OF THE FOLLOWING SPECIFIED, WILL BE VOTED FOR ALL NOMINEES)
DIRECTORS:
01: Kevin Blackwell [ ] FOR ALL NOMINEES
02: Robert Corliss
03: David Guarino [ ] WITHHOLD ALL NOMINEES
04: Alexandria Phillips
05: Don Plato [ ] WITHHOLD AUTHORITY TO VOTE FOR ANY
06: Haresh Shah INDIVIDUAL NOMINEE. WRITE NUMBER(S) OF
NOMINEE(S) BELOW. USE NUMBER ONLY.
_________________________________
DIRECTORS
PROPOSAL(S) RECOMMEND FOR AGAINST ABSTAIN
- ----------- --------- --- ------- -------
3. TO APROVE AND RATIFY THE SELECTION FOR [ ] [ ] [ ]
OF EPSTEIN, WEBER & CONOVER, P.L.C.
AS INDEPENDENT AUDITORS FOR THE
COMPANY FOR THE FISCAL 2002 YEAR
4. TO APPROVE AN AMENDMENT TO THE FOR [ ] [ ] [ ]
COMPANY'S ARTICLE OF INCORPORATION
TO AUTHORIZE 500,000 SHARES OF AN
ADDITIONAL SERIES OF THE COMPANY'S
PREFERRED STOCK
5. TO TRANSACT ANY OTHER BUSINESS AS FOR [ ] [ ] [ ]
MAY PROPERLY COME BEFORE THE ANNUAL
MEETING.
- ---------------------------------- --------------------
SIGNATURE(S) DATE
NOTE: PLEASE SIGN EXACTLY AS NAME APPEARS ON YOUR STOCK CERTIFICATE. JOINT
OWNERS SHOULD EACH SIGN. WHEN SIGNING AS AN ATTORNEY, EXECUTOR, ADMINISTRATOR,
TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH.
EXHIBIT "A"
AMENDMENT TO THE
ARTICLES OF INCORPORATION OF KAHALA CORP.
Article 6 of the Articles of Incorporation of the Corporation is amended by
the addition of the following paragraph after the initial first and only
paragraph:
"Of the total number of directors, not less than one and not more than two shall
be designated as Class 2 Directors, with all other remaining directors being
designated as Class 1 Directors. Class 1 Directors shall have one (1) vote each
on matters before the Board of Directors of the Corporation, and Class 2
Directors shall have two (2) votes each on matters before the Board of Directors
of the Corporation."
EXHIBIT "B"
AMENDMENT TO THE
ARTICLES OF INCORPORATION OF KAHALA CORP.
Article 4 of the Articles of Incorporation of the Corporation is amended by
the addition of the following paragraphs:
D. SERIES D PREFERRED STOCK.
1. DESIGNATION AND INITIAL NUMBER. The Class of shares of Preferred Stock
hereby classified shall be designated as "Series D Preferred Stock." The initial
number of authorized shares of the Series D Preferred Stock shall be 500,000.
2. DIVIDENDS. The dividend rate for the Series D Preferred Stock shall be
ten percent (10%) per annum of the face value of $10.00 per share, and no more.
Dividends on the Series D Preferred Stock shall be payable only in shares of the
Corporation's common stock on a quarterly basis each calendar year. Dividends on
shares of Series D Preferred Stock shall commence and accrue and shall be
cumulative from the date in which the Series D Preferred Stock is issued. No
dividends shall be paid or set apart for payment on any shares ranking junior to
the Series D Preferred Stock unless and until all accrued and unpaid dividends
on the Series D Preferred Stock shall have been declared and paid or a sum
sufficient for payment thereof set apart.
3. LIQUIDATION OR DISSOLUTION. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
holders of Series D Preferred Stock then outstanding shall be entitled to be
paid out of the assets of the Corporation available for distribution to its
stockholders, an amount per share equal to Ten Dollars ($10.00) per share (plus
an amount equal to unpaid cumulative dividends) without interest and no more,
before any payment shall be made to the holders of any common stock or stock of
the Corporation ranking junior to Series D Stock. For purposes of this
provision, the Series D Preferred Stock shall rank junior to the Series A
Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock.
4. SINKING FUND. The shares of Series D Preferred Stock may, at the
discretion of the Board of Directors, be subject to the operation of a purchase,
retirement or sinking fund.
5. CONVERSION PRIVILEGE. Subject to the mandatory conversion provisions
of Section 5.5 below, the holders of shares of Series D Preferred Stock shall
have the right at their option to convert their shares into common stock at any
time after the date of issue, on and subject to the following terms and
conditions:
5.1 One share of Series D Preferred Stock may be converted into 10
shares of Common Stock at any time. A minimum of 1000 shares of Series D
Preferred Stock must be converted with no maximum.
5.2 No fraction of shares of stock of any class of the Corporation at
any time authorized shall be issuable upon any conversion of the Series D Stock.
In lieu of any such fraction of a share, the person entitled to an interest in
respect to such fraction shall be entitled to an additional share to round up
the fraction to the next whole share.
5.3 Any conversion of Series D Preferred Stock shall be made by the
surrender to the Corporation, at the office of any Transfer Agent for the Series
D Preferred Stock and at such other office or offices as the Board of Directors
may designate, of the certificate or certificates representing the share or
shares of Series D Preferred Stock to be converted, duly endorsed or assigned
(unless such endorsement or assignment be waived by the Corporation, together
with a written request for conversion). All shares which may be issued upon
conversion of shares of the Series D Preferred Stock shall upon issue be fully
paid and non-assessable by the Corporation and free from all taxes, liens,
charges and security interests with respect to the issue thereof. The
Corporation shall not however, be required to pay any tax which may be payable
in respect to any transfer involved in the issue and delivery of shares of
Common Stock upon conversion in a name other than that of the holder of the
shares of the Series D Preferred Stock converted, and the Corporation shall not
be required to issue or deliver any such share unless and until the person or
persons requesting the issuance thereof shall have paid to the Corporation the
amount of any such tax or shall have established to the satisfaction of the
Corporation that such tax has been paid.
5.4 All shares of Series D Preferred Stock which shall have been
surrendered for conversion as herein provided shall no longer be deemed to be
outstanding and all rights with respect to such shares, including the rights, if
any, to receive notices and to vote, shall forthwith cease except only the right
to the holders thereof to receive Common Stock in exchange therefor. No payment
or adjustment shall be made upon any conversion on account of any dividends
accrued on the shares of the Series D Preferred Stock surrendered for conversion
or on account of any dividends on the Common Stock issued upon such conversion.
5.5 In the event all or any portion of the Series A Preferred Stock
is converted to Common Stock, the holders of Series D Preferred
Stock shall be required to immediately convert all of their Series D Preferred
Stock to Common Stock.
6. ADJUSTMENTS TO CONVERSION RATIO. The ratio for the conversion of
Series D Preferred Stock into Common Stock (the "Conversion Ratio") shall be
subject to adjustment from time to time as follows:
6.1 In the event the Corporation should at any time or from time to
time after the issuance of the Series D Preferred Stock fix a record date for
the effectuation of a split or subdivision of the outstanding shares of Common
Stock or the determination of holders of Common Stock entitled to receive a
dividend or other distribution payable in additional shares of Common Stock
without payment of any consideration by such holder for the additional shares of
Common Stock, then, as of such record date (or the date of such dividend,
distribution, split or subdivision, if no record date is fixed), the Conversion
Ratio shall be appropriately adjusted so that the number of shares of Common
Stock issuable on conversion of each share of the Series D Preferred Stock shall
be increased in proportion to such increase of outstanding shares.
6.2 If the number of shares of Common Stock outstanding at any time
after the issuance of the Series D Preferred Stock is decreased by a combination
of the outstanding shares of Common Stock, then, following the record date of
such combination, the Conversion Ratio shall be appropriately adjusted so that
the number of shares of Common Stock issuable on conversion of each share of
such Series D Preferred Stock shall be decreased in proportion to such decrease
in outstanding shares.
6.3 OTHER DISTRIBUTIONS. In the event the Corporation shall declare a
distribution payable in securities of other persons, evidences of indebtedness
issued by the Corporation or other persons, or assets (excluding cash
dividends), then, in each such case for the purpose of this subsection 6.3, the
holder of Series D Preferred Stock shall be entitled to a proportionate share of
any such distribution as though they were the holders of the number of shares of
Common Stock of the Corporation into which their shares of Series D Preferred
Stock are convertible as of the record date fixed for the determination of the
holders of Common Stock of the Corporation entitled to receive such
distribution.
6.4 RECAPITALIZATION. If, at any time or from time to time there
shall be a recapitalization of the Common Stock (other then a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 6), provisions shall be made so that the holders of Series D
Preferred Stock shall thereafter be entitled to receive upon conversion of their
Preferred Stock the number of shares of stock or other securities or property of
the Corporation or otherwise, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 6 with respect to the rights of the holders of Series B Preferred
Stock after the recapitalization to the end that the provisions of this Section
6 (including adjustment of the Series D Preferred Stock Conversion Price then in
effect and the number of shares purchasable upon conversion of Series D
Preferred Stock) shall be applicable after the event as nearly equivalent as may
be practicable.
6.5 NO IMPAIRMENT. The Corporation will not by amendment of its
Certificate of the Corporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 6 and in the taking of all such action as may
be necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series B Preferred Stock against impairment
6.6 NO FRACTIONAL SHARES AND CERTIFICATES AS TO ADJUSTMENTS.
(i) No fractional shares shall be issued upon conversion of the
Series D Preferred Stock and the number of shares of Common
Stock to be issued shall be rounded up to the nearest whole
share.
(ii) Upon the occurrence of each adjustment or readjustment of
the Conversion Ratio pursuant to this Section 6, the
Corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to each holder of Series D
Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder
of Series D Preferred Stock, furnish or cause to be
furnished to such holder a like certificate setting forth
(A) such adjustment and readjustment (B) the Conversion
Ratio at the time in effect, and (C) the number of shares
of Common Stock and the amount, if any, of other property
which at the time would be received upon the conversion of
a share of Series D Preferred Stock.
(iii) If any adjustment in the number of shares of Common Stock
into which each share of Series D Preferred Stock may be
converted required pursuant to this Section 6 would result
in an increase or decrease of less than 1% in the number of
shares of Common Stock into which each share of Series D
Preferred Stock is then convertible, the amount of any such
adjustment shall be carried forward and adjustment with
respect thereto shall be made at the time of and together
with any subsequent adjustment which, together with such
amount and any other amount or amounts so carried forward,
shall aggregate at least 1% of the number of shares of
Common Stock into which each share of Series D Preferred
Stock is then convertible. All calculations under this
paragraph (iii) shall be made to the nearest one-hundredth
of a share.
6.7 NOTICES OF RECORD DATE. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, the Corporation
shall mail to each holder of Series D Preferred Stock, at least 20 days prior to
the date specified therein, notice for specifying the date on which any such
record is to be taken for the purpose of such dividend or distribution.
6.8 RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of Series D Preferred Stock such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of Series D Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Series D Preferred Stock, in
addition to such other remedies as shall be available to the holder of such
Series D Preferred Stock, the Corporation will take such corporate action as
may, in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purposes.
6.9 NOTICES. Any notice required by the provisions of this Section 6
to be given to the holders of shares of Series D Preferred Stock shall be deemed
given if deposited in the United States mail, postage prepaid, and addressed to
each holder of record at his address appearing on the books of the Corporation.
6.10 MERGER, CONSOLIDATION. If at any time there is a merger or
consolidation of the Corporation with or into another Corporation or other
entity or person, or any other corporate reorganization, in which the
Corporation shall not be the continuing or surviving entity of such merger,
consolidation or reorganization, or the sale of all or substantially all of the
Corporation's properties and assets to any other person, then, as a part of such
reorganization, merger, consolidation or sale, provision shall be made so that
the holders of the Series D Preferred Stock shall be entitled to receive (on a
per share basis), prior to any distribution to holders of Common Stock, the
number of shares of stock or other securities or property to be issued to the
Corporation or its stockholders resulting from such reorganization, merger,
consolidation or sale in an amount per share equal to the applicable Liquidation
Price for the Series D Preferred Stock plus a further amount equal to any
dividends declared but unpaid on such shares.
7. VOTING RIGHTS. Holders of shares of Series D Preferred Stock shall
have a general right to vote and shall be entitled to notice of the meetings of
the stockholders of the Corporation, and to participate in such meetings. At
general meetings of the stockholders, Holders of Series D Preferred Stock shall
be entitled to ten (10) votes for each share of Series D Stock. Holders of
shares of Series D Preferred Stock shall be permitted to special voting rights
set forth in the following sub- paragraph 7.1 below.
7.1 So long as any shares of the Series D Preferred Stock are
outstanding, the Corporation shall not (a) without the affirmative vote of at
least one-half of the votes entitled to be cast by all shares of the Series D
Preferred Stock at the time outstanding amend or change any terms of the Series
D Preferred Stock in Article IV of the Articles of Incorporation of the
Corporation or other provisions of the Articles of Incorporation generally
applicable to the Series D Stock, so as to affect materially and adversely any
such terms, (b) without the affirmative vote of at least one-half of the vote
entitled to be cast by shares of the Series D Preferred Stock at the time
outstanding, (i) increase the authorized number of shares of Series D Preferred
Stock in excess of 500,000; (ii) authorize shares of any other class of stock
ranking on a parity with or superior to shares of Series D Preferred Stock as to
dividends or assets; or (iii) change the conversion features of the Series D
Preferred Stock.
8. GENERAL PROVISIONS. In addition to the above provisions with respect
to the Series D Stock, such Series D Preferred Stock shall be subject to and be
entitled to the benefits of, the provisions set forth in the Corporation's
Articles of Incorporation with respect to the Preferred Stock generally.