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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
<TABLE>
<S> <C>
FOR THE QUARTERLY REPORT ENDED SEPTEMBER 30, 1998 COMMISSION FILE NO. 001-14509
</TABLE>
EASYRIDERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4079057
(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) 889-4630
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 19,175,375 shares of outstanding Common Stock of the Registrant
as of November 18, 1998.
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
EASYRIDERS, INC AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
(unaudited)
CURRENT ASSETS:
Cash & cash equivalents 165,206 1,262,633
Restricted cash 350,693
Accounts receivable 3,028,096
Inventory 5,395,578 285,622
Prepaid publication costs 695,047
Deferred promotion costs 358,108
Prepaid expenses and other 522,058 15,738
Accounts receivable, related parties 141,656
Receivable from shareholder 765,981
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Total current assets 11,422,423 1,563,993
------------ ------------
PROPERTY AND EQUIPMENT, net 3,993,945 1,487,598
TRADEMARKS 820,733
GOODWILL, net 62,559,993
DEPOSIT AND OTHER ASSETS 578,202 410,764
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79,375,296 3,462,355
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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EASYRIDERS, INC AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
----------------------------------------
<S> <C> <C>
(unaudited)
CURRENT LIABILITIES:
Accounts payable 2,672,605 517,904
Accrued payroll and expenses 2,277,897 466,691
Advances from stockholders 201,350
Current portion of deferred subscription and advertising income 3,345,633
Current portion of note payable to stockholders 3,000,000
Current portion of long-term debt 509,548 157,694
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Total Current Liabilities 11,805,683 1,343,639
------------ ------------
LONG-TERM PORTION OF DEFERRED SUBSCRIPTION
AND ADVERTISING INCOME 550,034
CONVERTIBLE DEBENTURES, net 1,316,667 785,183
NOTE PAYABLE TO STOCKHOLDERS 10,000,000
LONG-TERM DEBT 22,511,190 892,306
OTHER LONG-TERM LIABILITIES 354,584 138,385
STOCKHOLDERS' EQUITY
Common stock; 50,000,000 shares authorized of $0.001 par value 19,175,375
and 8,590,500 shares issued and outstanding at 1998 and 1997,
respectively; Preferred Stock; 10,000,000 shares authorized of $.001 par
value, no shares issued and outstanding
at 1998 and 1997, respectively 19,175 17,181
Additional paid in capital 53,852,042 6,884,677
Common stock subscription receivable (750,000) (750,000)
Receivable from the sale of stock (7,300,000)
Accumulated deficit (12,984,079) (5,849,016)
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Total Stockholders' Equity 32,837,138 302,842
------------ ------------
79,375,296 3,462,355
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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EASYRIDERS, INC AND SUBSIDIARIES
Condensed Consolidated Statement of Operations and Comprehensive Income
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(unaudited) (unaudited) (unaudited) (unaudited)
SALES $ 1,416,563 $ 1,277,473 $ 2,240,718 $ 2,426,584
COST OF SALES 831,990 376,270 1,218,954 1,095,227
------------ ------------ ------------ ------------
GROSS MARGIN 584,573 901,203 1,021,764 1,331,357
------------ ------------ ------------ ------------
EXPENSES
Restaurant and store operating expenses 329,095 848,779 1,229,277 1,701,883
Selling, general and administrative 1,356,961 454,676 2,626,790 911,668
Stock issuance expense -- 1,888,867
Loss on sale of restaurant to related party 467,774 1,099,760
------------ ------------ ------------ ------------
Total Expenses 2,153,830 1,303,455 6,844,694 2,613,551
------------ ------------ ------------ ------------
OPERATING INCOME FROM
FRANCHISE OPERATIONS 5,911 5,911
Loss from Operations (1,563,346) (402,252) (5,817,019) (1,282,194)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Other income (expense) 6,269 6,270
Interest expense (81,697) (5,476) (121,443) (11,309)
Interest expense - noncash (299,115) (231,504) (1,202,870) (231,032)
------------ ------------ ------------ ------------
Total Other Income (Expense) (374,543) (236,980) (1,318,044) (242,341)
------------ ------------ ------------ ------------
NET LOSS $ (1,937,889) $ (639,232) $ (7,135,063) $ (1,524,535)
============ ============ ============ ============
COMPREHENSIVE LOSS $ (1,937,889) $ (639,232) $ (7,135,063) $ (1,524,535)
============ ============ ============ ============
NET LOSS PER SHARE $ (0.19) $ (0.08) $ (0.78) $ (0.18)
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC 10,012,929 8,368,069 9,143,064 8,368,069
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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EASYRIDERS, INC AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998
1998 1997
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<S> <C> <C>
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (7,135,063) $ (1,524,535)
Adjustments to reconcile net loss to net cash
used by operating activities:
Common stock issued for services 2,504,867 250,000
Depreciation and amortization 232,531 99,338
Loss on sale of restaurant to third party 1,099,760
Non-cash interest expense 1,202,870 231,665
Increase (decrease) in cash resulting from changes in operating accounts,
net of acquisitions:
Accounts receivable (52,469) (15)
Inventory 347,158
Prepaid expenses and other current assets (48,824) (38,095)
Prepaid publication costs 166,176 --
Deposits and other assets 46,093 (156,039)
Cash overdraft -- (36,837)
Accounts payable and accrued liabilities (140,307) 528,099
Deferred subscription and advertising income (195,801) --
Other liabilities (84,916) 30,491
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Net cash used by operating activities (2,057,925) (615,928)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions, less cash acquired (18,801,876)
Proceeds from sale of fixed assets 215,325
Purchase of fixed assets (203,496) (1,003,018)
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Net cash used by investing activities (18,790,047) (1,003,018)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans payable 234,850
Issuance of debt and convertible debentures 22,600,000
Payments on debt and convertible debentures (7,626,921)
Conversion of convertible notes into common stock -- 550,000
Payments on capital lease obligations (21,184) (2,696)
Payments of stockholders' and other advances (201,350)
Common stock issued for cash 5,000,000 500,000
Cash contributions to capital -- 373,084
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Net cash provided by financing activities 19,750,545 1,655,238
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</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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EASYRIDERS, INC AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows (Continued)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998
1998 1997
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<S> <C> <C>
(Unaudited) (Unaudited)
NET INCREASE IN CASH (1,097,427) 36,292
CASH AT BEGINNING OF PERIOD 1,262,633 20,047
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CASH AT END OF PERIOD $ 165,206 $ 56,339
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 92,467 $ 11,309
NON CASH FINANCING ACTIVITIES
Common stock issued in settlement of accounts payable $ 211,133
Common stock issued in settlement of debt $ 1,206,143
Issuance of warrants in connection with debt issuance $ 1,487,190
Convertible debentures issued with conversion discount $ 333,335
Common stock issued in exchange for a note receivable $ 7,300,000
DETAIL OF BUSINESSES ACQUIRED IN PURCHASE BUSINESS COMBINATIONS (Note 2):
On September 23, 1998, the Company acquired the net assets of the Paisano
Companies. A summary of the transaction is as follows:
Cash paid $ 15,000,000
Receivable related to purchase price adjustments (762,858)
Promissory notes issued 13,000,000
Fair market value of stock issued (6,493,507 shares at $3.08 per share) 20,000,000
Fair market value of options issued to employees of Paisano Companies 697,434
Fair value of liabilities assumed 14,392,434
Other acquisition costs 5,215,107
Fair value of tangible and identifiable assets acquired (11,776,378)
------------
Excess of cost over identifiable assets acquired (goodwill) $ 55,765,739
============
On September 23, 1998, the Company acquired the net assets of El Paso Bar-B-Que
A summary of the transaction is as follows:
Fair market value of stock issued (2,000,000 shares at $3.08 per share) $ 6,160,000
Fair value of liabilities assumed 4,140,729
Other acquisition costs 635,386
Fair value of tangible and identifiable assets acquired (4,141,861)
------------
Excess of cost over identifiable assets acquired (goodwill) $ 6,794,254
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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EASYRIDERS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements September 30, 1998
(Unaudited) and December 31, 1997
NOTE 1 - GENERAL BASIS OF PRESENTATION
Easyriders, Inc. (Easyriders or the Company) is a newly formed corporation,
organized under the laws of the state of Delaware. Easyriders currently derives
substantially all of its revenues from the operations of Paisano Publications,
Inc. (Paisano Publications), a California corporation, and M & B Restaurants,
L.C. (El Paso), a Texas limited liability company.
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);
(ii) the acquisition by Easyriders of all of the outstanding common stock of
Paisano Publications and certain affiliated corporations (collectively the
Paisano Companies); and (iii) the acquisition by Easyriders of all of the
outstanding membership interests of El Paso. See Note 2 for further discussion
of the acquisitions.
Newriders is a Nevada corporation which, through its wholly owned subsidiary,
Newriders Limited, leases facilities in Fresno, California which were previously
operated as an Easyriders Cafe restaurant, an Easyriders apparel and merchandise
store, and an Easyriders Motorcycle and Accessory shop, and which are closed for
remodeling.
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 Paisano Companies consist of Paisano Publications, Easyriders of Columbus,
Inc., an Ohio corporation, Easyriders Franchising, Inc., a California
corporation, Teresi, Inc., a California corporation, Bros Club, Inc., a
California corporation and Associated Rodeo Riders on Wheels, a California
corporation. Paisano Publications publishes eleven special interest magazines
directed to motorcycle and tattoo enthusiasts. Other Paisano Companies market a
line of apparel and other products designed to appeal to motorcycle and tattoo
interests, and own three Easyriders stores and have franchised twenty-two
additional stores which 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."
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The accompanying consolidated financial statements have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at September 30, 1998
and for all periods presented have been made.
Certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the December 31,
1997 audited consolidated financial statements and notes thereto included as
exhibits to the Easyriders and Newriders prospectus/proxy statement on Form S-4
dated September 8, 1998. The results of operations for the periods ended
September 30, 1998 and 1997 are not necessarily indicative of the operating
results for the full year.
NOTE 2 - ACQUISITIONS
On September 23, 1998, the Company acquired all of the issued and outstanding
stock of each of the corporations that comprise the Paisano Companies. The sole
stockholder of each of the Paisano Companies received in exchange for the
Paisano Companies stock, total consideration in the amount of $48,000,000,
comprising 6,493,507 shares of Easyriders Common Stock valued at $3.08 per
share, and promissory notes aggregating $28,000,000, consisting of a promissory
note of in the principal amount of $15,000,000 which was paid in cash
immediately after the Merger occurred, and three promissory notes in the
aggregate amount of $13,000,000 (the "Contributor Notes"). The aggregate amount
of consideration is subject to adjustment based upon terms set forth in the
Stock Contribution and Sale Agreement. As of September 30, 1998, the Company has
recorded an estimate of $762,858 as a receivable from the former Paisano
shareholder. This estimate is subject to revision and any modification to the
amount will be treated as an adjustment to goodwill in future periods.
The $3.08 per share amount used to value the stock issued as part of the
acquisition represents the estimated fair value of Easyriders common stock
determined via extended independent party negotiations between Newriders and the
sellers of each of the Paisano Companies and El Paso during the purchase
negotiations which resulted in the executed sales agreements dated June 30,
1998. During a short period subsequent to the initial filing of the Proxy
Statement/Prospectus with the Securities and Exchange Commission, Newriders
stock averaged $3.06 per share, on a one for two split adjusted basis.
The Contributor Notes consist of a subordinated promissory note (the
"Contributor Subordinated Note") in the amount of $5,000,000, a limited recourse
subordinated promissory note (the "Contributor Mirror Note") in the amount of
$5,000,000 secured by the Martin Mirror Note (defined below) and a subordinated
promissory note (the "Contributor Short-Term Subordinated Note") in the amount
of $3,000,000. The Contributor Subordinated Note has a term of five years and
can be extended for an additional term of five years by the Company and bears
interest at an annual rate between six and ten percent. The Contributor Mirror
Note has a term of five years and will be extended if and to the extent that the
Martin Mirror Note is extended, and bears interest at an annual
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rate between six and ten percent. The Contributor Short-Term Subordinated Note
has a term of ninety days and bears interest at an annual rate of ten percent.
The former Paisano shareholder also has the right, subject to the approval of
the Compensation Committee of Registrant, to recommend that certain employees of
the Paisano Companies who continue to perform services after the Reorganization
or are consultants to any of the Paisano Companies be granted options to
purchase an aggregate of 300,000 shares of Easyriders Common Stock under the
Easyriders Plan, exercisable at $5.00 per share. These options have been valued
at $674,434 using the Black-Scholes option pricing model and have been included
as part of the purchase price.
The acquisition of Paisano Companies was accounted for as a purchase and the
resulting goodwill of $55,765,739 is being amortized on a straight-line basis
over thirty years.
On September 23, 1998, the Company acquired all of the issued and outstanding
membership interests of El Paso from the members, who included the Chairman and
the President of the Company, for a total of 2,000,000 shares of Easyriders
Common Stock.
The acquisition of El Paso was accounted for as a purchase and the resulting
goodwill of $6,794,254 is being amortized on a straight-line basis over twenty
years.
Warrants to purchase 870,393 shares of Easyriders Common Stock have been issued
and sold to Imperial Capital LLC on the closing date of the Reorganization at
nominal cost. The exercise price of the Warrants are $4.3125 per share. The
warrants have been valued at $2,069,258 using the Black-Scholes Option Pricing
Model. The Warrants will be exercisable at any time for a period of seven years
from their date of issuance. The Warrants and the underlying common stock
issuable upon exercise of the Warrants will be covered by agreements which
provide for registration rights.
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Unaudited pro forma combined results of operations of the Company for the nine
months ended September 30, 1998 are included below. Such pro forma presentation
has been prepared assuming that the acquisitions had occurred as of January 1,
1998.
<TABLE>
<S> <C>
SALES $ 34,721,568
COST OF SALES 26,660,432
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GROSS MARGIN 8,061,136
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EXPENSES
Restaurant and store operating expenses 1,167,300
Selling, general and administrative 9,268,563
Amortization of goodwill 1,648,928
Stock issuance expense 1,888,867
Loss on sale of restaurant to related party 1,099,760
------------
Total Expenses 15,073,418
----------
OPERATING LOSS FROM FRANCHISE OPERATIONS (823,372)
Loss from Operations (7,835,654)
----------
OTHER INCOME (EXPENSE)
Other income 137,858
Interest expense (2,621,513)
Interest expense - noncash (1,202,870)
------------
Total Other Income (Expense) (3,686,525)
----------
PRO FORMA NET LOSS $(11,522,179)
============
PRO FORMA NET LOSS PER SHARE $ (0.62)
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC 18,547,662
</TABLE>
The pro forma results include the historical accounts of the Company, Newriders,
the Paisano Companies, and El Paso and pro forma adjustments, including the
amortization of goodwill and the interest expense related to the Term Notes and
the Revolving Notes (Note 4) and the promissory notes issued to the Paisano
Companies' previous shareholder. The pro forma results of operations are not
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necessarily indicative of actual results that may have occurred had the
operations of Easyriders, Newriders, the Paisano Companies, and El Paso been
combined in prior years.
NOTE 3 - OTHER STOCKHOLDERS' EQUITY ACTIVITIES
In connection with the Reorganization, John E. Martin, the Chairman of the
Company, purchased 4,036,797 shares of Easyriders Common Stock, for a purchase
price of $12,300,000, which he paid $5,000,000 in cash and the balance by
delivery of certain promissory notes. The notes consist of the Martin Mirror
Note in the amount of $5,000,000, which note has been pledged by Easyriders to
secure the Contributor Mirror Note, and the Other Martin Note in the amount of
$2,300,000. The Martin Mirror Note has a term of five years, may be extended by
Mr. Martin for an additional period of five years and bears interest at an
annual rate between six and ten percent. The Other Martin Note has a term of
five years and may be extended by Mr. Martin for an additional five years and
bears interest at an annual rate between six and ten percent.
In connection with the Reorganization, four of the largest shareholders of
Newriders agreed to return to Newriders an aggregate of 6,156,480 shares of
Newriders common stock to be canceled. A total of 4,848,480 of these shares were
delivered to Newriders for cancellation at or prior to closing. One of the four
shareholders failed to deliver 1,308,000 of the Newriders shares to be canceled,
of which 464,000 Newriders shares are beneficially owned by another individual,
who had consented to their cancellation. The Paisano shareholder waived the
condition for cancellation of the 1,308,000 Newriders shares at closing, on the
condition that Newriders continue to pursue the cancellation of the 1,308,000
Newriders shares.
Easyriders has issued stop transfer instructions concerning the 1,308,000
Newriders shares, which is equivalent to 654,000 shares of Easyriders, Inc.
common stock. Following the closing on September 23, 1998, a petition for an
involuntary bankruptcy proceeding under Chapter 11 of the U. S. Bankruptcy Code
involving the holder of these shares was filed. Easyriders, through its
subsidiary, Newriders, intends to pursue its claim for cancellation of the
1,308,000 Newriders shares in the bankruptcy proceeding involving the
shareholder. Per share calculations assume that the 1,308,000 shares have been
cancelled.
NOTE 4 - DEBT
On May 11, 1998, Newriders issued convertible debentures with a face value of
$500,000 due May 11, 2000 in a private placement transaction. The debentures
accrue interest at 8% per year. The debentures were fully converted in
increments throughout September 1998. Additionally, in conjunction with the
issuance of the convertible debentures, Newriders issued warrants for the
purchase of 25,000 shares of Newriders's common stock with an exercise price of
$2.82 per share during the next three years. The fair value of the warrants,
aggregating $40,901, has been recorded as debt issuance costs and was amortized
over the term that the debentures were outstanding.
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Paisano Publications, Inc. has received a loan from a financial institution (the
Senior Lender) of $22,000,000 in the aggregate, $17,000,000 of which consists of
term loans (the Term Loans) and $5,000,000 of which consists of revolving loans
(the Revolving Loans and collectively with the Term Loans, the Senior Loans).
The Term Loans plus $3,500,000 of the Revolving Loans were used to fund the
Paisano Acquisition.
The Senior Loans are guaranteed (the Guarantees) by Easyriders and the Paisano
Companies other than Paisano Publications (the Guarantors). The Senior Loans
will mature on September 23, 2001, and bear interest at an annual rate equal to
the prime rate of the Senior Lender from time to time plus 1.85%. The Senior
Loans 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 Easyriders and the Paisano Companies, including all of the capital
stock or equity interests of the Paisano Companies, Newriders and El Paso. The
Senior Loans and the Guarantees constitute the sole senior secured indebtedness
of Paisano Publications and the Guarantors and rank senior to all other
indebtedness of Paisano publications and the Guarantors, including the
$13,000,000 of Contributor Notes.
Paisano Publications is obligated to pay the Senior Lender a fee equal to 0.25%
per annum of the average daily undrawn amount of the Revolving Loans.
At the end of each six-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, for such period.
Because this prepayment is dependent upon Excess Cash Flow, no amounts have been
classified as current at September 30, 1998.
Subject to certain limitations on dividends, provided that no event of default
has occurred, Paisano Publications may loan or distribute funds to Easyriders
monthly, limited to the lesser of $100,000 or 35% of the Excess Cash Flow for
the preceding monthly period.
Generally, the net proceeds from any offering or private placement of debt,
equity or hybrid securities, and any funds raised through the incurrence of bank
indebtedness by Easyriders, Paisano Publications or any other Paisano Company
will be applied toward the mandatory prepayment of the principal of the Term
Loans plus accrued interest. Notwithstanding the foregoing, Easyriders may
retain up to $5,000,000 in the aggregate, from the net proceeds of any approved
sale of securities for purposes of refinancing the Contributor Short-Term
Subordinated Note or funding operating expenses of Easyriders.
The Senior Loans may be repaid in whole or in part from time to time, at the
option of Paisano Publications without premium.
Warrants to purchase 348,157 shares of Easyriders Common Stock have been issued
and sold to the Senior Lender on the closing date of the Reorganization at
nominal cost. The exercise price of the Warrants are $3.00 per share. The
warrants have been valued at $944,332 using the Black-Scholes Option Pricing
Model. Such amount has been recorded as a discount on the debt and is being
amortized straight-line over three years, the life of the Senior Loans. The
Warrants will be exercisable
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at any time for a period of seven years from their date of issuance. The
Warrants and the underlying common stock issuable upon exercise of the Warrants
will be covered by agreements which provide for registration rights.
The Senior Credit Agreement and the Guarantees contain operating and financial
covenants concerning Paisano Publications and the Guarantors and their
subsidiaries, including, but not limited to, the maintenance of minimum net
worth, minimum working capital, interest coverage ratio, leverage ratio and
EBITDA levels.
NOTE 5 - SALE OF RESTAURANT TO RELATED PARTY
On July 22,1998, the Company sold its Myrtle Beach Restaurant to a stockholder
of the Company. As a result of this sale, the Company recorded a loss during the
three months ended June 30, 1998 of $467,774 primarily related to the write-down
to net realizable value of leasehold improvements and store fixtures.
During the three months ended September 30, 1998, the Company renegotiated the
Myrtle Beach purchase agreement, thereby resulting in an additional loss on the
sale of the Myrtle Beach Restaurant of $631,986.
NOTE 6 - NET LOSS PER COMMON SHARE
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. Earnings per
share is computed using the weighted average number of common shares outstanding
during the period. Earnings per share assuming dilution is computed using the
weighted average number of shares outstanding and dilutive effect of potential
shares outstanding. Diluted earnings per share is not presented at September 30,
1998 due to the antidilutive effect on earnings per share.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Reorganization
On September 23, 1998, Easyriders, Inc. (the "Company" or "Easyriders")
consummated a series of transactions (collectively referred to as the
"Reorganization"), including the following: (i) the acquisition (the "Paisano
Acquisition") by Easyriders of all of the outstanding common stock of Paisano
Publications, Inc., a California corporation ("Paisano Publications") and
certain affiliated corporations (the "Paisano Companies"), which engage in
publishing special interest magazines relating to motorcycles and tattooing,
marketing motorcycle apparel and accessories, promoting tattoo and motorcycle
related events, and franchising retail stores which market motorcycle apparel
and accessories; (ii) the acquisition (the "El Paso Acquisition") by Easyriders
of all of the outstanding membership interests of M & B Restaurants, L.C., a
Texas limited liability company ("El Paso"), which engages in the operation of
four restaurants under the name "El Paso Bar-B-Que;" and (iii) the merger (the
"Merger") of a subsidiary of Easyriders with and into Newriders, Inc., a Nevada
corporation ("Newriders").
As a result of the Merger (i) each two shares of Newriders common stock, par
value $.01 per share (the "Newriders Common Stock") were exchanged for one share
of Easyriders common stock, par value $001 per share ("Easyriders Common
Stock"), and the stockholders 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.
Results of Operations - Historical
Balances presented for the three and nine months ended September 30, 1997
include only the results of operations for Newriders. Consolidated balances
presented for the three and nine months ended September 30, 1998 include the
results of operations for the Paisano Companies and El Paso for the period
September 23, 1998 (the date of acquisition) to September 30, 1998, along with
the results of operations for Newriders for the three and nine months ended
September 30, 1998.
14
<PAGE> 15
The following represents a summary of the components of revenues and net loss
for the three and nine months ended September 30, 1998 and 1997 for Easyriders
on a consolidated basis:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES, net
Newriders $ 151,254 $ 1,277,473 $ 975,409 $ 2,426,584
Paisano 1,107,703 1,107,703
El Paso 157,606 157,606
------------ ------------
Consolidated revenues $ 1,416,563 $ 1,277,473 $ 2,240,718 $ 2,426,584
============ ============ ============ ============
NET INCOME (LOSS)
Newriders $ (2,356,051) $ (639,232) $ (7,553,225) $ (1,524,535)
Paisano 411,295 411,295
El Paso 6,867 6,867
------------ ------------
Consolidated net loss $ (1,937,889) $ (639,232) $ (7,135,063) $ (1,524,535)
============ ============ ============ ============
</TABLE>
Results of Operations
During the three months ended September 30, 1998, Easyriders experienced a net
loss in the amount of $1,937,889 compared to the net loss of $639,232 for the
three months ended September 30, 1997. The net loss for the nine months ended
September 30, 1998 was $7,135,063 as compared to a net loss for the nine months
ended September 30, 1997 of $1,524,535.
Easyriders attributes the increased losses for the three and nine month periods
ended September 30, 1998 primarily to its subsidiary, Newriders. During the
three and nine months ended September 30, 1998 Newriders closed its Fresno
restaurant location for remodeling and sold its Myrtle Beach restaurant location
to a related party. Prior to July of 1998, these locations generated all of
Newrider's revenues, which amounted to $1,277,473 and $151,252 during the three
months ended September 30, 1997 and 1998 and $2,426,584 and $975,409 during the
nine months ended September, 30, 1997 and 1998. Offsetting the decline in
revenue from Newriders are revenues associated with the Company's acquisition of
the Paisano Companies and El Paso on September 23, 1998. Easyriders believes the
Paisano Companies and El Paso will generate substantially all of Easyriders'
revenues in the future and therefore, the historical financial statements of the
Company are not indicative of Easyriders' future operations. (See also Notes 1
and 2 to the Condensed Consolidated Financial Statements.)
15
<PAGE> 16
Additionally, contributing to Newriders' losses for the three and nine months
ended September 30, 1998 were the following items:
In aggregate, Newriders incurred a loss
of approximately $1.1 million related to
the sale of the Myrtle Beach restaurant
to a related party during the nine
months ended September 30, 1998. (See
Note 5 to the Condensed Consolidated
Financial Statements).
Due to the renegotiation of the terms
of the sale, $467,774 of this loss was
recorded in the three months ended
September 30, 1998.
During the nine months ended September
30, 1998 Newriders issued 1,000,000
shares of Newriders Common Stock to a
stockholder of Paisano for the
forgiveness of certain trade payables.
Newriders recorded a stock issuance
expense of approximately $1.9 million
associated with this transaction.
Newriders recorded noncash interest
expense of $299,115 and $1,202,870
during the three and nine months ended
September 30, 1998 associated with
conversion discounts and stock purchase
warrants granted to certain parties in
conjunction with the sale of convertible
debentures issued by Newriders on
various dates through May 1998. (See
Note 4 to the condensed Consolidated
Financial Statements).
Newriders incurred significant general
and administrative costs, primarily
associated with being a public company,
without the leverage of an adequate
revenue base. Additionally, during the
three months ended September 30, 1998
Newriders recorded $616,000 in
compensation expense to an employee as
consideration for services performed
associated with consummating the El Paso
and Paisano acquisitions.
Results of Operations: Paisano Companies
As previously stated, the consolidated operating results of Easyriders for the
three and nine months ended September 30, 1998 include one week operations of
the Paisano Companies and El Paso.
The Paisano Companies revenue attributable to this period totaled approximately
$1.1 million, which primarily relates to revenue associated with the publishing
and distribution of Easyriders' magazines during this one week period. The
Paisano Companies recognize newsstand, subscription and advertising revenue on
the "on-sale" date of each specific magazine. Revenues associated with the
Easyriders' magazine titles comprise a significant portion of the Paisano
Companies' revenues.
16
<PAGE> 17
Consequently, the Paisano Companies' revenue during this one week period is not
indicative of Paisano's revenue over a full operating cycle.
The Paisano Companies net income of $411,295 results primarily from the revenue
described in the preceding paragraph offset by direct costs associated with
publishing the Easyriders magazines distributed during the period and one week
of operating expenses associated with the Paisano Companies. Due to the
disproportionate amount of revenues recorded during this period, the results of
operations of the Paisano Companies during this period is not indicative of
future operating results.
Results of Operations: Pro Forma
The pro forma results of operations disclosed in Note 2 to the condensed
consolidated financial statements have been prepared assuming that the
acquisition had occurred as of January 1, 1998. The pro forma results include
the historical accounts of the Company, Newriders, the Paisano Companies, and El
Paso. The pro forma results of operations described herein are not necessarily
indicative of actual results that may have occurred had the operations of
Easyriders, Newriders, the Paisano Companies, and El Paso been combined in prior
years.
During the nine months ended September 30, 1998, Easyriders experienced a pro
forma net loss in the amount of $11,522,179 on sales of $34,721,568.
Easyriders attributes the pro forma sales primarily to its subsidiaries, the
Paisano Companies. The Paisano Companies had combined revenues of $25,960,615
for the nine months ended September 30,1998. Included in the pro forma sales for
the Paisano Companies was $17,912,659 of newsstand, advertising and subscription
revenue related to publishing Paisano Publications' eleven special interest
magazines, including Easyriders. Revenues also included $2,919,834 of mail-order
sales of the Paisano Companies' line of apparel and other motorcycle and tattoo
related products, $2,100,122 of sales from the Company's three Easyriders stores
and $2,513,166 of motorcycle event related sales.
The Company's restaurant subsidiary, El Paso, had revenues of $7,785,544 in food
and beverage sales for the nine months ended September 30, 1998 from their four
barbecue and smoked meat restaurants located in Arizona and Oklahoma.
The Company's pro forma loss for the nine months ended September 30, 1998 was
primarily related to the Newriders subsidiary's loss of $7,553,225 described
under Results of Operations above. The Paisano Companies and El Paso contributed
pro forma net losses of $3,593,444 and $375,510, respectively, for the same
period.
The Company attributes the Paisano Companies' pro forma net loss primarily to
$2,311,313 in pro forma interest expense related to the Senior Loans which were
used to fund the acquisition, $1,394,143 in pro forma amortization of goodwill
and a $879,384 loss from Easyriders Franchising, the Paisano Companies'
franchising company.
17
<PAGE> 18
The Company attributes the El Paso pro forma net loss primarily to $254,785 in
pro forma amortization of goodwill and costs associated with relocating El
Paso's administrative facilities.
Liquidity and Capital Resources
The Company's stockholders' equity increased to $32,837,138 at September 30,
1998, from $302,842 as of December 31, 1997. Cash and cash equivalents decreased
to $165,206 at September 30, 1998 from $1,262,633 at December 31, 1997 due
primarily to net cash used in operating activities of $2,057,925. Cash used in
operating activities reflects a net loss of $7,135,063, partially offset by
non-cash expenses of $2,504,867 for common stock issued for services, loss on
sale of restaurant of $1,099,760, $1,202,870 of non-cash interest expense and
$232,531 related to the depreciation and amortization of property and equipment
and goodwill.
These decreases in cash and cash equivalents were partially offset by the net
cash provided by financing and investing activities. $18,801,876 of the net cash
provided by financing activities of $19,750,545 was used to fund the cash
consideration for the acquisitions of the Paisano Companies and El Paso. The
components of net cash provided from financing activities included the issuance
of $17,000,000 in term notes, $3,500,000 in revolving notes and $5,000,000 in
common stock related specifically to the acquisition of the Paisano Companies
and $2,100,000 of debt issued to fund the operations of Newriders. (See Note 4
to the condensed Consolidated Financial Statements).
The Company has historically financed its operations through issuances of
convertible debentures and other equity instruments. In conjunction with the
Reorganization, the Company is required to make payments as required to service
the indebtedness incurred to effect the Reorganization. The source for the cash
required to make these payments is expected to be provided through the
operations of the Paisano Companies and El Paso and through draws on the
Company's revolving notes. At September 31, 1998, the Company had $1,500,000
available under the revolving notes.
Additional cash needs through 1999 include funding the operations of the Paisano
Companies, funding the overhead related to Newriders and the purchase of
additional sites for restaurants. The Company believes cash generated from
future operations and availability under its revolving notes will be sufficient
to meet working capital needs for the foreseeable future.
Year 2000 Compliance
What is commonly referred to as the "Year 2000 Issue" is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of Easyriders' computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in similar normal business activities.
In 1998, Easyriders will initiate a conversion for existing PC based accounting
software to programs that are year 2000 compliant. Management has determined
that the year 2000 issue will not pose
18
<PAGE> 19
significant operational problems for its computer systems. As a result, all
costs associated with this conversion will be expensed as incurred. Easyriders
will also initiate communications with all of its significant suppliers and
service providers to determine the extent to which Easyriders' interface systems
are vulnerable to those third parties' failure to remediate their own Year 2000
issues. There can be no guarantee that the systems of other companies on which
the Easyriders' systems rely will be timely converted and will not have an
adverse affect on the Easyriders' systems.
Easyriders will utilize both internal and external resources to reprogram, or
replace, and test software for Year 2000 modifications. Easyriders anticipates
completing its Year 2000 remediation efforts within one year but not later than
October 31, 1999, which is prior to any anticipated impact on its operating
systems. The total cost of Easyriders' Year 2000 remediation efforts is not
expected to have a material effect on Easyriders' results of operations.
19
<PAGE> 20
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.
Newriders has been named as a third party defendant in a lawsuit in which the
plaintiff alleged that Newriders sold a defective helmet which resulted in the
death of the user. A total of $2.5 million in damages is being sought. Newriders
has been advised by its insurance carrier that the insurance company is handling
the defense, and Newriders believes its insurance coverage is adequate.
Newriders has been named as a defendant in a lawsuit brought by Palisades
Capital, Inc. and Palisades Holdings, Inc. (collectively "Palisades") in the
Superior Court of California, County of Los Angeles, number BC194913, filed July
27, 1998, for payment of a promissory note in the amount of $100,000, plus
interest, together with damages arising out of, among other things, Newriders'
alleged breach of commitments to enter into certain financial relationships with
Palisades and other parties. Newriders believes that Palisades breached its
agreement to provide certain funding to Newriders, and accordingly, Newriders
proposes to vigorously defend the alleged breach and counterclaim for damages in
excess of the amount claimed under the promissory note.
Easyriders Franchising has been served with a demand in two arbitration
proceedings brought by two franchisees alleging fraud and breach of contract. No
specific amount of damages has been demanded. While Easyriders Franchising
vigorously denies the allegations in these arbitration proceedings, no assurance
can be given that Easyriders Franchising will ultimately prevail on the merits.
Easyriders Franchising has also received a claim letter from another franchisee.
No formal action has yet been taken.
El Paso is a defendant in one litigation proceeding involving a slip and fall
personal injury claim. El Paso's insurance carrier is defending the action and
Easyriders believes such insurance is adequate.
Item 2. Changes in Securities and Use of Proceeds.
On September 23, 1998, the Company issued 6,493,507 shares of Common Stock
to Joseph Teresi as partial consideration for the purchase of the Paisano
Companies. The shares were issued to Mr. Teresi in a transaction that was exempt
from the registration requirements of the Securities Act of 1933, as amended
(the "Act"), pursuant to Section 4(2) thereof.
On September 23, 1998, the Company issued 4,036,797 shares of Common Stock
to John Martin as partial consideration for the purchase of El Paso and
1,000,000 shares of Common Stock to Mr. Martin in exchange for $5,000,000 cash
and promissory notes in the amount of $7,300,000. The shares were issued to Mr.
Martin in transactions that were exempt from the registration requirements of
the Act pursuant to Section 4(2) thereof.
20
<PAGE> 21
On September 23, 1998, the Company issued 1,000,000 shares of Common Stock
to William Prather as partial consideration for the purchase of El Paso. The
shares were issued to Mr. Prather in a transaction that was exempt from the
registration requirements of the Act pursuant to Section 4(2) thereof.
On September 23, 1998, the Company issued 200,000 shares of Common Stock
to William Nordstrom as a stock grant in conjunction with his employment as
Executive Vice President and Chief Financial Officer of the Company.. The shares
were issued to Mr. Nordstrom in a transaction that was exempt from the
registration requirements of the Act pursuant to Section 4(2) thereof.
On November 18, 1998 the Company issued 120,000 shares of Common Stock to
Richard Dillon in connection with the termination of his employment of El Paso.
The shares were issued to Mr. Dillon in a transaction that was exempt from the
registration requirements of the Act pursuant to Section 4(2) thereof.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description of Exhibits
-------------- -----------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
The Registrant filed a Current Report on Form 8-K with the Commission on
October 8, 1998.
21
<PAGE> 22
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 23, 1998 /s/ WILLIAM PRATHER
---------------------------------------------
President, Chief Executive Officer and
Director
Dated: November 23, 1998 /s/ WILLIAM NORDSTROM
---------------------------------------------
Chief Financial Officer and
Executive Vice President
22
<PAGE> 23
INDEX TO EXHIBITS
Exhibit Number Description of Exhibit
- -------------- ----------------------
27.1 Financial Data Schedule
23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 165
<SECURITIES> 0
<RECEIVABLES> 3,028
<ALLOWANCES> 0
<INVENTORY> 5,396
<CURRENT-ASSETS> 11,422
<PP&E> 3,994
<DEPRECIATION> 0
<TOTAL-ASSETS> 79,375
<CURRENT-LIABILITIES> 11,806
<BONDS> 33,828
0
0
<COMMON> 19
<OTHER-SE> 32,818
<TOTAL-LIABILITY-AND-EQUITY> 79,375
<SALES> 2,241
<TOTAL-REVENUES> 2,241
<CGS> 1,219
<TOTAL-COSTS> 6,845
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,324
<INCOME-PRETAX> 7,135
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,135
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,135
<EPS-PRIMARY> (0.78)
<EPS-DILUTED> (0.78)
</TABLE>
