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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 September 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 29,816,860 shares of outstanding Common Stock of the Registrant
as of November 7, 2000.
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PART I -- FINANCIAL INFORMATION
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Item 1. Financial Statements
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
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(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ 429,256
Accounts receivable, less allowance for doubtful accounts
of $320,703 (2000) and $645,212 (1999) 3,279,791 3,230,067
Inventories 1,956,564 2,940,426
Prepaid publication costs 645,150 563,577
Prepaid expenses and other 790,549 670,386
Receivable from shareholder 5,918,303 395,010
Net assets of El Paso Bar-B-Que (Note 5) 362,056 6,780,142
-------------- ------------
Total current assets 12,952,413 15,008,864
PROPERTY AND EQUIPMENT, net 948,710 1,258,183
GOODWILL, net of accumulated amortization of
$3,733,897 (2000) and $2,388,110 (1999) 51,717,416 53,980,642
OTHER ASSETS 192,107 300,244
-------------- ------------
$65,810,646 $70,547,933
============== =============
See accompanying notes to consolidated financial statements.
1
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
September 30, December 31,
2000 1999
--------------- -------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 110,506 $ -
Accounts payable 6,968,361 7,084,278
Accrued payroll and payroll related expenses 1,158,083 813,099
Accrued interest payable 1,466,852 1,091,129
Other current liabilities 488,784 1,428,770
Income taxes payable 8,000 8,800
Reserve for disposal of El Paso Bar-B-Que Company 1,000,000 -
Current portion of deferred subscription and advertising income 3,777,941 3,464,959
Current portion of convertible debentures - 316,667
Current portion of long-term debt 960,045 1,148,880
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Total current liabilities 15,938,572 15,356,582
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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 $337,850 (2000) and
$489,541 (1999) 21,644,028 21,225,524
OTHER LONG-TERM LIABILITIES, including deferred
subscription revenues of $1,355,909 (2000) and $1,509,003 (1999) 2,957,610 1,769,087
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.001 per share; 10,000,000 shares
authorized, none outstanding - -
Common stock, par value $.001 per share; 50,000,000 shares
authorized, 28,566,719 shares (2000) and 23,056,751 (1999)
outstanding 28,566 23,056
Additional paid in capital 64,313,711 58,983,147
Receivable from the sale of stock (7,300,000) (7,300,000)
Accumulated deficit (40,771,841) (32,084,463)
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Total stockholders' equity 16,270,436 19,621,740
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$ 65,810,646 $ 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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
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(unaudited) (unaudited)
CONTINUING OPERATIONS:
SALES $ 6,347,464 $ 9,269,295 $ 22,032,056 $25,487,141
COST OF SALES 5,350,107 $ 8,493,611 18,173,806 22,855,604
-------------- ------------- ------------ ------------
GROSS MARGIN 997,357 775,684 3,858,250 2,631,537
EXPENSES:
Selling, general and administrative 1,374,432 2,377,173 4,443,166 6,587,296
Depreciation and amortization 561,596 588,234 2,594,186 1,751,977
Stock issuance expenses 6,721 100,000 202,305 700,000
-------------- ------------- ------------ ------------
Total expenses 1,942,749 3,065,407 7,239,657 9,039,273
-------------- ------------- ------------ ------------
LOSS FROM OPERATIONS (945,392) (2,289,723) (3,381,407) (6,407,736)
OTHER INCOME (EXPENSE) 116,364 208,835 (234,366) 184,443
INTEREST EXPENSE (1,157,092) (845,473) (3,246,511) (2,565,378)
-------------- ------------- ------------ ------------
LOSS BEFORE PROVISION FOR
INCOME TAXES (1,986,120) (2,926,361) (6,862,284) (8,788,671)
PROVISION FOR INCOME TAXES 3,705 2,075 13,557 6,225
-------------- ------------- ------------ ------------
NET LOSS FROM CONTINUING
OPERATIONS (1,989,825) (2,928,436) (6,875,841) (8,794,896)
DISCONTINUED OPERATIONS:
INCOME (LOSS) FROM OPERATIONS (932,603) (378,769) (811,537) (1,430)
GAIN (LOSS) ON DISPOSAL 1,100,000 - (1,000,000) -
-------------- ------------- ------------ ------------
NET LOSS $ (1,822,428) $ (3,307,205) $ (8,687,378) $(8,796,326)
============== ============= ============ ============
NET LOSS PER SHARE - BASIC AND
DILUTED
CONTINUING OPERATIONS $ (0.07) $ (0.13) $ (0.26) $ (0.41)
DISCONTINUED OPERATIONS 0.01 (0.02) (0.07) (0.00)
-------------- ------------- ------------ ------------
NET LOSS $ (0.06) $ (0.15) $ (0.33) $ (0.41)
============== ============= ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC
AND DILUTED 28,399,002 22,521,173 26,536,163 21,232,493
============== ============= ============ ============
See accompanying notes to consolidated financial statements.
3
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
September 30,
2000 1999
---------------------------------
CONTINUING OPERATIONS: (unaudited)
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Loss $ (6,875,841) $ (8,794,896)
Adjustments to reconcile net loss to cash used in operating activities:
Stock issuance expenses 202,305 700,000
Common stock issued for services 55,125 65,625
Common stock issued for interest 60,055 -
Common stock issued in settlement of litigation 43,750 -
Depreciation and amortization 2,594,186 1,751,977
Loss on sale of Easyriders of Columbus to related party 532,818 -
Loss on sale of fixed assets 55,072 127,224
Loss on sale of stock held for investment - 20,959
Loss on write-off of intangible - 20,507
Amortization of debt issuance costs 236,079 236,082
Non-cash interest expense 323,903 -
Increase (decrease) in cash resulting from changes in operating accounts:
Current assets 381,872 (419,766)
Other assets 756 (106,043)
Current liabilities 346,761 4,840,094
Other long-term liabilities 1,077,201 499,410
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Net cash used in operating activities (965,958) (1,058,827)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 10,000 3,000
Purchase of fixed assets (97,727) (486,542)
Purchase of intangible assets - (142,859)
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Net cash used in investing activities (87,727) (626,401)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of convertible debentures and debt 465,748 (331,777)
Common stock issued for cash 500,000 2,000,000
Payment of long-term debt and capital leases (236,079) (236,082)
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Net cash provided by financing activities 729,669 1,432,141
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NET DECREASE IN CASH AND CASH EQUIVALENTS
FROM CONTINUING OPERATIONS $ (324,016) $ (253,087)
CASH (USED FOR) PROVIDED BY DISCONTINUED OPERATIONS (105,240) 43,647
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NET DECREASE IN CASH AND CASH EQUIVALENTS (429,256) (209,440)
CASH AND CASH EQUIVALENTS, beginning of year 429,256 250,911
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CASH AND CASH EQUIVALENTS, end of year $ - $ 41,471
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 1,990,334 $ 2,515,361
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NON-CASH FINANCING ACTIVITIES:
Common stock issued in settlement of litigation $ 325,000 $ -
============ ============
Common stock issued in settlement of debt $ 3,446,787 $ 1,500,000
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Common stock issued upon conversion of debt $ 316,667 $ -
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See accompanying notes to consolidated financial statements
4
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 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 but 2 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 41 licensed stores and 2
retail stores still operating as franchises.
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." On October 5, 2000, the
Company sold its interest in El Paso to a related party. (See Footnote
5-Discontinued Operations).
Easyriders currently derives substantially all of its revenues from the
operations of Paisano Publications.
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EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (unaudited)
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Basis of presentation - The accompanying unaudited interim consolidated
financial statements of Easyriders, Inc. for the three and nine month
periods ended September 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 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 nine month periods ended September
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. 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 was adjusted down to $0.625 per share during the quarter
ended June 30, 2000, and was adjusted down to $0.50 per share during the
quarter ended September 30, 2000. The Company has recorded interest
expense of $8,104 for the quarter in the accompanying financial
statements as a result of the revaluation of these warrants.
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
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EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (unaudited)
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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, was recorded as interest
expense. In addition, Mr. Martin and Mr. Teresi agreed to make the
following modifications to the Siena Loan terms: (i) the interest rate
was 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.
As of July 13, 2000, the Company did not possess the resources to pay off
the Siena Loan. As a result, as provided under the modified terms, an
additional 150,000 warrants vested to each of Mr. Martin and Mr. Teresi
and the fair value of the warrants, aggregating $165,750, has been
recorded as interest expense. (See Footnote 8 - Subsequent Events).
3. 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.
4. 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
7
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (unaudited)
- --------------------------------------------------------------------------------
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 2 - 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 of $325,000 was
recognized, which represents the fair market value of such shares on the
date of issuance.
In September 2000, the Company issued 100,000 shares of the common stock
of the Company in settlement of a dispute between Paisano Publications
and an exclusive licensing agent. 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.
During the quarter ended September 2000, the Company issued 52,923 shares
of Easyriders, Inc. stock to a consultant of Paisano Publications as
compensation for services performed. The fair value of the stock,
$28,000, was recorded as consulting expense.
Also during the quarter ended September 2000, the Company issued 5,275
shares of Easyriders, Inc. stock to a related party in payment of legal
services rendered for Paisano Publications in the amount of $3,000.
In addition, during the quarter ended September 2000, the Company issued
11,000 shares of the Company's common stock to a consultant as
compensation for services performed. The fair value of the stock,
$11,000, 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.
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.
On September 1, 2000, the Company issued 53,772 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
8
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (unaudited)
- --------------------------------------------------------------------------------
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.
Stock Option Grants - During the nine months ended September 30, 2000, the
Board of Directors of the Company authorized the granting of 655,000
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.
5. DISCONTINUED OPERATIONS : EL PASO
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. This transaction was completed on October 5, 2000 (See
Footnote 8 - Subsequent Events). 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 September 30, 2000 can be
segregated into current and noncurrent components as follows:
Current $(2,775,243)
Noncurrent 8,693,546
-----------
Total $ 5,918,303
===========
The following table summarizes the results of discontinued operations for
the three and nine month periods ended September 30, 2000 and 1999:
9
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (unaudited)
- --------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
-------------------------------------------------------------------
Sales $ 3,836,473 $ 2,374,637 $10,706,438 $ 8,205,768
Cost of sales 2,534,216 1,621,445 6,808,977 5,191,846
----------- ----------- ----------- -----------
Gross margin 1,302,257 753,192 3,897,461 3,013,922
Expenses 2,087,850 1,070,543 4,320,338 2,901,407
----------- ----------- ----------- -----------
Income (loss) from operations $ (785,593) $ (317,351) $ (422,877) $ 112,515
=========== =========== =========== ===========
Net income (loss) $ (932,603) $ (378,769) $ (811,537) $ (1,430)
=========== =========== =========== ===========
Gain (loss) on disposal $ 1,100,000 $ - $(1,000,000) $ -
=========== =========== =========== ===========
Net income (loss) after loss on
disposal $ 167,397 $ (378,769) $(1,811,537) $ (1,430)
=========== =========== =========== ===========
The loss on disposal aggregating $1,000,000 has been estimated by
management using an estimate of net proceeds from the sale of this segment.
As of the quarter ended June 30, 2000, the Company recorded a $2,100,000
reserve based on an estimate at that time of the loss that the Company
would incur on the sale of El Paso. Based on the El Paso sale transaction
that was approved by the end of September 2000, the Company revised its
estimate down by $1,100,000 to an estimated loss of $1,000,000.
6. 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.
7. 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
10
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (unaudited)
- --------------------------------------------------------------------------------
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 but 2 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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (unaudited)
- --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Publishing Goods and Food Franchising Other Totals
Services Service /Licensing Operations
- ---------------------------------------------------------------------------------------------------------------------------------
Sales external customers -Quarter ended
September 30, 2000 5,664,871 659,390 0 0 23,203 6,347,464
- ---------------------------------------------------------------------------------------------------------------------------------
Sales external customers -Quarter ended
September 30, 1999 6,146,982 1,269,292 0 25,000 1,828,021 9,269,295
- ---------------------------------------------------------------------------------------------------------------------------------
Sales external customers -
Year-to date September 30, 2000 17,115,389 3,275,103 0 0 1,641,564 22,032,056
- ---------------------------------------------------------------------------------------------------------------------------------
Sales external customers -
Year-to date September 30, 1999 17,723,427 4,496,050 0 103,137 3,164,527 25,487,141
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations-
Quarter ended September 30, 2000 285,309 (351,290) 0 (80,263) (69,006) (215,250)
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations-
Quarter ended September 30, 1999 565,049 (203,925) 0 (538,448) (150,925) (328,249)
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations-
Year-to-date September 30, 2000 1,018,641 (838,621) 0 (390,075) 338,500 128,445
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations-
Year-to-date September 30, 1999 1,933,365 (396,641) 0 (1,706,813) (219,129) (389,218)
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued
operations-Quarter ended September 30, 2000 0 0 167,397 0 0 167,397
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued
operations-Quarter ended September 30, 1999 0 0 (378,769) 0 0 (378,769)
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued
operations-Year-to-date September 30, 2000 0 0 (1,811,537) 0 0 (1,811,537)
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued
operations-Year-to-date September 30, 1999 0 0 (1,430) 0 0 (1,430)
- ---------------------------------------------------------------------------------------------------------------------------------
Segment Assets at September 30, 2000 7,705,007 25,163 0 2,667 80,034 7,812,871
- ---------------------------------------------------------------------------------------------------------------------------------
Capital Expenditures at September 30, 2000 97,727 0 0 0 0 97,727
- ---------------------------------------------------------------------------------------------------------------------------------
Depreciation/Amortization -
Quarter ended September 30, 2000 82,848 0 0 2,015 16,341 101,204
- ---------------------------------------------------------------------------------------------------------------------------------
Depreciation/Amortization -
Quarter ended September 30, 1999 85,334 12,087 0 2,119 18,954 118,494
- ---------------------------------------------------------------------------------------------------------------------------------
Depreciation/Amortization -
Year-to-date September 30, 2000 255,212 16,116 0 6,235 53,397 330,960
- ---------------------------------------------------------------------------------------------------------------------------------
Depreciation/Amortization -
Year-to-date September 30, 1999 225,499 36,260 0 6,356 75,126 343,241
- ---------------------------------------------------------------------------------------------------------------------------------
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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
Quarter Ended Year-to-date
------------- -------------
September 30, 2000:
Income (loss) from continuing operations in segment disclosure $ (215,250) $ 128,445
Unallocated, selling, general and administrative (730,142) (3,509,852)
------------ -------------
Loss from continuing operations $ (945,392) $ (3,381,407)
------------ -------------
September 30, 1999:
Loss from continuing operations in segment disclosure $ (328,249) $ (389,218)
Unallocated, selling, general and administrative (1,961,474) (6,018,518)
------------ -------------
Loss from continuing operations $(2,289,723) $(6,407,736)
------------ -------------
As at September 30, 2000:
Segment assets $ 7,812,871
Receivable from shareholder 362,056
Net assets of El Paso Bar-B-Que - discontinued operations 5,918,303
Goodwill 51,717,416
------------
Total assets $ 65,810,646
------------
Quarter Ended Year-to-date
------------- ------------
September 30, 2000:
Depreciation and amortization included in segment disclosure $ 101,204 $ 330,960
Amortization of goodwill 460,392 2,263,226
---------- -----------
Depreciation and amortization $ 561,596 $ 2,594,186
---------- -----------
September 30, 1999:
Depreciation and amortization included in segment disclosure $ 118,494 $ 343,241
Amortization of goodwill 469,740 1,408,736
---------- -----------
Depreciation and amortization $ 588,234 $ 1,751,977
---------- -----------
Revenues concerning principal geographic areas are as follows based on
customer location:
USA Canada Germany UK Australia Other Total
-----------------------------------------------------------------------------------------------------
Q/E 9/30/00 $ 5,412,654 244,660 90,020 115,209 105,317 379,604 $ 6,347,464
Q/E 9/30/99 $ 8,353,316 274,217 123,241 127,236 112,110 279,175 $ 9,269,295
YTD 9/30/00 $19,063,049 774,512 342,897 317,618 363,438 1,170,542 $22,032,056
YTD 9/30/99 $22,406,022 794,813 422,898 419,216 336,640 1,107,552 $25,487,141
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.
13
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (unaudited)
- --------------------------------------------------------------------------------
8. SUBSEQUENT EVENTS
Siena loan - As of October 13, 2000, the Company did not possess the
resources to pay off the Siena Loan. As such, warrants to purchase an
additional 50,000 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 $30,250, 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. On October 5, 2000, the
Company closed the transaction, selling all interests in El Paso Bar-B-Que
Company to a newly formed subsidiary of Culinary Holdings, Inc. for a
combination of cash in the amount of $4,000,000 and the assumption of
liabilities in the amount of approximately $6,700,000. In accordance with the
terms of the sale transaction, the Company forgave a net intercompany
receivable of $782,753. In addition, Culinary Holdings assumed $1,000,000 of
convertible debentures held by a director of the Company, who thereupon
released the Company from all obligation in connection therewith.
Culinary Holdings is a restaurant development and management company of which
the Company's chairman, John Martin, is a controlling shareholder and also
serves as Chairman of the Board. The sale to Culinary Holdings was approved
by disinterested directors only after an extensive marketing effort
demonstrated that Culinary was offering the highest price and best terms for
the proposed transaction, and only after the Company had obtained from
Imperial Capital, LLC of Beverly Hills, California, a formal opinion as to
the fairness, from a financial point of view, of the proposed transaction.
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 acquisition of the Paisano Companies 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 September 30, 2000 and 1999:
Easyriders Paisano Companies El Paso Consolidated Consolidated
For the Three Months Ended September 30,
----------------------------------------------------------------------------
2000 2000 2000 2000 1999
CONTINUING OPERATIONS: (unaudited)
SALES
Publishing $ - $ 5,664,871 $ - $ 5,664,871 $ 6,146,982
Goods and services 659,390 659,390 1,269,292
Food service - - -
Franchising/Licensing - - 25,000
Other operations 23,203 23,203 1,828,021
----------------------------------------------------------------------------
- 6,347,464 - 6,347,464 9,269,295
COST OF SALES
Publishing 4,344,703 4,344,703 5,528,160
Goods and services 911,385 911,385 1,449,489
Food service - - -
Franchising/Licensing - - -
Other operations 94,019 94,019 1,515,962
----------------------------------------------------------------------------
- 5,350,107 - 5,350,107 8,493,611
GROSS MARGIN
Publishing - 1,320,168 - 1,320,168 618,822
Goods and services - (251,995) - (251,995) (180,197)
Food service - - - - -
Franchising/Licensing - - 25,000
Other operations - (70,816) - (70,816) 312,059
----------------------------------------------------------------------------
- 997,357 - 997,357 775,684
EXPENSES
Publishing 1,034,859 1,034,859 53,773
Goods and services 99,295 99,295 23,728
Food service - - -
Franchising/Licensing 80,263 80,263 563,448
Other operations (1,810) (1,810) 462,984
Unallocated expenses 724,693 5,449 730,142 1,961,474
----------------------------------------------------------------------------
724,693 1,218,056 - 1,942,749 3,065,407
INCOME (LOSS) FROM OPERATIONS
Publishing - 285,309 - 285,309 565,049
Goods and services - (351,290) - (351,290) (203,925)
Food service - - - - -
Franchising/Licensing (80,263) (80,263) (538,448)
Other operations - (69,006) - (69,006) (150,925)
Unallocated (724,693) (5,449) - (730,142) (1,961,474)
----------------------------------------------------------------------------
$ (724,693) $ (220,699) $ - $ (945,392) $ (2,289,723)
============================================================================
NET LOSS FROM CONTINUING
OPERATIONS $ (989,682) $ (1,000,143) $ - $ (1,989,825) $ (2,928,436)
NET INCOME (LOSS) FROM
DISCONTINUED OPERATIONS - - 167,397 167,397 (378,769)
----------------------------------------------------------------------------
NET INCOME (LOSS) $ (989,682) $ (1,000,143) $167,397 $ (1,822,428) $ (3,307,205)
============================================================================
17
The following table sets forth certain operating data for Easyriders for the
nine months ended September 30, 2000 and 1999:
Easyriders Paisano Companies El Paso Consolidated Consolidated
For the Nine Months Ended September 30,
-----------------------------------------------------------------------------
2000 2000 2000 2000 1999
CONTINUING OPERATIONS: (unaudited)
SALES
Publishing $ - $ 17,115,389 $ - $ 17,115,389 $ 17,723,427
Goods and services 3,275,103 3,275,103 4,496,050
Food service - - -
Franchising/Licensing - - 103,137
Other operations 1,641,564 1,641,564 3,164,527
-----------------------------------------------------------------------------
- 22,032,056 - 22,032,056 25,487,141
COST OF SALES
Publishing 13,333,235 13,333,235 15,221,305
Goods and services 3,543,199 3,543,199 4,686,912
Food service - - -
Franchising/Licensing - - -
Other operations 1,297,372 1,297,372 2,947,387
-----------------------------------------------------------------------------
- 18,173,806 - 18,173,806 22,855,604
GROSS MARGIN
Publishing - 3,782,154 - 3,782,154 2,502,122
Goods and services - (268,096) - (268,096) (190,862)
Food service - - - - -
Franchising/Licensing - - 103,137
Other operations - 344,192 - 344,192 217,140
-----------------------------------------------------------------------------
- 3,858,250 - 3,858,250 2,631,537
EXPENSES
Publishing 2,763,513 2,763,513 568,757
Goods and services 570,525 570,525 205,779
Food service - - -
Franchising/Licensing 390,075 390,075 1,809,950
Other operations 5,692 5,692 436,269
Unallocated expenses 2,584,795 925,057 3,509,852 6,018,518
-----------------------------------------------------------------------------
2,584,795 4,654,862 - 7,239,657 9,039,273
INCOME (LOSS) FROM OPERATIONS
Publishing - 1,018,641 - 1,018,641 1,933,365
Goods and services - (838,621) - (838,621) (396,641)
Food service - - - - -
Franchising/Licensing (390,075) (390,075) (1,706,813)
Other operations - 338,500 - 338,500 (219,129)
Unallocated (2,584,795) (925,057) - (3,509,852) (6,018,518)
-----------------------------------------------------------------------------
$(2,584,795) $ (796,612) $ - $ (3,381,407) $ (6,407,736)
=============================================================================
NET LOSS FROM CONTINUING
OPERATIONS $(3,069,321) $ (3,806,520) $ - $ (6,875,841) $ (8,794,896)
NET INCOME (LOSS) FROM
DISCONTINUED OPERATIONS (1,811,537) (1,811,537) (1,430)
-----------------------------------------------------------------------------
NET LOSS $(3,069,321) $ (3,806,520) $(1,811,537) $ (8,687,378) $ (8,796,326)
=============================================================================
18
The following tables set forth the EBITDA calculations for Easyriders for the
three and nine month periods ended September 30, 2000 and 1999:
Paisano
Easyriders Companies El Paso Consolidated Consolidated
For the Three Months Ended September 30,
--------------------------------------------------------------------------------
2000 2000 2000 2000 1999
Continuing Operations:
Net loss $ (989,682) $ (1,000,143) $ $ (1,989,825) $ (2,928,436)
Interest expense 371,387 785,705 - 1,157,092 845,473
Income tax expense 3,229 476 - 3,705 2,075
Depreciation /amortization expense 16,341 545,255 - 561,596 588,234
----------------------------------------------------------------------------------
EBITDA - Continuing Operations $ (598,725) $ 331,293 $ - $ (267,432) $ (1,492,654)
==================================================================================
Discontinued Operations:
Net income (loss) $ - $ - $ 167,397 $ - $ (378,769)
Interest expense - - 147,008 - 61,418
Income tax expense - - - -
Depreciation /amortization expense - - 304,685 - 208,426
----------------------------------------------------------------------------------
EBITDA - Discontinued Operations $ - $ - $ 619,090 $ - $ (108,925)
==================================================================================
EBITDA $ (598,725) $ 331,293 $ 619,090 $ 351,658 $ (1,601,579)
Add back stock issuance expense 6,721 - - 6,721 100,000
------------- ------------ ------------ ------------ -------------
Adjusted EBITDA $ (592,004) $ 331,293 $ 619,090 $ 358,379 $ (1,501,579)
============= ============ ============ ============ =============
For the Nine Months Ended September 30,
------------------------------------------------------------------------------------
2000 2000 2000 2000 1999
------------------------------------------------------------------------------------
Continuing Operations:
Net loss $ (3,069,321) $ (3,806,520) $ - $ (6,875,841) $ (8,794,896)
Interest expense 1,050,959 2,195,552 - 3,246,511 2,565,378
Income tax expense 7,281 6,276 - 13,557 6,225
Depreciation /amortization expense 49,023 2,545,163 - 2,594,186 1,751,977
----------------------------------------------------------------------------------
EBITDA - Continuing Operations $ (1,962,058) $ 940,471 $ - $ (1,021,587) $ (4,471,316)
==================================================================================
Discontinued Operations:
Net income (loss) $ - $ - $ (1,811,537) $ - $ (1,430)
Interest expense - - 388,659 - 113,945
Income tax expense - - -
Depreciation /amortization expense - - 797,959 - 596,628
----------------------------------------------------------------------------------
EBITDA - Discontinued Operations $ - $ - $ (624,919) $ - $ 709,143
==================================================================================
EBITDA $ (1,962,058) $ 940,471 $ (624,919) $ (1,646,506) $ (3,762,173)
Add back stock issuance expense 202,305 - - 202,305 700,000
----------------------------------------------------------------------------------
Adjusted EBITDA $ (1,759,753) $ 940,471 $ (624,919) $ (1,444,201) $ (3,062,173)
==================================================================================
19
Results of Operations of Easyriders Inc. and subsidiaries
During the three months ended September 30, 2000, the Company experienced a
net loss in the amount of $1,822,428, reflecting a loss decrease of $1,484,777,
or 45%, when compared with the net loss of $3,307,205 for the three months ended
September 30, 1999. The net loss for the nine months ended September 30, 2000
was $8,687,378, reflecting a loss decrease of $108,947 or 1%, when compared with
the net loss of $8,796,326 for the same period in the prior year. The net loss
decrease for the three month period can be substantially attributed to a
$1,100,000 adjustment to reduce the estimated loss on disposal of the
discontinued operations, an improvement in gross margin of $221,673 and a
$1,029,379 reduction in operating expenses, offset by a $312,441 increase in
interest and other expenses and a $553,834 increase in loss from discontinued
operations. The net loss decrease for the nine month period can be attributed to
a $1,226,713 improvement in gross margin and a $1,301,921 reduction in operating
expenses, offset by a $609,580 increase in interest and other expenses, a
$1,000,000 estimated loss on disposal of the discontinued operations and a
$810,107 increase in loss from discontinued operations. Net loss from continuing
operations improved $938,611, or 32%, for the three month periods, and
$1,919,054, or 22%, for the nine month periods.
The Company's net loss per share improved $0.09 per share, or 60%, to $0.06
per share for the three months ended September 30, 2000, as compared to the net
loss of $0.15 per share for the three months ended September 30, 1999. For the
nine month periods, the Company's net loss per share improved $0.08 per share,
or 20%, to $0.33 per share from $0.41 per share. Net loss per share from
continuing operations improved $0.06 per share, or 46%, for the three month
periods, and $0.15 per share, or 37%, for the nine month periods.
The Company experienced positive EBITDA in the amount of $351,658 and
negative EBITDA in the amount of $1,646,506 for the three and nine months ended
September 30, 2000, respectively, compared with negative EBITDA of $1,601,579
and $3,762,173 for the three and nine months ended September 30, 1999,
reflecting an improvement in EBITDA of $1,953,237, or 122%, for the three month
periods, and an improvement in EBITDA of $2,115,667, or 56%, for the nine month
periods. Adjusted EBITDA reflects the add-back of non-cash charges related to
stock issuance expenses of $6,721 and $202,305 for the three and nine months
ended September 30, 2000, respectively, and $100,000 and $700,000 for the three
and nine months ended September 30, 1999, respectively. For the three and nine
months ended September 30, 2000, the Company had adjusted EBITDA of $358,379 and
adjusted negative EBITDA of $1,444,201, respectively, compared with adjusted
negative EBITDA of $1,501,579 and $3,062,173 for the three and nine months ended
September 30, 1999, reflecting improvements in adjusted EBITDA of $1,859,958, or
124%, for the three month periods, and $1,617,972, or 53%, for the nine month
periods. Negative EBITDA from continuing operations was $267,432 and $1,021,587
for the three and nine months ended September 30, 2000, respectively, compared
with negative EBITDA from continuing operations of $1,492,654 and $4,471,316 for
the three and nine months ended September 30, 1999, reflecting an improvement in
EBITDA of $1,225,222, or 82%, for the three month periods, and an improvement in
EBITDA of $3,449,729, or 77%, for the nine month periods.
Results of Operations: Paisano Companies
The operating results of the Company for both the three and nine months
ended September 30, 2000 and September 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, paper,
publication and distribution costs. The goods and services segment includes
sales generated from the
20
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
operating franchisees/licensees. 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. As discussed in Footnote 3 - Long-Term
Liabilities, in March, 2000, the Company licensed its rights to produce and
manage these events.
The Paisano Companies' total sales decreased $2,921,831, or 32%, from
$9,269,295 for the three months ended September 30, 1999 to $6,347,464 for the
same three months in 2000. Total sales for the nine month periods decreased
$3,455,085, or 14%, from $25,487,141 for the nine months ended September 30,
1999 to $22,032,056 for the same nine months in 2000. These decreases can be
substantially attributed to a combination of 1) reduced revenues from Easyriders
of Columbus of $403,407 and $790,004 for the three and nine month periods,
respectively, as a result of this store being sold in April 2000, 2) reduced
revenues from Easyriders Events of $1,623,967 and $1,474,617 for the three and
nine month periods, respectively, as a result of a restructuring in March 2000
under which a third party licensed the rights to produce and manage events and
to sell event-specific merchandise, and 3) reduced revenues from Paisano
Publications of $1,056,656 and $1,935,101 for the three and nine month periods,
respectively, as a result of the reduction in frequency in American Rodder
magazine, the cessation of the Metal Hammer magazine, and the outsourcing of the
Bros Club division.
The Paisano Companies' gross margin increased $221,673, or 29%, from
$775,684 for the three months ended September 30, 1999, to $997,357 for the
three months ended September 30, 2000. For the nine month periods, gross margin
increased $1,226,713, or 47%, from $2,631,537 in 1999 to $3,858,250 in 2000. As
a percentage of sales, gross margin for the Paisano Companies increased from 8%
to 16% for the three month periods, and from 10% to 18% for the nine month
periods. The increase in gross margin for both the three and nine 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 outsourced through a licensing agreement in March
2000.
The Paisano Companies' loss from operations decreased $1,184,638, or 84%,
from $1,405,337 for the three months ended September 30, 1999, to $220,699 for
the three months ended September 30, 2000. The Paisano Companies' loss from
operations decreased $2,558,069, or 76%, from $3,354,681 for the nine months
ended September 30, 1999, to $796,612 for the nine months ended September 30,
2000. The decrease for the three month periods can be attributed to a decrease
in operating expenses of $1,464,266 offset by a decrease in gross margin of
$279,628. The decrease for the nine month periods can be attributed to a
decrease in operating expenses of $2,396,834 coupled with an increase in gross
margin of $161,235. The decrease in operating expenses for both the three and
nine 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
$5,449 and $925,057 for the three and nine months ended September 30, 2000, and
$1,077,088 and $2,965,463 for the three and nine months ended September 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 related to the Company's Columbus retail operations
which are not specifically attributable to a business segment.
21
Payroll and related benefits for the Paisano Companies decreased $126,586,
or 31%, from $404,742 for the quarter ended September 30, 1999 to $278,156 for
the same quarter in 2000, and decreased $423,102, or 32%, from $1,328,818 for
the nine months ended September 30, 1999 to $905,716 for the same nine months in
2000. These decreases are the result of efforts to reduce costs by decreasing
staff size. Depreciation and amortization for the quarters ended September 30,
2000 and 1999 totaled $545,255 and $555,074, respectively, and for the nine
month periods ended September 30, 2000 and 1999 totaled $2,545,163 and
$1,634,235, respectively, of which $460,392 and $2,263,226 for the three and
nine months ended September 30, 2000, respectively, and $469,740 and $1,408,736
for the three and nine 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
nine months ended September 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 $197,441, or 34%, from
$588,264 for the quarter ended September 30, 1999 to $785,705 for the quarter
ended September 30, 2000. For the nine month periods ended September 30, 1999
and 2000, interest expense increased $461,539, or 27%, from $1,734,013 to
$2,195,552, 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 decreased $1,052,433, or 51%, from
$2,052,576 for the three months ended September 30, 1999 to $1,000,143 for the
three months ended September 30, 2000. The net loss for the nine month periods
decreased $1,437,035, or 27%, from $5,243,555 to $3,806,520. The decrease in the
net losses for the both the three and nine month periods can be attributed to
the reduction in legal and professional fees, combined with 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, 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 $1,223,712, from a
negative EBITDA of $892,419 for the three months ended September 30, 1999 to an
EBITDA of $331,293 for the three months ended September 30, 2000. EBITDA for the
nine month periods improved by $2,747,059 from a negative EBITDA of $1,806,588
for the nine months ended September 30, 1999 to an EBITDA of $940,471 for the
nine months ended September 30, 2000.
The principal raw material used in publishing operations of the Paisano
Companies is paper. Paper costs represented approximately 18% and 15% of Paisano
Publications' production, selling and other direct costs for the three months
ended September 30, 2000 and 1999, respectively, and approximately 18% and 16%
for the nine 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. 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 and/or postal rates could have an effect on 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.
22
E1 Paso's sales from its five El Paso Bar-B-Que Restaurants increased
$1,461,836, or 62%, from $2,374,637 for the three months ended September 30,
1999 to $3,836,473 for the three months ended September 30, 2000. For the nine
month periods ended September 30, 1999 and 2000, sales increased $2,500,670, or
31%, from $8,205,768 to $10,706,438. The increase in sales for both the three
and nine 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 2000. Cost of sales, which includes food and direct
payroll costs related to the operations of the restaurants, increased $912,771,
or 56%, from $1,621,445 for the three months ended September 30, 1999 to
$2,534,216 for the same three months in 2000. For the nine month periods, cost
of sales increased $1,617,131, or 31%, from $5,191,846 to $6,808,977. Cost of
sales as a percentage of sales decreased from 68% to 66% for the three month
periods, and increased from 63% to 64% for the nine month periods. The decrease
for the three months period can be attributed to increased menu prices, while
the increase for the nine month periods is the result of rising food costs in
excess of increased menu prices. Gross margin as a percentage of sales increased
slightly from 32% to 34% for the three month periods ended September 30, 1999
and 2000, and decreased slightly from 37% to 36% for the nine month periods then
ended. Operating expenses as a percentage of sales increased from 45% to 54% for
the three month periods, and from 35% to 40% for the nine month periods. Loss
from operations increased $468,242, or 148%, for the three month periods, and
$535,392, or 476%, for the nine month periods. Interest expense associated with
debt used to finance the restaurants and capital leases was $63,112 and $186,065
for the three and nine months ended September 30, 1999 and $147,009 and $388,660
for the three and nine months ended September 30, 2000. The net loss before the
loss on disposal increased $553,834, or 146%, from $378,769 for the three months
ended September 30, 1999 to $932,603 for the three months ended September 30,
2000. For the nine month periods, the net loss before the loss on disposal
increased a substantial $810,107, from $1,430 to $811,537. EBITDA improved from
a negative $108,925 for the three months ended September 30, 1999 to $619,090
for the same three months in 2000, while EBITDA for the nine month periods
worsened from $709,143 for the nine months ended September 20, 1999 to a
negative $624,919 for the same period in 2000.
Liquidity and Capital Resources
The Company's primary cash requirements are to fund the Company's
operating costs (primarily payroll and related expenses) and working capital
needs (primarily accounts receivable, inventory, prepaid expenses and debt
service). On September 30, 2000, the Company had negative working capital of
$3.0 million due primarily to deferred subscription and advertising income of
$3.8 million.
Cash used in operating activities from continuing operations during the
nine month period ended September 30, 2000 totaled approximately $1.0 million.
The operating loss of $6.9 million was offset by several non-cash charges
including $2.6 million for depreciation and amortization, $0.2 million for stock
issuance expenses, $0.2 million for expenses settled with common stock, $0.2
million of amortization of debt issuance costs, $0.3 million of non-cash
interest expense, and $0.6 million for losses on the sale of assets. Cash of
$1.8 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
23
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 was in compliance with the terms of the Nomura Indebtedness as of
December 31, 1999, and available borrowings were no longer subject to the
approval of the Lender. At September 30, 2000, there were no available
borrowings under the Revolving Loans.
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
negotiate with Nomura a short-term extension of the maturity date sufficient to
allow the Company to refinance the Nomura Indebtedness with other lenders,
investors and/or joint venture partners. However, there can be no assurance that
the Company will be successful in its efforts to secure such financing .
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 September 30, 2000.
Subject to certain limitations on dividends, and 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. As of September 30, 2000, Paisano Publications has
been able to provide $294,994 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 September 30, 2000 total $26,091,743.
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
September 30, 2000, the Company was in compliance with all of the financial
covenants. Between September 22 and November 3, 2000, Nomura notified the
Company that certain activities undertaken by the Company were deemed by Nomura
not to be in compliance with certain of the operating covenants. As a
consequence, representatitves of the Company and Nomura are now in active
negotiations concerning resolution of these issues. In connection therewith, it
is anticipated that the Company will seek to modify certain operating and
financial covenants, and obtain waivers as to prior actions. No assurance can be
given that a satisfactory resolution will be obtained. Any non-compliance could
restrict the Company's business activities, and could expose the Company to
materially adverse consequences if any such defaults are not resolved, by reason
of the remedies available to Nomura under the loan
24
documents pertaining to the Nomura Indebtedness, including but not limited to,
the foreclosure on the Company's assets, which are provided as collateral.
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-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.
25
As of July 13, 2000 the Company did not possess the resources to pay
off the Siena Loan. As a result, as provided under the modified terms, an
additional 150,000 warrants vested to each of Mr. Martin and Mr. Teresi. In
addition, as of October 13, 2000 the Company did not possess the resources to
pay off the Siena Loan and, as a result, an additional 50,000 000 warrants
vested to each of Mr. Martin and Mr. Teresi.
On October 5, 2000, the Company sold all interests in El Paso Bar-B-Que
Company to a newly formed subsidiary of Culinary Holdings, Inc. for a
combination of cash in the amount of $4,000,000 and the assumption of
liabilities in the amount of approximately $6,700,000. In accordance with the
terms of the sale transaction, the Company forgave a net intercompany receivable
of $782,753. In addition, Culinary Holdings assumed $1,000,000 of convertible
debentures held by a director of the Company, who thereupon released the Company
from all obligation in connection therewith.
While the Company secured a $4 million cash infusion through the sale
of El Paso Bar-B-Que Company, it continues in its attempts to secure additional
cash infusions 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 (excluding the refinancing of the Nomura Indebtedness), 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 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.
In December 1999, the SEC staff issued Staff Accounting Bulletin (SAB)
No. 101, Revenue
26
Recognition in Financial Statements. SAB No. 101 summarizes the SEC staff's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company does not expect its
implementation will have an effect on its revenue recognition policy.
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44 of Accounting Principles Board Opinion No. 25 Accounting
for Certain Transactions Involving Stock Compensation, which, among other
things, addressed accounting consequences of a modification that reduces the
exercise price of a fixed stock option award (otherwise known as repricing). If
the exercise price of a fixed stock option award is reduced, the award must be
accounted for as variable stock option plan from the date of the modification to
the date the award is exercised, is forfeited, or expires unexercised. The
exercise price of an option award has been reduced if the fair value of the
consideration required to be paid by the grantee upon exercise is less than or
potentially less than the fair value of the consideration that was required to
be paid pursuant to the award's original terms. The requirements about
modifications to fixed stock option awards that directly or indirectly reduce
the exercise price of an award apply to modifications made after December 15,
1998, and will be applied prospectively as of July 1, 2000. The adoption of this
interpretation did not impact the Company's financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to a variety of risks, including paper price
volatility, postage 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 $21,222,770 outstanding on September 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.
27
PART II -- OTHER INFORMATION
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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." Subsequently, Plaintiff has filed
two amended complaints which the Company has challenged for similar reasons. The
court has granted Plaintiffs until November 15, 2000 to file an amended
complaint which meets the applicable pleading requirements. If such amended
complaint is materially deficient in this regard, it is possible that the
Hatcher Action could be dismissed entirely, with finality, but there can be no
assurance that this will be the case.
28
Regardless, 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 an insurance policy providing
indemnification for damages arising from securities claims and the misconduct of
its management, and has received confirmation from its insurance carrier that
the Hatcher Action is a claim covered by such policy. Accordingly, the Company
is of the view that the Hatcher Action is not likely to have a material adverse
affect on its financial operations.
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. Toward this end, a settlement
agreement has been drafted and circulated, and the parties are now in the
process of resolving the remaining minor details. The Company believes this
settlement will be consummated in the near future.
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. This action is in the
discovery phase.
The Richard Dillon Litigation
On May 9, 2000 a complaint was filed by Richard Dillon ("Dillon")
against Easyriders in the Superior Court of Maricopa County, Arizona (the
"Dillon Action"). Dillon is a former employee of El Paso. The Action alleges
that Dillon is entitled to damages for breach of contract and as a Wage Claim
under Arizona law, arising out of an alleged promise on the part of Easyriders
to deliver shares of stock of Easyriders to Dillon. The Dillon Action seeks
contract damages of approximately $162,000, treble damages under Arizona law of
not less than $500,000 and the recovery of attorneys fees. The contract in
question arises out of the former employment of Dillon with M&B. Easyriders is
the sole named
29
defendant in the Dillon Action, and disputes the claims of Dillon therein. In
this regard, the Company has filed a motion for Summary Judgment which is
scheduled to be heard in January, 2001.
The Greg King Litigation
On August 2, 1999 Greg King ("King") filed an action against the
Company and its subsidiary, Newriders, in Los Angeles County Superior Court (the
"King Action"), seeking damages of (a) not less than $500,000 for the alleged
breach of an oral agreement to deliver certain shares of Newriders, Inc. in
1998, and (b) approximately $100,000 for breach of an alleged oral agreement to
reimburse King for certain advances made by King on behalf of Newriders in 1998.
The King Action also seeks these damages on the basis of alleged fraud on the
part of certain officers of Newriders. On December 23, 1999, an amended
complaint was filed to name as additional defendants Leon Hatcher, Michael
Purcell and Bill Doyle, each a former officer and/or director of Newriders. The
allegations of King arise out of his employment with Newriders in Fresno,
California, and his associations with Leon Hatcher and Rick Pierce, identified
above. The Company is of the view that the King Action is without merit, and
that it has substantial defenses thereto. This matter is scheduled for trial on
February 15, 2001, with a mandatory mediation session to take place in early
December 2000.
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.
Item 2. Changes in Securities and Use of Proceeds.
On August 1, 2000, the Company issued 5,275 shares of Easyriders, Inc.
stock to a related party in payment of legal services rendered for Paisano
Publications. The shares were valued at their market price, market price being
determined as the closing price of the Common Stock on the American Stock
Exchange on the date of issuance.
Also on August 1, 2000, the Company issued 11,000 shares of the
Company's common stock to a consultant as compensation for services performed.
The shares were valued at their market price, market price being determined as
the closing price of the Common Stock on the American Stock Exchange on the date
of issuance.
In addition, on August 1, 2000, the Company issued 36,923 shares of
Easyriders, Inc. stock to a consultant of Paisano Publications as compensation
for services performed. The shares were valued at their market price, market
price being determined as the closing price of the Common Stock on the American
Stock Exchange on the date of issuance.
On September 1, 2000, the Company issued 53,772 shares of Easyriders,
Inc. stock to a related party in payment of accrued interest on convertible
debentures. 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.
30
On September 27, 2000, the Company issued 100,000 shares of the common
stock of the Company in settlement of a dispute between Paisano Publications and
a licensee. The shares were valued at their market price, market price being
determined as the closing price of the Common Stock on the American Stock
Exchange on the date of issuance.
On September 28, 2000, the Company issued 16,000 shares of Easyriders,
Inc. stock to a consultant of Paisano Publications as compensation for services
performed. The shares were valued at their market price, market price being
determined as the closing price of the Common Stock on the American Stock
Exchange on the date of issuance.
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
None.
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 September 30, 2000.
31
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: November 13, 2000 /s/ J. Robert Fabregas
-------------------------------
J. Robert Fabregas
Interim Chief Executive Officer
Chief Financial Officer and
Executive Vice President
32