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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 June 30, 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 29,561,159 shares of outstanding Common Stock of the Registrant as
of August 8, 2000.
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PART I -- FINANCIAL INFORMATION
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Item 1. Financial Statements
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2000 1999
----------------------------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 253,704 $ 429,256
Accounts receivable, less allowance for doubtful accounts
of $437,184 (2000) and $645,212 (1999) 3,505,316 3,230,067
Inventories 2,251,001 2,940,426
Prepaid publication costs 669,410 563,577
Prepaid expenses and other 748,798 670,386
Receivable from shareholder 392,995 395,010
Net assets of El Paso Bar-B-Que (Note 6) 6,862,998 6,780,142
----------- -----------
Total current assets 14,684,222 15,008,864
PROPERTY AND EQUIPMENT, net 962,177 1,258,183
GOODWILL, net of accumulated amortization
of $3,273,504 (2000) and $2,388,110 (1999) 52,177,809 53,980,642
OTHER ASSETS 222,734 300,244
----------- -----------
$68,046,942 $70,547,933
=========== ===========
See accompanying notes to consolidated financial statements.
1
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
June 30, December 31,
2000 1999
----------------------------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,451,564 $ 7,084,278
Accrued payroll and payroll related expenses 889,084 813,099
Accrued interest payable 1,292,632 1,091,129
Other current liabilities 763,258 1,428,770
Income taxes payable 12,000 8,800
Reserve for disposal of El Paso Bar-B-Que Company 2,100,000 -
Current portion of deferred subscription and advertising income 3,974,286 3,464,959
Current portion of convertible debentures - 316,667
Current portion of long-term debt 954,364 1,148,880
------------ ------------
Total current liabilities 16,437,188 15,356,582
------------ ------------
CONVERTIBLE DEBENTURES, related party 1,000,000 1,000,000
NOTE PAYABLE TO STOCKHOLDER 8,000,000 11,575,000
LONG-TERM DEBT, net of current portion and debt discount, including
related party indebtedness of $390,056 (2000) and $489,541 (1999) 21,646,429 21,225,524
OTHER LONG TERM LIABILITIES, including deferred subscription
revenues of $1,491,387 (2000) and $1,509,003 (1999) 3,156,950 1,769,087
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, 28,343,749 shares (2000) and 23,056,751 shares (1999)
outstanding 28,343 23,056
Additional paid in capital 64,027,445 58,983,147
Receivable from the sale of stock (7,300,000) (7,300,000)
Accumulated deficit (38,949,413) (32,084,463)
------------ ------------
Total stockholders' equity 17,806,375 19,621,740
------------ ------------
$ 68,046,942 $ 70,547,933
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See accompanying notes to consolidated financial statements.
2
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2000 1999 2000 1999
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(unaudited) (unaudited)
CONTINUING OPERATIONS:
SALES $ 7,279,153 $ 8,049,468 $15,684,591 $16,217,846
COST OF SALES 6,026,961 6,855,482 12,823,698 13,669,782
----------- ----------- ----------- -----------
GROSS MARGIN 1,252,192 1,193,986 2,860,893 2,548,064
EXPENSES:
Selling, general, and administrative 1,624,010 2,876,659 3,068,734 4,947,899
Depreciation and amortization 1,439,548 579,676 2,032,590 1,163,743
Stock issuance expenses 22,342 600,000 195,584 600,000
----------- ----------- ----------- -----------
Total expenses 3,085,900 4,056,335 5,296,908 6,711,642
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,833,708) (2,862,349) (2,436,015) (4,163,578)
OTHER INCOME (EXPENSE) (554,407) (85,206) (350,730) 21,173
INTEREST EXPENSE (1,112,781) (866,043) (2,089,419) (1,719,905)
----------- ----------- ----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (3,500,896) (3,813,598) (4,876,164) (5,862,310)
PROVISION FOR INCOME TAXES 2,001 2,075 9,852 4,150
----------- ----------- ----------- -----------
NET LOSS FROM CONTINUING OPERATIONS (3,502,897) (3,815,673) (4,886,016) (5,866,460)
DISCONTINUED OPERATIONS:
INCOME (LOSS) FROM OPERATIONS (12,464) 166,971 121,066 377,339
LOSS ON DISPOSAL (2,100,000) - (2,100,000) -
----------- ----------- ----------- -----------
NET LOSS $(5,615,361) $(3,648,702) $(6,864,950) $(5,489,121)
=========== =========== =========== ===========
NET LOSS PER SHARE - BASIC AND DILUTED
CONTINUING OPERATIONS $(0.13) $ (0.17) $(0.19) $ (0.29)
DISCONTINUED OPERATIONS (0.07) 0.00 (0.08) 0.02
----------- ----------- ----------- -----------
NET LOSS $(0.20) $ (0.17) $(0.27) $ (0.27)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC AND DILUTED 27,490,182 21,845,482 25,594,509 20,577,473
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
3
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
June 30,
2000 1999
-----------------------------------------
(unaudited)
CONTINUING OPERATIONS:
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $(4,886,016) $(5,866,460)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock issuance expenses 195,584 600,000
Common stock issued for services 13,125
Common stock issued for interest 39,890
Depreciation and amortization 2,032,590 1,163,743
Loss on sale of Easyriders of Columbus to related party 532,818
Loss on sale of fixed assets 55,072 170,042
Loss on sale of stock held for investment 20,959
Amortization of debt issuance costs 157,386 157,389
Non-cash interest expense 150,049
Increase (decrease) in cash resulting from changes in operating accounts:
Current assets (151,538) (932,039)
Other assets 122,337 (922,998)
Current liabilities (248,942) 3,494,277
Other long-term liabilities 1,387,863 660,883
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Net cash used in operating activities (599,782) (1,454,204)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 10,000
Purchase of fixed assets (40,617) (514,787)
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Net cash used in investing activities (30,617) (514,787)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of convertible debentures and debt 383,775 203,241
Common stock issued for cash 500,000 1,500,000
Payment of long-term debt and capital leases (157,386) (157,389)
----------- -----------
Net cash provided by financing activities 726,389 1,545,852
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FROM CONTINUING OPERATIONS $ 95,990 $ (423,139)
CASH (USED FOR) PROVIDED BY DISCONTINUED OPERATIONS (271,542) 352,058
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (175,552) (71,081)
CASH AND CASH EQUIVALENTS, beginning of year 429,256 250,911
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 253,704 $ 179,830
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid for interest $ 852,055 $ 1,015,043
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NONCASH FINANCING ACTIVITIES:
Common stock issued in settlement of litigation $ 325,000
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Common stock issued in settlement of debt $ 3,446,787 $ 1,500,000
=========== ===========
Common stock issued upon conversion of debentures $ 379,149
===========
See accompanying notes to consolidated financial statements
4
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (unaudited)
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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 sold 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 37 licensed stores.
El Paso is a Texas limited liability company, which owns and operates five
barbecue and smoked meat restaurants, four 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.
Basis of presentation - The accompanying unaudited interim consolidated
financial statements of Easyriders, Inc. for the three and six month periods
ended June 30, 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
5
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (unaudited)
- --------------------------------------------------------------------------------
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 and six month periods ended June 30, 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. CONVERTIBLE DEBENTURES
On December 12, 1997, the Company issued convertible debentures with a face
value of $1,000,000 in a private placement to institutional investors. The
Debentures accrue interest at the rate of 8% per year, payable semi-
annually. The Debentures are convertible at the option of the holder into
shares of the Company's common stock at the lesser of the five-day average
closing bid price on the closing date or 80% of the five-day average closing
bid price on the conversion date, as defined. As of December 31, 1999, the
Company had issued 158,445 shares of its common stock in connection with the
conversion of $683,333 in principal amount of the Debentures, leaving a
principal balance of $316,667. On May 31, 2000, the Company issued an
additional 473,937 shares of its common stock in connection with the
conversion of the remaining balance of $316,667 in principal amount of the
Debentures, together with accrued interest of $62,482. The Company recorded
$15,621 of stock issuance expense relating to this transaction.
3. LONG-TERM DEBT
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. The formula exercise price as of June 30,
6
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (unaudited)
- --------------------------------------------------------------------------------
2000 was $0.625 per share. The Company has recorded interest expense of
$57,299 in the accompanying financial statements as a result of the
revaluation of these warrants.
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.
On April 9, 1999, the Company issued shares of stock in exchange for the
forgiveness of interest on the subordinated note of $75,000 and a reduction
in principal of the subordinated note from $5,000,000 to $3,575,000.
Effective April 3, 2000, Joseph Teresi 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,
valued using 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. 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. (See
Footnote 4 - Long-Term Liabilities)
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 the fair value of the
warrants, aggregating $92,750, has been recorded as interest expense. In
addition, Mr. Martin and
7
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (unaudited)
- --------------------------------------------------------------------------------
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 received the formal consent of Nomura.
(See Footnote 9 - Subsequent Events)
4. LONG-TERM LIABILITIES
Licensing of Easyriders Events - In March 2000, Easyriders entered into a
long-term licensing agreement with a third party, Action Promotions, Inc.
("API") pursuant to which API has been granted the exclusive right to
produce and manage events and to sell event-specific merchandise under the
Easyriders brand, in exchange for a commitment to make an advance purchase
of merchandise and to pay certain guaranteed and percentage-based royalties.
In connection with this transaction, the Company has recorded a $1.5 million
liability (of which $0.2 million is classified as short-term and $1.3
million is classified as long-term) which represents the Company's
obligation to provide Easyriders branded merchandise over a period of
approximately eight years.
5. STOCKHOLDERS' EQUITY
Related-Party Stock Issuances - 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.
On April 14, 2000, the Company issued 3,356,170 shares of Easyriders, Inc.
stock to a related party in exchange for forgiveness of debt. (See Footnote
3 - Long-Term Debt).
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.
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.
8
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (unaudited)
- --------------------------------------------------------------------------------
On June 1, 2000, the Company issued 28,678 shares of Easyriders, Inc. stock
to a related party in payment of accrued interest on convertible debentures
in the amount of $20,164. 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 $6,721 of stock issuance expense.
Common Stock issued upon conversion of debentures - On May 31, 2000, the
Company issued an additional 473,937 shares of its common stock in
connection with the conversion of the remaining balance of $316,667 in
principal amount of the Debentures, together with accrued interest of
$62,482. The Company recorded $15,621 of stock issuance expense relating to
this transaction. (See Footnote 2 - Convertible Debentures).
Stock Option Grants - During the six months ended June 30, 2000, the Board
of Directors of the Company authorized the granting of 574,000 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.
On June 23, 2000, the Board of Directors of the Company took action to
increase the total number of shares authorized to be issued under the Plan
from 2,800,000 to 3,609,750. This action is subject to approval by
shareholders at the Company's next Annual Meeting.
6. DISCONTINUED OPERATIONS
Sale of El Paso Bar-B-Que - On June 21, 2000, the Company announced its
intention to sell its food service segment, the El Paso Bar-B-Que Company,
in order to generate working capital necessary to improve the Company's
financial condition. Presently management expects that this transaction
will be completed by the end of September 2000. Based on the Company's plan
to dispose of El Paso Bar-B-Que Company, the subsidiary is reflected as
discontinued operations in the accompanying financial statements.
The net assets of the discontinued operations at June 30, 2000 can be
segregated into current and noncurrent components as follows:
Current $(2,107,856)
Noncurrent 8,970,854
-----------
Total $ 6,862,998
===========
The following table summarizes the results of discontinued operations for
the three and six month periods ended June 30, 2000 and 1999:
9
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (unaudited)
- --------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
-----------------------------------------------------------------------
Sales $ 3,523,597 $2,967,797 $ 6,869,965 $5,831,131
Cost of sales 2,225,686 1,799,658 4,274,761 3,570,401
----------- ---------- ----------- ----------
Gross margin 1,297,911 1,168,139 2,595,204 2,260,730
Expenses 1,174,591 944,783 2,232,488 1,830,864
----------- ---------- ----------- ----------
Income (loss) from operations $ 123,320 $ 223,356 $ 362,716 $ 429,866
=========== ========== =========== ==========
Net income (loss) $ (12,464) $ 166,971 $ 121,066 $ 377,339
=========== ========== =========== ==========
Loss on disposal $(2,100,000) $ - $(2,100,000) $ -
=========== ========== =========== ==========
Net income (loss) after loss on
disposal $(2,112,464) $ 166,971 $(1,978,934) $ 377,339
=========== ========== =========== ==========
The loss on disposal aggregating $2,100,000 has been estimated by management
using an estimate of net proceeds from the sale of this segment. The actual
loss incurred may differ.
7. SALE OF ASSETS
Sale of Easyriders Columbus - In April 2000, the Company entered into an
agreement with Joseph Teresi pursuant to which the assets of Easyriders of
Columbus were 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
was $419,149. Upon closing of the Columbus Transaction, Easyriders of
Columbus was relieved of all liability under the lease for the premises
occupied by Easyriders of Columbus. Mr. Teresi, who owns the premises,
agreed to continue operating the business as "Easyriders of Columbus"
pursuant to a licensing agreement with Easyriders. The Company recorded a
loss associated with the sale of Easyriders of Columbus of $532,818 and the
write-off of the goodwill attributable to Easyriders of Columbus aggregating
$866,470.
10
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (unaudited)
- --------------------------------------------------------------------------------
8. 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 have
converted to licensees), 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 discontinued operations of El Paso. 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 from continuing operations for Easyriders,
Inc. five operating segments have been prepared on a basis which is
consistent with the 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.
11
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (unaudited)
- --------------------------------------------------------------------------------
Goods and Food Franchising Other
Publishing Services Service /Licensing Operations Totals
- ------------------------------------------------------------------------------------------------------------------------------------
Sales external customers - Quarter ended
June 30, 2000 5,963,021 1,181,746 0 0 134,386 7,279,153
- ------------------------------------------------------------------------------------------------------------------------------------
Sales external customers - Quarter ended
June 30, 1999 5,934,736 1,804,846 0 30,000 279,886 8,049,468
- ------------------------------------------------------------------------------------------------------------------------------------
Sales external customers -
Year-to date June 30, 2000 11,450,518 2,615,713 0 0 1,618,360 15,684,591
- ------------------------------------------------------------------------------------------------------------------------------------
Sales external customers -
Year-to date June 30, 1999 11,555,445 3,247,758 0 78,137 1,336,506 16,217,846
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations -
Quarter ended June 30, 2000 641,421 (182,488) 0 (173,887) (49,711) 235,335
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations -
Quarter ended June 30, 1999 685,664 85,998 0 (676,442) (54,767) 40,453
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations -
Year-to-date June 30, 2000 733,333 (487,331) 0 (309,812) 407,505 343,695
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations -
Year-to-date June 30, 1999 1,347,320 (171,716) 0 (1,168,367) 59,829 67,066
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued
operations - Quarter ended June 30, 2000 0 0 (2,112,464) 0 0 (2,112,464)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued
operations - Quarter ended June 30, 1999 0 0 166,971 0 0 166,971
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued
operations - Year-to-date June 30, 2000 0 0 (1,978,934) 0 0 (1,978,934)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued
operations - Year-to-date June 30, 1999 0 0 377,339 0 0 377,339
- ------------------------------------------------------------------------------------------------------------------------------------
Segment Assets at June 30, 2000 8,262,861 15,163 0 11,261 70,151 8,359,436
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Expenditures at June 30, 2000 40,617 0 0 0 0 40,617
- ------------------------------------------------------------------------------------------------------------------------------------
Depreciation/Amortization -
Quarter ended June 30, 2000 83,978 4,029 0 2,106 16,341 106,454
- ------------------------------------------------------------------------------------------------------------------------------------
Depreciation/Amortization -
Quarter ended June 30, 1999 67,363 12,086 0 2,118 28,369 109,936
- ------------------------------------------------------------------------------------------------------------------------------------
Depreciation/Amortization -
Year-to-date June 30, 2000 172,364 16,116 0 4,220 37,056 229,756
- ------------------------------------------------------------------------------------------------------------------------------------
Depreciation/Amortization -
Year-to-date June 30, 1999 140,165 24,173 0 4,237 56,172 224,747
- ------------------------------------------------------------------------------------------------------------------------------------
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements is as
follows:
12
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (unaudited)
- --------------------------------------------------------------------------------
Q/E YTD
--------------------------------------------
June 30, 2000:
Income (loss) from operations included in segment disclosure $ 235,335 $ 343,695
Unallocated, selling, general, and administrative (2,069,043) (2,779,710)
------------ ------------
Loss from operations $(1,833,708) $(2,436,015)
============ ============
June 30, 1999:
Income (loss) from operations included in segment disclosure $ 40,453 $ 67,066
Unallocated, selling, general, and administrative (2,902,802) (4,230,644)
------------ ------------
Loss from operations $(2,862,349) $(4,163,578)
============ ============
As at June 30, 2000:
Segment assets $ 8,359,436
Cash and cash equivalents 253,704
Receivable from shareholder 392,995
Net assets of El Paso Bar-B-Que - discontinued operations 6,862,998
Goodwill 52,177,809
-----------
Total Assets $68,046,942
===========
Q/E YTD
--------------------------------------------
June 30, 2000:
Depreciation and amortization included in segment disclosure $ 106,454 $ 229,756
Amortization of goodwill 1,333,094 1,802,834
---------- ----------
Depreciation and amortization $1,439,548 $2,032,590
============ ============
June 30, 1999:
Depreciation and amortization included in segment disclosure $ 109,936 $ 224,747
Amortization of goodwill 469,740 938,996
---------- ----------
Depreciation and amortization $ 579,676 $1,163,743
========== ==========
Revenues concerning principal geographic areas are as follows based on customer
location:
USA Canada Germany UK Australia Other Total
QE 6/30/00 6,285,493 $265,497 $117,117 $123,043 $106,184 $381,819 $ 7,279,153
QE 6/30/99 6,909,635 273,402 159,124 145,918 114,706 446,683 $ 8,049,468
YTD 6/30/00 13,650,395 529,852 252,877 248,229 212,301 790,938 $15,684,592
YTD 6/30/99 14,052,706 520,596 299,657 291,980 224,530 828,377 $16,217,846
13
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (unaudited)
- --------------------------------------------------------------------------------
The Company's foreign operations consist primarily of international
newsstand sales and mail-order product 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.
9. SUBSEQUENT EVENTS
Siena loan - On April 13, 2000, John Martin and Joseph Teresi assumed the
position of Siena with respect to the Siena Loan (See Footnote 3 - Long-Term
Debt). As of July 13, 2000, the Company did not possess the resources to pay
off the Siena Loan. As such, warrants to purchase an additional 150,000
shares of the common stock of the Company were issued to each of Mr. Martin
and Mr. Teresi. The fair value of the warrants, aggregating $165,750, will
be recorded as interest expense.
Sale of El Paso Bar-B-Que - On August 12, 2000, the Company's Board of
Directors approved the execution of a letter of intent with Culinary
Holdings, Inc. to sell all of the assets of the El Paso Bar-B-Que Company,
subject to the consumation of a definitive agreement. The Company expects
the transaction to close on or about September 26, 2000.
14
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.
15
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. Further, the Company has added back non-
cash charges relating to stock issuance expenses to derive an adjusted EBITDA
("Adjusted EBITDA"). 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, EBITDA, as calculated by the Company, may not
be comparable to similarly titled measures used by other companies.
16
Results of Operations
The following table sets forth certain operating data for Easyriders for the
three months ended June 30, 2000 and 1999:
Paisano
Easyriders Companies El Paso Consolidated Consolidated
For the Three Months Ended June 30,
-------------------------------------------------------------------------------
2000 2000 2000 2000 1999
(unaudited)
CONTINUING OPERATIONS:
SALES
Publishing $ - $ 5,963,021 $ - $ 5,963,021 $ 5,934,736
Goods and services 1,181,746 1,181,746 1,804,846
Food service - - -
Franchising/Licensing - - 30,000
Other operations 134,386 134,386 279,886
---------------------------------------------------------------------------------
- 7,279,153 - 7,279,153 8,049,468
COST OF SALES
Publishing 4,628,733 4,628,733 4,711,967
Goods and services 1,214,933 1,214,933 1,758,357
Food service - - -
Franchising/Licensing - - -
Other operations 183,295 183,295 385,028
---------------------------------------------------------------------------------
- 6,026,961 - 6,026,961 6,855,352
GROSS MARGIN
Publishing - 1,334,288 - 1,334,288 1,222,769
Goods and services - (33,187) - (33,187) 46,489
Food service - - - - -
Franchising/Licensing - - - - 30,000
Other operations - (48,909) - (48,909) (105,142)
---------------------------------------------------------------------------------
- 1,252,192 - 1,252,192 1,194,116
EXPENSES
Publishing 692,867 692,867 537,105
Goods and services 149,301 149,301 (39,509)
Food service - - -
Franchising/Licensing 173,887 173,887 706,442
Other operations 802 802 (50,375)
Unallocated expenses 1,202,573 866,470 2,069,043 2,902,802
---------------------------------------------------------------------------------
1,202,573 1,883,327 - 3,085,900 4,056,465
INCOME (LOSS) FROM OPERATIONS
Publishing - 641,421 - 641,421 685,664
Goods and services - (182,488) - (182,488) 85,998
Food service - - - - -
Franchising/Licensing - (173,887) - (173,887) (676,442)
Other operations - (49,711) - (49,711) (54,767)
Unallocated (1,202,573) (866,470) - (2,069,043) (2,902,802)
---------------------------------------------------------------------------------
$(1,202,573) $ (631,135) $ - $(1,833,708) $(2,862,349)
=================================================================================
NET LOSS FROM CONTINUING
OPERATIONS $(1,378,593) $(2,124,304) $ - $(3,502,897) $(3,815,673)
NET INCOME (LOSS) FROM
DISCONTINUED OPERATIONS - - (2,112,464) (2,112,464) 166,971
--------------------------------------------------------------------------------
NET LOSS $(1,378,593) $(2,124,304) $(2,112,464) $(5,615,361) $(3,648,702)
================================================================================
17
The following table sets forth certain operating data for Easyriders for the six
months ended June 30, 2000 and 1999:
Easyriders Paisano Companies El Paso Consolidated Consolidated
For the Six Months Ended June 30,
-------------------------------------------------------------------------------------
2000 2000 2000 1999 1999
(unaudited)
CONTINUING OPERATIONS:
SALES
Publishing $ - $11,450,518 $ - $11,450,518 $11,555,445
Goods and services 2,615,713 2,615,713 3,247,758
Food service - - -
Franchising/Licensing - - 78,137
Other operations 1,618,360 1,618,360 1,336,506
--------------------------------------------------------------------------------------
- 15,684,591 - 15,684,591 16,217,846
COST OF SALES
Publishing 8,988,531 8,988,531 9,128,968
Goods and services 2,631,814 2,631,814 3,237,423
Food service - - -
Franchising/Licensing - - -
Other operations 1,203,353 1,203,353 1,303,391
-------------------------------------------------------------------------------------
- 12,823,698 - 12,823,698 13,669,782
GROSS MARGIN
Publishing - 2,461,987 - 2,461,987 2,426,477
Goods and services - (16,101) - (16,101) 10,335
Food service - - - - -
Franchising/Licensing - - 78,137
Other operations - 415,007 - 415,007 33,115
-------------------------------------------------------------------------------------
- 2,860,893 - 2,860,893 2,548,064
EXPENSES
Publishing 1,728,654 1,728,654 1,079,157
Goods and services 471,230 471,230 182,051
Food service - - -
Franchising/Licensing 309,812 309,812 1,246,504
Other operations 7,502 7,502 (26,714)
Unallocated expenses 1,860,102 919,608 2,779,710 4,230,644
-------------------------------------------------------------------------------------
1,860,102 3,436,806 - 5,296,908 6,711,642
INCOME (LOSS) FROM OPERATIONS
Publishing - 733,333 - 733,333 1,347,320
Goods and services - (487,331) - (487,331) (171,716)
Food service - - - - -
Franchising/Licensing (309,812) - (309,812) (1,168,367)
Other operations - 407,505 - 407,505 59,829
Unallocated (1,860,102) (919,608) - (2,779,710) (4,230,644)
-------------------------------------------------------------------------------------
$(1,860,102) $ (575,913) $ - $(2,436,015) $(4,163,578)
=====================================================================================
NET LOSS FROM CONTINUING
OPERATIONS $(2,079,636) $(2,806,380) $ - $(4,886,016) $(5,866,460)
NET INCOME (LOSS) FROM
DISCONTINUED OPERATIONS (1,978,934) (1,978,934) 377,339
-------------------------------------------------------------------------------------
NET LOSS $(2,079,636) $(2,806,380) $(1,978,934) $(6,864,950) $(5,489,121)
=====================================================================================
18
The following tables set forth the EBITDA calculations for Easyriders for the
three and six month periods ended June 30, 2000 and 1999:
Easyriders Paisano Companies El Paso Consolidated Consolidated
For the Three Months Ended June 30,
-----------------------------------------------------------------------------------
2000 2000 2000 2000 1999
Continuing Operations:
Net loss $(1,378,593) $(2,124,302) $ - $(3,502,897) $(3,815,673)
Interest expense 381,469 731,312 - 1,112,781 866,043
Income tax expense 2,001 - 2,001 2,075
Depreciation /amortization expense 16,341 1,423,207 - 1,439,548 579,676
----------------------------------------------------------------------------------
EBITDA - Continuing Operations $ (978,782) $ 30,215 $ - $ (948,567) $(2,367,879)
==================================================================================
Discontinued Operations:
Net income (loss) $ - $ - $(2,112,464) $ - $ 166,971
Interest expense - - 135,784 - (4,605)
Income tax expense - - -
Depreciation /amortization expense - - 256,780 - 203,120
----------------------------------------------------------------------------------
EBITDA - Discontinued Operations $ - $ - $(1,719,900) $ - $ 365,486
==================================================================================
EBITDA $ (978,782) $ 30,215 $(1,719,900) $(2,668,467) $(2,002,393)
Add back stock issuance expense 22,342 - - 22,342 600,000
----------------------------------------------------------------------------------
Adjusted EBITDA $ (956,440) $ 30,215 $(1,719,900) $(2,646,125) $(1,402,393)
==================================================================================
For the Six Months Ended June 30,
----------------------------------------------------------------------------------
Continuing Operations:
Net loss $(2,079,636) $(2,806,380) $ - $(4,886,016) $(5,866,460)
Interest expense 679,572 1,409,847 - 2,089,419 1,719,905
Income tax expense 4,052 5,800 - 9,852 4,150
Depreciation /amortization expense 32,682 1,999,908 - 2,032,590 1,163,743
----------------------------------------------------------------------------------
EBITDA - Continuing Operations $(1,363,330) $ 609,175 $ - $ (754,155) $(2,978,662)
==================================================================================
Discontinued Operations:
Net income (loss) $ - $ - $(1,978,934) $ - $ 377,339
Interest expense - - 241,652 - 52,527
Income tax expense - - -
Depreciation /amortization expense - - 493,274 - 388,202
---------------------------------------------------------------------------------
EBITDA - Discontinued Operations $ - $ - $(1,244,008) $ - $ 818,068
=================================================================================
EBITDA $(1,363,330) $ 609,175 $(1,244,008) $(1,998,163) $(2,160,594)
Add back stock issuance expense 195,584 - - 195,584 600,000
---------------------------------------------------------------------------------
Adjusted EBITDA $(1,167,746) $ 609,175 $(1,244,008) $(1,802,579) $(1,560,594)
=================================================================================
19
Results of Operations of Easyriders Inc. and subsidiaries
During the three months ended June 30, 2000, the Company experienced a net
loss in the amount of $5,615,361, reflecting a loss increase of $1,966,659, or
54%, when compared with the net loss of $3,648,702 for the three months ended
June 30, 1999. The net loss for the six months ended June 30, 2000 was
$6,864,950, reflecting a loss increase of $1,375,829, or 25%, when compared
with the net loss of $5,489,121 for the same period in the prior year. The net
loss increase for the three month period can be substantially attributed to an
estimated $2.1 million loss on disposal of the discontinued operations, a
$715,865 increase in interest and other expenses, and a $179,435 reduction in
income from discontinued operations, offset by an improvement in gross margin of
$58,206 and a $970,435 reduction in operating expenses. The net loss increase
for the six month period can be attributed to a combination of the estimated
$2.1 million loss on disposal, a $747,119 increase in interest and other
expenses, and a $256,273 reduction in income from discontinued operations,
offset by a $312,829 improvement in gross margin, and a $1,414,734 reduction in
operating expenses. Net loss from continuing operations improved $312,776, or
8%, for the three month periods, and $980,444, or 17%, for the six month
periods.
The Company's net loss per share increased $0.03 per share, or 18%, to
$0.20 per share for the three months ended June 30, 2000, as compared to the net
loss of $0.17 per share for the three months ended June 30, 1999. For the six
month periods, the Company's net loss per share remained constant at $0.27 per
share. Net loss per share from continuing operations improved $0.04 per share,
or 24%, for the three month periods, and $0.10 per share, or 34%, for the six
month periods.
The Company experienced negative EBITDA in the amount of $2,668,467 and
$1,998,163 for the three and six months ended June 30, 2000, respectively,
compared with negative EBITDA of $2,002,393 and $2,160,594 for the three and six
months ended June 30, 1999, reflecting an increase in negative EBITDA of
$666,074, or 33%, for the three month periods, and a decrease in negative EBITDA
of $162,431, or 8%, for the six month periods. Adjusted EBITDA reflects the
add-back of non-cash charges related to stock issuance expenses of $22,342 and
$195,584 for the three and six months ended June 30, 2000, respectively, and
$600,000 for both the three and six months ended June 30, 1999. Adjusted
negative EBITDA was $2,646,125 and $1,802,579 for the three and six months ended
June 30, 2000, respectively, compared with adjusted negative EBITDA of
$1,402,393 and $1,560,594 for the three and six months ended June 30, 1999,
reflecting an increase in negative EBITDA of $1,243,732, or 89%, for the three
month periods, and an increase in negative EBITDA of $241,985, or 16%, for the
six month periods. Negative EBITDA from continuing operations was $948,567 and
$754,155 for the three and six months ended June 30, 2000, respectively,
compared with negative EBITDA from continuing operations of $2,367,879 and
$2,978,661 for the three and six months ended June 30, 1999, reflecting a
decrease in negative EBITDA of $1,419,312, or 60%, for the three month periods,
and a decrease in negative EBITDA of $2,224,506, or 75%, for the six month
periods.
Results of Operations: Paisano Companies
The operating results of the Company for both the three and six months
ended June 30, 2000 and June 30, 1999 include the results for the Paisano
Companies.
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
20
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 operating franchisees. There is no related cost of
sales. The Paisano Companies' other segments primarily includes events which
generate substantially all of their revenues from the sale of tickets to
motorcycle rodeos, motorcycle shows, and tattoo shows. Cost of sales for the
other segments represent direct costs of promoting the events.
The Paisano Companies' total sales decreased $770,315, or 10%, from
$8,049,468 for the three months ended June 30, 1999 to $7,279,153 for the same
three months in 2000. Total sales for the six month periods decreased $533,255,
or 3%, from $16,217,846 for the six months ended June 30, 1999 to $15,684,591
for the same six months in 2000. These decreases can be substantially
attributed to a combination of 1) reduced revenues from Easyriders of Columbus
of $397,583 and $386,597 for the three and six month periods, respectively, as
a result of this store being sold in April 2000, and 2) reduced revenues from
Paisano Publications of $284,148 and $217,921 for the three and six month
periods, respectively, as a result of the reduction in frequency in American
Rodder magazine, the cessation of the Metal Hammer magazine, and the closure of
the Bros Club division.
The Paisano Companies' gross margin increased $58,075, or 5%, from
$1,194,117 for the three months ended June 30, 1999, to $1,252,192 three months
ended June 30, 2000. For the six month periods, gross margin increased
$312,830, or 12%, from $2,548,064 in 1999 to $2,860,894 in 2000. As a
percentage of sales, gross margin for the Paisano Companies increased from 15%
to 17% for the three month periods, and from 16% to 18% for the six month
periods. The increase in gross margin for both the three and six month periods
can be attributed to the variable costs saved as a result of the decreases in
sales for these periods, and to the reduction in payroll costs related to the
events division which was restructured in March 2000.
The Paisano Companies' loss from operations decreased $588,810, or 48%,
from $1,219,945 for the three months ended June 30, 1999, to $631,135 for the
three months ended June 30, 2000. The Paisano Companies' loss from operations
decreased $1,418,997, or 71%, from $1,994,910 for the six months ended June 30,
1999, to $575,913 for the six months ended June 30, 2000. The decrease for the
three month periods can be attributed to a decrease in operating expenses of
$530,735 coupled with an increase in gross margin of $58,075. The decrease for
the six month periods can be attributed to a decrease in operating expenses of
$1,106,168 coupled with an increase in gross margin of $312,830. The decrease
in operating expenses for both the three and six month periods can be attributed
to the reduction in legal and professional expenses, which were unusually high
in 1999 as a result of pending litigation which was settled in the first quarter
of 2000.
Expenses of the Paisano Companies not allocated to any segment amount to
$866,470 and $919,608 for the three and six months ended June 30, 2000, and
$1,260,399 and $2,061,976 for the three and six months ended June 30, 1999. The
allocated expenses include payroll, promotion, and other general and
administrative expenses specifically attributable to the business segments. The
unallocated expenses represent legal and professional fees and accelerated
amortization of goodwill not specifically attributable to a business segment.
Payroll and related benefits for the Paisano Companies decreased $144,102,
or 32%, from $444,138 for the quarter ended June 30, 1999 to $300,036 for the
same quarter in 2000, and decreased $225,083, or 26%, from $852,643 for the six
months ended June 30, 1999 to $627,560 for the same six months in 2000. These
decreases are the result of efforts to reduce costs by decreasing staff size.
Depreciation and amortization for the quarters ended June 30, 2000 and 1999
totaled $1,417,072 and $537,103, respectively, and for the six month periods
ended June 30, 2000 and 1999 totaled $1,975,198 and $1,079,161, respectively, of
which $466,624 and $936,364 for the three and six months ended June
21
30, 2000, respectively, and $469,740 and $938,996 for the three and six months
ended in the prior year, respectively, relates to the amortization of the
$56,368,752 in goodwill created out of the Paisano Companies' acquisition by the
Company. In addition, the amortization for the three and six months ended June
30, 2000 includes $866,470 of accelerated amortization of the goodwill
attributed to Easyriders of Columbus, as such store was sold effective April 30,
2000.
Interest expense for the Paisano Companies increased $158,303, or 28%, from
$572,930 for the quarter ended June 30, 1999 to $731,233 for the quarter ended
June 30, 2000. For the six month periods ended June 30, 1999 and 2000, interest
expense increased $264,019, or 23%, from $1,145,749 to $1,409,768, respectively.
These increases are primarily attributable to increases in the prime rate, and
additional borrowings under the Revolving Loan.
The net loss for the Paisano Companies increased $286,310, or 16%, from
$1,837,994 for the three months ended June 30, 1999 to $2,124,304 for the three
months ended June 30, 2000. The net loss for the six month periods decreased
$384,600, or 12%, from $3,190,980 to $2,806,380. The increase in the net loss
for the three month periods can be attributed to the net loss incurred on the
sale of Easyriders of Columbus, offset by the reduction in expenses incurred by
the Events division as a result of the licensing of the rights to conduct the
events to a third party in March, 2000. The decrease in the net loss for the
six month periods can be attributed to the reduction in legal and professional
fees combined with the reduction in expenses incurred by Events, and offset by
the net loss resulting from the sale of Columbus and the increase in interest
expense. EBITDA for the three month periods improved by $731,944 from a
negative EBITDA of $701,729 for the three months ended June 30, 1999 to an
EBITDA of $30,215 for the three months ended June 30, 2000. EBITDA for the six
month periods improved by $1,523,345 from a negative EBITDA of $914,170 for the
six months ended June 30, 1999 to an EBITDA of $609,175 for the six months ended
June 30, 2000.
The principal raw material used in publishing operations of the Paisano
Companies is paper. Paper costs represented approximately 18% and 16% of Paisano
Publications' production, selling and other direct costs for the three months
ended June 30, 2000 and 1999, respectively, and approximately 17% and 16% for
the six months then ended. 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.
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.
Discontinued Operations: El Paso
The operating results of the Company do not include the results of El Paso
Bar-B-Que Company as this subsidiary has been segregated and treated as
discontinued operations.
E1 Paso's sales from its five El Paso Bar-B-Que Restaurants increased
$555,800, or 19%, from $2,967,797 for the three months ended June 30, 1999 to
$3,523,597 for the three months ended June 30,
22
2000. For the six month periods ended June 30, 1999 and 2000, sales increased
$1,038,834, or 18%, from $5,831,131 to $6,869,965. The increase in sales for
both the three and six month periods can be attributed to the relocation of the
Tulsa store to a bigger facility, increased revenues generated by the catering
division as a result of increased efforts to promote this portion of the
business, an increase in the menu prices, and revenues generated by the new
Mesa, Arizona store which opened its doors in May. Cost of sales, which includes
food and direct payroll costs related to the operations of the restaurants,
increased $426,028, or 24%, from $1,799,658 for the three months ended June 30,
1999 to $2,225,686 for the same three months in 2000. For the six month periods,
cost of sales increased $704,360, or 20%, from $3,570,401 to $4,274,761. Cost of
sales as a percentage of sales increased from 61% to 63% for the three month
periods, and from 61% to 62% for the six month periods. These increases are the
result of rising food costs in excess of increased menu prices. Gross margin as
a percentage of sales decreased slightly from 39% to 37% for the three month
periods ended June 30, 1999 and 2000, and from 39% to 38% for the six month
periods then ended. Operating expenses as a percentage of sales increased from
32% to 33% for the three month periods, and from 31% to 33% for the six month
periods, and income from operations as a percentage of sales decreased from 8%
to 4% for the three month periods, and from 7% to 5% for the six month periods.
Interest expense associated with debt used to finance the restaurants and
capital leases was $65,820 and $122,952 for the three and six months ended June
30, 1999 and $135,784 and $241,651 for the three and six months ended June 30,
2000. Net income decreased $179,435, or 107%, from $166,971 for the three months
ended June 30, 1999 to a loss of $12,464 for the three months ended June 30,
2000. For the six month periods, net income decreased $256,273, or 68%, from
$377,339 to $121,066. EBITDA increased from $365,486 for the three months ended
June 30, 1999 to $380,100 for the same three months in 2000, and increased from
$818,068 for the six months ended June 20, 1999 to $855,990 for the same period
in 2000.
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 June 30, 2000, the Company had negative working capital
of $1,752,966 due primarily to deferred subscription and advertising income of
$3,974,286.
Cash used in operating activities during the six month period ended June
30, 2000 totaled approximately $0.6 million. The operating loss of $4.9 million
was offset by several non-cash charges including $2.0 million for depreciation
and amortization, $0.2 million for stock issuance expenses, $0.2 million of
amortization of debt issuance costs, $0.2 million of non-cash interest expense,
and $0.6 million for losses on the sale of assets. Cash of $1.1 million was
provided 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 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. Available borrowings under the Revolving Loans
are 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 in compliance with the terms of the Nomura
Indebtedness, and available borrowings are no longer subject to the approval of
the Lender. At June 30, 2000, there was $75,000 of available borrowings under
the Revolving Loans.
23
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 Excess Cash Flow, which is
dependent on uncertain future events, no amounts have been classified as current
liabilities at June 30, 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 June 30, 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 June 30, 2000 total $27,091,886.
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. As of June
30, 2000, the Company was in compliance with all of these covenants.
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 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-
24
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, which have received the formal consent of
Nomura:
. 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.
The Company continues in its attempts to secure a cash infusion through
the pursuit of its sale of the El Paso Bar-B-Que Company, and through the
consummation of certain other 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 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
25
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 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 $21,220,588 outstanding on June 30, 2000 was
11.35 %. An increase in interest rates of 1% would result in an increase in
interest expense of approximately $212,000 per annum.
26
PART II -- OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings.
The Hatcher Litigation
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 named as a defendant James E. Salven, Trustee in Bankruptcy in connection
with the Pierce Action, previously disclosed by the Company.
The Hatcher Action alleged 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 asserted 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 were presented as derivative claims,
brought on behalf of Easyriders and/or Newriders against one or more individual
defendants. The action sought 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.
On July 31, 2000, the US District Court in Los Angeles issued an order
dismissing the Hatcher Action in its entirety, based on a motion brought by
defendants challenging the complaint as being in violation of applicable rules
requiring that complaints in Federal court set forth a "short and plain"
statement of the basis for relief, and that allegations of fraud be specific as
to all details. The order granted plaintiffs 30 days to file a new complaint,
stating that any amended complaint "must be a short, plain statement which is
concise, simple and direct in compliance with Rule 8 (a). Furthermore,
allegations of fraud, misrepresentation and securities fraud must be alleged
with particularity in compliance with Rule 9."
The Company believes it has substantial defenses to any amended
complaint plaintiffs may file in this action. Furthermore, 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
27
management, and has received confirmation from its carrier that the Hatcher
Action is a claim covered by such policy. By reason of all the foregoing, the
Company is of the view that the Hatcher Action is not likely to result in
materially adverse consequences.
The Pierce Litigation
The Company has previously reported on the legal action involving Rick
Pierce, a former shareholder of Newriders, including (a) the Chapter 7
bankruptcy proceeding pending in the United States Bankruptcy Court, Eastern
District of California, Fresno Division Case No. 98-19101-A-11, which was
commenced as an involuntary proceeding and then converted to a Chapter 11 case
with the debtor, Rick Pierce, in possession, and (b) the Company's adversary
proceeding against the Pierce Bankruptcy Estate and other parties who claim an
interest in shares of the Company acquired through various transactions with Mr.
Pierce. This action involves claims and counterclaims arising out of the
Reorganization of 1998 in which Mr. Pierce sought damages of at least $20
million.
Based upon the previously-reported (a) settlement conference in September,
1999 before Judge Montali, (b) the arrest and indictment of Mr. Pierce on 29
counts of conspiracy, mail fraud and money laundering (c) conversion of the
bankruptcy proceeding from Chapter 11 to Chapter 7, (d) dissolution of the
creditor's committee, (e) appointment of a trustee to administer the bankruptcy
estate, and (f) recent discussions with the trustee, the Company now believes it
likely that the action will be settled with no material adverse consequences to
the Company. A settlement agreement is presently in preparation, and the
Company anticipates a resolution of this matter during the next 60 days.
The Kaye, Scholer Litigation
On April 19, 2000, the Company filed an action in Los Angeles County
Superior Court against the law firm of Kaye, Scholer, Fierman, Hays & Handler,
LLP ("Kaye, Scholer"), which represented Newriders, Inc. in the Reorganization
of 1998 (the "Kaye, Scholer Action"). The Kaye, Scholer Action alleges that
defendant, and the responsible attorneys individually, committed legal
malpractice, rendered negligent advice and breached attorney-client fiduciary
duties by failing to protect the Company's interests in connection with the
indemnification agreement entered into by and between Newriders, as Buyer, and
Paisano Publications, Inc., as Seller, in the Reorganization. The complaint
alleges that as a consequence of such failures, the Company was exposed to costs
in excess of $2.5 million in connection with the previously reported Steel
Horses Arbitration, and seeks recovery of such sums, and other damages. In the
action, Kaye, Scholer has filed a cross-complaint seeking recovery of unpaid
legal fees in the amount of approximately $100,000.
Other Litigation
The Company is named as a defendant in other legal actions arising from its
normal operations. The Company anticipates that any damages or expenses it may
incur in connection with these actions, individually and collectively, will not
be material.
28
Item 2. Changes in Securities and Use of Proceeds.
On May 31, 2000, the Company issued 473,937 shares of Easyriders, Inc. stock
in connection with the conversion of debentures with a principal balance of
$316,667 and accrued interest of $62,482. Pursuant to the terms of the
debenture, the number of shares issued was calculated based on a price per share
equal to 80% of the average closing bid price of the common stock for the five
days preceding the issuance.
On June 1, 2000, the Company issued 28,678 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 3. Defaults Upon Senior Securities
None.
Item 4. Submission of matters to a vote of security holders
At the Company's Annual Meeting of its Stockholders held on June 22, 2000 (the
"Annual Meeting") the stockholders of the Company approved the following
proposals:
Proposal 1. Election of Directors
The following persons were elected as directors of the Company at the Annual
Meeting to hold office for a term of one year or until their successors have
been duly elected and qualified:
29
Name Votes For Votes Against Votes Abstaining Broker Non-Votes
- -------------------------------------------------------------------------------------------------------------------
John E. Martin 25,122,614 0 36,377 0
William E. Prather 25,122,714 0 36,277 0
Wayne L. "Buz" Knyal 25,122,614 0 36,377 0
Daniel J. Gallery 25,122,614 0 36,377 0
Joseph Teresi 25,122,714 0 36,277 0
John P. Corrigan 25,122,614 0 36,377 0
Stewart G. Gordon 25,122,614 0 36,377 0
Joseph J. Jacobs 25,122,614 0 36,377 0
Proposal 2. Appointment of Independent Auditors
The appointment by the Board of Directors of the Company of Deloitte and
Touche, LLP as the Company's independent auditors for the fiscal year ending
December 31, 2000 was ratified with 25,115,612 votes for the proposal, 33,264
votes against the proposal, 10,115 votes abstaining, and 0 broker non-votes.
Proposal 3. Issuance of Common Stock Pursuant to Private Placements
The issuance of Common Stock pursuant to Private Placements was ratified by a
majority of the disinterested shareholders voting on this issue with 6,794,964
votes for the proposal, 105,469 votes against the proposal, 13,975 votes
abstaining, and 3,641,372 broker non-votes.
Proposal 4. Amendment to Company's 1998 Executive Incentive Compensation
Plan
The amendment to the Company's 1998 Executive Incentive Compensation Plan was
approved with 12,522,720 votes for the proposal, 143,322 votes against the
proposal, 12,492,949 votes abstaining, and 0 broker non-votes.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description of Exhibit
- --------------- --------------------------------------------------------------
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 June 30, 2000.
30
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: August 14, 2000 /s/ J. Robert Fabregas
------------------------------
J. Robert Fabregas
Chief Financial Officer and
Executive Vice President
31