================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000 Commission File No. 001-14509
EASYRIDERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0811505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
28210 Dorothy Drive, Agoura Hills, California 91301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 889-8740
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.001 per share
Securities registered pursuant to Section 12(g) of the Act:
Not Applicable
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
There were 29,058,544 shares of outstanding Common Stock of the Registrant as
of May 10, 2000.
PART I -- FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
-----------------------------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 526,988 $ 734,856
Accounts receivable, less allowance for doubtful accounts
of $438,010 (2000) and $645,212 (1999) 3,288,209 3,307,501
Inventories 2,832,073 2,994,832
Prepaid publication costs 634,046 563,577
Prepaid expenses and other 1,021,801 712,935
Receivable from shareholder 390,436 395,010
----------- -----------
Total current assets 8,693,553 8,708,711
PROPERTY AND EQUIPMENT, net 5,715,198 5,314,321
GOODWILL, net of accumulated amortization
of $3,365,659 (2000) and $2,810,936 (1999) 59,801,777 60,356,501
TRADEMARKS, net of accumulated amortization
of $206,181 (2000) and $172,253 (1999) 618,752 652,680
OTHER ASSETS 707,171 713,695
----------- -----------
$75,536,451 $75,745,908
=========== ===========
See accompanying notes to consolidated financial statements.
1
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
March 31, December 31,
2000 1999
---------------------------------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,349,019 $ 7,683,114
Accrued payroll and payroll related expenses 898,568 951,115
Accrued interest payable 1,540,721 1,091,129
Other current liabilities 1,364,784 1,669,089
Income taxes payable 10,000 8,800
Current portion of deferred subscription and advertising income 3,539,355 3,464,959
Current portion of convertible debentures 316,667 316,667
Current portion of long-term debt 1,741,969 1,874,578
------------ ------------
Total current liabilities 16,761,083 17,059,451
CONVERTIBLE DEBENTURES, related party 1,000,000 1,000,000
NOTE PAYABLE TO STOCKHOLDER 11,575,000 11,575,000
LONG-TERM DEBT, net of current portion and debt discount, including
related party indebtedness of $440,540 (2000) and $489,541 (1999). 24,686,032 24,549,917
OTHER LONG TERM LIABILITIES, including deferred subscription
revenues in $1,535,654 (2000) and $1,509,003 (1999) 2,244,621 1,939,800
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.001 per share; 10,000,000 shares
authorized, none outstanding
Common stock, par value $.001 per share; 50,000,000 shares
authorized, 24,484,964 (2000) and 23,056,751 (1999) outstanding 24,485 23,056
Additional paid in capital 60,012,811 58,983,147
Receivable from the sale of stock (7,300,000) (7,300,000)
Accumulated deficit (33,467,581) (32,084,463)
------------ ------------
Total stockholders' equity 19,269,715 19,621,740
------------ ------------
$ 75,536,451 $ 75,745,908
============ ============
See accompanying notes to consolidated financial statements.
2
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended
March 31,
2000 1999
-----------------------------
(unaudited)
SALES $11,751,807 $11,031,712
COST OF SALES 8,845,812 8,585,173
----------- -----------
GROSS MARGIN 2,905,995 2,446,539
EXPENSES:
Selling, general, and administrative 2,266,127 2,772,112
Depreciation and amortization 829,536 769,149
Stock issuance expense 173,242
----------- -----------
Total expenses 3,268,905 3,541,261
----------- -----------
LOSS FROM OPERATIONS (362,910) (1,094,722)
OTHER INCOME 70,148 167,372
INTEREST EXPENSE (1,082,505) (910,994)
----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,375,267) (1,838,344)
PROVISION FOR INCOME TAXES 7,851 2,075
----------- -----------
NET LOSS $(1,383,118) $(1,840,419)
=========== ===========
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.06) $ (0.10)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC AND DILUTED 23,698,835 19,295,375
=========== ===========
See accompanying notes to consolidated financial statements.
3
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
March 31,
2000 1999
-----------------------------------
(unaudited)
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $(1,383,118) $(1,840,419)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Common stock issuance expense 173,242
Common stock issued for interest 19,726
Depreciation and amortization 829,536 769,149
Loss on sale of fixed assets 55,072 25,357
Amortization of debt issuance costs 78,694 78,694
Increase (decrease) in cash resulting from changes in operating
accounts, net of acquisitions:
Current assets (520,072) (614,928)
Other assets (240,759) (14,902)
Current liabilities (9,817) 1,506,476
Other long-term liabilities 304,821 556,164
----------- -----------
Net cash provided by (used in) operating activities (692,675) 465,591
CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 10,000
Purchase of fixed assets (28,699) (274,924)
----------- -----------
Net cash used in investing activities (18,699) (274,924)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Issuance of long-term debt 82,200 704,612
Payments on debt and convertible debentures (78,694) (611,792)
Common stock issued for cash 500,000
----------- -----------
Net cash provided by financing activities 503,506 92,820
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ (207,868) $ 283,487
CASH AND CASH EQUIVALENTS, beginning of year 734,856 278,035
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 526,988 $ 561,522
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid for interest $ 533,211 $ 1,083,101
=========== ===========
NONCASH FINANCING ACTIVITIES:
Common stock issued in settlement of litigation $ 325,000
===========
See accompanying notes to consolidated financial statements
4
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
- --------------------------------------------------------------------------------
1. GENERAL BASIS OF PRESENTATION
Easyriders, Inc. (Easyriders or the Company) was incorporated in the State
of Delaware on May 13, 1998, and for financial reporting purposes is the
successor to Newriders, Inc. On September 23, 1998, Easyriders, Inc.
consummated a series of transactions (collectively, the Reorganization),
including the following: (i) the merger of a subsidiary of Easyriders with
and into Newriders, Inc. (Newriders) (the Merger) upon which the
shareholders of Newriders exchanged their stock on a 2-for-1 basis for
Easyriders, Inc. common stock; (ii) the acquisition by Easyriders of all of
the outstanding common stock of Paisano Publications, Inc. (Paisano
Publications), a California corporation, and certain affiliated corporations
(collectively, the Paisano Companies); and (iii) the acquisition by
Easyriders of all of the outstanding membership interests of M&B
Restaurants, L.C. (El Paso), a Texas limited liability company.
As a result of the merger, the Newriders common stock was exchanged for
Easyriders common stock on the basis of one share of Easyriders common stock
for each two shares of Newriders common stock, and the stockholders of
Newriders immediately prior to the merger became stockholders of Easyriders.
The merger was accounted for as a combination of entities under common
control, similar to a pooling of interest. Therefore, the historical
financial statements represent the combined financial statements of
Easyriders and Newriders. The acquisitions of the Paisano Companies and El
Paso were accounted for as a purchase.
The Paisano Companies consist of Paisano Publications; Easyriders of
Columbus, Inc., an Ohio corporation; Easyriders Franchising, Inc., a
California corporation; Teresi, Inc. (DBA Easyriders Events, Inc.), a
California corporation; Bros Club, Inc., a California corporation and
Associated Rodeo Riders on Wheels, a California corporation; Paisano
Publications publishes 11 special-interest magazines directed to motorcycle,
hot-rod, and tattoo enthusiasts. Other Paisano Companies market a line of
apparel and other products designed to appeal to motorcycle, hot-rod, and
tattoo enthusiasts. Through the end of 1999 Easyriders Franchising had
established franchise stores that sell Easyriders apparel, customized new
and used American-made motorcycles, and motorcycle accessories.
Subsequently, all franchisees signed agreements converting their franchise
arrangement to a licensing arrangement and the operations of Easyriders
Franchising were assumed by Easyriders Licensing, Inc., a California
corporation, and a wholly-owned subsidiary of Newriders. Currently, there
are 34 licensed stores.
El Paso is a Texas limited liability company, which owns and operates four
barbecue and smoked meat restaurants, three of which are located in Arizona
and one of which is located in Oklahoma. The restaurants are operated under
the name "El Paso Bar-B-Que."
Easyriders currently derives substantially all of its revenues from the
operations of Paisano Publications and El Paso.
5
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited) (Continued)
- --------------------------------------------------------------------------------
Basis of presentation - The accompanying unaudited interim consolidated
financial statements of Easyriders, Inc. for the three months ended March
31, 2000 and 1999, respectively, reflect all adjustments (consisting of
normal recurring accruals) which, in the opinion of management, are
necessary for a fair presentation of the results for the interim periods
presented. These financial statements have been prepared in accordance with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
These financial statements should be read in conjunction with the Company's
annual audited financial statements for the year ended December 31, 1999.
Operating results for the three month period ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 2000.
Reclassifications - Certain reclassifications have been made to the 1999
financial statements in order to conform them to the 2000 presentation.
2. LONG-TERM DEBT
Paisano Debt - As of January 12, 2000, the Arbitration Action which was
commenced in January, 1998 by Steel Horses, Inc. dba Easyriders of Chicago
("Steel Horses") against Paisano Publications, Easyriders Franchising, Inc.
("EFI") and certain officers of the Company, arising out of the Franchise
Agreement entered into in 1994 between Steel Horses and EFI, was settled and
dismissed with finality pursuant to a settlement agreement executed as of
that date by all parties (the "Settlement Agreement"). Pursuant to the
Settlement Agreement, Paisano Publications agreed to pay Steel Horses and
its founders an agreed upon sum over a period of 2 years. The debt was
accrued as of December 31, 1999, as the amount of the loss was estimable and
the loss was probable as of that date.
3. STOCKHOLDERS' EQUITY
Related-Party Stock Purchases - On February 9, 2000, the Company sold to two
directors of the Company 493,827 shares each of common stock of the Company
for the sum of $250,000 each. The number of shares issued was calculated as
75% of the average closing price of the common stock, with average closing
price being defined as the average of the last recorded sale price of the
common stock on the ten consecutive trading days ending on and including
February 2, 2000. In conjunction with this stock issuance at a discount, the
Company recorded $166,667 of stock issuance expense.
Common Stock issued to settle litigation - In March 2000, the Company issued
400,000 shares of the common stock of the Company in settlement of a dispute
with an ex-franchisee. Settlement expense was recognized equal to the fair
market value of such shares on the date of issuance.
6
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited) (Continued)
- --------------------------------------------------------------------------------
Common Stock issued for services - During March 2000, the Company issued
10,500 shares of Easyriders, Inc. stock to two consultants of Paisano
Publications as compensation for services performed. The fair value of the
stock, $13,125, was recorded as consulting expense.
Common Stock issued for interest - On March 1, 2000, the Company issued
30,059 shares of Easyriders, Inc. stock to a related party in payment of
accrued interest on convertible debentures in the amount of $19,726. The
number of shares issued was calculated as 75% of the average closing price
of the common stock for the five days preceding the issuance. In conjunction
with this stock issuance at a discount, the Company recorded $6,575 of stock
issuance expense.
Stock Option Grants - During the three months ended March 31, 2000, the
Board of Directors of the Company authorized the granting of 285,000 options
to employees, consultants and directors of the company, all of which were
granted under the Company's 1998 Executive Incentive Compensation Plan.
SFAS No. 123, Accounting for Stock-Based Compensation, encourages but does
not require Company to record compensation cost for employee stock option
grants. The Company has chosen to continue to account for employee option
grants using Accounting Principles Board Opinion No. 25. No compensation
expense has been recognized for employee stock option grants.
4. BUSINESS SEGMENTS
Information by Operating Segment - Operating segments are defined as
components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision-maker,
or decision-making group, in deciding how to allocate resources and in
assessing performance. Easyriders, Inc. chief operating decision-making
group is comprised of the chief executive officer and the officers who
report to him directly.
Easyriders Inc. has five reportable segments: publishing, goods and
services, food service, franchising/licensing (all franchisees had converted
to licensees for the quarter ended March 31, 2000), and other events and
operations. The publishing segment includes magazine and catalog publishing
and other operations. The trade goods and services segment distributes
motorcycle apparel and other related goods to both intermediate and end-
users and offers motorcycle repair and services through a Company owned
store. The food service segment includes the operations of El Paso and
Newriders. The franchising/licensing segment includes the
franchising/licensing of Easyriders motorcycle stores for distribution of
equipment and apparel. The other events and operations segment includes the
coordination and sponsorship of motorcycle related events and operations.
Easyriders, Inc. evaluates performance based on profit or loss from
operations before income taxes, not including nonrecurring gains and losses
and foreign exchange gains and losses. (The Company utilizes the other
events and operations segment as a venue for increased exposure for
publication sales.) The accounting policies of the operating segments are
the same as those described in the summary of significant accounting
policies. The financial results for the five operating segments of
Easyriders, Inc. have been prepared on a basis which is consistent with the
7
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited) (Continued)
- --------------------------------------------------------------------------------
manner in which Easyriders, Inc. management internally disaggregates
financial information for the purposes of assisting in making internal
operating decisions. In this regard, certain common expenses have been
allocated among segments less precisely than would be required for stand
alone financial information prepared in accordance with generally accepted
accounting principles. Revenue attributed to geographic areas is based on
the location of the customer.
Goods and Food Franchising/ Other
Publishing services service Licensing operations Totals
Quarter ended March 31, 1999:
Sales external customers $5,620,709 $1,442,912 $2,863,334 $ 48,137 $1,056,620 $11,031,712
Income (loss) from
operations 117,268 (442,676) 206,510 (491,925) 114,596 (496,227)
Depreciation and
amortization 79,951 74,591 45,081 2,119 11,463 213,205
Quarter ended March 31, 2000:
Sales external customers $5,487,497 $1,432,451 $3,346,368 $ 0 $1,485,491 $11,751,807
Income (loss) from
operations 91,912 (306,359) 239,396 (135,925) 458,733 347,757
Segment assets 7,559,002 1,215,341 5,926,059 6,788 110,060 14,817,250
Capital expenditures 20,710 7,989 28,699
Depreciation and
amortization 88,386 12,087 151,510 2,114 20,715 274,812
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements is as
follows:
QE 3/31/00 QE 3/31/99
----------------------------------
Loss from operations included in segment disclosure $ 347,757 $ (496,227)
Unallocated, selling, general, and administrative (710,667) (598,495)
------------ -------------
Loss from operations $ (362,910) $ (1,094,722)
============ =============
QE 3/31/00 QE 3/31/99
----------------------------------
Depreciation and amortization included in segment disclosure $ 274,812 $ 213,205
Amortization of goodwill 554,724 555,944
------------ -----------
Depreciation and amortization $ 829,536 $ 769,149
============ ===========
8
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited) (Continued)
- --------------------------------------------------------------------------------
Segment assets $14,817,250
Cash and cash equivalents 526,988
Receivable from shareholder 390,436
Goodwill 59,801,777
-----------
Total assets $75,536,451
===========
Revenues concerning principal geographic areas is as follows based on
customer location:
USA Canada Germany UK Australia Other Total
2000 $10,711,270 $264,355 $135,760 $125,186 $106,117 $409,119 $11,751,807
1999 $10,006,405 $247,194 $140,533 $146,062 $109,824 $381,694 $11,031,712
The Company's foreign operations consist primarily of international
newsstand sales and mail-order product sales. No one country makes up more
than 10% of international sales. The Company does not have any identifiable
assets attributable to these foreign activities and does not separately
identify any expenses related specifically to foreign activities.
Therefore, income before taxes and net income associated with foreign
activities is not presented.
5. SUBSEQUENT EVENTS
Debt Covenant Amendment - At the time of the Reorganization, Easyriders and
Paisano Publications entered into a Note and Warrant Purchase Agreement (the
"Credit Agreement") with Nomura Holding America Inc. ("Nomura" or "Lender"),
pursuant to which Nomura agreed, subject to the satisfaction of certain terms
and conditions, to lend Paisano Publications up to $22,000,000 (the "Nomura
Indebtedness").
On April 12, 2000, Nomura agreed to waive defaults under the Credit Agreement
relating to maximum capital expenditures, maximum leverage ratios, minimum
consolidated EBITDA, minimum consolidated net worth, minimum consolidated
working capital and minimum interest coverage ratios, pursuant to a Second
Amendment and Waiver Under Note and Warrant Purchase Agreement and Second
Amendment to Warrant. In addition, Nomura agreed to amend the Credit
Agreement in order to relax covenants for the 2000 calendar year relating to
the maintenance of required levels of net worth and EBITDA, maximum leverage
ratios and minimum interest coverage ratios. In consideration of the
foregoing waivers and amendments, the Company agreed to reduce the exercise
price on warrants to purchase 355,920 shares of Easyriders Common Stock
issued to Nomura under the Credit Agreement, from $1.625 to "market price,"
as determined by a formula set forth in the Second Amendment to Warrant.
9
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited) (Continued)
- --------------------------------------------------------------------------------
Forgiveness of Debt by Stockholder - Joseph Teresi, sole stockholder of
Paisano Publications prior to the Reorganization, was issued 6,493,507
shares of the Company's common stock in the Reorganization. In addition,
Mr. Teresi received promissory notes aggregating $13,000,000 (the
"Contributor Notes"). The Contributor Notes consist of a subordinated
promissory note in the amount of $5,000,000, a limited recourse subordinated
promissory note in the amount of $5,000,000 secured by the Martin Mirror
Note (as defined in the applicable instruments) and a subordinated
promissory note in the amount of $3,000,000.
During 1999, Mr. Teresi acquired an additional 1,801,790 shares of Common
Stock through open market purchases and purchases directly from the Company
for cash and/or the forgiveness of debt under the Contributor Notes. As
part of the Nomura Consent and Waiver dated February 7, 2000, and in order
to help alleviate the Company's cash flow problems, Mr. Teresi purchased on
February 9, 2000 an additional 493,827 shares of the Company's Common Stock
for $250,000 in cash. Concurrently, the Company's Chairman, John Martin
made an identical purchase of 493,827 shares for $250,000 in cash. These
shares were sold to Messrs. Teresi and Martin at a 25% discount from market
price, market price being determined as the average daily closing price of
the Common Stock on the American Stock Exchange over period of 10
consecutive trading days ending on and including February 2, 2000.
Effective April 3, 2000, Joseph Teresi, the sole stockholder of Paisano
Publications prior to the Reorganization, agreed to forgive $3,446,787 of
principal owed on the Subordinated 7% note, leaving a principal balance of
$128,213, in exchange for 3,356,170 shares of the Company's Common Stock.
This transaction was valued at full market price without discount, market
price being determined as the average daily closing price of the Common
Stock on the American Stock Exchange over 30 consecutive trading days ending
on and including March 22, 2000, the date of the Company's last meeting of
its Board of Directors. Concurrently, Mr. Teresi agreed to forgive (a) the
residual balance due under the Subordinated 7% note of $128,213, (b) $96,739
of other obligations owed to Mr. Teresi by the Company in connection with
rent and consulting fees, and (c) accrued interest on the Contributor Notes
of $525,040, in exchange for the undertakings of Paisano Publications
pursuant to an agreement involving the Company's events division.
In April 2000, the Company entered into an agreement with Joseph Teresi
pursuant to which the assets of Easyriders of Columbus will be sold to Mr.
Teresi (the "Columbus Transaction"), in exchange for forgiveness by Mr.
Teresi of certain financial obligations owed to him by Paisano Publications
and/or the Company. The total amount of forgiveness is anticipated to be
approximately $600,000. Upon closing of the Columbus Transaction,
Easyriders of Columbus will be relieved of all liability under the lease for
the premises occupied by the retail operations in question. Mr. Teresi, who
owns the premises, has agreed to continue operating the business as
"Easyriders of Columbus" pursuant to a licensing agreement with Easyriders.
The Company anticipates recording a loss associated with the sale of
Easyriders of Columbus upon its consummation of approximately $1,400,000,
including a goodwill write-off of approximately $879,000.
10
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited) (Continued)
- --------------------------------------------------------------------------------
Assumption of the Siena Loan - In October 1999, Paisano Publications issued a
$275,000 increasing rate secured promissory note to an investment
partnership, Siena Capital Partners, L.P. This loan (the "Siena Loan") is
subordinate to the Nomura Indebtedness. The loan bears interest at a rate of
20% per annum (increasing by 1% monthly beginning April 14, 2000), and is due
and payable with accrued interest on October 14, 2000. Warrants to purchase
100,000 shares of the Common Stock of the Company were issued with an
exercise price of $0.01 per share. If the Siena Loan has been paid off in its
entirety by April 13, 2000, the warrants become null and void. In addition,
if the balance is not paid in full by July 13, 2000, the Company must issue
warrants to purchase an additional 300,000 shares of the Common Stock of the
Company, and if the balance is not paid in full by October 13, 2000, the
Company must issue warrants to purchase an additional 100,000 shares of the
Common Stock of the Company. Thereafter, until the loan is paid in full, the
Company must issue warrants to purchase 150,000 shares of the Common Stock of
the Company on the 13th day of each month.
As of April 13, 2000 the Company did not possess the resources to pay off the
Siena Loan. However, John Martin and Joseph Teresi were granted a right of
first refusal in connection with any assignment of the Siena Loan. Based on
this right, the Company pursued negotiations with Mr. Teresi and Mr. Martin
concerning their assumption of the Siena Loan upon terms more favorable to
the Company. These negotiations were successful and on April 13, 2000, Mr.
Martin and Mr. Teresi each paid to Siena the sum of $137,500 and assumed the
position of Siena with respect to the Siena Loan. Concurrently, the first
100,000 warrants vested, and Mr. Martin and Mr. Teresi agreed to make the
following modifications to the Siena Loan terms: (i) the interest rate will
be reduced from 20% per annum to 13% per annum, and (ii) provided the Siena
Loan is paid off by December 31, 2000, twenty percent (20%) of all warrants
vested by and through such date will be surrendered. These modifications are
subject to the formal consent of Nomura, which the Company is confident will
be secured.
Letter of Intent for the Sale of a Restaurant - El Paso is presently in
negotiations with an independent third party concerning the sale of one of El
Paso's restaurants in Arizona. Discussions have progressed to the point of a
letter of intent which is subject to certain contingencies. The transaction
contemplates that the purchaser will pay cash for a 100% interest, and will
then enter into a development agreement with El Paso pursuant to which the
purchaser will develop three additional El Paso restaurants as a franchisee
of El Paso.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Management's discussion and analysis of the financial condition and the
results of operations of the Company should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto.
Overview
Easyriders was organized under the laws of the state of Delaware on May
13, 1998. Easyriders currently derives substantially all of its revenues from
the operations of Paisano Publications and El Paso.
On September 23, 1998, Easyriders consummated a series of transactions
(the "Reorganization") comprising the following: (a) the acquisition by
Easyriders from Joseph Teresi of all of the outstanding common stock of Paisano
Publications and certain affiliated corporations (the "Paisano Companies"),
engaged at the time in (i) publishing special-interest magazines relating
primarily to American-made "V-Twin" motorcycles and tattoo art, (ii) selling
branded motorcycle apparel and accessories through a mail-order catalogue,
events and franchise stores, (iii) producing motorcycle and tattoo-related
events, and franchising retail stores to market its branded motorcycle apparel
and accessories; (b) the acquisition by Easyriders of all of the outstanding
membership interests of El Paso, which at the time was engaged in the operation
of four restaurants under the name "El Paso Bar-B-Que"; and (c) the merger (the
"Merger") of a subsidiary of Easyriders with and into Newriders, Inc., a Nevada
corporation ("Newriders").
As a result of the Merger (i) each two shares of Newriders common
stock, par value $.01 per share (the "Newriders Common Stock") were exchanged
for one share of Easyriders common stock, par value $.001 per share ("Easyriders
Common Stock"), and the shareholders of Newriders immediately prior to the
Merger became stockholders of Easyriders, (ii) all of the outstanding options,
warrants and other convertible securities exercisable for or convertible into
Newriders Common Stock were exchanged for the right to purchase or convert into
one-half the number of shares of Easyriders Common Stock at an exercise price or
conversion ratio per share equal to two times the exercise price or conversion
ratio provided for in the stock option, warrant or other agreements evidencing
such options, warrants or other convertible securities, and (iii) Newriders, the
Paisano Companies and El Paso became wholly-owned subsidiaries of Easyriders.
The Merger was accounted for as a combination of entities under common control,
similar to a pooling of interest. Therefore, the historical financial statements
represent the combined financial statements of the Company and Newriders. The
acquisitions of the Paisano Companies and El Paso were accounted for as a
purchase.
The acquisitions of the Paisano Companies and El Paso had, and will
continue to have, a material impact on the Company's financial statements;
accordingly, current and future financial statements may not be directly
comparable to the Company's historical financial statements. In future periods,
the amortization of goodwill will significantly effect the Company's financial
statements.
12
Use of EBITDA
The following comparative discussion of the results of operations and
financial condition of the Company includes, among other factors, an analysis of
changes in the operating income of the business segments before interest
expense, taxes, depreciation and amortization ("EBITDA") in order to eliminate
the effect on the operating performance of the Paisano Companies and El Paso of
significant amounts of amortization of intangible assets and interest expense
recognized through the Reorganization. Financial analysts generally consider
EBITDA to be an important measure of comparative operating performance for the
businesses of the Company and its subsidiaries, and when used in comparison to
debt levels or the coverage of interest expense as a measure of liquidity.
However, EBITDA should be considered in addition to, not as a substitute for,
operating income, net income, cash flow and other measures of financial
performance and liquidity reported in accordance with accounting principles
generally accepted in the United States of America. Also, the Company has added
back non-cash charges relating to stock issuance expenses to derive an adjusted
EBITDA ("Adjusted EBITDA").
13
Results of Operations
The following tables set forth certain operating data for Easyriders for the
three months ended March 31, 2000 and 1999:
Easyriders and Paisano
Newriders Companies El Paso Consolidated
For the Three Months Ended March 31, 1999
-----------------------------------------------------------------------------
(unaudited)
SALES
Publishing $ - $ 5,620,709 $ - $ 5,620,709
Goods and services 1,442,912 1,442,912
Food service 2,863,334 2,863,334
Franchising 48,137 48,137
Other operations 1,056,620 1,056,620
----------------------------------------------------------------------------
- 8,168,378 2,863,334 11,031,712
COST OF SALES
Publishing 4,417,001 4,417,001
Goods and services 1,479,066 1,479,066
Food service 1,770,743 1,770,743
Franchising - -
Other operations 918,363 918,363
----------------------------------------------------------------------------
- 6,814,430 1,770,743 8,585,173
GROSS MARGIN
Publishing - 1,203,708 - 1,203,708
Goods and services - (36,154) - (36,154)
Food service - - 1,092,591 1,092,591
Franchising 48,137 48,137
Other operations - 138,257 - 138,257
----------------------------------------------------------------------------
- 1,353,948 1,092,591 2,446,539
EXPENSES
Publishing 1,086,440 1,086,440
Goods and services 406,522 406,522
Food service 886,081 886,081
Franchising 540,062 540,062
Other operations 23,661 23,661
Unallocated expenses 526,265 72,230 598,495
----------------------------------------------------------------------------
526,265 2,128,915 886,081 3,541,261
INCOME (LOSS) FROM OPERATIONS
Publishing - 117,268 - 117,268
Goods and services - (442,676) - (442,676)
Food service - - 206,510 206,510
Franchising (491,925) (491,925)
Other operations - 114,596 - 114,596
Unallocated (526,265) (72,230) - (598,495)
----------------------------------------------------------------------------
(526,265) $ (774,967) $ 206,510 $(1,094,722)
============================================================================
NET LOSS (697,804) $(1,352,983) $ 210,368 $(1,840,419)
============================================================================
EBITDA $ (398,345) $ (212,437) $ 452,581 $ (158,201)
============================================================================
14
Easyriders and Paisano
Newriders Companies El Paso Consolidated
For the Three Months Ended March 31, 2000
-----------------------------------------------------------------------------
(unaudited)
SALES
Publishing $ - $ 5,487,497 $ - $ 5,487,497
Goods and services 1,432,451 1,432,451
Food service 3,346,368 3,346,368
Franchising/licensing - -
Other operations 1,485,491 1,485,491
-----------------------------------------------------------------------------
- 8,405,439 3,346,368 11,751,807
COST OF SALES
Publishing 4,359,798 4,359,798
Goods and services 1,416,881 1,416,881
Food service 2,049,075 2,049,075
Franchising/licensing - -
Other operations 1,020,058 1,020,058
-----------------------------------------------------------------------------
- 6,796,737 2,049,075 8,845,812
GROSS MARGIN
Publishing - 1,127,699 - 1,127,699
Goods and services - 15,570 - 15,570
Food service - - 1,297,293 1,297,293
Franchising/licensing - -
Other operations - 465,433 - 465,433
-----------------------------------------------------------------------------
- 1,608,702 1,297,293 2,905,995
EXPENSES
Publishing 1,035,787 1,035,787
Goods and services 321,929 321,929
Food service 1,057,897 1,057,897
Franchising/licensing 135,925 135,925
Other operations 6,700 6,700
Unallocated expenses 657,529 53,138 710,667
-----------------------------------------------------------------------------
657,529 1,553,479 1,057,897 3,268,905
INCOME (LOSS) FROM OPERATIONS
Publishing - 91,912 - 91,912
Goods and services - (306,359) - (306,359)
Food service - - 239,396 239,396
Franchising/licensing (135,925) (135,925)
Other operations - 458,733 - 458,733
Unallocated (657,529) (53,138) - (710,667)
-----------------------------------------------------------------------------
$(657,529) $ 55,223 $ 239,396 $ (362,910)
=============================================================================
NET LOSS $(834,572) $ (682,075) $ 133,529 $ (1,383,118)
=============================================================================
EBITDA $(518,077) $ 578,961 $ 475,890 $ 536,774
=============================================================================
Adjusted EBITDA/1/ $(344,835) $ 578,961 $ 475,890 $ 710,016
=============================================================================
/1/ Includes add-back of non-cash charges related to stock issuance expenses
of $173,242.
15
The three months ended March 31, 2000 compared to the three months ended March
31, 1999
Results of Operations of Easyriders Inc. and subsidiaries
Consolidated total revenues for the three month periods increased $720,095,
or 7%, from $11,031,712 for the three months ended March 31, 1999 to $11,751,807
for the same three months in 2000. This increase in revenues is substantially
comprised of an increase of $483,034 in El Paso revenues, an increase of
$207,985 in Easyriders Events revenues, an increase of $151,565 in Bros Club
revenues, and an offsetting decrease in Paisano revenues of $133,212.
During the three months ended March 31, 2000, the Company experienced a net
loss in the amount of $1,383,118, reflecting a loss reduction of $457,301, or
25%, when compared with the net loss of $1,840,419 for the three months ended
March 31, 1999. The loss reduction for the three month period ended March 31,
2000 can be attributed to the $459,456 increase in gross margin, the $272,356
decrease in operating expenses, and the offsetting net increase in interest and
other expenses of $274,511.
The Company's net loss per share was reduced $0.04 per share, or 40%, to
$0.06 per share for the three months ended March 31, 2000, as compared to the
net loss of $0.10 per share for the three months ended March 31, 1999. The
Company experienced EBITDA in the amount of $536,774 for the three months ended
March 31, 2000, an improvement of $694,975 when compared with the negative
EBITDA of $158,201 for the three months ended March 31, 1999. Adjusted EBITDA,
which reflects the add-back of non-cash charges related to stock issuance
expenses of $173,242 for the three months ended March 31, 2000, was $710,016 or
an improvement over EBITDA for the three months ended March 31, 1999 of
$868,217. There were no stock issuance expenses for the three months ended
March 31, 1999.
Results of Operations: Paisano Companies
The operating results of the Company for the three months ended March 31,
1999 and March 31, 2000 include the results for the Paisano Companies.
The Paisano Companies' total sales increased $237,061, or 3%, from
$8,168,378 for the three months ended March 31, 1999 to $8,405,439 for the three
months ended March 31, 2000. This increase in total sales is comprised of a
decrease in sales from the publishing segment of $133,212, a decrease in sales
from the goods and services segment of $10,461, a decrease in sales from the
franchising/licensing segment of $48,137, and an increase in sales from other
operations of $428,871. The decrease in the publishing segment revenues can be
significantly attributed to the discontinuation of Quick Throttle magazine. The
decrease in the franchising/licensing segment revenues is the result of the
Company's decision in 1999 to waive payment of franchise fees by its
franchisees. The increase in the other operations segment revenues can be
substantially attributed to a combination of increased participation in the
events held by Easyriders Events ($207,985) and the sale of Bros Club which
resulted in the recognition of deferred revenue ($151,565).
The Paisano Companies' total gross margin increased $254,754, or 19%, from
$1,353,948 for the three months ended March 31, 1999, to $1,608,702 for the
three months ended March 31, 2000. As a percentage of sales, total gross margin
for the Paisano Companies increased from 17% to 19%. The increase in gross
margin can be substantially attributed to the increase in margin resulting from
the sale of Bros Club. The Paisano Companies' total income/loss from operations
decreased $830,190, from a loss of $774,967 for the three months ended March 31,
1999 to income of $55,223 for the three months ended March 31, 2000. This
improvement in operating results is comprised of a decrease in income from
16
operations of $25,356 from the publishing segment, a decrease in loss from
operations of the goods and services segment of $136,317, a decrease in loss
from the operations of the franchising/licensing segment of $356,000, an
increase in income from operations of other segments of $344,137, and a decrease
in expenses not allocated to any segment of $19,092. The decrease in loss from
operations from the franchising/licensing segment can be substantially
attributed to the reduction in legal and professional fees of approximately
$216,000. Legal and professional fees were unusually high in the first quarter
of 1999 as a result of the pending litigation, which was settled in the first
quarter of 2000. The increase in income from operations of the other operations
segment can be substantially attributed to the increase in revenues from
Easyriders Events and from the sale of Bros Club (see above).
The Paisano Companies' publishing segment includes sales generated from
subscription sales, newsstand sales and advertising sales related to the
Companies' eleven special interest magazines. The related cost of sales
includes direct costs related to the sales consisting primarily of printing,
publication and distribution costs. The goods and services segment includes
sales generated from the sale of apparel and other products through its mail
order catalogs, one retail store, and franchise/license programs. The related
cost of sales includes the costs of the apparel and other products. The
franchising/licensing segment includes sales generated through royalties and
franchise fees charged to the Companies' twenty six operating franchisees.
There is no related cost of sales. The Paisano Companies' other segments
primarily includes Easyriders Events, Inc., which generates substantially all of
its sales from the sale of tickets to its motorcycle rodeos, motorcycle shows,
and tattoo shows. Cost of sales for the other segments represent direct costs
of promoting the events.
The Paisano Companies' operating expenses for the three months ended March
31, 2000 of $1,553,479 include $1,500,341 of expenses specifically allocated to
individual segments and $53,138 which have not been allocated to any one
segment. The allocated expenses include payroll, promotion, and other general
and administrative expenses specifically attributable to the business segment.
The unallocated expenses represent legal and professional fees.
Payroll and related benefits for the Paisano Companies decreased $80,981,
or 19%, from $327,524 for the quarter ended March 31, 2000 to $408,505 for the
same quarter in the prior year, as a result of efforts to reduce costs by
decreasing staff size. Depreciation and amortization for the quarters ended
March 31, 1999 and 2000 totaled $567,727 and $558,126, respectively, of which
$469,256 and $469,740, respectively, relate to the amortization of the
$56,368,752 in goodwill created out of the Paisano Companies' acquisition by the
Company.
Interest expense for the Paisano Companies increased $105,716, or 18%, from
$572,819 for the quarter ended March 31, 1999 to $678,535 for the quarter ended
March 31, 2000. This increase is primarily attributable to the increase in the
prime rate and the additional borrowings under the Revolving Loan.
The net loss for the Paisano Companies decreased $670,908, or 50%, from
$1,352,983 for the three months ended March 31, 1999 to $682,075 for the three
months ended March 31, 2000. EBITDA improved by $791,398 from a negative EBITDA
of $212,437 for the three months ended March 31, 1999 to an EBITDA of $578,961
for the three months ended March 31, 2000.
The principal raw material used in publishing operations of the Paisano
Companies is paper. Paper costs represented approximately 17% and 16% of Paisano
Publications' production, selling and other direct costs for the three months
ended March 31, 2000 and 1999, respectively. Certain commodity grades of paper
have shown considerable price volatility over the last decade. There can be no
assurance that future fluctuations in paper prices will not have a material
adverse effect on the Paisano Companies' results of operations or financial
condition.
17
The profitability of the Paisano Companies' publishing segment is also
affected by the cost of postage and could be materially adversely affected if
there is an increase in postal rates. Future fluctuations in postal rates could
have a material adverse effect on the publishing segments' results of operations
or financial condition. No assurance can be given that the publishing segment
can recoup paper or postal cost increases by passing them through to its
advertisers and readers. In addition, future fluctuations in paper prices or
postal rates could have an effect on comparisons of the results of operations
and financial condition of the publishing segments.
Results of Operations: El Paso
The operating results of the Company for the three months ended March 31,
2000 and 1999 include the results for E1 Paso.
E1 Paso's sales from its four El Paso Bar-B-Que Restaurants increased
$483,034, or 17%, from $2,863,334 for the three months ended March 31, 1999 to
$3,346,368 for the three months ended March 31, 2000. This increase can be
substantially attributed to the relocation of the Tulsa store to a bigger
facility (approximately $194,000) and the increased revenues generated by the
catering division (approximately $185,000) as a result of increased efforts to
promote this portion of the business. Cost of sales, which includes food and
direct payroll costs related to the operations of the restaurants, increased
$278,332, or 16%, from $1,770,743 to $2,049,075, which is constant with the
increase in sales levels. Gross margin as a percentage of sales remained
constant at 38%, as did operating expenses at 31% of sales, and income from
operations at 7% of sales. Interest expense associated with debt used to
finance the restaurants and capital leases increased $48,735, or 85%, from
$57,132 for the three months ended March 31, 1999 to $105,867 for the three
months ended March 31, 2000. Net income decreased $76,839, or 37%, from
$210,368 for the three months ended March 31, 1999 to $133,529 for the three
months ended March 31, 2000. Net income as a percentage of sales decreased from
7% to 4%, substantially as a result of the increase in interest expense. EBITDA
increased $23,309, or 5%, from $452,581 to $475,890.
Liquidity and Capital Resources
The Company's primary cash requirements are to fund the Company's working
capital needs, primarily accounts receivable, inventory and prepaid expenses and
to service its debt. On March 31, 2000, the Company had negative working
capital of $8.1 million due primarily from the loss sustained during the three
month period ended March 31, 2000, and to deferred subscription and advertising
income of $3,539,355.
Cash used in operating activities during the three months ended March 31,
2000 totaled $0.7 million. The net loss of $1.4 million was offset by non-cash
charges of $0.2 million for common stock issued for services and interest, $0.8
million for depreciation and amortization, a $0.1 million loss on the sale of
fixed assets, and $0.1 million of amortization of debt issuance costs. Cash of
$0.5 million was used by changes in operating accounts.
Upon its acquisition by the Company, Paisano Publications obtained an
aggregate of $22,000,000 in Nomura Indebtedness. This financing was comprised
of $17,000,000 of senior term loans (the "Term Loans") and $5,000,000 of
revolving loans (the "Revolving Loans"). The proceeds from the Term Loans plus
$3,500,000 of the Revolving Loans were used to repay certain promissory notes
issued to the shareholder of the Paisano Companies in conjunction with the
Paisano Acquisition and to pay certain
18
acquisition expenses. To the extent that Paisano Publications is in compliance
with the terms of the Nomura Indebtedness, any unused portion of the Revolving
Loans may be used by Paisano Publications for working capital purposes. At March
31, 2000, there was $300,000 of available borrowings under the Revolving Loans
subject to the approval of the Lender. On April 12, 2000, the Lender waived the
defaults that existed under the Nomura Indebtedness as of December 31, 1999. As
a result, the Company is now in compliance with the terms of the Nomura
Indebtedness, and available borrowings are no longer subject to the approval of
the Lender.
The Nomura Indebtedness is guaranteed (the "Guarantees") by the Company and
the Paisano Companies, other than Paisano Publications (the "Guarantors"). The
Nomura Indebtedness will mature on September 23, 2001, and bears interest at an
annual rate equal to the prime rate of the Lender from time to time plus 1.85%,
payable monthly. The Nomura Indebtedness and the Guarantees are secured by a
first priority security interest in substantially all of the tangible and
intangible assets (owned or hereafter acquired) of the Company and the Paisano
Companies, including all of the capital stock or equity interests of the Paisano
Companies, and Newriders. The Nomura Indebtedness and the Guarantees constitute
the sole senior secured indebtedness of Paisano Publications and Guarantors and
rank senior to all other indebtedness of Paisano Publications and the
Guarantors. With respect to the September 23, 2001 maturity, the Company has
begun to explore alternative financing sources and believes it will be able to
either negotiate with Nomura an extension of the maturity date, or to refinance
the Nomura Indebtedness with other lenders and/or investors.
At the end of each one-month period in which the Term Loans are
outstanding, Paisano Publications is required to prepay the Term Loans in an
aggregate principal amount equal to 35% of Excess Cash Flow, as defined in the
Credit Agreement, for such period, to the extent such Excess Cash Flow is
achieved. Because this prepayment is dependent upon the Company achieving
Excess Cash Flow, which is dependent on uncertain future events, no amounts have
been classified as current liabilities at March 31, 2000.
Subject to certain limitations on dividends, provided that no event of
default has occurred, Paisano Publications may advance funds to the Company
monthly, limited to the lessor of $100,000 or 35% of the Excess Cash Flow for
the preceding monthly period. In addition, the Company is able to secure
advances from El Paso without restriction. As of March 31, 2000, Paisano
Publications has been able to provide $204,712 of funding to the Company based
on Paisano's attainment of Excess Cash Flow. The inability of Paisano
Publications to provide funds to the Company can adversely impact the ability of
the Company to repay certain expenses of the Company.
Because the Nomura Indebtedness includes restrictions on the ability of the
Paisano Companies to transfer funds to the Company in the form of cash
dividends, loans or advances, the net assets of the Paisano Companies are
considered to be restricted. The restricted net assets of the Paisano Companies
on March 31, 2000 total $29,817,574.
The Nomura Indebtedness contains numerous operating and financial
covenants, including but not limited to, payment of dividends, limitations on
indebtedness and the maintenance of minimum net worth, minimum working capital,
interest coverage ratios and the achievement of cash flow measures.
In connection with the Paisano Acquisition, the Company issued Contributor
Notes in the aggregate amount of $13,000,000 to Joseph Teresi, the sole
shareholder of the Paisano Companies prior to the Paisano Acquisition. The
Contributor Notes consisted of a subordinated promissory note in the amount of
$5,000,000, a limited recourse subordinated promissory note in the amount of
$5,000,000 secured by the Martin Mirror Note (as defined in the applicable
instruments) and a short-term
19
subordinated promissory note in the amount of $3,000,000. The first two notes
(the "Subordinated Notes") bear interest at an annual rate that escalates from
6% to 10% and may be extended for an additional five years. The remaining
$3,000,000 (the "Short Term Note") was initially issued as a 90 day note that
bears interest at an annual rate of 10%. By mutual agreement, the maturity on
the Short Term Note was subsequently extended to March 31, 2000. As of April 1,
2000, the Company was in default in repayment of the $3,000,000 Short Term Note,
and for interest of $242,500 on the Subordinated Notes. On April 3, 2000, Joseph
Teresi waived the default which existed on that date with respect to the non-
payment of interest on the $3,000,000 Short Term Note. In addition, Mr. Teresi
agreed that between March 31, 2000 and March 31, 2002 he would not make any
claim of default in connection with the non-payment of principal under the
$3,000,000 Short Term Note, and that between March 31, 2000 and March 31, 2001,
he would not make any claim of default for interest which was due as of March
31, 2000 or which would accrue between March 31, 2000 and March 31, 2001.
Concurrently, on April 3, 2000 the then remaining principal and interest balance
on the subordinated promissory note was exchanged for 3,356,710 shares of
Easyriders, Inc. Common Stock issued to Mr.Teresi.
In October 1999, Paisano Publications issued a $275,000 increasing rate
secured promissory note to an investment partnership, Siena Capital Partners,
L.P. This loan (the "Siena Loan") is subordinate to the Nomura Indebtedness.
The loan bears interest at a rate of 20% per annum (increasing by 1% monthly
beginning April 14, 2000), and is due and payable with accrued interest on
October 14, 2000. Warrants to purchase 100,000 shares of the Common Stock of the
Company were issued with an exercise price of $0.01 per share. If the Siena
Loan has been paid off in its entirety by April 13, 2000, the warrants become
null and void. In addition, if the balance is not paid in full by July 13, 2000,
the Company must issue warrants to purchase an additional 300,000 shares of the
Common Stock of the Company, and if the balance is not paid in full by October
13, 2000, the Company must issue warrants to purchase an additional 100,000
shares of the Common Stock of the Company. Thereafter, until the loan is paid
off in full, the Company must issue warrants to purchase 150,000 shares of the
Common Stock of the Company on the 13th day of each month.
As of April 13, 2000 the Company did not possess the resources to pay off
the Siena Loan. However, John Martin and Joseph Teresi were granted a right of
first refusal in connection with any assignment of the Siena Loan. Based on
this right, the Company pursued negotiations with Mr. Teresi and Mr. Martin
concerning their assumption of the Siena Loan upon terms more favorable to the
Company. These negotiations were successful and on April 13, 2000, Mr. Martin
and Mr. Teresi each paid to Siena the sum of $137,500 and assumed the position
of Siena with respect to the Siena Loan. Concurrently, the first 100,000
warrants vested, and Mr. Martin and Mr. Teresi agreed to make the following
modifications to the Siena Loan terms:
. The interest rate will be reduced from 20% per annum to 13% per annum.
. Provided the Siena Loan is paid off by December 31, 2000, twenty percent
(20%) of all warrants vested by and through such date will be surrendered.
These modifications are subject to the formal consent of Nomura, which the
Company is confident will be secured.
The Company continues in its attempts to secure a cash infusion and to
accelerate cash flow, through the pursuit of various approaches, including
selling certain assets, drawing down funds available under the revolving credit
portion of the Nomura Credit Agreement and consummating certain business
transactions. The Company is also evaluating the issuance of additional debt or
equity securities. While the Company believes that such efforts, together with
ongoing operations, will enable the Company to
20
meet its anticipated cash needs for the next 12 months, there can be no
assurance that this will be the case, as projections of future cash needs and
cash flows are subject to substantial uncertainty. In the event that the Company
is unsuccessful in its efforts to raise capital beyond that which is projected
to be realized from current operations, the Company will not be able to meet its
liquidity obligations.
Forward-Looking Information and Certain Factors
Certain statements in this Form 10-Q and in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases,
and in oral statements made by or with the approval of an authorized executive
officer constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The
forward-looking statements are subject to numerous risks and uncertainties that
could cause actual results to differ materially from those set forth in such
forward-looking statements. Such risks and uncertainties include, without
limitation, risks associated with future capital needs, management of growth,
availability of adequate financing, integration of business operations,
concentration of stock ownership, restrictions imposed on the Company by the
Lender, the magazine publishing and restaurant business, paper, pork and other
raw material prices and other factors discussed herein, in the Company's
Prospectus/Proxy Statement on Form S-4 dated September 8, 1998 and other filings
submitted to date to the Securities and Exchange Commission.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities, was issued in June 1998 and
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133 was initially effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. In July 1999, SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, was issued which delays the effective date of SFAS No. 133 to
fiscal years beginning after June 15, 2000. The Company does not believe that
the adoption of this new standard will have a material impact on its financial
position or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to a variety of risks, including paper price
volatility and changes in interest rates affecting the cost of its debt.
Paper Price Volatility
A primary component of the Company's cost of revenues in the magazine
publishing segment is the cost of paper. Consequently, increases in paper
prices can adversely impact the Company results of operations.
Interest Rates
The Company is subject to certain interest rate risk related to the Term
Loans. The Term Loans mature on September 23, 2001 and bear interest at an
annual rate equal to the prime rate of the Lendor plus 1.85% payable monthly.
The interest rate on the balance of $20,995,588 outstanding on March 31, 2000
was 10.6%. An increase in interest rates of 1% would result in an increase in
interest expense of approximately $210,000.
21
PART II -- OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings.
On April 28, 2000 an action was filed in the U.S District court for the
Central District of California (Los Angeles) by Leon Hatcher, Richard Stafford
and entities controlled by them, naming as defendants the Company, Newriders,
Paisano Publications, El Paso, Easyriders Franchising, Easyriders Licensing,
Easyriders of Ohio, and the following current or former officers and/or
directors of the Company: John Martin, William Prather, Joseph Teresi, J. Robert
Fabregas, William Nordstrom, Robert Davis, Ellen Meagher, Joseph Jacobs, Daniel
Gallery, Wayne Knyal, and Grady Pfeiffer (the "Hatcher Action"). The complaint
also names as a defendant James E. Salven, Trustee in Bankruptcy in connection
with the Pierce Action, previously disclosed by the Company.
The Hatcher Action alleges wrongful conduct on the part of the named
defendants in connection with Mr. Hatcher's past and current relationship with
Easyriders and Newriders, including: (a) his role and ownership position in
Newriders prior to the Reorganization, (b) his role and participation in the
Reorganization, (c) his acquisition of shares of Easyriders as a consequence of
the Reorganization, (d) transactions involving the shares held by Mr. Hatcher in
Newriders and Easyriders, (e) the Company's Events business and his role in the
same, (f) the Company's event merchandise business and Mr. Hatcher's role in the
same, (g) the use and possession by Mr. Hatcher of property and vehicles used in
connection with the Events and event merchandise business of the Company, (h)
the acquisition by Mr. Hatcher and Mr. Stafford of franchises to operate retail
stores under the "Easyriders" name pursuant to various written agreements, and
(i) the termination of such franchise agreements by the Company in April, 2000.
The complaint asserts wrongful conduct by defendants in connection with the
foregoing under a wide range of legal theories, including violations of the
Securities Act of 1933, the Securities Exchange Act of 1934, the California
Corporations Code, Federal Trade Commission Disclosure Rules, the California
Franchise Investment Law Laws and the Federal RICO statute (18 U.S.C. sections
1961-1968); breach of fiduciary responsibilities; fraud, negligent
misrepresentation, breach of contract, infliction of emotional distress,
interference with contracts and business relations, unfair competition and
defamation. Certain of the causes of action are presented as derivative claims,
brought on behalf of Easyriders and/or Newriders against one or more individual
defendants. The action seeks general and compensatory damages in amounts to be
proven at the time of trial, contract damages of $450,000, punitive damages,
injunctive and declaratory relief, and the appointment of a receiver.
The Company believes that the Hatcher Action is without merit and that it
has substantial defenses thereto. The Company and its officers and directors
are insured under a policy providing indemnification for damages arising from
securities claims and the misconduct of its management. The Company believes
that the Hatcher Action is a claim covered by such policy, and, accordingly,
such claim has been tendered to the carrier in question. By reason of all the
foregoing, the Company is presently of the view that the Hatcher Action is not
likely to result in materially adverse consequences. However, if it is
determined that such coverage does not exist, the potential outcome of the
Hatcher Action could be materially adverse to the Company.
22
Item 2. Changes in Securities and Use of Proceeds.
On February 9, 2000, the Company sold to two directors of the Company, John
Martin and Joseph Teresi, 493,827 shares each of common stock of the Company for
the sum of $250,000 each. The number of shares issued was calculated as 75% of
the average closing price of the common stock, with average closing price being
defined as the average of the last recorded sale price of the common stock on
the ten consecutive trading days ending on and including February 2, 2000.
In March 2000, the Company issued 400,000 shares of the common stock of the
Company in settlement of a dispute with an ex-franchisee. The number of shares
issued was determined based on the closing price of the stock on the date of
issuance.
During March 2000, the Company issued 10,500 shares of Easyriders, Inc. stock
to two consultants of Paisano Publications as compensation for services
performed. The number of shares issued was determined based on the closing
price of the stock on the date of issuance.
On March 1, 2000, the Company issued 30,059 shares of Easyriders, Inc. stock
to a related party in payment of accrued interest on convertible debentures.
Pursuant to the terms of the debenture, the number of shares issued was
calculated based on a price per share equal to 75% of the average closing bid
price of the common stock for the five days preceding the issuance.
Effective April 3, 2000, Joseph Teresi, the sole stockholder of Paisano
Publications prior to the Reorganization, agreed to forgive $3,446,787 of
principal owed on the Subordinated 7% note, leaving a principal balance of
$128,213, in exchange for 3,356,170 shares of the Company's Common Stock. This
transaction was valued at full market price without discount, market price being
determined as the average daily closing price of the Common Stock on the
American Stock Exchange over 30 consecutive trading days ending on and including
March 22, 2000, the date of the Company's last meeting of its Board of
Directors. Concurrently, Mr. Teresi agreed to forgive (a) the residual balance
due under the Subordinated 7% note of $128,213, (b) $96,739 of other obligations
owed to Mr. Teresi by the Company in connection with rent and consulting fees,
and (c) accrued interest on the Contributor Notes of $525,040, in exchange for
the undertakings of Paisano Publications pursuant to an agreement involving the
Company's events division.
The transactions described above were exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2)
thereof.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description of Exhibits
-------------- -----------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarterly
period ended March 31, 2000.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EASYRIDERS, INC.
----------------
(Registrant)
Dated: May 12, 2000 /s/ J. Robert Fabregas
----------------------------------
J. Robert Fabregas
Chief Financial Officer and
Executive Vice President
24