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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, 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 23,828,565 shares of outstanding Common Stock of the Registrant
as of November 10, 1999.
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
-----------------------------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 112,242 $ 278,035
Restricted cash 313,640
Accounts receivable, less allowance for doubtful accounts
of $445,442 (1999) and $395,681 (1998) 3,106,555 2,874,779
Inventories 3,957,067 3,975,443
Prepaid publication costs 718,956 629,375
Prepaid expenses and other 1,401,222 875,846
Receivable from shareholder 381,358 398,085
----------- -----------
Total current assets 9,677,400 9,345,203
PROPERTY AND EQUIPMENT, net 5,219,890 3,718,067
GOODWILL, net of accumulated amortization
of $2,256,214 (1999) and $612,739 (1998) 60,911,223 62,704,698
INTANGIBLE ASSETS, net of accumulated amortization
of $152,610 (1999) and $36,538 (1998) 815,183 809,409
OTHER ASSETS 652,704 560,245
----------- -----------
$77,276,400 $77,137,622
=========== ===========
See accompanying notes to consolidated financial statements.
1
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
September 30, December 31,
1999 1998
-----------------------------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,652,056 $ 4,086,773
Accrued payroll and payroll related expenses 1,379,160 589,861
Accrued interest payable 979,307 -
Other current liabilities 1,386,462 1,659,631
Income taxes payable - 7,034
Current portion of deferred subscription and advertising income 4,204,049 3,348,420
Current portion of note payable to stockholder - -
Current portion of long-term debt 997,293 558,748
------------ ------------
Total current liabilities 15,598,327 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 11,575,000 13,000,000
LONG-TERM DEBT, net of current portion and debt discount, including
related party indebtedness of $762,406 (1999) and $895,304 (1998) 22,990,420 22,713,670
OTHER LONG TERM LIABILITIES, including deferred subscription
revenues of $1,092,895 (1999) and $549,838 (1998) 1,269,707 799,838
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, 22,611,155 shares (1999) and 19,295,375 shares (1998) 22,611 19,295
outstanding
Additional paid in capital 58,580,899 54,318,590
Receivable from the sale of stock (7,300,000) (7,300,000)
Accumulated deficit (26,777,231) (17,980,905)
------------ ------------
Total stockholders' equity 24,526,279 29,056,980
------------ ------------
$ 77,276,400 $ 77,137,622
============ ============
See accompanying notes to consolidated financial statements.
2
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------------------------------------------------------------------------
(unaudited) (unaudited)
SALES $ 11,643,932 $ 1,416,563 $ 33,692,909 $ 2,240,718
COST OF SALES 9,613,755 831,990 26,981,972 1,218,954
------------ ------------ ------------ ------------
GROSS MARGIN 2,030,177 584,573 6,710,937 1,021,764
EXPENSES:
Selling, general, and administrative 3,740,591 1,570,602 9,957,553 3,617,625
Depreciation and amortization 796,660 109,543 2,348,605 232,531
Stock issuance expenses 100,000 700,000 1,888,867
Loss on sale of restaurant to related party - 467,774 - 1,099,760
------------ ------------ ------------ ------------
Total expenses 4,637,251 2,147,919 13,006,158 6,838,783
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (2,607,074) (1,563,346) (6,295,221) (5,817,019)
OTHER INCOME (EXPENSE) 208,835 6,269 184,443 6,269
INTEREST EXPENSE (906,891) (380,812) (2,679,323) (1,324,313)
------------ ------------ ------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (3,305,130) (1,937,889) (8,790,101) (7,135,063)
PROVISION FOR INCOME TAXES 2,075 6,225
------------ ------------ ------------ ------------
NET LOSS $ (3,307,205) $ (1,937,889) $ (8,796,326) $ (7,135,063)
============ ============ ============ ============
COMPREHENSIVE LOSS $ (3,307,205) $ (1,937,889) $ (8,796,326) $ (7,135,063)
============ ============ ============ ============
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.15) $ (0.19) $ (0.41) $ (0.78)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC AND DILUTED 22,521,173 10,012,929 21,232,493 9,143,064
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
3
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
September 30,
1999 1998
------------------------------------
(unaudited)
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $ (8,796,326) $ (7,135,063)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock issuance expenses 700,000 1,888,867
Stock issued for services 65,625 616,000
Depreciation and amortization 2,348,605 232,531
Loss on sale of restaurant to related party 1,099,760
Loss on sale of fixed assets 132,602
Loss on sale of stock held for investment 20,959
Loss on write-off of intangible 20,507
Amortization of debt issuance costs 236,082 1,202,870
Increase (decrease) in cash resulting from changes in operating accounts:
Current assets (518,949) 412,041
Other assets 4,834,315 46,093
Current liabilities (141,482) (140,307)
Other long-term liabilities 469,869 (280,717)
------------ ------------
Net cash used in operating activities (628,193) (2,057,925)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, less cash acquired (18,801,876)
Proceeds from sale of fixed assets 3,000 215,325
Purchase of intangible assets (142,859)
Purchase of fixed assets (2,113,036) (203,496)
------------ ------------
Net cash used in investing activities (2,252,895) (18,790,047)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of convertible debentures and debt 951,377 22,600,000
Common stock issued for cash 2,000,000 5,000,000
Payments of stockholders advances (201,350)
Payment of long-term debt and capital leases (236,082) (7,648,105)
------------ ------------
Net cash provided by financing activities 2,715,295 19,750,545
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (165,793) $ (1,097,427)
CASH AND CASH EQUIVALENTS, beginning of year 278,035 1,262,633
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 112,242 $ 165,206
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid for interest $ 2,515,361 $ 92,467
============ ============
NONCASH FINANCING ACTIVITIES:
Common stock issued in settlement of debt $ 1,500,000
See accompanying notes to consolidated financial statements
4
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (unaudited)
- --------------------------------------------------------------------------------
1. GENERAL BASIS OF PRESENTATION
The information set forth in these condensed financial statements as of
September 30, 1999 and for the nine months ended September 30, 1999 and
1998 is unaudited. The information reflects all adjustments consisting
only of normal recurring entries that, in the opinion of management, are
necessary to present fairly the financial position and results of
operations of the Company for the periods indicated. Results of
operations for the nine months ended September 30, 1999 are not
necessarily indicative of the results of operations for the full fiscal
year.
Certain information in the footnote disclosures normally included in the
annual financial statements has been condensed or omitted, in accordance
with the rules and regulations of the Securities and Exchange
Commission.
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 Newriders 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 14 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 24
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."
5
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (unaudited)
- --------------------------------------------------------------------------------
Easyriders currently derives substantially all of its revenues from the
operations of Paisano Publications and El Paso.
2. LONG-TERM DEBT
El Paso - In March 1999, El Paso completed negotiations for a $500,000
unsecured revolving line of credit to be used for general corporate
purposes. This credit facility bears interest at a rate of prime plus
0.5%, and matures on March 15, 2000. At September 30, 1999, $372,000 was
owed under this credit facility.
In June 1999, El Paso borrowed $475,000 from a qualified lender to
complete the build-out of its El Paso Bar-B-Que in Tulsa, Oklahoma. This
unsecured loan bears interest at a rate of 10.5% per annum, matures on
July 1, 2009, and requires monthly payments of principal and interest to
commence August 1, 1999. During the quarter ended September 30, 1999,
approximately $13,000 was repaid on this loan.
Paisano Publications - Based on the results for the quarter ended
September 30, 1999, Paisano was in violation of the leverage ratio, the
minimum consolidated EBITDA and the interest coverage ratio required
under the financial covenants of the Nomura Credit Agreement.
6
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (unaudited)
- --------------------------------------------------------------------------------
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 sold
1,397,950 shares of common stock of the Company to a director of the
Company for the sum of $1,500,000. 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 April 8, 1999. In conjunction with this stock
issuance at a discount, the Company recorded $300,000 of stock issuance
expense.
Also on April 8, 1999, the Company sold 1,397,950 shares of common stock
of the Company to the former sole shareholder of the Paisano Companies
and a director of the Company for the sum of $1,500,000. 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 April 8, 1999. As consideration for
the $1,500,000 in common stock, the director forgave interest on a
$5,000,000 note payable of $75,000 and reduced the principal on the note
payable from $5,000,000 to $3,575,000. In conjunction with this stock
issuance at a discount, the Company recorded $300,000 of stock issuance
expense.
On July 14, 1999, the Company sold to two directors of the Company
234,940 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
July 14, 1999.
Stock issued to settle litigation - On August 3, 1999, the Company
issued 50,000 shares of the common stock of the Company in settlement of
a dispute with an ex-employee. Compensation expense was recognized equal
to the fair market value of such shares on the date of issuance.
Stock Option Grants - During the nine months ended September 30, 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 the 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.
4. CONTINGENCIES
The Company is involved in certain litigation as outlined in Part II
Item 1. Legal Proceedings. Currently, the Company believes that any
liability with respect to such legal actions can not be determined.
5. 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
7
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (unaudited)
- --------------------------------------------------------------------------------
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. 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.
- ------------------------------------------------------------------------------------------------------------------------------------
Goods and Food Other
Publishing Services Service Franchising Operations Totals
- ------------------------------------------------------------------------------------------------------------------------------------
Sales external customers -Quarter
ended September 30, 1999 6,146,982 1,269,292 2,374,637 25,000 1,828,021 11,643,932
Sales external customers -
Year-to date September 30, 1999 17,723,427 4,496,050 8,205,768 103,137 3,164,527 33,692,909
Income (loss) from operations-
Quarter ended September 30, 1999 565,049 (203,925) (317,351) (538,448) (150,925) (645,600)
Income (loss) from operations-
Year-to-date September 30, 1999 1,933,365 (396,641) 112,515 (1,706,813) (219,129) (276,703)
Segment Assets 8,959,294 1,411,362 5,150,049 44,803 687,427 16,252,935
Capital Expenditures 464,882 4,660 1,626,494 -- 17,000 2,113,036
Depreciation/Amortization -
Quarter ended September 30, 1999 85,334 12,087 123,442 2,119 18,954 241,936
Depreciation/Amortization -
Year-to-date September 30, 1999 225,499 36,260 341,677 6,356 75,126 684,918
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.
8
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (unaudited)
- --------------------------------------------------------------------------------
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements is as follows:
Quarter ended September 30, 1999:
Income (loss) from operations included in segment disclosure $ (645,600)
Unallocated, selling, general, and administrative (1,961,474)
------------
Loss from operations $ (2,607,074)
============
Year-to-date September 30, 1999:
Income (loss) from operations included in segment disclosure $ (276,703)
Unallocated, selling, general, and administrative (6,018,518)
------------
Loss from operations $ (6,295,221)
============
As at September 30, 1999:
Segment assets $ 16,252,935
Cash and cash equivalents 112,242
Goodwill 60,911,223
------------
Total Assets $ 77,276,400
============
Quarter ended September 30, 1999:
Depreciation and amortization included in segment disclosure $ 241,936
Amortization of goodwill 554,724
------------
Depreciation and amortization $ 796,660
============
Year-to-date September 30, 1999:
Depreciation and amortization included in segment disclosure $ 684,918
Amortization of goodwill 1,663,687
------------
Depreciation and amortization $ 2,348,605
============
Revenues concerning principal geographic areas are as follows based on customer
location:
USA Canada Germany UK Australia Other Total
QE 9/30/99 10,727,953 274,217 123,241 127,236 112,110 279,175 $11,643,932
YTD 9/30/99 30,611,790 794,813 422,898 419,216 336,640 1,107,552 33,692,909
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.
9
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (unaudited)
- --------------------------------------------------------------------------------
6. SUBSEQUENT EVENTS
In October 1999, Paisano Publications issued an Increasing Rate Secured
Promissory Note in the amount of $275,000 to a qualified lender. This
loan bears interest at a rate of 13% per annum, plus additional
capitalized interest at a rate of 7% per annum which increases by 1%
monthly beginning on April 14, 2000. Interest is due and payable
monthly, and the principal balance with any accrued interest is due and
payable on or before October 14, 2000. To the extent that the Note has
not been repaid in full, the Company will issue a warrant to the holder
to purchase up to 100,000 shares of common stock on the sixth month
anniversary, 400,000 shares of common stock on the ninth month
anniversary and 500,000 shares of common stock on the twelfth month
anniversary of the closing date of the Note. The warrant exercise price
will be $0.01 per share. The Note is guaranteed by Newriders, Inc. and
is secured by all of the common stock held by Newriders, Inc. in El
Paso. The proceeds are to be used for general working capital purposes.
10
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 Newriders 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;
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.
11
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. In addition, certain non-cash charges
pertaining to the private placement of common stock have been added back to the
results of operations in determining 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 generally
accepted accounting principles.
12
Results of Operations
The following table sets forth certain operating data for Easyriders and
Newriders for the three months ended September 30, 1999 and 1998:
Paisano
Easyriders Companies EL Paso Consolidated Newriders
For the Three Months Ended September 30,
-------------------------------------------------------------------------------------------
1999 1999 1999 1999 1998
(unaudited)
SALES
Publishing $ - $ 6,146,982 $ - $ 6,146,982 $ -
Goods and services 1,269,292 1,269,292
Food service 2,374,637 2,374,637 1,416,563
Franchising 25,000 25,000
Other operations 1,828,021 1,828,021
-------------------------------------------------------------------------------------------
- 9,269,295 2,374,637 11,643,932 1,416,563
COST OF SALES
Publishing 5,026,859 5,026,859
Goods and services 1,449,489 1,449,489
Food service 1,621,445 1,621,445 831,990
Franchising - -
Other operations 1,515,962 1,515,962
-------------------------------------------------------------------------------------------
- 7,992,310 1,621,445 9,613,755 831,990
GROSS MARGIN
Publishing - 1,120,123 - 1,120,123
Goods and services - (180,197) - (180,197)
Food service - - 753,192 753,192 584,573
Franchising - 25,000 - 25,000
Other operations - 312,059 - 312,059
-------------------------------------------------------------------------------------------
- 1,276,985 753,192 2,030,177 584,573
EXPENSES
Publishing 555,074 555,074
Goods and services 23,728 23,728
Food service 1,070,543 1,070,543 2,147,919
Franchising 563,448 563,448
Other operations 462,984 462,984
Unallocated expenses 884,386 1,077,088 1,961,474
-------------------------------------------------------------------------------------------
884,386 2,682,322 1,070,543 4,637,251 2,147,919
INCOME (LOSS) FROM OPERATIONS
Publishing - 565,049 - 565,049
Goods and services - (203,925) - (203,925)
Food service - - (317,351) (317,351) (1,563,346)
Franchising - (538,448) - (538,448)
Other operations - (150,925) - (150,925)
Unallocated (884,386) (1,077,088) - (1,961,474) -
-------------------------------------------------------------------------------------------
$ (884,386) $ (1,405,337) $ (317,351) $ (2,607,074) $ (1,563,346
===========================================================================================
NET INCOME (LOSS) $ (875,860) $ (2,052,576) $ (378,769) $ (3,307,205) $ (1,937,889)
===========================================================================================
EBITDA $ (500,235) $ (892,419) $ (108,925) $ (1,501,579) $ (1,447,534)
===========================================================================================
13
The following table sets forth certain operating data for Easyriders and
Newriders for the nine months ended September 30, 1999 and 1998:
Paisano
Easyriders Companies El Paso Consolidated Newriders
For the Nine Months Ended September 30,
---------------------------------------------------------------------------------------------
1999 1999 1999 1999 1998
(unaudited)
SALES
Publishing $ - $ 17,723,427 $ - $ 17,723,427 $ -
Goods and services 4,496,050 4,496,050
Food service 8,205,768 8,205,768 2,240,718
Franchising 103,137 103,137
Other operations 3,164,527 3,164,527
---------------------------------------------------------------------------------------------
- 25,487,141 8,205,768 33,692,909 2,240,718
COST OF SALES
Publishing 14,155,827 14,155,827
Goods and services 4,686,912 4,686,912
Food service 5,191,846 5,191,846 1,218,954
Franchising - -
Other operations 2,947,387 2,947,387
---------------------------------------------------------------------------------------------
21,790,126 5,191,846 26,981,972 1,218,954
GROSS MARGIN
Publishing - 3,567,600 - 3,567,600
Goods and services - (190,862) - (190,862)
Food service - - 3,013,922 3,013,922 1,021,764
Franchising 103,137 103,137
Other operations - 217,140 - 217,140
---------------------------------------------------------------------------------------------
- 3,697,015 3,013,922 6,710,937 1,021,764
EXPENSES
Publishing 1,634,235 1,634,235
Goods and services 205,779 205,779
Food service 2,901,407 2,901,407 6,838,783
Franchising 1,809,950 1,809,950
Other operations 436,269 436,269
Unallocated expenses 3,053,055 2,965,463 6,018,518 -
---------------------------------------------------------------------------------------------
3,053,055 7,051,696 2,901,407 13,006,158 6,838,783
INCOME (LOSS) FROM OPERATIONS
Publishing - 1,933,365 - 1,933,365
Goods and services - (396,641) - (396,641)
Food service - - 112,515 112,515 (5,817,019)
Franchising (1,706,813) (1,706,813)
Other operations - (219,129) - (219,129)
Unallocated (3,053,055) (2,965,463) - (6,018,518) -
---------------------------------------------------------------------------------------------
$ (3,053,055) $ (3,354,681) $ 112,515 $ (6,295,221) $ (5,817,019)
=============================================================================================
NET INCOME (LOSS) $ (3,551,341) $ (5,243,555) $ (1,430) $ (8,796,326) $ (7,135,063)
=============================================================================================
EBITDA $ (1,964,728) $ (1,806,588) $ 709,143 $ (3,062,173) $ (3,689,352)
=============================================================================================
14
Results of Operations: Easyriders, Inc. Consolidated
During the three months ended September 30, 1999, the Company
experienced a net loss in the amount of $3,307,205 (or $0.15 per share),
compared with a net loss of $1,937,889 (or $0.19 per share) for the three months
ended September 30, 1998. The net loss for the nine months ended September 30,
1999 was $8,796,326 (or $0.41 per share), compared with a net loss of $7,135,063
(or $0.78 per share) for the same period in the prior year. The Company
experienced negative EBITDA in the amount of $1,501,579 and $3,062,173 for the
three and nine months ended September 30, 1999, respectively, compared with
negative EBITDA of $1,447,534 and $3,689,352 for the three and nine months ended
September 30, 1998.
The increased loss for the three months ended September 30, 1999 can be
substantially attributed to the increase in gross margin of $1,445,604,
generated primarily by Paisano Publications and by El Paso, offset by the
increase in operating expenses of $2,489,332 and by the increase in
non-operational expenses of $323,513.
The increased loss for the nine months ended September 30, 1999 can be
substantially attributed to the increase in operating expenses for the combined
operations of the Company and Newriders of $6,167,375 together with the increase
in non-operational expenses of $1,176,836, offset by the increase in gross
margin of $5,689,173, generated primarily by Paisano Publications and by El
Paso.
Results of Operations: Paisano Companies
The operating results of the Company for both the three and nine months
ended September 30, 1999 include the results for the Paisano Companies.
The Paisano Companies' sales totaling $9,269,295 and $25,487,141 for
the three and nine months ended September 30, 1999, respectively, include sales
from the publishing segment of $6,146,982 and $17,723,427, sales from the goods
and services segment of $1,269,292 and $4,496,050, sales from the franchising
segment of $25,000 and $103,137, and sales from other segments of $1,828,021 and
$3,164,527. The Paisano Companies' gross margin totaling $1,276,985 and
$3,697,015 for the three and nine months ended September 30, 1999, respectively,
includes margin from the publishing segment of $1,120,123 and $3,567,600,
negative margin from the goods and services segment of $180,197 and $190,862,
margin from the franchising segment of $25,000 and $103,137, and margin from
other segments of $312,059 and $217,140. The Paisano Companies' loss from
operations totaling $1,405,337 and $3,354,681 for the three and nine months
ended September 30, 1999, respectively, includes income from operations of
$565,049 and $1,933,365 from the publishing segment, loss from operations of the
goods and services segment of $203,925 and $396,641, loss from operations of the
franchising segment of $538,448 and $1,706,813, loss from operations of other
segments of $150,925 and $219,129, and expenses not allocated to any segment of
$1,077,088 and $2,965,463.
The Paisano Companies' publishing segment includes sales generated from
subscription sales, newsstand sales and advertising sales related to the
Companies' fourteen 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, retail store, 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.
15
There is no related cost of sales. The Paisano Companies' other segments
primarily includes Easyriders Events, Inc., which generates substantially all of
its sales from the sale of tickets to its motorcycle rodeos, motorcycle shows,
and tattoo shows. The related cost of sales includes the direct costs of
promoting the events.
The Paisano Companies' operating expenses of $2,682,322 and $7,051,696
for the three and nine months ended September 30, 1999, respectively, include
$1,605,234 and $4,086,233 of expenses specifically allocated to individual
segments and $1,077,088 and $2,965,463 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 and nine month periods ended September 30, 1999 totaled $404,742
and $1,328,818, respectively. Depreciation and amortization for the same periods
totaled $555,074 and $1,634,235, related primarily to $469,740 and $1,408,736 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 $588,264 and
$1,734,013 for the three and nine months ended September 30, 1999, respectively,
which is primarily attributable to the debt issued to finance the Company's
acquisition of the Paisano Companies.
Net loss for the Paisano Companies was $2,052,576 and $5,243,555 for
the three and nine months ended September 30, 1999, respectively, with negative
EBITDA of $892,419 and $1,806,588.
The principal raw material used in publishing operations of the Paisano
Companies is paper. Paper costs represented approximately 15% and 16% of Paisano
Publications' production, selling and other direct costs for the three and nine
months ended September 30, 1999, respectively. Certain commodity grades of paper
have shown considerable price volatility over the last decade. There can be no
assurance that future fluctuations in paper prices will not have a material
adverse effect on the Paisano Companies' results of operations or financial
condition.
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 both the three and nine months
ended September 30, 1999, include the results for E1 Paso. The results for 1998
include the results for El Paso for only the 7 day period subsequent to the date
of the Reorganization.
16
E1 Paso's sales from its four El Paso Bar-B-Que Restaurants totaled
$2,374,637 and $8,205,768 for the three and nine months ended September 30,
1999, respectively, with cost of sales totaling $1,621,445 and $5,191,846 for
the same periods. Cost of sales includes food costs of $737,135 and $2,472,422
for the three and nine month periods, and direct payroll costs related to the
operations of the restaurants of $884,310 and $2,719,424 for the same periods.
The gross margin was $753,192 and $3,013,922, or 31.7% and 36.7% of sales, for
the three and nine months ended September 30, 1999, respectively. Operating
expenses for El Paso for the three and nine month periods totaled $1,070,543 and
$2,901,407, respectively, or 45.1% and 35.4% of sales, and include depreciation
and amortization of $208,426 and $596,628. 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. Net loss for the three and
nine months ended September 30, 1999 was ($378,769) and ($1,430), respectively,
and EBITDA was ($108,925) and $709,143 for the same periods.
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 September 30, 1999, the Company had
negative working capital of approximately $5.9 million due primarily to the loss
sustained during the three month period ended September 30, 1999 and to deferred
subscription and advertising income.
Cash used in operating activities during the nine month period ended
September 30, 1999 totaled approximately $0.6 million. The operating loss of
$8.8 million was offset by several non-cash charges including $2.6 million for
depreciation and amortization, $0.7 million for stock issuance expenses, and
$0.2 million for losses on the sale of assets. Cash of $4.7 million was provided
by changes in operating accounts.
Net cash used in investing activities totaled $2.3 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 September 30, 1999, there was $1,250,000 of
available borrowings under the Revolving Loans. On October 1, 1999, the Company
borrowed another $625,000 against the Revolving Loans, reducing the available
balance to $625,000. Paisano is currently in discussions to resolve the
technical default of several financial covenants required by the Nomura Credit
Agreement.
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
17
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 September 30, 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 September 30, 1999, Paisano Publications has
been able to provide $102,915 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 in the future 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, 1999 total $34,167,572.
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. Based on the
results for the quarter ended September 30, 1999, Paisano was in violation of
several financial covenants including the required leverage ratio, the required
minimum consolidated EBITDA and the required interest coverage ratio. Paisano is
currently in discussions with the lender to resolve the technical defaults.
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% 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. On
April 8, 1999, Mr. Teresi purchased $1,500,000 in the common stock of the
Company and paid for his shares by forgiving $75,000 of interest and $1,425,000
of principal owed to him by the Company, reducing the principal on one of the
$5,000,000 notes payable to $3,575,000.
In February 1999, El Paso secured a commitment from a qualified lender
to finance up to $3,450,000 for the purchase and lease back of up to two new
properties, together with the development costs associated with the new
restaurants. A transaction under this commitment would be structured as a
sale-leaseback, with El Paso having the option to purchase the property at
specified times in the lease life
18
for the greater of its fair market value or the lender's total investment in the
property. This commitment expires after March 1, 2000.
In March, 1999, El Paso completed negotiations for a $500,000 unsecured
revolving line of credit to be used for general corporate purposes. This credit
facility bears interest at a rate of prime plus 0.5%, and matures on March 15,
2000. At September 30, 1999, $372,000 was owing under this credit facility.
In June 1999, El Paso borrowed $475,000 from a qualified lender to
complete the build-out of its El Paso Bar-B-Que in Tulsa, Oklahoma. This
unsecured loan bears interest at a rate of 10.5% per annum, matures on July 1,
2009, and requires monthly payments of principal and interest to commence August
1, 1999. Through September 30, 1999, approximately $13,000 had been paid against
this loan.
In October 1999, Paisano Publications borrowed $275,000 from a
qualified lender. This loan is subordinate to the Nomura Indebtedness. The loan
bears interest at a rate of 7% per annum (increasing by 1% monthly beginning
April 14, 2000), and is due and payable with accrued interest on October 14,
2000. The funds are to be used for general working capital purposes.
The Company is presently attempting to secure a cash infusion and to
accelerate cash flow, through the pursuit of various approaches, including
selling certain assets, drawing down funds available under the revolving credit
portion of the Nomura Credit Agreement and consummating certain business
transactions. The Company is also evaluating the issuance of additional debt or
equity securities. While the Company believes that such efforts, together with
ongoing operations, will enable the Company to meet its anticipated cash needs
for the next 12 months, there can be no assurance that this will be the case. 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 in the near future.
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
19
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 the end of November, 1999. In addition, the Company is querying all
of its major suppliers and customers as to their progress in 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 $16,376,611 outstanding on September 30,
1999 was 10.1 %. An increase in interest rates of 1% would result in an increase
in interest expense of approximately $164,000 per annum.
20
The Company's remaining long-term debt and convertible debentures have
fixed interest rates and therefore the Company does not believe a 1% increase in
interest rates would have a material impact on the Company's consolidated
financial statements.
21
PART II -- OTHER INFORMATION
- ----------------------------
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.
The Pierce Litigation
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 "Adversary Claims"). The Adversary 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, is
vigorously opposing such claims, and has filed a response to the counterclaim
and other supplemental pleadings. On August 5, 1999, the Adversary Claims were
transferred for adjudication to the Federal District Court in Fresno.
On September 9 and 10 a settlement conference was held in San Francisco, at
which the Company presented its argument that the Adversary Claims are without
merit and are not supported by written documentation or evidence of any kind,
other than the uncorroborated testimony of Mr. Pierce. On October 1, 1999 Mr.
Pierce was arrested in Fresno, California as the result of a 29-count Federal
indictment charging Mr. Pierce and his brother, Kevin, with conspiracy, mail
fraud and money laundering. According to the indictment, Mr. Pierce and his
brother devised a scheme to defraud 342 mostly elderly or retired individuals in
connection with a real estate development project that was never completed, and
operated as a "Ponzi" scheme whereby money from new investors was used to pay a
guaranteed interest payment to earlier investors. Subsequently, Mr. Pierce was
denied bail after a finding that he presented a substantial flight risk, and he
remains in custody awaiting trial.
As a result of the foregoing, in October, 1999 (i) the bankruptcy proceeding
was converted from a Chapter 11 proceeding to a Chapter 7 proceeding, (ii) the
creditor's committee, comprised in part of nominees of Mr. Pierce, was
disbanded, and (iii) a trustee was appointed to administer the bankruptcy estate
and begin an aggressive search for cash assets believed to have been placed in
off-shore accounts by Mr. Pierce, as alleged in the Federal indictment. On the
basis of these developments, including the settlement conference, the Company
now believes that it likely that the Adversary Claims will be dismissed with no
material adverse consequences to the Company, and that in any event the
Adversary Claims could be successfully defended if necessary.
22
The Steel Horses Arbitration
On January 5, 1998 a Demand for Arbitration was filed with the American
Arbitration Association against Paisano Publications, Easyriders Franchising,
Inc. ("EFI") and certain officers of the Company. This action was commenced by
Steel Horses, Inc. dba Easyriders of Chicago (the "Chicago Franchisee"), and
arises out of the Franchise Agreement entered into in 1994 between Steel Horses
and EFI. This action (the "Arbitration Action") was brought before an
arbitration panel in Los Angeles, California. The Chicago Franchisee alleged
that EFI understated the capital requirements of the business opportunity, and
sought compensatory damages of at least $500,000, plus punitive damages under
various theories of recovery, including violation of the Illinois Franchise
Disclosure Act, violation of other Illinois business practices statutes, fraud
and breach of the 1994 Franchise Agreement. EFI and Paisano asserted that the
claims of the Chicago Franchisee were without merit.
On September 28, 1999, by mutual agreement of all parties after voluntary
mediation, a settlement agreement was concluded which provided for formal
dismissal of the Arbitration Action upon the satisfaction by Company of certain
terms and conditions by on or about October 28, 1999. The settlement was based
on the Company's belief that financing to cover a negotiated cash payment could
be obtained, and, therefore, the settlement was conditioned upon the
availability of this or a similar financing vehicle. The settlement agreement
provided that it would be null and void if this contingency were not met. The
Company did not finalize the required financing, as a result of which the
Company considers the original settlement agreement to be null and void.
However, the Company has indicated that it is willing to meet the essential
monetary provisions of the original settlement, subject to agreement on revised
terms of payment. Based on the history of the parties' negotiations and other
relevant considerations, the Company believes that settlement of the Arbitration
Action, upon modified terms, is still possible. There can be no assurance,
however, that subsequent discussions and efforts will produce this result, and
it is still possible, therefore, that arbitration proceedings could resume.
Item 2. Changes in Securities and Use of Proceeds.
On July 14, 1999, the Company raised additional capital by selling shares
of its Common Stock to John Martin and Joseph Teresi for $250,000 cash 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 July 14, 1999. Each of Messrs. Martin and
Teresi received 234,940 shares of Easyriders Common Stock as a result of such
purchases. 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. Based on the foregoing, the Board of
Directors determined that the $250,000 cash paid by each of Messrs. Martin and
Teresi for their shares was fair to the Company's stockholders from a financial
point of view.
In both transactions, the shares were issued to Mr. Martin and Mr. Teresi
in transactions that were exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.
On August 3, 1999, the Company issued 50,000 shares of the common stock of
the Company in settlement of a dispute with an ex-employee. 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
issuance of Easyriders Common Stock to the ex-employee was unanimously approved
by the members of the Board of Directors. Pendent registration rights were
provided.
Item 3. Defaults Upon Senior Securities
Based on the results for the quarter ended September 30, 1999, Paisano
was in violation of several financial covenants contained in the Nomura
Indebtedness Agreement including the required
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leverage ratio, the required minimum consolidated EBITDA and the required
interest coverage ratio. Paisano is currently in discussions with the lender to
resolve the technical defaults.
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 Description of Exhibit
- ------- ----------------------
Number
- --------------------------------------------------------------------------------
10.61 Securities Purchase Agreement between Siena Capital Partners, L.P.
("Siena Capital") and Paisano Publications, Inc., dated October 14,
1999, for the issue of a $275,000 Increasing Rate Secured Promissory
Note
- --------------------------------------------------------------------------------
10.62 Pledge and Guarantee Agreement between Newriders, Inc. and Siena
Capital, dated October 14, 1999
- --------------------------------------------------------------------------------
10.63 Warrant Agreement between Siena Capital and Easyriders, Inc., dated
October 14, 1999
- --------------------------------------------------------------------------------
10.64 Increasing Rate Secured Promissory Note executed by Paisano
Publications, Inc., dated October 14, 1999
- --------------------------------------------------------------------------------
10.65 Common Stock Purchase Warrant issued to Siena Capital by Easyriders,
Inc., dated October 14, 1999
- --------------------------------------------------------------------------------
10.66 Intercreditor and Subordination Agreement between Siena Capital,
Nomura Holding America, Inc., Paisano Publications, Inc. and
Easyriders, Inc., dated October 14, 1999
- --------------------------------------------------------------------------------
10.67 Consent and Waiver under Note and Purchase Warrant, between
Easyriders, Inc., Paisano Publications, Inc., and Nomura Holding
America, Inc., dated October 14, 1999
- --------------------------------------------------------------------------------
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, 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: November 11, 1999 /s/ J. Robert Fabregas
---------------------------------------
J. Robert Fabregas
Chief Financial Officer and
Executive Vice President
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