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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 report ended March 31, 1999 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 23,308,685 shares of outstanding Common Stock of the Registrant as
of May 10, 1999.
PART I -- FINANCIAL INFORMATION
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Item 1. Financial Statements
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
----------------------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 561,522 $ 278,035
Restricted cash 313,640
Accounts receivable, less allowance for
doubtful accounts of $453,890 (1999)
and $395,681 (1998) 3,426,019 2,874,779
Inventories 3,803,944 3,975,443
Prepaid publication costs 782,652 629,375
Prepaid expenses and other 1,265,464 875,846
Receivable from shareholder 404,016 398,085
----------- -----------
Total current assets 10,243,617 9,345,203
PROPERTY AND EQUIPMENT, net 3,789,006 3,718,067
GOODWILL, net of accumulated
amortization of $1,168,683 (1999)
and $612,739 (1998) 62,148,754 62,704,698
TRADEMARK, net of accumulated
amortization of $56,904 (1999)
and $36,538 (1998) 774,832 809,409
OTHER ASSETS 575,147 560,245
----------- -----------
$77,531,356 $77,137,622
=========== ===========
See accompanying notes to consolidated financial statements.
1
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
March 31, December 31,
1999 1998
-----------------------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,877,971 $ 4,086,773
Accrued payroll and payroll related
expenses 426,308 589,861
Other current liabilities 2,118,517 1,659,631
Income taxes payable 0 7,034
Current portion of deferred
subscription and advertising income 3,775,398 3,348,420
Current portion of note payable to
stockholder 704,612
Current portion of long-term debt 511,596 558,748
------------ ------------
Total current liabilities 12,414,402 10,250,467
------------ ------------
CONVERTIBLE DEBENTURES, net, including
related party debentures of $1,000,000
(1999 and 1998) 1,316,667 1,316,667
NOTE PAYABLE TO STOCKHOLDER 13,000,000 13,000,000
LONG-TERM DEBT, net of current portion
and debt discount, including related
party indebtedness of $852,532 (1999)
and $895,304 (1998). 22,227,724 22,713,670
OTHER LONG TERM LIABILITIES, including
deferred subscription revenues in
$1,166,992 (1999) and $549,838 (1998) 1,356,002 799,838
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, 19,295,375
(1999 and 1998) outstanding 19,295 19,295
Additional paid in capital 54,318,590 54,318,590
Receivable from the sale of stock (7,300,000) (7,300,000)
Accumulated deficit (19,821,324) (17,980,905)
------------ ------------
Total stockholders' equity 27,216,561 29,056,980
------------ ------------
$ 77,531,356 $ 77,137,622
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See accompanying notes to consolidated financial statements.
2
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Three Months Ended
March 31,
1999 1998
----------------------------
(unaudited)
SALES $11,031,712 $ 214,163
COST OF SALES 8,020,868 64,792
----------- -----------
GROSS MARGIN 3,010,844 149,371
EXPENSES:
Selling, general, and administrative 3,336,417 951,587
Depreciation and amortization 769,149 63,323
----------- -----------
Total expenses 4,105,566 1,014,910
----------- -----------
LOSS FROM OPERATIONS (1,094,722) (865,539)
OTHER INCOME 167,372
INTEREST EXPENSE (910,994) (363,379)
----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,838,344) (1,228,918)
PROVISION FOR INCOME TAXES 2,075 2,075
----------- -----------
NET LOSS $(1,840,419) $(1,230,993)
=========== ===========
COMPREHENSIVE LOSS $(1,840,419) $(1,230,993)
=========== ===========
NET LOSS PER SHARE - BASIC AND DILUTED $(0.10) $(0.14)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC AND DILUTED 19,295,375 8,628,407
=========== ===========
See accompanying notes to consolidated financial statements.
3
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
March 31,
1999 1998
--------------------------
(unaudited)
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $(1,840,419) $(1,230,993)
Adjustments to reconcile net loss to
net cash provided by
(used in) operating activities:
Depreciation and amortization 769,149 63,323
Loss on sale of fixed assets 25,357
Amortization of debt issuance costs 78,694 305,864
Increase (decrease) in cash resulting from changes in
operating accounts, net of acquisitions:
Current assets (614,928) (65,175)
Other assets (14,902) (4,993)
Current liabilities 1,506,476 (432,904)
Other long-term liabilities 556,164 25,896
----------- -----------
Net cash provided by (used in) operating activities 465,591 (1,338,982)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (274,924) (209,227)
----------- -----------
Net cash used in investing activities (274,924) (209,227)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of convertible debentures 600,000
Issuance of long-term debt 704,612
Payments of stockholders advances (217,000)
Payment of long-term debt and capital leases (611,792) (44,203)
----------- -----------
Net cash provided by financing activities 92,820 338,797
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 283,487 $(1,209,352)
CASH AND CASH EQUIVALENTS, beginning of year 278,035 1,262,633
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 561,522 $ 53,281
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid for interest $ 1,083,101 $ 35,438
=========== ===========
NONCASH FINANCING ACTIVITIES:
Common stock issued in settlement of debt $ 433,333
===========
Issuance of warrants in connection with debt issuance $ 51,223
===========
See accompanying notes to consolidated financial statements
4
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (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; 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,
and own three Easyriders stores and have franchised 22 additional stores
that sell Easyriders apparel, customized new and used American-made
motorcycles, and motorcycle accessories.
El Paso is a Texas limited liability company, which owns and operates four
barbecue and smoked meat restaurants, three of which are located in Arizona
and one of which is located in Oklahoma. The restaurants are operated under
the name "El Paso Bar-B-Que."
Easyriders currently derives substantially all of its revenues from the
operations of Paisano Publications and El Paso.
5
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (unaudited) (Continued)
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2. LONG-TERM DEBT
El Paso Debt - In March 1999, El Paso received commitments from three
financing companies to provide financing to enable El Paso to complete the
build-out of its El Paso Bar-B-Que in Tulsa, Oklahoma and subject to certain
other contingencies to re-open the Easyriders restaurant in Fresno,
California, as an El Paso Bar-B-Que.
Related Party Debt - On February 23, 1999, the Company borrowed $704,612
from two directors of the Company. The balance borrowed was evidenced by
two notes of equal amount from each shareholder. The notes bear interest at
13% per annum and both interest and principal are due on September 23, 2002.
The Notes were fully repaid through proceeds from the issuance of common
stock on April 8, 1999.
3. STOCKHOLDERS' EQUITY
Exchange Ratio - As more fully described in Note 1, at the time of the
Merger, the Company effected a 2-for-1 exchange of its common stock.
Historical share and per share information has been retroactively restated
in the accompanying consolidated financial statements.
Related-Party Stock Purchases - On April 8, 1999, the Company received a
commitment to purchase $1,500,000 of common stock of the Company from a
director of the Company. The number of shares to be issued under the
commitment is to be 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 April 8, 1999.
Also on April 8, 1999, the Company received a commitment to purchase
$1,500,000 of common stock of the Company from the former sole shareholder
of the Paisano Companies and a director of the Company. The number of
shares to be issued under the commitment is to be 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 April 8, 1999.
As consideration for the $1,500,000 in common stock, the director will
forgive interest on a $5,000,000 note payable of $75,000 and will reduce the
principal on the note payable from $5,000,000 to $3,575,000.
Stock Option Grants - During the three months ended March 31, 1999, the
Board of Directors of the Company authorized the granting of 1,727,000
options to employees, consultants and directors of the company, 1,227,000
were granted under the Company's 1998 Executive Incentive Compensation plan,
and 500,000 were granted outside of the 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.
6
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (unaudited) (Continued)
- --------------------------------------------------------------------------------
3. BUSINESS SEGMENTS
Information by Operating Segment - Operating segments are defined as
components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision-maker,
or decision-making group, in deciding how to allocate resources and in
assessing performance. Easyriders, Inc. chief operating decision-making
group is comprised of the chief executive officer and the officers who
report to him directly.
Easyriders Inc. has five reportable segments: publishing, goods and
services, food service, franchising, and other events and operations. The
publishing segment includes magazine and catalog publishing and other
operations. The trade goods and services segment distributes motorcycle
apparel and other related goods to both intermediate and end-users and
offers motorcycle repair and services through a Company owned store. The
food service segment includes the operations of El Paso and Newriders. The
franchising segment includes the franchising of Easyriders motorcycle stores
for distribution of equipment and apparel. The other events and operations
segment includes the coordination and sponsorship of motorcycle related
events and operations.
Easyriders, Inc. evaluates performance based on profit or loss from
operations before income taxes, not including nonrecurring gains and losses
and foreign exchange gains and losses. (The Company utilizes the other
events and operations segment as a venue for increased exposure for
publication sales.) The accounting policies of the operating segments are
the same as those described in the summary of significant accounting
policies. The financial results for Easyriders, Inc. four 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.
Goods and Food Other
Publishing services service Franchising operations Totals
Sales external customers $5,620,709 $1,442,912 $2,863,334 $ 48,137 $1,056,620 $11,031,712
Income (loss) from
operations 661,650 (257,713) 206,510 (491,925) 114,596 233,118
Segment assets 5,995,815 4,039,783 4,103,347 66,572 211,547 14,417,064
Capital expenditures 120,181 154,743 274,924
Depreciation and
amortization 79,951 74,591 45,081 2,119 11,463 213,205
7
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (unaudited) (Continued)
- --------------------------------------------------------------------------------
The historical results of the Company represent the results of Newriders,
Inc. only and therefore no segment information is provided for prior years.
The operations of Newriders, Inc. are considered to be one component of the
food service segment.
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements is as
follows:
Loss from operations included in segment disclosure $ 233,118
Unallocated, selling, general, and administrative (1,327,840)
-----------
Loss from operations $(1,094,722)
===========
Segment assets $14,417,064
Cash and cash equivalents 561,522
Receivable from shareholder 404,016
Goodwill 62,148,754
-----------
Loss from operations $77,531,356
===========
Depreciation and amortization included in segment disclosure $ 213,205
Amortization of goodwill 555,944
-----------
Depreciation and amortization $ 769,149
===========
Revenues concerning principal geographic areas is as follows based on
customer location:
USA Canada Germany UK Australia Other Total
1999 $10,006,405 $247,194 $140,533 $146,062 $109,824 $381,694 $11,031,712
The Company's foreign operations consist primarily of international
newsstand sales and mail-order product sales. No one country makes up more
than 10% of international sales. The Company does not have any identifiable
assets attributable to these foreign activities and does not separately
identify any expenses related specifically to foreign activities.
Therefore, income before taxes and net income associated with foreign
activities is not presented.
8
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 is a corporation 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
including the following: (i) the acquisition by Easyriders from Joseph Teresi of
all of the outstanding common stock of Paisano Publications and certain
affiliated corporations that engage in publishing special interest magazines
relating to motorcycles and tattooing, marketing motorcycle apparel and
accessories, promoting motorcycle and tattoo related events, and franchising
retail stores that market motorcycle apparel and accessories; (ii) the
acquisition by Easyriders of all of the outstanding membership interests of El
Paso, which engages in the operation of four restaurants under the name "El Paso
Bar-B-Que"; and (iii) the merger of a subsidiary of Easyriders with and into
Newriders.
As a result of the Merger (i) each two shares of Newriders Common Stock
were exchanged for one share of Easyriders Common Stock and the shareholders of
Newriders immediately prior to the Merger became stockholders of Easyriders,
(ii) all of the outstanding options, warrants and other convertible securities
exercisable for or convertible into Newriders Common Stock were exchanged for
the right to purchase or convert into one-half the number of shares of
Easyriders Common Stock at an exercise price or conversion ratio per share equal
to two times the exercise price or conversion ratio provided for in the stock
option, warrant or other agreements evidencing such options, warrants or other
convertible securities, and (iii) Newriders, the Paisano Companies and El Paso
became wholly-owned subsidiaries of Easyriders. The Merger was accounted for as
a combination of entities under common control, similar to a pooling of
interest. Therefore, the historical financial statements represent the combined
financial statements of the Company and Newriders. The acquisitions of the
Paisano Companies and El Paso were accounted for as a purchase.
The acquisitions of the Paisano Companies and El Paso had, and will
continue to have, a material impact on the Company's financial statements for
the reporting period ending December 31, 1998 and for the reporting periods
thereafter; accordingly, current and future financial statements may not be
directly comparable to the Company's historical financial statements.
9
Use of EBITDA
The following comparative discussion of the results of operations and
financial condition of the Company includes, among other factors, an analysis of
changes in the operating income of the business segments before interest
expense, taxes, depreciation and amortization ("EBITDA") in order to eliminate
the effect on the operating performance of the Paisano Companies and El Paso of
significant amounts of amortization of intangible assets and interest expense
recognized through the Reorganization. Financial analysts generally consider
EBITDA to be an important measure of comparative operating performance for the
businesses of the Company and its subsidiaries, and when used in comparison to
debt levels or the coverage of interest expense as a measure of liquidity.
However, EBITDA should be considered in addition to, not as a substitute for,
operating income, net income, cash flow and other measures of financial
performance and liquidity reported in accordance with generally accepted
accounting principles.
10
Results of Operations
The following table sets forth certain operating data for Easyriders and
Newriders for the three months ended March 31, 1999 and 1998:
Paisano
Easyriders Companies El Paso Consolidated Newriders
For the Three Months Ended March 31,
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1999 1999 1999 1999 1998
(unaudited)
SALES
Publishing $ - $ 5,620,709 $ - $ 5,620,709 $ -
Goods and services 1,442,912 1,442,912
Food service 2,863,334 2,863,334 214,163
Franchising 48,137 48,137
Other operations 1,056,620 1,056,620
----------------------------------------------------------------------------------------------------
- 8,168,378 2,863,334 11,031,712 214,163
COST OF SALES
Publishing 3,852,696 3,852,696
Goods and services 1,479,066 1,479,066
Food service 1,770,743 1,770,743 64,792
Franchising - -
Other operations 918,363 918,363
----------------------------------------------------------------------------------------------------
- 6,250,125 1,770,743 8,020,868 64,792
GROSS MARGIN
Publishing - 1,768,013 - 1,768,013
Goods and services - (36,154) - (36,154)
Food service - - 1,092,591 1,092,591 149,371
Franchising 48,137 48,137
Other operations - 138,257 - 138,257
----------------------------------------------------------------------------------------------------
- 1,918,253 1,092,591 3,010,844 149,371
EXPENSES
Publishing 1,106,363 1,106,363
Goods and services 221,559 221,559
Food service 886,081 886,081 356,529
Franchising 540,062 540,062
Other operations 23,661 23,661
Unallocated expenses 526,265 801,575 1,327,840 658,381
---------------------------------------------------------------------------------------------------
526,265 2,693,220 886,081 4,105,566 1,014,910
INCOME (LOSS) FROM OPERATIONS
Publishing - 661,650 - 661,650
Goods and services - (257,713) - (257,713)
Food service - - 206,510 206,510 (207,158)
Franchising (491,925) (491,925)
Other operations - 114,596 - 114,596
Unallocated (526,265) (801,575) - (1,327,840) (658,381)
---------------------------------------------------------------------------------------------------
$ (526,265) $ (774,967) $ 206,510 $(1,094,722) $ (865,539)
===================================================================================================
NET LOSS $ (697,804) $(1,352,983) $ 210,368 $(1,840,419) $(1,230,993)
===================================================================================================
EBITDA $ (398,345) $ (212,437) $ 452,581 $ (158,201) $ (865,539)
==================================================================================================
11
The three months ended March 31, 1999 compared to the three months ended March
31, 1998
Results of Operations of Easyriders and Newriders
During the three months ended March 31, 1999, the Company experienced a net
loss in the amount of $1,840,419, compared with a net loss of $1,230,993 for the
three months ended March 31, 1998. The Company's net loss per share was $0.10
for the three months ended March 31, 1999, compared to a net loss of $0.14 per
share for the three months ended March 31, 1998. The Company experienced a
negative EBITDA in the amount of $158,201 for the three months ended March 31,
1999, compared with a negative EBITDA of $865,539 for the three months ended
March 31, 1998.
The increased losses for the three month period ended March 31, 1999 can be
substantially attributed to the increase in operating expenses for the combined
operations of the Company and Newriders of $3,090,656 and the increase in
interest expense of $547,615, offset by the increased gross margin of
$2,861,473, generated primarily by Paisano Publications and by El Paso.
Results of Operations: Paisano Companies
The operating results of the Company for the three months ended March 31,
1999 include the results for the Paisano Companies.
The Paisano Companies' sales totaling $8,168,378, includes sales from the
publishing segment of $5,620,709, sales from the goods and services segment of
$1,442,912, sales from the franchising segment of $48,137, and sales from other
segments of $1,056,620. The Paisano Companies' gross margin totaling $1,918,253,
includes margin from the publishing segment of $1,768,013, a negative margin
from the goods and services segment of $36,154, margin from the franchising
segment of $48,137, and margin from other segments of $138,257. The Paisano
Companies' loss from operations totaling $774,967, includes income from
operations of $661,650 from the publishing segment, loss from operations of the
goods and services segment of $257,713, loss from the operations of the
franchising segment of $491,925, income from operations of other segments of
$114,596 and expenses not allocated to any segment of $801,575.
The Paisano Companies' publishing segment includes sales generated from
subscription sales, newsstand sales and advertising sales related to the
Companies' eleven special interest magazines. The related cost of sales
includes direct costs related to the sales consisting primarily of printing,
publication and distribution costs. The goods and services segment includes
sales generated from the sale of apparel and other products through its mail
order catalogs, two retail stores, and franchise programs. The related cost of
sales includes the costs of the apparel and other products. The franchising
segment includes sales generated through royalties and franchise fees charged to
the Companies' 24 operating franchisees There is no related cost of sales.
The Paisano Companies' other segments primarily includes Teresi, Inc., which
generates substantially all of its sales from the sale of tickets to its
motorcycle rodeos, motorcycle shows, and tattoo shows. The related cost of
sales includes the direct costs of promoting the events.
The Paisano Companies' operating expenses of $2,693,220 include $1,891,645
of expenses specifically allocated to individual segments and $801,575 which
have not been allocated to any one segment. The allocated expenses include
payroll, promotion, and other general and administrative expenses specifically
attributable to the business segment. The unallocated expenses include payroll
and related benefits, professional fees, consulting, rent and other expenses not
specifically attributable to any one segment. Unallocated payroll and related
benefits for the Paisano Companies for the three month period ended March 31,
1999 totaled $408,505. Depreciation and amortization for the same period
12
totaled $567,727 related primarily to $469,256 in amortization of the
$56,368,752 in goodwill created out of the Paisano Companies' acquisition by the
Company.
Interest expense for the Paisano Companies totaled $572,819, primarily
attributable to the debt issued to finance the Company's acquisition of the
Paisano Companies.
Net loss for the Paisano Companies was $1,352,983 for the three months
ended March 31, 1999, with a negative EBITDA of $212,437.
The principal raw material used in publishing operations of the Paisano
Companies is paper. Paper costs represented approximately 16% of Paisano
Publications' production, selling and other direct costs for the three months
ended March 31, 1999. Certain commodity grades of paper have shown considerable
price volatility over the last decade. There can be no assurance that future
fluctuations in paper prices will not have a material adverse effect on the
Paisano Companies' results of operations or financial condition.
The profitability of the Paisano Companies' publishing segment is also
affected by the cost of postage and could be materially adversely affected if
there is an increase in postal rates. Future fluctuations in postal rates could
have a material adverse effect on the publishing segments' results of operations
or financial condition. No assurance can be given that the publishing segment
can recoup paper or postal cost increases by passing them through to its
advertisers and readers. In addition, future fluctuations in paper prices or
postal rates could have an effect on comparisons of the results of operations
and financial condition of the publishing segments.
Results of Operations: El Paso
The operating results of the Company for the three months ended March 31,
1999, include the results for E1 Paso. The results for 1998 do not include any
of the results of El Paso.
E1 Paso's sales from its four El Paso Bar-B-Que Restaurants totaled
$2,863,334, and cost of sales, which included food and direct payroll costs
related to the operations of the restaurants of $855,956 and $914,787,
respectively, totaled $1,770,743 for the three months ended March 31, 1999. The
gross margin was $1,092,591, or 38.2% of sales. Operating expenses for El Paso
for the period totaled $886,081, or 30.9% of sales, and include depreciation and
amortization of $185,082. Interest expense associated with debt used to finance
the restaurants and capital leases was $57,132 for the three months ended March
31, 1999. Net income for the three months ended March 31, 1999 was $210,368,
and EBITDA was $452,581.
Liquidity and Capital Resources
The Company's primary cash requirements are to fund the Company's working
capital needs, primarily accounts receivable, inventory and prepaid expenses and
to service its debt. On March 31, 1999, the Company had negative working
capital of $2.2 million due primarily from the loss sustained during the three
month period ended March 31, 1999, deferred subscription and advertising income
and the current portion of a note payable to a stockholder.
Cash provided by operating activities during the three month period ended
March 31, 1999 totaled approximately $0.5 million. The operating loss of $1.8
million was offset by non-cash charges of $0.9 million for depreciation and
amortization, and $1.4 million in cash was provided by changes in operating
accounts.
13
Net cash used in investing activities totaled $0.3 million, and represented
cash paid for capital expenditures.
Upon its acquisition by the Company, Paisano Publications obtained an
aggregate of $22,000,000 in financing (the "Nomura Indebtedness") from Nomura
Holding American, Inc. (the "Lender"). 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 acquisition of the
Paisano Companies, 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. At March 31, 1999, there was $1,250,000 of
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, Newriders, and El Paso. 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.
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, no
amounts have been classified as current at March 31, 1999.
Subject to certain limitations on dividends, provided that no event of
default has occurred, Paisano Publications may loan 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 March 31, 1999, Paisano Publications did
not achieve such excess cash flow and therefore, Paisano Publications was unable
to provide funds to the Company. The inability of Paisano Publications to
provide funds to the Company can adversely impact the ability of the Company to
repay certain expenses of the Company.
Because the Nomura Indebtedness includes restrictions on the ability of the
Paisano Companies to transfer funds to the Company in the form of cash
dividends, loans or advances, the net assets of the Paisano Companies are
considered to be restricted. The restricted net assets of the Paisano Companies
on March 31, 1999 total $38,058,056.
The Nomura Indebtedness contains numerous operating and financial
covenants, including but not limited to, payment of dividends, limitations on
indebtedness and the maintenance of minimum net worth, minimum working capital,
interest coverage ratios and the achievement of cash flow measures.
In connection with the Paisano Acquisition, the Company issued notes in the
aggregate amount of $13,000,000 to Joseph Teresi (the sole shareholder of the
Paisano Companies prior to the Paisano Acquisition). Of the total, $10,000,000
of the notes consist of variable rate, five-year subordinated notes (the
"Contributor Notes"). The Contributor Notes bear interest at an annual rate
that may vary from 6%
14
to 10% and may be extended for an additional five years. The remaining
$3,000,000 was issued as a 90 day note that bears interest at an annual rate of
10%. As of March 31, 1999, the Company was in arrears in repayment of the
$3,000,000 short-term note which was due December 23, 1998. On March 31, 1999,
Joseph Teresi waived the default which existed on that date with respect to the
non-payment of interest on the $3,000,000 promissory note from the Company. In
addition, Mr. Teresi agreed that between March 31, 1999 and March 31, 2000 he
would not make any claim of default in connection with the non-payment of
interest or principal which were due as of March 31, 1999 or which would accrue
between March 31, 1999 and March 31, 2000 on the $3,000,000 promissory note and
two $5,000,000 promissory notes given to Mr. Teresi as part of the consideration
for the acquisition from him of the Paisano Companies.
The Company believes that projected cash flow from operations, projected
availability under the Credit Agreement and the $3 million raised in April 1999
from the sale of stock to Messrs. Martin and Teresi will be sufficient to meet
its anticipated cash needs for at least the next 12 months. However, any
projections of future cash needs and cash flows are subject to substantial
uncertainty. If current cash, funds that may be generated from operations, and
borrowings available from the Credit Agreement are insufficient to satisfy the
Company's liquidity requirements, the Company may seek to sell additional equity
or debt securities. The sale of additional equity or debt securities could
result in additional dilution to the Company's stockholders. There can be no
assurance that financing will be available in amounts or on terms acceptable to
the Company, if at all.
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.
Year 2000 Readiness Disclosure
Many of the world's computer systems currently record years in a two-digit
format. Such computer systems will be unable to properly interpret dates beyond
the year 1999, which could lead to business disruptions in the U.S. and
internationally (the "Year 2000 issue"). The potential costs and uncertainties
associated with the Year 2000 issue will depend on a number of factors,
including software, hardware and the nature of the industry in which the Company
operates. Additionally, companies must coordinate with other entities with
which they electronically interact, such as customers and creditors.
The Company has reviewed its business processes and internal information
systems, including its computer systems to determine whether the Company's
software applications and computer and information systems are compliant with
the Year 2000. The Company is in the process of upgrading its computer system
to be Year 2000 compliant and anticipates completing this process by June, 1999.
In addition, the Company is querying all of its major suppliers and customers as
to their progress in
15
identifying and addressing Year 2000 problems. The Company's products do not
have any material Year 2000 problems. While the Company believes that its
business processes and internal information systems will be fully compliant for
the Year 2000, there can be no assurance that the Company will not experience
unanticipated negative consequences and/or material costs caused by undetected
errors or defects in the technology used in its business processes or internal
information systems, which are comprised predominantly of third party software
and hardware. The Company does not currently anticipate that the Year 2000 issue
will have a material impact on its business, financial condition or results of
operations as total costs are not anticipated to exceed $150,000.
Should the Company not be completely successful in mitigating internal and
external Year 2000 risks, the likely worst case scenario could be a system
failure causing disruptions of operations, including, among other things, a
temporary inability to process transactions, or engage in normal business
activities at the Company or its vendors and suppliers. The Company currently
does not have a contingency plan with respect to potential Year 2000 failures of
its suppliers or customers. If these failures would occur, depending upon their
duration and severity, they could have a material adverse effect on the
Company's business, results of operations and financial condition.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for fiscal years
beginning after June 15, 1999. This standard establishes accounting and
reporting standards for derivative instruments and for hedging activities and
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Company does not believe that the adoption of this new
standard will have a material impact on its financial position or results of
operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to a variety of risks, including paper price
volatility and changes in interest rates affecting the cost of its debt.
Paper Price Volatility
A primary component of the Company's cost of revenues in the magazine
publishing segment is the cost of paper. Consequently, increases in paper
prices can adversely impact the Company results of operations.
Interest Rates
The Company is subject to certain interest rate risk related to the Term
Loans. The Term Loans mature on September 23, 2001 and bear interest at an
annual rate equal to the prime rate of the Lendor plus 1.85% payable monthly.
The interest rate on the balance of $20,250,000 outstanding on March 31, 1999
was 9.6%. An increase in interest rates of 1% would result in an increase in
interest expense of approximately $200,000.
The Company's remaining long-term debt and convertible debentures have
fixed interest rates and therefore the Company does not believe a 10% increase
in interest rates would have a material impact on the Company's consolidated
financial statements.
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PART II -- OTHER INFORMATION
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Item 1. Legal Proceedings.
Easyriders and its subsidiaries are subject to litigation incidental to the
conduct of their respective businesses in the ordinary course of operations.
In May 1999, Easyriders settled a lawsuit with Palisades Capital, Inc. and
Palisades Holdings, Inc. (collectively "Palisades"). Newriders was named as a
defendant in the lawsuit brought by Palisades in the Superior Court of
California, County of Los Angeles, number BC194913, filed July 27, 1998.
An involuntary bankruptcy proceeding was filed against Rick Pierce, a former
shareholder of Newriders, on September 23, 1998 in the United States Bankruptcy
Court, Eastern District of California, Fresno Division Case No. 98-19111-A-11.
The bankruptcy was filed against Mr. Pierce before Pierce had returned certain
stock certificates evidencing shares of Newriders Common Stock to Newriders in
accordance with certain contractual arrangements regarding the Reorganization.
By complaint filed November 20, 1998 and amended in February 1999, Easyriders
and Newriders commenced an adversary proceeding against the Pierce Bankruptcy
Estate and other parties who claim an interest in the share certificates through
various transactions with Mr. Pierce. The action sought a declaratory judgment
confirming that the Newriders certificates were canceled pursuant to the merger
and that the Bankruptcy Estate has no claim to the Newriders certificates and a
decision enjoining any transfer of Newriders stock. In March 1999, Mr. Pierce,
as debtor in possession, filed an amended counterclaim and cross-claim seeking
reinstatement and return of his Newriders stock certificate, delivery of the
Easyriders stock due in the Reorganization and seeking damages of at least $20
million based on various claims including breach of contract, breach of
fiduciary duty, fraud, and fraudulent transfer generally arising out of the
Reorganization. The claims have been asserted against Easyriders, Newriders,
Messrs. Martin and Teresi and a former officer of Easyriders and others now
claiming an interest in the shares through transactions with Mr. Pierce.
Easyriders denies these allegations and is vigorously opposing such claims, and
has filed a response to the counterclaim and other supplemental pleadings.
Item 2. Changes in Securities and Use of Proceeds.
On April 8, 1999, the Company raised additional capital by selling shares of
its Common Stock to John Martin and Joseph Teresi for $1,500,000 each. The
shares were sold to Messrs. Martin and Teresi at a 25% discount from market
price, market price being determined as the average daily closing price of the
Common Stock on the American Stock Exchange over a certain number of consecutive
trading days ending on and including April 8, 1999. Each of Messrs. Martin and
Teresi received 1,397,950 shares of Easyriders Common Stock as a result of such
purchases. Mr. Martin paid cash for his shares, and Mr. Teresi paid for his
shares by forgiving $75,000 of interest and $1,425,000 of principal owed to him
by the Company. The sale of Easyriders Common Stock to Messrs. Martin and
Teresi was unanimously approved by the members of the Board of Directors (other
than Messrs. Martin and Teresi) after extensive consideration of the
circumstances, including but not limited to, the cash needs of the Company and
the absence of any viable alternative funding sources. The Board of Directors
also received and relied upon, a written opinion of Imperial Capital that the
$1,500,000 cash paid by Mr. Martin for his shares and the $1,500,000 forgiveness
of interest and principal given by Mr. Teresi in exchange for his shares are
fair to the Company's stockholders from a financial point of view.
The shares were issued to Mr. Martin and Mr. Teresi in a transaction that was
exempt from the registration requirements of the Securities Act of 1933, as
amended, pursuant to Section 4(2) thereof.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description of Exhibits
-------------- -----------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the
quarterly period ended March 31, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EASYRIDERS, INC.
----------------
(Registrant)
Dated: May 13, 1999 /s/ J. Robert Fabregas
-----------------------------
J. Robert Fabregas
Chief Financial Officer and
Executive Vice President
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